                        T.C. Memo. 2003-111



                      UNITED STATES TAX COURT



                   CHARLES SHAW, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7752-00.             Filed April 18, 2003.



     A. Albert Ajubita and Wanda L. Theriot, for petitioner.

     Emile L. Hebert III, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax, penalties, and additions to tax

as follows:
                                  - 2 -

                              Addition to tax and penalties
Year     Deficiency     Sec. 6651(f)     Sec. 6654     Sec. 6663

1993        $52,022     $38,266.50        $2,137.78
1994         89,820      67,365.00         4,660.89
1995        146,427                                      $109,820.25

       Respondent concedes that petitioner is not liable for the

addition to tax for fraudulent failure to file for 1993 and 1994

under section 6651(f).     Respondent also determined that, if

petitioner is not liable for fraudulent failure to file under

section 6651(f) for 1993 and 1994, then he is liable for fraud

under section 6663(a) for those years.       Alternatively, respondent

determined that petitioner is liable for an addition to tax for

failure to timely file under section 6651(a) and an accuracy-

related penalty under section 6662(a) for 1993-95.

       After concessions, the issues for decision are:

       1.   Whether petitioner had unreported gross receipts in 1993

of $252,006, as petitioner contends, or $345,172, as respondent

contends.      We hold that he failed to prove that he had unreported

gross receipts of less than $345,172.

       2.   Whether petitioner had costs of goods sold of

$568,937.79 in 1993, $504,199.79 in 1994, and $560,235.41 in

1995, as petitioner contends, or $74,012 in 1993, $201,963 in

1994, and $101,395 in 1995, as respondent contends.         Respondent

determined that petitioner’s costs of goods sold were $199,073 in

1993, $213,564 in 1994, and $166,142 in 1995.         We hold that

petitioner failed to prove that his costs of goods sold were more
                                 - 3 -

than respondent determined, and that respondent failed to prove

that his costs of goods sold were less than respondent

determined.

     3.    Whether petitioner may deduct a larger amount for

business expenses than respondent allowed for each year in issue.

We hold that he may not.

     4.    Whether petitioner is liable for fraud under section

6663(a) for 1993-95.     We hold that he is not because respondent

did not prove by clear and convincing evidence that petitioner’s

gross receipts exceeded his costs of goods sold for any of the

years in issue.

     5.    Whether petitioner is liable for the accuracy-related

penalty under section 6662 for 1993-95.       We hold that he is.

     6.    Whether petitioner is liable for the addition to tax

under section 6654 for failure to pay estimated tax for 1993 and

1994.     We hold that we lack jurisdiction to decide this issue

because petitioner filed returns for 1993 and 1994.

     7.    Whether the statute of limitations bars assessment of

tax for 1993.     We hold that it does not because respondent proved

by a preponderance of the evidence that the 6-year period to

assess tax applies.     Sec. 6501(3)(1)(A).

     Unless otherwise specified, section references are to the

Internal Revenue Code as amended, and Rule references are to the

Tax Court Rules of Practice and Procedure.
                                - 4 -

                           FINDINGS OF FACT

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

A.   Petitioner

     Petitioner resided in Gretna, Louisiana, when the petition

was filed.    He was born and raised in China, where he had the

equivalent of a high school education in the United States.

     Petitioner has lived in the United States since 1984.

Petitioner’s Chinese name was Xia Zhi Wu.     Petitioner had

brothers named Xia Hung, also known as Steven Morgan, who lived

in New Orleans in 1984, and Xia Zhi Yuang, who lived in Shanghai,

China.

     In 1984, Steven Morgan owned a retail framing shop on

Bourbon Street in the French Quarter in New Orleans (Bourbon

Street store).    Petitioner worked for Steven Morgan at the

Bourbon Street store after he arrived in the United States.

     Petitioner changed his name to Charles Shaw when he became a

U.S. citizen in 1986.    He married Gwendolyn Shaw (Ms. Shaw) in

1986.    They bought the Bourbon Street store from Steven Morgan in

1986 and added retail sales of masks, dolls, T-shirts, posters,

and similar merchandise.    They had a daughter who was less than

10 years old during the years in issue.

     Petitioner and Ms. Shaw were divorced on September 19, 1991.

They did not remarry and were not married at any time during the

years in issue.    However, petitioner and Ms. Shaw lived together
                                - 5 -

in Gretna in 1993 and part of 1994, and in New Orleans during the

remainder of 1994 and 1995.    Ms. Shaw became the sole owner of

the Bourbon Street store sometime before 1993.

     In 1992, petitioner owned a residence at 432 Homes Boulevard

in Gretna.    In 1995, petitioner paid $5,279 in interest and

$2,496 in real estate taxes with respect to his personal

residence.

