                        T.C. Memo. 1996-305



                      UNITED STATES TAX COURT



                 JOHN VAN HEEMST, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 24252-93, 24253-93.1           Filed July 8, 1996.



     John Van Heemst, pro se.

     James F. Kearney, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     WELLS, Judge:   Respondent determined deficiencies in, and

additions to, petitioner's Federal income tax as follows:




1

     These cases were consolidated for purposes of trial,
briefing, and opinion and will hereinafter be referred to as the
instant case.
                                         - 2 -

                                          Additions to Tax
      Year   Deficiency   Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B)   Sec. 6661
                                                     1
      1987    $21,182         $15,887                               $5,296
1
  50 percent of the interest payable pursuant to sec. 6601 with respect to the
portion of any underpayment that is due to fraud.


                                           Additions to Tax
      Year   Deficiency   Sec. 6651(f)         Sec. 6653(b)(1)    Sec. 6654

      1988    $10,300         N/A                 $7,725             $659
      1989     16,103       $12,077                N/A              1,089



      Unless otherwise indicated, all section references are to

the Internal Revenue Code as in effect for the years in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

      The issues to be decided in the instant case are:

      (1)    Whether petitioner is entitled to a deduction for home

mortgage interest for taxable year 1987 in an amount greater than

that allowed by respondent;

      (2)    whether petitioner failed to report income from a sole

proprietorship for each of taxable years 1987, 1988, and 1989 in

the amounts determined by respondent;

      (3)    whether petitioner is liable for self-employment tax

for each of taxable years 1987, 1988, and 1989;

      (4)    whether petitioner is liable for the additions to tax

for fraud pursuant to section 6653(b)(1)(A) and (B) for taxable

year 1987 and section 6653(b)(1) for taxable year 1988, and for

fraudulent failure to file pursuant to section 6651(f) for

taxable year 1989;
                               - 3 -

     (5)   alternatively, should petitioner not be held liable for

the additions to tax for fraud, whether he is liable for the

addition to tax for failure to file timely pursuant to section

6651(a)(1) for each of taxable years 1987, 1988, and 1989;

     (6)   alternatively, should petitioner not be held liable for

the additions to tax for fraud, whether he is liable for the

additions to tax for negligence pursuant to section 6653(a)(1)(A)

and (B) for taxable year 1987 and section 6653(a)(1) for taxable

year 1988;

     (7)   whether petitioner is liable for the addition to tax

for a substantial understatement of income tax pursuant to

section 6661(a) for taxable year 1987; and

     (8)   whether petitioner is liable for the addition to tax

for failure to pay estimated income tax pursuant to section

6654(a) for each of taxable years 1988 and 1989.

                         FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.   The parties' stipulations are incorporated herein by

reference and are found accordingly.2



2

     In the stipulation of facts, respondent objected to certain
exhibits offered by petitioner, some of which petitioner has
cited on brief. Respondent, however, has neither addressed those
objections on brief nor advanced any argument concerning them.
We therefore consider those objections abandoned. Midkiff v.
Commissioner, 96 T.C. 724, 734 (1991), affd. sub nom. Noguchi v.
Commissioner, 992 F.2d 226 (9th Cir. 1993).
                                - 4 -

     At the time the petitions in the instant case were filed,

petitioner resided in Sarasota County, Florida.

     Petitioner was born in The Netherlands on November 14, 1938.

He immigrated to Canada sometime thereafter and became a citizen

of that country.   Petitioner was involved in the construction

business in Ontario, Canada, until 1976.   Petitioner immigrated

to the United States during that year.

     On April 7, 1977, petitioner married Colleen Murphy, and the

marriage continued through the years in issue.    Ms. Murphy also

goes by the name "Kelly Murphy".   During the years in issue, Ms.

Murphy used the names Colleen Van Heemst and Kelly Van Heemst.

Petitioner and Ms. Murphy were divorced no earlier than April 15,

1991.

     In 1978, petitioner started Cape Town Development, Inc.

(Cape Town Development), a corporation that built commercial and

residential properties, of which he was the president and sole

shareholder.   The corporation ceased operations, possibly during

1986, and filed for bankruptcy during 1986 or 1987.   Ultimately,

petitioner and Ms. Murphy satisfied the claims of Cape Town

Development's creditors because they were guarantors of all debts

incurred by that corporation.   Cape Town’s bankruptcy proceeding

was dismissed in 1988.   Petitioner did not have a large amount of

assets after that bankruptcy.

     During the years in issue, petitioner and Ms. Murphy jointly

owned and operated a sole proprietorship known as “Pieces of
                               - 5 -

Eight”, which was a retail jewelry store located in Captiva,

Florida.   In order to hide his assets from creditors, petitioner

claimed that Kathleen Murphy owned Pieces of Eight.    Kathleen

Murphy, the sister of Ms. Murphy, never had an ownership interest

in Pieces of Eight and had nothing to do with the business.

Petitioner maintained the books for Pieces of Eight.    During the

years in issue, a checking account was maintained for Pieces of

Eight with Citizens and Southern National Bank.    During the years

in issue, petitioner issued checks on the account of Pieces of

Eight to pay personal expenses.

     During 1987, petitioner informed Thomas Louwers, the

accountant who prepared petitioner's and Ms. Murphy's return for

that year, that Kathleen Murphy, who Mr. Louwers understood to be

Ms. Murphy's sister, owned Pieces of Eight.    Petitioner also

informed Mr. Louwers that petitioner was only an employee of

Pieces of Eight.   Petitioner provided Mr. Louwers with an asset

purchase agreement (asset purchase agreement) in which Kathleen

Murphy purported to sell the assets of Pieces of Eight to Michael

Van Heemst, petitioner’s son, as of the end of 1987.    Michael Van

Heemst was then a high school student and part-time employee of

Pieces of Eight.   Michael Van Heemst signed the asset purchase

agreement at the insistence of petitioner.    None of the sale

price was ever paid.   Petitioner informed Mr. Louwers that

Michael Van Heemst owned Pieces of Eight for years after 1987,

and Mr. Louwers prepared 1988 and 1989 income tax returns for
                              - 6 -

Michael Van Heemst reflecting the income of Pieces of Eight.

Petitioner provided Mr. Louwers with the information concerning

Pieces of Eight that was used for purposes of preparing financial

statements and tax returns.

     For taxable year 1987, petitioner filed a joint Federal

individual income tax return (1987 return) with Ms. Murphy.3   On

the 1987 return, petitioner and Ms. Murphy reported income from

the sources and in the amounts shown below:

             Source                                 Amount

     Form W-2 wages (Ms. Murphy)                  $10,000
     Form W-2 wages (petitioner)                   10,000
     Taxable interest income                          478
     Nonpassive income from S corporation
       (Pieces of Eight Dive Center, Inc.)            411
          Total income reported per return         20,889

The Forms W-2 for both petitioner and Ms. Murphy indicate as

employer "Kathleen Murphy, Pieces of Eight, PO Box 1124, Captiva,

Fl 33924".

