                         T.C. Memo. 1996-340



                       UNITED STATES TAX COURT



      HARALAMPOS KATERELOS AND IRENE KATERELOS, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15202-94.              Filed July 29, 1996.



     Stefano D. Corradini, for petitioners.

     John R. Mikalchus, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, additions to, and penalties on petitioners' Federal

income tax:
                                - 2 -


                   Section        Section     Section   Section
Year Deficiency 6653(b)(1)(A)1 6653(b)(1)(B) 6653(b)(1) 6663(a)

1987    $23,437      $10,037            *          --        --
1988     25,077         --              --      $13,613      --
1989     16,082         --              --         --      $8,189
1990     25,676         --              --         --      16,498
1991      4,021         --              --         --        --

* 50 percent of the interest due on the portion of the underpay-
ment attributable to fraud. Respondent determined that $13,383
of the underpayment for 1987 was attributable to fraud.

       The issues remaining for decision are:

       (1) Is petitioner Haralampos Katerelos (Mr. Katerelos)

liable for 1987 and 1988 for the additions to tax for fraud under

section 6653(b)(1) and for 1989 and 1990 for the penalties for

fraud under section 6663(a) on the portion of the underpayment

for each of those years that is attributable to his not reporting

certain gross receipts in petitioners' Federal income tax return

(return) for each of those years?    We hold that he is.

       (2) Did petitioners have gross receipts for each of the

years 1987 through 1990 in excess of those reported in Schedule C

of their return for each of those years?     We hold that they did.

       (3) Are petitioners entitled to deductions under section

162(a) for automobile expenses for each of the years at issue?

We hold that they are not.

       (4) Did petitioners place depreciable properties in service


1
   All section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 3 -


during 1986 with bases in excess of $22,102 to which the parties

stipulated?   We hold that they did not.

     (5) Are petitioners entitled to a general business credit

carryforward from 1986?   We hold that they are not.

                          FINDINGS OF FACT2

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

     Petitioners resided in Tucson, Arizona, at the time the

petition was filed.

     Petitioners, who emigrated to the United States from Greece,

have three children, all of whom they claimed as dependents in

the returns that they filed for the years at issue.

Petitioners' Restaurant Business--New Dolce Vita

     In General

     Petitioners have been involved in the restaurant business in

the United States since 1977.    In December 1985, petitioners

executed a lease for property located at 6781 North Thornydale in

Tucson, Arizona, at which they planned to operate a restaurant

called New Dolce Vita (NDV) that was to specialize in Italian,

American, and Greek cuisine.    Petitioners provided all the

fixtures and equipment for the restaurant, some of which they

2
   Petitioners' opening brief did not contain all of the findings
of fact that petitioners wanted to propose and that they were
required to set forth in that brief, as required by Rule
151(e)(3). Instead, in violation of that Rule, their answering
brief contained additional proposed findings of fact that the
Court did not find to be "alternative proposed findings of facts"
as permitted by Rule 151(e)(3).
                                - 4 -


purchased used, and not new.    One of the items that petitioners

furnished NDV was a Casio cash register (cash register) that they

purchased during 1986 from Cactus King Cash Register Co. (Cactus

King).   The cash register functioned properly throughout the

years at issue.

     Petitioners opened NDV for business in April 1986 and

operated it as a sole proprietorship throughout the years at

issue.   During those years, NDV served breakfast, lunch, and

dinner, seven days a week, from approximately 7 a.m. to about 10

p.m., except on approximately five days during each such year

when it was closed for certain holidays.

     Throughout the years at issue, Mr. Katerelos, who was

responsible for the management of NDV, worked approximately 105

hours per week at that restaurant and was involved in every

aspect of its operations, including mopping the floors, washing

the dishes, cooking the food, and purchasing the supplies.

During those years, petitioner Irene Katerelos (Ms. Katerelos),

petitioners' daughter Anneta, and Mr. Katerelos' brother

Evangelos also worked at NDV.

     During the years at issue, NDV's highest sales volumes

generally occurred on Friday and Saturday evenings and on Sunday

mornings and afternoons.   It also experienced large sales volumes

on special days such as Mother's Day and Valentine's Day.    The

winter months were the busiest months for NDV because of the high
                               - 5 -


number of visitors to Tucson during that time of year.

     During the years at issue, petitioners employed two to six

servers for the breakfast and lunch shifts on weekdays.   On

weekday evenings and on weekends during those years, petitioners

employed a hostess and two to six servers.

     Cash Register at NDV

     At the time petitioners purchased the cash register in 1986,

Tony Mastrangelo (Mr. Mastrangelo), the owner of Cactus King,

trained Mr. Katerelos in its operation.3

     During the years at issue, when a hostess was on duty, that

person generally operated the cash register and was responsible

for entering sales into it, and when no hostess was on duty, or

if the hostess was busy, the servers entered their own sales into

the cash register.   During those years, Mr. Katerelos also

entered sales into the cash register.4

          Operation of the Cash Register5

     The cash register could have been set at one of the fol-

lowing different modes by turning a key in the mode switch:

(1) Off, (2) register, (3) refund, (4) Z or reset, and (5) X or

read.


3
   It is unclear from the record who trained other individuals
who operated the cash register during the years at issue.
4
   It is unclear from the record how often Mr. Katerelos entered
sales into the cash register during the years at issue.
5
   Unless otherwise indicated, our discussion of operation of the
cash register applies to all of the years at issue.
                               - 6 -


     For purposes of entering sales into the cash register, the

mode switch was set to the register mode.   The operator of the

cash register entered a sale into the machine by entering the

price of an item and pressing one of the various buttons known

and hereinafter referred to as department buttons.   The cash

register was programmed so that the department buttons could be

used to distinguish among breakfast, lunch, and dinner sales.6

The entry of a transaction into the wrong department did not

affect the total amounts of gross receipts of NDV that Mr.

Katerelos was required to report in petitioners' returns for the

years at issue.

     After the operator finished entering all of the items for a

particular transaction into the cash register, the operator could

press a button known and hereinafter referred to as the subtotal

button.   When pressed down, the subtotal button added all of the

items entered as part of a transaction to arrive at a subtotal

for the amount of the transaction, calculated the sales tax due,

and added the sales tax to that subtotal to arrive at the total

for that transaction (transaction total).   After pressing the

subtotal button, the operator completed the transaction and

opened the cash register drawer by (1) entering the amount of

cash tendered by the customer into the cash register and pressing


6
   For example, if the operator were entering a lunch sale into
the cash register, that person entered the amount of the transac-
tion followed by the lunch department button.
                               - 7 -


a button known and hereinafter referred to as the cash/amount

tendered button or (2) pressing a button known and hereinafter

referred to as the charge button if the customer was paying by

credit card.   Instead of pressing the subtotal button and either

the cash/amount tendered button or the charge button, the opera-

tor could skip the step of pressing the subtotal button by

pressing the cash/amount tendered button or the charge button,

which caused the cash register to calculate the transaction total

for the transaction and open the cash register drawer in one

step, rather than two steps.

     Although the cash register was equipped to distinguish

between cash and credit sales, Mr. Katerelos did not distinguish

between those two types of sales when he was operating the cash

register.7   Failure to distinguish between cash and credit sales

did not affect the total amounts of gross receipts of NDV that

Mr. Katerelos was required to report in petitioners' returns for

the years at issue.

     The cash register was programmed to maintain certain data or

information in its memory in order to facilitate calculation of

the sales of a business.   Activation of the Z or reset mode on

the cash register by turning the mode switch to that mode and

pressing the cash/amount tendered button accessed that informa-


7
   It is unclear whether other operators of the cash register
during the years at issue distinguished between cash and credit
sales.
                               - 8 -


tion.   Mr. Katerelos was the only person who activated the Z or

reset mode on the cash register during the years at issue.8

     Activation of the Z mode (1) caused the cash register to

print on a cash register tape9 a summary of all the transactions

that occurred since the last activation of the Z mode and

(2) reset all amounts to zero other than the grand total as of

the time of the Z reading and the transaction number as of the

time of the Z reading, both of which were not resettable.     The

data printed on the cash register tape upon activation of the Z

mode (known and hereinafter referred to as a Z reading) included,

inter alia, the letter "Z", the date of the Z reading, the total

of all transaction totals since the last Z reading (total sales),

the nonresettable grand total as of the time of the Z reading,

and the nonresettable transaction number as of the time of the Z

reading.10

     Throughout the period January 1, 1987, through May 29, 1990,


8
   That information could also have been accessed by activating
the X or read mode on the cash register.
9
   The cash register tape is one of two printed tapes that the
cash register produced. The other tape is designed to provide
receipts to customers and is not relevant herein.
10
   Activation of the X or read mode printed a reading on the
cash register tape similar to the Z reading; however, unlike the
Z or reset mode that reset certain amounts to zero when it was
activated, activation of the X mode did not reset any amounts.
For certain days throughout the years at issue, Mr. Katerelos
activated the X mode on the cash register at approximately 5 p.m.
in order to subtotal and display on the cash register tape for
each such day the amount of gross receipts through breakfast and
lunch.
                               - 9 -


the nonresettable grand total as of the time of a Z reading

(grand total) equaled the sum of all transaction totals entered

into the cash register that commenced with the time at which the

cash register was first used in 1986 and that ended with the time

of that Z reading.11   From May 30, 1990, through December 31,

1990, the nonresettable grand total as of the time of a Z reading

equaled the sum of all transaction totals entered into the cash

register that commenced on May 30, 1990, and that ended with the

time of that Z reading.   Each time a transaction was entered into

the cash register, the grand total increased by that transaction

total.   The grand total could have included transactions that did

not constitute sales (nonsale transactions), such as transactions

entered while programming the cash register.   A person could not

have simply entered a number into the cash register as a grand

total.   The only way to reset the grand total to zero was to

cause the capacitors to drain by unsoldering and taking the

battery out of circuit.

