                          T.C. Memo. 2000-257



                        UNITED STATES TAX COURT



        ROBERT G. BACON AND BARBARA BACON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2993-97.                        Filed August 15, 2000.



     John R. Crayton, for petitioners.

     Richard H. Gannon and Linda Love Vines, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes, an addition to tax, and

penalties as follows:
                                    - 2 -

                                    Addition to Tax        Penalties
      Year         Deficiency       Sec. 6653(b)(1)1      Sec. 6663(a)

      1988          $107,589             $83,609               ---
      1989            70,297               ---               $52,723
      1990           147,326               ---               110,495
      1991            77,606               ---                58,205
      1992            13,927               ---                10,445
      1
       In the notice of deficiency, respondent also determined an addition to
tax for 1988 based on 50 percent of the interest due on the underpayment.
However, that addition to tax was improperly determined since the Technical
and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 1015(b)(2)(B),
102 Stat. 3568-3569, eliminated that addition to tax.

      After concessions,1 the issues for decision are: (1) Whether

petitioners underreported their income for each year in issue;

(2) whether any part of an underpayment for each year in issue is

due to fraud; and (3) whether assessment of the alleged

deficiencies is barred by the statute of limitations.

      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.      Throughout this opinion, all amounts have been

rounded to the nearest dollar.

                               FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.          The petitioners, Robert

G. Bacon (Mr. Bacon), and Barbara Bacon (Mrs. Bacon), are husband




      1
          Respondent has conceded the deficiency for the year 1992.
                                 - 3 -

and wife.   At the time they filed their petition in this case,

they resided in Cinnaminson, New Jersey.

     Mr. Bacon is a high school graduate.     He briefly attended

college as a part-time student where he completed courses in

Accounting I and II.     Mrs. Bacon is a college graduate.

     In 1980, Mr. Bacon purchased a bar/restaurant called the Jug

Handle Inn under the name of Radtam, Inc., a corporation

(Radtam).   Mr. Bacon was the sole shareholder of Radtam during

the years in issue.     The primary source of income for the Jug

Handle Inn during this time period was from the sale of food,

beer, and liquor.    The Jug Handle Inn also derived revenue from

lottery sales.

     Petitioners timely filed joint Federal income tax returns

for each of the years in issue.     Petitioners reported adjusted

gross income on their Federal income tax returns for the years in

issue as follows:2

                                 Adjusted
                 Year          Gross Income

                 1988            $44,221
                 1989             90,840
                 1990             97,478
                 1991             99,117
                   Total         331,656




     2
      See appendix A for details of reported income.
                                 - 4 -

     During the years in issue, petitioner made deposits into

their personal bank accounts in the following amounts:3

                                  Gross
               Year              Deposits

               1988               $843,032
               1989                530,188
               1990              1,285,386
               1991              1,149,802
                 Total           3,808,408

     Some of these deposits were made in the form of cash.    Some

of these deposits came from two of Radtam’s bank accounts.4   Cash

deposits and deposits from the Radtam accounts that were made

into petitioners’ personal bank accounts for the years in issue

were as follows:

                        Cash              Deposits from
                      Deposits           Radtam Accounts

     1988             $64,372                 $503,855
     1989              41,202                  293,313
     1990              90,804                  453,688
     1991             394,311                  227,543
       Total          590,689                1,478,399




     3
      See appendix B for details of deposits to personal
accounts.
     4
      Account Nos. 600-871255 and 23 856021 3.
                                    - 5 -

      During the years in issue, petitioners purchased

seven parcels of real property in Mrs. Bacon’s name as follows:5

                                      Balance Paid
                                       at Closing            Cash paid
Purchase Date      Purchase Price     Net of Loans           at Closing1
                     2
1. 02/23/88           $412,000              $3,167             $3,167
                      3
2. 03/04/88             585,000           285,000                 ---
3. 03/31/89            195,000            197,017              74,285
4. 06/18/90            425,000              25,000                ---
5. 06/29/90            530,000            152,285                 ---
                                         4                    5
6. 07/02/90            134,000             131,592              30,591
7. 10/18/90            250,000              35,528               5,528
  Total              2,531,000            829,589             113,571
      1
        Cash amounts are included in the balance paid at closing amounts.
      2
        During 1988, petitioners paid down a $287,069 first mortgage on this
property by $283,310. See appendix C.
      3
        Mrs. Bacon executed a $300,000 promissory note secured by a mortgage on
the property. The $300,000 purchase money note and mortgage required 36
monthly payments of $2,518 and a balloon payment of $288,988 at the end of the
36 months. Monthly payments of $2,518 were made by Mrs. Bacon, or on her
behalf, for 36 months and the balloon payment of $288,988 was also paid by
Mrs. Bacon, or on her behalf, at the end of 36 months. See appendix C.
      4
        Part of the purchase price was paid with a check in the amount of
$55,000 purchased with $17,000 in funds withdrawn from Radtam’s savings
account at Chemical Bank, account No. 600-871255, $28,000 in funds withdrawn
from petitioners’ personal savings account maintained at Chemical Bank,
account No. 623503349, and a check in the amount of $10,000 drawn on
petitioners’ personal checking account at the same institution. Additionally,
$35,000 of the purchase price was paid by a check drawn on petitioners’
personal checking account at Barnett Bank, $5,000 by a check drawn on
petitioners’ personal checking account at First Fidelity Bank, $20,000 by a
check purchased from Security Savings & Loan, in part with $19,000 in cash
tendered to the bank by petitioners on July 2, 1990, and a check in the amount
of $5,000, drawn on the account of Thomas Begley, Jr. Esq., from funds
deposited in the same account earlier in 1990.
      5
        Includes $10,000 in cash and $1,591 in coin deposited in the account of
Burlington County Abstract Co. at closing and $19,000 in cash tendered to
Security Savings & Loan by petitioners on July 2, 1990, in part, to purchase a
$20,000 check. ($10,000 + $1,591 + $19,000 = $30,591.)

      On or about October 19, 1989, petitioners paid Collective

Federal Savings Bank $10,657 to modify the terms of their loan

agreement on property located at 218 E. 18th Street, North Beach


      5
          See appendix C for details.
                                     - 6 -

Haven, New Jersey.      Petitioners paid with a cashier’s check,

which was paid for with a check drawn on the Radtam lottery

account at Security Savings & Loan.6

      During the taxable years in issue, petitioners made the

following expenditures:

              Year          Item             Purchase Price
                                                1
              1990      Boston Whaler            $15,850
                                                   2
              1990      Chrysler Voyager             6,500
                                                 3
              1991      U.S. Savings Bonds         15,000
                Total                              37,350
      1
        Paid in cash.
      2
        Paid in cash.
      3
        These purchases were made with a personal check written on one of
petitioners’ personal accounts payable to “cash”.

      On June 15, 1989, Mr. Bacon’s cousin, Tadeusz Ras, purchased

a residence.      Of the total purchase price, $50,220 was paid in

cash.      A check in the amount of $16,600 was also part of the

purchase money used to acquire the property.            On June 15, 1989,

$16,600 was withdrawn from Radtam’s savings account at Chemical

Bank.7      On June 27, 1989, Tadeusz Ras executed a mortgage on his

residence in favor of Mrs. Bacon for $64,000.

      Beginning on or before July 1989, petitioners prepared

monthly summary sheets on behalf of Radtam, which purportedly

listed total deposits into its bank accounts for the month,

breaking down the total by category such as food, sales tax,



      6
          Account No. 23 856021 3.
      7
          Account No. 600-871255.
                                       - 7 -

beer, liquor, etc.       These monthly summary sheets were furnished

to petitioners’ accountant who prepared Radtam’s corporate tax

returns.8

      In addition to the monthly summary sheets, each month

petitioners provided their accountant with corporate bank

statements and a schedule of corporate disbursements.                  The bank

statements furnished to the accountant reflected two of Radtam’s

accounts at Security Savings & Loan.              However, Radtam also

maintained a savings account at Chemical Bank9 from July 1, 1988,

through June 30, 1992.          Before 1991, petitioners’ accountant was

not made aware that Radtam had a bank account with Chemical Bank.

Sometime after 1991, and after the Internal Revenue Service (IRS)

began its investigation, petitioners started providing their

accountant with monthly summary sheets listing deposits into the

Chemical Bank account.

      Radtam reported gross receipts and taxable income on its

corporate income tax returns as follows:

                       FYE          FYE          FYE        FYE        FYE
                     6/30/88      6/30/89      6/30/90    6/30/91    6/30/92

Gross Receipts      $453,734     $684,395    $868,601    $901,615    $803,517
                     1
Taxable Income         18,657        (616)     12,308        (242)      7,331
      1
       Radtam was an S corporation in 1988 that reported this amount as
ordinary income.



      8
      The same accountant prepared petitioners’ individual
Federal income tax returns and the corporate Federal income tax
return for another entity owned by petitioners called Bradam.
      9
          Account No. 600-871255.
                                    - 8 -

     For purposes of preparing petitioners’ Federal income tax

returns, Mrs. Bacon prepared annual summaries of personal income

sources and expenses relating to petitioners’ real properties,

which she gave to their accountant.         Mrs. Bacon also provided the

accountant with Forms 1099 and settlement sheets from each real

estate purchase.

