T.C. Memo. 1998-371

UNITED STATES TAX COURT

PAUL ARTHUR ZIPP, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9216-96. Filed October 13, 1998.

Paul Arthur Zipp, pro se.

Shirley M. Francis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined deficiencies in

petitioner's Federal income tax and fraud penalties for taxable

years 1990, 1991, and 1992 as follows:

 Penalty

Year Deficiency Sec. 6663

1990 $124,387 $93,290
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1Petitioner concedes that he is not entitled (1) to the

alimony deduction he claimed on his income tax returns for the

taxable years 1990, 1991, and 1992, and (2) to business

deductions for payments of $49,685 and $45,700 made to Julie Anne

Stanbery during 1990 and 1991. 

1991 256,233 192,175

1992 86,650 61,988

As an alternate position, respondent determined that, if the

fraud penalty does not apply, petitioner is liable for the

accuracy-related penalty under section 6662(a) for negligence or

substantial understatement of tax for each of the years in issue.

All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated

After concessions by the parties,1 the issues to be decided

are as follows:

1. Whether petitioner failed to report gross receipts of

$344,225 for 1990, $666,563 for 1991, and $53,330 for 1992.

2. Whether petitioner is entitled to offsets and business

deductions in excess of those allowed by respondent for the 1992

taxable year. 

3. Whether petitioner is entitled to an embezzlement loss

deduction for the 1990 taxable year.

4. Whether petitioner is liable for the fraud penalty under

section 6663 for the 1990, 1991, and 1992 taxable years.
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5. Whether the assessment of a deficiency for the 1990

taxable year is barred by the statutory period of limitations. 

6. Whether petitioner is liable for the accuracy-related

penalty under section 6662(a) for the 1990, 1991, and 1992

taxable years.

FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. 

Petitioner is a licensed radiologist who resided in

Roseburg, Oregon, when the petition in this case was filed.

Petitioner received his bachelor's degree from the University of

California at Santa Barbara and his medical degree from the

University of California at San Francisco. He completed an

internship and residency at the University of Colorado Medical

Center in Denver. After completing his residency, petitioner

served in the U.S. Navy for 2 years. 

From 1977 until 1983, petitioner was chief of the radiology

department at the Columbia District Hospital in St. Helens,

Oregon, and also worked in the hospital's emergency room.

Petitioner incorporated his practice in St. Helens. Petitioner's

accountant recommended that he incorporate the practice so that

petitioner could keep his business separate from his personal

affairs and maximize his pension contributions.
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From 1983 until 1989, petitioner practiced radiology in

Seattle, Washington. In March 1989, petitioner began practicing

at the Highline Community Hospital in Burien, Washington, as

chief of radiology. 

On average, petitioner worked 14 to 18 hours a day at the

Highline Community Hospital and provided services to 100 patients

a day (over 30,000 per year). Petitioner provided patients a

broad range of services, including plain film analysis,

mammography, intravenous pyelography, computerized tomography,

ultrasound, nuclear medicine, magnetic resonance imaging, and

interventional radiology. An employee of the hospital would

screen a patient who came to the hospital and would take the

patient's name, address, and insurance information. The patient

would then go to the department with a request slip indicating

the procedure requested by the patient's doctor. The request

slip had three parts, the last of which was a pink slip that

petitioner used for billing purposes. The Highline Community

Hospital billed the radiology patients for the use of its

equipment, and petitioner billed the patients separately for his

professional services. After petitioner performed the radiology

procedure, the fee for petitioner's services was marked on the

pink slip. The pink slips were then batched daily and sent by

courier to petitioner's billing service. Petitioner did not
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maintain a log of the information on the pink slips but relied on

the billing services to accurately account for the billing.

Petitioner used three unrelated billing services to collect

his fees from patients. Petitioner used Professional Financial

Services from March 1989 until the end of that year; he used Hagy

& Hagy until June 1990; and he used Lynx Medical from June 1990

until December 1991. Petitioner resigned from the Highline

Community Hospital effective September 1, 1991, and used

Professional Financial Services to collect the residual

receivables remaining after December 1991. After petitioner

retired, he moved to Roseburg, Oregon. 

