                          T.C. Memo. 1997-354



                        UNITED STATES TAX COURT



                  DAVID F. DRIGGERS, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 22703-94.                     Filed August 4, 1997.



       David F. Driggers, pro se.

       Michael D. Zima, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       RUWE, Judge:   Respondent determined deficiencies in

petitioner's Federal income taxes, additions to tax, and

penalties as follows:

                                                     Accuracy-Related
                             Additions to Tax             Penalty
Year     Deficiency    Sec. 6651(a)(1)   Sec. 6661      Sec. 6662(c)

1988      $19,401          $4,818          $5,112          --
1989       19,184           4,741            --          $3,837
                                - 2 -

1990       19,082          4,639             --          3,816
1991       11,857            --              --          2,371

       The issues for decision are:   (1) Whether petitioner

underreported his income for 1988, 1989, 1990, and 1991, as

determined by respondent; (2) whether petitioner is liable for

the additions to tax for failure to file timely returns for 1988,

1989, and 1990; (3) whether petitioner is liable for the addition

to tax pursuant to section 66611 for an understatement of income

tax on his 1988 Federal income tax return; and (4) whether

petitioner is liable for the accuracy-related penalties pursuant

to section 6662(c) for 1989, 1990, and 1991.


                          FINDINGS OF FACT


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

The stipulation of facts and the first and second supplemental

stipulations of facts are incorporated herein by this reference.

Petitioner resided in Ponte Vedra Beach, Florida, at the time he

filed his petition.    At all times between December 31, 1987, and

January 1, 1992, petitioner was married to Arlene C. Driggers.

       Petitioner filed Federal income tax returns for the taxable

years 1988, 1989, and 1990, on September 9, 1991.     Petitioner

timely filed his 1991 Federal income tax return.    On his returns

for 1988 and 1989, petitioner reported income from First Coast

       1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

Engineers, Inc. (FCE), of $10,501 and $10,300 respectively.     On

his returns for 1990 and 1991, petitioner reported no income from

Paragon Construction Group, Inc. (PCG) in 1990 and $37,100 in

1991.   After examining petitioner's returns, respondent

determined that petitioner underreported his income during the

years in issue.    Relying primarily on the income figures listed

in two separate loan applications completed and signed by

petitioner, respondent determined that petitioner's total income

from FCE was $76,800 in 1988 and $76,800 in 1989 and that his

income from PCG was $70,902 in 1990 and $76,960 in 1991.


Loan Applications


     The first loan application was completed by petitioner and

Mrs. Driggers in an attempt to finance the construction of their

new residence.    Petitioner and Mrs. Driggers submitted a

Residential Loan Application on March 3, 1989 (1989 Application).

On the 1989 Application, petitioner listed his current gross

monthly income as $6,400, which translates to $76,800 per year

for 1989.   In connection with the 1989 Application, petitioner

authorized his employer, FCE, to verify his employment.      On the

Request for Verification of Employment form completed by FCE on

March 7, 1989, petitioner's current weekly salary is listed as

$1,476.92, which translates to $76,799.84 per year for 1989.     In

addition, this verification form also lists petitioner's 1988

salary as $76,800.
                                - 4 -

     Petitioner and Mrs. Driggers completed a second loan

application in an attempt to refinance their home mortgage in

1992 (the 1992 Application).    On the 1992 Application, petitioner

and Mrs. Driggers listed their combined monthly income as $9,438,

which translates to $113,256 annually.    With this application,

petitioner and Mrs. Driggers submitted what they purported to be

their 1990 Federal income tax return.    On this purported return,

petitioner and his wife claimed to have earned $97,882 in wages

during 1990.   A Form W-2 was included with this purported return

listing petitioner's wages from his employer, PCG, as $70,902.08

for 1990.   Also submitted with the 1992 Application was a

purported copy of petitioner's and Mrs. Driggers' 1991 Federal

income tax return.   This purported return lists petitioner's and

Mrs. Driggers' income as $99,604 for 1991.    A Form W-2 was also

included with this purported return listing petitioner's 1991

wages from PCG as $76,960.11.   These purported returns and Forms

W-2 were never filed with the Internal Revenue Service.

     Respondent's reliance on petitioner's income figures listed

in these loan applications is supported by additional evidence.


