1 Respondent's trial memorandum concedes a decreased

deficiency for 1987 and asserts increased deficiencies for 1988,

1989, and 1990. As petitioner has raised no objection to the

(continued...)

 

T.C. Memo. 1998-218

UNITED STATES TAX COURT

THEODORE LANGWORTHY, JR., Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13395-96. Filed June 22, 1998. 

Jack M. Battaglia and Bernadette Weaver-Catalana, for

petitioner.

Jerome F. Warner and Matthew I. Root, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Judge: Respondent determined the following

deficiencies in, additions to, and penalty onpetitioner's Federal

income tax for the years 1987, 1988, 1989, and 1990:1
- 2 -

1(...continued)

increased deficiencies, the issues relating to such increased

deficiencies appear to have been tried by consent. Rule

41(b)(1). We, however, do not address the increased deficiencies

because the decision we reach below results in deficiencies less

than those determined by respondent in the notice of deficiency.

 Additions to Tax Penalty

 Sec. Sec. Sec. Sec. Sec.

Year Deficiency 6653(b) 6653(b)(1)(A) 6653(b)(1)(B) 6661 6663

1987 $32,177 - $24,133 

1 $8,044

 -

1988 26,326 $19,745 - - 6,582 -

1989 27,199 - - - - $20,399

1990 11,624 - - - - 8,718

 150 percent of the interest due on the deficiency.

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, the issues to be decided are as follows:

(1) Whether the assessment and collection of taxes,

additions to tax, and penalties for 1987, 1988, and 1990 are

barred by the period of limitations pursuant to section 6501(a)

or are allowed under either (a) the fraud exception to the

general period of limitations provided in section 6501(c)(1) or

(b) the extended 6-year period of limitations provided in section

6501(e)(1)(A); and

(2) if assessment and collection are not barred for 1987,

1988, and 1990, then, for each of those years and for 1989 we

must decide whether:

(a) and, if so, to what extent, petitioner omitted
- 3 -

gross receipts from his tavern business during the years in

issue; 

(b) petitioner is entitled to deduct certain business

expenses in excess of the amount allowed by respondent for

the years in issue; 

(c) petitioner is liable for additions to tax for

fraud under section 6653(b)(1)(A) and (B) for 1987 and under

section 6653(b) for 1988;

(d) petitioner is liable for penalties for fraud under

section 6663 for 1989 and 1990; and

(e) petitioner is liable for additions to tax for

substantially understating income tax under section 6661 for

1987 and 1988.

FINDINGS OF FACT

Some of the facts have been stipulated for trial pursuant to

Rule 91. The parties' stipulations of fact are incorporated

herein by reference and are found as facts in the instant case. 

Petitioner resided in Jamestown, New York, at the time he filed

his petition. Petitioner filed timely Federal income tax returns

(returns) for all years in issue. 

Background

During the years in issue, petitioner owned and operated the

Bullfrog Hotel (Bullfrog) in Jamestown, New York. The Bullfrog,

located on the Chautauqua River in the industrial section of

Jamestown, consists of a 22-room hotel and a tavern. The
- 4 -

2 At the Bullfrog, a boilermaker is a shot of whiskey with a

beer chaser on the side. 

Bullfrog's clientele, generally workers from the surrounding

factories, is characterized as a boilermaker crowd.2 Open 7 days

a week, the Bullfrog serves food, soft drinks, and alcoholic

beverages including beer, wine, and liquor. The Bullfrog

employed three individuals during the years in issue: 

Petitioner, Jim Malbaum (Mr. Malbaum), and Dorothy Stacey (Ms.

Stacey). Petitioner manages all aspects of the hotel and tavern,

and he works there approximately 80 to 85 hours each week. Until

his retirement during 1990, Mr. Malbaum's duties included

sandwichmaking and bartending. Ms. Stacey worked part time at

the Bullfrog for 11 years, waiting on tables during the lunch

hour rush (11 a.m. to 2 p.m.), 5 days a week. Although her

primary duty was waitressing, Ms. Stacey occasionally filled in

as a bartender on nights that the Bullfrog had a band. Two to

three nights per week, usually on those band nights, Ms. Stacey

frequented the bar as a patron. 

Petitioner failed to report all of his beer, wine, and

liquor purchases during the years in issue. Petitioner's failure

to report all of his purchases led to criminal charges for

willfully filing false returns in violation of section 7206(1). 

On May 15, 1995, petitioner entered into a plea agreement,

agreeing to plead guilty to one count of violating section
- 5 -

3 The plea agreement, dated May 15, 1995, stated the following

factual basis for petitioner's plea of guilty:

The defendant failed to report substantial cash

purchases of beer, liquor, and wine on his federal

income tax returns for the 1988, 1989, and 1990 tax

years. The defendant knew the amounts stated on his

tax returns as expenses were not accurate. The

defendant signed the aforementioned federal income tax

returns under penalty of perjury, knowing the returns

falsely stated the amount of expenditures for beer,

liquor, and wine. 

4 Petitioner ordered and paid for all of the inventory

purchased for the Bullfrog. 

5 The parties agree, however, that petitioner's reported

purchases are not in dispute. 

7206(1) relating to the years 1988, 1989, and 1990.3 On August

25, 1995, the U.S. District Court for the Western District of New

York, on the basis of petitioner's guilty plea, held petitioner

guilty of one count of violating section 7206(1).

Invoices from the Bullfrog's vendors (vendor invoices), when

compared to purchases reported on petitioner's returns (reported

purchases), demonstrate that petitioner failed to report

purchases of $39,228, $42,787.80, $48,060.90, and $13,620.32 for

1987, 1988, 1989, and 1990, respectively (unreported purchases). 

Reported purchases were paid for by checks drawn on the

Bullfrog's account at Marine Midland Bank, and unreported

purchases were paid for by cash drawn from the cash register.4

Petitioner kept no record of his unreported purchases, and he

failed to advise his return preparer, Michael Dillon (Mr.

Dillon), of the unreported purchases.5 Petitioner failed to

report the gross receipts generated by the sale of the unreported
- 6 -

6 During 1988, 1989, and 1990, petitioner purchased Bartyles

and James brand wine coolers. Respondent did not include the

(continued...)

purchases (unreported gross receipts), and petitioner kept no

records of the unreported gross receipts. At the time petitioner

filed his returns for the years in issue, he knew that the

unreported purchases and the unreported gross receipts were not

reported on his return.

Mr. Dillon, of Acme Tax Service, prepared petitioner's

returns for the years in issue solely from the information

provided by petitioner, which included cash register receipts,

check stubs, cash payouts, a payroll book, a weekly rental book,

and bank statements. 

Unreported Gross Receipts

Using the beer, wine, and liquor purchases indicated on the

vendor invoices, the drink prices charged by petitioner for sales

of those beverages, and allowing an adjustment for discretionary

use (i.e., breakage, spillage, and complimentary drinks),

respondent reconstructed petitioner's total gross receipts. From

total gross receipts respondent subtracted reported gross

receipts to arrive at the amount of petitioner's unreported gross

receipts.

1. Purchases 

Vendor invoices indicate the following purchases:6
- 7 -

6(...continued)

sale of these wine coolers in the reconstruction of petitioner's

gross receipts for the years in issue. 

 Quantity Purchased 

 Item Purchased 1987 1988 1989 1990

Kegs of beer1 151 227 249.5 231.5

Bottled beer (cases)2 5,579 4,824 4,879 2,600

Canned beer (cases)2 732 668 616 1,217

Liquor:

 Liter bottles3 1,114 1,658 2,087 1,140

 .750-liter bottles4 60 79 12 9

Wine: 

 Liter bottles3 167 142 269 181

 .750-liter bottles4 23 25 60 143

 3-liter bottles 24 12 - -

 1.5-liter bottles - 96 42 42

1A keg of beer contains either 198 10-ounce or 165 12-ounce

glasses of beer. The average cost of a keg of beer was $23.13

during 1987, $23.30 during 1988, $25.61 during 1989, and $26.20

during 1990. 

2Each case contains 24 bottles or cans of beer. During

April 1990, petitioner began purchasing loose cans of beer;

before that time canned beer was purchased in six-packs bound

with plastic (i.e., four six-packs per case). 

3There are 33.5 ounces in each liter bottle of wine or

liquor. 

4There are 25.13 ounces in each .750-liter bottle of wine or

liquor. 

