                        T.C. Memo. 1997-570



                      UNITED STATES TAX COURT


                WILLIAM C. BERETTA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11615-94.              Filed December 29, 1997.



     William C. Beretta, pro se.

     Andrew P. Crousore, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined deficiencies in

petitioner's Federal income tax and additions to tax and

penalties for fraud as follows:
                                     - 2 -


                               Additions to Tax and Penalties
                         Sec.            Sec.         Sec.        Sec.
Year   Deficiency   6653(b)(1)(A)     6653(b)(1) 6653(b)(1)(B)    6663
                                                        1
1987    $5,115         $5,802              -                        -
1988    10,058            -             $7,544          -           -
1989    16,448            -                -            -        $12,336
1990    15,437            -                -            -         11,578
      1
        In addition, with respect to the taxable year 1987, respondent has
determined an addition to tax pursuant to sec. 6653(b)(1)(B) in an amount
equal to 50 percent of the interest due on the underpayment attributable to
fraud.

       The issues for our consideration are:         (1) Whether

petitioner was required to report as income money received from

two restaurants during the years at issue; (2) whether petitioner

failed to report dividend income from jointly held mutual funds

for 1988, 1989, and 1990; (3) whether petitioner received $2,000

in unreported income as a result of preparing a U.S. Individual

Income Tax Return, Form 1040, in the name of Chris Arias;

(4) whether respondent properly denied petitioner's claimed

capital losses of $2,858, $3,000, $3,000, and $2,400 for 1987,

1988, 1989, and 1990, respectively; (5) whether petitioner was

entitled to claim his mother as a dependent on his 1990 Federal

income tax return; (6) whether petitioner was entitled to certain

claimed itemized deductions for 1987, 1988, 1989, and 1990,

respectively; and (7) whether any part of any underpayment of tax

on petitioner's returns for the taxable years 1987 through 1990

was due to fraud.
                                 - 3 -


                         FINDINGS OF FACT1

     At the time the petition in this case was filed, petitioner,

Mr. William Beretta, resided in Salinas, California.    Petitioner

claimed head of household filing status for each of the years at

issue.

1.   Skimmed Proceeds

     Mr. Beretta was employed by the Internal Revenue Service

(IRS), Collection Division, from 1965 to 1994, as a revenue

officer.   Mr. Beretta was trained to identify tax examination

situations and to inform taxpayers of their obligation to pay

taxes.   In particular, Mr. Beretta conducted investigations of

taxpayers who had failed to file tax returns.    In addition to his

employment with the IRS, Mr. Beretta also invested in several

restaurants.   During the years at issue, petitioner owned an

interest in three restaurants:    The Salinas Peppertree

Restaurant, the Seaside Bobby Rodgers Steak and Gourmet Burgers,

and the Atascadero Peppertree Restaurant.

     Mr. Beretta was a principal in a corporation known as HRB

Enterprises, Inc. (HRB Enterprises).     The three principals in the

corporation were Randy Hurst (H), Bobby Rodgers (R) and

Mr. Beretta (B).   HRB Enterprises operated various restaurants in

Atascadero, Fresno, and Salinas, California.    On August 14, 1984,


     1
       The stipulation of facts and the attached exhibits are
incorporated by this references.
                                - 4 -


Mr. Beretta became an equity owner of a Peppertree Restaurant in

Salinas when the restaurant was purchased by HRB Enterprises from

Denny's, Inc.    Mr. Beretta provided the majority of capital to

acquire the Salinas Peppertree Restaurant.    In early 1985,

Mr. Beretta advanced an additional $70,000 to HRB Enterprises.

This advance was evidenced by two promissory notes from HRB

Enterprises that were payable on demand.

     In late 1985, Mr. Beretta discovered that Randy Hurst and

Bobby Rodgers were embezzling money from several of the

restaurants that were owned by HRB Enterprises.    As a result of a

negotiated settlement, Mr. Beretta received two restaurants that

were previously owned by HRB Enterprises, the Salinas Peppertree

Restaurant and Seaside Bobby Rodgers Steak and Gourmet Burgers.

     In September 1986, Mr. Beretta entered into an agreement

with William Arias whereby a new corporation would be formed to

take over the Salinas Peppertree Restaurant.    Mr. Beretta and

Mr. Arias formed DOBRA Enterprises, Inc., by recording articles

of incorporation, but they never completed the incorporation

process.

