                      T.C. Memo. 2001-270



                    UNITED STATES TAX COURT



             EUGENE A. BECK, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


    Docket Nos. 12215-99, 12216-99,   Filed October 9, 2001.
                12217-99.


    Eugene A. Beck, pro se.

    Tracey A. Martinez, for respondent.




    1
      Cases of the following petitioners are consolidated
herewith: Eugene A. Beck, docket No. 12216-99 and Beck's Village
West Liquors, Ltd., docket No. 12217-99.
                               - 2 -

                              CONTENTS


FINDINGS OF FACT   . . . . . . . . . . . . . . . . . . . . . . . 5

I.    Background . . . . . . . . . . . .   . . . . .   . . . .   .   .   .   6
       A. Formation and Titling of Stock   in Beck's   Liquors   .   .   .   6
       B. Purchases of Condominiums . .    . . . . .   . . . .   .   .   .   7
       C. Officers . . . . . . . . . . .   . . . . .   . . . .   .   .   .   8
       D. Operation of the Business . .    . . . . .   . . . .   .   .   .   8

II.   Audit of Returns . . . . . . . . . . . . . . . . . . . .           14

OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .            19

Issues 1, 2, & 3: Whether Beck's Liquors Is Liable for the Fraud
          Penalty Under Section 6663(a) for Each of the Years at
          Issue, and Whether Mr. Beck Is Liable for the Fraud
          Penalty Under Section 6663(a) for Fraudulently
          Understating His Income on His 1991 Federal Income Tax
          Return and Under Section 6651(f) for Fraudulently
          Failing To File Federal Income Tax Returns for 1992 and
          1993. . . . . . . . . . . . . . . . . . . . . . . . 19

I.    Underpayment of Tax . . . . . . . . . . . . . . . . . . . 20
       A. Gross Receipts of Beck's Liquors . . . . . . . . . . 21
            1. State Bank Deposits . . . . . . . . . . . . . . 21
            2. Cash Payments . . . . . . . . . . . . . . . . . 22
                 a. Cash From Till . . . . . . . . . . . . . . 22
                 b. Gambling Losses . . . . . . . . . . . . . 22
                 c. Insurance Payment . . . . . . . . . . . . 23
            3. Nonincome Items . . . . . . . . . . . . . . . . 25
       B. Disallowed Expenses . . . . . . . . . . . . . . . . 26
            1. Payments in Lieu of Wages . . . . . . . . . . . 28
            2. Vehicle Expenses and Depreciation . . . . . . . 28
            3. Annual Meeting Expenses . . . . . . . . . . . . 29
            4. Travel Expenses and Entertainment Expenses . . 30
                 a. Las Vegas Expenses . . . . . . . . . . . . 30
                 b. Other Meal and Entertainment Expenses . . 31
                 c. Cost of Tickets To Various Sporting Events
                        . . . . . . . . . . . . . . . . . . . . 32
            5. Insurance, Condominium Fees, Utilities, and
                 Property Taxes Paid for Residences of Mr. Beck,
                 Michael, and/or Michelle . . . . . . . . . . . 33
            6. Charges on the Corporate Visa Card for Mr. Beck's
                 Personal Expenses . . . . . . . . . . . . . . 34
            7. Mrs. Beck's Memorials, Funeral, and Medical
                 Expenses . . . . . . . . . . . . . . . . . . . 34
                                 - 3 -

       C.   Conclusion . . . . . . . . . . . . . . . . . . . . .   35

II.   Intent To Evade Taxes . . . . . . . . . . . . . . . . . 35
      A. Badges of Fraud . . . . . . . . . . . . . . . . . . 36
           1. Failure To Report Income Over an Extended Period of
                Time . . . . . . . . . . . . . . . . . . . . . 37
           2. Failure To File a Tax Return . . . . . . . . . . 39
           3. Concealment of Bank Accounts From Internal Revenue
                Agent, Failure To Furnish the Government With
                Access To His Records, and Failure To Cooperate
                With Tax Authorities . . . . . . . . . . . . . 39
           4. Failure To Keep Adequate Books and Records . . 40
           5. Dealing in Cash . . . . . . . . . . . . . . . . 40
           6. Taxpayer’s Experience and Knowledge, Especially
                Knowledge of Tax Laws . . . . . . . . . . . . 41
           7. Taxpayer's Implausible Explanations of Conduct
                Given at Trial . . . . . . . . . . . . . . . . 41
           8. Participation in Illegal Activities or Concealment
                of an Illegal Activity . . . . . . . . . . . . 41
      B. Conclusion . . . . . . . . . . . . . . . . . . . . . 42

Issue 4.    Whether Petitioner Mr. Beck Received Constructive
            Dividends From Beck's Liquors in 1992 and 1993 in the
            Respective Amounts of $151,448 and $117,641 . . . . 43

I.    Ownership of Stock of Beck's Liquors   . . . . . . . . . .   43

II.   Constructive Dividends . . . . . . . . . . . . . . . . .     45
      A. Diverted Corporate Income . . . . . . . . . . . . .       46
      B. Remaining Expenses . . . . . . . . . . . . . . . . .      48


               MEMORANDUM FINDINGS OF FACT AND OPINION


       PARR, Judge:   Respondent determined deficiencies and

penalties in petitioners' Federal income taxes for 1991, 1992,

and 1993 as follows:
                                   - 4 -

                          Eugene A. Beck
                  docket Nos. 12215-99, 12216-99

                                              Penalty
          Year        Deficiency           Sec. 6663(a)

          1991        $28,517.92            $21,388.44
          1992         41,509.00             31,131.75
          1993         30,649.00             22,986.75

                 Beck's Village West Liquors, Ltd.
                       docket No. 12217-99

                                               Penalty
          Year          Deficiency           Sec. 6663(a)

          1991          $44,274.16           $32,127.00
          1992           23,047.49            17,285.62
          1993           37,064.66            26,407.50

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years at issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     The issues for decision are as follows:2

     1.   Whether Beck's Village West Liquors, Ltd. (Beck's

Liquors or the corporation) is liable for the fraud penalty under

section 6663(a) for each of the years at issue.      We hold that it


     2
      Respondent determined that Beck's Liquors overstated its
cost of goods sold in the respective amounts of $3,014 and
$11,474 on its 1991 and 1993 Federal corporate income tax returns
and understated its cost of goods sold in the amount of $39,004
on its 1992 Federal corporate income tax return. Petitioners do
not contest those adjustments. Additionally, the notices of
deficiency contain adjustments to Beck's Liquors deductions for
charitable contributions and to Mr. Beck's taxable Social
Security benefits. These are computational adjustments which
will be affected by the outcome of the other issues to be
decided, and we do not separately address them.
                                - 5 -

is not, and, therefore, the period for assessing a deficiency has

expired.

     2.    Whether Eugene A. Beck (Mr. Beck) is liable for the

fraud penalty under section 6663(a) for fraudulently understating

his income tax on his 1991 Federal income tax return.    We hold

that he is not, and, therefore, the period for assessing a

deficiency has expired.

     3.    Whether Mr. Beck is liable for the penalty

under section 6651(f) for fraudulently failing to file Federal

income tax returns for 1992 and 1993.3    We hold that he is not.

     4.    Whether Mr. Beck received constructive dividends from

Beck's Liquors in 1992 and 1993 in the respective amounts of

$151,448, and $117,641.4    We hold that he received constructive

dividends in lesser amounts to be computed under Rule 155 in

accordance with the Court's finding and conclusions.

                           FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are


     3
      In the notice of deficiency issued to Mr. Beck for 1992 and
1993, respondent determined that Mr. Beck was liable for the
penalty for fraud under sec. 6663(a). In the answer, respondent
conceded that Mr. Beck was not liable under sec. 6663(a), but
alleged that Mr. Beck was liable under sec. 6651(f).
     4
      In the notice of deficiency issued to Mr. Beck for 1992 and
1993, respondent determined that Mr. Beck failed to report
interest income in the respective amounts of $35 and $26. Mr.
Beck did not challenge that determination in his petition, and it
is not at issue in these cases.
                                - 6 -

incorporated herein by this reference.

I.   Background

      At the time the petitions in these cases were filed, Mr.

Beck resided in Fargo, North Dakota, and Beck's Liquors had its

principal place of business in Fargo, North Dakota.    At the time

of the trial in this case, Mr. Beck was 73 years old.

      A.   Formation and Titling of Stock in Beck's Liquors

      In 1977, Mr. Beck and his then wife, Gretchen Beck (Mrs.

