                   T.C. Memo. 1996-452



                 UNITED STATES TAX COURT



        ROBERT D. GROSSMAN, JR., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos.   20526-90, 14364-91.        Filed October 7, 1996.



     P, a tax attorney, effectively controlled the daily
operations of a group of closely held corporations (C). The
corporations were owned by P’s wife (W), W’s mother, and W’s
brother. In 1983 through 1986, P and W took personal
vacation trips, which P caused C to pay for. C’s payments
of the personal expenses of P and W were constructive
dividends to W. P and W omitted to report these
constructive dividends on their 1983 through 1986 joint tax
returns. The notices of deficiency for 1983 through 1988
were sent to P and W more than 3 years after P and W filed
their joint tax returns for 1983, 1984, and 1985. R
contends that many of these omissions for 1983 through 1986
were due to P’s fraud. P denies the omissions, denies
fraud, and contends that, if there are deficiencies, then he
is entitled to innocent spouse treatment for 1986.

     1.   Held: The statute of limitations does not bar the
assessment and collection of tax for 1985, but is a bar as
to 1983 and 1984. Sec. 6501(c)(1), I.R.C. 1954.
                           - 2 -


     2.   Held, further, P is liable for fraud additions to
tax for 1985 and 1986. Sec. 6653(b)(1), I.R.C. 1954; sec.
6653(b)(1)(A), I.R.C. 1986.

     3.   Held, further, P is   liable for additional
additions to tax for 1985 and   1986 based on the portions of
the deficiencies attributable   to P’s fraud; amounts
determined. Sec. 6653(b)(2),    I.R.C. 1954; sec.
6653(b)(1)(B), I.R.C. 1986.

     4.   Held, further, P is liable for negligence
additions to tax based on the portion of the 1986 deficiency
that is not attributable to fraud; amounts determined. Sec.
6653(a)(1), I.R.C. 1986.

     5.   Held, further, amounts of deficiencies
redetermined.

     6.   Held, further, P is not entitled to innocent
spouse treatment. Sec. 6013(e), I.R.C. 1986.


Robert D. Grossman, Jr., pro se.

Stephen L. Braga and Eric F. Horvitz, for petitioner.

John C. McDougal, for respondent.


                     TABLE OF CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION................      4

FINDINGS OF FACT.......................................      7

     A. Background.....................................      7

     B. Sley Corporations..............................     10

        1.   Background..................................   11
        2.   Investments.................................   12
        3.   Daily Operations: 1980 through March 1986..    19
        4.   Daily Operations: After March 1986.........    28

     C. Salaries and Dividends.........................     30

     D. Travel and Entertainment Expenses..............     32
                            - 3 -


         1.   1983........................................   34
         2.   1984........................................   43
         3.   1985........................................   47
         4.   1986........................................   55

      E. Financial Statements, Tax Returns, Audits,
           Notice of Deficiency.........................     67

      F. Interest Expense for 1987......................     78

OPINION................................................      80

I. Statute of Limitations..............................      80

      A. Underpayments of Tax...........................      86
         (1) 1983.......................................      91
         (2) 1984.......................................     100
         (3) 1985.......................................     106
         (4) 1986.......................................     117
         (5) Conclusions................................     119

      B. Fraudulent Intent..............................     120
         (1) Petitioner’s Knowledge of
                Credit Card Charges.....................     122
         (2) Petitioner’s Knowledge of Payments.........     123
         (3) Petitioner’s Knowledge of Berger’s
                Limited Role............................     124
         (4) Petitioner’s Knowledge of the Tax Laws.....     125
         (5) Petitioner’s Misleading Explanations.......     128
         (6) Other Considerations.......................     133

      C. Conclusions.................................... 141

II.   Additions to Tax.................................. 141

      A. Fifty-Percent Fraud Addition--1985.............     141
      B. Additional Amount for Portion
           Attributable to Fraud--1985..................     142
      C. Fraud Additions--1986..........................     143
      D. Negligence Additions--1986.....................     146

III. Amounts of Deficiencies........................... 147

      A. Amount of Constructive Dividends............... 147
      B. Interest Deduction............................. 148

IV.   Innocent Spouse Relief............................ 152
                                                 - 4 -


                         MEMORANDUM FINDINGS OF FACT AND OPINION

             CHABOT, Judge:           Respondent determined deficiencies in

       Federal individual income tax, deficiencies in Federal excise tax

       under section 49731 (excess I.R.A. contributions), and additions

       to tax under sections 6653(b) (fraud) and 6661 (substantial

       understatement of income tax) against petitioner as follows:

            Deficiency                                Additions to Tax
                                  Sec.6653       Sec.6653    Sec.6653    Sec.6653
Year   Income Tax   Excise Tax     (b)(1)          (b)(2)    (b)(1)(A)   (b)(1)(B)   Sec. 6661
                                                    1
1983   $12,740      $105          $6,370                          --       --           --
                                                    2
1984    15,917       210           7,959                          --       --           --
                                                    3
1985    14,924       315           7,462                          --       --        $3,652
                                                                           4
1986     6,400        --             --            --           $4,800                  --
                                                                           5
1987     4,778       315             --            --              221                  --
1988     2,886        --             --            --             --       --           --

        1
            50   percent   of   the   interest   due    on   $12,635.
        2
            50   percent   of   the   interest   due    on   $3,856.
        3
            50   percent   of   the   interest   due    on   $14,609.
        4
            50   percent   of   the   interest   due    on   $6,400.
        5
            50   percent   of   the   interest   due    on   $294.

             Respondent determined in the alternative that, if petitioner

       is not liable for part or all of the additions to tax for fraud

       for 1986, then petitioner is liable for negligence additions to

       tax under subparagraphs (A) and (B) of section 6653(a)(1).

             Docket No. 20526-90 deals with 1986, a joint tax return

       year.     Docket No. 14364-91 deals with 1983, 1984, 1985, and 1987,


             1
                 Unless indicated otherwise, all section references are
       to sections of the Internal Revenue Code of 1954, or the Internal
       Revenue Code of 1986, as in effect for the respective years in
       issue.
                              - 5 -


all joint tax return years, and 1988, a separate tax return year.

The dockets are consolidated for trial, briefing, and opinion.

The joint returns were filed by petitioner and his then-wife,

Betsy Grossman, hereinafter sometimes referred to as Betsy.

After concessions2 and deemed concessions3 by both sides,

     2
          Petitioner concedes the 1988 deficiency; he also
concedes the 1987 innocent spouse contention.

     Respondent concedes that petitioner’s taxable income should
not be increased by $1,400 for each of the years 1983 through
1986 on account of the value of tax return preparation services
paid on behalf of petitioner and Betsy by corporations in which
Betsy owned stock. Respondent also concedes that petitioner is
not liable for additions to tax for fraud for 1987, nor is
petitioner liable for excise taxes under sec. 4973 for 1983,
1984, 1985, and 1987. On the latter issue, see, e.g., Johnson v.
Commissioner, 74 T.C. 1057, 1062 (1980), affd. 661 F.2d 53 (5th
Cir. 1981).

     On opening brief, respondent “concedes the medical
reimbursement adjustment to constructive dividends in 1983, 1984
and 1985 as de minimis.” In the notice of deficiency, respondent
determined the following adjustments for medical reimbursements:
An upward adjustment of $508 for 1983, a downward adjustment of
$411 for 1984, and an upward adjustment of $55 for 1985.
Respondent’s unilateral (i.e., not by stipulation) “concession”
for 1984 would increase petitioner’s deficiency for this year.
Respondent has not asked for an increased deficiency for 1984;
see sec. 6214(a).

     3
          In the notice of deficiency, respondent disallowed
Schedule W deductions under sec. 221 (the two-earner deduction)
for 1983, 1984, and 1985. Respondent also determined that
petitioner’s taxable income should be increased by $1,400 for
1987 for the value of tax return preparation services paid on
behalf of petitioner and Betsy. See supra note 2 as to the same
issue for 1983 through 1986. On opening brief, petitioner
listed, but failed to argue these issues. Respondent dealt with
both of these issues on opening brief. Petitioner did not deal
with either of these issues on answering brief.
                                                   (continued...)
                                - 6 -


the issues for decision are as follows:

          (1)   Whether the assessment and collection of

     deficiencies and additions to tax for 1983, 1984, and 1985

     are barred by the statute of limitations, section 6501(a),

     or are allowed under the fraud exception, section

     6501(c)(1), to the general period of limitations.

          (2)   If assessment and collection are not barred for

     1983, 1984, and 1985, then, for each of those years--

                (a)   whether petitioner is liable for civil fraud

          additions to tax under paragraphs (1) and (2) of

          section 6653(b) and, as to paragraph (2) of section

          6653(b), in what amounts.


     3
      (...continued)
     We treat petitioner’s failure to argue as, in effect, a
concession by petitioner of these issues. See subpars. (4) and
(5) of Rule 151(e); Sundstrand Corp. v. Commissioner, 96 T.C.
226, 344 (1991); Money v. Commissioner, 89 T.C. 46, 48 (1987).

     In the notice of deficiency, respondent disallowed
deductions for contributions to an I.R.A. under sec. 219 for
1983, 1984, and 1985, and determined that petitioner is liable
for an addition to tax for substantial understatement of
liability under sec. 6661 for 1985. Respondent dealt with both
of these issues on opening brief. Petitioner neither listed nor
dealt with either of these issues on opening brief or answering
brief. We conclude that petitioner has conceded these issues.
See subpars. (4) and (5) of Rule 151(e); Sundstrand Corp. v.
Commissioner, supra; Money v. Commissioner, supra.

     Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 7 -


                (b)   what is the amount of petitioner’s unreported

          gross income.

          (3)   For 1986--

                (a)   whether petitioner is liable for civil fraud

          additions to tax under subparagraphs (A) and (B) of

          section 6653(b)(1) and, as to subparagraph (B) of

          section 6653(b)(1), in what amount.

                (b)   what is the amount of petitioner’s unreported

          gross income.

                (c) whether petitioner qualifies for innocent

          spouse treatment under section 6013(e).

          (4)   For 1987, whether petitioner overstated an

     itemized interest deduction by $8,559.

                          FINDINGS OF FACT

     Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.

     When the petitions were filed in the instant cases,

petitioner resided in Chevy Chase, Maryland.

                             Background

     Petitioner is a sophisticated taxpayer.    Petitioner is a

practicing attorney; he holds a J.D. degree from the University

of Florida and an LL.M. in Taxation degree from New York

University.   Petitioner was a senior trial attorney in the Trial
                                 - 8 -


Branch of the Tax Court Litigation Division, Office of Chief

Counsel, Internal Revenue Service, from 1971 through July 1975.

Since July 1975, petitioner has been engaged in private practice,

specializing in Federal tax law, and is currently a member of the

bar of this Court.   Petitioner was a name partner in the law firm

of Grossman & Flask, located in Washington, D.C., during the

years in issue.   Petitioner does not prepare tax returns for

himself or others.

     Petitioner and Betsy married in 1967.      They had three

children, two daughters and a son, who were born in the 1970’s--

RobBee (1970), Wendi (1973), and Geoffrey (1976).      Petitioner and

Betsy were married during the years in issue; they separated in

September 1986 and divorced in 1991.

     Betsy holds a bachelor of science degree from the University

of Colorado and a masters degree in special education and

learning disabilities from the University of Florida.      In 1966,

Betsy worked for the Sley Corporations, described infra.         For

about 2 years, Betsy was employed as a schoolteacher and earned a

yearly salary of about $5,100.    At some point, Betsy was employed

as a substitute teacher and as a gift store clerk for “minimal”

salary.

     During the years in issue, petitioner and Betsy had only one

joint checking account.   Through September 1986, this was

petitioner’s only checking account.      Betsy wrote and signed
                               - 9 -


almost all the checks drawn on this account.   While petitioner

and Betsy were married, petitioner deposited his earnings into

the joint bank account, and Betsy was responsible for spending

these funds.   Betsy made the decisions regarding petitioner’s and

Betsy’s expenditures.

     Betsy is the daughter of Harry Sley, hereinafter sometimes

referred to as Harry, and Beatrice Sley, hereinafter sometimes

referred to as Beatrice.   Harry died on December 11, 1977.

During the years in issue, Beatrice generally divided her time

between Potomac, Maryland, and Miami, Florida.   From about May to

November, Beatrice lived at least part of the time in a home in

Potomac, which she rented from petitioner and Betsy.   From about

November to May, Beatrice lived in a Miami Beach condominium that

she owned.   Beatrice died in 1991.

     Betsy’s brother, Benjamin Harry Beryll Sley, hereinafter

sometimes referred to as Ben, lived in Corpus Christi, Texas,

during the years in issue.   Ben is an attorney; he holds a J.D.

degree from Baylor Law School (1974) and an LL.M. in Taxation

degree from Southern Methodist University (1982).4   He was first

in his class at Southern Methodist University.   From 1975 to

1979, Ben served as a judge advocate in the U.S. Marine Corps.

     4
          The parties stipulated that Ben received his LL.M. in
Taxation degree from New York University. Our finding, contrary
to the stipulation, is in accord with Ben’s trial testimony and
petitioner’s proposed finding, not objected to by respondent.
                                - 10 -


During the years in issue, Ben practiced law in Texas.     He is

also a registered stockbroker and a consolidated life

underwriter.     In 1984, Ben ran for county attorney in Neuces

County, Texas.

     Petitioner, Betsy, and Ben grew up in the Miami, Florida,

area.     Petitioner and Betsy went to the same high school.

Petitioner and Ben have known one another since they were

children, and petitioner was best man at Ben’s wedding.

Petitioner’s parents also lived in the Miami area during some

part of the years in issue.

                           Sley Corporations

Background

        Harry formed a number of corporations to conduct parking

lot, garage, and real estate investment businesses in more than

60 locations in Philadelphia, Pennsylvania.     In general, these

corporations, hereinafter sometimes referred to collectively as

the Sley Corporations, owned and operated properties at different

locations.

        The Sley Corporations’ businesses and offices originally

were located in Philadelphia; they remained in Philadelphia,

until the fall of 1980, when the offices were moved to

Washington, D.C.     The Sley Corporations include Brine Corp.,

Girard Holding Co., Inc., Markette Corp. (hereinafter sometimes

referred to as Markette), Parkette Corp. (hereinafter sometimes
                              - 11 -


referred to as Parkette), Chestnut Parking Corp., Locust Corp.,

Nine Ten Chestnut Corp., Stephen Girard Investment Corp., and

Twelfth and Sansom Corp.   Parkette is the administrative umbrella

for the Sley Corporations.

     Some of the Sley Corporations became holding companies when

Harry sold some of the parking lots and garages, and kept the

proceeds of the sales in those corporations.

     Harry was the president of each of the Sley Corporations,

and controlled them, until his death in 1977.   At that time, some

of the Sley Corporations were still operating as landlords.

After Harry’s death, Beatrice and Lorraine Hicks, hereinafter

sometimes referred to as Hicks, Harry’s secretary for 50 years,

oversaw the investments of the Sley Corporations and continued to

sell some of the lots that some of the Sley Corporations held.

Hicks resigned from the Sley Corporations in the fall of 1980.

     Betsy was a corporate officer of each of the Sley

Corporations during the years in issue; she first became an

officer of some of these corporations in the 1960’s.     After

Harry’s death, all of the stock in the Sley Corporations has been

owned, either directly or beneficially (through inter vivos and

testamentary trusts) by Beatrice, Betsy, and Ben.   Harry intended

that all the Sley Corporations stock was to be owned exclusively

by Beatrice, Betsy, and Ben; he intended that in-laws, such as
                                - 12 -


petitioner, would not have an ownership interest in the Sley

Corporations.

Investments

     In 1978, after Harry died, Ben started to become interested

in learning about investments and began going to seminars and

reading financial publications.    In 1979, Ben began taking an

active role in the investment decisions of the Sley Corporations.

Ben devised investment strategies for the Sley Corporations.      On

September 20, 1979, Ben bought 1,750 Krugerrands at a cost of

about $700,000 for the Sley Corporations.    On October 3, 1979,

Ben sold the 1,750 Krugerrands at a profit of about $40,000 for

the Sley Corporations.   On October 4, 1979, Ben bought 38

diamonds at a cost of $2,369,190 for the Sley Corporations.    On

October 9, 1979, Ben bought another 1,750 Krugerrands at a cost

of about $700,000 for the Sley Corporations.    At some later date,

Ben and petitioner traveled to New York to receive the diamonds.

Each of them wore a money belt that contained more than $1

million worth of diamonds, which they carried to Washington,

D.C., and then put into the Sley Corporations’ safe deposit box

in a Washington, D.C., bank.    Ben received a Gemological

Institute of America (hereinafter sometimes referred to as GIA)

certificate for each diamond.    A GIA certificate is a written

description of a diamond’s physical characteristics.    At various

other dates, Ben bought (in 1979 and 1980) and sold (in 1980)
                              - 13 -


Krugerrands for the Sley Corporations.   The sales produced a 1980

profit of $75,150 for the Sley Corporations.

     In 1981, there was a very rapid drop in the prices of both

diamonds and gold.

     In 1980, Ben was employed as a stockbroker; he engaged in

transactions on behalf of the Sley Corporations that year.   In

1981, Ben went back to law school full-time.   From 1981 through

1986, Ben did not perform any investment services for the Sley

Corporations other than generally keeping abreast of financial

markets for the Sley Corporations and for his own investment

purposes, and reviewing monthly account statements from the banks

at which the Sley Corporations had cash management accounts.    In

1987, Ben made some investments for Markette’s pension and

profit-sharing plan.

     On January 20, 1984, Girard Holding Co., Inc., sold land and

parking lot improvements for $640,000; it reported a $511,658

gain on this sale.   Twelfth and Sansom Corp. was liquidated in

1985.   The liquidation included about $1 million worth of assets.

     Apart from the disposition of Krugerrands when Twelfth and

Sansom Corp. was going through its liquidation, none of the Sley

Corporations bought or disposed of any Krugerrands or diamonds

between the end of 1980 and the end of 1986.   See infra table 1.

In fact, the Sley Corporations still owned those same Kruggerands

and diamonds during the trial of the instant cases.
                             - 14 -


     Table 1 shows the investment portfolios of the Sley

Corporations for 1980 through 1986.   The values shown are the

historical costs of these assets.   Apart from the limited buying

and selling of certificates of deposit and moving money from one

bank or account to another done by petitioner, see infra, the

1984 Girard Holding Co., Inc., land and parking lot sale, and the

1985 Twelfth and Sansom Corp. liquidation, the assets held by the

Sley Corporations did not change during the years in issue.   The

cash management accounts shown in table 1 were accounts held at

the trust department of a bank; the trust department

automatically fully invested the accounts’ income and principal

on a daily basis.
                                                      Table 1


                                                 Brine Corporation
Asset                       1980         1981        1982        1983           1984         1985         1986

Cash management acct    $1,556,190     $1,533,220   $1,957,913   $1,984,248    $937,270    $817,270    $1,627,989
Diamonds                   518,001        518,001      518,001      518,001     518,001     518,001       518,001
Krugerrands                 96,180         96,180       96,180       96,180      96,180      96,180        96,180
Affiliate                      100            100          100          100         100         100           100
Marketable securities       48,750         48,750       48,750       48,750      48,750      48,750        48,750
Certificates of deposit       --             --          --           --      1,030,822   1,088,863        --

 Totals                   $2,219,221   $2,196,251   $2,620,944   $2,647,279 $2,631,123    $2,569,164   $2,291,020


                                            Girard Holding Co., Inc.
Asset                        1980        1981       1982        1983            1984          1985         1986

Cash management acct       $752,260     $745,700    $762,823      $815,823    $963,819     $855,717    $1,245,356
Diamonds                    101,269      101,269     101,269       101,269     101,269      101,269       101,269
Krugerrands                  96,180       96,180      96,180        96,180      96,180       96,180        96,180
Affiliate                     1,725        1,725       1,725         1,625       1,625        1,625           200
Ready assets                   --            917       1,032         1,123       1,241        1,342         1,428
Marketable securities       188,703      188,703     188,703       188,703     188,703      188,703       173,603
Repurchase agreement           --          5,000       5,337         5,796       6,350        6,805         7,185
Certificates of deposit        --          --          --            --        395,980      429,934

 Totals                   1,140,137    1,139,494    1,157,069    1,210,519    1,755,167   1,681,575     1,625,221


                                                Markette Corporation
Asset                        1980        1981           1982        1983        1984          1985        1986

Cash management acct    $2,838,000     $2,790,680   $2,755,258   $2,710,130    $839,386    $766,980    $2,195,735
Diamonds                 1,477,377      1,477,377    1,477,377    1,477,377   1,477,377   1,477,377     1,477,377
Krugerrands                 96,180         96,180       96,180       96,180      96,180      96,180        96,180
Affiliate                      100            100          100          100         100         100           100
Repurchase agreements       19,000          --           --          --           --          --            --
Certificates of deposit      --             --           --          --       1,681,386   1,570,098

 Totals                   4,430,657    4,364,377    4,328,915    4,283,787    4,094,429   3,910,735    3,769,392



                                          Chestnut Parking Corporation
Asset                        1980        1981         1982        1983          1984         1985         1986
                                           - 16 -


Cash management acct   $50,700   $45,000   $45,032   $45,032   $45,032   $28,032   $27,032
Diamonds               269,745   269,745   269,745   269,745   269,745   269,745   269,745
Krugerrands             96,180    96,180    96,180    96,180    96,180    96,180    96,180
Affiliate                  100       100       100       100       100       100       100

 Totals                416,725   411,025   411,057   411,057   411,057   394,057   393,057
                                               Con’t. Table 1



                                           Locust Corporation
Assets                  1980           1981        1982           1983        1984      1985      1986

Cash management acct   $32,260       $22,970      $22,974       $22,974     $22,974   $20,974    $19,774
Diamonds               252,842       252,842      252,842       252,842     252,842   252,842    252,842
Krugerrands             96,180        96,180       96,180        96,180      96,180    96,180     96,180
Affiliate                  100           100          100           100         100       100        100

 Totals                381,382       372,092      372,096       372,096     372,096   370,096    368,896



                                     Nine Ten Chestnut Corporation
Asset                   1980         1981        1982        1983            1984      1985       1986

Cash management        $11,000      $497,980     $416,126       $416,127   $412,327   $312,327   $297,327
Krugerrands             13,740        13,740       13,740         13,740     13,740     13,740     13,740
Affiliate                  100           100          100            100        100        100        100
Ready assets                          16,567       18,666         20,298     22,435     24,248     25,817
Repurchase agreement                  15,000       16,012         17,388     19,050     20,415     21,562

 Totals                $24,840       543,387      464,644       467,653    467,652    370,830    358,546


                                  Stephen Girard Investment Corporation
Asset                   1980          1981        1982        1983          1984       1985       1986

Cash management acct   $113,700     $99,900      $99,708        $99,708    $99,708    $99,708    $99,708
Diamonds                100,125     100,125      100,125        100,125    100,125    100,125    100,125
Krugerrands              96,180      96,180       96,180         96,180     96,180     96,180     96,180
Affiliate                   100         100          100            100        100        100        100

 Totals                310,105      296,305      296,113        296,113    296,113    296,113    296,113

                                     Twelfth and Sansom Corporation
Asset                   1980         1981         1982         1983         1984       1985       1986

Cash management acct   $286,870    $288,390     $969,655        $845,655   $845,655      --        --
Krugerrands              96,180      96,180       96,180          96,180     96,180      --        --
Affiliate                   100         100          100             100        100       100        100
Ready assets               --           821          925           1,005      1,111      --        --
Repurchase agreement       --        15,000       16,012          17,388     19,050      --        --
                                              - 18 -


Marketable securities   84,500    84,500      84,500      84,500      84,500    84,500   --

Totals                  467,650   484,991   1,167,372   1,044,828   1,046,596   84,600    100
                                - 19 -

Daily Operations:   1980 Through March 1986

     In the fall of 1980, after Hicks resigned, the business

offices of the Sley Corporations were moved from Philadelphia to

Washington, D.C., into space sublet from and adjacent to Grossman

& Flask’s office.   Later, when the Grossman & Flask office was

moved, the Sley Corporations’ office was simultaneously moved, so

that the Sley Corporations’ office remained in sublet office

space of Grossman & Flask throughout the years in issue.    When

the Sley Corporations’ offices moved to Washington, D.C.,

petitioner took control of the daily operations of the Sley

Corporations.   Betsy did not give petitioner directions as to how

to run the daily operation of the Sley Corporations.

     Tanja Baybrook, hereinafter sometimes referred to as

Baybrook, was the bookkeeper for the Sley Corporations from

September 1980 to March 1986.    She has a B.S. degree in

accounting from Northeastern University.    Petitioner interviewed

and hired Baybrook for this bookkeeping position.    Petitioner

explained to Baybrook her duties with the Sley Corporations, and

told her that she was to report to him in connection with that

work.   Petitioner supervised Baybrook in carrying out her duties

for the Sley Corporations.   During Baybrook’s interview,

petitioner told her that he was administering the Sley

Corporations.   Baybrook saw Betsy and Ben in the Sley

Corporations’ office on a few occasions, but not on a regular

basis; she saw Beatrice there only once.    Baybrook never received
                              - 20 -

instructions as to how to perform her duties from Beatrice,

Betsy, or Ben.   Baybrook’s salary started at about $15,000 per

year and increased a little over time.

