                                    T.C. Memo. 1998-383



                                UNITED STATES TAX COURT



                     EDWARD NATHAN LEVINE, Petitioner v.
                COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 15656-96.                                     Filed October 23, 1998.



       Edward Nathan Levine, pro se.

       Jeffrey L. Heinkel and Lavonne Lawson, for respondent.



                     MEMORANDUM FINDINGS OF FACT AND OPINION


       PARR, Judge:          Respondent determined deficiencies in, and

additions to, petitioner's Federal income tax for 1987 and 1988

as follows:

                                              Additions to Tax
                          Sec.           Sec.            Sec.          Sec.           Sec.
Year    Deficiency     6651(a)(1)    6653(a)(1)(A)     6653(a)(1)   6653(a)(1)(B)     6654
                                                                         1
1987   $2,294,259       $573,565        $114,713          --                        $123,913
1988      102,259         25,700           --            $5,140          --            6,573
                                                   - 2 -
1
    50 percent of the interest due on $2,294,259.

          By an amendment to answer, respondent asserts as his primary

position an increase in the determination of deficiency for 1988

and additions to tax for fraud as follows:

                                                     Additions to Tax
                                       Sec.           Sec.             Sec.        Sec.
          Year      Deficiency     6653(b)(1)(A)   6653(b)(1)     6653(b)(1)(B)    6654
                                                                          1
          1987      $2,294,259       $1,720,694        --                         $123,913
          1988         110,500          --          $82,875             --           6,573
          1
              50 percent of the interest due on $2,294,259.


          All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.                  All dollar amounts are rounded to the

nearest dollar, unless otherwise indicated.

          The issues for decision are:                   (1) Whether petitioner had

unreported income of $5,948,020 and $367,360 in 1987 and 1988,

respectively.              We hold he did.           (2) Whether petitioner is liable

for additions to tax for fraud for 1987 and 1988, or, in the

alternative, whether petitioner is liable for the additions to

tax for failure to file tax returns for 1987 and 1988, and for

negligence.             We hold petitioner is liable for the additions to

tax for fraud for 1987 and 1988.                        (3) Whether petitioner is

liable for self-employment tax of $5,387 and $5,859 in 1987 and

1988, respectively.                 We hold he is.            (4) Whether petitioner is

liable for the additions to tax pursuant to section 6654 for

failure to pay estimated income tax.                           We hold he is.
                                  - 3 -

                         FINDINGS OF FACT

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

The stipulated facts and accompanying exhibits are incorporated

into our findings by this reference.        At the time the petition in

this case was filed, petitioner resided in Lompoc, California.

     On October 21, 1987, petitioner walked into the Bank of

America in Sunnyvale, California (the Sunnyvale BoA) and rented

three safe deposit boxes (the three boxes).        The first safe

deposit box was numbered 1 (box 1), the second, 6346E (box

6346E), and the third, 6348E (box 6348E). Petitioner filled each

of the boxes with short stacks of U.S. currency bound with rubber

bands.

     Petitioner rented the three boxes in the name of Michael

Stark, and he used a phony Missouri driver's licence in that name

and a fictitious Social Security account number to verify his

identification.   On November 5, 1987, petitioner returned to the

Sunnyvale BoA with a woman identified as Laura Dixon to add her

as co-renter on the boxes.

     In 1987, petitioner used the phony Michael Stark

identification and fictitious Social Security account numbers to

rent safe deposit boxes at three banks in San Jose, California,

(the San Jose banks) as follows:

     Date            Box Number           Bank and Location
     October 22      2109N                Bank of America, San Jose
                     2110N
                                - 4 -

     October 30     335                 First Interstate Bank, San
                    941                 Jose

     November 23     49                 Security Pacific National
                     50                 Bank, San Jose

     Shortly after renting the boxes, petitioner returned to each

of the San Jose banks to add Laura Dixon as co-renter, but they

did not enter the boxes.   All of the San Jose banks keep records,

which are time and date stamped, of their customers' entries to

the safe deposit boxes.    Subsequent to the date that petitioner

rented the boxes, he entered only three times; petitioner entered

box 2110N at Bank of America, box 335 at First Interstate Bank,

and box 49 at Security Pacific National Bank on October 23,

November 5, and December 10, 1987, respectively.