     In 1991, Mr. Bacon purchased a bar/restaurant called the

Whistler’s Inn under the name Bradam, Inc. (Bradam).        Mr. Bacon

was the sole shareholder of Bradam in 1991.        The primary source

of income for Whistler’s Inn was from the sale of food, beer, and

liquor.

     On or about April 17, 1991, Bradam entered into an agreement

to purchase a liquor license, restrictive covenant, and equipment

relating to the Whistler’s Inn.       At settlement, Bradam applied a

$50,000 cashier’s check toward the purchase.        The cashier’s check

was purchased with amounts withdrawn from Radtam’s savings

account.10

     On or about January 6, 1992, Mr. Bacon filed an application

for a VISA card listing his occupation as tavern owner of Radtam

Inc. t/a Jug Handle Inn and stating that his annual salary was

$299,000.     Mr. Bacon reported no salary, wages, or dividends from

Radtam on his income tax returns for the years in issue.




     10
          Account No. 600-871255.
                                  - 9 -

      On July 14, 1992, both petitioners met with and were

interviewed by two special agents from the IRS.     During this

interview, Mr. Bacon told the agents that petitioners and their

children had received extensive cash gifts from Mr. Bacon’s

grandfather in $10,000 cash increments.     According to Mr. Bacon,

he received a $10,000 cash gift each year since his 18th

birthday, his wife received an annual $10,000 cash gift since

they have been married, and their children each received an

annual $10,000 cash gift since their birth.     Mr. Bacon told

respondent’s agents that the gifts were from his grandfather and

were received through a brother-in-law and that neither

petitioners nor their children had ever met their grandfather.

Mr. Bacon told the agents that he was told never to tell anyone

about the gifts and never to put the money in a bank.     Mr. Bacon

told the special agents that he may have had as much as $650,000

cash on hand at the beginning of 1988.     At trial, petitioners

stipulated that at the beginning of 1988, they had approximately

$35,000 cash on hand.     During the years in issue, petitioners did

not receive any gifts, inheritances, legacies, or devises.

                                 OPINION

I.   Unreported Income

      Respondent determined deficiencies for the years in issue by

using the bank deposit method.     Bank deposits are prima facie

evidence of income.      See DiLeo v. Commissioner, 96 T.C. 858, 869
                                                - 10 -

(1991), affd. 959 F.2d 16 (2d Cir. 1992).                            Of course, when

utilizing this method, all nontaxable sources of deposits must be

taken into account.              See id.         Under the bank deposits method:

(1) Bank deposits are totaled; (2) nonincome deposits,

redeposits, or transfers are eliminated; (3) an excess of

deposits, as adjusted, over reported income is considered to be

unreported income; (4) cash expenditures that did not come from

deposited funds or nontaxable sources are added to the amount of

underreported income; and (5) deductible expenses not accounted

for in the taxpayer’s return are allowed.11

     Using the bank deposit method, respondent determined in the

notice of deficiency that petitioners understated their income

for the years 1988 through 1991 in the following amounts:
                 1                   2               3               4
                  1988                1989            1990            1991

                $362,461        $226,693         $500,851        $236,417
     1
          See   appendix   D   for    details   of   computations.
     2
          See   appendix   E   for    details   of   computations.
     3
          See   appendix   F   for    details   of   computations.
     4
          See   appendix   G   for    details   of   computations.

     The parties have stipulated that if a bank deposit analysis

is to be used, then the following adjustments must be made to

respondent’s bank deposit analysis in the notice of deficiency:12




     11
      Petitioners have not claimed deductions in addition to
what respondent has allowed.
     12
          See appendix H for details of these adjustments.
                                     - 11 -
                             1988           1989           1990           1991

Mathematical errors:         --—          $71,907         $78,361        $368,032
Less reductions for
  nontaxable items &
  credits:1               (284,603)       (150,922)       (268,424)      (434,422)
Plus cash expenditures2
  and debits:3              32,467        173,989          49,962         75,387
Net adjustments to
  statutory notice:       (252,136)        94,974         (140,101)        8,997
      1
        Items that reduce petitioners’ taxable income. The parties have
stipulated that these adjustments to respondent’s bank deposit analysis are
proper.
      2
        Including personal items paid by corporation.
      3
        Items that increase petitioners’ taxable income. The parties have
stipulated that these adjustments to respondent’s bank deposit analysis are
proper.

      Respondent has submitted schedules with his brief that show

petitioners’ unreported income for the years in issue is as

follows:
                                1                 2           3              4
                                   1988            1989           1990           1991

Total gross deposits:          $843,032       $530,188     $1,285,386     $1,149,802
Less reductions for
  nontaxable items, credits,5
  & reported income:           (740,724)      (560,045)    (1,067,222)    (1,070,042)
Plus cash expenditures6
  and debits:7                    5,447        351,378        161,451        165,568
Adjustments to taxable income: 8107,755       9
                                               321,521       10
                                                              379,615       11
                                                                             245,328
      1
        See appendix I for details.
      2
        See appendix J for details.
      3
        See appendix K for details.
      4
        See appendix L for details.
      5
        Items that reduce petitioners’ taxable income. The parties have
stipulated that these adjustments to respondent’s bank deposit analysis are
proper.
      6
        Including personal items paid by corporation.
      7
        In the bank deposit analysis incorporated in the statutory notice,
respondent included net salary deposits of amounts earned by Mrs. Bacon. The
same analysis credits petitioners with the gross amount of her salary rather
than the net salary included in petitioners’ bank deposits. Accordingly,
respondent increased petitioners’ income from bank deposits by the difference
between Mrs. Bacon’s gross salary and her net salary (salary deposited).
      8
        We note that respondent’s proposed adjustment to petitioners’ 1988
taxable income is $2,570 less than what we arrive at when subtracting the
agreed upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($362,461 - $252,136 - $107,755
= $2,570)
      9
        We note that respondent’s proposed adjustment to petitioners’ 1989
taxable income is $146 less than what we arrive at when subtracting the agreed
upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($226,693 + $94,974 - $321,521 =
$146)
                                   - 12 -
      10
         We note that respondent’s proposed adjustment to petitioners’ 1990
taxable income is $18,865 more than what we arrive at when subtracting the
agreed upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($500,851 - $140,101 - $379,615
= $18,865)
      11
         We note that respondent’s proposed adjustment to petitioners’ 1991
taxable income is $86 less than what we arrive at when subtracting the agreed
upon adjustments to the bank deposit analysis from respondent’s initial
computations under the bank deposit analysis. ($236,417 + $8,997 - $245,328 =
$86)

        With the exceptions noted below (see infra notes 13, 14, and

15), respondent’s final bank deposits analysis, as adjusted

pursuant to the parties’ stipulations, is supported by the facts.

On the basis of stipulated facts and evidence admitted at trial,

we find that petitioners had unreported income of $102,74813 in

1988, $320,66114 in 1989, $358,21515 in 1990, and $245,328 in

1991.

     Petitioners argue that respondent’s bank deposit method is

fundamentally flawed.      Admittedly, there have been a significant



        13
      We eliminated a $5,007 item in respondent’s bank deposit
analysis for corporate expenditures on petitioners’ behalf
because the proposed adjustment was not supported by the record.
The omission has the effect of reducing petitioners’ unreported
income by $5,007.
        14
      We eliminated an $860 item in respondent’s bank deposit
analysis for corporate expenditures on petitioners’ behalf
because the proposed adjustment was not supported by the record.
The omission has the effect of reducing petitioners’ unreported
income by $860.
        15
      We eliminated a $2,535 item in respondent’s bank deposit
analysis for corporate expenditures on petitioners’ behalf
because the proposed adjustment was not supported by the record.
The omission has the effect of reducing petitioners’ unreported
income by $2,535. We also reduced respondent’s final computation
of unreported income by $18,865. This is the amount by which
respondent’s final unreported income determination exceeds the
amount arrived at pursuant to the stipulated adjustments to the
notice of deficiency. (See supra p.11, table note 10.)
                                - 13 -

number of adjustments to respondent’s bank deposit analysis, and

the computations involve considerable detail.     Nevertheless, the

facts in the record, most of which were stipulated, support

respondent’s final computations as adjusted.     Indeed, on brief,

petitioners focus their factual dispute on only four specific

matters in the bank deposit analysis.     We address each of the

specific factual matters that petitioners dispute.

     A.    Cash on Hand

     Petitioners assert that respondent should reduce their 1988

unreported taxable income under the bank deposit analysis by

$35,000.     According to petitioners, the adjustment is necessary

because they had $35,000 cash on hand at the beginning of the

year.

