                             T.C. Memo. 2005-6



                          UNITED STATES TAX COURT



                       WINSTON KNAUSS, Petitioner v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket Nos. 12878-01, 7328-02.       Filed January 18, 2005.


        F. Pen Cosby, for petitioner.

        Ronald T. Jordan and Angela J. Kennedy, for respondent.



                  MEMORANDUM FINDINGS OF FACT AND OPINION


        GALE, Judge:    By notice of deficiency dated August 10, 2001,

respondent determined an income tax deficiency and fraud penalty

under section 6663(a)1 with regard to petitioner’s 1997 taxable

year.       By notice of deficiency dated January 23, 2002, respondent


        1
       Unless otherwise noted, all section references are to the
Internal Revenue Code as amended, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                               - 2 -

determined income tax deficiencies and fraud penalties under

section 6663(a) with respect to petitioner’s 1991, 1994, 1995,

and 1996 taxable years.   Petitioner timely petitioned for

redetermination with respect to both notices, and the cases

covering each were consolidated for trial, briefing, and opinion.

The deficiencies and fraud penalties determined were as follows:

                                             Penalty
              Year        Deficiency       Sec. 6663(a)

              1991           $4,323            $3,242
              1994           88,012            66,009
              1995          182,387           136,790
              1996          173,624           130,218
              1997          185,155           139,616


     After concessions,2 the issues for decision in these cases

(“this case”) are:   (1) Whether petitioner understated gain on

the sale of yachts in 1994, 1996, and 1997 by $155,848, $527,074,

and $615,119, respectively; (2) whether petitioner understated

gain from the sale of real property in 1995 by $232,400; (3)

whether petitioner had unreported income from his yacht charter

business in 1994, 1995, and 1996 of $68,350, $190,615, and

$34,544, respectively; (4) whether petitioner failed to report

income of $92,420, $36,000, and $13,000 in 1994, 1996, and 1997,

respectively, from the settlement of lawsuits; (5) whether


     2
       Petitioner has conceded that he received $85,119 of income
in 1995 as a finder’s fee that was not reported on his 1995
return. Respondent has conceded that his determination of the
amount of unreported gain on the sale of a yacht in 1994 was
overstated by $1,000.
                               - 3 -

petitioner’s wholly owned S corporation, Winston Development,

Inc., overstated deductions on its 1995 Federal income tax return

by $54,802; (6) whether there was an underpayment of tax in 1991;

and (7) whether the underpayments of tax in 1991, 1994, 1995,

1996, and 1997 were due to fraud.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are incorporated

into our findings by this reference.

     Petitioner was a resident of Ft. Lauderdale, Florida, when

the petitions were filed.

Petitioner’s Background

     Petitioner is a high school graduate.   He initially held a

variety of construction jobs before becoming trained to be a

construction project estimator.

     In 1968, petitioner started a demolition business that he

operated successfully for 20 years.    His business interests grew

to include apartment buildings, a hotel, and a country club.     In

1988, petitioner organized Winston Development, Inc. (WDI),3 an

S corporation, to build and sell condominiums in Indiana.    At all

relevant times, petitioner owned 100 percent of the stock of WDI.

     In the mid-1980s, petitioner also became successfully



     3
       The parties have stipulated that the name of the
corporation was “Winston Development, Inc.”, though the
corporation filed its tax returns as “Winston Development Corp.”,
and it is frequently referred to in the record by that name.
                                - 4 -

engaged in the business of chartering yachts for “dinner cruises”

in Ft. Lauderdale, Florida.     In the 1990s, petitioner had several

yachts built.    Petitioner would typically use the newly

constructed yachts in his charter business and eventually sell

them.

     Petitioner married Pam Maire in 1993, but they separated in

February 1995.    They filed for divorce in 1995 but reconciled in

June 1996.    The couple separated again in 1997 and ultimately

were divorced.

     In 1996, petitioner was convicted of three counts of felony

forgery for forging the signatures of nearby residents to

documents indicating they approved of petitioner’s application

for a liquor license for his country club.

Asset Sales

     Wrecking Krew

     In 1991, petitioner entered into a fixed-price contract with

Marine Builders, Inc., to deliver a completed yacht, built to his

specifications, for $796,707.    On December 20, 1991, the yacht

received a certificate of inspection by the U.S. Coast Guard,

which is issued only after a vessel is considered ready to carry

passengers for hire, and was assigned identification No. D979342.

 Petitioner took delivery of the yacht the same day and used it

in his charter business.    The vessel was named the Wrecking Krew.

Petitioner paid Marine Builders, Inc., the $796,707 contract
                               - 5 -

price for the yacht.   Shortly after taking delivery, petitioner

paid $2,683 to install deck lights.

     In 1992, petitioner advised his return preparer that the

purchase price of the yacht was $833,218.

     On January 27, 1994, petitioner sold the Wrecking Krew to

Dream USA, Inc., for $950,000.4   At the time of sale, petitioner

incurred the following costs: $13,068 for lead ballast; $1,000

for lead ballast installation; $5,563 in architect’s fees; and a

sales commission of $51,000.   The sum of the foregoing items,

plus the contract price paid to Marine Builders, Inc., and the

cost of the deck lights, equaled $870,021.

     Petitioner reported on his 1994 return that his basis in the

Wrecking Krew (plus selling expenses) was $1,025,869.     Adjusted

basis reported on the return, as a result of a claim of $100,740

in depreciation, was $925,129, resulting in a reported gain of

$24,871 on the sale of the vessel.     Accepting petitioner’s

claimed depreciation, respondent nonetheless determined that

petitioner’s adjusted basis in the vessel at the time of sale had

been overstated by $156,848, resulting in a determination of

unreported gain in that amount.   In the answer, respondent




     4
       By the time of the sale, petitioner had renamed the vessel
Sir Winston, the same name used for the two other vessels at
issue in this case. For simplicity, we shall refer to this
vessel as the Wrecking Krew.
                               - 6 -

conceded an additional $1,000 in selling expenses for lead

ballast installation, resulting in unreported gain of $155,848.

     Sir Winston

     On December 15, 1992, petitioner entered into a contract

with Darling Yachts, Inc., to construct a yacht to his

specifications for $623,706.   The contract provided for an offset

to the contract price for any item supplied by petitioner that

Darling Yachts, Inc., was obligated to provide under the

contract.   Petitioner supplied a $2,395 radar system and $18,433

in carpeting that Darling Yachts, Inc., was obligated to provide.

Petitioner also paid $49,220 for architectural fees, galley

equipment, blinds and wallpaper, miscellaneous electronics, life

jackets, and a security system for the yacht that were not

required to be provided by Darling Yachts, Inc.

     Darling Yachts, Inc., did not complete the vessel by the

December 15, 1993, completion deadline specified on the contract.