     In addition to maintaining the grand total, the cash regis-

ter maintained a nonresettable, consecutive transaction number




11
   The grand total was reset to zero on May 30, 1990. As dis-
cussed below, the only way to reset the grand total to zero was
to cause the capacitors to drain by unsoldering and taking the
battery out of circuit. The record does not provide any explana-
tion as to why the battery was unsoldered and taken out of
circuit as of May 30, 1990, and neither party has suggested that
the resetting of the grand total as of May 30, 1990, should
affect our findings or conclusions herein.
                               - 10 -


for every transaction entered into it (transaction number).12

The cash register automatically assigned a transaction number to

each transaction entered into it that increased by one each time

a new transaction was entered into the cash register and printed

that assigned transaction number on the cash register tape as

part of that transaction.    Opening the cash register by pressing

a button known and hereinafter referred to as the no-sale button

or activating the Z or reset mode also caused the cash register

to record a transaction and to increase the transaction number by

one.

       For the periods January 1, 1987, through September 14, 1987,

and May 30, 1990, through December 31, 1990, in addition to the

functions described above, the cash register was programmed to

print on the cash register tapes the time of day of every trans-

action using a 24-hour clock (clock).

            Cash Register Tapes of NDV Saved by Mr. Katerelos

       During the years at issue, Mr. Katerelos saved either the

entire cash register tape for each day on which NDV was open for

business or only a portion of each such tape.    Each such tape or

portion thereof showed, inter alia, all the transaction totals

since the last activation of the Z or reset mode, and the last

item printed thereon was a Z reading.


12
   When the grand total was reset to zero as of May 30, 1990,
the transaction number was also reset to zero.
                              - 11 -


     For the period January 1987 through about September 1990,

Mr. Katerelos' decision as to whether to save the entire cash

register tape or only a portion thereof for each day on which NDV

was open for business frequently depended on whether he had

activated the Z or reset mode more than once on a particular day.

The cash register tapes that Mr. Katerelos saved for a minimum of

650 days during that period on which he had activated the Z mode

more than once daily consisted of only a portion of the entire

cash register tape for each such day, and that portion showed

only one, and not all, of the Z readings for the day.13   Mr.

Katerelos discarded the remaining portion of the cash register

tape for each such day.   (Unless otherwise indicated, hereinaf-

ter, we shall refer to the portions of the cash register tapes

that Mr. Katerelos discarded as the missing portions of the cash

register tapes, and references to the cash register tapes that

Mr. Katerelos saved shall be to the portions of those tapes he

saved.)   In addition to discarding the missing portions of the

cash register tapes, Mr. Katerelos also discarded all of the

individual guest checks for the food and beverages sold during

the years at issue (guest checks).

     Mr. Katerelos was aware during the years at issue that he

was required to report as gross receipts in petitioners' returns



13
   As discussed below, the cash register tapes that Mr.
Katerelos saved for certain days during the years at issue showed
two Z readings.
                                - 12 -


for those years the receipts from all sales made by NDV during

those years.    The amount of gross receipts of NDV that petition-

ers reported in their return for each of the years at issue was

based upon the amount, if any, of gross receipts of NDV that Mr.

Katerelos had recorded for each day during those years in a gross

receipts journal that he maintained for NDV for each of those

years (gross receipts journals).    The amount of daily gross

receipts of NDV that Mr. Katerelos recorded in those journals

during the years at issue was based upon the amount of the total

sales shown as part of the Z reading on the cash register tape

that he saved for each day during those years.

     Since the cash register did not have a cancel function, if

the operator made a mistake in entering the amount of any item

for a particular transaction so that the transaction total for

that transaction also was incorrect, the operator had to start

over and correctly reenter into the cash register all items that

were part of that transaction so that the transaction total for

that transaction was correct.    Those corrected items were reen-

tered as items for a new transaction that had a correct trans-

action total.   Hereinafter, we shall refer to transactions with

incorrect transaction totals due to errors made by the operators

of the cash register in entering transactions into it as over-

rings.

     During the years at issue, Mr. Katerelos and/or other

operators of the cash register generally kept track of overrings
                              - 13 -


by circling any overring transaction on the cash register tape.

However, the transaction total of every transaction entered into

the cash register for a day, including any overring transaction,

was reflected in the total sales for that day.14   To correct that

problem, when a transaction was circled as an overring on the

cash register tape that Mr. Katerelos saved for a particular day,

Mr. Katerelos subtracted the transaction total of any such

transaction from the amount of daily total sales according to the

Z reading on the cash register tape that he saved for that day

and entered the balance as the amount of NDV's daily gross

receipts that he recorded for that day in the gross receipts

journal.

     For approximately 10 days during the years 1987 through

1990, Mr. Katerelos saved cash register tapes that showed two Z

readings.   The first Z reading on such a tape resulted from Mr.

Katerelos' having activated the Z or reset mode after an error

(that may or may not have been an overring) had occurred during

the day in entering a transaction into the cash register.    After



14
   In addition, the transaction number was increased by one as a
result of any overring transaction, and the grand total as of
that day was increased by the transaction total of any overring
transaction. Although Mr. Katerelos did not use the grand totals
to determine the amount of NDV's gross receipts that he recorded
for a particular day in the gross receipts journals, as discussed
below, respondent's revenue agent used the grand totals to
determine the amount of NDV's gross receipts for the years at
issue, and, in calculating those gross receipts, he made appro-
priate adjustments for any transactions that were or were treated
as overrings.
                                - 14 -


having generated the first Z reading on such a tape, Mr.

Katerelos correctly reentered all the transactions that had thus

far occurred for the day15 and entered additional transactions as

they occurred during that day.     Thereafter, on that same day, Mr.

Katerelos activated the Z mode a second time to generate the

second Z reading on the cash register tape that he saved for the

day.     Mr. Katerelos recorded in the gross receipts journals the

total sales from the second Z reading for the day as the amount

of NDV's gross receipts for that day.16

       During the years at issue, Irwin Berlat (Mr. Berlat),

petitioners' accountant,17 used the daily amount of gross re-

ceipts of NDV that Mr. Katerelos had recorded in the gross

receipts journals for those years in order to calculate the

amounts of NDV's monthly18 and annual gross receipts for those

years.     In addition to giving Mr. Berlat the gross receipts


15
   It usually took Mr. Katerelos five to ten, and not more than
30 minutes, to reenter those transactions.
16
   Mr. Katerelos treated the total sales from the first Z read-
ing as if it had been an overring (even if it was not) in that he
did not include it in the amount of NDV's gross receipts that he
recorded for that day in the gross receipts journal.
17
   Mr. Katerelos employed Mr. Berlat as the accountant for NDV
when Mr. Berlat's father, who had been performing that function,
died. Although it is unclear from the record when Mr. Berlat's
father died, it appears that he may have passed away during 1987.
18
   Following the close of each month during each of the years at
issue, Mr. Berlat visited the premises of NDV, obtained the gross
receipts journal from Mr. Katerelos, and calculated from that
journal the amount of NDV's gross receipts for the month just
ended.
                               - 15 -


journals that Mr. Katerelos maintained for the years at issue,

Mr. Katerelos provided him with the daily cash register tapes

that he had saved for those years and that he had used to arrive

at the amounts of daily gross receipts he recorded in those

journals.   Mr. Berlat used those gross receipts journals to

prepare petitioners' returns for the years 1987 through 1989, and

another accountant, Don Bailey (Mr. Bailey), used those journals

to prepare their returns for 1990 and 1991.

      For certain days during the years at issue, there is a gap

between the last transaction number shown on the cash register

tape that Mr. Katerelos saved for a particular day and the first

transaction number shown on the cash register tape that he saved

for the next day.   Neither those missing transaction numbers nor

the transactions to which the cash register assigned those

numbers appear on any of the cash register tapes that Mr.

Katerelos saved for the years at issue.   (We shall sometimes

refer (1) to the transactions that were entered into the cash

register during the years at issue but that do not appear on any

of the cash register tapes Mr. Katerelos saved for those years as

the missing transactions and (2) to the transaction numbers

assigned to those missing transactions as the missing transaction

numbers.)   The missing transactions included transactions that

increased the grand total maintained by the cash register.19


19
     The missing transactions and the missing transaction numbers
                                                     (continued...)
                             - 16 -


     To illustrate the foregoing, the last transaction number

shown on the cash register tape that Mr. Katerelos saved for

January 3, 1987, was 2,886, and the grand total according to the

Z reading on that tape was $246,182.93.    The first transaction

number shown on the cash register tape that he saved for the next

day, January 4, 1987, was 2,966, and the grand total and the

total sales according to the Z reading on that tape were

$247,681.04 and $689.48, respectively.    Thus, 79 transactions

that were assigned 79 transaction numbers were entered into the

cash register between the last transaction number shown on the

cash register tape that Mr. Katerelos saved for January 3, 1987,

and the first transaction number shown on the cash register tape

that he saved for January 4, 1987.    Neither those 79 missing

transactions nor the 79 missing transaction numbers assigned to

those transactions appear on any of the cash register tapes that

Mr. Katerelos saved for the years at issue.    In addition, the

difference between the grand totals according to the respective Z

readings on the cash register tapes that Mr. Katerelos saved for

those two days equaled $1,498.11.    However, the total sales

according to the Z reading on the cash register tape that he

saved for January 4, 1987, as well as the amount of gross re-



19
 (...continued)
also included Z readings. They also may have included transac-
tions attributable to pressing the no-sale button in order to
open the cash register. Neither of those types of transactions
increased the grand total maintained by the cash register.
                              - 17 -


ceipts of NDV for that day that he recorded in the gross receipts

journal for 1987, was only $689.48.    The difference between the

respective grand totals for those two days (viz., $1,498.11)

exceeded the total sales according to the Z reading on the cash

register tape that Mr. Katerelos saved for January 4, 1987 (viz.,

$689.48) by $808.63.   Such $808.63 excess was the total of the

various amounts entered into the cash register for the 79 missing

transactions between January 3, 1987, and January 4, 1987.

     Respondent's Audit

     During the summer of 1990, respondent's revenue agent, James

Phielix (Mr. Phielix), conducted an audit of petitioners' returns

for 1987, 1988, and 1989.   Mr. Phielix' examination of their 1990

and 1991 returns did not commence until early 1993 because of an

ongoing criminal tax investigation of Mr. Katerelos that ended

when Mr. Katerelos was informed by correspondence dated December

15, 1992, that he was no longer the subject of such an investiga-

tion.

