1Although the petition in the case at docket No. 22457-91

was filed on behalf of petitioners Jack S. Kramer and Maxine C.

Kramer, Jack S. Kramer and Jack J. Kramer are the same person.

 

2Mr. Soltz filed the original petitions on behalf of

petitioners in both cases. At trial, he made an oral motion in

the case at docket No. 22457-91 to dismiss for lack of jurisdiction as to Maxine C. Kramer. Mr. Soltz died after trial

without filing a brief on behalf of petitioners. 

 

3Although at trial Mr. Kaplan entered his appearance on

behalf of Jack J. Kramer in the case at docket No. 22785-90, he

represented petitioner only as a transitional figure after Mr.

Soltz's illness and eventual death; he did no substantive work on

petitioner's case and eventually withdrew as counsel.

T.C. Memo. 1996-513

UNITED STATES TAX COURT

JACK J. KRAMER, Petitioner v. COMMISSIONER OF

INTERNAL REVENUE, Respondent

JACK S. KRAMER1 AND MAXINE C. KRAMER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 22785-90, 22457-91. Filed November 19, 1996.

 Sidney A. Soltz,

2 for petitioners.

Stanley P. Kaplan,

3 for petitioner in docket No. 22785-90.
- 2 -

Kathleen L. Donohue, Ellen T. Friberg, and Eli J. Dicker,

for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge: Respondent determined deficiencies in

petitioners' Federal income taxes and additions to tax for the

taxable years 1985 to 1987 as follows:

1. Jack S. & Maxine C. Kramer--docket No. 22457-91

 Additions to Tax 

 Sec. Sec. Sec. 

Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(2)

1985 $25,766 $10,191.50 $2,304.75 1

 

1Equals 50 percent of interest due on the entire deficiency.

2. Jack J. Kramer--docket No. 22785-90

 Additions to Tax 

 Sec. Sec. Sec. Sec.

Year Deficiency 6653(b)(1)(A) 6653(b)(1)(B) 6654 6661

1986 $338,783 $254,087 1 $15,981 $84,696

1987 69,977 52,483 1 3,571 17,494

 

150 percent of the statutory interest applicable on $338,783 and $69,997

for 1986 and 1987, respectively, from the due date of the return to the date

of assessment of the tax or, if earlier, the date of the payment.

After concessions, the following deficiencies and additions

remain in dispute:

 Additions to Tax 

 Sec. Sec. Sec. 

Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(2)

1985 $25,177 $6,294.25 $2,275.30 1

 

1Equals 50 percent of interest due on the amount of the deficiency.
- 3 -

 Additions to Tax 

 Sec. Sec. Sec. Sec.

Year Deficiency 6653(b)(1)(A) 6653(b)(1)(B) 6654 6661

1986 $287,224 $368,323.70 1 $14,225.36 $71,806.00

1987 7,290 10,836.00 1 556.53 1,822.50

 

150 percent of the statutory interest applicable on $287,224 and $7,290

for 1986 and 1987, respectively, from the due date of the return to the date

of assessment of the tax or, if earlier, the date of the payment.

All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure, unless otherwise

indicated. All references to petitioner are to petitioner Jack

Kramer. All references to petitioners for tax year 1985 are to

petitioner and Maxine C. Kramer (Maxine), his wife.

The issues for consideration are: (1) Whether petitioners

are liable for a deficiency in income tax for tax year 1985, and

whether petitioner is so liable for tax years 1986 and 1987; (2)

whether petitioners are liable for additions to tax for failure

to file and negligence for 1985; and (3) whether petitioner is

liable for additions to tax for fraud, underpayment of estimated

tax, and substantial understatement for 1986 and 1987.

We hold, based upon the parties' stipulations, respondent's

concessions at trial, the entire record, and the findings below,

that petitioner has deficiencies that are less than those

recomputed by respondent for 1985 and 1986 and the same as

respondent recomputed for 1987. We also hold petitioner liable

for all determined additions computed on the reduced

deficiencies.
- 4 -

 

4Concurrently with the issuance of this opinion, we deny

petitioners' oral motion at trial to dismiss for lack of

jurisdiction as to petitioner Maxine C. Kramer in the case at

docket No. 22457-91.

We further hold, based upon the parties' stipulations,

respondent's concessions at trial, the entire record, and the

findings below, that Maxine has no deficiency for 1985 and is

therefore not liable for any additions to tax for that year.4

FINDINGS OF FACT

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

The stipulation of facts and attached exhibits are incorporated

herein. The cases were consolidated for trial, briefing, and

opinion.

When petitioners filed their petition for 1985, petitioner

resided in the Federal Correction Institution at Jesup, Georgia,

and Maxine resided in North Miami Beach, Florida. When

petitioner filed his petition for 1986 and 1987, he resided in

the Metropolitan Correctional Center, Miami, Florida. Throughout

1985-87, petitioner was married to Maxine; they divorced in 1993

after having lived separately since 1989. Petitioner and Maxine

have two children, Benjamin (Ben) and Mark. Ben is a convicted

drug smuggler, serving a life sentence without possibility of

parole. His younger brother, Mark, was convicted and

subsequently imprisoned for his role in attempting to help Ben

escape from Federal custody.
- 5 -

For 1985, after obtaining the appropriate extensions,

petitioner and Maxine signed and filed a Form 1040 that they

styled a "tentative return". The Form 1040 contained no detail

concerning income and deductions, although it did list $20,329 on

line 56 as the "total tax". The Form 1040 also displayed the

following legend at the bottom of page one: "Ongoing Grand Jury

Investigation May Materially Affect Tax Liability". Max Forman

(Forman), an accountant who performed services for Ben's

enterprises, signed the form as tax preparer. Petitioner was

aware of his obligation to file Federal income tax returns for

1986 and 1987, but he did not do so for either year.

1. Background

When respondent issued the notices of deficiency, petitioner

was serving a prison sentence stemming from his criminal

convictions on racketeering and associated charges of conspiracy

to commit racketeering and travel and use of facilities to

distribute the proceeds of unlawful activity. Petitioner had

participated in a series of schemes to launder the profits from

Ben's illegal marijuana smuggling operations.

Petitioner became involved in Ben's criminal enterprises as

early as 1977, after Ben was first arrested and convicted for

marijuana smuggling. Petitioner carried $80,000 in cash of Ben's

marijuana smuggling profits to Bel Air, California, to "invest"

in an enterprise controlled by Sam Gilbert. Ben received his

$80,000 back from an entity called Commercial Factors when he was
- 6 -

 

5Ben's share of these funds was $4 million. The other $8

million came from his partners in the drug smuggling enterprise,

Randy Lanier and "Tommy", also known as George Brock. By his own

testimony, petitioner was to control the laundering of these

funds. Petitioner and Ben met Tommy in New York in Sept. 1983 to

convince Tommy to invest in the Bell Gardens Bicycle Club, Inc.,

discussed infra.

released from prison in 1981. After this initial episode,

petitioner maintained a social and business relationship with Sam

Gilbert.

By November 1983, petitioner had become deeply involved in

laundering Ben's marijuana smuggling profits. He met with Sam

Gilbert in a Beverly Hills hotel to discuss a plan to launder $12

million in drug smuggling profits5 through a British Virgin

Islands (BVI) entity, to a bank in Liechtenstein. This bank

turned the funds into a seemingly legitimate "construction loan"

so that Ben, through various entities, was able to invest the

proceeds in the Bell Gardens Bicycle Club, Inc. (the card club),

a legal, State regulated gambling enterprise, without revealing

his participation. Another BVI entity, Troon Mortgage

Investments, N.V. (Troon Mortgage), run by Shaun (or Shawn)

Murphy (Murphy), subsequently held the note as a vehicle through

which Ben could recover the $12 million principal, 15 percent

interest on the loan, and an additional 15-percent "kicker". 

Ben and Sam Gilbert, along with M. Dale Lyon (Lyon) and

Michael Gilbert, the "front men" used to obtain the gambling

license for the card club, later formed the entities used to

conceal Ben's supposed ownership role in the card club. Sam
- 7 -

 

6Petitioner, as discussed infra pp. 13-14, would later

testify at the criminal trial of Michael Gilbert and Fainsbert as

a Government witness. Many of the findings for this background

story of petitioner's involvement in Ben's money laundering

activities are drawn from petitioner's testimony at this trial in

1993 and his similar testimony at the civil forfeiture trial

adjunct to his own criminal trial in 1991. Transcripts of

petitioner's testimony from those trials were made part of the

record in the trial of the cases at hand.

 

7In addition to signing petitioner's 1985 Form 1040 as

return preparer, Forman performed services for Ben's various

criminal enterprises, not the least of which was evaluating the

investment decisions concerning the card club, in which Ben and

his associates, with petitioner's assistance, invested $12

million.

 

8Allsworth, petitioner's longtime friend, served as attorney

to Ben's criminal enterprises, for which he was well paid from

petitioners' Safra Bank account (see infra pp. 16-17), especially

in 1986. Allsworth was listed as President of Hallandale

Residential Properties, Inc., the entity created to hold legal

title to the house that served as Ben's personal residence. 

Allsworth also was listed as the registered agent for the various

entities associated with the racing boat enterprise described

infra.

Gilbert's attorney, Stephen Fainsbert (Fainsbert), performed many

of the legal services necessary to create and operate these

entities.6

During early 1984, petitioner participated in several

meetings that monitored the card club's financing and

construction. He also used Forman's7 services and those of an

attorney, Emerson Allsworth8 (Allsworth), to oversee his and

Ben's financial interests. Both Allsworth and Forman, while not

initially involved in the actual money laundering, became

increasingly aware of the nature of the activities underlying the

card club's financing and Ben's actual ownership role.
- 8 -

 

9Super Chief South came into existence in Aug. 1985 and was

dissolved just 15 months later in Nov. 1986. Super Chief, Inc.,

was created in Jan. 1984 and not dissolved until 1992, well after

Ben, petitioner, and all of the others had been arrested, tried,

and convicted on various smuggling and money laundering charges.

The card club opened in October 1984. By 1985, Lyon and Sam

Gilbert were sending its profits, approximately $1.6 million over

the course of 1985 and 1986, back to Ben through their various

partnerships, such as LCP Associates. Some of these profits

flowed into a trust account controlled by Allsworth. Some went

directly to petitioner and some went through Allsworth's trust

account and then to petitioner. At least $505,000 flowed through

petitioners' joint checking account at Safra Bank in 1986. To

further conceal Ben's ownership role in the card club, some of

these payments took the form of "loans" to petitioner that he

signed for on what Allsworth called "drugstore pads". 

Throughout the early 1980's, Ben competitively raced

offshore power boats, an expensive sport popular in south Florida

at the time. In 1982, Ben created an entity, Apache Racing Team,

Inc., through which to conduct his boat racing and building

activities, although it was later administratively dissolved

while he was still racing and building powerboats. Other

entities were created on an ad hoc basis.9 Allsworth was

instrumental in creating many of these entities. Petitioner and

Ben used the term "Apache" generically when referring to many of

the entities connected with the offshore boat racing, and to
- 9 -

 

10Ben's attempts to conceal his ownership of the marina and

the card club destroyed his ability to later liquidate and

recover his interests. None of the entities that legally owned

the marina or the card club reflected Ben's ownership interest as

initially arranged with Sam Gilbert. The "safeguards" for Ben's

interests that Sam Gilbert put into place included holding the

resignation letters of the principals of Marina Bay Associates

and LCP Associates. But, as petitioner testified, the only real

safeguard was Ben's trust in Sam Gilbert. This meant that Ben

had no recourse but to accept the consequences when the Gilberts

reneged on their various arrangements with him. The Gilberts had

the upper hand until Federal agents seized the various assets,

beginning with the marina in Aug. 1987. See infra pp. 11-12. 

identify expenditures made on behalf of one or another of the

entities that supported some aspect of Ben's boat racing.