Beck), started a liquor store business in Fargo, North Dakota,

known as Village West Liquors.5   Mr. Beck also had another liquor

store/bar known as Vega Ltd.    Because Mr. Beck owned Vega Ltd.,

the Becks treated Mrs. Beck as the owner of Village West Liquors.

     For liability purposes, the Becks decided to incorporate the

liquor store business.   On January 14, 1981, the Becks

incorporated Beck's Liquors.    Mrs. Beck transferred the business

of Village West Liquors with a net value of $30,000 to Beck's

Liquors in exchange for 30,000 shares of the common stock of

Beck's Liquors.

     The Becks have two children, Michael and Michelle.   Every

year from 1983 to 1987, Mrs. Beck transferred title to 3,000

shares of the stock of Beck's Liquors to each of her children.

By July 1987, Michael and Michelle each held title to 15,000

shares of the common stock of Beck's Liquors.


      5
       Before Mr. Beck operated the liquor store, he was a farmer.
                                - 7 -

     In 1988, Michelle and her husband were having marital

difficulties.    In order to avoid a claim by Michelle's husband to

the shares of Beck's Liquors stock titled in Michelle's name,

title to the shares was transferred to Michael for $1.    The

corporate minutes specify that the corporation would issue 30,000

new shares of stock to Michelle after Mr. and Mrs. Beck had died.

     Although the stock of Beck's Liquors was originally titled

in Mrs. Beck's name and then transferred to the children, the

Becks did not intend for the children to have any control over

the stock, the corporation, or the business until after their

deaths.   Michael and Michelle were never told that they held

title to any shares of Beck's Liquors stock.    The corporate

minutes specify that Mr. and Mrs. Beck would operate the business

during their lifetime.

     B.   Purchases of Condominiums

     In 1987 or 1988, Beck's Liquors paid $60,000 in cash for a

condominium.    The condominium was titled in the name of the

corporation, but Mr. and Mrs. Beck lived in the condominium.    In

1988, Beck's Liquors also purchased a condominium for Michael.

Michael paid the condominium fees and utilities, and Beck's

Liquors paid the real estate taxes.

     On June 16, 1991, Mr. and Mrs. Beck were in an automobile

accident.   Mrs. Beck was killed instantly.
                                - 8 -

     C.   Officers

     During the years at issue, the following persons were

officers of Beck's Liquors:

                               1991

              President                     Gretchen Beck
              Vice president                Michael Beck
              Secretary                     Michelle Beck
              Treasurer                     Eugene Beck

                               1992

              President and Treasurer       Eugene Beck
              Vice president                Michael Beck
              Secretary                     Michael Beck

                               1993

              President                     Michael Beck
              Vice president                Michelle Beck
              Secretary and Treasurer       Eugene Beck

     D.   Operation of the Business

     In the 1980s, Mr. Beck worked at the liquor store in the

morning, an employee, Jim Grandbois (Mr. Grandbois) worked in the

afternoon, and Mrs. Beck closed the store.      Mrs. Beck cleaned

houses during the day and worked in the liquor store at night.

     From 1990 through the years at issue, Mr. Grandbois worked

full time and managed the store.      In addition to his wages,

Beck's Liquors provided Mr. Grandbois with basic health insurance

through Protective Life.

     During the years at issue, employees of Beck's Liquors often

cashed their paychecks at the store and occasionally used cash

from the till to pay for some minor store expenses; most store
                               - 9 -

expenses were paid by check.   The paychecks written on the

corporate account were not included with the daily bank deposits.

Paychecks were cashed from the till in the amounts of $14,118 in

1991, $18,002 in 1992, and $2,382 in 1993.    Expenses were paid

from cash taken from the till in the amounts of $138 in 1991,

$3,632 in 1992, and $1,709 in 1993.

     Each day, Mr. Grandbois removed all but $100 of the

currency, along with checks, receipts, and other miscellaneous

items from the two cash tills in the store.    He placed everything

he removed from the tills into a deposit bag.    The next morning,

he took the tapes out of the cash register and placed them in the

deposit bags.

     Each day, Mr. Beck picked up the deposit bag and took it to

his home, where he would count the money and prepare a deposit

slip.   Because of the store's close proximity to the Canadian

border, some of the cash was in Canadian currency.    Mr. Beck kept

a lock box in his home.   Often, he had in excess of $50,000 in

cash in the lock box.   Mr. Beck used the cash to exchange the

Canadian currency with U.S. currency at the exchange rate.    The

U.S. currency was then included in the deposit.

     Mr. Beck traveled to Las Vegas, Nevada, to exchange the

Canadian currency to U.S. currency and to gamble.    In 1991, he

went to Las Vegas four or five times.   In later years the

exchange rate was lower, and Mr. Beck went less often.    Mr. Beck
                              - 10 -

usually took $10,000 to $15,000 in Canadian money to exchange on

each trip and stayed in Las Vegas for 3 or 4 days.    The banks in

Fargo charged a fee of 5 to 7 percent above the exchange rate but

the casinos charged at the exchange rate.    Mr. Beck thought that

a better exchange rate given by the casinos exceeded and

justified the cost of the trips.    Beck's Liquors paid for Mr.

Beck's travel to Las Vegas and deducted the expenses on its

Federal income tax returns.   Mr. Beck played blackjack only and

"did very well" during the years at issue.    He won $1,400 in

1991, $8,300 in 1992, and $12,000 in 1993.    He did not report any

gambling winning on his or the corporation's Federal income tax

returns for the years at issue.    He did report $20,000 of

gambling winnings on the corporation's 1994 return.

     Beck's Liquors maintained corporate accounts at State Bank

of Fargo, Norwest Bank, and Merrill Lynch.    Mrs. Beck maintained

a personal account at Gate City Bank.    Mr. Beck did not

maintained a personal checking account; he paid for his personal

expenses in cash.

     During the years at issue, Mr. Beck kept the books and

records for Beck's Liquors and had the primary responsibility for

operating the store.   Beck's Liquors, however, did not maintain a

formal record keeping system for income and expense items.        Mr.

Beck kept ledger sheets on the back of a deposit book.      The

ledger sheets and cash register tapes were destroyed in July 1993
                              - 11 -

when the roof leaked.

     Every summer, the Becks spent one or two weeks in a cabin at

a resort on Lake Melissa in Detroit Lakes, Minnesota.    Michelle

and her three children stayed a week, and Michael stayed a couple

days.   The corporate minute book reflects that the annual

stockholders meeting was held at the lake, and Beck's Liquors

paid the expenses incurred by the Becks for the vacation.

     Up until the time of Mrs. Beck's death, Beck's Liquors paid

her a wage and officer's compensation.    At the time of her death,

Mrs. Beck had between $50,000 and $60,000, of which $26,000 was

in cash.   Mrs. Beck also had $6,604 in an IRA, the beneficiaries

of which were Michael and Michelle.    Two checks for $3,302

distributed from the IRA and a $1,000 check from her burial

insurance were deposited into Beck's Liquors checking account.

Some friends sent checks totaling approximately $9,500 to Mr.

Beck as memorials for Mrs. Beck.   The checks were deposited into

Beck's Liquors checking account, and Mr. Beck wrote checks to

churches and charitable organizations in memory of Mrs. Beck.

Some of Mrs. Beck's funeral expenses were paid from Beck's

Liquors checking account.

     The insurance company paid for the vehicle that was

destroyed in the accident.   The vehicle was owned by Beck's

Liquors.   A check for $6,535 was issued on July 31, 1991, and, on

August 12, 1991, $6,535 was deposited into the corporation's
                               - 12 -

Merrill Lynch account.   In addition to the payment for the loss

of the car, the insurance company paid to Mr. Beck death benefits

of $4,934 in 1991, $6,543 in 1992, and $5,328 in 1993.

     Beck's Liquors never paid Mr. Beck a salary.    During the

years at issue, Mr. Beck received Social Security benefits but

did not receive a salary or wages from any source.    Mr. Beck

received Social Security payments in 1991, 1992, and 1993 in the

respective amounts of $2,436, $2,836, and $2,923.    Beck's Liquors

paid a share of the expenses related to an office in the

condominium in which Mr. Beck resided and garage storage in two

garages.   Mr. Beck used the corporate VISA credit card to pay for

his personal expenses in addition to corporate expenses.    He

charged meals and travel expenses that were deducted as

entertainment expenses on the corporate returns.