     During the course of his examination of petitioners' returns

for the years at issue, Mr. Phielix created a handwritten summary

that showed for each day during the years at issue the following

data or information displayed on the cash register tape that Mr.

Katerelos saved for each day during those years:   The date, the

total sales according to the Z reading, the first and last

transaction numbers, the number of missing transaction numbers

between the first transaction number on the cash register for
                                - 18 -


each day and the last transaction number on the cash register

tape for the previous day, and the nonresettable grand total

according to the Z reading.20   That summary also showed the

difference that Mr. Phielix had calculated between the grand

total according to the Z reading for each day that was displayed

on each of those tapes and the grand total according to the Z

reading for the previous day that was displayed on each of those

tapes.   (Hereinafter, we shall sometimes refer to that difference

as the Z reading difference in grand totals.21)   Mr. Phielix

transferred the information for 1987 through 1990 that was

contained in his handwritten summary (with certain changes22)


20
   If the cash register tape that Mr. Katerelos saved contained
two Z readings, Mr. Phielix used the data displayed by the second
Z reading when he created his handwritten summary.
21
   The Z reading difference in grand totals included a differ-
ence in grand totals according to the Z readings on the cash
register tapes that Mr. Katerelos saved where, because Mr.
Phielix was unable to read the respective grand total displayed
on those tapes for certain days during the years at issue, he
used the grand total that was legibly displayed on the cash
register tape that Mr. Katerelos saved for the day next succeed-
ing the day for which the cash register tape that Mr. Katerelos
saved did not legibly display a grand total. Under this ap-
proach, instead of calculating the Z reading difference in grand
totals for a two-day period, Mr. Phielix computed the Z reading
difference in grand totals for a period consisting of more than
two days.
22
   Mr. Phielix did not transfer into the computer the informa-
tion for 1991 that was contained in his handwritten summary.
That was because the amount of additional tax that Mr. Phielix
had calculated that petitioners owed for that year as a result of
the underreporting of NDV's gross receipts for that year appeared
to him to be de minimis. Respondent did not determine in the
notice of deficiency (notice) that petitioners were liable under
                                                   (continued...)
                              - 19 -


into a computer from which he produced a computerized summary

that displayed the same information as the handwritten summary

(first computerized summary).23

     In addition to the first computerized summary, Mr. Phielix

created a second computerized summary (second computerized

summary) to display the amount of additional gross receipts of

NDV that he had calculated for each day during 1987 through 1990

on which NDV was open for business.    Mr. Phielix used the infor-

mation in the first computerized summary to determine whether the

gross receipts of NDV were underreported in petitioners' returns

for 1987 through 1990.   In that connection, Mr. Phielix treated

the amount of any Z reading difference in grand totals during the

years 1987 through 1990 as the amount of gross receipts of NDV

that petitioners were required to report for the last day of the

multiday period in respect of which Mr. Phielix had compared the

respective grand totals displayed on the cash register tapes that

Mr. Katerelos saved for those days.    To illustrate, Mr. Phielix

treated the $1,498.11 Z reading difference in grand totals that

were shown on the respective January 4, 1987 and January 3, 1987

cash register tapes that Mr. Katerelos saved for those days as


22
 (...continued)
sec. 6663(a) for the penalty for fraud for any portion of the
underpayment for 1991.
23
   Neither party advances any argument that our findings or
conclusions herein should be affected by any errors occurring
during the transfer into the computer of data by Mr. Phielix from
the cash register tapes that Mr. Katerelos saved.
                              - 20 -


the amount of NDV's gross receipts for January 4, 1987.

     In determining the amount of gross receipts that petitioners

were required to report for a particular day and that Mr. Phielix

displayed in the second computerized summary, Mr. Phielix made

certain adjustments to the Z reading differences in grand totals

that he had calculated by using the cash register tapes that Mr.

Katerelos saved.   For any day on which the cash register tape

that Mr. Katerelos saved showed that an overring occurred, Mr.

Phielix subtracted the amount of any such indicated overring from

the amount of gross receipts of NDV that he had calculated for

that day on the basis of the Z reading difference in grand

totals.   For any day on which the cash register tape that Mr.

Katerelos saved showed two Z readings, Mr. Phielix treated the

total sales according to the first Z reading shown on that tape

as an overring and subtracted the amount of those total sales

from the amount of gross receipts of NDV that he had calculated

for that day on the basis of the Z reading difference in grand

totals by using the second Z reading on that tape.24   For any day


24
   To illustrate, the cash register tape that Mr. Katerelos
saved for Aug. 30, 1989, displayed two Z readings. That tape
showed that (1) a series of transactions, the last of which
included an error, had been entered into the cash register before
the Z mode generating the first Z reading had been activated;
(2) after the first Z reading was generated, the transaction that
included the error was correctly entered into the cash register
and the amount of each transaction except the erroneous transac-
tion was reentered into the cash register as part of a single
transaction that was assigned a single transaction number;
(3) after those transactions were reentered into the cash regis-
                                                   (continued...)
                             - 21 -


on which the cash register tape that Mr. Katerelos saved showed

that there was a cash shortage in the cash register for that day,

Mr. Phielix subtracted the amount of any such shortage from the

amount of gross receipts of NDV that he had calculated for that

day on the basis of the Z reading difference in grand totals.

     In determining the amounts of gross receipts of NDV, if any,

that petitioners failed to report in their returns for the years

1987 through 1990 and that Mr. Phielix displayed in the second

computerized summary, Mr. Phielix subtracted the amount of NDV's

gross receipts that Mr. Katerelos had recorded in the gross

receipts journals for each day during the years 1987 through 1990

from the amount of gross receipts of NDV that he had calculated

for each such day on the basis of the Z reading difference in

grand totals (adjusted as described above by any amount treated




24
 (...continued)
ter, a series of additional transactions was entered into the
cash register; and (4) the Z mode was activated again, thereby
generating the second Z reading displayed at the end of that
tape. Mr. Katerelos recorded in the gross receipts journal for
1987 the total sales according to that second Z reading as the
amount of gross receipts of NDV for Aug. 30, 1989. In determin-
ing the amount of gross receipts of NDV that Mr. Katerelos was
required to report for that day, Mr. Phielix treated the total
sales according to the first Z reading on the cash register tape
that Mr. Katerelos saved for Aug. 30, 1989, as an overring and
subtracted that amount from the Z reading difference in grand
totals that he had calculated by using the second Z reading for
Aug. 30, 1989. As a result, Mr. Phielix determined that peti-
tioners had not underreported NDV's gross receipts for Aug. 30,
1989.
                               - 22 -


as an overring or cash shortage).25     Mr. Phielix treated any

resulting difference as additional gross receipts of NDV for that

day.

       The second computerized summary displayed the following

information for each day during 1987 through 1990 on which NDV

was open for business:    (1) The number of transactions shown on

the cash register tape that Mr. Katerelos saved for each such

day, (2) the amount of gross receipts of NDV that Mr. Katerelos

recorded in the gross receipts journals for each such day,

(3) the number of missing transaction numbers between the first

transaction number on the cash register tape that Mr. Katerelos

saved for each such day and the last transaction number on the

cash register tape that he saved for the preceding day, (4) the

amount of gross receipts of NDV that Mr. Phielix had calculated

for each such day on the basis of the Z reading difference in

grand totals (adjusted as described above by any amount treated

as an overring or cash shortage), (5) the amount, if any, treated

as an overring or cash shortage for each such day, and (6) the

amount, if any, of additional gross receipts of NDV that Mr.

Phielix had calculated for each such day (or multiday period).



25
   When the Z reading difference in grand totals was for a
period of more than two days, Mr. Phielix reduced the Z reading
difference for that multiday period (adjusted as described above
by any amount treated as an overring or cash shortage) by the sum
of the amount of daily gross receipts that Mr. Katerelos had
recorded in the gross receipts journals for each of the days
during that period.
                              - 23 -


     The second computerized summary showed that the amount of

daily gross receipts of NDV that Mr. Katerelos had recorded in

the gross receipts journals for a minimum of 650 of the 1,440

days throughout the period 1987 through 1990 on which NDV was

open for business was less than the amount of daily gross re-

ceipts of NDV that Mr. Phielix had calculated for each such day

on the basis of the Z reading difference in grand totals.

     The second computerized summary further showed that,

throughout the period 1987 through 1990, over 11,400 of the

approximately 140,000 transactions that were entered into the

cash register during that period do not appear on any of the cash

register tapes that Mr. Katerelos saved for those years.    That

summary also showed that the total of the various transaction

totals entered into the cash register for those missing transac-

tions during the period that began on January 1, 1987, and that

ended on December 31, 1990, was approximately $199,000.

     In order to determine how many hours NDV was open according

to the cash register tape that Mr. Katerelos saved for each of

the days throughout the periods January 1, 1987, through Septem-

ber 14, 1987, and May 30, 1990, through December 31, 1990, during

which the time of day of each transaction was printed on that

tape, Mr. Phielix created a third computerized summary (third

computerized summary).   That summary showed for each day during

those periods on which NDV was open for business:   (1) The

respective times of the first and last transactions recorded on
                             - 24 -


the cash register tape that Mr. Katerelos saved, (2) the number

of hours between those transactions, and (3) the number of

missing transactions between the first numbered transaction on

the cash register tape for that day and the last numbered trans-

action on the cash register tape for the preceding day.   The

third computerized summary showed that, for many days during the

periods January 1, 1987, through September 14, 1987, and May 30,

1990, through December 31, 1990, the times printed on the cash

register tapes that Mr. Katerelos saved indicated that the first

transaction was entered before or shortly after 7 a.m. and the

last transaction was entered just prior to or after 10 p.m.26

However, that summary further showed that, for many other days

during those same periods, the times printed on the cash register

tapes that Mr. Katerelos saved indicated that the first transac-

tion was not entered until substantially after NDV's normal



26
   It is not possible to determine from the cash register tape
that Mr. Katerelos saved for a particular day whether the times
printed thereon were the actual times of day at which transac-
tions were recorded. This is because the clock could have been
set incorrectly for that day. However, even if the clock had
been set incorrectly for a particular day, all of the times of
the various transactions that were printed on the cash register
tape that Mr. Katerelos saved for that day would have reflected
the same error. For example, if the clock for a particular day
had been set an hour ahead of the actual time, the time of day
for each transaction that was printed on the cash register tape
that Mr. Katerelos saved for that day would have been an hour
ahead. Nor would the number of hours between the first and last
transactions for a particular day have been affected if the clock
had been set incorrectly. In addition, unless the clock had been
reset, the clock would have been incorrect by the same amount
from one day to the next day.
                              - 25 -


opening time of 7 a.m. or the last transaction was entered

substantially earlier than its normal closing time of 10 p.m.     In

addition, the third computerized summary showed that a number of

transactions were often missing and did not appear on any of the

cash register tapes saved by Mr. Katerelos for days on which the

times printed on the cash register tapes saved by Mr. Katerelos

indicated that NDV either opened late or closed early.

