UNITED STATES TAX COURT



        GUILLERMO BAEZ ESPINOSA, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8900-94.                    Filed September 24, 1996.


     P, a nonresident alien individual, failed to file
Federal income tax returns for the years 1987 through 1991.
R repeatedly notified P of his failure to file. R prepared
substitute returns for P and notified P that pursuant to
sec. 874(a), I.R.C., no deductions were allowable. P
subsequently submitted returns claiming the benefit of
deductions. R then issued a notice of deficiency. Held: P
is not entitled to the benefit of deductions pursuant to
sec. 874(a), I.R.C. Held, further, P is liable for
additions to tax pursuant to secs. 6651(a)(1) and 6654,
I.R.C.


John P. Bender, for petitioner.

Joni D. Larson, for respondent.
                                    - 2 -


     DAWSON, Judge:    This case was assigned to Special Trial

Judge Carleton D. Powell pursuant to section 7443A(b)(3) and

Rules 180, 181, and 182.1    The Court agrees with and adopts the

opinion of the Special Trial Judge that is set forth below.

               OPINION OF THE SPECIAL TRIAL JUDGE

     POWELL, Special Trial Judge:        Respondent determined

deficiencies in petitioner's Federal income taxes and additions

to tax as follows:

                                                    Additions to Tax
     Taxable Year      Deficiency           Sec. 6651(a)(1)     Sec. 6654

     1987                $1,672                 $418             $90.35
     1988                 1,729                  432             108.99
     1989                 1,669                  417             112.89
     1990                 4,017                  389             264.50
     1991                 1,534                  384              88.22

     At the time of filing the petition, petitioner resided in

Mexico.

     The issues are:    (1) Whether section 874(a) prevents

petitioner, who submitted a return after respondent prepared

substitute returns but before respondent issued a notice of

deficiency, from receiving the benefit of deductions otherwise

allowable under subtitle A of the Internal Revenue Code, and (2)

whether petitioner is liable for additions to tax pursuant to

sections 6651(a)(1) and 6654.

     1
         Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                      - 3 -


                             FINDINGS OF FACT

     The facts have been fully stipulated, and they are

summarized below.

     Guillermo Baez Espinosa (petitioner) was a nonresident alien

individual during the taxable years 1987 through 1991.

Petitioner owned two rental properties located in Austin, Texas

(the Austin property) and Ruidoso, New Mexico (the Ruidoso

property).     The properties produced gross rental income during

the years in issue in the following amounts:

     Property       1987       1988           1989      1990      1991

     Austin        $10,472    $10,200    $10,316      $10,385   $10,200
     Ruidoso         1,138      1,324        804        -0-       -0-

When the expenses of producing the rental income including

depreciation deductions are taken into account, each property

produced an annual loss.      Petitioner sold the Ruidoso property on

February 1, 1990, for $13,000 incurring a loss on the sale in the

amount of $13,315.2

     Petitioner was required to file a Federal income tax return

for each of the years in issue, and does not contend otherwise.

Sec. 1.6012-1(b)(1)(i), Income Tax Regs.             For petitioner's


     2
         In the notice of deficiency respondent determined that
petitioner was liable for income tax on the $13,000 received from
the sale of the Ruidoso property, with no offset of basis.
Respondent concedes that sec. 874(a) allows petitioner to use the
basis in the property to determine the amount of the gain or
loss. Sec. 874(a) does, however, deny a deduction for a loss
under sec. 165.
                                 - 4 -


taxable years 1987 through 1991, his Federal income tax returns

were due on June 15 of the year following the close of the

taxable year.    Sec. 6072(c).   As of November 13, 1992, petitioner

had not filed any Federal income tax returns for the years in

issue.    On that date, respondent mailed a letter to petitioner

asking him if he had filed returns and, if he had not,

instructing him to file returns or otherwise respond.      That

letter also stated that, if petitioner did not respond by

December 1, 1992, respondent would file substitute returns for

him.    Petitioner did not respond, and on January 12, 1993,

respondent again wrote petitioner with the same request, adding

that, if there was no response within 20 days, "your tax

liability [will be determined] based on the information we have."

