London v. Commissioner

T.C. Memo. 1998-346

UNITED STATES TAX COURT

MICHAEL LONDON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

PATRICIA LONDON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 24601-93, 18987-94. Filed September 29, 1998.

Henry D. Katz, for petitioner Michael London.

Eugene F. Sullivan, Jr. and Francis J. DiMento, for

petitioner Patricia London.

Christine Colley and Ronald F. Hood, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHALEN, Judge: Respondent determined the following

deficiencies in and additions to petitioners' Federal

income tax:
 - 2 -

Additions to Tax
Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
1983 $148,421 $74,211 50% of the $37,105
interest due
on $148,421

1985 105,160 52,580 50% of the
interest due
on $105,160 26,290

All section references are to the Internal Revenue Code as

in effect during the years in issue.

After concessions, the issues for decision are:

(1) Whether Mr. London's deposition in a prior proceeding

is admissible in evidence on the ground that he is

unavailable as a witness within the meaning of rule 804(a)

of the Federal Rules of Evidence due to his refusal to

answer any of the questions put to him on Fifth Amendment

grounds; (2) whether the tapes and transcripts from the

electronic surveillance conducted at Mr. London's business

and the evidence derived therefrom are admissible in

evidence; (3) whether petitioners failed to report income

in 1983 and 1985, as determined by respondent using the net

worth method of reconstructing income; (4) whether

petitioners are liable for additions to tax for fraud under

section 6653(b)(1) and (2) for 1983 and 1985; (5) whether

petitioners are liable for additions to tax for substantial

understatement of liability under section 6661(a) for 1983

and 1985; (6) whether Mrs. London intended to file a joint
 - 3 -

return for 1985; and (7) whether Mrs. London qualifies as a

so-called "innocent spouse".

FINDINGS OF FACT

Some of the facts have been stipulated and are so

found. The stipulation of facts, supplemental stipulation

of facts, and attached exhibits are incorporated herein by

this reference. Petitioners are husband and wife. They

filed a joint Federal income tax return for each of the

years in issue. Respondent issued a separate notice of

deficiency to each petitioner, and each petitioner filed

a petition for redetermination in this Court. The two

cases were consolidated pursuant to Rule 141(a), Tax Court

Rules of Practice and Procedure. In this opinion, all

Rule references are to the Tax Court Rules of Practice

and Procedure. At the time they filed their petitions,

Mr. London resided in Lewisburg, Pennsylvania, and

Mrs. London resided in Weston, Massachusetts. In this

opinion, we sometimes refer to Mr. London as petitioner.

Mr. London graduated from high school in 1957. From

1957 to 1962, he attended Bordentown Military Academy, the

University of Maryland, and Boston University, but he did

not graduate from any of those institutions. Mrs. London

received a bachelor of arts degree from Emmanuel College

where she majored in biology. She also received a teaching

certificate from Salem State College. After graduating
 - 4 -

from college, Mrs. London worked for Massachusetts

Institute of Technology as a laboratory assistant. She was

later employed by the New England Baptist Hospital where

she taught biological studies to nursing students. She

left her employment at the hospital in August 1969.

Petitioners were married on May 22, 1969, in Chelsea,

Massachusetts. After they were married, they rented an

apartment in an area known as Glovers Landing, in

Marblehead, Massachusetts, where they resided for

approximately 3 years before moving to an apartment on

Blueberry Hill Road, in Marblehead, Massachusetts.

Petitioners lived in that apartment until September 10,

1976, when they purchased a house at 79 Black Oak Road,

Weston, Massachusetts.

Petitioners had four children, Roanna, Terrence,

Hellene, and Shauna. Roanna attended Colgate University

from 1987 through 1991, Terrence attended the University

of Michigan from 1989 through 1993, Hellene attended the

University of Vermont from 1992 through 1996, and Shauna

was a first year student at Georgetown University at the

time of trial. Terrence received a partial athletic

scholarship during college. Petitioners paid the tuition

for each child's college education.
 - 5 -

London's Cafe, Inc.

From 1957 through 1985, Mr. London was a stockholder

in London's Cafe, Inc., a corporation which operated a bar

in Chelsea, Massachusetts. Prior to 1974, the bar was

owned and managed by Mr. London's parents, who also held

the bar's liquor license. According to records filed with

the Secretary of State of the Commonwealth of Massachusetts

in 1960, petitioner's mother, Mrs. Ida London, was

president and treasurer of the predecessor of London's

Cafe, Inc., and petitioner's father, Mr. Isadore London,

was an officer of the corporation.

Gradually, petitioners took over more of the

ownership of the corporation, London's Cafe, Inc., and

Mr. London took more responsibility for operation of the

bar. In an application filed with the liquor licensing

authority in the Commonwealth of Massachusetts on March 28,

1974, Mrs. London is identified as the owner of 51 of the

100 outstanding shares of stock and as a director of the

corporation. Petitioner's mother is identified as the

owner of 49 shares and as president of the corporation.

Mr. London is identified as "clerk". Shortly thereafter,

in April 1974, Mrs. London applied for and was granted the

liquor license to operate London's Cafe, Inc., d/b/a

Heller's Cafe. Mrs. London is identified in the
 - 6 -

application as "Manager and Director". The parties have

stipulated that Mrs. London was the "liquor licensee" of

London's Cafe, Inc., d/b/a/ Heller's Cafe from 1974 through

at least December 1986. In this opinion, we refer to the

corporation as London's Cafe, Inc., and to the bar as

Heller's Cafe.

Check-Cashing Business

From 1977 through 1993, Mr. London also conducted a

check-cashing business as a sole proprietorship, M.L.

Associates, from an enclosed area in Heller's Cafe. M.L.

Associates charged its customers a fee for cashing checks.

The fee ranged from 1 to 15 percent of the total amount of

the check. Mr. London also lent money to customers and

charged various rates of interest ranging from 5 to 200

percent per week.

Mr. London used two bank accounts for the check-

cashing business, Essex Bank account No. 069-159-7 and

Shawmut County Bank account No. 616-781-0. During the

years 1980 through 1985, the aggregate deposits made to

these accounts are as follows:

Year Amount

1980 $16,074,523.13
1981 16,827,056.79
1982 21,791,552.32
1983 29,202,291.31
 - 7 -

1984 31,614,968.77
1985 40,767,857.96

Total: 156,278,250.28

M.L. Associates issued Forms W-2, Wage and Tax

Statement, to petitioners' children, Roanna and Terrence,

for 1983, 1984, and 1985. The Forms W-2 report that each

child was paid $3,600, $3,900, and $3,900 for 1983, 1984,

and 1985, respectively.

Petitioner's Criminal Activity

On August 6, 1969, the police raided Heller's Cafe.

They arrested Mr. Isadore London for "allowing his premises

to be used for gaming", and they arrested petitioner for

"setting up and promoting a lottery". In September 1969,

the U.S. District Court for the District of Massachusetts

found petitioner and his father guilty of those offenses.

Mr. London and his father were arrested a second time

in 1974. On November 7, 1974, they were indicted and on

July 24, 1975, they pleaded guilty to unlawfully,

knowingly, and willfully conducting an illegal gambling

business in violation of title 18 U.S.C. sections 1955 and

2. They were each sentenced to 2 years in prison. The

sentences were suspended and they were placed on probation
 - 8 -

for 2 years. Mr. London was fined $5,000, and his father

was fined $1,000.

From 1983 through 1985, officials from the Criminal

Investigation Division of the Internal Revenue Service, the

Drug Enforcement Administration, the Federal Bureau of

Investigation (FBI), and the Massachusetts State police

investigated Heller's Cafe for possible violation of the

laws prohibiting gambling, loan-sharking, drug trafficking,

money laundering, and for possible failure to submit

currency transaction reports (CTR's).

On October 28, 1986, in response to an application

and affidavit submitted by Federal agents, the U.S.

District Court for the District of Massachusetts issued two

orders authorizing Federal agents to conduct electronic

surveillance at Heller's Cafe for a 30-day period. One

order authorized the agents to intercept communications

in and adjacent to the enclosed area where Mr. London

conducted the business of M.L. Associates. The second

order authorized Federal agents to monitor and record

telephone communications on two telephones at Heller's

Cafe, a pay phone located on the premises and a private

phone line belonging to M.L. Associates. The District

Court extended the orders for an additional 30 days on

December 3, 1986. Federal agents terminated electronic
 - 9 -

surveillance of Heller's Cafe before the end of December

1986.

On December 17, 1986, pursuant to a search warrant,

a task force of FBI agents and Massachusetts State police

officers conducted a search of Heller's Cafe. The search

warrant authorized the task force to search for evidence

of unlawful gambling, loan-sharking, distribution of

narcotics, money laundering, and failure to file CTR's.

During the course of the search, the agents seized drugs,

weapons, records of M.L. Associates, records of bookmaking

activities, and money in the aggregate amount of $125,376,

consisting of a $20,000 cashier's check and currency of

$105,376 found in a safe in the enclosed area. Mr. London

was present when Federal agents searched Heller's Cafe.

On April 11, 1990, Mr. London was indicted by a

Federal grand jury for two counts of income tax evasion

in violation of section 7201. The grand jury returned

superseding indictments on May 10, 1990, and on

September 5, 1991. The second superseding indictment

charged Mr. London with the following violations of the

law:

Count No. Title and Sec. Nature of Offense

1 18 U.S.C. 1962 RICO--conspiracy
2 18 U.S.C. 1962(c) and 2 RICO--substantive
 - 10 -
3--16 18 U.S.C. 1956 and 2 Money Laundering
17--43 31 U.S.C. 5313, 5322(b) Failure to file CTR's
44 18 U.S.C. 1951 Conspiring to commit extortion
45--47 18 U.S.C. 1951 and 2 Aiding and abetting extortion
48 18 U.S.C. 894 Loan-sharking
49 18 U.S.C. 1955 and 2 Operating a gambling business
50 26 U.S.C. 7201 Tax evasion for 1983
51 26 U.S.C. 7201 Tax evasion for 1985

By the start of Mr. London's trial on January 4,

1993, the 51 counts of the second superseding indictment

had been reduced to 30 counts. Several counts, including

the count charging Mr. London with gambling, were dismissed

by the Government, and several other counts were dismissed

by the District Court. The two counts of tax evasion

(counts 50 and 51) were among the counts that were not

tried, but the record of these cases does not explain why.

