Stanoch v. Commissioner

1959 T.C. Memo. 132, 18 T.C.M. 583, 1959 Tax Ct. Memo LEXIS 114

• Court: United States Tax Court
• Decided: June 29, 1959
• Docket: Docket No. 58193.
• Status: Unpublished

Opinion

Frank Stanoch v. Commissioner.

Stanoch v. Commissioner

Docket No. 58193.

United States Tax Court

T.C. Memo 1959-132; 1959 Tax Ct. Memo LEXIS 114; 18 T.C.M. (CCH) 583; T.C.M. (RIA) 59132;

June 29, 1959

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Held: 1. That the accounting records for petitioner's bar business were incomplete, inaccurate, and unreliable; that it was proper for the respondent to reconstruct the income of the business for each year by the measurement method, but that he erred in using a three-quarter-ounce measure; that reconstruction based upon a 1-ounce measure is reasonable and proper; that an allowance should be made for beer spillage; and that petitioner understated in his returns for each year his income from his business.

2. That false and fraudulent returns were filed for each year and that part of each deficiency is due to fraud with intent to evade tax.

3. An addition to tax for each of the years involved under section 294(d)(2) is proper.

Frank J. Warner, Esq., Rand Tower, Minneapolis, Minn., for the petitioner. Richard G. Worden, Esq., for the respondent.

---

HARRON

Memorandum Findings of Fact and Opinion

The Commissioner determined deficiencies in income tax for the taxable years 1944 through 1948, 50 per cent additions to the deficiencies under section 293(b), 1939 Code, and 6 per cent additions to the tax under section 294(d)(2) as follows:

		Sec.	Sec.
Year	Deficiency	293(b)	294(d)(2)
1944	$10,146.44	$ 5,073.22	$ 428.79
1945	13,371.88	6,685.94	834.02
1946	11,124.73	5,562.36	635.40
1947	24,949.22	12,474.61	1,464.87
1948	17,412.91	8,706.46	1,012.69

The questions for decision are: (1) Whether petitioner realized in each of the taxable years a greater amount of taxable income than was reported in each return. (2) Whether all or part of each deficiency, if any, was due to fraud with intent to evade tax within the meaning of section 293(b), 1939 Code. (3) Whether the addition to tax for each year under section 294(d)(2) was properly imposed because of underestimates of estimated tax.

Findings of Fact

Petitioner, a resident of Minneapolis, Minnesota, filed timely his returns for the taxable years with the collector of internal revenue for the district of Minnesota.

From 1937 to 1955 petitioner operated a bar, known as Frank's Place on Second Street North, Minneapolis, from which he derived his principal income. The bar was located in a general commercial and industrial area and was patronized by men who worked at various trades. Petitioner's principal source of income was the sale of liquor, beer, and wine. Additional income was received from incidental sales of tobacco products, candy, potato chips, popcorn, and coin-operated pinball machines.

Petitioner filed declarations of estimated tax, and he made payments of estimated income tax, or received credits therefor, for each of the taxable years 1944 through 1948, as follows:

	Amount	Amount Paid
Year	Declared	or Credited
1944	$3,000.00	$3,000.00
1945	304.00	304.00
1946	600.00	600.00
1947	534.78	534.78 (credit)
1948	534.78	534.78 (credit)

The deficiency notice which gives rise to the instant proceedings was mailed on March 7, 1955.

Petitioner failed to include as income on his Federal income tax returns for the taxable years interest received as follows:

Year	Amount
1945	$ 45.48
1946	204.96
1947	97.25
1948	2.18

Petitioner's accounting records for the taxable year consisted of bound cash books in which petitioner entered the amounts of purchases, sales, and expenses. The entries are in pencil in petitioner's handwriting. They were made in a single entry form.

Petitioner used the cash method of accounting, with adjustments in his income tax returns for inventories.

There were erasures and alterations in petitioner's cash books, exhibits 2, 3, and 4, and in the book for the year 1948, which were observed by respondent's agents, as follows:

	No. of Erasures
Year	and Alterations
1944	18
1945	62
1946	38
1948	49
Total	167

The erasures appear in the $100 entry to sales column on Fridays and Saturdays.

