                          T.C. Memo. 1995-609



                      UNITED STATES TAX COURT



                    ERIC WYNN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16914-91.            Filed December 27, 1995.



     Eric Wynn, pro se.

     Frank A. Racaniello and William F. Halley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined the following

deficiencies in and additions to petitioner's Federal income tax:
                                  - 2 -

                                          Additions to Tax
                          Sec.               Sec.               Sec.
Year       Deficiency   6653(b)(1)        6653(b)(2)            6661

1983        $79,722     $39,861               1              $19,931
1984         39,785      19,982               1                9,946
       1
       The addition to tax under sec. 6653(b)(2) is 50 percent of
the interest payable under sec. 6601 with respect to the portion
of the underpayment that is attributable 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.

       Petitioner has conceded an increased deficiency of $27,199

for 1983, with corresponding additions to tax for fraud under

section 6653(b)(1) and (2) and for substantial understatement

under section 6661.

       After other concessions by the parties, the following issues

remain for decision:    (1) Whether and in what amount petitioner

is liable for the fraud additions under section 6653(b)(1) and

(2) for 1983; (2) whether and in what amount petitioner is liable

for the fraud additions under section 6653(b)(1) and (2) for

1984; (3) whether and in what amounts petitioner had unreported

embezzlement income for the years in issue and unreported

consulting income for 1984; (4) in the alternative to the fraud

additions, whether petitioner is liable for additions to tax for

negligence under section 6653(a)(1) and (2) for 1983 and 1984;

(5) whether petitioner is liable for the addition to tax for

substantial understatement under section 6661 for 1983 and 1984;
                                - 3 -

and (6) in the alternative to the fraud additions for 1984,

whether petitioner is also liable for an addition to tax for late

filing under section 6651(a).

     We hold that:   (1) For 1983, petitioner is collaterally

estopped from denying that he committed fraud and is liable for

the section 6653(b)(1) fraud addition because of his guilty plea

to criminal tax fraud, but that petitioner is not liable for the

section 6653(b)(2) fraud addition, except with respect to two

items as to which he both pleaded guilty to criminal tax fraud

and has otherwise conceded; (2) for 1984, petitioner is not

liable for any section 6653(b)(1) or (2) fraud additions; (3)

respondent's deficiency determinations are upheld for both 1983

and 1984; (4) petitioner is liable for additions to tax for

negligence for 1984; (5) petitioner is liable for additions to

tax for substantial understatement for 1983 and 1984; and (6)

petitioner is liable for an addition to tax for late filing for

1984.



                         FINDINGS OF FACT

     The parties have stipulated some of the facts, and the

stipulations of fact and attached exhibits are incorporated in

this opinion.   Petitioner resided in Bradford, Pennsylvania, when

he filed his petition.

     During the years in issue petitioner was the president of

Renaissance Enterprises, Inc. (Renaissance).   Renaissance was
                              - 4 -

incorporated by petitioner under Delaware law in 1983 with the

ostensible primary purpose, as stated in its original certificate

of incorporation, of manufacturing and selling jewelry.

Renaissance had an underwritten initial public offering of common

stock that raised $750,000, which was placed in escrow.

Petitioner signed the joint authorization with the president of

the underwriter to pay the net proceeds of the offering,

amounting to $636,631, into a Renaissance bank account.

     In 1988, a Federal grand jury returned a 12-count indictment

against petitioner, Mrs. Wynn, and Francis S. LaMagra, alleging,

among other things, criminal tax evasion under section 7201 for

1983 and 1984 and interstate transportation of stolen property

under 18 U.S.C. section 2314 (1988).   Petitioner pleaded guilty

to tax evasion under section 7201 with respect to his personal

income tax return for 1983, and to interstate transportation of

stolen property under 18 U.S.C. section 2314 (1988).   Petitioner,

in his guilty plea, admitted that he had omitted $85,000 in

taxable income for 1983 with intent to evade tax.   The parties

have stipulated that the income petitioner failed to report on

his 1983 tax return included the following corporate funds of

Renaissance that petitioner converted to his personal use:    (1)

$54,400 that petitioner transferred by wire from Renaissance to

Major Findings, Inc., on September 22, 1983, resulting in the

increased deficiency and additions that petitioner has conceded;

and (2) a check dated December 16, 1983, drawn on Renaissance's
                                  - 5 -

checking account made payable to Joe Bass in the amount of

$31,115.      Neither of those adjustments is at issue in this case.

         Four sets of transactions remain in issue:   (A) Funds paid

into a bank account in the name of "Ron Gelfman" in 1983; (B)

Renaissance's purchase of jewelry items from Faleck & Margolies,

Inc., in 1983 and 1984; (C) Renaissance checks made payable to

Weinstock & Yeager in 1983 and 1984; and (D) payments by a

brokerage house, at petitioner's request, into a bank account in

the name of "Joe Bass" in 1984.

