                        T.C. Memo. 1996-483



                      UNITED STATES TAX COURT



                  WILLIE THOMAS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10518-94.                 Filed October 28, 1996.



     William J. Day, for petitioner.

     Katherine Lee Wambsgans, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notice dated April 6, 1994, respondent

determined deficiencies in and additions to petitioner's Federal

income taxes as follows:
                                              - 2 -
                                              Additions to Tax
                       Sec.         Sec.           Sec.             Sec.            Sec.
Year   Deficiency   6653(b)(1)   6653(b)(2)    6653(b)(1)(A)   6653(b)(1)(B)      6661(a)
                                     1
1984   $78,807.11   $39,403.56                      --             --          $19,701.78
                                     2
1985    41,092.63    20,546.32                      --             --           10,273.16
                                                                    3
1986    36,949.80       --           --        $27,712.35                        9,237.45
                                                                    4
1987    16,621.39       --           --         12,466.04                        4,155.35

      1
        50 percent of the statutory interest on $78,807.11, computed from Apr. 15, 1985, to the
earlier of the date of assessment or the date of payment.
      2
        50 percent of the statutory interest on $41,092.63, computed from Apr. 15, 1986, to the
earlier of the date of assessment or the date of payment.
      3
        50 percent of the statutory interest on $36,949.80, computed from Apr. 15, 1987, to the
earlier of the date of assessment or the date of payment.
      4
        50 percent of the statutory interest on $16,621.39, computed from Apr. 15, 1988, to the
earlier of the date of assessment or the date of payment.


       Unless otherwise indicated, 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.

       The issues for decision are as follows:

       1.    Whether petitioner failed to report income in 1984, 1985,

1986, and 1987.          We hold that he failed to report income.

       2.    Whether petitioner, pursuant to section 1401, is liable

for self-employment tax.                  We hold that he is liable.

       3.    Whether petitioner, pursuant to section 6653(b), is

liable for additions to tax for fraud.                       We hold that he is liable

to the extent stated herein.

       4.    Whether petitioner, pursuant to section 6661(a), is

liable for additions to tax for substantial understatements of

tax.        We hold that he is liable.
                                 - 3 -

                         FINDINGS OF FACT

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

Petitioner resided in Cleveland, Ohio, at the time he filed his

petition.   He is the father of five children.    His fifth child

was born in 1987.

I.   Petitioner's Assets and Financial Activities

     Petitioner owns and manages real estate.    Between 1978 and

1983, he purchased four properties for a total of $111,000.      He

operates three of these properties as rental properties and uses

the fourth as his personal residence.    In 1981, he transferred

the title to his personal residence to his 10-year-old daughter.

He continued, however, to pay the mortgage, real estate taxes,

and insurance on the property.

     Petitioner maintained 16 bank accounts with aggregate year-

end balances of $12,252.81, $42,642.70, $153,060.80, and

$84,595.46 in 1984, 1985, 1986, and 1987, respectively.     In

addition, petitioner held a money market account in trust for his

children and owned two certificates of deposit.     On January 1,

1984, the money market account had a balance of $132,538.33.

Petitioner deposited in the money market account an additional

$82,392.38 in 1984 and $45,100 in 1985.     On March 1, 1986,

petitioner withdrew $281,294.86 from the money market account,
                                  - 4 -

opened an account for each of his four children, and transferred

approximately $70,320 to each of these accounts.

      In 1986, petitioner cashed a $50,000 certificate of deposit

and deposited the proceeds, together with additional funds, into

one of his bank accounts.    On May 14, 1987, petitioner withdrew

$104,089.55 from this account and transferred approximately

$26,020 to each of his children's accounts.

II.    Petitioner's Convictions

      In early 1986, petitioner was arrested and charged with

gambling as a result of his participation in an illegal numbers

operation.    On April 2, 1986, petitioner pled no contest.     He was

found guilty, assessed a fine, and ordered to pay court costs.

      On March 30, 1993, petitioner, pursuant to section 7201, was

charged with income tax evasion with respect to his 1986 and 1987

tax returns.    On July 12, 1993, in the U.S. District Court for

the Northern District of Ohio, petitioner pled guilty to the

charges.

III.    Respondent's Determinations

      Petitioner filed his 1984, 1985, and 1986 Federal income tax

returns in a timely manner but filed his 1987 tax return 4 months

late.    He reported gross income of $25,250.25, $24,615.67,
                                    - 5 -

$31,200.75, and $37,833.89 in 1984, 1985, 1986, and 1987,

respectively.