The most important of these entities was Fort Apache, Inc.

(Fort Apache), through which Ben and petitioner developed a

marina. They used Fort Apache to lease back the marina from

another entity known as Marina Bay Associates, ostensibly owned

by Lyon and Michael Gilbert. This partnership held legal title

to the marina in order to dissociate its assets from Ben's name. 

In order to allow Ben to fund marina development while still

concealing his ownership role, Lyon used a funding scheme similar

to that used for the card club.10 Petitioner, acting as Ben's

agent, became the president and sole board member of Fort Apache,

although without an independent ownership interest of his own.

Ben and petitioner wanted to use the marina to help them

persuade Lamborghini Motor Co. to custom-build high-performance

engines for the boats that Apache Boats, Inc., built for Ben to

race. Funds to purchase land for the marina came through

Allsworth's trust account. Len-Ed Construction, Inc. (Len-Ed), a
- 10 -

 

11Petitioner prepared to relocate to California to such a

degree that Michael Gilbert even leased a house for him. About

this time, in April 1984, petitioner broke his ankle in a boating

accident aboard one of Ben's new offshore power boats. The

severity of his injury effectively postponed petitioner's further

preparations to move to California for several months. Whether

the injury itself genuinely caused the change in petitioner's

eventual plans or merely served as a convenient excuse to keep

him out of California and away from the card club is unclear from

the record.

corporation partially owned by Len Dublin (Dublin), a longtime

friend of the Kramer family, built the marina, which eventually

opened in October 1985.

Petitioner participated in the money laundering schemes

because of a mixture of paternal loyalty, greed, and a desire for

an enhanced appearance of personal stature. Ben dominated

petitioner and exercised a powerful influence over petitioner in

his criminal activities. Ben continued to exercise that

influence over petitioner throughout the mid-1980's.

Ben's promise to petitioner of a large "salary", $360,000

per year, also helped entice petitioner to participate in these

schemes. The card club investment also provided petitioner with

the opportunity, at least in his own mind, to move to California

to oversee the Kramer interests and act as Ben's personal

representative.11

When British police arrested Murphy in Tortola, BVI, in

April 1986, the empire that petitioner had helped Ben build with

laundered proceeds of his drug smuggling activities began to come

apart. At about the same time, Ben's erstwhile partner, Sam
- 11 -

Gilbert, reneged on the terms of the note that Troon Mortgage

held on the card club by eliminating the 15-percent "kicker" on

the loan payments. Following Murphy's arrest, petitioner met

Lyon and Fainsbert at the Miami Marriott Hotel, ostensibly to

develop a plan for Ben to liquidate his interest in the marina. 

Lyon and Fainsbert, in Allsworth's presence, began dictating to

petitioner what would be done with the marina. Fainsbert also

informed petitioner at the same meeting that the "kicker" from

the card club had been eliminated. Petitioner protested

vociferously. But Fainsbert told him in no uncertain terms that

Sam Gilbert and Ben had already discussed and arranged this

change.

Ben and petitioner then decided to liquidate Ben's interest

in the card club and recover the $12 million investment by paying

off the note held by Troon Mortgage. Murphy's arrest prompted

petitioner to travel to Hong Kong in May or June 1986 to create

another entity to replace Troon Mortgage. Ben and petitioner

also attempted, albeit unsuccessfully, to liquidate Ben's

interest in the marina by selling it. As late as September or

October 1986, they had been unsuccessful at these efforts. 

Throughout most of 1987, petitioner participated in a convoluted

effort to recover $9.5 million of the original $12 million

investment in the card club. This effort ended in failure at a

meeting petitioner had in Zurich, Switzerland, in late October or

early November, with not clearly identified underworld figures.
- 12 -

In May 1987, in what was either a last ditch attempt to

conceal Ben's ownership of the marina, or the recognition that

the Gilberts had forced Ben out, petitioner abandoned management

of the marina and other boat racing assets to Michael Gilbert and

Marina Bay Associates. Ben's hopes of ever recovering his

investment in the marina terminated in August 1987, when Federal

law enforcement officials arrested him and seized the marina and

other Apache power boat entities and assets. By that time,

petitioner had moved to Atlantic City, where he and Maxine

remained through October 1987, in an effort to "get away from it

all".

For the remainder of 1987, petitioner, in addition to trying

to recover the $9.5 million from the card club investment,

delivered bank checks for $500,000 to Ben's criminal attorneys,

and $250,000 to his own attorney as retainers for services to be

rendered in the impending grand jury proceedings and criminal

trials. Petitioner also succeeded in funneling an additional $1

million into Apache Power Boats. These funds, which exceeded

$1.75 million, came through the same channels through which

petitioner had tried unsuccessfully to recover the card club

investment. 

In December 1989, Federal agents arrested petitioner. 

Petitioner was indicted, tried, and convicted for crimes

associated with the money laundering and other activities

described above, as well as others not specifically detailed
- 13 -

 

12Petitioner testified at the civil forfeiture trial adjunct

to his criminal trial that he lied at the deposition to protect

Allsworth, his longstanding friend and attorney for Ben's

criminal enterprise.

However, as he testified at the civil forfeiture trial on

cross-examination, petitioner was also apparently concerned about

the possible effects of his testimony on any possible criminal

indictment that could result against Maxine as well as on his own

exposure to further criminal prosecution.

Cross-examination at the civil forfeiture trial also brought

out that petitioner also lied to conceal the $9.5 million left in

limbo in Europe in the aftermath of petitioner's abortive

attempts to recover the card club investment. At the FainsbertMichael Gilbert criminal trial, he also testified to this lie.

 

13Petitioner denied that the Government offered him

inducements for his actual testimony at the Fainsbert/Michael

Gilbert criminal trial. He testified that the Government would

make a "recommendation" only to the judge about his future

incarceration.

here, sentenced to 19 years' imprisonment, and fined $200,000. A

lien for $9.5 million was recorded against petitioner.

In hopes of obtaining a lighter sentence, petitioner entered

into agreements to cooperate with authorities and testify at the

criminal trials of some of Ben's associates. The agreements were

never carried out because petitioner, by his own admission, lied

to the Government during the initial depositions.12 However,

petitioner ultimately did testify both at a civil forfeiture

trial adjunct to his own criminal trial and at the criminal trial

of Fainsbert and Michael Gilbert, in an effort to reduce his

sentence.13

2. The Tax Years in Issue.

During 1985-87, petitioner helped launder profits of Ben's

marijuana smuggling operations. During 1985 and 1986, as part of
- 14 -

 

14The payroll checks from SGA, while not necessarily for

services rendered, did provide support for petitioner during

1983-86.

the money laundering scheme, Sam Gilbert Associates, Inc. (SGA),

owned by Sam Gilbert, made payments to petitioner labeled "wages"

on W-2 Forms and withheld taxes therefrom.14 In 1987, petitioner

rendered services to Fort Apache, Inc., and received $17,000

wages, with taxes withheld. 

The Internal Revenue Service audited petitioner, first for

1986 and 1987, and then for 1985. During neither audit did

petitioner produce the books and records necessary to

substantiate items of income, gain, loss, or deduction. However,

some documentation was given to respondent during the audits. On

advice of counsel, petitioner did not cooperate with respondent

during the audit for 1986 and 1987. Because of the lack of

records and failure to cooperate by petitioner, respondent used

the bank deposits method to determine petitioner's income for the

3 years at issue.

During these 3 years, petitioner operated three bank

accounts in his and Maxine's names: Safra Bank joint checking

account (hereinafter Safra), Barnett Bank Joint Money Market

Account (hereinafter Barnett money market), and Barnett Bank

joint checking account (hereinafter Barnett joint checking). 

Safra was active beginning in December 1985, and closed in July

1987. The other two accounts remained open during the entire 3-

year period. Safra, and to a lesser extent Barnett money market,
- 15 -

 

15The tables summarize the inflows and outflows for the

three accounts, petitioner's explanations for some of these

transactions, and respondent's concessions on others.

were conduits through which large amounts of money flowed from

1985 to 1987. The record explains some, but not all, of these

flows.15 Petitioner earned interest, which he did not report as

income, on the deposits in these accounts during each of the 3

years. Petitioner used Barnett joint checking only for personal

purposes throughout the 3-year period.

During this period, petitioner had no other sources of funds

such as "cash hoards", except for an inheritance of $19,641 from

his mother, which was deposited into Barnett money market in

November-December 1985. In 1985, petitioner sold a house and

bought a condominium at Turnberry Isle, a luxury residential

community. Petitioner had a mortgage loan on the condominium

with payments of approximately $2,000 per month. He also owned a

1984 Mercedes automobile.

Profits from Ben's marijuana smuggling funded Fort Apache

while petitioner was its president. Petitioner disbursed funds

to Fort Apache and other of Ben's enterprises from deposits that

others, such as LCP Associates, made in Safra and Barnett money

market.

In December 1985, Len-Ed deposited $85,000 into Safra; 

$50,000 of this deposit went to two of the racing entities:

$35,000 to Apache Power Boats and $15,000 to Team Apache. The

remainder of the funds in that account rolled over into 1986. In
- 16 -

1985, petitioner also disbursed a total of $29,465.80 from

Barnett money market to support the racing efforts. However,

petitioner never explained or established the source of these

funds. The $85,000 in Safra could not have been so used because

it was deposited in December 1985, and the Barnett expenditures

were made during February-December 1985. The record does not

show a transfer between the two accounts. Tables 1 through 3 in

the appendix detail these transactions. Table 4 reconstructs the

bank deposits and summarizes the various explanations; as set

forth therein, petitioner's net unexplained bank deposits amount

to $29,480.75 for 1985. Table 5 calculates petitioner's taxable

income for 1985 based upon the net unexplained bank deposits and

items of income and deductions that the parties stipulated to or

were included in respondent's notice of deficiency for that year.

 The bulk of the unexplained bank deposits at issue were

deposited and disbursed in 1986, largely through Safra. 

Virtually all the disbursed funds supported some aspect of the

powerboat racing entities. Petitioner disbursed funds for

freight delivery, insurance, advertising, work on the boats, and

rigger services. Petitioner also disbursed $100,000 to Len-Ed as

payment for services related to construction of the marina. 

Dublin was a designated recipient for a portion of the $505,000

that LCP Associates, controlled by Lyon and others, deposited in

Safra during April as part of Ben's remittances from the card

club profits.
- 17 -

Petitioner disbursed funds totaling $50,628.44 from Safra to

Allsworth on a regular basis throughout 1986, either into

Allsworth's trust account or to him personally. Some of these

payments supplemented the marina land purchase that Allsworth

made with funds that he received directly from LCP Associates.

