UNITED STATES TAX COURT

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T.C. Memo. 1997-276

UNITED STATES TAX COURT

TED W. GLEAVE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

747 KENMORE AVE., INC., Petitioner v. COMMISSIONER

OF INTERNAL REVENUE, Respondent

Docket Nos. 3586-87, 10512-89.

Filed June 18, 1997.

Individual petitioner (G) owned corporate petitioner

(K). G caused K to write checks drawn against K’s account

(1) to pay for investments and personal expenses of G, or

(2) that were payable to cash or other. K filed tax returns

for 1980, 1981, and 1982, but G did not. R used the bank

deposits method and an analysis of checks disbursed in

determining deficiencies against K.

1. Held: G and K are liable for additions to tax for

civil fraud for 1980, 1981, and 1982. Secs. 6653(b) and

6653(b)(1), I.R.C. 1954.

2. Held, further, G and K are liable for additional

additions to tax for 1982 based on the portion of the

deficiencies attributable to fraud; amounts redetermined.

Sec. 6653(b)(2) I.R.C. 1954.

- 2 3. Held, further, amounts of deficiencies

redetermined.

Donald L. Summer, for petitioners.

Jerome F. Warner and Matthew I. Root, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHABOT, Judge:

Respondent determined deficiencies in

Federal individual and corporate income tax and additions to tax

under section 6653(b)1 (fraud) against petitioners as follows:

Additions to tax

Sec.

6653(b)(1) 6653(b)(2)

Petitioner

Year1

Deficiency2

Sec.

6653(b)

Ted W. Gleave

Dkt. No. 3586-87

1980

1981

1982

$50,619.25

266,339.71

52,610.08

$25,309.63

133,169.86

---

----$26,305.04

-----

747 Kenmore

1980

Ave. Inc.

1981

Dkt. No. 10512-89 1982

2,972.00

317,523.17

191,446.02

1,486.00

158,761.59

---

----95,723.01

-----

Calendar years for the individual petitioner and fiscal years ending Aug.

31 for the corporate petitioner.

Of these amounts in docket No. 3586-87, $2,097.90 for 1980, $2,762.10 for

1981, and $3,029.40 for 1982 are self-employment taxes under ch. 2; the

remainder are income taxes under ch. 1.

50 percent of the interest due on the entire deficiency.

The substance of sec. 6653(b) as in effect for 1980 and

1981, and sec. 6653(b)(1) as in effect for 1982 appears in secs.

6651(f) and 6663 of present law.

Unless indicated otherwise, all section and chapter

references are to sections and chapters of the Internal Revenue

Code of 1954 as in effect for the years in issue.

- 3 By answer to the petition of Ted W. Gleave, docket No. 358687, respondent asserts as to each of the years in issue, in the

alternative to section 6653(b), additions to tax under sections

6651 (failure to timely file tax returns), and 6653(a)

(negligence, etc.).

See secs. 6214(a), 6653(d).

Petitioner Ted W. Gleave is hereinafter sometimes referred

to as Gleave.

Petitioner 747 Kenmore Ave., Inc., is hereinafter

sometimes referred to as Kenmore.

The instant cases have been consolidated for trial,

briefing, and opinion.

After concessions by both sides,2 the issues for decision

are as follows:

(1) Whether Gleave is liable for civil fraud additions

to tax under section 6653(b) (for 1980 and 1981), and under

sections 6653(b)(1) and 6653(b)(2) (for 1982) and, as to

section 6653(b)(2), in what amount.

(2)

Whether Kenmore is liable for civil fraud

additions to tax under section 6653(b) (for its fiscal 1980

and 1981), and under sections 6653(b)(1) and 6653(b)(2) (for

Gleave concedes that he did not file income tax returns

for any of the years in issue. Petitioners concede that certain

of the checks that Kenmore issued are for Gleave’s personal

expenses. Respondent concedes adjustments that, respondent

contends, reduce Gleave’s deficiencies to $26,820.24 for 1980,

$259,373.31 for 1981, and $50,213.68 for 1982; and reduce

Kenmore’s deficiencies to $215,601.05 for its fiscal 1981, and

$155,587.90 for its fiscal 1982. Respondent’s concessions as to

Gleave aggregate almost one-tenth of the amounts determined

against Gleave; those as to Kenmore aggregate more than onequarter of the amounts determined against Kenmore. The additions

to tax are reduced accordingly.

- 4 its fiscal 1982) and, as to section 6653 (b)(2), in what

amount.

(3)

What the amount is of Gleave’s and Kenmore’s

unreported income.

FINDINGS OF FACT3

Rule 151(e) provides that “All briefs shall contain the

following in the order indicated”. Petitioners’ opening and

answering briefs (66 pp. and 16 pp., respectively) essentially

ignore the first four of the six subparagraphs of the Rules’

instructions. Our ability to understand petitioners’ contentions

was handicapped by their failure to obey the Rules’ instructions.

In many instances, our ability to ascertain the basis for those

of petitioners’ contentions that we do understand, was defeated

by petitioners’ failure to obey the instruction in Rule 151(e)(3)

that-In each such numbered statement, [proposed finding of

fact] there shall be inserted references to the pages

of the transcript or the exhibits or other sources

relied upon to support the statement.

In addition, petitioners have ignored the instruction in Rule

151(e)(3) that-In an answering or reply brief, the party shall set

forth any objections, together with the reasons

therefor, to any proposed findings of any other party,

showing the numbers of the statements to which the

objections are directed; in addition, the party may set

forth alternative proposed findings of fact.

Under the circumstances, we have assumed that petitioners do not

object to respondent’s proposed findings of fact except to the

extent that petitioners’ statements on brief are clearly

inconsistent therewith, in which event we have resolved the

inconsistencies based on our understanding of the record as a

whole. See Estate of Jung v. Commissioner, 101 T.C. 412, 413

n.2 (1993).

Unless indicated otherwise, all Rule references are to the

Tax Court Rules of Practice and Procedure.

- 5 Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.

When the respective petitions were filed in the instant

cases, Gleave resided in Grand Island, New York, and Kenmore had

its principal place of business in Kenmore, New York, a village

adjacent to Buffalo, New York.

Background

Gleave attended school through the tenth grade, and he

earned a G.E.D., the equivalent of a high school diploma.

began working when he was 14, about 1956.

Gleave

For the next 10 years

or so he held several jobs, including military service and

construction work.

About 1966 Gleave bought a nursery, called

Ted’s Nursery, which he operated as a proprietorship.

Gleave

sold Ted’s Nursery about 1978; he took back a purchase-money

mortgage of about $75,000, which was paid at the rate of $550 per

month.

Kenmore is a New York corporation organized about 1972; at

all pertinent times Gleave was Kenmore’s president and sole

owner.

When Kenmore was organized, it was a secondary business

to Ted’s Nursery.

During the years in issue Kenmore operated a

retail gasoline station, an automobile repair shop, and a dump

truck and construction business, and transported and soldwholesale bulk fuel.

Kenmore was not in business when its

petition was filed in the instant cases.

- 6 Kenmore’s principal business location was in Kenmore, at 747

Kenmore Avenue, hereinafter sometimes he referred to as the

Kenmore location.

The gasoline station business that Kenmore

operated at the Kenmore location will hereinafter sometimes be

referred to as the Kenmore station.

Gleave did not file Federal income tax returns for any of

the years in issue.4

However, Gleave caused Kenmore to file

Federal corporate income tax returns for its fiscal years ending

August 31 of 1980, 1981, and 1982.

These tax returns were

prepared by Kenmore’s accountant, Norbert Schechter, C.P.A.,

hereinafter sometimes referred to as Schechter.

Kenmore’s 1980

and 1981 tax returns were signed by Gleave.

During the years in issue Gleave did not have a checking

account in his own name in any financial institution in the

United States, and it appears that Gleave did not keep personal

records.

During the years in issue Kenmore had a checking

account in its name at M & T Bank.

This account will hereinafter

sometimes be referred to as Kenmore’s Account.

Kenmore’s Account for his personal banking.

Gleave used

Many (if not all) of

Gleave’s personal expenses were paid out of Kenmore’s Account.

Kenmore

For each of the years in issue, Gleave’s tax status is

married filing separately; he is not entitled to a dependency

deduction for his wife; and he is not entitled to the standard

deduction but must itemize his “below-the-line” deductions. Sec.

63(e)(1)(A).

- 7 Kenmore began as a retail gasoline station about 1972.

June of 1980 Kenmore had expanded into an automobile repair shop,

and a dump truck and construction business.

In late 1980 or

early 1981 Kenmore further expanded into the transporting and

wholesaling of bulk fuel.

On July 1, 1981, Kenmore began to

operate a second retail gasoline station, at 1066 Sheridan Drive,

Tonawanda, New York, hereinafter sometimes referred to as the

Sheridan location.

The gasoline station business that Kenmore

operated at the Sheridan location will hereinafter sometimes be

referred to as the Sheridan station.

Gleave bought the Sheridan

location from an unrelated party on June 30, 1981.

The Sheridan

location is within 5 miles of the Kenmore location.

Gleave was often at the Kenmore location around 6 a.m. each

day.

However, Gleave was usually away from this location during

most of the day.

Gleave often worked “out on the road”--for

example, driving and fixing Kenmore’s trucks.

Also, at one point

during the years in issue Gleave spent some time in Indiana

helping a brother run a construction business.

Joe Heintz (hereinafter sometimes referred to as Heintz) ran

Kenmore’s daily operations.

Although Heintz was not a

bookkeeper, he did some bookkeeping for Kenmore.

Shirley Bohn

(hereinafter sometimes referred to as Bohn) assisted Heintz with

Kenmore’s bookkeeping and secretarial work from January 1981 to

March 1983.

- 8 Kenmore used the “one-write” system of bookkeeping, a

“pegboard” accounting system, in which each check that was

written on Kenmore’s Account was simultaneously recorded as a

disbursement.

If desired, notations could be made on the one-

write record.

(See the description in Safeguard Business Sys. v.

New England Bus. Sys., 696 F. Supp. 1041, 1042 (E.D. Pa. 1988).)

In addition to disbursements, deposits were recorded on Kenmore’s

one-write system.

During the years in issue Bohn and Heintz made

all (or substantially all) of the bookkeeping entries on

Kenmore’s one-write system.

Each disbursement listed in Kenmore’s one-write system had a

corresponding notation in one of several columns, which explained

the purpose for which the disbursement was made.

One of these

columns, headed “Gleave account”, was used as a catch-all for all

the disbursements that Bohn and Heintz did not know how to

classify.

Neither Bohn nor Heintz was trained in accounting.

Bohn understood that, when Schechter received the one-write

ledgers each month from Kenmore, then he would determine the

purpose of, and classify the items listed under the “Gleave

account” heading.

It is unclear what determinations and

classifications Schechter actually made about the “Gleave

account” items.5

Testimony from Schechter might have been useful in

clarifying the facts of this case. Despite Schechter’s being

available and living in the Buffalo area (where most of the trial

(continued...)

- 9 At times, Heintz, Bohn, Gleave, and Clifford Pixley

(hereinafter sometimes referred to as Pixley) all signed Gleave’s

name as maker on Kenmore’s checks.6

brother.

Pixley is Gleave’s half-

Pixley worked at the Kenmore location for Kenmore; he

also drove trucks for Robert Broskin, hereinafter sometimes

referred to as Broskin.

Kenmore’s expansion into the wholesale fuel business

occurred together with the expansion of Broskin’s trucking

business into the wholesale fuel business.

Broskin and Gleave

met in 1980 while both were working on a rapid-transit

underground rail project in Buffalo.

At that time both Kenmore

and Broskin were operating dump trucks for this project.

A few

months after they met, Gleave suggested to Broskin that Broskin

park his trucks at the Kenmore location, and Broskin did so.

or around this time Broskin began operating his business out of

(...continued)

was conducted), neither petitioners nor respondent chose to

subpoena him. As we indicated at trial, we conclude that

Schechter was not peculiarly within one side’s power to produce,

and that Schechter was equally available to both sides;

accordingly, Schechter’s absence from the trial does not give

rise to any inference under Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th

Cir. 1947); see United States v. Rollins, 862 F.2d 1282, 12971298 (7th Cir. 1988); Kean v. Commissioner, 469 F.2d 1183, 11871188 (9th Cir. 1972), affg. on this issue and revg. on another

issue 51 T.C. 337, 343-344 (1968).

