                         T.C. Memo. 2003-158



                       UNITED STATES TAX COURT



                  DUNCAN & ASSOCIATES, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10285-02.                 Filed May 29, 2003.


     Michael W. Duncan, for petitioner.

     Jason W. Anderson and Kathleen C. Schlenzig, for respondent.



                          MEMORANDUM OPINION


     CHIECHI, Judge:    This case is before the Court on respon-

dent’s motion for summary judgment (respondent’s motion).

Petitioner filed a response to respondent’s motion (petitioner’s

response).    We shall grant respondent’s motion.
                               - 2 -

                            Background

     Pursuant to the Court’s Order issued under Rule 37(c)1 on

January 23, 2003, all of the affirmative allegations in paragraph

2 of the answer, and consequently all of the facts on which

respondent relies in respondent’s motion, are deemed admitted.

     Petitioner had a mailing address in Glenview, Illinois, at

the time the petition in this case was filed.

     During 1990 and 1991, petitioner, a subchapter C corpora-

tion, engaged in the insurance brokerage business.   During those

years, Michael W. Duncan (Mr. Duncan) operated and was the

president, corporate secretary, and sole shareholder of peti-

tioner.

     During 1990 and 1991, deposits into petitioner’s bank

accounts totaled $729,261 and $963,097, respectively.

     As of December 31, 1989, Mr. Duncan had an outstanding loan

balance of $86,562 with respect to amounts that petitioner had

lent him for which petitioner did not charge Mr. Duncan any

interest.   (We shall refer to the interest that petitioner did

not charge Mr. Duncan on his outstanding loan from petitioner as

forgone interest.)   During 1990 and 1991, Mr. Duncan did not pay

petitioner any interest on his outstanding loan balance with

petitioner.


     1
      All Rule references are to the Tax Court Rules of Practice
and Procedure. All section references are to the Internal
Revenue Code (Code) in effect for the years at issue.
                                 - 3 -

     During 1990, petitioner sold a business interest to the

Chicago Board of Trade for $125,000.      At the time of that sale,

petitioner’s adjusted basis in that business interest was

$16,081.   (We shall refer to the amount petitioner received on

the sale of its business interest (i.e., $125,000) reduced by

petitioner’s adjusted basis in that interest (i.e., $16,081) as

petitioner’s 1990 amount realized.)      At all relevant times,

petitioner through Mr. Duncan knew that at least a portion of the

$125,000 that it received during 1990 on the sale of its business

interest constitutes income to petitioner for that year.

     On or about April 13 and July 18, 1991, petitioner received

checks totaling $49,500, which were not deposited into any bank

account of petitioner but which Mr. Duncan retained and/or

deposited in his bank account.    At all relevant times, petitioner

through Mr. Duncan knew that $40,000 of the total $49,500 in such

checks constitutes income to petitioner for 1991.      (We shall

refer to such $40,000 of such checks as petitioner’s 1991 check

amount.)

     During 1990 and 1991, respectively, petitioner made payments

or other transfers to or on behalf of Mr. Duncan of amounts

totaling $293,650.112 and $460,263.56.     Petitioner failed to



     2
      Of the $293,650.11 in payments or other transfers to or on
behalf of Mr. Duncan that petitioner made during 1990, $9,610 was
paid to Georgio Armani for the purchase of clothing for Mr.
Duncan.
                               - 4 -

record those amounts in its books and records as dividends or, in

the alternative, as compensation to Mr. Duncan.

     During 1990 and 1991, respectively, Mr. Duncan made payments

or other transfers to or on behalf of petitioner of amounts

totaling $100,900 and at least $58,780.    Those respective amounts

represent petitioner’s nontaxable receipts from Mr. Duncan for

such years.

     At a time not disclosed by the record before September 1992,

respondent commenced an examination of petitioner with respect to

its taxable years 1990 and 1991.

     At a time not disclosed by the record, petitioner filed

Federal income tax (tax) returns for its taxable years 1990 (1990

return) and 1991 (1991 return).    In such returns, petitioner

reported gross receipts of $454,034 and $453,451, respectively.

When petitioner filed its 1990 return and 1991 return, petitioner

through Mr. Duncan knew and understood that each such return

understated petitioner’s income for each such year.    To illus-

trate, in its 1990 return and/or 1991 return, petitioner did not

report as income the following:    (1) The forgone interest on Mr.

Duncan’s outstanding loan balance with petitioner for 1990 and

1991; (2) petitioner’s 1990 amount realized; and (3) petitioner’s

1991 check amount.   In addition, petitioner claimed a deduction

of $9,610 in its 1990 return for “outside services”.    However, we

found above that petitioner paid the $9,610 claimed for “outside
                               - 5 -

services” to Georgio Armani for the purchase of clothing for Mr.

