                         T.C. Memo. 1999-159



                       UNITED STATES TAX COURT



         PAUL MIFSUD AND MARIA G. MIFSUD, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12569-97.                        Filed May 12, 1999.



     B. Gray Gibbs, for petitioners.

     Charles A. Baer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following de-

ficiencies in, and fraud penalties under section 66631 on, peti-

tioners' Federal income tax (tax):



     1
        All section references are to the Internal Revenue Code
in effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 2 -



                                         Fraud
                 Year   Deficiency      Penalty
                 1992     $18,087       $13,565
                 1993      15,653        11,740
                 1994      17,073        12,805


     In respondent's answer, respondent alleged in the alterna-

tive, inter alia, that petitioners fraudulently and with intent

to evade tax understated their income tax liability for 1992,

1993, and 1994 in the amounts of $26,132, $30,201, and $39,712,

respectively.

     The issues remaining for decision are:

     (1)   Do petitioners have unreported income reconstructed

under the bank deposits method for 1992, 1993, and 1994?   We hold

that they do in the amounts of $73,233.69, $80,607, and $103,724,

respectively.2

     (2)   Are petitioners liable for the fraud penalty under

section 6663 for each of the years 1992, 1993, and 1994?   We hold

that they are.

     (3)   Did the period of limitations for 1992 prescribed by

section 6501 expire?    In light of our holding in (2) above, we

hold under section 6501(c)(1) that it did not.



     2
        During the trial in this case, the parties agreed that
petitioners have unreported income attributable to their personal
use of restaurant goods for each of the years at issue in the
amount of $2,600.
                               - 3 -


                         FINDINGS OF FACT

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

     At the time the petition was filed, petitioners, Paul Mifsud

(Mr. Mifsud) and Maria G. Mifsud (Ms. Mifsud), resided in Hudson,

Florida.

     Ms. Mifsud emigrated from Malta to the United States around

1952 or 1953, when she was 13 years old.    Mr. Mifsud, who was one

of ten children, and his father, also named Paul Mifsud, em-

igrated from Malta to the United States in 1951, when Mr. Mifsud

was around 14 years old and his father was around 47 years old.

One of Mr. Mifsud's brothers and one of his sisters had pre-

viously emigrated to the United States in 1947 and 1950, re-

spectively.   Mr. Mifsud's mother and two of his brothers em-

igrated to the United States in 1953, and his other brothers came

to the United States thereafter.   At the time of the trial in

this case, Mr. Mifsud's mother, who was still living in the

United States, was 94 years old and very ill.   At that time, she

was living on funds that Mr. Mifsud and certain of his siblings

sent to her for her care and on Social Security payments which

she was receiving and which were attributable to the earnings of

her husband from his employment in the United States.

     During World War II, Malta was devastated by German air

strikes.   Estimates of Maltese national income in the postwar

period ranged from $28.2 million to $44.3 million.   In 1951, when
                                 - 4 -


Mr. Mifsud and his father emigrated from Malta to the United

States, Malta was a country of small shopkeepers, dockworkers,

and bureaucrats, with a small Anglo-Maltese ruling class, and the

median wage for private workers in Malta was about $11 per week,

or $572 per year.

     Maltese official records show only two purchases and one

sale of real property by Mr. Mifsud's father and one sale of real

property by Mr. Mifsud and certain of his family members.   In

November 1929, Mr. Mifsud's father purchased a house in Malta for

570 British pounds sterling (pounds), which was the official

currency of Malta.   In April 1937, he sold that house for 270

pounds.   In September 1938, Mr. Mifsud's father purchased another

house in Malta for 350 pounds.    In 1966, Mr. Mifsud, along with

his mother, three brothers, and a sister, sold a house in Malta

for 2,600 pounds, or $7,254 at the exchange rate in effect in

1966 of $2.79 per pound.

     In 1951, Malta was under English exchange controls which

limited the ability of Maltese persons to bring any form of

currency out of the country.   The export in 1951 of currency from

Malta in an amount of pounds or any other form of currency equal

to approximately $500,000 would have had a serious impact on

Malta's economy and the policy of its Government and would have

been required by the English exchange controls to have been

documented.   Malta has no official record that an export from
                                - 5 -


Malta took place in 1951 of currency in an amount of pounds or

any other form of currency equal to approximately $500,000.

     Mr. Mifsud, who lived with his father after he arrived in

the United States in 1951, began working about one year there-

after, when he was around 15 years old.   Since that time until

petitioners moved to Florida in 1980, Mr. Mifsud worked at

different times in the kitchens of a few hotels in the Detroit

metropolitan area, in the kitchen of a cafeteria at Ford Motor

Company, in a restaurant in the Detroit metropolitan area, and at

a Ford Motor Company plant.   For a period of years during the

1960's, Mr. Mifsud also operated a laundromat.   Around 1974,

petitioners purchased a restaurant in the Detroit metropolitan

area, which they operated until they moved to Florida in 1980.

     Petitioners, who married in 1960, have two daughters, Diana

Mamo (Ms. Mamo) and Geraldine, who were born in 1962 and 1966,

respectively.   Throughout the years at issue, Ms. Mamo was

married to Joe Mamo (Mr. Mamo), and they have children from that

marriage.   They divorced in 1995.

     In December 1979, while petitioners were living in Michigan,

a robbery occurred at their house during which $40,000 was stolen

from a safe.    In 1980, they sold the restaurant that they owned

and operated in Michigan and moved to Florida.   When petitioners

first moved to Florida, they rented a house in Embassy township.

Shortly thereafter, they purchased a house in Port Richey,
                                - 6 -


Florida.    Around 1989 or 1990, petitioners purchased a house in

Hudson, Florida, in which they resided at the time of the trial

in this case.