On February 19, 1993, a jury returned guilty verdicts with

respect to 29 counts involving RICO, money laundering,

failure to file CTR's, and extortion. The jury acquitted

Mr. London on one count of money laundering. During the

jury trial, the contents of the communications intercepted

during the electronic surveillance of Heller's Cafe were

introduced into evidence. On March 3, 1993, Mr. London

pleaded guilty to willful evasion of his 1985 Federal

income tax under section 7201.
 - 11 -

On June 30, 1993, the District Court gave Mr. London

the following sentence for all of the offenses on which he

was convicted:

The defendant is hereby committed to the
custody of the United States Bureau of Prisons
to be imprisoned for a term of 188 months on
counts 1 & 2, 5-16, 44, 45 & 47 to be served
concurrently with each other; 96 months on
counts 17, 18, 21, 23, 25, 26, 29, 32, 34, 35,
37 & 40 to be served concurrently with each
other and with counts 1 & 2; 48 months on count
51, to be served concurrently with counts 1 & 2.

The defendant is remanded to the custody of
the United States marshal.

The District Court fined him $500,000 on counts 5 through

16 for money laundering. On the same day, the District

Court also entered an Order of Forfeiture under which it

gave the United States title to an additional $865,000

which Mr. London had agreed to forfeit. The District Court

entered judgment against Mr. London for his criminal

offenses on July 7, 1993. This judgment was affirmed by

the U.S. Court of Appeals for the First Circuit, United

States v. London, 66 F.3d 1227 (1st Cir. 1995).
 - 12 -

Heller's Cafe Liquor License

On December 13, 1993, the Board of Excise of the City

of Chelsea, issued a "Decision" revoking the liquor license

of Heller's Cafe, effective December 20, 1993. The

decision states in relevant part:

the Board finds that the Licensee [London's Cafe,
Inc.] permitted a violation of a condition of its
license or of the laws of the Commonwealth of
Massachusetts by permitting Mr. London to use the
licensed premises for a racketeering enterprise,
loan sharking, extortion, money laundering and
currency violations.

In its decision, the Board of Excise also found the

following:

All of the issued and outstanding stock of
London's Cafe, Inc., d/b/a Heller's Cafe
("Heller's"), is and was at all times
relevant hereto owned of record by Patricia
London. Mrs. London was and is the licensed
manager at all times relevant hereto.

On June 22, 1994, the Alcoholic Beverages Control

Commission of the Commonwealth of Massachusetts approved

the Board's decision, and that action was affirmed on

October 30, 1995, by the Superior Court of the Commonwealth

of Massachusetts, Suffolk County. The memorandum of

decision and order issued by the Superior Court on

October 30, 1995, states that "Patricia London was the
 - 13 -

record owner and manager of Heller's from 1985 to December,

1993."

Wrongful Levy Suit

In 1993, the Commissioner levied on stock brokerage

accounts at Paine Webber and Kidder Peabody which

petitioners owned jointly. Mrs. London challenged the levy

in a civil suit brought against the Commissioner in the

U.S. District Court of the District of Massachusetts. The

Government took Mr. London's deposition while the suit was

pending. In 1996, the parties to the suit agreed to a

settlement under which Mrs. London received $214,342 of

assets in the Paine Webber account and she was permitted to

keep her individual retirement account at Paine Webber,

amounting to $91,472.22, as of March 1996. Under the

settlement, Mrs. London also retained one-half of the

Kidder Peabody account or approximately $60,000.

Bank Accounts

During the years 1976 through 1985, petitioners either

individually, jointly, or with Mr. London's parents,

maintained the following bank accounts:
 - 14 -
Bank Accounts Account No. Date Opened

Broadway Natl. Bank 90-378-7 1/3/84
Broadway Natl. Bank 58-063-5 Before 1975
Broadway Natl. Bank 63-450-6 3/24/80
Broadway Natl. Bank 41-028-4 2/13/68
Broadway Natl. Bank (Heller's Cafe) 41-001-2 3/2/60
Carmel Credit Union 21614 Before 12/31/76
Carmel Credit Union 17795 Before 1/1/77
Essex Bank (M.L. Associates) 069-159-7 6/81
Provident Inst. for Sav. 88-6612 8/25/69
Shawmut County Bank (Roanna) 685-946-1 1/4/84
Shawmut County Bank (M.L. Associates) 616-781-0 During 1977
Shawmut County Bank 633-084-3 8/6/77

Mrs. London wrote checks on the three accounts which she

held jointly with her husband, Broadway National Bank

account No. 90-378-7, Broadway National Bank account No.

63-450-6, and Shawmut County Bank account No. 633-084-3.

In addition to the above accounts, petitioners

reported on the Schedules B, Interest and Dividend Income,

filed as part of their Federal income tax returns for 1976

through 1981 that they had received interest income from

accounts at five banks, Atlantic Savings Bank, Commonwealth

Bank, Marblehead Savings Bank, Metropolitan Credit Union,

and Grand National Bank. The interest reported from those

accounts is set out in the following schedule:

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Atlantic Sav. $897 $313 $155 $683 $30 $16 -- -- -- --
Metro. Credit Union -- 71 661 -- -- -- -- -- -- --
Metro. Credit Union -- 71 -- -- -- -- -- -- -- --
Metro. Credit Union -- 71 -- -- -- -- -- -- -- --
Commonwealth Bank 60 151 519 -- 623 -- -- -- -- --
Commonwealth Bank 141 151 -- -- -- -- -- -- -- --
Commonwealth Bank 159 174 -- -- -- -- -- -- -- --
Commonwealth Bank 141 -- -- -- -- -- -- -- -- --
Natl. Grand Bank 452 225 -- -- -- -- -- -- -- --
Natl. Grand Bank 479 255 -- -- -- -- -- -- -- --
Natl. Grand Bank 482 211 -- -- -- -- -- -- -- --
Marblehead Sav. 590 -- 3 -- -- -- -- -- -- --
 - 15 -

They also reported receiving a small amount of interest

income during each of the years 1982 through 1985 from an

account at Boston Five Cents Savings.

Stocks

Petitioners purchased the following stocks and

securities during the period 1976 through 1985:

Name No. of Units Date Purchased

AT&T 150 Pre-1977
General Motors Corp. 150 Pre-1977
Boston Edison 200 Pre-1977
John Hancock 200 Pre-1977
Big Piney Oil & Gas 2,000 5/27/81
Mass. St. Go. 5.8 JJ 150,000 10/01/81
Mass. St. Go. 6.4 JJ 60,000 10/27/81
Utah Power & Light 2,000 12/17/81
Xerox Corp. 600 2/16/82
Santa Fe S. Pac. 1,804 2/26/82
Florida Fed. Sav. 1,000 6/03/83
San Diego Gas & Elec. 2,000 6/08/83
Western Co. of N. Am. 3,000 6/08/83
Isomedix, Inc. 500 7/21/83
1
Haber, Inc. (Silver Tech) 11,000
Pension Ins. Group Am. 6,000 2/14/84
Arkla, Inc. 1,200 3/01/84
Mass. St. Go. 6.5 FA 150,000 4/26/84
Zenith Natl. Ins. Corp. 500 5/04/84
Zenith Natl. Ins. Corp. 1,500 5/07/84
Mass. St. Go. 9.0 MS 50,000 11/30/84
So. Calif. Edison Co. 200 4/25/85
So. Calif. Edison Co. 1,600 4/25/85
Mass. Med. Ctr. 10.2 J 10,000 4/25/85
Mass. Med. Ctr. 10.4 J 50,000 4/25/85
2
Kidder Peabody Acct. Fund 122,203

1
An agreement to purchase the shares was signed by petitioners on
1/16/84.
2
Value as of 12/31/85.

Petitioners reported on the Schedules B, Interest and

Dividend Income, filed as part of their returns for 1977,
 - 16 -

1979, and 1980, that the General Motors, Boston Edison,

John Hancock, and AT&T stocks were jointly owned. On

the Schedule B filed as part of their return for 1984,

petitioners also reported that they had received dividend

income from Southwestern Bell, Ameritech, U.S. West, Bell

Atlantic, NYNEX, Bell South, and Pacific Telesis.

Real Estate

On May 7, 1974, petitioners paid $15,050 to purchase

the building at 110 Chestnut Street, Chelsea, Massachu-

setts, the site of Heller's Cafe. Title to the building

was taken in Mrs. London's name d/b/a London Realty and was

leased to London's Cafe, Inc. On June 1, 1974, petitioners

paid $3,547 for improvements to the building.

On July 1, 1975, Mrs. London purchased a ½-acre tract

of land in Marblehead, Massachusetts, for $37,000. She

paid the purchase price by check on the same day. During

1975 and 1976, petitioners paid $4,500 and $11,500,

respectively, for improvements to the land. Petitioners

sold this property on August 2, 1984, for $125,000.

On September 10, 1976, petitioners purchased the

property at 79 Black Oak Road, Weston, Massachusetts, as

tenants by the entirety. They paid $146,000 for the

property, $66,000 from their own funds, and $80,000 from
 - 17 -

funds borrowed from the Broadway National Bank in Chelsea,

Massachusetts. This property was petitioners' primary

residence during the years at issue.

On October 7, 1982, Mr. London purchased a

condominium unit, No. 304, located at 1265 Beacon Street,

Brookline, Massachusetts, for $174,336. Petitioner

borrowed the funds used to purchase the property from

the Broadway National Bank. As collateral for the loan,

petitioner gave the bank two certificates of deposit which

were worth $100,882.29 and $100,909, respectively, as of

October 12, 1982, the maturity date of both certificates.

Petitioner sold the condominium unit on May 24, 1985, for

$187,000.

On June 18, 1984, petitioners purchased property as

tenants by the entirety at 140 Greeley Avenue, West Hyannis

Port, Massachusetts, for $467,500 (Hyannis Port property).

They borrowed $270,000 from the Broadway National Bank to

purchase the property and agreed to repay the loan in 3

years with interest at the rate of 11.5 percent per year.

