                           T.C. Memo. 2001-4



                     UNITED STATES TAX COURT



                JOSEPH ALAN PIOLE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19094-96.                  Filed January 9, 2001.


     Joseph Alan Piole, pro se.

     John M. Zoscak, Jr. and Donna P. Leone, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Chief Judge:     Respondent determined deficiencies in

and an addition to tax for fraud and fraud penalties in respect

of petitioner’s tax liabilities for 1988, 1989, 1990, and 1991.

Because petitioner failed to maintain adequate tax records during

the years in issue, respondent relied upon the net worth (plus

expenditures) method to reconstruct petitioner’s taxable income.
                                  - 2 -

Unless otherwise indicated, section references are to sections of

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

the Tax Court Rules of Practice and Procedure.

     After conceding certain items, respondent determined that

petitioner is liable for deficiencies in income tax, an addition

to tax, and penalties for the years and in the amounts as

follows:

                                Addition to Tax      Penalty
           Year   Deficiency     Sec. 6653(b)(1)       Sec. 6663

           1988    $30,660          $22,995                --
           1989     33,549             --                $25,162
           1990      9,280             --                  6,960
           1991     37,835             --                 28,376

The issues to be decided are:      (1) Whether petitioner had

unreported income for the taxable years in issue as determined by

respondent; and (2) whether petitioner is liable for the addition

to tax and penalties for fraud.1

                             FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.        In addition, petitioner


     1
        Respondent conceded certain items underlying his
reconstruction of petitioner=s taxable income for 1989 and 1991,
resulting in a reduction of the deficiencies and fraud penalties
as set forth in the notice of deficiency for those years.
Because we are unable to discern the specific items that
respondent has conceded, the Court=s decision in this case will
be entered pursuant to Rule 155 consistent with the Court=s
findings in this opinion.
                               - 3 -

is deemed to have admitted undenied allegations set forth in

respondent's requests for admissions.   See Rule 90(c).   The

following facts form the basis for respondent's net worth

analysis for the years in issue.   At the time the petition was

filed, petitioner was incarcerated in Terre Haute, Indiana.

     During the years in issue, petitioner received taxable

income from the operation of a taxidermy business, rental

receipts, and the sale of illegal drugs.    In 1994, petitioner was

indicted in the U.S. District Court for the Western District of

Pennsylvania for various crimes including conspiracy to

distribute cocaine between 1986 and August 1994, threatening a

special agent of the Internal Revenue Service, using a firearm in

the commission of a drug trafficking crime, and four counts of

income tax evasion.   On March 9, 1995, after entering a plea of

guilty to the drug conspiracy count, the weapons charge, and

income tax evasion for 1991, petitioner was sentenced to a period

of incarceration.

     Petitioner was born on May 31, 1964.   In 1982, petitioner

graduated from Technical Training School, McKees Rocks,

Pennsylvania.

Assets/Personal Expenditures

     As of December 31, 1986, petitioner owned the following

vehicles:   A 1973 Chevrolet Corvette, vehicle identification No.

(VIN) 16126, for which he had paid $500 in cash; a 1969 Harley
                                - 4 -

Davidson, VIN H7062, for which he had paid $100 in cash; a 1950

Chevrolet, VIN A5965, for which he had paid $1,700 in cash; a

1982 Harley Davidson, VIN 13307, for which he had paid $1,475;

and a 1960 Harley Davidson, VIN H2578, for which he had paid

$1,500.

     As of January 1, 1987, petitioner had cash on hand of

$10,000.    As of January 1, 1987, petitioner had no bank or

brokerage accounts.

     During 1987, petitioner purchased a 1972 GMC pickup, VIN

04714, for which he paid $1,500, and a 1979 Cadillac, VIN 38892,

for which he paid $3,750.

     During 1988, petitioner purchased a 1986 Boss Trailer, VIN

00257, for which he paid $200, and a 1972 Harley Davidson, VIN

296H2, for which he paid $2,900.

     During 1990, petitioner purchased a 1990 Harley Davidson,

VIN 09113, for which he paid $18,910.87, and a 1990 Travelite

Trailer, for which he paid $3,028.90.

     During 1988, petitioner sold the 1982 Harley Davidson, VIN

13307.    During 1989, petitioner sold the 1960 Harley Davidson,

VIN H2578, and the 1979 Cadillac, VIN 38892.    During 1990,

petitioner sold the 1950 Chevrolet, VIN A5965.

     As of December 31, 1987, 1988, 1989, 1990, and 1991,

petitioner owned business equipment with a value (at cost) of

$7,170, $7,670, $12,366, $13,359, and $18,078, respectively.
                               - 5 -

     During August 1987, petitioner purchased from Kim C. and

Mary P. Hammill a building located at 1939 Babcock Boulevard,

Pittsburgh, Pennsylvania (the Babcock building or property).     The

sale price of the Babcock property was $55,000.    In November

1987, petitioner paid $25,000 in cash to Kim C. Hammill in

partial payment of the amount due on the Babcock property.    The

balance of the sale price, $30,000, was the subject of a seller-

financed mortgage on the property.     Petitioner paid $50 for the

recording of the deed and mortgage for the Babcock property, and

$300 for Pennsylvania transfer taxes.

