                       T.C. Memo. 1997-508



                     UNITED STATES TAX COURT



       DONALD J. AND LILLIAN JOY MIRAVALLE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10686-94.                  Filed November 12, 1997.



     Donald J. Miravalle and Lillian Joy Miravalle, pro se.

     Howard P. Levine, for respondent.



                          MEMORANDUM OPINION

     TANNENWALD, Judge:     Respondent determined deficiencies in

and additions to petitioners' Federal income taxes as follows:
                                  - 2 -

Petitioner Donald J. Miravalle

                                         Additions to Tax Under
    Tax Year         Deficiency       Sec. 6653(b)      Sec. 6654
         1982          $12,402              $6,201
                                            1
                                                               --
         1983           74,586              37,293
                                            1
                                                            $10,009
     1
          Plus 50 percent of the interest due on the deficiency.

Petitioner Lillian Joy Miravalle

                                             Additions to Tax Under
    Tax Year         Deficiency           Sec.6653(b)       Sec. 6654
         1982          $12,402              $6,201
                                            1
                                                               --
         1983           74,586              37,293
                                            1
                                                            $10,009

     1
          Plus 50 percent of the interest due on the deficiency.

     The issues for decision are whether petitioners:

     (1)    Had unreported income derived from Schedule C gross

receipts and expenses for the taxable years 1982 and 1983;

     (2)    Had unreported interest income in 1982 and 1983;

     (3)    Are liable for the additions to tax for fraud under

section 6653(b)(1) and (2)1 for 1982 and 1983; and

     (4)    Are liable for the addition to tax under section 6654

for 1983.

     This case was submitted fully stipulated under Rule 122.

Certain facts and exhibits are deemed stipulated by the granting

of respondent's motion pursuant to Rule 91(f).         The agreed facts


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

resulting from that motion, the stipulation of facts, and the

attached exhibits are incorporated herein by this reference.

     Petitioners resided in Largo, Florida, at the time they

filed their petitions in this case.

Background

     Petitioners are husband and wife and have been married since

1966.    In 1977 or 1978, petitioners, who were then about 50 years

of age, moved from St. Louis, Missouri, to Florida.   During at

least the years 1979 through 1986, petitioner Donald J. Miravalle

(Mr. Miravalle) was also known as Don King, and petitioner

Lillian Joy Miravalle (Mrs. Miravalle) used her maiden name, Joy

Smythe, for business activities.2   During the years 1979 through

1986, petitioners were engaged in the manufacture and sale of

marine air conditioners which they conducted through a sole

proprietorship known variously as King-Air, King Marine, or King

Marine Air Conditioning.

     In 1979, petitioners rented industrial space comprising

about 1,260 square feet from Vincent Morelli for the purpose of

building air conditioners for boats.    On November 26, 1982, Mr.

Miravalle, using the alias Donald J. King, entered into a 2-year

lease for approximately 3,500 square feet of space for the period

beginning on January 1, 1983, on behalf of King Marine Air



     2
        Mrs. Miravalle goes by her middle name Joy, rather than
her first name Lillian.
                              - 4 -

Conditioning with Pinellas Industrial Development Corporation

(Pinellas).

     Petitioners began purchasing air conditioning controls,

reversing valves, and solenoid coils from Ranco Controls of Plain

City, Ohio (Ranco), in March of 1981.    They made the following

purchases from Ranco:

                                               Dollar
            Shipping Date                      Amount

            July 29, 1981                  $  941.00
            Aug. 16, 1983                   1,303.61
            Sept. 21, 1983                    585.00
            Sept. 21, 1983                  4,930.00
            Sept. 23, 1983                  2,730.00

In dealing with Ranco, petitioners represented themselves as Joy

Smythe and Don King, president of King Marine.