Duncan.   When petitioner filed its 1990 return, petitioner

through Mr. Duncan knew that the deduction of $9,610 claimed for

“outside services” was improper.   Petitioner also claimed a

deduction of $25,000 in its 1990 return for alleged contributions

to petitioner’s pension and/or profit sharing plan.   However,

petitioner did not make any contributions to petitioner’s pension

and/or profit sharing plan during 1990.

     On March 24, 1993, Mr. Duncan spoke with two of respondent’s

revenue agents on behalf of petitioner.   During Mr. Duncan’s

conversation with those revenue agents, Mr. Duncan acknowledged

that petitioner would have to pay tax, interest, and fraud

penalties that were attributable to the adjustments made by

respondent to petitioner’s 1990 return and 1991 return.   Mr.

Duncan also told respondent’s revenue agents on behalf of peti-

tioner the following with respect to petitioner’s taxable years

1990 and 1991:   (1) He believed that petitioner’s books, records,

and returns were incorrect; (2) the worksheets that petitioner

presented to respondent’s examining agents to explain income were

false; (3) petitioner’s accountant prepared an altered set of

books, including journals and ledgers, to conceal the fact that

petitioner had understated its income; and (4) he and one of

petitioner’s employees had participated in the falsification of

invoices, receipts, and check register stubs during respondent’s
                                - 6 -

examination.

     The fraudulent and corrupt activity of Mr. Duncan and

petitioner’s accountant during respondent’s examination of

petitioner included causing an employee of petitioner to prepare

77 false deposit slips incorrectly identifying amounts totaling

$179,579.36 that were deposited into one of petitioner’s bank

accounts (petitioner’s 1991 deposits) as loans from Mr. Duncan to

petitioner.    By presenting such false receipts to respondent’s

examining agents, Mr. Duncan intended to mislead respondent’s

examining agents into believing that certain of petitioner’s

receipts during taxable year 1991 constituted the repayment by

Mr. Duncan of loans made to him by petitioner, rather than income

to petitioner.    Furthermore, when initially asked about the

source of petitioner’s 1991 deposits, Mr. Duncan told respon-

dent’s revenue agents on behalf of petitioner that those deposits

had to have been made from his personal account.    The fraudulent

and corrupt activity of Mr. Duncan and petitioner’s accountant

during respondent’s examination of petitioner also included

directing an employee of petitioner to create a fictitious

receipt in the amount of $9,610 for petitioner’s taxable year

1990 to document the alleged purchase of an oriental rug from

Georgio Armani, which was then presented to respondent’s examin-

ing agents.    In fact, as we found above, the $9,610 that peti-

tioner paid Georgio Armani during 1990 was for the purchase of
                               - 7 -

clothing for Mr. Duncan.

     On March 31, 1998, Mr. Duncan entered into a plea agreement

with the United States Attorney for the Northern District of

Illinois (Mr. Duncan’s March 31, 1998 plea agreement), in which

Mr. Duncan pleaded guilty to one count of obstructing and imped-

ing the due administration of the Code in violation of section

7212(a).3

     In Mr. Duncan’s March 31, 1998 plea agreement, Mr. Duncan

acknowledged that he fraudulently and corruptly obstructed and

impeded, and endeavored to obstruct and impede, the due adminis-

tration of the Code by knowingly creating and causing the cre-

ation of false and fraudulent documents for the purpose of


     3
      Sec. 7212(a) provides:

     SEC. 7212.   ATTEMPTS TO INTERFERE WITH
                  ADMINISTRATION OF INTERNAL REVENUE LAWS.

          (a) Corrupt or Forcible Interference.–-Whoever
     corruptly or by force or threats of force (including
     any threatening letter or communication) endeavors to
     intimidate or impede any officer or employee of the
     United States acting in an official capacity under this
     title, or in any other way corruptly or by force or
     threats of force (including any threatening letter or
     communication) obstructs or impedes, or endeavors to
     obstruct or impede, the due administration of this
     title, shall upon conviction thereof, be fined not more
     than $5,000, or imprisoned not more than 3 years, or
     both, except that if the offense is committed only by
     threats of force, the person convicted thereof shall be
     fined not more than $3,000, or imprisoned not more than
     1 year, or both. The term “threats of force”, as used
     in this subsection, means threats of bodily harm to the
     officer or employee of the United States or to a member
     of his family.
                               - 8 -

obstructing and impeding respondent’s examination of petitioner

with respect to its taxable years 1990 and 1991 and for the

purpose of concealing from respondent the falsity of petitioner’s

1990 return and 1991 return.

