                        T.C. Memo. 1998-218



                      UNITED STATES TAX COURT



             THEODORE LANGWORTHY, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13395-96.                     Filed June 22, 1998.



     Jack M. Battaglia and Bernadette Weaver-Catalana, for

petitioner.

     Jerome F. Warner and Matthew I. Root, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     WELLS, Judge:   Respondent determined the following

deficiencies in, additions to, and penalty onpetitioner's Federal

income tax for the years 1987, 1988, 1989, and 1990:1

1
     Respondent's trial memorandum concedes a decreased
deficiency for 1987 and asserts increased deficiencies for 1988,
1989, and 1990. As petitioner has raised no objection to the
                                                   (continued...)
                                           - 2 -
                                            Additions to Tax                      Penalty
                              Sec.          Sec.            Sec.       Sec.         Sec.
Year        Deficiency       6653(b)   6653(b)(1)(A)   6653(b)(1)(B)   6661         6663
                                                            1
1987             $32,177        -        $24,133                               $8,044
             -
1988              26,326     $19,745        -               -          6,582          -
1989              27,199         -          -               -            -        $20,399
1990              11,624         -          -               -            -          8,718
    1
        50 percent of the interest due on the deficiency.

          Unless otherwise indicated, all section references are to

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

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

Procedure.

          After concessions, the issues to be decided are as follows:

          (1)      Whether the assessment and collection of taxes,

additions to tax, and penalties for 1987, 1988, and 1990 are

barred by the period of limitations pursuant to section 6501(a)

or are allowed under either (a) the fraud exception to the

general period of limitations provided in section 6501(c)(1) or

(b) the extended 6-year period of limitations provided in section

6501(e)(1)(A); and

          (2)      if assessment and collection are not barred for 1987,

1988, and 1990, then, for each of those years and for 1989 we

must decide whether:

                   (a)     and, if so, to what extent, petitioner omitted


1
 (...continued)
increased deficiencies, the issues relating to such increased
deficiencies appear to have been tried by consent. Rule
41(b)(1). We, however, do not address the increased deficiencies
because the decision we reach below results in deficiencies less
than those determined by respondent in the notice of deficiency.
                                 - 3 -

     gross receipts from his tavern business during the years in

     issue;

           (b)   petitioner is entitled to deduct certain business

     expenses in excess of the amount allowed by respondent for

     the years in issue;

           (c)   petitioner is liable for additions to tax for

     fraud under section 6653(b)(1)(A) and (B) for 1987 and under

     section 6653(b) for 1988;

           (d)   petitioner is liable for penalties for fraud under

     section 6663 for 1989 and 1990; and

           (e)   petitioner is liable for additions to tax for

     substantially understating income tax under section 6661 for

     1987 and 1988.

                           FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.   The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case.

Petitioner resided in Jamestown, New York, at the time he filed

his petition.    Petitioner filed timely Federal income tax returns

(returns) for all years in issue.

Background

     During the years in issue, petitioner owned and operated the

Bullfrog Hotel (Bullfrog) in Jamestown, New York.    The Bullfrog,

located on the Chautauqua River in the industrial section of

Jamestown, consists of a 22-room hotel and a tavern.    The
                                 - 4 -

Bullfrog's clientele, generally workers from the surrounding

factories, is characterized as a boilermaker crowd.2    Open 7 days

a week, the Bullfrog serves food, soft drinks, and alcoholic

beverages including beer, wine, and liquor.    The Bullfrog

employed three individuals during the years in issue:

Petitioner, Jim Malbaum (Mr. Malbaum), and Dorothy Stacey (Ms.

Stacey).   Petitioner manages all aspects of the hotel and tavern,

and he works there approximately 80 to 85 hours each week.      Until

his retirement during 1990, Mr. Malbaum's duties included

sandwichmaking and bartending.    Ms. Stacey worked part time at

the Bullfrog for 11 years, waiting on tables during the lunch

hour rush (11 a.m. to 2 p.m.), 5 days a week.    Although her

primary duty was waitressing, Ms. Stacey occasionally filled in

as a bartender on nights that the Bullfrog had a band.    Two to

three nights per week, usually on those band nights, Ms. Stacey

frequented the bar as a patron.

     Petitioner failed to report all of his beer, wine, and

liquor purchases during the years in issue.    Petitioner's failure

to report all of his purchases led to criminal charges for

willfully filing false returns in violation of section 7206(1).

On May 15, 1995, petitioner entered into a plea agreement,

agreeing to plead guilty to one count of violating section




2
     At the Bullfrog, a boilermaker is a shot of whiskey with a
beer chaser on the side.
                              - 5 -

7206(1) relating to the years 1988, 1989, and 1990.3   On August

25, 1995, the U.S. District Court for the Western District of New

York, on the basis of petitioner's guilty plea, held petitioner

guilty of one count of violating section 7206(1).

     Invoices from the Bullfrog's vendors (vendor invoices), when

compared to purchases reported on petitioner's returns (reported

purchases), demonstrate that petitioner failed to report

purchases of $39,228, $42,787.80, $48,060.90, and $13,620.32 for

1987, 1988, 1989, and 1990, respectively (unreported purchases).

Reported purchases were paid for by checks drawn on the

Bullfrog's account at Marine Midland Bank, and unreported

purchases were paid for by cash drawn from the cash register.4

Petitioner kept no record of his unreported purchases, and he

failed to advise his return preparer, Michael Dillon (Mr.

Dillon), of the unreported purchases.5   Petitioner failed to

report the gross receipts generated by the sale of the unreported


3
     The plea agreement, dated May 15, 1995, stated the following
factual basis for petitioner's plea of guilty:

     The defendant failed to report substantial cash
     purchases of beer, liquor, and wine on his federal
     income tax returns for the 1988, 1989, and 1990 tax
     years. The defendant knew the amounts stated on his
     tax returns as expenses were not accurate. The
     defendant signed the aforementioned federal income tax
     returns under penalty of perjury, knowing the returns
     falsely stated the amount of expenditures for beer,
     liquor, and wine.
4
     Petitioner ordered and paid for all of the inventory
purchased for the Bullfrog.
5
     The parties agree, however, that petitioner's reported
purchases are not in dispute.
                              - 6 -

purchases (unreported gross receipts), and petitioner kept no

records of the unreported gross receipts.   At the time petitioner

filed his returns for the years in issue, he knew that the

unreported purchases and the unreported gross receipts were not

reported on his return.

     Mr. Dillon, of Acme Tax Service, prepared petitioner's

returns for the years in issue solely from the information

provided by petitioner, which included cash register receipts,

check stubs, cash payouts, a payroll book, a weekly rental book,

and bank statements.

Unreported Gross Receipts

     Using the beer, wine, and liquor purchases indicated on the

vendor invoices, the drink prices charged by petitioner for sales

of those beverages, and allowing an adjustment for discretionary

use (i.e., breakage, spillage, and complimentary drinks),

respondent reconstructed petitioner's total gross receipts.   From

total gross receipts respondent subtracted reported gross

receipts to arrive at the amount of petitioner's unreported gross

receipts.

1.   Purchases

     Vendor invoices indicate the following purchases:6


6
     During 1988, 1989, and 1990, petitioner purchased Bartyles
and James brand wine coolers. Respondent did not include the
                                                   (continued...)
                                  - 7 -

                                     Quantity Purchased
    Item Purchased         1987         1988      1989       1990

Kegs of beer1               151             227     249.5     231.5
Bottled beer (cases)2     5,579           4,824   4,879     2,600
Canned beer (cases)2        732             668     616     1,217
Liquor:
  Liter bottles3          1,114           1,658   2,087     1,140
  .750-liter bottles4        60              79      12         9
Wine:
  Liter bottles3            167             142     269       181
  .750-liter bottles4        23              25      60       143
  3-liter bottles            24              12      -         -
  1.5-liter bottles          -               96      42        42

     1
       A keg of beer contains either 198 10-ounce or 165 12-ounce
glasses of beer. The average cost of a keg of beer was $23.13
during 1987, $23.30 during 1988, $25.61 during 1989, and $26.20
during 1990.
     2
       Each case contains 24 bottles or cans of beer. During
April 1990, petitioner began purchasing loose cans of beer;
before that time canned beer was purchased in six-packs bound
with plastic (i.e., four six-packs per case).
     3
       There are 33.5 ounces in each liter bottle of wine or
liquor.
     4
       There are 25.13 ounces in each .750-liter bottle of wine or
liquor.

