                        T.C. Memo. 1997-321




                      UNITED STATES TAX COURT



     A. LEE PETERSEN AND INI BUILDERS, INC., Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24466-93.                Filed July 10, 1997.




     A. Lee Petersen (an officer), for petitioner INI Builders,

Inc., and pro se.

     Kay Hill, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     BEGHE, Judge:   Respondent determined deficiencies in

petitioners' Federal income taxes and additions to tax as

follows:1

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable years in
                                                   (continued...)
                                    - 2 -


A. Lee Petersen

                                            Addition to Tax
     Year              Deficiency             Sec. 6653(b)

     1984                    -0-                 $11,224
     1986                    -0-                   9,074

INI Builders, Inc.
                                           Additions to Tax
Year Ending       Deficiency         Sec. 6653(b)       Sec. 6661

  9/30/84          $43,515             $21,758             $10,879


     Having declined, because we lack jurisdiction over the

subject matter, to address the argument of A. Lee Petersen

(petitioner) that respondent’s claims against petitioner were

discharged in bankruptcy, we hold that petitioner committed fraud

within the meaning of section 6653(b).       Because we dismiss INI

Builders, Inc. (INI), a dissolved corporation, as a party for

lack of jurisdiction, we do not address whether INI is liable for

a deficiency or additions to tax for fraud and substantial

understatement under sections 6653(b) and 6661.

                              FINDINGS OF FACT

Background

     On August 20, 1993, respondent issued notices of deficiency

to petitioner and INI.       On November 16, 1993, petitioner timely

filed a petition with this Court on his and INI’s behalf.            At the

     1
      (...continued)
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure. Dollar amounts have been rounded to the
nearest dollar.
                                - 3 -


time the petition was filed, petitioner was a resident of Alaska,

and INI was a dissolved Alaska corporation that had conducted

operations and had its principal place of business in Alaska.2

       Petitioner timely filed, pursuant to extension, his 1984

Federal income tax return on June 21, 1985.    Petitioner timely

filed his 1986 Federal income tax return on April 15, 1987.

INI's Federal income tax return for the fiscal year ended

September 30, 1984 (TYE 9/84), was timely filed on December 15,

1984.

       Petitioner received a B.A. degree in economics from Brigham

Young University and, in 1959, a J.D. degree from New York

University.    Petitioner took two elementary accounting courses as

an undergraduate.    In law school, petitioner studied corporation

law and took one elementary tax course.    Petitioner is admitted

to practice law in New York, Utah, and Alaska.    While serving as

an assistant U.S. attorney for the District of Alaska from 1968

until 1975, petitioner tried some tax cases.    During the years in

issue, petitioner was a sole practitioner whose practice included

appellate litigation and criminal, corporate, and personal injury

law.



       2
       INI was originally incorporated under Alaska law on
Apr. 6, 1983, as PBS of Alaska, Inc. On Aug. 15, 1983, its name
was changed to INI Builders, Inc. On Oct. 14, 1991, INI was
involuntarily dissolved by the Alaska commissioner of
corporations.
                               - 4 -


     Edward A. Burke (Burke) came to Alaska in 1971 as an

investigator for the U.S. Customs Service.    Later, Burke served

as an investigator for the U.S. Drug Enforcement Agency (DEA)

until he was dismissed for misconduct.    Eventually, with

petitioner’s assistance, Burke was reinstated by the DEA, with

backpay.   During the interim period, Burke worked as a

construction superintendent for the U.S. Public Health Service,

supervising the building of laundry facilities and the erection

of water tanks in native Alaskan villages.    During this period,

Burke developed contacts with the native Alaskan village of

Shaktoolik.

     In 1983, petitioner and Burke organized INI for the purpose

of building water and sewer systems for native Alaskan villages.

Prior to May 23, 1984, the outstanding shares of INI were owned

50 percent each by petitioner and Burke.

     In August 1983, INI entered into the first of two contracts

with the village of Shaktoolik to construct water and sewer

systems (Shaktoolik I).   In April 1984, INI and Shaktoolik

entered into the second contract (Shaktoolik II).    Burke was

instrumental in obtaining these contracts and was designated the

project manager of Shaktoolik I and II.

