                   T.C. Memo. 2000-128



                  UNITED STATES TAX COURT



   MICHAEL VETRANO AND PATRICIA VETRANO, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8996-97.           Filed April 10, 2000.



     John R. Crayton, for petitioners.

     Keith L. Gorman, for respondent.



          MEMORANDUM FINDINGS OF FACT AND OPINION


     WHALEN, Judge:   Respondent determined the following

deficiencies in, and penalties with respect to, Mr. Michael

Vetrano’s Federal income tax for 1991 and 1992:


          Year        Deficiency     Fraud Penalty

          1991        $10,488            $7,866
          1992         10,600             7,950
                              - 2 -

Respondent also determined the following deficiency and

penalty with respect to petitioners’ Federal income tax for

1993:

             Year      Deficiency      Fraud Penalty

             1993       $32,114             $24,086


        The issues for decision are:   (1) Whether Mr. Vetrano

(referred to herein as petitioner) earned unreported net

income in 1991, 1992, and 1993 from his business of dealing

in used automobile parts; (2) whether petitioner is subject

to self-employment tax with respect to the unreported

income from his automobile parts business; (3) whether

returns at issue are subject to the fraud penalty under

section 6663 and, if so, whether some part of the

underpayment for 1993 is due to the fraud of Mrs. Patricia

Vetrano; and (4) whether Mrs. Patricia Vetrano is eligible

for relief as an innocent spouse under section 6015 or

former section 6013.     Unless stated otherwise, all section

references in this opinion are to the Internal Revenue Code

as in effect during the years in issue.


                        FINDINGS OF FACT

        Petitioners are husband and wife.    They filed separate

returns for 1991 and 1992 and a joint return for 1993.

Mrs. Vetrano’s separate returns for 1991 and 1992 are not
                             - 3 -

at issue in this proceeding.   At the time they filed the

instant petition, petitioners resided in Sicklerville, New

Jersey.

     Petitioner is a bricklayer.     His returns for 1986 and

1987 report wages of $15,119 and $10,123, respectively,

that appear to be from employment as a bricklayer.     Circa

1984, he entered into the business of dealing in used

automobile parts.   Petitioner’s 1986 and 1987 income tax

returns include Schedules C, Profit or (Loss) From Business

Or Profession, that report income and deductions from an

automobile parts sales business operating under the name B

& D Auto Parts.   The Schedules C report the following

income and deductions:


          B & D Auto Parts              1986           1987

     Gross receipts or sales          $103,329       $109,029
     Cost of goods sold                -91,429        -96,453

     Gross profit                       11,900         12,576

     Deductions
       Car and truck expenses            3,315           3,540
       Office expense                       22              25
       Utilities and telephone             297             289

       Total deductions                  3,634           3,854

     Net profit or (loss)                8,266           8,722


Petitioners’ returns for 1986 and 1987 were prepared by a

public accountant, Mr. Dennis F. Judge.
                            - 4 -

     During the years in issue, 1991 through 1993,

petitioner received payroll checks from BMAP CORP, also

known as Bill Murray Auto Parts (referred to herein in as

BMAP) and another business, Anastasi Brothers Corp., that

are reflected on Forms W-2, Wage and Tax Statements, issued

to petitioner.   The Forms W-2 report wages in the following

amounts:

                            1991       1992         1993

BMAP                     $2,744.00    $14,560      $14,000
Anastasi Bros. Corp.      5,860.80      -0–          -0–

                          8,604.80     14,560       14,000


The above amounts are reported on Mr. Vetrano’s separate

returns for 1991 and 1992 and petitioners’ joint return for

1993.

     During the years in issue, petitioner’s income was

derived principally from his automobile parts business.

He did little or no work as a bricklayer.     Petitioner

received the following nonpayroll payments from BMAP and

four other entities:
                                    - 5 -
                            1991        1992       1993            Total
BMAP
 Cash                     $73,713      $30,319     $16,981        $121,013
 Checks, Nonpayroll        21,097       64,824     230,322         316,243

  Subtotal                 94,810       95,143     247,303        437,256

Sing-Sing                      90           -0-     -0-                90
Gerre Trans                   280            470    -0-               750
Richman & Sons                525           -0-     -0-               525
Camden City Probation        -0-            -0-     1,035           1,035

 Total                     95,705       95,613     248,338        439,656


The above payments are not reported on petitioner’s

separate returns for 1991 and 1992 or petitioners’ joint

return for 1993.        Petitioner maintained no books and

records for his automobile parts business.