Of the funds deposited into Safra during 1986, $200,000 came

from a loan from Safra Bank. Respondent made no adjustment with

respect to those funds in the notice of deficiency for 1986 and

1987. The funds were deposited into the account in July and

August. The loan covered the $93,582 overdraft on Safra that

existed at the end of June 1986. Disbursements made in June,

which total $206,500 and remain unexplained by the record, caused

the overdraft. The unexplained deposits for 1986, summarized in

Table 9, are decreased by the amount of the loan.

None of the 11 debits to the account in June 1986 was

smaller than $2,000 and all were for amounts rounded to the

nearest thousand or five hundred dollars. The largest debits

were for $50,000 (two checks for that amount), $30,000, and

$20,000 (two checks for that amount). By the end of 1986,

petitioner had disbursed all the funds that had been deposited

during December 1985-October 1986.

Based upon exhibits stipulated by both parties, the total

deposits into Safra during 1986 exceed by $75,200 the amount

reported on Schedule C in respondent's notice of deficiency for

1986 and 1987.
- 18 -

Petitioner explained only $14,230.89 of the $133,523.32 that

petitioner and Maxine disbursed from Barnett money market in

1986. The $14,230.89 represents expenditures for accounting

services for Ben's enterprises or for the racing boat

enterprises. The source of another $30,204.45 is undisputed: a

refund check from the IRS.

Table 9 reconstructs the bank deposits for 1986 and

summarizes the various explanations; as set forth therein,

petitioner had net unexplained bank deposits of $99,077.39 for

1986. Table 10, using income and deductions stipulated by the

parties, or calculated in respondent's notice of deficiency for

1986 and 1987, calculates petitioner's taxable income for 1986.

In 1987, the Safra account was inactive and closed in July

of that year. No deposits were made other than one for $400 to

correct an overdraft.

During 1987, Barnett money market continued to be active. 

However, only $4,175 was deposited into the account, while

petitioner spent $12,650.93 supporting Ben's enterprises. Since

the expenditures tend to explain the deposits, only $4,175 is

credited to explaining 1987 deposits. The balance is applied to

explaining their source: the 1986 deposits. Petitioner's

disbursements from this account paid Apache Power Boat's building

rental and $4,850.93 for property taxes for Ben's property. 

Funds also went to Allsworth's trust account.

Respondent conceded a $150,000 loan from petitioner's

sister-in-law used to post petitioner's bail. This corresponds
- 19 -

to a $150,000 deposit made into Barnett joint checking in

December and a check written for the same amount on the same day. 

Based upon the exhibits, the total deposits made into Barnett

joint checking exceed by $10,000 the amount shown in respondent's

notice of deficiency for 1986 and 1987 as having been deposited

into the account.

Table 14 reconstructs the net unexplained deposits for 1987,

$41,899.34, based on the record. Because the parties stipulated

a smaller amount, $36,088, we use that lesser figure attributable

to unexplained bank deposits to calculate petitioner's taxable

income for 1987. Table 15 calculates petitioner's taxable income

for 1987 based upon the stipulated unexplained bank deposits and

income items and deductions that either the parties stipulated or

respondent used in her notice of deficiency for 1986 and 1987.

Based upon respondent's concessions and the above findings

of fact, the unexplained bank deposits included in petitioner's

gross income for each year are:

1985 $29,480.75 (From Table 4)

1986 99,077.39 (From Table 9)

1987 36,088.00 (From Table 14)

Based upon respondent's statutory notices of deficiency, her

concessions, and the unexplained bank deposits, petitioner's

income and deductions are:
- 20 -

 Item 19851 19862 19873

Net unexplained

 bank deposits $29,480.75 $99,077.39 $36,088

Wages 32,199.00 34,020.00 17,000

Interest income 11,777.00 7,922.00 388

Other income 3,468.00 - 0 - - 0 -

Gross income 76,924.75 141,019.39 53,476

Stipulated 

 deductions (28,044.00) (31,362.92) (23,394)

Taxable income 48,880.75 109,656.47 30,082

1From Table 5.

2From Table 10.

3From Table 15.

OPINION

The convoluted facts and missing records in these cases,

attributable in part to the criminality of petitioner's

activities, have resulted in a fragmentary record, all the gaps

in which have not been fully explained by the parties.

Petitioner's counsel, Mr. Soltz, became ill shortly after

trial, and died without filing a brief. Although Mr. Soltz had

originally associated with Mr. Kaplan to obtain his help in

preparing a brief, we granted Mr. Kaplan's motion to withdraw,

filed shortly after Mr. Soltz's death. Petitioner did not retain

new counsel and declined to file an answering brief, citing his

limited education. Respondent then decided not to file a reply

brief.
- 21 -

 

16These differences and the failure of those exhibits to

fully substantiate the amounts that respondent presents in the

notices of deficiency bring up the issue of who bears what

burden, especially in regard to the accuracy of the computations

in the notice of deficiency.

Judge Tannenwald, in his concurring opinion in Llorente v.

Commissioner, 74 T.C. 260, 275 (1980) (Tannenwald, J.,

concurring), affd. in part and revd. and remanded in part 649

F.2d 152 (2d Cir. 1981), wrote that "All of the decided cases are

in agreement that the presumption of correctness of a notice of

deficiency does not cause the notice to be evidence as such, and,

that, at least initially, the taxpayer has the burden of proof." 

(Citations omitted.) He later wrote that "This Court has

consistently made it clear that, even in cases involving

unreported income, we will only shift to respondent the burden of

coming forward with evidence". O'Reilly v. Commissioner, T.C.

Memo. 1994-61. In the seminal unreported income from illegal

activities case, Weimerskirch v. Commissioner, 596 F.2d 358, 361

(9th Cir. 1979), revg. 67 T.C. 672 (1977), the Commissioner

failed to produce any records to "substantiate the computations

made by the IRS agent", which was one component of a decision by

the Court of Appeals for the Ninth Circuit to require some

linkage between the taxpayer's unreported income and alleged

illegal activity.

The situation here is somewhat different. Respondent made

deficiency determinations and then conceded certain items. She

also stipulated to the bank exhibit records, thus satisfying her

burden of coming forward with evidence. A problem arises because

that evidence does not match the determinations in the notices of

deficiency, and respondent's brief does not explain the

differences. However, for the reasons described above, the

burden of proof has not shifted from petitioner.

Respondent's opening and only brief does not reconcile the

differences between respondent's notices of deficiency and the

stipulated bank record exhibits.16 As a starting place for the

deficiency calculations, Schedules C in the deficiency notices

listed certain amounts as the total deposits, from which the net

unexplained bank deposits were then calculated. For 1986, these
- 22 -

amounts do not correspond to the total deposits recorded in the

bank records. The record indicates that the deposits for that

year total $1,043,161.86. Schedule C of the notice of deficiency

for 1986 and 1987 shows the total deposits in the three accounts

to be $975,648.36. Nothing in the record or respondent's brief

explains this difference or why respondent determined the numbers

she did. The amounts of respondent's concessions and how she

arrived at them are also unclear.

In the stipulations, respondent claimed $593,716 in

unexplained deposits for 1986, which petitioner denied. But,

based on the record, and using respondent's concessions and known

non-income items, that number cannot be reconciled with the

actual deposits in that year, nor can it be reconciled with

respondent's total for the 1986 deposits. Because petitioner

denies the income, the $593,716 has not been stipulated by the

parties.

We are presented with a similar problem for 1987, although,

as shown in tables 13 and 14, the cause seems to be arithmetical

error in one case and an oversight in the other. Respondent also

never explained her stipulation that the 1987 unexplained bank

deposits were only $36,088. Using the bank records as a starting

point, the record supports a different and slightly larger

number, $41,899.34. In determining the unexplained bank deposits

for each of the years, we went back to the bank deposits, as

listed in the record, to recalculate the amounts that remain
- 23 -

unexplained based upon the record and concessions made by

respondent. Tables 4, 9, and 14 summarize the unexplained

deposits and expenditures for the 3 years.

Issue 1. Deficiencies in 1985, 1986, and 1987

Section 61 provides the general rule that gross income

includes income from whatever source derived. To facilitate

calculating that income, section 6001, as interpreted by section

1.6001-1(b), Income Tax Regs., requires taxpayers "to keep such

records as will enable the district director to determine the

correct amount". In the absence of such records, respondent may

use indirect methods of proof of income such as the bank deposits

method. DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd.

959 F.2d 16 (2d Cir. 1992); Petzoldt v. Commissioner, 92 T.C.

661, 687 (1989); Estate of Mason v. Commissioner, 64 T.C. 651,

657 (1975), affd. 566 F.2d 2 (6th Cir. 1977); Estate of Hague v.

Commissioner, 45 B.T.A. 104 (1941), affd. 132 F.2d 775 (2d Cir.

1943), affd. sub nom. Commissioner v. Uniacke, 132 F.2d 781 (2d

Cir. 1942). Respondent's determinations are entitled to a

presumption of correctness, and petitioner bears the burden of

proof to rebut that presumption by a preponderance of the

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

see also Reid v. Commissioner, T.C. Memo. 1974-185, affd. without

published opinion 516 F.2d 896 (2d Cir. 1975) (using the bank

deposits method, deducting identifiable items, and regarding the

rest as unexplained deposits and thus taxable income, puts the
- 24 -

burden of proof on petitioner). Respondent's concessions on one

or more issues do not destroy the presumption of correctness, nor

do they shift the burden of proof on issues remaining in dispute. 

United States Holding Co. v. Commissioner, 44 T.C. 323, 328

(1965); see also Mensik v. Commissioner, 37 T.C. 703, 725 (1962),

affd. 328 F.2d 147 (7th Cir. 1964); Gobins v. Commissioner, 18

T.C. 1159, 1168-1169 (1952), affd. 217 F.2d 952 (9th Cir. 1954)

(concessions by the Commissioner in an unexplained bank deposit

case did not destroy the presumption of correctness of the

deficiency, nor did it shift the burden of proof to the

Commissioner).

Ordinarily, the presumption of correctness does not allow

"looking behind the notice of deficiency to examine the evidence

used by the Commissioner". Petzoldt v. Commissioner, supra at

687-688 (citing Weimerskirch v. Commissioner, 596 F.2d 358 (9th

Cir. 1979), revg. 67 T.C. 672 (1977)). However, for cases

involving illegal activity as the source of income, the Court of

Appeals for the Eleventh Circuit has adopted the Weimerskirch

doctrine, which requires both an evidentiary linkage of illegal

income-producing activity with the deficiency determination,

Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993),

affg. T.C. Memo. 1991-636 (citing Weimerskirch v. Commissioner,

supra at 362), and records to substantiate the IRS
- 25 -

 

17As discussed supra pp. 20-22, respondent did not

substantiate her deficiency calculations and stipulated evidence

that would support different--although not necessarily smaller--

amounts. But the evidence does substantiate the order of

magnitude of the IRS computations. The differences are

relatively insignificant (the biggest discrepancy is the $75,200

understatement by the statutory notice of deficiency for 1986 and

1987 as compared to the bank records, which is less than 10

percent of the actual deposits of $849,128).

computations.17 Weimerskirch v. Commissioner, supra at 361; see

also Hobart v. Commissioner, T.C. Memo. 1995-517. But, the

required showing of an evidentiary linkage is only "minimal",

Blohm v. Commissioner, supra at 1549 (citing Carson v. United

States, 560 F.2d 693, 697 (5th Cir. 1977) (quoting Gerardo v.

