                               T.C. Memo. 1995-563



                             UNITED STATES TAX COURT



             ROBIN F. AND ANNE F. JENKINS, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 25085-93.           Filed November 28, 1995.



       Robin F. and Anne F. Jenkins, pro sese.

       Lindsey D. Stellwagen, for respondent.



                 MEMORANDUM FINDINGS OF FACT AND OPINION


       JACOBS,      Judge:        Respondent   determined     the     following

deficiencies in and additions to petitioners' Federal income taxes:

                                              Additions to Tax
                      Sec.         Sec.          Sec.        Sec.           Sec.
Year   Deficiency    6653(b)(1)   6653(b)(1)(A) 6653(b)(2) 6653(b)(1)(B)    6661

1984   $12,454        $6,347          --            *            --        $3,114
1985    13,007         6,504          --            *            --         3,252
1986    22,442          --          $16,832         --           *          4,773

       * 50 percent of the interest due on the deficiency.
                                    - 2 -

In the alternative to the additions to tax pursuant to section

6653(b)(1) and (2) for 1984 and 1985, respondent determined the

negligence additions to tax pursuant to section 6653(a)(1) in the

respective amounts of $623 and $650, and under section 6653(a)(2),

in the respective amounts of 50 percent of the interest due on

$12,454 and $13,007.      In the alternative to the additions to tax

under section 6653(b)(1)(A) and (B) for 1986, respondent determined

a $1,122 addition to tax under section 6653(a)(1)(A), and an

addition to tax under section 6653(a)(1)(B) in the amount of 50

percent of the interest due on $22,442.

     All section references are to the Internal Revenue Code in

effect for the years under consideration.             All Rule references are

to the Tax Court Rules of Practice and Procedure.

     The   issues   for     decision     are:    (1)    Whether    petitioners

underreported their income and overstated Schedule C deductions for

1984, 1985, and 1986, as determined by respondent; (2) whether

petitioners are liable for the additions to tax for fraud pursuant

to section 6653(b) for 1984, 1985, and 1986; or in the alternative,

whether petitioners       are   liable   for    the    additions   to   tax   for

negligence pursuant to section 6653(a); (3) whether petitioners are

liable for the additions to tax for substantial understatements of

income tax pursuant to section 6661 for 1984, 1985, and 1986; and

(4) whether the statute of limitations bars respondent's assessment

and collection of petitioners' Federal income taxes.
                                 - 3 -

                          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.

Background

     Petitioners, husband and wife, resided in Sterling, Virginia,

at the time they filed their petition.       They timely filed joint

Federal income tax returns for 1984, 1985, and 1986, the years

under consideration.   Respondent mailed petitioners a notice of

deficiency with respect to all years under consideration on August

26, 1993.

     Robin F. Jenkins (hereinafter referred to in the singular as

petitioner) obtained a high school diploma and completed one year

of college. While in college, petitioner studied wildlife biology;

he did not take any tax or accounting courses.    He left college and

became a mason by trade.     During the years under consideration,

petitioner was self-employed; he owned and operated a business

known as Field Masonry.

     Anne F. Jenkins (Mrs. Jenkins) also graduated from high school

and completed one semester of college study.     She did not take any

tax or accounting classes.

Audit

     Respondent's revenue agent, Kathleen Bellamy (Ms. Bellamy),

was assigned to audit petitioners' Federal income tax returns for

the years under consideration.     Ms. Bellamy first met petitioners
                                            - 4 -

in December 1987 at their residence.                        She began the audit by

examining petitioners' bank deposits in order to identify possible

unreported    income.          Ms.          Bellamy    examined      deposit      slips,

petitioner's business records, and the records of some of the

vendors with whom petitioner dealt.                   Ms. Bellamy discovered that

substantial amounts of income were omitted from, and deductions

were improperly claimed on, petitioners' 1984, 1985, and 1986

income tax returns.

Petitioner's Brown Books

      During their first meeting, Ms. Bellamy questioned petitioner

about his business books and records; he told her that there were

no books to examine.        Subsequently, petitioner provided her with

bank statements, canceled checks, a bag of invoices, and sheets of

notebook paper containing unexplained figures.