     An adjustment to respondent’s bank deposit analysis would be

appropriate if petitioners had less than $35,000 at the end of

the year.     If petitioners started with $35,000 cash at the

beginning of the year but had less than $35,000 at the end of the

year, then the difference could have been nontaxable source of

deposits to petitioners’ bank accounts or a nontaxable source of

cash expenditures by petitioners.    However, Mr. Bacon testified

that he kept substantial amounts of cash on hand at all times

during the years in issue. Indeed, petitioners prepared a loan

application dated March 8, 1990, which reflected $35,000 cash on

hand.     There is no credible evidence that petitioners’ cash on

hand was less than $35,000 at the end of any of the years in
                                    - 14 -

issue.     On the basis of the record, we cannot conclude that an

adjustment to respondent’s bank deposit analysis is justified for

cash on hand.

     B.     Loan to Tadeusz Ras

     Respondent increased petitioners’ 1989 unreported income

under the bank deposit analysis by $64,000 due to an alleged

transfer from Mrs. Bacon to Tadeusz Ras (Mr. Ras).           Petitioners

argue that the alleged transfer should be eliminated from the

bank deposit analysis, since no transfer ever took place.

     Mr. Ras is Mr. Bacon’s cousin and has been continuously

employed by Radtam since 1991.        When Mr. Ras started working for

Mr. Bacon in 1991, he was paid approximately $5 to $6 per hour.

Mr. Ras cared for Mr. Bacon’s grandmother before he was employed

by Radtam.

     On June 15, 1989, Mr. Ras purchased a house.           According to

the settlement statement, Mr. Ras owed the seller $108,213 and

satisfied this obligation with $50,220 in cash and paid the

remainder with a number of checks.           One of the checks used to

purchase the house was in the amount of $16,600.           On the day of

Mr. Ras’ purchase, the sum of $16,600 was withdrawn from Radtam’s

savings account at Chemical Bank.16          On June 27, 1989, Mr. Ras

executed a mortgage on his residence in favor of Mrs. Bacon in

the amount of $64,000.

     Mr. Ras testified that his grandmother, not Mrs. Bacon,


     16
          Account No. 600-871255.
                                   - 15 -

provided him with the money to purchase the house.       When he was

asked how his grandmother managed to accumulate $50,220 in cash,

Mr. Ras was unable to provide an answer.       When he was asked who

issued the checks for the remainder of the purchase price, Mr.

Ras could not provide a definite answer, nor could he deny that

Mr. Bacon provided him with some of the checks.       When he was

asked why he signed a $64,000 mortgage in favor of Mrs. Bacon if

she had not lent him the money, Mr. Ras said that Mr. Bacon told

him to sign and that he would sign anything that Mr. Bacon gave

him.

       We do not find Mr. Ras’ explanation to be credible.     On the

basis of the facts, we find that petitioners provided Mr. Ras

with $64,000 and that he in turn executed a mortgage on the house

in the amount of $64,000.

       C.   Real Estate Deposits

       Petitioners argue that respondent should reduce their

unreported taxable income under the bank deposit analysis by

$9,000 for 1988 and $4,000 for 1990.        According to petitioners,

they issued checks totaling $13,000 to make deposits on

unconsummated real estate transactions.       This resulted, according

to petitioners, in the return of $13,000 of nontaxable funds that

were either redeposited or cashed.

       Petitioners have not established that these transactions

ever took place or that the amounts in question were returned to
                                - 16 -

them.     No adjustment to respondent’s bank deposit analysis is

necessary for this item.

     D.     Loans Payable to Mrs. Bacon

     Petitioners argue that respondent should reduce their

unreported taxable income under the bank deposit analysis by

$319,109.     Petitioners allege that such an adjustment is

necessary because in 1989 Radtam owed Mrs. Bacon $319,109.

Petitioners argue that, to the extent that the bank deposit

analysis indicates the underreporting of income from Radtam,

petitioners should be given credit for $319,109 as being for the

repayment of previous loans from Mrs. Bacon.     Respondent argues

that petitioners have not substantiated that Radtam owed Mrs.

Bacon $319,109 in 1989.

     To support petitioners’ contention, petitioners rely on

Radtam’s Federal income tax return for the fiscal year ended June

30, 1989.     Page four of the income tax return included a balance

sheet which listed “Mortgages, notes, bonds payable in less than

1 year” (notes payable) of $319,109.      The income tax return does

not identify the persons or entities to whom Radtam owed

$319,109.     Petitioners’ C.P.A., Jerome Collins, prepared the June

30, 1989, Federal income tax return.17     The income tax return was

filed in March of 1991.




     17
      Mr. Collins also prepared petitioners’ individual Federal
income tax returns for the years 1988, 1989, 1990, and 1991.
                              - 17 -

     Mr. Collins testified that he did not ask either Mr. Bacon

or Mrs. Bacon whether the $319,109 entry on the June 30, 1989,

balance sheet was a loan payable to Mrs. Bacon.   Furthermore, Mr.

Collins testified that he did not see any documents that would

indicate that the corporation owed Mrs. Bacon $319,109.18

Petitioners did not provide corporate minutes, loan documents,

promissory notes, mortgage documents, or other documents that

would substantiate their assertion.

     Mr. O’Malley, petitioners’new C.P.A., testified that he does

not know how Mr. Collins arrived at the loan payable figures that

appeared on Radtam’s Federal income tax return for the fiscal

year ending June 30, 1989.   Mr. O’Malley also testified that he

could not obtain any information about the loans payable account.

     Radtam’s Federal income tax returns for the fiscal years

ending 1990, 1991, and 1992, were all filed in June of 1996.19


     18
      Although he never asked petitioners about this, Mr.
Collins testified that he thought the $319,109 was rent that
Radtam owed Mrs. Bacon. If that were true, payments of rental
amounts due from prior years would appear to be income to Mrs.
Bacon in the year received.
     19
      Mr. Collins testified that Radtam’s Federal income tax
returns were not prepared or filed timely because details
regarding cash disbursements were not available. Each of these
income tax returns contained a Form 8275, Disclosure Statement.
The instructions to Form 8275 provide:

     Form 8275 is used by taxpayers and income tax return
     preparers to disclose items or positions, except those
     taken contrary to a regulation, that are not otherwise
     adequately disclosed on a tax return for purposes of
     avoiding certain penalties. The form is filed to avoid
     the portions of the accuracy-related penalty due to
                                                   (continued...)
                               - 18 -

None of those income tax returns contained any balance sheet

information.20   The lack of balance sheet information on

subsequent Radtam Federal income tax returns suggests that Mr.

Collins did not have sufficient detail to prepare the balance

sheets and that a note payable to Mrs. Bacon never existed.

     The evidence does not support petitioners’ assertion that

Radtam owed Mrs. Bacon $319,109 in 1989, and we do not believe




     19
      (...continued)
     disregard of rules or to a substantial underpayment of
     income tax if the return position has a reasonable
     basis. It can also be used for disclosures relating to
     the preparer penalties for understatements due to
     unrealistic positions or disregard of rules.

     The description of the items disclosed in Part I, General
Information, of the form was the same for each year. The
description provided was as follows: Gross receipts, Cost of
Sales, Payroll and other Expenses.

     The instructions for completing Part II of the form,
Detailed Explanation, provide that a taxpayer’s disclosure must
include:

     (1) A description of the relevant facts and the nature
     of the controversy affecting the tax treatment of the
     item, or

     (2) A concise description of the legal issues presented
     by these facts.

     The detailed explanation provided on Radtam’s Federal income
tax returns for its fiscal years ending 1990, 1991, and 1992 was
the same for each year. The explanation provided was as follows:
“Payroll, Sales and some expenses were established by other
estimates and means. Due to certain records which could not be
reconstructed or documented.”
     20
      The Federal income tax returns for the fiscal years ending
June 30, 1993 and 1994, also did not contain any balance sheet
information.
                                    - 19 -

petitioners’ assertion in this regard.       Thus, we find that the

bank deposit analysis does not have to be adjusted for this item.

II.   Fraud

      The next issue is whether any part of the underpayment of

income tax for each year in issue is due to fraud.       Respondent’s

notice of deficiency determined that petitioners are liable for

the addition to tax for fraud imposed under section 6653(b)(1)21

for the taxable year 1988 and penalties under section 6663(a)22

for the taxable years 1989, 1990, and 1991.       Each section imposes

an addition to tax or penalty equal to 75 percent of the portion

of an underpayment that is attributable to fraud.       Additionally,

each section provides that if any portion of an underpayment is

attributable to fraud, the entire underpayment is treated as

attributable to fraud, unless the taxpayer proves that some

portion of the underpayment is not due to fraud.       Finally, in the

case of a joint return, the fraud penalty does not apply with


      21
           Sec. 6653(b) provides, in part:

              SEC. 6653(b). Fraud.--

           (1) In general.--If any part of any underpayment
      * * * of tax required to be shown on a return is due to
      fraud, there shall be added to the tax an amount equal
      to 75 percent of the portion of the underpayment which
      is attributable to fraud.
      22
           Sec. 6663(a) provides:

           SEC. 6663(a). Imposition of Penalty.--If any part
      of any underpayment of tax required to be shown on a
      return is due to fraud, there shall be added to the tax
      an amount equal to 75 percent of the portion of the
      underpayment which is attributable to fraud.
                              - 20 -

respect to a spouse unless some part of the underpayment is due

to fraud of such spouse.   See secs. 6653(b)(3) for 1988 and

6663(c) for the years 1989, 1990, and 1991.

