                        T.C. Memo. 2002-125



                      UNITED STATES TAX COURT



           EDDIE CORDES, INC., ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 19027-98, 4815-99,      Filed May 22, 2002.
                 4816-99, 4823-99,
                 5508-99, 7369-99.


     O. Christopher Meyers, for petitioners.

     Gary L. Bloom, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   In separate notices of deficiency,

respondent determined the following income tax deficiencies and


     1
      Cases of the following petitioners are consolidated
herewith: Eddy B. and Ellen K. Cordes, docket No. 4815-99;
Joseph P. and Jean Ann Richard, docket No. 4816-99; John J. and
Sue E. Cordes, docket No. 4823-99; Eddie Cordes, Inc. Successor
by Merger With Cordes Finance Corp., docket No. 5508-99; and
Edmund J. and June J. Cordes, docket No. 7369-99.
                               - 2 -

penalties with respect to petitioners’ Federal income taxes:2

Docket No. 19027-98
Eddie Cordes, Inc.:

                               Accuracy-related penalty
     Year      Deficiency            sec. 6662(a)
     1992       $22,453                 $4,491
     1994       159,087                 31,817
     1995        41,783                  8,357

Docket No. 4815-99
Eddy B. and Ellen K. Cordes:

                               Accuracy-related penalty
     Year      Deficiency            sec. 6662(a)
     1994      $1,759,679              $351,936
     1995         985,704               197,141

Docket No. 4816-99
Joseph P. and Jean Ann Richard:

                               Accuracy-related penalty
     Year      Deficiency            sec. 6662(a)
     1994      $1,757,554              $351,590
     1995         980,285               196,884

Docket No. 4823-99
John J. and Sue E. Cordes:

                               Accuracy-related penalty
     Year      Deficiency            sec. 6662(a)
     1994      $1,970,294              $394,059
     1995         972,618               194,523




     2
      All 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. Monetary amounts are
rounded to the nearest dollar.
                                - 3 -

Docket No. 5508-99
Eddie Cordes, Inc. Successor by Merger with Cordes Finance Corp.:

                                Accuracy-related     Fraud
                                   penalties       penalties
     Year         Deficiency     sec. 6662(a)      sec. 6663
     1994          $328,625          -0-           $246,654
     1995           298,393        $59,861             (685)

Docket No. 7369-99
Edmund J. and June J. Cordes:

                                Accuracy-related     Fraud
                                   penalties       penalties
     Year         Deficiency     sec. 6662(a)      sec. 6663
     1994         $1,806,379       $211,212        $562,739
     1995          1,162,589        108,851         463,750

     Separate petitions were filed contesting respondent’s

determinations.    These cases present common issues of fact and

law and were consolidated for trial, briefing, and opinion

pursuant to Rule 141(a).

     After concessions,3 the only issues for decision are:

     1)     Whether any of the individual petitioners received

constructive dividends from Cordes Finance Corp. (CFC) and/or

Eddie Cordes, Inc. (ECI), in 1994 and/or 1995, and, if so, in
what amounts;

     2)     whether interest earned on certain notes in 1994 and

1995 is properly included in CFC’s or Edmund J. Cordes’s (Mr.


     3
      Many issues in these consolidated cases have been settled
or conceded by the parties or are deemed by this Court to be
conceded. Other issues raised by the parties are computational
in nature. In the interest of space, these conceded, deemed
conceded, computational, and settled issues, and their respective
dispositions, are set forth in Appendix, Summary of Conceded,
Deemed Conceded, Computational, and Settled Issues. We
incorporate those dispositions into our opinion by this
reference.
                                - 4 -

Cordes’s) income and, if properly included in Mr. Cordes’s

income, whether that interest is income from self-employment;

     3)     whether CFC may properly deduct from income

repossession costs in 1994 and 1995;

     4)     whether any of the petitioners are liable for the

accuracy-related penalty pursuant to sec. 6662(a) for 1994 or

1995; and

     5)     whether CFC and Mr. Cordes are liable for the fraud

penalty pursuant to sec. 6663(a) for 1994 or 1995.

                           FINDINGS OF FACT

     Some of the facts have been stipulated.    The stipulation of

facts and the two supplemental stipulations of facts are

incorporated herein by this reference, except as specifically

noted below.    At the time the petitions in these cases were

filed, ECI’s principal place of business was in Lawton, Oklahoma;

Eddy Ben and Ellen K. Cordes resided in Lawton, Oklahoma; Joseph

P. and Jean Ann Richard resided in Lawton, Oklahoma; John J. and

Sue E. Cordes resided in Austin, Texas; and Edmund J. and June J.

Cordes (the Cordeses) resided in Lawton, Oklahoma.    Eddy Ben

Cordes, Jean Ann Richard, and John Cordes are the Cordeses’

children.    We refer to the Cordeses together with their children

as the Cordes family.

I.   Corporate Ownership

     ECI was incorporated in Oklahoma in January 1963 as an

authorized dealership for Jeep-Eagle vehicles.    CFC was

incorporated in January 1964 and operated mainly to finance new
                                 - 5 -

and used vehicles purchased by customers from ECI and other car

dealerships owned by Mr. Cordes.    In 1997, CFC merged into ECI,

with ECI surviving as the successor corporation.

       During the taxable years at issue, members of the Cordes

family held legal title to all the shares of stock in CFC and

ECI.    On January 1, 1994, Jean Ann Richard and John Cordes each

held legal title to 33.3 percent of the shares of stock in CFC,

and June J. Cordes (Mrs. Cordes) held legal title to the

remaining 33.4 percent of the shares of stock in CFC.       On January

14, 1994, Mrs. Cordes transferred her legal title to Eddy Ben

Cordes.    Cordes v. Commissioner, T.C. Memo. 2002-124.     No further

transfers of stock in CFC took place in the years at issue.         At

all times during the years at issue, Eddy Ben Cordes held legal

title to 100 percent of the shares of stock in ECI.

       Mr. Cordes exercised complete control over CFC and ECI (the

corporations) during the taxable years at issue.       Mr. Cordes

controlled all of the corporations’ operations and made all

decisions pertaining to the timing, amount, and character of the

distributions at issue herein.    All corporate decisions that

would typically be made by shareholders--including who would hold

legal title to the shares of stock in the corporations, and for

how long--were made by Mr. Cordes.       The record owners had no

knowledge of the corporations’ day-to-day operations, did not

authorize or disapprove of any of the distributions at issue,

and, in many cases, were not aware of those distributions.
                               - 6 -

      Robert Hinman, C.P.A., of Stanfield & O’Dell, P.C., prepared

CFC’s, ECI’s, the Cordeses’, John Cordes’s, and Eddy Ben Cordes’s

tax returns for the years at issue.    Michael Mayhall of Godlove,

Mayhall, et al., Attorneys, prepared Jean Ann Richard’s tax

returns for the years at issue.

II.   Constructive Dividends

      Respondent determined that one or more of the individual

petitioners received constructive dividends in the years at issue

from CFC and/or ECI.   Specifically, respondent determined that

the individual petitioners in each docket4 received the following

constructive dividends from the following corporations:

Source of Distribution

          ECI                               1994            1995
Diversion of checks from
  unidentified loans                      $88,225         $16,000
Diversion of tag refunds                   57,609          55,088
Excess payoffs                              3,826          28,514
Cash distributions to Mr. Cordes              -0-         600,000

  Total from ECI                          149,660         699,602




      4
      Respondent claims that the constructive dividends arose
from certain transactions between CFC and/or ECI and the members
of the Cordes family, wherein the shareholder(s) received
economic benefit(s) from the corporation or corporations, without
an expectation of repayment. Because respondent was initially
unable to determine which individual petitioner received each
constructive dividend, respondent determined, to protect the
Government’s interest, that each of the individual petitioners
received the constructive dividend in full.
                                 - 7 -

               CFC                          1994          1995
Cash distributions to John Cordes5        $800,000         -0-
Cash distributions to Jean Ann Richard     800,000      $120,000
Cash distributions to Mrs. Cordes          484,651       400,000
Sale of 1994 and 1995 notes              1,733,608     1,073,608
Diversion of checks from bad debts6         12,282         -0-
Diversion of unbooked CFC income            71,910         -0-
Unexplained source of funds                405,724       211,612

  Total from CFC                         4,308,175     1,805,220

    Total constructive dividends         4,457,835     2,504,822

Below, we set out the facts relevant to respondent’s

determinations regarding constructive dividends.

     A.   Constructive Dividends From ECI

          1.   Diversion of Checks From Unidentified Loans,
               Diversion of Tag Refunds, and Excess Payoffs

     Petitioners concede that the amounts respondent determined

ECI distributed as diverted checks on unidentified loans,

diverted tag refunds, and excess payoffs constitute constructive

dividends to ECI’s shareholder(s) for 1994 and 1995.

          2.   Cash Distributions to Mr. Cordes

     In 1995, ECI issued checks to Mr. Cordes in the amounts of

$200,000 and $400,000.   ECI recorded the amounts of the checks in

its “Paid-In Capital” account.



     5
      The $800,000 was a check made payable to John Cordes.
Although the parties stipulated that it was a cash distribution
to Edmund J. Cordes, we treat it as a cash distribution of
$800,000 to John Cordes, and we refer to it as such.
     6
      The parties refer to these items as “Diversion of checks
from Chapter 13”. The parties have failed to explain fully the
significance of chapter 13, and we surmise by a careful review of
the record that these checks were paid to CFC from chapter 13
trustees representing funds CFC received as a creditor to
bankruptcy estates.
                                - 8 -

     B.     Constructive Dividends From CFC

            1.   Cash Distributions to John Cordes

     On March 16, 1994, CFC issued to John Cordes a check for

$800,000.    On that same day, Mr. Cordes, or someone on his

behalf, endorsed the check for $800,000 over to CFC, and CFC

deposited the check in its own account.    CFC recorded this

transaction as a liability in CFC’s account titled “Note

Payable--John J. Cordes” (John Cordes’s loan account).

     During 1994, CFC issued 12 checks totaling $94,000 to John

Cordes.   Each was charged to John Cordes’s loan account.     John

Cordes returned to CFC $4,000 of the $94,000 received.7     During

1995, CFC issued 23 checks totaling $430,000 to John Cordes.