      In point of fact, petitioner used "brown books" to record

income and profit, and to compile summary sheets of his Field

Masonry business activities.                 The brown books were also used to

calculate     the     amount       of        petitioners'        annual    charitable

contributions.

      One of respondent's special agents accompanied Ms. Bellamy to

petitioners' home for a second meeting regarding possible criminal

violations.    At that time, petitioner provided the agents with one

of   his   brown    books   from        a    year     prior    to   the   years   under

consideration       and   showed     them       how    he     computed    his   income.

Petitioner told them that the brown books and summary sheets for
                                      - 5 -

the years under consideration had been destroyed because he had

given them to his children to color on.            He also expressed his

belief that records more than 3 years old should be destroyed.

     Because    of   the   possible    criminal   violations,   petitioners

retained a lawyer.     Their lawyer had possession of the brown books

for the years under consideration. The brown books were ultimately

turned over to respondent's special agent who provided them to Ms.

Bellamy.

Tax Return Preparation

     Petitioner prepared petitioners' tax returns for the years

under consideration.        Mrs. Jenkins did not participate in the

completion of the returns.        Petitioners paid no income tax for

1982, 1983, 1985, and 1986; they paid $240 in income tax for 1984.

     Ms. Bellamy primarily used the bank deposit analysis (and then

made modifications as additional information was provided) to

identify petitioners' unreported Schedule C income for 1984, 1985,

and 1986.    Petitioner did not report all of his gross receipts from

his Field Masonry business.

     When the audit began, petitioner wrote a $25,000 personal

check, payable to the Internal Revenue Service, and gave it to Ms.

Bellamy because he was certain that petitioners had underreported

their income and owed at least that amount.

     a.     1984 Joint Federal Income Tax Return

     Petitioners claimed, among others, the following expenses as

Schedule C deductions on their 1984 return:
                               - 6 -

               Advertising...................$416
               Dues and publications......... 111
               Legal and professional ....... 919
               Office expense................ 432
               Travel and entertainment...... 693
               Utilities and telephone....... 611
               Work clothes.................. 473
               Security guard................ 183

Petitioners could not substantiate the advertising expense.   Under

the category dues and publications, petitioners deducted the dues

paid to petitioners' homeowners association, and amounts paid for

the disposal of household trash.       The legal and professional

expense was for a $50 stuffed deerhead that petitioner gave to an

accountant for preparing petitioners' 1979 income tax return, and

$869 of family doctor bills.     Petitioners deducted, as office

expense, $198 for cassette tapes and a tape player.   They deducted

a $500 color television set and a family trip to Williamsburg,

Virginia, as travel and entertainment.    Petitioners deducted home

utility bills under the utilities and telephone category, and a

portion of the deduction was allowed by respondent.      Under the

category of work clothes, petitioners deducted personal clothing

purchased by petitioner during 1984.     The security guard expense

consisted of dog food and a license for the family dog.          In

addition to these Schedule C deductions, petitioners deducted $382,

which was paid for hazard insurance on their home, as a Schedule A

medical and dental expense.

     b.   1985 Joint Federal Income Tax Return

     Petitioners claimed, among others, the following expenses as

Schedule C deductions on their 1985 return:
                                 - 7 -

            Advertising............................$ 496
            Travel and entertainment...............   324
            Supplies............................... 2,249
            Utilities and telephone................   588

The advertising expense consisted of two deerheads, which were

worth approximately $200 apiece.         The travel and entertainment

expenses consisted of fireworks, fishing, and motel costs.            Under

supplies, petitioners deducted a $1,575 video camera purchased for

both personal and business use, and deducted the costs of utilities

and telephone used at their residence.         Petitioners also deducted

$379 for dog food, veterinary bills, and a chain for their dog.

     c.    1986 Joint Federal Income Tax Return

     Petitioners claimed, among others, the following expenses as

Schedule C deductions on their 1986 return:

            Employee benefit program..............$ 3,356
            Mortgage interest..................... 14,277
            Supplies.............................. 5,365
            Security guard........................    682
            Contributions......................... 11,567

Petitioners could not substantiate the supplies deduction.             The

security   guard   expense   represented   a   fence   erected   to   house

petitioners' family dog.      The employee benefit program deduction

consisted of family doctor and medical expenses.             Petitioners

deducted $14,277 for home mortgage interest as a business expense.