     Respondent has the burden of proving by clear and convincing

evidence that an underpayment exists for the years in issue and

that some portion of the underpayment is due to fraud.   See sec.

7454(a); Rule 142(b); Niedringhaus v. Commissioner, 99 T.C. 202,

210 (1992).   Consequently, respondent must establish: (1)

Petitioners have underpaid their taxes for each year, and (2)

some part of the underpayment is due to fraud.   See DiLeo v.

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

1992).

     Respondent need not prove the precise amount of the

underpayment resulting from fraud but only that some portion of

the underpayment of tax for each year is due to fraud.   See

Niedringhaus v. Commissioner, supra at 210.

     A.   Understatement of Income

     Where allegations of fraud are intertwined with unreported

and indirectly reconstructed income, respondent is required to

establish a likely taxable source for alleged unreported income

or to disprove nontaxable sources alleged by the taxpayer.     See

DiLeo v. Commissioner, supra at 873.

     The evidence clearly establishes that the Jug Handle Inn was

a likely source of unreported income.   The evidence also

establishes that petitioners had no nontaxable sources that could
                               - 21 -

account for the unreported income.      Mr. Bacon originally claimed

to have had $650,000 in nontaxable cash gifts on hand at the

beginning of 1988, which would have been a potential nontaxable

source.   However, at trial petitioners stipulated that they only

had $35,000 cash on hand at the beginning of 1988.     Petitioners

stipulated that they did not receive any gifts, inheritances,

legacies, or devises.

     Respondent’s final bank deposit analysis is based primarily

on stipulated facts.    The record contains clear and convincing

affirmative evidence that petitioners underpaid their 1988, 1989,

1990, and 1991 Federal income taxes.

     B.   Fraudulent Intent

     Respondent must prove that a portion of the underpayment is

attributable to the fraudulent intent of petitioners.     Fraud is

the intentional wrongdoing motivated by a specific purpose to

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

United States, 398 F.2d 1002, 1004 (3d Cir. 1968).      The existence

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

of the entire record.    See Gajewski v. Commissioner, 67 T.C. 181,

199 (1976), affd. without published opinion 578 F.2d 1383 (8th

Cir. 1978).

     Fraudulent intent can seldom be established by a single act

or by direct proof of the taxpayer’s intention.     It is usually

found by surveying the taxpayer’s whole course of conduct and is

to be proven as any other fact from all the evidence of record
                              - 22 -

and reasonable inferences properly to be drawn therefrom.   See

Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).   Any conduct, the

likely effect of which would be to mislead or to conceal may

establish an affirmative act of evasion.   See Spies v. United

States, 317 U.S. 492, 499 (1943).

     The courts have relied upon a number of indicia of fraud in

deciding whether an underpayment of tax is due to fraud.    While

no single factor is necessarily sufficient to establish fraud,

the existence of several indicia is persuasive circumstantial

evidence of fraud.   See Petzoldt v. Commissioner, 92 T.C. 661,

700 (1989).

     Respondent argues that the following factors or “badges” of

fraud are present in this case:   (1) A substantial and consistent

understatement of income; (2) false statements made by

petitioners during their interview with respondent’s agents; (3)

extensive dealings in cash; (4) failure to maintain adequate

records; and (5) failure to furnish their return preparer with

accurate information.

          1.   Substantial and Consistent Understatement of
               Income

     The consistent failure to report substantial amounts of

income over a number of years, standing alone, is effective

evidence of fraudulent intent.    See Schwarzkopf v. Commissioner,

246 F.2d 731, 734 (3d Cir. 1957), affg. and remanding on another

issue T.C. Memo. 1956-155.   In this case, there is a substantial
                                - 23 -

underpayment of tax for each of the years in issue.    Over the 4-

year period in issue, petitioners failed to report approximately

$1 million dollars of income.

            2.   False Statements

     Respondent argues that false statements made at the time

petitioners were interviewed by respondent’s agents are evidence

of fraudulent intent.   The Supreme Court has stated that an

"affirmative willful attempt may be inferred from * * * any

conduct, the likely effect of which would be to mislead or to

conceal."    Spies v. United States, supra at 499.   Making false

statements to a revenue agent is evidence of fraud.    See United

States v. Beacon Brass Co., 344 U.S. 43, 45 (1952).

     When petitioners first met with respondent’s special agents

regarding the years in question, Mr. Bacon told them that

petitioners and their children had received extensive cash gifts

from Mr. Bacon’s grandfather in $10,000 cash increments.

According to Mr. Bacon, he received a $10,000 cash gift each year

since his 18th birthday, his wife received an annual $10,000 cash

gift since they have been married, and their children each

received an annual $10,000 cash gift since their birth.    Mr.

Bacon told respondent’s agents that he received the cash gifts

through a brother-in-law, that neither petitioners nor their

children had ever met their grandfather, that they were told

never to tell anyone about the gifts, and that they were never to

put the money in the bank.   Mr. Bacon told the agents that
                                  - 24 -

petitioners had as much as $650,000 cash on hand at the beginning

of 1988.     Mr. Bacon’s statement about cash on hand was false.

Petitioners stipulated that at the beginning of 1988, they had

approximately $35,000 cash on hand.        Had Mr. Bacon’s statements

about cash on hand at the beginning of 1988 been true,

petitioners would have had a nontaxable source from which to make

deposits during the years in issue.        We can conceive of no reason

for such a false statement other than to mislead the agents.

     We find that Mr. Bacon’s statements about cash on hand

during this interview were intended to mislead the agents.

             3.   Extensive Dealings in Cash

     Dealing in cash to avoid scrutiny of one’s finances is a

badge of fraud.     See Bradford v. Commissioner, 796 F.2d 303, 307-

308 (9th Cir. 1986), affg. T.C. Memo. 1984-601.       Petitioners made

numerous and substantial cash transactions during the 4 years in

issue.     During this period, $590,689 in cash was deposited into

petitioners’ personal bank accounts and $113,571 in cash was used

in the purchase of real estate.23      All real estate purchases were

in Mrs. Bacon’s name, and she attended some, if not most, of the

property settlements.       A boat and a personal van were also

purchased for $22,350 in cash.

     Petitioners’ extensive use of cash supports a reasonable

inference that petitioners were knowingly and willfully

attempting to understate their taxable income.


     23
          See appendix C.
                                - 25 -

            4.   Failure To Maintain Adequate Records

     Taxpayers are required to keep such records as are necessary

for the determination of tax.    See sec. 6001.   The failure to

keep adequate records is a badge of fraud.    See Bradford v.

Commissioner, supra at 307.

     During the years in issue, petitioners transferred

$1,478,399 from two Radtam accounts into their personal bank

accounts.    Despite the significant transfers between Radtam’s

accounts and personal accounts, petitioners appear to have

maintained no records of these transactions.      Rather, they argue

that they were unaware of the accounting problems being created

and that they lacked the technical ability to keep corporate

books or prepare tax returns.

     Petitioners also deposited $590,689 in cash into their

personal bank accounts.    At trial, Mr. Bacon testified he did not

know the source of these significant cash deposits.

     While Mr. Bacon testified that he was unaware of the

problems created by commingling funds, his testimony is self-

serving, and we do not find him to be credible.     Mr. Bacon

appears to us to be an astute businessman and investor.     It would

have required relatively little, if any, technical ability to

maintain, or hire a bookkeeper to maintain, a record of transfers

between corporate and individual accounts or records of the

source of petitioners’ substantial cash deposits to their

personal accounts.
                              - 26 -

     Mrs. Bacon also had a working knowledge of Radtam’s books

and records.   Mrs. Bacon testified about the “settling” of daily

cash register receipts and the recording of Radtam’s income

during the years in issue.   Mrs. Bacon prepared disbursement

summaries from Radtam’s account at Security Savings & Loan, which

were furnished to petitioners’ accountant.   While Mr. Bacon

handled most of the deposits, Mrs. Bacon handled some deposits

and testified that she may have handled some large cash deposits.

          5.   Failure To Furnish Their Tax Return Preparer With
               Accurate Information

     The duty of filing accurate returns cannot be avoided by

placing responsibility upon an agent.   See American Properties,

Inc. v. Commissioner, 28 T.C. 1100, 1116 (1957), affd. 262 F.2d

150 (9th Cir. 1958).

     Beginning on or before July 1989, petitioners prepared a

monthly summary sheet on behalf of Radtam, which purportedly

listed total deposits into its bank accounts for that month.

These monthly summary sheets were furnished to petitioners’

accountant who prepared Radtam’s corporate tax returns24.   In

addition to the monthly summary sheets, each month petitioners

provided their accountant with corporate bank statements and a

schedule of corporate disbursements.