     The contract price for Shaktoolik I was $1,328,800.     Under

the terms of the contract, Shaktoolik agreed to pay $400,000 on

execution of the contract, so that INI could commence operations.
                               - 5 -


Thereafter, payments were due based on percentage of completion,

with 25 percent of the balance due at 25 percent completion, 25

percent at 50 percent completion, 25 percent at 75 percent

completion, and 25 percent due at 100 percent completion.     The

contract price for Shaktoolik II was $1,138,500, with payment

terms similar to those for Shaktoolik I.

     On December 22, 1983, petitioner and Burke executed a buy-

sell agreement with respect to the shares of INI.    Petitioner

drafted the buy-sell agreement using a form provided by Mutual

Life Insurance Co. of New York (Mutual Life).   The buy-sell

agreement required that upon the death of either shareholder, the

surviving shareholder would purchase, and the estate of the

deceased shareholder would sell, the stock of the deceased

shareholder at a price determined under article 3 of the

agreement.   Article 3 of the agreement required semiannual

valuation of the stock.   The purchase price of the decedent’s

stock was to be based on the most recent valuation unless more

than 1 year had elapsed since the valuation, in which case the

value of the decedent's stock would be determined, as of the date

of death, by agreement of the surviving shareholder and the

estate, or by arbitration if they could not agree.

     Article 4 of the buy-sell agreement provided for the

purchase of insurance from Mutual Life by each shareholder on the

life of the other, with the proceeds to be used to fund any
                               - 6 -


purchase under the buy-sell agreement.   The buy-sell agreement

provided that, in the event the insurance proceeds were

insufficient to pay the full purchase price of the stock in cash,

the survivor was required to pay the balance within 5 years, with

interest at the prime rate plus 2 percent, and to execute a

promissory note on those terms.

     As contemplated by the terms of the buy-sell agreement,

Burke applied to Mutual Life for a life insurance policy in the

amount of $100,000.   Despite Burke’s having disclosed on the

application that he suffered from high blood pressure, Mutual

Life issued an insurance policy on Burke’s life with petitioner

as owner and beneficiary.   Burke did not disclose to Mutual Life

that he had been treated for chest pains and self-inflicted wrist

wounds, and that he was a member of Alcoholics Anonymous.

     Burke had prepared the bids for the Shaktoolik projects and

had been optimistic that INI would make a substantial profit on

them.   Petitioner expected a profit of about 10 percent.

Schedule A, an addendum to the buy-sell agreement, showed an

initial stated value of $75,000 for each shareholder's stock, and

insurance policies in the amount of $100,000 each.   The addendum,

dated December 22, 1983, was signed by Burke and petitioner.

     On May 16, 1984, petitioner and Burke signed a new Schedule

A, which increased the stated value of each shareholder's stock

to $150,000 and assumed that each of the insurance policies in
                                 - 7 -


the amount of $100,000 would remain in force.   Also on May 16,

1984, petitioner and Burke agreed that, contingent upon the

successful completion of the Shaktoolik projects and sufficient

funds being available, Burke would receive a $100,000 bonus.

Neither on that date nor at any other time was any formal

corporate action ever taken to authorize the payment of a bonus

to petitioner.

     On May 23, 1984, Burke died intestate of a ruptured aorta.

Burke was survived by his mother, Pauline Burke, adopted sons

Mark and Robert Thorpe, and his natural children Edward A. Burke,

Jr., Michael Thorpe, and Tina Vicnair.

     Petitioner volunteered to serve, without compensation, as

counsel for Burke's estate.   Petitioner successfully petitioned

for the appointment of Robert Thorpe (Thorpe) as the personal

representative of Burke's estate.

     On the date of Burke's death, the Shaktoolik projects were

less than 10 percent complete.    On May 28, 1984, petitioner, in

his capacity as sole remaining director of INI, authorized the

hiring of Art Ronimus (Ronimus) to supervise the completion of

the Shaktoolik projects.3   Petitioner also authorized INI to pay

all Burke's debts and charge these payments as advances to

petitioner for the purchase of Burke's stock.   Petitioner caused

     3
       Ronimus is a professional engineer who had done design
work for Shaktoolik I and helped Burke prepare the bid for
Shaktoolik II.
                                - 8 -


INI to hire Carole Sookiayak, Burke’s companion and the daughter

of the mayor of Shaktoolik, at a salary of $2,000 per month.