Each was charged to John Cordes’s loan account.      Six of the 23

checks, totaling $180,000, were deposited in Mrs. Cordes’s

personal checking account.

     John Cordes failed to report the $800,000 distribution or

any of the other payments as any type of income in 1994 or 1995.

He did, however, report $20,000 of interest income from CFC in

1995.

     Also on March 16, 1994, John Cordes transferred to Mr.

Cordes legal title to 500 shares of stock in John Cordes, Inc.

This transaction was recorded in the “Minutes of Special Meeting

of Shareholders of John Cordes, Inc.”.


     7
      The record does not disclose the circumstances regarding
John Cordes’s return of funds to CFC or the manner in which the
transaction was reported on CFC’s books. The circumstances are
not relevant in light of our holding.
                                - 9 -

           2.    Cash Distributions to Jean Ann Richard

     On March 16, 1994, CFC issued to Jean Ann Richard a check

for $800,000 and recorded that transaction as a debit to account

No. 309, titled “Notes Payable--Edmund Cordes, Inc.”      This record

was subsequently changed, and the transaction was recorded as a

debit to CFC’s asset account titled “Stock--Edmund Cordes, Inc.”

     On March 16, 1994, Mr. Cordes, or someone on his behalf,

endorsed the check for $800,000 over to CFC, and CFC deposited

the check in its own account.    CFC recorded this transaction as a

liability in CFC’s account titled “Note Payable--Jean Ann Cordes”

(Jean Ann Richard’s loan account).8

     During 1994, CFC issued 11 checks totaling $90,000 to Jean

Ann Richard.    Each was charged to Jean Ann Richard’s loan

account.   During 1995, CFC issued 16 checks totaling $220,000 to

Jean Ann Richard.    Each was charged to Jean Ann Richard’s loan

account.   Four of the 16 checks, totaling $100,000, were

deposited in Mrs. Cordes’s personal checking account.

     Jean Ann Richard failed to report the $800,000 distribution

or any of the other payments as any type of income in 1994 or

1995.

     Also on March 16, 1994, Jean Ann Richard transferred to CFC

legal title to 1,000 shares of stock in Edmund Cordes, Inc.     This




     8
      Jean Ann Cordes is the same person as Jean Ann Richard. We
refer to this person as Jean Ann Richard throughout this opinion
wherever appropriate.
                              - 10 -

transaction was recorded in the “Minutes of Special Meeting of

Shareholders of Edmund Cordes, Inc.”

          3.    Cash Distributions to Mrs. Cordes

     During 1994, CFC issued 18 checks totaling $484,651 to Mrs.

Cordes.   During 1995, CFC issued five checks totaling $120,000 to

Mrs. Cordes.   Those checks were deposited into Mrs. Cordes’s

personal checking account in the year in which they were issued.

Additionally, the six checks totaling $180,000 charged to John

Cordes’s loan account and the four checks totaling $100,000

charged to Jean Ann Richard’s loan account were also deposited in

Mrs. Cordes’s personal checking account in 1995.

     In each of 1994 and 1995, one of the checks issued to Mrs.

Cordes was in the amount of $20,000, and each year CFC deducted

those $20,000 payments as interest expenses, and Mrs. Cordes

reported the payments as interest income.   The remainder of the

checks issued to Mrs. Cordes were charged to account No. 312, a

shareholder loan account in the Cordeses’ name.

          4.    Bargain Sale of Notes

     In the years at issue, CFC was in the trade or business of

financing auto purchases.   Each note CFC issued to a purchaser

was recorded on a ledger card and, eventually, in a computer.      As

CFC received each payment on a note, CFC recorded that payment on

the ledger card and issued a receipt to the borrower.

     During 1994, Mr. Cordes used $200,000 of his own money to

“pay off” a number of CFC’s outstanding notes.    Mr. Cordes and

CFC applied that $200,000 to the selected notes in a manner
                              - 11 -

directly related to those notes’ outstanding balances.    CFC then

treated each of those notes as satisfied on its books and erased

records of those notes from its computer.    CFC also removed the

ledger cards from its records, and Mr. Cordes added those

records, or had them added, to his own filing system.    Thereafter

all of the borrowers’ payments on the “paid off” notes were paid

or delivered ultimately to Mr. Cordes.    Mr. Cordes issued

receipts to the borrowers.9
     Mr. Cordes accumulated the payments he received on those

notes and used them to “pay off” a number of CFC’s remaining

outstanding notes.   Throughout 1994 and 1995, Mr. Cordes “paid

off” 1,168 of CFC’s notes in this fashion, 584 in each year (the

1994 notes and the 1995 notes, respectively).

     At the time the 1994 notes were removed from CFC’s books,

they were worth $3,340,313.   In exchange for those 1994 notes,

Mr. Cordes paid CFC $1,600,700, and CFC deducted the balance,

$1,733,608, as a bad debt for 1994.    Respondent determined the

difference between the 1994 notes’ values and the prices Mr.

Cordes paid for them constituted a constructive dividend to CFC’s

shareholder(s).10


     9
      Some CFC employees assisted Mr. Cordes in collecting the
payments and issuing the receipts. In many cases, the borrowers
were not aware that Mr. Cordes now held those notes.
     10
      The parties stipulated that the difference between the
value of the 1994 notes and the amount Mr. Cordes transferred in
exchange for the 1994 notes was $1,733,608. The difference
between the 1994 notes’ values and the prices Mr. Cordes paid for
them, however, is $1,739,614, according to the values the parties
                                                   (continued...)
                              - 12 -

     At the time the 1995 notes were removed from CFC’s books,

they were worth $5,218,828.   In exchange for those 1995 notes,

Mr. Cordes paid CFC $4,139,512, and CFC deducted the balance,

$1,073,608,11 as a bad debt for 1995.   Respondent determined the

difference between the 1995 notes’ values and the prices Mr.

Cordes paid for them constituted a constructive dividend to CFC’s

shareholder(s).

     In 1997, CFC executed a Form CG-4549, Income Tax Examination

Changes, in which it conceded that the bad debt deductions it

claimed in 1994 and 1995 with respect to the 1994 and 1995 notes

described above were false, fraudulent, and not allowable.

     The parties stipulated that the 1994 notes and the 1995

notes accumulated $138,409 and $448,164, respectively, in

interest from the dates Mr. Cordes “paid them off”.   Neither CFC

nor Mr. Cordes reported that interest income on their returns for

those years.   The Cordeses did not provide their accountant, Mr.




     10
      (...continued)
assigned to those items. We are unable to discover the source or
rationale for this discrepancy, but we nevertheless treat
$1,733,608 as the amount at issue, in accordance with
respondent’s determination and the parties’ stipulation.
     11
      The parties stipulated that the difference between the
value of the 1995 notes and the amount Mr. Cordes transferred in
exchange for the 1995 notes was $1,073,608. The difference
between the 1995 notes’ values and the prices Mr. Cordes paid for
them, however, is $1,079,317, according to the values the parties
assigned to those items. We are unable to discover the source or
rationale for this discrepancy, but we nevertheless treat
$1,073,608 as the amount at issue, in accordance with
respondent’s determination and the parties’ stipulation.
                                - 13 -

Hinman, with complete and accurate information regarding the 1994

and 1995 notes.

     In connection with the 1994 and 1995 notes, CFC paid costs

associated with repossessions of financed vehicles in the amounts

of $6,879 and $16,175 in 1994 and 1995, respectively.      CFC

deducted these payments on its 1994 and 1995 Forms 1120, U.S.

Corporation Income Tax Return, respectively.

          5.      Diversion of Checks From Bad Debt Recoveries,
                  Diversion of Unbooked CFC Income, and Unexplained
                  Source of Funds

     The parties stipulated that the amounts respondent

determined CFC distributed as diverted checks from bad debt

recoveries and as diverted unbooked CFC income constitute

constructive dividends for 1994 to the extent of $10,380 and

$71,910, respectively.     Respondent concedes that portion of his

determination in excess of the parties’ stipulation.

     As set forth above, respondent determined that CFC sold the

1994 and 1995 notes to Mr. Cordes for prices below their fair

market value.     Respondent determined that the prices at which

they were sold were $1,600,700 and $4,139,512, respectively, but

was unable to determine the source of all those funds used to

purchase the notes at those prices.      Respondent determined that

the unexplained source of funds constituted a further

constructive dividend to CFC’s shareholder(s).     After

stipulations, the parties agree that, with respect to these

items, CFC’s shareholder(s) received constructive dividends in

the amount of $45,702, both in 1994 and in 1995.     Respondent
                                - 14 -

concedes that portion of his determination in excess of the

parties’ stipulation.

                                OPINION

I.   Constructive Dividends

     Respondent determined that each of the individual

petitioners before us had taxable income from receipt of

constructive dividends in 1994 and 1995 in amounts of $4,457,835

and $2,504,822, respectively.    See sec. 61(a)(7).   Respondent

primarily argues that Mr. Cordes is properly taxable for all of

the constructive dividends, rather than any of the other

individual shareholders, because respondent contends Mr. Cordes

was the beneficial owner of all the CFC and ECI stock during the

years at issue.12   Respondent alternatively argues that each

individual petitioner is taxable on receipt of constructive

dividends in amounts proportionate to his or her record

ownership.

     Petitioners argue that although Mr. Cordes completely

controlled CFC and ECI, Mr. Cordes cannot be held to have

received constructive dividends because he did not hold stock in

those corporations in the taxable years before us.     In response

to respondent’s alternative argument, petitioners argue that

because Mr. Cordes completely controlled CFC and ECI, and the

record owners had no knowledge of, did not authorize, or did not


     12
      Respondent concedes that if we find Mr. Cordes was the
beneficial owner of all the CFC and ECI stock during the years at
issue, then the other individual petitioners are not liable for
tax on receipt of constructive dividends for those years.
                               - 15 -

actually benefit from the transactions, they received no

constructive dividends.   This is not the first time Mr. Cordes

and his family have appeared before us, nor is it the first time

that Mr. Cordes and his family have presented us with a mishmash

of arguments apparently designed to escape the consequences of

the tax laws.   Cordes v. Commissioner, T.C. Memo. 2002-124;

Cordes v. Commissioner, T.C. Memo. 1994-377.   For the reasons

discussed below, we conclude that, in the taxable years before

us, CFC and ECI conferred certain economic benefits on Mr. Cordes

as beneficial owner of all the stock in those corporations,

without expectation of repayment, and that Mr. Cordes has income

from constructive dividends.