The billing services billed petitioner's patients and their

insurance carriers, collected the payments, and deposited the

payments into petitioner's main bank account at First Interstate

Bank (the main account). For these services, the billing

services billed petitioner a percentage of the receivables

collected, usually 11 percent to 14 percent. The billing

services collected approximately 50 percent of the gross charges,

primarily because of disallowances by insurance carriers. The

billing services sent petitioner lengthy monthly statements of

his accounts. 

Occasionally a billing service would receive an overpayment

resulting from payments from both the patient and the patient's

insurance carrier. Petitioner established a separate refund
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account at First Interstate Bank (the refund account) to handle

the payments refunded to patients. Petitioner would transfer

funds from the main account to the refund account and his friend

Julie Anne Stanbery (Ms. Stanbery) would then write a check from

the refund account to reimburse the patient for the overpayment.

By late 1989, petitioner agreed to pay the hospital up to

$1,500 per month for clerical and other services. Petitioner

also paid other radiologists for professional services they

rendered in the radiology department of the Highline Community

Hospital. He treated the radiologists as independent contractors

and filed Forms 1099 with the Internal Revenue Service (IRS) to

report the payments he made to them. For the taxable years 1990

and 1991, he deducted the payments made to other radiologists as

an outside services expense on the Schedules C attached to his

income tax returns. 

During the taxable years 1990 and 1991, petitioner wrote

checks to Ms. Stanbery totaling $49,685 and $45,700, 

respectively. On the Schedules C attached to his income tax

returns for those years, petitioner deducted the amounts paid to

Ms. Stanbery as business expenses for outside services. 

Petitioner, however, did not file a Form W-2 or a Form 1099 for

the amount paid to Ms. Stanbery for either year. 

Petitioner did not employ a bookkeeper or use a bookkeeping

system. Petitioner's accountant has prepared petitioner's tax
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returns since the mid-1970's and prepared petitioner's Federal

income tax returns and Washington State excise tax returns for

1990, 1991, and 1992. For years prior to 1991, the accountant

prepared the returns using the bank statements and canceled

checks from petitioner's main bank account. Petitioner also

provided the accountant with Forms 1099 petitioner received for

interest and dividends. Petitioner wrote checks on the main

account for personal as well as business purposes. Using the

bank statements and checks, the accountant made assumptions as to

which payments were deductible business expenses. Petitioner did

not provide the accountant with bank statements and canceled

checks from the refund account or the monthly statements from the

billing services.

From 1974 until 1989, petitioner paid his former wife child

support of $250 per month and alimony of $400 per month. In

1989, petitioner and his former wife agreed that the entire

payment of $650 per month would be child support. During 1990,

1991, and 1992, petitioner did not pay alimony to his former

wife. The accountant, however, deducted alimony payments on the

1990, 1991, and 1992 returns, because petitioner had taken the

deductions in prior years. 
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2The accountant erroneously assumed that interest paid to

petitioner by James & Associates had been deposited into the

business account. The accountant also made an adjustment of

$200,000 but could not recall to what transaction the adjustment

related.

In preparing petitioner's 1990 return, the accountant

erroneously deducted $263,700 from gross receipts.2 The

accountant reduced petitioner's gross receipts by the amounts

transferred from the main account to the refund account. The

accountant thought that checks with the notation of "rent" were

for petitioner's payment of rent to the hospital. Those rent

payments, however, were for petitioner's personal residence. On

the Schedule C attached to his 1990 return, petitioner reported

gross income of $1,165,076 from his business, computed by

reducing gross receipts of $1,194,606 by $29,530 for returns and

allowances. On the Schedule C, petitioner reported total

business expenses of $521,980 and a net profit of $643,096. On

petitioner's 1990 return, in addition to $643,096 of net profit

from his practice, petitioner reported $52,810 of interest

income, of which $3,695 was from First Interstate Bank, and

$5,309 of dividend income.