     Petitioners began purchasing compressors from Tecumseh

Products of Tecumseh, Michigan, in September of 1983.    During

1983, petitioners made the following purchases from Tecumseh

Products:

                                        Dollar
            Date Charged                Amount

            Oct. 21, 1983             $14,978.52
            Nov. 29, 1983               2,130.00
            Dec. 19, 1983                  62.27

     During the years at issue, petitioners regularly placed

advertisements in boating publications.    At least by December of

1983, petitioners advertised having 10 models of marine air

conditioners available.
                               - 5 -

     Bank and Investment Accounts

     On October 12, 1979, a checking account (Account No. 05-

0148-4) was opened in the name of King Air Conditioning at Park

National Bank (Park Bank).   The type of business listed was

marine air conditioning; Donald J. Miravalle was listed as the

owner and signatory.   On April 1, 1980, the signatory was changed

to Lillian Joy Miravalle, who was listed as the then owner.

Petitioners deposited business receipts into this account.

During 1981, petitioners deposited $57,123.20, including $510.31

in transfers from other bank accounts and no currency, into the

King Air Conditioning account at Park Bank.     During 1982,

petitioners deposited $74,386.60, including $5,600.00 in

transfers and $850.00 in currency.     During 1983, there were no

transfers or currency deposits included in the $127,629.88 that

petitioners deposited.

     On April 27, 1982, Mrs. Miravalle opened up an individual

checking account (Account No. 0049051210) at Fortune Federal

Savings and Loan Association (Fortune Federal) using the name Joy

Smythe and the Social Security number XXX-XX-XXXX.3    She listed

her place of employment as retired.     The deposits into this

account included some checks from third parties made out to

"Cash", transfers from the Park Bank account, and transfers from

the Atlantic National Bank checking account described below.


     3
         Mrs. Miravalle's Social Security number is XXX-XX-XXXX.
                               - 6 -

Beginning in December of 1982, Mrs. Miravalle wrote out checks

from the Fortune Federal account to "Cash" and, beginning in

September 1983, to King-Air.   The latter checks were deposited

into the King-Air account at Bank of Indian Rocks described

below.   Fortune Federal began printing the account holder's

Social Security number on the monthly statements with the January

1984 statement.   The account was closed on July 30, 1984, and the

balance transferred to a money market account at Fortune Federal.

      During some portion of the years at issue, Mrs. Miravalle

had a checking account (Account No. 14806653249) at Atlantic

National Bank in the name Lillian Joy Miravalle.   Deposits into

this account during 1983 included transfers from the Park Bank

account and a check in the amount of $2,960.91 made out to cash

with the notation "King Air-AC".   On or about August 23, 1983,

Mrs. Miravalle opened up a money market savings account (Account

No. 54800011355) at Atlantic National Bank in the name Lillian

Joy Miravalle by transferring $30,000 from the Atlantic National

Bank checking account.

     Petitioners maintained two accounts (Account Nos. 104-105-

300 and 104-105-312(business checking)) at Bank of Indian Rocks

in the name of King-Air, which were opened on or about July 21,

1983, by Mrs. Miravalle.   The authorized signatory was Mrs.

Miravalle using the name J. Smythe; the Social Security number
                                     - 7 -

provided was XXX-XX-XXXX.4         J. Smythe was stated as the sole

proprietor of King-Air.      The driver's license number on the

account card includes the name Miravalle in parentheses.

Petitioners deposited business receipts into account 104-105-300

(the Indian Rocks account).        During 1983, they also deposited at

least $25,500 transferred from the Fortune Federal account.

Activity in the Park Bank account declined significantly after

petitioners opened the Indian Rocks account.

     During the years at issue, petitioners made deposits into

their bank accounts totaling the following amounts:

           Bank            Name of Account          1982          1983
    Park Bank           King Air Conditioning    $74,386.60    $127,629.88
    Fortune Federal     Joy Smythe                28,641.60      18,417.98
    Atlantic Natl.      Lillian Joy Miravalle        ---         35,000.00
    (#54800011355)
    Indian Rocks        King-Air                     ---        115,224.57
    Atlantic Natl.      Lillian Joy Miravalle        ---        28,461.41
    (#14806653249)
                                        TOTALS   $103,028.20   $324,733.84

     Respondent has allowed petitioners deductions for business

expenses paid from the Park Bank account during the years 1982

and 1983, totaling $50,783.10 and $62,708.23, respectively.