2. Beer, Wine, and Liquor Sales

Throughout the years in issue, petitioner sold, for onpremises consumption (over the bar), (1) draft beer in 10-ounce

glasses for 50 cents per draft, (2) bottled beer for $1.10 per

bottle, (3) wine for $1.10 per glass, and (4) liquor for $1.15

per drink. Petitioner also sold kegs and six-packs of beer for

off-premises consumption (to go). To-go kegs were sold to local
- 8 -

softball teams for postgame parties and to individuals for

private parties, picnics, and weddings. To-go six-packs were

generally sold at closing time and on weekends to patrons and

hotel guests. Petitioner kept no records of the number of to-go

kegs or six-packs he sold. Petitioner rang up none of his to-go

keg sales and only some of his to-go six-pack sales. 

Respondent's reconstruction of gross receipts from the sale

of keg and canned beer made no allowance for to-go sales of kegs

and six-packs. Respondent's computation of gross receipts from

the sale of wine and liquor was based on a determination that

each wine drink sold contained 4 ounces of wine, and that each

liquor drink sold contained 1 ounce of liquor. 

3. Discretionary Use Percentage

Respondent reconstructed petitioner's gross receipts from

the sale of each keg of draft beer assuming sales of 165 12-ounce

glasses per keg which allows approximately 17 percent for

discretionary use. Reconstructed gross receipts from the sale of

bottled and canned beer were adjusted to reflect an 8.3-percent

discretionary use allowance (i.e., two bottles or cans per case). 

Into the reconstruction of gross receipts from the sale of wine

respondent factored a discretionary use allowance of 20 percent
- 9 -

7 Each 1.5-liter bottle of wine contains the equivalent of two

.750-liter bottles.

8 Each 3-liter bottle of wine contains the equivalent of four

.750-liter bottles.

9 Calculations were stipulated for trial, for respondent and

petitioner, respectively, solely for the purpose of showing how

the parties calculated gross receipts. Neither party stipulated

the accuracy, correctness, or reasonableness of the other party's

calculations. 

for each .750-liter bottle, 1.5-liter bottle,7 and 3-liter

bottle8 and an allowance of 40 percent for each liter bottle. 

Gross receipts from the sale of liquor were calculated using 16

percent as the discretionary use allowance. 

Petitioner kept no record of the number of beer, wine, or

liquor drinks given away, and he did not keep records of broken

or spilled drinks (beer, wine, or liquor). 

4. Reconstructed Gross Receipts

In the deficiency notice, mailed on April 1, 1996,

respondent determined that petitioner had gross receipts for

1987, 1988, 1989, and 1990 in the amounts of $256,344, $242,740,

$249,378, and $199,199, respectively. Respondent's computations,

as stipulated by the parties,9 indicate reconstructed gross

receipts from the sale of draft beer, bottled beer, canned beer,

wine, and liquor in the amounts of $204,076.50 for 1987,

$209,167.85 for 1988, $223,325.45 for 1989, and $150,639.60 for
- 10 -

10 We note that the deficiency notice indicates gross receipts

in amounts greater than those shown in respondent's stipulated

computations. The difference, we assume, is that gross receipts

as determined in the deficiency notice include sales of food and

soft drinks. As respondent made no argument concerning food and

soft drink sales at the Bullfrog, any issues relating to such

sales appear to have been conceded. Rybak v. Commissioner, 91

T.C. 524, 566 (1988). 

11 Petitioner's returns reflect reported gross receipts in

excess of the amounts stipulated for trial. Petitioner reported

gross receipts of $131,448, $121,149, $121,483, and $157,613 for

1987, 1988, 1989, and 1990, respectively. The difference, we

assume, is that petitioner's reported gross receipts included

sales of food and soft drinks which are not in issue in the

instant case.

1990.10 Petitioner's computations, as stipulated by the parties,

indicate gross receipts from the sale of draft beer, bottled

beer, canned beer, wine, and liquor in the amounts of $167,715.73

for 1987, $169,321.93 for 1988, $178,809.03 for 1989, and

$122,014.47 for 1990.

5. Reported Gross Receipts

The parties stipulated reported gross receipts

from the sale of beer, wine, and liquor of $84,179.57 for 1987,

$73,801.36 for 1988, $73,865.70 for 1989, and $104,254.74 for

1990.11 

Expenses

1. Band Expenses

Country western, rock and roll, rock and roll blues, 

fifties, and sixties style bands regularly played at the

Bullfrog. Petitioner hired bands directly and through David

Blackburn (Mr. Blackburn), a local entertainment agent. When
- 11 -

12 We note that several back copies of Nite-Line are not

available for the years in issue. 

bands played at the Bullfrog, they typically played on Thursday,

Friday, and Saturday nights. Petitioner customarily paid the

bands in cash following each performance. 

Bands featured at the Bullfrog were regularly advertised in

Nite-Line Magazine (Nite-Line), a local entertainment guide.

Petitioner advertised in Nite-Line 44 weeks during 1987, 48 weeks

during 1988, 39 weeks during 1989, and 44 weeks during 1990. 

Available back copies of Nite-Line demonstrate that, during the

years in issue, petitioner regularly listed three band nights

(typically Thursday, Friday, and Saturday) in each

advertisement.12 Nite-Line records indicate that petitioner

incurred band advertising expenses of $1,596, $1,740, $1,416, and

$1,596 during 1987, 1988, 1989, and 1990, respectively. 

Petitioner maintained no records of (1) the nights that

bands appeared or failed to appear, (2) the amounts that he paid

bands that performed at the Bullfrog, or (3) the amounts that he

paid for band advertising expenses. Petitioner issued no Forms

1099 to the bands that played at the Bullfrog. Petitioner

claimed no deduction for band or band advertising expenses for

the years in issue, and petitioner disclosed no band or band

advertising expenses to his return preparer, Mr. Dillon. 

In the notice of deficiency, respondent allowed petitioner

deductions for band advertising expenses for 1987 and 1988 in the

amounts of $1,596 and $1,740, respectively, but allowed nothing
- 12 -

13 A "cadet car" is a "stock car" which is defined as a racing

car having the basic chassis of a commercially produced assemblyline model. Webster's Third New International Dictionary (1993).

for 1989 and 1990. Respondent now agrees that petitioner is

allowed deductions for band advertising expenses in the amounts

of $1,416 for 1989 and $1,596 for 1990. Respondent allowed

petitioner no deduction for amounts allegedly paid to bands that

played at the Bullfrog.

2. Race Car Expenses--1987 and 1988

During 1987 and 1988, petitioner owned a "cadet car"13 that

he raced in a novice class on Saturday nights at Stateline

Speedway (speedway). Petitioner also owned a truck, described

below, which he used to tow the race car to and from the

speedway, located in Busti, New York, approximately 4 miles from

his home. The Bullfrog and Arthur R. Gren Co., Inc., a beer

distributor, sponsored the race car. Patrons from the Bullfrog

often came out to the speedway to see petitioner race. 

On his 1987 and 1988 returns, petitioner claimed Schedule C

losses from the operation of his race car. For 1987, petitioner

reported income of $1,965 and claimed expenses of $2,865. For

1988, petitioner reported income of $2,440 and claimed expenses

of $2,604.

Petitioner's expenses associated with the race car included: 

Gasoline, oil, tires, A-frames, ball-joints, spark plugs, spark

plug wires, distributor caps, pit entrance fees, paint, and
- 13 -

miscellaneous car repairs (including parts). Petitioner raced

the car approximately 10 times during each of the years in issue. 

In support of his claimed deductions, petitioner provided his

return preparer, Mr. Dillon, with a summary listing of gasoline

and parts purchased during 1987 and 1988. At trial, petitioner

produced no receipts for the race car expenses, which he

generally paid in cash. Respondent disallowed petitioner's

deductions for race car expenses on the basis of petitioner's

failure to substantiate them.

3. Truck Expenses--1990

During 1990, petitioner owned a 1976 Ford pickup truck which

he used in his business at the Bullfrog. Petitioner used the

vehicle to pick up restaurant supplies, haul garbage to the dump,

drive to the bank, and drive drunk patrons home after the bar

closed at night. Petitioner claimed truck expenses for the

Bullfrog in the amount of $3,800. Respondent disallowed

petitioner's deduction for truck expenses on the basis of

petitioner's failure to substantiate the claimed expenses. 

OPINION

I. Period of Limitations and Fraud

The deficiency notice in the instant case was sent on April

1, 1996, after the expiration of the usual 3-year period of
- 14 -

14 Sec. 6501(a) reads as follows:

SEC. 6501(a). General rule.--Except as otherwise

provided in this section, the amount of any tax imposed

by this title shall be assessed within 3 years after

the return was filed (whether or not such return was

filed on or after the date prescribed) * * * , and no

proceeding in court without assessment for the

collection of such tax shall be begun after the

expiration of such period.

limitations provided in section 6501(a).14 The contention that

the period of limitations has expired is an affirmative defense

which must be specifically pleaded. Rule 39; Robinson v.

