                        T.C. Memo. 2002-183



                      UNITED STATES TAX COURT



            CHARLES Y. AND JIN Y. CHOI, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2983-98.                 Filed July 31, 2002.



     A. Jerry Busby, for petitioners.

     Rick V. Holser, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Judge:   Respondent determined deficiencies in,

additions to, and penalties on petitioners’ Federal income tax as

follows:
                                  - 2 -

                            Charles Y. Choi
                                          Addition to Tax
         Year          Deficiency            Sec. 6663

          1991          $59,106                $44,330

                      Charles Y. and Jin Yi Choi
                                 Additions to Tax and Penalties
   Year          Deficiency      Sec. 6651(a)(1)      Sec. 6663

   1992          $49,624              -—                 $37,218
   1993           34,177           $39,613                25,633


     The issues remaining for our consideration are:        (1) Whether

Charles Y. Choi (petitioner) understated income for the taxable

year 1991; (2) whether petitioners understated income for the

taxable year 1992; (3) whether petitioner is liable for the civil

fraud penalty under section 66631 for the taxable years 1991; (4)

whether petitioners are liable for an addition to tax for

delinquent filing of their return for 1993; (5) whether

petitioners are liable for self-employment tax on their earnings

from Gene’s Modern Market; and (6) whether petitioners provided

over one-half of the support of James Choi during 1991 and 1992

so as to be entitled to claim him as a dependent.

                            FINDINGS OF FACT

     Petitioner and Jin Y. Choi were married in 1992 and resided

in California at the time their petition was filed.        During 1991

through 1993, petitioner was the sole proprietor of Gene’s Modern


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

Market (Gene’s), a full-service grocery store.    Petitioner

reported Gene’s income and expenses using the cash basis method

of accounting.   Gene’s was open for business Monday through

Sunday from 9 a.m. to 9 p.m.   Petitioners, along with

petitioner’s brother, father, and mother, worked at Gene’s.

     In addition to selling grocery items, Gene’s cashed payroll

checks, personal checks, and third-party checks for a fee of 1

percent of the face amount of the check or $1 for checks under

$100.   Gene’s did not charge a check-cashing fee if cash was

returned in connection with the purchase of groceries.    The cash

petitioners used for check cashing was from sales of merchandise,

fees from cashing checks, and the proceeds of checks drawn on

Gene’s deposit account.

     Two cash registers were available and used at Gene’s.

Although petitioner retained the cash register tapes, he did not

report sales based on them or reconcile the amount of cash in the

register at the end of a day’s operations.    Instead, petitioner

fabricated daily sales summary sheets for Gene’s, which were used

to reflect the gross receipts for Gene’s.    The fabrication of

gross receipts was accomplished by marking up the cost of

inventory and the cost of purchases by 25 percent.    Petitioner

did not physically account for Gene’s inventory during the years

in issue.   Petitioner did not provide his bookkeeper, Michael

Kim, with information about cash purchases or cash sales of
                               - 4 -

Gene’s.   Petitioner provided the daily summary sheets to Mr. Kim

every month.

     Petitioner knew that the amounts of gross receipts provided

to Mr. Kim were less than the actual gross receipts for Gene’s.

As an example, the cash register tapes for August 1, 1992,

totaled $2,925.72, whereas petitioner’s summary sheets given to

Mr. Kim reflected total sales of $1,325.42.    Mr. Kim prepared

yearly summaries based on the daily summary sheets received from

petitioner and used the summaries to prepare the Schedules C,

Profit or Loss From Business, for Gene’s that were included with

petitioners’ Federal income tax returns.   Petitioner did not

provide Mr. Kim with the register tapes from Gene’s.    In

addition, Mr. Kim was provided with inaccurate (understated)

records of cash inventory purchases.