A.       Ron Gelfman

         On September 29, 1983, a person not identified in the record

opened a checking account at the Union City branch of the Trust

Company of New Jersey (the Trust Co.), in the name of Ron Gelfman

(Gelfman account).1     On October 31, 1983, a Renaissance check in

the amount of $68,200 was deposited in the Gelfman account.      The

parties have stipulated that Renaissance's corporate records

contain what purports to be a receipt from Ron Gelfman

Associates, dated October 28, 1985,2 reflecting the sale of 14K

"gold findings" to Renaissance in the amount of $68,200.




     1
       The record is replete with references to the names Ron or
Ronnie Gelfman, Gelman, and Geleman. These are all different
spellings of the same name, and for simplicity we will use
Gelfman to represent all three spellings.
     2
       Neither party addressed the fact that the receipt was
dated 2 years after the check. This apparent discrepancy does
not affect our decision.
                               - 6 -

     On November 2, 1983, at petitioner's request, Martin Klein,

an employee of Faleck & Margolies, Inc. (F&M), a jewelry

manufacturer selling at both wholesale and retail, issued an F&M

check for $10,755 to Ron Gelfman.      The check bears the printed

statement:   "This check is delivered for payment on the following

accounts".   Beneath this statement is the handwritten notation

"Gold purchase".   This check was deposited in the Gelfman account

at the Trust Co.   Mr. Klein has never met a Ron Gelfman and only

made the check payable to him on petitioner's request.

     On December 16, 1983, another Renaissance check, in the

amount of $45,000, was deposited in the Gelfman account.      The

parties have stipulated that Renaissance's corporate records

contain what purports to be a receipt from Ron Gelfman

Associates, dated December 16, 1983, reflecting the sale of 14K

gold findings to Renaissance at a price of $45,000.

     Petitioner opened a brokerage account at Walter Capital

Corp., a securities brokerage firm, in the name of Ron Gelfman.

Petitioner routinely traded in and for this account.      Walter

Capital allowed petitioner to use its facilities to trade in

discretionary accounts because it had developed a relationship

with petitioner in which petitioner brought in brokerage business

rather than just acting as a client.      This relationship enabled

petitioner to open and trade in discretionary accounts for

others.
                                    - 7 -

         Ron Gelfman Associates is not known in the local jewelry

industry, and the name is not in the IRS computer database for

the greater New York area by either name or employee

identification number (EIN).        The Social Security number for Ron

Gelfman on the Trust Co. signature card has never been used on

any Federal tax return filed in the New York/New Jersey

metropolitan area.3

B.       Faleck & Margolies, Inc.

         F&M operated a retail jewelry division known as "Designs by

Maurice" during the years in question.       Occasionally, Maurice

Goldstein, the employee of F&M who operated "Designs by Maurice",

would write receipts on F&M invoices for its retail sales of

personal jewelry.

         Petitioner had a close relationship with F&M.   Petitioner,

prior to organizing Renaissance, worked with F&M as a contractor,

setting and manufacturing jewelry for F&M.       F&M also bought

jewelry items from petitioner.       After forming Renaissance,

petitioner continued to do business with F&M, purchasing jewelry

items from F&M until 1985.




     3
       A Ron Gelfman testified at the criminal trial of Francis
LaMagra. Mr. Gelfman, who lived on the West Coast at the time of
his testimony, testified that he did not have a bank account at
the Trust Co. and that the Social Security number on the account
was not his. He also testified that he was acquainted with
petitioner from high school days, but that he had not seen or
heard from petitioner in over 15 years.
                                - 8 -

     On or about December 21, 1983, a check in the amount of

$18,077 made payable to F&M was drawn on the Renaissance bank

account.   On or about December 21, 1983, a handwritten F&M

receipt dated January 5, 1984, was prepared reflecting the sale

of "assorted jewelry items" in the amount of $18,077 and showing

Renaissance as the purchaser.    "Assorted jewelry items" is a term

sometimes used by F&M to describe retail personal jewelry items

and one-of-a-kind pieces.    The parties have stipulated that

Renaissance's corporate records contain what purports to be a

duplicate receipt, dated December 12, 1983, reflecting the

purchase of $18,077 worth of 14K gold watch cases.    At the time,

F&M did not sell 14K gold watch cases, and the invoice form is

not the usual form used by F&M.

     On or about February 11, 1984, a check made payable to F&M

in the amount of $6,750 was drawn on the Renaissance bank

account.   On or about February 11, 1984, an F&M receipt was

prepared reflecting the sale of "assorted jewelry items" in the

amount of $6,750 and showing Renaissance as the purchaser.      This

receipt has the same form and handwriting as the handwritten

receipt issued in January.    Both receipts are the type of invoice

form usually used by F&M.    As with the December 1983 transaction,

Renaissance's corporate records contain a duplicate receipt dated

February 1, 1984, for $6,750, for 14K "gold findings".    Although

F&M sold gold findings, this invoice form is not the usual form

used by F&M.
                                - 9 -

C.   Weinstock & Yeager

     Weinstock & Yeager (W&Y) is a jewelry firm located in the

Manhattan jewelry district.   The parties have stipulated that the

corporate records of Renaissance contain what purports to be a

receipt from W&Y, dated September 13, 1983, reflecting the sale

of 14K gold watch cases to Renaissance in the amount of $1,650.