The loan required petitioners to make monthly payments of

$3,148.20 for 36 months and to pay the balance on June 18,

1987. Petitioners gave $198,737.35 of the loan proceeds to

Alger & Schilling, the escrow attorneys, to pay part of the

purchase price. They used $69,882.65 of the loan proceeds
 - 18 -

to discharge the mortgage on their Weston property, and

used the remaining $1,380 of the loan proceeds to pay for

attorney and filing fees. Petitioners paid the balance of

the purchase price of the Hyannis Port property by

depositing the following checks into the escrow account of

Alger & Schilling:

Payee Bank
Amount

Mrs. London Broadway Natl. Bank (BNB) $2,968.00
acct. No. 90-378-7
Mrs. London Shawmut County Bank 10,000.00
--cashier's check
Alger & Shilling Cape Cod Co-op 25,000.00
Mrs. London BNB--cashier's check 100,000.00
Mrs. London BNB--cashier's check 100,000.00
Mrs. London BNB--cashier's check 30,000.00
Mrs. London BNB--cashier's check 1,262.65

269,230.65

The following is a summary of petitioners' real

estate:
Purchase
Real Estate Date Mrs. London Mr. London Joint Total

110 Chestnut 5/7/74 $15,050 -- -- --
St. Chelsea
improvements 3,547 -- -- $18,597
1
Marblehead 7/1/75 37,000 -- -- --
improvements 16,000 -- -- 53,000

79 Black Oak 9/10/76 -- -- $146,000 146,000
Rd. Weston
2
1265 Beacon St. 10/7/82 -- $174,336 -- 174,336
Unit No. 304
Brookline

140 Greeley Ave. 6/18/84
 - 19 -
W. Hyannis Port -- 467,500
improvements -- 77,013 544,513

71,597 174,336 690,513 936,446

1
Sold on 8/2/84.
2
Sold on 5/24/85.

Financial Statement

On August 16, 1976, petitioners submitted a financial

statement to the Broadway National Bank to obtain the loan,

mentioned above, in connection with their purchase of the

property located at 79 Black Oak Road, Weston,

Massachusetts. The statement was signed by Mr. London and

provides the following information:

Assets
Cash on hand in banks $85,000

U.S. Government Securities:
Series E bonds 20,000

Listed Securities: Market Value
150 Shares Am. Tel. $8,000
150 Shares General Motors 9,000
200 Shares Boston Edison 6,000
200 Shares John Hancock 4,000
27,000
Real Estate Owned: Cost
Brick bldg.--Chelsea, MA 18,597
Land--Marblehead, MA 37,500

56,097

Autos and other personal property 14,000
Cash value life insurance

2,500
 - 20 -

Other Assets:
Investment in M.L. Associates 50,000

Total assets 254,597

Liabilities
Notes payable to banks--secured:
Automobiles 3,000

Total liabilities 3,000

Net worth 251,597

Jewelry and Home Furnishings

On December 20, 1984, petitioners' Hyannis Port house

was burglarized. In reporting the burglary to the police,

petitioners claimed that property worth approximately

$29,027 was stolen. Among the stolen items they reported

to their insurance company, there were six oriental rugs

worth about $10,560, one Baume-Mercier watch worth about

$3,500, several items of jewelry worth about $255, 12

five-piece sterling silver place settings worth about

$4,500, and several paintings and a lithograph worth

about $6,089.

Automobiles

Petitioners purchased eight cars during the period

from 1975 through 1985. The following is a summary of the

cars purchased by petitioners during that period:
 - 21 -

Cars Date Purchased Cost Title

1975 Buick 7/18/75 $7,303 Mrs. London

1976 Volvo 265 7/16/76 8,400 Mrs. London
DLA wagon

1978 Buick 3/11/78 9,981 Mrs. London
Estate wagon

1980 Cadillac 3/1/80 17,700 Mrs. London
Eldorado

1981 Volvo GLT 6/30/81 14,976 Mrs. London
station wagon

1982 Mercedes 2/10/83 35,000 Mr. London
500 SEC coupe

1983 Mercedes 300 8/29/83 35,000 Mrs. London1
TDT station wagon

1985 Mercedes 3/26/85 49,000 Mr. London2
500 SEL sedan

1
Mrs. London made a $15,000 downpayment and financed the balance.
Petitioners paid the balance due on Jan. 12, 1984.
2
Mr. London traded in his 1982 Mercedes, which had a trade-in
value of $32,000, and he financed the balance by obtaining a loan from
Broadway Natl. Bank for $20,000. Petitioners repaid the loan by
Nov. 15, 1985.

Petitioner's Parents

Both prior to and after petitioners' marriage,

Mr. London's parents were involved with Mr. London in the

operation of Heller's Cafe. Petitioner's father worked

at the bar and petitioner's mother was responsible for

ordering supplies for the bar, and paying some of the

bar's bills. When petitioner's mother was not feeling
 - 22 -

well, petitioner's wife would order supplies for the bar.

Petitioner's father died on October 2, 1980.

From 1969 through 1982, petitioner's mother lived

at 57 Franklin Avenue, Chelsea, Massachusetts. On

February 11, 1981, she sold that property for $28,000 but

she continued to live there for about 1 year after the

sale. In 1982, she rented an apartment in a subsidized

housing development located at 5 Admiral's Hill, Chelsea.

She lived in that apartment from 1982 until her death on

June 10, 1988.

During the period from 1975 through 1981,

petitioner's mother received the following proceeds

from the sale of real estate:

Real Estate Date
Sold Amount Received

122-124 Everett Ave.
47-49-51 Elm St.
1
123-131 Spruce St. 3/3/75 $49,784.47
400 and 402 Broadway 9/15/80 27,000.00

57 Franklin Ave. 2/11/81 28,000.00

Total received: $104,784.47

1
These properties were sold for $61,000.
Petitioner's mother paid $215.53 in taxes and $11,000
to discharge a mortgage on the property and she
received the difference $49,784.47 ($61,000 -
$11,215).
 - 23 -

All of the above properties are located in Chelsea,

Massachusetts.

Mr. London's parents held a safe deposit box (No.

1618) at the Broadway National Bank. In June 1980, the

safe deposit box was in the name of Mr. London and his

parents as joint tenants. In 1984, the safe deposit box

was changed to another box, No. 891, and it was held

jointly by petitioners and Mr. London's mother.

Petitioner's parents filed Federal income tax returns

for taxable years 1966 through 1980. His mother filed a

Federal income tax return for the taxable year 1981, but

she did not file individual income tax returns for taxable

years 1982 through 1988. Set out below is the amount of

Federal income tax paid by petitioner's parents from 1966

through and including 1988:
 - 24 -

Year Tax

1966 $1,639.04
1967 1,843.34
1968 2,068.27
1969 2,316.72
1970 2,221.51
(2,221.51) Tax abated
1971 2,037.13
(2,037.13) Tax abated
1972 828.24
1973 --
1974 --
1975 4,905.00
1976 370.00
1977 116.00
1978 160.00
1979 --
1980 1,445.00
1981 1,209.00
1982 No return filed
1983 No return filed
1984 No return filed
1985 No refund filed
1986 No refund filed
1987 No refund filed
1988 No refund filed

Petitioner's parents did not file a gift tax return (Form

709), or an estate tax return (Form 706), during the period

from 1966 through 1994, and neither left a probate estate.

Petitioner and his parents shared a close personal

and financial relationship. In fact, before he was

married, petitioner gave his mother most of his earnings

and kept only a small allowance. Through the years,

petitioner and his parents purchased various assets

jointly, including stocks and bonds.
 - 25 -

Petitioners' Income Tax Returns

Mr. Gerald Silverstein, a public accountant, prepared

petitioners' joint individual income tax returns for

taxable years 1976 through 1985. Mr. London annually

provided Mr. Silverstein with the information necessary to

prepare petitioners' individual returns. From time to

time, Mrs. London also delivered to Mr. Silverstein Forms

1099 and other information necessary to prepare the

returns. After Mr. Silverstein prepared each return, he

would give it to Mr. London. Mr. Silverstein signed

petitioners' signatures on their return for 1984. He was

not present when petitioners' returns for 1983 and 1985

were signed.

Mr. Abraham Trugman, a certified public accountant,

prepared the Schedules C, Profit or (Loss) From Business or

Profession, for Mr. London's check-cashing business, M.L.

Associates. Mr. London supplied Mr. Trugman with bank

statements, deposit slips, and machine tapes showing the

weekly check-cashing income of the business. Mr. London

forwarded the Schedules C to Mr. Silverstein for use in

preparing petitioners' joint individual income tax returns.

Mr. Trugman never met Mr. Silverstein.
 - 26 -

The following is a summary of the joint income tax

returns filed by, or on behalf of, petitioners for 1976

through 1985:

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985
1
Wages -- -- -- $2,600 -- -- -- -- -- --

Wages--
Heller's Cafe

Mrs. London $2,650 $2,600 $2,600 -- $2,600 $2,600 $2,650 $2,600 $2,600 $2,600
Mr. London 13,950 18,200 2,600 -- -- -- -- -- -- --

Wages--
M.L. Associates

Mrs. London -- -- -- -- -- -- -- 1,920 2,080 3,900
Mr. London -- -- -- -- -- -- -- -- -- --

Schedule B
Interest 4,056 2,794 2,345 2,905 10,812 27,431 18,043 29,212 31,954 37,095
income

Dividend2 2,346 2,187 2,192 2,197 2,045 1,914 9,432 7,207 17,580 15,332

State refund -- -- 500 87 -- -- -- -- -- --

Schedule C
M.L. Associates -- 2,432 46,992 51,255 53,068 64,180 63,969 70,009 91,340 101,671

Schedule D
Capital gain -- -- -- -- -- -- -- -- 38,060 10,226

Schedule E
110 Chestnut St.3 20,454 12,712 1,052 187 1,831 (1,207) 4,100 (2,044) (1,512) (3,128)

Total income 43,456 40,925 58,281 59,231 70,356 94,918 98,194 108,904 182,102 167,696

Taxable income 28,519 27,418 41,836 43,595 54,427 69,571 74,868 65,001 112,665 96,882

1
No Form W-2, Wage and Tax Statement, attached to 1979 return.

2
Dividend income after exclusion.
3
Rental income from 110 Chestnut St., the site of Heller's Cafe was reported on petitioners' Schedule E.
 - 27 -

Each of petitioners' returns describes the occupation

of both Mr. and Mrs. London as "manager". Mrs. London

received Forms W-2, Wage and Tax Statement, from London's

Cafe, Inc., and M.L. Associates reporting the following

wages:
Year London's Cafe, Inc. M.L. Associates

1976 $2,650 --
1977 2,600 --
1978 2,600 --
1979 -- --
1980 2,600 --
1981 2,600 --
1982 2,650 --
1983 2,600 $1,920
1984 2,600 2,080
1985 2,600 3,900

Petitioners' returns also report individual retire-

ment account contributions on behalf of Mrs. London in the

amount of $390 for each year 1976 through and including

1981, and in the amount of $2,000 for 1982 through and

including 1985. We note that petitioners' return for 1977

includes Form 5329, Return for Individual Retirement

Savings Arrangement, on behalf of Mrs. London, on which

"No" is checked in response to the question "Are you a non-

working spouse for whom this arrangement has been

established?" We also note that petitioners' returns for

1982 through and including 1985 include Schedule W,

Deduction for a Married Couple When Both Work, on which
 - 28 -

petitioners claimed deductions provided by section 221(a)

for two-earner married couples.