     Employees of the BoA-Sunnyvale were suspicious of

petitioner's box-renting activity and called the Sunnyvale Public

Safety Department (the police).   Special Agent James R. Krehbiel

(Krehbiel) of the Drug Enforcement Administration (DEA) was

called in by the police to help investigate the case.

     Krehbiel and the police determined that the Missouri

driver's license petitioner used for identification to rent the

boxes was not legitimate and that the address petitioner gave the

bank as his local address belonged to a private mailbox business.

In addition, the investigators brought two detector dogs to the

bank vault with the boxes.   The dogs, which are trained to sniff

out illegal drugs, "alerted" to boxes numbered 1 and 6346E.
                                - 5 -

     On the basis of the results of the investigation, Krehbiel

obtained search warrants for the three boxes at the BoA-

Sunnyvale.   Krehbiel and police officers executed the warrants on

January 15, 1988.   Box 1 contained $570,520, box 6346E contained

$707,800, and box 6348E contained $1,139,250.     None of the boxes

contained any thing other than currency, which was not tested for

drug residue.

     The investigators seized the currency, left a receipt in

each of the boxes, deposited the currency in a different branch

of the Bank of America, and received a cashier's check from the

bank for $2,417,570 made payable to the U.S. Marshals Service.

     On October 4, 1988, petitioner returned to the BoA-Sunnyvale

to pay the rent on the three boxes.     Bank employees delayed

petitioner while they summoned the police.     When the police

officers arrived, petitioner identified himself as Michael Stark

and produced the phony Missouri driver's license as proof of his

identity.    Petitioner was arrested by the police for presenting

false identification to a police officer, and he was advised that

he was to be charged with money laundering under the laws of the

State of California.   Upon his arrest, the police searched

petitioner and found rent receipts for the safe deposit boxes at

the San Jose banks.1

     When the police arrived at the BoA-Sunnyvale, they noticed a

woman standing next to a 1986 white 2-door Cadillac automobile

     1
      The Sunnyvale-BoA and the San Jose Banks are collectively
referred to as the California Banks.
                               - 6 -

(the Cadillac) parked in front of an adjacent business.    While

petitioner was inside the bank, the police questioned him about

what was in the three boxes, what he did for employment, and

where he lived.   In general, petitioner's answers to the police

officers' questions were evasive; however, petitioner did admit

that the Cadillac belonged to a woman whom he had met recently in

a bar.

     After arresting petitioner, the police observed the woman

cruising the bank in the Cadillac.     The police noted the license

plate number and ran a registration check, which revealed that

the Cadillac was registered to a Michael Stark.    The police

stopped the car, and the woman furnished a California driver's

license in the name of Linda Lee Nelson (Nelson) for

identification.   Nelson told the police officers that the

Cadillac belonged to Michael Stark, who had driven her to the

bank and then told her to drive to the mall.    Nelson gave the

police officers permission to search the Cadillac; however, when

they found a small bag of marijuana, she revoked her permission.

Nelson was arrested, and the Cadillac was impounded.

     David Harris (Harris), Criminal Investigator for the U.S.

Customs Service (Customs), obtained search warrants for the boxes

at the San Jose banks, and a warrant to search the Cadillac.      The

search revealed the boxes at the San Jose banks were filled with

rubber band bound stacks of U.S. currency, which totaled

$3,530,600.   The search of the Cadillac yielded $27,620 in cash.
                                - 7 -

     The State of California declined to prosecute the money

laundering charges, and petitioner pleaded no contest to a

misdemeanor violation of the vehicle code.    Petitioner received a

sentence of 15 days in the county jail.    The charges against

Nelson were dismissed.

     On November 29, 1988, petitioner, using a phony Missouri

driver's license in the name of Robert Morrison for

identification, leased safe deposit box number 5507 (the box)

from Universal Safe Deposit Corp. (Univault).    Univault is a

private safe deposit facility and computer tape storage business

in New York, New York.    Petitioner put a black attache case

containing bundles of cash, which totaled $339,860, into the box.