     Mr. Beretta and Mr. Arias agreed that Mr. Arias would

contribute the expertise, and Mr. Beretta would contribute the

restaurant business, for which they would each receive a share of

the profits.    Throughout the period 1987 to April 30, 1991,

Mr. Beretta was fully involved in the operation and supervision
                               - 5 -


of the Salinas Peppertree Restaurant.     Mr. Beretta reflected a

50-percent ownership of the Salinas Peppertree Restaurant as a

personal asset on a 1990 loan application.

     Mr. Beretta and William Arias agreed that they would "skim"

money directly from the restaurant's cash register.     The parties

decided that Mr. Beretta would receive the majority of the

skimmed proceeds in the beginning.     The arrangement was for

Mr. Beretta to receive 75 percent and William Arias to receive 25

percent of the skimmed proceeds during 1987, 1988, and 1989.

During 1990, Mr. Beretta and Mr. Arias split the skimmed proceeds

equally.   Mr. Beretta instructed Pat Bartley, the manager of the

Salinas Peppertree Restaurant, to remove however much currency

the restaurant could afford.   Mr. Beretta ordered Ms. Bartley to

account for the skimmed proceeds as a miscellaneous expense in

the daily sales book.   This column was also used to account for

cash payments to employees.

     Ms. Bartley removed between $50 and $200 a day for

Mr. Beretta.   Mr. Beretta instructed Ms. Bartley to put the

currency in an envelope and to place the envelope inside the safe

at the restaurant.   Mr. Beretta advised Ms. Bartley that the

money was repayment to him for the money that he had invested in

the restaurant.   Mr. Beretta came into the restaurant every 2 or

3 days and collected the currency.
                               - 6 -


     In January of 1986, Mr. Beretta invested $30,000 to open a

Peppertree Restaurant in Atascadero, California.    Mr. Beretta's

partner in this venture was Garlo Enterprises, Inc., a wholly

owned corporation of Gary Longfellow.   Although the Atascadero

Peppertree Restaurant was owned by Garlo Enterprises, Inc., Mr.

Beretta was the primary financial force behind the restaurant.

Garlo Enterprises, Inc., and Mr. Beretta formed a partnership to

operate the Atascadero Peppertree Restaurant.    Mr. Beretta

assisted in the preparation of Garlo Enterprises, Inc.’s,

corporate tax returns (Forms 1120) for the years 1986 through

1992.

     Mr. Beretta and Mr. Longfellow agreed to split the profits

from the Atascadero Peppertree Restaurant equally.    Mr. Beretta

suggested to Mr. Longfellow that they "skim" money from the cash

register in order to avoid paying taxes on any profits from the

restaurant.   Mr. Longfellow agreed, and he began removing between

$100 and $200 a day from the cash register, depending on the

restaurant's cash-flow.   At the end of the day, Mr. Longfellow

would place Mr. Beretta's money in a bag for Mr. Beretta to come

by and retrieve.

     In order to account for the skimmed proceeds, Mr. Longfellow

would make false overrings on the cash register and then remove

an amount of cash equal to the false overring.    Therefore, the

skimmed profits were not reported on the restaurant's books.
                               - 7 -


Mr. Beretta would stop by the restaurant occasionally in order to

retrieve his share of the skimmed proceeds.    On October 25, 1993,

Mr. Beretta pleaded guilty to a Federal criminal conflict of

interest charge for abating a tax bill of the Atascadero

Peppertree Restaurant.

     Respondent conducted a bank deposits analysis2 in order to

calculate the amount of unreported income, including skimmed

proceeds, that Mr. Beretta received.    The amount of unreported

income calculated and determined for the years at issue is as

follows:

                Year              Skimmed Proceeds

                1987                   $11,835.61
                1988                    19,080.65
                1989                    37,482.13
                1990                    35,124.67
                Total                  103,523.06

2.   Dividend Income

     During the years at issue, petitioner maintained investment

accounts with Franklin Money Fund and Strong Total Return Funds.

The accounts were established with petitioner's funds.

