                         T.C. Memo. 1995-538



                       UNITED STATES TAX COURT



           YARBROUGH OLDSMOBILE CADILLAC, INC., Petitioner
            v. COMMISSIONER OF INTERNAL REVENUE, Respondent

                   ELVIN P. YARBROUGH, Petitioner
           v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 7174-92, 7175-92.       Filed November 13, 1995.



     James D. O'Donnell and Libero Marinelli, Jr., for

petitioners.

     Francis C. Mucciolo, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:    Respondent determined deficiencies in

petitioners' Federal income taxes and additions to tax as

follows:
                                        - 2 -
Elvin P. Yarbrough

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

1983      $165,498      $104,567        *                                  $41,374
1984       164,324       148,555        *                                   41,081
1985       150,708        75,354        *                                   30,177
1986        95,021                              $71,266            *        23,755


                     * 50 percent of interest due on portion of
                         underpayment attributable to fraud.


Yarbrough Oldsmobile Cadillac, Inc.

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

  1983         $33,649             $16,825                *            $8,412
  1984          18,097               9,048                *             4,524
  1985          34,118              17,059                *             8,529


                     * 50 percent of interest due on portion of
                          underpayment attributable to fraud.


       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.

       After settlement of some issues, the issues for decision in

these consolidated cases are:               (1) Whether petitioner Yarbrough

Oldsmobile Cadillac, Inc. (YOC), is entitled to certain claimed

business expense deductions disallowed by respondent; (2) whether

petitioner Elvin P. Yarbrough (Elvin) is to be treated as having

received constructive dividends from YOC, and, if so, the amount

of the constructive dividends; (3) whether prizes and awards that
                                 - 3 -

Elvin received are to be treated as income to Elvin; and (4)

whether Elvin and YOC are liable for the fraud and other

additions to tax, and if so which adjustments are attributable to

fraud.


                        FINDINGS OF FACT

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

     At the time the petitions were filed, Elvin resided in and

YOC maintained its principal place of business in St. Augustine,

Florida.

     In 1974, Elvin formed YOC, an Oldsmobile, Cadillac, and

Nissan automobile dealership.    From 1983 through 1986, Elvin

owned 51 percent and Herbert H. Swisher (Swisher) owned 49

percent of YOC's outstanding stock.      Elvin was president, Elvin's

wife Kelley Yarbrough (Mrs. Yarbrough) was vice president, and

Swisher was secretary-treasurer of YOC.     Elvin and Swisher were

apparently the only directors of YOC.     In 1989, Swisher sold to

Elvin all of his YOC stock, and Elvin thereafter owned 100

percent of the outstanding YOC stock.     Swisher died on May 4,

1990.

     During the relevant years, Elvin was in charge of day-to-day

and overall operations of YOC.    Swisher was merely a passive

investor in YOC.
                               - 4 -

The YOC-Elvin Account

     There was maintained on YOC's books and records an asset

account entitled Accounts Receivable-Customers (Account 220).

This account was used generally to record amounts due from YOC's

customers.   At Elvin's direction, a subaccount was established

and maintained within Account 220 to record transfers of funds by

YOC to, or for the benefit of, Elvin.     This YOC subaccount is

hereinafter referred to as the YOC-Elvin Account.

     Transfers of funds by YOC to Elvin or for Elvin's benefit

were made at Elvin's direction, and they were recorded as debits

or increases to the balance of the YOC-Elvin Account.

     Certain payments made by Elvin to YOC and certain salary and

other adjustments were recorded as credits or decreases to the

balance of the YOC-Elvin Account.

     On December 31 of each of the years 1982 through 1986, there

was reflected in the YOC-Elvin Account an outstanding debit

balance as follows:

                                         Debit
                      Year              Balance

                      1982             $ 87,465
                      1983              223,138
                      1984              240,648
                      1985              305,473
                      1986              564,412


     The four schedules set forth below (one schedule for each

year) reflect in detail the transfers of YOC's funds that
                               - 5 -

occurred during 1983, 1984, 1985, and 1986 that benefited Elvin

personally and that were recorded in YOC's books as debits or

increases to the YOC-Elvin Account.    The schedules also reflect

payments Elvin made to YOC on the YOC-Elvin Account and salary

and other adjustments that were reflected as credits or decreases

to the YOC-Elvin Account.

     Each of the four schedules also indicates the identity of

the third party payees or recipients of YOC's funds or property

where YOC's funds or property were transferred to third-parties

on behalf of Elvin.   The last column of each schedule describes,

where indicated in the record, the nature of the transfers that

provided a personal benefit to Elvin and the nature of Elvin's

payments and of the other adjustments that were reflected as

credits or decreases to the balance of the YOC-Elvin Account.
                                                   - 6 -
                                  1983 ENTRIES TO THE YOC-ELVIN ACCOUNT

           Debit or   Credit or
 Date      Increase   Decrease         Recipient of Funds                 Nature of Transfer


01/05/83   $45,000                    Atlantic Bank            Purchase of real property for Mrs.
                                                                 Yarbrough's interior decorating
                                                                 business

02/03/83    3,000                     Elvin                    Cash


02/08/83    1,000                     Elvin                    Cash


02/15/83              $48,627         YOC                      Proceeds from YOC bank loan


02/16/83    5,000                     Michael Walrath                         ---


03/22/83    6,000                     Elvin                                   ---


04/19/83   55,000                     San Sebastian            Purchase for Elvin of floating
                                        Marine                   restaurant

04/25/83      760                     Yankee Clipper           Purchase of wire wheels for Elvin's
                                                                 Cadillac

04/22/83      982                     Aero Sport                              ---


04/29/83    1,400                     Clock Realty, Inc.       Purchase of Elvin's condominium
                                                         - 7 -
04/30/83                          55,000      YOC                      Transfer ownership of floating
                                                                         restaurant into YOC's used car
                                                                         inventory

[Continued from prior page]


                                    1983 ENTRIES TO THE YOC-ELVIN ACCOUNT (CONTINUED)

             Debit or         Credit or
 Date        Increase         Decrease          Recipient of Funds               Nature of Transfer


05/20/83                      $       3       YOC                                         ---

05/30/83                          1,400       YOC                      Payment by Elvin


06/09/83     $ 87,500                         Title & Abstract         Purchase of Elvin's Coastal Highway
                                                company                  real property

06/27/83        2,060                         Hardwick Fences          Installation of fence at Elvin's
                                                                         residence

07/08/83                          25,000      YOC                      Payment by Elvin

07/26/83       23,500                         Construction company     Purchase of real property

07/27/83                          23,500      YOC                      Payment by Elvin

12/06/83       50,000                         Elvin                    Purchase of Elvin's liquor
                                                                         license

  Total      $281,202         $153,530
                                                  - 8 -

                                   1984 ENTRIES TO THE YOC-ELVIN ACCOUNT

           Debit or   Credit or
 Date      Increase   Decrease         Recipient of Funds                  Nature of Transfer

02/29/84              $     760        YOC                      Payment by Elvin

03/02/84                  49,959       YOC                      YOC bonus to Elvin

03/02/84                  49,959       YOC                      YOC bonus to Elvin

03/14/84   $ 99,918                    Elvin                    Reduction in other debt Elvin owed YOC

03/30/84     2,000                     Elvin                                       ---

04/12/84    15,000                     Elvin                                       ---

05/10/84                  6,900        YOC                      Credit of Elvin's payroll check

05/21/84     5,170                     Fitzgerald               Payment to tear down a structure on
                                         Excavating               Elvin's Coastal Highway property

08/23/84     3,000                     Elvin                                       ---

09/04/84    10,000                     Elvin                                       ---

09/10/84                  5,000        YOC                      Credit of Elvin's payroll check

10/10/84                  5,000        YOC                      Credit of Elvin's payroll check

  Total    $135,088   $117,578
                                                      - 9 -
                                    1985 ENTRIES TO THE YOC-ElVIN ACCOUNT

           Debit or     Credit or
 Date      Increase     Decrease         Recipient of Funds                 Nature of Transfer


01/17/85   $   7,500                    Elvin                                       ---

01/23/85       25,000                   North River              Transfer of funds to Elvin's 50-percent
                                          Development Corp.        owned corporation

01/23/85                $25,000         YOC                      Transfer of funds from North River
                                                                   Development Corp. to YOC

02/06/85                  1,500         YOC                      Credit of Elvin's payroll check

02/08/85       1,500                    Elvin                    Cash

02/08/85       1,200                    John Simmons             Rental of condominium

02/11/85       3,195                    Florida Power &          Payment of Elvin's utility bill
                                        Light

03/09/85       6,650                    John Simmons             Rental of condominium

07/03/85       15,000                   Elvin                    Cash

10/02/85       7,325                    Statewide Paving         Payment of paving work

10/09/85       4,196                    Elvin                    Cash

10/14/85                  4,196         YOC                      Payment by Elvin

12/02/85       35,000                   Elvin                    Cash

12/18/85       25,000                   Ned McQuaig              Purchase for Elvin of Chrysler-Plymouth
                                                                   dealership

12/31/85                 25,000         None                     Transfer debit to Yarbrough
                                                                   Chrysler-Plymouth, Inc.

12/31/85       26,478                   None                     Accrued interest for 1985
                                                  - 10 -
12/31/85                 37,523         YOC                      Payment by Elvin -- includes interest
                                                                   accrued on 12/31/85

  Total    $158,044     $93,219



                                    1986 ENTRIES TO THE YOC-ELVIN ACCOUNT

           Debit or     Credit or
 Date      Increase     Decrease        Recipient of Funds                  Nature of Transfer


01/02/86   $     296                    Florida Power &          Payment of Elvin's utility bill
                                          Light

01/16/86       5,000                    Elvin                    Cash

02/21/86       10,500                   Elvin                    Cash

04/21/86       25,000                   None                     To transfer debit from Yarbrough
                                                                   Chrysler-Plymouth, Inc. to the YOC-
                                                                   Elvin Account

10/28/86       2,000                    None                     To transfer debit from customer to the
                                                                   YOC-Elvin Account

11/06/86                $ 50,000        YOC                      Payment by Elvin from funds received on
                                                                   sale of State liquor license that
                                                                   Elvin had purchased on 12/6/83

11/17/86                122,000         YOC                      Payment by Elvin

11/17/86   325,939                      Upchurch, Bailey &       Purchase of real property
                                          Upchurch, P.A.,
                                          Trust Account

12/26/86       62,500                   None                     To reflect that correct amount of
                                                                   payment received on 11/17/86 was
                                                                   only $59,500

12/26/86       31,141                   None                     Accrued interest for 1986
                                       - 11 -
12/31/86               31,437    YOC            Elvin's payment of $31,437 for interest
                                                  accrued in 1986 and to reimburse
                                                  YOC for payment of Elvin's $296
                                                  utility bill paid on 1/2/86

  Total    $462,376   $203,437
                              - 12 -

     During the years in issue, Elvin's purported liability to

YOC on the debit balance of the YOC-Elvin Account was never

reflected by any promissory notes to YOC or by any other loan

documents.   Elvin never provided YOC any collateral or security

for, nor was he required to make periodic payments to YOC on, the

debit balance of the YOC-Elvin Account.