     BMAP supplies automobile parts to remanufacturers and

rebuilders on a wholesale basis.            It does not sell

automobile parts to the general public.            During the years

in issue, BMAP published one or more price lists of the

automobile parts that it would purchase and the amount

that it would pay for each automobile part on the list.

Petitioner obtained automobile parts listed on BMAP’s price

list principally from junk yards and delivered them to

BMAP.    BMAP paid petitioner the amount set forth on its

price list for each of the automobile parts that it

received from petitioner.           BMAP did not require petitioner

to produce receipts for the automobile parts that he sold

to BMAP or to establish his cost in any way.              After

petitioner received a payment from BMAP, either in cash or
                            - 6 -

by check, petitioner was not obligated to account to BMAP

for the money, and there was no restriction or limitation

on petitioner’s use of the money.     He was free to use the

money received from BMAP in any way he wished.

     Petitioner married Mrs. Patricia Vetrano in 1991.

During 1993, she was employed at a racetrack in Atlantic

City, New Jersey.   She received a Form W-2 from the

Atlantic City Racing Association for 1993 that reports

wages of $17,561.75.   This amount was reported on

petitioners’ joint return for 1993.

     Petitioner was previously married to Ms. Teresa A.

Simone.   He had two children from that marriage.    He was

divorced from Ms. Simone pursuant to a divorce action that

was commenced in 1987 in the New Jersey Superior Court,

Family Part, Chancery Division.     By order dated May 3,

1988, the divorce court ordered him to pay $200 per week

to Ms. Simone as child support for his two children.     For

several years thereafter, including during the years in

issue, petitioner and Ms. Simone engaged in litigation over

the amount of child support that petitioner would have to

pay and various other matters.    From time to time in that

litigation, petitioner was required to document his income

by submitting pay stubs and other financial information,

including bank statements, to the divorce court.
                                 - 7 -

     On or about May 29, and November 11, 1992, Mr. Vetrano

filed case information statements with the divorce court.

Both statements include the following “income information”:

                        1. Last Year’s Income               Yours

     1.    Gross earned income in calendar year (1991)      $8,605

     2.    Unearned income (same year)                      2,995

     3.    Total Income Taxes paid on above income
             (inc. Fed., State, F.I.C.A. and S.U.I).        2,023

     4.    Net Income                                       9,577


Petitioner’s return for 1991 reports wages of $8,605,

taxable interest of $112, a State tax refund of $46, and

unemployment compensation of $2,837.            As to petitioner’s

income for 1992, the case information statements submitted

to the divorce court suggest that petitioner was receiving

gross wages from BMAP of $280 per week.

     During the years in issue, petitioner and his wife

deposited only a few of the checks that petitioner received

from BMAP.     The following schedule shows the total number

of checks that petitioner received from BMAP, the aggregate

dollar amount of those checks, the aggregate dollar amount

of the checks that were cashed, and the aggregate dollar

amount deposited into an account maintained by either one

of them:
                                    - 8 -
Year   No. of Checks   Total Received   Amount Cashed   Amount Deposited

1991         18           $21,097           $18,955         $2,142
1992         53            64,824            58,847          5,977
1993        168           230,322           224,830          5,492


       During the years in issue, Mrs. Vetrano knew that

petitioner’s income was derived principally from his

automobile parts business.       She was also aware of the

payments that he received from BMAP.         She played a role in

negotiating the checks that petitioner received from BMAP.

During 1991 and 1993, she signed or countersigned checks in

the aggregate amounts of $7,650 and $52,157, respectively.

During 1993, she also cashed 34 checks in the aggregate

dollar amount of $48,203 at the race track where she was

employed.     Finally, during 1993, she signed a check in the

amount of $2,603 and deposited it into a bank account that

she maintained at Mid Atlantic Bank.

       Mrs. Vetrano handled the couple’s household finances.

She made deposits into the separate checking accounts

maintained by herself and her husband, and she signed

checks drawn on both accounts to pay household expenses.