Income From First Coast Engineers, Inc.


     Petitioner and Howard Young incorporated FCE on April 4,

1984.   FCE was engaged in the construction business as a general

contractor from its incorporation until sometime in 1990.

Petitioner was a 50-percent shareholder of FCE and its vice
                                - 5 -

president.   Mr. Young owned the remaining 50 percent of FCE's

shares and was its president.    FCE paid both petitioner and Mr.

Young salaries based upon how much time each put into the company

during a given week.    With the exception of a brief period during

1988, petitioner worked for FCE on a full-time basis from its

inception until the day it ceased operations in 1990.     In

addition to petitioner and Mr. Young, FCE employed Theresa J.

Fischer as a receptionist/bookkeeper/office secretary.

     Prior to incorporating FCE, petitioner owned his own

painting business.    This business accrued Federal tax

liabilities, which petitioner failed to pay.    An agent of the

Commissioner came to the offices of FCE to inquire about the

payment of these tax liabilities and issued a levy upon the wages

of petitioner.   In an effort to avoid the levy of his wages,

petitioner directed that what was termed his "wages" would be

lowered to $201 per week, effective February 17, 1987.

Petitioner received checks written to him from FCE in amounts

totaling $9,616.38 in 1988, $10,296.96 in 1989, and at least

$4,997.082 in 1990.




     2
      In auditing petitioner's 1990 tax year, respondent issued
summonses for checks written on the First Coast Engineers, Inc.
(FCE), account at Barnett Bank which were in excess of $1,000.
Therefore, if there were any checks written by FCE to petitioner
in amounts less than $1,000, they are not in the record.
                               - 6 -

     To compensate for the illusory reduction in his salary,

petitioner directed Ms. Fischer to write checks on FCE's account

payable either to cash, a fictitious subcontractor called "Delta

Design," or to Ms. Fischer herself.    Ms. Fischer wrote

approximately four checks to "Delta Design" on FCE's account,

each in an amount of approximately $2,000.    If the payee on the

check were Ms. Fischer, she would give the proceeds to

petitioner.   Petitioner received $33,746.01 in 1988, $34,018.99

in 1989, and $6,759.86 in 1990, in this manner.

     During 1988, 1989, and 1990, FCE leased a Chevrolet Corvette

for petitioner's use.   During this period, FCE paid the lease

payments for this automobile, which totaled $5,417.24 in 1988,

$5,053.91 in 1989, and $2,701.59 in 1990.    In addition, all

expenses relating to this automobile were paid for by FCE.

Petitioner used this vehicle for personal trips.    Petitioner did

not present any documentation regarding the business use of this

vehicle.

     FCE also paid for certain vacations for petitioner and Mrs.

Driggers, which included two trips to Las Vegas, Nevada, and a

trip to Miami, Florida.   On occasion, FCE purchased tickets to

various professional tennis and golf tournaments for petitioner

and his wife.   Petitioner did not present any evidence that any

business was conducted during these occasions.
                                     - 7 -

       Petitioner used FCE funds to partially pay for the

construction of his personal residence.      In particular, FCE paid

First Coast Supply between $8,000 and $10,000 to build and

install kitchen cabinets in petitioner's new home.

       In late 1989, or early 1990, petitioner and Mr. Young had a

falling out, and FCE ceased operations by early 1990.       Upon the

closing of FCE, the company's computer and copier were stored at

the apartment of Ms. Fischer until they were given to petitioner.

Income From Paragon Construction Group, Inc.


       On April 4, 1990, petitioner incorporated PCG, which

operated as a general contractor in the construction business.

Petitioner was the sole shareholder and president of this

corporation.    Petitioner started PCG with a capital contribution

of $20,000.    PCG had a corporate bank account at First Union

National Bank of Florida.       Petitioner had complete control over

this account.      Checks written on PCG's corporate account directly

to petitioner totaled $39,219.91 in 1990 and $82,162.80 in 1991.