     Shortly after petitioners moved to Florida, they, together

with their daughter Ms. Mamo and her husband Mr. Mamo, organized

Paul & Joe, Inc., an S corporation, for the purpose of acquiring

and operating Spring Hill Family restaurant (Spring Hill res-

taurant).    At all relevant times, petitioners owned in the

aggregate 60 percent, and Ms. Mamo and Mr. Mamo owned in the

aggregate 40 percent, of the stock of Paul & Joe, Inc.    Spring

Hill restaurant is located near Weehi Wachee Springs, a major

Florida tourist attraction.

     Around 1990, petitioners, together with their daughter Ms.

Mamo and her husband Mr. Mamo, organized Nichole & Eric, Inc., an

S corporation, for the purpose of operating a restaurant known as

Breakfast Club of 7 Hills.    At all relevant times, petitioners

owned in the aggregate 50 percent, and Ms. Mamo and Mr. Mamo

owned in the aggregate 50 percent, of the stock of Nichole &

Eric, Inc.

     Around 1991, petitioners, together with their daughter

Geraldine and her husband, organized Crystal & Ryan, Inc., an S

corporation, for the purpose of operating a restaurant known as

The Breakfast Club.    At all relevant times, petitioners owned in

the aggregate 51 percent, and their daughter Geraldine and her
                                 - 7 -


husband owned in the aggregate 49 percent, of the stock of

Crystal & Ryan, Inc.

     In 1994, petitioners organized The Mifsuds, Inc., an S

corporation, for the purpose of operating a restaurant known as

Rams Horn.   During that year, petitioners owned 100 percent of

the stock of The Mifsuds, Inc.

     When Paul & Joe, Inc., first began operating Spring Hill

restaurant, Mr. Mifsud and Mr. Mamo, his son-in-law, worked

principally as cooks, Ms. Mifsud operated the cash register, and

occasionally Ms. Mamo operated the cash register and served as a

hostess in the dining room of that restaurant.

     Around 1983, Mr. Mamo had an automobile accident, was forced

to quit working at Spring Hill restaurant, and did not return to

work there until around 1985 or 1986.    When Mr. Mamo returned to

work at Spring Hill restaurant, he worked at the cash register

and served as a host in the dining room.   Mr. Mamo stopped

working at Spring Hill restaurant around October 1991 and started

working at Breakfast Club of 7 Hills, which was owned by Nichole

& Eric, Inc.   Thereafter, he had no further involvement in the

operations of Spring Hill restaurant, although he and Ms. Mano

continued to own 40 percent of the stock of Paul & Joe, Inc.,

which owned that restaurant.

     After Mr. Mamo's accident in 1983, Mr. Mifsud stopped

working as a cook at Spring Hill restaurant and began, and
                               - 8 -


continued throughout the years at issue, to work up front at that

restaurant, primarily operating the cash register.   Around 1985

or 1986, when Mr. Mamo returned to work at Spring Hill restau-

rant, Mr. Mifsud was running the afternoon shift at that restau-

rant.   After Mr. Mamo stopped working at Spring Hill restaurant

in 1991, Mr. Mifsud was solely responsible for running that

restaurant.

     During the years at issue, Mr. Mifsud also spent time

working at the cash register and in the dining room of The

Breakfast Club, which was owned by Crystal & Ryan, Inc.

     When Paul & Joe, Inc., first began operating Spring Hill

restaurant, it could accommodate approximately 55 customers.

Around 1986, the size of that restaurant was expanded to ac-

commodate approximately 160 customers.

     During the years at issue, Spring Hill restaurant was open

for breakfast, lunch, and dinner.   At all relevant times, the

peak period during the year for business at Spring Hill res-

taurant lasted from around September until Easter, which was the

peak tourist season in Florida.   Business at the Spring Hill

restaurant declined somewhat as peak tourist season in Florida

declined after Easter through around August.

     Since Paul & Joe, Inc., first began operating Spring Hill

restaurant, Mr. Mifsud has been the only person who closed out

the cash register at that restaurant.    The business records for
                                - 9 -


Spring Hill restaurant for the years at issue relating to, inter

alia, that restaurant's gross receipts consisted of sheets of

paper referred to by petitioners as sales sheets (sales sheets).

Mr. Mifsud prepared a sales sheet for each week day during those

years and made entries on each such sheet on each night of each

such week.   Each sales sheet contained for each day of the week,

inter alia, a column headed "SALES".    During the years at issue,

each night after Mr. Mifsud closed out the cash register at

Spring Hill restaurant, he filled in an amount under that column,

which purported to show that restaurant's total daily gross

receipts reflected on the cash register tape and guest checks for

each day.    During the years at issue, each night after Mr. Mifsud

completed the sales sheet for the day, he discarded the cash

register tape and guest checks for that day.   During those years,

each night after Mr. Mifsud closed out the cash register at

Spring Hill restaurant, he brought the cash receipts from that

day's restaurant operations to his house.

     At all relevant times, Mr. Mifsud, who was knowledgeable

about Federal deposit insurance which insures U.S. deposits of

one person up to $100,000, and Ms. Mifsud maintained multiple

bank accounts.   As of December 31, 1991, petitioners had

$220,872.67 on deposit at Barnett Bank, $160,000 of which was in

a certificate of deposit, $55,952.82 of which was in an individ-

ual retirement account, and $4,919.85 of which was in a checking
                               - 10 -


account.   During the years at issue, petitioners maintained bank

accounts at Barnett Bank, Sun Bank, and Citizens Federal.     During

1993 and 1994, petitioners also maintained a bank account at

Great Western Bank.   During the years at issue, petitioners made

numerous deposits of cash into their bank accounts, which, for

the most part, were regularly made throughout the year in rela-

tively small amounts (i.e., around $1,000 or less).     In 1993,

Great Western Bank issued a cash transaction report with respect

to petitioners because they made two cash deposits on August 20

of that year, which totaled in excess of $10,000.