The deposits that she made into the couple’s separate

checking accounts consisted mostly of cash and were in

amounts that approximated the couple’s monthly bills.            She

obtained the cash for her monthly deposits by cashing her

own payroll checks and by asking petitioner for cash.
                             - 9 -

     On March 30, 1990, Mrs. Vetrano and petitioner

executed a residential loan application to the Meridian

Mortgage Corp. for a mortgage loan in the principal amount

of $88,900 to purchase a home as joint tenants.    The

application states that petitioner’s “base empl. income”

was $4,583 per month.    The application also states that the

couple had liquid assets, principally two bank accounts,

of $53,918 and owned two other real properties with an

aggregate market value of $205,000.    A second residential

loan application that Mrs. Vetrano and petitioner executed

on December 15, 1990, provides similar information.

     Apparently, the mortgage loan was approved, and

petitioners purchased the property.    One of the two other

real properties listed on the loan application was sold on

or about April 29, 1992, and the proceeds were divided

between Mr. Vetrano and his former spouse.    The record does

not disclose what happened to the other real property

listed on the loan application.

     In August 1993, petitioners sought to refinance the

above mortgage loan.    In that connection, a credit agency,

Credit Lenders Service Agency, Inc., asked petitioners to

explain certain information regarding Mr. Vetrano’s payment

of child support that appeared on a derogatory credit

history.   Mrs. Vetrano corresponded with a representative
                             - 10 -

of Credit Lenders Service Agency, Inc., regarding the

matter and explained:


          My husband (at that time) was in the process
     of having his support order reduced. His lawyer
     was holding an escrow account of $3,000 for his
     support. Support was reduced from $130 to $75
     per week. This money is paid weekly thru his
     employer - paid directly to Camden County
     Probation Dept and to date he is paid as stated
     by new court order.

                                Patricia A. Vetrano
                                      8-31-93


She also sent a copy of Mr. Vetrano’s divorce decree to the

credit agency.

     As mentioned above, the returns at issue do not report

the payments that petitioner received from BMAP and four

other entities in the aggregate amounts of $95,705,

$95,613, and $248,338, composed primarily of the nonpayroll

checks and cash issued to petitioner by BMAP for the

sale of automobile parts.    Each of the returns lists

petitioner’s occupation as “brick layer”.    None of the

returns states that petitioner was engaged in the

automobile parts business.

     The subject returns were prepared for petitioners by

Mr. Dennis Judge, who had also prepared petitioners’ 1986

and 1987 returns.   As mentioned above, petitioner’s 1986

and 1987 returns included Schedules C for his automobile
                           - 11 -

parts business operating under the name B & D Auto Parts.

Mr. Judge did not know that petitioner had engaged in the

automobile parts business during the years in issue, nor

did he know of the unreported income earned by petitioner

from that business until the subject returns were audited.

     When respondent’s agent asked Mr. Judge about the

checks that petitioner had received from BMAP, Mr. Judge

said that he would obtain an explanation of those items

from his client.   Subsequently, he advised the agent that

the checks were “cash advances”.    Shortly after that,

Mr. Judge withdrew his representation of petitioners, and

another individual, Mr. Kenneth Federman, undertook

petitioners’ representation.    Initially, Mr. Federman

asserted that the checks had been issued to petitioner in

the course of his automobile parts business and the net

profit of the business was reflected in the Forms W-2

issued to petitioner by BMAP.    Later, Mr. Federman withdrew

that assertion, and petitioners offered no other

explanation of the cash and checks paid to petitioner by

BMAP.

     During the audit, Mr. Federman provided respondent’s

agent with a list that he said was a list of 100 vendors

from whom petitioner purchased the used automobile parts.

Respondent’s agent contacted each of the vendors by a
                                   - 12 -

letter requesting confirmation of the vendor’s transactions

with petitioner.       The agent received 60 responses from the

vendors, each of which stated that the vendor did not have

any knowledge of Michael Vetrano.

     Respondent’s agent treated the unreported income

summarized above as gross income from petitioner’s

automobile parts business.          In the absence of any records

regarding petitioner’s cost of goods, respondent’s agent

allowed petitioner a cost of goods equal to 58.3 percent

of gross receipts.       This amount is based upon industry

standards for a used automobile parts business.

Respondent’s agent also allowed certain other expenses that

petitioner substantiated during the audit and applied the

self-employment tax to the net income from the business.