B.   Petitioner’s Business

     In 1993, petitioner started a sole proprietorship known as

Far Eastern Artworks Wholesale (Far Eastern) in Terrytown,

Louisiana.    Far Eastern did business as both a retailer and a

wholesaler.

     1.   Merchandise

     During 1993-95, Far Eastern sold gifts, souvenirs, and Mardi

Gras type merchandise.    In 1993-95, petitioner bought goods for

resale from Shanghai Charles Artware Co., Ltd. (Shanghai

Charles), Jindge Zhen Huaxia Artware Co., Ltd. (Jindge Zhen),

Bizehen, Shanghai Shen Hong Corp. (Shanghai Shen), Kuang-Yu Wen,

Henry’s Gifts International Inc. (Henry’s Gifts), Boxter Customer

Service, The Express Publishing, Mardi Gras Imports, Graphtex,

United Gifts, Southland Shirts, Cunningham Posters, Sam’s Club,

and Jefferson Variety Store.    Petitioner paid $8,439 to buy goods

for resale from Henry’s Gifts in 1993.    Shanghai Charles, Jindge
                                - 6 -

Zhen, Bizhen, Shanghai Shen, and Kuang-Yu Wen were located in

China.

     2.     Shipping Charges and Customs House Brokers

     Petitioner obtained 70 to 75 percent of his merchandise from

China.    Petitioner paid shipping charges of $38,682 in 1993,

$18,678 in 1994, and $21,401 in 1995 to buy merchandise for Far

Eastern to resell.

     Petitioner was required to file forms with the U.S. Customs

Service (Customs Service) when he imported goods to the United

States.    He used customs house brokers to prepare and file

documents with the Customs Service on his behalf in the years in

issue.    One of the customs house brokers petitioner used was

Panalpina, Inc. (Panalpina).    Petitioner also used The Hipage

Co., Inc., and Southern Export Services as customs house brokers

in 1993.

     3.     Petitioner’s Business Expenses

     In 1993-95, petitioner incurred business expenses for

electricity, gas, garbage removal, termite control, telephone,

and travel.

     Petitioner traveled to China during each of the years in

issue to attend craft and trade shows and to identify merchandise

that he could sell.    He incurred business travel expenses of

$4,188 in 1994.
                                - 7 -

     Petitioner paid $50 per day for about 250 days per year to

each of two individuals to help him with the business (e.g.,

unloading containers) in 1993-95.

     4.     Petitioner’s and Ms. Shaw’s Bank Accounts

     During 1993-95, petitioner was a signatory on six bank

accounts (petitioner’s bank accounts) that he used for his

business.

     Ms. Shaw also had a business bank account.    Some of the

gross receipts from her store were deposited in petitioner’s bank

accounts in 1993-95.

     The following amounts were deposited in petitioner’s bank

accounts:    $549,478 in 1993, $612,380 in 1994, and $603,049 in

1995.1    These deposits included some of Ms. Shaw’s income from

the Bourbon Street store, which was nontaxable to petitioner, and

the following additional amounts that are nontaxable to

petitioner:2




     1
        This included some deposits of income from Ms. Shaw’s
business, which respondent concedes is a nontaxable source for
petitioner.
     2
        Respondent concedes that the following amount of Ms.
Shaw’s income was deposited in petitioner’s bank accounts:
$38,834 in 1993, and $12,085 in 1994, and that those deposits
were not taxable to petitioner. Petitioner contends that more
than $38,834 of Ms. Shaw’s gross receipts was deposited in his
bank accounts in 1993. We discuss petitioner’s contention below
in par. B-1 of the opinion.
                                 - 8 -

            Item                  1993        1994       1995

        Interest income            $793        $410       $225
        Rental income             2,614      11,379     12,600
        Loans received           68,000     125,000     27,000
        Credit card advances       –-         4,000       –-
        Tax refunds                 138         278        548
        Insurance proceeds       25,000        –-         –-
        Transfers between
         accounts                  –-        27,500      3,400
        Real property sale       68,427        –-         –-

       Total amounts of deposits,
     not including deposits of
     Ms. Shaw’s income:         164,972     168,567     43,773

        Petitioner received no nontaxable or excludable income,

receipts, cash, or other assets during 1993-95, other than as

described above.     He received no gifts or inheritances in 1993-

95.3

C.      Petitioner’s Income Tax Returns

        Petitioner and Ms. Shaw met with a representative of H & R

Block who prepared joint 1993 and 1994 Federal income tax returns

for them.     They did not take any documents to H & R Block.

