                  T.C. Memo. 2001-73



                UNITED STATES TAX COURT



ROGELIO R. BALOT and ZENAIDA V. BALOT, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19077-98.                   Filed March 23, 2001.



     Ps worked as blackjack and roulette dealers, and P-H
worked as a “pit boss”, at a casino in Prince George’s
County, Maryland. The casino recorded on daily time sheets
the number of hours Ps worked. Also, the casino gathered,
apportioned, and periodically paid to the dealers and pit
bosses the tips from the patrons. R determined deficiencies
based on the casino’s time sheets and other records, and Ps’
bank deposits.

     1. Held: Ps are liable for additions to tax for civil
fraud for 1991 and 1992. See sec. 6663, I.R.C. 1986.

     2. Held, further, Ps are liable for an addition to tax
for negligence for 1993. See sec. 6662(a), I.R.C. 1986.

     3. Held, further, amounts of deficiencies
redetermined.
                               - 2 -

     Benson S. Goldstein, for petitioners.

     Judith C. Cohen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHABOT, Judge:   Respondent determined deficiencies in

individual income tax and additions to tax under sections 66631

(fraud) and 6662(a) (negligence) against petitioners as follows:

                                       Additions to Tax
     Year      Deficiency         Sec. 6662(a)     Sec. 6663

     1991        $3,910                 --          $2,933
     1992         7,686                 --           5,765
     1993         2,968                $594            --




     1
      Unless indicated otherwise, all part and section references
are to parts and sections of the Internal Revenue Code of 1986 as
in effect for the years in issue.
                               - 3 -

     After concessions by respondent2, the issues for decision

are as follows:

          (1) Whether petitioners are liable for civil fraud

     additions to tax under section 6663 for 1991 and 1992.

          (2)   Whether petitioners are liable for a negligence

     addition to tax under section 6662(a) for 1993.

          (3)   What is the amount of petitioners’ unreported

     income for 1991 through 1993.

                         FINDINGS OF FACT

     Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.


     2
      In the answer, respondent conceded that the proper amounts
of petitioners’ 1993 deficiency and addition to tax are not more
than $2,800 and $560, respectively. However, on opening brief,
respondent asks us to conclude that petitioners are liable for a
1993 negligence addition to tax “in the amount of $594”. We
regard respondent’s statement on brief as a clerical error and
not an attempt to withdraw part of the concession.

     Also, at five places in paragraph 7 of the answer,
respondent stated that at least a part of petitioners’ 1993
underpayment is due to fraud. In the prayer for relief,
respondent asked: “That the additions to tax for the years 1991
through 1993 under the provisions of I.R.C. § 6663, as set forth
in the notice of deficiency, be in all respects approved.” In
the prayer for relief, respondent did not refer to the section
6662(a) addition to tax for negligence. On brief, respondent
deals with fraud for only 1991 and 1992, and deals with
negligence for 1993. We conclude that (1) Respondent did not
intend to assert the fraud addition to tax for 1993, and (2)
respondent did not intend to concede the negligence addition to
tax for 1993, except to the extent indicated in the first
paragraph of this footnote.
                               - 4 -

     Petitioners Rogelio R. Balot (hereinafter sometimes referred

to as Rogelio) and Zenaida V. Balot (hereinafter sometimes

referred to as Zenaida) filed joint tax returns for the years in

issue, but have since divorced.   Petitioners resided at separate

addresses in Fort Washington, Maryland, when they filed their

joint petition.

A.   Rogelio’s Background

     From 1967 to April 1989, Rogelio served in the United States

Navy as a logistician; that is, a person who is responsible for

logistics.   Logisticians attend to the details of acquiring

equipment and other supplies, making sure that these supplies

meet specifications, and making sure that these supplies are sent

to the right place at the right time.   During the last 3 years of

his military service, Rogelio was the enlisted supervisor of

about 25 people who dealt with logistics for the Presidential

helicopter in Quantico, Virginia.   Rogelio received pension

distributions from the Navy in each of the years in issue.

     In 1989, shortly after retiring from the Navy, Rogelio

obtained full-time employment as a logistician with Validity

Corporation, a defense contractor that deals with the Government.

Rogelio attended to the requisitioning of supplies for the

Validity Corporation, a task similar to his Navy duties.   He did

not have any supervisory responsibilities in this Validity

Corporation position.   Validity Corporation compensated Rogelio
                               - 5 -

on a biweekly basis using the direct deposit method of payment

during the years in issue.

     Although Rogelio does not hold a college degree, he did

complete 3 years of college course work.    Rogelio also completed

several courses in business management, accounting, and business

law at the University of Maryland and Prince George’s Community

College.

B.   Zenaida’s Background

     During the years in issue, Zenaida was employed full-time as

a branch manager for First American Bank.   In this position,

Zenaida was (1) in charge of branch sales, (2) in charge of

branch operations, and (3) responsible for keeping branch

expenditures within budget determinations that were made at

higher levels.   She supervised 9 to 10 employees, including bank

tellers and personnel in charge of establishing new accounts with

the bank.   First American Bank entrusted Zenaida with

responsibilities such as ordering supplies in accord with the

branch’s operating budget, ensuring the branch had sufficient

cash on hand to transact business for the day, and ensuring the

automated teller machines contained sufficient cash for the

operation thereof.   At the time of the trial, Zenaida was a

branch manager for Crestar Bank.

     Zenaida earned a Bachelor of Science Degree in Elementary

Education from the University of the Philippines in or about
                                 - 6 -

1967.   Before beginning her career in the banking industry,

Zenaida worked as a schoolteacher.

C.   The CIPAA Casino

     The Combined International Philippines America Association

(hereinafter sometimes referred to as CIPAA) was organized

sometime in the 1970’s.   CIPAA operated a casino (hereinafter

sometimes referred to as the CIPAA Casino) in Prince George’s

County, Maryland, during the years in issue.       Proceeds from the

CIPAA Casino were to aid in the construction and operation of a

Philippine cultural center to be located in the Washington, D.C.,

metropolitan area.

     The CIPAA Casino employed dealers and pit bosses to operate

the tables at the casino premises.       Dealers accepted bets and

received or paid out chips as required by the results of the

bets; they dealt cards, spun wheels, and otherwise interacted

directly with the bettors.    Pit bosses supervised dealers.

During the years in issue there generally were about 70 to 80

dealers, and one pit boss for each 6 to 8 dealers.

     The CIPAA Casino recorded on daily time sheets the number of

hours each employee worked.    Employees generally signed their

names and recorded the times at which they arrived at the casino

premises for work, on the time sheet kept for that particular

day, although pit bosses occasionally recorded the time one or

another employee came to work.    If an employee left the casino
                                - 7 -

premises before closing time, then that employee recorded the

time at which he or she left.    If an employee worked until

closing time, then a pit boss entered the time the CIPAA Casino

closed as the time the employee’s shift ended.    The CIPAA

Casino’s Tuesday sessions closed at 11:00 p.m.; the Saturday

sessions closed at 2:00 a.m. Sunday morning.