Respondent presented an expert witness to testify about

the signatures on Kenmore’s checks. This witness’s testimony was

unpersuasive, and was not relied upon by the Court. See Estate

of Jung v. Commissioner, 101 T.C. 412, 450-451 n.16 (1993).

- 10 Kenmore’s office, and Broskin took over some of the

responsibility of dispatching Kenmore’s trucks.

After the

Sheridan station opened, Broskin parked his trucks at the

Sheridan location because there was more space.

Until Broskin

moved his trucks to the Sheridan location, Broskin spent 1 to 2

hours each day at the Kenmore location.

Thereafter, Broskin

mostly worked out of the Sheridan location and did not appear

very often at the Kenmore location.

During the years in issue although Broskin had his own

checking account at Marine Midland Bank, Broskin sometimes used

Kenmore’s Account when he needed Kenmore’s lines of credit.

When

Heintz or Bohn recognized that Broskin used Kenmore’s Account,

these transactions were recorded under the “Gleave account”

heading on the one-write system.

Broskin used Kenmore’s lines of

credit to buy fuel in order to resell it at wholesale.

had lines of credit at two on more refineries.

Kenmore

Broskin charged

the purchase price of fuel at the refineries to Kenmore’s

Account.

Kenmore paid the refineries for this fuel, and Broskin

paid Kenmore.

Also, Kenmore provided currency and bank drafts to

Broskin in order for Broskin to buy tanker-loads of fuel.

Broskin repaid Kenmore for this currency and these bank drafts,

ordinarily within a few days.

There was usually a significant amount of money ($2,000$20,000) in the safe at the Kenmore location.

Bohn, Heintz,

Broskin, Gleave, and Pixley all handled this money; each of them

- 11 placed money in and took money out of this safe.

Money belonging

to either Kenmore or Broskin was put in the safe at the Kenmore

location.

Although Kenmore had some records of cash receipts and

expenditures for both the Kenmore station and the Sheridan

station, at least for 1982, there was not a system to keep track

of whose money was in the safe at the Kenmore location.

Kenmore’s currency transactions were not recorded on the onewrite system, and Kenmore did not deposit all of its cash

receipts into Kenmore’s Account.

Overall, about 10 percent of

the deposits into Kenmore’s Account in Kenmore’s fiscal 1981 and

fiscal 1982 consisted of currency, with the rest consisting of

checks.

The ratio for any one deposit was likely to vary

substantially from the ratio for any other deposit.

At some point, Broskin began to participate in fuel

“prebuys” every 2 weeks or so.

Most of Broskin’s prebuys were

with A1 Fuels, which was owned by Broskin’s uncle.

A prebuy is

an up-front payment to a refinery for a relatively large amount

of fuel at a set price that is lower than the market price for

single tanker-loads at the time of payment, with the fuel to be

picked up at the refinery over a period of time.

When Kenmore

participated in a Broskin prebuy, Kenmore provided currency, not

checks, to Broskin.

The currency came from Kenmore’s safe, or

from Broskin’s repayment of some other debt to Kenmore, or a

combination thereof.

- 12 At some point, at Bohn’s and Heintz’s initiative, Kenmore

began to charge a fee to Broskin for the paperwork involved in

Kenmore’s dealings with Broskin.

In general, this fee amounted

to 1 percent of the amount involved in the transaction.

When

Broskin used Kenmore’s credit to buy gasoline, Broskin was

required to pay the total amount promptly to Kenmore, while

Kenmore retained the 1-percent discount for prompt payment of the

supplier’s gasoline bill.

Records & Tax Returns

At the time of trial some of Kenmore’s records were missing.

At some point the Department of Justice subpoenaed some of

Kenmore’s records.

A year or more later, the Department of

Justice returned the subpoenaed records.

Thereafter, on June 29,

1986, many of Kenmore’s records, along with other records, were

stolen from the office of David Knoll (hereinafter sometimes

referred to as Knoll).

Some of these records were recovered

after the theft, and some were never recovered.

On its tax returns for the indicated fiscal years, Kenmore

reported gross receipts, purchases, taxable income, and total tax

liability in the amounts shown in table 1.

Table 1

Item

1980

1981

1982

Gross receipts

$484,527

$391,070

$1,710,217

Purchases

438,296

226,009

1,523,673

Taxable income

17,548

1,755

23,821

- 13 Total tax liability

2,972

-0-

On its tax return for its fiscal 1981, Kenmore showed (1) a

tentative investment credit in the amount of $8,449, (2) an

income tax liability before investment credit in the amount of

$298, and (3) application of the investment credit to eliminate

the income tax liability.

In the notice of deficiency,

respondent allowed $8,151 investment credit and $617 new jobs

credit for Kenmore’s fiscal 1981.

On February 16, 1982, Kenmore filed an application for

tentative refund of the $2,972 fiscal 1980 tax liability.7

Respondent refunded this amount to Kenmore.

The fiscal 1980

deficiency that respondent determined results entirely from this

refund.

On each of its tax returns for its fiscal 1980, 1981, and

1982, Kenmore reported that it did not pay any compensation to

Gleave.

In the answer in the Kenmore docket, respondent states

that the fiscal 1980 refund claim was based on a claimed fiscal

1981 net operating loss. In the reply, Kenmore agrees. On

brief, however, respondent states that the claimed carryback was

of an investment credit. Neither side explains how Kenmore could

have had a net operating loss from its fiscal 1981, when it

reported taxable income of $1,755 on its fiscal 1981 tax return.

Nor does either side explain the mechanics of either a net

operating loss carryback or an investment credit carryback from

Kenmore’s fiscal 1981 to Kenmore’s fiscal 1980. See secs.

172(b)(2) (opening flush language); 46(b)(1).

- 14 Kenmore reported on Schedule L of each of its tax returns

for its fiscal 1980, 1981, and 1982 a balance on line 18, loans

from stockholders, as shown in table 2.

Table 2

Item

Beginning of year

End of year

Net increase or (decrease)

1980

1981

1982

$14,632

$4,481

$113,250

4,481

113,250

99,771

(10,151)

108,769

(13,479)

Respondent received Kenmore’s tax returns on the following

dates:

Kenmore’s fiscal 1980 tax return on June 1, 1981;

Kenmore’s fiscal 1981 tax return on February 4, 1982; and

Kenmore’s fiscal 1982 tax return at some time after March 4,

1983.

The notice of deficiency in Kenmore’s docket, dated April

13, 1984, was mailed on or about that date, less than 3 years

after Kenmore filed its tax returns for all the years in issue.

Income

In the notice of deficiency respondent determined Kenmore’s

taxable income for its fiscal 1981 and its fiscal 1982 by using

the bank deposits method and an analysis of checks disbursed,

based on at least three sources of information, as follows:

(1)

Kenmore’s one-write system, (2) Kenmore‘s bank deposit tickets

and canceled checks, and (3) a box of receipts for cash payments,

which box Kenmore gave to respondent.

Tables 3 (fiscal 1981) and

4 (fiscal 1982) show, as to the components of respondent’s

- 15 calculations, (1) what respondent determined in the notice of

deficiency, (2) what respondent contends on brief, and (3) what

the Court has redetermined.

Table 3

Fiscal 1981

Item

Respondent-Def. Notice

Respondent-Brief

Court’s

Findings1

Increase in

gross receipts

$1,072,790.42

$991,918.10

$985,318.11

Less: Increase

in purchase

324,117.74

464,816.45

474,398.83

Net

748,672.68

527,101.65

510,919.28

750.00

749,422.68

527,851.65

511,669.28

Legal fees

disallowed2

Taxable income

omitted

These findings (and those in tables 4, 5, and 7, infra) are

amounts that respondent has shown by clear and convincing

evidence. As indicated infra in part II.A., for purposes of

determining the amounts of deficiencies without regard to fraud,

$6,600 is to be added to the amounts shown in tables 3 and 4 as

taxable income omitted.

These disallowed legal fees consist of a check in the amount

of $250 (#334), which petitioners concede was for a personal

obligation of Gleave, and a check in the amount of $500 (#414),

which was used to pay legal fees associated with the Eggertsville

Inn, a personal investment of Gleave, as discussed infra 1980-Gleave Income--Clear and Convincing.

Table 4

Fiscal 1982

Item

Increase in

Respondent-Def. Notice

Respondent-Brief

Court’s

Findings1

- 16 gross receipts

$1,019,499.60

$945,481.27

$938,881.27

Less: Increase

in purchases

553,080.81

557,014.91

589,531.60

Net

466,418.79

388,466.36

349,349.67

Less: increased

depreciation

3,793.00

Taxable income

omitted

462,625.79

384,673.36

345,556.67

See supra table 3, note 1,

Table 5 shows the components and amounts of our calculations

of Kenmore’s increase in gross receipts.

Table 5

Fiscal 1981

Fiscal 1982

Total deposits to

Kenmore’s Account

$1,433,985.73

$2,712,461.27

Less: nontaxable

deposits1

65,187.62

58,844.00

1,368,798.11

2,653,617.27

Accounts

receivable--end

of year2

11,574.00

7,055.00

Less: accounts

receivable--start

of year2

3,984.00

11,574.00

1,376,388.11

2,589,098.27

391,070.00

1,710,217.00

Item

Total taxable

deposits

Gross operating

receipts

Less: gross

receipts reported

Increase in gross

- 17 receipts

985,318.11

938,881.27

For fiscal 1981, this includes $23,540.62 in proceeds from the

sale of Gleave’s mother’s house, deposited into Kenmore’s Account

on Sep. 10, 1980, in the form of a check in the amount of

$17,215.58 and another check in the amount of $6,325.04. For

each year, this includes $6,600 of purchase-money mortgage

receipts that may have been deposited into Kenmore’s Account.

The accounts receivable amounts are as reported on Kenmore’s

tax returns.

Table 6 shows the components and amounts of the calculations

of Kenmore’s increase in purchases.

Table 6

1981

1982

Kenmore’s total purchases

$700,407.83

$2,113,204.60

Purchase reported

226,009.00

1,523,673.00

Increase in purchases

474,398.83

589,531.60

Item

Table 7 shows Kenmore’s total taxable income, the amount

Kenmore reported, and the amount Kenmore omitted to report.

See

supra table 3 note 1.

Table 7

Year

1981

1982

Total taxable income

Reported taxable income

$513,424.28

1,755.00

$369,377.67

23,821.00

Taxable income omitted

511,669.28

345,556.67

Gleave

1980--Gleave Income--Clear and Convincing

During 1980 Kenmore issued 10 checks aggregating $2,853.35

to make Gleave’s mortgage payments on his house.

During 1980

- 18 Kenmore issued four checks aggregating $112.19 to make Gleave’s

payments on his life and disability insurance policies.

November 1, 1980, Kenmore issued a check in the amount of $250 to

make Gleave’s payment to an Indiana attorney in connection with

See supra table 3, note 2.

his divorce proceedings.

On June 10,

1980, Kenmore issued a check to Eastern Airlines in the amount of

$708 to pay for Gleave’s flight to Florida to settle a relative’s

estate.

On December 15, 1980, Kenmore (1) paid $17,500 to Amherst

Delta, Inc., for Gleave to buy for himself an interest in

Eggertsville Inn, Inc., a tavern, and (2) paid $500 to LoTempio &

Brown, a law firm, in connection with this purchase.

table 3, note 2.

Inn, Inc.

See supra

Kenmore did not own an interest in Eggertsville

Kenmore deducted on its fiscal 1981 tax return the

$500 LoTempio & Brown payment.

This $500 payment was not an

expense of any trade or business of Kenmore, but was an

expenditure for the benefit of Gleave, in connection with

Gleave’s buying the Eggertsville Inn.

On February 28, 1980, Kenmore issued a check to “cash” in

the amount of $400.

Gleave received the $400 and used it to pay

his personal expenses.

1980--Not Income to Gleave

- 19 On September 10, 1980, Gleave deposited $23,540.62 into

Kenmore’s Account.

mother’s house.

