                       T.C. Memo. 1995-610



                     UNITED STATES TAX COURT



ELLWEST STEREO THEATRES OF MEMPHIS, INC., ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 3891-94,   3892-94      Filed December 27, 1995.
                3894-94,   3895-94
                3896-94,   3897-94
                3898-94,   3902-94
                3903-94,   3904-94
                3906-94,   3908-94.




     1
       Cases of the following petitioners are consolidated
herewith: Ellwest Stereo Theatres, Inc. of Phoenix, docket No.
3892-94; Jolar Cinema, docket No. 3894-94; M.I.C. Limited,
docket No. 3895-94; Michigan Reef Development Corp., docket No.
3896-94; Premium Films, Ltd., docket No. 3897-94; Jolar Cinema of
San Diego, Ltd., docket No. 3898-94; A.J. Films, docket No.
3902-94; Ellwest Stereo Theatres of Fort Worth, Inc., docket No.
3903-94; Corporate Investments, Inc., docket No. 3904-94; Ellwest
Stereo Theatres, Inc. of Kansas City, docket No. 3906-94; Ellwest
Stereo Theatres of Youngstown, Inc., docket No. 3908-94.
                                        - 2 -

              Over several years Ps made payments to related
         foreign corporations without reporting the payments on
         Forms 1042 or withholding and paying the tax due. Ps
         sought to avoid additions to tax under secs.
         6651(a)(1), 6656(a) and 6653(a), I.R.C., on the
         grounds, inter alia, that the governing law was
         complex, that they relied on accountants and counsel,
         and that they cooperated fully with R as soon as they
         discovered their mistake. Held: The additions are
         sustained.



         Robert E. Miller and Edith S. Thomas, for petitioners.

         Alexandra E. Nicholaides and Eric R. Skinner, for

   respondent.



                    MEMORANDUM FINDINGS OF FACT AND OPINION


         LARO, Judge:     These cases were consolidated for purposes of

   trial, briefing, and opinion pursuant to Rule 141(a).2

   Petitioners sought redetermination of deficiencies and additions

   to tax determined by respondent as follows:

Ellwest Stereo Theatres of Memphis, Inc., docket No. 3891-94

                                              Additions to Tax
                                Sec.          Sec.            Sec.      Sec.
 Year        Deficiency      6651(a)(1)    6653(a)(1)      6653(a)(2)   6656

 1985         $7,950           $1,988           $398           $4,306   $795




         2
          All Rule references are to the Tax Court Rules of Practice
   and Procedure and, unless otherwise indicated, all section
   references are to the Internal Revenue Code in effect for the
   years at issue.
                                        - 3 -
Ellwest Stereo Theatres, Inc. of Phoenix, docket No. 3892-94

                                              Additions to Tax
                                Sec.          Sec.            Sec.         Sec.
 Year       Deficiency       6651(a)(1)    6653(a)(1)      6653(a)(2)      6656

 1985        $15,450           $3,862           $772           $8,368      $1,545


Jolar Cinema, docket No. 3894-94

                                              Additions to Tax
                                Sec.          Sec.            Sec.         Sec.
 Year       Deficiency       6651(a)(1)    6653(a)(1)      6653(a)(2)      6656

 1985        $8,100            $2,025           $405           $4,387      $810


M.I.C. Limited, docket No. 3895-94

                                            Additions to Tax
                                Sec.              Sec.             Sec.
 Year       Deficiency       6651(a)(1)        6653(a)(1)          6656

 1988        $31,462           $7,866             $1,573          $3,146
 1989         75,113           18,778               ---            7,511
 1990         30,375            7,594               ---            3,038
 1991         53,311           13,328               ---            5,331


Michigan Reef Development Corp., docket No. 3896-94

                                            Additions to Tax
                    Sec.      Sec.         Sec.          Sec.        Sec.         Sec.
Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6653(a)(2)      6656