     The CIPAA Casino paid its employees an hourly amount for

their services even though the CIPAA Casino management and staff,

including dealers, understood that Maryland gaming laws expressly

prohibited the practice.    During the years in issue, pit bosses

and dealers earned compensation of $12 and $10 per hour,

respectively.    The CIPAA Casino paid this compensation to its

employees in cash on a weekly basis.    Beginning about July of

1993, the CIPAA Casino began to pay its employees by check

instead of cash.

     CIPAA Casino employees did not complete Forms W-4, and the

CIPAA Casino did not withhold Social Security taxes or income

taxes, in 1991 and 1992 from any of the compensation it paid to

its employees.    The CIPAA Casino recorded the amount of

compensation its employees received in 1991 and 1992 on

individual affidavits executed by each employee.    The CIPAA

Casino issued Forms W-2 to its employees for the first time for

1993.
                                - 8 -

     To create the appearance of compliance with Maryland law,

the CIPAA Casino’s management and staff, including dealers, (1)

characterized all remuneration they received from the CIPAA

Casino as tips, the receipt of which was believed to be legal,

and (2) referred to themselves as volunteers rather than

employees.    The CIPAA Casino’s management told the staff that

amounts received from the CIPAA Casino were not to be reported to

the Internal Revenue Service as wages.

     CIPAA Casino employees also received tip income through the

CIPAA Casino.    On each gaming table at the casino premises were

two boxes:    One for cash that bettors exchanged for chips at the

table, and one for chips and cash that the bettors gave to the

dealers as tips.    The latter box is sometimes hereinafter

referred to as a tip box.    Each hour a “runner” collected both

boxes.    The moneys in the tip boxes were then commingled and

distributed to the pit bosses and dealers in proportion to their

hourly compensation; i.e., hourly rate times amount of time

worked.    The CIPAA Casino distributed tip income about every 3

weeks.

     Some pit bosses and dealers also received tips directly from

casino patrons.    These tips were not placed into the table’s tip

box and were not divided in the manner described above.    Rather,

the recipient of the tip simply kept it for personal use.     The
                                - 9 -

record does not show that either petitioner received any such

direct tips.

D.    Petitioners’ Involvement With the CIPAA Casino

      Rogelio and Zenaida became members of CIPAA to help with the

cultural center project.    In 1991, Rogelio and Zenaida applied

for and obtained positions with the CIPAA Casino; each of them

worked for the CIPAA Casino during each of the years in issue.

After receiving extensive training from the CIPAA Casino’s

management, Rogelio became a low-stakes blackjack dealer; Zenaida

became a roulette dealer.    Rogelio began working for the CIPAA

Casino on or about March 30, 1991; Zenaida began on or about

November 23, 1991.   Rogelio and Zenaida maintained their full-

time positions with Validity Corporation and First American Bank,

respectively, in addition to the positions they held at the CIPAA

Casino.

      Each petitioner worked for the CIPAA Casino most Saturdays

and most Tuesdays.   For 1991 and 1992, each petitioner typically

worked for the CIPAA Casino 14 hours on Saturdays.     Rogelio

typically worked for the CIPAA Casino 11 hours on Tuesdays;

Zenaida typically 6 hours on Tuesdays.    (The record does not

include time sheets or equivalent information for 1993.)

      Rogelio became a pit boss at some point.   (See infra note

3).   Rogelio became treasurer of the CIPAA Casino in 1994.
                                   - 10 -

Zenaida became a pit boss at some point and an assistant to the

president of the CIPAA Casino at a later point.

       1.    Hourly Compensation

       Rogelio worked 882.5 hours at the casino premises in 1991,

for which the CIPAA Casino paid $8,825 of hourly compensation to

him.       Zenaida worked 105.5 hours at the casino premises in 1991,

for which the CIPAA Casino paid $1,055 of hourly compensation to

her.       Petitioners did not report any of their CIPAA Casino hourly

compensation on their 1991 tax return.

       Rogelio worked 947.5 hours in 1992, for which the CIPAA

Casino paid hourly compensation to him.3      Zenaida worked 654.75

hours in 1992, for which the CIPAA Casino paid $6,548 (rounded)

of hourly compensation to her.       Petitioners did not report any of

their CIPAA Casino hourly compensation on their 1992 tax return.

       The CIPAA Casino paid $8,110.75 of compensation income to

Rogelio for 1993.       The CIPAA Casino paid $5,781.79 of


       3
      On opening brief, respondent asks us to find that Rogelio
was a dealer in 1992, “and in 1993 casino management promoted him
to pit boss.” On the same page of this brief, respondent asks us
to find that Rogelio was paid “$12 an hour as a pit boss in
1992.” Petitioners do not object to either proposed finding.
The parties agree that the CIPAA Casino compensated Rogelio at
the rate of $10 per hour when he was a dealer and $12 per hour
when he was a pit boss. Because each party is on both sides of
the question as to when Rogelio was shifted from $10 per hour to
$12 per hour, the parties are directed to resolve this matter in
the computation under Rule 155.

     Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
                              - 11 -

compensation income to Zenaida for 1993.   The CIPAA Casino issued

Forms W-2 to Rogelio and Zenaida for this 1993 compensation

income, which petitioners reported on their 1993 tax return.4

     2.   Tip Income

     Each petitioner received a share of the tips that bettors

left at the tables in the casino premises during each of the

years in issue.   On their 1992 tax return, petitioners reported

that Rogelio received $750 tip income and Zenaida received $480

tip income.   Petitioners’ 1991 and 1993 tax returns do not

include any income that is stated to be tip income.   Petitioners

did not report any income from the CIPAA Casino on their 1991 tax

return.   The income from the CIPAA Casino that petitioners

reported on their 1993 tax return is shown on Forms W-2, but is

not described as including tip income, on either the Forms W-2 or

petitioners’ tax return.




     4
      The four Forms W-2 attached to petitioners’ 1993 tax return
show “Wages, tips, other compensation” amounts aggregating
$71,146.57. On their tax return, petitioners show $71,237. The
difference is accounted for by (1) rounding and (2) petitioners’
reporting Zenaida’s CIPAA Casino income as $5,872, instead of
$5,781.79, as shown on the Form W-2. This roughly $90
overreporting is to be corrected in the computation under Rule
155, to the extent it has not already been indirectly taken into
account in respondent’s notice of deficiency determination of
“Other Unreported Income”.
                                     - 12 -

     3.    Check Cashing

      In addition to her other income-producing activities,

Zenaida cashed checks for a $5 fee.            She performed this service

about two or three times during the years in issue.

E.   Bank Deposits

      Petitioners maintained five bank accounts in four separate

institutions during the years in issue.

      Table 1 shows petitioners’ aggregate deposits into each

account, by account number, in each year in issue.

                                     Table 1

      Account                 1991                 1992          1993

      5-852-706         $57,905.90             $47,971.13     $56,679.69

      26-320-93-3          1,449.09             13,029.36        -0-

      612-2552-9           3,305.32             44,415.40      32,065.10

      0215714-007          9,600.00              9,600.00       9,660.66

      75-009-232           11,829.51            29,142.89      21,639.44

          Total Deposits 84,089.82             144,158.78     120,044.89

      Table 2 shows respondent’s analysis of petitioners’ bank

account deposits for each of the years 1991 through 1994.              Except

as indicated otherwise in the notes to table 2, the “Excess

deposits per Appeals” in the table became the notice of

deficiency adjustments labeled “Other Unreported Income”.
                                    - 13 -

                                    Table 2

                              BANK ACCOUNT ANALYSIS

                                           9112           9212             9312   9412
                                                    [3]
Total Bank Account Deposits           84,090.         144,149.       120,045.     139,307.

less non-taxable deposits             (9,066.)        (37,457.)      (22,219.) (45,958.)

