                        T.C. Memo. 2011-102



                      UNITED STATES TAX COURT



                   RICK FISHMAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14514-06.               Filed May 18, 2011.



     J. Timothy Bender and J. Scott Broome, for petitioner.

     Cathy J. Horner, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARIS, Judge:   Petitioner and his wife, Mary Ann Fishman

(the Fishmans, and petitioner’s wife alone, Mrs. Fishman), timely

filed joint Federal income tax returns for tax years 1994, 1995,

1996, and 1997 (the tax years at issue).    Respondent issued a

statutory notice of deficiency covering the tax years at issue to

the Fishmans on May 9, 2006.   The notice stated that respondent
                               - 2 -

had determined the following deficiencies and penalties with

respect to their Federal income taxes:

                                                 Penalty
          Year          Deficiency             Sec. 6663(a)

          1994           $13,878               $10,409.50
          1995            14,415                10,811.25
          1996            14,692                11,019.00
          1997            15,304                11,478.00

Petitioner timely filed a petition with this Court challenging

the deficiencies and penalties.1    Petitioner resided in Indiana

when he filed his petition.

     This case presents one issue for decision:    whether

underpayments due to fraud exist for the tax years at issue such

that, because of the fraud:   (1) Petitioner is liable for civil

fraud penalties under section 6663(a)2 and (2) the period of

limitations on assessment does not bar assessment of the proposed

deficiencies and penalties.   The Court holds that no

underpayments due to fraud exist.    Therefore, petitioner is not

liable for civil fraud penalties, and the period of limitations



     1
      Petitioner and Mrs. Fishman originally filed separate
petitions. The Court consolidated their cases on Oct. 21, 2009.
Respondent and Mrs. Fishman later agreed to settle her case at
docket No. 14515-06, and on Mar. 12, 2010, after the date of
trial in the instant case, the Court severed the previously
consolidated cases. The Court then entered a stipulated decision
in Mrs. Fishman’s case on Apr. 5, 2010.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the tax years at issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
                               - 3 -

bars assessment of the proposed deficiencies.   As a result, the

Court need not otherwise address the correctness of the proposed

deficiencies, including the computational adjustments.3

                          FINDINGS OF FACT

I. Petitioner’s Career With United Group Association

     Some of the facts have been stipulated and are found

accordingly.   The stipulations of fact and the attached exhibits

are incorporated herein by this reference.   In 1988 when the

Fishmans lived in Cleveland, Ohio, petitioner became a sales

representative for United Group Association (UGA).   As a sales

representative, petitioner was a self-employed independent

contractor of UGA.   His responsibilities included marketing and

selling to other self-employed individuals insurance policies for

life, health, dental, vision, and prescription drug coverage, as

well as memberships in the National Association for the Self-

Employed (NASE).

     In a little over a year UGA promoted petitioner to district

sales leader (district leader); he remained a self-employed

independent contractor.   As a district leader, petitioner

continued his previous duties of marketing and selling insurance

and NASE memberships.   He also took on new responsibilities such

as recruiting, hiring, training, managing, and motivating a team


     3
      Specifically, respondent adjusted petitioner’s self-
employment tax deductions and liability, his medical expense
deductions, and his earned income tax credits.
                                - 4 -

of sales representatives.   The sales representatives in

petitioner’s district were also self-employed independent

contractors.

     When petitioner became a district leader, he began doing

business as PACE Associates (PACE).     Petitioner formed and

operated PACE as a sole proprietorship and reported income (or

loss) from PACE on Schedules C, Profit or Loss From Business, of

the Fishmans’ joint returns.    Petitioner also opened and

maintained a bank account for PACE, from which he paid all

expenses relating to his business.

     In 1991 UGA promoted petitioner again, this time to division

sales leader (division leader).    Petitioner remained a self-

employed independent contractor and continued to do business as

PACE.   His new division covered the entire State of Indiana, so

the Fishmans moved to Indianapolis, where they remained

throughout the tax years at issue.      Petitioner held the position

of division leader throughout the tax years at issue.

     As a division leader, petitioner retained the same general

responsibilities--sell insurance and NASE memberships and

recruit, hire, train, manage, and motivate a sales team.     His new

sales team, however, consisted not only of sales representatives

but also of district leaders.     Specifically, during the tax years

at issue petitioner had between 3 and 5 district leaders and

between 40 and 60 sales representatives in his division.        The
                               - 5 -

district leaders and sales representatives in petitioner’s

division were all self-employed independent contractors.