When it had still not been completed approximately 12 months

later, petitioner took possession on December 6, 1994, and

undertook the completion work himself.   Immediately prior to

petitioner’s taking possession, a marine survey report5 on the


     5
       The parties’ stipulation covering this report states that
the survey was conducted on Nov. 3, 1994. However, the report
itself is a stipulated exhibit and states that the survey was
conducted on Dec. 3, 1994. We therefore conclude that the
stipulation is erroneous and that the survey date was Dec. 3,
1994.
                               - 7 -

yacht concluded that it was 95 percent complete, and the vessel

was issued a certificate of inspection by the U.S. Coast Guard,

subject to the correction of certain minor deficiencies.    The

vessel was assigned identification No. D1026508 and named the Sir

Winston.

     Petitioner caused WDI to pay for the installation of

mirrors, doorframes, carpeting, and other fixtures on the Sir

Winston, and two individuals on the WDI payroll did finishing

work on the Sir Winston interiors.     Petitioner also replaced a

defective steering mechanism that had been installed by Darling

Yachts, Inc.6

     During the 1-year period after petitioner took possession of

the Sir Winston (December 6, 1994 to December 6, 1995),

petitioner had four checking accounts.    During this period, the

checks drawn on those accounts that could have been for capital

improvements to the Sir Winston did not exceed $195,799.     During

this period, petitioner also had two credit cards through which

he made expenditures totaling $29,917.

     In April 1996, petitioner sold the Sir Winston to Dream USA,

Inc., for $1,250,000.   Petitioner advised his return preparer,

and reported on his 1996 return, that his basis in the Sir


     6
       The failure of Darling Yachts, Inc., to complete the
vessel satisfactorily, or to deliver it on time, prompted
litigation between petitioner and Darling Yachts, Inc., discussed
infra.
                                 - 8 -

Winston was $1,200,000.    Adjusted basis reported on the return,

as a result of a claim of $33,360 in depreciation, was

$1,166,640, resulting in a reported gain of $83,360 on the sale

of the vessel.   Accepting petitioner’s claimed depreciation,

respondent nonetheless determined that petitioner’s adjusted

basis in the vessel at the time of sale was $639,566, or $527,074

less than claimed by petitioner, resulting in a determination of

unreported gain in that amount.

     Sir Winston II

     On December 5, 1994, petitioner entered into a fixed-price

contract with Marine Builders, Inc., to build a yacht to his

specifications for $1,099,173.     Petitioner made cash payments

totaling $39,000 toward the construction of the yacht.

Petitioner also made direct payments to vendors totaling $33,330

for improvements to the yacht during its construction.    The yacht

was issued a certificate of inspection by the U.S. Coast Guard

and assigned identification No. D1037815.    The yacht was

delivered complete and ready to carry passengers for hire on

January 11, 1996.     Petitioner also named this vessel the Sir

Winston (Sir Winston II).

     During the 1-year period after petitioner took delivery of

the Sir Winston II (January 11, 1996 to January 11, 1997),

petitioner had two checking accounts and a brokerage account on

which he could draw checks.    During this period, the checks drawn
                                 - 9 -

on those accounts that could have been for capital improvements

to the Sir Winston did not exceed $79,347.    During this period,

petitioner also had two credit cards through which he made

expenditures totaling $54,589.

     Petitioner sold the Sir Winston II to Dream Boat, Inc., for

$2 million on April 7, 1997.     Petitioner advised his return

preparer, and reported on his 1997 return, that his basis in the

Sir Winston II was $1,789,322.    Adjusted basis reported on the

return, as a result of a claim of $41,700 in depreciation, was

$1,747,622, resulting in a reported gain of $252,378 on the sale

of the vessel.   Accepting petitioner’s claimed depreciation,

respondent nonetheless determined that petitioner’s adjusted

basis in the vessel at the time of sale was $1,132,503, or

$615,119 less than claimed by petitioner, resulting in a

determination of unreported gain in that amount.

     Later-Built Yachts

     Petitioner had four more yachts constructed by Marine

Builders, Inc., in addition to the Wrecking Krew and Sir Winston

II at issue in this case.    Those later-built yachts were

constructed pursuant to “cost-plus” contracts, whereas the

Wrecking Krew and Sir Winston II were constructed pursuant to

fixed-price contracts.    Under the “cost-plus” contracts with

Marine Builders, Inc., petitioner supplied a greater portion of
                               - 10 -

the material used in the vessel’s construction than under the

previous fixed-price contracts.

     Real Property

     On June 7, 1995, petitioner sold real property at 6729

Westfield Boulevard, Indianapolis, Indiana, to Evergreen, LLC for

$1,500,000.    Prior to the sale, petitioner leased the property to

Winston Yacht and Country Club, Inc., a country club wholly owned

by petitioner.    In November 1995, petitioner provided his return

preparer with a handwritten schedule that purported to list

improvements made to the property between 1990 and 1995 that

totaled $232,400.    Petitioner had not previously advised his tax

return preparer of these improvements.    The improvements were

included in the cost basis of $1,045,742 reported on petitioner’s

1995 return.

     Respondent determined that petitioner’s claimed basis in the

property should be reduced by $232,400 for failure to

substantiate, resulting in a determination of unreported gain in

that amount.

Business Income

     Yacht Charter Business

     Petitioner was engaged in the yacht charter business in

1994, 1995, and 1996.    Petitioner advised his return preparer,

and reported on his returns, that gross receipts from his yacht
                                - 11 -

charter business were $74,893, $215,427, and $320,532 in 1994,

1995, and 1996, respectively.

     In the notice of deficiency, respondent determined that

petitioner’s gross receipts were $144,217, $415,018, and $364,247

in 1994, 1995, and 1996, respectively, resulting in

determinations of unreported gross receipts of $68,350, $190,615,

and $34,544 in those years.7    With respect to 1994, petitioner

subsequently admitted that he deposited charter receipts of

$116,095, an amount exceeding his reported charter gross receipts

by $41,202.   He further admitted that in 1994 he made additional

deposits of funds from third parties totaling $29,247 and cash of

$7,000, but denied that these amounts represented charter

receipts.   With respect to 1995, petitioner subsequently admitted

that he deposited charter receipts of $399,239, an amount

exceeding his reported charter gross receipts by $182,812.       He

further admitted that in 1995 he made additional deposits of

funds from third parties totaling $5,733, but denied that this

amount represented charter receipts.     With respect to 1996,

petitioner subsequently admitted that he deposited charter

receipts of $318,471, an amount that is $2,061 less than his

reported charter gross receipts.    He further admitted that in

1996 he made additional deposits of funds from third parties


     7
       In determining unreported gross receipts, respondent made
adjustments for petitioner’s collection of sales tax.
                                   - 12 -

totaling $2,075 and cash of $35,800, but denied that these

amounts represented charter receipts.

