                         T.C. Memo. 1998-275



                      UNITED STATES TAX COURT



                ALBERT C. JOHNSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22161-96.                       Filed July 29, 1998.



     Isham B. Bradley, for petitioner.

    Edsel Ford Holman, Jr. and Kirk S. Chaberski, for

respondent.




                         MEMORANDUM OPINION


     JACOBS,    Judge:   Respondent    determined    the   following

deficiencies and additions with respect to petitioner's Federal

income taxes:
                                    - 2 -


                                         Additions to Tax
      Year       Deficiency         Sec. 6651(f)       Sec. 6654

      1990       $14,439               $10,829                $949
      1991        17,659                13,244               1,015
      1992         3,725                 2,794                 161
      1993        22,271                16,703                 930

In   the   alternative   to   the   section    6651(f)   additions   to   tax,

respondent determined section 6651(a)(1) additions to tax for the

years in issue.     In an amended answer, respondent adjusted the

amount of the deficiencies made in the notice of deficiency as

follows: Respondent increased the 1990 deficiency to $15,179,

decreased the 1991 deficiency to $17,511, decreased the 1992

deficiency to $3,348, and decreased the 1993 deficiency to $4,894.

For all of these years, respondent made corresponding adjustments

to the additions to tax.

      Respondent determined that petitioner must include in income

unreported gross receipts from the operation of a cattle-breeding

business.     Petitioner agrees that there were unreported gross

receipts from his cattle-breeding operation, but claims that a

portion of these receipts is amounts from sales of cattle belonging

to others.

      Following concessions by the parties, the issues remaining to

be decided are: (1) Whether petitioner must include in income

unreported gross receipts from his cattle-breeding operation in

1990-93 in amounts determined by respondent; (2) whether petitioner

is entitled to deductions for: (a)            Cash expenditures for cattle
                                - 3 -


feed for each of the years in issue; (b) a 1990 trip to Belgium;

and (c) depreciation for a barn for each of the years in issue; and

(3) whether petitioner is liable for the section 6651(f) fraudulent

failure to file addition to tax, or in the alternative the section

6651(a)(1) failure to file addition to tax, for each of the years

in issue.1

     All section references are to the Internal Revenue Code as in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedures.    Some of the facts have

been stipulated, and the stipulated facts are incorporated in our

findings by this reference.

                           General Findings

     At the time the petition was filed, petitioner resided in

Tennessee.    During the years in issue, petitioner was married to

Juanita Johnson; she resided much of the time in Panama City,

Florida.     Petitioner did not file Federal income tax returns for

any of the years in issue.

     For convenience and clarity, we have combined our remaining

findings of fact and opinion with respect to each issue.




     1
          Petitioner concedes that should we conclude that the
sec. 6651(f) addition to tax is not applicable, then the sec.
6651(a)(1) addition to tax would be applicable to any finally
determined deficiency.
                                    - 4 -


Issue 1.      Amount of Unreported Receipts From Cattle-Breeding
Operation

     We first address the amount of petitioner's           unreported gross

receipts     during   the   years   1990-93   from   his   cattle-breeding

operation.

     Petitioner was employed by Stouffer Chemical until 1986 when

he became disabled and began receiving disability and Social

Security benefits.     In 1989, he began to supplement his disability

benefits by breeding and raising Belgian blue cattle. Belgian blue

cattle are a unique breed:      originally imported from Belgium, they

have a high meat to bone ratio and are low in fat and cholesterol.2

(Belgian blue cattle are even lower in fat and cholesterol than

skinless chicken breast.)

     Petitioner first became interested in Belgian blue cattle as

a consequence of his being (in his words) "overweight" (360 pounds)

and having suffered several heart attacks.            He wished to raise

healthy meat for his own personal consumption, as well as to

promote the breed so that others similarly situated could enjoy

low-fat beef.

     Petitioner purchased his first heifer from agents of Philip

Stennett in 1989, and since that time petitioner has maintained

about 10 cows on his 24-acre farm in Fairview, Tennessee.              Mr.