Petitioner continued to work for UGA until 2008, when he left the

insurance industry.

II. UGA’s Commission Advance System

     UGA paid its agents4 solely on commission.   Commissions were

earned as monthly insurance premiums were paid.   Specifically,

when an agent sold an insurance policy, for the first 12 months

the policy was in effect he would earn a sales commission equal

to 20 percent of the policy’s monthly premiums.   For each

subsequent month the policy remained in effect, he would earn a

sales commission equal to 4 percent of the monthly premium.

Thus, agents earned larger commissions from selling new policies

than from maintaining existing policies.

     Sales leaders earned two types of commission.   First, they

earned sales commissions on policies they personally sold.

Second, they earned commissions on their subordinate5 agents’

sales.   UGA called this second type of commission an override.




     4
      For convenience, the Court will use the term “agents” to
refer to division leaders, district leaders, and sales
representatives combined. The Court will also use the term
“sales leaders” to refer to division leaders and district leaders
combined.
     5
      The Court uses the term “subordinate” loosely. Recall that
all UGA agents were self-employed independent contractors.
                               - 6 -

     UGA recognized that earning commissions only as monthly

premiums were paid might prevent agents from initially earning

adequate commissions to cover their living expenses.6   To address

these concerns, UGA used a commission advance system.   Under this

system, when an agent sold a policy, UGA would advance (i.e.,

lend) the agent approximately 6 months’ anticipated but unearned

commissions.   As the monthly premiums on that policy were paid,

UGA would apply the earned commissions against the advance (i.e.,

as repayment of the loan).   Thus, after approximately 6 months,

earned commissions would fully offset the advance.    As a result,

agents who consistently sold new policies would have as cash on

hand approximately 5 to 6 months’ anticipated but unearned

commissions.   If premium payments discontinued within the first 6

months, however, UGA would collect from the agent any portion of

the advance not offset by earned commissions.   An advance not

offset by earned commissions carried simple interest at rates

ranging from 1 to 1.5 percent, and the agent had a contractual

duty to repay whether or not he continued to earn commissions.

     Because the advances were loans bearing a stated rate of

interest, UGA did not report them as compensation to its agents

on Forms 1099-MISC, Miscellaneous Income.   Rather, UGA reported

only earned commissions as compensation.    Specifically, for tax


     6
      An agent would have to sell a substantial number of
policies and keep them on the books to live solely on earned
commissions.
                              - 7 -

year 1996, when UGA issued Forms 1099-MISC to its agents, UGA

included a document that explained the commission advance system.

The document explained the income-reporting implications of the

system, provided an illustration of how the system worked, and

alerted its agents to “start planning today for 1997’s tax

liability!”7

     The commission advance system applied to petitioner’s

division during all tax years at issue.    Each week UGA would

approve new policies sold by agents in petitioner’s division.

Upon approving the policies, UGA would wire-transfer the entire

division’s weekly advances to the PACE account and would send to

petitioner a summary document specifying the advance amounts for

each agent, including petitioner.    Petitioner was responsible for

writing checks to the other agents in his division as per the UGA

summary document, which he did.     Of course, petitioner retained

in the PACE account his own advances on personal sales and

overrides.




     7
      Petitioner provided this document to his certified public
accountant (C.P.A.) along with other documents pertaining to tax
year 1996. The document was also in the possession of the
Internal Revenue Service (IRS). See infra note 15 and
accompanying text.
                               - 8 -