Income-wages-Net[1]                  (44,149.)        (46,922.)[6](54,638.) (75,164.)
      -Retirement T/P-H              (15,094.)        (15,177.) (17,756.) (23,246.)
      -Retirement T/P-W               (3,157.)
      -IRA Distribution                 (224.)
      -Condo Rent                     (8,200.)            (5,895.)     (4,500.)   (6,950.)
      -Miscellaneous                    (147.)              (675.)       (368.)     (668.)
      -Tips                                               (1,230.)
      -Sale of Stock-Net                                  (5,978.)     (2,969.)
                                                    [4]
Excess Deposits per Exam                   4,053.         30,823.      17,595.    (12,679.)
Additional Non-Taxable Income
Per Appeals Adjustments                    -0-            (3,396.)     (7,576.)
                                     [2]            [5]              [7]
Excess deposits per Appeals            4,053.             10,629.      10,018.       -0-


  1
      “Net” means net of withheld amounts shown on the Forms W-2.
  2
      This amount is $19 less than the 1991 $4,072 notice of
      deficiency adjustment for Other Unreported Income. In the
      absence of an explanation from respondent, we conclude that
      the slight preponderance of the evidence of record leans
      toward petitioners with respect to this $19. On opening
      brief, respondent concedes a $21 amount, which may include
      this $19. The parties are directed to resolve this matter
      in the computation under Rule 155.
  3
      This amount is $10 less than the sum of the stipulated
      amounts deposited into petitioners’ bank accounts. Compare
      supra table 1, column 1992. Respondent attributes the
      difference to a clerical error on respondent’s part, and
      “concedes the $10 difference.” That is, respondent does not
      ask that the 1992 $10,630 notice of deficiency adjustment
      for Other Unreported Income be increased to correct this
      error.
  4
      This amount is $8 more than the sum of the items in the 1992
      column showing the bank account analysis that respondent
      made in determining the amount of the 1992 $10,630 notice of
      deficiency adjustment for Other Unreported Income. In the
      absence of an explanation from respondent, we conclude that
      the slight preponderance of the evidence of record leans
      toward petitioners with respect to this $8.
  5
      In arriving at the 1992 Other Unreported Income adjustment
      in the notice of deficiency, respondent subtracted the
                               - 14 -

      $16,798 adjustment for Unreported Income--Casino.
      Respondent did not make a corresponding subtraction of the
      1991 $9,880 adjustment for Unreported Income--Casino in
      arriving at the 1991 Other Unreported Income. Neither side
      has sought to explain, justify, or attack this substantial
      difference between the 1991 and 1992 procedures. We leave
      the parties as we find them on this matter. See, e.g.,
      Thomas v. Commissioner, 92 T.C. 206, 232 (1989), and cases
      there cited.
  6
      This amount includes the $90 by which petitioners overstated
      their Forms W-2 income on their 1993 tax return. See infra
      table 3, note 2.
  7
      This amount is $600 less than the amount of the 1993 $10,618
      notice of deficiency adjustment for Other Unreported Income.
      On brief, respondent asks us to find that the correct amount
      of this adjustment is $10,010, which is $608 less than the
      notice of deficiency adjustment. It may be that this
      discrepancy is what led to respondent’s concession (see
      supra note 2) in the answer that the deficiency is $168 less
      than the amount determined in the notice of deficiency, and
      that the negligence addition to tax is $34 less than the
      amount determined in the notice of deficiency. Also, there
      is a $1 difference between the $10,018 “excess deposits” and
      the sum of the amounts in the 1993 column; we assume that
      this difference arises from rounding the amounts to the
      nearest dollar. The parties are directed to resolve this
      matter in the computation under Rule 155.

F. Tax Returns

      On their tax returns for the years in issue, petitioners

reported income and total tax as shown in table 3.

                               Table 3

           Item                   1991          1992          1993
                                           1              2
l.7--Wages, etc. (Form W-2)     $57,945        $62,339        $71,237
l.8--Interest                       129            675            218
l.9--Dividends                        18          --                 9
l.10--Taxable refunds              --             --              136
                                                                  3
l.13--Capital gain or (loss)       --           (3,000)             14
l.17--Pensions and annuities     16,413         16,576         17,281
l.18--Rents, etc.                (5,081)        (3,899)        (6,122)
l.23--Total income               69,424         72,691         82,773
l.53--Total tax                   7,333          7,362          9,224
                               - 15 -
   1
       The $62,339 total includes petitioners’ Form W-2 income from
       First American Bank and Validity Corporation, and
       petitioners’ “Unreported Tip Income” from the CIPAA Casino
       (Rogelio--$750; Zenaida--$480).
   2
       Comparison of a schedule attached to petitioners’ 1993 tax
       return and the Forms W-2 attached to the same return makes
       it clear that a transposition of two digits from Zenaida’s
       CIPAA Casino Form W-2 to the schedule resulted in
       petitioners overstating their income by $90. See supra
       note 4.
   3
       Petitioners’ 1992 tax return shows a $19,000 capital loss
       carryover from 1992 to 1993, stemming primarily from a
       $21,688 “Loss in value” on 12,000 shares of PanAm Stock
       acquired on November 26, 1990. It does not appear that
       petitioners claimed any capital loss carryover on their 1993
       tax return.

       Petitioners timely filed their tax returns for each of the

years in issue: 1991--mid-April 1992, 1992--mid-August 1993, and

1993--mid-April 1994.

       Petitioners’ 1991 and 1992 tax returns were prepared by W.O.

Monroyo & Associates.    Petitioners’ 1993 tax return was prepared

by Automated Tax & Financial Services.

                    ____________________________

       Petitioners failed to report on their tax returns the hourly

compensation that the CIPAA Casino paid to each of them in 1991

and 1992.    Petitioners failed to report on their tax return the

tip income that the CIPAA Casino gathered, apportioned, and

periodically paid to petitioners in 1991.    The failures to report

this income resulted in underpayments of tax required to be shown

on petitioners’ tax returns for 1991 and 1992.     The failures to
                              - 16 -

report this income, and the resulting underpayments for 1991 and

1992, were due to the fraud of each petitioner for each year.

     For 1993, petitioners had an underpayment of tax required to

be shown on their tax return, and some part of this underpayment

was due to petitioners’ negligence.

                              OPINION

                       I.   General Summary

     The CIPAA Casino paid $10 or $12 per hour worked to each

petitioner in 1991, 1992, and 1993.     As to this hourly

compensation, the CIPAA Casino did not send Forms W-2 to

petitioners for 1991 and 1992, but did for 1993.     Petitioners did

not report any of this income on their 1991 (almost $10,000) and

1992 (about $15,000) tax returns; they reported the full W-2

amounts on their 1993 tax return.

     The CIPAA Casino gathered, apportioned, and periodically

paid to their employees the tips that patrons paid.     Petitioners

did not report any of this tip income on their 1991 tax return;

they reported $1,230 of this income (Rogelio--$750, Zenaida--

$480) on their 1992 tax return.

