                        T.C. Memo. 2005-125



                      UNITED STATES TAX COURT



               TIMOTHY DEAN STRONG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     STRONG CONSTRUCTION CO., INC., A MINNESOTA CORPORATION,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 821-01, 2048-01.      Filed May 26, 2005.



     Thomas E. Brever, for petitioners.

     John C. Schmittdiel, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax, additions to tax, and penalties

as follows:
                                   - 2 -

                 Timothy Dean Strong--docket No. 821-01

                                              In the alternative
                              Penalty       Penalty    Addition to Tax
Year        Deficiency       Sec. 6663     Sec. 6662   Sec. 6651(a)(1)

1990          $9,768        $7,326.00      $1,953.60        $2,442.00
1991          11,185         8,388.75       2,237.00         2,796.25
1992          19,794        14,845.50       3,958.80         4,948.50
1993          31,567        23,675.25       6,313.40         7,891.75
1994           6,613         4,959.75       1,322.60            N/A

            Strong Construction Co., Inc.--docket No. 2048-01

                                                       In the alternative
                                 Addition to Tax         Addition to Tax
Year           Deficiency          Sec. 6651(f)          Sec. 6651(a)(1)

1990            $6,257              $4,693                   $1,564
1991             6,925               5,194                    1,731
1992            12,871               9,653                    3,218
1993            25,783              19,337                    6,446
1994             5,090               3,818                     N/A

       Unless otherwise noted, all section references are to the

Internal Revenue Code in effect during the taxable years at

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

       The issues for decision are:

       1.    Whether petitioner Strong Construction Co., Inc. (SCC),

should be recognized as a taxable entity.        We hold SCC is a

taxable corporate entity;

       2.    whether SCC had additional income from sales of houses

it constructed during the years 1990-94 (the years at issue) and

from unidentified taxable sources, as established on the basis of

deposits to petitioner Timothy Dean Strong’s (Mr. Strong) joint
                                - 3 -

bank account with SCC.    We hold with certain specific exceptions

that SCC did have the additional income determined by respondent;

     3.    whether SCC is entitled to expenses for construction

costs and general and administrative expenses related to its

homebuilding business during the years at issue in excess of

those allowed by respondent.    We hold SCC is entitled to deduct

certain expenses as redetermined herein;

     4.    whether Mr. Strong had additional income for the years

at issue for constructive dividends from SCC, deposits of SCC’s

funds for his personal use, and the corporation’s payment of his

personal expenses.    We hold he did as redetermined herein;

     5.    whether Mr. Strong is liable for the fraud penalty

under section 6663 on his underpayment of tax for each of the

years at issue.    We hold he is;

     6.    whether SCC is liable for the addition to tax under

section 6651(f) for fraudulent failure to file timely on its

underpayment of tax for each of the years at issue.    We hold that

SCC is not liable for the section 6651(f) addition to tax; and

     7.    alternatively, whether SCC is liable for the addition

to tax under section 6651(a)(1) for failure to file timely tax

returns.   We hold that SCC is liable for the section 6651(a)(1)

addition to tax.
                               - 4 -

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time of filing his

petition in this case, Mr. Strong resided in Clear Lake,

Minnesota.   At the time of filing its petition, SCC had its

principal place of business, mailing address, and registered

office in Minnesota.

SCC

      SCC was incorporated under Minnesota law in 1986, and as of

December 31, 1994, had not been formally dissolved.   At all times

relevant, Mr. Strong was the 100-percent owner of SCC.    He was

its incorporator, director, and president.   During the years at

issue, SCC had no officers except Mr. Strong and had no

employees.

      During the years at issue, SCC was engaged in the

residential construction business and built and sold houses under

the names Strong Construction or Strong Construction Co., Inc.

SCC constructed and sold the following houses (the 22 house

sales):
                         - 5 -

                         1990

Date           Property (Buyer)              Sale Price

7/5            10925 Osage Street              $59,900
7/5            10929 Osage Street               64,600
10/12          10901 Osage Street               64,900
12/10          374 Rose Avenue East             75,400
  Total                                        264,800


                         1991

Date           Property (Buyer)              Sale Price

1/17           12166 Wedgewood Drive           $88,000
1/30           10905 Osage Street               64,000
4/5            16051 Andrie Street             116,960
6/28           767 99th Lane, NE                87,760
7/26           1755 124th Avenue, NW            84,000
9/6            1737 McKnight                    84,000
  Total                                        524,720

                         1992

Date           Property (Buyer)              Sale Price

2/20           1761 County Road F               $89,000
4/2            3242 129th Lane                   85,000
4/13           3854 120th Avenue, NW             78,000
7would be one word             12154 Wedgewood Drive
    92,900
7/23           11900 NE Kerry Street             91,000
11/18          818 Meander Street                96,000
  Total                                         531,900

                         1993

Date           Property (Buyer)              Sale Price

10/27          14671 Helium Street             $85,448
  Total                                         85,448
                                 - 6 -

                                 1994

     Date              Property (Buyer)                Sale Price

     8/30              14685 Iodine Court               $117,600
     9/27              4412 Josephine Lane North         103,766
     10/7              5661-146th Circle                 115,000
     10/25             4265 Victoria Street              121,880
     11/22             7096 Progress Road                 73,150
       Total                                             531,396

     During the years at issue, Mr. Strong had signatory

authority over bank account No. 893315300 at First Bank, Coon

Rapids, Minnesota (later known as Marquette Bank Coon Rapids).

This account bears his name and that of SCC.       The net proceeds

from the 22 house sales during the years at issue were paid by

checks issued to SCC and deposited in account No. 893315300.        SCC

did not file Federal or State income tax returns for the years

1990-94.    Mr. Strong considered SCC funds deposited into account

No. 893315300 to be available for his personal use.

Mr. Strong’s Income Tax Returns

     Mr. Strong filed his 1990, 1991, and 1993 Forms 1040, U.S.

Individual Income Tax Return, on March 23, 1995.       He filed his

1992 Form 1040 on March 2, 1995, and he timely filed his 1994

return.     For each of the years 1990-94, the returns filed by Mr.

Strong reflect negative taxable income.    These tax returns all

included a Schedule C, Profit or Loss From Business (Sole

Proprietorship), which identified his principal business as

“construction”.    These Schedules C reflect the following gross

receipts, expenses, and net profits or losses:
                                     - 7 -

  Item         1990          1991            1992          1993        1994
Gross
 receipts
 or sales     $20,100                                                $81,640
                           $24,150      $26,210          $47,934
Returns &
 allowances     ---            ---             ---           2,110      ---
Net sales       ---           ---             ---          45,824      ---
Cost of
 goods sold     ---            ---             ---          29,151    66,204
Gross
 profit         ---            ---             ---          16,673    15,436

Total
 expenses      19,642         24,818          24,970        30,016    15,436

Net profit
 (loss)              458       (668)           1,240                    -0-
                                                         (13,343)

     The Forms 1040 Mr. Strong filed reflect a $65 tax liability

based on self-employment tax in 1990 and a $175 self-employment

tax liability in 1992.      Mr. Strong reported no other tax on the

Forms 1040 for 1990-94.

