DeSantis v. Commissioner

                         T.C. Memo. 1997-141



                       UNITED STATES TAX COURT



         ALBERT J. AND HELEN R. DESANTIS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 5766-90, 13108-91.      Filed March 18, 1997.



     Albert J. DeSantis, pro se.

     Aaron P. Rosenfeld and George N. Corey, for petitioner Helen

R. DeSantis.

     John A. Freeman, Robin L. Herrell, James W. Ruger, and Nancy

Ortmeyer Kuhn, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION



     DAWSON, Judge:     This case was assigned to Chief Special

Trial Judge Peter J. Panuthos pursuant to the provisions of
                                 - 2 -


section 7443A(b)(4) and Rules 180, 181, and 183.1      The Court

agrees with and adopts the opinion of the Special Trial Judge,

which is set forth below.

                  OPINION OF THE SPECIAL TRIAL JUDGE

        PANUTHOS, Chief Special Trial Judge:   In a notice of

deficiency dated December 27, 1989, respondent determined

deficiencies in and additions to petitioner Albert J. DeSantis'

(hereinafter petitioner) Federal income tax for 1982, 1983, and

1984:

                          Docket No. 5766-90

                                     Additions to Tax
Year         Deficiency   Sec. 6653(b)(1) Sec. 6653(b)(2)   Sec. 6661
                                                   1
1982          $329,250        $164,625                          $82,313
                                                   1
1983         1,326,062         663,031                          331,516
                                                   1
1984           319,814         159,907                           79,953
1
    50 percent of the interest due on the deficiency.


       The deficiencies and additions to tax are based upon

respondent's claim that petitioner fraudulently, and with intent

to evade tax, failed to report income in the amounts of $658,498,

$2,655,666, and $639,624 on his 1982, 1983, and 1984 returns,

respectively.    While deficiencies in tax and additions to tax

under sections 6653(a)(1) and (2) and 6661 were determined


       1
        All section references are to the Internal Revenue Code
in effect for the years in issue, unless otherwise indicated.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                    - 3 -


against petitioner Helen R. DeSantis, said deficiencies and

additions were resolved prior to trial.2

           In her amended answer at docket No. 5766-90, respondent

asserted that the deficiencies in and additions to petitioner's

Federal income tax be increased by the following amounts:

                                       Additions to Tax
Year        Deficiency     Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
                                                  1
1982         $64,429.86       $32,214.93                  $16,106.97
                                                  1
1983          12,621.33         6,310.67                     3,154.83
                                                  1
1984       1,066,763.88       533,381.94                   266,691.47
1
    50 percent of the interest due on the deficiency.

       The increases to the deficiencies in and additions to tax

are based upon respondent's claim that petitioner fraudulently,

and with the intent to evade tax, failed to report income in the

additional amounts of $128,860.71, $25,237.66, and $2,133,528.76

on his 1982, 1983, and 1984 returns, respectively.         Therefore,

the total deficiencies in and additions to tax in dispute with

respect to docket No. 5766-90 are as follows:

                                            Additions to Tax
Year         Deficiency    Sec. 6653(b)(1)    Sec. 6653(b)(2)   Sec. 6661
                                                    1
1982         $393,679.86     $196,839.93                        $98,419.97
                                                    1
1983        1,338,683.33      669,341.67                        334,670.83
                                                    1
1984        1,386,577.88      693,288.94                        346,644.47
1
    50 percent of the interest due on the deficiency



       2
        Respondent, in a second notice of deficiency dated Apr.
9, 1991, determined additions to tax under secs. 6653(b)(1) and
(2) and 6661 against petitioner Helen R. DeSantis. A timely
petition was filed at docket No. 13108-91. Respondent conceded
the adjustments in this notice of deficiency.
                                        - 4 -


        The adjustments raised by respondent in the notice of

deficiency, answer, and amendment to answer are as follows:
                                                    Tax Years Ended
Adjustments to Income                  1982            1983                  1984

a. Partnership fee income          $624,000.00     $1,017,900.00        $291,700.00
     ADJ/Bethel Woods, Ltd.               -0-         153,900.00             -0-
     ADJ/Bethel Woods, Ltd.               -0-           3,222.00             -0-
                                     1
b. Newtowne                            31,014.00    1,282,500.00             -0-
     Park Place                           -0-           -0-              180,000.00
     Saltergate I                    120,000.00         -0-                  -0-
     Cost savings                         -0-         106,037.66         202,028.76
     Architectural fee                    -0-           -0-               30,000.00
     Ford Van                           8,860.71        -0-                  -0-
c. Savko                                  -0-         124,330.00          34,000.00
d. Interest                               -0-         (10,524.00)            -0-
e. Schedule C
     Oil & gas exploration              3,484.00        -0-                  -0-
     Uncollectible operating expense      -0-           -0-            2,516,224.00
     Gross receipts                       -0-           -0-             (480,800.00)

    Total                            787,358.71     2,677,365.66      2,773,152.76
1
   This amount reflects the difference between $158,000, as determined by respondent
in the notice of deficiency, and $126,986, as reported on petitioner's 1982 return.

        After concessions,3 the issues for decision are:                     (1)

Whether petitioner failed to report income he received from

several partnerships on his 1982, 1983, and 1984 Federal income

tax returns; (2) whether petitioner received income from

Newtowne, Inc., which was not reported by petitioner on his 1982,


        3
        Respondent concedes the following issues raised in the
notices of deficiency and amendment to answer: (1) An increase
in taxable income for 1984 in the amount of $34,000 identified in
the amendment to answer as "a kickback from Savko"; (2) $1,060.71
of the Ford Van income raised in the amendment to answer for
1982; (3) $1,371.02 of the cost savings adjustment raised in the
amendment to answer for 1984; and (4) the addition to tax for
fraud under sec. 6653(b)(2) on that portion of the deficiencies
attributable to:
Year                              Adjustment                             Amount

1982           Schedule C - Oil and gas exploration                       $3,484
1983           Partnership fee income (AJD/Development. Co.)              65,650
1983           Partnership fee income (Savko)                            124,330
1983           Partnership fee income (AJD/Bethel Woods, Ltd.)             3,222
                               - 5 -


1983, and 1984 returns; (3) whether petitioner received $124,330

in income from Savko which was not reported on his 1983 return;

(4) whether petitioner is entitled to claim a deduction for

windfall profits tax withheld in the amount of $3,484 on his 1982

return; (5) whether petitioner is entitled to claim a bad debt

deduction in the amount of $2,516,224 on his 1984 return; (6)

whether respondent erroneously decreased reported 1984 income by

$1,933,600, as determined in the notice of deficiency, and

whether the proper decrease of reported income is $480,800, as

claimed by respondent in her amended answer; (7) whether

petitioner is liable for the additions to tax for fraud pursuant

to section 6653(b)(1) and (2) for the tax years ended 1982, 1983,

and 1984; and (8) whether petitioner is liable for the additions

to tax for substantial understatement of income tax for 1981,

1982 and 1983 under section 6661.

Procedural Background

     These cases have a long history.    The petition in docket No.

5766-90 was filed in March 1990.    The first notice of trial was

issued in June 1991 setting this matter for trial in November

1991.   The matter was continued based on a joint motion by the

parties.   During 1992 through 1994, the matter was continued

three more times.   In August 1993, we granted Aaron P.

Rosenfeld's and George N. Corey's motion to withdraw as counsel

for petitioner Albert J. DeSantis.     When the matter was continued
                               - 6 -


in January 1994, the parties represented that they believed they

might settle the case or at least narrow the issues.    The cases

were specially assigned in November 1994, and in December 1994

the cases were set for trial in May 1995.    During the period

between December 1994 and May 1995, extensive motions were filed

by respondent seeking to compel discovery as well as seeking to

enforce stipulation under Rule 91(f).    The Court held hearings on

some of the motions and issued appropriate orders.

     On the eve of the scheduled May 8, 1995, trial (May 5,

1995), the Court received copies of documents from petitioner

indicating his unavailability for trial.    The documents consisted

of notes from doctors indicating that petitioner was suffering

from vertigo and imbalance.   The Court attempted to schedule a

conference call; however, petitioner advised a representative of

the Court that he was unwilling to engage in a conference call.

     The matter was called for trial in Columbus, Ohio, on May 8,

1995.   Petitioner did not appear.   The Court filed the documents

previously received on May 5, 1995, as petitioner's motion to

continue.   Respondent presented Dr. Hurlbutt as a witness so that

the Court could get a sense of petitioner's medical condition.

