                        T.C. Memo. 1997-21



                      UNITED STATES TAX COURT



                 MORTON ZUCKERMAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10713-93.                    Filed January 13, 1997.



     Morton Zuckerman, pro se.

     Laurie B. Kazenoff, Laurence D. Ziegler, and Mark L. Hulse,

for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined that petitioner and his

wife, Pearl Zuckerman (Mrs. Zuckerman), were jointly liable for

deficiencies in and additions to their Federal income taxes for

1986 and 1987 as follows:1

     1
      Unless otherwise indicated, section references are to the
                                                   (continued...)
                                        - 2 -



                                            Additions to Tax
                              Sec.          Sec.             Sec.       Sec.
Year        Deficiency     6651(a)(1)   6653(a)(1)(A)   6653(a)(1)(B)   6661
                                                              1
1986   $34,031              $8,005      $1,712
$8,498
                                                              2
1987          26,867         6,118       1,348
6,202
        1
            Fifty percent of the interest due on $34,031.
        2
            Fifty percent of the interest due on $26,867.


For reasons discussed below, Mrs. Zuckerman is no longer a party

to this case.            The issues for decision are:

        (1)     Whether petitioner had unreported embezzlement income

for 1986;

        (2)     whether deposits to certain bank accounts held by

petitioner represent unreported taxable income to him for 1987;

        (3)     whether petitioner failed to report interest and

dividend income for both taxable years at issue;

        (4)     whether petitioner is entitled to deductions for

Schedule A and Schedule C expenses in excess of the amounts

allowed by respondent; and

        (5)     whether petitioner is liable for additions to tax under

sections 6651(a)(1), 6653(a), and 6661.

        We sustain respondent's determinations in respect of each of

the aforesaid issues to the extent specified herein.




        1
      (...continued)
Internal Revenue Code in effect for the years at issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -


                         FINDINGS OF FACT

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

The stipulation of facts and attached exhibits are incorporated

by this reference.   At the time the petition was filed,

petitioner resided in Plainview, New York.

     In 1985 petitioner was hired to conduct title closings for

East Coast Abstracts, Inc., a title abstract agency located in

Mineola, New York.   Petitioner worked as an independent

contractor.   Steven Lieter (Lieter) and Stanley Levine (Levine)

were the agency's officers and shareholders.

     At some time during 1985, Lieter and Levine organized

Consumer Equities Associates (CEA), a company whose business

initially was to broker first mortgage loans from Citibank.       At

petitioner's suggestion, in early 1986 CEA entered the business

of arranging second mortgages.    Acting on CEA's behalf,

petitioner would secure funds from investors to finance second

mortgage loans for borrowers with a poor credit history.     An

investor's funds would be set aside in an interest-bearing

account until CEA paid them to a borrower as a second mortgage

loan and assigned the loan to the investor.    In time the

borrower's credit record would improve, thereby creating the

opportunity to refinance on a first mortgage basis, and the

investor would be repaid.   Petitioner, Lieter, Levine, and

Richard Cohen, the manager of CEA, each had signature authority
                                - 4 -


over the CEA account at the Mineola branch of Citibank, account

No. 23429344.

     In March or April 1986, Lieter and Levine became aware of

financial irregularities at CEA.    Checks were missing, and

petitioner failed to provide satisfactory documentation of his

activities.    They responded by revoking his independent authority

over the CEA bank account:    henceforth petitioner would not be

permitted to write checks on the account without the signature of

one of the other three signatories.     CEA began to receive

complaints from individuals claiming that they had invested in

second mortgages through petitioner's solicitations yet had not

received interest payments or mortgage documentation.      In most

cases Lieter and Levine were unable to locate any records of the

alleged transactions.    In late May or early June 1986,

petitioner's relationship with CEA and East Coast Abstracts was

terminated.

     Mildred Lawrence (Lawrence) was one of the numerous

individuals who believed they had invested in second mortgages

through CEA.    Petitioner and his wife were close friends of the

Lawrences.    Shortly before his work for CEA began, petitioner

informed Lawrence of the investment opportunities he would be

handling and offered to select some safe mortgages for her.