Again petitioner did not respond.    On February 3, 1993,

respondent notified petitioner that respondent had filed

substitute returns for the taxable years 1987 through 1991.        On

March 23, 1993, respondent informed petitioner that the

substituted returns were computed without the benefit of any

deductions.

       On October 7, 1993, petitioner submitted Federal income tax

returns for all the years in issue.      The returns reflected the

net losses from the rental properties described above.      Each

return contained an election pursuant to section 871(d), to treat
                               - 5 -


the rental income as if it was effectively connected with a trade

or business within the United States.

     On January 13, 1994, respondent issued a notice of

deficiency to petitioner for the taxable years 1987 through 1991.

In the notice of deficiency, respondent determined that

petitioner was liable for deficiencies and additions to tax in

the above listed amounts.   Respondent treated petitioner's income

as effectively connected with a U.S. trade or business, but

determined that petitioner was not entitled to the benefit of any

deductions pursuant to section 874(a).   For each year in issue,

respondent further determined that petitioner is liable for

additions to tax for failure to file tax returns pursuant to

section 6651(a)(1) and for failure to pay estimated tax pursuant

to section 6654.

                              OPINION

Section 874(a)

     In order to understand the primary issue it is useful to

briefly explore the taxation of rental income of nonresident

alien individuals under the Internal Revenue Code.   Under section

871(a)(1)(A) the "amount" from rents received by a nonresident

alien individual that is not effectively connected with the

conduct of a trade or business within the United States is taxed

at a 30-percent rate.   This 30-percent rate is imposed on gross

rental income.   See sec. 1.871-7(a)(3), Income Tax Regs.   A
                               - 6 -


nonresident alien individual engaged in a trade or business

within the United States is taxed on the "taxable income"

effectively connected with that trade or business at the

graduated rates of tax (graduated rates), applicable to U.S.

residents enumerated in section 1.     Sec. 871(b)(1).   "Taxable

income" means gross income reduced by allowable deductions.

Secs. 3(d), 63(a).   In determining taxable income, generally,

deductions "shall be allowed * * * only if and to the extent that

they are connected with income which is effectively connected

with the conduct of a trade or business within the United

States".   Sec. 873(a).   Thus, there may be a dramatic difference

in the tax treatment of rental income depending on whether the

income is effectively connected with a trade or business.      If the

income is effectively connected with a trade or business,

deductions are allowed (unless barred by sec. 874, as discussed

infra) and the graduated tax rates in section 1 apply.      If the

income is not effectively connected with a trade or business, no

deductions are allowed, and the gross rental income is taxed at a

30-percent rate.

     Because of the uncertainties in determining whether a rental

activity constitutes a trade or business, Congress has provided

an election under section 871(d).    See S. Rept. 1707, 89th Cong.

2d Sess. (1966), 1966-2 C.B. 1055, 1076-1077.     Section 871(d)(1)

provides that a nonresident alien individual who derives any
                               - 7 -


income from real property located in the United States may elect

to treat all such income as though it were effectively connected

with a trade or business within the United States.   Under the

regulations, an election under section 871(d) is made by "filing

with the income tax return required under section 6012 and the

regulations thereunder * * * a statement to the effect that the

election is being made."   Sec. 1.871-10(d)(1)(ii), Income Tax

Regs.   Respondent has treated petitioner's rental income as

effectively connected with a trade or business within the United

States, and there is no question before the Court as to whether

petitioner's election is valid.

     With these provisions in mind we now turn to section 874(a)

which, in pertinent part, provides:

     Return Prerequisite to Allowance.--A nonresident alien
     individual shall receive the benefit of the deductions
     and credits allowed to him in this subtitle only by
     filing or causing to be filed with the Secretary a true
     and accurate return, in the manner prescribed in
     subtitle F (sec. 6001 and following, relating to
     procedure and administration), including therein all
     the information which the Secretary may deem necessary
     for the calculation of such deductions and credits. * *
     *