     During the years at issue, petitioners deposited the fol-

lowing aggregate amounts into their bank accounts at the banks

indicated:

                               1992           1993         1994
Barnett Bank                $103,595.40     $118,519     $183,044
Great Western Bank               --           47,863       70,086
Sun Bank                      19,691.10        7,610       12,221
Citizens Federal              73,811.19       30,952       23,490
  Total Deposits             197,097.69      204,944      288,841


     At all relevant times, Mr. Mifsud paid attention to the

economy and to changes in interest rates and how such changes

might affect petitioners.   For example, when interest rates fell,

Mr. Mifsud contacted Barnett Bank in order to refinance petition-

ers' house at a lower interest rate.      At all relevant times, Mr.

Mifsud also was concerned with the interest that petitioners were
                              - 11 -


able to earn on their bank deposits.   If there was a better rate

of interest accruing on certificates of deposits, Mr. Mifsud

transferred funds from one or more of petitioners' checking

accounts and/or savings accounts in order to buy such a certifi-

cate, even though he recognized that a certificate of deposit was

not as liquid an asset as a checking or other similar bank

account.   At all relevant times, Mr. Mifsud was aware that he

could not redeem a certificate of deposit before maturity without

incurring a financial penalty, as compared to withdrawing funds

at any time from a checking account or similar bank account.     Mr.

Mifsud was not aware of any U.S. bank that had failed and thereby

caused injury to its depositors.

     At all relevant times, petitioners financed through loans

the purchases of their residences, businesses, and automotive

vehicles and paid interest on those loans.   After petitioners

moved to Florida, they purchased on credit at least the following

automotive vehicles:   a 1979 Datsun 240Z, a 1986 Ford Bronco, a

1988 Lincoln Town Car, a 1988 Cadillac Eldorado, a 1990 Lexus LS-

400, a 1983 Datsun 240Z, a 1992 Cadillac Seville, a 1992 Honda

Accord EX, and two 1995 Lincoln Town Cars.

     Mr. Mifsud submitted a credit application to Ford Motor

Credit Company, dated July 16, 1993.   That application showed,

inter alia, (1) gross monthly salary of $10,833, or $129,996

annually, from Spring Hill restaurant, and (2) income from two
                               - 12 -


other restaurants, the amount of which was not stated on that

application.    Petitioners submitted to Barnett Bank an applica-

tion, dated October 19, 1993, for a line of credit in the amount

of $75,000.    That application showed, inter alia, (1) gross

monthly salary of $9,000 from three restaurants and (2) other

monthly income of $1,800 in the form of interest, or total annual

income of $129,600.

     During the years at issue, petitioners did not receive any

inheritances, legacies, or devises.

     Petitioners filed joint tax returns (returns) for the years

1992, 1993, and 1994, in which they reported the following

amounts of wages or salaries from the corporate owners of the

restaurants indicated:
                              - 13 -


  Corporate Owner--
      Restaurant       Year   Mr. Mifsud     Ms. Mifsud    Total
Nichole & Eric,        1992       $12,100      $12,100    $24,200
  Inc.--Breakfast
  Club of 7 Hills      1993        11,450       11,450     22,900
                       1994         8,400        8,400     16,800
Paul & Joe, Inc.--     1992        11,150       14,600     25,750
  Spring Hill
  restaurant           1993         8,050        8,050     16,100
                       1994         8,575        8,500     17,075
Crystal & Ryan,        1992        12,100       12,100     24,200
  Inc.--The
  Breakfast Club       1993        11,400       11,400     22,800
                       1994         8,500        8,500     17,000

       Total by Year   1992        35,350       38,800     74,150
                       1993        30,900       30,900     61,800
                       1994        25,475       25,400     50,875

     In their return for each of the years at issue, petitioners

reported a capital loss of $3,000.     They also reported subchapter

S losses of $20,002 in their 1992 return, $13,499 in their 1993

return, and $9,392 in their 1994 return.    The amounts of total

income reported by petitioners in their returns for 1992, 1993,

and 1994 were $80,130, $74,699, and $62,658, respectively.

     Petitioners reported the following amounts of interest

income in Schedule B, Interest and Dividend Income, of their

return for each year indicated:
                              - 14 -




                 Year                   Amount
                1986                   $11,995
                1987                    13,108*
                1988                    12,067**
                1989                    25,286
                1990                    28,988
                1991                    25,709
                1992                    28,982
                1993                    29,398
                1994                    23,947
* Includes $2,424 in tax-exempt interest.
** Includes $2,452 in tax-exempt interest.

     Petitioners reported the following amounts of interest

expense in Schedule A, Itemized Deductions, of their returns for

the years indicated:

                  Year                    Amount

                  1986                   $13,688
                  1987                     5,135
                  1988                     6,046
                  1989                    13,570
                  1990                    12,752
                  1991                     9,394
                  1992                     8,040
                  1993                     4,382
                  1994                     4,892

     In Forms 1120S, U.S. Income Tax Return for an S Corporation,

for 1992, 1993, and 1994, Paul & Joe, Inc., reported gross

receipts in the amounts of $308,643, $334,427, and $307,478,

respectively.   In those forms, Paul & Joe, Inc., reported cost of

goods sold in the amounts of $161,149, $208,999, and $151,120,

respectively, of which $93,478, $117,149, and $90,164, respec-

tively, were reported as "Purchases" and $68,543, $93,125, and
                               - 15 -


$62,804, respectively, were reported as "Cost of labor".

     During the period 1982 through 1993, interest rates under

section 6621 ranged as follows from a high of 20 percent in 1982

to a low of 7 percent in 1993:   Interest rates under section 6621

were 20 percent in 1982, 10 percent in 1986, 8 percent in 1987,

10 percent in 1990, 9 percent in 1991, 8 percent in 1992, and 7

percent in 1993.

     In 1992, the collection division of the Internal Revenue

Service (IRS) issued a summons because the IRS did not have a

record that Paul & Joe, Inc., had filed a Form 1120S for any of

the years 1985 through 1991.   When the IRS received no response

to the summons, the matter was referred to the examination

division of the IRS and assigned to William Joseph Slater (Mr.

Slater), a revenue agent in that division.   Around October 1994,

Mr. Slater wrote a letter to petitioners in which he indicated

that the IRS had no record of having received Forms 1120S for

Paul & Joe, Inc., and requested that they contact Mr. Slater to

discuss the matter.   Because petitioners did not respond to Mr.