Between April and July 1986, she gave him three checks payable to

CEA in the aggregate amount of $65,000.     Petitioner represented

to her that each of the checks would be used to acquire an
                               - 5 -


interest in a specific mortgage, that she would receive monthly

interest payments of approximately 16 percent, and that her

principal would be returned after about 1 year.    By letters on

CEA stationery dated May 9 and August 12, 1986, petitioner

confirmed to Lawrence that she had purchased interests in three

mortgages issued by borrowers named Guyre, Farber, and Small,

that she would receive monthly interest payments at 16 or 19

percent, and that mortgage assignment documents would be sent to

her "in a few days" or "in about two weeks".

     A check drawn on CEA's account representing the initial

interest payment for the first of Lawrence's three advances was

sent to her on time.   The second and third scheduled interest

payments from CEA also may have been punctual.    After she had

given petitioner the third and final check in July, interest

payments were few and sporadic, all checks sent to her were

written on petitioner's personal accounts, and many of the checks

bounced.   Despite Lawrence's repeated requests, petitioner never

sent her the mortgage assignment documents as he had promised.

In April 1991, after Lawrence had threatened legal action against

him, petitioner sent her an instrument purporting to evidence the

assignment to her of a mortgage in the principal amount of

$14,953 from one Frank Di Domenico.    Noticing that petitioner had

notarized the instrument and recognizing the signature of Frank

Di Domenico to be in petitioner's handwriting, Lawrence filed a

complaint against petitioner with law enforcement authorities.
                               - 6 -


     On October 15, 1993, petitioner was indicted in Nassau

County, New York, on multiple charges, including criminal

possession of a forged instrument.     Pursuant to a plea bargain,

he was convicted of attempted criminal possession of a forged

instrument, sentenced to 5 years' probation, and ordered to make

immediate restitution to Lawrence in the amount of $14,953.

There is no evidence that any of the mortgages ostensibly

assigned to Lawrence ever in fact existed.    Except for the

restitution paid in late 1993 or early 1994, no part of the

$65,000 principal that Lawrence entrusted to petitioner for

mortgage investments was ever returned to her.

     Each of Lawrence's checks was converted to petitioner's

personal use.   Check No. 929 for $25,000 dated April 17, 1986,

was deposited by petitioner into the CEA account (No. 23429344)

at Citibank on April 21.   The bank statement for Citibank account

No. 23429344 reflects that the next transaction was a withdrawal

of $28,000 3 days later.   A bank statement for Citibank account

No. 23408658 shows a deposit of $28,000 on the same day,

April 24, 1986.   Citibank account No. 23408658 was one of

petitioner's personal accounts.

     Lawrence's check No. 993 in the amount of $30,000, dated

June 25, 1986, was used by petitioner to open an account in CEA's

name at the Port Washington, New York, branch of Citibank,

account No. 13786145.   Petitioner opened this account, over which

he gave himself exclusive signature authority, without the
                                - 7 -


authorization or knowledge of the CEA principals.    Bank

statements for account No. 13786145 show a post office box

address in Albertson, New York, that petitioner used for several

of his personal accounts.    Two weeks later, on July 14,

petitioner withdrew the $30,000 plus accrued interest.      No other

transactions occurred with respect to this account for the rest

of 1986.

     Lawrence's check No. 994 for $10,000, dated July 8, 1986,

was deposited directly into one of petitioner's personal accounts

at Fidelity Bank on July 14, 1986.

     A Form 1040 that purports to be the joint Federal income tax

return of petitioner and Mrs. Zuckerman for 1986 was filed on

April 16, 1990.    Both spouses' names were signed to the return.

The return shows gross income in the amount of $28,160, including

$18,882 of wage income earned by Mrs. Zuckerman, and tax

liability of $199.    The funds received from Lawrence were not

reported.   A Form 1040 that purports to be the Zuckermans' joint

Federal income tax return for 1987 was received by the Internal

Revenue Service on March 8, 1990.    The Form was not signed by

either spouse.    It reports gross income of $22,971, including

$21,425 of Mrs. Zuckerman's wage income and Mrs. Zuckerman's

gambling winnings net of gambling losses in the amount of $830.

The Form shows a tax liability for the year of $98.

     On audit, Revenue Agent Irwin Dickoff (Dickoff) could not

determine the Zuckermans' income for 1987 from the records made
                                 - 8 -


available to him, and consequently he resorted to an analysis of

their bank deposits.    His analysis was limited to the accounts

that he was able to identify through a search, using petitioner's

Social Security number, of interest-bearing accounts reported to

the Internal Revenue Service on Forms 1099.      In computing

deposits made to each account, he excluded any funds transferred

from other accounts held by the Zuckermans.      All deposits that

could not be attributed to a nontaxable source on the basis of

available information were deemed to represent taxable income.