     During 1983 through 1986, Elvin did not list his purported

liability on the debit balance of the YOC-Elvin Account as a

liability on his financial statements that he prepared and

submitted to banks in connection with personal loan applications.

     On occasion from 1977 through 1984, YOC's controllers

advised Elvin that consistent with Elvin's purported liability on

the YOC-Elvin Account, loan documents should be executed,

interest payments should be made, and the outstanding debit

balance in the account should be reduced.   YOC's controllers also

advised Elvin that YOC should not pay Elvin's personal expenses.

     With regard to interest, during 1983 through 1986, YOC's

accounting system generally automatically charged interest on

debit balances in Account 220 subaccounts that had outstanding

debit balances for more than 30 days.   Interest, however, during

1983 and 1984 and in prior years, was not charged on the debit

balance in the YOC-Elvin Account.   Not until December 31, 1985,

after Elvin became aware that he was under criminal tax

investigation, did Elvin direct YOC's controller to calculate

interest on the debit balance of the YOC-Elvin Account for 1985
                              - 13 -

and subsequent years at a specified market rate and to debit the

interest so calculated to the YOC-Elvin Account.

     The November 17, 1986, $325,939 transaction referred to in

the above schedule for 1986 warrants further explanation.    On

July 28, 1983, Elvin and Charles R. Koons (Koons) formed North

River Development Corp. (NRDC) as a Florida corporation to open a

new Chrysler-Plymouth dealership.   Elvin and Koons each owned 50

percent of NRDC's outstanding stock.

      On November 17, 1986, in order to provide funds for the

purchase of real property that was located one block from the YOC

dealership and that would serve as the site of the new Chrysler-

Plymouth dealership, YOC transferred $325,939 to an escrow

account to provide one-half of the funds necessary for purchase

of the real property.   As a result of this transfer, the

outstanding debit balance in the YOC-Elvin Account was increased

by $325,939.

     No representative of NRDC, nor Elvin, executed any loan

documents or promissory notes in connection with this use of

$325,939 of YOC's funds to purchase the real property.   The real

property that was purchased was titled in the name of NRDC.

     In 1987, YOC's outside accounting firm reclassified on YOC's

books the $325,939 debit to the YOC-Elvin Account related to the

above transaction as a debit to a new YOC account receivable

reflecting a debt owed by NRDC to YOC.   It is not clear in the

record who requested the accounting firm to make this change.
                                - 14 -

     As a result of the above transaction, Elvin, in 1986, as

controlling shareholder of YOC, effectively withdrew $325,939

from YOC and, as a 50-percent shareholder of NRDC, made a capital

contribution of that amount to NRDC to enable NRDC, along with

Koons' matching contribution of approximately $325,939, to

purchase the above-referred-to real property.

     On audit, respondent determined that for each year in issue

the yearend net increase over the prior year in the debit balance

of the YOC-Elvin Account represented a constructive dividend to

Elvin.   The net increases for 1983, 1984, 1985, and 1986, treated

by respondent as constructive dividends to Elvin (limited by

YOC's annual earnings and profits), were $137,673, $17,510,

$64,825, and $180,906, respectively.


The Yacht Capriole

     On or about August 6, 1984, a used 60-foot motor yacht named

the Capriole was purchased from David M. Ponce (Ponce) for

$80,000 in cash.     Elvin created a false invoice reflecting that

Ponce traded in the Capriole to YOC in exchange for a 1983

Oldsmobile Firenza with a stated value of $5,500.     Elvin, using

YOC's funds, made a cash downpayment to Ponce of $5,000, and then

applied to Barnett Bank of St. John's County (Barnett Bank) for

an $80,000 loan, nominally on behalf of YOC, to provide the

remaining funds for purchase of the yacht.     With regard to the

$80,000 loan application, on September 27, 1984, Elvin signed a
                                - 15 -

promissory note reflecting his capacity as YOC's president and as

personal guarantor of the note.

     On September 28, 1984, Barnett Bank approved the $80,000

loan application and issued a check for $79,880 to YOC

representing the net loan proceeds.      The loan proceeds were used

to pay the remaining balance due to Ponce for purchase of the

Capriole.    The Capriole was used as collateral for the $80,000

loan.

     Ponce understood that Elvin, not YOC, was purchasing the

Capriole.    Elvin located the Capriole, negotiated for its

purchase, created false documentation to make it appear as if YOC

received the Capriole in trade on the purchase of a new

automobile, and used the loan proceeds to make the purchase.

     On the Florida State sales tax receipt regarding purchase of

the Capriole, the purchase price of the Capriole was reported as

only $40,000 instead of the actual purchase price of $80,000.

The record does not reflect whether YOC or Elvin paid the sales

tax relating to the Capriole.

        On the registration and the title documents relating to the

Capriole, Elvin indicated that the Capriole was owned by YOC but

also that the Capriole was to be used for "pleasure".      On YOC's

log and guest register, Elvin, not YOC, was indicated as owner of

the Capriole.

     The Capriole was listed on YOC's books and records as an

asset included in YOC's used car inventory.     During 1984 and
                                - 16 -

1985, however, at Elvin's direction, YOC's employees did not

attempt to sell the Capriole.    The log and guest register

relating to the Capriole do not reflect any business use of the

Capriole.   The Capriole was used by Elvin on numerous occasions

to entertain personal friends.    Elvin invited guests to take

pleasure cruises aboard the Capriole.    Elvin and his guests used

cocaine, marijuana, and alcohol during cruises aboard the

Capriole.

     During 1984 and 1985, respectively, YOC paid $90,635 and

$133,179 in expenses for repairs, restoration, maintenance, and

operation of the Capriole, and YOC deducted these expenses as

business expenses.   For 1983, 1984, and 1985, YOC did not claim

depreciation deductions relating to the Capriole.

     In July of 1989, the Capriole was traded to an unrelated

party for real property located in Jackson County, North

Carolina.   The stated sale price for the Capriole was $186,500.

The real property that was received in the exchange was treated

by YOC as an asset of YOC.   The record does not reflect whether a

gain or loss was realized on this sale nor whether YOC reported

the sale on its 1989 corporate Federal income tax return.

     The parties have stipulated that for 1984 and 1985 the fair

rental value for use of the Capriole was $1,200 per day.

     On audit, respondent determined that YOC held only nominal

legal title to the Capriole and that Elvin was the owner of the

Capriole.   Respondent determined that for 1984 the $80,000
                               - 17 -

provided by YOC for purchase of the Capriole represented a

constructive dividend to Elvin.   Respondent also determined that

the Capriole was used by Elvin solely for his personal benefit.

Respondent disallowed all of the $90,635 and $133,179 for 1984

and 1985 that were claimed by YOC as business expenses relating

to the Capriole, and respondent determined that YOC's payment of

these expenses represented constructive dividends to Elvin.


The Sea Ray Boat

     On October 1, 1981, YOC transferred to Elvin $9,575 for

purchase from one of YOC's employees of a used 22-foot Sea Ray

Boat (Sea Ray Boat).    The Sea Ray Boat was purchased by Elvin for

Elvin's personal use.

     The Sea Ray Boat was listed on YOC's books and records as an

asset and was included in YOC's used car inventory.

     The Sea Ray Boat was used by Elvin, Elvin's son Buddy, and

their friends for personal recreation.   A log was not maintained

relating to use of the Sea Ray Boat, and the evidence in the

record does not reflect any business use of the Sea Ray Boat.

     During 1983, YOC paid $1,155 for maintenance, repairs, and

operation of the Sea Ray Boat.    For income tax purposes, YOC did

not deduct this $1,155 as a business expense.

     During 1983, 1984, and 1985, in addition to the above

$1,155, YOC paid and did claim business expense deductions of

$2,077, $3,837, and $1,228, respectively, relating to the Sea Ray
                                - 18 -

Boat.     For 1983, 1984, and 1985, YOC did not claim depreciation

deductions relating to the Sea Ray Boat.

     On audit, respondent disallowed the expenses claimed by YOC

for 1983, 1984, and 1985 relating to the Sea Ray Boat in the

respective amounts of $2,077, $3,837, and $1,228.       Respondent

also determined that these amounts represented constructive

dividends to Elvin, and respondent determined that the $1,155

paid in 1983 that was not claimed by YOC as a business expense

represented a constructive dividend to Elvin.


The Motor Home

        On October 11, 1983, one of YOC's customers traded in a

motor home on the purchase of a new automobile.       The motor home

was then listed on YOC's books and records as an asset and was

included in YOC's used car inventory at a cost of $10,000.         Elvin

used the motor home for his personal use, and he instructed YOC's

sales staff not to sell the motor home.       It is not clear from the

record whether YOC claimed depreciation deductions relating to

the motor home.

        During 1983 and 1984, Elvin, for his personal use and

benefit, had repairs and improvements made to the motor home at a

cost of $10,697 and $16,802, respectively.       These repairs and

improvements were paid for by YOC.       Of the $16,802 paid for
                              - 19 -

improvements to the motor home in 1984, $7,232 was paid to

Mrs. Yarbrough for improvements to the motor home by

Mrs. Yarbrough's interior decorating business.

     Occasionally, the motor home was used in connection with

YOC's business, but the majority of the use of the motor home

represented Elvin's personal use.   For example, Elvin used the

motor home to travel to Sylva, North Carolina, to visit Buddy,

and to travel to Los Angeles, California, to the 1984 Summer

Olympics.   No log or other record indicating the nature and

extent of the use of the motor home was maintained.

     Respondent disallowed the above expenses claimed by YOC for

1983 and 1984 relating to the motor home, and respondent

determined that these expenses represented constructive dividends

to Elvin.


The Sylva Residence

     In 1984, Elvin purchased for $67,500 a residence in Sylva,

North Carolina, for Buddy's use while Buddy attended college at

Western Carolina University (the Sylva Residence).    Title to the

Sylva Residence was placed in the name of Yarbrough Leasing, Inc.

(Yarbrough Leasing), a family corporation owned by Mrs. Yarbrough

(49 shares), by Buddy (49 shares), and by Elvin (2 shares).

     On May 17, 1984, YOC transferred to Yarbrough Leasing a

$65,000 check to provide most of the funds necessary to purchase
                                - 20 -

the Sylva Residence.   YOC reflected on its books and records this

$65,000 as an account receivable due from Yarbrough Leasing.

