TAX COURT OPINION

Case: Allen Powerstein & Rita Powerstein Rosen
Docket Number: 30261-89
Judge: Laro
Opinion Type: memo
Filed: 11/16/2011
Pages: 77

T.C. Memo. 2011-271 UNITED STATES TAX COURT ALLEN POWERSTEIN AND RITA POWERSTEIN ROSEN, Petitioners y. COMMISSIONER OF INTERNAL REVENUE, Respondent ALLEN POWERSTEIN, Petitioner y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 30261-89, 13443.-92.1 Filed November 16, 2011. Mitchell I. Horowitz and Micah G..Fogarty, for petitioners. Stephen R. Takeuchi and.Robert W. Dillard, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION LARO, Judge: At the heart of these cases is petitioner Allen Powerstein (Mr. Powerstein), a former certified public 1These cases were consolidated for purposes of trial, briefing, and opinion pursua,nt-to Rule 1 1(a) . O NOV F6 2011 - 2 - accountant (C.P.A.). who in 1993 pleaded guilty to criminal tax evasion in violaticn of seátion 7201.1 At issue are the 1984 through. 1988 joint Federal income taxes of petitioners Mr. Powerstein and Rita Powerstein Rosen (Ms . Rosen) and the 1989 individual Federal income tax.of lVIr. Powerstein. In docket No. 30261 89, petitioners petitioned the Court to redetermine respondent's determination of the following Federal income tax deficiencies and additions to tax: Xear Deficiency 6653 (b) (1) 6653 (b) (2) 6653 (b) (1) (A) .6653 (b) (1) (B) Sec. Sec. Sec. Sec. Additions to Tax 1984v 1985 1986 1987 1988 $28,664. 48, 948 38,186 39,749 30,915 $14,374 24, 474 -0- -0-23,186 . .. $7,918 9, 520 -0- -0-, -0- . -0- -0 - $28,64Ó 29,935 -02 . . -0- . 0 - $5,095 2,952 -0- . Se'c. (cid:16)042 6661 $7,166 12, 237 9,547 9,937 7,729 In his answer, respond nt adjusted the deficiencies and additions to tax, decreasing uhe amounts for 1984 and 1985 and increasing the amounts for each of the years 1986 through 1988 as follows: Year Deficïency 6653 (3) (1) 6653'(b) (2) 6653 (b) (1) (A) 6653 (b) (1) (B) Se:. Sec. . Sec. Sec. Additions to Tax Sec. (cid:16)0426661 1984 1985 1986 1987 1988 $1, 599 23, 492 47, 566 58, 251 58,187 $ 342 11, ó95 -0 - 0 - 43.,S63 $442 4, 549 -0 - -0 - -0- -0 - -0- $35, 353 43 , 536 -0- . 0- -0 - ( ) (1) -0- . -0 - $5, 873. 11, 892 14 , 563 14,547 Respondent determined that if the addition to tax under sec. 6653 (b) (1) (A) then the addit on to tax ünder sec. 6653 (b) (1) (B) applies in an . the interestspayable with respect,to the portion applies, amount equal to 50 percent of of the underpayment that is due to fraud. 2Unless otherwise indicated, section references are to .the applicable versions of references are to the(Tax Court Rùles of).Prac;tice and Procedure. Some dollar amounts have been rounded. the Internal Revenue Code, arid Rule . - 3 - In docket No. 13443-92, Mr.Y Powerstein petitioned the Court to redetermine respondent's determination of a $49 000 deficiency in his 1989 Federal.income tax and a $36,750 fraud penalty under section 6663. After concessions by the parties,31we decide: (1) Whether the burden of proof shifts to respondent with respect to his reconstruction of petitioners' net worth for 1984 through 1988. We hold that it does to the extent stated hereiù; (2) whether petitioners·omitted income ;of $5,668, $42,212, $107,089, $153,670, and $153,351, for 1984 through 1988, respectively. We hold that they omitted income of $3,624, $83,739, $85,702, (3) 3In docket No. 30261-89, failed to report respectively. In docket,No. 13443-92, the parties loss of $2,926, resulting in·a $5,208 adjustment for the parties agree that petitioners interest income of $2,148, $79, $239, $101, (2) understated (1) and $2,409 for 1984 through 1988, respectively; dividend income of $138, $200, and $196 for 1984 through 1986, received :$563 of dividends for 1987 of which respectively; (4) $282 is excluded from income as a nontaxable distribution; failed to report net capital gains of $3,167 for 1984, (5) failed to report net capital gains of $2,282 and instead reported a net capital 1986; and (6) overstated capital 1987 and 1988, agree that for 1989 Mr. Powerstein (1) receipts of $56,063 on Schedule C, Profit or Loss From Business;. (2) fees as an expense on Schedule C; Profit or Loss From Farming; of $4,058; is liable for self-employment tax of $6 25.0; and (7) liable for a fraud penalty under sec. 6663 but accuracy-related penalty under sec. 6662. have conceded that their 1984 through 1988 Federal income taxes is open and that Ms. Rosen is not entitled to relief under sec. 6013(e), by virtue of the fact that these issues were not raised at trial or on brief. See Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001). failed to report capital gains (6) is not entitled to a $122 loss(cid:16)042onSchedule F, the period of limitations for assessment of is entitled to deduct $67,250 of legal tax credit of $63; is not is liable for an We deem petitioners to losses*by $2,747 and $875 for failed to report gross (3) (5) is not entitled to a fuel (4) - 4 - $145,266, and $142,i637, for 1984 through 1988, respectively; (3) whether petitioners are entitled.to deductions related to Mr. Powerstein's accounting practice.: We hold they are to the extent stated herein; (4) hether petitioners are entïtled to a $.22,290 loss as reported on their 1988 Schedule F. We hold they are not; (5)n whether petitioners may use special income-averaging provisions pursuant to section 1305 .-We hold they may not; (6) whether Mr. Powerstain may deduct" $65,778 of.-interest which respondent jeopardy-assessed and collected by levy in 1989. We hold he. may not; (7) whether petitioners are liable for additions to tax under sectio:1 6653(b) for 1984 through 1988. We hold that Mr. Powerstein is t the extent stated herein, and that -Ms. Rosen is not; and (8) whether petitioners are liable for additions to tax under section 6561 for 1985 through 1988. We hold they are. I. Preliminaries FINDINGS OF FACT The parties submitted to the Court numerous stipulations of fact and.accompanying exhibits. The.stipulated facts and exhibits submitted therewith are incorporated herein by this reference. We ·find the sÚipulated facts accordingly. When their respective¯petitions were filed, etitioners resided in Florida. II. ' Mr. Powerstein b .. Mr. Powerstein was raised in Brooklyn, New York (Brooklyn), and he served in the U.S. Army from May 4, 1958, through May 3, 196:4. · He holds a bachelor of business administration degree in accounting from the City College of New York, and he has completed work towards a master's degree. He was a C.P.A. from June 1967 until at least January 1987. Between May 1964 and 1976 Mr. Powerstein was im accountänt at various accounting firms and businesses. Beginning in 1965 and at all relevant times, hei operated a bookke ping, accounting, and tax return.preparation business; na ely, Allen D. Powerstein, CPA (accounting firm). III. Ms. Rosen Ms. Rosen was born and raised in Brooklyn. She graduated from high school and did not attend col ege. ver the yeárs, Ms. Rosen was mostly a homemaker though she occasionally held a job during some of the years in issue. IV. Petitioners Petitioners were married*in June 1 57 and ave two children; namely, Madelyn Ballard (Ms. Ballard) and Irene Powerstein (Ms. I..Powerstein). Mr. Powerstein was the'household's primary income producer, and he regularly provided financial assistance to Ms. Ballard into her adult years. Throughout the years in issue, petitioners incurred typical household expenses, including amounts for groceries, utilities, and other necessities. Petitioners were macried until July 1989, at which time they legally divorced. V. The Ballards . . Ms.. Ballard and Michael Ballard (Mr..Ballard) (collectively, the Ballards) were married in 1983, and they had. at least one child; namely, K.B.· Mr. Ballard was raised on a farm in Arkansas. He.drank alcohol during the years in issue, and he has been convicted. of. d::iving. under the influence. VI. Coral Springs Residence , . (cid:16)042 Petitioners lived in Brooklyn until 1972, when they moved their family and household property to Miami, Florida. They paid $6,700 for a.parcel of land in Coral Springs, Florida, and subsequently built a home (Corál Springs residence) thereon. . They deposited $500.with respect to that residence and secured a $60,472 residential loan (first Glendale mortgage) from.Glendale Federal Bank (Glendale Bank) after construction of the residence was completed.5 Petitioners'.actual cost. of constructing that home.exceeded.its et timated cost by approximately $11,191. In addition to principal and interesp due under...the first Glendale mortgage, petitioneis álso impounded.(escrowed) $153 per month 4Despite their divorce, petitioners continued to live together, Mr. Powerstein'continued to support Rosen continued to maintain the household. the family, and Ms. The first Glendale mortgage was issued by First Federal Savings & Loan of Broward County (First Federal) . First Federal and its successors as Glendale Bank. ,We refer to - 7 - for real·estate taxes. In 1978 petitioners moved in to the Coral Springs residence, and they continued to live 'there through August 1984. Petitioners refinanced the first Glendale mortgage in February 1984 .with a $100,000 loan (second Glendale mortgage) from Glendale Bank. At the closing of the second Glendale mortgage, petitioners escrowed 5 monthst of realrestate taxes totaling $453. Payments due under the second Glendale mortgage impounded $91 per month for real estate.taxes." During 1984 petitioners made nine payments against the second_Glendale mortgage totaling $9,324, of which $820(was paid through escrow for real estate taxes. During 1985 petitioners made two payments against the second Glendale mortgage totaling $2,072. In early-to-mid-1984, petitioners contracted to sell the Coral Springs residence to nDale Underhill (Mr. Underhill) and Mona Underhill (Ms. Underhill) (collectively, the Underhills) for $112,000. The Underhills deposited $8,000 to an interest-bearing account (Underhill account) at Atlantic|Federal Savings & Loan (Atlantic Bank) which was j}ointly held by Mr. Powerstein and Mr. Underhill in trust for Ms. Rosen and Ms. Underhill. That deposit served as a downpayment for the purchase of the Coral Springs residence, and as of December 31, 1984, the Underhill account had earned interest of $259. The Underhills leased the Coral Springs residence beginning in August 1984 and continued .to do so through April 1985, at which time they secured financing to.close the sale. Although the Underhills paid rent of $1,000 per month to petitioners, this income was not reported as taxable ^òn petitioners' Federal income tax returns.. After the Underhillfs began leasing the Coral Springs residence, petitioners moved.to Romeo, Florida (Romeo). On April 12, 1985, the sålelof the Coral.Sprïngs residence closed . for $112,000 and petitioners realized net proceeds of $107,201. At the clos>ing.,.petitioners were charged $288 for unpaid county taxes from January L through April *11, 1985, and.$234 for taxes related,to 1980. VII. Vacation Home On November 14. 1981, petitioners purchased a residence in Lake Lure, North.Carolina. In or around 1983, the Powersteins exchanged that property and additional consideration to purchase a second residence in Lake Lure, North *Carolina (vacation home) . The cost of acquiring the vacation..home totaled $7 333, and petitioners paid $52 of real estate taxes on it in 1984. VIII. Romeo Property A. Overview In August 1983 petitioners purchased an 11.06 acre wooded parcel of land (Romeo.property) in Romeo for $20,009.. Shortly thereafter, the Ballards moved to the Romeo property to make the land habitable. With the help of local(workerb the Ballardé ' cleared the Romeo property and installed fence roads, andföther improvements. The Ballards.left their obs to ove to the'Romeo property and, having earned no wages in 1984, réceived support from petitioners. The Ballards lived o .the Ro eo property in a tent for approximately 6 months and eveàtually onstructed.a woode,n cabin which they lived in. tempörårily. B. Improvements . Petitioners.purchased two.mobile" hämès in 9(cid:0)5403and 1984, and situated those homes on ther Romeo prope ty in c ose -proximity. First, they purchased a mobile home (Pi e Stree mobile home) for $26,164 which.the Ballards cusednas thei residé ce. Second, .petitioners purchased a mobile home (Ad ison mö ile home) for $23, 431 which they lived in.. ?By August 1984 the Ballards and petitioners had also improvedithe Romeo propert with, among other improvements,.· a three-st all barn a pump ouse, fencing, and a septic tank. . C. Mortgages Petitioners mortgaged the Romeo pr perty w th a $26/000 loan (first Sun Bank mortgage) from Sun Bank of Ocalá (Sun Bank) in' January '1984 . On or about Oct!ober 5, 1 84, petitioners retired the first Sun Bank mortgage wïth a seco d loan second Sun Bank mortgage) for $53,918 which was secured by the Romeo property. The second Sun Bank mortgage remained until. Oct ber 5, 1987, when 10 - petitioners refinanced.that mortgage-with a $51,068 loan (first Mid State mortgage) from Mid State Federal Savings and Loan '(ÍVlid State) . Petitioners- satisfied .the first Mid State mortgage e through a loan+ (sec:>nd Mid State enortgage) in or around 1988. D. Farming Attivities Although they lacked experience to do so, petitioners becarne . minimally engaged im farmings ac t ivit ie s af ter ; moving t o the - Romeo property. Without conducting due diligence of the agricultural feasibility of using the .Romeo property as a farm; they purchased, ,among other e things, a tractor for-$10, 500 and a ghainsaw sfor .