     To illustrate, the first transaction recorded on the cash

register tape that Mr. Katerelos saved for January 4, 1987, a

Sunday, was not entered until 4:39 p.m. and the last transaction

recorded on that tape was entered at 9:18 p.m.   Thus, according

to the cash register tape that Mr. Katerelos saved for that day,

the sales transactions that NDV had on that day spanned only 4

hours and 39 minutes.   However, according to the cash register

tapes that he saved for that day and the immediately preceding

day, 79 transactions totaling $808.63 were entered into the cash

register between 8:42 p.m. on January 3, 1987, when the Z or

reset mode was activated, and 4:39 p.m. on January 4, 1987, when

the first transaction recorded on the cash register tape that Mr.

Katerelos saved for that day was entered into the cash register.

Those 79 missing transactions did not appear on the cash register

tapes Mr. Katerelos saved for either of those two days.

     By way of further illustration, the first transaction shown

on the cash register tape that Mr. Katerelos saved for Valen-

tine's Day 1987, a Saturday, was recorded at 4:49 p.m.    However,
                              - 26 -


according to the cash register tapes that he saved for that day

and the immediately preceding day, 70 transactions totaling

$457.28 were entered into the cash register throughout the period

that began with the last transaction entered into the cash

register on the day before Valentine's Day and that ended with

the first transaction entered on Valentine's Day.

     According to the cash register tapes that Mr. Katerelos

saved, the last transaction on every Sunday during the period

June through August 1990 was entered several hours prior to 10

p.m., and there were missing transactions that had been entered

between the last transaction shown on those tapes for each of

those Sundays and the first transaction shown on those tapes for

each of the succeeding days during that same period.

     Mr. Phielix first raised with Mr. Katerelos his findings

that petitioners omitted gross receipts of NDV from their returns

for 1987 through 1989 when he met with petitioners on September

6, 1990.   After that meeting, very few transactions were missing

from the cash register tape that Mr. Katerelos saved for each of

the days after September 6, 1990, through 1991, and the total

sales according to the Z reading on that tape for each such day

generally corresponded to each of the Z reading differences in

grand totals that Mr. Phielix calculated.
                               - 27 -


Tax Returns

     Petitioners filed returns for the years 1987 through 1989

that were prepared by Mr. Berlat.27     In those returns, petition-

ers reported gross receipts and net profit of NDV and total gross

income, as follows:

              Gross Receipts    Net Profit
     Year         of NDV          of NDV         Total Gross Income

     1987      $323,509          $12,584              $21,094
     1988       323,037           10,378                8,862
     1989       350,540           20,262               20,372

     During 1990, petitioners filed amended returns for each of

the years 1987 through 1989 that were prepared by petitioners'

accountant, Mr. Bailey, a certified public accountant (C.P.A.)

whom petitioners hired as their accountant during respondent's

examination of their returns for 1987 through 1989 because Mr.

Berlat was not a C.P.A.   Petitioners indicated in each of those

amended returns that they had additional gross receipts of $5,200

attributable to "Cash - Register".      Mr. Bailey prepared the

amended returns for the years 1987 through 1989 after he had

advised Mr. Katerelos that Mr. Phielix had informed him that

petitioners had underreported the gross receipts of NDV for those

years.

     Mr. Bailey prepared petitioners' returns for 1990, 1991,


27
   Both parties acknowledge that Mr. Berlat made certain errors
in preparing petitioners' returns for the years 1987 through
1989. However, neither party has suggested that those errors
should affect our findings or conclusions herein.
                                  - 28 -


1992, and 1993.      In those returns, petitioners reported gross

receipts and net profit of NDV and total gross income, as fol-

lows:

                 Gross Receipts    Net Profit
     Year            of NDV          of NDV       Total Gross Income

        1990       $372,332          $25,647           $22,626
        1991        365,611           21,076            18,861
        1992        396,801           38,694            42,614
        1993        439,578           65,425            65,425

Petitioners' Expenditures and Other Relevant
Admissions During the Years at Issue

        In a residential loan application signed by petitioners

during December 1987, petitioners indicated that their monthly

gross income was $5,000.      Petitioners' monthly mortgage payment

after securing that loan was $887.27.

        In an application for casualty insurance for NDV that Mr.

Katerelos signed and that is dated April 8, 1988, he stated that

NDV had annual sales of $360,000.

        During 1987, petitioners made $29,000 of improvements to the

residence that they had purchased in 1986.       A list of those

improvements appeared in NDV's gross receipts journal for 1987 at

the time in 1990 that that journal was provided to Mr. Phielix

during respondent's examination of petitioners' returns for 1987

through 1989.       One week after he returned that journal to peti-

tioners and confronted them with the list of improvements, Mr.

Phielix reviewed the journal again and noticed that that list was

missing.       Mr. Katerelos had torn that list out of the gross
                              - 29 -


receipts journal for 1987 sometime during that intervening one-

week period.

     During 1987, petitioners and their family traveled to

Disneyland and Las Vegas.   During 1988, petitioners purchased

airplane tickets for over $4,900 for Ms. Katerelos and other

family members to fly to Greece.

     During August 1988, Mr. Katerelos purchased a 1987 Cadillac.

Under the terms of a loan from Valley National Bank to finance

that purchase, he made a downpayment of $4,500 and monthly

payments of $330.   All the payments for the purchase of that car,

including the downpayment, were made from NDV's checking account

at Valley National Bank.

     Prior to purchasing the Cadillac, Mr. Katerelos owned a 1974

Lincoln.   In the application for insurance that Mr. Katerelos

signed in May 1988 for the Lincoln, the box marked "no" was

checked in response to the question in that application as to

whether that vehicle was used for business purposes.

     During the years 1988 through 1990, in addition to petition-

ers, NDV had one full-time employee.   During 1988, Mr. Katerelos

submitted an application for group health insurance for employees

of NDV through Central Reserve Life of North America.   The policy

issued covered petitioners and their children, and not NDV's only

other full-time employee.

     During 1989, Mr. Katerelos purchased a 14-carat gold ring

for $1,467, and petitioners installed a swimming pool for which
                               - 30 -


they paid Wilson Swimming Pools more than $14,000 and a patio and

barbeque for which they paid more than $3,300.

     During January 1989, Mr. Katerelos purchased a 1985 Honda

Accord for his daughter Anneta.   In the application for insurance

for that car, dated January 16, 1989, Mr. Katerelos was listed as

the driver of the car for 60 percent of the time, Ms. Katerelos

was listed as the driver for 20 percent of the time, and his

daughter Anneta was listed as the driver for 20 percent of the

time.   In fact, that car was primarily driven by petitioner's

daughter Anneta after it was purchased.

     Petitioners borrowed $9,000 in May 1989 from Valley National

Bank.   They paid off that loan by making a principal payment of

$6,000 during August 1989 and two principal payments totaling

$3,000 during November 1989.

     In an application for insurance for a 1987 Chevrolet S-10

Blazer, dated June 10, 1991, petitioners were listed as the

owners of the vehicle and Mr. Katerelos was listed as the driver

of that vehicle for 30 percent of the time, Ms. Katerelos was

listed as the driver for 50 percent of the time, and petitioners'

son John was listed as the driver for 20 percent of the time.    In

fact, that vehicle was primarily driven by petitioners' son John

after it was purchased.

     From 1988 to 1992, Mr. Katerelos was a 50-percent owner of

Kefalonia, Inc. (Kefalonia) that operated a restaurant called

Dolce Vita East.   Mr. Katerelos' original investment in Kefalonia
                                - 31 -


was $4,200, which he recovered at the rate of $175 per month.     In

1992, Mr. Katerelos sold his interest in Kefalonia for $20,000.

Automobile Deductions Claimed

     During the years at issue, petitioners used Valley National

Bank for their personal and business accounts.   One branch of

that bank was located approximately .7 miles from NDV, and

another branch was located approximately 10 miles from NDV.

During at least certain of the years at issue, Mr. Katerelos

shopped at a Price Club for supplies for NDV and always wrote

checks for those supplies.   During at least part of the years at

issue, a Price Club was located approximately 10 miles from NDV.

In 1988, a second Price Club opened for business only .2 miles

from NDV.   After the second Price Club opened, Mr. Katerelos

wrote checks only to that store to purchase supplies for NDV.

     Three weeks prior to the trial herein, Mr. Katerelos pre-

pared a summary of his claimed automobile mileage for business

purposes for 1987 through 1991.    All of the miles listed in that

summary were estimated, and he did not keep contemporaneous

records of the actual miles traveled for alleged business pur-

poses.

Former Employees of NDV

     From 1988 to 1991, Elizabeth Solle (Ms. Solle) worked as a

server at NDV.   She generally worked about 20-25 hours per week

during the evening shift and usually did not work on Tuesday or

Wednesday evenings.   During certain periods of her employment,
                               - 32 -


Ms. Solle did not work on Sundays or Mondays.    Mr. Katerelos

terminated her employment at NDV in 1991.    While working at NDV,

Ms. Solle never saw anyone being trained on the cash register

using hypothetical sales or before or after normal business

hours.

     From approximately 1988 through 1993, June Yubeta (Ms.