1982    $15,156   $3,789     $758          ---           ---        $14,893    $1,516
1983     23,339    5,835    1,167          ---           ---         18,871     2,334
1984     21,367    5,342    1,068          ---           ---         14,270     2,137
1985     19,568    4,892      978          ---           ---         10,599     1,957
1986     17,892    4,473      ---         $895         $8,043          ---      1,789
1987     11,918    2,980      ---          596          4,316          ---      1,192
1988      8,395    2,099      420          ---           ---           ---        840
1989     11,931    2,983      ---          ---           ---           ---      1,193
1990     11,074    2,769      ---          ---           ---           ---      1,107
                                          - 4 -
Premium Films, Ltd., docket No. 3897-94

                                             Additions to Tax
                     Sec.      Sec.         Sec.          Sec.         Sec.        Sec.
Year   Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6653(a)(2)     6656

1980    $22,544   $5,636     $1,127          ---           ---         ---       $2,254
1981     51,067   12,767      2,553          ---           ---      $65,147       5,107
1982     48,642   12,160      2,432          ---           ---       47,798       4,864
1983     38,715    9,679      1,936          ---           ---       31,305       3,872
1984     33,238    8,310      1,662          ---           ---       22,198       3,324
1985     28,672    7,168      1,434          ---           ---       15,530       2,867
1986      9,285    2,321       ---          $464         $4,174        ---          928
1987      3,421      855       ---           171          1,239        ---          342
1988     28,791    7,198      1,440          ---           ---         ---        2,879
1991      1,210      302       ---           ---           ---         ---          121


Jolar Cinema of San Diego, Ltd., docket No. 3898-94

                                                Additions to Tax
                                Sec.           Sec.            Sec.       Sec.
 Year       Deficiency        6651(a)(1)     6653(a)(1)      6653(a)(2)   6656

 1985        $8,400              $2,100           $420        $4,550      $840

A.J. Films, docket No. 3902-94

                                                Additions to Tax
                                Sec.           Sec.             Sec.      Sec.
 Year       Deficiency        6651(a)(1)     6653(a)(1)      6653(a)(2)   6656

 1985       $17,250              $4,312           $862        $9,343      $1,725


Ellwest Stereo Theatres of Fort Worth, Inc., docket No. 3903-94

                                                Additions to Tax
                                Sec.           Sec.             Sec.      Sec.
 Year       Deficiency        6651(a)(1)     6653(a)(1)      6653(a)(2)   6656

 1985        $4,650              $1,162           $232        $2,519      $465


Corporate Investments, Inc., docket No. 3904-94

                                             Additions to Tax
                     Sec.       Sec.        Sec.          Sec.         Sec.        Sec.
Year   Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6653(a)(2)     6656

1984    $5,850    $1,462      $292           ---           ---         $3,907      $585
1985     5,400     1,350       270           ---           ---          2,925       540
1986     5,400     1,350       ---          $270         $2,428          ---        540
1987     5,400     1,350       ---           270          1,956          ---        540
1988       660       165        33           ---           ---           ---         66
                                        - 5 -
Ellwest Stereo Theatres, Inc. of Kansas City, docket No. 3906-94

                                              Additions to Tax
                                Sec.         Sec.             Sec.      Sec.
 Year      Deficiency        6651(a)(1)    6653(a)(1)      6653(a)(2)   6656

 1985       $29,850            $7,463           $1,492      $16,168     $2,985


Ellwest Stereo Theatres of Youngstown, Inc., docket No. 3908-94

                                              Additions to Tax
                                Sec.         Sec.             Sec.      Sec.
 Year      Deficiency        6651(a)(1)    6653(a)(1)      6653(a)(2)   6656

 1985       $20,250            $5,062           $1,012      $10,968     $2,025

         At trial petitioners conceded that they are liable for the

   deficiencies.      The only issues remaining for decision are:

   (1) Whether petitioners are liable for additions to tax under

   section 6651 for failure to file Forms 1042 (Annual Withholding

   Tax Return for U.S. Source Income of Foreign Persons) in

   connection with certain payments they made to foreign

   corporations; (2) whether petitioners are liable for additions to

   tax under section 6656 for failure to withhold and deposit the

   Federal income taxes due on such payments; and (3) whether

   petitioners are liable for additions to tax under section 6653(a)

   for negligence or intentional disregard of rules or regulations.

