                         T.C. Memo. 1998-62



                       UNITED STATES TAX COURT



               LEO M. RYAN, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.    790-95, 3073-95,    Filed February 12, 1998.
                   3117-95, 3292-95,
                   3341-95.



     Leo M. Ryan, pro se in docket No. 790-05.

     Michael A. Mulroney and Marcus Schoenfeld, for petitioner

Ronald V. Giongo in docket No. 3073-95.2


1
     The following cases are consolidated herewith for purposes
of trial and opinion: Ronald V. Giongo, docket No. 3073-95; John
R. Wilson, docket No. 3117-95; James G. Cattalo, docket No. 3292-
95; and David A. Grove, docket No. 3341-95.
2
      Also specially recognized as counsel for petitioner Giongo
are the following students at Villanova Law School Tax Clinic,
Philadelphia, Pennsylvania: Edward Bernatavicius, Gregory Doran,
Patricia Meise, Greg Platt, Rhon C. Reid, Anthony Scardino, Jode
Shaw, Lisa Sher, Gary Sica, and Rachel M. White.
                                  - 2 -


       Christopher S. Wilson, for petitioner John R. Wilson in

docket No. 3117-95.

       James G. Cattalo, pro se in docket No. 3292-95.

       David A. Grove, pro se in docket No. 3341-95.

       Keith L. Gorman, George D. Curran, and Linda A. Love, for

respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

       WELLS, Judge:3    Respondent determined deficiencies in, and

additions to, petitioners' Federal income taxes as follows:

Petitioner Leo M. Ryan (Ryan), docket No. 790-95

                                          Additions to Tax
                                Sec.            Sec.         Sec.
Year        Deficiency       6653(b)(1)      6653(b)(2)      6661
                                                  1
1982         $44,993          $22,497                        $11,248
                                                  1
1983          81,653           40,827                         20,413
1
    Plus 50 percent of the interest due on the deficiency.

Petitioner Ronald V. Giongo (Giongo), docket No. 3073-95

                                          Additions to Tax
                                Sec.            Sec.         Sec.
Year        Deficiency       6653(b)(1)      6653(b)(2)      6661
                                                  1
1982         $45,764          $22,882                        $11,441
                                                  1
1983          56,567           28,284                         14,142
1
    Plus 50 percent of the interest due on the deficiency.



3
     These consolidated cases were tried by the late Judge Edna
G. Parker and reassigned to Judge Thomas B. Wells with the
consent of the parties for disposition on the existing record.
                                - 3 -


Petitioner John R. Wilson (Wilson), docket No. 3117-95

                                        Additions to Tax
                              Sec.            Sec.           Sec.
Year        Deficiency     6653(b)(1)      6653(b)(2)        6661
                                                1
1982         $46,574        $23,287                        $11,644
                                                1
1983          59,924         29,962                         14,981
1
    Plus 50 percent of the interest due on the deficiency.

Petitioner James G. Cattalo (Cattalo), docket No. 3292-95

                                        Additions to Tax
                              Sec.            Sec.           Sec.
Year        Deficiency     6653(b)(1)      6653(b)(2)        6661
                                                1
1982         $44,969        $22,485                        $11,242
                                                1
1983          77,862         38,931                         19,466
1
    Plus 50 percent of the interest due on the deficiency.

Petitioner David A. Grove (Grove), docket No. 3341-95

                                        Additions to Tax
                              Sec.            Sec.           Sec.
Year        Deficiency     6653(b)(1)      6653(b)(2)        6661
                                                1
1982         $48,302        $24,151                        $12,076
                                                1
1983          85,674         42,837                         21,419
1
    Plus 50 percent of the interest due on the deficiency.

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the taxable years before

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

Practice and Procedure.

       The following issues are to be decided with respect to

Giongo, Wilson, Cattalo, and Grove:4

4
       Ryan and respondent have entered into a stipulation of
                                                     (continued...)
                                - 4 -


     (1) Whether the respective petitioners failed to report

income from illegally received money or property in the taxable

years 1982 and 1983;5

     (2) whether the respective petitioners are liable for

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

the years 1982 and 1983;6 and

     (3) whether the respective petitioners are liable for the

addition to tax under section 6661 for 1982 and 1983.

                        FINDINGS OF FACT

     Some of the facts have been stipulated pursuant to Rule 91.

The parties' stipulations of fact are incorporated herein by

reference and are found as facts in the instant cases.   At the

time their respective petitions were filed in the instant cases,

all petitioners resided in Pennsylvania.




4
 (...continued)
settlement in which Ryan has conceded the issues presented in his
notice of deficiency, with the provision that the amounts of
unreported income are to be adjusted on the basis of this Court's
opinion as to the amounts of income received by the other
petitioners. Such an adjustment is necessary because of
respondent's protective position asserting that certain items of
income should be attributed to more than one petitioner.
5
     Each petitioner's liability for self-employment tax will be
a computational adjustment dependent on the outcome of this
issue. Petitioners do not argue against the application to them
of the self-employment tax per se, but that they did not receive
the underlying unreported income.
6
     Resolution of this issue will determine whether the period
of limitations under sec. 6501 has expired.
                               - 5 -


     During 1982 and 1983, the years in issue, petitioners were

Philadelphia police officers assigned to the 5 Squad.     The

Philadelphia Police Department was organized on a squad system

which included four line squads usually consisting of uniformed

officers (called 1 Squad, 2 Squad, etc.), the 5 Squad, and a 6

Squad.   The 5 Squad was a narcotics squad within the Philadelphia

Police Department which had authority to enforce the ordinances

of the City of Philadelphia and the laws of the Commonwealth of

Pennsylvania.   It also assisted in enforcement in surrounding

townships by assisting police from those townships.     The 5

Squad's headquarters were located at 39th Street and Lancaster

Avenue in Philadelphia (the unit).     The Philadelphia Police

Narcotics Unit headquarters were located in the Police

Administration Building (PAB) at 8th and Race Streets.     The 5

Squad was disbanded on or about February 1, 1984.

5 Squad Procedures

     If a police officer observed a drug transaction, that

officer could make an immediate arrest and confiscate the drugs.

Otherwise, an officer wishing to make an arrest could do so

through the use of a search warrant or through the undercover

purchase of illegal drugs.   The officer preparing the search

warrant was the "assigned officer" for that case.7



7
     Supervisors did not prepare search warrants.
                               - 6 -


     For the undercover purchase of illegal drugs, one option was

termed "letting the money walk", where the undercover police

officer would make the purchase, leave the premises, complete a

property receipt for the supposed drugs, and after analysis of

the substance, if positive, later arrest the seller with a

warrant.   The officers would not recover the money used to

purchase the drugs as the arrest was not immediate.   By letting

the money walk and establishing a relationship with that dealer,

it might be possible to apprehend individuals higher up in the

drug organization.   For larger purchases where the authority to

let the money walk was not available, a "buy-bust" could be used.

Once the dealer produced the drugs, the officer would arrest the

dealer and recover the purchase money.

     According to departmental procedure, Philadelphia police

officers prepared investigation reports for any drug searches or

purchases they conducted.   The assigned officer was responsible

for completing the investigation report.   Additionally, arrest

reports were prepared for persons arrested, and property seizure

reports were prepared for items seized from suspects.   Seized

items were taken to the evidence room, except that suspected

drugs were sent to the police chemical lab, where an analysis

reflecting the weights and types of drugs seized would be
                                - 7 -


performed.8   The weights of the drugs stated on these reports

were the officers' estimates.   Paperwork would be reviewed and

signed by two supervisors.   A copy of each of these reports was

required to be maintained at the Philadelphia Police Narcotics

Unit headquarters.

5 Squad Personnel

     Ryan and Cattalo were partners in 5 Squad for most of their

time on the squad and had been partners in 2 Squad prior to their

being transferred to 5 Squad during 1980 and 1979, respectively.

Grove joined 5 Squad during September or October of 1982 and

became the partner of Charles Hund (Hund) when Hund was assigned

to 5 Squad later during 1982.

     Giongo became a sergeant during December 1980, and at that

time, was transferred to 5 Squad to serve as supervisor.      Wilson

had the rank of lieutenant and was also a supervisor.      Both

Giongo and Wilson signed the investigation reports prepared by

Ryan, Cattalo, Grove, and Hund.

     Giongo's job as a supervisor on 5 Squad included preparing

daily attendance reports, giving assignments, going on searches,

and signing investigation reports.      Giongo never made buys,

worked with informants, or prepared warrants.      On searches, he

helped to secure the area, reducing the officers' chances of


8
     An analysis reflecting drug purity was not performed unless
requested.
                                 - 8 -


injury.   Giongo generally would stay in the central area of the

search location until a uniformed officer arrived to watch the

suspects and then would check on the other officers.     Depending

on the number of searches being conducted, a supervisor was not

always present on each search.

     Giongo reviewed the officers' warrants before they went to

the magistrate to see if there appeared to be probable cause for

the proposed search.   Giongo checked the reports for

completeness, especially of data used for statistical purposes

such as dates, times, property receipt numbers, and types of

crimes.   Giongo did not verify the facts contained in warrants or

other reports or check seized items against the items as listed

unless such items were physically present in the unit.    Giongo

signed investigation reports whether or not he had been present

on the day of the search.

     Giongo was assigned to police radio detail at the PAB from

June 29 until August 15, 1983, during the investigation of a

shooting in which he was involved.

Illegal Activities

     As will be set forth in further detail below, occasionally

some 5 Squad members appropriated to their own use money, drugs,

or other items they seized from the suspects.   The 5 Squad

members divided the appropriated money among the officers

present, their partners, and sometimes their supervisor(s);
                                 - 9 -


however, not all of the persons involved received equal amounts.

The officers arranged to have the appropriated drugs sold and

divided the proceeds, but they did not let Giongo or Wilson,

their supervisors, know about their appropriation and sale of the

drugs.     For certain types of drugs, such as cocaine, a cutting

agent was added to the drugs turned in for evidence, so that the

quantity submitted was roughly equivalent to what had been

seized.9    On the investigation reports and property receipts for

searches where money and drugs were appropriated, the officers

reported incorrect amounts of money and, sometimes, incorrect

weights of drugs seized to correspond with the quantity they

submitted.10

     Drug Dealers and Informants

     Hund came to 5 Squad from a narcotics line squad and had

participated in the appropriation and sale of drugs while on that

squad.     Scott Karasinski (Karasinski) became an informant for

Hund while Hund was on the 1 Squad narcotics unit.     In return for

information, Hund gave Karasinski some of the drugs and money

appropriated during searches.     Hund also had Karasinski sell some

of the drugs appropriated during searches.




9
     A cutting agent also was added to the drugs to be sold.
10
     The weights of drugs would not appear incorrect if a cutting
agent had been added to compensate for the amount appropriated by
the officers.
                              - 10 -


     William Gerace (Gerace) worked at Gerace Jewelers, a family

business started by his father.   He also manufactured and sold

methamphetamine.   Charles Hitchens (Hitchens) supplied Gerace

with P2P, the prime ingredient used in the manufacture of

methamphetamine, or with methamphetamine itself.   Gerace paid

Hitchens in cash, gold, diamonds, or methamphetamine.    Pursuant

to an arrangement Gerace had with Hund, Gerace gave Hund money,

drugs, or jewelry in exchange for protection, i.e., not getting

arrested, or for information on police activities.   In a similar

arrangement that Hitchens subsequently had with Hund and Grove,

Hitchens would give them money for protection or information.

