                               T.C. Memo. 1995-514




                          UNITED STATES TAX COURT



            DONALD FERRY AND SHARON FERRY, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 25901-92.                   Filed October 30, 1995.



       Donald Ferry and Sharon Ferry, pro sese.

       Douglas A. Fendrick, for respondent.



                  MEMORANDUM FINDINGS OF FACT AND OPINION


       PARR, Judge:     Respondent determined deficiencies in and

additions to petitioners' Federal income taxes as follows:

                                     Additions to Tax
                      Sec.           Sec.           Sec.          Sec.
Year   Deficiency    6653(b)    6653(b)(1)(A)   6653(b)(1)(B)     6661
                                                     1
1987    $38,956        --         $28,777                       $9,593
1988     33,831      $24,779         --             --           8,259
                                    - 2 -

      1
        50 percent of the interest due on the amount of the underpayment
attributable solely to fraud.

      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, unless otherwise

indicated.

      The issues for decision are:        (1) Whether petitioners

underreported their taxable income for the year 1987 in the

amount of $130,232; (2) whether petitioners underreported their

taxable income for the year 1988 in the amount of $85,231; (3)

whether the above-mentioned understatements of income for 1987

and 1988 were attributable to fraud by Donald Ferry (petitioner);

and (4) whether petitioners are liable for an addition to tax

under section 6661 for 1987 and 1988.           Respondent has conceded

that Sharon Ferry is not liable for the fraud addition.

                             FINDINGS OF FACT

Preliminary Matters

      The stipulated facts and exhibits are incorporated by this

reference.

      When the petition in this case was filed, petitioners

resided in Newark, Delaware.        Petitioners are husband and wife

and filed joint Federal income tax returns for the years in

issue.

      On their joint Federal income tax return for 1987,

petitioners reported total income of $6,920 consisting of wages
                               - 3 -


of $4,180.69, interest income of $206.31, and unemployment income

of $2,533.   They claimed a child care credit of $81 and showed a

tax liability of zero.   They also claimed (and apparently

received as a refund) an earned income credit in the amount of

$851.   Petitioners claimed two children as dependents, Sean D.

Ferry and Brent R. Ferry.   On line 6(c)(3), requesting the

children's Social Security numbers, petitioners stated, "applied

for".

     On their joint Federal income tax return for 1988

petitioners reported wages of $5,665.10, interest of $63.80, and

unemployment income of $4,920 for a total of $10,648.90.     They

claimed and received as a refund an earned income credit of $793.

Again, they listed the children as dependents and showed their

Social Security numbers as "applied for".

     Forms W-2 were attached to the returns.   The Forms W-2 for

Donald D. Ferry showed wages from Wayanne, 1108 South College

Avenue, Newark, Delaware 19713, in the amount of $3,910.69 in

1987 and $5,665.10 in 1988.    These forms were prepared by

petitioner himself, not by Wayanne's normal payroll preparer, and

petitioner's business associate, Wayne Wilberding, was not aware

of them.

     Using a combination of the bank deposits and specific items

methods, respondent originally determined that petitioners

understated their income for 1987 by $130,232 and for 1988 in the
                                  - 4 -


amount of $124,879.      Prior to trial, respondent conceded $39,648

of the adjustment for 1988.     Thus, respondent now claims

petitioners' income for 1988 was understated in the amount of

$85,231.

     Respondent determined that petitioners failed to report the

following amounts of bank deposits as income for the taxable year

1987:

     I.H.R-L LTD bank account              $103,514
     Ferry Associates bank account           22,503

                                                          $126,017
           plus

     Personal expenses paid from
      MIT LTD bank account                    8,126
        Less W-2 reported income from
         Wayanne, Inc.                       (3,911)

                            Difference                       4,215
                            1987 understatement            130,232

     Respondent determined an understatement based on bank

deposits in 1988 as follows:

     I.H.R-L LTD bank account               $47,458
     Ferry Associates bank account           12,175
     R.E.P., LTD bank account                24,290

                                                           $83,923

                  plus

     Personal expenses paid from
     MIT LTD bank account                                      1,308
                                                           1
                             1988 understatement            85,231
     1
        Apparently, respondent's concession for 1988 described
above takes into account the Form W-2 wages reported from
Wayanne, Inc.
                                 - 5 -


     Petitioner's theory is that it was not his money.     He posits

several possibilities:   It was Wayanne's money, already taxed.