Some of the sales entries in exhibits 2, 3, and 4 were examined by an examiner of questioned documents for the Treasury Department. A detailed examination and restoration of the present and original entries to sales for the days of the week appearing on the respective page dates of exhibits 2, 3, and 4 disclosed the following:

Page		Present	Original
Date	Day	Entry	Entry
1- 8-44	Friday	$206.30	$306.30
1-22-44	Friday	269.35	No erasure
1-29-44	Saturday	246.45	446.45
3-25-44	Friday	297.40	397.40
4- 1-44	Saturday	241.25	341.25
4- 8-44	Saturday	200.30	300.30
4-15-44	Saturday	200.70	400.70
10-14-44	Saturday	208.70	No erasure
	Friday	206.80	No erasure
12-30-44	Friday	260.00	Undecipherable
1-27-45	Saturday	385.35	Undecipherable
	Friday	202.80	Undecipherable
3- 3-45	Saturday	325.65	225.65
	Friday	365.95	265.95
3-10-45	Saturday	330.80	230.80
	Friday	314.75	214.75
4- 7-45	Saturday	330.05	230.05
4-21-45	Saturday	322.55	222.55
	Friday	309.30	209.30
6-16-45	Saturday	286.35	486.35
	Friday	368.50	268.50
8- 4-45	Saturday	324.10	224.10
9-15-45	Saturday	256.75	Undecipherable
9-22-45	Saturday	360.85	260.85
10- 6-45	Saturday	303.70	203.70
10-20-45	Saturday	314.00	214.00
	Friday	317.60	217.60
10-27-45	Saturday	327.80	227.80
	Friday	372.35	227.35
11-10-45	Saturday	269.50	Undecipherable
	Friday	263.70	463.70
12-15-45	Saturday	480.00	280.00
1-19-46	Saturday	300.60	200.60
	Friday	339.60	Undecipherable
2- 2-46	Saturday	373.60	173.60
	Friday	382.40	Undecipherable
2-16-46	Saturday	317.85	217.85
6- 8-46	Friday	354.40	254.40
6-15-46	Saturday	387.40	287.40
6-22-46	Saturday	278.20	Undecipherable
7-13-46	Saturday	326.35	226.35
7-20-46	Saturday	341.35	241.35
7-27-46	Saturday	398.30	298.30

The examiner found substantial similar alterations, not subjected to a detailed analysis and restoration, in entries to sales made for each of the years 1944-1946, inclusive.

Petitioner's income tax returns for each of the years 1941-1948, inclusive, were prepared by an accountant from petitioner's cash books.

Petitioner's accounting books and records were inadequate and incorrect, and did not reflect his entire, true gross receipts and income for each of the years 1944-1948, inclusive.

During the taxable years, petitioner purchased nearly all of his inventory of liquor and wine from Ed. Phillips and Sons in Minneapolis, and, beer from the Minneapolis Brewing Company.

Petitioner purchased liquor in quart bottles (each bottle containing 32 ounces), and in one-fifth gallon bottles (each bottle containing 25.6 ounces). Beer was purchased in cases of 24 bottles per case, and in one-half barrel kegs, each keg containing 15 3/4 gallons. Wine was purchased in gallon bottles, one-half gallon bottles, quart bottles, and one-fifth gallon bottles.

Petitioner's purchases in each of the years 1944 through 1948 of liquor, beer, and wine were of the brands and in the quantities and container sizes which are set forth in exhibit A, which is incorporated herein by this reference.

Petitioner's inventories of liquor, beer, and wine available for sale as of December 31, 1945, 1946, 1947, and 1948 were in the amounts and container sizes which are set forth in exhibit B, which is incorporated herein by this reference.

Exhibits N, R, and V are incorporated herein by this reference.