Commissioner, 57 T.C. 735, 737 (1972). Petitioner properly

raised in his petition the affirmative defense of the expiration

of the period of limitations for each year in issue except 1989. 

Petitioner's failure to plead the affirmative defense of the

expiration of the period of limitations with respect to 1989

constitutes a waiver of the defense for that year. Rule

34(b)(4); see Shopsin v. Commissioner, T.C. Memo. 1984-151, affd.

without published opinion 751 F.2d 371 (2d Cir. 1984). 

Consequently, we conclude that the assessment and collection of

any deficiency for 1989 is not barred by the period of

limitations. 

As to the remaining years (i.e., 1987, 1988, and 1990),

however, unless one of the exceptions to the period of

limitations is applicable, the assessment of the deficiencies,

additions, and penalties determined in the deficiency notice is
- 15 -

15 In the alternative, respondent contends that petitioner's

return for 1990 is subject to the 6-year period of limitations

applicable under sec. 6501(e)(1)(A) because that return omitted

substantial amounts of gross income. We need not consider

respondent's alternative argument because we find fraud for each

of the years in issue, including 1990.

16 Sec. 6653(b)(1)(A) and (B) reads as follows:

SEC. 6653(b). Fraud.--

(1) In general.--If any part of any underpayment (as

defined in subsection (c)) of tax required to be shown on a

return is due to fraud, there shall be added to the tax an

amount equal to the sum of--

(A) 75 percent of the portion of the underpayment

which is attributable to fraud, and

(B) an amount equal to 50 percent of the interest

payable under section 6601 with respect to such portion

for the period beginning on the last day prescribed by

law for payment of such underpayment (determined

without regard to any extension) and ending on the date

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

of the payment of the tax.

17 Sec. 6653(b) reads, in pertinent part, as follows:

SEC. 6653(b). Fraud.--

(continued...)

barred. Respondent contends that the instant case falls within

the exception in section 6501(c)(1), which provides that tax may

be assessed at any time if a false or fraudulent return is filed

with the intent to evade tax.15 Accordingly, respondent also

determined in the deficiency notice that petitioner is liable for

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

(B) for 1987,16 (2) an addition to tax for fraud under section

6653(b) for 1988,17 and (3) a penalty for fraud under section
- 16 -

17(...continued)

(1) In general.--If any part of any underpayment (as

defined in subsection (c)) of tax required to be shown on a

return is due to fraud, there shall be added to the tax an

amount equal to 75 percent of the portion of the

underpayment which is attributable to fraud.

18 Sec. 6663 reads, in pertinent part, as follows:

SEC. 6663(a). Imposition of Penalty.--If any part

of any underpayment of tax required to be shown on a

return is due to fraud, there shall be added to the tax

an amount equal to 75 percent of the portion of the

underpayment which is attributable to fraud.

6663 for 1989 and 1990.18

The Commissioner has the burden of proving the applicability

of the fraud exception to the general period of limitations. 

Sec. 7454; Rule 142(b); Farmers Feed Co. v. Commissioner, 10

B.T.A. 1069, 1075-1076 (1928). The Commissioner's burden is the

same as that which is borne with respect to the fraud additions

imposed under section 6653(b) and the fraud penalties imposed

under section 6663. See, e.g., Schaffer v. Commissioner, 779

F.2d 849, 857 (2d Cir. 1985), affg. in part and remanding in part

T.C. Memo. 1982-34; Asphalt Indus., Inc. v. Commissioner, 384

F.2d 229, 232 (3d Cir. 1967), revg. on other grounds 46 T.C. 622

(1966); Estate of Temple v. Commissioner, 67 T.C. 143, 159-160

(1976). Accordingly, we consider together (1) the fraud

exception to the general 3-year period of limitations with

respect to 1987, 1988, and 1990 and (2) the fraud additions and

penalties for all years in issue, including 1989.
- 17 -

To carry the burden of proof on the fraud exception and the

fraud additions and penalties, the Commissioner must show by

clear and convincing evidence both (1) that the taxpayer

underpaid his tax for each taxable year in issue and (2) that at

least some part of the underpayment was due to fraud. Sec.

7454(a); Rule 142(b); DiLeo v. Commissioner, 96 T.C. 858, 873

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Hebrank v.

Commissioner, 81 T.C. 640, 642 (1983). 

A. Proof of an Underpayment

The Commissioner need not prove the precise amount of the

underpayment resulting from fraud, but only that there is some

underpayment and that some part of it is attributable to fraud. 

Lee v. United States, 466 F.2d 11, 16-17 (5th Cir. 1972);

Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir. 1972),

affg. T.C. Memo. 1970-274. To carry that burden, the

Commissioner may not rely on the taxpayer's failure to meet his

burden of proving error in the Commissioner's determinations as

to the deficiencies. DiLeo v. Commissioner, supra at 873;

Habersham-Bey v. Commissioner, 78 T.C. 304, 312 (1982); Otsuki v.

Commissioner, 53 T.C. 96, 106 (1969).

In the instant case, it is uncontroverted that petitioner

failed to report certain gross receipts during the years in

issue. Petitioner concedes unreported gross receipts on brief

and in his stipulated calculations. Accordingly, we conclude

that the record contains clear and convincing evidence of
- 18 -

unreported gross receipts for each year in issue.

The existence of unreported gross receipts, however, does

not demonstrate that petitioner underpaid his tax for each of the

years in issue. Indeed, gross receipts from sales must be

reduced by cost of goods sold to determine gross income from

sales. Sec. 1.61-3(a), Income Tax Regs. Moreover, gross income

from sales must be reduced by all deductible expenses to

determine taxable income from sales. Sec. 63(a). Accordingly,

an underpayment of tax resulting from unreported gross receipts

from sales is possible only if such unreported gross receipts are

not exceeded by cost of goods sold and deductible expenses. See,

e.g., Franklin v. Commissioner, T.C. Memo. 1993-184. 

In the instant case, petitioner contends that he did not

underpay his tax for the years in issue because the profits from

unreported sales of alcoholic beverages at the Bullfrog were used

to pay bands that performed at the Bullfrog.

The general rule is well settled that, even in criminal

cases where the Government bears the greater burden of proof,

i.e. beyond a reasonable doubt, "'evidence of unexplained

receipts shifts to the taxpayer the burden of coming forward with

evidence as to the amount of offsetting expenses, if any.'" 

United States v. Garguilo, 554 F.2d 59, 62 (2d Cir. 1977)

(quoting Siravo v. United States, 377 F.2d 469, 473 (1st Cir.

1967)); United States v. Campbell, 351 F.2d 336, 339 (2d Cir.

1965); Gleave v. Commissioner, T.C. Memo. 1997-276; Franklin v.

Commissioner, supra. 
- 19 -

19 The following computation demonstrates that petitioner would

have unreported income even if, in addition to the expenses and

purchases conceded by respondent, we credited petitioner with the

full amount of the band expenses he claims:

 1987 1988 1989 1990

Unreported gross receipts1 $104,917 $116,072 $127,474 $31,369

Less:

 Band expenses2 36,300 39,600 32,175 13,200

 Band advertising expenses 1,596 1,740 1,416 1,596

 7-percent New York 

 State sales tax3 7,344 8,125 8,923 2,195

 Additional purchases4 39,228 42,787 48,061 13,620

 Total unreported income 20,449 23,820 36,899 758 

(continued...)

Citing Richardson v. Commissioner, 264 F.2d 400, 404 (4th

Cir. 1959), revg. in part T.C. Memo. 1957-122, and Perez v.

Commissioner, T.C. Memo. 1974-211, however, petitioner contends

that respondent bears the burden of proving that petitioner did

not incur the band expenses that he now claims. Petitioner

argues that respondent failed to carry this burden because

respondent presented no evidence whatsoever with respect to the

band expenses.

We have no doubt, as indicated by our findings of fact, that 

petitioner incurred deductible band expenses during the years in

issue. We conclude, however, that even if we credit petitioner

with the band expenses that he claims, much of which we credit

infra in deciding the correct amount of the deficiency, those

expenses, along with the additional expenses and purchases

conceded by respondent, nonetheless would be insufficient to

offset the unreported gross receipts proved by respondent and

discussed more fully infra.

19 We therefore find it unnecessary
- 20 -

19(...continued)

1These figures (rounded to the nearest dollar) represent petitioner's

unreported gross receipts as recalculated in accordance with this opinion. 

See the discussion concerning gross receipts in part II of this opinion,

infra.

