                        T.C. Memo. 2002-117



                      UNITED STATES TAX COURT



           TAN DANG AND KE T. CHAW DANG, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6715-00.                   Filed May 13, 2002.



     Joyce Rebhun, for petitioner.

     Michael W. Berwind, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax of $10,448 for 1995, $11,065 for

1996, and $11,689 for 1997, and accuracy-related penalties under

section 6662(a) of $2,089.60 for 1995, $2,213 for 1996, and

$2,337.80 for 1997.
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     The issues for decision are:

     1.   Whether petitioners correctly reported gross receipts

from their grocery store business for 1995, 1996, and 1997.   We

hold that they did.

     2.   Whether petitioners are liable for the accuracy-related

penalty for negligence for 1995, 1996, and 1997.   We hold that

they are not.

     Section references are to the Internal Revenue Code in effect

for the years in issue.   References to petitioner are to Tan Dang.

                          FINDINGS OF FACT

     Some of the facts are stipulated and are so found.

A.   Petitioners

     Petitioners are husband and wife who resided in California

when they filed the petition.

B.   Manwah Supermarket

     During the years in issue, petitioners owned and operated a

4,000-square-foot grocery store in downtown Los Angeles,

California, known as L.A. Manwah Supermarket (Manwah).    Manwah was

a sole proprietorship in 1995 and a partnership in 1996 and 1997.

     Petitioners sold meat, poultry, fruits, vegetables, canned

goods, and dry goods at Manwah.   Canned and dry goods were about

25 percent of Manwah’s sales, and meat, poultry, and produce were

about 75 percent.   Typically, the work at Manwah was performed by
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7 employees and members of petitioners’ family.   Manwah employees

used cash registers which had an internal tape system that

recorded each sale.

     Manwah was located in an economically depressed area in Los

Angeles.   About half of the purchases at Manwah were made with

food stamps.   Manwah suffered losses from shoplifting.

Petitioners closed Manwah in December 1998 or in 1999.    Six of the

7 grocery stores in the area where Manwah was located had closed

by the time of trial.

C.   Petitioners’ Returns

     Petitioners used a bookkeeping business known as Asian

Services to prepare their personal and partnership tax returns for

1996, 1997, and 1998.

     Petitioners gave Asian Services daily cash register tapes and

other records of receipts and expenses for Manwah.   Asian Services

recorded total daily sales and other information, and then

returned the records, including the tapes, to petitioners.

Petitioners stored the records at Manwah.   Petitioners threw out

some of Manwah’s records for the years in issue when they cleaned

up the storage area after a visit by the Health Department.

     Petitioners timely filed Forms 1040, Individual Income Tax

Return, for 1995, 1996, and 1997, and Forms 1065, U.S. Partnership

Return of Income, for 1996 and 1997.   Petitioners reported costs
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of goods sold and gross receipts for Manwah as follows:

                               Cost of        Gross
                   Year       goods sold     receipts

                   1995       $869,270     $1,088,298
                   1996        862,277      1,074,289
                   1997        881,352      1,077,288

D.   Audit

     Richard Ng, respondent’s revenue agent, audited petitioners’

1995, 1996, and 1997 returns.     He went to Manwah and Asian

Services to examine Manwah’s records.      Petitioners gave Ng daily

summaries or tapes of Manwah’s sales for 331 days for 1995, 6

months for 1996, 9 months for 1997, and all of 1998.

     Ng used three indirect methods to estimate Manwah’s gross

receipts for 1995, 1996, and 1997 because petitioners did not have

complete daily records of sales for those years.        First, Ng used a

percentage markup method.     He applied the following formula to

estimate Manwah’s gross receipts:

           Gross receipts =     Cost of goods sold
                              (1 - Profit percentage)

Ng calculated Manwah’s gross receipts as follows.       He used average

gross profit percentages contained in Dun & Bradstreet data for

U.S. grocery stores with annual gross receipts of up to $1 million.

Those percentages were 22.6 for 1995, 22.5 for 1996, and 21.2 for

1997.   He used the costs of goods sold that petitioners reported on

their returns for the years in issue.      Using this method, Ng
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estimated Manwah’s gross receipts to be $1,123,087 for 1995,

$1,111,182 for 1996, and $1,118,467 for 1997.

      Second, Ng estimated Manwah’s gross receipts by annualizing

the amounts shown on the daily records that petitioners gave him.

The record does not include the results of that analysis.

      Third, petitioners gave all of Manwah’s records for 1998 to

Ng.   Ng used them to estimate the markups of specific products sold

in Manwah.    The record does not indicate which products he

analyzed.    Ng concluded that the average markup for those

unspecified products was 25 to 28 percent.