Dr. Hurlbutt was the attending physician in the emergency room

where petitioner sought treatment.     Dr. Hurlbutt testified that

petitioner complained of vertigo; however, there were no
                               - 7 -


objective physical symptoms of the condition such as nystagmus.4

Dr. Hurlbutt indicated that he originally wrote on a prescription

that petitioner should remain out of work for 1 week; however,

petitioner asked that the prescription be more specific and

coincide with a prescription for an episode that occurred a few

years earlier.   As a result, Dr. Hurlbutt rewrote the

prescription suggesting 2 weeks of minimal activity.     After

hearing Dr. Hurlbutt's testimony, respondent indicated that she

did not object to a continuance and asked that the cases be set

for trial in a few weeks.   On the basis of the record, the Court

granted the motion to continue.   The Court expressed its concern

at the continued delay of this matter and advised that it would

reset the cases for trial in the near future.   The Court's order

dated May 8, 1995, directed petitioner to review the transcript

of the May 8, 1995, proceeding and further indicated that the

Court would be inclined to deny any further requests for a

continuance.

     By order served May 30, 1995, the Court set the cases for

trial on July 31, 1995.   The order, among other things, pointed

out that the Court attempted on a number of occasions after May

5, 1995, to arrange conference calls with the parties.

Petitioner advised representatives of the Court on more than one


     4
        Nystagmus is a quick oscillation of the eyes that often
is noted in patients who suffer vertigo.
                               - 8 -


occasion of his unwillingness to engage in a conference call.5

The Court further reiterated that it would not be inclined to

grant any further continuances.   On June 23 and 28, 1995, the

Court issued orders respectively relating to respondent's motion

to show cause why proposed facts and evidence should not be

accepted as established, Rule 91(f), and respondent's motion in

limine.   The Court had previously issued an order sanctioning

petitioner for failure to respond to respondent's discovery.     The

Court also deemed certain facts and evidence stipulated based on

the record.

     On July 24, 1995, a week before the scheduled trial,

petitioner filed a motion to continue.    Petitioner asserted that

he continued to suffer from dizziness.    The Court denied the

motion to continue on July 26, 1995, and conducted a conference

call with the parties.   Petitioner advised that he would not

appear at the trial scheduled for July 31, 1995.    Respondent

advised that she would appear and present her case with respect

to those matters on which she had the burden of proof.    The Court

advised petitioner that the trial would proceed on July 31, 1995,

and that his failure to appear or his failure to have counsel

appear could have adverse consequences.



     5
        The Court sought to schedule conference calls to obtain
updates on petitioner's medical condition and coordinate the
scheduling of hearings and the trial.
                               - 9 -


     When the case was called for trial at Columbus, Ohio, on

July 31, 1995, petitioner did not appear for trial.     Respondent

presented Dr. Kelly Lee Mckeraham, a physician at the Ohio State

University family practice clinic.     Dr. Mckeraham did not examine

petitioner, nor was he able to express an opinion as to whether

petitioner's medical condition was so severe as to prevent him

from appearing in Court.   At petitioner's request and based on

petitioner's medical file, Dr. Mckeraham provided a note for

petitioner excusing him from upcoming business meetings.

     On the basis of the record, the Court concluded that the

matter should proceed to trial despite petitioner's absence.       The

Court was far from satisfied that petitioner's failure to appear

was based on his medical condition rather than his desire to

further delay the trial.   The record in this case revealed a

history of delay and failure to communicate and cooperate.     The

Court simply could not tolerate any further delay tactics by

petitioner.   The Court also notes that there were substantial

stipulations of fact and exhibits already in the record, some of

which petitioner had agreed to and some of which were the result

of orders issued under Rule 91(f).     The Court issued an order

providing the parties an opportunity to file briefs.     In fact,

petitioner did file a posttrial brief.

     When this case was called for trial on July 31, 1995,

respondent orally moved to dismiss this case for failure to
                               - 10 -


properly prosecute as to those issues on which petitioner bears

the burden of proof.   At the conclusion of trial, respondent

filed a written motion to dismiss for petitioner's failure to

properly prosecute.    The Court took the motion under advisement.

Since respondent bears the burden of proof with respect to the

additions to tax for fraud, the increased deficiencies, and the

additions to tax claimed in her amended answer, the case

proceeded to trial wherein respondent presented her case.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.6

The stipulation of facts and attached exhibits are incorporated

herein by this reference.   At the time of filing the petition

herein, petitioner resided in Columbus, Ohio.

1.   General Background

     During the years at issue, petitioner was self-employed in

various businesses relating to the development of residential

real estate.   Petitioner has a bachelor of science degree from

Miami University, with a major in accounting, and a master of

business administration degree from Ohio State University, with a

major in finance.   Petitioner has also completed a major portion

     6
        A stipulation of facts was filed by the parties
containing almost 500 paragraphs and hundreds of attached
exhibits. The Court also deemed certain facts and evidence
stipulated pursuant to Rule 91(f). Also, petitioner was
sanctioned for failure to comply with discovery, in that he was
prevented from presenting evidence of certain matters. In any
event, petitioner did not appear nor offer any evidence at trial.
                             - 11 -


of the work toward a doctoral degree in finance.    Petitioner has

10 years of part-time teaching experience in the areas of

finance, business, and accounting.    Petitioner was associated

with the Graduate School of Central Michigan University with

teaching responsibility in the finance area for Central Michigan

University/American Society of Medical Technologists' Business

Program for 8 years.

     On September 1, 1989, petitioner pled guilty to the willful

making of false Federal income tax returns for the years 1982 and

1983, pursuant to section 7206(1).    Section 7206 provides in

pertinent part:

     Any person who--

          (1) Declaration under penalties of perjury.--
     Willfully makes and subscribes any return, statement,
     or other document, which contains or is verified by a
     written declaration that it is made under the penalties
     of perjury, and which he does not believe to be true
     and correct as to every material matter; * * *

     *        *         *       *         *        *        *

     shall be guilty of a felony * * *


In a Sentencing Decision filed December 28, 1989, in the U.S.

District Court for the Southern District of Ohio, the court

stated:

          It is agreed between the Government and Mr.
     DeSantis that Mr. DeSantis' federal income tax returns
     for the years 1982 and 1983 failed to include a
     substantial amount of income, from one or more sources,
     the amount of which is in dispute. * * *
                              - 12 -


          The defendant stands before this Court as an
     apparently intelligent, hard driving business man who
     has succeeded in his chosen field. Unfortunately, the
     defendant for whatever reason, chose to commit perjury
     in the preparation and verification of his tax returns
     which means that they were not true and correct as to
     every material matter.

2.   The Partnerships

     Petitioner organized over 100 general and limited

partnerships (the partnerships) for the purpose of acquiring and

developing property for his real estate activities in the

northwest region of Columbus, Ohio.    Petitioner was either the

sole general partner or controlled the general partner in each

partnership.   DeSantis Associates, for example, was a general

partnership in which DeSantis, Inc., was a general partner, and

petitioner was the managing partner.    The stock of DeSantis,

Inc., was owned solely by petitioner.    Each partnership had a

separate bank account with BancOhio National Bank (BancOhio) in

Columbus, Ohio.   Petitioner also maintained a personal checking

account, No. 830536146, with BancOhio.

     Petitioner, as general partner, entered into separate

written contracts with the partnerships in which he agreed to

provide the latter with financial and consulting services.

Specifically, the contracts were entitled "Ongoing Financial and

Tax Analysis, and Investment Counseling Agreements".    Petitioner,

as the general partner of the partnerships, signed the agreement

on behalf of the parties.   Petitioner agreed to perform the
                                         - 13 -


financial services for a set fee.                The partnerships paid

petitioner in accordance with the agreements.                The partnerships

deducted the fees on their income tax returns as the cost of

services provided by petitioner.

      From 1981 through 1990, John Meeks (Meeks), a certified

accountant, assisted in the preparation of petitioner's

individual income tax returns and Forms 1065 for most of the

partnerships.      Petitioner gave Meeks photocopies of returns which

were completed in pencil.          Meeks reviewed the photocopies for

mathematical errors and forwarded them to petitioner.                Petitioner

typed the corrected information on the returns and Meeks reviewed

this information before petitioner mailed the returns to the IRS.

Meeks did not ask petitioner for documentation verifying the

amounts reflected on any of petitioner's returns.