2These figures represent the amount of band expenses claimed by

petitioner in the stipulated computations. As discussed infra, we conclude

that petitioner is entitled to deduct band expenses in the amount of $18,150

for 1987, $19,800 for 1988, $16,088 for 1989, and $13,200 for 1990. 

3Respondent concedes that petitioner may deduct the 7-percent New York

State sales tax associated with any additional gross receipts received by

petitioner from the sale of beer, wine, or liquor. We computed the sales tax

shown above on the basis of the amount of petitioner's unreported gross

receipts as recalculated in accordance with this opinion.

4These figures represent the additional purchases allowed by respondent

in the deficiency notice and in the stipulation of facts. 

to explore the implications of Richardson v. Commissioner, supra

and Perez v. Commissioner, supra. Consequently, we conclude,

that respondent has shown by clear and convincing evidence that

petitioner had unreported gross receipts, net of expenses, which

result in an underpayment of tax for each year in issue.

B. Proof That the Underpayment Was Due to Fraud

Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing. Powell v. Granquist, 252 F.2d 56

(9th Cir. 1958); DiLeo v. Commissioner, 96 T.C. at 874; Miller v.

Commissioner, 94 T.C. 316, 332 (1990). The Commissioner's burden

of proving fraud is met if it is shown that the taxpayer intended

to evade taxes known to be owing by conduct intended to conceal,

mislead or otherwise prevent the collection of taxes. Stoltzfus

v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968); DiLeo v.

Commissioner, supra at 874; Rowlee v. Commissioner, 80 T.C. 1111,

1123 (1983).

The existence of fraud is a question of fact and is to be
- 21 -

resolved on the basis of the entire record. DiLeo v.

Commissioner, supra at 874; Gajewski v. Commissioner, 67 T.C.

181, 191 (1976), affd. without published opinion 578 F.2d 1383

(8th Cir. 1978). Fraud is not to be imputed or presumed. It

must be affirmatively established by clear and convincing

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

taxpayer's entire course of conduct may establish the requisite

fraudulent intent. DiLeo v. Commissioner, supra at 874; Stone v.

Commissioner, 56 T.C. 213, 223-224 (1971). Because direct

evidence of the taxpayer's fraudulent intent is rarely available,

fraud may be proven by circumstantial evidence and reasonable

inferences drawn from the facts. DiLeo v. Commissioner, supra at

874; Rowlee v. Commissioner, supra at 1123.

Courts have relied on a number of indicia of fraud in

deciding whether to sustain the Commissioner's determinations

with respect to fraud. Although no single factor is necessarily

sufficient to establish fraud, the existence of several indicia

is persuasive circumstantial evidence of fraud. Petzoldt v.

Commissioner, 92 T.C. 661, 700 (1989). In Bradford v.

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

1984-601, the Court of Appeals for the Ninth Circuit gave a

nonexclusive list of circumstantial evidence that may give rise

to a finding of fraudulent intent. Badges of fraud include (1)

understatement of income, (2) inadequate records, and (3) dealing

in cash. Id. A failure to be forthright with one's return
- 22 -

preparer is also an indication of fraud, Korecky v. Commissioner,

781 F.2d 1566, 1568 (11th Cir. 1986), affg. per curiam T.C. Memo.

1985-63, as is a conviction under section 7206(1), Wright v.

Commissioner, 84 T.C. 636 (1985).

Although the mere failure to report income is not sufficient

to establish fraud, Merritt v. Commissioner, 301 F.2d 484, 487

(5th Cir. 1962), affg. T.C. Memo. 1959-172, a pattern of

consistent underreporting of income, especially when accompanied

by other circumstances showing an intent to conceal, justifies

the inference of fraud, see Holland v. United States, 348 U.S.

121, 139 (1954); Parks v. Commissioner, 94 T.C. 654, 664 (1990); 

Otsuki v. Commissioner, 53 T.C. at 108. In the instant case,

considering the record as a whole, we conclude that there are

sufficient badges of fraud to carry respondent's burden of proof. 

The record reveals a pattern of consistent underreporting of

income by petitioner during all of the years in issue. Moreover,

it is uncontroverted that petitioner failed to maintain adequate

records of his unreported income and expenses and that petitioner

conducted much of his business in cash. Additionally, petitioner

failed to be forthcoming with his return preparer, Mr. Dillon,

disclosing neither his cash purchases nor his band expenses,

including band advertising. Furthermore, while a conviction

under section 7206(1) does not establish fraud, it is one factor

to be considered. Wright v. Commissioner, supra at 643-644.

We conclude that the record in the instant case contains

clear and convincing evidence that there was an underpayment for
- 23 -

20 On brief, both parties make extensive arguments concerning

who bears the burden of proof with respect to the amount of the

deficiency. We need not decide the situs of the burden of proof,

however, because the record in the instant case is sufficient for

us to reach our findings of fact without resort to the burden of

proof. 

each year in issue and that each such underpayment was due to

fraud.

C. Conclusion

Having found fraud for each year in issue, we conclude that:

(1) Section 6501(a) does not operate to bar the assessment and

collection of taxes for 1987, 1988, and 1990; (2) for 1987,

petitioner is liable for the 75-percent fraud addition to tax

under section 6653(b)(1)(A) and for the additional amount added

to the tax under section 6653(b)(1)(B); (3) for 1988, petitioner

is liable for the 75-percent fraud addition to tax under section

6653(b); and (4) for 1989 and 1990, petitioner is liable for the

75-percent fraud penalty under section 6663.

We have considered the parties' remaining arguments as to

fraud and conclude that the arguments are either without merit or

unnecessary to reach in light of our holdings above.

II. Amount of the Deficiency20

A. Unreported Gross Receipts

Although petitioner conceded unreported gross receipts,

petitioner did not concede unreported gross receipts in the

amounts determined by respondent. Petitioner contends that

respondent's reconstruction of gross receipts is overstated
- 24 -

21 The parties also disagree as to the proper discretionary use

allowance to be applied to the sale of keg beer. Petitioner's

stipulated computations assert that a discretionary use allowance

of 15 percent should be applied to all over-the-bar keg beer

sales. Respondent's stipulated computations, however, apply a

greater discretionary use allowance of 17 percent for all overthe-bar sales of keg beer. We conclude that respondent's

stipulated calculations concede that 17 percent is the proper

discretionary use allowance for over-the-bar sales of keg beer.

Neither party asserts that a discretionary use allowance

would be proper for to-go sales of kegs. Accordingly, we do not

apply a discretionary use allowance in deciding petitioner's

gross receipts from to-go sales of kegs.

because it relies on certain erroneous assumptions. Each

contested item is addressed separately below.

1. Keg Sales

Petitioner asserts that respondent's calculation of gross

receipts from the sale of draft beer is overstated because it

makes no allowance for kegs that were sold for off-premises

consumption.21 Petitioner contends that, during each year in

issue, he sold approximately 85 kegs to go at a price of $5 over

cost. 

In support of his position, petitioner points to his

testimony and that of Ms. Stacey. Petitioner testified that he

sold kegs throughout the calendar year, but that the busiest

period for keg sales was from May to October, with sales peaking

during the summer months (June, July, and August). Petitioner

indicated that he sold approximately 3 to 31⁄2 kegs per week during

the peak summer months (June, July, and August), and 2 to 3 kegs

per week during the remainder of the busy season (May, September,

and October). Petitioner also testified that he had seven or
- 25 -

eight portable keg taps on hand at the Bullfrog. 

Ms. Stacey's testimony indicates that, although she had no

involvement in the sale of kegs at the Bullfrog, she saw

individuals purchase kegs for parties, weddings, and special

occasions. Ms. Stacey recalled that petitioner sold two to three

kegs per week, depending on the season, and that more kegs were

sold during the summer months. Ms. Stacey, however, could not

say with certainty the total number of kegs sold to go.

Furthermore, she did not know whether petitioner owned any

portable keg taps. 

Respondent urges this Court to discount petitioner's

testimony as unreliable and self-serving because petitioner

maintained no books or records from which the number of kegs he

sold to go can be determined. Emphasizing the fact that Ms.

Stacey had no direct involvement in the sale of kegs and could

neither say how many kegs petitioner allegedly sold to go nor

corroborate the claim that petitioner had portable keg taps on

hand for use with kegs sold to go, respondent also calls into

doubt the testimony of Ms. Stacey. Respondent contends that

petitioner's attempt to rebut the determination of gross receipts

from the sale of keg beer falls solely on petitioner's selfserving, uncorroborated testimony, which is insufficient to

refute respondent's determination.

Generally, a taxpayer's unimpeached, competent, and relevant

testimony may not be arbitrarily discredited and disregarded. 
- 26 -

See, e.g., Blackmer v. Commissioner, 70 F.2d 255, 257 (2d Cir.