Petitioner's inventory of liquor, beer, and wine available for sale as of December 31, 1945, 1946, 1947, and 1948 was as follows:

Merchandise	1945	1946	1947	1948
Beer, 1/2 bbl.	5	0	5	9
Beer, cases	8	0	4	10
Wine, qts.	0	0	0	0
Wine, fifths	12	12	0	0
Wine, gals.	16	8	12	20
Liquor, qts.	876	72	2,172	900
Liquor, fifths	1,178	1,080	108	312

Petitioner's inventories of liquor, beer, and wine available on January 1, 1944, and December 31, 1944, as reconstructed by respondent, were as follows:

Merchandise	1/1/44	12/31/44
Beer, 1/2 bbl.	3	2
Beer, cases	5	3
Wine, gallons	8	4
Liquor, qts., lowest prices	538	312
Liquor, fifths	727	421

Petitioner's purchases of beer, wine, and liquor during 1944-1948, inclusive, were in the total quantities set forth below:

Merchan-
dise	1944	1945	1946	1947	1948
Beer, 1/2
bbl.	190	83	129	141	121
Beer,
cases	905	1,319	1,106	1,775	1,875
Wine, qts.	96	320	208	448	342
Wine,
fifths	36	72	24	216	144
Wine,
gals.	24	80	52	112	85 1/2
Liquor,
qts.	3,188	4,968	1,812	5,832	10,768
Liquor,
fifths	7,558	10,930	13,223	13,022	2,584

Petitioner overstated his purchases for the years 1944, 1945, 1946, 1947, and 1948 in the respective amounts of $224.90, $694.29, $69.56, $2,082.64, and $478.25.

During the taxable years petitioner charged prices for drinks of various brands of liquor, wine, and beer (in cents) as follows:

	1/1/44	1/1/47
	thru	thru
Brand	12/31/46	12/31/48
Old Grand Dad	40	45
Old Crow	40	45
Old Taylor	40	45
Canadian Club	40	45
McBrayer	30	35
Hill & Hill	30	35
Hermitage	30	35
Bond & Lillard	30	35
H & W Deluxe	30	35
Sunnystraight	30	35
Courtesy Club	25	30
Sunny Brook	25	30
Log Cabin	25	30
Hart Brandy	25	30
P M Deluxe	25	30
Black Gold	25	30
H & W Imperial	25	30
Dell Spec. Reserve	25	30
Ron. Mer. Gold	25	30
Dekuypers Blackberry Brandy	25	30
Dekuypers Rock Rye	25	30
Phillips Peppermint Schnaps	25	30
Old Angus	25	30
Dekuypers Sloe Gin	25	30
H & W Blackberry	25	30
H & W London Dry	25	30
P M Spirit Mas	25	30
Aristocrat Brandy	25	30
Phillips Blackberry Liq.	25	30
Gilbey's Dry Gin	25	30
U.S. Club	25	30
J. W. Red	25	30
Mt. Vernon	25	30
Farmdale Bl. Mas	25	30
Cedar Brk Mason	25	30
Phillips Sloe Gin	25	30
Old Overholt	25	30
Mello Red	25	30
Carlotta Ginger	25	30
Pete Hagen Rye	25	30
Old Plaid Scot	25	30
Old Smug Scot	25	30
Maraca Gold	25	30
Muy Blackberry Brandy	25	30
P M Regal	25	30
National Eagle	25	30
Town Tavern	25	30
Rewco Rye	25	30
Tweed Blend	25	30
B. Hills Mallort	25	30
O J Pep. Schn.	25	30
Fonseca Brandy	25	30
Century Club	25	30
H & W Rock Rye	25	30
Phillips Blackberry Brandy	25	30
Lejon Brandy	25	30
P M Spirit Blend	25	30
St C Rumgold	25	30
Courtesy Pep. Schn.	25	30
Phillips Bond	25	30
Mer Sher	25	30
Spey Royal	25	30
Tap Beer - 10 cents per 10 oz. glass
Jan. 1, 1944 thru Dec. 31, 1948
Bottle Beer - 20 cents per bottle
Jan. 1, 1944 thru Dec. 31, 1948
Wine - 20 cents per 2 1/2 oz. glass
Jan. 1, 1944 thru Dec. 31, 1948

Petitioner sold candy, cigarettes, and tobacco at an average of 10 per cent markup on cost during the taxable years.

Petitioner realized income from coin-operated pinball machines of $7.50 per week during all of the taxable years.