     Michael worked as a custodian for Blue Cross/Blue Shield and

Red Lobster.   He also worked in the liquor store on Friday

nights.    He stocked shelves, filled the cooler, dusted shelves,

swept the floors, and occasionally took deposits to the Bank and

picked up freight from the liquor companies.    In 1992, Beck's

Liquors paid $9,400 in cash for a Mercury Topaz for Michael.      He

drove the Topaz when he ran errands for the store.    During the

years at issue, Beck's Liquors did not pay Michael cash for the

work he did in the store.    In lieu of wages, Beck's Liquors paid

the real estate taxes on the condominium in which Michael
                               - 13 -

resided, the insurance on the Topaz, and the premium on Michael's

life insurance policy.

     During the years at issue, Michelle received public

assistance and resided in Minnesota.    After Mrs. Beck died,

Michelle frequently drove with her three young children to Fargo

to help Mr. Beck.   At the time, Michelle owned an old Ford

Mustang that did not have air conditioning, and Mr. Beck drove a

Buick Century, titled in the name of the corporation.    In order

to make Michelle's drive to Fargo more comfortable, Mr. Beck

traded the Buick for the Mustang.   Beck's Liquors, however,

retained title to the Buick.   Mr. Beck drove the Mustang during

the summer of 1991 and then traded the Mustang for a new

Oldsmobile.   The Oldsmobile was titled in the name of Beck's

Liquors.   For the occasional work Michelle performed for the

store, Beck's Liquors paid for the insurance on the Buick she

drove.

     In August 1992, Michelle purchased a house in Cottage Grove,

Minnesota, for $80,000.   The $1,000 downpayment was paid by a

check drawn on Beck's Liquors checking account.    The balance of

the purchase price was paid with cash from a loan secured by

certificates of deposit (CDs) owned by Beck's Liquors.     Mr. Beck

paid the balance of the loan with cash payments of $35,000 in

1992 and $44,000 in 1993.
                                - 14 -

      In 1991, Beck's Liquors paid off a $5,000 loan with cash.

In 1992, Mr. Beck purchased a diamond ring for $10,655 in cash.6

      Mr. Beck prepared and filed corporate income tax returns for

Beck's Liquors for tax years 1991, 1992, and 1993.    Mr. Beck

prepared and filed his individual income tax return, Form 1040,

for tax year 1991.    He did not file individual income tax

returns, Forms 1040, for tax years 1992 and 1993.

II.   Audit of Returns

      In 1993, the Internal Revenue Service (IRS) reviewed the

records of businesses in the Fargo area to ensure that the

businesses had properly reported cash transaction of $10,000 or

more.     A review of the records of a car dealership revealed that

Beck's Liquors purchased a car for approximately $9,000 in cash.

On the basis of that cash transaction, the IRS conducted an audit

of Beck's Liquors returns for 1991 and 1992.    Later, the agent

included the return for 1993.

      The IRS agent interviewed Mr. Beck.   Mr. Beck cooperated

with the agent.     He gave the agent his checks, invoices, and cash

register receipts, which were his only records.    He did not make

misleading statements to, or give misleading documents to,

respondent's agents.

      Because Beck's Liquors had no formal books, the IRS agent



      6
        Mr. Beck remarried in 1994 and gave the ring to his present
wife.
                                - 15 -

reconstructed the corporation's income using canceled checks,

bank statements, invoices, and cash register receipts.   The agent

identified all of the accounts of Beck's Liquors and the Becks.

The agent analyzed the deposits made to the accounts and excluded

all deposits that the agent believed were nontaxable, including

transfers between accounts.   The agent also obtained other

documents, such as statements from casinos and forms reporting

cash transactions.   Statements from two casinos showed gambling

losses of $20,600 in 1991 and $15,700 in 1992.   The agent

concluded that Beck's Liquors had income in 1991, 1992, and 1993

from Mr. Beck's use of the corporation's cash that was not

deposited into any corporate account.    He also concluded that Mr.

Beck had income from the use of corporate funds to make the cash

purchases and to pay funeral and memorial expenses of Mrs. Beck

and personal living expenses of Mr. Beck and his children.

     The agent referred the case to the Criminal Investigation

Division.   The case was assigned to a special agent and finally

to the Department of Justice.    The Department of Justice declined

to prosecute Mr. Beck.   In 1997, the case was returned to the

original IRS agent for civil closing.

     The agent met with Mr. Beck two or three times.   The first

time Mr. Beck saw the proposed adjustments was during one of

these meetings.   The agent prepared a report and the matter went

to Appeals.   On April 9, 1999, respondent mailed to Beck's
                               - 16 -

Liquors and to Mr. Beck notices of deficiency for the taxable

years 1991, 1992, and 1993.

     Using the bank deposits and cash expenditures method,

respondent determined that Beck's Liquors underpaid its tax by

$44,274.16 in 1991, $23,047.49 in 1992, and $37,064.66 in 1993.

      Respondent asserts that Beck's Liquors underreported its

income by the following amounts:

                                 1991       1992         1993
Unreported gross receipts       74,453      115,133       84,782
Cost of goods sold               3,014      (39,004)      11,474
Disallowed expenses             46,060       26,476       30,204
 Total unreported income       123,527      102,605      126,460

     Respondent's adjustments to the gross receipts of Beck's

Liquors were computed as follows:

                                1991         1992         1993
State Bank deposits           1,574,706    1,475,700    1,554,350
Cash payments                    85,164      101,305       75,487
Nonincome items                (404,324)    (335,616)    (391,143)
 Total gross receipts         1,255,546    1,241,389    1,238,694
Reported on return            1,181,093    1,126,256    1,153,912
Unreported gross receipts        74,453      115,133       84,782

     The cash payments were identified as follows:

Cash payments                   1991        1992         1993
 Cash expenses--till                138       3,632        1,709
 Wage--till                      14,118      18,002        2,382
 Gambling losses                 20,600      15,700         –-
 Insurance proceeds               6,535        –-           –-
 State Bank CD                   27,500        –-           –-
 Norwest Bank                     2,273       2,316        4,026
 Gate City S&L                    9,000        –-           –-
 Loan payments                    5,000      35,000       44,000
                             - 17 -

 Purchase of ring                –-        10,655          –-
 Purchase of car                 –-         9,400          –-
 Merrill Lynch                   –-         6,600          –-
 Deposit subsequent year         –-          –-          23,370
  Total cash payments          85,164     101,305        75,487

     The nonincome items did not include $6,604 from Mrs. Beck's

IRA, a $1,000 check from her burial insurance, and gifts totaling

approximately $9,500 from friends given to Mr. Beck in memorial

to Mrs. Beck that were deposited into the corporation's accounts.

     Respondent made adjustments to the deductions for expenses

as follows:
                                                 - 18 -
                              1991                        1992                            1993
                   Return     Exam    Adjust.    Return     Exam     Adjust.    Return     Exam     Adjust.
Wages              26,658    16,220   10,438     31,394    32,649    (1,255)    33,567    33,078       489
Repairs             5,322     2,605    2,717      2,893        690    2,203      1,110       371       739
Bad debts           1,250       -0-    1,250      2,017        -0-    2,017      2,274       -0-     2,274
Rents              47,015    45,136    1,879     46,966    45,946     1,020     46,119    44,864     1,255
Taxes               3,594     1,361    2,233      3,031     1,190     1,841      5,701         20    5,681
Interest            1,079       -0-    1,079        567        -0-      567        748       -0-       748
Depreciation        5,390     1,340    4,050      6,890     1,340     5,550      7,466     1,186     6,280
Payroll tax        10,344     7,538    2,806      8,953     8,935        18     11,199    10,292       907
Advertising        10,647     9,016    1,631      9,327     6,432     2,895      9,582     6,120     3,462
Cleaning            3,279     1,198    2,081        -0-        145     (145)       -0-       295      (295)
Entertmnt. 80%      2,600        18    2,582      2,948        230    2,718      2,367       -0-     2,367
Utilities          10,733     9,635    1,098     10,657     9,259     1,398     11,588    10,008     1,580
Security              540       540      -0-        540        540      -0-        540       540       -0-
Bus. expense        2,091       267    1,824      2,140     1,075     1,065      2,204       404     1,800
License             2,730     1,400    1,330      1,850        700    1,150        -0-     2,130    (2,130)
Supplies            9,284     8,578      706      8,614     9,173      (559)     5,944     6,451      (507)
Insurance           6,197       740    5,457      3,657        740    2,917      3,105       745     2,360
Legal                 497       497      -0-        -0-        -0-      -0-        200       200       -0-
Job service           105        84       21        256        256      -0-        258       258       -0-
Dues & subs.          972       -0-      972      1,102         75    1,027      1,044       810       234
Auto. exp.          4,409     1,200    3,209      3,913     1,200     2,713      4,234     1,200     3,034
Bank charges        1,550     2,293     (743)     3,330     5,427    (2,097)     3,596     5,909    (2,313)
Workmen's comp.       193       193      -0-        325        325      -0-        529       529       -0-
Ann. mtg. exp.      1,254       -0-    1,254      1,084        -0-    1,084        910       -0-       910
State withng.         -0-       -0-      -0-        349        -0-      349        396       -0-       396
ND income tax        --       1,814   (1,814)     2,710     2,710       -0-        933       -0-       933
  Total           157,733   111,673   46,060    155,513   129,037    26,476    155,614   125,410    30,204
                              - 19 -

