                         T.C. Memo. 2003-224



                       UNITED STATES TAX COURT



                  WALTER L. MEDLIN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2615-98.                 Filed July 29, 2003.


     David D. Fussell and Mark L. Horwitz, for petitioner.

     James F. Kearney, Benjamin A. de Luna, and Robert W.
Dillard, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


                              CONTENTS

GENERAL FINDINGS OF FACT   . . . . . . . . . . . . . . . . .     6

General Legal Principles   . . . . . . . . . . . . . . . . .    20

I.   Items of Income   . . . . . . . . . . . . . . . . . . .    21

     A.   Rents Received From Island Livings, Inc. in 1988 .    22
                           - 2 -

      FINDINGS OF FACT . . . . . . . . . . . . . . . .       22
      OPINION   . . . . . . . . . . . . . . . . . . . .      22

B.   Schedule C Gains From Property Sales      . . . . . .   23

      1.   Florida Fruit Belt Subdivision (OS-06)    . . .   23

            FINDINGS OF FACT  . . . . . . . . . . . . .      23
            OPINION . . . . . . . . . . . . . . . . . .      24

      2.   Susan’s Lakefront Estate (OS-03)    . . . . . .   28

            FINDINGS OF FACT  . . . . . . . . . . . . .      28
            OPINION . . . . . . . . . . . . . . . . . .      29

      3.   High Plains Property (OS-35)    . . . . . . . .   30

            FINDINGS OF FACT  . . . . . . . . . . . . .      30
            OPINION . . . . . . . . . . . . . . . . . .      31

      4.   Silver Lake (OS-1.4)    . . . . . . . . . . . .   36

            FINDINGS OF FACT  . . . . . . . . . . . . .      36
            OPINION . . . . . . . . . . . . . . . . . .      37

      5.   East Lake Vista (OS-47)     . . . . . . . . . .   38

            FINDINGS OF FACT  . . . . . . . . . . . . .      38
            OPINION . . . . . . . . . . . . . . . . . .      42

      6.   Grissom Parcels (OS-1.3)    . . . . . . . . . .   52

            FINDINGS OF FACT  . . . . . . . . . . . . .      52
            OPINION . . . . . . . . . . . . . . . . . .      53

      7.   Arrowhead Lakes Subdivision (OR-2),
             Angel-Royse Property (OS-39) . . . . . . .      58

            FINDINGS OF FACT  . . . . . . . . . . . . .      58
            OPINION . . . . . . . . . . . . . . . . . .      60

      8.   Prather Ranch Property (OR-01)    . . . . . . .   65

            FINDINGS OF FACT  . . . . . . . . . . . . .      65
            OPINION . . . . . . . . . . . . . . . . . .      68

      9.   Citrus County Property    . . . . . . . . . . .   75
                             - 3 -

            FINDINGS OF FACT  . . . . . . . . . . . . .      75
            OPINION . . . . . . . . . . . . . . . . . .      77

C.   Miscellaneous Items of Schedule C Income      . . . .   81

      FINDINGS OF FACT . . . . . . . . . . . . . . . .       81
      OPINION   . . . . . . . . . . . . . . . . . . . .      82

D.   Schedule E Income   . . . . . . . . . . . . . . . .     82

      FINDINGS OF FACT . . . . . . . . . . . . . . . .       82
      OPINION   . . . . . . . . . . . . . . . . . . . .      83

E.   Unidentified Deposits    . . . . . . . . . . . . . .    83

      1.   Deposit on March 12, 1985, of $59,000     . . .   84

            FINDINGS OF FACT   . . . . . . . . . . . . .     84
            OPINION    . . . . . . . . . . . . . . . . .     85

      2.   Deposit on September 16, 1986, of $84,521.63      88

            FINDINGS OF FACT   . . . . . . . . . . . . .     88
            OPINION    . . . . . . . . . . . . . . . . .     89

      3.   Deposit on April 9, 1987, of $67,740    . . . .   93

            FINDINGS OF FACT   . . . . . . . . . . . . .     93
            OPINION    . . . . . . . . . . . . . . . . .     95

      4.   Deposit on July 8, 1988, of $140,000    . . . .   96

            FINDINGS OF FACT   . . . . . . . . . . . . .     96
            OPINION    . . . . . . . . . . . . . . . . .     98

      5.   Other Deposits   . . . . . . . . . . . . . . . 103

            FINDINGS OF FACT   . . . . . . . . . . . . . 103
            OPINION    . . . . . . . . . . . . . . . . . 103

F.   Deductions Claimed by Petitioner     . . . . . . . . 103

      1.   Schedule C Real Estate Business Deductions    . 103

            FINDINGS OF FACT   . . . . . . . . . . . . . 103
            OPINION    . . . . . . . . . . . . . . . . . 104

      2.   Personal Residence Interest    . . . . . . . . 105
                                    - 4 -


                   FINDINGS OF FACT  . . . . . . . . . . . . . 105
                   OPINION . . . . . . . . . . . . . . . . . . 105

             3.   Orange Grove, Cattle, and Ferrari
                    Activities . . . . . . . . . . . . . . . . 106

                   FINDINGS OF FACT  . . . . . . . . . . . . . 106
                   OPINION . . . . . . . . . . . . . . . . . . 108

       G.   Self-employment Tax    . . . . . . . . . . . . . . . 116

                   FINDINGS OF FACT  . . . . . . . . . . . . . 116
                   OPINION . . . . . . . . . . . . . . . . . . 116

II.    Additions to Tax for Fraud      . . . . . . . . . . . . . 118

       A.   Underpayment of Tax Required To Be Shown
              on a Return . . . . . . . . . . . . . . . . . . 121

             1.   Underpayment for 1985 . . . . . . . . . . . . 122

             2.   Underpayment for 1986 . . . . . . . . . . . . 128

             3.   Underpayment for 1987 . . . . . . . . . . . . 131

             4.   Underpayment for 1988 . . . . . . . . . . . . 132

             5.   Conclusion    . . . . . . . . . . . . . . . . . 135

       B.   Fraudulent Intent    . . . . . . . . . . . . . . . . 135

             1.   Clear and Convincing Evidence of Fraud   . . . 135

             2.   Portion of Underpayment Not Attributable
                    to Fraud    . . . . . . . . . . . . . . . . 145

       C.   Section 6653(b)(2) Addition to Tax for 1985    . . . 153

III.    Statute of Limitations for Assessment      . . . . . . . 155

Appendix A     . . . . . . . . . . . . . . . . . . . . . . . . 157

Appendix B     . . . . . . . . . . . . . . . . . . . . . . . . 162

Appendix C     . . . . . . . . . . . . . . . . . . . . . . . . 164

Appendix D     . . . . . . . . . . . . . . . . . . . . . . . . 171
                                       - 5 -

       RUWE, Judge:      Respondent determined deficiencies in

petitioner’s Federal income taxes and additions to tax as

follows:

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


1985       $86,533      $43,736       50% of the        ---            ---
                                      Interest Due
                                      on $87,471
1986       165,732        ---            ---         $124,340       50% of the
                                                                     Interest Due
                                                                     on $165,787
1987       309,456        ---           ---           232,092       50% of the
                                                                     Interest Due
                                                                     on $309,456
1988        64,910       51,021         ---             ---             ---


After concessions,1 the issues for decision are:                (1) Whether

petitioner had unreported income from various real estate

transactions, from commissions, interest, rents, and unidentified

deposits for the years in issue; (2) whether petitioner is liable

for additions to tax for fraud under section 6653(b);2 and (3)

whether assessment of the alleged deficiencies is barred by the

statute of limitations.           For convenience and clarity, general

findings of fact are discussed first followed by a statement of

general legal principles applicable to this opinion; separate

       1
      The concessions of petitioner and respondent, as well as
the amounts which remain in dispute, are detailed in app. C.
Petitioner on brief adopts respondent’s statement of the issues
settled by the parties and the accompanying schedules thereto.
       2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 6 -

findings of fact and opinion are then set forth for each item of

unreported income.    Finally, we discuss whether the additions to

tax for fraud apply and whether assessment is barred by the

statute of limitations.

                      GENERAL FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

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

petition, petitioner resided in Kissimmee, Florida.

     Since the 1960s through the present, petitioner has been

engaged in the business of buying and selling real estate, as

well as real estate development.    Petitioner used Donna Allen

(Ms. Allen), Michael Johnson,3 and R. Stephen Miles, Jr. (Mr.

Miles), as trustees for the buying and selling of real estate.

Ms. Allen’s and Mr. Johnson’s only duties as trustees were to

hold title to the various properties in trust.

     Petitioner met Ms. Allen in 1971, and since 1974, she has

worked for petitioner as a bookkeeper, secretary, and

housekeeper.    Petitioner and Ms. Allen had a child together in

1982.    The child lived with Ms. Allen from 1982 through 1990.

Petitioner agreed to pay child support of $50,000 per year to Ms.

Allen.    Since 1975, petitioner has given real property and two




     3
        Michael Johnson was petitioner’s cousin.
                               - 7 -

Ferrari automobiles to Ms. Allen.    Petitioner owed Ms. Allen

money for a number of different things, including child support.

     Mr. Miles is an attorney in the State of Florida, and he has

known petitioner since 1959.   He has been petitioner’s real

estate attorney since 1975, and he started acting as a trustee

for petitioner at that time.   As trustee, Mr. Miles did whatever

petitioner instructed him to do.    Mr. Miles held the proceeds

from petitioner’s sales of real estate in his law firm’s trust

account.   Alana Goodman was a bookkeeper for Mr. Miles’s law

firm, and she maintained ledger cards which reflected the

identity of properties held in trust, the date that funds were

deposited or disbursed, and the amounts that were deposited and

disbursed from the law firm’s trust account.

     On several occasions, petitioner instructed Mr. Miles or Ms.

Goodman to disburse his funds from the law firm’s trust account

for various payments:   (1) On December 23, 1985, a house payment

of $51,266.25 was paid to Walter E. and Maxine Melitshka from the

trust account with respect to petitioner’s personal residence;

(2) on May 15, 1987, a house payment of $71,266.25 was paid to

Mr. and Mrs. Melitshka with respect to petitioner’s personal

residence; (3) on May 21, 1987, petitioner’s accountant, John F.

Kelly, was paid $12,187.50; (4) on June 15, 1987, $32,500 was
                               - 8 -

paid for the purchase of a 1960 Ferrari;4 (5) on July 2, 1987,

Ms. Allen was paid $31,800; (6) on July 9, 1987, income taxes of

$8,472 were paid to the Internal Revenue Service (IRS); (7) on

July 28, 1987, $12,000 was paid to Mid America Exotic Auto Sales;

(8) on July 30, 1987, income taxes of $1,482 were paid to the

IRS; (9) on September 17, 1987, child support of $10,000 was paid

to Ms. Allen; (10) on October 9, 1987, a house payment of $30,000

was paid to Mr. and Mrs. Melitshka with respect to petitioner’s

personal residence; (11) on November 2, 1988, political

contributions of $2,800 were paid.     None of those payments from

the law firm’s trust account were reported as income by

petitioner.

     Mr. Kelly prepared petitioner’s Forms 1040, U.S. Individual

Income Tax Returns, for 1983 through 1988.5    Petitioner provided

Mr. Kelly with spreadsheets which reflected deposits into, and

expenditures from, petitioner’s bank accounts for the years 1983

through 1988.6   Those spreadsheets provided the basis for

preparing petitioner’s tax returns for those years:    The income


     4
      The bill of sale and the application for a temporary tag
for the Ferrari were in the name of Mr. Miles’s law firm;
however, petitioner was its actual owner.
     5
      Mr. Kelly is a certified public accountant who has known
petitioner since 1975. Mr. Kelly and petitioner were members of
the Ferrari Club of America.
     6
      The spreadsheets were prepared by Ms. Allen at petitioner’s
request. Petitioner provided Ms. Allen guidance in preparing the
spreadsheets.
                                - 9 -

reported on the returns reflected deposits into petitioner’s bank

accounts, less any deposits that were classified as loan

proceeds.    Any amounts not deposited into petitioner’s bank

accounts were not reported as income.    Petitioner did not provide

Mr. Kelly with checks, real estate contracts, real estate closing

statements or any other books or records to prepare his income

tax returns.    Petitioner did not inform Mr. Kelly that the

proceeds from his real estate sales were deposited in Mr. Miles’s

law firm’s trust account, and those proceeds were not reflected

on the spreadsheets.    Petitioner did not inform Mr. Kelly of any

additional income.    Throughout the 1980s and 1990s, petitioner

asked Mr. Kelly questions about the requirements for like-kind

exchanges.

     Petitioner requested extensions for the filing of his income

tax returns for 1985, 1986, 1987, and 1988.    Petitioner’s Form

2688, Application for Extension of Time to File U.S. Individual

Income Tax Return, for the 1985 tax year states as his need for

an extension:    “Client derived substantially all his income from

a bulk land transaction, which was extremely complex.    Additional

time is needed to analyze the transaction.”    Petitioner did not

provide any information to Mr. Kelly regarding any bulk land sale

transaction.    Petitioner requested an extension for tax years

1986, 1987, and 1988, because “Taxpayer has not received all

needed K-1's for 1065 & 1120 tax returns that represent a
                               - 10 -

substantial portion of his income.      Without these items a

complete and accurate return cannot be prepared.”      Petitioner

provided no Schedules K-1 to Mr. Kelly.7

     On petitioner’s Form 1040, Schedule C, Profit or (Loss) From

Business or Profession, for 1985, petitioner listed his principal

business or profession as “Real Estate Development”.       Petitioner

reported no income from gross receipts or sales, but he did

report $160,363 as “Other income Commissions, Fees & Interest”

and claimed deductions of $152,481.      See appendix A.   Petitioner

reported a net profit from his real estate development business

of $7,882 on his Form 1040.    This was the only amount petitioner

reported as income for 1985.   Petitioner reported taxable income

of $5,802 and a tax of $426.

     On petitioner’s Form 1040, Schedule C, for 1986, petitioner

listed his principal business or profession as “Real Estate

Development”.   He likewise reported no income from gross receipts

or sales, reported $119,772 as “Other income Commissions, Fees &

Interest”, and claimed deductions of $115,634.      See appendix A.

Petitioner reported a net profit from his real estate development

business of $4,138 on his Form 1040.      This was the only amount




     7
      Mr. Kelly discussed Schs. K-1 with Mr.    Miles and Mr.
Miles’s accountant. However, the accountant     informed him that
Schs. K-1 would not be provided and that any    information that
would have been on those schedules should be    put on petitioner’s
personal income tax returns.
                              - 11 -

petitioner reported as income for 1986.     Petitioner reported

taxable income of $2,058 and a tax of $0.

     On petitioner’s Form 1040, Schedule C, for 1987, petitioner

listed his principal business or profession as “Real Estate

Development”.   He reported no income from gross receipts or

sales, reported $138,653 as “Other income * * * Fees, int, &

Sales”, and claimed deductions of $94,434.     See appendix A.

Petitioner reported a net profit from his real estate development

business of $44,219 on his Form 1040.     This was the only amount

petitioner reported as income for 1987.     Petitioner reported

taxable income of $37,879 and a tax of $7,515.

     On petitioner’s Form 1040, Schedule C, for 1988, petitioner

listed his principal business or profession as “Developer/Real

Estate”.   Petitioner reported $61,921 as income from gross

receipts or sales, reported no “Other income”, and claimed

deductions of $43,713.   See appendix A.    Petitioner reported a

net profit from his real estate development business of $18,208

on his Form 1040.   This was the only amount petitioner reported

as income for 1988.8   Petitioner reported taxable income of

$5,206 and a tax of $784.

     In 1985, petitioner purchased a ring, earrings, and two

necklaces for Ms. Allen as a gift.     Those items cost $14,540,



     8
      Petitioner claimed an S corporation loss from Frank’s
Corner, Inc., of $4,702 in 1988.
                               - 12 -

which petitioner deducted as commissions paid on Schedule C of

his 1985 tax return.    Petitioner deducted the costs of his

subscriptions to Playboy and Penthouse magazines on his 1986 tax

return as Schedule C business expenses.

     The trusts that petitioner used did not file tax returns for

any of the tax years at issue.    During 1985-88, petitioner never

informed Mr. Miles that petitioner believed that he had no

obligations to report his earnings from the trust transactions,

because they supposedly involved tax free exchanges.

     Petitioner used the fictitious names “John Waltin”9 and

“William R. Wright” in some of his real estate transactions

during the tax years at issue.    Petitioner signed various real

estate documents as “William R. Wright”.    Petitioner signed that

name as a notary public on real estate documents and on articles

of incorporation filed with the State of Florida.    Petitioner

used and signed the name “D.W. Davis” to purchase and sell real

estate.    He opened a bank account in that name without the

knowledge of Mr. Davis.    At one time, petitioner was a notary

public in the State of Florida; however, his license expired.

Petitioner continued to notarize documents after his license

expired.




     9
      At trial, petitioner claimed that the name John Waltin was
not a fictitious name because “there’s probably a John Waltin
somewhere.”
                               - 13 -

       Mr. Miles held properties in land trusts, which we refer to

as the Mefford Property (OS-22) and Susan’s Lakefront Estate (OS-

03).    Mr. Miles, as trustee, applied for and received an employer

identification number for those land trusts.    Respondent

requested tax returns from Mr. Miles for the land trust holding

the Mefford Property for 1985, 1986, and 1987.    Respondent also

requested tax returns from Mr. Miles for the land trust holding

Susan’s Lakefront Estate for 1984, 1985, and 1986.    Mr. Miles

discussed with petitioner this latter request.    Mr. Miles

informed respondent that the trusts were not required to file

returns because each of the beneficiaries had filed a return and

reported his or her share of the income.10

       In 1985-88, petitioner was a shareholder and officer in

Frank’s Corner, Inc., which operated a bar and lounge (Island

Living, Inc.), a furniture import business, and Waltin

Investments, Inc.    Petitioner was also a shareholder in Medlin

Investment Co., Michigan Avenue Car Wash, Majestic Oaks, and

Cheyenne Social Club.    During the tax years at issue, petitioner

owned approximately 25 Ferrari automobiles.    Petitioner did not

sell any of those Ferraris during 1985-88.

       On December 17, 1985, petitioner sold a piece of property to

Fred Brunson for $5,000.    The quitclaim deed that petitioner or



       10
      Mr. Miles testified that he supposed that he got this
information from petitioner.
                                 - 14 -

his agent filed with the Osceola County Recorders Office paid

documentary stamp taxes of only $.50, reflecting a reported sales

price of less than $100.

     Petitioner maintained the following bank accounts during the

tax years at issue:

          Bank Name               Account Number           Account Name

  Freedom Savings and Loan         32-480-9               Walter L. Medlin
    (formerly Com Bank)                                     Trust Account 1
  Tucker State Bank                 1089234               Walter L. Medlin
  Tucker State Bank                  18066                Walter L. Medlin
                                                            Trust Account 1

The accounts titled “Trust Account 1” were actually petitioner’s

personal bank accounts.      Petitioner was also the beneficiary of a

Cayman Islands trust account at Washington International Bank and

Trust, Ltd., which he had funded.

     On a financial statement dated November 15, 1985, petitioner

represented that he had a net worth of $10,822,260, and he valued

his automobile collection at $2,717,000.           On a financial

statement dated June 1, 1988, petitioner represented that he had

a net worth of $7,121,800.     On a financial statement dated

September 20, 1989, petitioner represented that he had a net

worth of $8,837,000.11

     Thomas Brooks, a certified public accountant, prepared

petitioner’s tax returns for the 1977-1982 tax years.           Petitioner

provided spreadsheets of his income and expenses to Mr. Brooks


     11
      The financial statements dated June 1, 1988, and Sept. 20,
1989, do not include a listing for petitioner’s automobile
collection.
                               - 15 -

for the preparation of his tax returns.   Mr. Kelly prepared those

spreadsheets using as their basis the deposits and disbursements

into, and from, petitioner’s bank accounts.   Petitioner did not

inform Mr. Brooks that the proceeds from his real estate

transactions were deposited into Mr. Miles’s law firm’s trust

account, that those proceeds were not accounted for on the

spreadsheets, that petitioner used trustees in his transactions,

or that petitioner had a Cayman Islands trust account.

Petitioner did not give to Mr. Brooks any books, records, or

closing statements from his real estate transactions.    Petitioner

did not file timely his Federal income tax returns for 1977,

1978, 1979, 1980, and 1981.   Petitioner did not file his Forms

1040 for those years until June 15, 1983.

     Respondent audited petitioner for the 1977-1982 tax years,

and respondent issued a notice of deficiency for those years on

June 13, 1986.12   On September 12, 1986, petitioner filed a

petition with the Tax Court (docket No. 36958-86).   In January

1988, petitioner and his representative met with respondent’s

revenue agent for purposes of resolving that case.   Petitioner

took an active role in those meetings.    Most of the real estate

transactions which were at issue for the 1977-1982 tax years



     12
      Petitioner’s representative would not allow petitioner to
meet with respondent’s revenue agent assigned to examine his
returns or to extend the period of limitations, unless respondent
gave petitioner immunity from criminal prosecution.
                                   - 16 -

involved the use of trustees, and petitioner agreed that those

particular transactions were taxable.         Petitioner did not inform

the revenue agent that proceeds from his real estate transactions

were deposited into Mr. Miles’s law firm’s trust account, nor did

he inform him of his belief that those proceeds were not subject

to taxation if not disbursed.       On April 27, 1988, this Court

entered a decision pursuant to a stipulation of the parties and

found the following deficiencies and additions to tax:

                                     Additions to Tax
Tax                      Sec.          Sec.      Sec.        Sec.           Sec.
Year    Deficiency    6651(a)(1)     6653(a) 6653(a)(1)   6653(a)(2)        6661

1977       $1,082      $2,240           $54     n/a              n/a         n/a
1978       22,213      10,661         1,161     n/a              n/a         n/a
1979       63,533      15,883         3,177     n/a              n/a         n/a
1981        7,110       1,778           n/a    $356       50%   interest
                                                           on   $7,110       n/a
1982       37,921       3,792          n/a     1,896      50%   interest
                                                           on   $37,921    $9,480

       Petitioner did not file timely his Forms 1040 for 1983 and

1984.    Those tax returns were filed on January 30, 1986, and

March 7, 1986, respectively.       Respondent examined those tax

returns.    Petitioner told the revenue agent assigned to that

examination that he was not involved in any corporations,

partnerships, or trusts.     Petitioner’s income for 1983 and 1984

was determined on the basis of deposits and disbursements from

his bank accounts.    The revenue agent explained to petitioner

that simply analyzing deposits into his bank account was not the

proper way to report income and did not reflect the true

financial picture of his real estate transactions.              Petitioner
                                - 17 -

did not disclose all his installment sale activities to the

revenue agent during this examination.    Petitioner also informed

the revenue agent that his Cayman Islands trust account had been

closed in 1983.    However, petitioner received five checks

totaling $135,000 from the Cayman Islands trust in 1985.      On

October 21, 1988, petitioner agreed to income tax deficiencies of

$10,550 and penalties of $3,584 for those tax years.

     Respondent received Forms 1040 for petitioner’s 1985 and

1986 tax years on November 29, 1988.     Those forms were not timely

filed.13    Petitioner’s Form 1040 for 1987 was received on October

17, 1988.    Petitioner was given an extension until October 16,

1989, to file his 1988 Federal income tax return.    Petitioner did

not file his Form 1040 for 1988 until April 26, 1990.    For each

of his Forms 1040 for 1985, 1986, 1987, and 1988, petitioner

listed his address as “P.O. Box 383, Lake Lure, NC 28746”.

However, petitioner actually resided in Kissimmee, Florida, at

the time he filed his returns.

     Respondent examined petitioner’s 1985, 1986, 1987, and 1988,

tax returns.    As part of that examination, respondent’s revenue

agent spent several weeks researching courthouse records in seven

counties in order to identify petitioner’s real estate


     13
      Petitioner claims to have previously filed timely returns
for 1985 and 1986; however, respondent could not find those
purported returns. Petitioner did not produce copies of any such
returns, and he did not present any evidence or testimony on the
subject of those purported returns.
                               - 18 -

transactions for 1985-88.    Petitioner never informed the revenue

agent of his belief that funds from his real estate transactions,

which were held in trust, were not subject to taxation.

Respondent reconstructed petitioner’s income and expenses for

1985, 1986, 1987, and 1988.

     On September 5, 1990, respondent served a third-party

recordkeeper summons on Mr. Miles, which requested information

pertaining to petitioner’s income tax liabilities for the 1985-88

tax years.   At the request of petitioner’s representative, Mr.

Miles did not provide the requested documents to the IRS.     On

March 7, 1991, the Government filed a petition in the U.S.

District Court for the Middle District of Florida, Orlando

Division, to enforce the summons issued to Mr. Miles.    On March

26, 1991, petitioner filed a motion to intervene in the

enforcement proceeding.    On September 17, 1992, the Government

filed a notice to dismiss, and, on September 18, 1992, the court

canceled a show cause hearing and dismissed the summons

enforcement proceeding.    On April 18, 1991, respondent served a

summons on petitioner.    Petitioner failed to comply with the

summons, and the Government filed a petition to enforce the

summons in the U.S. District Court for the Middle District of

Florida, Orlando Division.

     On June 12, 1997, an information was filed in the U.S.

District Court for the Middle District of Florida alleging that
                              - 19 -

petitioner violated section 7206(4) in regard to his unpaid

income tax liabilities for 1977-82.    On November 13, 1997,

pursuant to petitioner’s plea of guilty, the District Court

entered a judgment convicting petitioner of a violation of

section 7206(4) and sentenced petitioner to imprisonment.      The

offense to which petitioner pleaded guilty occurred on August 9,

1990.   In the plea agreement, petitioner admitted:

          WALTER L. MEDLIN, in an attempt to avoid the
     collection of a previously assessed income tax
     liability for which levy was authorized under 26 U.S.C.
     § 6331, placed three of his automobiles in a storage
     facility, located on Michigan Avenue in Kissimmee,
     Florida, in the Middle District of Florida, which
     facility leased to an entity called Central Florida
     Transportation Museum, Inc.

          Specifically, the defendant MEDLIN, after
     consenting to a United States Tax Court judgment
     against him in the approximate amount of $400,000.00
     for liabilities stemming from tax years 1977-1982,
     misrepresented the nature and extent of his assets to
     an IRS Revenue Officer. Further, after issuance of the
     levy, defendant MEDLIN stored the automobiles in the
     above-referenced storage facility and, when asked about
     the case by and [sic] IRS Revenue Officer, stated that
     he no longer owned the vehicles. MEDLIN knew this
     statement to be false.

     On November 14, 1997, respondent issued a notice of

deficiency to petitioner for 1985, 1986, 1987, and 1988.    On

February 11, 1998, petitioner filed his petition.

     Petitioner testified on his own behalf at trial.   We find

that, generally, his testimony was self-serving, was not

credible, was at times inconsistent, and was at other times

confusing.   Petitioner did not satisfactorily answer many of the
                                - 20 -

questions that he was asked, and the questions that he did answer

he did not answer with any degree of specificity.    With respect

to the real estate transactions, he was evasive and did not

recall specific transactions.    Petitioner could not testify

whether his financial statements were accurate.

                     General Legal Principles

     Respondent’s determinations of unreported income for the tax

years at issue are presumed correct, and petitioner bears the

burden of proving those determinations incorrect, arbitrary, or

erroneous.   Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933);

Parks v. Commissioner, 94 T.C. 654, 658-659 (1990).    On the other

hand, respondent has the burden of proving by clear and

convincing evidence that some portion of an underpayment of taxes

by petitioner is due to fraud.    Sec. 7454(a); Rule 142(b).

     Section 6001 requires taxpayers to keep adequate records.

The regulations promulgated under that section provide:

          Records. (a) In general. * * * any person subject
     to tax under subtitle A of the Code * * * or any person
     required to file a return of information with respect
     to income, shall keep such permanent books of account
     or records, including inventories, as are sufficient to
     establish the amount of gross income, deductions,
     credits, or other matters required to be shown by such
     person in any return of such tax or information. [Sec.
     1.6001-1(a), Income Tax Regs.]

In Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,

1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947), we stated:

     The rule is well established that the failure of a
     party to introduce evidence within his possession and
                              - 21 -

     which, if true, would be favorable to him, gives rise
     to the presumption that if produced it would be
     unfavorable. This is especially true where * * * the
     party failing to produce the evidence has the burden of
     proof or the other party to the proceeding has
     established a prima facie case. * * *

Also, the failure to present the testimony of available

witnesses, who purportedly possess knowledge about certain

relevant facts, provides sufficient basis to infer that the

testimony of those witnesses would not have been favorable.

Petzoldt v. Commissioner, 92 T.C. 661, 691 (1989); Pollack v.

Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th

Cir. 1968).

     We are not required to accept incredible, implausible, or

biased testimony.   Fleischer v. Commissioner, 403 F.2d 403, 406

(2d Cir. 1968), affg. T.C. Memo. 1967-85; Parks v. Commissioner,

supra at 659; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

I.   Items of Income Determined by Respondent

     Respondent prepared on brief a reconciliation of items which

are “in dispute” and concessions as to the adjustments in the

statutory notice of deficiency.   Appendix C of this opinion

reflects the reconciliation schedules that respondent prepared

and which petitioner stipulated in his answering brief.   We

discuss below those items of income that the parties represented

were still in dispute.   However, we point out that petitioner

does not contest on brief many of those items.   Instead, he
                                - 22 -

states “In addition, any issues not raised in Petitioner’s Brief

are also conceded by Petitioner.”

     A.    Rents Received From Island Living, Inc. in 1988

                           FINDINGS OF FACT

     In 1985, petitioner through Mr. Miles, as trustee, purchased

property located in Osceola County, Florida, the “Osceola County

Property” (OS-19).    On July 22, 1985, petitioner leased that

property to petitioner’s corporation, Island Living, Inc., for

$3,000 per month.    Petitioner concedes that he received rents of

$6,000 in 1985, $24,000 in 1986, $24,000 in 1987, and $12,000 in

1988 from Island Living, Inc.

