T.C. Memo. 1998-141

UNITED STATES TAX COURT

RAMON AND IRMA ORTIZ, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6202-95. Filed April 16, 1998.

Ramon Ortiz, pro se.

Joanne B. Minsky, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WRIGHT, Judge: Respondent determined deficiencies in

petitioners' Federal income taxes and penalties as follows:

Penalties

Year Deficiency Sec. 6663

1991 $15,459 $11,594

1992 32,657 24,493
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1 Petitioners concede that they received interest of

$18,000 in 1991 and $4,000 in 1992 which was not reported on

their Federal income tax returns. Respondent concedes that

$25,000 of petitioners' unreported income for 1992 is not subject

to self-employment tax. These concessions, along with two

computational adjustments for 1992 relating to a reduction in

itemized deductions and the recapture of a claimed earned income

credit, can be given effect in the Rule 155 computations.

In the alternative to the fraud penalties, respondent asserts in

the answer to the petition that petitioners are liable for the

accuracy-related penalties for 1991 and 1992 pursuant to section

6662(a).

Unless otherwise indicated, 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.

After concessions,1 the issues to be decided are as follows:

(1) Whether petitioner Ramon Ortiz had substantial amounts

of unreported self-employment income for 1991 and 1992 from his

wholesale used car business;

(2) whether petitioners received additional interest income

for 1991 and 1992 in the respective amounts of $3,500 and $3,000;

(3) whether petitioners are entitled to a capital loss in

1991 in the amount of $3,000;

(4) whether petitioner Ramon Ortiz is liable for additional

self-employment taxes for 1991 and 1992;

(5) whether petitioner Irma Ortiz is liable for fraud

penalties under section 6663 for 1991 and 1992; and
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(6) whether petitioner Ramon Ortiz is liable for fraud

penalties under section 6663 for 1991 and 1992;

(7) whether, alternatively, petitioners are liable for the

accuracy-related penalties for 1991 and 1992.

FINDINGS OF FACT

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

The stipulation of facts and supplemental stipulation with

attached exhibits are incorporated herein by this reference.

Petitioners Ramon Ortiz (Mr. Ortiz) and Irma Ortiz (Mrs.

Ortiz) resided in Orlando, Florida, at the time they filed their

petition in this case. They were formerly residents of Puerto

Rico, where Mr. Ortiz owned and operated a pharmacy which he sold

in 1987. In July 1988, petitioners moved to Orlando, Florida,

where they purchased a house.

Bank Accounts

During 1991 and 1992 and for prior years, petitioners

maintained a personal checking account at Barnett Bank. Mr.

Ortiz maintained a business checking account in the name of R&X

Auto Sales, a sole proprietorship, at Osceola National Bank.

Sale of Petitioners' House in Puerto Rico

In 1974, petitioners purchased a parcel of land in Puerto

Rico for $18,000. In 1974 or 1975 they had a house built on this

land. Although the record does not show the actual cost of

building the house, petitioners' total investment in the property
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exceeded $75,000. They continued to own the property when they

moved to the United States. In September 1988, petitioners sold

the house for $75,000 plus interest to Andres Rivera Rodriguez

(Mr. Rodriguez), who paid them $25,000 in principal and $18,000

in interest in 1991 and $50,000 in principal and $4,000 in

interest in 1992. Petitioners received the $25,000 in 1991 in

four cash payments, which were deposited in the business bank

account at Osceola National. The exact amount of $50,000 was

deposited on October 13, 1992, in Mr. Ortiz' business bank

account. Some of the interest payments received from Mr.

Rodriguez, $3,500 in 1991 and $3,000 in 1992, were by checks

which were deposited in petitioners' personal bank account. The

remainder of the payments received in 1991 and 1992 was

apparently received in cash.

Mrs. Ortiz

In 1991 and 1992, Mrs. Ortiz worked as a pharmacist for Rite

Aid and GM Drug Company. She received wages of $19,291 in 1991

and $12,938 in 1992. The Federal income tax withheld was $1,560

in 1991 and $1,029 in 1992. The checks she received from these

employers were deposited in petitioners' personal bank account. 