Mr. Strong’s Initial Contacts and Discussions With A Revenue
Officer

     In late 1991, Mr. Strong was contacted by an Internal

Revenue Service (IRS) revenue officer.               The purpose of this

contact was to inquire regarding Mr. Strong’s unpaid income tax

liabilities for 1987 and 1988 and his unfiled income tax returns

for 1989 and 1990.     Mr. Strong refused to provide the revenue

officer with any personal or financial information, but he told

the revenue officer that he expected his tax liabilities for 1989

and 1990 to be at least $50,000.        In a later conversation, Mr.
                                 - 8 -

Strong informed the revenue officer that the reason he was

delinquent in filing his tax returns was that he could not access

records held by his ex-spouse.    This statement was inaccurate

since his former spouse did not have any of his records.

Return Preparation

     Mr. Strong’s tax returns for 1990 and 1993 were signed by D.

R. Newman (Mr. Newman) as the paid tax return preparer on April

10 and 21, 1994, respectively.    His 1991, 1992, and 1994 tax

returns were executed by D. Wade (Ms. Wade) as the paid tax

return preparer.    Ms. Wade dated her signature on the 1991 return

February 21, 1995, and dated the 1994 return February 15, 1995.

     Mr. Strong initially had Mr. Newman prepare his tax returns

for 1990-93.    Mr. Newman prepared those returns from information

and documents provided to him by Mr. Strong.    Mr. Newman gave the

completed tax returns along with the provided documents back to

Mr. Strong in April 1994.    Mr. Newman did not discuss the tax

returns with him upon completing and providing them to Mr.

Strong.    Mr. Strong did not provide Mr. Newman with bank

statements, deposit slips, or canceled checks to prepare his tax

returns.

     Without the knowledge of Mr. Newman, Mr. Strong altered or

caused to be altered the amounts shown on the 1990 return

prepared by Mr. Newman before he filed the return.    He also

caused the 1991 and 1992 returns originally prepared by Mr.
                               - 9 -

Newman to be changed by Ms. Wade.   Mr. Strong instructed Ms. Wade

to change the figures shown on the 1991 and 1992 returns as

originally prepared using handwritten sheets he gave her.    Ms.

Wade changed the figures on the 1991 tax return by covering the

original numbers with correction fluid and writing new numbers

over them because she did not have a 1991 form at the time she

revised the return.   She redid the 1992 return, but on a clean

form.   The changes Mr. Strong instructed Ms. Wade to make to the

1991 and 1992 tax returns, originally prepared by Mr. Newman,

reduced the reported Schedule C profit on each return.   Ms. Wade

also prepared Mr. Strong’s 1994 income tax return from a sheet of

paper provided to her that contained the income and expense

figures she placed on the return.

The Audit of Mr. Strong’s Income Tax Returns

     In September 1995, respondent notified Mr. Strong that his

1990 and 1991 Federal income tax returns were under examination,

and in a meeting on November 30, 1995, at his residence, a

revenue agent advised him that his 1992, 1993, and 1994 returns

were also under review.   In response to requests for his bank and

business records, Mr. Strong provided only handwritten summaries

of settlement sheets for five houses sold in 1991 and 1992.

Respondent’s revenue agent obtained information regarding the

construction business by issuing summonses under section 7602 for
                             - 10 -

SCC’s bank records and for settlement statements from title

companies for the houses that had been sold by SCC.

     After the revenue agent’s preliminary findings were provided

to Mr. Strong, reconstructed financial statements for SCC for the

years 1991, 1992, 1993, and 1994 were presented to the revenue

agent by Mr. Frazier, an accountant who had been engaged by Mr.

Strong.

     Respondent used the financial statements provided by Mr.

Frazier as the starting point for determining SCC’s taxable

income for the years at issue.   Respondent determined that SCC

was not entitled to deduct all the expenses shown on the

financial statements prepared by Mr. Frazier.   Respondent also

analyzed deposits in bank account No. 893315300 to determine

SCC’s taxable income in addition to the identified deposits of

sales proceeds of houses.

     The following shows the deposits to account No. 893315300

that remain in dispute1:




     1
      Respondent conceded that a deposit of $6,000 on Dec. 4,
1990, was a loan from Mr. Strong’s father and that a deposit of
$1,000 on June 2, 1992, was a loan from Mr. Strong’s parents.
                          - 11 -

                          1990 Date     Amount
     Payor                Deposited   Deposited

Cash in ticket              1/2       $1,000.00
Vincent Kurkowski           1/2          240.00
Cash in ticket              1/24       2,200.00
Cash in ticket              2/6        3,500.00
Cash in ticket              2/10       4,700.00
Cash in ticket              2/27       9,850.00
Cash in ticket              2/13       7,200.00
Cash in ticket              3/5        9,900.00
Cash in ticket              3/8        4,900.00
Ken Jeanotte                3/13       9,900.00
Unknown                     3/15       4,500.00
Ken Jeanotte                5/25       9,900.00
Ken Jeanotte                6/5        9,900.00
Gordon Schnobrich           6/22         312.00
Gordon Schnobrich           7/5          304.80
Gordon Schnobrich           7/17         170.00
Cash in ticket              12/3       1,400.00
Wesley Strong               12/4       6,000.00
  Total other deposits                85,876.80


                          1991 Date     Amount
     Payor                Deposited    Deposited

Scherer Brothers Lumber     1/30        $144.45
Bradley or Mary Lathrop     4/30         100.00
Cash in ticket              6/14       4,000.00
Cash in ticket              7/12       9,900.00
Cash in ticket              12/17      5,300.00
Todd Peterson               12/17      2,000.00
Cash in ticket              12/18      6,000.00
  Total other deposits                27,444.45
                           - 12 -


                           1992 Date           Amount
     Payor                 Deposited         Deposited

Cash in   ticket             1/2               $4,600
Cash in   ticket             1/28               6,560
Cash in   ticket             2/5                9,000
Cash in   ticket             2/14               3,200
Cash in   ticket             2/14               3,400
Cash in   ticket             3/17               3,000
Cash in   ticket             3/23               5,000
Gene or   Sharon Strong      6/2                1,000
  Total   other deposits                       35,760

                           1993 Date          Amount
     Payor                 Deposited         Deposited

Cash in ticket               1/19             $3,000
Cash in ticket               1/29               4,000
Harstad Companies            2/17                 100
Harstad Companies            2/17                 250
Cash in ticket               3would be one word
3,000
Cash in ticket               3/22               2,000
No bank info.                3/24               5,000
Cash in ticket               4/2                5,000
Cash in ticket               4/22               9,900
Cash in ticket               4/23               9,850
Cash in ticket               4/28               9,900
Cash in ticket               5/19               7,000
Cash in ticket               6would be one word
4,000
Cash in ticket               6/21              5,000
Cash in ticket               7/2               8,000
Cash in ticket               7/15             11,000
Cash in ticket               8/3               5,000
No bank info.                8/24              9,900
No bank info.                8/24              9,900
Cash in ticket               9/22              6,000
Cash in ticket               10/15             4,450
Cashier’s check -
   Rodney Nelson             10/18             4,000
  Total other deposits                       126,250
                               - 13 -