$600 .. They raised approximately-16' head 'of cattle, 2 horses, pigs, and chickens; andh although they sold. 2. head of cattle at a livestodk market in 1985, 'they mostly used these animals for persona:. consumption and enjoyment. They also attempted to growiseveral types of crops without success. By- July 1989 -petitioners 13adaabandoned their farming activity. - IX. Petitioners' Suppoort_of_J;;he_J3allards A. Overview . During the years in issue; Mr Powerstein furnished considerable support. to the .Ballards.. By 'letter dated April 1986,· petitioners - st ated that they paid support to the Ballards of $4, 870 .in 1985 ar d $1, 635 through April 1986. This support included rent, utili ty payments, food, and medical bills. B. M&M - 11. - The Ballards incorporated M&M Tree Service, Inc. (Ñ&M) as equal shareholders on or about October 13, 1983. Through M&M, the Ballards provided landscaping and tree services in central Florida during 1984 and 1985. Mr. Powerstein provided most, if not all, of the financing for the startup and operation of M&M. He purchased various assets for M&M,.inbluding hhe tractor and the chainsaw which petitioners used in their fakming activity. C. Income The Ballards received minimal income during the years in issue, and they received support in addition tb that described above. The Ballards' 1984 'joint return reported zero wages, interest income of $131, a $28,659 dist ibutive loss from M&M, and total income of negative $28,528. he Ball rds' 1985 joint return reported wages of $780, interest income of $83, a $19,714 distributive loss from M&M, and total income of negative $18,851. The Ballards' 1986 joint return reported wages of $5,963, interest income of $439, and total inco e of $6;402. The Ballards' 1987 joint return reported wa es of $8,749, interest income of $135, a $2,098 net farm loss, and totäl income of $6,786. The Ballards' 1988 joint retur reportËd wages of $13,108, interest income of $86, a $3,348 net fdrm loss, and total income ,of $9,846. X. Financial Arrangement With Clients - 12 - After petitioners moved to the Romeo property in 1984, Mr. Powerstein continued to operate his accounting firm in South Florida, and he frequently traveled there by car. He was diligent in. prepariag original and amended Federal income tax returns for his cli¢nts, but far from.honest. He -significantly understated income and overstated deductions on his clients' Federál income tax eturns as early as 1983. For. example, Mr. Powerstein wrote the following letter to two clients in 1985: Received your recent letter and IRS letter regarding the :.983 taxes. Before I explain the real meaning of.the:.r let.ter,. I3must point out that I am not (cid:16)042- surprised that we got such a letter and that computer is accurate in tracking bank interest reported on 1099s. explain.what vm did and if there is any additionál tax to pay, and I am not saying there will be, we will pay it at We. nust carefully reply to [the] IRS.and the appropriate time. g the IRS (cid:16)042 . * * * * * * Here is why I like their letter: 1) the entire amount question this. I reported tche Ford pension of $4,634, but showed to be non-taxable and the IRS did not I know you are both aware of this. I claimed Airlift International as a worthless 2) security in the amount of $4,251, however it really cost you $1,25). IRS.didinot question this.. I claimed a $2,000 exclusion for All-Savers 3) certificates ät American Savings, when in fact you never had an A]l-Saver Certificate. question this. IRS.did not 4). I claimed a $200 exclusion against dividends. exclusion. These dividends do not qualify for the IRE did not question this. the Merrill Lynch - 13.- I claimed 3-additional exemptions * * which the 5) IRS did not question. Each exemption is $1,000 or a total of $3,000 whichiwe are really not entitled to. * 6) $100.. I claimed a political party -contributiþn credit of IRS did not question this. I claimed a residential energy credit carryforward 7) from 1982 which the IRS did not quéstion. Here is what the IRS picked up: I reported * 1) that you earned in 1983 on account no. know the account number as they show the number to be 10-zeroes). the Chase Feder 1 interest (IRS does not * 50% of * * * * I reported a CD penalty forfeiture of $2,479 which 2) the IRS.has no record of receiving from any of our banks. on.this point at account. I know the IRS is correct and we will concede the time I answer on the" Chase Federal * * * * * * * * * * to anyone'who fails to report * Please understand that the I$S sends these * * letters out the amount shown on the 1099, namely in our case Chase Federal. The CD penalty is something else. This isda routine to answer on time. letter but they decided to audit the return on all raised in the early part of this letter. a fortune. Speak to noone at the bank about letter but only that we need an aménded 1099. the points I important the IRS Just think if You would owe · For preparing his clients' amended Federal incoàe tax returns, Mr. Powerstein charged a contingent fee of one-third to one-half of the amount refunded to his clients He reported the return address on the amended return as a P.O. Box in his name, and the refunds.were sent to that address. Upon receipt of a refund check, Mr. Powerstein contacted his client, went to the bank with that client, deposited the check, and took his "share". XI. .Loan.Applications - 14 - In connection with their various:mortgages, petitioners completed and submitted various bank loan applications that reported income greater than.that reported on their joint Federal income tax returns. First, they estimated the·net income -from the accounting firm for 1977 as $24,185 on a. residential loan application to Glendale Bank.dated August 2, 1977 (1977 loan application). However, petitioners reported business income from the accounting firm of only.$3,289 on their 1977 joint Federal income tax return (L977 joint return).. Second, they estimated. the net income from the accounting firm for 1978.as $31,262 on a residential loan application to Glendale Bank dated September 19, 1978 (1978 loan app ication). However, petitioners reported business -income fron the accounting firm of only $3,060 on their 1978 joint Federal :.ncome tax retprn (1978 joint return). . Third, they estimated the net; income from the accounting firm for 1983 as $2",500 on a residential loan application.to Sun Bank dated December 23, 1983 (1983 .loan application). However, petitioners reported business income from the accounting firm of only $195 on their J983 joint Federal income tax return (1983 . joint return). Att2.ched to the 1983.loan application were purported.joint Federal income tax returns for petitioners for 1981 and 1982 (purported 1981 and 1982 returns, respectively) which reported busir.ess income from the accounting firm of - 15 - $24,028 and $.23,886, respectively. The amounts reported as business income from the accounting firm on the.purported 1981 and 1982 returns did ·not match the amounts reported on the 1981 and31982 joint Federal income tax returns (respectively, 1981 and 1982 joint returns) that petitioners filed with respondent. Fourth, on a residential loan application to Sun Bank dated June 20, 1984 (1984 loan application),.petitioners estimated their 1984 net income from the accounting firm as $26 000. However, petitioners reported a business loss fróm the accounting firm of $996 on their 1984 joint Federal income tax return (1984 joint return). XII. Investments .A. Bank Accounts During the years at issue, petitioners maintained at least 40 bank accounts. Most of the accounts were held jointly in petitioners' names. However, Mr. Powerstein held certain accounts jointly or in trust for Pearl Powerstein (Ms. P. Powerstein), his step-mother;;Ann Paste(cid:16)040nak(Ms Pasternak), his aunt; or Stacey Korman (Ms. Korman), hi(cid:0)541cousin B. Investments During the subject years petitioners also purchased more than $200,000 in stock and "debt of various companies. Included irr the stock purchased were: 775 shares of Charme Properties, Inc. (Charme). Charme filed a·chapter 11 bankruptcy petition on May - 16 - 11, 1984, which the bankruptcy court.subsequently converted to a chapter 7 liquidation in 1985. Charme forfeited its corporate charter with the, Delaw!are secretary of state on September 24, 1985,. though.the bankruptcy continued into April.1995 when final distributions were nade. XIII. Asset Transf3rs .Between. Februa y 23 and May 25, 1989, Mr. Powerstein and/or Ms. Rosen transferred approximately 30 bank accounts' to.Ms. Ballard and Ms. I. ?owerstein, either individually or as trustees for K.B. On March 6, 1989,.Mr. Powerstein and Ms. Rosen deeded the. vacation home to Ms. Ballard and Ms. I. Powerstein as joint. tenants for $10. .Also on March 6 .1989, Mr. Powerstein. and Ms. Rosen deeded the Roneo property to Ms. Ballard and Ms. I. Powerstein as joint tenants.for $10.. XIV . !Federal Tax ..Reporting . -(cid:16)042 Petitioners·filed joint Federal.income tax returns for.years before 1989, includ ng returns foi- 1983 through 1988 (1983 through 1988 joint returns, respectively). The 1983 joint return reported wages of.$ ,629, interest income of $14,305, dividend income of $227 of wlich $200 was. excludable from gross income, business income of $195, _a capital loss o.f $696, and total income of $21,475.. Attached to the 1983 joint return was Schedufe B, Interest and Dividerd Income, which reported interest earned from All-Savers:Certificates of $2,000. . - 17 - The -1984 joint return reported wages of $5,244, interest income of $19,396; dividend income of $138, all of which was treated as nontaxable; a business loss of $996'; net capital gain of $168; and total income of $23,812. Attached to the 1984 joint return was a Schedule C which reported income that Mr. Powerstein received from two clients. The 1985 joint return reported interest income of $23,705; dividend income of $427, of which $200 was excluded from gross income; buäiness income of $392; net capital gain of $2; and total income ofà $24,326. The 1986 joint .return reported interest income of $27,288; dividend income of $602, of ·which $200 was excluded from g¼oss incóme; a business loss of $5,505; a net capital"loss of $2,926; aÅd total income of $19,259. The 1987 joint return reported intereät income of $30,224;.dividend income of $263; a business loás of $8,924; a capital loss of $2,976; and total income ·of $18,587. The 1988 joint return reported interest income of $35,298, dividend income of $822, a business loss of $24,279, a capital loss of $1,131, and total income of $10,710. Attached to the 1988 joint return was a Schedule C which reported a $1,989 loss from the accounting firm and a Schedule F on which petition rs repÊrted a $22,290 loss from growing vegetables and melons.y Also"attached :to the 1988 joint return was Form 4562, Depreciation and Amortization, on which petitioners reported 7-year pr perty with a depreciable basis of $1,442. - 18 - Mr. Powerstein filed. an indiyidual Federal income tax return for 1989, (1989 retu n). The 1989 return..reported interest income of $7,214, dividend income of $974, a business loss of $118,953, capital gains of $8 458, a farm loss of $122, and total income of negative $102,429. XV. Criminal Proceeding A. Preliminary Investigation In early 1989 the Questionab;Le Refund Detection Team (QRDT) of the Atlanta, Georgia, Service.Center forwarded information to the Criminal Invest:.gation Division (CID) of thecInternal Revenue Service (IRS) in Ja ksonville, Florida; indicating that'Mr. Powerstein had prepared false Federal tax returns·on behalf of nµmerous individual . CID.investigated Mr. Powerstein, contacted third p.arties, and issued -summonses in furtherance of that investigation. . B. Search Warrant On July 19, 19f9, special agents with CID executed a search warrant at the AddiPon mobile höme, three detached outbuildings, and automobiles loc2ted on the Romeo property.. Among the documents seized were financial.records refated to the accounting firm, client files, correspondence, check registers, deposit tickets, envelopes containing.cash receipts, and bank documents and statements. CIE did. not find böoks, records, cash disbursement·journa]s, or bank reconciliation papers. An ,- 19 - envelope with more than .$1, 000 was alsos found in the Addison mobile home . The special agents who ex¾cuted the search warrant inventoried the seized items by description-andilocation found. C. Jeopardy Assessment Respondent determined that collection of the deficiencies allegedly due from peti,tioners, was in jeopardy because, among other things, Mr. Powerstein was percei(cid:16)040edas a| flight risk who placed assets beyond the reach of the Fëderal Government by transferring them to nominees: Respondënt' s a itor used the net worth and expenditure's method to determine the etmounts to be jeopardy-assessed. The auditor made these determinations over a 4-day period in which information seized from Rhe Romeo property was examined and analyzed. For jeopardy assessment purposes, espond%t's auditor calculated petitioners' increase in net worth b(cid:0)540tweenDecember 1988 and July 1989. Petitioners' openi g net worth,was determined from the 1983 loan applicati n, and- their ending net worth was determined:by reference to ba k account balances as of July 1989. The difference :between peti ioners' ending and opening net worth was .allocated equally over each of . the years 1984 through 1988; i.e., the.increase in net worth was divided by 5. Additional adjustments were made fo each of the years 1984 through 1988 for living expenses and av ilable ash. The net worth increase. for each of *the yÀars'1984 through 1988 was determined to be business income from the accounting firm. - 20 - On July 24, 1589, responderif jeopardy-assessed taxes, additions to tax, and interest against petitioners for each of the years 1984 thrcugh 1988.' SeÄ sec.'6861. On July 25, 1989, respondent issued a notice of jeopardy assessment to petitioners for 1984 through 1988 in the following' amounts: Year Deficiency .6653·(,b) (1) 6653 (b) (2) 6653 (b) (1) (A) 6653 (b) (1) (B) . Sec. Sec. Additions to Tax Sec. Sec. ·1984 1985 1986 1987 1988 $28,664 48, 948 3.8,186 39,749 30,915 . $14,374 24, 474 -0- -0-23,186 $7,918 " (cid:16)042 9, 520 -0- -0- -0- · -0- -0 $28,640 ·29,935 -0- . · -0- -0- $5,095 2,952 -.0- Sec. 6661 $ 7,166 12, 237 9,547 9,937 . 