The amounts received by Mrs. Ortiz were reported by her as gross

income on petitioners' Federal income tax returns for 1991 and

1992. She also received de minimis amounts from Como Pharmacy

that were not reported and not determined by respondent to be

self-employment income.
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Mrs. Ortiz was not involved in her husband's wholesale used

car business, R&X Auto Sales. 

Mr. Ortiz and R&X Auto Sales

Mr. Ortiz was in the wholesale used car business and

operated R&X Auto Sales. Most of his business involved

purchasing automobiles at auctions and then selling them to

dealers in Puerto Rico. This business required Mr. Ortiz to

handle checks in amounts as high as $30,000. He occasionally

sold used cars to local individuals. Mr. Ortiz deposited car

payments from individuals into petitioners' personal bank

account. He also deposited rent payments from Angels Transport

into petitioners' personal bank account during 1991 and 1992. 

Angels Transport was a business that did mechanical work on some

of petitioners' property in Orlando.

Mr. Ortiz had a license that allowed him to purchase

automobiles at auctions. As part of his business, he allowed

other salesmen to purchase automobiles with his license. Mr.

Ortiz charged the salesmen $100 for each car they purchased with

his license. The salesmen would pay him for the price of the

automobiles purchased in addition to the $100 fees. The money

received from these buyers was included by respondent in

determining the income of Mr. Ortiz for 1991 and 1992, and the

price paid for the cars purchased by the buyers was included in

cost of goods sold.
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Alvarado Transactions

Angel Luis Alvarado (Mr. Alvarado) sent Mr. Ortiz a $14,100

check in 1991 and a $13,000 check in 1992, both drawn on the

account of Asomante Auto Sales, a company in Puerto Rico that was

a customer of R&X Auto Sales. When submitted to the bank, the

checks were marked with notations about advances for automobiles. 

After the checks were processed through Banco Popular in Puerto

Rico and returned to Mr. Alvarado, the notations on the checks

were changed by Mr. Alvarado to read "prestamo", the Spanish word

for loan. Mr. Ortiz repaid Mr. Alvarado by sending him used

cars. He retained part of the advances as his "commission". No

documents were executed to formalize these advances. No interest

was paid by Mr. Ortiz on the advances.

Loan From Luna

On May 10, 1991, Mr. Ortiz received a $20,000 bank check as

a loan from Anibal Rivera Luna (Mr. Luna), who is related to Mrs.

Ortiz. On May 15, 1991, petitioners purchased four lots in

Marydia, Florida, as investment property. Petitioners paid

$29,767.24 at the closing. Petitioners did not deposit an amount

of $20,000 into their personal bank account or the business bank

account in May 1991. Petitioners did not withdraw the amount of

$29,767.24 from either account in May 1991.

Income Tax Returns

Mr. Ortiz provided his accountant and return preparer, Paul

Solano (Mr. Solano), with information and data pertaining to R&X
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Auto Sales and the business bank account. This information was

used by Mr. Solano in preparing the Schedule C (Profit or Loss

From Business) for R&X Auto Sales attached to petitioners'

Federal income tax returns for 1991 and 1992. However, Mr.

Solano was unaware that petitioners had a personal bank account

at Barnett Bank.

In the Schedule C for 1991, Mr. Ortiz, operating as R&X Auto

Sales, reported gross sales of $1,384,446, cost of goods sold of

$1,319,153, gross income of $65,293, total expenses of $56,535,

and a net profit of $8,758.

In the Schedule C for 1992, Mr. Ortiz reported that R&X Auto

Sales had gross sales of $3,303,511, cost of goods sold of

$3,085,454, gross income of $55,755, total expenses of $46,565,

and a net profit of $9,190.

On their Federal income tax return for 1991 petitioners

reported total taxable income of $25,049 and total tax of $2,433. 

On their 1992 return petitioners reported total taxable income of

$22,163 and total tax of $2,075.

Petitioners did not report the interest they received from

Mr. Rodriguez ($18,000 in 1991 and $4,000 in 1992) as income on

their Federal income tax returns for those years. However,

petitioners provided respondent's agent with a reconstructed 1991

Puerto Rico income tax return that reported $18,000 as interest

income. The Department of the Treasury, Commonwealth of Puerto

Rico, provided respondent with a certified copy of petitioners'
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1987 Puerto Rican tax return and a certificate of nonfiling for

petitioners for 1988 through 1994. Petitioners do not recall

having filed tax returns in Puerto Rico after 1988.