       2.   Beer, Wine, and Liquor Sales

       Throughout the years in issue, petitioner sold, for on-

premises consumption (over the bar), (1) draft beer in 10-ounce

glasses for 50 cents per draft, (2) bottled beer for $1.10 per

bottle, (3) wine for $1.10 per glass, and (4) liquor for $1.15

per drink.    Petitioner also sold kegs and six-packs of beer for

off-premises consumption (to go).     To-go kegs were sold to local


6
 (...continued)
sale of these wine coolers in the reconstruction of petitioner's
gross receipts for the years in issue.
                                - 8 -

softball teams for postgame parties and to individuals for

private parties, picnics, and weddings.   To-go six-packs were

generally sold at closing time and on weekends to patrons and

hotel guests.    Petitioner kept no records of the number of to-go

kegs or six-packs he sold.   Petitioner rang up none of his to-go

keg sales and only some of his to-go six-pack sales.

     Respondent's reconstruction of gross receipts from the sale

of keg and canned beer made no allowance for to-go sales of kegs

and six-packs.   Respondent's computation of gross receipts from

the sale of wine and liquor was based on a determination that

each wine drink sold contained 4 ounces of wine, and that each

liquor drink sold contained 1 ounce of liquor.

     3.   Discretionary Use Percentage

     Respondent reconstructed petitioner's gross receipts from

the sale of each keg of draft beer assuming sales of 165 12-ounce

glasses per keg which allows approximately 17 percent for

discretionary use.   Reconstructed gross receipts from the sale of

bottled and canned beer were adjusted to reflect an 8.3-percent

discretionary use allowance (i.e., two bottles or cans per case).

Into the reconstruction of gross receipts from the sale of wine

respondent factored a discretionary use allowance of 20 percent
                              - 9 -

for each .750-liter bottle, 1.5-liter bottle,7 and 3-liter

bottle8 and an allowance of 40 percent for each liter bottle.

Gross receipts from the sale of liquor were calculated using 16

percent as the discretionary use allowance.

     Petitioner kept no record of the number of beer, wine, or

liquor drinks given away, and he did not keep records of broken

or spilled drinks (beer, wine, or liquor).

     4.   Reconstructed Gross Receipts

     In the deficiency notice, mailed on April 1, 1996,

respondent determined that petitioner had gross receipts for

1987, 1988, 1989, and 1990 in the amounts of $256,344, $242,740,

$249,378, and $199,199, respectively.    Respondent's computations,

as stipulated by the parties,9 indicate reconstructed gross

receipts from the sale of draft beer, bottled beer, canned beer,

wine, and liquor in the amounts of $204,076.50 for 1987,

$209,167.85 for 1988, $223,325.45 for 1989, and $150,639.60 for




7
     Each 1.5-liter bottle of wine contains the equivalent of two
.750-liter bottles.
8
     Each 3-liter bottle of wine contains the equivalent of four
.750-liter bottles.
9
     Calculations were stipulated for trial, for respondent and
petitioner, respectively, solely for the purpose of showing how
the parties calculated gross receipts. Neither party stipulated
the accuracy, correctness, or reasonableness of the other party's
calculations.
                                - 10 -

1990.10    Petitioner's computations, as stipulated by the parties,

indicate gross receipts from the sale of draft beer, bottled

beer, canned beer, wine, and liquor in the amounts of $167,715.73

for 1987, $169,321.93 for 1988, $178,809.03 for 1989, and

$122,014.47 for 1990.

     5.     Reported Gross Receipts

                 The parties stipulated reported gross receipts

from the sale of beer, wine, and liquor of $84,179.57 for 1987,

$73,801.36 for 1988, $73,865.70 for 1989, and $104,254.74 for

1990.11

Expenses

     1.     Band Expenses

     Country western, rock and roll, rock and roll blues,

fifties, and sixties style bands regularly played at the

Bullfrog.    Petitioner hired bands directly and through David

Blackburn (Mr. Blackburn), a local entertainment agent.    When



10
     We note that the deficiency notice indicates gross receipts
in amounts greater than those shown in respondent's stipulated
computations. The difference, we assume, is that gross receipts
as determined in the deficiency notice include sales of food and
soft drinks. As respondent made no argument concerning food and
soft drink sales at the Bullfrog, any issues relating to such
sales appear to have been conceded. Rybak v. Commissioner, 91
T.C. 524, 566 (1988).
11
     Petitioner's returns reflect reported gross receipts in
excess of the amounts stipulated for trial. Petitioner reported
gross receipts of $131,448, $121,149, $121,483, and $157,613 for
1987, 1988, 1989, and 1990, respectively. The difference, we
assume, is that petitioner's reported gross receipts included
sales of food and soft drinks which are not in issue in the
instant case.
                               - 11 -

bands played at the Bullfrog, they typically played on Thursday,

Friday, and Saturday nights.   Petitioner customarily paid the

bands in cash following each performance.

     Bands featured at the Bullfrog were regularly advertised in

Nite-Line Magazine (Nite-Line), a local entertainment guide.

Petitioner advertised in Nite-Line 44 weeks during 1987, 48 weeks

during 1988, 39 weeks during 1989, and 44 weeks during 1990.

Available back copies of Nite-Line demonstrate that, during the

years in issue, petitioner regularly listed three band nights

(typically Thursday, Friday, and Saturday) in each

advertisement.12   Nite-Line records indicate that petitioner

incurred band advertising expenses of $1,596, $1,740, $1,416, and

$1,596 during 1987, 1988, 1989, and 1990, respectively.

     Petitioner maintained no records of (1) the nights that

bands appeared or failed to appear, (2) the amounts that he paid

bands that performed at the Bullfrog, or (3) the amounts that he

paid for band advertising expenses.     Petitioner issued no Forms

1099 to the bands that played at the Bullfrog.    Petitioner

claimed no deduction for band or band advertising expenses for

the years in issue, and petitioner disclosed no band or band

advertising expenses to his return preparer, Mr. Dillon.

     In the notice of deficiency, respondent allowed petitioner

deductions for band advertising expenses for 1987 and 1988 in the

amounts of $1,596 and $1,740, respectively, but allowed nothing


12
     We note that several back copies of Nite-Line are not
available for the years in issue.
                                - 12 -

for 1989 and 1990.     Respondent now agrees that petitioner is

allowed deductions for band advertising expenses in the amounts

of $1,416 for 1989 and $1,596 for 1990.     Respondent allowed

petitioner no deduction for amounts allegedly paid to bands that

played at the Bullfrog.

     2.      Race Car Expenses--1987 and 1988

     During 1987 and 1988, petitioner owned a "cadet car"13 that

he raced in a novice class on Saturday nights at Stateline

Speedway (speedway).    Petitioner also owned a truck, described

below, which he used to tow the race car to and from the

speedway, located in Busti, New York, approximately 4 miles from

his home.    The Bullfrog and Arthur R. Gren Co., Inc., a beer

distributor, sponsored the race car.     Patrons from the Bullfrog

often came out to the speedway to see petitioner race.

     On his 1987 and 1988 returns, petitioner claimed Schedule C

losses from the operation of his race car.      For 1987, petitioner

reported income of $1,965 and claimed expenses of $2,865.     For

1988, petitioner reported income of $2,440 and claimed expenses

of $2,604.

     Petitioner's expenses associated with the race car included:

Gasoline, oil, tires, A-frames, ball-joints, spark plugs, spark

plug wires, distributor caps, pit entrance fees, paint, and

13
     A "cadet car" is a "stock car" which is defined as a racing
car having the basic chassis of a commercially produced assembly-
line model. Webster's Third New International Dictionary (1993).
                                - 13 -

miscellaneous car repairs (including parts).    Petitioner raced

the car approximately 10 times during each of the years in issue.

In support of his claimed deductions, petitioner provided his

return preparer, Mr. Dillon, with a summary listing of gasoline

and parts purchased during 1987 and 1988.    At trial, petitioner

produced no receipts for the race car expenses, which he

generally paid in cash.   Respondent disallowed petitioner's

deductions for race car expenses on the basis of petitioner's

failure to substantiate them.

     3.   Truck Expenses--1990

     During 1990, petitioner owned a 1976 Ford pickup truck which

he used in his business at the Bullfrog.    Petitioner used the

vehicle to pick up restaurant supplies, haul garbage to the dump,

drive to the bank, and drive drunk patrons home after the bar

closed at night.   Petitioner claimed truck expenses for the

Bullfrog in the amount of $3,800.    Respondent disallowed

petitioner's deduction for truck expenses on the basis of

petitioner's failure to substantiate the claimed expenses.

                                OPINION

I.   Period of Limitations and Fraud

     The deficiency notice in the instant case was sent on April

1, 1996, after the expiration of the usual 3-year period of
                              - 14 -

limitations provided in section 6501(a).14   The contention that

the period of limitations has expired is an affirmative defense

which must be specifically pleaded.    Rule 39; Robinson v.

Commissioner, 57 T.C. 735, 737 (1972).    Petitioner properly

raised in his petition the affirmative defense of the expiration

of the period of limitations for each year in issue except 1989.

