                        T.C. Memo. 2004-154



                      UNITED STATES TAX COURT



            KAMIL F. AND NAGWA GOWNI, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

           GEORGE R. AND NEHAD MANSOUR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 8094-02, 8095-02.   Filed June 29, 2004.



     Peter C. Pappas, for petitioners.

     Stephen R. Takeuchi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies, an

addition to tax, and penalties with respect to petitioners

Kamil F. and Nagwa Gowni’s (the Gownis) Federal income taxes for

1998 and 1999 as follows:
                                - 2 -

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

      1998     $105,470            –-            $21,094
      1999      114,603        $27,087.75         22,921

Respondent determined deficiencies, an addition to tax, and

penalties with respect to petitioners George R. and Nehad

Mansour’s (the Mansours) Federal income taxes for 1996, 1997,

1998, and 1999 as follows:

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

      1996     $93,552         $23,494.20      $18,710.40
      1997      18,093             –-            3,618.60
      1998     129,324             –-           25,864.80
      1999      42,884             –-            8,576.80

The issues for decision in these consolidated cases are:

(1) Whether one of petitioners’ S corporations recognized a gain

rather than a loss on the sale of its assets; (2) whether

petitioners have shown that respondent’s computation of their

income for the years in issue using the bank deposits method is

inaccurate or that any of the deposits that were made into their

personal bank accounts during the years in issue are not taxable;

(3) whether petitioners are liable for additions to tax under

section 6651(a)(1); and (4) whether petitioners are liable for

accuracy-related penalties under section 6662(a).

     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
                                 - 3 -

Procedure.   Except for the amounts shown above, all amounts have

been rounded to the nearest dollar.

                           FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    At the

time that the Gownis filed their petition at docket No. 8094-02,

they resided in Florida.    At the time that the Mansours filed

their petition at docket No. 8095-02, they also resided in

Florida.

Background

     Petitioner George R. Mansour (Mr. Mansour) is 45 years old

and was born in Egypt.    After graduating from high school in

Egypt, Mr. Mansour attended college in Egypt and studied

chemistry for 2 years and accounting for another 2 years.    In

1981, Mr. Mansour immigrated to the United States and has been a

U.S. resident since that time.    Mr. Mansour lived in Ohio for a

portion of 1981 before he moved to California.    While in

California, Mr. Mansour attended college and worked at a gasoline

station.   In 1986, Mr. Mansour moved to Florida.   From 1986 until

sometime in 1987 or 1988, Mr. Mansour worked in a convenience

store as a cashier/clerk and then as an assistant manager for

Southland Corp.   Mr. Mansour married petitioner Nehad Mansour

(Mrs. Mansour) in 1987.    Mrs. Mansour came to the United States
                                 - 4 -

in 1991.   During 1996, 1997, 1998, and 1999, Mrs. Mansour was a

homemaker.    Mr. Mansour has a real estate license.

     Petitioner Kamil F. Gowni (Mr. Gowni) is 45 years old and

was born in Egypt.    After graduating from high school in Egypt,

Mr. Gowni attended college and studied agriculture for 3 years.

Mr. Gowni immigrated to London, England, in 1978.      During the

time that Mr. Gowni lived in England, he studied and worked as an

assistant manager in a restaurant.       Mr. Gowni immigrated to the

United States in 1982 and has been a U.S. resident since that

time.   From 1982 to 1993, Mr. Gowni lived in Los Angeles,

California.    While in Los Angeles, Mr. Gowni managed a gasoline

station and worked with computers for Teledyne Corp.      Mr. Gowni

married petitioner Nagwa Gowni (Mrs. Gowni) in 1988.      The Gownis

moved to Florida in 1993.    From December 31, 1997, through

November 4, 1998, the Gownis bought and sold stocks totaling

approximately $1.7 million.    During 1998 and 1999, Mrs. Gowni was

a homemaker.

     Messrs. Gowni and Mansour met in Los Angeles in 1984 or 1985

while attending the same church.

Petitioners’ Business Entities

     Petitioners used a number of different corporations to

conduct their business affairs during the years in issue.

Messrs. Gowni and Mansour were actively and substantially

involved in the operation of these business entities.
                                - 5 -

Messrs. Gowni and Mansour commingled the funds of these

corporations and generally treated the corporations’ bank

accounts as one account.

     A.   Mansour Enterprises, Inc.

     In March 1989, Mr. Mansour and his brother, Sam Mansour,

organized Mansour Enterprises, Inc. (Mansour Enterprises), as a

Florida corporation.    Mansour Enterprises purchased a gasoline

station located in Mt. Dora, Florida, and operated it as an Amoco

gasoline station until sometime in 1998.     The gasoline station

included a snack shop and a repair facility with an automobile

mechanic on the premises.    Mansour Enterprises filed a corporate

income tax return for 1996 and reported $53,400 of ordinary

income from its operations for that year.

     B.   Mansour’s of Mount Dora, Inc.

     In November 1989, Mr. Mansour and his brother organized

Mansour’s of Mount Dora, Inc. (Mansour’s of Mt. Dora), as a

Florida corporation.    Mansour’s of Mt. Dora owned the building

next to the gasoline station owned by Mansour Enterprises and

leased it to a car detail shop and a hair salon during 1996,

1997, 1998, and 1999.    This building was also used for storage.

     C.   Pyramid of Lake County, Inc.

     In October 1992, Pyramid of Lake County, Inc. (Pyramid), was

organized as a Florida corporation.     Messrs. Gowni and Mansour

owned and operated Pyramid.    Pyramid owned a gasoline station in
                                  - 6 -

Eustis, Florida, that it leased to a third party.        Pyramid sold

the gasoline station in 1999 or 2000.

     D.   Mina of Deland, Inc.

     In November 1992, Mina of Deland, Inc. (Mina of Deland), was

organized as a Florida corporation.        Messrs. Gowni and Mansour

owned and operated Mina of Deland.        Mina of Deland leased a

gasoline station from the Amoco Oil Co. (Amoco).        The lease

terminated sometime between 1994 and 1996.

     E.   Mina of Sanford, Inc.

     In October 1993, Mina of Sanford, Inc. (Mina of Sanford),

was organized as a Florida corporation.        Messrs. Gowni and

Mansour owned and operated Mina of Sanford.        Mina of Sanford

owned and operated a gasoline station in Sanford, Florida, from

1993 through 1999.

     F.   Mina of Forest City, Inc.

     In July 1994, Mina of Forest City, Inc. (Mina of Forest

City), was organized as a Florida corporation.        Messrs. Gowni and

Mansour owned and operated Mina of Forest City.        Mina of Forest

City owned and operated an Amoco gasoline station in Orlando,

Florida, from 1994 until it transferred its assets to Bishoy,

Inc., in 1998.   The following explanation was given for the asset

transfer on an attachment to the Form 1120S, U.S. Income Tax

Return for an S Corporation, that was filed for Mina of Forest

City for 1998:
                                 - 7 -

     Spin-Off

     Taxpayers elect under IRC sec 355 to spin off 100% of
     basis and surrender of stock in exchange for stock and
     basis in spin-off company, Bishoy, Inc. * * * Business
     purpose of change in oil company supplier required this
     transaction!