     Thus, in dealing with rental income, there are three

possible computations of tax liability facing a nonresident alien

individual:   (1) If the rental income is not effectively

connected with a trade or business within the United States, and

no election is made under section 871(d), then the tax is

computed at the 30-percent rate on gross rental income under
                              - 8 -


section 871(a); (2) if the income is effectively connected with a

trade or business within the United States, or if an election is

made to treat the income as effectively connected, the tax is

computed pursuant to section 871(b), on net rental income at the

graduated rates prescribed by section 1, provided that the

taxpayer has filed a return as required by section 874(a); and

(3) where the income is effectively connected and the taxpayer

fails to file a tax return as required by section 874(a), the tax

is computed on gross rental income at the graduated rates

prescribed in section 1.

     Petitioner, while recognizing that section 874(a) disallows

deductions if no return is filed, asserts that he did file

returns for the years in question.    The issue, therefore, is

whether the returns submitted on October 7, 1993, after

respondent notified petitioner that he had not filed returns and

after respondent prepared returns for petitioner but before the

notice of deficiency was issued, satisfy the requirements of

section 874(a).

     On its face, section 874 contains no time limit within which

a nonresident alien must file an income tax return.    For taxable

years ending after July 31, 1990, the regulations explicitly

create a timely filing requirement.    Section 1.874-1(b)(1),

Income Tax Regs., as amended by T.D. 8322, 1990-2 C.B. 172, 173,

provides, inter alia, that
                               - 9 -


          (b) Filing deadline for return--(1) General rule.
     * * * If no return for the taxable year immediately
     preceding the current taxable year has been filed, the
     required return for the current taxable year (other
     than the first taxable year of the nonresident alien
     individual for which a return is required to be filed)
     must have been filed no later than the earlier of the
     date which is 16 months after the due date, as set
     forth in section 6072, for filing the return for the
     current taxable year or the date the Internal Revenue
     Service mails a notice to the nonresident alien
     individual advising the nonresident alien individual
     that the current year return has not been filed and
     that no deductions or credits * * * may be claimed by
     the nonresident alien individual.

     On March 23, 1993, respondent sent petitioner a so-called

doomsday letter3 notifying petitioner that returns had been filed

by respondent, and that deductions and certain credits could no

longer be claimed.   Petitioner's returns were not submitted

until October 7, 1993.   Accordingly, petitioner does not satisfy

the conditions of the regulation for either the 1990 or 1991

taxable year.   Petitioner, however, contends that this regulation

is invalid for various reasons.   We will address this argument

later.

     Prior to 1990, the regulations under section 874 only

addressed the problem by implication.   Section 1.874-1(c), Income




     3
         Wright H. Schickli coined the term "doomsday letter" to
refer to the Internal Revenue Service notice described in sec.
1.874-1(b), Income Tax Regs., that cuts off or restricts a
nonresident alien individual's ability to claim deductions.
Schickli, "New House Rules for Foreign Taxpayers that Play the
U.S. Audit Lottery", 43 Tax Lawyer 915, 953 (1990).
                              - 10 -


Tax Regs. (T.D. 6258, 1957-2 C.B. 368, 404-405), old section

1.874-1, Income Tax Regs.,4 provided that if no return was filed

     the district director (or, if applicable, the Director of
     International Operations) shall (1) cause a return of income
     to be made, (2) include therein the income described in sec.
     1.871-7 of that individual * * *, without allowance for
     deductions * * *.

Therefore, for petitioner's taxable years 1987, 1988, and 1989 we

must decide whether section 874(a) implicitly created a timely

filing requirement.   Furthermore, since the validity of the new

regulation is called into question, this analysis will also be

relevant for the taxable years 1990 and 1991.

     Section 874(a) has its genesis, Revenue Act of 1918, ch. 18,

sec. 217, 40 Stat. 1057, 1069.   Section 217 was reenacted

throughout the years.5   When carried forward into the Internal

Revenue Code of 1954 as section 874, section 874 was "identical

in substance with sections 215 and 216, 1939 Code."   H. Rept.