      The record reflects that petitioner received the following

amounts from partnerships which he controlled:

                                          1982

             Partnership

AJD/Bethel Colony II
AJD/Chillowick
AJD/Olde Sawmill on the Lake II
AJD/Olde Sawmill on the Lake
AJD/Rivergreen
Bethel Colony, Buildings 1--10
Bethel Office Buildings 5 & 7
Brafferton, Buildings 19, 29, 30, & 31
Brafferton Village Associates
Saltergate, Buildings 1--10
Saltergate II, Buildings 1--9
Woodbridge Buildings 10--15
Mobile Office Building
                                      - 14 -

  Total received


                                        1983

          Partnership                                                 Amount

JD/Dierker Rd., Ltd.                                                 $96,000
AJD/Robin Woods, Ltd.                                                 80,900
Bethel Office Buildings 1, 2, 5--7                                    60,000
Brafferton Buildings 19 & 30                                          13,600
Rivergreen Buildings 1--10                                           135,000
AJD Development/The 161 Company                                       47,700
Mobile Office Building                                                 6,000
Olde Sawmill on the Lake Buildings 1--8                              128,900
Olde Sawmill on the Lake II, Buildings 1--6 & 9                      106,600
AJD/Bethel Woods                                                     153,900

Total received                                                       828,600
Less concession                                                      (12,000)

  Total                                                              816,600




                                        1984

Partnership                          Amount       Amount Previously Reported    Conce

AJD Development/The 161 Company     $192,750               $54,050
AJD/Robin Woods                      215,900                63,000               $17,

Total received                       408,650
Less concession                      (17,900)
Less amount previously reported     (117,050)

  Total                              273,700



      Petitioner does not contest respondent's claim that he

received payments from the partnerships during the years in

issue.      Petitioner asserts that the payments were either: (1)

Repayments to petitioner of loans allegedly made to the

partnerships; (2) nontaxable partnership withdrawals by

petitioner which are properly chargeable to his capital accounts;

or (3) loans to petitioner from the partnerships.
                               - 15 -


     Petitioner recorded his transactions with each partnership

on a ledger (the ledger).    Respondent introduced into evidence a

computer spreadsheet outlining those transactions, which utilized

the ledger.    Petitioner also recorded certain financial

information concerning petitioner and the partnerships on several

documents entitled "GAP loan interest payments" (GAP sheets).

The GAP sheets purport to record short-term loans from petitioner

to the partnerships.    The amounts and dates of payment reflected

on the GAP sheets are virtually identical to the entries listed

on the ledgers.    The only difference is the manner in which

certain of the payments are recorded.      On the GAP sheets, these

payments are recorded as loans from petitioner to the

partnerships.    On the ledgers, they are recorded as miscellaneous

draws from the partnerships.    The ledgers do not reflect loans

from petitioner to the partnerships in the amounts and on the

dates indicated on the GAP sheets.      Apart from the GAP sheets,

there is no evidence in the record that petitioner lent money or

otherwise transferred funds to the partnerships during the years

at issue.   Some of the ledgers reflect negative balances at the

close of the year.

     The limited partnerships' offering circulars specifically

state:   "No loans of any type or description shall be made or

given to the General Partner, its constituent partners or its

affiliates".    The offering circulars did permit petitioner, as
                               - 16 -


general partner, to make short-term or GAP loans to the limited

partnerships at an interest rate of 2 percent above the prime

rate.   The GAP sheets purport to record that petitioner made such

loans and that the limited partnerships paid interest to

petitioner.   The record does not reflect that the limited

partnerships made payments of principal to petitioner.

     Petitioner caused checks to be issued from the partnerships

payable to himself, bearing the notation "second mortgage

interest".    The second mortgage interest is attributable to

second mortgage loans purportedly made by petitioner to the

partnerships.   The record does not reflect the terms of any

second mortgage loans.   Furthermore, there is no evidence that

petitioner transferred any funds to the partnerships in

accordance with the purported second mortgage loans.

     Petitioner also caused the partnerships to pool funds to

purchase jumbo certificates of deposit during the years at issue.

A jumbo certificate of deposit is a certificate of deposit in the

amount of $100,000 or more.

     Petitioner owned rental properties in the Ohio State

University and other Columbus, Ohio, areas.    During the years in

issue, petitioner owned from 31 to 79 such rental properties.

Petitioner hired several independent contractors (the laborers)

to clean and repair the rental units.   Petitioner would present

the laborers with their weekly paychecks which they, in turn,
                               - 17 -


would endorse back to petitioner.    Petitioner would give the

laborers cash in return for the checks.     The checks were drawn on

different partnership accounts and were often left blank in

amount.   Petitioner instructed his secretary to write a specified

dollar amount on the front of the checks that exceeded the amount

of cash paid to laborers.    The checks were cashed on the

following day at BancOhio.    Petitioner had an arrangement with

BancOhio whereby the checks could be cashed without his

endorsement.

     Some of the checks drawn on the partnership accounts were

for services that were not performed by the persons who endorsed

the checks.    For example, the record reflects notations on

several checks for "cleaning" services.     The record further

reflects that these checks were actually yearend bonuses paid to

petitioner's secretaries.    Some of the checks were in payment of

petitioner's personal expenditures.     For example, petitioner

caused checks to be drawn from his partnership accounts to pay

for supplies for his Arabian horses.     The checks, however,

reflect that payment was made for "duck feed" for a duck pond on

one of the partnership's properties.

     The inflated checks written on partnership accounts and

other payments made from partnership accounts for personal

expenditures are part of the basis of the increased partnership

income determined by respondent and not disputed by petitioner.
                              - 18 -


3.   Newtowne, Inc., and Related Transactions

     Newtowne, Inc. (Newtowne), an Ohio corporation founded in

1972, was the construction company which served as petitioner's

general contractor for most of his real estate projects.     Phillip

Fankhauser (Fankhauser), William Riat (Riat), Steven Branam

(Branam), and Frederick Forster (Forster) were officers and

shareholders of Newtowne.   Fankhauser served as Newtowne's

president during the years in issue.     In 1992, Newtowne filed a

chapter 11 petition in bankruptcy.     During the years in issue,

Newtowne was desperate for business from petitioner and, thus,

acceded to many of petitioner's wishes and demands.     As a result

of the lack of arm's-length dealing, petitioner was able to

manipulate many of the transactions with Newtowne to his benefit.

     Newtowne entered into contracts with the partnerships to

provide the latter with construction and design services.

Newtowne also entered into several "Market Research Analysis and

Ongoing Planning [Agreements]" and "Warranty Service

[Agreements]" with the partnerships.     With the exception of two

contracts, petitioner signed the contracts on behalf of both

parties.

     Petitioner advised representatives of Newtowne that he did

not expect to receive the services set forth in the market

research and warranty agreements.    Petitioner sent messengers to

Newtowne's office with checks that were drawn on various
                               - 19 -


partnership accounts and bore the following preprinted

endorsement:    "Pay to the Order of Albert J. DeSantis in Partial

Payment of Consulting Services."      The messengers were instructed

to wait for Fankhauser to endorse the checks before returning to

petitioner.    The messengers returned the endorsed checks to

petitioner who deposited the checks into account No. 830536146 at

BancOhio.

     So-called Ongoing Financial & Tax Analysis & Investment

Counseling Agreements reflect that funds were drawn on various

partnership accounts, and were made payable to petitioner as

follows:
                                 1982

            Partnership                        Amount      Concession

AJD/Bethel Colony II, Building   1           $15,000
AJD/Bethel Colony II, Building   2            10,000
AJD/Bethel Colony II, Building   3            15,000
AJD/Bethel Colony II, Building   4            10,000
AJD/Bethel Colony II, Building   5            15,000
AJD/Bethel Colony II, Building   6            10,000
AJD/Bethel Colony II, Building   7            15,000
AJD/Bethel Colony II, Building   8            10,000
AJD/Bethel Colony II, Building   9            15,000
AJD/Bethel Colony II, Building   10           10,000
AJD/Bethel Colony II, Building   11           15,000
AJD/Bethel Colony II, Building   12           10,000
Bethel Office, Building 7                     12,000         $4,000

Total received                               162,000
Less concession                               (4,000)

  Total                                      158,000
                                    - 20 -




                                     1983
                                                     Check
         Partnership                       Date   Deposit Date     Amount      Conc

AJD/Bethel Colony II                   12/31/82      1/3/83       $150,000       $1
AJD/Olde Sawmill on the Lake           12/31/82      1/3/83        126,000
AJD/Olde Sawmill on the Lake II        12/31/82      1/3/83        144,000
AJD/Rivergreen                         12/31/82      1/3/83        171,000
Saltergate II                           1/25/83     1/27/83        120,000
AJD/Dierker Rd.                         6/15/83     6/23/83        184,000
Bethel Colony II                        8/16/83     8/16/83        150,000       13
Rivergreen                              11/8/83    11/14/83        142,500
OSOTL                                   11/8/83    11/14/83        115,000
OSOTLII                                 11/8/83    11/14/83        120,000

  Total                                                          1,422,500
Less concessions                                                  (150,000)
  Total                                                            1,272,500




                                     1984

      Partnership                   Date          Amount

      Park   Place                10/15/84        $18,000
      Park   Place                10/15/84         18,000
      Park   Place                10/15/84         18,000
      Park   Place                10/15/84         18,000
      Park   Place                10/15/84        108,000

         Total                                    180,000

      In the preparation of petitioner's Federal income tax

returns, Meeks did not determine whether the checks from Newtowne

that were endorsed to petitioner, some of which were deducted on

the partnerships' returns, were included in petitioner's income.
                                - 21 -


Meeks did not examine the endorsements written on the back of the

checks.