During 1983, petitioners wrote checks totaling $106,659.95 on the

Indian Rocks account.     Included in these checks were payments to

Ranco of $9,548.61 and to Tecumseh Products of $17,164.52.



     4
         See supra note 3.
                                       - 8 -

Petitioners also paid their monthly rent of $689.06 to Pinellas

from the Indian Rocks account beginning in August 1983.

     Petitioners earned at least the following amounts of

interest on their bank accounts during the years at issue:

              Bank              Name of Account        1982         1983
    Park Bank               King Air Conditioning       ---          ---
    Fortune Federal         Joy Smythe                $613.95     $1,335.69
    (#0049051210)
                                                                    1
    Atlantic Natl.          Lillian Joy Miravalle       ---          825.55
    (#14806653249)
    Indian Rocks            King-Air                    ---          ---
    Atlantic Natl.          Lillian Joy Miravalle       ---          502.72
    (#54800011355)
                                            TOTALS    $613.95     $2,663.96

     1
         This is the interest earned through Nov. 30, 1983.

     During 1984, petitioners had a business account in the name

of DJM Enterprises at Flagship Bank.              Mrs. Miravalle had a

personal account at the same bank in the name of L. J. Miravalle,

Social Security number XXX-XX-XXXX.5

     On December 30, 1983, petitioners opened a joint account at

Merrill Lynch.       William L. Schools (Mr. Schools) was the Merrill

Lynch employee who served as petitioners' financial consultant.

When opening their account, petitioners represented their annual

salary as $100,000 from their business known as King-Air, which

they said they had been operating for 10 years.                 Mrs. Miravalle

told Mr. Schools that petitioners had $400,000 in cash, their



     5
          See supra note 3.
                                 - 9 -

life savings, in a "lock box".    Petitioners bought and sold tax-

free municipal bonds through their account at Merrill Lynch,

investing approximately $10,000 in 1983, $60,000 in 1984, and

$40,000 in 1985.    In addition, during 1984, petitioners purchased

City of Brooksville bonds for $20,277.50 and New Jersey Economic

Development Authority bonds for $41,191.67 through Jay Milton

Newton, Inc.,    which they later transferred to their Merrill

Lynch account.

     Petitioners purchased a 56' sailboat on April 17, 1985, for

$125,000.   They purchased two warehouses on April 29, 1986, for

$372,000.   Petitioners paid for the sailboat and the warehouses

without the use of financing; their Merrill Lynch account served

as the conduit for the funds.    Petitioners sold nearly all of the

bonds in the Merrill Lynch account to help fund the purchase of

the warehouses on April 29, 1986.

     Tax Returns and Audits

     Petitioners did not file income tax returns for the taxable

years 1979 through 1983.    Petitioners filed joint income tax

returns for 1984 through 1986, which they prepared themselves.

Attached to each of the 1984 through 1986 tax returns were

Schedules C (Profit or (Loss) from Business or Profession),

wherein petitioners reported income and expenses on the cash

method of accounting from the manufacture and sale of marine air

conditioners operating under the name of DJM Enterprises.    The
                              - 10 -

Schedule C attached to the 1984 return lists opening inventory as

"First Year 0".

     Respondent's Revenue Agent Ellen Loeb (Ms. Loeb) conducted

an audit of petitioners' 1985 tax return.   Petitioners told Ms.

Loeb that they had been retired since 1976, and then started

their current business in 1984.   In response to Ms. Loeb's

inquiry about their 1985 bank accounts, petitioners failed to

disclose the King-Air account at Indian Rocks.

     Previous Litigation

     Petitioners were convicted on December 14, 1990, of

attempting to evade their 1984 through 1986 income tax

liabilities in violation of section 7201 and of conspiracy

beginning in 1983 and continuing thereafter to defraud the United

States in violation of 18 U.S.C. sec. 371 (1994) by attempting to

evade and defeat the income tax they owed in violation of section

7201.   This Court issued its opinion in the civil case for those

taxable years in Miravalle v. Commissioner, T.C. Memo. 1994-49.