The adjustments and the self-employment tax determined in

the subject notices of deficiency are as follows:

   Adjustments to Income                1991    1992       1993

Used auto parts   gross receipts      $95,705   $95,613   $248,338
Used auto parts   cost of sales       -55,796   -55,742   -144,781
Used auto parts   other expenses      -10,671    -9,294     -7,382
Self-employment   tax deduction        -2,066    -1,892     -3,991

 Total adjustments                     27,172   28,685     92,184

Self-employment tax                     4,131    3,783      7,982



     After the respondent’s agent began auditing

petitioners, Mr. Vetrano transferred title to the couple’s
                           - 13 -

marital residence, a 1994 Cadillac, and a 1989 Ford truck

from joint ownership to Mrs. Vetrano.


                           OPINION

     Petitioners advance two positions in their posttrial

brief.   First they contend that “Mr. Vetrano had no

unreported income from BMAP”.   Second, they contend that

Mrs. Vetrano is eligible for relief as a so-called innocent

spouse under former section 6013(e) or section 6015.     The

issues that we decide in this opinion involve petitioners’

contention that “Mr. Vetrano had no unreported income from

BMAP”.

     Two preliminary observations are appropriate.     First,

in their posttrial brief petitioners do not contend that

the period of limitations on assessments under section

6501(a) expired before respondent issued either of the

notices of deficiency.   The petition asserts that the

period of limitations on assessments under section 6501(a)

had expired with respect to petitioner’s separate 1991 and

1992 returns before the notice of deficiency was issued.

Petitioners did not address this issue in their posttrial

brief, and, thus, we consider it waived or abandoned.

See Bradley v. Commissioner, 100 T.C. 367, 370 (1993)

(“Petitioner has not pursued this line of objection on

brief, and we consider it abandoned.”); Stringer v.
                          - 14 -

Commissioner, 84 T.C. 693, 706 (1985) (“On numerous

occasions, we in essence have defaulted or dismissed

issues for failure to brief them.   Generally, we have

accomplished this result by considering the issue waived or

conceded.”), affd. without published opinion 789 F.2d 917

(4th Cir. 1986); Lime Cola Co. v. Commissioner, 22 T.C.

593, 606 (1954) (“Petitioners in their brief do not argue

anything about transferee liability; and, although they do

not expressly abandon the issue of transferee liability,

we presume they no longer press it.”); Stonegate of

Blacksburg, Inc. v. Commissioner, T.C. Memo. 1974-213

(“Since petitioner did not consider this issue in either

its original or reply briefs, we consider it to have been

conceded.”).

     Second, petitioners’ entire argument concerning the

unreported income issue is directed toward the payments

that petitioner received from BMAP.   Petitioners raise no

defense concerning the payments that petitioner received

from the four other entities, Sing-Sing, Gerre Trans,

Richman & Sons, and Camden City Probation, that are

identified in the notices of deficiency.   Accordingly,

we hereby sustain respondent’s determination as to the

payments received from those entities.
                            - 15 -

     As to petitioners’ position that “Mr. Vetrano had

no unreported income from BMAP”, petitioners make three

assertions.    First, they acknowledge that Mr. Vetrano

received payments from BMAP in the amounts determined by

respondent, but they assert that “these payments were not

income to him but advances made by his employer to purchase

used auto parts on behalf of his employer.”    They also

suggest that Mr. Vetrano received the payments “as agent

for BMAP”.    According to petitioners:


     An employee who is given cash by his employer
     to purchase auto parts for his employer does not
     receive income when he is given that cash. While
     Mr. Vetrano could be adjudged stupid for cashing
     checks made out to him in order to secure the
     currency needed to buy auto parts for BMAP,
     the evidence does not establish that these
     disbursements were income to him. In fact, the
     evidence establishes that these were non-income
     disbursements made by BMAP to one of there [sic]
     employees.


     Second, petitioners assert that Mr. Vetrano simply

took the funds provided by BMAP and used them to purchase

the automobile parts supplied to BMAP.    They assert:    “It

is clear that Mr. Vetrano was a paid employee of BMAP and

purchasing parts for BMAP at a cost reflected as a purchase

expense on the books of BMAP.”    As we understand it,

petitioners are asserting that the amount that Mr. Vetrano

paid for each of the automobile parts supplied to BMAP and
                             - 16 -

the amount received from BMAP for each such part are the

same.