     Petitioner and Ms. Murphy claimed one personal exemption for

each of themselves and a dependency exemption for petitioner's

17-year-old son, Jason, who lived with them.   Additionally, they

claimed itemized deductions on Schedule A in the amounts shown

below:


3

     The notice of deficiency for 1987 was issued to both
petitioner and Ms. Murphy. She did not file a petition with
respect to that notice and, accordingly, is not a party to the
instant case.
                                - 7 -

              Item                                   Amount

     Real estate taxes                               $5,519
     Home mortgage interest                          25,200
     Personal interest
       ($944 less nondeductible portion)                614
     Cash contribution                                   70
          Total itemized deductions claimed          31,403

Consequently, for the taxable year 1987, petitioner and Ms.

Murphy reported negative taxable income in the amount of $16,214

and total tax due of zero.    None of the activity of Pieces of

Eight, except as noted above, was reported on the 1987 return.

     The face of the 1987 return is date-stamped received at the

Internal Revenue Service Atlanta Service Center on October 24,

1988.   Included with the 1987 return is a Form 4368, Application

for Automatic Extension of Time to File U.S. Individual Income

Tax Return, and a Form 2688, Application for Additional Extension

of Time to File, both of which were signed by the return

preparer, Mr. Louwers.   The Form 2688 requested an extension

until October 15, 1988, to file the 1987 return and represented

that petitioner and Ms. Murphy needed the extension because they

were "awaiting K-1 from Subchapter S corporation".    The form

further indicates that approval for the extension was granted.

     Petitioner filed no Federal individual income tax return for

taxable years 1988 or 1989.    Petitioner, however, was aware of

his obligation to file returns.    For those years, Ms. Murphy
                               - 8 -

filed delinquent Federal individual income tax returns, claiming

the filing status of married, filing separately.

     During the initial stage of the audit for the years in

issue, which began during or about October 1990, petitioner told

respondent’s agent that (1) he was merely an employee of Pieces

of Eight, (2) the agent was not to ask him any questions about

Pieces of Eight, and (3) the agent could not visit its store.

Petitioner also represented to respondent’s agent that Pieces of

Eight had been owned by Kathleen Murphy, a woman he had never

seen.   Petitioner later told respondent’s agent that Kathleen

Murphy was an alias used by Ms. Murphy.   Petitioner also claimed

that Kathleen Murphy had sold the business to Michael Van Heemst,

petitioner’s 17-year-old son, and showed respondent’s agent the

asset purchase agreement.   Petitioner admitted to respondent’s

agent that none of the sale price had been paid and that he did

not know where Kathleen Murphy lived.   Petitioner further claimed

during the audit that Pieces of Eight was owned by Michael Van

Heemst.

     Petitioner initially was unwilling to provide Pieces of

Eight’s records to respondent’s agent, but, after the agent

issued a summons, petitioner provided seven boxes of records in

April 1991 at Pieces of Eight’s place of business, acting

pursuant to a purported power of attorney given by Michael Van

Heemst.   Petitioner, however, did not assist the agent in
                                - 9 -

reconstructing the taxable income of Pieces of Eight for the

years in issue, even though he was its bookkeeper.    Ms. Murphy

and Mr. Louwers did assist respondent’s agent in the

reconstruction.   After the reconstruction was completed,

respondent’s agent turned the records of Pieces of Eight over to

Ms. Murphy and Mr. Louwers.   Ms. Murphy took the records to

petitioner’s store in Sarasota.

     For 1987, based on an analysis of deposits into Pieces of

Eight’s bank account, checks drawn on that account, and other

expenditures made in connection with Pieces of Eight’s business,

respondent determined that petitioner and Ms. Murphy received

gross receipts from Pieces of Eight, incurred cost of goods sold

and other deductible expenses, and realized gross income from the

business in the following amounts:

      Gross           Cost of Goods Sold             Gross
     Receipts         and Other Deductions           Income

     $279,944              $187,478                  $92,466

     Respondent also eliminated the $20,000 of wages reported on

the return as having been paid by Pieces of Eight, essentially

including them in the income of Pieces of Eight.   Respondent

disallowed $8,816 of the home mortgage interest deduction claimed

on the 1987 return.

     For 1988 and 1989, respondent determined petitioner’s income

from Pieces of Eight using a check spread or transcript of checks
                              - 10 -

drawn on Pieces of Eight’s account.     The checks that respondent’s

agent could not determine were allowable business expenses were

considered to represent personal, nondeductible expenses of

petitioner and Ms. Murphy, one-half of the amount of which was

allocated to petitioner.   Those expenditures were determined to

represent net income of Pieces of Eight.

     In July 1991, a Florida court awarded Ms. Murphy sole use

and possession of Pieces of Eight and restrained petitioner from

coming on or about the business (July 1991 order).    During 1992,

Ms. Murphy found hidden in petitioner’s files an agreement dated

September 3, 1990, in which petitioner, as transferee for a

company to be incorporated, purported to purchase the assets of

Pieces of Eight from Michael Van Heemst.

                              OPINION

Home Mortgage Interest Deduction

     Respondent determined that petitioner and Ms. Murphy were

entitled to claim a deduction for home mortgage interest paid in

1987 in the amount of $16,582, rather than the $25,200 claimed on

the 1987 return, because the payment of interest in excess of the

amount allowed had not been established.

     Deductions are strictly a matter of legislative grace, and a

taxpayer bears the burden of proving entitlement to any deduction

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S. 111, 115
                                - 11 -

(1933).   The taxpayer’s burden includes the burden of

substantiation.     Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).       A taxpayer is

required to maintain sufficient records to substantiate

deductions claimed on the tax return.       Sec. 6001.

     Petitioner has not attempted to substantiate the portion of

the home mortgage interest deduction claimed on his 1987 return

that was disallowed by respondent.       We accordingly sustain

respondent’s determination with respect to the allowable amount

of the deduction.

Unreported Income

     Respondent used indirect methods of reconstructing

petitioner’s income for the years in issue.       Deficiencies

determined by indirect methods of proof are presumed correct, and

the burden is on the taxpayer to show any claimed unfairness or

inaccuracy in the Commissioner’s calculations.       Webb v.

Commissioner, 394 F.2d 366, 372 (5th Cir. 1968), affg. T.C. Memo.

1966-81; Marcello v. Commissioner, 380 F.2d 494, 497 (5th Cir.

1967), affg. in part and revg. and remanding in part T.C. Memo.

1964-302; DiLeo v. Commissioner, 96 T.C. 858, 871, (1991), affd.

959 F.2d 16 (2d Cir. 1992); Harper v. Commissioner, 54 T.C. 1121,

1129 (1970).   The reconstruction of income need only be

reasonable in light of all surrounding facts and circumstances.
                              - 12 -

Giddio v. Commissioner, 54 T.C. 1530, 1533 (1970); Schroeder v.

Commissioner, 40 T.C. 30, 33 (1963).

     We note that petitioner complains, inter alia, that

respondent did not provide him with copies of Pieces of Eight’s

books and records.   Petitioner further claims that he was

prevented from seeking records of Pieces of Eight by the July

1991 order restraining him from coming on or around the business.

