                            T.C. Memo. 1997-94



                       UNITED STATES TAX COURT



            MAURZAL FRIAS AND TERESA FRIAS, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4416-95.                      Filed February 24, 1997.



     Maurzal Frias and Teresa Frias, pro sese.

     Edith F. Moates, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined deficiencies in,

additions to, and accuracy-related penalties on petitioners'

Federal income taxes as follows:

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

     1991          $5,002               ---              $1,000
     1992           9,202              $469               1,840
                               - 2 -

All section references are to the Internal Revenue Code in effect

for the years in issue, and all Rules references are to the Tax

Court Rules of Practice and Procedure.

     After concessions,1 the issues for decision are:

     (1) Whether petitioners underreported their Schedule C gross

receipts for the years 1991 and 1992 in the amounts of $9,733 and

$16,403, respectively;

     (2) whether petitioners are entitled to Schedule C

deductions for car and truck expenses for the years 1991 and 1992

in amounts greater than those allowed by respondent; and

     (3) whether petitioners are liable for accuracy-related

penalties under section 6662(a) for negligence or disregard of

rules or regulations.

                         FINDINGS OF FACT

     Petitioners, husband and wife, lived in Tulsa, Oklahoma, at

the time the petition was filed in this case.

     During 1991 and 1992,2 Mr. Frias was self-employed primarily

as a house painter.   He also worked as a musician and magician.

Petitioners reported their gross income and deductions on one

Schedule C; they described their principal business as

"Painting/Music".   Petitioners were cash basis taxpayers.

Petitioners' tax returns were prepared by Richard Gardner.


     1
         On brief, petitioners have conceded the sec. 6651(a)
issue.
     2
        Unless otherwise indicated, all descriptions refer to the
1991 and 1992 tax years.
                                 - 3 -

Petitioners maintained four bank accounts, two at the Bank of

Oklahoma, one at the Bank of Tulsa, and one at Sooner Federal

Savings and Loan.

     During an audit of petitioners' 1991 and 1992 Federal

individual income tax returns (tax returns), the revenue agent

analyzed petitioners' bank deposits and determined that

petitioners had underreported their gross income.         Petitioners

did not report any income from magic shows or band activities on

their tax returns.

     After the audit began, Mr. Gardner prepared detailed

schedules of petitioners' bank deposits, including a calculation

of "total income", for the 1991 and 1992 years.         Cash withheld

from deposits3 was reflected on Mr. Gardner's schedules but was

not included in the total deposits.

     Petitioners maintained check registers.         The deposits

recorded in petitioners' check registers do not include cash

withheld from the deposits.   A summary of total deposits, as

calculated by the IRS, Mr. Gardner, and petitioners, for 1991

follows:

                     Respondent's                          Petitioners'
                        Audit            Mr. Gardner     Check Registers

Bank of Oklahoma       $18,585             $18,707           $18,711
  Withheld cash          2,320               ---               ---
Bank of Tulsa           33,226              34,956            35,097
  Withheld cash          6,930               ---               ---
Sooner Fed. S&L         13,982              13,981            13,571
  Withheld cash          1,416               ---               ---

     3
        When petitioners deposited checks, they often withdrew
cash, depositing less than the amount of the check.
                                   - 4 -

Bank of Oklahoma               5              ---              ---

  Total                76,464         67,644           67,379
Schedule C gross receipts reported on petitioners' 1991 tax

return were $57,501.    "Total Income", as recalculated by Mr.

Gardner after the start of the audit, for 1991 was $64,281.

Petitioners made cash deposits--not to be confused with withheld

cash--during 1991 of $3,090.       Mr. Gardner did not consider these

cash deposits as part of petitioners' Schedule C gross receipts.

Respondent determined that petitioners had underreported their

gross receipts for 1991 by $9,733.         (Respondent did not consider

all deposits to be gross receipts; her revenue agent backed out

loan proceeds, account transfers, and gifts.)

     A summary of total deposits, as calculated by the IRS, Mr.

Gardner, and petitioners, for 1992 follows:

                       Respondent's                        Petitioners'
                          Audit            Mr. Gardner   Check Registers

Bank of Oklahoma             $63              $2,448          $2,492
  Withheld cash              520               ---             ---
Bank of Tulsa             68,398              68,348          48,886
  Withheld cash            4,029               ---             ---
Sooner Fed. S&L           11,570              11,115           7,796
  Withheld cash              935               ---             ---

Total                    85,515               81,911          59,174

Schedule C gross receipts reported on petitioners' 1992 tax

return were $61,553.    "Total Income", as recalculated by Mr.

Gardner after the start of the audit, for 1992 was $66,345.

Petitioners made cash deposits during 1992 totaling $16,476.

These cash deposits were not considered as part of petitioners'

Schedule C gross receipts as recalculated by Mr. Gardner.
                                - 5 -

Respondent determined that petitioners had underreported their

gross receipts for 1992 by $16,403.     (Again, respondent did not

consider all deposits to be gross receipts; her revenue agent

backed out loan proceeds, account transfers, and gifts.)

Auto and Truck Expense

     Petitioners had three vehicles that they used in conjunction

with their business activities.    Petitioners' 1991 Schedule C

shows 28,966 business miles and 4,000 personal miles.

Petitioners did not keep contemporaneous logs of business miles

driven; the mileage numbers on their tax returns were estimates.

     At the time of the audit, petitioners reconstructed their

business mileage for 1991.    Respondent accepted petitioners'

reconstruction and allowed 25,600 business miles for 1991.