Or it was a "pass-through" among various entities.   Or it was his

father's or his children's money (which petitioner was holding or

investing for them).   Or the money came from gifts or loans from

his parents.   Or it was the repayment (without his business

associate's knowledge) of "loans" petitioner had made to the

business.   Or it was the movement of funds left over from the

settlement of a lawsuit in 1983.

Family Relations

     Sharon Ferry attended St. Joseph's College and Duquesne

University and has a degree in nursing.   She took a nursing

refresher course in 1988.   Aside from the Form W-2 income of $270

reported in 1987, she was employed only as a babysitter for 3

hours per week at $5 per hour during the years in issue.

     Since 1982, petitioners have lived at 404 Arbour Drive,

Newark, Delaware.   Sharon Ferry's maiden name is Rowan.   She has

two brothers, William and David.    Neither brother ever mentioned

to Mrs. Ferry that he was the owner of the house where

petitioners reside.

     During 1987, petitioners' sons were ages 13 and 9.    They

attended Holy Angels parochial school.

     During the years in issue, petitioners had only one

telephone line in their house.    Although this number was listed
                                 - 6 -


under R.E. Plus, it was petitioners' personal and only telephone

number.

     Petitioner's parents were working-class people.      His mother

did not work outside the home.    Mrs. Ferry never saw petitioner's

parents give petitioners a gift by cash or check.      Petitioner's

father died in 1989.    At time of trial, his mother was in a

nursing home.    Petitioner has at least one sister.

     In 1987 and 1988, Sharon Ferry had the following credit

cards:    Visa, Mastercard, Strawbridge, J.C. Penney, Macy's, and

Sears.    Although the accounts were in Mrs. Ferry's name,

petitioner possessed cards with his name on them, which he used.

Sharon Ferry kept a checkbook, which she considered a joint

account, in the name of Ferry Associates.    The couple had no

personal joint account in their own names.

The Iron Hill Restaurant

     Petitioner was involved in a restaurant known as the Iron

Hill Restaurant and Lounge (Iron Hill).    As is true of much of

this case, the nature of petitioner's involvement is unclear.

The legal form of any entity or entities connected with Iron Hill

is also unclear.    We do the best we can, given the state of the

record.

     Iron Hill opened in 1971 or 1972.    Wayne Wilberding was then

the owner and president of Wayanne, Inc. (Wayanne), trading as

the Iron Hill Inn Restaurant.    Wilberding met petitioner in 1981,
                               - 7 -


when petitioner approached him about investing in the restaurant.

Iron Hill was in arrears with State and Federal taxes.     It was

also facing a balloon payment on a mortgage taken out in 1977.

     Petitioner convinced Wilberding that he had financial and

business expertise, and outlined a plan to pay off the taxes and

the prime lease.   Petitioner would pay Wayanne's debts; in

return, Wayanne would be dissolved and petitioner would become a

50-percent partner in everything connected with the restaurant,

including the 40-year lease and leasehold improvements.

Petitioner paid approximately $47,000 to the Internal Revenue

Service (IRS) in August of 1982 for Wayanne's withholding taxes,

and $25,000 to the State of Delaware.

     At trial, petitioner claimed these amounts were loans to

Wayanne, that he is thus a creditor, and therefore any moneys he

took out of the business (which he denies having done) were

simply loan repayments and not taxable income to himself.

Wilberding contends that petitioner was buying a 50-percent

partnership share of the business.     Neither a partnership

agreement nor notes evidencing loans are in evidence.     Nor are

there any stock agreements or shares or, in fact, anything

showing that any of the entities referred to in this case had any

legal existence.

     Petitioner claimed that he created or used various entities

for various aspects of the business.     One entity was to buy
                                - 8 -


furniture; another to buy the leasehold.   Petitioner told

Wilberding that these were all flow-throughs and that this was

the way to get tax savings.1

     Petitioner began working at the restaurant in the early

1980's.    He worked there 6 to 8 hours per day during the years in

issue, but neither he nor Wilberding was on the payroll.