     Mina of Forest City filed Forms 1120S for 1996, 1997, and

1998 and reported $30,908 and $48,405 of ordinary income from its

operations in 1996 and 1997, respectively, and a loss of $1,512

in 1998.    The Form 1120S filed for Mina of Forest City for 1998

was its final return.     On the Schedule M-2, Analysis of

Accumulated Adjustments Account, Other Adjustments Account, and

Shareholders’ Undistributed Taxable Income Previously Taxed,

attached to its Form 1120S filed for 1998, Mina of Forest City’s

accumulated adjustments account was reported to have a balance of

$64,681 as of the end of that year.      John L. Bradshaw, P.A.,

C.P.A. (Bradshaw), prepared these Forms 1120S for Mina of Forest

City.

     In a letter dated November 10, 1999, and addressed to

Bradshaw, the Internal Revenue Service (IRS) granted Mina of

Forest City S corporation status with an effective date of

January 1, 1995.

     G.    Micca, Inc.

     In April 1995, Micca, Inc. (Micca), was organized as a

Florida corporation.     Messrs. Gowni and Mansour owned and

operated Micca.    Micca operated as a C corporation during the
                                   - 8 -

years in issue.     Micca purchased real property and, with

financing provided by Amoco, built a gasoline station and

convenience store on that property.        Micca operated the gasoline

station from 1996 until sometime in 1998.       Micca filed a

corporate income tax return for 1996 and reported taxable income

of $52,923 for that year.

     H.     Tomson, Inc.

     In August 1995, Tomson, Inc. (Tomson), was organized as a

Florida corporation.       Messrs. Gowni and Mansour owned and

operated Tomson.     In 1995, Tomson negotiated the purchase from

Amoco of an existing Amoco gasoline station that was located in

Orlando.     The purchase price of the gasoline station was

$330,000.     Tomson was to pay Amoco $140,000 at closing.      Tomson

borrowed $140,000 from Citicorp North America, Inc., in order to

make this payment.     The remaining $190,000 of the purchase price

was secured by a note owed to Amoco.       The note was payable over

10 years and was reduced by 1 cent for every gallon of motor fuel

that Tomson purchased from Amoco.       The closing date for the sale

was January 22, 1996.

     Tomson contracted with Orange Petroleum, Inc. (Orange

Petroleum), for the installation of gasoline tanks and related

work.     Tomson paid Orange Petroleum $159,462 for this work, which

was completed by April 22, 1996.
                                - 9 -

     Tomson contracted with Joseph P. Sexton, Inc. (Sexton), to

renovate the existing building and surrounding property.      The

gasoline station had service bays to repair automobiles.      Sexton

converted the space for the service bays into a convenience

store.   Tomson paid Sexton $183,507 for this work, which was

completed by the end of June 1996.      The gasoline station was

ready for business at that time.

     Tomson operated the gasoline station and convenience store

until it sold the property to Sembler E.D.P. Partnership

(Sembler) in 1998 for $822,000.    The closing date for the sale

was April 9, 1998.   As of the closing date, the $190,000 note

that was payable to Amoco had been reduced to $170,000.      Tomson

did not pay the balance of the note.

     Petitioners determined the basis that Tomson had in the

property that it sold to Sembler by taking into account the

following amounts:

                       Source                      Amount

         Purchase of property from Amoco
            - Cash                                $140,000
            - Note                                 190,000
         Tank installation costs                   159,462
         Construction costs
            - Ryko Manufacturing                    45,005
            - Sexton                               145,000
         Sale closing/miscellaneous expenses        64,229
         Additional expenses                       168,304
                                 - 10 -

Accordingly, petitioners determined that Tomson had a $912,000

basis in the property that it sold to Sembler and that the sale

generated a $90,000 capital loss.

     I.   Shenody, Inc.

     In December 1995, Shenody, Inc. (Shenody), was organized as

a Florida corporation.      Messrs. Gowni and Mansour owned and

operated Shenody.    Shenody leased an Amoco gasoline station

during 1996, 1997, 1998, and 1999.

     J.   Bishoy, Inc.

     In July 1996, Bishoy, Inc. (Bishoy), was organized as a

Florida corporation.      Messrs. Gowni and Mansour owned and

operated Bishoy.    From the time that Mina of Forest City

transferred the Amoco gasoline station to Bishoy in 1998, Bishoy

operated the station as a Hess gasoline station.       Bishoy operated

the gasoline station through 1999.

     Bishoy filed Forms 1120S for 1998 and 1999 and reported

ordinary income of $18,580 and $5,295, respectively, from its

operations in those years.      On the Schedule M-2 attached to its

Form 1120S filed for 1998, Bishoy’s accumulated adjustments

account was reported to have a balance of $18,580 as of the end

of that year.   Bradshaw prepared these Forms 1120S for Bishoy.

     K.   Ava Anthony, Inc.

     In September 1996, Ava Anthony, Inc. (Ava Anthony), was

organized as a Florida corporation.       Messrs. Gowni and Mansour
                                - 11 -

owned and operated Ava Anthony.     Ava Anthony operated as a

C corporation during the years in issue.     In 1996, Ava Anthony

owned land.    In 1998, Ava Anthony purchased 10 gasoline stations

from Presto Food Stores for approximately $9 million and operated

them through 1999.

Bradshaw’s Employment by Petitioners

     Beginning in May 1998, petitioners employed Bradshaw to do

the accounting for Mina of Sanford, Mina of Forest City, and

Shenody.    This arrangement eventually expanded to include Ava

Anthony and Bishoy.     Bradshaw did not do the accounting for

petitioners’ other business entities and had not done any other

work for petitioners prior to May 1998.

     From the time that he began working for petitioners,

Bradshaw was aware that petitioners withdrew cash from the

corporate bank accounts of Ava Anthony, Mina of Sanford, Mina of

Forest City, Bishoy, and Shenody before he could reconcile those

accounts.     Bradshaw was also aware that petitioners frequently

wrote checks from the corporate bank accounts of their business

entities and deposited them into their personal bank accounts.

Bradshaw advised petitioners to discontinue this latter practice.

The Mansours’ Income Tax Returns for 1996 through 1999

     On their joint income tax return for 1996, the Mansours

reported the following sources of income:
                                - 12 -

                   Source            Amount of Income

          Wages                          $9,300
          Taxable interest                1,545
          Dividends                       1,000
          Capital gains                     245
          Rental property                 4,504
          Mansour Enterprises             9,044
          Mina of Forest City            10,454
          Mina of Deland                  2,064
          Mina of Sanford                10,524
          Shenody                         5,133
          Bishoy                          6,575

The Mansours reported taxable income of $27,204 and total tax of

$4,084 for 1996.   The Mansours identified Mansour Enterprises,

Mina of Forest City, Mina of Deland, and Mina of Sanford as

S corporations on this return.    The IRS received the Mansours’

1996 return on September 28, 1998, in an envelope that was

postmarked September 25, 1998.    Tax Aid & Accounting, Inc.,

prepared the Mansours’ 1996 return.

     On their joint income tax return for 1997, the Mansours

reported the following sources of income:

                   Source             Amount of Income

          Taxable interest                  $98
          Dividends                          68
          Capital gains                   2,343
          Gambling winnings               2,500
          Rental properties               5,650
          Mansour Enterprises            12,000
          Mina of Forest City            24,202
          Mina of Sanford                42,053
          Mansour’s of Mt. Dora           8,000

The Mansours reported taxable income of $52,130 and total tax of

$9,239 for 1997.   The Mansours identified Mansour Enterprises,
                              - 13 -

Mina of Forest City, Mina of Sanford, and Mansour’s of Mt. Dora

as S corporations on this return.   Bradshaw prepared the

Mansours’ 1997 return.