Petitioner's failure to plead the affirmative defense of the

expiration of the period of limitations with respect to 1989

constitutes a waiver of the defense for that year.   Rule

34(b)(4); see Shopsin v. Commissioner, T.C. Memo. 1984-151, affd.

without published opinion 751 F.2d 371 (2d Cir. 1984).

Consequently, we conclude that the assessment and collection of

any deficiency for 1989 is not barred by the period of

limitations.

     As to the remaining years (i.e., 1987, 1988, and 1990),

however, unless one of the exceptions to the period of

limitations is applicable, the assessment of the deficiencies,

additions, and penalties determined in the deficiency notice is


14
     Sec. 6501(a) reads as follows:

          SEC. 6501(a). General rule.--Except as otherwise
     provided in this section, the amount of any tax imposed
     by this title 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.
                                - 15 -

barred.   Respondent contends that the instant case falls within

the exception in section 6501(c)(1), which provides that tax may

be assessed at any time if a false or fraudulent return is filed

with the intent to evade tax.15   Accordingly, respondent also

determined in the deficiency notice that petitioner is liable for

(1) additions to tax for fraud under section 6653(b)(1)(A) and

(B) for 1987,16 (2) an addition to tax for fraud under section

6653(b) for 1988,17 and (3) a penalty for fraud under section

15
     In the alternative, respondent contends that petitioner's
return for 1990 is subject to the 6-year period of limitations
applicable under sec. 6501(e)(1)(A) because that return omitted
substantial amounts of gross income. We need not consider
respondent's alternative argument because we find fraud for each
of the years in issue, including 1990.
16
     Sec. 6653(b)(1)(A) and (B) reads as follows:

     SEC. 6653(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 extension) and ending on the date
           of the assessment of the tax or, if earlier, the date
           of the payment of the tax.
17
     Sec. 6653(b) reads, in pertinent part, as follows:

     SEC. 6653(b).   Fraud.--

                                                    (continued...)
                                 - 16 -

6663 for 1989 and 1990.18

        The Commissioner has the burden of proving the applicability

of the fraud exception to the general period of limitations.

Sec. 7454; Rule 142(b); Farmers Feed Co. v. Commissioner, 10

B.T.A. 1069, 1075-1076 (1928).     The Commissioner's burden is the

same as that which is borne with respect to the fraud additions

imposed under section 6653(b) and the fraud penalties imposed

under section 6663.     See, e.g., Schaffer v. Commissioner, 779

F.2d 849, 857 (2d Cir. 1985), affg. in part and remanding in part

T.C. Memo. 1982-34; Asphalt Indus., Inc. v. Commissioner, 384

F.2d 229, 232 (3d Cir. 1967), revg. on other grounds 46 T.C. 622

(1966); Estate of Temple v. Commissioner, 67 T.C. 143, 159-160

(1976).     Accordingly, we consider together (1) the fraud

exception to the general 3-year period of limitations with

respect to 1987, 1988, and 1990 and (2) the fraud additions and

penalties for all years in issue, including 1989.


17
     (...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 75 percent of the portion of the
         underpayment which is attributable to fraud.
18
        Sec. 6663 reads, in pertinent part, as follows:

             SEC. 6663(a). Imposition of Penalty.--If any part
        of any underpayment of tax required to be shown on a
        return is due to fraud, there shall be added to the tax
        an amount equal to 75 percent of the portion of the
        underpayment which is attributable to fraud.
                               - 17 -

     To carry the burden of proof on the fraud exception and the

fraud additions and penalties, the Commissioner must show by

clear and convincing evidence both (1) that the taxpayer

underpaid his tax for each taxable year in issue and (2) that at

least some part of the underpayment was due to fraud.     Sec.

7454(a); Rule 142(b); DiLeo v. Commissioner, 96 T.C. 858, 873

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Hebrank v.

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

     A.     Proof of an Underpayment

     The Commissioner need not prove the precise amount of the

underpayment resulting from fraud, but only that there is some

underpayment and that some part of it is attributable to fraud.

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.    To carry that burden, the

Commissioner may not rely on the taxpayer's failure to meet his

burden of proving error in the Commissioner's determinations as

to the deficiencies.    DiLeo v. Commissioner, supra at 873;

Habersham-Bey v. Commissioner, 78 T.C. 304, 312 (1982); Otsuki v.

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

     In the instant case, it is uncontroverted that petitioner

failed to report certain gross receipts during the years in

issue.    Petitioner concedes unreported gross receipts on brief

and in his stipulated calculations.     Accordingly, we conclude

that the record contains clear and convincing evidence of
                              - 18 -

unreported gross receipts for each year in issue.

     The existence of unreported gross receipts, however, does

not demonstrate that petitioner underpaid his tax for each of the

years in issue.   Indeed, gross receipts from sales must be

reduced by cost of goods sold to determine gross income from

sales.   Sec. 1.61-3(a), Income Tax Regs.   Moreover, gross income

from sales must be reduced by all deductible expenses to

determine taxable income from sales.   Sec. 63(a).   Accordingly,

an underpayment of tax resulting from unreported gross receipts

from sales is possible only if such unreported gross receipts are

not exceeded by cost of goods sold and deductible expenses.    See,

e.g., Franklin v. Commissioner, T.C. Memo. 1993-184.

     In the instant case, petitioner contends that he did not

underpay his tax for the years in issue because the profits from

unreported sales of alcoholic beverages at the Bullfrog were used

to pay bands that performed at the Bullfrog.

     The general rule is well settled that, even in criminal

cases where the Government bears the greater burden of proof,

i.e. beyond a reasonable doubt, "'evidence of unexplained

receipts shifts to the taxpayer the burden of coming forward with

evidence as to the amount of offsetting expenses, if any.'"

United States v. Garguilo, 554 F.2d 59, 62 (2d Cir. 1977)

(quoting Siravo v. United States, 377 F.2d 469, 473 (1st Cir.

1967)); United States v. Campbell, 351 F.2d 336, 339 (2d Cir.

1965); Gleave v. Commissioner, T.C. Memo. 1997-276; Franklin v.

Commissioner, supra.
                                    - 19 -

     Citing Richardson v. Commissioner, 264 F.2d 400, 404 (4th

Cir. 1959), revg. in part T.C. Memo. 1957-122, and Perez v.

Commissioner, T.C. Memo. 1974-211, however, petitioner contends

that respondent bears the burden of proving that petitioner did

not incur the band expenses that he now claims.           Petitioner

argues that respondent failed to carry this burden because

respondent presented no evidence whatsoever with respect to the

band expenses.

     We have no doubt, as indicated by our findings of fact, that

petitioner incurred deductible band expenses during the years in

issue.   We conclude, however, that even if we credit petitioner

with the band expenses that he claims, much of which we credit

infra in deciding the correct amount of the deficiency, those

expenses, along with the additional expenses and purchases

conceded by respondent, nonetheless would be insufficient to

offset the unreported gross receipts proved by respondent and

discussed more fully infra.19        We therefore find it unnecessary

19
     The following computation demonstrates that petitioner would
have unreported income even if, in addition to the expenses and
purchases conceded by respondent, we credited petitioner with the
full amount of the band expenses he claims:
                                  1987        1988       1989      1990

Unreported gross receipts1     $104,917   $116,072    $127,474   $31,369
Less:
  Band expenses2                36,300       39,600    32,175    13,200
  Band advertising expenses      1,596        1,740     1,416     1,596
  7-percent New York
   State sales tax3              7,344        8,125     8,923     2,195
  Additional purchases4         39,228       42,787    48,061    13,620
     Total unreported income    20,449       23,820    36,899       758
                                                             (continued...)
                                   - 20 -

to explore the implications of Richardson v. Commissioner, supra

and Perez v. Commissioner, supra.         Consequently, we conclude,

that respondent has shown by clear and convincing evidence that

petitioner had unreported gross receipts, net of expenses, which

result in an underpayment of tax for each year in issue.

        B.   Proof That the Underpayment Was Due to Fraud

        Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing.         Powell v. Granquist, 252 F.2d 56

(9th Cir. 1958); DiLeo v. Commissioner, 96 T.C. at 874; Miller v.

Commissioner, 94 T.C. 316, 332 (1990).          The Commissioner's burden

of proving fraud is met if it is shown that the taxpayer intended

to evade taxes known to be owing by conduct intended to conceal,

mislead or otherwise prevent the collection of taxes.             Stoltzfus

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

Commissioner, supra at 874; Rowlee v. Commissioner, 80 T.C. 1111,

1123 (1983).