     Third, petitioners assert that respondent failed to

offer a “rational basis for the deficiency” and that the

notices of deficiency are therefore “arbitrary and

unreasonable” and, thus, lack a presumption of correctness.

As authority for this assertion, petitioners cite Portillo

v. Commissioner, 932 F.2d 1128 (5th Cir. 1991), and Jackson

v. Commissioner, 73 T.C. 394 (1979).

        Addressing the last point first, we reject

petitioners’ assertion that the subject notices of

deficiency are “arbitrary and unreasonable” and lack a

presumption of correctness because respondent failed “to

offer a rational basis for the deficiency”.     Generally,

a taxpayer bears the burden of proving that the

Commissioner’s determination of a deficiency is erroneous.

See Rule 142(a).     All Rule references are to the Tax Court

Rules of Practice and Procedure.

        The cases cited by petitioners involve notices of

deficiency in which the Commissioner had determined that

the taxpayers had realized unreported income.     See Portillo

v. Commissioner, supra at 1131; Jackson v. Commissioner,

supra at 397.     In the first case, the court found the

notice arbitrary and excessive because the Commissioner had
                            - 17 -

introduced no evidentiary foundation linking the taxpayer

to the unreported income.   See Portillo v. Commissioner,

supra at 1134.   In the second case, the Court found the

notice arbitrary and excessive because the Commissioner’s

own evidence convinced the Court that the Commissioner’s

determination was arbitrary.    See Jackson v. Commissioner,

supra at 403-404.

     This is not such a case.   In this case, the testimony

of the principal of BMAP, Mr. Gartland, proves that BMAP

paid the subject amounts to petitioner, and petitioners

have acknowledged in their posttrial brief that Mr. Vetrano

engaged in the automobile parts business and received the

payments from BMAP.   Thus, in this case, there is ample

evidence linking the subject payments to petitioners.

     In their first assertion, petitioners seem to be

arguing that Mr. Vetrano functioned as a conduit through

which his employer, BMAP, acquired automobile parts from

various junk dealers during the years in issue, with the

result that the payments he received from BMAP are not

taxable income to him.   Petitioners do not clearly explain

the legal basis for this position, and they cite no cases

in support thereof.

     We would agree that a taxpayer need not treat as

income moneys which he did not receive under a claim of
                           - 18 -

right, which were not his to keep, and which he was

required to transmit to someone else as a mere conduit.

See Diamond v. Commissioner, 56 T.C. 530, 541 (1971),

affd. 492 F.2d 286 (7th Cir. 1974); see also Stevens Bros.

& Miller-Hutchinson Co. v. Commissioner, 24 T.C. 953, 957

(1955); Mill v. Commissioner, 5 T.C. 691, 694 (1945);

Parker v. Commissioner, T.C. Memo. 1985-263.   On the other

hand, if a taxpayer receives moneys under a claim of right

and without restriction or limitation as to the

disposition of the moneys, then the taxpayer has received

taxable income, even though it may still be claimed that he

is not entitled to retain the money, and even though he may

be liable to restore its equivalent.   See North Am. Oil

Consol. v. Burnet, 286 U.S. 417, 424 (1932).

     Our problem with petitioners’ conduit argument is that

the facts do not support it.   Neither petitioner’s nor

Mr. Gartland’s testimony establishes a restriction or

limitation on petitioner’s use of the money received from

BMAP.   There was no requirement that petitioner account to

BMAP or any other person for the funds paid by BMAP, and we

find no agreement between petitioner and BMAP restricting

petitioner’s use of the funds to purchase automobile parts

for delivery to BMAP.   Neither the testimony of petitioner

nor that of Mr. Gartland establishes that petitioner
                           - 19 -

received the subject payments as a conduit.     Based upon all

of the facts and circumstances of this case, we find that

petitioners received the subject payments from BMAP under a

claim of right with no restriction or limitation on their

use of the funds.

     Our conclusion that the subject payments constitute

taxable income to petitioner is not based upon his status

as an employee of BMAP or as an independent contractor.

The subject payments are taxable income to Mr. Vetrano

regardless of whether his status is that of an employee or

that of an independent contractor.   This is so because,

in either event, he received the funds without restriction

or limitation as to their disposition.