     On their joint income tax return for 1998, the Mansours

reported the following sources of income and loss:

               Source               Amount of Income (Loss)

     Wages                                 $19,200
     Taxable interest                           78
     Dividends                                  23
     Tomson                                (45,000)
     Short-term capital gains                1,994
     Sales of business property             36,557
     Capital gain distributions                 19
     Rental properties                      (2,465)
     Mansour Enterprises                    13,000
     Mina of Forest City                      (756)
     Mina of Sanford                        39,144
     Mansour’s of Mt. Dora                   6,300
     Shenody                                (3,679)
     Bishoy                                  9,290

The Mansours reported taxable income of $29,588 and total tax of

$3,636 for 1998.   The $45,000 loss reported by the Mansours with

respect to Tomson represented one-half of the long-term capital

loss that was calculated from Tomson’s sale of its gasoline

station to Sembler in 1998.   The Mansours identified Mansour

Enterprises, Mina of Forest City, Mina of Sanford, Mansour’s of

Mt. Dora, Shenody, and Bishoy as S corporations on this return.

Bradshaw prepared the Mansours’ 1998 return.

     On their joint income tax return for 1999, the Mansours

reported the following sources of income and loss:
                                - 14 -

                 Source                  Amount of Income (Loss)

  Wages                                         $39,475
  Taxable interest                                   35
  Dividends                                          51
  Short-term capital losses                      (2,028)
  Long-term capital loss carryover               (3,430)
  Capital gain distributions                        259
  Mansour Enterprises                             5,700
  Mina of Sanford                               (10,023)
  Mansour’s of Mt. Dora                          12,150
  Shenody                                        (6,325)
  Bishoy                                          2,647

The Mansours reported taxable income of $2,160 and total tax of

zero for 1999.   The Mansours identified Mansour Enterprises, Mina

of Sanford, Mansour’s of Mt. Dora, Shenody, and Bishoy as

S corporations on this return.    Bradshaw prepared the Mansours’

1999 return.

The Gownis’ Income Tax Returns for 1998 and 1999

     On their joint income tax return for 1998, the Gownis

reported the following sources of income and loss:

                   Source        Amount of Income (Loss)

          Wages                           $15,000
          Taxable interest                  8,505
          Tomson                          (45,000)
          Mina of Forest City                (756)
          Mina of Sanford                  39,144
          Shenody                          (3,680)
          Bishoy                            9,290

The Gownis reported taxable income of $30,984 and total tax of

$3,846 for 1998.    The $45,000 loss reported by the Gownis with

respect to Tomson represented one-half of the long-term capital

loss that was calculated from Tomson’s sale of its gasoline
                              - 15 -

station to Sembler in 1998.   The Gownis were limited to

recognizing $3,000 of this loss in 1998.    The Gownis identified

Mina of Forest City, Mina of Sanford, Shenody, and Bishoy as

S corporations on this return.   Bradshaw prepared the Gownis’

1998 return.

     On their joint income tax return for 1999, the Gownis

reported the following sources of income and loss:

                Source                 Amount of Income (Loss)

  Wages                                        $39,475
  Taxable interest                                 827
  Long-term capital loss carryover             (42,000)
  Mina of Sanford                              (10,023)
  Shenody                                       (6,325)
  Bishoy                                         2,647

The Gownis reported taxable income of zero for 1999.      The Gownis

were limited to recognizing $3,000 of their reported $42,000

long-term capital loss carryover in 1999.   The Gownis identified

Mina of Sanford, Shenody, and Bishoy as S corporations on this

return.   Bradshaw prepared the Gownis’ 1999 return.

     The Gownis requested an extension to file their 1999 return.

Their first request extended the time to file to August 15, 2000.

Their second request extended the time to file to October 15,

2000.   On Form 4868, Application for Automatic Extension of Time

to File U.S. Individual Income Tax Return, the Gownis estimated

that their total tax liability for 1999 was zero.    The Gownis’

1999 return was received by the IRS on November 6, 2000, in an

envelope with a postage meter date of November 3, 2000.
                              - 16 -

Examination of the Mansours’ Income Tax Returns for
1996 through 1999

     The examination of the Mansours’ income tax return for 1996

began in June 1999 and expanded to include 1997, 1998, and 1999.

The Mansours executed a power of attorney in favor of Bradshaw

with respect to their income tax returns for 1996, 1997, and

1998.   During the examination of the Mansours’ income tax

returns, the IRS made requests for copies of workpapers, the

income tax returns of their business entities, and bank

statements.   The Mansours did not produce adequate records with

respect to those requests, however, so the IRS summonsed the

Mansours’ bank records in order to make an appropriate

determination of their income for those years.

     In determining the Mansours’ income for 1996, the IRS

summonsed and evaluated copies of the bank statements from, the

checks written for $500 or more on, and any items that were

listed on deposit tickets totaling $500 or more that were

deposited to the Mansours’ personal bank account at First Union

National Bank of Florida (First Union) for that year.    In

determining the Mansours’ income for 1997, the IRS summonsed and

evaluated copies of the bank statements from, checks written for

$500 or more on, and any items that were listed on deposit

tickets totaling $500 or more that were deposited to the

Mansours’ personal bank account at First Union as well as the

bank statements from, checks written for $1,000 or more on, and
                                - 17 -

any items that were listed on deposit tickets totaling $300 or

more that were deposited to the Mansours’ personal bank account

at SunTrust Bank (SunTrust) for that year.   In determining the

Mansours’ income for 1998 and 1999, the IRS summonsed and

evaluated copies of the bank statements from, checks written for

$1,000 or more on, and any items that were listed on deposit

tickets totaling $300 or more that were deposited to the

Mansours’ personal bank account at SunTrust for those years.

During the examination of the Mansours’ bank records, the IRS

requested that the Mansours provide documentation and

explanations as to any nontaxable items that were deposited to

their personal bank accounts.    The IRS received information about

Mina of Sanford’s shareholder loan account in response to those

requests.

     The examination of the Mansours’ income tax returns for 1996

through 1999 and the evaluation and analysis of their bank

records and other information spanned 2 years and consumed more

than 300 hours of revenue agent time.

Results of the Examination of the Mansours’ Income Tax Returns

     A.     1996

     The IRS made the following determinations with respect to

the Mansours for 1996:
                                - 18 -

          1.   Unreported Income From the Operations of Mansour
               Enterprises

     The corporate income tax return for Mansour Enterprises for

1996 reported ordinary income of $53,400 from its operations

during that year.    The IRS determined that Mansour Enterprises

was an S corporation during 1996 and that the Mansours’

distributable share of this income was $26,700.    The Mansours

reported income from the operations of Mansour Enterprises in the

amount of $9,044 on their 1996 return.    Accordingly, the IRS

determined that the Mansours should have included an additional

$17,656 in income.

          2.   Corporate Distributions

     The Mansours received and deposited into their personal bank

account at First Union checks from Micca, net of repayments,

totaling $52,000.    The IRS determined that the Mansours should

have reported this amount as dividend income.

     The Mansours received and deposited into their personal bank

account at First Union checks from Mina of Forest City, net of

repayments, totaling $24,484.    The IRS determined that Mina of

Forest City was an S corporation during 1996 and that the

Mansours had failed to establish their basis in their Mina of

Forest City stock.    Accordingly, because the Mansours reported

income of $10,454 from the operations of Mina of Forest City on

their 1996 return, the IRS determined that the Mansours should
                                 - 19 -

have included an additional $14,030 in income as a result of

these distributions.