The next day, petitioner added Melinda Ferris as a joint lessee;

however, petitioner did not enter the box after his initial

visit.

     The currency seized from the California banks eventually was

forfeited to the United States.    During the civil forfeiture

proceedings, on January 20, 1989, attorneys for petitioner filed

an opposing motion to the Government's motion for a default

judgment with respect to the $2,417,570 found in the three boxes

at the BoA-Sunnyvale.    In this motion, petitioner claimed

ownership of the $2,417,570 at issue, the $3,530,600 found in the

boxes at the San Jose banks, and the 1986 white 2-door Cadillac.

     Petitioner never filed income tax returns, paid any income

tax, or filed estimated tax returns for 1987 or 1988.
                              - 8 -

     Petitioner was indicted on or about February 24, 1989, in

the Federal District Court, Middle District of Florida, for

violation of Comprehensive Drug Abuse Prevention and Control Act

of 1970, Pub. L. 91-513, secs. 401 and 406, 84 Stat. 1260, 1265,

21 U.S.C. sections 841 and 846 (1994), conspiring to distribute

cocaine during the years of 1974 through 1984.   On or about

September 28, 1989, petitioner was indicted in the Federal

District Court, Northern District of California, for 18 counts of

violation of Social Security Act, ch. 531, tit. II, sec. 203, 49

Stat. 625 (1935), 42 U.S.C. section 408(g)(2) (1988),

misrepresentation of a Social Security account number in

connection with opening the safety deposit boxes.    Petitioner

fled before he could be arrested for these charges.

     On February 28, 1995, U.S. marshals assisted by detectives

from the City of Newport Police Department (the detectives)

arrested petitioner and Nelson outside the house they rented in

Glen Eden Beach, Oregon (the Glen Eden residence).    When

arrested, petitioner had an Arizona driver's license which

identified him as Joel Watnick, and Nelson had documents which

identified her as Sherry Watnick.

     Shortly after petitioner was arrested, petitioner's mother,

Cecile Kasner (Kasner), arrived at the Glen Eden residence.

Kasner was put under surveillance by the detectives.    On March 9,

the detectives followed Kasner from the Glen Eden residence to a

storage facility in the City of Newport where she retrieved a

briefcase.
                              - 9 -

     The detectives obtained a warrant to search Kasner's

automobile and petitioner's residence.    The search of Kasner's

automobile revealed a State of New York birth certificate in the

name of Robert Morrison, a State of Missouri driver's license in

the name of Robert Morrison, which displayed a picture of

petitioner, and four handwritten notes on lined light-blue paper.

     One of the notes, dated 3-7-95, was addressed to Univault

and read as follows:


          To Whom it May Concern

          I, Robert Morrison, due [sic] hereby give
     authorization to Cecile Kasner to have
     a one time entry visit to my safety deposit
     Box #5507

          Thank You
            Robert Morrison


     Another note, which was not dated, read as follows:

          Dear Mom,

               I need your help. There is a large
          attache (heavy) at my box in N.Y. We need to
          remove it immediately. Please help. It is
          at Univault 115 East 57th St. under Robert
          Morrison
          & Melinda Ferris. Please remove the case
          Box # 5507
          You need authorization to enter-and the combination
          is 11-27-88?-My wedding day
          for entering into the vault area.

          Don't talk on the phone about your plans
          Don't talk to me on the phone about this.

                         Love
                          Edward
          [Bring your keys to N.Y.
          You can put the attache there
                              - 10 -

           It is too heavy for you alone]2

     On March 12, 1995, the DEA used the notes along with other

evidence to show probable cause for a warrant to search the box

at Univault.   The search revealed the attache case filled with

$339,860 of cash, which the DEA seized.      The DEA also seized

Univault's records of the rental payments made on the box and the

lease agreement between Robert Morrison and Univault.