This money was from the sale of Gleave’s

See supra table 5, note 1.

On the same day

Kenmore issued a check in the amount of $10,000, and on the next

day a check in the amount of $11,403.57; both of these Kenmore

checks were for Gleave’s personal purposes, but Gleave’s deposit

into Kenmore’s Account and Kenmore’s checks were merely an

accommodation by Kenmore.

On December 8, 1980, Gleave borrowed $15,000 from a bank and

deposited it into Kenmore’s Account.

The same day, Kenmore

issued a check to “cash” in the amount of $20,000.

Gleave’s

deposit into Kenmore’s Account and Kenmore’s check (to the extent

of $15,000) were merely an accommodation by Kenmore.

A November 7, 1980, Kenmore check in the amount of $1,135 to

Broskin is not a payment to, or for the benefit of, Gleave.

Kenmore’s checks to “cash” in the amounts of $1,978.50 (Nov.

11, 1980), $5,044.12 (Nov. 17, 1980), and $1,233.25 (Dec. 16,

1980) were cashed by Heintz, who gave the money to Gleave, who

used the money to pay for fuel and repairs for Kenmore vehicles.

1980--Other Items--Burden of Proof

Kenmore’s April 29, 1980, check to Western-Southern

Insurance Co. in the amount of $2,070.50 was for “key-man” life

insurance on Gleave’s life.

In addition to the items discussed supra, during 1980

Kenmore issued checks, or otherwise made payments, aggregating

- 20 $28,559 to “cash” or named payees.

The evidence of record as to

the key-man life insurance and these items does not enable us to

conclude that any of these Kenmore payments was--or was not-income to Gleave.

We refer to the latter category of items as

resolved by “burden of proof.”

Table 8 summarizes respondent’s determinations as to

Gleave’s 1980 income subject to tax, and our redeterminations.

Table 8

Respondent’s

Determinations

Income to Gleave

$98,747.58

Not income to Gleave

---

Burden of proof

---

Totals

98,747.58

Court’s

Redeterminations

$22,323.54

45,794.44

30,629.50

98,747.48

$36,403.57 of this amount results from respondent’s

concessions in stipulations, and $1,135 results from respondent’s

oral concession at trial. The remaining $8,255.87 results from

the Court’s evaluation of the evidence.

The parties’ stipulations show that five of the checks listed

in the notice of deficiency as $298.55 each should be $298.53

each.

1981--Gleave Income--Clear and Convincing

During 1981 Kenmore issued eight checks aggregating

$2,388.26 to make Gleave’s mortgage payments on his house.

During 1981 Kenmore issued eight checks aggregating $231.84 to

make Gleave’s payments on his life and disability insurance

policies.

- 21 On March 3, 1981, Kenmore paid $3,000 to Eggertsville Inn,

which Gleave owned.

This payment was not for any benefit to or

purpose of Kenmore, but rather was for Gleave’s benefit.

On June 12, 1981, Gleave bought a new 18-foot boat from

Zahno Marine, Inc.; this boat is hereinafter sometimes referred

to as the Zahno boat.

Gleave paid $8,099.70 for the Zahno boat,

after a trade-in credit of $1,500.

This transaction was not

reflected in Kenmore’s Account, but Kenmore provided the money

for Gleave to buy the Zahno boat.

On July 31, 1981, Gleave

registered the Zahno boat with the New York State Department of

Motor Vehicles.

On July 26, 1982, David T. Young, Gleave’s

cousin, registered the Zahno boat with this same agency.

infra Bankruptcies.

See

At some later date, Gleave traded the Zahno

boat in for a second boat.

At the time of the trial herein,

Gleave still had the second boat, although it was by then

registered in the name of a relative.

1981--Not Income to Gleave

Checks numbered 585 ($3,000--Apr. 21, 1981), 643 ($3,500-May 22, 1981), and 1039 ($8,549.92--Oct. 26, 1981) are not income

to Gleave.

On August 21, 1981, Kenmore issued a check to “cash” in the

amount of $181.72.

The check, or the proceeds, was given to

Gleave in order to reimburse him for his expenditures for

gasoline and tolls while driving one of Kenmore’s trucks.

- 22 On September 17, 1981, Kenmore issued a check to Kenmore

Mercy Hospital in the amount of $23.

This was in payment of a

charge for the hospital’s emergency room treatment of a Kenmore

employee.

In October 1981, on two occasions, Kenmore issued checks to

M & T Bank to wire funds to repair Kenmore’s trucks that had

broken down a long distance from Buffalo.

The checks were in the

amounts of $1,553.39 and $1,448.25.

1981--Other Items--Burden of Proof

Kenmore’s April 17, 1981, check to Western-Southern Life

Insurance Co. in the amount of $2,095.76 was for key-man life

insurance on Gleave’s life.

In addition to the items discussed supra, during 1981

Kenmore issued checks, or otherwise made payments, aggregating

$376,926.37 to “cash” or named payees.

The evidence of record as

to the key-man life insurance and these items does not enable us

to conclude that any of these Kenmore payments was--or was not-income to Gleave.

Table 9 summarizes respondent’s determinations as to

Gleave’s 1981 income subject to tax, and our redeterminations.

Table 9

Respondent’s

Determinations

Income to Gleave

$411,038.63

Court’s

Redeterminations

$13,719.80

Not income to Gleave

---

Burden of proof

---

379,022.13

18,256.28

- 23 2

Totals

411,038.63

410,998.21

$15,049.92 of this amount results from respondent’s

concessions in stipulations. The remaining $3,206.36 results

from the Court’s evaluation of the evidence.

In the notice of deficiency checks numbered 929 ($23) and 1024

($17.42) are counted twice.

1982--Gleave Income--Clear and Convincing

On January 29, 1982, Kenmore issued a check to Gleave in the

amount of $85,000.

During 1982 Kenmore issued two checks aggregating $432.20 to

make Gleave’s mortgage payments on his house.

During 1982

Kenmore issued 19 checks and made seven electronic fund transfers

aggregating $1,201.02 to make Gleave’s payments on his life and

disability insurance policies.

In February 1982 Kenmore issued two checks to Grand Island,

aggregating $1,478.58, in payment of real estate taxes on

residential property.

Gleave was liable for these taxes.

During 1982 Kenmore issued seven checks to the Bank of New

York, aggregating

$15,400, in payment of rental or mortgage

obligations of Eggertsville Inn.

On July 12, 1982, Kenmore

issued a check to Niagara Mohawk in the amount of $1,942.42 for

electric power for the Eggertsville Inn.

On August 17, 1982,

Kenmore issued a check to the Eggertsville Inn in the amount of

$78.75.

Gleave owned the Eggertsville Inn.

These payments were

for Gleave’s benefit and were not for any benefit to or purpose

of Kenmore.

- 24 On October 22, 1982, Kenmore issued a check to US Air in the

amount of $298 for an airline ticket to enable Gleave to visit

his mother, in Florida.

On December 21, 1982, Kenmore issued

checks to the City of St. Petersburg, Florida Power and Light,

and Central Telephone (Fla.), in the respective amounts of

$16.62, $21.43, and $169.73, in connection with Gleave’s

grandmother’s house.

1982--Not Income to Gleave

On September 10, 1982, Kenmore issued a check to “cash” in

the amount of $303.75.

This check, or the proceeds, was given to

Gleave in order to reimburse him for his expenditures for

gasoline and tolls while driving one of Kenmore’s trucks.

1982--Other Items--Burden of Proof

Kenmore’s December 31, 1982, check to Western-Southern Life

Insurance Co. in the amount of $239.40 was for key-man life

insurance on Gleave’s life.

During 1982 Kenmore issued four checks to Blue Cross,

aggregating $1,301.79 to pay for health insurance for Gleave and

his family.

In addition to the items discussed supra, during 1982

Kenmore issued checks, or otherwise made payments, aggregating

$7,424.25 to “cash” or named payees.

The evidence of record as

to the key-man life insurance, the Blue Cross, and these items

does not enable us to conclude that any of these Kenmore payments

was--or was not--income to Gleave.

- 25 Table 10 summarizes respondent’s determinations as to

Gleave’s 1982 income subject to tax, and our redeterminations.

Table 10

Income to Gleave

Respondent’s

Court’s

Determination

Redeterminations

$117,525.36

$106,038.75

Not income to Gleave

---

303.75

Burden of proof

---

8,965.44

1,2

117,525.36

115,307.94

Form 5278 of the notice of deficiency shows this amount as

$117,525.31. However, the addition on that form and on Form 886A is consistent with $117,525.36.

In the notice of deficiency checks numbered 1494 ($2,200) and

1555 ($17.42) are counted twice.

Deductions

In 1980, 1981, and 1982 Gleave paid mortgage interest in the

amounts of $1,645.04, $1,586.85, and $750, respectively.

In 1982

Gleave paid real property taxes in the amount of $1,478.98 on

property that Gleave owned.8

Respondent agrees that Gleave is entitled to deduct

(continued...)

- 26 Bankruptcies

Gleave and Kenmore filed petitions for chapter 11

reorganization in the United States Bankruptcy Court for the

Western District of New York on August 2 and 3, 1982,

respectively.9

In their respective bankruptcy petitions, Gleave reported

that he owned Eggertsville Inn, the stock of which had a “Market

value” of $20,000, and Kenmore reported that it did not own stock

of any corporation.

Gleave reported that he received “Annual

Income” of $16,872 from mortgages on two Tonawanda, New York,

properties in each of the 2 years immediately before he filed his

bankruptcy petition; Kenmore’s bankruptcy petition shows it as

the holder of the mortgages on these two properties.

One of

(...continued)

sales tax in accordance with the appropriate sales tax table.

Petitioners have not contended that Gleave is entitled to deduct

any greater amount, e.g., on account of the 1981 Zahno boat

purchase.

As a result of the foregoing (including supra note 4),

Gleave’s itemized deductions exceed the zero bracket amount (sec.

1(d)) for each of the years in issue.

The parties stipulated that Kenmore filed its ch. 11

petition on Aug. 2, 1982. Our finding is in accord (1) with the

stipulated copy of the ch. 11 petition, which shows on its face

the Bankruptcy Court’s stamp that the ch. 11 petition was filed

on Aug. 3, 1982, and (2) with Knoll’s testimony that the ch. 11

petitions were filed with the Bankruptcy Court on consecutive

days.

Gleave was discharged from bankruptcy on Sept. 22, 1986, and

Kenmore was relieved of the automatic stay provisions of 11

U.S.C. sec. 362 (1994) on or about May 16, 1989, for the purpose

of filing a petition and proceeding in the Tax court.

- 27 these mortgages is on the property where Ted’s Nursery had been,

across the street from the Kenmore location.

Gleave’s bankruptcy

petition indicates that he was paid $550 per month ($6,600 per

year) on this mortgage.

Kenmore’s bankruptcy petition indicates

that this mortgage was worth about $65,000.

The other of these

mortgages is identified by street address in both bankruptcy

petitions; this address is not the address of either the Kenmore

location or the Sheridan location.

On Kenmore’s bankruptcy petition, Kenmore reported that it

did not make any payments on loans during the year before August

3, 1982, and Kenmore did not include Gleave in the list of its

creditors.

Gleave did not include on his bankruptcy petition’s

list of assets any debt from Kenmore to him, and he reported that

he did not have any interest in a boat.

Income--Clear and Convincing.

See supra 1981--Gleave

On their respective bankruptcy

petitions, both Gleave and Kenmore reported that Kenmore had paid

$10,000 compensation to Gleave during the past year.

On July 28, 1982, Gleave certified “under penalty of

perjury” that the statements in his and Kenmore’s bankruptcy

petitions “are true and correct to the best of * * *[his]

knowledge, information, and belief.”

Criminal Activity

On December 8, 1982, Gleave, Kenmore, and Joseph A. Matthews

were indicted by a Federal grand jury on 27 counts for stealing

- 28 gasoline from the Tonawanda, New York, refinery and tank and

storage facility of Ashland Oil, Inc.

On April 14, 1983, Gleave pleaded guilty in United States

District Court for the Western District of New York to two of

these counts:

(1) Wire fraud, and (2) embezzlement and theft.