     Respondent determined that the following payments by Beck's

Liquors were constructive dividends to Mr. Beck:

                                     1991      1992       1993
Condo association fees                1,276     1,014        980
Insurance-condos, vehicles            3,687     1,866      1,830
Diverted corporate income            74,453   115,133     84,782
Credit card--personal expenses       14,095    14,993     16,193
Auto expense/repairs                 10,152     7,294      4,679
Miscellaneous                          -0-        378        254
Advertising/personal ticket use         200       200        200
Condo utilities                       1,098     1,398      1,580
Other personal expenses              15,237     5,239      2,221
Property taxes                        1,780     1,750      3,296
Annual meeting expenses               1,461     2,183      1,626
 Total                              123,439   151,448    117,641

     As a result of respondent's determination that Mr. Beck

received constructive dividends from Beck's Liquors in each of

the years at issue, respondent determined that Mr. Beck underpaid

his taxes in 1991, 1992, and 1993, respectively, in the amounts

of $28,517.92, $41,509.00, and $30,649.00.

                              OPINION

Issues 1, 2, & 3: Whether Beck's Liquors Is Liable for the Fraud
Penalty Under Section 6663(a) for Each of the Years at Issue, and
Whether Mr. Beck Is Liable for the Fraud Penalty Under Section
6663(a) for Fraudulently Understating His Income on His 1991
Federal Income Tax Return and Under Section 6651(f) for
Fraudulently Failing To File Federal Income Tax Returns for 1992
and 1993.

     Respondent asserts that Beck's Liquors is liable for the

fraud penalty under section 6663(a) for each of the years at

issue, and that Mr. Beck is liable for the fraud penalty under

section 6663(a) for fraudulently understating his income on his
                               - 20 -

1991 Federal income tax return and under section 6651(f) for

fraudulently failing to file Federal income tax returns for 1992

and 1993.

     Respondent has the burden of proving fraud by clear and

convincing evidence.   Sec. 7454(a); Rule 142(b); Parks v.

Commissioner, 94 T.C. 654, 660 (1990).   Respondent must prove by

clear and convincing evidence (1) that petitioners underpaid

their taxes in each year and (2) that petitioners intended to

evade taxes by conduct intended to conceal, mislead, or otherwise

prevent tax collection.    Parks v. Commissioner, supra at 660-661.

I.   Underpayment of Tax

      First, respondent must prove by clear and convincing

evidence the existence of an underpayment of tax for each of the

years at issue.   For fraud purposes, respondent may not rely upon

petitioners' failure to carry the burden of proof as to the

underlying deficiency. Id.; Petzoldt v. Commissioner, 92 T.C.

661, 700 (1989); Estate of Beck v. Commissioner, 56 T.C. 297, 363

(1971).

      Respondent asserts that, using the bank deposits and cash

expenditures method, Beck's Liquors underpaid its tax by

$44,274.16 in 1991, $23,047.49 in 1992, and $37,064.66 in 1993.

Respondent asserts that Mr. Beck received constructive dividends

from Beck's Liquors in each of the years at issue, and, as a

result, Mr. Beck underpaid his taxes in 1991, 1992, and 1993,
                                - 21 -

respectively, in the amounts of $28,517.92, $41,509.00, and

$30,649.00.

     If a taxpayer does not maintain adequate books and records,

the Commissioner may reconstruct the taxpayer's income by any

reasonable method which clearly reflects income.     Sec. 446(b);

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

v. Commissioner, 33 F.3d 991, 992-993 (8th Cir. 1994), affg. T.C.

Memo. 1993-423.     The bank deposits and cash expenditures method

is a rational way to reconstruct income.      See Caulfield v.

Commissioner, supra at 993; Parks v. Commissioner, supra at 658;

Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd.

566 F.2d 2 (6th Cir. 1977).

        Respondent asserts that Beck's Liquors underreported its

income by $123,527 for 1991, $102,605 for 1992, and $126,460 for

1993.

     A.    Gross Receipts of Beck's Liquors

     Respondent determined unreported gross receipts of Beck's

Liquors totaling $74,453 for 1991, $115,133 for 1992, and $84,782

for 1993.

            1.   State Bank Deposits

     Petitioners do not dispute the amounts of the State Bank

deposits.     Bank deposits are prima facie evidence of income.

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason

v. Commissioner, supra at 656-657.
                                 - 22 -

          2.     Cash Payments

     Respondent included in the gross receipts of Beck's Liquors

items identified as cash payments totaling $85,164 in 1991,

$101,305 in 1992, and $75,487 in 1993.     Petitioners dispute that

these items were gross receipts of Beck's Liquors.

                  a.   Cash From Till

     Employees of Beck's Liquors often cashed their paychecks at

the store and occasionally used cash from the till to pay for

some minor store expenses; most store expenses were paid by

check.   The paychecks written on the corporate account were not

included with the daily bank deposits.    Because Mr. Beck used the

deposits to calculate gross receipts, the cash used to cash the

checks and pay the expenses was omitted from the computation of

gross receipts.    Paychecks were cashed from the till in the

amounts of $14,118 in 1991, $18,002 in 1992, and $2,382 in 1993.

Expenses were paid from cash taken from the till in the amounts

of $138 in 1991, $3,632 in 1992, and $1,709 in 1993.    Beck's

Liquors underreported its gross receipts in those amounts in the

years at issue.

                  b.   Gambling Losses

     On the basis of reports from two casinos, respondent asserts

that Mr. Beck used corporate cash to pay for gambling losses in

1991 and 1992.    Records from the Mirage casino indicate that Mr.

Beck lost $1,000 in 1991.     Records from the Riviera casino show
                                 - 23 -

that Mr. Beck lost $19,600 in 1991 and $15,700 in 1992, and won

$3,200 in 1993.    Mr. Beck, however, did not have gambling losses

during the years at issue.     Rather, he had gambling winnings of

$1,400 in 1991, $8,300 in 1992, and $12,000 in 1993.     Mr. Beck

did not report the gambling winnings on his individual returns or

the corporation's returns for the years at issue.     Because he

gambled with the corporation's Canadian currency, Mr. Beck

thought that the winnings were taxable to Beck's Liquors.

Therefore, in an attempt to "correct" the omission, he reported

$20,000 of gambling winnings on the corporation's 1994 return.

     The winnings, however, are not the income of Beck's Liquors.

Even though Mr. Beck used corporate funds for gambling, the

winnings are Mr. Beck's income and represent his unreported

income in the years at issue.     In computing the income of Beck's

Liquors, however, we find that the cash expenditures should not

include gambling losses.     Furthermore, the cash winnings

represent a source of cash, and the cash expenditures should be

reduced by $1,400 in 1991, $8,300 in 1992, and $12,000 in 1993.

                  c.   Insurance Payment

     The insurance payment was for the vehicle that was destroyed

in the accident in which Mrs. Beck was killed.     The vehicle was

owned by Beck's Liquors.     Respondent included insurance proceeds

of $6,604 in the gross receipts of Beck's Liquors because,

respondent asserts, there was no business use and Mr. Beck cashed
                                - 24 -

the check and received the money.    Contrary to respondent's

assertion, however, the record shows that the insurance company

issued a check for $6,535 on July 30, 1991 and $6,535 was

deposited into the corporation's Merrill Lynch account on August

12, 1991.   Mr. Beck did not receive the money.    The insurance

payment was for a casualty loss that occurred in the year of the

payment.    Respondent has not established that there was a gain on

the receipt of the insurance payment (i.e., that the basis in the

vehicle was less than the amount of the payment).     We find that

the payment is income neither to the corporation nor to Mr. Beck.

                 d.   Remaining Cash Payments

     Mr. Beck contends that the following cash payments were not

income because they were made with cash Mrs. Beck had accumulated

before her death:

                                     1991         1992       1993
  Purchase of ring                    –-        $10,655       –-
  Purchase of car                     –-          9,400       –-
  Loan payments                     $5,000       35,000    $44,000
  State Bank CD                     27,500         –-         –-
  Norwest Bank                        –-           –-        4,026
  Gate City S&L                      9,000         –-         –-
   Total                            41,500       55,055     48,026

     At the time of her death, Mrs. Beck had between $50,000 and

$60,000, of which only $26,000 was in cash.     The cash

expenditures for 1991 should be reduced to reflect the $26,000

available to Mr. Beck.
                                   - 25 -

     In addition to Mrs. Beck's cash, Mr. Beck received Social

Security payments in 1991, 1992, and 1993 in the respective

amounts of $2,436, $2,836, and $2,923.        The corporation paid most

of Mr. Beck's living expenses, meals, condominium fees,

utilities, car expenses, and entertainment and travel expenses.