       In addition to the checks written directly to petitioner,

PCG also paid for labor, materials, building permits, and

property taxes associated with the construction of petitioner's

personal residence, including the following:


Check No.   Date             Payee                     Amount

 107        4/20/90     Coastal Interiors              $2,200.00
                                    - 8 -
 113         5/01/90   A & B Hardwood Flooring          2,426.50
 116         5/04/90   Rambo's Landscaping                194.00
 118         5/06/90   Wesley Luchenbill                  510.00
 121         5/11/90   A & B Hardwood Flooring          1,757.50
 122         5/11/90   St. Johns County                 1,347.00
 123         5/12/90   Wesley Luchenbill                  432.00
 126         5/22/90   Rambo's Landscaping                375.00
 140         9/13/90   A & B Hardwood Flooring            587.00
 170        12/17/90   Wesley Luchenbill                  400.00


       Furthermore, PCG paid for numerous other miscellaneous

expenses, which respondent determined were petitioner's personal

expenses, including:


Check No.    Date           Payee                       Amount

 139         9/06/90   Circuit City                      $314.43
 151        10/17/90   Nationwide Insurance               703.00
 157        11/06/90   Circuit City                       532.49
 172        12/18/90   Southern Bell                      300.75
 215         2/04/91   Southern Bell                      103.10
 216         2/04/91   Geico Insurance Company            230.96
 217         2/05/91   Ford Motor Credit Co.              826.25
 218         2/04/91   Jiffy Lube                          27.68
 230         2/25/91   The Haskell Company              4,772.27
 233         3/04/91   Ponte Vedra Inn & Club             181.97
 234         3/02/91   ATP Tour                            73.60
 236         3/04/91   Ford Motor Credit Co.              399.01
 237         3/04/91   Geico Insurance Company            118.45
 247         3/15/91   Southern Bell                       86.27
 248         3/15/91   Geico Insurance Company             61.59
 267         4/01/91   Ford Motor Credit Co.              399.01
 281         4/17/91   Oak Bridge Club                    412.61
 286         4/18/91   Cesery Blvd. Pawn Shop              63.90
 287         4/17/91   Tax Collector                       71.25
 292         4/22/91   Ford Motor Credit Co.              399.01
 293         4/22/91   Southern Bell                      219.06
 301         4/29/91   Ponte Vedra Inn & Club           1,291.23
 302         4/29/91   ATP Tour                           161.01
 309         5/07/91   Geico Insurance Company             63.58
 326         5/07/91   The Haskell Company              7,547.46
 343         6/03/91   Ford Motor Credit Co.              399.01
 345         6/04/91   The Haskell Company                271.63
 348         6/04/91   Southern Bell                       94.00
 359         6/12/91   Tax Collector                       20.00
 361         6/18/91   ATP Tour                           202.56
 369         6/21/91   Jacksonville Fed. Credit Union     322.99
 376         6/28/91   Tax Collector                       54.10
 377         6/31/91   The Haskell Company                459.00
 379         7/03/91   Ford Motor Credit Co.              399.01
                                 - 9 -
 395        7/16/91   Southern Bell                          319.49
 407        7/22/91   City of St. Augustine (parking div.)     7.50
 408        7/22/91   Clerk of the County Court              131.00
 413        7/23/91   R. A. Green, P.A.                      487.50
 417        7/23/91   Geico Insurance Company                168.24
 419        7/26/91   Ponte Vedra Inn & Club                 334.08
 420        7/26/91   ATP Tour                               104.20
 425        8/02/91   Ford Motor Credit Co.                  399.01
 428        8/05/91   The Haskell Company                    459.00
 448        8/27/91   Tax Collector                           13.82
 454        9/03/91   The Haskell Company                    459.00
 464        9/05/91   Jacksonville Fed. Credit Union         625.98
 465        9/05/91   Ford Motor Credit Co.                  399.01
 486        9/17/91   Southern Bell                          330.42
 484        9/17/91   Geico Insurance Company                 87.12
 498        9/23/91   Ford Motor Credit Co.                  399.01
 512       10/04/91   Geico Insurance Company                 86.52
 514       10/04/91   The Haskell Company                    459.00
 520       10/15/91   Southern Bell                          120.00
 530       10/17/91   Ponte Vedra Inn & Club                 291.27
 531       10/17/91   ATP Tour                               203.52
 537       10/24/91   Ford Motor Credit Co.                  399.01
 541       10/24/91   Jacksonville Fed. Credit Union         312.99
 542       10/24/91   Geico Insurance Company                 85.32
 543       10/24/91   Chemlawn                               145.50
 554       10/28/91   Southern Bell                          210.55
 567       11/08/91   The Haskell Company                    459.00
 586       12/04/91   Ford Motor Credit Co.                  399.01
 588       12/06/91   The Haskell Company                    459.00
 589       12/06/91   Jacksonville Fed. Credit Union         310.92
 596       12/06/91   Cone, Purcell, Miller, Flanagan, P.A. 250.00
 599       12/13/91   Mahoney, Adams & Criser, P.A.        1,641.27
 601       12/13/91   Southern Bell                          207.59


Petitioner has not presented any evidence to substantiate the

business nature of any of these expenses.