     Petitioner’s method of accounting for Gene’s receipts and

expenditures caused the omission and understatement of income for

the years in issue.   During the examination of petitioners’

Federal income tax returns, petitioner estimated and represented

to respondent’s agent that he had understated Gene’s gross

receipts by approximately $15,000 per month.    Petitioner, on the

basis of the actual cash register receipts, determined that

Gene’s gross receipts during 1991 and 1992 were $50,000 to

$60,000 per month or $600,000 to $720,000 per year, respectively.

On the Schedules C of the 1991 and 1992 income tax returns, gross
                               - 5 -

receipts of approximately $592,000 and $508,000, respectively,

were reported.

     The cash used in the operation of Gene’s was maintained in a

safe, and petitioner counted the cash daily.    No record of the

cash transactions or cash on hand was maintained, and the cash

received from customers of Gene’s was not deposited in the bank

accounts maintained for Gene’s.   Some of the cash receipts from

the operation of Gene’s were used to pay petitioners’ and their

family’s household and other living expenses.

     During the 1991 and 1992 tax years, petitioner maintained

two checking accounts in the name of Gene’s.    Petitioner was the

only person with access to the two business accounts.    The first

account, No. 162-14996 (the deposit account), was used for

deposits of third-party payroll and personal checks, food stamps,

and WIC vouchers that were received in Gene’s grocery business.

No cash deposits were made with respect to the deposit account

during 1991 or 1992.

     The second account, No. 161-17636 (the operating account),

was used for Gene’s operating expenditures.    Petitioner’s

practice was to fund the operating account by making withdrawals

from the deposit account.   During 1991, petitioner drafted checks

made out to “cash” from the deposit account in the total amount

of $2,045,900, $625,700 of which was deposited into the operating

account.   During 1992, petitioner drafted checks made out to
                                - 6 -

“cash” from the deposit account in the total amount of

$1,293,600, $582,200 of which was deposited into the operating

account.

     In 1992, petitioner purchased a house in Glendale, Arizona,

for $208,250.    A downpayment of $41,650 was made on the home.

Petitioner applied for a loan to finance the purchase.     He

reflected on the loan application that the net worth of Gene’s

was $269,115 and that his monthly income from Gene’s was $7,197.

In 1994, petitioner sold Gene’s for $259,790.

     On their 1991, 1992, and 1993 income tax returns,

petitioners reported net profit from Gene’s of $6,696, $13,363

and $67,126, respectively.    On the 1991 and 1992 returns,

petitioners claimed petitioner’s parents and brother as

dependents.   Petitioner knew that the gross receipts reported for

1991 through 1993 were understated.     He omitted some gross

receipts in order to avoid tax so that he would have more

retained cash.

     Respondent conducted a civil examination of petitioners’

income tax returns, and petitioners did not provide the internal

revenue agent with the cash register tapes.     Invoices for

purchases by check were presented, but no invoices were provided

for cash purchases.    During the examination, petitioner stated

that he was the sole source of support of his parents.
                                  - 7 -

      Because of the inadequacy of petitioners’ records and

accounting practices, respondent reconstructed petitioners’

income using an indirect method.      Using the bank deposits and

cash expenditures method, respondent determined that petitioner’s

unreported income for 1991 was as follows:2

          Bank Deposit and Expenditures Reconstruction for 1991

Bank Deposit Summary

Acct. no. 162-14996-–                                  $2,066,381
  bus. deposit acct.
Acct. no. 161-17636–-                                     625,700
  bus. operating acct.
Acct. no. 166-67322–-                                       4,600
  personal checking acct.
  Total gross bank deposits                             2,696,681

Add

Personal cash expenditures                                $16,200
Business cash expenditures                                149,602
  Subtotal                                              2,862,483

Subtract

Checks written to cash:
  Deposited into operating account         $625,700
  Amount of checks not deposited          1,420,200
  Subtotal                                2,045,900

                                                      ($2,045,900)
Nontaxable income                                          (1,000)
Business gross receipts                                   815,583


Per audit                                                $815,583
Per return                                                591,910
Unreported income                                         223,673


      2
       All of the amounts used by respondent in the bank deposits
reconstruction for 1991 and 1992 are supported by facts in the
record of this case.
                               - 8 -