     On May 18, 1984, either Elvin or Yarbrough Leasing made a

partial repayment to YOC of $50,000.     This $50,000 apparently

represented a repayment to YOC of the $65,000 transferred by YOC

the day before to Yarbrough Leasing.

     On or about June 14, 1984, the purchase of the Sylva

Residence was consummated.

     On June 3, 1985, Elvin, nominally on behalf of Yarbrough

Leasing, applied for a $55,000 loan from Northwestern Bank in

Sylva, North Carolina.   On June 26, 1985, proceeds from this loan

of $54,586 were deposited into Yarbrough Leasing's checking

account at Barnett Bank, and on the same day a check for $54,586

was issued by Yarbrough Leasing to Elvin.     The Sylva Residence

was used as collateral for the $55,000 loan.

     During 1984 and 1985, Buddy resided in the Sylva Residence

while he attended college.   Buddy did not pay rent to Yarbrough

Leasing for use of the Sylva Residence.     A college friend of

Buddy's also resided at the Sylva Residence and paid

approximately $200 a month in rent directly to Elvin, not to

Yarbrough Leasing.

     With regard to the Sylva Residence, Elvin personally, not

Yarbrough Leasing, was the named insured on the related

homeowner's insurance policy.
                             - 21 -

     The Sylva Residence was sold in February of 1991, and a

small loss resulted from the sale.

     On audit, respondent determined that the full $65,000

transferred from YOC to Yarbrough Leasing for purchase of the

Sylva Residence represented a constructive dividend from YOC to

Elvin, followed by a capital contribution of $65,000 from Elvin

to Yarbrough Leasing.


Claimed Travel and Entertainment Expenses

     During 1983, 1984, and 1985, miscellaneous personal expenses

of Elvin and of Mrs. Yarbrough were paid by YOC, and these

expenses were claimed on YOC's corporate Federal income tax

returns as deductible business travel and entertainment expenses.

On audit, a portion of these claimed travel and entertainment

expenses was disallowed by respondent and treated as constructive

dividends to Elvin in the amounts set forth below:


                                             Amount Disallowed
                    T and E Expenses            and Treated
                        Claimed               as Constructive
     Year           on YOC's Return          Dividends to Elvin

     1983               $31,048                  $22,014
     1984                18,209                   14,012
     1985                30,510                   22,080


     Petitioners did not introduce any records or other credible

evidence in support of the proposition that the above disallowed

travel and entertainment expenses qualified as deductible

business expenses of YOC or that they did not represent

constructive dividends to Elvin.
                               - 22 -

Additional Personal Expenses of Elvin Paid by YOC
and Claimed by YOC as Deductible Business Expenses

     During 1983 through 1986, YOC paid numerous additional

personal expenses of Elvin that were claimed by YOC as deductible

business expenses.    Elvin instructed YOC's employees to pay these

expenses and to reflect these expenses in YOC's books and records

as YOC's business expenses.

     The schedules below set forth by year the amount of these

additional personal expenses of Elvin that YOC paid and claimed

as deductible business expenses.   The schedules also indicate the

manner in which these expenses were reflected in YOC's books and

records and the benefit that Elvin received as a result of the

expenses.   On audit, respondent disallowed the business expense

deductions claimed by YOC with respect to the expenses set forth

in the schedules, and respondent treated them as constructive

dividends to Elvin.   In a number of instances (identified as "Not

deducted" in the column reflecting the manner in which the

expenses were treated on YOC's books), respondent determined

(with respect to certain expenses that were paid by YOC for

Elvin's benefit but not deducted as business expenses by YOC)

that such expenses represented constructive dividends to Elvin.

The schedule also reflects which expenses petitioners now concede

should be treated as nondeductible personal expenses and as

constructive dividends to Elvin.
                            - 23 -
        1983 -- ADDITIONAL PERSONAL EXPENSES OF ELVIN
  THAT YOC PAID AND CLAIMED AS DEDUCTIBLE BUSINESS EXPENSES

             Recorded on                                  Conceded by
Amount       YOC Books As            Benefit to Elvin     Petitioners


$ 6,000      Employee           3 months' rent on             No
               expense            California
                                  oceanfront property


 3,100       Employee           Purchase of spa               Yes
               expense

 4,374       Employee           Purchase of sauna             Yes
               expense

 2,393       Repair             Installation of spa           Yes
               expense            and sauna at
                                  Elvin's
                                  residence

 7,300       Repair             Plastering and                Yes
               expense            painting of
                                  Elvin's
                                  residence

 3,300       Employee           Buddy's college rent          No
               expense

 8,901       Employee           Rental of wind                No
               expense            surfers, barbecue
                                  grill, microwave
                                  oven, and boat

 2,461       Utility            Utility bills for             Yes
               expense            Elvin's residence

 1,663       Company            Gasoline credit cards         No
               vehicle            used by Mrs.
               expense            Yarbrough and Buddy

 1,945       Miscella-          Expenses relating to          No
               neous              Sea Ray Boat
               expense

   132       Outside            Expenses relating to          No
               services           Sea Ray Boat
               expense

 1,363       Depreciation       Depreciation claimed          No
               expense            by YOC on assets
                                  used personally by
                                  Elvin

 8,203       Salary             Services of Elvin's           No
               expense            housekeeper
                                    - 24 -
        14,352       Not deducted       YOC automobiles for           No
                                          personal use of
                                          Elvin, Mrs.
                                          Yarbrough, and
                                          Buddy
Total
        $65,487


                1984 -- ADDITIONAL PERSONAL EXPENSES OF ELVIN
          THAT YOC PAID AND CLAIMED AS DEDUCTIBLE BUSINESS EXPENSES


                     Recorded on                                  Conceded by
          Amount     YOC Books As            Benefit to Elvin     Petitioners

         $    312    Repairs            Kitchen improvements          Yes
                       expense            at Elvin's
                                          residence

             1,100   Employee           Buddy's college rent          No
                       expense            in North Carolina

              668    Employee           Elvin's medical bill          Yes
                       expense

             3,281   Utility            Utility bills on              Yes
                       expense            Elvin's residence

             2,179   Company            Gasoline credit cards         No
                       vehicle            used by Mrs.
                       expense            Yarbrough and Buddy

             2,869   Miscella-          Expenses relating to          No
                       neous              Sea Ray Boat
                       expense

              968    Outside            Expenses relating to          No
                       services           Sea Ray Boat
                       expense

          10,600     Salary             Elvin's housekeeper           No
                       expense

          18,167     Not deducted       YOC automobiles for           No
                                          personal use of
                                          Elvin, Mrs.
                                          Yarbrough, and
                                          Buddy

              915    Depreciation       Depreciation                  No
                       expense            claimed by YOC on
                                          assets used
                                          personally by Elvin

              383    Insurance          Insurance on Capriole         No
                       expense
                                      - 25 -
           2,053       Interest           Interest on $80,000         No
                         expense            loan to purchase
                                            Capriole
Total
         $43,495



                      1985 -- ADDITIONAL PERSONAL EXPENSES OF ELVIN
          THAT YOC PAID AND CLAIMED AS DEDUCTIBLE BUSINESS EXPENSES


                       Recorded on                                Conceded by
        Amount         YOC Books As            Benefit to Elvin   Petitioners

        $ 2,227        Repairs            Repairs on                  Yes
                         expense            Elvin's personal
                                            residence

        22,708         Not deducted       YOC automobiles for         No
                                            personal use of
                                            Elvin, Mrs.
                                            Yarbrough, and
                                            Buddy

         1,751         Depreciation       Depreciation                No
                         expense            claimed by YOC on
                                            assets used
                                            personally by Elvin

        21,411         Salary             Elvin's housekeeper         No
                         expense            and captain of
                                            Capriole

         4,084         Company            Gasoline credit cards       No
                         vehicle            used by Mrs.
                         expense            Yarbrough and Buddy

         1,228         Miscella-          Expenses relating to        No
                         neous              Sea Ray Boat
                         expense

         6,242         Outside            Maintenance and             No
                         services           operation of
                         expense            Capriole

         4,200         Insurance          Insurance on Capriole       No
                         expense

        10,947         Interest           Interest on $80,000         No
                         expense            loan to purchase
                                            Capriole

Total   $74,798




                  1986 -- ADDITIONAL PERSONAL EXPENSES OF ELVIN
                                  THAT YOC PAID
                                     - 26 -
                      Recorded on                             Conceded by
          Amount      YOC Books As        Benefit to Elvin    Petitioners

          $15,136     Not deducted       Repairs on Elvin's        No
                                           residence




Travel Awards

       In 1983 and 1985, Elvin received travel awards from General

Motors relating to the successful operation and profitability of

YOC.    In 1983, Elvin received a trip to Germany at a cost of

$4,361.    In 1985, Elvin and his wife received a trip to France

and Switzerland at a cost of $10,087.

       For both 1983 and 1985, Elvin did not provide his income tax

return preparer any information regarding these travel awards,

and no amount with respect to these travel awards was reported as

income on Elvin's 1983 and 1985 Federal income tax returns.

       On audit, respondent determined that costs of $4,361 in 1983

and $10,087 in 1985 relating to these travel awards represented

income to Elvin under section 74(a).


Elvin's Brain Tumor

       On June 19, 1987, Elvin was diagnosed as having a tumor in

the frontal lobe of his brain.        The frontal lobe constitutes the

area of the brain responsible for, among other things, the

ability to perform executive functions and complex tasks, the

ability to plan, remember, and carry out logical sequences of
                               - 27 -

behavior, to control emotions, to monitor impulsive behavior, and

to formulate speech.

     On June 19, 1987, the day on which Elvin was diagnosed with

the brain tumor, Elvin complained to the attending doctor that he

suffered from headaches, blurred vision, and impaired eye-hand

coordination.   Doctors who examined Elvin estimated that Elvin's

brain tumor had been growing for a period of between 7 and 10

years.

     On June 23, 1987, Dr. John S. Boggs surgically removed

Elvin's brain tumor.    The tumor was approximately 6 centimeters

in diameter and was benign.    The tumor destroyed a small part of

Elvin's frontal lobe.

     In spite of the brain tumor, during each of the years in

issue (1983 through 1986), Elvin was responsible for and actually

supervised day-to-day management and operations of YOC, and YOC

became increasingly profitable.    During these same years, Elvin

was also responsible for and involved with other businesses and

corporations, such as Yarbrough Leasing and NRDC.

     During the years in issue, none of Elvin's coworkers or

business associates noticed that Elvin suffered any signs of

impaired mental abilities or impaired judgment.   Elvin, from year

to year, remembered customers' names and what models of

automobiles they had purchased.