The other petitioners did not know about such arrangements.

     Walter Roeder 1981 Search

     Walter Roeder (Roeder) sold illegal narcotics during the

early 1980's, including Quaaludes, P2P, and cocaine.    Roeder also

operated a garage for detailing cars.   He kept cash in his

pockets and in the oven, cabinets, and safe located in his home.

     On September 22, 1981, Cattalo obtained a search warrant for

Roeder's apartment, and Cattalo, Ryan, and Thomas Taggart

conducted the search.   The officers found small plastic bags with

white powder.   Roeder then arrived home carrying a bag containing

$40,000 in cash.   Cattalo suggested to Roeder that the officers

would turn the $40,000 over to the Internal Revenue Service

(IRS).   The officers also threatened to arrest both Roeder and
                                - 11 -


his fiancee, Betty.    Cattalo and Roeder then reached an agreement

whereby Roeder would keep $20,000, the officers would keep

$20,000, and the officers would neither tell Betty about Roeder's

drug dealing nor arrest either of them.     Betty was told that

Roeder was working undercover for the Drug Enforcement Agency and

that the search was a mixup; and neither Roeder nor Betty was

arrested.    However, the officers switched the wrappers on the

money and appropriated $30,000, instead of $20,000.

     William Gerace Search

     At some point, Hund, Grove, and Wilson conducted a search of

Gerace's house.     Hund called and warned Gerace in advance.

Wilson did not know that Hund had called Gerace.     No drugs were

found there.    Gerace offered them $3,000, but Wilson refused the

money.

     James Hampton Search

     During January 1984, Hund, Grove, Ryan, and Cattalo

conducted a search of the house of James Hampton.     Ryan had

obtained the warrant.     The officers found no drugs at Hampton's

house, but they confiscated number plays and arrested Hampton for

illegal gambling.     When Hampton would not open his safe, the

officers broke into it and appropriated the money contained

inside.     Ryan was responsible for distributing the appropriated

money.
                                    - 12 -


Petitioners' Financial Information

     Wilson advised 5 Squad members to buy stock and referred

several officers to his broker, William Johnson, at the brokerage

firm of Hopper Soliday & Co. (Hopper Soliday).            Generally, the

officers referred by Wilson would buy stock in the same companies

that Wilson bought.    The officers discussed the advantages of

placing assets in the names of their children.

     Petitioner Wilson

     Wilson bought and sold stocks regularly.            Wilson opened

custodial accounts for his three children.            The following

accounts were held at the brokerage firm Hopper Soliday:

                 Account Name                            Account No.

     John   R. Wilson                                       219395
     Lisa   DiWilliams1                                     220144
     J.R.   Wilson c/f Jennifer Wilson                      224206
     John   R. Wilson c/f Christopher S. Wilson             219283
     John   R. Wilson c/f Marc James Wilson                 219263
     1
      Lisa DiWilliams was Wilson's fiancee when the account was
opened; they married on May 16, 1982.

William Johnson dealt exclusively with Wilson on all of these

accounts.    The largest account in terms of dollar value was that

of Wilson himself.

     Wilson made the following cash transactions with Hopper

Soliday:

         Date             Account            Amount         Purpose

     Mar. 3, 1980     John R. Wilson     $1,410.00    Cash deposit
     Sept. 10, 1980   John R. Wilson     18,398.65    MCI shares
                                - 13 -

    Feb. 18, 1981    Lisa DiWilliams     1,900.00    Deposit for MCI & PECO
    Dec. 28, 1983    J.R. Wilson c/f     1,600.00    PECO shares
                       Jennifer Wilson
     Jan. 30, 1984   John R. Wilson      1,000.00    Cash deposit

All other transactions with Hopper Soliday were by check.

     The $18,398.65 cash payment on September 10, 1980, was a

partial payment for the purchase of 2,000 shares of MCI stock at

a total cost of $22,647.86.     The cash consisted of old bills in

denominations of twenties, fifties, and hundreds.           Thereafter,

the MCI stock split, and on December 23, 1982, Wilson sold 2,000

of the resulting MCI shares, receiving a net amount of $78,226.

     On June 30, 1982, Wilson purchased Philadelphia Electric Co.

(PECO) stock for $3,000.

     On or about February 9, 1984, Wilson withdrew the amount of

$8,359 from the account jointly held by Wilson and his wife Lisa

(Mrs. Wilson) at the Police and Fire Federal Credit Union

account.   On or about February 10, 1984, Wilson made a $13,000

deposit to the brokerage house of Quick & Reilly.           That deposit

consisted of nine $1,000 personal money orders from Philadelphia

Savings Fund Society and one $4,000 money order from Germantown

Savings Bank all dated February 10, 1984.           Wilson purchased the

$4,000 money order with cash.

     During the years in issue, Mrs. Wilson and Grove's wife

Maryann (Mrs. Grove) worked at the Police and Fire Federal Credit

Union.   During or about January of 1984, Wilson and Grove and
                               - 14 -


their wives went on a vacation to Rio de Janeiro.    The trip cost

approximately $900 to $1,000 per person.    Wilson gave Grove cash

for the Wilsons' fares.

     Petitioner Giongo

     On December 14, 1982, Giongo purchased 22 acres of

undeveloped real property in Huntington Mills, Pennsylvania, for

the purchase price of $13,650.    Giongo made an initial payment of

$3,650, plus $473 in closing costs, and undertook a $10,000

purchase money mortgage for the balance, with monthly payments of

$155.27.   The property was titled in the names of Giongo and his

wife.   The Giongos later located a trailer and constructed a dirt

road on the property.

     On November 25, 1983, Giongo purchased 30 shares of AT&T

stock in the name of Ronald V. Giongo, Sr., custodian for Ronald

V. Giongo, Jr., for the amount of $1,955.67 through William

Johnson at Hopper Soliday.

     Petitioner Cattalo

     Cattalo purchased MCI stock in his son's name.    By December

1981, Cattalo had purchased at least $5,000 of PECO stock in the

name of James G. Cattalo, custodian for James G. Cattalo, Jr.

Cattalo was the payee of a money order in the amount of $2,000

dated January 7, 1982.    On January 8, 1982, Cattalo deposited

$3,500 in cash into his bank account.    On December 14, 1982,
                                     - 15 -


Cattalo received a loan advance of $4,000 from the credit union.

      On August 6, 1983, Cattalo purchased a 1983 Ford cargo van

for $11,222.94.    Cattalo paid $5,000.94 in cash at the time of

the sale and financed the remaining $6,222.          The van as purchased

from the dealer was a stripped-down model, which Cattalo had

customized elsewhere.

      Petitioner Grove

      Grove opened accounts at Hopper Soliday for himself and his

wife, and for his daughters.         He conducted all the transactions

for these accounts.      He used William Johnson as his broker,

having been referred to him by Wilson.

     Grove made the following stock purchases through Hopper
Soliday:

                                                   Payment
    Date               Title Owner               Amount/Type         Stock

Sept. 10, 1980   David & Maryann Grove         $1,010.71   check   MCI
Nov. 22, 1982    David & Maryann Grove          1,001.35   check   Chronar
Feb. 7, 1983     D. Grove c/f Francine Grove    1,490.48   cash    Chronar
June 7, 1983     D. Grove c/f Francine Grove    2,123.04   cash    Contracap
Aug. 24, 1983    D. Grove c/f Jordan Grove      3,012.48   check   PECO, AT&T

The November 22, 1982, purchase of Chronar stock in the name of

David and Maryanne Grove was paid for by a check, dated November

19, 1982, written on the checking account of Alan Grove, Grove's

father.    On November 19, 1982, a $1,000 cash deposit was made

into the checking account of Alan Grove.

      On or about February 14, 1983, Grove purchased stock through

the brokerage house of Quick & Reilly by paying $2,590 in cash.
                                 - 16 -


On March 31, 1983, Grove purchased PECO stock for $5,000 in the

name of David A. Grove, custodian for Francine M. Grove.     On

April 5, 1983, Mrs. Grove signed a check from their joint

checking account to Quick & Reilly in the amount of $2,000.       On

September 19, 1983, check no. 138, made payable to AT&T, in the

amount of $3,000 was written on the checking account of Alan

Grove and used to purchase AT&T stock in the name of David Grove,

custodian for Jordan Ann Grove.

     On June 7, 1983, Grove entered into a contract to purchase a

1983 motor boat and trailer from Jack's Marine for $24,000.

Grove received $9,000 for the trade-in value of his 1977 motor

boat.     The remaining balance, after taxes and fees, to be paid

for the new boat was $15,820.     Grove made the following cash

payments to Jack's Marine for the new boat:

                     Date                  Amount

                 June 7, 1983               $100
                 June 13, 1983             4,500
                 Oct. 10, 1983             8,000
                 Dec. 19, 1983             1,000
                 Jan. 4, 1984              1,200
                 May 14, 1984              1,285

        On August 6, 1983, Grove signed a Deposit Receipt and

Agreement of Sale with United Farm Agency to purchase 29 acres in

Bradford County, Pennsylvania, for $18,000.     On August 8, 1983, a

$1,800 cash deposit was made into the checking account of Alan

Grove at East Girard Saving Bank.     On the same date, check no.
                                - 17 -


134, made payable to United Farm Agency, in the amount of $1,800

was written on the checking account of Alan Grove for the

required deposit on the land.    The purchase of the property was

never consummated, and on August 30, 1983, a check in the amount

of $1,800 made payable to Grove was issued by United Farm Agency.

The $1,800 check was endorsed by Grove, and on September 19,

1983, deposited along with $8,000 cash into the checking account

of Alan Grove.

     During September 1983, Grove and Alan Grove decided to

purchase real estate located in Sullivan County, Pennsylvania

(the Sullivan County property), from James Bonnano for $30,000.

On September 17, 1983, check no. 137, made payable to James

Bonnano, in the amount of $1,000 was written on the checking

account of Alan Grove.    On October 11, 1983, a cash deposit of

$2,000 was made into the checking account of Alan Grove.

     Prior to settlement, Grove delivered $10,000 in cash to

James Bonnano in two installments of $5,000 each.    The settlement

sheet for the Sullivan County property reflects a contract sale

price of $20,000.   It also reflects that $9,945.01 was paid at

settlement on October 28, 1983.    The amount was paid as follows:

certified check nos. 140 and 141 in the amounts of $5,000 and

$3,000, respectively, written on the account of Alan Grove, and a

$1,945.01 cash payment.    A $10,000 mortgage was obtained from
                                 - 18 -


Northern Central Bank by Grove and his wife; Grove represented

the purchase price to the bank as $20,000.



           Petitioner Ryan

     The following cash deposits were made into the joint account

of Ryan and Nancy Ryan, who was then his wife, at First

Pennsylvania Bank:

                     Date                 Amount

                Sept. 24, 1981             $600
                Sept. 29, 1981            5,600
                June 15, 1983             5,000
                June 27, 1983             4,550
                July 8, 1983              1,000

On October 25, 1983, Ryan entered into an agreement to purchase a

1984 Oldsmobile Cutlass for $18,287.32.   On December 12, 1984,

Ryan entered into an agreement to trade in his 1984 Oldsmobile

Cutlass and purchase a 1982 Oldsmobile Firenza for $4,233.70.