Respondent determined that petitioners’ unreported income for

1992 using the bank deposits and cash expenditures method was as

follows:

      Bank Deposit and Expenditures Reconstruction for 1992

Bank Deposit Summary

Acct. no. 162-14996-–                               $1,298,435
  bus. deposit acct.
Acct. no. 161-17636-–                                     582,200
  bus. operating acct.
Acct. no. 166-67322-–                                      35,430
  personal checking acct.
  Total gross bank deposits                          1,916,065

Add

Personal cash expenditures                               2,700
Business Cash Expenditures                              85,671
  Subtotal                                           2,004,436

Subtract

Checks written to cash
  Deposited into operating account      $582,200
  Amount of checks not deposited         711,400
  Subtotal                             1,293,600

                                                   ($1,293,600)
Nontaxable deposits                                    (40,998)

Business gross receipts                                   669,838

Per audit                                             $669,838
Per return                                             508,049
Unreported income                                      161,789


      During November 1994, respondent began a criminal

investigation of petitioner, and on November 25, 1996, petitioner

waived indictment and pleaded guilty to criminal tax evasion
                                  - 9 -

under section 72013 for 1992.     In the process of his plea

agreement petitioner averred that:        (1) He and his spouse had a

substantial income tax due and owing to the United States for the

year 1992; (2) he evaded tax by filing and causing to be filed

with the Internal Revenue Service a false and fraudulent Form

1040, U.S. Individual Income Tax Return, for the calendar year

1992 in which he substantially underreported gross receipts; (3)

he acted willfully, with intent to defraud the Government of the

tax on the additional unreported income.       Petitioner was

sentenced to 12 months in prison and required to pay a $20,000

fine.

     Petitioner’s father obtained a favorable judgment from a

civil court in Korea on May 17, 1991, which was appealed, and the

appeal was dismissed on May 18, 1993.       The payment of the

judgment was not available to petitioner’s father and mother

until some time during 1993 or 1994.




        3
            Sec. 7201 provides:

             Any person who willfully attempts in any manner to
        evade or defeat any tax imposed by this title or the
        payment thereof shall, in addition to other penalties
        provided by law, be guilty of a felony and, upon
        conviction thereof, shall be fined not more than
        $100,000 ($500,000 in the case of a corporation), or
        imprisoned not more than 5 years, or both, together
        with the cost of prosecution.
                               - 10 -

                              OPINION

     Although we consider several issues in this case, the two

primary issues involve the reconstruction of petitioners’ income

for 1991 and 1992 and whether any part of the 1991 underpayment

of tax is attributable to fraud.4   The main thrust of

petitioners’ attack focuses on respondent’s use of a bank

deposits analysis to reconstruct petitioners’ income.

     Taxpayers are required to maintain records sufficient to

show whether they are liable for Federal income taxes.      See sec.

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

F.2d 16 (2d Cir. 1992).   If a taxpayer fails to keep records, the

Commissioner may reconstruct the taxpayer’s income.      See sec.

446(b); Holland v. United States, 348 U.S. 121, 130-132 (1954);

Parks v. Commissioner, 94 T.C. 654, 658 (1990).

     The records petitioner maintained for purposes of reporting

the income and deductions of Gene’s were inadequate.      Petitioners

do not argue that the books and records were accurate or

adequate.5   Petitioner admitted that he understated the gross


     4
       In a Dec. 21, 2000, order, respondent’s motion for partial
summary judgment was granted, and it was held that “petitioner
Charles Y. Choi is estopped from denying that he is liable for a
fraud penalty, under section 6663, I.R.C., to the extent that
there is any deficiency finally determined to which a fraud
penalty would be applicable for the 1992 taxable year.”
     5
       Petitioners have attempted to discredit respondent’s bank
deposits reconstruction of income by offering their own
reconstruction using the percentage markup method. The
                                                   (continued...)
                              - 11 -

receipts on the daily sales summaries.    In an interview with a

revenue agent, petitioner estimated that he could have

understated the gross receipts for Gene’s by as much as $15,000

per month.   As of the time of trial, petitioner was not able to

produce most of the cash register tapes for Gene’s, and no

records of cash balances, cash receipts, cash expenditures, or

inventories were maintained except for a few invoices for cash

purchases of inventory.   Because the records for Gene’s could not

be reconciled with petitioners’ income tax returns, respondent

reconstructed the gross receipts of Gene’s by means of the bank

deposits method coupled with the cash expenditures method.