     The law in this area is well settled.   Section 301(a) and

(c)(1) requires the inclusion in a shareholder’s gross income of

amounts received as dividends.   Secs. 61(a)(7), 301(c)(1),

316(a); Hillsboro Natl. Bank v. Commissioner, 460 U.S. 370, 392

(1983); see Ireland v. United States, 621 F.2d 731, 735 (5th Cir.

1980); see also Old Colony Trust Co. v. Commissioner, 279 U.S.

716, 729-731 (1929).   Section 316(a) defines a dividend as “any

distribution of property made by a corporation to its

shareholders--(1) out of its earnings and profits accumulated

after February 28, 1913, or (2) out of its earnings and profits

of the taxable year”.13   It is not necessary that the corporation


     13
      Petitioners have failed to prove that there was not
sufficient accumulated or current earnings and profits to support
the deficiency determined in respondent’s notices of deficiency.
                                                   (continued...)
                                - 16 -

intend a dividend, or that the distribution be termed a dividend

or recorded as such.     Dolese v. United States, 605 F.2d 1146,

1152 (10th Cir. 1979).    Thus, dividends may be either formally

declared, or they may be “constructive”.     Ireland v. United

States, supra at 735.

     A constructive dividend is paid when a corporation confers

an economic benefit on a shareholder without expectation of

repayment.   Wortham Mach. Co. v. United States, 521 F.2d 160, 164

(10th Cir. 1975).    That shareholder, for the taxable years before

us, is Mr. Cordes.

     Although Mrs. Cordes, Eddy Ben Cordes, Jean Ann Richard, and

John Cordes, in some proportion, held legal title to all of the

outstanding shares of stock in CFC and ECI throughout the taxable

years at issue, “record ownership of stock, standing alone, is

not determinative of who is required to include any dividends

attributable to such stock in gross income.    Rather, beneficial

ownership is the controlling factor.”     Cordes v. Commissioner,

T.C. Memo. 1994-377 (citing Walker v. Commissioner, 544 F.2d 419


     13
      (...continued)
Rule 142(a). The Internal Revenue Service Restructuring & Reform
Act of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 685, 726,
added sec. 7491(a), which is applicable to court proceedings
arising in connection with examinations commencing after July 22,
1998. Under sec. 7491, Congress requires the burden of proof to
be placed on the Commissioner, subject to certain limitations,
where a taxpayer introduces credible evidence with respect to
factual issues relevant to ascertaining the taxpayer’s liability
for tax. In the instant case, petitioners have not raised the
application of this provision. Further, the record does not
indicate that the Commissioner’s examinations commenced after
July 22, 1998.
                                - 17 -

(9th Cir. 1976), revg. T.C. Memo. 1972-223; Ragghianti v.

Commissioner, 71 T.C. 346, 349 (1978), affd. without published

opinion 652 F.2d 65 (9th Cir. 1981); Cepeda v. Commissioner, T.C.

Memo. 1994-62).    “‘Beneficial ownership is marked by command over

property or enjoyment of its economic benefits.’”     Cordes v.

Commissioner, T.C. Memo. 1994-377 (quoting Cepeda v.

Commissioner, supra).     A taxpayer’s total control over a

corporation and use of corporate funds for personal reasons can

result in constructive dividends, even though the taxpayer did

not hold legal title to the corporation’s stock at the time of

the advances.     Yelencsics v. Commissioner, 74 T.C. 1513, 1532-

1533 (1980); Cordes v. Commissioner, T.C. Memo. 1994-377.

     In Cordes v. Commissioner, T.C. Memo. 1994-377, and in

Cordes v. Commissioner, T.C. Memo. 2002-124, we held Mr. Cordes

received constructive dividends even though he did not hold legal

title to any shares because we found he exercised full control

over CFC in the taxable years there at issue.    In those cases,

Mr. Cordes caused CFC to make distributions to him, to friends

and family, and to his personal creditors; he controlled the

timing, amount, and uses of those funds.    Because Mr. Cordes had

total control over CFC and used the corporate funds for personal

reasons, we held that “whether or not petitioner [Mr. Cordes] was

a stockholder of record, petitioner had beneficial ownership of

all of the stock”.     Cordes v. Commissioner, T.C. Memo. 2002-124;

Cordes v. Commissioner, T.C. Memo. 1994-377.     By virtue of his
                              - 18 -

beneficial ownership, we held he received constructive dividends

and was required to include those dividends in his gross income.

     Petitioners do not dispute Mr. Cordes’s complete control

over all aspects of the corporations in the taxable years before

us; in fact, petitioners rely on that control as the reason why

the record owners should not be held to have received

constructive dividends.   Petitioners acknowledge that in the

taxable years before us, Mr. Cordes exercised complete control

over CFC and ECI and made all the decisions as to amounts,

timing, and character of the distributions here at issue.    All

decisions typically made by shareholders were instead made by Mr.

Cordes, and the record owners knew that.   The parties concede

that, regardless of record ownership, Mr. Cordes had the power to

change ownership of those shares as he wished.   Petitioners even

stated in their opening brief that “The nominal owners are Eddy

Ben Cordes, John J. Cordes, and Jean Ann Richard for the years

1994 and 1995.   It is clear however that these persons own [these

corporations] in form only.   The true control of [these

corporations] is in Edmund J. Cordes.”

     It is abundantly clear that Mr. Cordes was CFC’s and ECI’s

beneficial owner during the taxable years before us.    We must now

consider whether ECI and CFC conferred economic benefits on the

petitioner-shareholder, Mr. Cordes, as beneficial owner, without

expectation of repayment.   See Dolese v. United States, supra at

1152 (citing Palo Alto Town & Country Vill., Inc. v.
                                - 19 -

Commissioner, 565 F.2d 1388 (9th Cir. 1977), affg. T.C. Memo.

1973-223).

     In order for a company-provided benefit to be treated as

income to the shareholder, the item “must primarily benefit

taxpayer’s personal interests as opposed to the business

interests of the corporation.”     Ireland v. United States, supra

at 735; accord Dolese v. United States, supra at 1152.

Petitioners bear the burden of proving that the amounts at issue

were not expended for personal benefit or in discharge of

personal obligations.   Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933); Challenge Manufacturing Co. v. Commissioner, 37 T.C.

650 (1962); Arnold v. Commissioner, T.C. Memo. 1994-97.     Our

standard, in reviewing these many expenditures, is whether the

expense primarily benefited ECI or CFC, as appropriate, or their

sole shareholder, Mr. Cordes.    Frazier v. Commissioner, T.C.

Memo. 1994-358, affd. 90 F.3d 437 (10th Cir. 1996).

     A.   Constructive Dividends From Eddie Cordes, Inc.

          1.   Diversion of Checks From Unidentified Loans,
               Diversion of Tag Refunds, and Excess Payoffs

     Petitioners concede these items constitute constructive

dividends for 1994 and 1995.    Petitioners’ only contention is

that Mr. Cordes did not receive income from these items because

he was not a shareholder in ECI.    We have already held that Mr.

Cordes was ECI’s sole shareholder for Federal income tax

purposes, and we now hold that petitioners’ concession operates

to include these items in Mr. Cordes’s income.
                               - 20 -

            2.   Cash Distributions to Mr. Cordes

     ECI distributed $600,000 to Mr. Cordes in 1995.    Petitioners

contend that this amount does not represent constructive

dividends, but instead it represents loans or repayments of loans

by ECI to Mr. Cordes.    Petitioners have offered no evidence that

any loans existed between ECI and Mr. Cordes.    Without support,

petitioners assert that the “multi-year history of large loans by

and to Mr. Cordes and these corporations over the years” and the

“consistent history of repayment of the loans” supports their

position.    These statements are insufficient to show that the

economic nature of the transactions themselves is that of a debt

rather than of a constructive dividend.    Cordes v. Commissioner,

T.C. Memo. 1994-377 (citing Williams v. Commissioner, 627 F.2d

1032, 1034 (10th Cir. 1980), affg. T.C. Memo. 1978-306; Alterman

Foods, Inc. v. United States, 505 F.2d 873, 876-877 (5th Cir.

1974)).

     We cannot find that these payments represent loans or

repayments of loans; petitioners have failed to meet their burden

of proof.    Furthermore, because petitioners have not shown that

Mr. Cordes did not benefit or that ECI did benefit from these

payments, we conclude these payments are constructive dividends

to ECI’s beneficial owner and sole shareholder for Federal income

tax purposes, Mr. Cordes.
                               - 21 -

     B. Constructive Dividends From CFC

            1.   Cash Distributions to John Cordes and Jean Ann
                 Richard

     On March 16, 1994, CFC made two checks payable, one to John

Cordes, the other to Jean Ann Richard, each in the amount of

$800,000.    Both checks bore the notation “Purchase Stock”, and

both checks were endorsed by Mr. Cordes, or someone acting on his

behalf, and redeposited in CFC’s bank account at Mr. Cordes’s

direction.    Upon receipt of the checks, CFC established accounts

on its books evidencing a note payable to John Cordes and another

to Jean Ann Richard, each in the amount of $800,000.    Throughout

1994 and 1995, CFC made a number of distributions to John Cordes,

Jean Ann Richard, and Mrs. Cordes and charged those distributions

to John Cordes’s and Jean Ann Richard’s loan accounts.

                 a.   The Two $800,000 Distributions

     Respondent’s primary arguments with respect to the two

$800,000 distributions are:    (1) CFC distributed $800,000 for Mr.