     Petitioner’s second assertion is that he paid junk

dealers the amount specified on BMAP’s price list for

the automobile parts supplied to BMAP.     According to

petitioner’s testimony, he did not attempt to buy any

parts for less than the amount specified on BMAP’s price

list.   Petitioner testified as follows:


     Q.    Well, I’m saying is you would try to get the
           parts as cheaply as you could, correct?

     A.    You have price lists from BMAP that you went
           and I went and had to pay for that. I went
           and paid for that price. Whatever he had on
           that list, I paid for the price because I
           worked for him. He wanted me to get as much
           material as possible, so what I did, I went
                            - 20 -

            out and I went by that list. Whatever that
            list said, I went and got. I didn’t try to
            get it cheaper. I had to be responsible for
            BMAP. BMAP was my responsibility. He was
            paying me to go get the parts, so I went
            through the price list, and I paid what was
            on that list.


     We cannot accept the assertion that petitioner paid

the amount set forth in BMAP’s price list for every

automobile part he supplied to BMAP during the years in

issue.   Petitioners introduced no books and records for

Mr. Vetrano’s automobile parts business, and nothing in the

record corroborates petitioner’s testimony.    We find

petitioner’s testimony incredible and not worthy of belief.

In this connection, we note that even the Schedules C filed

with petitioner’s own tax returns for 1986 and 1987 show a

profit margin of approximately 11.5 percent.    Accordingly,

we sustain respondent’s determination that petitioner

received unreported income from BMAP.


Employee Versus Independent Contractor

     As mentioned above, it is unnecessary to determine

whether petitioner was an employee or an independent

contractor in order to resolve the issue of whether

Mr. Vetrano realized unreported income during the years

at issue.   However, it is necessary to decide that issue

in order to redetermine whether petitioners are liable
                             - 21 -

for self-employment tax.    This is a factual question.

See Professional & Executive Leasing, Inc. v. Commissioner,

89 T.C. 225, 232 (1987), affd. 862 F.2d 751 (9th Cir.

1988); Packard v. Commissioner, 63 T.C. 621 (1975).

     Petitioners rely upon the vague and self-serving

testimony of Mr. Vetrano and Mr. Gartland and on the fact

that BMAP issued payroll checks and Forms W-2 to

Mr. Vetrano.    In their testimony at trial, petitioner and

Mr. Gartland simply label petitioner as an employee.      There

is nothing in their testimony or in the record of this case

to show that, with respect to his earning of the unreported

income, Mr. Vetrano was an employee of BMAP under the usual

common-law rules applicable in determining the employee-

employer relationship.     See, e.g., Rev. Rul. 87-41, 1987-1,

C.B. 296.   For example, there is no evidence that BMAP,

Mr. Gartland, or any other person had the right to control

petitioner’s activities in any fashion.     There is no

evidence that petitioner was obligated to devote any of his

time to BMAP.    BMAP supplied no equipment, training, office

space, or expense reimbursements to petitioner.     Indeed,

neither petitioner nor Mr. Gartland was able to explain how

petitioner’s alleged salary payments were computed.

Accordingly, we conclude that petitioner was an independent

contractor subject to self-employment tax.
                           - 22 -

Fraud Penalty

     Respondent determined that petitioner fraudulently

omitted income from his individual 1991 and 1992 returns on

which there are underpayments of $10,488, and $10,600,

respectively.   Respondent determined that the entire

underpayment for each of the years 1991 and 1992 is

attributable to fraud.   Therefore, respondent determined

that petitioner is liable for civil fraud penalties under

section 6663 of $7,866 and $7,950, respectively.

     Respondent also determined that petitioners

fraudulently omitted income from their joint 1993 return

on which there is an underpayment of $32,114.    As to 1993,

respondent also determined that the entire underpayment

is attributable to fraud and that some part of the

underpayment is due to the fraud of both petitioners.

Therefore, respondent determined that petitioners are both

liable for a civil fraud penalty under section 6663 of

$24,086 for 1993.

     Section 6663(a) provides that, if any part of an

underpayment is due to fraud, there shall be added to the

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

underpayment which is attributable to fraud.    The

Commissioner bears the burden of proving by clear and

convincing evidence:   (1) An underpayment exists; and (2)
                          - 23 -

some portion of the underpayment is attributable to fraud.