     The bank deposits and cash expenditures methods are

acknowledged methods of reconstructing income.    See Parks v.

Commissioner, supra; Nicholas v. Commissioner, 70 T.C. 1057, 1065

(1978).   Respondent’s bank deposits analysis reflects that

petitioners had substantial unreported income from Gene’s

business operations during 1991 and 1992.   Gene’s was

petitioners’ only source of business income.   Respondent’s agent

examined petitioners’ records and also performed an analysis of

bank deposits for the years in issue.    The bank deposits analysis

was accomplished by totaling the deposits made to petitioners’



     5
     (...continued)
percentage markup method of reconstruction is one whereby an
established base, such as cost of goods sold, is marked up to
reconstruct gross sales or gross receipts.
                               - 12 -

three bank accounts.   Respondent then added petitioners’

identified cash expenditures for personal and business purposes

to the total bank deposits.    The total of the bank deposits and

expenditures was next reduced by the total amount of nontaxable

deposits to arrive at petitioners’ annual income from Gene’s.

Finally, the annual income was reduced by the income reported on

petitioners’ returns to arrive at respondent’s determination of

petitioners’ unreported income of $223,673 and $161,789 for 1991

and 1992, respectively.

     The items included in respondent’s reduction for nontaxable

items included deposits from the deposit account to the operating

account, transfers from other accounts, gifts, and loans made to

the business or petitioners.   The cash for Gene’s check cashing

came from business operations.   Some of the cash was from cash

sales of groceries, and some was obtained from the deposit

account.

     Respondent did not attempt to separately determine the

amount of gross receipts from cash sales of groceries.   In

addition, respondent considered the entire amount of cash

withdrawn from the deposit account to be nontaxable.

Accordingly, respondent’s approach to reconstructing petitioners’

income was conservative, allowing petitioners the benefit of the

doubt.   In addition, some of the cash from cash grocery sales was
                                - 13 -

maintained in a safe at Gene’s and was used by petitioner and his

family for personal expenses.

     Petitioners argue that additional bank deposits should be

eliminated as nontaxable because they represent cash gifts from

petitioner’s parents.   Petitioner, his parents, and several close

relatives testified that petitioner’s parents received cash from

Korea, and that cash gifts were made to petitioner by his

parents.   The record reflects that petitioner’s father had

instituted a lawsuit in Korea and that he had won a judgment in

his favor.   The record also reveals that the judgment was

appealed and that petitioner’s father was successful on appeal,

but the appeal did not conclude until May 1993.   Respondent

points out that under the laws of Korea, petitioner’s parents

were not entitled to expatriate the proceeds of the judgment from

Korea to the United States.   There is also evidence in the record

that certain American Express traveler’s checks did not become

available to petitioner’s parents until sometime during 1994.

     In an attempt to show that petitioner’s parents had the

means to make gifts, petitioners offered the testimony of close

relatives (uncles, aunts, etc.), each of whom testified that on

specific dates in 1991 and 1992 they received large amounts of

cash ($20,000 to $30,000) on behalf of petitioner’s parents.    The

witnesses each stated that they received the cash in stacks of
                                  - 14 -

$100 bills from unknown individuals who had traveled to the

United States from Korea.