Cordes’s use in purchasing stock from John Cordes, and the

distribution thereby constitutes a constructive dividend to CFC’s

shareholder(s),14 and (2) CFC distributed $800,000 to Jean Ann




     14
      Respondent also argued that John Cordes received the
$800,000 as proceeds from the sale of a capital asset, but
respondent did not amend his answer to include the tax on such
proceeds. Respondent further argued that John Cordes lent the
$800,000 to CFC upon his receipt of the funds and that CFC made
payments to John Cordes on that loan in 1994 and 1995. As these
arguments have no bearing on whether the items in the notice of
deficiency constitute constructive dividends to CFC’s
shareholder(s), we do not examine these arguments.
                              - 22 -

Richard,15 and the distribution thereby constitutes a

constructive dividend to CFC’s shareholder(s).16

     Petitioners contend that John Cordes and Jean Ann Richard

never received the two $800,000 checks or the funds the checks

represented, and CFC’s shareholder(s) therefore cannot be held to

have received constructive dividends.   Petitioners argue that the

two $800,000 checks were drafted merely to establish interest-

free lines of credit through CFC to John Cordes and Jean Ann

Richard and that only amounts charged to those lines of credit

and actually received by John Cordes or Jean Ann Richard may be

constructive dividends.

     Petitioners’ argument that CFC did not confer a benefit on

John Cordes and Jean Ann Richard begs the question of who was the

beneficial owner of the stock nominally owned by John Cordes and



     15
      Regarding the distribution to Jean Ann Richard, respondent
asserts that the distribution alternatively may be characterized
as a sale of stock in Edmund Cordes, Inc., by Jean Ann Richard to
CFC in exchange for (a) $800,000, which she constructively
received in 1994, or (b) $800,000 paid by installment, of which
she received $90,000 in 1994 and $120,000 in 1995.
     16
      Upon careful review of the facts in this case and our
prior opinions involving Mr. Cordes and the Cordes corporations,
we find that Mr. Cordes was beneficial owner of all the
corporations discussed herein, including those corporations in
which respondent contends Mr. Cordes purchased stock. The facts
do not establish that Mr. Cordes used a $800,000 check to
purchase stock from John Cordes, or that CFC used $800,000 to
purchase stock from Jean Ann Richard. The facts do show that, on
March 16, 1994, Mr. Cordes and CFC became the respective record
owners of the shares in question, but Mr. Cordes’s complete
control over the corporations allowed him to alter record
ownership in any or all of the corporations at any time, without
consideration.
                                 - 23 -

Jean Ann Richard.      CFC conferred economic benefits on its

shareholder, Mr. Cordes, by and upon delivering to him the two

$800,000 checks, on March 16, 1994, without expectation of

repayment.    CFC provided these funds to Mr. Cordes for personal

reasons, and it is inconsequential that Mr. Cordes subsequently

deposited the funds into CFC’s bank account for his family’s

benefit, rather than directly into his children’s personal

accounts.    What Mr. Cordes ultimately did with the funds is not

relevant; CFC conferred upon Mr. Cordes the economic benefit of

control over $1,600,000 for personal reasons.      Because CFC

conferred upon Mr. Cordes the ability to dispose of $1,600,000

for any personal reason and received no corporate benefit and did

not expect any repayment, we hold that Mr. Cordes received

constructive dividends in 1994 in the aggregate amount of

$1,600,000.

                  b.    Subsequent Distributions From John Cordes’s
                        and Jean Ann Richard’s Loan Accounts

     In 1994, distributions were made from John Cordes’s loan

account to John Cordes in the amount of $94,000 and from Jean Ann

Richard’s loan account to Jean Ann Richard in the amount of

$90,000.     In 1995, payments were made from John Cordes’s loan

account to John Cordes in the amount of $250,000 and to Mrs.

Cordes in the amount of $180,000 and from Jean Ann Richard’s loan

account to Jean Ann Richard in the amount of $120,000 and to Mrs.

Cordes in the amount of $100,000.      Respondent determined that the

distributions to Mrs. Cordes in 1994 and 1995 and the
                               - 24 -

distributions to Jean Ann Richard in 1995 constitute constructive

dividends to CFC’s shareholder(s).      For some reason, respondent

did not make a similar determination with respect to the

distributions to John Cordes in 1994 and 1995 or with respect to

the distributions to Jean Ann Richard in 1994.17

     Respondent’s positions are inconsistent, and respondent’s

arguments are confusing, incomplete, and unsupported, at best.

In light of our holding, we see no need to address them fully.

The distributions to John Cordes, Jean Ann Richard, and Mrs.

Cordes were charged to John Cordes’s and Jean Ann Richard’s loan

accounts.    Those loan accounts were established to account for

the $1,600,000 that was distributed in effect to Mr. Cordes and

returned to CFC until Mr. Cordes determined what to do with the

funds.    The loan accounts operated in substance as savings

accounts from which Mr. Cordes distributed funds to his family

members at will.    Because we have already held that Mr. Cordes

must report the $1,600,000 recorded in the loan accounts as

constructive dividends, we hold that the distributions from the

loan accounts; i.e., the distributions of $94,000 and $250,000 to


     17
      Respondent instead argued that the distributions to John
Cordes establish that a bona fide debt existed between CFC and
John Cordes, but respondent did not determine that a portion of
those distributions constituted interest income or, if respondent
agreed with petitioners that these distributions were interest-
free loans from CFC to John Cordes, that the forgone interest
constituted a constructive dividend to CFC’s shareholder(s).
Respondent has not made an argument with regard to the
distributions to Jean Ann Richard totaling $90,000, other than to
mention that they may constitute constructive dividends or the
proceeds of an installment sale to Jean Ann Richard.
                                - 25 -

John Cordes in 1994 and 1995, respectively; the distributions of

$90,000 and $120,000 to Jean Ann Richard in 1994 and 1995,

respectively; and the distributions of $180,000 and $100,000 to

Mrs. Cordes in 1995 from John Cordes’s and Jean Ann Richard’s

accounts, respectively, do not constitute additional constructive

dividends from CFC to Mr. Cordes.18

          2.      Cash Distributions to Mrs. Cordes

     CFC issued checks totaling $484,651 in 1994 and totaling

$120,000 in 1995 made payable to Mrs. Cordes.    All of the checks

were deposited in Mrs. Cordes’s personal checking account.

Respondent determined that all of these distributions constituted

constructive dividends to CFC’s shareholder(s).       Petitioners

maintain that the distributions are not constructive dividends to

CFC’s shareholder(s) because the shareholder(s) did not

authorize, receive, or derive economic benefits from the

distributions or, alternatively, that the distributions

represented loans or the repayment of loans to the

shareholder(s).

     Respondent also determined that the $180,000 and $100,000

distributions Mrs. Cordes received and deposited in 1995 and

which were charged to John Cordes’s and Jean Ann Richard’s loan

accounts, respectively, were constructive dividends to CFC’s

shareholder(s).    We addressed those distributions above.     Below,


     18
      Respondent has not alleged that these distributions are
taxable to any of the petitioners on any other grounds nor has
respondent alleged that the distributions are gifts from Mr.
Cordes to the respective recipients.
                                 - 26 -

we address the $484,651 and the $120,000 Mrs. Cordes received in

1994 and 1995, respectively, and which have not already been

considered.

                a.    Interest

     In each of 1994 and 1995, CFC deducted $20,000 of the

distributed funds as interest expenses, and Mrs. Cordes included

that $20,000 in income as interest received.      Respondent

determined that CFC and Mrs. Cordes improperly treated the funds

as interest because CFC was not indebted to Mrs. Cordes in 1994

or 1995.   Respondent therefore disallowed CFC’s deductions and

decreased Mrs. Cordes’s income.

     Petitioners contend “The uncontroverted testimony here is

that $200,000.00 was advanced to Cordes Finance Corp. by Edmund

J. Cordes in 1994 * * *.   * * * the money was advanced and the

$20,000.00 payments annually do constitute a reasonable rate of

interest (approximately 10%) on these funds.”      Petitioners have

confused the facts.   We have found the $200,000 was transferred

by Mr. Cordes to CFC in exchange for some of the notes.        Mrs.

Cordes did not transfer those funds, nor did the transfer of

$200,000 constitute a loan.      Petitioners have failed to

demonstrate that CFC was indebted in any way to Mrs. Cordes,19


     19
      We note that although Mr. Cordes testified that CFC repaid
total loans of approximately $884,000 to Mrs. Cordes’s account
between 1994 and 1995, petitioners have not presented any
corroborative evidence that such loans existed.
     Mr. Cordes also testified that some of the funds Mrs. Cordes
received in 1995 may have been repayments of loans she made to
John Cordes. Mr. Cordes’s testimony is inconsistent and not
                                                   (continued...)
                                - 27 -

and we must therefore hold that the two $20,000 distributions to

Mrs. Cordes do not constitute deductible interest expenses to CFC

or interest income to Mrs. Cordes.

                  b.   Loans and Repayment of Loans

     Respondent determined that the amounts Mrs. Cordes received

and deposited which we have not yet addressed, $464,651 in 1994

and $100,000 in 1995, constitute constructive dividends to CFC’s

shareholder(s).    Petitioners posit a theory that these

distributions are either loans from CFC to Mrs. Cordes or

repayment of loans by CFC to Mrs. Cordes.    Petitioners rely on

their alleged history of loans, together with CFC’s treatment of

these distributions; petitioners did not introduce any evidence

that these distributions were loan related.

     Petitioners failed to show that CFC benefited from these

distributions or that Mr. Cordes did not so benefit.

Distributions to family members can constitute constructive

dividends to the shareholder(s) when the distributions fail to

benefit the corporation.     Cordes v. Commissioner, T.C. Memo.

1994-377 (in situation nearly identical to that before us, this

Court held CFC’s transfers to friends, wife, and children of Mr.

Cordes to be constructive dividends to him when he failed to show

corporate benefit or expectation of repayment); Proctor v.

Commissioner, T.C. Memo. 1981-436 (payments to shareholder’s

mother, in excess of compensation reasonable for services


     19
      (...continued)
credible.
                                - 28 -

provided, constituted constructive dividend income to

shareholder).   Because petitioners failed to show Mr. Cordes

received no personal benefit from these transfers, we hold Mr.

Cordes received constructive dividends in 1994 and 1995 with

respect to these items.