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


19
     (...continued)
      1
        These figures (rounded to the nearest dollar) represent petitioner's
unreported gross receipts as recalculated in accordance with this opinion.
See the discussion concerning gross receipts in part II of this opinion,
infra.
      2
        These figures represent the amount of band expenses claimed by
petitioner in the stipulated computations. As discussed infra, we conclude
that petitioner is entitled to deduct band expenses in the amount of $18,150
for 1987, $19,800 for 1988, $16,088 for 1989, and $13,200 for 1990.
      3
        Respondent concedes that petitioner may deduct the 7-percent New York
State sales tax associated with any additional gross receipts received by
petitioner from the sale of beer, wine, or liquor. We computed the sales tax
shown above on the basis of the amount of petitioner's unreported gross
receipts as recalculated in accordance with this opinion.
      4
        These figures represent the additional purchases allowed by respondent
in the deficiency notice and in the stipulation of facts.
                                - 21 -

resolved on the basis of the entire record.       DiLeo v.

Commissioner, supra at 874; Gajewski v. Commissioner, 67 T.C.

181, 191 (1976), affd. without published opinion 578 F.2d 1383

(8th Cir. 1978).    Fraud is not to be imputed or presumed.       It

must be affirmatively established by clear and convincing

evidence.    Beaver v. Commissioner, 55 T.C. 85, 92 (1970).       The

taxpayer's entire course of conduct may establish the requisite

fraudulent intent.     DiLeo v. Commissioner, supra at 874; Stone v.

Commissioner, 56 T.C. 213, 223-224 (1971).       Because direct

evidence of the taxpayer's fraudulent intent is rarely available,

fraud may be proven by circumstantial evidence and reasonable

inferences drawn from the facts.     DiLeo v. Commissioner, supra at

874; Rowlee v. Commissioner, supra at 1123.

     Courts have relied on a number of indicia of fraud in

deciding whether to sustain the Commissioner's determinations

with respect to fraud.    Although no single factor is necessarily

sufficient to establish fraud, the existence of several indicia

is persuasive circumstantial evidence of fraud.       Petzoldt v.

Commissioner, 92 T.C. 661, 700 (1989).       In Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.

1984-601, the Court of Appeals for the Ninth Circuit gave a

nonexclusive list of circumstantial evidence that may give rise

to a finding of fraudulent intent.       Badges of fraud include (1)

understatement of income, (2) inadequate records, and (3) dealing

in cash.    Id.    A failure to be forthright with one's return
                              - 22 -

preparer is also an indication of fraud, Korecky v. Commissioner,

781 F.2d 1566, 1568 (11th Cir. 1986), affg. per curiam T.C. Memo.

1985-63, as is a conviction under section 7206(1), Wright v.

Commissioner, 84 T.C. 636 (1985).

     Although the mere failure to report income is not sufficient

to establish fraud, Merritt v. Commissioner, 301 F.2d 484, 487

(5th Cir. 1962), affg. T.C. Memo. 1959-172, a pattern of

consistent underreporting of income, especially when accompanied

by other circumstances showing an intent to conceal, justifies

the inference of fraud, see Holland v. United States, 348 U.S.

121, 139 (1954); Parks v. Commissioner, 94 T.C. 654, 664 (1990);

Otsuki v. Commissioner, 53 T.C. at 108.   In the instant case,

considering the record as a whole, we conclude that there are

sufficient badges of fraud to carry respondent's burden of proof.

The record reveals a pattern of consistent underreporting of

income by petitioner during all of the years in issue.   Moreover,

it is uncontroverted that petitioner failed to maintain adequate

records of his unreported income and expenses and that petitioner

conducted much of his business in cash.   Additionally, petitioner

failed to be forthcoming with his return preparer, Mr. Dillon,

disclosing neither his cash purchases nor his band expenses,

including band advertising.   Furthermore, while a conviction

under section 7206(1) does not establish fraud, it is one factor

to be considered.   Wright v. Commissioner, supra at 643-644.

     We conclude that the record in the instant case contains

clear and convincing evidence that there was an underpayment for
                               - 23 -

each year in issue and that each such underpayment was due to

fraud.

      C.   Conclusion

      Having found fraud for each year in issue, we conclude that:

(1) Section 6501(a) does not operate to bar the assessment and

collection of taxes for 1987, 1988, and 1990; (2) for 1987,

petitioner is liable for the 75-percent fraud addition to tax

under section 6653(b)(1)(A) and for the additional amount added

to the tax under section 6653(b)(1)(B); (3) for 1988, petitioner

is liable for the 75-percent fraud addition to tax under section

6653(b); and (4) for 1989 and 1990, petitioner is liable for the

75-percent fraud penalty under section 6663.

      We have considered the parties' remaining arguments as to

fraud and conclude that the arguments are either without merit or

unnecessary to reach in light of our holdings above.

II.   Amount of the Deficiency20

      A.   Unreported Gross Receipts

      Although petitioner conceded unreported gross receipts,

petitioner did not concede unreported gross receipts in the

amounts determined by respondent.   Petitioner contends that

respondent's reconstruction of gross receipts is overstated



20
     On brief, both parties make extensive arguments concerning
who bears the burden of proof with respect to the amount of the
deficiency. We need not decide the situs of the burden of proof,
however, because the record in the instant case is sufficient for
us to reach our findings of fact without resort to the burden of
proof.
                               - 24 -

because it relies on certain erroneous assumptions.    Each

contested item is addressed separately below.

          1.     Keg Sales

     Petitioner asserts that respondent's calculation of gross

receipts from the sale of draft beer is overstated because it

makes no allowance for kegs that were sold for off-premises

consumption.21   Petitioner contends that, during each year in

issue, he sold approximately 85 kegs to go at a price of $5 over

cost.

     In support of his position, petitioner points to his

testimony and that of Ms. Stacey.    Petitioner testified that he

sold kegs throughout the calendar year, but that the busiest

period for keg sales was from May to October, with sales peaking

during the summer months (June, July, and August).    Petitioner

indicated that he sold approximately 3 to 3½ kegs per week during

the peak summer months (June, July, and August), and 2 to 3 kegs

per week during the remainder of the busy season (May, September,

and October).    Petitioner also testified that he had seven or


21
     The parties also disagree as to the proper discretionary use
allowance to be applied to the sale of keg beer. Petitioner's
stipulated computations assert that a discretionary use allowance
of 15 percent should be applied to all over-the-bar keg beer
sales. Respondent's stipulated computations, however, apply a
greater discretionary use allowance of 17 percent for all over-
the-bar sales of keg beer. We conclude that respondent's
stipulated calculations concede that 17 percent is the proper
discretionary use allowance for over-the-bar sales of keg beer.
     Neither party asserts that a discretionary use allowance
would be proper for to-go sales of kegs. Accordingly, we do not
apply a discretionary use allowance in deciding petitioner's
gross receipts from to-go sales of kegs.
                                - 25 -

eight portable keg taps on hand at the Bullfrog.

     Ms. Stacey's testimony indicates that, although she had no

involvement in the sale of kegs at the Bullfrog, she saw

individuals purchase kegs for parties, weddings, and special

occasions.   Ms. Stacey recalled that petitioner sold two to three

kegs per week, depending on the season, and that more kegs were

sold during the summer months.    Ms. Stacey, however, could not

say with certainty the total number of kegs sold to go.

Furthermore, she did not know whether petitioner owned any

portable keg taps.

     Respondent urges this Court to discount petitioner's

testimony as unreliable and self-serving because petitioner

maintained no books or records from which the number of kegs he

sold to go can be determined.    Emphasizing the fact that Ms.

Stacey had no direct involvement in the sale of kegs and could

neither say how many kegs petitioner allegedly sold to go nor

corroborate the claim that petitioner had portable keg taps on

hand for use with kegs sold to go, respondent also calls into

doubt the testimony of Ms. Stacey.       Respondent contends that

petitioner's attempt to rebut the determination of gross receipts

from the sale of keg beer falls solely on petitioner's self-

serving, uncorroborated testimony, which is insufficient to

refute respondent's determination.

     Generally, a taxpayer's unimpeached, competent, and relevant

testimony may not be arbitrarily discredited and disregarded.
                                    - 26 -

See, e.g., Blackmer v. Commissioner, 70 F.2d 255, 257 (2d Cir.

1934); Akerson v. Commissioner, T.C. Memo. 1998-129 (and the

cases cited therein).       Petitioner's testimony was believable and

was corroborated by the testimony of Ms. Stacey, whom we also

find credible.      Although she could not say with certainty the

number of kegs sold, or whether petitioner had portable keg taps

on hand, Ms. Stacey did see kegs of beer sold to go at the

Bullfrog.