The contribution deduction represented petitioners' charitable

contributions.     Petitioners also claimed a $1,588 jobs credit on

their 1986 Schedule C.

     In prior years, petitioners deducted their medical, home

mortgage interest, and charitable contribution expenses as Schedule
                                 - 8 -

A   itemized   deductions    rather   than   Schedule   C   deductions.

Petitioner deducted the aforementioned expenses on Schedule C of

their 1986 return because Schedule C provided them with greater tax

savings.

     Respondent determined that petitioners underreported their

income during each of the years in issue by:       (1) Underreporting

petitioner's masonry business receipts; (2) inflating business

deductions; and (3) changing Schedule A deductions to Schedule C

expenses.

1985 Loan Application

     In 1985, petitioner applied for a loan at the First American

Savings and Loan Association (First American).     On the application

form, petitioner listed his income as $4,000 a month.        He listed

$118 of monthly inheritance interest, and reported cash assets of

approximately $40,000.      The inheritance interest income was not

reported on petitioners' Federal income tax returns for the years

under consideration.    Petitioners' 1983 and 1984 tax returns were

attached to the bank loan application.         First American denied

petitioner a loan.

     Petitioner wrote a letter to First American following the

denial of the loan.    In the letter, he provided First American with

profit information for the first eight months of 1985. He reported

gross profit of $57,566 and net profit of $36,788.           Petitioner

obtained these figures using his brown books.
                                    - 9 -

Tithing

     During   the   years   under     consideration,         petitioners   made

charitable    contributions    based        on    tithing.       They   tithed

approximately 10 percent of petitioner's annual profits to their

church. Petitioner determined the amount to be tithed each year by

using his brown books.

     Ms. Bellamy met with petitioners after she had completed a

bank deposit analysis and reconstructed petitioners' expenses for

each of the years under consideration.             During this meeting, Ms.

Bellamy asked petitioners to review her calculations to see if they

agreed with the income and expense figures.            Petitioner suggested

that if Ms. Bellamy's figures matched petitioners' tithing, he

would agree with her numbers.    He asked Ms. Bellamy to calculate 10

percent of the amount she determined as his gross profit.                  Ms.

Bellamy did so, and the result was close to the amount petitioners

tithed.    Petitioner agreed with the agent's income analysis.              He

told the agent that he always computed gross profit accurately for

tithing because "I'd never cheat the Lord."

                                OPINION

Issue 1.   Unreported Income

     Every individual liable for tax is required to maintain books

and records sufficient to establish the amount of his or her gross

income. Sec. 6001; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991),

affd. 959 F.2d 16 (2d Cir. 1992).                Where a taxpayer fails to
                                     - 10 -

maintain or produce adequate books and records, the Commissioner is

authorized to compute the taxpayer's taxable income by any method

that clearly reflects income.              Sec. 446(b); Holland v. United

States, 348 U.S. 121 (1954); Webb v. Commissioner, 394 F.2d 366,

371-372     (5th    Cir.    1968),   affg.     T.C.      Memo.   1966-81.    The

reconstruction of income need only be reasonable in light of all

surrounding facts and circumstances. Giddio v. Commissioner, 54

T.C. 1530, 1533 (1970); Schroeder v. Commissioner, 40 T.C. 30, 33

(1963).     The Commissioner is given latitude in determining which

method of reconstruction to apply when a taxpayer fails to maintain

records.    Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989).