     2
          Following World War II, the Belgian Government sought
to produce cattle with a high ratio of meat to feed its people
following their freedom from occupation.
                                      - 5 -


Stennett is a British cattle breeder, doing business as The Cattle

Company.     He was one of the original importers of Belgian blue

cattle from Belgium to Britain. Mr. Stennett is the past president

of the Belgian Blue Association.

     Petitioner       advertised      his    breeding    operation       (known    as

Johnson's Belgian Blue Cattle) in farmers' and/or cattlemen's trade

magazines.

     The offspring from petitioner's first heifer were outstanding;

petitioner     won    several   awards      in   the    United   States.      Others

approached     him    with   regard    to    finding     Belgian       blue   cattle.

Petitioner was unable to meet the demand for Belgian blue cattle

through his own operations.            Consequently, petitioner agreed to

broker the purchase and sale of Belgian blue cattle in the United

States   for    Mr.    Stennett    and      others,    notably     a    partnership

consisting of the Vanderhayden family of Ontario, Canada, and

Orliin Pelton.3       In this regard, Mr. Stennett would send Belgian

blue cattle embryos--which had been "flushed" from Belgian blue

cattle in Britain, frozen, and then transferred--to Canadians4 such

as the Vanderhayden family, who would then implant the Belgian blue

embryos into non-Belgian blue heifers at the Vanderhayden farm.


     3
          The record does not contain any specific information
regarding Mr. Pelton.
     4
          During the years in issue, U.S. law prohibited the
direct importation of Belgian blue cattle embryos from Britain to
the United States.
                                  - 6 -


Following a quarantine period required under U.S. law, petitioner

would drive a truck with a trailer from Tennessee to the Canadian

border where he would pick up the impregnated heifers.               Petitioner

would then return to Tennessee and deliver the heifers to the

ultimate buyers.    Occasionally, the Vanderhaydens would travel to

Tennessee to pick up the proceeds from the sales of the heifers.

      Petitioner did not specifically travel to Canada in order to

broker the deals on behalf of Mr. Stennett or the Vanderhaydens.

Rather, he would travel to Canada to purchase cattle for himself

and concurrently pick up heifers implanted with Belgian blue

embryos (in his broker capacity) and deliver them to the ultimate

buyer.

      A majority of the transactions engaged in by petitioner were

completed informally, often on a handshake.              Contracts or other

documentation of transactions was rare, although registration of

Belgian blue cattle did occur.

      Petitioner   did   not   maintain   any    books    or   records    that

accurately reflected his cattle operations or sales he made on

behalf of others.    During the years in issue, petitioner utilized

a bank account at Third National Bank, account number 8651884, for

his   business   operations.    That   account    was    in    the    names   of

petitioner and his wife.

      Because of petitioner's failure to file Federal income tax

returns for the years in issue, an agent of the Internal Revenue
                                       - 7 -


Service began an examination of petitioner's 1990-93 tax years. On

the basis of this examination, the agent reconstructed petitioner's

income from his cattle-breeding operations for years 1990-93 by

combining a bank deposit analysis of the Third National Bank

account held by petitioner and his wife with an analysis of

nondeposited cash sales of cattle. The parties stipulated that the

following represents a proper calculation of the unreported gross

receipts received by petitioner from his cattle-breeding operation

during the years in issue:

                            1990          1991              1992        1993

Total deposits
 to bank account          $55,370.14   $151,571.06     $80,084.43    $110,639.83

Less: nonincome
 deposits                 30,527.77     56,150.95      37,417.52      71,427.61

Net income
 deposits                 24,842.37     95,420.11      42,666.91      39,212.22

Add: receipts
 from cattle sales
 not deposited            39,810.90     33,850.00       1,000.00      13,500.00

Unreported gross
 receipts                 64,653.27    129,270.11      43,666.91      52,712.22

     Petitioner, however, maintains that a portion of each year's

"unreported       gross   receipts"    produced      from    his   cattle-breeding

operation represents amounts he received on behalf of others                       with

respect to their interests in the cattle sold.                     In this regard,

petitioner claims that he received the following amounts on behalf

of the Vanderhaydens and Mr. Stennett (as well as others), which
                                      - 8 -


respondent erroneously included in the calculation of petitioner's

unreported gross receipts:

                               1990            1991       1992        1993

      Vanderhaydens       $11,814.70      $21,181      $15,096      $15,896
      Stennett/others        ---           37,000         ---          ---

Respondent maintains that to the extent petitioner made cash

payments to the Vanderhaydens and/or Mr. Stennett (and others),

such payments were made with funds not considered by respondent in

the determination of petitioner's unreported gross receipts.