     In early 1981, Baybrook also began doing the bookkeeping for

Grossman & Flask.   Baybrook spent about 75 percent of her time

doing the bookkeeping for Grossman & Flask.    Baybrook was paid by

Parkette; she was not paid by Grossman & Flask.    Petitioner

explained to Betsy that, because he was not being paid directly

for his administrative work on behalf of the Sley Corporations,

Parkette’s payment of Baybrook’s entire salary was, in effect, an

indirect way of the Sley Corporations paying for his

administrative work.

     Pursuant to her duties for the Sley Corporations, Baybrook

did bank reconciliations, disbursed payroll checks, and prepared

general ledger and payroll quarterly tax returns; she also

prepared checks for paying bills, and prepared summary financial

statements and monthly financial statements.   Baybrook created,

among other documents, computerized books of accounts and bank

statements for the investment accounts of Brine Corp., Girard

Holding Co., Inc., and Markette.   Baybrook did this work after

discussing it with petitioner, and chose the computer and program

after petitioner approved the purchases.   Baybrook did not

prepare any minutes for the Sley Corporations.    Baybrook

occasionally prepared corporate correspondence, which generally

was signed by petitioner.
                                - 21 -

     Baybrook opened the Sley Corporations’ mail.   For those

bills that came into the office that were readily identifiable,

Baybrook prepared checks as payment; for those bills that she had

questions about, she asked petitioner.    Petitioner told Baybrook

which of the Sley Corporations would pay a particular bill;

Baybrook used her own judgment to categorize the expenses on the

Sley Corporations’ books.    Baybrook prepared the checks as

payment for bills that came in on a particular day, attached the

bills to the checks, then took the bills and checks to petitioner

so that he could review the bills and sign the checks.

Petitioner closely reviewed the checks that Baybrook prepared

against each underlying bill.

     Petitioner usually signed the Sley Corporations checks

prepared by Baybrook.   Betsy occasionally signed Sley

Corporations checks.    Baybrook generally prepared about 12 Sley

Corporations checks per month as payments for dividends, rent,

telephone, payroll, and travel, although there was heavier

activity in some months.    Petitioner signed more than 98 percent

of the Sley Corporations checks that were written from January 1,

1983, thought March 31, 1986.

     The invoices that came into the Sley Corporations’ offices

from American Express discussed infra (under Travel and

Entertainment Expenses), were processed a bit differently.      These

invoices were addressed primarily to petitioner at his home.

Petitioner usually brought these invoices to Baybrook and told
                              - 22 -

her which of the Sley Corporations would pay for the charges on a

particular invoice.   If Baybrook had a question as to which of

the Sley Corporations would pay for a particular charge, then

Baybrook asked petitioner.   Baybrook prepared the check, attached

the invoice to the check, and returned the invoice with the

attached check to petitioner for his final review.   Petitioner

closely reviewed the checks that Baybrook prepared against each

invoice; he also reviewed each transaction on each invoice.

Baybrook categorized these charges as “TRAVEL/TRANSPORTATION”

expenses on Markette’s books and records.   Petitioner never told

Baybrook that a travel expense was personal, as opposed to

business, and thus was not to be paid by the Sley Corporations.

At one time, when Baybrook was going to Orlando, Florida, for

personal purposes, petitioner asked Baybrook to check on the

health of two people who were receiving checks from Harry’s

estate.   Petitioner arranged for Baybrook to be paid $200 by the

Sley Corporations, which was payment for her time and the

expenses she incurred while doing work for Harry’s estate5 while

in Florida, not the cost of her entire trip to Florida.

     Baybrook prepared Sley Corporations’ payroll checks to be

paid to Beatrice, Betsy, and Ben.   Petitioner told Baybrook the



     5
          Petitioner’s proposed finding 318 states that this work
was for Markette. Respondent did not object to this proposed
finding. Nevertheless, Baybrook’s detailed testimony, on which
petitioner’s proposed finding was based, makes it clear that the
work was done for Harry’s estate, and we have so found.
                                - 23 -

amount for which each payroll check should be written and later

told her when the amounts of the payroll checks changed.   See

infra Salaries and Dividends.    Baybrook was not told the reasons

for the changes.   When petitioner gave these instructions to

Baybrook, he did not indicate to her that he was passing on

instructions from the Sley Corporations’ officers.   Baybrook also

prepared the Sley Corporations payroll tax returns; petitioner

signed them.   Petitioner signed Sley Corporations tax returns as

an “officer”; the “title” he used was “attorney”.

     Baybrook prepared summary financial statements of

petitioner’s income based on the books she kept for the Sley

Corporations and for Grossman & Flask; Baybrook did not intend

that these summaries be all-inclusive, but she tried and intended

to include everything that occurred “inside the office”--that is,

the income from Grossman & Flask and from the Sley Corporations.

Baybrook was not asked by petitioner to prepare the summary

financial statements; Baybrook prepared them as a courtesy to

Harvey J. Berger, hereinafter sometimes referred to as Berger,

the accountant who, from 1980 on, prepared the Sley Corporations’

tax returns and petitioner’s and Betsy’s joint tax returns.

Baybrook gave the summary financial statements to petitioner so

that he could make sure that all items of income and deductions

were included.   Baybrook was never asked to prepare a schedule of

constructive dividends.
                             - 24 -

     During 1983 through March 1986, when Baybrook left the Sley

Corporations, Baybrook did not have any communication with either

Beatrice, Betsy, or Ben about the Sley Corporations.    During

these years, Baybrook did not send to Beatrice, Betsy, or Ben

copies of bills, the financial statements she prepared, or any

other correspondence that came into the office.   Baybrook did not

see any correspondence that was signed or received by Beatrice,

Betsy, or Ben on behalf of the Sley Corporations, except for (1)

occasional checks signed by Betsy or (2) promissory notes signed

by Sley Corporations officers.   During this period, Baybrook was

in the Sley Corporations offices virtually every day, except when

she was on vacation.

     Betsy did not direct either petitioner or Baybrook as to

which, if any, of the Sley Corporations should pay for the

expenses appearing on the American Express invoices.    Petitioner

checked with Betsy as to whether Betsy charged particular items

or incurred particular expenses, but he did not ask Betsy whether

particular expenses should be paid by the Sley Corporations.

Neither Betsy nor Ben gave petitioner instructions to pass along

to Baybrook as to the amount of salary Beatrice, Betsy, and Ben

were to receive, nor did they give instructions as to which of

the Sley Corporations were to pay the salaries.

     In addition to supervising Baybrook and running the daily

operations of the Sley Corporations, petitioner transferred money

among the Sley Corporations’ bank accounts and bought
                                - 25 -

certificates of deposit for the Sley Corporations.        For example,

in July 1984, petitioner told Baybrook to telephone the Mellon

Bank, where Markette had an investment account, and have $1

million transferred from the Mellon Bank to the National

Permanent Bank of Washington to buy certificates of deposit.        In

October 1984, petitioner told Baybrook to telephone the Mellon

Bank and have that bank transfer $75,000 to Markette’s checking

account.

     On February 3, 1986, petitioner moved the amounts shown in

table 2 from the National Permanent Bank of Washington and

deposited these funds into accounts he had opened in the names of

the Sley Corporations at the National Bank of Washington.

                                Table 2

           Corporation                Amount Transferred

           Markette                       $1,663,963.84
           Brine Corp.                     1,171,718.68
           Girard Holding Co.                433,638.66


     On February 4, 1986, petitioner transferred by wire

$432,638.66 from Girard Holding Co., Inc.’s account at the

National Bank of Washington to the Mellon Bank.      On February 4 or

5, 1986, $1,170,718.68 was transferred by wire to Brine Corp.’s

account at Mellon Bank and $1,654,754.92 was transferred by wire

to Markette’s account at Mellon Bank.      Generally, Ben was not

involved in decisions to invest money in particular certificates

of deposit or to move money from one bank or account to another;
                               - 26 -

however, petitioner did speak to Ben before he moved funds out of

the National Permanent Bank of Washington in February 1986.

     In January 1981, petitioner became the named fiduciary for

the Markette Corporation Comprehensive Health Plan, which was

created at that time.   Petitioner was the administrator and one

of the trustees of the Parkette Corporation Profit Sharing Plan

and also of the Parkette Corporation Pension Plan.   Both of these

plans were established “as of” December 31, 1980, and both plans

covered employees of all the Sley Corporations.   In 1984,

petitioner handled the sale of real estate that belonged to one

of the Sley Corporations.

     From 1980 to about March 1986, Betsy did not take an active

interest in the Sley Corporations, nor did she have a working

knowledge of the Sley Corporations’ operations.   During the years

in issue until March 1986, Betsy entrusted the entire operations

of the Sley Corporations to petitioner so that she could stay at

home to take care of her children; Betsy also was very involved

in civic activities.    During the years in issue until 1986, Betsy

and petitioner had, in Betsy’s words, an “old-fashioned

relationship” where she took care of the children and the

household, and petitioner took care of business matters, those

being his law practice and the daily operations of the Sley

Corporations.   However, see our findings as to petitioner’s and

Betsy’s joint checking account, under Background, supra.
                              - 27 -

     Before 1986, Betsy had a general understanding of what

assets the Sley Corporations held, participated in general family

discussions about the Sley Corporations, and “just read up on

different things and the Wall Street Journal.”   From 1980 through

about March 1986, Betsy did not go into the Sley Corporations’

office, review the monthly financial statements, or sign Sley

Corporations’ correspondence on a regular basis.    From 1979

through early 1986, Betsy merely signed whatever petitioner asked

her to sign.   Before 1986, Betsy did not have any involvement in

the preparation, review, or filing of the Sley Corporations’ tax

returns.

     Ben lived in Texas during the years in issue and did not

take responsibility for, nor have any involvement in, the daily

operations of the Sley Corporations.   Ben received copies of the

Sley Corporations’ tax returns, but he did not have any

involvement in the preparation and filing of those tax returns.

In 1984, Ben was involved in decision-making that led to the

liquidation of Twelfth and Sansom Corp.   Also in 1984, Ben

proposed consideration of liquidating all the Sley Corporations.

Petitioner and Ben received a letter from Berger stating the pros

and cons of liquidation; Twelfth and Sansom Corp. was the only

one of the Sley Corporations that was liquidated.

     In September of 1984, 1985, and 1986, Beatrice, Betsy, and

Ben met as the Markette board of directors, to authorize the

redemption of stock held by trusts of which Betsy and Ben were
                               - 28 -

the beneficiaries.   From 1983 to 1986, these three meetings were

the only meetings held of the Sley Corporations’ directors.    The

minutes prepared for these three meetings were the only minutes

prepared for the Sley Corporations for about 1982 through 1989.

     During the period 1980 through 1986, petitioner and his law

firm performed legal services for the Sley Corporations.    When

such services were performed, Grossman & Flask billed the client

for fees.

Daily Operations:    After March 1986

     Matters between petitioner and Betsy were deteriorating.

Petitioner and Betsy separated permanently in September 1986.

     When Baybrook left the Sley Corporations in March 1986,

Betsy began to become more involved with the operation of the

Sley Corporations.    Betsy began signing checks and tax returns;

she interviewed and hired a bookkeeper in July 1986, Bridgette

Coupeon, and a replacement for Bridgette Coupeon in September

1986, Evelyn Wilson, hereinafter sometimes referred to as Wilson.

     Maggie-Jo Brown, hereinafter sometimes referred to as Brown,

is an accountant who originally was employed by the accounting

firm of Grant Thornton under Berger’s supervision.    The first

week after Brown started at Grant Thornton, in February 1985,

Berger assigned her to prepare the 1984 tax returns and

compilation financial statements for the Sley Corporations.

(For a description of the compilation financial statements, see

Financial Statements, etc., infra.)     After Baybrook left the Sley
                              - 29 -

Corporations, Brown began going into the Sley Corporations’

office on a weekly basis, at night or on the weekend, to do work

for the Sley Corporations that Baybrook had left undone; at this

point, Brown was still employed by Grant Thornton.    Brown did the

bookkeeping, made sure that checks were written and payroll tax

returns were filed, and answered correspondence.

     Brown first met Betsy and Ben in April 1986.    Thereafter,

Brown dealt with both petitioner and Betsy regarding the Sley

Corporations.   Over the course of 1986, however, petitioner told

Brown to start directing questions regarding the Sley

Corporations to Betsy.   After Wilson was hired as the Sley

Corporations’ bookkeeper in September 1986, Brown no longer went

into the Sley Corporations’ office on a weekly basis and mainly

dealt with Wilson over the telephone about questions concerning

the Sley Corporations when preparing the compilation financial

statements and the tax returns.   Although petitioner’s status in

the Sley Corporations’ operations diminished after March 1986, he

continued to play a role throughout 1986.

     In January 1987, Betsy, petitioner, and Brown met with a

bond investor; the purpose of the meeting was to have Betsy begin

to think about the investment portfolios of the Sley

Corporations, which had not changed since 1980.     See supra table

1.   In April 1987, Brown ended her employment with Grant

Thornton.   In May 1987, petitioner and Betsy hired Brown to work

for the Sley Corporations as the comptroller; this position
                              - 30 -

combined the bookkeeping and the tax preparation duties.   As a

practical matter, Betsy ran the Sley Corporations by the time

Brown was hired, and Betsy supervised Brown.

                      Salaries and Dividends

     Beatrice started receiving a salary from the Sley

Corporations in 1978, when she and Hicks took over the operations

of the Sley Corporations.   Beatrice also received dividends from

the Sley Corporations.

     Before 1980, Betsy and Ben received dividends, but not

salaries, from the Sley Corporations.   In 1980, Betsy received a

salary of $25,000.   From 1981 through 1987, Betsy and Ben each

received salaries of at least $100,000.   In 1986, each of them

received a salary of $124,583.   Betsy and Ben were not doing

anything more for the Sley Corporations in 1981 and later years

than they were doing before 1981.

     Neither Betsy nor Ben set the salaries for themselves or for

their mother.   Betsy does not know why she received her salary

from Markette,6 nor does she know why she received the amounts of

salaries she received.   Likewise, Ben does not know why he

received his salary from Brine Corp.,7 nor does he know why he


     6
          Betsy received her salary exclusively from Markette,
except for 1983, when she also received $1,562 from Girard
Holding Co., Inc.
     7
          Ben received his salary exclusively from Brine Corp.,
except for 1983, when he also received $1,563 from Girard Holding
Co., Inc.
                                                   (continued...)
                              - 31 -

received the amounts of salaries he received.   Beatrice, Betsy,

and Ben received salaries from only one or two of the Sley

Corporations, so that, as to any one shareholder or one

corporation, the salaries were grossly disproportionate to the

shareholdings.   However, the aggregate salaries of each of them

were closely proportionate to their respective aggregate

ownerships of the Sley Corporations.

     Betsy and Ben learned the amounts of their Sley Corporations

salaries from petitioner; they did not direct petitioner on this

matter.   Petitioner set Betsy’s and Ben’s Sley Corporations

salaries, at least up to early 1986.

     Table 3 shows the amounts that Markette withheld as Social

Security taxes, hereinafter sometimes referred to as F.I.C.A.

taxes, from the amounts Markette paid as salary to Betsy.

                              Table 3

                 Year                        Amount

                 1983                      $2,391.91
                 1984                       2,532.59
                 1985                       2,791.78
                 1986                       3,003.00
                 1987                       3,131.70
                 1988                       3,379.50

     At the end of each year, Berger came into the Sley

Corporations’ office to calculate the amounts of the dividends




     7
      (...continued)
                             - 32 -

each of the Sley Corporations had to pay out in order to avoid

the personal holding company tax.

     Table 4 shows the amounts of Sley Corporations dividends

paid to Betsy and reported on Schedules B of petitioner’s and

Betsy’s joint tax returns.

                             Table 4

               Year                          Amount

               1983                         $36,384
               1984                         1
                                              37,609
               1985                           13,481
               1986                           18,153
1
  Petitioner’s proposed finding 59, not objected to by
respondent, shows this total as $37,573. Our finding is the sum
of the component dividend amounts, which are correctly
transcribed from petitioner’s and Betsy’s 1984 joint tax return.
The $36 difference between our finding and the total on
petitioner’s proposed finding does not affect our analysis.

               Travel and Entertainment Expenses8

     8
          On brief, in proposed finding 165, respondent asks us
to find that “During the years 1893[sic] through 1986, Markette
paid and deducted the following travel expenses”. The proposed
finding then sets forth the amounts shown on Markette’s tax
returns for those years. In compliance with Rule 151(e)(3),
respondent shows exhibits Q, R, and S, retained copies of
Markette’s tax returns, as the sources in the record supporting
the proposed finding as to what Markette deducted as travel
expenses for 1983, 1984, and 1985. As respondent properly alerts
us on brief, “Exs. Q, R, and S were admitted into evidence for
the limited, non-hearsay, purpose of establishing the
compensation and dividends reported by the corporation.”
Respondent’s counsel limited his offer of those exhibits at trial
to the compensation and dividend information shown on those tax
returns. We overruled petitioner’s objections to that limited
offer. The trial adjourned for the weekend, resumed the
following Monday, and continued for an additional 496 pages of
transcript.

     Later that same day, respondent’s counsel properly asked to
expand the limited admission. Respondent’s counsel explained as
                                                   (continued...)
                             - 33 -

     During the years in issue, Markette had several American

Express credit card accounts on which credit cards were issued in

petitioner’s name and in Betsy’s name.   Petitioner and Betsy


     8
      (...continued)
follows:

          I had stipulated that the nonhearsay purpose for which
     I was offering those returns was to prove, I believe I said,
     salary and dividends. I would like to modify that to cover
     all compensation and dividends.

          The Revenue agent, in preparing her summary, included
     other things in compensation besides salary, to include
     particularly contributions to pension and profit sharing
     plans. Those also would be nonhearsay purposes. We don’t
     care if they are true or not; we just want to show what was
     reported to the IRS.

The Court accepted the expansion. The expansion clearly did not
relate to deductions of travel expenses.

     If respondent’s counsel overlooked the travel expenses
matter before the instant cases were submitted and later
concluded that it was important to secure a further expansion,
then respondent’s counsel should have either (1) secured
petitioner’s agreement or (2) moved before opening briefs were
due to reopen the record to expand the limited admission. We do
not believe it is appropriate to allow petitioner to write and
file his opening brief on the assumption that these exhibits were
offered and received only for a specified limited purpose and,
afterward, learn that these exhibits are being used for another
purpose. True, petitioner has (and used) the opportunity to
respond on answering brief. However, if the Court were to accede
to respondent’s request in this situation, then petitioner would
have been deprived of the opportunity to use the expanded
admission in crafting his own proposed findings.

     There may be extraordinary circumstances under which such a
delay in presenting the matter may be excusable. We do not
decide that hypothetical; in the instant cases, we do not reach
the question of what we would have ruled if respondent had
presented the matter seasonably. We shall expand the limited
admission. Exhibits Q, R, and S were admitted at trial for
limited purposes and, as so limited, do not support respondent’s
proposed finding.
                               - 34 -

charged travel and entertainment expenses on these credit cards,

as detailed infra.

       Since the 1960’s, Betsy has held credit cards issued in the

name of one or another of the Sley Corporations.    Harry

originally gave these credit cards to Betsy.    Betsy had used the

credit cards, both before and during the years in issue, without

regard to whether the charges made had a business purpose.    Betsy

understood that, as a result, Markette would be paying for the

amounts she charged, and that she and petitioner would not be

paying for these amounts.    Petitioner used his Markette American

Express credit card only once after 1986.

       When Betsy took a trip without petitioner, she informed him

of the trip.

1983

       Table 5 lists certain checks written on the Markette account

in 1983.    The table shows the date the check was written, check

number, payee, and amount.    All of these checks were signed by

petitioner.    Respondent determined that petitioner and Betsy

failed to report $18,611.70 of constructive dividends received

from Markette in 1983, the sum of the checks listed in table 5,

$15,299.88, plus the amount of a $3,311.82 debit memorandum

resulting from a transfer of funds to Media Communications, Inc.9

       9
          Respondent’s travel and entertainment expense
determinations in the notices of deficiency are based on amounts
of certain Markette checks. It is apparent to us that, in
general, our redetermination should be based on evaluations of
the specific trips or the occasions of the specific entertainment
                                                   (continued...)
                                - 35 -

                                Table 5

Date             Check
1983             Number               Payee               Amount

Jan.       05      1824          American Express          $42.80
Feb.       03      1844          American Express        3,588.87
Mar.       28      1856          American Express        1,038.08
Apr.       18      1862          Eastern Airlines        1,302.00
May        111     1870          American Express          795.59
May        24      1873          American Express          964.41
June       29      1884          American Express        2,210.00
Aug.       04      1896          American Express        3,366.19
                 2
Sept.      19      115417        American Express        1,001.60
Sept.      29      1903          American Express          496.00
Nov.       113     1912          American Express          494.34

                                                        15,299.88

                            Debit Memorandum4

June 02           --             Media Communications    3,311.82

    Total                                               18,611.70

1
   Markette’s cash disbursements journal shows the date as May 9,
but the check itself is dated May 11.
2
   Markette’s cash disbursements journal shows the check No. as
115416800, but the check itself is numbered 115417; it appears to
be a counter check.



       9
      (...continued)
items. The trips often cut across the American Express vouchers
and the Markette checks. It is often difficult to determine
which voucher items are to be matched with a specific trip or
entertainment item, or with a specific Markette check. These
difficulties are heightened in those instances in which American
Express allowed credits for amounts previously paid, but the
record herein does not clearly describe the specific charge that
is being reversed in whole or in part by the specific credit. As
a result, notwithstanding the extensive record and long briefs,
there are many items as to which we have been unable to make
meaningful findings. The sums of these items appear infra in
tables 6, 8, 10, and 12, in the columns headed "Unknown".
                              - 36 -
3
   Markette’s cash disbursements journal shows the date as Nov.
10, but the check itself is dated Nov. 11.
4
   Markette’s cash disbursements journal shows this item as check
No. 1877, the date as June 1, and the payee as National Seminar,
Inc. The bank’s debit memorandum itself shows the information
set forth in the table.

     During the years in issue, petitioner, Betsy, and the

children usually flew to Miami to see Beatrice in December and in

the spring, and stayed for about one week.   No notes or records

were kept of any Miami Sley Corporations’ business discussions.

Baybrook was never asked to make copies of the Sley Corporations’

financial statements to take to Miami, nor was Baybrook asked to

make travel arrangements.

     Check No. 1862--Miami.   In February 1983, five Eastern

Airlines tickets, costing $1,302, were bought for petitioner,

Betsy, and the children to fly to Miami to visit Beatrice.     The

primary purpose of this trip was personal--a family vacation.

     These tickets were paid for by Markette check No. 1862.

     Check No. 1896--Lake Tahoe.   The American Express July

invoice includes petitioner’s charges totaling $1,351.50 for five

United Airlines tickets for petitioner, Betsy, and their children

to fly round-trip from Washington, D.C., to Reno, Nevada.    The

primary purpose of this trip was personal--a family vacation to

Lake Tahoe to visit relatives in the area (petitioner’s father

rented a condominium in Lake Tahoe) and to go skiing.   These

charges were paid for by Markette check No. 1896.   The family

usually went to Lake Tahoe in August.   However, petitioner did
                              - 37 -

not go on this trip, and the $318 charge for his ticket was

refunded by a credit on the American Express August invoice.

Thus, the $318 that was later refunded is not properly part of

the cost of this Lake Tahoe trip.

     Check No. 1896, Debit Memo--Hawaii.   The American Express

July invoice includes charges totaling $2,014.69 for

miscellaneous hotel and airline expenses on a trip to Hawaii by

petitioner, Betsy, and the children.   Petitioner charged all of

these expenses on his Markette American Express credit card.    The

primary purposes of this trip were (1) for petitioner to appear

as a panelist on a video conference to be broadcast from Hawaii

by satellite, (2) to meet Howard Ruff (hereinafter sometimes

referred to as Ruff) in person, and (3) to take a family

vacation.   These charges were paid for by Markette check No.

1896.

     Petitioner was invited to be a panelist by a radio talk show

host, H.I. “Sonny” Bloch, hereinafter sometimes referred to as

Bloch.   Bloch’s brother, a Washington, D.C., attorney, was a

client of petitioner.   Bloch also became a client of petitioner.

Ruff, a well-known financial adviser, described by petitioner as

“the greatest guru”, was the other panelist.   On the video

conference, Ruff spoke about financial aspects of investing, and

petitioner spoke about tax aspects of investing.   The video

conference was a segment of “Investor’s Action Line”, a

nationally syndicated television program for investors and
                               - 38 -

financial specialists.   The video conference took place in Hawaii

to accommodate Ruff’s schedule.    Ben was an admirer of Ruff and

believed in Ruff’s views.    At Ben’s suggestion, petitioner and

Betsy went to a seminar that Ruff was conducting on Maui apart

from his appearance on the video conference, and “went through

the seminar to see what was going on”.