     Some of Elvin's friends, however, did notice that Elvin

occasionally missed meetings and appointments, that Elvin's
                              - 28 -

attention span had lessened, that his desire and ability to play

golf had lessened, and that Elvin, at times, apparently had

trouble concentrating and remembering.

     After the brain tumor was removed, Elvin's ability to make

business decisions and to manage business and financial matters

was not impaired.   During the past 7 to 8 years, Elvin has

continued to be responsible for overall and day-to-day management

and operations of YOC, and YOC has continued to constitute a

successful business.


Criminal Tax Proceedings

     On November 4, 1985, Elvin was advised that he was under

criminal investigation for filing false Federal income tax

returns.   In late 1990 or early 1991, after completion of a

criminal tax investigation by respondent of both Elvin and of

YOC, Elvin was indicted for willfully attempting to evade payment

of his personal Federal income taxes for 1983, 1984, 1985, and

1986 in violation of section 7201, and for willfully aiding and

assisting in the preparation of false and fraudulent corporate

Federal income tax returns of YOC for 1983, 1984, 1985, and 1986

in violation of section 7206(2).   On January 2, 1991, Elvin pled

guilty to one count each of the above criminal charges, both for

1983.   As part of the plea agreement, the other criminal charges

against Elvin with regard to 1984, 1985, and 1986 were dismissed.

     With regard to Elvin's plea for 1983 under sections 7201 and

7206(2), the plea agreement contains the following language:
                              - 29 -


     Although * * * [Elvin] does not contest the Factual
     Basis for the plea which is incorporated herein, * * *
     [Elvin] as a result of a brain tumor, contends he is
     unwilling and unable to admit his participation in or
     criminal intent regarding the acts constituting the
     crime and maintains his innocence thereof.
     Nevertheless, * * * [Elvin] hereby represents to the
     Court that the guilty plea herein is entered by * * *
     [Elvin] voluntarily, knowingly and understandingly and
     further represents to the Court that * * * [Elvin's]
     interests require entry of a guilty plea and that the
     Factual Basis incorporated herein, as well as other
     evidence which * * * [Elvin] anticipates the United
     States would present at trial, contains strong evidence
     of guilt. * * * [Citations omitted.]

     On July 11, 1991, Elvin was sentenced by the U.S. District

Court for the Middle District of Florida (District Court) to 3

years in prison.   Elvin's sentence was suspended, and Elvin was

placed on probation for 5 years.   The District Court placed two

conditions on Elvin's probation in lieu of imprisonment:   (1)

That Elvin enter a treatment facility for mental health

counseling; and (2) that Elvin pay all Federal income taxes,

interest, and penalties found to be lawfully owed to respondent

for the "years 1983 through and including the present" within 30

days after his release from the treatment facility.


Elvin's Income Tax Returns and Respondent's Audit Determinations

     For each of the years 1983, 1984, 1985, and 1986, Elvin

filed separate individual Federal income tax returns.   Thereon,

Elvin reported salary income from YOC of $119,380, $312,620,

$272,365, and $259,958, respectively.
                               - 30 -

     For 1983, 1984, 1985, and 1986, none of the expenses

described above that were paid by YOC for Elvin's personal

benefit were reported as income on Elvin's Federal income tax

returns.    As indicated on audit, respondent determined that these

expenses were incurred by YOC for Elvin's personal benefit and

that they represented constructive dividends to Elvin.        The

following schedule sets forth a summary, by category, of the

constructive dividends that respondent determined Elvin received

from YOC.   Each category reflects the manner in which the

expenses were reflected on YOC's books and records.     For example,

the "salary expense" category reflects the salary paid by YOC to

the captain of the Capriole that respondent treated as

nondeductible to YOC and as a constructive dividend to Elvin.

 Constructive Dividends
Determined by Respondent
      Relating to              1983        1984        1985          1986

The YOC-Elvin Account        $137,673    $ 17,510    $ 64,825       $258,939
Capriole                         -        170,635     133,179           -
Sea Ray Boat                    1,155        -           -              -
Motor Home                     10,697      16,802        -              -
Sylva Residence                  -         65,000        -              -
Travel/Entertainment           22,014      14,012      22,080           -
Employee Benefits              25,676       1,768        -              -
Utilities                       2,461       3,281        -              -
Company Vehicle Expense         1,663       2,179       4,084           -
Miscellaneous Expense           1,945       2,869       1,228           -
Repair Expense                  9,693          312      2,227           -
Insurance Expense                -           -           -              -
Outside Services                   132         968      6,242           -
Depreciation                     -           -          2,400           -
Salary Expense                  8,203      10,600      21,411           -
Interest Expense                 -          2,053      10,947           -
Demonstrator Vehicles          14,352      18,167      22,708           -
Elvin's Residence                -           -           -            15,136

                   Total     $235,664    $326,156    $291,331       $274,075
                                - 31 -


     Respondent determined that for 1983, 1984, 1985, and 1986,

Elvin received total constructive dividends from YOC of $235,664,

$326,156, $291,331, and $274,075 (the taxable portion of which

for 1986 is limited to $196,042 as a result of YOC's 1986

earnings and profits), respectively.

     Also, as explained, respondent determined that for 1983 and

1985 Elvin received income in the form of travel awards received

from General Motors of $4,361 and $10,087, respectively.

     The schedule below reflects for 1983, 1984, 1985, and 1986

Elvin's taxable income as reported by Elvin on his Federal income

tax returns, Elvin's taxable income as determined by respondent,

and Elvin's underreported taxable income as determined by

respondent (namely, Elvin's taxable income as determined by

respondent less Elvin's reported taxable income).



                        Taxable Income
                                             Underreported
                                                Income
            As Reported     As Determined    as Determined
    Year     by Elvin       by Respondent    by Respondent

    1983     $103,285         $434,279        $330,994
    1984      283,714         612,362          328,648
    1985      219,427         520,845          301,418
    1986      209,743         399,785          190,042


     Respondent also determined that for 1983, 1984, 1985, and

1986, Elvin was liable for the fraud additions to tax, increased

interest relating to fraud, and substantial understatement

additions to tax.
                              - 32 -


YOC's Tax Returns and Respondent's Audit Determinations

     For each of the years 1982 through 1986, YOC reported on its

corporate Federal income tax returns total retained earnings of

$118,956, $267,275, $515,486, $709,967, and $852,304,

respectively.   During these years, however, YOC did not declare

and pay any dividends to either Elvin or its other shareholder,

Swisher.

     For 1983, 1984, and 1985, in order to prepare the corporate

Federal income tax returns, YOC's tax return preparer was given

only YOC's general ledger.   Detail on specific expenses,

reflected in YOC's journals, was not provided to the tax return

preparer.   The tax return preparer was not requested to and did

not audit YOC's books and records.

     The schedule below reflects for 1983, 1984, and 1985, YOC's

taxable income as reported on YOC's corporate Federal income tax

returns, YOC's taxable income as determined by respondent,1 and

YOC's underreported taxable income as determined by respondent

(namely, YOC's taxable income as determined by respondent less

YOC's reported taxable income).




1
     YOC's taxable income as determined by respondent is based on
the adjustments described above and taking into account the fact
that some of the adjustments described above were not claimed as
business expense deductions on YOC's tax returns.
                               - 33 -

                       YOC's Taxable Income
                                              Underreported
                                                 Income
          As Reported        As Determined    as Determined
  Year       by YOC          by Respondent    by Respondent

  1983      $132,021           $205,171         $73,150
  1984       410,227            449,567          39,340
  1985       308,762            382,932          74,170


     For 1983, 1984, and 1985, respectively, the underreported

income as determined by respondent was attributable to disallowed

claimed business expenses of $73,150, $39,340, and $74,170.

     Respondent also determined that for 1983, 1984, and 1985,

YOC was liable for the fraud additions to tax, increased interest

relating to fraud, and for the substantial understatement

additions to tax.


                               OPINION

Claimed Business Expenses and Constructive Dividends

     Numerous court opinions establish that if shareholders of a

corporation receive corporate funds or corporate property for

personal use, they will be charged with distributions from the

corporation, taxable to them as constructive dividend income if

the corporation has sufficient earnings and profits.   Ireland v.

United States, 621 F.2d 731, 735 (5th Cir. 1980); Loftin &

Woodard, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir.

1978); Commissioner v. Riss, 374 F.2d 161, 166-167 (8th Cir.

1967), affg. in part, revg. in part, and dismissing in part T.C.
                               - 34 -

Memo. 1964-190; Melvin v. Commissioner, 88 T.C. 63 (1987), affd.

per curiam 894 F.2d 1072 (9th Cir. 1990); Challenge Manufacturing

Co. v. Commissioner, 37 T.C. 650, 663 (1962); American

Properties, Inc. v. Commissioner, 28 T.C. 1100, 1115 (1957),

affd. 262 F.2d 150 (9th Cir. 1958).     In addition, the corporation

will not be allowed to deduct costs of owning and maintaining

property and other expenses that are attributable to personal use

of the property by the shareholders.     United Aniline Co. v.

Commissioner, 316 F.2d 701, 705 (1st Cir. 1963), affg. T.C. Memo.

1962-60; Challenge Mfg. Co. v. Commissioner, supra at 663.

     In determining whether constructive dividends have been

received by a shareholder, the key factors to consider are

whether the shareholder received economic benefit from the

corporation without expectation of repayment therefor and whether

corporate benefits made available to the shareholder represented

benefits primarily of a personal nature and did not relate to the

business of the corporation.   Ireland v. United States, supra at

735; Loftin & Woodard, Inc. v. United States, supra at 1215-1217.

A mere declaration by a shareholder that a withdrawal was

intended as a loan is insufficient if the transaction fails to

meet more reliable indicia of debt.     Williams v. Commissioner,

627 F.2d 1032, 1034 (10th Cir. 1980), affg. T.C. Memo. 1978-306;

Alterman Foods, Inc. v. United States, 505 F.2d 873, 876 (5th

Cir. 1974).
                              - 35 -

     Whether a shareholder withdrawal constitutes a bona fide

loan or a dividend involves a question of fact that turns on a

consideration of all of the surrounding facts and circumstances.

Alterman Foods, Inc. v. United States, supra at 875.   Some of the

relevant facts are:   (1) The extent to which the shareholder

controls the corporation; (2) the earnings and dividend history

of the corporation; (3) the magnitude of the withdrawal and

whether a ceiling existed to limit the amount to be withdrawn

from the corporation; (4) how the withdrawal was recorded on the

books and records; (5) whether promissory notes were executed;

(6) whether interest was paid or accrued; (7) whether security

was given for the withdrawal; (8) whether there was a set

maturity date; (9) whether the shareholder was in a position to

repay the withdrawal; (10) whether the corporation ever undertook

to enforce repayment; and (11) whether there was any indication

the shareholder attempted to repay the amount withdrawn.    Id. at

877 n.7; see also Dolese v. United States, 605 F.2d 1146, 1153

(10th Cir. 1979); Thielking v. Commissioner, T.C. Memo. 1987-227,

affd. without published opinion 855 F.2d 856 (8th Cir. 1988).