Hund's Financial Information

     Hund made the following purchases of stock through Hopper

Soliday in the names of Charles and Patricia Hund:

    Date          Payment Amount/Type              Stock

Feb. 11, 1983    $9,462.08   cash         Arlen Realty, Chronar
Feb. 23, 1983     1,233.13   cash         Chronar
May 12, 1983      1,598.47   cash         Solid State Scientific
June 7, 1983      1,456.19   cash/check   Contracap
June 29, 1983     2,534.76   cash         Royal Palm Beach Colony
                              - 19 -


Hund used William Johnson as his broker, having been introduced

to him by Wilson.

Ryan's Criminal Indictment and Convictions

     During September 1981, Ryan staged a phony burglary at his

house.   He then filed a false police report and a false claim

with his insurer, which, in March of 1982, after Ryan obtained

the assistance of an attorney, sent him a check for $14,000.

     Sometime during 1985 or 1986, Ryan was interviewed by the

Ethics Accountability Division (EAD) of the Philadelphia Police

Department about the activities of 5 Squad with regard to

possible corruption.   After discussing the interview with Wilson,

Ryan took steps to sue the city for harassment in order to deter

their investigation.   During early 1987, Ryan heard rumors about

his wife's cooperation in an investigation.   Soon thereafter, the

FBI searched his house and seized the items which Ryan had

reported as stolen.

     On February 10, 1987, a Federal grand jury returned an

indictment against Ryan.   The grand jury indicted Ryan for one

count of mail fraud and three counts of filing false tax returns

under section 7206(1) for the 1981, 1982, and 1983 taxable years.

The mail fraud charge arose from Ryan's obtaining the insurance

money from the phony burglary at his house.   The false returns

counts charged Ryan with willful and knowing omission of
                                - 20 -


substantial income derived from moneys obtained from drug dealers

during 1981 through 1983 and omission of the proceeds from the

false insurance claim received in 1982.    The ensuing criminal

case was Ryan v. United States, Criminal No. 87-52 (E.D. Pa.)

(Ryan's criminal case).   The trial of Ryan's criminal case was

held during May 1987.

     In preparation for the trial of Ryan's criminal case, some

of the 5 Squad members had numerous discussions as well as a few

meetings.    Some of the 5 Squad members, including Ryan, Cattalo,

Hund, Grove, and Wilson, among others, but not Giongo, met to

review discovery material.     Ryan, Cattalo, Hund, Grove, and

Wilson also attended a meeting held just prior to Ryan's taking

the stand.

     Ryan was convicted of one count of mail fraud and three

counts of filing a false tax return for the 1981 through 1983

taxable years.   After his conviction, Ryan agreed to cooperate

with the authorities in their investigation of 5 Squad.

Hund's Cooperation

     EAD also interviewed Hund about 5 Squad's appropriation of

money and drugs seized from suspects.    Hund informed Wilson of

the EAD interview, and Wilson suggested initiating a lawsuit to

slow down the investigation.    Hund talked to some lawyers about
                              - 21 -


the potential lawsuit, but did not file or join any suit.     After

Ryan's conviction, Hund began to cooperate in the investigation.

     During about March 1988, Hund entered into a pre-indictment

plea agreement wherein he agreed to plead guilty to one count of

conspiracy to distribute cocaine and one count of distributing

cocaine.   Hund also agreed to cooperate with the U.S. Attorney's

Office and to testify as requested by the U.S. Attorney's Office

in exchange for immunity from further criminal prosecution.

Other Petitioners' Criminal Indictments and Convictions

     On July 19, 1988, a Federal grand jury returned an

indictment against petitioners other than Ryan.   On September 13,

1988, a Federal grand jury returned a superseding indictment

against Giongo, Wilson, Cattalo, Grove, Richard Jumper (Jumper),

and Francis Hilt (Hilt).   That superseding indictment charged the

named defendants with varying counts including:   Engaging in

racketeering activity, conspiring to do so with the purpose of

using their power and authority as police officers to illegally

obtain money and property for personal gain; distribution and

possession with intent to distribute methamphetamine and cocaine;

conspiracy to obstruct justice; making false statements (i.e.,

perjury); and filing false tax returns under section 7206(1).

Each count charging the filing of a false return alleged that the

respective defendant willfully and knowingly filed a return that
                                    - 22 -


"he did not believe to be true and correct * * * whereas he then

and there well knew and believed that he received substantial

income in addition to that [reported] which included moneys

stolen or otherwise obtained from drug dealers and others."                 The

ensuing criminal case was Wilson v. United States, Criminal No.

88-282 (E.D. Pa.) (the Wilson case).         Grove, Giongo, Cattalo, and

Wilson were defendants in the Wilson case.

         The first trial of the Wilson case began on January 3, 1989,

and ended on March 10, 1989.        The jury was deadlocked after

approximately 5 days of deliberations, and the judge declared a

mistrial.      The second trial of the Wilson case began on October

2, 1989, and the jury returned its verdict on November 14, 1989.

         Jumper and Hilt were acquitted on all charges.           Giongo,

Wilson, Cattalo, and Grove were found guilty of engaging in a

pattern of racketeering and conspiracy to do so.            The individual

racketeering activities underlying these convictions for which at

least one petitioner was found guilty are listed below.
Search                Guilty
(Other)            Petitioner(s)             Act(s)

1980
Cipriani          Wilson, Cattalo   Robbery, Conspiracy

1981
Mingone           Wilson            Aiding and abetting bribery
                  Cattalo           Bribery, conspiracy

Roeder            Wilson, Giongo    Aiding and abetting bribery
                  Cattalo           Bribery, conspiracy

1982
Wolff             Grove, Cattalo    Robbery, conspiracy
                                    - 23 -

Wolff             Grove, Cattalo    Intent to distribute marijuana and
  (distribution                       cocaine, aiding and abetting
    of drugs)

Hitchens          Grove             Bribery, conspiracy
  (payment)       Cattalo           Bribery

Hitchens          Grove, Cattalo,   Robbery, conspiracy
                    Wilson
                  Giongo            Conspiracy

1983
Lees              Grove, Wilson     Robbery, conspiracy
                  Giongo            Conspiracy

Garrett           Grove, Cattalo    Intent to distribute cocaine,
  (distribution                       aiding and abetting
   of drugs)

Myles             Grove, Cattalo    Intent to distribute cocaine,
  (distribution                       aiding and abetting
   of drugs)

Kaminski          Grove, Cattalo,   Robbery, conspiracy
                    Wilson

Kaminski          Grove             Intent to distribute cocaine,
  (distribution                       aiding and abetting
   of drugs)      Cattalo           Aiding and abetting

Gerace            Grove, Cattalo    Bribery, conspiracy
  (payment)

Roeder            Grove, Cattalo,   Bribery, conspiracy
                    Wilson
                  Giongo            Aiding and abetting bribery

Pontarelli        Grove             Intent to distribute cocaine,
                                      aiding and abetting
                  Cattalo           Aiding and abetting




Search                Guilty
(Other)            Petitioner(s)             Act(s)

 Carr             Grove, Cattalo    Robbery, aiding and abetting,
                                      conspiracy
                  Wilson            Aiding and abetting
                  Giongo            Aiding and abetting

Sims              Grove, Cattalo,   Robbery, conspiracy
                    Wilson
                                    - 24 -

Tesylar           Grove, Cattalo    Intent to distribute methamphetamine,
  (distribution                       aiding and abetting
   of drugs)

Gonzales          Grove             Intent to distribute cocaine,
  (distribution                       aiding and abetting
   of drugs)


Baker             Grove, Cattalo,   Robbery, conspiracy
                  Wilson            Aiding and abetting, conspiracy

Baker             Grove, Cattalo    Intent to distribute cocaine,
  (distribution                       aiding and abetting
   of drugs)

Hitchens          Grove             Bribery, conspiracy
  (payment)

1984
Hampton           Grove, Cattalo    Robbery, conspiracy
                  Wilson            Aiding and abetting robbery, conspiracy
                  Giongo            Aiding and abetting robbery

        Grove and Cattalo were found guilty of possession with

intent to distribute methamphetamine with respect to the Tesylar

drugs.     Grove was found guilty of possession of cocaine with

intent to distribute with respect to the Gonzales drugs.              Grove

and Cattalo were found guilty of possession of cocaine with

intent to distribute with respect to the Baker drugs.

        On counts separate from the racketeering charges, Wilson was

found guilty of three counts of making false statements with

respect to his testimony at the trial of Ryan's criminal case

regarding the 1981 Roeder search (that he had no knowledge of

whether money was illegally obtained), the 1983 Roeder search

(that the total amount of money found was $13,000 and that no

safe was found), and the Carr search (that he had no knowledge of

money being stolen).       Cattalo was found guilty of three counts of
                              - 25 -


making false statements with respect to his testimony at the

trial of Ryan's criminal case regarding the 1981 Roeder search

(that no money was illegally obtained), the 1983 Roeder search

(that nothing was illegally obtained and that money found there

was only $10,000), and the Carr search (that the money found

totaled $13,500).

     Wilson, Grove, and Cattalo were found guilty of filing false

returns for the 1982 through 1984 taxable years under section

7206(1).   Giongo was found guilty of the same charge for the 1983

and 1984 taxable years, but not guilty for the 1982 taxable year.

     The District Court granted the Government's motion to mold

the jury's forfeiture verdict and for the entry of judgment of

forfeiture.   United States v. Wilson, 742 F. Supp. 905 (E.D. Pa.

1989), affd. without published opinion 909 F.2d 1478 (3d Cir.

1990).   As a result, Giongo, Wilson, Cattalo, and Grove were held

jointly and severally liable for $180,700, the amount the jury

determined the racketeering enterprise had derived from its

racketeering activity.   The District Court ordered petitioners

and Hund to pay restitution of $5,000 to James Carr; in

accordance with statutory provisions, they were held jointly and

severally liable for that amount.

Federal Income Tax Returns

     Petitioners each filed joint 1982 and 1983 Federal income

tax returns with their respective wives.   On their respective
                                - 26 -


returns, petitioners reported the following amounts of total tax:

     Petitioner             1982             1983

      Giongo               $4,360           $3,343
      Wilson               22,178            5,722
      Cattalo               2,932            2,326
      Grove                 6,158            4,599

Wilson reported net gain from the sale of stock in the amounts of

$66,633 and $3,919 for 1982 and 1983, respectively.

Respondent's Determinations

     Using the specific items method, respondent determined that

petitioners had additional gross receipts as follows:

     Petitioner        Taxable Year 1982    Taxable Year 1983

      Ryan                 $94,650                  $159,650
      Giongo                93,300                   121,600
      Wilson                94,650                   126,650
      Cattalo               94,650                   167,150
      Grove                 95,731                   177,150

Respondent granted each petitioner's spouse innocent spouse

status as to the deficiencies and additions to tax.   Respondent

mailed the respective notices of deficiency to petitioners on

December 1, 1994.

                                OPINION

I.   Unreported Income

     Burden of Proof

     Petitioners argue that the notices of deficiency in the

instant case are arbitrary and excessive and request that we

place upon respondent the burden of proof with respect to the

issue of the income tax deficiency determined against petitioners
                              - 27 -


based on unreported income.   In determining the amounts stated in

the notices of deficiency, respondent took a protective position,

attributing the same income to more than one petitioner.