     Petitioner, Betsy, and the children checked into a hotel on

Maui on June 7, 1983.    The video conference was conducted on June

8, 1983, in Honolulu, on Oahu, and lasted about 2 hours.

Honolulu is about 100 miles from Maui by air.    Petitioner, Betsy,

and the children checked into another hotel on Maui on June 13,

1983.   Their stay in Hawaii lasted altogether 10 days or more.

     The $2,014.69 of charges related to the Hawaii trip includes

two items for $39.95 each.    The charge on one of the $39.95 items

was refunded by a credit on the American Express August invoice,

and so is not properly part of the cost of the Hawaii trip.

     On June 2, 1983, $3,311.82 was transferred, via debit

memorandum, from Markette to Media Communications, Inc.

Markette’s cash disbursements journal shows a June 1, 1983, check

(No. 1877) in the amount of $3,311.82 to National Seminar, Inc.,

the company that produced the video satellite broadcast on which

petitioner appeared.    The record does not include a copy of the

June 1, 1983, check, nor does it enable us to determine whether

the check to National Seminar, Inc., and the June 2, 1983, debit

memorandum to Media Communications, Inc., are essentially the
                               - 39 -

same transaction.    Likewise, the record does not enable us to

determine the purpose of either the check or the debit

memorandum.

     There was no, or practically no, Sley Corporations business

purpose for the Hawaii trip, and the predominant purposes of the

Hawaii trip were personal and Grossman & Flask business.

     Check Nos. 115417 and 1896--1984 Olympics.    On August 12,

1983, Betsy bought $1,359.55 of tickets to the 1984 Olympics in

Los Angeles, and charged this on her Markette American Express

credit card.   The tickets were used by petitioner, Betsy, and

their children to attend the 1984 Olympics.    The purpose of this

trip was personal.    Betsy told petitioner that she would

reimburse Markette for the cost of the Olympics tickets, but she

did not reimburse Markette.

     Against the bill for the 1984 Olympics tickets, American

Express allowed credits on account of the $318 Lake Tahoe trip

ticket refund (Check No. 1896--Lake Tahoe, supra) and the $39.95

Hawaii trip ticket refund.    Check No. 1896, Debit Memo--Hawaii,

supra.   As a result, the American Express August invoice netted

to $1,001.60, which Markette paid by check No. 115417.

     Check Nos. 1903, 1912--New York City.    On September 29,

1983, Markette issued check No. 1903, in the amount of $496, to

American Express, to pay for round-trip airline tickets to New

York City.    On November 11, 1983, Markette issued check No. 1912,

in the amount of $494.34, to American Express, to pay for hotel,
                               - 40 -

telephone, and meal expenses in New York City.    All the charges

were on Betsy’s Markette American Express credit card, but

petitioner signed the credit slips for the hotel, etc., expenses.

The expenses were incurred for a trip by petitioner, Betsy, and

the children to New York City on September 9, 1983, and back on

September 11, 1983.    The purpose of this trip was for petitioner

and Betsy to go to the “diamond district” in New York City to

talk with diamond brokers about selling the Sley Corporations’

diamonds.    Petitioner and Betsy took GIA certificates on their

visits to the diamond district, but did not take the actual

diamonds.    Petitioner and Betsy did not keep notes or records of

their discussions with the diamond brokers, nor did they get

written quotations on the value of their diamonds.

     The children were ages 13, 10, and 7 at the time of this New

York trip.   Petitioner and Betsy took the children to New York

City because it was more convenient to take the children with

them than to get a babysitter for the children in Maryland.

     Petitioner’s and Betsy’s airline tickets cost a total of

$220; the children’s tickets a total of cost $276.    Petitioner,

Betsy, and the children took two rooms at the Grand Hyatt New

York; the cost (including taxes) of each room for the two nights

was $183.70.   Telephone call charges total $7.18.   Charges for

meals total $119.76.

     This New York City trip was taken for Sley Corporations

business purposes and was not a personal or family vacation or
                              - 41 -

sightseeing trip.   However, there were no Sley Corporations

business purposes for the children’s presence on this trip; their

presence was for Betsy’s personal purposes.   Of the $990.34 of

expenses paid by Markette ($496 airline plus $494.34 hotel,

etc.), $520 (the children’s airline tickets, one of the hotel

rooms, and about half the meals) is attributable to the children

and the remaining $470.34 is attributable to petitioner and

Betsy.

     Summary.

     The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed supra on

table 5.



     Table 6 shows our allocations with respect to respondent’s

determinations listed supra on table 5.
                                                        Table 6


                                                                               Purpose
                                                                                                    Credit Generated
Date        Check                      Check         Personal or     Sley Corporations                    or
1983        Number     Payee           Amount     Grossman & Flask        Business       Unknown       (Allowed)

Jan.   05   1824   American Express     $42.80          --                --               $42.80        --
Feb.   03   1844   American Express   3,588.87          --                --             3,588.87        --
Mar.   28   1856   American Express   1,038.08          --                --             1,038.08        --
Apr.   18   1862   Eastern Airlines   1,302.00     $1,302.00              --                --           --
May    11   1870   American Express     795.59          --                --               795.59        --
May    24   1873   American Express     964.41          --                --               964.41        --
June   29   1884   American Express   2,210.00          --                --             2,210.00        --
Aug.   04   1896   American Express   3,366.19      3,008.24              --                --        $318.00
                    (July invoice)
Sept.19     115417 American Express   1,001.60      1,359.55              --               --           39.95
                    (Aug. invoice)
Sept.29     1903   American Express     496.00        276.00            220.00             --         (318.00)
                    (Sept. invoice)
Nov. 11     1912   American Express     494.34        244.00            250.34             --          (39.95)
                    (Oct. invoice)
June 02            Debit memorandum   3,311.82          --                --             3,311.82        --

 Total for 1983                       18,611.70     6,189.79            470.34       11,951.57
                                - 43-


1984

       Table 7 lists certain checks written on the Markette account

in 1984.    The table shows the date the check was written, check

number, payee, and amount.    All of these checks, except for check

Nos. 1951, 1975, and 1995, were signed by petitioner.      Check No.

1951 was unsigned (but was processed and paid, anyway), check No.

1975 was signed by Betsy, and check No. 1995 does not appear in

the record.    Respondent determined that petitioner and Betsy

omitted to report $14,894.26 of constructive dividends received

from Markette in 1984, the sum of the checks listed in table 7.

In the notice of deficiency, this figure was adjusted downward by

$1,214 for the amount of check No. 1995 and by $138 for a travel

and entertainment reimbursement.    See supra note 9.

                               Table 7

                 Check
Date             Number         Payee                   Amount

Jan. 09          1929      American Express         $2,526.53
Feb. 21          1946      Eastern Airlines          1,616.50
Mar. 12          1951      American Express            800.00
Mar. 13          1952      American Express          1,840.28
Apr. 17          1966      American Express            930.75
May 25           1975      American Express            694.20
July 20          1987      United Airlines           2,057.00
Aug. 02          1993      American Express          1,399.00
Aug. 31          1995      American Express          1,214.00
Sept.19          2003      Sean Henry                  240.00
Oct. 08          2008      American Express          1,576.00
                                                    14,894.26
      Less adjustments                               1,352.00
                                                   1
    Total                                              13,542.26
1
   In the notice of deficiency, respondent made a mathematical
error and stated this figure as $13,452.26. Respondent, however,
                                - 44-


used the arithmetically correct figure, $13,542.26, in
calculating the total constructive dividend amount and thus used
the arithmetically correct total in determining the 1984
deficiency.

     Check No. 2008--Orlando.    As payment for the American

Express September invoice, Markette issued check No. 2008,10 for

$1,576, to American Express on October 8, 1984.    By this check,

Markette paid for five Eastern Airlines tickets appearing on the

August invoice and a Pan American World Airways ticket appearing

on the September invoice.

     The Markette American Express invoice with a closing date of

October 17, 1984, shows charges for five Eastern Airlines

tickets, costing $780, and no other charged items.    The October

invoice also shows the $1,576 payment made with check No. 2008

and a $860 credit on account of the return or cancellation of

five Eastern Airlines tickets that had appeared on the August

invoice.   The October invoice charges were on Betsy’s card.   The

October invoice had a credit balance of $80, the net of the $780

charges and the $860 credit.

     The five Eastern Airlines tickets on the October invoice

were bought for petitioner, Betsy, and the children to fly from

Washington, D.C., to Orlando, Florida, on September 27, 1984, and

back on September 30, 1984.    The purpose of this trip was




     10
          The notice of deficiency shows this as check No. 2007.
However, it is clear from the context that 2008 is intended.
                                - 45-


personal--a family vacation to meet Ben and to take the children

to Walt Disney World.

     No payment was made on the October invoice.   The five

Eastern Airlines tickets to Orlando on the October invoice were

“paid for” with the $860 credit issued on account of the refund

of the five Eastern Airlines tickets appearing on the August

invoice.    Markette had paid for the five Eastern Airlines tickets

on the August invoice, later refunded, with check No. 2008.

Thus, in effect, Markette used check No. 2008 to pay $780 for the

five Eastern Airlines tickets to Orlando on the October invoice.

     Check No. 1995.    As payment for the August invoice, Markette

issued check No. 1995, for $1,214, to American Express on August

31, 1984.   Check No. 1995 was voided on September 10, 1984.

     Summary.

     The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed on table 7,

supra.

     Table 8 shows our allocations with respect to respondent’s

determinations listed on table 7, supra.
                                            Table 8



                                                                     Purpose
                                                      Personal or   Sley Corporations
Date        Check                         Check       Grossman &    Business or
1984        Number        Payee           Amount        Flask         Voided          Unknown

Jan.   09   1929     American Express   $2,526.53         --           --          $2,526.53
Feb.   21   1946     Eastern Airlines    1,616.50         --           --           1,616.50
Mar.   12   1951     American Express      800.00         --           --             800.00
Mar.   13   1952     American Express    1,840.28         --           --           1,840.28
Apr.   17   1966     American Express      930.75         --           --             930.75
May    25   1975     American Express      694.20         --           --             694.20
July   20   1987     United Airlines     2,057.00         --           --           2,057.00
Aug.   02   1993     American Express    1,399.00         --           --           1,399.00
                      (July invoice)
Aug. 31     1995     American Express    1,214.00         --         $1,214.00          --
                      (Aug. invoice)
Sept. 19    2003     Sean Henry            240.00         --           --             240.00
Oct. 08     2008     American Express    1,576.00         --           --             796.00
                      (Sept. invoice)
                     American Express        --         $780.00        --               --
                      (Oct. invoice)
Less adjustments                        (1,352.00)                  (1,214.00)       (138.00)

  Total for 1984                        13,542.26        780.00         --         12,762.26
                                  - 47 -


1985

       Table 9 lists certain checks written on the Markette account

in 1985.      The table shows the date the check was written, check

number, payee, and amount.      Betsy signed the checks numbered

2036, 2050, 2078, and 2092.      All of the other checks were signed

by petitioner.     Respondent determined that petitioner and Betsy

omitted to report $23,014.34 of constructive dividends received

from Markette in 1985, the sum of the checks listed in table 9.

See supra note 9.

                                  Table 9
                     Check
       Date          Number        Payee               Amount

       Jan.   06     2036     American Express       $1,802.00
       Feb.   04     2043     Eastern Airlines        1,192.00
       Feb.   26     2050     American Express        2,002.25
       Feb.   26     2051     Eastern Airlines          974.00
       Apr.   03     2068     American Express        2,636.42
       May    15     2078     American Express        3,514.96
       May    24     2080     American Express          208.00
       June   06     2084     American Express        3,494.66
       July   10     2092     American Express          292.18
       Aug.   02     2098     American Express        2,587.86
       Aug.   27     2100     American Express          457.00
       Oct.   28     2108     American Express        3,530.01
       Nov.   25     2118     American Express           45.00
       Dec.   03     2123     American Express          278.00

        Total                                        23,014.34


       Check No. 2036--Miami--Betsy.        The American Express December

1984 invoice includes a $198 charge for an Eastern Airlines

ticket for Betsy to fly round-trip to Miami.         Betsy bought the

ticket in November 1984.      She left Washington, D.C., on November
                              - 48 -


15, 1984, and returned on November 21, 1984.     The primary purpose

of the trip was personal--to see Beatrice.     This charge was paid

for by Markette check No. 2036.

     Check No. 2036--Miami--Children.     The American Express

December 1984 invoice includes charges totaling $397 for three

Eastern Airlines one-way tickets for the children from New York

City to Miami.   Betsy bought the tickets on December 3, 1984.

The children left New York on December 26, 1984.11    Petitioner,

Betsy, and the children had gone to New York City for Christmas.

It was intended that all five of them would go to Miami to meet

with Beatrice--a personal family vacation purpose.     However,

petitioner had some business to do in Washington, D.C., before

the end of the year, so he and Betsy returned to Washington,

D.C., from New York City, while the children went directly from

New York City to Miami.   A few days later, petitioner and Betsy

went on to Miami to meet Beatrice.     These charges for the

children’s three tickets were paid for by Markette check No.

2036.




     11
          Petitioner’s proposed finding of fact 507 indicates
that this trip was on Dec. 26, 1987, and on answering brief
respondent does not dispute the date. Even if we were to regard
the parties’ agreement on this point as a supplemental
stipulation, we would disregard the stipulation because it is
contrary to the persuasive evidence in the record that the trip
was on Dec. 26, 1984. Jasionowski v. Commissioner, 66 T.C. 312,
318 (1976).
                               - 49 -


     Check Nos. 2084 and 2092--Acapulco.    In April 1985,

petitioner, Betsy, and the children went to Acapulco, Mexico.

Petitioner and Betsy charged the following items, totaling

$3,682.21, for this trip on Markette credit cards:   $2,988.46

(Acapulco Princess)--petitioner signing the charge slip made on

his card, $426.21 (Viajes Mexicanos de Acapulco) and $187.55

(Aeronaves de Mexico)--Betsy signing the charge slip made on her

card, and $79.99 (Andersons)--petitioner signing the charge slip

made on Betsy’s card.    The purpose of this trip was personal--a

family spring vacation, and not to conduct Sley Corporations

business.   The first, second, and fourth items, totaling

$3,494.66, appear on the American Express May invoice, and were

paid for by Marquette check No. 2084.   The third item, $187.55,

appears on the American Express June invoice, and was paid for by

Marquette check No. 2092.

     Check Nos. 2092 and 2098--Stamford.    The American Express

June invoice includes a $59.6312 charge at LePavillon, in

Stamford, Connecticut.   Petitioner charged this item on his

American Express credit card on June 8, 1985.   Petitioner and

Betsy went to Stamford from New York to attend a bar mitzvah--a

personal purpose--and not on Sley Corporations’ business.    This

charge was paid for by Markette check No. 2092.



     12
          The charge slip shows $59.93, but the American Express
invoice shows only $59.63, so Markette paid only $59.63.
                                - 50 -


     The American Express July invoice includes charges totaling

$290 for two adult ($65 ea.) and four children’s ($40 ea.) one-

way Eastern Airline tickets between Washington, D.C., and New

York City, for travel on June 8, 1985.      The tickets, which do not

indicate the direction of the flight, were charged on Betsy’s

American Express credit card.    These transportation expenses were

incurred in connection with the same trip on which petitioner and

Betsy went to Stamford for a bar mitzvah.      These charges were

paid for by Markette check No. 2098.

     Check No. 2092--American Express Fee.       The American Express

June invoice includes a charge of $45 for the annual membership

fee for petitioner’s American Express credit card.      This business

expense was paid for by Markette check No. 2092.

     Check No. 2098--Corpus Christi.       The American Express July

invoice includes charges totaling $1,137.50 for four American

Airlines tickets for Betsy and the children to fly round-trip

from Washington, D.C., to Corpus Christi, Texas.      The charges

were made on Betsy’s American Express credit card on June 24,

1985.   This trip was for personal purposes, for Betsy to visit

with her mother and brother, and for the children to visit with

their grandmother and uncle.    Petitioner did not go on this trip.

The record does not enable us to determine how long Betsy and the

children stayed in Corpus Christi.       These charges were paid for

by Markette check No. 2098.
                               - 51 -


     Check No. 2098--San Diego.   The American Express July

invoice includes a $450 charge for an American Airlines ticket

for Betsy to fly round-trip from Washington, D.C., to San Diego,

California.   The purpose of this trip was personal, and not for

Sley Corporations’ business.   The charge was made on Betsy’s

American Express credit card on July 7, 1985, and was paid for by

Markette check No. 2098.

     Check Nos. 2098 and 2108--Canada.     On July 15, 1985, five

USAir tickets were bought for petitioner and Betsy to fly from

Washington, D.C., to Buffalo, New York, and the children to fly

from Washington, D.C., to Buffalo, and from Buffalo to Natchez,

Mississippi, in August 1985.   In August 1985, petitioner, Betsy,

and the children rented an automobile in Buffalo, and incurred

expenses at hotels in Montreal, Toronto, and Ottawa.    The trip in

Canada lasted about 10 days.   The purpose of this trip was

personal--to take a 10-day family vacation trip to Canada, and

not for Sley Corporations business.     The record does not provide

a basis for findings as to why (or even whether) the children

went to Natchez.   The airline tickets, which total $710.36, were

charged on Betsy’s Markette American Express credit card, and

were paid for by Markette check No. 2098.    The automobile rental

and hotel expenses, which total $2,900.01, were charged on

petitioner’s Markette American Express credit card, and were paid

for by Markette check No. 2108.
                                - 52 -


     Check No. 2100--Los Angeles.    The American Express August

invoice includes a $457 charge for a one-way American Airlines

ticket from Los Angeles to Washington, D.C.   Petitioner bought

this ticket on or about July 28, 1985, and charged it on his

American Express credit card.    This charge was paid for on August

27, 1985, by Markette check No. 2100.

     Check No. 2108--Lake Tahoe.    The American Express September

invoice includes charges totaling $630 for Continental Airlines

ticket, between Reno, Nevada, and Washington, D.C.   On August 6,

1985, Betsy bought a ticket for herself to fly round-trip from

Washington, D.C.   The next day Betsy bought a one-way ticket for

petitioner from Reno to Washington, D.C.   Betsy flew to Reno on

August 7, 1985; Betsy and petitioner flew back 4 days later.    The

primary purpose of this trip was personal--a vacation to visit

petitioner’s relatives’ condominium in the Lake Tahoe area.    The

charges were paid for by Markette check No. 2108.

     Check No. 2118--American Express Fee.    The American Express

November invoice includes a charge of $45 as the annual

membership fee for Betsy’s American Express credit card.    This

business expense was paid for by Markette check No. 2118.

     Summary.

     The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed on table 9,

supra.
                             - 53 -


     Table 10 shows our allocations with respect to respondent’s

determinations listed supra on table 9.
                                              Table 10

                                                                  Purpose
Date        Check                         Check            Personal or      Sley Corporations
1985        Number        Payee           Amount         Grossman & Flask        Business     Unknown

Jan. 06     2036     American Express   $1,802.00            $595.00              --       $1,207.00
                      (Dec. invoice)
Feb. 04     2043     Eastern Airlines    1,192.00              --                 --        1,192.00
Feb. 26     2050     American Express    2,002.25              --                 --        2,002.25
                      (Feb. invoice)
Feb. 26     2051     Eastern Airlines      974.00              --                 --          974.00
Apr. 03     2068     American Express    2,636.42              --                 --        2,636.42
May 15      2078     American Express    3,514.96              --                 --        3,514.96
                      (Apr. invoice)
May 24      2080     American Express      208.00              --                 --          208.00
June 06     2084     American Express    3,494.66           3,494.66              --            --
                      (May invoice)
July 10     2092     American Express      292.18             247.18            45.00           --
                      (June invoice)
Aug. 02     2098     American Express    2,587.86           2,297.86              --          290.00
                      (July invoice)
Aug. 27     2100     American Express      457.00              --                 --          457.00
                      (Aug. invoice)
Oct. 28     2108     American Express    3,530.01           3,530.01              --            --
                      (Sept. invoice)
Nov. 25     2118     American Express       45.00              --               45.00           --
                      (Nov. invoice)
Dec. 03     2123     American Express      278.00              --                  --         278.00

  Total for 1985                        23,014.34           10,164.71           90.00      12,759.63
                                 - 55 -

1986

       Table 11 lists certain checks written on the Markette

account in 1986.     The table shows the date the check was written,

check number, payee, and amount.        Check Nos. 2137, 2148, and 2203

were signed by petitioner.     The remaining checks were signed by

Betsy.      Respondent determined that petitioner and Betsy failed to

report $12,447.69 of constructive dividends received from

Markette in 1986, the sum of the checks listed in table 11.              In

the notice of deficiency, this figure was adjusted downward by

$788.07 for net constructive dividends of $11,659.62.13          See

supra note 9.

                                Table 11

                   Check
Date               Number         Payee                      Amount
                                                        1
Jan. 23            2137      American   Express             $5,076.65
                                                            1
Mar. 13            2148      American   Express               1,447.00
Mar. 31            2203      American   Express                 958.18
                                                            1
May 10             2162      American   Express               1,656.33
Sept.30            2200      American   Express                  86.42
Oct. 31            2213      American   Express                  39.00
                                                            1
Dec. 05            2220      American   Express               1,017.50
Dec. 31            2227      VISA                             2,166.61

                                                            12,447.69


       13
          The only explanation that respondent gives in the
notice of deficiency for this $788.07 negative adjustment is the
cryptic “Less JE[JB?] 284 11/30/86”. We have not found any
explanation in the record for this negative adjustment. Under
the circumstances, we shall subtract the $788.07 from whatever
amount we otherwise find to be the total 1986 constructive
dividends to Betsy on account of Markette payments of Betsy’s, or
her household’s, personal expenses. This subtraction is to be
applied in calculating income omissions resulting from fraud, as
well as total income omissions.
                               - 56 -

                          Less adjustment              (788.07)
    Total                                            11,659.62
1
   The total amounts for check Nos. 2137, 2162, and 2220 are
$6,750.65, $4,713.94, and $1,615.50, respectively. The check
amounts listed in table 11 are the net amounts respondent
determined were constructed dividends.

      Check Nos. 2137, 2148, and 2203--Miami.   Petitioner or his

family traveled to Miami in late November 1985, in January 1986,

and in February 1986.   Of the net $5,424.86 expenses for these

three trips charged on Markette American Express credit cards,

$4,265.28 was paid for by Markette check No. 2137,14 $438 was

paid for by Markette check No. 2148,15 and $721.58 was paid for

by Markette check No. 2203.

      On November 14, 1985, Betsy bought six round-trip Eastern

Airlines tickets to Miami, to leave Washington, D.C., on November

27 and return on December 1.   Three of the tickets cost $399 each



      14
          In the notice of deficiency, respondent allowed as Sley
Corporations business expenses $1,674 of the expenses paid for by
Markette check No. 2137. At trial, respondent’s revenue agent
testified that the allowed $1,674 “related to November `85,
January `86 and February `86 airfare to Miami.” Neither side has
offered, and we have been unable to discover, a likely
identification of which are the items of the total $4,265.28
Miami expenses paid by check No. 2137 that respondent determined
to be includable in petitioner’s and Betsy’s income, and which
are the items in the $1,674 not so includable.

      15
          For some reason undisclosed by the record, Markette
check No. 2137 was not used to pay the charges shown on one of
the four pages of the American Express Jan. 1986 invoice.
Instead, the two $219 Eastern Airlines charges on that page were
paid together with American Express Feb. 1986 invoice items by
Markette check No. 2148. See infra Check No. 2148--Betsy’s
Western Trip.
                                - 57 -

and the other three cost $219 each.      The tickets were for

petitioner, Betsy, the children, and another adult, probably

Beatrice.   All six of these tickets, totaling $1,854, were

charged on Betsy’s Markette American Express credit card.

Eastern Airlines refunded $200, which was credited on the

December statement.   On the same Miami trip, petitioner charged

$179.24 at Pershing Auto Leasing in Miami Beach.

     On November 26, 1985, a purchase was made of a Pan American

World Airlines round-trip ticket from Dulles Airport to Miami and

back to Washington, D.C.    The ticket was bought for petitioner

but was charged on Betsy’s Markette American Express credit card;

the price was $1,095.   The record does not indicate which of the

Miami trips this item relates to.

     On or about January 6, 1986, petitioner, Betsy, and the

children were in Miami.    They stayed at the Omni International

Hilton.   Petitioner charged the $719.04 hotel bill on his

Markette American Express credit card.