     Respondent's Determination

     Using information contained in petitioners' bank records,

respondent determined the following with respect to petitioners'

taxable income for the years currently at issue:
                                 - 11 -

                                  1982                   1983
Schedule   C Receipts           $86,559               $224,331
Schedule   C Expenses           (50,783)               (62,708)
Interest   Income                   610                  2,927
Personal   Exemption             (1,000)                (1,000)


Total Adjustments               $35,386               $163,550
Self-employment Tax               3,029                  3,338



     In determining petitioners' Schedule C receipts, respondent

allowed for nontaxable transfers in the amounts of $15,600 and

$102,500 for 1982 and 1983, respectively, and other miscellaneous

nontaxable items.    When determining 1983 expenses, respondent

analyzed items paid from the Park Bank account only and failed to

consider any items paid from the Indian Rocks account.

Respondent attributed 100 percent of the income and expenses as

listed above to each petitioner, and treated each as married,

filing separately.      On March 23, 1994, respondent issued two

notices of deficiency for the years at issue, one to each

petitioner.

Discussion

     Schedule C Gross Receipts and Expenses

     Bank deposits are prima facie evidence of income.         DiLeo v.

Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir.

1992) and cases cited therein.      When using the bank deposits

method of reconstructing income, respondent must take into

account any nontaxable source of income and deductible expense of

which respondent has knowledge.      Id.   In respect of the
                                - 12 -

underlying deficiencies, petitioners have the burden of proving

respondent's determination incorrect.    Rule 142(a); DiLeo v.

Commissioner, 96 T.C. at 869.

     Petitioners' position is that they were not "in business"

during the years at issue, that they were preparing in late 1983

for their opening on January 1, 1984, and that, although they may

have sold a few experimental models, they certainly did not make

a profit.   They also assert that some of the deposits were

reimbursements for items which they purchased at a discount for

others.

     In 1979, petitioners opened their business bank account at

Park Bank and rented space to build marine air conditioners.

They advertised regularly during 1982 and 1983.   During 1981,

1982, and 1983, they made regular deposits of business receipts.

We find they were engaged in business activities during the years

at issue.   In calculating petitioners' business receipts,

respondent has allowed for nontaxable transfers between

petitioners' bank accounts.   Petitioners have presented no

evidence to counter respondent's determinations as to the amounts

of petitioners' receipts.   Thus, we sustain those determinations,

except that, since petitioners jointly operated their business

but are considered to be filing their tax returns separately,6

     6
        Since petitioners failed to file any tax returns for the
years at issue and have filed their petition with the Court, they
are precluded from being treated on the basis of joint return
                                                   (continued...)
                               - 13 -

only half of the receipts should be attributed to each

petitioner.

     Respondent disallowed checks to Vincent Morelli,

petitioners' landlord, totaling $951 ($317/mo.) in January,

February, and March of 1982.    In later months, a slightly higher

amount was paid to VJ King Enterprises, which respondent did

allow.   We conclude that petitioners are entitled to deduct the

$951.00 in addition to the amount of $50,783.10 allowed in

respondent's determination, or a total of $51,734.10 for 1982.

     In determining petitioners' 1983 expenses, respondent did

not allow any expenditures from the Indian Rocks account, even

though, after opening that account in July, petitioners rarely

used the Park Bank account.    During 1983, petitioners paid

$9,548.61 to Ranco, $17,164.52 to Tecumseh Products, and

$2,756.24 (4 months x $689.06) in rent from the Indian Rocks

account.   It is highly likely other allowable business expenses

were among the $106,659.95 paid from the Indian Rocks account

during 1983, but petitioners have not substantiated the purposes

of any further checks from that account.    We have added the

foregoing three amounts, totaling $29,469.37, to the $62,709.23

of expenses allowed by respondent, or a total of $92,178.60 for




     6
      (...continued)
status. Thompson v. Commissioner, 78 T.C. 558, 561 (1982);
Roberts v. Commissioner, T.C. Memo. 1996-346.
                               - 14 -

1983.    As with the receipts, one-half of the expenses for each

year are allocated to each petitioner.