        WDI

        WDI was engaged in the construction and sale of condominium

units.        WDI reported gross receipts of $1,342,216 and $1,624,352

in 1995 and 1996, respectively.       Petitioner reviewed all of the

checks written from the WDI corporate account and often directed

the accounting code to which they should be charged.        In 1995,

petitioner directed that invoices for expenses associated with

the Sir Winston be paid by checks drawn on WDI’s corporate

account.       WDI then deducted the yacht expenditures as expenses on

its 1995 Federal income tax return.         WDI’s bookkeeper questioned

petitioner about the payment of invoices for the yacht with

checks drawn on the WDI corporate account and was specifically

instructed by petitioner to record the checks for the yacht

expenses on WDI ledger accounts that he designated.         Some of the

checks for the yacht expenses were recorded on WDI’s books as

“repair and maintenance”, while others were recorded as additions

to an asset account for a condominium building under

construction.       The amounts recorded as repair expenses were

deducted on WDI’s 1995 return as current expenses.        The asset

account charges were included in the “cost of sales” for

condominium units sold in 1995, resulting in a deduction in that

year.
                               - 13 -

Settlements of Lawsuits

     Marine Builders, Inc.

     In 1993 petitioner filed suit against Marine Builders, Inc.,

seeking damages for breach of warranty, breach of contract,

conversion, lost income, and lost value in connection with the

contract to construct the Wrecking Krew.    In 1994, petitioner and

Marine Builders, Inc., entered into a settlement agreement which

provided that three installments (totaling $92,420) would be paid

to petitioner “in settlement of damages for contractual claims

that Winston Knauss has alleged against Marine Builders, Inc.”,

and that three further installments (totaling $85,119) would be

paid to petitioner “as a separate matter and as such are not

alleged damages to Winston Knauss for the contracts referenced in

the complaint for damages.”    The settlement agreement further

provided that the initial three installments “are not to be

considered income under any respects to Winston Knauss”.       The

agreement was silent regarding any such characterization of the

latter three installments.    The initial three installments

(totaling $92,420) were paid to petitioner in 1994, and the final

three installments (totaling $85,119) were paid to him in 1995.

Marine Builders, Inc., issued a Form 1099-Misc, Miscellaneous

Income, to petitioner for 1995 denoting $85,119 as nonemployee

compensation.   Petitioner subsequently admitted that the $85,119
                             - 14 -

was paid to him as a finder’s fee for referral of a customer to

Marine Builders, Inc.

     Petitioner did not inform his return preparer of any of the

foregoing payments, and they were not reported as income on his

1994 or 1995 returns.

     Darling Yachts, Inc.

     On February 23, 1995, petitioner filed suit against Darling

Yachts, Inc., seeking damages for breach of warranty, failure to

complete the vessel, and lost income in connection with the

contract to construct the Sir Winston.   An Agreed Judgment in the

case was entered on March 18, 1995, which provided that

petitioner was entitled to recover $65,000 from Darling Yachts,

Inc., in satisfaction of his claims.   The judgment further

provided that an initial installment of $25,000 was due upon the

execution of the judgment by the parties, with further monthly

installments of $1,000 commencing January 10, 1996.   The judgment

was not executed until March 13, 1996.   Pursuant thereto, Darling

Yachts, Inc., paid petitioner $65,000, of which $36,000 was paid

in 1996, and $13,000 was paid in 1997.

     Petitioner did not inform his return preparer of the

foregoing payments, and they were not reported as income on his

1996 or 1997 returns.
                               - 15 -

Net Operating Loss Carryback

     Petitioner timely filed a Form 1045, Application for

Tentative Refund, claiming an adjustment to his 1991 Federal

income tax based on a net operating loss from 1994.

Books and Records

     Petitioner did not produce books and records in support of

his yacht purchases or sales, his yacht charter business, his

real estate transactions, or any of his personal financial

transactions.   When petitioner and his ex-wife, a school teacher,

separated in February 1995, she took records related to their

joint checking accounts with NBD Bank8 and SunTrust Bank.     In

March 1997, following a period of reconciliation but pending

their final divorce, petitioner’s ex-wife again took joint

checking account records.

                               OPINION

Gain From Sale of Yachts

     Respondent determined that petitioner overstated his basis,

and therefore had unreported gain, in the amounts of $156,848,9

$527,074, and $615,119 in 1994, 1996, and 1997, respectively,

from the sale of a yacht in each year.   In reaching his

determination of petitioner’s basis, respondent used the sum of

     8
       Petitioner’s ex-wife also refers to an account at Summit
Bank, which was acquired by NBD Bank sometime in or around 1993.
     9
       As noted, respondent conceded in his answer that the
amount of unreported gain was $1,000 less, or $155,848.
                               - 16 -

the contract price for each yacht’s construction and capital

improvements that had been substantiated.   Petitioner contends

that he in fact made expenditures to account for his claimed

basis, but is unable to substantiate the expenditures because all

of his records were stolen by his estranged spouse.   On account

of this purported theft, petitioner, relying on Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930), urges us to accept a

reconstruction of his basis based upon an extrapolation from the

costs he incurred in the construction of certain other yachts in

later years.10

     We do not find credible petitioner’s claim that his boat

records were stolen by his former spouse.   The former spouse

testified credibly that the only records she took when she left

petitioner were those pertaining to the couple’s personal joint

checking accounts.11   She denied taking records related to his

yachts, yacht charter business, or any other records besides the

joint checking accounts in either 1995 or 1997.   Petitioner did

not issue a subpoena to his former spouse in an effort to obtain


     10
       Petitioner has neither claimed nor shown entitlement to
any shift in the burden of proof pursuant to sec. 7491(a).
Accordingly, petitioner retains the burden of proof with respect
to all issues in this case except respondent’s determinations of
fraud for the years in issue. See Rule 142(a) and (b).
     11
       The checking account records taken by petitioner’s spouse
are in the record and, as discussed more fully hereinafter, do
not support petitioner’s claim that he made expenditures that
created basis in the amounts he claims.
                               - 17 -

the records he claims she took, even though she appeared as a

witness in this case.    Moreover, some of the purportedly stolen

records in fact turned up as part of petitioner’s evidence

intended to document expenditures for yachts built in later

years.    That is, although petitioner claimed that the records

substantiating claimed capital improvements to the Sir Winston II

that he made from January 1996 to January 1997 were stolen,

invoices for yacht-related expenditures dated within that period

were offered by him into evidence for other purposes.12

     Our conclusion that petitioner did not make the basis-

generating expenditures that he claims is further buttressed by

the fact that, although the unaccounted for expenditures range

from $155,848 in 1994 to $615,119 in 1997, petitioner did not

seek the testimony of, or even identify, a single vendor or

service provider associated with a claimed capital improvement to

any of the vessels at issue.    Instead, he merely rested on his

claim that records were stolen and made no effort, through the

time of trial, to reconstruct those records through bank records

or contacts with third-party vendors.