     After his arrest, petitioner agreed to plead guilty to one

count of violating 42 U.S.C. 408(g), misrepresentation of a

Social Security account number, and one count of violating 21

U.S.C. secs. 841 and 846, conspiring to distribute cocaine.        The

charges against Nelson were dismissed.    Petitioner was

incarcerated in a Federal prison in Lompoc, California, for 2

years and 8 months.

                              OPINION

Issue 1.   Whether Petitioner Had Unreported Income in 1987 and
           1988

     Respondent determined that petitioner had unreported income

of $5,965,240 and $339,860, and deficiencies of $2,294,259 and

$102,800 in 1987 and 1988, respectively.      By an amendment to

answer, respondent increased the deficiency for 1988 to $110,500,

to account for the cash seized from the Cadillac.      Petitioner

asserts that he had no income during the years at issue, or, in

the alternative, if this Court finds that he did have income,

that it was no more than $48,900 in 1987 and $55,600 in 1988.

     2
      This postscript was crossed out.
                              - 11 -

     At trial, petitioner admitted that in 1987 and 1988 he

rented the safe deposit boxes and that he put the bundles of cash

into the boxes; however, petitioner argues that as there is no

evidence that he was engaged in any illegal income-producing

activity during 1987 and 1988, respondent has no grounds for

charging him with unreported income for those years.   Petitioner

therefore is arguing implicitly that respondent's determination

is arbitrary and erroneous.

     In the usual case, a statutory notice of deficiency carries

with it a presumption of correctness, and petitioner would have

the burden of proving that respondent's determinations are

erroneous.   Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).   Courts have recognized a limited exception to this

general rule in cases involving unreported illegal income where

respondent introduced no substantive evidence but rested on the

presumption of correctness, and the taxpayer challenged the

notice of deficiency.   Weimerskirch v. Commissioner, 596 F.2d 358

(9th Cir. 1979), revg. 67 T.C. 672 (1977); see also Dellacroce v.

Commissioner, 83 T.C. 269, 280 (1984); Llorente v. Commissioner,

74 T.C. 260, 264 (1980), affd. in part and revd. in part 649 F.2d

152 (2d Cir. 1981); Jackson v. Commissioner, 73 T.C. 394 (1979).

     We are satisfied that Weimerskirch v. Commissioner, supra,

and its progeny are distinguishable.   In Weimerskirch v.

Commissioner, supra, respondent determined that the taxpayer had

a deficiency in his income tax based upon a revenue agent's

finding that the taxpayer omitted income derived from heroin
                                - 12 -

sales.    The only evidence supporting this determination consisted

of statements made to the agent by two confidential informants

and certain information obtained by him from law enforcement

officials.   No admissible evidence was introduced at the trial to

substantiate those statements or information otherwise linking

the taxpayer to drug dealing.    The Court of Appeals for the Ninth

Circuit held that a "deficiency determination which is not

supported by the proper foundation of substantive evidence is

clearly arbitrary and erroneous" and that the Government had the

burden of producing some evidence linking the taxpayer to an

income-producing activity.    Id. at 362.   This is true even where

that taxpayer has not made a showing that the notice was

arbitrary. Id. at 361; Petzoldt v. Commissioner, 92 T.C. 661, 689

(1989).

     The facts in the instant case, however, are more closely

aligned with Delaney v. Commissioner, 743 F.2d 670 (9th Cir.

1984), affg. T.C. Memo. 1982-666; Tokarski v. Commissioner, 87

T.C. 74 (1986); and Schad v. Commissioner, 87 T.C. 609 (1986),

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

In each of these cases, the taxpayers possessed liquid assets or

expended funds during the taxable year.

     Respondent has offered ample evidence that petitioner was in

possession of the funds respondent seeks to tax as income.    In

1988, Government agents seized $27,620 from petitioner's

Cadillac, and $5,965,240, which petitioner had put into safe

deposit boxes in 1987.   In 1995, the DEA seized $339,860 which
                                 - 13 -

petitioner put into a safe deposit box in 1988.      Furthermore,

petitioner filed a claim for the money seized from the boxes at

the California banks and for the Cadillac from which the $27,620

was seized.    Finally, petitioner admits that he rented the boxes,

and that he put the money into the boxes.