          3.      Bargain Sale of Notes

     Respondent determined that CFC sold 584 notes to Mr. Cordes

in each of 1994 and 1995 at prices below their fair market value

and that the discount at which CFC sold the notes constitutes

constructive dividends from CFC to CFC’s shareholder(s).

Petitioners contend CFC owned the 1994 and 1995 notes at all

times and that because Mr. Cordes did not purchase the 1994 and

1995 notes (in a bargain sale or otherwise), CFC conferred no

economic benefit on its shareholder(s).   We conclude below that

Mr. Cordes did in fact purchase the 1994 and 1995 notes at prices

below fair market value and that Mr. Cordes, as beneficial owner

of CFC, received constructive dividends in amounts equal to the

discounts received.

     In 1994, Mr. Cordes transferred $200,000 of his personal

savings to CFC.    Contemporaneously, CFC removed a number of notes

from its books, and Mr. Cordes recorded those notes on his books.

Mr. Cordes contends that his transfer of $200,000 to CFC was

merely coincident with CFC’s reorganization of its records.     Mr.

Cordes, however, offered no evidence that the $200,000 was

treated as a capital contribution or loan to CFC, rather than as

funds used to purchase the notes.
                              - 29 -

     Mr. Cordes later collected payments of principal and

interest on those notes and transferred those payments to CFC in

exchange for additional notes.   Petitioners have failed to offer

any evidence that those subsequent transfers to CFC were other

than funds used to purchase notes.     Petitioners contend instead

that CFC owned the notes because the borrowers were never told to

make payments to Mr. Cordes, the ledger cards were merely moved

across the room, payments were still made payable to CFC, and

those payments were ultimately deposited in CFC’s account.

     We reject petitioners’ contentions for several reasons.     The

borrowers’ beliefs regarding the identity of the lender, and the

retention of the ledger cards in the same room, are of

comparatively little relevance in these circumstances.    What is

more relevant is that CFC treated the notes as satisfied and

completely removed the records from its computer and files, going

so far as to claim deductions for bad debts, and Mr. Cordes added

the records to his files and treated them as outstanding debts

owed to him.   Moreover, any payments delivered to CFC were

promptly forwarded to Mr. Cordes.    Although CFC’s employees

occasionally collected the payments from the borrowers, recorded

them in Mr. Cordes’s records, and issued receipts for those

payments, they did so on behalf of Mr. Cordes.

     We also reject petitioners’ allegation that Mr. Cordes

merely held the payments “in escrow”, ultimately delivering them

to CFC.   We presume petitioners’ argument is that because Mr.

Cordes never deposited the payments in his own account, he did
                              - 30 -

not have dominion or control over the funds, and the funds,

therefore, are not income to him.   However, Mr. Cordes received

payments on notes he had already purchased from CFC and exchanged

them for more of CFC’s notes, which he then also owned.    That Mr.

Cordes did not first deposit the payments received in a personal

account before purchasing additional notes is irrelevant.   We

find that Mr. Cordes had full control over the payments and that

he owned the notes in question.

     Clearly, Mr. Cordes purchased 1,168 notes from CFC in 1994

and 1995.   Petitioners have disputed only who owned the 1994 and

1995 notes and have not addressed whether CFC sold the notes to

Mr. Cordes for prices below fair market value, should we

conclude, as we have, that Mr. Cordes owned the notes.    Section

1.301-1(j), Income Tax Regs., states that “If property is

transferred by a corporation to a shareholder which is not a

corporation for an amount less than its fair market value in a

sale or exchange, such shareholder shall be treated as having

received a distribution to which section 301 applies.”    Because

CFC sold the 1994 and 1995 notes to Mr. Cordes for prices below

fair market value, we hold that the differences between the

prices paid for the notes and the fair market values of the notes

are constructive dividends to Mr. Cordes.   See Estate of Durkin

v. Commissioner, 99 T.C. 561, 567 (1992); Eugene D. Lanier, Inc.

v. Commissioner, T.C. Memo. 1998-7 (citing sec. 1.301-1(j),

Income Tax Regs.; Palmer v. Commissioner, 302 U.S. 63, 69-70

(1937)).
                                - 31 -

          4.      Diversion of Checks From Bad Debt Recoveries and
                  Diversion of Unbooked CFC Income

     The parties agree that these items constitute constructive

dividends for 1994, in the amounts of $10,380 and $71,910,

respectively.     Petitioners’ only contention is that Mr. Cordes

did not receive income from these items because he was not a

shareholder in CFC.     We have already held that Mr. Cordes was

CFC’s sole shareholder for Federal income tax purposes, and we

now hold that petitioners’ concessions operate to include these

items in Mr. Cordes’s income.

          5.      Unexplained Source of Funds

     In connection with respondent’s determination that Mr.

Cordes purchased the 1994 and 1995 notes at prices below fair

market value, respondent further determined that CFC provided

some of the funds for those purchases or further discounted the

purchases.     That is, although the parties stipulated that CFC

sold the 1994 notes to Mr. Cordes for $1,600,700, only $1,248,907

could be traced to funds supplied by Mr. Cordes.     Respondent

determined that the difference, $351,793, was a further

constructive dividend from CFC to its shareholder(s).     Likewise,

the parties stipulated that CFC sold the 1995 notes to Mr. Cordes

for $4,139,512 but that only $3,963,462 could be traced to funds

supplied by Mr. Cordes.     Respondent determined that the

difference, $176,050, was a further constructive dividend from

CFC to its shareholder(s).     The parties later stipulated that of

those amounts, only $45,702 constitutes a constructive dividend
                                - 32 -

for each of 1994 and 1995, and respondent concedes that the

amounts in excess of those stipulations are not constructive

dividends.

      The only issue with regard to these items is who received

these constructive dividends.    Because Mr. Cordes was CFC’s sole

shareholder for Federal income tax purposes, we hold Mr. Cordes

must include constructive dividends of $45,702 in income for each

of his 1994 and 1995 taxable years.

II.   The Proper Tax Treatment of Interest Earned on the 1994 and
      1995 Notes

      In our discussion above regarding the 1994 and 1995 notes,

we found that Mr. Cordes purchased 584 notes from CFC in each of

1994 and 1995.   Respondent determined that Mr. Cordes earned

interest on the notes purchased20 and that Mr. Cordes earned that

interest in connection with his trade or business (presumably the

trade or business of financing, but respondent has not

specifically named that trade or business) and is liable for tax

on the net earnings from self-employment.   The parties stipulated

that interest in the amounts of $138,409 and $448,164 was earned

on the notes in 1994 and 1995, respectively.

      Petitioners concede that neither CFC nor Mr. Cordes reported

any of that interest as income and that the owner of the notes,

either CFC or Mr. Cordes, must report that income.   Petitioners



      20
      Respondent alternatively determined that if we find Mr.
Cordes did not purchase the notes; i.e., that CFC still owned the
notes, then CFC must report that interest as income in 1994 and
1995.
                                - 33 -

contend CFC owned the notes at all times, and CFC concedes the

interest is includable in its income.    Because we have held that

Mr. Cordes owned the 1994 and 1995 notes, Mr. Cordes must include

in income the interest on those notes, in accordance with his

concessions and section 61(a)(4).

     Mr. Cordes has not addressed respondent’s contention that if

Mr. Cordes owned the notes, he is liable for self-employment tax

on the interest.21    By virtue of his failure to address the self-

employment tax issue, Mr. Cordes is liable for self-employment

tax on that income.    See also sec. 1.1402(a)-5(b), Income Tax

Regs., for specific inclusion.

III. Repossession Costs Deduction

     CFC deducted costs incurred and paid in connection with

repossessing certain vehicles in 1994 and 1995, including the

costs associated with repossessing vehicles which secured the

1994 and 1995 notes.    The parties stipulated that CFC incurred,

paid, and deducted costs of $6,879 in 1994 and $16,175 in 1995 in


     21
      The extent of Mr. Cordes’s argument regarding self-
employment tax is as follows:

     XI. EDMUND J. CORDES IS NOT LIABLE FOR SELF-EMPLOYMENT
     TAX FOR THE TAXABLE YEARS 1994 AND 1995.

          Petitioner contends the omitted interest income
     relating to the discounted notes is income to Cordes
     Finance Corp., not to Petitioner. Any other income as
     a result of constructive dividends would not be subject
     to self employment taxes.

          IRC §1401(a) imposes a tax only on the self
     employment income of an individual and Edmund J. Cordes
     had no self employment income in 1994 or 1995.
                              - 34 -

connection with repossessing vehicles that secured the 1994 and

1995 notes.   Respondent determined that CFC improperly deducted

the costs under section 162 because CFC did not incur or pay the

costs in connection with its trade or business.    Petitioners

contend that CFC owned the notes and that CFC paid and properly

deducted the costs in connection with its trade or business.

     Section 162(a) provides for a deduction from income of all

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on a trade or business.    Section 1.162-

1(a), Income Tax Regs., provides that the expenses deductible

from income include those pertaining to the taxpayer’s trade or

business.   In the instant cases, we have held Mr. Cordes, not

CFC, owned the notes associated with these costs.    It follows

that CFC did not incur or pay these costs in connection with its

own trade or business, but in connection with an activity carried

on by Mr. Cordes.   Petitioners have cited no authority allowing

one party (CFC) a deduction for costs paid in connection with

another party’s (Mr. Cordes’s) trade or business, or other

activity.   We hold, therefore, CFC may not deduct those costs

under section 162.22



     22
      Petitioner contends that if CFC may not deduct the costs,
then we must allow Mr. Cordes to deduct them. This issue was not
formally raised by either party, but both parties have addressed
it, and we treat it as tried by consent.
     Because Mr. Cordes is a cash method taxpayer, he can deduct
the costs in the year in which he pays them. Sec. 461(a); United
States v. Hughes Props., Inc., 476 U.S. 593, 599 (1986). Because
Mr. Cordes did not pay the costs in 1994 or 1995, he may not
deduct the costs in those taxable years.
                                    - 35 -

IV.     Accuracy-Related Penalties

        Respondent determined that each petitioner is liable for an

accuracy-related penalty for each of the taxable years before

us.23        With respect to ECI, docket No. 19027-98, 1994 is the only

year in which the penalty is still at issue.        We consider the

1994 and 1995 taxable years with respect to all the other

petitioners.