     At the time their case was heard by an IRS Appeals officer,

petitioners reconstructed their 1991 mileage to reflect a total

of 29,560 business miles.    In their trial memorandum to this

Court, petitioners reconstructed their 1991 mileage to reflect a

total of 36,9204 business miles.

     Petitioners' 1992 Schedule C reflects total miles of 38,286

with business miles of 34,786 and personal miles of 3,500.       At

the time of the audit, petitioners reconstructed their business

mileage for 1992.    Respondent accepted petitioners'

reconstruction of 28,909 business miles for 1992 but deducted



     4
          Petitioners' exhibit incorrectly totals the miles at
30,320.
                                 - 6 -

5,000 miles for commuting mileage--20 miles a day--in light of

the United States Supreme Court's decision in Commissioner v.

Soliman, 506 U.S. 168 (1993).

     At the time they submitted their trial memorandum to this

Court, petitioners reconstructed their 1992 mileage to reflect a

total of 40,045 business miles.

                                OPINION

A.   Additional Income

     Section 6001 requires taxpayers to maintain records

sufficient to establish the amount of their gross income and

deductions.    Where taxpayers fail to keep adequate records, the

Commissioner is authorized by section 446(b) to reconstruct their

income by any reasonable method.     Petzoldt v. Commissioner, 92

T.C. 661, 687, 693 (1989).   Use of the bank deposits method for

reconstructing income is well established.     DiLeo v.

Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir.

1992); Estate of Mason   v. Commissioner, 64 T.C. 651, 656 (1975),

affd. 566 F.2d 2 (6th Cir. 1977).    Under the bank deposits

method, there is a rebuttable presumption that all funds

deposited to a taxpayer's bank account constitute taxable income.

Price v.    United States, 335 F.2d 671, 677 (5th Cir. 1964);

Hague Estate v. Commissioner, 132 F.2d 775, 777-778 (2d Cir.

1943), affg. 45 B.T.A. 104 (1941); DiLeo v. Commissioner, supra

at 868.    The Commissioner must take into account any nontaxable

sources of deposits of which she is aware in determining the

portion of the deposits that represent taxable income, but she
                               - 7 -

is not required to trace deposits to their source.   Petzoldt v.

Commissioner, supra at 695-696; Estate of Mason v. Commissioner,

supra at 657.

     Respondent's revenue agent analyzed petitioners' bank

accounts.   She took the net deposits shown on the bank

statements, added back any cash withheld, and subtracted out any

deposits that were identifiable as nontaxable.

     Petitioners argued at trial5 that their check registers show

their gross income.   We find the check registers to be unreliable

as they do not tie in with petitioners' bank statements.

Petitioners conceded at trial that they did not report any income

from magic shows or band activities.   Petitioners further argue

that the cash deposits into their bank accounts are not income

because the cash came from other bank accounts.   Petitioners,

however, have offered no proof to support their claim other than

vague, uncorroborated testimony.   Petitioners failed to prove

that respondent's reconstruction of income is incorrect.    Rule

142(a). Therefore, we sustain respondent's determination on this

issue.

B.   Deduction for Mileage

     Petitioners admitted that their auto logs were estimates and

not contemporaneously made, as required by section 1.274-

5(c)(2)(ii)(a), Income Tax Regs.   Respondent allowed petitioners'

     5
        Petitioners' brief consists of a two-page letter in which
they assert that no additional tax is owed. The mileage and
negligence issues are not addressed.
                                   - 8 -

auto mileage based on their initial reconstructions submitted at

the time of the audit.    Petitioners' ever increasing claims for

additional mileage are unsubstantiated.         This issue was not

addressed by petitioners on brief.         Deductions are a matter of

legislative grace; petitioners have the burden of showing that

they are entitled to any deduction claimed.         New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934).         We find that petitioners

have not proven that they are entitled to mileage expenses in

excess of those allowed by respondent.

C.   Section 6662(a) Accuracy-Related Penalty

     Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

one or more of the items set forth in section 6662(b), such as

negligence or disregard of rules or regulations.         Respondent

determined that the entire underpayment of petitioners' tax was

due to negligence or intentional disregard of rules or

regulations.    Sec. 6662(b)(1).    As in the case of the predecessor

section covering the addition to tax for negligence, section

6653(a), petitioners bear the burden of proof on the penalties in

issue.    Rule 142(a); Neely v. Commissioner, 85 T.C. 934, 947

(1985).    Negligence includes a failure to make a reasonable

attempt to comply with the provisions of the internal revenue

laws.    Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Negligence is the failure to exercise due care or the failure to

do what a reasonable and prudent person would do under the
                                - 9 -

circumstances.    Neely v. Commissioner, supra.     Disregard includes

any careless, reckless, or intentional disregard of rules or

regulations.   Sec. 6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.

     The accuracy-related penalties of section 6662 do not apply

with respect to any portion of an underpayment if it is shown

that there was reasonable cause for such portion and the taxpayer

acted in good faith with respect to such portion.         Sec.

6664(c)(1).    The determination of whether petitioners acted with

reasonable cause and in good faith depends upon the pertinent

facts and circumstances.    Sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioners have conceded that they failed to keep accurate

books and records and that they omitted entire sources of income

from their tax returns.    Petitioners have offered no evidence

that they were not negligent and do not address the issue on

brief.   We cannot be sure that petitioners intended to abandon

this issue, but in any case respondent's determination of the

applicable penalty must be sustained as petitioners have not met

their burden of proof on this issue.

     To reflect the foregoing and concessions of the parties,

                                             Decision will be entered

                                        under Rule 155.