     Petitioner failed to attach a schedule to his 1982 or 1983

return indicating how he determined gross receipts from his

financial consulting activity.    Petitioner attached a schedule to

his 1984 return which itemized the income he received from

financial consulting for that year.      The attached schedule does

not reflect that petitioner received $180,000 from Park Place.

Rather, the schedule reflects that petitioner received $30,525

from Park Place and $180,000 in "other consulting fees", without

indicating what "other consulting fees" represents.

     After the completion of a project known as Bethel Colony I,

petitioner signed all contracts on behalf of the partnerships and

negotiated with subcontractors, while Newtowne did most of the

estimating and bidding for the projects.     Petitioner required

that Newtowne use Reno Morine, a cement contractor, and Nicholas

Savko & Sons (Savko) for excavation and site preparation

services.   Petitioner threatened the employees of Newtowne so

that they would comply with his demands.     For example, at one of

petitioner's meetings with the employees of Newtowne, petitioner

posted the following message:

   Your business is   at stake. Your homes are at stake. Your
   reputation is at   stake. Your livelihood is at stake. I
   want performance   not damn excuses or I will go elsewhere,
   and if you don't   like it, you are welcome to go elsewhere.
                                - 22 -


At the bottom of the message, Riat wrote "And so we did".

Petitioner's manipulation of Newtowne enabled him to obtain

personal benefits that he would not have been able to enjoy under

an ordinary business relationship.       Through his intimidation

tactics, petitioner was able to reap the benefits from "cost

savings", the purchase of two office buildings at a reduced cost,

the construction of his personal residence, and a Ford van,

infra.

     (a)   Cost Savings (Including Park Place)

     Before obtaining financing for a given project, Newtowne

would prepare a detailed budget estimating specific costs

allocated to specific line items in the budget.       Any funds

remaining upon the completion of the project were known

internally as "cost savings".    Cost savings were determined on a

line-by-line basis for each item of the project by comparing the

estimated cost to the actual cost.       Petitioner and Newtowne

entered into an agreement whereby petitioner would receive 100

percent of the cost savings for certain items of the budget,

Newtowne would receive 100 percent for other items, and the cost

savings from the remaining items would be split equally.       The

checks Newtowne received for cost savings were often endorsed

over to petitioner.
                                   - 23 -


       Petitioner applied a portion of the cost savings towards the

construction cost of his home.       The amounts of the cost savings

from each construction project that were applied by Newtowne to

petitioner's construction account in 1983 and 1984 as follows:

                                    1983

       Partnership                 Check Date           Amount

Saltergate I                         2/23/83         $10,842.54
Saltergate II                        6/30/83          42,942.03
Bethel Colony II                    11/01/83          31,756.51
Owner's Check Request1              8/31/83          20,496.58

  Total                                              106,037.66

       1
           See discussion infra.
                                    1984

Partnership                                  Date          Amount

Bethel Colony II/Park Place                  2/84         $2,324.04
Bethel Woods                                 8/84          9,000.00
Park Place                                   7/84          9,457.15
OSOTL                                        7/84         10,686.61
Bethel Woods                                 7/84         13,300.00
Park Place                                   6/84          5,475.00
OSOTL                                        6/84         15,986.81
Park Place                                   5/84         15,000.00
                                                        1
Park Place/SAVKO                             4/84         28,000.00
OSOTL                                        4/84         19,000.00
Park Place                                   4/84          9,671.40
OSOTL                                        3/84         24,499.98
OSOTL                                        3/84         15,000.00
Rivergreen                                   1/84         13,256.70
Park Place                                  12/83         10,000.00

  Total                                                200,657.69
   1
     See discussion entitled "Construction of Petitioner's
Home", infra.
                              - 24 -


     Distributions from particular line items in the construction

budgets were also made to petitioner before cost savings were

computed.   Such distributions were known internally as "owner's

check request(s)".   On August 31, 1983, for example, an owner's

check request was issued to petitioner from Newtowne in the

amount of $20,496.58.   This amount is not reflected on

petitioner's 1983 return.   Petitioner failed to attach to that

return a schedule indicating how he determined his gross receipts

for 1983.   Petitioner prepared a document entitled "1099 Income"

which purports to reflect amounts he received during 1983 for his

financial consulting services.   This document was not presented

to Meeks when he reviewed petitioner's return for that year.    The

owner's check request is not reflected on this document.

     Petitioner's 1984 return does not reflect the amounts he

received from Newtowne in cost savings.    As indicated, petitioner

attached a schedule to his 1984 return which itemized the income

he received from "Financial Consulting".   The schedule does not

state that he received payments from Newtowne.   Petitioner

reported "other consulting fees" on the schedule in the amount of

$180,000.   It is unclear whether "other consulting fees"

represents the amounts petitioner received from Newtowne for his

consulting services, cost savings, or a portion of the cost
                              - 25 -


associated with Newtowne's construction of petitioner's home,

infra.

     Meeks was not aware that petitioner received cost savings

from Newtowne when he assisted in the preparation of petitioner's

1984 return.   Meeks was also not aware that Newtowne acted as the

general contractor for the construction of petitioner's home.

     (b)   Saltergate I

     On July 30, 1982, petitioner, acting as general partner of

two limited partnerships, purchased two office buildings from

Newtowne for $430,000 and $50,000, respectively.   The limited

partnerships participated in a real estate construction project

known as Saltergate Village Phase I.   Petitioner received credits

for syndication and consulting fees from Newtowne in the amounts

of $110,000 and $10,000, respectively, which were applied to the

purchase price of the office buildings.   The $120,000 in credits

petitioner received was not reported as income on his 1982

return.

     On December 1, 1982, petitioner caused the two limited

partnerships to enter into separate "Market Research Analysis and

Ongoing Planning [Agreements]" with Newtowne.   The agreements

were signed on behalf of both parties by petitioner.   On July 30,

1982, petitioner caused checks to be drawn on the accounts of the
                                - 26 -


limited partnerships totaling $120,000 payable to Newtowne.

Petitioner caused the checks to bear a notation indicating that

payment was for warranty and/or market research fees.       The

partnerships did not owe Newtowne any amounts for warranty and/or

market research fees in 1982.    The checks were endorsed to the

Huntington Mortgage Co. and deposited into an account entitled

"Newtowne III" at Huntington Bank.       These checks represent the

amounts referred to above as syndication and consulting fees.

Huntington Bank issued a loan commitment letter to petitioner

setting forth the provisions of loans in the amount of $320,000

for the purchase of the two office buildings.

     (c) Construction of Petitioner's Home and Architectural
     Services

     As a condition to signing one of the contracts between a

partnership that petitioner controlled and Newtowne, petitioner

approached Riat with the prospect of swapping petitioner's home

for Riat's home.   Instead of swapping homes, Riat suggested that

he design and build, with Newtowne, a 10,000-square-foot home for

petitioner.   The parties entered into a contract to build the

home in November 1983, and construction began shortly thereafter.

     On February 28, 1985, Newtowne and petitioner entered into a

separation agreement.   The construction of the home was not

completed at the time Newtowne entered into the separation
                               - 27 -


agreement.    Newtowne was never compensated for its services as a

general contractor, which are estimated at $100,000.   Riat

received $5,000 from petitioner for the architectural services he

provided that had a value of approximately $35,000.    Petitioner

failed to report on his 1984 return the $30,000 difference

between the value of Riat's services, $35,000, and the amount he

actually paid, $5,000.    Newtowne's cost of constructing the home,

not taking into account any credits for petitioner's consulting

services, was $361,055.   The cost of constructing petitioner's

home and the value of the contractor services provided by

Newtowne were not reported as income on petitioner's 1984 return.

     As indicated earlier, Savko was the excavation and site

preparation firm that performed most of the excavation work for

petitioner.   Petitioner obtained a construction loan account for

four of his projects at Chicago Title Insurance Co. (Chicago

Title).   Specific amounts of construction loan funds in the

Chicago Title account were budgeted to cover specific costs.

During the construction of petitioner's home, petitioner drew on

this construction loan account to pay Newtowne and Savko for

their services.   Savko endorsed the checks it received from

Chicago Title to Newtowne in payment of the costs associated with

the construction of petitioner's home.   For example, on April 13,
                                - 28 -


1984, Chicago Title issued a check in the amount of $28,000

payable to Savko and petitioner.    The check was endorsed by Savko

and petitioner and made payable to Newtowne on April 17, 1984.

