                            T.C. Memo. 1995-516



                          UNITED STATES TAX COURT



                 JOHN B. MATHERS, SR., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent


       Docket No. 4702-94.         Filed October 30, 1995.


       Roland J. Mestayer, Jr., and Elliot G. Mestayer, for

petitioner.

       Marshall R. Jones, for respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION

       COHEN, Judge:     Respondent determined deficiencies in and

additions to petitioner's Federal income taxes as follows:

                                        Additions to Tax
                              Sec.           Sec.          Sec.
Year        Deficiency        6653(b)(1)1    6653(b)(2)1   6654
                                                    2
1982         $38,926           $19,463                     $3,790
                                                    2
1983          49,503            24,752                      3,033
                                                    2
1984          45,510            22,755                      2,861
                                                    2
1985          51,467            25,734                      2,949
                                                    2
1986          16,945            12,709                        820
       1
       For 1986, secs. 6653(b)(1)(A) and 6653(b)(1)(B),
respectively.
     2
       50 percent of the interest due on the deficiency.
                               - 2 -


Respondent's amended answer asserted the delinquency and

negligence additions to tax under sections 6651 and 6653(a),

respectively, in the alternative to the fraud addition to tax.

Unless otherwise noted, 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 remaining for decision are:

(1) Whether payments received by petitioner constituted loan

repayments or constructive dividends; (2) whether payments made

to petitioner's son constituted constructive dividends to

petitioner; (3) whether petitioner is liable for the fraud

addition to tax, or, in the alternative, for the delinquency and

negligence additions to tax; and (4) whether petitioner is liable

for the addition to tax for failure to pay estimated taxes.


                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    At the

time the petition was filed, petitioner resided in Mobile,

Alabama.

     Petitioner graduated from high school and attended 2 years

of college.   Petitioner worked in the finance industry before

entering the retail furniture business in 1960.
                                  - 3 -

     During the years in issue, petitioner served as president

and principal operating officer of Furniture Barn, Inc. (FBI).

Petitioner owned approximately 97 percent of the outstanding

stock of FBI.      Petitioner did not receive a salary from FBI

during the years in issue.      FBI paid petitioner's personal

expenses, including food, household expenses, and other living

expenses.    The following amounts represent expenditures by FBI

for the personal benefit of petitioner:


            Year                            Amount

            1982                          $36,511.39
            1983                           53,743.85
            1984                           60,469.07
            1985                           54,681.48
            1986                           33,599.64


Petitioner also used corporate assets for personal purposes

during the years in issue.

     Petitioner's son, John B. Mathers, Jr. (Mathers, Jr.),

worked at FBI in sales management and served as vice president.

He received a salary from FBI for his services.        During the years

in issue, Mathers, Jr. wrote numerous checks from the FBI account

to pay his personal expenses.      Petitioner had knowledge of at

least some of these checks.      Petitioner had control over the

check writing of Mathers, Jr. but did not require Mathers, Jr. to

get approval before writing checks for his personal benefit.

Petitioner never told Mathers, Jr. that he was taking too much

money out of FBI.      On previous occasions, petitioner had helped

Mathers, Jr. through financially difficult times.
                                - 4 -

     The following amounts were paid by FBI solely for the

personal benefit of Mathers, Jr.:


            Year                          Amount

            1982                        $28,947.29
            1983                         25,811.92
            1984                         18,363.25
            1985                         25,667.61
            1986                          9,269.58


The parties have stipulated that, if any of the amounts paid by

FBI for the personal benefit of petitioner or Mathers, Jr. are

taxable to petitioner, they constitute constructive dividends

from FBI.

     Petitioner was audited in the 1960's.         In 1972, this Court

decided that he had unreported taxable income in 1964; an opinion

was rendered as Mathers v. Commissioner, 57 T.C. 666 (1972).

Petitioner did not file individual Federal income tax returns for

any year from 1974 through 1986.    In late 1983, the Internal

Revenue Service began an audit of petitioner.        After the initial

interview, it became apparent that FBI was the source of

petitioner's funds.    The audit expanded to include FBI as well as

petitioner.    Because of petitioner's failure to keep personal

income records, it was necessary to use the FBI records to

reconstruct petitioner's income.    Petitioner was given time to

organize the records of FBI and to file amended returns for FBI

for the years in issue.    The audit took 4 years to complete

because of the lack of financial records for petitioner and FBI.
                               - 5 -

     During the investigation, petitioner denied having income

from wages, dividends, sales of assets, gifts, or inheritances.