Discussion

        Section 6001 requires all taxpayers to maintain adequate books

and records of taxable income.          In the absence of adequate books

and records, the Commissioner may recompute the taxpayer's income

by any reasonable method that clearly reflects the taxpayer's

income.     Sec. 446(b); Holland v. United States, 348 U.S. 121, 130-

132 (1954); Parks v. Commissioner, 94 T.C. 654, 658 (1990).             One of

these methods is the bank deposits method.            DiLeo v. Commissioner,

96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

Although      not   conclusive,   the    bank    deposits     calculation     is

considered to be prima facie evidence of income.                   Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).           Here, because petitioner did

not    file   income    tax   returns    for    the   years   in   issue,     the

Commissioner reconstructed petitioner's income for each of these

years through the use of the bank deposits method combined with

specific nondeposited cash sales of cattle.
                                         - 9 -


       Generally, respondent's determination in a statutory notice of

deficiency is entitled to a presumption of correctness.                   Welch v.

Helvering, 290 U.S. 111, 115 (1933).5             The fact that in the instant

case respondent's revised computation of income reduced the amount

of petitioner's unreported income for 3 of the 4 years in issue

does       not   affect   the    presumption     of   correctness   attached     to

respondent's original determination of petitioner's tax deficiency,

to the extent not reduced by respondent's revision.                 See Gobins v.

Commissioner, 18 T.C. 1159, 1168-1169 (1952), affd. per curiam 217

F.2d 952 (9th Cir. 1954).

       Amounts received by a taxpayer while acting as an agent or

conduit are not required to be reported as income.                      Goodwin v.

Commissioner,        73   T.C.    215,    230    (1979);   see   also    Liddy   v.

Commissioner, T.C. Memo. 1985-107, affd. 808 F.2d 312 (4th Cir.

1986).       As we stated in Diamond v. Commissioner, 56 T.C. 530, 541

(1971), affd. 492 F.2d 286 (7th Cir. 1974):                "We accept as sound

law the rule that a taxpayer need not treat as income moneys which

he did not receive under a claim of right, which were not his to

keep, and which he was required to transmit to someone else as a

mere conduit."

       We accept petitioner's assertion that he received moneys while

acting as an agent for Mr. Stennett and the Vanderhaydens.                 In this

       5
          Respondent has the burden of proof with regard to the
1990 increased deficiency asserted in the amended answer. Rule
142(a).
                                - 10 -


vein, petitioner credibly testified that he acted as an agent for

Mr. Stennett and the Vanderhaydens because he was "trying to help

a fellow breeder * * * and trying to promote a breed of cattle that

[he] thoroughly believed in".     Nonetheless, petitioner failed to

convince us that the amount of unreported gross receipts for the

years in issue, as stipulated,6 included cash payments he made to

the Vanderhaydens and/or Mr. Stennett (and others) as agent for

others.   Further, petitioner failed to show that other than the

amount by which petitioner's cattle-breeding receipts were reduced

to reflect amounts petitioner paid to the Vanderhaydens and Mr.

Stennett (the Cattle Company) by check, respondent was aware of

cash payments to them in reconstructing petitioner's income.    Mr.

Stennett as well as Marion Vanderhayden testified that in examining

their books and records, they could not differentiate which of the

payments they received from petitioner represented payments for

cattle petitioner purchased from them for his own operation, and

which represented proceeds from sales to others in which petitioner

acted as their (the Vanderhaydens' or Mr. Stennett's) broker.