     As of December 31, 1987, petitioner owed $29,556.95 on the

Babcock property.   During 1988, petitioner made monthly cash

mortgage payments of $396.45 to the Hammills.    In September 1988,

petitioner used cash to pay off the balance due on the Babcock

property.

     Petitioner maintained an apartment on the second floor of

the Babcock building and operated a taxidermy business, known as

the Wilderness Taxidermy Studio (Wilderness Taxidermy), on the

first floor of the building.

     During 1987, petitioner opened checking account No. 1534-119

in his name at Equibank.   As of December 31, 1987, 1988, 1989,

1990, and 1991, petitioner’s Equibank checking account had

balances of $1,414.53, $909.99, $645.50, $396.24, and $289.76,

respectively.
                                - 6 -

     During 1987, petitioner opened checking account No. 555-209-

411 in the name of Wilderness Taxidermy at Equibank.   As of

December 31, 1987, 1988, 1989, 1990, and 1991, Wilderness

Taxidermy’s Equibank checking account had balances of $2,657.95,

$3,750.54, $349.50, $1,600.61, and $113.77, respectively.

     During 1987, petitioner opened money market account No.

5607645 in the name of Wilderness Taxidermy at Equibank.    As of

December 31, 1987, Wilderness Taxidermy’s Equibank money market

account had a balance of $985.64, with zero balances thereafter.

     During 1988, petitioner opened money market account No.

5607653 in his name at Equibank.   As of December 31, 1988,

petitioner's Equibank money market account had a balance of

$3,543.01, with zero balances thereafter.

     During 1987, petitioner obtained a certificate of deposit

(CD) from Equibank.    As of December 31, 1987, December 31, 1988,

and November 10, 1989, petitioner's Equibank CD had balances of

$2,500, $2,677.57, and $2,806.37, respectively, with zero

balances thereafter.

     Petitioner continued to own the Babcock building through

December 31, 1991.    During 1987, 1988, and 1989, petitioner made

significant additions and improvements to the Babcock building.

     During 1987, petitioner paid $12,500 in cash to Holtz

Construction Co. (Holtz) for the purchase and installation of a

vinyl window, cedar siding, and trim for the Babcock building.
                                - 7 -

     During 1988, petitioner contracted with Holtz to build a

large addition on the Babcock building.    Because Holtz planned to

relocate out of State, the company prepared a second construction

contract naming Ben Corey Building Contractor (Corey) as the

contractor to perform the work described under the first

contract.   The cost of the construction work to be performed

under both contracts totaled $162,000.    During August and

September 1988, petitioner paid $20,000 in cash to Holtz pursuant

to the first contract.    Holtz retained $15,000 of the $20,000

payment as its fee for completing the building design plans and

preparing the contract.    Holtz transferred the remaining $5,000

to Corey.

     During 1988, petitioner paid a total of $90,825.32 to Corey

under the second contract.    During 1989, petitioner paid a total

of $72,062.64 to Corey under the second contract.    Petitioner

made a substantial number of payments to Corey in cash.

     During 1988, petitioner paid $1,500 to James E. Lignelli for

an appraisal of the Babcock property.

     During 1988, petitioner paid $547 to Tait Engineering for a

survey of the Babcock property.

     During 1988, petitioner paid $341 to Ross, Schonder,

Sterzinger, Cupcheck, P.C., an architectural engineering firm,

for services rendered with respect to the Babcock property.
                              - 8 -

     During 1988, petitioner paid $5,000 to Girty's Run Joint

Sewage Authority for a permit to use the sewage system servicing

the Babcock building.

     During 1988, petitioner paid $6,226.44 to Pool City for the

purchase and installation of a hot tub at the Babcock building.

     During 1988, petitioner paid $2,625 in cash to Ralph Yunker,

Jr., for excavation work at the Babcock property.

     During 1989, petitioner paid $1,800 to Ralph Yunker, Jr.,

for excavation work at the Babcock property, including the

digging of ditches for natural gas and water lines.

     During 1989, petitioner paid $1,550 to Fiore Glass for the

purchase and installation of glass mirrors and a door for the

Babcock building.

     During 1989, petitioner paid $1,091 to Pittsburgh Glass

Block Co. for the purchase and installation of glass block at the

Babcock building.

     During 1989, petitioner paid $6,323.38 to Steven Novak for

the purchase and installation of carpeting and tile at the

Babcock building.

     During 1989, petitioner paid $11,395 to Roscoe Asphalt

Paving Co. to pave the parking lot at the Babcock property.