                                OPINION

     Petitioner did not address on brief whether he received the

additional amount of $12,000 that respondent determined as rent

in 1988.    We find that petitioner has conceded this matter.    We

find that he received $24,000 of rental income in 1988 and that

he is taxable on that amount.    See sec. 61(a)(5).

     B.    Schedule C Gains From Property Sales

           1.   Florida Fruit Belt Subdivision (OS-06)

                           FINDINGS OF FACT

     On April 11, 1985, petitioner through Mr. Miles, as trustee,

sold three lots from the “Florida Fruit Belt Subdivision” located

in Osceola County, Florida, to Burl and Louise Mynhier for

$69,000.    Mr. and Mrs. Mynhier paid cash of $33,000 and issued to
                               - 23 -

petitioner, through Ms. Allen, a promissory note and mortgage for

$36,000.    Petitioner’s basis in the three lots was $9,316, and he

incurred selling costs of $412.

     On May 20, 1985, petitioner through Ms. Allen, as trustee,

assigned the mortgage that the Mynhiers issued to his father,

Charles Medlin, for $36,000.   Petitioner instructed the mortgagor

to send the mortgage payments directly to Charles Medlin.    An

assignment of mortgage dated May 20, 1985, and signed by Ms.

Allen, was filed with the County of Osceola, Florida; it

provides:

     That I, Donna L. Allen part[y] of the first part, in
     consideration of the sum of Thirty-Six Thousand and
     no/100 dollars, and other valuable considerations,
     received from or on behalf of Charles B. Medlin party
     of the second part, at or before the ensealing and
     delivery of those presents, the receipt whereof is
     hereby acknowledged, do hereby grant, bargain, sell,
     assign, transfer and set over unto the said part[y] of
     the second part a certain mortgage bearing date the
     12th day of April A.D. 1985 made by Burl R. Mynhier and
     Louise Mynhier, his wife in favor of Donna L. Allen and
     recorded in Official Records Book 772; page 782, public
     records of Osceola County, Florida, upon the following
     described piece or parcel of land, situate and being in
     said County and State, to wit:

                      [Description of OS-06]

                 *    *    *    *    *    *    *

     Together with the note or obligation described in said
     mortgage, and the moneys due and to become due thereon,
     with interest from the 20th day of May 1985.

          To Have and to Hold the same unto the said party
     of the second part his heirs, legal representatives,
     successors and assigns forever.
                               - 24 -

     Petitioner did not report any income from the sale to the

Mynhiers on his Form 1040 for 1985.

                               OPINION

     An installment sale is a disposition of property where at

least one payment is to be received after the close of the

taxable year in which the disposition occurs.     Sec. 453(b).

Income from an installment sale shall be taken into account under

the installment method.    Sec. 453(a).   Under the installment

method, the income recognized for any taxable year from a

disposition is that proportion of the payments received in that

year which the gross profit bears to the total contract price.

Sec. 453(c).    Respondent determined that petitioner recognized

$28,347 as income from the installment sale to the Mynhiers in

1985.14   Petitioner did not address this issue on brief, and he

conceded any arguments he might have made, but did not.     We hold

that petitioner recognized $28,347 as income from the installment

sale in 1985.

     Under section 453B(a), gain or loss shall be recognized on

the sale or exchange of an installment obligation to the extent

of the difference between the basis of the obligation and the

amount realized.    The basis of an installment obligation shall be


     14
      Respondent computed the installment gain in 1985 as
follows: Gross profit ($59,272) = sales price ($69,000) minus
selling expenses ($412) minus basis ($9,316); gross profit
percentage (0.859014) = gross profit ($59,272)/contract price
($69,000); income from installment sale ($28,347) = payments in
1985 ($33,000) x gross profit percentage (0.859014).
                               - 25 -

the excess of the face value of the obligation over an amount

equal to the income which would be returnable were the obligation

satisfied in full.    Sec. 453B(b).   Any gain or loss recognized

shall be considered as resulting from the sale or exchange of the

property in respect of which the installment obligation was

received.    Sec. 453B(a) (flush language).

     Respondent determined that the assignment by petitioner to

Charles Medlin was a sale of an installment obligation under

section 453B(a) and that petitioner recognized a gain of $30,925

in 1985.15   Petitioner argues that the assignment of the mortgage

to his father was not a sale but that it was pledged as

collateral for a loan.

     At trial, petitioner testified as follows:

     Q    All right. Would you explain what transpired in
     relation to this mortgage and how you dealt with the
     mortgage in relation to your father?

     A    From the sale of the property, there was down
     payment for cash. And then the mortgage, we took out
     the mortgage. And the guy would make payments; I
     believe they were annual payments, or maybe monthly;
     I’m not sure. Anyway, he was going to make payments,
     but I needed some money.

          And my father, again, he was mainly a go-put-his-
     money-in-the-bank; he wasn’t interested in real estate
     deals or anything, and I was probably sitting around
     moaning to him about the interest I was paying to other
     people like Mr. Margolis and things like that; he
     expressed an interest in--why didn’t I give him some of


     15
      Respondent computed the gain from the purported sale of
the installment obligation as follows: Gain from sale of
installment obligation ($30,925) = face value of the obligation
sold ($36,000) x gross profit percentage (0.859014).
                             - 26 -

     that? And I was reluctant. He lived in Jacksonville
     and didn’t know anything about my business or anything
     else, so--but, anyway, this was something he could
     relate to. It was a mortgage on a piece of property
     and there were payments coming in and I went to him and
     borrowed--I’d borrowed from him before, just smaller
     amounts of money--some money from him against the
     mortgage, and signed a note to him as collateral, and
     proceeded to continue to collect the payments. Again,
     trying to make him feel warm and fuzzy, instructed the
     mortgagor to send the mortgage payments directly to my
     dad. We stayed on top of it and if they were a day
     late, he called, and we had to go round up the guy and
     get it to him.

          Basically, it was a loan from my dad and as I got
     in my payments from the other guy, they were forwarded
     either directly to him or I got the payments in and
     forwarded them directly to my dad. Unlike where you
     sell a mortgage without recourse and it’s gone, it’s
     the other person’s mortgage and you get the money and
     go home, I had to live with this. And, if he had quit
     paying, my father didn’t want a piece of property in
     Osceola County, at his age, his health, you know, I was
     going to have to pay the mortgage.

     Q    You were going--

     A    Right. I was going to have to pay the loan in
     lieu of the mortgage payments?

     Q    So your position in relation to the handling of
     that mortgage is that you did not sell the mortgage to
     your father?

     A     Correct. As collateral, though, it was assigned
     to him. And that’s customary practice. I’ve borrowed
     against mortgages, mortgage payments, from like Finance
     America, Chrysler Financial Corporation, and stuff and
     generally what you do is assign them a mortgage,
     usually you assign them the mortgage and a portion of
     the note. Say you only borrowed the next five
     payments, say, you would assign them a portion of the
     note.

Petitioner’s testimony is self-serving, is less than credible,

and it is not supported by the testimony of other witnesses or
                              - 27 -

evidence of record.   Indeed, on brief, petitioner states that

“Mr. Medlin’s testimony clouded by the passage of so many years

was not precise.”   We cannot accept petitioner’s unsubstantiated

testimony.16

     If we were to accept petitioner’s unsubstantiated testimony

at face value that an installment obligation was pledged as

collateral for loan proceeds, section 453B would be largely

ineffective.   Where as here, no documentary proof has been

introduced to show that petitioner remained personally liable for

any failure of the mortgagor’s payment, we cannot accept that the

assignment was a pledge of collateral.

     Certainly, the form of the assignment was a sale.   The

assignment of mortgage filed with Osceola County states that Ms.

Allen assigned the mortgage to Charles Medlin “in consideration

of the sum of” $36,000.   Moreover, petitioner’s instructions to

the mortgagor were that direct payments were to be made to his

father following the assignment.   Further, although petitioner

testified to his continued involvement in the collection of the

mortgage, he could not testify definitively as to whether he or

Charles Medlin received the mortgage payments.   Nevertheless,

petitioner claims that the assignment of the mortgage occurred



     16
      Petitioner testified that he signed a promissory note to
his father as collateral; however, he did not produce any such
note for the record. Petitioner relies solely on his testimony
and cites the fact that records and witnesses have been lost or
are unavailable.
                                - 28 -

without an assignment of the promissory note and that this

indicates the mortgage was assigned to Charles Medlin as

collateral for a loan.17    However, the assignment of the mortgage

states that the mortgage “Together with the note or obligation

described in said mortgage, and the moneys due and to become due

thereon” were transferred.    We hold that petitioner recognized

gain of $30,925 from the sale of an installment obligation in

1985.

           2.   Susan’s Lakefront Estate (OS-03)

                           FINDINGS OF FACT

     In 1970, Medlin Investment Co. purchased certain real

property in Osceola County, Florida, for $59,005.    This property

was subdivided as “Susan’s Lakefront Estate” and consisted of 30

lots (Lot 1, Lot 2, * * *, Lot 30) and one tract (Tract A).

     On July 2, 1985, petitioner through Ms. Allen, as trustee,

sold Lot 1 for $22,000.    Petitioner did not report any income

from this sale on his 1985 Form 1040.    On June 12, 1986,

petitioner through Ms. Allen, as trustee, sold Tract A, for

$23,000.    Petitioner did not report any income from this sale on

his 1986 Form 1040.    On May 25, 1988, petitioner through Mr.




     17
      We note that a mortgage generally secures payment of the
underlying installment obligation and that an assignment of the
mortgage without an assignment of the note creates no right in
the assignee with respect to the note. See Vance v. Fields, 172
So. 2d 613, 614 (Fla. Dist. Ct. App. 1965).
                                 - 29 -

Miles, as trustee, sold Lots 6 through 30, for $540,000.18     The

purchasers paid $89,077 in 1988 and issued a purchase money

mortgage for the remainder.     We are unable to locate this payment

on petitioner’s spreadsheets for 1988, and it does not appear

that he reported any amount of this payment as income on his

return for 1988.

                                OPINION

     In computing petitioner’s gains from the sales in 1985,

1986, and 1988, respondent apportioned the cost basis of the

entire property equally among Lots 1 through 30 and Tract A, and

assigned a basis of $1,903 to each lot and tract.19     Respondent

determined that petitioner realized a gain of $20,097 from the

sale in 1985,20 a gain of $21,097 from the sale to Mr. Dugger in

1986,21 and installment gains of $77,298 from the sales in 1988.22

     On brief, petitioner does not address the disputed gains


     18
          Petitioner incurred selling expenses of $23,831 for this
sale.
     19
      Cost basis for each lot and tract ($1,903) = cost of the
entire property ($59,005)/the number of lots and the tract (31).
     20
      Gain realized ($20,097) = amount realized ($22,000) -
adjusted basis ($1,903).
     21
      Gain realized ($21,097) = amount realized ($23,000) -
adjusted basis ($1,903).
     22
      Gross Profit ($468,594) = sales price ($540,000) - selling
expenses ($23,831) - total of the adjusted bases in lots 6-30
($47,575); gross profit percentage (0.867767) = gross profit
($468,594)/ contract price ($540,000); installment gain from sale
in 1988 ($77,298) = payments received in 1988 ($89,077) x gross
profit percentage (0.867767).
                              - 30 -

from the sales of the lots and the tract.     We find that

petitioner received the amounts determined by respondent as

income for the years in issue and they are taxable as gains

derived from dealings in property.     See sec. 61(a)(3).

         3.   High Plains Property (OS-35)

                         FINDINGS OF FACT

     On June 29, 1977, petitioner, as trustee, through Mr. Miles,

as trustee, purchased real property in Osceola County, Florida,

which we refer to as the “High Plains Property” (OS-35), from

William F. Mitchell, for $448,000.     The High Plains Property was

a large piece of property (a couple hundred acres) which was

divided into 5-acre tracts.

     On May 30, 1985, petitioner through Ms. Allen, as trustee,

sold a lot (Lot 23) in the High Plains Property to Clarence L.

Bass for $27,000.   A gain of $19,699 was realized from the sale

of this lot in 1985.   Petitioner did not report any income from

the sale on his Form 1040 for any tax year.

     Wayne Schoolfield and petitioner each originally owned a 50-

percent interest in the High Plains Property.     Indeed, a

declaration of trust dated April 11, 1977, provides:

          MADE this 11th day of April 1977 by and between D.
     L. Allen, hereinafter referred to as Allen and C. Wayne
     Schoolfield and W. L. Medlin, Trustee as Beneficiaries.

          NOW, THEREFORE, Allen, in consideration of $1.00
     and other valuable considerations, hereby declares that
     she as Trustee holds in trust (for the beneficiaries
     herein named) that certain Offer to Purchase Contract
                              - 31 -

     on property in Osceola County, Florida, presently owned
     by William F. Mitchell, Trustee.

          WHEREAS, the beneficiaries of this Trust and their
     interest are as follows: C. Wayne Schoolfield - 50%
     and W. L. Medlin, Trustee - 50%.

          WHEREAS, Allen further declares she as Trustee
     will own, possess and administer the same only in
     keeping with the interest of the beneficiaries thereto
     and they shall have sole discretion and authority to
     sell, assign, transfer, and convey or otherwise dispose
     of the aforesaid Offer to Purchase Contract and that
     she will execute any and all necessary forms to
     consummate a sale upon receiving notice from the
     beneficiares [sic]. Allen shall account to and pay
     over to the beneficiarie [sic] herein the proceeds
     derived from their stated interest in that Receipt for
     Deposit and Offer to Purchase contract dated April 7,
     1977 and attached hereto.

          AND WHEREAS: Allen shall not sell, convey or
     exchange the property conveyed to her as Trustee with
     herself as an individual without written consent of the
     beneficiaries of this Trust Agreement and she shall
     keep an accurate set of records regarding the above
     property and render periodic accounting therefore to
     the beneficiaries.

Mr. Schoolfield and petitioner’s joint ownership of the High

Plains Property terminated at some point in time.

                              OPINION

     Respondent determined that petitioner was the sole owner of

Lot 23 and that he realized the entire $19,699 gain from the sale

of Lot 23 in 1985.   Petitioner contends that he was a half-owner

of the lot with Mr. Schoolfield when the property was sold and

that he received only half of the gain that respondent

determined.
                              - 32 -

     At trial, petitioner testified that he was in a partnership

with Mr. Schoolfield with respect to the High Plains Property;

however, he could not testify definitively that he and Mr.

Schoolfield were still 50-50 owners at the time of the sale:

     Q    What was your ownership interest in * * * [the
     High Plains Lot]?

     A     I was in a partnership. This is one of the pieces
     I mentioned earlier that Wayne Schoolfield and I had
     purchased from Mr. Green and Mr. Mitchell and developed
     it, broke it up into these 5-acre tracts, and sold
     them.

     Q    What percentage interest did you have when OS-35
     was sold?

     A    I’m sorry. I don’t--Wayne and I, when we did this
     development, were 50-50 and, I believe, that at this
     time, we were still 50-50 owners in the property.

               *      *   *   *    *    *    *

     Q    Did that partnership ultimately end?

     A    Yes, sir.

     Q    Do you recall whether it ended before or after the
     sale of the lots in OS-35?

     A    I think we ultimately sold all the property out,
     and, then, basically, took our money and went home.

     Mr. Schoolfield testified that he was involved in a joint

venture with petitioner with respect to the High Plains Property.

However, when Mr. Schoolfield was shown a copy of the warranty

deed from Ms. Allen to Mr. Bass, he could not recall having ever

owned any interest in Lot 23, and he did not recall having ever
                             - 33 -

received any sale proceeds from Ms. Allen for this property.23

Mr. Schoolfield further testified that the joint ownership of the

High Plains Property may have terminated sometime prior to the

sale of Lot 23 to Mr. Bass, perhaps as early as the 1970s:

     Q    Did you ever have any ownership interest in
     property known as High Plains?

     A    I had some--I ended up with some 5-acre tracts out
     of that. Started off to joint venture, but ended up
     with some 5-acre tracts out of it, yes.

     Q    You say it was a joint venture with who?

     A    Mr. Medlin.

     Q    With Mr. Medlin?
          And when did that joint venture break up?

     A    I’m not sure I can give you a date there, it’s so
     long. It’s in--back in the 70’s.

     Q    It broke up sometime in the 70’s?

     A     I think it occurred probably then, but you got to
     remember, this stuff is going back so far. My hair was
     black and I didn’t have a bald spot in the back of my
     head.



     23
      And with respect to the declaration of trust, Mr.
Schoolfield testified:

     Q    What property did this Declaration of Trust
     pertain to?

     A    There’s nothing attached to it. I--it could have
     been this property or another piece, but--

     Q    Okay. Did this Declaration of Trust pertain
     specifically to this Lot 23?

     A    I--I don’t know. That’s--I don’t think so, but I
     don’t know. It’s been too long for me. I don’t recall
     ever owning this piece.
                             - 34 -

          You know, it’s a long time. But I think it was in
     the early stages, but I can’t, you know, I--my memory
     is not that good.

     Q    Did it occur before the date of this warranty
     deed, which is May of 1985?

     A    I certainly thought it would have.

Ms. Allen testified that petitioner and Mr. Schoolfield were

partners with respect to the High Plains Property and that they

had split up at some point in time.   She could not testify as to

when specifically they split up.

     The evidence of record shows that at one point, Mr.

Schoolfield and petitioner held joint interests in the High

Plains Property, which may or may not have included Lot 23.

Neither petitioner’s, Mr. Schoolfield’s, nor Ms. Allen’s

testimony establishes that Mr. Schoolfield still possessed his

joint interest at the time of the sale of Lot 23 in 1985, or, for

that matter, whether he ever possessed any interest in Lot 23.

The testimony suggests that it was just as likely, if not more

probable, that Mr. Schoolfield and petitioner split up the

various tracts amongst themselves before 1985, that petitioner

was left as the sole owner of Lot 23, and that petitioner

proceeded to sell that lot in 1985 and collect the sales proceeds

therefrom.24


     24
      On recross-examination by petitioner’s counsel, Mr.
Schoolfield testified:

     Q    Ultimately at some point in time, these various 5-
                                                   (continued...)
                             - 35 -

     Petitioner relies on Mr. Schoolfield’s testimony that he

could not say for certain that he did not have a 50-percent

interest in Lot 23 at the time of its sale to Mr. Bass and that

he could not say for certain when the “ultimate division” of the

respective interests in the High Plains Property had occurred.



     24
      (...continued)
     acre tracts, of which you and Walter were 50 percent
     beneficial owner interest in, were sold and then also
     you and he ultimately divided up what was left; is that
     right?

     A    I don’t know that that’s correct. What was left,
     we--somewhere in there I said, “Here, look, let me have
     X tracts and this is--and you take the rest of it. You
     take it all.”

     Q    And as you sit here today, you’re not sure when
     that happened, what the date of that was.

     A    That’s correct. I don’t know that I can give you
     a date. I don’t think I could.

     Q    So, am I correct in your testimony that if that
     date happened, if you split up, and the document, the
     deed on page 1 is one of the 5-acre tracts that Walter
     got, then you would not have had any interest in it if
     it went to Walter after you and he split up.

     A    Yeah.

     Q    And if it happened before the split-up, then you
     would have had an interest in it.

     A    I think that probably is correct.

     Q    And as you sit here today, because of the number
     of years that have gone by, in fact you don’t have your
     tax returns anymore, you can’t specifically tell us for
     sure when that happened in relation to this sale; is
     that right?

     A    Not sitting here today, I can’t.
                                - 36 -

We reemphasize that respondent’s determination of a deficiency is

presumed correct, and it is petitioner who bears the burden of

proving that determination incorrect.    Since petitioner bears the

burden of proof, he must also bear the onus of failed

recollection and the lack of documentary evidence.    Further,

petitioner has created the situation in which he now finds

himself by failing to document properly his various real estate

transactions, in failing to maintain and keep adequate records,

and by unnecessarily complicating those transactions.    We hold

that petitioner is responsible for 100 percent of the gain

realized on the sale of Lot 23 in 1985.

           4.   Silver Lake (OS-01.4)

                           FINDINGS OF FACT

     On September 30, 1975, petitioner, as trustee, purchased

property in Osceola County, Florida, which we refer to as “Silver

Lake” (OS-01.4).     In November 1978, petitioner, as trustee, sold

Silver Lake to L.R. Donnell, Jr., as trustee, for $70,000.    On

February 5, 1979, Mr. Donnell, as trustee, conveyed Silver Lake

to Mr. Miles, as trustee, for no consideration.

     On October 31, 1980, Mr. Miles, as trustee, sold Silver Lake

to Don Prewitt, as trustee, for $220,600.     Mr. Prewitt issued a

purchase money mortgage for $180,000 to Mr. Miles and paid the

balance.    Mr. Miles, as trustee, received the following principal

and interest payments in 1985, 1986, and 1987:
                                 - 37 -
           Year             Principal      Interest

           1985             $18,000        $13,545
           1986              36,000         11,610
           1987              72,000         10,976

Petitioner owned a 50-percent interest in Silver Lake at the time

of its sale in 1980, and his basis was $70,000.

                                OPINION

     Respondent argues that petitioner realized installment gains

of $6,144, $12,288, and $24,577 in 1985, 1986, and 1987,

respectively, for the principal amounts paid to Mr. Miles.25

Petitioner, on brief, does not address the matter.        We find that

petitioner realized installment gains of $6,144, $12,288, and

$24,577 in 1985, 1986, and 1987, respectively.        Sec. 453(a).

     Respondent originally determined that petitioner realized

interest income for the full amount of the interest payments made

to Mr. Miles.     Respondent now concedes that petitioner realized

only 50 percent of the original amounts determined.        Petitioner

does not address on brief his liability for half of the interest

income.   We hold that petitioner realized interest income of

$6,773, $5,805, and $5,488 in 1985, 1986, and 1987, respectively.




     25
      Respondent computed petitioner’s gross profit percentage
as follows: Gross profit ($150,600) = sales price ($220,600)
minus basis ($70,000); gross profit percentage (0.682684) = gross
profit ($150,600)/contract price ($220,600). Respondent then
applied the gross profit percentage to each of the principal
payments in 1985, 1986, and 1987, respectively, and divided the
result in half to account for petitioner’s 50-percent interest.
                                  - 38 -



           5.     East Lake Vista (OS-47)

                             FINDINGS OF FACT

     On May 1, 1984, Mr. Miles, as trustee, purchased real

property consisting of approximately 156.65 acres in Osceola

County, Florida, which we refer to as “East Lake Vista” (OS-47),

from Reba Smith, for $500,000.       Part of the purchase price,

$125,000, was paid in cash, and Mr. Miles issued a purchase money

mortgage of $375,000 for the remainder.26

     In May 1986, Mr. Miles sold approximately 31 acres of East

Lake Vista to Nicholas Pope, for $205,000.       On December 16, 1986,

Mr. Miles sold an additional 31.50 acres of East Lake Vista to

Mr. Pope for $215,181.      Petitioner did not report any income from

those transactions on a Form 1040 for any tax year.

     On December 16, 1986, at the same time as the second sale,

petitioner and Dr. George Gant entered into a “Continuing and

Unconditional Guaranty of Performance and Payment” in favor of

Mr. Pope.       That document shows petitioner and Dr. Gant as

“Guarantors”, Mr. Miles, trustee, as “Seller”, and Mr. Pope as

“Buyer”:

          WHEREAS, R. Stephen Miles, Jr., Trustee, as
     Seller, and Nicholas A. Pope, as Trustee under that
     certain unrecorded Trust Agreement dated December 16,


     26
      The mortgage provides for interest of 10 percent, per
annum, and requires “Three equal annual payments of $150,793.05
including principal and interest commencing one year from the
date hereof and continuing each year thereafter until the entire
balance plus interest is paid in full.” A satisfaction of
mortgage was issued by Reba Smith and was filed on Dec. 18, 1986.
                             - 39 -

     1986, and/or Assigns, as Buyer, entered into that
     certain Contract and Sale and Purchase dated May 2,
     1986 (the “Contract”) with respect to the purchase of
     approximately 31.50 acres, more or less, located in
     Osceola County, Florida (the “Property”); and

          WHEREAS, the terms of the Contract provide for
     Seller’s obligation to complete construction of a road
     to be known as “Dan Smith Road” adjacent to the
     Property at Seller’s expense within one (1) year after
     the date of closing, and further provide for Buyer’s
     right to complete said construction and be reimbursed
     by Seller in the event of Seller’s failure to complete
     said construction in accordance with the Contract; and

          WHEREAS, the Contract further calls for the
     personal guaranty of Seller’s performance of said road
     construction and payment for said road construction by
     the undersigned;

          NOW THEREFORE, as an inducement to the Buyer to
     purchase the Property, and for good and valuable
     consideration not herein recited but the receipt and
     sufficiency of which is hereby acknowledged, the
     undersigned, jointly and severally, give to Buyer, and
     its successors and assigns, their continuing and
     unconditional guaranty of performance and payment by
     the Seller of the following described obligation, to
     the same extent as if Guarantors were the named parties
     identified as the Seller under the Contract:

               *    *    *    *    *     *     *

          The Guarantors hereunder also agree to pay all
     costs (including attorneys’ fees whether incurred in
     connection with collection, trail [sic], appeal or
     otherwise) of collection against the Guarantors under
     this Guaranty. The liability of Guarantors hereunder
     is binding upon Guarantors and Guarantors’ successors
     and assigns.

Petitioner and Dr. Gant signed the guaranty.

     In August 1988, Mr. Miles, as trustee, sold approximately 10

acres of East Lake Vista for $80,000.   Petitioner, for Mr. Miles,
                               - 40 -

signed the sales contract.    Petitioner did not report any income

from this sale on his Form 1040 for 1988.

     The record contains two personal financial statements for

petitioner.   The first is dated November 15, 1985, and lists as

an asset, East Lake Vista;27 a “160 acre parcel located on East

Lake North of Narcoossee being subdivied [sic] into 5 ac. tracts

and is encumbered by 2 mortgages totaling $386,000.00”.    The

listing states:   “I own 1/2 interest”, and values that interest

at $560,000, subject to liabilities of $193,000.    The second

financial statement is dated June 1, 1988, and lists as an asset,

East Lake Vista; a “100 acre parcel located on East Lake North of

Narcoossee being subdivided into 5 ac. tracts”.    That property is

listed under “Miscellaneous Lots & Acreage (Unencumbered)” and is

valued at $400,000.

     Mr. Miles’s law firm maintained certain ledger cards,

numbers 70006 through 70008, which are entitled “Walter

Medlin/Reba Smith”, “Medlin   Re:   Smith, Reba”, and “Medlin,

Walter from Reba L. Smith”, respectively.    Those ledger cards

contain the following relevant entries:




     27
      Petitioner testified that East Lake Vista is also known as
the “Narcoossee property” and the “Dan Smith Road property”. The
parties also agree that the property was sometimes called the
“Reba Smith property”.
                                    - 41 -




Ledger Card                                                   Trust Funds
Number/Line   Date           Name            Memo         Received    Disbursed

70008/1       5-1-84     Reba Louise Smith   Medlin        ----        $95,551.82
70008/2       5-1-84     H.R. Thornton       Medlin        ----          1,250.00
70008/3       5-1-84     Allen’s Osceola
                           Realty, Inc.      Medlin        ----        25,000.00
70008/4       5-1-84     Clerk of Circuit
                           Court             Medlin        ----         3,588.95
70008/5       5-2-84     Transferred from
                           Medlin/Gant                    $62,873.61      ----
70008/6       5-2-84     George Gant         Medlin/
                                             Smith R.     62,867.16       ----
70008/9       5-14-85    Moved from
                           Medlin/Tai         ----        61,646.52       ----
70008/10      ----       Moved from
                           Medlin/Tai         ----         1,950.00       ----
70008/11       ----      Johnston’s Eng.   Medlin/Smith    ----         1,950.00
70008/12      5-14-85    Moved from
                           Medlin/Tai         ----         61,646.52       ----
70008/13      5-14-85    Reba Smith        Medlin/Smith     ----       123,293.04
70008/16      5-2-86     Webb              Medlin/Smith   189,922.60       ----
70008/21      5-2-86     Lowndes,
                           Drosdick et al Medlin/Smith    20,000.00       ----
70007/4       5-2-86     H.R. Thornton,
                           Jr., Trustee    Medlin          ----        150,793.05
70007/9       5-14-86    Transfer to
                           Medlin/Gant card   ----         ----        14,740.92
70007/11      5-14-86    Walter L. Medlin Medlin/Smith     ----         3,768.93
70007/12      5-19-86    Freedom Financial
                           Center          Medlin          ----         6,602.74
70007/13      5-19-86    Walter L. Medlin
                           Trustee            ----          ----         1,897.26
70007/15      12-16-86   Wire-Transfer     Medlin/Smith   218,268.00       ----
70007/16      12-16-86   Reba Louise Smith Medlin/Smith     ----       145,722.80
70006/5       12-24-86   Transfered to
                           Medlin/Gant        ----         ----        55,094.55
70006/6       8-8-88     Walter T.
                           Rose, Jr        Medlin/Smith   40,000.00       ----
70006/7       8-8-88     Beverly L. Rose       ‘’         39,000.00       ----
70006/8       8-8-88     ERA-Horacio
                           Toledo, Inc.        ‘’          1,000.00       ----
70006/14      8-8-88     Moved to Medlin
                           Mefford            ----         ----           528.52
70006/15      8-8-88     Moved to Medlin/
                           Gant 1/2 proceeds ----          ----        35,083.53
70006/16      8-8-88     Moved to Medlin/
                           Gant 1/2 proceeds ----          ----        35,083.52
70006/22      ?-27-89    Moved to Medlin/
                           General            ----         ----           100.00
70006/22      10-4-89    Moved to Medlin/
                           General            ----         ----           128.64


For each of the various sales transactions in 1986 and 1988, the

parties executed a closing statement.          The amounts listed in
                               - 42 -

those statements as deposits in escrow and as amounts due from

the buyer to the seller match amounts listed as deposits in the

ledger cards above, ledger card No. 70008 (lines 16 and 21), No.

70007 (line 15), and No. 70006 (lines 6-8).