The record shows, and petitioner admits on brief, that he

provided all of the records of Pieces of Eight to respondent’s

agent during the audit, although he claims that he did so on the

instructions of Pieces of Eight.   Those records consisted of

seven boxes of documents and were supplied to the agent at Pieces

of Eight’s place of business during April 1991.    Although

petitioner maintained the books and records of Pieces of Eight,

he neither participated in the process of reconstructing its

taxable income nor met with respondent’s agent at the conference

at which the records were reviewed, although he had been notified

of it.   After the reconstruction was completed, respondent turned

the records over to Ms. Murphy and Mr. Louwers.    Ms. Murphy took

the records to petitioner’s store in Sarasota.    Although

petitioner contends that the records have disappeared, the

problem seems to be one of his own making, and we find his

complaint that respondent did not provide him with the records of

Pieces of Eight to be without merit.
                              - 13 -

     1987

     Petitioner and Ms. Murphy reported none of the business

activity of Pieces of Eight on the 1987 return.4   For that year,

respondent determined the deficiency in income tax using the bank

deposit method.   The bank deposit method is a well-accepted means

of establishing the receipt of income.   Clayton v. Commissioner,

102 T.C. 632, 645 (1994); DiLeo v. Commissioner, supra at 867;

Estate of Mason v. Commissioner, 64 T.C. 651 (1975), affd. 566

F.2d 2 (6th Cir. 1977).

     In general, the bank deposit method reconstructs a

taxpayer’s income by analyzing deposits and withdrawals from all

of a taxpayer’s bank accounts.   Dodge v. Commissioner, 96 T.C.

172, 181 (1991), affd. in part and revd. in part and remanded 981

F.2d 350 (8th Cir. 1992).   Bank deposits are prima facie evidence

of income, and the Commissioner need not show a likely source

where the taxpayer has the burden of proof.   Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v.

Commissioner, supra at 656.   When the bank deposit method is

employed, however, the Commissioner must take into account any

nontaxable source or deductible expense of which the Commissioner



4

     The only references to their business activities on the
return were the report of (1) purported wage income from Pieces
of Eight and (2) income from an S corporation called “Pieces of
Eight Dive Ctr, Inc.”
                                - 14 -

has knowledge.   DiLeo v. Commissioner, supra at 868.    However,

the Commissioner is not required to show that all deposits

constitute taxable income.     Estate of Mason v. Commissioner,

supra at 657; Gemma v. Commissioner, 46 T.C. 821, 823 (1966).

Consequently, in analyzing a bank deposit case, deposits are

considered income when there is no evidence that they represent

anything other than income.     Price v. United States, 335 F.2d

671, 677 (5th Cir. 1964); United States v. Doyle, 234 F.2d 788,

793 (7th Cir. 1956).    The burden of showing duplications is on

the taxpayer.    Zarnow v. Commissioner, 48 T.C. 213, 216 (1967).

     For 1987, respondent determined that petitioner and Ms.

Murphy received gross receipts from Pieces of Eight, incurred

cost of goods sold and other deductible expenses, and realized

gross income from the business in the following amounts:5

      Gross            Cost of Goods Sold            Gross
     Receipts          and Other Deductions          Income

     $279,944               $187,478                 $92,466




5

     Respondent also eliminated from the taxable income of
petitioner and Ms. Murphy the $20,000 of wage income reported on
the 1987 return purportedly paid them by Pieces of Eight.
Respondent did so on the grounds that petitioner and Ms. Murphy
could not receive wage income from the business because they were
its owners. In the computations with respect to Pieces of Eight,
respondent allowed no deduction for the wages. Consequently, the
amount was treated as income derived by petitioner and Ms. Murphy
from Pieces of Eight that was reportable on Schedule C of the
return.
                              - 15 -

     On brief, petitioner does not question respondent’s

determination, based on the bank deposit method, of the amount of

income earned by Pieces of Eight during 1987.   Rather, petitioner

claims that he is not taxable on that income because Ms. Murphy

alone owned the business.   Ms. Murphy, however, testified that

Pieces of Eight was a business owned and operated by both

petitioner and her during the years in issue.   Ms. Murphy

testified that petitioner did not wish to have the business in

his name because he feared that it would be taken from him to

satisfy liens and judgments that were outstanding against him.

We found Ms. Murphy a credible witness and accept her testimony.

Moreover, on at least one invoice that is in the record,

petitioner represented himself as an owner of Pieces of Eight.

     Petitioner’s conflicting stories concerning the ownership of

Pieces of Eight also render his claims implausible.    Prior to and

at the beginning of the audit, petitioner claimed that Kathleen

Murphy, a woman he had never seen, had owned Pieces of Eight.

Kathleen Murphy is Ms. Murphy’s sister and had nothing to do with

the business.   Petitioner also told respondent's agent that

Kathleen Murphy was an alias used by Ms. Murphy.    Petitioner

further claimed that the business was subsequently acquired from

Kathleen Murphy by petitioner’s son, Michael Van Heemst, who was

then a high school student, at the end of 1987.    Petitioner,

however, admitted that none of the purchase price called for in
                                - 16 -

the asset purchase agreement was paid and offered implausible

explanations for the failure.    At trial, however, petitioner

claimed that Kathleen Murphy never sold Pieces of Eight to

Michael Van Heemst.   The sale transaction seems to have been

fabricated by petitioner.    During the course of the audit, which

the record indicates began during or about October 1990,

petitioner claimed that Michael Van Heemst was the current owner

of Pieces of Eight.   At trial, however, petitioner testified that

Ms. Murphy was the owner of Pieces of Eight at the time he told

the agent that it was owned by Michael Van Heemst.    Moreover, the

record contains a sale agreement dated September 3, 1990,

pursuant to which petitioner, as transferee for a company to be

incorporated, purports to purchase the assets of Pieces of Eight

from Michael Van Heemst.    During 1992, Ms. Murphy found the

agreement hidden in petitioner’s files and apparently provided it

to respondent.

     At trial, petitioner claimed that Ms. Murphy and Kathleen

Murphy initially agreed that Kathleen Murphy would be the owner

of Pieces of Eight but later decided Ms. Murphy would own the

business.   Petitioner also claimed at trial that Ms. Murphy used

the name Kathleen Murphy as an alias and always owned the

business.   Petitioner makes the same claim on brief, although

elsewhere on brief seems to admit that Ms. Murphy and Kathleen

Murphy were different persons.    In one portion of his brief,
                             - 17 -

petitioner claims that “Kathleen Murphy, petitioners ex wife”

executed the asset purchase agreement.   In another portion of his

brief, he claims that the asset purchase agreement was signed

either by Ms. Murphy or her sister.   Petitioner’s stories

concerning the ownership of Pieces of Eight are so conflicting as

to be unworthy of belief,6 and we reject them.    Conti v.

Commissioner, 39 F.3d 658, 664 (6th Cir. 1994), affg. and

remanding 99 T.C. 370 (1992) and T.C. Memo. 1992-616.     On the

basis of the record in the instant case, we conclude that

petitioner was a coowner of Pieces of Eight.     We accordingly

sustain respondent’s determination of the deficiency in income

tax for 1987.7



6

     This brings to mind a letter from Thomas Jefferson to Peter
Carr, dated Aug. 19, 1785, which notes that once a lie is told,
it is much easier to do it again and again "till at length it
becomes habitual."