     24
      The same accountant prepared petitioners’ individual
Federal income tax returns and Bradam’s corporate Federal income
tax returns.
                                    - 27 -

     The bank statements provided to petitioners’ accountant were

primarily for two accounts at Security Savings & Loan.           Yet

Radtam maintained a savings account at Chemical Bank25 from July

1, 1988, through June 30, 1992.        It was not until after the

commencement of the examination by respondent that petitioners’

accountant learned that Radtam had a savings account with

Chemical Bank.

     Mrs. Bacon prepared annual summaries of personal income

sources and expenses relating to petitioners’ real estate, which

she gave to their accountant.        Mrs. Bacon also provided the

accountant with Forms 1099 and settlement sheets from each real

estate purchase.

     During the years in issue, petitioners transferred

$1,478,399 from two Radtam accounts and deposited $590,689 in

cash into their personal accounts.           Despite the significant

deposits into petitioners’ personal accounts, Mrs. Bacon did not

disclose these deposits or provide personal bank statements to

their accountant.

     On or about January 6, 1992, Mr. Bacon filed an application

for a VISA card listing his occupation as tavern owner of Radtam

Inc. t/a Jug Handle Inn and listed his annual salary as $299,000.

However, Mr. Bacon never reported receiving any salary or




     25
          Account No. 600-871255.
                                 - 28 -

dividends from Radtam on his individual Federal income tax

returns.26

       After considering the entire record, we hold that respondent

has met his burden of proving that some portion of petitioners’

underpayment for each year in issue is attributable to fraud on

the part of both Mr. and Mrs. Bacon.

III.    Statute of Limitations

       Section 6501(a) provides, generally, for a 3-year period of

limitations.    However, in the case of a false or fraudulent

return with the intent to evade tax, the tax may be assessed, or

a proceeding in court for collection of such tax may be begun

without assessment, at any time.     See sec. 6501(c)(1).   Where a

joint Federal income tax return was filed, a finding that fraud

was committed by either spouse keeps the period of limitations on

assessment open with respect to both spouses.     See Vannaman v.

Commissioner, 54 T.C. 1011, 1018 (1970).

       Since we have already found that the returns for the years

in issue were fraudulent, it follows that the exception found in



       26
      Mr. Bacon testified that he did not want to confuse the
credit card company with the fact that he did not draw a salary
but instead had substantial rental income. On their 1991 income
tax return, petitioners reported $135,000 gross rents from
property located at Route 73, Cinnaminson, N.J. (the property
rented to Radtam on which the Jug Handle Inn is located).
Petitioners’ total net rental income reported for 1991 was
$65,277. Petitioners reported gross rental receipts of $368,930,
rental expenses, other than depreciation of $221,217, and
depreciation of $82,435 on their Schedule E, Supplemental Income
and Loss Schedule.
                                - 29 -

section 6501(c)(1) applies, and the assessment of taxes for the

years in issue is not barred.

     After concessions by respondent,



                                     Decision will be entered

                                under Rule 155.
                                 - 30 -

                             APPENDIX A

             Income Reported on Tax Returns by Year

                          1988      1989        1990        1991

Wage/salary1             $3,196     $3,008       $2,840      $3,003
Interest income            3,286      4,631       9,426      21,522
Dividend income            1,357      1,123       1,170       1,202
Sch. D income              1,088       -0-         -0-         -0-
Pension/annuities          4,060      4,263       4,263       4,263
Social Security            5,094      4,710       5,544       5,850
                        2          3           4           5
Rents                     28,140     75,105      76,485      65,277
IRA deduction            (2,000)     (2,000)     (2,250)     (2,000)
Adjusted gross income     44,221     90,840      97,478      99,117
     1
      During the years in issue, the only wage or salary income
from Bradam and Radtam reported by petitioners on their Federal
income tax returns consisted of wages reported by Mrs. Bacon.
     2
      Petitioners reported on Schedule E gross rental income of
$136,000, rental expenses of $93,600, depreciation or depletion
expenses of $32,917, and Radtam S earnings of $18,657. ($136,000
- $93,600 - $32,917 + $18,657 = $28,140)
     3
      Petitioners reported on Schedule E gross rental income of
$232,000, rental expenses of $115,388, and depreciation or
depletion expenses of $41,507. ($232,000 - $115,388 - $41,507 =
$75,105).
     4
      Petitioners reported on Schedule E gross rental income of
$311,700, rental expenses of $172,150, and depreciation or
depletion expenses of $63,065. ($311,700 - $172,150 - $63,065 =
$76,485)
     5
      Petitioners reported on Schedule E gross rental income of
$368,930, rental expenses of $221,217, and depreciation or
depletion expenses of $82,436. ($368,930 - $221,217 - $82,436 =
65,277)
                                            - 31 -

                                       APPENDIX B

                         Deposits Made to Personal Bank Accounts

     Bank Account                              1988      1989      1990        1991
                                           1
Energy People Federal Credit Union          $5,000        ---        ---        ---
Savings account No. 11195-004

Barnett Bank
Checking account No. 1672684397             16,316      $27,523    $125,640   $59,702

Horizon Bank2
                                       3
Checking account No. 00506140-3         270,674         250,835     395,039   340,750

Security Savings & Loan
Checking account No. XX-XXXXXXX-1          182,947      142,400     219,001   343,915

Security Savings & Loan
Passbook account No. XX-XXXXXXX                89,748      ---       15,575     6,400

First Fidelity Bank
Money Market account No. 0010186161        278,347       32,867     176,807    63,395

Chemical Bank
Savings account No. 623-503-349                ---       76,051      57,137    13,802

Collective Federal Bank
Savings account No. 36-6-750909                ---          512      18,922     7,119
(continued...)
                                          - 32 -

(Appendix B continued...)
     Bank Account                         1988         1989          1990            1991

Barnett Bank
Money Market account No. 1679177650        ---          ---         277,265      24,719

Barnett Bank
Certificates of Deposit
account No. 0031756406                     ---           ---          ---        97,000

Barnett Bank
Certificates of Deposit
account No. 0031760714                     ---           ---          ---        96,000

Barnett Bank
Certificates of Deposit
account No. 0031760659                     ---           ---          ---        97,000

Total Gross Deposits:                    843,032       530,188     1,285,386   1,149,802
     1
       A single cash deposit made on Dec. 28, 1988.
     2
       Subsequent to the years in question, Horizon was acquired by Chemical Bank.    Thus,
the terms “Horizon” and “Chemical” refer to the same institution.
     3
       The notice of deficiency incorrectly shows 1988 deposits in this account as
$239,218.
                                   - 33 -

                                APPENDIX C

Property                     Payments Terms and Payments Made

1. 211 E. 17th Street,       The contract sales price was $412,000
Long Beach Township,         and the gross amount due from Mrs.
New Jersey --                Bacon was $415,167. To finance the
Purchased 2/23/88            purchase, Mrs. Bacon paid $3,167 in
                             cash, assumed a $287,0691 first mortgage
                             on the property, and secured a $124,931
                             second mortgage on the property. During
                             1988, petitioners paid down the $287,070
                             first mortgage by $283,310. The
                             payments were made over an 8-month
                             period of time, consisted of five
                             payments,2 all drawn on petitioners’
                             personal bank accounts. The $124,931
                             second mortgage required a single
                             payment of $124,931 in 1 year.3

2. Lots 7, 8, 13, and        Mrs. Bacon put down 10 percent or
14, Block 304, Marco         $58,500 as a deposit, executed a
Beach Unit 9 located         $300,000 promissory note secured by a
in Collier County,           mortgage on the property, and paid the
Florida. --                  balance on or before the closing.4
Purchased 3/4/88             The $300,000 purchase money note and
                             mortgage required 36 monthly payments of
                             $2,518 and a balloon payment of $288,988
                             at the end of the 36 months. Payments
                             on the purchase money note and mortgage
                             were made in accordance with the terms.
      1
        The settlement statement indicates that the existing loan assumed is
$287,069, while the stipulation indicates that the existing loan assumed was
$287.070 (after rounding). We assume that the stipulation contained a
typographical error.
      2
        From petitioners’ First Fidelity account, No. 0186161, a payment of
$76,509 was made on Apr. 1, 1988; a $94,950 payment on May 1, 1988; and a
$40,035 payment on June 1, 1988. From petitioners’ Security Savings & Loan
account, No. 238351019, a payment of $64,311 was made on Nov. 27, 1988, and a
$7,504 payment was made on Nov. 30, 1988.
      3
        The payment was satisfied on Feb. 21, 1989, in part by a $60,931
cashier’s check drawn on petitioners’ First Fidelity account and $64,000 in
funds withdrawn from Radtam’s savings account at Chemical bank, account No.
600-871255.
      4
        A portion of the payments, $158,375, was financed from $338,097 in
loan proceeds secured by property located at Block D-32, Lot 8, 216 E. 18th
Street, North Beach Haven, NJ. The remaining $179,722 of the loan proceeds
was deposited in Radtam’s account No. 23-835065-6.
                             - 34 -

3. 212 West Broad St., The contract sale price was $195,000.
and Palmyra, New Jersey, At closing, $197,017, consisting of
Purchased 3/31/89        $74,285 in cash and three checks
                         totaling $122,732, was deposited with
                         the settlement agent. The individual
                         check amounts are: $82,000, $21,000,
                         and $19,732.