1934); Akerson v. Commissioner, T.C. Memo. 1998-129 (and the

cases cited therein). Petitioner's testimony was believable and

was corroborated by the testimony of Ms. Stacey, whom we also

find credible. Although she could not say with certainty the

number of kegs sold, or whether petitioner had portable keg taps

on hand, Ms. Stacey did see kegs of beer sold to go at the

Bullfrog. 

We are satisfied from the record that petitioner did in fact

sell kegs of beer to go at a price of $5 over cost. The only

question remaining is the quantity sold. Bearing heavily against

petitioner, whose inexactitude is of his own making, we find, on

the basis of the record before us, that petitioner sold 40 kegs

to go during each year in issue. Cf. Cohan v. Commissioner, 39

F.2d 540 (2d Cir. 1930). Accordingly, we conclude that

petitioner's gross receipts from the sale of keg beer are as

follows:

Over-the-Bar To-Go Total

Year Gross Receipts Gross Receipts Gross Receipts1

1987 $9,120.87 $1,125.20 $10,246.07

1988 15,365.79 1,132.00 16,497.79

1989 17,214.62 1,224.40 18,439.02

1990 15,735.56 1,248.00 16,983.56

1See Table I in the attached appendix.

2. Canned Beer Sales

Petitioner asserts that respondent erred by calculating

gross receipts from the sale of canned beer on the assumption
- 27 -

22 The parties also disagree as to the proper discretionary use

allowance to be applied in the determination of gross receipts

from the sale of canned beer. Each party stipulated the other's

computations on the basis of the respective party's own

discretionary use contention. Respondent contends that the

proper discretionary use allowance for over-the-bar sales of

canned beer is 8.3 percent. Petitioner contends that a 15-

percent discretionary use allowance for over-the-bar canned beer

sales is proper and correct. Petitioner, however, abandoned that

position on brief, as he presented no argument concerning the

proper discretionary use allowance for canned beer sales and the

record contains no evidence of the proper allowance. 

Accordingly, we conclude that petitioner has conceded that the

proper discretionary use allowance for over-the-bar canned beer

sales is 8.3 percent. Rybak v. Commissioner, 91 T.C. 524, 566

(1988). 

Neither party asserts that a discretionary use allowance

would be proper for to-go sales of canned beer. Accordingly, we

do not apply a discretionary use allowance in deciding

petitioner's gross receipts from to-go sales of canned beer.

23 Petitioner indicated that premium brands generally did not

sell well.

24 Petitioner testified that he switched to cans from bottles

during 1990 because the cans were cheaper, easier to handle, and

took up less space in the storeroom. Additionally, petitioner

viewed the cans as a safer alternative to bottles, which had been

known to cause injury when thrown by rowdy patrons. 

that all cans were sold over the bar, for on-emisesconsumption.22

Petitioner contends that during the time preceding April 1990, he

sold canned beer exclusively to go in 

six-packs for $3.25 each ($4 each for premium brands such as 

Michelob and Molson).23 Petitioner, however, acknowledges that 

over-the-bar as well as to-go canned beer sales occurred during

the period after April 1990.24 

Respondent argues that the only evidence presented in

support of petitioner's position is petitioner's uncorroborated,

self-serving testimony. Respondent first points out that Ms.
- 28 -

25 Respondent notes that petitioner purchased 5,600 six-packs

of beer during 1987 and 1988 (i.e., 732 cases in 1987 + 668 cases

in 1988 = 1,400 cases x 4 six-packs per case = 5,600 six-packs). 

On the basis of the fact that the Bullfrog is open 7 days a week,

365 days a year, respondent contends that petitioner would have

sold over seven six-packs a day, if petitioner in fact sold all

canned beer to go during the 2-year period (i.e., 5,600 six-packs

÷ 730 days = 7.7 six-packs per day). Accordingly, respondent

contends that the 34-day stipulated sample should contain 238

entries of $3.25 under category I (i.e., 34 days x 7 six-packs

per day = 238 entries).

Stacey's testimony regarding the price charged for six-packs does

not support that of petitioner. We disagree. Ms. Stacey

testified that canned beer was sold to go at the Bullfrog at a

price of $3 to $3.50 depending on the brand of beer sold. 

Petitioner's statement that six-packs sold for $3.25 is not

inconsistent with the range indicated by Ms. Stacey.

Next, respondent argues that a stipulated sampling of 34

cash register tapes from 1987 and 1988 fails to corroborate

petitioner's contention that six-packs were sold only to go

during the period prior to April 1990. Respondent argues that

the sampling should show 238 entries of $3.25 under category I

(for beer sales) if petitioner in fact sold all canned beer to go

during the 2-year period including 1987 and 1988.25 Respondent

contends that the stipulated sampling contains only four such

entries. Such a large disparity, respondent argues, casts doubt

on petitioner's claim that he sold canned beer to go.

We do not find the lack of entries on the stipulated

sampling of cash register tapes fatal to petitioner's contention
- 29 -

26 Moreover, we note that there is no analysis accompanying the

stipulated sampling of cash register tapes, and respondent

introduced no evidence as to how the sample was selected. We

therefore accord such evidence little weight in our analysis and

decision.

27 Total six-packs purchased each year was determined as

(continued...)

that he sold six-packs of beer to go during the years in issue. 

Rather, we would not expect the cash register receipts to include

all of petitioner's six-pack sales. Although Ms. Stacey

testified that she rang up all six-pack sales, she also testified

that she sold relatively few six-packs of beer during her shift

(i.e., 11 a.m. to 2 p.m.) at the Bullfrog. Except occasionally,

Ms. Stacey did not work weekends and evenings when the bulk of

petitioner's six-pack sales took place. Furthermore, petitioner

testified that he failed to ring up all six-pack sales.26

We conclude from the record that petitioner sold six-packs

of beer to go for $3.25 each during the years in issue. We are

not persuaded, however, that petitioner sold canned beer

exclusively to go during the period preceding April 1990. 

Petitioner testified that he sold 5 to 10 six-packs each night

during the weekend (i.e., Friday and Saturday) and 2 to 3 sixpacks each night during the remainder of the week (i.e., Sunday

through Thursday). Petitioner purchased 2,928 six-packs during

1987, 2,672 six-packs during 1988, and 2,464 six-packs during

1989.27 Had all of those six-packs been sold to go, petitioner
- 30 -

27(...continued)

follows:

 1987 1988 1989

 

Cases of beer purchased 732 668 616 

Multiplied by 24 cans/case 24 24 24

 Total cans purchased 17,568 16,032 14,784

 Divided by 6 cans/pack 6 6 6

 Total six-packs 2,928 2,672 2,464

would have sold 56 six-packs each week during 1987, 51 six-packs

each week during 1988, and 47 six-packs each week during 1989. 

Petitioner's testimony, however, indicates that he sold a maximum

of 35 six-packs each week (i.e., 10 six-packs each day Friday

through Saturday, and 3 six-packs each day Sunday through

Thursday). On the record before us, we find that petitioner sold

to go 1,352 six-packs each year (8 six-packs each weekend day,

and 2 six-packs each weekday). Cf. Cohan v. Commissioner, 39

F.2d 540 (2d Cir. 1930). Accordingly, we conclude that

petitioner's gross receipts from the sale of canned beer are as

follows:

Over-the-Bar To-Go Total

Year Gross Receipts Gross Receipts Gross Receipts1

1987 $9,534.80 $4,394 $13,928.80 

1988 7,986.00 4,394 12,380.00

1989 6,727.60 4,394 11,121.60

1990 21,271.80 4,394 25,665.80

1See Table II in the attached appendix.

3. Bottled Beer Sales

Petitioner contends that the 8.3-percent discretionary use
- 31 -

28 Ms. Stacey indicated that she generally gave patrons free

drinks upon the purchase of three or four rounds. She also

testified that she usually dispensed the last shot in each bottle

of liquor free of charge. 

allowance applied by respondent in the calculation of gross

receipts from the sale of bottled beer is unreasonably low,

especially considering that respondent used a 17-percent

discretionary use allowance for sales of draft beer which, unlike

bottled beer, does not involve breakage. Petitioner asserts that

he should be afforded a 15-percent allowance for discretionary

use in computing gross receipts from the sale of bottled beer. 

In support of his contention, petitioner offers (1) his

testimony that he gave away free beers to patrons and band

members and (2) Ms. Stacey's testimony that she also gave away

free drinks at the Bullfrog.28 This testimony, however, does not

persuade us that 15 percent is the proper discretionary use

allowance. Although petitioner testified that he gave one

complimentary beer for every four or five beers purchased, he

also indicated that he favored certain patrons with free drinks.