      For    the    years   under    consideration        herein,   petitioner

maintained inadequate books and records. As a result, respondent

was   required     primarily   to    use    the   bank    deposit   method    to

reconstruct petitioners' income.           "The bank deposit method assumes

that all money deposited in a taxpayer's bank account during a

given period constitutes taxable income."             DiLeo v. Commissioner,

96 T.C. at 868.      Bank deposits are prima facie evidence of income.

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

Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2 (6th Cir.

1977).    In analyzing a bank deposits case, deposits are considered

income when there is no evidence that they represent anything other

than income.       Price v. United States, 335 F.2d 671, 677 (5th Cir.

1964); United States v. Doyle, 234 F.2d 788, 793 (7th Cir. 1956).
                                       - 11 -

      Because petitioners used a modified accrual accounting method,

Ms. Bellamy used the same method to calculate petitioners' income.

She   reconstructed       petitioners'       income     and    expenses    using    the

information she possessed.

      Petitioners failed to present evidence to refute respondent's

income determinations and to substantiate the deductions claimed.

In contrast, respondent has established that the underpayments

determined in the statutory notice of deficiency are correct.

Accordingly, we sustain respondent's determination both as to the

amounts    of    unreported       income    and   the      denial   of    Schedule    C

deductions for each of the years under consideration.

Issue 2.    Fraud Additions to Tax

      Respondent determined that petitioners are liable for the

additions to tax for fraud under section 6653(b)(1) and (2) for

1984 and 1985 and under section 6653(b)(1)(A) and (B) for 1986.

      For 1984 and 1985, section 6653(b)(1) provides that if any

part of any underpayment of tax required to be shown on a return is

due to fraud, there shall be added to the tax an amount equal to 50

percent    of    the    underpayment.       Section     6653(b)(2)       provides   for

additional interest with respect to the portion of underpayment

attributable to fraud.           For 1986, section 6653(b)(1)(A) imposes an

addition    to    tax    equal    to   75   percent     of    the   portion    of   the

underpayment      which     is     attributable       to      fraud,     and   section
                                   - 12 -

6653(b)(1)(B) provides for additional interest on the portion of

the underpayment attributable to fraud.

      Under section 6653(b)(1), applicable to 1984 and 1985, if

respondent proves that any part of the underpayment is attributable

to fraud, the addition to tax imposed by that section applies to

the entire underpayment, regardless of whether petitioners show

that some part of the underpayment is not attributable to fraud.

Sec. 6653(b)(1).      Under section 6653(b)(1)(A) and (B), applicable

to   1986,    if   respondent   establishes   that   any   portion   of   an

underpayment is attributable to fraud, the entire underpayment is

to be treated as attributable to fraud, except with respect to any

portion of the underpayment that petitioners establish is not

attributable to fraud. Sec. 6653(b)(2).

      Fraud is intentional wrongdoing on the part of the taxpayer

with the specific purpose to evade a tax believed to be owing.

McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121

(5th Cir. 1975).      To support fraud, respondent has the burden of

proving, by clear and convincing evidence, that petitioners have an

underpayment for each year, and that some part of the underpayment

is due to fraud.     Sec. 7454(a); Rule 142(b); Katz v. Commissioner,

90 T.C. 1130, 1143 (1988); Otsuki v Commissioner, 53 T.C. 96, 105

(1969).      This burden is met if respondent shows that petitioners

intended to evade taxes known to be owing by conduct intended to

conceal income, mislead, or otherwise prevent the collection of
                                     - 13 -

taxes.   Stoltzfus v. United States, 398 F.2d 1002, 1004 (3rd Cir.

1968); Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).

     For purposes of the fraud addition, an underpayment of taxes

can be accomplished by an overstatement of deductions as well as by

an omission of income.        Estate of Temple v. Commissioner, 67 T.C.

143, 161 (1976).      Petitioners failed to report substantial amounts

of Schedule C income.        Further, they inflated business deductions

by deducting practically everything they purchased (except food) as

a Schedule C expense.        In addition, they manipulated income and

expenses to evade self-employment tax.                Thus, respondent has

proven, by clear and convincing evidence, that an underpayment of

tax existed with respect to each of the years under consideration.