In computing petitioner's 1991 Washington State excise tax,

the accountant did not use petitioner's bank statements, although

he had those records. Instead, the accountant estimated

petitioner's 1991 State excise tax on the basis of petitioner's

1990 income, taking into account the fact that petitioner
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effectively stopped practicing as of the end of July 1991. In

preparing petitioner's 1991 Federal income tax return, the

accountant used the Washington State excise tax amounts to

determine gross receipts and petitioner's checks to compute

expenses. On the Schedule C attached to his 1991 return,

petitioner reported gross receipts of $888,637, no returns or

allowances, and $562,348 of total business expenses, resulting in

a net profit of $326,289 from his business.

During 1991, petitioner used currency in the following

amounts to purchase Krugerrands from Clackamas Gold & Silver,

Inc., of Clackamas, Oregon, that were reported to the IRS as cash

transactions:

Date Total Purchase Currency

3/18/91 $55,387.50 $19,887.50

3/26/91 54,900.00 19,900.00

5/31/91 74,000.00 70,000.00

In early 1993, as a result of the reported cash transactions

with Clackamas Gold & Silver, the IRS began an audit of

petitioner's 1991 return. Petitioner requested that the audit be

conducted in his accountant's office in Port Angeles, Washington,

where the records were located. In preparation for the audit and

to verify the accuracy of the 1991 return, the accountant

constructed a spreadsheet for 1991. In preparing the

spreadsheet, however, the accountant made errors that resulted in

an understatement of gross receipts in excess of almost $500,000.
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Because petitioner's 1991 return was under audit, the

accountant advised petitioner not to file his 1992 return until

the last possible date. Petitioner filed an application for an

automatic extension and filed his 1992 return in August 1993. In

preparing petitioner's 1992 return, the accountant used Forms

1099 and handwritten notes from petitioner to compute

petitioner's income; the accountant did not look at petitioner's

bank statements and canceled checks. On the Schedule C attached

to petitioner's 1992 return, petitioner reported $15,835 of gross

receipts, no refunds, $7,030 total expenses, and net profit of

$8,805. Petitioner did not deduct any amount on the 1992 return

for fees paid to the billing services. 

In June 1994, the IRS agent referred petitioner's case to

the criminal investigation division (CID). In December 1995, the

CID withdrew from the case, because petitioner's accountant

accepted responsibility for the omissions and errors in

petitioner's returns. 

Respondent reconstructed petitioner's income for the taxable

years 1990, 1991, and 1992 using the bank deposits method. The

reconstruction report shows deposits of income into four of

petitioner's bank accounts (the main account, the refund account,

the First Interstate Bank Roseburg account (FIB Roseburg

account), and the South Umpqua Bank account (SUB account)),
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transfers between petitioner's bank accounts, adjustments, and

unreported gross income for 1990, 1991, and 1992, as follows:

Bank Account 1990 1991 1992

Main account:

 Total deposits $1,470,890.84 $1,672,099.55 $52,732.35

 Transfers -0- (140,000.00) -0-

 Refunds (29,530.00) -0- -0

 Charge backs (9,330.37) -0- -0

 Interest (2,703.70) (1,792.00) (1,647.59)

 Income 1,429,326.77 1,530,307.55 51,084.76

Refund account:

 Total deposits $106,527.85 49,635.00 4,300.00

 Transfers (26,002.00) (48,995.00) (3,300.00)

 Refunds -0- -0- -0-

 Charge backs -0- -0- -0-

 Interest -0- -0- -0- 

 Income 80,525.85 640.00 1,000.00

FIB Roseburg:

 Total deposits -0- 83,924.26 23,157.57

 Transfers -0- (48,000.00) (5,000.00)

 Income -0- 35,924.26 18,157.57 

SUB Roseburg:

 Total deposits -0- -0- 233,132.41

 Transfers -0- -0- (207,877.63)

 Income -0- -0- 25,254.78

Total income 1,509,852.62 1,566,871.81 95,497.11

Reported 

 gross income (1,165,076.09) (888,637.00) (15,835.00)

Unreported income 344,776.53 678,234.81 79,662.11

In the notice of deficiency, respondent determined that

petitioner had unreported income during 1990, 1991, and 1992 as

follows:

Bank Account 1990 1991 1992

Main account $263,700 $630,113 $35,173

Refund account 80,525 640 -0-

FIB Roseburg -0- 35,810 18,313

SUB Roseburg -0- -0- 177,726

 Total 344,225 666,563 

1231,212
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1 Respondent conceded before trial that the adjustment for

unreported income for 1992 should be $79,662.11, rather than

$231,212 as determined in the notice of deficiency. Respondent

made additional concessions on brief regarding 1992, as discussed

in the Opinion section, infra. 