     Generally, the notice of deficiency is afforded a

presumption of correctness, and the taxpayer has the burden of

proof as to the amounts of the deficiencies.   Rule 142(a);

Anastasato v. Commissioner, 794 F.2d 884, 886-887 (3d Cir. 1986),

vacating and remanding T.C. Memo. 1985-101.    The Court of Appeals

for the Third Circuit, to which an appeal of the instant cases

would lie,11 will not give effect to the presumption of

correctness without some predicate evidence connecting the

taxpayer to the charged activity.   Id. at 887; Gerardo v.

Commissioner, 552 F.2d 549, 554 (3d Cir. 1977), affg. in part,

revg. in part, and remanding T.C. Memo. 1975-341; Berkery v.

Commissioner, 91 T.C. 179, 195 (1988), affd. without published

opinion 872 F.2d 411 (3d Cir. 1989).    If the taxpayer rebuts the

presumption by showing the determination is arbitrary and

erroneous, the presumption disappears and the burden of going

forward shifts to the Commissioner, but the Court of Appeals for

the Third Circuit has held that the ultimate burden of proof or

persuasion remains with the taxpayer.    Anastasato v.

Commissioner, supra; Sullivan v. United States, 618 F.2d 1001,

1008 (3d Cir. 1980).   The Commissioner has the right to make

11
     See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445
F.2d 985 (10th Cir. 1971).
                              - 28 -


inconsistent determinations to protect the public fisc, as long

as none of the deficiencies has been collected and the

Commissioner acknowledges only one tax liability is due.    Gerardo

v. Commissioner, supra at 555-556.

     At trial, respondent's counsel stated respondent's intention

to ask the Court to decide the amounts of income each petitioner

received individually.   Accordingly, on brief respondent no

longer attributes the same dollar of income to more than one

petitioner and asserts the following amounts as petitioners'

respective unreported gross receipts:12

          Petitioner             1982         1983

            Giongo             $16,541       $9,425
            Wilson              16,541       26,275
            Cattalo             25,791       34,825
            Grove               25,833       48,075

     In Gerardo v. Commissioner, supra, the taxpayer was

convicted of conspiracy to operate a lottery between August 5,

1966, and February 3, 1967.   The Commissioner computed a

deficiency in Federal income tax based on the average daily gross

receipts of the lottery operation on February 2 and 3, 1966,

which were projected over the period from April 4, 1966, through

12
     These figures represent the totals of respondent's primary
assertions as to the way income from each search was divided.
Generally, respondent has asserted that each petitioner deriving
income from a search received an equal amount of income. In
several instances, respondent has suggested alternative ways of
allocating the proceeds; e.g. fewer individuals receiving larger
amounts of income. Thus, depending on what the Court decides as
to each search, the total annual receipts for any one of
petitioners could exceed that amount shown above.
                               - 29 -


February 3, 1967.    The taxpayer presented no evidence other than

his self-serving denials of his involvement.   However, the record

contained no evidence of the taxpayer's involvement in the

lottery prior to August 5, 1966.   The Court of Appeals for the

Third Circuit stated:

     some evidence must appear which would support an
     inference of the taxpayer's involvement in gambling
     activity during the period covered by the assessment.
     Without that evidentiary foundation, minimal though if
     [sic] may be, an assessment may not be supported even
     where the taxpayer is silent. [Citation omitted.]

Id. at 554.   Accordingly, the taxpayer was held to be not liable

for the portion of the deficiency attributed to the period prior

to August 5, 1966.

     As we review each of respondent's assertions concerning each

respective search, we consider whether respondent has presented

predicate evidence linking the specific petitioner to the tax-

generating activity from which respondent asserts income has

arisen for such petitioner.   Where there is no such predicate

evidence, we attribute no income to that petitioner.    Id.   Where

the record provides some evidence that a particular petitioner

received income on a particular occasion, but that evidence is

sparse or conflicting as to the amount of the income, we charge

the respective petitioner with an amount of income based on the

record as a whole.    Cannon v. Commissioner, 533 F.2d 959, 960-961

(5th Cir. 1976), affg. Ash v. Commissioner, T.C. Memo. 1974-219;

Arouth v. Commissioner, T.C. Memo. 1992-679; Puppe v.
                                - 30 -


Commissioner, T.C. Memo. 1988-311; see also Walker v.

Commissioner, 757 F.2d 36 (3d Cir. 1985), revg. T.C. Memo. 1983-

538; Gerardo v. Commissioner, supra; Mandina v. Commissioner,

T.C. Memo. 1982-34, affd. 758 F.2d 1399 (11th Cir. 1984) and

affd. in part, revd. in part, and remanded sub nom. Schaffer v.

Commissioner, 779 F.2d 849 (2d Cir. 1985); Barber v.

Commissioner, T.C. Memo. 1980-39, affd. without published opinion

679 F.2d 896 (9th Cir. 1982).

     Giongo also argues that determining as to him the same

deficiencies as those determined against the other petitioners,

when he had at most a small role in the conspiracy, violates his

rights under the Eighth Amendment to the Constitution.13   The

imposition of liability for a Federal income tax deficiency and

the additions to tax for fraud, however, has been held to be

remedial and not punitive.   Helvering v. Mitchell, 303 U.S. 391,

397 (1938); United States v. Alt, 83 F.3d 779, 784 (6th Cir.

1996); Thomas v. Commissioner, 62 F.3d 97 (4th Cir. 1995), affg.

T.C. Memo. 1994-128; McNichols v. Commissioner, 13 F.3d 432 (1st

Cir. 1993), affg. T.C. Memo. 1993-61; Ianniello v. Commissioner,

98 T.C. 165, 180 (1992).   Accordingly, the Eighth Amendment does

not apply in the context of this civil tax proceeding.14

13
     The Eighth Amendment provides that "Excessive bail shall not
be required, nor excessive fines imposed". U.S. Const. amend.
VIII.
14
     However, in keeping with the opinion of the Court of Appeals
                                                   (continued...)
                               - 31 -


     Amounts of Unreported Income15

     Throughout the instant proceedings, petitioners Giongo,

Wilson, Cattalo, and Grove have maintained that they received no

income from illegal activities, and they testified to that

effect.    We will not repeat their denials in our discussion.

     Carlos Ayala Search

     On or about January 15, 1982, Hilt, Jumper, Cattalo, and

Ryan executed a search warrant, obtained by Hilt, for the home of

Carlos Ayala.    The officers seized marijuana from Ayala's home.

Respondent asserts that Giongo, Wilson, and Cattalo each received

$75 from the Ayala search.    Ryan testified that he received some

money from either Jumper or Hilt from the Ayala search, and that

Cattalo told Ryan that he also received some money.    Ryan

believes the amounts were approximately $75 each.    Jumper and

Hilt deny taking any money.    There was neither testimony from

Ayala nor any testimony that either Wilson or Giongo received

funds.    We find that the evidence presented does not support a

finding that Cattalo, Wilson, or Giongo received funds from the



14
 (...continued)
for the Third Circuit, we consider whether respondent has
presented predicate evidence to support the unreported income
attributed to each petitioner. Walker v. Commissioner, 757 F.2d
36, 42 (3d Cir. 1985), revg. and remanding T.C. Memo. 1983-538.
15
     In order to avoid   repeating certain findings of fact
concerning the various   searches and other activities underlying
respondent's assertion   of unreported income against petitioners,
we have combined those   findings of fact with our opinion in the
instant case.
                                - 32 -


Ayala search.   Accordingly, we attribute no unreported income to

Giongo, Wilson, or Cattalo from that search.

     Joseph and Pamela Rizzo Search

     On or about January 26, 1982, Ryan obtained a search warrant

for the home of Joseph and Pamela Rizzo; and Ryan, Cattalo,

Herbert Scott (Scott), and Marie Watson (Watson) executed the

search warrant.     Ryan discovered that he knew Mrs. Rizzo; she had

worked for his father.    The officers found a small quantity of

marijuana and some cash.    Mr. Rizzo was arrested, but Mrs. Rizzo

was not.   Because of some action on Ryan's part, the case against

Mr. Rizzo was discharged as Ryan had promised Mr. Rizzo.

     Respondent asserts that Giongo, Wilson, and Cattalo each

received one-sixth of $5,000, or $833, from the Rizzo search.

Ryan testified that "he believes" that Scott made an arrangement

with Mr. Rizzo whereby the officers would accept money and Mrs.

Rizzo would not be arrested.    Ryan does not remember whether the

total amount was $500 or $5,000.    Ryan also testified that he

"believes" that he received three shares16 from the search, one

each for himself, Giongo, and Wilson; and that Scott, Watson, and

Cattalo each received shares.    Scott denies negotiating with Mr.

Rizzo.   There was no testimony from the Rizzos.   Ryan used the

phrase "I believe" to qualify many of his answers with respect to

the Rizzo search.    We find that the use of that phrase creates

16
     Ryan testified that "shares" are equal portions, a "piece"
is half of a share, and a "bone" about $50.
                               - 33 -


uncertainty that undermines the strength of his testimony.     Also,

the facts that Ryan knew Mrs. Rizzo and promised to get Mr.

Rizzo's case discharged lead us to question the scenario Ryan

described.    Apart from Ryan's testimony in this regard, which we

have discounted, respondent has presented no predicate evidence

connecting Giongo, Wilson, or Cattalo to the receipt of funds

from the Rizzo search.   Accordingly, we attribute no unreported

income from the Rizzo search to Giongo, Wilson, or Cattalo.

     James Blow, Sr. Search

     On or about June 11, 1982, Watson obtained a search warrant

for the home of James Blow, Sr., and Cattalo, Ryan, Watson, and

Scott executed the search warrant.      James Blow, Jr., had illegal

drugs in a bank bag and was arrested.

     Respondent asserts that Giongo, Wilson, and Cattalo each

received $1,200 from the Blow search.     Ryan testified that he and

Cattalo each received an amount "he believes" was about $1,200

from Scott.    Scott denies appropriating any money.   There was no

testimony from Blow, Sr., or Blow, Jr.     Although Ryan was less

than certain about the amount of money, his testimony establishes

that he and Cattalo received some amount.     We sustain

respondent's assertion as to the amount of unreported income from

the Blow search as to Cattalo.    We find no unreported income for

Wilson or Giongo from the Blow search, for respondent has

presented no predicate evidence to support such a finding.
                                - 34 -


     Michael Duonnolo Search

     On or about September 30, 1982, Ryan obtained a search

warrant for the home of Michael Duonnolo (Duonnolo).    Giongo,

Cattalo, Ryan, and Scott executed the search warrant.    The

officers found illegal pills.    Ryan appropriated $1,000 from

Duonnolo, telling Duonnolo not to complain about it or they would

arrest his wife as well as Duonnolo himself.    Ryan referred

Duonnolo to a specific attorney, so Ryan would receive a

kickback.   That attorney called Ryan, who then falsified the

location of drugs reported on the investigation report in order

that Duonnolo would not be convicted.    Ryan received $1,000 from

the attorney.

     Respondent asserts that Giongo, Wilson, and Cattalo each

received $200 of the $1,000 appropriated from Duonnolo and that

Cattalo received $500 of the $1,000 Ryan received from Duonnolo's

attorney.   Scott denies that any money was appropriated, and

there was no testimony from Duonnolo.    Ryan did not testify as to

whether or how he shared the $1,000 he appropriated from

Duonnolo.   Accordingly, absent sufficient predicate evidence, we

do not allocate any of such payment to the other petitioners.