1337, 83d Cong., 2d Sess. A245 (1954).   A parallel provision,

dealing with foreign corporations, was enacted as section 233 of

the Revenue Act of 1928, ch. 852, 45 Stat. 849.    This provision

     4
         Old sec. 1.874-1, Income Tax Regs., had its origins in
Regs. 45, art. 311, promulgated under the Revenue Act of 1918,
ch. 18, 40 Stat. 1057. That section was repromulgated throughout
the years. See, e.g., Regs. 65, art. 331; Regs. 69, art. 331;
Regs. 74, art. 1071; Regs. 77, art. 1071; sec. 39.215, Regs. 118.
     5
         See, e.g., Revenue Act of 1924, ch. 234, sec. 217(g), 43
Stat. 275; Revenue Act of 1926, ch. 27, sec. 217(g), 44 Stat. 32;
Revenue Act of 1928, ch. 852, sec. 215(a), 45 Stat. 848; Revenue
Act of 1932, ch. 208, sec. 215(a), 47 Stat. 229; Internal Revenue
Code of 1939, ch. 2, sec. 215, 53 Stat. 77.
                             - 11 -


was reenacted throughout the years,6 and carried into current

section 882(c)(2).7

     Sections 874(a) and 882(c)(2) are draconian provisions

designed to induce foreign corporations and nonresident alien

individuals to file tax returns.   In Blenheim Co. v.

Commissioner, 

, 909 (4th Cir. 1942), affg. 

(1940), the Court of Appeals for the Fourth Circuit

explained:

     Indeed, unless a foreign corporation is induced voluntarily
     to advise the Commissioner of all of its income attributable
     to sources within the United States and of the exact nature
     of all deductions from such income, the Commissioner may
     never learn even of the corporation's existence, and, in any
     event, * * * [the Commissioner] will probably be unable to
     determine the correct amount of its taxable income.

          The situation is pregnant with possibilities of tax
     evasion. In express recognition of this fertile danger to
     the orderly administration of the income tax as applied to
     foreign corporations, Congress conditioned its grant of
     deductions upon the timely filing of true, proper and
     complete returns. * * *

     While both sections 874(a) and 882(c)(2) are venerable,

there are few cases dealing with these provisions.   In fact,

there are no cases dealing squarely with the application of

     6
         Sec. 233 of the Revenue Act of 1932, 47 Stat. 230,
provided that "A foreign corporation shall receive the benefit of
the deductions and credits allowed to it in this title only by
filing or causing to be filed with the collector a true and
accurate return * * * in the manner prescribed in this title".
     7
         The language of sec. 882(c)(2) is virtually identical to
the language of sec. 874(a) except that sec. 882(c)(2) uses the
words "foreign corporation" in place of the words "nonresident
alien individual".
                              - 12 -


section 874(a), or its predecessors, in the context of an

untimely submitted return.8   However, more than half a century

ago, the Board of Tax Appeals wrestled with the issue in a series

of cases that arose under the predecessor to section 882(c)(2).

Because of the similarity of sections 874(a) and 882(c)(2), in

both language and the intent of the provisions, we interpret them

in pari materia.

     In Anglo-American Direct Tea Trading Co. v. Commissioner, 

(1938), a revenue agent prepared overdue returns for a

foreign corporation, without notifying the corporation, 3 days

before the corporation filed its own returns.   Apparently, the

returns prepared by the revenue agent were never submitted to, or

accepted by, the Commissioner.   Nevertheless, the Commissioner

determined that the corporation was not entitled to any

deductions because the returns were not filed timely.   The Board

of Tax Appeals, the predecessor of this Court (sometimes herein

referred to as the Board), held that section 233 of the Revenue

Act of 1928, ch. 852, 45 Stat. 849, and Revenue Act of 1932, ch.

209, 47 Stat. 230, did not include a requirement that the returns

     8
         See, however, Brittingham v. Commissioner, 

,
408-409 (1976), affd. per curiam 

(5th Cir. 1979);
Inverworld, Inc. v. Commissioner, T.C. Memo. 1996-301; Ross v.
Commissioner, 

(1941), vacated and remanded per
stipulation 43-2 USTC par. 9686 (4th Cir. 1943); Roerich v.
Commissioner, 

(1938), affd. 