In the notice of deficiency, respondent disallowed (1)

deductions of $5,200 for 1990, 1991, and 1992 that petitioner

claimed for alimony payments, (2) deductions of $49,685 for 1990

and $104,690 for 1991 (of which $49,685 in 1990 and $45,700 in

1991 was paid to Ms. Stanbery) that petitioner claimed as outside

business expenses for those years, and (3) deductions of $15,600

for 1990 and $10,400 for 1991 that petitioner claimed as business

rental expense. Respondent also disallowed deductions for (1)

$29,530 that petitioner claimed for returns and allowances in

1990, (2) $28,038 of business expenses claimed in 1991 that

petitioner had previously claimed in 1990, and (3) $11,668 for

unsubstantiated business expenses claimed in 1991.

OPINION

Issue I. Whether Petitioner Failed To Report Gross Receipts of

$344,225 for 1990, $666,563 for 1991, and $53,330 for 1992

A taxpayer is required to maintain records sufficient to

show whether or not he is liable for Federal income taxes. Sec.

6001. Where a taxpayer has failed to maintain adequate records,

respondent may reconstruct the taxpayer's income by any

reasonable method that clearly reflects income. Sec. 446;

Holland v. United States, 348 U.S. 121, 130-132 (1954). The bank

deposits method has long been approved by the courts as a method
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for computing income. Estate of Mason v. Commissioner, 64 T.C.

651, 656-657 (1975), affd. 566 F.2d 2 (6th Cir. 1977). 

Petitioner bears the burden of proving that respondent's

determinations, including unreported income, are incorrect. Rule

142(a); Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978). 

In the notice of deficiency, respondent determined that

petitioner failed to report $344,225 of gross receipts from his

business practice in 1990, $666,563 in 1991, and $231,212 in

1992. For the 1990 and 1991 taxable years, petitioner has not

contested that the deposits into the accounts were income from

his medical practice. Therefore, we find that petitioner failed

to report $344,225 of gross receipts from his business for 1990

and $666,563 for 1991. 

For the 1992 taxable year, respondent concedes (1) that

petitioner's income for 1992 does not include $177,726 deposited

in his SUB account, and (2) that the unreported income from

petitioner's deposits in the FIB Roseburg account is $18,157 as

set forth in the bank deposits method rather than the $18,313

determined in the notice of deficiency. On the basis of

respondent's concessions and petitioner's failure to show that

any of the deposits were not income, we find petitioner failed to

report $53,330 of gross receipts in 1992 ($35,173 from the main

account and $18,157 from the FIB Roseburg account). 
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Issue II. Whether Petitioner Is Entitled to Offsets and Business

Deductions in Excess of Those Allowed by Respondent for the 1992

Taxable Year

Respondent acknowledges that the determination for 1992 has

not taken into account any offsetting business expenses. 

Petitioner contends that he is entitled to offsets or deductions

totaling $23,349 for (1) amounts refunded to patients, (2)

amounts paid to the billing service, (3) State license fee, and

(4) miscellaneous expenses charged to his VISA card.

Petitioner has the burden of establishing that he is

entitled to such offsets or deductions. Rule 142(a); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This

includes the burden of substantiation. Hradesky v. Commissioner,

65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976). A taxpayer must maintain records sufficient to permit

verification of income and expenses. Sec. 6001; sec. 1.6001-1,

Income Tax Regs. That a taxpayer cannot prove the exact amount

of an otherwise deductible item, however, is not necessarily

fatal. Unless precluded by section 274, we may estimate the

amount of such an expense and allow the deduction for the

estimated amount. Cohan v. Commissioner, 39 F.2d 540 (2d Cir.