The results of the analysis are set forth below:2

                       Account      Gross Deposits
    Bank               Number     (incl. transfers)   Net Deposits

Fairfax Savings   50-04-11525          $600.00            - 0 -
Fairfax Savings   50-04-11517         1,000.00         $1,000.00
Fidelity          3951002546          6,478.34          6,478.34
Citibank          23408711           13,486.36         11,986.36
Citibank          23408682           27,706.78         20,256.78
Citibank          23408658           55,231.96         44,931.96
  Total                                                84,653.44

Plus:
  Self-employment income originally
    reported as wages                             $4,084.00
    Total income                                              $88,737.44

Less:
  Net W-2 wages (Mrs. Zuckerman)             (16,423.19)
  Self-employment earnings reported as wages (4,084.00)
  Gambling winnings (Mrs. Zuckerman)          (2,000.00)
    Total income accounted for                           (22,507.19)
    Unreported income                                     66,230.25

     2
      After checking Dickoff's work papers against the bank
statements for the six identified accounts, we are satisfied that
the deposit amounts he computed are correct. Owing to a clerical
error, the work papers misstate the interest earned for one of
the accounts, but the discrepancy amounts to only 10 cents and
does not affect the computation of deposits.
                               - 9 -




     Dickoff requested documents from petitioner relating to the

sources of unexplained deposits, but petitioner did not provide

them.   Petitioner did not apprise Dickoff of any loans or

inheritances that might have accounted for some of the deposits.

Dickoff did not attempt to obtain copies of the Zuckermans'

canceled checks from the banks to ascertain whether they may have

made or received any loans in 1987.    Owing, inter alia, to

petitioner's refusal to extend the limitations period for

assessment, Dickoff concluded that the time remaining to complete

his investigation and analysis was insufficient.

     In the notice of deficiency issued to petitioner and

Mrs. Zuckerman on March 3, 1993, respondent increased the

Zuckermans' gross income for 1986 by the $65,000 that petitioner

had misappropriated from Lawrence, increased their gross income

for 1987 by the $66,230 of unexplained bank deposits, increased

their gross income for both years to reflect amounts of

unreported interest and dividends shown on Forms 1099, and

disallowed in whole or in part certain deductions claimed on

Schedules A and C for interest, taxes, and other expenses which

the Zuckermans had not adequately substantiated.    A petition

signed in both spouses' names was timely filed.

     On August 16, 1994, the Court granted a motion by respondent

to compel production of documents and answers to interrogatories

relating to all substantive issues in the case and advised the
                                - 10 -


Zuckermans of the likelihood of sanctions under Rule 104(c) in

the event of noncompliance.   Petitioner sought an extension to

obtain some of the documents from his banks.       He offered no

satisfactory explanation for his failure to produce numerous

other documents requested by respondent and for his failure to

answer any of the interrogatories.       Nevertheless, the Court

granted petitioner's request.    Following the expiration of the

extended deadline and a conference with petitioner and

respondent's counsel, the Court concluded that petitioner was not

attempting to cooperate in good faith.       Accordingly, on motion

by respondent for sanctions under Rule 104(c), by order dated

November 4, 1994, the Court prohibited the Zuckermans from

introducing any documentary or testimonial evidence pertaining

to matters addressed in respondent's discovery requests.

Mrs. Zuckerman took no part in these pretrial proceedings, having

received no actual notice of them despite respondent's efforts to

contact her.

     At trial petitioner revealed that he had signed his wife's

name to the 1986 return and, without her knowledge, to the

petition as well.   Mrs. Zuckerman testified that she had not

intended to file a joint return with her husband for either year.

In response to these disclosures, on motion by respondent, the

case was dismissed for lack of jurisdiction with respect to

Mrs. Zuckerman, the caption of the case was changed, and

respondent amended her answer to recompute petitioner's tax
                                     - 11 -


liability for 1987 without regard to items attributable to

Mrs. Zuckerman and using rates applicable to married persons

filing separately.        The deficiency and additions to tax

recomputed in this manner are higher than those set forth in the

notice of deficiency:

                                          Additions to Tax
                           Sec.          Sec.              Sec.      Sec.
Year       Deficiency   6651(a)(1)   6653(a)(1)(A)   6653(a)(1)(B)   6661
                                                           1
1987   $31,702           $7,950         $1,590
$7,926
       1
           Fifty percent of the interest due on $31,702.