     The Mansours received and deposited into their personal bank

account at First Union checks from Mina of Sanford, net of

repayments, totaling $31,750.     The IRS determined that Mina of

Sanford was an S corporation during 1996 and that the Mansours

had failed to establish their basis in their Mina of Sanford

stock.    Accordingly, because the Mansours reported income of

$10,524 from the operations of Mina of Sanford on their 1996

return, the IRS determined that the Mansours should have included

an additional $21,226 in income as a result of these

distributions.

            3.    Other Income

     The Mansours received and deposited into their personal bank

account at First Union unexplained amounts of cash and checks

from sources other than their business entities or those reported

on their income tax return totaling $138,235.     The IRS determined

that the Mansours should have reported this amount on their 1996

return as income from self-employment.

     B.    1997

     The IRS determined that the Mansours received and deposited

into their personal bank accounts at First Union and SunTrust

unexplained amounts of cash and checks from sources other than

their business entities or those reported on their income tax
                                - 20 -

return totaling $44,818.    The IRS determined that the Mansours

should have reported this amount on their 1997 return as income

from self-employment.

     C.   1998

     The IRS made the following determinations with respect to

the Mansours for 1998:

           1.    Distributable Gain From the Sale of Property by
                 Tomson

     Tomson had a $413,696 basis in the property that it sold to

Sembler and recognized a $408,304 gain on the sale.    The IRS

determined that Tomson was an S corporation during 1998 and that

$204,152 of this gain was attributable to the Mansours.    Because

the Mansours reported a $45,000 loss from this sale on their 1998

return, the IRS adjusted the Mansours’ income to reflect this

gain.

           2.    Corporate Distributions

     The Mansours received and deposited into their personal bank

account at SunTrust checks from Ava Anthony, net of repayments,

totaling $16,500.    The IRS determined that the Mansours should

have reported this amount as dividend income.

     The Mansours received and deposited into their personal bank

account at SunTrust checks from Mansour Enterprises, net of

repayments, totaling $22,600.    The IRS determined that Mansour

Enterprises was an S corporation during 1998 and that the

Mansours had failed to establish their basis in their Mansour
                                - 21 -

Enterprises stock.    Accordingly, because the Mansours reported

income of $13,000 from the operations of Mansour Enterprises on

their 1998 return, the IRS determined that the Mansours should

have included an additional $9,600 in income as a result of these

distributions.

          3.     Other Income

     The Mansours received and deposited into their personal bank

account at SunTrust unexplained amounts of cash and checks from

sources other than their business entities or those reported on

their income tax return totaling $122,853.    The IRS determined

that the Mansours should have reported this amount on their 1998

return as income from self-employment.

     D.   1999

     The IRS made the following determinations with respect to

the Mansours for 1999:

           1.    Disallowance of Long-Term Capital Loss Carryover

     The long-term capital loss carryover of $3,430 that was

reported on the Mansours’ 1999 return was disallowed because it

resulted from their reporting a capital loss rather than a

capital gain from the transaction between Tomson and Sembler on

their 1998 return.    The IRS adjusted the Mansours’ income to

account for this disallowance.
                                - 22 -

          2.   Corporate Distributions

     The Mansours received and deposited into their personal bank

account at SunTrust checks from Mansour Enterprises, net of

repayments, totaling $32,675.    The IRS determined that Mansour

Enterprises was an S corporation during 1999 and that the

Mansours had failed to establish their basis in their Mansour

Enterprises stock.   Accordingly, because the Mansours reported

income of $5,700 from the operations of Mansour Enterprises on

their 1999 return, the IRS determined that the Mansours should

have included an additional $26,975 in income as a result of

these distributions.

          3.   Other Income

     The Mansours received and deposited into their personal bank

account at SunTrust unexplained amounts of cash and checks from

sources other than their business entities or those reported on

their income tax return totaling $112,407.    The IRS determined

that the Mansours should have reported this amount on their 1999

return as income from self-employment.

Examination of the Gownis’ Income Tax Returns for 1998 and 1999

     The examination of the Gownis’ income tax returns for 1998

and 1999 began in October 2000 as a result of the identification

of a common issue concerning the loss claimed in 1998 with

respect to Tomson.   The Gownis executed a power of attorney in

favor of Bradshaw with respect to their income tax returns for
                                - 23 -

1998 and 1999.   During the examination of the Gownis’ income tax

returns, the IRS made requests for copies of workpapers and bank

statements.   Because the Gownis did not produce adequate records

with respect to those requests, the IRS summonsed the Gownis’

bank records in order to make an appropriate determination of

their income for those years.

     In determining the Gownis’ income for 1998, the IRS

summonsed and evaluated copies of (1) the bank statements from,

checks written for more than $500 on, and any items that were

listed on deposit tickets totaling $500 or more that were

deposited to the Gownis’ personal bank accounts at NationsBank,

First Union, Great Western Bank, Washington Mutual Bank, and

SunTrust for that year and (2) the statements from the Gownis’

personal VISA account for that year.     In determining the Gownis’

income for 1999, the IRS summonsed and evaluated copies of the

bank statements from, checks written for more than $500 on, and

any items that were listed on deposit tickets totaling $500 or

more that were deposited to the Gownis’ personal bank accounts at

NationsBank, Washington Mutual Bank, and SunTrust for that year.

In addition, the IRS summonsed and evaluated the following

sources of information for purposes of determining the Gownis’

income for 1998 and 1999:   (1) Additional documents from

NationsBank pertaining to the Gownis’ certificate of deposit;

(2) information related to the Gownis from the Money Transfer
                                - 24 -

Query System at Bank of America; (3) a copy of NationsBank’s

records concerning a loan to Mr. Gowni in 1996; (4) a copy of

NationsBank’s records concerning a loan to Mr. Gowni in 1997;

(5) a copy of NationsBank’s records concerning a loan to

Mr. Gowni in 1999; and (6) a copy of NationsBank’s records

concerning a loan to Ava Anthony in 1999.    During the examination

of the Gownis’ bank records, the IRS requested that the Gownis

provide documentation and explanations as to any nontaxable items

that were deposited to their personal bank accounts.    The IRS

received information about Mina of Sanford’s shareholder loan

account in response to those requests.

     The examination of the Gownis’ income tax returns for 1998

and 1999 and the evaluation and analysis of their bank records

and other information took approximately 1 year and consumed more

than 150 hours of revenue agent time.

Results of the Examination of the Gownis’ Income Tax Returns

     A.   1998

     The IRS made the following determinations with respect to

the Gownis for 1998:

           1.    Distributable Gain From the Sale of Property by
                 Tomson

     Tomson had a $413,696 basis in the property that it sold to

Sembler and recognized a $408,304 gain on the sale.    The IRS

determined that Tomson was an S corporation during 1998 and that

$204,152 of this gain was attributable to the Gownis.    Because
                                 - 25 -

the Gownis reported a $45,000 loss from this sale on their 1998

return, the IRS adjusted the Gownis’ income to reflect this gain.

            2.    Corporate Distributions

     The Gownis received and deposited into their personal bank

accounts checks from Ava Anthony, net of repayments, totaling

$13,640.    The IRS determined that the Gownis should have reported

this amount as dividend income.

     The Gownis received and deposited into their personal bank

accounts checks from Tomson, net of repayments, totaling

$101,000.    The IRS determined that these distributions were made

from sources other than the proceeds of the transaction between

Tomson and Sembler.     Therefore, the IRS determined that the

Gownis should have included this amount in income.

            3.    Other Income

     The Gownis received and deposited into their personal bank

accounts unexplained amounts of cash and checks from sources

other than their business entities or those reported on their

income tax return totaling $80,868.       The IRS determined that the

Gownis should have reported this amount on their 1998 return as

income from self-employment.