Petitioner kept the books, counted the receipts, made the

deposits at the bank, and handled tax and other financial

matters.   Petitioner told people he was the "business manager" or

"business manager for the creditors".   Wilberding handled the

day-to-day operations, such as hiring and scheduling employees,

cooking, and waiting tables.

     At various times, petitioner held himself out as owner of

the building in which the restaurant was located, as a creditor,

as a shareholder of Wayanne before the years in issue (claiming

in testimony that he sold his interest to his father in 1986,

which he described as the sale of stock), as an employee (in




     1
        The IRS agent testified that she located 14 corporations,
13 partnerships, and 3 trusts related to petitioner. Although
petitioner objected that some of them were not his, it is obvious
from a cursory glance at Exhibit AL that many were mentioned by
petitioner himself during the trial, and others seem clearly
related by the names (such as (Don) Ferry Family Trust, Inc.,
Ferry Family Trust, Don Ferry Limited Trust, Restaurant Equipment
& Property Ltd - D. Ferry Ltd. Trust, Gen. Ptr.).
                                - 9 -


Forms W-2), and as a partner (signing a partnership return as

"general partner").2

     Wilberding considered petitioner to be his 50-percent

partner.    Wilberding believed that Wayanne was dissolved in 1983

or 1984, at which time he and petitioner became partners in all

the various entities petitioner had created.     At that time some

bank accounts were closed, and other bank accounts were set up

for various aspects of the business.    For instance, a payroll

account under the name of "Wayanne, Inc." was changed to "Wayanne

Ltd."    The name of the restaurant was changed to Iron Hill

Restaurant, Ltd.

     In 1989 Wilberding and petitioner parted ways, and

Wilberding sued petitioner for an accounting.    The dispute was

precipitated by a letter from the IRS saying that Wayanne was

being audited.3    Wilberding discovered his name was on purported

returns which he had not signed, and he asked petitioner for an

     2
        Petitioner testified in a previous trial that his sons
owned an interest in Iron Hill Investments, Inc., but sold their
interest in December 1988, when the children would have been 14
and 10 years of age.
     3
        It is unclear what years were under audit, whether
returns had been filed for those years and, if so, whether they
were corporate or partnership returns. It is clear that
petitioner told the IRS agent that he had a power of attorney for
the business. Petitioner had removed the records from the
restaurant premises, and met with the revenue agent, giving her
permission to take the records for copying. She later returned
them to Wilberding. Despite some tangential testimony about the
restaurant audit, those returns are not in evidence and appear to
have little or no relevance to this case.
                               - 10 -


accounting.   On July 23 or 24, when Wilberding's wife went in to

open the restaurant, all the cash registers were gone, the phones

were gone, and the door was padlocked.    Petitioner claimed that

other creditors were about to seize the restaurant's assets, and

he had moved first to "protect his father's investment".    There

is no documentary evidence or credible testimony to what extent,

if any, petitioner's father had an interest in the business.

     Based on all the evidence in the record, we hold that the

amounts paid by petitioner on behalf of Wayanne and its progeny

were investments, not loans.

The Partnership Return

     Petitioner prepared the 1986 Form 1065 Federal partnership

income tax return for the restaurant and signed the return as a

general partner.    This return was filed for the tax year ended

June 30, 1987.   The return is filed in the name of Iron Hill

Restaurant-Lounge Ltd., employee identification number (EIN) 51-

0290454, c/o 404 Arbour Drive, Newark, Delaware 19713

(petitioner's home address).    It states the business started

February 1, 1986.    It states that there are two partners in the

partnership, and that it is not a limited partnership.    The

partnership reported $1,011.39 ordinary income.

     However, a Schedule K-l (Partner's Share of Income, Credits,

Deductions, etc.) is attached, which conflicts with and

contradicts the Form 1065.    The Schedule K-1 lists the partner's
                               - 11 -


name and address as Iron Hill Restaurant-Lounge Inc., 1108 S.

College Ave., Newark, Delaware 19713 (the restaurant's location).