Accordingly, petitioner's testimony indicates that he did not

employ a consistent policy of providing complimentary drinks at

the Bullfrog. Given in response to questioning concerning liquor

sales, Ms. Stacey's testimony regarding free drinks of liquor

likewise sheds no light on the appropriate discretionary use

allowance for bottled beer sales. We conclude that 8.3 percent
- 32 -

29 Petitioner and respondent also disagree on the proper

discretionary use percentage to be applied in the calculation of

gross receipts from the sale of wine. Petitioner asserts that 15

percent is the proper discretionary use allowance for all wine

sales. On brief, and in respondent's stipulated calculations,

however, respondent contends that the proper discretionary use

allowance for wine sales is 20 percent for each .750-liter

bottle, 1.5-liter bottle, and 3-liter bottle and 40 percent for

each liter bottle. We conclude that respondent has conceded that

the proper discretionary use allowance for wine sales is 20

percent or 40 percent, for the respective size bottle.

is a reasonable allowance for discretionary use. See, e.g.,

Jurkiewicz v. Commissioner, T.C. Memo. 1955-318 (5-percent

reduction for spillage, waste, and gratuities sustained).

Consequently, we find that petitioner's gross receipts from the

sale of bottled beer are as follows:

 Bottled Beer

Year Gross Receipts1

1987 $135,011.80

1988 116,740.80 

1989 118,071.80 

1990 62,920.00 

1See Table III in the attached appendix.

4. Wine Sales

Petitioner contends that respondent erred by calculating

gross receipts from the sale of wine on the assumption that each

glass of wine sold contained only 4 ounces of wine. To the

contrary, petitioner asserts that each glass of wine sold

contained 6 ounces of wine.29

Respondent seeks to use an apparent inconsistency in

petitioner's testimony to impugn petitioner's claim regarding the
- 33 -

30 25.13 ounces per bottle ÷ 4 glasses per bottle = 6.28 ounces

per glass.

31 The transcript reads, in pertinent part, as follows: 

Q. Now, you testified that its over ice, correct?

A. Well, either way. They could drink a glass of wine up,

you know --

Q. Right.

A. -- on the rocks, and you'd probably only get three

glasses or two-and-a-half out of a bottle. If you use

a 10-ounce glass -- if you had a 25 ounce glass and you

had a 10 -- a 10-ounce glass, you'd only get 2 [and

one-half] glasses of wine.

amount of wine poured in each glass. Initially, petitioner

testified that each .750-liter bottle yielded approximately four

6-ounce servings of wine if it was served over ice in a 10-ounce

glass.30 Later, however, petitioner indicated that each bottle

served only 21⁄2 glasses of wine. When viewed in context, however,

petitioner's testimony reveals no incongruity. Petitioner's

statement that each bottle yielded only 21⁄2 glasses of wine was

made in response to respondent's inquiry as to whether wine was

served over ice. Petitioner stated that wine was served "either

way" and then elaborated on how many servings he obtained from

each bottle.31 Petitioner's testimony that he got "only * * *

21⁄2 glasses of wine" from each bottle appears to clarify the

number of servings of wine each bottle yielded when the wine was

served without ice in a 10-ounce glass. Accordingly, we find no

irreconcilable conflict in petitioner's testimony. 

Respondent contends that a 6-ounce serving of wine is
- 34 -

"unreasonably large" and that aside from petitioner's testimony,

the record is devoid of any further evidence to support or

corroborate his assertions. To the contrary, we find that the

record is devoid of any evidence as to what constitutes an

"unreasonably large" glass of wine. Moreover, we find no reason

to doubt either the honesty or credibility of petitioner's

testimony concerning the size of wine drinks served at the

Bullfrog. Accordingly, we find that each wine drink sold

contained 6 ounces of wine. Consequently we conclude that

petitioner's gross receipts from the sale of wine are as follows:

Wine

Year Gross Receipts1

1987 $1,053.92

1988 1,499.80

1989 1,521.91

1990 1,503.49

1See Table IV in the attached appendix.

5. Liquor Sales

Petitioner asserts that each liquor drink sold contained 1.6

ounces of liquor and that respondent erred by calculating gross

receipts from the sale of liquor on the assumption that each

liquor drink sold contained only 1 ounce of liquor. 

Respondent predicated the determination that each liquor

drink contained only 1 ounce of liquor on petitioner's earlier

statement to Revenue Agent Theresa Antoun (Ms. Antoun) during a

February 1990 interview. In that interview petitioner indicated
- 35 -

32 We confirmed respondent's computation as follows:

Ounces per .750-liter bottle 25.13

Less: 16-percent discretionary use allowance 4.02

 Ounces available for sale 21.11

 Divided by 21 shots per bottle 21

 Ounces per shot 1.005 (rounded

 to 1) 

33 If 20 shots are sold from each liter bottle, petitioner

contends that each shot is at least 1.65 ounces (i.e., 33 ounces

÷ 20 shots = 1.65 ounces per shot). If 22 shots are sold from

(continued...)

that he sold shots of liquor for $1 and that each bottle of

liquor contained approximately 20 to 22 shots. Respondent

determined that each liquor drink contained 1 ounce of liquor on

the basis of the sale of 21 shots from each .750-liter bottle of

liquor (i.e., after the 16-percent discretionary use allowance

each .750-liter bottle yields twenty-one 1-ounce shots).32

Petitioner testified that he sold liquor drinks ranging in

size from 1.5 to 1.75 ounces per drink. Although drinks were

"free poured" (i.e., measured by eye rather than a standard

measuring device), petitioner indicated that it was his "standard

policy" to "give them a good drink at the Bullfrog" and that

"everybody got a good shot and a half [to a] shot and three

quarters." Accordingly, petitioner contends that the average

amount of liquor poured in each drink was 1.6 ounces. Petitioner

also contends that his testimony is fully consistent with his

earlier statement to Ms. Antoun because each liter bottle of

liquor generates 20 to 22 shots which are at least 1.5 ounces.33
- 36 -

33(...continued)

each liter bottle, petitioner contends that each shot is at least

1.5 ounces (i.e., 33 ounces ÷ 22 shots = 1.5 ounces per shot). 

The parties stipulated that each liter bottle contains 33.5

ounces of liquor; we are unsure why petitioner used 33 ounces per

bottle in his argument on brief.

34 Petitioner purchased .750-liter bottles and liter bottles of

liquor as follows:

 Quantity Purchased 

 Item Purchased 1987 1988 1989 1990

Liquor:

 Liter bottles 1,114 1,658 2,087 1,140

 .750-liter bottles 60 79 12 9

Total bottles 

 purchased 1,174 1,737 2,099 1,149

35 We determined that each liquor drink contained 1.3 ounces of

liquor as follows:

Ounces in each liter bottle 33.50

 Less: 16-percent discretionary use allowance 5.36

 Ounces available for sale 28.14

 Divided by 21 shots per bottle 21

 Ounces per shot 1.34 (rounded to 

 1.3)

(continued...)

We think that both parties have missed the mark. 

Respondent's determination that each liquor drink contained only

1 ounce of liquor ignores the fact that the majority of

petitioner's liquor purchases were liter bottles, not .750-liter

bottles.34 Petitioner's contention that each liquor drink

contains 1.6 ounces of liquor ignores the discretionary use

allowance which operates to reduce the amount of liquor available

for sale. After a 16-percent discretionary use allowance, each

liter bottle would yield twenty-one 1.3-ounce liquor drinks.35 
- 37 -

35(...continued)

 Respondent conceded on brief that 16 percent is the proper

discretionary use allowance for liquor sales. 

36 See Table VI in the attached appendix.

Accordingly, we find that each liquor drink sold contained 1.3

ounces of liquor. Consequently we conclude that petitioner's

gross receipts from the sale of liquor are as follows:

 Liquor

Year Gross Receipts1

1987 $28,856.38

1988 42,755.46

1989 52,185.19

1990 28,551.23

1See Table V in the attached appendix.

6. Conclusion

On the basis of our findings above, we conclude that

petitioner had unreported gross receipts of $104,917.40 for 1987,

$116,072.49 for 1988, $127,473.82 for 1989, and $31,369.34 for

1990.36 

B. Expenses

1. Band Expenses

Petitioner argues that he is entitled to deductions for band

expenses he incurred during the years in issue. Respondent

allowed petitioner a deduction for band advertising expenses but

allowed no deduction for the related band expenses on the ground

that petitioner failed to substantiate those expenses. 