Petitioner and Ms. Shaw timely filed those returns.     They did not

report any income or deductions relating to Far Eastern on their

1993 or 1994 returns.     The income and expenses reported on




        3
        Contrary to the stipulation of facts, petitioner
testified that he received gifts or loans in 1993-95. However,
he does not contend that he deposited those alleged gifts in his
bank accounts in 1993-95. Thus, his testimony about those
alleged gifts does not affect the amount of petitioner’s
unreported gross receipts in 1993-95.
                               - 9 -

petitioner’s and Ms. Shaw’s 1993 and 1994 returns related to Ms.

Shaw’s store.

     Petitioner timely filed his 1995 return as a single person.

On that return, he reported $221,000 in gross receipts from Far

Eastern, but he understated gross receipts from Far Eastern by

$338,276, and overstated net rental income by about $5,000.

D.   Respondent’s Determination

     Revenue Agent Claude Williams (Williams) began to examine

petitioner’s 1993-95 returns before July 23, 1998.    Petitioner

cooperated fully with Williams during the examination.

Petitioner signed a document allowing Williams to review

petitioner’s bank records.   Williams asked petitioner to complete

a lengthy form to provide information about his personal living

expenses during the years in issue.    Petitioner completed the

form with information that Williams believed was fair and

complete.

     Petitioner did not have many records for Far Eastern.    As a

result, Williams reconstructed petitioner’s gross receipts for

1993-95 using the bank deposits method.    To reduce photocopying

costs, Williams did not obtain copies of petitioner’s bank

deposit records or canceled checks for the years in issue.

     Williams obtained records for Far Eastern from the Customs

Service, Panalpina, and Henry’s Gifts.    He used those records to

try to reconstruct petitioner’s shipping costs.    The Panalpina
                              - 10 -

employee who gave Panalpina’s records of petitioner’s imports to

Williams during the audit of petitioner’s 1993-95 tax years was

transferred from New Orleans to Chicago, where she was a manager

or vice president.   She was subsequently fired or forced to

resign from Panalpina.

     Petitioner gave Williams a document purporting to be a

summary of petitioner’s purchases from Jindge Zhen in 1993-95.

Williams included the amounts from that summary in petitioner’s

costs of good sold for 1993-95.   However, Williams did not

include any payments by petitioner to The Hipage Co., Inc.,

Southern Export Services, Bizehen, Shanghai Shen, Boxter Customer

Service, Sam’s Club, Jefferson Variety Store, and Kuang-Yu Wen in

petitioner’s costs of goods sold for 1993-95.   Respondent’s

determination of petitioner’s costs of goods sold is based solely

on petitioner’s purchases from Henry’s Gifts and Jindge Zhen and

amounts paid to Panalpina for brokerage services in 1993-95.

     Respondent mailed a notice of deficiency to petitioner for

1993-95 on April 11, 2000.

E.   Invoice Summaries of Shanghai Charles and Shanghai Shen

     In anticipation of the trial in this case, petitioner

obtained documents from one of his brothers in China which

purport to be summaries of petitioner’s purchases in 1993-95 from

Shanghai Charles and Shanghai Shen.
                               - 11 -

                               OPINION

A.   Respondent’s Determination

     Respondent determined that petitioner had unreported income

of $139,425 in 1993, $239,655 in 1994, and $375,637 in 1995.

Petitioner disputes respondent’s determination of his gross

receipts for 1993 and costs of goods sold and business expenses

for each year in issue.

     Petitioner must keep records which are sufficient to

calculate his tax liability.   Sec. 6001.   Where, as here, a

taxpayer keeps inadequate records, the Commissioner may

reconstruct the taxpayer’s gross receipts and costs to determine

the taxpayer’s unreported income.    Webb v. Commissioner, 394 F.2d

366, 373 (5th Cir. 1968), affg. T.C. Memo. 1966-81.    As the U.S.

Court of Appeals for the Fifth Circuit said in Webb v.

Commissioner, supra at 373:

     Arithmetic precision was originally and exclusively in
     * * * [the taxpayer’s] hands, and he had a statutory
     duty to provide it. He did not have to add or
     subtract; rather, he had simply to keep papers and data
     for others to mathematicize. Having defaulted in his
     duty, he cannot frustrate the Commissioner’s reasonable
     attempts by compelling investigation and recomputation
     under every means of income determination. * * *

     Respondent reconstructed petitioner’s income for 1993-95

using the bank deposits method because petitioner did not have

adequate books and records.    Petitioner points out that Williams

did not account for amounts petitioner paid to vendors other than

Jindge Zhen and Henry’s Gifts even though the documents that
                              - 12 -

Williams obtained from Panalpina listed other vendors.