Slater's letter, Mr. Slater contacted the individual who was

shown in petitioners' returns as their return preparer in order

to obtain an explanation regarding the failure of Paul & Joe,

Inc., to file Forms 1120S.   Shortly thereafter, Mr. Slater

received Forms 1120S for Paul & Joe, Inc., for 1991, 1992, and

1993, which were signed by Mr. Mifsud and petitioners' return
                              - 16 -


preparer.   Those returns showed losses for Spring Hill restau-

rant.   Mr. Slater compared petitioners' returns for 1991, 1992,

and 1993 with Forms 1120S for Paul & Joe, Inc., for those years

and ascertained, inter alia, that petitioners' returns for those

years showed significant interest income.   Mr. Slater also

determined from IRS records that a currency transaction report

had been filed with respect to petitioners which showed that on

one day in 1993 they deposited more than $10,000 in cash into

their bank account at Great Western Bank.

     Mr. Slater decided to audit the restaurant business of Paul

& Joe, Inc., notified petitioners and their return preparer by

letter of that decision, and requested a meeting.   Mr. Slater met

with Mr. Mifsud and petitioners' return preparer.   At that

meeting, Mr. Slater asked Mr. Mifsud how he operated the res-

taurant business of Paul & Joe, Inc., inquired about the types of

business records that were kept, and similar matters.   Mr. Slater

requested, and received, records relating to corporate bank

accounts and other corporate documents.   The only business

records for Paul & Joe, Inc., relating to its gross receipts that

were provided to Mr. Slater during his examination of Paul & Joe,

Inc., and of petitioners were the sales sheets that Mr. Mifsud

completed daily during the years under examination.   No other

such records were available because each night throughout those

years Mr. Mifsud discarded the daily cash register tapes and
                              - 17 -


daily individual guest checks after he completed the sales sheet

for the day.

     Mr. Slater decided to expand his examination to petitioners

individually and asked them to provide him with certain informa-

tion, including personal bank statements.   Mr. Slater conducted

an analysis under the bank deposits method with respect to

petitioners' bank deposits for the years 1993 and 1994.    That

analysis showed that for each of the years 1993 and 1994 pe-

titioners had substantial deposits in excess of the income that

they reported in their return for each of those years.    Mr.

Slater requested a meeting with petitioners and their return

preparer whom they had authorized to represent them with respect

to the examination by the IRS of their returns for 1993 and 1994.

At that meeting, Mr. Slater asked for the source of petitioners'

bank deposits.   Mr. Mifsud informed Mr. Slater at that meeting

that petitioners had a cash hoard from around 1980 when they

moved from Michigan to Florida.   Mr. Mifsud indicated at that

meeting that immediately prior to petitioners' move to Florida

they had $200,000 in cash and $11,000 in a bank in Detroit.     When

they moved to Florida they brought that cash with them and

deposited into a Florida bank account the $11,000 that they had

kept in a Detroit Bank.   Mr. Mifsud further explained to Mr.

Slater that petitioners kept the cash hoard until the years under

examination by the IRS when, according to Mr. Mifsud, they
                               - 18 -


started depositing some of the cash hoard into petitioners' bank

accounts because Ms. Mifsud was insisting that he do that in view

of a robbery that occurred at petitioners' house in 1979.

     Upon learning Mr. Mifsud's explanation of the amounts of

cash deposits that petitioners made during 1993 and 1994 in

excess of the income that they reported in their returns for

those years, Mr. Slater asked Mr. Mifsud for any information that

could corroborate their position that they had a cash hoard.      In

response, petitioners gave Mr. Slater a copy of a newspaper

article with respect to the robbery that took place in 1979 at

their house in Michigan as well as tax returns for years prior to

1993.   However, no other information or documentation was pro-

vided to Mr. Slater in an attempt to corroborate petitioners'

position that their unexplained bank deposits were attributable

to their claimed cash hoard.    Mr. Slater expanded his examination

of petitioners to include their taxable year 1992, and he con-

ducted an analysis under the bank deposits method of petitioners'

bank deposits for that year.

     In addition to auditing petitioners and Paul & Joe, Inc.,

Mr. Slater also examined Ms. Mamo and Mr. Mamo who owned 40

percent of Paul & Joe, Inc.    Mr. Slater did not find any sub-

stantial unexplained cash deposits by them during the years under

examination.
                               - 19 -


     Respondent issued a notice of deficiency (notice) to pe-

titioners with respect to their taxable years 1992, 1993, and

1994.    In the notice, respondent determined, inter alia, that

petitioners had unreported income for 1992, 1993, and 1994 in the

amounts of $60,034, $53,094, and $57,891, respectively, the

likely source of which was Paul & Joe, Inc.    In making those

determinations, respondent relied on an analysis under the bank

deposits method of petitioners' bank deposits during the years at

issue, which showed that petitioners had unexplained bank de-

posits during those years.    Respondent further determined in the

notice that the cost of goods sold reported by Paul & Joe, Inc.,

for 1993 and 1994 was understated in the amounts of $16,515 and

$19,637, respectively, because Mr. Mifsud made purchases for Paul

& Joe, Inc., during those years, which were not reimbursed by

that company.3   In the notice, respondent determined that pe-

titioners had deficiencies in tax (and underpayments) for 1992,

1993, and 1994 in the amounts of $18,087, $15,653, and $17,073,

respectively.    Respondent further determined in the notice that

petitioners are liable for each of the years at issue for the

fraud penalty under section 6663 on the entire amount of each

such underpayment.


     3
        The notice indicates that no adjustment was made to cost
of goods sold for 1992 because no information was available for
that year.
                              - 20 -


     In respondent's answer, respondent alleged in the alterna-

tive to the allegations in the answer that were based on the

determinations in the notice that petitioners had increased

deficiencies in tax (and underpayments) for the years at issue

and that such increased underpayments of tax are due to fraud.