III. Expenses Petitioner Paid on Behalf of the District Leaders

     Petitioner paid various expenses on behalf of the district

leaders in his division.8   For example, if a district leader

shipped something using petitioner’s Federal Express (FedEx) or

United Parcel Service (UPS) account number, petitioner paid the

entire FedEx or UPS bill.   Petitioner also paid the costs of

running advertisements for the district leaders.   In addition, if

a district leader made a long-distance phone call, petitioner

paid the entire phone bill.   Lastly, one district leader needed a

fax machine, so petitioner bought the fax machine for the

district leader.9

     While petitioner initially paid these expenses, the district

leaders eventually reimbursed him.10   Rather than sending bills

to the district leaders showing their expenses--which would have

required the district leaders to write reimbursement checks to

petitioner each week--petitioner obtained reimbursement directly


     8
      Petitioner also incurred and paid expenses to run his
division that were not on the district leaders’ behalf. Such
expenses included those for office rent, utilities, equipment,
advertising, travel, and meals and entertainment. Petitioner
deducted these expenses on Schedules C of the Fishmans’ joint
returns.
     9
      Petitioner also paid a “Management Package Fee” on behalf
of each district leader. No evidence exists regarding this fee
other than its amount, which was approximately $150 to $200 per
week per district leader.
     10
      Petitioner was not reimbursed for the other expenses he
paid to run his division. See supra note 8.
                                - 9 -

by deducting the expenses from the district leaders’ commission

advance checks.    Specifically, petitioner would review any

invoices, bills, and receipts containing such expenses and would

note on a sheet of paper the expense types and amounts, as well

as the names of the district leaders on whose behalf petitioner

had initially paid the expenses.    Each week petitioner would

transfer the information on the sheet of paper to balance sheets

he prepared for the district leaders.    On a given balance sheet

petitioner noted, among other things:    (1) The district leader’s

weekly advance amount as per the UGA summary document and (2) the

expenses he had paid on behalf of that district leader.

Petitioner subtracted these expenses from the UGA-prescribed

advance amounts and wrote checks to the district leaders for the

net amounts.11    He also provided copies of the balance sheets to

the district leaders.    During the tax years at issue petitioner

prepared between three and five balance sheets per week and

obtained repayment for expenses he had paid on the district

leaders’ behalf of $54,549, $51,996, $63,159, and $59,241,

respectively.




     11
      Petitioner was not always reimbursed in full every week.
For example, the district leader for whom petitioner initially
purchased the fax machine reimbursed him over multiple weeks, as
if making installment payments on the purchase.
                              - 10 -

IV. The Fishmans’ Joint Tax Returns

     For each tax year at issue petitioner prepared a summary

list of what he believed to be his Schedule C business expenses.

He sent the lists, his Forms 1099-MISC, and Mrs. Fishman’s Forms

W-2, Wage and Tax Statement, to his C.P.A.     Petitioner

occasionally provided his C.P.A. with other information relevant

to his tax return preparation.   Specifically, for tax year 1996,

petitioner provided to his C.P.A.:     (1) The document from UGA

outlining the income-reporting implications of the commission

advance system and (2) information regarding petitioner’s stock

purchase plan with UGA.

     Petitioner prepared the summary lists using a rather

rudimentary method.   Petitioner took what he called a “vacation”

from his normal UGA duties for approximately 1 week each year.

During these weeks, which he spent in his home, petitioner

compiled all of the division’s expense receipts and the district

leaders’ balance sheets for the respective tax year.     Petitioner

would then take the balance sheets for a district leader and

determine the total amount of expenses he initially paid on that

district leader’s behalf (for which he had been reimbursed).12

He would then begin adding up the expense receipts for his



     12
      Petitioner viewed these expenses as the district leaders’
“[expenses] to help the division grow.” In other words,
petitioner viewed the expenses to be the district leaders’
business expenses rather than his own.
                               - 11 -

division.   When the dollar amount of the receipts reached the

amount of expenses petitioner had paid on that district leader’s

behalf, he would set those receipts and that district leader’s

balance sheets aside.   Petitioner would repeat this process for

each district leader in his division.

     After completing this process, petitioner added up and

categorized the remaining expense receipts and reported the

amounts as Schedule C business expenses on the summary lists he

sent to his C.P.A.    See supra note 7.   Because petitioner set

aside receipts up to the amount of the reimbursed expenses, the

summary lists neither included those expenses as Schedule C

business deductions nor reported the reimbursements as Schedule C

gross receipts.    Consequently, the C.P.A. did not include the

expenses as business deductions or the reimbursements as gross

receipts on the Fishmans’ joint returns.