     We hold that respondent proved, by clear and convincing

evidence, that (1) petitioners failed to report hourly

compensation that they received in 1991 and 1992, (2) petitioners

failed to report tip income that they received in 1991, (3) these

omissions led to underpayments of tax for 1991 and 1992, and (4)
                               - 17 -

each of these underpayments was due to the fraud of both Rogelio

and Zenaida.

     We hold that petitioners failed to prove, by a preponderance

of the evidence, that (1) any part of the underpayments for 1991

and 1992 was not due to fraud, (2) any of the deficiency

determinations for 1991, 1992, or 1993 in the notice of

deficiency was excessive, and (3) any part of the 1993

underpayment was not due to petitioners’ negligence.

     We consider first 1991 and 1992, the years as to which

respondent determined fraud.   We then consider 1993.

                         II.   1991-1992

     Respondent contends (1) that petitioners underpaid their

taxes for 1991 and 1992, and (2) that all of petitioners’ 1991

and 1992 underpayments are due to fraud and thus, petitioners are

liable for the fraud additions to tax under section 6663.

     Petitioners contend (1) that they did not underpay their

taxes for 1991 and 1992, and (2) that respondent has not met

respondent’s burden of proof on the fraud issue.   Petitioners

maintain (A) that respondent’s use of the bank deposits method of

income reconstruction was not appropriate, and (B) that even if

use of the bank deposits method was appropriate, petitioners’

excess deposits are attributable to nontaxable sources.

Alternatively, petitioners contend that if they have underpaid

their taxes, then any additions to tax are not appropriate
                              - 18 -

because (1) petitioners did not act with the requisite fraudulent

intent, and (2) reasonable cause supported their actions.

     We agree with respondent’s conclusions and most of

respondent’s contentions.

     When respondent seeks to impose the addition to tax under

section 66635, respondent has the burden of proof.   To carry this

burden for a year, respondent must prove two elements, as

follows:   (1) That petitioners have an underpayment of tax for

that year, and (2) that some part of that underpayment is due to

fraud.   See sec. 7454(a)6; Rule 142(b); see, e.g., Carter v.


     5
      SEC. 6663.   IMPOSITION OF FRAUD PENALTY.

          (a) Imposition of Penalty.--If any part of any
     underpayment of tax required to be shown on a return is due
     to fraud, there shall be added to the tax an amount equal to
     75 percent of the portion of the underpayment which is
     attributable to fraud.

          (b) Determination of Portion Attributable to Fraud.--
     If the Secretary establishes that any portion of an
     underpayment is attributable to fraud, the entire
     underpayment shall be treated as attributable to fraud,
     except with respect to any portion of the underpayment which
     the taxpayer establishes (by a preponderance of the
     evidence) is not attributable to fraud.

          (c) Special Rule for Joint Returns.--In the case of a
     joint return, this section shall not apply with respect to a
     spouse unless some part of the underpayment is due to the
     fraud of such spouse.
     6
      SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION
                MANAGER, AND TRANSFEREE CASES.

          (a) Fraud.--In any proceeding involving the issue
     whether the petitioner has been guilty of fraud with intent
                                                   (continued...)
                                - 19 -

Campbell, 264 F.2d 930, 936 (5th Cir. 1959); Stone v.

Commissioner, 56 T.C. 213, 220 (1971); Otsuki v. Commissioner, 53

T.C. 96, 105-106 (1969).7    Each of these elements must be proven

by clear and convincing evidence.    See DiLeo v. Commissioner, 96

T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Parks v.

Commissioner, 94 T.C. 654, 663-664 (1990); Hebrank v.

Commissioner, 81 T.C. 640, 642 (1983).

     For this purpose, respondent need not prove the precise

amount of the underpayment resulting from fraud, but only that

there is some underpayment and that some part of it is

attributable to fraud.    See, e.g., Lee v. United States, 466 F.2d

11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner, 465 F.2d

299, 303 (7th Cir. 1972), affg. T.C. Memo. 1970-274.    In carrying

this burden, respondent may not rely on petitioners’ failure to

meet their burden of proving error in respondent’s determinations

as to the deficiencies.     See, e.g., Petzoldt v. Commissioner, 92

T.C. 661, 700 (1989); Habersham-Bey v. Commissioner, 78 T.C. 304,

312 (1982), and cases cited therein.



     6
      (...continued)
     to evade tax, the burden of proof in respect of such issue
     shall be upon the Secretary.

     7
      The elements of fraud under sec. 6663 are essentially the
same as those we considered under sec. 6653(b) of prior law. See
also Rhone-Poulenc Surfactants v. Commissioner, 114 T.C. 533,
547-548 (2000); Clayton v. Commissioner, 102 T.C. 632, 652-653
(1994); Houser v. Commissioner, 96 T.C. 184, 185 n.1 (1991).
                             - 20 -

     Where fraud is determined for each of several years,

respondent’s burden applies separately for each of the years.

See Estate of Stein v. Commissioner, 25 T.C. 940, 959-963 (1956),

affd. sub nom. Levine v. Commissioner, 250 F.2d 798 (2d Cir.

1958); McLaughlin v. Commissioner, 29 B.T.A. 247, 249 (1933).     A

mere understatement of income does not establish fraud.     However,

a pattern of consistent underreporting of income for a number of

years is strong evidence of fraud.    See Estate of Mazzoni v.

Commissioner, 451 F.2d 197, 202 (3d Cir. 1971), affg. T.C. Memos.

1970-144 and 1970-37; Adler v. Commissioner, 422 F.2d 63, 66 (6th

Cir. 1970), affg. T.C. Memo. 1968-100; Otsuki v. Commissioner, 53

T.C. at 108.

     The issue of fraud is a factual question that is to be

decided on an examination of all the evidence in the record.     See

Plunkett v. Commissioner, 465 F.2d at 303; Mensik v.

Commissioner, 328 F.2d 147, 150 (7th Cir. 1964), affg. 37 T.C.

703 (1962); Stone v. Commissioner, 56 T.C. at 224.

     In order to establish fraud as to a taxpayer, respondent

must show that that taxpayer intended to evade taxes which that

taxpayer knew or believed were owed, by conduct intended to

conceal, mislead, or otherwise prevent the collection of taxes.

See, e.g., Grossman v. Commissioner, 182 F.3d 275, 277 (4th Cir.

1999), affg. T.C. Memo. 1996-452; Powell v. Granquist, 252 F.2d

56, 60 (9th Cir. 1958); Danenberg v. Commissioner, 73 T.C. 370,
                                - 21 -

393 (1979); McGee v. Commissioner, 61 T.C. 249, 256-257 (1973),

affd. 519 F.2d 1121 (5th Cir. 1975).     This intent may be inferred

from circumstantial evidence.    See Powell v. Granquist, 252 F.2d

at 61; Gajewski v. Commissioner, 67 T.C. 181, 200 (1976), affd.

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

including the implausibility of petitioners’ explanations.    See

Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986) (and

cases cited therein), affg. T.C. Memo. 1984-601; Boyett v.