     B.    1999

     The IRS made the following determinations with respect to

the Gownis for 1999:
                               - 26 -

          1.   Disallowance of Long-Term Capital Loss Carryover

     The long-term capital loss carryover of $42,000 that was

reported on the Gownis’ 1999 return was disallowed because it

resulted from their reporting a capital loss rather than a

capital gain from the transaction between Tomson and Sembler on

their 1998 return.    The IRS adjusted the Gownis’ income to

account for this disallowance.

          2.   Corporate Distributions

     The Gownis received and deposited into their personal bank

accounts checks from Tomson, net of repayments, totaling $50,610.

The IRS determined that Tomson was an S corporation during 1999

and that these distributions were made from sources other than

the proceeds of the transaction between Tomson and Sembler.

Therefore, the IRS determined that the Gownis should have

included this amount in income.

     The Gownis received and deposited into their personal bank

accounts checks from Mina of Forest City, net of repayments,

totaling $63,277.    The IRS determined that Mina of Forest City

was an S corporation during 1999.    Accordingly, the IRS

determined the net taxable distribution that the Gownis received

from Mina of Forest City by reducing this $63,277 amount by

one-half of the ending balance of the accumulated adjustments

account reported on Mina of Forest City’s Form 1120S filed for
                                  - 27 -

1998.     As a result, the IRS determined that the Gownis should

have included an additional $30,937 in income.

     The Gownis received and deposited into their personal bank

accounts checks from Bishoy, net of repayments, totaling $32,614.

The IRS determined that Bishoy was an S corporation during 1999.

Accordingly, the IRS determined the net taxable distribution that

the Gownis received from Bishoy by reducing this $32,614 amount

by (1) the amount of income that the Gownis reported from the

operations of Bishoy on their 1999 return and (2) one-half of the

ending balance of the accumulated adjustments account reported on

Bishoy’s Form 1120S filed for 1998.        As a result, the IRS

determined that the Gownis should have included an additional

$20,677 in income.

     The Gownis received and deposited into their personal bank

accounts checks from Pyramid, net of repayments, totaling

$39,641.     The IRS could not determine whether Pyramid was an

S corporation during 1999.       The IRS did, however, determine that

the Gownis should have included this amount in income.

             3.   Other Income

        The Gownis received and deposited into their personal bank

accounts unexplained amounts of cash and checks from sources

other than their business entities or those reported on their

income tax return totaling $180,781.        The IRS determined that the
                               - 28 -

Gownis should have reported this amount on their 1999 return as

income from self-employment.

Procedural Matters

     The Gownis and the Mansours filed their respective petitions

with the Court on May 3, 2002.       Included in the Mansours’

petition was the following statement:

          5. The facts upon which Petitioners rely, as the
     basis of their case, are as follows:

               *     *     *     *      *    *    *

               d. Petitioners’ [sic] can prove that the
     gross income they reported in 1996 through 1999
     represented their worldwide gross taxable income and
     that all other bank deposits constitute non-taxable
     income.

The Gownis included a similar statement in their petition as to

the years 1998 and 1999.

     On April 22, 2003, the Court served on petitioners Notices

Setting Case for Trial.    Attached to the Notices Setting Case for

Trial was the Court’s Standing Pretrial Order.        The Standing

Pretrial Order provided, in pertinent part, as follows:

          To facilitate an orderly and efficient disposition
     of all cases on the trial calendar, it is hereby

          ORDERED that all facts shall be stipulated to the
     maximum extent possible. All documentary and written
     evidence shall be marked and stipulated in accordance
     with Rule 91(b), unless the evidence is to be used
     solely to impeach the credibility of a witness. * * *
     Any documents or materials which a party expects to
     utilize in the event of trial (except solely for
     impeachment), but which are not stipulated, shall be
     identified in writing and exchanged by the parties at
     least 14 days before the first day of the trial
                              - 29 -

     session. The Court may refuse to receive in evidence
     any document or material not so stipulated or
     exchanged, unless otherwise agreed by the parties or
     allowed by the Court for good cause shown. * * *

     On July 8, 2003, respondent served on petitioners

Respondent’s Interrogatories to Petitioners (interrogatories) and

Respondent’s Request for Production of Documents (requests for

production of documents).   The interrogatories that were served

on the Mansours requested, inter alia, that they describe the

nature, amount, and date of the (1) payments received from Micca

in 1996; (2) payments received from Ava Anthony in 1998;

(3) deposits to their personal bank account at First Union in

1996 and 1997; (4) deposits to their personal bank account at

SunTrust in 1997, 1998, and 1999; (5) payments to and from Mina

of Forest City and Mina of Sanford in 1996; and (6) deposits to

the bank accounts of Mansour Enterprises in 1999.    The

interrogatories that were served on the Gownis requested, inter

alia, that they describe the nature, amount, and date of the

(1) deposits to their personal bank accounts at Washington Mutual

Bank, First Union, NationsBank, and SunTrust in 1998 and 1999 and

(2) deposits to the bank accounts of Ava Anthony, Tomson, Mina of

Forest City, Pyramid, and Bishoy in 1998 and 1999.    The requests

for production of documents that were served on petitioners

requested, inter alia, all documents and records that (1) proved

that the gross income that the Mansours reported in 1996, 1997,

1998, and 1999 and that the Gownis reported in 1998 and 1999
                              - 30 -

represented their respective worldwide taxable income for those

years and that all other bank deposits were nontaxable sources of

income and (2) pertained to the matter about which respondent

inquired in respondent’s written interrogatories.   Petitioners

did not respond to either the interrogatories or the requests for

production of documents.

     On August 11, 2003, respondent filed with the Court in these

cases motions to compel responses to respondent’s interrogatories

and motions to compel production of documents.   On August 14,

2003, the Court issued Orders that directed petitioners, in

pertinent part, as follows:

          ORDERED: That so much of respondent’s * * *
     motions that seeks an order directing compliance with
     Respondent’s Interrogatories to Petitioners and
     Respondent’s Request for Production of Documents, both
     served on July 8, 2003, is granted, and petitioners
     shall, on or before September 2, 2003, (1) produce to
     counsel for respondent those responses requested in
     Respondent’s Interrogatories to Petitioners served on
     petitioners on July 8, 2003, and (2) produce to counsel
     for respondent those documents requested in
     Respondent’s Request for Production of Documents served
     on petitioners on July 8, 2003. * * *

Petitioners did not comply with the Court’s Orders.

                              OPINION

Respondent’s Use of the Bank Deposits Method

     Taxpayers bear the responsibility to maintain books and

records that are sufficient to establish their income.   See sec.

6001; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959

F.2d 16 (2d Cir. 1992); sec. 1.446-1(a)(4), Income Tax Regs; see
                              - 31 -

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

affd. 566 F.2d 2 (6th Cir. 1977).   When a taxpayer fails to keep

adequate books and records, the Commissioner is authorized to

determine the existence and amount of the taxpayer’s income by

any method that clearly reflects income.    Sec. 446(b); Mallette

Bros. Const. Co. v. United States, 695 F.2d 145, 148 (5th Cir.

1983); Webb v. Commissioner, 394 F.2d 366, 371-372 (5th Cir.

1968), affg. T.C. Memo. 1966-81; see also Holland v. United

States, 348 U.S. 121, 131-132 (1954).    The Commissioner’s

reconstruction of a taxpayer’s income need only be reasonable in

light of all surrounding facts and circumstances.     Schroeder v.