(D.C. Cir.
1940); Furst v. Commissioner, 

(1930). In these
cases, no returns were filed, and the question whether returns
were timely was not at issue.
                                - 13 -


be filed timely within the meaning of section 235 (currently

section 6072(c)).   Therefore, the foreign corporation was

entitled to the benefit of deductions even though its returns

were not filed timely.     

     In Mills, Spence & Co. v. Commissioner, a Memorandum Opinion

of this Court dated Oct. 5, 1938, the Board of Tax Appeals

followed its decision in Anglo-American Direct Tea Trading Co. v.

.     On July 19, 1934, the Commissioner sent a

letter to a foreign corporation advising the corporation that its

returns had not been filed for the taxable years 1929 through

1933.   In February 1936, after several rounds of correspondence,

attorneys filed the corporation's income tax returns.

Thereafter, the Commissioner disallowed the deductions claimed on

those returns and issued a notice of deficiency.    The Board held

the corporation was entitled to the deductions, stating:     "It is

unnecessary to assign any reason for such conclusion other than

to say that our decision on this point is clearly controlled by

the holding of the Board in Anglo-American".     Mills, Spence & Co.

v. 

.

     The Board of Tax Appeals next addressed the issue in Taylor

Sec., Inc. v. Commissioner, 

(1939).     In Taylor Sec.

a foreign corporation filed its returns after the Commissioner

had filed substitute returns and issued a notice of deficiency.

The Board held that the foreign corporation was not entitled to
                              - 14 -


the claimed deductions.   The Board distinguished Anglo-American

Direct Tea Trading Co. v. 

, on the grounds

that in Anglo-American the returns prepared by the revenue agent

were never accepted by the Commissioner, the taxpayer's

delinquent returns were audited (not the returns prepared by the

revenue agent), and the returns were filed by the taxpayer before

the notice of deficiency was issued.   Taylor Sec., Inc. v.

at 702-703.

     A year later in Blenheim Co. v. Commissioner, 

, 1251 (1940), affd. 

(4th Cir. 1942), the Board

followed Taylor Sec., Inc. v. 

, where a

foreign corporation filed a timely personal holding company

return (Form 1120H) for the taxable year 1934, but failed to file

a corporate income tax return (Form 1120).   The only income shown

on the Form 1120H consisted of dividends received from domestic

corporations.   The Commissioner notified the corporation that a

Form 1120 had not been filed on its behalf and requested that it

be filed.   The secretary of the corporation ignored these

requests because he believed the Form 1120H contained all the

information required to compute the corporation's tax liability.

In addition, he believed the corporation was not required to file

a Form 1120 since, at that time, dividends received from a

domestic corporation were not subject to Federal income tax.    The

Commissioner subsequently prepared a return for the corporation
                              - 15 -


and issued a notice of deficiency.     Thereafter, the corporation's

secretary filed a Form 1120 for the year in question.      The Board

held that the filing of Form 1120H did not satisfy the

requirements of section 233 of the Revenue Acts of 1928 and 1932

because the personal holding company surtax was a separate and

distinct tax from the corporate income tax.    The Board went on to

distinguish its holding in Anglo-American Direct Tea Trading Co.

v. 

, noting that

          Undoubtedly a taxpayer may litigate a determination of
     respondent on the basis of a return made by * * *
     [respondent]. But, a "return" filed by a taxpayer after
     such a return has been prepared and filed for him by
     respondent, under the circumstances existing here, is a
     nullity and does not comply with section 

. The
     taxpayer can not thus take advantage from an alleged return
     submitted by the taxpayer not only after respondent's filing
     of its return * * * but also after the issuance of a notice
     of deficiency. * * * [Blenheim Co. v. 

.]

     The Court of Appeals for the Fourth Circuit affirmed the

Board of Tax Appeals.   However, rather than simply relying on

Taylor Sec., Inc. v. 