      Respondent determined that petitioners understated Manwah’s

gross receipts on their returns solely by applying the Dun &

Bradstreet gross profit percentage data to Manwah’s reported costs

of goods sold.    Respondent did not use Ng’s estimate of Manwah’s

annualized daily receipts or markup of specific products for 1998

to determine petitioners’ unreported income.

                                OPINION

A.    Whether Petitioners Underreported Gross Receipts

      Petitioners contend that they had gross receipts from Manwah

of $1,088,298 for 1995, $1,074,289 for 1996, and $1,077,288 for

1997, as they reported on their returns.

      Respondent contends that petitioners had gross receipts of

$1,123,087 for 1995, $1,111,182 for 1996, and $1,118,467 for 1997,
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and contends that respondent’s determination, based solely on Ng’s

application of average gross profit percentages from Dun &

Bradstreet to Manwah’s costs of goods sold, was reasonable.

We disagree.   The Dun & Bradstreet data did not provide a reliable

basis to estimate Manwah’s gross profit percentages for the years

in issue because Manwah was clearly below average.    Manwah was a

failing business in an economically depressed neighborhood.

     Respondent contends that petitioner’s testimony regarding

Manwah’s difficulties was self-serving and not credible.    We

disagree.   We decide whether a witness is credible based on

objective facts, the reasonableness of the testimony, and the

demeanor and consistency of statements made by the witness.      Quock

Ting v. United States, 140 U.S. 417, 420-421 (1891); Wood v.

Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C. 593

(1964); Pinder v. United States, 330 F.2d 119, 124-125 (5th Cir.

1964); Concord Consumers Hous. Coop. v. Commissioner, 89 T.C. 105,

124 n.21 (1987).   We may discount testimony which we find to be

unworthy of belief, but we may not arbitrarily disregard testimony

that is competent, relevant, and uncontradicted.     Conti v.

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

on another ground 99 T.C. 370 (1992) and T.C. Memo. 1992-616; Banks

v. Commissioner, 322 F.2d 530, 537 (8th Cir. 1963), affg. in part

and remanding in part on another ground T.C. Memo. 1961-237.
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Petitioner's testimony was credible and consistent both on direct

and cross-examination.   Petitioner credibly testified about the

manner in which petitioners kept and provided records to their

return preparers.   Ng, respondent’s sole witness, did not

contradict petitioner’s testimony that Manwah was economically

below average.   We conclude that application of the Dun &

Bradstreet data to Manwah was inappropriate.

     Ng testified that he analyzed markups for selected items sold

by Manwah in 1998 and concluded that the average markup was 25 to

28 percent.   However, Ng did not indicate which items he analyzed

or how he selected them.   Petitioner testified that markup

percentages varied by product.    For example, he testified that the

markup for dry goods was greater than that for produce.    Ng’s

testimony was too general to establish that Manwah’s markups were

incorrect.

     Respondent contends that Ng’s annualized gross receipts

estimates for Manwah show that petitioners’ gross receipts for the

years in issue are incorrect.    We disagree.   Ng’s estimates are not

in the record.

     Citing Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158 (1946), affd. 162 F.2d 513 (10th Cir. 1947), respondent

contends that we should infer from petitioners’ failure to call any

employee of Asian Services as a witness that the employee’s
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testimony would have been unfavorable to petitioners.   We disagree.

If a witness is equally available to both parties and neither party

calls that witness at trial, then no adverse inference is

warranted.   See United States v. Rollins, 862 F.2d 1282, 1297-1298

(7th Cir. 1988); Kean v. Commissioner, 469 F.2d 1183, 1187-1188

(9th Cir. 1972), affg. on this issue and revg. on another issue 51

T.C. 337, 343-344 (1968); Grossman v. Commissioner, T.C. Memo.

1996-452, affd. 182 F.3d 275 (4th Cir. 1999); Gaw v. Commissioner,

T.C. Memo. 1995-531.   We have no reason to believe that a witness

from Asian Services was not equally available to both parties.

Thus, we do not apply the adverse inference rule.

     We conclude that petitioners had gross receipts from their

grocery store business of $1,088,298 for 1995, $1,074,289 for 1996,

and $1,077,288 for 1997, and that they did not underreport their

income for those years.

B.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty for Negligence

     In view of our conclusion above, we conclude that petitioners

are not liable for the accuracy-related penalty for negligence for

any of the years in issue.

     To reflect the foregoing,

                                              Decision will be

                                         entered for petitioners.