     On December 19, 1985, Betsy bought five round-trip Eastern

Airlines tickets to Miami, to leave Washington, D.C., on February

14, 1986, and return on February 17, 1986.      Two of the tickets

cost $399 each and the other three cost $219 each.      The tickets

were for petitioner, Betsy, and the children.      All five of these

tickets, totaling $1,455, were charged on Betsy’s Markette

American Express credit card.    On January 24, 1986, Betsy bought

a round-trip United Airlines ticket for herself from Washington,
                              - 58 -

D.C., to Miami, to Tucson, Arizona, then San Diego, California,

to Denver, Colorado, and back to Washington, D.C.     This is

discussed further infra, at Check No. 2148--Betsy’s Western Trip.

It had been intended that Betsy would fly from Denver to

Washington, D.C., where she would join petitioner and the

children on the February 14 trip to Miami.    However, petitioner’s

mother died in Miami at that time.     What had been planned as a

Presidents Day weekend visit to Miami was turned into a funeral

trip to Miami.   Instead of returning to Washington, D.C., Betsy

bought a United Airlines one-way ticket from Denver to Miami for

herself.   Betsy charged the $399 cost of this ticket on her

Markette American Express credit card.    On or about February 15,

1986, petitioner charged the $322.58 Miami Omni International

Hilton hotel bill on Betsy’s Markette American Express credit

card.

     The $399 Denver-Miami ticket and the $322.58 Miami Hotel

item appeared on the American Express March invoice.    The $721.58

total of these expenses was paid for by Markette check No. 2203.

The remaining above-described expenses for these Miami trips were

paid for as indicated in the text supra at notes 14 and 15.

However, Betsy did not use her $399 ticket that had been bought

on December 19, 1985--the one that had been replaced by the

Denver-Miami ticket.   Markette received a credit for that ticket

on the American Express April invoice.     Accordingly, that $399 is

not properly an expense of the Miami trips paid for by check Nos.
                              - 59 -

2137, 2148, and 2203, but rather is properly attributable to one

of the trips paid for by check No. 2162.   Thus, the net Miami

trip expenses paid for by check No. 2137 are $4,265.28.

     The primary purpose of Betsy’s Denver-Miami trip ($399) and

the Miami mid-February hotel stay ($322.58) was personal.    The

primary purpose of $1,674 of the Miami trips’ expenses that

appeared on the American Express December 1985 and January 1986

invoices was Sley Corporations business (see supra note 14).

The $438 paid for by check No. 2148 was not included in the

$1,674 Sley Corporations business expenses.   The primary purpose

of the remaining $2,591.28 of these expenses paid for by check

No. 2137 was personal.

     Check No. 2137--Snowmass.   The American Express December

1985 invoice includes charges totaling $1,693.22 for four round-

trip United Airlines tickets to Aspen, Colorado.   The ticket for

Betsy cost $521 and the other three tickets cost $390.74 each.

Betsy bought the tickets on November 19, 1985.   The American

Express January 1986 invoice includes a $326.15 charge for a stay

at the Silvertree Motel at Snowmass Village, Colorado.    The

$2,019.37 total of these Snowmass expense charges were paid for

by Markette check No. 2137.   The purpose of this trip was to take

a Christmas vacation to Snowmass, a ski resort near Aspen,

Colorado.   Although petitioner did not go on this trip, he knew

that Betsy and the children were going to Snowmass.
                                - 60 -

     Petitioner, Betsy, and the children had gone to Snowmass in

1983.    Betsy may have paid for the 1983 transportation by

charging it on her Markette American Express credit card, but

neither Betsy nor petitioner charged any of the other expenses of

that trip on their Markette American Express credit cards.

     Check No. 2137--Shoreham.     The American Express December

1985 invoice includes a $67 charge for petitioner’s and Betsy’s

dinner at the Shoreham Hotel in Washington, D.C.     Petitioner made

this charge on his Markette American Express credit card on

December 7, 1985.    This meal expense was paid for by Markette

check No. 2137.    The primary purpose of this “night out” was

personal.

        Check No. 2148--Betsy’s Western Trip.   As we found, supra

(Check Nos. 2137, 2148, and 2203--Miami), on January 24, 1986,

Betsy bought a round-trip United Airlines ticket for herself from

Washington, D.C., to Miami, to Tucson, then San Diego, to Denver,

and back to Washington, D.C.    The Tucson-San Diego leg of the

trip required a separate ticket on Pacific Southwest Airlines.

The former ticket cost $945 and the latter ticket cost $64; both

were charged on Betsy’s Markette American Express credit card.

Both tickets appeared on the American Express January invoice.

The $1,009 total of these western trip expenses was paid for by

Markette check No. 2148.    This was a personal vacation trip for

Betsy.
                                - 61 -

     Check No. 2203--Miscellaneous.      The American Express March

invoice includes charges of $53.6016 for Lenny’s Restaurant, $173

for Vista International Hotel (Washington, D.C.), and $10 for

delinquency.     Petitioner charged the Lenny’s item on March 3,

1986, and the Vista item on March 6, 1986.     These items, totaling

$236.60, were paid for by Markette check No. 2203.

     The record does not provide an adequate basis for findings

as to the purposes of these expenses.

     Check No. 2162--Miami, Key West, Daughters.      The American

Express April invoice includes charges totaling $1,016.50 for

four round-trip Eastern Airlines tickets to Miami, to leave

Washington, D.C., on March 27, 1986, and return on April 5, 1986.

One of the tickets cost $362.50, and the other three cost $218

each.     The tickets were for Betsy and the children.   Betsy

charged the tickets on March 12, 1986.     The American Express

April invoice also includes charges totaling $231 for three

round-trip Piedmont Airlines tickets to Key West, Florida, to

leave Miami on April 1, 1986, and return the next day.      Each

ticket cost $77.     The tickets were for Betsy and the daughters.

Betsy charged the tickets on April 1, 1986.     The $1,247.50 total




     16
          The charge slip shows a charge of $46.22 and a tip of
$6.78, for a total of $53.00. However, the invoice shows the
amount as $53.60, and the entire invoiced amount was paid.
                              - 62 -

of these Miami-Key West expenses was paid for by Markette check

No. 2162.17

     The purpose of this trip was for Betsy and the children to

take a personal vacation to Miami during the spring school break.

The side trip to Key West was to see Halley’s Comet.   The son was

sick, and so he stayed in Miami while the others went to Key

West.

     Check No. 2162--Miami, Key West, Son.   The American Express

April invoice includes charges totaling $827 for three round-trip

Eastern Airlines tickets to Miami, to leave Washington, D.C., on

April 11, 1986.   The tickets, for petitioner, Betsy, and the son,

cost $289, $319, and $219, respectively.   The American Express

April invoice also includes charges totaling $352 for three one-


     17
          As shown supra table 14, respondent determined that a
net of $1,656.33 ($4,713.94 less $3,057.61) of check No. 2162 was
a constructive dividend. The remaining amount, $3,057.61,
represents $897 of travel expenses and $2,160.61 in connection
with a computer; respondent later concluded that the computer was
not paid for by check No. 2162. Respondent has not identified
which travel expenses are included in the $897 that was allowed.
Also, respondent has not asked for an increased deficiency, or
otherwise acted, with regard to the $2,160.61 computer expense
that was allowed.

     As we noted in the next-to-last paragraph of supra Check
Nos. 2137, 2148, and 2203--Miami, Markette received a $399 credit
on its American Express April invoice. Markette used this credit
to pay charges appearing on this invoice, and paid the balance by
its check No. 2162. See infra table 12. For purposes of
determining whether Markette paid for an item, and whether that
payment constitutes a constructive dividend, it does not make any
difference whether Markette’s payment was accomplished by
applying the credit or by check No. 2162. For convenience in our
findings we shall refer to all the payments of April invoice
items as being accomplished by check No. 2162.
                                - 63 -

way Piedmont Airlines tickets from Miami to Key West for April

11, 1986, and another three tickets from Key West to Miami for

April 13, 1986.    Each adult ticket cost $66 and each child ticket

cost $44.    Betsy charged all nine of these tickets on April 11,

1986.    The American Express April invoice also includes a $790.23

charge for a stay at the Marriott Casa Marina at Key West.

Petitioner charged this item on or about April 11, 1986.      The

$1,969.23 total of these Miami-Key West expenses was paid for by

Markette check No. 2162.

     There was a two-fold purpose for the trip: (1) To take the

son to Key West to see Halley’s Comet for his birthday, this to

make up for his inability to see Halley’s Comet with his sisters

because he was sick when his sisters went; and (2) for petitioner

to meet with a Grossman & Flask client.

     Check No. 2162--Corpus Christi.      The American Express April

invoice includes charges totaling $983.78 for four American

Airlines tickets to Corpus Christi, Texas.      Betsy charged these

tickets on March 31, 1986.    These expenses were paid for by

Markette check No. 2162.    The purpose of this trip to Corpus

Christi was personal--to visit Ben and to attend a wedding.

        Check No. 2162--Philadelphia.    The American Express April

invoice includes a $115.22 charge for a bill from the Franklin

Plaza Hotel, in Philadelphia.    Petitioner charged this item on or

about March 7, 1986.    This item was paid for by Markette check

No. 2162.     The charge from the Franklin Plaza Hilton was incurred
                              - 64 -

in connection with a trip petitioner took to Philadelphia to do

Pennsylvania State tax work for one of the Sley Corporations.

     Check No. 2162--Miscellaneous Washington, D.C.     Miscel-

laneous hotel, airlines, restaurant, and theater expenses,

totaling $797.21, appear on the American Express April invoice.

These expenses were incurred by petitioner and Betsy in the

Washington area.   These expenses were paid for by check No. 2162.

The record does not provide an adequate basis for findings as to

the purposes of these expenses.

     Check No. 2220--Miami.   The American Express November

invoice includes charges totaling $1,570.50 for six round-trip

Eastern Airlines tickets to Miami.     Three of the tickets cost

$299 each, and the other three cost $224.50 each.     The tickets

were for Betsy, the children, probably petitioner, and another

adult.   Betsy charged the tickets on October 10, 1986.    These

tickets were paid for by Markette check No. 2220.     Respondent

conceded that two of the adult tickets ($598) were for business

purposes and reflected this concession in the notice of

deficiency.   The remaining expenses were for personal purposes--a

family vacation.

     Check No. 2220--American Express Fee.     The American Express

November invoice includes a charge of $45 as the annual

membership fee for Betsy’s American Express credit card.     This

business expense was paid for by Markette check No. 2220.
                             - 65 -

    Summary.

     The record does not provide an adequate basis for findings

as to the purposes of the other expenditures listed supra on

table 11.

     Table 12 shows our allocations with respect to respondent’s

determinations listed supra on table 11.
                                                         Table 12



                                                                             Purpose
                                                                                                       Credit Generated
Date       Check                        Check           Personal or     Sley Corporations                      or
1986       Number       Payee           Amount       Grossman & Flask     Business          Unknown         (Allowed)

Jan. 23    2137      American Express   $6,750.65      $3,593.46             --               --              --
                      (Dec. invoice)
                     American Express     --            2,758.19             --               --            $399.00
                      (Jan. invoice)
  less adjustments                      (1,674.00)     (1,674.00)
Mar. 13     2148     American Express    1,447.00         438.00             --               --              --
                      (Jan. invoice)
                     American Express                   1,009.00             --               --              --
                      (Feb. invoice)
Mar. 31    2203      American Express     958.18          721.58             --             $236.60           --
                      (Mar. invoice)
May 10     2162      American Express   4,713.94        4,200.51          $115.22            797.21         (399.00)
                      (Apr. invoice)
  less adjustments                      (3,057.61)     (3,057.61)
Sept. 30    2200     American Express       86.42          --                --               86.42           --
                      (Sept. invoice)
Oct. 31    2213      American Express      39.00           --                --               39.00           --
                      (Oct. invoice)
Dec. 05    2220      American Express   1,615.50        1,570.50            45.00             --              --
                      (Nov. invoice)
  less adjustments                       (598.00)        (598.00)
Dec. 31     2227     VISA               2,166.61           --                --             2,166.61          --

                                        12,447.69       8,961.63             --               --              --
 less adjustment                          (788.07)       (788.07)

Total for 1986                          11,659.62       8,173.56           160.22           3,325.84          --
                              - 67 -


Financial Statements, Tax Returns, Audits, Notices of Deficiency

     Berger is a Certified Public Account and a partner in the

accounting firm of Grant Thornton;18 he also has a J.D. degree

from the University of Maryland School of Law.   Petitioner

approached Berger to prepare tax returns for the Sley

Corporations for 1980.   Berger continued to prepare or supervise

the preparation of such tax returns for the years through 1986.

Berger also prepared or supervised the preparation of compilation

financial statements and made or supervised the making of

dividend calculations to avoid the personal holding company tax

for the Sley Corporations.   Berger prepared or supervised the

preparation of petitioner’s and Betsy’s joint tax returns for

1980 through 1987, and petitioner’s individual tax returns for

1988 through 1991.   During the years in issue, Berger or those he

supervised came into the Sley Corporations’ offices in February

to prepare the corporate tax returns and the compilation

financial statements, and in November or December to calculate

the dividends needed to avoid the personal holding company tax.




     18
          When Berger was first engaged to prepare tax returns
for petitioner and Betsy, and for the Sley Corporations, he was
with the accounting firm of Fox and Co. In 1985, Fox and Co.
merged with Alexander Grant, and was known under the latter name
for about 1 year. Thereafter, Berger’s accounting firm was known
as Grant Thornton.
                                - 68 -


       Berger prepared the Sley Corporations’ tax returns based on

the books and records of the Sley Corporations, primarily the

general ledger and the trial balances.19    Berger did not

routinely verify the general ledger and the trial balances

against supporting documents before preparing the corporate tax

returns; Berger’s firm was not retained to do any audit work on

behalf of the Sley Corporations.    Baybrook was Berger’s principal

contact at the Sley Corporations and the person who provided

Berger with information; petitioner was the secondary contact

person.     Berger did not have any business discussion with Betsy

about the Sley Corporations until late 1986.     Berger had access

to all of the Sley Corporations’ books and records that he asked

for.

       Berger did not give Baybrook instructions about how to

report transactions or how to define expenses for the Sley

Corporations.

       Berger was aware that Beatrice, Betsy, and Ben were

receiving six-figure salaries from the Sley Corporations; Berger

did not know how the salary structure was established, who

established the salary structure, or what Beatrice, Betsy, and


       19
          A trial balance is a listing of all account balances.
It provides a means of testing whether total debits equal total
credits for all accounts. Generally, trial balances are used to
prepare financial statements. Skousen et al, Financial
Accounting 62, 758 (4th ed. 1991).
                              - 69 -


Ben were doing for the Sley Corporations to earn the salaries

that they were paid.   Berger did not set the salary structure,

nor did he participate in the setting of salary levels at any

time.   Berger also did not participate in the decision to

allocate the officers’ salaries among the Sley Corporations or

among the officers themselves.    Berger did not have anything to

do with the decisions to raise and lower the salaries from year

to year.

     Berger or those he supervised prepared annual compilation

financial statements for the Sley Corporations for 1980 through

1986.   These compilation financial statements were a form of

financial statement whereby the accounting firm takes the least

responsibility for the figures.   Berger and those he supervised

took the Sley Corporations’ figures and basically put them into

financial statement format.   There was no routine verification of

the Sley Corporations’ figures in the process of preparing

compilation financial statements.

     Each compilation financial statement for those years has two

parts, the accountants’ compilation report and the financial

statements.   Each accountants’ compilation report for those years

includes the following paragraphs:

          A compilation is limited to presenting in the form of
     financial statements information that is the representation
     of management. We have not audited or reviewed the
     accompanying [December 31, 1980, 1981, etc.] financial
                              - 70 -


     statements and[,] accordingly, do not express an opinion or
     any other form of assurance on them.

          Management has elected to omit substantially all of the
     disclosures and the statements of changes in financial
     position required by generally accepted accounting
     principles. If the omitted disclosures and statement[s] of
     changes in financial position were included in the financial
     statements, they might influence the user’s conclusions
     about the company’s [Corporations’] financial position,
     results of operations and changes in financial position.
     Accordingly, these financial statements are not designed for
     those who are not informed about such matters.
Attached to each of these accountants’ compilation reports are

financial statements for each of the Sley Corporations.     The

financial statements for each corporation include a balance sheet

listing that corporation’s assets and liabilities and

stockholders’ equity, and a statement of income and retained

earnings.   Each page of each financial statement refers the

reader to the accountants’ compilation report.   The figures used

in the compilation financial statements came from the books and

records of the Sley Corporations; the compilation financial

statements were prepared at the end of each year, as soon as the

books were closed.

     In conjunction with the preparation of the compilation

financial statements for 1981 through 1984, Berger and those he

supervised used a financial statement compilation program, which

is a checklist of steps to be followed in preparing a compilation

financial statement.   The introductory paragraphs on the

financial statement compilation program are as follows:
                              - 71 -


     Our OBJECTIVE for compilation engagements is to present in
     the form of financial statements information that is the
     representation of management. No assurances may be given.

     INSTRUCTIONS: This form specifies the procedures necessary
     to comply with [the accounting firm’s] standards when
     engaged to compile financial statements of nonpublic
     entities in accordance with Statements on Standards for
     Accounting and Review Services (SSARS). Form PF-06 is also
     required documentation for compilation engagements.

     We are not required by SSARS to make inquiries or perform
     procedures to corroborate or review information supplied by
     the client. Any information we may have indicating that
     client-supplied data is incorrect, incomplete or
     unsatisfactory must be addressed by us and resolved
     regardless of the source of such data. [Emphasis in
     originals.]

     Berger prepared or supervised the preparation of

compilations of financial statements as checklists in preparing

the compilation financial statements for 1985 and 1986.   The

introductory language of the compilations of financial statements

states the following as the compilation objectives:

     A. To assist the client in presenting its financial data in
     financial statement form. B. Determine that professional
     standards for compilation engagements have been met and that
     any significant matters that came to our attention have been
     adequately considered and resolved.

     Baybrook and petitioner were the contact personnel for the

Sley Corporations on the financial statement compilation programs

for 1981 through 1984, and on the compilation of financial

statements for 1985.   Betsy and Wilson were the contact personnel

for the Sley Corporations on the compilation of financial

statements for 1986.
                              - 72 -


     Berger also calculated the amount of dividends to be paid

out by the Sley Corporations at the end of the year so as to

avoid the personal holding company tax.   The amount of the

dividends was dictated by the amount of the taxable income of the

Sley Corporations--if taxable income decreased, then dividends

decreased; if taxable income increased, then dividends increased.

     Before 1987, there were no Forms 1099 issued to shareholders

for dividends income in the form of payment of travel expenses.

     At some point in the period 1980-1986, Berger discussed the

travel expenses paid by the Sley Corporations, with someone

associated with the Sley Corporations.    Berger was told that the

travel and entertainment expenses were incurred so that the

officers of the Sley Corporations could meet to discuss corporate

business, and that there were no personal expenses included in

those amounts.   Berger had never seen the travel records of the

Sley Corporations before the trial, nor had he heard of specific

trips taken by petitioner, Betsy, and the children.   If Berger

would have heard of trips to the resort destinations, described

under Travel and Entertainment Expenses, supra, then he would

have asked whether the trips were taken for personal or business

purposes.   If a trip was taken for personal purposes, then Berger

would not have deducted the trip expenses on the Sley

Corporations’ tax return, and he probably would have treated the
                               - 73 -


Sley Corporations’ payment of those expenses as dividends to the

shareholders.

     Petitioner understood that Berger was not engaged to audit

the travel and entertainment expenses of the Sley Corporations.

     In calculating income for purposes of preparing petitioner’s

and Betsy’s individual tax returns, Berger and those he

supervised used third-party information such as Forms W-2, 1099,

and K-1 that petitioner gave to Berger, schedules prepared by the

Sley Corporations’ bookkeeper, and information on transactions

that petitioner had with his law firm.

     During the years in issue, petitioner and Betsy were cash-

basis taxpayers.

     Brown worked for Grant Thornton as a tax specialist from

January 1985 to April 1987.    Brown worked under Berger’s

supervision.    Berger assigned her to prepare the 1984 tax returns

and the compilation financial statements for the Sley

Corporations.   Pursuant to her assignment to the Sley

Corporations’ account, Brown was told to prepare trial balances,

corporate tax returns, and compilation financial statements, and

to make adjustments to the compilation financial statements for

accrued income and expenses; she was not told to audit the books

of the Sley Corporations.    Brown used the books and records

prepared by Baybrook to prepare trial balances and then used the
                              - 74 -


trial balances to prepare the Sley Corporations’ tax returns.

Brown was not assigned to do, and did not do, any verification of

the truth of the figures on the books and records kept by

Baybrook.

     Baybrook was Brown’s primary contact person regarding the

Sley Corporations’ tax returns during the period February 1985

through March 1986; Brown occasionally spoke to petitioner about

the Sley Corporations’ tax returns.    Brown had no discussions

regarding the Sley Corporations’ tax returns with either Betsy or

Ben before April 1986; Brown had never even met either of them.

     In April 1987, Brown ended her employment with Grant

Thornton; in May 1987, petitioner and Betsy hired Brown to work

for the Sley Corporations.   Brown prepared the Sley Corporations’

tax returns for 1987 and 1988.   As part of her duties, Brown also

prepared tax returns for trusts of which Betsy or Ben were

beneficiaries.

     In 1988 Betsy hired an independent accountant named Olshan,

primarily to help with investments.    Brown began to discuss the

travel expenses and some other matters that she noted on the Sley

Corporations’ tax returns.   As a result of a discussion between

Betsy, Brown, and Olshan, in early 1988 Betsy had the Sley

Corporations issue a Form 1099 for 1987 dividend income received

in the form of payment of travel expenses.    Also, for 1988,
                               - 75 -


Betsy’s and Ben’s salaries were reduced to $95,000 and Beatrice’s

salary was reduced to $60,000.

     Petitioner and Betsy timely filed joint tax returns for 1983

through 1987.   Petitioner timely filed a separate tax return for

1988.20   On January 30, 1990, petitioner, Betsy, and respondent

extended to June 15, 1990, the period for assessment for 1986.

     Respondent audited petitioner’s and Betsy’s 1983 joint tax

return sometime before March 1987, and concluded that petitioner

and Betsy had overstated their income for that year by $69,885;

this overstatement resulted in a $34,942 overstatement of

petitioner’s and Betsy’s 1983 tax liability.   The resulting Form

4549 (Income Tax Examination Changes) for 1983, agreed to on

March 5, 1987, shows that petitioner and Betsy were entitled to a

$69,885 downward adjustment to income for “Sale of Partnership

Interest”.   Petitioner and Betsy reported this item on their 1983

tax return as ordinary income from the sale of “Integrated

Natural Gas Partnership.”   Apparently, petitioner and Betsy

received a credit or refund of the $34,942.




     20
          The tax returns for 1983 through 1987 were filed on or
about Apr. 15 of the appropriate years. The tax return for 1988
was filed on July 3, 1989, which was timely because Berger had
timely filed, on petitioner’s and Betsy’s behalf, an application
for a 4-month automatic extension to Aug. 15, 1989.
                                  - 76 -


          Table 13 sets forth petitioner’s and Betsy’s 1983 adjusted

  gross income, taxable income, and income tax liability as (1)

  shown on their 1983 tax return, (2) adjusted by respondent in

  1987, and (3) determined in the notice of deficiency in the

  instant cases.

                                 Table 13

                                                 1987
                                            Audit--Revenue      Notice of
                           Tax Return       Agent’s Report      Deficiency1
                                                  2
Adjusted gross income      $407,347                                 2


Taxable income              354,112           $284,227           $309,497

Income tax liability        160,344            125,402            138,142

   1
    These amounts are as shown in the notice of deficiency, and do
  not take into account respondent’s later concessions. See supra
  note 2.
  2
       Adjusted gross income is not shown on the indicated documents.

          Respondent audited petitioner’s and Betsy’s 1985 joint tax

  return sometime before February 1987, and concluded that

  petitioner and Betsy had overstated their income for that year by

  $18,033; this overstatement resulted in a $9,016 overstatement of

  petitioner’s and Betsy’s 1985 tax liability.        The resulting Form

  4549 (Income Tax Examination Changes) for 1985 shows that

  petitioner and Betsy were entitled to a $8,333 increase in

  deduction for “Rental Expenses” and a $9,700 increase in

  deduction for “Contributions”.      Apparently, petitioner and Betsy
                              - 77 -


received a credit or refund of the $9,016.      Respondent audited

petitioner’s and Betsy’s 1985 joint tax return again sometime

before May 1988, and concluded that petitioner and Betsy had

$2,760 of unreported dividend income for that year; this

unreported income resulted in a $1,380 understatement of

petitioner’s and Betsy’s 1985 tax liability.      On May 9, 1988,

respondent mailed to petitioner and Betsy a notice of deficiency

for 1985, based on the $1,380 deficiency; Betsy paid the

deficiency.

      Table 14 sets forth petitioner’s and Betsy’s 1985 adjusted

gross income, taxable income, and income tax liability as (1)

shown on their 1985 tax return, (2) adjusted by respondent in

1987, (3) adjusted by respondent in 1988, and (4) determined in

the notice of deficiency in the instant cases.

