                  T.C. Memo. 1997-187



                UNITED STATES TAX COURT



            THOMAS G. ROOTS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19287-95.                    Filed April 21, 1997.


     P underreported income from his rental and
insurance businesses during 1984, 1985, 1986, and 1987.
P did not keep records for either business, and he
commingled funds of each business with funds of the
other and with his personal funds. P received
commission checks from his insurance business, but he
reported on his tax returns only the commissions for
which he received Forms 1099, Miscellaneous Income.
P told rental tenants to mislead Internal Revenue
Service agents as to the amount of rent they paid to
him. P was convicted of willfully attempting to evade
or defeat income taxes under sec. 7201, I.R.C., for his
1987 taxable year and of willfully attempting to
interfere with the administration of internal revenue
laws in violation of sec. 7212(a), I.R.C.
     Held: The currency deposits to P's bank account
for his 1984 and 1985 taxable years are taxable
deposits.
     Held, further, P is liable for additions to tax
for fraud under sec. 6653(b)(1) and (2), I.R.C., for
                                  - 2 -

       1984 and 1985 and under sec. 6653(b)(1)(A) and (B),
       I.R.C., for 1986 and 1987.
            Held, further, P is liable for additions to tax
       for substantial underpayment of tax liability under
       sec. 6661, I.R.C., for 1984, 1985, 1986, and 1987.


       Robert L. Gallaway, for petitioner.

       Margaret C. Tinagero, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       LARO, Judge:    Thomas G. Roots petitioned the Court to

redetermine respondent's determination of the following Federal

income tax deficiencies and additions1 thereto:

                                          Additions to Tax
                               Sec.              Sec.            Sec.
Year        Deficiency       6653(b)(1)      6653(b)(1)(A)       6661

1984         $30,759          $15,380             ---            $7,690
1985          36,545           18,272             ---             9,136
1986           5,166            ---              $3,875           1,292
1987          30,816            ---              23,455           7,704

       Following concessions, we must decide:

       1.   Whether petitioner's currency deposits to his bank

account for 1984, 1985, 1986, or 1987 are taxable deposits.        We


       1
       For petitioner's 1984 and 1985 taxable years, respondent
also determined that if the addition to tax under sec. 6653(b)(1)
applies, the addition to tax under sec. 6653(b)(2) will apply in
an amount equal to 50 percent of the interest payable with
respect to the portion of the underpayment which is attributable
to fraud. For petitioner's 1986 and 1987 taxable years,
respondent also determined that if sec. 6653(b)(1)(A) applies,
sec. 6653(b)(1)(B) will apply in an amount equal to 50 percent of
the interest payable with respect to the portion of the
underpayment which is attributable to fraud.
                                - 3 -

hold that they are, except for those which respondent has

conceded;

     2.     whether petitioner is liable for additions to tax for

fraud under section 6653(b)(1) and (2) for 1984 and 1985 and

under section 6653(b)(1)(A) and (B) for 1986 and 1987.    We hold

that he is;

     3.     whether petitioner is liable for additions to tax for

substantial underpayment of tax liability under section 6661 for

1984, 1985, 1986, and 1987.    We hold that he is.

     Unless otherwise indicated, section references are to the

Internal Revenue Code applicable to the years in issue.    Rule

references are to the Tax Court Rules of Practice and Procedure.

Dollar amounts are rounded to the nearest dollar.

                          FINDINGS OF FACT

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

The stipulations and the exhibits attached thereto are

incorporated herein by this reference.    Petitioner resided in

Ventura, California, when he filed his petition.

     Petitioner was the sole proprietor of an insurance agency

and owned residential real estate properties during the years in

issue.    For 1984, 1985, and 1986, petitioner prepared his own

Federal tax returns; for 1987, Thomas Proctor, a bookkeeper,

prepared petitioner's return.    On the returns, petitioner

reported his receipt of insurance commissions only as reflected
                                - 4 -

on Forms 1099, Miscellaneous Income, even though he knew he

received additional commissions.

1.   Rental Business

       Petitioner owned approximately eight residential rental

properties during each of the taxable years in issue.      All rental

receipts, either in cash or by check, were deposited into

petitioner's account at American Commercial Bank in Ventura,

California (ACB account), the same account into which he

deposited income from other sources including his insurance

agency.    For the taxable years at issue, petitioner had the

information available to him to maintain accurate records of his

correct rental income, but he failed to maintain accurate records

of the amount of rent he received.      As summarized below and

stipulated by the parties, petitioner failed to report all of his

rental income for the years in issue:

             Amount         Rental         Percentage of Rental
            Reported        Income          Income Petitioner
Year        on Return      Received         Failed to Report

1984        $25,560        $39,680                36%
1985         20,769         40,012                48
1986         21,613         48,742                56
1987         32,880         64,586                49

       Petitioner submitted applications for loans to purchase

property during the years in issue in which he listed his income

as significantly greater than the amounts shown on his returns.