Petitioner represented at one point that his average cash on hand

was $100, but later represented that he had up to $10,000 cash in

a safe in his house.   Petitioner indicated to the investigating

agents that his source of funds was the repayment of loans he

made to FBI some years earlier.   Petitioner asserted to the

agents that the loans were made to FBI out of proceeds he

received from sales of several furniture stores during the late

1960's and early 1970's.   During the audit, petitioner did not

produce any documentary evidence, such as promissory notes or

repayment schedules, to verify his claim of such loans to FBI.

     Petitioner prepared and filed Federal income tax returns for

FBI from 1982 to 1985.   The 1982 and 1984 returns were each filed

approximately 1 year late.   The corporate returns did not report

any compensation paid to officers or dividends paid to

shareholders, although Mathers, Jr. was an officer and received a

salary from the corporation.

     Schedule L of Form 1120, U.S. Corporation Income Tax Return,

on the FBI returns set forth balances in the "Loans from

stockholders" entry and in the "Mortgages, notes, bonds payable

in 1 year or more" entry (collectively referred to as loans from

stockholders) between 1982 and 1985, which allegedly represented

the loans made to FBI by petitioner.   The balances shown

decreased, however, by only $36,000 between 1982 and 1985.     This
                               - 6 -

decrease did not reflect the amount of petitioner's personal

expenses, totaling approximately $239,000, that were paid by FBI

over the same time period.

     After meeting with the agents assigned to his case,

petitioner sought assistance from an accountant, G. Marshall

Burden (Burden), in preparing amended returns for FBI.   Burden

relied on the prior FBI returns prepared by petitioner to arrive

at the beginning loans from stockholders balance on the amended

returns.   Petitioner possessed no other documents to substantiate

the alleged loans.   The loans from stockholders balance shown on

the amended returns declined in accordance with the FBI payment

of the personal expenses of both petitioner and Mathers, Jr.    In

June 1989, Burden filed further amended returns to eliminate the

allocation to the loans from stockholders balance of Mathers,

Jr.'s personal expense payments in prior years.


                              OPINION

     Petitioner contends that the amounts he received from FBI

were in repayment of loans he made to FBI, and, therefore, those

amounts are not taxable to him.   He claims that he had no

obligation to file tax returns for the years in issue because he

had no taxable income.

     Respondent contends that the payments from FBI for the

benefit of petitioner and his son constituted constructive

dividends and are taxable to petitioner.   Respondent further

argues that petitioner knew that these payments were income to
                                - 7 -

him and that his failure to file income tax returns reporting

that income and to pay tax on the income are due to fraud.

     The issues of taxability of the payments and fraud turn on

the credibility of petitioner's claim that the disbursements on

his behalf were repayments to him of loans previously made to the

corporation.    Petitioner's contentions in the context of this

case are simply not credible.    He presented no contemporaneous

documentation that the distributions for his benefit during the

years in issue were intended to be repayments of loans.


Payments for the Benefit of Petitioner

     At trial, the evidence introduced by petitioner consisted

primarily of his uncorroborated testimony.    We are not required

to accept petitioner's testimony that is improbable or vague.

See Geiger v. Commissioner, 440 F.2d 688, 689-690 (9th Cir.

1971), affg. T.C. Memo. 1969-159.    His testimony is contradicted

by the minimal records that he created.    The Federal income tax

returns prepared by petitioner for FBI do not show a

contemporaneous intent to treat the payments from FBI as loan

repayments.    From January 1, 1980, to December 31, 1985,

petitioner showed a reduction of only $36,000 in the loans from

stockholders entry on the returns he prepared for FBI, while

payments by FBI for petitioner's sole benefit totaled

approximately $239,000 for the same period.    Larger adjustments

to the loans from stockholders balance were not reflected until

the amended returns were prepared and filed by Burden after the
                               - 8 -

audit began.   Burden relied solely on the prior returns, prepared

by petitioner, in arriving at the beginning loans from

stockholders entry he used in preparing the amended returns.      No

other documentation, such as promissory notes or repayment

schedules, was available to verify the existence of such loans.

Petitioner, with prior experience in the finance industry,

understood the importance of documenting loans, if indeed loans

existed.   Attempts by petitioner to characterize retroactively

the payments he received as loan repayments are not credible.

See Noble v. Commissioner, 368 F.2d 439 (9th Cir. 1966), affg.

T.C. Memo. 1965-84.

     We conclude, therefore, that the payments from FBI to

petitioner were not loan repayments.    See Reis v. Commissioner,

T.C. Memo. 1995-231; Cordes v. Commissioner, T.C. Memo. 1994-377.

Pursuant to the parties' stipulation, the payments for the

personal benefit of petitioner are constructive dividends.


Payments for the Benefit of Mathers, Jr.