     During 1989, petitioner paid (by cash and checks) a total of

$4,036.86 to Gotich Electric Co., Inc., for work performed at the

Babcock property.
                                 - 9 -

     During 1989, petitioner paid $6,235 to Automatic Door

Enterprises, Inc., for the purchase and installation of an

automatic electric door at the Babcock building.

     During 1989, petitioner paid $5,209.21 in cash to Lighting

by Erik for the purchase and installation of light fixtures and

bulbs at the Babcock building.

     On or about April 19, 1989, petitioner paid $1,700 in cash

to John M. Sebbens Painting for work done on the Babcock

building.

     During 1989, petitioner paid $7,420 to Russell Construction

Co. ($996 by check and $6,424 in cash) for the installation of a

wooden deck, a lattice, skylights, and a laundry chute at the

Babcock building.

     During 1989, petitioner paid $4,118 to Alpine Pools for the

installation of a hot tub at the Babcock building.    During 1989,

petitioner paid an additional $930 to Alpine Pools.

     During 1989, petitioner paid $382.12 to Allegheny Millwork &

Lumber for the installation of a wooden handrail in the Babcock

building.

     During 1989, petitioner paid $4,000 to Lentz's Heating and

Air Conditioning (Lentz's) for the installation of a furnace at

the Babcock building.   During the same year, petitioner paid

$813.91 to Lentz's for the installation of an exhaust fan and an

outdoor spa at the Babcock building.
                              - 10 -

     During 1989, petitioner paid $400 to North Hills Stone Co.

for a fireplace slate slab.

     During 1989, petitioner paid $923 to the Listening Post for

the installation of a security system at the Babcock building.

During 1990, petitioner paid $251.45 to Lentz's for the

installation of an exhaust fan and an outdoor receptacle.

     During 1990, petitioner paid $300.75 to Thermal Industries,

Inc., for the installation of two windows at the Babcock

building.

     During 1988, 1989, 1990, and 1991, petitioner paid

$3,394.44, $28,787.92, $223, and $3,736.79, respectively, to the

Listening Post for various home entertainment products.

     On September 21, 1989, petitioner paid $386.76 to Sun

Television & Appliances, Inc. (Sun), for merchandise.     On

September 15 and November 29, 1990, petitioner paid $173.84 and

$561.55, respectively, to Sun for merchandise.   On July 2 and

September 28, 1991, petitioner paid $633.64 and $1,606.71,

respectively, to Sun for merchandise.

     During 1989, petitioner paid $542.72 in cash to Gas-Lite

Manufacturing Co. for merchandise.

     During 1989, petitioner paid $3,306.93 in cash to Levin

Furniture for bedroom furniture for his apartment at the Babcock

building.
                                - 11 -

     During 1989, petitioner paid $1,377.98 to Wickes Furniture

for furniture for his apartment at the Babcock building.    On

November 11, 1989, petitioner paid $50 to Kelly's Delivery

Service for the delivery of the furniture that he had purchased

from Wickes Furniture.

     During 1989, petitioner paid $2,517.50 in cash to West Penn

Billiards for a pool table for the Babcock building.

     During 1989, 1990, and 1991, petitioner paid $6,122.58,

$2,418.90, and $6,334.14, respectively, to Aquatic Interiors for

the purchase, installation, and care of two aquariums at the

Babcock building.

     During 1989, petitioner paid $1,350.71 to Louis Hahn & Son,

a flower and garden shop, for the purchase and installation of a

small waterfall and aquatic plants at the Babcock building.

     During 1989, petitioner paid $430.88 to Vic Polk Studio for

art posters.

     During 1989, petitioner paid $2,607.13 for shares of stock

purchased through the brokerage firm Hibbard, Brown & Co.    During

1991, petitioner sold all of the above-referenced stock.

     During November 1990, petitioner paid $169 to Pool City for

an artificial Christmas tree.

     During 1991, petitioner paid $741 to Peter Berger for a

Motorola Flip cellular telephone.
                              - 12 -

     During 1991, petitioner paid a total of $472.75 to Laser

Devices, Inc., for merchandise for his residence.

     During 1991, petitioner paid $1,363.61 to Pittsburgh Florist

for the installation and maintenance of shrubbery and plants at

the Babcock building.

     In May 1991, petitioner purchased a Rinker boat from Chet

Aleks Yamaha & Marine (Chet Aleks).    The purchase price of the

Rinker boat, including sales tax, document preparation fees,

registration fees, and a temporary license fee totaled $66,819.

     Joseph C. and Bertha M. Piole are petitioner's parents.

Before purchasing the Rinker boat, petitioner transferred $19,000

in cash to his parents' checking account.    On May 10, 1991, M.