1930). The estimate, however, must have some reasonable

evidentiary basis. Vanicek v. Commissioner, 85 T.C. 731, 743

(1985). 

With respect to petitioner's claim that his income should be

reduced for amounts he transferred into the refund account, such
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3Petitioner has made an advance payment of tax for the

adjustment related to the payments made to Ms. Stanbery.

transfers are not payments to his patients. Petitioner has

provided no evidence of the amount of payments made from the

refund account to his patients. On the basis of the evidence in

the record, we are unable to reasonably estimate the amount of

such payments. 

Petitioner paid the billing services between 11 and 14

percent of the amounts collected. During 1992 the billing

service collected a total of $70,889 ($52,732 deposited into

petitioner's main bank account plus $18,157 deposited into his

FIB Roseburg account). On his 1992 return, petitioner did not

deduct any amount for the billing fees he paid. We will allow

petitioner a $7,798 deduction (11 percent of the amounts

collected) for billing fees. 

On his 1992 return petitioner reported $1,125 for supplies

and $1,250 for licenses and taxes. Petitioner stopped practicing

medicine by 1992 and has not shown that the State license fee and

miscellaneous expenses exceed the amounts deducted on his 1992

return.

Issue III. Whether Petitioner Is Entitled to an Embezzlement

Loss Deduction for the 1992 Taxable Year

Petitioner concedes the adjustments for alimony, the portion

of the adjustment related to payments to Ms. Stanbery,3 and the

adjustments for the rental expenses. 
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For the 1990 taxable year, petitioner has offered no

evidence with respect to the expenses disallowed by respondent. 

Petitioner, however, claims that between $80,000 and $99,000 was

embezzled from his accounts. According to petitioner, employees

of the billing service and the bank conspired to embezzle the

funds. Petitioner asserts that the billing service employee

improperly deposited funds collected from his patients to his

refund account rather than the main account. The funds were then

transferred by a bank employee to petitioner's Columbia Daily

Income investment account, and later a check for $99,000 from the

investment account was made payable to Clackamas Gold & Silver. 

Petitioner also asserts that Clackamas Gold & Silver has no

record of the transaction.

Ms. Stanbery testified at the trial in this case. No one

asked her about these transactions. Petitioner did not call any

witnesses from the billing service, the bank, or Clackamas Gold &

Silver to testify at the trial in this case. 

Section 165 allows a deduction for a theft loss sustained

during the taxable year and not compensated for by insurance or

otherwise. Sec. 165(a), (c)(3). Section 165(e) provides that

the deduction for such a loss is treated as sustained in the

taxable year in which the taxpayer discovers the loss. Thus, a

loss arising from theft is not deductible in the taxable year in

which the theft actually occurs unless that is also the year in
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which the taxpayer discovers the loss. Sec. 1.165-8(a)(2),

Income Tax Regs. 

Petitioner testified that he did not learn of the loss until

bank records for the refund account were obtained by the IRS in

the criminal investigation. The criminal investigation did not

begin until June 1994. We need not decide whether the purported

loss occurred, because, for purposes of section 165, the loss, if

any, was sustained in 1994, and petitioner is not entitled to a

deduction for the loss in the 1990 taxable year.

Issue IV. Whether Petitioner Is Liable for the Fraud Penalty

Under Section 6663 for the 1990, 1991, and 1992 Taxable Years

Respondent determined that petitioner is liable for an

addition to tax for fraud under section 6663(a) for each of the

years at issue. Section 6663(a)(1) provides: "If any part of

any underpayment of tax required to be shown on a return is due

to fraud, there shall be added to the tax an amount equal to 75

percent of the portion of the underpayment which is attributable

to fraud." Section 6663(b) provides that if the Secretary

establishes that any portion of the underpayment is due to fraud,

the entire underpayment is treated as fraudulent, except for the

portion the taxpayer proves is not attributable to fraud.

Fraud is intentional wrongdoing on the part of the taxpayer

with specific intent to avoid tax known to be owing. Bradford v.