     Even if we accepted petitioner’s claim that his records were

stolen, his attempt to estimate the expenditures so that we would

     12
       The same occurred with respect to purportedly stolen
records substantiating capital improvements to the Sir Winston.
Petitioner offered a yacht-related invoice dated Oct. 24, 1995,
notwithstanding his claim that records covering the period
including this date had been stolen.
                               - 18 -

accept them under the Cohan rule is unavailing.   We do not accept

petitioner’s estimates under the Cohan rule for two reasons.

First, to qualify for the Cohan rule, a taxpayer must show that

some expenditure in fact occurred and only its precise amount

lacks direct proof.   See Cohan v. Commissioner, supra at 543-544

(Board of Tax Appeals’s disallowance of any deduction for

entertainment expenditure inconsistent with its finding that

expenditure was made); see also Portillo v. Commissioner, 932

F.2d 1128, 1134-1135 (5th Cir. 1991)(court has discretion to

estimate allowable deductions if there is sufficient evidence to

support the contention that expenses were in fact incurred),

affg. in part, revg. and remanding in part T.C. Memo. 1990-68;

Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).   Here, we are

not persuaded that the claimed expenditures occurred.    Two of the

yachts at issue were fully completed when delivered to

petitioner.   The remaining vessel, the Sir Winston, was nearly

complete but required finishing work and replacement of the

steering mechanism, expenditures which we are satisfied have been

accounted for.13   Thus, we are not persuaded in these


     13
       Respondent has shown that certain expenditures made by
petitioner with respect to the Sir Winston were caused by him to
be paid and deducted by his S corporation engaged in condominium
development and that petitioner deducted significant amounts for
repairs to the Sir Winston in the year when petitioner took
delivery. On balance, we are satisfied that the expenditures
required to finish the Sir Winston have been accounted for and do
not provide a basis for invoking the Cohan rule.
                               - 19 -

circumstances that expenditures in fact occurred which lack only

direct proof as to their amounts.

     Second, petitioner’s attempt to estimate his purported

expenditures for capital improvements for the yachts is not

reliable.    Petitioner has proffered spreadsheets that purport to

document the expenditures he incurred to complete certain other

yachts that he arranged to have constructed in years after the

construction of the vessels at issue.   As best we understand

petitioner’s argument, he contends that the expenditures he made

to complete the later-built yachts provide a basis for estimating

the capital expenditures he made with respect to the yachts at

issue.

     However, petitioner’s analysis is fundamentally flawed.     The

later-built yachts were constructed pursuant to “cost-plus”

contracts, whereas the yachts at issue were constructed pursuant

to fixed-price contracts.   The unchallenged testimony of an

official at Marine Builders, Inc., was that under the “cost-plus”

contracts, petitioner himself provided a greater portion of the

material used in the vessel’s construction than under fixed-price

contracts.   Thus, it has not been shown that the expenditures

that petitioner may have been required to incur in connection

with the completion of a yacht under a “cost-plus” contract

approximate the expenditures he would have incurred to obtain a

completed yacht under a fixed-price contract.   Moreover, even if
                              - 20 -

petitioner’s methodology were reasonable, the invoices that

petitioner proffered to substantiate the costs he claims to have

incurred in connection with the construction of the later-built

yachts were repeatedly shown to have dates that preceded the

commencement of construction of the yacht whose costs they

purportedly substantiated.   Even more egregious were repeated

instances where invoices’ dates had been crudely altered in an

effort to make the invoices appear to have been created within

the time period that the yacht whose costs they purported to

substantiate was built.   In sum, petitioner’s effort to invoke

the Cohan rule to substantiate his claimed basis in the three

yachts is wholly unreliable, and we reject it.

     Because petitioner has failed to substantiate any basis in

the three yachts beyond that determined by respondent, we sustain

respondent’s determination that petitioner had unreported gain

from the sale of yachts of $155,848, $527,074, and $615,119 in

1994, 1996, and 1997, respectively.

Gain From Sale of Real Property

     In 1995, petitioner sold real property at 6729 Westfield

Boulevard, Indianapolis, that he leased to the Winston Yacht and

Country Club, Inc.   Petitioner reported an adjusted basis in the

Westfield Boulevard property at the time of sale of $1,045,742,

which included capital improvements of $232,400.   Respondent
                              - 21 -

determined that the claimed capital improvements of $232,400

should be disallowed for lack of substantiation.

     The only substantiation of the $232,400 that has been

offered by petitioner in this proceeding is a handwritten list of

capital improvements and their purported cost (totaling $232,400)

that he gave his return preparer in November 1995.    There are no

invoices or other supporting documentation for these claimed

expenditures.   Instead, petitioner again asserts his contention

that his records were stolen and claims entitlement to an

estimate under the Cohan rule.

     As with the claimed expenditures concerning the yachts,

there is no proof that expenditures of this nature were in fact

incurred, nor is there any evidence to support a reasonable

estimate of the amount of these expenditures.    We accordingly

sustain respondent’s determination that $232,400 of petitioner’s

claimed basis be disallowed and petitioner’s gain on the sale be

increased in a corresponding amount.

Understatement of Income From Charter Business

     Taxpayers must maintain records sufficient to establish the

amount of income required to be shown on a return.    Sec. 1.6001-

1(a), Income Tax Regs.   In the absence of adequate records, the

Commissioner may reconstruct the taxpayer’s income by any

reasonable method.   Estate of Rau v. Commissioner, 301 F.2d 51

(9th Cir. 1962), affg. T.C. Memo. 1959-117; Schellenbarg v.
                                - 22 -

Commissioner, 31 T.C. 1269 (1959), affd. in part and revd. in

part on another issue 283 F.2d 871 (6th Cir. 1960); Bolton v.

Commissioner, T.C. Memo. 1975-373.

     Petitioner failed to produce records establishing his gross

receipts from his yacht charter business for 1994, 1995, and

1996.     Using third-party records, respondent determined that

petitioner’s gross receipts were $144,217, $415,018, and $364,247

in 1994, 1995, and 1996, respectively, resulting in a

determination of unreported gross receipts of $68,350, $190,615,

and $34,544 in those years.