The parties have stipulated that the corporate records of

Renaissance contain what purports to be a receipt from W&Y, dated

April 15, 1984, reflecting the sale of 14K gold findings to

Renaissance in the amount of $7,050.

D.   Joe Bass

     On September 14, 1983, petitioner brought in a new checking

account to the Weehawken branch of the Trust Co. for a Joe Bass.

John Schlitt, the branch manager of the Trust Co. who opened the

account, does not recall ever having met anyone named Joe Bass.

As with Ron Gelfman, the Social Security number for Joe Bass on

the Trust Co. signature card has never been used on any Federal

tax return filed in the New York/New Jersey metropolitan area.

     In addition to trading securities in accounts at Walter

Capital, see supra p. 6, petitioner did consulting and referral

work for Walter Capital.   On March 14, 1984, the manager of

Walter Capital, Frank Grillo, drew a check on Walter Capital's

checking account for $25,000.   At petitioner's request, Mr.

Grillo made the check payable to Joe Bass.   The check was

deposited in the Joe Bass account at the Trust Co.   On April 2,
                               - 10 -

1984, Mr. Grillo drew another check on Walter Capital's checking

account to Joe Bass, also at petitioner's request.    This check,

for $30,000, was deposited in the Joe Bass account at the Trust

Co.   Mr. Grillo never met anyone named Joe Bass, and no one named

Joe Bass ever worked for Walter Capital.    The Walter Capital

checks to Joe Bass were not for services rendered directly by

anyone named Joe Bass.

                              OPINION

      Respondent alleges that petitioner embezzled funds from

Renaissance by drawing Renaissance checks (and causing F&M to

issue a check) to a bank account in the name of Ron Gelfman and

failed to report these funds as income on his 1983 Federal income

tax returns.   Respondent also alleges that petitioner embezzled

Renaissance funds by drawing Renaissance checks to W&Y and to F&M

in payment for personal jewelry.   Finally, respondent claims that

petitioner failed to include fee income that Walter Capital paid

to Joe Bass.   The following schedule lists the amounts still in

issue:

                                             1983          1984

Renaissance to Ron Gelfman                 $68,200          ---
     "       " "     "                      45,000          ---
F&M to Ron Gelfman                          10,755          ---
Renaissance to F&M                          18,077        $6,750
Renaissance to W&Y                           1,650         7,050
Walter Capital payments to Joe Bass           ---         30,000
  "       "        "     "   " "              ---         25,000
  Total:                                   143,682        68,800
                                - 11 -

     Respondent has the burden of proof, by clear and convincing

evidence, on the fraud issue; petitioner has the burden of proof,

by a preponderance of the evidence, on the deficiencies and non-

fraud additions.    The sparse record of events described in our

findings of fact does not compel a holding in favor of either

party's contentions.    Cf. Ishijima v. Commissioner, T.C. Memo.

1994-353.    For the reasons described below, we find that

respondent has not proven fraud by clear and convincing evidence

beyond what necessarily flows from petitioner's guilty plea in

the criminal case and his concessions in the case at hand with

respect to the year 1983.    Because petitioner offered no proof,

he has not borne his burdens of disproving the deficiencies and

the nonfraud additions.

Issue 1:    1983--Section 6653(b)(1) and (2)

     A. Section 6653(b)(1).    Section 6653(b)(1) imposes an

addition to tax of 50 percent of the underpayment of tax required

to be shown on the return if any part of the underpayment is due

to fraud.    Respondent bears the burden of proving by clear and

convincing evidence that (1) petitioner has an underpayment for

the taxable year, and (2) that some part of the underpayment is

due to fraud.    Sec. 7454(a); Rule 142(b); DiLeo v. Commissioner,

96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Stone

v. Commissioner, 56 T.C. 213, 220 (1971).

     Conviction of criminal tax evasion under section 7201

collaterally estops a taxpayer from denying that the fraud
                                 - 12 -

addition under section 6653(b)(1) applies to the determined

deficiency.     Gray v. Commissioner, 708 F.2d 243 (6th Cir. 1983),

affg. T.C. Memo. 1981-1; Plunkett v. Commissioner, 465 F.2d 299,

305 (7th Cir. 1972), affg. T.C. Memo. 1970-274; Arctic Ice Cream

Co. v. Commissioner, 43 T.C. 68 (1964); Harrison v. Commissioner,

T.C. Memo. 1993-587; Mazzocchi Bus Co. v. Commissioner, T.C.

Memo. 1993-43, affd. 14 F.3d 923 (3d Cir. 1994).     The elements of

criminal tax evasion under section 7201 are similar to the

elements of civil tax fraud under section 6653(b), and a guilty

plea is equivalent to a conviction after trial for the purpose of

collateral estoppel.     Gray v. Commissioner, supra at 246; Arctic

Ice Cream Co. v. Commissioner, supra at 75.