Mr. Beck did not deposit his Social Security checks into any bank

account.    He kept the money in cash.      Respondent has not

established that the cash was not available for the cash

payments.

     We have also found that Mr. Beck's gambling winnings should

be included in the cash available.

            3.   Nonincome Items

     Mr. Beck asserts that the amount of nonincome items should

be increased to reflect $6,604 from Mrs. Beck's IRA, a $1,000

check from her burial insurance, gifts from friends totaling

approximately $9,500 given to Mr. Beck in memorial to Mrs. Beck,

and death benefits paid to Mr. Beck.

     Mrs. Beck had $6,604 in an IRA, the beneficiaries of which

were Michael and Michelle.    Two checks for $3,302 distributed

from the IRA and a $1,000 check from her burial insurance were

deposited into Beck's Liquors checking account.        The nonincome

items should be increased to reflect those nontaxable deposits.

     Friends sent checks totaling approximately $9,500 to Mr.

Beck as memorials for Mrs. Beck.       The checks were deposited into
                                - 26 -

Beck's Liquors checking account.    The nonincome items should be

increased to reflect those nontaxable deposits.

     The insurance company paid to Mr. Beck death benefits of

$4,934 in 1991, $6,543 in 1992, and $5,328 in 1993.     The

insurance payments were deposited into the State Bank account.

The payments are not income to Beck's Liquors, and the nonincome

amount should be increased by those amounts.

     B.   Disallowed Expenses

     Respondent disallowed certain of Beck's Liquors' business

expense deductions reported on the corporation's returns for

1991, 1992, and 1993 in the respective amounts of $46,060,

$26,476, and $30,204.

     Petitioner was unable to substantiate some of the expenses.

Some of the expenses were personal living expenses that are not

deductible pursuant to section 262.      The primary items in dispute

are (1) payments in lieu of wages, (2) vehicle expenses and

depreciation, (3) annual meeting expenses, (4) travel and

entertainment expenses, (5) insurance, condominium fees,

utilities, and property taxes paid for residences of Mr. Beck,

Michael, and/or Michelle, (6) charges on the corporate VISA card

for Mr. Beck's personal expenses, (7) Mrs. Beck's funeral and

medical expenses, and (8) payments made to churches and

charitable organizations in memory of Mrs. Beck.
                                - 27 -

     Section 162 generally allows a deduction for ordinary and

necessary business expenses.     In general, an expense is ordinary

under section 162 if it is considered "normal, usual, or

customary" in the context of the particular business out of which

it arose.    Deputy v. du Pont, 308 U.S. 488, 495 (1940).

Ordinarily, an expense is necessary if it is appropriate and

helpful to the taxpayer's trade or business.       Commissioner v.

Tellier, 383 U.S. 687, 689 (1966); Carbine v. Commissioner, 83

T.C. 356, 363 (1984), affd. 777 F.2d 662 (11th Cir. 1985).         Even

if an expense is ordinary and necessary, it is deductible under

section 162 only to the extent it is reasonable in amount.         See,

e.g., United States v. Haskel Engg. & Supply Co., 380 F.2d 786,

788-789 (9th Cir. 1967).

     In deciding whether an expense is ordinary and necessary

within the meaning of section 162, courts generally focus on the

existence of a reasonably proximate relationship between the

expense and the taxpayer's business and the primary motive or

purpose for incurring the expense.       See, e.g., Greenspon v.

Commissioner, 229 F.2d 947, 954-955 (8th Cir. 1956), affg. on

this issue 23 T.C. 138 (1954); Henry v. Commissioner, 36 T.C.

879, 884 (1961); Larrabee v. Commissioner, 33 T.C. 838, 841-843

(1960).     In general, where an expenditure is primarily for

profit-motivated purposes, and personal benefit is distinctly

secondary and incidental, it may be deducted under section 162.
                              - 28 -

Intl. Artists, Ltd. v. Commissioner, 55 T.C. 94, 104 (1970);

Sanitary Farms Dairy, Inc. v. Commissioner, 25 T.C. 463, 467-468

(1955); Rodgers Dairy Co. v. Commissioner, 14 T.C. 66, 73 (1950).

Conversely, if an expenditure is primarily motivated by personal

considerations, no deduction for it will be allowed.     Henry v.

Commissioner, supra; Larrabee v. Commissioner, supra.

          1.   Payments in Lieu of Wages

     In lieu of wages, Beck's Liquors paid the real estate taxes

on the condominium in which Michael resided, the insurance on the

Topaz, and the premium on Michael's life insurance policy.    For

the occasional work Michelle performed for the store, Beck's

Liquors paid for the insurance on the Buick she drove.    Those

payments are for services rendered and are deductible by the

corporation.

          2.   Vehicle Expenses and Depreciation

     Section 167 generally allows a depreciation deduction with

respect to property used in a trade or business or held for the

production of income.   In determining whether such a deduction is

permitted, courts ordinarily have focused on whether the

acquisition and/or maintenance of property was primarily

associated with profit-motivated purposes.   Intl. Artists, Ltd.

v. Commissioner, supra.

     On the 1991, 1992, and 1993 corporate returns, Beck's

Liquors claimed vehicle expenses for three vehicles:    The pickup
                               - 29 -

truck, the car driven by Mr. Beck, and the car driven by Michael.

Respondent allowed a vehicle expense deduction for 100 percent of

the use of the pickup truck, plus $100 per month for other

expense relating to vehicle use.

     A taxpayer's costs of commuting to and from his place of

business are nondeductible, personal expenses.   Fausner v.

Commissioner, 413 U.S. 838 (1973); Commissioner v. Flowers, 326

U.S. 465 (1946); Feistman v. Commissioner, 63 T.C. 129, 134

(1974); secs. 1.162-2(e), 1.262-1(b)(5), Income Tax Regs.

     Mr. Beck and Michael used the corporate-owned automobiles to

commute to work and for personal purposes.   Petitioners did not

keep logs for any business use of the vehicles, and the record

does not show that Beck's Liquors is entitled to a deduction

greater than the amount allowed by respondent.   Beck's Liquors

may not deduct amounts in excess of those allowed by respondent.

           3.   Annual Meeting Expenses

     Every summer, the Becks spent 1 or 2 weeks in a cabin at a

resort on Lake Melissa in Detroit Lakes, Minnesota.   Michelle and

her three children stayed a week, and Michael stayed a couple

days.   The corporate minute book reflects that the annual

stockholders meeting was held at the lake, and Beck's Liquors

paid the expenses incurred by the Becks for the vacation.

     Although an informal annual stockholders meeting may have

been held during the week at the cabin, the trip was, in fact, a
                                - 30 -

vacation, primarily for the recreation and pleasure of the

family.   The expenses are not deductible.

          4.    Travel Expenses and Entertainment Expenses

                 a.   Las Vegas Expenses

     Beck's Liquors deducted travel expenses Mr. Beck incurred

traveling to Las Vegas, and expenses incurred for the yearly trip

to the cabin.   Under section 162(a)(2), a taxpayer is allowed to

deduct ordinary and necessary travel expenses paid while away

from home in the pursuit of business.      Commissioner v. Flowers,

supra at 470; Walliser v. Commissioner, 72 T.C. 433, 437 (1979).

Where a taxpayer travels to a destination for both business and

personal activities, travel expenses to and from the destination

are deductible only if the trip is related primarily to the

taxpayer's business.    If the purpose of the trip is primarily

personal, the travel expenses to and from the destination are not

deductible even though the taxpayer engages in some business

activities at the destination.     Duncan v. Commissioner, 30 T.C.

386, 390-391 (1958); sec. 1.162-2(b)(1), Income Tax Regs.

Whether a trip is related primarily to the taxpayer's business or

is primarily personal is a question of fact.     Commissioner v.