7

     Moreover, even if Ms. Murphy had been the sole owner of
Pieces of Eight, petitioner would still be liable for the
deficiency determined by respondent resulting from the failure to
report the income of Pieces of Eight for 1987. As an
unincorporated business, the income of Pieces of Eight was
reportable on the joint return petitioner and Ms. Murphy filed
for 1987. Liability for the tax on the aggregate income of a
husband and wife is joint and several, sec. 6013(d)(3), and,
therefore, petitioner would be liable for the tax attributable to
the income of Pieces of Eight whether or not he was one of its
owners, Davenport v. Commissioner, 48 T.C. 921, 926 (1967); sec.
1.6013-4(b), Income Tax Regs.
                               - 18 -

     1988 and 1989

     Petitioner filed no returns for 1988 and 1989.    For those

years, respondent determined that petitioner received net income

from Pieces of Eight in the amounts of $37,891 and $58,577,

respectively, based on a check spread, or transcript of checks

drawn on Pieces of Eight’s bank account.    The checks that

respondent could not determine were allowable business expenses

were considered to represent personal nondeductible expenses of

petitioner and Ms. Murphy, one half of the amount of which was

allocated to petitioner, and represented net income of Pieces of

Eight.   Ms. Murphy testified that petitioner would issue to her

checks drawn on Pieces of Eight’s account that were used to pay

their household expenses.    Respondent’s agent claimed at trial

that she had utilized a bank deposit method of reconstructing the

income of Pieces of Eight, but the work papers in the record

concerning 1988 and 1989 do not contain any analysis of Pieces of

Eight’s bank deposits for those years.    Furthermore, the

description of the method by which the deficiencies were

determined set forth in the stipulations of the parties and

respondent’s brief makes clear that the determination was based

on expenditures from, rather than deposits into, the Pieces of

Eight bank account.   On brief, respondent does not claim that the

deficiencies for 1988 and 1989 were determined on the basis of

the bank deposit method.    Indeed, respondent does not
                               - 19 -

characterize the method used to determine the deficiencies,

simply stating that certain expenditures from the Pieces of Eight

account were determined to be nondeductible and were presumed to

represent income to petitioner.   Although we may infer that

deposits in amounts equal to the amount of the checks were made

into the Pieces of Eight account, we shall treat respondent as

having utilized the cash expenditures method of reconstructing

income for those years.

     The cash expenditures method is a variant of the net worth

method that is designed to reconstruct the income of a taxpayer

who consumes his income during the year and does not invest it.

Petzoldt v. Commissioner, 92 T.C. 661, 694 (1989).    The method is

well accepted by the courts.   United States v. Johnson, 319 U.S.

503, 517-518 (1943); DeVenney v. Commissioner, 85 T.C. 927, 930

(1985).   It is based on the assumption that the amount by which a

taxpayer’s expenditures during a taxable year exceed his reported

income has taxable origins unless the taxpayer can show that the

expenditures were made from some nontaxable source.    DeVenney v.

Commissioner, supra at 930-931.   Income is reconstructed pursuant

to the cash expenditures method in the following manner:

     after taking into account the amount of resources that
     a taxpayer had on hand at the beginning of a period,
     the income received by the taxpayer for the same period
     is compared with his expenditures that are not
     attributable to his resources on hand or non-taxable
     receipts during the period. A substantial excess of
     expenditures over the combination of reported income,
                              - 20 -

     non-taxable receipts, and cash on hand may establish
     the existence of unreported income. [United States v.
     Citron, 783 F.2d 307, 310 (2d Cir. 1986).]

     Formal opening net worth statements are not required

provided the evidence "'shows the extent of any contribution

which beginning resources or a diminution of resources over time

could have made to expenditures.'"     Petzoldt v. Commissioner,

supra at 694-695 (quoting Taglianetti v. United States, 398 F.2d

558, 565 (1st Cir. 1968), affd. 394 U.S. 316 (1969)).    To carry

his burden of proof, petitioner must show that the expenditures

in question were made from some nontaxable source of funds, such

as loans, gifts, or assets on hand at the beginning of the

period.   DeVenney v. Commissioner, supra at 931.   Alternatively,

petitioner may show that the expenditures were allowable business

expenses, in which case they would offset the income presumed to

have been received by petitioner.    Curry v. Commissioner, T.C.

Memo. 1991-102.

     Petitioner argues that the expenditures identified by

respondent were business expenses of Pieces of Eight or were

loans or repayments made by it to himself or other related

businesses and that any loans Pieces of Eight made were repaid.

Petitioner relies on his testimony and charge account statements

to establish his claim with respect to the business expenses.

However, we found petitioner’s testimony vague and replete with

unsupported conclusions, and, based on our observation of his
                               - 21 -

demeanor at trial, we do not consider petitioner's testimony to

be credible.    Moreover, the records relied on by petitioner are

inconclusive and do not establish that the amounts charged and

paid by Pieces of Eight were expenditures of a business, rather

than of a personal, nature.    Indeed, based on the information in

the charge account statements, many of the charges listed appear

indistinguishable from personal expenses.    Petitioner’s claim

that other expenditures were loans that were subsequently repaid,

even if we were to accept it, does not call into question

respondent’s determination.    In essence, respondent determined,

on the basis of the expenditures by Pieces of Eight, that Pieces

of Eight received taxable income that enabled it to make those

expenditures.    Petitioner did attempt to show a nontaxable source

for the expenditures, claiming money obtained from refinancing a

mortgage on his home provided funds that were advanced to Pieces

of Eight in 1987, and that additional funds were advanced through

the end of 1990.   Petitioner’s testimony on the matter, however,

was vague, confusing, and contradictory, and we do not accept it.

Moreover, petitioner did not have a large amount of assets after

the bankruptcy of Cape Town, which concluded in 1988.    We also

conclude that petitioner was an owner of Pieces of Eight during

1988 and 1989.   We accordingly hold that petitioner has failed to

carry his burden of demonstrating error in respondent’s
                              - 22 -

determination that he received unreported income with respect to

Pieces of Eight during those years.

Section 1401 Self-Employment Tax

     Respondent determined that petitioner is liable for self-

employment tax on the following amounts of unreported income from

Pieces of Eight for the years in issue:

                Year           Amount

                1987           $92,446
                1988            37,891
                1989            58,577

Section 1401 imposes a tax on the self-employment income of every

individual.   The term “self-employment income” generally is

defined as an individual’s net earnings from self-employment

during any taxable year that do not exceed the contribution and

benefit base provided by section 230 of the Social Security Act,

42 U.S.C. sec. 430 (1988), for that year.   Sec. 1402(b).   “Net

earnings from self-employment” generally are defined as the gross

income from any trade or business carried on by the individual,

less allowable deductions attributable to the trade or business.

Sec. 1402(a).   Petitioner bears the burden of establishing error

in respondent’s determination that he is liable for self-

employment tax on the net earnings of Pieces of Eight.   Rule

142(a).

     We have rejected above petitioner’s claim that Ms. Murphy

was sole owner of the business, and we have sustained
                              - 23 -

respondent’s determinations with respect to the unreported income

received by petitioner with respect to Pieces of Eight.   We

accordingly sustain respondent’s determinations of petitioner’s

liability for self-employment tax.