Also, on this date Kenmore (through Gleave) pleaded guilty to

embezzlement and theft.

The theft of gasoline occurred on

various occasions between July 1981 and January 1982.

Gleave

stole the gasoline on at least 7 different days, loading

Kenmore’s tanker-trucks with the stolen gasoline, three to four

times on each of the days.

Gleave then drove the trucks to the

Kenmore location (or perhaps the Sheridan location), unloaded the

gasoline, and then sold the gasoline at retail in the normal

course of Kenmore’s business.

Gleave or Kenmore made a profit of

about $120,000 on this stolen gasoline.

The other counts of the indictments were dismissed.

Gleave

was sentenced for the crimes to which he pleaded guilty, to 5

years’ imprisonment and to pay fines totaling $6,000.

The record

does not indicate what sentence was imposed on Kenmore.

On February 22, 1990, Gleave was indicted by a Federal grand

jury on numerous counts including bankruptcy fraud.

On March 2, 1992, Gleave was found guilty in the United

States District Court for the Western District of New York of

bankruptcy fraud, in that Gleave knowingly and fraudulently

concealed from the Trustee and other officers of the Court, and

- 29 from creditors, money deposited in a bank account outside the

United States.

Gleave was sentenced to Federal custody for 27

months (2 years’ probation and 3 months to be served in a halfway house) and a fine of $5,000.

Also, on this date Gleave was

found guilty of another count of bankruptcy fraud; however, the

conviction on this other count was reversed by the United States

Court of Appeals for the Second Circuit.

_______________________________

Kenmore’s various business activities are collectively the

source of its unreported income.

Respondent has shown by clear and convincing evidence that

none of Kenmore’s suggested nontaxable sources (other than the

$6,600 per year purchase-money mortgage payments) explains

Kenmore’s unreported income.

The amounts shown supra in tables 8, 9, and 10 as “Income to

Gleave” and “Burden of Proof” in the columns headed “Court’s

Redeterminations” were not Kenmore’s repayments of loans from

Gleave.

For each of its fiscal 1980, 1981, and 1982 years, Kenmore

had an underpayment of income tax required to be shown on its tax

return; some part of the underpayment for each of these years was

due to Kenmore‘s fraud.

For each of the years 1980, 1981, and 1982, Gleave had an

underpayment of income tax required to be shown on his tax

- 30 return; some part of the underpayment for each of these years was

due to Gleave’s fraud.

OPINION

Respondent contends that (1) petitioners underpaid their

taxes for 1980 through 1982, and (2) petitioners’ 1980 through

1982 underpayments are due to fraud and thus petitioners are

liable for the fraud additions to tax under section 6653(b).

Respondent also maintains that Kenmore is not permitted to deduct

any payments by Kenmore to or for the benefit of Gleave.

Petitioners contend that (1) they did not underpay their

taxes for 1980 through 1982, and (2) respondent has not met

respondent’s burden of proof on the fraud issue.

Petitioners

maintain that (A) most of the checks drawn against Kenmore’s

Account, payable to cash are not income to Gleave, because they

were used to buy tanker loads of fuel, (B) the checks drawn

against Kenmore’s Account, used to pay for investments and

personal expenses of Gleave are not income to Gleave because they

were Kenmore’s repayment of a loan owed to Gleave, (C) checks

drawn against Kenmore’s Account to pay for investments made in

Gleave’s name were not income to Gleave, because the investments

were not Gleave’s but were Kenmore’s, and (D) much of the money

deposited into Kenmore’s Account belonged to others.

We agree in general with respondent.10

In the notice of deficiency to Gleave, respondent

determined that Gleave had income in the amounts that Kenmore

(continued...)

- 31 I. Fraud

When respondent seeks to impose the addition to tax under

section 6653(b),11 respondent has the burden of proof.

To carry

(...continued)

paid to Gleave or for Gleave’s benefit. Respondent also

determined that Gleave is liable for self-employment taxes for

each of the years in issue. On brief, respondent refers to this

income as being entirely dividend income. Petitioners’

contentions do not include any challenge to respondent’s implicit

self-employment income determinations in the notice of

deficiency, nor to issues such as Kenmore’s earnings and profits

that would be relevant to a dividend characterization. See,

e.g., Hagaman v Commissioner, 958 F.2d 684, 692, 695 (6th Cir.

1992), affg. and remanding T.C. Memo. 1987-549; DiLeo v.

Commissioner 96 T.C. 858, 888-889 (1991), affd. 959 F.2d 16 (2d

Cir. 1992). Also the parties do not discuss whether any portion

of these amounts should be treated as employee compensation for

Gleave’s personal services, which could affect both Gleave’s and

Kenmore’s tax liabilities. In the circumstances of the instant

cases, we limit ourselves on this matter to what is disputed by

the parties. E.g., George R. Holswade, M.D., P.C. v.

Commissioner, 82 T.C. 686, 698 (1984); Estate of Fusz v.

Commissioner, 46 T.C. 214, 215 n.2 (1966).

Sec. 6653(b) provides, in pertinent part, as follows:

SEC. 6653.

FAILURE TO PAY TAX.

(b) Fraud.--

(1) In general.--If any part of any underpayment

(as defined in subsection (c)) of tax required to be

shown on a return is due to fraud, there shall be added

to the tax an amount equal to 50 percent of the

underpayment.

(2) Additional amount for portion attributable to

fraud.--There shall be added to the tax (in addition to

the amount determined under paragraph (1)) an amount

equal to 50 percent of the interest payable under

section 6601-(A) with respect to the portion of the

underpayment described in paragraph (1) which is

(continued...)

- 32 this burden for a year, respondent must prove two elements, as

follows: (1) That petitioner has an underpayment of tax for that

year, and (2) that some part of that underpayment is due to

fraud.

Sec. 7454(a);12 Rule 142(b); e.g., Carter v. Campbell,

(...continued)

attributable to fraud, and

(B) for the period beginning on the last day

prescribed by law for payment of such underpayment

(determined without regard to any extension) and

ending on the date of the assessment of the tax

(or, if earlier, the date of the payment of the

tax).

For 1980 and 1981, the fraud addition to tax is provided for

in sec. 6653(b), the first sentence of which is the same as the

above-quoted sec. 6653(b)(1).

Par. (2) was added by sec. 325(a) of the Tax Equity and

Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324,

616, and was effective for taxes the payment of which (determined

without regard to any extension) is due after Sept. 3, 1982. In

the instant case, par. (2) is applicable to the additions to tax

determined against petitioners for 1982.

The later amendments of this provision by sec. 1503 of the

Tax Reform Act of 1986 (TRA 86--Pub. L. 99-514, 100 Stat. 2085,

2742), by sec. 1015(b)(2)(B) of the Technical and Miscellaneous

Revenue Act of 1988 (Pub. L. 100-647, 102 Stat. 3342, 3569), and

by sec. 7721(a) of the Omnibus Budget Reconciliation Act of 1989

(OBRA 89--Pub. L. 101-239, 103 Stat. 2106, 2395) do not affect

the instant case.

As a result of OBRA 89, the revised fraud addition to tax

now appears in secs. 6663 and 6651(f).

SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION

MANAGER, AND TRANSFEREE CASES.

(a) Fraud.--In any proceeding involving the issue

whether the petitioner has been guilty of fraud with intent

to evade tax, the burden of proof in respect of such issue

(continued...)

- 33 264 F.2d 930, 936 (5th Cir. 1959); Stone v. Commissioner, 56 T.C.

213, 220 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105, 106

(1969).

Each of these elements must be proven by clear and

convincing evidence.

DiLeo v. Commissioner, 96 T.C. 858, 873

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Parks v. Commissioner,

94 T.C. 654, 663-664 (1990); Hebrank v. Commissioner, 81 T.C.

640, 642 (1983).

For this purpose, respondent need not prove the precise

amount of the underpayment resulting from fraud, but only that

there is some underpayment and that some part of it is

E.g., Lee v. United States, 466 F.2d 11,

attributable to fraud.

16-17 (5th Cir. 1972); Plunkett v. Commissioner, 465 F2d 299, 303

(7th Cir. 1972), affg. T.C. Memo. 1970-274.

In carrying this

burden, respondent may not rely on petitioners’ failure to meet

their burden of proving error in respondent’s determinations as

to the deficiencies.

E.g., Petzoldt v. Commissioner, 92 T.C.

661, 700 (1989); Habersham-Bey v. Commissioner, 78 T.C. 304, 312

(1982), and cases cited therein.

Where fraud is determined for each of several years,

respondent’s burden applies separately for each of the years.

Drieborg v. Commissioner, 225 F.2d 216, 219-220 (6th Cir. 1955),

affg. in part and revg. in part a Memorandum Opinion of this

Court dated Feb. 24, 1954; Estate of Stein v. Commissioner, 25

(...continued)

shall be upon the Secretary.

- 34 T.C. 940, 959-963 (1956), affd. sub nom. Levine v. Commissioner,

250 F.2d 798 (2d Cir. 1958).

does not establish fraud.

A mere understatement of income

However, a pattern of consistent

under-reporting of income for a number of years is strong

Estate of Mazzoni v. Commissioner, 451 F.2d

evidence of fraud.

197, 202 (3d Cir. 1971), affg. T.C. Memos. 1970-144 and 1970-37;

Adler v. Commissioner, 422 F.2d 63, 66 (6th Cir. 1970), affg.

T.C. Memo. 1968-100; Otsuki v. Commissioner, 53 T.C. at 108.

The issue of fraud poses a factual question that is to be

decided on an examination of all the evidence in the record.

Plunkett v. Commissioner, 465 F.2d at 303; Mensik v.

Commissioner, 328 F.2d 147, 150 (7th Cir. 1964), affg. 37 T.C.

703 (1962); Stone v. Commissioner, 56 T.C. at 224.

In order to establish fraud as to a petitioner, respondent

must show that petitioner intended to evade taxes, which he or it

knew or believed were owed, by conduct intended to conceal,

mislead, or otherwise prevent the collection of taxes. E.g., Webb

v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C.

Memo. 1966-81; Powell v. Granquist, 252 F.2d 56, 60 (9th Cir.

1958); Danenberg v. Commissioner, 73 T.C. 370, 393 (1979); McGee

v. Commissioner, 61 T.C. 249, 256-257 (1973), affd. 519 F.2d 1121

(5th Cir. 1975).

This intent may be inferred from circumstantial

evidence, Powell v. Granquist, 252 F.2d at 61; Gajewski v.

Commissioner, 67 T.C. 181, 200 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978), including the

- 35 implausibility of petitioner’s explanations, Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986) (and cases

therein cited), affg. T.C. Memo. 1984-601; Boyett v.

Commissioner, 204 F.2d 205, 208 (5th Cir. 1953), affg. a

Memorandum Opinion of this Court dated Mar. 14, 1951.

A. Kenmore

(1) Underpayments of Tax

Respondent’s determination of a deficiency against Kenmore

for its fiscal 1980 is based entirely on disallowance of a

carryback from its fiscal 1981.

Supra note 7.

This disallowance

in turn is based entirely on respondent’s determination that

Kenmore did not have any carryback from Kenmore’s fiscal 1981.

We consider first Kenmore’s tax liabilities for its fiscal 1981

and 1982, and then consider how our conclusions for these years

affect its fiscal 1980.

As shown supra in tables 3 and 4, respondent’s

determinations as to Kenmore’s income for its fiscal 1981 and

fiscal 1982 are almost entirely on account of adjustments that

(1) increase Kenmore’s gross receipts, and (2) increase Kenmore’s

purchase expenses, but by substantially lesser amounts.

(a) Gross Receipts

Respondent used the bank deposits method and an analysis of

checks disbursed to determine Kenmore’s income for its fiscal

1981 and fiscal 1982.

It is well established that bank deposits

are evidence of income where the deposits were made by the party

- 36 charged with the income or to an account controlled by the party

charged with the income.

77 (1986).

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

The premise underlying the bank deposits method of

income reconstruction is that, absent some explanation, a

taxpayer’s bank deposits represent income subject to tax.

v. Commissioner, 96 T.C. at 868.