     Dr. Gant and petitioner each owned a 50-percent interest in

the “Mefford Property” (OS-22), which was sold on October 7,

1988, for $250,000.    A gain of $110,328 was realized from this

sale.   Respondent originally determined that petitioner was

responsible for the entire gain realized from this sale, but he

now concedes that petitioner is responsible for only half of that

amount ($55,164).

     Dr. Gant and petitioner also each owned a 50-percent

interest in a piece of property which we refer to as the “Tai

Property”.    The Tai Property was sold in 1984 for $457,900, and

petitioner concedes that he is liable for 50 percent of the

installment gain ($50,863) from payments received in 1985.     See

appendix C.

                               OPINION

     It is well established that income must be taxed to him who

earns it, United States v. Basye, 410 U.S. 441, 449 (1973), and

that income includes gains derived from dealings in property.

Sec. 61(a)(3).   Respondent determined that petitioner owned a 50-

percent interest in the portions of East Lake Vista sold in 1986

and 1988 and that he was responsible for 50 percent of the gain
                              - 43 -

realized from those transactions.28    Petitioner contends that Dr.

Gant owned 100 percent of East Lake Vista at the time of the

sales in 1986 and 1988.   Petitioner argues that he and Dr. Gant

originally agreed to be 50-50 partners with respect to East Lake

Vista, but that Dr. Gant contributed the entire purchase price

and thus acquired a 100-percent ownership interest in the

property.

     At trial, petitioner testified that, initially, he was to

receive a 50-percent interest in East Lake Vista, but because Dr.

Gant “put up all the money and wanted all the interest in the

property”, Dr. Gant “essentially owned all of it”.    However,

petitioner’s testimony was not definitive and was indeed

speculative.   It was also self-serving, and we do not agree that

he owned no interest in East Lake Vista at the time of the 1986

and 1988 sales.   The documentary evidence of record shows that


     28
      Respondent allocated basis of $3,191.83 to each acre in
East Lake Vista: Basis per acre ($3,191.83) = purchase price
($500,000)/acres purchased (156.65). Respondent determined
$41,775 as petitioner’s gain from the May 1986 sale: Gain
realized ($83,550) = sales price ($205,000) - selling costs
($22,503) - basis ($98,947 = 31 acres x $3,191.83); petitioner’s
gain ($41,775) = gain realized ($83,550) x petitioner’s ownership
interest (50 percent). Respondent determined $50,726 as
petitioner’s gain on the Dec. 16, 1986, sale: Gain realized
($101,452) = sales price ($215,181) - selling costs ($13,187) -
basis ($100,542 = 31.5 acres x $3,191.83); petitioner’s gain
($50,726) = gain realized ($101,452) x petitioner’s ownership
interest (50 percent). Respondent determined $19,522 as
petitioner’s gain on the 1988 sale: Gain realized ($39,045) =
sales price ($80,000) - selling costs ($9,005) - basis ($31,950 =
10.01 acres x $3,191.83); petitioner’s gain ($19,522) = gain
realized ($39,045) x petitioner’s ownership interest (50
percent).
                              - 44 -

petitioner held an ownership interest in East Lake Vista at the

time of the sales in 1986 and 1988.

     First, petitioner’s financial statements dated November 15,

1985, and June 1, 1988, show that he owned at least a 50-percent

interest in East Lake Vista at some point before the sales that

occurred in 1986 and 1988.   Petitioner contends that the November

15, 1985, financial statement is not inconsistent with his

testimony and Dr. Gant’s testimony that he was to originally own

a 50-percent interest in East Lake Vista, which subsequently

changed to no interest.   Petitioner has not presented any

evidence to establish when his and Dr. Gant’s original

understanding supposedly changed; however, if it did change, we

assume the change would have occurred either before or shortly

after May 1, 1984, when Dr. Gant purportedly “put up all the

money”, the $125,000 cash portion of the purchase price.29    The

financial statement is dated November 15, 1985, a full year and a

half after the purchase of East Lake Vista.   Petitioner offers no

explanation why he continued to represent himself as owning a 50-

percent interest in November 1985, if, in fact, he owned no

interest after Dr. Gant put up all the cash in May 1984.

     Petitioner also contends that the June 1, 1988, financial

statement cannot be relied upon since it incorrectly shows that



     29
      Dr. Gant testified that he could not recall when the
parties original understanding changed, but he suggested that it
might have been in 1984.
                               - 45 -

he owned 100 percent of East Lake Vista and that the property

consisted of 100 acres when, in fact, it consisted of 84 acres.

We do not agree that these purported inaccuracies cause the June

1, 1988, financial statement to lose its persuasive value.    The

financial statement was prepared by or for petitioner, and

petitioner does not explain why those inaccuracies were reflected

on his financial statement, and why they invariably suggest that

he held no interest in East Lake Vista in 1988.    At the very

least, the June 1, 1988, financial statement shows that

petitioner perceived himself to own at least some interest in

East Lake Vista in 1988 and that he intended other persons who

might rely on the financial statement to recognize that

ownership.

     The road construction guaranty also indicates that

petitioner had an ownership interest in East Lake Vista.

Petitioner, Mr. Miles, and Dr. Gant executed the guaranty on

December 16, 1986, the same date as the sale of the 31.50 acres

of East Lake Vista to Mr. Pope.    And, it specifically refers to a

contract for the sale of 31.50 acres that Mr. Miles and Mr. Pope

entered into on May 2, 1986.    Petitioner argues that this

guaranty originated in petitioner’s “working relationship” with

Dr. Gant and did not arise from any ownership interest in the

property.    However, petitioner did not present any evidence or

testimony to suggest that he was compensated for his real estate
                               - 46 -

services.    Also, we cannot accept that he was performing those

services for free.    Petitioner does not suggest that amounts he

received following the sales in 1986 and 1988 were, in fact,

compensation, and, indeed, petitioner claims those amounts were

loans.    It is more plausible that petitioner’s performance of

services and his guarantee for the road construction arose from

his ownership interest in East Lake Vista.

     Under petitioner’s argument, we must assume that any

services that petitioner performed were for the benefit of Dr.

Gant, the purported 100-percent owner of East Lake Vista.    But,

Dr. Gant did not testify that petitioner performed services for

his benefit and that he compensated petitioner.    Dr. Gant’s

testimony, as a whole, indicates that petitioner performed the

real estate services for a 50-percent interest in East Lake

Vista.    Dr. Gant testified that he and petitioner started out 50-

50, with Dr. Gant putting up all the money30 and petitioner doing

all the work.   However, according to an “agreement” with Mr.

Miles, ownership of the property was “posted as 100 percent on my

part since I put up the money”.   Dr. Gant also testified:

     Q    Did you pay anything for the additional 50 percent
     interest from Mr. Medlin?


     30
      Dr. Gant testified that he gave petitioner $125,000 in
1984 for the purchase of East Lake Vista. This amount represents
the initial cash portion of the purchase price for the property.
Dr. Gant testified: “I didn’t pay any more. We paid it out of
operations at the time.”
                          - 47 -

A    As I tried to explain to you earlier, the 50
percent was a 50/50 ownership in property and a 50
percent in participation. I tried to explain that to
you, and I thought you understood it.

Q    I must not have, sir.    I apologize.

A    He did not put any money up. He didn’t put a dime
up to the best of my knowledge. I put the money up.

Q    But now, he purchased the property.         Correct?

A    No.

Q    In terms of the expertise--he selected the
property? Excuse me.

A    He selected the property.

Q    He selected the property?

A    I paid for the property.

Q    Okay. And so he just gifted his interest to you?
I mean, I understood the deal was 50/50 initially.

A    He didn’t have any interest.    His interest was in
the developing part of it.

           *   *    *     *      *   *       *

Q    * * * On the Narcoossee property, if Mr. Medlin
had a financial statement that showed that he was a 50
percent interest or owned half of the Narcoossee
property, would you say that that was correct.

A    Sure. That was our understanding--I tried to
explain that--when we first started.

     But to protect my interest it was necessary for me
to assume the 100 percent, as I had put the money in,
100 percent of the property.

Q    I understand, sir.

A    And all of the money he has taken out of it, the
original investment has never been paid back. I know
                              - 48 -

     you haven’t asked this question, but it’s important for
     you to know.

Dr. Gant’s testimony, as a whole, shows considerable confusion

regarding petitioner’s interest in East Lake Vista.    However, his

testimony indicates that he assumed 100-percent legal ownership

of East Lake Vista to protect his initial $125,000 contribution;

however, petitioner continued to possess an interest in the

property because of his contribution of services.    Dr. Gant did

not testify that the supposed agreement with Mr. Miles deprived

petitioner of a participation in any profits realized from the

property.

     Petitioner’s execution of the sales contract for the August

1988 sale also indicates that he had more than just a working

relationship with Dr. Gant with respect to East Lake Vista.    It

shows that he had the legal capacity to sell the property.     This

denotes ownership.   In addition, the ledger cards maintained by

Mr. Miles’s law firm are essentially a record of the transactions

associated with East Lake Vista.    Those ledger cards show the

initial disbursement of approximately $125,000 to Reba Smith, the

annual payments on the mortgage issued to Ms. Smith, and the

amounts received from the sales in 1986 and 1988.    The ledger

cards each list petitioner’s name with respect to transactions

which occurred from 1984 to 1989.    The ledger cards contradict a

significant portion of Dr. Gant’s testimony and are certainly

inconsistent with petitioner’s contention that he owned no
                               - 49 -

interest in East Lake Vista.    Although Dr. Gant testified that he

did not put up any additional cash after his initial $125,000,

the ledger cards show that $62,867.16 was received from “George

Gant” on May 2, 1984.    Further, Dr. Gant testified that he was

the only cash person in the deal; however, the ledger cards show

that $62,873.61 was received on May 2, 1984, from the Medlin/Gant

ledger card.31   Also, the ledger cards show that matching

deposits of $61,646.52 were received on May 14, 1985, from the

Medlin/Tai card.   Since petitioner and Dr. Gant each owned a 50-

percent interest in the Tai Property, we assume that petitioner

contributed at least $61,646.52 with respect to East Lake Vista.

     The ledger cards also show disbursements to petitioner’s

general ledger card.    Moreover, the pattern of duplicate

disbursements shortly after the 1986 and 1988 sales to ledger

cards in which petitioner and Dr. Gant presumably held equal

interests certainly supports respondent’s position that

petitioner and Dr. Gant each owned a 50-percent interest in East

Lake Vista.   Petitioner, on the other hand, argues that his and

Dr. Gant’s testimony shows that any amounts he received from the

1986 and 1988 sales were received as loans from Dr. Gant.    We

disagree.




     31
      According to petitioner, the Medlin/Gant ledger card
represents “an account in which both Medlin and Gant have an
interest.”
                               - 50 -

     Dr. Gant testified that he did not have any records showing

loans to petitioner, that he did not receive a note from

petitioner, and that all records were maintained by Mr. Miles.

Petitioner did not submit any records to substantiate his and Dr.

Gant’s testimony that loans were made, and none of the records

from Mr. Miles’s law firm, including the ledger cards, show any

loans or their amounts.

     At trial, petitioner and Dr. Gant testified that proceeds

from the sales of East Lake Vista were deposited into Mr. Miles’s

law firm’s trust account and that petitioner would then “borrow”

those proceeds for his own purposes.    However, it is not at all

clear from Dr. Gant’s testimony what he considers to be a

“loan”.32   It appears to us that Dr. Gant understood that upon

the receipt of any sale proceeds from East Lake Vista, and after

debt service on the note to Reba Smith, that he was to be repaid

his initial $125,000, but that petitioner instead borrowed those

proceeds, and that Dr. Gant has never been paid back his

$125,000.   However, those facts do not establish a loan, and, in

any event, they are not inconsistent with petitioner owning a 50-

percent interest in East Lake Vista.    There is no evidence in

this case that petitioner had an obligation to repay the amounts


     32
      The “hallmarks” of a loan are: (1) Consensual recognition
between the borrower and the lender of the existence of the loan,
i.e., the obligation to repay; and (2) bona fide intent on the
part of the borrower to repay the funds advanced. Inv. Research
Associates, Ltd. v. Commissioner, T.C. Memo. 1999-407.
                              - 51 -

“borrowed”, and there is no evidence that those amounts were

treated as a bona fide obligation or that Dr. Gant attempted to

collect the amounts supposedly borrowed.   At best, Dr. Gant’s

testimony indicates that petitioner made draws from Mr. Miles’s

trust account on the sale proceeds received from East Lake Vista

and that those draws caused Dr. Gant to fail to realize the full

extent of what he initially invested.   However, those facts do

not establish a loan or otherwise permit petitioner to escape

taxation on his share of the gains from East Lake Vista.

     Petitioner also points to respondent’s concession that

petitioner owned only a 50-percent interest in the Mefford

Property, and he argues that this concession supports the

credibility of petitioner’s and Dr. Gant’s testimony with respect

to East Lake Vista.   We disagree.   The record contains numerous

concessions by both petitioner and respondent, and we are not

inclined to speculate as to the basis for those concessions.     In

any event, respondent notes that he conceded one-half of the

deficiency with respect to the Mefford Property, because there

was contemporaneous documentary evidence to support Dr. Gant’s

testimony.   Respondent contends, and we agree, that Dr. Gant’s

testimony lacks such support with respect to East Lake Vista.

Further, respondent’s position after concession with respect to

the Mefford Property would now appear consistent with the

position he has taken with respect to East Lake Vista, that
                               - 52 -

petitioner and Dr. Gant each owned a 50-percent interest.      It is

also consistent with their respective interests in another piece

of property, the Tai Property.

     We hold that petitioner owned a 50-percent interest in East

Lake Vista, and we sustain respondent’s determination that

petitioner realized 50 percent of the gains from the sales in

1986 and 1988.

         6.    Grissom Parcels (OS 1.3)

                          FINDINGS OF FACT

     On April 15, 1985, petitioner purchased three parcels

(parcels 1, 2, 3) of real property in Osceola County, Florida,

which we refer to as the “Grissom Parcels”, for $47,000.    Parcel

1 is fronted by U.S. Highway 192, and it borders another road,

Rivers Road, on one side.    Parcels 2 and 3 do not border U.S.

Highway 192, are separated from parcel 1 by Rivers Road and

several smaller tracts of property, and border a road referred to

as “County Road”.    The relative sizes of the parcels are similar,

although the dimensions differ.

     On November 5, 1985, petitioner transferred the parcels to

Ms. Allen, as trustee, for no consideration.    Petitioner was the

sole beneficiary of the parcels conveyed to Ms. Allen.    On

October 22, 1986, petitioner, through Ms. Allen, sold parcel 1

for $40,000.
                                   - 53 -

     For 1987, Osceola County assessed the values of the Grissom

Parcels as follows:

      Parcel Number                      Assessed Value

        Parcel 1                             $12,500
        Parcel 2                              14,955
        Parcel 3                              11,228
          Total Assessed Value                38,683


                                   OPINION

     The parties agree that $40,000 was realized on the sale of

parcel 1 in 1986, and that petitioner is responsible for any gain

from that sale.    The issue that remains for decision is

petitioner’s basis in parcel 1.        The adjusted basis for

determining gain from the sale of property, whenever acquired,

shall be the basis determined under section 1012 and adjusted as

provided in section 1016.        Sec. 1011(a).    Under section 1012, the

basis of property shall be the cost of such property.         Under

section 1016(a)(1), the basis of property shall be adjusted for

expenditures, receipts, losses, or other items, properly

chargeable to capital account.

     When a part of a larger property is sold, the cost or other

basis of the entire property shall be equitably apportioned among

the several parts, and the gain realized or loss sustained on the

part of the entire property sold is the difference between the

selling price and the cost or other basis allocated to that part.

Fasken v. Commissioner, 71 T.C. 650, 655 (1979); sec. 1.61-6(a),

Income Tax Regs.      An equitable apportionment of cost basis may
                                  - 54 -

reflect the relative fair market values of the portions of the

larger property at the time of their purchase.          Sec. 1.61-6(a),

Example (2), Income Tax Regs.       Our determination of the

allocation of basis is a question of fact.           Sleiman v.

Commissioner, 187 F.3d 1352, 1360 (11th Cir. 1999), affg. T.C.

Memo. 1997-530.

     Respondent relies upon the assessed values of the Grissom

Parcels in 1987 to determine the relative values of those parcels

when they were purchased in 1985.        Respondent allocated the

purchase price of $47,000 in 1985 to the parcels as follows:

                                     Percentage
     Parcel        Assessed           of Total               Basis
     Number         Value           Assessed Value         Allocated1

    Parcel 1       $12,500               32%                $15,040
    Parcel 2        14,955               39                  18,330
    Parcel 3        11,228               29                  13,630
      Totals        38,683              100                  47,000

     1
      The basis allocated equals the purchase price multiplied by the
     percentage of the total assessed value of the parcels.

After accounting for selling expenses of $4,458, respondent

determined that petitioner realized a gain of $20,502.33

Petitioner contends that the methodology used by respondent to

allocate cost basis to the Grissom Parcels is arbitrary.

Petitioner argues that the cost basis should have been allocated

according to the relative fair market values of the parcels in




     33
      Gain ($20,502) = sales price ($40,000) - selling expenses
($4,458) - basis ($15,040).
                               - 55 -

1985 and that several factors show that parcel 1 was the most

valuable of the three parcels when they were purchased.

     Generally, “We do not consider that the amount for which the

property was assessed for purposes of local taxation is

necessarily a reliable criterion to be used in estimating its

fair market value.”34   Frazee v. Commissioner, 98 T.C. 554, 563

(1992).   However, in appropriate circumstances tax-assessed

values can be useful as a guideline or as corroboration of other

evidence of fair market value.   Kellahan v. Commissioner, T.C.

Memo. 1999-210.   And, in the case that we are concerned with the

relative values of several parts of a larger piece of property,

local tax assessments may be relied upon to provide the correct

value of a particular parcel of real estate.   2554-58 Creston

Corp. v. Commissioner, 40 T.C. 932, 940 n.5 (1963).35   We are not

willing to conclude as a matter of law that because respondent’s

determination is based on local tax assessments, it is arbitrary.

And, indeed, respondent’s determination appears reasonable and

consistent with the relative sizes of the three parcels.   See


     34
      This is especially true when there is nothing in the
record indicating that the tax-assessed value was intended to
represent fair market value. Kellahan v. Commissioner, T.C.
Memo. 1999-210; Estate of Dowlin v. Commissioner, T.C. Memo.
1994-183; see also sec. 20.2031-1(b), Estate Tax Regs.
     35
      In 2554-58 Creston Corp. v. Commissioner, 40 T.C. 932, 940
n.5 (1963), we stated: “Although valuations for real estate
taxes may often be too low to be relied upon as furnishing the
correct value of a particular parcel of real estate as a whole,
we have no reason to reject the use of such valuations in
determining the relative value of land and buildings.”
                              - 56 -

Clayton v. Commissioner, T.C. Memo. 1956-21, affd. 245 F.2d 138

(6th Cir. 1957).

     “When, as in this case, the Commissioner has determined an

allocation of basis, a taxpayer bringing a deficiency proceeding

bears the burden of proving by a preponderance of the evidence

that the Commissioner’s determination is erroneous.”    Sleiman v.

Commissioner, supra at 1359; see also Byram v. Commissioner, 555

F.2d 1234, 1236 (5th Cir. 1977), affg. T.C. Memo. 1975-135.

Petitioner argues that parcel 1 is fronted by U.S. Highway 192,

the main road through Osceola County to Walt Disney World,

whereas parcels 2 and 3 are on a dirt road, and that parcel 1 was

zoned commercial, whereas parcels 2 and 3 were zoned residential.

He also testified that parcels 2 and 3, at the time of their

purchase, were “in a real undesirable neighborhood.    As you get

down here, a lot of drug users and stuff.   There’s sort of a

shack here.”   Petitioner claims, on the sole basis of his

testimony, that one-half of the original $47,000 purchase price,
                                  - 57 -

$23,500,36 should be allocated to the parcel sold in 1986 and

that he is responsible for $12,042 of gain.37

     Petitioner is not a disinterested witness.        Further, his

opinion regarding the value of the Grissom Parcels is based on

his own subjective viewpoint about the desirability of those

individual parcels.     Petitioner presents no objective analysis to

support his valuation of parcel 1 to be “at least half of the

entire purchase”.     Petitioner presented no records that were

prepared at the time of the purchase or sale that reflected the

allocation in his testimony, and he completely failed to report

the sale on his income tax return.         We cannot accept petitioner’s

testimony to establish the relative values of the Grissom

Parcels, and he has failed to overcome the presumption of

correctness that attaches to respondent’s determination.        We hold

that petitioner’s basis in parcel 1 was $15,040 and that his gain

from its sale in 1986 was $20,502.




     36
          Petitioner testified:

     Q    And what value do you place as to the basis when
     you bought it--of the total purchase price, what value
     do you attribute to the value of parcel 1?

     A    I had figured that it was worth at least half of
     the entire purchase, which would mean that it was
     equivalent to the other two parcels put together.
     37
      Gain realized ($12,042) = amount realized ($40,000) -
selling expenses ($4,458) - basis ($23,500).
                                - 58 -

         7.    Arrowhead Lakes Subdivision (OR-2), Angel-Royse
               Property (OS-39)


                           FINDINGS OF FACT

     In 1974, Roger McLaughlin, as trustee, purchased Lots 26,

27, and 28 in the Arrowhead Lakes Subdivision (OR-2), which was

located in Orange County, Florida.       In 1977, Mr. McLaughlin

conveyed those lots to Ms. Allen, as trustee, for no

consideration.    In 1979, Ms. Allen conveyed those same lots to

Mr. Miles, as trustee, for no consideration.       Petitioner owned

Lots 26, 27, and 28 in the Arrowhead Lakes Subdivision;

petitioner was the 100-percent beneficiary of the lots held in

trust by Mr. Miles.

     In 1983, Mr. Miles, as trustee, purchased 40 acres of a

certain real property in Osceola County, Florida.       On January 31,

1983, Mr. Miles, as trustee, issued a mortgage deed (purchase

money note and first mortgage) of $70,200 with respect to this

purchase.     On February 24, 1983, Mr. Miles, as trustee, issued to

Mr. McLaughlin a mortgage deed (purchase money note and second

mortgage) of $30,500, which related to the 40-acre purchase.        On

March 25, 1983, petitioner entered into a contract to purchase an

additional 34 acres for $102,000.    Mr. Miles, as trustee, issued

a mortgage deed of $73,000 for part of the purchase price.         The

34 acres were conveyed to Mr. Miles, as trustee, on October 26,

1983.   Petitioner and Mr. McLaughlin were equal beneficiaries in
                              - 59 -

the 74 acres held in trust; we refer to the property held in

trust as the “Angel-Royse Property” (OS-39).

     Petitioner’s financial statement dated November 15, 1985,

lists as an asset, “Angel-Royce Development”;38 a “74 Acre parcel

located on North side of Boggy Creek Road west of the Turnpike

and valued at $8,000 per acre.   There are several mortgages

covering the various parcels totaling $212,000 payable over 15

years I own 50%”.   The statement values petitioner’s interest in

the property at $300,000, subject to liabilities of $106,000.

     In 1986, petitioner exchanged his ownership interest in Lots

26, 27, and 28 of the Arrowhead Lakes Subdivision for Mr.

McLaughlin’s ownership interest in the Angel-Royse Property.    In

exchange for the subdivision lots, Mr. McLaughlin forgave the

$30,500 of outstanding principal that petitioner owed to him from

the February 24, 1983, mortgage deed.   Mr. McLaughlin also

assumed the liability for real estate taxes on Lots 26, 27, and

28, which totaled $1,251 at the time of the exchange.   Petitioner

assumed Mr. McLaughlin’s share of the liabilities associated with

the Angel-Royse Property.   Those liabilities totaled $66,202 and

$71,042, respectively, at the time of the exchange.   Petitioner’s

basis in Lots 26, 27, and 28 was $40,300.   On November 23, 1986,

Mr. McLaughlin transferred his interest in the 74 acres of the


     38
      Petitioner referred to the Angel-Royse Property as the
“Angel-Royce [sic] Development”, the “Angel and Royce [sic]
Property” and the “pit piece”. Mr. McLaughlin also referred to
the Angel-Royse Property as the “Boggy Creek Road” property.
                              - 60 -

Angel-Royse Property to Michael D. Johnson, as trustee.

Petitioner was the 100-percent beneficiary of the Angel-Royse

Property held in trust.   Petitioner did not report any income

from the exchange on a Form 1040 for the tax years at issue.

     On June 9, 1987, a final judgment was entered by the Circuit

Court of the Ninth Judicial Circuit of Osceola County, Florida,

in the case of South Fla. Water Mgmt. Dist. v. Walter Medlin,

Steven Miles, Tr., and Robert Adkins, Case No. 85-943.    The

judgment was entered into pursuant to a stipulation for consent

decree, which requires petitioner and Mr. Adkins to restore the

Angel-Royse Property and to plant cypress trees.   The consent

decree enjoins petitioner and Mr. Adkins from further excavation

or dumping activities on the property.

     The record contains no partnership tax returns or Schedules

K-1, Partner’s Share of Income, Credits, Deductions, etc., and

there is no evidence that any such returns or schedules were

filed or distributed.

                              OPINION

     Respondent determined that the value of the 74 acres of the

Angel-Royse Property was $312,600, the value which was assessed

by Osceola County for the two parcels of acreage.39   Respondent

determined that Mr. McLaughlin’s interest had a fair market value



     39
      Osceola County assessed a value of $180,000 for the 40
acres acquired in early 1983 and assessed a value of $132,600 for
the 34 acres acquired on Oct. 26, 1983.
                              - 61 -

of $156,30040 and that petitioner realized a gain of $60,709 from

the exchange in 1986.41

     Petitioner contends that he and Mr. McLaughlin were partners

in a partnership with respect to the properties, that the Angel-

Royse Property was distributed to him from the partnership, and

that this distribution did not result in the recognition of any

gain under section 731(a)(1).42   Respondent argues that section

731(a)(1) does not apply because:   (1) There was no distribution

from a partnership to a partner; petitioner simply exchanged his

100-percent interest in the Arrowhead Lakes Subdivision lots for

Mr. McLaughlin’s 50-percent interest in the Angel-Royse Property;

and (2) no partnership existed.

     In order for petitioner’s partnership argument to work, that

supposed partnership would have had to own both the Angel-Royse




     40
      Value of Mr. McLaughlin’s interest in the Angel-Royse
Property ($156,300) = fair market value of the Angel-Royse
Property ($312,600) x Mr. McLaughlin’s interest (50 percent).
     41
      Amount realized ($101,009) = value of Mr. McLaughlin’s
interest in the Angel-Royse Property ($156,300) + discharge by
Mr. McLaughlin of petitioner’s debt ($15,250) + assumption by Mr.
McLaughlin of real estate taxes ($1,251) - petitioner’s
assumption of Mr. McLaughlin’s share of the liabilities
associated with the Angel-Royse Property ($68,622) - property
taxes ($3,170). Gain on exchange ($60,709) = amount realized
($101,009) - basis ($40,300).
     42
      Sec. 731(a)(1) provides that in the case of a distribution
by a partnership to a partner “gain shall not be recognized to
such partner, except to the extent that any money distributed
exceeds the adjusted basis of such partner’s interest in the
partnership immediately before the distribution”.
                                - 62 -

Property and the Arrowhead Lakes Subdivision lots.43   However,

the form of ownership of the Arrowhead Lakes Subdivision lots was

clearly a trust and not a partnership.   Moreover, petitioner

stipulated that he was the 100-percent beneficiary of the

Arrowhead lots held in trust by Mr. Miles, and he does not

dispute, and in fact incorporates, respondent’s requested finding

of fact that “Petitioner owned Lots 26, 27 and 28 in OR-2 (a.k.a.

Arrowhead Lakes Subdivision), which were held in trust by R.

Stephen Miles, Jr., Trustee.”    Petitioner is bound by the form of

ownership expressed in the stipulation and demonstrated by the

record, and he cannot now argue that the Arrowhead lots were in

fact held by a partnership.   We agree with respondent’s

characterization that petitioner exchanged his 100-percent

interest in the Arrowhead Lakes Subdivision lots for Mr.

McLaughlin’s 50-percent interest in the Angel-Royse Property and

that there was no distribution of those properties from any

partnership.44   We also agree that petitioner and Mr. McLaughlin


     43
      Mr. McLaughlin and petitioner testified that their
supposed partnership owned the Arrowhead Lakes Subdivision lots.
They testified that they were equal partners with respect to both
the Arrowhead Lakes Subdivision lots and the Angel-Royse
Property. Petitioner contends that the partnership was
terminated with the properties’ being distributed equally. He
claims that the properties exchanged were of equal value after
accounting for the environmental liabilities associated with the
Angel-Royse Property.
     44
      This finding is supported by a letter from Mr. Miles to
Mr. McLaughlin’s attorney; he states:

                                                     (continued...)
                             - 63 -

were not engaged in a partnership with respect to the Angel-Royse

Property.

     A partnership is an organization for the production of

income to which each partner contributes one or both of the

ingredients of income, capital, or services.   Commissioner v.

Culbertson, 337 U.S. 733, 740 (1949).   In determining whether

there is a partnership, we consider the following factors:

     The agreement of the parties and their conduct in
     executing its terms; the contributions, if any, which
     each party has made to the venture; the parties'
     control over income and capital and the right of each
     to make withdrawals; whether each party was a principal
     and coproprietor, sharing a mutual proprietary interest
     in the net profits and having an obligation to share
     losses, or whether one party was the agent or employee
     of the other, receiving for his services contingent
     compensation in the form of a percentage of income;
     whether business was conducted in the joint names of
     the parties; whether the parties filed Federal
     partnership returns or otherwise represented to
     respondent or to persons with whom they dealt that they
     were joint venturers; whether separate books of account
     were maintained for the venture; and whether the
     parties exercised mutual control over and assumed
     mutual responsibilities for the enterprise. [Luna v.
     Commissioner, 42 T.C. 1067, 1077-1078 (1964).]

In order for there to exist a partnership, the parties must

conduct some business activity.   Madison Gas & Elec. Co. v.