     Interest Income

     Petitioners argue that because no tax is otherwise owed and

thus no returns are required, the matter of interest income is

immaterial.    Petitioners have presented no other arguments as to

why the interest is not included in gross income under section

61(a)(4).    The record generally supports respondent's

determinations of the amounts of interest income received during

the years at issue.7   Although the underlying bank accounts were

in Mrs. Miravalle's name, because the funds deposited therein

were the proceeds of petitioners' business, we find that, as with

the business income, petitioners share the interest income.

Thus, we allocated one-half to each petitioner.

     Additions to Tax For Fraud

     For the years at issue, section 6653(b) imposes an addition

to tax of 50 percent of the underpayment of tax if any part of

the underpayment is due to fraud, plus an amount equal to 50

percent of the interest on the portion of the underpayment

attributable to fraud.    Respondent has the burden of proving

fraud by clear and convincing evidence.    Sec. 7454(a); Rule 142;


     7
        Petitioners' bank statements establish $2,663.96 of the
$2,927.00 which respondent has determined in interest income for
1983. The difference appears to be the Dec. 1983 interest on the
Atlantic Natl. money market account, which monthly statement is
not in the record.
                                - 15 -

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

affg. T.C. Memo. 1985-63.   For the addition to tax under section

6653(b)(1) to apply, respondent must establish for each year that

(1) the taxpayer has underpaid the taxes and (2) some part of the

underpayment is due to fraud.    Sec. 6653(b)(1); DiLeo v.

Commissioner, 96 T.C. at 873.    For the addition to tax under

section 6653(b)(2) to apply, respondent must establish the

portion of the underpayment attributable to fraud.      Sec.

6653(b)(2); DiLeo v. Commissioner, supra at 873.

     To prove an underpayment of tax, respondent cannot rely on

the taxpayer's failure to satisfy his or her burden of proof as

to the underlying deficiency.     Parks v. Commissioner, 94 T.C.

654, 661 (1990).   When allegations of fraud are intertwined with

unreported and indirectly reconstructed income, respondent can

prove an underpayment by (1) proving a likely source of the

unreported income or (2) where the taxpayer alleges a nontaxable

source, by disproving the alleged nontaxable source.        DiLeo v.

Commissioner, supra at 873-874.

     Based on the facts herein, respondent has shown that

petitioners were engaged in a business activity during the years

at issue and failed to report their gross receipts.      Unreported

receipts alone, however, do not establish an underpayment of tax,

unless such unreported receipts are greater than the cost of

goods sold plus deductible expenses.      See Franklin v.

Commissioner, T.C. Memo. 1993-184.       Petitioners have contended
                               - 16 -

throughout these proceedings that they have no tax liability for

the years at issue because their business made no profit during

these years.    Where respondent has established unreported income

and the taxpayer claims that there are offsetting deductions, the

taxpayer has the burden to come forward with evidence as to the

claimed deductions, in which event the burden of proof to

disprove the deductions then rests with respondent.     See id. and

the cases discussed therein. Petitioners have not produced any

evidence of deductions in excess of the amounts allowed by

respondent, as previously increased.     See supra pp. 12-13.

       A comparison of the receipts and expenses for 1982 clearly

establishes an amount of business and interest income which would

require the filing of a tax return.     Accordingly, we find that

respondent has established some underpayment of tax for 1982.

       For 1983, respondent has not addressed the deductibility of

the $106,659.95 paid from the Indian Rocks account.     Nonetheless,

even if all $106,659.95 were deductible, petitioners still would

have net business income in 1983, plus interest income.     Thus, we

find that respondent has established some underpayment of tax for

1983.

       To establish fraud, respondent must show that the taxpayer

intended to evade a tax believed to be owing by conduct intended

to conceal, mislead, or otherwise prevent the collection of such

tax.    Korecky v. Commissioner, supra; DiLeo v. Commissioner,

supra; Parks v. Commissioner, 94 T.C. at 660-661.     Fraud is never
                                - 17 -

presumed.     Cochrane v. Commissioner, 107 T.C. 18, 28 (1996).

Since direct proof of a taxpayer's intent is rarely available,

fraud may be established by circumstantial evidence and

reasonable inferences drawn from such evidence.     Korecky v.