                         The source of funds, in part, for the
                         $82,000 check was obtained in the form
                         of cash withdrawals from Radtam’s
                         general and lottery accounts at the
                         Security Savings & Loan. Additionally,
                         $21,000 was withdrawn from Radtam’s
                         savings account at Chemical Bank5 and
                         used to purchase a cashier’s check,
                         which was used to pay a portion of the
                         purchase price.

4. Lot 26, Block 388,    The property was purchased with $25,000
Unit 12, located in      in personal funds and a $400,000
Collier County,          purchase money mortgage was incurred.
Florida --
Purchased 6/18/90

5. Lot 4, Block 304,     The purchase price was $530,000 and the
Unit 9, located in       total amount due from buyer was
Collier County,          $533,896. At closing, Mrs. Bacon
Florida --               provided $152,285, and the principal
Purchased 6/29/90        amount of the new loan was $380,000.

6. 610 South Reed St., The property was paid for with $10,000
Cinnaminson, New Jersey, in cash, $1,592 in coin, and five
Purchased 7/2/90         checks totaling $120,000. Mr. Bacon, as
                         president of Radtam, Inc., was the
                         source of the $11,592 in cash and coin.
                         The source of the five checks are as
                         follows: First, a check for $55,000 was
                         purchased with $17,000 in funds
                         withdrawn from the Radtam 600 account,
                         $28,000 in funds withdrawn from
                         petitioners’ personal savings account
                         maintained at the same institution,6 and
                         a $10,000 check drawn on petitioners’
                         personal checking account at the same
                         institution. Second, $35,000 of the
                                   - 35 -
     5
         Account No. 600-871255.
     6
         Account No. 623503349.
                               purchase price was paid by check drawn
                               on petitioners’ personal checking
                               account at Barnett Bank. Third, $5,000
                               of the purchase price was paid by check
                               drawn on petitioners’ personal checking
                               account at First Fidelity Bank. Fourth,
                               a $20,000 check purchased from Security
                               Savings & Loan, in part with $19,000 in
                               cash tendered to the bank by petitioners
                               on July 2, 1990, and a $5,000 check,
                               drawn on the account of Thomas Begley,
                               Jr., Esq., from funds deposited in the
                               same account earlier in the year.

7. 407 North Canal St., Mrs. Bacon deposited $35,528 at
Cinnaminson, New Jersey, closing for the property. The deposit
Purchased 10/18/90       consisted of $5,528 in cash and a check
                         for $30,000. The $30,0007 cashier’s
                         check was purchased with a check drawn
                         on petitioners’ Chemical Bank account.8
     7
        The stipulation incorrectly refers to property located at 417 North
Canal Avenue when, in fact, the property is located at 407 North Canal Avenue.
      8
        Account No. 00506140-3.
                                      - 36 -
                                 APPENDIX D

                                       1988

Bank deposits to personal accounts:

      Bank                   Account Number    Deposit
Energy People
  Federal Credit Union          11195-004       $5,000
Barnett Bank                   1672684397       16,316
Chemical Bank                  00506140-3      239,218
Security Savings
  & Loan                     XX-XXXXXXX-1      182,947
Security Savings
  & Loan                       XX-XXXXXXX       89,748
First Fidelity                 0010186161      278,347
  Total gross deposits                         811,576

Less:
  a. Redeposited items, transfers, checks
     to cash                                   (221,947)
  b. Nontaxable items                            (5,094)
  c. Repayment to corporation                   (73,000)
Equals: Net deposits                            511,535

Less:
  a. Wages/salary per return                     (3,196)
  b. Interest income per return                  (3,286)
  c. Dividend income per return                  (1,357)
  d. Schedule D per return                       (1,088)
  e. Pension/annuities                           (4,060)
  f. Social Security (tax)                       (5,094)
  g. Rents (gross)                             (136,000)
Equals: Total deposits in excess of reported    357,454
         income

Plus:
  a. Corporate checks written for personal
     benefit of taxpayers                        5,007
Equals: Unreported income for 1988             362,461
                                 - 37 -

                               APPENDIX E

                                  1989

Bank deposits to personal accounts:

     Bank                  Account Number          Deposit
Energy People
  Federal Credit Union         11195-004             ---
Barnett Bank                  1672684397           $27,523
Chemical Bank                 00506140-3           250,835
Security Savings
  & Loan                    XX-XXXXXXX-1           142,400
Security Savings
  & Loan                      XX-XXXXXXX            72,000
First Fidelity                0010186161            27,867
Chemical Bank                623-503-349            76,051
Collective Federal           36-6-750909               512
  Total bank deposits - 1989                       597,188

Cash expenditures:
  a. Note receivable (Ras)                          64,000
  b. Purchase 212 W. Broad Street (3/31/89)         74,285

Rental income checks paid by Radtam, Inc. to
taxpayer and not deposited into taxpayer’s
bank accounts used in above analysis.               41,000

Rental income checks paid to taxpayer by
managing agent(s) of taxpayer’s Marco Island,
FL rental properties and not deposited into
taxpayers’ bank accounts used in above analysis.
Agent: Horizon by Sea                                3,250
  Total gross income - 1989                        779,723

Less   nontaxable deposits/items:
  a.   Paybacks to corp. from personal account      (55,925)
  b.   Social Security benefits (nontaxable)         (4,710)
  c.   Transfer between accounts                   (173,000)

Receipts per return:
  a. Wages/salary per return                         (4,631)
  b. Interest income per return                      (3,008)
  c. Dividend income per return                      (1,123)
  d. Pension/annuities                               (4,263)
  e. Social Security (tax)                           (4,710)
  f. Rents (gross)                                 (232,000)
Equals: Total nontaxable deposits/items            (483,370)

Total gross income unreported                      296,353
Taxable income per return                          (71,907)
Total income unreported                            224,446
Personal items paid by corporation                   2,247
Total unreported income - 1989                     226,693
                                         - 38 -
                                       APPENDIX F

                                          1990

Bank deposits to personal accounts:

       Bank                       Account Number    Deposit
Energy People
  Federal Credit Union                 11195-004       ---
Barnett Bank                          1672684397    $125,640
Chemical Bank                         00506140-3     395,039
Security Savings
  & Loan                           XX-XXXXXXX-1      219,001
Security Savings
  & Loan                             XX-XXXXXXX        15,575
First Fidelity                       0010186161       176,807
Chemical Bank                       623-503-349        57,137
Collective Federal                  36-6-750909        18,922
Barnett Bank                         1679177650       277,265
  Total bank deposits - 1990                        1,285,386

Cash   expenditures:
  a.   Purchase 10/18/90 - 407 Canal Street            5,258
  b.   Purchase 7/2/90 - 610 Reed Street              11,592
  c.   Purchase 6/18/90 - Lot 26 B 388 Unit 12        25,000
  d.   1990 Plymouth Voyager 10/9                      6,500
  e.   Boston Whaler boat 7/26                        15,850

Rental income checks paid by Radtam, Inc., to
taxpayer and not deposited into taxpayer’s bank
accounts used in above analysis.                      44,000

Rental income checks paid to taxpayer by managing
agent of taxpayer’s Marco Island, FL rental
properties and not deposited into taxpayer’s bank
accounts used in above analysi.
  Agents: Harborview Realty, Inc.                      1,000
           Horizon by Sea Realty                       8,809

Rental income checks paid to taxpayer by managing
agent of taxpayer’s New Jersey rental properties
and not deposited into taxpayer’s bank accounts
used in analysis.
  Agents: Van Dyk Group, Inc.                          3,080
           Newbern Realty                              9,774

Rental income checks paid to taxpayer directly
by tenants for rental of Marco Island or New
Jersey properties and not deposited into
taxpayer’s bank accounts used in above analysis.       16,761
  Total gross income 1990                           1,433,010

Less   nontaxable deposits/items:
  a.   Transfer between accounts                    (487,811)
  b.   Social Security benefits (nontaxable)          (5,544)
  c.   Check to cash 611 account 00506140            (30,000)

Receipts Per Return:
  a. Wages/salary per return                          (2,840)
  b. Interest income per return                       (9,426)
  c. Dividend income per return                       (1,170)
  d. Social Security (tax)                            (5,544)
  e. Rents (Gross)                                  (311,700)
  f. Pension/annuities                                (4,263)
Equals: Total nontaxable deposit/items              (858,298)

Total gross income unreported                        574,712
Taxable income per return                            (73,861)
Total income unreported - 1990                       500,851
                                         - 39 -
                                        APPENDIX G