Commissioner, 796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo.

1984-601; Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). The

Commissioner must prove fraud by clear and convincing evidence. 
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Sec. 7454(a); Rule 142(b). Where fraud is determined for more

than 1 year, the Commissioner's burden applies individually to

each year. Barbuto v. Commissioner, T.C. Memo. 1991-342 (citing

Estate of Stein v. Commissioner, 25 T.C. 940, 959-963 (1956),

affd. per curiam sub nom. Levine v. Commissioner, 250 F.2d 798

(2d Cir. 1958)). To satisfy the burden of proof, the

Commissioner must show two things: (1) An underpayment exists,

and (2) the taxpayer intended to evade taxes known to be owing by

conduct intended to conceal, mislead, or otherwise prevent the

collection of taxes. Parks v. Commissioner, 94 T.C. 654, 660-661

(1990); Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989). 

The first element requires respondent to establish the

existence of an underpayment of tax. To prove the underpayment

respondent cannot rely solely on petitioner's failure to

discharge his burden of proving error in respondent's

determination of deficiencies. Otsuki v. Commissioner, 53 T.C.

96, 106 (1969). Respondent may prove an underpayment by proving

a likely source of the unreported income, Holland v. United

States, 348 U.S. at 137-138, or, where the taxpayer alleges a

nontaxable source, by disproving the specific nontaxable source

so alleged, United States v. Massei, 355 U.S. 595 (1958).

Through the bank deposits method, respondent has proven

petitioner received income from his practice of radiology that he

did not report on his Federal income tax returns for each of the

years at issue. Additionally, petitioner took deductions for
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alimony to his former wife and payments to Ms. Stanbery to which

he was not entitled. The underreported income and improper

deductions would result in an underpayment of petitioner's taxes

for each of the years in issue. Therefore, we find that

respondent has satisfied the burden of proof regarding the first

element.

The second element requires respondent to prove fraudulent

intent on the part of petitioner. Fraud will never be presumed. 

Toussaint v. Commissioner, 743 F.2d 309, 312 (5th Cir. 1984),

affg. T.C. Memo. 1984-25; Beaver v. Commissioner, 55 T.C. 85, 92

(1970). Fraud, however, may be proved by circumstantial

evidence, because direct proof of a taxpayer's intent is rarely

available. The existence of fraud is a question of fact to be

determined on the basis of the entire record. Gajewski v.

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

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

Courts have developed various factors or "badges" that tend

to establish fraud. Recklitis v. Commissioner, 91 T.C. 874, 910

(1988). Although the list is nonexclusive, some of the factors

are: (1) A pattern of understatement of income; (2) inadequate

records; (3) concealment of assets; (4) income from illegal

activities; (5) attempting to conceal illegal activities; (6)

implausible or inconsistent explanations of behavior; (7) dealing

in cash; (8) failure to cooperate with the Internal Revenue

Service; and (9) failure to file tax returns. Bradford v.
- 20 -

4Petitioner reported taxable income on his returns of

approximately $50,000 in 1988, $385,828 in 1989, $701,215 in

1990, and $430,095 in 1991.

Commissioner, supra at 308; McGee v. Commissioner, 61 T.C. 249,

260 (1973), affd. 519 F.2d 1121 (5th Cir. 1975).

Petitioner acknowledges that he was irresponsible and

negligent in the manner in which he handled his business affairs

and by his failure to review his returns for the years in issue,

but he contends that he did not intend to evade taxes known to be

owing. Petitioner contends that the understatement of income for

1990 was caused by a combination of the increase in the volume of

procedures petitioner performed at the Highline Community

Hospital,4 the inadequate system previously set in place and used

by his accountant, and erroneous assumptions made by the

accountant regarding deductions for alimony, payment of rent, and

payments to Ms. Stanbery. The understatement of income for 1991

was caused by the accountant's improper use of income reported

for the Washington State excise tax, which the accountant had

estimated using petitioner's 1990 income and adjusted on the

assumption petitioner stopped practicing medicine at the end of

July 1991. Although the accountant may have told petitioner that

he was estimating the excise tax, there is no evidence that the

accountant told petitioner that he had prepared petitioner's

Federal income tax returns using the estimated excise tax. The

accountant prepared petitioner's 1992 based on Form 1099 and
- 21 -

petitioner's notes. The accountant had petitioner's bank

statements and canceled checks for 1991 and 1992, but he did not

bother to use them in preparing petitioner's returns for those

years. 