     On the date of Burke's death, the buy-sell agreement by its

terms obligated petitioner to purchase Burke's stock from his

estate for $150,000.   No later than July 1984, petitioner told

Thorpe that INI would not pay a bonus to Burke's estate because

the bonus was not due until completion of the Shaktoolik projects

and because INI needed the money to pay Ronimus.     As a result,

Thorpe did not expect that the estate would receive a bonus, but

he did expect that the estate would receive $150,000 for the sale

of Burke’s stock in INI.

     By letter dated September 25, 1984, Mutual Life denied

petitioner’s application for payment of the insurance policy on

Burke’s life.   The stated grounds for the denial were that Burke

had failed to disclose on his application that he had been

treated for chest pains and self-inflicted wrist wounds and that

he was a member of Alcoholics Anonymous.

     Petitioner filed a lawsuit for breach of contract to hold

Mutual Life liable for the $100,000 face value of the insurance

policy on Burke’s life.    A jury returned a verdict of no

liability in favor of Mutual Life.      In December 1990, the Alaska

Supreme Court affirmed the jury verdict.     See Petersen v. Mutual

Life Ins. Co., 803 P.2d 406 (Alaska 1990).      Under rule 82 of the

Alaska Rules of Civil Procedure, which allows a successful
                                - 9 -


defendant to recoup some or all of the legal fees incurred, a

judgment was entered against petitioner in the approximate amount

of $70,000.

     By October 1, 1984, the Shaktoolik projects were

substantially complete and operational, and INI had received

payments totaling $1,875,000.    The gross receipts reported on

INI’s TYE 9/84 U.S. corporation income tax return amounted to

$1,665,000.    INI's TYE 9/84 return reflects taxable income of

$87,177 after deductions.    INI reported officer's compensation

and wages on line 12 of the TYE 9/84 return in the amount of

$165,000 and bonuses on line 26 in the amount of $63,800.      The

$165,000 shown on line 12 of INI’s TYE 9/84 return includes the

deduction for $100,000 attributable to the accrual of the bonus

payable to Burke’s estate.

     Shortly after Mutual Life denied the insurance claim,

petitioner and Thorpe discussed the buy-sell agreement.    During

this discussion, petitioner told Thorpe he would pay $150,000 for

the stock.    Petitioner did not try to rescind the buy-sell

agreement or reduce the purchase price of the stock; he simply

tried to extend the time over which he had to pay.

     Later, during fall 1984, petitioner suggested to Thorpe that

the estate could be paid faster, on the rationale that a layer of

taxation could be eliminated, if the buy-sell agreement were

reformed, nunc pro tunc, to reduce the purchase price by $100,000
                               - 10 -


and make up the reduction with an agreement to pay Burke a bonus

in an equivalent amount.    Petitioner did not tell Thorpe that his

proposal to change the character of the payments would impose an

income tax burden on Burke’s estate.    Thorpe told petitioner he

did not care what petitioner did, so long as the estate was not

adversely affected.

     Virginia Cutshall (Cutshall) is an Alaska certified public

accountant who prepared INI's and petitioner's income tax returns

and petitioner’s amended returns for the years in issue.     In

preparing INI's TYE 9/84 return, Cutshall used INI's general

ledger, corporate minutes, payroll records, and other information

provided by petitioner.    Cutshall relied on either the corporate

minutes or the information received from petitioner in deciding

that INI could accrue a bonus payable to Burke.    Prior to and at

the times of the preparation of petitioner’s original 1984 and

1986 income tax returns, petitioner did not inform Cutshall of

his efforts to reduce the purchase price of his obligation to buy

Burke’s stock and to make up the difference with INI bonus

payments, nor did he ask for her advice on the tax consequences

of the course of action he was trying to implement.

     Thorpe did not understand the tax implications of the

reformation that petitioner had proposed.    Thorpe is a sales

manager for an auto dealer.    He has not completed high school,

nor does he have any tax training; he does not even balance his
                               - 11 -


own checkbook.   In 1984, Thorpe was 25 years old and anxious to

receive distributions from the estate.