Richard Mellon (Mellon), an attorney who was assisting petitioner

in the purchase of the boat, tendered to Chet Aleks a check in

the amount of $6,300, representing petitioner's downpayment on

the boat.   On or about May 13, 1991, petitioner paid Chet Aleks a

total of $61,519, consisting of $7,019 in cash, petitioner's

check in the amount of $11,500, Wilderness Taxidermy's check in

the amount of $16,500, a check in the amount of $19,000 made

payable to Chet Aleks and drawn on his parents' account, and a

check in the amount of $7,500 made payable to Chet Aleks drawn on

Mellon's account.   Petitioner subsequently reimbursed Mellon by

giving him $7,500 in cash.   Chet Aleks applied $60,519 of the

$61,519 to pay off the balance due on the Rinker boat.    Chet
                              - 13 -

Aleks applied the remaining $1,000 to cover the cost of life

preservers, ropes, a boat cover, and an anchor that petitioner

had purchased for the boat.   During 1991, petitioner paid $299.72

to Chet Aleks for additional boat accessories.

     In May 1989, petitioner and his parents organized a

corporation known as Joe's Laundromat, Inc. (Joe's), to operate a

laundromat at the Babcock building.    Joe's paid rent to

petitioner at the rate of $1,250 per month.    Petitioner was the

manager of the corporation, petitioner's father served as

president, and petitioner's mother served as secretary/treasurer.

In 1991, petitioner became president of the corporation.

Petitioner kept the books and records of the corporation.

Petitioner made loans to Joe's.   As of December 31, 1989, 1990,

and 1991, Joe's owed petitioner $30,637.90, $25,331.81, and

$13,726.23, respectively, on those loans.

     Petitioner took many pleasure trips and stayed at various

hotels and motels during 1990 and 1991.    During 1990, petitioner

booked round-trip air transportation through Travel Planners

International, Inc. (Travel Planners), from Pittsburgh to:

Amsterdam, Holland; Fort Lauderdale, Florida; Memphis, Tennessee;

Rapid City, South Dakota; New Orleans, Louisiana; and two trips

to Fort Myers, Florida.   During 1990, petitioner paid $2,885 to

Travel Planners for the aforementioned trips.

     During 1990, petitioner paid $479.60 in cash to Sea Chateau,
                               - 14 -

a motel located in Fort Lauderdale, Florida, for a stay from

January 21 through 29, 1990.

     During 1990, petitioner paid $31.80 to Trails End Motel in

Naples, Florida, for an overnight stay on September 24, 1990.

     During 1990, petitioner paid $203.52 to the Vanderbilt Beach

Motel, in Naples, Florida, for a stay from September 25 through

October 1, 1990.   In November 1990, petitioner paid $100 to

Vanderbilt Beach Motel for a planned stay in January 1991.

     During 1990, petitioner booked round-trip air transportation

from Pittsburgh to Holland through Go Go Tours & Travel Planners

International (Go Go Tours).   During 1990, petitioner paid $500

to Go Go Tours.

     During 1991, petitioner booked round-trip air transportation

through Travel Planners from Pittsburgh to:   Los Angeles,

California; Kansas City, Missouri; Naples, Florida;

Toronto/Sudbury, Canada; Orofino, Idaho; and Fort Myers, Florida.

During 1991, petitioner paid $5,228.98 to Travel Planners for

these trips.

     In April 1991, petitioner paid $1,014 to US Airways for

round-trip airfares from Pittsburgh to Los Angeles for himself

and three companions.

     During 1991, petitioner paid $733.09 to Marina Pacific, a

hotel in Venice, California, for a stay from April 4 through 15,

1991.
                              - 15 -

     During 1991, petitioner paid $368 to Northwest Airlines for

round-trip airfare between Pittsburgh and Detroit, Michigan.

Petitioner subsequently exchanged this ticket for a ticket to

Lewistown, Idaho.   During his trip to Idaho, petitioner paid

$16.54 for a one-night stay at Helgesin Place in Orofino, Idaho.

Petitioner's trip to Idaho included a hunting expedition

organized by Moose Creek Outfitters.   During 1991, petitioner

paid $2,250 to Moose Creek Outfitters for the hunting expedition.

Petitioner paid $204.75 to Orofino Aviation, Inc., for

transportation during the hunting trip.    In connection with the

hunting trip, petitioner paid $92 to the State of Idaho for

various nonresident hunting licenses and a fine of $240 for

violating Idaho law by shooting, but not tagging, a bull moose.

     During August and November of 1991, petitioner stayed at the

Marco Bay Resort, Marco Island, Florida.   During 1991, petitioner

paid $468.80 to Marco Bay Resort for the two stays.   During 1991,

petitioner paid $560.55 in cash to Affordable Limousine Service,

Inc., for the rental of a limousine while in Marco Island,

Florida.

     During 1991, petitioner paid $385.74 to the Vanderbilt Beach

Motel, in Naples, Florida, for two separate stays in January and

November 1991.

     During 1991, petitioner paid $1,590 to A-Bear Charter

Service of Florida for chartered ocean fishing trips.
                                - 16 -

     During 1991, petitioner paid $80.85 to Scott's Motel in

Erie, Pennsylvania, for a stay in March 1991.