     As outlined in our findings, with respect to 1994,

petitioner has admitted depositing charter receipts of $116,09514

and other amounts which bring total deposits to $152,342, as

compared to respondent’s determination that his gross receipts

were $144,217.     With respect to 1995, petitioner has admitted

depositing charter receipts of $399,23915 and other amounts which

bring total deposits to $404,972, as compared to respondent’s

determination that his gross receipts were $415,018.     With

respect to 1996, petitioner has admitted depositing charter

receipts of $318,471 and other amounts, which bring total



     14
       This figure exceeds petitioner’s reported gross receipts
for 1994 by $41,202.
     15
       This figure exceeds petitioner’s reported gross receipts
for 1995 by $182,812.
                                - 23 -

deposits to $356,346, as compared to respondent’s determination

that his gross receipts were $364,247.

     The only specific error in respondent’s analysis that

petitioner has alleged is his claim that respondent failed to

take account of amounts that were subsequently refunded to

customers when charters were canceled.     As evidence for his

claim, petitioner proffers 14 checks he wrote in 1994 and 12 in

1996.     The 1994 checks generally contain a notation that they are

refunds (with two exceptions), while the 1996 checks generally do

not (with two exceptions).     There is a fatal defect in most of

these checks; namely, there is no evidence that the payee of the

refund check was included as a source of income in respondent’s

reconstruction of petitioner’s charter receipts.     Respondent’s

reconstruction is not necessarily comprehensive.     Thus, unless a

refund payee was listed as one of the sources of a deposit in

respondent’s reconstruction, proof that a refund was made to that

payee does not require a downward adjustment in respondent’s

reconstructed total.

     For 1994, eight of petitioner’s proffered checks contain the

foregoing defect.16    Six checks remain, four of which, for

$10,314 in the aggregate, have “United Yacht Charters” as the

payee.     However, the evidence in the record of respondent’s

     16
       While it is possible that some of the 1994 checks listed
by petitioner were refunds of amounts deposited in 1993 or
earlier years, petitioner has not established this fact.
                              - 24 -

reconstruction shows that only $7,762 of receipts from “United

Yacht Charters” was included therein for 1994.   We therefore

conclude that the downward adjustment to respondent’s figure that

is appropriate in light of petitioner’s refund evidence is capped

at $7,762.   The remaining two checks, both evidencing refunds to

“K.D.B.” aggregating $8,900, should result in a downward

adjustment in that amount, as respondent’s reconstruction for

1994 includes receipts from “K.D.B.” in excess of $8,900.    Thus,

we conclude that petitioner has shown error in respondent’s

reconstruction of 1994 gross receipts; they are overstated by

$16,662.

     For 1996, all but 3 of petitioner’s 12 proffered checks

suffer the defect of their payee’s not having been shown to be a

source of a deposit in respondent’s reconstruction of

petitioner’s charter gross receipts; that is, none of the payees

on these purported refund checks is listed as the source of a

deposit in respondent’s reconstruction of 1994, 1995, or 1996

gross receipts, and petitioner has not established that any was a

source in some other year.   Of the three remaining, we disregard

two because the checks (for $1,020 to “Betty Corson Yacht

Charter, Inc.” and for $2,000 to “Gold Coast”) do not on their

face indicate that they are refunds, and there is no other

evidence to corroborate petitioner’s claim to that effect.     The

remaining check, evidencing a refund of $2,000 to “Al Schrold”,
                               - 25 -

produces only a minor adjustment, because the available evidence

indicates that only $75 in income from this source was included

in respondent’s reconstruction of 1994-96 gross receipts (and

petitioner has failed to show inclusion in his income in any

other year).   We therefore conclude that the downward adjustment

in respondent’s reconstruction that is appropriate in light of

petitioner’s evidence is capped at $75.   Thus, we conclude that

petitioner has shown error in respondent’s reconstruction of 1996

gross receipts, in that it is overstated by $75.

     Petitioner has not alleged or shown any other error in

respondent’s reconstruction of the gross receipts from

petitioner’s yacht charter business in 1994, 1995, or 1996.     We

accordingly sustain respondent’s determination of unreported

charter income in those years, except to the extent of $16,662 in

1994 and $75 in 1996.

Disallowed Deductions of WDI

     Taxpayers may deduct the ordinary and necessary expenses of

carrying on a trade or business.   Sec. 162.   Expenses incurred by

a corporation for the personal benefit of its shareholders are

not deductible.   Intl. Trading Co. v. Commissioner, 275 F.2d 578,

585 (7th Cir. 1960), affg. T.C. Memo. 1958-104.    Further, a

taxpayer may not deduct the business expenses of another

taxpayer.   Welch v. Helvering, 290 U.S. 111, 114 (1933).   The

burden of proof with respect to deductions claimed rests on the
                              - 26 -

taxpayer.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593

(1943); Deputy v. duPont, 308 U.S. 488, 493 (1940); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

     In the notice of deficiency, respondent determined that

petitioner had additional income of $54,802 from WDI for 1995, as

a result of the disallowance of deductions on the corporation’s

1995 return in that amount.   Petitioner has not shown that WDI is

entitled to any of the deductions that were disallowed.   We

accordingly sustain respondent’s determination that WDI’s

deductions totaling $54,802 for 1995 should be disallowed.

     At trial, respondent also proffered detailed evidence

demonstrating that petitioner caused WDI to pay $18,660 in

expenditures for yachts, and that these expenditures were

deducted on WDI’s 1995 return.   While petitioner argues on brief

that the yacht-related expenditures deducted by WDI were proper

because they were reflected in petitioner’s drawing account, we

need not resolve this issue, as respondent has sought no increase

in the 1995 deficiency as a result of this evidence.17




     17
       We surmise that respondent proffered this evidence in
support of his determination of fraud.
                                - 27 -

Unreported Income From Settlements of Lawsuits

     Marine Builders, Inc.

     Petitioner argues that the $92,420 he received in 1994 in

settlement of his lawsuit against Marine Builders, Inc., was a

return of capital.18    The taxability of proceeds received from a

lawsuit depends on the nature of the claim and the basis of the

recovery.   Raytheon Prod. Corp. v. Commissioner, 144 F.2d 110,

114 (1st Cir. 1944), affg. 1 T.C. 952 (1943).     When amounts

received from a lawsuit, through litigation or settlement,

represent lost profits, the amount is taxable income; when the

amount represents damages for lost capital, such amount is not

taxable.    Booker v. Commissioner, 27 T.C. 932, 937 (1957);

Raytheon Prod. Corp. v. Commissioner, 1 T.C. 952, 958 (1943),

affd. 144 F.2d 110 (1st Cir. 1944).      Petitioner bears the burden

of establishing that the proceeds of a settlement are what he

claims them to be.     Milenbach v. Commissioner, 318 F.3d 924 (9th

Cir. 2003), affg. on this issue 106 T.C. 184 (1996).