7,729 Respondent also jeo7ardy-assessed interest of $65, 778 against petitioners and collected that amount in 1989 by levying upon petitioners' bank accounts. In tòtal, .respondent seized $449,513 from petitioners' va ious accounts. After jeopardy assessment of petitioners' assets was made respondent contintied his criminal investigat·.ón by sumthoning at least 36 banks and interviewing at- least 36 witnesses . Respondent subsequently redetermined petitione s' net worth and reflected those determinations in h s answer. 'Respondent too c the position that as of July 24, 1989, the tax, additione to tax, and interest purportedly due from total petitioners for 1984 through 1988 was $429,424 (total As of respondent has not refunded. petitioners the $20, 089 difference between the amount seized ($449, 513) and the total liability ($429, 424) . liability)-. the date of the trial in these cases, D. Indictment - F 21 - A Federal grand jury in the U.S.. District C ourt for the~ Middle District, of Florida eindicted Mr. Powerståin for various Federal tax of fenses in a 13-count ïndi tment (indictment) . The indictment charged Mr. Powerstein with (1) one ount of corruptly obstructing and impeding: the due admini tration of the internal revenue laws by. preparing and filing false and raudulent Federal income·tax returns- for himself and clieÅts in violation of section 7212 (a) ; (2) eight counts. of knowingly nd willfully aiding and assisting in the pi^eparation and, pre$entation of materially false income tax returns 4df Ålients n violåtion of section 7206 (2) ; (3) three counts of knàwingly nd willfully attempting to tevade taxes during,1986 tl¼rough 1.988 in violation of section 7201; and. (4) one count of públishin a false power of attorney in violation of 18 U:S.C. sec. (495. E . Plea Agreement and Sentencing On July 2, 1993, Mr. Powerstein sicjned a plea agreement in which he pleaded guilty to one count of i corrupt j interference with the administration of the internal reveñue laws in violation of section 7212 (a) and one count of criminál tax eyasion in violation o.f section 7201. In connection with tihe plea agreement, Mr. Powerstein agreed that he prepared and filed false and fraudulent Federal income tax returns indiv dually and on behalf of his client-taxpayers in order to frau ulently obtain - 22 - tax refunds. Mr. Powerstein agreed that he.understated his 1987 income by approximately $150,159 and that he owed Ethe U.S. Treasury approximately. $53, 715 ;of Federal income tax for ^1987 . .Mr. Powerstein admitted to'preparing fräudulent Forms W-2, Wage and Tax Statement, which overstated the Federal income taxes withheld for 79 client-taxpayers He also admitted to, on several occaslons, creating false and 'fraudulent Forms W-2 for' client-taxpayers that identif.ied firms or business that had never employed, paid wageä stö, ortwithhèld Federal income taxes from those client-taxpayers. In total, the District Court found that the total tax losses attributable:to Mr. Powerstein were "slightly less than.' $1.5 million.7 * On March 31, 1994, the - District Court sentenced Mr..Powerstein to 63 months of imprisonment, 3 yea:7s of supervised release, a fine of $100, 000, and a spe.cial assessment of $100.. 7The tax losses included Federal income tax.deficiencies and interest for 1984 through 1$88 of $191, 812, $246,615 related to the 79 client-:taxpayers for-whom Mr.. Powerstein'prepared fraudulent returns, and tax losses of almost $1. 1 million attribLtable . to Mr . Powerstein' s clients whose returns.were not exëmined. slightly more than 1.5 million. We observe that the ctax losses are tax losses of - 23 - XVI. Pleadings A. Docket No. 30261-89 1. Notice of Deficiency and Petition By notice of deficien$y dated September 21, 1988, respondent determined deficiencies in petitioners' 1984 through 1988 Federal income taxes and additions · to tax as f ollows : Year Deficiency 6653 (b) (1) 6653 (b) (2) 6653 (b) (1) (A) 6653 (b) (1) (B) sec. sec. Additions to Tax , Sec. sec. 1984 1985 1986 1987 1988 $28,664 48,948 38,186 . 39,749 30,915 $14,374 24,474 -0- -0-23,186 $7,918 . 9,520 -0- -0- -0- · -0- -0- $28, 640 29,935 -0- · . ... -0- -0- $5, 095 2,952 -0- . sec. 6661 $ 7,166 12,237 9,547 9,937 7,729 The amounts determined in the notice of deficiency were equal to those determined in the jeopardy assessment; i,.e., both determinations used the same method for calculating net worth. Thus, the notice of deficiency reports petitioners' ope.ning net worth as of December 31, 1983, their closing net worth as of December 31, 1988, and the increase or decrease during that time as follows: 12 /31/83 12 /31/88 Increase / (Decrease) Stocks Bank accounts Real estate Total assets $5,000 85,000 107,201 197, 201 $43,024 529,700 42,461 615, 185 . $38,024 444,700 (64,740) 417, 984 Total liabilities 73,000 -0- -0- Net worth 124,201 615,185 490,894 Respondent then divided the $490, 894 increase to petitioners' net worth between 1984 and 1988 by 5 to arrive at petitioners' annual I - 24 - net worth increase, or $98,197. Respondent then determined, petitioners' business income, as follows:. Increase in net worth Additions: Personal living . expenses Subtract ions : 12 /31/84 .12 /31/85 . 12 /31/86 12 /31/87 12 /31/88 $98,197 $98.,197 $98,19'7 $98,197 $98,197 25,085 26,781 26,540 26,540. 26,540 Cash available Business income (cid:16)042 20 , 0 95 LO3,187 3 , 4'79 ,. 121,499 . .. 29 , 903 94,834 13 , 162 111,575' . 10 , 710 198,680 1We observe that respordent's calculation of business income does not equal increase in net worth plus personal living expenses less cash available. Petitioners petitioned the Court in response to the notice of- deficiency, and the Court docketed that case at docket No. 30261-89. 2 . Answe: In the answer, ::espondent asserted that because . the notice of deficiency averaged petitioners' understatements evenly over 1984 through 1988, petitioners' reconstructed taxable income was (1) . overstated for 1984 and 1985, and (2) understated for 1986, 1987, and 1988. Accordingly, respbndent asserted adjustments to the deficiencies and additions to tax determined to be due from petitioners as folloùs: Year Deficiency 6653 (b) (1) -6653 (b) (2)= 6653 (b) (1) (A) 6653 (b) (1) (B) see sec. sec. Sec. Additions to Tax Sec. 6661 1984 1985 1986 1987 1988 $1,599 23, 492 · 47, 566 58,251 58,187 $84 2 11, 695 .-(·- -(·- . 43,5(cid:16)2543 $442 4, 549 -0 - -0- -0- -0- -0 - $35,·353 43,536. -0- L . 150 percent of the interest due on the deficiency. -0- -0 - (1) (1) -0- . . -0- $5, 873 11, 892 .14,563 14;54.7 ' . - 25 - For purposes of the answer, respondent used the net worth method to determine increases t-o petitioners' 1984 .through 1988 taxable income as follows: 12/31/83 '12/31/84 12/31/85 .12/31/86 12/31/87 12/31/88 $188,159 26,662 26,099 96,376 $231,552 21,441 36,599 143,371 $231,848 21,441 36,599 81,171 $325,·992 23,703 36,687 81,171 $457,059 32,935 36,687 81,171 $565,765 47,469 51,015 81,171 9,065 346,361 7,422 440,385 7,787 378,846 7,712 475,265 10,082 617,934 10,321 755,741 72,807 -0- 153,627 -0- 52,674L -0- 51,420 -0- 51,023 -0- 51,497 -0- Net worth computation: Cash on hand Investments Personal assets Real estate Additional · investments Total assets Loans and mortgages Charge accounts Accumulated depreciation Total liabilities Net worth Less prior year's net worth Net worth increase Personal expenses Less nontaxable income Adjusted gross income Less itemized deductions Less exemptions Corrected taxable income Reported taxable income (cid:16)042 Increase to taxable income . N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 6,637 79,444 266,917 10,535 164,162 276,223 10,535. 63,209 315,637 6,093 57,513 417,752 266, 917 9,306 25,085 276 , 223 39,414 . 26,781 315, 631 102,115 26,540 7,755 58,778 559,156 417, 752 141,404 28,549 9,373 .60.,870 694,871 559, 156. 135,715 28,549 5,333 329 . 4,233 429 203 29,058 . 65,866 124,422 169,524 164,061 15, 304 3,000 16, 0 87 .3,120 , 6, 148 3,240 8, 655 5,700 5, 000 5,850 10,754 46,659 115,034 155,169 153,211 .5,086 . 4,447 7,945 1,499 .(140) 5,668 42,212 107,089 153,670 153,351 a. Cash On Hand Respondent determined petitioners' cash on hand as follows: Cash in Banks 12/31/83 12/31/84 12/31/85 12/31/86 12/31/87 12/31/88 American.Savings Atlantic Bank BankAtlantic Barnett Bank Biscayne Federal Brooklyn·Federal California Federal Carteret Savings $37,301 3,169 51,352 -0-10,846 158 -0-10 , 237 $35,003 63,430 -0- -0-10,884 .218 10,762 6, 368 -0- $10,047 -0- -0-10,930 178 75,490 - 6, 485 -0- . $64,208 -0- -0-10,965 142. 11,912 6, 592 -0- $160,961 -0- -0-10,185 150 25,468 6,.699 -0- $202,448 -0-2,670 10,185 148 10,133 6, 827 Centrust Savings Citicorp Savings City Federal Savings . Commonwealth Dime Savings First Nationwide First Union Fund for . Government Inc. Glendale Bank Greater New York Hollywood Federal Mid State Federal . Roosevelt Bank Safra Bank Sun Bank .. Total . -0-6, 518 2(t, 233 2, 590 135 1,513 10 89 -0 3,.56 3 , 0 73 -0-2 , 049 36,83¼ 4oÒ 188, 155 -0-6, 419 0-^ 56, 678 10,000 126, 445 10,000 96, 775 20 , 233 22, 643 526 2,858 108 . 39 10,512 0-1, 134 -0 - 1, 253 38,858 304 23 T, 552 . 20 , 353 22, 697 559 3,142 114 S 39 -0- -0-1, 198 . -0-1, 438 22,500 -0-231, 848 20 , 358 22, 750 591. -0-120 39 -0- -0-1, 265 11, 446 2, 159 37,000 -0-325, 992 '20 , 364 2, 804 624 -0-126 - 40 -0- -0-1, 3·37 85, 464 1, 562 34,500 -0-457, 059 20,897 96, 860 20, 343 2, 857 659 . -0-132 . . . 40 -0- -0-1, 412 154, 840 814 34,.500 -0- . 565, 765 b. . Investments . Respondent valued petitioners investments in 1983 through 1988 at $3k, 727, $2 3, 86 , $ 9, 228, $31, 415, $43, Öl7, and $57, 790, respectively. Inc15ded in this determination were 775 shares of . . Charme which petitione s contend are worthless. c Personal Assets . . Respondent valued pet-itioners' personal assets as follows: . De scription 12 /3 L /83 12 /31/84 12 / 1/85 12 /31/86 12 /31/87 , 12 /31/88 -0 - -0- -0 - $9, 373 $9, 373 $9, 373 -0- $15 564 1Q 535 $10,500 15, 564 10,535 $10,500 . 15, 564 10,535 10,500 15, 564 -0- 10,500 . 15, 564 -0- .. 1986 Caprice classic International tractor 1982 Chevy pickup 1982 Caprice. 1984 Plymouth Reliant 1985 Mercury 1973 Ford ti-uck 1980 Dodge aspen 19'73 Ford S/W -0 0- -0- -0- -0 -0- -0- -0- -Ø- -Ò- 36, 599 -0-0- -0 -0- -0-. 36 599 . -0- -0- .-0 1,000 2.50 36, 687 -0- -0-- -0- 1,000 . 250. 36, 687 , . Total 26, 099 Petitioners contend that they owned additional personal property, including. a copler. 10,500 15, 564 -0- 4,284 8,500 2,544 -0-250 51, 015 - .27 - . d. Real Est:ate Respondent valued petitioners' real sestate as follows:. Description 12 /31/83 12 /31/84 12 /31/85 12 /31/86 :12 /31/87 12 /31/88 Romeo property Coral Springs residence Vacation home Addison mobile home Well Fenceposts Crossties Pine Street mobile home Total $20,009. $20,009 $20,009 $20,009. $20,009 $20,009 62,200 7,333 . 62,200 7 333 ' -0-7,333 -0-7,333 -0-1,375 2,358 501 23,431 1,375 2,358 501 2,600 96,375 26,164 143,371 23,431 1,375 2,358 501 26,164 81,171 23,431 1,375 2,358 501' 26,164. 81,171 e. Loans and Mortgages -0-7,333 23,431 1,375 2,358 501 . 26,164 81,171 -0-7,333 23,431 1,375 2,358 501 26,164 81,171 Respondent valued petitiioners' loans and mortgages as follows: Description 12/31/83 12/31/84 , 12/31/85 '12/31/86 12/31/87 12/31/88 Glendale Bank Glendale Bank Sun Bank Mid State Mid State Total $72,807 -0- -0- -0- -0-72,807 -0- $99,873 53,754 -0- -0-153.,627 -0- -0- $52,674 -0- -0-52,674 -0- .-0- $51,420 -0-. -0-51,420 -0- -0- -0- $51,023 -0-51,023 -0- -0- -0- -0- $51,497 51,497 Petitioners contend that there is an additional loan outstanding for $19,500 from Atlantic Bank. 3 . Amended Answer Respondent amended his answer on April 27, 2007 (añiended answer), to assert that Mr. Powerstein is collaterally estopped from denying (1) his liability for the additions;to tax imposed by section 6653 (b) (1) (A) and (B) ; and (2) the fagts necessary to convict him under counts 1 and 11 of the indictment. - 28 - 4 . Second Amended Answer Re spondent ' s net worth . computation determined nondeductible expenditures allocable to petitioners _of $135, 504 on the -basis of average ahnual expenditures fdr a family of thfee as determined by the Bureau of Labor Statistics (BLS) . In-his second amendment to answer (second anended answer) filèd with the Court on April 21, 2010, respondent revised his détermination of petitioners' nondeductible personal[ expénditures. Theïsecond amended answer determined nondeduc:ible personal expenditures allocable to petitioners of $241/789 using a composite of check gegisters. from petitioners' variou3 bänk accounts, BLS., and petitioners' 1984 t-brough 1988 joint eturns. In part-icular, respondent recalculated petitioners'· personal expenditures using a . combination of BLS, check registers, and petitioners' tax returns. The second amended answer also asserted an increased deYibiéncy if respondeht's personal livincj expenses analysis is sustained. B. Docket No 13443-92 . On.March 30, 1992y respondent issued to Mr. Powerstein a notice of .deficiencv which! determined a $49,000 defici^ency in Mr. Powerstein's ~1989 Fede¼al incomé tax and a $36,750 frhud= penalty under section 6663 . Mr .. Powerst-ein petitioned the Court in response to .that noticè òf déficiency, and the Court docketed the. case at docket No. :.3443-92. - 29 - OPINION I. Burden of Proof Petitioners moved the Court in limine to modify the burden of proof with respect to amounts shown òn respondent's net worth schedule because, petitioners contended, respondent seized but did not return some of their personal and business records. We denied petitioners' motion without prejudice to arguing the point in their opening brief, and they again asserted on brief that the burden of proof should shift to respondent. Absent a written stipulation to the contrary, these cases are appealable to the U.S. Court of Appeals for the/Eleventh Circuit., See sec. 7482(b) (1) (A), (2). The Commissioner's determinations in a notice of deficiency are generally presumed correct, and taxpayers must prove those determinations erroneous in order to prevail. Rule 142(a); Welch v. Helvering, 290 U.S. 111,. 