                             Table 14
                                                 1
                         Tax           1987       1988        Notice of
                         Return        Audit      Audit       Deficiency
                                        2              2
Adjusted gross income   $272,480                                  2


Taxable income           191,733   $173,700      $176,460     $205,679

Income tax liability      76,110       67,094        68,474     83,398

 1
    The notice of deficiency issued in 1988 mistakenly sets forth
 the “corrected” taxable income and tax liability by making the
 $2,760 (income) and $1,380 (liability) adjustments as adjustments
 directly to the amounts set forth on the 1985 tax return as
 filed, ignoring the adjustments made in the 1987 audit. The
 effects of the 1988 audit are correctly shown in the notice of
 deficiency in the instant cases as the basis for purposes of
                              - 78 -


calculating the 1985 deficiency that respondent determined in the
instant cases.
2
    Adjusted gross income is not shown on the indicated documents.

      In 1989, Brown photocopied some Sley Corporations records.

She turned those records over to respondent’s agent in August

1989, and provided other information to that agent.

      On June 14, 1990, respondent mailed to petitioner and Betsy

a notice of deficiency for 1986.    On April 4, 1991, respondent

mailed to petitioner and Betsy a notice of deficiency for 1983,

1984, 1985, and 1987.   Also on April 4, 1991, respondent mailed

to petitioner a notice of deficiency for 1988.    Petitioner filed

petitions in response to these three notices of deficiency,

giving rise to the instant cases.

      The notice of deficiency for 1986 was mailed more than 3

years after the 1986 tax return was filed, but within the period

agreed upon in the parties’ timely extension agreement.    Sec.

6501(c)(4).   The notice of deficiency for 1983, 1984, 1985, and

1987 was mailed more than 3 years after the 1983, 1984, and 1985

tax returns were filed, but within 3 years after the 1987 tax

return was filed.   The notice of deficiency for 1988 was mailed

within 3 years after the 1988 tax return was filed.

                    Interest Expense for 1987.

      At sometime before 1987, Betsy borrowed money from Markette,

a portion of which was to be repaid in 1987.     Betsy wrote check
                              - 79 -


No. 121 on her checking account for $13,167.96 as a payment of

interest on the loan and delivered it to Brown sometime between

December 22, 1987, and February 12, 1988.    The check was dated

December 22, 1987.   The check was posted to Markette’s bank

account on February 12, 1988, and to Betsy’s checking account on

February 16, 1988.   Betsy wrote checks in her checking account in

numerical order.   Check No. 120 was recorded on Betsy’s checking

account register on November 30, 1987, and check No. 122 was

recorded on June 25, 1988.

     Starting in December 1987, Betsy and Brown began to pack up

the Sley Corporations books and records in boxes because they

were going to move the Sley Corporations office out of the

Grossman & Flask sublet office space.   Betsy arranged to have

professional movers move the Sley Corporations office on January

13, 1988.

     On their 1987 joint tax return, petitioner and Betsy listed

a $13,168 personal interest expense to Markette and deducted 65-

percent of it--$8,559--as an itemized deduction on Schedule A.

     Respondent disallowed this deduction.



     For each of the years 1983 through 1986, petitioner had an

underpayment of income tax required to be shown on his tax

return; some part of the underpayment for each of the years 1985

and 1986 was due to petitioner’s fraud.
                                 - 80 -


     For 1986, petitioner knew and had reason to know of the

underpayment due to his and Betsy’s failure to report Betsy’s

constructive dividends; it would not be inequitable to hold

petitioner liable for this underpayment.

                                OPINION

                      I.   Statute of Limitations

     Petitioner has properly raised in his petition the

affirmative defense of the statute of limitations under section

6501(a).   Rule 39.

     In general, section 650121 bars assessment of an income tax

deficiency more than 3 years after the later of (1) the date the

tax return was filed, or (2) the due date of the tax return.    If



     21
           Sec. 6501 provides, in pertinent part, as follows:

     Sec. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

          (a) General Rule.--Except as otherwise provided in this
     section, the amount of any tax imposed by this title [title
     26, the Internal Revenue Code] shall be assessed within 3
     years after the return was filed (whether or not such return
     was filed on or after the date prescribed) * * * and no
     proceeding in court without assessment for the collection of
     such tax shall be begun after the expiration of such period.

           (b) Time Return Deemed Filed.--

                (1) Early return.--For purposes of this section, a
           return of tax imposed by this title, * * * filed before
           the last day prescribed by law or by regulations
           promulgated pursuant to law for the filing thereof,
           shall be considered as filed on such last day.
                             - 81 -


the taxpayer proves that the notice of deficiency was mailed more

than 3 years after the later of the filing or the due date, then

respondent has the burden of pleading and proving the existence

of an exception to the general period of limitations.   Stratton

v. Commissioner, 54 T.C. 255, 289 (1970); Farmers Feed Co. v.

Commissioner, 10 B.T.A. 1069, 1075-1076 (1928); see Miami

Purchasing Service Corp. v. Commissioner, 76 T.C. 818, 823

(1981); see also Minahan v. Commissioner, 88 T.C. 492, 506

(1987).

     In the instant cases, we found that the tax returns for

1983, 1984, and 1985 were filed more than 3 years before the

notice of deficiency for those years was issued, and that the tax

returns for 1987 and 1988 were filed less than 3 years before the

notices of deficiency for those years were issued.   Although the

tax return for 1986 was filed more than 3 years before the notice

of deficiency for that year was issued, we found that the parties

had timely extended the period for assessment as to 1986, and the

notice of deficiency was mailed within that extended period.

Thus, the statute of limitations is in issue only for 1983, 1984,

and 1985.

     Respondent contends that the instant cases fall within the

exception to the general period of limitations set forth in
                                  - 82 -


section 6501(c)(1),22 which provides that if a false or

fraudulent return is filed with the intent to evade tax, then the

tax may be assessed at any time.23      Petitioner contends that

respondent has failed to prove fraud by clear and convincing

evidence for 1983, 1984, and 1985 and thus, assessment and

collection of tax for 1983, 1984, and 1985 are barred by the

statute of limitations.

     We agree with respondent as to 1985, and with petitioner as

to 1983 and 1984.

     Respondent has the burden of proving the applicability of

the fraud exception to the general period of limitations.


     22
          SEC. 6501. LIMITATIONS ON ASSESSMENT AND COLLECTION.

                    *     *   *     *      *   *   *

          (c) Exceptions.--

               (1) False return.--In the case of a false or
          fraudulent return with the intent to evade tax, the tax
          may be assessed, or a proceeding in court for
          collection of such tax may be begun without assessment,
          at any time.
     23
          Proof that either spouse committed fraud on a joint tax
return extends the limitations period for both spouses on that
tax return, even though only one of the spouses may be liable for
the fraud addition to tax. Hicks Co. v Commissioner, 56 T.C.
982, 1030 (1971), affd. 470 F.2d 87 (1st. Cir. 1972); Stone v.
Commissioner, 56 T.C. 213, 227-228 (1971). In the joint notices
of deficiency, respondent had determined that both Betsy and
petitioner had committed fraud for 1983 through 1987. However,
in the instant cases respondent’s counsel made it plain at trial
that respondent is relying, as to the statute of limitations,
solely on the fraud determined against petitioner, and not on any
contention that Betsy committed fraud.
                              - 83 -


Farmers Feed Co. v. Commissioner, 10 B.T.A. at 1075-1076.      This

burden is the same as that which respondent has under section

6653(b).   Asphalt Industries, Inc. v. Commissioner, 384 F.2d 229,

232 (3d Cir. 1967), revg. on other grounds 46 T.C. 622 (1966);

Botwinik Brothers of Mass., Inc. v. Commissioner, 39 T.C. 988,

996 (1963).

     To carry this burden for a year, respondent must prove two

elements, as follows:   (1) That petitioner has an underpayment of

tax for that year, and (2) that some part of that underpayment is

due to fraud.   Sec. 7454(a);24 Rule 142(b); e.g., Carter v.

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, 114 (1969).   Each of these elements must be proven

by clear and convincing evidence.   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


     24
          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
     to evade tax, the burden of proof in respect of such issue
     shall be upon the Secretary.
                               - 84 -


there is some underpayment and that some part of it is

attributable to fraud.   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 petitioner’s failure to meet

his burden of proving error in respondent’s determinations as to

the deficiencies.   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.

     Where fraud is determined for each of several years,

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

Drieborg v. Commissioner, 225 F.2d 216, 219-220 (6th Cir. 1955),

affg. in part and revg. in part a Memorandum Opinion of this

Court dated Feb. 24, 1954; 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).   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.   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 poses a factual question that is to be

decided on an examination of all the evidence in the record.
                              - 85 -


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, respondent must show that

petitioner intended to evade taxes, which petitioner knew or

believed he owed, by conduct intended to conceal, mislead, or

otherwise prevent the collection of taxes.   E.g., Webb v.

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

1966-81; Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958);

Danenberg v. Commissioner, 73 T.C. 370, 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, 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 petitioner’s explanations, Bradford v.

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

cited, 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.

     We consider first whether petitioner has an underpayment of

tax for any of the statute of limitations years, and then we

consider whether any part of that underpayment is due to fraud.
                               - 86 -


A. Underpayments of Tax

     In order to determine whether there were any underpayments

of tax, we first determine whether petitioner had unreported

income for 1983 through 1986.25

     In the notices of deficiency, respondent determined that

petitioner and Betsy omitted to report, on their 1983 through

1986 joint tax returns, constructive dividends in the form of

personal travel and entertainment expenses paid on behalf of

Betsy by Markette.   Other adjustments are briefly described supra

in notes 2 and 3.    On opening brief, however, respondent states

that respondent relies only on certain of the travel and

entertainment items to carry the fraud burden of proof.    The

latter items are listed in table 15.    Table 15 also shows the

totals of the travel and entertainment constructive dividend

adjustments in the notices of deficiency.    Because a year is

“open” under section 6501(c)(1) only if respondent succeeds in

proving by clear and convincing evidence that there is an

underpayment due to fraud, we focus in this part of the opinion

on only the items listed in table 15.




     25
          We have determined, supra, that the statute of
limitations is in issue only for 1983, 1984, and 1985.
Nevertheless, we consider petitioner’s 1986 actions at this point
because any pattern established may have a bearing on our
analysis of other years. E.g., Adler v. Commissioner, 422 F.2d
63, 66 (6th Cir. 1970), affg. T.C. Memo. 1968-100.
                                     - 87 -


                                  Table 15

                           1983           1984       1985         1986

 Miami, Fla.            $1,302.00      $1,616.50    $397.00     $1,854.00
                                          716.00   2,166.00      1,777.58
                              --          --          --         1,570.50
 Miami, Key West, Fla.        --          --          --         3,216.73
 Hawaii                   5,326.51        --          --            --
 Lake Tahoe, Nev.         1,351.50        --         630.00         --
 L.A. Olympics            1,359.55      2,057.00      --            --
 New York, N.Y.             990.34        --          --            --
 Orlando, Fla.                --          780.00      --            --
 Acapulco, Mexico             --          --       3,682.24         --
 Stamford, Conn.              --          --         349.63         --
 Corpus Christi, Tex.1        --          --       1,137.50        983.78
 San Diego, Calif.            --          --         450.00         --
 Canada                       --          --       3,610.37         --
 Los Angeles, Calif.          --          --         457.00         --
 Snowmass, Colo.              --          --          --         2,019.37
 Western Trip                 --          --          --         1,009.00
 Miscellaneous Washington     --          --          --           846.36
 Annual Fee                   --          --          --            45.00

Totals--fraud per        10,329.90   5,169.50   12,879.74       13,322.32
  respondent’s brief
                                                              2
Total Travel and         18,611.70  13,452.26   23,014.34       11,659.62
  entertainment
  adjustments
  --notice of deficiency
    1
       Respondent does not set forth the amounts of the Corpus
    Christi, Texas, trips constructive dividends at the same place in
    the brief at which the other amounts are listed. The amounts we
    show for the Corpus Christi constructive dividends are taken from
    Appendix VI to respondent’s opening brief.
    2
       See infra text following note 29 for discussion of the effect
    of unexplained allowance items in the notices of deficiency.

         Section 61(a)(7) includes dividends in gross income.

    Section 316(a) provides that a dividend is any property

    distributed by a corporation to its shareholders out of post-1913
                              - 88 -


accumulated or current earnings and profits.26    Sec. 316(a).    A

distribution taxable as a dividend under section 301 may be found

even though the corporation has not formally declared a dividend

or even intended to distribute a dividend.   Loftin and Woodard,

Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir. 1978);

Crosby v. United States, 496 F.2d 1384, 1388 (5th Cir. 1974);

Hash v. Commissioner, 273 F.2d 248, 250 (4th Cir. 1959), affg.

T.C. Memo. 1959-96.   Accordingly an expenditure made by a

corporation for the personal benefit of one of its shareholders,

or the personal use of corporate property by a shareholder, may

result in the shareholder’s being treated as having received a

constructive dividend.   Ireland v. United States, 621 F.2d 731,

735 (5th Cir. 1980); Commissioner v. Riss, 374 F.2d 161, 170 (8th

Cir. 1967), affg. on this issue and revg. on another issue T.C.

Memo. 1964-190;   Challenge Manufacturing Co. v. Commissioner, 37

T.C. 650, 663 (1962), and opinions there cited.    See also Old

Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929).

     In determining whether constructive dividends have been

received, the key factors are whether the shareholders received


     26
          Petitioner has not argued that Markette’s earnings and
profits for 1983 through 1986 were insufficient to cover any of
the determined constructive dividends. Thus, we do not
redetermine the amounts of the relevant earnings and profits, nor
do we address the “wrongful diversion” and sec. 312 issues dealt
with in Hagaman v. Commissioner, 958 F.2d 684, 692 (wrongful
diversion), 695 (sec. 312) (6th Cir. 1992), affg. and remanding
T.C. Memo. 1987-549.
                              - 89 -


economic benefits from the corporation without expectation of

payment therefor, Ireland v. United States, 621 F.2d at 735;

United States v. Smith, 418 F.2d 589, 593 (5th Cir. 1969), and

opinions there cited, and whether the company-provided benefits

made available to the shareholders were primarily of a personal

nature rather than in the business interests of the corporation.

Ireland v. United States, 621 F.2d at 735; Loftin and Woodard,

Inc. v. United States, 577 F.2d at 1215-1217.

     The fact that certain payments are not deductible by a

corporation as business expenses, does not automatically result

in income to that corporation’s shareholder.    The disallowed

expenses also must represent an economic gain or benefit to the

shareholder.   See Dolese v. United States, 605 F.2d 1146, 1152

(10th Cir. 1979); Falsetti v. Commissioner, 85 T.C. 332, 356-357

(1985); Ashby v. Commissioner, 50 T.C. 409, 418 (1968).      Whether

a shareholder received a constructive dividend is a question of

fact.   Loftin and Woodard, Inc. v. United States, 577 F.2d at

1215.   See generally, Bittker and Eustice, Federal Income

Taxation of Corporations and Shareholders, par. 8.05[8] at 8-48

(6th ed. 1994).

     The disputed items we deal with in the fraud portion of the

opinion are predominantly travel expenses.   Where respondent has

succeeded in establishing that the travel was by petitioner,

Betsy, and the children to a vacation resort or for a family
                             - 90 -


function, petitioner contends that the Sley Corporations business

purpose in most such instances is that the travel was undertaken

so that Betsy could confer with Beatrice or petitioner, or

sometimes with Ben, about Sley Corporations business.

     Petitioner states his view of the situation as follows in

his answering brief:

          Every trip Petitioner and Betsy took was partly related
          to business. On the trips, petitioner and Betsy would
          talk about business and about the Sley Corporations
          continuously.

          In the context of closely held, personal holding
          companies differentiating between shareholder purpose
          and corporate purpose makes no sense because the
          shareholders and their corporation generally have
          identical interests.

     Of course, a trip that is primarily for the taxpayer’s

individual pleasure is not converted into a business trip merely

because some short portions of the trip involve business

activities, even when it is clear that the asserted business

activities actually occurred and that those business activities

actually affected the cost of the trip.   This has been the rule

under section 162 and its predecessors, even without regard to

the restrictions of section 274, enacted in 1962.   E.g., George

R. Holswade, M.D., P.C. v. Commissioner, 82 T.C. 686 (1984);

Hoover v. Commissioner, 35 T.C. 566 (1961).

     In the instant cases, we doubt that there were significant

business discussions on these trips.   Petitioner’s general

testimony about business discussions was sometimes disputed by
                               - 91 -


Betsy; where it was supported by Betsy, in almost all instances

Betsy’s testimony was no more believable on this point than

petitioner’s.   For example, we simply do not believe that

petitioner, Betsy, and the children spent thousands of dollars to

travel to Miami during the 6 months or so each year that Beatrice

was there, simply to facilitate Sley Corporations business

discussions, or even in significant part to have such

discussions.    We do not believe Betsy’s testimony that, when she

and the children were in Miami for a week she and Beatrice spent

1-2 hours a day discussing Sley Corporations business.

     We consider the disputed items year-by-year and, for any

year, trip-by-trip in the order appearing supra in table 15.

(1) 1983

     Miami

     Markette paid $1,302 airfare for petitioner, Betsy, and the

children to fly to Miami in early 1983 to visit Beatrice.

See Findings Check No. 1862--Miami, supra.

     In the context of the entire record, we are convinced that

the Miami trips in general, and this early 1983 Miami trip in

particular, were primarily personal and that Sley Corporations’

business, if it was discussed at all, was at most an incidental,

side aspect.

     The personal nature of the Miami trips is demonstrated by

the fact that these were trips taken by the entire household to
                              - 92 -


visit Betsy’s mother, the children’s grandmother.   In addition,

petitioner and Betsy grew up in the Miami area, and petitioner’s

parents lived in the Miami area during at least some of the years

in issue.

     Another indication of the personal nature of these trips is

that petitioner and Betsy did not make notes of what business

activities occurred on the trips.   The general rule as to

allowance of deductions for ordinary and necessary expenses paid

or incurred during the taxable year for trade or business

purposes, is now codified at section 162.   Section 274,

originally enacted as part of the Revenue Act of 1962, imposes

requirements in addition to those of section 162 for the

deductibility of travel and entertainment expenses incurred in

the conduct of a trade or business; subsection (d) of section 274

mandates specific substantiation requirements.   Petitioner has

been a tax attorney since 1971; we believe that during the years

in issue, he knew of the substantiation requirements of section

274(d).   If the trips to Miami were indeed business trips, then

we believe petitioner would have kept the records required by

section 274.   Thus, petitioner’s exceptional knowledge of the tax

laws coupled with the fact that no records were kept of what

petitioner claims were business expenses, is further evidence

that leads us to conclude that the trips to Miami were not

business trips.
                                - 93 -


     We conclude, and we have found, that the trip to Miami was

primarily of personal nature.    Markette’s payment of $1,302 of

the expenses of this trip constitutes a constructive dividend to

Betsy from Markette in this amount.

     We hold for respondent on this issue.

     Hawaii

     Markette paid $2,014.69 of charges that petitioner made on

his Markette American Express credit card that was associated

with a trip to Hawaii taken by petitioner, Betsy, and the

children.     Of this amount, a $39.95 airline ticket related to the

Hawaii trip later was refunded by way of a credit against the Los

Angeles Olympics tickets bill, discussed infra.     Respondent also

contends that the $3,311.82 debit memorandum dated June 2, 1983,

was an expenditure by Markette associated with the trip to Hawaii

and that this expenditure had a primarily personal purpose.    We

have found that the primary purposes of the trip to Hawaii were

(1) for petitioner to appear as a panelist on a video conference

to be broadcast from Hawaii by satellite, (2) meet Ruff in

person, and (3) to take a family vacation.    See Findings Check

No. 1896, Debit Memo--Hawaii, supra.

     Petitioner’s appearance on the video conference may have

been significant in enhancing his reputation as a tax lawyer,

although it appears to have netted him only one client, but no

Sley Corporations purpose has been suggested as being served by
                                - 94 -


this appearance.27   Petitioner’s opportunity to meet Ruff might

conceivably have served a Sley Corporations purpose, but we have

no information suggesting that petitioner or Betsy learned, or

even sought to learn, anything from Ruff that would have been of

use to the Sley Corporations.

     Petitioner’s role in the video conference on Oahu lasted

only about a few hours, with perhaps some studio preparation the

day before.   Petitioner and Betsy visited Ruff’s operations on

Maui, but the record does not indicate that this was anything

more than a walk-through.   On the other hand, petitioner, Betsy,

and the children were in Hawaii for 10 days or more.   Thus,

substantially all of the time that petitioner, Betsy, and the

children spent in Hawaii was spent having a family vacation--

clearly a personal purpose and not a Sley Corporations’ business

purpose.

     We conclude, and we have found, that there was no, or

practically no, Sley Corporations business purpose for the Hawaii

trip, and the predominant purposes of the Hawaii trip were

personal pleasure and Grossman & Flask business.

     However, we do not agree with respondent’s contention that

Betsy should be charged with $5,326.51 constructive dividend


     27
          Petitioner has not contended for, or pointed to
evidence as a basis for, any allowance of an offsetting deduction
on account of his trade or business as a lawyer.
                               - 95 -


income on account of this trip.    Firstly, $39.95 of the amount

Markette paid by its check No. 1896 on account of this trip was

refunded to Markette by way of a credit against the Los Angeles

Olympics tickets bill discussed infra.    As we understand

respondent’s contentions, respondent includes the $39.95 in the

Hawaii trip expenses (because that was paid as part of Markette’s

check No. 1896 payment of the July 1983 American Express invoice)

and also includes the $39.95 in the Los Angeles Olympics expenses

(because the credit was used against the charge for Olympics

tickets paid as part of Markette’s payment of the August 1983

American Express invoice).    This is improper double-counting.    We

conclude, and we have found, that the $39.95 is not properly an

expense of the Hawaii trip.

     Secondly, our Findings of Fact detail the little information

that the record reveals about the $3,311.82 debit memorandum.

Respondent’s conclusion that this is properly a Markette

expenditure for a constructive dividend purpose is neither

adequately supported nor adequately refuted by evidence in the

record.   Respondent, who has the burden of proving on this issue

that the debit memorandum represents an economic gain or benefit

to Betsy, Dolese v. United States, 605 F.2d at 1152; Falsetti v.

Commissioner, 85 T.C. at 356-357; Ashby v. Commissioner, 50 T.C.

at 418, must bear the consequence of failing to carry that

burden.
                                - 96 -


     We conclude that the trip to Hawaii was primarily of a

personal nature.    Respondent proved by clear and convincing

evidence that $1,974.74 ($2,014.69 minus $39.95) of Markette’s

expenditures for this trip was associated with that purpose.

Thus, Betsy received a $1,974.74 constructive dividend in 1983

from Markette.

     We hold for respondent as to $1,974.74 and for petitioner as

to $3,351.77 ($3,311.82 plus $39.95), on this issue.

     Lake Tahoe

     Markette paid $1,351.50 for round-trip airline tickets for

petitioner, Betsy, and their children to visit Lake Tahoe.      See

Findings Check No. 1896--Lake Tahoe, supra.     However, petitioner

did not go on that trip, and American Express refunded the $318

cost of his ticket.    Thus, the net Markette payment for this trip

was $1,033.50.     Betsy testified that the primary purpose of the

family’s usual midsummer Lake Tahoe trips was pleasure, and we

have found that that was the primary purpose of this trip.

     On brief, petitioner refers to (1) Betsy’s testimony that

“we looked at investment properties around the Tahoe area” and

(2) his testimony “that he talked about the corporations’ assets

with Betsy ‘every waking moment, maybe too much.’”    Firstly,

there is no basis for allocating any part of the expenses of this

Lake Tahoe trip to Sley Corporations business, as distinguished

from petitioner’s and Betsy’s personal and family purposes.
                              - 97 -


Secondly, petitioner did not go on that trip, so he could not

have “looked at investment properties” with Betsy on that trip.

Thirdly, Betsy testified that she never did anything about the

alleged investment property examination.

     We are satisfied that respondent has shown by clear and

convincing evidence that the 1983 Lake Tahoe trip was for

personal pleasure and not for Sley Corporations’ business, and

that Markette’s payment of the cost of the airline tickets

constituted income to Betsy, reportable on petitioner’s and

Betsy’s 1983 joint tax return.

     However, we do not agree with respondent’s contention that

petitioner and Betsy should be charged with $1,351.50

constructive dividend income on account of this trip.   We have

found that $318 of the amount Markette paid by its check No. 1896

on account of this trip was refunded to Markette by way of a

credit against the Los Angeles Olympics tickets bill discussed

infra.   As we understand respondent’s contentions, respondent

includes the $318 in the Lake Tahoe trip expenses (because that

was paid as part of Markette’s payment of the American Express

July 1983 invoice) and also includes the $318 in the Los Angeles

Olympics expenses (because the credit was used against the charge

for Olympics tickets paid as part of Markette’s payment of the

American Express August 1983 invoice).   This is improper double-
                              - 98 -


counting.   We conclude, and we have found, that the $318 is not

properly an expense of the Lake Tahoe trip.