     Respondent has connected petitioner to the funds that form

the basis of the deficiency; the notice of deficiency was not

arbitrary.     Delaney v. Commissioner, supra; Schad v.

Commissioner, supra; Tokarski v. Commissioner, supra.

     Since respondent's deficiency notice was not arbitrary,

petitioner has the burden of going forward with the evidence as

well as the ultimate burden of persuasion.      Dellacroce v.

Commissioner, supra at 280.

     Every taxpayer is required to maintain adequate records of

taxable income.     Sec. 6001.   Petitioner did not file a Federal

income tax return or make any estimated Federal income tax

payments for any of the years at issue.      Nor did he maintain

adequate records from which the amount of his income or Federal

income tax liability for any of the years at issue could be

computed.     In the absence of such records, respondent may

reconstruct the taxpayer's income by any reasonable method that

clearly reflects income.     Sec. 446(b); Holland v. United States,

348 U.S. 121, 130-132 (1954); Parks v. Commissioner, 94 T.C. 654,

658 (1990).     Respondent used the specific items method of proof

to determine petitioner's income for the taxable years at issue.

This method requires proof of specific items of income that were
                               - 14 -

omitted from petitioner's returns.      United States v. Merrick, 464

F.2d 1087, 1092 (10th Cir. 1972).    In this case, where petitioner

has failed to keep the required records, respondent was justified

in determining petitioner's tax liabilities for the years at

issue by this method.   Parrish v. Commissioner, T.C. Memo. 1997-

474; McManus v. Commissioner, T.C. Memo. 1972-200, affd. without

published opinion 498 F.2d 1399 (4th Cir. 1973).

     Petitioner testified at trial that all of the money actually

belonged to two men, "Cos" and "Bro", who gave him living

expenses and drugs as gifts in appreciation of his renting the

boxes and depositing the money into the boxes on their behalf.

Petitioner estimated the value of these gifts was $48,900 in

1987, and $55,600 in 1988.    Petitioner testified that when Cos

and Bro needed to contact him they would beep him on his

electronic pager.   Petitioner testified that the last time he had

contact with Cos and Bro was in 1988 when they gave him phony

identification in the name of Robert Morrison and the attache

case full of cash to deposit in the Univault box.     Petitioner did

not call Cos and Bro as witnesses or produce any other evidence

that could verify his story.

     Petitioner relies on only his testimony to carry the burden

of proving the source of the bundles of cash.     Thus, the issue is

one of credibility wherein we must determine the extent to which

the proffered testimony is believable.     See Schad v.

Commissioner, supra at 620.
                               - 15 -

     It is well established that we are not required to accept

self-serving testimony in the absence of corroborating evidence.

Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992); Tokarski

v. Commissioner, supra at 77. Moreover, our analysis of

petitioner's testimony reveals inconsistencies that cast doubt

upon his credibility.   Thus, there is no credible evidence that

the money actually belonged to Cos and Bro.      Upon the basis of

the entire record, we simply do not believe that the money came

from the source petitioner claims.      We find, therefore, that

petitioner has not met his burden of proving a nontaxable source

of the unreported income.

Issue 2.   Additions to Tax for Fraud

     Respondent asserts as his primary position that petitioner

is liable for additions to tax for fraud pursuant to section

6653(b)(1)(A) and (B) for 1987, and section 6653(b)(1) for 1988.

Petitioner asserts that respondent has failed to prove that the

funds deposited in the various safe deposit boxes were his

income, and that without such proof inferences of fraud cannot be

drawn from his use of fictitious names and his concealment of the

cash.

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

upon consideration of the entire record.      Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).      Fraud is not to be

imputed or presumed.    Beaver v. Commissioner, 55 T.C. 85, 92

(1970); Otsuki v. Commissioner, 53 T.C. 96 (1969).      Respondent
                               - 16 -

has the burden of proving that some portion of the underpayment

is due to fraud by clear and convincing evidence.     Sec. 7454(a);

Rule 142(b); Parks v. Commissioner, supra at 660.