     In 1989, petitioner pleaded guilty to, and was convicted of,

criminal tax evasion for 1983 under section 7201.     Therefore,

petitioner is collaterally estopped to deny fraud for 1983, and

petitioner is liable for the section 6653(b)(1) addition to tax

for the entire deficiency for that year.

     B. Section 6653(b)(2).     Section 6653(b)(2) imposes an

addition to tax of 50 percent of the interest payable under

section 6601 on the part of the underpayment due to fraud.      As

with section 6653(b)(1), respondent bears the burden of proving,

by clear and convincing evidence, that petitioner has an

underpayment for the taxable year and that the underpayment is

due to fraud.    Sec. 7454(a); Rule 142(b); DiLeo v. Commissioner,

supra; Stone v. Commissioner, supra.      However, the interest-
                                    - 13 -

sensitive addition of section 6653(b)(2) is imposed only on the

portion of the deficiency shown by respondent to be due to fraud.

Therefore, petitioner is collaterally estopped from denying the

interest-sensitive fraud addition only with respect to the

portion of the 1983 deficiency attributable to items that he

admitted in his guilty plea in the criminal trial and conceded in

this case.        For any remaining portion of the deficiency,

respondent must prove:        (1) That there is an underpayment of tax

and (2) what part of the underpayment is due to fraud.         Sec.

7454(a); Rule 142(b); DiLeo v. Commissioner, supra at 873; Stone

v. Commissioner, supra.4

           In order to prove an underpayment, the Commissioner cannot

rely on the presumption of correctness of the statutory notice

for deficiency purposes.        See DiLeo v. Commissioner, supra at

873.        Fraud is never presumed; even if a taxpayer's testimony is

incredible, we may still be left with no more than a suspicion of

fraud.        Rinehart v. Commissioner, T.C. Memo. 1983-184.

Suspicion, even a strong suspicion, of fraud will not sustain the

Commissioner's determination.5       See Drieborg v. Commissioner, 225


       The Court of Appeals for the Third Circuit has stated that
       4

evidence must be so "'clear, direct, weighty and convincing as to
enable the * * * [fact finder] to come to a clear conviction,
without hesitancy, of the truth of the precise facts in issue'".
United States Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306, 309
(3d Cir. 1985), quoting In re Estate of Fickert, 337 A.2d 592,
594 (Pa. 1975).

       See Balter, Tax Fraud and Evasion, par. 8.03[9][a], at 8-
       5

71 (1983 & 1994 Supp.).
                                 - 14 -

F.2d 216, 219-220 (6th. Cir. 1955), affg. in part, revg. and

remanding in part a Memorandum Opinion of this Court; Axelrod v.

Commissioner, T.C. Memo. 1982-92, affd. without published opinion

711 F.2d 1062 (9th Cir. 1983).

     Most of the underpayment determined by respondent for 1983

arises from alleged embezzlement income.   Embezzled funds, once

reduced to a taxpayer's complete dominion and control, are income

to the taxpayer.   James v. United States, 366 U.S. 213 (1961).

However, as we have said:

          The Supreme Court's decision in James v. United
     States, supra, firmly established the principle that
     embezzled funds are income to the embezzler. That
     decision, however, does not stand for the proposition
     that all misappropriated funds are gross income of the
     person who illegally misapplied the funds. The
     decision necessarily confines taxation of an embezzler
     to circumstances where the embezzler receives a
     sufficiently cognizable benefit under the normal
     principles of income taxation.

     The Court referred to its oft-quoted language
     describing the breadth of Congress' intent regarding
     the statutory definition of gross income: all
     "'accessions to wealth, clearly realized, and over
     which the taxpayers have complete dominion and
     control'." James v. United States, supra at 219
     (quoting Commissioner v. Glenshaw Glass Co., 348 U.S.
     426, 431 (1955)). The Court refined this definition by
     noting that such gain exists when the "recipient has
     such control over it that, as a practical matter, he
     derives readily realizable economic value from it."
     James v. United States, supra at 219 (quoting Rutkin v.
     United States, 343 U.S. 130, 137 (1952)). [Hobson v.
     Commissioner, T.C. Memo. 1992-312.]

Jewelry Purchased From F&M

     Respondent has not persuaded us by proffering clear and

convincing evidence that the Renaissance payment to F&M was not
                               - 15 -

for corporate purposes of Renaissance.     Respondent's only witness

to this transaction was Mr. Klein.      Mr. Klein testified that the

"assorted jewelry items" on the F&M receipts probably referred to

personal jewelry items; i.e., one-of-a-kind creations.     He also

testified that the receipt dated December 12, 1983, listing the

purchase as "14K gold watch cases" was not the usual type of

invoice form used by F&M and that F&M did not sell watch cases.

     This testimony, without more, is not clear and convincing

evidence of diversion of corporate funds by petitioner.     Even if

the payment was for personal jewelry items, petitioner contends

that they were business gifts on behalf of Renaissance.     Mr.