Petitioners filed no Federal income tax return for

taxable years 1986 through 1993. They made the following

estimated tax payments for those years:

Year Estimated Tax

1986 $34,700
1987 36,000
1988 36,000
1989 36,000
1990 40,046
1991 48,000
1992 24,000
1993 12,000

Returns of London's Cafe, Inc.

Mr. Silverstein prepared returns on Forms 1120, U.S.

Corporation Income Tax Return, for London's Cafe, Inc.,

for taxable years 1976 through 1985. For each of those 10

years, London's Cafe, Inc., reported zero taxable income.

The following schedule summarizes the amounts reported on

behalf of London's Cafe, Inc.:

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Gross receipts $63,052 $66,650 $56,807 $52,236 $52,385 $54,777 $55,654 $63,989 $66,146 $77,369
Cost of goods 32,875 34,992 43,596 41,069 40,932 43,342 42,966 51,036 53,982 62,769
Gross profit 30,177 31,658 13,211 11,167 11,453 11,435 12,688 12,953 12,164 14,600
Total deduction 30,840 34,506 13,757 11,552 10,878 10,049 11,435 11,424 10,797 12,584
Taxable income before (663) (2,848) (546) (385) 575 1,386 1,253 1,529 1,367 2,016
certain deductions
Net operating loss deduction -- -- -- -- 575 1,386 1,253 1,529 1,367 2,016
Taxable income (663) (2,848) (546) (385) -- -- -- -- -- --

The returns were signed by the following individuals:
 - 29 -

Taxable Year Officer's Signature Officer's Title

1976 Mrs. Ida London Treasurer
1977 Mrs. London Director
1978 Mr. London Clerk
1979 Mrs. London Clerk
1980-85 Mr. London Clerk

Respondent's Determination

Respondent recomputed petitioners' taxable income for

1983 and 1985 using the net worth method of reconstructing

income. As the starting point for that computation,

respondent used the net worth shown on the financial

statement that petitioners submitted to the Broadway

National Bank in 1976, $251,597. Respondent then computed

petitioners' net worth for 1976 through 1985.

Respondent determined that petitioners had received

unreported income of $311,974 and $213,120 for taxable

years 1983 and 1985, respectively. The "explanation of

items" attached to the notice of deficiency issued to

Mrs. London states as follows:

It is determined that you realized additional
income [for 1983] in the amount of $311,974.00
because the comparison of all known expenditures
with all known receipts, as shown on Exhibit A
attached hereto, has established an understate-
ment of income. Since you failed to include
such additional income on your income tax return,
taxable income is increased in the amount of
$311,974.00.
 - 30 -

* * * * * * *

It is determined that you realized additional
income [for 1985] in the amount of $213,120.00
because the comparison of all known expenditures
with all known receipts, as shown on Exhibit A
attached hereto, has established an understate-
ment of income. Since you failed to include
such additional income on your income tax return,
taxable income is increased in the amount of
$213,120.00.

Based thereon, respondent computed increases in tax of

$148,421 and $105,160 for 1983 and 1985, respectively.

Respondent also determined with respect to 1983 and 1985

that petitioners are liable for the additions to tax for

fraud under section 6653(b)(1) and (2), and the addition

to tax for substantial understatement of liability under

section 6661.

OPINION

Admissibility of Mr. London's Deposition in the Wrongful
Levy Suit

At trial, Mrs. London called her husband to testify as

a witness. In response to each of the questions put to him

by Mrs. London's attorney and by the Court, Mr. London

invoked his Fifth Amendment privilege against self-

incrimination and refused to answer the question. Counsel

for Mrs. London then offered into evidence the deposition

of Mr. London taken during the wrongful levy suit,
 - 31 -

described above. Petitioners argue that Mr. London is

"unavailable" as a witness in these cases because he

validly claimed his privilege against self-incrimination

under the Fifth Amendment (see rule 804(a)(1) of the

Federal Rules of Evidence), or because he would have

persisted in refusing to testify despite any order of this

Court directing him to do so (see rule 804(a)(2) of the

Federal Rules of Evidence). Accordingly, petitioners argue

that Mr. London's deposition is admissible into the record

of these cases under rule 804(b)(1) of the Federal Rules of

Evidence, which provides an exception to the hearsay rule

with respect to former testimony of the declarant.

Respondent objects to the admission of Mr. London's

deposition into evidence. Respondent asserts that the

deposition is hearsay for which there is no exception.

Respondent asserts that Mrs. London has not shown her

husband's "unavailability" as a witness within the meaning

of that term in rule 804(a) of the Federal Rules of

Evidence. In this connection, respondent asserts that

Mr. London did not validly claim the Fifth Amendment

privilege against self-incrimination because any criminal

prosecution of him is remote or speculative. Respondent

also asserts that the Court did not order Mr. London to
 - 32 -

testify, and, thus, there is no basis to claim his

unavailability on the ground that he persisted in refusing

to testify in the face of an order of the Court to do so.

Moreover, respondent asserts that, even if the Court finds

that Mr. London is unavailable, his deposition in the

wrongful levy suit is not the type of former testimony

described by rule 804(b)(1) of the Federal Rules of

Evidence because the purpose of the deposition was to

investigate Mrs. London's claim of an interest in two

brokerage accounts, neither of which was included as an

asset in the net worth statement used in these cases.

Notwithstanding respondent's objection to the

introduction of the entire deposition into evidence,

respondent proffered approximately 11 pages of the

deposition as an admission by a party opponent. In

response, petitioners argue that if this portion of the

deposition is accepted into evidence, then rule 106 of

the Federal Rules of Evidence requires the receipt of the

entire deposition into evidence on the ground that the

entire deposition "ought in fairness to be considered

contemporaneously with" the portion introduced by

respondent.
 - 33 -

In reviewing Mr. London's Fifth Amendment claims, it

is worthwhile to review the following statement from our

opinion in Petzoldt v. Commissioner, 92 T.C. 661, 684

(1989):

It is well established that the Fifth
Amendment may excuse a taxpayer from responding
to discovery or from testifying in this Court.
Dellacroce v. Commissioner, supra. [83 T.C. 269
(1984).] The witness may invoke the privilege
when he reasonably apprehends a risk of self-
incrimination although no criminal charges are
pending against him. Marchetti v. United States,
390 U.S. 39, 53 (1968); Hoffman v. United States,
341 U.S. 479, 486 (1951). The privilege not only
extends to testimony which would support a
conviction, but also to testimony which would
furnish a link in the chain of evidence needed
to prosecute. Hoffman v. United States, supra.
If the testimony is incriminating, then the
propriety of invoking the privilege depends
on whether the risk of prosecution is real.
Zicarelli v. New Jersey State Commission of
Investigation, 406 U.S. 472, 478 (1972);
Marchetti v. United States, supra at 53; Stubbs
v. Commissioner, 797 F.2d 936, 938 n.2 (11th Cir.
1986), affg. per curiam an unreported order and
decision of this Court. It is further well
established that the privilege does not protect
against a fear of prosecution which is remote,
speculative, or fanciful. Zicarelli v. New
Jersey State Commission of Investigation, supra;
Marchetti v. United States, supra; Stubbs v.
Commissioner, supra. However, the privilege must
be accorded liberal construction in favor of the
right it was intended to secure. Hoffman v.
United States, supra.

The Supreme Court stated in Hoffman v. United States,

341 U.S. 479, 488 (1951), that under the Fifth Amendment
 - 34 -

a response may not be compelled unless it is "'perfectly

clear, from a careful consideration of all the

circumstances in the case, that the witness is mistaken,

and that the answer(s) cannot possibly have such tendency'

to incriminate." Hoffman v. United States, supra at 488

(quoting Temple v. Commonwealth, 75 Va. 892, 898 (1880)).

In these cases, Mr. London's attorney argues that his

client's fears of incrimination are reasonable. He notes

the fact that the Government chose not to prosecute the

gambling count of the second superseding indictment. He

also argues that any testimony by Mr. London about his

activities during 1983 through 1985 could be used as a

predicate in a RICO prosecution for a later period. We

cannot say that Mr. London's position is clearly mistaken.

See Hoffman v. United States, supra at 486. Accordingly,

we agree with petitioners that Mr. London was unavailable

at trial due to his assertion of the Fifth Amendment

privilege against self-incrimination. We also agree that

Mr. London's deposition in the wrongful levy suit

constitutes "former testimony" described by rule 804(b)(1)

of the Federal Rules of Evidence. Therefore, Mr. London's

deposition in the wrongful levy suit is hereby accepted

into evidence.
 - 35 -

Admissibility of the Tapes and Transcripts
From the Electronic Surveillance of Heller's Cafe

At trial, respondent sought to introduce into

evidence the tape recordings and transcripts of

conversations that were intercepted during the electronic

surveillance of Heller's Cafe, described above.

Petitioners object to the tape recordings and transcripts

of the intercepted conversations and to certain other

evidence that they claim was derived from the intercepted

conversations, consisting of the testimony of various

Government agents about the search conducted at Heller's

Cafe on December 17, 1986. We refer to all of the evidence

that is the subject of petitioners' objection as "the

intercepted communications".

Petitioners' position is that 18 U.S.C. section 2515

(1970), a statutory suppression provision, enacted as part

of the Federal wiretapping statute, Title III of the

Omnibus Crime Control and Safe Streets Act of 1968, Pub. L.

90-351, 82 Stat. 211-225, prohibits the reception of the

intercepted communications into evidence in these

proceedings. Title 18 U.S.C. section 2515 provides as

follows:
 - 36 -

Whenever any wire or oral communication
has been intercepted, no part of the contents
of such communication and no evidence derived
therefrom may be received in evidence in any
trial, hearing, or other proceeding in or
before any court, grand jury, department,
officer, agency, regulatory body, legislative
committee, or other authority of the United
States, a State, or a political subdivision
thereof if the disclosure of that information
would be in violation of this chapter.