, the Court of Appeals

for the Fourth Circuit placed emphasis on the fact that the

taxpayer filed a return after the Commissioner had prepared a

substitute return for the taxpayer.    The Court stated:

          The conclusion that the preparation of a return by
     the Commissioner a reasonable time after the date it
     was due terminates the period in which the taxpayer may
     enjoy the privilege of receiving deductions by filing
     its own return, is consistent not only with the
     intention of Congress * * * but also with
     considerations of sound administrative procedure and
                              - 16 -


     the generally accepted rule concerning the number of
     returns which may be filed.

          *       *       *       *      *        *      *

          Without prescribing an absolute and rigid rule
     that whenever the Commissioner files a return for a
     foreign corporation the taxpayer is completely and
     automatically denied the benefit of deductions or
     credits, we yet hold that the facts of the instant case
     justify a disallowance of deductions which petitioner
     might otherwise have been entitled to claim, had it
     filed a timely return in compliance with the statutory
     requirement. [Blenheim Co. v. Commissioner, 

, 910 (4th Cir. 1942), affg. 

(1942).]

     In Georday Enterprises v. Commissioner, 

(4th

Cir. 1942), affg. a Memorandum Opinion of the Board of Tax

Appeals dated Sept. 30, 1940, a companion case to Blenheim Co. v.

, the Board denied deductions under section

233 of the Revenue Acts of 1928 and 1932.    The Court of Appeals

for the Fourth Circuit affirmed on the basis of Blenheim noting

that the case for the disallowance was even stronger because the

taxpayer did not attempt to file a return until after a petition

had been filed with the Board.

     One other case deserves some discussion.   In Ardbern Co. v.

Commissioner, 

(1940), modified and remanded 

(4th Cir. 1941), the taxpayer, a foreign corporation,

proffered income tax returns to a revenue agent prior to the date

the Commissioner prepared returns and issued a notice of

deficiency.   The revenue agent refused to accept the returns

because they were required to be filed with the Collector of
                             - 17 -


Internal Revenue at Baltimore, Maryland.    However, in refusing to

accept the returns the revenue agent failed to instruct the

taxpayer how to properly file them; he simply stated that the

returns were improperly executed.    The Board sustained the

Commissioner's disallowance of deductions.    The Court of Appeals

for the Fourth Circuit reversed.    However, the same Court of

Appeals later noted in Blenheim Co. v. 

, that Ardbern was distinguishable:

          A substantially different factual situation is
     presented in the case before us. Here the Commissioner
     prepared a return only after he had unsuccessfully made
     repeated requests to the taxpayer to do so, and only
     after the taxpayer had flouted all of these requests. *
     * *

     From these cases we make the following observations.

First, although section 874(a) contains no express time limit, at

some point there exists a terminal date, after which a taxpayer

can no longer claim the benefit of deductions by filing a return.

Blenheim Co. v. Commissioner, 

(1940); Taylor Sec.,

Inc. v. Commissioner, 

(1939).    Second, while a

terminal date does exist, the timely filing requirements of

section 6072(c) are not determinative as to whether a taxpayer is

entitled to the benefit of deductions.     Anglo-American Direct Tea

Trading Co. v. Commissioner, 

(1938).    Third, absent

some compelling equitable considerations, such as those existing

in Ardbern Co. v. 

, a taxpayer cannot claim

the benefit of deductions by filing a return after the
                               - 18 -


Commissioner has prepared a substitute return and issued a notice

of deficiency.   Blenheim Co. v. 

; Taylor Sec.,

Inc. v. 

.

     In this case we decide whether a nonresident alien

individual may avoid the sanctions of section 874(a) by filing

returns after the Commissioner has prepared substitute returns

for him, but before the notice of deficiency is issued.

Petitioner first argues that, since there is no explicit terminal

date in the statute, a taxpayer may file delinquent returns at

any time and avoid the proscription of section 874(a).    In the

alternative, petitioner contends that if there is a terminal date

that date should be the issuance of the notice of deficiency, and

not the filing of the return prepared by the Commissioner.

Where, as here, the Commissioner has notified the taxpayer that

he has not filed a return and has given the taxpayer a reasonable

time within which to file a return, we disagree with both

arguments.