     Around October 1984, Thorpe consulted Cheryl Scanlon-Hull

(Scanlon-Hull), a certified public accountant, with respect to

the proposed reformation.    Scanlon-Hull discussed with Thorpe the

tax effects to the estate of converting payments due from

petitioner to the estate under the buy-sell agreement into a

bonus to be paid by INI.    Scanlon-Hull advised Thorpe that the

buy-sell agreement was binding and could not be converted to a

bonus and that a bonus paid to the estate would be taxable income

to the estate.   Thorpe told petitioner that the estate would not

agree to petitioner’s proposed modification of the agreement

because it would create a tax burden for the estate.

     Subsequently, but before the end of 1984, petitioner called

Scanlon-Hull to discuss her advice to Thorpe respecting the tax

effects of converting petitioner’s obligation to pay pursuant to

the buy-sell agreement into a bonus payable by INI.    Petitioner

told Scanlon-Hull he disagreed with her conclusions, and that he

had discussed the tax effects with Cutshall, who had advised him

that there would be no adverse tax consequences to the estate.

Petitioner did not raise the matter again with Thorpe.

     In December 1984, INI made a payment to Burke's estate in

the amount of $50,000.   INI made another payment to Burke’s

estate in 1986 in the amount of $17,500.    Petitioner asserts that
                              - 12 -


these amounts were payments on Burke’s $100,000 bonus, which INI

had accrued in TYE 9/84.   As payments were received by the

estate, Thorpe made no distinction between payments the estate

received from INI and payments received from petitioner

personally; Thorpe accepted and treated all moneys received from

petitioner and INI as part payment for the stock.

The Internal Revenue Audit

     Between August 1985 and August 1986, INI's TYE 9/84 return

was audited by Revenue Agent Douglas Becker (Becker).   Petitioner

authorized Cutshall to represent INI before the Internal Revenue

Service (IRS).   During the audit, Becker questioned the

deductibility of the accrued bonus to Burke.

     Cutshall refused to allow Becker to interview petitioner

during the initial audit interview, but they did meet later.

Petitioner told Becker that INI had paid $50,000 to Burke’s

estate as payment on a note for an accrued bonus.   Petitioner

told Becker that INI's liability to pay a bonus to Burke accrued

on the date of Burke's death because both the fact and the amount

of the liability were fixed, absolute, and irrevocable at that

time.   In support of the deduction, Cutshall and petitioner

showed Becker minutes from INI’s board of directors meeting dated

May 16, 1984, and a canceled check for $50,000 dated December 13,

1984.
                                - 13 -


     At the May 16, 1984, INI board of directors meeting,

petitioner took notes.   These notes are no longer in existence,

having been destroyed by petitioner when he prepared the minutes.

The front page of the minutes sets forth May 18, 1984, as their

date, which is a typographical error.    The last page of the

minutes is signed by petitioner and dated May 16, 1984.     However,

the minutes were not transcribed in May 1984, nor did petitioner

sign the minutes in May 1984.    The minutes note that the initial

value of each shareholder's stock was set at $75,000, omit any

reference to the increase in valuation to $150,000, and state

that, instead of allowing the value of the corporate stock to

increase, the shareholders would take any excess profits in

bonuses.   The minutes state that petitioner moved to approve a

bonus to Burke in the amount of $100,000 because he was

principally responsible for obtaining the contracts.    The minutes

further state that Burke may be given a promissory note to be

paid when funds are available.    During the audit, petitioner took

the position that the May 16, 1984, minutes constituted a demand

note for the bonus.

     Petitioner knew that Becker would rely on the May 16, 1984,

minutes in making his audit determination.    The May 16, 1984,

minutes and canceled check for $50,000 induced Becker to allow

INI to take a deduction for the bonus of $50,000, the amount

Becker believed had actually been paid.    Becker would not have
                              - 14 -


allowed INI any deduction for the bonus if he had not seen the

minutes and the canceled check.    Becker issued an examination

report that disallowed half of the $100,000 deduction INI claimed

for the bonus payable to Burke.

Appeal of the Examination Report

     INI protested Becker's findings.    An Appeals conference was

held on March 5, 1987.   The Appeals officer was William O’Meara

(O’Meara).   To support the deduction for an accrued bonus of

$100,000, petitioner and Cutshall showed O’Meara a document

entitled “Agreement for Payment of Debts and Distribution of

Estate” (Heirs’ Agreement), a letter dated June 2, 1987, and

several canceled checks.