        A.      ECI, the Cordeses’ Children, CFC, and the Accuracy-
                Related Penalty Due to a Substantial Understatement of
                Income Tax

        Respondent determined that all petitioners, save the

Cordeses, are liable for the accuracy-related penalty due to a

substantial understatement of income tax pursuant to sec. 6662(a)

and (b)(2).        A substantial understatement is an understatement of

income tax for any taxable year which exceeds the greater of (a)

10 percent of the tax required to be shown on the return, or (b)

$5,000, in the case of an individual, or $10,000, in the case of

a corporation.        Sec. 6662(d)(1).   As this threshold computation

is dependent on our other, earlier, conclusions, we leave for the

Rule 155 computation whether there was a substantial

understatement and whether and to what extent an accuracy-related


        23
      In docket No. 5508-99, respondent did not determine
petitioner Eddie Cordes, Inc., Successor by Merger with Cordes
Finance Corp., was liable for the accuracy-related penalty
pursuant to sec. 6662(a) for 1994. Respondent so determined
because the items which were not attributable to fraud did not
give rise, on their own, to a deficiency to which an accuracy-
related penalty could attach. Respondent did determine, however,
that should we find petitioner not liable for the fraud penalty
pursuant to sec. 6663, petitioner is liable for the accuracy-
related penalty pursuant to sec. 6662(a).
                              - 36 -

penalty is properly imposed for each of the taxable years at

issue in these dockets.

     Petitioners contend that they are not liable for the

substantial understatement penalty because they did not

substantially understate their income tax liabilities.      ECI

separately alleges that “the underpayment of tax after all agreed

adjustments is less than $10,000.”     (Emphasis added.)   Rather

than point out all of petitioner’s errors in making this

statement, we defer to the Rule 155 computation for resolution of

ECI’s liability.

     The Cordes children24 and CFC claim that (1) they did not

understate their income tax and, alternatively, (2) they relied

on their financial adviser/return preparer for correct and proper

tax return preparation and that such reliance absolves them of

liability for the penalty.   As to their first argument, to the

extent the Rule 155 computation discloses a substantial

understatement as defined in section 6662(d)(1), petitioners’

primary argument fails.   If the Rule 155 computation discloses no

substantial understatement, then no accuracy-related penalty is

proper as to that petitioner for that taxable year.




     24
      We have found that the Cordes children did not receive
constructive dividends, and it appears that the Rule 155
computation will demonstrate that they did not substantially
understate their respective income tax liabilities. We
nevertheless address the accuracy-related penalties as they
relate to these petitioners, in the unlikely event that the Rule
155 computation does demonstrate a substantial understatement.
                              - 37 -

     As to petitioners’ second argument, section 6664(c)(1)

provides a defense against the accuracy-related penalty with

respect to any portion of an underpayment if the taxpayer shows

that there was reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion.

Reliance on professionals may satisfy the reasonable cause and

good faith elements of section 6664(c)(1) if taxpayers show by a

preponderance of the evidence that the professional was a

competent professional who had sufficient expertise to justify

reliance, the taxpayer gave the adviser all necessary and

accurate information, and the taxpayer actually relied in good

faith on the adviser’s judgment.   Neonatology Associates, P.A. v.

Commissioner, 115 T.C. 43, 99 (2000).

     Based on all the pertinent facts and circumstances, section

1.6664-4(b)(1), Income Tax Regs., we find petitioners have failed

to establish that there was reasonable cause for any portion of

the understatements in these cases or that they acted with any

measure of good faith.   Sec. 6664(c)(1).   Among other reasons,

John Cordes, Eddy Ben Cordes, and CFC have not established that

they provided Robert Hinman, their financial adviser/return

preparer, with all the necessary and accurate information or that

Mr. Hinman advised them on any reporting positions.    Petitioners

seemed to rely on Mr. Hinman, if at all, solely because he was a

certified public accountant known and recommended by Mr. Cordes.

John Cordes testified that “I don’t really recall what

specifically was on * * * [the 1995 tax return], what Robert
                                - 38 -

[Hinman] sent me.    I--my wife and I signed and returned it.   He’s

a CPA and I figured he knew how to handle that situation”,

referring to $20,000 reported on his 1995 return as interest, for

which he could not recollect the source.

     Jean Ann Richard has also failed to prove she reasonably

relied on her return preparer.    Jean Ann Richard’s returns for

1994 and 1995 were not prepared by Mr. Hinman.    The record

contains no information regarding Mr. Mayhall (the individual who

prepared her returns), Mr. Mayhall’s competency or expertise,

what information Jean Ann Richard provided to him, or whether he

issued any advice upon which Jean Ann Richard relied.

     We hold petitioners are liable for the accuracy-related

penalty due to substantial understatement of income tax pursuant

to section 6662(a) and (b)(2), to the extent the Rule 155

computation shows an underpayment of tax.

     B.   The Cordeses and the Accuracy-Related Penalty Due to
          Negligence or Disregard of Rules or Regulations

     Respondent determined in docket No. 7369-99 that the

Cordeses were liable for the accuracy-related penalty due to

negligence or disregard of rules or regulations, pursuant to

section 6662(a) and (b)(1).

     Negligence is defined as “any failure to make a reasonable

attempt to comply with the provisions of * * * [the Internal

Revenue Code]”.     Sec. 6662(c); Neely v. Commissioner, 85 T.C.

934, 947 (1985) (negligence is lack of due care or failure to do

what a reasonable and prudent person would do under the
                              - 39 -

circumstances).   The term “disregard” includes “any careless,

reckless, or intentional disregard.”    Sec. 6662(c).    Disregard of

rules or regulations is careless if the taxpayer does not

exercise reasonable diligence to determine the correctness of a

return position that is contrary to the rule or regulation.       Sec.

1.6662-3(b)(2), Income Tax Regs.   Disregard of rules or

regulations is reckless if the taxpayer makes little or no effort

to determine whether a rule or regulation exists.       Id.   Disregard

of rules or regulations is intentional if the taxpayer knows of

the rule or regulation that is disregarded.     Id.   Petitioners

have the burden of proving that respondent’s determination is

erroneous and that they did what reasonably prudent people would

have done under the circumstances.     Rule 142(a); Bixby v.

Commissioner, 58 T.C. 757, 791 (1972).

     Petitioners’ sole defenses to respondent’s determination are

that (1) they did not underpay their tax, and, alternatively, (2)

they acted with reasonable cause and in good faith with respect

to the underpayment.   We must sustain respondent’s determination.

     We have already decided whether the Cordeses underpaid their

taxes for the taxable years before us.    To the extent the Rule

155 computation discloses an underpayment as defined in section

6664(a), the Cordeses’ argument fails.    In addition, the evidence

does not demonstrate that the Cordeses relied on Robert Hinman25



     25
      The Cordeses also purportedly relied on Revenue Agent Ken
McGee’s advice. We reject their claim because it is not
credible.
                               - 40 -

or that their purported reliance on Mr. Hinman was in good faith

or reasonable.   The Cordeses did not show they requested or

received advice regarding these transactions, and any advice

regarding those transactions that were discussed was based on

incomplete and inaccurate information, information withheld by

Mr. Cordes.

     The facts before us simply do not establish that the

reasonable cause exception in section 6664(c) applies.

Therefore, the Cordeses are liable for the accuracy-related

penalty due to negligence or disregard of rules or regulations

for the taxable years before us, to the extent the Rule 155

computation shows an underpayment of tax.

V.   The Fraud Penalty

     Respondent determined that CFC and Mr. Cordes are liable for

the fraud penalty for their 1994 and 1995 taxable years.    Section

6663(a) provides:    “If any part of any underpayment of tax

required to be shown on a return is due to fraud, there shall be

added to the tax an amount equal to 75 percent of the portion of

the underpayment which is attributable to fraud.”    Section

6663(b) provides that if any portion of an underpayment is

attributable to fraud, then the entire underpayment shall be

treated as attributable to fraud unless the taxpayer shows by a

preponderance of the evidence that a portion was not so

attributable.    Respondent has the burden of proving fraud by

clear and convincing evidence.    Sec. 7454(a); Rule 142(b).
                              - 41 -

     A.   Cordes Finance Corp.

     In 1997, respondent and CFC executed a partial agreement,

Form CG-4549, wherein CFC conceded it underpaid taxes in the

amount of $226,31626 for 1994 and that $226,069 of that

underpayment was attributable to fraud.   Respondent later issued

a notice of deficiency to CFC in which respondent determined CFC

underpaid taxes for 1994 in the amount of $554,941 ($226,316 as

agreed; $328,625 in additional deficiencies) and that the entire

underpayment was attributable to fraud.   Consequently, respondent

determined CFC’s fraud penalty for 1994 was $246,654 more than

the parties had previously agreed.27   CFC disputes this increased

fraud penalty.28

     Respondent’s determinations are typically entitled to a

presumption of correctness.   When respondent alleges fraud,

however, respondent must prove by clear and convincing evidence



     26
      CFC conceded an underpayment of taxes of $226,316 for 1994
based on adjustments to CFC’s bad debt expenses, bad debts
charged to income, and interest expenses to John Cordes, Inc.
     27
      Respondent argued in his opening brief that the only issue
with regard to CFC’s liability for fraud is the computation of
the fraud penalties under the ordering rules of sec. 1.6664-3,
Income Tax Regs. Petitioner, however, does not appear to dispute
respondent’s calculation of the fraud penalties. Petitioner
disputes only the underlying deficiencies.
     28
      The parties’ partial agreement also included a concession
by CFC to an underpayment and a fraud penalty for CFC’s 1995
taxable year. Respondent later determined in his notice of
deficiency that the fraud penalty for 1995 was less than the
parties had previously agreed, and CFC has not disputed that
determination. We therefore need not address the fraud issue
with respect to CFC’s 1995 taxable year.
                               - 42 -

that (1) there is an underpayment, and (2) at least some of the

underpayment is attributable to fraud.    Shaw v. Commissioner, 27

T.C. 561, 570 (1956), affd. 252 F.2d 681 (6th Cir. 1958).    “If he

carries this burden by clear and convincing evidence, * * * the

correctness of the deficiencies determined by him will [again] be

presumed.”   Id.   This burden does not require respondent to prove

each item comprising the underpayment set forth in the notice of

deficiency, nor does it require respondent to prove all of the

underpayment is attributable to fraud.   Sec. 6663(b); see also

Shaw v. Commissioner, supra at 570; Bencivenga v. Commissioner,

T.C. Memo. 1989-239.