Petitioner's reported gross sales, cost of goods sold, gross profit, and net income as disclosed by his Federal income tax returns for each of the years 1941 to 1948, and the resulting gross margin per cent, were as follows:

		Cost of		Gross Margin	Net Income
Year	Gross Sales	Goods Sold	Gross Profit	Percent	or Loss
1941	$32,647.55	$21,520.91	$11,126.64	34	$ 4,460.09
1942	36,108.40	17,124.14	18,984.26	52.5	9,877.67
1943	46,731.98	17,092.58	29,639.40	63.4	21,774.31
1944	48,386.80	38,995.07	9,391.73	21.3	884.27
1945	67,170.50	52,085.34	15,085.16	22.4	5,210.79
1946	71,622.50	56,513.50	15,109.00	21.1	2,337.87
1947	79,379.65	72,755.91	6,623.74	8.3	(6,252.23)
1948	81,256.50	68,912.98	12,343.52	15.2	(3,196.80)

Petitioner's spillage and overage of liquor did not exceed 10 per cent of the amount available for sale in each of the years 1944 to 1948.

During the taxable years petitioner gave customers who purchased two drinks of liquor or wine a third drink free.

Petitioner's liquor licenses in the taxable years from the city of Minneapolis were "on-sale" licenses under Chapter 15 of the liquor ordinance which allowed him to sell liquor, beer, and wine on the premises.

Petitioner and his bartenders sold some liquor by the bottle and by the case during each of the taxable years.

The liquor ordinance of Minneapolis and the laws of Minnesota prohibit the serving of free drinks and the sale of liquor in bottles and by the case, i.e., other than by the drink for consumption on the premises, under "on-sale" licenses.

Petitioner's business operations were substantially the same during the years 1941 through 1948. The same policy and practice was followed in each year with respect to sales made other than by the drink, the size of the measure used, the method of pouring liquor, the method of entering daily sales in the cash books, spillage, and the preparation of Federal income tax returns. Petitioner worked the same hours and found the same months of the year to be uniformly the most profitable months.

Petitioner's best business hours were from 3:30 p.m. to 6 p.m.; his best days for business were Friday and Saturday; the best month for business was December, and the worst months for business were January, February, and March. His business receipts were substantially less in the month of January than in the month of December of each year.

Petitioner employed two bartenders in each of the years 1941, 1942, 1943, 1944, and 1945; he employed three bartenders in 1946, 1947, and 1948. Ambrose J. "Bud" Mack, petitioner's nephew, worked for petitioner as a bartender from 1937 until 1955. Edward W. "Eddie" Pawloski, petitioner's son-in-law, worked for petitioner as a bartender from October 14, 1945, until 1955. Andrew "Andy" Stanoch, petitioner's nephew, worked for petitioner as a bartender from 1939 or 1940 until 1941, and from December 1945 through 1948.

Petitioner stored his liquor in the basement of his bar. The storeroom was locked and petitioner alone had the key thereto.

Petitioner purchased liquor dispensing machines for use in his bar in September 1953.

Petitioner opened savings account at the Farmers and Merchants Savings Bank in Minneapolis on December 11, 1945. The balance in this account was $151.18 on April 26, 1950.

During the years 1944 and 1946, petitioner purchased United States Savings Bonds in the face amounts of at least $9,000 and $8,000, respectively, all of which were unredeemed on August 28, 1950.

Petitioner constructed a new personal residence during the taxable years at a cost of $29,099, all of which was paid prior to August 28, 1950.

A proper method for reconstructing the income from petitioner's bar business for each of the years 1944-1948, inclusive, is the measurement, or drink, method, using as the measurement for sales of liquor a 1-ounce drink, allowing 10 per cent for spillage of liquor, and allowing every third drink free; and allowing, also, for spillage of beer as follows:

Allowance for Beer Spillage
1944	$378.18
1945	158.40
1946	265.32
1947	269.29
1948	231.66

Reconstruction of the gross and net receipts from petitioner's bar business from the sales of liquor, wine, and beer is necessary because petitioner's method of accounting employed in the years 1944-1948 did not clearly reflect the income for each year. Reconstruction of annual income by the use of the measurement method reflects the income realized.

A 10 per cent markup on the cost of candy, and like items sold, and on tobacco products is proper. Income of $7.50 per week from pinball machines is correct.