     In Mr. Duncan’s March 31, 1998 plea agreement, Mr. Duncan

also acknowledged that:   (1) Petitioner’s 1990 return fraudu-

lently understated petitioner’s income by $125,000; (2) peti-

tioner’s 1991 return understated petitioner’s income by $150,000;

and (3) petitioner’s accounting documents contained entries

falsely reclassifying $125,000 of petitioner’s income for 1990

and $150,000 of petitioner’s income for 1991 as repayments by Mr.

Duncan of loans allegedly drawn from petitioner’s “Loan to

Shareholder” account.

     On March 20, 2002, respondent issued to petitioner a notice

of deficiency (notice) with respect to its taxable years 1990 and

1991.   In that notice, respondent determined deficiencies in, and

fraud penalties under section 6663(a) on, petitioner’s tax, as

follows:

                                         Fraud Penalty
    Year         Deficiency            Under Sec. 6663(a)
    1990           $64,392                 $48,294.00
    1991            75,726                  56,794.50


     Respondent further determined in the notice that petitioner

has imputed interest income for 1990 and 1991 under section 7872

of $7,089 and $7,670, respectively, as a result of the forgone
                               - 9 -

interest on Mr. Duncan’s outstanding loan balances with peti-

tioner during those respective years.

     Respondent also determined in the notice that petitioner

has capital gain income of $108,919 for 1990 as a result of

petitioner’s sale during that year of its business interest to

the Chicago Board of Trade.

     Respondent further determined in the notice that petitioner

understated its gross receipts for 1990 and 1991 in amounts

computed as discussed below.   Respondent used the bank deposits

method in order to reconstruct petitioner’s gross receipts for

each of the years 1990 and 1991, as follows:

             Explanation                    1990        1991
Deposits                                  $729,261    $963,097
Nontaxable Receipts from Mr. Duncan       (100,900)    (58,780)
Amount Received on Sale of                (125,000)      ---
  Business Interest
Repayments to Customers                      ---      (281,614)
Petitioner’s 1991 Check Amount               ---        40,000
Gross Receipts                            $503,361    $662,703[1]
     1
      Due to a mathematical error, the notice determined that
petitioner’s gross receipts for 1991 totaled $662,903. That
mathematical error shall be corrected in the parties’ computa-
tions under Rule 155.

Petitioner’s 1990 return and 1991 return reported gross receipts

of $454,034 and $453,451, respectively.   Consequently, respondent

determined in the notice that petitioner had understated its

gross receipts for 1990 and 1991 by $49,327 and $219,452,4


     4
      The $219,452 amount by which respondent determined in the
                                                   (continued...)
                              - 10 -

respectively.

     Respondent also determined in the notice to disallow the

deductions petitioner claimed in its 1990 return of $9,610 and

$25,000, respectively, for “outside services” and contributions

to petitioner’s pension and/or profit sharing plan.

                            Discussion

     The Court may grant summary judgment where there is no

genuine issue of material fact and a decision may be rendered as

a matter of law.   Rule 121(b); Sundstrand Corp. v. Commissioner,

98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).

     All of the facts on which respondent relies in respondent’s

motion have been deemed admitted.   Those facts include the

material facts on which we may proceed to resolve the issues in

respondent’s motion, including the issue relating to the fraud

penalties under section 6663(a), see, e.g., Doncaster v. Commis-

sioner, 77 T.C. 334, 337 (1981).    We conclude that there are no

genuine issues of material fact regarding the issues raised in

respondent’s motion.

     With respect to respondent’s determinations that petitioner

has a deficiency in tax for each of the years at issue, on the



     4
      (...continued)
notice petitioner understated its gross receipts for 1991 is
wrong due to mathematical errors by respondent, including respon-
dent’s mathematical error noted above. The correct amount by
which petitioner understated its gross receipts for 1991 is
$209,252. Respondent’s mathematical errors in the notice shall
be corrected in the parties’ computations under Rule 155.
                             - 11 -

record presented, we sustain those determinations5 except to the


     5
      In petitioner’s response, petitioner does not dispute
respondent’s determinations that it has deficiencies in tax for
the years at issue. In fact, petitioner admits in that response
that “There clearly are monies due and owing the IRS which the
petitioner admits to and wants to settle.”