     The complaint against Marine Builders, Inc., sought damages

for breach of warranty, lost income, and loss of value.     The

settlement indicated that payments of $92,420 were for “damages

for contractual claims” but did not indicate what portion, if

any, of the payments was attributable to lost value versus lost


     18
       Petitioner concedes that the remaining $85,119 payment
received from Marine Builders, Inc., in 1995 is taxable income.
                              - 28 -

income.   We have held that where the evidence did not provide a

basis for determining an allocation of a settlement payment

between claimed damages for lost profit and for lost capital, the

taxpayer has not met his burden of proving a recovery of capital.

See Aluminum & Metal Serv., Inc. v. Commissioner, T.C. Memo.

1965-129, affd. 358 F.2d 138 (7th Cir. 1966).   Petitioner has not

shown what portion, if any, of the settlement payments from

Marine Builders, Inc., was for lost value and not lost income.

We accordingly sustain respondent’s determination that they were

taxable income.

     Darling Yachts, Inc.

     Petitioner received payments from Darling Yachts, Inc., in

1996 and 1997 and did not report those payments as income.    As

with the Marine Builders, Inc., settlement, petitioner argues

that the Darling Yachts, Inc., payments were a return of capital.

In the Darling Yachts, Inc., complaint, petitioner sought damages

for breach of warranty, failure to complete the vessel, and loss

of income.   The agreed judgment settling the matter does not

indicate the purpose or nature of the settlement payments.

Petitioner has not shown what portion, if any, of the settlement

payments he received from Darling Yachts, Inc., was attributable

to damages for lost value or lost profits from its failure to

complete the vessel.   Accordingly, we conclude that petitioner

has failed to meet his burden of proof that there was a return of
                                - 29 -

capital; thus, the settlement payments from Darling Yachts, Inc.,

are taxable income, and respondent’s determination is sustained.

See id.

Net Operating Loss Carryback

        Respondent determined that the adjustments determined for

petitioner’s 1994 taxable year eliminated the net operating loss

that had been carried back from that year to 1991.     As a

consequence, respondent determined a deficiency of $4,323 for

1991.     See Pesch v. Commissioner, 78 T.C. 100 (1982).

Respondent’s deficiency determination for 1994 has been

sustained, thereby eliminating any net operating loss for that

year.     As a consequence, the deficiency determined for 1991 is

also sustained.     See id.; Toussaint v. Commissioner, T.C. Memo.

1984-25, affd. 743 F.2d 309 (5th Cir. 1984).

Fraud

        Respondent determined that the underpayments of tax on

petitioner’s 1994, 1995, 1996, and 1997 returns, as well as his

amended return for 1991, were due to fraud.     To establish fraud,

the Commissioner must show by clear and convincing evidence that

there is an underpayment and that a portion of the underpayment

is attributable to fraud.     See sec. 7454(a); Rule 142(b);

Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989).     If the

Commissioner establishes that any portion of an underpayment is

attributable to fraud, the entire underpayment shall be treated
                                - 30 -

as attributable to fraud, except that portion which the taxpayer

establishes by a preponderance of the evidence is not

attributable to fraud.    See sec. 6663(b); Marretta v.

Commissioner, T.C. Memo. 2004-128; Peyton v. Commissioner, T.C.

Memo. 2003-146.

     Underpayment

     We conclude that respondent has shown the existence of an

underpayment in each year by clear and convincing evidence.       With

respect to 1994, petitioner has admitted that he failed to report

$41,202 in gross income from his charter business.     Had this

amount been reported, it would have eliminated the net operating

loss that petitioner carried back to 1991.     As a consequence, the

underpayment for 1991 has also been established under a clear and

convincing standard.     See Toussaint v. Commissioner, supra.     With

respect to 1995, petitioner has admitted that he failed to report

charter business gross income of $182,812 and income from a

finder’s fee of $85,119.

     With respect to 1996 and 1997, we have found that petitioner

failed to demonstrate error in respondent’s determination that he

understated the gain from the sale of yachts in those years by

$527,074 and $615,119, respectively.     While a mere failure by

petitioner to show error in respondent’s determination is not a

sufficient basis for fraud, Petzoldt v. Commissioner, supra at

700; Habersham-Bey v. Commissioner, 78 T.C. 304, 312 (1982);
                              - 31 -

Otsuki v. Commissioner, 53 T.C. 96, 106 (1969), respondent has

marshaled considerable affirmative evidence that petitioner

substantially overstated the basis reported with respect to the

sale of the Sir Winston and Sir Winston II in 1996 and 1997,

respectively.

     In an effort to verify petitioner’s reported basis,

respondent subpoenaed the records of the checking and credit card

accounts that petitioner indicated he maintained during the

relevant periods.   Based on petitioner’s representation that the

capital improvements he made to the Sir Winston and Sir Winston

II were all made within the 1-year period following his

acquisition of each vessel, respondent undertook an analysis of

all expenditures made during those periods through the checking

and credit card accounts then held by petitioner19 to identify

expenditures that could have been for capital improvements to the

vessels.   With respect to the checking accounts, respondent

sought to identify checks for possible capital improvements by

excluding all checks that could not have been for that purpose.

Respondent first excluded all checks that, on their face, could

not have been for capital improvements, such as checks for

utilities, docking fees, taxes, insurance, and the like.

Respondent was able to exclude other checks based on evidence in

     19
       We note that respondent’s analysis covered records of
joint checking accounts that petitioner held with his ex-wife,
including those that she conceded taking.
                                - 32 -

the record, such as matching the checks to petitioner’s monthly

mortgage payment on his residence or to payments, such as for

marine architectural services, that had already been incorporated

in respondent’s determination of petitioner’s basis.    The

remaining checks that could not be excluded on the foregoing

basis were treated as possible payments for capital improvements

to the vessels.

     On the basis of this methodology, respondent concluded that

petitioner could not have expended more than $46,507 for capital

improvements to the Sir Winston from the four checking accounts

he held during the 1-year period following the vessel’s

acquisition.20    Upon careful review, we are convinced that

respondent’s methodology is reasonable.21    Petitioner has not

     20
       This is the total from respondent’s description of his
analysis of the four checking accounts in the requested findings
of fact in his brief. Elsewhere in the text of his brief, he
omits the checks from one account at the First Indiana Bank,
totaling $2,543. By using the total from respondent’s requested
fact findings, we have resolved any ambiguity in petitioner’s
favor.
     21
       In his analysis of petitioner’s SunTrust Bank checking
account, respondent did not consider checks for less than $800,
based on the fact that petitioner’s capital improvements to the
vessels that had been substantiated were virtually always in
excess of that figure. We are persuaded that this methodological
assumption was reasonable in the circumstances. In any event,
even if all checks under $800 were treated as expended for
capital improvements, there would still be substantial amounts of
claimed basis in the Sir Winston and Sir Winston II unaccounted
for, because the totals of the checks written for less than $800
during the 1-year periods after the acquisition of the Sir
Winston and Sir Winston II were $86,010 and $98,278,
                                                   (continued...)
                              - 33 -

disputed the methodology, other than to disagree with its

conclusions.   Our own review reveals a few errors in its

application, however.   Respondent does not appear to have

accounted for a $143,818 cashier’s check drawn on one of

petitioner’s checking accounts.   We also disagree with the

treatment of three minor checks, two to “Costco” totaling $2,298

and a $3,176 check to a payee that we find illegible, all of

which respondent excluded from the class of checks that could

have been for capital improvements.    Giving petitioner the

benefit of any doubt, by treating the foregoing four checks as

having possibly been for capital improvements, raises by $149,292

respondent’s total for possible capital improvements expenditures

through the checking accounts, from an amount not exceeding

$46,507 to an amount not exceeding $195,799.    In comparison, the

amount of basis in the Sir Winston that petitioner has been

unable to substantiate is $527,074.