     During 1991, petitioner paid $622.40 to the Hyatt Regency

Allicante.

     During September 1991, petitioner paid $478.30 to the

Pittsburgh Hilton.

     During 1991, petitioner, through his girlfriend, Leigh Ann

Mulig, paid $9,197.42 to attorneys in Canada for legal

representation provided to petitioner.

     On or about March 5, 1988, petitioner paid $485 in cash to

Lowry Western Shop for two pairs of boots and a pair of work

shoes.

     During 1988, 1989, 1990 and 1991, petitioner paid $650,

$224.95, $349.95, and $150.58, respectively, to Jim & Chuck's

Boot Shop for boots and gift certificates.

     During 1988, 1989, 1990, and 1991, petitioner paid $200,

$611, $3,231.60, and $600, respectively, to Jeff Critchlow Auto

Body for repair and maintenance work on petitioner's various

vehicles.

     During 1988, 1989, 1990, and 1991, petitioner paid $500,

$500, $1,250, and $1,116, respectively, to Carl Marcus, an

attorney, for legal services.

     During 1991, petitioner paid $1,000 to Mellon for legal

services.
                             - 17 -

     During 1989, 1990, and 1991, petitioner paid $154.71,

$1,350.23, and $365.31, respectively, to J-J-D Service for repair

and maintenance work on petitioner's various vehicles.

     During 1989, petitioner paid $524.70 to Weigand Brothers

Transmission Service for transmission work on his GMC pickup.

During 1990, petitioner paid $113.95 to Weigand Brothers

Transmission Service for transmission work on his 1973 Chevrolet

Corvette.

     During each of the years 1989, 1990, and 1991, petitioner

paid $450 to Edward Brazier for the rental of a garage which

petitioner used to store his motorcycles.

     During 1990, petitioner paid $597.80 to State Farm Insurance

Co. for insurance coverage on one of his motorcycles.    During

1991, petitioner paid $2,830.13 to State Farm Insurance Co. for

insurance coverage on a motorcycle, the 1973 Chevrolet Corvette,

the 1972 GMC pickup, the 1990 Travelite Trailer, and the Rinker

boat.

     In January 1990, petitioner paid $40 to Pool City for a

service call.

     During 1990, petitioner paid $746.35 in cash to Guy R.

Palermo Auto Body for repainting one of petitioner's motorcycles.

     During 1991, petitioner paid $399.25 to Street Sweeper,

Inc., of Atlanta, Georgia, for the purchase of a firearm.
                                   - 18 -

      During 1991, petitioner paid a total of $1,000 to Doc of

the Bay Marina for dock space for the Rinker boat.

     During 1991, petitioner paid $87.13 to Lighting by Erik for

light bulbs and parts.

     During the years in issue, petitioner paid for food,

clothing, telephone, gas, and electric service.

Liabilities

     Petitioner incurred various liabilities during the period in

question (in addition to the aforementioned mortgage on the

Babcock property).       During 1981, petitioner obtained an education

loan of $2,500.     As of December 31, 1987, the outstanding

principal balance on the education loan was $2,500.       During 1988,

petitioner paid off the principal amount of the loan and $226.20

in accumulated interest.

     During 1988, petitioner obtained a loan (account No.

5882253) from Equibank.        Pursuant to the loan agreement, Equibank

released cash to petitioner in the amounts and on the dates as

follows:

              Date                          Amount

           Oct.   11,   1988                $10,000
           Nov.    2,   1988                 20,000
           Nov.   16,   1988                 20,000
           Nov.   23,   1988                 20,000
           Jan.   10,   1989                 20,000
           June    5,   1989                 10,000

As of December 31, 1988, 1989, 1990, and 1991, the outstanding
                                 - 19 -

balances on the above-referenced loan were $70,000, $95,917.38,

$87,978.67, and $79,177.29, respectively.

     During March 1989, petitioner obtained a second loan from

Equibank (also assigned account No. 5882253).        Pursuant to the

second loan agreement, Equibank released cash to petitioner in

the amounts and on the dates as follows:

                   Date                    Amount

            Mar.   17,   1989             $10,000
            Mar.   20,   1989               5,000
            Mar.   31,   1989               5,000
            Apr.   11,   1989              18,000
            Apr.   13,   1989               7,000

As of December 31, 1989, 1990, and 1991, the outstanding balances

on the above-referenced loan were $44,498.61, $40,732.84, and

$36,572.29, respectively.

     Petitioner's purchase of the aforementioned 1990 Harley

Davidson (VIN 09113) was financed through a vehicle loan (account

No. 5409023) from Pittsburgh National Bank.         As of December 31,

1990 and 1991, the outstanding balances on account No. 5409023

were $15,483.06 and $11,902.07, respectively.