Petitioner held one of the accounts as custodian for his

daughter, Jennifer Beretta, and three accounts in joint tenancy

with Jennifer Beretta.   On his 1987 tax return, petitioner


     2
       The bank deposits analysis is conducted by examining
deposits into an individual's bank account. Reported income and
any nontaxable items are subtracted from total deposits in order
to determine unreported income.
                                   - 8 -


reported a $2,558 capital loss with respect to one of the Strong

Total Return Fund Accounts he held in joint tenancy with his

daughter.    In addition, petitioner listed said accounts as his

assets on loan applications prepared and filed during the period

at issue.    The accounts produced the following dividends for the

years at issue:

 Account          1988 Dividends   1989 Dividends   1990 Dividends

Franklin Money
Fund Acct. No.
11100662247        $2,051.29        $3,460.72        $2,849.23

Strong Fund
Acct. No.
021-2021885157        128.38           135.89             ---

Strong Fund
Acct. No.
023-2300221719        901.56         1,157.64         1,010.55

Strong Fund
Acct. No.
028-2800101143         42.34           409.37           561.85

Total Dividends     3,123.57         5,163.62         4,421.63


     The dividend amounts shown above were reported on Jennifer

Beretta's income tax returns for the years at issue.            Respondent

determined that petitioner maintained control of the investment

accounts, and therefore included the dividend amounts in

petitioner's income for taxable years 1988, 1989, and 1990

respectively.
                                 - 9 -


3.   Income Tax Refund

     Petitioner participated in a scheme to defraud the U.S.

Government.   Specifically, petitioner and William Arias

fraudulently prepared and filed a 1987 Federal tax return

claiming a refund under the name Chris Arias.     Chris Arias,

William Arias' brother, never received the $4,168 refund check

from the return that was filed on his behalf.     Instead, William

Arias received the check, cashed it, and delivered $2,000 in cash

to Mr. Beretta for his participation in the scheme.     Mr. Beretta

did not report the $2,000 as income on his 1988 Federal

individual income tax return.     Respondent included the $2,000 in

petitioner's income for the 1988 taxable year.

4.   Capital Losses

     On his 1987 tax return, petitioner claimed a capital loss

from the sale of stock in a Strong Total Return Fund in the

amount of $2,558.     At trial, petitioner presented documentary

evidence substantiating the claimed loss.     Respondent disallowed

the $2,558 loss in his 1987 notice of deficiency.

     Petitioner claimed capital losses of $300, $3,000, $3,000

and $2,400 from bad debts for the tax years 1987, 1988, 1989, and

1990, respectively.     The bad debts were the result of

petitioner's payments to creditors for obligations of the

restaurants for which he was a guarantor.     In 1987, petitioner

paid $300 for liabilities owed to PG&E, an electrical supplier of
                                - 10 -


one of the restaurants in which petitioner owned an interest.      In

1989, petitioner paid $400 for liabilities owed to a local

garbage company.   Petitioner paid $3,000 and $2,400 in the years

1989 and 1990, respectively, on a Wells Fargo Bank loan that was

taken out when petitioner acquired an interest in the Bobby

Rodgers Steak and Gourmet Burgers restaurant.    Petitioner made

those loan payments when the restaurant was unable to make the

payments out of its own funds.    Respondent disallowed the claimed

capital losses for all 4 years.

5.   Dependent

      Petitioner claimed his mother, Edith Beretta, as a dependent

on his 1990 income tax return.    Mrs. Beretta suffered a stroke in

1989, as a result of which she moved into petitioner's home.

Mrs. Beretta resided with petitioner from January 1, 1990, until

October 10, 1990, at which time she returned to the hospital.

Respondent determined that Mrs. Beretta was not a dependent of

petitioner.

6.   Deductions

      Petitioner claimed expenses for legal fees in connection

with his ownership of various restaurants in the amounts of

$1,464, $8,354, $10,004, and $3,000 for the tax years 1987, 1988,

1989, and 1990, respectively.    Petitioner expended $1,464,

$8,006, $8,267, and $3,000 for legal expenses for the tax years

1987, 1988, 1989, and 1990, respectively.    The legal expenses
                                - 11 -


were incurred in defending suits from the restaurants' creditors.

Respondent disallowed the claimed expenses for all 4 years.

     In addition, petitioner claimed medical expenses in the

amount of $3,524 for amounts paid on behalf of his mother, Edith

Beretta, in 1990.    Respondent determined that Edith Beretta was

not a dependent of petitioner and accordingly denied petitioner's

deduction for the claimed medical expenses.