Ryan testified that he split the $1,000 kickback from Duonnolo's

attorney with Cattalo.   We do not believe that Ryan would have

shared such kickback, and do not allocate any part of it to the

other petitioners.
                               - 35 -


     Marvin Periera Search

     On or about November 2, 1982, Grove obtained a search

warrant for the home of Marvin Periera (Periera).     Grove, Wilson,

Cattalo, and Ryan executed the search warrant.     The officers

found marijuana and arrested Periera.

     Respondent asserts that petitioners each received $200 from

the Periera search.   Ryan testified that he received $200 from

Grove.   He did not testify as to any of the other petitioners.

Ryan also testified that two days later Periera offered him money

and drugs so as not to be arrested on that occasion.       Periera did

not testify.   Based on Ryan's testimony, we find it likely Grove

kept at least $200 for himself.    Accordingly, we sustain

respondent's assertion as to the $200 received by Grove.      As

there is nothing in the record to indicate that Giongo, Wilson,

or Cattalo received any moneys from the Periera search, we do not

sustain respondent's assertions as to them.

     Ernest Durkin 1982 Search

     On or about November 4, 1982, Grove, Cattalo, and Ryan

assisted police officers from Bensalem Township, Pennsylvania, in

obtaining and executing a search warrant for the home of Ernest

Durkin (Durkin) in Bensalem.

     Respondent asserts that petitioners each received $1,200

from the Durkin 1982 search.     Durkin did not testify.    Ryan

testified that Grove distributed money to him and Cattalo and
                              - 36 -


that the amount he (Ryan) received was approximately $1,200.      We

sustain respondent's assertions as to the amounts of income for

Cattalo and Grove from the Durkin 1982 search.

     Ryan also testified that Grove said he had funds for Wilson

and Giongo.   There is no evidence in the record that Wilson or

Giongo actually received the funds.17    We find no unreported

income was received by Giongo or Wilson from that search.

     Richard Wolff Search

     On December 28, 1982, Grove obtained a search warrant for

the third floor apartment of Richard Wolff (Wolff); and Grove,

Cattalo, Giongo, Ryan, and Hund conducted a search of the

premises.   This was Hund's first search on 5 Squad.    The officers

found two trash bags of marijuana and a quantity of cocaine.

Hund put the cocaine in his pocket.     Ryan appropriated a radio.

Inositol, a cutting agent, also was appropriated.      The officers

arrested Wolff and his girlfriend.     Grove and Hund took one bag

of marijuana and the cocaine and gave it to Karasinski for sale.

This was the first time Grove met Karasinski.    Grove and Ryan

signed the property receipt for the search, which falsely stated

that only the following were seized:    One large green trash bag

containing a green weed and seeds, three large clear plastic bags



17
     In addition, the record contains evidence of several
instances where the officers failed to give Ryan his full share
or complete information as to their earnings.
                               - 37 -


with a green weed, and one large clear plastic bag with a white

powder.

     Respondent asserts that Grove received $3,600 ($850 from the

sale of the cocaine plus installments of $2,000 and $750 from the

sale of the marijuana) and that Cattalo received $750 as a result

of the Wolff search.   Hund testified that he received $1,700 for

the cocaine which he split with Grove, one payment for the

marijuana of $4,000 which he split with Grove, and then a second

payment of $3,000 which he split four ways with Grove, Ryan, and

Cattalo.   Ryan testified that he received $200 from Cattalo that

night and about $1,000 later which he understood to be the

proceeds of the sale of the drugs.      With respect to this search,

Cattalo and Grove were convicted on charges of robbery and

possession of cocaine and marijuana with intent to distribute.

We sustain respondent's assertions as to the amounts of income

Cattalo and Grove received from the proceeds of the drugs

appropriated during the Wolff search.

     Charles Hitchens Search

     On December 30, 1982, Cattalo obtained a search warrant for

Hitchens' premises and Cattalo, Wilson, Giongo, Grove, and Hund

conducted a search.    When Hund and Grove arrived on the scene,

Hitchens had two containers, each containing $24,000 in cash.

After the officers introduced themselves, Hitchens recognized at

least one of them by name or by face.      Hitchens already owed the
                              - 38 -


Internal Revenue Service (IRS) from a previous seizure of funds

and was anxious to avoid another such incident, so he offered

Hund and Grove half the money to ignore the cash.18   They

accepted one container and asked Hitchens not to mention this to

the other officers who would be arriving later.    Hitchens put the

other container in his neighbor's trash can, from which the

neighbor later retrieved it for him.

     Thereafter, Cattalo arrived, then Wilson, and later Giongo.

Hitchens had a box of casino chips in a kitchen cabinet and

diamonds in the freezer.   Approximately $16,000 in a closet was

left untouched.   Hitchens had $2,213 in currency on his person

which was returned to him.   No drugs were found on the premises.

Hitchens was not arrested.   After the search, Hitchens found that

the majority of the casino chips and diamonds were missing.

     When Grove, Hund, and Cattalo left the unit at the end of

their shift, each of them appropriated a portion of the $24,000

from the container.   Karasinski visited Hund after the Hitchens

search and saw a large sum of money, a velvet sack of diamonds,

and casino chips in $500's on the kitchen table.   Hund led

Karasinski to believe that the items were Hund's share of what




18
     It was sometime after this Dec. 30, 1982, search that
Hitchens developed his relationship with Grove and Hund described
supra p. 10.
                              - 39 -


was appropriated on the Hitchens search.    Hund and Karasinski

then went to a casino and cashed in some of the chips.

     Ryan was away during the Hitchens search.   When he returned,

Ryan received several hundred dollars from Cattalo, who

attributed the money to this search, and Ryan received one

diamond.   Cattalo completed the investigation report on February

18, 1983, indicating that nothing was found and nothing was

taken.

     Respondent asserts that Grove and Cattalo each received

$8,000 of the $24,000 in cash from the Hitchens search.   Cattalo

was convicted of bribery and Grove of bribery and conspiracy with

respect to the bribe.   The total amount of the bribe was $24,000.

We sustain respondent's assertions that Grove and Cattalo each

received $8,000 of the cash from the Hitchens search.

     Respondent also ascribes one-sixth of $65,000 in casino

chips and of $6,000 in diamonds to each petitioner.   The total

amounts are based on Hitchens' testimony that he was missing

$65,000 in chips and three-quarters of approximately 300 diamonds

for which he paid $6,000 to $8,000.    Grove, Cattalo, and Wilson

were convicted of robbery of the diamonds and/or casino chips and

conspiracy, and Giongo was convicted of conspiracy for the

search.

     Karasinski understood the chips he saw at Hund's house to be

Hund's share.   Karasinski testified that he cashed in a handful
                              - 40 -


of $500 casino chips, totaling about $5,000, but that these chips

were not all that Hund had.   Hund testified that Karasinski

cashed in $12,000 to $14,000 of chips which Hund received from

Wilson, and that Hund divided the cash into seven shares, one

each for himself, Cattalo, Grove, Ryan, Wilson, Giongo, and the

Captain, and distributed the shares to the respective individuals

at Giongo's New Year's Eve party, with Wilson accepting the

shares for Cattalo and the Captain, neither of whom attended the

party.   Giongo and his wife testified about the party and denied

that any distribution of money occurred during the party.      Ryan

did not testify about the New Year's Eve party at all, but

testified that he was away for the Hitchens search and that he

later received several hundred dollars from Cattalo attributed to

the Hitchens search.

     As for the diamonds, Karasinski saw a sack of diamonds at

Hund's house which he understood to be Hund's share.    Hund

testified that Wilson found the diamonds, and that he (Hund)

later saw 13 diamonds and received two diamonds from Wilson.

Ryan testified that after he returned from his vacation, he,

Cattalo, Grove, and Hund each picked out one diamond.

     Based on the record as a whole, it is likely that Hund kept

more than his proportionate share and that Ryan received less

since he was not present on the search.   Faced with conflicting

testimony on the amounts of casino chips and how they or their
                              - 41 -


proceeds were divided, we attribute $14,000 to Hund and divide

$51,000 equally among petitioners ($10,200 each).   We allocate

two diamonds, or $50,19 each to Wilson, Cattalo, and Grove.

     Raymond Brown Search

     Also on December 30, 1982, Cattalo obtained a search warrant

for the home of Raymond Brown (Brown), one of Hitchens'

customers, and after the above-described Hitchens search,

Cattalo, Wilson, Grove, and Hund executed the Brown search

warrant.   The officers found a small amount of drugs and arrested

Brown.

     Respondent asserts that $6,000 was appropriated and divided

six ways (including petitioners and Hund), each petitioner

receiving $1,000 from the Brown search.   Brown did not testify.

Hund testified that Grove found and held $6,000, but that Cattalo

gave Hund $800.   There was no testimony regarding the other

petitioners.   We sustain respondent's assertion as to the amount

of the deficiency resulting from the Brown search for Cattalo

only, there being no predicate evidence connecting the other

petitioners to money appropriated from Brown.

     Raymond Lees Search

     On January 7, 1983, on the basis of information Hund

received from Karasinski, Hund and Grove set up Raymond Lees




19
     According to Hitchens, he paid approximately $6,000 to
$8,000 for about 300 diamonds. Thus, on average, each was worth
about $20 to $27.
                                - 42 -


(Lees).   Karasinski paid Lees $6,050 for some cocaine,20 but did

not purchase the marijuana he had requested.    Hund, Grove,

Giongo, and Wilson stopped Lees while he was driving away from

the sale and seized two large clear plastic bags of marijuana.

The officers appropriated the $6,050 from Lees during the search

and did not return it.   Lees was arrested and charged for having

the marijuana, but not for the cocaine sale.    Hund was the

assigned officer and did not mention the cocaine sale or money in

the investigation report.

     Respondent asserts $6,050 was appropriated and divided six

ways (including petitioners and Hund), each petitioner receiving

$1,008 from the Lees search.    Hund testified that, after the Lees

search and two subsequent searches that night, he received $800

to $1,000 from Wilson, who also handed money to Grove, Ryan,

Cattalo, and Giongo.   Grove and Wilson were convicted of robbery

of the money obtained from the Lees search and conspiracy to

steal the money, and Giongo was convicted of conspiracy.

Petitioners argue that the Lees search was a buy-bust and that

the purchase money was not "stolen", but there is no evidence to

that effect,21 and the convictions estop those convicted from

denying the robbery occurred.    Cattalo and Ryan did not



20
     The officers either gave Karasinski the money used to
purchase the cocaine from Lees or, more likely, reimbursed him
out of the sale proceeds.
21
     Hund did not mention the cocaine deal in his testimony or in
the investigation report.
                                - 43 -


participate in the Lees search.     Ryan's testimony did not address

the Lees search.    We do not believe Ryan or Cattalo would have

received money where neither one was on the search.     Accordingly,

we attribute no income from the Lees search to Cattalo.     We

allocate $1,800 each to Hund, Wilson, and Grove and $650 to

Giongo from the Lees search.

     Steven and Alan Garrett Search

     On January 25, 1983, Grove and Hund conducted an undercover

purchase of cocaine from Steven Garrett at Garrett's residence.

After purchasing two bags of cocaine for $2,200 each, Grove and

Hund identified themselves as police officers.     Grove, Hund,

Wilson, Cattalo, and Ryan conducted a search of the premises and

arrested Steven and Alan Garrett.     Grove completed the property

receipts and the investigation report.     Hund appropriated some

cocaine during the search; he used a vial's worth in his car and

later took one bag to Karasinski's, where the two of them used a

large amount of it.