     Petitioner maintained credit card accounts with Discover

Card, First Card, Colonial National Bank, and Bank One.        As of

December 31, 1989, 1990, and 1991, the Bank One account had

outstanding balances of $1,835.44 and $810.69, and a credit of

$16.41, respectively.      As of December 31, 1991, the outstanding

balances on the Discover Card and First Card accounts were $28.69
                               - 20 -

and $64.87, respectively.    Petitioner did not have any end-of-

year balances on the Colonial National Bank card.

     As of December 31, 1987, 1988, 1989, 1990, and 1991,

Wilderness Taxidermy had accumulated depreciation balances of

$1,504.87, $4,204.87, $7,529.87, $11,511.87, and $15,288.87,

respectively.

     Petitioner's purchase of the aforementioned hot tub from

Pool City was financed with a loan from Commercial Credit Corp.

(Commercial Credit).   As of December 31, 1988 and 1989, the

outstanding balances on the Commercial Credit loan were $4,820.89

and $2,476.72, respectively.    Petitioner paid off the Commercial

Credit loan in full during 1990.

     During 1988, petitioner obtained a loan of $3,034.20 from

Manufacturers Hanover Consumer Discount Co. (Manufacturers

Hanover).    As of December 31, 1988 and 1989, the outstanding

balances on the Manufacturers Hanover loan were $3,034.20 and

$252.85, respectively.   Petitioner paid off the Manufacturers

Hanover loan in full during 1990.

     During 1987 and 1988, petitioner paid $4,200 and $2,800 in

cash, respectively, to Hubert Zelina for the rent on an

apartment.   Petitioner was evicted from the apartment after

failing to pay rent for September, October, and November 1988.

Petitioner was sued for back rent and for damaging the apartment.
                             - 21 -

During 1990, petitioner paid $1,366.32 to Hubert Zelina in

settlement of the suit.

     During 1987, 1988, and 1990, petitioner paid State sales tax

and title and registration fees of $97.00, $55.50, and $1,416.38,

respectively.

     Pursuant to orders issued by courts of competent

jurisdiction, petitioner was required to make support payments to

two children, Jessica Piole and Sarah Ayres Slanina.    During

1987, 1988, 1989, and 1991, petitioner paid $75, $475, $425, and

$637.50, respectively, in support payments for Jessica Piole.

During 1988, 1989, and 1990, petitioner paid $2,600.00,

$1,437.50, and $15,000, respectively, in support payments for

Sarah Ayres Slanina.

     During 1988 and 1989, petitioner paid $3,312.50 and $957.50,

respectively, to Equibank for settlement charges arising from

various loans.

     During 1989, petitioner retained Bedway Security Agency,

Inc., to provide services with respect to a civil court action.

During 1989, petitioner paid $316 to Bedway Security Agency,

Inc., for its services.

     During 1990, petitioner paid $350 to Spirit Harley Davidson

for repair and restorative work on several of his motorcycles.

After a dispute arose between petitioner and Spirit Harley

Davidson as to the cost of said work, Spirit Harley Davidson
                               - 22 -

filed a civil suit against petitioner seeking payment.    During

1991, petitioner paid $3,952.90 to Spirit Harley Davidson in

settlement of the suit.

Nontaxable Sources of Income

     During 1987, petitioner received welfare benefits of $3,224.

Petitioner did not receive any welfare benefits during 1988,

1989, 1990, or 1991.

     During 1988, 1989, and 1991, petitioner received insurance

proceeds in the amounts of $172.28, $1,829.99, and $2,595.10,

respectively.   Petitioner did not receive any insurance proceeds

during 1987 and 1990.

Petitioner's Tax Returns

     Petitioner used the calendar year for tax reporting and the

cash method of accounting.   Petitioner's Federal income tax

returns for 1987, 1988, 1989, 1990, and 1991 were prepared by

paid return preparers.    Petitioner did not keep books and records

of his illegal drug sales during the years in issue.    Petitioner

did not inform his return preparers of the income that he derived

from illegal drug sales, and he failed to report such income on

his Federal income tax returns for the years in issue.

     The tax return that petitioner filed for 1987 reflects a

Schedule C, Profit or Loss From Business, loss of $3,608.85,

rental income of $595.50, and taxable income of zero.    The tax

return that petitioner filed for 1988 reflects a Schedule C loss
                              - 23 -

of $7,511, rental loss of $663, and taxable income of zero.    The

tax return that petitioner filed for 1989 reflects a Schedule C

loss of $8,202, rental loss of $3,632, and taxable income of

zero.   The tax return that petitioner filed for 1990 reflects a

Schedule C loss of $15,881, rental income of $2,121, and taxable

income of zero.   The tax return that petitioner filed for 1991

reflects a Schedule C loss of $3,794, rental income of $4,360,

and taxable income of zero.