     We conclude that the trip to Lake Tahoe was primarily of a

personal nature.   Respondent proved by clear and convincing

evidence that $1,033.50 ($1,351.50 minus $318) of Markette’s

expenditures for this trip were associated with that purpose.

Thus, Betsy received a $1,033.50 constructive dividend from

Markette.

     We hold for respondent as to $1,033.50 and for petitioner as

to $318, on this issue.

     Los Angles Olympics

     Markette paid $1,359.55 for tickets to the 1984 Los Angeles

Olympics to be used (and in 1984 in fact used) by petitioner,

Betsy, and the children.   See Check Nos. 115417 and 1896--1984

Olympics, supra.   This payment was made by issuance of a check in

the amount of $1,001.60, and application of credits on Markette’s

American Express invoice on account of a $39.95 overpayment

resulting from the Hawaii trip, see supra, and a $318 overpayment

resulting from the Lake Tahoe trip, see supra.   See supra table

6.

     Apart from his general contention that “on every trip, Betsy

and petitioner discussed the business of her multimillion dollar

enterprise”, petitioner does not suggest that there was any Sley

Corporations business purpose for Markette to buy the tickets, or
                               - 99 -


for himself, Betsy, and the children to go to the Los Angeles

Olympics in 1984, and we do not perceive any such business

purpose.

     Petitioner testified that Betsy told him that she would

reimburse Markette, but she did not in fact reimburse Markette.

     We conclude, and we have found, that the tickets to the 1984

Los Angeles Olympics were personal.     Respondent proved by clear

and convincing evidence that Markette paid $1,359.55 for these

tickets.    Thus, Betsy received a $1,359.55 constructive dividend

from Markette.

     We hold for respondent on this issue.

     New York

     Markette paid $496 for airfare and $494.34 for hotel and

meals for a trip to New York, N.Y., on September 9, 1983, and a

return on September 11, 1983, for petitioner, Betsy, and the

children.    See Findings Check Nos. 1903 and 1912--New York City,

supra.   On opening brief, petitioner “concedes that any travel

related to the children is a constructive dividend.”    As detailed

in our findings, supra, of the total $990.34, we have attributed

$520 to the children and the remaining $470.34 to petitioner and

Betsy.

     We have accepted petitioner’s and Betsy’s testimony to the

effect that the purpose of this trip was for petitioner and Betsy

to go to the “diamond district” in New York City to talk with
                              - 100 -


diamond brokers about selling the Sley Corporations’ diamonds.

We have accepted their testimony that this was not a vacation

trip.

     We conclude, and we have found, that the expenditures for

the children on this New York trip were for personal purposes and

not for Sley Corporations business purpose.   Thus, Betsy received

a $520 constructive dividend from Markette.

     We hold for respondent as to $520, and for petitioner as to

$470.34, on this issue.

     Summary--1983

     Our fraud issue holdings as to 1983 constructive dividends

are summarized in table 16.
                          Table 16

                       Respondent’s
1983 Trip            Contention on Brief           Court’s Holding

Miami                     $1,302.00                   $1,302.00
Hawaii                     5,326.51                    1,974.74
Lake Tahoe                 1,351.50                    1,033.50
L.A. Olympics              1,359.55                    1,359.55
New York                     990.34                      520.00
  Totals                  10,329.90                    6,189.79
(2) 1984

     Miami

     On February 21, 1984, Markette issued check No. 1946 to

Eastern Airlines, Inc., in the amount of $1,616.50.

     Apart from photocopies of the front and back of the check,

the only evidence in the record as to this item is the following

colloquy:
                                 - 101 -


          Q [McDougal] Check number 1946 should be probably a
     couple page down for Eastern Air, $1616.50, February 17,
     1984. Would that be for a Miami trip?

             A   [Betsy] I haven’t found it yet.

             Q   I’m sorry.

          A Okay, I found it.       It might be.   I don’t have the
     bills to match it up.

          Q But that time of year would Eastern Airline’s
     flights have been to Miami?

             A   Most likely.


     We cannot determine from the foregoing whether or not Betsy

received a constructive dividend on account of that payment.

Respondent has failed to carry the burden of proving that

constructive dividend by clear and convincing evidence.

     We hold for petitioner on this issue.

     Miami

     On or about August 5, 1984, Betsy charged a round-trip

ticket on Pan American World Airways to Miami for $716.       Markette

paid for this on October 8, 1984, by check No. 2008.

     Apart from photocopies of the front and back of the check;

photocopies of the fronts of the charge slip, the September

invoice, and the invoice stub; and the fact that petitioner’s and

Betsy’s son was 8 years old at the time, the only evidence in the

record as to this item is the following colloquy:

          Q [McDougal] If you’ll turn back to Exhibit AQ again,
     please, page 15. On the invoice at the bottom is an
     American Express charge for Pan Am ticket for G. Grossman
                           - 102 -


from Dulles to Miami in the amount of $716.    Your son’s name
begins with a “G”--Geoffrey?

     A   [Betsy]   Yes.

     Q   Would that pertain to him?

     A   Well, I have a son named Geoffrey.

     Q Do you remember sending him on a flight to Florida
in 1984?

     A I’m not sure.      This is an awful large amount for one
ticket.

     Q   You think it might have been more than one ticket?

     A   What?

     Q Do you think it might have been for more than one
ticket?

      A I have no idea. Usually my children are in camp in
August, until about the middle of August. I’m not really
sure.

     Q During this general period of time, <83 through <86,
do you recall sending your son to Florida, say to visit his
grandparents?

     A We usually went to Tahoe in August, after the
children came home from camp, so I’m not really sure about
this ticket, or this invoice.

     Q Do you remember any time during this general period
of time when you sent your son to Florida to meet with his
grandparents?


     A I don’t think I would have sent him by himself.     He
was too young.

     Q   So you don’t know what this ticket is for?

     A   No, I can’t tell you.
                              - 103 -


     We cannot determine from the foregoing whether or not Betsy

received a constructive dividend on account of that payment.

Respondent has failed to carry the burden of proving that

constructive dividend by clear and convincing evidence.

     We hold for petitioner on this issue.

     Los Angeles Olympics

     On July 20, 1984, Markette issued check No. 1987 to United

Airlines, in the amount of $2,057.   Apart from photocopies of the

front and back of the check, and testimony that petitioner,

Betsy, and the children had attended the 1984 Olympics (for which

Markette had bought them tickets in 1983), the only evidence in

the record as to this item is the following colloquy:

          Q [McDougal] One more check in [Exhibit] AP, Mrs.
     Grossman, number 1987. That should be a check to United
     Airlines and it appears that there are five ticket numbers
     noted at the top.

          A   [Betsy] I don’t know what’s noted at the top.

          Q At the end of that long number, does that appear to
     be a sequence of five tickets?

                  *     *     *      *    *    *

          Q Mrs. Grossman, I don’t have the number right in
     front of me, but does it appear to you that that number
     refers to a series of about five ticket numbers?

          A I can’t read the number. I don’t know if they
     are numbers or letters. It’s not--I must need better
     glasses. I can’t tell you.

          Q I can’t read it to you. We’ll just move on.       The
     check was written I believe July 20th 1984.

          A   That’s what it says.
                               - 104 -


          Q The Olympics that year were late July and early
     August of 1984?

          A    Yes.

          Q Would you have flown United Airlines to the
     Olympics?

          A    I don’t remember.

          Q So you don’t know whether this check went to the
     Olympics or not?

          A The check didn’t go to the Olympics.   The check is
     written out to United Airlines.

          Q My question was very poorly worded. You don’t have
     any idea whether this check related to the Olympics trip?

          A    I can’t say for sure.

          Q Do you remember any business trips you took on
     behalf of Markette Corporation at around the time of the
     Olympics?

          A    I can’t say for sure.

     We cannot determine from the foregoing whether or not Betsy

received a constructive dividend on account of that payment.

Respondent has failed to carry the burden of proving that

constructive dividend by clear and convincing evidence.

     We hold for petitioner on this issue.

     Orlando

     On September 27, 1984, petitioner, Betsy, and the children

flew to Orlando, Florida; they returned on September 30, 1984.

See Findings Check No. 2008--Orlando, supra.   Betsy testified

that they went to Orlando to meet Ben at Walt Disney World.    She
                                - 105 -


testified that Ben had “some kind of new computer system that he

was working with futures in the market.”

        We are satisfied that, when parents take their three

children (then aged 14, 11, and 8) to Walt Disney World on a 3-

day trip, the trip is for personal purposes unless something

appears in the record to lead us to a different conclusion.      The

only suggestion in the record as to a Sley Corporations business

purpose is Betsy’s reference to Ben’s “computer system”.       There

is no evidence of any discussions at Walt Disney World about the

Sley Corporations possible use of whatever Ben had found or

developed, nor is there anything in the record indicating why it

made business sense to travel from Washington, D.C., to Orlando

(and, in Ben’s case, from Corpus Christi to Orlando) for any such

discussions.     See George R. Holswade, M.D., P.C. v. Commissioner,

82 T.C. at 701-702.

     As we have found, Markette’s American Express October

invoice showed an $860 credit on account of an item paid for on

the August invoice and carried over to the September invoice.

The September invoice was paid.    The October invoice also showed

the $780 charge for the Orlando tickets.    This left a credit

balance of $80 to be carried over to the next invoice.    Thus the

Orlando tickets were indirectly paid for by Markette’s check No.

2008.
                               - 106 -


     We are satisfied, and we have found, that respondent has

shown by clear and convincing evidence that the Orlando trip was

for personal pleasure and not for Sley Corporations business.     We

conclude that Markette’s payment of the cost of the airline

tickets constituted constructive dividend income to Betsy,

reportable on petitioner’s and Betsy’s 1984 joint tax return.

     We hold for respondent on this issue.

     Summary--1984

     Our fraud issue holdings as to 1984 constructive dividends

are summarized in table 17.

                              Table 17

                            Respondent’s
1984 Trip                Contention on Brief          Court’s Holding

Miami                         $1,616.50                    --
Miami                            716.00                    --
L.A. Olympics                  2,057.00                    --
Orlando                          780.00                   $780

  Totals                       5,169.50                    780

(3) 1985

     Miami

     Markette paid $397 for airfare to Miami for the children

that Betsy charged on her Markette American Express credit card.

Our Findings of Fact (Check No. 2036--Miami--Children, supra)

detail the arrangements that led to the children flying from New

York to Miami on December 26, 1984.      It is clear that the

children were on vacation in New York and traveled from there to
                              - 107 -


Miami to meet their grandmother, Beatrice.   Petitioner does not

even bother to suggest a possible Sley Corporations business

purpose, and we have found that the Miami trip was for a personal

family vacation purpose.   Betsy testified that “The reason that

they [the children] went to Miami was because of the babysitter

situation.”

     We are satisfied that respondent has shown by clear and

convincing evidence that the children’s Miami trip was for

personal purposes and not for Sley Corporations business, and

that Markette’s payment of the cost of the airline tickets

constituted constructive dividend income to Betsy, reportable on

petitioner’s and Betsy’s 1985 joint tax return.

     We hold for respondent on this issue.

     Miami

     On February 4, 1985, Markette issued check No. 2043 to

Eastern Airlines, Inc., in the amount of $1,192.   On February 26,

1985, Markette issued check No. 2051 to Eastern Airlines, Inc.,

in the amount of $974.

     Apart from photocopies of the fronts and backs of the

checks, totaling $2,166, the only evidence in the record as to

this item is the following colloquy:

          Q [McDougal] If you’ll turn, please, to page 20, we
     will skip the Marriott invoice at the top because it does
     not appear to have been charged to the corporation.

          Mrs. Grossman, would you look at AP, the checks, the
     ‘85 section, check number 2043, which is about the fifth
                                  - 108 -


     page down. There’s a check to Eastern Airlines for $1192 on
     February 24th. It’s about three pages beyond that, 2051,
     Eastern Airlines in the amount of $974 again in February
     ‘85.

                    *   *     *     *       *   *   *

          THE COURT: Now what was your question again?

          MR. McDOUGAL: The question is would Eastern Airline
     tickets purchased at that time of year be for the spring
     Miami trip.

          THE WITNESS [Betsy]: I have no idea what they’re for.

          BY MR. McDOUGAL:

          Q   I’m sorry?

          A   I have no idea what they were for in February.

          Q Do you recall flying Eastern Airlines for trips
     other than to Miami?

          A   No.

          Q We just looked at 2051. The check above that, 2050,
     is American Express, February 26th 1985 for $2002.25.

          If the Eastern checks were for a trip to Miami, would
     the American Express charges for the same period be for some
     other purpose?

          A   I don’t know.

     Although respondent referred to Markette check No. 2050 in

the colloquy and determined in the notice of deficiency that the

amount of that check ($2,002.25) also was constructive dividend

income to Betsy, the record does not include information shedding

further light on check No. 2050 or its connection to check Nos.

2043 and 2051.
                                - 109 -


     We cannot determine from the foregoing whether Betsy

received a constructive dividend on account of the $2,166 payment

by check Nos. 2043 and 2051.    Respondent has failed to carry the

burden of proving that constructive dividend by clear and

convincing evidence.

     We hold for petitioner on this issue.

     Lake Tahoe

     Markette paid for $630 of airfare to Reno--$420 round-trip

for Betsy and $210 Reno-to-Washington, D.C., for petitioner.      See

Findings Check No. 2108--Lake Tahoe, supra.     Betsy testified as

follows regarding this trip:

            Q [McDougal] So this trip would be purely personal.

          A [Betsy] Well, we went out there and I guess it was
     basically personal. We were there by ourselves. We
     probably took sometime to talk about what was going on with
     the business.

Betsy flew to Reno on August 7, 1985.     The record does not

indicate when petitioner went there, or how his flight there was

paid for.    Betsy and petitioner flew back on August 11, 1985.    As

we noted in analyzing the 1983 Lake Tahoe trip, Betsy testified

that the primary purpose of the family’s usual midsummer Lake

Tahoe trips was pleasure.    We have found that the 1985 Lake Tahoe

trip, almost precisely in the middle of the summer, also was

taken primarily for pleasure.

     Respondent has shown by clear and convincing evidence that

petitioner’s and Betsy’s Lake Tahoe trip was for personal
                                - 110 -


purposes and not for Sley Corporations business, and that

Markette’s payment of the cost of the airline tickets constituted

constructive dividend income to Betsy, reportable on petitioner’s

and Betsy’s 1985 joint tax return.

     We hold for respondent on this issue.

     Acapulco

     Markette paid $3,682.21 on account of an April 1985 trip by

petitioner, Betsy, and the children to Acapulco.     See Findings

Check Nos. 2084, and 2092--Acapulco, supra.     Betsy testified as

follows regarding this trip:

          Q [McDougal] Thank you. I’m going to ask you to move
     back to [Exhibit] AQ again, this time page 19. The invoice
     on page 19, both pages, show charges for the Acapulco
     Princess in Mexico and a couple of other charges in Mexico,
     and page 21 appears to show the backup charge slips for that
     invoice.

          Do you recall the purpose of the trip to Acapulco?

          A     [Betsy] The purpose was a spring vacation trip.

          Q Did it have anything to do with the business of
     Markette Corporation?

          A     Not specifically.

     Petitioner’s analysis of the Sley Corporations business

purpose of this trip is as follows:

          Betsy and petitioner travelled to destinations that
     were conducive to business discussions, and business
     discussions were held. (P.R.F. ¶ 463). The Grossman house
     was being renovated, (P.R.F. ¶ 510), and was at that time an
     unsuitable forum to discuss Sley System business. * * *
     [There follows an attack on respondent’s expenditures of
     “tax money he collects in cases like the one at bar.”]
                               - 111 -


          Petitioner worked in a busy law office. (P.R.F. ¶
     57(A)). He devoted 99.99 percent of his time to his law
     firm. (P.R.F. ¶ 57(A)). The trips to Mexico and Canada
     preceding the end of his marriage were trips where Markette
     Corp. business was discussed and the expenses paid are not
     dividends to petitioner.

          Obviously, Betsy and petitioner had substantial trouble
     communicating at home. When Betsy and petitioner travelled
     to Acapulco and Canada, Markette Corp. business was
     discussed. (P.R.F. ¶¶ 512, 518).

     We are satisfied that Betsy’s testimony captured the essence

of the situation.    Respondent has shown by clear and convincing

evidence, and we have found, that petitioner’s, Betsy’s, and the

children’s Acapulco trip was for personal purposes and not for

Sley Corporations business.    We conclude that Markette’s payment

of the costs of the trip constituted income to Betsy, reportable

on petitioner’s and Betsy’s 1985 joint tax return.

     We hold for respondent on this issue.28

     Stamford

     Markette paid a $59.63 bill from Le Pavillon, dated June 8,

1985, that petitioner charged on his Markette American Express

credit card.    This expenditure was associated with a trip to

Stamford, Connecticut, to attend a bar mitzvah.    On the same day,

petitioner and Betsy charged two adult ($65 ea.) and four

     28
          On brief, respondent asserts that Betsy had $3,682.24
constructive dividend income on account of the Acapulco trip.
Our addition comes to $3,682.21, and we have so found. The
latter number appears to be consistent with respondent’s
determination in the notice of deficiency. Our holding is for
the latter number.
                                - 112 -


children’s ($40 ea.) one-way shuttle airline tickets between

Washington, D.C., and New York.    Markette also paid the $290 cost

of these airline tickets.   See Findings Check Nos. 2092 and 2098-

-Stamford, supra.   The trip to Stamford to attend the bar mitzvah

was personal and not on Sley Corporations business.   Although the

evidence of record as to the $290 is equivocal, petitioner

appears to concede that the shuttle travel was the Washington-New

York or the New York-Washington portion of the Stamford trip.

Petitioner’s only contention on this point, on answering brief,

is that “the $290 trip to the New York diamond market was a

legitimate business expense.”

     Although it is clear that the Stamford trip is entirely

personal (and thus the $59.63 is entirely personal), we cannot

tell from the record how the six shuttle tickets fit in, and what

was the length and nature of the associated New York City trip.

Betsy, for example, could not recall any trip to New York with

four children.

     Respondent has shown by clear and convincing evidence, and

we have found, that petitioner’s and Betsy’s Stamford trip was

for personal purposes and not for Sley Corporations business.    We

conclude that Markette’s payment of the $59.63 item related to

this trip constituted income to Betsy, reportable on petitioner’s

and Betsy’s 1985 joint tax return.    Respondent has failed to make

the same showing as to the shuttle tickets.
                                - 113 -


     We hold for respondent as to $59.63, and for petitioner as

to $290, on this issue.

     Corpus Christi

     Markette paid $1,137.50 for round-trip airfare to Corpus

Christi, Texas, for Betsy and the children.      See Findings Check

No. 2098--Corpus Christi, supra.

     Betsy testified as follows regarding this Corpus Christi

trip:

            Q   [McDougal] Do you remember the purpose of the trip?

          A [Betsy] I think my mother was out there and I think
     I had gone out there to meet with my mother and my brother.

          Q And was that for the business of Markette
     Corporation.

            A   I think there was some business that was discussed.

            Q   Was that the primary purpose of the trip?

            A   I don’t remember specifically.

          Q What interest did Markette Corporation have in
     having your children go to Corpus Christi?

          A I don’t know. I mean all these bills were given
     over to Harvey Berger and it was not my procedure to ever
     really question what was done with these things.

     Respondent has shown by clear and convincing evidence, and

we have found, that Betsy’s and the children’s Corpus Christi

trip was for personal purposes and not for Sley Corporations’

business.    We conclude that Markette’s payment of the $1,137.50

airfare constituted constructive dividend income to Betsy,

reportable on petitioner’s and Betsy’s 1985 joint tax return.
                              - 114 -


     We hold for respondent on this issue.

     San Diego

     Markette paid $450 for Betsy’s round-trip airfare to San

Diego.   See Findings Check No. 2098--San Diego, supra.

     Betsy testified as follows regarding this trip:

          Q [McDougal] Now the invoice back on page six also
     shows an American Airline charge of $450. Do you see that?
     It’s the next charge down after the U.S. Air charges.

          A   [Betsy] Yes.

          Q Page eight shows a receipt in your name from Dulles
     to O’Hare to San Diego in the amount of $450, at the bottom
     of the page.

          A   Yes.

          Q   What was the purpose of the trip to San Diego?

          A   I had gone out there myself.

          Q   For what purpose?

          A   Pleasure.

     On answering brief, petitioner’s only response seems to be

“Petitioner knew nothing about said trip.”

     Respondent has shown by clear and convincing evidence, and

we have found, that Betsy’s San Diego trip was for personal

purposes and not for Sley Corporations business.   We conclude

that Markette’s payment of the $450 airfare constituted

constructive dividend income to Betsy, reportable on petitioner’s

and Betsy’s 1985 joint tax return.

     We hold for respondent on this issue.
                              - 115 -


     Canada

     Markette paid $3,610.37 for expenses of petitioner, Betsy,

and the children on a trip to Canada.    See Findings Check Nos.

2098 and 2108--Canada, supra.   When asked what the purpose was of

this 10-day August 1985 trip, Betsy testified that “Basically it

was a family trip.”   On answering brief, petitioner states that

“While in Canada, Betsy Grossman and petitioner continually

discussed Markette Corp. business.”     We do not believe

petitioner’s protestations about “continually” discussing Sley

Corporations business in Buffalo, Montreal, Toronto, Ottawa, and

places in between.

     At trial, petitioner appeared to have acknowledged that the

expenses of the Canada trip should have been subject to an

“allocation * * * to do the right thing”.     However, taking into

account factors described in George R. Holswade, M.D., P.C. v.

Commissioner, 82 T.C. at 701-702, and the allocations we made in

that opinion, the record herein leads us to the conclusion that

no allocation should be made in the instant cases; all the Canada

trip expenses here in dispute are personal.

     Respondent has shown by clear and convincing evidence, and

we have found, that petitioner’s, Betsy’s, and the children’s

Canada trip was for personal purposes and not for Sley

Corporations business.   We conclude that Markette’s payment of

the costs of the trip constituted constructive dividend income to
                                - 116 -


Betsy, reportable on petitioner’s and Betsy’s 1985 joint tax

return.

     We hold for respondent on this issue.

     Los Angeles

     Markette paid $457 for petitioner’s airfare from Los Angeles

to Washington, D.C., that petitioner charged on his Markette

American Express credit card.    See Findings Check No. 2100--Los

Angeles, supra.

     Respondent asked Betsy about the airline ticket, and Betsy

testified that she did not remember anything about the trip and

did not “specifically” remember anything about petitioner’s being

in Los Angeles on Sley Corporations business.   Respondent did not

ask petitioner about the trip, and petitioner did not testify

about it.

     Respondent has failed to show by clear and convincing

evidence that petitioner’s Los Angeles trip was for personal

purposes and provided a benefit to Betsy.

     We hold for petitioner on this issue.

     Summary--1985

     Our fraud issue holdings as to 1985 constructive dividends

are summarized in table 18.
                               - 117 -


                              Table 18

                      Respondent’s Contention
     1985 Trip                on Brief            Court’s Holding

     Miami                      $397.00                $397.00
     Miami                     2,166.00                   --
     Lake Tahoe                  630.00                 630.00
     Acapulco                  3,682.24               3,682.21
     Stamford                    349.63                  59.63
     Corpus Christi            1,137.50               1,137.50
     San Diego                   450.00                 450.00
     Canada                    3,610.37               3,610.37
     Los Angeles                 457.00                   --
                                                     1
       Totals                 12,879.74               9,966.71

1
  Table 10, supra, shows that we found that Betsy had $10,164.71
of constructive dividend income from 1985 Markette payments for
personal travel and entertainment expenses. The $198 difference
between that amount and the $9,966.71 shown in table 18 is
accounted for by Betsy’s round-trip ticket to Miami, described in
our findings of Check No. 2036--Miami--Betsy, supra. Respondent
included that item in the notice of deficiency, but not in the
listing of fraudulent items.

(4) 1986

     On answering brief, petitioner contends as follows:



           12. 1986 trips.

          Respondent contends at pages 124 - 126 of her
     [opening] brief that Betsy had constructive dividend
     income from corporate expenditures which was
     fraudulently omitted from petitioner’s 1986 joint
     return. Petitioner in his Opening Brief at pages 177 -
     184, inclusive, argues that he is an innocent spouse
     for 1986. Petitioner relies on his innocent spouse
     argument as his response to respondent’s 1986
     constructive dividend claim. Petitioner neither signed
     nor saw Markette’s 1986 tax return. P.R.F. ¶ 255(A).
                               - 118 -


     The pages of respondent’s opening brief to which petitioner

refers are where respondent details respondent’s contentions as

to fraudulently omitted constructive dividends totaling

$13,322.32.    See supra table 15.   Thus, petitioner appears to

concede these omissions, although contesting his involvement in

these omissions and in any fraud that might be associated

therewith.    Despite petitioner’s broad concession, however, we

reduce this $13,322.32 figure by (1) $6,117.68 of allowances by

respondent and (2) $1,241.21 of expenses determined by respondent

to be fraudulently omitted constructive dividends, but with

respect to which we did not find a personal purpose.29

     In the notice of deficiency for 1986, respondent determined

that omitted constructive dividend income was only $11,659.62.