                               1994 Date         Amount
     Payor                     Deposited       Deposited

Stephen Roche Homebuilders       3/16             $444
North Metro Auto Salvage         3/16               75
Sean Strong for #7               3/16              500
Stephen Roche Homebuilders       3/24              988
No info. available from bank     5/13            5,000
Keith E. Hagford                 5/27              500
Burnet trust acct./
  Hagford earnest                6/20              500
Jack W. Thompson                 8/10            8,500
Sean Strong/personal             8/16            8,500
Criston or Ann Holst/Iodine      10/5              225
  Total other deposits                          25,232

     On March 13, 1990, Mr. Strong deposited $9,900 into account

No. 893315300.   The deposit was cashier’s check No. 6724 in the

amount of $9,900 issued by First National Bank Anoka-Brooklyn

Park-Champlin (First Bank), which identifies the purchaser as Ken

Jeanotte (Mr. Jeanotte).   On May 25, 1990, Mr. Strong deposited

$9,600 in account No. 893315300, after taking $300 cash back.

The deposit was cashier’s check No. 6726 in the amount of $9,900

issued by First Bank, which also identifies the purchaser as Mr.

Jeanotte.    On June 5, 1990, Mr. Strong deposited $9,500 into

account No. 893315300, after taking $400 cash back.    The deposit

was cashier’s check No. 6725 in the amount of $9,900 issued by

First Bank, which also identifies the purchaser as Mr. Jeanotte.

Mr. Jeanotte did not purchase cashier’s check No. 6724, 6725, or

6726 deposited to account No. 893315300 and did not pay Mr.

Strong the $29,700 those checks represent.   Mr. Strong used Mr.

Jeanotte’s name without his knowledge or permission.
                                - 14 -

     On July 19, 1994, Mr. Strong obtained two cashier’s checks

issued by Norwest Bank each in the amount of $8,500.     The first

made payable to Mr. Strong shows the payor was his brother, Sean

Strong and was deposited to account No. 893315300 on August 16,

1994.     The second was made payable to Mr. Strong, and Jack

Thompson, the payor, is unidentified.     It was deposited into

account No. 893315300 on August 10, 1994.

     Before 1990, Mr. Strong was aware of the title 31

requirements that currency transactions in excess of $10,000 be

reported to the Government.

SCC’s Activity

        During the years at issue, SCC entered into vacant land

purchase agreements and acquired real property in its name.       Mr.

Strong signed the purchase agreements as president of SCC.      As

part of the sales process, SCC entered into new construction

purchase agreements with buyers.     SCC also applied for building

permits, which Mr. Strong signed as president of SCC.     In

addition, SCC entered into a builder’s security agreement and

applied for a home buyer’s warranty on some of the 22 house

sales.     SCC was identified as the seller of the property on the

settlement statements or closing statements prepared for the real

estate property closings for the 22 house sales.     Mr. Strong

executed those statements as president of SCC.     For the purpose

of passing title to real property, Mr. Strong executed, as
                                - 15 -

president of SCC, affidavits regarding the good standing of SCC.

SCC issued deeds for the 22 houses.      Mr. Strong executed those

deeds as president of SCC.     Finally, during the years at issue

and thereafter, SCC filed various notices with the Minnesota

secretary of state.

Mr. Strong’s Bankruptcy Filing

     In March 1990, Mr. Strong, doing business as Strong

Construction, filed for relief under chapter 7 of the Bankruptcy

Code.     In his bankruptcy petition, which Mr. Strong signed under

penalties of perjury, he made the following representations:

     a.      That his current monthly gross income was zero and

     that his current monthly expenses were $1,319.      He also

     stated that “debtor had been living off proceeds from

     sale of personal property, which proceeds are now

     exhausted”;

     b.      that he had been engaged in the construction

     business under the name “Strong Construction” and that

     all books of account and records were kept and

     maintained by him, that they were available, and that

     none had been destroyed;

     c.      that he had received no income other than from the

     operation of his business in the 2 years preceding the

     filing of the bankruptcy petition;
                                - 16 -

     d.      that he was not holding property for another

     person and that no other person was holding property

     for him;

     e.      that the only real property in which he had an

     interest was his residence at 7090 107th Avenue, Clear

     Lake, Minnesota, and that the value of his interest

     therein was $30,000;

     f.      that he had no cash on hand, and the market value

     of any interest he had in stock or interests in

     incorporated or unincorporated companies was zero.       He

     reported only $3,500 in personal property on his

     bankruptcy petition; and

     g.      he reported liabilities of $199,581.38.

     Mr. Strong attended a meeting of creditors under 11 U.S.C.

section 341 on June 15, 1990.     The trustee reported that after

diligent inquiry, she had located no property belonging to the

bankruptcy estate.     A discharge was granted Mr. Strong on August

15, 1990.     Robert Munns (Mr. Munns) represented Mr. Strong as his

attorney in his 1990 bankruptcy filing.     Mr. Munns prepared the

bankruptcy petition and accompanying schedules using information

Mr. Strong provided to him.     Mr. Munns reviewed Mr. Strong’s

bankruptcy petition with him before filing it.     Mr. Strong did

not inform Mr. Munns that he had a large accumulation of cash on

hand.     Mr. Munns did not advise Mr. Strong that he did not have
                              - 17 -

to report cash on hand, or corporation stock, which he held when

he filed for bankruptcy in 1990.

Other Circumstances Related to Cash Available

     Mr. Strong entered the Navy on December 5, 1974, and was

discharged on June 9, 1976.   The highest rank he attained was E-

1, which paid a monthly salary of $361.20 in 1976.    After

discharge from the Navy, he attended vocational school and was

trained as a machinist.   He then worked as a machinist for a

couple of years and later moved into the home construction

business.

     Mr. Strong was married to Anna Lisa Strong (Mrs. Strong)

from 1978 to 1989; the couple separated in 1986.    He was divorced

from Mrs. Strong in August 1989.   That proceeding was brought by

Mrs. Strong in 1987.   Mr. Strong did not disclose in that

proceeding his interest in any real estate (except for 7090 107th

Avenue, Clear Lake, Minnesota) or his interest in any cash on

hand.   Petitioner paid child support to his ex-wife during the

years 1991-94.