Flowers, supra; sec. 1.162-2(b)(1), Income Tax Regs.     A casual

connection to one's business does not make the cost of the trip a

business expense.     Ballantine v. Commissioner, 46 T.C. 272, 279-

280 (1966).
                                - 31 -

     Mr. Beck justified payment by Beck's Liquors of expenses for

traveling to Las Vegas by the savings in the exchange rate.      The

Fargo banks charged 17 percent whereas the casinos charged 10

percent.    If he exchanged $10,000 in Fargo, the banks charged

$1,700.    If he exchanged the same amount in Las Vegas, the

casinos charged only $1,000.    Therefore, every time he went to

Las Vegas, he saved $700 to $1,050 on the exchange, which amounts

exceeded his travel expenses.

     Although Mr. Beck was able to get a better exchange rate for

the Canadian currency, we are convinced that the trips to Las

Vegas were primarily to allow Mr. Beck to gamble.    The expenses

are personal and not deductible.

                 b.   Other Meal and Entertainment Expenses

     Beck's Liquors claimed the cost of meals as entertainment

deductions for 1991, 1992, and 1993, most of which respondent

disallowed.    Respondent disallowed all deductions for meal

expenses.

     Entertainment expenses are not deductible from gross income

unless, as a threshold matter, they are ordinary and necessary

expenditures directly connected with or pertaining to the

taxpayer's trade or business.    Sec. 1.162-1(a), Income Tax Regs.

The expenses must be "directly related" to the business.      Sec.

274(a); sec. 1.274-2(c)(3), Income Tax Regs.    For an

entertainment expense to be directly related to the active
                               - 32 -

conduct of a business, the taxpayer must have had more than a

generalized expectation of deriving income or a specific business

benefit at some indefinite future time from those entertained.

Walliser v. Commissioner, supra at 441.    Even if such expenses

are business related within the meaning of section 162, however,

they must be substantiated pursuant to section 274(d) and the

regulations thereunder.    Sec. 1.274-1, Income Tax Regs.

     Beck's Liquors did not comply with the detailed

substantiation requirements of section 274 and the regulations

thereunder.   Beck's Liquors deducted meal expenses because some

topic related to the liquor store was always discussed.     Mr. Beck

testified that, during the meals, he was entertaining clients or

discussing business with an employee or supplier.    A taxpayer's

general testimony that business was always discussed during the

entertainment is not sufficient to establish a business purpose.

The fact that there was a general discussion of the liquor store

does not establish a business purpose directly related to the

business of Beck's Liquors.    Rutz v. Commissioner, 66 T.C. 879,

884 (1976); Leon v. Commissioner, T.C. Memo. 1978-367.

                c.   Cost of Tickets To Various Sporting Events

     Beck's Liquors purchased tickets to various sporting events

for promotional purposes and deducted the cost as an

entertainment expense.    Respondent allowed all but $200 of the

cost of the tickets as a deductible expense.    Respondent did not
                                   - 33 -

allow a deduction for $200 attributable to tickets used by Mr.

Beck.     The tickets used by Mr. Beck were personal expenses not

deductible by the corporation.

          5. Insurance, Condominium Fees, Utilities, and
Property Taxes Paid for Residences of Mr. Beck, Michael, and/or
Michelle

        Generally, a taxpayer may not deduct expenses with respect

to a dwelling unit that the taxpayer uses as a residence during a

taxable year.     Sec. 280A(a).    This general rule does not apply,

however, where the taxpayer uses a portion of the residence

regularly and exclusively as the taxpayer's principal place of

business.     Sec. 280A(c)(1)(A).    Mr. Beck asserts that, because

his residence address is the address used by Beck's Liquors for

purposes of State licensing and registration, that his residence

is the principal place of business of Beck's Liquors.

        In Commissioner v. Soliman, 506 U.S. 168, 174 (1993), the

Supreme Court held that when a taxpayer carries on business in

more than one location the principal place of a taxpayer's

business is the most important or significant place of business.

This turns on two conditions: (1) The relative importance of the

activities performed at each business location, and (2) the time

spent at each place.     Id.      The most important activity of Beck's

Liquors is the sale of liquor.       The sale take place in the store,

not in petitioner's condominium.
                                 - 34 -

     Mr. Beck also asserts that he should be allowed to deduct

expenses related to garages, because store supplies are stored in

the garages.      An exception in section 280A(c)(1)(C) provides

that if an office is a "separate structure" not attached to the

dwelling unit and is used in connection with the taxpayer's trade

or business, a home office deduction may be justified.       However,

the statute requires that the separate structure be used

exclusively for business purposes in order to qualify for the

deduction.    Mr. Beck does not assert that the garages are used

exclusively for business purposes.        The expenses related to Mr.

Beck's condominium and the garages are personal expenses of Mr.

Beck and may not be deducted by the corporation.

          6. Charges on the Corporate Visa Card for Mr. Beck's
Personal Expenses

     Mr. Beck used the corporate VISA credit card to pay for his

personal expenses in addition to corporate expenses.       Mr. Beck

claims that he did not deduct his personal expenses on the

corporation's return.      Mr. Beck did not report the payments as

income to him.      The expenses are not deductible by the

corporation and are taxable dividends to Mr. Beck.

             7.   Mrs. Beck's Memorials, Funeral, and Medical
Expenses

     Mr. Beck wrote checks from the corporate account to churches

and charitable organizations in memory of Mrs. Beck.       Some of

Mrs. Beck's funeral expenses were paid from Beck's Liquors
                                - 35 -

checking account.    These items represent nondeductible personal

expenses.

      C.   Conclusion

      We conclude that respondent has shown that Beck's Liquors

and Mr. Beck underpaid taxes in all the years at issue.

II.   Intent To Evade Taxes

      The Commissioner must prove by clear and convincing evidence

that the taxpayer intended to evade taxes by conduct intended to

conceal, mislead, or otherwise prevent tax collection.      Stoltzfus

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

Commissioner, 94 T.C. at 661; Rowlee v. Commissioner, 80 T.C.

1111, 1123 (1983).

      A corporation is liable for fraud if the corporate officer

has the fraudulent intent to evade the corporation's taxes.

DiLeo v. Commissioner, 96 T.C. 858, 875 (1991), affd. 959 F.2d 16

(2d Cir. 1992); Federbush v. Commissioner, 34 T.C. 740, 749

(1960), affd. 325 F.2d 1 (2d Cir. 1963); Mazzocchi Bus Co. v.

Commissioner, T.C. Memo. 1993-43, affd. 14 F.3d 923 (3d Cir.

1994).     The fraudulent intent of Beck's Liquors may be

established by the acts of its president, Mr. Beck, who

completely dominated its activity.

      Fraud means "actual, intentional wrongdoing", Mitchell v.

Commissioner, 118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A.

424 (1939), or the intentional commission of an act or acts for
                               - 36 -

the specific purpose of evading a tax believed to be owing, Webb

v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C.

Memo. 1966-81.   A taxpayer's negligence, even gross negligence,

is not enough to prove a willful attempt to evade tax, Kellett v.

Commissioner, 5 T.C. 608, 618 (1945), and understatement of

income is not sufficient to establish fraud, Estate of Upshaw v.

Commissioner, 416 F.2d 737, 741 (7th Cir. 1969), affg. Upshaw v.

Commissioner, T.C. Memo. 1968-123.      However, if a taxpayer

consistently underreports income and other circumstances show an

intent to conceal the income, an inference of fraud may be

justified.    Holland v. United States, 348 U.S. at 137.

     A.   Badges of Fraud

     The courts have developed a number of objective indicators

or "badges" of fraud.    Recklitis v. Commissioner, 91 T.C. 874,

910 (1988).

     Fraud may be inferred from "any conduct, the likely effect

of which would be to mislead or to conceal."     Spies v. United

States, 317 U.S. 492, 499 (1943).    The courts have relied on

numerous indicia of fraud including the following: (1) a

taxpayer’s failure to report income over an extended period of

time; (2) a taxpayer’s failure to file a tax return; (3) a

taxpayer’s concealment of bank accounts from internal revenue

agents, failure to furnish the Government with access to his

records, and failure to cooperate with tax authorities; (4) a
                                - 37 -

taxpayer’s failure to keep adequate books and records; (5)

dealing in cash; (6) a taxpayer’s experience and knowledge,

especially knowledge of tax laws; (7) a taxpayer's implausible

explanations of conduct given at trial; and (8) participation in

illegal activities or concealment of an illegal activity.

Solomon v. Commissioner, 732 F.2d 1459, 1461-1462 (6th Cir.

1984), affg. per curiam T.C. Memo. 1982-603; Bahoric v.

Commissioner, 363 F.2d 151, 153-154 (9th Cir. 1966); Niedringhaus

v. Commissioner, 99 T.C. 202, 211 (1992); McCullough v.

Commissioner, T.C. Memo. 1993-70.    These indicia are not direct

evidence of fraud, and we consider them in the context of the

surrounding circumstances.     King's Court Mobile Home Park, Inc.

v. Commissioner, 98 T.C. 511, 516 (1992); Comparato v.

