                  T.C. Memo. 1996-184



                UNITED STATES TAX COURT



    ARA ERESIAN AND EVELYN ERESIAN, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 21523-92.                    Filed April 16, 1996.



      Held: respondent's deficiency determinations are
sustained; held, further, petitioners are liable for
additions to tax under sec. 6651(a)(1), I.R.C., sec. 6653
(a)(1), I.R.C., and sec. 6661, I.R.C., for 1988; and for the
accuracy-related penalty under sec. 6662(a), I.R.C., for
1989.



Ara Eresian and Evelyn Eresian, pro se.

Paul Colleran, for respondent.
               MEMORANDUM FINDINGS OF FACT AND OPINION

     NIMS, Judge:    Respondent determined the following income tax

deficiencies, additions to tax, and penalty with respect to

petitioners' 1988 and 1989 taxable years:

                                 Additions to Tax          Penalty
Taxable                 Sec.         Sec.         Sec.       Sec.
 Year   Deficiency    6651(a)(1)    6653(a)(1)    6661      6662(a)


 1988      $28,495      $2,479      $1,425      $7,124         -0-
 1989        4,550         -0-         -0-        -0-         $910

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years in

issue.    All Rule references are to the Tax Court Rules of

Practice and Procedure.

     After concessions, the issues for decision are:

     1.   Did petitioners have unreported income of $61,353 and

$4,666 for 1988 and 1989, respectively?

     2.   Did petitioners have unreported interest income of $84

and $214 for 1988 and 1989, respectively?

     3.   Did petitioners have a loss of $350,000 on the

disposition of real estate in 1988?
                                - 3 -


     4.   How much are petitioners entitled to deduct as Schedule

A itemized deductions for 1988 and 1989?       The following amounts

are in contention:

     Category                           1988      1989

     Mortgage Interest............ $2,046        $2,364
     Personal Interest............    776           334
     Charitable Contributions..... 7,763          6,493
     Legal Expenses............... 5,897          5,045
     Total                         16,482        14,2351


     5.   Did petitioners receive $5,409 in Social Security

benefits during 1988, of which $2,705 should have been included

in gross income under section 86(a)(1)?

     6.   Are petitioners liable for the addition to tax for late

filing under section 6651(a)(1) for 1988?

     7.   Are petitioners liable for the addition to tax for

substantial understatement of income tax liability under section

6661 for 1988?

     8.   Are petitioners liable for the addition to tax for

negligence under section 6653(a)(1) for 1988 and for the

negligence penalty under section 6662 for 1989?

     Some of the facts have been stipulated and are found

accordingly.    The stipulation of facts and attached exhibits are

incorporated herein by this reference.



     1
          This number comes from respondent's Notice of
Deficiency. There is a $1 addition error.
                               - 4 -


                         FINDINGS OF FACT

     Petitioners resided at 62 Westwood Road, Shrewsbury,

Massachusetts, at the time they filed their petition.   During the

years in issue, petitioners filed joint returns.   Their 1988

return was not filed until January 31, 1990.

     Petitioner wife, Evelyn Eresian (Evelyn), has been a title

examiner for approximately 54 years, and for several years,

including 1988 and 1989, she has owned one-third of Hobbs

Abstract Company.   Petitioners reported $58,000 of wages from the

company for 1989.   They also reported $83,000 of wages in 1988,

but the source of the 1988 wages is uncertain.

     During the years in issue, Evelyn and her son, Ara Eresian,

Jr. (Ara), held as trustees four rental properties, most improved

with apartment houses.   At least one of the properties, 16 Ripley

Street, Worcester, Massachusetts, was completely rented as of

January 28, 1988.   Its five apartments rented for a total monthly

rental of $2,050.   Nevertheless, none of the rental income from

any of these properties was reported on any Federal income tax

return for 1988 and 1989.   The trust owning the properties failed

to file Federal income tax returns for the years in issue, and

petitioners' reported no rental income on their own returns.

Moreover, while both Evelyn and Ara, the two trustees, attended

trial, they failed to identify the beneficiaries of the trust.
                                 - 5 -


     Petitioners failed to provide respondent with adequate books

and records.    Respondent, therefore, reconstructed petitioners'

1988 and 1989 gross income using the bank deposits method of

proof.    The following is a summary of respondent's analysis:

Deposits to Northeast
Savings Bank accounts:                    1988              1989

     1.    #1395781                       --               $6,245.22
     2.    #21 02 040311681               --                  740.00
     3.    #21 02 040194580           $19,350.52          107,302.59
     4.    #21 02 140784006           109,587.38            3,087.44
     5.    #21 00 144789746            10,481.00            5,647.00
           Total                      139,418.90          123,022.25

Less:
     1.    Transfers                     5,358.71          40,588.32
     2.    Funds available for
           deposit
             Wages less withholding   59,797.42            46,909.88
             IRA distributions         7,500.00            25,232.00
             Social Security           5,409.00             5,627.00
           Total                      78,065.13           118,357.20

Unexplained bank deposits:            61,353.77             4,665.05


     The $350,000 loss revolves around a real estate transaction

of petitioners' son, Ara.     On May 3, 1988, Ara established the

King Realty Trust.    Immediately afterward, the trust acquired

several properties on King Street and Oread Place in Worcester,

Massachusetts (the King Trust Properties).       The trust then, in

early May, encumbered the properties by mortgages with three

lenders.    The total amount of the encumbrances was $1,750,000.

     Later that same year, on November 14, 1988, one of the

lenders, Petron Mortgage Company Limited Partnership (Petron)
                                 - 6 -


initiated foreclosure proceedings against the King Trust

Properties.   (What became of the other lenders is unknown).