     Next,     respondent     must     prove   that   a   portion   of    such

underpayment    was    due    to   fraud.      Professional    Services    v.

Commissioner, 79 T.C. 888, 930 (1982).           Fraud is never presumed,

but must be affirmatively established by clear and convincing

evidence.    Beaver v. Commissioner, 55 T.C. 85, 92 (1970).          Because

direct evidence of fraud is rarely available, fraud may be proved

by circumstantial evidence.          Spies v. United States, 317 U.S. 492,

499 (1943).     The existence of fraud is a factual question to be

determined upon a consideration of the entire record. Grosshandler

v. Commissioner, 75 T.C. 1, 19 (1980); Gajewski v. Commissioner, 67

T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383

(8th Cir. 1978).      However, the mere failure to report income is not
                                 - 14 -

sufficient to establish fraud.      Merritt v. Commissioner, 301 F.2d

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

     The courts have listed several indicia or "badges of fraud"

from which fraudulent intent can be inferred.        These include: (1)

Understating income; (2) inadequate books and records; (3) failure

to file tax returns; (4) implausible or inconsistent explanations

of behavior; (5) concealment of assets; (6) failure to cooperate

with tax authorities; (7) engaging in illegal activities; (8) an

intent to mislead which may be inferred from a pattern of conduct;

(9) lack of credibility of the taxpayer's testimony; and (10)

dealings in cash. Bradford v. Commissioner, 796 F.2d 303, 307 (9th

Cir. 1986), affg. T.C. Memo. 1984-601; Recklitis v. Commissioner,

91 T.C. 874, 910 (1988); Grosshandler v. Commissioner, supra at 20.

These "badges of fraud" are nonexclusive.       Miller v. Commissioner,

94 T.C. 316, 334 (1990).    Although no single factor is necessarily

sufficient to establish fraud, the combination of a number of

factors constitutes persuasive evidence.       Solomon v. Commissioner,

732 F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo.

1982-603.    The taxpayer's background and the context of the events

in question may be considered as circumstantial evidence of fraud.

Spies   v.   United   States,   supra   at   497.   The   sophistication,

education, and intelligence of the taxpayer also are relevant to

this determination.    Halle v. Commissioner, 175 F.2d 500, 503 (2d
                               - 15 -

Cir. 1949), affg. 7 T.C. 245 (1946); Niedringhaus v. Commissioner,

99 T.C. 202, 211 (1992).

     Fraud cannot be imputed from one spouse to another.    In the

case of a joint return, section 6653(b)(4) (for taxable years 1984

and 1985) and section 6653(b)(3) (for taxable year 1986) provide

that section 6653(b) shall not apply with respect to a spouse

unless some part of the underpayment is due to fraud by such

spouse.   Hence, respondent must prove fraud as to each spouse

charged with liability for the addition to tax.      Hicks Co. v.

Commissioner, 56 T.C. 982, 1030 (1971), affd. 470 F.2d 87 (1st Cir.

1972); Stone v. Commissioner, 56 T.C. 213, 227-228 (1971).      We

shall first address whether any part of the underpayment for the

years under consideration is due to petitioner's fraud.

     a.   Petitioner

     Petitioner claims that the understatements and deductions on

the returns for the years under consideration were not fraudulent,

but rather resulted from his honest mistakes.      He claims that

mistakes were made because he thought every expense was deductible

and that the IRS audited all returns and corrected any inaccurate

items listed on the returns.     We find petitioner's claim to be

self-serving and, at least in part, incredible.

     Respondent has affirmatively established numerous badges of

fraudulent intent by petitioner as follows:
                                      - 16 -

       (1)       Understatements of Income

     Consistent        understatement         of     income        with     consequent

underpayment of taxes may be strong evidence of fraudulent intent

to evade taxes.       Patton v. Commissioner, 799 F.2d 166, 171 (5th

Cir. 1986), affg. T.C. Memo. 1985-148.