According to petitioners, the disclosure of the intercepted

communications in these proceedings is contrary to 18

U.S.C. section 2517(5) and, thus, it would be in "violation

of this chapter" (i.e., 18 U.S.C. sections 2510-2522).

Title 18 U.S.C. section 2517(5) provides as follows:

When an investigative or law enforcement
officer, while engaged in intercepting wire,
oral, or electronic communications in the manner
authorized herein, intercepts wire, oral, or
electronic communications relating to offenses
other than those specified in the order of
authorization or approval, the contents thereof,
and evidence derived therefrom, may be disclosed
or used as provided in subsections (1) and (2)
of this section. Such contents and any evidence
derived therefrom may be used under subsection
(3) of this section when authorized or approved
by a judge of competent jurisdiction where such
judge finds on subsequent application that the
contents were otherwise intercepted in accordance
with the provisions of this chapter. Such
application shall be made as soon as practicable.

Petitioners contend that the intercepted communications

relate "to offenses other than those specified in the order
 - 37 -

of authorization or approval" within the meaning of 18

U.S.C. section 2517(5). Petitioners argue that respondent,

accordingly, was required to obtain authorization or

approval by a court of competent jurisdiction before the

contents of the intercepted communications could be

disclosed or used in these cases. 18 U.S.C. sec. 2517(5).

Respondent having failed to obtain such an order,

petitioners argue that respondent's disclosure of the

contents of the electronic surveillance in these cases

would violate 18 U.S.C. section 2517(5), and, thus, such

contents are not admissible in evidence in this proceeding

pursuant to 18 U.S.C. section 2515.

Congress enacted 18 U.S.C. section 2517(5) and imposed

the requirement of making a subsequent application to

obtain judicial approval to disclose communications

involving "offenses other than those specified in the order

of authorization or approval", in order to provide

assurance that the Government could not secure a wiretap

authorization order to investigate an offense as a

subterfuge to acquire evidence of a different offense for

which the prerequisites to an authorization order were

lacking. See, e.g., United States v. McKinnon, 721 F.2d

19, 22 (1st Cir. 1983); United States v. Southard, 700 F.2d
 - 38 -

1, 31 (1st Cir. 1983); United States v. Campagnuolo, 556

F.2d 1209, 1214 (5th Cir. 1977); United States v. Levine,

690 F. Supp. 1165, 1170 (E.D.N.Y. 1988). Congress intended

the subsequent application to "include a showing that the

original order was lawfully obtained, that it was sought

in good faith and not as subterfuge search, and that the

communication was in fact incidentally intercepted during

the course of a lawfully executed order." S. Rept. 1097,

90th Cong., 2d Sess. (1968), reprinted in 1968 U.S.C.C.A.N.

2112, 2189.

We agree with respondent that 18 U.S.C. section 2515

of the Federal wiretap statute does not require suppression

of the wiretap evidence in these cases. First, we do not

agree that disclosure of the intercepted communications in

these cases would violate 18 U.S.C. section 2517(5).

Obviously, if there is no violation of 18 U.S.C. section

2517(5), then there is no predicate for petitioners'

argument that suppression of the wiretap evidence is

required by 18 U.S.C. section 2515. Title 18 U.S.C.

section 2517(5) applies only to "communications relating

to offenses other than those specified in the order of

authorization or approval". We interpret the term

"offenses", as used in 18 U.S.C. section 2517(5), in
 - 39 -

conformity with the use of the same term in 18 U.S.C.

section 2516, to mean crimes or criminal conduct. However,

respondent is not using the contents of the intercepted

communications in this proceeding as proof of tax evasion

or some other tax offense. To the contrary, respondent is

using the intercepted communications in these civil tax

cases to satisfy the Commissioner's burden of proof with

respect to the fraud addition under section 6653(b)(1) and

(2). This is a civil, not a criminal, penalty. Helvering

v. Mitchell, 303 U.S. 391 (1938).

We acknowledge that it might also be possible to use

the intercepted communications as evidence of one or more

tax crimes but that is not the use to which they are being

put here. We do not believe that 18 U.S.C. section 2517(5)

is violated by disclosure of the intercepted communications

in a civil proceeding by reason of the fact that the same

communications could theoretically be used to prove

offenses other than those originally specified. See United

States v. Campagnuolo, supra at 1214-1215. It is difficult

to perceive how 18 U.S.C. section 2517(5) would be violated

in these cases, in view of the fact that the Government

does not seek to use the intercepted communications as

evidence of a tax offense. See United States v.
 - 40 -

Campagnuolo, supra. Contrary to petitioners' position,

the introduction of the intercepted communications in

these cases appears to be specifically approved by 18

U.S.C. section 2517(3), which states as follows:

Any person who has received, by any means
authorized by this chapter any information
concerning a wire, oral, or electronic
communication, or evidence derived therefrom
intercepted in accordance with the provisions
of this chapter may disclose the contents of
that communication or such derivative evidence
while giving testimony under oath or affirmation
in any proceeding held under the authority of
the United States or of any State or political
subdivision thereof.

Second, even assuming, ad arguendo, that disclosure

of the intercepted communications in these cases, without

first obtaining judicial approval, would constitute a

violation of 18 U.S.C. section 2517(5), we do not agree

that suppression of the communications would be required

under 18 U.S.C. section 2515. That provision is intended

to be read in light of 18 U.S.C. section 2518(10)(a), which

defines the class of persons entitled to make a motion to

suppress and enumerates the circumstances that trigger

suppression under section 2515. S. Rept. 1097, supra,

reprinted in 1968 U.S.C.C.A.N. 2185. Title 18 section
 - 41 -

2518(10)(a) provides the following three grounds for a

motion to suppress:

(i) the communication was unlawfully
intercepted;

(ii) the order of authorization or approval
under which it was intercepted is insufficient
on its face; or

(iii) the interception was not made in conformity
with the order of authorization or approval.

In reviewing the relationship of those provisions, 18

U.S.C. sections 2515 and 2518(10)(a), the Supreme Court

held in United States v. Giordano, 416 U.S. 505 (1974),

and United States v. Chavez, 416 U.S. 562 (1974), that

"(not) every failure to comply fully with any requirement

provided in Title III would render the interception of

wire or oral communications 'unlawful.'" United States v.

Donovan, 429 U.S. 413, 433 (1977) (quoting United States v.

Chavez, supra at 574-575). According to the Supreme Court:

suppression is required only for a "failure to
satisfy any of those statutory requirements
that directly and substantially implement the
congressional intention to limit the use of
intercept procedures to those situations clearly
calling for the employment of this extraordinary
investigative device."

Id. at 433-434 (quoting United States v. Giordano, supra at

527).
 - 42 -

Title 18 U.S.C. section 2517 deals with the use and

disclosure of intercepted wire or oral communications in

specified circumstances. S. Rept. 1097, supra reprinted

in 1968 U.S.C.C.A.N. 2188. Therefore, a violation of

18 U.S.C. section 2517 would not seem to implicate

the suppression remedy specified in 18 U.S.C. section

2518(10)(a) which applies to unlawful interceptions. Based

upon this reasoning, a number of courts have held that

suppression under 18 U.S.C. section 2515 is not a remedy

for violation of 18 U.S.C. section 2517. E.g., United

States v. Williams, 124 F.3d 411, 426-427 (3d Cir. 1997);

United States v. Barnes, 47 F.3d 963, 965 (8th Cir. 1995);

United States v. Davis, 780 F.2d 838, 845-846 (10th Cir.

1985); United States v. Cardall, 773 F.2d 1128, 1133-1134

(10th Cir. 1985); Resha v. United States, 767 F.2d 285,

287-288 (6th Cir. 1985); United States v. Horton, 601 F.2d

319, 324 (7th Cir. 1979); United States v. Vento, 533 F.2d

838, 855 (3d Cir. 1976); United States v. Iannelli, 477

F.2d 999, 1001 (3d Cir. 1973), affd. on other grounds 420

U.S. 770 (1975); United States v. Aloi, 449 F. Supp. 698,

717 (E.D.N.Y. 1977). According to these courts, the remedy

for an unauthorized disclosure is found in 18 U.S.C.

section 2520 which provides a civil action for damages to
 - 43 -

any person whose wire, oral, or electronic communication is

intercepted, disclosed, or intentionally used in violation

of Title III.

It is unnecessary in the instant cases for us to

follow the above cases and to decide that, as a matter of

law, the statutory suppression rule set forth in 18 U.S.C.

section 2515 is never applicable as a sanction for

violation of section 2517. To decide these cases, it is

only necessary to conclude, as we do, that the facts and

circumstances are such that suppression is not

an appropriate remedy. The same approach was taken in

Fleming v. United States, 547 F.2d 872 (5th Cir. 1977).

See Spatafore v. United States, 752 F.2d 415, 417-418 (9th

Cir. 1985); Griffin v. United States, 588 F.2d 521, 524-526

(5th Cir. 1979); Estate of Best v. Commissioner, 76 T.C.

122, 141-142 (1981).

In these cases, like Fleming v. United States, supra,

the subject communications were lawfully intercepted during

a duly authorized wiretap, and the court orders authorizing

or approving the original interception and its extension

were sought in good faith and not as subterfuge. In fact,

Mr. London's jury conviction of conspiring to conduct and

actually conducting the affairs of an enterprise through a
 - 44 -

pattern or racketeering activity, money laundering, failing

to file CTR's, conspiring to commit extortion, and aiding

and abetting extortion was affirmed by the Court of

Appeals. United States v. London, 66 F.3d 1227 (1st Cir.

1995). Furthermore, in these cases, like Fleming v. United

States, supra, the intercepted communications were made

part of the public record of Mr. London's criminal

prosecution, so that petitioners' privacy interest in the

subject communication is extremely weak.

In passing, we note that on appeal Mr. London, seeking

to overturn the District Court's denial of his motion to

suppress evidence, argued that the electronic surveillance

conducted at Heller's Cafe in 1986 violated the Federal

wiretap law in five ways:

(1) no Department of Justice official designated
in 18 U.S.C. § 2516(1) had authorized the local
United States Attorney to apply for the initial
interception orders; (2) the orders improperly
allowed the government to monitor conversations
relating to money laundering, which was not an
offense for which interception could be ordered,
see 18 U.S.C. § 2516(1)(a)-(o), on the date the
interception orders issued; (3) the government
intercepted and disclosed extortion-related
conversations--conversations pertaining to the
paying of "rent" to Ferrara--beyond the scope of
the court's orders; (4) the court ordered and
the government employed inadequate minimization
procedures under 18 U.S.C. § 2518(5); and (5)
the government's application misled the district
court as to the necessity for conducting
 - 45 -

electronic surveillance, in violation of 18
U.S.C. §2518(1)(c). * * *

The Court of Appeals rejected Mr. London's position and

affirmed the District Court's denial of the suppression

motion. United States v. London, supra.