Commissioner, 552 F.2d 549, 554 (3d Cir. 1977), affg. in part and

revg. in part T.C. Memo. 1975-341)), and petitioner's admitted

participation in money laundering on Ben's behalf clearly

provides such a linkage. Petitioner's admission establishes not

only that he was linked to illegal activity, but that he received

income from that illegal activity. Much of the funds that flowed

through Safra and Barnett money market in 1985 and 1986 came from

the card club through LCP Associates.

Because of the "obvious intent of that Congress to tax

income derived from both legal and illegal sources, to remove the

incongruity of having the gains of the honest laborer taxed and

the gains of the dishonest immune", funds from illegal sources

have long been considered taxable income. James v. United

States, 366 U.S. 213, 218 (1961) (quoting Rutkin v. United

States, 343 U.S. 130, 138 (1952)). However, in James v. United
- 26 -

States, supra (citing Commissioner v. Glenshaw Glass Co., 348

U.S. 426, 431 (1955)), as in other cases, the wrongdoer obtained

"complete dominion" over his illegal gains. 

If petitioner could show that he accrued no gain or benefit

and had mere dominion over the funds without control, he could

rebut the presumption that the funds are taxable income to him. 

Brittingham v. Commissioner, 57 T.C. 91, 101 (1971). Petitioner

posits just that theory: While he admits that the source of

funds was illegal, he maintains that Safra and to a lesser extent

Barnett money market were mere conduits for funds that supported

the various enterprises that Ben caused to be created to launder

the proceeds of his illegal marijuana smuggling. Petitioner

argues that he lacked the requisite dominion and control because

he was not free to use the funds at will. See Ianniello v.

Commissioner, 98 T.C. 165, 173 (1992) (citing Rutkin v. United

States, supra at 137).

Petitioner relies upon his own testimony as his primary

proof. "Undoubtedly, as a general rule, positive testimony as to

a particular fact, uncontradicted by any one, should control the

decision of the court; but that rule admits of many exceptions", 

Quock Ting v. United States, 140 U.S. 417, 420 (1891); Greenfeld

v. Commissioner, 165 F.2d 318, 319-320 (4th Cir. 1947), affg. a

Memorandum Opinion of this Court dated Feb. 26, 1947, and courts

are not obliged to accept testimony of interested parties that is

not credible and is not corroborated by any other evidence. 
- 27 -

Davis v. Commissioner, 88 T.C. 122, 141-142 (1987), affd. 866

F.2d 852 (6th Cir. 1989); see also Anaya v. Commissioner, T.C.

Memo. 1991-91, affd. 983 F.2d 186 (10th Cir. 1993). However,

that is not the case here.

Petitioner corroborated his testimony on the use of the bank

deposits with bank statements for each of the three accounts and

exhibits summarizing various annotated checks. His testimony at

the trial in these cases is consistent with his earlier testimony

in the criminal trial of his former associates Michael Gilbert

and Fainsbert and the civil forfeiture trial adjunct to his own

criminal trial. The flows of funds that petitioner did explain

were almost exclusively directed towards the entities associated

with Ben's powerboat racing, paying Allsworth for his legal and

other services, and paying for other costs that Ben had incurred. 

As in Brittingham v. Commissioner, the facts are persuasive. 

Petitioner's testimony, corroborated as it is, constitutes

compelling evidence that tips "the scales in * * * [petitioner's]

favor", Brittingham v. Commissioner, supra at 101, and, insofar

as these particular expenditures are concerned, enables him to

meet his burden of proof.

Respondent did not controvert petitioner's testimony that he

made each of these disbursements at Ben's behest. Respondent

also did not dispute petitioner's assertion that Ben, not he,

controlled and owned the various Apache enterprises. 

Respondent's failure on this count is telling because the
- 28 -

circumstantial evidence strongly corroborates petitioner's story. 

The May 1986 meeting in which Fainsbert told petitioner that the

15-percent "kicker" had been eliminated is just one instance of

petitioner as a subordinate participant being presented with a

fait accompli. Another such instance is how, after breaking his

ankle in the boating accident, petitioner never went to

California to assume the role he had sought as overseer of Ben's

investment in the card club, see supra note 11. These incidents

help to demonstrate the tenuousness of petitioner's position in

Ben's enterprises and his lack of any real ownership interest in

them. Also persuasive to us is petitioner's lack of involvement

in the underlying drug smuggling activities.

 Even after accepting petitioner's explanations for the

disbursements to and from the various bank accounts, significant

amounts still remain unaccounted for and unexplained in each of

the 3 years. Petitioner failed to discharge his burden of proof

with regard to all the funds that came into his accounts. 

Indeed, petitioner used funds from Barnett joint checking

exclusively for his own personal use. Only one deposit in that

account is not income: a $150,000 loan to petitioner by his

sister-in-law. The record does show that funds going through

Safra, and, to a lesser extent, Barnett money market, came from

the card club via LCP Associates and other entities. But,

without more, merely showing the source is insufficient to rebut

the presumption that they were income to petitioner. 
- 29 -

Accordingly, we find that petitioner has unexplained bank

deposits in the amounts set forth in our concluding findings,

with resulting decreased deficiencies for 1985 and 1986. The

unexplained deposits for 1987 are as the parties have stipulated

for that year.

Issue 2. Additions to Tax for 1985

a. Failure to file a return--section 6651

Section 6011(a) requires that "any person made liable for

any tax * * * shall make a return or statement according to the

forms and regulations prescribed by the Secretary." Treasury

regulations require that returns contain "therein the information

required by the applicable regulations or forms." Sec. 1.6011-

1(a), Income Tax Regs. Failure to file a return subjects a

taxpayer to additions to tax under section 6651(a)(1) of "5

percent for each additional month * * * not exceeding 25

percent".

To be a return that starts the period of limitations, a

document must "purport to be a specific statement of the items of

income, deductions, and credits in compliance with the statutory

duty to report information and `to have that effect it must

honestly and reasonably be intended as such'". Beard v.

Commissioner, 82 T.C. 766, 778 (1984), affd. 793 F.2d 139 (6th

Cir 1986) (quoting Florsheim Bros. Drygoods Co. v. United States,

280 U.S. 453, 462 (1930)). However, a document may be sufficient

to be a return, even if not perfectly accurate or complete, "if
- 30 -

 

18"Each taxpayer should carefully prepare his return and set

forth fully and clearly the information required to be included

therein. Returns which have not been so prepared will not be

accepted as meeting the requirements of the Code." Sec. 1.6011-

1(b), Income Tax Regs.

it purports to be a return, is sworn to as such * * * and evinces

an honest and genuine endeavor to satisfy the law. This is so

[even] though at the time of filing the omissions or inaccuracies

are such as to make amendment necessary." Zellerbach Paper Co.

v. Helvering, 293 U.S. 172, 180 (1934).

In 1985, petitioner filed appropriate extensions and

eventually filed what he labeled a "tentative return" on a Form

1040. The document did not include any information on income,

deductions, credits or exclusions, although it did list $20,329

in line 56 as the "total tax". It also displayed the legend:

"Ongoing Grand Jury Investigation May Materially Affect Tax

Liability". Even with an "estimated tax" listed in the "total

tax" line, the form still lacked the minimum information

prescribed by the regulations.18 It did not evince an honest and

genuine endeavor to satisfy the law. Id.; see also, e.g., Porth

v. United States 426 F.2d 519, 522-523 (10th Cir. 1970) (name and

address on a form is insufficient to be a valid return because it

fails to "contain any information relating to the taxpayer's

income from which the tax can be computed * * * within the

meaning of the Internal Revenue Code or the regulations adopted

by the Commissioner"); United States v. Jordan, 508 F.2d 750, 752

(7th Cir. 1975) (same); Ross v. Commissioner, T.C. Memo. 1984-27
- 31 -

(return form without information with which to calculate a tax

liability, containing approximately 60 references to "Object Self

Incrimination" is not a tax return).

A taxpayer who fails to file a return bears the burden of

showing that: (1) His failure to file did not result from 

"willful neglect"; and (2) he had reasonable cause for failure to

file the return. Sec. 6651(a)(1); United States v. Boyle, 469

U.S. 241, 245 (1985). United States v. Boyle, supra at 245-246,

defines willful neglect as "a conscious, intentional failure or

reckless indifference." Whether petitioner's filing of the

"tentative return" sufficiently rebuts the presumption of "a

conscious, intentional failure" is a question of fact on which

petitioner presented no evidence.

Petitioner must also show, by a preponderance of the

evidence, that he had reasonable cause to fail to file a return,

a question determined in the "instant circumstances". Id. at

246-247. Petitioner presented no evidence on this point beyond

submitting the "tentative return" as an exhibit, perhaps in an

attempt to allow us to draw an inference that his uncertainty

regarding the outcome of an ongoing criminal investigation

constituted reasonable cause not to file a return. Any argument

along that line must fail. Pending criminal investigations do

not excuse a failure to file a return, United States v. Sullivan,

274 U.S. 259 (1927); United States v. Malquist, 791 F.2d 1399
- 32 -

(9th Cir. 1986), even if the taxpayer is asserting his Fifth

Amendment privilege against self-incrimination, see Kirschbaum v.

Commissioner, T.C. Memo. 1989-526. The least a taxpayer must do

to cause the period of limitations to start to run is to file an

appropriate return and then assert the Fifth Amendment privilege

against self-incrimination by refusing to answer specific

questions. United States v. Egan, 459 F.2d 997, 998 (2d Cir.

1972). Petitioner failed to do that. His omissions of data on

income, deductions, and credits and cloaking that omission with

the legend on the form demonstrate an attempt not to disclose

more than the Government might ultimately find in the criminal

investigation. Those omissions do not discharge petitioner's

obligation to provide respondent with sufficient data from which

his income tax liability can be computed. United States v.

Daly, 481 F.2d 28, 29-30 (8th Cir. 1973); Porth v. United States,

supra at 523; Reiff v. Commissioner, 77 T.C. 1169, 1178-1179

(1981).

Accordingly, we find that petitioner failed to show either

that he had reasonable cause not to file a return or that his

failure to file was not due to willful neglect. Petitioner is

therefore liable for the addition to tax under section 6651(a)(1)

for 1985.

b. Additions to tax for negligence--section 6653(a)

Respondent also determined a 5-percent penalty on

underpayments under section 6653(a)(1) and an additional penalty
- 33 -

of 50 percent of interest due on the underpayment under section

6653(a)(2), based on her determination of petitioner's

negligence. Section 6653(c)(1) defines an underpayment as, among

other things, a deficiency as defined in section 6211(a). As

discussed supra in Issue 1, we find that there will be a reduced

deficiency against petitioner for 1985.

Section 6653(a), as applicable to the 1985 tax year, does

not define negligence. It makes no real distinction between

negligence and "disregard of rules and regulations". For

purposes of this section, courts have generally followed Marcello

v. Commissioner, 380 F.2d 494, 506 (5th Cir. 1967), affg. in part

and revg. and remanding in part 43 T.C. 168 (1964), in holding

that "Negligence is lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances". See also Neely v. Commissioner, 85 T.C. 934, 947

(1985). Respondent determined the negligence additions in light

of petitioner's admitted failure to maintain adequate records

during 1985; such failure supports and sustains a finding of

negligence. Harris v. Commissioner, 745 F.2d 378 (6th Cir.