                             OPINION

     Except for the fraud penalty and the increased deficiencies

alleged in respondent's answer on which respondent has the burden

of proof, see sec. 7454(a); Rule 142(b) and (a), petitioners have

the burden of establishing that respondent's determinations in

the notice are erroneous, see Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     We turn to the fraud penalty under section 6663.   That is

because our resolution of that issue is determinative of pe-

titioners' contentions that respondent's deficiency determina-

tions in the notice are erroneous, that respondent has not shown

that petitioners have the increases in such deficiencies that

were alleged as part of respondent's alternative position in the

answer, and that the period of limitations for 1992 has expired.

     In order for the fraud penalty to apply, respondent must

prove by clear and convincing evidence that an underpayment

exists and that some portion of such underpayment is attributable

to fraud.   See secs. 6663(a), 7454(a); Rule 142(b); Niedringhaus

v. Commissioner, 99 T.C. 202, 210 (1992).   If respondent es-
                                - 21 -


tablishes that any portion of an underpayment is attributable to

fraud, the entire underpayment is to be treated as attributable

to fraud, except with respect to any portion of such underpayment

which the taxpayer establishes by a preponderance of the evidence

is not attributable to fraud.    See sec. 6663(b).   In a situation

such as the present case in which the allegations of fraud are

intertwined with unreported and indirectly reconstructed income,

respondent can satisfy the burden of establishing an underpayment

in one of two ways:   (1) Where the taxpayer alleges a nontaxable

source for the unreported income reconstructed by respondent, by

disproving that alleged nontaxable source, see Parks v. Com-

missioner, 94 T.C. 654, 661 (1990), or (2) by proving a likely

source of that unreported income, see Parks v. Commissioner,

supra.

     The parties stipulated that petitioners made bank deposits

during 1992, 1993, and 1994 totaling $197,097.69, $204,944, and

$288,841, respectively.   As part of respondent's alternative

position in the answer, respondent permitted petitioners to

reduce their total bank deposits for 1992, 1993, and 1994 by

$46,644, $49,638, and $122,459, respectively, which were the

amounts of deposits that respondent concluded were attributable

to nontaxable sources.4   Petitioners do not dispute the amounts


     4
         Under respondent's position in the answer that is based
                                                    (continued...)
                              - 22 -


of those reductions of petitioners' bank deposits for the years

at issue.5   However, petitioners contend that for each year at

issue the excess of (1) petitioners' bank deposits reduced by

those amounts attributable to nontaxable sources that respondent

allowed over (2) the amount of total income that petitioners

reported in their return for each such year also is attributable

to a nontaxable source, namely, a cash hoard.

     Respondent may disprove petitioners' allegation of a cash

hoard by showing that respondent's reconstruction of income under

the bank deposits method is accurate and that petitioners'

allegation of a cash hoard is inconsistent, implausible, and not

supported by objective evidence in the record.   See Parks v.

Commissioner, supra.   On the record before us, we find that

respondent's reconstruction of petitioners' income under the bank

deposits method, as alleged as part of respondent's alternative

position in the answer, is accurate.   Indeed, the only complaint



     4
        (...continued)
on the notice, respondent reduced petitioners' total deposits for
the years at issue in amounts of such deposits that were greater
than those allowed under respondent's alternative position in the
answer.
     5
        Respondent also adjusted the total income of Paul & Joe,
Inc., (1) for 1993 in the amounts of $14,515 for corporate
purchases paid for by Mr. Mifsud and $2,000 for checks deposited
to that business for cash and (2) for 1994 in the amounts of
$11,946 for corporate purchases paid for by Mr. Mifsud and $7,691
for checks deposited to that business for cash. Petitioners do
not dispute those adjustments.
                                - 23 -


that petitioners have about that reconstruction is that respon-

dent failed to reduce their bank deposits for each of the years

at issue by the total amount of such deposits for each such year

that petitioners claim was attributable to their cash hoard.

     To support their position that the source of the unreported

income alleged by respondent under respondent's alternative

position in the answer was their cash hoard, petitioners rely

principally on the testimony of Mr. Mifsud and to a lesser extent

on the testimony of Ms. Mifsud, Ms. Mamo, and Mr. Mamo.   We are

not required to, and we do not, accept the self-serving testimony

of petitioners.   Nor are we required to, and we do not, accept

any testimony of petitioners' daughter Ms. Mamo or of Mr. Mamo,

the father of two of petitioners' grandchildren and their former

son-in-law, which serves petitioners' interest in this case.    See

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

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).

     We found the testimony of Mr. Mifsud and of Ms. Mifsud that

they had a cash hoard which was the source for each of the years

at issue for the bank deposits at issue to be implausible,

inconsistent with and/or not supported by objective evidence in

the record, and not credible.    By way of illustration, we found

Mr. Mifsud's testimony that in 1951 his father brought approxi-
                              - 24 -


mately $500,000 from Malta to the United States, large amounts of

which Mr. Mifsud claims his parents gave to him both during his

father's lifetime and after his father died, to be implausible,

inconsistent with and not supported by objective evidence in the

record, and not credible.   The record establishes that in 1951

Malta was under English exchange controls which limited the

ability of Maltese persons to bring currency out of the country.

The export of currency from Malta in 1951 in an amount of pounds

or any other form of currency equal to approximately $500,000

would have had a serious impact on Malta's economy and the policy

of its Government and would have been required by the English

exchange controls to have been documented.   Malta has no official

record that an export from Malta took place in 1951 of currency

in an amount of pounds or any other form of currency equal to

approximately $500,000.   The record also establishes that in

1951, when Mr. Mifsud and his father emigrated from Malta to the

United States, Malta, which had been devastated during World War

II by German air strikes, was a nation of small shopkeepers,

dockworkers, and bureaucrats, with a small Anglo-Maltese ruling

class.   Estimates of Maltese national income in the postwar

period ranged from $28.2 million to $48.3 million, and the median

wage for private workers in Malta was about $11 per week, or $572

per year.
                                - 25 -


     By way of further illustration of testimony of Mr. Mifsud

that we found to be implausible, inconsistent with and not

supported by objective evidence in the record, and not credible

Mr. Mifsud testified that his father owned a very large, eight-

bedroom house in Malta, which, according to Mr. Mifsud, his

father sold for 30,000 pounds in 1952, or $146,400 at the then

prevailing exchange rate of $4.88 per pound.    Maltese official

records show only two purchases and one sale of real property by

Mr. Mifsud's father and one sale by Mr. Mifsud and certain of his

family members.   In November 1929, Mr. Mifsud's father purchased

a house in Malta for 570 pounds.    In April 1937, he sold that

house for 270 pounds.   In September 1938, Mr. Mifsud's father

purchased another house in Malta for 350 pounds.    In 1966, Mr.