On petitioner's May 19, 1986, application for a loan to purchase

a property, petitioner included a statement that he received
                               - 5 -

$5,750 in gross monthly income, amounting to $69,000 annually.

On petitioner's June 4, 1986, application for a loan to purchase

another property, petitioner listed his annual rental income as

$56,880.   On the "returns" petitioner attached to the latter

application, petitioner indicated that his receipts from rentals

during 1984 and 1985 were $53,028 and $46,340, respectively; the

amounts listed on petitioner's application and attached "returns"

were significantly greater than the amounts he reported on his

returns which he filed with the Internal Revenue Service.

     In 1987, Jimmie and Dorothy Wilson (the Wilsons) occupied

residential real property that they leased from petitioner.

While an audit of petitioner's tax returns was in progress,

petitioner contacted the Wilsons and told them to tell anyone who

asked that they were paying petitioner $275 per month for the

rental of the property.   In fact, they were paying $775 per month

for the rental of the property, and they had never made rental

payments as low as $275 per month.     Petitioner told the Wilsons

that if they gave false information about the amount of rent they

paid to him to anyone who asked them about it, he would not raise

their rent in the future.

     In June 1987, Revenue Agent Paula Lurvey (Agent Lurvey)

contacted the Wilsons and inquired about the amount of rent they

paid to petitioner.   The Wilsons told Agent Lurvey that they paid

petitioner $275 per month.   In August 1990, special agents of the

Criminal Investigation Division of the Internal Revenue Service
                                 - 6 -

subpoenaed the Wilsons and their records concerning their payment

of rent to petitioner.    The Wilsons admitted at that time that

they had lied in their earlier statement to Agent Lurvey.      On

June 10, 1987, petitioner met with Agent Lurvey. At this meeting,

petitioner presented the agent with a handwritten "Rental Income"

schedule representing that it reflected all of his rental income.

Petitioner failed to report on this schedule that he received

rental income from his tenants at 1739 Swift, even though he knew

he had.

2.   Insurance Business

     Petitioner also operated an independent insurance agency in

Ventura County, California, during the years in issue.

Petitioner's insurance agency represented various companies,

including Dairyland Insurance Co. (Dairyland), Republic Insurance

Co. (Republic), Progressive, Civil Service Employees Insurance,

and Blue Shield.

     Petitioner deposited the cash receipts from his insurance

business into his ACB account.    Petitioner failed to maintain any

general ledger or other accounting record for his insurance

business and did not maintain separate personal and business bank

accounts.   In preparing his Federal income tax returns for 1984,

1985, and 1986, petitioner determined the gross receipts for his

business from the Forms 1099 that were provided to him by the

companies for which he sold insurance.    The parties have

stipulated that petitioner failed to report at least $45,347,
                                - 7 -

$122,038, $159,535, and $141,553 of gross income from his

insurance business for 1984 through 1987, respectively.

     During the years in issue, petitioner was selling insurance

on behalf of Republic.    Although petitioner received monthly

commission checks, petitioner did not report the commission

income he received from Republic because he did not receive a

Form 1099 reflecting it.    Petitioner received at least $4,256 and

$6,585, respectively, in commission income from Republic.

     During 1984, 1985, 1986, and 1987, petitioner received

commissions of $8,775, $24,707, $37,888, and $57,510,

respectively, from Dairyland.    Petitioner received bimonthly

commission statements from Dairyland, but no Forms 1099, so

petitioner did not report the commission income he received from

Dairyland.   Petitioner explained that he failed to report this

income because Dairyland told him that some of the payments to

him were not taxable because they were not "earned".    Later,

petitioner testified that Dairyland did not understand what it

had said.    Petitioner characterized Dairyland's statement as

"ignorant", but he claims to have relied on it nonetheless.

     Petitioner prepared a profit and loss statement for his

insurance agency for the period of January 1 through May 31,

1986, which he submitted to South Bay Savings with a loan

application.    Attached to the application were 1984 and 1985

"returns" prepared by petitioner which indicated gross insurance
                               - 8 -

agency income of $80,894 and $97,405, and net profit of $41,996

and $45,515, respectively.