DiLeo

The use of the bank deposits

method of income reconstruction has long been sanctioned by the

courts.

Id.; Tokarski v. Commissioner, 87 T.C. at 77; Estate of

Mason v. Commissioner, 64 T.C. 651, 656 (1975) (and cases therein

cited), affd. 566 F.2d 2 (6th Cir. 1977).

When this method is

used, respondent must take into account any nontaxable deposits

or deductible expenses of which respondent has knowledge.

DiLeo

v. Commissioner, 96 T.C. at 868.

We have held that, where respondent has the burden of proof

in a bank deposits case, e.g., where respondent has determined

that a taxpayer has committed tax fraud, then-Respondent can satisfy * * * [the] burden of proving

the first prong of the fraud test, i.e., an underpayment,

when the allegations of fraud are intertwined with

unreported and indirectly reconstructed income in one of two

ways. Parks v. Commissioner, 94 T.C. at 661. Respondent

may prove an underpayment by proving a likely source of the

unreported income. Holland v. United States, 348 U.S. 121

(1954); Parks v. Commissioner, supra at 661; Nicholas v.

Commissioner, 70 T.C. [1057,]* * * 1066 [(1978)].

Alternatively, where the taxpayer alleges a nontaxable

source, respondent may satisfy * * * [the] burden by

disproving the nontaxable source so alleged. United States

v. Massei, 355 U.S. 595 (1958); Parks v. Commissioner, supra

at 661. [DiLeo v. Commissioner, 96 T.C. at 873.]

The parties have stipulated that total deposits to Kenmore’s

Account amounted to $1,433,985.73 in Kenmore’s fiscal 1981 and

- 37 $2,712,461.27 in Kenmore’s fiscal 1982.

Supra table 5.

They

also have stipulated that, of these amounts, at least $58,587.62

for fiscal 1981 and $52,244 for fiscal 1982 are nontaxable

deposits.

The accounts receivable amounts used in calculating

the increase in gross receipts, as shown supra in table 5, are

taken from Kenmore’s tax returns and are not disputed by either

side.

We conclude, and we have found, that Kenmore’s various

business activities are collectively the source of its unreported

income.

As discussed infra, we also conclude that none of the

suggested nontaxable sources explains Kenmore’s unreported

income, except for Gleave’s apparent deposits of $6,600 payments

on a purchase-money mortgage from the sale of Ted’s Nursery.

Kenmore contends that because Broskin used Kenmore’s lines

of credit and charged fuel at the refineries to Kenmore,

Broskin’s money was just passing through Kenmore’s Account, and

thus the amounts deposited into Kenmore’s Account that came from

Broskin should not be included in Kenmore’s gross receipts,

because these amounts are income of Broskin.

We have found that, when Broskin used Kenmore’s lines of

credit and charged fuel at the refineries to Kenmore, then

Kenmore paid the refineries for this fuel, and Broskin paid

Kenmore for this fuel.

So, although payments by Broskin

deposited into Kenmore’s Account are included in the total

deposits to Kenmore’s Account for its fiscal 1981 and its fiscal

- 38 1982, supra table 5, payments by Kenmore to the refineries for

the fuel charged by Broskin are included in Kenmore’s purchases

for its fiscal 1981 and fiscal 1982.

Supra table 6.

As a

result, amounts deposited into Kenmore’s Account that came from

Broskin are offset by payments from Kenmore’s Account to the

refineries for fuel charged by Broskin, and thus the amounts

deposited into Kenmore’s Account that came from Broskin are

properly includable in Kenmore’s gross receipts and do not

explain Kenmore’s unreported income.

This may be illustrated by a transaction to which Bohn

testified.

Kenmore’s one-write records show that on December 1,

1981, Kenmore wrote a check to American Refining Group, Inc., in

the amount of $53,887.70.

Evidently, the original bill was in

the amount of $54,432, and Kenmore took advantage of a onepercent discount ($544.30) for timely payment.

The one-write

records show a December 1, 1981, $54,432 deposit to Kenmore’s

Account.

Evidently, Broskin paid $54,432 to Kenmore, which

amount was deposited into Kenmore’s Account.

Although the bank

deposits method may arguably be said to overstate Kenmore’s gross

receipts by $54,432, this is offset by the Kenmore payment to

American Refining Group, Inc., which (under that line of

reasoning) overstates Kenmore’s cost of purchases by $53,887.70.

Under the bank deposits method as applied in the instant cases,

see supra tables 4 through 7, only $544.30 of taxable income

results from the above-described transaction; that is the correct

- 39 result on these facts.

Thus, although petitioners may or may not

be technically correct in contending that the bank deposits

method overstates Kenmore’s gross receipts because of these

Broskin transactions, this method does not cause Kenmore’s

taxable income to be overstated.

Petitioners suggest that the prebuys may have resulted in

the bank deposits method’s overstating Kenmore’s gross receipts.

Only one prebuy is described in some detail, (1) in testimony by

Bohn and Broskin and (2) in a stipulated extract from Kenmore’s

books and records.

On or about May 19, 1982, Kenmore gave

$105,000 cash to Broskin, for him to buy 100,000 gallons of

gasoline.

Broskin delivered the gasoline in 13 installments to

Kenmore over a 5-week period.

Sheridan location.

Most of the deliveries were to the

Broskin invoiced Kenmore for the delivered

gasoline at $1.05 per gallon, plus an amount for trucking.

Kenmore’s books show the transaction as “Purchased in advance

from Broskin”, with each delivery resulting in a reduction of the

amounts in both the “Bal. gal.” and the “Bal. $” columns.

The

final delivery, on June 22, 1982, resulted in the “Bal. gal.”

column being reduced to zero and the “Bal. $” column being

reduced to negative $2,240.57.

This last amount is shown as

having been paid on June 25, 1982, with the balance in the “Bal.

$” column then shown as zero.

We are satisfied from the record

in the instant cases that this transaction involved (1)

$107,240.57 deductible expenditures ($105,000 for the gasoline

- 40 plus $2,240.57 for the trucking)13, (2) gross receipts in the

amount Kenmore received from selling the 100,000 gallons of fuel,

and (3) no double inclusion of gross receipts for Kenmore.

Thus,

prebuys do not result in overstating Kenmore’s gross receipts,

nor in overstating Kenmore’s taxable income.

Petitioners assert on brief that “More than $100,000. was

placed in [Kenmore’s account] by * * * Gleave at the time of the

sale of the business and equipment of Ted’s Nursery”.

sold Ted’s Nursery about 1978.

Gleave

If Gleave deposited the proceeds

of this sale to Kenmore’s Account more or less contemporaneously

with the sale, then this deposit did not increase Kenmore’s gross

receipts for fiscal 1981 or 1982.

Also, Kenmore reported on its

fiscal 1980 tax return that the loans from stockholders account

showed an opening fiscal 1980 balance (i.e., a balance as of

Sept. 1, 1979) of only $14,632 and a closing (as of Aug. 31,

1980) balance of only $4,481.

Supra table 2.

Thus, even if we

were to credit petitioners’ contentions, substantially all the

proceeds of the Ted’s Nursery sale had already worked through

Kenmore’s Account before any of the years in issue in the instant

cases.

We note a $49.50 arithmetic error on Kenmore’s ledger

sheet in computing the balance after the last delivery. The net

to Broskin should have been $2,290.07, instead of $2,240.57. A

careful examination of the ledger sheet suggests that it

originally did show $2,290.07, but someone changed the 9 to 4 and

changed the 0 to 5. We have not been given a reconciliation or

other explanation. This $49.50 differential does not affect any

of our conclusions.

- 41 Gleave took a purchase-money mortgage on his sale of Ted’s

Nursery; this is consistent with part of Gleave’s bankruptcy

petition.

There also was testimony that Gleave put into

Kenmore’s Account the $550 monthly payments on the purchase-money

mortgage.

The record does not enable us to conclude by clear and

convincing evidence that $6,600 per year of the deposits into

Kenmore’s Account did not come from payments on the purchasemoney mortgage from the sale of Ted’s Nursery.

Petitioners assert that “Approximately $70,000, was placed

in [Kenmore’s Account] reflecting the inheritance of * * * Gleave

and his brother Terrance”.

It appears that, on September 2,

1980, the estate of Gleave’s grandmother (Edith Service)

distributed $30,900 to Gleave and the same amount to his brother,

Terrance J. Gleave.

At various points in the trial, Gleave

testified to the effect that (1) he received his brother’s check,

as well as his own, because his brother owed money to him, (2)

both Gleave’s and his brother’s checks were deposited into

Kenmore’s Account as a loan by Gleave to Kenmore, and (3) as of

the time of the trial, Kenmore had not yet repaid this loan from

Gleave.

However, we have carefully examined the evidence as to

deposits into Kenmore’s Account, and the only deposits involving

checks at least as great as $30,900 in Kenmore’s fiscal 1981 are

checks of $34,575.24 and $35,719.96, on August 18 and 20, 1981,

respectively, deposited about 11½ months after the apparent

- 42 estate distributions.

testimony.

These facts are inconsistent with Gleave’s

Also, Gleave, who is the sole source of the evidence

that the 1980 inheritance was deposited as a loan into Kenmore’s

Account and not repaid by Kenmore, certified under penalty of

perjury in the bankruptcy petitions in effect that Kenmore did

not owe him any money in 1982.

Gleave’s certification is

inconsistent with Gleave’s testimony.

We note that $23,540.62 of

proceeds from the sale of Gleave’s mother’s house was deposited

into Kenmore’s Account on September 10, 1980, just 8 days after

the apparent distributions from Gleave’s grandmother’s estate.

This deposit has been excluded from Kenmore’s income as a

nontaxable deposit (supra table 5, note 1), and Kenmore’s checks

to Gleave shortly thereafter have been excluded from Gleave’s

income.

It is conceivable that Gleave may have confused this

transaction with the apparent inheritance.

We have already taken

account of this transaction.

We conclude that the apparent inheritance is not a

nontaxable source of gross receipts to Kenmore.

Petitioners assert that “Kenmore routinely cashed checks for

many of its suppliers and other persons involved in related

businesses, all of which checks went through its account, but

were incorrectly attributed to * * * Kenmore as income.”

We have

found that Kenmore routinely kept thousands of dollars, sometimes

tens of thousands of dollars in its safe.

The deposits into

Kenmore’s Account often included currency.

From this we conclude

- 43 that any check-cashing by Kenmore might have affected the mix of

checks and currency that Kenmore deposited, but did not affect

the total amounts of the deposits.

Accordingly, we conclude

that, if Kenmore indeed did any check-cashing, that is not a

nontaxable source of gross receipts.

We conclude, and we have found, that respondent has shown by

clear and convincing evidence that none of Kenmore’s suggested

nontaxable sources (other than the $6,600 per year purchase-money

mortgage payments) explains its unreported income.

(b) Purchases.

On its tax returns, Kenmore claimed to have spent almost

$1.75 million on purchases over fiscal 1981 and fiscal 1982.

Supra tables 1 and 6.

In the notice of deficiency, respondent

determined that Kenmore had spent $877,000 more than Kenmore had

claimed for those 2 years.

Supra tables 3 and 4.

On brief,

respondent concedes that Kenmore spent over $1 million more than

Kenmore had claimed for those 2 years.

Supra tables 3 and 4.

Our findings are in amounts slightly greater than respondent’s

concessions.

Supra tables 3, 4, and 6.

Thus, we treat Kenmore

as having spent, and as being entitled to subtract, more than

$2.81 million in purchases for those 2 years, even though Kenmore

claimed only $1.75 million on its tax returns for those 2 years.

Supra tables 3, 4, and 6.

Petitioners do not make any specific contentions on brief

about their allowable costs of purchases.

They do make

- 44 generalized statements about the use of currency to make

purchases.

Both Broskin and Bohn testified about Kenmore’s use

of cash, including the extensive “recycling” of cash to pay for

purchases.

We are satisfied from the record in the instant cases

that any such purchases not reflected in our Findings of Fact

would be matched by gross receipts that were not deposited into

Kenmore’s Account, and so were not included in our Findings of

Fact as to Kenmore’s gross receipts.