     Unfettered control of a corporation by a shareholder weighs

in favor of a constructive dividend characterization, as does a

corporate history of not declaring and paying dividends in spite

of substantial earnings and profits.   Busch v. Commissioner, 728
                              - 36 -

F.2d 945 (7th Cir. 1984), affg. T.C. Memo. 1983-98; Thielking v.

Commissioner, supra.

     Shareholder repayments are evidence that a withdrawal from a

corporation constituted a loan.    The repayment, however, must be

bona fide.   Crowley v. Commissioner, T.C. Memo. 1990-636, affd.

962 F.2d 1077 (1st Cir. 1992).    Little weight need be given to

repayments that appear to be motivated by a tax audit.     Crowley

v. Commissioner, 962 F.2d at 1084.     Additionally, the fact that a

taxpayer made some repayments may be overshadowed where total

withdrawals each year, after repayments, steadily increase from

year to year.   See Regensburg v. Commissioner, 144 F.2d 41, 44

(2d Cir. 1944), affg. a Memorandum Opinion of this Court dated

Apr. 20, 1943; Electric & Neon, Inc. v. Commissioner, 56 T.C.

1324, 1339 (1971), affd. without published opinion 496 F.2d 876

(5th Cir. 1974); Koufman v. Commissioner, T.C. Memo. 1976-330.

     Further, repayments that occur through bookkeeping entries

such as salary credits and credits for bonuses are given less

weight because such repayments are funded by the corporation.

Busch v. Commissioner, 728 F.2d 945 (7th Cir. 1984), affg. T.C.

Memo. 1983-98; Estate of Taschler v. United States, 440 F.2d 72,

76 (3d Cir. 1971).   In Estate of Taschler, the Court of Appeals

for the Third Circuit noted the following with regard to

repayments in the form of salary credits:


     Within limits, taxpayer had complete control over the
     amount of his salary payments. He could have increased
                              - 37 -

     or decreased them as he saw fit, and determined the
     time when they should be paid. So whether amounts were
     or were not deducted from his salary payments is
     immaterial, for the net effect on * * * [the
     corporation's] financial status would have been the
     same. They came from assets of the corporation. [440
     F.2d at 76.]


     Interest charges and interest payments indicate an intent to

repay, but the probative value of interest charges may be

significantly reduced if the interest charges did not begin until

after a tax audit was initiated.   Crowley v. Commissioner, supra;

Offshore Operations Trust v. Commissioner, T.C. Memo. 1973-212.

     In appropriate circumstances, the fair rental value of

property includes all of the days on which the property is

available for personal use, not just the days on which the

property is so used.   Nicholls, North, Buse Co. v. Commissioner,

56 T.C. 1225, 1241 (1971); Offshore Operations Trust v.

Commissioner, supra.


The YOC-Elvin Account -- Constructive Dividends

     As explained, respondent determined that for 1983, 1984,

1985, and 1986, the amount of the net increase each year over the

prior year in the outstanding balance of the YOC-Elvin Account

should be treated not as a loan but as a constructive dividend to

Elvin.   Respondent relies on the following factors.   The net

increase each year in the YOC-Elvin Account reflected payments or

transfers of funds by YOC for Elvin's personal benefit.    Elvin

did not execute loan documents or promissory notes with regard
                                - 38 -

thereto.     There were no limits on the amount that Elvin could

withdraw from YOC.     There were no fixed payment dates, nor was

there a requirement that Elvin make repayments to YOC.     No

interest was charged on the debit balance in the account until

December of 1985 after Elvin was notified of respondent's

criminal tax investigation.     No formal dividends were declared

and paid to Elvin despite the annual increases in YOC's retained

earnings, and Elvin completely controlled the business affairs

and day-to-day operations of YOC.

     Petitioners argue that Elvin always had an intent to repay

the debit balance in the YOC-Elvin Account, that some repayments

were made, that Swisher's minority interest in YOC acted as a

check on the amounts Elvin could withdraw from YOC, that the lack

of loan documents and promissory notes is not significant, that

Elvin began to pay interest in December of 1985 when section

78722 was enacted, and therefore that the net increase each year

in the YOC-Elvin Account represented loans, not constructive

dividends.

     Petitioners also argue (with regard to the $325,939 that was

used by YOC in 1986 for the purchase of real property on which to

locate the new Chrysler-Plymouth dealership to be owned by NRDC)

that the $325,939 represented a loan by YOC to NRDC and was


2
     Sec. 7872 requires interest income to be imputed to a
taxpayer in certain circumstances involving loans with below
market interest rates.
                               - 39 -

incorrectly reflected as an increase in the outstanding balance

of the YOC-Elvin Account.    Petitioners also stress that after

1986 significant, additional repayments were made by Elvin to

reduce the debit balance of the YOC-Elvin Account and that

respondent has not given Elvin credit for these later repayments.

     Weighing all of the relevant facts in this case, we agree

with respondent's determinations.    We conclude that for each year

in issue, the YOC-Elvin Account did not constitute a valid loan

account and that the net increase each year in the outstanding

debit balance of the YOC-Elvin Account represents a constructive

dividend to Elvin (namely, for 1983 -- $137,673, for 1984 --

$17,510, for 1985 -- $64,825, and for 1986 -- $258,939).

     Elvin's self-serving testimony that he withdrew money from

YOC in good faith and that he intended to fully repay YOC is

entitled to little weight.    See Williams v. Commissioner, 627

F.2d 1032 (10th Cir. 1980), affg. T.C. Memo. 1978-306.    With

regard to the YOC-Elvin Account, no loan documents or other

promissory notes were executed, no maturity dates existed, no

repayment dates were established, and no limits were placed on

the amount of funds that Elvin could withdraw from YOC for his

personal benefit.   Elvin did not provide any collateral to secure

the transfers that YOC made to Elvin.
                              - 40 -

     YOC's retained earnings increased substantially each year,

but YOC did not declare or pay any dividends.    Instead, Elvin

appears to have had unlimited use of YOC's funds for his personal

benefit.

     Elvin owned a majority of the outstanding stock of YOC, and

Elvin was solely responsible for day-to-day operations and

management of YOC.   Swisher was a silent partner, and there is no

evidence that Swisher's minority interest in YOC in any way

limited the amount of funds Elvin could withdraw from YOC.

     Most, if not all, of the debits or increases to the YOC-

Elvin Account resulted from payments or transfers of funds made

by YOC for Elvin's personal use.   The payment of Elvin's utility

bill for his residence, the transfer of cash to Elvin, the rental

of a vacation condominium for Elvin and his family, and

improvements to Elvin's residence are examples of the personal

nature of Elvin's expenses that were paid by YOC.

     Interest was not charged on the YOC-Elvin Account until

December of 1985, after Elvin was notified by respondent that a

criminal tax investigation of Elvin had begun.

     The outstanding debit balance in the YOC-Elvin Account

increased each year and at no time did repayments exceed the

amounts withdrawn.

     With regard to the $325,939 debited in 1986 to the YOC-Elvin

Account in connection with the purchase of real property for the

new Chrysler-Plymouth dealership, YOC did not have an ownership
                               - 41 -

interest in this real property, which was purchased in the name

of NRDC.   Elvin and Koons were the sole shareholders of NRDC.      We

do not find it particularly significant that in 1987 YOC's

outside accounting firm transferred the $325,939 debit from the

YOC-Elvin Account to an account receivable due from NRDC in that

amount.

     There is no credible evidence that the $325,939 debited in

1986 to the YOC-Elvin Account was intended to be a loan to NRDC.

Petitioners did not introduce into evidence any books and records

of NRDC supporting their argument that the $325,939 was intended

to be a loan to NRDC, and there was no explanation at trial as to

why the records of NRDC were not produced at trial.     Further,

there is no indication in YOC's books and records indicating that

NRDC made any repayments to YOC of the $325,939.

     We conclude that the $325,939 that YOC provided for purchase

of the real property should be treated as a constructive dividend

to Elvin, followed by a $325,939 contribution by Elvin to the

capital of NRDC.    See Sammons v. Commissioner, 472 F.2d 449 (5th

Cir. 1972).

     Many of the credits or repayments reflected in the YOC-Elvin

Account related to YOC's declaration of salary adjustments or

bonuses to Elvin.    These credits are not entitled to significant

weight in our consideration of how to treat the annual net

increase in the YOC-Elvin Account.      See Epps v. Commissioner,
                                - 42 -

T.C. Memo. 1995-297; Boecking v. Commissioner, T.C. Memo. 1993-497.

     We conclude that the annual net increase each year in the

outstanding debit balance of the YOC-Elvin Account is to be

treated as a constructive dividend to Elvin.       Respondent gave

Elvin credit for all repayments reflected in the YOC-Elvin

Account during the years in issue.       We agree with respondent's

determination of the amount of constructive dividends charged to

Elvin.   We conclude and hold that Elvin received from YOC

constructive dividend income for 1983, 1984, 1985, and 1986 of

$137,673, $17,510, $64,825, and $258,939 (the taxable portion of

which for 1986 is limited to $196,042 as a result of YOC's 1986

earnings and profits), respectively, relating to the annual net

increase in the YOC-Elvin Account.


The Yacht Capriole -- Claimed Business Expenses
and Constructive Dividends

     Petitioners note that title to the Capriole was held in the

name of YOC, and petitioners argue that Elvin entertained

business associates and potential customers on the Capriole, that

business discussions with YOC employees were conducted on the

Capriole, that the Capriole was used a majority of the time for

business, and that YOC did not attempt to sell the Capriole

because YOC expected to make a profit in later years on

appreciation of the Capriole.

     Elvin is to be treated as owner of the Capriole.       Elvin

purchased and used the Capriole solely for personal use.       During
                                - 43 -

1984 and 1985, the Capriole was at all times available for

Elvin's personal use.    Elvin personally guaranteed the $80,000

loan, and the loan proceeds of $79,880 were used by Elvin to

purchase the Capriole.

     It is significant that Elvin created false documentation to

reflect incorrectly that the Capriole was received by YOC as a

trade-in on a new automobile.    On the log book and on the guest

register, Elvin, not YOC, was indicated as owner of the Capriole.

     YOC paid all of the expenses relating to the Capriole, and

YOC deducted these expenses in 1984 and 1985 as business

expenses.   All of the payments made by YOC relating to the

Capriole benefited Elvin personally.