The increase in the deficiency results in large part from

respondent's assumption that the $18,423 of reported wage and

gambling income attributable to Mrs. Zuckerman was not the source

of any of the total $84,653 of deposits to petitioner's bank

accounts during the year, from which respondent concluded that

petitioner had $18,423 more unreported income than she had

originally determined.        In her amended answer, respondent did not

recompute the deficiency and additions to tax for the 1986

taxable year.

                                     OPINION

       Respondent's determinations in the notice of deficiency are

presumed to be correct, and petitioner has the burden of proving

otherwise.       Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).       However, respondent has the burden of proving the
                              - 12 -


increase in the deficiency for 1987 attributable to the

amendments to respondent's answer.     Rule 142(a).

Embezzlement Income

     Section 61 defines gross income as income from whatever

source derived.   Property is includable in gross income when, by

lawful or unlawful means, the taxpayer gains complete dominion

and control over it, thereby realizing an economic benefit.

United States v. Curtis, 782 F.2d 593, 595-596 (6th Cir. 1986);

Davis v. United States, 226 F.2d 331, 334 (6th Cir. 1955).

Income realized through embezzlement must be reported in the year

of receipt, even though restitution may be required in a later

year.   James v. United States, 366 U.S. 213, 219-220 (1961).    The

evidence establishes that petitioner received Lawrence's three

checks for $65,000 under false pretenses and converted them to

his own use by depositing them into bank accounts over which he

exercised complete dominion and control.     His disposition of the

funds entrusted to him was plainly inconsistent with the pretense

that he possessed them as authorized agent of CEA.    Consequently,

these funds constitute taxable income to him for 1986.

     Petitioner contends that, inasmuch as he has never been

charged with or convicted of embezzlement, respondent may not

treat the funds he received from Lawrence as embezzlement income.

The decision of the district attorney for Nassau County to charge

petitioner with crimes other than embezzlement is likely to have
                              - 13 -


been influenced by factors that have no relevance to this case,

such as applicable statutes of limitations and the exacting

burden of proof on the government in criminal cases.    Whether or

not petitioner could have been convicted of the crime of

embezzlement, he has failed to prove that he did not acquire

complete dominion and control over the funds he received from

Lawrence so as to realize income for tax purposes.

     Petitioner points out that some interest was paid to

Lawrence on the funds he received from her.    He appears to reason

from this fact either or both of the following:    (i) The payment

of interest proves that he treated the funds as a loan during the

years at issue; or (ii) even if he did convert the funds to his

own use and thereby realize income, his income for the years at

issue should be reduced by the amount of interest payments he

made.   Neither argument has merit.

     First, the pattern of interest payments is not inconsistent

with the conclusion that he embezzled.    Payments of interest

would have been calculated to reassure Lawrence in furtherance of

the fraud.   The only interest payments by petitioner during the

years at issue that are specifically confirmed by the record are

the first three payments at most.     Lawrence testified that it was

these initial scheduled interest payments that induced her to

write the second and third checks.
                                - 14 -


     Second, the evidence does not establish that petitioner made

any interest payments to Lawrence with his own funds during the

years at issue.    Her testimony implies that the initial scheduled

payments that she received were drawn on CEA's account.

Subsequent interest checks were drawn on petitioner's personal

account, but many of these were returned for insufficient funds.

Petitioner did not prove that any checks payable to Lawrence from

his own account cleared during the years at issue.

Bank Deposits

     Section 6001 requires each taxpayer to maintain records

sufficient to establish the amount of his gross income and

deductions.     Where a taxpayer fails to keep adequate records, the

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

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
                              - 15 -


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 is not required

to trace deposits to their source.     Petzoldt v. Commissioner,

supra 695-696; Estate of Mason v. Commissioner, supra at 657.