     Respondent’s analysis also sought to identify the possible

capital improvements expenditures made through the credit card

accounts held by petitioner during the 1-year period following


     21
      (...continued)
respectively.

     Similarly, in the case of one of petitioner’s First Indiana
Bank checking accounts, respondent did not consider checks for
less than $301. However, treating all such checks as
expenditures for capital improvements would have produced an
increase of only $1,396 in possible capital improvements.
                              - 34 -

his acquisition of the Sir Winston.     While we find respondent’s

effort to classify the credit card expenditures less persuasive,

this is no help to petitioner.   Even if all credit card

expenditures during the period ($29,917) are treated as having

been for capital improvements (a highly unrealistic assumption in

petitioner’s favor), this would still leave a substantial amount

of claimed basis in the Sir Winston unaccounted for.        That is, if

the $29,917 in petitioner’s credit card expenditures is added to

the $195,799 in checks that could have been for capital

improvements, the $225,716 total still falls substantially short

of accounting for the $527,074 in reported basis that petitioner

has not been able to substantiate.     In sum, even under

assumptions that are extremely favorable to petitioner, the

possible capital improvement expenditures traceable through

petitioner’s checking and credit card accounts cannot explain

almost $300,000 in claimed basis.    This leaves only cash

transactions to account for this amount, a premise we do not

believe.   Consequently, we conclude that respondent has shown by

clear and convincing evidence that petitioner had an underpayment

for 1996, attributable to a failure to report a substantial

amount of gain on the sale of the Sir Winston.22

     22
       In reaching our conclusion that respondent has clearly
and convincingly shown that petitioner overstated his basis in
the Sir Winston by a substantial amount, we are mindful of the
fact that petitioner took possession of the vessel before the
                                                   (continued...)
                              - 35 -

     A similar result obtains with respect to the Sir Winston II.

Respondent’s analysis of the two checking accounts and one

brokerage account held by petitioner during the 1-year period

following his acquisition of the Sir Winston II concluded that

petitioner could not have expended more than $72,315 from these

sources for capital improvements to that vessel.   Upon review of

respondent’s analysis, we conclude that five additional checks

that were not treated by respondent as possible capital

improvements expenditures should have been so treated.    Those

checks include two checks to “Costco” totaling $1,901, two checks

to “Henry Lee Co.” totaling $2,226, and a check to “Weaver &

Weaver, P.A.” for $2,905.   We conclude that the payees on these

checks do not provide a sufficient basis to exclude them as

possible expenditures for capital improvements.    The total of the

foregoing additional checks is $7,032, which when added to

respondent’s calculation brings the total of possible capital

expenditures from petitioner’s checking and brokerage accounts to

     22
      (...continued)
builder had completed it. Nonetheless, a marine survey conducted
3 days before petitioner took possession found that the vessel
was 95 percent complete, and a U.S. Coast Guard certificate of
inspection, qualified by minor deficiencies, was issued at the
same time. Moreover, petitioner settled his lawsuit against the
builder for $65,000, a figure that is inconsistent with the claim
that expenditures exceeding $500,000 were required to complete
the Sir Winston after petitioner took possession. Thus, we do
not believe that the somewhat unfinished state of the Sir Winston
when petitioner took possession can account for the remainder of
the $527,074 in claimed, but unsubstantiated, capital
improvements.
                               - 36 -

$79,347.   As with the Sir Winston, we make the assumption

favorable to petitioner that the entire $54,689 of his credit

card expenditures during the 1-year period following acquisition

of the Sir Winston II was expended for capital improvements to

that vessel.    Thus, after the petitioner-favorable adjustments

that we make to respondent’s analysis, the maximum in

expenditures from his checking, brokerage, and credit card

accounts that could have been for capital improvements to the Sir

Winston II is $134,036, or $522,783 less than the $656,819 in

reported basis that petitioner has not substantiated.    We do not

accept the premise that cash transactions can account for this

discrepancy, and consequently we conclude that respondent has

shown by clear and convincing evidence that petitioner had an

underpayment for 1997, attributable to a failure to report a

substantial amount of gain on the sale of the Sir Winston II.

     Fraudulent Intent

     “Fraud is established by proving that the taxpayer intended

to evade tax believed to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of such tax.”

Recklitis v. Commissioner, 91 T.C. 874, 909 (1988).     The

existence of fraud is a question of fact established by

consideration of the entire record.     Petzoldt v. Commissioner, 92

T.C. at 699; Estate of Pittard v. Commissioner, 69 T.C. 391

(1977).    Direct proof of fraud is seldom available; therefore,
                               - 37 -

fraud may be proved by circumstantial evidence and reasonable

inferences from the facts.    Petzoldt v. Commissioner, supra;

Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).    The courts

have recognized numerous indicia or “badges” of fraud, including

the following:    (1) A pattern of underreporting income; (2)

maintaining inadequate records; (3) giving implausible or

inconsistent explanations of behavior; (4) making false entries;

(5) dealing in cash; (6) engaging in illegal activities; and (7)

the lack of credibility of taxpayer’s testimony.     Spies v. United

States, 317 U.S. 492, 499 (1943); Conti v. Commissioner, 39 F.3d

658, 662 (6th Cir. 1994), affg. and remanding on other grounds 99

T.C. 370 (1992) and T.C. Memo. 1992-616; Douge v. Commissioner,

899 F.2d 164, 168 (2d Cir. 1990); Laurins v. Commissioner, 889

F.2d 910 (9th Cir. 1989), affg. Norman v. Commissioner, T.C.

Memo. 1987-265; Bradford v. Commissioner, 796 F.2d 303, 307-308

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

Commissioner, 781 F.2d 1566 (11th Cir. 1986), affg. T.C. Memo.