V. The IRS Criminal Investigation of Petitioner

     In 1998 special agents from respondent’s Criminal

Investigation Division (CID) contacted petitioner concerning an

investigation into PACE’s finances and the Fishmans’ joint

returns.    CID terminated the investigation sometime in 2003

without initiating criminal prosecution against petitioner.     The

record contains no evidence concerning:    (1) The details of the

investigation; (2) what prompted CID to open the investigation;

(3) why criminal prosecution was not initiated; or (4) whether
                              - 12 -

CID ever notified petitioner that it had terminated the

investigation.

VI. Subsequent Civil Audit and Notice of Deficiency

     In December 2003 respondent assigned the audit of the

Fishmans’ tax years 1994, 1995, 1996, and 1997 to Revenue Agent

Kay Shoaf (revenue agent).   CID delivered to the revenue agent 10

boxes of materials it had collected during its investigation.     In

April 2004 petitioner provided the revenue agent with six

additional boxes of documents.    These boxes contained bank

statements, checks, receipts mostly organized in monthly packets,

charge card statements, and telephone, shipping, and advertising

bills.   Despite having six boxes of documents containing expense

receipts, the revenue agent analyzed only the telephone, shipping

(FedEx and UPS), and advertising expenses.   She observed that,

while the amounts of these expenses did not exceed the amounts

reported on the Fishmans’ joint returns, they did exceed the

amounts for which petitioner was reimbursed by the district

leaders.   The revenue agent could not, however, determine whether

the expenses she reviewed were reported as Schedule C deductions

on the Fishmans’ joint returns.    The revenue agent did not review

receipts corresponding to any other expense items on the joint

returns.

     The revenue agent did create spreadsheets based on

information contained in the joint returns, IRS computer
                               - 13 -

databases, the weekly balance sheets, and letters petitioner

wrote to his C.P.A.    One spreadsheet the revenue agent created

reflects the stipulated amounts of expenses petitioner paid on

behalf of the district leaders for which he was reimbursed.

Aside from the spreadsheets, however, the record contains nothing

prepared by the revenue agent during her audit.   The revenue

agent never spoke with the Fishmans or the C.P.A. during the

course of her audit.   She completed her audit in August 2004.

     On May 9, 2006, almost 2 years after the revenue agent

completed her audit, respondent determined deficiencies in the

Fishmans’ Federal income taxes for the tax years at issue.    The

deficiency determinations resulted primarily from respondent’s

adjustment to petitioner’s gross income.13   Specifically, the

notice of deficiency stated:

     It is determined that you received reimbursement for
     business expenses claimed on your returns * * * which were
     not reflected on your return. These reimbursements are
     taxable income to you under the provisions of Section 61 of
     the Internal Revenue Code. Alternatively, your other
     business expenses are decreased by the amount of
     reimbursements you received. [Emphasis added.14]



     13
      All other adjustments reflected in the notice of
deficiency were computational. See supra note 3.
     14
      While respondent in the notice of deficiency uses the term
“taxable income” to articulate his determination, the reference
to sec. 61 and the statements surrounding the term clearly
indicate that respondent’s determination focused on petitioner’s
gross income (as opposed to taxable income or adjusted gross
income as defined in secs. 63 and 62, respectively).
                                 - 14 -

Notably, the notice of deficiency did not reflect a determination

that petitioner had overstated any specific deductions he claimed

on his Schedules C.     In addition, the notice of deficiency

reflected no adjustment to gross income related to the commission

advances petitioner received from UGA.      In fact, the revenue

agent never saw or considered the UGA document explaining the

commission advance system during her audit, even though she

admitted that the 16 boxes of information she had may have

contained that document.15

                                OPINION

I. Underpayments Due to Fraud Do Not Exist.

     A taxpayer is liable for a civil fraud penalty if, acting

with fraudulent intent, he underpays the Federal income tax

required to be shown on his return.       Sec. 6663(a).   In other

words, fraud consists of two elements:      (1) Underpayment of tax

and (2) fraudulent intent.     To establish fraud, the Commissioner

must prove both elements with clear and convincing evidence.16

Secs. 7454(a), 7491(c); Rule 142(a)(2), (b); DiLeo v.




     15
          See supra note 7 and accompanying text.
     16
      The taxpayer’s mere failure to prove error in the
Commissioner’s deficiency determination does not, without more,
satisfy the Commissioner’s burden for either element. Gromacki
v. Commissioner, 361 F.2d 727, 730 (7th Cir. 1966), affg. T.C.
Memo. 1964-292; Petzoldt v. Commissioner, 92 T.C. 661, 700
(1989).
                               - 15 -

Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir.