Sections 6653(b) and 6651(f) Additions to Tax

     Respondent determined that petitioner is liable for the

addition to tax for fraud provided by section 6653(b)(1)(A) and

(B) for 1987 and section 6653(b)(1) for 1988.   Respondent also

determined that petitioner is liable for the addition to tax for

fraudulent failure to file a return provided by section 6651(f)

for 1989.8   In deciding whether a failure to file is fraudulent,

we consider the same elements as are considered in imposing the

addition to tax for fraud provided by former section 6653(b) and

present section 6663.   Clayton v. Commissioner, 102 T.C. at 653.

Accordingly, we have consolidated our discussion of respondent’s

fraud determinations.




8

     Sec. 6664(b) provides that, for tax returns the due date for
which (determined without regard to extensions) is after Dec. 31,
1989, neither the negligence penalty provided by sec. 6662 nor
the fraud penalty provided by sec. 6663(a) applies where a tax
return has not been filed. Clayton v. Commissioner, 102 T.C.
632, 652 (1994). Sec. 6651(f), however, provides that, where a
failure to file a return is fraudulent, the addition to tax
imposed by section 6651(a) is increased to 15 percent of the
amount required to be shown as tax for each month the failure
continues, up to a maximum of 75 percent of the amount.
                                - 24 -

     The addition to tax for fraud is a civil sanction provided

primarily for the protection of the revenue and to reimburse the

Commissioner for the heavy expense of investigation and the loss

resulting from the taxpayer's fraud.     Helvering v. Mitchell, 303

U.S. 391, 401 (1938).   Fraud is defined as an intentional

wrongdoing designed to evade tax believed to be owing.    Powell v.

Granquist, 252 F.2d 56 (9th Cir. 1958); Miller v. Commissioner,

94 T.C. 316, 332 (1990).   The Commissioner bears the burden of

demonstrating fraud by clear and convincing evidence.    Sec.

7454(a); Rule 142(b).   The existence of fraud is a question of

fact to be resolved upon consideration of the entire record.

Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986),

affg. per curiam T.C. Memo. 1985-63; Gajewski v. Commissioner, 67

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

1383 (8th Cir. 1978); Estate of Pittard v. Commissioner, 69 T.C.

391 (1977).

     In order to carry the burden of proof on the issue of fraud,

respondent must show, for each year in issue, that (1) an

underpayment of tax exists and (2) some portion of the

underpayment is due to fraud.    Petzoldt v. Commissioner, 92 T.C.

at 699.
                                 - 25 -

     Underpayment

     With respect to the first prong of the test, respondent need

not prove the precise amount of the underpayment resulting from

fraud, but only that some part of the underpayment of tax for

each year in issue is attributable to fraud.        Lee v. United

States, 466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v.

Commissioner, 465 F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo.

1970-274.    Respondent may not, however, simply rely upon

petitioner’s failure to show error in the determinations of the

deficiencies.      DiLeo v. Commissioner, 96 T.C. at 873; Petzoldt v.

Commissioner, supra at 700.

            1987

     As noted above, respondent reconstructed petitioner’s income

for 1987 using the bank deposit method, and we are satisfied that

respondent’s bank deposit analysis establishes that petitioner

had substantial unreported income during that year.       In contrast

to the net worth and cash expenditures methods, it is not

necessary to establish a taxpayer’s opening net worth in order to

show the receipt of taxable income by means of the bank deposit

method.   United States v. Conaway, 11 F.3d 40, 43 (5th Cir.

1993).    “Such proof is not required because the evidence of bank

deposits suffices to raise the inference that the taxpayer’s

income came from a taxable source.”       Id.   Where the Commissioner

has the burden of proof, the Commissioner must, however,
                                - 26 -

establish either a likely source for the unreported income or

disprove nontaxable sources alleged by the taxpayer.    DiLeo v.

Commissioner, supra at 873-874; Parks v. Commissioner, 94 T.C.

654, 661 (1990).   Proof of a likely source necessarily negates

possible nontaxable sources.    United States v. Abodeely, 801 F.2d

1020, 1025 (8th Cir. 1986).

     Respondent’s bank deposit analysis for 1987 was carefully

performed.   Respondent’s agent analyzed the deposits made in

Pieces of Eight’s bank account for 1987, excluding the deposits

that could be identified as transfers from other accounts and

considering claims of loans made to the business, which were

rejected because of a lack of substantiation.    Respondent’s agent

also analyzed the checks drawn on the account as well as other

expenditures, and allowed as cost of goods sold or deductible

expenses those payments that were shown to be attributable to the

business of Pieces of Eight.    Ms. Murphy and Mr. Louwers assisted

the agent in establishing the allowable amount of those items.

The difference between the net deposits and the total cost of

goods sold and expenses allowed was determined to be the taxable

income of Pieces of Eight.    Respondent has shown a likely source

for the unreported income in issue; to wit, Pieces of Eight, of

which petitioner was coowner.    Although respondent, having

established a likely source of petitioner’s unreported income,

need not negate nontaxable sources of that income, DiLeo v.
                               - 27 -

Commissioner, supra at 873-874, the record shows that respondent

investigated petitioner’s claims of nontaxable sources and showed

them to be implausible and/or not supported by objective evidence

in the record, United States v. Conaway, supra at 44; Parks v.

Commissioner, supra at 661.    Respondent has thus established an

underpayment for 1987.

          1988 and 1989

     In contrast to the approach used for 1987, respondent

determined that petitioner underpaid his 1988 and 1989 taxes, not

on the basis of deposits into Pieces of Eight’s bank account, but

on the basis of expenditures from the account.   Respondent does

not argue on brief that the method used to determine the

underpayments of tax for 1988 and 1989 was the bank deposit

method or any variation thereof.   Respondent’s agent examined the

checks drawn on the account of Pieces of Eight and treated as

personal or nondeductible the expenditures that could not be

associated with that business.   Respondent did not place in

evidence any analysis of bank deposits for Pieces of Eight during

those years, although respondent’s agent claimed to have gone

through its bank deposits.    Respondent has offered no explanation

why the determination of the underpayment of tax apparently was

based on only an analysis of expenditures from Pieces of Eight’s

bank account, and not on deposits into the account.9

9

     For instance, respondent does not claim that records of
                                                   (continued...)
                              - 28 -

Consequently, we do not consider it appropriate to review

respondent’s method using the standards developed for the bank

deposit method.10

     Instead, we shall consider whether respondent has carried

the burden of proving that underpayments of tax occurred for

those years using the standards customarily applied to the cash

expenditures method.   Evidence of expenditures alone is not

sufficient to establish the existence of unreported income for a

taxable year where the Commissioner has the burden of proof;

rather, there must be sufficient proof to support an inference

that the expenditures are made from currently taxable sources.

Marcus v. United States, 422 F.2d 752, 755 (5th Cir. 1970);

United States v. Nunan, 236 F.2d 576, 582 (2d Cir. 1956); Olinger

v. Commissioner, 234 F.2d 823, 824 (5th Cir. 1956), affg. in part

and revg. in part T.C. Memo. 1955-9.