     Contrary to the income that petitioner reported on the tax

returns that he filed for the years in issue, petitioner

submitted financial statements and tax returns to various

financial institutions in support of loan applications reflecting

substantial taxable income.   On or about August 27, 1988,

petitioner submitted to Equibank a financial statement in support

of his application for a loan listing assets of $249,600,

liabilities of $700, net worth of $248,900, and gross income of

$38,150.   On or about March 13, 1989, petitioner submitted to

Equibank a financial statement in support of his application for

a loan listing assets of $249,600, liabilities of $1,000, and net

income of $87,542.   On or about May 3, 1991, petitioner submitted

to Colonial National Bank an application for a MasterCard credit

card listing his income as $140,000.

     When petitioner applied for loans at Equibank and Commercial

Credit Corp., he submitted signed copies of Federal income tax
                              - 24 -

returns that he had purportedly filed for the years 1985, 1986,

1987, and 1988.   The tax return for 1987 shows Schedule C income

of $42,671.50, rental income of $4,800, and total income of

$47,541.50.   The tax return for 1988 shows Schedule C income of

$33,653, rental income of $5,000, and total income of $38,653.

     Petitioner understated his taxable income for the years

1988, 1989, 1990, and 1991.   Petitioner's failure to report such

taxable income resulted in underpayments of tax in each of those

years.   Petitioner is liable for self-employment taxes on his

unreported income for each of those years.   A part of

petitioner's underpayment of tax for each of the years 1988,

1989, 1990, and 1991 was due to fraud.

                              OPINION

Petitioner's Motion To Seal The Record

     At the commencement of the trial in this case, petitioner

orally moved to seal the record.   There being no objection from

respondent, the Court conditionally granted petitioner's motion.

In particular, by order dated May 22, 2000, the Court directed

petitioner to identify the particular evidence in the record that

should not be disclosed to the public.   Petitioner failed to

comply with the Court's order.

     Section 7458, which governs hearings before the Tax Court,

provides that such hearings shall be open to the public.   In

addition, section 7461, provides in pertinent part:
                                  - 25 -

     SEC. 7461.    PUBLICITY OF PROCEEDINGS.

          (a) General Rule.--Except as provided in subsection
     (b), all reports of the Tax Court and all evidence received
     by the Tax Court and its divisions, including a transcript
     of the stenographic report of the hearings, shall be public
     records open to the inspection of the public.

          (b)     Exceptions.--

               (1) Trade secrets or other confidential
          information.--The Tax Court may make any provision
          which is necessary to prevent the disclosure of trade
          secrets or other confidential information, including a
          provision that any document or information be placed
          under seal to be opened only as directed by the court.

     Rule 103 provides that upon motion by a party or other

affected person, and upon good cause shown, the Court may make

any order which justice requires to protect a party or other

person from annoyance, embarrassment, oppression, or undue burden

or expense.

     Sections 7458 and 7461 reflect the well-established

principle that official proceedings and records of all courts,

including the Tax Court, generally shall be open and available to

the public.   See Nixon v. Warner Communications, Inc., 435 U.S.

589, 597 (1978); Willie Nelson Music Co. v. Commissioner, 85 T.C.

914, 917 (1985).     However, section 7461 and Rule 103 provide that

the Court has the discretionary authority to order all or part of

a record to be sealed where such action is necessary to protect

trade secrets and confidential information or to avoid annoyance,

embarrassment, oppression, or undue burden or expense.    See
                              - 26 -

Willie Nelson Music Co. v. Commissioner, supra at 918-919, and

cases cited therein.

     In resolving whether a permanent protective order sealing a

portion of the evidentiary record is warranted in this case, we

must weigh the public's interest in free and open access to Tax

Court proceedings against petitioner's individual interests.

Nixon v. Warner Communications, Inc., supra at 602.   The public's

interest in open judicial proceedings is presumed to be paramount

to the interests of an individual seeking to close the

proceedings in that open proceedings allow the public an

opportunity to understand the underlying dispute and its

disposition, thereby enhancing public confidence in our system of

taxation.   Willie Nelson Music Co. v. Commissioner, supra at 919.

     As previously discussed, petitioner failed to identify the

particular documents or information that he contends should not

be disclosed to the public.   Under the circumstances, we conclude

that the Court's earlier protective order sealing the record in

this case has served its purpose and that the public's interest

in open proceedings outweighs any continuing individual interests

at stake herein.   Accordingly, we will vacate the protective

order dated May 22, 2000.
                                - 27 -

Deficiencies

     Petitioner failed to maintain adequate books and records as

required by section 6001.    Accordingly, respondent relied on the

net worth method as a means to indirectly reconstruct

petitioner's income for the years in issue.     See Holland v.

United States, 348 U.S. 121 (1954); Goodmon v. Commissioner, 761

F.2d 1522, 1524 (11th Cir. 1985); Cupp v. Commissioner, 65 T.C.