Commissioner, 40 T.C. 30, 33 (1963); see also Giddio v.

Commissioner, 54 T.C. 1530, 1533 (1970).     The Commissioner is

given latitude in determining which method of reconstruction to

apply when taxpayers fail to maintain adequate books and records.

Boyett v. Commissioner, 204 F.2d 205, 208 (5th Cir. 1953), affg.

a Memorandum Opinion of this Court dated Mar. 14, 1951; Kenney v.

Commissioner, 111 F.2d 374, 375 (5th Cir. 1940), affg. a

Memorandum Opinion of this Court dated July 28, 1938; Petzoldt v.

Commissioner, 92 T.C. 661, 693 (1989).     The method of

reconstruction employed by the Commissioner is not invalidated

solely because the Commissioner’s income determination may not be

completely correct.   DiLeo v. Commissioner, supra at 868; see

also Marcello v. Commissioner, 380 F.2d 494, 497 (5th Cir. 1967),
                              - 32 -

affg. in part and revg. in part T.C. Memo. 1964-302; Halle v.

Commissioner, 175 F.2d 500, 502-503 (2d Cir. 1949), affg. 7 T.C.

245 (1946).

      Respondent chose to apply the bank deposits method in these

cases because petitioners failed to maintain adequate books and

records for the years in issue.   A bank deposit is prima facie

evidence of income.   Tokarski v. Commissioner, 87 T.C. 74, 77

(1986); see also Clayton v. Commissioner, 102 T.C. 632, 645

(1994); DiLeo v. Commissioner, supra at 868; Estate of Mason v.

Commissioner, supra at 657.   When a taxpayer keeps no books or

records and has large bank deposits, the Commissioner is not

acting arbitrarily or capriciously by resorting to the bank

deposits method.   DiLeo v. Commissioner, supra at 867.   The bank

deposits method of reconstruction assumes that all of the money

deposited into a taxpayer’s account is taxable income unless the

taxpayer can show that the deposits are not taxable.   See id. at

868; see also Price v. United States, 335 F.2d 671, 677 (5th Cir.

1964).   The Commissioner need not show a likely source of the

income when using the bank deposits method, but the Commissioner

must take into account any nontaxable items or deductible

expenses of which the Commissioner has knowledge.   See Price v.

United States, supra at 677; Tokarski v. Commissioner, supra at

77.
                                - 33 -

     Respondent used the bank deposits method to identify two

sources of unreported income.    The first source was determined

from checks written from the corporate bank accounts of

petitioners’ business entities and deposited into petitioners’

personal bank accounts.   The second source was determined from

deposits of unexplained amounts of cash and checks from sources

other than petitioners’ business entities or those reported on

petitioners’ income tax returns into petitioners’ personal bank

accounts.   Respondent submitted into evidence copies of the bank

records that disclosed all of the deposits to as well as the

disbursements from petitioners’ personal bank accounts during the

years in issue.   Respondent analyzed these bank records and

prepared schedules that summarized the deposits to, disbursements

from, and other transactions occurring in petitioners’ personal

bank accounts during those years.    Respondent identified deposits

that were not taxable or that were previously reported by

petitioners.   Consequently, respondent has properly reconstructed

petitioners’ income under the bank deposits method for the years

in issue.

     If the taxpayer contends that the Commissioner’s use of the

bank deposits method is unfair or inaccurate, the burden is on

the taxpayer to show such unfairness or inaccuracy.    Price v.

United States, supra at 677.    Petitioners must show either that

respondent’s computation of their income is inaccurate or that
                               - 34 -

the deposits made into their personal bank accounts are not

taxable.   See Marcello v. Commissioner, 380 F.2d 509, 511 (5th

Cir. 1967), affg. T.C. Memo. 1964-303; Price v. United States,

supra at 678; DiLeo v. Commissioner, 96 T.C. at 871.      The burden

of proof in these cases has not shifted to respondent under

section 7491 because petitioners failed to maintain adequate

books and records and to cooperate with reasonable requests for

information and documents.    See sec. 7491(a)(2).

     A.    Distributions From Petitioners’ Business Entities

     Respondent determined that the Mansours received and failed

to report dividend distributions from two C corporations:      Micca

in 1996 and Ava Anthony in 1998.    Respondent also determined that

the Mansours received and failed to report distributions from

three S corporations:    Mina of Forest City in 1996, Mina of

Sanford in 1996, and Mansour Enterprises in 1998 and 1999.      With

respect to the Gownis, respondent determined that they received

and failed to report dividend distributions from one

C corporation:    Ava Anthony in 1998.    Respondent also determined

that the Gownis received and failed to report distributions from

three S corporations:    Tomson in 1998 and 1999, Mina of Forest

City in 1999, and Bishoy in 1999.    In addition, respondent

determined that the Gownis received and failed to report

distributions from Pyramid in 1999.      Respondent did not make a

determination as to Pyramid’s status in 1999, and there is no
                                - 35 -

evidence in the record that indicates whether Pyramid elected to

be taxed under subchapter S at the time that it made

distributions to the Gownis in 1999.

     At trial, respondent conceded that a mathematical error had

occurred during the analysis of the checks that the Gownis

received from Ava Anthony and deposited into their personal bank

accounts during 1998.    Accordingly, the amount of the checks that

the Gownis received from Ava Anthony and deposited into their

personal bank accounts, net of repayments, must be adjusted from

$13,640 to $1,640 for 1998 to reflect this concession.

            1.   Petitioners’ Arguments

     Except for the concession that petitioners achieved with

respect to the dividend distribution that the Gownis received

from Ava Anthony in 1998, petitioners have not challenged the

computational accuracy of respondent’s analysis of the deposits

of checks from petitioners’ business entities into petitioners’

personal bank accounts.    Petitioners have, however, asserted

several arguments as to the nontaxable nature of some of the

distributions that they received from three of their business

entities.    Specifically, petitioners argue that (1) the

distributions that the Gownis received from Mina of Forest City

and Bishoy in 1999 were repayments of loans that the Gownis had

made to those entities in prior years; (2) respondent failed to

offset the distributions that the Gownis received from Tomson in
                                - 36 -

1998 and 1999 against their basis in their Tomson stock; and

(3) $50,000 of the distribution that the Mansours received from

Micca in 1996 was not taxable because Mr. Mansour used that

amount to buy out another shareholder’s interest in Micca.     We

address each of these arguments in turn.

          2.     Repayment of Shareholder Loans by Mina of Forest
                 City and Bishoy

     Whether a withdrawal of funds by a shareholder from a

corporation or an advance made by a shareholder to a corporation

creates a true debtor-creditor relationship is a factual question

to be decided based on all of the relevant facts and

circumstances.     Haag v. Commissioner, 88 T.C. 604, 615 (1987),

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

also Haber v. Commissioner, 52 T.C. 255, 266 (1969), affd. 422

F.2d 198 (5th Cir. 1970); Roschuni v. Commissioner, 29 T.C. 1193,

1201-1202 (1958), affd. 271 F.2d 267 (5th Cir. 1959).    For

disbursements to constitute true loans, there must have been, at

the time that the funds were transferred, an unconditional

obligation on the part of the transferee to repay the money and

an unconditional intention on the part of the transferor to

secure repayment.     Haag v. Commissioner, supra at 615-616; see

also Haber v. Commissioner, supra at 266.     Direct evidence of a

taxpayer’s state of mind is generally unavailable, so courts have

focused on certain objective factors to distinguish repayments of

bona fide loans from disguised dividends, compensation, and
                               - 37 -

contributions to capital.   The factors considered relevant for

purposes of identifying bona fide loans include (1) the existence

or nonexistence of a debt instrument; (2) provisions for

security, interest payments, and a fixed payment date;

(3) treatment of the funds on the corporation’s books;

(4) whether repayments were made; (5) the extent of the

shareholder’s participation in management; and (6) the effect of

the “loan” on the shareholder/employee’s salary.   Haber v.