See sec. 7454(a); Rule 142(b); DiLeo v. Commissioner, 96

T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

The term “underpayment” is defined in section 6664(a) as

“the amount by which any tax imposed by this title exceeds

the excess of (1) the sum of (A) the amount shown as the

tax by the taxpayer on his return, plus (B) amounts not so

shown previously assessed (or collected without

assessment), over (2) the amount of rebates made.”     The

Commissioner must establish fraud with respect to

the taxpayer’s return for each taxable year.   See Otsuki

v. Commissioner, 53 T.C. 96, 105 (1969); AJF Transp.

Consultants, Inc. v. Commissioner, T.C. Memo. 1999-16.

     If the Commissioner establishes that any portion of

the underpayment is attributable to fraud, then the entire

underpayment is treated as attributable to fraud, unless

the taxpayer establishes by a preponderance of evidence

that it is not attributable to fraud.   See sec. 6663(b).

In the case of a joint return, the fraud penalty shall not

apply to a spouse unless some part of the underpayment is

due to the fraud of that spouse.   See sec. 6663(c).

     To prove fraudulent intent, the Commissioner must

show that the taxpayer intended to evade tax believed to

be owing by conduct intended to conceal, mislead, or
                             - 24 -

otherwise prevent the collection of such tax.     See

Recklitis v. Commissioner, 91 T.C. 874, 909 (1988); Rowlee

v. Commissioner, 80 T.C. 1111, 1123 (1983).     The existence

of fraud is a question of fact to be resolved upon

consideration of the entire record.     See DiLeo v.

Commissioner, supra at 874; Gajewski v. Commissioner, 67

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

F.2d 1383 (8th Cir. 1978).    Fraud will never be imputed or

presumed but must be affirmatively established by clear and

convincing evidence.   See Beaver v. Commissioner, 55 T.C.

85, 92 (1970).

     Because direct proof of a taxpayer’s fraudulent intent

is rarely available, fraud may be shown by circumstantial

evidence.   See Stephenson v. Commissioner, 79 T.C. 995,

1005-1006 (1982), affd. per curiam 748 F.2d 331 (6th Cir.

1984).   A taxpayer’s entire course of conduct may establish

the requisite fraudulent intent.      See Stone v. Commis-

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

supra at 105-106.

     Over the years, courts have developed a nonexclusive

list of factors that demonstrate fraudulent intent.     These

badges of fraud include:   (1) Understating income, see

Holland v. United States, 348 U.S. 121, 137 (1954); Parks

v. Commissioner, 94 T.C. 654, 664 (1990); (2) inadequate
                          - 25 -

books and records, see Merritt v. Commissioner, 301 F.2d

484, 487 (5th Cir. 1962), affg. T.C. Memo. 1959-172; (3)

false entries on or alterations of documents, see Spies v.

United States, 317 U.S. 492, 499 (1943); (4) failure to

file tax returns, see id.; (5) implausible or inconsistent

explanations of behavior, see Grosshandler v. Commissioner,

75 T.C. 1, 20 (1980); (6) concealment of income or assets,

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

1986), affg. T.C. Memo. 1984-601; (7) dealing in cash; and

(8) failure to cooperate with tax authorities, see id. at

307-308.

     Respondent argues that Mr. Vetrano’s conduct exhibit

the following badges of fraud:


     Vetrano engaged in a 3-year pattern of under-
     stating income. He took steps to cover up the
     source of his income. He dealt in cash to avoid
     scrutiny of his finances. He structured his
     affairs to avoid making records the effect of
     which was to mislead or conceal. He failed to
     keep adequate and accurate records. Not only did
     Vetrano fail to cooperate with tax authorities in
     computing his correct income, he deliberately
     misled the examining agent by having his
     representative supply a false list of suppliers
     to him. He willingly defrauded others and was
     dishonest in business and personal transactions,
     particularly with respect to statements made in
     the New Jersey court which was adjudicating his
     divorce from Teresa Vetrano. He possessed
     sufficient education and knowledge of his duty to
     report income. He provided implausible and false
     explanations, such as that he was not in the auto
     parts business but was a bricklayer, when he
     admittedly had earned no income from 1991 through
                             - 26 -

     1993 at that profession. Finally, he admittedly
     transferred title to his home and vehicles from
     joint ownership to single ownership by Patricia
     Vetrano in an attempt to place these assets
     beyond respondent’s reach should the Court
     determine that she is an innocent spouse under
     I.R.C. §6013(e) for the years at issue.
     [Citations omitted.]