Petitioner's lack of records, as well as the skimpy record before

us, inhibit us from further reducing the stipulated unreported


     6
          The stipulated amount of petitioner's cattle-breeding
gross receipts was reduced to reflect: (1) Amounts petitioner
paid the Vanderhaydens by check as follows: 1991--$14,241, 1992--
$1,500, and 1993--$700; and (2) amounts petitioner paid Mr.
Stennett (The Cattle Company) by check as follows: 1992--
$1,450.23, and 1993--$12,500.
                                   - 11 -


gross receipts for purported cash amounts petitioner received from

others on behalf of Mr. Stennett and the Vanderhaydens.

     To summarize, because petitioner failed to keep adequate books

and records and did not file Federal income tax returns for the

years in issue, we conclude that respondent properly reconstructed

petitioner's income for the years in issue with one exception

relating to tax year 1990.    That exception relates to $9,500 which

petitioner claims, and we accept as true, belonged to his father,

and resulted from the sale of a bull purchased and resold by

petitioner's   father.     Thus,    petitioner's   gross   receipts   as

determined by respondent for 1990 should be reduced by $9,500.

Issue 2.   Expenses

     We next address whether petitioner is entitled to deductions

for expenses in excess of those agreed upon through an analysis of

petitioner's checks.     Specifically, petitioner claims entitlement

to deductions for (a) cash expenditures for cattle feed, (b) a

portion of the expenses for a trip to Belgium in 1990, and (c)

depreciation for a barn.

Discussion

     As often stated, deductions are a matter of legislative grace.

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Taxpayers bear the burden of establishing that they are entitled to

the claimed deductions.     Rule 142(a); Welch v. Helvering, 290 U.S.

111, 114 (1933).      This includes the burden of substantiating the
                                    - 12 -


amount and purpose of the item claimed.             Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821

(5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.                 If claimed

deductions are not adequately substantiated, we are permitted to

estimate them, provided we are convinced from the record that the

taxpayer has incurred such expenses and we have a basis upon which

to make an estimate.        Cohan v. Commissioner, 39 F.2d 540 (2d Cir.

1930); Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

       Pursuant to section 162(a), a taxpayer may deduct all ordinary

and necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.                In general, an expense is

ordinary if it is considered “normal, usual, or customary” in the

context of the particular business out of which it arose.                Deputy

v. duPont, 308 U.S. 488, 495-496 (1940).           An expense is necessary

if it is appropriate and helpful to the operation of the taxpayer’s

trade or business.         Carbine v. Commissioner, 83 T.C. 356, 363

(1984),     affd.    777   F.2d   662   (11th    Cir.    1985);   Heineman   v.

Commissioner, 82 T.C. 538, 543 (1984).             Only the portion of an

expense that is reasonable in amount is deductible under section

162.    United States v. Haskel Engg. & Supply Co., 380 F.2d 786,

788-789 (9th Cir. 1967). Pursuant to section 262(a), no portion of

any    expenditure    attributable      to   personal,    living,   or   family

expenses may be deducted, except as otherwise expressly provided in

the Code.
                                - 13 -


     (a) Cattle Feed

     Petitioner agrees with respondent's analysis of petitioner's

deductible business-related expenses as evidenced by checks.

     Petitioner purchased cattle feed during the years in issue.

He contends that he is entitled to a $6,000 deduction for cash

purchases of feed during each of the years in issue.

     Petitioner presented two witnesses with regard to the amount

of the cattle feed expenses.   One, Hubert Wiles, owner of the R.L.

Wiles Feed Mills Store in Tennessee, testified that during the

years in issue petitioner paid him a total of at least $1,560 a

year for cattle feed (in both cash and check).    The other, Warren

Edward Paul Gagner, Jr., owner of G&G Feed and Seed in Dickson,

Tennessee, also testified that he sold feed to petitioner during

the years in issue.    Mr. Gagner testified that he was unsure as to

the specific amount of feed petitioner purchased during the years

in issue.

     The deductions agreed to by the parties included amounts

petitioner paid to Mr. Wiles by check for the years in issue (1990-

-$217, 1991--$529.90, 1992--$399.75, and 1993--$204.50), as well as

amounts petitioner paid to Mr. Gagner by check (1992--$530.18, and

1993--$670.60), but did not include any cash amounts expended for

cattle feed.