See supra table 11.    This resulted from respondent’s allowing a

total of $6,117.68 from the challenged items--the sum of the four

adjustments shown on supra table 12, in connection with check

Nos. 2137 ($1,674), 2162 ($3,057.61), and 2220 ($598), and the

$788.07 adjustment not related to a specific check.    Although

there is some suggestion that respondent has had second thoughts

about some or all of those allowances, respondent has not moved

to amend the answer to reduce the amount of any of these

allowances.    Also, respondent has failed to clarify precisely

     29
          On the other side of the coin, we found that certain
expenses had a personal purpose, with respect to which respondent
did not allege fraud. Compare supra table 12 with table 15.
                              - 119 -


which of the disputed expenditures are being allowed, and in what

amounts.   Thus, we construe these allowances against respondent.

     We also reduce the $13,322.32 figure by $1,241.21, as

follows:   (1) $797.21 of miscellaneous Washington area expenses,

as we found that the record does not support a finding that these

expenditures had a personal purpose, see supra Check No. 2162--

Miscellaneous Washington, D.C., (2) $45 annual membership fee

that we found had a business purpose, see supra Check No. 2220--

American Express Fee, and (3) $399 refund of one of the five

Washington-Miami tickets, see supra Check Nos. 2137, 2148, and

2203--Miami.

     We hold for respondent to the extent of $5,963.43

($13,322.32 less $6,117.68 and less $1,241.21) and for petitioner

to the extent of $7,358.89 ($6,117.68 plus $1,241.21), on this

issue.

(5) Conclusions

     Table 19 shows the amounts of constructive dividends Betsy

received from Markette that petitioner and Betsy omitted from

their 1983 through 1986 tax returns.
                                - 120 -


                               Table 19

                  Respondent’s Contentions
      Year               (Table 15)            Court’s Holdings

      1983               $10,329.90                $6,189.79
      1984                 5,169.50                   780.00
      1985                12,879.74                 9,966.71
      1986                13,322.32                 5,963.43

      Petitioner does not contend that he is entitled to

offsetting deductions or credits for any of those years.30     Thus,

we conclude that respondent has shown by clear and convincing

evidence that petitioner had an underpayment of tax for each of

the years 1983 through 1986.

     We hold for respondent on this issue.

B.   Fraudulent Intent

      Respondent contends that “petitioner’s returns for four

consecutive years omitted substantial amounts of constructive

dividend income”, petitioner was “intimately aware” of the

pattern of omissions, petitioner’s “specialized knowledge and


      30
             The parties have stipulated that petitioner and Betsy--

      are entitled to credits in the above amounts [the amounts of
      F.I.C.A. taxes withheld from Sley Corporations’ payments to
      Betsy] for 1983, [$2,391.91] 1984 [$2,532.59] and 1985
      [$2,791.78; see supra table 3] in determining the amounts of
      overpayments or deficiencies to be paid with respect to
      their joint returns for said years.

We understand this to be an agreement relating to payments, and
not an agreement affecting the determination of the
“underpayment” as used in sec. 6653(b)(1). However, this
agreement would affect the amount of any additional addition to
tax under sec. 6653(b)(2).
                                - 121 -


experience in the tax field” makes this awareness of greater

significance, this pattern of omissions “was part of a larger

pattern of tax evasion in which distributions of earnings and

profits of Markette and related corporations were disguised as

deductible compensation and in which petitioner had the guiding

hand”, and petitioner’s “false and misleading statements to

respondent and the Court”, all lead to the conclusion that

petitioner had a “fraudulent intent”, in omitting the

constructive dividend income.

     Petitioner maintains that “Betsy managed all Grossman family

affairs” and “made arrangements for all travel”, during the years

in issue “Betsy oversaw corporate administration” of the Sley

Corporations, “Betsy gave petitioner instructions on how to carry

out his duties, [regarding the Sley Corporations] and petitioner

followed them”, and “petitioner relied upon Betsy, Ben, Bea and

Berger to allocate through reimbursements and their yearly

dividend declarations between business and personal expenses”.

Petitioner also points out that respondent had previously audited

petitioner’s and Betsy’s 1983 and 1985 tax returns, and

respondent then determined that petitioner and Betsy had overpaid

their taxes.   Finally, petitioner insists that he relied on

Baybrook and Berger--both of whom were highly qualified and had

access to all books and records--to (1) assure the accuracy of
                              - 122 -


his and Betsy’s, and the Sley Corporations’, tax returns and (2)

determine the amounts of Betsy’s dividends.

     We agree with significant portions of respondent’s

contentions, but conclude that respondent failed to carry the

heavy burden of proof as to 1983 and 1984.

     Petitioner knew that he and Betsy charged personal expenses

on Markette’s American Express credit cards.   Petitioner oversaw

the Sley Corporations’ daily operations and knew that Markette

paid these charges and did not identify these payments as

payments of personal expenses.   Petitioner knew that Berger was

not retained to audit the Sley Corporations’ books and records,

and so Berger almost certainly would not discover that Markette

paid petitioner’s and Betsy’s personal expenses.   Petitioner, a

tax lawyer familiar with constructive dividend rules, understood

that he and Betsy were failing to report income on which they

were taxable.   Petitioner’s attempts to blame the omissions on

Baybrook, Berger, and Betsy are not credible; these attempts are

a further indication of petitioner’s fraudulent intent.    We

consider these elements seriatim, and then deal with other

considerations.

     (1) Petitioner’s Knowledge of Credit Card Charges

     Firstly, petitioner went on almost all of the trips

discussed in part A.   If petitioner did not go with his family on
                              - 123 -


a particular vacation trip, then Betsy told petitioner of the

trip.

     Secondly, petitioner knew that expenses of these vacation

trips were charged to Markette, because he, himself, charged many

of those expenses on his Markette American Express credit card.

In 1983, petitioner charged on his American Express credit card

the airfare to Lake Tahoe and all the expenses associated with

the Hawaii trip.   On the 1983 New York City trip, all the charges

were on Betsy’s Markette American Express credit card, but

petitioner signed the credit slips for the hotel, etc., expenses.

In 1985, petitioner charged most of the expense of the Acapulco

trip, the expense associated with the trip to Stamford, and all

but the airline ticket portion of the expenses associated with

the trip to Canada.   In 1986, petitioner charged part of the

expenses associated with the trips to Miami, dinner for

petitioner and Betsy at the Shoreham Hotel, the charges from

Lenny’s Restaurant and Vista International Hilton, and part of

the expenses associated with the second trip to Key West.

     (2) Petitioner’s Knowledge of Payments

     Petitioner knew that Markette paid for the charges on the

Markette American Express credit cards, because he directed

Baybrook to make those payments.   Petitioner supervised Baybrook

in her duties for the Sley Corporations, and she took directions,
                              - 124 -


including directions with respect to paying bills, exclusively

from petitioner.

     Petitioner brought the American Express invoices to Baybrook

and told her which of the Sley Corporations was to pay for the

charges on a particular invoice.   After Baybrook prepared a check

as payment, she attached the check to the invoice and returned it

to petitioner for his final review.     Petitioner closely reviewed

each check against each invoice, as well as each transaction on

each invoice.   Petitioner signed most of the Markette checks to

pay for the charges on the American Express invoices; Betsy

signed checks when petitioner asked her to do so.     In verifying

the charges on the American Express invoices, petitioner checked

with Betsy, on at least some occasions, to determine whether

Betsy had made a particular charge.     Petitioner never told

Baybrook that a travel expense on an American Express invoice was

a personal item, and thus was not to be paid by the Sley

Corporations.

     (3) Petitioner’s Knowledge of Berger’s Limited Role

     Petitioner brought Berger into the picture, initially to

prepare the Sley Corporations’ 1980 tax returns.     Berger

continued preparing the Sley Corporations’ tax returns,

petitioner’s and Betsy’s tax returns, and the Sley Corporations’

compilation financial statements; he also calculated the amounts
                               - 125 -


of dividends necessary to avoid imposition of personal holding

company taxes on the Sley Corporations.

     Berger was not retained to do any audit work on behalf of

the Sley Corporations.   Each of Berger’s compilation financial

statements includes a compilation report that starts as follows:

           A compilation is limited to presenting in the form
     of financial statements information that is the
     representation of management. We have not audited or
     reviewed the accompanying [December 31, 1980, 1981,
     etc.] financial statements and[,] accordingly, do not
     express an opinion or any other form of assurance on
     them.

     Because petitioner knew that Berger did not audit the Sley

Corporations books--and was reminded of this in each year’s

compilation financial statements--petitioner knew that Berger

would not discover that Markette paid petitioner’s and Betsy’s

personal expenses.   As a result, no one in the system would be

likely to realize that Betsy had constructive dividends that were

not reported on petitioner’s and Betsy’s joint tax returns.

     (4) Petitioner’s Knowledge of the Tax Laws

     In analyzing whether some part of the underpayments of the

tax was due to petitioner’s fraud, we consider petitioner’s

background and knowledge of tax law.     Scallen v. Commissioner,

877 F.2d 1364, 1370-1371 (8th Cir. 1989), affg. T.C. Memo. 1987-

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

1984), affg. T.C. Memo. 1982-603; Beaver v. Commissioner, 55 T.C.

85, 93-94 (1970).    As we have said, “In determining the presence
                                - 126 -


or absence of fraud, the trier of the facts must consider the

native equipment and the training and experience of the party

charged.”   Iley v. Commissioner, 19 T.C. 631, 635 (1952).

     Petitioner is a practicing attorney with an LL.M. in

taxation degree from New York University.   Petitioner was a

senior trial attorney in the Trial Branch of the Tax Court

Litigation Division, Office of Chief Counsel, Internal Revenue

Service, for 4 years.   He has been in private practice,

specializing in tax law, for about 20 years.   Petitioner is a

member of the bar of this Court.

     Petitioner understands that a shareholder-taxpayer receives

a constructive dividend when a corporation in which a taxpayer

owns stock pays the personal expenses of that shareholder without

the expectation of repayment.    We take judicial notice of a case

in this Court, First Teachers Investment Corp. v. Commissioner,

T.C. Memo. 1980-302, involving constructive dividends, in which

petitioner appeared as counsel for the taxpayer, and a Case

before the Court of Appeals for the Fourth Circuit, Clevenger v.

Commissioner, 826 F.2d 1379 (4th Cir. 1987), affg. T.C. Memo.

1986-149, also involving constructive dividends, in which

petitioner appeared on brief for the taxpayer.    Petzoldt v.

Commissioner, 92 T.C. at 674; Estate of Reis v. Commissioner, 87

T.C. 1016, 1027 (1986).   Further, we believe that petitioner

knows that expenses can be apportioned between the business and
                               - 127 -


personal portions of a trip, because petitioner arranged for the

Sley Corporations to pay for only that portion of Baybrook’s trip

to Florida that she spent on business (see supra note 5), not her

entire trip.

     Petitioner’s background increases our confidence that he

understood that, when he told Baybrook that Markette was to pay

for the travel and entertainment expenses on the Markette

American Express invoices, it would result in the constructive

dividends’ not being reported on his and Betsy’s joint tax

returns.   We believe that petitioner acted in bad faith, with the

intention that the constructive dividends not be reported.

     Petitioner points to the relatively small amounts of omitted

constructive dividends, compared to the substantial amounts of

income that he and Betsy reported, and substantial amounts of

income taxes they paid.    Compare, for example, table 19 with

tables 13 and 14.   The significance of large relative omissions

in most fraud opinions decided for respondent is that the

relative magnitude of the omissions convinced us that the

omissions could not have been inadvertent.    In the instant cases,

petitioner’s knowledge of the tax laws combines with the other

elements we discuss to convince us that these omissions could not

have been inadvertent.    Thus, in the instant cases, the

comparatively small relative magnitude of omissions does not

point toward inadvertence.
                              - 128 -


     (5) Petitioner’s Misleading Explanations

     Petitioner claims that he was merely acting as Betsy’s agent

in her administration and oversight of the Sley Corporations and

that Betsy gave petitioner instructions on how to carry out his

duties.   The extension of petitioner’s argument then, is that

petitioner cannot be held responsible for any income that may

have been omitted from petitioner’s and Betsy’s joint tax return

because petitioner was merely acting under Betsy’s control and

direction.   This claim is squarely contradicted by the record.

     We are not concerned with whether petitioner was Betsy’s

agent in the sense that Betsy is bound by, or liable for,

petitioner’s actions.   Our concern is as to petitioner’s

liability for his own actions.   It was petitioner, not Betsy, who

hired and supervised Baybrook.   It was petitioner, not Betsy, who

directed Baybrook as to Markette’s payment of American Express

invoices, knowing that those invoices included numerous charges

for petitioner’s and Betsy’s personal benefits.   It was

petitioner, not Betsy, who brought Berger into the picture and

who understood that Berger’s limited engagement meant that (in

the words of the accountants’ compilation reports that

accompanied the Sley Corporations financial statements) Berger

would merely present “information that is the representation of

management”.   Petitioner, thus, made and effectuated the

decisions that led to the omission of constructive dividend
                              - 129 -


income from his and Betsy’s joint tax returns.   Petitioner

controlled the situation and knew what was happening with regard

to the omitted income.   Petitioner’s claim that he was merely

acting for Betsy, and implicitly that any blame should be shifted

from him to Betsy, is belied by the record.   The transparent

falseness of petitioner’s effort is itself an indicator of

petitioner’s fraudulent intent.   Bahoric v. Commissioner, 363

F.2d 151, 153-154 (9th Cir. 1966), affg. T.C. Memo. 1963-333;

Boyett v. Commissioner, 204 F.2d at 208.

     Respondent contends that petitioner’s role in the Sley

Corporations’ payments of salaries to Betsy and Ben is

significant because it “bear[s] upon his [petitioner’s] attitude

toward reporting and paying taxes generally.”    Petitioner points

out that Betsy and he reported all of Betsy’s salary receipts on

their joint tax returns, and contends that “Betsy’s salary is

neither a badge of fraud nor relevant to this case.”   After

examining the record in the instant case, we conclude that the

most significant elements of the salary matter are (1)

petitioner’s role in the salary determinations and (2)

petitioner’s contentions regarding that role.    We do not decide

whether the payments were salary or whether the payments were

fraudulent.31

     31
          We note that the question of whether the amounts paid
to Betsy as salary really were salary or really were dividends
                                                   (continued...)
                              - 130 -


     Petitioner proposed findings of fact that he “did not

participate in setting the yearly salaries paid by the Sley

Corporations”, that he “does not know who decided how to allocate

the salaries among the Sley Corporations”, and that he “believes

decisions regarding salaries paid by the Sley Corporations were

made by the corporations’ officers.”

     Before the Sley Corporations were moved into Grossman &

Flask facilities, Betsy and Ben did not receive salaries from the

Sley Corporations.   Then Betsy and Ben received salaries, but

     31
      (...continued)
affects petitioner’s and Betsy’s income taxes, not just the
income taxes of the payor corporations. In particular, it
affects the Schedule W deduction (sec. 221) and the I.R.A.
contribution deduction (sec. 219), both of which are dealt with
supra note 3, and the excise tax (sec. 4973), which is dealt with
supra note 2. It also has a consequence as to the proper
treatment of the amounts withheld as F.I.C.A. taxes from the
amounts paid to Betsy. See supra table 3; supra note 30.
However, petitioner implicitly conceded the Schedule W and I.R.A.
contribution adjustments, respondent conceded the excise tax, and
neither side pursued the dispute about the credit for withheld
F.I.C.A. taxes.

     Respondent contends that the salary arrangement was part of
a “corporate tax evasion scheme” guided by petitioner, and so
shows petitioner willing to commit tax fraud. At the same time,
(1) respondent understands that both the Schedule W and I.R.A.
deductions “turn on the question whether amounts paid to Betsy by
Markette Corporation during those years represent compensation
for services actually rendered”, but (2) respondent does not
contend that the underpayments resulting from the Schedule W and
I.R.A. deductions in the instant cases are due to fraud.

     In light of this apparent inconsistency in respondent’s
position, coupled with the above-described resolutions of the
adjustments that flow from the salary issue, we conclude that it
is not necessary for us to decide in the instant cases whether
the payments to Betsy constituted salary or additional dividends.
                               - 131 -


only from certain of the Sley Corporations.    See supra notes 6

and 7.    Petitioner did not challenge Betsy’s and Ben’s testimony

that each of them was notified by petitioner when her or his

salary was set or changed, and that neither Betsy nor Ben

participated in the decision-making.     Indeed, petitioner proposed

findings of fact to the effect that Betsy and Ben did not know

who made the decision that the Sley Corporations would pay them

salaries, how the salary structure was set for the Sley

Corporations, or who decided how much their salaries would be.

The parties agree that Berger did not set the salary structure,

and that he did not participate in the setting of salary levels

at any time.   The parties agree that Berger also did not

participate in the decision to allocate the officers’ salaries

among the Sley Corporations or among the officers themselves.

The parties agree that Berger did not have anything to do with

the decisions to raise and lower the salaries from year to year.

Petitioner does not suggest that Beatrice gave him instructions,

or even consulted with him, in this matter.    Harry was long dead

by the time the salaries in question began to be paid.

Petitioner does not explain how he got the salary information

that he then presented to Betsy and Ben.    That leaves petitioner

as the only person who could have made the salary decisions.32

     32
           How often have I [Sherlock Holmes] said to
           you [Dr. Watson] that when you have
                                                    (continued...)
                                - 132 -


We conclude, and we have found, that petitioner set Betsy’s and

Ben’s salaries from the Sley Corporations, at least up to early

1986.     Petitioner had a substantial degree of control over many

matters at the Sley Corporations.     The transparent falseness of

petitioner’s contentions that he did not participate in the

decisions and that he did not know who made the decisions as to

Betsy’s and Ben’s salaries is itself an indicator of petitioner’s

fraudulent intent.     Bahoric v. Commissioner, 363 F.2d at 153-154;

Boyett v. Commissioner, 204 F.2d at 208.

     On brief petitioner lauds Baybrook’s and Berger’s

qualifications and abilities, and declares his reliance on them

to (1) assure the accuracy of his and Betsy’s, and the Sley

Corporations’ tax returns, and (2) determine the amounts of

Betsy’s dividends.

     A taxpayer’s reliance on his or her accountant to prepare

accurate returns may indicate an absence of fraudulent intent.

Marinzulich v. Commissioner, 31 T.C. 487, 492 (1958).        This is

so, however, only where the accountant has been supplied with all

the information necessary to prepare the returns accurately.

Scallen v. Commissioner, 877 F.2d at 1371; Foster v.

     32
          (...continued)
              eliminated the impossible, whatever remains,
              however improbable, must be the truth?
              [Emphasis in original.]

     Doyle, “The Sign of Four”, Sherlock Holmes: The Complete
Novels and Stories (vol. l) 107, 139 (Bantam Books 1986).
                                - 133 -


Commissioner, 391 F.2d 727, 732-733 (4th Cir. 1968), affg. on

this issue and revg. on another issue T.C. Memo. 1965-246; Estate

of Temple v. Commissioner, 67 T.C. 143, 162-163 (1976).

     In the instant cases, petitioner supervised Baybrook in such

a manner that Baybrook was not informed of the personal nature of

the charges that she was noting on the Sley Corporations books.

Also petitioner knew that this meant that Berger’s access to the

books would not enable Berger to realize that Markette was paying

petitioner’s and Betsy’s personal expenses.

     Petitioner’s effort to claim that he relied on Baybrook and

Berger is belied by the record.    The transparent falseness of

petitioner’s efforts is itself an indicator of petitioner’s

fraudulent intent.   Bahoric v. Commissioner, 363 F.2d at 153-154;

Boyett v. Commissioner, 204 F.2d at 208.

     (6) Other Considerations

     We believe that petitioner established a pattern that

continued into 1986 with regard to constructive dividends, and

there is strong evidence about his fraudulent intent with regard

to the omission of that income from his and Betsy’s joint tax

returns.   However, determinations about fraud must be made year-

by-year.   Drieborg v. Commissioner, 225 F.2d at 219-220; Estate

of Stein v. Commissioner, 25 T.C. at 959-963.    We consider at

this point matters of particular significance to individual

years.
                               - 134 -


     (a) 1983.    Petitioner contends that the fact that an earlier

audit of petitioner’s and Betsy’s 1983 joint tax return revealed

that they overstated their income for that year indicates that

petitioner lacked an intent to evade tax for 1983.    Respondent

contends that because petitioner did not offer any explanation of

this audit, it is impossible to draw conclusions from this audit

that are relevant to determining petitioner’s intent with respect

to the unreported income for 1983.   Respondent also contends that

the lack of evidence in the record regarding the audit conducted

in 1987 should be construed against petitioner.    Respondent urges

that, under the Wichita Terminal doctrine, petitioner’s failure

to offer further evidence of the earlier audit gives rise to the

inference that any such evidence would not be favorable to

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

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

     We agree with petitioner’s conclusion.

     As table 13, supra, shows, petitioner and Betsy reported a

joint liability of $160,344 for 1983.    In the notice of

deficiency in the instant cases, respondent determined a joint

tax liability of $138,142--$22,202 less than what petitioner and

Betsy reported.   In other words, respondent’s determination in

the notice of deficiency means that petitioner and Betsy

originally overstated their 1983 tax liability by $22,202.     As a

result of respondent’s concessions (supra note 2), respondent now
                              - 135 -


contends, in effect, that petitioner and Betsy originally

overstated their 1983 tax liability by significantly more than

$22,202.

     As the text preceding table 13, supra, shows, this state of

affairs results from a 1987 audit that resulted in respondent’s

deciding that petitioner and Betsy overstated their taxable

income (by $69,885) and tax liability (by $34,942).   The record

herein does not explain why the 1987 audit adjustment was made.

The stipulated revenue agent’s report does not show that this

adjustment was related to any other adjustment for any other

year.   In this regard, the instant cases are materially different

from those where a nonfraudulent tax return was made fraudulent

by a later action of the taxpayer fraudulently claiming a

carryback to the originally nonfraudulent year.   E.g., Arc Elec.

Const. Co. v. Commissioner, 923 F.2d 1005 (2d Cir. 1991), revg.

T.C. Memo. 1990-30; Toussaint v. Commissioner, 743 F.2d 309 (5th

Cir. 1984), affg. T.C. Memo. 1984-25.   The instant cases also are

materially different from those where the taxpayer unsuccessfully

claimed that the original fraud was “cured” (i.e., the

underpayment was eliminated, in whole or in part) by a later

action of the taxpayer.   E.g., Romm v. Commissioner, 245 F.2d

730, 736 (4th Cir. 1957), affg. on this issue and revg. on

another issue T.C. Memo. 1956-104 (payment of correct tax

liability before notice of deficiency); Gum Products, Inc. v.
                              - 136 -


Commissioner, 38 T.C. 700, 706-707 (1962) (nonfraudulent

carryback); Elmbrook Home, Inc. v. United States, 559 F.Supp. 787

(D.R.I. 1983) (nonfraudulent sec. 1341 adjustment).

     Neither side has cited us to, and our research has not

disclosed, any other opinion involving the pattern of events that

we find in the instant cases for 1983.

     Respondent contends that petitioner should bear the

consequences of the failure to explain on the record why the 1987

adjustment to his and Betsy’s 1983 tax liability was made.

However, (1) respondent has the burden of proving fraud by clear

and convincing evidence, and (2) we are looking for an

explanation of respondent’s determination, resolving respondent’s

audit.   We do not agree that the failure to provide the

explanation should be borne by petitioner.

     On answering brief, respondent invokes the Wichita Terminal

doctrine, stating that--

     If petitioner really felt that he had such an argument
     in this case, he certainly could have testified about
     the basis of the examination and submitted himself to
     cross-examination on the point, or he could have
     offered some other independent evidence of the nature
     of the adjustments.

However, respondent overlooks the requirement of the adverse

inference rule that an uncalled witness not only must be within a

party’s power to produce but also must be “peculiarly” within

that party’s power to produce before such an inference may be

drawn against that party.   See United States v. Rollins, 862 F.2d
                              - 137 -


1282, 1297-1298 (7th Cir. 1988).   If a witness is “equally

available” to both parties and neither party calls that witness

at trial, then no adverse inference is warranted.   See Kean v.

Commissioner, 469 F.2d 1183, 1187-1188 (9th Cir. 1972), affg. on

this issue and revg. on another issue 51 T.C. 337, 343-344

(1968).

     The fact that the tax liability shown on petitioner’s and

Betsy’s timely filed 1983 tax return is substantially greater

than the tax liability determined in the notice of deficiency in

the instant cases is apparent; it should be explained by

respondent in a fraud case.   The issue of the audit conducted in

1987 and its impact on the question of fraud for 1983 was

referred to in petitioner’s pretrial memorandum.    Petitioner was

called as respondent’s witness, and so petitioner was available

to respondent, and respondent should have dealt with the matter.