Petitioners reported adjusted gross income of $32,041 on

their 1990 Federal income tax return. That return did not report

a capital loss, and petitioners did not make an election to carry

forward a net operating loss.

Respondent's Determination of Unreported Income

In the audit of the income tax returns, the revenue agent

deemed petitioners' records to be inadequate. Consequently, he

computed their taxable income for 1991 and 1992 by using a bank

deposits analysis. He took the total deposits from the personal

and business bank accounts and combined them. He then subtracted

amounts to account for interbank transfers, gifts, loans,

redeposits, and other nontaxable items to determine unreported

income. The revenue agent who performed the bank deposits

analysis requested an extension of time to complete it but the

extension was not granted by petitioners. At trial the agent

stated that he thought the determination was, in his best

estimate, correct.

In the notice of deficiency, respondent determined

unreported income by the bank deposit analysis as follows:

Bank Deposit Analysis 1991 1992

Deposits to Business Account--Osceola $1,536,251 $3,598,451

Deposits to Personal Account--Barnett 67,066 52,403
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Total Deposits Per Bank Statements 1,603,317 3,650,854

Less:

Loans 105,000

Loans 20,000

Redeposits to Bus. Acct. 77,823 102,241

Sales Tax 5,783

Refunds 64,481

Transfers from Bus. Acct. 4,300

Transfers from Pers. Acct. 1,000 1,800

Redeposits from Pers. Acct. 920

Reported Wages 19,291 12,938

1990 Tax Refund 1,079

Loan or Transfer-Eckerd CU 418

Bank Deposit Analysis 1991 1992

Credit Card Advance 1,000

Credit Card Loan 5,000

Insurance Payment 142

Non-Self Employment Deposits 3,500 3,000

Total 1,423,800 3,400,655

Add Back

Withheld Taxes 1,560 802

Withheld FICA 1,476 1,217

Total Sales Per Bank Analysis 1,426,836 3,402,674

Total Sales Per Return 1,384,446 3,303,511

Total Unreported Income 42,390 99,163

Respondent's determinations of unreported income for 1991

and 1992 by using a bank deposits analysis were not accurate in

some respects. The sources of certain amounts of the deposits

were from nontaxable income items.
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OPINION

Issue 1. Unreported Income

Utilizing the bank deposits method of income reconstruction,

respondent determined that petitioners had unreported income of

$42,390 and $99,163 for 1991 and 1992, respectively. Petitioners

contend that some of the deposits constituted loans or other

nontaxable items. In particular, they assert that the amounts

received from Mr. Rodriguez in 1991 and 1992 as principal

payments on the sale of their Puerto Rico house were nontaxable

items. They also assert that the amounts they received from Mr.

Alvarado and Mr. Luna were loans which were not income subject to

tax under section 61(a).

Under section 6001, a taxpayer is required to maintain

adequate records of taxable income. In the absence of adequate

books and records, the Commissioner may reconstruct a taxpayer's

income by any reasonable method that clearly reflects income. 

Sec. 446(b); Holland v. United States, 348 U.S. 121, 130-132

(1954); Harper v. Commissioner, 54 T.C. 1121, 1129 (1970). In

this case respondent used the bank deposits method to reconstruct

petitioners' income and to determine the amount of unreported

income for 1991 and 1992. The bank deposits method is based on

the principle that a bank deposit is prima facie evidence of

income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). This

Court has repeatedly accepted this method of income

reconstruction when a taxpayer has inadequate books and records
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and large bank deposits. Mills v. Commissioner, 399 F.2d 744,

749 (4th Cir. 1968), affg. T.C. Memo. 1967-67; DiLeo v.

Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir.

1992).

The deficiency determination is presumed correct. Welch v.

Helvering, 290 U.S. 111, 111 (1933). Petitioner has the burden

of proving that respondent's determination is incorrect. Rule

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

Estate of Mason v. Commissioner, 64 T.C. 651, 657 (1975), affd.

566 F.2d (6th Cir. 1977).

Here petitioners first argue that respondent's determination

should not be sustained because the revenue agent did not have

sufficient time to complete his audit, and he said that he only

estimated the deficiencies. Petitioners misunderstood the

revenue agent's testimony at trial in which he stated that he

requested an extension of time to complete his examination and

that the deficiencies determined were, in his best estimate,

correct. 