The $28,000 was applied to petitioner's construction account at

Newtowne.    Petitioner failed to report this amount as income on

his 1984 return.

     Branam served as treasurer of Newtowne from May 1982 to

September 1988.    When Branam first received the check drawn on

the Chicago Title account, he questioned why it should be applied

to petitioner's construction account. Savko indicated that the

check was in partial payment of petitioner's consulting services.

Upon receiving this information, Branam credited this check to

petitioner's account.

     The total amount of credits applied to petitioner's

construction account was not reported on his 1983 and 1984

returns.    As indicated above, Meeks was unaware that petitioner

was subsidizing the construction of his home with his purported

financial consulting services through Newtowne and Savko.

     (d)    The Ford Van

     In 1982, Newtowne was working on the first phase in a real

estate project, the Saltergate Village project, with one of the

partnerships.     Forster, who was vice president of Newtowne during
                               - 29 -


the years at issue, was the superintendent in charge of the

Saltergate Village project.

     Petitioner informed the other owners of Newtowne that he did

not want Forster working on the project.   Petitioner indicated

that if Forster continued working on the project, he would

terminate the contract between the partnerships and Newtowne.

The parties finally agreed that Forster could remain on the

project if he purchased a Ford van for petitioner.   Petitioner

also indicated that Forster could not write a company check for

this purchase.    Instead, petitioner wanted Forster to pay for

this van using funds from his personal checking account.

     In accordance with petitioner's instructions, Forster

presented petitioner with a check for $7,800 payable to a Ford

dealership.   Petitioner invited his secretaries and other

employees into his office to witness the exchange.   As Forster

handed him the check, petitioner announced:   "I want to thank you

for this gift".   Forster remained on the Saltergate Village

project, and Newtowne reimbursed him for the $7,800.   Petitioner

did not report receipt of this van on his 1982 return.

4.   Unreported Income From Savko

     Respondent determined in the notice of deficiency that

petitioner failed to report $124,330 and $34,000 in income he
                                - 30 -


received from Savko on his 1983 and 1984 returns, respectively.

Respondent conceded $34,000 of income from Savko with respect to

1984.

5.   Schedule C Oil and Gas income

        One of the Schedules C of petitioner's 1982 return reflects

that petitioner, doing business as "Albert J. DeSantis", engaged

in "Oil & Gas Exploration".     Petitioner claimed a deduction for

windfall profits tax withheld in 1982 in the amount of $3,484.

In the notice of deficiency, respondent disallowed the deduction

of windfall profits tax withheld in 1982 and increased

petitioner's 1982 taxable income by $3,484.

6.      Uncollectible Operating Expenses

        On Schedule C of his 1984 return, petitioner reported

$2,742,409 in gross receipts or sales.      Petitioner also claimed a

bad debt deduction in the amount of $2,516,224, attributable to

his financial consulting activity, as "Uncollectible operating

advances".     Meeks advised petitioner that in order to claim the

bad debt deduction, petitioner was required to file amended

partnership returns to reflect this discharge of indebtedness

income.     Petitioner did not heed this advice despite Meeks'

insistence on making these changes.      The only partnership that

reported discharge of indebtedness income during 1984 was Bethel
                              - 31 -


Colony II, Building 9, Ltd.   Petitioner deducted $28,000 for

worthless debts owed him by that partnership on his 1984 return.

     In the notice of deficiency, respondent disallowed the

claimed bad debt.   Also in the notice of deficiency, respondent

decreased reported income by $1,933,600.   The basis for the

adjustment was that petitioner incorrectly reported fee income in

1984 that should have been reported in other years.   In the

amendment to answer and on brief, however, respondent asserts

that reported income for 1984 should have been reduced by

$480,800, rather than the $1,933,600 determined in the notice of

deficiency.   Therefore, as a result of her amendment to answer,

respondent's claimed adjustment with respect to Schedule C of the

1984 return is $2,035,424, rather than $582,624 as originally

determined.

     In her amendment to answer, respondent reduced the 1984

reported consulting fee income by $480,800 and specifically

identified the amounts of payments from named partnerships

controlled by petitioner.   The following fee income was reported

on the 1984 return; however, respondent contends that it properly

belongs on the 1982 and 1983 returns and was so determined in the

notice of deficiency:
                              - 32 -


     AJD/Robin Woods, Ltd.                             $63,000
     Rivergreen Buildings 1--10                        135,000
     Brafferton Buildings 30 and 31                     20,000
     Olde Sawmill on the Lake Buildings 1--8           128,100
     Old Sawmill on the Lake II Buildings 1--9         134,700

        Total                                           480,800


7.   The Tax Returns

      Petitioners filed joint Federal income tax returns for the

taxable years 1982, 1983, and 1984.     Schedules C of these returns

reflect that petitioner, doing business as "Albert J. DeSantis",

engaged in "Financial Consulting".     On Schedule C of his 1982

return, petitioner reported $361,222 in gross receipts or sales.

On Schedule C of his 1983 return, petitioner reported $470,806 in

gross receipts or sales.   Petitioner did not indicate on the 1982

and 1983 returns what specific items of income represented the

gross receipts.   There is no explanation as to how petitioner

calculated gross receipts on Schedules C of his 1982 and 1983

returns.   On Schedule C of his 1984 return, petitioner reported

$2,742,409 in gross receipts or sales.     Petitioner attached a

schedule which itemized the income he received from "Financial

Consulting" in 1984.   There is an entry on the schedule for

"other consulting fees" in the amount of $180,000.     As indicated,

petitioner did not provide an explanation of what fees he

received and how he calculated this amount.
                                - 33 -


8.   Petitioners' Bankruptcy

      After submission of these cases, petitioners filed a

petition for bankruptcy on July 17, 1996.    By order of the

bankruptcy court dated October 4, 1996, the stay was lifted,

permitting the Tax Court to proceed in this matter.


                                OPINION

1.    Dismissal

      With respect to the deficiencies determined in the notice of

deficiency, respondent moved to dismiss these cases for

petitioner's failure properly to prosecute.    The primary basis of

the motion is that petitioner failed to appear at the scheduled

trial of this case.     Respondent's motion to dismiss was limited

to the deficiencies determined by respondent in the notice of

deficiency upon which petitioner bears the burden of proof.    Rule

142(a).   We took this motion under advisement.   Because we find,

based on the extensive record, that petitioner has failed to

carry his burden of proof, we will deny respondent's motion as

moot.

2.    Burden of Proof

      As we have indicated with respect to the deficiencies

determined in the notice of deficiency, petitioner bears the

burden of proving that those determinations are erroneous.     Rule
                                - 34 -


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

respect to the increased deficiencies asserted by respondent in

her amended answer, respondent bears the burden of proof.        Rule

142(a); Achiro v. Commissioner, 77 T.C. 881, 889-890 (1981).

     With respect to the additions to tax for fraud under section

6653(b)(1) and (2), respondent bears the burden of proving fraud

by clear and convincing evidence.    Rule 142(b).   In order to

establish petitioner's liability for fraud under section

6653(b)(1), respondent bears the burden of proving by clear and

convincing evidence that:   (1) An underpayment of tax exists for

each of the years in issue, and (2) some portion of the

underpayment is due to fraud.    Sec. 7454(a); Rule 142(b);

Petzoldt v. Commissioner, 92 T.C. 661, 698-699 (1989); Hebrank v.

Commissioner, 81 T.C. 640, 642 (1983).     To meet this burden,

respondent must show that petitioner intended to evade taxes

known to be owing by conduct intended to conceal, mislead or

otherwise prevent the collection of such taxes.      Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983).     For purposes of section

6653(b)(2), respondent must also prove the portion of the

underpayment attributable to fraud.      Sec. 6653(b)(2); DiLeo v.

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

1992).
                               - 35 -


3.   The Deficiencies

      (a)   Unreported Income From the Partnerships

      In the notice of deficiency, respondent determined that

petitioner failed to report fee income in the amounts of

$624,000, $1,252,600, and $57,000 on his 1982, 1983, and 1984

returns, respectively.    Respondent also determined that

petitioner had overstated his 1983 interest income by $10,524 and

decreased that item accordingly.    Respondent further determined

that petitioner's distributive share of partnership loss from

ADJ/Bethel Woods, Ltd., for 1983 was $56, and not $3,278 as

reported on petitioner's return.    Since these matters were

determined in the notice of deficiency, petitioner bears the

burden of proof.

      In her amendment to answer, respondent decreased her

determination with respect to petitioner's 1983 partnership fee

income by $234,700, and increased her determination with respect

to 1984 partnership fee income by an equal amount.    Respondent

also asserts that petitioner failed to report additional

partnership fee income in the amount of $153,900 in 1983.