In Fleming v. United States, supra, the court

rejected the taxpayer's argument that the contents of the

intercepted communications should be suppressed under 18

U.S.C. section 2515 because the disclosure of the evidence

to revenue agents was not authorized by 18 U.S.C. section

2517. In view of ambiguities that the court found in 18

U.S.C. sections 2515 and 2517, the court interpreted the

statute in light of its purposes and found that no purpose

would be served by excluding lawfully seized evidence. See

Fleming v. United States, supra at 875. The court set

forth its holding as follows:

We hold only that evidence derived from
communications lawfully intercepted as part of
a bona fide criminal investigation that results
in the taxpayer's conviction may properly be
admitted in a civil tax proceeding, at least
when the evidence is already part of the public
record of the prior criminal prosecution. * * *

Similarly, we can see no purpose in suppressing, in this

civil tax proceeding, the contents of the intercepted

communications which were lawfully seized as part of a
 - 46 -

bona fide criminal investigation that resulted in

Mr. London's conviction and which previously were made

part of the public record in that criminal prosecution.

Spatafore v. United States, supra; Griffin v. United

States, supra; Fleming v. United States, supra; Estate

of Best v. Commissioner, supra.

The case on which petitioners rely, United States v.

Brodson, 528 F.2d 214 (7th Cir. 1975), is distinguishable.

In that case, the Government sought and received

authorization to intercept telephone conversations for the

purpose of investigating a violation of 18 U.S.C. section

1955, which prohibits the operation of an illegal gambling

business in interstate commerce. Nevertheless, the

Government presented the intercepted conversations to a

grand jury and obtained the defendant's indictment under

18 U.S.C. section 1084, which prohibits the transmission

of wagers and wagering information in interstate commerce.

United States v. Brodson, supra at 215. The Government

failed to seek an order under 18 U.S.C. section 2517(5)

until approximately 8 months later, just prior to trial.

United States v. Brodson, supra. Unlike the instant cases,

United States v. Brodson, supra, involved an attempted use

by the Government of the fruits of a wiretap to prove a
 - 47 -

crime other than that specified in the order of

authorization or approval. Accordingly, the Court of

Appeals approved the District Court's dismissal of the

indictment as a sanction for the Government's failure to

obtain the order required by 18 U.S.C. section 2517(5).

Net Worth Computation

Taxpayers are required to keep adequate books or

records from which their correct tax liability can be

determined. Sec. 6001. In the absence of such books or

records, the Commissioner is entitled to reconstruct a

taxpayer's income by any reasonable means. Sec. 446(b).

The net worth method is an indirect method of reconstruct-

ing taxable income that has long been approved by the

courts. See, e.g., Holland v. United States, 348 U.S. 121,

131 (1954); Manzoli v. Commissioner, 904 F.2d 101 (1st Cir.

1990), affg. T.C. Memo. 1989-94 and T.C. Memo. 1988-299;

United States v. Sorrentino, 726 F.2d 876 (1st Cir. 1984);

Mazzoni v. Commissioner, 451 F.2d 197 (3d Cir. 1971),

affg. T.C. Memo. 1970-144 and T.C. Memo. 1970-37; McGarry

v. United States, 388 F.2d 862 (1st Cir. 1967).

Under the net worth method, the Commissioner seeks to

compute taxable income in a given year by determining from

all available evidence of assets and liabilities the
 - 48 -

increase (or decrease) in the taxpayer's net worth over a

12-month period, adding to it his nondeductible expenses

for that year, and subtracting from that sum any amount

attributable to nontaxable sources. McGarry v. United

States, supra at 864. A net worth increase computed for a

given year creates an inference of taxable income, if the

Commissioner shows a likely source of unreported income or

negates possible nontaxable sources. E.g., United States

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

supra at 104. The Commissioner must clearly and accurately

establish the opening net worth of the taxpayer by

competent evidence. See Manzoli v. Commissioner, supra at

104; United States v. Smith, 890 F.2d 711, 713 (5th Cir.

1989); Thomas v. Commissioner, 232 F.2d 520, 524 (1st Cir.

1956), revg. and remanding T.C. Memo. 1955-46.

In the instant cases, petitioners did not provide any

books or records from which their tax liability could be

computed, and respondent chose to reconstruct petitioners'

income using the net worth method. As the starting point

for the net worth computations, respondent used $251,597,

the net worth reported on the financial statement that they

submitted on August 16, 1976, to the Broadway National Bank

in connection with their loan application to purchase the
 - 49 -

property located at 79 Black Oak Road. Respondent then

computed petitioners' net worth for the years 1976 through

and including 1985. According to respondent's computation,

petitioners' net worth increased from $251,597 to

$1,908,738.01 during that time. The likely source of the

increases in petitioners' net worth is the profits from

Mr. London's unlawful activities. Respondent's net worth

statement is summarized in Appendix A hereto.

Petitioners attack the net worth statement on three

grounds. First, petitioners assert that respondent did not

take into account the balances in five bank accounts.

Second, petitioners contend that respondent used incorrect

balances with respect to three bank accounts. Finally,

petitioners argue that respondent failed to take into

account a cash hoard derived by petitioners as gifts given

from Mr. London's mother, Mrs. Ida London. We describe

each of petitioners' factual contentions in detail below.

Even if we assume that respondent's net worth

statement should be adjusted in order to take into account

all of petitioners' contentions, that would cause no change

in the taxable income determined by respondent for the year

1983 and 1985. This is shown in Appendix B hereto, in

which all of the changes suggested by petitioners have been
 - 50 -

made and there is no change in respondent's computation of

taxable income for 1983 and 1985.

Omitted Bank Balances

Petitioners assert that respondent's net worth

statement is wrong because it does not take into account

the balances that petitioners maintained at five banks with

respect to which they reported interest income on their

Federal income tax returns for 1976 through 1981. The five

banks are Atlantic Savings, Commonwealth Bank, Marblehead

Savings, Metropolitan Credit Union, and National Grand

Bank. Petitioners assert that "the median rate of interest

paid by banks in the years of the net worth investigation

was 5%" and that "a reasonable way to ascertain a balance

in a given account is to multiply the interest figure by

20% (sic)." Based upon this approach, it appears that

petitioners are complaining that respondent omitted the

following account balances from the net worth statement

in these cases:

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Atlantic Sav. $17,940 $6,260 $3,100 $13,660 $600 $320 -- -- -- --
Metro. Credit Union -- 1,420 13,220 -- -- -- -- -- -- --
Metro. Credit Union -- 1,420 -- -- -- -- -- -- -- --
Metro. Credit Union -- 1,420 -- -- -- -- -- -- -- --
Commonwealth Bank 1,200 3,020 10,380 -- 12,460 -- -- -- -- --
Commonwealth Bank 2,820 3,020 -- -- -- -- -- -- -- --
Commonwealth Bank 3,180 3,480 -- -- -- -- -- -- -- --
Commonwealth Bank 2,820 -- -- -- -- -- -- -- -- --
Natl. Grand Bank 9,040 4,500 -- -- -- -- -- -- -- --
 - 51 -
Natl. Grand Bank 9,580 5,100 -- -- -- -- -- -- -- --
Natl. Grand Bank 9,640 4,220 -- -- -- -- -- -- -- --
Marblehead Sav. 11,800 -- 60 -- -- -- -- -- -- --

68,020 33,860 26,760 13,660 13,060 320 -- -- -- --

If we were to accept petitioners' assertion that

they maintained balances in the accounts at the five banks

in the amounts and for the years shown above, we would

agree with their contention that respondent's net worth

statement should have included those bank balances as

assets. It is unnecessary to make that finding, however,

because even if it were true, it would not change

respondent's computation of petitioners' taxable income for

1983 and 1985. The revised net worth statement attached

hereto as Appendix B shows that inclusion of the above bank

balances as assets would not cause any change in

respondent's computation of taxable income for 1983 and

1985.

Incorrect Bank Balances

Petitioners also complain that the balances included

in respondent's net worth statement for accounts at

three banks are wrong. First, petitioners complain

that respondent's net worth statement includes a balance of

$18,288.31 for petitioners' Shawmut County Bank account No.

685-94601, for the first time in 1984, whereas, in fact,
 - 52 -

the account was opened in 1977 with an initial deposit of

$10,009.24. In effect, it appears that petitioners are

complaining that their total assets are understated by

$10,009.24 from 1977 when the account was opened through

1983, the year before respondent included the account in

the net worth computation.

Second, petitioners complain that the Provident

Institution for Savings account which is included on

respondent's net worth statement beginning in 1979,

"had been opened in or prior to 1969 and had substantial

balances prior to 1976." Respondent included this account

on the net worth statement for the first time in 1979 with

a balance of $8,168.06. Petitioners contend that they

maintained balances in the account prior to that year.

Essentially, petitioners complain that respondent's net

worth statement understates their total assets by the

amount that was in the Provident Institution for Savings

account from 1976 through 1978, the year before respondent

included the account in his net worth computation.

Third, petitioners complained at trial that

respondent's net worth statement fails to include yearend

balances that were on deposit in the Carmel Credit Union,

account No. 17795, from 1976 through 1979. Respondent
 - 53 -

first included the Carmel Credit Union account in 1980 with

a balance of $280.11. Petitioners contend that their total

assets are understated by the amounts that were in the

Carmel Credit Union account from 1976 through and including

1979. A check register from that account shows a balance

in the account of $648 at the end of 1977, $727.25 at the

end of 1978, and $25,105 at the end of 1979.

In the revised net worth statement attached hereto

as Appendix B, we have adjusted respondent's net worth

statement by including a balance of $10,009.24 in the

Shawmut County Bank account for the years 1977 through

1983; by including a balance of $8,168.06 in the Provident

Institute for Savings account for 1976 through 1978; and by

including the yearend balances shown by the check register

for the Carmel Credit Union account No. 17795 for 1977

through 1979. Appendix B demonstrates that, even if we

accept petitioners' position that respondent's net worth

statement is in error with respect to those balances,

the errors have no effect on respondent's computation of

petitioners' net worth or taxable income for 1983 and 1985.