                                FINDINGS OF FACT

         Some of the facts have been stipulated and are so found.

   The stipulation of facts and the joint exhibits attached thereto

   are incorporated herein by this reference.            At the time the

   petitions were filed the principal office or agency for each

   petitioner was in Durand, Michigan.           Most, if not all, of
                               - 6 -

petitioners were engaged in the adult entertainment business

during the taxable years at issue.     A.J. Films, Ellwest Stereo

Theatres of Fort Worth, Ellwest Stereo Theatres of Phoenix,

Ellwest Stereo Theatres of Youngstown, Jolar Cinema, and Premium

Films no longer conduct business.

     During the taxable years at issue, all petitioners were

owned, in whole or part, by Harry V. Mohney (Mohney), either

directly or indirectly as one of several beneficiaries of a

trust.   Mohney directly owned 100 percent of the stock of

Corporate Investments.   Mohney and his children owned beneficial

interests in the Durand Trusts, a group of five domestic trusts,

which owned all the stock of Michigan Reef Development Corp.

The Durand Trusts also owned all the stock of Dynamic Industries

Ltd., a domestic corporation of which M.I.C. Limited was the

wholly owned subsidiary.   Mohney together with three family

members and a business associate named Elizabeth Scribner

(Scribner) were the beneficiaries of the Amaranta Trust, a

foreign trust that owned all the stock of several foreign holding

companies.   All remaining petitioners were first- or second-tier

wholly owned subsidiaries of two of these foreign holding

companies:   Fun Films, Ltd., located in the Turks and Caicos

Islands, and Caribbean Films, N.V., whose residence for Federal

income tax purposes was the Netherlands Antilles.    Among the

foreign corporations existing under the Amaranta Trust umbrella

were also two others of significance to these cases:
                               - 7 -

European Investments, N.A., whose residence for Federal income

tax purposes was the Netherlands Antilles, and Petro Land

Drilling & Development, whose residence for Federal income tax

purposes was the Cayman Islands.

     At various times between 1980 and 1991 petitioners made

payments to Fun Films, Caribbean Films, European Investments, and

Petro Land Drilling & Development.     Eight petitioners made only a

single payment during this period.     Each of the eight transferred

funds to Fun Films in January 1985.    Canceled checks for these

payments to Fun Films bear the word "loan", and the payments were

characterized as loans on petitioners' books.    There is no

documentation, however, that confirms the existence of a

debtor-creditor relationship between any of petitioners and

Fun Films.   Moreover, Fun Films has never paid interest on the

"loans" or repaid the principal.   Petitioners did not file

Forms 1042, Annual Withholding Tax Return for U.S. Source Income

of Foreign Persons, for any year in which the payments were made

to the foreign corporations, as required by section 1.1461-2,

Income Tax Regs.   Nor did petitioners withhold and deposit

Federal income tax with respect to these payments, as required by

sections 1442(a) and 6302.

     During the years at issue, petitioners engaged Modern

Bookkeeping, Inc. (Modern), to provide bookkeeping services and

prepare their tax returns.   Modern employed a number of

accountants, one of whom was Tom Tompkins (Tompkins).    Tompkins
                                - 8 -

was not a certified public accountant, having failed the C.P.A.

examination at least once.   An attorney named Lee Klein (Klein)

provided legal services for Modern and its clients.   In 1984

Federal agents seized a large quantity of books and records at

Modern in connection with a criminal investigation.    In 1987

Klein retained David Shindel (Shindel), a certified public

accountant, on behalf of Modern and a number of its clients,

including two of petitioners.   The purpose of the retainer was to

review corporate books and records for compliance with the tax

laws.   The scope of Shindel’s retainer subsequently expanded to

include additional petitioners as the extent of noncompliance

among Modern’s clients became evident.   In 1988 the criminal

investigation of persons working for, or associated with, Modern

resulted in the indictment of Mohney, Klein, Tompkins, and

Scribner for conspiracy to defraud the Government by impeding the

Internal Revenue Service (IRS).   Each was subsequently convicted

of this or a related offense.