     We conclude that although YOC held nominal legal title to

the Capriole, Elvin is to be treated as the owner thereof.     The

$80,000 transferred from YOC to Elvin to provide funds to

purchase the Capriole are to be treated as a constructive

dividend to Elvin.    Additionally, the $90,635 for 1984, and the

$133,179 for 1985, claimed as business expenses relating to the

Capriole are disallowed to YOC and are treated as constructive

dividends to Elvin.

     Even if we were to conclude that YOC should be treated as

owner of the Capriole, the fair rental value of the Capriole for

the two years that the Capriole was available for Elvin's use

would be approximately $438,000 per year ($1,200 daily rental

value times 365 days), which is more than the constructive
                               - 44 -

dividend relating to the Capriole determined by respondent for

1984 and 1985.    See Nicholls, North, Buse Co. v. Commissioner, 56

T.C. 1225, 1241 (1971).

The Sea Ray Boat -- Claimed Business Expenses
and Constructive Dividends

     Respondent argues that Elvin should be treated as owner of

the Sea Ray Boat and that YOC held mere nominal legal title to

the boat.   Respondent observes that Elvin negotiated for the

purchase of the boat, that the boat was not traded in on a new

automobile, that the seller of the boat understood he was selling

the boat to Elvin for Elvin's personal use, that after purchase

of the boat YOC's employees did not attempt to resell the boat,

that the boat was used solely for Elvin's personal use, and that

a log was not kept reflecting any business use of the boat.

     Petitioners argue that YOC should be treated as owner of the

Sea Ray Boat.    Petitioners argue that title to the boat was in

the name of YOC and that the Sea Ray Boat was used for business.

     Although YOC provided the funds necessary for Elvin to

purchase the Sea Ray Boat, the Sea Ray Boat was used solely for

Elvin's personal use.    The record does not reflect any business

use of the Sea Ray Boat.

     We conclude that Elvin is to be treated as the owner of the

Sea Ray Boat.    The business expense deductions of $2,077,

$3,837, and $1,228, that YOC claimed for 1983, 1984, and 1985,

relating to the Sea Ray Boat are disallowed and are to be treated
                                - 45 -

as constructive dividends to Elvin.      We also conclude that Elvin

received a constructive dividend of $1,155 for maintenance,

repairs, and operation of the Sea Ray Boat that were paid by YOC

in 1983 but that were not deducted by YOC as a business expense.


The Motor Home -- Claimed Business Expenses
and Constructive Dividends

     Petitioners argue that because YOC received the motor home

in trade on the sale of a new automobile and because Elvin used

the motor home primarily for business, the motor home should be

treated as an asset of YOC and expenses associated with the motor

home should be treated as deductible business expenses of YOC.

     Respondent argues that the motor home should be treated as

Elvin's property and that Elvin used the motor home almost

exclusively for personal use.    Respondent therefore concludes

that the full $10,000 cost of the motor home should be treated as

a constructive dividend to Elvin.    Respondent also argues that

the $10,697 in 1983 and the $16,802 in 1984 paid by YOC for

maintenance, improvement, and operation of the motor home should

be disallowed as business expenses of YOC and should be treated

as constructive dividends to Elvin.

     We agree with petitioner as to ownership of the motor home,

but we agree with respondent as to its use and as to the various

expenses related thereto.

     YOC received the motor home as a trade-in on the purchase of

a new automobile in a valid business transaction, and the motor
                              - 46 -

home was used occasionally in YOC's business.   We conclude that

YOC is to be treated as the owner of the motor home.

     Petitioners, however, did not offer any records or other

documentation to substantiate the specific business use of the

motor home, and the record does reflect substantial personal use

by Elvin of the motor home.

     We conclude with regard to the motor home that the expenses

of $10,697 in 1983 and $16,802 in 1984 paid by YOC for

maintenance, improvement, and operation of the motor home are not

deductible business expenses of YOC, and Elvin is to be treated

as receiving constructive dividends in those amounts.


The Sylva Residence -- Constructive Dividends

     Petitioners argue that the $65,000 used by Elvin in 1984 to

purchase the Sylva Residence represented a loan by YOC to

Yarbrough Leasing, not a constructive dividend to Elvin.

Respondent argues that the $65,000 should to be treated as a

constructive dividend to Elvin.

     The Sylva Residence was purchased as a residence for Elvin's

son Buddy while Buddy attended college.   During 1984 and 1985,

Elvin received rental payments of $200 per month from Buddy's

roommate, who also resided at the Sylva Residence.

     Although the YOC check for $65,000 that was used to purchase

the Sylva Residence was made payable to Yarbrough Leasing, Elvin,

in substance and effect, withdrew the $65,000 from YOC and
                              - 47 -

transferred that amount as a capital contribution to Yarbrough

Leasing in order to provide Yarbrough Leasing the funds necessary

to purchase the Sylva Residence.    See Sammons v. Commissioner,

472 F.2d 449 (5th Cir. 1972), affg. in part and revg. in part

T.C. Memo. 1971-45.

     In calculating the amount of the constructive dividend to be

charged to Elvin relating to the Sylva residence, respondent did

not give Elvin credit for a $50,000 repayment that was made by

Elvin or by Yarbrough Leasing the day after the $65,000 was

transferred to Yarbrough Leasing.   This treatment by respondent

is inconsistent with the treatment that respondent gave to

payments made by Elvin on the debit balance in the YOC-Elvin

Account.   As explained, respondent, with regard to the YOC-Elvin

Account, in each year charged Elvin only with constructive

dividends for the annual net increase in the outstanding balance

on the YOC-Elvin Account.

     We conclude that only $15,000 of the $65,000 (namely, the

$65,000 transferred by YOC to Yarbrough Leasing less the $50,000

repayment) relating to the Sylva Residence should be treated as a

constructive dividend to Elvin.


Travel and Entertainment Expenses -- Claimed Business Expenses
and Constructive Dividends

     Petitioners argue that for 1983, 1984, and 1985, the

expenses of $22,014, $14,012, and $22,080, respectively, incurred

by YOC for Elvin's travel and entertainment qualify as valid
                              - 48 -

business expenses.   Petitioners argue that Elvin, on behalf of

YOC, entertained potential customers, some of whom purchased new

automobiles from YOC on an annual basis.   Petitioners argue that

General Motors encouraged Elvin to entertain potential customers

and that entertainment was a necessary expense to attract

purchasers of high-priced Cadillac automobiles.

     Respondent argues that petitioners have not substantiated

the business, as opposed to the personal, nature of any of the

claimed travel and entertainment expenses that respondent

disallowed and treated as constructive dividends to Elvin.

     Petitioners have not offered any documentary evidence or

other credible substantiation to support the business nature of

the claimed travel and entertainment expenses disallowed by

respondent.

     We sustain respondent's determination that for 1983, 1984,

and 1985, the claimed travel and entertainment expenses of

$22,014, $14,012, and $22,080, respectively, are to be

disallowed, and Elvin is to be treated as receiving constructive

dividends for the same years and in the same amounts.


Additional Personal Expenses of Elvin Paid by YOC -- Claimed
Business Expenses and Constructive Dividends

     Petitioners make no persuasive argument and offer no

credible evidence that any of the expenses in question under this

category (1983 -- $65,487; 1984 -- $43,495; 1985 -- $74,798; and

1986 -- $15,136) qualify as valid business expenses of YOC.     Many
                              - 49 -

of these expenses relate to Elvin's residence and his family,

such as the payments made to Elvin's housekeeper, and gasoline

credit cards used by Elvin and his family for personal travel.

     We sustain in full respondent's disallowance to YOC of these

claimed business expenses, and we sustain respondent's

determination that these payments by YOC should be treated as

constructive dividends to Elvin.


Travel Awards

     Generally, gross income includes the value of prizes and

awards.   Sec. 74(a).

     Petitioners argue that the cost of the trips to Europe

should not be treated as income to Elvin because the trips were

related to the business of YOC and because on each trip Elvin

attended conferences regarding the automobile business.   The

evidence, however, indicates that these trips actually

represented promotional awards received by Elvin from General

Motors.   The business necessity associated with these trips has

not been established.

     We conclude that the cost of the travel awards received by

Elvin from General Motors represents taxable income to Elvin.


Additions to Tax

     Respondent determined that as to Elvin for each of the years

1983, 1984, 1985, and 1986, and as to YOC for each of the years

1983, 1984, and 1985, the fraud addition to tax should apply.
                               - 50 -

       For 1983, 1984, and 1985, if any portion of a tax

underpayment is attributable to fraud, the addition to tax for

fraud under section 6653(b)(1) equals 50 percent of the total

underpayment of tax, and the increased interest under section

6653(b)(2) equals 50 percent of the interest payable under

section 6601 but only with respect to that portion of the

underpayment that is attributable to fraud.

       For 1986, the addition to tax for fraud under section

6653(b)(1)(A) equals 75 percent of only that portion of a tax

underpayment that is attributable to fraud, and the increased

interest under section 6653(b)(1)(B) equals 50 percent of the

interest payable under section 6601 with respect to the portion

of the underpayment that is attributable to fraud.     Sec.

6653(b)(1)(A) and (B).

       Respondent has the burden of proof on the fraud addition to

tax.    Sec. 7454(a); Rule 142(b).   To satisfy this burden of

proof, respondent must prove by clear and convincing evidence

each of the following elements of tax fraud under section 6653:

(1) That the taxpayer underpaid taxes owed for each year; and

(2) that some part of the underpayment for each year is due to

fraud.    King's Court Mobile Home Park, Inc. v. Commissioner, 98

T.C. 511, 515 (1992).

       Fraud consists of an intentional wrongdoing for the purpose

of avoiding the payment of taxes known to be owed.     Stoltzfus v.

United States, 398 F.2d 1002, 1004 (3d Cir. 1968); DiLeo v.
                              - 51 -

Commissioner, 96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir.

1992); Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).     The

existence of fraud is a question of fact to be resolved upon

consideration of the entire record.     Parks v. Commissioner, 94

T.C. 654, 660 (1990); Gajewski v. Commissioner, 67 T.C. 181, 199

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

1978); Beaver v. Commissioner, 55 T.C. 85, 92 (1970).

     A pattern of consistent underreporting of income may

indicate fraud, as does the failure to maintain adequate records

of income and expenses.   Holland v. United States, 348 U.S. 121,

137 (1954); Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th

Cir. 1986), affg. T.C. Memo. 1985-63; Lollis v. Commissioner, 595

F.2d 1189, 1192 (9th Cir. 1979), affg. T.C. Memo. 1976-15;

Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980); Otsuki v.

Commissioner, 53 T.C. 96, 109 (1969).

     The use of a corporation to disguise the personal nature of

expenses constitutes an indicium of fraud.     Truesdell v.

Commissioner, 89 T.C. 1280, 1302-1303 (1987); Benes v.

Commissioner, 42 T.C. 358, 383 (1964), affd. 355 F.2d 929 (6th

Cir. 1966).