Yubeta) worked as a hostess at NDV.     She generally worked approx-

imately 20 hours per week during the evenings and on Sunday

mornings.   Ms. Yubeta worked every Sunday while she was employed

at NDV, except possibly one or two Sundays on which she was sick.

As a hostess, Ms. Yubeta was responsible for operating the cash

register.   While working at NDV, Ms. Yubeta never entered a

hypothetical sale into the cash register for training purposes

and never saw anyone being trained on the cash register before or

after normal business hours.

     From August 1988 to December 1989, Carmine Solle (Mr. Solle)

worked at NDV as a dishwasher.   He worked five days a week from 5

p.m. until 10 or 10:30 p.m. and generally had Tuesday and Wednes-

day evenings off.   While working at NDV, Mr. Solle never saw

anyone being trained on the cash register after business hours.

     Judith DiIoli (Ms. DiIoli) worked at NDV as a hostess for

approximately six months during the years at issue.    She

generally worked during the evenings from 3 p.m. to closing and

on Saturday mornings.   As a hostess, Ms. DiIoli was responsible

for operating the cash register.   While working at NDV, she
                               - 33 -


entered actual, not hypothetical, sales into the cash register

for purposes of her training and was trained during normal

business hours.

     From 1987 until approximately 1991 or 1992, Margaret Rogers

(Ms. Rogers) was employed at NDV as a server.    She generally

worked the breakfast and lunch shifts and usually did not work on

Tuesdays or Wednesdays.   As a server working the breakfast and

lunch shifts, Ms. Rogers was responsible for operating the cash

register.    While working at NDV, she did not enter hypothetical

sales into the cash register for the purpose of training.

Ted Fisher

     Throughout all relevant periods, including the time of the

trial herein, Ted Fisher (Mr. Fisher), who sells restaurant

supplies, was a close, personal friend of Mr. Katerelos.     During

the years at issue, they saw each other at least twice a week.

Mr. Fisher did not notice any supplies on the premises of peti-

tioners' house at the time they purchased it.

                               OPINION

     Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous except those with respect to

the additions to tax and penalties for fraud as to which respon-

dent has the burden of proof that she must satisfy by clear and

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

     Mr. Katerelos testified at trial.    Based on the Court's

opportunity to observe his demeanor and evaluate his credibility,
                                - 34 -


we did not find him credible.    In addition, we found that Mr.

Katerelos had a selective memory and that he was evasive when

answering questions posed by counsel for respondent.      Under such

circumstances, we are not required to, and generally do not, rely

on the testimony of Mr. Katerelos.       Geiger v. Commissioner, 440

F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo.

1969-159; Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir.

1964), affg. 41 T.C. 593 (1964); Tokarski v. Commissioner, 87

T.C. 74, 77 (1986); Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

Issues As to Which Respondent Has the Burden of Proof

     Additions to Tax and Penalties for Fraud

     Respondent determined that Mr. Katerelos is liable for 1987

and 1988 for the additions to tax under section 6653(b)(1) and

for 1989 and 1990 for the penalties under section 6663(a) on the

portion of the underpayment attributable to the underreporting of

certain gross receipts of NDV.28   Respondent concedes that Ms.

Katerelos is not liable for any of the years 1987 through 1990

for any additions to tax or penalties for fraud.29


28
   Respondent determined in the notice that $18,151, $10,918,
and $21,997 of the total underpayment for each of the years 1988
through 1990, respectively, was due to fraud. Respondent did not
determine that petitioners are liable for the additions to tax
and penalties for fraud on that portion of the underpayment for
each of those years that was not attributable to the under-
reporting of certain gross receipts of NDV.
29
   Petitioners argue that, because fraud cannot be imputed from
one spouse to another and because respondent concedes that Ms.
                                                   (continued...)
                               - 35 -


     For 1987, section 6653(b)(1)(A) imposes an addition to tax

equal to 75 percent of the portion of an underpayment that is

attributable to fraud and section 6653(b)(1)(B) imposes an

addition to tax equal to 50 percent of the interest due on that

portion of the underpayment.   Section 6653(b)(1) for 1988 and

section 6663(a) for 1989 and 1990 impose an addition to tax and a

penalty, respectively, equal to 75 percent of the portion of an

underpayment that is attributable to fraud.   For purposes of the

foregoing provisions, section 6653(b)(2) for 1987 and 1988 and

section 6663(b) for 1989 and 1990 provide that if respondent

establishes that any portion of an underpayment is due to fraud,

the entire underpayment is treated as attributable to fraud,

unless the taxpayer proves that some portion of the underpayment

is not due to fraud.

     In order for the additions to tax and penalties for fraud to

apply, respondent must prove by clear and convincing evidence

that an underpayment exists and that some portion of such under-


29
 (...continued)
Katerelos is not liable for any additions to tax or penalties for
fraud for any of the years 1987 through 1990, respondent has not
carried her burden of proving fraud. That respondent concedes
that Ms. Katerelos is not liable for fraud does not relieve Mr.
Katerelos from the additions to tax or penalties for fraud. That
petitioners filed a joint return is not a defense to the imposi-
tion of such additions and penalties against only one spouse.
See, e.g., Otsuki v. Commissioner, 53 T.C. 96, 112-113 (1969).
Even the case cited by petitioners as authority for the proposi-
tion that fraud cannot be imputed from one spouse to another
imposed the penalty for fraud against one spouse even though
respondent failed to prove fraud against the other spouse. See
Fry v. Commissioner, T.C. Memo. 1991-51, affd. without published
opinion 8 F.3d 26 (9th Cir. 1993).
                                - 36 -


payment is due to fraud.    Sec. 7454(a); Rule 142(b); Neidringhaus

v. Commissioner, 99 T.C. 202, 210 (1992).    To prove the existence

of an underpayment, respondent may not rely on the taxpayer's

failure to carry his or her burden of proof with respect to the

underlying deficiency.     Parks v. Commissioner, 94 T.C. 654, 660-

661 (1990); Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).

Respondent must prove only that an underpayment exists, and not

the precise amount of such underpayment.     DiLeo v. Commissioner,

96 T.C. 858, 872 (1991), affd. 959 F.2d 16 (2d Cir. 1992);

Petzoldt v. Commissioner, supra at 699.

     Underpayment of Tax

     Respondent contends that Mr. Katerelos underreported the

gross receipts of NDV by $40,111, $65,009, $41,190, and $52,111

for the years 1987, 1988, 1989, and 1990, respectively, which

resulted in an underpayment of income tax for each of those

years.30   To support that contention, respondent relies on vari-

ous admissions by petitioners and the analyses by respondent of

the cash register tapes that Mr. Katerelos saved for the years

1987 through 1990.   We turn first to petitioners' admissions.

     Petitioners admitted in the amended returns they filed

during 1990 for each of the years 1987 through 1989 that they had



30
   Respondent originally determined that petitioners under-
reported the gross receipts of NDV by $65,102 and $60,094 for
1988 and 1990, respectively; however, on brief, respondent
reduces the amounts of the additional gross receipts that she
claims were underreported for those years to $65,009 and $52,111,
respectively.
                               - 37 -


underreported in the returns they originally filed for each of

those years NDV's gross receipts for each such year.   Each of

those amended returns increased by $5,200 the amount of the gross

receipts of NDV that petitioners had originally reported for each

of the years 1987 through 1989.   Although the filing of those

amended returns is not evidence of fraudulent intent, it is

evidence of an underpayment of tax for each of those years.    See

Badaracco v. Commissioner, 464 U.S. 386, 399 (1984); see also Old

Mission Portland Cement Co. v. Commissioner, 69 F.2d 676, 680

(9th Cir. 1934), affg. in part and revg. in part 25 B.T.A. 305

(1932); Roche v. Commissioner, 63 F.2d 623, 624 (5th Cir. 1933),

affg. 21 B.T.A. 1139 (1931).

     In addition to the amended returns petitioners filed for the

years 1987 through 1989, on two other occasions, petitioners

admitted having gross income and/or gross receipts for 1987 and

1988 in excess of that reported in petitioners' return for each

of those two years.   In the residential loan application signed

by petitioners during December 1987, petitioners indicated that

their monthly gross income was $5,000, or approximately $60,000

per year.   In their return for 1987, they reported gross income

of only $21,094.   Similarly, in an application for casualty

insurance for NDV that Mr. Katerelos signed and that is dated

April 8, 1988, he indicated that NDV had annual sales of

$360,000.   In their return for 1988, petitioners reported that
                               - 38 -


NDV's gross receipts were only $323,037.31

      Turning now to respondent's analyses of the cash register

tapes that Mr. Katerelos saved for the years 1987 through 1990,

Mr. Katerelos saved one cash register tape for each day through-

out those years on which NDV was open for business.   Those cash

register tapes contained detailed information concerning certain

transactions entered into the cash register, including (1) a

nonresettable, consecutive transaction number for each transac-

tion, (2) the transaction total of each transaction, (3) the date

of each transaction, and (4) for certain periods during the years

at issue, the time of each transaction.   In addition, a Z reading

on each cash register tape that Mr. Katerelos saved for the years

at issue showed a summary of all the transactions entered into

the cash register since the last Z reading, including the total

sales since the last Z reading and the amount of the non-

resettable grand total as of the time of the Z reading.32


31
   The $21,094 that petitioners reported as gross income in
their return for 1987 plus the additional gross receipts of NDV
of $40,111 that respondent determined, and that we sustain below,
that petitioners failed to report for that year equals approxi-
mately $60,000 in gross income for 1987. The $323,509 that
petitioners reported as gross receipts of NDV in their return for
1987 plus the additional gross receipts of NDV of $40,111 that
respondent determined, and that we sustain below, that petition-
ers failed to report for that year equals approximately $360,000
of gross receipts for 1987. On the record before us, we believe
that, when petitioners believed it was to their advantage, they
admitted having additional gross income and/or additional gross
receipts of NDV in almost the exact amount determined by respon-
dent for 1987.
32
     Activation of the Z or reset mode also caused the cash regis-
                                                     (continued...)
                             - 39 -


     Although Mr. Katerelos utilized the cash register tapes that

he saved in order to calculate the amounts of gross receipts of

NDV that he recorded in the gross receipts journals for 1987

through 1990 and that he reported in petitioners' returns for

those years, he did not save the entire cash register tape

generated by the cash register for each day on which NDV was open

for business during those years.   For certain days during the

years 1987 through 1990, Mr. Katerelos activated the Z mode,

thereby resetting the cash register, more than once a day.33

However, the cash register tape that he saved for each such day

showed only one Z reading, and it was that Z reading (adjusted as

described above by any amount treated as an overring or cash

shortage) from which he calculated the amount of gross receipts

of NDV that he recorded in the gross receipts journals and

reported in petitioners' returns for the years 1987 through 1990.