     Respondent asserts Grove and Cattalo each received $250 from

the sale of the Garrett drugs.     Grove and Cattalo were convicted

of possession of cocaine with intent to distribute for the

Garrett drugs.     Hund testified that he and Karasinski used a

large portion of the appropriated cocaine, that Karasinski paid

him $750 for it, and that he in turn gave $250 each to Grove,

Cattalo, and Ryan.     Ryan testified that he received about $1,000
                              - 44 -


weeks later.   We find that Grove and Cattalo each received $250

from the sale of the Garrett drugs.

     Alan Myles Search

     On February 10, 1983, Grove obtained a search warrant for

the premises of Alan Myles (Myles), and Grove, Giongo, Hund,

Cattalo, and Ryan conducted a search.   Myles lived in a highrise

building, and Giongo remained downstairs while the other four

officers conducted the search of Myles' residence.   The officers

found four bags of cocaine and a quantity of cutting agent.     One

of the officers added some cutting agent to the cocaine and made

two more bags of cocaine.   Hund and Grove took two bags of

cocaine and gave them to Karasinski for resale.

     Respondent asserts that Grove and Cattalo each received

$1,000 from the sale of the Myles drugs.   Both were convicted of

possession of cocaine with intent to distribute for the Myles

drugs.   Ryan testified that he and Cattalo received at least

$1,000 from either Hund or Grove for the Myles drugs.   Hund

testified that Karasinski gave him and Grove about $2,000 that

they shared and then Karasinski gave them some more money later,

which Grove controlled.   We sustain respondent's assertions as to

the income Grove and Cattalo received from the proceeds of the

Myles drugs.

     Ernest Durkin 1983 Search

     On or about February 11, 1983, Grove, Cattalo, Wilson, Hund,

and Ryan assisted police officers from Bensalem Township in
                                - 45 -


obtaining and executing a search warrant for Durkin's home.       Hund

appropriated at least $2,500.    Durkin filed a complaint that

money was stolen.    The officers involved were interviewed by

police investigators in relation to this complaint and, per

Wilson's instructions, denied knowledge of any missing money.

     Respondent asserts that Wilson, Grove, and Cattalo along

with Hund and Ryan each received a portion of the $2,000

appropriated on the Durkin search.       Durkin did not testify and

the complaint is not part of the record.       Hund testified that he

found $2,500, of which he put $500 in his sock, and that at the

unit, he gave Grove the remaining $2,000 and received back

approximately $400 to $500.    Ryan testified that he did not know

about the money being appropriated at the scene, but back at the

unit he received at least $75 from Grove.       There is no evidence

of Wilson's or Cattalo's receiving any cash from the Durkin 1983

search.    Accordingly, we attribute no income to Wilson or

Cattalo.    We find that Grove received $400 from the Durkin

search.

     Spennato Payment

     Bart Spennato (Spennato) was a massage parlor operator.

Hund had been receiving bribes from Spennato since Hund was on 1

Squad.     Spennato would call Hund at work to say he had money for

Hund, and they would talk in code in case anyone was listening

in, saying, e.g., that Spennato had "information" for Hund.

Sometime during 1983, Spennato contacted Hund and asked Hund to
                               - 46 -


come to his massage parlor.    When leaving the unit to go to

Spennato's, he told Grove and Cattalo that he was going to meet

with an informant.   Spennato gave Hund $2,000 to help clear his

brother, who had been arrested by 1 Squad.

     Respondent asserts that of a total payment of $2,000, Grove

and Cattalo each received $500.    Hund testified that he went to

Spennato's with Grove and Cattalo and split the money with them

and Bill Young from 1 Squad.    Spennato did not testify, nor did

Young.   Grove's testimony involved answering a phone call from

Spennato and did not address going to Spennato's.    Cattalo did

not testify about Spennato.    Hund had been receiving payoffs from

Spennato since Hund was on 1 Squad.     We believe it unlikely that

Hund shared the Spennato payment with the others and find that

Cattalo and Grove derived no income from the Spennato payment.

     John Kaminski/Robert Rossi Search

     On March 11, 1983, Hund, observed by Grove and Wilson,

conducted an undercover purchase of 3 ounces of cocaine at the

price of $6,300 from John Kaminski (Kaminski) in the parking lot

of a Friendly Restaurant.   Ryan and Cattalo also were present.

Kaminski was arrested.   Robert Rossi (Rossi), who was observed

delivering a brown paper bag to Kaminski, was arrested inside the

adjacent Ground Round Restaurant.    A search of Rossi's apartment

was conducted.   Hund and Grove found money and cocaine there.

They appropriated some of the cocaine and took it to Karasinski

to resell.   Back at the unit, Grove or Hund distributed portions
                              - 47 -


of the appropriated money to Ryan and Cattalo.   When Hund

received the proceeds of the sale of the cocaine from Karasinski,

he distributed them among himself, Grove, Ryan and Cattalo.

     Respondent asserts that Wilson, Grove, and Cattalo each

received $200 in appropriated cash, and that Grove received

$1,000 and Cattalo $500 of the proceeds of the drugs from the

Kaminski/Rossi search.   Wilson, Grove, and Cattalo were convicted

of robbery with respect to the appropriated cash.   Grove was

convicted of possession of cocaine with intent to distribute.

Grove and Cattalo were convicted of aiding and abetting with

respect to the drug possession.   There was no testimony from

Kaminski or Rossi.   Hund testified that the cash was split but

did not say how.   He testified the drug proceeds were split

$1,000 each to himself and Grove and $500 each to Ryan and

Cattalo.   Ryan stated the amounts he received from the cash and

from the drug proceeds as each being several hundred dollars.     He

also testified Cattalo had received cash the night of the search.

We sustain respondent's assertions as to the Kaminski/Rossi

search.

     Walter Roeder 1983 Search

     On June 13, 1983, Ryan obtained a search warrant for

Roeder's house at 228 Shawmont Avenue.   Roeder was driving when

two or three officers jumped into his car and returned with him

to his house; the other officers followed in their car.   Ryan,

Wilson, Cattalo, and Grove conducted a search of Roeder's
                               - 48 -


premises.   Ryan stayed with Roeder in the kitchen while the other

officers searched the house.   Ryan found $13,000 in the oven; the

$13,000 was returned to Roeder.   No illegal drugs were found.

The officers made Roeder open his safe which contained

approximately $220,000 from the sale of P2P.    Ryan, at first

threatening to give all $220,000 to the IRS,22 reached an

agreement with Roeder to split the money half for Roeder, half

for the officers.   Roeder was not arrested.   After the search,

the officers called Hund and Giongo, and all of them met for

dinner.

     At the unit after dinner, Wilson distributed portions of the

appropriated money.   On the daily complaint summary, Ryan typed

an incorrect street number for Roeder's address and omitted

Roeder's name.   Ryan completed the investigation report on July

6, 1983, using Roeder's correct address and indicated that

nothing was found and nothing was taken.   When Ryan's wife

discovered where Ryan had hidden his share of the money, he

explained that it was stolen money, and she deposited some of it

into their checking account.

     Respondent asserts that Wilson, Grove, and Cattalo each

received $21,000 and that Giongo received $5,000 from the Roeder

1983 search.   Wilson, Grove, and Cattalo were convicted of

bribery and conspiracy and Giongo of aiding and abetting with



22
     The officers had planned for Grove to act as an IRS agent
should any money be found.
                               - 49 -


respect to such search.    Wilson and Cattalo also were convicted

of perjury for their testimony at the trial in Ryan's criminal

case regarding the amounts of money found and for denying that

money was taken.   Hund testified that he received $17,000 from

Wilson and that Wilson said that he would give Giongo and the

Captain $5,000 each.   Ryan testified that after returning to the

unit after dinner, he received about $18,000 to $22,000 from

Wilson, and that Wilson said that the two piles of money on his

desk were for Giongo and "the boss".    Ryan also testified that he

saw Cattalo receive money.    Neither Hund nor Ryan saw Wilson

giving money to anyone else.    Ryan testified that he confirmed

with Hund and Grove the amounts they received, and with Giongo

that the latter received something.     Ryan did not testify as to

what the amounts were.    On the basis of the evidence linking

petitioners to the funds appropriated during the Roeder 1983

Search, we sustain respondent's assertions.

     John Bruno/Nicholas Pontarelli Search

     On June 17, 1983, Cattalo obtained a search warrant for the

premises of John Bruno, and Cattalo, Ryan, Grove, and Hund

conducted a search.    Hund found a small and a large bag of

cocaine in Nicholas Pontarelli's (Pontarelli's) car; the small

bag was returned to Pontarelli.    Hund and Grove took the large

bag and gave it to Karasinski who paid them for it.    The proceeds

were shared among Hund, Grove, Ryan, and Cattalo.    Cattalo

completed the investigation report stating one white tablet was
                                - 50 -


confiscated from the premises; he did not mention Pontarelli in

the report.

     Respondent asserts that Grove received $1,000 and Cattalo

$500 from the sale of drugs taken during the Bruno/Pontarelli

search.    Those amounts are based on Hund's testimony that he

received $3,000 from Karasinski, of which he and Grove each kept

$1,000 and gave Ryan and Cattalo each $500.     Ryan testified that

he and Cattalo each received several hundred dollars a month

later.    With respect to those drugs, Grove was convicted of

possession of cocaine with intent to distribute and aiding and

abetting, and Cattalo was convicted of aiding and abetting.       We

sustain respondent's assertions as to the amounts of the proceeds

of the drugs appropriated during the Bruno/Pontarelli search that

Grove and Cattalo received.

     James Carr Search

     On July 7, 1983, Ryan obtained a search warrant for the

residence of James Carr (Carr), using information supplied by

Hund.     The search was conducted on that date by Ryan, Grove,

Hund, and Cattalo.     Carr operated a variety/grocery store located

about 1-1/2 blocks from his residence.     Carr kept the receipts

from his store in a safe on the third floor of his residence.       At

the time of the search, the safe contained $18,505 in cash, food

stamps, and some personal items.     Carr had the store receipts

from the early part of the day, about $700, on his person; that

money was returned to him.     Carr was arrested.
                              - 51 -


     The officers left Carr's house with the money bags from the

safe, refusing Carr's request to count the money there.    At the

unit, they issued Carr a property receipt for $13,505, and

appropriated $5,000 for themselves.    A second property receipt,

not signed by Carr, indicates that the officers confiscated one

glass vial with a white powder.    Both property receipts contained

the typed names of Ryan and Cattalo.    Upon returning home, Carr

found white talcum powder sprinkled all over the bureau in his

bedroom.   According to the seizure analysis report, the amber

vial contained 220 milligrams of a white powder which contained

no detectable controlled substance; the attached metal spoon

contained an insufficient quantity of material to give a positive

test for controlled substances.    Carr did not have an amber vial

with metal spoon in his house.    Charges against Carr were

dropped.

     Respondent asserts that $5,000 was appropriated and that

each petitioner received $833 from the Carr search.    Grove and

Cattalo were convicted of robbery of cash on the Carr search,

aiding and abetting, and conspiracy.    Wilson and Giongo were

convicted of aiding and abetting.    Wilson and Cattalo also were

convicted of perjury for their testimony denying knowledge that

money was appropriated.   Ryan testified that he divided the

$5,000 evenly among the six police officers.23   Hund testified


23
     Ryan testified about a "policy" of dividing the cash equally
among the officers and supervisors. He would sometimes phrase
                                                   (continued...)
                               - 52 -


that the four officers discussed giving Wilson a share and Giongo

a piece.24   Hund also testified that he counted the money with

Cattalo and that Cattalo gave him $800 to $1,000 and that he

believes he saw Grove receive a share.    Taking into account that

Giongo was on police radio duty at the time of this search, we

allocate $500 to Giongo and $900 each to Wilson, Cattalo, and

Grove.