     Petitioner       considered     himself       to    be    a     successful      and

sophisticated businessman.         He operated Field Masonry prudently by

filing appropriate       tax   forms      for    each    of   his    employees,      and

presented    himself    at   trial     as    a   knowledgeable        and    competent

individual.      Nevertheless, he exhibited a pattern of substantially

understating      petitioners'     1984,     1985,      and   1986    income.     Also,

petitioner chose to deduct all personal and business expenses.

Personal expenses are not deductible.                Sec. 262.        A practice of

claiming personal expenses as business expenses has been held to

justify the imposition of the fraud addition to tax.                        See, e.g.,

Hicks Co. v. Commissioner, 56 T.C. 982, 1030 (1971), affd. 470 F.2d

87 (1st Cir. 1972); Ramsey v. Commissioner, T.C. Memo. 1984-251.

By attempting to convert nondeductible personal expenses into

deductible business expenses, petitioner fraudulently understated

petitioners' Federal income taxes for the years under consideration

through     an    overstatement      of     deductions.       See    Hicks     Co.    v.

Commissioner, supra at 1019.
                                   - 17 -

     Petitioner also excluded gross receipts and interest income

for each of the years under consideration.           He deliberately moved

Schedule A itemized deductions to Schedule C for increased tax

benefits. In fact, he offered Ms. Bellamy a $25,000 check, payable

to the IRS, at their first meeting because he was sure that

petitioners had understated income.         Moreover, petitioners paid no

income tax in 1985 and 1986, and only paid $240 in 1984.                  Thus,

respondent has proven that petitioner consistently understated and

underpaid petitioners' income tax for each year.

       (2)       Inadequate Books and Records

     Failure to maintain adequate books and records may be an

indicium of fraud. Grosshandler v. Commissioner, supra at 20.

Petitioner's brown books were inadequate. He was unable to use his

brown books or other records to substantiate any of petitioners'

expenses.    At trial, he attempted to defend many of the claimed

Schedule     C    deductions.      However,     he   did   not     keep     any

contemporaneous records to substantiate the expenses.            Petitioner

could not substantiate the expenses relating to the family trip to

Williamsburg, Virginia, the color television set, the family dog

expenses, the work clothes deduction, family medical bills, or the

household    trash    and   utilities   expenses.     Petitioner    did     not

maintain adequate books and records during 1984, 1985, and 1986.
                                   - 18 -

         (3)   Inconsistent Explanations of Behavior

      Petitioner testified that he used his brown books to calculate

petitioners' annual charitable contributions. He also claimed that

he used the brown books to prepare petitioners' tax returns.            The

figures on the returns, however, did not match the figures in the

books.    Petitioner asked Ms. Bellamy to take her figures and

calculate 10 percent of his gross profit for each year under

consideration. Petitioner agreed that Ms. Bellamy's income analysis

was correct because 10 percent of the gross profit calculated from

Ms.   Bellamy's    figures   approximated    petitioners'   tithing.    We

conclude that although petitioner used his brown books to calculate

petitioners' tithing, he chose not to use them when he prepared

petitioners' Federal income tax returns.

      The brown books also were used to complete a 1985 bank loan

application.      The   figures   reported   on   the   application    were

inconsistent with the figures petitioner listed on petitioners'

1985 Federal income tax return.        Petitioner was denied the loan

based on the application, which included petitioners' 1983 and 1984

income tax returns.      In a letter written to the bank, he tried to

explain why the reported income was so low by informing the bank

that he had a $36,788 profit during the first 8 months of 1985.          He

used his brown books to compute these figures.           Subsequently, he

reported no taxable income on the 1985 return.          Thus, petitioner's
                                   - 19 -

behavior concerning his calculation of tithing and in reporting

petitioners' income on the bank loan application was inconsistent

with the reporting of petitioners' income on the tax returns for

the years under consideration.

         (4)   Intent to Mislead

       Misleading   statements    to   an   investigating   agent   may   be

evidence of fraud.    See Gajewski v. Commissioner, 67 T.C. 181, 200

(1976), affd. without published opinion 578 F.2d 1383 (8th Cir.