115 (1933). In ca(cid:0)541esinvolving unreported income, however, the presumption of correctness does not attach until the Commissioner supports his determinations with a.minimal "'evidentiary foundationtlinkingt the taxpayer to the alleged -income-producing activity.'¼ Blöhmtv. Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993) (quoting Weimerskirch v. Commissioner, 596 F.2d 358, 362 (9th Cir. 1979), revg. 67 T.C. 672 (1977)), affg. T.C. Memo. 1991-636. Once the Commissioner has produced evidence linking the taxpayers to an income- 30 - producing activity, thp burden of proof shifts to the taxpayers to rebut that presumption by establishing that the Commissioner's determinations are a.rbï trary . or erroneôus . Blohm V . ^ Commissioner, supra at 1549. The Court of Appeals for the Eleventh Circuit has described the situation in wh .ch the burdenb of proof shifts· to the Commissioner as "ra:e" and only occurring« "where' the Commissioner has introduced no substantive evidence; and thet evîdence shows that the claïmed tax déficiency arising fkóm unreported income was derived by the overnment from unreliable evidence." Gatlin v. Commissioner, 75 F 2d 921, 923»(11th* Cir. 1985), affg. T.C. Memo. 1982-489. To satisfy his initial burden of production, respondent introduced records whichswere seized from petitioners or .summoned from third;parties.. Those .records establish that petitioners receivect,÷but did not§ report, substantial amounts of income. between 1984 and 1988. . On jthe basis of 'this credible evidence; we are sat-isfied that responcient has made the requisite showing .for his detörminations as set forth in the·notice of deficiency to 2be ent itled to the general presumption of correctness. See schad v. Commissioner., 87 T.C. 609, ~620 (1986) (connecting a taxpa er with funds that form the basis of the. deficiency ïs suffi ie t for the presumption of corredtness' to attach)., affd. withcut published opinion.827 F.2d 774 (11th Cir. 1987) . . I - 31 - As relevant here, the prèsumption òf correntness is modified in several respects; First, respondent(cid:16)040assertëda·claim for an increased deficiency in.his.answer^for each of the.years'1986 through 1988, and he bears tthé burden of proof as to those increased deficiencies. See. Rule 142(a) (1). Sècond, respondent amended his answer to assert that Mr. P¼werstein is collaterally estopped from denying liability for the fraud ädditions to tax for 1987, and he bears the iburden of pròof withjrespect to that newly pleaded matter. See id .Third, ¼espondéÁt revised his - determination of petitioners'inondeductible per(cid:0)541onalexpenditures in the second amended answer,3and he bears the burden of proof with respect to that issue. See id. Wé have dècided the issues hërein with these general principles infmind.';To the extent that we have not specifically addrèssed whether respondent has met'his burden of proof with respect to any of the fore(cid:0)541oing^issues,we decline to do so because the record fav¼rs respändent. II. Unreported Income A. - Overview - Gross income includes all income f om whatëver source derived.,.including income derived from $usiness Sec. 61(a) (2). Taxpayers are required to máintain book and rêåords sufficient to.establish the amount of their Federal income tax liability. See sec..6001·; sec. 1.6001-1(a), Income Tax:Regá. In the absence of such books and records, thë Commissi ner is authorized to - 32 - reconstruct the taxpayers' incomel by any method that clearly reflects income. Sec. 446(b); Parks v. Commissioner, 9.4 T.,C. 654, 658 (1990).. One such method that3 courts have long . recognized as reaso1able, and the method used by respondent in these,cases, is the net worth method. See Ho.lland v. United States, 348 U.S. 12L, 131 (1954). Under the net worth method, the Commi.ssioner reconstructs . the taxpaye.rs' income by determining the taxpayers' net worth at the beginning and end of each of the years in issue. The difference between ;hose amounts for each successive year is the taxpayers' annual net worth increase -(or decrease). The net . worth.for.each year.is then adjusted by adding nondeductible personal expenditures änd subtracting nontaxable receipts. Id. at .125. An increase in netz worthy in any given year creates an inference of- taxable income in: that year, - provided that. the Commissioner shows a likely source of the3unreported income, or negates possible nontaxable sources. See United.States v. Massei, 355 U.S. 595 (1958). In the instant cases, petitioners failed to maintain books or records from which their Federal tax liabilities could be computed, and respondent reconstructed petitioners' income using the net worthe method.. As the starting point for determining petitioners' net worth, respondent.used the net worth statement included in the 1983 loan application. Respondent then computed 33. - petitionersv',net worth for eaáh of the.ýears frdm 1984- through 1988 and determined an aggregate increase in- neu worth:'of $427,954. Respondent attributed the soÜrce of 4his increase to Mr. Powerstein's.accounting firm. . .. , Petitioners challenge the accuracylof respóndent's income reconstruction on four principal grounds. First, petitioners contend that respondent overstated theis,opening net worth by including, among.other.things; cash,in dertainr$ank accounts which:they did not wholly own). Second, petitioners claim that respondent failed to.make various adjusuments: tj-their.net worth in each. of the years in issue - Third, etitionërs assert·that respondent's calculation of nondeductible persoñaltexpenditures is erroneous, duplicative, .and/or unsup orted bý the record. Fourth,. petitioners-argue that responde t's cal ulation of nontaxable receipts is.understated. B. Disputed Opening Net Worth Petitioners cite.three.reasons for challenging respondent's computation.of their opening ået worth. First they contend that respondent's calculation erroneously inàluded cásh in bank accounts held jointly or in t¼ust for Ms. P:. Po erstein, Ms. Pasternak, tand Ms . Korman. Secohd, the claim hat respondent failed to.account for household'furnish ngs whi h they owned at the.start of 1984. Third, they assert hat res ondent-failed to. adjust t e bàsiÅ of the CoÈal Springs^ r sidence for certain - 34 - additions and improvem|ents . We agree with petitioners for the most part, cand consideir. their arguments seriatim. 1. Bank Accounts C (cid:16)042 . Petitioners be in by arguing that respondent incorrectly included in their .o ening net worth, cash in bank accounts which Mr'.:Powerstein held jointly with or. in trust for: Ms. P. Powerstein, Ms. Pascerhak, (cid:16)042andMsi. -Korman First, petitioners- claim that cash in .niné accounts at! Safra Bank was improperly' included in their. opening net worth because»those _accourits were jointly. owned with Ms:xP-: Powerstein and that she funded one=half of . the initial deposits ;made t to those accounts . 8 -We agree . To satisfy their burden,, petitioners¼rely upbn the .testimony of Mr. Powerstein and bank records: for:these.accounts. . Included in the records are account signature cardstwhich list the.owners address as being in Brooklyn and a letter «requesting changes to those accounts that is: signed by Mr. Powerstein and'Ms. P Powerstein.- .We ùnderstand thesaddress referenced in the " signature cards to .he that of Ms: P Powerstein,' and wescredit Mr. Powerstein's tenti ony in the light. of the. corroborating documentary evidence. Accordingly, we find t-hat petitioners opening net worthrshouldebe reduced by $11,250 whicheis Ms. P. Powerstein's share nf cash in the accounts held mjointly with Mr. 8The accounts at Saf,ra Bank claimed to be held jointly ,with Ms . P. Powerst'eln are account numbers endirig 1178, 1770, 1202, 1203, 1204, 1205, 1106, 2334, and 2335. - 35 - Powerstein. Cf . Unger .v. Commissioner, T. C. Meiho. 2000-267 (including cash in jointly held bank acéounts in a taxpayer's net worth where inclusion of those. accounts was suþþorted by documentary evidence) . Second, petitioners ascribe error to the iàclusion of cash in accounts at Brooklyn Federal Savings & Loan (Brooklyn Federal) and Roosevelt Savings Bank (Roosevelt Bånk) in their opening net worth.' According to petitioners, thes accou t s are not attributable. to them because they were jointly < wned with and wholly funded by Ms. Pasternak. .We agree. Petitioners again rely upon the testimony of .Mri Powersteln and b$nk records for these "accounts. The account records fo# each of the Brooklyn Federal -and Roosevelt Bank acòounts est¼blish that those accounts were held in trust for.Susan Mark, Mr. owerstein's cousin. A signature card for the Roosevelt Bank aöcount wRs signed by Mr. Powerstein and Ms. Pasternak, tand listeÒ separäte addresses for each·account holder. We again credit M . Powekstein's testimony given the supporting documentary evidenóe . Acpördingly, we f ind that petitioners' openinéj net*worth forl cash on deposit at ' Brooklyn Federal and Roosevelt Bank shoûld be r duced 'by $158 and $1, 049, respectively. Cf . id. 9The accounts alleged to be jointl held w th Ms. Pasternak are account number ending 0790 at Brook yn Federal and account number ending 9211 at Roosevelt Bank. - 36 - Third, petitio2ers maintain that an account at Citicorp Bank (Citicorp), which was held in truist for Ms. Korman and funded by her father, is not an asset belonging to. them. .We agree. Petitioners carry theit burden with the testimony of Mr. Powerstein and bank records which establish that this account was held in trust for M:3. Korman. Wercredit Mr. Powerstein's testimony in the light of the supporting documentary evidence. Accordingly, we find that petitioners' opening net worth for cash held at Citicorp should be reduced by $2i7. See Estate of Cardulla v. Commissionér, T.C. Memo. 1986-307. 2. Hous(hold Furnishings Petitioners nent argue that ·respondent erroneously excluded an allowance for personal household furnishings from their opening net worth. According to petitioners, their opening net worth.should be increased to reflect household items which they moved from Brooklyn to the Coral Springs residence.. We agree. To support, this increase ~in opening net worth, petitioners rely upon a bill of lading from the moving company that transported their furnishings, proof of insurance for $64,800 of personal property located at the Coral Springs resi-dence, and Mr. 1°The.account c aimed to be held in trust for Ms. Korman is We observe that Mr. account number endirg 7299 at Citicorp. Powerstein testifiec. at trïal that the $1,533 balance in account number ending 161-8 at Atlantic Bank was also attributable to Ms. Korman. since they do not ac!dress. it on brief. Commissioner, 117 T.C. at 120. We consider petitioners.·to have conceded this argument See Nïcklaus v. +- 37 - Powerstein's testimony that the household items cost approximately $30,000. We credit Mr. Pòwerstei 's testimony as reasonablè and hold thht petitioners' opening n t worth is increased by $30,000. 3.' Basis in thel Coral Sprin s Resid nce Petitioners furthërlabguë that their opening net worth should be increased to reflect $11,191 öf costb incurred in constructing the Coral Springs residëhcé andi$14,529 of expenses incurred to improve that propèrty. As Ôetitiohérs see it, these additional.costs increase their basis i¼ the Co¼al Springs residence and thereby effect their open¼ng net ùorth. We agree in part. With respect to thef$11,191- o¼ constk&ction costs, petitioners rely upon Mr. Powerstein's irect t stimony, his handwritten notes regarding the paymentlof suchlexpenses in the late 1970s, and the 1978 loan applicatión, all öf which support petitioners' claim that they incurred s$ch expè¼ses. Given the corroborating evidence, we credit Mr. Pöwerstein's testimony as reasonable, and hold that petitioners' asis in the Corall Springs residence is increased by $11)191. iSee sec. 10 6(a) (1); . With respect to the $14,529 in add tional' improvements, petitioners rely s'olely- upon the testim ny anå andùrittën notes of Mr. Powerstein to establish such an increase to the.ir basis in the Coral Springs residence. We decliné to cre it this evidence absent.further corroborating evidence, such as testimony,of the 38 - contractors whó performed the work or receipts for the work performed. Mr. Powerstein.maintained receipts and records related to a variety oif expenses associated.with petitioners' : investments. Altho2gh Mr..Powerstein's handwritten notes reference canceled checks and invoices as source documents, petitioners did not provide copies of those items. Accordingly, we hold that.petitiöners' basis increase in the.Coral Springs residence is limited to ·$11,191. C. Disputed £ncreases to Net Worth Petitioners ne. t contend. that respondent's determination of their annual net worthv increase for.each of the years in issue failed to account for various adjustments to.their assets and liabilities. We consider petitioners' contentions in turn. 1. Cash in Banks We previously held that respondent incorrectly included in petitioners' opening net worth cash in bank-accounts held jointly or in.trust for Ms. Pasternak, Ms. P. Powerstein, and Ms. Korman. On ·the basis of the.record as a whole, and taking into account the parties' stipulations as·to bank accounts which.petitioners owned, we hold that petitioners' net worth for 1984, 1986, 1987, and 1988 should be reduced by $17,948, $3,807, $1,982, and In the absence of such records, we assume that they did not exist or were unfavorable to petitioners'. position. Wichita Terminal Elevator Co..v. Commissioner, (1946), affd. 162 F 2d 513 (10th Cir. 1947). 