     We note at the outset that intrafamily transactions are

subjected to closer scrutiny.       Caligiuri v. Commissioner, 549

F.2d 1155, 1157 (8th Cir. 1977), affg. T.C. Memo. 1975-319; Perry

v. Commissioner, 92 T.C. 470, 481 (1989), affd. 912 F.2d 1466

(5th Cir. 1990).      The witnesses’ stories were strikingly similar,

and, curiously, none of the witnesses knew the person who gave

them the alleged currency.      We also find it curious that the

alleged deliveries of relatively large amounts of currency were

given to different family intermediaries of petitioner’s parents

and that no deliveries were made directly to petitioner’s

parents.      Finally, there is no documentary evidence of the

existence of the alleged cash that petitioners argue was infused

into the operation of Gene’s.      In particular, the three bank

accounts in this record do not reflect the deposit of any cash.6

     With respect to petitioners’ cash gift argument, respondent

notes that the alleged cash was not available from the Choi

families’ Korean lawsuit, at very least, until 1993, whereas all

of the witnesses testified to receiving the money during 1991 and

1992.       Because this case involves a reconstruction for 1991 and

1992, it is imperative that petitioners show the infusion of cash


        6
       The deposit account received check deposits from Gene’s,
and the operating account received transfers from the deposit
account.
                               - 15 -

in those years to reduce the amount of the deposits that would be

deemed income.    Significantly, respondent points out that his

bank deposits reconstruction represents only check deposits

because no cash was deposited into the deposit account for

Gene’s.

     Petitioners attempt to convince us that some of the cash

that was used to cash checks came from petitioner’s parents, as

opposed to cash from the sale of groceries.    Admittedly, by

intentionally not relying on the cash register tapes, petitioner

omitted cash sales of groceries from the income reported to

respondent.    Respondent, by including all checks that were

deposited into deposit accounts, included some checks that were

exchanged by Gene’s customers for cash only or cash and

groceries.    Respondent, however, by eliminating all of the

transfers to the operating account, gave petitioners the benefit

of the doubt by allowing all of petitioners’ expenditures,

including expenses of Gene’s, cash for check cashing, and also

personal expenses of petitioners and their family.    Considering

respondent’s conservative approach, it is likely that

respondent’s reconstruction did not capture some portion of the

income derived from the cash sales of groceries.    In connection

with respondent’s bank deposits analysis, however, some income

from cash sales may have been included in the cashed checks

deposited in the deposit account.    Respondent’s eliminations from
                                - 16 -

the bank deposits analysis would have likely addressed any such

inclusion.   To the extent any cash from check cashing was a part

of the bank deposits analysis, it is unlikely that it is

attributable to cash gifts from petitioner’s parents.

     We find the testimony offered on this point by petitioners

and their relatives to be self-serving, vague, and

uncorroborated.   Petitioner’s parents could not recall the

incremental amounts, dates, or total amount allegedly given to

petitioners and/or infused into Gene’s operation.    No gift tax

returns were filed by petitioner’s parents, and no record exists

of the alleged transfers.   Additionally, during the years under

consideration, petitioner supported his father and mother, both

of whom worked at Gene’s and lived under petitioners’ roof.    In

the absence of persuasive evidence and reliable corroboration, we

are not required to accept the self-serving testimony of

interested parties.   See Tokarski v. Commissioner, 87 T.C. 74, 77

(1986).

     Petitioners, in an attempt to discredit respondent’s

reconstruction, offered their own reconstruction of income using

the percentage markup method.    They maintain that the percentage

markup method of reconstructing income would more accurately

reflect petitioners’ income for the years in issue.   In

particular, petitioners argue that a large percentage of the

checks deposited and included in respondent’s bank deposits
                                - 17 -

reconstruction was attributable to check cashing and not to the

sale of merchandise.

     Petitioners called Patrick Schindele as an expert witness to

provide a report and to testify in support of their argument.

Mr. Schindele’s report contained a reconstruction of Gene’s gross

receipts using the percentage markup method.   His approach,

however, was flawed in several respects.   Because of petitioners’

inadequate records, Mr. Schindele’s report, in large part, is

based on assumptions.   Many critical assumptions were based on

information provided by petitioners and not developed by Mr.

Schindele’s independent analysis.