The partner's EIN is shown as XX-XXXXXXX.     However, the

partnership's name and address on the Schedule K-1 is I.H.R.L.,

Ltd., c/o 404 Arbour Dr., Newark, Delaware., with the EIN

previously given for Iron Hill Restaurant-Lounge Ltd. on the Form

1065.    The Schedule K-1 indicates that the partner (Iron Hill

Restaurant-Lounge, Inc.) is not a general partner, that it is a

corporation, and that the partner's percentage of profit and loss

is "100%".    The Schedule K-1 thus shows the partner's distrib-

utive share of ordinary income as $1,011.39.

     Respondent's records show no returns filed for 1987 or 1988

for Iron Hill under either of the two EIN's shown on the

partnership return:    XX-XXXXXXX or XX-XXXXXXX.   We find that no

such returns were filed for 1987 or 1988.     Nor were income tax

returns filed from 1980 through the years in issue for R.E.P.,

Ltd., Real Estate Plus, or Ferry Associates.

MIT LTD Bank Account

     Iron Hill funds were deposited in two bank accounts:     MIT,

Ltd., and Wayanne, Ltd.4   The Wayanne account was used for

payroll, and is not here relevant.      The restaurant proceeds not


     4
        At one point some restaurant proceeds were also deposited
in an account in the name of R.E.P. at First Federal, but that
was closed in or before 1985. The R.E.P. account at issue here
was located at Second National Federal Savings Bank.
                                - 12 -


allocated to payroll went into an account at Delaware Savings and

Loan Association in the name of "D. Ferry or W. Wilberding - MIT

Ltd".5   The account was used for food purchases, car purchases,

and other purchases and supplies used in the course of the

restaurant's business.   Both petitioner and Wilberding signed the

card, dated January 16, 1985.    Although the address on the

signature card is that of the restaurant, during the years in

issue, bank statements were mailed to petitioner's residence.

The EIN shown on the MIT account statement is XXX-XX-XXXX.

     Neither petitioner nor Wilberding was paid a salary for his

work at Iron Hill.   However, it was petitioner's idea to pay many

of his own and Wilberding's personal expenses from the MIT

account, and this was done.

     In 1987, petitioners' personal expenses in the amount of

$8,126 were paid from the MIT account; in 1988, $1,278 was paid.

Checks were written from this account for petitioners' personal

benefit, to Holy Angels parochial school (which petitioners'

children attended); to Macy's, J.C. Penney, and Strawbridge for

credit card purchases; to Wilmington Trust for car payments; to

First Federal Savings and Loan for petitioners' home mortgage




     5
        MIT stands for Mortgage Investors Trust, which in a prior
lawsuit petitioner admitted was himself.
                               - 13 -


payments; and for petitioners' residential utilities and

telephone bills.6

Ferry Associates

     In 1984, petitioner opened a bank account at Delaware

Savings and Loan Association in the name of "Ferry Associates".

Petitioner listed his home address as the business address of

Ferry Associates, and monthly bank statements were sent to his

home.    He represented to the bank that he was the owner of Ferry

Associates.

     The account was opened under the Social Security number (but

not the name) of petitioners' son, Sean Ferry.   In 1984,

petitioners' sons were 10 and 6 years old.

     Petitioners, along with petitioner's parents, had check-

signing authority for this account and, in fact, used it as their



     6
        Specifically, we find that petitioners were the owners of
a 1985 Mercury Marquis financed through Wilmington Trust Co.
Petitioner's father was not the owner. Petitioners bought the
car, drove it, obtained insurance for it, and kept it at their
house. Thus, payments to Wilmington Trust in the amount of
$2,250 are income to petitioners.
     We also find that petitioners were the beneficial owners of
their residence at 404 Arbour Dr., Newark, Del., where they have
lived since 1982. Specifically, we find that the house was not
owned by petitioner's brother-in-law, David Rowan, by
"Investments Plus, Inc." or by "Iron Hill Investments, Inc." or
by any other entity. Thus, mortgage and tax payments made to
First Federal Savings and Loan totaling $3,249.44, from checks
drawn on the MIT account, were for petitioners' personal expenses
and are income to petitioners, as are payments of telephone and
utility bills at that address.
                               - 14 -


personal checkbook.7   In fact, Mrs. Ferry testified under the

assumption that this was their personal, joint bank account.