6 T.C. 1158, 1165 See - 39 - $1,247, respectively." ,We also hold that petitioners' net worth for 1985 should be increased by $21,895. . . 2. Investments : Petitioners maintain that their net worths should be reduced to exclude the value of 775 shares of Charme stock which were worthless during the years in issue. We disagree. Taxpayers generally bear the burden of proving thát the stock in question was "wholly.worthless" and when it becomes worthless. See Boehm v. Commissioner, 326 U.S. 287, 294 (1945); sec. 1.165-5(c), Income Tax Regs. We ordinarily treat stock as porthless if it has neither liquidating'value.nor potential valùe. Austin Co. v. Commissioner, 71 T.C. 955, 970 (1979). HA'corpo¼ation's stock has liquidating value if the corporation's ássets ekceed its liabilities. Id. A corporation's stock has potential value if there is a reasonable expectation that it will+ become valuable in the future. Morton v. Commissioner, 38 B.T.A. 1270, 1278 (1938), affd. 112 F.2d 320 (7th Cir. 1940). Where a corporation declares "These adjustments relate to bank hccounÊs at Brooklyn The 1984 Federal, Citicorp, Roosevelt Bank, and Safra Bank. adjustment reflects·the parties' stipulation that petitioners' bank account should be. reduced by $8,259 for amounts deposited to the Underhill account. We attribute any diffekence in amounts to rounding. Included in the 1985 adjustment are a reduction in net worth of $13,108 related to various bank accounts, and an increase in net worth of $35,003 as reflected by petitioners' receipt of a certificate of deposit (California Federal). from California Federal Bank - 40 - bankruptcy,- ceases to conduct business-, liquidates, or has a receiver appointed, its stock may:be worthless because these events can limit or de troy the stock's potential value. See id. That rule,' however, is not absolute.. See,.e.g., Dallmeyer v. Commissioner, 14 T.C. 1282, 1291-1292 (1950); Patten & Davies Lumber Co. v. Commlasloner, 45-F.2d 556, 558 (9th Cir. 1930), revg. a Memorandum Opinion of this Court dated July 29, 1929; see also Scagliotta v. Commissioner,. T.C. Memo. 1996-498 Storch v. Commissioner, T. C. emo. 1985-17. . In applying the foregoing principles, we are unable to agree with petitioners that the Charme stock became wholly worthless during any of"the years in issue.1 Although Charme declared bankruptcy in.1985, its bankruptcy continued into 1995, which suggests.that its s ock had at least some residual liquidation value in 1985. Suc1 value might have.included, for example, liquidating distributions to.the stockholders after creditors' claims had been sat:.sfied. Absent additional facts surrounding the financial viabi itý of Charme, the assets it held when placed into chapter 7 liqu da ing bankruptcy, the expenses of administration, or a f xed änd identifiàble event establishing complete worthlessness, we decline to accept that the stock was devoid of all prese t or potential value. See Miami Beach Bay Shore Co. v. Commissioner, 136 F.2d 408,.409 (5th Cir. 1943) (stock is not worth ess. until the "last'vestige of value has disappeared"). Accordingly, we hold that petitioners' net worth - 41 - includes the $1,750 value of the Charme stock. 3. Household Property We previously held that respondent incorre tly omitted from petitioners' opening net worth a $30,000 allowance for personal hóusehold furnishings. Petitioners now contend that they are entitled to a nondeductible loss to reflect the disposition of that property when they moved from the Coral Springs residence to the Addison mobile home. We are not persuaded. Without elaboration, petitioners contend on brief that they disposed of "a good amount" of these furnishings because the Addison mobile home was "substantially smaller" than the Coral Springs residence. As support- for.their entitlement to the nondeductible loss, petitioners state that they did not claim a charitable contribution ,deduction for that property, which·suggests that they donated it. Absent a greceipt of the donation or other corroborating evidence, we decline to accept petitioners' self- serving statements. We find petitioners' claims especially implausible given that the property listed in the bill of lading included bedroom furniture, electronics, living room furniture., office furniture, and household.items, all of which conceivably would have been suitable for use in ther Addison mobile home.. On the basis of the record at hand, petitioners have not proved their entitlement to a nondeductible loss for personal property in 1985. . Accordingky, we hold that. petitioners' net worth is increased by $30, 00 fbr each of the years in issue to reflect 42 - petitioners' househ ld property 4. Real Estate a. Co al Springs4 Property - We previously helél supra p. 37 that petitioners' basiä in the Coral Springs residence should be increaséd by- $11, 191 to account for construction costs rel'ated to~ t-hat home.7 We similarly hold that petitioners' basis in the Coral Springs residence for 1984 _s incréased by $11,191 Seé*sec. 1016(a) (1). b1 Roineo (cid:16)042Propef t 7 Petitioners contend that respondent. understated their basis in the Romeo property. Accordingüto petitioners, their basis' in the Romeo property ahoàld be incréased by $10, 284 to reflect costs of clearing and improving that property, support paid to the Ballards, and ccists of hiring workers . to assist 'in clearing that property. , Pet:.tioners rely upon a number of methods of proof to carry their burden. First, they rely upon the direct testimony of ' Mr . Powers t ein, Mr . .Ballard, - and IVIs . Ballard . Second, they offered an appraisalfwhich reported improvements to that property such 2.s a three-stall barny a pump house and a septic tank. Third, they submitted checks, receipts, arid létters establishing that they paid support to the Ballards while the Romeo property was.¿evelopedtand hired(cid:16)042workersto help in the h 43 - clearing of that land.· Fourth',, they offered the handwritten notes of Mr. "Powerstein listing the expÔnses in¼urred in connection with developing the Romeo pròperty.i [We also nòte that petitioners' estimates of the cost of dëvelopihé the Romeo property reasonably excluded (1) expensès related to M&M; and (2) improvements that respondent (cid:16)042hadcreditèd themt ¼ith. Given the overwhelming.evidence intröduced to cor oboratelpetitioners claim^, we hold.that -their basis in the omeo pr perty is increased by $10 , 284 . See id c . Addi s on. Móbi le Home Petitioners maintain that their ba is in e Addison mobile home should be reduced by $970 from $23 431- to $22,461. We disagree. . In an attempt to mêet their urden, etitioners rely upon the handwritten- notes of"Mr. Powerstein·sh¼wing a purchase price for the Addison mobile home òf $2(cid:0)575,461.espondent, on the other hand, submitted canceled checks eåtablishing that thë cost of acquiring the Addison mobile home wa $23,431s. As compared with.Mr. Powerstein's handwritten sched le, we find the checks rëlied upon by-respondent to-be more pe suasive Accordingly; we sustain respondent's determination that petitio ers''basis in the Addison mobile.home was $23,431. 5. Loans and Mortgages Petitioners assert that heir net orth shòuld be adjusted to reflect a $19,500 loan (Atlantic lòañ) from Àtlantic Bank. We - 44 - agree. Petitioners submitted evidence showing that they.became liable on the Atlantic-.loan in or around 1984. First,.they made a large -deposit to a. bank account with Atlantic .Bank on February 2, 1984, which we beli.eve reasonably could.have included the proceeds from the=Atlantic. loan. 1 Second, petitioners submitted a bank deposit ticket showing that a $19^,500 loan with Atlantic Bank was repaid in 1985. Third, petitioners presented handwritten not.es oE Mr.. Powerstein showing that a $19,500 note was taken from Atla2tic Bank. Accordingly,. we hold that petitioners' net worth. should be increased by $19,5.00 in 1984 and 1985, the years during!which the Atlantic loan was outstanding. 6. Depreciation Respondent determined that petitioners were entitled to adjustments for accumulated depreciation of $10,535,i$10,535, $6,093, $7,755, and $9,373 in 1984 through 1988, respectively. Petitioners counter th t they are entitled to ad.ditional depreci.ation of $200, $349, $299, $250,.and $452 in 1984 through 1988, respectively. These adjustments stem from petitioners' .alleged use of the Addïson mobile.home. and the copier in Mr. Powerstein'.s accounting firm. As discussed·more fully below, we conclude that expenses related totthe copier·, but not to the Addison mobile home were ordinary and necessary business expenses of Mr. Powerstein's accounting firm. We thus hold that petitioners' adjustnents for accumulated depreciation in 1984 45 - through 1988 are $107535, $10, 535, $6, 0 3, ' $7, 7 5, and $9, 538, respectively. .:D. e Disputed Nondeductible Person 1 Expeúditures 1. Overview 3 Given the absence of information c ncernin petitioners specific personal living expenses, resp ndent ed BLS figures to calculate petitioners' nondedúctible pe sonal iiving expenses for 1984 through 1988 and reflectèd his det rminati ns in the answer. After more than 20 years, respondent am nded'thÄ·answer a second time to assert:increases inapetitioners nondedùctiblë personal expenses of- $106,285-. :The revised©expeÅditures were based òn a composite of BLS figures and expenditurés refle ted in petitioners three'main checking accoun s. Bec use the adjustments in nondeductible personal 1 ving ex ensés increased petitioners annual net worth for'each f the y ars 1984 through. 1988, we treat the revised pefsonal don eductib e éxpenditúres 'as a new matterion which respond nt bears he burd n of proöf. See Rule 142-(a); Michas v. CommisÊioner, T. . Memo. 1992-161. Petitioners offered substantial pr of+ to r but respondent's imputation of items under the BLS and a ditioná adjustments: In particular,.petitioners submiÒted evidedce that proied that (1) they did not make certain exp nditures ttribut d to them under BLS, or (2).respondent erroneáusly clas ified é penses as nondeductible that were'in ,fact deducti le. Al hough we mostl agree with petitioners' challenges to respondent's revisedpr i adjustments, that agre;ement is not unlimited. We explain . . seriatim only those adijust-ments proposed by petitioners with which we disagree or those items that we feel warrant explanation. To the extent that we,have rejected any adjustment proposed by respond3nt ast to petitioners' nondeductible personal expenditures, we have done so because respondent failed to persuade us that such an adjustment.was proper. 2. Alcoholic Beverages Respondent impµted to petitioners allowances of $275., $286, $272, $29,4, and $26, for alcoholic beverages;for'1984 through 1988, respectively. Although,petitioners testified that they did not consume alcohol during the yeµrs in issue,. they also testif ied that they provided moste(if fnots all) of ,the.Ballards support from. 1984 through 1986 . Mr . Ballard: was descríbed at trial as a 7"social drinker", and he was convicted of driving . under' the .influence We thus.believe ;it reasonable _to impute expenses f or· alcoho: ic· beverages to petitioners for 31984 i through 1986 because :petitionersasupported the Ballards, at least one of whom consumed alcohol. We do ngt"belsiever it.reasonable to impute expenses for alcoho .ic beverages to petitioners during 1987 .and 1988 because petitioners apparently did not support :the Ballards during those years fnd petit-ioners testified 2credibly that they did not . consume alcohol . Accordingly, e sus tain re spondent ' s - 47 - determination that nondeductible persón 1 expen es for alcoholic beverages of $275, $286, and $272 for 1984 th opgh 1986, respectively, are imputed to petitionerb.. . . 3. Second Glendale Mortgage Respondent determined,that pet.itioners madë four payments on the second Glendale mortgage during 1985, inclußing (1) two payments totaling $2,072 fromy an'account with Atlantic Bank, and (2)- two payments totaling $2,072 from oßher soukces. Petitioners contend that they made only three payments durihg 1985 because it "appeared to be" petitioners' "custom and habi f* * * to make .payments around the fifteenth)of each mþnth." We disagree. Petitioners were obliged to make paymenhs under the second Glendale mortgage un.til that note was satisfied. The sale of the Coral Springs residence closed on Apriljl2 19L85, and the second Glendale.mortgage was satisfied with thë proceeds of that sale. Regardless of when petitioners customarlly paiditheir mortgage, they were obligated for the pro.rata shþre of the mortgage up until the date of repayment. ;We are satisfiedl that the amounts imputed to petitioners regarding the fourth moktgage payment covered April 1985 and.sustain responde t's dÊtèrmination that petitioners made four payments on the sècond G1 ndale mortgage during 1985 totaling $4,144. 