    On April 6, 1994, respondent issued a notice of deficiency to

petitioner.    Respondent used the net worth method of income

reconstruction to determine petitioner's taxable income for the

years in issue.     For each of these years, respondent determined

that petitioner's net worth, increase in net worth, total net

worth, and personal living expenses were as follows:

                  01/01/84    12/31/84      12/31/85    12/31/86    12/31/87

Total assets      $330,568    $502,423      $570,027    $350,432    $281,967
Total liabilities (53,920)     (70,173)      (64,598)    (51,563)    (45,024)
NET WORTH          276,648     432,250       505,429     298,869     236,943
Net worth at
  beginning
  of year            --       (276,648)     (432,250)   (505,429)   (298,869)
Increase in
  net worth          --        155,602       73,179     (206,560)   (61,926)
Personal
                                                        1
  living expenses    --         44,111       46,812      319,358    136,977
ECONOMIC INCREASE    --        199,713      119,991      112,798     75,051
       1
         Petitioner's personal living expenses included gifts to his children
of $281,294.86 in 1986 and $104,089.55 in 1987.

      Based on these computations, respondent calculated that

petitioner had gross income of $199,713.04, $119,990.50,

$112,798.82, and $75,050.67 for 1984, 1985, 1986, and 1987,

respectively.     Based on these amounts, respondent determined that

petitioner was liable for deficiencies of $78,807.11, $41,092.63,

$36,949.80, and $16,621.39 for 1984, 1985, 1986, and 1987,

respectively.     The deficiencies included self-employment tax of
                                 - 6 -

$4,271.40, $4,672.80, $5,166 and $4,577.66 for 1984, 1985, 1986,

and 1987, respectively.

                                OPINION

I.   Unreported Income

      Gross income includes all income from whatever source

derived.    Sec. 61(a).   Every taxpayer is required to maintain

adequate records of taxable income.       Sec. 6001.   When a taxpayer

does not maintain adequate records, the Commissioner may

reconstruct income in accordance with a method that clearly

reflects the full amount of income received.       Sec. 446(b);

Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965).

      Because petitioner maintained inadequate records of his

income-producing activities, respondent used the net worth method

of income reconstruction to determine petitioner's taxable

income.    Under this method, income is computed by determining a

taxpayer's net worth at the beginning and end of a taxable year.

The difference between the amounts is the increase in net worth.

An increase in a taxpayer's net worth, plus his nondeductible

expenditures, less nontaxable receipts, may be considered taxable

income.    Holland v. United States, 348 U.S. 121, 125 (1954);

United States v. Giacalone, 574 F.2d 328, 330-331 (6th Cir.

1978).
                                - 7 -

     When the Commissioner uses the net worth method to determine

whether a taxpayer has underreported income, she must (1)

establish with reasonable certainty the taxpayer's beginning net

worth, and (2) either establish a likely source of unreported

taxable income or conduct a reasonable investigation of leads

negating possible sources of nontaxable receipts.    United States

v. Massei, 355 U.S. 595 (1958); Holland v. United States, supra

at 132-138; Conti v. Commissioner, 39 F.3d 658, 663 (6th Cir.

1994), affg. in part and remanding in part 99 T.C. 370 (1992);

Smith v. Commissioner, 91 T.C. 1049, 1059 (1988), affd. 926 F.2d

1470 (6th Cir. 1991).

     A.   Beginning Net Worth

     The taxpayer's net worth at the beginning of the taxable

year is a key element in a net worth case.    Fuller v.

Commissioner, 313 F.2d 73, 77 (6th Cir. 1963), affg. in part and

modifying in part T.C. Memo. 1961-262.   The validity of the

Commissioner's net worth calculations depends on the accuracy of

the beginning net worth   figure.   Estate of Phillips v.

Commissioner, 246 F.2d 209, 213 (5th Cir. 1957), revg. T.C. Memo.

1955-139.

     For petitioner's 1984 taxable year, respondent determined

that petitioner's beginning net worth was $276,648.70, which

included $25,000 of cash on hand.   Petitioner contends that the
                                - 8 -

beginning net worth figure is incorrect, because it does not

include $210,000 he accumulated over many years.    Petitioner

contends that beginning at age 6 he simultaneously worked five or

six jobs (e.g., selling peas and greens, herding cattle, and

delivering firewood).   He further contends that over the course

of 15 years he accumulated $210,000 performing these tasks and

stored these earnings in a bucket and later in a suitcase.

Petitioner testified, however, that prior to 1984 the $210,000

was deposited in bank accounts and used to purchase real estate.

These assets are accounted for in respondent's beginning net

worth figure.   As a result, petitioner has effectively conceded

that respondent's beginning net worth figure is correct.