In each of the years 1944-1948, petitioner's total sales, increased for excessive cost of goods sold reported in petitioner's returns, and decreased for beer spillage, were as follows:

1944
Gross receipts	$ 57,678.70
Merchandise purchases overstated	224.90
	$ 57,903.60
Less beer spillage	378.18
Corrected gross receipts	$ 57,525.42
1945
Gross receipts	$ 72,302.39
Merchandise purchases overstated	694.29
	$ 72,996.68
Less beer spillage	158.40
Corrected gross receipts	$ 72,838.28
1946
Gross receipts	$ 76,099.53
Merchandise purchases overstated	69.56
	$ 76,169.09
Less beer spillage	265.32
Corrected gross receipts	$ 75,903.77
1947
Gross receipts	$104,398.94
Merchandise purchases overstated	2,082.64
	$106,481.58
Less beer spillage	269.29
Corrected gross receipts	$106,212.29
1948
Gross receipts	$ 98,114.54
Merchandise purchases overstated	478.25
	$ 98,592.79
Less beer spillage	231.66
Corrected gross receipts	$ 98,361.13

Petitioner understated the amount of his taxable income in his returns for each of the taxable years, derived from the operation of his business and from interest, in the following amounts, as is shown in the following tabulation: $9,138.62 for 1944; $5,713.26 for 1945; $4,486.23 for 1946; $26,929.89 for 1947; and $17,106.81 for 1948. He failed to report income in the above amounts for each of the taxable years:

1944
Corrected receipts	$ 57,525.42
Receipts reported in return	48,386.80
Unreported business receipts	$ 9,138.62
1945
Corrected receipts	$ 72,838.28
Receipts reported in return	67,170.50
Unreported business receipts	$ 5,667.78
Plus unreported interest	45.48
Unreported income	$ 5,713.26
1946
Corrected receipts	$ 75,903.77
Receipts reported in return	71,622.50
Unreported business receipts	$ 4,281.27
Plus unreported interest	204.96
Unreported income	$ 4,486.23
1947
Corrected receipts	$106,212.29
Receipts reported in return	79,379.65
Unreported business receipts	$ 26,832.64
Plus unreported interest	97.25
Unreported income	$ 26,929.89
1948
Corrected receipts	$ 98,361.13
Receipts reported in return	81,256.50
Unreported business receipts	$ 17,104.63
Plus unreported interest	2.18
Unreported income	$ 17,106.81

The following schedule shows petitioner's unreported income from his business and interest for each of the taxable years and the net income or loss disclosed by petitioner's returns:

		Net Income or
	Unreported	Loss Reported
Year	Income	in Returns
1944	$ 9,138.62	$ (570.30)
1945	5,713.26	4,869.85
1946	4,486.23	1,843.25
1947	26,929.89	(6,078.65)
1948	17,106.81	(2,896.80)
	$63,374.81	[2,832.65)

Petitioner filed false and fraudulent returns for each of the years 1944-1948, inclusive, and part of the deficiency for each year was due to fraud with intent to evade tax.

For each of the taxable years there was a substantial underestimate of estimated tax by petitioner within the provisions of section 294(d).

Opinion

HARRON, Judge: The first question is whether the respondent was justified in disregarding petitioner's accounting records of the receipts of his bar business for the years 1944-1948, inclusive, and resorting to a method for reconstructing the income of petitioner's bar business.

Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Section 54, 1939 Code. Regulations 111, section 29.54-1, require that a taxpayer shall keep such permanent books of account, including inventories, as are sufficient to establish the amounts of gross income, deductions, and other matters so as to enable the Commissioner to determine the correct amounts of income subject to tax. But if a taxpayer's records are inadequate, inaccurate, or otherwise unsatisfactory, the Commissioner may compute the amount of taxable income by using such method as in his opinion clearly reflects the income, and he may look to other information than the taxpayer's records to discover the full and correct amount of taxable income, and to assess and collect the full tax liability imposed by law. Sec. 41; , affd. ; , affd. .