1984), affg. T.C. Memo. 1982-410; Mack v. Commissioner, 429 F.2d

182, 184 (6th Cir. 1970) (citing Marcello v. Commissioner, 380

F.2d at 506-507, 509, 511), affg. T.C. Memo. 1969-26; Cox v.

Commissioner, 54 T.C. 1735, 1745 (1970) (Court found negligence

based upon the failure to keep adequate records in light of the

total record). The record herein strongly supports the
- 34 -

conclusion. That the parties stipulated the lack of records

during the audit and respondent used the indirect bank deposits

method to show income further demonstrate that petitioner failed

to maintain adequate records. 

Petitioner bears the burden of proof to show that he was not

negligent. Rule 142(a); Patterson v. Commissioner, 740 F.2d 927,

930 (11th Cir. 1984)(citing Marcello v. Commissioner, 380 F.2d at

506-507), affg. T.C. Memo. 1983-655. Petitioner must furnish

evidence to show that he exercised reasonable care--in this case

by showing that he did indeed keep adequate records. However,

petitioner never addressed this issue on the record at trial, and

of course, he has not filed a brief. In view of the lack of

evidence rebutting respondent's determination, we find that

petitioner is liable for the additions to tax under sections

6653(a)(1) and (2), based upon the deficiencies to be determined

in the Rule 155 computation.

Issue 3. Additions to Tax for 1986 and 1987

Respondent determined that petitioner was liable for

additions to tax under three different Code sections: (1) section

6653(b) for civil fraud; (2) section 6661 for failing to pay

estimated tax; and (3) section 6654 for substantial underpayment

of tax.

a. Civil tax fraud--section 6653(b)

The addition to tax for fraud is a civil sanction provided

primarily to safeguard the revenue and recoup the heavy costs of
- 35 -

 

19The Court of Appeals for the Fourth Circuit recently

reaffirmed the principle of Helvering v. Mitchell, 303 U.S. 391,

401 (1938), that the civil tax fraud addition does not result in

double jeopardy in the wake of more recent Supreme Court

decisions that seemingly called that principle into question. 

Thomas v. Commissioner, 62 F.3d 97 (4th Cir. 1995), affg. T.C.

Memo. 1994-128; see also McNichols v. Commissioner, 13 F.3d 432,

434-435 (1st. Cir. 1993) (rejecting taxpayer's argument, citing

"an insurmountable wall of cases" beginning with Helvering v.

Mitchell, supra, and then distinguishing civil forfeiture as

entirely distinct from civil tax liabilities), affg. T.C. Memo.

1993-61; United States v. Alt, 83 F.3d 779, 782 (6th Cir. 1996)

(quoting United States v. Halper, 490 U.S. 435, 446 (1989): "the

Government is entitled to rough remedial justice, that is, it may

demand compensation according to somewhat imprecise formulas

* * * without being deemed to have imposed a second punishment

for the purpose of double jeopardy analysis"); United States v.

Brennick, 908 F. Supp. 1004, 1009 (D. Mass. 1995) (reaffirms the

continuing vitality of Helvering v. Mitchell in the wake of

recent Supreme Court decisions in United States v. Halper, supra,

Montana DOR v. Kurth Ranch, 511 U.S. 767 (1994), and Austin v.

United States, 509 U.S. 602 (1993), noting that the Supreme Court

approval of Mitchell in Halper and Kurth Ranch "strongly

indicates that the Court did not intend to overturn Helvering [v.

Mitchell] sub silentio"); Ianniello v. Commissioner, 98 T.C. 165

(1992).

investigating tax fraud. Helvering v. Mitchell, 303 U.S. 391,

401 (1938); see also Zand v. Commissioner, T.C. Memo. 1996-19;

Hobart v. Commissioner, T.C. Memo. 1995-517. These policies

undergirding the additions for civil tax fraud obviate any

challenges based on theories of double jeopardy and excessive

fines arising from the forfeiture proceedings and petitioner's

criminal trial, and the loss of liberty and fines stemming

therefrom.19
- 36 -

For the 2 tax years at issue, the fraud additions under

6653(b)(1) are two-fold. First, a taxpayer is liable for 75

percent of the underpayment attributable to fraud. Sec.

6653(b)(1)(A). However, that effectively means that the taxpayer

who fails to show that part of the underpayment is not

attributable to fraud can be liable for 75 percent of the entire

underpayment. Sec. 6653(b)(2). Second, section 6653(b)(1)(B)

calls for an addition equal to 50 percent of the interest payable

on that underpayment under section 6601(a).

Section 6653(b)(1) requires the presence of two elements for

a finding of civil tax fraud: underpayment of tax and fraudulent

intent. Respondent bears the burden of proof on the issue of

existence of fraud, sec. 7454(a); Rule 142(b), and can meet that

burden by presenting a prima facie case of clear and convincing

evidence. DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), affd.

on other issues 959 F.2d 16 (2d Cir. 1992); Smith v.

Commissioner, 91 T.C. 1049, 1053 n.3 (1988) (citing Rickard v.

Commissioner, 15 B.T.A. 316, 317 (1929)), affd. 926 F.2d 1470

(6th Cir. 1991); see also Manton v. Commissioner, a Memorandum

Opinion of this Court dated Nov. 22, 1948. The existence of

fraud is a question of fact that we must resolve separately for

each year upon considering the entire record. Recklitis v.

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

Commissioner, 294 F.2d 541, 547 (7th Cir. 1961), affg. T.C. Memo.

1960-11.
- 37 -

i. Existence of an underpayment

In addition to proving fraudulent intent, respondent bears

the burden of proving, by clear and convincing evidence, that

there is an underpayment. Sec. 7454(a); Rule 142(b); DiLeo v.

Commissioner, supra at 873. Section 6653(c)(1) defines an

underpayment for the purposes of section 6653 as a deficiency as

defined by section 6211. However, as in Franklin v.

Commissioner, T.C. Memo. 1993-184, respondent presented little

evidence at trial and little argument in her brief as to the

existence and amounts of the underpayments.

Respondent did adduce considerable evidence that petitioner

had large, unreported bank deposits in 1986 and 1987. For 1986,

the parties also stipulated that petitioner received income from

wages and interest, which also explained some of the deposits. 

Respondent further conceded that transfers and the $200,000 loan

from Safra Bank explained still more of the bank deposits,

because they were not includable in income. Petitioner's own

corroborated explanations for the expenditure of much of the

money that flowed through the three accounts in 1986 accounted

for another portion of the bank deposits as nontaxable income. 

Only $99,077.39 of the bank deposits for 1986, along with

stipulated sources of income and deductions, form clear and

convincing evidence of taxable income of $109,656.47, upon which

a deficiency may be calculated.
- 38 -

In 1987, the parties stipulated the unexplained bank

deposits were $36,088. They also stipulated items of income and

deductions such that petitioner's taxable income in 1987 upon

which the deficiency is calculated is $30,082.

ii. Fraudulent intent

The Code does not specifically define fraudulent intent. 

However, courts have developed a working definition of fraudulent

intent as the "`actual, intentional wrongdoing, and the intent

required is the specific purpose to evade a tax believed to be

owing'". Estate of Temple v. Commissioner, 67 T.C. 143, 159

(1976) (quoting Mitchell v. Commissioner, 118 F.2d 308, 310 (5th

Cir. 1941), revg. 40 B.T.A. 424 (1939)); see also Chin v.

Commissioner, T.C. Memo. 1994-54. 

Fraudulent intent may never be imputed or assumed, but must

be proven by independent evidence. Recklitis v. Commissioner,

supra at 909-910 (citing Beaver v. Commissioner, 55 T.C. 85, 92

(1970)); see also Rowlee v. Commissioner, 80 T.C. 1111, 1123

(1983); Stone v. Commissioner, 56 T.C. 213, 224 (1971). Because

direct proof is often difficult to obtain, respondent may use

circumstantial evidence. Spies v. United States, 317 U.S. 492,

499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1005-1006

(1982), affd. 748 F.2d 331 (6th Cir. 1984); see also Powell v.

Granquist, 252 F.2d 56, 61 (9th Cir. 1958); Gajewski v.

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

opinion 578 F.2d 1383 (8th Cir. 1978).
- 39 -

(a) The badges of fraud

To that end, courts have, in the past, developed a nonexhaustive list of the "badges of fraud". Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.

1984-601; Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir.

1990), affg. in part and revg. and remanding in part an Oral

Opinion of this Court. Respondent's brief does little more than

recite the badges without fully developing why their presence

shows fraudulent intent for 1986 and 1987. In most cases, courts

can infer a causal connection. But, the presence of

contradictory evidence in this record makes these indicia

insufficient by themselves to allow us to infer fraudulent

intent. However, they still provide part of the foundation for

that inference, and, hence, must be developed.

(i) Taxpayer's experience and sophistication

Petitioner's relative experience and sophistication are

relevant in determining whether fraud exists. Stephenson v.

Commissioner, 79 T.C. at 1006. While petitioner was not an

astute businessman of the degree of sophistication described in

Zand v. Commissioner, T.C. Memo. 1996-19, he nevertheless

participated directly in the laundering of Ben's drug profits

during a period that not only encompassed the 2 years in

question, but went back as far as 1977, when he "invested"

$80,000 in Sam Gilbert's enterprises on Ben's behalf, and 1983,

when he participated in the initial discussions on how to invest

in the card club.
- 40 -

(ii) Participation in illegal activities

The Court has repeatedly found that illegal activity

strongly indicates the presence of fraud even when the taxpayer

has not been criminally convicted. Clayton v. Commissioner, 102

T.C. 632, 647 (1994) (citing Bradford v. Commissioner, supra at

307-308) (ample evidence found of illegal activity based on

taxpayer's engaging in illegal bookmaking, even though charges

against him were dropped)); see also Meier v. Commissioner, 91

T.C. 273, 302-303 (1988); Deletis v Commissioner, T.C. Memo.

1995-512 (engaging in theft and concealment of that fact from his

employer and failing to report the income derived is a course of

conduct upon which the Court based its finding that the taxpayer

acted fraudulently).

The evidence of illegal activity in this case is even more

compelling than in Clayton because petitioner was convicted of

money laundering. Petitioner funneled the proceeds from the card

club investment into the Apache enterprises, some of it through

his own bank accounts. He also tried to recover the $12 million

investment in the card club. Petitioner admitted that his

sources of income, at least in part, were those illegal

activities for both 1986 and 1987. He produced no evidence to

show that his sources of income for either year were anything

other than criminal activity. SGA, controlled by Sam Gilbert,

paid petitioner's "wages" in 1985 and 1986 as a conduit for

returning laundered money to the Kramers.
- 41 -

(iii) Failure to maintain accurate records

A taxpayer's failure to maintain accurate records is another

badge of fraud, especially in combination with other indicia.

Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg.

T.C. Memo. 1959-172; Reaves v. Commissioner, 295 F.2d 336, 338

(5th Cir. 1961), affg. 31 T.C. 690 (1958); Grosshandler v.