     Between 1978 and 1989, Mr. Strong and his then wife acquired

and relinquished title to various real estate parcels.    In 1983

and 1984, Mr. Strong and his then wife lost at least three

properties in foreclosure actions.     Mr. Strong filed his 1981-85
                              - 18 -

income tax returns jointly with his then wife; they reported the

following adjusted gross income and taxable income on those

returns:

    Year            Adjusted Gross Income        Taxable Income
    1981                   $35,266                  $24,184
    1982                    32,636                   15,314
    1983                    20,917                    2,765
    1984                    21,371                     -0-
    1985                     3,170                     -0-


Mr. Strong’s Prior Year Returns

     Mr. Strong filed his 1986 Federal income tax return in March

1990 with the following details:     (1) His filing status on that

return was married filing separate; (2) he claimed exemptions for

his three children; (3) he reported adjusted gross income of

$31,952; (4) he claimed itemized deductions of $6,826; and (5) he

reported taxable income of $17,526.    The reported tax liability

of $2,105 was not paid until August 1991.    He filed his 1987

Federal income tax return in March 1990 with the following

details:   (1) His filing status on that return was married filing

separate; (2) he claimed exemptions for his three children; (3)

he reported adjusted gross income of $11,976; (4) he claimed

itemized deductions of $5,875; and (5) he reported taxable income

of zero.   The reported self-employment tax liability of $1,116

was not paid until April 1992.    Mr. Strong filed his 1988

Federal income tax return in March 1990 with the following
                                - 19 -

details:   (1) His filing status on that return was married filing

separate; (2) he claimed exemptions for his three children; (3)

he reported adjusted gross income of $8,867; (4) he claimed

itemized deductions of $4,127; and (5) taxable income of zero.

The reported self-employment tax liability of $1,153 was not paid

until April 1992.   Mr. Strong did not file a Federal income tax

return for 1989.

Respondent’s Income Determinations

      Respondent determined in the notice of deficiency that SCC

was a taxable corporate entity and determined SCC’s net taxable

income in the years 1990-94.    These determinations are disputed

as to the status of SCC as a taxpayer, the gross income, and the

allowable expenses.    Respondent also determined in a separate

notice of deficiency that Mr. Strong received constructive

dividend income in the full amount of SCC’s net income.    Both SCC

and Mr. Strong timely filed petitions with this Court.

                                OPINION

I.   Is SCC A Taxable Entity?

      SCC and Mr. Strong argue that SCC should be ignored for tax

purposes and was not a separate taxable entity apart from Mr.

Strong.    A corporation is a separate taxable entity if it was

formed for a business purpose and engaged in business activity.

See Moline Props., Inc. v. Commissioner, 319 U.S. 436, 439

(1943); Strong v. Commissioner, 66 T.C. 12, 23-24 (1976), affd.
                                   - 20 -

553 F.2d 94 (2d Cir. 1977).     SCC was a valid Minnesota

corporation.    More critical to this question, SCC was engaged in

the construction business and houses were sold in its name during

the years in question.    SCC was jointly listed with Mr. Strong on

account No. 893315300 where the receipts in dispute were

deposited.    Checks for house sales were issued with SCC as the

payee.     Mr. Strong chose to operate the construction business

through a corporation, not a sole proprietorship.     Under these

facts, SCC must be recognized as a distinct taxable entity.

II.   SCC’s Unreported Income and Expenses

      The extent of SCC’s taxable income is a separate issue.

There are two distinct questions in this regard.     First, should

the unreported deposits be treated as income, and second, should

SCC be allowed deductions against its income in addition to those

allowed by respondent?

      A.     Construction Income

      The parties stipulated that the construction business earned

gross income of $264,800 in 1990, $524,720 in 1991, $531,900 in

1992, $85,448 in 1993, and $531,396 in 1994 from the construction

and sale of houses.     This business was conducted in SCC’s name,

and the deposits of proceeds from these home sales should be

included in SCC’s gross income.
                              - 21 -

     B.   Unidentified Deposits

     The question whether the unidentified deposits to the First

Bank account are income to SCC merits further discussion.    The

record reflects deposits were made to account No. 893315300 in

addition to the amounts traced to specific home sales.

Respondent conceded that two of these deposits were loans from

Mr. Strong’s parents but asserts that the rest of these deposits

were income to SCC and Mr. Strong.

     Many of the deposits in dispute were of currency or were

completely unidentified.   Other deposits were by check

purportedly from various individuals or entities.    Respondent

asserts that Mr. Strong used nominee names to hide his own

identity on some of the deposited cashier’s checks, such as the

three checks from Mr. Jeanotte in 1990 and two checks from his

brother, Sean Strong, in 1994.

     Because of Mr. Strong’s inadequate records, respondent

reasons under the bank deposits method of proof that these

deposits are construction receipts absent evidence of any

nontaxable source of the deposits.     Respondent cites DiLeo v.

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

1992); Clayton v. Commissioner, 102 T.C. 632 (1994); Tokarski v.

Commissioner, 87 T.C. 74 (1986); and Nicholas v. Commissioner, 70

T.C. 1057 (1978).   We agree with respondent that unless

petitioners have shown that the funds came from nontaxable
                              - 22 -

sources, they are taxable to SCC.   Dodge v. Commissioner, 981

F.2d 350, 353 (8th Cir. 1992), affg. in part, revg. in part and

remanding in part 96 T.C. 172 (1991).   Petitioners argue that the

deposits in question were from cash that Mr. Strong accumulated

over the years.

     SCC clearly had a taxable source of income as it was in the

construction business during the years at issue.    The amounts

were deposited to bank account No. 893315300, as were the

proceeds from the 22 house sales.   Mr. Strong did not point to

any source for the deposits other than his previously accumulated

funds.

     Mr. Strong alleges he began to accumulate cash through

gambling winnings during his service in the U.S. Navy in the mid-

1970s.   He claims to have maintained a substantial cash hoard

throughout his marriage from 1978 to 1989 and during his filing

under chapter 7 of the Bankruptcy Code in 1990.    Mr. Strong’s

assertions are not credible for several reasons.    First, Mr.

Strong was unable to explain specifically how the cash was

obtained, where it was maintained, its amount after 1978, and how

it was used.   He stated that he was basically guessing when asked

to specify what amounts he had on hand at any particular point.

On cross-examination regarding the nature of his cash hoard, Mr.

Strong refused to be specific and continually changed his story.

For example, he stated that he did not add to his cash
                              - 23 -

accumulation for 6 years, from 1982 through 1988.    Later, upon

being questioned by the Court, Mr. Strong stated that he did add

to his cash accumulation during that period.    Still later, Mr.

Strong decided that his cash accumulation would have been in one

of three bank accounts.   We construe against him Mr. Strong’s

failure to provide adequate details regarding his cash hoard.

“We are not required to accept implausible, uncorroborated, and

incoherent contentions as to the existence of a cash hoard.”

Daniels v. Commissioner, T.C. Memo. 1992-692.

     Second, even though Mr. Strong was married during the period

he held his cash hoard, his ex-wife was unaware that it existed.

His ex-wife testified that the couple did not have an excess of

cash during the 8 years they were living together.    Further, Mr.

Strong did not disclose the existence of the cash hoard upon

their divorce, even though he stated under penalties of perjury

in that proceeding that he had disclosed all assets.