     Respondent must prove both that an understatement of tax

exists and the taxpayer intended to evade paying the correct tax.

United States v. Rexach, 482 F.2d 10, 31 (1st Cir. 1973); Parks

v. Commissioner, supra at 660-661.      Where fraud is determined for

each of several years, respondent's burden applies separately for

each of the years.   Estate of Stein v. Commissioner, 25 T.C. 940,

959-963 (1956), affd. per curiam sub nom. Levine v. Commissioner,

250 F.2d 798 (2d Cir. 1958).   Where, as here, respondent has

prevailed on the issue of the existence of a deficiency by virtue

of petitioner's failure to carry his burden of proof, respondent

cannot rely on that failure to sustain his burden of proving

fraud.   Parks v. Commissioner, supra; Petzoldt v. Commissioner,

92 T.C. at 700.

     Respondent can satisfy his burden of proving the existence

of an underpayment when the "allegations of fraud are intertwined

with unreported and indirectly reconstructed income in one of two

ways."   Parks v. Commissioner, supra at 661.     Respondent may

prove an underpayment by proving a likely source of the

unreported income.   Holland v. United States, supra.

Alternatively, where the taxpayer alleges a nontaxable source,

respondent may satisfy his burden by disproving the nontaxable

source so alleged.   United States v. Massei, 355 U.S. 595 (1958).
                              - 17 -

     Respondent maintains that the cash originated from

petitioner's sale of illegal drugs.    Respondent contends that

petitioner's plea of guilty to conspiring to distribute cocaine

in the years 1974 to 1985, petitioner's stipulation that he paid

most of his living expenses during 1987 and 1988 using cash,

cashier's checks, and money orders, the amount of cash found in

the boxes, the use of the safe deposit boxes to conceal the

money, and petitioner's use of fictitious identifications

indicate that petitioner was involved in the activity of

distributing illegal drugs.

     Laurence M. Gallion (Gallion), a special agent with Customs

testified that during the early part of 1987 Customs instigated

an investigation of major drug smugglers on the West Coast.

Among the suspected major smugglers investigated was petitioner.

     Gallion testified that at the time of these investigations,

Customs had a warehouse in San Francisco that was full of

confiscated marijuana which it decided to sell in a reverse sting

operation to suspected drug dealers.    In the sting operation,

Customs planned to sell the marijuana to the suspect, and then

arrest the suspect for buying it.

     Accordingly, Customs asked Paul Logan (Logan) to work for it

as a confidential informant and to set up a marijuana deal with

petitioner.   Petitioner and Logan have known each other since

sometime in the 1970's when Logan was a mid-level marijuana

dealer in Miami, Florida.   Furthermore, they have engaged in

business with each other in the past; sometime around 1985,
                             - 18 -

petitioner sold Logan 10 pounds of high-potency "Thai weed" on

consignment, for which Logan never paid petitioner.   Logan was in

jail at the time Customs made its offer to him.

     At trial, respondent introduced tape recordings of telephone

calls made on February 18, February 23, and February 24, 1987,

between Logan and petitioner.3

     On these calls, Logan offered to sell petitioner a "4-digit

number, starts with a one" quantity of "T-shirts" in "2.2

packages" for a price in the "mid-11s".   Petitioner has never



     3
      At trial, petitioner objected to the introduction of the
recordings as evidence, because they were made without his
knowledge or consent in violation of the law of the State of
California.
     Title 18 U.S.C. sec. 2511 (1994) prohibits interception and
disclosure of wire, oral, or electronic communications, except as
otherwise specifically provided. Sec. 2511(2)(c) specifically
provides:

     (c). It shall not be unlawful under this chapter for a
     person acting under color of law to intercept a wire,
     oral, or electronic communication, where such a person
     is a party to the communication or one of the parties
     to the communication has given prior consent to such
     interception. [18 U.S.C. sec. 2511(2)(c) (West 1994).]