In challenging respondent's income reconstruction, there is

evidence in this record that supports petitioners' claim that

some of the deposits were from nontaxable sources. The evidence

primarily consists of Mr. Ortiz' testimony, bank account

statements, canceled checks, and other documents. On brief,

respondent stresses that Mr. Ortiz was not able to readily trace

nontaxable payments received to specific bank deposits. We are
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satisfied that he made a sufficient showing to match nontaxable

funds to some of the deposits. If the funds are nontaxable, they

should be removed from unreported income determined by

respondent.

A. Payments Received on Sale of Puerto Rico House

Petitioners contend that deposits attributable to the

principal payments they received from Mr. Rodriguez in the

amounts of $25,000 and $50,000 for 1991 and 1992, respectively,

on the sale of their house in Puerto Rico should not be included

in determining their unreported income for those years. We

agree. We are satisfied, based on Mr. Ortiz' testimony, that he

had invested more in the property than the $75,000 Mr. Rodriguez

agreed to pay for it in 1988. Consequently, we find that $25,000

received in 1991 and $50,000 received in 1992, which amounts were

included in the bank deposits, are nontaxable and must be removed

from the unreported income determined by respondent.

B. Checks Received From Mr. Alvarado

Petitioners claim that the $14,100 and $13,000 checks

received from Mr. Alvarado in 1991 and 1992 were intended by the

parties to be loans. We disagree. Considering that the checks

were drawn from the account of Asomante Auto Sales, a customer of

R&X Auto Sales, that the checks originally contained notations

about advances for automobiles, and that Mr. Ortiz provided cars

to repay Mr. Alvarado for the checks, we are persuaded that the

form and substance of the transactions were automobile sales, not
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loans. Accordingly, we conclude that respondent correctly

included the amounts of these checks as income in the bank

deposits analysis.

C. Loan From Mr. Luna

Petitioners argue that respondent should have reduced the

amount determined to be unreported income in 1991 by $20,000 to

account for the loan they received from Mr. Luna in May 1991. In

our opinion an adjustment is not warranted because petitioners

failed to provide any evidence that they deposited $20,000 from

this loan into either of the bank accounts. Five days after

receiving the $20,000 loan, petitioners paid $29,767.24 to close

on the purchase of investment property in Marydia, Florida. 

Because their bank records do not show that petitioners withdrew

$29,767.24 in May 1991, we think respondent's explanation that

petitioners used the $20,000 loan for closing costs on this

property is reasonable.

D. Interest Payments Received From Mr. Rodriguez

Petitioners have conceded that the $18,000 and $4,000

interest payments they received in 1991 and 1992, respectively,

from Mr. Rodriguez from the sale of their house in Puerto Rico

are taxable income to them in those years. The interest deposits

of $3,500 in 1991 and $3,000 in 1992 were not included in

unreported income, and such amounts should not be removed from

the unreported income determined by respondent.
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E. License Use

Petitioners assert that $39,163 of their unexplained

deposits for 1992 is attributable to salesmen's use of Mr. Ortiz'

license to purchase automobiles. They argue that only money

attributable to the $100 fees that Mr. Ortiz charged the salesmen

for each car purchased using this license should be taxed. 

However, petitioners failed to substantiate any of these

salesmen's purchases and provided no information indicating how

many $100 fees they received. Petitioners also failed to show

that money received from any such transactions was deposited into

either of the bank accounts.

F. Conclusions as to Unreported Income

In sum, we hold that Mr. Ortiz had unreported selfemployment income from his wholesale used car business of $17,390

in 1991 and $49,163 in 1992. Petitioners had unreported interest

income of $18,000 in 1991 and $4,000 in 1992.

Issue 2. Additional Interest Income

We hold that petitioners did not receive additional interest

income of $3,500 in 1991 and $3,000 in 1992. These amounts are

included in the interest payments petitioners have conceded they

received from Mr. Rodriguez. See supra Issue 1D.