                                OPINION

Issue 1.   Skimmed Proceeds

     Initially, we must decide whether petitioner's receipt of

cash from the two restaurants constituted taxable income.       The

accuracy of respondent's bank deposits analysis is not at issue

because petitioner has conceded that he has received

approximately $103,000 in cash from the Salinas and Atascadero

Peppertree Restaurants during the years at issue.

     Petitioner claims that the skimmed proceeds were repayment

for amounts loaned to the two restaurants, and, therefore, the

receipt of the cash constituted a nontaxable repayment of the

loan principal.     In addition, Mr. Beretta contends that he

received no interest on the amounts lent.       Respondent contends

that the transfers of funds to the restaurants were not loans and

that petitioner's receipt of the skimmed proceeds constituted

taxable income.     We agree with respondent.
                               - 12 -


     Although we are not deciding a debt versus equity question,

we find that the test used by this Court in deciding that issue

will be useful in deciding whether petitioner's transfers of

funds to the restaurants constituted loans.   The question of

whether a transfer of funds to a closely held business

constitutes debt or equity must be decided on the basis of all

relevant factors.    Dixie Dairies Corp. v. Commissioner, 74 T.C.

476, 493 (1980). Courts look to the following nonexclusive

factors to evaluate the nature of transfers of funds to closely

held businesses:    (1) The names given to the documents evidencing

the purported loans; (2) the presence or absence of fixed

maturity dates with regard to the purported loans; (3) the likely

source of any repayments; (4) whether the taxpayers could or

would enforce repayment of the transfers; (5) whether the

taxpayers participated in the management of the business as a

result of the transfers; (6) whether the taxpayers subordinated

their purported loans to the loans of the corporation's

creditors; (7) the intent of the taxpayers and the corporations;

(8) whether the taxpayers who are claiming creditor status were

also shareholders of the corporations; (9) the capitalization of

the corporations; (10) the ability of the corporations to obtain

financing from outside sources at the time of the transfers; (11)

how the funds transferred were used by the corporations; (12) the
                                  - 13 -


failure of the corporations to repay; and (13) the risk involved

in making the transfers.    Id.

     These factors serve only as aids in evaluating whether

transfers of funds to a closely held business should be regarded

as capital contributions or as bona fide loans.         Boatner v.

Commissioner, T.C. Memo. 1997-379.         No single factor is

controlling.    Dixie Dairies   Corp. v. Commissioner, supra.        As

expressed by this Court, the ultimate question is "Was there a

genuine intention to create a debt, with a reasonable expectation

of repayment, and did that intention comport with the economic

reality of creating a debtor-creditor relationship?"         Litton

Business Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973).

     We find that Mr. Beretta's transfers of funds to the

entities that controlled the Atascadero and Salinas Peppertree

Restaurants were not loans.     Only the factors material to our

decision will be discussed.

     First, the notes that evidenced the contributions to HRB

Enterprises had no maturity date.      The absence of a maturity date

with respect to a note weighs against finding that the transfers

were loans.    Stinnett's Pontiac Serv., Inc. v. Commissioner, 730

F.2d 634, 638 (11th Cir. 1984), affg. T.C. Memo. 1982-314.

     Second, the source of “repayments” for the transfers was

highly unusual.   Mr. Beretta had employees skim money directly

from the cash registers on his behalf.        No repayment schedule
                                - 14 -


existed for the purported loans, and no record was ever kept of

the amount of money that Mr. Beretta was receiving from the two

restaurants.    In addition, the amount of money that Mr. Beretta

skimmed each month depended directly upon the earnings of the

restaurants.    These factors indicate that the transfers were not

loans and that the repayments were not loan repayments.     Id.

     Third, Mr. Beretta concedes that he never received interest

payments on the alleged loans.    “[A] true lender is concerned

with interest.”     Curry v. United States, 396 F.2d 630, 634 (5th

Cir. 1968).    If the lender does not insist on interest payments,

he is, therefore, “interested in the future earnings of the

corporation or the increased market value of his interest.”       Id.

Moreover, while the notes evidencing the transfers called for

interest payments, none were actually made.    The absence of

interest supports our ultimate finding that the advances were not

loans.