     The recordings in this case were made by the U.S. Customs
Service in connection with an official investigation of
petitioner for drug trafficking, one of the parties in the
telephone conversation, Logan, consented to the recordings, and
the recordings were offered as evidence in a Federal court.
     Accordingly, the recordings were lawful as consensual
wiretaps and are admissible as evidence. United States v. Kovac,
795 F.2d 1509, 1511-1512 (9th Cir. 1986) (whether the officials
complied with State law is not relevant; the only question is
whether the officials acted in compliance with Federal law);
United States v. Adams, 694 F.2d 200 (9th Cir. 1982) (evidence
obtained from a consensual wiretap conforming to 18 U.S.C. sec.
2511(2)(c) is admissible in Federal court without regard to State
law).
                               - 19 -

been in the business of buying and selling T-shirts; however, he

responded enthusiastically to the offer, saying "Well, you'd

better get your [expletive deleted] over here and let's get to

work."   Petitioner also indicated that he was very interested in

purchasing the entire quantity of what was offered for sale.4

     Logan testified that when drug dealers speak on the

telephone about illegal substances, they substitute ordinary

words for incriminating words or terms.   Thus, they use "4-digit

number, starts with a one", for 1,000; "T-shirts" for marijuana;

"2.2 packages" for packages of drugs that weigh 1 kilogram

(kilos), and "mid-11s" for a $1,100 price range.     Logan was

therefore offering petitioner 1,000 kilos of marijuana for $1,100

per pound.   Petitioner stated that he "could do the whole lot",

which indicated his willingness to purchase the entire quantity

of marijuana that Logan was offering for sale.




     4
      Petitioner's willingness to purchase the entire quantity is
indicated by the following recorded telephone conversation
between Logan and petitioner (Voice 1 was identified as Logan;
voice 2 as petitioner):

     Voice 2:   We can do the whole lot real fast.

     Voice 1:   Okay

     Voice 2:   I guarantee it, the whole lot, real fast.

     Voice 1:   One triple zeros.

     Voice 2:   What's that?

     Voice 1:   I've got a one and three zeros after.

     Voice 2:   I know, man.   We can do the whole lot, real fast.
                              - 20 -

     Petitioner and Logan agreed to meet at a restaurant in

Emoryville, California, to further discuss the transaction.

Logan brought an undercover DEA agent who was posing as a drug

distributor with him to the meeting.   Petitioner met with Logan;

however, he did not agree to purchase the marijuana, because he

recognized immediately that Logan's confederate was a Government

agent.

     Petitioner argues that the fact that he did not purchase the

marijuana is proof he was not involved in the business of buying

and selling illegal drugs.   We disagree.   In the recordings,

petitioner's response to Logan's initial offer to sell him the

marijuana was, "I've got people bugging me about that exact

material right now and I ain't got a line on it."    Petitioner's

statement indicates that he had an existing customer base that

depended on him as a source for marijuana.    Thus, the evidence

supports a finding that although petitioner was in the business

of buying and selling marijuana, he was not interested in buying

it from a DEA agent posing as a drug distributor.

     We have stated that we doubt petitioner's credibility and

that we find his story of the source of the unreported income

implausible.   Furthermore, we find that the evidence supports

respondent's contentions that the likely source of petitioner's

unreported income was the sale of illegal drugs.    Accordingly, we

find that respondent has met his burden of proving an

underpayment by clear and convincing evidence.
                                - 21 -

     Respondent must also prove by clear and convincing evidence

that petitioner had the requisite fraudulent intent.    Fraudulent

intent may be proven by circumstantial evidence and reasonable

inferences drawn from proven facts, because direct proof of a

taxpayer's intent is rarely available.     Spies v. United States,

317 U.S. 492, 499 (1943); Rowlee v. Commissioner, 80 T.C. 1111

(1983).    Because respondent's assertion of fraud requires an

inquiry into the taxpayer's frame of mind, a single act or

omission seldom demonstrates the necessary fraudulent intent.

Rather, the existence of the fraudulent intent must generally be

determined by surveying a taxpayer's entire course of conduct.