     In or about 1990 Shindel became aware that several of

Modern's clients were making payments to foreign companies.

By 1991 he had uncovered evidence of prior payments extending

back several years.   Available records concerning these payments

were in some cases incomplete; it is not clear, however, to what

extent this was attributable to the earlier Government seizure.

For example, there were canceled checks payable to Fun Films

dated January 1985 that bore the word "loan", but Shindel found
                               - 9 -

no other documentation for these transactions.    Other payments

were evidenced by contracts, leases, and buy-sell agreements,

which Shindel reviewed.   Lacking expertise in foreign tax

matters, Shindel made inquiries in order to determine the tax

obligations arising from these payments.    He received the

impression that Tompkins, who was preparing most of the tax

returns at that time, was not knowledgeable about the reporting

and withholding requirements for payments to foreign persons.

Nor was Shindel satisfied that his clients were sufficiently

sophisticated to determine the applicable requirements.

He sought expert advice from two outside attorneys, one a senior

tax partner at a Michigan law firm and the other a tax partner at

a Washington, D.C., firm.   His consultations with these attorneys

concerning the payments at issue began either in early 1990 or in

late 1991 or 1992.   The attorneys advised him orally of their

views; neither furnished Shindel a written opinion.    Shindel

advised Modern of the problems he had identified.    Petitioners

made no further payments to the related foreign corporations

after 1991.

     Meanwhile, the IRS began an audit of several of petitioners

in 1990.   The audit was conducted on Modern's premises by

Revenue Agent Berniece Petzold (Petzold).    In the late winter or

early spring of 1993 Petzold questioned Shindel regarding certain

canceled checks she had found that had been cashed abroad.    They

discussed the reporting requirements applicable to these
                              - 10 -

payments.   Thereafter Shindel had Modern personnel compile a

summary of all the payments to foreign companies that he could

trace, and presented it to Petzold.      Under Shindel's

instructions, Modern also prepared Forms 1042 on behalf of four

petitioners to report payments made between 1980 and 1991 to

Caribbean Films, European Investments, and Petro Land Drilling

& Development.   Shindel was unable to secure the signature of a

corporation officer for any of these forms, however.       The

unexecuted Forms 1042 were mailed to the IRS on June 4, 1993, but

without authorized signatures they were invalid, and the IRS did

not file them.   No Forms 1042 were submitted for the payments to

Fun Films in 1985 by the other eight petitioners. This was

because Shindel had concluded that if these payments constituted

loans, no reporting would have been required.     Notices of

deficiency were mailed to petitioners on December 8, 1993.

                              OPINION

Additions to Tax Under Sections 6651 and 6656

     An addition to tax is imposed under section 6651 for failure

to file a return within the prescribed period, unless it is shown

that such failure was due to reasonable cause and not due to

willful neglect.   Sec. 6651(a)(1).    Form 1042 constitutes a

return for purposes of this section.     Secs. 6651(a)(1), 6001;

sec. 1.1461-2(e), Income Tax Regs.     The amount of the addition is

5 percent of the amount required to be shown as tax for each

month that the delinquency persists, up to a maximum of
                                - 11 -

25 percent.   An addition to tax is imposed under section 6656(a)

for failure to make timely deposit of tax with a Government

depositary, unless it is shown that such failure was due to

reasonable cause and not due to willful neglect.   For additions

to tax assessed after October 21, 1986, the amount of the

addition under section 6656(a) is 10 percent of the underpayment.

Sec. 6656(a).   For deposits required to be made after

December 31, 1989, the addition is 10 percent of the underpayment

in cases where the delinquency persists for 15 days or more.

Sec. 6656(b)(1)(A)(iii).