       We are satisfied from the record that petitioner did in fact

sell kegs of beer to go at a price of $5 over cost.             The only

question remaining is the quantity sold.              Bearing heavily against

petitioner, whose inexactitude is of his own making, we find, on

the basis of the record before us, that petitioner sold 40 kegs

to go during each year in issue.          Cf. Cohan v. Commissioner, 39

F.2d 540 (2d Cir. 1930).         Accordingly, we conclude that

petitioner's gross receipts from the sale of keg beer are as

follows:

                   Over-the-Bar                 To-Go               Total
Year               Gross Receipts          Gross Receipts       Gross Receipts1

1987                 $9,120.87                  $1,125.20         $10,246.07
1988                 15,365.79                   1,132.00          16,497.79
1989                 17,214.62                   1,224.40          18,439.02
1990                 15,735.56                   1,248.00          16,983.56

       1
        See Table I in the attached appendix.
             2.    Canned Beer Sales

       Petitioner asserts that respondent erred by calculating

gross receipts from the sale of canned beer on the assumption
                                 - 27 -

that all cans were sold over the bar, for on-emisesconsumption.22

Petitioner contends that during the time preceding April 1990, he

sold canned beer exclusively to go in

six-packs for $3.25 each ($4 each for premium brands such as

Michelob and Molson).23   Petitioner, however, acknowledges that

over-the-bar as well as to-go canned beer sales occurred during

the period after April 1990.24

     Respondent argues that the only evidence presented in

support of petitioner's position is petitioner's uncorroborated,

self-serving testimony.   Respondent first points out that Ms.


22
     The parties also disagree as to the proper discretionary use
allowance to be applied in the determination of gross receipts
from the sale of canned beer. Each party stipulated the other's
computations on the basis of the respective party's own
discretionary use contention. Respondent contends that the
proper discretionary use allowance for over-the-bar sales of
canned beer is 8.3 percent. Petitioner contends that a 15-
percent discretionary use allowance for over-the-bar canned beer
sales is proper and correct. Petitioner, however, abandoned that
position on brief, as he presented no argument concerning the
proper discretionary use allowance for canned beer sales and the
record contains no evidence of the proper allowance.
Accordingly, we conclude that petitioner has conceded that the
proper discretionary use allowance for over-the-bar canned beer
sales is 8.3 percent. Rybak v. Commissioner, 91 T.C. 524, 566
(1988).
     Neither party asserts that a discretionary use allowance
would be proper for to-go sales of canned beer. Accordingly, we
do not apply a discretionary use allowance in deciding
petitioner's gross receipts from to-go sales of canned beer.
23
     Petitioner indicated that premium brands generally did not
sell well.
24
     Petitioner testified that he switched to cans from bottles
during 1990 because the cans were cheaper, easier to handle, and
took up less space in the storeroom. Additionally, petitioner
viewed the cans as a safer alternative to bottles, which had been
known to cause injury when thrown by rowdy patrons.
                              - 28 -

Stacey's testimony regarding the price charged for six-packs does

not support that of petitioner.   We disagree.   Ms. Stacey

testified that canned beer was sold to go at the Bullfrog at a

price of $3 to $3.50 depending on the brand of beer sold.

Petitioner's statement that six-packs sold for $3.25 is not

inconsistent with the range indicated by Ms. Stacey.

     Next, respondent argues that a stipulated sampling of 34

cash register tapes from 1987 and 1988 fails to corroborate

petitioner's contention that six-packs were sold only to go

during the period prior to April 1990.   Respondent argues that

the sampling should show 238 entries of $3.25 under category I

(for beer sales) if petitioner in fact sold all canned beer to go

during the 2-year period including 1987 and 1988.25    Respondent

contends that the stipulated sampling contains only four such

entries.   Such a large disparity, respondent argues, casts doubt

on petitioner's claim that he sold canned beer to go.

     We do not find the lack of entries on the stipulated

sampling of cash register tapes fatal to petitioner's contention



25
     Respondent notes that petitioner purchased 5,600 six-packs
of beer during 1987 and 1988 (i.e., 732 cases in 1987 + 668 cases
in 1988 = 1,400 cases x 4 six-packs per case = 5,600 six-packs).
On the basis of the fact that the Bullfrog is open 7 days a week,
365 days a year, respondent contends that petitioner would have
sold over seven six-packs a day, if petitioner in fact sold all
canned beer to go during the 2-year period (i.e., 5,600 six-packs
÷ 730 days = 7.7 six-packs per day). Accordingly, respondent
contends that the 34-day stipulated sample should contain 238
entries of $3.25 under category I (i.e., 34 days x 7 six-packs
per day = 238 entries).
                               - 29 -

that he sold six-packs of beer to go during the years in issue.

Rather, we would not expect the cash register receipts to include

all of petitioner's six-pack sales.     Although Ms. Stacey

testified that she rang up all six-pack sales, she also testified

that she sold relatively few six-packs of beer during her shift

(i.e., 11 a.m. to 2 p.m.) at the Bullfrog.     Except occasionally,

Ms. Stacey did not work weekends and evenings when the bulk of

petitioner's six-pack sales took place.     Furthermore, petitioner

testified that he failed to ring up all six-pack sales.26

     We conclude from the record that petitioner sold six-packs

of beer to go for $3.25 each during the years in issue.       We are

not persuaded, however, that petitioner sold canned beer

exclusively to go during the period preceding April 1990.

Petitioner testified that he sold 5 to 10 six-packs each night

during the weekend (i.e., Friday and Saturday) and 2 to 3 six-

packs each night during the remainder of the week (i.e., Sunday

through Thursday).   Petitioner purchased 2,928 six-packs during

1987, 2,672 six-packs during 1988, and 2,464 six-packs during

1989.27   Had all of those six-packs been sold to go, petitioner

26
     Moreover, we note that there is no analysis accompanying the
stipulated sampling of cash register tapes, and respondent
introduced no evidence as to how the sample was selected. We
therefore accord such evidence little weight in our analysis and
decision.
27
     Total six-packs purchased each year was determined as
                                                   (continued...)
                                    - 30 -

would have sold 56 six-packs each week during 1987, 51 six-packs

each week during 1988, and 47 six-packs each week during 1989.

Petitioner's testimony, however, indicates that he sold a maximum

of 35 six-packs each week (i.e., 10 six-packs each day Friday

through Saturday, and 3 six-packs each day Sunday through

Thursday).     On the record before us, we find that petitioner sold

to go 1,352 six-packs each year (8 six-packs each weekend day,

and 2 six-packs each weekday).         Cf. Cohan v. Commissioner, 39

F.2d 540 (2d Cir. 1930).         Accordingly, we conclude that

petitioner's gross receipts from the sale of canned beer are as

follows:
                   Over-the-Bar                  To-Go              Total
Year               Gross Receipts            Gross Receipts     Gross Receipts1

1987                 $9,534.80                   $4,394           $13,928.80
1988                  7,986.00                    4,394            12,380.00
1989                  6,727.60                    4,394            11,121.60
1990                 21,271.80                    4,394            25,665.80

       1
        See Table II in the attached appendix.

             3.    Bottled Beer Sales

       Petitioner contends that the 8.3-percent discretionary use



27
 (...continued)
follows:

                                      1987          1988       1989

Cases of beer purchased                 732          668         616
Multiplied by 24 cans/case               24           24          24
    Total cans purchased             17,568       16,032      14,784
     Divided by 6 cans/pack               6            6           6
       Total six-packs                2,928        2,672       2,464
                                 - 31 -

allowance applied by respondent in the calculation of gross

receipts from the sale of bottled beer is unreasonably low,

especially considering that respondent used a 17-percent

discretionary use allowance for sales of draft beer which, unlike

bottled beer, does not involve breakage.    Petitioner asserts that

he should be afforded a 15-percent allowance for discretionary

use in computing gross receipts from the sale of bottled beer.

     In support of his contention, petitioner offers (1) his

testimony that he gave away free beers to patrons and band

members and (2) Ms. Stacey's testimony that she also gave away

free drinks at the Bullfrog.28    This testimony, however, does not

persuade us that 15 percent is the proper discretionary use

allowance.   Although petitioner testified that he gave one

complimentary beer for every four or five beers purchased, he

also indicated that he favored certain patrons with free drinks.

Accordingly, petitioner's testimony indicates that he did not

employ a consistent policy of providing complimentary drinks at

the Bullfrog.   Given in response to questioning concerning liquor

sales, Ms. Stacey's testimony regarding free drinks of liquor

likewise sheds no light on the appropriate discretionary use

allowance for bottled beer sales.     We conclude that 8.3 percent



28
     Ms. Stacey indicated that she generally gave patrons free
drinks upon the purchase of three or four rounds. She also
testified that she usually dispensed the last shot in each bottle
of liquor free of charge.
                                - 32 -

is a reasonable allowance for discretionary use.   See, e.g.,

Jurkiewicz v. Commissioner, T.C. Memo. 1955-318 (5-percent

reduction for spillage, waste, and gratuities sustained).