     As we have already discussed, while sections 874(a) and

882(c)(2) contain no explicit time limit, the policy behind these

provisions, as applied by the case law, dictates that there is a

cut-off point or terminal date after which it is too late to

submit a tax return and claim the benefit of deductions.    If no

cut-off point existed, taxpayers would have an indefinite time to

file a return, and these provisions would be rendered
                              - 19 -


meaningless.   "To hold otherwise would render the entire

provisions of the statute a nullity."   Gladstone Co. v.

Commissioner, 

, 768 (1937).    The prior case law

established the terminal date as a mechanism designed to ensure

that sections 874(a) and 882(c)(2) would have the in terrorem

effect that Congress intended.   The Court of Appeals for the

Fourth Circuit explained:

          This terminal date, which the Board of Tax Appeals
     first adopted in Taylor Securities v. Commissioner, 1939, 

, is directed against those foreign corporations
     which instead of being induced voluntarily to advise the
     Commissioner of their domestic operations, might find their
     interests best served by filing no return whatever, and then
     waiting until such time, if any, as the Commissioner
     discovers their existence and acquires sufficient
     information about their income on which to base a return.
     Unless they are precluded from then obtaining the deductions
     and credits under such circumstances, such foreign
     corporation can, if detected, come in for the first time
     after the Commissioner has made a return and suffer no
     economic loss other than the general 25% late filing penalty
     which applies to domestic as well as foreign corporations.
     [Blenheim Co. v. 

.]

     The second aspect of petitioner's argument is that a

taxpayer may avoid section 874(a) by submitting returns prior to

the issuance of the notice of deficiency.   We do not believe,

however, that the Congressional intent in enacting section 874(a)

would be furthered by a rule that always lets a taxpayer wait and

see what information the Commissioner puts on a substitute return

before the taxpayer has to file a return of his own.

     The facts in this case point out our concerns.    When

respondent first contacted petitioner concerning his failure to
                              - 20 -


file, petitioner had filed no Federal income tax returns for 5

years.   Only after a second warning and the expiration of 3 more

months, during which time petitioner failed to respond, did

respondent prepare substitute returns for petitioner.   Eight more

months passed before petitioner submitted his own returns.    We

see no reason to reward such tactics.

     With respect to the taxable years 1990 and 1991, petitioner

essentially contends that section 1.874-1(b)(1), Income Tax

Regs., is invalid.   Given the posture of this case, however,

there is no reason to delve into the validity of this new

regulation.   Under the factual circumstances here the regulation

confers no additional rights on petitioner, and even if we were

to hold some portion of this regulation invalid, petitioner would

not prevail under our analysis of the provisions of section

874(a) and the relevant case law.

     There is one area of the new regulation, however, that

deserves some mention.   For the 1991 taxable year, petitioner

submitted his return before the 16-month time limit set forth in

1.874-1(b)(1), Income Tax Regs., had expired, but well after

respondent had sent petitioner the so-called doomsday letter

notifying him that he was not entitled to claim any deductions

for that year.   As stated, however, respondent repeatedly

notified petitioner of his failure to file returns prior to

sending a doomsday letter.
                                - 21 -


     We hold in the circumstances of this case that the

submission of returns by petitioner after substitute returns had

been prepared by respondent, and after petitioner had been

notified that no deductions are allowable but prior to the

issuance of the notice of deficiency, is insufficient to avoid

the sanction of section 874(a).    We recognize that the

application of section 874(a) in this case may appear draconian.

That result, however, flows from the nature of the statute.    As

we have suggested, were we to hold otherwise we essentially would

reward petitioner for ignoring the repeated requests that he

comply with the filing requirements of the Code.    By the same

token we, as did the Court of Appeals for the Fourth Circuit in

Blenheim Co. v. Commissioner, 

(4th Cir. 1942), affg.

(1940), decline at this time to adopt an absolute

and rigid rule for all cases.