     Petitioners deposited $22,503 into the account in 1987 and

$12,175 in 1988.   The account was not supposed to contain any

proceeds from the Iron Hill or Wayanne.

I.H.R-L Bank Account

     In 1985, petitioner opened a checking account at Second

National Federal Savings Bank in the name of I.H.R-L LTD (IHRL).

Although I.H.R-L is an abbreviation for Iron Hill Restaurant-

Lounge, restaurant funds were not supposed to be deposited in

this account, but in the MIT account.   Wilberding did not have

signature authority on the IHRL account--in fact, he did not know

it existed.    Petitioners' home telephone number and home address

were listed on the IHRL account, and monthly bank statements were

sent there.    Petitioner made deposits and had sole check-signing

authority.

     Petitioner deposited $103,514 into the account in 1987 and

$47,458 in 1988.    No one but petitioner used this account.

R.E.P., Ltd.

     In February 1988, petitioner opened a checking account at

Second National Federal Savings Bank in the name of R.E.P., Ltd.

(REP).   Petitioner listed his home telephone number and home


     7
        There is no evidence that petitioner's parents used the
account or, indeed, even knew of it.
                               - 15 -


address on the account, and monthly bank statements were sent to

him there.    Petitioner had sole check-signing authority.

     During 1988 petitioners deposited $56,224 into the account.

No proceeds from the Iron Hill or Wayanne were supposed to have

gone into this account.

     REP may stand for Real Estate Plus.8     Petitioner was the

actual and beneficial owner of R.E.P., LTD.     Throughout 1987 and

1988, petitioners' home utility bills were in the name of R.E.

Plus.     This was simply another name for petitioner.

     We find and hold that petitioners had unreported income of

$130,232 for 1987 and $85,231 for 1988.

     Petitioner did not cooperate during the audit.      Although

requested to do so, he did not turn over any personal records to

respondent.    He refused to pick up certified mail from the post

office.    Moreover, he made false statements to respondent's

agent, Joanne Griffin.    He claimed he had no bank accounts, no

credit cards, and no financial interest in any business during

1987 and 1988.

                               OPINION

     The theme of this case could well be: "Oh, what a tangled

web we weave when first we practice to deceive."9    To that end,



     8
         REP may also stand for "Restaurant Equipment Properties".

     9
       Sir Walter Scott, "Marmion", canto VI, st. XVII (Little
Brown & Co. 1857).
                              - 16 -


petitioner created or participated in numerous entities, bank

accounts, transactions among purported partners and shareholders,

and other purported arrangements (such as loans, leases, flow-

throughs), many of which were fictitious, creating layers of

complexity which appear to have served little or no function

other than an attempt to deceive respondent.   Indeed, the web

woven by petitioner is so tangled as to be virtually

impenetrable.

Additions for Fraud

     Respondent determined in the notice of deficiency that

petitioner is liable for the additions to tax for fraud under

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

1988.   Respondent bears the burden of proof and must establish

each element of fraud by clear and convincing evidence.    Sec.

7454(a); Rule 142(b); Akland v. Commissioner, 767 F.2d 618, 621

(9th Cir. 1985), affg. T.C. Memo. 1983-249; Toussaint v.

Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), affg. T.C. Memo.

1984-25; Wright v. Commissioner, 84 T.C. 636, 639 (1985).

Respondent must prove fraud in each of the years involved.

Drieborg v. Commissioner, 225 F.2d 216, 220 (6th Cir. 1955),

affg. in part and revg. in part a Memorandum Opinion of this

Court dated Feb. 24, 1954.

     Respondent must prove by clear and convincing evidence that:

(1) An underpayment of tax exists for each of the years in issue,

and (2) that some part of the underpayment is due to fraud.    Sec.
                                - 17 -


7454(a); Rule 142(b); Petzoldt v. Commissioner, 92 T.C. 661, 698-

699 (1989); Hebrank v. Commissioner, 81 T.C. 640, 642 (1983);

Mosteller v. Commissioner, T.C. Memo. 1986-505, affd. without

published opinion 841 F.2d 1123 (4th Cir. 1988).