3.   Miscellaneous Income

     In 1985, petitioner sold to Mr. Fry real property located at

1271 Milligan Street, Camarillo, California.   Petitioner failed

to report $4,257 of capital gains income from the sale of this

property.   Petitioner also received referral fee income from

Attorney William Bogue for referring clients to Mr. Bogue;

neither party introduced evidence as to the amounts of the

referral fees.

     In 1985, petitioner acquired 3,000 units in Diamond Shamrock

Offshore Partners Limited Partnership (Diamond Shamrock).    In

1985, 1986, and 1987, respectively, Diamond Shamrock distributed

to petitioner $2,800, $8,400, and $8,400.

     Also, in 1985, petitioner acquired 3,000 units in Union

Exploration Partners, Ltd. (Union Exploration).   Through his

ownership of the Union Exploration stock, petitioner received

distributions of $1,812 and $5,654 in 1985 and 1987,

respectively.

4.   Criminal Conviction

     On April 7, 1992, a criminal indictment was filed against

petitioner in the U.S. District Court for the Central District of

California.   The indictment alleged that petitioner willfully

attempted to evade or defeat his 1985, 1986, and 1987 income

taxes in violation of section 7201, and that petitioner violated
                               - 9 -

section 7212(a) by knowingly and corruptly endeavoring to

obstruct or impede the due administration of the Internal Revenue

Code by requesting one of his tenants to lie to the revenue agent

about the amount of rent the tenant paid to petitioner.    On

May 29, 1992, petitioner pled guilty to willfully attempting to

evade income taxes for his 1987 taxable year in violation of

section 7201 and to willfully attempting to interfere with the

administration of internal revenue laws in violation of section

7212(a).   On August 10, 1992, the District Court sentenced

petitioner to 8 months of imprisonment and 5 years of probation

and imposed a $20,000 fine.

                              OPINION

A.   Unreported Income

     Respondent determined that certain deposits into

petitioner's ACB account constituted unreported income to him.

Petitioner argues that the disputed deposits are not taxable to

him in the subject years because they were loans or previously

taxed income.   We agree with respondent.

     Section 61(a) defines gross income as "all income from

whatever source derived".   Sec. 61(a)(1).   This definition

includes all "accessions to wealth, clearly realized, and over

which the taxpayers have complete dominion."    Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Hawkins v. United

States, 30 F.3d 1077, 1079 (9th Cir. 1994).    When a taxpayer

keeps no books or records for his or her business, the
                                - 10 -

Commissioner generally may recompute the taxpayer's income under

any method that the Commissioner determines clearly reflects

income.   Sec. 446(b); Commissioner v. Hansen, 360 U.S. 446, 467

(1959); Cole v. Commissioner, 586 F.2d 747, 749 (9th Cir. 1978),

affg. 64 T.C. 1091 (1975); Meneguzzo v. Commissioner, 43 T.C.

824, 831 (1965).   The Commissioner may use any method that is

reasonable in light of the facts and circumstances of the

particular case.     Giddio v. Commissioner, 54 T.C. 1530, 1532-1533

(1970).

     When the taxpayer's records are incomplete, the Commissioner

may rely on the bank deposits method to reconstruct income.

Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978); Estate of

Mason v. Commissioner, 64 T.C. 651, 656 (1978), affd. 566 F.2d

2 (6th Cir. 1977).    The propriety of this method is well

established.   Parks v. Commissioner, 94 T.C. 654, 658 (1990);

Nicholas v. Commissioner, supra at 1064; see also Estate of Mason

v. Commissioner, supra at 656-657; Harper v. Commissioner,

54 T.C. 1121, 1129 (1970).    Although not conclusive, we consider

bank deposits to be prima facie evidence of income.     Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v.

Commissioner, supra at 656-657; see also Price v. Commissioner,

T.C. Memo. 1995-187, supplemented by T.C. Memo. 1995-290.

     Once a bank deposits analysis is performed, the burden

normally is on the taxpayer to prove that the deposits do not

represent unreported income.    See Rule 142(a); Welch v.
                              - 11 -

Helvering, 290 U.S. 111, 115 (1933); see also Sproul v.

Commissioner, T.C. Memo. 1995-207.     Testimony of a taxpayer which

is unsupported by documentary evidence may be insufficient to

satisfy his or her burden.   See Alvarez v. Commissioner, T.C.

Memo. 1995-414; Price v. Commissioner, supra.