Petitioners have not

directed our attention to, and we have not found, any additional

costs of purchases that would have reduced the net of Kenmore’s

gross receipts minus its purchases.

Respondent need not prove that Kenmore did not have the

offsetting deductions that petitioners assert in conclusory

terms.

Once the Commissioner has presented clear and convincing

evidence of unreported gross receipts, the taxpayer has the

burden of coming forward with evidence as to offsetting

deductions claimed by the taxpayer, even in criminal cases where

the Government must prove a deficiency beyond a reasonable doubt.

E.g., United States v. Campbell, 351 F.2d 336, 338-339 (2d Cir.

1965); Elwert v. United States, 231 F.2d 928, 933 (9th Cir.

1956); see also Reiff v. Commissioner, 77 T.C. 1169, 1175

(1981).14

This rule is independent of the general rule applicable

to civil cases in which the taxpayer has the burden of proving

entitlement to deductions before they may be allowed. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

- 45 We are satisfied, and we have found, that Kenmore

understated the net of its gross receipts over its purchases by

$510,919.28 for 1981 and $349,349.67 for 1982.

and 4.

Supra tables 3

We so hold.

Respondent‘s determination against Kenmore for its fiscal

1981 is based primarily on the bank deposits method.

addition, respondent disallowed Kenmore’s deduction of a $500

payment by Kenmore to a law firm, LoTempio & Brown.

This payment

was made in connection with the Eggertsville Inn.

Supra table 3,

note 2.

The notice of deficiency states that the payment is

disallowed “because it has not been established that * * * [it

was] for an ordinary and necessary business expense”.

Section 162(a)15 allows a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”.

In order to satisfy the

requirements of section 162(a), an expense must be both ordinary

and necessary, and it must have the requisite relationship to the

taxpayer’s business.

George R. Holswade, M.D., P.C. v.

Commissioner, 82 T.C. 686, 698 (1984).

Also, “the trade or

Sec. 162(a) provides, in pertinent part, as follows:

SEC. 162. TRADE OR BUSINESS EXPENSES.

(a) In General.--There shall be allowed as a deduction

all the ordinary and necessary expenses paid or incurred

during the taxable year in carrying on any trade or

business, * * *

- 46 business of the corporation must be considered separately from

the trade or business of the shareholders.”

Markwardt v.

Commissioner, 64 T.C. 989, 995 (1975).

Gleave testified that the December 1980 $17,500 Kenmore

check to Amherst Delta, Inc., was “the deposit from 747 [Kenmore]

to the landlord, if I recall, for Eggertsville Inn”, which was

“an investment of” Kenmore.

However, (1) Gleave’s August 2,

1982, bankruptcy filing shows him (not Kenmore) as owner of

Eggertsville Inn, Inc.; (2) Kenmore’s August 3, 1982, bankruptcy

filing shows Kenmore not owning any corporate stock and not

otherwise owning any interest in Eggertsville Inn, Inc.; (3)

Kenmore’s fiscal 1981 tax return balance sheet shows that Kenmore

did not own any corporate stock at all; and (4) Gleave told the

IRS auditor that the $17,500 check was for a tavern that Gleave

had an option to buy.

We conclude, and we have found contrary to

Gleave’s testimony, that Kenmore did not own an interest in

Eggertsville Inn, Inc.

In addition, we conclude, and we have

found, that the $500 LoTempio & Brown payment was in connection

with Gleave’s buying Eggertsville Inn, Inc.

This $500 was a

capital expenditure, to be added to Gleave’s basis in

Eggertsville Inn, Inc., and was not currently deductible by

Gleave or by Kenmore.

Petitioners do not contend that the $500 LoTempio & Brown

payment was deductible by Kenmore for any alternative reason,

e.g., as compensation to Gleave, and so we do not consider

- 47 alternatives.

See, e.g., Estate of Fusz v. Commissioner 46 T.C.

214, 215 n.2 (1966).

We hold for respondent on this issue.

(d) 1980

It is clear that our determinations eliminate any possible

claim of Kenmore net operating loss carrybacks from its fiscal

1981 or fiscal 1982.

Supra tables 1, 3, and 4.

Respondent does

not dispute Kenmore’s claimed investment credits for fiscal 1981

or fiscal 1982; in fact respondent increases Kenmore’s claimed

fiscal 1982 investment credit by $1,896.50.

Neither of these

allowed investment credits is great enough to generate an

investment credit carryback to fiscal 1980.

Thus, Kenmore has a

$2,972 deficiency for fiscal 1980, generated entirely by the

elimination of the claimed carryback from fiscal 1981.

note 7.

Supra

We have so found.

We hold for respondent on this issue.

(e) Summary

We conclude, and we have found, that respondent has proven

by clear and convincing evidence that Kenmore had an underpayment

of tax for each of the years in issue.

We hold for respondent on this issue.

(2) Fraudulent Intent

Respondent contends as follows:

(1) Kenmore’s failure to

keep or furnish adequate books and records is a strong indicium

of fraud; (2) Kenmore’s failure to report substantial amounts of

- 48 gross receipts for both its fiscal 1981 and its fiscal 1982 “is

an obvious indication” of its fraudulent intent to evade tax; (3)

petitioners’ explanations of Kenmore’s asserted large nontaxable

deposits and the reasons for large cash expenditures are so

implausible that the giving of the explanations is itself a

further indication of fraud; (4) “Kenmore’s * * * pleas to theft

and * * * admission to the receipt of income resulting from this

theft is further proof of * * * fraudulent intent”; and (5)

Kenmore’s “extensive dealings in cash * * *[show its] attempt to

conceal corporate assets”.

Petitioners contend as follows: (1) Kenmore made a good

faith effort to keep adequate records, and was prevented from

producing all its records by a burglary of Kenmore’s thenattorney’s office, and by New York State’s auctioning off of the

remaining contents of that office; (2) Kenmore was “forced by

market conditions to operate for many vital transactions on a

cash basis”; and (3) Kenmore did not conceal its income and

Gleave “was not educated, and he left the bookkeeping to trusted

long term employees, each of whom did the best they [sic] could

with the transactions at hand”.

We agree with respondent’s conclusion and with some of

respondent’s contentions.

In weighing Kenmore’s intent and actions, we note that a

corporation is a separate entity, created by statute, which acts

through its officers, employees and agents.

Benes v.

- 49 Commissioner, 42 T.C. 358, 382-383 (1964), affd. 355 F.2d 929

(6th Cir. 1966); Ace Tool & Eng., Inc. v. Commissioner, 22 T.C.

833, 843 (1954).

Where there are a number of shareholders, all

of whom are parties to the fraud, their fraudulent intent is

attributed to the corporation.

Ace Tool & Eng., Inc. v.

Commissioner, 22 T.C. at 843.

Similarly, the fraud of a sole or

dominant shareholder can be attributed to the corporation.

Benes

v. Commissioner, 42 T.C. at 383; Auerbach Shoe Co. v.

Commissioner, 21 T.C. 191, 194 (1953), affd. 216 F.2d 693, 697698 (1st Cir. 1954).

Corporate fraud exists if an agent commits

fraud and the corporation is the agent’s alter ego, or the agent

is acting on behalf of the corporation such that the corporation

actually benefits from the fraudulent acts.

Ruidoso Racing

Association, Inc. v. Commissioner, 476 F.2d 502, 506 (10th Cir.

1973), affg. on this issue T.C. Memo. 1971-194; see Federbush v.

Commissioner, 34 T.C. 740, 749-751 (1960), affd. 325 F.2d 1 (2d

Cir. 1963).

We have found, pursuant to the parties’ stipulation, that at

all pertinent times Gleave was Kenmore’s president and sole

owner.

(a) Criminal Activity

Both Kenmore and Gleave pleaded guilty to embezzlement and

theft of gasoline on various occasions between July 1981 and

January 1982.

During the years in issue, Kenmore operated a

retail gasoline station.

Kenmore’s embezzlement and theft of

- 50 gasoline in its fiscal 1981 and its fiscal 1982 are significant

evidence of its fraudulent intent with regard to its income taxes

for these years.

Bradford v. Commissioner, 796 F.2d at 308;

Petzoldt v. Commissioner, 92 T.C. at 701-702; McGee v.

Commissioner, 61 T.C. at 260.

(b) Substantial Omissions

Kenmore reported taxable income in the amount of $1,755 for

its fiscal 1981 and $23,821 for its fiscal 1982.

Supra table 1.

Kenmore failed to report taxable income in the amount of

$511,669.28 for its fiscal 1981 and $345,556.67 for its fiscal

1982 (supra tables 3 and 4), which amounts to more than 99

percent of Kenmore’s fiscal 1981 taxable income and more than 94

percent of its fiscal 1982 taxable income.

Supra table 7.

These

omissions are not the result of any good-faith dispute as to

taxability.

See infra (d) Implausible Explanations.

The mere failure to report income is not sufficient to

establish fraud.

Petzoldt v. Commissioner, 92 T.C. at 700.

However, exceedingly large discrepancies between the taxpayer’s

actual net income and the net income reported do constitute

evidence of fraud when such discrepancies are not adequately

explained.

Stone v. Commissioner, 56 T.C. at 224.

Kenmore’s

substantial omissions of taxable income for its fiscal 1981 and

its fiscal 1982 are substantial evidence of fraud as to these 2

years.

- 51 An aggregate of more than $4.1 million was deposited into

Kenmore’s Account during Kenmore’s fiscal 1981 and its fiscal

1982.

Supra table 5.

In addition to the $4.1 million of

deposits into Kenmore’s Account, there was some indeterminate

amount of cash that passed through Kenmore’s safe, and did not

show up in Kenmore’s Account.

The one-write bookkeeping system

focused only on Kenmore’s Account.

Both Gleave and Broskin used

Kenmore’s Account; the one-write system did not adequately

distinguish among Kenmore, Gleave, and Broskin transactions.

Heintz and Bohn carried it out, the one-write system used a

miscellaneous column (Gleave account) for any transactions that

(1) they were aware of and (2) did not know how to classify.

cannot deduce what happened to many of the Gleave account items,

except that we know that Heintz and Bohn put all the Broskin

items that they recognized into the Gleave account.

Not only was

the currency in the safe (generally $2,000-$20,000) not recorded

in the one-write system, but also there was not a system to

enable Heintz or Bohn to know how much of the currency belonged

to Broskin and how much belonged to Kenmore or Gleave.

Kenmore’s operations were large enough and varied enough,

and the comingling of Kenmore’s, Broskin’s, and Gleave’s assets

was extensive enough, so that it was obvious that detailed

record-keeping was important.

Failure to keep and supply

adequate records may be an indication of fraud.

Bahoric v.

Commissioner, 363 F.2d 151, 154 (9th Cir. 1966), affg. T.C. Memo.

- 52 1963-333.

We understand that some portion of Kenmore’s records

had been stolen in 1986, and this was at least partially

responsible for petitioners’ inability to produce complete

records at the trial.

However, the records that were produced,

and the testimony of Bohn, Gleave, and Broskin, convince us that

the records never were adequate to track through the maze of

Kenmore’s activities and assets.

Thus, the 1986 theft does not

affect our conclusions on this point.

Kenmore’s failure to make and keep adequate records, in the

context of the instant cases, is significant evidence of fraud.

(d) Implausible Explanations

Gleave’s determination to run his financial activities

through Kenmore--both with regard to Kenmore’s Account and the

cash in the safe at the Kenmore location--led to many of the

record-keeping confusions that may have inspired several of the

implausible explanations that petitioners offered in attempts to

bridge the substantial gap between (1) the total deposits into

Kenmore’s Account and (2) the gross receipts reported on

Kenmore’s tax returns.

Thus, petitioners contend that more than $170,000 of the gap

resulted from Gleave’s deposits into Kenmore’s Account--$100,000

from the Ted’s Nursery sale and $70,000 from the apparent

inheritance.

As we explained (supra, (a) Gross Receipts), we are

satisfied that: (1) If any such deposit occurred after the Ted

Nursery sale, then it did not affect more than $6,600 of the gap

- 53 for each of Kenmore’s fiscal 1981 and fiscal 1982, and (2) Gleave

did not deposit into Kenmore’s Account the proceeds he claims to

have received from his grandmother’s estate.