     As noted above, while the Commissioner need not establish an

opening net worth in order to apply the bank deposit method, the

Commissioner must, as a prerequisite to establishing that

expenditures during a taxable year are made from currently

taxable income, show the "'extent of any contribution which



9
   (...continued)
deposits into the account were not available.
10

     We note that, even if we were to apply those standards, we
would find, essentially for the reasons set forth below, that
respondent had not carried the burden of proving an underpayment
of tax for 1988 or 1989.
                               - 29 -

beginning resources or a diminution of resources over time could

have made to expenditures.'"   Petzoldt v. Commissioner, 92 T.C.

at 694-695 (quoting Taglianetti v. United States, 398 F.2d at

565).

     Formal net worth statements are not required as long as
     sources of available funds are identified and
     quantified. The relevant issue in a cash expenditures
     case is whether any expenditures in excess of reported
     income can be attributed to assets available at the
     beginning of the relevant period or to nontaxable
     receipts, such as loans, gifts, or inheritances. [Id.
     at 695; citations omitted.11]

Establishment of a taxpayer’s beginning resources is essential

and is recognized to be the most difficult component of the

Commissioner’s proof where the expenditures method is used.

United States v. Citron, 783 F.2d at 316.   Where underpayments of

tax are to be shown over successive years, the Commissioner may

establish the opening available funds for the first year and show

the net amount of taxable and nontaxable receipts less

disbursements for that year in order to establish the opening

available funds for the successive year, and so on.      United

States v. Caswell, 825 F.2d 1228, 1232 (8th Cir. 1987); United

States v. Marshall, 557 F.2d 527, 530 (5th Cir. 1977).


11

     We held in Petzoldt v. Commissioner, 92 T.C. 661, 694-696
(1989), that the Commissioner’s failure to determine a taxpayer’s
opening and closing net worth did not prevent the Commissioner
from showing an underpayment of tax on the basis of the cash
expenditures method where the Commissioner introduced sufficient
evidence for us to conclude that the taxpayer did not have
sufficient resources at the beginning of the relevant period to
provide a nontaxable source for the expenditures in question.
                               - 30 -

     Additionally, the Commissioner must show either a likely

source for the unreported income or negate nontaxable sources.

Petzoldt v. Commissioner, supra at 695-697.     If all nontaxable

sources are negated, respondent need not show a likely source.

United States v. Massei, 355 U.S. 595 (1958).    “One or the other

will do.”    Petzoldt v. Commissioner, supra at 696.   The

Commissioner must also follow up leads to sources of nontaxable

income furnished by the taxpayer where they are reasonably

susceptible of being checked but need not negate every possible

nontaxable source where no leads are forthcoming.      Holland v.

United States, 348 U.S. 121, 135-136, 138 (1954); United States

v. Penosi, 452 F.2d 217, 220 (5th Cir. 1971).

     Because respondent’s determinations were based upon

transactions occurring with respect to Pieces of Eight’s bank

account, we need only consider circumstances relating to that

account in order to decide whether respondent has carried the

burden of proving an underpayment for each of 1988 and 1989.

Respondent has shown that petitioner was coowner of Pieces of

Eight.   Respondent, however, has introduced evidence only of

expenditures made by checks drawn on Pieces of Eight’s bank

account.    Respondent has not attempted to show the opening

balance of that account for each of 1988 and 1989,12 which would

12

     Furthermore, respondent’s analysis of Pieces of Eight’s
account for 1987, although sufficient to demonstrate the
existence of an underpayment of tax for that year, does not
                                                   (continued...)
                              - 31 -

establish the extent to which expenditures during those years

could have been accounted for by cash on hand at the beginning of

each of those years.   Respondent has thus failed to identify and

quantify sources of available funds, which is required to

establish an underpayment of tax pursuant to the cash

expenditures method.   Petzoldt v. Commissioner, supra at 695.    In

fact, the total amount of unreported income determined for 1988

and 1989, namely, $96,468, is only slightly larger than the

amount of unreported income determined for 1987 to have been

deposited in that account; namely, $92,466.13   Therefore, the

extent to which resources on hand at the beginning of 1988 and

1989 could have contributed to the expenditures during those

years is unclear.   Had respondent placed in evidence the

statements for the account or other records showing the activity

for the account for those years, we might have been able to infer

that the expenditures in issue were made from currently taxable

income.

     Respondent’s approach to establishing that underpayments of

tax occurred for 1988 and 1989 is summed up by the following



12
   (...continued)
afford a reliable basis for an inference as to the balance of the
account at the end of that year.
13

     Although we do not conclude that this amount necessarily was
on deposit in Pieces of Eight's account at the close of 1987, the
unreported income indicates the availability of resources that
could have funded at least a portion of the expenditures in
question and that respondent failed to take into account.
                                - 32 -

statement from respondent's brief:       “It is presumed that if

petitioner could have used * * * funds [of Pieces of Eight] for

nondeductible personal expenditures then at least that amount of

income must have been earned.”    Such a presumption, however, is

insufficient to carry respondent’s burden of proof.14      The fact

that expenditures were made, without evidence supporting the

inference that they were made from currently taxable income,

rather than from resources on hand at the beginning of the period

in question, is not sufficient to establish, by clear and

convincing evidence, that underpayments of tax occurred in each

of 1988 and 1989.    We therefore do not sustain respondent’s

determination with respect to the addition to tax for fraud for

1988 and the addition to tax for fraudulent failure to file for

1989.

     Fraudulent Intent

        Because we have found that respondent has carried the burden

of proving that an underpayment of tax occurred only with respect

to 1987, we shall consider the second prong of the fraud test

14

     Elsewhere on brief, respondent argues that “petitioner
cannot reasonably dispute that the amounts of income he failed to
report in each of the three consecutive years before the Court
was substantial” to support the determination that petitioner is
liable for the addition to tax for fraud. If respondent means to
suggest that petitioner should be held liable for the addition to
tax for fraud because he cannot show error in respondent’s
determinations, we must point out that respondent bears the
burden of proof on this issue, and a finding of fraud cannot be
based upon petitioner’s failure to show error in respondent’s
determinations. Parks v. Commissioner, 94 T.C. 654, 660-661
(1990).
                                - 33 -

only with respect to that year.    Respondent must show that

petitioner intended to evade taxes known or believed to be owing

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

collection of taxes.    Korecky v. Commissioner, 781 F.2d at 1568;

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

Webb v. Commissioner, 394 F.2d at 377; Rowlee v. Commissioner, 80

T.C. 1111, 1123 (1983).    Fraud is not to be imputed or presumed,

but rather must be established by some independent evidence of

fraudulent intent.     Beaver v. Commissioner, 55 T.C. 85, 92

(1970); Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).    However,

fraud need not be established by direct evidence, which is rarely

available, but may be proved by surveying the taxpayer’s entire

course of conduct and drawing reasonable inferences therefrom.

Spies v. United States, 317 U.S. 492, 499 (1943); Korecky v.

Commissioner, supra at 1568; Rowlee v. Commissioner, supra at

1123; Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982), affd.

748 F.2d 331 (6th Cir. 1984).    Although fraud may not be found

under "circumstances which at the most create only suspicion",

Petzoldt v. Commissioner, 92 T.C. at 700, the intent to defraud

may be inferred from any conduct the likely effect of which would

be to conceal, mislead, or otherwise prevent the collection of

taxes believed to be owing, Spies v. United States, supra at 499.