                                OPINION


       The principal issue in this case is whether petitioner

realized unreported income for the taxable years 1988, 1989,
                               - 10 -

1990, and 1991.    Respondent reconstructed petitioner's income

during the years in issue from figures that petitioner listed on

various loan applications and on purported copies of his Forms

1040 and Forms W-2 attached to one of these applications.

Respondent contends that the use of these figures is supported by

other evidence demonstrating petitioner's receipt of unreported

income from FCE and PCG.    In his post-trial brief, petitioner

argues that respondent's determination is "not based on any fact

or evidence and is completely unfounded."    We disagree.

     Respondent's determinations are normally entitled to a

presumption of correctness.    Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933).    In order to deprive respondent's determination

of this presumption, petitioner must demonstrate that the

determination is arbitrary and unreasonable.    Harbin v.

Commissioner, 40 T.C. 373, 376 (1963).    Petitioner has failed to

so demonstrate.    Respondent has provided sufficient evidence to

show that the determinations were neither arbitrary nor

unreasonable.

     Here, respondent reconstructed petitioner's income using the

figures that petitioner himself listed on various loan

applications and on the purported copies of his tax returns and

Forms W-2 attached to one of these loan applications.    This Court

has previously held that the use of income figures supplied by

the taxpayer himself "is an eminently reasonable and fitting
                                - 11 -

method for computing * * * [the taxpayer's] true income."

Schroeder v. Commissioner, T.C. Memo. 1989-110 (held that the use

of income figures listed on invalid Federal income tax returns

was a reasonable method of reconstructing the taxpayer's income);

see also Hill v. Commissioner, T.C. Memo. 1995-136, affd. without

published opinion 86 F.3d 1155 (6th Cir. 1996); Schroeder v.

Commissioner, T.C. Memo. 1986-583.       Therefore, respondent's use

of this method of reconstruction was well within the discretion

of respondent.   Sec. 446(b).

     At trial, respondent also introduced summaries of numerous

checks drawn on FCE's account, which list Ms. Fischer as the

payee.   Ms. Fischer identified the checks which were cashed for

petitioner.   These checks totaled $33,746.01 in 1988, $34,018.99

in 1989, and $6,759.86 in 1990.    These amounts exceed the income

reported by petitioner on his delinquent returns for these

respective years.   We found Ms. Fischer's testimony persuasive

and, consequently, find that petitioner received income during

1988, 1989, and 1990 in amounts greater than that reported on his

Federal income tax returns for these years.

     Respondent also presented evidence that petitioner received

unreported income, including checks written on PCG's corporate

account during 1990 and 1991, which list petitioner as the payee.

These checks totaled $39,219.91 in 1990 and $82,162.80 in 1991.
                               - 12 -

     Although we find that petitioner underreported his income

during the years in issue, it is not possible to determine the

exact amount based on the record before us.   Where, as here, a

taxpayer fails to keep books and records sufficient to establish

the amount of his tax liabilities, or if the records maintained

do not clearly reflect income, then the Commissioner is

authorized to reconstruct income by any method which, in the

Commissioner's opinion, clearly reflects the taxpayer's income.

Sec. 446(b); Harbin v. Commissioner, supra at 377; sec. 1.446-

1(b)(1), Income Tax Regs.   The Commissioner may use any

reasonable method to compute the income, and no particular method

is required.    Campbell v. Guetersloh, 287 F.2d 878, 880 (5th Cir.

1961).   The Commissioner's method need not be exact but must be

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

Rowell v. Commissioner, 884 F.2d 1085 (8th Cir. 1989), affg. T.C.