     44
      (...continued)
     I trust you will recall that Walter and Roger discussed
     with you and I a settlement of the existing dispute
     over the Royse-Angell property by an even exchange of
     Walter’s interest in the Arrowhead Lakes property for
     Roger’s interest in the Royse-Angell property. Walter
     apparently feels that he can salvage the Angell-Royse
     property and has directed me to proceed with the
     proposed settlement. * * *
                                 - 64 -

Commissioner, 633 F.2d 512, 514-517 (7th Cir. 1980), affg. 72

T.C. 521 (1979); Frazell v. Commissioner, 88 T.C. 1405, 1412

(1987); Cusick v. Commissioner, T.C. Memo. 1998-286.      And, mere

coownership of property as tenants in common or otherwise does

not result in a partnership.     See Bergford v. Commissioner, 12

F.3d 166, 169 (9th Cir. 1993), affg. Alhouse v. Commissioner,

T.C. Memo. 1991-652; Cusick v. Commissioner, supra.        Petitioner

testified that when he initially invested in the acreage in the

Angel-Royse Property, it was “landlocked” and “it wasn’t

developable property.”     He also testified that Mr. McLaughlin

held an adjoining tract of land that could provide access to the

property and that Mr. McLaughlin’s ownership of this tract

prompted their entering into a “partnership”.      However, neither

petitioner nor Mr. McLaughlin testified as to any development

activity or plans for development on the Angel-Royse Property.

Neither testified regarding whether they had any expectation of a

profit from their activities and as to what kind of business

activity their partnership was to engage in; i.e., subdivision,

development, real estate sales, etc.      There is substantial

evidence of record that the property was not the subject of any

business activity, and, indeed, the record indicates that

petitioner and Mr. McLaughlin were allowing the property to

waste.45     There is no evidence of any partnership returns’ having


     45
          Petitioner testified that Mr. McLaughlin “let a guy come
                                                       (continued...)
                               - 65 -

been filed or any Schedules’ K-1 having been issued to petitioner

or Mr. McLaughlin.   Petitioner has submitted no evidence of any

partnership records, any partnership agreement, and he has not

provided any discussion regarding the operations of this supposed

partnership.   The record shows that petitioner’s and Mr.

McLaughlin’s relationship with respect to the Angel-Royse

Property never rose above mere coownership.     Petitioner has not

established that he and Mr. McLaughlin formed a partnership with

respect to the Angel-Royse Property, and we sustain respondent’s

determination that petitioner realized gain on the exchange of

properties.

          8.   Prather Ranch Property (OR-01)

                          FINDINGS OF FACT

     In 1978, petitioner and Wayne Schoolfield sought to acquire

certain property owned by the Bank of Palm Beach and Trust Co.,

located in Orange County, Florida, which we refer to as the

“Prather Ranch Property”.   Petitioner secured a contract with the

bank for the purchase of the property, and he then located other




     45
      (...continued)
in and cut all the trees on the property and start digging out
the dirt”, and that these operations resulted in considerable
environmental problems. The record also contains a letter from
Mr. Miles, in which he complains to petitioner and Mr. McLaughlin
that they had not paid their installments on the 1986 mortgages
associated with the property and that the mortgagees were
threatening foreclosure.
                               - 66 -

purchasers to facilitate its acquisition.46     On October 17, 1978,

the bank sold the Prather Ranch Property to Investors Realty of

Osceola, Inc., Agri-Land Corp., William L. Gibson, as trustee,47

Mr. Prewitt, as trustee, William R. Wright (i.e., petitioner), as

trustee,48 and Marlborough Investors, Inc.    At the time of its

purchase, the Prather Ranch Property consisted of 1500-1600 acres

and was generally flat pasture with a creek running through the

property; the property was zoned agricultural.

     In 1981, Mr. Gibson sold a portion of the property that he

held in trust to third parties.   On June 7, 1985, Mr. Gibson

transferred the remaining property, which we refer to as “parcel

1”, to Mr. Miles, as trustee, for no consideration.     Petitioner

was the beneficiary of a 100-percent interest in parcel 1.

     In March 1983, Mr. Schoolfield, Max Hagen, and petitioner

entered into an agreement to trade and to purchase certain

parcels of the Prather Ranch Property.49     Pursuant to this


     46
      Mr. Schoolfield was interested in the front piece of the
property, and petitioner was interested in the back piece.
     47
      Petitioner was the beneficiary of the property interest
held in trust by Mr. Gibson.
     48
      Petitioner   and Agri-Land Corp. were originally the
beneficiaries of   50-percent interests, respectively, in the
property held in   trust by “Mr. Wright” (parcel 3). Agri-Land’s
interest in this   parcel subsequently terminated.
     49
      According to petitioner, he ended up with a piece of the
Prather Ranch Property in its southeast corner; Mr. Schoolfield
owned a piece in front of petitioner’s, which had “good access”;
and Mr. Hagen owned a 400-acre piece south of Mr. Schoolfield’s.
                                                   (continued...)
                                - 67 -

agreement, on April 22, 1982, Agri-Land conveyed its portion

(parcel 2) of the Prather Ranch Property to its shareholder, Mr.

Schoolfield, as trustee.   On May 10, 1983, Mr. Schoolfield sold

parcel 2 to Mr. Hagen, as trustee, and Mr. Hagen, in turn, sold

it to Mr. Miles, as trustee, for $356,400.    Petitioner was the

sole beneficiary of parcel 2.    On May 10, 1983, Mr. Wright, as

trustee, conveyed parcel 3 to Mr. Miles, as trustee.

     On September 5, 1986, Mr. Miles, as trustee, entered into a

contract with Maury L. Carter to sell parcels 1, 2, and 3 for

$1,731,000.   Mr. Carter never saw an advertisement concerning the

sale of this property, and Mr. Carter initiated the sale

discussions with Mr. Miles.   Pursuant to this contract, Mr.



     49
      (...continued)
Petitioner testified that Mr. Schoolfield was interested in
purchasing Mr. Hagen’s piece, and according to petitioner:

          And as part of an accommodation for him to buy the
     Hagen piece, I was going to buy his piece that was next
     to my portion of this 1,500 acres. So that would leave
     me with Wayne’s piece and my piece, but to accomplish
     that--I didn’t have the cash to give Wayne for it--so
     we went, both jointly, went and sat down and worked out
     a deal with Mr. Hagen.

          And the end result of the deal was that Mr. Hagen
     would, out of his 400 acres, would trade 240 acres, I
     believe it was, with Wayne. So he and Wayne did a
     trade of 240 acres. That meant that Hagen owned the
     240 acres next to my piece and, at the same time, then
     Wayne purchased the remaining portion of the 400 acres
     from Mr. Hagen that was down in Osceola County. The
     240 acres that Mr. Hagen now owns, up in Orange County,
     next to my piece, I purchased from him. I added to my
     holding by purchasing the property from Mr. Hagen, that
     he’d acquired from Wayne.
                                - 68 -

Miles, as trustee, sold parcel 1 for $120,000 on October 13,

1986.     On May 13, 1987, Mr. Miles, as trustee, sold parcels 2 and

3 for $1,611,000.50    Petitioner realized a gain of $72,039 from

the sale of parcel 1 in 1986, and a gain of $823,079 from the

sale of parcels 2 and 3 in 1987.    Petitioner did not report those

gains on his Forms 1040 for 1986 and 1987.

     At the time of the sales of petitioner’s interests in the

Prather Ranch Property, the property was raw land with no

improvements or site development.

                                OPINION

     The only issue with respect to the Prather Ranch Property is

whether petitioner realized capital gains on the sales of the

parcels in 1986 and 1987, or ordinary income.    Respondent

determined that petitioner realized ordinary income.

     In order for taxpayers to obtain preferential long-term

capital gains tax rates, the gain must arise from “the sale or

exchange of a capital asset”.    Sec. 1222(3).   The term “capital

asset” means “property held by the taxpayer (whether or not

connected with his trade or business)”, but does not include

“property held by the taxpayer primarily for sale to customers in

the ordinary course of his trade or business”.    Sec. 1221(1).




     50
      At the time of the sale, petitioner was the beneficiary of
a 90.689-percent interest in parcels 2 and 3, which interest was
held in trust by Mr. Miles.
                             - 69 -

     In determining whether the gains that petitioner realized

from the sales of the three parcels of the Prather Ranch Property

were capital gains, we must ask three questions:   (1) Was

petitioner engaged in a trade or business, and, if so, what

business?; (2) was petitioner holding the property primarily for

sale in that business?; (3) were the sales contemplated by

petitioner “ordinary” in the course of that business?   Sanders v.

United States, 740 F.2d 886, 888-889 (11th Cir. 1984); Suburban

Realty Co. v. United States, 615 F.2d 171, 178 (5th Cir. 1980).51

 The question whether property is held primarily for sale to

customers in the ordinary course of one’s business is “purely

factual”, Pritchett v. Commissioner, 63 T.C. 149, 162 (1974), and



     51
      The following factors are considered in answering those
questions:

     (1) the nature and purpose of the acquisition of the
     property and the duration of the ownership; (2) the
     extent and nature of the taxpayer’s efforts to sell the
     property; (3) the number, extent, continuity and
     substantiality of the sales; (4) the extent of
     subdividing, developing, and advertising to increase
     sales; (5) the use of a business office for the sale of
     the property; (6) the character and degree of
     supervision or control exercised by the taxpayer over
     any representative selling the property; and (7) the
     time and effort the taxpayer habitually devoted to the
     sales. [Sanders v. United States, 740 F.2d 886, 889
     (11th Cir. 1984); United States v. Winthrop, 417 F.2d
     905, 910 (5th Cir. 1969).]

The frequency and substantiality of sales is the most important
factor of those listed. Suburban Realty Co. v. United States,
615 F.2d 171, 176 (5th Cir. 1980); Biedenharn Realty Co. v.
United States, 526 F.2d 409, 416 (5th Cir. 1976); Hancock v.
Commissioner, T.C. Memo. 1999-336.
                             - 70 -

petitioner bears the burden of showing that the property was held

as a capital asset, Guardian Indus. Corp. & Subs. v.

Commissioner, 97 T.C. 308, 316 (1991), affd. without published

opinion 21 F.3d 427 (6th Cir. 1994).    See also Pritchett v.

Commissioner, supra at 164 (“Petitioner has the burden of proving

that when he dealt with the parcels of land here involved he was

wearing the hat of an investor rather than that of a dealer.”).

     Respondent argues that petitioner was in the business of

buying and selling real estate at the time of the sales, that

“petitioner agrees that he is not entitled to capital gain

treatment for any of the numerous properties which he sold [in

that business] during the years at issue”, and that he has failed

to meet his burden of demonstrating that he held the parcels as

an investor, rather than a dealer.    Petitioner, on the other

hand, contends that he acquired the parcels with the intention of

holding them as long-term investments, that he did not develop

the parcels, did not advertise them for sale, did not attempt to

change the zoning of the property, and that it was Mr. Carter,

not petitioner, who initiated the discussions regarding the sales

of the parcels.

     Petitioner stipulated that “Since the mid 1970s through the

present, the petitioner has been in the business of buying and

selling real estate and real estate development.”    Nevertheless,

petitioner contends that his ordinary course of business is “the
                                - 71 -

purchase, platting, subdividing, rezoning, and improvement of

property”, and since petitioner merely purchased and sold the

parcels of the Prather Ranch Property, he cannot be said to have

sold the property in the ordinary course of his trade or

business.    After examining the record, the stipulation provides

the proper characterization of petitioner’s business activity.

Petitioner was involved in real estate sales without development,

as well as real estate sales that involved varying degrees of

development.    Indeed, there are several examples of record

wherein petitioner did not engage in development prior to sale

and did not make an immediate sale following purchase, and those

properties were sold as part of his real estate business.      We

cannot find that the purchase and the sale of the Prather Ranch

Property were outside petitioner’s ordinary course of business.

However, we must decide whether the Prather Ranch Property was

held primarily for sale in that business.

     The U.S. Supreme Court has defined “primarily” as used in

section 1221(1) to mean “principally” or “of first importance”.

Malat v. Riddell, 383 U.S. 569, 572 (1966).    “It is, of course,

well established that even though petitioner is a dealer in land,

he still has the right to acquire land and hold it for investment

purposes.”     Pritchett v. Commissioner, supra at 163; see also

Maddux Constr. Co. v. Commissioner, 54 T.C. 1278, 1286 (1970).

The taxpayer’s primary holding purpose must be determined by
                                  - 72 -

reference to his purpose “at some point before he decided to make

the sale in dispute.”       Suburban Realty Co. v. United States,

supra at 182; cf. Guardian Indus. Corp. & Subs., supra at 316.

     At trial, petitioner testified that he viewed the Prather

Ranch Property as a “long-term situation from a retirement

standpoint”.       Keeping in mind that it is petitioner’s burden to

show his entitlement to capital gains treatment, we are not

convinced that petitioner acquired the Prather Ranch Property as

a long-term investment.52      His purchase of this property was

similar in many respects to his acquisition of other properties

in his real estate business.       Petitioner did not offer any

evidence showing that this property, when acquired, was

exceptional.       The record reflects that like petitioner’s

acquisitions of other properties in the ordinary course of his

     52
          Petitioner also testified:

     Q    When you say--was that something--did you intend
     to deal with that property as you deal with most of
     your other properties?

     A    You’re meaning develop it and immediately sell it
     and stuff like that?

     Q       Right.

     A       No.

We cannot accept petitioner’s testimony in and of itself that he
did not intend to resell the property on its acquisition.
Further, for reasons previously stated, we must reject
petitioner’s suggestion that his business was confined to the
development and immediate sale of properties. The record
suggests several properties were acquired, held for a
considerable length of time, and then sold without development.
                              - 73 -

real estate business, he intended to resell the acquired property

as soon as the circumstances permitted.53   We find, on the

record, and in the absence of proof to the contrary, that

petitioner acquired the property as part of his real estate

business.   However, we must decide whether petitioner’s

motivation in holding the property for some time after its

acquisition changed to an investment purpose.

     At trial, petitioner testified that he became interested in

putting cows on the Prather Ranch Property, that his “ultimate

plan” was to move cattle to that property for grazing, and that

he had a cattle guard54 installed.   Petitioner’s testimony was

subjective and self-serving, and we cannot accept as true his

testimony that he “got in the cow business, because of this piece

of property”.   Further, petitioner never moved any cattle to the

Prather Ranch Property,55 and, indeed, he testified that he had

     53
      We also note that the 1982-1983 series of trades and
purchases orchestrated by petitioner and Mr. Schoolfield are
highly indicative of a business acquisition. Through that series
of maneuvers, petitioner was able to acquire a parcel of property
with “good access” and we suspect a property with a higher
probability of resale under favorable circumstances.
     54
      A cattle guard is “a device consisting of a shallow ditch
across which ties or rails are laid far enough apart to prevent
livestock from crossing that is often used instead of a gate at a
fence opening”. Webster’s Third New International Dictionary 354
(1986). Petitioner testified that the cattle guard he installed
was a “huge concrete thing”, which cost $1,600 and weighed about
5,000 pounds.
     55
      Petitioner testified that as he was preparing to move
cattle to the Prather Ranch Property, Mr. Carter “came along and
                                                   (continued...)
                                 - 74 -

moved the cattle to another piece of property, which according to

his testimony, was only 2 miles from his house.56    Other than the

cattle guard, petitioner presented no evidence of any preparation

of the property for cattle grazing or that the property was even

suitable for grazing.     We cannot agree that petitioner’s

testimony alone establishes a change in his holding purpose to

investment.     We hold that petitioner has not established his

entitlement to capital gains treatment.




     55
      (...continued)
made me an offer I couldn’t refuse.”
     56
          Petitioner testified in relevant part:

         Well, what I had done was I had, in the course of
     doing this, I had investigated with him -- I'd known
     Mike [Partin] for years -- getting into the cow
     business, with just the piece I had. And then I get
     tied up with acquiring this other Hagen piece.

           Meanwhile, I had already started buying cows from
     Mike and we had a piece of property nearby that I moved
     the cows to and put them on. Well, they, you know,
     same thing, you start buying too many cows and they
     start having babies and you're trying to keep them all
     as best you can and so I ended up kind of with too
     many.

          But just about the time I was getting ready to --
     I felt like I had enough cows -- to move up to this
     piece of property, which was probably ten miles from my
     house, where the other piece was probably two miles
     from my house, that to get enough cows to put up there
     on this piece of property, Mr. Maury Carter came along
     and made me an offer I couldn't refuse. And by then I
     was probably up to my eyeballs in something else and
     was over my head in the cow business -- had more cows
     that I could handle.
                              - 75 -

         9.   Citrus County Property

                         FINDINGS OF FACT

     On September 7, 1977, petitioner through Ms. Allen, as

trustee, purchased real property in Citrus County, Florida, which

we refer to as the “Citrus County Property”, for $1,837.54.     On

August 10, 1981, petitioner through Ms. Allen, as trustee,

transferred the Citrus County Property to Mr. Miles, as trustee.

Petitioner was the sole beneficiary of this property.

     On July 2, 1982, Combank, the predecessors in interest of

Freedom Savings & Loan Association of Tampa, Inc. (Freedom), lent

$120,000 to Cramer, Hoffman & Haber, P.A.    On July 2, 1982,

petitioner guaranteed the $120,000 promissory note and pledged

the Citrus County Property (sometimes referred to as property) as

collateral.   In 1983, Freedom filed a mortgage foreclosure action

in the Circuit Court of Citrus County, Florida, Case No. 83-917-

CA (the foreclosure case) to foreclose its mortgage interest in

the property.   On March 26, 1984, the parties in the foreclosure

case, including petitioner as guarantor, filed a Joint Motion and

Stipulation for Rendition of Final Judgment wherein they asked

the court to render a final judgment of foreclosure regarding the

property pursuant to certain conditions.    Those conditions

included Freedom’s forbearance of its right to foreclose in

consideration for petitioner’s unconditional promise to perform

the terms of his guaranty and to make payments on the amounts due
                                - 76 -

Freedom.     Petitioner also agreed that if those payments were not

made as scheduled, then Freedom could proceed with the

foreclosure.     On October 11, 1985, Freedom filed a motion for

final judgment of foreclosure against the property averring that

the required payments had not been made in accordance with the

parties’ March 26, 1984, stipulation.57    On October 25, 1985,

pursuant to the stipulation, the court entered a Final Judgment

of Foreclosure.    Pursuant to the judgment, the property was sold

and title was conveyed to the purchaser, Freedom, on November 25,

1985.

     In 1983, Freedom filed a separate action in the Circuit

Court for Orange County, Florida, Case No. 83-12119 (the judgment

case), for judgment against petitioner and two other guarantors

of the loan to Cramer, Hoffman & Haber, P.A.    On September 16,

1986, Freedom filed a Motion for Final Judgment against

petitioner seeking money judgment for the unpaid balance of the

note that he guaranteed.    In a pleading that petitioner filed on

October 8, 1986, petitioner represented that the only issue in

the judgment case that remained was the value of the property

that had been sold pursuant to the prior foreclosure action in

Citrus County.    On December 22, 1986, the Circuit Court for

Orange County rendered final judgment finding that petitioner


        57
      The Court’s final judgment recited that the outstanding
debt to Freedom consisted of $96,872.18 principal, together with
interest of $3,553.20 and attorney’s fees of $4,000.
                               - 77 -

should be given credit for the fair market value of the Citrus

County Property and found that the fair market value was $87,000.

The Circuit Court’s final judgment then determined that

petitioner owed a remaining $20,834 on his guaranty obligation.

On December 31, 1986, petitioner asked for rehearing claiming

that at the time of the foreclosure sale in 1985, the Citrus

County Property had a fair market value far in excess of $87,000.

Petitioner alleged that the Citrus County appraiser’s records

indicated a fair market value of $133,000 and that petitioner’s

testimony was that the property value was, at an “absolute

minimum”, at least $114,000.   Based on petitioner’s averments,

the Circuit Court for Orange County granted a rehearing as to the

fair market value of the Citrus County Property.   There is no

evidence that a rehearing ever occurred.   The parties eventually

reached a settlement, and on October 28, 1987, Freedom filed a

Satisfaction of Judgment stating that the $20,834 had been fully

satisfied.   Thus, petitioner’s remaining personal liability on

his guaranty was resolved approximately 2 years after the

foreclosure sale had become final.

     Petitioner’s basis in the property at the time of the

foreclosure sale was $1,844.

                               OPINION

     Respondent has raised as a new matter in his amendment to

answer an allegation that petitioner realized a gain of $112,156
                              - 78 -

from the foreclosure sale in 1985.58    Respondent agrees that he

bears the burden of proof on this issue under Rule 142(a).

     The transfer of property in a foreclosure sale represents a

sale or exchange for tax purposes.     Helvering v. Hammel, 311 U.S.

504 (1941); 2925 Briarpark, Ltd. v. Commissioner, 163 F.3d 313,

318 (5th Cir. 1999), affg. T.C. Memo. 1997-298; Cox v.

Commissioner, 68 F.3d 128, 133 (5th Cir. 1995), affg. T.C. Memo.

1994-189; Yarbro v. Commissioner, 737 F.2d 479, 485 (5th Cir.

1984), affg. T.C. Memo. 1982-675; Aizawa v. Commissioner, 99 T.C.

197, 198 (1992), affd. without published opinion 29 F.3d 630 (9th

Cir. 1994).   Under section 1001(a), the amount of gain realized

from a sale or exchange is the excess of the amount realized over

the taxpayer’s adjusted basis in the property.    In the case of

recourse debt, the amount realized from the transfer of property

in a foreclosure sale is the fair market value of the property on

the date of the sale.   Frazier v. Commissioner, 111 T.C. 243, 245

(1998); Marcaccio v. Commissioner, T.C. Memo. 1995-174.    The

amount realized from a sale or other disposition of property

includes the amount of liabilities from which the transferor is

discharged as a result of the sale or other disposition.     2925

Briarpark, Ltd. v. Commissioner, supra at 317; sec. 1.1001-

2(a)(1), Income Tax Regs.   Any unpaid portion of the recourse


     58
      Respondent originally determined that petitioner realized
cancellation of indebtedness income. Respondent now concedes
this determination.
                                - 79 -

debt in excess of the fair market value of the property is not

used to calculate the amount realized from a sale under section

1001(b).    See 2925 Briarpark, Ltd. v. Commissioner, supra at 318

n.2; Marcaccio v. Commissioner, supra.

     Respondent contends that petitioner realized at least

$114,000 in the 1985 foreclosure sale of the Citrus County

Property.   He relies upon petitioner’s position in the deficiency

judgment proceedings that the fair market value of that property

was at least $114,000 at the time of the foreclosure sale.    We

cannot agree that respondent has established that the fair market

value of the Citrus County Property was at least $114,000 on the

date of the foreclosure sale.    The Orange County Circuit Court

found that the Citrus County Property had a fair market value of

$87,000 at the time of the foreclosure sale.    The court gave

petitioner credit for $87,000 and then entered a deficiency

judgment of $20,834 against petitioner, which represented

petitioner’s remaining personal liability as guarantor.    Although

final judgment was stayed for the introduction of additional

evidence as to fair market value, no such evidence appears to

have been submitted, and, in any event, the parties settled the

matter and Freedom filed a Satisfaction of Judgment stating that

the $20,834 deficiency judgment had been satisfied.    We find that

the fair market value on the date of the foreclosure sale was

$87,000, the amount determined by the Circuit Court.
                              - 80 -

     We must also reject petitioner’s argument that he is not

required to recognize gain from the foreclosure sale, because he

was not the borrower of the original loan proceeds and received

no benefit therefrom.   Petitioner argues:

     The law is clear that to realize gain based upon market
     value of property transferred, the transfer must be in
     consideration of the discharge or reduction of
     indebtedness. This gain is not realized when the
     indebtedness is based upon a guaranty and the taxpayer
     received none of the loan proceeds.

Petitioner cites Landreth v. Commissioner, 50 T.C. 803 (1968);

Payne v. Commissioner, T.C. Memo. 1998-227, revd. on other

grounds 224 F.2d 415 (5th Cir. 2000); and Whitmer v.

Commissioner, T.C. Memo. 1996-83, in support of his position.     We

find those cases distinguishable in that they dealt with

discharge of indebtedness income of a guarantor, not gain

realized from the sale of the guarantor’s property at a

foreclosure sale.

     In Frazier v. Commissioner, supra at 248, we achieved parity

between the tax results to a party owning property sold in a

foreclosure sale and the tax results to the willing seller who

sells the property in an arm’s-length transaction to a willing

buyer, “neither being under compulsion to buy or sell and both

having reasonable knowledge of relevant facts.”59   Applying that


     59
      A foreclosure, like a voluntary sale, is a disposition
within the scope of the gain or loss provisions of sec. 1001.
See Helvering v. Hammel, 311 U.S. 504 (1941); 2925 Briarpark,
Ltd. v. Commissioner, 163 F.3d 313, 318 (5th Cir. 1999), affg.
                                                   (continued...)
                                - 81 -

approach in this case, if petitioner sold the Citrus County

Property to a willing buyer for its fair market value of $87,000,

and then transferred the sale proceeds in partial satisfaction of

his personal liability as guarantor, he would have realized

$85,156 ($87,000 amount realized minus $1,844 basis).   On the

facts presented, we hold that petitioner realized $85,156 on the

foreclosure sale to Freedom.

     C.   Miscellaneous Items of Schedule C Income

                         FINDINGS OF FACT

     On February 6, 1985, petitioner deposited $37,500 into his

bank account with Freedom Savings & Loan Association.   The record

contains a check of $37,500 from Orange Valley Real Estate

Exchange, Inc., to the order of Metro Realty Association.    The

spreadsheets that petitioner used to complete his tax returns

list this amount under “Sales & Comm”.   Petitioner reported this

amount as a part of his gross profit from his real estate

business on Schedule C of his 1985 return.

     Petitioner received net commission income of $598 from

National Land Commissions in 1986.

     On July 1, 1985, petitioner deposited checks from Crazy

Commandos of $250 for rent from June 15 to 30, 1985, and $500 for

rent from July 1 to 31, 1985.    Petitioner also deposited $500 of

rent from Crazy Commandos into his Freedom account on September


     59
      (...continued)
T.C. Memo. 1997-298; Rev. Rul. 90-16, 1990-1 C.B. at 13.
                                  - 82 -

3, 1985.    Petitioner received rents of $1,250 from Crazy

Commandos in 1985.

     Petitioner received $400 in 1985 from the sale of 100 wax

myrtle trees.

                                 OPINION

     Gross income means all income from whatever source derived,

including compensation for services, commissions, gross income

derived from business, gains derived from dealings in property,

rents, etc.    Sec. 61(a).    Petitioner does not contest

respondent’s determinations in the notice of deficiency, his

requested findings of fact, or his arguments on brief with

respect to the amounts that petitioner received.      Petitioner has

abandoned any arguments he may have made with respect to those

amounts.    We hold that petitioner is taxable for the various

amounts described above as determined by respondent.

     D.    Schedule E Income

                             FINDINGS OF FACT

     Petitioner owned stock in Frank’s Corner, Inc., an S

corporation.    Frank’s Corner filed a Schedule K-1 (Form 1120S),

Shareholder’s Share of Income, Credits, Deductions, etc.,

relating to petitioner for 1987.      The Schedule K-1 reported

ordinary income of $4,492 and a section 179 deduction of $604.

Petitioner did not report any income from Frank’s Corner on his

1987 return.    Respondent determined that petitioner realized
                               - 83 -

income of $3,888 ($4,492 - $604) in 1987, which should have been

reported on Schedule E, Supplemental Income and Loss (from rental

real estate, royalties, partnerships, S corporations, estates,

trusts, REMICs, etc.).   On his 1988 return, petitioner reported a

loss of $4,702 from Frank’s Corner, which matches the loss

reported on the Schedule K-1 for that year.

                               OPINION

     A shareholder in an S corporation must take into account, in

determining his tax, the shareholder’s pro rata share of the S

corporation’s “nonseparately computed income or loss”.    Sec.

1366(a)(1)(B).   Nonseparately computed income or loss means gross

income minus the deductions allowed to the corporation.    Sec.

1366(a)(2).   In other words, the taxpayer is responsible for his

distributive share of income realized by an S corporation in

which he is a shareholder.   See Ishler v. Commissioner, T.C.

Memo. 2002-79.

     Petitioner presents no challenge to respondent’s

determination, and he has therefore abandoned any arguments he

might have presented.    We hold that petitioner realized Schedule

E income as determined by respondent and that petitioner should

have reported that amount on his 1987 return.

     E.   Unidentified Deposits

     Bank deposits are prima facie evidence of income.    DiLeo v.

Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir.
                               - 84 -

1992).    “Where the petitioner has failed to maintain adequate

records as to the amount and source of his income, and the

Commissioner has determined that the deposits are income, the

petitioner has the burden of showing that the determination is

incorrect”, Estate of Mason v. Commissioner, 64 T.C. 651, 657

(1975), affd. 566 F.2d 2 (6th Cir. 1977), and he must prove by a

preponderance of the evidence that the deposits came from a

nontaxable source, Rule 142(a); Kudo v. Commissioner, T.C. Memo.

1998-404, affd. 11 Fed. Appx. 864 (2001).    All money deposited

into a taxpayer’s bank account is presumed to represent taxable

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

1964).    Except where he bears the burden of proof, e.g., fraud,

the Commissioner need not prove a likely source of the unreported

income.    Clayton v. Commissioner, 102 T.C. 632, 645 (1994);

Tokarski v. Commissioner, 87 T.C. at 77.     Also, he is not

required to prove that all deposits made by the taxpayer are

income.    Estate of Mason v. Commissioner, supra at 657; Gemma v.

Commissioner, 46 T.C. 821, 833 (1966).

     1.    Deposit on March 12, 1985, of $59,000

                          FINDINGS OF FACT

     On March 4, 1985, a $70,000 check from Washington

International Bank & Trust Ltd. (Washington International), was

deposited into petitioner’s Freedom bank account (account No.

0110324809).   Respondent did not determine that this deposit
                              - 85 -

represented unreported income.   On March 11, 1985, a check (No.