4. . Firsk Sun Bank Mortgage Respondent det- rmined that pet(cid:0)541ìtionersmade nine payments of approximately $342 (cid:16)042n the first Sun -Bank mortgage during 1984, including (1) four paynents totaling $1,367 .from an account with Atlantic Bank, and (2) five payments 'totaling $1, 710 from other sources.14 Accordin) to petitioners, only seven payments were due under the- first Sun Bank mortgage, during 1984, and respondent has not proved that petitioners made- any more than- three payments under. that mortgage We concludei that petitioners made seven payments under the : irst Sun Bank mortgage'. Payment due on that loan began on March 1, .1984, and continùed until October 5, 1984, when petitioners+retired the first Sun Bank mortgage. with the proceeds »of the secondt Sun Bank mortgage . Thus, petitioners were required to make payments under .the first Sun Bank mortgage for the 7-month period between March 1 and October 1, 1984, and for the first sidays of October 1984.4 Accordingly, we hold-that petitioners incurred $2, 392÷0f nondeductible personal expenditures in 1984 . related to- the first Sun Bank mortgage ($342 times 7 . months ) . 1 Petitioners cor.tendsthat each .of the seven payments paid under the first Sun Bank .mortgageireduced the principal due on 14Monthly payments of approximately $342 were :calculated as total payments of $1, 367 divided by 4 months . isThe product of the items may not eglial the total because of rounding. - 49 - that note. We 'agree. The first Sun Ba k sortgåge provided for monthly payments of principal and inter st.. BMÓause the record does not contain a copy of Lthe note on hich thé first·Sun Bank mortgage was based, we are forced to estimate the proper allocation between principal ánd intefe t on that note. The short-term, semiannual-compounding applicable Féderal rate (AFR) in effect for 1984 was 10 perãent." .Se Rev. R 1 84-163, ~1984- 2 C.B.' 179. Assuming'a prìncipal amoun of $26 000, an interest rate of 10 percent, and a 3-year term, e find that principal due under the first Sun Bank mortgage was m re tha $2,392. We limit the principal reduction to the amount p titione s proposed. 5. Real Estate Taxes Respondent imputed to spetitioners eal est te tax payments for the Coral Springs residence of $1,7 1 and $522 in 1984 and 1985, respectively. With respect to 19 4, peti ióners counter that imputing real estate taxes to them is imp per because (1) the firstland second Glendale mortgages impound d real estate taxes of $91 per month and (2) petïtiohers p e aid 5 months of real estate taxes totaling $453. Petitloners c ncede that $367 of real estate'taxes should bé imputed to them n 1984. We agree with petitioners that they paid real eshate ta s through the "We use the short-term A R because the ter of the first Sun Bank mortgage was 3 years. the semiannual-compounding convention a approximating the average daily interest rate for 1984. See sec. 1274 (d) (1) (A). that m st closely We use -, 50 - first and second, Glendale mortgages, and we hold that :they rieed impute real estate tax:es, only in the amount conceded. With respect . ta 1985, petitioners contend that . respondent ' s· imputation of real estate, taxes is improper because those real estate taxes were paid from .the closing proceeds, on the sale of the Coral Springs .residence. . We disagree. The settlement statement with respec(t to the sale of the Coral Springs residence to thev Underhills made two adjustments:related to real estate taxes.. First, peti:ioners were assessed $288 for unpaid county taxes from January L through Apri, 11, 1985. Second, ;petitioners were charged .$234 for taxes: related to 1980. Thus, petitioners paid $522 of real estate taxes with respept to the Coral Springs residence, which is the amountt respondent. imputed to them. Accordingly, we suscaln respondent's imputation of $522 in,real estate taxes to petitiöners for 1985 6. Improvements to Romeo Property . Petitioners contend that the]i.r nondeductible personal expenditures should be reduced by;| amounts expended to improve the Romeo property. We agree. We have held that petitioners, incurred $1;0, 284 in connection with improving thé Romeo property, and those costs were already included in3 the increased basis of the Romeo property. Accordingly, we hold that petitioners' nondeductible personal expenditures should be reduced by $10, 284 . - 51 - 7. Summary . On our review of _the record as a whole and||with due regard to respondent's burden of proof, we conålude thÀt petitioners' nondeductible personal expenditures for 1984 through 1988 were $54,807, $39,452, $39,274, $22,854, and $22,261, respectively. E. Disputed Nontaxable Receipts 1. Overview As asserted in the answer, respondent's net worth computation adjusted petitioners' nontaxable receipts only for Federal income tax refunds ·for each of the years 1984·through 1988. The parties have stipulated thatspetitioners received additional nontaxable receipts as follows: (1) Qualified reinvested dividends of $549.and $331 in 1984 and 1985, respectively; and (2) nontaxable distributions of $282 in 1987. Petitioners also contend.that, they are entitled to further adjustments for nontaxable bitems, including a 60-percent deduction on the net capital gain from the sale of the Coral Springs residence, certain interest income, an inheritance allegedly received from Ms. P. Powerstein, and a deduction for dual-income taxpayers filing a joint return. 2. Gain on the Sale of the Coral Springs Residence After accounting for settlement charges and credits due to the Underhills, petitioners realized $107,201 on the sale of the Coral Springs residence. Petitioners' basis in the Coral Springs - 52 - residence.was $79,133. Therefore, their net capital gain on the sale of the Coral Springs ·residence is $28,068 ($107,201.less $79,133).. See sec. 1001(a). The parties agree, and we conclude, that petitioners are entitled to a 60-percent deduction on that gain. See sec. 1202(a) (allowing individual, taxpayers a 60- percent deduction for.net capital gains). Accordingly, we hold that petitioners ma exclude $16,841.($28,.068 times 60 percent). 3. Interest Income Petitioners contend that they are entitled to exclude $2,000 of interest income hich they..purportedly earned on an All Savers Certificate iss.ued y Safra Bank.] They cite no.legal support for their entitlement to sùch an exclusion, instead referring the Court to their 1983 joint return on which they excluded $2,000 of interest income. S(pction 128 (a)i allows for.the exclusion from gross income of interent earned on a "depository instïtution tax- exempt savings certificate", sometimes referred to as an "All- Savers Certificate" In the case of a joint return,- the. excludable amount during any taxable year is limited to $2,000 less the aggregate amount the taxpayers received in prior years. Sec. 128 (b). Thus, taxpayers were entitled to a one-time $2,000 exclusion from grosa,income for interest paid on an All-Savers Certificate. Becauue petitioners c·laimed a $2,000 exclusion on their 1983 joint return, we hold that they are.not entitled to a similar exclusion for 1984. 4 . Inheritance - 53 - Petitioners cont;end that they are þntitled to exclude Ms. P. Powerstein' s share of nine bank accounts held a Safra Bank as nontaxable inheritance. We are not persuaded.ÜPetitioners did not establish that Mr. Powerstein was a benefiöiary under Ms. P. Powerstein's _will (if she died testate) or as a heir at law (if she. died intestate) . We thus;hold that petitio ers may not exclude as nontaxabl.e income t-he balanc s of ac ounts held jointly with Ms. P. Powerstein. . Cf. Mos:row v. ommissioner, T.C. . Memo.. 1967-242 (crediting a taxpayer's élaim that amounts received as inheritance should be. excluded from his net worth where that testimony was corroborated with a co y of the State estate ta:ic return. filed by thê decedent s estatë). 5. . Married Coul:ile's Deduction Petitioners further contend that t ey are entitled to a married couple's deduction for 1984. Wé agree. For taxpayers filing a 198.4 joint return, section 221 allows ual-income married couples a deduction equal to 10 percent of the lesser of $30,000 or the "qualified earned income of the spouse with the lower qualified earned income for the t xable yëar." Estate of Johnson v. Commissioner, T.C. Memo. 200 -182, a fd. without The term ."qualified earned income to the excess of equal the taxable year, over certain deductions allowable under sec. 62 and to or chargeable against earned income.. Sec. 221(b). (a) (b) LanA amount eq al thé earned i comA of is defined as an amount the spouse for to t e sum of the roperly allocable Il - 54 - published opinion 12 Fed. Appx. 597 (11th Cir. 2005) . Ms. Rosen earned $5, 244. of inc me in 1984, which is less than the income that Mr. Powerstein ar:ned in his accounting firm. Accordingly,i petitioners are enti:led to a married couple's deduction for 1984 . of $524 . F. Summary On the basis of the foregoing, 'we determine increases ln. petitioners' taxable- income as follows: Net worth computation: Cash on hand Investments Personal assets Real estate Additional investments Total assets Loans and mortgages . Charge accounts Accumulated depreciation Total Net worth liabilities Less prior year' s net worth Net .worth increase Personal expenses Nondeductible.loss Less nontaxable income Adjusted gross income Less itemized deductions Less exemptions Corrected taxable income Reported taxable income. Increase to taxable 12 /31/83 . 12 /31/84 Bf 31/85 12 /31/86 12 /31/87 12 /31/8.8 .. $175,(cid:16)04185$213,604 26, (cid:16)04062 21, 441 . 56, (cid:16)04099 66, 599 170 , 588 123 , 99 $253,743 21, 441 56, 599 91, 455 $322,185 . 23, 703 . 66 687 91, 455 $455,077 32, 935 66, 687 91, 455 $564,518 47, 469 82, 168 91, 455 10, 74 392,a19 8,831 __ 9,196 442, 434 481 063 7,947 511, 97.7 10,317 . 10,556 796, 166 656, 471 7.2, 807 0 - 173 / 127 -0 - 52, 6274 -0 - 51, 420 -0 - 51, 023 -0 - 51, 497 -0 - 6, 63.7 79,'44 312, n7.5 10 , 535 183,662. 297, 401 __LO , 535 63,209 379, 225 6, 093 57,513 45.4., 464 .7 , 755 58,778 597, 693 '9, 538 .61,035 -735, 131 N/A N/A N/A - 0- N/A N/A ly/A N/A N/A N/A 312 , 875 (15, 4'74) 54,807 -0- ' 297, 401 81, 824 39 452 -0- 379, 225 .75, 239 39,274 -0- 454 , 464 597 , 693 143, 229 137, 438 (cid:16)04222,854 22,261 -0- -0- · 6, 406 __L7 , 501 4 , 233 711 203 32, 927 103, 775 110 280 165, 372 159, 496 21, 217 3, 000 12, 469 3, 120 13, 393 3, 240 12, 907 5, 700 11, 149 5, 850 8, 710 88, 186 93, 647 146,.765 142, 497 5, 0 86 4, 447 7, 945 1, 499 (140 ) income . . N/A 3, 624 83, 739 85', 702 145, 266 . 142, 637 It follows that petitioners' income for 1984 thÈough 1988 is increased by $3, 624, $83, 739, $85, 702, $145, 266 and $142, 637, respectively. See sec . 61 (a) (2) . III. Deductions A. Øverview . Having determined the Increases , to petitibúers' taxable ' income under the, net worth meÊhod, we nöw. exami e the additional components of petitioners' taxable inco¼e for t e years'in issue. Although the parties agreed' to many: of the add:i ional components of adjusted gross income, petitioners c¼ntend t at they are entitled t:0 deductions related to Mr. P<bweräteiå's account'ing firm and their farming,activity. Respo dent apÒarently relies upon the general presumption hfforded t e noticë of deficiency, not addressing these issues with any real preciáion. We consider petitioners' contentions in turn. A B. . Schedule C Expenses? . 1. Home 'Of f ice Exþense Petitioners allege that Mr. Powerstein kept an office in the Addison mobile home that~qualj.fied as h a principal'place of business .and that they are lent'itled to deduct on for home office expenses for 1984· throùgh 1988. As a g neral rule, a "Although petitioners assert that they are entitled to a to t e Coral Springs residence home office deduction with respect for 1984, the benefit of0the "depreciati n deducti n in 19 4 will be offset . ) they abandon that argument because according to them, (continued. . - 56 - . taxpayer is. not ,all wed a deduction for expenses. related to property that a taxpayer occupies as his:'or. her residence.: Sec. 280A (.a) . An except on to the general ,rule is found in section 280A (c) (1) .(A) , which provides that . an expense that is allocable to a portion of the taxpayer's dwelling that is usedcéxclusively on a regular basis As the taxpayek's "principal, place of business" Mill, he à Llowed as a 2deduction. In? deciding whether a home office qualifies as a t-axpayer's. principal place of business, we consider. (1) the relative importance of the activities performed at each :busihess location; and (2) the amount . of time, spenp at each- location. Commissioner v . Soliman, 506 U.S. 168, 175 (1993) . The location where a taxpayer contacts clients is an important indicators of the principal place of business. Id -. Although we are satisfied that Mr. Powerstein worked on client matters from the Addison mobile home, we are not persuaded that such activity entitles petitionerss to home office expense deductions. For an accountant such as Mr. Powerstein,. soliciting business and collect:ing information from client taxpayers- is as important a function of that trade or .business as analyzing.the underlying information to report on the returns to be :filed with the IRS. Mr. Powerstein testified that he spent considerable (cid:16)042 - ( . . . cont inued . . by recapture of Springs residence ir. 1985. that depreciation upon the sale of- the, Coral - 57 - time servicing clients in south Florida, yet he did not elaborate on the amount of time he spent at each location or the functions he performed while there. Nor did petitioners.offer any evidence indicating the amount of time and the relative importance of the activities that Mr. Powerstein performed in the Addison mobile home as compared to work conducted in south Florida. We are particularly skeptical of petitioners' claim that Mr. Powerstein used the Addison mobile home as his principal place of business in the light of the fact that he did not meet with clients there. Moreover, on Schedules C attached to thé 1984 through 1987 joint returns, petitioners reported that they»were not deducting expenses for an office in their.home. Their reporting, we believe, is indicative of Mr. Powerstein's state of mind during the years in issue. We doubt that Mr. Powerstein would not have claimed a home office expense deduction»if he regarded that residence as his principal place of business, e(cid:0)541peciallybecaus.e he so liberally claimed deductions to which he was not entitled or failed :to report income ialtogether. FWe thus hold that petitioners are not entitled tò deduct éxpenses associated with the Addison mobile home, including utilities expenses. 