In addition, we may assume (at least, in the absence of

explanation to the contrary) that respondent’s records indicate

the sequence of events and the names of respondent’s

participating agents with respect to the 1987 audit.   Thus, there

is no basis for invoking the Wichita Terminal doctrine against

petitioner; rather, we might fairly consider applying it against

respondent.

     Petitioner’s and Betsy’s 1983 tax return, as filed,

substantially overstated their actual 1983 tax liability.     But
                               - 138 -


for respondent’s 1987 audit and the resulting refund, there could

not be a holding of fraud against petitioner for 1983.    For all

we can tell, petitioner did not initiate that refund.    We do not

decide in the instant cases whether on these facts, a taxpayer is

entitled to a ruling of “no fraud” as a matter of law, but we do

conclude that, on these facts, the evidence of fraud is less than

“clear and convincing”.

     We hold for petitioner as to 1983.

     (b) 1984.   The circumstances of the American Express

invoices for 1984 present a special problem.    For 1984, in part

I.A.(2), supra, we concluded that respondent proved by clear and

convincing evidence that Betsy received from Markette a $780

constructive dividend, which petitioner and Betsy omitted from

their 1984 joint tax return.   See supra table 17.    Based on the

record in the instant cases, however, it is not clear that

petitioner knew that Markette paid for the trip to Orlando.

Petitioner and Baybrook established the routine discussed supra

(Daily Operation: 1980-March 1986) for payment of the charges on

the Markette American Express invoices.    From this description,

it appears that petitioner did not examine the American Express

invoices in detail until they were returned to him with an

attached check prepared by Baybrook.     The record is not clear as

to what steps petitioner and Baybrook took to process an invoice,

like the October 1984 invoice on which the airlines tickets to
                               - 139 -


Orlando appeared, which showed a net credit and not a net amount

due.    Because Baybrook would not have had to prepare a check as

payment for the October 1984 invoice, it is not clear whether

petitioner examined the October invoice in detail.    If petitioner

had examined the October invoice and traced the charges and

payments made back to the August 1984 invoice, then petitioner

would have realized that the airlines tickets to Orlando

appearing on the October invoice were “paid for” with credit

issued on account of the refund of charges appearing on the

August invoice.    It is not clear that petitioner went through

such deliberation.    It is not clear whether petitioner actually

knew, much less intended, that Markette paid for the airlines

tickets to Orlando; thus, it is not clear that petitioner knew

and intended that that amount be omitted from petitioner’s and

Betsy’s 1984 joint tax return.    Respondent has failed to prove by

clear and convincing evidence that the omission of the $780

constructive dividend in 1984 was due to petitioner’s fraud.

       As shown supra table 17, this $780 item is the only one of

the items that respondent relies on as to which we have found

that respondent showed by clear and convincing evidence that

petitioner had an underpayment of tax for 1984.    Respondent’s

failure to show by clear and convincing evidence that this $780

omission was fraudulent leads to the conclusion that respondent
                              - 140 -


failed to prove by clear and convincing evidence that petitioner

had a fraudulent underpayment for 1984.

     We hold for petitioner as to 1984.

     (c) 1985.   Petitioner’s contentions as to 1985 are the same

as those he makes for 1983.   However, the material facts are

different.   Compare supra tables 13 and 14.   Petitioner’s and

Betsy’s tax liability for 1985 clearly is greater than the amount

they reported on their 1985 tax return.   We conclude that no

special 1985 element detracts from our general conclusions as to

petitioner’s fraud.

     We hold for respondent as to 1985.

     (d) 1986.   Petitioner points to his vastly reduced role at

the Sley Corporations after March 1986 as a basis for his lack of

responsibility for what occurred at the Sley Corporations.

However, (1) the systems that petitioner oversaw continued to

operate for a while, at least; (2) substantially all of the 1986

constructive dividends were for expenses charged on Markette’s

American Express credit cards while petitioner was fully in

charge; (3) petitioner continued to play a role in Sley

Corporations’ affairs through 1986 and at least into early 1987;

and (4) petitioner signed his and Betsy’s 1986 joint tax return

with knowledge of the foregoing.   We conclude that no special

1986 element detracts from our general conclusions as to

petitioner’s fraud, and that some part of the $5,963.43 omitted
                                     - 141 -


constructive dividend income (supra table 19) was omitted because

of petitioner’s fraud.

     We hold for respondent as to 1986.

C.   Conclusions

     We conclude that respondent has shown by clear and

convincing evidence that petitioner intended to evade his income

taxes for each of the years 1985 and 1986, which taxes petitioner

knew or believed he owed, by conduct intended to conceal this

income.

     Accordingly, the statute of limitations does not bar

respondent’s assessment of deficiencies against petitioner for

1985.     Sec. 6501(c)(1).

     We hold for respondent with respect to 1985, and for

petitioner with respect to 1983 and 1984, on this statute of

limitations issue.

                            II. Additions to Tax

A.   Fifty-Percent Fraud Addition--1985

     In order to impose the 50-percent fraud addition to tax for

1985 under section 6653(b)(1),33 respondent must prove, by clear

     33
             Sec. 6653(b) for 1985 provides, in pertinent part, as
follows:

     SEC. 6653.    FAILURE TO PAY TAX.

                       *     *   *     *   *   *   *

             (b) Fraud.--
                                                       (continued...)
                                 - 142 -


and convincing evidence, that petitioner has an underpayment of

tax for that year, and that some part of that underpayment is due

to fraud.      Sec. 7454(a); Rule 142(b).   Our conclusion as to the

statute of limitations issue results in our concluding that

respondent has carried this burden of proof as to the 50-percent

fraud addition to tax for 1985.

      We hold for respondent on this issue with respect to 1985.

B.   Additional Amount for Portion Attributable to Fraud--1985

      The additional amount added to the tax under section

6653(b)(2) is equal to 50 percent of the interest payable under

      33
           (...continued)
                    (1) In general.--If any part of any underpayment
               (as defined in subsection (c)) of tax required to be
               shown on a return is due to fraud, there shall be added
               to the tax an amount equal to 50 percent of the
               underpayment.

                   (2) Additional amount for portion attributable to
              fraud.--There shall be added to the tax (in addition to
              the amount determined under paragraph (1)) an amount
              equal to 50 percent of the interest payable under
              section 6601--

                        (A) with respect to the portion of the
                   underpayment described in paragraph (1) which is
                   attributable to fraud, and

                         (B) for the period beginning on the last day
                   prescribed by law for payment of such underpayment
                   (determined without regard to any extension) and
                   ending on the date of the assessment of the tax
                   (or, if earlier, the date of the payment of the
                   tax).

This provision was amended by sec. 1503 of the Tax Reform Act of
1986 (TRA 86), Pub. L. 99-514, 100 Stat. 2085, 2742. See infra
note 35.
                              - 143 -


section 6601 and applies only to the portion of the underpayment

that is attributable to fraud.   Respondent has the burden of

proving, by clear and convincing evidence, what portion of the

deficiency is attributable to fraud.34

     Our analysis in part I., supra, leads us to conclude that

respondent proved by clear and convincing evidence that the

unreported amount for 1985 (supra table 19) was omitted from

petitioner’s and Betsy’s joint tax return due to petitioner’s

fraud.

      We hold for respondent on this issue with respect to the

indicated amount for 1985.   (The payment described supra in note

30, shall be taken into account in determining the amount of this

addition to tax.)   We hold for petitioner on this issue with

respect to the remaining amount for 1985.

C.   Fraud Additions--1986

     In order to impose the fraud 75-percent addition to tax or

the additional addition to tax for 1986 under paragraph (1) of

section 6653(b),35 respondent must prove, by clear and convincing

     34
          The 1986 amendments include a provision under which the
burden of proof shifts to the taxpayer. See sec. 6653(b)(2), set
forth infra in note 35. The statute applicable to 1985 (set
forth supra in note 33) does not have any such provision, and so
the general fraud burden-of-proof rules of sec. 7454(a) (supra
note 24) apply for 1985.
     35
           Sec. 6653 for 1986 provides, in pertinent part, as
follows:

                                                    (continued...)
                             - 144 -



35
 (...continued)
SEC 6653. ADDITIONS TO TAX FOR NEGLIGENCE AND FRAUD.

     (a) Negligence.--

          (1) In general.--If any part of any underpayment
     (as defined in subsection (c)) is due to negligence or
     disregard of rules or regulations, there shall be added
     to the tax an amount equal to the sum of--

               (A) 5 percent of the underpayment, and

               (B) an amount equal to 50 percent of the
          interest payable under section 6601 with respect
          to the portion of such underpayment which is
          attributable to negligence for the period
          beginning on the last date prescribed by law for
          payment of such underpayment (determined without
          regard to any extension) and ending on the date of
          the assessment of the tax (or, if earlier, the
          date of the payment of tax).

          (2) Underpayment taken into account reduced by
     portion attributable to fraud.--There shall not be
     taken into account under this subsection any portion of
     an underpayment attributable to fraud with respect to
     which a penalty is imposed under subsection (b).

               *    *    *     *   *   *   *

     (b) Fraud.--

          (1) In general.--If any part of any underpayment
     (as defined in subsection (c)) of tax required to be
     shown on a return is due to fraud, there shall be added
     to the tax an amount equal to the sum of--

               (A) 75 percent of the portion of the
          underpayment which is attributable to fraud, and

               (B) an amount equal to 50 percent of the
          interest payable under section 6601 with respect
          to such portion for the period beginning on the
          last day prescribed by law for payment of such
          underpayment (determined without regard to any
                                              (continued...)
                                - 145 -


evidence, that petitioner has an underpayment of tax for that

year, and that some part of that underpayment is due to fraud.

If respondent establishes that petitioner has an underpayment of

tax some part of which is due to fraud, then section 6653(b)(2)

shifts the burden of proof to petitioner to establish what

portion of the underpayment is not attributable to fraud.     Our

conclusion as to the statute of limitations issue results in our

concluding that respondent has carried respondent’s burden of

proof.




     35
          (...continued)
                   extension) and ending on the date of the
                   assessment of the tax or, if earlier, the date of
                   the payment of the tax.

                  (2) 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 is not attributable to
             fraud.

     These provisions were added by sec. 1503(a) of TRA 86, 100
Stat. 2742, and apply to tax returns the due date of which is
after Dec. 31, 1986.

     The later amendments of these provisions by sec. 1015(b)(2)
of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA
88)(Pub. L. 100-647, 102 Stat. 3342, 3569) and by sec. 7721(a) of
the Omnibus Budget Reconciliation Act of 1989 (OBRA 89--Pub. L.
101-239, 103 Stat. 2106, 2395) do not affect the instant cases.

     As the result of OBRA 89, the revised negligence addition to
tax appears in sec. 6662, and the revised fraud addition to tax
now appears in secs. 6663 and 6651(f).
                              - 146 -


     In part I.B.(4), supra, we described our conclusion that

respondent proved by clear and convincing evidence that

petitioner and Betsy omitted $5,963.43 from income and that all

of this was due to petitioner’s fraud.   In the notice of

deficiency, respondent determined that all the constructive

dividend omissions were due to petitioner’s fraud, but on brief

respondent took the position that only certain of the travel and

entertainment constructive dividends were fraudulently omitted.

Compare supra tables 12 and 15, and text following note 29.     As

to $797.21 of miscellaneous Washington area expenses, we held

that respondent did not prove fraud by clear and convincing

evidence; however, petitioner has failed to carry his section

6653(b)(2) burden of proof as to these expenses.    Accordingly, we

hold that the fraud additions to tax for 1986 apply to so much of

the underpayment as is attributable to $6,760.64 ($5,963.43 plus

$797.21) of constructive income dividend omissions.

     We hold for respondent as to $6,760.64; we hold for

petitioner as to the remaining amount on this issue.

D.   Negligence Additions--1986

     Respondent determined in the alternative that, if petitioner

is not liable for part or all of the additions to tax for fraud

for 1986, then petitioner is liable for negligence additions to

tax under subparagraphs (A) and (B) of section 6653(a)(1).

Petitioner did not address this issue on brief.    Because
                               - 147 -


petitioner has the burden of proof on the negligence issue, we

conclude that petitioner conceded this issue.   See subparagraphs

(4) and (5) of Rule 151(e); Sundstrand Corp. v. Commissioner, 96

T.C. 226, 344 (1991); Money v. Commissioner, 89 T.C. 46, 48

(1987).

     The negligence addition to tax applies to those 1986 items

in supra table 12, that we found had a personal purpose and with

respect to which we did not sustain respondent’s fraud

determination or with respect to which respondent did not

determine fraud.   The negligence addition to tax also applies to

those 1986 items in supra table 12, the purpose of which we were

unable to determine on this record; those items total $3,325.84.

     We hold for respondent on this issue.

                   III.   Amounts of Deficiencies

     In this part of the opinion, petitioner has the burden of

proving by a preponderance of the evidence that respondent erred

in the notice of deficiency determinations as to matters of fact.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

A.   Amounts of Constructive Dividends

     In supra table 10, we set forth our conclusions that

$10,164.71 of the disputed 1985 amounts was constructive

dividends to Betsy, that $90 were Sley Corporations’ business

expenses, and that we could not find that the remaining

$12,759.63 of disputed Markette payments fit into either
                              - 148 -


category.   Petitioner failed to carry his burden of proving that

respondent erred in determining that the remaining $12,759.63

constitutes unreported constructive dividend income to Betsy.

     In supra table 12, we set forth our conclusions that

$8,173.56 of the disputed 1986 amounts were constructive

dividends to Betsy, that $160.22 were Sley Corporations’ business

expenses, and that we could not find that the remaining $3,325.84

of disputed Markette payments fit into either category.

Petitioner failed to carry his burden of proving that respondent

erred in determining that the remaining $3,325.84 constitutes

unreported constructive dividend income to Betsy.

     We hold for respondent on this issue, except that we hold

for petitioner as to $90 for 1985 and as to $160.22 for 1986.

B. Interest Deduction

     Respondent contends that petitioner’s and Betsy’s 1987 joint

tax return overstated an itemized personal interest deduction by

$8,559.   Petitioner contends that the interest deduction was

properly taken for 1987.   The deduction in issue stems from the

$13,167.96 interest payment Betsy made to Markette.

     We agree with respondent’s conclusion.
                             - 149 -


For 1987, section 16336 allowed a deduction, subject to the

36
     Sec. 163 provides, in pertinent part, as follows:

SEC. 163.   INTEREST.

     (a) General Rule.--There shall be allowed as a
deduction all interest paid or accrued within the taxable
year on indebtedness.

                 *   *   *     *       *       *       *

     (d) Limitation on Investment Interest.--

                 *   *   *     *       *       *       *

          (6) Phase-in of disallowance.--In the case of any
     taxable year beginning in calendar years 1987 through
     1990--

                 *   *   *     *       *       *       *

                 (B) Applicable percentage.--for purposes of
            this paragraph, the applicable percentage shall be
            determined in accordance with the following table:

     In the case of taxable                                    The applicable
     years beginning in:                                       percentage is:
          1987 . . . . . . .       .   .   .   .   .   .   .   . . . . 35
          1988 . . . . . . .       .   .   .   .   .   .   .   . . . . 60
          1989 . . . . . . .       .   .   .   .   .   .   .   . . . . 80
          1990 . . . . . . .       .   .   .   .   .   .   .   . . . . 90

                 *   *   *     *       *       *       *

     (h) Disallowance of Deduction for Personal Interest.--

                 *   *   *     *       *       *       *

           (2) Personal interest.--For purposes of this
     subsection, the term “personal interest” means any
     interest allowable as a deduction under this chapter
     * * *

                 *   *   *     *       *       *       *

                                                                  (continued...)
                                - 150 -


limitations of subsections (d) and (h), for personal interest

paid during the taxable year in the amount of 65 percent of the

interest paid.     ($13,167.96 times 65 percent is $8,559.17.)   A

cash-basis taxpayer properly takes a deduction for interest for

the year in which the interest is paid.     Sec. 461(a); sec. 1.461-

1(a), Income Tax Regs.; e.g., Heyman v. Commissioner, 652 F.2d

598 (6th Cir. 1980), affg. 70 T.C. 482 (1978).     Delivery of a

check37 to the payee, not deposit of the check by the payee,

constitutes payment for purposes of determining the year in which

a sum is deductible by a cash-basis taxpayer.     Estate of Bradley

v. Commissioner, 19 B.T.A. 49 (1930), affd. 56 F.2d 728 (6th Cir.

1932); see Weber v. Commissioner, 70 T.C. 52, 57 (1978).     In the

instant cases, the parties do not dispute whether the interest

     36
          (...continued)
                   (6) Phase-in of limitation.--In the case of any
              taxable year beginning in calendar years 1987 through
              1990, the amount of interest with respect to which a
              deduction is disallowed under this subsection shall be
              equal to the applicable percentage (within the meaning
              of subsection (d)(6)(B)) of the amount which (but for
              this subsection) would have been so disallowed.

     Although the year before us on this issue is 1987, we apply
the statute as amended in 1988, because sec. 1005(c)(9) of the
TAMRA 88, Pub. L. 100-647, 102 Stat. 3342, 3392, amended sec.
163(h)(6) retroactively to taxable years beginning after Dec. 31,
1986. See TAMRA 88, sec. 1019(a), 102 Stat. at 3593; TRA 86,
sec. 511(e), 100 Stat. at 2249.
     37
          When a check is mailed, as opposed to being hand
delivered as in the instant case, the mailing of the check,
properly addressed, generally constitutes delivery of that check
to the addressee. See, e.g.; Griffin v. Commissioner, 49 T.C.
253, 261 (1967).
                              - 151 -


payment was made, but when.   Also, no question is raised as to

acceptance of Betsy’s check, and presentation to and payment by

the drawee bank.   See Weber v. Commissioner, 70 T.C. at 57-58.

Also, no question is raised as to Brown’s being an appropriate

agent of Markette for purposes of accepting delivery.     Broussard

v. Commissioner, 16 T.C. 23 (1951).

     Thus, the question of whether petitioner and Betsy

overstated an interest deduction for 1987 turns on whether Betsy

delivered her check, dated December 22, 1987 (Griffin v.

Commissioner, 49 T.C. 253, 261 (1967)), to Markette’s bookkeeper,

Brown, in 1987 or in 1988.

     Both Betsy and Brown testified on this matter; their

testimony conflicted.   We do not believe that either of them

lied, but clearly at least one of them misremembered what had

occurred during the turmoil when the Sley Corporations moved out

of the Grossman & Flask sublet office space.   All the other

evidence in the record is consistent with the testimony of both

Betsy and Brown.   In effect, the evidence is in equipoise.    Thus,

petitioner failed to carry his burden of proving that it is more

likely than not that respondent erred with respect to this

adjustment.   See Brookfield Wire Co., Inc. v. Commissioner, 667

F.2d 551, 553 n.2 (1st Cir. 1981), affg T.C. Memo. 1980-321;

Deskins v. Commissioner, 87 T.C. 305, 322-323 n.17 (1986).
                                 - 152 -


     We hold for respondent on this issue.38

                      IV.   Innocent Spouse Relief

     Petitioner contends that he is entitled to innocent spouse

relief for 1986 under section 6013(e), because he separated from

Betsy in September of that year and did not see Markette’s 1986

tax return.   Respondent contends that petitioner is not entitled

to innocent spouse relief.

     We agree with respondent.

     Section 6013(a) permits a husband and wife to elect to file

a joint tax return.    Together with section 1(a), this joint tax

return option is a valuable privilege, which ordinarily operates

to lower the tax liability for the income reported on the joint

tax return.   The price taxpayers must pay for this benefit is

joint and several liability.     Sec. 6013(d)(3); Stevens v.

Commissioner, 872 F.2d 1499, 1503 (11th Cir. 1989), affg. T.C.

Memo. 1988-63; Murphy v. Commissioner, 103 T.C. 111, 117 (1994);

Bokum v. Commissioner, 94 T.C. 126, 151-152 (1990), affd. 992




     38
          Ordinarily, when the item should be deductible in one
of two years and both of these years are before us, a taxpayer
does not lose the deduction entirely merely because of failure to
prove which of the two years is the correct one. However, in the
instant cases the interest deduction is properly an item of
Betsy’s, and petitioner and Betsy did not file a joint tax return
for 1988. Accordingly, petitioner’s failure to carry his burden
of proof for 1987 means that he has lost the deduction entirely,
even though Betsy apparently would be entitled to a 1988
deduction on account of the interest payment.
                                   - 153 -


F.2d 1132 (11th Cir. 1993); Pesch v. Commissioner, 78 T.C. 100,

129-130 (1982).

     Under section 6013(e),39 however, a spouse may be relieved

of this joint liability for a year only if certain requirements

are met for that year.     The putative innocent spouse must show

the following:    (1) A joint income tax return was filed for the


     39
          Sec. 6013(e) provides, in pertinent part, as follows:

     SEC. 6013.    JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

                       *   *   *     *   *   *   *

          (e) Spouse Relieved of Liability in Certain Cases.--

               (1) In general.--Under regulations prescribed by
          the Secretary, if--

                       (A) a joint return has been made under this
                  section for a taxable year,

                       (B) on such return there is a substantial
                  understatement of tax attributable to grossly
                  erroneous items of one spouse,

                       (C) the other spouse established that in
                  signing the return he or she did not know, and had
                  no reason to know, that there was such substantial
                  understatement, and

                       (D) taking into account all the facts and
                  circumstances, it is inequitable to hold the other
                  spouse liable for the deficiency in tax for such
                  taxable year attributable to such substantial
                  understatement,

          then the other spouse shall be relieved of liability
          for tax (including interest, penalties, and other
          amounts) for such taxable year to the extent such
          liability is attributable to such substantial
          understatement.
                                - 154 -


year (sec. 6013(e)(1)(A)); (2) on this tax return there is a

substantial understatement of tax (sec. 6013(e)(1)(B)); (3) this

substantial understatement of tax is attributable to grossly

erroneous items (sec. 6013(e)(1)(B)); (4) the grossly erroneous

items are items of the other (the putative “guilty”) spouse (sec.

6013(e)(1)(B)); (5) when the tax return was signed, the putative

innocent spouse did not know, and had no reason to know, that

there was this substantial understatement of tax (sec.

6013(e)(1)(C)); and (6) it is inequitable to hold the putative

innocent spouse liable for the tax deficiency that is

attributable to this substantial understatement of tax (sec.

6013(e)(1)(D)).

     The spouse seeking relief has the burden of proof on each of

these requirements.   Rule 142(a); Purcell v. Commissioner, 826

F.2d 470, 473 (6th Cir. 1987), affg. 86 T.C. 228 (1986); Bokum v.

Commissioner, 94 T.C. at 138.    Because the statute is phrased in

the conjunctive, failure to prove any one of the requirements

will prevent the taxpayer from qualifying for relief.    Hayman v.

Commissioner, 992 F.2d 1256, 1260 (2d Cir. 1993), affg. T.C.

Memo. 1992-228; Bokum v. Commissioner, 992 F.2d at 1134, 94 T.C.

at 138; Clevenger v. Commissioner, 826 F.2d at 1382.

     These factors, taken together with the well-established

principle that exemptions from taxation are to be narrowly

construed, place a significant burden on the taxpayer.    United
                              - 155 -


States v. Stewart, 311 U.S. 60, 71 (1940); Matthews v.

Commissioner, 907 F.2d 1173, 1174, 1178 (D.C. Cir. 1990), affg.

92 T.C. 351, 361 (1989); Bokum v. Commissioner, 94 T.C. at 155,

and cases cited therein.

     The parties agree that requirements (1) through (4) have

been satisfied.   The parties dispute only whether (5) in signing

the 1986 joint tax return, petitioner knew or had reason to know

that there was a substantial understatement of tax, and (6) it is

inequitable to hold petitioner liable for the tax deficiency that

is attributable to the substantial understatement of tax.

     In part I.C., supra, we concluded that petitioner knew and

intended that Betsy had constructive dividend income that was

omitted from petitioner’s and Betsy’s 1986 joint tax return.

     Further, petitioner enjoyed a large number of the trips for

which he caused Markette to pay.   Under these circumstances, it

is not inequitable to hold petitioner liable for the resulting

tax deficiency.   Clevenger v. Commissioner, 826 F.2d at 1382.

     We hold for respondent on this issue.
                             - 156 -


     To take account of the foregoing,40


                                           Decisions will be entered

                                   under Rule 155.




     40
          In the notices of deficiency, respondent made
determinations as to the alternative minimum tax for 1984, 1987,
and 1988. Petitioner asserted error with regard to adjustments
to income for 1984 and 1987 and thus asserted error with regard
to the alternative minimum tax, a function of the adjustments to
income. Petitioner conceded liability with regard to the
alternative minimum tax for 1988. Our redeterminations with
regard to the adjustment to income may have arithmetic effects on
the application and calculation of the alternative minimum tax;
they are to be dealt with in the computations under Rule 155.