Commissioner, 204 F.2d 205, 208 (5th Cir. 1953), affg. a

Memorandum Opinion of this Court dated Mar. 14, 1951.    Fraud is

not imputed from one spouse to another; in the case of a joint

tax return, respondent must prove fraud as to each spouse charged

with liability for the addition to tax.    See sec. 6663(c); Hicks

Co. v. Commissioner, 56 T.C. 982, 1030 (1971), affd. 470 F.2d 87

(1st Cir. 1972); Stone v. Commissioner, 56 T.C. at 227-228.

A. Underpayment

     1. The CIPAA Casino--Hourly Compensation

     Time sheets were maintained by the CIPAA Casino for dealers

and others who worked at the casino during each of the years

before the Court.   The CIPAA Casino paid compensation of $10 per

hour to dealers and $12 per hour to pit bosses during these

years.

     Each petitioner worked at the casino in 1991 and in 1992 and

received, as compensation for his or her services, weekly
                              - 22 -

payments from the CIPAA Casino, calculated at the appropriate

hourly rate.

     Petitioners did not report any of this income on the joint

tax returns that they filed for 1991 and 1992.   Petitioners do

not claim for either year that this unreported income is properly

offset by any deductions, etc., in addition to what is shown on

their tax returns.8

     Accordingly, petitioners’ failures to report this hourly

compensation on their 1991 and 1992 joint tax returns result in

an underpayment of tax required to be shown on their 1991 tax

return and an underpayment of tax required to be shown on their

1992 tax return.   We have so found.

     Petitioners agree that both of them worked for the CIPAA

Casino during each of the years before the Court.   They also

agree, or at least do not dispute, that the CIPAA Casino paid to

each of them weekly $10 or $12 per hour for each hour petitioners


     8
      Respondent need not prove that petitioners did not have
offsetting deductions. Once the Commissioner has presented clear
and convincing evidence of unreported gross receipts, the
taxpayer has the burden of coming forward with evidence as to
offsetting deductions claimed by the taxpayer, even in criminal
cases where the Government must prove a deficiency beyond a
reasonable doubt. See, e.g., United States v. Hiett, 581 F.2d
1199, 1202 (5th Cir. 1978); United States v. Campbell, 351 F.2d
336, 338-339 (2d Cir. 1965); Elwert v. United States, 231 F.2d
928, 933 (9th Cir. 1956); see also DiLeo v. Commissioner, 96 T.C.
858, 872 (1991); Reiff v. Commissioner, 77 T.C. 1169, 1175
(1981). This rule is independent of the general rule applicable
to civil cases, in which the taxpayer has the burden of proving
entitlement to deductions before they may be allowed. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
                              - 23 -

worked in the casino.   Petitioners’ only contentions with regard

to this hourly “remuneration” (petitioners’ term) are that (1) it

was not “wages”, and (2) “The management of the CIPAA casino

inflated the number of hours worked by casino employees during

the years 1991-1993.”

     Firstly, none of this hourly compensation was reported on

petitioners’ tax returns for 1991 and 1992.9   As a result,

petitioners’ allegation that the management of the CIPAA Casino

inflated the number of hours worked by casino employees does not

affect our conclusion that petitioners’ failures to report any of

their hourly compensation result in underpayments of tax for both

1991 and 1992.

     Secondly, the CIPAA Casino time sheets appear to conform to

the testimony of each petitioner, both as to the procedures that

were followed and also as to each petitioner’s pattern of

arrivals at and departures from the casino.    The variety of

handwritings confirms the testimony that often the entries for



     9
      Petitioners reported on their 1992 tax return $750 tip
income for Rogelio and $480 tip income for Zenaida. The parties
stipulated that “Petitioners typically worked on Saturdays and at
least one day during the week.” If these tips were the hourly
compensation (as petitioners seem to suggest), and if petitioners
were paid $10 or more per hour (as petitioners concede), then
this would mean that Rogelio worked for an average of less than 1
hour each day he showed up, and Zenaida worked for about ½ hour
each day she showed up. The absurdity of this conclusion
convinces us that petitioners do not seriously contend that their
1992 tip reporting was intended to be a reporting of the hourly
compensation that each petitioner received from the CIPAA Casino.
                               - 24 -

any individual were made by that individual.    Rogelio testified

that his usual Saturday shift was 14 hours--from noon to 2 a.m.

the next morning, confirming the information on the time sheets.

Zenaida testified to her usual 14-hour Saturday shift.    As to

Tuesdays, Rogelio’s confusing testimony appears to confirm the

general 11-hour shift shown by the time sheets; Zenaida clearly

testified that her Tuesday shift was generally around 6 hours.

As a result, we are satisfied that the CIPAA Casino time sheets

are accurate as to the number of hours each petitioner worked at

the casino in 1991 and 1992.

     Thirdly, as petitioners implicitly conceded by reporting

tips as income on their 1992 tax return, tips are income subject

to tax.   See, e.g., Olk v. United States, 536 F.2d 876, 879 (9th

Cir. 1976).   So that “he that runs may read”, line 7 of the Form

1040 for each of the years before the Court states “Wages,

salaries, tips, etc.”   (Emphasis added.)    Whatever label

petitioners would rather we apply to the hourly compensation that

the CIPAA Casino paid to each petitioner in 1991 and 1992, those

payments are income subject to tax.     See, e.g., section 61(a)(1).

     We hold, for respondent, that respondent has proven by clear

and convincing evidence that petitioners failed to report the

hourly compensation paid to them by the CIPAA Casino in 1991 and

1992, in the amounts determined in the notice of deficiency as

“Unreported Income-Casino”, except to the extent that
                               - 25 -

respondent’s brief introduces an uncertainty as to the amount of

Rogelio’s 1992 hourly compensation.     See supra note 3.

2. The CIPAA Casino--Tip Income

     The record is clear that each petitioner also received each

year an appropriate portion of the tips that the casino’s patrons

left in 1991 and 1992.10   Petitioners did not report any tip

income on their 1991 tax return.   Petitioners reported 1992 tip

income of $750 for Rogelio and $480 for Zenaida.    Apart from

petitioners’ thus-reported 1992 tip income, we do not find

anything in the record that would enable us to quantify

petitioners’ tip income for 1991 or 1992.