Cash Hoard Obtained as Gifts From Mr. London's Mother

Finally, petitioners argue that respondent's net worth

statement is wrong because it fails to take into account a
 - 54 -

cash hoard obtained as gifts from petitioner's mother,

Mrs. Ida London. According to petitioners, Mrs. Ida London

gave them cash from Treasury bonds and other securities,

worth from $149,000 to $200,000, the proceeds from the sale

in 1980 of Mrs. Ida London's property at 400 and 402

Broadway in the amount of $27,000, the proceeds from the

sale in 1981 of Mrs. Ida London's home at Franklin Avenue

in the amount of $28,000, Treasury bills and certificates

of deposit in an amount from $100,000 to $200,000, and

occasional cash gifts. Petitioners argue that respondent's

"disregard of a possible cash hoard (bond proceeds and

other property of Ida London) and disregard for the

existence of a plausible explanation as to the informal

transfer of parental property to their only child, only

daughter-in-law, and grandchildren, indicates that the net

worth statement is wrong and cannot retain its presumption

of correctness in this case."

At the outset, we note that the record as to each of

the assets that petitioner's mother allegedly gave to

petitioners is vague as to the amount of the asset and the

time that she allegedly transferred it to her son and his

family. For example, Mrs. London testified that her

mother-in-law had "close to $200,000" in bonds whereas a
 - 55 -

list of the bonds that petitioner sought to introduce into

evidence, totaled $162,050, according to respondent's

agent, of which $12,450 had not been redeemed at the time

of trial. On the other hand, petitioner proposed the

following finding of fact which states that bonds totaling

$180,500 were cashed prior to April 1980:

141. Agent Sullivan testified bonds were cashed
prior to April, 1980 (Tr. 566) in the following
amounts and years:

1971 $ 500
1974 82,000 [82,700]
1975 36,600
1976 5,500
1979 500
1980 54,700

There are also outstanding evidentiary issues, such

as whether the list of bonds, referred to above, can be

accepted into evidence as the past recollection recorded

of Mrs. London under rule 803(5) of the Federal Rules of

Evidence. In passing, we note that we found Mrs. London's

testimony, regarding the gifts that her family received

from her husband's mother, to have been vague, self-

serving, and not credible. Of course, we are not obligated

to accept such testimony. See Tokarski v. Commissioner, 87

T.C. 74, 77 (1986).
 - 56 -

Moreover, we are skeptical of petitioners' argument

that Mrs. Ida London was able to accumulate such large sums

of cash by her frugal lifestyle. First, the only source of

Mrs. Ida London's income was London's Cafe, Inc., which did

not report any taxable income in the 10 years from 1976

through 1985. Furthermore, the tax paid by petitioner's

parents during the last 15 years of Mr. Isadore London's

life shows that the couple earned very little income and

Mrs. Ida London filed no tax return during the last 7 years

of her life. Petitioner's parents did not file gift

or estate tax returns during 1966 through 1994, and they

left no probate estate. Furthermore, on February 11, 1981,

when Mrs. Ida London sold her home on Franklin Avenue, she

rented an apartment located in a subsidized housing

project.

It is unnecessary to resolve the factual and

evidentiary issues presented by petitioners' cash hoard

defense because even accepting petitioners' assertion that

Mrs. Ida London transferred her property to them, we would

still hold for respondent. This is true because even if we

were to accept petitioners' position that Mrs. Ida London

transferred the subject assets to them, there is nothing in

the record to establish that the net worth increases
 - 57 -

computed by respondent for 1983 and 1985 are in any way

linked to any of those assets. For example, in the case

of the bonds, the principal source of alleged gifts,

petitioners ask the Court to find, based upon Agent

Sullivan's testimony, that the bonds were cashed prior to

April 1980. However, there is no testimony or other

evidence concerning the manner in which this alleged sum

was expended or indicating it has any relationship to the

net worth increases in 1983 and 1985. See McGarry v.

United States, 388 F.2d 862, 866-867 (1st Cir. 1967). The

same is true of the proceeds from the sale of Mrs. Ida

London's property at 400 and 402 Broadway for $27,000 in

1980, and the proceeds from the sale of her home at

Franklin Avenue in the amount of $28,000 in 1981. In the

case of the funds that were invested in Treasury bills or

certificates of deposit through Mrs. Ida London's account

at Broadway National Bank, petitioners' proof suggests that

approximately $100,000 to $200,000 were invested through

the account beginning in 1975, but there is no evidence to

suggest that such funds were withdrawn from the account

prior to or during 1983 or 1985. For the above reasons,

we sustain respondent's determination of petitioners'

taxable income for 1983 and 1985.
 - 58 -

Whether Petitioners Filed a Joint Return for 1985

We disagree with petitioners' contention that they

did not file a joint return for 1985, and, therefore,

Mrs. London "cannot be held liable for any deficiency

thereon." Petitioners' position is based solely upon the

contention that she did not sign the 1985 return. However,

it is clear that there can be a binding joint return even

though one of the spouses fails to sign the return. E.g.,

O'Connor v. Commissioner, 412 F.2d 304, 309 (2d Cir. 1969),

affg. in part, revg. in part and remanding T.C. Memo. 1967-

174; Heim v. Commissioner, 251 F.2d 44, 45 (8th Cir. 1958),

affg. 27 T.C. 2700 (1956); Kann v. Commissioner, 210 F.2d

247, 251-252 (3d Cir. 1953), affg. per curiam 18 T.C. 1032

(1952). In this case, there is ample evidence from which

we infer that Mrs. London intended to file a joint return

with her husband. For example, Mrs. London had a long

history of filing joint tax returns. The 1985 return

included her wage income and income from other sources such

as jointly held property. Her petition in this Court does

not assert that she did not file a joint return. Most

significantly, at trial, she testified only that she did

not sign the 1985 return. She did not testify that she had
 - 59 -

no intention to file a joint return or that Mr. London

signed the 1985 return without her consent.

Additions to Tax for Fraud

Respondent determined that petitioners are liable for

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

and (2) with respect to their 1983 and 1985 returns.

Section 6653(b)(1) imposed an addition to tax in the

amount of 50 percent of the underpayment if any part of

the underpayment is due to fraud, and section 6653(b)(2)

imposed an addition to tax in the amount of 50 percent of

the interest payable under section 6601 with respect to the

portion of the underpayment which is attributable to fraud.

For purposes of section 6653, "fraud" is defined as an

actual, intentional wrongdoing, or intentionally committing

an act specifically to evade a tax believed to be owing.

Mitchell v. Commissioner, 118 F.2d 308, 310 (5th Cir.

1941), revg. 40 B.T.A. 424 (1939).

Respondent bears the burden of proving by clear and

convincing evidence: (1) That there is an underpayment of

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

fraud. Sec. 7454(a); Rule 142(b). Fraud is established by

showing that the taxpayer intended to evade tax believed to

be owing by conduct intended to conceal, mislead, or
 - 60 -

otherwise prevent the collection of such tax. Recklitis

v. Commissioner, 91 T.C. 874, 909 (1988); Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983). In the case of

a joint return, respondent must prove some part of the

underpayment is due to the fraud of each spouse. Sec.

6653(b)(4); Hicks Co. v. Commissioner, 56 T.C. 982, 1030

(1971), affd. 470 F.2d 87 (1st Cir. 1972); Stone v.

Commissioner, 56 T.C. 213, 227-228 (1971).

The existence of fraud is a question of fact to be

resolved upon consideration of the entire record. DiLeo

v. Commissioner, 96 T.C. 858, 874 (1991), affd. 959 F.2d

16 (2d Cir. 1992); Gajewski v. Commissioner, 67 T.C. 181,

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

(8th Cir. 1978). Fraud will never be imputed or presumed

but must be established by clear and convincing evidence.

Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Since

direct proof of a taxpayer's fraudulent intent is rarely

available, fraud may be shown by circumstantial evidence.

Stephenson v. Commissioner, 79 T.C. 995, 1005-1006

(1982), affd. per curiam 748 F.2d 331 (6th Cir. 1984).

A taxpayer's entire course of conduct may establish the

requisite fraudulent intent. Stone v. Commissioner,
 - 61 -

supra at 223-224; Otsuki v. Commissioner, 53 T.C. 96,

105-106 (1969).

Courts have developed several indicia or "badges of

fraud." These "badges of fraud" include: (1) Understating

income; (2) maintaining inadequate records; (3) failing to

file tax returns; (4) implausible or inconsistent explana-

tions of behavior; (5) concealing income or assets; (6)

failing to cooperate with tax authorities; (7) engaging in

illegal activities; (8) an intent to mislead which may be

inferred from a pattern of conduct; (9) lack of credibility

of the taxpayer's testimony; (10) filing false documents;

and (11) dealing in cash. Spies v. United States, 317 U.S.

492, 499 (1943); Bradford v. Commissioner, 796 F.2d 303,

307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601;

Recklitis v. Commissioner, supra at 910. Although no

single factor is necessarily sufficient to establish fraud,

the combination of a number of factors may be persuasive

evidence of fraud. Solomon v. Commissioner, 732 F.2d 1459,

1461 (6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603.

A taxpayer's intelligence and education are also relevant

for purposes of determining fraudulent intent. Stephenson

v. Commissioner, supra at 1006.
 - 62 -

Mr. London concedes that his guilty plea to tax

evasion in violation of section 7201 for 1985 estops him

from denying liability for additions to tax for fraud under

section 6653(b)(1) and (b)(2) for that year. The issues

remaining for decision are whether Mr. London is liable for

the additions to tax for fraud for petitioners' 1983 return

and whether Mrs. London is liable for the additions to tax

for fraud for 1983 and 1985.

Respondent contends that the following facts, when

taken as a whole, establish that petitioners' underpayment

of tax for 1983 and 1985 was attributable to fraud: (1)

There is a large discrepancy between petitioners' actual

income and the income reported on their returns for 1983

and 1985; (2) petitioners did not keep adequate books or

records from which their tax liability could be computed;

(3) Mr. London was engaged in illegal activities;

(4) Mr. London attempted to conceal his illegal activities;

(5) Mrs. London was actively involved in petitioners'

finances; (6) Mr. London did not supply complete

information about the check-cashing business' income

and expenses to Mr. Trugman, the accountant who prepared

the Schedule C for M.L. Associates; and (7) Mrs. London's
 - 63 -

explanations of her behavior are implausible or

inconsistent.