     A corporation can act only through its officers and does not

escape responsibility for acts of its officers performed in that

capacity.   DiLeo v. Commissioner, supra at 875; Federbush v.

Commissioner, 34 T.C. 740, 749 (1960), affd. 325 F.2d 1 (2d Cir.

1963).   It follows that corporate fraud is established through
                              - 52 -

the fraudulent acts and intent of corporate officers.     Auerbach

Shoe Co. v. Commissioner, 216 F.2d 693 (1st. Cir. 1954), affg. 21

T.C. 191 (1953); DiLeo v. Commissioner, supra; Federbush v.

Commissioner, supra.

     Generally, courts have recognized that in limited

situations, because of mental incapacity or disease, a taxpayer

may not have the requisite fraudulent intent.   See Farber v.

Commissioner, 43 T.C. 407, 421-422 (1965); Hollman v.

Commissioner, 38 T.C. 251, 259-260 (1962).

     We concluded in a prior opinion in these consolidated cases

that for 1983 Elvin, but not YOC, is collaterally estopped from

denying civil tax fraud.   Yarbrough Oldsmobile Cadillac, Inc. v.

Commissioner, T.C. Memo. 1993-20.   We therefore must now decide

whether Elvin is liable for the fraud additions to tax for 1984,

1985, and 1986, and whether YOC is liable for the fraud additions

to tax for 1983, 1984, and 1985.

     Petitioners, as indicated above, disagree with the

substantive merit of many of the adjustments respondent has made,

and petitioners therefore argue that no significant underpayment

of tax was reflected on petitioners' and on YOC's Federal income

tax returns as filed.

     Petitioners also argue that the adverse effects of Elvin's

brain tumor precluded Elvin from forming any fraudulent intent.

Petitioners argue that, in the preparation of the tax returns,

Elvin relied on YOC's accountant, that Elvin did not sign YOC's
                             - 53 -

1984 and 1985 corporate Federal income tax returns, and that

Elvin is not sophisticated in tax matters.

     In support of the contention that both Elvin and YOC filed

fraudulent Federal income tax returns for the years in issue,

respondent argues that the correct taxable income on each of the

individual and corporate tax returns in question was

significantly underreported, that Elvin had the mental capacity

in 1983 through 1986 to form fraudulent intent, that Elvin for

1983 was convicted under section 7201 of Federal income tax

evasion and under section 7206(2) of filing a false and

fraudulent corporate Federal income tax return for YOC, that the

same activities and course of conduct that were present in 1983

and that formed the factual basis for Elvin's convictions for

1983 were continued by Elvin in 1984, 1985, and 1986, that Elvin

followed a pattern of consistent underreporting of income, that

Elvin caused YOC to pay many of his personal expenses and to

purchase personal assets, and that YOC followed a pattern of

consistent underreporting of income.

     Based on our many findings and conclusions herein sustaining

respondent's substantive tax adjustments, it is clear that

respondent has shown that very substantial underreporting of

income and underpayments of Federal income taxes occurred on

Elvin's and on YOC's Federal income tax returns for the years at

issue.
                             - 54 -

     The schedule below reflects for 1983, 1984, 1985, and 1986,

Elvin's taxable income as reported by Elvin on his Federal income

tax returns, Elvin's taxable income as sustained by us, and the

amount of taxable income underreported by Elvin (namely, Elvin's

taxable income as sustained by us less Elvin's reported taxable

income).


                    Elvin's Taxable Income
                                As
            As Reported     Sustained         Underreported
    Year     by Elvin      by the Court       Taxable Income

    1983      $103,285       $434,279            $330,994
    1984       283,714        612,362             328,648
    1985       219,427        520,845             301,418
    1986       209,743        399,785             190,042


     The schedule below reflects for 1983, 1984, and 1985, YOC's

taxable income as reported by YOC on its corporate Federal income

tax returns, YOC's taxable income as sustained by us, and the

amount of taxable income underreported by YOC (namely, YOC's

taxable income as sustained by us less YOC's reported taxable

income).



                      YOC's Taxable Income
                                As
            As Reported     Sustained        Underreported
    Year       by YOC      by the Court      Taxable Income

    1983     $132,021        $205,171           $73,150
    1984      410,227         449,567            39,340
    1985      308,762         382,932            74,170
                              - 55 -

     Based on the underreported taxable income, as reflected

above, the first element of the fraud addition to tax has been

established as to both Elvin and YOC for each year in dispute.

     With regard to the allegation that Elvin's brain tumor

precluded Elvin from forming the requisite fraudulent intent,

both parties offered expert medical testimony.   Unfortunately,

none of the expert witnesses examined Elvin before June 23, 1987,

the day the brain tumor was removed.

     Petitioners' first expert witness is a neurosurgeon.   He

examined Elvin two times, once in July of 1990 (3 years after the

brain tumor was removed), and once in March of 1994 (shortly

before trial herein).   He testified that brain tumors in certain

parts of the brain may cause behavioral abnormalities and that

when the frontal lobe of the brain is intruded on or destroyed,

there likely will be some degree of dementia, which is a decrease

in intellectual function.

     Petitioners' first expert witness concluded that a brain

tumor such as Elvin's may cause a change in personality, an

inability to plan for the future, and a decrease in the ability

to remember and to make rational judgments.   He acknowledged that

the use of drugs and alcohol may intensify the physical and

mental changes caused by a brain tumor.   In offering his opinion,

he relied extensively on broad theories of expected behavioral

changes associated with a brain tumor in the frontal lobe, and he
                               - 56 -

acknowledged that the degree of dementia that occurs is not the

same in every individual.

     Petitioners' second expert witness is a physician

specializing in general psychiatry who conducted approximately 35

therapy sessions with Elvin after Elvin's brain tumor was

removed.    His sessions with Elvin were for post-operative therapy

relating to Elvin's depression, not for evaluation of Elvin's

behavior during the years in issue.

     Petitioners' second expert witness testified that, in his

opinion, Elvin's moods and behavior were significantly affected

by the brain tumor and by its removal.    He acknowledged that

Elvin's use of drugs and alcohol could have influenced Elvin's

behavior during the years in issue and that the criminal

investigation pending against Elvin at the time of his sessions

with Elvin could have affected Elvin as well.

     Petitioners' third expert witness is a psychiatrist.     He

examined Elvin for 2-1/2 hours in 1988 and conducted several

follow-up examinations.   He also reviewed reports prepared by

other doctors and other background material.    Besides his

interviews with Elvin, he did not speak to anyone about Elvin's

behavior during the years in issue.     He opined that Elvin's brain

tumor would have had a negative effect on Elvin's judgment and

behavior.   He acknowledged that the criminal investigation

pending against Elvin at the time of his interviews with Elvin

could have affected Elvin.
                               - 57 -

     Respondent's expert witness is a forensic psychiatrist.    He

has published on the subject of brain tumors.   He reviewed all of

the reports of petitioners' expert witnesses, and he reviewed

information obtained from Elvin's coworkers, associates, and

friends.    He met with Elvin, and he observed the testimony of all

of the witnesses at trial.

     Respondent's expert witness testified that because brain

tissue does not regenerate, if it is destroyed, it will not grow

back.    Consistent therewith, he testified that if deficiencies in

Elvin's judgment and behavior existed during the years in issue

because of damage the tumor had done to Elvin's brain, those

deficiencies would not disappear upon removal of the tumor.     He

opined that, because Elvin does not today suffer from a defect in

reasoning or judgment that impairs his ability to manage his very

successful automobile dealership, to make business decisions, and

to understand his responsibility to pay his Federal income taxes,

during the years in issue Elvin did not suffer from any such

defect.

     Respondent's expert witness opined that in light of all of

the evidence of Elvin's past and present behavior, Elvin's brain

tumor, during the years in issue, did not impair Elvin's judgment

as to financial and tax matters.   He opined that Elvin was

competent and was not mentally impaired during the years in

issue.
                               - 58 -

     Some of Elvin's acquaintances testified that, during the

years in issue, Elvin would forget scheduled appointments and

that his golf game suffered.   Elvin's coworkers and business

associates, however, testified that Elvin, during the years in

issue, appeared mentally sharp, was able to make rational

business decisions and to manage YOC, and that he appeared

otherwise mentally normal.

     During the years in issue, under Elvin's personal direction,

control, and management, YOC became increasingly more profitable.

Elvin organized several corporations, entered into contracts to

purchase real property, and negotiated with lending institutions

for loans.   According to YOC's employees, with whom Elvin met

regularly to review YOC's financial records, during the years in

issue, Elvin understood tax matters.    At several points of time

during the years in issue, Elvin was advised by YOC's employees

that the YOC-Elvin Account might not be treated as a loan account

if YOC was audited by respondent.

     During the years in issue, Elvin continued to manage his

business dealings and financial transactions.   Elvin was

considered competent in 1987 by a District Court to enter a plea

of guilty for 1983 to violation of sections 7201 and 7206(2).

     We believe that, during the years in issue, as a result of

the continual growth of the brain tumor Elvin suffered some

physical ailments, including headaches and loss of vision, but we

do not believe that these conditions resulted in an impairment of
                              - 59 -

Elvin's ability to make rational decisions, nor of Elvin's

ability to understand the requirement of filing true and correct

Federal income tax returns.   During the years in issue, Elvin

apparently never went to see a doctor, and Elvin apparently never

complained of any physical or mental ailments other than

headaches and, in early 1987, of blurred vision.

     In our opinion, petitioners' expert witnesses did not

adequately take into account Elvin's behavior during the years in

issue.   Petitioners' expert witnesses opined generally that

because of the size of the brain tumor and because of its

location in the frontal lobe of the brain, Elvin's judgment and

behavior must have been or would likely have been impaired.

Their opinions are inconsistent with the evidence before us.

     Respondent's expert witness' opinion, however, was

consistent with the objective evidence in the record.     He was a

particularly credible expert witness, and we agree with his

opinion.

     On the record before us, we conclude that during the years

in issue Elvin was capable of forming the intent to commit fraud

and that he did not suffer from a mental or physical disease or

defect that would negate that intent.

     Elvin instructed YOC's employees to pay his personal

expenses and to record those payments on YOC's books and records

as the payment of business expenses.    Elvin did not report these

payments as income on his individual Federal income tax returns.
                              - 60 -

Elvin disguised his personal expenses as YOC's business expenses.

Elvin also used YOC funds to purchase personal assets (e.g., the

Capriole and the Sea Ray Boat) and to pay expenses associated

with those assets.

     Elvin had substantial experience in business and financial

activities.   During the years in issue, under Elvin's direction

and control, YOC's profits increased significantly each year.

Elvin was advised by YOC's accountants that it was inappropriate

and risky to pay personal expenses with corporate funds.    Elvin

did not take this advice, and he continued to use YOC's funds for

his personal benefit.