     Petitioner argues that respondent could not properly

conclude that deposits to his bank accounts during 1987

represented taxable income without verifying the sources of the

deposits.   Petitioner suggests that if the revenue agent had

obtained petitioner's canceled checks from the banks, the

information they provided as to the purposes for petitioners'

withdrawals might have indicated nontaxable loan proceeds or loan

repayments as the source of some deposits.    To the extent that

petitioner bears the burden of proof, respondent was fully

justified in assuming that the sources of unexplained deposits

were taxable income.   If respondent did not identify the sources

of funds, it was because petitioner failed to provide

documentation requested by the revenue agent and would not

consent to extend the limitations period for assessment to enable

the agent to continue his investigation and analysis.     Petitioner

did not advise respondent during the audit or pretrial discovery

phases of the case that he had received any nontaxable funds, and

the Court's order of November 4, 1994, barred petitioner from

offering any evidence thereof at trial.    Respondent's
                                - 16 -


determination in the notice of deficiency that petitioner had

$66,230 of unreported income for 1987 is accordingly sustained.

     In the amended answer respondent asserted that the amount of

petitioner's unreported income for 1987 should be increased to

$84,653.   The asserted increase of $18,423 is equal to income

reported as Mrs. Zuckerman's.    Respondent, in her amended answer,

allowed no credit to petitioner for the amount of this reported

income because respondent assumed that the bank accounts analyzed

by the revenue agent were used solely for the deposit of

petitioner's own funds.   Respondent did not attempt to confirm

the accuracy of this assumption, and there is reason for

skepticism.   Two of the six accounts included in the analysis

were titled as joint accounts of both spouses, to which Mrs.

Zuckerman would naturally have had access.       Because respondent's

assertion of an increased amount of unreported income results in

an increase in the deficiency, respondent bears the burden of

proof on this point.   Rule 142(a).      Respondent has failed to

carry that burden.   We therefore reject the deficiency asserted

in respondent's amended answer insofar as it includes in

petitioner's gross income amounts equal to Mrs. Zuckerman's wages

and gambling winnings.

Other Issues Bearing on Tax Liabilities

     Pursuant to section 6001 petitioner was obligated to

maintain records to substantiate his income and deductions.         He
                               - 17 -


failed to produce documents and provide answers to

interrogatories to explain why he reported less interest and

dividends for 1986 and 1987 than the amounts shown on the Forms

1099 issued by his payers, or to support his claim to deductions

in excess of the amounts allowed by respondent on audit.    By

order of this Court, he was accordingly denied the opportunity to

present any such evidence at trial.     Where it is clear from the

record that deductible expenses were incurred, but the taxpayer

cannot prove the exact amount thereof, under some circumstances

the Court may estimate.    Cohan v. Commissioner, 39 F.2d 540, 544

(2d Cir. 1930).    The so-called Cohan rule has no application,

however, where, as here, the record lacks any basis for

estimation.    Williams v. United States, 245 F.2d 559, 560-561

(5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).    Respondent's determinations are therefore sustained.

Additions

     Section 6651(a)(1) imposes an addition to tax for failure to

file a timely return, unless it is shown that the failure was due

to reasonable cause and not to willful neglect.    The addition to

tax is calculated as a percentage of the amount of tax required

to be shown on the return, reduced by any part of this tax

liability that was paid within the prescribed time period.    Sec.

6651(b).    Petitioner filed his return for 1986 3 years late.    The

Form 1040 he filed for 1987 was not signed under penalty of
                             - 18 -


perjury in accordance with section 6065.    Under well-settled law,

the unsigned form does not constitute a valid return, and hence

petitioner filed no return for 1987.3   Lucas v. Pilliod Lumber

Co., 281 U.S. 245, 248-249 (1930); Dixon v. Commissioner, 28 T.C.

338, 346-348 (1957); Plunkett v. Commissioner, 41 B.T.A. 700

(1940), affd. 118 F.2d 644 (1st Cir. 1941).   Petitioner made no

payments prior to the due date for his returns.   Federal income

tax withheld from Mrs. Zuckerman's wage income appears to have

been properly credited entirely to her in respondent's

determination of her separate deficiency.   Therefore, in the

absence of excuse for petitioner's delinquencies, the addition to

tax would apply to the full amount of his tax liability for each

year, at the maximum statutory rate of 25 percent.   Sec.

6651(a)(1) and (b).