     "The power to dispose of income is the equivalent of

ownership of it.   The exercise of that power to procure the

payment of income to another is the enjoyment, and hence the

realization, of the income by him who exercises it."     Helvering

v. Horst, 311 U.S. 112, 118 (1940).    The assignment of income

principle has been extended to situations such as this instance

where one with a controlling interest in the corporation has the

power to direct corporate funds to another.    See Green v. United
                                - 9 -

States, 460 F.2d 412, 419 (5th Cir. 1972); Sammons v. United

States, 433 F.2d 728, 730 (5th Cir. 1970).    To determine whether

petitioner should be taxed on the receipt of FBI funds by

Mathers, Jr., we take into account "whether the taxpayer has

exercised substantial influence over the corporate action whose

tax consequences are at issue."    Green v. United States, supra at

420.

       Petitioner, as president and 97-percent shareholder in FBI,

had the power to control the distribution of FBI funds.

Petitioner admitted that he had control over the FBI checking

account.    Petitioner possessed the power to require Mathers, Jr.

to stop writing personal expense checks on the FBI account.

Petitioner chose not to use this power.    Instead, petitioner

furnished Mathers, Jr. with complete access to FBI funds and

knowingly permitted Mathers, Jr.'s use of those funds for his

personal expenses.

       The facts of this case are similar to the situation

presented in Nicholls, North, Buse Co. v. Commissioner, 56 T.C.

1225 (1971).    In that case, the taxpayer was president and 50-

percent shareholder in a corporation.    The taxpayer played a very

important role in the corporation's acquisition of a boat.

His sons, with his knowledge, frequently used the boat for

nonbusiness purposes.    The Court found that the taxpayer received

a constructive dividend from the use of the boat by his sons,

because he "was in complete control of the events".    Id. at 1240.
                                - 10 -

Here, too, petitioner must include in income those amounts that

FBI paid for the personal benefit of Mathers, Jr.


Fraud

        The addition to tax in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from the taxpayer's fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938).        For 1982, 1983,

1984, and 1985, section 6653(b)(1) provides for an addition to

tax equal to 50 percent of the entire underpayment when any part

of an underpayment is due to fraud, and section 6653(b)(2)

provides for an addition to tax equal to 50 percent of the

interest payable under section 6601 for that portion of the

underpayment that is attributable to fraud.     For 1986, section

6653(b)(1)(A) provides for an addition to tax equal to 75 percent

of the underpayment attributable to fraud, and section

6653(b)(1)(B) provides for an addition to tax equal to 50 percent

of the interest payable under section 6601 for that portion that

is attributable to fraud.

        Respondent has the burden of proving, by clear and

convincing evidence, that some part of an underpayment for each

year was due to fraud.     Sec. 7454(a); Rule 142(b).    For 1982,

1983, 1984, and 1985, respondent must prove the specific portion

of the underpayment of tax attributable to fraud for purposes of

section 6653(b)(2).     For 1986, section 6653(b)(2), provides:
                               - 11 -


                 (2) Determination of portion attributable to
            fraud.--If the Secretary establishes that any
            portion of an underpayment is attributable to
            fraud, the entire underpayment shall be treated as
            attributable to fraud, except with respect to any
            portion of the underpayment which the taxpayer
            established is not attributable to fraud.


In regard to proving an underpayment due to fraud, respondent

cannot rely on petitioner's failure to satisfy his burden of

proof as to the deficiency.    See DiLeo v. Commissioner, 96 T.C.

858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

     Respondent's burden with respect to fraudulent intent is met

if it is shown that the taxpayer intended to conceal, mislead, or

otherwise prevent the collection of taxes known 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.    The existence of fraud is a question of fact

to be resolved upon consideration 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 will never be

presumed.    Beaver v. Commissioner, 55 T.C. 85, 92 (1970).     Fraud

may, however, be proved by circumstantial evidence because direct

proof of the taxpayer's intent is rarely available.    The

taxpayer's entire course of conduct may establish the requisite

fraudulent intent.    Stone v. Commissioner, 56 T.C. 213, 223-224

(1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969).
                               - 12 -

     The failure to file tax returns, without more, is not

conclusive proof of fraud; such omission may be consistent with a

state of mind other than the intention and expectation of

defeating the payment of taxes.   Stoltzfus v. United States,

supra; Cirillo v. Commissioner, 314 F.2d 478, 482 (3d Cir. 1963),

affg. in part and revg. in part T.C. Memo. 1961-192; Kotmair v.

Commissioner, 86 T.C. 1253 (1986).      Failure to file, however, may

be considered in connection with other facts in determining

whether an underpayment of tax is due to fraud.