Memo. 1988-410.   Courts permit the Commissioner broad discretion

in this area, requiring only that the estimate be rational "'in

logic and in light of normal business experience.'"    Rowell v.

Commissioner, supra at 1087 (quoting 2 Mertens, Law of Federal

Income Taxation, sec. 12.108, at 443 (1989 rev.)).    As the Court

of Appeals for the Ninth Circuit explained in Bradford v.

Commissioner, 796 F.2d 303, 306 (9th Cir. 1986) (quoting Webb v.

Commissioner, 394 F.2d 366, 373 (5th Cir. 1968), affg. T.C. Memo.

1966-87), affg. T.C. Memo. 1984-601,
                               - 13 -


          "Arithmetic precision was originally and
     exclusively in [the taxpayer's] hands, and he had a
     statutory duty to provide it. * * * [H]aving defaulted
     in his duty, he cannot frustrate the Commissioner's
     reasonable attempts by compelling investigation and
     recomputation under every means of income
     determination. Nor should he be overly chagrined at
     the Tax Court's reluctance to credit every word of his
     negative wails."


     Petitioner has failed to persuade us that respondent's

determination of his income for any of the years in issue was

erroneous.   Petitioner relied heavily on his own testimony to

satisfy his burden of proof.   We found most of petitioner's trial

testimony to be general, vague, conclusory, and questionable in

material respects.   Under the circumstances presented here, we

are not required to, and generally do not, rely on petitioner's

testimony to sustain his burden of establishing error in

respondent's determinations.   See Lerch v. Commissioner, 877 F.2d

624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger

v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per

curiam T.C. Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).   We believe that respondent's method of reconstruction

was rational, and accordingly, we sustain respondent's

determination of petitioner's income.


Additions to Tax and Penalties
                              - 14 -

     Respondent determined that petitioner is liable for the

additions to tax for failure to file timely returns for 1988,

1989, and 1990.   Section 6651(a)(1) imposes an addition to tax in

case of failure to file a timely tax return, unless the taxpayer

can show that such failure is due to reasonable cause and not due

to willful neglect.   Petitioner neither argued nor offered any

evidence to show that the additions to tax pursuant to section

6651(a)(1) should not be imposed.   Therefore, we sustain

respondent's determination under section 6651(a)(1).

     Respondent also determined that petitioner is liable for the

addition to tax for substantial understatement of income tax, as

prescribed by section 6661 with respect to his 1988 return.    As

in effect during 1988, section 6661(a) imposed an addition to

tax equal to 25 percent of the amount of any underpayment

attributable to a substantial understatement of income tax.

Finally, respondent determined that petitioner is liable for the

accuracy-related penalties prescribed by section 6662 with

respect to his 1989, 1990, and 1991 returns.   Section 6662(a)

imposes a penalty equal to 20 percent of the portion of any

underpayment attributable to a substantial understatement of

income tax.

     Both sections 6661 and 6662 define a "substantial

understatement" as an understatement of tax liability equal to

the greater of 10 percent of the tax required to be shown for the
                              - 15 -

taxable year or $5,000.   Secs. 6661(b)(1)(A), 6662(d)(1)(A).   In

determining whether there is a substantial understatement of tax

liability, the amount of an understatement is reduced by any

portion attributable to the tax treatment of an item for which

the taxpayer had substantial authority or by any item with

respect to which the relevant facts affecting the taxpayer's

treatment are adequately disclosed in the return or in a

statement attached to the return.   Secs. 6661(b)(2)(B),

6662(d)(2)(B).

     Petitioner bears the burden of proving that respondent's

determination of an addition to tax under section 6661 or

accuracy-related penalty under section 6662 is erroneous.    See

Rule 142(a); Luman v. Commissioner, 79 T.C. 846, 860-861 (1982).

Petitioner also bears the burden of proving that he had

substantial authority for omitting an item from his return.     See

Tippin v. Commissioner, 104 T.C. 518, 535 (1995).   Petitioner has

failed to satisfy his burden of proving that respondent's

determination is erroneous.   Accordingly, we sustain respondent's

determination that petitioner is liable for the addition to tax

prescribed by section 6661 with respect to his 1988 return, and

the accuracy-related penalties prescribed by section 6662 with

respect to his 1989, 1990, and 1991 returns.



                                    Decision will be entered
- 16 -

under Rule 155.