     Courts have relied on a number of indicia or badges of fraud

in deciding whether to sustain the Commissioner’s determinations

with respect to the additions to tax for fraud.    Although no
                                - 34 -

single factor may be necessarily sufficient to establish fraud,

the existence of several indicia may be persuasive circumstantial

evidence of fraud.    Solomon v. Commissioner, 732 F.2d 1459, 1461

(6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603; Beaver v.

Commissioner, supra at 93.

       Circumstantial evidence which may give rise to a finding of

fraudulent intent includes:    (1) Understatement of income; (2)

inadequate records; (3) failure to file tax returns; (4)

implausible or inconsistent explanations of behavior; (5)

concealment of assets; (6) failure to cooperate with tax

authorities; (7) filing false Forms W-4; (8) failure to make

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

illegal activity; and (11) attempting to conceal illegal

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

1986), affg. T.C. Memo. 1984-601; see Douge v. Commissioner, 899

F.2d 164, 168 (2d Cir. 1990).    These "badges of fraud" are

nonexclusive.    Miller v. Commissioner, 94 T.C. at 334.   The

taxpayer's background and the context of the events in question

may be considered as circumstantial evidence of fraud.     Spies v.

United States, supra at 497; United States v. Murdock, 290 U.S.

389, 395 (1933), overruled on another issue Murphy v. Waterfront

Commn., 378 U.S. 52 (1964); Plunkett v. Commissioner, 465 F.2d at

303.

       Considering the record as a whole, we conclude that there

are sufficient badges of fraud to carry respondent’s burden of
                                 - 35 -

proof.    During 1987, petitioner was coowner of and received

income from Pieces of Eight, yet he reported that he received

only $10,000 in wage income from that business on the 1987

return, reporting none of the income and expenses attributable to

that business on the return.15    Petitioner maintained the books

and records of Pieces of Eight and was therefore aware of its

financial position.    The Form W-2 filed with that return also

falsely represented that Kathleen Murphy was the owner of Pieces

of Eight.    As noted above, respondent reconstructed the taxable

income of Pieces of Eight for 1987 using the bank deposit method.

Although unexplained bank deposits are not in themselves clear

and convincing evidence of fraud, York v. Commissioner, 24 T.C.

742, 743 (1955), a large unexplained discrepancy between

petitioner’s actual income and his reported income constitutes

evidence of fraud, Stone v. Commissioner, 56 T.C. 213, 224

(1971).

     Furthermore, petitioner misled the accountant who prepared

the financial statements for Pieces of Eight and the 1987 income

tax return concerning its ownership.      Although he and Ms. Murphy

owned Pieces of Eight during the years in issue, he informed the

accountant that Kathleen Murphy was its owner in 1987.

Petitioner continued to mislead the accountant in subsequent

years, telling the accountant that Michael Van Heemst,

15

     The record does not disclose that the income of Pieces of
Eight for 1987 was reported on any return.
                               - 36 -

petitioner’s son, was its owner in 1988 and 1989.16   Petitioner

showed the accountant the asset purchase agreement in which

Kathleen Murphy purportedly sold Pieces of Eight to Michael Van

Heemst.   On the basis of that information, the accountant

prepared 1988 and 1989 returns for Michael Van Heemst that

reflected the income of Pieces of Eight.    The accountant

subsequently learned that Pieces of Eight was owned by petitioner

and Ms. Murphy.    A failure to be forthright with one’s return

preparer is an indication of fraud, Korecky v. Commissioner, 781

F.2d at 1568, as is the use of an alias, Lipsitz v. Commissioner,

21 T.C. 917, 937 (1954), affd. 220 F.2d 871 (4th Cir. 1955).

     Petitioner also told respondent’s agent that Kathleen Murphy

owned Pieces of Eight from 1986 until the end of 1987.   At first,

he claimed not to know her but later claimed that the name was an

alias used by Ms. Murphy.   During the initial stage of the audit,

petitioner also told respondent’s agent that (1) he was merely an

employee of Pieces of Eight, (2) the agent was not to ask him any

questions about Pieces of Eight, and (3) the agent could not

visit its store.   Petitioner also initially was unwilling to

provide Pieces of Eight’s records to respondent’s agent, but,

after the agent issued a summons, petitioner provided records,

16

     Although some of petitioner’s conduct does not relate
directly to 1987, we may consider evidence of prior and
subsequent similar acts reasonably close to the years in issue in
deciding whether petitioner is liable for the addition to tax for
fraud. United States v. Johnson, 386 F.2d 630, 631 (3d Cir.
1967); Gruber v. Commissioner, T.C. Memo. 1995-230.
                               - 37 -

acting pursuant to a purported power of attorney given by Michael

Van Heemst.   During this time, however, it appears that there was

in existence a sale agreement, dated September 3, 1990, pursuant

to which petitioner, as transferee for a company to be

incorporated, purported to purchase the assets of Pieces of Eight

from Michael Van Heemst and which petitioner kept hidden in his

files.    Petitioner, moreover, did not assist the agent in

reconstructing the taxable income of Pieces of Eight for the

years in issue, even though he was its bookkeeper.    Making false

and inconsistent statements to the Commissioner’s agents during

the course of their examinations is a badge of fraud, as is

failure to cooperate with the agents.    Grosshandler v.

Commissioner, 75 T.C. 1, 20 (1980).

     Furthermore, we consider petitioner’s testimony at trial,

which we found to be at times vague, evasive, inconsistent, and

incredible.    “Although mere refusal to believe the taxpayer’s

testimony does not discharge the Commissioner’s burden, * * * the

lack of credibility of the taxpayer’s testimony, the

inconsistencies in his testimony, and his evasiveness on the

stand are heavily weighted factors in considering the fraud

issue.”    Toussaint v. Commissioner, 743 F.2d 309, 312 (5th Cir.

1984), affg. T.C. Memo. 1984-25.

     Petitioner relies on a memorandum from respondent’s Criminal

Investigation Division declining to accept referral of

petitioner’s case for criminal prosecution.    That petitioner’s
                              - 38 -

case was not accepted for criminal prosecution, in which the

Government would be required to bear a heavier burden of proof

than in a civil case, see Moore v. United States, 360 F.2d 353,

355 (4th Cir. 1965), does not suggest that petitioner is not

liable for the civil fraud addition, and the memorandum states

that none of the considerations leading to the declination of the

referral would preclude imposition of that addition to tax.     That

the Government declined to pursue criminal charges against

petitioner has no bearing on the question of petitioner’s

liability for the civil fraud addition, and even an acquittal of

criminal tax evasion charges would in no way affect his liability

for those additions.   Otsuki v. Commissioner, 53 T.C. at 112.

     Petitioner also claims that he relied on the representations

of Ms. Murphy that taxes were paid through 1991.   While a showing

of good faith on the part of a taxpayer can preclude the

existence of fraud, Loftin & Woodard, Inc. v. United States, 577

F.2d 1206, 1238 n.72 (5th Cir. 1978); Niedringhaus v.