Petitioner contends that Williams’ failure to obtain information

from other vendors about how much petitioner paid them in the

years in issue means that the determination of costs of goods

sold was arbitrary.   We disagree.

     Williams’ analysis is a reasonable basis for the notice of

deficiency.   Thus, the notice of deficiency is presumed to be

correct, and petitioner bears the burden of proving that the

deficiencies were less than determined by respondent.4   Welch v.

Commissioner, 204 F.3d 1228, 1230 (9th Cir. 2000), affg. T.C.

Memo. 1998-121; Calhoun v. United States, 591 F.2d 1243, 1245

(9th Cir. 1978); Clayton v. Commissioner, 102 T.C. 632, 645

(1994); DiLeo v. Commissioner, 96 T.C. 858, 869 (1991), affd. on

other grounds 959 F.2d 16 (2d Cir. 1992); Parks v. Commissioner,

94 T.C. 654, 660 (1990).   That burden of proof is important

because petitioner lacked important business records.

Conversely, there are gaps in Williams’ analysis which are

important to issues where respondent has the burden of proof;

i.e., whether petitioner is liable for fraud, and whether the

deficiencies are larger than respondent determined.




     4
        Sec. 7491(a) does not apply because the examination for
each year in issue commenced before July 23, 1998.
                                   - 13 -

B.   Whether Petitioner Had Unreported Income in 1993-95

     1.      Petitioner’s Gross Receipts for 1993

     Respondent contends that petitioner had unreported gross

receipts of $345,172 for 1993.       Petitioner contends that he had

unreported gross receipts of $252,006 for 1993.

     Respondent concedes that $38,834 of petitioner’s bank

deposits in 1993 was from Ms. Shaw’s business, a nontaxable

source.     Petitioner contends that, because Ms. Shaw deposited

$132,393 from her business in her bank accounts in 1994, and

because she testified that her gross receipts were similar for

1993 and 1994, $132,000 from Ms. Shaw’s business was deposited in

his bank accounts in 1993.

     There is no evidence that more than $38,834 of Ms. Shaw’s

gross receipts was deposited in petitioner’s bank accounts in

1993.     Thus, because petitioner has the burden of proving that

his gross receipts were less than respondent determined, we

conclude that he had unreported gross receipts of $345,172 in

1993.5

     2.      Costs of Goods Sold

             a.   Positions of the Parties

     Respondent determined that petitioner had costs of goods

sold of $199,073 for 1993, $213,564 for 1994, and $166,142 for



     5
        Petitioner concedes that he had unreported gross receipts
of $431,728 for 1994 and $338,276 for 1995.
                                - 14 -

1995.     Petitioner contends that he had costs of goods sold of

$568,937.79 in 1993, $504,199.79 in 1994, and $560,235.41 in

1995.     Petitioner bears the burden of proving that his costs of

goods sold for 1993-95 were greater than respondent determined.

Rule 142(a)(1).

     Respondent contends that petitioner had costs of goods sold

of $74,012 for 1993, $201,963 for 1994, and $101,395 for 1995.

Respondent bears the burden of proving that costs of goods sold

are less than respondent determined.       Id.

             b.   Whether Documents Bearing the Names Shanghai
                  Charles, Shanghai Shen, and Jindge Zhen Are
                  Admissible

        Petitioner offered what appears to be summaries on company

invoice forms bearing the names of Shanghai Charles (Exhibit 79-

P), Shanghai Shen (Exhibit 80-P), and Jindge Zhen (Exhibit 81-P)

to show the amounts he paid to those companies in 1993-95.

Exhibits 79-P and 80-P are dated “Jane 7 2001” (sic).       Exhibit

81-P is not dated.     Exhibits 79-P and 81-P are stamped with a

company seal but not signed.     Exhibit 80-P is signed by an

unidentified person but not stamped with a company seal.       The

summaries state that petitioner paid the following amounts for

merchandise:

            Merchant                1993           1994         1995

        Shanghai Charles          $194,000       $181,500    $149,000
        Shanghai Shen              115,000         94,500     103,500
        Jindge Zhen                174,500        131,600     154,400
          Total                    483,500        407,600     406,900
                               - 15 -

     The parties stipulated that we may treat Exhibits 90-J and

91-J as statements of petitioner’s brother, Xia Zhi Yuang (Xia

Zhi Yuang’s statements), in China.      According to those

statements, the information in Exhibits 79-P and 80-P was created

by accountants for Shanghai Charles and Shanghai Shen in 2001 at

petitioner’s request and then translated into English.