     Petitioner’s response, however, does not address the balance
of the issues presented in respondent’s motion. To illustrate,
petitioner’s response states in part:

     The respondent has filed a motion for summary judgment
     based upon lack of response and stated allegations and
     to this end I (we) request that you consider mitigating
     circumstances, as follows:

          1.   Petitioner does not have funds to hire legal
               counsel needed to prepare briefs and re-
               sponses to motions.
          2.   Petitioner records were destroyed in a flood
               August 22, 2002, at a warehouse facility in
               Glenview, Illinois.
          3.   Petitioner sustained a disabling injury re-
               sulting in two (2) surgeries to his left foot
               with continuing care through Mayo Clinic
               Rochester, Minnesota.
          4.   Petitioner requests the court to consider the
               six (6) year delay during which the IRS did
               not assess outstanding taxes.
          5.   In excess of 80% of amounts due and owing IRS
               are accrued interest and penalties resulting
               from the IRS admitting to losing/misplacing
               Mr. Duncan’s and Duncan & Associates’ files.
          6.   Petitioner and legal counsel Mr. Fred Fore-
               man, former U.S. attorney for the 7th Dis-
               trict, requested on numerous occasions
               amounts due and owing the IRS for tax years
               1990 and 1991 only to be told that cases
               involving fraud or allegations of fraud could
               not be paid until concluded. [Reproduced
               literally.]

We note that the so-called mitigating circumstances quoted above
in paragraph 2 of petitioner’s response is inconsistent with
petitioner’s petition in which petitioner alleges that its
                                                   (continued...)
                                 - 12 -

extent necessary to correct the mathematical errors discussed

above.6

     With respect to the fraud penalty under section 6663(a) that

respondent determined against petitioner for each of its taxable

years 1990 and 1991, section 6663(a) imposes a penalty equal to

75 percent of the portion of any underpayment that is attribut-

able to fraud.   For purposes of section 6663(a), if the Commis-

sioner of Internal Revenue (Commissioner) establishes that any

portion of an underpayment is attributable to fraud, the entire

underpayment is to be treated as attributable to fraud, except

with respect to any portion of the underpayment that the taxpayer

establishes by a preponderance of the evidence is not attribut-

able to fraud.   Sec. 6663(b).    In order for the fraud penalty to

apply, the Commissioner must prove by clear and convincing

evidence, sec. 7454(a); Rule 142(b), that an underpayment exists

and that some portion of such underpayment is attributable to

fraud.    Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992).

     To prove the existence of an underpayment, the Commissioner

may not rely on a taxpayer’s failure to carry his or her burden

of proof with respect to the underlying deficiency.     Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990); Petzoldt v. Commis-



     5
      (...continued)
records for the years at issue “were discarded due to their age”.
     6
      See supra note 4.
                                - 13 -

sioner, 92 T.C. 661, 700 (1989).    The Commissioner must prove

only that an underpayment exists, and not the precise amount of

such underpayment.   DiLeo v. Commissioner, 96 T.C. 858, 873

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Petzoldt v. Commis-

sioner, supra at 699-700.     When an allegation of fraud is inter-

twined with reconstructed unreported income, as is the case here

with respect to a portion of the underpayment for each of the

years at issue, the Commissioner may satisfy such burden by

establishing an underpayment by either: (1) Proving a likely

source of the unreported income or (2) disproving the nontaxable

source(s) that the taxpayer alleges for the unreported income.

Parks v. Commissioner, supra at 661.

     Petitioner understated its gross receipts in its 1990 return

and 1991 return by $49,327 and $209,252,7 respectively.    In

addition, petitioner did not report as income in its 1990 return

and/or its 1991 return the following:    (1) The forgone interest

on Mr. Duncan’s outstanding loan balance with petitioner for 1990

and 1991; (2) petitioner’s 1990 amount realized; and (3) peti-

tioner’s 1991 check amount.    Furthermore, the deductions peti-

tioner claimed in its 1990 return of $9,610 and $25,000, respec-

tively, for “outside services” and contributions to petitioner’s

pension and/or profit sharing plan were improper.

     In Mr. Duncan’s March 31, 1998 plea agreement, Mr. Duncan


     7
      See supra note 4.
                                - 14 -

acknowledged that petitioner’s 1990 return fraudulently under-

stated petitioner’s income by $125,000 and that petitioner’s 1991

return understated petitioner’s income by $150,000.    Moreover, in

petitioner’s response, petitioner admits that “There clearly are

monies due and owing the IRS which the petitioner admits to and

wants to settle.”

     On the instant record, we find that respondent has estab-

lished by clear and convincing evidence that there was an under-

payment of petitioner’s tax for each of its taxable years 1990

and 1991.