     Respondent cannot meet her burden of establishing the

existence of an underpayment on the basis of petitioner's failure

to meet his burden of proving error in the determination of

deficiencies.      Drieborg v. Commissioner, supra at 218; Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990).     However, respondent

has amply met her burden.

     Where a taxpayer fails to keep books and records sufficient

to establish the amount of his or her 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 her opinion, clearly reflects the taxpayer's income.

Sec. 446; Harbin v. Commissioner, 40 T.C. 373, 377 (1963); 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.

     The use of the bank deposits method for computing income has

long been sanctioned by the courts.      Estate of Mason v.
                              - 18 -


Commissioner, 64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2 (6th

Cir. 1977).   Bank deposits are prima facie evidence of income.

Estate of Hague v. Commissioner, 132 F.2d 775 (2d Cir. 1943),

affg. a Memorandum Opinion of this Court.    The bank deposits

method assumes that all money deposited in a taxpayer's bank

account during a given period constitutes taxable income, unless

shown to derive from a nontaxable source.     Price v. United

States, 335 F.2d 671, 677 (5th Cir. 1964).

     Although requested, petitioner did not supply respondent

with books and records showing sources of income.    Petitioner

told the agent that he and his wife had no bank accounts.

Respondent's agent identified their bank accounts through third

party information provided from summonses issued to banks in

northern New Castle County, Delaware.    Although the bank accounts

included in respondent's analysis were not in petitioners' names,

there was ample evidence to attribute them to petitioners.

     All three bank accounts examined were opened by petitioner.

He made the deposits in the accounts.    On the IHRL and R.E.P.,

Ltd. accounts petitioner had sole check signing authority; on the

Ferry Associates account this authority was shared with Mrs.

Ferry and allegedly with petitioner's parents, although there is

no evidence they used the account.     Petitioners' home address was

listed on the accounts, and monthly bank statements were sent

there.
                              - 19 -


     There is no credible evidence that the deposits were from

nontaxable sources.   We simply do not believe that the money came

from gifts or loans from petitioner's father.   Petitioner failed

to call any family members (his mother, sister, or brother-in-

law) in an effort to verify his stories.   We thus infer that

their testimony would have been unfavorable.    Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d

513 (10th Cir. 1947).

     Petitioner did not produce any evidence of so-called flow-

throughs.   Neither did he explain away the payment of his

personal expenses (sometimes disguised in corporate names) out of

the MIT account.   Respondent has met her burden of showing the

understatements of income for both years in issue.

     Fraud is actual, intentional wrongdoing, and the intent is

the specific purpose to evade a tax believed to be owing.

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

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

T.C. Memo. 1966-81.   Respondent must show that petitioner

intended to evade taxes by conduct calculated to conceal,

mislead, or otherwise prevent the collection of the tax.

Stoltzfus v. United States, supra at 1004; Webb v. Commissioner,

supra at 377.

     Fraud is never to be presumed.    Toussaint v. Commissioner,

supra at 312; Webb v. Commissioner, 394 F.2d at 377.   The

existence of fraud is a question of fact to be determined on the
                              - 20 -


basis of the entire record.   Gajewski v. Commissioner, 67 T.C.

181, 199 (1976), affd. without published opinion 578 F.2d 1383

(8th Cir. 1978).   Fraud, however, can seldom be proved by direct

proof of the taxpayer's intention.     Fraud can be established by

circumstantial evidence and by reasonable inferences drawn from

the taxpayer's entire course of conduct.     Spies v. United States,

317 U.S. 492, 499 (1943); Toussaint v. Commissioner, 743 F.2d at

312; Gajewski v. Commissioner, supra at 200.

     Courts frequently list various factors or "badges of fraud"

from which fraudulent intent may be inferred.     Recklitis v.

Commissioner, 91 T.C. 874, 909 (1988).     Although such lists are

nonexclusive, some of the factors this Court has considered as

indicative of fraud are (1) understatement of income, (2)

inadequate records, (3) implausible or inconsistent explanations

of behavior, (4) concealment of assets, and (5) failure to

cooperate with the tax authorities.      Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992) (citing Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601).   These indicia are amply present here, as set

forth in the findings of fact.