We agree with respondent that several indicia of fraud

are present with respect to Mr. London. In these cases,

Mr. London failed to report income in the amounts of

$311,974.34 for 1983 and $213,120.25 for 1985. These

understatements represented approximately a 20-percent

omission of income for 1983 and a 45-percent omission for

1985. Substantial understatements of income in successive

years, when coupled with other circumstances showing an

intent to conceal or misstate income, justify an inference

of fraud. Holland v. United States, 348 U.S. at 137-139;

Patton v. Commissioner, 799 F.2d 166, 171 (5th Cir. 1986),

affg. T.C. Memo. 1985-148. Moreover, the fact that

Mr. London engaged in illegal activities, and was con-

victed of RICO offenses, money laundering, extortion, and

failure to file CTR's, is a badge of fraud. Bradford v.

Commissioner, supra at 307-308. Mr. London has not shown

that he maintained adequate books and records for M.L.

Associates, his check-cashing business. Special Agent

Rooks testified that he found no formal books and records

for M.L. Associates. Mr. London's failure to maintain

adequate records is indicative of fraud. Truesdell v.
 - 64 -

Commissioner, 89 T.C. 1280, 1302 (1987). In addition,

Mr. London supplied inaccurate information to Mr. Trugman,

an accountant who prepared the Schedules C for M.L.

Associates. Mr. Trugman testified that he was not able

to track all the deposits made into accounts for M.L.

Associates. Providing incorrect information to a tax

return preparer is also a badge of fraud. Estate of

Temple v. Commissioner, 67 T.C. 143, 162-163 (1976).

Upon consideration of the entire record, we find that

respondent has proven by clear and convincing evidence that

Mr. London acted with the requisite fraudulent intent, and

that the entire understatement of tax for 1983 and 1985

is due to Mr. London's fraud, as determined by respondent.

Accordingly, we sustain respondent's determination that

Mr. London is liable for the additions to tax for fraud

under section 6653(b)(1) and (2).

We reach a different conclusion with respect to

Mrs. London. In her case, we do not believe that

respondent has proven by clear and convincing evidence that

she intended to evade tax believed to be owing by conduct

intended to conceal, mislead, or otherwise prevent the

collection of such tax. See Recklitis v. Commissioner,

91 T.C. at 909; Rowlee v. Commissioner, 80 T.C. at 1123.
 - 65 -

Respondent's proof of Mrs. London's fraud is principally

based on the contention that she "was deeply involved in

the couple's business and financial affairs." We agree

that Mrs. London owned stock in London Cafe, Inc., wrote

checks on various accounts maintained by petitioners,

and purchased assets such as real estate and automobiles.

However, there is no evidence of her involvement in

Mr. London's illegal activities, the source of the

unreported income. For example, during the surveillance

of Heller's Cafe, Mrs. London was never observed in the

bar. She was not a target of the Government's

investigation. As to the unreported income, Mr. London

insulated his wife from the reporting of that income by

supplying information for preparation of the Schedules

C, Profit or (Loss) From Business or Profession, to

Mr. Trugman. The Schedules C were then given to

Mr. Silverstein for preparation of petitioners' joint

individual income tax returns. There is no evidence that

Mrs. London was involved in the accounting for or reporting

of, income from Mr. London's illegal activities. Upon

consideration of the entire record, we find no clear and

convincing evidence that Mrs. London took any action
 - 66 -

intended to conceal, mislead, or otherwise prevent the

collection of Federal income tax.

Additions to Tax Under Section 6661

Respondent determined that petitioners are liable

for the addition to tax for substantial understatement

of liability under section 6661. Section 6661 imposes

an addition to tax of 25 percent of any underpayment

attributable to a substantial understatement of income

tax which is assessed after October 21, 1986. Pallottini

v. Commissioner, 90 T.C. 498, 503 (1988). A substantial

understatement is any understatement which exceeds the

greater of 10 percent of the tax required to be shown on

the return or $5,000. Sec. 6661(b)(1). Petitioners bear

the burden of proving that respondent's determinations are

incorrect. Rule 142(a).

Petitioners failed to address this issue at trial or

in their posttrial briefs. They have shown no reason why

they are not liable for the addition to tax. Accordingly,

we sustain respondent's determination that petitioners are

liable for the addition to tax for substantial understate-

ment of liability under section 6661.

Innocent Spouse Relief

Petitioners claim that Mrs. London is eligible to be

relieved of liability for the tax deficiencies and
 - 67 -

additions to tax for 1983 and 1985 under former section

6013(e). Following passage of section 6015 by the Internal

Revenue Service Restructuring and Reform Act of 1998, Pub.

L. 105-206, sec. 3201(a), 112 Stat. 685, 734, the Court is

deferring consideration of this issue until the parties

have been given an opportunity to provide the Court with

their positions concerning the effect of the new law.

To reflect the foregoing,

An appropriate order will

be issued.
Appendix A
Net worth statement 08/16/76 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Total assets $254,597.00 $417,800.55 $343,773.61 $408,147.79 $605,402.54 $912,161.46 $1,030,570.49 $1,437,979.16 $1,793,399.62 $2,120,610.58 $2,253,066.90
Liabilities 3,000.00 82,739.84 78,788.41 82,091.30 83,995.57 86,277.71 88,446.53 261,061.04 265,995.99 460,999.21 284,328.83

Net worth 251,597.00 335,060.71 264,985.20 326,056.49 521,406.97 825,883.75 942,123.96 1,176,918.12 1,527,403.63 1,659,611.37 1,968,738.07
Less: prior year's net worth 251,597.00 335,060.71 264,985.20 326,056.49 521,406.97 825,883.75 942,123.96 1,176,918.12 1,527,403.63 1,659,611.37

Increase (decrease) in net worth 83,463.71 (70,075.51) 61,071.29 195,350.48 304,476.78 116,240.21 234,794.16 350,485.51 132,207.74 309,126.70

Plus:
Nondeductible expenditures 35,633.45 45,796.50 54,560.89 84,634.61 115,836.98 129,495.55
Nondeductible capital loss 6,980.55 4,188.00 -0- 1,476.00 -0- 3,000.00

Subtotal 347,090.78 166,224.71 289,355.05 436,596.12 24,8044.72 441,622.25

Less:
Non-Taxable items 7,635.02 2,300.51 16,773.00 19,995.78 78,902.17 65,215.00

Corrected AGI 339,455.76 163,924.20 272,582.05 416,600.34 169,142.55 376,407.25

Excess itemized deductions 12,684.00 15,438.72 12,138.00 33,625.00 59,169.00 60,165.00
Personal exemptions 6,000.00 6,000.00 6,000.00 6,000.00 6,240.00

Corrected taxable income 326,771.76 142,485.48 254,444.05 376,975.34 103,973.55 310,002.25

Taxable income per return 54,427.00 69,571.00 74,868.00 65,001.00 112,665.00 96,882.00

Unreported income 272,344.76 72,914.48 179,576.05 311,974.34 (8,691.45) 213,120.25
Appendix B
Revised net worth statement Pre-1976 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

Atlantic Sav. $17,940.00 $6,260.00 $3,100.00 13,660.00 $600.00 $320.00
Commonwealth Bank 1,200.00 3,020.00 10,380.00 12,460.00
Commonwealth Bank 2,820.00 3,020.00
Commonwealth Bank 3,180.00 3,480.00
Commonwealth Bank 2,820.00
Marblehead Sav. 11,800.00 60.00
Metro, Credit Union 1,420.00 13,220.00
Metro. Credit Union 1,420.00
Metro. Credit Union 1,420.00
Grand Natl. Bank 9,040.00 4,500.00
Grand Natl. Bank 9,580.00 5,100.00
Grand Natl. Bank 9,640.00 4,220.00
Shawmut Bk. of Boston 10,009.24 10,009.24 10,009.24 10,009.24 10,009.24 10,009.24 10,009.24
Provident $8,168.06 8,168.06 8,168.06 8,168.06
Carmel 648.00 648.00 727.25 25,105.09

Adjustments 8,168.06 76,836.06 52,685.30 45,664.55 48,774.33 23,069.24 10,329.24 10,009.24 10,009.24 -0- -0-

Total assets per net worth statement 254,597.00 417,800.55 343,773.61 408,147.79 605,402.54 912,161.46 1,030,570.49 1,437,979.16 1,793,399.62 $2,120,610.58 $2,253,066.9
0

Adjusted total assets 262,765.06 494,636.61 396,458.91 453,812.34 654,176.87 935,230.70 1,040,899.73 1,447,988.40 1,803,408.86 2,120,610.58 2,253,066.90
Liabilities 3,000.00 82,739.84 78,788.41 82,091.30 83,995.57 86,277.71 88,446.53 261,061.04 265,995.99 460,999.21 284,328.83

Net worth 259,765.06 411,896.77 317,670.50 371,721.04 570,181.30 848,952.99 952,453.20 1,186,927.36 1,537,412.87 1,659,611.37 1,968,738.07
Less: prior year's net worth 259,765.06 411,896.77 317,670.50 371,721.04 570,181.30 848,952.99 952,453.20 1,186,927.36 1,537,412.87 1,659,611.37
Increase (decrease) in net worth 152,131.71 (94,226.27) 54,050.54 198,460.26 278,771.69 103,500.21 234,474.16 350,485.51 122,198.50 309,126.70

Nondeductible expenditures 35,633.45 45,796.50 54,560.89 84,634.61 115,836.98 129,495.55
Nondeductible capital loss 6.980.55 4,188.00 -0- 1,476.00 -0- 3,000.00

Subtotal 321,385.69 153,484.71 289,035.05 436,596.12 238,035.48 441,622.25

Non-Taxable items
Bonds 124,600.00 500.00 54,700.00
Treasury bills 200,000.00
Proceeds from sale of home at Franklin Ave. 28,000.00
Proceeds from sale of 400 & 402 Broadway 27,000.00
Other Non-Taxable items 7,635.02 2,300.51 16,773.00 19,995.78 78,902.17 65,125.00

Corrected AGI 232,050.67 123,184.20 272,262.05 416,600.34 159,133.31 376,407.25

Excess itemized deductions 12,684.00 15,438.72 12,138.00 33,625.00 59,169.00 60,165.00
Personal exemptions 6,000.00 6,000.00 6,000.00 6,000.00 6,240.00

Corrected taxable income 219,366.67 101,745.48 254,124.05 376,975.34 93,964.31 310,002.25

Taxable income per return 54,427.00 69,571.00 74,868.00 65,001.00 112,665.00 96,882.00

Unreported income 164,939.67 32,174.48 179,256.05 311,974.34 (18,700.69) 213,120.25