68, 82 (1975), affd. without published opinion 559 F.2d 1207 (3d

Cir. 1977).    From our examination of respondent's net worth

calculations, we are satisfied that these calculations comport

with the requirements of Holland v. United States, supra.        In

particular, respondent made adequate opening cash-on-hand

computations, established a likely source of income, and

investigated relevant leads of nontaxable sources of income.          See

id. at 130-131.    Respondent's net worth calculations were based

on substantial documentary evidence.     Moreover, petitioner has

stipulated or is deemed to have admitted many if not all of the

adjustments underlying respondent's determinations.     Petitioner

bears the burden of proving that respondent's determinations are

incorrect.     See Parks v. Commissioner, 94 T.C. 654, 658-659

(1990); Schad v. Commissioner, 87 T.C. 609, 620 (1986), affd.

without published opinion 827 F.2d 774 (11th Cir. 1987).

     Petitioner failed to offer any credible evidence that

respondent's determinations are erroneous.     At trial, petitioner
                               - 28 -

attempted to challenge various matters that were deemed admitted

under Rule 90(c).   In particular, petitioner testified that:     (1)

The purchase price of the Babcock property was only $30,000 (as

opposed to the $55,000 determined by respondent); (2) the

improvements to the Babcock property cost only $103,000 (as

opposed to the $162,000 determined by respondent); (3) his

parents paid $15,000 of his child-support obligation in 1990; and

(4) his parents paid a substantial portion of the purchase price

of the Rinker boat.

     Petitioner's testimony at trial lacked credibility and was

contradicted by respondent's witness, Special Agent Gary

Makovsky.   On the basis of our review of the entire record

herein, we find petitioner's assertions to be contrived and

unpersuasive.

     Respondent also determined that petitioner is liable for the

addition to tax for fraud for the taxable year 1988 and the fraud

penalty for the taxable years 1989, 1990, and 1991.    Respondent

must prove fraud by clear and convincing evidence.    See sec.

7454(a); Rule 142(b); Rowlee v. Commissioner, 80 T.C. 1111, 1123

(1983).

     Fraud requires a showing that the taxpayer intended to evade

a tax known or believed to be owing.    See Stoltzfus v. United

States, 398 F.2d 1002, 1004 (3d Cir. 1968).   The existence of

fraud is a question of fact.   See Gajewski v. Commissioner, 67
                                - 29 -

T.C. 181, 199 (1976), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978).    Fraud is never presumed or imputed; it

must be established by independent evidence that establishes a

fraudulent intent on the taxpayer's part.     See Otsuki v.

Commissioner, 53 T.C. 96, 106 (1969).     Because direct proof of a

taxpayer's intent is rarely available, fraud may be proven by

circumstantial evidence, and reasonable inferences may be drawn

from the relevant facts.     See Spies v. United States, 317 U.S.

492, 499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1006

(1982), affd. 748 F.2d 331 (6th Cir. 1984).     For example, an

intent to conceal or mislead may be inferred from a pattern of

conduct, see Spies v. United States, supra at 499, or from a

taxpayer's entire course of conduct, see Stone v. Commissioner,

56 T.C. 213, 223-224 (1971).     Likewise, a pattern showing a

consistent underreporting of income, when accompanied by

circumstances evidencing an intent to conceal, may justify a

strong inference of fraud.     See Parks v. Commissioner, supra at

664.

       We often rely on certain indicia of fraud in deciding the

existence of fraud.     The presence of several indicia is

persuasive circumstantial evidence of fraud.     See Beaver v.

Commissioner, 55 T.C. 85, 93 (1970).     The "badges of fraud"

include:    (1) The filing of false documents; (2) understatement
                              - 30 -

of income; (3) maintenance of inadequate records; (4) implausible

or inconsistent explanations of behavior; (5) concealment of

assets; (6) failure to cooperate with tax authorities; (7)

engaging in an illegal activity; (8) attempting to conceal such

activity; (9) dealing in cash; and (10) failing to make estimated

tax payments.   See Bradford v. Commissioner, 796 F.2d 303, 307

(9th Cir. 1986), affg. T.C. Memo. 1984-601; Petzoldt v.

Commissioner, 92 T.C. 661, 700 (1989).

     On the basis of our review of the entire record, we hold

that respondent has met his burden of proving fraud.     As

previously discussed, respondent's reconstruction of petitioner's

income for the years in issue reveals that petitioner underpaid

his taxes for 1988, 1989, 1990, and 1991.   Further, each such

underpayment was attributable to fraud.   Petitioner engaged in

illegal drug sales, established a clear pattern of underreporting

taxable income from 1988 through 1991, failed to maintain

adequate records of his income, and engaged in substantial cash

transactions.   In sum, petitioner's conduct supports a

particularly strong inference of fraud.   See Parks v.

Commissioner, supra at 664.   Equally significant, petitioner

pleaded guilty to criminal tax evasion for 1991.   See Petzoldt v.

Commissioner, supra at 701-702.   Considering all the facts and

circumstances, we hold that petitioner is liable for the addition

to tax for fraud for 1988 and the fraud penalty for 1989, 1990,

and 1991.
                        - 31 -

To reflect the foregoing,



                              An appropriate order will be

                            issued, and decision will be

                            entered under Rule 155.