     Third, Mr. Strong’s liabilities are inconsistent with his

claimed cash hoard.   For instance, Mr. Strong and his then wife

lost at least three properties through foreclosure from December

1986 through February 1988.   Such a forfeiture is inconsistent

with the existence of a cash hoard.    See Holland v. United

States, 348 U.S. 121, 133 (1954).   Mr. Strong also borrowed

$10,000 in 1991 to purchase equipment and allegedly borrowed

$6,000 from his father in December 1990.   Mr. Strong specifically
                                - 24 -

testified that he borrowed from his father in 1990 because he

“was short on cash”.    Borrowing money and incurring interest

charges are inconsistent with sitting on a large amount of

unproductive cash.     Thomas v. Commissioner, 223 F.2d 83, 88 (6th

Cir. 1955), revg. a Memorandum Opinion of this Court; Daniels v.

Commissioner, supra.

     Fourth, Mr. Strong’s prior years’ tax returns are

inconsistent with his claim that the cash hoard came from

previously taxed income.    From 1981 through 1989, he reported

taxable income of $59,789, an average of $6,643 per year.2       The

largest taxable income he reported was $24,184 in 1981, and in

1984, 1985, 1987, 1988 and 1989, he reported zero taxable income.

This was at the same time he was supporting three children.       Mr.

Strong’s reported income from 1981 to 1989 is not sufficient to

live on, much less accumulate a large cash hoard.      See Holland v.

United States, supra.

     Finally, Mr. Strong filed for chapter 7 bankruptcy

protection in March 1990.    In his bankruptcy case, he represented

that the sum total of his assets equaled $33,500, including his

homestead valued at $30,000.    He alleged he had no cash on hand

and no interest in any corporation.      These representations

plainly contradict his current assertion that his cash deposits

during the years at issue were from cash on hand at the beginning


     2
      SCC reported no taxable income during this same period.
                               - 25 -

of 1990.   Mr. Strong testified that he made these representations

on the advice of his bankruptcy counsel.    Mr. Strong’s bankruptcy

counsel, Mr. Munns, plainly denied that charge in his testimony.

Mr. Munns unequivocally stated that he did not inform Mr. Strong

that cash on hand or the value of a corporation did not have to

be reported in bankruptcy.    Mr. Munns also stated that Mr. Strong

failed to inform him that he had a significant amount of cash on

hand.

     In conclusion, we reject Mr. Strong’s cash hoard explanation

for the unidentified deposits.    Respondent also asserts judicial

estoppel as a result of the representations in the bankruptcy

filing.    Because we reject Mr. Strong’s claims of a cash hoard,

it is unnecessary for us to reach this argument.

     The burden is on SCC to establish that the deposits in

dispute were not income.   “Once the deposits were shown to be in

the nature of income and to exceed what the taxpayers had

reported as income, it became the taxpayers’ responsibility to

persuade the trier of fact the deposits were nontaxable.”      Dodge

v. Commissioner, 981 F.2d at 354.    In addition to Mr. Strong’s

claim of a cash hoard, SCC argues that two of the deposits were

not taxable to SCC.    The first is a deposit of $8,500 on August

10, 1994, which Mr. Strong claims was payment for the sale of a

motorcycle.    In that instance, we accept the corroborating

testimony of Mr. Strong’s then girlfriend and hold that the
                                - 26 -

$8,500 was not income to SCC.    The second is a deposit of $8,500

on August 16, 1994, which Mr. Strong claims was payment for the

sale of his truck to his brother.      In this instance, SCC has not

carried its burden.   Mr. Strong provided testimony from his

brother that the $8,500 deposit was payment for a pickup truck.

However, this testimony is inconsistent with the records of the

Minnesota Department of Motor Vehicles regarding the ownership of

the truck in question, and we find this testimony unconvincing.

SCC does not provide any explanation for the remaining deposits,

and we conclude that these deposits are income to SCC.

     C.    Allowable Expenses of SCC

     Section 162(a) allows a taxpayer deductions for ordinary and

necessary business expenses incurred during the taxable year in

carrying on a trade or business.    Deductions, however, are a

matter of legislative grace, and the taxpayer bears the burden of

proving entitlement to any deduction claimed.     See INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992).      Generally, a taxpayer

must establish that deductions taken pursuant to section 162 are

ordinary and necessary business expenses and must maintain

records sufficient to substantiate the amounts of the deductions

claimed.    Sec. 1.6001-1(a), Income Tax Regs.

     With respect to certain business expenses specified in

section 274(d), more stringent substantiation requirements apply.

Section 274(d) disallows deductions for travel expenses, gifts,
                               - 27 -

meals, and entertainment, as well as for listed property defined

by section 280F(d)(4), unless the taxpayer substantiates by

adequate records or by sufficient evidence corroborating the

taxpayer’s own statement:    (1) The amount of the expense; (2) the

time and place of the expense; (3) the business purpose of the

expense; and (4) the business relationship to the taxpayer of the

persons involved in the expense.

       SCC argues that many of the expenses paid by Mr. Strong out

of account No. 893315300 were deductible business expenses of

SCC.    For 1990, SCC’s financial statement provided to the revenue

agent during respondent’s audit of SCC did not include an

accountant’s compilation of expenses paid from account No.

893315300; instead, it estimated SCC’s costs using industry

standards and information available from closing statements.      For

1991-94, respondent allowed SCC expenses based upon financial

statements including accountant’s compilations of expenses for

those years.    Respondent allowed SCC expenses for 1990 on the

basis of the information in the financial statement, adjusted by

SCC’s average actual gross profits percentage taken from the

1991-94 accountant’s compilations.

       Mr. Strong testified that he paid some of his personal

expenses, including child support, medical fees, clothing

purchases, restaurant charges, magazine subscriptions, and
                               - 28 -

groceries, for 1991-94 by issuing checks from account No.

893315300.

     There are seven general categories of additional disputed

expenses that were paid out of account No. 893315300 which we

will discuss:   (1) Advertising or promotional expenses; (2)

professional fees; (3) travel expenses; (4) automobile and truck

expenses; (5) office supplies and general supplies; (6) utility

expenses; and (7) miscellaneous expenses.

          1.    Advertising or Promotional Expenses

     Expenses for the promotion or sponsorship of activities not

directly related to a taxpayer’s business are deductible if the

taxpayer can establish a proximate relationship between the

activity and the taxpayer’s business such that the sponsorship

was reasonably calculated to advertise the business.      Gill v.

Commissioner, T.C. Memo. 1994-92, affd. without published opinion

76 F.3d 378 (6th Cir. 1996).

     SCC advertised its business primarily either through word of

mouth or by athletic sponsorships.      As part of the athletic

sponsorships, SCC paid for the uniforms, logo design, hats, t-

shirts, sweat pants, coats, bags, and pants for all players on

its sponsored teams.   In addition, SCC made monetary donations

for high school wrestling organizations and would provide

equipment and league/tournament fees for its sponsored athletic

teams.
                              - 29 -

     SCC claimed that the expenses for advertising were

deductible as ordinary and necessary business expenses.