Klein testified that it is common practice in the jewelry

industry to give personal jewelry items as business gifts and

that petitioner sometimes picked up jewelry items for other

people.   If the items were Renaissance business gifts, then the

corporate funds used to pay for them were not diverted for

noncorporate purposes, and petitioner would have no embezzlement

income with respect to them.

     One way to prove that the payment was not for corporate

purposes is to show that Renaissance received no value in return

for the payment.   However, respondent presented no evidence to

show this.   Another way to show that petitioner diverted

corporate funds for noncorporate purposes is to show that

Renaissance public shareholders took legal action against him for

the misappropriation.   However, respondent also offered no
                               - 16 -

evidence that any outside shareholder brought legal action

against petitioner for the F&M payment.    There is an indication

in the record that the SEC took some action against petitioner,

but there is no evidence of why it did or the outcome of the

proceeding.   Respondent has not proven, by clear and convincing

evidence, that petitioner diverted the F&M payment from

Renaissance for noncorporate purposes.    In addition, respondent

has offered no proof that the jewelry items gave petitioner any

economic benefit or accession to wealth.   Respondent offered no

testimony that petitioner later sold these items or even that he

or his wife ever received or possessed any of the items.

Respondent also offered no evidence that petitioner ever gave any

of these items as personal gifts on his own behalf.   See Estate

of Geiger v. Commissioner, 352 F.2d 221, 231 (8th Cir 1965),

affg. T.C. Memo. 1964-153 (holding that gifts of embezzled funds

evidenced sufficient control to establish an accession to wealth

and taxable income to the embezzling donor).   Although we suspect

that petitioner may have acquired control of these items and

appropriated them to his own use, our suspicion, without more, is

no substitute for clear and convincing evidence.   Respondent has

failed to carry her burden of proving that the jewelry items

purchased from F&M came under petitioner's control so as to

create income to him that resulted in an underpayment of tax.
                                - 17 -

W&Y Payment

     We are satisfied that W&Y is a legitimate firm in the

jewelry business.    Respondent offered no evidence that the

Renaissance payment to W&Y was not for legitimate corporate

purchases.    Nor did respondent offer evidence that the amounts

paid to W&Y or the items purchased from W&Y came under

petitioner's control.    Respondent has not proven by clear and

convincing evidence any underpayment of tax resulting from the

W&Y payment.

Payments to Ron Gelfman

     Respondent has also failed to prove an underpayment arising

from the payments into the Ron Gelfman checking account at the

Trust Co.    There is no evidence, much less clear and convincing

evidence, that these payments were for noncorporate purposes.

Renaissance's corporate records contain receipts from Ron Gelfman

Associates, showing the payments to be for business purchases.

Respondent presented no contrary evidence that these were not

actual Renaissance purchases.    Respondent never showed that

Renaissance did not receive value in exchange for the payments.

The facts that the Social Security number on the Gelfman bank

account was not in the Internal Revenue Service computer data

base for the New York metropolitan area and that Ron Gelfman

Associates is not known in the jewelry business may raise

suspicions that someone diverted Renaissance funds for

noncorporate purposes.    These facts, however, without more, are
                                - 18 -

not clear and convincing evidence that Renaissance funds were

actually so diverted by petitioner.

     Moreover, there is no convincing evidence that petitioner

received any accession to wealth from the funds that Renaissance

deposited in the Ron Gelfman bank account.    Respondent has not

proven that petitioner controlled the Gelfman bank account.     Cf.

Beasley v. Commissioner, T.C. Memo. 1989-173 (holding that

corporate funds diverted into controlled nominee bank accounts

for noncorporate purposes were income).

     The only evidence linking petitioner with the Gelfman

account is a notation "I.D. by Eric Wynn" on the bottom of a

check with three endorsements by a Ron Gelfman cashed against the

Gelfman account.    This "I.D. by Eric Wynn" does not prove that

petitioner controlled the account or any of the funds deposited

in the Gelfman account.    Respondent's witness, Mr. Schlitt,

testified that when a check is endorsed three times it probably

means that the first endorsement is made outside of the bank, the

second is in front of the teller, and the third is in front of a

bank officer.    Mr. Schlitt also testified that two people would

have been present for the check to have a triple endorsement and

a second identification.    This testimony indicates that someone

signed this check as Ron Gelfman in the presence of a bank teller

and officer.    Although we believe that this person was not the

Ron Gelfman who testified at the criminal trial, it is possible

that the person who signed the checks and the signature card
                               - 19 -

received the funds.   But respondent's proof fails to persuade us

that petitioner was that person or that petitioner actually

received any accession to wealth from the funds.    Respondent has

not proven by clear and convincing evidence an underpayment

resulting from the Ron Gelfman payments.

     The F&M check to Ron Gelfman also does not help respondent's

case.   Mr. Klein testified that he thought the check was for

money that he or F&M owed to petitioner.    Even if that is true,

there is no clear and convincing evidence that the payment

resulted in taxable income to petitioner.    It could have been

repayment on a loan, in which case, even if petitioner received

the money, it would not be taxable income to him.