601) for $63,212.50 was drawn on petitioner’s Freedom account.

This check was payable to the order of “Freedom Financial Center”

and was endorsed by Ms. Allen.   The account balance was reduced

from $64,775.80 to $1,563.30 as a result of this check.

     On March 11, 1985, petitioner purchased a cashier’s check

for $59,000 from Freedom.   Petitioner was listed as both the

remitter and the payee.   On March 12, 1985, petitioner deposited

the proceeds of this check into his Tucker State Bank account.

Respondent determined that the $59,000 deposit was taxable as

income to petitioner for 1985.

                             OPINION

     Petitioner contends that the March 12, 1985, deposit of

$59,000 was traceable to the $70,000 check from Washington

International and that respondent did not determine that the

proceeds of this check represented unreported income.   Petitioner

argues that after the $70,000 check was deposited to his Freedom

account, Ms. Allen made a withdrawal of $63,212.50 in the form of

check No. 601 and used the proceeds to purchase the $59,000

cashier’s check payable to Mr. Medlin and deposited in his Tucker

bank account.

     Petitioner did not question Ms. Allen at trial regarding her

endorsement on check No. 601 and whether she used that check to

purchase the $59,000 cashier’s check from Freedom.   Petitioner
                                 - 86 -

could not establish at trial, and has not established on brief,

the appropriate link between the $59,000 deposit, the purchase of

the $59,000 cashier’s check, the $63,212.50 check signed by Ms.

Allen, and the $70,000 check from Washington International.

Petitioner has not explained why the cashier’s check and the

Tucker account deposit are for $59,000, while the check signed by

Ms. Allen is for $63,212.50, and where the $4,212.50 excess ended

up.   His explanation at trial was for the most part confusing.

      Petitioner claims that since check No. 601 caused a decrease

of $63,212.50 in his Freedom account and that since check No. 601

is payable to the order of “Freedom Financial Center”, the

proceeds of that check must have been used to purchase the

$59,000 cashier’s check from Freedom.      Petitioner assumes too

much.      He assumes that he and Ms. Allen did not have other

accounts with Freedom, that he and Ms. Allen did not engage in

other transactions with Freedom, and, most importantly, that

“Freedom Savings and Loan Association” is the same entity as

“Freedom Financial Center”.60     Petitioner assumes, but fails to

establish, those matters.      In any event, petitioner’s claim fails

again to account for the $4,212.50 difference between the amount

of the cashier’s check and the amount of check No. 601.


      60
      At trial, petitioner cross-examined Revenue Agent Sherri
Blackton, but he failed to establish through that witness that
Freedom Savings & Loan Association was the same entity as Freedom
Financial Center. Indeed, Ms. Blackton testified that they might
be separate entities.
                              - 87 -

     Even if we were to assume that the deposit of $59,000 is

traceable to the $70,000 received from Washington International,

petitioner has not established that this is a nontaxable source

of income.   Petitioner relies on the fact that respondent failed

to determine in the notice of deficiency that this amount

represented unreported income.   However, this alone does not

establish an income source to be nontaxable.   Respondent may have

had a wide range of valid reasons for not targeting this

particular item for an increased deficiency, including lack of

information and records.   Those reasons do not indicate that the

source is a nontaxable one, especially given the particular

circumstances of this case where moneys are being moved around

through a variety of entities, individuals, transactions, and

trust accounts.

     Petitioner claims that the $70,000 check from Washington

International was a loan, because “The evidence as to Washington

International was that it loaned money secured by real estate

(TR-412, 453).”   At trial, John Kelly testified with respect to

petitioner’s Washington International account, i.e., the Cayman

Island account, that “it was basically a loan account.   He would

pledge property as collateral, and they would advance him funds

against his property.   And subsequently he would repay the loan

either from other funds or through sales of the property.”    Mr.

Kelly also testified that “Mr. Medlin would transfer title to
                               - 88 -

pieces of property--or a security interest in pieces of property

--not title--to the Cayman bank.    The Cayman bank would then

advance him funds using the property as a security.    Mr. Medlin

would then repay the loan in time.”

     At best, John Kelly’s testimony provides a possible

explanation for what the $70,000 check represented.    Petitioner

has offered no additional evidence or testimony to establish his

claim that the check was a loan.    Importantly, he does not argue,

nor has he shown, that title to, or a security interest in,

property was ever transferred to Washington International for

what he purports to be $70,000 in loan proceeds.    Mr. Kelly’s

testimony that Washington International and Mr. Medlin were

generally involved in loan transactions does not establish that

this amount was a loan.   Indeed, his testimony was inconsistent

with petitioner’s testimony at trial that he used the Washington

International trust account as a vehicle for deferring income

from real estate sales.   Petitioner has not established a link

between the unreported deposit and a nontaxable source of income.

We sustain respondent’s determination that the $59,000 deposit is

taxable as income to petitioner.

         2.   Deposit on September 16, 1986, of $84,521.63

                          FINDINGS OF FACT

     On September 16, 1986, $84,521.63 was deposited into Mr.

Miles’s trust account.    Ledger card No. 70042 for that trust
                                      - 89 -

account is entitled “Walter Medlin” and “Re $ Partin”.61           Lines 3

through 6 of that ledger card contain the following notations:

Date            Name                   Memo         Received     Disbursed

9-16-86     Michael Bast            Medlin/Partin   $84,521.63      --
9-16-86     Natl. Land & Inv. Inc   Medlin/Partin     1,000.00      --
9-18-86     Transferred to Partin
              Sybil card                --             --        $84,521.63
9-18-86     Transferred to Partin
              Sybil card                –-             --         1,000.00

Respondent determined that the deposit of $84,521.63 was taxable

as income to petitioner for 1986.

                                     OPINION

       Petitioner contends that he did not receive the benefit of

the deposit of $84,521.63 on September 16, 1986, that the amount

deposited related to a transaction between Michael Bast and Sybil

Partin that did not involve petitioner, that the entry on the

ledger card was a mistake, and that this mistake was corrected 2

days later with a transfer to the correct ledger card.

       At trial, petitioner testified that he did not receive any

of the proceeds of the $84,521.63 deposit and that he had no

interest in the sale of property from Ms. Partin to Mr. Bast.

Petitioner testified that the entry on the Medlin/Partin ledger

card must have been a mistake:

            And because of my relationship with Mike and
       having a real estate license and being interested in
       real estate as well as his cattle business, I kind of

       61
      This ledger card relates to ledger card No. 70043, which
has its title line partially cut off. The title line does show
“Partin”, “P.O. Box 521 Kissimmee, FL”, and lists the “Adverse
Party” as “Partin Property”.
                              - 90 -

     got first shot at buying a couple pieces of property.
     And one of them was a Breckenridge piece that is
     subject to this. I forget what the other piece was.

          But because of my relationship with Mike, a couple
     people had come to me. One of them was Mr.
     Schoolfield. I believe he bought the parcel that Doc
     Partin had gotten. I wasn’t interested in it.

          And so Mike Bast had come to me and asked me if I
     was trying to buy Sybil’s piece and/or if I could help
     him buy it. And, basically, I, you know, told him I
     wasn’t interested in it. I couldn’t--I had all I could
     afford at the time. And, so I took him to Mike Partin
     --they really knew each other--but I basically took him
     to Mike Partin and said, Mike and Mike, why don’t you
     all get together on Sybil’s behalf because Mike, Mr.
     Mike Partin who was here, and his wife had been
     handling his aunt’s, who is Sybil, handling all her
     affairs and helping handle her cattle because she was a
     widow. And I think she was the only sister in the
     group, I believe, so she didn’t have any help. Anyway,
     I kind of put the deal together for them, put the two
     of them together, and recommended that Mike take Aunt
     Sybil over to Steve Miles and have him do the closing
     and so forth.

          And, I think, because of my PR position in the
     middle, dealmaker or whatever, it got put on one of my
     cards by Alana, I think. Then, it appears, that a
     couple days later, Mr. Miles--and again I’m guessing by
     looking at this--had said, Wait a minute. This is not
     Medlin’s deal. Start a card that says Sybil Partin and
     transfer everything to Sybil Partin’s card. I’m
     surmising this. I haven’t discussed this with Mr.
     Miles. I’ve heard his testimony and Alana’s testimony
     as to kind of how these things happen.

Mr. Miles referenced various checks accompanying ledger card No.

70042 and concluded that the references to “Partin” on that card

must refer to “Edward L. Partin”, known as “Geech Partin”, and

“Constance Partin”.   Mr. Miles testified that the property

referred to in ledger card No. 70042 “was known or later
                              - 91 -

developed as Anorada Subdivision”.     Mr. Miles then testified

about the entries at issue:

     Q    Well, if you look at again 70042, you see this
     Michael Bast payment of $84,521.

     A    Yes.

     Q    And then, the same amount, $84,521.63, was
     transferred to, according to the notation there,
     Partin, Sybil card. Do you see that?

     A    That’s correct.

     Q    And Partin, Sybil card is a card that you
     apparently maintained for a Partin, Ms. Sybil Partin?

     A    Yes.

     Q    Was she also a client of yours that you performed
     trustee activities for?

     A    I don’t know that we ever held anything in trust
     for Sybil Partin. We just represented her in
     connection with the transaction with Mr. Bast, I
     believe.

     Q    Okay, So would it be fair to say that, from
     looking at this, while Mr. Bast sent a check and it
     originally got placed onto this card that relates to
     Mr. Medlin, that the same amount of funds was then, two
     days later, transferred over to the benefit of Sybil
     Partin?

     A    Yes. And it looks like it was just a mistake in
     putting it on this card to start with, because to my
     knowledge Mr. Bast did not have anything to do with the
     property that Mr. Medlin acquired from Geech and Connie
     Partin. Mr. Bast bought property from Sybil Partin.

          And there’s a lot of Partins in Osceola County.
     And when this check came in, it probably just said
     Partin on it, and Alana put it on here. I don’t know.
     Did you all ask her about it when she was here?

     Q    No, I didn’t.
                             - 92 -

     A    Oh. Okay.   She could probably tell you better
     than I could.

     Q    But that kind of a mistake would have been
     corrected through the transfer that we see on there?

     A    That’s correct.

     Q    And that’s your memory of it now?

     A    I don’t have any memory of it. Just looking at
     that and knowing the cast of characters, I think that’s
     what happened.

Mike Partin, who was personally involved with the Sybil

Partin/Michael Bast transaction, also testified that petitioner

had no ownership interest in the property sold to Mr. Bast, that

Sybil Partin was the owner of the property, and that Mr. Bast was

the purchaser.

     Although petitioner did not question Ms. Goodman regarding

the deposit entry and the purported correction, Ms. Goodman was

questioned generally about the ledger system she maintained.    She

testified that the ledger system did not involve actual physical

transfers but was “simply a bookkeeping trace”.   Ms. Goodman

testified that when a transfer was made to another ledger card,

“I would write, Moved, on the card that it came from, and I would

write either Received or Transferred from the card that it came

from.”

     On the basis of the testimony offered at trial, we are

satisfied that petitioner did not have an ownership or other

interest in the property sold by Sybil Partin to Michael Bast and
                               - 93 -

that the payment from Michael Bast was mistakenly entered on the

Medlin/Geech Partin ledger card, ledger card No. 70042.       Although

petitioner’s testimony was, as a general matter, self-serving and

less than credible at trial, his testimony regarding his

involvement in the Sybil Partin/Michael Bast property transaction

was detailed and supported by the testimony of Mr.     Miles and

Mike Partin.   Given that petitioner lacked any discernible

interest in that transaction, petitioner’s contention that the

entry on ledger card No. 70042 was a mistake is supported by the

record.   The ledger card shows a deposit of $84,521.63 followed 2

days later by a transfer in that same amount to the Sybil Partin

ledger card.   Mr. Miles confirmed that these entries were

consistent with the procedures he and his bookkeeper followed

with respect to a mistaken entry.     Ms. Goodman’s general

testimony establishes that the initial deposit of $84,521.63 was

indeed transferred to the Sybil Partin card given the notation

“Transferred to Partin Sybil card”.     We hold that the $84,521.63

deposit is not income to petitioner.

          3.   Deposit on April 9, 1987, of $67,740

                          FINDINGS OF FACT

     On April 9, 1987, petitioner deposited $67,740 into his

Tucker bank account No. 00018066.62     A memorandum dated October


     62
      The record contains a Tucker State Bank signature card,
which contains account information for account No. 00018066.
That record contains the signatures of petitioner and Ms. Allen,
                                                   (continued...)
                               - 94 -

19, 1993, from Revenue Agent Sherri Blackton to Special Agent

Linda Ford states with respect to the source of this deposit:

          At 12:35 p.m. today, Mr. Larry Blackwater of
     Community First Bank of Winter Garden returned my call.
     I explained that I had a question regarding a deposit
     made to Mr. Medlin’s account number 18066 on April 9,
     1987 in the amount of $67,740. The deposited item we
     received in response to the summons previously issued
     to the bank indicated the money was transferred from
     another account. (#1089234) I explained that I needed
     to identify the originating account owner. * * *

               *    *      *   *      *      *    *

          At 1:08 p.m. Mr. Blackwelder called to report that
     the originating account belonged to Mr. Medlin and that
     he thought we were provided with copies of the
     statements, etc. to that account. He stated his
     research indicated that a $90,000 check from Orlando
     Land and Investment, less a $22,260 cashier’s check,
     was deposited to account number 1089234. The $67,740
     was then immediately transferred to account number
     18066.

A “Transfer of Funds” statement by Tucker State Bank states:      “On

the date indicated above [4/9/87], we made the following transfer

of funds between your accounts, according to your instructions

received by phone * * *.   We have charged your account for this

transfer From 1089234 to 00018066.”       The statement is to “Walter

L. Medlin” and shows an amount of “$67,740.00”.

     Orlando Land & Investment Co. issued a check dated April 3,

1987, for $90,000, which is payable to the order of petitioner

and which contains the notation “FOR Loan”.      A deposit ticket for


     62
      (...continued)
shows the type of account as a trust with a “separate agreement”,
and states an initial deposit of $67,740 having been made on
“4/8/87”.
                              - 95 -

Mr. Medlin’s Tucker bank account No. 1089234 dated April 8, 1987,

shows the deposit of a check for $90,000 from “Orl. Land &

Investment”, “LESS CASHIERS CHECK in the amount of $22,260.00”;

this resulted in a net deposit of $67,740 to account No. 1089234.

     On April 6, 1987, petitioner executed a promissory note for

the benefit of Don Henry and Sylvia Cohn, which provided:

     90,000.00                                       4/6/1987

     Ninty (90) days after date, the undersigned, for value
     received jointly and severally promise to pay to the
     order of Don Henry and/[illegible entry] Sylvia Cohn at
     Orlando Fla.   Ninty Thousand ($90,000) + Twenty
     Thousand ($20,000) dollars with interest from date at
     the rate of ----% per annum until fully paid. Interest
     payable ----. This note shall bear interest from
     maturity at the rate of ----% per annum until fully
     paid.

The promissory note is signed by petitioner.   Don Henry was the

president of Orlando Land & Investment Co.

     Respondent determined that the deposit of $67,740 was

taxable as income to petitioner for 1987.

                              OPINION

     Petitioner contends that the deposit of $67,740 on April 9,

1987, represents a portion of the loan proceeds received from Don

Henry of the Orlando Land & Investment Co.

     Respondent agrees that “The source for the deposit was a

check for $90,000 from Orlando Land & Investment”.   Accordingly,

the April 9, 1987, deposit is not unidentified as respondent

originally determined.   Nevertheless, respondent argues that this
                                - 96 -

check was not a loan from Don Henry and Sylvia Cohn.      He argues

that the promissory note that petitioner relies upon shows Don

Henry and Sylvia Cohn as the obligees, not Orlando Land &

Investment Co., and that the check from that entity was not a

check from those obligees.

     Since respondent has conceded the source of the formerly

unidentified deposit, we are concerned only with whether that was

a nontaxable source.   We note that respondent did not determine

an increased deficiency based on the $90,000 check, although his

failure to do so is not conclusive, see supra.       At trial,

petitioner testified that the deposit was attributable to

proceeds lent to him by Don Henry.       Respondent concedes that Don

Henry was the president of Orlando Land & Investment Co., and we

have found that as fact.    Although this fact alone does not

establish a connection between the check of $90,000 and the

promissory note of $90,000, we believe the evidence as a whole

shows a sufficient connection beyond mere coincidence.      We hold

that the deposit of $67,740 is not taxable as income to

petitioner.

         4.   Deposit on July 8, 1988, of $140,000

                           FINDINGS OF FACT

     On July 8, 1988, $140,000 was deposited into Mr. Miles’s law

firm’s trust account for petitioner.      Ledger card No. 70269 for

that trust account is entitled “Walter Medlin”, “Prather Ranch
                                      - 97 -

Property”, and “see also Maury Carter”.              Line 21 of the ledger

card contains the following information:

       Date               Name              Memo               Received

       7-8-88         Walter Medlin     Medlin/Prather         $140,000


Line 22 of this same ledger card contains the following entry:

       Date               Name                     Memo          Disbursed

       7-12-88     moved to Medlin/Partin          --          $97,893.78
       7-13-88     moved to Medlin/Malfa   (24,529.00 + 342.72) 24,871.72
       7-13-88     moved to Medlin/general                      17,234.50


Ledger card No. 70042, entitled “Walter Medlin” and “Re $

Partin”, contains the following entries on lines 10, 11, and 12,

which were related to the transfer to the ledger card noted in

line 13 below:

Line     Date             Name                   Memo        Received   Disbursed

10      7-12-88      Edward L. and
                       Constance A. Partin   Medlin/Partin       --     $89,615.96
11      7-12-88      Mike Partin             Medlin/Partin       --       5,094.04
12      7-12-88      W.G. Boyd               Medlin/Partin       --       3,183.78
13      7-12-88      Rec from Medlin/Prather      --         $97,893.78      --


       The record contains a Dean, Witter, Reynolds, Inc. (Dean

Witter), check (No. 69566) dated July 7, 1988, for $140,000,

which is payable to the order of the “Stephen Miles Trust

Account”.        The stub to that check is signed as “RECD BY Richard

Margolis”.        A deposit statement for the “Miles & Cumbie P.A.

Trust Account”, dated July 8, 1988, lists check “1-23” for

$140,000.        This deposit statement was filled out by Alana

Goodman.        Ms. Goodman was Mr. Miles’s bookkeeper, and she made

the entries into the ledger cards.             Ms. Goodman matched the
                                - 98 -

number “1-23” listed on the deposit statement to the bank tracing

number “1-23” on the Dean Witter check.

     Respondent determined that the deposit of $140,000 was

taxable as income to petitioner for 1988.

                                OPINION

     Petitioner argues that the deposit on July 8, 1988, of

$140,000, was traceable to a loan from Richard Margolis, that the

loan proceeds were needed to make a mortgage payment on the

Partin property, and that “The loan was secured by being

structured as a sale and option to buy back from Margolis rather

than a mortgage to Margolis.”    Respondent agrees that $97,893.78

was transferred from the Medlin/Prather Ranch ledger card to the

Medlin/Partin ledger card and that checks were written for the

Medlin/Partin property on that same date; however, respondent

disagrees that the deposit for $140,000 and the subsequent

transfers establish that a loan was made.   We agree with

respondent.

     We find that petitioner has established that the source of

the $140,000 deposit was the Dean Witter check of $140,000.   That

check was dated July 7, 1988, the day before the unidentified

deposit to the Medlin/Prather Ranch Property card.   Ms. Goodman

testified that she always used the bank tracing number for checks

when making deposits.   As such, she was able to match the bank

tracing number on the Dean Witter check to the bank tracing
                               - 99 -

number of a check listed on a deposit statement for the Miles &

Cumbie P.A. Trust Account.   The deposit statement is dated July

8, 1988, the check is in the amount of $140,000, and the deposit

slip was filled out by Ms. Goodman.     Petitioner has shown that

the issuance of the $140,000 Dean Witter check on July 7, 1988,

the deposit of $140,000 to Mr. Miles’s law firm’s trust account

on July 8, 1988, and the deposit entry of $140,000 on the

Medlin/Prather Ranch Property ledger card were more than mere

coincidences and that the source of the deposit entry was the

Dean Witter check.   Nevertheless, petitioner has not shown that

the Dean Witter check was a loan; i.e., that the check was a

nontaxable source of income.   See Polidori v. Commissioner, T.C.

Memo. 1996-514.

     At trial, petitioner testified that he needed to make a

mortgage payment on what petitioner refers to as the Partin

property, that he called Richard Margolis up and told him he

needed some money, and that Mr. Margolis lent him the $140,000 at

issue.   Petitioner testified that Mr. Margolis’s representative

recommended:

     rather than do a mortgage, have me deed them the
     property, or deed or convey them the beneficial
     interest in the property, if I only held the beneficial
     interest, and then give me an option to buy it back at
     this continually accelerating price, which was
     reflective of the interest rate. And that’s what
     happened here.
                             - 100 -

Petitioner claims that this recommendation was followed and that

the property he put up as collateral was the Partin property.

Petitioner also testified that he used some of the proceeds from

the Margolis “loan” to make his mortgage payment, and he also

described the various ledger entries:

     Q    Okay. And did you use some of the proceeds of the
     $140,000 loan, after you had conveyed the property to
     Mr. Margolis, to make a payment on that very property,
     on the mortgage already existing on that very property?

     A    Yes, sir.

     Q    And is that reflected in 70042 ledger card of 93-
     R?

     A    Yes, sir, but you sort of have to go back to
     70501. And you can see where a portion on the next
     line from the entry of the $140,000--you can see on
     line 22, it says, 7/12/88, moved to Medlin/Partin,
     $97,893.78.

          And then you go to the--as Mrs. Goodman explained,
     that was her way of getting the money out of, in this
     case off the Prather Ranch card onto the Partin card.
     So, I guess kind of an attempt to, all this gets very
     confusing and we probably should have, somebody should
     have done better--I didn’t keep these cards. They may
     have been in worse shape. But just trying to keep
     track of this stuff. But in this case, she moved it.

          The $140,000 probably should have been put on the
     Partin card to begin with. And it had nothing to do
     with the Prather Ranch. But she put it there and we’ve
     seen it before, and we’ll probably see it again, where
     she put stuff on the wrong card. But it’s not the end
     of the world. It’s correctable. She makes an entry
     and says, I’m moving this over to the Partin card. It
     was moved to the Partin card on line 13, same date
     7/12/88, and it says, Received from Medlin/Prather
     97,893.78.

     Q    And did you then use that to make a payment out?
                               - 101 -


     A    Yes, sir.

     Q    Does that show there?

     A    Yes, sir. Those are reflected in the columns
     above, 10, 11, and 12.

     Q    So then the source of this $140,000 unknown
     deposit on ledger card 70501, on 93-R, is the loan from
     Mr. Margolis?

     A    Yes, sir.

Unlike petitioner’s testimony with respect to the deposit of

$84,521.63 on September 16, 1986, petitioner’s testimony with

respect to this deposit cannot be substantiated with the

testimony of other witnesses or with evidence of record.

Petitioner did not call Richard Margolis to testify, and he did

not submit any evidence or documentation to show that the

$140,000 Dean Witter check was a loan from Mr. Margolis.63

Accordingly, we find petitioner’s testimony to be self-serving

and of no assistance to him.

     Petitioner expends considerable effort to establish that on

July 12, 1988, $97,893.78 was transferred from the Medlin/Prather

Ranch Property ledger card (no. 70501) to the Medlin/Partin

ledger card (no. 70042), and that on that same date, $97,893.78

was disbursed to Edward L. and Constance Partin, Mike Partin, and


     63
      Petitioner cites the testimony of Revenue Agent Sherri
Blackton that petitioner would at times borrow funds which were
secured by giving a deed to the property with an option to buy
the property back. However, this does not establish that
petitioner engaged in this type of transaction with Richard
Margolis on this particular occasion.
                               - 102 -

W.G. Boyd from the Medlin/Partin ledger card.    However, this has

little relevance in determining whether the $140,000 Dean Witter

check was a nontaxable source of income; i.e., a loan.    Moreover,

the considerable difference between the amount of the Dean Witter

check, $140,000, and the total amount of the disbursements,

$97,893.78, contradicts petitioner’s testimony that the purpose

of the loan was to make a mortgage payment.64

     Also, we are not inclined to accept petitioner’s testimony

that the entries on the Medlin/Prather Ranch Property ledger card

were mistaken entries by Ms. Goodman that were subsequently

corrected.    Unlike the deposit in 1986, which we held was

attributable to a mistaken entry, the entry on the ledger card at

issue here was not simply corrected with a transfer in an

equivalent amount to another card.    Instead, there were three

offsetting entries:    (1) A transfer to the Medlin/Partin ledger

card on July 12, 1988, of $97,893.78; (2) a transfer to the

Medlin/Malfa card on July 13, 1988, of $24,871.72; and (3) a

transfer to the Medlin/general ledger card on July 13, 1988, of

$17,234.50.    We cannot conclude that the deposit entry on the

Medlin/Prather Ranch Property was necessarily a mistake and that

the $140,000 should have been transferred to the Medlin/Partin




     64
      And, indeed, it could indicate that the transaction was in
fact a sale of the property. Proceeds from a sale of property
would not be a nontaxable source of income.
                                 - 103 -

ledger card.     We sustain respondent’s determination that the

$140,000 deposit represents taxable income to petitioner.

           5.   Other Deposits

                           FINDINGS OF FACT

     On May 6, 1986, petitioner deposited $300 into his Freedom

account.    On August 1, 1986, a deposit of $9,038.47 was made to

Mr. Miles’s law firm’s trust account.      On October 10, 1986, $300

was deposited into Mr. Miles’s law firm’s trust account for

petitioner.     Respondent determined that those deposits were

taxable as income to petitioner.

                                 OPINION

     Petitioner does not discuss on brief the deposit of $300 on

May 6, 1986.    We find that he received that item as income.

     In respondent’s reply brief, he concedes that the deposit of

$9,038.47 on August 1, 1986, to Mr. Miles’s law firm’s trust

account was not income to petitioner.

     Petitioner does not discuss on brief the deposit of $300 on

October 10, 1986.    We find that he received that item as income.

     F.    Deductions Claimed by Petitioner

           1.   Schedule C Real Estate Business Deductions

                           FINDINGS OF FACT

     Petitioner claimed deductions on the Schedules C for his

real estate business on his returns for 1985 through 1988.       Those

deductions were claimed on the basis of the spreadsheets that
                              - 104 -

petitioner prepared for the deposits and disbursements from his

personal bank accounts.   Petitioner’s spreadsheets classified the

various disbursements as expenditures for automobiles, dues and

subscriptions, office, telephone, utilities, interest,

maintenance and repair, travel and entertainment, licenses and

taxes, commissions paid, insurance, and miscellaneous.   Those

disbursements were then claimed on the Schedules C as deductions

from the gross income he reported for his real estate business.

Respondent reconstructed petitioner’s expenses from buying and

selling real estate for 1985 through 1988.   See appendix A.   In

reconstructing petitioner’s expenses, respondent disallowed many

of the deductions petitioner claimed for a failure to

substantiate or a failure to show an ordinary and necessary

business expense for purposes of section 162.   Respondent allowed

deductions for petitioner’s real estate business in much larger

amounts than petitioner originally claimed on his returns.65

                              OPINION

     Petitioner did not present any evidence that respondent

erred in reconstructing his Schedules C real estate expenses.

Petitioner does not present any arguments on brief relating to

his Schedules C real estate expenses or respondent’s


     65
      Of course, it is likely that many of these expenses were
related to properties that petitioner sold but failed to report.
We point out that the largest items of additional expense
deductions are interest and taxes which appear to be linked to
properties which petitioner sold as part of his real estate
business.
                                - 105 -

reconstruction of those expenses.    Petitioner’s only argument

relates to certain deductions he claims for alleged expenses from

his orange grove, cattle, and Ferrari automobile collection

activities.    We hold that petitioner has conceded any arguments

relating to respondent’s reconstruction of the allowable expenses

for his real estate business.

          2.   Personal Residence Interest

                          FINDINGS OF FACT

     On August 31, 1981, petitioner purchased his personal

residence in Osceola County, Kissimmee, Florida, from Walter E.

and Maxine J. Melitshka.66   Petitioner borrowed certain amounts

from the Melitshkas for the purchase of this residence.     The

amount of the loan, the interest rate, the repayment terms for

the loan, and the actual amount of interest petitioner paid

during tax years 1985, 1986, 1987, and 1988 were not established

on the record.

                                OPINION

     Respondent determined that petitioner was entitled to

deductions for mortgage interest paid on his personal residence

of $24,957, $0, $41,759, and $16,249 for 1985, 1986, 1987, and

1988, respectively.   Petitioner does not challenge those

determinations on brief, and, accordingly, he has conceded the



     66
      The residence was originally titled in the name of Mr.
Miles, as trustee; however, on Aug. 10, 1990, Mr. Miles conveyed
title to the residence to petitioner.
                                - 106 -

matter.    We sustain respondent’s determination of the allowable

mortgage interest expenses.

          3.   Orange Grove, Cattle, and Ferrari Activities

                          FINDINGS OF FACT

     Petitioner had an orange grove of approximately 800 trees

near his personal residence, which covered approximately 17 to 18

acres.    When petitioner moved to his personal residence in or

about 1981, the orange grove was old with at least a portion of

it having been planted in the 1920s.      Petitioner was not in the

growing business, and he allowed the orange grove to deteriorate.

     After a bad freeze in 1985, petitioner let the orange grove

go for a year without spraying it (without putting any herbicide

or fertilizer on the trees).    Petitioner replaced a considerable

number of old trees and dead trees with 690 new trees.     The

orange grove had an irrigation system which needed repairs, and

the orange grove required fertilizer and herbicide treatment.

Petitioner paid $10,000 on June 22, 1987, and $6,371.53 on June

1, 1988, to Irrigation Engineers for certain irrigation work done

on petitioner’s orange grove.    Petitioner did not maintain any

books or records for the orange grove, except for his checkbook.

Petitioner has never made a profit from selling oranges.