1985-63; Bingham v. Commissioner, T.C. Memo. 1998-102, affd.

without published opinion 188 F.3d 512 (9th Cir. 1999).    Although

no single factor is necessarily sufficient to establish fraud,

the existence of several indicia constitutes persuasive

circumstantial evidence of fraud.    Petzoldt v. Commissioner,

supra at 700.    Further, the taxpayer’s background, including his

sophistication, experience, and education may be considered
                                - 38 -

circumstantial evidence of fraud.    Korecky v. Commissioner supra;

Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir.

1972)(taxpayer’s business success indicated more than gross

negligence), affg. T.C. Memo. 1970-274; Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992).

     Petitioner had a clear pattern of underreporting income, as

the previously described understatements spanning 1994 through

1997 document.

     Petitioner’s records were inadequate with respect to his

basis in the yachts and the real estate he sold, as well as his

charter business.   Moreover, his testimony concerning his former

spouse’s theft of his records lacked credibility, and other

evidence concerning his records shows that his account is

implausible and inconsistent.    Notably, petitioner has failed,

through the time of trial, to make any serious effort to

reconstruct his records.   Though he claims his ex-wife took

records, he did not subpoena her to obtain them.   He generally

failed to contact any vendors of the goods or services that

underlay his unsubstantiated basis claims; in one instance where

a contact was made, petitioner did not disclose the retrieved

records to respondent.   Petitioner did not offer the testimony of

any vendors.   Petitioner claimed that his efforts to obtain

records from his financial institutions were unsuccessful,

whereas respondent was able to obtain them.   Instead of making a
                             - 39 -

good faith attempt at reconstruction, petitioner merely rested on

his claim that his records had been stolen.    We believe that a

taxpayer in petitioner’s position, facing challenged basis claims

exceeding $1 million in the aggregate, would have made a more

serious effort to reconstruct unless he knew that such efforts

would tend to disprove his claims.    The records of petitioner’s

financial transactions that have been proffered in this case were

generally obtained through the efforts of respondent alone and

substantially rebut petitioner’s basis claims.

     In addition, petitioner’s claim that the records

substantiating his basis had been stolen was undermined when, at

trial, he proffered various invoices purporting to be

substantiation of costs of later-built yachts that, upon close

inspection, bore dates that fell within the time period for which

records were claimed to have been taken.   Moreover, the repeated

instances where the dates on invoices proffered as evidence had

been altered is further evidence of petitioner’s fraudulent

intent.

     We also take account of the fact that petitioner was

convicted of felony forgery in 1996 for forging the signatures of

persons residing near the country club he operated on that

business’s application for a liquor license.

     In an apparent effort to address the pervasive lack of

records in this case, petitioner has also sought to portray
                               - 40 -

himself as unsophisticated or careless with respect to

recordkeeping.    The evidence, however, belies the notion that

petitioner was an unskilled or indifferent recordkeeper.    The

bookkeeper for his condominium development company credibly

testified that when she raised questions concerning whether the

company should pay what were clearly invoices for yacht expenses,

she was not only specifically ordered by petitioner to pay them,

but was further instructed as to the specific ledger accounts in

which to record the expenditures so that they would appear to be

expenses incident to the construction or maintenance of the

condominiums.    The evidence shows that petitioner was a

knowledgeable, but deceitful, recordkeeper.    Cf. Korecky v.

Commissioner, supra (rejecting claim of recordkeeping

inexperience as fraud defense).

     Petitioner also claims that he was distraught and mentally

impaired during 1995 and 1996, due to the breakup of his marriage

and his conviction for felony forgery.    Putting aside the fact

that this claim does not address 1994 or 1997, we reject it

because it is contradicted by substantial evidence.    During the

claimed impairment, petitioner was operating three successful

businesses in two States, generating more than $3.5 million in

revenue.23   During the years in issue, he also negotiated the

     23
        WDI reported gross receipts of $1,342,216 and $1,624,352
in 1995 and 1996, respectively. Petitioner admitted to gross
                                                   (continued...)
                              - 41 -

profitable sale of three yachts and real estate worth more than

$5.7 million.   He also brought two lawsuits that resulted in

significant monetary settlements to him.   In sum, we are not

persuaded that petitioner was experiencing any significant

incapacity during the period that fraud has been alleged.     To the

contrary, the record amply demonstrates that petitioner was an

astute businessman.   In this context, such a background is

further circumstantial evidence that his underpayment of taxes

was due to fraud.

     We conclude that, viewed as a whole, the evidence

establishes that a portion of the underpayment in each year at

issue was attributable to fraud and that petitioner has failed to

show that any portion of the underpayments was not attributable

to fraud.   Petitioner’s efforts to provide a nonfraudulent

explanation for his actions are unconvincing.   The sheer

magnitude of the overstatements of basis and petitioner’s

inconsistent and implausible explanations of his lack of

substantiation strongly suggest that petitioner was attempting to

avoid paying tax on the gain from the sale of the yachts.     While

he claims on brief that the lawsuit proceeds were a return of


     23
      (...continued)
receipts from his charter business of $399,239 in 1995 and
$318,471 in 1996. The total 2-year revenues from these two
enterprises are $3,684,278. Petitioner's 1995 and 1996 receipts
for the Winston Yacht and Country Club, Inc., are not in record
and are not included in this total.
                               - 42 -

capital, he did not disclose their receipt to his return preparer

so that adjustments pursuant to this treatment could be made.    As

for petitioner’s failure to report more than $200,000 in charter

income that he admits receiving in 1994 and 1995, or a finder’s

fee exceeding $85,000 that he admits receiving in 1995,

petitioner has not even offered an explanation, other than his

general claim of impairment.

     We accordingly sustain respondent’s determination of fraud

for 1994, 1995, 1996, and 1997.   A taxpayer is liable for a civil

fraud penalty on a deficiency that arises when the taxpayer

carries back a fraudulent loss.   Toussaint v. Commissioner, T.C.

Memo. 1984-25.   Therefore, it follows from our conclusion

regarding fraud for 1994 that the underpayment in 1991 was also

due to fraud, as the underpayment in 1991 resulted from the

carryback of a fraudulent loss from 1994.    The fraud penalty for

1991 is therefore also sustained.24

     To reflect the foregoing,

                                           Decisions will be entered

                                      under Rule 155.


     24
       Our conclusion that the underpayments for 1991, 1994,
1995, 1996, and 1997 were attributable to fraud disposes of
petitioner’s claim that the period of limitations for assessment
of 1991, 1994, 1995, 1996, and 1997 income taxes has expired, see
sec. 6501(c)(1); Badaracco v. Commissioner, 464 U.S. 386, 394-396
(1984), as well as respondent’s allegations in the alternative
that petitioner is liable for accuracy-related penalties under
sec. 6662(a) for the years in issue.