     Finally, respondent alleges that petitioner's trading in the

Ron Gelfman brokerage account at Walter Capital proves that the

account was a nominee account, and therefore, that the Ron

Gelfman bank account was also a nominee account.    This argument

does not rise to the level of clear and convincing evidence.

Respondent's witness, Mr. Grillo, testified that it could have

been an account for an actual customer over which petitioner had

discretionary trading authority.   Respondent has failed to prove

by clear and convincing evidence that petitioner received the Ron

Gelfman funds, or acquired any accession to wealth that resulted

in an omission of income and an underpayment of tax.

     Respondent has not proven that petitioner had signature

control over the Ron Gelfman bank account.    Similarly, respondent
                                - 20 -

has not proven that petitioner was more than a mere conduit for

someone else or that he ever received any of the funds at issue

and used them for personal purposes.     Nor has respondent

proffered persuasive third-party testimony, as she did in Beasley

v. Commissioner, supra, linking petitioner with the receipt and

use of the diverted corporate funds.     Respondent's evidence in

this case, unlike that in Beasley, does not clearly and

convincingly prove embezzlement income.     Cf. Roberts v.

Commissioner, T.C Memo. 1993-98 (finding fraud from embezzlement

income where taxpayer used corporate funds to build and improve

personal residences); Hobson v. Commissioner, T.C. Memo. 1992-312

(finding embezzlement income where funds were diverted into

taxpayer's own bank accounts); Davis v. Commissioner, T.C. Memo.

1991-333 (finding embezzlement income where taxpayer used

diverted funds to buy horse for daughter, cars for self and

family, and contributed remaining funds to family owned

corporation).

     We need not reach the question of fraudulent intent for 1983

with respect to the unconceded items because respondent has

failed to prove an underpayment for 1983 with respect to any of

those items.    Ishijima v. Commissioner, T.C. Memo. 1994-353.      We

therefore reject respondent's determination of section 6653(b)(2)

additions for 1983, except with respect to the underpayment

arising from petitioner's concession that he received unreported

income during that year.   See supra p. 2.
                                 - 21 -

Issue 2:   1984--Section 6653(b)(1) and (2)

     A. Section 6653(b)(1).   Because there was no conviction or

admission for 1984, respondent must prove fraud in order to

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

See Drieborg v. Commissioner, 225 F.2d at 219-220 (holding that

the Commissioner's proof of fraud for one year will not sustain

the Commissioner's burden for another year).    The F&M and W&Y

transactions are subject to the same analysis for this addition

and year as they are for the 6653(b)(2) addition for 1983.     For

the reasons set out supra pp. 14-16 with respect to 1983, we find

that respondent has failed to carry her burden of proving an

underpayment concerning the F&M and W&Y transactions for 1984.

     The final items for 1984 are the checks that Walter Capital

made to the order of Joe Bass.     These transactions are subject to

traditional analysis used to determine whether there is income:

did petitioner receive the funds so as to have an accession to

wealth, Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955),

or did petitioner earn the fees, Lucas v. Earl, 281 U.S. 111

(1930)?

     Although respondent has presented a stronger case on these

transactions than she did on the alleged embezzlement

transactions, she has failed to prove by clear and convincing

evidence that petitioner received the Walter Capital payments.

Respondent put all her effort at trial into trying to show that

the Joe Bass bank account was petitioner's nominee account.
                                 - 22 -

Respondent's evidence that the Joe Bass account at the Trust

Company was petitioner's nominee account does not rise to the

level of clear and convincing.6     Respondent offered no

handwriting expert to show that the Joe Bass signature was

petitioner's.     Indeed, the Government's handwriting expert

testified at the criminal trial that the comparison of

petitioner's handwriting exemplar with the Joe Bass signature was

inconclusive.     Also, respondent offered no evidence that

petitioner ever withdrew any funds from the Joe Bass account.

        Respondent has also failed to prove by clear and convincing

evidence that the check payments to the order of Joe Bass

represent consulting fees earned by petitioner.     Respondent's

only witness concerning these transactions, Mr. Grillo, could not

remember what, if any, services were performed for these

payments.     However, he also testified that petitioner helped

secure loans for Walter Capital.     Mr. Grillo's equivocal

testimony leaves us unpersuaded that respondent has sustained her

burden.     Mr. Grillo further testified that Walter Capital did

issue a Form 1099 regarding these payments and that it would

indicate the reason for the payments and the person receiving

them.     Mr. Grillo testified that he believed that the Form 1099


    6
       Petitioner did plead guilty in the criminal case, and has
stipulated in this case, to receiving the Renaissance check to
Joe Bass for $31,115 during 1983, and its inclusion in his
income. This does not, however, constitute clear and convincing
proof that other funds paid into the Joe Bass account went to or
were under the control of petitioner.
                                 - 23 -

was included with the records turned over to the U.S. attorney's

office for the criminal trial.     However, respondent has failed to

produce any Form 1099.