Petitioner contends that Xia Zhi Yuang’s statements show that all

of the requirements for admissibility under rule 803(6) of the

Federal Rules of Evidence6 have been met for Exhibits 79-P, 80-P,

and 81-P.   We disagree.   There is no evidence that Exhibits 79-P,

80-P, or 81-P were contemporaneously made, were regularly kept,

were based on information transmitted by a person with knowledge,

or that the witness was qualified to provide the information.

Exhibits 79-P, 80-P, and 81-P lack trustworthiness because they



     6
         Fed. R. Evid. 803(6) provides as follows:

          (6) Records of regularly conducted activity.--A
     memorandum, report, record, or data compilation, in any
     form, of acts, events, conditions, opinions, or
     diagnoses, made at or near the time by, or from
     information transmitted by, a person with knowledge, if
     kept in the course of a regularly conducted business
     activity, and if it was the regular practice of that
     business activity to make the memorandum, report,
     record, or data compilation, all as shown by the
     testimony of the custodian or other qualified witness,
     * * * unless the source of information or the method or
     circumstances of preparation indicate lack of
     trustworthiness. The term “business” as used in this
     paragraph includes business, institution, association,
     profession, occupation, and calling of every kind,
     whether or not conducted for profit.
                                - 16 -

were unaccompanied by any underlying business records and because

the accountants and translators are not identified in the record.

Fed. R. Evid. 803(6); see also Fed. R. Evid. 1006.

     Petitioner contends that this case is like Gerling Intl.

Ins. Co. v. Commissioner, 98 T.C. 640 (1992), in which we

admitted summaries.    We disagree.   The summaries in Gerling were

made at or near the time of the events recorded in the summaries

and were regularly kept.     Id. at 652-653.   That is not the case

here.   We conclude, as we did at trial, that Exhibits 79-P, 80-P,

and 81-P are inadmissible.

           c.     Whether Petitioner’s Costs of Goods Sold Were
                  Greater Than Respondent Determined

     Petitioner contends that Exhibits 79-P, 80-P, and 81-P show

that his costs of goods sold were greater than respondent

determined.     We disagree because, as discussed above at paragraph

B-2-b, those exhibits are not in evidence.

     Petitioner contends that Williams failed to count all of

petitioner’s costs of goods sold because Panalpina’s numerical

codes made it difficult to retrieve all records of petitioner’s

imports.   Petitioner also contends that the Panalpina records are

unreliable because the Panalpina employee who gave them to

respondent was not competent to do so because she was fired or

forced to resign.

     Petitioner’s criticism of Williams and Panalpina misses the

mark because petitioner bears the burden of proving that his
                                    - 17 -

costs of goods sold for the years in issue were greater than

respondent determined.

            d.      Whether Petitioner’s Costs of Goods Sold Were Less
                    Than Respondent Determined

     Respondent contends that petitioner’s costs of goods sold

were less than the amounts determined in the notice of

deficiency.      Respondent contends that respondent erroneously

credited payments to Jindge Zhen in calculating petitioner’s

costs of goods sold for 1993-95 as a result of relying on a

document that is unreliable.        Respondent determined and contends

that petitioner had cost of goods sold as follows:

                           Notice of Deficiency       Litigating Position1

 Supplier                1993     1994       1995   1993      1994       1995

Henry’s Gifts            –-     $73,189    $4,050   $8,439   $73,189    $4,050
Panalpina             $24,573       8,774   7,692   24,573     8,774     7,692
Jindge Zhen           174,500   131,600 154,400       –-      56,000    58,100
Shanghai Charles         --          --      --     41,000    64,000     9,000
Express Publishing       --          --      --       –-        –-       1,260
Certified Merchant Svcs. –-          --      --       –-        –-       1,175
Mardi Gras Imports       --          --      --       –-        –-       6,145
Graphtex                 –-          --      --       --        --       2,519
United Gift and Novelty --           --      --       –-        –-       8,958
Southland Shirts         --          --      --       –-        –-       1,163
Cunningham Enterprises   --          --      --       –-        –-       1,333
                                2
  Total               199,073     213,563 166,142   74,012   201,963   101,395

     1
        Respondent’s litigating position is based on amounts
contained in the stipulation. However, the parties did not stipulate
that these amounts included all of petitioner’s costs of goods sold.
     2
        Respondent determined that petitioner’s costs of goods sold
were $213,564 for 1994. The $1 discrepancy is unexplained in the
record.