     Petitioners urge, in both opening brief and answering brief,

that our opinion in Executive Network Club, Inc. v. Commissioner,

T.C. Memo. 1995-21, “highlights the extent to which the IRS’ case


     10
      On opening brief, respondent asserts that, in addition to
the tips that the CIPAA Casino gathered from patrons and
distributed to the dealers, etc., “Moreover, in each year,
petitioners received cash tips directly from patrons. (Tr. pp.
191-193).” We have found, supra, that “The record does not show
that either petitioner received any such direct tips.” The
transcript pages that respondent cites refer to the testimony of
another person who worked for the CIPAA Casino during at least
part of the period in issue in the instant case. That person
testified that she had received such direct tips. Respondent’s
counsel asked: “Okay. Did other employees earn tips in this
manner as well?” The witness replied: “Probably, I don’t know.”
Later, petitioners’ counsel asked that witness: “Did you ever
see someone on the see [side ?] pay Mr. Balot or Mrs. Balot?”
The witness replied: “I don’t recall, sir, because it was done
secretly.” Thus the only evidence to which respondent directs
our attention, or that our examination has turned up, is a
disclaimer of knowledge. Respondent’s assertion on this point is
unfounded on the record in the instant case.
                               - 26 -

regarding the Petitioners is distorted.”   Our findings of fact in

Executive Network Club, Inc. describe some of the operations of a

charitable organization’s casino operation in Prince George’s

County, with a focus on how tips from patrons were collected by

the casino and “were ultimately distributed to the workers in

cash.”   We held that the casino operation constituted an

unrelated trade or business.   However, we held that the tips that

came from the patrons and were distributed to the casino workers

did not constitute income to the exempt organization.   In the

course of our opinion, we noted as follows:
     4
       The fact that the tips were shared does not preclude a
     finding that the payments by the patrons were tips. Similar
     pooling or tip-splitting arrangements have been held to
     constitute tip income to those participating in the pooling
     or tip-splitting arrangement. See Allen v. United States,
     976 F.2d 975, 976 (5th Cir. 1992); Olk v. United States, 536
     F.2d 876, 877 (9th Cir. 1976); Catalano v. Commissioner, 81
     T.C. 8, 11-13 (1983), affd. without published opinion sub
     nom. Knoll v. Commissioner, 735 F.2d 1370 (9th Cir. 1984);
     Armeno v. United States, 6 Cl. Ct. 521 (1984). In
     respondent’s regulations, respondent describes such pooling
     arrangements. Secs. 31.3121(a)-1(c), 31.6053-3(j)(12)-(13),
     and 31.6053-4(a)(2), Employment Tax Regs.; see also Guadron
     v. Commissioner, T.C. Memo. 1994-553; Tech. Adv. Mem. 81-46-
     001 (Sept. 21, 1978) [Executive Network Club, Inc. v.
     Commissioner, T.C. Memo 1995-21.]

     We agree with petitioners (as does respondent) that the

process of gathering tips, apportioning them, and periodically

paying them out to the workers in Executive Network Club, Inc. is

quite similar to the process followed by the CIPAA Casino during

the years in issue in the instant case.
                              - 27 -

     However--

           (1) As we note in Executive Network Club, Inc. such

     tips are income to those workers who ultimately receive the

     money, but in the instant case petitioners did not report

     any of this tip income on their 1991 tax return.

           (2) Such tips are separate from the hourly compensation

     that each petitioner received in each year; the hourly

     compensation also is income; and petitioners did not report

     any of this hourly compensation on their 1991 and 1992 tax

     returns.

     Thus our opinion in Executive Network Club, Inc. v.

Commissioner, supra, does not support any of petitioners’

relevant contentions, but rather is consistent with, and

supports, respondent’s position in the instant case.

     We hold that respondent has proven by clear and convincing

evidence that each petitioner received taxable tip income in 1991

and 1992, and that petitioners failed to report their 1991 tip

incomes.   However, we also hold that respondent failed to prove,

by even a preponderance of the evidence, (a) the amount of either

petitioner’s unreported 1991 tip income and (b) whether

petitioners failed to report any 1992 tip income.11


     11
      On opening brief, respondent asserts that “these tips
clearly accounted for a large part, if not virtually all, of the
‘other unreported income.’” Respondent has not favored us with
citations to evidence of record that would support this assertion
                                                   (continued...)
                               - 28 -

B. Fraudulent Intent

     Each day that either petitioner worked in the casino, that

petitioner earned $10 (or $12) per hour for the time worked.

Each week, the CIPAA Casino paid to each petitioner (and to their

coworkers at the casino) the hourly compensation.    These hourly

compensation amounts paid to petitioners totaled almost $10,000

in 1991 and around $15,000 in 1992.     Petitioners failed to report

any part of this hourly compensation on their 1991 and 1992 tax

returns.   They also failed to report any of their 1991 tip

income.    The foregoing omitted income amounts to about 15 percent

in comparison to the total income they reported on their 1991 tax

return, and about 20 percent for 1992.    See supra table 3.   Based

on the record as a whole, including our observations of each

petitioner at trial (both testified) and our evaluation of their

educational backgrounds and the sort of full-time jobs each of

them had during 1991 and 1992, we conclude that each petitioner

knew that this hourly compensation and tip income were subject to

tax and that their failures to report any part of this income on

either of their tax returns for 1991 and 1992 were due to fraud.

Thus the underpayments resulting from these failures to report

were due to fraud.   We have so found.




     11
      (...continued)
or any quantification of petitioners’ tip income.
                              - 29 -

     Petitioners’ own testimony confirms their having received

this hourly compensation and tip income.   Petitioners have not

explained their total failure to report these amounts.

Petitioners’ explanations of why fraud penalties should not be

imposed lack coherence; if anything, these explanations’

implausibility confirms our conclusions as to fraud.

     Petitioners acknowledge that they earned the compensation

computed on an hourly rate for the hours they worked, but insist

that these amounts were not “wages”.   Petitioners contend that

these amounts were “tips”.   When confronted at trial with the

unlikelihood that the amount of patrons’ tips precisely matched

their hourly rate times hours worked, they lapsed into

unresponsiveness.   On opening brief and again on answering brief,

petitioners contend that they “should not be subject to any civil

fraud penalties on the tip income received from the casino as

they have reasonable cause for their actions”; yet, they do not

tell us what is this “reasonable cause”.

     On opening brief and again on answering brief, petitioners

contend as follows:

          With respect to the audit examination involving the
     Balots, the IRS has failed to establish--through clear and
     convincing evidence--that there is an intentional wrongdoing
     on the part of the taxpayer. [Sic.] First, the Balots were
     never at any time involved with the managerial operations of
     the casino as they worked part-time. Therefore, they were
     never in any position to commit any fraudulent acts
     pertaining to their work in the casino.
                             - 30 -

Petitioners’ fraud is their own omissions to report on their own

tax returns their own receipts of the hourly compensation that

the CIPAA Casino paid to them.   Thus, their not being “involved

with the managerial operations of the casino” is not a relevant

defense to the civil tax fraud with which petitioners are

charged.

     In our analysis of underpayment (supra part II. A.) we

concluded that respondent proved by clear and convincing evidence

that petitioners failed to report what clearly was tip income

(i.e., petitioners’ shares of the patrons’ tips) that was

gathered, apportioned, and periodically paid to them in 1991.

The foregoing evaluation of petitioners’ fraudulent intentions as

to hourly compensation applies with even greater force to the

1991 tip income.

     We conclude, and we have found, that respondent has shown by

clear and convincing evidence that the underpayments of tax that

result from petitioners’ failure to report (a) their hourly

compensation paid to each of them by the CIPAA Casino in 1991 and

1992, and (b) their shares of the patrons’ tips that the CIPAA

Casino gathered, apportioned, and periodically paid to

petitioners in 1991, all are due to the fraud of each petitioner.

     We so hold.
                                - 31 -

C.   Amounts of Deficiencies; Nonfraudulent Causes

     In parts II. A. and II. B. of this opinion, respondent had

the burden of proving, by clear and convincing evidence, that

there were underpayments of tax, some part of which was due to

fraud; respondent carried this burden.