Petitioner admits that his bookkeeping was "abhorrent". The

method petitioner used, however, was established by his

accountant and used by the accountant for many years. The

accountant used petitioner's main bank statements and canceled

checks to prepare petitioner's returns. Petitioner provided

those records to the IRS during the audit of his return. 

Although the billing services provided petitioner with monthly

statements of his patients' receivables and collections,

petitioner did not keep those records. Respondent has not

proven, however, that petitioner destroyed or otherwise failed to

maintain those records in order to evade tax.

Petitioner purchased gold Krugerrands with substantial

amounts of cash during 1991. The IRS agent testified that he

assumed the cash came from petitioner's safe-deposit box. 

Although the IRS agent never determined where the cash came from,

the notice of deficiency did not include an increase in

petitioner's 1991 income attributable to the cash payments for

the gold. There is no evidence that any of petitioner's patients

paid in cash. Petitioner's fees were collected by his billing

service, and payments were deposited into petitioner's checking

account. 
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Based on all the evidence, we find that respondent has

failed to prove 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. 

We hold that petitioner is not liable for the fraud penalty under

section 6663(a) for any of the years at issue.

Issue V. Whether the Assessment and Collection of a Deficiency

for the 1990 Taxable Year Is Barred by the Statute of Limitations

Petitioner asserts that the 3-year period of limitations

bars respondent's assessment of the deficiency for the 1990

taxable year. Respondent contends that petitioner filed a false

or fraudulent return for the 1990 year, and therefore, under

section 6501(c)(1), the tax may be assessed at any time. Since

we have found no fraud, the section 6501(c)(1) exception to the

3-year period of limitations does not apply.

Respondent alternatively contends that section 6501(e)(1)(A)

applies to extend the limitations period for the 1990 taxable

year to 6 years. Petitioner concedes that the notice of

deficiency was issued within the 6-year period.

Section 6501(e)(1)(A) provides that "If the taxpayer omits

from gross income an amount properly includible therein which is

in excess of 25 percent of the amount of gross income stated in

the return, the tax may be assessed * * * at any time within 6

years after the return was filed." For purposes of the 6-year

limitations period, in the case of a trade or business, the term
- 23 -

"gross income" means the total of the amounts received from the

sale of services prior to diminution by the cost of such

services. Sec. 6501(e)(1)(A)(i).

For the 1990 taxable year, petitioner reported gross

receipts of $1,194,606 from his practice, plus $52,810 of

interest income and $5,309 of dividend income. Thus, for

purposes of section 6501(e)(1), petitioner reported $1,252,725 of

gross income on his 1990 return. Twenty-five percent of that

amount is $313,181.25. Petitioner failed to report $344,225 of

gross receipts from his practice, which is in excess of 25

percent of the gross income reported on the return. If

petitioner had suffered an embezzlement loss, the loss would not

reduce his gross income for purposes of the 6-year limitations

period. Sec. 6501(e)(1)(A)(i). Therefore, the 6-year period of

limitations under section 6501(e)(1) applies, and respondent is

not barred from assessing or collecting the deficiency in tax for

the 1990 taxable year.

Issue VI. Whether Petitioner Is Liable for the Accuracy-Related

Penalty Under Section 6662(a) for the 1990, 1991, and 1992

Taxable Years

In the notice of deficiency respondent determined that, if

the fraud penalty does not apply, petitioner is liable for the

accuracy-related penalty under section 6662(a) for negligence or

substantial understatement of tax for each of the years in issue. 

Petitioner admitted that he was negligent for the years at issue
- 24 -

Accordingly, respondent's determination is sustained for each of

the taxable years at issue.

To reflect the foregoing,

Decision will be entered

under Rule 155.