                                           1991

Bank deposits to personal accounts:
       Bank                      Account Number       Deposit
Energy People
  Federal Credit Union               11195-004          ---
Barnett Bank                        1672684397        $59,702
Chemical Bank                       00506140-3        340,750
Security Savings
  & Loan                          XX-XXXXXXX-1        343,915
Security Savings
  & Loan                            XX-XXXXXXX           6,400
First Fidelity                      0010186161          63,395
Chemical Bank                      623-503-349          13,802
Collective Federal                 36-6-750909           7,119
Barnett Bank                        1679177650          24,719
Barnett Bank C.D.                   0031756406          97,000
Barnett Bank C.D.                   0031760714          96,000
Barnett Bank C.D.                   0031760659          97,000
  Total bank deposit - 1991                          1,149,802

Cash expenditures:
  a. Purchase 3 Savings Bonds at face
     value of $10,000                                  15,000

Rental income checks paid by Radtam, Inc., to
taxpayer and not deposited into taxpayer’s bank
accounts used in above analysis.                       56,000

Rental income checks paid to taxpayer by managing
agent(s) of taxpayer’s Marco Island, FL rental
properties and not deposited into taxpayer’s bank
accounts used in above analysis.
Agent(s): Horizon By Sea Inc.                           9,951

Rental income checks paid to taxpayer by managing
agent of taxpayer’s New Jersey rental properties
and not deposited into taxpayer’s bank accounts
used in above analysis.
Agent(s): Bayshore Realty                               3,816
           Newbern Realty                              13,710

Rental income checks paid to taxpayer directly
by tenants for rental of Marco Island or New
Jersey properties and not deposited into
taxpayer’s bank accounts used in above analysis.        31,790
  Total gross income                                 1,280,069

Less   nontaxable deposits/items:
  a.   Paybacks to corp. from personal account         (87,500)
  b.   Social Security benefits (nontaxable)            (5,850)
  c.   Transfer between accounts                      (177,500)

Receipts per return:
  a. Wages/salary per return                            (3,003)
  b. Interest income per return                         21,522)
  c. Dividend income per return                         (1,202)
  d. Pension/annuities                                  (4,263)
  e. Social Security (tax)                              (5,850)
  f. Rents (gross)                                    (368,930)
  g. Barnett CD (3)                                   (290,000)
Equals: Total nontaxable deposit/items                (965,620)

Total gross income unreported                         314,449
Taxable income per return                             (78,032)
Total income unreported - 1991                        236,417
                                                  - 40 -
                                                     APPENDIX H

                                                     1988          1989       1990       1991
Mathematical errors:
  Reported taxable income allowed twice              ---          71,907     73,861      78,032
  CD purchases deducted as reported receipts         ---           ---        ---       290,000
  Transfer1 included as $5,000.10. Should be
    $500.10                                          ---           ---        4,500       ---
Distributive share Radtam “S” Corp. income
  reported and included in deposits from corp.     (38,341)        ---        ---         ---
Salary withholding - gross is taxable but only
  net was deposited                                   440            326        292         301
Transfers used to purchase CD’s not in
  statutory notice                                   ---           ---        ---       (214,500)
Transfers between accounts - not in statutory
  notice of deficiency:
   To First Fidelity2 Bank                           ---           ---       (25,000)     ---
   To Barnett3 Bank                                  ---           ---       (85,000)     ---
   To Barnett4 Bank                                  ---           ---       (50,000)     ---
   To Chemical5 Bank                                 ---           ---         ---      (22,000)
   To Chemical6 Bank from Commerce Bank              ---           ---         ---      (17,000)
   To Chemical7 Bank                                 ---           ---         ---      (26,000)
   To Chemical8 Bank                                 ---           ---         ---       (8,255)
Refund of advance to Radtam                          ---          (5,425)      ---        ---
Corp. funds used to purchase 610 S. Reed             ---           ---        17,000      ---
Radtam funds9 used to pay King Mortgage on
  personal real estate                               ---          64,000       ---        ---
Cash expenditure/Lot 26 B 388 Unit 12                ---           ---       (25,000)     ---
Specific rental income checks deposited to
  corporate bank accounts - added separately
  in statutory notice of deficiency                  ---          (44,250)   (83,424)   (115,267)
Additional identified paybacks to corporations:
  Chemical10 Bank                                  (10,000)         ---       ---         ---
  Chemical11 Bank                                  (10,000)         ---       ---         ---
  Barnett12 Bank                                      (100)         ---       ---         ---
  Barnett13 Bank                                      (100)         ---       ---         ---
  Barnett14 Bank                                      ---         (11,000)    ---         ---
  Chemical15 Bank                                     ---         (16,000)    ---         ---
  Barnett16 Bank                                      ---           ---       ---        (2,400)
                                                  - 41 -
(continued...)
(Appendix H continued...)
                                                      1988      1989        1990      1991
Deposits from bank statements originally missing:
  Chemical17
   2/17/88 deposit                                   20,000     ---         ---        ---
   2/22/88 deposit                                      339     ---         ---        ---
  Radtam withdrawals                                 11,118     ---         ---        ---
  First Fidelity18 Bank                                ---      5,000       ---        ---
Insurance claim - nondeposit refund - 4/29/92
  property settlement refund 9/30/91 Cinnaminson
  Sewer Authority                                      ---      ---         ---       (14,000)
Corporate withdrawal 2/1/91 used to purchase
  $68,000 cashier’s check.19 (Cashier’s check from
  personal account included as transfer
  in statutory notice)                                 ---      ---         ---       25,000
Corporate funds - purchase for Bradtam                 ---      ---         ---       50,000
Check No. 611 to cash - to Boatworks for
  purchase 407 Canal Street given as cash
  withdrawal in statutory notice.                      ---      ---        30,000       ---
Savings bond purchases not with cash.                  ---      ---         ---       (15,000)
Radtam check - points to refinance personal
  mortgage.                                            ---     10,657       ---        ---
Interest income Commerce Bank - not in deposits        ---      ---           135         86
Interest income, Security Savings & Loan20 not
  included in deposits                                  435        146      ---        ---
 Interest income, Energy People Federal Credit Union    135      ---        ---        ---
Deposits to Security Savings & Loan                    ---     (72,000)     ---        ---
Corporate checks used to purchase cashier’s check
  at Security Savings & Loan21 for purchase of 212
  W. Broad Street Property                             ---     72,000       ---        ---
Proceeds mortgage refinance - deposit to Radtam
  savings account (2/29/88)                        (179,722)    ---         ---        ---
Personal funds deposited to corporate bank
  account on 2/1/88                                 (46,340)    ---         ---        ---
Corporate funds used to purchase 212 W. Broad
  (3/31/89)                                            ---     21,000       ---        ---
Personal items paid by corporation:
   Per statutory notice                                ---     (2,247)      ---        ---
                                                                 22        23
   Corrections to statutory notice                     ---         860      2,535      ---

Net adjustments to statutory notice               (252,136)    94,974     (140,101)    8,997
(continued...)
                                                  - 42 -
(Appendix H continued...)
      1
        Check No. 622, Chemical Bank.
      2
        Account No. 6161 (2/12/90)
      3
        Account No. 2684-397 (6/18/90)
      4
        Account No. 177650 (6/25/90)
      5
        Account No. 506-140-3 (1/31/91)
      6
        Account No. 506-140-3 (1/31/91)
      7
        Account No. 506-140-3 (1/31/91)
      8
        Account No. 506-140-3 (2/04/91)
      9
        Account No. 600-871255 (2/21/89)
      10
         Account No. 506140-3 (2/16/88), Check No. 157.
      11
         Account No. 506140-3 (2/16/88), Check No. 158.
      12
         Account No. 2684-397 (6/22/88), Check No. 114.
      13
         Account No. 2684-397 (10/4/88), Check No. 115.
      14
         Account No. 2684-397 (2/27/89), Check No. 118.
      15
         Account No. 506140-3 (2/27/89), Check No. 278.
      16
         Account No. 84397    (2/26/91), Check No. 157.
      17
         Account No. 506140-3.
      18
         Account No. 10186161.
      19
         On Feb. 1, 1991, Mr. Bacon purchased a cashier’s check in the amount of $68,000 from Chemical Bank
made payable to himself. Mr. Bacon obtained $25,000 of the cost of the cashier’s check with a $25,000
withdrawal from Radtam’s savings account at Chemical Bank, account No. 600-871255, and the remaining $43,000
from petitioners’ savings account at Chemical Bank, account No. 623 503 349. The $68,000 was included as a
nontaxable transfer in the bank deposits listed in respondent’s bank deposit analysis, as incorporated in
the statutory notice.
      20
         Account No. 23-100672.
      21
         Account No. 23-100672.
      22
         The record is unclear on how the parties arrived at this number.
      23
         The record is unclear on how the parties arrived at this number.
                                      - 43 -
                                 APPENDIX I

                                       1988

Bank deposits to personal accounts:

      Bank                   Account Number    Deposit
Energy People Federal
  Credit Union                  11195-004       $5,000
Barnett Bank                   1672684397       16,316
Chemical Bank                  00506140-3      270,674
Security Savings
  & Loan                     XX-XXXXXXX-1      182,947
Security Savings
  & Loan                       XX-XXXXXXX       89,748
First Fidelity                 0010186161      278,347
  Total gross deposits                         843,032