     For purposes of both sections, the delinquency is due to

reasonable cause if the taxpayer exercised ordinary business care

and prudence but was nevertheless unable to perform its tax

obligations in timely manner.    Brewery v. United States, 33 F.3d

589, 592 (6th Cir. 1994); In re Biomaterials Corp., 954 F.2d 919,

923 (3d Cir. 1992); Housden v. Commissioner, T.C. Memo. 1992-91;

sec. 301.6651-1(c)(1), Proced. & Admin. Regs.   The delinquency is

due to willful neglect if it resulted from a conscious decision

or from reckless indifference.    United States v. Boyle, 469 U.S.

241, 245 (1985).   The plain language of the proviso in both

sections 6651(a)(1) and 6656(a) requires that reasonable cause

and the absence of willful neglect be established as of the time

that performance of the relevant obligation was due.

See Industrial Indemnity v. Snyder, 54 AFTR 2d 84-5127, 84-1 USTC

par. 9507 (E.D. Wash. 1984).    Thus, whether the taxpayer acts in
                               - 12 -

good faith and with ordinary business care and prudence in

attempting to comply with its obligations after the deadline for

performance has passed is of little or no direct relevance to the

taxpayer’s liability for the additions to tax under these

sections.    The burden of proving reasonable cause and the absence

of willful neglect is on the taxpayer.     Rule 142(a).

     Petitioners advance five arguments.    We will consider each

in turn.

     1.    Complexity

     First, petitioners argue that the reporting and withholding

obligations that arose from their payments to the foreign

corporations involve a highly complex interrelationship among

regulations, administrative guidance, and treaty provisions which

only a very sophisticated taxpayer could reasonably be expected

to comprehend.

     Complex legal provisions may reasonably be susceptible of

different interpretations.   In some cases taxpayers have

succeeded in avoiding additions to tax by showing that the

deficiency resulted from an honest and reasonable

misunderstanding of complex law.    Metra Chem Corp. v.

Commissioner, 88 T.C. 654, 661 (1987) (no negligence for purposes

of sec. 6653(a)); Yelencsics v. Commissioner, 74 T.C. 1513,

1533 (1980) (same); Belz Inv. Co. v. Commissioner, 72 T.C. 1209,

1233-1234 (1979), affd. 661 F.2d 76 (6th Cir. 1981) (same).   That

tax obligations are complex does not necessarily make
                              - 13 -

noncompliance reasonable, however.     Edgar v. Commissioner,

56 T.C. 717, 762-763 (1971); Smith v. Commissioner, T.C. Memo.

1993-203.   Even if we grant that the reporting and withholding

obligations involved in these cases are relatively complicated,

petitioners have not demonstrated that this complexity was

responsible for their failure to comply.    No contemporaneous

corporate documents were offered as evidence; no corporate

officers were called to testify.   Petitioners have not persuaded

us that they were not in fact aware of their obligations.       They

have not satisfied their burden.

     2.   Reliance on Professionals

     Petitioners argue that because of their lack of

sophistication, they relied on their accounting service to ensure

tax compliance.   Their accounting service failed to do its job

properly.   Nevertheless, in their view this reliance was

consistent with ordinary business care and prudence under the

circumstances.

     The responsibility to file returns and pay tax when due

rests upon the taxpayer and cannot be delegated; in general, the

taxpayer must bear the consequences of any negligent errors

committed by its agent.   Logan Lumber Co. v. Commissioner,

365 F.2d 846, 854 (5th Cir. 1966); Pritchett v. Commissioner,

63 T.C. 149, 173-175 (1974); Abernathy v. Commissioner, T.C.

Memo. 1992-237.   There is a well-recognized, albeit narrow,

exception to this rule.   When the taxpayer selects a competent
                             - 14 -

tax adviser and supplies him with all relevant information, it is

consistent with ordinary business care and prudence to rely upon

his professional judgment as to the taxpayer’s tax obligations.

United States v. Boyle, supra at 250-251; Commissioner v.

American Assocation of Engrs. Employment, Inc., 204 F.2d 19

(7th Cir. 1953); Haywood Lumber & Mining Co. v. Commissioner,

178 F.2d 769, 771 (2d Cir. 1950).   In order to qualify for this

exception the taxpayer must demonstrate that: (1) Its tax adviser

or return preparer had sufficient expertise to justify reliance,

Zabolotny v. Commissioner, 97 T.C. 385, 401-402 (1991), affd. in

part and revd. in part on other grounds 7 F.3d 774 (8th Cir.