2. Copier Petitioners contend that they are ëntitled to a $206 depreciation deduction ïn connection with a copier which Mr. Powerstein purchased in 1988 for his accounting firm. Attached - 58 - to the joint return was Form 4562, which reported 7-year property with a depreciable basis-of $1,442. Mr. Powerstein, however, recorded that the purchase price of the copier was $1,153.. _We credit Mr. Powerstein's 'testimony, and in the light of his. handwritten cash disbursements journal, we hold that the copier's depreciable basis was $1,153..;Depreciating the copier by a straight-line method over 7 years, we hold that petitioners are entitled to a depreciation deduction of $165 for.1988 ($1,153. divided by 7 years)." See secs. 167(a), 168 (a) through (.d). 3. Addi:ional Legal Expenses Petitioners deducted $946 as legal fees on Schedule C attached to the 1983 jo.int return. Petitioners contend that they are entitled to addLt.ional deductions of $2,066 for legal fees incurred in connection± with Mr."Powerstein's accounting firm. They refer the Cour; to two separate exhibits which purport to be cashier's checks issue<Ö to various.law firms but are actually checks or deposit s:Lips for accounts that Mr. Powerstein held at California Federal. Accordingly, we hold that petitioners have failed to prove the:.r entitlement to.additional deductions for legal fees because they have not proved that these fees were paid "Whereas petit'oners contend that their 1988 net worth should be increased by $1,538 to reflect ownership of the copier, we limit the increa ed net worth for that copier to the purchase price of the copier, or $1,153. - 59 - or that they were ordinary and necessary expenses. See sec. 162(a). D. Schedule F Expenses ' ; Attached to.the 1988 joint return was Schedule F, on which petitioners reported that they were engaged in, the trade or business of farming.. Respondent determined that.petitioners were not engaged in the trade or business of farming.during 1988 and that they could not claim depreciation and expenses as deductions on Schedule F. We agree with respondent. Section 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred in carrying on any activity that constitutes a trade; or business. Section.212 allows as a deduction all the ordinary and necessary expenses paid or incurred in carrying on an activity for the (1)iproduction or collectioñ of income, or (2) management; conseryation, or maintenance of property held for the pröductionFof income. Section 183 generally limids deductions'for an activity not entered into for profit to [the amount of the activity's gross income. Sec. 183(b). Section 183(c). defines an activity not engaged in for profit as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." To be engaged in a ·trade or business, the taxpayer must conduct the activity with continuity, regularity, and for the primary purpose of realiz.ing income or profit. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). While a reasonable - expectation of profit is not requi.red, the objective facts and circumstances must demonstrate'an;actual and honest objective to realize a profit. Osteen v. Commissiòner, 62 F.3d 356, 358 (11th Cir. 1995), affg. in part and revg. in part T.C. Memo. 1993-519; sec. 1.183-2(a), Income Tax Regs. Greater weight is given to objective facts than a taxpayer's mere statement of his or her intent to make a profit. Sec... 1.183-2.(a), Income Tax. Regs. Applying the above principles, we.conclude that petitioners were not engaged in the trade.or business of farming. .They did not consult with an expert or.conduct any.research on developing the Romeó property :.nto a farm. Although they raised a modest number of cattle, p:.gs, horses, and chickens, they did not establish.that they int;ended to profit from raising these animals. Nor did theyfestablish that they intended to profit from raising crops which never, grew because.of."drought conditions". Although. an appraisal performed.for Sun Bank states that "some,farming is planned in .the future", we are not. persuaded on the basis of the record at hand that petitioners' farming.activity rose to the level of being engaged in.as a trade or business. On balance, we.believe petitioners' farming activity was more consistent with rural living and not with the trade or I - 61 - business of farming. We hold that petitioners were not engaged in the trade or business. of farming. Because we have found that petitioners' farming activittyndid not constituté a trade or business or was not entered into for pròfit, it.follows that expenses associated with that activity are limited to the amount of the activity's gross income. See sec. 183 (b). Given that petitioners reported zero g"ross income from thèir farming activity on Schedule F attached to the 1988 joint return, it follows that they are not entitled to any deduction in connection with their farming activity. IV. Income Averaging Petitioners contend that for 1984 and 1986 they are entitled to special income-averaging provisions afforded taxpayers under section 1305. That section, which was tepealed for tax years beginning after December 31, 1986, by the Tax Reform Act of 198.6, Pub. L. 99-514, sec. 141(a)ë, 100 Stat. 2117, allows for averaging of damages arising from causes of action for b each of contract or breach of fiduciary duty. Petitioners' unreported income is attributable to Mr. Powerstein's accounting fir and not to an award of damages for breach of contract or breach of fiduciary duty. Thus, section 1305 is not applicable. V. Interest Expense Mr. Powerstein contends that he is entitled to a $65,778 ·ll interest expense deduction1for interest that respondent jeopardy- - 62 - assessed during 1989. Respondent answers that the interest is nondeductible personal interest within the purview of section 1. 163 -9T (b) (2) (i) (A) , Temporary Income Tax Regs . , . 52 Fed. Reg ., 48409 (Dec. 22, 1987) (regulation). Mr. Powerstein urges the Court to invalidate the,regulation on thesbasis of our reasoning in Redlark v. Commiasiòner, 106 T.C. 31 (19.96), revd..and remanded 141. F.3d 936 ·(9th Cir. 1998) . .We decline to do so. We had occasion to carefully consider the validity of the regulation in Robinson v. Commissioner, .119 T. C. 44,, 73-75 (2002), a Court-re.viewed ·Opinion. In Robinson, we concluded that the regulation was valid,.that our Opinion in Redlark should no longer be followed, and that interest paid òn individual tax liabilities relating_to income from a.sole proprietorship is to be treated as nondeductible personal interest. Idn at 75. While we are not aware of any decision in the Court of Appeals for the Eleventh Circuit deciding thegvalidity of the regulation, we note that our decision.in Robinson is consistent with opinions of the Courts of Appeals for the Fourth, Fifth, Sixth, Seventh, Eighth, and.Ninth Circuïts."- We see no reason to disturb our decision. "See Alfaro v. Co$missioner, 349 F.3d 225, 231 (5Êh Cir. th Cir. 1999),· revg. T.C. Memo. 1998-92; 2003), affg. T.C. Memo. 2002-309; Kikalos v. Commissioner, 190 F.3d 791, 798-799 ( McDonnell v. United States, 180 F.3d 721,, 723 (6th Cir. 1999); Allen v. United StaÜes, 173 F.3d 533, 538 (4th Cir. 1999); Redlark v. CommissiÈner, 141 F.3d 936, 937-938, 942 (9th Cir. 1998), States, 65 F.3d 687,. 691 (8th Cir. 1995). revg. and,renanding 106 T.C. 31 (1996); Miller v. United - 63 - in Robinson, and therefore we reject peditioners' invitation to invalidate the regulation. It follows that interest respondent jeopardy-assessed is nondeductible persònal interest. VI. Additions to Tax A. Fraud Respondent determined that petitioners are liable for additions to tax for fraud under section 6653 (b) (1) and (2) with respect to their 1984 through 1988 joinÈ return . For 1984 and 1985,' section 6653(b) (1) imposed a 50-pércent addition to tax on any portion of an underpayment of tax.that is due to fraud, and section 6653 (b) (2) imposed la 50-percent haddition to tax on any interest payable under section 6661 with respeåt to any portion of an underpayment of tax that is attributable to fraud. For 1986 and 1987, section 6653'(b) (1) (A) imposed a 75-percent addition to tax on any portion of an underpayment of tax due to fraud, and section 6653 (b) (1) (B) imposed a 50-percent addition to tax on any interest payable under sectión 6661 with respect to any portion of an underpayment of tax t at is aètributable to fraud. For 1988, section 6653(b) (1) im osed a Ý5-percent addition to tax where any portion of an underpayment of tax is due to fraud. For all years, in the case of a joint return the additions to tax imposed by section 6653(b) (1)·and (2) do not apply to a spouse unless some part of the undekpayment is attributable to the fraud of that spouse. Sec. 6653(b) (4) (as in effect for 1984 and 1985), sec. 6653 (b) (3) (as in effect for 1986 through 1988). The Commissioner bears the burden of establishing fraud by clear and convincing evidence. Sec. 7454 (a); Rule 142(b). Clear and convincing evidence is. that degree of proof that produces."'a firm belief or conviction as to the allegations sought to be established. It is intermediate,¢being more than a mere preponderance, but not the extent.of such certainty as is required beyond a-reasonable doubt as in criminal cases. It does not mean clear.and unequivocal.'" Ohio v. Akron Ctr. for Reprod. Health,.497 U.S. 502, 516 (1990) (quoting Cross v. Ledford, 120 N.E.:2d 118, 123 (Oh:.o 1954)). To carry his burden, the Commissioner must prove as to each taxpayer for each.year in which fraud is alleged that (1) aul underpayment of tax existed, and (2) each taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such.taxes. Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986), affg. T.C. Memo. 1985-63; Parks v. Commissioner, 94 T.:C. 654, 660-661 (1990) . We consider..whether respondent has met his burden as to each of Mr. Powerste.in and Ms.. Rosen. - 65 - 1. Mr. Powerstein. a. Collateral Estoppel; . . We begin by. recognizing that Mr. POwerstein was convicted of income tax evasion under section 7201 for 1987. As a result, Mr. Powerstein is collateral.ly estopped from denying civil fraud with respect to 1987. .See Grav v.tCommissioñer, 708(F.2d 243, 246 (6th Cir. 1983), affg. T.C. Memo. 1981-1. We néxt consider whether Mr. Powerstein is liable for additions to tax for fraud for 1984, 1985, 1986, and 1988. We hold he is. b. Underpåvment of Tax The Commissioner can.prove an underpayment of tax stemming from unreported and indirectly reconstructed. income by, among other means, proving a likely source ofithe unreported income. DiLeo V:. Commissioner, 96 T.C. 858, 873¼874 (1991), affd. 959 F.2d 16 (2d Cir. 1992). To satisfy his burden, respondent submitted into evidence records showing that petitioners deposited and/or investe,d substantial sùms of money in bank accounts, investments, and'real estate. Respondent also established that petitioners received these moneys in connection with Mr. Powerstein's accounting firm. The record clearly and convincingly establishes that petitioneks underétated their income by more than $450,000. We.find that respondent has clearly and convincingly proven the first element of fraud. c. Fraudulent Intent Whether a portion of the underpayment of tax is attributable to fraud is a question. of fact to· be resolved on the basis .of the record as a whole. Parks v. Commissioner, supra at 660. Fraud has been' defined as the intentional. commission of an act or acts for the specific purpose of evading taxes believed to be owing. Petzoldt v. Commissioner, 92 T. C. 661,: 698 (1989) .. "'Fraud implies bad faith, intentional wrong doing and a sinister motive.'" Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 196·8) (quoting Carter v. Campbell,| 264 F.2d 930., 93.5 (5th Cir. 1959)), affg. T.C. Memo.. 1966--81. ' Fraud is .never imputed or presumed but must be established by clear. and conv1ncing evidence that establishes fraadulent intent. Petzoldt v. Commissioner, supra at 699. Fraud nëed not be established by direct evidence because such evidenc 3 is rarely available but can be shown by surveying the taxpayer's entire course of conduct and drawing reasonable inference3 therefrom. Biqqs v. Commissioner, 440 F.2d 1, 5 (6th Cir. 1971) . affg. sT.C. Memo. 1968-240. We may infer fraud from d'any conduct, the likely effect of which would be to mislead or to conceal.' Spies v. United States, 317 U.S. 492, 499 (1943') . Courts often rely upon certain indicia or badges of fraud in deciding whether a tµxpayer acted with fraudulent intent. These badges of fraud incl11de i (1) A pattern of understating income, - 67 - (2) giving implausible or inconsistent explanations of behavior, (3) concealing income and/or assets, (4) ,failing to cooperate with taxing authorities, (5)> an intent tá mislead, which may be inferred from a pattern of conduct; (6) providing false documents; and (7) dealing in cash. _See id.; Niedringhaus v. Commissioner, 99 T.C. -202, 211 (1992). No single factor is dispositive, though the existence of sevèral indicia is competent evidence of fraud. See Niedridghaus v. Èommissiéner, supra at 211. In determining the existence of fráud, we:may look to evidence of prior and subsequent similartacts reasonably close to the years at issue. Tipton v. Commissioner, T.C. Memo. 1994-624 (citing United States v. Johnson, 386 F.2d 630 i(3d Cir. 1967)). i. Understatements of Income The consistent and substantial understatement of Income over several years is strong evidence of fraudulent intent. Korecky v. Commissioner, supra at 1568 (citing Mèrritt v..Commissionër,. 