Petron then held a public foreclosure auction at which it was the

highest bidder, with a bid of $850,000.      The foreclosure deed

transferred the King Trust Properties to Petron on June 21, 1989.

     A little more than a month later, on August 7, 1989, Evelyn

filed a complaint against Petron, claiming that she was a junior

mortgagee and seeking to void Petron's foreclosure sale for

failure to give her proper notice.       Her claim to mortgagee status

rested on a $350,000 note and mortgage, both of which indicate

that they were executed contemporaneously with the formation of

the King Trust on May 3, 1988.    There is no credible proof that

Evelyn actually transferred $350,000 to the King Trust.

Moreover, the mortgage was not recorded until November 2, 1988.

At trial, she explained this delay, "I never hoped to get the

money back until this opportunity."      Evelyn also never attempted

to enforce this obligation.   She never received the principal or

interest due her; rather she received "love and affection".

                              OPINION

     Petitioners' testimony is internally inconsistent and

inconsistent with other evidence.    Evelyn testified that she had

no real estate interest during 1988 and 1989, but later testified

that she and her son held four properties in trust and that she

was part owner of the King Trust Properties.      Furthermore, while
                               - 7 -


she claimed that she was a mortgagee in her suit against Petron,

she now claims that she had an equity interest in the King Trust

Properties.

     Some of the documents in evidence dealing with Evelyn's

interest in the King Trust Properties are inherently

contradictory.   Some of the documents support her claim as a

mortgagee, but because she now claims an equity interest, she

points to other documents.   One of these documents, entitled

"Agreement to Form a Joint Venture", has an execution date of

August 3, 1988, which precedes Evelyn's suit against Petron by

more than a year.   The document purports to make her a 25-percent

partner in the King Street venture in return for forgiveness of

its $350,000 indebtedness to her.   She asserts that this

agreement entitles her to a $350,000 loss from the foreclosure

sale.

     Petitioners' testimony was also evasive.   Evelyn, while a

trustee of several rental properties, denied knowing who the

beneficiaries of the trust were or who collected the rent.

Presumably the other trustee, her son Ara, would have known this

information, but while he was at the trial, he failed to testify.

When Evelyn was asked about one of the properties, 10 Bourne

Street, Worcester, Massachusetts, she recognized the property as

a three-family home, but then responded, "I don't remember.     I

had something to do with it, but I don't remember in what
                                - 8 -


capacity."   After respondent showed her a deed which indicated

that she had owned the property prior to December 23, 1987, and

respondent asked if the deed refreshed her memory, she replied,

"No, it doesn't."   When questioned further, she finally admitted

that she had owned the property, but she asserted, "I haven't

even been on that property."

     We find no flaw in respondent's reconstruction of

petitioners' income using the bank deposits method, and

petitioners have pointed to none.   The use of the bank deposits

method for computing income has long been sanctioned by the

courts.    When a taxpayer keeps no books or records and has large

bank deposits, the Commissioner is not arbitrary or capricious in

resorting to the bank deposits method.    DiLeo v. Commissioner, 96

T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992).   Because

petitioners failed to produce books and records, respondent

reconstructed income from petitioners' bank deposits.    Respondent

added petitioners' deposits together, identified any deposits

which represented interaccount transfers, and subtracted the

known funds that petitioners had available during the years for

deposit.   Petitioners have failed to show that respondent

improperly reconstructed their gross income.

     Petitioners, while bearing the burden of proof, Rule 142,

have introduced no credible evidence that disproves any element

of respondent's deficiency determination--no books or records and
                                - 9 -


no underlying documentation.    Respondent's determination is,

therefore sustained as to the inclusion of unreported income from

an unknown source of $61,353 and $4,666 in 1988 and 1989,

respectively, unreported interest income in the amounts of $84

and $214 for 1988 and 1989, respectively, and the disallowance of

the $350,000 loss for 1988.    Similarly, respondent's

determination is also sustained as to itemized deductions in the

amounts of $16,482 and $14,235 for 1988 and 1989, respectively,

and taxable Social Security benefits in the amount of $2,705 for

1988.

     Respondent determined an addition to tax for late filing of

petitioners' income tax return for 1988 under section 6651(a)(1)

in the amount of $2,479.   Petitioners filed their 1988 return,

the extended due date of which was October 15, 1989, on January

31, 1990.   They have offered no explanation for this lateness.

Petitioners are, therefore, liable for the addition to tax for

late filing as determined by respondent.

     Respondent also determined an addition to tax for

substantial understatement of income tax liability for 1988 under

section 6661 in the amount of $7,124.    Because we have sustained

respondent's deficiency determination, petitioners'

understatement exceeds 10 percent of the amount required to be

shown on their return, and it also exceeds $5,000.    Petitioners
                              - 10 -


are, therefore, liable for the addition to tax for substantial

understatement as determined by respondent.

     Respondent determined an addition to tax for negligence

under section 6653(a)(1) for 1988 in the amount of $1,425 and an

accuracy-related penalty for negligence under section 6662 for

1989 in the amount of $910.   Section 6662(a) imposes a 20-percent

accuracy-related penalty based upon any portion of an

underpayment of tax required to be shown on a return if, as

provided in section 6662(b), the underpayment is attributable,

among other things, to negligence or disregard of rules or

regulations, or any substantial understatement of income tax.

Section 6662(c) includes in the definition of "negligence" any

failure to make a reasonable attempt to comply with the Internal

Revenue title.   Petitioners have the burden of proof.   Bixby v.

Commissioner, 58 T.C. 757 (1972); see Grzegorzewski v.

Commissioner, T.C. Memo. 1995-49.   They have failed to present

any evidence refuting respondent's determination of negligence.

Respondent's determination of negligence is sustained.

     To reflect the above,

                                    Decision will be entered for

                               respondent.