Stone v. Commissioner, 56 T.C. 213, 220 (1971); Bradford v.

Commissioner, T.C. Memo. 1984-601, affd. 796 F.2d 303 (9th Cir.

1986).

     Because fraudulent intent is rarely established by direct

evidence, the Court of Appeals for the Ninth Circuit, the court

to which this case is appealable, has inferred intent from

various kinds of circumstantial evidence.     Bradford v.

Commissioner, 796 F.2d at 307.    These badges of fraud include:

(1) Understatement of income; (2) inadequate records; (3) failure

to file tax returns; (4) implausible or inconsistent explanations

of behavior; (5) concealing assets; and (6) failure to cooperate

with tax authorities.    Id.   Furthermore, in Bradford, the Court

of Appeals found that the following facts support a finding of

fraud:    (1) Engaging in illegal activities; (2) efforts to

conceal such illegal activity; (3) dealing in cash to avoid
                               - 22 -

scrutiny of the taxpayer's finances; and (4) failure to make

estimated tax payments.    Id. at 308.

     In the instant case, we find the following indicia of fraud:

(1) Petitioner admitted that he did not file Federal income tax

returns for the taxable years 1982 through 1994; (2) petitioner

did not maintain records for the years at issue; (3) petitioner

concealed assets by depositing cash in 10 safe deposit boxes in

two states, and registering his Cadillac in a different name; (4)

petitioner engaged in illegal business activities; (5) petitioner

attempted to conceal his illegal business activities by

concealing assets and using false identifications; (6) petitioner

had substantial dealings in cash, including paying most of his

bills during the years at issue with cash, cashier's checks, and

money orders; (7) petitioner did not make estimated tax payments;

and (8) petitioner's explanation of the source of the unreported

income is implausible.

       Upon consideration of all of the facts and circumstance of

this case, we hold that respondent has carried his burden of

proving petitioner's fraudulent intent with respect to the

underpayments for the years at issue by clear and convincing

evidence.

Issue 3.    Whether Petitioner Is Liable for Self-Employment Tax

     Respondent determined that petitioner is liable for self-

employment tax of $5,387 and $5,859 in 1987 and 1988,

respectively.   Petitioner asserts that he had no income subject

to self-employment tax during the years at issue.
                                - 23 -

     Section 1401 imposes a tax on an individual's net earnings

from self-employment.    Self-employment income consists of gross

income from any trade or business carried on by an individual

less allowable deductions attributable to the trade or business.

Sec. 1402(a).   Respondent's determination that petitioner is

liable for self-employment tax is presumed to be correct, and

petitioner bears the burden of proving that it is erroneous.

Rule 142(a); Kasey v. Commissioner, 33 T.C. 656, 660 (1960).

     At trial, petitioner testified that he was not employed

during 1987 and 1988, nor does he recall having a job or an

employer from 1980 through 1994.    We have found that petitioner

had unreported income in 1987 and 1988.    Although petitioner has

persuaded this Court that he did not earn the unreported income

as an employee, he has not met his burden of proving that he did

not receive the unreported income from self-employment.    Thus, we

find that petitioner is liable for self-employment tax on the

unreported income as determined by respondent for 1987 and 1988.

Issue 4.   Additions to Tax Under Section 6654

     Respondent determined that petitioner is liable for

additions to tax under section 6654(a) for his failure to make

estimated tax payments for 1987 and 1988.

     Subject to exceptions provided by statute, the imposition of

the addition to tax is otherwise automatic if the amounts of the

withholdings and estimated tax payments do not equal statutorily

designated amounts.     Niedringhaus v. Commissioner, 99 T.C. at

202; Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980).
                              - 24 -

Petitioner bears the burden of showing that respondent's

determination that section 6654 applies to the years in issue was

made in error.   Niedringhaus v. Commissioner, supra.    Petitioner

has made no such showing.   For the years in issue, petitioner had

substantial taxable income; yet he made no tax payments.

Therefore, we hold he is liable for the additions to tax under

section 6654(a) for those years.

     To reflect the foregoing,

                                      Decision will be entered for

                                 respondent.