Commissioner, supra at 266; see also In re Indian Lake Estates,

Inc., 448 F.2d 574, 578-579 (5th Cir. 1971); Haag v.

Commissioner, supra at 616-617 & n.6.   When the individuals are

in substantial control of the corporation, as petitioners were in

these cases, such control invites a special scrutiny of the

situation.   Haber v. Commissioner, supra at 266; Roschuni v.

Commissioner, supra at 1202.   For the reasons set forth below, we

conclude that the facts of record do not support the Gownis’

attempt to characterize the distributions that they received from

Mina of Forest City and Bishoy in 1999 as repayments of bona fide

loans.

     First, no note or other evidence of indebtedness

representing the amount or existence of the shareholder loans was

given to the Gownis by Mina of Forest City or Bishoy.

     Second, no evidence indicates that Mina of Forest City or

Bishoy provided any collateral or security for repayment of these

purported loan amounts or that the corporations made any
                              - 38 -

agreement with the Gownis as to the time of repayment or the

interest to be paid.

     Third, whether the amounts contributed by the Gownis to Mina

of Forest City and Bishoy were treated as loans or as

contributions to capital by the corporations is not established

because the corporate books of Mina of Forest City and Bishoy

were never offered into evidence.

     Fourth, the Gownis have failed to establish the amounts of

the allegedly outstanding loans due to them from Mina of Forest

City and Bishoy for 1999.   Petitioners contend that the

Schedules L, Balance Sheets per Books, attached to the Forms

1120S filed by Mina of Forest City in 1998 and Bishoy in 1999

support the conclusion that the Gownis made loans to these

corporations.   While the Schedules L indicate that there are

loans from shareholders outstanding for Mina of Forest City and

Bishoy, they do not establish the amount of the outstanding

shareholder loans due to the Gownis for 1999.   (Moreover, on

Mr. Gowni’s Schedule K-1, Shareholder’s Share of Income, Credits,

Deductions, etc., that is attached to Bishoy’s Form 1120S for

1999, there is no amount of repayment listed on line 21, “Amount

of loan repayments for ‘Loans from Shareholders’”.)   The schedule

of purported loans prepared by Mr. Gowni is also insufficient to

establish the outstanding shareholder loan amounts due to the

Gownis from Mina of Forest City and Bishoy for 1999 because it

details only the amounts that the Gownis paid to Mina of Forest
                               - 39 -

City and Bishoy during the course of their ownership and does not

include an analysis of the amounts that these corporations paid

to the Gownis prior to 1999.   Without knowing the amounts of the

outstanding shareholder loans due to the Gownis from Mina of

Forest City and Bishoy for 1999, it is impossible to determine

the amount of the distributions that the Gownis received from

these corporations during 1999 that could be characterized as

repayment of these loans.

     Fifth, the Gownis have not established how much compensation

Mr. Gowni received for the services that he provided for Mina of

Forest City and Bishoy.   Mr. Gowni testified that he worked 10

hours per day 5-6 days per week for his business entities

(including Mina of Forest City and Bishoy) during the years in

issue.   It is unlikely that Mr. Gowni received no compensation

for those services.   It is more likely than not that the

distributions were compensation rather than loan repayments.

     We conclude that the Gownis did not intend to create a true

debtor-creditor relationship with Mina of Forest City and Bishoy.

The Gownis treated these entities as their own personal bank,

depositing and withdrawing funds at will.   Accordingly, we

sustain respondent’s contention that the distributions that the

Gownis received from Mina of Forest City and Bishoy during 1999

did not constitute repayment of bona fide loans.
                                - 40 -

          3.     Offset of the Gownis’ Basis in Their Tomson Stock

     By a Stipulation of Settled Issues, the parties agreed to

certain elements of the calculation of the capital gain resulting

from Tomson’s sale of property to Sembler in 1998.    They also

stipulated that “any properly allowable capital costs that the

petitioners can establish with regard to equipment rental of

Tomson, Inc. [that] related to gasoline dispenser rentals” would

be taken into account in this calculation.     Petitioners have not

established that Tomson incurred any capital costs for equipment

rentals related to gasoline dispensers.    Consequently, the

capital gain will be calculated in accordance with the agreed

upon elements.

     Petitioners contend that the gain generated by the

transaction between Tomson and Sembler increased their basis in

their Tomson stock, and, as a result, the payments made by Tomson

to the Gownis in 1998 and 1999 should not be included in the

Gownis’ income because the Gownis’ stock basis should have been

sufficient to offset the amount of these payments.    Respondent

asserts that the Gownis should have included the amounts of these

distributions in income.

     The parties agree that the Gownis should have reported

50 percent of the capital gain that resulted from Tomson’s sale

of property to Sembler in 1998.    Consequently, the Gownis’ basis

in their Tomson stock should be increased to account for their

distributable share of the gain.    Sec. 1367(a)(1); see also sec.
                               - 41 -

1.1367-1(b), (d)(1), Income Tax Regs.     Respondent does not

account for the Gownis’ increased basis in their Tomson stock in

arguing that the payments that the Gownis received from Tomson

during 1998 and 1999 should be included in income.     Instead,

respondent contends that Tomson could not have made a

“distribution” to the Gownis after May 29, 1998, because Tomson’s

checking account balance was $8,177 on that date.     Respondent

appears to be arguing that a corporation’s checking account

balance is determinative on the issue of whether a corporation

made a distribution of property to a shareholder.     Respondent

does not cite any authority for this proposition, and we see no

reason to adopt such an arbitrary approach.

     Section 1368(a) directs that a distribution of property made

by an S corporation with respect to its stock is generally

treated in the manner provided in either section 1368(b) or

section 1368(c), whichever applies.     For purposes of section

1368(a), “property” means money, securities, and any other

property, except that such term does not include stock in the

corporation making the distribution (or rights to acquire such

stock).   Sec. 317(a).   Respondent determined that the Gownis

received distributions of money from Tomson in 1998 and 1999

totaling $101,000 and $50,610, respectively.     Respondent has not

argued that these distributions were made to the Gownis for any

reason other than their ownership of Tomson stock.     Consequently,

section 1368(a) governs the treatment of these distributions.
                               - 42 -

     The record in these cases fails to establish that Tomson had

accumulated earnings and profits as of the end of 1998 or 1999.

Therefore, section 1368(b) sets out the manner in which the

distributions will be treated.   Sec. 1.1368-1(c), Income Tax

Regs.   Under section 1368(b)(1), a distribution shall not be

included in a shareholder’s gross income to the extent that it

does not exceed the shareholder’s adjusted basis in the

corporation’s stock.   If the amount of the distribution exceeds

the shareholder’s adjusted basis in the corporation’s stock, such

excess shall be treated as gain from the sale or exchange of

property.   Sec. 1368(b)(2).

     With respect to 1998, the $101,000 distribution that the

Gownis received from Tomson should be included in income only to

the extent that it exceeds the Gownis’ basis in their Tomson

stock, which, as discussed above, must be determined by taking

into account the Gownis’ share of the gain recognized by Tomson

on its sale to Sembler.   The portion of this distribution that is

a nontaxable return of capital must be taken into account under

section 1367(a)(2) and must decrease the Gownis’ basis in their

Tomson stock accordingly.   These calculations should be made

incident to Rule 155 computations in these cases.