Accordingly, we conclude that respondent has established with

reasonable certainty petitioner's beginning net worth.

     B.   Source of Taxable Income and Reasonable Investigation

     We must also determine whether respondent has established a

likely source of taxable income or has conducted a reasonable

investigation of leads negating possible sources of nontaxable

receipts.    Holland v. United States, supra at 135-137; United

States v. Massei, supra.    In 1986, petitioner was convicted of

gambling as a result of his participation in an illegal numbers

operation.   Respondent contends that petitioner's gambling

constitutes a likely source of unreported income.    Respondent,
                               - 9 -

however, has failed to present any evidence to show that the

gambling conviction relates to petitioner's conduct during the

years in issue.   Although petitioner was convicted in 1986, this

fact alone does not establish that petitioner participated in an

illegal numbers operation during the relevant years.     Therefore,

we conclude that respondent has not established a likely source

of income for the years in issue.

     Respondent has established, however, that she conducted a

reasonable investigation of leads negating possible sources of

nontaxable receipts.   United States v. Massei, supra.    Respondent

also has established that petitioner's alleged source of

nontaxable receipts is implausible and not supported by the

record.   Parks v. Commissioner, 94 T.C. 654, 661 (1990).

Petitioner contends that he had accumulated $210,000 and stored

it in a bucket and later in a suitcase.   Petitioner, however,

presented no credible evidence to support this contention.

Moreover, even if petitioner had saved $210,000, petitioner

testified that he invested it before the years in issue and, as a

result, the cash was already accounted for in respondent's

beginning net worth figure.   Petitioner offered respondent no

other leads of nontaxable receipts.    A taxpayer cannot complain

about the sufficiency of an investigation where he has offered no

credible leads.   United States v. Penosi, 452 F.2d 217, 220 (5th
                               - 10 -

Cir. 1971); Blackwell v. United States, 244 F.2d 423, 429 (8th

Cir. 1957).

       Accordingly, we sustain respondent's determined deficiencies

for 1984, 1985, 1986, and 1987.

II.    Self-Employment Tax

       Respondent determined that petitioner, pursuant to section

1401, is liable for self-employment tax of $4,271.40, $4,672.80,

$5,166.00 and $4,577.66 for 1984, 1985, 1986, and 1987,

respectively.

       Section 1401 imposes a tax on self-employment income.   Self-

employment income consists of gross income from any trade or

business carried on by an individual less allowable deductions

attributable to the trade or business.    Sec. 1402(a).

Respondent's determination that petitioner is liable for self-

employment tax is presumed to be correct, and petitioner bears

the burden of proving that it is erroneous.    Rule 142(a); Kasey

v. Commissioner, 33 T.C. 656, 660 (1960).

        Petitioner introduced no evidence relating to the self-

employment tax issue.    Therefore, petitioner has failed to carry

his burden of proof and is liable for self-employment tax.

III.    Additions to Tax for Fraud

       Respondent determined that petitioner, pursuant to section

6653(b), is liable for additions to tax for fraud with respect to
                              - 11 -

1984, 1985, 1986, and 1987.   Respondent determined that the

entire deficiencies, including the portions attributable to self-

employment tax, were subject to the additions to tax.   Section

6653(b)(1), applicable to petitioner's 1984 and 1985 returns,

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

underpayment of tax where any part of the underpayment is due to

fraud.   Section 6653(b)(1)(A), applicable to petitioner's 1986

and 1987 returns, provides for an addition to tax equal to 75

percent of the portion of the underpayment attributable to fraud.

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

returns, provides for an addition to tax equal to 50 percent of

the interest payable under section 6601 with respect to the

portion of the underpayment attributable to fraud.   Section

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

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

interest payable under section 6601 with respect to the portion

of the underpayment attributable to fraud.   Section 6653(b)(2),

applicable to petitioner's 1986 and 1987 returns, provides that

where the Commissioner establishes that any portion of an

underpayment is attributable to fraud, the entire underpayment is

treated as attributable to fraud except to the extent the

taxpayer proves otherwise.
                                - 12 -

     Fraud is defined as an intentional wrongdoing designed to

evade tax.   Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958);

Miller v. Commissioner, 94 T.C. 316, 332 (1990).     The existence

of fraud is a question of fact to be resolved upon consideration

of the entire record.    Estate of Pittard v. Commissioner, 69 T.C.

391, 400 (1977); Gajewski v. Commissioner, 67 T.C. 181, 199

(1976), affd. without published opinion 578 F.2d 1383 (8th Cir.