Respondent bears the burden of proof with respect to the

increased deficiencies.    Rule 142(a).
                              - 36 -


     Petitioner does not dispute that he received payments in the

amounts determined by respondent for the years in issue.    In any

event, respondent presented substantial evidence that petitioner

received such payments (with slight modifications as found by the

Court).   Petitioner contends that such payments were not

partnership fee income but were either:   (1) Repayments of loans

from the partnerships to petitioner; (2) nontaxable partnership

withdrawals by petitioner chargeable to the capital accounts; or

(3) loans to petitioner from the partnerships.   We will now

consider these arguments.

     Section 707(a) provides that, if a partner engages in a

transaction with a partnership other than as a partner, the

transaction shall, except as otherwise provided, be treated as

occurring between the partnership and one who is not a partner.

Section 707(c) provides that payments to a partner for services

or the use of capital, if fixed without regard to the income of a

partnership, are to be considered as made to one who is not a

member of the partnership, but only for the purposes of including

such amounts in the recipient's gross income and allowing a

business expense deduction to the partnership.   Specifically,

section 707(c) provides:

          (c) Guaranteed Payments.--To the extent determined
     without regard to the income of the partnership,
                               - 37 -


     payments to a partner for services * * * shall be
     considered as made to one who is not a member of the
     partnership, but only for the purposes of section 61(a)
     (relating to gross income), and, subject to section
     263, for purposes of section 162(a) (relating to trade
     or business expenses).

     Whether a partner is acting in his capacity as a partner

while providing services to his partnership is a factual

determination.    Falconer v. Commissioner, 40 T.C. 1011, 1015

(1963).    The regulations indicate:    "In all cases, the substance

of the transaction will govern rather than its form."     Sec.

1.707-1(a), Income Tax Regs.    The inquiry under section 707(c) is

whether the payments for petitioner's services were determined

"without regard to the income of the partnership."      Falconer v.

Commissioner, supra at 1016; see also sec. 1.707-1(c), Income Tax

Regs.

        We are satisfied that the facts of this case clearly place

the payments made to petitioner pursuant to the "Ongoing

Financial and Tax Analysis, and Investment Counseling

[Agreements]", within the ambit of the term "guaranteed payments"

pursuant to section 707(c).    Petitioner contracted with each

partnership to provide the latter with financial consulting

services for a fixed fee.    The fees were not dependent upon the

profits of the partnerships.    Therefore, the fees were determined

"without regard to the income of the [partnerships]."      Falconer
                               - 38 -


v. Commissioner, supra at 1016.    Accordingly, we find that the

payments to petitioner made in accordance with the partnership

agreements were guaranteed payments.

     We now address petitioner's argument that the payments he

received are not income because they are repayments of loans from

petitioner to the partnerships.   Whether a transaction is a loan

for Federal income tax purposes is a question of fact.     The

following factors are considered in determining whether a loan is

bona fide:   (1) The existence of a sum certain; (2) the

likelihood of repayment; (3) a definite date of repayment; and

(4) the manner of repayment.    Seay v. Commissioner, T.C. Memo.

1992-254; Mangham v. Commissioner, T.C. Memo. 1980-280.

     Petitioner's argument that the payments represent the

repayment of loans from petitioner to the partnerships is not

supported by the record.   As indicated, petitioner recorded the

transfer of funds to and from the partnerships on the ledgers.

The ledgers do not reflect that petitioner transferred funds to

the partnerships as reflected on his GAP sheets.   In addition,

there are no documents in the record, other than the GAP sheets,

setting forth the terms of the purported loans, terms of

repayment, collateral, etc.    Some of the ledgers reflect negative

yearend balances, indicating that petitioner withdrew more funds
                               - 39 -


than he transferred to the partnerships.    Although the GAP sheets

indicate that some interest payments were made to petitioner,

there is no evidence of repayments of principal.7

     We now address petitioner's second argument, that the

payments are not income but are nontaxable distributions

chargeable to his capital accounts.     Section 731 provides that a

partner recognizes gain to the extent that the amount of any

money distributed exceeds the adjusted basis of the partner's

interest in the partnership.   Sec. 731(a).   Section 1.731-1(a),

Income Tax Regs., provides that this rule is applicable to

current distributions and distributions in liquidation of a

partner's entire interest in a partnership.    Section 707 is not

applicable to distributions of money or property by a partnership

to a partner.   Sec. 1.707-1(a), Income Tax Regs.

     Since we have determined that the payments petitioner

received are guaranteed payments within the purview of section

707(c), the payments are not distributions within the meaning of

section 731.    Therefore, petitioner's argument that the payments

are chargeable to his capital accounts is without merit.



     7
        If petitioner had lent funds to a partnership and was
paid interest, such payment would, in any event, constitute
income, whereas a return of principal would not constitute
income.
                                - 40 -


     Petitioner's final argument, that the payments represent

loans from the partnerships to petitioner, is also without merit.

There is no evidence in the record which indicates that such

loans were made.   In addition, the offering circulars for the

limited partnerships clearly prohibit the making of such loans to

petitioner, the general partner.

     We hold that petitioner failed to report fee income in the

total amounts of $624,000, $806,076,8 and $273,700, on the 1982,

1983, and 1984 returns, respectively.

     (b) Unreported Income From Newtowne and Related
Transactions

     In the notice of deficiency, respondent determined that

petitioner failed to report income he received from Newtowne in

the amounts of $31,014 and $1,282,500 on his 1982 and 1983

returns, respectively.    Petitioner has the burden of proof with

respect to these adjustments.

     In her amendment to answer, respondent claims that

petitioner failed to report income he received from Newtowne and

from transactions with Newtowne in the amounts of $8,860.71,

     8
         Calculated as follows:

Amount received less concession                           $816,600
Less interest conceded                                     (10,524)

1983 omitted fee income                                   806,076
                                - 41 -


$106,037.66, and $232,028.76 on his 1982, 1983, and 1984 returns,

respectively.    Respondent concedes $1,060.71 and $1,371.02 of

omitted income with respect to petitioner's 1982 and 1984

returns, respectively.    Respondent also claims that petitioner

failed to report income that he received through Newtowne from

Saltergate I and Park Place in the amounts of $120,000 and

$180,000 on his 1982 and 1984 returns, respectively. Respondent

bears the burden of proof with respect to these claimed increased

deficiencies.    Rule 142(a).

     Petitioner does not deny that he received the amounts as set

forth in the findings herein.    In any event, substantial evidence

was presented which leads us to the conclusion that petitioner

received the amounts of income claimed by respondent (as modified

by the Court).    Petitioner asserts that the payments from

Newtowne originated with the partnerships and were either:     (1)

Repayments to petitioner of loans he made to the partnerships or

(2) nontaxable partnership withdrawals.

     We addressed petitioner's arguments in our discussion

regarding the unreported partnership fee income supra.    In

holding that the payments petitioner received from the

partnerships were income, we found that there was no evidence in

the record which indicates that the amounts were:    (1) Repayments
                               - 42 -


of loans from petitioner to the partnerships; (2) loans from the

partnerships to petitioner; or (3) nontaxable partnership

withdrawals.    Since petitioner is advancing the same theories of

nonincludability as he did with respect to payments he received

from the partnerships, we see no need to reiterate our analysis

herein.    We hold that petitioner failed to report income from

Newtowne and related transactions in the total amounts as

follows:
                                1982

     Amount received                                $162,000.00
     Ford van                                          7,800.00
     Saltergate I                                    120,000.00
                                                     289,800.00

     Less amount reported                           (126,986.00)
     Less respondent's concession                     (4,000.00)
       Total                                        158,814.00

                                1983

     Amount received                              $1,422,500.00
     Cost savings                                    106,037.66

                                                   1,528,537.66
     Less respondent's concession                   (150,000.00)
       Total                                       1,378,537.66

                                1984

     Cost savings                                   $174,028.76
     Park Place                                      180,000.00
     Owner's check request                            28,000.00
     Riat's architectural services                    30,000.00
     Less amount reported with respect
       to Park Place                                 (30,525.00)
     Less respondent's concession                     (1,371.02)
                                - 43 -


       Total                                         $380,132.74

     (c) Unreported Income From Savko and Schedule C Oil
     and Gas Income

     With respect to respondent's determination that petitioner

received unreported income from Savko in 1983 and 1984,

petitioner has not met his burden of proving that respondent's

determination is erroneous.    No evidence or argument was

presented that the amount petitioner received from Savko in 1983

or 1984 does not represent taxable income.      In addition,

petitioner has not met his burden of proving that respondent's

determination erroneously disallowed a deduction for windfall

profits tax withheld in 1982, relating to petitioner's oil and

gas exploration business.    Accordingly, respondent's

determinations are sustained.