     Respondent bears the burden of proof on this point.               Rule

142(a)(1).       To meet this burden, respondent must show that

petitioner’s cost of goods sold for each year in issue was less
                             - 18 -

than respondent determined for that year.    Respondent does not

meet this burden by pointing out gaps in petitioner’s proof.     In

calculating petitioner’s costs of goods sold, respondent did not

account for any payments to The Hipage Co., Inc., Southern Export

Services, Bizehen, Shanghai Shen, Boxter Customer Service, Sam’s

Club, Jefferson Variety Store, and Kuang-Yu Wen in 1993-95,

despite the fact that these are companies with which Far Eastern

did business during the years in issue.   Williams did not obtain

canceled checks from petitioner’s bank accounts for the years in

issue because they were numerous and he thought that his

supervisor would not approve the cost of copying them.    This

suggests that respondent did not count all of petitioner’s costs

in calculating petitioner’s costs of goods sold.   Respondent’s

apparent failure to account for payments to some of the companies

with which Far Eastern did business and respondent’s failure to

obtain petitioner’s checks casts doubt on respondent’s contention

that petitioner’s costs of goods sold is less than respondent

determined.

     Respondent has not shown that petitioner’s costs of goods

sold were less than respondent determined.

          e.   Conclusion

     We conclude that, because neither party has proven

otherwise, petitioner had costs of goods sold as respondent
                                - 19 -

determined in the amounts of $199,073 in 1993, $213,564 in 1994,

and $166,142 in 1995.

     3.     Petitioner’s Business Expense Deductions

     Petitioner contends that he may deduct greater amounts for

business expenses than respondent allowed.     We disagree for

reasons discussed below.

             a.   Insurance

     Petitioner contends that he may deduct insurance expenses of

$2,803.25 in 1994 and $2,280 in 1995.     There are four canceled

checks in evidence written by petitioner to insurance companies

in 1994 and 1995.     However, there is no evidence that these

payments were for petitioner’s business.

             b.   Supplies

     Petitioner contends that three checks that he wrote to Sam’s

Club, Home Supplies, and Jefferson Variety Store, Inc., were

business expenses.     However, there is no evidence that these

payments were for business expenses.

             c.   Travel

     The parties stipulated that petitioner incurred business-

related travel expenses of $4,188 in 1994.     There is no evidence

showing the amount of petitioner’s travel expenses for 1993 or

1995.     Petitioner contends that he may deduct expenses that he

and Ms. Shaw incurred to attend a festival of rural craftsmen in

China in each year in issue.     However, there is no evidence
                                  - 20 -

showing how much he spent to travel to the festivals.    Thus,

petitioner may not deduct more than $4,188 for travel expenses in

1994 and $0 for 1993 and 1995.

            d.   Other Expenses

     Respondent determined that petitioner did not substantiate,

and therefore may not deduct, expenses for electricity,

telephone, sewage, water, labor, and transportation used in his

business.    Petitioner asks us to estimate the amount of these

expenses under Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir.

1930); see also Bayou Verret Land Co. v. Commissioner, 450 F.2d

850, 858 (5th Cir. 1971), affg. 52 T.C. 971 (1969).    The taxpayer

must present credible evidence that provides a rational basis for

our estimate.    Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

Petitioner offers only the vaguest estimates of his costs.     It is

not appropriate under Cohan for us to guess the amounts of his

expenses.    Thus, petitioner may not deduct any amounts for

miscellaneous business expenses.

     4.     Conclusion as to Unreported Income

     Petitioner has not shown that he had unreported income less

than $139,425 in 1993, $239,655 in 1994, and $375,637 in 1995, as

determined by respondent.    Thus we sustain respondent’s

determination.
                                - 21 -

C.   Whether Petitioner Is Liable for Fraud Under Section 6663(a)

     1.   Background

     Respondent contends that petitioner is liable for the

penalty for fraud under section 6663(a) for 1993-95.     Fraud is

actual, intentional wrongdoing designed to evade a tax believed

to be owing.   Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir.

1968), affg. T.C. Memo. 1966-81.    To prevail, the Commissioner

must prove by clear and convincing evidence:     (a) Petitioner

underpaid tax for each year in issue, and (b) some part of the

underpayment is due to fraud.    Secs. 6663(b), 7454(a); Rule

142(b); Parks v. Commissioner, 94 T.C. at 660-661; Petzoldt v.

Commissioner, 92 T.C. 661, 699 (1989).     If respondent shows that

any part of an underpayment is due to fraud, the entire

underpayment is treated as due to fraud unless the taxpayer shows

by a preponderance of the evidence that part of the underpayment

is not due to fraud.   Sec. 6663(b).

     The fact that petitioner failed to meet his burden of proof

on the underlying deficiencies in this case does not relieve

respondent of the burden to prove, by clear and convincing

evidence, both elements of fraud.      Fairchild v. United States,

240 F.2d 944, 947 (5th Cir. 1957); Olinger v. Commissioner, 234

F.2d 823 (5th Cir. 1956), affg. in part and revg. in part T.C.