     Citing Niedringhaus v. Commissioner, 99 T.C. 202, 211

(1992), respondent relies here on various indicia of fraud in

addition to failure to file tax returns, including understatement

of income, inadequate records, implausible or inconsistent

explanations of behavior, concealment of assets, and failure to

make estimated tax payments.   In this case, however, all of those

factors depend on the validity of petitioner's contention that

the distributions from the corporation for his benefit were

repayments of loans and on his alleged good-faith belief that he,

therefore, did not have any taxable income and was not required

to file returns.   For various reasons, we conclude that

petitioner's explanations with respect to the purported loans are

so implausible that we are convinced that his failure to file

returns and report the income reflected in the distributions from

the corporation for his benefit was due to fraud.
                              - 13 -

     First, as indicated above, petitioner's contention that the

distributions represented loan repayments to him is unsupported

by any independent evidence and is contradicted by the corporate

tax returns that he prepared and filed.    Second, in view of his

business experience, it is not credible that he believed that

over a period of 13 years he could withdraw substantial sums of

money from the corporation for his living expenses, report no

income from the services that he performed on behalf of the

corporation or dividends from the corporation, and have no income

tax liability and no obligation to file tax returns.    His

position in this regard is too untenable to be believed.

     Petitioner also had experience in this Court, as reflected

in an opinion rendered not long before he commenced his pattern

of failing to file returns.   See Mathers v. Commissioner, 57 T.C.

666 (1972).   Petitioner apparently was sufficiently knowledgeable

to prepare the corporate tax returns, and he has not suggested

that he relied on any professional advice that he had no

obligation to file individual returns.    Under these

circumstances, the use of the corporation to pay his personal

expenses is clear and convincing evidence of fraud.     See Benes v.

Commissioner, 42 T.C. 358, 384 (1964), affd. 355 F.2d 929 (6th

Cir. 1966); Hedlund v. Commissioner, T.C. Memo. 1993-455; Kahrahb

Restaurant, Inc. v. Commissioner, T.C. Memo. 1992-263.

     We are convinced that petitioner underpaid taxes due for the

years in issue when he failed to report as income the
                              - 14 -

distributions from the corporation for his benefit; that he knew

that these distributions were income to him; and that his failure

to file returns, to report the income, and to pay tax on that

income was due to fraud.   Therefore, respondent has established

these elements by clear and convincing evidence, and the

additions to tax under section 6653(b)(1) for 1982, 1983, 1984,

and 1985 and under section 6653(b)(1)(A) and (B) for 1986 will be

sustained.

     It is not clear, however, that petitioner knew or should

have known that the payments withdrawn from the corporation by

his son would be taxable to him as constructive dividends.    With

respect to those amounts for 1982, 1983, 1984, and 1985,

respondent has not satisfied her burden of proving that

petitioner's failure to report the amounts paid for his son and

to pay tax on them was due to fraud.   Therefore, we do not

sustain the 50 percent of the interest portion attributable to

those payments under section 6653(b)(2) for those years.   See

Franklin v. Commissioner, T.C. Memo. 1993-184.   On the other

hand, petitioner has not satisfied his burden of proving, for

1986, that the omissions with respect to distributions for the

benefit of his son were not due to fraud.   See sec. 6653(b)(2),

quoted above.

     Because we have upheld respondent's determination with

respect to the additions to tax for fraud, we need not address

the alternative additions to tax for negligence and for failure
                               - 15 -

to file returns.   Our determinations with respect to fraud,

however, necessarily reject any argument that the failure to file

returns was due to reasonable cause or that the underpayments of

tax were not at least due to negligence.


Section 6654 Addition to Tax

     Respondent also determined that petitioner is liable for the

addition to tax under section 6654 for the years in issue.

Section 6654 provides an addition to tax for failure to make

timely and sufficient payments of estimated tax.

     Petitioner argues that, because he did not have taxable

income for any of the years in issue, he was not required to pay

estimated taxes.    We have determined, however, that petitioner

had taxable income during the years in issue.

     The section 6654 addition to tax is mandatory unless

petitioner can place himself within one of the computational

exceptions provided by section 6654.     Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980).     None of the exceptions of

section 6654(d) for 1982, 1983, and 1984, or section 6654(e) for

1985 and 1986, apply in this instance.

     Petitioner has further asserted that the imposition of this

addition to tax would be inequitable in this case because he had

an "honest" belief that he did not have taxable income during the

years in issue.    "This section has no provision relating to

reasonable cause and lack of willful neglect.    It is mandatory

and extenuating circumstances are irrelevant."     Estate of Ruben
                             - 16 -

v. Commissioner, 33 T.C. 1071, 1072 (1960).   Accordingly, we

sustain respondent's determination on this issue.

     To reflect the foregoing and concessions of the parties,


                                        Decision will be entered

                                   under Rule 155.