     (d) Uncollectible Operating Expenses in 1984 and the
     Adjustment to Gross Receipts

     As indicated, respondent's notice of deficiency determined

that petitioner was not entitled to a claimed bad debt deduction

in the amount of $2,516,224, purportedly attributable to

"Uncollectible operating advances".      Petitioner, however, has

failed to produce any evidence of loans related to the claimed

bad debts.     Accordingly, we sustain respondent's determination.
                                 - 44 -


      In her amendment to answer, respondent asserted that gross

receipts as reported by petitioner on the 1984 return should be

reduced by $480,800 rather than $1,933,600 as originally

determined by respondent.    Petitioner presented no arguments or

facts to dispute this assertion.     Upon a review of this record,

we are satisfied that respondent's claim in her amendment to

answer is correct.   Therefore, we sustain respondent's adjustment

to petitioner's Schedule C income for 1984 in the amount of

$2,035,424 ($2,516,224 less $480,800).

4.   Additions to Tax (Section 6653(b)(1) and (2))

      Respondent determined that petitioner is liable for

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

1982, 1983, and 1984.    As we previously indicated, respondent

bears the burden of proving by clear and convincing evidence that

there is an underpayment for each of the years in issue and that

some portion of the underpayment is due to fraud.    Sec.

6653(b)(1).

      (a)   Section 6653(b)(1)

      We first consider the additions to tax under section

6653(b)(1).    The existence of fraud is a question of fact to be

resolved upon consideration of the entire record.     Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published
                               - 45 -


opinion 578 F.2d 1383 (8th Cir. 1978).   Fraud may be proven by

circumstantial evidence and reasonable inferences drawn from

proven facts because direct proof of a taxpayer's intent is

rarely available.    Spies v. United States, 317 U.S. 492, 499

(1943); Rowlee v. Commissioner, 80 T.C. 1111 (1983).   A

taxpayer's entire course of conduct may establish the requisite

fraudulent intent.    Stone v. Commissioner, 56 T.C. 213, 223-224

(1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969).      The

intent to conceal or mislead may be inferred from a pattern of

conduct.   Spies v. United States, supra at 499.

     Respondent has established, and we have held that there are,

understatements of tax for 1982, 1983, and 1984.   Respondent has

proven by clear and convincing evidence the existence of

understatements of tax in all of the years at issue.   Having

proved understatements of tax, respondent must also prove that

some portion of each understatement is attributable to fraud.

     The courts have developed a number of objective indicators

or "badges" of fraud.    Recklitis v. Commissioner, 91 T.C. 874,

910 (1988).   Evidence that may give rise to a finding of

fraudulent intent includes:   (1) Understatement of income; (2)

inadequate or no records; (3) failure to file tax returns; (4)

implausible or inconsistent explanations of behavior; (5)
                              - 46 -


concealment of assets; (6) failure to cooperate with tax

authorities; (7) failure to make estimated tax payments; (8)

dealing in cash; (9) engaging in illegal activity; and (10)

attempting to conceal an illegal activity.   Clayton v.

Commissioner, 102 T.C. 632, 647 (1994).   These badges of fraud

are nonexclusive.   Miller v. Commissioner, 94 T.C. 316, 334

(1990).

     In light of the record, taken as a whole and by reasonable

inferences therefrom, we find that the facts show by clear and

convincing evidence that petitioner intended to evade taxes known

to be owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of taxes.

     The consistent understatement of large amounts of income for

a number of years is evidence of willful intent to evade.

Holland v. United States, 348 U.S. 121, 139 (1954); Rogers v.

Commissioner, 111 F.2d 987, 989 (6th Cir. 1940), affg. 38 B.T.A.

16 (1938); Conforte v. Commissioner, 74 T.C. 1160, 1201 (1980),

affd. in part and revd. on another issue 692 F.2d 587 (9th Cir.

1982); Otsuki v. Commissioner, supra at 107-108.   We are mindful

that fraud cannot be inferred from a mere inadvertent

understatement of income.   Holland v. United States, supra.

Petitioner is an intelligent and financially astute individual.
                              - 47 -


Despite his business acumen, petitioner failed to report his

receipt of substantial amounts of income on his 1982, 1983 and

1984 returns.   Hughes v. Commissioner, T.C. Memo. 1994-139;

LiButti v. Commissioner, T.C. Memo. 1985-314.

     A taxpayer's use of cash to conceal income is evidence of

fraud.   Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.

1986), affg. T.C. Memo. 1984-601; United States v. Chapman, 168

F.2d 997, 1000 (7th Cir. 1948).   Petitioner's method of paying

the laborers in cash, and cashing their checks in larger amounts

for himself without a valid business reason, is strong evidence

of fraud.

     Petitioner attempted to conceal the receipt of substantial

amounts of income from the partnerships and Newtowne by entering

into a series of transactions that camouflaged receipt of these

funds.   For example, petitioner asked Newtowne to endorse the

partnership checks to petitioner in "partial payment for his

consulting services", even though it was understood between the

parties that no such services would be provided.   Petitioner also

caused the partnerships to pay him in accordance with the

respective financial consulting agreements.9

     9
        We note that, despite these agreements, petitioner argued
in his petition that these payments from the partnerships and
                                                   (continued...)
                                - 48 -


     The failure to keep records of all earnings may be material

evidence of fraud.   Otsuki v. Commissioner, supra at 109; see

also Baumgardner v. Commissioner, 251 F.2d 311, 314 (9th Cir.

1957), affg. T.C. Memo. 1956-112.    To hold otherwise would, as

the Supreme Court stated in United States v. Johnson, 319 U.S.

503, 518 (1943), "be tantamount to holding that skillful

concealment is an invincible barrier to proof".    During the years

at issue, petitioner failed to maintain adequate books and

records with respect to his financial consulting activity as

required by law.   Sec. 6001; sec. 1.6001-1, Income Tax Regs.    In

addition, petitioner failed to provide his tax adviser and return

preparer with the records he did maintain.

     Petitioner's conviction under section 7206(1) is also

probative that petitioner intended to evade taxes for 1982 and

1983.   Wright v. Commissioner, 84 T.C. 636, 643-644 (1985).

     For the reasons stated above, we hold that petitioner is

liable for the additions to tax for the tax years 1982, 1983, and

1984 pursuant to section 6653(b)(1).

     (b)   Section 6653(b)(2)




(...continued)
Newtowne were not income.
                                       - 49 -


      We now turn to respondent's additions to tax under section

6653(b)(2).      Section 6653(b)(2) imposes an addition to tax equal

to 50 percent of the interest payable on the portion of the

understatement attributable to fraud.            Respondent must prove the

portion of the understatement attributable to fraud.                  Sec.

6653(b)(2); DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), affd.

959 F.2d 16 (2d Cir. 1992).

      Respondent asserts that the following amounts of income that

petitioner failed to report on his 1982, 1983, and 1984 returns,

respectively, are attributable to fraud for purposes of section

6653(b)(2):
                               1982             1983           1984

Partnership fee income      $624,000       $1,095,626.00    $291,700.00
Newtowne                      31,014        1,282,500.00        -0-
  Park Place                   -0-               -0-         180,000.00
  Saltergate                 120,000             -0-            -0-
Cost savings                   -0-          106,037.66       230,657.69
Bad debt deduction             -0-               -0-       2,035,424.00
Ford Van                       7,800             -0-            -0-

  Total                      782,814        2,484,163.66   2,737,781.69



              (1)   Partnership Fee Income

          We have concluded that petitioner failed to report

$624,000, $806,076, and $273,700 in partnership fee income for

1982, 1983, and 1984, respectively.             Now we must determine what

portion, if any, of each underpayment is attributable to fraud.
                               - 50 -


     We conclude that respondent has met her burden of proving

that $624,000, $806,076, and $273,700 in partnership fee income

for 1982, 1983, and 1984, respectively, is attributable to fraud.

In an attempt to camouflage or conceal his receipt of the

partnership fee income, petitioner entered into complex

transactions with numerous partnerships.    Despite the written

agreements petitioner entered into with the partnerships,

petitioner failed to report as income the fees he received for

the contracted services.    Petitioner's failure to accurately

report receipt of these funds was due to fraud.

           (2)   Newtowne

     We have concluded that petitioner failed to report income he

received from Newtowne in the amounts of $31,014 and $1,272,500

on his 1982 and 1983 returns, respectively.    We have also

concluded that petitioner failed to report income from the

Saltergate I project in the amount of $120,000 on his 1982

return.   Respondent asserts that $151,01410 and $1,282,500 for

1982 and 1983, respectively, is attributable to fraud.