Memo. 1955-9; Drieborg v. Commissioner, 225 F.2d 216, 218 (6th
                               - 22 -

Cir. 1955); Estate of Beck v. Commissioner, 56 T.C. 297, 363

(1971); Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).

     2.   Underpayment

     Respondent contends that petitioner had an underpayment in

each of the years in issue.   Respondent contends that respondent

has shown that the amounts deposited in petitioner’s bank

accounts (less nontaxable deposits) are greater than the amount

of petitioner’s costs of goods sold for each year in issue.

Petitioner stipulated to the amounts deposited in his bank

accounts in each year in issue.   However, for reasons described

below, respondent had not shown by clear and convincing evidence

that petitioner had an underpayment for each year in issue.

     If a taxpayer alleges that he or she had a nontaxable source

of income, respondent may satisfy the burden of proving that the

taxpayer had an underpayment by disproving that nontaxable

source.   United States v. Massei, 355 U.S. 595 (1958).   As

discussed at paragraph B-1, above, petitioner contends that

$132,000 of Ms. Shaw’s gross receipts in 1993 was deposited in

his bank accounts in 1993.    Respondent contends that no more than

$38,834 of gross receipts from Ms. Shaw’s business was deposited

in petitioner’s bank accounts in 1993.   However, respondent has

not proved that no more than $38,834 of receipts from Ms. Shaw’s

business was deposited in petitioner’s bank accounts in 1993.
                             - 23 -

     To show an underpayment for purposes of the fraud penalty,

respondent must show by clear and convincing evidence that

petitioner had an underpayment of tax for each year in issue.

Once respondent shows that a taxpayer had unreported income,

respondent generally does not have the burden of proving that the

taxpayer does not have any unclaimed costs of goods sold or

deductions that would offset the unreported income.   United

States v. Bender, 218 F.2d 869, 871-872 (7th Cir. 1955); United

States v. Stayback, 212 F.2d 313, 317 (3d Cir. 1954); Clark v.

United States, 211 F.2d 100, 103-104 (8th Cir. 1954); Franklin v.

Commissioner, T.C. Memo. 1993-184; Perez v. Commissioner, T.C.

Memo. 1974-211.

     In contrast, to show an underpayment in a case in which

there appears to be a genuine basis for believing the taxpayer’s

claim that costs of goods sold and expenses were substantial, the

Commissioner must prove that the taxpayer had at least some

unreported net income; i.e., that the taxpayer’s gross receipts

exceeded the taxpayer’s costs of goods sold and deductions.     AJF

Transp. Consultants, Inc. v. Commissioner, T.C. Memo. 1999-16,

affd. without published opinion 213 F.3d 625 (2d Cir. 2000); Cox

v. Commissioner, T.C. Memo. 1993-559; CHEM, Inc. v. Commissioner,

T.C. Memo. 1993-520; Van Vorst v. Commissioner, T.C. Memo. 1993-

353; McNichols v. Commissioner, T.C. Memo. 1993-61, affd. 23 F.3d

932 (1st Cir. 1993); Zack v. Commissioner, T.C. Memo. 1981-700,
                              - 24 -

affd. 692 F.2d 28 (6th Cir. 1982); Rivera v. Commissioner, T.C.

Memo. 1979-343; Perez v. Commissioner, supra; H.J. Feinberg & Co.

v. Commissioner, a Memorandum Opinion of this Court dated Sept.

20, 1950; see Franklin v. Commissioner, supra at n.4.

     There appears to be a genuine basis for petitioner’s claim

that his business had substantial costs of goods sold that could

have offset the unreported gross receipts and eliminated

underpayment of taxes.   Thus, respondent must show by clear and

convincing evidence that petitioner’s unreported gross receipts

exceeded his costs of goods sold.    Respondent did not do so.

     Williams used the sources and applications method to

reconstruct petitioner’s income.    Williams testified that

petitioner cooperated by providing reasonable information about

his living expenses.   However, respondent did not offer that data

into evidence.   We infer from respondent’s failure to offer that

data into evidence that petitioner’s living expenses do not

support respondent’s determination.    Singleton v. Commissioner,

65 T.C. 1123, 1144 (1976) (the Commissioner’s failure to call a

certain witness gives rise to the inference that any proof, if

offered, would have been unfavorable), affd. 606 F.2d 50 (3d Cir.

1979); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947); Apothaker

v. Commissioner, T.C. Memo. 1985-445 (the Court may infer from

the Commissioner’s failure to offer into evidence the taxpayer’s
                                - 25 -

bank records that those records would not support the

determination).