Issue 3. Capital Loss for 1991

Under section 1211 a taxpayer other than a corporation is

limited to $3,000 in net capital losses in any given tax year. 
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Under section 1212 any net capital losses that are disallowed as

a result of the limitation in section 1211 may be carried forward

to the next taxable year. In this case petitioners did not

report a capital loss in 1990, but they have claimed a capital

loss carryover to 1991. They have also claimed that the loss was

actually a net operating loss carryforward. However, petitioners

did not elect on their 1990 return to carry forward a net

operating loss, as required by section 172(b)(3), and they have

failed to substantiate that they experienced a loss in 1990 or

1992. Petitioners have the burden of proving entitlement to a

capital loss or net operating loss. Rule 142(a); Burke v.

Commissioner, T.C. Memo. 1995-608. They failed to do so. 

Therefore, we sustain respondent's disallowance of the claimed

capital loss.

Issue 4. Self-Employment Taxes and Adjustments

Respondent determined that Mr. Ortiz' unreported income in

1991 and 1992 was subject to self-employment taxes under section

1401 and to an adjustment in his self-employment tax deduction in

each year.

Section 1401 imposes a tax on a taxpayer's self-employment

income. Self-employment income includes the net earnings from

self-employment derived by an individual during the taxable year. 

Sec. 1402(b). Net earnings from self-employment means gross

income derived by an individual from any trade or business

carried on by the individual, less allowable deductions
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attributable to the trade or business, plus certain items not

relevant here. Sec. 1402(a). The term "trade or business" for

purposes of the self-employment tax generally has the same

meaning it has for purposes of section 162. Sec. 1402(c). Thus,

to be engaged in a trade or business within the meaning of

section 1402(a), an individual must be involved in an activity

with continuity and regularity, and the primary purpose for

engaging in the activity must be for income and profit. 

Commissioner v. Groetzinger, 480 U.S. 23 (1987). Whether an

individual is carrying on a trade or business requires an

examination of all the facts in each case. Higgins v.

Commissioner, 312 U.S. 212, 217 (1941). These provisions are to

be broadly construed to favor treatment of income as earnings

from self-employment. Hornaday v. Commissioner, 81 T.C. 830, 834

(1983).

Clearly Mr. Ortiz received unreported self-employment income

in 1991 and 1992 from his wholesale used car business. Having

found that the amounts were $17,390 and $49,163, respectively, it

follows that he is liable for self-employment taxes under section

1401 on those earnings. However, he is entitled to corresponding

increases in his self-employment tax deductions for 1991 and

1992. These adjustments are computational.

Issues 5 and 6. Fraud Penalties

Respondent determined that both petitioners are liable for

fraud penalties pursuant to section 6663 for the years in issues. 
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To the contrary, petitioners assert that they are not liable for

the penalties.

A. Fraud Generally

Under section 6663(a), if any part of any underpayment of

tax is due to fraud, a 75-percent penalty is added to the portion

of the underpayment attributable to fraud. Respondent has the

burden of proving that some portion of an underpayment is

attributable to fraud by clear and convincing evidence. Sec.

7454(a); Rule 142(b); Castillo v. Commissioner, 84 T.C. 405, 408

(1985); Stone v. Commissioner, 56 T.C. 213, 220 (1971). However,

once respondent establishes that any portion of the underpayment

is attributable to fraud, the entire underpayment is treated as

attributable to fraud, unless the taxpayer establishes otherwise. 

Sec. 6663(b).

To meet the burden of proof, respondent must establish: (1)

That the taxpayer has underpaid his or her taxes for each year;

Parks v. Commissioner, 94 T.C. 654, 660 (1990); Otsuki v.

Commissioner, 53 T.C. 96, 105 (1969); and (2) that some part of

the underpayment was due to the taxpayer's intent to conceal,

mislead, or otherwise prevent the collection of such taxes. Sec.

6653(b); Scallen v. Commissioner, 877 F.2d 1364, 1369 (8th Cir.

1989), affg. T.C. Memo. 1987-412; Stoltzfus v. United States, 398

F.2d 1002, 1004 (3d Cir. 1968); Parks v. Commissioner, supra at

660-661; Hebrank v. Commissioner, 81 T.C. 640, 642 (1983); Rowlee

v. Commissioner, 80 T.C. 1111 (1983).
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Fraud may not be found under "circumstances which at the

most create only suspicion." Davis v. Commissioner, 184 F.2d 86,

87 (10th Cir. 1950); Katz v. Commissioner, 90 T.C. 1130, 1144

(1988). Merely underreporting or failing to report income is

insufficient to establish fraud. Merritt v. Commissioner, 301

F.2d 484, 487 (5th Cir. 1962), affg. T.C. Memo. 1959-172. 