Commissioner, 75 T.C. 1, 20 (1980). The parties stipulated that

petitioner failed to bring any books and records to the audit for

1986 and 1987. This stipulation and respondent's use of the

indirect bank deposits method to reconstruct income demonstrate

that petitioner failed to maintain adequate records. Even the

incomplete nature of petitioner's explanations, especially in

light of the other circumstantial evidence of the conduit nature

of the three bank accounts, especially Safra, only accentuates

the inadequacy of his records of income during 1986 and 1987. 

Petitioner's failure to produce canceled checks that could begin

to explain the $206,500 of expenditures in June 1986, payments

displaying the hallmarks of the conduit theory that petitioner

advances to explain the use of Safra to support Ben's

enterprises, is the most eloquent testimony to the inadequacy of

petitioner's records.

(iv) Unexplained bank deposits

 While unexplained bank deposits are not themselves

necessarily clear and convincing evidence of fraud, York v.

Commissioner, 24 T.C. 742, 743 (1955), a large discrepancy
- 42 -

between a taxpayer's actual income and his reported income is

evidence of fraud. Stone v. Commissioner, 56 T.C. at 224. "This

is particularly true where * * * there is other evidence that the

taxpayer was engaged in unlawful activities which at once offer a

probable explanation of the concealment, and make other

violations of law, including tax fraud, less difficult to

believe". Manton v. Commissioner, a Memorandum Opinion of this

Court dated Nov. 22, 1948 (citing Rogers v. Commissioner, 111

F.2d 987 (6th Cir. 1940), affg. 38 B.T.A. 16 (1938)); see also

Recklitis v. Commissioner, 91 T.C. at 912. Even with the

reduction in unexplained income that petitioner's explanations

showed, large discrepancies still exist for which petitioner

provided no evidence or explanation and for which we can find no

answers, even given the corroborating circumstances of the

conduit nature of Safra. This is especially true for 1986,

specifically the June expenditures of $206,500. It is also true

for 1987, where both respondent and petitioner stipulated $36,088

in unexplained bank deposits and analysis of the records shows

that as much as $41,899.34 of deposits in the three accounts

remained unexplained. When these discrepancies are viewed in the

context of petitioner's admitted illegal activity, his

demonstrated understanding of the consequences of his failure to

report his income, and his failure to maintain adequate records,

the unexplained bank deposits indicate fraudulent intent.
- 43 -

(v) Failure to file tax returns

Petitioner's failure to file tax returns in 1986 or 1987

serves as yet another indicator of fraud. Bradford v.

Commissioner, 796 F.2d at 307-308. Petitioner's admitted

understanding that he was obliged to file returns during those

years reinforces the strength of this badge of fraud.

(vi) Failure to cooperate with tax authorities

Failure to cooperate with tax authorities is a badge of

fraud. Zell v. Commissioner, 763 F.2d 1139, 1145-1146 (10th Cir.

1985) (taxpayer's open defiance of tax laws helped establish his

intent to commit tax fraud), affg. T.C. Memo. 1984-152; Powell v.

Granquist, 252 F.2d 56, 61 (9th Cir. 1958) (taxpayer's open

defiance of tax laws helped establish his intent to commit tax

fraud). By contrast, a taxpayer's active cooperation may be a

factor in finding no fraud. Jones v. Commissioner, 259 F.2d 300,

303 (5th Cir. 1958) (taxpayer's cooperation by making his books

readily available to authorities was one factor in finding no

fraud), revg. and remanding 25 T.C. 1100 (1956); Chin v.

Commissioner, T.C. Memo. 1994-54 (showing of cooperation by

trying to correct past mistakes was one indication that there was

no fraud). In this instance, petitioner deliberately failed to

cooperate with the Government during the course of his audit for

1986 and 1987, albeit at his counsel's advice.

Reliance on an attorney or another tax preparer may

constitute a defense against fraud if the taxpayer relied upon
- 44 -

the preparer's advice and actual preparation of the returns to

calculate his taxable income. See, e.g., Marinzulich v.

Commissioner, 31 T.C. 487, 490-491 (1958). However, not yet

resolved is the tax consequence of whether a taxpayer can rely

upon the advice of an attorney not to cooperate with the IRS

because of the implications for ongoing criminal investigations

against him. However, given the limited scope of the privilege

against self-incrimination to protect a taxpayer from charges of

failing to file a return, see, e.g., United States v. Egan, 459

F.2d 997, 998 (2d Cir. 1972), such a shield would not likely

provide much comfort to petitioner. However, we need not reach

that issue here, because the presence of all of the other factors

prevents petitioner's failure to cooperate from being the sole

determinant.

(b) Causal connection between indicia of fraud and

petitioner's specific purpose to evade paying taxes

The record is replete with the badges of fraud as discussed

above from which we can infer the specific purpose of evading

taxes. But the record also contains some evidence that

petitioner may not have actually intended to fraudulently evade

paying taxes. The issue is whether, using the indicia of fraud

in the presence of such contrary evidence, we infer from the

record as a whole that petitioner had the specific purpose to

evade paying his taxes. Estate of Temple v. Commissioner, 67

T.C. 143, 159 (1976).
- 45 -

 

20This $250,000 may have been additional income to

petitioner in 1987 if he received the funds to pay his attorney

in that year. Although the record is somewhat ambiguous about

the exact date that petitioner paid his attorney or received the

funds to do so, petitioner did pay Ben's attorney in Nov. 1987.

(continued...)

In April 1987, when the 1986 return was due, petitioner was

trying to recover the card club investment, and find a way out of

the marina, activities that had occupied him for nearly a year

following Murphy's arrest in Tortola. In May of the previous

year, Sam Gilbert had reneged on the payment of the "kicker" on

the Troon Mortgage, and Fainsbert had openly said, at the May

1986, meeting at the Miami Marriott, that petitioner was no

longer in charge of the marina. By June 1987, petitioner had

left the marina, either in a desperate attempt to continue to

conceal Ben's interest in it, or because the Gilberts had forced

him out.

In the wake of Ben's arrest in August 1987, petitioner and

Maxine stayed in a condominium they had leased in Atlantic City

during the late summer and fall of 1987 to "get away from it

all". Petitioner focused on recovering the $9.5 million from

June 1987 until the meeting in Zurich in November 1987

effectively ended those efforts. Thereafter, until his arrest in

December 1989, petitioner was using laundered funds to make

payments to lawyers and generally doing all that he could to keep

his son from being convicted. He also took care of his own legal

fees of $250,000 with these same funds.20
- 46 -

 

20(...continued)

Even if respondent could establish receipt of the $250,000

in 1987, she has not asserted an increased deficiency pursuant to

sec. 6214(a). Accordingly, we have not considered this in

discussing the amount of the unreported income for 1987.

Petitioner also feared criminal prosecution. Murphy had

been arrested and the Troon Mortgage conduit disrupted. 

Petitioner was under investigation by a grand jury. Petitioner's

fear of prosecution drove him in October 1986 to file a document

that, as we have held, was not a tax return. Petitioner was

afraid that a proper return could reveal his illegal sources of

income and perhaps tie him to the money laundering. Max Forman,

the accountant who had advised him and Ben on the card club

investment, had signed the 1985 Form 1040 that petitioner and

Maxine jointly filed. With Forman's advice and preparation, that

Form 1040 completely lacked the requisite detail about income and

deductions, even to the point of excluding the SGA "wages", the

interest income, and bona fide deductions such as home mortgage

interest. Fear of criminal investigation must have driven the

decision to disclose no detail, because petitioner also inscribed

a legend on the document that referred to the possible effect

that the outcome of the grand jury investigation could have on

his tax liability.

By 1987, petitioner's fear of criminal prosecution had grown

even stronger. Ben's criminal enterprise was falling apart, and

petitioner was trying to help him in the wake of his arrest by

ensuring that his lawyers were paid. Petitioner also ensured
- 47 -

that his own criminal lawyer was paid. But his understanding

that filing a legitimate return and paying the tax shown thereon

as due could reveal a link to criminal activity had not

disappeared. Petitioner has stipulated that he knew that he was

required to file returns and pay taxes for 1986 and 1987.

Based upon the clear link between petitioner's fear of

criminal prosecution, and his deliberate attempt to evade paying

his taxes, we infer that petitioner had the requisite fraudulent

intent. The pressures that petitioner was under, and any sense

that he was simply overwhelmed by events, do not rebut our

conclusion, especially in light of the continuing nature of

petitioner's fear of criminal prosecution. The combination of

the other indicia of fraud and petitioner's fear that filing

adequate returns and paying taxes for 1986 and 1987 would

increase his vulnerability to criminal prosecution is clear and

convincing evidence of fraudulent intent to evade paying taxes.

iii. Portion of underpayment attributable to fraud

Once the underpayment is established, respondent need only

establish that some portion stems from fraud, sec. 6653(b)(2);

Otsuki v. Commissioner, 53 T.C. 96, 105 (1969); Meier v.

Commissioner, 91 T.C. at 303, thereby shifting to petitioner the

burden of showing, by a preponderance of the evidence, the part

of the underpayment that does not stem from fraud. The clear and

convincing evidence in the record links the fraud to at least

part of each year's underpayment. Petitioner stipulated that he
- 48 -

received income from illegal sources in both years. He sought to

conceal that income and its sources by not filing tax returns and

paying taxes for 1986 and 1987. Petitioner presented no evidence

that any portion of the income, and thus of the underpayment in

either year, was not due to fraud. Petitioner is therefore

liable for additions to tax for fraud on the entire underpayments

for both years. Sec. 6653(b)(2).

b. Substantial underpayment of tax--section 6661

For 1986 and 1987, section 6661 authorizes an addition to

tax of 25 percent of any underpayment if there has been a

substantial understatement of income. Pallottini v.

Commissioner, 90 T.C. 498 (1988) (the applicable rate for

assessments made after October 21, 1986, is 25 percent). The

Code defines a substantial understatement as one that exceeds 10

percent of the tax required to be shown on the return or $5,000. 

Sec. 6661(b)(1)(A); Tweeddale v. Commissioner, 92 T.C. 501, 505

(1989); Woods v. Commissioner, 91 T.C. 88, 95 (1988). An

understatement is the difference between the tax required to be

shown on the return and the actual amount shown. Since

petitioner failed to file returns for both years, the

understatement for both years is the entire deficiency. Estate

of McClanahan v. Commissioner, 95 T.C. 98, 103 (1990) (section

6661 applies both to taxpayers who fail to disclose adequately

their taxable income and tax due on a return and to taxpayers who

fail to file any return at all). The understatements from both
- 49 -

years are substantial because they are necessarily greater than

10 percent, and they both exceed $5,000. Woods v. Commissioner,

supra at 95. As discussed supra under Issue 1 of this opinion,

we have recalculated the understatements based upon the evidence

presented by petitioner rebutting respondent's initially

determined deficiency determinations.

The underpayment against which the statute calculates the 25

percent addition is the understatement net of any prepayment

credits, which in this situation is the withholding paid in each

of the two years. Id. at 99. The amount of the underpayment may

be further reduced by the portion attributable to the tax

treatment of any item if there was substantial authority for such

treatment (a reduction for items that were adequately disclosed

on the return or in a statement attached to the return is not

applicable because no returns were filed). Sec. 6661(b)(2)(B). 