     Petitioner also owned cattle during the tax years at issue.

Petitioner was advised by Michael Partin, a rancher, that the
                               - 107 -

cattle business could be profitable.67     Petitioner purchased a

herd of purebred Brahman cattle from Mr. Partin in or about 1982

or 1983.   Most of the cattle were midage to older-age cattle, and

a few were 1-2 year-old heifers.   Petitioner joined the American

Brahman Beef Association and registered a brand.

     In 1989, petitioner returned the cattle back to Mr. Partin.

The market for cattle at this time was not good.     When Mr. Partin

took the cattle back in 1989, the cattle were in good condition.

Mr. Partin sold the cattle off over time.

     Petitioner owned approximately 25 Ferrari automobiles in

1985 to 1988.   He did not sell any of the Ferraris in 1985

through 1988.   The Ferraris were damaged by vandals, and

petitioner went to a dealer to get the damages repaired.

Petitioner also had alternators replaced, carburetors cleaned

out, and timing belts changed, etc.      Petitioner was a member of

the Ferrari Club of America.

     Petitioner did not maintain separate bank accounts for the

orange grove, the cattle, or the Ferraris.     Petitioner did not

report any business activities relating to the orange grove, the

cattle, or the Ferraris on any income tax returns for the

relevant tax years.   To the extent petitioner did report any


     67
      Mr. Partin testified that “the Brahman business was really
good. We had good foreign sales, good domestic sales. And I
just told him that I thought it would be a good business for him
to get into. He had some land he could put some cattle on.” He
also testified that “we were selling our yearling bulls for
$1,500 apiece and our heifers for about the same price.”
                              - 108 -

expenses with respect to those activities, he reported them on

the Schedules C for his real estate business.

                              OPINION

     Petitioner claims that he is entitled to deductions for 1985

through 1988, which relate to expenses incurred with respect to

his orange grove, his cattle, and his collection of Ferrari

automobiles.68   Respondent argues that petitioner was not engaged

in a trade or business with respect to those activities and that

petitioner has failed to substantiate the expenses he claims.

     It is well established that “‘an income tax deduction is a

matter of legislative grace and that the burden of clearly

showing the right to the claimed deduction is on the taxpayer.’”

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (quoting

Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593

(1943)).   It is also the taxpayer’s burden to show that the

particular expense is currently deductible and is not a capital




     68
      Petitioner claims that he reported the expenses relating
to his orange grove, cattle, and Ferrari activities on his
returns for 1985 through 1988. The civil report that respondent
prepared indicates that petitioner claimed expenses for those
activities. However, we are unable to determine from the
spreadsheets and petitioner’s returns to what extent he claimed
expenses for those activities, since the expenses are
intermingled with expenses for other activities. Further, we are
unable to determine whether any expenses, if identifiable, were
in fact incurred in the activities that petitioner claims. Also,
it appears from petitioner’s supplement to petition that he is
claiming expenses in greater amounts than the expenses claimed on
his returns.
                                - 109 -

expenditure which is amortized or depreciated over time.        See id.

at 83-84.

     Section 162(a) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.     Conversely, section 262(a)

disallows any deduction, except as otherwise expressly provided

in the Code, for personal, living, or family expenses.       And,

section 263(a) disallows a current deduction for any capital

expenditure; i.e., an amount paid out for new buildings or for

permanent improvements or betterments made to increase the value

of any property or estate.   See id.      To qualify for a deduction

under section 162(a), an item must:       (1) Be paid or incurred

during the taxable year, (2) be for carrying on any trade or

business, (3) be an expense, (4) be a necessary expense, and (5)

be an ordinary expense.   Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352 (1971).       We are primarily

concerned here with the second requirement; i.e., whether

petitioner incurred the expenses while carrying on a trade or

business.

     “[T]o be engaged in a trade or business, the taxpayer must

be involved in the activity with continuity and regularity and

that the taxpayer’s primary purpose for engaging in the activity

must be for income or profit.    A sporadic activity, a hobby, or

an amusement diversion does not qualify.”       Commissioner v.
                                - 110 -

Groetzinger, 480 U.S. 23, 35 (1987).        The taxpayer’s expectation

of profit need not be reasonable; however, a good faith

expectation of profit is required.        Burger v. Commissioner, 809

F.2d 355, 358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Golanty

v. Commissioner, 72 T.C. 411, 425-426 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981).        All the facts

and circumstances must be considered, and more weight is given to

objective facts than to the taxpayer’s statement of his intent.

Engdahl v. Commissioner, 72 T.C. 659, 666 (1979).

     In determining whether petitioner possessed the requisite

profit motive under section 162(a), we look to the factors set

forth in section 183.     Osteen v. Commissioner, 62 F.3d 356, 358

(11th Cir. 1995), affg. in part and revg. in part T.C. Memo.

1993-519.   The regulations promulgated under section 183, section

1.183-2(b), Income Tax Regs., set forth a nonexclusive list of

factors, which include:    (1) The manner in which the taxpayer

carried on the activity; (2) the expertise of the taxpayer or his

advisers; (3) the time and effort expended by the taxpayer in

carrying on the activity; (4) the expectation that assets used in

the activity may appreciate in value; (5) the success of the

taxpayer in carrying on similar or dissimilar activities; (6) the

taxpayer’s history of income or losses with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) the
                                - 111 -

presence of elements of personal pleasure or recreation.      See

Nichols v. Commissioner, T.C. Memo. 1990-546.    None of these

factors alone is necessarily controlling, nor is any mathematical

preponderance of factors determinative.    Osteen v. Commissioner,

supra at 358.   Petitioner bears the burden of proving the

requisite profit motive.   Allen v. Commissioner, 72 T.C. 28, 34

(1979).

     During the tax years at issue petitioner did not realize a

profit on the orange grove, and he did not receive any income

attributable to that activity.69    At trial, petitioner did not

know how many crates of oranges he produced from the orange grove

during the years at issue, and he could only testify that it

“seems like ‘87, I sold a few oranges.”    Petitioner did not know

how much fruit he had picked.    Petitioner also testified:

     Q    Did you do it hoping you would make money
     eventually?

     A    Oh, yes. And I eventually will. I’ve been hit a
     couple of hard times by the freeze. And, particularly,
     the time that we have in question, the irrigation
     system was a mess and I had to bring in Mrs. Ray’s
     husband and they came in and straightened it out.
     There was a problem with the pump. I had to replace
     the pump just to get it up and going.

          But, unfortunately, what happens though, is I kind
     of get it up and going and either a freeze came along,
     like in ‘85, and just about killing everything. That
     set me back for a couple years.


     69
      A history of unexplained losses over an extended period is
persuasive evidence of the absence of a profit motivation,
especially where the taxpayer has substantial independent sources
of income. Allen v. Commissioner, 72 T.C. 28, 34 (1979).
                                - 112 -

On the basis of petitioner’s testimony, we cannot agree that

petitioner incurred his expenses while carrying on a trade or

business.     At best, petitioner in 1985-1988 had an aspiration

that one day the orange grove would be capable of producing fruit

and that the fruit could be sold as part of an ongoing trade or

business.70    Indeed, from petitioner’s testimony, it is clear

that his aspirations have not changed at the time of the trial in

this case, some 13 years later.

     The fact that an activity has recreational aspects is an

important factor in determining whether petitioner has the

requisite profit motivation.     See Nichols v. Commissioner, supra;

sec. 1.183-2(b)(9), Income Tax Regs.      Although cattle, unlike

horses, and an orange grove are not activities which one might

think of as providing the type of personal pleasure or

gratification that might supplant a profit motivation, see Allen

v. Commissioner, supra at 36, at trial, petitioner testified:

          The grove really went downhill. I bought it and
     I’m not in the growing business--I was out there
     chasing cows--and gradually I figured out, similar to
     the cow situation, you can’t afford to be in the cow
     business unless you own the land. And I owned a large
     piece of land that I was already buying and talked to
     Mike Partin and he said if you can’t make enough out of
     the cows to pay for the land--but cows can be a good
     investment and I enjoy the animals.



     70
      Similarly, petitioner testified with respect to his
claimed cattle business that “Basically, I never got up to the
point that I was really producing stock, and so forth, that I
would be selling into it and know myself.”
                              - 113 -

          Same way with the orange grove. I was setting
     there with the orange grove, paying for my house
     anyway, and so it was suggested to me, Why are you
     letting the grove go to hell. And so then I started
     fixing it up which--probably, very little fruit came
     off in the beginning because, like I say, I wasn’t
     paying any attention to it. I just thought, well, gee,
     nobody makes money off groves, but if you already own
     the grove and you can buy a tractor and buy a sprayer
     and stuff like this--I always bought used equipment,
     and you can see in all the repair things, I had to fix
     up old tractors and discs and sprayers and stuff--
     [Emphasis added.]

Mr. Partin also testified that, prior to petitioner’s purchase of

the cattle; “He loved the cattle.   He’d come--he’d be at my place

off and on, and you know, he just loved the cattle.    And we

thought, you know, with his love of the cattle, that’s what it

takes to be in the cattle business.”    And, certainly, it is

beyond doubt that the Ferrari automobile has an inherent pleasure

quality, and petitioner has not presented any evidence to suggest

otherwise.   Elements of personal pleasure do not alone negate a

profit motivation, see Burger v. Commissioner, supra at 360;

McCarthy v. Commissioner, T.C. Memo. 2000-135; however, on the

record before us we find considerable evidence that the

activities were engaged in for hobby and as a personal diversion.

     Petitioner did not maintain any books or records for any of

these purported businesses, and his only method of bookkeeping

with respect to the orange grove and cattle business was his

“checkbook”.   The lack of a bookkeeping system such that the

taxpayer could not monitor expenses or losses and could not make
                                - 114 -

informed business decisions is persuasive evidence that the

business activity was not engaged in for profit.      Burger v.

Commissioner, 809 F.2d at 359.     Further, with respect to the

cattle and the orange grove, the record and petitioner’s

testimony show that he had a very primitive expertise in those

activities.     For example, even though petitioner noted the

importance of the age of cattle as an “economic factor” in their

“economic production”, he could not testify from personal

knowledge regarding the age of the cattle he acquired from Mr.

Partin.     This indicates to us a lack of a bona fide profit

motivation.

     Petitioner did not provide evidence of the amount of time

that he devoted to the particular activities during the tax years

at issue, or any evidence that he was required to withdraw from

his real estate business to devote more time to any of those

activities.     See McCarthy v. Commissioner, supra; sec. 1.183-

2(b)(3), Income Tax Regs.     On the record before us, we find that

petitioner was not engaged in a trade or business with respect to

the orange grove, cattle, and Ferrari activities.

     Taxpayers must substantiate any expenses which they claim as

deductions.     See Hradesky v. Commissioner, 65 T.C. 87, 89-90

(1975), affd. 540 F.2d 821 (5th Cir. 1976); Tarakci v.

Commissioner, T.C. Memo. 2000-358.71      Further, to be an


     71
          Sec. 274(d) provides for more stringent substantiation
                                                       (continued...)
                              - 115 -

“ordinary” expense under section 162, the expense must arise from

a transaction that is “of common or frequent occurrence in the

type of business involved.”   Deputy v. du Pont, 308 U.S. 488, 495

(1940); Tarakci v. Commissioner, supra.

     There is no dispute in this case that petitioner was engaged

in orange grove, cattle, and Ferrari activities.   There is also

no dispute, we think, that those activities are such that

expenses arise in their normal course.72   As petitioner states

with respect to his cattle, “he’s got to eat”.   However, to

substantiate his expenses for those activities, petitioner has

simply provided a bundle of receipts and a listing of expenses.

Most of those receipts and the listing do not show for what

purpose the expenses were made.   Those items do not foreclose

that the expenses incurred were personal expenses unrelated to

the activities that petitioner claims deductions for or that the


     71
      (...continued)
requirements with respect to “any traveling expense (including
meals and lodging while away from home)”, “for any item with
respect to an activity which is of a type generally considered to
constitute entertainment, amusement, or recreation, or with
respect to a facility used in connection with such an activity”,
and for any expenses relating to passenger automobiles or any
other property used as a means of transportation. See secs.
274(d)(4), 280F(d)(4). We note that several of the expenses that
petitioner claims as a deduction, he categorizes as “Automobiles”
and “Meals & Entertainment”. Also, he claims expenses relating
to his collection of Ferraris.
     72
      At trial, petitioner testified with respect to his cattle
activity that he incurred expenses for 50-pound mineral blocks,
hay, and health supplies such as injections, insect sprays, “and
stuff”. Petitioner’s testimony regarding those expenses was
general and not specific.
                                - 116 -

expenses are such that they are required to be capitalized.

Petitioner has not provided further substantiation of those

items, and he has not provided evidence which would permit us to

conclude that those particular expenses were of frequent and

common occurrence in the petitioner’s purported business

activity.   With that being said, petitioner has not met his

burden of substantiation or proved his entitlement to current

deductions under section 162(a).    We hold that the claimed

expenses are not allowable as ordinary and necessary business

deductions.

     G.   Self-employment Tax

                         FINDINGS OF FACT

     Petitioner reported self-employment tax of $930, $509,

$5,387, and $2,371, on his Forms 1040 for 1985, 1986, 1987, and

1988, respectively.   Those amounts were computed on the basis of

petitioner’s net profits, which he reported from his real estate

business:   Net profits of $7,882, $4,138, $44,219, and $18,208,

for 1985, 1986, 1987, and 1988, respectively.

                                OPINION

     Section 1401 imposes a percentage tax on self-employment

income of every individual.     See Baker v. Commissioner, T.C.

Memo. 2001-283.   Self-employment income is defined as “the net

earnings from self-employment derived by an individual    * * *

during any taxable year”.   Sec. 1402(b).   The term “net earnings
                               - 117 -

from self-employment” is defined as “the gross income derived by

an individual from any trade or business carried on by such

individual, less the deductions * * * which are attributable to

such trade or business”.    Sec. 1402(a).

     Respondent determined self-employment taxes on the basis of

petitioner’s income from his real estate business.    The

applicable percentage for each of the tax years at issue was

applied to the maximum amount of self-employment earnings subject

to self-employment tax:    $39,600 in 1985, $42,000 in 1986,

$43,800 in 1987, and $45,000 in 1988.    See sec. 1402(b)(1).

Respondent determined petitioner’s self-employment tax liability

to be $4,67373 for 1985, $5,16674 for 1986, $5,38775 for 1987, and

$5,85976 for 1988.

     Petitioner was engaged in the trade or business of buying

and selling real estate during the years at issue.    He does not

contest on brief that his earnings from that business are subject

to self-employment taxes.    Therefore, we sustain respondent’s



     73
      Self-employment tax ($4,673) = Maximum amount subject to
self-employment tax ($39,600) x Applicable percentage (.118).
     74
      Self-employment tax ($5,166) = Maximum amount subject to
self-employment tax ($42,000) x Applicable percentage (.123).
     75
      Self-employment tax ($5,387) = Maximum amount subject to
self-employment tax ($43,800) x Applicable percentage (.123).
     76
      Self-employment tax ($5,859) = Maximum amount subject to
self-employment tax ($45,000) x Applicable percentage (.1302).
                                - 118 -

determination regarding the application of the self-employment

tax to petitioner’s net earnings and the amounts he determined.

II.   Additions to Tax for Fraud

      Respondent determined additions to tax under section 6653(b)

for petitioner’s 1985, 1986, 1987, and 1988 tax years.    Section

6653(b), in effect for the tax years at issue, provided for

additions to tax for underpayments of tax which are attributable

to fraud.    Section 6653(b)(1) and (2), in effect for petitioner’s

1985 tax year provided:

            SEC. 6653(b).   Fraud.--

           (1) In general.--If any part of any underpayment
      * * * of tax required to be shown on a return is due to
      fraud, there shall be added to the tax an amount equal
      to 50 percent of the underpayment.

           (2) Additional amount for portion attributable to
      fraud.--There shall be added to the tax (in addition to
      the amount determined under paragraph (1)) an amount
      equal to 50 percent of the interest payable under
      section 6601--

                 (A) with respect to the portion of the
            underpayment described in paragraph (1) which is
            attributable to fraud, and

                  (B) for the period beginning on the last day
            prescribed by law for payment of such underpayment
            (determined without regard to any extension) and
            ending on the date of the assessment of the tax
            (or, if earlier, the date of the payment of the
            tax).

Section 6653(b)(1) and (2), in effect for 1986 and 1987,

provided:
                              - 119 -

          SEC. 6653(b).   Fraud.--

          (1) In general.--If any part of any underpayment
     * * * of tax required to be shown on a return is due to
     fraud, there shall be added to the tax an amount equal
     to the sum of--

               (A) 75 percent of the portion of the
          underpayment which is attributable to fraud, and

               (B) an amount equal to 50 percent of the
          interest payable under section 6601 with respect
          to such portion for the period beginning on the
          last day prescribed by law for payment of such
          underpayment (determined without regard to any
          extension) and ending on the date of the
          assessment of the tax or, if earlier, the date of
          the payment of the tax.

          (2) Determination of portion attributable to
     fraud.--If the Secretary establishes that any portion
     of an underpayment is attributable to fraud, the entire
     underpayment shall be treated as attributable to fraud,
     except with respect to any portion of the underpayment
     which the taxpayer established is not attributable to
     fraud.

Section 6653(b)(1) and (2), in effect for 1988, provided:

          SEC. 6653(b).   Fraud.--

          (1) In general.--If any part of any underpayment
     * * * of tax required to be shown on a return is due to
     fraud, there shall be added to the tax an amount equal
     to 75 percent of the portion of the underpayment which
     is attributable to fraud.

          (2) Determination of portion attributable to
     fraud.--If the Secretary establishes that any portion
     of an underpayment is attributable to fraud, the entire
     underpayment shall be treated as attributable to fraud,
     except with respect to any portion of the underpayment
     which the taxpayer established is not attributable to
     fraud.

Respondent has the burden of proof, sec. 7454(a); Rule 142(b),

and he must show by clear and convincing evidence:   (1)
                              - 120 -

Petitioner has underpaid his taxes for each year, and (2) at

least some part of the underpayment is due to fraud.     DiLeo v.

Commissioner, 96 T.C. at 873; Hebrank v. Commissioner, 81 T.C.

640, 642 (1983).

     With respect to the 1985 tax year, the 50-percent addition

to tax for fraud under section 6653(b)(1) is imposed on the total

underpayment, where any portion of the underpayment is

attributable to fraud.   See H. Conf. Rept. 99-841 at II-780

(1986), 1986-4 C.B. 1, 780.   With respect to the section

6653(b)(2) addition to tax for 1985, it is respondent’s burden to

establish, by clear and convincing evidence, the specific portion

of the underpayment attributable to fraud.   Hughes v.

Commissioner, T.C. Memo. 1994-139.

     With respect to the 1986, 1987, and 1988 tax years, once

respondent has shown by clear and convincing evidence an

underpayment of tax and that at least some portion of the

underpayment is attributable to fraud, the entire underpayment is

treated as attributable to fraud and subject to the section

6653(b)(1) addition to tax.   Sec. 6653(b)(2); Kalo v.

Commissioner, T.C. Memo. 1996-482, affd. without published

opinion 149 F.3d 1183 (6th Cir. 1998).   The normal presumption of

correctness then attaches to the Commissioner’s determination,

DiLeo v. Commissioner, supra at 873, and the taxpayer bears the
                                  - 121 -

burden of showing how much of the underpayment is not due to

fraud.       Ishler v. Commissioner, T.C. Memo. 2002-79.77

  A.    Underpayment of Tax Required To Be Shown on a Return78

       Under section 6653(c)(1), in effect for each of the tax

years at issue, an “underpayment” is defined as follows:

            SEC. 6653(c). Definition of Underpayment.–For
       purposes of this section, the term “underpayment”
       means--

                    (1) Income, estate, gift, and certain excise
               taxes.--In the case of a tax to which section 6211
               (relating to income, estate, gift, and certain
               excise taxes) is applicable, a deficiency as
               defined in that section (except that, for this
               purpose, the tax shown on a return referred to in
               section 6211(a)(1)(A) shall be taken into account
               only if such return was filed on or before the
               last day prescribed for the filing of such return,
               determined with regard to any extension of time
               for such filing) * * *

The Commissioner cannot rely upon the taxpayer’s failure to meet

the burden of proof on the issue of the existence of a deficiency

to sustain his burden of proving an underpayment by clear and

convincing evidence.       Parks v. Commissioner, 94 T.C. at 660-661;

Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).79       However, the

       77
      See also Hughes v. Commissioner, T.C. Memo. 1994-139
(describing sec. 6653(b)(2) as a burden-shifting provision).
Sec. 6653(b)(2) was added to the Code by the Tax Reform Act of
1986, Pub. L. 99-514, sec. 1503(b), 100 Stat. 2742, and is
effective for return due dates after Dec. 31, 1986.
       78
      Our discussions in subs. A and B do not address fraudulent
underpayments under sec. 6653(b)(2) for the 1985 tax year. That
addition is discussed separately in subs. C, infra.
       79
            See appendix D for the items of income that respondent
                                                         (continued...)
                              - 122 -

Commissioner need only show that there is “some underpayment” for

each of the tax years at issue.   Langworthy v. Commissioner, T.C.

Memo. 1998-218.

     Since petitioner’s returns for 1985, 1986, and 1988 were not

filed timely, respondent computed the fraud penalty on the basis

of petitioner’s total tax liability for each year without

reduction for amounts shown on petitioner’s untimely returns.

See sec. 6653(c)(1) (parenthetical).    On the record before us, we

hold that respondent has met his burden of proving by clear and

convincing evidence an underpayment for each of the tax years

1985, 1986, 1987, and 1988.

     1.   Underpayment for 1985

     For 1985, petitioner has specifically conceded the following

amounts as income, see appendix C:

           Income item                              Amount

     Schedule C miscellaneous income               $12,357
     Gains from property sales                     185,661
     Schedule C interest income                     40,479
     Commission income                              30,249
     Unidentified deposits                           1,700
       Total                                       270,446

In addition, petitioner did not address on brief the following

items of income:




     79
      (...continued)
relies upon as clear and convincing evidence of an underpayment.
                              - 123 -

          Income item                                Amount

     Gain from sale of Lot 1 in
       Susan’s Lakefront Estate                     $20,097
     Installment gain from sale of 3 lots
       in Florida Fruit Belt Subdivision           28,347
     Installment gain from Silver Lake sale         6,144
     Gain from sale of Wax Myrtle trees               400
     Interest income from Silver Lake mortgage      6,773
     Commission income                             37,500
     Rental income                                  1,250
       Total                                      100,511

Those items are conceded by petitioner’s own statement on brief

that “any issues not raised in Petitioner’s Brief are also

conceded by Petitioner”.80   Respondent has produced affirmative

evidence for each of the items conceded, and he has proven those

items of income by clear and convincing evidence.

     Respondent’s determination that petitioner realized $30,925

in 1985 from the sale of an installment obligation to his father

is supported by clear and convincing evidence in the record:   (1)

An assignment of mortgage relates that the mortgage along with

the “note or obligation” and “the moneys due and to become due

thereon” were being transferred “in consideration of the sum of”

$36,000 received from Charles Medlin; (2) the form of the

transaction was a sale of an installment note, which is evidenced

by petitioner’s instructions to the mortgagor to make direct

payments to his father.


     80
      See Brodsky v. Commissioner, T.C. Memo. 2001-240
(taxpayer’s failure to contest certain amounts of undisputed
income determined by respondent establishes underpayment by clear
and convincing evidence).
                                - 124 -

     Respondent also relies on his determination that petitioner

realized 100 percent of the gain realized on the sale of Lot 23

in the High Plains Property in 1985.       The record is clear that,

at one point in time, petitioner and Mr. Schoolfield were 50-50

owners of the High Plains Property.       However, it is not clear

from the record whether this 50-50 interest extended to Lot 23,

and, if so, whether petitioner and Mr. Schoolfield split up

before or after the sale in 1985.     In our general discussion

relating to the deficiency determination, we have relied on

petitioner’s failure to overcome the presumption of correctness

which attaches to respondent’s determination.       See supra.   We

decided that petitioner did not establish that Mr. Schoolfield

owned 50 percent of that lot at the time of its sale, and we

decided that petitioner was responsible for 100 percent of the

gain realized.     However, with respect to the fraud addition to

tax, we find that respondent has not proven by clear and

convincing evidence that petitioner was responsible for 100

percent of the gain from this sale.       Petitioner agrees on brief

that he is responsible for half of the gain from this sale.

     There is clear and convincing evidence that the fair market

value of the Citrus County Property at the time of the

foreclosure sale in 1985 was at least $87,000 and that petitioner

realized $85,15681 on the foreclosure sale in 1985.

     81
          Gain realized ($85,156) = Amount realized ($87,000) -
                                                       (continued...)
                               - 125 -

       Respondent determined that the deposit of a $59,000

cashier’s check into petitioner’s Tucker bank account on March

12, 1985, was income to petitioner.      Bank deposits are prima

facie evidence of income.    United States v. Price, 335 F.2d at

677; DiLeo v. Commissioner, 96 T.C. at 868.      Where respondent

bears the burden of proof, he must show a likely taxable source

for the deposits.    Armes v. Commissioner, 448 F.2d 972, 975 (5th

Cir. 1971), affg. in part, revg. in part, and remanding T.C.

Memo. 1969-181.    Alternatively, where the taxpayer alleges a

nontaxable source, the Commissioner may satisfy his burden by

disproving the nontaxable source so alleged.      United States v.

Massei, 355 U.S. 595 (1958); Parks v. Commissioner, 94 T.C. at

661.    Respondent claims that the Tucker bank account is an

account to which petitioner deposited, generally, taxable income

from his business.    Also, respondent relies upon petitioner’s

“business of buying and selling real estate and real estate

development” as the likely source of the $59,000 deposit.

       The record shows that there were a number of deposits into

petitioner’s Tucker bank account from his real estate business

and that those deposits represented taxable income.      Indeed, the

spreadsheets provided to Mr. Kelly, which list deposits to and

expenditures from the Tucker bank account, show items such as

commissions and interest received in petitioner’s real estate

       81
      (...continued)
Basis ($1,844).
                              - 126 -

business.   Respondent has shown by clear and convincing evidence

the likely source of the $59,000; i.e., petitioner’s real estate

business.   Petitioner was regularly engaged in the real estate

business during 1985, and he received a substantial amount of

unreported income during that period from that business.82

Petitioner did not maintain adequate records for his real estate

transactions or development activities, and there is substantial

evidence of an intent to conceal income received in that

business.   Given those circumstances, we find that the real

estate business provides a likely source for the $59,000

cashier’s check.

     Petitioner argues, on the other hand, that the $59,000

cashier’s check is traceable to a $70,000 check from Washington

International, and that check represents a loan.   Petitioner

contends that respondent has not proven this source to be a

taxable source and that, indeed, he was aware of this $70,000

check during the examination, but he did not classify it as

income.   First, we note that respondent, having shown a likely

taxable source for the $59,000 deposit, does not bear the burden

of negating nontaxable sources alleged by petitioner.   Holland v.


     82
      Petitioner’s financial statement dated Nov. 15, 1985, also
reveals certain items of income receivable in petitioner’s real
estate business that could provide a likely source of the
deposit. For example, the financial statement shows notes and
mortgages receivable of $329,210, annual income from rentals of
$40,000, and “Projected annual income from Monarch Realty” of
$40,000.
                              - 127 -

United States, 348 U.S. 121 (1954).     Second, we find that

respondent has nevertheless negated the Washington International

check as a nontaxable source of the deposit.    Petitioner, in this

case, relies upon Mr. Kelly’s testimony that Washington

International, generally, “loaned money secured by real estate”

and that petitioner’s account was “basically a loan account”.

However, this position is inconsistent with petitioner’s

testimony at trial that the Washington International trust

account was used as a vehicle for deferring income from real

estate sales.   We cannot agree, on the basis of the record before

us, that the Washington International trust account was a loan

account or that the $70,000 check represents a loan.    There is

evidence that this check did not represent a nontaxable source,

and we do not draw any adverse conclusion from respondent’s

failure to classify it as taxable income in his examination.     We

hold that respondent has shown by clear and convincing evidence

that the $59,000 deposit represents income to petitioner.

     Respondent has proven by clear and convincing evidence the

following items of income for 1985:

                Item                                    Amount

     Income conceded or stipulated                   $270,446
     Disputed income conceded on brief                100,511
     Gain from sale of installment obligation          30,925
     One-half gain from sale of High Plains Property    9,850
     Gain from foreclosure of Citrus County Prop.      85,156
     Unidentified deposit--Mar. 12, 1985               59,000
       Total                                          555,888
Respondent allowed the following deductions for 1985:
                               - 128 -

      Type of deduction                                 Amount

     Schedule C expenses                               $225,301
     Itemized deductions                                 22,567
     Exemptions                                           2,080
       Total                                            249,948
Respondent has proven by clear and convincing evidence that

petitioner received taxable income of $305,94083 in 1985.

Respondent has also proven that petitioner is liable for self-

employment taxes of $4,673 for 1985.     Respondent has proven an

underpayment for 1985 by clear and convincing evidence.

          2.   Underpayment for 1986

     For 1986, petitioner has specifically conceded the following

amounts as income; see appendix C:

           Income item                               Amount

     Schedule C   miscellaneous income              $27,019
     Gains from   property sales                    154,924
     Schedule C   interest income                    10,614
     Schedule C   commission income                  32,357
     Schedule C   unidentified deposit               24,186
       Total                                        249,100

In addition, petitioner did not address on brief the following

items of income:

           Income item                               Amount

     Gain from sale of Tract A in
       Susan’s Lakefront Estate                     $21,097
     Installment gain from Silver Lake sale          12,288
     Interest from Silver Lake                        5,805
     Deposit on May 6, 1986                             300
     Deposit on Oct. 10, 1986                           300
       Total                                         39,790


     83
      Total income proven of $555,888 less allowable deductions
of $249,948 equals $305,940 in taxable income.
                              - 129 -


Petitioner has conceded those items.    Respondent has produced

affirmative evidence for each of the items conceded, and he has

proven those items of income by clear and convincing evidence.