     Petitioner also contends that respondent acted unreasonably

in failing to grant a waiver of the filing deadlines set forth in

section 1.874-1(b)(1), Income Tax Regs., as permitted by section

1.874-1(b)(2), Income Tax Regs.    Section 1.874-1(b)(2), Income

Tax Regs., provides that the deadlines may be waived "in rare and

unusual circumstances if good cause for such waiver, based on the

facts and circumstances, is established by the nonresident alien

individual."   As a preliminary matter, however, petitioner must

establish that he requested a waiver.    Cf. Sisson v.
                              - 22 -


Commissioner, T.C. Memo 1994-545.   Petitioner has not shown that

such a request was made.9   Furthermore, petitioner has not

offered any reasons as to why, if the request had been made, it

should have been granted.   Assuming, but not deciding, that we

may have jurisdiction to review the disposition of such a

request, we have no basis upon which to make a determination that

respondent's action constituted an abuse of discretion.    Compare

Mailman v. Commissioner, 

, 1082 (1988).

     Lastly, petitioner contends that because section 1.874-1(a),

Income Tax Regs., imposes a timely filing requirement on

residents of foreign countries including Mexico as a prerequisite

to receiving the benefit of deductions, and no such requirement

is imposed on U.S. residents, the regulation violates the

nondiscrimination clause in Article 25 of the Income Tax Treaty

between Mexico and the United States.   United States-Mexico

Income Tax Treaty, Sept. 18, 1992, Tax Treaties (CCH) par.

5903.27.   Petitioner's argument is not well taken.   While we

question whether there is a conflict between section 874(a) and

the provisions of the treaty, the treaty is effective for taxable




     9
         In the petition, petitioner alleged that he requested a
waiver. Respondent denied the allegation in the answer. This
case was submitted fully stipulated, and there is nothing in that
stipulation establishing that petitioner requested a waiver or,
if requested, the grounds for a waiver.
                                - 23 -


years beginning after 1993, and, therefore, does not apply to the

taxable years in issue.    

5903.31.10

Additions to Tax

     Respondent determined that petitioner is liable for

additions to tax for failure to file tax returns pursuant to

section 6651(a)(1), and for failure to pay estimated tax pursuant

to section 6654.   Section 6651(a)(1) provides that

     In the case of failure--

               (1) to file any return required under authority of
          subchapter A * * * unless it is shown that such failure
          is due to reasonable cause and not due to willful
          neglect, there shall be added to the amount required to
          be shown as tax on such return 5 percent of the amount
          of such tax if the failure is for not more than 1
          month, with an additional 5 percent for each additional
          month or fraction thereof during which such failure
          continues, not exceeding 25 percent in the aggregate.

     The tax return of a nonresident alien individual is not due

until the 15th day of the 6th month following the close of the

taxable year.   Sec. 6072(c).   Petitioner does not dispute that

the returns he submitted were untimely.

     Section 6654 imposes an addition to tax on individuals for

failure to pay estimated income tax.     The amount of the addition

is

     determined by applying--

     10
         In passing,   we note that sec. 6114(a)(1) and sec.
301.6114-1(a)(1)(i),   Proced. & Admin. Regs., provide that a
taxpayer who asserts   that a treaty provision overrides any
internal revenue law   must disclose that position on the return
for such tax.
                                - 24 -


             (1) the underpayment rate established under section
     6621,

             (2) to the amount of the underpayment,

          (3) for the period of the underpayment.       [Sec.
     6654(a).]

     Unlike section 6651, the liability for the addition to tax

under section 6654 does not depend on a lack of reasonable cause

or the presence of willful neglect.

     Petitioner has the burden of establishing that the additions

to tax should not apply.     Rule 142(a).   Petitioner essentially

contends that since respondent erroneously applied section 874(a)

to disallow the deductions, there is neither an "amount [of tax]

required to be shown", sec. 6651(a), nor an "underpayment of

estimated tax", sec. 6654(a).     We have rejected that argument.

Applying section 874(a), statutory predicates for the additions

to tax are present.     Furthermore, petitioner has not attempted to

establish that he satisfied the reasonable cause or lack of

willful neglect exceptions contained in section 6651(a)(1).

Accordingly, respondent's determinations as to the additions to

tax under sections 6651(a)(1) and 6654 are sustained.

     To reflect respondent's concession concerning the basis of

the property sold,

                                            Decision will be entered

                                      under Rule 155.