     In this case, respondent used the bank deposits method to

reconstruct petitioner's income.   Petitioner argues that several

items which were deposited into petitioner's ACB account should

not constitute income.   We will discuss each item in turn.

     First, petitioner contends that $2,812 from the sale of

Jerrico, Inc. stock in 1984 and $9,507 from the sale of

Securities Settlement Corp. stock in 1985 should not be taxed as

unreported income.   Respondent conceded in her brief that these

amounts are not taxable.

     Second, petitioner contends that he borrowed $50,000 from

Ray Kaiser to open his insurance agency.    Petitioner testified

that Mr. Kaiser first contacted him because Mr. Kaiser would be

receiving a $50,000 disability settlement and wanted to invest

the proceeds in an annuity from which he would receive an

adequate return.   Petitioner testified that he suggested a

Prudential annuity, but Mr. Kaiser rejected it.    Petitioner

testified that he deposited the funds into various savings and

loans but then withdrew the funds and kept them in a "secret

hiding spot" in his house because he was dissatisfied with the

return on investment he was receiving from the banks.    Petitioner
                                - 12 -

offered no explanation as to how he would realize a greater

return by holding the money in cash in his home.     Since

petitioner's rationale for the loan defies common sense and we

find petitioner's testimony uncorroborated by the evidence,

petitioner has not met his burden of proof, and he must include

the $50,000 in his 1986 income.

     Third, petitioner asserts that deposits totaling $2,800,

$4,900,2 and $8,400 for 1985, 1986, and 1987, respectively,

constituted nontaxable distributions from Diamond Shamrock, and

that a deposit of $5,022 in 1987 constituted a nontaxable

distribution from Union Exploration.     Petitioner attempted to

prove this assertion based on security account statements

indicating distributions from Diamond Shamrock and Union

Exploration.   These statements, however, merely indicate that

petitioner received distributions, not that he cashed the

distribution checks and then deposited the cash into his ACB

account.   Petitioner did not have deposits in his ACB account

which corresponded to amounts of the distributions; rather,

petitioner would have us aggregate various deposits in the

amounts of the distributions.    Also, when his attorney asked him

if the dividends from the Diamond Shamrock and Union Exploration

investments were deposited into his ACB account, petitioner

testified that he "would assume" they all went in.     Since

     2
       The parties stipulated that the amount of the Diamond
Shamrock distributions at issue for 1986 was only $4,900.
                               - 13 -

petitioner himself is unsure whether he deposited the

distribution proceeds and there is no evidence to establish that

he did, we find that the deposits in question are includable in

his income.

     Further, petitioner contends that he issued checks totaling

$3,000 to Linda Holliday for services in 1987 and that she then

returned the money to him since they were dating so that he could

deposit it in his account.    Petitioner claims that he had

Ms. Holliday endorse the checks so that he could redeposit them

and have a record for Federal income tax purposes.    The only

documentary evidence petitioner presented to prove this

transaction was copies of checks payable to Ms. Holliday.

Ms. Holliday did not testify as to this matter, and petitioner

did not explain why she did not testify.    Accordingly, we find

that petitioner has not met his burden of proof with respect to

the $3,000 deposit in 1987.

     Petitioner next alleges that a $2,500 deposit in 1985

constituted the repayment by Peter Zelinski of sums owed to

petitioner and that $16,275 in deposits should not be included in

his 1987 income because they are the result of the repayment of a

loan he made to Gloria Treadwell.    In both instances, there is no

evidence that petitioner lent money to or paid any expenses of

Mr. Zelinski or Ms. Treadwell.    None of the alleged checks or

deposit slips are in evidence.    Neither Mr. Zelinski nor

Ms. Treadwell testified at trial.    Because there is no proof of
                               - 14 -

the existence of the loans or the repayment thereof, petitioner

must include the $2,500 and $16,275 deposits in his income for

1985 and 1987, respectively.

     Moreover, petitioner contends that in 1987 he paid $3,500 to

his attorney, William T. Bogue, for services, that Mr. Bogue

endorsed the check to petitioner, petitioner gave Mr. Bogue

$3,500 cash, and petitioner deposited the check in petitioner's

account.   Petitioner introduced into evidence a copy of a bank

statement and deposit ticket for the $3,500 deposit but did not

introduce any evidence proving that the $3,500 cash petitioner

paid to Mr. Bogue came from his ACB account.   Under United States

v. Boulet, 577 F.2d 1165, 1167 (5th Cir. 1978), in a bank

deposits method of proof case, deposits are added, nontaxable

deposits are eliminated, and cash expenditures are added to

derive gross income.   Since petitioner did not prove that the

$3,500 cash originated from his bank account, the $3,500

redeposit would decrease taxable income, but the cash expenditure

of $3,500 would increase taxable income in a like amount.