Also, petitioners have tried to throw up smokescreens by

general contentions that Broskin’s dealings would fill this gap.

But, as we have shown, Broskin’s dealings would not have affected

the substantial shortfall in Kenmore’s reporting of its taxable

income.

Petitioners have tried to explain away Kenmore’s failure to

keep sufficient records of currency by arguing that Kenmore’s

need for currency (e.g., in order to cash checks) explains the

gap in its reporting.

We have no reason to believe the

underlying factual predicates.

As far as we can tell, any check-

cashing that Kenmore may have done probably was small in amount

and affected only the check-versus-currency mix (and not the

total amount) of the deposits to Kenmore’s Account.

The transparent falseness of petitioners’ explanation of

Kenmore’s reporting omissions is itself an indicator of Kenmore’s

fraudulent intent.

Bahoric v. Commissioner, 363 F.2d at 153-154;

Boyett v. Commissioner, 204 F.2d at 208.

We conclude from the foregoing, and we have found, that

respondent has shown by clear and convincing evidence that

Kenmore intended to evade its income taxes for each of its fiscal

1981 and fiscal 1982 years, which taxes Kenmore knew or believed

- 54 it owed, by conduct intended to conceal income, and prevent the

collection of taxes.

(e) 1980

In general, if (1) a net operating loss is carried back from

a fraud year to a nonfraud year, (2) a credit or refund is issued

to the taxpayer, and (3) the credit or refund leads to an

underpayment for the nonfraud year, then the underpayment for the

nonfraud carryback year is treated as due to the fraud of the

Toussaint v. Commissioner, 743 F.2d 309 (5th Cir.

loss year.

1984), affg. T.C. Memo. 1984-25.

Our holding that Toussaint is

distinguishable and the rule is otherwise if the carryback is of

a new jobs credit and the amount of the claimed credit is

nonfraudulent, was reversed.

Arc Elec. Const. Co. v.

Commissioner, 923 F.2d 1005 (2d Cir. 1991), revg. T.C. memo.

1990-30.

It appears that Kenmore’s entire fiscal 1980

underpayment is attributable to a carryback from Kenmore’s fiscal

1981, which may have been a carryback of a net operating loss or

of an investment or new jobs credit.

Supra note 7.

The parties

have stipulated that the instant cases are appealable to the

Court of Appeals for the Second Circuit, which reversed us in Arc

Elec.

Our conclusion that Kenmore’s fiscal 1981 underpayment is

due to fraud leads us to conclude that Kenmore’s fiscal 1980

underpayment also is due to fraud, whether the carryback was of a

fiscal 1981 net operating loss (Toussaint) or an otherwise

- 55 allowable fiscal 1981 credit.

Arc Elec. Const. Co. v.

Commissioner supra; Golsen v. Commissioner, 54 T.C. 742 (1970),

affd. 445 F.2d 985 (10th Cir. 1971).

Accordingly, we do not in

the instant cases determine what is the nature of the claimed

carryback, nor do we at this time reconsider our holding in Arc

Elec.

We hold for respondent on this issue.

B. Gleave

(1) Underpayment of Tax

We have found that respondent has shown by clear and

convincing evidence that Gleave had income subject to tax in the

following amounts:

$106,038.75.

1980--$22,323.54; 1981--$13,719.80; 1982--

Supra tables 8, 9, and 10.

We have found that

Gleave is entitled to deductions that exceed the zero bracket

amount for each of these years.

text.

Supra note 8 and associated

It is evident, however that the deductions are not large

enough to eliminate Gleave’s tax liability for any of these

years.

Gleave did not file tax returns for any of these years.

Accordingly, in the instant cases we conclude that Gleave’s

entire tax liability for each year is a deficiency for that year

and an underpayment for that year.

Sec. 6653 (c).

We discuss several of the items that led to the conclusions

that Gleave has an underpayment of tax for each of the years in

issue.

(a) Gleave Loans to Kenmore

- 56 The most significant dispute centers on petitioners’

contention that Gleave made numerous loans to Kenmore, and that

Kenmore’s payments to Gleave, or on Gleave’s behalf, were merely

repayments of these loans and thus not income subject to tax for

Gleave.

Gleave made a “soup sandwich” almost inevitable when he

determined to use Kenmore’s Account for his personal banking and

not keep personal records.

In our Findings of Fact, we have

described two instances in which Gleave did deposit amounts into

Kenmore’s Account, and we concluded that certain payments to

Gleave or for Gleave’s benefit were not income to Gleave.

1980--Not Income to Gleave.

Supra

In the portion of our opinion

dealing with Kenmore’s gross receipts we examined and rejected

petitioners’ contentions as to the proceeds of the sale of Ted’s

Nursery (except for $6,600 per year) and the proceeds of Gleave’s

and his brother’s apparent inheritances from their grandmother.

We observed Gleave as he testified.

We examined the

statements he signed under penalty of perjury in connection with

his and Kenmore’s bankruptcies, (1) as to his compensation from

Kenmore, (2) as to Kenmore’s not owing anything to him and not

repaying any loans during the preceding year.

The $550 per month payments on the purchase-money mortgage

from the sale of Ted’s Nursery require a different analysis.

our analysis as to Kenmore, it was evident that, if the payments

were deposited to Kenmore’s Account, then Kenmore’s taxable

- 57 income should be reduced because $6,600 of Kenmore’s annual gross

receipts came from a source that was nontaxable to Kenmore.

concluded that there was a sufficient likelihood that the

deposits were made, so that respondent had failed to present

clear and convincing evidence that the payments were not

deposited into Kenmore’s Account in the years in which the

purchase-money mortgage payments were made.

However, in order

for us to conclude that Gleave’s taxable income should be

reduced, the mortgage payments had to be deposited into Kenmore’s

Account, and the deposits had to be by way of loans and not

shareholder contributions to capital, and it had to be intended

that some of the Kenmore payments to Gleave described in our

Findings of Fact as Gleave Income--Clear and Convincing (and not

those in Other Items--Burden of Proof) be repayments of the

asserted loans.

We conclude that the likelihood of all of those

predicates being true is so slight that we are satisfied that

respondent has negatived that likelihood by clear and convincing

evidence.

We conclude, and we have found, that the income subject to

tax as found is tables 8, 9, and 10 was not from Kenmore’s

repayment of Gleave loans.

(b) $85,000 Check

On January 29, 1982, Kenmore issued a check to Gleave in the

amount of $85,000.

At trial, Gleave testified as follows--

Q [Summer] Item C is a check payable to Ted Gleave.

you recall what that was about?

- 58 A [Gleave] Yes, I do.

Would you please tell the Court?

A At this particular time I was about to be indicted

by Ashland Oil. This money was in 747’s account. The monies

really didn’t belong to 747 or Ted Gleave and it had to be

drawn out so it could pay the people that the monies really

belonged to.

Q Was part of that money used to repay loans by

yourself to 747? If you know.

I don’t know.

Q Do you recall a portion of that being utilized to

pay for a truck?

A That could have been some of the monies that were

used to pay for our truck.

Q Do you recall how much money you had to pay for that

truck, approximately?

truck?

I’m going to just say in the $60,000 range.

Do you know who actually went over and picked up the

Yes, I do.

Who was that?

Bob Broskin.

Q Do you know if he paid the money for the truck on

your behalf?

I think Bob did.

Then did 747 repay Mr. Broskin?

Yes.

On cross examination, Gleave testified as follows:

A [Warner] Paragraph 11(c) [of the stipulation]

reflects that on January 29, 1982, you issued check 1246

payable to yourself in the amount of $85,000, correct?

- 59 A [Gleave] That’s correct.

Q You testified relative to that $85,000 that you had

written that check to pay off certain individuals who you

owed money to.

A The gasoline people had turned around and had checks

that were running through the systems, you might as well

say.

Who were those individuals?

Bob Broskin, Frank Calderella, James Tavenier.

Q Prior to January 29, 1982, 747 had written checks to

Bob Broskin before that, hadn’t they?

Yes.

I imagine they did, yes.

Q Subsequent to January 29, 1982, 747 wrote checks to

Bob Broskin, didn’t they?

What do you mean?

Q After January 29, 1982, checks were written to Bob

Broskin?

I imagine they did. I don’t have the records.

Q But in this instance you chose to write a check to

yourself for $85,000 and pay off Bob Broskin in cash.

A No. I knew that the indictment was coming down for

Ashland Oil. Everybody knew it. There was a grand jury

investigation. What happened there was I was advised by my

attorney and my bookkeeper that if you want to keep the

stations in business and have the money to operate, take it

out of the checkbook, because they are going to seize the

checkbook.

Thus, Gleave testified that (1) the $85,000 did not belong

to either him or Kenmore and had to be returned to the rightful

owners, (2) most of the $85,000 was used to buy a truck for

Kenmore (which Kenmore did not show as a depreciable asset on its

fiscal 1982 tax return), and (3) the money had to be hidden from

- 60 Ashland Oil and kept available to Kenmore so that Kenmore could

stay in business.

This $85,000 item is more than four times as large as the

next largest item in the notice of deficiency to Gleave.

Gleave

testified as to the $85,000 item that he did “recall what that

was about”, even though the event was many years before the trial

in the instant case.

If Gleave did recall what that was about,

then why did he promptly give us three conflicting stories under

oath?

If the $85,000 had to be returned to its rightful owners,

then why did Kenmore not merely write checks to those owners,

rather than pass the money into Gleave’s hands?

If Gleave spent

about $60,000 to buy a truck for Kenmore, then why did Kenmore

not show the truck (depreciation, investment credit) on its tax

return?

If Gleave kept it hidden on the side, then (1) what was

to be gained, since Kenmore’s creditors would quickly see the

substantial check, and (2) what finally happened to the money?

After discounting Gleave’s conflicting testimony, we are

left with the fact that Kenmore paid the $85,000 to Gleave

because of Gleave’s decision that Kenmore should pay the money to

him.

Thus, the record herein establishes that (1) Gleave

received the $85,000, and (2) the $85,000 came from Kenmore’s

Account, which is the source of many payments which constitute

income to Gleave.

See DiLeo v. Commissioner, 96 T.C. at 873;

Tokarski v. Commissioner, 87 T.C. at 77.

Gleave’s testimony

- 61 convinces us that Gleave either kept the $85,000 or used it for

his own purposes, and it is income to Gleave.

During the years in issue Kenmore issued at least three

checks to Western-Southern Life Insurance Co. as premium payments

on an insurance policy on Gleave’s life.

Gleave claims that

these premium payments are not income to him, because this policy

was a key-man life insurance policy.

Generally, life insurance premiums paid by an employer on

the life of its employee, where the proceeds of the insurance are

payable to the employee’s beneficiary, are part of the employee’s

gross income.

Section 1.61-2(d)(2)(ii)(a), Income Tax Regs.

the life insurance policy is an asset of the employer, then it

may be that the premium payments made by the employer are not

income to the employee, even if the employee is also the

employer’s controlling shareholder.

Resolution of this matter

involves consideration of various factors.

See, e.g., Casale v.

Commissioner, 247 F.2d 440 (2d Cir. 1957), revg. 26 T.C. 1020

(1956);16 Centre v. Commissioner, 55 T.C. 16 (1970); Lacey v.

Commissioner, 41 T.C. 329 (1963); Rev. Rul. 59-184, 1959-1 C.B.

65.

The record in the instant cases does not provide us with the

information that is necessary to decide whether the life

The rationale of the Court of Appeals was accepted by

this Court in Centre v. Commissioner, 55 T.C. 16, 20 (1970).

- 62 insurance premium payments made by Kenmore are, or are not,

income to Gleave.

We thus conclude that the tax treatment of the

checks in the amounts of $2,070.50 for 1980, $2,095.76 for 1981,

and $239.40 for 1982 that Kenmore issued to Western-Southern Life

Insurance Co. as premium payments is to be determined in

accordance with the burden of proof.

(d) Blue Cross

During 1982 Kenmore issued at least four checks to Blue

Cross.

Gleave claims that these checks were not income to him

because they were payments for health insurance premiums for

Gleave and his family.