Consequently, we find that petitioner's gross receipts from the

sale of bottled beer are as follows:

                                 Bottled Beer
               Year             Gross Receipts1

               1987               $135,011.80
               1988                116,740.80
               1989                118,071.80
               1990                 62,920.00
     1
      See Table III in the attached appendix.

          4.   Wine Sales

     Petitioner contends that respondent erred by calculating

gross receipts from the sale of wine on the assumption that each

glass of wine sold contained only 4 ounces of wine.   To the

contrary, petitioner asserts that each glass of wine sold

contained 6 ounces of wine.29

     Respondent seeks to use an apparent inconsistency in

petitioner's testimony to impugn petitioner's claim regarding the


29
     Petitioner and respondent also disagree on the proper
discretionary use percentage to be applied in the calculation of
gross receipts from the sale of wine. Petitioner asserts that 15
percent is the proper discretionary use allowance for all wine
sales. On brief, and in respondent's stipulated calculations,
however, respondent contends that the proper discretionary use
allowance for wine sales is 20 percent for each .750-liter
bottle, 1.5-liter bottle, and 3-liter bottle and 40 percent for
each liter bottle. We conclude that respondent has conceded that
the proper discretionary use allowance for wine sales is 20
percent or 40 percent, for the respective size bottle.
                                - 33 -

amount of wine poured in each glass.     Initially, petitioner

testified that each .750-liter bottle yielded approximately four

6-ounce servings of wine if it was served over ice in a 10-ounce

glass.30   Later, however, petitioner indicated that each bottle

served only 2½ glasses of wine.    When viewed in context, however,

petitioner's testimony reveals no incongruity.     Petitioner's

statement that each bottle yielded only 2½ glasses of wine was

made in response to respondent's inquiry as to whether wine was

served over ice.    Petitioner stated that wine was served "either

way" and then elaborated on how many servings he obtained from

each bottle.31     Petitioner's testimony that he got "only * * *

2½ glasses of wine" from each bottle appears to clarify the

number of servings of wine each bottle yielded when the wine was

served without ice in a 10-ounce glass.     Accordingly, we find no

irreconcilable conflict in petitioner's testimony.

     Respondent contends that a 6-ounce serving of wine is


30
     25.13 ounces per bottle ÷ 4 glasses per bottle = 6.28 ounces
per glass.
31
     The transcript reads, in pertinent part, as follows:

     Q.    Now, you testified that its over ice, correct?
     A.    Well, either way. They could drink a glass of wine up,
           you know --
     Q.    Right.
     A.    -- on the rocks, and you'd probably only get three
           glasses or two-and-a-half out of a bottle. If you use
           a 10-ounce glass -- if you had a 25 ounce glass and you
           had a 10 -- a 10-ounce glass, you'd only get 2 [and
           one-half] glasses of wine.
                                - 34 -

"unreasonably large" and that aside from petitioner's testimony,

the record is devoid of any further evidence to support or

corroborate his assertions.     To the contrary, we find that the

record is devoid of any evidence as to what constitutes an

"unreasonably large" glass of wine.      Moreover, we find no reason

to doubt either the honesty or credibility of petitioner's

testimony concerning the size of wine drinks served at the

Bullfrog.   Accordingly, we find that each wine drink sold

contained 6 ounces of wine.     Consequently we conclude that

petitioner's gross receipts from the sale of wine are as follows:

                                           Wine
                 Year                 Gross Receipts1

                 1987                    $1,053.92
                 1988                     1,499.80
                 1989                     1,521.91
                 1990                     1,503.49
     1
      See Table IV in the attached appendix.

            5.   Liquor Sales

     Petitioner asserts that each liquor drink sold contained 1.6

ounces of liquor and that respondent erred by calculating gross

receipts from the sale of liquor on the assumption that each

liquor drink sold contained only 1 ounce of liquor.

     Respondent predicated the determination that each liquor

drink contained only 1 ounce of liquor on petitioner's earlier

statement to Revenue Agent Theresa Antoun (Ms. Antoun) during a

February 1990 interview.   In that interview petitioner indicated
                              - 35 -

that he sold shots of liquor for $1 and that each bottle of

liquor contained approximately 20 to 22 shots.   Respondent

determined that each liquor drink contained 1 ounce of liquor on

the basis of the sale of 21 shots from each .750-liter bottle of

liquor (i.e., after the 16-percent discretionary use allowance

each .750-liter bottle yields twenty-one 1-ounce shots).32

     Petitioner testified that he sold liquor drinks ranging in

size from 1.5 to 1.75 ounces per drink.   Although drinks were

"free poured" (i.e., measured by eye rather than a standard

measuring device), petitioner indicated that it was his "standard

policy" to "give them a good drink at the Bullfrog" and that

"everybody got a good shot and a half [to a] shot and three

quarters."   Accordingly, petitioner contends that the average

amount of liquor poured in each drink was 1.6 ounces.    Petitioner

also contends that his testimony is fully consistent with his

earlier statement to Ms. Antoun because each liter bottle of

liquor generates 20 to 22 shots which are at least 1.5 ounces.33


32
     We confirmed respondent's computation as follows:

     Ounces per .750-liter bottle                    25.13
     Less: 16-percent discretionary use allowance     4.02
       Ounces available for sale                     21.11
         Divided by 21 shots per bottle                 21
            Ounces per shot                          1.005 (rounded
                                                            to 1)
33
     If 20 shots are sold from each liter bottle, petitioner
contends that each shot is at least 1.65 ounces (i.e., 33 ounces
÷ 20 shots = 1.65 ounces per shot). If 22 shots are sold from
                                                   (continued...)
                               - 36 -

     We think that both parties have missed the mark.

Respondent's determination that each liquor drink contained only

1 ounce of liquor ignores the fact that the majority of

petitioner's liquor purchases were liter bottles, not .750-liter

bottles.34    Petitioner's contention that each liquor drink

contains 1.6 ounces of liquor ignores the discretionary use

allowance which operates to reduce the amount of liquor available

for sale.    After a 16-percent discretionary use allowance, each

liter bottle would yield twenty-one 1.3-ounce liquor drinks.35


33
 (...continued)
each liter bottle, petitioner contends that each shot is at least
1.5 ounces (i.e., 33 ounces ÷ 22 shots = 1.5 ounces per shot).
The parties stipulated that each liter bottle contains 33.5
ounces of liquor; we are unsure why petitioner used 33 ounces per
bottle in his argument on brief.

34
     Petitioner purchased .750-liter bottles and liter bottles of
liquor as follows:

                                    Quantity Purchased
  Item Purchased            1987      1988      1989         1990
Liquor:
  Liter bottles            1,114     1,658      2,087       1,140
  .750-liter bottles          60        79         12           9
     Total bottles
       purchased           1,174     1,737      2,099       1,149
35
     We determined that each liquor drink contained 1.3 ounces of
liquor as follows:

Ounces in each liter bottle                      33.50
 Less: 16-percent discretionary use allowance     5.36
  Ounces available for sale                      28.14
    Divided by 21 shots per bottle                  21
      Ounces per shot                             1.34 (rounded to
                                                        1.3)

                                                        (continued...)
                               - 37 -

Accordingly, we find that each liquor drink sold contained 1.3

ounces of liquor.    Consequently we conclude that petitioner's

gross receipts from the sale of liquor are as follows:

                                         Liquor
               Year                  Gross Receipts1

               1987                     $28,856.38
               1988                      42,755.46
               1989                      52,185.19
               1990                      28,551.23
     1
      See Table V in the attached appendix.

          6.   Conclusion

     On the basis of our findings above, we conclude that

petitioner had unreported gross receipts of $104,917.40 for 1987,

$116,072.49 for 1988, $127,473.82 for 1989, and $31,369.34 for

1990.36

     B.   Expenses

          1.   Band Expenses

     Petitioner argues that he is entitled to deductions for band

expenses he incurred during the years in issue.      Respondent

allowed petitioner a deduction for band advertising expenses but

allowed no deduction for the related band expenses on the ground

that petitioner failed to substantiate those expenses.

     The Court must estimate the amount of the deductible expense



35
 (...continued)
    Respondent conceded on brief that 16 percent is the proper
discretionary use allowance for liquor sales.
36
     See Table VI in the attached appendix.
                                - 38 -

if a taxpayer establishes that a deductible expense was paid,

even though the precise amount has not been established.     Cohan

v. Commissioner, 39 F.2d at 543-544.     We are satisfied by the

testimony of petitioner, Ms. Stacey, and Mr. Blackburn that

petitioner incurred deductible band expenses during the years in

issue.   Petitioner and Ms. Stacey both testified that petitioner

hired bands to play at the Bullfrog throughout the years in

issue.   Mr. Blackburn, the local entertainment agent, testified

that he personally placed bands at the Bullfrog during the years

in issue.     That petitioner incurred deductible band expenses is

further corroborated by the stipulated fact that petitioner

advertised bands and incurred band advertising expenses.    From

such advertising expenses we draw the reasonable inference that

petitioner did, in fact, pay some amount of deductible band

expenses.