Mifsud, along with his mother, three brothers, and a sister sold

a house in Malta for 2,600 pounds, or $7,254 at the exchange rate

in effect in 1966 of $2.79 per pound.

     We also found implausible, not supported by objective

evidence in the record, and not credible Mr. Mifsud's testimony

that although his father did not have to work since he brought

with him approximately $500,000 from Malta in 1951, he decided to

take a position about a year after he emigrated to the United

States when he was 48 years old as a head waiter at a hotel in

Detroit because he was bored.    We simply do not believe that Mr.

Mifsud's father would have undertaken such physically demanding
                              - 26 -


work if, as Mr. Mifsud testified, his father did not have to do

so because he brought approximately $500,000 with him to the

United States a year before he started working as a head waiter.

Nor do we believe that Mr. Mifsud's elderly and ill mother would

be living on Social Security benefits and gifts from her children

if, in fact, Mr. Mifsud's father had brought around half a

million dollars to the United States in 1951, which would have

belonged to her upon the death of Mr. Mifsud's father.

     To illustrate further why we shall not accept and rely on

the testimony of Mr. Mifsud and Ms. Mifsud relating to petition-

ers' claim that the source of the bank deposits at issue was a

cash hoard which they brought with them when they moved from

Michigan to Florida, Mr. Mifsud testified that petitioners

brought $332,000 in cash and $69,000 in bank deposits to Florida

when they moved there in 1980.   However, Ms. Mifsud testified

that petitioners had "over $200,000 cash" when they moved from

Michigan to Florida.   Moreover, during the examination of Paul &

Joe, Inc., and of petitioners by the IRS, Mr. Mifsud told Mr.

Slater, the revenue agent responsible for that examination, that

the source of funds that petitioners deposited into their bank

accounts during the years at issue was $200,000 in cash, which

they brought with them when they moved from Michigan to Florida.6


     6
         Mr. Mifsud also told Mr. Slater during the IRS'
                                                    (continued...)
                              - 27 -


Mr. Mifsud also testified that around 1983 he began depositing

money from petitioners' alleged cash hoard into various bank

accounts in increments of $3,000 to $10,000 usually once a week

or every three weeks.   However, Mr. Mifsud told Mr. Slater during

the IRS' examination of Paul & Joe, Inc., and of petitioners that

petitioners began depositing their cash hoard during the years at

issue, and Ms. Mifsud testified that they began depositing their

cash hoard in 1992.   Moreover, the amounts of the various bank

deposits that petitioners made throughout the years at issue are

for the most part much smaller than the level of deposits that

Mr. Mifsud testified he made from his cash hoard during those

years (i.e., from $3,000 to $10,000).

     Assuming arguendo that, starting in 1983, Mr. Mifsud made 17

deposits of $3,000 a year, a conservative assumption in light of

Mr. Mifsud's testimony that around 1983 petitioners began de-

positing cash in increments of $3,000 to $10,000 usually once a

week or every three weeks, petitioners would have deposited

within six and a half years, or by around 1989 or 1990, all of

the $332,000 in cash that Mr. Mifsud claims petitioners brought

with them in 1980 when they moved from Michigan to Florida.

Furthermore, under the same assumption, petitioners would have



     6
        (...continued)
examination of petitioners that they brought $11,000 in bank
deposits when they moved to Florida from Michigan.
                              - 28 -


deposited within four years, or by around 1987, all of the

$200,000 in cash which Mr. Mifsud informed Mr. Slater petitioners

brought with them to Florida in 1980.   If the Court were to

accept Mr. Mifsud's testimony as to when petitioners started

making bank deposits from their alleged cash hoard and the

amounts and frequency of such deposits, such alleged cash hoard

would have been fully deposited into petitioners' bank accounts

well before 1992, the first year at issue, regardless whether it

is assumed that petitioners had $332,000 or $200,000 in cash when

they moved from Michigan to Florida in 1980.

     Another illustration of the implausibility, inconsistency,

and lack of credibility of Mr. Mifsud's testimony relates to his

claim at trial that he maintained a cash hoard because he was

distrustful of banks, a distrust, according to his testimony,

that he learned from his parents.   The record belies Mr. Mifsud's

claim that he was distrustful of banks.   At all relevant times,

petitioners maintained multiple bank accounts into which they

deposited in the aggregate large amounts of cash.   For example,

petitioners had $220,870.67 on deposit at Barnett Bank on De-

cember 31, 1991.   In addition, during 1992, 1993, and 1994, they

made bank deposits totaling $197,097.69, $204,944, and $288,841,

respectively.   Furthermore, at all relevant times, Mr. Mifsud was

knowledgeable about Federal deposit insurance, which protects

bank deposits of one person up to $100,000.    He also was knowl-
                               - 29 -


edgeable about interest rates and transferred his bank invest-

ments from deposits in checking and/or savings accounts to one or

more certificates of deposit whenever the applicable interest

rate on such a certificate would yield a greater return for

petitioners.    Mr. Mifsud also admitted that he had never heard of

a bank in the United States that had failed and thereby caused

injury to its depositors.