There are 167 marks of erasure and alteration in petitioner's records of cash receipts, or sales, for the years 1944-1946, and 1948. The alterations appear uniformly in the $100 column on the best days of business. Many of the alterations reduced the original entry by $100 or $200. The only explanation offered was that such erasures and alterations were made to correct errors. Such explanation is unsatisfactory, and results in the conclusion that petitioner's books have no value as evidence in supporting his claim that the amounts of income reported in his returns were true, accurate, and correct. .

Petitioner's cash receipts were shown on cash registers. But, the cash register tapes were not retained. Therefore, petitioner's original accounting records were incomplete.

Bookkeeping entries are not determinative of tax liability, although in some instances they are of evidential value. . The real facts, not mere bookkeeping entries, control in tax controversies, as well as in other disputes. In order for books of account to be entitled to any probative force, they must be fairly and honestly maintained. As was said in , books of account "cannot be given evidential value (absent a satisfactory explanation) when suspicious marks of erasure and alteration in a material respect appear on them. 32 C.J.S., Evidence, par. 685f, p. 563. Indeed, an affirmative, willful attempt to defeat or evade taxes may be 'inferred from * * * making false entries or alterations (in books of account) * * *.'"

The records of substantially all of petitioner's purchases of liquor, wine, and beer were retained by the vendors, Ed. Phillips and Sons and the Minneapolis Brewing Company. Such purchases were in quantities and amounts which on their face raise a question whether petitioner's returns, which were made up from his books, reported all of the actual sales and receipts. The returns for 1944, 1947, and 1948 showed losses from the bar business of $570.30, $6,078.65, and $2,896.80, respectively; and the returns for the years 1945 and 1946 showed net sales of $4,869.85 and $1,843.25, respectively. For the 5 years, the returns showed a loss of $2,832.65 from the operation of the bar business.

Petitioner's books did not represent a full, complete, and accurate record of all of the receipts of his bar business during the 5 years involved. Petitioner has failed to establish that his books reflected the full and true income of the business for each year. It is not a sufficient showing for petitioner to testify that his books and his returns were correct. Indeed, he admits that for some of the years, his returns did not reflect all of the income of the business. Under all of the circumstances and upon the entire record, it must be concluded that the respondent was justified in exercising the authority given to him in section 41 in disregarding petitioner's accounting records and in resorting to the measurement method of reconstructing the income of the business for each year. It is now well established that where adequate records are not available for the taxable period, the Commissioner may determine the amount of income received by a taxpayer upon any reasonable basis. ; .

Furthermore, the net income of the business determined by the use of the measurement method, using a 1-ounce measure of the drinks sold, is substantially in excess of the net income of the business shown in the returns. This is cogent evidence of the unreliability of the books and that there is unreported income. , affd. ;.

The next question involves determining the correct amount of the net income from the bar business for each of the 5 years 1944-1948, inclusive. The respondent's method of reconstructing income for each year was the measurement, or drink, method in which he assumed that petitioner used a three-quarter-ounce shot glass, or measure, in measuring the amount of drinks sold. The petitioner does not disagree with the respondent's figures for his inventories at the end of each year and for his purchases in each year of liquor, wine, and beer; he does not disagree with the figures used by respondent for the prices charged in each year for drinks of various brands of liquor. Respondent, in his reconstruction, allowed 10 per cent of the total liquor and wine sold for spillage, waste, and breakage. Petitioner does not disagree with that factor. Petitioner contends that in the event it is held that the respondent was justified in disregarding the accounting records for the business and that it was proper for the respondent to reconstruct income by use of the measurement method, then the proper measure to use is a 1-ounce measure. Petitioner also contends that he is entitled to an allowance for beer spillage.

It is concluded that respondent erred in not allowing for beer spillage and it is found that for each year, the amount to be allowed for beer spillage is the amount set forth in the Findings of Fact.

The measurement, or drink, method of reconstructing the income of a bar business is an established and generally approved method. The respondent was justified in using that method here. Petitioner concedes that the general method, if correctly used here, would provide a reasonably fair way of reconstructing his income. The crux of the dispute is whether it was reasonable for the respondent to use as the measure a three-quarter-ounce drink.