1992).

     Respondent has not proven the first element--that petitioner

underpaid his Federal income tax.   The Commissioner may initially

establish that a taxpayer underpaid his Federal income tax by

producing clear and convincing evidence that the taxpayer failed

to report specific transactions that gave rise to gross income.

See, e.g., United States v. Shavin, 320 F.2d 308, 311 (7th Cir.

1963); Peyton v. Commissioner, T.C. Memo. 2003-146 (citing Siravo

v. United States, 37 F.2d 469, 473-474 (1st Cir. 1967), Elwert v.

United States, 231 F.2d 928, 933 (9th Cir. 1956), United States

v. Bender, 218 F.2d 869, 871-872 (7th Cir. 1955), and United

States v. Stayback, 212 F.2d 313, 317 (3d Cir. 1954)).   This

method of establishing an underpayment is called the specific

items method of proof.17   See Price v. Commissioner, T.C. Memo.

2004-103.   If, using this method, the Commissioner produces clear

evidence of unreported gross income, the taxpayer must then prove

by a preponderance of the evidence that he incurred, but did not



     17
      The Commissioner can also employ the specific items method
by producing clear and convincing evidence of specific items of
overstated deductions. See Beauchamp v. Commissioner, T.C. Memo.
1997-393 (sustaining fraud penalty for portion of underpayment
related to overstated alimony deductions). However, respondent
did not produce any evidence--much less clear and convincing
evidence--that petitioner overstated any specific deductions.
Rather, respondent focuses solely on whether the reimbursements
petitioner received constituted gross income that petitioner
failed to report.
                              - 16 -

report, enough deductible costs or expenses to offset the

unreported income.   See United States v. Bender, supra at 871-

872; Peyton v. Commissioner, supra.    If, however, the

Commissioner improperly characterizes a nonincome item as gross

income, he fails to meet his initial burden and, as a result, the

taxpayer need not produce evidence of offsetting expenses.    Cf.

United States v. Bender, supra at 871-872 (stating that the

burden of production shifts to the taxpayer “when the Government

has shown unreported income”).

     Respondent determined deficiencies based solely on the

following two-pronged argument:   (1) Petitioner paid expenses on

behalf of the district leaders and deducted the expenses on his

Schedules C;18 (2) the district leaders eventually reimbursed

petitioner for these expenses, and the reimbursements constituted

gross income to petitioner, which he omitted from his return.     To

establish an underpayment based on this position, respondent must

produce clear and convincing evidence that the reimbursements


     18
      The Court recognizes that, as part of his determination,
respondent asserted that petitioner had deducted the reimbursed
expenses on his Schedules C. See supra p. 12. That assertion
does not, however, equate to a determination that petitioner
overstated specific items of deduction. See supra note 17.
Rather, the essence of respondent’s determination is that, while
petitioner correctly reported his Schedule C deductions, he
underreported his gross receipts.
     In any event, petitioner employed a system--albeit
rudimentary--to deduct only those business expenses for which he
had not been reimbursed. See supra pp. 10-11. Thus, the Court
finds that petitioner did not report the reimbursed expenses on
his Schedules C.
                              - 17 -

were properly characterized as gross income.    See United States

v. Bender, supra at 871; Peyton v. Commissioner, supra.

     Respondent claims that petitioner conceded that he

underreported gross income.   If a taxpayer concedes that he

failed to report gross income, his concession may serve as the

evidence the Commissioner needs to satisfy his initial burden.

Karcho v. Commissioner, T.C. Memo. 2000-213.   Absent such a

concession, however, the Commissioner must produce actual

evidence of unreported gross income.   See United States v.

Bender, 218 F.2d 869, 871 (7th Cir. 1955); Peyton v.

Commissioner, supra.