Accordingly, petitioner must include the $3,500 deposit in his

1987 income.

     Petitioner also claims that in 1987, he paid Mr. Bogue by

transferring his car ownership to Mr. Bogue; that Mr. Bogue

refunded to petitioner the $2,200 difference between the value of

the car and the value of Mr. Bogue's services; and that

petitioner deposited the $2,200 check in his ACB account.
                                 - 15 -

Petitioner produced an illegible copy of the $2,200 check at

trial.     Mr. Bogue testified at trial that he returned only

$900 to $1,000 to petitioner in exchange for the automobile.

Petitioner testified that the car had a $7,000 value, while

Mr. Bogue testified that the car had a $2,000 book value.       We are

not persuaded that petitioner has met his burden of proof.

Accordingly, we sustain respondent's determination as to the

$2,200 deposit in 1987.

     Lastly, petitioner alleges that a deposit of $4,348 should

not be included in his 1984 income because it is "from funds

previously acquired and retained by Petitioner".     There is no

evidence to substantiate that claim, and accordingly we find that

the $4,348 deposit is includable in his 1984 income.

     We thus hold that all the disputed deposits were taxable

income.3    Accordingly, petitioner must include all of the

contested deposits in his income for the years in issue.

B.   Addition to Tax for Fraud




     3
       In so holding, we note that petitioner also alleges that
he incurred a $15,523 casualty loss for 1984 because he forwarded
that amount to Lewco Securities, which claimed to be an agent of
Lehman Brothers Kuhn Loeb, Inc. (Lehman Brothers), but Lehman
Brothers never received the funds or established an account for
him. In support of his claim, petitioner has introduced only his
uncorroborated testimony and evidence that his account balance
with Lewco Securities fell below the minimum margin maintenance
requirements. Petitioner never identified the names or positions
of the individuals with whom he dealt at Lewco Securities. We do
not allow him a deduction for a casualty loss.
                               - 16 -

     Respondent determined that the deficiencies for 1984, 1985,

1986, and 1987 were attributable to fraud.     Respondent must prove

her determinations of fraud by clear and convincing evidence.

Sec. 7454(a); Rule 142(b); Rowlee v. Commissioner, 80 T.C. 1111,

1123 (1983).   Fraud requires a showing that the taxpayer intended

to evade a tax known or believed to be owing.      Stoltzfus v.

United States, 398 F.2d 1002, 1004 (3d Cir. 1968).      In order to

carry the burden of proof on the issue of fraud, respondent must

prove that:    (1) Petitioner underpaid his tax in each year and

(2) some part of each underpayment was due to fraud.     See Lee v.

Commissioner, T.C. Memo. 1995-597.      With respect to section

6653(b)(1)(A) and (B), applicable to petitioner's 1986 and 1987

taxable years, if respondent establishes that some part of

petitioner's underpayment was due to fraud, the entire

underpayment is treated as attributable to fraud unless

petitioner proves otherwise.    Sec. 6653(b)(2).   With respect to

section 6653(b)(2), applicable to petitioner's 1984 and 1985

taxable years, respondent must prove the portion of the

deficiency that is attributable to fraud.     Sec. 6653(b)(2);

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

     1.   Underpayment

     Based on our careful review of the record, we find that

respondent has clearly and convincingly proven that petitioner

underpaid his taxes for 1984, 1985, 1986, and 1987.     The record

clearly convinces us that petitioner had significant amounts of
                                - 17 -

income that were not reported on his 1984, 1985, 1986, and 1987

tax returns.    Indeed, before trial petitioner conceded

adjustments in his income tax in the respective amounts of

$48,159, $131,545, $159,535, and $71,946 for the years in

question.    Thus, with respect to each of petitioner's taxable

years in issue, we hold that respondent has met her burden on the

first prong of the two-prong test for fraud.

     2.    Fraudulent Intent

     Fraud is defined as an intentional wrongdoing designed to

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

56 (9th Cir. 1958); Miller v. Commissioner, 94 T.C. 316, 332

(1990).     The existence of fraud is a question of fact.

Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. without

published opinion 578 F.2d 1383 (8th Cir. 1978).     Fraud is never

presumed or imputed; it must be established by independent

evidence that establishes a fraudulent intent on the taxpayer's

part.     Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).   For

respondent to prevail, she must show that petitioner intended to

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

Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986),

affg. per curiam T.C. Memo. 1985-63; Stoltzfus v. United States,

supra at 1004; Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir.