Mr. Katerelos discarded the portions of the cash register tape

for each such day that showed any other Z reading for that day.

The missing portions of the cash register tapes that Mr.

Katerelos discarded for 1987 through 1990 not only displayed Z



32
 (...continued)
ter to reset all amounts (other than certain nonresettable
amounts) to zero.
33
   Unless otherwise indicated, our discussion hereinafter con-
cerning days on which Mr. Katerelos activated the Z or reset mode
more than once a day does not pertain to any day on which Mr.
Katerelos activated the Z mode only twice during the day and the
cash register tape that he saved for that day showed both Z
readings.
                             - 40 -


readings that Mr. Katerelos ignored in calculating the amounts of

gross receipts of NDV that petitioners reported in their returns

for those years, they also listed transactions that increased the

grand total maintained by the cash register.

     By analyzing the cash register tapes that Mr. Katerelos

saved for 1987 through 1990, respondent was able to ascertain the

number of missing transactions that did not appear on any of the

cash register tapes that Mr. Katerelos saved for those years and

the Z reading differences in grand totals.   Respondent determined

that the amount of any such Z reading difference, less (1) the

amount of gross receipts recorded by Mr. Katerelos in the gross

receipts journals for a particular day and (2) any adjustments

for amounts treated as overrings or shortages of cash for that

particular day, constituted the amount of daily gross receipts of

NDV that Mr. Katerelos was required to, but did not, report in

petitioners' returns for each of the years 1987 through 1990.34

     The amount of daily gross receipts of NDV that Mr. Katerelos

had recorded in the gross receipts journals for a minimum of 650

of the 1,440 days throughout the period 1987 through 1990 on



34
   The amounts that respondent determined constituted additional
gross receipts of NDV that Mr. Katerelos did not report in
petitioners' returns for 1987 through 1990 included sales tax
that petitioners collected on sales by NDV. Petitioners do not
argue that respondent's determinations of the amounts of their
underpayments for those years should be reduced by the amounts of
sales tax included in the unreported gross receipts determined by
respondent, presumably because petitioners did not pay any sales
tax that they collected on unreported transactions to the appro-
priate local tax authorities.
                              - 41 -


which NDV was open for business was less than the amount of daily

gross receipts of NDV that Mr. Phielix had calculated for each

such day by using the Z reading difference in grand totals.

     Throughout the period 1987 through 1990, more than 11,400 of

the approximately 140,000 transactions that were entered into the

cash register during that period did not appear on any of the

cash register tapes that Mr. Katerelos saved for those years.

The total of the various amounts entered into the cash register

for those missing transactions during the period that began on

January 1, 1987, and that ended on December 31, 1990, was approx-

imately $199,000.

     Mr. Katerelos does not dispute that portions of the cash

register tapes are missing for the years 1987 through 1990 or

that transactions were entered into the cash register during

those years that do not appear on the cash register tapes that he

saved.   In fact, Mr. Katerelos admitted that he discarded

(1) the portions of the cash register tapes that he did not

utilize to calculate the amounts of gross receipts that he

recorded in the gross receipts journals during the years 1987

through 1990 and (2) the guest checks.   It is his position that

the missing transactions were nonsale transactions, such as

corrections for amounts treated as overrings or transactions

entered into the cash register for purposes of training employees

on its use, that did not generate gross receipts of NDV that he

failed to report in petitioners' returns for the years 1987
                              - 42 -


through 1990.   To support that position, Mr. Katerelos relies on

his own testimony.

     We did not find Mr. Katerelos' testimony that the missing

transactions were nonsale transactions that did not constitute

gross receipts of NDV for the years 1987 through 1990 to be

credible.   As for his testimony that the missing transactions

resulted from the correction of overrings, the record establishes

that Mr. Katerelos and/or other employees of NDV accounted for

overring transactions that occurred on certain days during the

years at issue by circling the overring transactions on the cash

register tape for any such day and that Mr. Katerelos subtracted

the transaction total of any such transaction from the total

sales on the cash register tape that he saved for each such day

in order to calculate the amount of NDV's gross receipts for that

day that he recorded in the gross receipts journal.   We reject

Mr. Katerelos' testimony that the missing transactions were

overrings that were not accounted for by using the method de-

scribed above.35

     As for Mr. Katerelos' testimony that he trained persons to



35
   We also reject Mr. Katerelos' testimony that the missing
transactions were attributable to his having occasionally ac-
counted during 1987 through 1990 for errors (that may or may not
have been overrings) in entering transactions into the cash
register by using the Z or reset mode after an error occurred,
correctly reentering into the cash register each transaction for
a given day that had been entered prior to the first Z reading,
and using the Z or reset mode again in order to calculate the
amount of NDV's gross receipts for that day that he recorded in
the gross receipts journals.
                              - 43 -


operate the cash register by having them enter hypothetical sales

into it, certain individuals who worked at NDV during the years

at issue testified that they themselves never entered any such

hypothetical sales into the cash register.36   Nor did they ob-

serve anyone entering such sales into the cash register.    We

reject Mr. Katerelos' testimony that the missing transactions

were hypothetical sales entered into the cash register for

purposes of training employees on its use.

     Mr. Katerelos also argues that respondent's analyses as

shown in the second computerized summary created by Mr. Phielix

are flawed because they show that NDV had high sales volumes on

Mondays during 1987 through 1990, whereas, in fact, NDV had low

sales volumes on Mondays during those years.    We disagree.   In

determining the amount by which Mr. Katerelos underreported the

gross receipts of NDV for a particular day, which he displayed in

the second computerized summary, Mr. Phielix assumed that the

missing transactions were entered into the cash register on the

last day of the multiday period in respect of which he was

comparing the grand totals shown on the cash register tapes that

Mr. Katerelos saved for the years at issue.    Mr. Phielix made

that assumption because although he was able to determine from



36
   Although Ms. Yubeta initially testified that she was trained
using hypothetical sales, we question that testimony. This is
because Ms. Yubeta subsequently admitted during her testimony
that she had never entered a hypothetical sale into the cash
register and that she did not want to say anything to hurt Mr.
Katerelos because she thought he was a "good employer".
                             - 44 -


examining those tapes that there were missing transactions, he

was not able to determine from the cash register tapes whether

those missing transactions were entered into the cash register on

the last day of that period before the first transaction shown on

that day's cash register tape was entered or on the first (or any

other) day of that period after the last transaction shown on

that day's cash register tape was entered.

     We agree with respondent that it is likely that the gross

receipts of NDV generated by the missing transactions that Mr.

Phielix assumed were attributable to Mondays during the years

1988 through 1990 were actually attributable to the preceding

Sundays, days on which NDV generally had high sales volumes.    An

analysis of the time at which the last transaction was entered

into the cash register as shown on the cash register tapes that

Mr. Katerelos saved for Sundays for the period June through

August 1990 shows that on every Sunday during that period the

last transaction entered into the cash register was entered

several hours prior to 10 p.m.   Respondent has also shown that,

according to the cash register tapes that Mr. Katerelos saved for

many of the days throughout the periods January 1, 1987, through

September 14, 1987, and from May 30, 1990, through December 31,

1990, during which the cash register was programmed to print on

the cash register tapes the time of day of every transaction

using a clock, the first transaction at NDV was not entered into

the cash register until substantially after NDV's normal opening
                               - 45 -


time of 7 a.m. and/or the last transaction was entered into the

cash register substantially earlier that NDV's normal closing

time of 10 p.m.

     To illustrate, the first transaction recorded on the cash

register tape for January 4, 1987, a Sunday, was not entered

until 4:39 p.m., and the last transaction recorded on that tape

was entered at 9:18 p.m.    Thus, according to the cash register

tape that Mr. Katerelos saved for January 4, 1987, the sales

transactions that NDV had on that day spanned only 4 hours and 39

minutes.   However, 79 missing transactions totaling $808.63 were

entered into the cash register between 8:42 p.m. on January 3,

1987, when the Z or reset mode was activated, and 4:39 p.m. on

January 4, 1987, when the first transaction recorded on the cash

register tape that Mr. Katerelos saved for that day was entered

into the cash register.37   Those 79 missing transactions do not

appear on the cash register tapes that Mr. Katerelos saved for

either of those two days.



37
   Because the last transaction recorded on the cash register
tape for Jan. 3, 1987, was entered into the cash register at 8:42
p.m., it is possible that some of the 79 missing transactions for
the two-day period Jan. 3-4, 1987, were entered into the cash
register after 8:42 p.m., prior to the close of business on Jan.
3, 1987, and some were entered into the cash register on Jan. 4,
1987, prior to 4:39 p.m. at which time the first transaction
appears on the cash register tape that Mr. Katerelos saved for
that day. However, it does not matter on which of those two days
the missing transactions were entered into the cash register.
This is because, regardless on which of those two days those
transactions were entered, the grand total maintained by the cash
register was increased by the transaction total of each of those
transactions.
                              - 46 -


     By way of further illustration, the first transaction shown

on the cash register tape for Valentine's Day 1987, a Saturday,

was recorded at 4:49 p.m.   However, 70 transactions totaling

$457.28 were entered into the cash register throughout the period

that began with the last transaction entered into the cash

register on the day before Valentine's Day and that ended with

the first transaction entered on Valentine's Day.

     Mr. Katerelos has not offered any credible explanation for

the allegedly early closing or late opening of NDV shown on the

cash register tapes that he saved for many days throughout the

periods January 1, 1987, through September 14, 1987, and May 30,

1990, through December 31, 1990, during which the cash register

printed the time of each transaction on the cash register tapes.