Commissioner, supra; Cochrane v. Commissioner, supra.     The

taxpayer's entire course of conduct may establish the requisite

fraudulent intent.     Bagby v. Commissioner, 102 T.C. 596, 609

(1994).     Mere failure to file tax returns is not sufficient to

establish fraud.     Kotmair v. Commissioner, 86 T.C. 1253, 1261

(1986).

     Respondent points to the purchase of substantial assets as

one indicator of petitioners' fraud.     Respondent also alleges

that petitioners chose tax-free bonds as their investment vehicle

so as to avoid the reporting of taxable interest.     However, only

$10,000 of bonds were purchased during the years at issue and

that purchase occurred on December 30, 1983.     Petitioners

purchased the sailboat and the warehouses in 1985 and 1986,

respectively.     Respondent has not shown a connection between the

unreported income for the years 1982 and 1983 and these assets.

The latter purchases and the convictions for criminal tax evasion

for the years 1984 through 1986 do not shed any light on

petitioners' intent with respect to the years at issue in the

instant case.     The use of one's maiden name alone is not

indicative of fraud, particularly where, as here, Mrs. Miravalle

used her maiden name for business purposes.
                              - 18 -

     The account opened at Fortune Federal in 1982 with one

incorrect digit in the Social Security number is just as likely

to have been a typographical error as intentional.     However,

during 1983, petitioners opened the Indian Rocks account under

the Social Security number ending with -3540.     The repositioning

of all of the last four digits of the Social Security number

cannot be ascribed to typographical error, especially since Mrs.

Miravalle's personal account at Flagship Bank had the same

erroneous Social Security number.    During 1983, petitioners

withdrew funds from the Park Bank account, deposited them into

their personal accounts, and after July 21, 1983, transferred

funds to the Indian Rocks account.     Petitioners then used the

Indian Rocks account as their primary business account instead of

the Park Bank account.   Petitioners' use of the Indian Rocks

account is a clear indication of petitioners' intent to conceal

their business income.

     Finally, we note that petitioners were convicted under 18

U.S.C. 371 (1994) of conspiracy commencing in 1983 to defraud the

United States by evading the tax due from them in violation of

section 7201.   This constitutes evidence of fraud for 1983.

     Based on the foregoing facts and the record as a whole, we

find that respondent has established that some portion of the

underpayment for 1983 was due to fraud.     For 1982, while

petitioners failed to file a return, we find insufficient

evidence of other badges of fraud.     Therefore, petitioners are
                               - 19 -

liable for the addition to tax for fraud under section 6653(b)(1)

for the year 1983 only.

     For purposes of the section 6653(b)(2) addition to tax,

respondent must prove those portions of the underpayments that

are due to fraud.    We find that the underpayment of tax on

petitioners' business income for 1983 is attributable to fraud.

However, the reason petitioners are not entitled to deduct the

1983 payments from the Indian Rocks accounts beyond the

$29,469.37 discussed supra, is because of the lack of evidence

from which to determine business purpose.    Petitioners' failure

to meet the burden of proof is insufficient to establish fraud as

to this amount.    Thus, for the purposes of the addition under

section 6653(b)(2) only, petitioners' business income for 1983

should be offset by the remaining $77,190.58 ($106,659.95 less

$29,469.37).    Cf. Van Vorst v. Commissioner, T.C. Memo. 1993-353.

     With respect to petitioners' unreported interest income, we

conclude that respondent has not provided sufficient evidence to

conclude that the addition to tax under section 6653(b)(2) should

attach.

     Addition to Tax under Section 6654

     Section 6654 imposes an addition to tax for failure to pay

estimated tax.    Petitioners' only argument which respect to this

addition to tax for 19838 is that, since there is no underlying


     8
          Respondent did not seek this addition to tax for 1982.
                             - 20 -

deficiency, there can be no addition.   As petitioners have not

overcome the burden of showing there is no deficiency, we hold

they are liable for this addition to tax.

     In keeping with the above holdings,

                                           Decision will be entered

                                   under Rule 155.