     Mr. Schindele had to make numerous assumptions in order to

reconstruct the amount that he believed represented Gene’s gross

receipts.   The amounts used, however, could not be supported or

verified.   He also assumed that only a small portion of

customers’ checks was for the purchase of merchandise.

Conversely, he assumed that either most checks were cashed at

face value or that nominal amounts of grocery purchases were

involved in the transactions.    Because of petitioners’ lack of

records, the register tapes in particular, there is no way to

know whether Mr. Schindele’s assumption is correct.

     We find Mr. Schindele’s assumption that the majority of

customers who paid by check bought only nominal amounts of

groceries and merely went to Gene’s for cash to be highly
                                - 18 -

unlikely.   We also note that Gene’s did not receive a check-

cashing fee if cash was returned in connection with the purchase

of groceries.   On the basis of the record, this assumption is, at

best, highly speculative.

     Mr. Schindele also assumed that the cash from these check

purchases described above was “used to cash payroll checks or for

cash purchases of inventory”.    In that way, Mr. Schindele

attempted to neutralize the possibility of income reposing in

customers’ cashed checks.   Here again such assumptions are purely

speculative and unverified.   We note that the lack of records to

support such assumptions was of petitioner’s own making and was

intended to conceal the true amount of reportable income.

     Because petitioner did not account for Gene’s inventory,

either at the beginning or at the end of a taxable year, and

inadequate records were kept of cash purchases, it is not

possible to determine Gene’s cost of goods sold--the base on

which Mr. Schindele employed the percentage markup method.

     Mr. Schindele’s report was also flawed in connection with

the amount of the percentage markup used.    In that regard, his

trial testimony conflicted with his written report.    The report

contains the statement that Mr. Schindele determined the

percentage markup through interviews of petitioners and of “some

of the vendors of Gene’s Market.”    Mr. Schindele later testified

that he did not interview any of Gene’s vendors to establish the
                              - 19 -

markup of inventory, and thus he based the amount of the

percentage markup entirely on interviews with petitioners.

     Because of those flaws and weaknesses, we place no reliance

on petitioners’ expert’s opinion.      Moreover, respondent’s bank

deposits analysis was properly and conservatively used.

Therefore, petitioners have not shown that the percentage markup

method they used would more accurately reflects Gene’s gross

receipts for the years in issue.      Accordingly, respondent’s

determinations with regard to petitioners’ understatements of

income is upheld for 1991 and 1992.

     Having decided that there was unreported income for 1991 and

1992, we now consider, for 1991, whether the understatement was

due to fraud within the meaning of section 6663.7     Respondent

determined that petitioner fraudulently and with intent to evade

income tax understated his income by omitting $223,673 and

$161,789 of gross receipts for 1991 and 1992, respectively.

     Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing.     Edelson v. Commissioner, 829

F.2d 828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223.

Respondent bears the burden of proving fraud by clear and

convincing evidence.   Rule 142(b).

     In order to prove fraud, the Commissioner must show the



     7
       Respondent has conceded that petitioner Jin Y. Choi is not
liable for the fraud penalty for the 1991 tax year.
                               - 20 -

existence of an underpayment and that the taxpayer intended to

evade taxes known to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of taxes.    Parks v.

Commissioner, 94 T.C. at 660-661.   In this case, respondent has

shown the existence of underpayments for 1991 and 1992.

      The existence of fraud is a question of fact to be resolved

upon consideration of the entire record.     DiLeo v. Commissioner,

96 T.C. at 874.    Fraud is never presumed and must be established

by independent evidence of fraudulent intent.    Edelson v.

Commissioner, supra.    Fraud may be shown by circumstantial

evidence because direct evidence of the taxpayer’s fraudulent

intent is seldom available.    Gajewski v. Commissioner, 67 T.C.

181, 199 (1976), affd. without published opinion 578 F.2d 1383

(8th Cir. 1978).   The taxpayer’s entire course of conduct may

establish the requisite fraudulent intent.    Stone v.

Commissioner, 56 T.C. 213, 224 (1971).