However, a pattern of consistent underreporting of income may be

strong evidence of fraud, especially when accompanied by other

circumstances showing intent to conceal. Mazzoni v.

Commissioner, T.C. Memo. 1970-37, affd. 451 F.2d 197, 202 (3d

Cir. 1971); see Holland v. United States, 348 U.S. at 137. Fraud

is an intentional wrongdoing by a taxpayer that is designed to

evade tax believed to be owing. Edelson v. Commissioner, 829

F.2d 828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223.

The existence of fraud is a question of fact to be resolved

upon consideration of the entire record, DiLeo v. Commissioner,

96 T.C. at 874; Gajewski v. Commissioner, 67 T.C. 181, 199

(1976), affd. without published opinion 578 F.2d 1383 (8th Cir.

1978), and the taxpayer's entire course or pattern of conduct. 

Spies v. United States, 317 U.S. 492, 499 (1943); Stone v.

Commissioner, supra at 224; Otsuki v. Commissioner, supra at 105-

106;. Because direct proof of fraudulent intent is rarely

available, fraud may be shown by circumstantial evidence and

reasonable inferences drawn from the facts. Miller v.

Commissioner, 94 T.C. 316, 333 (1990); Stephenson v.
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Commissioner, 79 T.C. 995 (1982), affd. per curiam 748 F.2d 331

(6th Cir. 1984); Gajewski v. Commissioner, supra at 199. 

However, fraud should not be imputed or presumed, Beaver v.

Commissioner, 55 T.C. 85, 92 (1970), and a finding of fraud may

not be bootstrapped to a taxpayer's failure to prove the

Commissioner's deficiency determination erroneous. Drieborg v.

Commissioner, 225 F.2d 216, 218 (6th Cir. 1955), affg. in part a

Memorandum Opinion of this Court. Parks v. Commissioner, supra

at 660-661; Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989); 

Estate of Beck v. Commissioner, 56 T.C. 297, 363 (1971).

When allegations of fraud are intertwined with unreported

and indirectly reconstructed income, the Commissioner can prove

an underpayment by one of two alternate methods. United States

v. Massei, 355 U.S. 595 (1958). First, a likely source of the

unreported income can be proved. Holland v. United States,

supra; DiLeo v. Commissioner, supra at 873-874; Nicholas v.

Commissioner, 70 T.C. 1057 (1978); Otsuki v. Commissioner, supra

at 105-106. Second, if the taxpayer alleges a nontaxable source,

the Commissioner can disprove the alleged source. United States

v. Massei, supra; Kramer v. Commissioner, 389 F.2d 236, 239 (7th

Cir. 1968), affg. T.C. Memo. 1966-234; DiLeo v. Commissioner,

supra at 873-874. The Commissioner may disprove an alleged

specific nontaxable source of income by showing that the

reconstruction of income is accurate and that the taxpayer's
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allegations are inconsistent, implausible, and not supported by

objective evidence.

B. Indicia of Fraud

There are certain indicia that can lead to a decision as to

fraud. They include: (1) Understatements of income, Holland v.

United States, supra at 137; Patton v. Commissioner, 799 F.2d

166, 171 (5th Cir. 1986), affg. T.C. Memo. 1985-148; (2)

inadequate books and records, Merritt v. Commissioner, supra at

487; Edwards v. Commissioner, T.C. Memo. 1995-77; (3) false

entries on or alterations of documents, Spies v. United States,

supra at 499; (4) failure to file tax returns; (5) implausible or

inconsistent explanations of behavior; Grosshandler v.

Commissioner, 75 T.C. 1, 20 (1980); (6) concealment of income or

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

1986), affg. T.C. Memo. 1984-601; (7) dealing in cash; (8)

failure to cooperate with tax authorities, Bradford v.

Commissioner, supra at 307; (9) filing false documents,

Stephenson v. Commissioner, supra at 1007; Recklitis v.

Commissioner, 91 T.C. 874, 910 (1988); and (10) failing to give

complete information to the tax return preparer, Korecky v.

Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986), affg. per

curiam T.C. Memo. 1985-63. This list is nonexclusive. See

Miller v. Commissioner, supra at 334. Although no single factor

may be necessarily sufficient to establish fraud, the existence

of several indicia may be persuasive circumstantial evidence of
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fraud. Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir.

1984), affg. per curiam T.C. Memo. 1982-603.

C. Fraud Penalties--Mrs. Ortiz

Fraud is not imputed from one spouse to the other. Stone v.

Commissioner, 56 T.C. at 227-228. Section 6663(c) provides that,

in the case of a joint income tax return, the imposition of the

fraud penalty under section 6663(a) does not apply with respect

to a spouse unless some part of the underpayment is due to the

fraud of such spouse. Respondent has the burden of proving by

clear and convincing evidence that Mrs. Ortiz committed fraud. 

There is no evidence in this record that Mrs. Ortiz displayed a

fraudulent intent to evade taxes during the years in issue. 

There is nothing to show that she was involved in her husband's

wholesale used car business or had any direct knowledge of its

operations. She worked as a pharmacist in 1991 and 1992. She

received wages and reported them as income for tax purposes. 

While it is likely that she was not completely unaware of her

husband's activity, that fact alone cannot sustain a finding of

fraud as to her. It is true that there was some unreported

interest income in 1991 and 1992, but those omissions do not

justify a finding of fraud. Thus, we conclude that Mrs. Ortiz is

not liable for the fraud penalties, although she is jointly and

severally liable for any deficiencies resulting from the findings

and conclusions reached herein. Mrs. Ortiz has not raised the

issue, or offered any evidence, to show that she should be
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considered an innocent spouse within the meaning of section

6013(e). Therefore, we decline to apply that section.

D. Fraud Penalties--Mr. Ortiz

Whether Mr. Ortiz is liable for fraud penalties is more

troublesome. The evidence is conflicting, and the indicia of

fraud are weak. To be sure, his self-employment income from the

wholesale used car business was underreported in both years and,

according to the revenue agent who audited his returns, the books

and records of the business were not entirely adequate. 

Therefore, the agent resorted to a bank deposits analysis in

reconstructing the income of the business. As we have found,

that analysis was flawed in certain respects. Furthermore, the

records and data Mr. Ortiz furnished to Mr. Solano, his

accountant and return preparer, were apparently sufficient to

enable Mr. Solano to determine business gross sales, cost of

goods sold, and expenses.

Although respondent argues that Mr. Ortiz presented altered

notations on checks received from Mr. Alvarado, it was not Mr.

Ortiz who changed the notations from "advances for autos" to

"prestamo", the Spanish word for loan. Mr. Alvarado made the

changes after the checks cleared his Puerto Rican bank.

Because of Mr. Ortiz' difficulty with the English language,

his testimony was given through an interpreter. He was not

represented by counsel. At times he appeared not to fully
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understand the questions asked by respondent's counsel on crossexamination. Nonetheless, he was candid, not evasive.

Considering the totality of the facts and circumstances

contained in this record, we conclude that respondent has not

carried the heavy burden of proving fraud by clear and convincing

evidence. Consequently, we hold for Mr. Ortiz on this issue.

Issue 7. Accuracy-Related Penalties

The Court is satisfied, based on this record, that

respondent's alternative determination that petitioners are

liable for the accuracy-related penalties under section 6662 for

both years should be sustained. Section 6662(a) provides

generally for a penalty of 20 percent of the portion of an

underpayment to which the section applies.

Section 6662(b) lists five categories in which an

underpayment of tax will be subjected to the penalty, including

negligence. "Negligence" includes any failure to make a

reasonable attempt to comply with the Internal Revenue Code. 

Sec. 6662(c). Petitioners underreported their income for the

years in issue. In short, they did not do what a reasonable and

ordinary prudent person would do under the circumstances. Neely

v. Commissioner, 85 T.C. 934, 947 (1985). Petitioners presented

no evidence to show that their underpayments were due to

reasonable cause and that they acted in good faith with respect

to such underpayments. Sec. 6664(c).
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We conclude that their actions constituted negligence as

defined in section 6662(c). Accordingly, respondent is sustained

on this issue.

To reflect concessions and our conclusions with respect to

the disputed issues,

Decision will be entered

under Rule 155.