     Respondent relies upon the gain from the sale of one of the

Grissom Parcels in 1986 as evidence of an underpayment.

Petitioner agrees that he is responsible for $12,042 of gain from

that sale.   Respondent has proven that amount by clear and

convincing evidence.

     Respondent also relies on the gain from the exchange of

petitioner’s ownership interest in Lots 26, 27, and 28 of the

Arrowhead Lakes Subdivision for Mr. McLaughlin’s ownership

interest in the Angel-Royse Property.    In our discussion relating

to whether a deficiency existed with respect to this item, the

record reflected that petitioner was the 100-percent owner of the

lots in the Arrowhead Lakes Subdivision and that he exchanged

those lots for Mr. McLaughlin’s 50-percent interest in the Angel-

Royse Property.   There is clear and convincing evidence that

petitioner and Mr. McLaughlin were not involved in a partnership

with respect to both the Arrowhead Lakes Subdivision and the

Angel-Royse Property.   We hold that respondent has proven by

clear and convincing evidence that petitioner realized $60,709 of

gain from the exchange of the properties in 1986.

     Respondent also relies upon the gain of $92,502 from the

sales of 31 and 31.5 acres of East Lake Vista in 1986.    There is
                              - 130 -

clear and convincing evidence that petitioner owned at least a

50-percent interest in the East Lake Vista properties at the time

of their sales in 1986, including petitioner’s financial

statements, a guaranty that petitioner entered into with the

buyer at the time of the sale of the 31.5 acres, and the ledger

cards that Mr. Miles’s law firm maintained with respect to East

Lake Vista.   We hold that respondent has proven by clear and

convincing evidence that petitioner realized half of the gain

from the sales of 31 and 31.5 acres from East Lake Vista in 1986.

     Respondent has proven by clear and convincing evidence the

following items of income for 1986:

                Item                                Amount

     Income conceded or stipulated                 $249,100
     Disputed income conceded on brief               39,790
     Gain from sale of Grissom Parcels               12,042
     Gain from exchange of Arrowhead Lakes
       Subdivision lots                              60,706
     Gain from sales in East Lake Vista              92,502
       Total                                        454,140
Respondent allowed the following deductions for 1986:

      Type of deduction                            Amount

     Schedule C expenses                          $298,656
     Nonitemized contributions                          48
     Exemptions                                      2,160
       Total                                       300,864
Respondent has proven by clear and convincing evidence that

petitioner received taxable income of $153,27684 in 1986.



     84
      Total income proven of $454,140 less allowable deductions
of $300,864 equals $153,276 in taxable income.
                                - 131 -

Respondent has also proven that petitioner is liable for self-

employment taxes of $5,166 for 1986.      Respondent has proven an

underpayment for 1986 by clear and convincing evidence.

           3.   Underpayment for 1987

     For 1987, petitioner has specifically conceded the following

amounts as income; see appendix C:

            Income item                               Amount

     Schedule C miscellaneous income                 $24,000
     Gains from property sales                       946,649
     Schedule C interest income                        9,084
       Total                                         979,733

In addition, petitioner did not address on brief the following

items of income:

            Income item                               Amount

     Gain from sale of Silver Lake                   $24,577
     Interest income                                   5,488
       Total                                          30,065

Petitioner has conceded those items.      Respondent has produced

affirmative evidence for each of the items conceded, and he has

proven those items of income by clear and convincing evidence.

Thus, respondent has proven by clear and convincing evidence that

petitioner received income of $1,009,798 ($979,733 + $30,065) in

1987.
     Respondent allowed the following deductions for 1987:

        Type of deduction                             Amount

     Schedule C expenses                             $265,076
     Itemized deductions                               43,561
     Exemptions                                         3,800
       Total                                          312,437
                               - 132 -

Respondent has proven by clear and convincing evidence that

petitioner received taxable income of $697,36185 in 1987.

Respondent has proven by clear and convincing evidence that

petitioner is liable for self-employment tax of $5,387.

Petitioner reported taxable income of $37,879, a tax of $7,515 on

that amount, and self-employment tax of $5,387.    Respondent has

proven an underpayment for 1987 by clear and convincing evidence.

          4.   Underpayment for 1988

     For 1988, petitioner has specifically conceded the following

amounts as income; see appendix C:

           Income item                               Amount

     Schedule C miscellaneous income                $12,000
     Gains from property sales                      167,120
     Unidentified deposits                            4,400
       Total                                        183,520

In addition, petitioner did not dispute on brief the following

items of income:

           Income item                               Amount

     Gain from sale of Lots 6-30 in
       Susan’s Lakefront Estate                     $77,298
     Gain from sale of Mefford property              55,164
     Rents received from Island Living, Inc.         12,000
       Total                                        144,462

Petitioner has conceded those items.     Respondent has produced

affirmative evidence for each of the items conceded, and he has

proven those items of income by clear and convincing evidence.


     85
      Total income proven of $1,009,798 less allowable
deductions of $312,437 equals $697,361 in taxable income.
                              - 133 -

     Respondent relies on the sale of 10 acres in East Lake Vista

as evidence of an underpayment for 1988.    Considering our

discussion above with respect to the sales of acres from East

Lake Vista in 1986, we hold that respondent has proven by clear

and convincing evidence that petitioner owned a 50-percent

interest in East Lake Vista at the time of the sale in 1988 and

that he realized gain of $19,522 in 1988 from the sale of his 50-

percent interest.

     Respondent also relies on the $140,000 that was deposited

into Mr. Miles’s law firm’s trust account for petitioner on July

8, 1988.   Petitioner established that the $140,000 was traceable

to a $140,000 check from Dean Witter and that the check stub was

signed “RECD BY Richard Margolis”.   Respondent has demonstrated

by clear and convincing evidence that petitioner was involved in

the business of buying and selling real estate; he received

substantial amounts of income from numerous property transactions

in this business; those property transactions were carried out

using trustees, including Mr. Miles; proceeds from those

transactions were deposited into Mr. Miles’s law firm’s trust

account; and those proceeds represented income taxable to

petitioner but which he failed to report.    By petitioner’s own

account, the $140,000 check from Dean Witter and allegedly from

Mr. Margolis was attributable to a transaction which was in form

a sale of petitioner’s property.   We hold that respondent has
                               - 134 -

established that petitioner’s business of buying and selling real

estate was a likely taxable source of this deposit.

     Petitioner alleges that the source of the deposit of

$140,000 was a loan from Mr. Margolis.   Petitioner did not call

Mr. Margolis as a witness, and he did not provide any documentary

evidence to support his claim that this amount was a loan.

Petitioner’s claim that this item represents a loan is based

solely on his testimony, which was uncorroborated, inconsistent,

and not credible.   Given these circumstances, petitioner’s use of

Mr. Miles’s law firm’s trust account to transact his real estate

deals, the substantial evidence of concealment of petitioner’s

real estate sales and gains therefrom, and the form of the

transaction that petitioner relies upon as a source of nontaxable

income, we are convinced that the $140,000 was not a loan.

     Respondent has proven by clear and convincing evidence the

following items of income for 1988:

               Item                                Amount

     Income conceded or stipulated                $183,520
     Disputed income conceded on brief             144,462
     Sale of 10 acres from East Lake Vista          19,522
     Deposit of $140,000 on July 8, 1988           140,000
       Total                                       487,504


Respondent allowed the following deductions for 1988:

          Type of deduction                        Amount

         Schedule C expenses                     $301,910
         Itemized deductions                       44,651
         Exemptions                                 3,900
            Total                                 350,461
                                 - 135 -

Respondent has proven by clear and convincing evidence that

petitioner received taxable income of $137,04386 in 1988.

Respondent has also proven that petitioner is liable for self-

employment taxes of $5,859 for 1988.       Respondent has proven an

underpayment for 1988 by clear and convincing evidence.

          5.   Conclusion

     Respondent has proven underpayments by clear and convincing

evidence for 1985, 1986, 1987, and 1988.

     B.   Fraudulent Intent

          1.   Clear and Convincing Evidence of Fraud

     Respondent must show that a portion of the underpayment is

attributable to fraud.      Fraud is established where the

Commissioner shows that “the taxpayer intended to evade taxes

that he knew or believed to be owing by conduct intended to

conceal, mislead or otherwise prevent the collection of such

taxes.”   Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir.

1986), affg. T.C. Memo. 1985-63; see also Webb v. Commissioner,

394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81;

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

Commissioner, T.C. Memo. 2001-205.      Suspicion of fraudulent

conduct is not sufficient.      King’s Court Mobile Home Park, Inc.

v. Commissioner, 98 T.C. 511, 517 (1992).       The issue of

fraudulent intent is a question of fact shown by surveying the

     86
      Total income proven of $487,504 less allowable deductions
of $350,461 equals $137,043 in taxable income.
                               - 136 -

taxpayer’s entire course of conduct and drawing reasonable

inferences therefrom.    Korecky v. Commissioner, supra at 1568.

     Fraud is rarely provable by direct evidence but may be

provable by circumstantial evidence.      Brooks v. Commissioner, 82

T.C. 413, 431 (1984), affd. without published opinion 772 F.2d

910 (9th Cir. 1985).    Such evidence includes, but is not limited

to the following “badges of fraud”:      (1) Understating income, (2)

maintaining inadequate records, (3) failing to file tax returns,

(4) giving implausible or inconsistent explanations of behavior,

(5) concealing income or assets, (6) failing to cooperate with

tax authorities, (7) engaging in illegal activities, (8) an

intent to mislead which may be inferred from a pattern of

conduct, (9) lack of credibility of the taxpayer’s testimony,

(10) filing false documents, and (11) dealing in cash.     See

Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986),

affg. T.C. Memo. 1984-601; Recklitis v. Commissioner, 91 T.C.

874, 910 (1988); Kalo v. Commissioner, T.C. Memo. 1996-482.      No

single factor is necessarily dispositive, but a combination of

several factors is persuasive circumstantial evidence of fraud.

Petzoldt v. Commissioner, 92 T.C. at 699.      We find substantial

evidence of fraud in this case.

     The record shows a consistent pattern of understating income

by petitioner.   For the years in issue, petitioner received

substantial amounts of income from his real estate business,
                              - 137 -

which he did not report as income.   Petitioner reported income

only to the extent that deposits were made into his personal

checking accounts and which he did not classify as “loans”.

However, the income that petitioner reported was substantially

offset by deductions that petitioner claimed for each

disbursement that he made from his personal bank accounts.87    The

items of income that respondent determined, and which he proved

by clear and convincing evidence, greatly exceed the amounts

which petitioner reported as gross income on his returns for 1985

through 1988.   We find that the understatements for the years at

issue were substantial and are evidence of fraud.

     Petitioner has previously understated his income in

considerable amounts and with respect to items of income

substantially similar to those items involved herein.88     On April

17, 1988, we entered a stipulated decision for deficiencies of

$1,082 for 1977, $22,213 for 1978, $63,533 for 1979, $7,110 for

1981, and $37,921 for 1982.   Petitioner also understated his

income for the 1983 and 1984 tax years, and he eventually agreed

to deficiencies of $10,550 for those years.   We find the


     87
      Petitioner reported gross income from his real estate
business of $160,363 for 1985, $119,772 for 1986, $138,653 for
1987, and $61,921 for 1988. He claimed deductions for expenses
of $152,481 for 1985, $115,634 for 1986, $94,434 for 1987, and
$43,713 for 1988.
     88
      Evidence of tax evasion for tax years which occur before
and after the filing of the return for the particular tax year at
issue is relevant on the issue of willfulness for that return.
United States v. Dixon, 698 F.2d 445, 447 (11th Cir. 1983).
                                - 138 -

stipulated decision constitutes substantial evidence of fraud for

the years at issue in the instant case since:   (1) The decision

involved similar items as those involved herein; i.e., the use of

nominee accounts to hold real estate sale proceeds; and (2) it

was entered before petitioner’s filing of each of his returns for

the 1985 through 1988 tax years.    Further, in the course of the

previous years’ examinations, petitioner was apprised that the

use of trustees to hold real estate sale proceeds did not

insulate him from tax liability, and he agreed that those

transactions were taxable.   Petitioner’s consistent

understatement of large amounts of such income over a period of

years is evidence of willful intent to evade tax.      Otsuki v.

Commissioner, 53 T.C. at 108.

     Petitioner filed Forms 2688 for each of the years at issue

in which he requested an extension of time for filing his

returns.   In the Form 2688 for the 1985 tax year, he states as

his need for an extension:   “Client derived substantially all his

income from a bulk land transaction, which was extremely complex.

Additional time is needed to analyze the transaction.”

Petitioner did not report income on his Form 1040 for 1985 from

any bulk land transaction, and he accepts on brief that he did

not provide any information to Mr. Kelly regarding any bulk land

sale transaction.   We find his statement on the Form 2688, which

essentially admits having received income from a land sale, as
                               - 139 -

substantial evidence that petitioner knew he was taxable for such

a transaction before the filing of his return.

     In his Forms 2688 for the 1986, 1987, and 1988, tax years,

petitioner requested an extension because “Taxpayer has not

received all needed K-1's for 1065 & 1120 tax returns that

represent a substantial portion of his income.    Without these

items a complete and accurate return cannot be prepared.”

However, petitioner never provided any Schedules K-1 to Mr.

Kelly.    Moreover, in the examination of his 1983 and 1984 Forms

1040 filed on January 30, 1986, and March 7, 1986, respectively,

petitioner informed the revenue agent that he was not involved in

any corporations, partnerships, or trusts, i.e., entities from

which Schedules K-1 might be issued.     We have found as fact that

petitioner was involved in several business entities, and

petitioner accepts that he owned properties held in trust by Mr.

Miles and other trustees under his control.    We also note that

petitioner informed the revenue agent examining his 1983 and 1984

returns that his Cayman Islands trust account was closed in 1983.

However, petitioner subsequently received five checks totaling

$135,000 from the Cayman Islands trust in 1985.    We find that

this record of inconsistent statements and claims by petitioner

is yet another indication of fraud.89


     89
      The making of false and inconsistent statements to the
Commissioner’s revenue agents during the course of their
investigation indicates fraudulent intent. Solomon v.
                                                   (continued...)
                              - 140 -

     Petitioner did not provide to his return preparer, Mr.

Kelly, any checks or other documents relating to his real estate

transactions, and he did not disclose to Mr. Kelly the existence

or nature of his use of Mr. Miles’s law firm’s trust account.

Petitioner provided to Mr. Kelly only spreadsheets reflecting his

deposits into and expenditures from his bank accounts.90

Concealing evidence from one’s tax return preparer is indicative

of fraud.   Ishler v. Commissioner, T.C. Memo. 2002-79.

     Petitioner’s reliance on spreadsheets of his bank deposits

and disbursements to compute his income tax liability was surely

misplaced, and there is considerable evidence that he knew this

to be the case.   Indeed, he was told during the examination of

his 1983 and 1984 returns, which occurred prior to filing the

returns for the years in issue, that this method of computing

taxable income was not acceptable.   The duty of filing accurate

returns cannot be avoided by placing responsibility upon an

agent, especially where the taxpayer has withheld books, records,

and other information regarding sources of income, see Bacon v.


     89
      (...continued)
Commissioner, 732 F.2d 1459, 1462 (6th Cir. 1984) (“concealment
of bank accounts from Internal Revenue agents is yet another sign
indicating fraud), affg. T.C. Memo. 1982-603; Grosshandler v.
Commissioner, 75 T.C. 1, 20 (1980); Kalo v. Commissioner, T.C.
Memo. 1996-482 (taxpayer’s failure to mention foreign bank
accounts), affd. without published opinion 149 F.3d 1183 (6th
Cir. 1998).
     90
      This same lack of disclosure was apparent in the
preparation of petitioner’s 1977-1982 spreadsheets and tax
returns involving Mr. Kelly and Mr. Brooks.
                              - 141 -

Commissioner, T.C. Memo. 2000-257, affd. without published

opinion 275 F.3d 33 (3d Cir. 2001), and where the taxpayer has

taken an active and controlling role in the process of preparing

the tax returns and the information used for their preparation.

     During the examination of petitioner’s returns, respondent

served a third-party recordkeeper summons on Mr. Miles and a

summons on petitioner, both of which requested information for

petitioner’s 1985 through 1988 tax years.   Petitioner did not

comply with the summons issued to him, and, at petitioner’s

behest, Mr. Miles did not provide any requested information.

Respondent was forced to pursue enforcement in court of those

summonses.   Petitioner’s refusal to cooperate with respondent in

determining his correct income tax liability is indicia of fraud.

See Rowlee v. Commissioner, 80 T.C. at 1125.

     We also consider petitioner’s testimony at trial to be

evidence of his fraudulent intent for the years at issue.    We

find that petitioner’s testimony at trial was evasive and

inconsistent, and we do not find it credible:

     Although mere refusal to believe the taxpayer’s
     testimony does not discharge the Commissioner’s burden,
     the lack of credibility of the taxpayer’s testimony,
     the inconsistencies in his testimony and his
     evasiveness on the stand are heavily weighted factors
     in considering the fraud issue.” [Toussaint v.
     Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), affg.
     T.C. Memo. 1984-25; citations omitted.]

Petitioner was unable to explain credibly his failure to report

the amounts of income from his real estate sales transactions.
                               - 142 -

     There is considerable evidence of the concealment of assets

and of income for the tax years at issue, and we find that this

concealment is due in large part to an intent to mislead tax

authorities and to evade taxation on income.91   For the years

1981 through 1990, petitioner had his personal residence titled

in the name of Mr. Miles, as trustee.92   Also, in 1987,

petitioner purchased a Ferrari and had the bill of sale and the

application for a temporary tag put in the name of Mr. Miles’s

law firm.   Petitioner regularly used Mr. Miles, Ms. Allen, and

other trustees to hold and sell his various properties, and he

then used Mr. Miles’s law firm’s trust account to hold the

proceeds from the sales.   The trustees had no functions other

than holding title to the properties, and petitioner was firmly

in control of the proceeds that passed into the law firm’s trust

account.    Indeed, as trustee of that account, Mr. Miles did

whatever petitioner instructed him to do, and petitioner

requested on several occasions that Mr. Miles or Ms. Goodman pay

his personal expenses with his trust funds.    The use of nominee

accounts; i.e., the use of bank accounts fashioned as trust


     91
      Petitioner’s concealment of the various real estate
transactions was so prevalent that respondent’s revenue agent was
able to discover those transactions only by a search of various
courthouse records in seven different counties.
     92
      We also note that on petitioner’s Forms 1040 for 1985-
1988, he lists his address as “P.O. Box 383, Lake Lure, NC
28746”. However, petitioner resided in Osceola County,
Kissimmee, Florida, during the tax years at issue and at the time
of filing his returns.
                                - 143 -

accounts, to conceal assets is evidence of fraud where petitioner

has unfettered control over those accounts.93      Temple v.

Commissioner, T.C. Memo. 2000-337, affd. 62 Fed. Appx. 605 (6th

Cir. 2003); Friedman v. Commissioner, T.C. Memo. 1968-145, affd.

421 F.2d 658 (6th Cir. 1970).

     Petitioner used fictitious names in some of his real estate

dealings for the years in issue.    Indeed, petitioner signed

various documents relating to real estate documents in the name

of “William R. Wright”, and he also notarized several documents

in that name.   Petitioner also used the name “D.W. Davis” and

opened a bank account in that name.       When asked about his use of

fictitious names, petitioner testified with respect to the name

“John Waltin” that it was not fictitious since “there’s probably

a John Waltin somewhere”.   We find petitioner’s testimony not

credible, and we find that he used those fictitious names for the

purpose of concealing income and property transactions.        See

Milito v. Commissioner, T.C. Memo. 1989-145 (“The use of aliases



     93
      Petitioner argues that his use of trusts is not evidence
of fraud, since “the practice of owning property through nominees
and trustees was widespread and common.” We might agree that the
use of trusts alone does not establish fraudulent intent;
however, the use of trusts in combination with evidence of the
concealment of assets and sale proceeds provides persuasive
evidence of fraud. Further, it does not follow from the frequent
use of the trust vehicle to hold property in Florida that
petitioner’s use of the trust vehicle was not fraudulent.
Indeed, the use of trusts does not necessarily involve the same
circumstances that exist with respect to petitioner’s use,
notably the failure to report income and the failure to file
appropriate returns.
                              - 144 -

or fictitious names to conceal income is also evidence of

fraud.”); see also Cooperstein v. Commissioner, T.C. Memo. 1984-

290; Yu v. Commissioner, T.C. Memo. 1973-188; Staff v.

Commissioner, T.C. Memo. 1954-59.

     As we have noted throughout this opinion, petitioner has

consistently failed to maintain adequate records of his real

estate and other transactions.   In some cases, the only record

petitioner admits to have maintained is his checkbook.   Clearly,

a checkbook is an insufficient record for purposes of computing

his gross income, especially where the transactions involved are

complex real estate transactions which include installment sales

and subdividing.   Such a gross failure to maintain adequate

records (or to provide such records) is certainly indicative of

fraud.   See Clayton v. Commissioner, 102 T.C. at 647.

     We hold that there is clear and convincing evidence of

fraudulent intent to evade income taxes by petitioner and that

the circumstances which lead us to that holding were apparent

with respect to at least some part of the underpayments for each

of the tax years in issue.   Thus, with respect to the 1985 tax

year, respondent has satisfied his burden, and the addition to

tax under section 6653(b)(1) applies to the entire underpayment;

with respect to the 1986, 1987, and 1988, tax years respondent

has satisfied his initial burden, and the additions to tax for

fraud for those tax years apply to the entire underpayment unless
                               - 145 -

petitioner can show the specific portion of the underpayment that

is not due to fraud.

          2.   Portion of Underpayment Not Attributable to Fraud

     Petitioner contends, generally, that he understood that, in

dealings in real estate (and exotic cars), receipts from sales or

mortgage payments related to the real estate business “were not

taxable, but were a tax free exception”, but that “Payments taken

for living and personal expenses were taxable.”    Petitioner is

correct that the fraud penalty cannot be imposed on the basis of

an “honest mistake” regarding taxability.   Indeed, the “due to

fraud” language in section 6653(b) requires a specific intent to

evade a tax owing, and “a good-faith misunderstanding of the tax

laws could negate fraud”.    Niedringhaus v. Commissioner, 99 T.C.

202, 217 (1992).   However, considering all the facts and

circumstances on the record, we find petitioner’s alleged

misunderstanding of the law on tax free exchanges incredible.94

     Petitioner was an experienced real estate developer and

dealer for many years.   He was involved in a considerable number

of real estate transactions during the years at issue and in

prior years.   Mr. Kelly testified that petitioner appeared



     94
      It appears that petitioner raised this explanation of his
failure to report income from his real estate transactions for
the first time at trial. The record shows that he did not
present this purported “misunderstanding” of tax free exchanges
to respondent’s revenue agent during the examination of his 1985-
1988 returns, and his petition does not provide any allegation of
a misunderstanding of the tax laws.
                              - 146 -

knowledgeable on the subject of like-kind exchanges.    See sec.

1031; Kalo v. Commissioner, T.C. Memo. 1996-482 (A taxpayer’s

intelligence, education, and tax expertise are also relevant for

purposes of determining fraudulent intent).

     At trial, petitioner testified:

     Q    Now, in relation to mortgage payments--the receipt
     of mortgage payments--if those payments went to Mr.
     Miles as trustee, you related how they might not--
     might or might not have appeared on your tax return.

     A    Yes, sir.

     Q    Would you explain to the Court why they might or
     might not appear on your tax return if a payment went
     to Miles?

     A    Well, I mean, we were discussing before that as
     long as I was leaving in there to either pay--I mean,
     some of it went for legal fees or taxes--real estate
     taxes, mortgage payments, interest payments, to
     purchase another piece of property that--and
     occasionally I would go, you know, need money and say,
     Write me a check. I would put it in my account, go on
     the spreadsheet; it would go on the return.

     Q    Now, as far as payments that were received from
     the sale of a property, if that went to Miles, how
     would you consider it? How did you consider it?

     A    I’m sorry. I thought that was the question you
     had just previously asked me.

     Q    No, I asked you specifically about receipt from
     mortgage payments--if there was a mortgage payment that
     Miles received.

     A    Okay.   All right, well, I gave you the correct
     answer.

     Q    Now, if it was not a mortgage payment, but
     actually a payment at a closing from the sale of
     property--
                           - 147 -

A    Oh, like the downpayment at closing.

Q    Right.

A    Same thing.

Q    Did you use Miles--any of the money in Miles’s
trust account at times to attempt to make purchases of
property?

A    Oh, yes.

Q    And did you think that that caused you to have to
declare that as income when you made the purchase
through Miles?

A    No, sir.

Q    Why not?

A    Again, I had this. I thought, an understanding of
what a tax-free exchange was, and I don’t think in this
game you have to be off very much. But apparently I
was off a little bit on this.

Q    Well, what was your understanding in the years at
issue--1985, ‘-6, ‘-7, and ‘8, as to how this tax-free
exchange worked in relation to your tax liability?

A    Okay. It’s hard to divorce myself from what I
think today and what I thought today--is that, you
could sell a piece of property, the money goes into
escrow, and you take that money and buy another piece
of property, and if you don’t--again, I refer to it as,
take it out and spend it on wine, women, and song--

Q    By that, you mean--

A    --that is reinvestment.

Q    By that phrase--wine, women, and song--you mean
take it out for yourself, for living.

A    Yes, sir.

Q    And if you didn’t take it out for living, what was
your opinion at that time?
                              - 148 -

     A    That it was like a tax-free--that was the way, and
     I’m not far off, but I think I’m off far enough. I
     understand now that that was how you do a tax-free
     exchange.

     Q    Now, you considered yourself to be in the business
     of buying and selling property. Is that correct?

     A    Yes, pretty much.   Yes, sir.

     Q    Did you think that because you were in the
     business of buying and selling property, that that
     impacted your ability to engage in tax-free exchanges?

     A    That was my business.

     Q    Did you think that you could be in the business of
     buying and selling properties, and still engage in tax-
     free exchanges?

     A    Oh, yes.

     Q    I mean, as you sit here today, you know there’s a
     --

     A    Yes, now I understand your question, and yes, sir.

     Q    So back in the years at issue, did you know that
     there was this distinction about, even if you do it
     correctly, it may--a tax-free exchange may not be
     available to a dealer in property?

     A    Yes, sir.   I understand that now.

As we have stated previously in this opinion, we were not

impressed with petitioner’s testimony at trial, generally, and we

were certainly not impressed with his supposed understanding of

tax free exchanges of property.   During the examinations of

petitioner’s returns for 1985 through 1988, petitioner did not

discuss with the revenue agent his beliefs regarding tax free

exchanges, and the substantial evidence of concealment of the
                              - 149 -

trust holdings and the sales proceeds in Mr. Miles’s law firm

trust account indicates that petitioner’s use of nominees was for

a purpose other than tax-free exchanges.

     Most importantly, petitioner’s testimony and contentions

regarding his failure to report income deposited in Mr. Miles’s

law firm’s trust account are contradicted by other evidence of

record.   Petitioner’s purported understanding was that he was not

required to report income from his sales of real estate so long

as the sale proceeds remained in the trust account and were not

disbursed for personal expenses.   Petitioner claims that he

reported consistently with that understanding.     Nevertheless,

there were considerable amounts that were disbursed from Mr.

Miles’s law firm’s trust account for personal expenses during the

years in issue that were not reported as income.     Petitioner does

not explain this failure to report.     We cannot accept that

petitioner had a bona fide misunderstanding of tax free exchanges

and that this purported misunderstanding explains his failure to

report the substantial amounts of income from real estate

transactions.

     Petitioner argues that fraud penalties should not apply to

the amounts which he reported as income on his returns for 1986

through 1988.95   Petitioner suggests that to the extent those

     95
      The addition to tax for fraud under sec. 6653(b)(1)
applies to the entire underpayment for 1985, regardless of
whether petitioner establishes that some portion of that
                                                   (continued...)
                               - 150 -

amounts gave rise to underpayments, the underpayments are not

attributable to fraud.    We disagree.

     Petitioner’s method of preparing his returns for 1985

through 1988 was erroneous, and petitioner was aware at the time

he signed those returns that the method was erroneous.     His

returns for 1985 through 1988 were prepared on the basis of

spreadsheets of the deposits to, and disbursements from, his

personal bank accounts.    Petitioner reported income only to the

extent that deposits were made to his personal accounts and,

then, only to the extent that the deposit was not classified as a

“loan”.   However, petitioner’s reported income from these

spreadsheets was substantially offset by disbursements from his

personal bank accounts, which he claimed as deductible expenses

on his Schedules C.

     Petitioner contends that the fraud penalties should not be

applied to the tax liability which was increased due to the

expenses that respondent disallowed.     After reviewing the

spreadsheets that petitioner used to prepare his returns, we are

convinced that many of the expenses that petitioner claimed as

deductions were personal in nature.      For example, on Schedule C

of petitioner’s 1985 tax return, he claimed a deduction for

commission expenses of $14,540, which represented the cost of a

ring, earrings, and two necklaces that he purchased for Ms.

     95
      (...continued)
underpayment is not attributable to fraud.
                               - 151 -

Allen.    On Schedule C of petitioner’s 1986 tax return, he

deducted the costs of his subscriptions to Playboy and Penthouse

magazines.96   Petitioner also claimed as deductible expenses on

his Schedules C:   (1) Subscription payments for Sesame Street and

Dr. Seuss books; and (2) travel and entertainment expenses for

credit card payments to Burdines, Neiman Marcus, Jordan Marsh,

Master Card, and Visa; and (3) expenses for gasoline and expenses

related to his 25 Ferrari automobiles.    These items are

inherently personal in nature, and petitioner’s claiming those

deductions pursuant to his method of preparing his returns for

1985 through 1988 is evidence of fraud.

     Petitioner also points to certain expenses which he claims

are related to his orange grove, cattle, and Ferrari collection

activities.    He claims that respondent disallowed all expenses

relating to those activities, which he claimed on his returns.