     Contrary to respondent’s claim, petitioner did not concede

that he underreported gross income.    Respondent relies on two

stipulated facts to support his claim:   (1) Petitioner received

reimbursements for expenses PACE paid on behalf of the district

leaders; and (2) petitioner did not report the reimbursements as

gross income.   These two stipulations, however, do not constitute

a concession that the reimbursements constitute gross income

pursuant to section 61.19


     19
      Petitioner argues that, while he “has never denied that he
received expense reimbursements * * * for expenses that PACE paid
or incurred on behalf of the District Sales Leaders”, he never
conceded that he had unreported gross income. Specifically,
petitioner’s brief states: “The only dispute is over whether
Petitioner realized additional taxable income as a result of
[the] reimbursements or if the reimbursements were offset by
other business expenses incurred and paid by the Petitioner”.
                                                   (continued...)
                                - 18 -

     Generally, gross income does not include reimbursements for

expenses a taxpayer pays on behalf of another.     Price v.

Commissioner, T.C. Memo. 1999-142 (citing Gray v. Commissioner,

10 T.C. 590, 596-597 (1948)).    Morever, a taxpayer generally

cannot deduct such expenses because, when the taxpayer obtains

reimbursement, the expenses have been paid not by the taxpayer

but by the person who reimbursed the taxpayer.20    Universal Oil

Prods. Co. v. Campbell, 181 F.2d 451, 475 (7th Cir. 1950) (citing

Glendinning, McLeish & Co. v. Commissioner, 61 F.2d 950, 952 (2d



     19
      (...continued)
[Emphasis added.] This statement is consistent with his
petition, which specifically assigns error to respondent’s
determination that petitioner “realized taxable income * * * for
the alleged reimbursement of business expenses.”
     To be sure, gross income and taxable income do not mean the
same thing. See secs. 61, 63. Thus, to argue that a taxpayer
did not receive additional taxable income generally does not
equate to an argument that he did not receive additional gross
income. However, the notice of deficiency uses the term “taxable
income” when referring to gross income “under the provisions of
Section 61”. See supra note 14 and accompanying text. Thus, the
Court views petitioner’s use of the term as simply corresponding
with respondent’s determination regarding unreported gross
income, as opposed to an argument focused specifically on taxable
income as prescribed by sec. 63.
     20
      Only under limited circumstances may a taxpayer deduct
expenses for which he obtains reimbursement. See, e.g., secs.
62(a)(2)(A), 274(a), (e)(3); secs. 1.62-1(c)(2), 1.62-2, 1.162-
17, 1.274-2(f)(2)(iv), Income Tax Regs.; sec. 1.62-1T(e),
Temporary Income Tax Regs., 53 Fed. Reg. 9874 (Mar. 28, 1988).
Accordingly, only under limited circumstances does mere receipt
of reimbursements give rise to gross income. See, e.g., sec.
62(a)(2)(A); sec. 1.162-17(b), Income Tax Regs. (regulating how
employee taxpayers must report certain expenses and any
reimbursements received therefor). None of those circumstances
apply in this case.
                              - 19 -

Cir. 1932), affg. 24 B.T.A. 518 (1931)).   In other words, the

taxpayer merely advances (i.e., lends) the payment to the other

person or business, and the other person or business returns

(i.e., repays) the advanced amount at a later time.   Flower v.

Commissioner, 61 T.C. 140, 152 (1973), affd. without published

opinion 505 F.2d 1302 (5th Cir. 1974); see Commissioner v. Tufts,

461 U.S. 300, 307 (1983).

     The two stipulated facts respondent relies upon establish

only that petitioner initially paid the expenses and that the

district leaders eventually reimbursed him.   They do not

establish that petitioner could have properly deducted the

expenses as his own business expenses.   In fact, respondent

ignores the most important stipulation--the district leaders were

self-employed independent contractors.   They had no employment or

contractual relationship with PACE or petitioner.   As independent

contractors, they carried on their own businesses separate from

PACE.   See World Wide Agency, Inc. v. Commissioner, T.C. Memo.

1981-419.   Thus, any expenses the district leaders paid or

incurred that were ordinary and necessary to their businesses

would not be directly attributable to PACE and therefore would

not be deductible by petitioner.   See secs. 62(a)(1), 162(a);

Glendinning, McLeish & Co. v. Commissioner, supra at 952; Phila.-

Balt. Stock Exch. v. Commissioner, 19 T.C. 355, 359 (1952); sec.

1.162-1(a), Income Tax Regs.; sec. 1.62-1T(c)(1), Temporary
                              - 20 -

Income Tax Regs., 53 Fed. Reg. 9873 (Mar. 28, 1988).    Because the

stipulated facts do not represent a concession that petitioner

could have deducted the reimbursed expenses as his own business

expenses, they cannot represent a concession that the

reimbursements were properly characterized as gross income.