Respondent determined that SCC was not entitled to deduct these

expenses as shown on the financial statements and the

accountants’ compilations provided by SCC and adjusted these

expenses in determining SCC’s tax liabilities for the years at

issue.   SCC’s canceled checks supported many of these promotional

expenses.   In addition, members of SCC’s sponsored teams

testified credibly to substantiate the expenses.   Accordingly, we

conclude the amounts of the following advertising or promotional

expenses for the years 1991, 1992, 1993, and 1994 were ordinary

and necessary expenses of SCC:

                                 1991

     Date                 Expense                  Amount

     1/2             Letterman Sports              $50.00
     1/2             Letterman Sports              644.80
     2/2             A & B                          42.38
     2/4             Gladiators                     74.00
     2/27            Letterman Sports              186.00
     2/27            SRO Softball                  320.00
     3/23            USA Wrestling                  30.00
     4/9             SRO Softball                  615.00
     4/10            SRO Softball                  320.00
     4/19            Letterman Sports              297.75
     5/7             Dave’s Sports                  73.62
     5/8             Letterman Sports               50.00
     5/15            Athlete’s Foot                 37.09
     5/17            USA Wrestling                  10.00
     5/17            USA Wrestling                  20.00
     6/5             Letterman Sports               95.40
     6/13            Letterman Sports              271.75
     6/19            Letterman Sports               50.00
     8/13            Letterman Sports               48.00
     9/12            SRO Softball                  225.00
                        - 30 -

                          1991

Date                Expense                  Amount

12/11          Herman’s Sports               $89.35
12/11          Dave’s Sports                  47.94
12/14          Broomball League               60.00
12/19          Herman’s Sports               285.39
12/23          Dave’s Sports                 100.00
12/23          Dave’s Sports                 169.26
12/23          Herman’s Sports                63.88
  Total                                    4,276.61


                          1992

Date                Expense                  Amount

1/9            Herman’s Sports                $32.37
1/14           Dave’s Sports                  385.00
1/31           State Broomball                185.00
2/3            Butch Salzinger                800.00
2/29           Radisson (Broomball)           132.69
3would be one word             Radisson (Broomball)
104.81
3/14           D. Stecker (Softball)        3,900.00
4/10           Butch Salzinger (Hats)         185.40
4/13           Herman’s Sports                 51.99
5/19           Letterman Sports               429.75
6/10           Letterman Sports                78.00
6/10           Wal-Mart (Balls)                12.32
6/17           Letterman Sports               102.00
6/17           Mardi’s Embroidery             480.25
9/27           Slow Pitch MN                  112.00
12/10          Dave’s Sports                  287.64
12/11          St. Francis Wrestling          250.00
12/20          4 Seasons Broomball             60.00
  Total                                     7,589.22

                              1993

Date                Expense                  Amount

1/23           Herman’s Sports              $149.97
1/24           Mardi’s Embroidery            180.00
2/06           Marc Washburn                  80.00
3/05           Mardi’s Embroidery            294.00
3/11           MN Sports Federation           63.00
4/15           City of Coon Rapids           846.00
                                - 31 -

                                 1993

     Date                   Expense                  Amount

     4/16              MN Liquor Liability         $200.00
     4/21              City of Coon Rapids           60.00
     4/22              Janet Cullen               1,000.00
     6/5               MN Recreation Assn.          125.00
     6/7               A & B Sporting Goods          21.29
     8/10              City of Coon Rapids          100.00
     12/03             Sports Connection             75.00
       Total                                      3,194.26


                                 1994

     Date                   Expense                  Amount

     3/7               Elk River Wrestling          $105.00
     11/16             A & B Sporting Goods          118.42
     4/21              C.R. Athletic Assn.           300.00
       Total                                         523.42

            2.   Professional Fees

     Mr. Strong claimed accounting and legal expenses of $3,410

and $4,790 for 1993 and 1994, respectively.    Of these amounts,

respondent allowed $575 and $790 for 1993 and 1994, respectively,

as miscellaneous itemized deductions for tax preparation fees

paid to Mr. Newman.    The remaining $2,835 for 1993 and $4,000 for

1994 are in dispute.    Mr. Strong testified that the $2,835 was

paid to Michael Scott, an attorney, for title clarification in

connection with one of SCC’s business properties.    In addition,

Mr. Strong testified that the $4,000 was paid to Craig Cascorono,

an attorney, also with respect to title issues concerning SCC’s

business properties.    Mr. Strong testified that SCC often had to

retain attorneys in order to make sure its properties had valid
                              - 32 -

titles from the city council before building on them.   Respondent

argues that legal expenses relating to title issues are not

deductible as ordinary and necessary business expenses but should

be added to the basis of each property to which they relate.

     We agree with respondent.   The cost of defending or

perfecting title to property constitutes a capital expenditure

and no deduction shall be allowed for it.    Estate of Franco v.

Commissioner, T.C. Memo. 1980-340; Cowden v. Commissioner, T.C.

Memo. 1965-278, affd. per curiam 365 F.2d 832 (1st Cir. 1966);

sec. 1.263(a)-2(c), Income Tax Regs.    The only evidence presented

by Mr. Strong and SCC shows that these legal fees were for

defending or perfecting title.   In his testimony, Mr. Strong did

not relate these expenses to specific properties sold during the

years at issue.   Therefore, the legal fees of $2,835 and $4,000

paid in 1993 and 1994, respectively, are not currently deductible

to SCC.

          3. Charitable Contributions

     SCC claimed deductions for charitable contributions of

$73.14 for 1991, $220 and $80 for 1992, and $80 for 1993.    Of

these amounts, respondent allowed only the $80 charitable

contribution for 1992.   Respondent contends that SCC failed to

provide the required documentation to substantiate the remaining

charitable deductions.
                                   - 33 -

     Under section 1.170A-13(a)(1), Income Tax Regs., a taxpayer

is required to maintain for each charitable contribution a

canceled check, a receipt from the donee organization, or other

reliable written records of the contribution.    Because Mr. Strong

presented copies of canceled checks for the $73.14 in 1991 and

$80 in 1993, we conclude that SCC is allowed these charitable

contributions.    However, because Mr. Strong failed to

substantiate the $220 contribution, we conclude that SCC is

precluded from deducting the $220 for the year 1992 as a

charitable contribution.

            4.   Travel Expenses

     SCC claimed travel expenses for the years 1991-94 of

$1,914.59, $397.79, $148.62, and $1,045.67, respectively.

Respondent disallowed these travel expenses.