1978).     Petitioner misled     Ms. Bellamy when he provided her with

details of his income.    During the audit, Ms. Bellamy indicated to

petitioner the importance of obtaining all relevant information so

that she could reconstruct petitioners' income. Petitioner refused

to permit Ms. Bellamy to review petitioners' 1983 Federal income

tax return.

       Petitioner claims that petitioners provided Ms. Bellamy with

the brown books for the years under consideration at the first

audit meeting, and that she took the books with her and later

returned them.      He further contends that his preparation of a

mileage log, completed during the audit and at Ms. Bellamy's

recommendation, is proof that the brown books were handed over to

her.     But he later claimed that the brown books were destroyed by

his children, and expressed a belief that it was useless to keep

records for longer than 3 years.       It took almost 2 years before Ms.
                                     - 20 -

Bellamy was given an opportunity to review photocopies of the 1984,

1985, and 1986 brown books, which were provided to her through

petitioners' counsel. We conclude that petitioner did not turn the

brown books over to Ms. Bellamy as asserted, and that he intended

to mislead Ms. Bellamy by withholding this information.

         (5)   Lack of Credibility of Petitioner's Testimony

     A taxpayer's lack of credibility, inconsistent testimony, or

evasiveness are factors in considering the fraud issue.          Toussaint

v. Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), affg. T.C.

Memo.    1984-25.    Portions   of    petitioner's   testimony   were   not

credible.      For   example,   petitioner    accused   Ms.   Bellamy   of

manufacturing a portion of his 1985 First American bank loan

application.     Furthermore, he testified that Ms. Bellamy did not

adequately inform petitioners about the statute of limitations

extension period, and that she lied about her handling of the brown

books.    We disbelieve petitioner's accusations.

         (6)   Failure to Cooperate with Tax Authorities

     A failure to cooperate with tax authorities is further proof

of fraud.      Rowlee v. Commissioner, 80 T.C. 1111, 1125 (1983).

Petitioner admitted that he was not cooperative with Ms. Bellamy

during one of their audit meetings, and that he once held a grudge

against the IRS.      At the second audit meeting, in which a special

agent accompanied Ms. Bellamy to petitioners' home, petitioner
                                        - 21 -

showed them a brown book from a year not under consideration and

explained    how     he    calculated         his     income.     Petitioner       was

uncooperative and evasive when asked to produce the brown books for

the years under consideration.               He was not able to explain the

numbers on his summary sheets, and stated that he could not read

his own writing.

     To summarize, the evidence in this case shows, clearly and

convincingly, that the entire underpayment for 1984, 1985, and 1986

is due to petitioner's fraud.                 Thus, we sustain respondent's

determination that petitioner is liable for the additions to tax

under section 6653(b) for 1984, 1985, and 1986.                       We now turn to

whether   any   part      of    the    underpayment      for    the     years    under

consideration is due to Mrs. Jenkins' fraud.

     b.   Mrs. Jenkins

     Mrs. Jenkins' testimony was not fully credible.                     Her support

of petitioner's claim that petitioner provided Ms. Bellamy with the

brown books for the years under consideration demonstrates that

part of her testimony was not plausible.                      We have found that

petitioner   never     provided        Ms.   Bellamy    with    the    brown    books.

Nonetheless,    we   are       not    inclined   to    hold    that    Mrs.    Jenkins

committed fraud based solely on her lack of credibility.                            As

previously stated, fraud is never presumed; even if the taxpayer's

testimony is not credible in all respects, we may still be left
                                  - 22 -

with no more than a suspicion of fraud.         Rinehart v. Commissioner,

T.C. Memo. 1983-184.    We will not sustain respondent's finding of

fraud when we are only left with a suspicion of fraud.               Green v.

Commissioner,   66    T.C.    538,     550   (1976);    see   Comparato     v.

Commissioner, T.C. Memo. 1993-52.

     The record contains no evidence to indicate that Mrs. Jenkins

was involved in petitioner's Field Masonry business.             Respondent

failed to show that Mrs. Jenkins was responsible for understating

income, for maintaining petitioner's brown books, or that she was

in any way involved in claiming the unsubstantiated deductions.