Less:
Per statutory notice
  a. Redeposited items, transfers, checks
      to cash                                  (221,947)
  b. Nontaxable items                            (5,094)
  c. Repayment to corporation                   (73,000)
Additional repayments to corporation            (22,200)
Proceeds of personal mortgage deposited in
  corporate account                            (179,722)
Repayment of loan to petitioners deposited
  in corporate account                         (46,339)
Reduction to income - Subchapter S income      (38,341)

Equals: Net deposits                           256,389

Less:
  a. Wages/salary per return                     (3,196)
  b. Interest income per return                  (3,286)
  c. Dividend income per return                  (1,357)
  d. Schedule D per return                       (1,088)
  e. Pension/annuities                           (4,060)
  f. Social Security (tax)                       (5,094)
  g. Rents (gross)                             (136,000)
Equals: Gross income per tax return            (154,081)

Difference between gross salary and
  actual salary deposited                          440
Plus corporate expenditures on petitioners’
  behalf                                         5,007

 Total unreported income from bank deposits    107,755
                                       - 44 -
                                      APPENDIX J

                                         1989

Bank deposits to personal accounts:

       Bank                      Account Number                   Deposit
Energy People Federal
  Credit Union                      11195-004                       ---
Barnett Bank                       1672684397                     $27,523
Chemical Bank                      00506140-3                     250,835
Security Savings
                                                                  1
  & Loan                         XX-XXXXXXX-1                         142,400
Security Savings
  & Loan                           XX-XXXXXXX                       ---
First Fidelity                     0010186161                      32,867
Chemical Bank                     623-503-349                      76,051
Collective Federal                36-6-750909                         512
  Total bank deposits                                             530,188
Cash expenditures:
  a. Notes receivable (Ras)                                           64,000
  b. Purchase 212 W. Broad Street (3/31/89)                           74,285
  c. Radtam check - Points paid to refinance
       personal mortgage                                              10,657
  d. Corporate funds2 used to purchase 212
       West Broad Street                                              93,000
  e. Corporate funds used to pay mortgage on
       211 East 17th                                                   64,000
                                                                  3
                                                                      305,942
Rental income checks paid by Radtam, Inc., to
  taxpayer and not deposited into taxpayer’s
  bank accounts used in above analysis.                               41,000
Rental income checks paid to taxpayer by
  managing agent(s) of taxpayer’s Marco Island,
  Fl., rental properties and not deposited into
  taxpayers’ bank accounts used in above analysis.
    Agent: Horizon by Sea                                           3,250
  Total gross income                                              880,380

Less nontaxable deposits/items per statutory notice:
  a. Paybacks to corp. from personal account                      (55,925)
  b. Social Security benefits (nontaxable)                         (4,710)
  c. Transfer between accounts                                   (173,000)
Additional repayments and transfers:
  a. Refund of advance to Radtam                                      (5,425)
  b. Personal rental income deposited to
       corporate accounts                                         (44,250)
  c. Additional paybacks to corporation                          (27,000)
  Total reductions to bank deposits                              (310,310)

Receipts per return:
  a. Wages/salary per return                                       (4,631)
  b. Interest income per return                                    (3,008)
  c. Dividend income per return                                    (1,123)
  d. Pension/annuities                                             (4,263)
  e. Social Security (tax)                                         (4,710)
  f. Rents (gross)                                               (232,000)
  Equals: Gross receipts per return                              (249,735)
Difference between gross salary and
  actual salary deposited                                               326
Plus personal items paid by corporation                                 860
                                                                  4
  Total unreported income from bank deposits:                       321,521
       1
         Because of a typographical error, respondent incorrectly reflected gross
deposits of “$142,000”. The correct figure is “$142,400”.
       2
         Corporate funds were drawn from two accounts: $72,000 from the Security
Savings account and $21,000 from Radtam’s savings account at Chemical Bank (account
No. 600-871255).
       3
         Because of a computational error, respondent incorrectly reflected total cash
expenditures of “$306,482”. The correct figure is “$305,942”.
       4
         The net effect of respondent’s typographical and computational errors is a
$140 reduction in petitioners’ unreported income.
                                        - 45 -
                                       APPENDIX K

                                            1990

Bank deposits to personal accounts:

       Bank                        Account Number                Deposit
Energy People
  Federal Credit Union                 11195-004                    ---
Barnett Bank                          1672684397                 $125,640
Chemical Bank                         00506140-3                  395,039
Security Savings
  & Loan                            XX-XXXXXXX-1                  219,001
Security Savings
  & Loan                              XX-XXXXXXX                   15,575
First Fidelity                        0010186161                  176,807
Chemical Bank                        623-503-349                   57,137
Collective Federal                   36-6-750909                   18,922
Barnett Bank                          1679177650                  277,265
Total bank deposits - 1990                                      1,285,386

Cash   expenditures:
  a.   Purchase 10/18/90 407 Canal Street                            5,258
  b.   Purchase 7/2/90 610 Reed Street                             47,592
  c.   1990 Plymouth Voyager 10/9                                    6,500
                                                                  1
  d.   Boston Whaler boat 7/26                                      15,850

Gross income deposited to corporate account:
Personal rental income treated as income in Statutory Notice
  of Deficiency                                                    83,424
Difference between gross salary and actual salary deposited           292
Personal items paid by corporation                                  2,535
  Total increase in bank deposits:                                161,451

Less   nontaxable deposits/items:
  a.   Transfer between accounts                                 (487,811)
  b.   Social Security benefits (nontaxable)                       (5,544)
  c.   Check to cash 611 account 00506140                         (30,000)

Additional repayments and transfers:
  a. Corrections to statutory notice of deficiency
     for check to cash                                             30,000
  b. Correction of transfer listed in statutory notice of
     deficiency                                                     4,500
  c. Personal rental income deposited to corporate accounts       (83,424)
  d. Additional transfers not listed in statutory notice of
     deficiency                                                  (160,000)

Receipts Per Return:
  a. Wages/salary per return                                       (2,840)
  b. Interest income per return                                    (9,426)
  c. Dividend income per return                                    (1,170)
  d. Social Security (tax)                                         (5,544)
  e. Rents (gross)                                               (311,700)
  f. Pension/annuities                                             (4,263)
  Total reductions:                                            (1,067,222)

  Total gross income unreported:                                  379,615
       1
         Because of a typographical error in respondent’s bank deposit analysis,
“$15,580” should be “$15,850”. As a result, petitioners’ total unreported gross
income is increased by $270.
                                           - 46 -
                                          APPENDIX L

                                             1991

Bank deposits to personal accounts:

       Bank                        Account Number                  Deposit
Energy People
  Federal Credit Union                    11195-004                  ---
Barnett Bank                             1672684397                $59,702
Chemical Bank                            00506140-3                340,750
Security Savings
  & Loan                            XX-XXXXXXX-1                   343,915
Security Savings
  & Loan                                 XX-XXXXXXX                   6,400
First Fidelity                           0010186161                  63,395
Chemical Bank                           623-503-349                  13,802
Collective Federal                      36-6-750909                   7,119
Barnett Bank                             1679177650                  24,719
Barnett Bank C.D.                        0031756406                  97,000
Barnett Bank C.D.                        0031760714                  96,000
Barnett Bank C.D.                        0031760659                  97,000
  Total bank deposit - 1991                                       1,149,802

Cash expenditures:
  a. Purchase 3 savings bonds at face
     value of $10,000                                               15,000
  b. Less: Correction - $15,000 paid by check                      (15,000)
  c. Use of Radtam funds to purchase assets for Bratam              50,000

Gross income deposited to corporate account:
Personal rental income treated as income in statutory notice
                                                                   1
  of deficiency                                                        115,267

Difference between gross salary and actual salary deposited            301
  Total increase in bank deposits:                                 165,568

Less    nontaxable deposits/items:
  a.    Paybacks to corp. from personal account                     (87,500)
  b.    Social Security benefits (nontaxable)                        (5,850)
  c.    Transfer between accounts                                  (177,500)

Additional repayments, transfers and nontaxable items:
  a. Transfers from personal accounts used to purchase Barnett
     Bank certificates of deposit                                  (214,500)
  b. Personal rental income deposited to corporate accounts        (115,267)
  c. Additional transfers not listed in statutory notice of
     deficiency                                                    (73,255)
  d. Additional payback to corporation                              (2,400)
  e. Nontaxable refund from sewer authority                        (14,000)
  f. Withdrawal from corporate account treated as a transfer
     in statutory notice of deficiency                                 25,000

Receipts per return:
  a. Wages/salary per return                                         (3,003)
  b. Interest income per return                                     (21,522)
  c. Dividend income per return                                      (1,202)
  d. Pension/annuities                                               (4,263)
  e. Social Security (tax)                                           (5,850)
  f. Rents (gross)                                                 (368,930)
    Total reductions:                                            (1,070,042)

       Total gross income unreported:                              245,328
       1
         Because of a typographical error in respondent’s bank deposit analysis,
“$115,627" should be “$115,267". As a result, petitioners’ total unreported gross
income is decreased by $360.