1993); cf. Patin v. Commissioner, 88 T.C. 1086, 1129-1131 (1987),

affd. sub nom. Gomberg v. Commissioner, 868 F.2d 865 (6th Cir.

1989), affd. without published opinion 865 F.2d 1264 (5th Cir.

1989), affd. sub nom. Skeen v. Commissioner, 864 F.2d 93 (9th

Cir. 1989), affd. without published opinion sub nom. Hatheway v.

Commissioner, 856 F.2d 186 (4th Cir. 1988); Hoffman v.

Commissioner, T.C. Memo. 1982-380, (2) the taxpayer provided

necessary and accurate information, Coldwater Seafood Corp. v.

Commissioner, 69 T.C. 966, 974 (1978); cf. Pessin v.

Commissioner, 59 T.C. 473, 489 (1972), and (3) the taxpayer

actually relied in good faith on the tax adviser’s or return

preparer’s judgment, New York State Association. of Real Estate

Bds. Group Ins. Fund v. Commissioner, 54 T.C. 1325, 1336 (1970);

Kenner v. Commissioner, T.C. Memo. 1974-273.
                                - 15 -

     There is no evidence in the record that Modern’s accountants

and attorney possessed, or reasonably appeared to possess,

sufficient relevant expertise to warrant reliance on their

judgment.   The only evidence petitioners did present on this

subject would support an inference to the contrary.    Shindel

testified that Tompkins, the accountant employed by Modern to

handle most return preparation, had failed the C.P.A.

examination.   Whether Klein’s field of legal expertise included

tax matters remains unclear.    No one associated with Modern

impressed Shindel as being competent to handle the tax questions

at issue.

     There is no evidence that expert advice regarding the

foreign payments was solicited by or on behalf of any of

petitioners before Shindel conducted his investigation.    The

record does not establish when Shindel sought and received the

expert tax attorneys’ advice:    at one point his testimony fixes

the start of his consultations with them in early 1990, and at

another point, in late 1991 or 1992.     The Forms 1042 for the last

year of payments would have been due by March 15, 1992.    Sec.

1.1461-2(b)(1), Income Tax Regs.    There is no record of what the

tax attorneys advised Shindel, nor to which payments and which

tax years the advice related.    Shindel’s testimony is ambiguous

as to the identity of the clients on whose behalf he consulted

the tax attorneys.   There is no evidence that petitioners

solicited, authorized, or were cognizant of Shindel’s
                                - 16 -

investigations, or that they were ultimately informed of the tax

attorneys’ advice.

     Moreover, petitioners have not attempted to prove that they

supplied their accounting service with all necessary information

concerning the payments and payees.      Regarding the “loans” to Fun

Films in January 1985, Shindel found at Modern no records besides

the canceled checks.    Moreover, petitioners have not established

that their failure to report and withhold tax was in fact based

on advice from their accounting service.     Petitioners have not

carried their burden of proving reasonable reliance.

     3.   Loans

     Petitioners argue that their honest belief that the payments

made to Fun Films in January 1985 were loans establishes

reasonable cause for failing to file Forms 1042 and withhold and

deposit tax with respect to those payments.     It is true that

loans would not have been subject to the Form 1042 or withholding

requirements.     Secs. 1442(a), 881(a); sec. 1.1461-2(b)(1) and

(c)(1), Income Tax Regs.     However, the fact that petitioners

treated these payments as loans does not establish reasonable

cause unless this treatment had a reasonable basis.     Petitioners

failed to offer any evidence supporting the loan

characterization.     They stipulated the absence of any

documentation confirming the existence of a debtor-creditor

relationship and to the failure of Fun Films to treat the
                              - 17 -

transactions as bona fide loans.    We can only conclude that they

have not satisfied their burden of showing reasonable cause.