     In order to prove fraudulent intent, the Commissioner must

prove by clear and convincing evidence that the taxpayer intended

to evade tax, which the taxpayer believed to be owing, by conduct

intended to conceal, mislead, or otherwise prevent the collection

of such tax.    Laurins v. Commissioner, 889 F.2d 910, 913 (9th

Cir. 1989), affg. Norman v. Commissioner, T.C. Memo. 1987-265;

Parks v. Commissioner, supra.    The existence of fraud is a

question of fact to be resolved upon consideration of the entire

record.     DiLeo v. Commissioner, supra at 874; Gajewski v. Commis-

sioner, 67 T.C. 181, 199 (1976), affd. without published opinion

578 F.2d 1383 (8th Cir. 1978).    Fraud is never presumed or

imputed and should not be found in circumstances which create at

most only suspicion.    Toussaint v. Commissioner, 743 F.2d 309,

312 (5th Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v.
                              - 15 -

Commissioner, supra at 699-700.     Direct evidence of the requisite

fraudulent intent is seldom available.      Petzoldt v. Commissioner,

supra at 699; Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).

Consequently, the Commissioner may prove fraud by circumstantial

evidence.   Toussaint v. Commissioner, supra at 312; Rowlee v.

Commissioner, supra at 1123; see Marsellus v. Commissioner, 544

F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368.

     The courts have identified a number of badges of fraud from

which fraudulent intent may be inferred, including (1) the

understatement of income, (2) the making of false and inconsis-

tent statements to revenue agents, and (3) the failure to cooper-

ate with tax authorities.   See Bradford v. Commissioner, 796 F.2d

303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Parks v.

Commissioner, 94 T.C. at 664-665.     Although no single factor is

necessarily sufficient to establish fraud, the existence of

several indicia constitutes persuasive circumstantial evidence of

fraud.   Petzoldt v. Commissioner, 92 T.C. at 700; see Bradford v.

Commissioner, supra at 307.

     A corporation can act only through its officers and does not

escape responsibility for acts of its officers performed in that

capacity.   DiLeo v. Commissioner, 96 T.C. at 875.    It follows

that corporate fraud necessarily depends upon the fraudulent

intent of the corporate officers.     Id.   Thus, in determining

whether petitioner acted with the requisite fraudulent intent, we
                               - 16 -

must consider the actions of Mr. Duncan, petitioner’s president,

corporate secretary, and sole shareholder.

     The record in this case contains indicia of fraud by

petitioner.    When petitioner filed its 1990 return and 1991

return, petitioner through Mr. Duncan knew and understood that

each such return understated petitioner’s income for each such

year.    In order to mislead respondent’s examining agents with

respect to the understatement of petitioner’s income for its

taxable years 1990 and 1991, Mr. Duncan and petitioner’s accoun-

tant directed, prepared, and/or caused others to prepare certain

false documents that were presented to respondent’s examining

agents.8   Moreover, in Mr. Duncan’s March 31, 1998 plea agree-

ment, Mr. Duncan acknowledged that he fraudulently and corruptly

obstructed and impeded, and endeavored to obstruct and impede,

the due administration of the Code by knowingly creating and

causing the creation of false and fraudulent documents for the

purpose of obstructing and impeding respondent’s examination of

petitioner with respect to its taxable years 1990 and 1991 and

for the purpose of concealing from respondent the falsity of

petitioner’s returns for each such year.    In Mr. Duncan’s March

31, 1998 plea agreement, Mr. Duncan further acknowledged that



     8
      On Mar. 24, 1993, Mr. Duncan told respondent’s revenue
agents that he and one of petitioner’s employees had participated
in the falsification of invoices, receipts, and check register
stubs.
                               - 17 -

petitioner’s 1990 return fraudulently understated petitioner’s

income by $125,000.9

       Based upon our examination of the entire record before us,

we find that respondent has established by clear and convincing

evidence that petitioner through Mr. Duncan intended to evade tax

for petitioner’s taxable years 1990 and 1991, which petitioner

through Mr. Duncan believed to be owing, by conduct intended to

conceal, mislead, or otherwise prevent the collection of such

tax.

       We have considered all of petitioner’s contentions, argu-

ments, and requests that are not discussed herein, and we find

them to be without merit and/or irrelevant.

       On the record before us, we shall grant respondent’s motion.

       To reflect the foregoing,

                                        An order granting respondent’s

                                   motion will be issued, and decision

                                   will be entered under Rule 155.




       9
      We note that on Mar. 24, 1993, Mr. Duncan acknowledged to
respondent’s revenue agents that petitioner would have to pay
fraud penalties for its taxable years 1990 and 1991.