Petitioner has failed to present any evidence or argument for a

reduction under section 6661. We therefore hold him liable for

the additions to tax for substantial understatement for both

years on the full amounts of the understatements. See Bard v.

Commissioner, T.C. Memo. 1993-105.

c. Failure to pay estimated tax--section 6654

Respondent determined an addition to tax under section

6654(a) for petitioner's failure to pay estimated income tax. 
- 50 -

 

21The rate is the short-term Federal rate for the applicable

period plus 3 percentage points. Sec. 6621(a)(2) and (b).

 

22See infra Tables 9 and 14 in appendix.

The addition is imposed at the rate determined by section 6621.21

Imposition of the tax is mandatory where prepayments of the tax,

either through withholding or by making estimated quarterly

payments, do not satisfy the specified percentages of total

liability required under the statute. Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980); see also Swonder v.

Commissioner, T.C. Memo. 1994-430. Section 6654 allows no

generally available reasonable cause or willful neglect defenses. 

See Swonder v. Commissioner, supra; cf. sec. 6654(e)(3)(B)

(reasonable cause/willful neglect defense allowed for newly

retired or disabled individuals).

Once respondent determines that petitioner is liable for the

addition to tax under section 6654, the burden shifts to

petitioner to prove, by a preponderance of the evidence, that

respondent's determination was incorrect. Rule 142(a); Register

v. Commissioner, T.C. Memo. 1988-390.

Petitioner presented no evidence on this issue. He did not

pay any estimated income tax in either 1986 or 1987 beyond

minimal withholding on the wages reported by Sam Gilbert

Associates in 1986 and Fort Apache, Inc. in 1987.22 Therefore,

petitioner is liable for the addition to tax imposed by section

6654(a) for both years.
- 51 -

To reflect the foregoing,

An appropriate order will be

issued denying petitioners' oral

motion to dismiss in the case at

docket No. 22457-91.

Decisions will be entered

under Rule 155. 
- 52 -

Safra Bank--1985

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January - 0 - - 0 - - 0 - 

February - 0 - - 0 - - 0 - 

March - 0 - - 0 - - 0 - 

April - 0 - - 0 - - 0 - 

May - 0 - - 0 - - 0 - 

June - 0 - - 0 - - 0 - 

July - 0 - - 0 - - 0 -

August - 0 - - 0 - - 0 - 

September - 0 - - 0 - - 0 - 

October - 0 - - 0 - - 0 - 

November - 0 - - 0 - - 0 - 

December $85,000 $50,000 $50,000 1. Deposit came from Len-Ed, of which Dublin was an

owner.

 2. $35,000 "loan" to Apache Power Boats and $15,000 to

Team Apache "to pay expenses". 

 Total 85,000 50,000 50,000 

 for year 

Adjustments 50,000 50,000

 Net total 35,000 - 0 -
- 53 -

Table 2

Barnett Money Market Account--1985

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January $18,860.35 $11,176.89 - 0 - 

February 6,229.83 20,923.98 7,845.00 1. $4,000 to Miami Boat Show for Apache Powerboat.

 2. $3,845 for Marina insurance (Fort Apache).

March 1,824.19 4,731.08 - 0 - 

April 3,227.26 5,203.15 - 0 - 

May 4,012.70 9,733.40 2,733.40 1. $2,733.40 to sponsor of boat race.

June 4,681.10 500.00 - 0 - 

July 21,179.70 2,930.22 - 0 - 

August 1,012.70 3,443.69 - 0 - 

September 2,352.34 6,294.90 - 0 - 

October - 0 - 2,873.00 - 0 - 

November 18,454.81 2,273.00 - 0 - 1. $17,518.84 is from an inheritance conceded by

respondent in the notice of deficiency for tax year

1985. This amount is not included in adjustments, but

deducted from income as nontaxable income in Table 5.

December 19,249.67 19,387.40 18,887.40 1. $18,887.40 for furniture for Fort Apache/Team

Apache.

 2. $2,122.49 is traced to an inheritance conceded by

respondent in the notice of deficiency. This amount

is not included in the adjustments, but deducted from

income as nontaxable income in Table 5.

 Total 101,084.65 89,470.71 29,465.80

 for year 
- 54 -

Adjustments 29,465.80 29,465.80

 Net total 71,618.85 60,004.91 - 0 - 
- 55 -

Table 3

Barnett Joint Checking--1985

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January $3,208.61 $2,832.71 - 0 - 

February 1,198.61 1,536.69 - 0 - 

March 3,767.12 5,017.69 - 0 - 

April 5,529.70 3,546.56 - 0 - 

May 3,592.03 4,620.54 - 0 - 

June 4,322.44 4,868.57 - 0 - 

July 2,185.03 2,286.76 - 0 - 

August 2,830.09 1,779.65 - 0 - 

September 2,313.98 3,628.08 - 0 - 

October 2,848.30 2,236.89 - 0 - 

November 2,559.63 1,409.10 - 0 - 

December 4,186.36 4,695.21 - 0 - 

 Total 38,541.90 38,458.45 - 0 -

 for year 

Adjustments - 0 - - 0 -

 Net total 38,541.90 38,458.45
- 56 -

Table 4

Schedule C Reconstruction--1985

Bank Deposits Amount Explanation

Barnett joint checking $38,541.90 

Barnett money market 101,084.65

Safra Bank 85,000.00

 224,626.55

Nontaxable Income

Refunds/Reimbursements 2,753.00 1. These figures drawn from notice of

deficiency for tax year 1985.

Certificate of deposit 15,191.00

Transfers 3,000.00

Exchanges 1,250.00

Sale of house 20,000.00

Inheritance 19,641.00 2. Inheritance deposited into the Barnett

money market account in November and

December 1985.

Sale of car 14,000.00

 (75,835.00)

Petitioner's Explanations

Safra Bank 50,000.00 1. Table 1.

Barnett money market 29,465.80 2. Table 2

Barnett joint checking - 0 - 3. Table 3

 (79,465.80)

Unexplained Bank Deposits 69,325.75

(Without taking into 

 account stipulated

 sources of income)

Wages 32,199.00

Less withholding (5,329.00)

Less FICA (2,270.00)

 Net Wages (24,600.00)

Other Sources of Income 
- 57 -

Interest income 11,777.00

State tax refund 3,468.00

 (15,245.00)

 Net unexplained deposits 29,480.75
- 58 -

Table 5

Income Calculation--1985

 Amount Explanation

Wages $32,199.00

Interest 11,777.00

State income tax refund 3,468.00

Unexplained bank deposits 29,480.75 1. From Table 4.

 Total income 76,924.75

Stipulated deductions (28,044.00) 2. All deductions listed herein either

stipulated by the parties or drawn from the

notice of deficiency for tax year 1985.

Contributions 2,733.00

Sales tax 747.00

Real property taxes 3,483.00

Mortgage interest 21,501.00

Zero Bracket Amount (3,540.00) 3. Reduction in allowable itemized deductions as

calculated in the notice of deficiency for tax

year 1985.

Personal exemptions 3,120.00 4. Three personal exemptions allowed in the

notice of deficiency.

 (28,044.00)

 Taxable Income 48,880.75
- 59 -

Table 6

Safra Bank--1986

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January $30,768.33 $26,013.29 $19,123.29 1. $370.89 for freight delivery to Team Apache. 

 2. $2,355.80 insurance for the racing enterprises.

 3. $1,396.60 for engine blocks.

 4. $5,000 "loan" to Apache Boats, Inc.

 5. $10,000 to pay for Fort Apache insurance.

February - 0 - 37,208.44 35,025.44 1. $3,229 to pay balance on insurance installment.

 2. $8,557.50 to pay for Fort Apache advertising.

 3. $10,000 to pay next installment for insurance.

 4. $9,000 to Emerson Allsworth Trust for legal

services rendered.

 5. $4,238.94 to Allsworth personally--exact reason

unknown--probably to pay for land for the marina. Ben

used Allsworth's Trust Account as a conduit for

purchase of that land. 

March - 0 - 126.00 - 0 - 

April 505,000.00 155,000.00 155,000.00 1. $5,000 for offshore boat race purse for race that

Ben sponsored.

 2. $100,000 payment for forklifts used at Fort Apache

 3. $50,000 to Ben's racing team.

 

May - 0 - 240,914.18 217,434.00 1. $100,000 payment to Len-Ed Construction. This was

one of the destinations for the $505,000 that Sam

Gilbert, using LCP Associates, which was run by Dale

Lyon and David Pierson, had deposited in the account

that month, although the funds originated from Ben.

 2. $5,000 for insurance costs.

 3. $6,384 to Allsworth Trust Account for property

purchased by Allsworth for Ben.

 4. $3,500 to Allsworth Trust; legal services rendered.

 5. $2,700 to repay a personal loan from Dublin, one of

the owners of Len-Ed Construction, a beneficiary of

funds from this account.

6. $9,980 to buy a boat.

7. $43,000 to pay rigger for Ben's race boats.
- 60 -

 8. $5,370 for three airline tickets to Hong Kong so

that petitioner could open new accounts for money

laundering.

 9. $12,500 for work on the boat just purchased.

 10. $24,000 for legal services to Melvin Kessler

(Kessler was involved in the laundering of $12 million

in an operation involving banks in Lichtenstein).

 11. $5,000 for insurance.

June - 0 - 206,500.00 - 0 - 
- 61 -

Table 6 (Continued)

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

July 165,000.00 71,814.17 69,435.00 1. $6,500 to Allsworth Trust for legal services.

 2. $2,500 to Allsworth Trust for legal services.

 3. $6,403 for insurance for the offshore boat race. 

4. $2,090 to American Power Boat Assn. for an entry

fee for race.

5. $28,742 for race expenses for the race that Ben was

sponsoring.

6. $10,000 for electronics installed on one of Ben's

Boats, the Apache Queen.

7. $10,000 to Apache Boats, Inc.

 8. $3,200 (five checks) to IRS for taxes owed by

Superchief, Apache Boats, Inc., Apache Offshore

Engineering, Apache Racing Team, Inc., and Fort

Apache, Inc. 

 9. The deposits for this month are labeled in the bank

deposit slip as having come from proceeds of Loan #

730-000-4195.

August 35,000.00 46,742.19 43,226.22 1. $2,500 in two payments (to Nova University and Joe

Sonken) for the building housing Apache Boats, Inc.

 2. $11,726.22 for a helicopter lease for the offshore

boat race.

 3. $4,000 to furnish the interior of Apache Queen.

4. $10,000 to the local offshore boat racing

association for a boat race.

5. $5,000 to Kate Bonner for legal services for Ben's

enterprises (She was a criminal defense attorney who

was later associated with Ben Kramer's criminal trial

as one of his counsel).

 6. $10,000 to pay an invoice for Apache racing.

7. The deposits for this month are listed on the

deposit Memos as having come from the proceeds of loan

# 730-000-4195. 

 

September 75,000.00 38,019.53 36,646.75 1. $6,000 to Allsworth Trust Account for either legal

services or property purchased on account for Ben.

 2. $1,985 for pilot services for helicopter.
- 62 -

 3. $20,000 to an employee of Team Apache (which entity

is unclear), given at Ben's behest, to buy out his

retirement fund from another employer.

 4. $543.90 for paperhanger for Marina.

 5. $2,000 for the Apache Queen.