Commissioner, 99 T.C. 202, 220 (1992), the evidence petitioner

relies on does not indicate good faith on his part.    In one

portion of his brief, petitioner points to a provision of what

appears to be a proposed divorce settlement between petitioner

and Ms. Murphy dated October 18, 1991, which states:    “John Van

Heemst agrees that Colleen Murphy has paid to date several monies

for him both personal and business including paying the IRS up to

1991”.   Elsewhere on brief, however, petitioner claims that the
                               - 39 -

statement was a lie on the part of Ms. Murphy, that the agreement

was an attempt to “blackmail” him, and that he did not sign the

agreement.    At trial, Ms. Murphy denied that the statement

indicated that she had paid petitioner’s taxes.    Under the

circumstances, we do not think that petitioner relied on the

statement.    Petitioner also claims on brief that Ms. Murphy

verbally advised him that taxes were paid up to 1991, but he

points to no evidence in the record to support his assertion.

Statements in briefs, however, are not evidence, Rule 143(b), and

we do not accept petitioner’s assertion without evidence.      We do

not accept that there was good faith on petitioner’s part with

respect to the underpayment of taxes for the years in issue.

Moreover, petitioner’s belief in 1991 that taxes were paid would

not purge any prior fraudulent intent on his part with respect to

the years in issue.    Cf. Badaracco v. Commissioner, 464 U.S. 386,

394 (1984).

Section 6651(a) Addition to Tax

     Respondent determined that, in the event petitioner were not

held liable for the additions to tax for fraud for 1988 and for

fraudulent failure to file a return for 1989,17 he was liable for

the addition to tax for failure to file timely provided by

17

     Because we have held above that petitioner is liable for the
addition to tax for fraud for 1987, we need not consider
respondent’s alternative determination that petitioner is liable
for the addition to tax for failure to file timely for that year.
Sec. 6653(a)(2).
                              - 40 -

section 6651(a) for each of those years.   The addition to tax for

failure to file timely does not apply where the taxpayer

demonstrates that the failure to file was due to reasonable cause

and not willful neglect.   The regulations provide that reasonable

cause exists where the taxpayer was unable to file timely despite

the exercise of ordinary business care and prudence.   Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.   “Willful neglect” has

been defined as a “conscious, intentional failure or reckless

indifference.”   United States v. Boyle, 469 U.S. 241, 245 (1985).

The question whether a failure to file is due to reasonable cause

and not willful neglect is one of fact, on which petitioner bears

the burden of proof.   Rule 142(a); Lee v. Commissioner, 227 F.2d

181, 184 (5th Cir. 1955), affg. a Memorandum Opinion of this

Court dated July 31, 1953.

     Petitioner failed to file returns for 1988 and 1989.

Although petitioner makes no argument directed specifically to

his liability for the addition to tax provided by section

6651(a), petitioner testified that he believed that he was

required to file returns every year, whether he owed tax or not.

While petitioner claims that he relied on the statement of Ms.

Murphy that taxes were paid through 1991, which was apparently

made at that time, we have rejected his claim.   Moreover, the

relevant question is not whether petitioner believed that tax was

owed, but whether he knew that a return should be filed.      Jackson

v. Commissioner, 864 F.2d 1521, 1527 (10th Cir. 1989), affg. 86
                                - 41 -

T.C. 492 (1986); Olsen v. Commissioner, T.C. Memo. 1993-432;

Estate of Cox v. United States, 637 F. Supp. 1112, 1115 (S.D.

Fla. 1986).     Based on the entire record, we hold that petitioner

has failed to carry his burden of proving that his failure to

file returns for 1988 and 1989 was due to reasonable cause and

not willful neglect.

Section 6653(a)(1) Addition to Tax

     Respondent determined that, in the event petitioner were not

held liable for the addition to tax for fraud for 1988, he was

liable for the addition to tax for negligence provided by section

6653(a)(1).18    The addition to tax is equal to 5 percent of the

underpayment if any part is attributable to negligence.

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

what a reasonable and ordinarily prudent person would do under

the circumstances.     Neely v. Commissioner, 85 T.C. 934, 937

(1985).   The failure to file timely a tax return is prima facie

evidence of negligence.     Emmons v. Commissioner, 92 T.C. 342, 349

(1989), affd. 898 F.2d 50 (5th Cir. 1990).    Petitioner bears the

burden of proving that he was not negligent.     Bixby v.

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

18

     Because we have held above that petitioner is liable for the
addition to tax for fraud for 1987, we need not consider
respondent’s alternative determination that petitioner is liable
for the addition to tax for negligence for that year. Sec.
6653(a)(2). No accuracy-related penalty for negligence pursuant
to sec. 6662 was determined in the alternative for 1989 because
no return was filed for that year. See supra note 8.
                               - 42 -

     Petitioner has made no argument specifically directed to

respondent’s determination of negligence and has failed to

introduce evidence sufficient to overcome the prima facie

evidence of negligence furnished by his failure to file a return

for 1988.   As noted above, we have rejected petitioner’s claim

that he relied on any statement by Ms. Murphy that his taxes were

paid through 1991.    Based on our consideration of the entire

record, we sustain respondent’s determination with respect to the

addition to tax for negligence for 1988.

Section 6661(a) Addition to Tax

     Respondent determined that, for 1987, petitioner was liable

for the addition to tax for a substantial understatement of

income tax provided by section 6661(a).    The addition to tax is

equal to 25 percent of the amount of any underpayment of tax

attributable to a substantial understatement of income tax.

Pallottini v. Commissioner, 90 T.C. 498 (1988).    The amount of

the understatement is equal to the amount of tax required to be

shown on the return less the amount of tax shown on the return.

Sec. 6661(b)(2)(A).    For individuals, an understatement is

substantial if it exceeds the greater of 10 percent of the tax

required to be shown on the return or $5,000.    The amount of the

understatement is reduced by the portion that is attributable to

an item for which there is or was substantial authority for the

position taken on the return or which was adequately disclosed on

the return.   Sec. 6661(b)(2)(B).
                                - 43 -

     Petitioner bears the burden of proving error in respondent’s

determination pursuant to section 6661(a).     Weis v. Commissioner,

94 T.C. 473, 490 (1990).    Petitioner presented no argument

concerning his liability for the addition to tax provided by

section 6661(a).   The understatement of petitioner’s income tax

for 1987 was substantial.    On the record before us, we hold that

petitioner failed to carry his burden of proof with respect to

respondent’s determination pursuant to section 6661(a).

     Section 6654(a) Addition to Tax

     Respondent also determined that, for 1988 and 1989,

petitioner is liable for the addition to tax provided by section

6654(a) for failure to pay estimated income tax.    Imposition of

that addition to tax is mandatory where prepayments of tax,

either through withholding or by making estimated quarterly tax

payments during the course of the year, do not equal the

percentage of total liability required by the statute, unless

petitioner shows that one of the several statutorily provided

exceptions applies.   Sec. 6654(a); Niedringhaus v. Commissioner,

99 T.C. at 222; Grosshandler v. Commissioner, 75 T.C. at 20-21.

For 1988 and 1989, petitioner filed no returns and made no

estimated tax payments.     Petitioner has not shown that any of the

statutorily provided exceptions apply to him.     We therefore

sustain respondent’s determination of petitioner’s liability for

the addition to tax for failure to pay estimated income tax for

those years.
                             - 44 -

     We have considered all of petitioner’s other arguments and

find them to be without merit.

     To reflect the foregoing,

                                        Decisions will be entered

                                   under Rule 155.