     We found the testimony of both Messrs. Wiles and Gagner to be

credible.   Based on the record before us, and using our best
                                      - 14 -


estimate, we find that petitioner paid an aggregate of $10,000 (by

cash and check) for the 4 years in issue for the cattle feed, or an

average of $2,500 per year.            See Cohan v. Commissioner, supra;

Vanicek v. Commissioner, supra.          The following summarizes the cash

payments we believe petitioner made to Messrs. Wiles and Gagner:

       Cash Payments Made              Cash Payments              Total Cash
Year     to Mr. Wiles                Made to Mr. Gagner        Expenses Allowed

1990    $1,343.00   (1,560-217)      $940.00   (2,500-1,560)       $2,283.00
1991     1,030.10   (1,560-529.90)    940.00   (2,500-1,560)        1,970.10
1992     1,160.25   (1,560-399.75)    409.82   (2,500-1,560-530.18) 1,570.07
1993     1,355.50   (1,560-204.50)    269.40   (2,500-1,560-670.60) 1,624.90

       (b)   Trip to Belgium

       Petitioner traveled to Belgium in 1990. Initially, petitioner

claimed entitlement to a $2,800 deduction with regard to the trip

(consisting of $1,800 in airfare and $1,000 for expenses), which he

asserted was business related.           At trial, petitioner admitted that

he spent only $800 for the trip.

       Petitioner has failed to produce any evidence to prove that he

expended $800 for a 1990 trip to Belgium.              Thus, we hold that he is

not entitled to a deduction for a 1990 trip to Belgium.

       (c) Barn Depreciation

       In approximately 1986, petitioner built a 60- by 100-square

foot barn to house horses for his 5 children.             Petitioner testified

that the barn cost approximately $30,000, and that it was appraised

for $69,000.     The barn contained 14 stalls, an office, wash rack,

and feed room.       In 1989, when petitioner became interested in the

Belgian blue        cattle,   he   converted     the   barn   to   house   cattle.
                                    - 15 -


Petitioner claims entitlement to a $3,000 depreciation deduction

per year related to the barn, based on straight-line depreciation.

      Section 167 generally allows as a depreciation deduction a

reasonable allowance for the exhaustion, wear and tear of property

used in a trade or business, or property held for the production of

income.        Under section 168, depreciation for an agricultural or

horticultural structure is calculated using a 10-year recovery

period. Sec. 168(e)(3)(D)(i). Under the straight-line method, the

cost or other basis of the property less its estimated salvage

value is deductible in equal annual amounts over the period of the

estimated useful life of the property.           Sec. 1.167(b)-1(a), Income

Tax Regs.

      We accept petitioner's testimony that the barn was placed into

service in 1989 as part of his cattle-ranching operation and that

it   had   a    10-year   life   with   a   depreciable   basis   of   $30,000.

Accordingly, we hold that petitioner is entitled to a $3,000

depreciation deduction for each year in issue.

      To conclude, the following summarizes our determination of

petitioner's net income from his cattle-breeding operations for the

years in issue:
                                          - 16 -


                        1990               1991               1992          1993
Gross
 receipts         $64,653.27             $129,270.11        $43,666.91    $52,712.22

Father's
 bull                 (9,500.00)               ---                ---        ---

Adjusted gross
 income               55,153.27          129,270.11         43,666.91     52,712.22

Stipulated
 deductions       (28,723.00)            (81,888.00)        (31,304.00)   (40,819.00)

Cash cattle
 feed expenses        (2,283.00)          (1,970.10)        (1,570.07)    (1,624.90)

Barn
 depreciation         (3,000.00)          (3,000.00)        (3,000.00)    (3,000.00)

Net income            21,147.27           42,412.01          7,792.84      7,268.32

Issue 3.      Section 6651(f) Addition to Tax

     The final issue is whether petitioner is liable for the

fraudulent failure to file addition to tax pursuant to section

6651(f) for each of the years in issue.                 Respondent contends that

petitioner       is    liable      for   the     addition    to    tax.    Petitioner

disagrees.