     Mr. Mifsud's own testimony belies his testimony that he

learned to distrust banks from his parents.   Mr. Mifsud testified

that his mother "made" him open a savings account with Detroit

National Bank.   It is implausible to us that his parents were

distrustful of banks and taught Mr. Mifsud to distrust them, and

yet Mr. Mifsud's mother "made" him open a savings account with a

Detroit bank.

     Other facts established by the record further erode the

credibility of petitioners' claim that their cash hoard was the

source for the bank deposits at issue.   For example, petitioners

had interest income of $23,947 or more for each of the years at

issue and received interest income in excess of $10,000 during

every year starting in 1986.   Petitioners' interest income for

1987 and 1988 included tax-exempt interest.   We believe that a

person like Mr. Mifsud, who was sophisticated enough to seek and

receive tax-exempt interest, buy certificates of deposit when

interest rates on such deposits yielded petitioners a greater
                               - 30 -


return than the interest that they were earning on their checking

and/or savings bank accounts, and refinance the mortgage loan on

their house when interest rates fell below the interest rate

applicable to that loan, would not forgo the ability to earn

interest income on petitioners' alleged cash hoard of $332,000

(or even $200,000), especially considering the high interest

rates available during the 1980's, which peaked at 20 percent in

1982.   Considering those high interest rates, petitioners would

have forgone interest income of as much as $60,000 a year by

keeping the alleged cash hoard of $332,000 at home and not

depositing it into banks.    That amount of forgone interest income

is more than petitioners reported as total income for any of the

years 1986 through 1991.    We do not believe that petitioners

would have forgone such interest income, and we do not believe

that they did.   That is because we do not find credible their

claim that their cash hoard of $332,000 (or $200,000) was the

source of the bank deposits at issue.

     It is also significant that Mr. Mifsud testified at trial

that he could not recall the amount of petitioners' alleged cash

hoard that they deposited into their bank accounts during each of

the years at issue.   We find Mr. Mifsud's claimed inability to

remember those alleged matters to be suspect in view of his

ability to remember with specificity other facts relating to

petitioners' financial situation.    For example, Mr. Mifsud was
                             - 31 -


able to recall the precise amount of the monthly mortgage loan

payment (i.e., $38.55) that was required with respect to the

first house that petitioners purchased in 1960.   We believe that

Mr. Mifsud's inability to remember the amount of petitioners'

alleged cash hoard that they deposited into their bank accounts

during each of the years at issue is attributable to the fact

that they did not make such deposits.

     Another aspect of Mr. Mifsud's and Ms. Mifsud's testimony

that we found to be implausible and not credible relates to their

assertion at trial that they made bank deposits during the years

at issue from their cash hoard because of Ms. Mifsud's strong

fear that their house in Florida would be burglarized, which fear

was precipitated by the 1979 robbery at their house in Michigan.

Petitioners' testimony rings hollow.    If, in fact, Ms. Mifsud's

fear that petitioners' house in Florida would be burglarized were

as strong as petitioners testified, we cannot fathom why they

would have continued to keep large amounts of cash in their house

throughout the 1980's and the years at issue, as they contend

they did.

     On the record before us, we find petitioners' contention

that the source of the bank deposits at issue during the years at

issue was their cash hoard to be implausible and inconsistent

with and/or not supported by objective evidence in the record.
                             - 32 -


Indeed, we find the testimony of both Mr. Mifsud and Ms. Mifsud

regarding such deposits to be patently incredible.

     Based on our examination of the entire record in this case,

we find that respondent has established by clear and convincing

evidence that under the bank deposits method petitioners have

unreported income for each of the years 1992, 1993, and 1994 in

the amounts of $70,323.69, $80,607, and $103,724, respectively.

See Parks v. Commissioner, 94 T.C. at 661.7   We further find on


     7
        Since respondent has disproved petitioners' alleged
nontaxable source of the bank deposits at issue and thereby has
satisfied respondent's burden of establishing an underpayment for
each of the years at issue, see Parks v. Commissioner, 94 T.C.
654, 661 (1990), we need not address whether respondent has
established a likely source of petitioners' unreported income for
those years, see id. We nonetheless note that we find on the
record before us that respondent has shown by clear and con-
vincing evidence a likely source of that unreported income, viz.,
Spring Hill restaurant. We also believe that The Breakfast Club
at which Mr. Mifsud spent time during the years at issue working,
inter alia, at the cash register was a likely source for at least
some of the unreported income of petitioners for those years.
Crystal & Ryan, Inc., owned The Breakfast Club, and petitioners
owned 51 percent of the stock of that S corporation.
     The record establishes that Mr. Mifsud admitted in a credit
application that he submitted to Ford Motor Credit Company, dated
July 16, 1993, that he had, inter alia, (1) gross monthly salary
of $10,833, or $129,996 annually, from Spring Hill restaurant,
and (2) income from two other restaurants, the amount of which
was not stated on that application. Petitioners also admitted in
an application for a line of credit in the amount of $75,000,
dated Oct. 19, 1993, which they submitted to Barnett Bank that
they had, inter alia, (1) gross monthly salary of $9,000 from
three restaurants and (2) other monthly income of $1,800 in the
form of interest, or total annual income of $129,600. Even Mr.
Mamo, petitioners' former son-in-law and the father of petition-
ers' grandchildren, admitted at trial that around 1991, the last
year during which Mr. Mamo worked at Spring Hill restaurant,
                                                   (continued...)
                             - 33 -


that record that petitioners have a deficiency in tax for each of

the years 1992, 1993, and 1994 attributable to (1) petitioners'