     CFC’s concession of a $226,316 underpayment, of which

$226,069 is attributable to fraud, satisfies respondent’s burden

of proving that some part of CFC’s underpayment is due to fraud.

Console v. Commissioner, T.C. Memo. 2001-232 (underpayment

attributable to fraud deemed stipulated under Rule 91(f) for

failure to prosecute can satisfy both elements of respondent’s

burden of proof); Wagner v. Commissioner, T.C. Memo. 1996-355

(stipulation to underpayment satisfies that element of

respondent’s burden of proof); Barlow v. Commissioner, T.C. Memo.

1994-11 (stipulation to underpayment satisfies that element of

respondent’s burden of proof and stipulation to fraud

acknowledged by Court but decided on other grounds); see also

Frazier v. Commissioner, 91 T.C. 1, 12-13 (1988).    Consequently,

a part of CFC’s 1994 underpayment is due to fraud.   Sec. 6663(b).

Unless CFC establishes that a portion of the underpayment is not
                                - 43 -

due to fraud, we must treat the entire underpayment as

attributable to fraud.     Sec. 6663(b).

     CFC has the burden of showing by a preponderance of the

evidence that any of respondent’s determinations are erroneous or

that any portion of the underpayment was not attributable to

fraud.29    CFC has failed to meet that burden on all counts.   We,

therefore, must hold that the entire underpayment, $554,941, is

attributable to fraud.     Sec. 6663(b).

     B.      Edmund J. Cordes

     Respondent determined that the portions of Mr. Cordes’s 1994

and 1995 underpayments attributable to fraud are those portions

representing the unreported constructive dividend and interest

income resulting from Mr. Cordes’s bargain purchase of CFC’s

notes.     Again, the burden of proof is on respondent.   Respondent

has clearly and convincingly shown that Mr. Cordes has unreported

constructive dividends and interest income giving rise to


     29
      CFC’s only argument that a portion of the underpayment is
not so attributable to fraud was “the taxpayer not only relied on
the advice of his C.P.A. but also on the advice of the Internal
Revenue Service Agent Ken McGee.” (Record cites omitted.) While
reliance on professionals can be a defense to fraud, CFC could
prevail with this defense only if it showed it provided the
professional with complete and accurate information. Korecky v.
Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986) (quoting
Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg.
T.C. Memo. 1959-172), affg. T.C. Memo. 1985-63. The facts with
which we were presented indicate just the opposite.
     CFC did not turn to professionals for any advice, let alone
provide them with complete and accurate information. The only
occasion when CFC (through Mr. Cordes) obtained advice from a
professional was when Mr. Cordes inquired about the deductibility
of losses upon the sale of CFC’s notes. CFC has conceded those
deductions were fraudulently taken.
                                - 44 -

underpayments in 1994 and 1995.    The only remaining issue is

whether Mr. Cordes intended to evade the taxes on these items

known to be owing by conduct intended to conceal, mislead, or

otherwise prevent collection of taxes.     Stoltzfus v. United

States, 398 F.2d 1002, 1004 (3d Cir. 1968); Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983).    The issue is one of

fact to be determined upon a consideration of the entire record.

Rowlee v. Commissioner, supra at 1123; Beaver v. Commissioner, 55

T.C. 85, 92 (1970).    For the reasons discussed below, we hold for

respondent.

     Fraudulent intent can seldom be established by direct proof

of the taxpayer’s intention; therefore, fraud is usually

established by drawing inferences from the taxpayer’s entire

course of conduct.     Parks v. Commissioner, 94 T.C. 654, 664

(1990); Estate of Beck v. Commissioner, 56 T.C. 297, 363 (1971).

The courts have developed several indicia or “badges” of

fraudulent behavior.    Circumstantial evidence which may give rise

to a finding of fraudulent intent includes:    (1) Understatement

of income; (2) inadequate records; (3) failure to file tax

returns; (4) implausible or inconsistent explanations of

behavior; (5) concealment of assets; (6) failure to cooperate

with tax authorities; (7) filing false documents; (8) failure to

make estimated tax payments; (9) dealing in cash; (10) engaging

in illegal activity; and (11) attempting to conceal illegal

activity.   Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th

Cir. 1986), affg. T.C. Memo. 1984-601; Clayton v. Commissioner,
                               - 45 -

102 T.C. 632, 647 (1994).    These “badges of fraud” are

nonexclusive.    Miller v. Commissioner, 94 T.C. 316, 334 (1990).

The taxpayer’s background and the context of the events in

question may be considered as circumstantial evidence of fraud.

Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir. 1972)

(citing Gano v. Commissioner, 19 B.T.A. 518, 532-533 (1930)),

affg. T.C. Memo. 1970-274.

     Respondent has clearly and convincingly shown that Mr.

Cordes intended to evade tax known to be owing by concealing,

misleading, and otherwise preventing the collection of taxes, and

Mr. Cordes is therefore liable for the fraud penalty for 1994 and

1995.   We rely on the following facts in reaching our conclusion:

     (1)   Respondent demonstrated that Mr. Cordes consistently

over a period of several years substantially understated his

income by not reporting the constructive dividends or interest

income earned.    Clayton v. Commissioner, supra at 647; see also

Steines v. Commissioner, T.C. Memo. 1995-261.    While this

consistent underreporting alone is not enough to establish fraud,

other badges of fraud are present here that make it clear Mr.

Cordes’s behavior was fraudulent.

     (2)   Mr. Cordes repeatedly failed to cooperate with tax

authorities.    Regarding Mr. Cordes’s 1994 taxable year, the

revenue agent assigned to the case, Ken McGee, requested from Mr.

Cordes and CFC, which Mr. Cordes controlled, documents (such as

the loan ledger cards) which relate to the constructive dividends

and the interest income.    Mr. Cordes refused to provide the
                                - 46 -

revenue agent with CFC’s books or records, refused to comply with

a subsequent summons for the same books and records, and only

complied with a second-chance letter to provide those documents

approximately 4 months after the initial summons.       The revenue

agent issued two additional document requests after reviewing the

initial documents, but Mr. Cordes specifically refused to provide

any additional information.    The revenue agent then issued a

summons for those documents, as well as a summons for the books

and records containing information regarding Mr. Cordes’s 1995

taxable year; those summonses were issued to Eddy Ben Cordes,

president of CFC, as well as to Bill Burns, Viola Burns, and

Michael Heinz (other administrative personnel).       The revenue

agent also issued a summons to Mr. Cordes to produce his personal

ledger cards.    Mr. Cordes denied he had those cards and refused

to comply with the summons, although Mr. Burns and Mrs. Burns had

informed the revenue agent that Mr. Cordes did keep those cards.

Eventually, Mr. Cordes produced 108 ledger cards in partial

compliance with a judge’s order.    The revenue agent was later

able to obtain more ledger cards from Mr. Cordes but cumulatively

obtained cards pertaining to fewer than 200 of the 1,168 notes

Mr. Cordes had purchased from CFC.       Mr. Cordes’s repeated

refusals to cooperate with the revenue agent and his concealment

of documents strongly indicate that Mr. Cordes’s behavior was

fraudulent.

     (3)    Mr. Cordes provided false documents to the revenue

agent.     Mr. Cordes, in an effort to prove there were no personal
                               - 47 -

ledger cards in excess of those already produced, provided the

revenue agent with documents that purported to show that the

transferred notes were properly removed from CFC’s books and were

not personally owned by Mr. Cordes.     Those documents consisted of

purported lien releases, each dated to coincide with the date the

note was removed from CFC’s records.     The Oklahoma Tax

Commission’s records, however, evidenced that the liens were

actually released on later dates, indicating that those notes

were outstanding beyond the date CFC removed them from its

records.    Mr. Cordes did not deny that the Oklahoma Tax

Commission’s records were accurate.     It appears Mr. Cordes, or

someone acting on Mr. Cordes’s behalf, falsified many of those

records, intending to deceive the revenue agent, with the goal of

evading taxes known to be owed.    This is yet another strong

indication of fraud.

     Like CFC, Mr. Cordes’s sole defense to respondent’s

assertion of the fraud penalty was that he reasonably relied, in

good faith, on his accountant and the revenue agent.     The facts

pertaining to Mr. Cordes’s reliance are identical to those we

examined with regard to CFC.    The facts presented do not allow us

to find Mr. Cordes reasonably relied on professional advice in

good faith.   Mr. Cordes did not show that he ever requested,

received, or relied on any advice with regard to the transactions

at issue.

      Considering all the facts and circumstances, we hold

respondent has clearly and convincingly proven a portion of Mr.
                             - 48 -

Cordes’s underpayment is attributable to fraud, and we conclude

Mr. Cordes is liable for the fraud penalty for 1994 and 1995.

     We have considered the other arguments of the parties, and,

to the extent not discussed herein, we conclude that the

arguments are irrelevant, moot, or meritless.

     To reflect the foregoing,



                                        Decisions will be entered

                                   under Rule 155.
                             - 49 -

                            APPENDIX

      Summary of Conceded, Deemed Conceded, Computational,
                       and Settled Issues

     The following is a summary of issues and/or adjustments
conceded, deemed conceded, of a computational nature, or settled.