Section 10617 provides that “Gross income does not include

contributions by the employer to accident or health plans for

compensation (through insurance or otherwise) to his employees

for personal injuries or sickness.”

The regulations provide that

the gross income of an employee also does not include

contributions by the employer to health plans that include the

employees’s spouse and dependents.

Regs.

Section 1.106-1, Income Tax

However, section 106 requires, by its terms, that the

employer’s contributions (here, Kenmore’s payments of premiums to

Blue Cross) be for compensation to the employer’s employees.

See

Larkin v. Commissioner, 48 T.C. 629, 632 n.3 (1967), affd. 394

Later amendments to this provision, providing

exceptions for highly compensated individuals, did not apply

until 1987, and so do not affect the instant cases.

- 63 F.2d 494 (1st Cir. 1968); Rev. Rul. 58-90, 1958-1 C.B. 88.

Gleave was Kenmore’s sole shareholder, its president, and an

active worker.

As we have pointed out (supra note 10), neither

side in the instant cases is clear as to its position regarding

which hat Gleave wore with regard to any of the Kenmore payments.

Neither side has given us the benefits of stating, much less

analyzing, its position as to whether section 106 properly leads

to Gleave’s excluding from his income Kenmore’s payment of the

Blue Cross premiums.

Our analysis of the record in the instant

cases does not enable us to redetermine this point.

Thus, we

conclude that the tax treatment of Kenmore’s payments of the Blue

Cross premiums is to be determined in accordance with the burden

of proof.

(e) Kenmore’s Income

Petitioners contend “that the income attributed to Mr.

Gleave was in fact income of 747 Kenmore.”

All of Gleave’s

income that we deal with in the instant cases are payments by

Kenmore to or for the benefit of Gleave.

There is not an

inconsistency between an item of income to Kenmore providing the

funds for a payment that results in income to Gleave.

(f) Eggertsville Inn

Petitioners contend on brief that the Eggertsville Inn was

“a wholly owned and operated subsidiary of 747 Kenmore.”

They

state that “Ted Gleave and Shirley Bohn and Clifford Pixley all

testified without contradiction that both 1066 Sheridan and the

- 64 Eggertsville Inn were wholly owned and operated subsidiaries of

747 Kenmore.”

Bohn’s and Pixley’s testimony to which petitioners

cited does not appear to deal with the Eggertsville Inn.

Only

Gleave’s testimony indicates that Kenmore was an owner of

Eggertsville Inn.

However, in contrast to the statements on

brief, Gleave testified that Kenmore was one of three “partners”,

and not that Kenmore was sole owner of Eggertsville Inn.

In even

sharper contrast are the careful statements on both Gleave’s and

Kenmore’s bankruptcy petitions that Gleave owned the Eggertsville

Inn and that Kenmore did not own any interest in the Eggertsville

Inn.

Gleave executed both of these petitions and certified to

their correctness under penalty of perjury.

We believe Gleave’s

1982 bankruptcy statements under penalty of perjury that he, not

Kenmore, owned the Eggertsville Inn; we have so found.

(g) The Zahno Boat

Gleave testified that Kenmore provided the money to buy the

Zahno boat.

Gleave bought the Zahno boat in his own name and

registered it in his own name with the New York State Department

of Motor Vehicles.

Gleave’s cousin registered the Zahno boat 2

days before Gleave signed his and Kenmore’s bankruptcy petitions,

in which Gleave and Kenmore disclaimed any ownership of the Zahno

boat and being a creditor of any debt related to it.

When the

smoke cleared, Gleave’s cousin died, but apparently neither the

cousin’s widow, nor the cousin’s estate or other heirs, had any

- 65 interest that survived, and Gleave traded the Zahno boat in for a

second boat, which Gleave still had at the date of the trial.

We are convinced that the cousin’s involvement was not in

derogation of Gleave’s interest, and that Kenmore’s providing

Gleave with the money to buy the Zahno boat resulted in $8,099.70

income to Gleave for 1981.

(h) Conclusion

We hold, and we have found, that respondent proved by clear

and convincing evidence that Gleave had an underpayment of tax

for each of the years 1981, 1982, and 1983.

(2) Fraudulent Intent

Gleave knew he had income.

He signed (“under Penalty of

Perjury”) Kenmore’s bankruptcy petition on the very page where it

states that Kenmore paid “$10,000 compensation”, and he signed

his own bankruptcy petition on the very page where it states that

he took from his business “$10,000 - $200 per week draws self

employed”.

Gleave knew that Kenmore was paying many of his

obligations.

Gleave tried to “drop out” of the system.

Gleave did not

file tax returns, even though he signed Kenmore’s tax returns.

Gleave ran his funds through Kenmore’s Account, thereby avoiding

information reporting by any bank.

Gleave did not have Kenmore

provide information reports, such as Forms W-2 and 1099.

Consistent with this approach, Gleave did not keep personal

- 66 records to show his income.

See, e.g., Habersham-Bey v.

Commissioner, 78 T.C. at 313-314.

Gleave pleaded guilty to embezzlement and theft of gasoline

from Ashland Oil, Inc., on various occasions between July 1981

and January 1982, activities which by their nature produce

income.

Bradford v. Commissioner, 796 F.2d at 308; Petzoldt v.

Commissioner, 92 T.C. at 701-702; McGee v. Commissioner, 61 T.C.

at 260.

Gleave’s overarching explanation is that Kenmore’s payments

to him, or for his benefit, are not income to him because they

are merely repayments of loans by him to Kenmore.

We do not

believe the stories of his receiving assertedly nontaxable

sources of capital at convenient times.

In addition, we note

that petitioners do not even contend that any of the asserted

transfers by Gleave to Kenmore met any of the criteria for loans,

as distinguished from contributions to capital.

For a discussion

of such criteria and case law, see Bittker & Eustice, Federal

Income Taxation of Corporations and Shareholders, par. 4.04, at

4-31 through 4-39 (6th ed. 1994).

Gleave’s implausible explanations, which we reject, are

themselves an indication of fraud.

Bahoric v. Commissioner, 363

F.2d at 153-154; Boyett v. Commissioner, 204 F.2d at 208.

We conclude from the foregoing, and we have found, that

respondent has shown by clear and convincing evidence that Gleave

intended to evade his income taxes for each of the years 1980,

- 67 1981, and 1982, which taxes Gleave knew or believed he owed, by

conduct intended to conceal, mislead, or otherwise prevent the

collection of taxes.

We hold for respondent on this issue.18

C. Additional Amount for Portion Attributable to Fraud

The additional amount added to the tax under section

6653(b)(2) is equal to 50 percent of the interest payable under

section 6601 and applies only to the portion of the underpayment

that is attributable to fraud.

In the notices of deficiency

respondent determined that this additional amount applies to the

entire deficiencies determined against Kenmore for its fiscal

1982, and Gleave for 1982.

Respondent has the burden of proving

by clear and convincing evidence what portion of the deficiency

is attributable to fraud.

Sec. 7454(a); Rule 142(b).19

Because of our holding on this issue, we do not reach

the alternative contention that Gleave is liable for additions to

tax, under secs. 6651 (failure to timely file tax returns) and

6653(a)(negligence, etc.), which respondent asserted in the

answer.

Sec. 1503(a) of TRA 86, 100 Stat. 2742, amended sec.

6653(b)(2) to provide as follows:

SEC. 6653.

ADDITIONS TO TAX FOR NEGLIGENCE AND FRAUD.

(b) Fraud.--

(2) Determination of portion attributable to

fraud.--If the Secretary establishes that any portion

of an underpayment is attributable to fraud, the entire

underpayment shall be treated as attributable to fraud,

(continued...)

- 68 (1) Kenmore

In part I.A. of this opinion, we considered the parties’

disputes as to the amounts of Kenmore’s income in order to

determine whether respondent proved by clear and convincing

evidence that Kenmore has an underpayment of tax.

After

examining the evidence in the record, we concluded that

respondent carried this burden of proof for each of the years in

issue.

This conclusion applies also to our consideration of the

additional addition to tax under section 6653(b)(2) for Kenmore’s

fiscal 1982.

In particular, we conclude that respondent has proven by

clear and convincing evidence that (consistent with our holding

supra in part I.A.) Kenmore omitted from taxable income

$345,556.67 for its fiscal 1982 (supra table 4), and that the

underpayment of tax resulting from this omission is attributable

to fraud.

We hold for respondent as to the amount of underpayment

resulting from this omission; we hold for petitioner as to any

other amount of underpayment for 1982.

(...continued)

except with respect to any portion of the underpayment

which the taxpayer establishes is not attributable to

fraud.

This amendment placed the burden of proof on the taxpayer to

establish that a portion of the deficiency was not attributable

to fraud. The amendment applies to tax returns the due date of

which is after Dec. 31, 1986, and so does not affect the instant

cases.

- 69 (2) Gleave

In part I.B. of this opinion we considered the parties’

disputes as to the amounts of Gleave’s income in order to

determine whether respondent proved by clear and convincing that

Gleave has an underpayment of tax.

After examining the evidence

in the record, we concluded that respondent carried this burden

for each of the years in issue.

This conclusion applies also to

our consideration of the additional addition to tax under section

6653(b)(2) for 1982.

In particular, we conclude that respondent has proven by

clear and convincing evidence that Gleave omitted from 1982

taxable income $106,038.75 (supra table 10), less the deductions

described in our Findings of Fact (supra note 8 and associated

text) and his personal exemption, and that the underpayment of

tax resulting from this omission is attributable to fraud.

We hold for respondent as to the amount of underpayment

resulting from this omission; we hold for petitioner as to any

other amount of underpayment for 1982.

II. Amounts of Deficiencies

In part I of this opinion respondent had the burden of

proving, by clear and convincing evidence, that there were underpayments of tax, some part of which was due to fraud; respondent

carried this burden.

Also, in part I.C. of this opinion

respondent had the burden of proving, by clear and convincing

evidence, the amounts of petitioners’ underpayments of tax for

- 70 1982 or fiscal 1982 that were attributable to fraud; respondent

carried this burden to the extent described in part I.C.

In this part of the opinion, petitioners have the burden of

proving by a preponderance of the evidence that respondent erred

in the notice of deficiency determinations as to matters of fact.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

A. Kenmore

We have set forth our findings as to the amounts of

Kenmore’s income for its fiscal 1981 and its fiscal 1982 supra in

tables 3, 4, and 7.

The amounts of Kenmore’s omitted income for

these years are derived from adjustments that (1) increase

Kenmore’s gross receipts, and (2) increase Kenmore’s purchases.

We have held in part I.A. that respondent proved by clear

and convincing evidence that for fiscal 1981 and fiscal 1982

Kenmore’s taxable income was understated by the amounts set forth

supra in tables 3 and 4.

In our analysis as to fraud, we indicated our uncertainty as

to the matter of $6,600 per year of purchase-money mortgage

payments.

Petitioners have failed to carry their burden of

proving that it is more likely than not that part of the deposits

to Kenmore’s Account consisted of these payments.

Accordingly we hold that, in computing Kenmore’s

deficiencies for its fiscal 1981 and 1982, the parties are to add

$6,600 to the amounts set forth supra in tables 3 and 4 as

- 71 “Taxable income omitted” under the heading “Court’s Findings”.

We hold for respondent as to Kenmore’s fiscal 1980.

B. Gleave

We have set forth our findings as to the amounts of Gleave’s

income supra in tables 8, 9, and 10.

We conclude, and we have found, that Gleave has failed to

carry his burden of proof as to the amounts set forth in the row

“Burden of Proof” in tables 8, 9, and 10.

We hold for respondent in the amounts set forth supra in

tables 8, 9, and 10, in the rows “Income to Gleave” and “Burden

of Proof”, less the amounts of deductions set forth in our

Findings of Fact at note 8 and associated text; we hold for

Gleave in the amounts set forth in tables 8, 9, and 10 in the row

“Not Income to Gleave”.

To take account of the parties’ concessions and the

foregoing,

Decisions will be entered

under Rule 155.20

At trial the parties were unsure whether Gleave was

entitled to any dependency deductions for his children for the

years in issue. This matter is to be dealt with in the

computations under Rule 155.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.