1968), affg. T.C. Memo. 1966-81; Rowlee v. Commissioner, supra at

1123.     Because direct proof of a taxpayer's intent is rarely

available, fraud may be proven by circumstantial evidence, and
                              - 18 -

reasonable inferences may be drawn from the relevant facts.

Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson v.

Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th

Cir. 1984); Collins v. Commissioner, T.C. Memo. 1994-409.

     We often rely on certain indicia of fraud in deciding the

existence of fraud.   Although no single factor is necessarily

sufficient to establish fraud, the presence of several indicia is

persuasive circumstantial evidence of fraud.    Beaver v.

Commissioner, 55 T.C. 85, 93 (1970).   The "badges of fraud"

include:   (1) Understatement of income; (2) inadequate records;

(3) failure to file tax returns; (4) implausible or inconsistent

explanations of behavior; (5) concealing assets; (6) failure to

cooperate with tax authorities; (7) income from illegal

activities; (8) an intent to mislead which may be inferred from a

pattern of conduct; and (9) dealings in cash.    Bradford v.

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

1984-601; Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989);

Rowlee v. Commissioner, supra at 1125.   These "badges of fraud"

are nonexclusive, Niedringhaus v. Commissioner, 99 T.C. 202, 211

(1992), and the taxpayer's education and business background are

relevant to the determination of fraud, see Wheadon v.

Commissioner, T.C. Memo. 1992-633.

     First, we recognize that petitioner was convicted of income

tax evasion pursuant to section 7201 for his 1987 tax year.    As a

result, petitioner is collaterally estopped from denying
                               - 19 -

liability for civil fraud with respect to 1987.    Gray v.

Commissioner, 708 F.2d 243, 246 (6th Cir. 1983), affg. T.C. Memo.

1981-1.

     Next, we consider whether respondent established that

petitioner committed fraud for his 1984, 1985, and 1986 taxable

years.    Viewing the record as a whole, we are satisfied that

respondent has met her burden of proving fraud.    Among other

things, we note that petitioner:    (1) Intentionally understated

his income, (2) did not keep books for either his rental or

insurance business, (3) failed to segregate his other income and

expenses from the income and expenses of his insurance agency and

rental activities, and (4) engaged in conduct which clearly

indicates his attempt to conceal income by instructing his

tenants to lie to the Internal Revenue Service about the rent

they paid to him.4   Petitioner had a 4-year pattern of

underreporting his gross income; petitioner admits that he

received commission checks for insurance commissions but did not

report these amounts unless the insurance companies reported the

amounts on Forms 1099; and petitioner admits that he received and

failed to report rental income from his tenants at 1739 Swift.

On loan applications, he disclosed to financial institutions

     4
       In the stipulation of facts, the parties agreed that the
Wilsons would testify that petitioner instructed the Wilsons to
lie to the Internal Revenue Service about the amount of rent they
paid. At trial, petitioner testified that he never instructed
the Wilsons to lie. We do not find petitioner's testimony
credible.
                                - 20 -

information which more accurately reflected his actual income

than did the returns he filed.     Petitioner had business acumen

since he ran both an insurance and a rental business during the

years in issue.    We hold that petitioner's entire underpayment

for each of the years 1984, 1985, 1986, and 1987 was attributable

to fraud.

C. Addition to Tax for Substantial Understatement of Tax
Liability

     Section 6661 imposes an addition to tax for substantial

understatements of income tax.     The amount of the section 6661

addition to tax for additions assessed after October 21, 1986,

equals 25 percent of the amount attributable to the substantial

understatement.     Pallottini v. Commissioner, 90 T.C. 498, 500-503

(1988).     An understatement is substantial if it exceeds the

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

return or $5,000.     Sec. 6661(b)(1)(A).   An understatement is

reduced to the extent it is based on the tax treatment of any

item regarding which:     (1) There is or was substantial authority,

or (2) the relevant facts were adequately disclosed in the return

or in a statement attached to the return.      Sec. 6661(b)(2).

     Petitioner has failed to meet his burden of proof on this

issue.    The understatements are substantial, and the record does

not establish that any of the understatements are reduced under

section 6661(b)(2).     We sustain respondent's determination.
                             - 21 -

     We have considered petitioner's other arguments and find

them to be without merit.

     To reflect the foregoing,




                                        Decision will be entered

                                   under Rule 155.