Mr. Katerelos suggested during his testimony that he sometimes

opened NDV late or closed it early if business were light or if

one of his family members were sick.   However, he could not

explain why the restaurant would have opened late or closed early

on any particular day during the years at issue or why NDV would

have often opened late during 1987 on Sundays after breakfast and

lunch, which were among its busiest times.   Moreover, Mr.

Katerelos' testimony was contradicted by the former employees of

NDV who testified that they did not remember any occasion on

which NDV opened late or closed early, but that, if it had, that

would have occurred only on very rare occasions.

     Respondent has also shown that petitioners made certain
                              - 47 -


large expenditures during 1987, 1988, 1989, and 1990 that are

inconsistent with the gross income reported by petitioners for

those years.   Mr. Katerelos alleges several sources for those

expenditures other than his underreporting of the gross receipts

of NDV.   However, we did not find his testimony to be credible,

and we are unwilling to rely on the testimony of Mr. Fisher, a

close personal friend of Mr. Katerelos, who testified on his

behalf about the alleged source of the funds for those expendi-

tures.

     Based on our examination of the entire record before us, we

find that respondent has established by clear and convincing

evidence that there was an underpayment of petitioners' income

tax for each of the years 1987 through 1990 as a result of Mr.

Katerelos' underreporting certain gross receipts of NDV for each

of those years.

     Fraudulent Intent

     To prove that an underpayment is attributable to the fraudu-

lent intent of a taxpayer, respondent must prove that the tax-

payer intended to evade taxes that he or she believed to be owing

by conduct intended to conceal, mislead, or otherwise prevent the

collection of such taxes.   Stoltzfus v. United States, 398 F.2d

1002, 1004 (3d Cir. 1968); Parks v. Commissioner, 94 T.C. at 661;

see Laurins v. Commissioner, 889 F.2d 910, 913 (9th Cir. 1989),

affg. Norman v. Commissioner, T.C. Memo. 1987-265.   The existence

of fraudulent intent is a question of fact to be resolved upon
                                - 48 -


consideration of the entire record.      Gajewski v. Commissioner, 67

T.C. 181, 199 (1976), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978).   Although fraudulent intent is never

presumed, it may be established by circumstantial evidence.     This

is because direct proof of the taxpayer's intent is rarely

available.    Powell v. Granquist, 252 F.2d 56, 61 (9th Cir. 1958);

Petzoldt v. Commissioner, 92 T.C. at 699; Rowlee v. Commissioner,

80 T.C. 1111, 1123 (1983).   The taxpayer's entire course of

conduct may establish the requisite fraudulent intent.     Otsuki v.

Commissioner, 53 T.C. at 106.

     The Courts have identified a number of badges of fraud from

which fraudulent intent may be inferred.     Those badges include:

(1) Substantial and consistent understatement of income, (2) in-

adequate records, (3) incomplete and erroneous information

provided to tax return preparer or bookkeeper, (4) destruction of

books and records, (5) implausible explanations of behavior, and

(6) lack of credibility of the taxpayer's testimony.     Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Toussaint v. Commissioner, 743 F.2d 309, 312 (5th

Cir. 1984), affg. T.C. Memo. 1984-25; Merritt v. Commissioner,

301 F.2d 484, 487 (5th Cir. 1962), affg. T.C. Memo. 1959-172;

Powell v. Granquist, supra at 59; Parks v. Commissioner, 94 T.C.

at 664-665.   A pattern of underreporting income over an extended

period of time is indicative of fraud.      Laurins v. Commissioner,

supra at 913; Petzoldt v. Commissioner, supra at 700.     However,
                              - 49 -


the mere failure to report income is not sufficient to establish

fraud.   Petzoldt v. Commissioner, supra at 700.

     The record in this case establishes, inter alia, that

(1) Mr. Katerelos substantially underreported the gross receipts

of NDV for each of the years 1987 through 1990; (2) he activated

the Z or reset mode on the cash register more than once on a

number of days during each of those years, but reported the total

sales from only one such Z reading on those days as the amount of

gross receipts of NDV even though he knew he was required to

report the transaction totals of all sales made by NDV as gross

receipts for those years; (3) during each of the years 1987

through 1990, Mr. Katerelos discarded the portions of the cash

register tapes that he did not utilize to calculate the amounts

of gross receipts that he recorded in the gross receipts journal

for each such year; (4) Mr. Katerelos discarded all of the guest

checks for the years 1987 through 1990; (5) Mr. Katerelos pro-

vided his accountant with only the gross receipts journals and

the portions of the cash register tapes that he saved and uti-

lized to calculate the amounts of gross receipts that he recorded

therein; (6) the pattern of missing transactions repeated itself

on a regular basis during each of the years 1987 through 1990

until September 1990 when Mr. Phielix first confronted petition-

ers concerning his analyses of the cash register tapes; (7) Mr.

Katerelos provided implausible explanations as to the nature of

the missing transactions and as to why the cash register tapes
                             - 50 -


for certain days indicated NDV was not open during normal busi-

ness hours; and (8) Mr. Katerelos' testimony at trial was not

credible.

     Although the additions to tax and the penalties for fraud

apply to the entire underpayment unless the taxpayer proves that

some portion of the underpayment is not due to fraud, respondent

determined, and does not argue otherwise herein, that only the

portion of the underpayment for each of the years 1987 through

1990 that is attributable to the underreporting of certain gross

receipts of NDV for each such year is due to fraud.   Mr.

Katerelos has not shown either (1) that he underreported in

petitioners' returns for the years 1987 through 1990 the gross

receipts of NDV in any amounts other than the amounts by which

respondent contends that he underreported those gross receipts or

(2) that any portion of the underpayment for each of those years

that is attributable to that underreporting is not due to fraud.

     Based on our examination of the entire record before us, we

find that respondent has established by clear and convincing

evidence that Mr. Katerelos intended to evade tax for each of the

years 1987 through 1990 that he knew to be owing by conduct

intended to conceal, mislead, or otherwise prevent the collection

of such taxes.

     We find on the record before us that Mr. Katerelos is liable

for 1987 and 1988 for the additions to tax for fraud under
                               - 51 -


section 6653(b)(1) and for 1989 and 1990 for the penalties for

fraud under section 6663(a) with respect to the entire portion of

the underpayment for each of those years that is attributable to

the underreporting of gross receipts of NDV.

Issues as to Which Petitioners Have the Burden of Proof

     Underreporting of Gross Receipts of NDV

     Respondent determined in the notice that petitioners under-

reported the gross receipts of NDV by $40,111, $65,102, $41,190,

and $60,094 for the years 1987, 1988, 1989, and 1990, respec-

tively.38   On brief, respondent reduces the amounts of the gross

receipts that she claims petitioners underreported for 1988 and

1990 to $65,009 and $52,111, respectively.

     We found above on the record before us that respondent

proved by clear and convincing evidence that Mr. Katerelos under-

reported certain gross receipts of NDV in petitioners' returns

for each of the years 1987 through 1990.   A fortiori, we further

find on that record that petitioners failed to sustain their

burden of proving error in respondent's determination that they

underreported those gross receipts for each of those years.

Accordingly, we sustain respondent's determination, as modified



38
   Although respondent determined in the notice that petitioners
underreported the gross receipts of NDV by $4,714 for 1991, the
parties stipulated that petitioners' gross receipts for 1991
should be increased by only $999.49. Thus, we need not address
whether petitioners underreported any of NDV's gross receipts for
that year.
                              - 52 -


on brief, that petitioners underreported the gross receipts of

NDV by $40,111, $65,009, $41,190, and $52,111 for the years 1987,

1988, 1989, and 1990, respectively.

     Automobile Expenses

     Petitioners argue that they are entitled to deductions under

section 162(a) for each of the years at issue for expenses

incurred with respect to the use of an automobile.    Respondent

determined in the notice that petitioners are not entitled to the

automobile expense deductions that they claimed in their returns

for 1987, 1989, 1990, and 199139 and argues that they are not

entitled to the deductions for such expenses that they claimed in

the amended return they filed for 1988.40    Petitioners bear the

burden of proof on this issue.

     Section 162(a) generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   The determination of whether an

expenditure satisfies the requirements for deductibility under

section 162 is a question of fact.     Commissioner v. Heininger,

320 U.S. 467, 475 (1943).   In general, an expense is ordinary if

it is considered "normal, usual, or customary" in the context of

the particular business out of which it arose.     Deputy v. du


39
   Petitioners did not claim any automobile expense deductions
in their return for 1988.
40
   Respondent made no determination with respect to that amended
return.
                               - 53 -


Pont, 308 U.S. 488, 495-496 (1940).     Ordinarily, an expense is

necessary if it is appropriate and helpful to the operation of

the taxpayer's trade or business.     Commissioner v. Tellier, 383

U.S. 687, 689 (1966); Carbine v. Commissioner, 83 T.C. 356, 363

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

     To substantiate their claimed deductions for automobile

expenses, petitioners rely on the testimony of Mr. Katerelos and

a document he prepared three weeks prior to the trial herein that

purports to reconstruct in very summary fashion the business use

of his automobile (summary).   We are unwilling to rely on the

testimony of Mr. Katerelos or on the document he prepared in

anticipation of trial to prove either (1) that petitioners

actually incurred such expenses or (2) that if such expenses were

incurred, they were ordinary and necessary expenses with respect

to petitioners' business, NDV.

     With respect to Mr. Katerelos' testimony regarding the

automobile expenses at issue, in addition to our having found

that his testimony is generally not credible, his testimony with

respect to his use of an automobile for NDV's business is in

conflict with an insurance application he signed in May 1988 for

the Lincoln that he claims he used for business purposes through-

out 1987 and during 1988 until he purchased a 1987 Cadillac.     In

that application, the box marked "no" was checked in response to

a question as to whether the Lincoln was used for business
                              - 54 -


purposes.   Thus, according to that insurance form, Mr. Katerelos

was not using the Lincoln for business purposes, and his testi-

mony is inconsistent with that form.

     With respect to the summary of the automobile expenses at

issue that Mr. Katerelos reconstructed, we did not find that

self-serving and uncorroborated reconstruction to be credible.