Respondent argues that Mrs. Vetrano’s conduct exhibits the

following badges of fraud:


     She was an active participant in her husband’s
     attempts to conceal the correct amount of his
     1993 income. She handled all of the BMAP checks,
     cashed them, and received the proceeds. She
     endorsed most of these checks, and on some
     occasions signed her husband’s name on them.
     She dealt in cash to avoid scrutiny of her and
     her husband’s finances. Her actions were
     designed to cover up the source of his income
     from his first wife, the divorce court, and not
     coincidentally, the Internal Revenue Service.
     Mrs. Vetrano signed a joint tax return containing
     an amount of income for her husband that she knew
     had to be false. She also took title to their
     home and vehicles in an attempt to place them
     beyond respondent’s reach. [Citations omitted.]


     In their posttrial brief, petitioners’ only mention of

the fraud penalty is the following:


          The IRS has asserted the civil fraud penalty
     against Mr. Vetrano and amazingly against
     Mrs. Vetrano as well. Pursuant to 26 U.S.C. §
     7454 and Tax Court Rule 142(b), this shifts the
     burden of proof to the IRS. Such fraud must be
     proven by clear and convincing evidence. Smith
     v. Commissioner, 91 T.C. 1049, 1053 (1988). In
     unreported income cases the burden is on the
     IRS to offer a rational basis for the deficiency
     and if no rational basis exists for the proposed
                             - 27 -

    adjustments the Court can conclude that the
    deficiency is arbitrary and unreasonable.
    Portillo v. Commissioner, 932 F.2d 1128, 1132
    (5th Cir. 1991); Jackson v. Commissioner, 73
    T.C. 394, 396-97, 402 (1979). Without this
    presumption of correctness the IRS must do more
    than submit its belief that Mr. Vetrano had this
    income. They did not present any such evidence,
    in fact they presented evidence that Mr. Vetrano
    had no such unreported income through the
    testimony of Mr. Gartland. A decision in favor
    of both Mr. and Mrs. Vetrano is warranted under
    these facts.


     We agree with respondent that the underpayment in each

of the years in issue is attributable to the fraud of

Mr. Vetrano.   Respondent established that the portion of

the underpayment in each year attributable to the payments

from BMAP is due to fraud.    The record shows that

petitioner engaged in an automobile parts business and

realized substantial income from selling automobile parts

to BMAP in each of those years.       Petitioner took steps to

conceal the income that he earned from his automobile parts

business from his accountant, from his ex-wife, and from

the Internal Revenue Service.    These steps included, among

others, failing to maintain or produce books and records

regarding his automobile parts business, conducting his

business and personal affairs almost entirely in cash, and

providing false information to his former spouse and to the

court in his divorce action.
                               - 28 -

     As mentioned above, if the Commissioner establishes

that any portion of an underpayment is attributable to

fraud, then the entire underpayment is treated as

attributable to fraud, except with respect to any portion

of the underpayment which the taxpayer establishes (by a

preponderance of the evidence) is not attributable to

fraud.    See sec. 6663(b).    In this case, petitioners have

not established that any portion of the underpayment in

each of the years in issue is not attributable to fraud.

See id.    Specifically, petitioners have not established

that the portion of the underpayments relating to the

payments from Sing-Sing, Gerre Trans, Richman & Sons,

and Camden City Probation is not attributable to fraud.

     We also agree with respondent that Mrs. Vetrano played

a role in her husband’s fraudulent scheme and that some

part of the underpayment for 1993 is due to her fraud.

See sec. 6663(c).    She knew of her husband’s activities

in connection with his automobile parts business involving

BMAP during the years in issue.         She was aware of the

payments received from BMAP during 1993, and she played an

important part in converting the checks received from BMAP

to cash.    She oversaw payment of the couple’s monthly bills

and deposited only the amount of cash necessary to pay the

couple’s monthly bills.       Accordingly, we sustain
                          - 29 -

respondent’s determination that petitioner is liable for

the fraud penalty with respect to the 1991 and 1992 tax

years and that both petitioners are liable for the fraud

penalty with respect to 1993.

     In light of the fact that the so-called innocent

spouse issue remains for decision in this case,


                                    An appropriate order

                                will be issued.