     Relying on Professional Servs. v. Commissioner, 79 T.C. 888

(1982), respondent contends that the Cohan rule is inapplicable

for all of the years in issue because the evidence is

insufficient to make a reasonable estimation of petitioner's band

expenses.37


37
     Citing Lerch v. Commissioner, 877 F.2d 624 (7th Cir. 1989),
affg. T.C. Memo. 1987-295, respondent also argues that Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930), should not be invoked
where the claimed but unsubstantiated deductions are of a sort
for which the taxpayer could have and should have maintained the
necessary records. Absent stipulation to the contrary, the
instant case is appealable to the Court of Appeals for the Second
                                                   (continued...)
                              - 39 -

     In the instant case, we make our estimate on the basis of

Nite-Line's records, stipulated for trial, which indicate that

petitioner advertised in Nite-Line 44 weeks during 1987, 48 weeks

during 1988, 39 weeks during 1989, and 44 weeks during 1990.

Available back copies of Nite-Line demonstrate that, during the

years in issue, petitioner regularly listed three band nights

(typically Thursday, Friday, and Saturday) in each advertisement.

We also credit petitioner's testimony concerning the amounts he

paid bands booked to play at the Bullfrog, which indicates that

he generally paid Thursday night bands $225 for each performance.

Petitioner's testimony also indicates that he typically paid

Friday and Saturday night bands $300, although he occasionally

paid up to $500 for popular bands.     Petitioner's testimony is

corroborated by that of Mr. Blackburn, who indicated that in

Jamestown, during the years in issue, the going rate for a

Thursday night band was at least $250 and that the going rate for

a weekend band (i.e., Friday or Saturday night) was $250 to $350.

     Using the foregoing parameters, petitioner computed band

expenses in the amounts of $36,300, $39,600, $32,175, and $26,400

for 1987, 1988, 1989, and 1990, respectively.38    The Nite-Line


37
 (...continued)
Circuit. Thus, efficient and harmonious judicial administration
calls for us to apply the Cohan rule. Golsen v. Commissioner, 54
T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
38
     Petitioner computed the amount of his deductible band
                                                   (continued...)
                                      - 40 -

records upon which petitioner's computations are based, however,

do not reveal whether bands actually performed at the Bullfrog,

or how much the bands were actually paid.             Additionally, several

copies of Nite-Line were unavailable.             We cannot say with

certainty what information those unavailable back copies would

reveal.    Moreover, petitioner's computations do not reflect any

allowance for bands that failed to perform as advertised.

Bearing heavily against petitioner, whose inexactitude is of his

own making, Cohan v. Commissioner, supra, we find that petitioner

incurred deductible band expenses in the amounts of $18,150,

$19,800, $16,088, and $13,200 for 1987, 1988, 1989, and 1990,

respectively.


38
 (...continued)
expenses as follows:

                                               1987     1988      1989      1990

Advertisements in Night-Line Magazine           44        48        39          44
Nights/bands in each advertisement             x 3       x 3       x 3         x 2
Total band/nights advertised                   132       144       117          88

Week night bands                              44           48       39
Average week night price per band         x $225      x $225    x $225         --1
Thursday night band expense               $9,900      $10,800   $8,775

Friday night bands advertised                 44           48        39        44
Average price per Friday night band      x $300       x $300    x $300    x $300
Friday night band expense                $13,200      $14,400   $11,700   $13,200

Saturday night bands advertised               44           48        39        44
Average price per Saturday night bank    x $300       x $300    x $300    x $300
Saturday night band expense              $13,200      $14,400   $11,700   $13,200

Total band expenses                      $36,300      $39,600   $32,175   $26,400
   1
     Petitioner's computation for 1990 reflects the fact that he cut back on
week night bands during 1990.
                                - 41 -

          2.   Race Car Expenses--1987 and 1988

     As indicated in our findings of fact, we are satisfied from

the record that petitioner incurred deductible expenses in

connection with his car racing business.   Accordingly, an

estimate must be made under Cohan v. Commissioner, supra.39

     Petitioner testified that each year he raced the car

approximately 10 times at the speedway in Busti, New York.

Petitioner indicated that his race car expenses included:

Gasoline, oil, tires, A-frames, ball-joints, spark plugs, spark

plug wires, distributor caps, pit entrance fees, paint, and

miscellaneous car repairs (including parts).   Petitioner

testified with particularity, however, only with respect to the

pit entrance fees and tire expenditures.   Petitioner indicated

that each week during the racing season he paid a total of $20 in

pit entrance fees for himself and a helper; and that every other

week he replaced the rear tires at a cost of $50 to $55 per tire.

From the record we find that petitioner incurred deductible

expenses of $750 for each year in issue (i.e., 1987 and 1988).

Cohan v. Commissioner, supra.

          3.   Truck Expenses--1990

     Petitioner claimed truck expenses for the Bullfrog in the


39
     As respondent failed to argue the applicability of sec.
274(d)(4) with respect to the race car expenses claimed by
petitioner, we conclude that respondent has conceded that
petitioner's race car is not listed property subject to the
substantiation requirements of sec. 274(d).
                               - 42 -

amount of $3,800 for 1990.    Mr. Dillon computed petitioner's

deduction for truck expenses based on petitioner's statement that

he put approximately 15,000 business miles on the vehicle during

1990.   Respondent disallowed petitioner's deduction for the truck

expenses on the basis of petitioner's inability to substantiate

them.   Respondent failed, however, to assert the applicability of

section 274(d)(4), which imposes strict substantiation

requirements with respect to certain listed property, defined in

section 280F(d)(4)(A) to include passenger automobiles.     Section

280F(d)(5)(A) defines the term "passenger automobile" to mean any

four-wheeled vehicle (i) which is manufactured primarily for use

on public streets, roads, and highways, and (ii) which is rated

at 6,000 pounds unloaded gross vehicle weight or less.     In the

case of a truck, section 280F(d)(5)(A)(ii) is to be applied by

substituting "gross vehicle weight" for "unloaded gross vehicle

weight".   Sec. 280F(d)(5).

     We treat respondent's failure to argue that section

274(d)(4) is applicable in the instant case as a concession that

it does not apply to petitioner's vehicle.    Accordingly, we

decline to apply the strict substantiation requirements imposed

by section 274(d)(4) and look instead to the rule of Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930), to decide the amount of

petitioner's truck expenses.    Bearing heavily against petitioner,

whose inexactitude is of his own making, we find that petitioner
                               - 43 -

incurred deductible truck expenses of $1,500 for 1990.

       We have considered the parties' remaining arguments

concerning the amounts of the deficiencies for the years in issue

and find those arguments to be either without merit or

unnecessary to reach.

III.    Substantial Understatement

       Section 6661(a) imposes an addition to tax of 25 percent of

any underpayment attributable to a substantial understatement of

tax.    A substantial understatement is any understatement which

exceeds the greater of (1) 10 percent of the tax required to be

shown on the return or (2) $5,000.      Sec. 6661(b)(1)(A).   If the

taxpayer has substantial authority for the tax treatment of the

item in question, or if the taxpayer adequately discloses the tax

treatment of the item on the return, then the amount of the

understatement for purposes of this section will be reduced by

that portion of the understatement which is attributable to that

item.    Sec. 6661(b)(2)(B).

       Petitioner made no disclosures with his returns for the

years in issue.    Petitioner argues simply that there is no

underpayment of tax for any of the years in issue which

constitutes a substantial understatement of income tax within the

meaning of section 6661.    Consequently, should either the 1987 or

the 1988 understatement of tax as recalculated in accordance with
                             - 44 -

this opinion be substantial, we hold that petitioner is liable

for the addition to tax under section 6661 for the applicable

year.