     In order to substantiate a deduction by means of adequate

records, a taxpayer must maintain a diary, log, statement of

expenses, trip sheet, or similar record, and documentary evidence

which, in combination, are sufficient to establish each element

of each expense or use.    Sec. 1.274-5T(c)(2)(i), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).    Accordingly, no

deduction for expenses under section 274(d) may be allowed on the

basis of any approximation or the unsupported testimony of the

taxpayer.    See, e.g., Sanford v. Commissioner, 50 T.C. 823, 827-

828 (1968), affd. 412 F.2d 201 (2d Cir. 1969).
                                  - 34 -

     Here, although Mr. Strong testified to some of the travel

expenses and provided copies of some canceled checks, SCC did not

provide adequate substantiation to meet the strict requirements

of section 274(d).      The record does not include any receipts,

vouchers, itineraries, diaries, logs, or calendars made in

connection with the alleged travel expenses, nor any other

evidence sufficient to corroborate Mr. Strong’s testimony.

Accordingly, we sustain respondent’s determinations with respect

to these travel expenses for the years 1991 through 1994.

            5.    Miscellaneous Expenses

                   a.   Office Supplies and General Supplies Expenses

     SCC contests respondent’s disallowance of the deductions

claimed for office supplies and general supplies incurred for

1991, 1992, 1993, and 1994 of $797.96, $611.16, $396.12, and

$1,102.14, respectively.      Of these amounts, respondent allowed

$326 for 1991, $495.52 for 1992, $386.66 for 1993, and $518.01

for 1994.

     However, SCC contends that it is entitled to additional

office and general supplies expenses that were not allowed by

respondent.      SCC offered as proof only copies of canceled checks.

The canceled checks do not show in any detail the items purchased

or the business purpose for the items, as required to

substantiate the claimed deductions.       See sec. 1.162-17, Income
                                 - 35 -

Tax Regs.   Therefore, we cannot allow SCC deductions for these

expenses.

                 b.    Automobile and Truck Expenses

     SCC claims deductions for automobile and truck expenses for

1991, 1992, 1993, and 1994 of $686.56, $572.66, $27, and

$1,239.93, respectively.      Respondent allowed SCC automobile and

truck expenses for only the years 1992 and 1994 of $469.35 and

$320.91, respectively.      Respondent disallowed the remaining

automobile and truck expenses because of failure to substantiate

that the amounts were expended for business use.        SCC did not

offer any evidence at trial or present any argument on brief

regarding these amounts.      Accordingly, respondent’s determination

on these remaining items is sustained.

                 c.    Utility and Telephone Expenses

     SCC claimed utility expenses for the years 1991-94 of

$3,704.50, $3,314.11, $1,669.92, and $4,692.60, respectively.

Respondent concedes that SCC may deduct $3,609.20, $2,873.73,

$912.20, and $3,118.61, respectively for 1991-94.        SCC has failed

to present any evidence to substantiate entitlement to the

remaining disallowed deductions.      Accordingly, respondent’s

determination on these items is sustained.

     In addition, SCC claimed telephone expenses for the 1992 tax

year of $665.53.      Respondent concedes that SCC may deduct

$355.77.    SCC failed to present any evidence at trial or present
                                 - 36 -

any argument on brief regarding the additional amount.

Accordingly, respondent’s determination on the remaining claimed

deduction is sustained.

                  d.   Miscellaneous Expenses

       As to SCC’s other deductions (i.e., entertainment,

insurance, and rent), Mr. Strong was not able to proffer any

documentation to substantiate that the purpose of these expenses

was for business.      Mr. Strong attributes the lack of

substantiation to two fires that resulted in the loss of his

receipts, but his general attitude regarding Federal income taxes

and his lack of credibility leave us with no reason to believe

receipts were ever maintained.

       Even if we were persuaded that some portion of these

expenses was for business purposes, Mr. Strong has not offered

any evidence that would support his allocation of expenses or

otherwise allow the Court to reach an alternate determination

under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).

Thus, with regard to these additional expenses for which there

are no adequate receipts, SCC’s claim fails for lack of

substantiation.

III.   Constructive Dividends to Mr. Strong

       Respondent argues that the unreported business income of

SCC, measured by the deposits into account No. 893315300, is

taxable to Mr. Strong as constructive dividend income because Mr.
                               - 37 -

Strong freely used the money for personal expenses.    Petitioners

do not address respondent’s argument.

       If a controlling shareholder diverts corporate income to his

own use, the diverted funds are generally treated as constructive

dividends for tax purposes.    DiLeo v. Commissioner, 96 T.C. at

883.    A dividend is any distribution of property made by a

corporation to its shareholders out of its earnings and profits.

Sec. 316(a).    Where a corporation makes a distribution to a

shareholder that serves no legitimate corporate purpose and

results in an economic benefit to the shareholder, the payment is

a constructive dividend to the benefited shareholder.

Commissioner v. Riss, 374 F.2d 161, 167 (8th Cir. 1967), affg. in

part, revg. in part and vacating in part T.C. Memo. 1964-190; see

also Meridian Wood Prods., Inc. v. United States, 725 F.2d 1183,

1191 (9th Cir. 1984).    However, the fact that certain payments

are not deductible by a corporation as business expenses does not

automatically make them taxable to the shareholder.     Dolese v.

United States, 605 F.2d 1146, 1152 (10th Cir. 1979); Falsetti v.

Commissioner, 85 T.C. 332, 356-357 (1985); Ashby v. Commissioner,

50 T.C. 409, 418 (1968).   To the extent the payments do not

represent some direct benefit to the shareholder, they are not

taxable to him.   See Ashby v. Commissioner, supra.

       Some of the income deposited into account No. 893315300 was

used by Mr. Strong for SCC’s legitimate business expenses.
                              - 38 -

Respondent allowed some of these expenses in the notice of

deficiency, and we have identified additional promotional

expenses in section II.C.1., above.     In addition, although SCC

may not deduct certain capital legal fees, see supra section

II.C.2., we are convinced that those items were of no personal

benefit to Mr. Strong.   These items, which are not constructive

dividends to Mr. Strong, are $2,835 in 1993 (check No. 6834) and

$4,000 in 1994 (check No. 7763).

     Either the remaining income items disallowed as deductions

to SCC were used by Mr. Strong for personal benefit or he has

failed to show that they were not so used.     He made no

distinction between SCC’s funds and his own, by his own

admission.   He paid child support, medical bills, clothing,

groceries, travel, and other personal expenses directly out of

account No. 893315300.   In addition to failing to properly

substantiate his travel expenses, he has not shown that the

travel expenses were not personal.     He has failed to establish

that the remaining nondeductible corporate expenditures had any

legitimate corporate purpose and were not for his benefit.

     In summary, the deposits into account No. 893315300

determined to be taxable to SCC are taxable to Mr. Strong as

constructive dividends, less the amounts of (1) the expenses

allowed by respondent, (2) the promotional expenses we have held
                               - 39 -

in section II.C.1. and 3. above are deductible by SCC, and (3)

the items we have determined have no benefit to Mr. Strong in

this section. IV.    Penalties and Additions to Tax

     A.    Fraud Penalty Under Section 6663--Mr. Strong

     Respondent determined that Mr. Strong is liable for the

fraud penalty under section 6663 for each of the years 1990,

1991, 1992, 1993, and 1994.    Respondent must show by clear and

convincing evidence that Mr. Strong fraudulently intended to

underpay his taxes in each year in issue in order to prove that

he is liable for the fraud penalty under section 6663.    See sec.