     The facts of this case raise the suspicion that petitioner

earned and received fees from Walter Capital that were paid in

the form of checks to the order of Joe Bass.      However,

respondent's reliance on one witness who could not recollect the

events surrounding the payments and her failure to provide any

additional documentary evidence, in the form of the Form 1099,

does not elevate our suspicion to the level of certitude required

by the clear and convincing standard.      Respondent has failed to

persuade us that there is any underpayment with respect to the

Walter Capital checks to the order of Joe Bass.

     We need not reach the question of fraudulent intent for 1984

because respondent has failed to prove an underpayment for 1984.

Because respondent has failed to prove by clear and convincing

evidence that petitioner had an underpayment resulting from the

F&M jewelry purchase, the purchase from W&Y, or the Walter

Capital payments, we find no section 6653(b)(1) addition to tax

for fraud for 1984.

     B. Section 6653(b)(2).   Nor do we uphold a section

6653(b)(2) addition to tax for 1984.      By dint of the foregoing

section 6653(b)(1) analysis, we have concluded that respondent

has not carried her burden of proving by clear and convincing

evidence that there is any underpayment for 1984 that was due to
                                 - 24 -

fraud.     We therefore reject respondent's determination of a

section 6653(b)(2) addition to tax for 1984.

Issue 3(a):     Deficiencies Attributable to Embezzlement Income7

        Respondent's deficiency determinations are presumed to be

correct; petitioner bears the burden of proving by a

preponderance of the evidence that they are incorrect.     Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).

        The evidence proffered by respondent on the underpayments

for fraud purposes was pretty thin gruel; less nourishing to the

point of nonexistence is the case that petitioner presented.

Petitioner failed to carry the burden of overturning the

deficiencies determined by respondent.     Petitioner did not prove

that any of the payments to Ron Gelfman, F&M, or W&Y was for a

corporate purpose of the payor.     There was no proof that any

Renaissance checks to Ron Gelfman or W&Y were supported by any

actual purchases of jewelry or supplies by Renaissance.     The

checks to F&M do reflect actual purchases, but they are purchases

of personal jewelry items, and petitioner did not show what

happened to those items.     Petitioner did not prove that the


    7
       Respondent also determined that petitioner overstated his
itemized deductions for 1984 in the amount of $17,905.
Petitioner presented no evidence at trial on this issue and did
not mention it in his brief. Therefore, petitioner is deemed to
have conceded this issue. In his petition, petitioner argues
that his earlier guilty plea to tax evasion was in full
settlement of all tax liabilities, criminal and civil.
Petitioner has shown no evidence that the plea had any such
effect; we find this contention to be without merit and likewise
conceded because it was not argued at trial.
                                 - 25 -

jewelry items were business gifts.        Petitioner did not provide

any explanation or evidence to show that the preparation of the

duplicate receipts for the F&M transactions did not amount to a

falsification of documents for the purpose of concealing

diversions of corporate funds.     Petitioner has not sustained his

burden of proving that any of the payments in question were not

includable in his gross income.

     Although respondent offered no clear and convincing proof

that the funds or jewelry came under petitioner's control or

created an accession to petitioner's wealth, petitioner offered

no proof to the contrary, which it was his burden to do in order

to overturn respondent's deficiency determinations.        Petitioner

also failed to provide any evidence to show that the F&M payment

to Ron Gelfman was not income to him.        Petitioner has failed to

carry his burden of proof.   We uphold respondent's determinations

that petitioner had unreported embezzlement income for 1983 and

1984.

Issue 3(b): Walter Capital Payments

     Petitioner offered no proof that he did not receive the

Walter Capital payments to the order of "Joe Bass" in 1984.

Petitioner opened the bank account at the Trust Co. in the name

of Joe Bass.   He told Mr. Grillo to make the checks payable to

Joe Bass.   Petitioner called no witness at trial that knew or

knew of Joe Bass and presented no evidence other than his self-

serving assertions that he did not receive these funds, while
                                 - 26 -

there is contrary evidence that petitioner did work for Walter

Capital that was a likely source of income from services

rendered.    Cf. Armes v. Commissioner, 448 F.2d 972 (5th Cir

1971), affg. in part, revg. and remanding in part T.C. Memo.

1969-181.    Petitioner's self-serving testimony is insufficient to

carry the day for the purpose of disproving respondent's

deficiency determination.    Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).    Petitioner has failed to meet his burden of proving

that he did not receive the amounts paid to the Joe Bass account

by Walter Capital and that they did not constitute income to him.

We uphold respondent's 1984 deficiency determinations with

respect to the Joe Bass items.

Issue 4:    Section 6653(a)(1) and (2)--Negligence

     Section 6653(a) provides for an addition to tax if any part

of the underpayment is due to negligence or intentional disregard

of rules and regulations.    Section 6653(a)(1) provides for an

addition of 5 percent on the entire deficiency if any part of the

deficiency is due to negligence or intentional disregard of rules

and regulations, and section 6653(a)(2) provides for an addition

equal to 50 percent of the interest due on any part of the

deficiency due to negligence.     Sec. 6653(a)(1) and (2).   However,

section 6653(b)(3) obviates the addition under this subsection

when there is an addition for fraud under subsection (b) for the

same year.    Miller v. Commissioner, 94 T.C. 316, 332 (1990).