     Hitchens Summer 1983 Payment

     In July of 1983, Hund received a Dunkin' Donuts bag

containing $4,500 from Hitchens.    At his house, Hund counted the

money and removed $1,000 from the bag; when Grove arrived, Hund

removed another $1,000 while they discussed the matter,25 without

disclosing to Grove the first $1,000.    Hund told Wilson, Ryan,

and Cattalo that he found the bag with $2,500 under his car seat.

Wilson advised Hund to make an incident report and turn the bag

in because it could be a setup or an attempted bribe.   On July 7,

1983, Hund turned in the remaining $2,500, reporting the same


23
 (...continued)
his responses in terms of who "would have" received funds.
However, his testimony and that of Hund, when properly based on
actual knowledge, contradicted such a "policy", both as to the
supervisors' being included and the amounts' being equal.
Therefore, we give less weight to Ryan's testimony.
24
     See supra note 16.
25
     According to Hund, Hitchens gave him this money to pay for
the repairs to his car which had been damaged in a shoot-out with
someone that Hitchens knew; Grove, Wilson, Cattalo, and Ryan had
helped Hund pay for the repairs; and Hund wanted to reimburse
them. However, Hund did not want to reveal to them the source of
the money.
                              - 53 -


story, and an investigation ensued.     The investigating inspector

concluded that the proposition that the money was a set-up or a

bribe could not be substantiated.     The money was returned to Hund

at a later point not within the years in issue.    Respondent

asserts Grove received $500 of the Hitchens summer 1983 payment.

Hund testified that he shared the second $1,000 with Grove during

their conversation, each taking half.    We sustain respondent's

assertion.

     Clyde Sims Search

     On July 21, 1983, Cattalo obtained a search warrant for the

premises of "Akeem", a.k.a. "Sam", and Cattalo, Wilson, Ryan, and

Grove conducted a search.   They found marijuana and $1,200, and

they arrested Clyde Sims (Sims).    The officers did not issue Sims

a money receipt for the $1,200, and they did not return the money

to him.

     Respondent asserts that each petitioner received $200 from

the Sims search.   The total amount appropriated from Sims was

$1,200.   Wilson, Cattalo, and Grove were convicted of robbery and

conspiracy with respect to the Sims search.    Both Ryan and Hund

testified that they received about $200, Ryan receiving his from

Cattalo, and Hund, who had been on vacation, receiving his later

from Grove, who attributed the money to the Sims, and at least

one other, search.   Ryan testified that Grove, Hund, Wilson, and

Giongo received money, but he also testified incorrectly that

Hund was on the search.   We need not accept Ryan's testimony in
                                - 54 -


its entirety as to who received money when he did not distribute

the cash and did not testify as to any specific amounts

distributed to the others.26    Giongo was on police radio duty

during the time of the Sims search.      We do not believe Giongo

would have received any funds from this search.      Wilson, Cattalo,

and Grove were present on the search and convicted of robbery.

We sustain respondent's assertions as to Wilson, Cattalo and,

Grove.

     Fred Megna Search

     On or about July 25, 1983, Ryan obtained search warrants for

two hotel rooms in the Hilton Hotel at 10th and Packer Avenue,

registered to Fred Megna (Megna) and James Travers (Travers),

respectively.   The information for this search came from the New

Jersey State Police.     Cattalo, Grove, Wilson, Ryan, and Hund

executed the search warrants.     Cattalo and Hund heard sports bets

coming in over the telephones in the hotel rooms.      One of the

officers found a bag containing cash.

     Respondent asserts that each petitioner received $1,667 of a

total of $10,000 appropriated on the Megna search.      Ryan

testified that $10,000 was found and that he distributed the

money, giving equal amounts to the 5 Squad members present on the

search and some amount to Giongo.     Hund testified that Wilson

found the bag and gave him about $1,500 to $2,000 from the Megna

search, that Wilson said he would take care of everyone including


26
     See supra note 23.
                                - 55 -


Giongo, and that Ryan and Cattalo inquired to see if Hund had

received his share.    Giongo was still on police radio duty.

There was no testimony from either Megna or Travers.      In light of

the conflicting testimony,27 we allocate $1,000 to Giongo and

$1,800 each to Wilson, Cattalo, and Grove.

     Sterling Ferguson Search

     On or about July 28, 1983, Cattalo obtained a search warrant

for the home of Sterling Ferguson (Ferguson).    Cattalo, Grove,

Hund, and Ryan executed the search warrant.    The officers found

money and cocaine.    Hund appropriated a video camera.   When

Ferguson returned home after his arrest, he discovered that $200,

cocaine, cutting agent, a triple beam scale, a gun, and a video

camera were missing.

     Respondent asserts that $1,000 was taken and divided six

ways, with $167 distributed to each petitioner from the Ferguson

search.   Ferguson testified that $200 was missing along with a

video camera and other items.    Ryan testified that $1,000 was

appropriated and that he, Grove, and Hund received money from

Cattalo and that Cattalo had portions for Wilson and Giongo.

Hund testified that he found an unspecified amount of money that

he gave to Cattalo to hold, and that he turned down the money

offered to him by Cattalo, since he appropriated the video

camera.   Hund states that Wilson was to receive a piece and

Giongo a bone but then amended his testimony to say that Giongo


27
     See supra note 23.
                               - 56 -


did not receive money from the Ferguson search.    Neither Ryan or

Hund testified that he saw Wilson or Giongo actually receive any

cash.    Wilson and Giongo were not present on the search.   We find

that $200 was appropriated during the Ferguson search and

attribute $67 each to Grove and Cattalo.    We allocate nothing to

Wilson or Giongo.

     Howard and Dolores Douglas Search

     On or about August 22, 1983, Hund obtained a search warrant

for the home of Howard and Dolores Douglas.    Grove and Hund

executed the search warrant.

     Respondent asserts that Grove received $700, Cattalo and

Wilson each $200, and Giongo $50 from money appropriated during

the Douglas search.    Respondent's assertion is based on Hund's

testimony that (1) he and Grove kept $600 to $700 each, and (2)

he estimates he (Hund) gave the others the amounts specified

above.    There was no testimony from the Douglases.   Ryan and

Cattalo were not on the search, nor was Wilson or Giongo.     Based

on the record as a whole, we do not believe that Ryan, Cattalo,

Wilson, or Giongo received funds from the Douglas search.     We

sustain respondent's assertion as to Grove.

     Jacob Tesylar et al. Search

     Karasinski provided Hund with information on a pending

methamphetamine "cook"28 involving Jacob Tesylar (Tesylar) that



28
     "Cooking" is the term used for manufacturing
methamphetamine.
                                - 57 -


led to the Tesylar searches.    Gerace was in charge of the cook

but was not present during the searches.      On September 14, 1983,

Grove, Cattalo, Giongo, Hund, and Ryan, along with police

officers from Abington Township, set up surveillance of Frank

Martino's (Martino's) home in Abington, Pennsylvania.      On that

date, Tesylar, Ronald Bertino (Bertino), and others were

arrested, and a search of Martino's house was conducted.      After

midnight (on September 15, 1983), Hund obtained a search warrant

for Bertino's house and a search was conducted there.      Grove

obtained a search warrant for Tesylar's premises, which was

executed.

     Ryan and Grove found two grocery bags of methamphetamine in

the trunk of one of the cars at Martino's house and put one bag

into Grove's trunk.    At Bertino's house, the officers found

money, methamphetamine, and lab equipment.      Hund appropriated

some of the money.    Some money and methamphetamine were seized

and turned in as evidence.     Hund and Grove appropriated a large

quantity of the methamphetamine, including that from Martino's

and from Bertino's, to Karasinski.       Karasinski sold some of the

methamphetamine and later returned the remainder to Hund.

     Respondent asserts that Grove received $9,250 ($4,000 +

$1,500 + $3,750) and Cattalo received $3,500 ($2,000 + $1,500)

from the proceeds of the sale of the drugs from the Tesylar

search.   Those amounts are based on Hund's testimony that he

received (1) $12,000 from Karasinski of which he and Grove
                              - 58 -


appropriated $4,000 and gave Ryan and Cattalo $2,000 each, (2) an

additional $6,000 from Karasinski which he split evenly with

Grove, Ryan, and Cattalo, and (3) $7,500 from Neil Horner through

Charles Scanzella which he split with Grove.    Gerace testified

about the amounts of drugs to be manufactured and those stored.

Karasinski testified that he received 50 pounds of drugs from

these combined searches and that he sold some of the drugs, but

he did not testify as to the amounts of the proceeds.    Neither

Scanzella nor Horner testified.   Ryan testified that he received

several thousand dollars from the sale of the drugs.    Grove and

Cattalo were convicted of possession of methamphetamine with

intent to distribute and aiding and abetting.    We find Cattalo

received $3,500 and Grove $5,550 from the Tesylar search drug

proceeds; i.e., the proceeds coming from Karasinski, but not

including those from Scanzella.

     Daniel Gonzales Search

     On October 20, 1983, Daniel Gonzales was arrested by Hund,

Grove, and Giongo at the bus terminal at 17th and Market Streets.

Two bags of white powder were seized.   The arrest was the result

of a setup initiated when Hund received information from Neil

Horner.   Hund or Grove cut the cocaine, submitted some as

evidence, and gave the remainder to Horner.    Horner gave Hund

$3,000 for the cocaine he received.

     Respondent asserts, on the basis of Hund's testimony, that

Grove received $1,000 and Cattalo $500 of the total $3,000
                                - 59 -


received for the drugs appropriated during the Gonzales search.

Grove was convicted of possession of cocaine with intent to

distribute and aiding and abetting with respect to the Gonzales

drugs.    Ryan and Cattalo were not on the search.   Ryan did not

testify about receiving money from the search.    We do not believe

that Ryan or Cattalo received money from the sale of the drugs.

We find that Grove received $1,000 from the sale of the Gonzales

drugs.

     Reid Baker Search

     On November 16, 1983, Reid Baker (Baker) was stopped while

driving to Karasinski's store to sell Karasinski about 2 ounces

of cocaine.     Karasinski had provided Hund with the information to

set up the stop, in which Hund, Grove, Ryan, and Cattalo

participated.    Baker had $1,262 on his person which was returned

to him.    Then the officers searched Baker's residence with

Baker's written consent.    Prior to the search, Baker had $2,000

in one pocket of a suit hanging in his closet and $3,000 in

another pocket.    During the search, the officers placed $2,000 on

a table where Baker could see it.    They arrested Baker.

     When Baker returned to his residence from the police

station, he saw the $2,000 still lying on the table; however, the

other $3,000 was missing from his suit pocket.    Baker did not see

anyone take the money.29    After the search, Hund and Grove took



29
     During the time of the search, Baker was having his house
painted and the painters had keys to the house.
                               - 60 -


the cocaine to Karasinski, who cut it and sold half of the

resulting amount.   Karasinski divided the proceeds with Hund and

Grove.