     In this part of the opinion, petitioners have the burden of

proving, by a preponderance of the evidence, that the

deficiencies12 are less than the amounts respondent determined in

the notice of deficiency.   See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     Petitioners also have the burden of proving, by a

preponderance of the evidence, that some part of the 1991 or 1992

underpayment is not due to fraud.    See sec. 6663(b).

     In the absence of adequate records, respondent may employ

reasonable methods of reconstructing petitioners’ taxable income

in a manner which clearly reflects income.    See sec. 446(b);

Holland v. United States, 348 U.S. 121 (1954); Parks v.

Commissioner, 94 T.C. at 658.

     Although the notice of deficiency does not so state, it is

evident from the record herein that respondent’s notice of

deficiency determinations of “Other Unreported Income” are based




     12
      For purposes of the instant case, “deficiency” is the same
as “underpayment”. Compare sec. 6211(a) with sec. 6664(a).
                                - 32 -

on use of the bank deposits method to reconstruct petitioners’

income.   See supra table 2.

     It is well established that bank deposits are evidence of

income where the deposits were made by the party charged with the

income or to an account controlled by the party charged with the

income.   See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

The premise underlying the bank deposits method of income

reconstruction is that, absent some explanation, a taxpayer’s

bank deposits represent income subject to tax.    See DiLeo v.

Commissioner, 96 T.C. at 868.    The use of the bank deposits

method of income reconstruction has long been sanctioned by the

courts.   See id.; Tokarski v. Commissioner, 87 T.C. at 77; Estate

of Mason v. Commissioner, 64 T.C. 651, 656 (1975)(and cases cited

therein), affd. 566 F.2d 2 (6th Cir. 1977).   When this method is

used, respondent must take into account any nontaxable deposits

or deductible expenses of which respondent has knowledge.   See

DiLeo v. Commissioner, 96 T.C. at 868.

     We have held that, where respondent has the burden of proof

in a bank deposits case, e.g., where respondent has determined

that a taxpayer has committed tax fraud, then--

          Respondent can satisfy * * * [the] burden of proving
     the first prong of the fraud test, i.e., an underpayment,
     when the allegations of fraud are intertwined with
     unreported and indirectly reconstructed income in one of two
     ways. Parks v. Commissioner, 94 T.C. at 661. Respondent
     may prove an underpayment by proving a likely source of the
     unreported income. Holland v. United States, 348 U.S. 121
     (1954); Parks v. Commissioner, supra at 661; Nicholas v.
                              - 33 -

     Commissioner, 70 T.C. [1057,] * * * 1066 [(1978)].
     Alternatively, where the taxpayer alleges a nontaxable
     source, respondent may satisfy * * * [the] burden by
     disproving the nontaxable source so alleged. United States
     v. Massei, 355 U.S. 595 (1958); Parks v. Commissioner, supra
     at 661. * * * [DiLeo v. Commissioner, 96 T.C. at 873.]

     Table 2, supra, summarizes respondent’s revenue agent’s

conclusions in analyzing petitioners’ bank deposits.   On its

face, respondent’s calculations seem reasonable.   But see our

notes to table 2.   Petitioners contend that the bank deposits

method “is not appropriate for use in the Petitioners’ case”, and

also “that the alleged excess bank deposits are from sources

representing traditional inter-family [intra-family?] and friend

transfers.”

     Petitioners assert as follows:

     According to a review of the various court cases involving
     the bank deposit method, it is clear that the bank deposit
     method is most prevalently used to determine “unreported
     income” of professionals, shopkeepers, and others whose
     income arise largely from receipts of a business.

Petitioners stress that they “were never self-employed during tax

years 1991, 1992 and 1993;” and that they “did not operate a

business during tax years 1991-1993, nor were they ever in the

business of being ‘gamblers.’”

     Firstly, we are not aware of any doctrine that the

Commissioner may appropriately use the bank deposits method to

reconstruct income only where the taxpayer is operating a

business, nor do petitioners suggest any reason why there should

be such a doctrine.
                                    - 34 -

     Secondly, each petitioner testified that petitioners did not

keep track of their tip income and that they should have kept

records.13       Clearly, there was unreported tip income for 1991 and


     13
      On answering brief, petitioners “object to the statement
claiming they failed to keep adequate books and records.” They
overlook their own trial testimony, as follows:

          Q    [Cohen] Can you tell the Court the amount of tips
     that you earned from the casino during the tax years at
     issue? And that would be 1991 through 1993.

             A      [Rogelio] What I earned?

             Q      Tips.

             A      Tips. I don’t know.

          Q    You don’t know?        Well, didn’t you keep any records
     of the tips?

          A    I should have because the management was telling
     us, you know, it’s up to you to make sure, you know, to keep
     a record of what you receive.

          Q    You said you should have, but you didn’t is that
     what you said? I don’t want to put words in your mouth.

             A      Yes.

                      *     *   *     *      *   *    *

          Q    [Cohen] Did you tell your return preparer that you
     worked at the casino during 1991 through 1993?

             A      [Rogelio] Did I tell my lawyer?

          Q    No, no, no.       The return preparer, the person who
     did your tax return.

             A      Yes, they’re aware of it.

             Q      You told them you worked there in 1991 through
     1993?
                                                          (continued...)
                                     - 35 -

there may have been unreported income for later years.          This,

alone, is sufficient to warrant the use of the bank deposits

method to determine how much 1991 income was unreported and to

test the comprehensiveness of petitioners’ income reporting for

later years.




     13
          (...continued)
              A    Uh-huh.

          Q    Okay. Did you tell them how much income you
     earned at the casino?

          A    As far as my recollection, as far as ‘91 because
     we were just talking about it, I remember I told him that
     these are tips.

             Q    You told him what?

          A    When -- in 1991, I remember I was -- you know, I
     don’t know. Best of my recollection, I thought I told my
     accountant or the tax preparer that this is how much money I
     made in the casino.

          Q    But you didn’t provide that return preparer with
     any books and records reflecting the amount of tips and
     wages that you earned at the casino during 1991 through
     1993, right?

          A       No.   We just -- just like I said, I never kept a
     record.

                    *        *   *     *      *    *    *

          Q    [Cohen] Did you keep any books and records related
     to the income that you earned with the casino back in the
     years at issue?

             A    [Zenaida] No, I did not.        I should have, but I did
     not.
                                - 36 -

     Thirdly, from the testimony of the IRS revenue agent and

from petitioners’ trial memorandum it appears that, during the

years in issue, petitioners went to Atlantic City, New Jersey,

“about 4-5 times a year”, and that they gambled while in Atlantic

City.   Petitioners did not report gambling winnings and did not

deduct gambling losses.   Since 1934, the Federal tax laws have

required that nonbusiness gamblers--petitioners strenuously

insist that they are not in the business of being gamblers--must

report their winnings “above the line” and may deduct their

losses only “below the line”.    See discussion in Gajewski v.

Commissioner, 84 T.C. at 982-983.    This bifurcation of gambling

winnings, and losses for nonbusiness gamblers has been mandated

even when it is clear that the taxpayers’ losses exceed their

winnings and they are not entitled to itemize their deductions--

in effect, taxing the nonbusiness taxpayers on their gross

winnings.   See Johnston v. Commissioner, 25 T.C. 106 (1955).