Commissioner, T.C. Memo. 1993-52.

            1.   Failure To Report Income Over an Extended Period of
Time

       Mr. Beck underreported the income of Beck's Liquors in each

of the years at issue.    The greatest portion of the omitted

income is attributable to the inclusion of cash purchases and

disallowance of deductions for payment of personal expenses of

Mr. Beck and his children.    Mr. Beck also failed to report as

income the amount of his personal expenses that were paid out of

the corporation's funds.    Fraud, however, may not be inferred

from a mere understatement of income, Holland v. United States,

348 U.S. at 139, or from a deficiency in tax due to an honest
                               - 38 -

mistake or poor judgment, Iley v. Commissioner, 19 T.C. 631

(1952).    Although these omissions are substantial enough to

indicate fraudulent intent, the omissions alone are not so

substantial as to unequivocally indicate fraudulent intent, and

we consider them in the context of the entire record.     Candela v.

United States, 635 F.2d 1272, 1274 (1980); Recklitis v.

Commissioner, supra at 909; Wheadon v. Commissioner, T.C. Memo.

1992-633; cf. Kramer v. Commissioner, 389 F.2d 236 (7th Cir.

1968), affg. T.C. Memo. 1966-234.

     Mr. Beck believed that payment by the corporation of an

expense tied to the corporation was proper.    For example, the

corporation paid for the expenses incurred at the cabin and

deducted them as expenses related to the annual stockholders'

meeting.    The corporation owned the condominiums where Mr. Beck

and Michael resided.    The corporation paid expenses related to

the condominiums and deducted the expenses on its return.

Similarly, expenses for the vehicles used by Mr. Beck and Michael

were deducted.

     The corporation paid for many of Mr. Beck's meals.    Mr. Beck

believed that the payment and deduction was proper because he

discussed the activities of the liquor store or was entertaining

customers or suppliers of the store.

     The corporation paid for Mr. Beck's travel expenses to Las

Vegas.    The corporation's savings at the better exchange rate in
                              - 39 -

Las Vegas exceeded the costs of Mr. Beck's travel expenses.

Therefore, he reasoned that it was proper for the corporation to

pay for the expenses and deduct the expenses on its returns.

     Although Mr. Beck was wrong about the propriety of paying

those expenses with corporate funds and deducting the expenses on

the corporate return, we do not think that the error was a result

of fraudulent intent to evade tax.

     Furthermore, Beck's Liquors underreported its cost of goods

sold by $39,004 on its 1992 return.    A taxpayer intending to

fraudulently evade tax would not understate the cost of goods

sold, particularly by such a substantial amount.

          2. Failure To File a Tax Return

     In the instant cases, Mr. Beck's failure to file returns for

1992 and 1993 is consistent with his belief that his gross income

was less than the minimum amount that required the filing of a

return.   Mr. Beck's failure to file does not, therefore, convince

us that such failure was due to fraud.    Dajos v. Commissioner,

T.C. Memo. 1986-330.

          3. Concealment of Bank Accounts From Internal Revenue
Agent, Failure To Furnish the Government With Access To His
Records, and Failure To Cooperate With Tax Authorities

     There is no evidence of concealment or attempts to mislead

respondent’s agents.   Mr. Beck was cooperative and forthright

throughout respondent’s investigation.    There is no evidence of

any falsification or alteration of books and records.    Mr. Beck
                                  - 40 -

did not conceal his assets or the assets of Beck's Liquors.     Mr.

Beck did not use secret accounts or fictitious nominees to hide

his sources of income.    Mr. Beck turned over to respondent all

records that he was aware of at the relevant times and thought

were pertinent to the tax returns.

          4.    Failure To Keep Adequate Books and Records

     Mr. Beck's failure to keep adequate books and records

resulted in large part from his failure to seek professional

bookkeeping and tax advice, his lack of bookkeeping training, and

the unusual and tragic circumstances surrounding Mrs. Beck's

death.   Mrs. Beck was killed in a car accident in July 1991.   As

Mr. Beck explains:

          The years 1991-93 were years of trama [sic]. My
     wife and I were in an auto accident in which we struck
     a moose on the interstate. The top of our car was
     taken off. My wife was driving and was decapated
     [sic]. Unless someone has seen your wife and best
     friend of 38 years bleed to death and die in front of
     your eyes, I don't think that you could be thinking
     about keeping a great set of books. She had done the
     bookkeeping up to that time. * * *

   On the entire record, petitioners' books and records are not

inadequate as a result of fraud.

           5.   Dealing in Cash

     Although Mr. Beck may have conducted many transactions in

cash, there is no indication that he tried to hide or conceal any

of these activities.     His property purchases and banking

activities were appropriately documented.     There is no evidence
                              - 41 -

that Mr. Beck attempted to structure cash purchases to avoid the

requirements for reporting cash transactions.

          6. Taxpayer’s Experience and Knowledge, Especially
Knowledge of Tax Laws

     In determining the presence or absence of fraud, we "must

consider the native equipment and the training and experience of

the party charged."   Iley v. Commissioner, 19 T.C. at 635.    Mr.

Beck did not consult an accountant or any other professional for

advice in preparing the returns of Beck's Liquors or his

individual returns.   He has no special training or education.

          7. Taxpayer's Implausible Explanations of Conduct
Given at Trial

     Mr. Beck's testimony was plausible and, we believe,

generally truthful.   At the trial of this case, he answered

questions directly and candidly and did not appear to be evasive

or deceptive.   He impressed us as a sincere, although mistaken,

individual.   We may discount testimony which we find to be

unworthy of belief, but we may not arbitrarily disregard

testimony that is credible and uncontradicted, Conti v.

Commissioner, 39 F.3d 658, 664 (6th Cir. 1994), affg. and

remanding 99 T.C. 370 (1992), and T.C. Memo. 1992-616.

          8. Participation in Illegal Activities or Concealment
of an Illegal Activity

     Respondent does not allege that Mr. Beck participated in any

illegal activities or that he tried to conceal an illegal

activity.
                               - 42 -

     B.   Conclusion

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

by consideration of the entire record.      Parks v. Commissioner, 94

T.C. at 660; Gajewski v. Commissioner, 67 T.C. 181, 199 (1976),

affd. without published opinion 578 F.2d 1383 (8th Cir. 1978).

We do not impute or presume fraud, and we do not find fraud on

the basis of circumstances that do no more than create a

suspicion of fraud.    Green v. Commissioner, 66 T.C. 538, 550

(1976).   Although respondent is not required to establish fraud

beyond a reasonable doubt, the "clear and convincing" standard

requires that he establish fraud by more than a preponderance of

the evidence.   Kellett v. Commissioner, 5 T.C. at 616.

     Although Mr. Beck's omissions of income were substantial,

alone they do not provide clear and convincing evidence that he

intended to evade tax.   The other indicia of fraud that we have

considered are inconclusive or show a lack of fraudulent intent.

Mr. Beck's explanations for his failures to report all income

were neither implausible nor inconsistent, and the circumstances

surrounding the omissions are as consistent with innocent mistake

as with willful evasion.

     What has been proved is a negligent or, at most, a willful

disregard of rules or regulations.      After examining the record,

we conclude that Mr. Beck lacked the specific intent to evade tax

that is required to find fraud.
                              - 43 -

     In the absence of fraud, the period for assessing a

deficiency in tax had expired prior to the issuance of the

notices of deficiencies to Beck's Liquors for all years at issue

and to Mr. Beck for 1991.   Sec. 6501(c)(2).

Issue 4. Whether Petitioner Mr. Beck Received Constructive
Dividends From Beck's Liquors in 1992 and 1993 in the Respective
Amounts of $151,448 and $117,641

      Because Mr. Beck did not file returns for 1992 and 1993, the

period for assessing a deficiency did not expire prior to the

issuance of the notice of deficiency.    Sec. 6501(c)(3).

Respondent asserts that Mr. Beck is the true owner of the stock

of Beck's Liquors and that he received constructive dividends

from the corporation in 1992 and 1993.

I.   Ownership of Stock of Beck's Liquors

      Beneficial ownership rather than bare legal title is

critical in determining who is a shareholder.    Hook v.

Commissioner, 58 T.C. 267, 273 (1972); Hoffman v. Commissioner,

47 T.C. 218, 233 (1966), affd. per curiam 391 F.2d 930 (5th Cir.

1968).

      A nominee theory involves the determination of the true

beneficial ownership of property.   See, e.g., Oxford Capital

Corp. v. United States, 211 F.3d 280, 284 (5th Cir. 2000).