301 F.2d 484, 487 (5th Cir. 1962), affg.{T.C..Meáo. 1959-172). Between 1984 and 1988 petitionérs failed(to -repoft or account for more. than $450,000 of income which Mr. Powerstein earned through his accòunting firm. The evidence clear(cid:16)041yand convincingly establishes that petitioners substantially understated their taxable income from 1984 through 1988. The failure to report this income is strong evide ce of fraud. 4H - 68 - Li. Implausible Explanations of Behavior Giving implausible or inconsistent explanations of behavior may implicate frauduLent intent. Bradford v.. Commissioner, 796 F.·2d 303, 307 (9th Cir. 1986), af-fg. T.C. Memo. 1984-601. Mr. Powerstein consisten;ly exhibited implausible behavior suggesting f raudulent . intent . As a college graduate and_ a C. P . A . , Mr . Powerstein Ís knowledgeable in tax matters and was capable of. preparing accurate returns for 1984 through 1988. Nevertheless he omitted from each of the 1984 through 1988 joint returns substantial income earned from the accounting firm. In preparing petitioners' joint returns for those years., Mr..Powerstein also understated capital gains, ·overstated capital losses, and/or omitted interest and dividend income. Mr. Powerstein also exhibited implausible behavior in the loan applications that he submitted to ban.ks. Each of those- loan applications reported income substantially higher than that reported to respondent for Federalfincome tax purposes. First, Mr. Powerstein reported on' the 1977 loan application that he expected to earn- $24;185 of income.from-his accounting firm, yet the 1977 joint return reported that he earned only $3,289·from that business.. Second, although he. reported on the 1978 loan Although respondent does not contend that the.rental income petitioners received in connection with the Coral Springs residence was taxable to them, we obs.erve that such income is ordinarily taxable. See sec. 61(a) (5). .application.that he expected to earn $31,262 from his accounting firm, the 1978 joint return reported that he earned only $3,060 from that business. Third, the 1984 loán application estimated income from his accounting firm of $26,000, buu the 1984 joint return claimed a loss of $996 from that business. Fourth, attached to the 1983 loan application were the purported 1981 and 1982 returns, each of which reported income different from that reported on the corresponding 1981 and 1982 joint return filed with respondent. We find it implausiblé that an uncorrupted individual would attach false tax returns to a loan application. We also doubt that Bhr. Powerstein's groås underestimation of his income was harmless. Also indicative of fraud is that M . Powe(cid:0)576steinwas unable to offer any logical explanation for his behavior. He evaded basic questions about the 1:etter he drafted to!his clients. He was unable to rationalize the.differences in income reported on the loan applications submitted to banks and the joint returns filed with respondent. He sought to explain his actions by suggesting that he neglected himself and his personal Federál income tax.returns to place his clientsi needs first. We doubt that placing his clients' needs·above his own w¼uld lead him to file false returns absent fraùdulent in¼ent. Such behavior supports a consistent pattern of fraud before 1984 and continuing throughout 1988. - 70 - iii. Concealment of Income or Assets Fraud may be -implicated where a taxpayer conceals assets.or income. Spies v. U2ited States, 317 U.S.' at 499. Petitioners' use of nominees to :place assets beyond the reach of ,the Federal Government supports a finding of fraudulent intent. Between February 23 and May 25, 1989, Mr. Powerstein and Ms.. Rosen transferred approximately 30. bank accounts to Ms. Ballard and Ms. I. Powerstein individually or in trust for K.B. They transferred the vacation.home and the Romeo property to Ms. Ballard and Ms. I. Powerstein for $20. On the record as a- whole, we believe it reasonable to conclude that petitioners transferred these assets in an attempt to place them beyond the reach of the Government. I Such acts favor.a f:.nding of..fraudulent intent. iv. Accurate Returns The failure to file.accurate tax returns may indicate fraudulent intent. Mr. Ballard testified credibly that amounts reported as loans from.shareholders on the Federal income tax returns for M&M·were stretched". For example, Mr. Ballard attributed expenses provided by Mr..Powerstein as consisting of $14,000 for a tractor, $600 for a chainsaw, and then amounts for ropes, fertilizer, 2nd other equipment. Mr. Powerstein also purchased other items such as a riding lawnmower for $1,425 on February 5,·1983.. The 1984 and 1985 returns for M&M reported . that Mr. and Ms. Ballard made more than ·$63,000 in loans to that - 71 - company even though neither individual had theffinancial wherewithal to contribute such moneys.. v. I legal Activities A criminal conviction for engagingtin illegal activities may be probative of fraudulent intent. Bradford v. Commissioner, supra at 308. We consider it significant that'Mr. Powerstein pleaded·guilty to income tax evasion under section 7201 for 1987. Although his conviction does not decidedly establish fraudulent intent with respect to 1984 through 1986 and 1988, we consider that crime evidence of a propensity to defraud. See McGee v. Commissioner, 61 T.C. 249, 260 (1973), Äffd. 51Ú F.2d 1121 (5th Cir. 1975). . ix In connection with the plea agreemènt, Mr. Powerstein admitted to preparing Forms W-2 that overreported Federal income taxes withheld for 79 client-taxpayers.n He wrote a letter during 1985 that acknowledged, either explicitly or implicitly, that he mischaracterized his client-taxpayers' Federal tax treatment of dividends, pension distributions, political party contributions, and basis. Mr. Powerstein also deliberately mlsrepresented the investments of those client-taxpayers to the IRS and claimed exemptions to which he admitted that they were "not entitled". Although th.is letter is direct evidence of his fraud for 1983, we also rely on that letter as evidence oof.Mr. Pòwerstein's attempts to conceal and mislead the Government in determining his client- - 72 - taxpayers' Federal income tax liabilities. Cf. Richardson v. Commissioner, 509 F 3d 736, 743-744 (6th Cir. 2007) . (considering a taxpayer's actions after returns have been filed to determine his earlier state o: mind), affg.1|'.Ü!C. Memo. 2006-69. Such behavior favors.a f:_nding of fraudulent intent vi. Dealing in· Cash A taxpayer' s une of cash evidence:s fraudulent intent because it demonstrates a dnsire to. airoid- detection of income--producing activities. Bradford v. Commissioner, 796 F.2d at 308. Mr. Powerstein kept numerous bank accounts, and he dealt with many of his clients in cash both before and after the years at issue. Such dealings in cash favor a finding of fraudulent intent. vii. Summary After applying the. foregoing factors, we are satisfied .that respondent has clearly and convincingly proved that Mr. Powerstein filed the.1984 through!r1986 and 1988 joint -returns intending to conceaJ , mislead, or Îotherwise prevent the collection of taxes. Respondent has therefore satisfied the second prong of the fraud (cid:16)042testsas to Mr. Powerstein. For each of the years 1984 and ]985, we hold that Mr. Powerstein is liable for an addition to t ax equal to 50 percent of the underpayment of tax for that year. See sec: 6653 (b) (i) ; LHarvey v. Commissioner, T. C. Memo. 1999-229. With respect to additions to tax under section ..6653 (b) (1) f or 1988, section 6653 (b) (2) for 1984 . and - 73 - 1985, and section 6653(b) (1k) (A) and (B) Xfor 1986 and 1988, Mr. Powerstein is liable for. thbse additions to tak only on the portions of the underpayments attributable to fraud. See Harvey v. Commissioner, supra. The burden of proving-by a preponderance of the evidence that a portion of the underpayment for each year is not attributable to.fraud lies with Mr. Powerstein; otherwise the entire underpayment is subject to the fraud addition to tax. d. Portion of Underpayment Attributable to ·Fraud Petitioners contend that the portiòns of the underpayments attributable to the gain on the sale of the of the Coral Springs res.idence, their farming acti ity, capital gains on the sale or disposition of certain stock, and "relaÈively såall amounts of interest and dividend" were not attribu¢able tö fraud. We agree in part. With respect to that portion òf the deficiency from the gain on the sale of the Coral Springs résidence, we conclude that the underpayment was not attributable tö fraud Attached to the 1985 joint return was Form 2119, Sale o¼ Exchahge of Principal Residence, which reported. the selling pfice of the Coral Springs residence and petitioners' perceived basis in hat property. As evidenced by the fact.that Form 2119 was filed albeit incorrectly, we do not believe that petitioners reported the sale of the Coral Springs residence intending to conceal, mislead, or otherwise prevent the cöllection of tax. - 74 - As to that portion of the deficiency attributable. to the-ir alleged farming activity, we.find that the underpayment is ·not attributable to fraud. Petitioners attached to the 1988 joint return Schedule*F alerting respondent to their farming.activity, and respondent,disallowed those losses in connection with his . criminal investigation of Mr. Powerstein. Although..petitioners' position regarding :he status of their farming activity as a trade or business was wrong, it was not entirely unreasonable.and did not -rise to the level of intending to mislead, conceal, or otherwise prevent the çollection of tax.m Accordingly, we hold that the portion of the underpayment attributable to petitioners' farming activity was not attributable to fraud. As to that portion of the-deficiency.attributable to capital gains, interest income, and dividend income whîch Mr. Powerstein "overlooked" in preparing the 1986 and 1988 joint-returns, we conclude that those underpayments.were attributable to fraud. Mr. Powerstein devised a scheme to conceal his income from respondent. As evidenced by Mr. Powerstein's letter to two clients in 1985, he misstated capital transactions, interest income,.and dividend.income which he believed -the IRS was unable to "track". We bel:eve that petitioners employed a similar strategy on their joint.returns. Omitting such gains and income allowed Mr. Powerstein to further conceal his income.fraudulently in an attempt to coriceal, mislead .and otherwise frustrate the - 75 - collection of taxes. We thus hold thatnportions of the underpayment attributable do unreported'capital gains and to interest and dividend income are attributable to fraud. It follows that Mr. Powerstein is liable for additions to tax under section 6653(b) (1) for 1988, section 6653(b) (2) for 1984 and 1985, and section 6653(b) (1) (A) and (B) for 1986 and 1988, td the extent stated herein. 2 . Ms . Rosen On our review of the record, we aré not convinced that respondent has carried his burden of proving fraud by clear and convincing evidence as to Ms. Rosen. Although" she signed the 1984 through 1988 joint returns, which äubstantially understated petitioners' income, and aifded the fraudulent transfer of assets to family members, we are left with only a suspicion of fraud on her part. She did not understand accounting, was unfamiliar with the bank accounts and recordkeeping of Mr. Powerstein, and·was not involved with the accounting firm w&atsoeve¼. While we have our suspicions as to whether Mr. Powerstein.explained the nuances of his fraudulent scheme to Ms. Rosen, äuch susjicions do not warrant.imposition of the fraud addition to tax absent more compelling evidence. See Gow v. Commissioner, T.C. Memo. 2000- 93, affd. 19 Fed. Appx. 90 !f(4th Cir. 2001). In this regard, respondent has failed to satisfy his burden of(cid:16)040proofwith respect to Ms. Rosen. We therefore hold that she is not liable for fraud - 76 - additions to tax foc.1984 through.1988. B. .Section 6561 Respondent.detArmined that petitioners are liable for additions to tax under section 6661 for 1985 through 1988. For tax returns due on or before Decembër 31, 1986, section 6661(a) imposed an addition to tax for substantial.understatements of income tax equal to 10 percent of the underpayment attributable to the.understatement. Pallottini v. Commissioner, 90 T.C. 498,. 500-503 (1988). The amount of the section 6661(a) addition to tax was subsequently increased to 25 percent for returns due on or after January 1, 1987. An under.statement is substantial if it exce.eds the greáter of: (1) 10 percent of the.tax required to be reported on the return, or . (2 ) $5, 0 0 0 . Sec . 6661 (b) (1) (A) . An understatement is reduced to the extent.that the understatement is attributable to any item whichjis (1) supported by substantial authority, or (2) adequately disclosed in the return or in a statement attached to the return. Sec. 6661(b) (2) (B): Petitioners,did. not adequately disclose,the amounts.leading to the understatemer.ts on their 1985- through 1988 returns. Nor have they.cited any.authority to.support the understatements.. We therefore sustain respondent's determination.that petitioners are liable for additions to tax under3section 6661. VII. Epiloque - 77 - We have considered all arguments raised by the parties, and to the extent not discussed herein we conclude that they are irrelevant, moot, or without merit. To reflect the.foregoing, Decisions will be entered -under Rule 155.