Therefore, respondent must produce actual evidence that the

reimbursements constitute gross income.

     Respondent has not produced sufficient evidence to

characterize the reimbursements as gross income.    Respondent

acknowledges that petitioner used the reimbursement system merely

as a substitute for billing the district leaders weekly and

having them write checks to reimburse petitioner for the outlays.

Inherent in this acknowledgment is that, by the end of each year,

the district leaders ultimately paid the expenses.

     Petitioner’s testimony, which the Court finds credible,

further supports this view of the reimbursements.    Petitioner

viewed the expenses as the district leaders’ “[expenses] to help

the division grow”.   Despite using a rudimentary method,

petitioner segregated the expenses ultimately paid by the

district leaders from those ultimately paid by PACE.    Petitioner

listed only the expenses ultimately paid by PACE on the documents

he sent to his C.P.A., who prepared petitioner’s tax returns.21


     21
      Petitioner’s method only matched the amounts of the
receipts to the amounts on the balance sheets. Thus, while the
                                                   (continued...)
                              - 21 -

Furthermore, petitioner provided the weekly balance sheets

showing the nature and amount of the reimbursable expenses to the

district leaders.   These balance sheets served as summary tax

documentation that enabled:   (1) Petitioner to determine the

total expenses paid by the district leaders during the tax years

at issue and (2) the district leaders to substantiate their

business expenses on their tax returns.

     Simply put, respondent has not produced clear and convincing

evidence that the reimbursements constitute gross income.22

Rather, petitioner’s receipt of the reimbursements gave rise to

nothing more than a loan repayment.    Because receiving repayment



     21
      (...continued)
character of the expenses on the receipts may not have matched
the character of the expenses on the balance sheets, respondent
made no determination that the character of any of petitioner’s
expenses should be adjusted. See supra note 17.
     22
      Respondent also argues in his posttrial briefs that “the
commission advances he received from UGA are income to petitioner
upon his exercise of dominion and control over the funds in the
bank account”. Respondent makes this argument despite the facts
that the revenue agent never saw or considered UGA’s policy
document regarding the commission advance system during her audit
and that respondent did not determine that the commission
advances constituted gross income to petitioner. The Court need
not consider this argument raised for the first time after trial.
Centel Commcns. Co. v. Commissioner, 920 F.2d 1335, 1340 (7th
Cir. 1990) (citing Knowlton v. Commissioner, 791 F.2d 1506, 1511
(11th Cir. 1986), affg. 84 T.C. 160 (1985)), affg. 92 T.C. 612
(1989). In any event, UGA required petitioner to distribute the
advances to the agents in his division. The system imposed a
contractual obligation upon the agents to repay UGA for any
unearned advances, which bore a stated rate of interest. Thus,
the advances did not constitute gross income to petitioner when
UGA wire-transferred the amounts to the PACE account.
                                - 22 -

of a loan does not give rise to gross income, respondent has not

met his initial burden.    Thus, petitioner need not produce

evidence of offsetting expenses.    Therefore, the Court holds that

respondent has not proven that petitioner underpaid the Federal

income tax required to be shown on his returns for the tax years

at issue.   Because respondent did not prove that petitioner

underpaid his Federal income tax during the tax years at issue,

the Court need not discuss whether petitioner acted with

fraudulent intent.    See Jenkins v. United States, 313 F.2d 624,

627 (5th Cir. 1963); Elfmon v. United States, 209 F.2d 642, 643

(4th Cir. 1954).     Accordingly, petitioner is not liable for civil

fraud penalties pursuant to section 6663(a).

II. The Period of Limitations Bars Assessment of the Proposed
    Deficiencies.

     Respondent conceded that, if he could not prove fraud, the

period of limitations would bar assessment of the proposed

deficiencies.   Respondent has not proven fraud.   Thus, the period

of limitations bars assessment of the proposed deficiencies.23

     To reflect the foregoing and the concessions of the parties,


                                            Decision will be entered

                                      for petitioner.



     23
      Because respondent cannot assess the proposed deficiencies
(including the computational adjustments), the Court need not
otherwise determine their correctness. See supra note 3 and
accompanying text.