In addition to our having found that Mr. Katerelos' testimony is

generally not credible, we question how he could have remembered

enough specific facts to prepare that summary when he testified

on various occasions that he did not remember specific facts when

questioned by counsel for respondent.41   We also question the

validity of the summary of automobile expenses that Mr. Katerelos

prepared, since he claimed therein that (1) he traveled five

times a week to a branch of his bank that was 10 miles away from

NDV when another branch was located approximately .7 miles from

NDV and (2) he continued to visit a Price Club once a week that

was 10 miles from NDV even after a new Price Club opened in 1988

that was only .2 miles from NDV and to which he wrote all of the

checks that he wrote to Price Club subsequent to its opening.

     Based on our review of the entire record before us, we find

that petitioners failed to prove that they are entitled to


41
   For example, when asked whether construction on the swimming
pool that petitioners had installed was started in May 1989, Mr.
Katerelos responded, "I don't remember dates." Similarly, when
asked whether he installed a $3,500 barbeque and patio, he
responded, "I don't recall amounts."
                               - 55 -


deductions under section 162(a) for automobile expenses for any

of the years at issue.42   We therefore sustain respondent's

determinations disallowing those deductions for 1987, 1989, 1990,

and 1991 and reject petitioners' contention that they are enti-

tled to any such deduction for 1988.

     Depreciation

     Petitioners claimed depreciation deductions in their returns

for each of the years at issue with respect to properties that

they claim they placed in service for their business, NDV, during

1986 and that they claim had total bases of $76,052.     Respondent

determined in the notice that petitioners are not entitled to

those depreciation deductions because they failed to establish

(1) their bases in the properties with respect to which the

depreciation deductions were claimed and (2) that the properties

with respect to which those deductions were claimed were depre-

ciable assets.   On brief, respondent argues that petitioners

failed to establish what properties they placed in service during

1986 and their adjusted bases in any properties they did in fact

place in service during that year.      Petitioners bear the burden

of proof on this issue.

     Section 167(a) allows a deduction for a reasonable allowance

for the exhaustion, wear and tear of property used, inter alia,



42
   We note that petitioners also failed to prove that they
satisfy the requirements imposed by sec. 274(d)(4).
                                - 56 -


in a trade or business.     Section 167(c)(1) provides that the

basis on which the exhaustion, wear and tear is allowed is the

adjusted basis determined under section 1011.     Thus, to be

entitled to a depreciation deduction, petitioners must establish

their adjusted bases in the properties with respect to which they

are claiming depreciation deductions for the years at issue.

     Prior to the trial herein, the parties stipulated that

petitioners are entitled to depreciation deductions for the years

at issue that are based on adjusted bases of a minimum of $22,102

with respect to properties placed in service during 1986.       Peti-

tioners argue that their bases in the properties placed in serv-

ice during 1986 was greater than the amount of $22,102 to which

the parties stipulated.43    The only evidence in the record re-

garding petitioners' claim is the testimony of Mr. Katerelos on

which we are unwilling to rely.44

      Although petitioners admitted that they do not have re-

ceipts to support their claim that they had bases in properties


43
   It is unclear whether petitioners are arguing that they
placed properties into service during 1986 in addition to those
properties that the parties stipulated had minimum bases of
$22,102 or that their bases in the latter properties exceeded
$22,102.
44
   Petitioners attempted to call Mr. Fisher to testify as an
expert witness on their behalf for purposes of valuing the
properties used at NDV. As required by Rule 143(f), petitioners
submitted a purported expert report prepared by Mr. Fisher before
trial. Respondent filed a motion to exclude that report and any
expert testimony by Mr. Fisher. The Court granted respondent's
motion and did not admit the purported expert report of Mr.
Fisher into evidence and did not allow him to testify as an
expert witness.
                              - 57 -


placed in service during 1986 in excess of the $22,102 to which

the parties stipulated, they argue that they should be allowed to

estimate from memory their bases in the properties that they

placed in service during that year and that the Court should

sustain that estimate.   On the record before us, we decline to do

so.   Petitioners have failed to establish what properties they

placed in service during 1986 or that their bases in whatever

properties they did so place in service exceeded the $22,102 to

which the parties stipulated, and the present record does not

provide enough reliable information to enable us to make a

reasonable estimate of the petitioners' bases in the properties

with respect to which they claim depreciation deductions for the

years at issue.   See Coloman v. Commissioner, 540 F.2d 427, 431-

432 (9th Cir. 1976), affg. T.C. Memo. 1974-78; Vanicek v. Commis-

sioner, 85 T.C. 731, 742-743 (1985).

      Based on our review of the entire record before us, we find

that petitioners failed to prove that their bases in the proper-

ties at issue exceeded the $22,102 to which the parties stipu-

lated.   We therefore shall not allow petitioners to deduct for

any of the years at issue any amount under section 167(a) in

excess of that amount calculated by taking account of those

stipulated bases.

      General Business Credit Carryforward

      In addition to claiming depreciation deductions for the

years at issue with respect to the properties that they claim
                                - 58 -


they placed in service during 1986, petitioners contend that they

are entitled to a general business credit carryforward from 1986

with respect to those properties.    Respondent determined that

petitioners are not entitled to that credit because they failed

to establish that they had a credit from 1986 to carry forward.

       Credits are a matter of legislative grace, and taxpayers

must prove their entitlement to them.    Rule 142(a); Segel v.

Commissioner, 89 T.C. 816, 842 (1987).       A taxpayer is required to

maintain records as long as the contents of those records may

become material in the administration of any internal revenue

law.    Sec. 1.6001-1(e), Income Tax Regs.    If a credit affects the

calculation of tax due for an open year, respondent is entitled

to recalculate the amount of credits earned and/or used for a

particular year even if the period of limitations has expired for

that year.    Hill v. Commissioner, 95 T.C. 437, 445-446 (1990);

Mennuto v. Commissioner, 56 T.C. 910, 923 (1971).

       Petitioners have failed to establish that they had a general

business credit from 1986 to carry forward.      For 1986, section

38(a)(2) allows a credit for, inter alia, the amount of the cur-

rent year business credit.    Section 38(b) defines the term "cur-

rent year business credit" to include the investment credit

determined under section 46(a).    Sec. 38(b)(1).    Section 46 de-

fines the amount of the investment credit to include the regular

percentage of the qualified investment determined under section

46(c).    Sec. 46(a)(1).   Section 46(c)(1) provides that the term
                              - 59 -


"qualified investment" means with respect to any taxable year the

aggregate of the applicable percentage of the basis of each new

section 38 property, as defined in section 48(b), placed in serv-

ice by the taxpayer during such year plus the applicable percent-

age of the cost of each used section 38 property, as defined in

section 48(c)(1), placed in service by the taxpayer during such

year.   Section 38 property is defined to include "tangible per-

sonal property (other than an air conditioning or heating unit)".

Sec. 48(a)(1)(A).   The term "section 38 property" "includes only

recovery property (within the meaning of section 168 * * *) and

any other property with respect to which depreciation * * * is

allowable and having a useful life * * * of 3 years or more."

Sec. 48(a).   Petitioners have not established that (1) they

placed section 38 property in service during 1986 or (2) either

(a) their basis in new section 38 property or (b) the cost of

used section 38 property.45

     In addition, section 49(a) disallows the regular percentage

of the qualified investment determined under section 46(c) for

property placed in service after December 31, 1985.   Section

49(b)(1) provides an exception to that disallowance for transi-



45
   Although it is possible that certain of the properties that
the parties stipulated had minimum bases of $22,102 and that
petitioners placed in service during 1986 do, in fact, fit within
the definition of sec. 38 property, the record before us does not
permit us to make such a determination. For example, petitioners
have not even established what properties are covered by that
stipulation, let alone whether such properties, whatever they
are, constitute sec. 38 property.
                               - 60 -


tion property as defined in section 49(e).    Section 49(e)(1)

defines transition property to mean

     any property placed in service after December 31, 1985,
     and to which the amendments made by section 201 of the
     Tax Reform Act of 1986 do not apply, except that in
     making such determination--

           *      *        *      *      *      *      *

               (B) sections 203(b)(1) and 204(a)(3) of such
          Act shall be applied by substituting "December 31,
          1985" for "March 1, 1986",

Section 203(b)(1) of the Tax Reform Act of 1986, Pub. L. 99-514,

100 Stat. 2143-2144, provides in pertinent part:

          (1) IN GENERAL.--The amendments made by section
     201 shall not apply to--

                (A) any property which is constructed, recon-
          structed, or acquired by the taxpayer pursuant to
          a written contract which was binding on March 1,
          1986,

(We shall hereinafter refer to the foregoing exception in section

203(b)(1)(A) of the Tax Reform Act of 1986, 100 Stat. 2144, as

the binding contract exception.)

     The conference committee report addressing the binding

contract exception states that the binding contract exception

"applies only to contracts in which the construction, reconstruc-

tion, erection, or acquisition of property is itself the subject

matter of the contract."    H. Conf. Rept. 99-841, at II-55 (1986),

1986-3 C.B. (Vol. 4) 55.    Thus, in order for property to be

transition property within the meaning of section 49(e)(1), it

must be constructed, reconstructed, or acquired by the taxpayer

pursuant to a written contract (1) that was binding on December
                               - 61 -


31, 1985, and (2) the subject matter of which was the construc-

tion, reconstruction, or acquisition of such property.

     During December 1985, petitioners executed a lease for the

premises at which NDV was located.      That lease provided that the

leased premises were to be used to operate a restaurant.     Peti-

tioners argue that, in order to operate the leased premises as a

restaurant, they were required to purchase property for use at

the leased premises and that therefore the binding contract

exception applies to property that they purchased for use at NDV.

We disagree.   The subject of the lease executed by petitioners in

December 1985 was the use of the premises at which NDV was

located, and not the construction, reconstruction, or acquisition

of property for use at that premises.     Consequently, the binding

contract exception does not apply to the lease executed by

petitioners for the premises at which NDV was located.

     On the instant record, we find that petitioners failed to

prove that they are entitled to a general business credit carry-

forward from 1986.    We therefore sustain respondent's determina-

tion on that issue.

     To reflect the foregoing and the concessions of the parties,


                                   Decision will be entered under

                                Rule 155.