unreported income that we have found for each of those years and

     7
        (...continued)
that restaurant was generating as much as approximately $420,000
of gross receipts annually. That amount is well in excess of the
gross receipts of $289,648, $308,643, $334,427, and $307,478 for
1991, 1992, 1993, and 1994, respectively, that Paul & Joe, Inc.,
reported in Forms 1120S for those years.
     In an attempt to show that Spring Hill restaurant could not
have been the source of the bank deposits at issue, petitioners
proffered the testimony of Theodore R. Mandigo (Mr. Mandigo) whom
the Court found qualified as an expert in the restaurant busi-
ness. Petitioners' expert acknowledged during his testimony that
he based his opinion that Spring Hill restaurant could not have
been the source of those deposits on data provided to him by
petitioners. For example, petitioners' expert witness assumed
that Paul & Joe, Inc., had gross receipts of $306,000, $334,000,
and $307,000 during 1992, 1993, and 1994, respectively, which
were approximately the amounts that Paul & Joe, Inc., reported as
gross receipts in Forms 1120S for those years. Those amounts of
gross receipts are belied by Mr. Mamo's testimony that during
1991 Spring Hill restaurant generated gross receipts of as much
as approximately $420,000 and by the credit applications that Mr.
Mifsud and petitioners, respectively, submitted during 1993.
Petitioners' expert witness also assumed that the amounts of cost
of goods sold of Spring Hill restaurant for the years at issue
that petitioners provided to him were accurate. However, the
parties stipulated that the cost of goods sold of Paul & Joe,
Inc., was understated for 1993 and 1994 in the amounts of $14,515
and $11,946, respectively, because, for some unexplained reason,
Paul & Joe, Inc., did not claim all of its expenses. Mr. Mandigo
conceded that if the data which petitioners provided to him and
on which his opinion was based were incorrect, his opinion would
change. We conclude that petitioners' expert witness has not
rebutted the evidence in the record establishing that Spring Hill
restaurant was capable of producing the bank deposits at issue.
                               - 34 -


(2) the $2,600 of unreported income for each of those years to

which the parties agreed at trial.8

     We turn now to the requirement of fraudulent intent under

section 6663.    To prove fraudulent intent on the part of pe-

titioners for the years at issue, respondent must establish by

clear and convincing evidence that they intended to evade tax for

each such year, which they believed to be owing, by conduct

intended to conceal, mislead, or otherwise prevent the collection

of such tax.    See Laurins v. Commissioner, 889 F.2d 910, 913 (9th

Cir. 1989), affg. Norman v. Commissioner, T.C. Memo. 1987-265;

Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968);

Parks v. Commissioner, supra at 661.    The existence of fraud is a

question of fact to be resolved upon consideration of the entire

record.    See DiLeo v. Commissioner, 96 T.C. 858, 874 (1991),

affd. 959 F.2d 16 (2d Cir. 1992); Recklitis v. Commissioner, 91

T.C. 874, 909 (1988); Gajewski v. Commissioner, 67 T.C. 181, 199

(1976), affd. without published opinion 578 F.2d 1383 (8th Cir.

1978).    Fraud is never presumed or imputed and should not be

found in circumstances which create at most only suspicion.      See

Toussaint v. Commissioner, 743 F.2d 309, 312 (5th Cir. 1984),

affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner, 92 T.C. 661,

700 (1989); Katz v. Commissioner, 90 T.C. 1130, 1144 (1988).

     8
          See supra note 2.
                              - 35 -


Direct evidence of the requisite fraudulent intent is seldom

available.   See Petzoldt v. Commissioner, supra at 699; Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983).    Consequently, respon-

dent may prove fraud by circumstantial evidence.    See Toussaint

v. Commissioner, supra at 312; Marsellus v. Commissioner, 544

F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368; Rowlee

v. Commissioner, supra at 1123.

     The courts have identified a number of badges of fraud from

which fraudulent intent may be inferred, including (1) consistent

and substantial understatement of income, (2) inconsistent or

implausible explanations of behavior, (3) lack of credibility of

the taxpayer's testimony, and (4) dealing in cash.    See Laurins

v. Commissioner, supra at 913; Bradford v. Commissioner, 796 F.2d

303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Ruark v.

Commissioner, 449 F.2d 311, 312-313 (9th Cir. 1971), affg. per

curiam T.C. Memo. 1969-48; Niedringhaus v. Commissioner, 99 T.C.

at 211; Parks v. Commissioner, supra at 664-665; Miller v.

Commissioner, 94 T.C. 316, 334 (1990); Recklitis v. Commissioner,

supra at 910; Castillo v. Commissioner, 84 T.C. 405, 409 (1985);

Rowlee v. Commissioner, supra at 1125.     In addition, the tax-

payer's background and the context of the events in question may

be considered circumstantial evidence of fraud.    See Plunkett v.

Commissioner, 465 F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo.

1970-274; Niedringhaus v. Commissioner, supra at 211.     Although
                              - 36 -


no single factor is necessarily sufficient to establish fraud,

the existence of several indicia constitutes persuasive

circumstantial evidence of fraud.   See Bradford v. Commissioner,

supra at 307; Petzoldt v. Commissioner, supra at 700.

     The record in this case is replete with indicia of fraud by

petitioners, including the following:   Petitioners consistently

failed to report substantial amounts of income for the years

1992, 1993, and 1994.   They gave inconsistent and implausible

explanations about the source of the bank deposits at issue.     We

did not find the testimony of either Mr. Mifsud or Ms. Mifsud to

be credible in many material respects, including their testimony

that the source of the bank deposits at issue was their alleged

cash hoard.   The restaurant business in which petitioners engaged

dealt primarily in cash, and most of the deposits that petition-

ers made during the years at issue were in cash.

     Based on our examination of the entire record in this case,

we find that respondent has established by clear and convincing

evidence that petitioners intended to evade tax for each of the

years 1992 through 1994, which they believed to be owing, by

conduct intended to conceal, mislead, or otherwise prevent the

collection of such tax.9   We further find on that record that

     9
        We have considered all of the contentions and arguments
of petitioners that are not discussed herein, and we find them to
be without merit.
                              - 37 -


petitioners are liable for the fraud penalty under section 6663

for 1992, 1993, and 1994 on the underpayment attributable to

(1) petitioners' unreported income that we have found for each of

those years and (2) the $2,600 of unreported income for each of

those years to which the parties agreed at trial.10   See sec.

6663(a) and (b).

     To reflect the foregoing and the concessions of the parties,

                                        Decision will be entered

                                   under Rule 155.

     10
          See supra note 2.