1978).   Respondent bears the burden of proving fraud by clear and

convincing evidence.    Sec. 7454(a); Rule 142(b).   To carry her

burden of proof, respondent must show for each year in issue that

an underpayment of tax exists and that some portion of the

underpayment is due to fraud.     Petzoldt v. Commissioner, 92 T.C.

661, 699 (1989).

     Petitioner, pursuant to section 7201, was convicted of

income tax evasion with respect to his 1986 and 1987 tax returns.

As a result, petitioner is collaterally estopped from denying

liability for civil fraud with respect to 1986 and 1987, because

the elements of criminal tax evasion and civil fraud are

identical.   Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir.

1983), affg. T.C. Memo. 1981-1.    As a result, we hold that

petitioner, pursuant to section 6653(b)(1)(A) and (B), is liable

for additions to tax for fraud for 1986 and 1987.     We next
                                - 13 -

determine whether petitioner is liable for the additions to tax

for fraud with respect to 1984 and 1985.

     A.   Underpayment

     The record provides sufficient evidence that for 1984 and

1985 petitioner omitted significant amounts of income and

underpaid his taxes.     As stated earlier, petitioner is liable for

self-employment tax because he failed to meet his burden of

proof.    Rule 142(a).   While respondent determined that petitioner

underpaid his taxes by $78,807.11 for 1984 and $41,092.63 for

1985, she failed to produce clear and convincing evidence that

petitioner's income was derived from self-employment.    As a

result, these underpayments must be reduced accordingly.

     B.    Fraudulent Intent

     To prove fraud, respondent must establish that petitioner

intended to evade taxes.    This intent may be established by

conduct designed to conceal, mislead, or otherwise prevent the

collection of taxes.     Korecky v. Commissioner, 781 F.2d 1566,

1568 (11th Cir. 1986), affg. T.C. Memo. 1985-63; Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983).    Fraudulent intent is

not to be imputed or presumed but rather must be established by

some independent evidence.     Beaver v. Commissioner, 55 T.C. 85,

92 (1970); Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).

Because direct proof of the taxpayer's intent is rarely

available, fraudulent intent may be established by circumstantial

evidence and reasonable inferences drawn from the facts.     Spies
                               - 14 -

v. United States, 317 U.S. 492, 498 (1943); Stephenson v.

Commissioner, 79 T.C. 995, 1005 (1982), affd. 748 F.2d 331 (6th

Cir. 1984).    The taxpayer's entire course of conduct may

establish the requisite fraudulent intent.    Stone v.

Commissioner, 56 T.C. 213, 223-224 (1971).    The mere existence of

deficiencies in tax liability does not show fraud.       Otsuki v.

Commissioner, supra at 106.    Exceedingly large discrepancies

between a taxpayer's actual income and reported income, however,

do constitute evidence of fraud when such discrepancies are

unexplained.    Stone v. Commissioner, supra at 224.

     Petitioner reported gross income of $25,250.85 for 1984 and

$24,615.67 for 1985.    Respondent determined that petitioner

actually had gross income of $199,713.04 for 1984 and $119,990.50

for 1985.   The only explanation furnished by petitioner for these

large discrepancies was that he had accumulated $210,000.

Petitioner, however, failed to present any credible evidence

establishing the existence of the accumulated cash.       Moreover,

even if the $210,000 existed, petitioner testified that he

invested all of it before the years in issue.    Therefore,

petitioner's explanation for the discrepancies is unpersuasive.

We conclude that the record provides sufficient evidence of

petitioner's fraudulent intent to evade taxes for 1984 and 1985.

     Accordingly, for 1984 and 1985, we hold that petitioner,

pursuant to section 6653(b)(1) and (2), is liable for additions

to tax for fraud.    We conclude, however, that the portion of the
                              - 15 -

deficiency relating to self-employment tax is not attributable to

fraud and that the additions to tax for fraud, pursuant to

section 6653(b)(2), must be reduced accordingly.

IV.   Additions to Tax for Substantial Understatements

      Respondent determined that petitioner is liable, pursuant to

section 6661(a), for additions to tax for substantial

understatements of income tax.    The addition to tax is equal to

25 percent of the amount of each underpayment of tax attributable

to a substantial understatement.   Petitioner bears the burden of

proving that respondent's determination is erroneous.    Rule

142(a); Cluck v. Commissioner, 105 T.C. 324, 340 (1995).

      Petitioner did not dispute his liability for the additions

to tax provided by section 6661(a).    Therefore, petitioner has

failed to carry his burden of proof and is liable for the

additions to tax.

      We have considered the other arguments raised by the parties

and find that they are without merit.

      To reflect the foregoing,


                                         Decision will be entered

                                      under Rule 155.