     Based on all of the facts and circumstances surrounding the

transfer of funds, we hold that Mr. Beretta's transfers to the

restaurants were not loans.    Further, the skimming payments to

petitioner were being divided with his coowners based on

ownership.    In that regard, there is no evidence that

petitioner's coowners also had made any advances that could be

considered loans.
                               - 15 -


     Finally, petitioner disregarded the business form and entity

of the respective restaurants and, as relevant here, used the

assets and income of the restaurants as his own.   Petitioner does

not deny that the skimmed proceeds were converted to his own use.

He had complete and unfettered use of the skimmed proceeds, and

therefore the receipt of the skimmed proceeds constituted income

within the meaning of section 61.3

Issue 2.   Dividend Income

     The next issue for our consideration is whether petitioner

failed to report dividend income from certain jointly held mutual

funds for 1988, 1989, and 1990.   Petitioner held one of the

mutual fund accounts as custodian for his daughter, Jennifer

Beretta, and three accounts in joint tenancy with her.

Resolution of this issue turns on who is the true owner of the

income-producing property.   The owner of property for Federal

income tax purposes is a question of fact to be determined from

an examination of all the facts and circumstances.    Hang v.

Commissioner, 95 T.C. 74, 80 (1990).    In determining the identity

of the owner of the property, we may look to beneficial ownership

instead of mere legal title.   Serianni v. Commissioner, 80 T.C.

1090, 1104 (1983), affd. 765 F.2d 1051 (11th Cir. 1985).   It is



     3
       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.
                                - 16 -


command over the property or the enjoyment of its economic

benefits that marks the real owner.      Hang v. Commissioner, supra.

     The accounts were created with petitioner's personal funds.

When a parent holds an account in joint tenancy with his child,

or as guardian for his child, income from the account that is

used to support the child is taxable to the person who is legally

liable for such support.    Garriss Inv. Corp. v. Commissioner,

T.C. Memo. 1982-38.    Courts apply strict scrutiny to transactions

between related parties to prevent the shifting of income into

lower tax brackets.    Doxey v. Commissioner, T.C. Memo. 1991-150,

affd. without published opinion 979 F.2d 1534 (5th Cir. 1992).

Mr. Beretta did not show whether he had a support obligation for

his daughter or that he was not the beneficial owner of the

accounts.    We also find it persuasive that petitioner claimed

losses from the accounts on his tax returns, while the income

from the accounts was reported on his daughter's returns.

Accordingly, Mr. Beretta is taxable on the dividend income

credited to the accounts during the taxable years at issue.

Issue 3.    Income Tax Refund

     The next issue for our consideration is whether petitioner

received $2,000 in unreported income in connection with his

preparation of a false U.S. Individual Income Tax Return, Form

1040, in the name of Chris Arias.    Mr. Beretta and William Arias

participated in a scheme to defraud the U.S. Government by
                               - 17 -


fraudulently preparing and filing a 1987 Federal tax return

claiming a refund under the name of Chris Arias.    Mr. Beretta

received $2,000 for his part in the scheme.    Gross income

includes funds derived from legal and illegal sources.     Rutkin v.

United States, 343 U.S. 130 (1952).     Accordingly, the $2,000

should be included in petitioner's income for the 1988 taxable

year.

Issue 4.    Capital Losses

     We next must decide whether petitioner is entitled to

claimed capital losses for the years at issue.    On his 1987 tax

return, petitioner claimed a $2,558 capital loss from the sale of

stock in the Strong Total Return Fund.    We have already decided

that petitioner was the owner of the mutual funds for Federal tax

purposes.    At trial, petitioner presented documentary evidence

substantiating the claimed loss.    We find that petitioner is

entitled to the $2,558 capital loss.    Sec. 165(f).

     Petitioner claimed capital losses of $300, $3,000, $3,000

and $2,400 from bad debts for the tax years 1987, 1988, 1989, and

1990, respectively.    The bad debts were the result of payments

made for liabilities to creditors of the restaurants for which

Mr. Beretta was a guarantor.    Payments by an individual on a

guaranty of a debt which are not then repaid to the guarantor may

give rise to a bad debt deduction if the debt to the guarantor is

worthless.    Tolzman v. Commissioner, T.C. Memo. 1981-689; sec.
                               - 18 -


1.166-8, Income Tax Regs.    Whether or not a debt has become

worthless within a particular year is a question of fact, the

burden of proving which rests upon the petitioner.    American

Offshore, Inc. v. Commissioner, 97 T.C. 579, 593 (1991).