     Section 6653(a) imposes additions to tax if any part of an

underpayment is due to negligence or intentional disregard of


     3
      Respondent treated the Form 1040 for 1987 as a valid
Federal income tax return, and in these proceedings took the
position that petitioner had adopted the Form 1040 as his return
by stipulation. Neither respondent's acceptance of the Form 1040
nor petitioner's attempt to adopt it--if in fact that was his
intent--would have been effective to waive the statutory
requirement. Lucas v. Pilliod Lumber Co., 281 U.S. 245, 248-249
(1930); Dixon v. Commissioner, 28 T.C. 338, 343-344, 347-348
(1957); Hammann v. Commissioner, T.C. Memo. 1987-260.
Nevertheless, inasmuch as the Form 1040 was not filed until
nearly 2 years after it was due, the addition to tax under sec.
6651(a)(1) is the same--the 25-percent maximum rate provided--
whether or not petitioner is treated as having filed a valid
return.
                                - 19 -


rules and regulations.   Sec. 6653(a)(1)(A) and (B).    An

underpayment for purposes of this section is the excess of the

amount of tax required to be shown on the return over the amount

of tax shown on the return, except that where a return is not

filed within the prescribed time period any amount of tax shown

on the return is disregarded.    Sec. 6653(c)(1).   Negligence is

defined as the lack of due care or failure to do what an

ordinarily prudent person would do under the circumstances.

Marcello v. Commissioner, 380 F.2d 494, 506 (5th Cir. 1967),

affg. in part and revg. and remanding in part 43 T.C. 168 (1964).

The failure to file timely returns without reasonable cause and

the failure to maintain adequate records to substantiate the

taxpayer's income and deductions each constitute negligence or

disregard of rules and regulations.      Sullivan v. Commissioner,

985 F.2d 704, 706 (2d Cir. 1993), affg. in part and revg. in part

on another issue T.C. Memo. 1991-492; Crocker v. Commissioner, 92

T.C. 899, 917 (1989); Emmons v. Commissioner, 92 T.C. 342, 349

(1989), affd. 898 F.2d 50 (5th Cir. 1990).

     The addition to tax under section 6661 applies to any

underpayment of tax that is attributable to a substantial

understatement.   An understatement is generally defined as the

excess of the amount of tax required to be shown on the return

over the amount of tax shown on the return.     Sec. 6661(b)(2)(A).

If no valid return is filed for the taxable year, the amount of
                               - 20 -


the understatement is the full amount of the tax imposed.     Mosher

v. Commissioner, 927 F.2d 599 (5th Cir. 1991), affg. without

published opinion T.C. Memo. 1989-157; Hesselink v. Commissioner,

97 T.C. 94 (1991); sec. 1.6661-2(d)(2), Income Tax Regs.    An

understatement is substantial if it exceeds the greater of 10

percent of the amount of tax required to be shown or $5,000.

Sec. 6661(b)(1)(A).   The underpayment for purposes of section

6661 is determined by subtracting from the understatement any

withholding credits to which the taxpayer is entitled.     Woods v.

Commissioner, 91 T.C. 88, 92-99 (1988).   In petitioner's case, no

withholding credits apply, there is an underpayment equivalent to

the understatement, and the understatement is substantial for

each taxable year.    For 1986, the underpayment and understatement

equal the amount of tax imposed less the $199 liability reported;

for 1987 the underpayment and understatement equal the full

amount of the tax imposed.4

     Petitioner offered no evidence or explanations on brief for

his failure to file timely income tax returns for 1986 and 1987,

for his failure to report income and deductions accurately, or


     4
      Consistent with her treatment of the Form 1040 for 1987 as
a valid return, respondent granted petitioner credit for $98
shown as tax on the form in computing the understatement. As
explained above, such treatment is more favorable than is
warranted under established law. However, the benefit conferred
by this treatment amounts to less than $25 ($98 x 25%, the
applicable rate for additions to tax assessed after Oct. 21,
1986. Pallottini v. Commissioner, 90 T.C. 498 (1988)).
                             - 21 -


for his lack of adequate records.   He has advanced no arguments

to challenge respondent's determinations of additions to tax.

Consequently, he is deemed to have conceded them.   Rule 149(b);

Murphy v. Commissioner, 103 T.C. 111, 119 (1994); Rothstein v.

Commissioner, 90 T.C. 488, 497 (1988).   The additions to tax are

sustained for both years, subject to computational adjustments

under Rule 155.

     For 1986, the deficiency and additions to tax must be

computed by reference to petitioner's separate tax liability,

determined without regard to items attributable to Mrs. Zuckerman

and using rates applicable to married persons filing separately.

For 1987, respondent has failed to satisfy her burden of proving

the $18,423 increase in unreported income asserted in her amended

answer and the correspondingly higher deficiency.   The additions

to tax must be revised accordingly.   For all relevant purposes,

petitioner is to be treated as having filed no return for 1987.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.