Because the fraud addition arising from petitioner's guilty pleas
                               - 27 -

and concessions obviates the negligence addition for 1983, we

need only address section 6653(a) for the year 1984.

     For the purpose of section 6653(a), negligence has been

defined as the failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.     Emmons v.

Commissioner, 92 T.C. 342, 349 (1989), affd. 898 F.2d 50 (5th

Cir. 1990); Neely v. Commissioner, 85 T.C. 934, 947 (1985).

Petitioner has the burden of proving by a preponderance of the

evidence that he did not act negligently or with intentional

disregard of rules and regulations.     Rule 142(a); Luman v.

Commissioner, 79 T.C. 846, 860-861 (1982); Bixby v. Commissioner,

58 T.C. 757, 791 (1972).

     The evidence supports the conclusions that petitioner acted

negligently and intentionally disregarded the rules and

regulations for 1984.   Petitioner failed to submit any evidence

to show that he had any reasonable basis for the substantial

omissions from his income tax return for 1984.    Petitioner has

not carried his burden of proving that he acted reasonably or

prudently with respect to his income tax obligations for 1984.

     Therefore, we hold that petitioner is liable for the

additions to tax under section 6653(a)(1) and (2) for negligence

or intentional disregard of rules and regulations.

Issue 5:   Section 6661 Additions--Substantial Understatement

      Respondent also determined additions to tax for substantial

understatement of income tax under section 6661.     For the years
                                - 28 -

1983 and 1984, section 6661(a) imposes an addition to tax equal

to 10 percent of the underpayment attributable to the

understatement for that year.    An understatement is substantial

if it exceeds the greater of 10 percent of the tax required to be

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

defined as the excess of the tax required to be shown on the

return over the tax actually shown on the return, but the

understatement is reduced if and to the extent that the taxpayer

either had substantial authority for, or adequately disclosed,

the tax treatment shown on the return.    Sec. 6661(b)(2).

Respondent's determination of the addition is presumed to be

correct, and petitioner bears the burden of proving that he is

not liable for the addition.    Rule 142(a).

     If the taxpayer shows that there was reasonable cause for

the understatement and that he acted in good faith, the Secretary

may waive all or any part of the addition to tax under section

6661(a).   Sec. 6661(c).   In this Court, the taxpayer must prove

that the Secretary abused his discretion by denying the waiver of

the section 6661(a) addition to tax.     Mailman v. Commissioner, 91

T.C. 1079, 1083-1084 (1988).    To carry this burden petitioner

must show (I) that he requested a waiver under section 6661(c),

Klieger v. Commissioner, T.C. Memo. 1992-734, (ii) that

respondent refused the request, id., and (iii) that respondent's

refusal to waive the addition to tax was arbitrary, capricious,
                                 - 29 -

or without sound basis in fact, Mailman v. Commissioner, supra at

1084.

     Petitioner did not provide any evidence to show that he had

authority for the understatements of income on his 1983 and 1984

income tax returns.    Petitioner did not disclose any part of the

underpayments for these years.     Petitioner did not provide any

evidence that he requested a waiver or that respondent denied any

such request.   Even if petitioner had requested a waiver, the

lack of evidence in the record indicates that he would not have

been able to show reasonable cause for the understatements or

that he acted in good faith.   Respondent's determinations of

section 6661(a) additions to tax for 1983 and 1984 will be

sustained, subject to recomputation under Rule 155.

Issue 6:   Section 6651(a)--Late Filing

     Section 6651(a) provides for an addition to tax where a

taxpayer files a tax return after the due date.     The addition is

equal to 5 percent of the underpayment for every month the return

is late, with a maximum of 25 percent.     If the Commissioner

determines this addition in the deficiency notice, the taxpayer

bears the burden of proving that the return was timely filed, or

that his failure to file was due to reasonable cause and not

willful neglect.   Rule 142(a); United States v. Boyle, 469 U.S.

241, 245 (1985); Wm. J. Lemp Brewing Co. v. Commissioner, 18 T.C.

586, 591-592 (1952).
                                 - 30 -

     Respondent determined in her notice of deficiency that

petitioner is liable for additions to tax under section 6651(a)

in amounts equal to 25 percent of the underpayments for 1983 and

1984.   In her answer, respondent conceded that this addition was

not due for 1983.   On brief, respondent conceded that if we

determine that petitioner is not liable for the addition to tax

for fraud under section 6653(b) for 1984, then petitioner is

liable for no more than a 10-percent addition to the underpayment

under section 6651(a).

     Petitioner offered no proof that he timely filed his return

for 1984, or that the late filing was due to reasonable cause and

not willful neglect.   Petitioner has not carried his burden.   We

therefore sustain respondent's determination that petitioner is

liable for the 10 percent addition to tax under section 6651(a)

for 1984.

     To reflect the foregoing,

                                    Decision will be entered under

                             Rule 155.