     We conclude that respondent has not shown by clear and

convincing evidence that petitioner had an underpayment for each

year in issue.7   Thus, petitioner is not liable for the fraud

penalty for 1993, 1994, or 1995.8

D.   Whether Petitioner Is Liable for the Accuracy-Related
     Penalty for 1993-95 Under Section 6662

     In the alternative to fraud, respondent determined and

contends that petitioner is liable for the accuracy-related

penalty for negligence under section 6662 for 1993-95.

Petitioner did not address this issue at trial or on brief.      A

taxpayer may be deemed to have conceded an issue that was raised

in the petition if he or she made no argument at trial or on

brief relating to that issue.    Levin v. Commissioner, 87 T.C.

698, 722-723 (1986), affd. 832 F.2d 403 (7th Cir. 1987);

Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976).     We

conclude that petitioner is liable for the accuracy-related

penalty under section 6662(a) for 1993-95.



     7
        This case is similar to Chin v. Commissioner, T.C. Memo.
1994-54, in which the Commissioner used the bank deposits method
to reconstruct income, and we held that the Commissioner had not
shown by clear and convincing evidence that the taxpayer had an
underpayment.
     8
        In light of our conclusion, we need not decide whether
respondent established by clear and convincing evidence that
petitioner intended to evade tax in each year in issue.
                              - 26 -

E.   Whether Petitioner Is Liable for the Addition to Tax for
     Failure To Pay Estimated Tax Under Section 6654

     Respondent determined and contends that petitioner is liable

for the addition to tax under section 6654 for failure to pay

estimated tax for 1993 and 1994.   Respondent concedes that

petitioner filed returns for 1993 and 1994.    Thus, we lack

jurisdiction to decide whether petitioner is liable for the

addition to tax under section 6654 for 1993 and 1994.    See sec.

6665(b)(2); Fendler v. Commissioner, 441 F.2d 1101 (9th Cir.

1971); Meyer v. Commissioner, 97 T.C. 555, 562 (1991); Estate of

DiRezza v. Commissioner, 78 T.C. 19, 25-26 (1982).

F.   Whether the Statute of Limitations Bars Assessment of
     Petitioner’s 1993 Tax Liability

     Petitioner filed his 1993 return on or before April 15,

1994.   Respondent mailed the notice of deficiency on April 11,

2000.   Petitioner contends that the time to assess tax for 1993

expired before respondent issued the notice of deficiency.      We

disagree.

     Generally, the Commissioner must assess tax within 3 years

after the due date of a timely filed return.    Sec. 6501(a).

Respondent bears the burden of proving that an exception to the

3-year limit on the time to assess tax applies if, as here as to

1993, the notice of deficiency was mailed more than 3 years after

the filing date.   Wood v. Commissioner, 245 F.2d 888, 893-895

(5th Cir. 1957), affg. in part and revg. in part T.C. Memo. 1955-
                              - 27 -

301; Bardwell v. Commissioner, 38 T.C. 84, 92 (1962), affd. 318

F.2d 786 (10th Cir. 1963).

     Respondent contends that respondent has 6 years to assess

tax under section 6501(e)(1)(A) because petitioner omitted more

than 25 percent of his gross income for 1993.   Although

respondent must prove fraud by clear and convincing evidence,

respondent need only prove a 25-percent omission from income by a

preponderance of the evidence.   Armes v. Commissioner, 448 F.2d

972, 974-975 (5th Cir. 1971), affg. in part and revg. in part

T.C. Memo. 1969-181.

     For purposes of section 6501(e)(1)(A)(i), “gross income”

includes the amounts received or accrued from the sale of goods

or services without considering the cost of those sales or

services.   Id.; sec. 301.6501(e)-1(a)(1)(ii), Proced. & Admin.

Regs.   Thus, we do not consider petitioner’s costs of goods sold

in deciding whether he omitted 25 percent of his gross income for

a year.

     Petitioner and Ms. Shaw reported gross receipts of $26,810

on Schedule C of their 1993 return.    We need not decide whether

to calculate the 25 percent omission based on the amount

petitioner reported ($0), or the amount reported on the purported

joint return ($26,810), if respondent shows that petitioner

omitted more than $6,701.50 (25 percent of $26,810).   Respondent

made that showing because petitioner concedes that he had
                              - 28 -

unreported gross receipts of $252,006 in 1993, and $338,276 in

1995.   Respondent has proved by a preponderance of the evidence

that section 6501(e)(1)(A) applies.

     We conclude that the statute of limitations does not bar

assessment of tax for 1993.

     To reflect concessions and the foregoing,



                                              Decision will be

                                         entered under Rule 155.