Thus, petitioners’ acknowledgment that they did some nonbusiness

gambling in each of the years in issue is another basis for the

IRS revenue agent’s belief that petitioners may have some

unreported income that may be reconstructed by the bank deposits

method.

     Accordingly, we conclude that respondent was justified in

using the bank deposits method to reconstruct petitioners’

income.
                              - 37 -

     Petitioners’ oft-voiced contention that the excess bank

deposits are from “traditional inter-family [intra-family?] and

friend transfers”, was not supported by evidence of record.

Where there was evidence presented to respondent during the

audit, respondent treated the transactions as nontaxable, as is

shown in Exhibits 26-R and 39-R.   Before the Court, petitioners

neither provided particulars, nor presented the testimony of

relatives or friends, nor explained why those witnesses were not

available.   See Wichita Terminal Elevator Co. v. Commissioner, 6

T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

     Petitioners have failed to carry their burden of proving

that they are entitled to nontaxable treatment for any deposits

(or parts of any deposits) in excess of what respondent already

allowed.

     Finally, petitioners contend as follows:

          In fact, the Taxpayers should not be subject to any
     civil tax penalties on the tip income received from the
     casino as they have reasonable cause for their actions.
     However, should the Tax Court determine that a civil tax
     penalty should be assessed against the Taxpayers based on
     their receipt of tip income, a fair reading of recent case
     law clearly establishes that the Petitioners should (at the
     most) only be subject to the negligence penalty under Code
     Section 6662.

Neither petitioner testified why he or she thought that the

income (whether hourly compensation or tip income) was not

subject to tax.   For that matter, neither petitioner even

testified that he or she thought any category or specific item of
                             - 38 -

omitted income was not subject to tax.   The record is devoid of

evidence that petitioners, or either of them, asked any tax

adviser or tax-return preparer about any of the omitted items.

Petitioners do not even take the trouble to describe to us what

they claim to be the “reasonable cause for their actions.”

     We have ignored Zenaida’s check-cashing activities because

(1) the amounts of her fees for any year are uncertain and

trivial, and (2) they may in any event be adequately dealt with

under respondent’s use of the bank deposits method.14

     We hold, for respondent, that petitioners failed to show by

a preponderance of the evidence that the deficiency for 1991 or

1992 is less than what respondent determined, as modified by

respondent’s concessions and our observations in the footnotes to

table 2, supra.

     We hold, for respondent, that petitioners failed to show by

a preponderance of the evidence that any part of the underpayment

for 1991 or 1992 was not due to fraud.

                           III.   1993

     For 1993, respondent determined that (1) petitioners have a

tax deficiency resulting from their failure to report $10,618 of

income, and (2) petitioners are liable for 20-percent negligence



     14
      We assume that the cashed checks have been properly
accounted for under the instant case’s application of the bank
deposits method. See supra table 2. Petitioners have not
suggested otherwise.
                                - 39 -

penalty based on a determination that the entire amount of the

deficiency is due to petitioners’ negligence.

A.   Amounts of Deficiency

     The 1993 deficiency that respondent determined is due

entirely to application of the bank deposits method.    Supra table

2, especially notes 6 and 7.    Our comments and conclusions in the

course of our analysis of the bank deposits method in Part II.

C., supra, apply equally to 1993.

     We hold that, except as to respondent’s concessions and our

comments in supra table 2, notes 6 and 7, petitioners have failed

to show that respondent’s determination of omitted income was

excessive.

B.   Negligence

     Respondent determined that petitioners are liable for a 20-

percent negligence addition to tax on the entire underpayment for

1993.   Respondent contends petitioners’ failure to maintain and

furnish adequate records of their 1993 income-producing

activities “thwarted respondent’s attempt to examine petitioners’

tax liability for that year.”    Petitioners maintain that section

6662 does not apply because reasonable cause excuses their

failure to report all of their taxable income for 1993.
                              - 40 -

Section 666215 imposes an accuracy-related penalty of 20




15
     Sec. 6662 provides, in pertinent part, as follows:

SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY.

     (a) Imposition of Penalty.--If this section applies to
any portion of an underpayment of tax required to be shown
on a return, there shall be added to the tax an amount equal
to 20 percent of the portion of the underpayment to which
this section applies.

     (b) Portion of Underpayment to Which Section Applies.
--This section shall apply to the portion of any
underpayment which is attributable to 1 or more of the
following:

             (1) Negligence or disregard of rules or
        regulations.

                *    *    *     *      *   *   *

     (c) Negligence.--For purposes of this section, the
term “negligence” includes any failure to make a reasonable
attempt to comply with the provisions of this title, [title
26, the Internal Revenue Code] and the term “disregard”
includes any careless, reckless or intentional disregard.

Sec. 6664 provides, in pertinent part, as follows:

SEC. 6664. DEFINITIONS AND SPECIAL RULES.

                *    *    *     *      *   *   *

        (c)   Reasonable Cause Exception.--

             (1) In general.--No penalty shall be imposed
        under this part [part II, relating to accuracy-related
        and fraud penalties] with respect to any portion of an
        underpayment if it is shown that there was reasonable
        cause for such portion and that the taxpayer acted in
        good faith with respect to such portion.
                               - 41 -

percent of any portion of an underpayment that is attributable to

the taxpayer’s negligence.

     Broadly speaking, for purposes of the provision, negligence

is the lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances to

determine that person’s income tax liability.    See ASAT, Inc. v.

Commissioner, 108 T.C. 147, 175 (1997); Cluck v. Commissioner,

105 T.C. 324, 339 (1995).    Negligence includes any failure to

keep adequate books and records.    See sec. 1.6662-3(b)(1), Income

Tax Regs.   Petitioners have the burden of proving error in

respondent’s determination that the addition to tax should be

imposed against them.16   See Little v. Commissioner, 106 F.3d

1445, 1449-1450 (9th Cir. 1997), affg. T.C. Memo. 1993-281;

Korshin v. Commissioner, 91 F.3d 670, 671 (4th Cir. 1996), affg.

T.C. Memo. 1995-46; ASAT, Inc. v. Commissioner, 108 T.C. at 175.

     Petitioners have failed to introduce any evidence or offer

any relevant argument supporting their contention that respondent

erred in determining that the addition to tax under section

6662(a) applies.   The following sentence represents the extent of



     16
      Section 7491(c), relating to burden of proof with respect
to additions to tax, as enacted by sec. 3001 of the Internal
Revenue Service Restructuring and Reform Act of 1998 (1998 Act),
Pub. L. 105-206, 112 Stat. 685, 726, does not apply in the
instant case because the examination in petitioners’ case began
before July 22, 1998, the effective date of sec. 7491(c). See
the 1998 Act, sec. 3001(c)(1), 112 Stat. 727.
                              - 42 -

petitioners’ argument in support of their contention that

reasonable cause excuses their 1993 underpayment:   “In fact, the

Taxpayers should not be subject to any civil tax penalties on the

tip income received from the Casino as they have reasonable cause

for their actions.”   Petitioners have not favored us with any

statement as to what is the “reasonable cause for their actions.”

In the absence of any explanation and any evidence that, on our

inspection, might constitute reasonable cause, we conclude that

section 6662(a) applies.

     To take account of respondent’s concessions and the

foregoing,

                                               Decision will be

                                         entered under Rule 155.