6. $4,000 to Allsworth Trust Account for legal

services.

7. $2,117.85 for office furniture for the Marina.

 8. The deposit is listed as a transfer from account

number 939-0614467 "per letter in file" [signed] Jack

Kramer.
- 63 -

Table 6 (Continued)

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

October 38,359.87 43,311.93 34,540.00 1. $20,000 for insurance for Fort Apache.

 2. $2,500 for rent on building Apache Power Boats.

 3. $3,200 for pictures of the offshore boat race.

4. $8,840 for cabinetry of the Marina Office.

5. A deposit slip for $12,000 lists that deposit as

having come from account # 0614270 - not the same

account number as the previous month.

November - 0 - 20,220.50 10,720.50 1. $7,505.50 to Allsworth Trust Account for either

legal services or property purchased on account for

Ben.

 2. $1,000 to the offshore boat association. 

 3. $1,215 to an air service for trip in conjunction

with a boat race.

4. $1,000 to Allsworth Trust Account for services of

some kind. 

December - 0 - - 0 - - 0 - 

 Total 849,128.20 885,870.23 621,151.20 1. The total amount of all the deposits listed exceeds

 for year by $75,200 the amount listed in Schedule C of the

notice of deficiency for tax years 1986 and 1987.

 

Adjustments 621,151.20 621,151.20

 Net total 227,977.00 264,719.03
- 64 -

Table 7

Barnett Money Market Account--1986

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January $5,000.00 $3,980.98 - 0 - 

February 968.87 1,109.40 - 0 - 

March - 0 - 11,045.95 5,087.50 1. $5,087.50 paid balance for decorating services for

Team Apache.

April 1,887.74 2,698.00 - 0 - 

May 2,449.94 11,193.67 - 0 - 

June 1,887.74 1,876.00 - 0 - 

July 30,204.45 6,198.00 32,204.45 1. $30,204.45 is a Federal tax refund and nontaxable.

 2. $2,000 paid for accounting services to the

enterprise.

August - 0 - 17,766.35 5,120.00 1. $3,620 for interior decoration of Ben's office.

 2. $1,500 for office furniture for one of the Apache

enterprises. 

September - 0 - 4,531.39 2,023.39 1. $2,023.39 for interior decoration of Ben's office.

October 2,263.50 17,000.00 - 0 - 

 

November 100,900.00 44,328.58 - 0 - 1. There was single large deposit of unexplained

origin. On the same day as the deposit, there was an

outgoing funds transfer of $25,550. A check was

written on the account the next day for $15,000. 

Petitioner offered no explanation. In 1987, however,

there were more funds with an explanation from

petitioner that were outgoing than were deposited. 

This partially explains the use of this large deposit.

December - 0 - 11,795.00 - 0 - 
- 65 -

 Total 145,562.24 133,523.32 44,435.34 1. The total amount of bank deposits is greater than

that listed in Schedule C of the notice of deficiency

for tax years 1986 and 1987 by $2,263.50.

 

Adjustments 44,435.34 44,435.34

 Net total 101,126.90 89,087.98 
- 66 -

Table 8

Barnett Joint Checking--1986

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January $4,473.38 $1,790.79 - 0 - 

February - 0 - 3,122.21 - 0 - 

March 1,953.57 2,230.17 - 0 - 

April 2,131.87 1,341.79 - 0 - 

May 3,507.00 1,310.24 - 0 - 

June 2,403.94 4,398.60 - 0 - 

July 3,177.88 3,068.53 - 0 - 

August 4,830.54 4,386.61 - 0 - 

September 1,611.62 2,567.52 - 0 - 

October 1,881.62 2,849.85 - 0 - 

November 22,500.00 7,395.13 - 0 - 

December - 0 - 12,920.34 - 0 - 

 Total 48,471.42 47,381.78 - 0 -

 for year 

Adjustments - 0 - - 0 -

 Net total 48,471.42 47,381.78 1. Note that amount of bank deposits is $9,050 less

than Schedule C, contained in the notice of deficiency

for tax years 1986 and 1987. The difference cannot be

explained by counting the beginning balance

($1,564.62).
- 67 -

Table 9

Schedule C Reconstruction--1986

Bank Deposits Amount Explanation

Barnett joint checking $48,471.42

Barnett money market 145,562.24

Safra Bank 849,128.20

 1,043,161.86

Nontaxable Income

Transfers 37,300.00 1. These figures drawn from the notice of

deficiency for tax years 1986 and 1987.

 2. The notice of deficiency lists only

$37,300 from transfers this year. The

Safra account lists $62,000 in transfers

from two different bank accounts. The

other two accounts do not list any

transfers.

Loans - Safra Bank 200,000.00 3. Respondent conceded the nontaxable

source of funds on its original Schedule C

calculations in the notice of deficiency. 

These loans probably account for July and

August deposits.

Tax Refund 30,204.45 

 (267,504.45)

Petitioner's Explanations

Safra Bank 621,151.20 1. Table 6.

Barnett money market 14,230.89 2. Table 7. This amount is less the

 1986 expenditures $30,204.45 tax refund conceded by

respondent and accounted for in

"Nontaxable Income".

Barnett money market 8,475.93 3. This reflects expenditures made in 1987

 1987 expenditures whose source was 1966 deposits. See Table

12.
- 68 -

 (643,858.02)

Unexplained Bank Deposits 131,799.39

(Without taking into 

 account stipulated

 sources of income)
- 69 -

Table 9 (Continued)

Stipulated Sources of Income

Wages 34,020.00

Less withholding (6,788.00)

Less FICA (2,432.00)

 Net Wages (24,800.00)

Other Sources of Income 

Interest income 7,922.00 (7,922.00)

 Net unexplained deposits 99,077.39
- 70 -

Table 10

Income Calculation--1986

 Amount Explanation

Wages $34,020.00 

Interest 7,922.00 

Unexplained bank deposits 99,077.39 1. From Table 9. 

 Total income 141,019.39

Stipulated deductions (31,362.92) 1. All deductions listed herein were

either stipulated by the parties or drawn

from the notice of deficiency for tax

years 1986 and 1987.

Real property taxes 3,104.00 

Mortgage interest 21,366.00 

Personal interest deduction 4,732.92 

Personal Exemptions 2,160.00 2. Two exemptions. 

 (31,362.92)

 Taxable Income 109,656.47
- 71 -

Table 11

Safra Bank--1987

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January $400 - 0 - - 0 - 1. This deposit was made to correct a $372 overdraft

that had existed since November. 

February - 0 - - 0 - - 0 - 

March - 0 - - 0 - - 0 - 

April - 0 - - 0 - - 0 - 

May - 0 - - 0 - - 0 - 

June - 0 - - 0 - - 0 - 

July - 0 - - 0 - - 0 - 2. Account closed in July.

August - 0 - - 0 - - 0 - 

September - 0 - - 0 - - 0 - 

October - 0 - - 0 - - 0 - 

November - 0 - - 0 - - 0 - 

December - 0 - - 0 - - 0 -

 Total 400 - 0 - 

 for year 

Adjustments - 0 - - 0 -

 Net total 400 
- 72 -

Table 12

Barnett Money Market Account--1987

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January - 0 - $17,183.19 - 0 - 

February - 0 - 13,943.25 $2,500.00 1. $2,500 for Apache Power Boats building rental.

March $1,495.00 9,990.00 3,200.00 1. $3,200 to Allsworth Trust Account for legal

services rendered.

April 2,680.00 7,393.81 6,950.93 1. $4,850.93 for taxes on Ben's house at Hibiscus.

 2. $2,100 to Allsworth Trust Account for legal

services rendered.

May - 0 - 994.00 - 0 - 

June - 0 - - 0 - - 0 - 

July - 0 - - 0 - - 0 - 

August - 0 - - 0 - - 0 - 

September - 0 - - 0 - - 0 - 

October - 0 - 730.80 - 0 - 

November - 0 - - 0 - - 0 - 

December - 0 - - 0 - - 0 - 

 Total 4,175.00 50,235.05 12,650.93 1. The source of funds for these checks for which

 for year petitioner makes explanations comes from the previous

year's deposits, which were largely the remains of the

November 1985 $100,900 deposit.

 

Adjustments 12,650.93 12,650.93 

 Net total (8,475.93) 37,584.12
- 73 -

Table 13

Barnett Joint Checking--1987

 Deposit/ Check/ 

Month Credit Debit Adjustment Explanation

January $11,290.50 $8,929.50 - 0 - 

February 4,245.40 5,403.47 - 0 - 

March 2,131.92 3,966.59 - 0 - 

April 4,342.50 3,109.65 - 0 - 

May 1,047.50 4,067.93 - 0 - 

June 10,745.44 4,045.92 - 0 - 

July 8,154.44 9,450.52 - 0 - 

August - 0 - 2,817.45 - 0 - 

September - 0 - 945.85 - 0 - 

October 3,439.00 4,515.70 - 0 - 

November 4,269.70 3,363.18 - 0 - 

December 154,928.94 155,151.45 $150,000.00 1. This is the $150,000 loan from petitioner's sisterin-law conceded by respondent. The monthly statement

reports a $150,000 check written on the same day as a

$150,000 deposit.

 Total 204,595.34 205,767.21 150,000.00 2. This is exactly $10,000 more than respondent

 for year reported in Schedule C income in the notice of

deficiency for tax years 1986 and 1987 as coming from

this account.

Adjustments 150,000.00 150,000.00

 Net total 54,595.34 55,767.21
- 74 -

Table 14

Schedule C Reconstruction--1987

Bank Deposits Amount Explanation

Barnett joint checking $204,595.34 Table 13.

Barnett money market 4,175.00 Table 12.

Safra Bank 400.00 Table 11.

 209,170.34

Petitioner's Explanations

Safra Bank - 0 - 1. Table 11.

Barnett money market 4,175.00 2. To account for the balance carried

forward from 1986, $8,475.93 allocated to

1986 (the amount that exceeds 1987

deposits). The rest is allocated to 1987.

Barnett joint checking 150,000.00 3. Table 13.

 (154,175.00)

Unexplained Bank Deposits 54,995.34

(Without taking into 

 account stipulated

 sources of income)

Wages 17,000.00 

 

Less withholding (3,077.00) 

Less FICA (1,215.00) 

 Net Wages (12,708.00)

Other Sources of Income 

Interest income 388.00 (388.00) 

 Net unexplained deposits 41,899.34 1. Respondent and petitioner stipulated

that the unexplained bank deposits for

1987 were $36,088. The record supports
- 75 -

$41,899.34 of unexplained deposits. The

$8,450 properly allocated to 1986 does not

explain the difference. We calculate

petitioner's 1987 income using the smaller

amount stipulated by the parties.
- 76 -

Table 15

Income Calculation--1987

 Amount Explanation

Wages $17.000.00 

Interest 388.00 

Unexplained bank deposits 36,088.00 1. Amount stipulated by the parties (see

explanation in Table 14).

 Total income 53,476.00

Stipulated deductions (23,394.00) 1. The deductions listed herein were

either stipulated or drawn from the notice

of deficiency for tax years 1986 and 1987.

Real property taxes 6,594.00 

Mortgage interest 13,000.00 

Personal exemptions 3,800.00 2. Two exemptions.

 (23,394.00)

 Taxable Income 30,082.00