     In light of the evidence before us, it is evident, and we so

hold, that Elvin knew that he received taxable income

substantially in excess of that reported on his 1983, 1984, 1985,

and 1986 Federal income tax returns and that Elvin consciously

intended to commit fraud when those returns were filed.    We

conclude that Elvin filed fraudulent Federal income tax returns

for 1984, 1985, and 1986.

     The same conduct that forms the basis for Elvin's liability

for fraud relates to YOC's liability for fraud for 1983, 1984,

and 1985.   A corporation can only act through its officers.    See

DiLeo v. Commissioner, 96 T.C. 858, 875 (1991).   Elvin was

responsible for the day-to-day operation of YOC, and Elvin was

involved in all major business decisions that were made on behalf
                             - 61 -

of YOC, and Elvin instructed YOC's employees to pay his personal

expenses.

     Every adjustment that we have sustained in this case relates

to transactions that occurred between Elvin and YOC.   Elvin also

signed YOC's 1983 corporate Federal income tax return.   Although

Elvin did not sign YOC's 1984 and 1985 corporate Federal income

tax returns, Elvin was advised by YOC's employees to stop paying

personal expenses with YOC's funds.   In light of the evidence in

this case, it is evident, and we so hold, that Elvin's conduct

led to the filing of fraudulent corporate Federal income tax

returns of YOC and that Elvin had knowledge of the erroneous

items that were reported thereon.

     For 1983, 1984, and 1985, we conclude that Elvin was fully

aware of the falsity of and of the underreporting of income that

were reflected on YOC's income tax returns.

     Respondent has established by clear and convincing evidence

that some portion of Elvin's income tax deficiencies for 1983,

1984, 1985, and 1986, and of YOC's income tax deficiencies for

1983, 1984, and 1985 is due to fraud.   For 1983, 1984, and 1985,

respondent, under section 6653(b)(1), need only prove that some

portion of the underpayment is due to fraud.   Therefore, for

1983, 1984, and 1985, Elvin and YOC are liable for the section

6653(b)(1) additions to tax for fraud on the entire underpayments

that we have determined herein.
                               - 62 -

       We must now determine what portion of the underpayments is

attributable to fraud for 1983, 1984, 1985, and 1986.    We must

make this determination because, as explained, for 1983, 1984,

and 1985, the section 6653(b)(2) increased interest for fraud

applies only to the portion of the underpayment that is

attributable to fraud.    Moreover, for 1986, the entire fraud

addition to tax applies only to the portion of the underpayment

that is attributable to fraud.    Sec. 6653(b)(1)(A) and (B).

       For 1983, 1984, and 1985, for purposes of the section

6653(b)(2) increased interest for fraud, respondent has the

burden of proving by clear and convincing evidence the portion of

the underpayment attributable to fraud.    Sec. 7454(a); Rule

142(b).    For 1986, after respondent proves that some portion of

the underpayment is attributable to fraud, the entire

underpayment is treated as attributable to fraud, except as to

any portion which the taxpayer proves is not attributable to

fraud.    Sec. 6653(b)(2); Houser v. Commissioner, T.C. Memo. 1995-

330.

       We now address that question with regard to each of the

various adjustments that we have sustained herein.


Fraud- and Non-Fraud-Related Adjustments Relating to Elvin

       With regard to Elvin, we conclude that for 1983, 1984, 1985,

and 1986, the adjustments relating to the YOC-Elvin Account are

not attributable to fraud.    During the years in issue and prior

to respondent's audit, Elvin made some significant repayments on
                                - 63 -

the balance in the account, disclosed the account on YOC's books

and records, and after the criminal tax investigation was

initiated, began to pay interest on the account.

     With regard to the Capriole and the Sea Ray Boat, we

conclude that adjustments relating thereto are attributable to

fraud.   The Capriole and the Sea Ray Boat effectively constituted

Elvin's personal assets, and YOC held mere nominal legal title

thereto.   Elvin used the Capriole and the Sea Ray Boat

exclusively for personal use.     All of the expenses incurred by

YOC for the Capriole and the Sea Ray Boat related to Elvin's

personal use.   Elvin created false documentation to make it

appear as if YOC received the Capriole in trade for a new

automobile.

     The adjustments relating to the motor home are not

attributable to fraud.   The motor home was received by YOC in

trade on a new automobile in a valid business transaction.     YOC

owned the motor home.    There is evidence in the record that the

motor home was used some of the time for business purposes.

     The adjustments relating to the Sylva Residence are not

attributable to fraud.   Petitioners presented some evidence to

the effect that the $65,000 transferred by YOC to purchase the

Sylva Residence represented a loan to NRDC instead of a

constructive dividend to Elvin.    Essentially, simultaneously with

the transfer of the $65,000, a $50,000 repayment was made by
                               - 64 -

Elvin or by Yarbrough Leasing to YOC relating to the Sylva

Residence.

     The adjustments relating to the travel and entertainment

expenses are not attributable to fraud.    There is some evidence

that indicates that General Motors encouraged Elvin to entertain

customers and that Elvin in fact entertained prospective

customers and repeat customers.    We sustained respondent's

adjustments relating to travel and entertainment expenses

because petitioners did not offer adequate substantiation.

     Respondent has not met her burden of proving that the

adjustments relating to the travel awards are attributable to

fraud.   Petitioners argue that the trips to Europe represented

business travel and that Elvin attended meetings relating to the

automobile business.    Although it may have been negligent for

Elvin to exclude these travel awards from his income, we do not,

in this case, believe it was fraudulent.

     The remaining adjustments for 1983, 1984, 1985, and 1986

relate to YOC's payment of Elvin's personal expenses and to other

benefits that YOC provided to Elvin.3   The schedules supra pp.

22-24 reflect the inherently personal nature of many of these

expenses.    We conclude that respondent has met her burden of




3
     These adjustments include employee benefits expense,
utilities expense, company vehicle expense, miscellaneous
expense, repair expense, outside services expense, depreciation,
salary expense, interest expense, demonstrator vehicles, and
improvements to Elvin's personal residence.
                             - 65 -

proving for 1983, 1984, 1985, and 1986 that these remaining

adjustments are attributable to fraud.


Fraud- and Non-Fraud-Related Adjustments Relating to YOC

     With regard to YOC, with the exception of the travel and

entertainment expenses, we believe and we so hold, that for 1983,

1984, and 1985 all of the adjustments relating to YOC that we

have sustained relating to the claimed business expenses of YOC

are attributable to fraud.

     Respondent, however, has not met her burden of proving that

the erroneously claimed travel and entertainment expenses are

attributable to fraud.

     The schedule set forth as an appendix to this opinion

provides separately for Elvin and for YOC a summary of the

adjustments we have sustained, the year and amount of the

adjustments, and a summary of which adjustments we conclude are

and are not attributable to fraud.


Substantial Understatement Addition to Tax

     Respondent also determined that Elvin (for 1983, 1984, 1985,

and 1986) and YOC (for 1983, 1984, and 1985) are liable under

section 6661 for an addition to tax equal to 25 percent of the

respective underpayments of tax.   For a taxpayer to be liable for

the substantial understatement addition to tax under section

6661, the amount of the understatement must exceed the greater of
                              - 66 -

10 percent of the tax required to be shown on the Federal income

tax return or $5,000.   Sec. 6661(b)(1)(A).

     For purposes of section 6661, the amount of the

understatement is reduced to the extent that the understatement

is attributable to items with respect to which the taxpayer's tax

treatment of the items is or was supported by substantial

authority.   Sec. 6661(b)(2)(B).

     We have concluded that petitioners fraudulently failed to

report substantial amounts of income on their respective Federal

income tax returns.   Petitioners did not have substantial

authority for their failure to report as income those adjustments

made by respondent which we have sustained.      We sustain the

adjustments made by respondent, and petitioners are liable for

the section 6661 additions to tax as determined by respondent.


                                    Decisions will be entered

                               under Rule 155.
                                                                 - 67 -
                                                     Adjustments to Elvin's Returns

    Adjustment We Have                    Attrib.                    Attrib.                       Attrib.               Attrib.
        Sustained             1983        to Fraud       1984        to Fraud              1985    to Fraud    1986      to Fraud

The YOC Elvin Account       $137,673         No        $ 17,510           No          $ 64,825         No     $180,906      No
Capriole                        -             -         170,635           Yes          133,179         Yes       -           -
Sea Ray Boat                   1,155         Yes           -               -              -             -        -           -
Motor Home                    10,697         No          16,802           No              -             -        -           -
Sylva Residence                 -             -          15,000           No              -             -        -           -
Travel/Entertainment          22,014         No          14,012           No            22,080         No        -           -
Employee Benefits Expense     25,676         Yes          1,768           Yes             -             -        -           -
Utilities Expense              2,461         Yes          3,281           Yes             -             -        -           -
Company Vehicle Expense        1,663         Yes          2,179           Yes            4,084         Yes       -           -
Miscellaneous Expense          1,945         Yes          2,869           Yes            1,228         Yes       -           -
Repair Expense                 9,693         Yes             312          Yes            2,227         Yes       -           -
Outside Services Expense          132        Yes             968          Yes            6,242         Yes       -           -
Depreciation Expense            -             -            -               -             2,400         Yes       -           -
Salary Expense                 8,203         Yes         10,600           Yes           21,411         Yes       -           -
Interest Expense                -             -           2,053           Yes           10,947         Yes       -           -
Demonstrator Vehicles
  Benefiting Elvin            14,352         No          18,167           No              22,708       No        -          -
Waterproofing Elvin's
  Personal Residence            -             -            -               -                -           -       15,136      Yes
Prizes and Awards              4,361         No            -               -              10,087       No        -           -




                                                      Adjustments to YOC's Returns

    Adjustment We Have                  Attrib.                      Attrib.                       Attrib.
        Sustained             1983      to Fraud         1984        to Fraud             1985     to Fraud

Employee Benefits           $25,676        Yes         $ 1,768            Yes         $     -          -
Utilities Expense             2,461        Yes           3,281            Yes               -          -
Travel/Entertainment         22,014        No           14,012            No              22,080      No
Company Vehicle Expense       1,663        Yes           2,179            Yes              4,084      Yes
Miscellaneous Expense         1,945        Yes           2,869            Yes              1,228      Yes
Repair Expense                9,693        Yes             312            Yes              2,227      Yes
Insurance Expense              -            -              383            Yes              4,200      Yes
Outside Services Expense         132       Yes             968            Yes              6,242      Yes
Depreciation Expense          1,363        Yes             915            Yes              1,751      Yes
Salary Expense                8,203        Yes          10,600            Yes             21,411      Yes
Interest Expense               -            -            2,053            Yes             10,947      Yes