     To decide whether the fraud penalty is applicable, courts

have considered various indicia or “badges of fraud”, which

include:   (1) Understatement of income; (2) inadequate books and

records; (3) failure to file tax returns; (4) implausible or

inconsistent explanations of behavior; (5) concealment of assets;

(6) failure to cooperate with tax authorities; (7) engaging in

illegal activities; (9) lack of credibility of the taxpayer’s

testimony; and (10) dealing in cash.     Bradford v. Commissioner,
                               - 21 -

796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601;

Recklitis v. Commissioner, 91 T.C. 874, 910 (1988).    This list is

nonexclusive.    Although no single factor is necessarily

sufficient to establish fraud, the combination of a number of

factors constitutes persuasive evidence of fraud.    Solomon v.

Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per

curiam T.C. Memo. 1982-603; Miller v. Commissioner, 94 T.C. 316,

334 (1990).

     The record in this case supports our holding that petitioner

fraudulently intended to evade 1991 and 1992 income tax.

Petitioner was receiving the proceeds from Gene’s, and he

intentionally and consistently understated that income.     His

testimony was evasive and to some extent not credible.

Petitioner fabricated records of income and intentionally

discarded cash register tapes, which would have shown the true

sales of Gene’s.   He concealed income by fabricating his daily

sales summary sheets and admitted to respondent’s agents that he

underreported the sales income of Gene’s by approximately $15,000

per month.    Petitioner dealt in cash and did not maintain records

of his cash transactions involving the purchase of inventory.

Petitioner pleaded guilty to and was convicted of criminal income

tax evasion under section 7201 for the year 1992.   In that

regard, we have already held that petitioner is collaterally

estopped from denying that part of the underpayment for 1992 is
                                 - 22 -

due to fraud within the meaning of section 6663.      See DiLeo v.

Commissioner, supra at 885-886; Amos v. Commissioner, 43 T.C. 50,

54-56 (1964), affd. 360 F.2d 358 (4th Cir. 1965).

     Respondent has shown by clear and convincing evidence that

petitioner fraudulently understated income for 1991.      The classic

indicia of fraud have been shown in this case.      Respondent has

shown:      A pattern of fraudulent activity; concealment; and large

consecutive understatements of income.      In addition, we have

considered the fact that petitioner pleaded guilty to criminal

tax evasion for 1992, a year in which the pattern of activity and

gravity of the understatement were essentially the same as in

1991.

     Respondent also determined that petitioners were liable for

self-employment tax under section 1402 on the earnings from

Gene’s.     Earnings from self-employment are income derived by an

individual from any trade or business carried on by the

individual.      Petitioners did not brief8 this issue, and there is

nothing in the record showing respondent’s determination to be in

error.      Accordingly, petitioners are liable for self-employment

tax on the earnings from Gene’s.



        8
       With respect to the final two issue discussed in this
opinion, petitioners failed to present argument, reply to
respondent’s argument, or otherwise discuss the issues in their
briefs. Failure to discuss an argument on brief has been held to
constitute an abandonment of the controversy. See Rybak v.
Commissioner, 91 T.C. 524, 566 n.19 (1988).
                              - 23 -

     Finally, respondent disallowed a dependency exemption that

petitioners claimed for petitioner’s brother, James Choi.

Respondent determined that petitioners were not entitled to claim

the exemption because they had not shown that they provided more

than one-half of the support for James Choi as required under

sections 151(c) and 152(a).   Petitioners must show that they

provided more than 50 percent of the support to be entitled to

claim the dependency exemption for 1991 and 1992.     See Morrison

v. Commissioner, T.C. Memo. 1975-73; Johnson v. Commissioner,

T.C. Memo. 1974-150.

     Respondent contends that the evidence shows that James Choi

worked full time in Gene’s in exchange for the payment of his

living expenses.   Petitioners did not brief this issue and have

not shown that they provided more than one-half of James Choi’s

support.   Accordingly, we hold that petitioners are not entitled

to the claimed dependency exemption.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