                                   Decision will be entered

                              under Rule 155.
                                         - 45 -

                                        Appendix

               Table I     Gross Receipts From Keg Beer Sales

                             1987            1988               1989       1990

Kegs purchased                   151             227            249.50      231.50
  Less: Kegs sold to go           40              40                40          40
Kegs sold over the bar              111          187            209.50      191.50
  Multiplied by $82.171       $82.17          $82.17            $82.17      $82.17
Gross receipts from
  over-the-bar sales       $9,120.87      $15,365.79      $17,214.62     $15,735.56
Gross receipts from
  to-go sales2             $1,125.20       $1,132.00       $1,224.40     $1,248.00
    Total gross receipts
      from keg sales       $10,246.07     $16,497.79      $18,439.02     $16,983.56
      1
        Each keg sold over the bar generated $82.17 in gross receipts, determined as
follows:

Ounces per keg                                      1,980
  Less: 17%-discretionary use allowance               336.60
  Ounces sold                                       1,643.40
    Divided by 10 oz.                                      10
  Number of 10-oz. drafts/keg                         164.34
    Multiplied by $0.50/draft                           $0.50
       Gross receipts/kegs sold
         over the bar                                  $82.17

      2
        Gross receipts were determined by multiplying the total number of kegs sold
to go each year by cost plus $5 (i.e., 40 kegs x $28.13 for 1987, 40 kegs x $28.30
for 1988, 40 kegs x $30.61 for 1989, and 40 kegs x $31.20 for 1990).
                                              - 46 -

                    Table II     Gross Receipts From Canned Beer Sales


                                                 1987             1988      1989              1990

Individual cans sold over the bar1               9,456           7,920      6,672              21,096
  Less: 2 cans/case
    discretionary use allowance2                   788             660         556              1,758
Total cans sold over the bar                     8,668           7,260       6,116             19,338
  Multiplied by $1.103                           $1.10             $1.10             $1.10      $1.10
Gross receipts from
  over-the-bar sales                             $9,534.80           $7,986.00       $6,727.60   $21,271.80
Gross receipts from to-go sales4                 $4,394.00           $4,394.00       $4,394.00    $4,394.00
    Total gross receipts from
      canned beer sales                          $13,928.80          $12,380.00      $11,121.60 $25,665.80
       1
           The number of individual cans sold over the bar was determined as follows:
                                                 1987         1988          1989              1990

       Total cases purchased                       732           668          616             1,217
         Multiplied by 24 cans/case                24              24          24                24
       Total cans purchased                    17,568         16,032       14,784            29,208
         Divided by 6 cans/pack                     6               6           6                 6
       Total six-packs                          2,928          2,672        2,464             4,868
         Less: six-packs sold to go             1,352          1,352        1,352             1,352
       Six packs sold over the bar              1,576          1,320        1,112             3,516
          Multiplied by 6 cans/pack                 6             6             6                 6
             Total individual cans
                sold over the bar               9,456            7,920      6,672            21,096
       2
           The discretionary use allowance was determined as follows:

                9,456 individual cans ÷ 24 cans/case = 394 cases x 2 cans/case = 788 cans
                7,920 individual cans ÷ 24 cans/case = 330 cases x 2 cans/case = 660 cans
                6,672 individual cans ÷ 24 cans/case = 278 cases x 2 cans/case = 556 cans
                21,096 individual cans ÷ 24 cans/case = 879 cases x 2 cans/case = 1,758 cans
       3
           $1.10 reflects the price per can sold over the bar.
        4
          Gross receipts from to-go sales were determined by multiplying the number of six-packs
sold   to go each year by $3.25 (i.e., 1,352 six-packs x $3.25 = $4,394).
                                         - 47 -


               Table III    Gross Receipts From Bottled Beer Sales



                                  1987             1988       1989          1990

Total cases purchased                5,579          4,824       4,879        2,600
  Multiplied by 24 bottles/case          24            24          24           24
Total bottles purchased            133,896        115,776     117,096       62,400
  Less: 2 bottles/case discretionary
    use allowance1                  11,158          9,648       9,758        5,200
Total bottles sold                 122,738        106,128     107,338       57,200
  Multiplied by $1.102               $1.10          $1.10       $1.10        $1.10
    Total gross receipts from
      bottled beer sales          $135,011.80   $116,740.80   $118,071.80   $62,920.00
      1
        The discretionary use allowance was determined by multiplying the number of cases
purchased by 2 cans/case.
      2
        $1.10 represents the price per bottle sold.
                                           - 48 -

                      Table IV    Gross Receipts From Wine Sales

                                                    1987       1988        1989       1990

.750-liter bottles:
  Number of 6-oz. glasses/bottle1                 3.35          3.35        3.35        3.35
    Multiplied by number of bottles sold            23            25          60         143
  Total glasses sold                             77.05         83.75      201.00      479.05
    Multiplied by $1.102                         $1.10         $1.10       $1.10       $1.10
      Gross receipts from .750-liter
        bottles                                 $84.76        $92.13     $221.10     $526.96

Liter bottles:
  Number of 6-oz. glasses/bottle1                 3.35          3.35        3.35        3.35
    Multiplied by number of bottles sold           167           142         269         181
  Total glasses sold                            559.45        475.70      901.15      606.35
    Multiplied by $1.102                         $1.10         $1.10       $1.10       $1.10
       Gross receipts from liter bottles       $615.40       $523.27     $991.27     $666.99

1.5-liter bottles:3
  Number of 6-oz. glasses/bottle1                   6.70        6.70        6.70        6.70
    Multiplied by number of bottles sold            -0-           96          42          42
  Total glasses sold                                 -0-      643.20      281.40      281.40
    Multiplied by $1.102                             -0-        $1.10      $1.10       $1.10
      Gross receipts from 1.5-liter
        bottles                                 -0-        $707.52       $309.54     $309.54

3-liter bottles:4
  Number of 6-oz. glasses/bottle1                13.40         13.40       13.40       13.40
    Multiplied by number of bottles sold            24            12        -0-         -0-
  Total glasses sold                            321.60        160.80        -0-         -0-
    Multiplied by $1.102                         $1.10         $1.10        -0-         -0-
      Gross receipts from 3-liter bottles      $353.76       $176.88        -0-         -0-


          Total gross receipts from wine     $1,053.92     $1,499.80    $1,521.91   $1,503.49


     1
         The number of 6-oz. glasses per bottle was determined as follows:

                                            .
                                              .750-liter   Liter    1.5-liter 3-liter
         Ounces/bottle                          25.13      33.50      50.26    100.52
           Less: discretionary use allowance
             (20% for .750-, 1.5-, and 3-liter
              bottles, 40% for liter bottles)          5.03      13.40      10.05     20.10
           Ounces sold/bottle                         20.10      20.10      40.21     80.42
             Divide by 6 oz.                              6          6          6         6
           Number of 6-oz. glasses/bottle              3.35       3.35       6.70     13.40
     2
      $1.10 reflects the price per glass of wine.
     3
      One 1.5-liter bottle is equivalent to two .750-liter bottles.
     4
      One 3-liter bottle is equivalent to four .750-liter bottles.
                                            - 49 -

                       Table V Gross Receipts for Liquor Sales



                                                1987             1988        1989         1990

Liter bottles
  Number of 1.3-oz. servings/bottle1            21.65            21.65       21.65        21.65
    Multiplied by number of bottles
      purchased                                  1,114          1,658         2,087        1,140
  Number of 1.3-oz. servings sold            24,118.10      35,895.70     45,183.55       24,681
    Multiplied by $1.152                        $1.15          $1.15         $1.15         $1.15
      Gross receipts from liter bottles     $27,735.82     $41,280.06    $51,961.08   $28,383.15

.750-liter bottles
  Number of 1.3-oz. servings/bottle1            16.24            16.24       16.24        16.24
    Multiplied by number of bottles
      purchased                                     60             79           12            9
  Number of 1.3-oz. servings sold               974.40       1,282.96       194.88       146.16
    Multiplied by $1.152                         $1.15          $1.15        $1.15        $1.15
      Gross receipts from .750-liter
        bottles                              $1,120.56      $1,475.40      $224.11      $168.08

         Total gross receipts from liquor
           sales                            $28,856.38     $42,755.46    $52,185.19   $28,551.23

     1
      The number of 1.3-oz. servings per bottle was determined as follows:

                                                         Liter             .750-liter
     Ounces per bottle                                   33.50                25.13
        Less: 16%-discretionary use allowance             5.36                 4.02
      Ounces sold per bottle                             28.14                21.11
        Divide by 1.3 oz.                                 1.30                 1.30
      Number of 1.3-oz. servings/bottle                  21.65                16.24
     2
      $1.15 reflects the price charged per liquor drink.
                                            - 50 -




                              Table VI   Gross Receipts--Summary


                                  1987          1988           1989           1990

Keg beer gross receipts            $10,246.07     $16,497.79     $18,439.02    $16,983.56
Canned beer gross receipts          13,928.80      12,380.00      11,121.60     25,665.80
Bottled beer gross receipts        135,011.80     116,740.80     118,071.80     62,920.00
Wine gross receipts                  1,053.92       1,499.80       1,521.91      1,503.49
Liquor gross receipts               28,856.38      42,755.46      52,185.19     28,551.23

 Total gross receipts              189,096.97     189,873.85     201,339.52    135,624.08

   Less: Reported gross receipts    84,179.57      73,801.36      73,865.70    104,254.74

     Unreported gross receipts     104,917.40     116,072.49     127,473.82     31,369.34