I.   Docket No. 19027-98, Eddie Cordes, Inc.:
     A.   1992:
          1.    Respondent disallowed petitioner’s deduction for a
                net operating loss carryback of $22,453 from 1995.
                In accordance with certain of respondent’s
                concessions for the 1995 taxable year and for
                purposes of the Rule 155 computation, respondent
                concedes petitioner incurred a net operating loss
                in 1995 in the amount of $48,872 and that it may
                be properly carried back to 1992.
          2.    Respondent determined petitioner was liable for an
                accuracy-related penalty pursuant to sec. 6662(a).
                Respondent concedes that determination.
     B.   1994:
          1.    Respondent increased petitioner’s taxable income
                by $61,435 to account for overstated costs of
                goods sold. Petitioner concedes this adjustment.
          2.    Respondent concedes that petitioner’s taxable
                income should be decreased by $31,763, pursuant to
                sec. 263A, to reflect additional costs of goods
                sold.
          3.    Respondent increased petitioner’s taxable income
                by $405,724 to account for receipt of certain
                payments from Mr. Cordes. Respondent made an
                identical adjustment in docket No. 5508-99, in
                order to protect the Government’s interest.
                Respondent concedes this adjustment in docket No.
                19027-98.
          4.    Respondent concedes petitioner may be entitled to
                deduct a larger amount for charitable
                contributions for the taxable year, as and to the
                extent shown in the Rule 155 computation.
     C.   1995:
          1.    Respondent increased petitioner’s taxable income
                by $83,602 to account for overstated costs of
                goods sold. Petitioner concedes this adjustment.
          2.    Respondent concedes that petitioner’s taxable
                income should be decreased by $31,764, pursuant to
                sec. 263A, to reflect additional costs of goods
                sold.
          3.    Respondent increased petitioner’s taxable income
                by $211,612 to account for receipt of certain
                payments from Mr. Cordes. Respondent made an
                              - 50 -

                identical adjustment in docket No. 5508-99, in
                order to protect the Government’s interest.
                Respondent concedes this adjustment in docket No.
                19027-98.
           4.   Respondent concedes petitioner may be entitled to
                deduct a larger amount for charitable
                contributions for the taxable year, as and to the
                extent shown in the Rule 155 computation.
           5.   Respondent’s adjustments computationally
                eliminated petitioner’s net operating loss for
                1994. In accordance with certain of respondent’s
                concessions and for purposes of the Rule 155
                computation, respondent concedes petitioner
                incurred a net operating loss for 1995, in an
                amount at least equal to $48,872, and that it may
                be carried back to petitioner’s 1992 taxable year.
           6.   Respondent determined petitioner was liable for an
                accuracy-related penalty pursuant to sec. 6662(a).
                Respondent concedes that determination.
II.   Docket No. 4816-99, Joseph P. and Jean Ann Richard:
      A.   1994:
           1.    The parties previously agreed to increase and
                 decrease taxable income to account for a Schedule
                 A expense, Schedule C expenses and depreciation,
                 Schedule E income and expenses, and the self-
                 employment tax and the self-employment tax
                 deduction.
           2.    Respondent made various computational changes to
                 petitioners’ taxable income so that the limitation
                 of itemized deductions was increased, itemized
                 deductions were eliminated, the standard deduction
                 was allowed, and the exemption amount under sec.
                 151(d)(3) was reduced. The extent to which these
                 changes affect petitioners’ ultimate liability
                 will be calculated in the Rule 155 computation.
      B.   1995:
           1.    The parties previously agreed to increase and
                 decrease taxable income to account for a Schedule
                 A expense, Schedule C expenses and depreciation,
                 Schedule E income and expenses, and the self-
                 employment tax and the self-employment tax
                 deduction.
           2.    Respondent made various computational changes to
                 petitioners’ taxable income so that the limitation
                 of itemized deductions was increased, itemized
                 deductions were eliminated, the standard deduction
                 was allowed, and the exemption amount under sec.
                 151(d)(3) was reduced. The extent to which these
                 changes affect petitioners’ ultimate liability
                 will be calculated in the Rule 155 computation.
           3.    Respondent increased petitioners’ taxable income
                             - 51 -

               by $2,258 for wage expense under sec. 45A.
               Furthermore, respondent allowed a credit against
               petitioners’ tax in the amount of $2,258 for the
               Indian employment credit. Petitioners had
               requested this credit in a claim for a refund
               submitted to respondent. Respondent did not allow
               any other portion of the claimed refund.
               Petitioner did not address these amounts at trial
               or on brief, and we deem petitioners to have
               conceded these adjustments.
III. Docket No. 5508-99, Eddie Cordes, Inc., Successor by Merger
     with Cordes Finance Corp.:
     A.   1994:
          1.    The parties previously agreed to increase taxable
                income for bad debt expenses and bad debts charged
                to income. The parties also previously agreed to
                decrease taxable income to reflect an interest
                expense payment made to John Cordes, Inc.
          2.    Respondent increased petitioner’s taxable income
                by $8,564 to reflect additional gross receipts
                (described in the notice of deficiency as “Gross
                Receipts – Debit to Income). Respondent concedes
                this adjustment.
          3.    Respondent increased petitioner’s taxable income
                by $86,160 to reflect additional gross receipts
                (described in the notice of deficiency as “Gross
                Receipts – Credits to Retained Earnings). The
                parties stipulated instead to increase taxable
                income by $66,560.
          4.    Petitioner concedes respondent’s determination
                increasing taxable income by $10,380 to reflect
                bad debt recoveries.
          5.    Respondent increased petitioner’s taxable income
                by $131,020 to reflect income from misposted
                receipts. The parties stipulated instead to
                increase taxable income by $43,673.
          6.    Petitioner concedes respondent’s determination
                increasing taxable income by $71,910 to reflect
                income from unbooked receipts.
          7.    Petitioner concedes respondent’s determination
                increasing taxable income by $88,225 to reflect
                payments on unidentified loans.
          8.    Respondent increased petitioner’s taxable income
                by $405,724 to reflect income from unidentified
                sources. The parties stipulated instead to
                increase taxable income by $45,702.
     B.   1995:
          1.    The parties previously agreed to increase taxable
                income for bad debt expenses, bad debts charged to
                income, and due to a disallowed net operating loss
                carryover from 1994. The parties also previously
                              - 52 -

                agreed to decrease taxable income to reflect an
                interest expense payment made to John Cordes, Inc.
           2.   Respondent increased petitioner’s taxable income
                by $138,424 to reflect income from misposted
                receipts. The parties stipulated instead to
                increase taxable income by $46,141.
           3.   Petitioner concedes respondent’s determination
                increasing taxable income by $16,000 to reflect
                payments on unidentified loans.
           4.   Respondent increased petitioner’s taxable income
                by $211,612 to reflect income from unidentified
                sources. The parties stipulated instead to
                increase taxable income by $45,702.
           5.   Respondent increased petitioner’s taxable income
                by $27,250 to reflect an overstatement to legal
                and professional fees. The parties stipulated
                instead to increase taxable income by $5,000.
IV.   Docket No. 7369-99, Edmund J. and June J. Cordes:
      A.   1994:
           1.    The parties stipulated that for 1994, the
                 following distributions constitute constructive
                 dividends from ECI: $88,225 from diversion of
                 checks from unidentified loans; $57,609 from
                 diversion of tag refunds; and $3,826 from excess
                 payoffs.
           2.    The parties stipulated that for 1994, the
                 following distributions constitute constructive
                 dividends from CFC: $10,380 from diversion of
                 checks from bad debt recoveries; $71,910 from
                 diversion of unbooked CFC income; and $45,702 from
                 an unexplained source of funds. Respondent
                 concedes that portion of his determination in
                 excess of the parties’ stipulation.
           3.    Petitioners concede receiving $14,078 in Social
                 Security benefits in 1994. The extent to which
                 they are taxable will be calculated in the Rule
                 155 computation.
           4.    Respondent made various computational changes to
                 petitioners’ taxable income because the increase
                 in constructive dividends increased petitioners’
                 taxable income so that the limitation of itemized
                 deductions was increased, itemized deductions were
                 eliminated, the standard deduction was allowed,
                 and the exemption amount under sec. 151(d)(3) was
                 reduced. The extent to which these changes affect
                 petitioners’ ultimate liability will be calculated
                 in the Rule 155 computation.
           5.    Respondent determined petitioner had self-
                 employment income, that petitioner was liable for
                 the self-employment tax on that income, and that
                 petitioner was entitled to a deduction for a
                        - 53 -

          portion of that tax. Petitioner’s liability is
          decided in the body of the opinion; the deduction
          is computational.
     6.   Respondent concedes petitioners may be entitled to
          deduct a larger amount for charitable
          contributions for the taxable year, as and to the
          extent shown in the Rule 155 computation.
     7.   Respondent determined petitioners were liable for
          the fraud penalty pursuant to sec. 6663 on the
          portion of the underpayment attributable to the
          constructive dividends and the income from self
          employment. Respondent concedes that Mrs. Cordes
          is not liable for that penalty.
B.   1995:
     1.    The parties stipulated that for 1995, the
           following distributions constitute constructive
           dividends from ECI: $16,000 from diversion of
           checks from unidentified loans; $55,088 from
           diversion of tag refunds; and $28,514 from excess
           payoffs.
     2.    The parties stipulated that for 1995, $45,702 from
           an unexplained source of funds constitutes a
           constructive dividend from CFC. Respondent
           concedes that portion of his determination in
           excess of the parties’ stipulation.
     3.    Petitioners concede receiving $14,462 in Social
           Security benefits in 1995. The extent to which
           they are taxable will be calculated in the Rule
           155 computation.
     4.    Respondent made various computational changes to
           petitioners’ taxable income because the increase
           in constructive dividends increased petitioners’
           taxable income so that the limitation of itemized
           deductions was increased, itemized deductions were
           eliminated, the standard deduction was allowed,
           and the exemption amount under sec. 151(d)(3) was
           reduced. The extent to which these changes affect
           petitioners’ ultimate liability will be calculated
           in the Rule 155 computation.
     5.    Respondent determined petitioner had self-
           employment income, that petitioner was liable for
           the self-employment tax on that income, and that
           petitioner was entitled to a deduction for a
           portion of that tax. Petitioner’s liability is
           decided in the body of the opinion; the deduction
           is computational.
     6.    Respondent concedes petitioners may be entitled to
           deduct a larger amount for charitable
           contributions for the taxable year, as and to the
           extent shown in the Rule 155 computation.
     7.    Respondent determined petitioners were liable for
              - 54 -

the fraud penalty pursuant to sec. 6663 on the
portion of the underpayment attributable to the
constructive dividends and the income from self
employment. Respondent concedes that Mrs. Cordes
is not liable for that penalty.