Petitioner contends that, although it might be appropriate to

disallow expense deductions for those activities when determining

his deficiencies, fraud penalties should not be imposed on the

tax liabilities resulting from their disallowance.    However, it


     96
      Petitioner argues on brief that the Playboy magazine
“could be used by Mr. Medlin as reading material for his real
estate business”, and although he concedes those are not
allowable expenses, he suggests that such deductions are not
indicative of fraud. We disagree. Those items are inherently
personal and are items which we find someone in petitioner’s
position as a real estate businessman would have known were not
deductible. In our view, claiming those deductions on a return
shows a willingness to evade tax.
                              - 152 -

is unclear to us the extent to which petitioner claimed those

items as expenses on his returns, and, the amounts claimed and

disallowed.97   Petitioner did not prepare separate Schedules C

for the orange grove, cattle, and Ferrari collection activities

for 1985 through 1988.   Instead, he claimed those expenses, along

with other expenses including personal expenses, on the Schedules

C relating to his real estate business.    We also point out that

petitioner’s method of preparing his returns considered only

whether a disbursement was made from his personal bank accounts

and not whether that disbursement related to a trade or business

or was otherwise a deductible expense.

     Given petitioner’s faulty method of preparing his returns,

and the inherently personal nature of many of the expenditures

claimed on his returns, petitioner has not established that the

portion of the underpayment arising from the disallowed expense

deductions is not attributable to fraud.    Petitioner has not

shown that any portion of the underpayment for each of the years

1986, 1987, and 1988, is not attributable to fraud, and,

accordingly, the entire underpayment for each of those years is

subject to the addition to tax for fraud.

     97
      We note that the civil report that respondent prepared
indicates that certain expenses were disallowed with respect to
petitioner’s Ferrari automobile collection and his orange grove
and cattle activities. However, since petitioner lumped the
expenses relating to those activities into expenses relating to
other activities, and reported them as car and truck and repair
and maintenance expenses, we are unable to determine to what
extent those items were claimed as deductions on his returns.
                              - 153 -

     C.   Section 6653(b)(2) Addition to Tax for 1985

     With respect to the section 6653(b)(2) addition to tax for

1985, it is respondent’s burden to establish, by clear and

convincing evidence, the specific portion of the underpayment

which is attributable to fraud.   Hughes v. Commissioner, T.C.

Memo. 1994-139; Franklin v. Commissioner, T.C. Memo. 1993-184.

     Pursuant to our discussion above, respondent has proven by

clear and convincing evidence that petitioner received taxable

income of $305,940 and that petitioner is liable for self-

employment tax of $4,763 for 1985.   For purposes of section

6653(b)(2), respondent has proven by clear and convincing

evidence an underpayment for 1985, which the parties shall

compute under Rule 155 on the basis of our findings and

conclusions.

     Respondent has proven by clear and convincing evidence that

petitioner failed to report substantial gains and other income

from his real estate transactions and that he did so with

fraudulent intent.   Petitioner was an experienced real estate

developer and businessman.   We are convinced that he knew those

items were taxable as income when received.   Indeed, petitioner

was informed during the examination of his 1983 and 1984 returns,

which occurred prior to the time petitioner filed his 1985

through 1988 returns, that the sale proceeds deposited into the
                              - 154 -

law firm’s trust account were taxable, and petitioner agreed.98

We cannot accept petitioner’s explanation that he misunderstood

that if sales proceeds and other items were “reinvested” and held

in trust accounts, they would not be taxable until withdrawn for

“wine, women, and song”.   Respondent has produced evidence

showing that substantial amounts of income were paid from the

trust account per petitioner’s instructions for personal expenses

and that those withdrawals were not reported as income on his tax

returns.   Petitioner did not inform respondent’s revenue agent,

who examined his returns for 1985-1988, that he held this belief

regarding tax deferred exchanges, and there is no credible

evidence of record showing that petitioner had this purported

misunderstanding.

     Respondent has also proven by clear and convincing evidence

that petitioner’s method of preparing his return for 1985 was

done with a fraudulent intent.   On the Schedule C for his real

estate business, petitioner reported income and expenses from

that business on the basis of spreadsheets of the deposits and

disbursements from his personal bank accounts.   He reported the

deposits, less amounts he classified as “loans”, as gross income

from his business, and the disbursements, as deductible expenses

on the Schedule C.   Many of the disbursements were for inherently

     98
      Also, the Tax Court’s stipulated decision with respect to
petitioner’s agreed deficiencies for 1977, 1978, 1979, 1981, and
1982, was entered before petitioner’s filing of each of his
returns for the 1985 through 1988 tax years.
                               - 155 -

personal items, including jewelry for Ms. Allen and expenses for

his 25 Ferrari automobiles.

       Unlike most of the unreported items involving gain from real

estate transactions that we find were due to fraud, the 1985

foreclosure sale of the Citrus County Property was not a typical

sale of real estate.    Respondent originally determined that

petitioner realized $49,907 as cancellation of indebtedness

income with respect to the Citrus County Property, in 1987.

Respondent first raised the issue of gain from the foreclosure

sale as a new matter in his amendment to answer.    Respondent has

not proven that the portion of the underpayment from the 1985

foreclosure sale of the Citrus County Property was attributable

to petitioner’s fraud.    The addition to tax under section

6653(b)(2) shall not apply to that portion of the underpayment

attributable to the gain realized from the foreclosure sale in

1985.    Respondent has proven to our satisfaction that the

remaining amount of the underpayment for 1985 is attributable to

fraud.    We hold that the addition to tax under section 6653(b)(2)

applies to that amount of the underpayment.

III.    Statute of Limitations for Assessment

       Generally, the amount of any tax must be assessed within 3

years after the return required to be filed by the taxpayer was

filed (whether such return was filed on or after the date

prescribed therefor).    Sec. 6501(a).   However, in the case of a
                               - 156 -

false or fraudulent return with the intent to evade tax, the tax

may be assessed at any time.    Sec. 6501(c)(1).   Respondent bears

the burden of proving the applicability of this exception, and he

must prove the same elements of fraud under section 6501(c)(1) as

he is required to prove with respect to the additions to tax for

fraud.    Estate of Johnson v. Commissioner, T.C. Memo. 2001-182.

In this case, respondent has shown by clear and convincing

evidence that an underpayment of tax exists for each of the years

1985, 1986, 1987, and 1988, and he has shown that at least some

part of that underpayment for each of those years is a result of

fraud by petitioner.   Therefore, we hold that the open period of

limitations of section 6501(c)(1) applies, and section 6501(a)

does not bar assessment of petitioner’s deficiencies in taxes.

See DiLeo v. Commissioner, 96 T.C. at 880.99



                                                   Decision will be

                                            entered under Rule 155.




     99
      Since we hold that each of the tax years at issue is open
under sec. 6501(c)(1), we do not address respondent’s alternative
argument that the 1988 assessment is not barred under sec.
6501(a), because the period of limitations specified in sec.
6501(e)(1) applies and was extended by sec. 7609(e)(1).
                                    - 157 -

                                  Appendix A

     INCOME AND DEDUCTIONS REPORTED BY PETITIONER ON RETURNS
   RESPONDENT’S DETERMINATIONS OF INCOME AND DEDUCTIONS IN THE
                  STATUTORY NOTICE OF DEFICIENCY


1985:

Schedule C Income

     Amount Reported            Amount Determined        Total Adjustment

        $160,363                    $448,498                $288,135

                                                         Deduction Allowed in
Description of Deduction             Deduction Claimed   Notice of Deficiency

Schedule C

Car and truck expenses                   $7,712                - 0 -
Commissions                              26,840                - 0 -
County recording fee expense                ---                  $640
Depreciation and sec. 179
 deduction from Form 4562                 2,300                 3,575
Development expense                         ---                   437
Dues and publications                     3,677                - 0 -
Engineering expense                         ---                 4,060
Insurance                                 1,277                - 0 -
Legal and professional services           9,282                 3,609
Office expense                            6,996                   316
Other interest                           43,291               178,435
Repairs & maintenance                    23,157                - 0 -
Taxes                                     9,073                29,955
Title insurance expense                     ---                     8
Travel and entertainment                 15,688                - 0 -
Utilities and telephone                   3,188                - 0 -
  Total                                 152,481               221,035

Itemized Deductions

     Reported by petitioner                 ---
     Determined by respondent           $22,567

Personal Exemptions

     Reported by petitioner (2)          $2,080
     Determined by respondent (2)        $2,080

Taxable Income

     Reported by petitioner              $5,802
     Determined by respondent          $202,816
                                     - 158 -
Tax

      Reported by petitioner                $426
      Determined by respondent           $82,798

Self-employment Tax

      Reported by petitioner                $930
      Determined by respondent            $4,673

Earned Income Credit Recapture

      Determined by respondent              $382


1986:
Schedule C Income

      Amount Reported            Amount Determined        Total Adjustment

        $119,772                     $659,361                $539,589

                                                          Deduction Allowed in
Description of Deduction              Deduction Claimed   Notice of Deficiency

Car and truck expenses                    $4,807                - 0 -
Commissions                                6,922                - 0 -
County recording fee expense                 ---                  $351
Depreciation expense                         ---                 8,579
Dues and publications                      1,146                - 0 -
Engineering expense                          ---                 6,380
Insurance                                    112                - 0 -
Interest:
  Mortgage (paid to
  financial institutions)                    ---                - 0 -
  Other                                   76,828               208,287
Legal and professional services           11,031                16,870
Office expense                             3,935                   268
Repairs & maintenance                      4,510                - 0 -
Taxes                                        ---                63,588
Title insurance expense                      ---                   159
Travel                                     3,505                - 0 -
Utilities and telephone                    2,838                - 0 -
  Total                                  115,634               304,482

Itemized deductions

      Reported by petitioner                    ---
      Determined by respondent                  $48

Personal Exemptions

      Reported by petitioner (2)          $2,080
      Determined by respondent (2)        $2,160
                                    - 159 -
Taxable Income

      Reported by petitioner              $2,058
      Determined by respondent          $352,671

Tax

      Reported by petitioner              - 0 -
      Determined by respondent          $160,671

Self-employment Tax

      Reported by petitioner                $509
      Determined by respondent            $5,166

Political Contribution Credit

      Reported by petitioner                  ---
      Determined by respondent                $50

Earned Income Credit Recapture

      Determined By Respondent              $454


1987:

Schedule C Income

      Amount Reported            Amount Determined       Total Adjustment

        $138,653                    $1,157,509              $1,018,856

                                                         Deduction Allowed in
Description of Deduction             Deduction Claimed   Notice of Deficiency

Appraisal expense                            ---                 $630
Car and truck expenses                    $5,152               - 0 -
Commissions                                2,840                3,441
County recording fee expenses                ---                    9
Depreciation expense                         ---                8,579
Development expense                          ---                  106
Dues and publications                      1,649                   75
Engineering expenses                         ---                2,272
Interest:
  Mortgage (paid to
  financial institutions)                    ---               - 0 -
  Other                                      619              213,685
Legal and professional expenses              ---                8,115
Office expense                            13,104                  126
Repairs                                   41,554               - 0 -
Taxes                                     24,290               20,509
Title insurance expense                      ---               10,979
Travel                                     2,325               - 0 -
Utilities and telephone                    2,901               - 0 -
  Total                                   94,434              268,526
                                     - 160 -
Itemized Deductions

      Reported by petitioner                 ---
      Determined by respondent           $41,021


Personal Exemptions

      Reported by petitioner (2)          $3,800
      Determined by respondent (2)        $3,800

Taxable Income

      Reported by petitioner             $37,879
      Determined by respondent           845,510

Tax

      Reported by petitioner              $7,515
      Determined by respondent          $316,971

Self-employment Tax

      Reported by petitioner              $5,387
      Determined by respondent            $5,387


1988:

Schedule C Income

      Amount Reported            Amount Determined          Total Adjustment

        $61,921                      $576,668                  $514,747

                                                            Deduction Allowed in
Description of Deduction              Amount of Deduction   Notice of Deficiency

Advertising expense                          ---                    $265
Appraisal expense                            ---                   1,500
Car and truck expenses                      $986                  - 0 -
Commissions                                3,750                   3,467
County recording fee expenses                ---                     146
Depreciation expense                         ---                   8,579
Development expense                          ---                     604
Dues and publications                        555                  - 0 -
Engineering expenses                         ---                   9,500
Interest:
  Mortgage (paid to
  financial institutions)                    ---                  - 0 -
  Other                                   19,272                 222,133
Legal and professional services            3,986                   5,885
Office expense                               823                     173
Repairs                                   10,182                  - 0 -
Taxes                                        510                  56,057
Title insurance                                0                  (1,435)
                                     - 161 -
Travel, meals, ent.
  Travel                                       ---
  Meals & ent.                   1,081
  20% of meals & ent.             (216)
  Meals & ent. minus 20%                      865     - 0 -
Utilities and telephone                     2,784     - 0 -
  Total                                    43,713    306,874

S Corporation Loss

      Reported by petitioner               $4,702
      Determined by respondent             $4,702

Itemized Deductions

      Reported by petitioner                  ---
      Determined by respondent            $38,661

Personal Exemptions

      Reported by petitioner (2)           $3,900
      Determined by respondent (2)         $3,900

Taxable Income

      Reported by petitioner                $5,206
      Determined by respondent            $218,131

Tax

      Reported by petitioner                 $784
      Determined by respondent            $62,169

Self-employment Tax

      Reported by petitioner               $2,371
      Determined by respondent             $5,859

Earned Income Credit Recapture

      Determined by respondent                 $37
                                  - 162 -

                                Appendix B

              ADDITIONAL INCOME AND CLAIMED DEDUCTIONS
           RAISED IN PETITIONER’S SUPPLEMENT TO PETITION
                AND RESPONDENT’S AMENDMENT TO ANSWER


Petitioner’s Supplement to Petition

Petitioner claims that respondent erred in disallowing expenses and in failing
to allow expenses relating to his land development business, orange grove
business, cattle business, and interest expense.

Petitioner claims to have incurred the following expenses as to part-time
labor with grove, cattle, and general property maintenance and repair:

           Tax Year                      Expenses

             1985                          $787
             1987                         4,782
             1988                         3,765

Petitioner claims to have incurred the following expenses as to orange grove
agricultural dues and fees, supplies and equipment along with grove
fertilizer, general maintenance and repairs, and development work:

           Tax Year                      Expenses

             1985                       $15,628.42
             1986                         2,716.22
             1987                        27,409.61
             1988                        33,136.92

Petitioner claims to have incurred the following expenses as to the purchase
of cattle, feed, supplies and equipment:

           Tax Year                      Expenses

             1985                       $7,508.94
             1986                        1,656.61
             1987                        7,349.77
             1988                          125.00

Petitioner claims to have incurred the following expenses as to vintage
automobiles:

           Tax Year                      Expenses

             1985                       $16,125.77
             1986                        28,938.78
             1987                        72,951.91
             1988                           349.17
                                   - 163 -
Respondent’s Amendment to Answer

Citrus County Property: Respondent originally determined that petitioner
realized $49,907 as forgiveness of indebtedness income in 1987. Respondent
alternatively alleges that petitioner realized $112,156 of ordinary income
from the sale of that property in 1985.


Tai Property: Respondent alleges that petitioner realized additional income
of $50,863 from the sale of real property in 1985.


As a result of those allegations, respondent asserts an additional deficiency
of $80,523. Thus, respondent claims a total revised income tax deficiency of
$167,056 for 1985.

Respondent also alleges that those items of income were   omitted with
fraudulent intent to evade tax and asserts an increased   sec. 6653(b)(1)
addition to tax of $40,402 (revised addition to tax for   fraud of $84,188 for
1985), and an increased sec. 6653(b)(2) addition to tax   of 50 percent of the
interest due on the revised underpayment of $167,056.


Total adjustments to Schedule C income: $163,019
Taxable income from notice of deficiency: $202,816
Corrected taxable income: $365,835
Tax: $163,321
Self-employment tax: $4,673
Total corrected tax liability: $167,994
Total tax shown on return or as previously adjusted:   $1,320
Adjustment to earned income credit: ($382)
Deficiency - increase in tax: $167,056
                                    - 164 -

                                  Appendix C

                                 CONCESSIONS100


                       SCHEDULE C MISCELLANEOUS INCOME


                                                     Taxable Year
                                     1985         1986        1987     1988

Notice of deficiency
      Miscellaneous income         $12,357     $27,019     $73,907    $24,000

Amounts conceded by petitioner
      Commission Income             $6,357        $3,019     - 0 -      - 0 -
      Rent                           6,000        24,000   $24,000    $12,000
        Total                       12,357        27,019    24,000     12,000

Amounts conceded by respondent
      Forgiveness of debt            - 0 -        - 0 -    $49,907*     $0

Amounts in dispute
      Rent                           - 0 -        - 0 -      - 0 -    $12,000

*Respondent concedes his forgiveness of debt determination for 1987. However,
he raises as new matter that petitioner realized $112,156 of ordinary income
from the sale by foreclosure of the Citrus County Property in 1985. See
appendix B.




     100
       Respondent prepared on brief a reconciliation of items
which are “in dispute” and concessions as to the adjustments in
the statutory notice of deficiency. Appendix C of this opinion
reflects the reconciliation schedules that respondent prepared
and which petitioner stipulated in his answering brief. However,
there are a number of income items, as we discuss in the opinion,
that the parties represented were still in dispute but which
petitioner does not contest on brief. Instead, he states: “In
addition, any issues not raised in Petitioner’s Brief are also
conceded by Petitioner”.
                                   - 165 -
                      SCHEDULE C GAINS FROM PROPERTY SALES


                                                   Taxable Year
                                    1985        1986        1987         1988

Notice of deficiency
      Gains on property sales     $247,154    $417,788       $995,801   $375,268

Amendment to answer
      Tai Property                 $50,863      - 0 -         - 0 -      - 0 -


Amounts conceded by petitioner
      OS-13                        $4,854       - 0 -         - 0 -      - 0 -
      OS-06                        10,270      $13,100        - 0 -     $12,950
      OS-49                        20,000       - 0 -        $94,446     - 0 -
      OS-1.2                        6,878       - 0 -         29,124     - 0 -
      OS-61                        92,796       - 0 -           0        - 0 -
      OR-01                         - 0 -       72,039       823,078     - 0 -
      OS-29                         - 0 -        2,570        - 0 -      - 0 -
      OS-31                         - 0 -       48,432        - 0 -      - 0 -
      OR-ABC                        - 0 -       18,783        - 0 -      - 0 -
      OS-23                         - 0 -       - 0 -         - 0 -     154,170
        Total                     134,798      154,924       946,648    167,120

     Concession relating to
       amendment to answer
           Tai Property           $50,863       - 0 -         - 0 -      - 0 -


Amounts conceded by respondent
      OS-06                        $1,000       $1,000        - 0 -      $1,000
      OS-1.4                        6,144       12,289       $24,577     - 0 -
      OS-29                         - 0 -       42,480        - 0 -      - 0 -
      OS-22                         - 0 -       - 0 -         - 0 -      55,164
        Total                       7,144       55,769        24,577     56,164


Amounts in dispute
      OS-03                       $20,097      $21,097        - 0 -     $77,298
      OS-06                        59,272       - 0 -         - 0 -      - 0 -
      OS-35                        19,699       - 0 -         - 0 -      - 0 -
      OS-1.4                        6,144       12,289       $24,577     - 0 -
      OS-47                         - 0 -       41,776        - 0 -      - 0 -
      OS-47                         - 0 -       50,726        - 0 -      19,522
      OS-1.3                        - 0 -       20,502        - 0 -      - 0 -
      OS-39                         - 0 -       60,706        - 0 -      - 0 -
      OS-22                         - 0 -       - 0 -         - 0 -      55,164
        Total                     105,212      207,096        24,577    151,984


*Petitioner on brief concedes that his share of the gain from the sale of the
Mefford Property (OS-22) was $55,164.
                                 - 166 -
                         SCHEDULE C INTEREST INCOME


                                                 Taxable Year
                                  1985        1986        1987   1988

Notice of deficiency
      Interest income            $54,024    $22,224    $20,061   - 0 -

Amounts conceded by petitioner

     Payee
     Botos                        - 0 -      - 0 -        $400   -   0   -
     Horton                       - 0 -     $10,614      - 0 -   -   0   -
     Tai                         $27,718     - 0 -       - 0 -   -   0   -
     Commonwealth Int.            - 0 -      - 0 -       8,305   -   0   -
     Muroff                       12,761     - 0 -       - 0 -   -   0   -
     Miles                        - 0 -      - 0 -         380   -   0   -
       Total                      40,479     10,614      9,085   -   0   -

Amounts conceded by respondent

     Payee
     Bettner, et al.             $6,773      $5,805     $5,488   - 0 -

Amounts in dispute

     Payee
     Bettner, et al.             $6,773      $5,805     $5,488   - 0 -
                                  - 167 -
                        SCHEDULE C COMMISSION INCOME


Notice of deficiency
      Commission income-1985                 $67,749
      Commission income-1986                  32,383
      Commission income-1987                  - 0 -
      Commission income-1988                  - 0 -

Amounts conceded by petitioner

     Commission income-1985
           Account (Date of deposit)
           Freedom (01/03/85)                   $500
           Freedom (01/18/85)                 18,562
           Freedom (06/10/85)                    500
           Freedom (07/22/85)                 10,530
           Tucker (03/01/85)                     157
             Total                            30,249

     Commission income-1986*
           Account (Date of deposit)
           Freedom (01/08/86)                 $1,817
           Freedom (01/17/86)                  1,600
           Freedom (04/10/86)                  4,680
           Freedom (06/20/86)                  5,215
           Freedom (07/24/86)                  1,588
           Freedom (08/01/86)                 13,558
           Freedom (08/25/86)                  3,000
           Freedom (10/03/86)                    600
           Freedom (12/12/86)                    300
             Total                            32,358

*The amounts of commission income for 1986 were not part of respondent’s
reconciliation of Schedule C commission income; however, petitioner agrees to
respondent’s requested finding that he received those amounts as income in
1986.


Amounts in dispute

     Commission income-1985
           Account (Date of deposit)
           Freedom (02/06/85)                $37,500

     Commission income-1986
           None                               - 0 -

*The statutory notice of deficiency determined $32,383 as commission income
for 1986. However, on brief, respondent states $32,358 as the amount of
commission income for 1986. Respondent has apparently conceded the $25
difference between these two figures.
                                   - 168 -
                    SCHEDULE C RENT FROM CRAZY COMMANDOS


Notice of deficiency
      Rent from Crazy Commandos-1985         $1,353

Amounts conceded by respondent
      Rent from Crazy Commandos-1985             $103

Amounts in dispute
      Rent from Crazy Commandos-1985         $1,250


                      SCHEDULE C UNIDENTIFIED DEPOSITS



Notice of deficiency
      Unidentified deposits-1985       $60,854
      Unidentified deposits-1986       159,349
      Unidentified deposits-1987        67,740
      Unidentified deposits-1988       177,400

Amounts conceded by petitioner

     Unidentified deposits-1985
     Account (Date of deposit)
     Tucker (08/01/85)                  $1,700

     Unidentified deposits-1986
     Account (Date of deposit)
     Freedom (04/14/86)                 $6,000
     Freedom (09/09/86)                 11,186
     Freedom (12/16/86)                  7,000
       Total                            24,186

     Unidentified deposits-1987
     None                                - 0 -

     Unidentified deposits-1988
     Account (Date of deposit)
     Freedom (03/21/88)                 $2,200
     Tucker (09/07/88)                   2,200
       Total                             4,400

Amounts conceded by respondent

     Unidentified deposits
     Account (Date of deposit)
     Tucker (09/30/85)                   $154

     Unidentified deposits-1986
     Account (Date of deposit)
     Ledger (08/01/86)                  $9,038
     Ledger (08/15/86)                  41,003
       Total                            50,041

     Unidentified deposits-1987
     None                                - 0 -
                                   - 169 -
     Unidentified deposits-1988
     Account (Date of deposit)
     Freedom (03/24/88)                $33,000

Amounts in dispute

     Unidentified deposits-1985
     Account (Date of deposit)
     Tucker (03/12/85)                 $59,000

     Unidentified deposits-1986
     Account (Date of deposit)
     Freedom (05/06/86)                   $300
     Ledger (09/16/86)                  84,522
     Ledger (10/10/86)                     300
       Total                            85,122

     Unidentified deposits-1987
     Account (Date of deposit)
     Tucker (04/09/87)                 $67,740

     Unidentified deposits-1988
     Account (Date of deposit)
     Ledger (07/08/88)                $140,000


                 SCHEDULE C NATIONAL LAND COMMISSION INCOME


Notice of deficiency

     Natl. Land Commissions-1985       $4,607
     Natl. Land Commissions-1986          598

Amounts conceded by respondent

     Natl. Land Commissions-1985       $4,607*

*According to respondent’s concession, this is a net amount composed of
commission income received from, and commission expenses paid to, National
Land. Respondent is actually conceding commission income of $8,873; which
eliminates the $4,607 adjustment in the notice of deficiency and results in a
negative adjustment of $4,266 ($4,607 - $8,873).

Amounts in dispute

     Natl. Land Commissions-1985         - 0 -
     Natl. Land Commissions-1986          $598
                                  - 170 -
                       SCHEDULE C SALE WAX MYRTLE TREES


Notice of deficiency

     Sale Wax Myrtle Trees-1985          $400

Amounts in dispute

     Sale Wax Myrtle Trees-1985          $400


                              SCHEDULE E INCOME*

Notice of deficiency

     Schedule E income-1987              $3,888

Amounts in dispute

     Schedule E income-1987              $3,888


*This item was not reflected in respondent’s reconciliation schedules.
                                   - 171 -

                                 Appendix D

                  ITEMS RESPONDENT RELIES UPON AS
           CLEAR AND CONVINCING EVIDENCE OF UNDERPAYMENT


1985:
Stipulated Income:

        Income Item                                  Amount

 Miscellaneous Sch. C income                        $12,357
 Gains from property sales                          185,661
 Interest income                                     40,479
 Commission income                                   30,249
 Unidentified deposits                                1,700
   Total stipulated income                          270,446

Disputed Income:

        Income Item                                  Amount

 Gain from sale of Lot 1 in
   Susan’s Lakefront Estate                         $20,097
 Installment gain from sale of
   3 lots in Florida Fruit Belt Subd.                28,347
 Gain from sale of installment note                  30,925
 Gain from sale of Lot 23, High Plains               19,699
 Installment gain from Silver Lake sale               6,144
 Gain from foreclosure sale of
   Citrus County Property                           112,156
 Interest income from Silver Lake mortgage            6,773
 Commission income                                   37,500
 Rental income                                        1,250
 Unidentified deposit                                59,000
   Total disputed income                            321,891


Total income relied upon by respondent (stipulated income +
  disputed income): $592,337
Less reconstructed Schedule C expenses
  (after concessions on brief): $225,301
Less itemized deductions: $22,567
Less personal exemptions: $2,080
Taxable income: $342,389
Tax liability (based on head of household filing status):
  $151,597
Plus self-employment tax: $4,673

CLAIMED UNDERPAYMENT FOR 1985:   $156,270
                                   - 172 -

1986:

Stipulated Income:

        Income Item                                  Amount

 Miscellaneous Sch. C income                        $27,019
 Gains from property sales                          154,924
 Interest income                                     10,614
 Commission income                                   32,357
 Unidentified deposits                               24,186
   Total stipulated income                          249,100


Disputed Income:


        Income Item                                  Amount

 Gain from sale of Tract A in
   Susan’s Lakefront Estate                         $21,097
 Gain from sale of parcel in Grissom Parcels         20,502
 Installment gain from Silver Lake sale              12,288
 Gain from sale of 62.5 acres in East Lake Vista     92,502
 Gain from exchange of Arrowhead Lakes Subd.
   for Angel-Royse Property                          60,706
 Interest income from Silver Lake mortgage            5,805
 Unidentified deposits                                9,638
   Total disputed income                            222,538


Total income relied upon by respondent (stipulated income +
  disputed income): $471,638
Less reconstructed Sch. C expenses
  (after concessions on brief): $298,656
Less itemized deductions: - 0 -
Less nonitemized contributions: $48
Less personal exemptions: $2,160
Taxable income: $170,774
Tax liability (based on head of household filing status):
  $69,723
Plus self-employment tax: $5,166

CLAIMED UNDERPAYMENT FOR 1986:   $74,889
                                   - 173 -

1987:

Stipulated Income:

        Income Item                                  Amount

 Miscellaneous Sch. C income                        $24,000
 Gains from property sales                          946,649
 Interest income                                      9,084
   Total stipulated income                          979,733


Disputed Income:

        Income Item                                  Amount

 Installment gain from Silver Lake sale             $24,577
 Interest income from Silver Lake mortgage            5,488
   Total disputed income                             30,065


Total income relied upon by respondent (stipulated income +
  disputed income): $1,009,798
Less reconstructed Sch. C expenses
  (after concessions on brief): $265,076
Less itemized deductions: $43,561
Less personal exemptions: $3,800
Taxable income: $697,361
Tax liability (based on head of household filing status):
  $259,934
Plus self-employment tax: $5,387
Less tax per return: $12,902

CLAIMED UNDERPAYMENT FOR 1987:   $252,419
                                   - 174 -

1988:

Stipulated Income:

        Income Item                                  Amount

 Miscellaneous Sch. C income                        $12,000
 Gains from property sales                          167,120
 Unidentified deposits                                4,400
   Total stipulated income                          183,520

Disputed Income:

        Income Item                                  Amount

 Gain from sale of Lots 6-30 in
   Susan’s Lakefront Estate                          $77,298
 Gain from sale of 10 acres in East Lake Vista        19,522
 Gain from sale of Mefford Property                   55,164
 Rent received from Island Living, Inc.               12,000
 Unidentified deposit                                140,000
   Total disputed income                             303,984



Total income relied upon by respondent (stipulated income +
  disputed income): $487,504
Less reconstructed Sch. C expenses
  (after concessions on brief): $301,910
Less itemized deductions: $44,651
Less personal exemptions: $3,900
Taxable income: $137,043
Tax liability (based on head of household filing status):
  $39,035
Plus self-employment tax: $5,859

CLAIMED UNDERPAYMENT FOR 1988:   $44,894