     Respondent asserts that $3,000 cash was appropriated during

the Baker search and divided up equally among Hund and

petitioners.   Respondent also asserts that Grove and Cattalo each

received $300 from the proceeds of the sale of the drugs.     Hund

testified that the only money he recalled was that on Baker's

person, which was returned, but he also testified that he

received $200 to $250 from Grove on the way back to the unit from

dropping off the cocaine at Karasinski's and that Grove said he

had portions for Ryan, Cattalo, Wilson, and Giongo.     Hund's

testimony conflicted with his earlier testimony that did not

include Giongo as receiving any money.    Hund's testimony is also

conflicting in that Giongo and Wilson did not know about or share

in drug proceeds.   Ryan testified that he later received several

hundred dollars from the sale of the drugs, but he does not

recall receiving any money that night.    Grove and Cattalo were

convicted of robbery, conspiracy, and possession of cocaine with

intent to distribute.   Wilson was convicted of aiding and

abetting robbery and conspiracy.    Based on the above, we allocate

$600 each to Wilson, Cattalo, and Grove of the cash appropriated

from Baker.    Giongo was not present on the search.   Given the

questionable nature of Hund's testimony, the record does not

support an allocation to Giongo.    We sustain respondent's
                              - 61 -


assertions as to the drug proceeds received by Grove and Cattalo

($300 each).

     Gerace Payment

     Sometime during 1983, Hund and Grove saw Gary Long (Long)

and Gerace driving in Long's car and pulled them over.   Hund

appropriated Gerace's gun from under the seat, and Grove grabbed

Long and held a gun on him.   On the basis of what Hund told him,

Gerace feared Grove would kill Long and he would be blamed.

Gerace offered them money to settle the matter.    Grove and Hund

followed Gerace and Long to the house of Gerace's mother.    Gerace

went into his mother's house and obtained a stack of money

containing at least $5,000 which he put in a brown bag and gave

to Hund.

     Respondent asserts that Gerace gave Grove and Hund $5,000

during this incident and that Grove and Cattalo each received

$1,500 and Ryan $500 of that amount.   Grove and Cattalo were

convicted of bribery and conspiracy with respect to the Gerace

payment.   Gerace testified that the stack of money contained

either $5,000 or $10,000.   Hund testified that the amount was

$5,000 and that the distribution was as asserted by respondent.

We sustain respondent's assertions as to the amounts of the

Gerace payment that Grove and Cattalo received.

     Hitchens December 1983 Payment

     Sometime around Christmas 1983, Hitchens invited Hund and

Grove to his house and gave each of them $5,000.   After this,
                                - 62 -


during late December 1983 or early 1984, Hund notified Hitchens

of a search planned for his residence.     Hund instructed Hitchens

to leave $5,000, supposedly for Wilson, on his dresser and to be

present at the house.    Wilson did not know Hitchens had been

warned.   Wilson, Ryan, Cattalo, Hund, and Grove searched the

residence.    During the search, Hund appropriated the money from

the dresser.

      Respondent asserts that Grove received $5,000 from Hitchens

in December 1983.   Grove was convicted of bribery and conspiracy

for this payment.   We find that Grove received the $5,000.

II.   Fraud

      For the years in issue, section 6653(b) imposes an addition

to tax of 50 percent of the underpayment of tax if any part of

the underpayment is due to fraud, plus an amount equal to 50

percent of the interest on the portion of the underpayment

attributable to fraud.     Respondent has the burden of proving

fraud by clear and convincing evidence.     Sec. 7454(a); Rule

142(b); Estate of Mazzoni v. Commissioner, 451 F.2d 197, 201 (3d

Cir. 1971), affg. T.C. Memo. 1970-37; Cochrane v. Commissioner,

107 T.C. 18 (1996).     Absent a finding of fraud, section 6501

precludes the assessment and collection of the alleged

deficiencies in and additions to tax for the years in issue.

      For the addition to tax under section 6653(b)(1) to apply,

the Commissioner must establish (1) an underpayment of taxes for

each year and (2) that some part of the underpayment is due to
                               - 63 -


fraud.   Sec. 6653(b)(1); DiLeo v. Commissioner, 96 T.C. 858, 873

(1991), affd. 959 F.2d 16 (2d Cir. 1992).    For the addition to

tax under section 6653(b)(2) to apply, the Commissioner must

establish the specific portion of the underpayment which is

attributable to fraud.   Sec. 6653(b)(2); DiLeo v. Commissioner,

supra at 873.

     To prove an underpayment of tax, the Commissioner cannot

rely on the taxpayer's failure to satisfy his or her burden of

proof as to the underlying deficiency.     Parks v. Commissioner, 94

T.C. 654, 661 (1990).    Where allegations of fraud are intertwined

with unreported and indirectly reconstructed income, the

Commissioner can prove an underpayment by proving a likely source

of the unreported income or, where the taxpayer alleges a

nontaxable source, by disproving the alleged nontaxable source.

DiLeo v. Commissioner, supra at 873-874.

     Wilson, Grove, and Cattalo were convicted under section

7206(1) of filing false returns for both 1982 and 1983.     Giongo

was convicted of filing a false return for 1983, but not 1982.

The convictions do not estop petitioners from denying that there

was an underpayment of tax or that any such underpayment was due

to fraud.   Considine v. United States, 227 Ct. Cl. 77, 80-81, 645

F.2d 925, 928 (1981); Wright v. Commissioner, 84 T.C. 636 (1985);

Franklin v. Commissioner, T.C. Memo. 1993-184.    The convictions,

however, are evidence to be considered in deciding whether

respondent has proved an underpayment of tax due to fraud.
                                - 64 -


Petitioners have made no contentions or presented any evidence of

omitted deductions or credits.    On the basis of the evidence

presented in the instant cases, we conclude that respondent has

established by clear and convincing evidence an underpayment of

tax for 1982 and 1983 for petitioners Wilson, Cattalo, and

Grove,30 and for 1983 for petitioner Giongo.     Cf. Franklin v.

Commissioner, supra.     For Giongo's 1982 taxable year, we conclude

that respondent did not present clear and convincing evidence of

an underpayment of tax.    Although, in our discussion above, we

attributed income from the Hitchens search casino chips to Giongo

based on the preponderance of the evidence, we do not find the

evidence as to his receipt of the income from the chips to rise

to the level of clear and convincing.    There being no other

search during 1982 for which we have attributed income to Giongo,

we do not find clear and convincing evidence of an underpayment

of tax by Giongo for that year.

       To establish fraud, respondent must show that the taxpayer

intended to evade a tax believed to be owing by conduct intended

to conceal, mislead, or otherwise prevent the collection of such

tax.    Cochrane v. Commissioner, supra at 28.   Fraud is never

presumed.    Id.   Because direct proof of a taxpayer's intent is

rarely available, fraud may be established by circumstantial



30
     Additionally, petitioners Wilson, Cattalo, and Grove were
convicted of at least one count of either bribery or robbery
within each of the years in issue. Such crimes are likely
sources of unreported income.
                               - 65 -


evidence and reasonable inferences drawn from such evidence.

Estate of Mazzoni v. Commissioner, supra at 202 (citing Webb v.

Commissioner, 394 F.2d 366, 380 (5th Cir. 1968), affg. T.C. Memo.

1966-81); Cochrane v. Commissioner, supra at 28.   The taxpayer's

entire course of conduct may establish the requisite fraudulent

intent.   Bagby v. Commissioner, 102 T.C. 596, 609 (1994).

Circumstances which this Court and others have considered as

indicative of fraud include:   Understatement of income,

inadequate records, implausible or inconsistent explanations of

behavior, concealment of assets, failure to cooperate with the

tax authorities, dealing in cash, engaging in illegal activity,

and attempting to conceal illegal activity.    Estate of Mazzoni v.

Commissioner, supra; Niedringhaus v. Commissioner, 99 T.C. 202,

211 (1992) (citing Bradford v. Commissioner, 796 F.2d 303, 307

(9th Cir. 1986), affg. T.C. Memo. 1984-601).

     Wilson, Cattalo, and Grove understated their income for both

1982 and 1983.   In addition to the convictions for filing false

returns, they were found guilty of robbery or bribery committed

during both years in issue, and Wilson and Cattalo of perjury for

their testimony regarding the 1981 and 1983 Roeder searches and

the 1983 Carr search.   Cattalo and Grove were convicted of

possession of drugs with intent to distribute (1982 and 1983) and

did receive the proceeds of the sale of drugs.   Petitioners

attempted to conceal such activities in various ways including:

Filing or signing false investigation reports and property
                              - 66 -


receipts (Cattalo--1983, Grove--1982 and 1983, Wilson--1983),

cutting drugs (Grove--1983), not telling supervisors of drug

theft and resale (Cattalo, Grove--1982 and 1983), not revealing

protection arrangements (Grove--1983), and the perjury

previously mentioned (Cattalo, Wilson).    Grove, in particular,

made several large cash payments during 1983, for the purchase of

real property and a boat.   The cash paid for the real estate was

"under the table".

     We hold that respondent has established by clear and

convincing evidence that there is an underpayment of tax due to

fraud for petitioners Wilson, Cattalo, and Grove for the years

1982 and 1983.   The entirety of each of their underpayments

arises from their fraudulent schemes.    Consequently, for Wilson,

Cattalo, and Grove, the period of limitations does not apply to

1982 or 1983, and we hold that they are liable for the additions

to tax under section 6653(b)(1) and (2) to the full extent of

their underpayments for each year.

     The badges of fraud present with respect to Giongo are his

convictions for racketeering and conspiracy and for filing a

false return under section 7206(1).    Underlying Giongo's

racketeering conviction were conspiracy, aiding and abetting

bribery, and aiding and abetting robbery.    Such crimes, in

contrast to bribery or robbery per se, do not include the element

of obtaining money or property.   A conviction under section

7206(1) does not establish fraud but is one factor to be
                              - 67 -


considered.   Wright v. Commissioner, supra at 643-644.    As we

have held above that respondent has not established by clear and

convincing evidence an underpayment by Giongo for 1982,

respondent has not proved fraud for that year, and the expiration

of the period of limitations bars assessment and collection of

tax for that year.   For 1983, we hold that there is clear and

convincing evidence of an underpayment which, when combined with

other evidence, including Giongo's convictions for racketeering

and filing a false return, establishes fraud for 1983.

Accordingly, the period of limitations does not preclude

assessment and collection of tax for that year, and we hold that

Giongo is liable for the additions to tax under section

6653(b)(1) and (2) as to his entire underpayment for 1983.

III. Additions to Tax Under Section 6661

     Section 6661(a) imposes an addition to tax of 25 percent of

any underpayment attributable to a substantial understatement of

income tax.   A substantial understatement is any understatement

which exceeds the greater of (1) 10 percent of the tax required

to be shown on the return or (2) $5,000.   Sec. 6661(b)(1).   If

the taxpayer has substantial authority for the tax treatment of

the item in question, or if the taxpayer adequately discloses the

tax treatment of the item on the return, then the amount of the

understatement for purposes of this section will be reduced by

that portion of the understatement which is attributable to that

item.   Sec. 6661(b)(2)(B).
                             - 68 -


     None of petitioners made any disclosures with their returns.

Petitioners' only argument is that there is no deficiency, so

there can be no addition under section 6661.    Should any of their

respective understatements of tax as recalculated in accordance

with this opinion be substantial, we hold that the respective

petitioner is liable for the addition to tax under section 6661

for that year.


     In keeping with the foregoing,

                                      Decisions will be entered

                              under Rule 155.