     Petitioner has offered no evidence that the restaurants'

obligation to repay him for amounts paid became worthless in the

years claimed by petitioner.    In addition, petitioner's claim

that the obligation to repay him became worthless contradicts his

claim that he received thousands of dollars in loan repayments

from the restaurants during the years at issue.    Accordingly,

respondent's denial of the bad debt deduction with respect to

these guaranty payments is sustained.

Issue 5.   Dependent

     The next issue for our consideration is whether petitioner

was entitled to claim his mother, Edith Beretta, as a dependent

on his 1990 income tax return.    Section 151(c)(1)(A) allows a

taxpayer to claim an exemption for each dependent (as defined in

section 152) whose gross income is less than the exemption

amount.    Section 152(a)(4) defines the term "dependent" to

include the mother of a taxpayer who receives over one-half of

her support from the taxpayer during the taxable year.

Petitioner bears the burden of showing that he is entitled to

claim his mother as a dependent.    Collins v. Commissioner, T.C.

Memo. 1994-409.
                                - 19 -


     Petitioner has failed to show that he is entitled to claim

his mother as a dependent.     Petitioner did not substantiate that

he provided over one-half of his mother's support, nor did he

provide any evidence that his mother's gross income was less than

the exemption amount.    Thus, we sustain respondent on this issue

and hold that petitioner is not entitled to claim his mother as a

dependent.

Issue 6.    Deductions

     We next consider whether petitioner is entitled to various

claimed itemized deductions for the years at issue.       Petitioner

claimed deductions for legal fees in connection with his

ownership of several restaurants in the amounts of $1,464,

$8,354, $10,004, and $3,000 for the tax years 1987, 1988, 1989,

and 1990, respectively.

     Section 162(a) provides for a deduction for “ordinary and

necessary” expenses paid or incurred during the taxable year in

carrying on a trade or business.     Sanford v. Commissioner, 50

T.C. 823, 826 (1968), affd. per curiam 412 F.2d 201 (2d Cir.

1969).     An ordinary and necessary expense is one that is

appropriate and helpful to the taxpayer's business and that

results from an activity which is a common and accepted practice.

Boser v. Commissioner, 77 T.C. 1124, 1132 (1981), affd. without

published opinion (9th Cir. 1983).       Legal fees are deductible

under section 162(a) if they arise in connection with or
                                - 20 -


proximately from the taxpayer’s trade or business.     Peters, Gamm,

West & Vincent, Inc. v. Commissioner, T.C. Memo. 1996-186.

     Deductions are a matter of legislative grace, and petitioner

bears the burden of proving that he is entitled to the deductions

claimed.    Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992).    At trial, petitioner presented testimony

substantiating legal expenses in connection with his ownership of

the restaurants of $1,464, $8,006, $8,267, and, $3,000 for the

tax years 1987, 1988, 1989, and 1990.     Petitioner incurred the

legal expenses defending his business from creditors' suits.

Accordingly, petitioner is entitled to deduct legal expenses in

the above-listed amounts.

     We reach a different result with respect to the $3,524 in

medical expenses that petitioner claimed on his 1990 return for

amounts paid on behalf of his mother.     Since we have determined

that petitioner's mother is not a dependent of petitioner,

petitioner is not entitled to deduct medical expenses paid on her

behalf.    Sec. 213(a).   Therefore, we sustain respondent's

determination with respect to this issue.

Issue 7.    Fraud Additions to Tax and Penalty

     Finally, we consider whether any part of the underpayment of

tax required to be shown on petitioner's returns was due to

fraud.    Respondent determined that the underpayment of tax was

due to fraud under the statute applicable for each taxable year:
                                - 21 -


section 6653(b)(1) for 19874 and 1988, and section 6663 for 1989

and 1990.   These sections impose an addition to tax or penalty

equal to 75 percent of the portion of the underpayment which is

attributable to fraud.    However, if respondent proves that any

portion of the underpayment is attributable to fraud, the entire

underpayment shall be treated as attributable to fraud, unless

petitioner can establish by a preponderance of the evidence that

a portion is not attributable to fraud.       Secs. 6653(b)(2),

6663(b).

     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 has the burden of proving fraud by clear and

convincing evidence.     Rule 142(b).    To satisfy this burden,

respondent must prove that petitioner 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. 654, 661 (1990).