     The taxpayer's evasiveness on the stand, inconsistencies in

his testimony, and the lack of credibility of such testimony are

heavily weighted factors in considering the fraud issue.

Toussaint v. Commissioner, supra at 312.     Petitioner was not

credible.   His testimony was highly inconsistent concerning his
                               - 21 -


interest in the restaurant, the purpose of the transfer of funds

to or on behalf of Wayanne, and interests purportedly owned by

his sons and parents.   At one point he denied having created his

own Forms W-2, but later said he intended thereby to reflect the

personal expenses paid on his behalf from the MIT account.     He

denied that he had charge accounts, but when confronted with

evidence, admitted that he did have cards with his name on them,

but said the accounts were in his wife's name.   He could not give

the Court a straight answer to a simple question, such as "Why

did you not have a personal bank account in your own name?"

     Moreover, petitioner's testimony was flatly contradicted by

Wilberding, an insurance agent (who testified that petitioner

represented that the house and car were his), and a revenue

agent.   Although Mrs. Ferry was evasive, clearly trying hard to

avoid the twin pitfalls of perjury and contradicting her husband,

she did not corroborate his testimony.   She said, for instance,

unbelievably, that she did not know who owned her house ("You'll

have to ask Don"), but admitted that she had no reason to believe

her brother owned it.   She also testified that she had never seen

any gifts from petitioner's parents.

     It is well settled that we are not required to accept a

taxpayer's self-serving testimony in the absence of corroborating

evidence, particularly where the testimony is unreasonable,

improbable, or questionable.   Lerch v. Commissioner, 877 F.2d

624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger
                               - 22 -


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

curiam T.C. Memo. 1969-159; Niedringhaus v. Commissioner, supra

at 212.    Petitioner's testimony was unreasonable, improbable, and

questionable, and we do not accept it.

     The sophistication, education, and intelligence of the

taxpayer are also relevant.    Halle v. Commissioner, 175 F.2d 500,

503 (2d Cir. 1949), affg. 7 T.C. 245 (1946); Niedringhaus v.

Commissioner, supra.    Although petitioner is not highly educated,

he held himself out as a financial and business expert.    He kept

books and prepared individual, corporate, and partnership tax

returns.    He purported to set up trusts, corporations, and

partnerships.    He prepared Forms W-2 (at least, his own), and

held himself out as the person with whom the revenue agent should

deal in conducting the Wayanne audit.    In testifying, he referred

more than once to the gift tax limitation of $10,000 per year.

We believe he was informed about taxes, and intended to evade

them.

     We have no doubt that petitioner intended to conceal his

assets.    The use of multiple entities with names and EIN's, use

of his son's Social Security number on the Ferry Associates

account (before stating for two consecutive years in issue that

the children's numbers were "applied for"), putting his house,

automobile, and telephone in other names, and the various other

devices employed by petitioner convince us that he intended to

conceal his assets.
                              - 23 -


     In light of the above, we find that petitioner is liable for

the additions to tax for fraud for each of the years in issue.

Substantial Understatement Under Section 6661(a)

     Section 6661(a) provides that if there is a substantial

understatement of income tax for any taxable year, there shall be

added to the tax an amount equal to 25 percent of the amount of

any underpayment attributable to such understatement.        Pallottini

v. Commissioner, 90 T.C. 498 (1988).     The amount of the

understatement is equal to the excess of the amount of tax

required to be shown on the return for the tax year over the

amount of the tax shown on the return.     Woods v. Commissioner, 91

T.C. 88, 94 (1988).   An understatement is substantial if it

exceeds the greater of 10 percent of the tax required to be shown

on the return for the taxable year or $5,000.    Sec. 6661(b)(1).

     The amount of the understatement under this section shall be

reduced if there was substantial authority for the tax treatment

of the item by the taxpayer or if the relevant facts affecting

the item are adequately disclosed on the return.    Neither

exception applies here.   Therefore, we find that petitioners are

liable for the addition to tax for substantial understatement.

     To reflect a concession by respondent,



                                           Decision will be entered

                                    under Rule 155.