The Court must estimate the amount of the deductible expense
- 38 -

37 Citing Lerch v. Commissioner, 877 F.2d 624 (7th Cir. 1989),

affg. T.C. Memo. 1987-295, respondent also argues that Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930), should not be invoked

where the claimed but unsubstantiated deductions are of a sort

for which the taxpayer could have and should have maintained the

necessary records. Absent stipulation to the contrary, the

instant case is appealable to the Court of Appeals for the Second

(continued...)

if a taxpayer establishes that a deductible expense was paid,

even though the precise amount has not been established. Cohan

v. Commissioner, 39 F.2d at 543-544. We are satisfied by the

testimony of petitioner, Ms. Stacey, and Mr. Blackburn that

petitioner incurred deductible band expenses during the years in

issue. Petitioner and Ms. Stacey both testified that petitioner

hired bands to play at the Bullfrog throughout the years in

issue. Mr. Blackburn, the local entertainment agent, testified

that he personally placed bands at the Bullfrog during the years

in issue. That petitioner incurred deductible band expenses is

further corroborated by the stipulated fact that petitioner

advertised bands and incurred band advertising expenses. From

such advertising expenses we draw the reasonable inference that

petitioner did, in fact, pay some amount of deductible band

expenses.

Relying on Professional Servs. v. Commissioner, 79 T.C. 888

(1982), respondent contends that the Cohan rule is inapplicable

for all of the years in issue because the evidence is

insufficient to make a reasonable estimation of petitioner's band

expenses.37
- 39 -

37(...continued)

Circuit. Thus, efficient and harmonious judicial administration

calls for us to apply the Cohan rule. Golsen v. Commissioner, 54

T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

38 Petitioner computed the amount of his deductible band

(continued...)

In the instant case, we make our estimate on the basis of

Nite-Line's records, stipulated for trial, which indicate that

petitioner advertised in Nite-Line 44 weeks during 1987, 48 weeks

during 1988, 39 weeks during 1989, and 44 weeks during 1990. 

Available back copies of Nite-Line demonstrate that, during the

years in issue, petitioner regularly listed three band nights

(typically Thursday, Friday, and Saturday) in each advertisement. 

We also credit petitioner's testimony concerning the amounts he

paid bands booked to play at the Bullfrog, which indicates that

he generally paid Thursday night bands $225 for each performance.

Petitioner's testimony also indicates that he typically paid

Friday and Saturday night bands $300, although he occasionally

paid up to $500 for popular bands. Petitioner's testimony is

corroborated by that of Mr. Blackburn, who indicated that in

Jamestown, during the years in issue, the going rate for a

Thursday night band was at least $250 and that the going rate for

a weekend band (i.e., Friday or Saturday night) was $250 to $350.

Using the foregoing parameters, petitioner computed band

expenses in the amounts of $36,300, $39,600, $32,175, and $26,400 

for 1987, 1988, 1989, and 1990, respectively.38 The Nite-Line
- 40 -

38(...continued)

expenses as follows:

 1987 1988 1989 1990

Advertisements in Night-Line Magazine 44 48 39 44

Nights/bands in each advertisement x 3 x 3 x 3 x 2

Total band/nights advertised 132 144 117 88

Week night bands 44 48 39 

Average week night price per band x $225 x $225 x $225 --

1

Thursday night band expense $9,900 $10,800 $8,775

Friday night bands advertised 44 48 39 44

Average price per Friday night band x $300 x $300 x $300 x $300

Friday night band expense $13,200 $14,400 $11,700 $13,200

Saturday night bands advertised 44 48 39 44

Average price per Saturday night bank x $300 x $300 x $300 x $300

Saturday night band expense $13,200 $14,400 $11,700 $13,200

Total band expenses $36,300 $39,600 $32,175 $26,400

 1Petitioner's computation for 1990 reflects the fact that he cut back on

week night bands during 1990. 

records upon which petitioner's computations are based, however,

do not reveal whether bands actually performed at the Bullfrog,

or how much the bands were actually paid. Additionally, several

copies of Nite-Line were unavailable. We cannot say with

certainty what information those unavailable back copies would

reveal. Moreover, petitioner's computations do not reflect any

allowance for bands that failed to perform as advertised. 

Bearing heavily against petitioner, whose inexactitude is of his

own making, Cohan v. Commissioner, supra, we find that petitioner

incurred deductible band expenses in the amounts of $18,150,

$19,800, $16,088, and $13,200 for 1987, 1988, 1989, and 1990,

respectively.
- 41 -

39 As respondent failed to argue the applicability of sec.

274(d)(4) with respect to the race car expenses claimed by

petitioner, we conclude that respondent has conceded that

petitioner's race car is not listed property subject to the

substantiation requirements of sec. 274(d).

2. Race Car Expenses--1987 and 1988

As indicated in our findings of fact, we are satisfied from

the record that petitioner incurred deductible expenses in

connection with his car racing business. Accordingly, an

estimate must be made under Cohan v. Commissioner, supra.

39

Petitioner testified that each year he raced the car

approximately 10 times at the speedway in Busti, New York. 

Petitioner indicated that his race car expenses included:

Gasoline, oil, tires, A-frames, ball-joints, spark plugs, spark

plug wires, distributor caps, pit entrance fees, paint, and

miscellaneous car repairs (including parts). Petitioner

testified with particularity, however, only with respect to the

pit entrance fees and tire expenditures. Petitioner indicated

that each week during the racing season he paid a total of $20 in

pit entrance fees for himself and a helper; and that every other

week he replaced the rear tires at a cost of $50 to $55 per tire. 

From the record we find that petitioner incurred deductible

expenses of $750 for each year in issue (i.e., 1987 and 1988). 

Cohan v. Commissioner, supra.

3. Truck Expenses--1990

Petitioner claimed truck expenses for the Bullfrog in the
- 42 -

amount of $3,800 for 1990. Mr. Dillon computed petitioner's

deduction for truck expenses based on petitioner's statement that

he put approximately 15,000 business miles on the vehicle during

1990. Respondent disallowed petitioner's deduction for the truck

expenses on the basis of petitioner's inability to substantiate

them. Respondent failed, however, to assert the applicability of

section 274(d)(4), which imposes strict substantiation

requirements with respect to certain listed property, defined in

section 280F(d)(4)(A) to include passenger automobiles. Section

280F(d)(5)(A) defines the term "passenger automobile" to mean any

four-wheeled vehicle (i) which is manufactured primarily for use

on public streets, roads, and highways, and (ii) which is rated

at 6,000 pounds unloaded gross vehicle weight or less. In the

case of a truck, section 280F(d)(5)(A)(ii) is to be applied by

substituting "gross vehicle weight" for "unloaded gross vehicle

weight". Sec. 280F(d)(5).

We treat respondent's failure to argue that section

274(d)(4) is applicable in the instant case as a concession that

it does not apply to petitioner's vehicle. Accordingly, we

decline to apply the strict substantiation requirements imposed

by section 274(d)(4) and look instead to the rule of Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930), to decide the amount of

petitioner's truck expenses. Bearing heavily against petitioner,

whose inexactitude is of his own making, we find that petitioner
- 43 -

incurred deductible truck expenses of $1,500 for 1990.

We have considered the parties' remaining arguments

concerning the amounts of the deficiencies for the years in issue

and find those arguments to be either without merit or

unnecessary to reach.

III. Substantial Understatement

Section 6661(a) imposes an addition to tax of 25 percent of

any underpayment attributable to a substantial understatement of

tax. A substantial understatement is any understatement which

exceeds the greater of (1) 10 percent of the tax required to be

shown on the return or (2) $5,000. Sec. 6661(b)(1)(A). If the

taxpayer has substantial authority for the tax treatment of the

item in question, or if the taxpayer adequately discloses the tax

treatment of the item on the return, then the amount of the

understatement for purposes of this section will be reduced by

that portion of the understatement which is attributable to that

item. Sec. 6661(b)(2)(B).

Petitioner made no disclosures with his returns for the

years in issue. Petitioner argues simply that there is no

underpayment of tax for any of the years in issue which

constitutes a substantial understatement of income tax within the

meaning of section 6661. Consequently, should either the 1987 or

the 1988 understatement of tax as recalculated in accordance with
- 44 -

this opinion be substantial, we hold that petitioner is liable

for the addition to tax under section 6661 for the applicable

year.