     With respect to 1999, the $50,610 distribution that the

Gownis received from Tomson should be included in income only to

the extent that it exceeds the Gownis’ basis in their Tomson

stock as calculated at the end of 1998.   The portion of this
                                  - 43 -

distribution that is a nontaxable return of capital must also be

taken into account under section 1367(a)(2) and must decrease the

Gownis’ basis in their Tomson stock accordingly.      These

calculations also should be made incident to Rule 155

computations in these cases.

          4.     The Nature of the Distribution From Micca

     Respondent determined that the Mansours received a $52,000

dividend distribution from Micca in 1996.      Petitioners contend

that $50,000 of this distribution is not taxable because

Mr. Mansour used that amount “to facilitate Micca’s redemption of

the shares of a minority shareholder, Fouad Aycab.”      Petitioners

do not cite any authority that supports this contention.

Furthermore, the facts upon which petitioners base this

contention are limited to Mr. Mansour’s uncorroborated,

inconsistent, and confusing testimony in response to leading

questions.     The unreliable quality of the testimony is shown by

the following passage:

          Q [By petitioners’ counsel] There’s a memo in
     there. What does that say? Do you see the memo in the
     middle?

          A    [By Mr. Mansour]    It says, Buying partner.

          Q Buying partner, okay. So the money that you
     received from Micca, you sent to Mr. Ayoub [sic]. You
     said this was a repayment of a loan or a buyout of him?

          A    Yes, sir.

          Q    Did he own an interest in Micca?

          A    No, sir.
                                  - 44 -

          Q Okay. So this wouldn’t have been a buyout of
     him, would it?

              A   Most likely it was a loan then.

          Q Okay, but you paid it to him. Why didn’t the
     company just pay it to him? Why was it done this way?

          A I cannot recall what happened actually, but I
     guess to get me an immediate credit. Back then, that’s
     the only way it could be done, to give him his money
     before he leaves.

Accordingly, we sustain respondent’s determination that the

Mansours received a $52,000 dividend distribution from Micca in

1996.

     B.      Petitioners’ “Other Income”

        Petitioners have not challenged the computational accuracy

of respondent’s analysis of the deposits of unexplained amounts

of cash and checks from sources other than petitioners’ business

entities or those reported on petitioners’ income tax returns

into petitioners’ personal bank accounts.       Petitioners have

presented neither evidence nor argument that these deposits are

not taxable or that these deposits do not represent income from

self-employment.       Consequently, we hold that petitioners

understated the income that they received from self-employment in

the amounts set forth in the notices of deficiency.

        C.   Summary

        An examination of the record indicates that respondent’s

determination of petitioners’ income for each of the years in

issue was not completely correct.       The burden was on petitioners,
                              - 45 -

however, to address these errors and to provide alternative

analyses.   The errors do not invalidate respondent’s use of the

bank deposits method in these cases, which was necessitated by

petitioners’ failure to maintain adequate books and records for

themselves as well as for the corporations that they owned and

controlled.   Petitioners’ vague assertions, unsupported by

corroborating records or documents, are not reliable or

persuasive.   If documentation existed, it should have been

produced in response to discovery and/or exchanged with

respondent in accordance with the Court’s Standing Pretrial Order

and the Court’s Orders of August 14, 2003.   Therefore, except to

the extent discussed above, respondent’s determinations of

petitioners’ income for the years in issue are sustained.

Additions to Tax and Accuracy-Related Penalties

     Respondent determined an addition to tax under section

6651(a)(1) with respect to the Mansours for 1996 and with respect

to the Gownis for 1999 as a result of their failure to file

timely returns for those years.   Petitioners have presented

neither evidence nor argument regarding the addition to tax.

     The Commissioner has the burden of production under section

7491(c) and must come forward with sufficient evidence indicating

that it is appropriate to impose the penalty.   Respondent has met

that burden of production in these cases by showing that the

returns were late.   Respondent determined the addition to tax for

late filing for the Mansours because the Mansours’ 1996 return
                              - 46 -

was not filed until September 1998.    Respondent determined the

addition to tax for late filing for the Gownis because, although

the Gownis were granted an extension to file until October 15,

2000, the Gownis’ 1999 return was not filed until November 2000.

     To escape the addition to tax for filing late returns,

petitioners have the burden of proving that the failure to file

did not result from willful neglect and that the failure was due

to reasonable cause.   See United States v. Boyle, 469 U.S. 241,

245 (1985).   Because petitioners failed to present any

explanation as to their late filing, they remain liable under

section 6651.

     Respondent determined accuracy-related penalties with

respect to petitioners under section 6662(a) for one or more of

the following reasons:   (1) Negligence or disregard of rules or

regulations or (2) any substantial understatement of income tax.

Petitioners argue that the accuracy-related penalties should not

be imposed because of their reliance on Bradshaw.

     Under section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

due to, inter alia, negligence or disregard of the rules or

regulations or any substantial understatement of income tax.

Sec. 6662(b)(1) and (2).   The term “negligence” includes any

failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws or to exercise ordinary

and reasonable care in the preparation of a tax return.    Sec.
                               - 47 -

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

“disregard” includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).   An understatement of income tax is

“substantial” if it exceeds the greater of 10 percent of the tax

required to be shown on the return or $5,000.    Sec.

6662(d)(1)(A).   An “understatement” is defined as the excess of

the tax required to be shown on the return over the tax actually

shown on the return, less any rebate.    Sec. 6662(d)(2)(A).

     The Commissioner has the burden of production under section

7491(c) and must come forward with sufficient evidence indicating

that it is appropriate to impose the penalty.    See Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).     Because the

understatement on each of petitioners’ returns satisfies the

definition of “substantial”, respondent has met that burden of

production in these cases.    Once the Commissioner meets the

burden of production, the taxpayer must come forward with

persuasive evidence that the Commissioner’s determination is

incorrect.   Id. at 447.

     The section 6662(a) penalty will not be imposed with respect

to any portion of the underpayment as to which the taxpayer acted

with reasonable cause and in good faith.    Sec. 6664(c)(1); see

also Higbee v. Commissioner, supra at 448.    The decision as to

whether a taxpayer acted with reasonable cause and in good faith

is made by taking into account all of the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.    Relevant
                               - 48 -

factors include the taxpayer’s efforts to assess his or her

proper tax liability, including the taxpayer’s reasonable and

good faith reliance on the advice of a tax professional.    See

id.; see also sec. 1.6664-4(c), Income Tax Regs.

     The record in these cases negates any mitigation by

reasonable cause.   Petitioners’ failure to maintain adequate

books and records constitutes negligence, particularly when that

failure resulted in substantial underreporting of income.    See

sec. 6662(c).    Bradshaw handled only part of petitioners’ income-

producing activities.   Petitioners did not take Bradshaw’s advice

that corporate funds should not be deposited in their personal

bank accounts.   They did not provide to him accurate and complete

information concerning income.   We do not believe that they

relied on him reasonably or in good faith.    Accordingly, the

accuracy-related penalties determined by respondent are

sustained.

     We have considered the arguments of the parties that were

not specifically addressed in this opinion.    Those arguments are

either without merit or irrelevant to our decision.

     To reflect the foregoing and the concessions of the parties,


                                          Decisions will be entered

                                     under Rule 155.