Nominees, guardians, agents, and custodians are not recognized as

taxable entities.   W & W Fertilizer Corp. v. United States, 208

Ct. Cl. 443, 527 F.2d 621, 627 (1975).
                              - 44 -

     The following factors are generally considered in

determining nominee status: (a) No consideration or inadequate

consideration paid by the nominee; (b) property placed in the

name of the nominee in anticipation of a suit or occurrence of

liabilities while the transferor continues to exercise control

over the property; (c) close relationship between transferor and

the nominee; (d) failure to record conveyance; (e) retention of

possession by the transferor; and (f) continued enjoyment by the

transferor of benefits of the transferred property.    United

States v. Miller Bros. Constr. Co., 505 F.2d 1031 (10th Cir.

1974)); see also Oxford Capital Corp. v. United States, supra.

     Mr. Beck testified:   "My son and my daughter owned the

stock.   My son said he didn't own the stock.   But this, of

course, is a private family affair.    When I am gone, the children

are going to own that store without any hassle.    So the stock was

transferred to the children back in the '80s."    Further, he

testified that Michael "will own the business, half of it, when

the time comes."

     The record in these cases establishes that, although the

stock was originally titled in Mrs. Beck's name, Mr. and Mrs.

Beck equally owned and controlled the stock in Beck's Liquors.

After Mrs. Beck died, Mr. Beck alone controlled and owned the

stock.   Neither Mr. Beck nor Mrs. Beck intended for Michael and

Michelle to own the stock during the parents' lifetimes.    We find
                               - 45 -

that Mr. Beck was the sole shareholder of Beck's Liquors during

the years at issue.

II.   Constructive Dividends

      Section 61(a) defines gross income to include "all income

from whatever source derived," including receipt of a dividend.

Sec. 61(a)(7).   A dividend is "any distribution of property made

by a corporation to its shareholders" to the extent of its

earnings and profits.7   Sec. 316(a).   "When a corporation confers

an economic benefit upon a shareholder, in his capacity as such,

without an expectation of reimbursement, that economic benefit

becomes a constructive dividend, taxable to the respective

shareholder."    Loftin & Woodard, Inc. v. United States, 577 F.2d

1206, 1214 (5th Cir. 1978); see also Magnon v. Commissioner, 73

T.C. 980, 993-994 (1980).

      Respondent determined that the following payments by Beck's

Liquors were constructive dividends to Mr. Beck:

                                              1992          1993
Diverted corporate income                   $115,133       $84,782
Condo association fees                         1,014           980
Insurance-condos, vehicles                     1,866         1,830
Credit card--personal expenses                14,993        16,193
Auto expense/repairs                           7,294         4,679
Miscellaneous                                    378           254
Advertising/personal ticket use                  200           200



      7
      Neither party argued that Beck's Liquors had insufficient
earnings and profits for the distributions to be treated as
dividends.
                              - 46 -

Condo utilities                                1,398        1,580
Other personal expenses                        5,239        2,221
Property taxes                                 1,750        3,296
Annual meeting expense                         2,183        1,626
 Total                                       151,448      117,641

     A.   Diverted Corporate Income

     The diverted corporate income is the gross receipts omitted

from the corporate returns for each year determined as follows:

                                          1992            1993
State Bank deposits                    $1,475,700      $1,554,350
Cash payments                             101,305          75,487
Nonincome items                          (335,616)       (391,143)
 Total gross receipts                   1,241,389       1,238,694
Reported on return                      1,126,256       1,153,912
Unreported gross receipts                 115,133          84,782

     The State Bank deposit amounts were the amounts deposited

into the corporation's State Bank account.   There is no evidence

that those amounts were distributed to Mr. Beck or to either of

his children.   We hold that those amounts are not constructive

dividends to Mr. Beck.

     The cash payments include the following:

Cash payments                              1992            1993
 Cash expenses--till                      $3,632          $1,709
 Wage--till                               18,002           2,382
 Gambling losses                          15,700            –-
 Norwest Bank                              2,316           4,026
 Loan payments                            35,000          44,000
 Purchase of ring                         10,655            –-
 Purchase of car                           9,400            –-
 Merrill Lynch                             6,600            –-
 Deposit subsequent year                    –-            23,370
  Total cash payments                    101,305          75,487
                              - 47 -

     The amount of cash that was not reported by the corporation

that is attributable to cash taken from the till to cash employee

checks and to pay for expenses was not cash distributed to Mr.

Beck and is not a constructive dividend to him.

     Mr. Beck did not have gambling losses during the years at

issue.   Rather, he had gambling winnings of $8,300 in 1992 and

$12,000 in 1993.   Mr. Beck did not report the gambling winnings

as income.   Although the winnings are not constructive dividends,

they are income to Mr. Beck that is to be included in his income

for the years at issue.   We have found that the cash winnings

represent a source of cash, and the cash payments should be

reduced by $8,300 in 1992 and $12,000 in 1993.

     The $6,600 was deposited into the corporation's Merrill

Lynch account in 1992; Mr. Beck did not receive the money, and it

is not a constructive dividend to him.   Similarly, the Norwest

account is the corporation's account, and the cash deposited into

that account is not a constructive dividend to Mr. Beck.   The

$23,370 received at the end of 1993 and deposited into the State

Bank account in January 1994 also is not a constructive dividend

to Mr. Beck.

     Mr. Beck asserts that the $10,655 paid in 1992 for the ring

was a cash loan to him, that the $9,400 paid in 1992 for the car

was a cash loan to Michael, and that the loan payments of $35,000

in 1992 and $44,000 in 1993 were cash loans to Michelle.    Mr.
                               - 48 -

Beck has failed to prove that it is more likely than not that

these items were loans.   There are no loan documents, and there

is no evidence that Mr. Beck, Michael, or Michelle ever intended

to repay the corporation for the payments.    Those amounts are

dividends to Mr. Beck.

     B.   Remaining Expenses

     Respondent asserts that the remaining items are personal

expenses of Mr. Beck that were paid for by the corporation.

     Corporate shareholders who use corporate property for

personal purposes or for whom the corporation pays personal

expenses are charged with additional distributions from the

corporation, taxable to them as constructive dividends to the

extent of the corporation's earnings and profits.     Melvin v.

Commissioner, 88 T.C. 63, 79 (1987), affd. per curiam 894 F.2d

1072 (9th Cir. 1990); Challenge Manufacturing Co. v.

Commissioner, 37 T.C. 650, 663 (1962).     When a corporation has

made such a transfer to a member of the shareholder's family, the

shareholder has enjoyed the use of such property no less than if

it had been distributed to him directly.     Byers v. Commissioner,

199 F.2d 273 (8th Cir. 1952), affg. a Memorandum Opinion of this

Court.

     If a corporation provides property for or pays personal

expenses of employees in their capacity as such, the employees

are charged with additional income in the form of constructive
                              - 49 -

wages or salary.   Sec. 61(a)(1).   Whether personal use of

corporate property constitutes constructive dividends or

constructive wages is a question of fact.    Loftin & Woodard, Inc.

v. United States, 557 F.2d at 1242; Goldstein v. Commissioner,

298 F.2d 562, 566 (9th Cir. 1962), affg. T.C. Memo. 1960-276.

     Whether amounts are paid as compensation turns on the

factual determination of whether the payor intends at the time

that the payment is made to compensate the recipient for services

performed.   See Whitcomb v. Commissioner, 733 F.2d 191, 194 (1st

Cir. 1984), affg. 81 T.C. 505 (1983); Neonatology Associates,

P.A. v. Commissioner, 115 T.C. 43, 92 (2000); King's Ct. Mobile

Home Park, Inc. v. Commissioner, 98 T.C. at 514-515; Paula

Constr. Co. v. Commissioner, 58 T.C. 1055, 1058-1059 (1972),

affd. without published opinion 474 F.2d 1345 (5th Cir. 1973).

     In lieu of wages, Beck's Liquors paid the real estate taxes

on the condominium in which Michael resided, the insurance on the

Topaz, and the premium on Michael's life insurance policy.    For

the occasional work Michelle performed for the store, Beck's

Liquors paid for the insurance on the Buick she drove.    Those

payments are not constructive dividends to Mr. Beck.
                             - 50 -

     With respect to the remaining items, they are personal

expenses of Mr. Beck that were paid for by the corporation; they

are dividends taxable to Mr. Beck in the year of payment.

     To reflect the foregoing,

                                        Decisions will be entered

                                   for petitioners in docket Nos.

                                   12215-99 and 12217-99.

                                        Decision will be entered

                                   under Rule 155 in docket No.

                                   12216-99.