Decision will be entered

under Rule 155.
- 45 -

Appendix

Table I Gross Receipts From Keg Beer Sales

 1987 1988 1989 1990

 

Kegs purchased 151 227 249.50 231.50

 Less: Kegs sold to go 40 40 40 40

Kegs sold over the bar 111 187 209.50 191.50

 Multiplied by $82.171 $82.17 $82.17 $82.17 $82.17

Gross receipts from 

 over-the-bar sales $9,120.87 $15,365.79 $17,214.62 $15,735.56

Gross receipts from

 to-go sales2 $1,125.20 $1,132.00 $1,224.40 $1,248.00

 Total gross receipts

from keg sales $10,246.07 $16,497.79 $18,439.02 $16,983.56

1Each keg sold over the bar generated $82.17 in gross receipts, determined as

follows:

Ounces per keg 1,980

 Less: 17%-discretionary use allowance 336.60

 Ounces sold 1,643.40

 Divided by 10 oz. 10

 Number of 10-oz. drafts/keg 164.34

 Multiplied by $0.50/draft $0.50

 Gross receipts/kegs sold

 over the bar $82.17

2Gross receipts were determined by multiplying the total number of kegs sold

to go each year by cost plus $5 (i.e., 40 kegs x $28.13 for 1987, 40 kegs x $28.30

for 1988, 40 kegs x $30.61 for 1989, and 40 kegs x $31.20 for 1990).
- 46 -

Table II Gross Receipts From Canned Beer Sales

1987 1988 1989 1990

Individual cans sold over the bar1 9,456 7,920 6,672 21,096

 Less: 2 cans/case

 discretionary use allowance2 788 660 556 1,758

Total cans sold over the bar 8,668 7,260 6,116 19,338

 Multiplied by $1.103 $1.10 $1.10 $1.10 $1.10

Gross receipts from 

 over-the-bar sales $9,534.80 $7,986.00 $6,727.60 $21,271.80

Gross receipts from to-go sales4 $4,394.00 $4,394.00 $4,394.00 $4,394.00

 Total gross receipts from

 canned beer sales $13,928.80 $12,380.00 $11,121.60 $25,665.80

1The number of individual cans sold over the bar was determined as follows:

 1987 1988 1989 1990

Total cases purchased 732 668 616 1,217

 Multiplied by 24 cans/case 24 24 24 24

 Total cans purchased 17,568 16,032 14,784 29,208

 Divided by 6 cans/pack 6 6 6 6

Total six-packs 2,928 2,672 2,464 4,868

 Less: six-packs sold to go 1,352 1,352 1,352 1,352

 Six packs sold over the bar 1,576 1,320 1,112 3,516

 Multiplied by 6 cans/pack 6 6 6 6

 Total individual cans

 sold over the bar 9,456 7,920 6,672 21,096

2The discretionary use allowance was determined as follows:

9,456 individual cans ÷ 24 cans/case = 394 cases x 2 cans/case = 788 cans

7,920 individual cans ÷ 24 cans/case = 330 cases x 2 cans/case = 660 cans

6,672 individual cans ÷ 24 cans/case = 278 cases x 2 cans/case = 556 cans

21,096 individual cans ÷ 24 cans/case = 879 cases x 2 cans/case = 1,758 cans

3$1.10 reflects the price per can sold over the bar.

4Gross receipts from to-go sales were determined by multiplying the number of six-packs

sold to go each year by $3.25 (i.e., 1,352 six-packs x $3.25 = $4,394).
- 47 -

Table III Gross Receipts From Bottled Beer Sales

 1987 1988 1989 1990

Total cases purchased 5,579 4,824 4,879 2,600

 Multiplied by 24 bottles/case 24 24 24 24

Total bottles purchased 133,896 115,776 117,096 62,400

 Less: 2 bottles/case discretionary

 use allowance1 11,158 9,648 9,758 5,200

Total bottles sold 122,738 106,128 107,338 57,200

 Multiplied by $1.102 $1.10 $1.10 $1.10 $1.10

 Total gross receipts from

 bottled beer sales $135,011.80 $116,740.80 $118,071.80 $62,920.00 

1The discretionary use allowance was determined by multiplying the number of cases

purchased by 2 cans/case.

2$1.10 represents the price per bottle sold. 
- 48 -

Table IV Gross Receipts From Wine Sales

 1987 1988 1989 1990

.750-liter bottles:

 Number of 6-oz. glasses/bottle1 3.35 3.35 3.35 3.35

 Multiplied by number of bottles sold 23 25 60 143

 Total glasses sold 77.05 83.75 201.00 479.05

 Multiplied by $1.102 $1.10 $1.10 $1.10 $1.10

 Gross receipts from .750-liter 

 bottles $84.76 $92.13 $221.10 $526.96

Liter bottles:

 Number of 6-oz. glasses/bottle1 3.35 3.35 3.35 3.35

 Multiplied by number of bottles sold 167 142 269 181

 Total glasses sold 559.45 475.70 901.15 606.35

 Multiplied by $1.102 $1.10 $1.10 $1.10 $1.10

 Gross receipts from liter bottles $615.40 $523.27 $991.27 $666.99

1.5-liter bottles:3

 Number of 6-oz. glasses/bottle1 6.70 6.70 6.70 6.70 

 Multiplied by number of bottles sold -0- 96 42 42

 Total glasses sold -0- 643.20 281.40 281.40

 Multiplied by $1.102 -0- $1.10 $1.10 $1.10

 Gross receipts from 1.5-liter 

 bottles -0- $707.52 $309.54 $309.54

3-liter bottles:4

 Number of 6-oz. glasses/bottle1 13.40 13.40 13.40 13.40

 Multiplied by number of bottles sold 24 12 -0- -0- 

 Total glasses sold 321.60 160.80 -0- -0- 

 Multiplied by $1.102 $1.10 $1.10 -0- -0- 

 Gross receipts from 3-liter bottles $353.76 $176.88 -0- -0- 

 Total gross receipts from wine $1,053.92 $1,499.80 $1,521.91 $1,503.49

1The number of 6-oz. glasses per bottle was determined as follows:

..750-liter Liter 1.5-liter 3-liter

Ounces/bottle 25.13 33.50 50.26 100.52 

 Less: discretionary use allowance 

 (20% for .750-, 1.5-, and 3-liter 

 bottles, 40% for liter bottles) 5.03 13.40 10.05 20.10

 Ounces sold/bottle 20.10 20.10 40.21 80.42

 Divide by 6 oz. 6 6 6 6

 Number of 6-oz. glasses/bottle 3.35 3.35 6.70 13.40

2$1.10 reflects the price per glass of wine.

3One 1.5-liter bottle is equivalent to two .750-liter bottles. 

4One 3-liter bottle is equivalent to four .750-liter bottles.
- 49 -

Table V Gross Receipts for Liquor Sales

1987 1988 1989 1990

 

Liter bottles

 Number of 1.3-oz. servings/bottle1

21.65 21.65 21.65 21.65

 Multiplied by number of bottles 

purchased 1,114 1,658 2,087 1,140

 Number of 1.3-oz. servings sold 24,118.10 35,895.70 45,183.55 24,681

 Multiplied by $1.152 $1.15 $1.15 $1.15 $1.15

 Gross receipts from liter bottles $27,735.82 $41,280.06 $51,961.08 $28,383.15

.750-liter bottles

 Number of 1.3-oz. servings/bottle1

16.24 16.24 16.24 16.24

 Multiplied by number of bottles 

purchased 60 79 12 9

 Number of 1.3-oz. servings sold 974.40 1,282.96 194.88 146.16

 Multiplied by $1.152 $1.15 $1.15 $1.15 $1.15

 Gross receipts from .750-liter 

 bottles $1,120.56 $1,475.40 $224.11 $168.08

 Total gross receipts from liquor 

 sales $28,856.38 $42,755.46 $52,185.19 $28,551.23

1The number of 1.3-oz. servings per bottle was determined as follows:

Liter .750-liter

Ounces per bottle 33.50 25.13

 Less: 16%-discretionary use allowance 5.36 4.02

 Ounces sold per bottle 28.14 21.11

 Divide by 1.3 oz. 1.30 1.30

 Number of 1.3-oz. servings/bottle 21.65 16.24

2$1.15 reflects the price charged per liquor drink.
- 50 -

Table VI Gross Receipts--Summary

1987 1988 1989 1990

Keg beer gross receipts $10,246.07 $16,497.79 $18,439.02 $16,983.56

Canned beer gross receipts 13,928.80 12,380.00 11,121.60 25,665.80

Bottled beer gross receipts 135,011.80 116,740.80 118,071.80 62,920.00

Wine gross receipts 1,053.92 1,499.80 1,521.91 1,503.49

Liquor gross receipts 28,856.38 42,755.46 52,185.19 28,551.23

 

 Total gross receipts 189,096.97 189,873.85 201,339.52 135,624.08

 Less: Reported gross receipts 84,179.57 73,801.36 73,865.70 104,254.74

 Unreported gross receipts 104,917.40 116,072.49 127,473.82 31,369.34