Petitioner testified that during the years involved he used not less than a 1-ounce measure. Petitioner's testimony stands unrefuted. Respondent, who has the burden of proof under the fraud issue, did not produce any direct or rebuttal evidence that it was a general practice in bars of the type that petitioner operated to use a three-quarter-ounce measure during the years before us, or that petitioner actually used such measure. Petitioner presented the testimony of his bartenders to support and corroborate his claim that throughout the years involved a measure of not less than 1 ounce was used. Their testimony was not refuted. Upon the entire record it is concluded that petitioner used a measure of not less than 1 ounce, and that the proper method for reconstructing the income of the business for the taxable years is the measurement method using a 1-ounce measure.

There are in the record two computations of reconstructed income; one employs the three-quarter-ounce measure, on which the deficiencies are based; the other uses the 1-ounce measure. We are able, therefore, to determine the amount of the net income of the bar business for each year by applying the 1-ounce measure reconstruction. In our opinion, it provides a reasonable and fair reconstruction of net income, and it is approved. It is concluded that respondent's use of the three-quarter-ounce measure was arbitrary and incorrect.

In determining the deficiencies, respondent determined that in the returns petitioner overstated for each year the cost of purchases of merchandise. Petitioner does not contest those determinations. They are sustained.

Based upon the 1-ounce drink method of reconstructing the bar business income, taking into account the uncontested adjustments of the respondent of excessive amounts in the returns for purchases, and allowing for beer spillage it is found and concluded that petitioner's bar business income was in the amount for each year stated in the Findings of Fact, and that petitioner failed to report in his returns net income from the bar business of at least $9,138.62 for 1944; $5,667.78 for 1945; $4,281.27 for 1946; $26,832.64 for 1947; and $17,104.63 for 1948.

Petitioner admits that he failed to report interest he received in each of the years 1945-1948, inclusive. He therefore failed to report income in at least the amounts stated in the Findings of Fact.

In determining the deficiencies, the respondent made mathematical adjustments in the allowable amounts of medical and dental expense deductions based upon his determinations of petitioner's taxable income for each year. Since the respondent's determination of the amount of taxable income for each year is sustained in part only, there must be a recomputation under Rule 50 of the amount of the allowable medical expense deduction for each year.

Having determined that petitioner failed to report all of his income for each of the taxable years, we now turn to the question whether such understatement of income for each year was due to fraud with intent to evade tax. Deficiencies for all of the years are barred unless a false or fraudulent return was filed for each year. Sections 275(a), 276(a).

It is concluded that the respondent has met his burden of proving by clear and convincing proof that a false and fraudulent return with intent to evade tax was filed for each year and that part of each deficiency is due to fraud with intent to evade tax. .

To establish fraud by direct proof of intent is rarely possible. However, this Court has held that consistent understatements of a substantial amount of income over a period of several years without tenable or satisfactory explanation strongly evidence an intent to defraud the . See, also, , affirming ; and , rehearing denied . In his returns, petitioner reported for the 5 years 1944-1948 a net loss from his bar business of $2,832.65. We have found that for the 5 years the net income of the business was $63,374.81. The understatements of income are too large and too continuous and persistent to be attributable to mere inadvertence or negligence. Petitioner had the requisite knowledge of business operations to fulfill his duty to report all of his income from his business for each year. A willful intent to evade tax may be inferred, also, from petitioner's consistent and extensive alteration of the amounts of the cash receipts of the business in the books, and the making of false entries. . Petitioner failed to give a reasonable or satisfactory explanation of the alterations of entries in his books. Petitioner gave the respondent's agents false information about his assets and the cost thereof, and about his bank account, during their investigation.

Since false and fraudulent returns were filed the deficiencies are not barred.

The respondent's addition of 50 per cent of each deficiency under section 293(b) is sustained.

The last question is whether an addition to tax for each year under section 294(d)(2) is proper. It appears to be clear from our findings with respect to the amount of petitioner's unreported income for each year that 80 per cent of the correct tax for each year exceeds the estimated tax declared in the estimates. On brief, petitioner has not made any contention that the additions under section 294(d)(2) should not be sustained. Accordingly, it is understood that this matter is to be agreed upon under Rule 50, at which time there will be recomputation of the amounts of the additions, if any, under section 294(d)(2), in accordance with the determinations of the Court relating to the correct amount of tax liability for each year.

Decision will be entered under Rule 50.