Also, respondent produced no evidence to show that Mrs. Jenkins

concealed   assets,   was    engaged   in    illegal   activities,    or   had

dealings in cash.     Petitioner completed petitioners' 1984, 1985,

and 1986 tax returns by himself.        Mrs. Jenkins signed the returns

without glancing at any of the reported figures.

     Respondent has not affirmatively established by clear and

convincing evidence that Mrs. Jenkins intended to evade taxes.              We

cannot conclude on this record that Mrs. Jenkins committed fraud,

where respondent has failed to adduce evidence showing intentional

wrongdoing.

     We now turn to whether petitioners are liable for additions to

tax for negligence under section 6653(a).
                                   - 23 -

Issue 3.    Negligence Additions to Tax

     Petitioner and Mrs. Jenkins filed joint Federal income tax

returns for the years under consideration.               The liability for

additions to tax for taxpayers who file jointly is joint and

several.    Sec. 6013(d)(3); Pesch v. Commissioner, 78 T.C. 100, 129

(1982). As previously stated, fraud must be proved for each spouse

individually.     But negligence additions are imposed jointly and

severally.

     We held above that petitioner is liable for the additions to

tax for fraud for all years under consideration.             If we were to

hold Mrs. Jenkins liable for the negligence additions to tax for

such years, petitioner would then be jointly and severally liable

for such addition.          But a taxpayer cannot be liable for the

addition to tax for fraud and also the addition to tax for

negligence.    Sec. 6653(b).      See Minter v. Commissioner, T.C. Memo.

1991-448;     Congelliere    v.   Commissioner,   T.C.    Memo.   1990-265.

Therefore, having found petitioner liable for fraud under section

6653(b) for each year under consideration, we cannot hold Mrs.

Jenkins liable for negligence under section 6653(a) on the same

underpayments.
                                      - 24 -

Issue 4. Substantial Understatement Additions to Tax

     The next issue is whether petitioners are liable for the

additions to tax for substantial understatements of income tax

pursuant to section 6661 for the years in issue.                  Section 6661(a)

imposes an addition to tax on any underpayment attributable to a

substantial understatement of income tax.                An understatement of

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

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

section 6661 addition to tax is 25 percent of the underpayment

attributable to such understatement. The understatement is reduced

if it is based on substantial authority or is adequately disclosed

on the return or in a statement attached to the return.

     With respect to the additions to tax under section 6661, the

burden of proof is on petitioners.              Rule 142(a); King's Court

Mobile   Home   Park   v.   Commissioner,      98   T.C.    511,     517    (1992).

Petitioners     presented   no   evidence      showing     that    they    did   not

substantially understate their income taxes. Their understatements

for the years in issue were neither based on substantial authority

nor adequately     disclosed     on    their   returns     or   in   a    statement

attached to their returns.        Accordingly, we sustain respondent's

determination as to these additions to tax.

Issue 5.   Statute of Limitations

     The final issue is whether respondent is barred by the statute

of limitations from assessing and collecting petitioners' Federal

income taxes for the years under consideration.
                                     - 25 -

     As    a   general   rule,     the    Commissioner          must     determine    a

deficiency within 3 years after a return is filed.                     Sec. 6501(a).

The statute of limitations is suspended by respondent mailing the

notice of deficiency.       Sec. 6503(a)(1).          Here, respondent's notice

of deficiency was mailed to petitioners on August 26, 1993, more

than the 3 years after the returns were filed.                   However, section

6501(c)(1) provides an exception to the general rule.                     It permits

respondent to assess a deficiency at any time if the taxpayer files

a   fraudulent    return.    Based       on   our     holding     that     petitioner

fraudulently filed petitioners' Federal income tax returns for each

of the years under consideration, section 6501(c)(1) extends the

period    of   limitations   for     each     year.      Thus,     the     notice    of

deficiency is timely.

     To reflect the foregoing,


                                                      Decision will be entered

                                              under Rule 155.