     4.   Payees’ Failure To Secure Treaty Exemption

     Petitioners seek to excuse their failure to withhold and

deposit tax on payments made to the Netherlands Antilles

corporations, Caribbean Films and European Investments, on the

ground that these payments would have been exempt from

withholding under the United States-Netherlands income tax

convention, as applied to the Netherlands Antilles, but for the

fact that the Netherlands Antilles corporations failed to follow

certain procedures for certifying their eligibility for the

exemption.   See sec. 1.1441-6(b) and (c), Income Tax Regs.;

Rev. Proc. 79-40, 1979-2 C.B. 504.

     There is no evidence, however, that petitioners decided not

to withhold and deposit tax in the belief that the foreign payees

had filed or would file the requisite certificates.    On the

contrary, since petitioners also failed to withhold and deposit

tax with respect to payments made to other foreign corporations

that would not have been eligible for an exemption, it is

reasonable to conclude that the availability of an exemption

under the United States-Netherlands income tax convention had

nothing to do with their failure.

     5.   Subsequent Good Faith Efforts

     Finally, petitioners call our attention to their cooperation

with the IRS to uncover the extent of the prior payments and
                              - 18 -

their belated efforts to comply with the law after the errors

were discovered.   They believe this conduct attests to their good

faith and militates against an inference of willful neglect.

According to Revenue Agent Petzold’s uncontroverted testimony,

Shindel presented to her in 1993 a summary of payments for prior

years.   Shindel testified that he could not recall whether the

payment summary was given to Petzold before or after she

uncovered evidence of the payments herself and questioned him

about them.   She testified that it was she who raised the issue

first.   Compliance efforts made years after the obligations arose

and only after prompting by an examining agent are not

inconsistent with the inference that the original failure to

comply was due to willful neglect.

     We conclude that petitioners have not shown that their

failure to file returns and deposit tax for the years at issue

was due to reasonable cause and not due to willful neglect.

Accordingly, we sustain respondent’s determination that they are

liable for additions to tax under sections 6651(a)(1) and

6656(a).

Additions to Tax Under Section 6653(a)

     Respondent determined that petitioners are liable for the

additions to tax under section 6653(a).     For the taxable years at

issue section 6653(a) provided for an addition to tax if any part

of an underpayment of tax is due to negligence or intentional

disregard of rules or regulations.     For taxable years 1981
                              - 19 -

through 1987 the amount of the addition to tax was 5 percent of

the entire underpayment plus 50 percent of the interest payable

with respect to the portion of the underpayment attributable to

negligence or intentional disregard of rules or regulations.

Sec. 6653(a)(1) and (2) (taxable years 1981 through 1985);

sec. 6653(a)(1)(A) and (B) (taxable years 1986 and 1987).     For

taxable years 1980 and 1988 the addition to tax was an amount

equal to 5 percent of the underpayment.   Sec. 6653(a) (for

taxable year 1980); sec. 6653(a)(1) (for taxable year 1988).

Negligence is defined as the lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances.   Neely v. Commissioner, 85 T.C. 934, 947

(1985).   The taxpayer bears the burden of proof.   Rule 142(a);

Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

     Failure to file timely tax returns constitutes prima facie

evidence of negligence.   Emmons v. Commissioner, 92 T.C. 342,

349 (1989), affd. 898 F.2d 50 (5th Cir. 1990).   “The type of

evidence necessary to meet or rebut a prima facie case of

negligence arising in a late filing situation is that which

indicates the existence of an adequate and reasonable excuse or

justification for the delinquent filing.”   Id. at 350.   Where the

taxpayer’s evidence is insufficient to prove reasonable cause and

absence of willful neglect for purposes of section 6651(a)(1),

the taxpayer cannot carry its burden of proof for purposes of
                              - 20 -

section 6653(a).   Condor Intl., Inc. v. Commissioner, 98 T.C.

203, 225 (1992).

     The arguments petitioners have presented to contest the

addition to tax under section 6653(a) are the same arguments that

we have assessed and rejected above.   It would serve no purpose

to repeat that discussion.   Petitioners have not carried their

burden of proof.

     To reflect the foregoing,

                                         Decisions will be entered

                                    for respondent.