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

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

96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir. 1992).         Fraud


     4
       In addition, with respect to the taxable year 1987,
respondent has determined an addition to tax pursuant to sec.
6653(b)(1)(B) in an amount equal to 50 percent of the interest
due on the underpayment attributable to fraud.
                              - 22 -


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, 223-224 (1971); Otsuki v.

Commissioner, 53 T.C. 96, 105-106 (1969).

     Courts have developed several indicia of fraud, 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) filing false Forms W-4, (8) failure to

make estimated tax payments, (9) dealing in cash, (10) engaging

in illegal activity, and (11) attempting to conceal illegal

activity.   Bradford v. Commissioner, 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.   Miller v.

Commissioner, 94 T.C. 316, 334 (1990).

     The strongest evidence of fraud in this case is the method

in which petitioner received income from the restaurants.

Petitioner instructed Pat Bartley, the manager of the Salinas
                               - 23 -


Peppertree Restaurant, to remove cash directly from the

restaurant's cash register and place the money in an envelope.

Mr. Beretta ordered Ms. Bartley to account for the skimmed

proceeds as a miscellaneous expense in the daily sales book.

     In addition, petitioner suggested to Mr. Longfellow that

they skim money directly from the Atascadero Peppertree

Restaurant cash register.   In order to account for the skimmed

proceeds, Mr. Longfellow would make false overrings on the cash

register and then remove an amount equal to the false overring.

     We find that petitioner's entire course of conduct reveals

that he willfully intended to conceal income and prevent the

collection of tax he knew was owing on the skimmed income.

Petitioner skimmed money directly from the cash registers in

order to make it difficult to determine that he was receiving

income from the restaurants and to ensure that no record existed

of the amount of money that he was deriving from the restaurants.

In addition, petitioner received all of his income from the

restaurant in cash in order to make the detection of skimming

activity more difficult.    Petitioner also ensured that his name

was not on any of the business records for any of the restaurants

in which he was involved.   Fraud may be inferred from conduct

intended to conceal income.    Gajewski v. Commissioner, supra;

Stone v. Commissioner, supra at 224.
                              - 24 -


     We also find it persuasive that the skimming from the

restaurants continued for a number of years.    Courts have held

that consistent understatements of income in substantial amounts

over a number of years by knowledgeable taxpayers are persuasive

evidence of fraudulent intent to evade taxes.    Baumgardner v.

Commissioner, 251 F.2d 311, 322 (9th Cir. 1957), affg. T.C. Memo.

1956-112; Otsuki v. Commissioner, supra at 107-108.

     Another important factor in this case is Mr. Beretta's

knowledge of the tax laws.   The intelligence and sophistication

of the taxpayer, especially his knowledge of the tax laws, is an

important factor in determining whether he committed fraud.

Scallen v. Commissioner, 877 F.2d 1364, 1370-1371 (8th Cir.

1989), affg. T.C. Memo. 1987-412.   Mr. Beretta was employed by

the Internal Revenue Service as a revenue officer for nearly 30

years.   Mr. Beretta was trained to identify tax examination

situations and to inform taxpayers of their obligation to pay

taxes.   In addition, he investigated taxpayers who had failed to

file tax returns.

     Petitioner asserts that he honestly believed that the

proceeds were repayment for interest-free loans made to the

restaurants.   We find it difficult to believe that a person with

petitioner's knowledge of tax law would not know that the receipt

of cash directly from the cash registers of the restaurants he

owned was not taxable.   There was no loan schedule nor were there
                             - 25 -


any records of the amounts that petitioner was receiving.

Nothing in the entire course of conduct surrounding these

payments indicates that a legitimate loan was being repaid.

     Based upon these indicia, we find that respondent has

carried the burden of showing by clear and convincing evidence

that petitioner's failure to report income for 1987, 1988, 1989,

and 1990 was fraudulent with the intent to evade his tax.

Because we have found that respondent has proven fraud with

respect to portions of the underpayments, the entire

underpayments shall be treated as attributable to fraud because

petitioner has not established by a preponderance of the evidence

that any portion is not attributable to fraud.   Secs. 6653(b)(2),

6663(b).

     To reflect the foregoing,

                                        Decision will be entered

                                   under Rule 155.