     10
        Respondent determined that petitioner failed to report
$31,014, or the difference between $158,000 and the amount
reported on his 1982 return, $126,986. We added the $120,000
that petitioner failed to report from the Saltergate I project to
the $31,014 for a total of $151,014. The $7,800 petitioner
received for the Ford van is discussed infra.
                               - 51 -


     As indicated, petitioner caused the partnerships to enter

into market research and warranty agreements with Newtowne

without expecting that the partnerships would receive services in

accordance with the contracts.    Petitioner "paid" for these

nonexistent services with checks that were drawn on the

partnerships' accounts and bore preprinted endorsements payable

to himself.    In substance, petitioner was simply draining the

partnerships of funds and using Newtowne as a conduit to carry

out this fraudulent scheme.    The fact that petitioner did not

expect that the partnerships would receive services from Newtowne

indicates that the transactions were a sham.    Petitioner's

failure to report the income on his returns was due to fraud.

     Of the $151,014 of unreported income in 1982, $120,000

represents the amount petitioner received from the limited

partnerships in the Saltergate I project.    Petitioner was in

control of the limited partnerships and caused them to enter into

financial consulting and warranty agreements.    Newtowne credited

the $120,000 to petitioner's purchase of the two office

buildings.    By this method, petitioner was able to

surreptitiously drain the limited partnerships of $120,000.
                                - 52 -


Petitioner's failure to report this amount, and the method he

utilized to obtain the $120,000, clearly indicate his intent to

conceal his receipt of this income.      Respondent has met her

burden of proving that $151,014 and $1,272,500, for 1982 and

1983, respectively, is attributable to fraud for section

6653(b)(2) purposes.

          (3)     Park Place

     Respondent alleges that petitioner failed to report $180,000

in income from Newtowne and the Park Place partnership on his

1984 return.    Petitioner reported $30,525 in income from the Park

Place partnership on his 1984 return.

     Petitioner caused checks to be drawn on the Park Place,

Ltd., partnership account totaling $180,000.      These checks were

made payable to Newtowne and were presented to Fankhauser with

the following preprinted endorsement:      "Pay to the Order of

Albert J. DeSantis in Partial Payment of Consulting Services".

It was agreed that petitioner would not provide Newtowne with the

consulting services as indicated on the checks.      Petitioner sent

the checks by messengers to Newtowne's office where they waited

for Fankhauser's endorsement before returning the checks to

petitioner.     Petitioner deposited the checks into his personal

checking account at BancOhio.
                               - 53 -


     The method by which petitioner withdrew funds from the

partnership accounts, caused the checks to be paid to Newtowne,

and caused Newtowne to endorse those amounts back to petitioner

is clearly fraudulent given the parties' expectation that no

services would actually be provided.    Even if the parties

anticipated that petitioner would perform the stated services,

the amounts received would clearly be income.    Sec. 61(a)(1).

Petitioner's failure to report the entire $180,000 is also

indicative of his intent to conceal.    Because petitioner did

report $30,525 of the income he received from Park Place, we hold

that $149,475 is attributable to fraud for purposes of section

6653(b)(2).

          (4)   Cost Savings

     Respondent asserts that petitioner's failure to report

$106,037.66 and $230,657.6911 in cost savings on his 1983 and

1984 returns, respectively, is attributable to fraud for section

6653(b)(2) purposes.

     Through his tactics, petitioner caused Newtowne to construct

a 10,000-square-foot house.    Petitioner financed the project with

cost savings from various construction projects he caused the

partnerships to enter into with Newtowne.    As indicated,



     11
       The $230,657.69 equals $200,657.69 in cost savings plus
$30,000 in architectural services provided by Riat.
                                - 54 -


petitioner determined how much of the cost savings he would

receive from line item savings in the construction budget for

each project.     Even though petitioner determined how much of the

cost savings he was to receive, petitioner failed to report these

amounts as income on his 1983 and 1984 returns.      Petitioner also

failed to inform Meeks that Newtowne was constructing his house,

and that the cost savings were being credited to his construction

account.

     Petitioner's failure to report this income, coupled with the

method by which he obtained the funds, indicates petitioner's

fraudulent intent.    We have found that petitioner failed to

report $106,037.66 and $230,657.69 on his 1983 and 1984 returns,

respectively.     Accordingly, we hold that $106,037.66 and

$230,657.69 is attributable to fraud for section 6653(b)(2)

purposes.

            (5)   Uncollectible Operating Expenses

     Petitioner claimed a bad debt deduction in the amount of

$2,516,224 on his 1984 return attributable to "Uncollectible

operating advances".     Respondent asserts that the entire amount

of the underpayment due to petitioner's bad debt deduction is

attributable to fraud.     As indicated, we have held that

petitioner was not entitled to claim the bad debt deduction in

the amount of $2,035,424 on his 1984 return.     We must now
                                - 55 -


determine what portion of the bad debt deduction claimed on

petitioner's return is attributable to fraud.

     The record is devoid of any evidence of loans being made to

or by the partnerships.    Meeks advised petitioner that he would

have to file amended partnership returns to reflect the discharge

of indebtedness income in order to claim the deduction.

Petitioner knew that the deduction was improper and

unsupportable.   Petitioner did not follow the advice of his tax

adviser.   We conclude that the claimed deduction was for the sole

purpose of evading tax.

     Accordingly, on the basis of the record, we hold that the

amount of $2,035,424 which petitioner claimed as a bad debt

deduction was fraudulent in its entirety.

           (6)   The Ford Van

     As indicated, Forster presented petitioner with a personal

check in the amount of $7,800, payable to a Ford dealership, to

enable petitioner to purchase a van.     Petitioner failed to report

this amount in income on his 1982 return.    Respondent asserts

that the entire $7,800 is attributable to fraud.

     We hold that petitioner's failure to report the $7,800 on

his 1982 return is fraudulent.    Forster did not present the check

to petitioner as a gift.    Rather, petitioner coerced Forster by

threatening to cancel Newtowne's project if Forster refused to
                              - 56 -


comply with his demand.   At the time, petitioner was aware that

Newtowne was in dire financial straits and did not have other

contracts.    Petitioner's failure to report the $7,800 as income

is fraudulent given the manner in which the check was obtained

and petitioner's attempt to characterize it as a gift.

     (c)   Section 6661

     Respondent determined that petitioner is liable for the

additions to tax under section 666112 for 1982, 1983, and 1984.

     Respondent's determinations are presumed correct, and

petitioner bears the burden of proving otherwise.    Rule 142(a);

Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).

     Section 6661(a) provides for an addition to tax equal to 10

percent of the amount of any underpayment attributable to a

substantial understatement of tax.     An understatement, for

purposes of this addition to tax, is the amount by which the

amount required to be shown on a return exceeds the amount

actually reported on the return.   Sec. 6661(b)(2); Tweeddale v.

Commissioner, 92 T.C. 501, 505 (1989).     An understatement is

substantial if it exceeds the greater of $5,000 or 10 percent of

the tax required to be shown on the return.     Sec. 6661(b)(1)(A).




     12
        Sec. 6661 is applicable to returns required to be filed
after Dec. 31, 1982.
                                - 57 -


     The amount of the understatement may be reduced under

section 6661(b)(2)(B) for amounts adequately disclosed or

supported by substantial authority.      In addition, section 6661(c)

authorizes the Secretary to--

     waive all or any part of the addition to tax * * * on a
     showing by the taxpayer that there was reasonable cause
     for the understatement * * * and that the taxpayer
     acted in good faith.

     Petitioner argues that there is substantial authority for

the positions taken on his 1982, 1983, and 1984 returns with

respect to the payments he received from the partnerships and

Newtowne, and the bad debt deduction claimed on his 1984 return.

Petitioner further argues that he acted in good faith and that

there is reasonable cause for the understatements.     Finally,

petitioner argues that he accurately described the relevant facts

relating to the positions taken on his returns.

     Petitioner has not demonstrated what authorities he

purportedly relied upon for the positions taken on his returns.

Nor has he shown that any authority he relied upon was

substantial.    Given that we have found that petitioner

fraudulently, and with the intent to evade tax, substantially

understated his income tax for the years in issue, we cannot

conclude that petitioner acted in good faith or with reasonable

cause with respect to the positions taken on his 1982, 1983, and

1984 returns.    Furthermore, we have found that petitioner did not
                              - 58 -


fully disclose all of the facts to his return preparer, Meeks.

In addition, petitioner did not make adequate disclosures on his

returns.   Accordingly, respondent's determination is sustained.

     To reflect the foregoing,

                                       An appropriate order will

                                  be issued and decisions will be

                                  entered under Rule 155.13




     13
       The $180,000 petitioner reported as "other consulting
fees" on his 1984 return should be subtracted from the total
amount of income we have determined that petitioner failed to
report from the partnerships and Newtowne.