7454(a); Rule 142(b); Rowlee v. Commissioner, 80 T.C. 1111, 1113

(1983).   For Federal tax purposes, fraud entails intentional

wrongdoing with the purpose of evading a tax believed to be

owing.    See Neely v. Commissioner, 85 T.C. 934, 947 (1985).   In

order to show fraud, respondent must prove:    (1) An underpayment

exists and (2) Mr. Strong intended to evade taxes known to be

owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of taxes.    See Parks v. Commissioner, 94

T.C. 654, 660-661 (1990).

           1.   Underpayment

     We have found above that SCC received construction income in

each of the years 1990-94 and that Mr. Strong used most of the

construction income for his personal expenses.    Neither SCC nor

Mr. Strong paid Federal income tax on the additional construction
                                - 40 -

income.   Therefore, both SCC and Mr. Strong underpaid their taxes

for 1990-94.

          2.     Fraudulent Intent

     Because direct evidence of fraud is rarely available, fraud

may be proved by circumstantial evidence and reasonable

inferences from the facts.    Petzoldt v. Commissioner, 92 T.C.

661, 699 (1989).    Courts have developed a nonexclusive list of

factors, or “badges of fraud”, that demonstrate fraudulent

intent.   Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).

These badges of fraud include:    (1) Understating income; (2)

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

(4) implausible or inconsistent explanations of behavior; (5)

concealment of income or assets; (6) failing to cooperate with

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

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

illegal activities; (11) attempting to conceal illegal activity;

(12) an intent to mislead which may be inferred from a pattern of

conduct; and (13) lack of credibility of the taxpayer’s

testimony.     Id.; see also Spies v. United States, 317 U.S. 492,

499 (1943); Recklitis v. Commissioner, 91 T.C. 874, 910 (1988).

Although no single factor is necessarily sufficient to establish

fraud, the combination of a number of factors constitutes

persuasive evidence.     Niedringhaus v. Commissioner, supra at 211.
                               - 41 -

     Mr. Strong consistently understated his income while

spending SCC’s construction income on his personal expenses

during the years in issue.   During these same years, Mr. Strong

reported minimal taxable income, if any, and at most $81,640 in

gross receipts from the construction business.      Mr. Strong’s

personal tax returns also do not take into account any of the

funds he used for personal expenses.

     Mr. Strong did not keep adequate records of the expenses he

claims were related to SCC’s business.      His claim of a cash hoard

that he periodically deposited into account No. 893315300 was an

implausible explanation of the unreported construction income.

His purported explanation, if true, is an admission that he

defrauded his creditors and lied to his attorney during his

bankruptcy proceedings by denying the existence of the cash he

claims was hidden under his house.      During an inquiry by

respondent’s revenue agent, Mr. Strong refused to provide the

revenue agent with any personal or financial information and lied

about his access to records.   During the later audit, he provided

detailed financial records only after respondent obtained third

party records by summons.    Mr. Strong knowingly filed false tax

returns for each year at issue.   His patterns of depositing cash

in amounts less than $10,000 and understating the construction

income in each year show that he intended to conceal the income

he appropriated from his construction business.      We did not find
                                - 42 -

Mr. Strong’s testimony credible and do not accept his explanation

for the income deposited into his bank account.      He admitted in

his testimony that he considered the money in account No.

893315300 his personal funds.       The factors indicating fraud weigh

heavily against Mr. Strong.     Respondent has shown by clear and

convincing evidence that Mr. Strong fraudulently underpaid his

taxes for 1990, 1991, 1992, 1993, and 1994.      Therefore, he is

liable for the fraud penalty under section 6663 for each year in

issue.

     B.     Additions to Tax for Failure To File--SCC

     Respondent asserts that SCC is liable for the addition to

tax under section 6651(f) for fraudulent failure to file a

return, or, in the alternative, that SCC is liable for the

addition to tax for failure to file a return under section

6651(a)(1) for each of the years 1990, 1991, 1992, 1993, and

1994.     Corporations subject to taxation must file Federal income

tax returns.     Sec. 6012(a)(2).   If a corporation fails to file a

return, the Commissioner may impose an addition to tax of 5

percent per month of the amount of tax required to be shown on

the return, to a maximum of 25 percent.      Sec. 6651(a)(1).   If the

failure to file is fraudulent, the addition to tax is increased

to 15 percent per month of the tax required to be shown on the

return, to a maximum of 75 percent.      Sec. 6651(f).   We consider

the same factors under section 6651(f) that are considered in
                               - 43 -

imposing the fraud penalty under section 6663.     Clayton v.

Commissioner, 102 T.C. 632, 653 (1994).

     A corporation can act only through its officers and does not

escape responsibility for acts of its officers performed in that

capacity.   DiLeo v. Commissioner, 96 T.C. at 875.    It follows

that corporate fraud necessarily depends upon the fraudulent

intent of the corporate officers.   Id.    In determining whether

SCC acted with the requisite fraudulent intent, we must consider

the actions of Mr. Strong, SCC’s president and sole shareholder.

The pertinent questions are:   (1) Whether Mr. Strong had

sufficient control of the corporation that his fraudulent acts

should be imputed to the corporation and (2) whether Mr. Strong

was acting on behalf of, and not against the interests of, SCC.

See Ruidoso Racing Association, Inc. v. Commissioner, 476 F.2d

502, 506 (10th Cir. 1973), affg. in part and remanding in part on

another ground T.C. Memo. 1971-194; Botwinik Bros., Inc. v.

Commissioner, 39 T.C. 988, 996 (1963); Federbush v. Commissioner,

34 T.C. 740, 750 (1960), affd. per curiam 325 F.2d 1 (2d Cir.

1963); Moore v. Commissioner, T.C. Memo. 1977-275, affd. 619 F.2d

619 (6th Cir. 1980).

     Mr. Strong was the sole shareholder, officer, and director

of SCC and had control over its activities.    He diverted proceeds

for his own use that belonged to SCC.     Given Mr. Strong’s limited

education, lack of tax experience, and existence as SCC’s only
                              - 44 -

shareholder, we are not convinced that he fully understood that

SCC’s corporate form required a separate tax return.    In fact,

Mr. Strong formed SCC as a corporation because his attorney

recommended it.   It has not been shown that Mr. Strong had any

expertise in keeping corporate books and records, or that his

attorney or accountants instructed him in filing corporate

returns.   As a result, respondent has not shown by clear and

convincing evidence that Mr. Strong’s fraudulent intent extended

beyond his desire to conceal income with respect to his personal

income tax returns or that SCC’s failure to file tax returns was

fraudulent.

     However, it is clear from the record that SCC did not file

Federal income tax returns for 1990-94 without any reasonable

explanation.   Therefore, SCC is liable for the addition to tax

under section 6651(a)(1) for failure to file returns.

     To reflect the foregoing and concessions by the parties,



                                    Decisions will be entered

                               under Rule 155.