     Section 6651(f) imposes an addition to tax for failure to file

a tax return.            Where the failure to file is fraudulent, the

addition to tax is 15 percent of the amount required to be shown on

the return for each month beyond the return's due date, up to a

maximum of 75 percent.             (If the failure to file is not fraudulent

and is not due to reasonable cause, the addition to tax is 5

percent of the amount required to be shown on the return for each

month that the return is not filed, up to a maximum of 25 percent.)

Respondent bears the burden of proving by clear and convincing
                                     - 17 -


evidence that the failure to file was fraudulent.              Sec. 7454(a);

Rule 142(b); Clayton v. Commissioner, 102 T.C. 632, 652-653 (1994).

Respondent's burden is met if it is shown that petitioner intended

to evade taxes known to be due and owing by conduct intended to

conceal, mislead, or otherwise prevent the collection of taxes, and

that there is an underpayment of tax.          Stoltzfus v. United States,

398 F.2d 1002, 1004 (3d Cir. 1968); Rowlee v. Commissioner, 80 T.C.

1111, 1123 (1983); Acker v. Commissioner, 26 T.C. 107, 112 (1956).

Respondent cannot satisfy the burden of proving fraud simply by

piling inference upon inference.

       The existence of fraud is a question of fact to be resolved

upon consideration of the entire record. DiLeo v. Commissioner, 96

T.C.    at   874.   Fraud    is   never   presumed   but,   rather,   must   be

established by affirmative evidence.           Edelson v. Commissioner, 829

F.2d 828, 832-833 (9th Cir. 1987), affg. T.C. Memo. 1986-223.

Direct evidence of the requisite fraudulent intent is seldom

available, but fraud may be proved by circumstantial evidence.

Spies v. United States, 317 U.S. 492, 499 (1943).             The taxpayer's

entire course of conduct may establish the requisite intent. Stone

v.     Commissioner,    56    T.C.    213,    223-224   (1971);   Otsuki     v.

Commissioner, 53 T.C. 96, 105-106 (1969).

       Over the years, courts have identified various factors from

which fraudulent intent can be inferred.                These include: (1)

Maintaining inadequate records; (2) failing to file tax returns;
                                      - 18 -


(3) giving implausible or inconsistent explanations of behavior;

(4)   concealing    assets;     (5)    failing    to   cooperate   with   tax

authorities; (6) engaging in illegal activities; (7) attempting to

conceal illegal activities; (8) dealing in cash; and (9) failing to

make estimated tax payments.           Recklitis v. Commissioner, 91 T.C.

874, 910 (1988).        These "badges of fraud" are nonexclusive, and

none of them is dispositive in and of itself.              Niedringhaus v.

Commissioner,      99    T.C.   202,     211     (1992).     A     taxpayer's

sophistication, education, and intelligence may be considered in

determining whether or not he had fraudulent intent.             See Halle v.

Commissioner, 175 F.2d 500, 502 (2d Cir. 1949), affg. 7 T.C. 245

(1946); Niedringhaus v. Commissioner, supra; see also Wheadon v.

Commissioner, T.C. Memo. 1992-633.

      Although there are several factors or "badges" existing in

this case which might indicate fraud, on balance, we believe that

respondent has not proven fraud by clear and convincing evidence.

We observed petitioner at trial.          His testimony reflected that he

lacked financial sophistication and that he strongly believed that

his cattle-breeding operation did not generate sufficient net

income to require the filing of a tax return.

      We do not sustain respondent's finding of fraud when we are

only left with a suspicion of fraud.             Green v. Commissioner, 66

T.C. 538, 550 (1976); see Comparato v. Commissioner, T.C. Memo.

1993-52.   In the instant case, we cannot conclude that petitioner
                               - 19 -


committed fraud, inasmuch as respondent has failed to adduce

evidence showing petitioner's intentional wrongdoing. Accordingly,

we do not sustain respondent's determination with regard to the

section 6651(f) additions to tax for fraud.      Because petitioner

concedes that the section 6651(a)(1) additions would be applicable

in this instance,   we direct the parties to determine the amount of

those additions in the Rule 155 computations.

     To reflect the foregoing and the concessions of the parties,



                                          Decision will be entered

                                     under Rule 155.