     Petitioner drafted the Heirs’ Agreement for the distribution

of Burke's estate.   There are three different versions of the

agreement (Heirs I, Heirs II, and Heirs III).    Paragraph 1.b. of

Heirs I reads:

          Receivables from and interest in INI Builders.
     Inc. At the time of the death of Edward A. Burke,
     amounts owed by INI Builders, Inc. to him and the value
     of his stock, pursuant to a buy-sell agreement, totaled
     $150,000. The personal representative has collected
     $170,242 [sic] of this amount, the personal
     representative has agreed after all parties have signed
     this agreement to accept, and an additional $50,000 is
     to be collected when the City of Shaktoolik makes
     another payment on the contract with INI Builders, and
     a promissory note from A. Lee Petersen in the amount of
     $30,757.51, with 14% interest per annum, payable in
     full within two years, in full settlement of amounts
     owed by INI Builders, Inc. to Edward A. Burke and for
     the stock of Edward A. Burke in the corporation.
                                - 15 -


The sentence in Heirs I stating that the personal representative

of Burke's estate had collected $170,242 contains a typographical

error; it was intended to read "$70,242".    The sentence is also

garbled.   Heirs II contains a correction of the typographical

error in paragraph 1.b. and makes the sentence referenced above

grammatically coherent.    Heirs III contains the correction made

in Heirs II, bears the signatures of the heirs, and contains

additional changes to paragraph 1.b.     Paragraph 1.b. of Heirs III

reads:

          Receivables from and interest in INI Builders.
     Inc. At the time of the death of Edward A. Burke,
     amounts owed by INI Builders, Inc. to him were a
     $100,000 bonus and $20,242 in management and other
     fees. The personal representative has collected
     $70,242 of these amounts. An additional $50,000 is to
     be collected when the City of Shaktoolik makes another
     payment on the contract with INI Builders, Inc. A
     promissory note from A. Lee Petersen in the amount of
     $30,757.51, with 14% interest per annum, payable in
     full within two years, will be accepted in full
     settlement of the balance owed for the stock of Edward
     A. Burke in the corporation.

     Thorpe and his brothers signed Heirs I containing the

typographical error in paragraph 1.b., then gave the signed

copies to petitioner.     Thorpe never signed or reviewed Heirs II

or Heirs III.   Heirs III is the version of the Heirs’ Agreement

petitioner showed O’Meara.

     The terms of Heirs III raised a question in O’Meara’s mind

as to whether the payments for which INI had taken a deduction

were made in payment for the stock or as a bonus.    To obviate
                                - 16 -


O’Meara’s concerns, petitioner submitted a letter dated June 2,

1987, which was purportedly signed by Thorpe.

     There are two different versions of the June 2, 1987, letter

(June 2, 1987 I and June 2, 1987 II).    June 2, 1987 I lists a

schedule of payments labeled "Payments made by INI Builders,

Inc." and "Payments made by A. Lee Petersen".    Petitioner's

alleged payments include 10 payments of $2,000 each, a $28,757

payment for legal services rendered to the estate, and an

additional amount of $1,612.    The 10 payments of $2,000 were

payments made by INI to Carole Sookiayak.    The $1,612.32 was

petitioner's fee for representing Thorpe in an employment-related

matter.   Petitioner never billed the estate for the $28,757.51 in

legal fees; he represented the estate free of charge.

     On June 26, 1987, petitioner visited Thorpe at his office

and presented June 2, 1987 I.    Because Thorpe disagreed with the

accuracy of the amounts paid according to the letter, petitioner

made a handwritten notation on Thorpe’s copy of June 2, 1987 I

that reads:   "As of this date the total payments for which credit

should be allowed against a total of $150,000 is about $97,000-".

This notation is dated June 26, 1987.    Thorpe signed June 2, 1987

I even though the letter contained errors as to the amounts paid

to the estate.   Petitioner never asked Thorpe for permission to

make any changes to the letter, nor did petitioner inform Thorpe
                               - 17 -


he was going to "fix" the letter.    After being asked to sign June

2, 1987 I, Thorpe began to lose faith in petitioner.

     June 2, 1987 II lists, separately, "Payments made by INI

Builders, Inc. on the $100,000 note for bonus", totaling $67,500,

and "Payments made by A. Lee Petersen, including credits for

services, on purchase of corporate stock" (emphasis added),

totaling $50,369.83.    The second page of June 2, 1987 II bears

petitioner's signature and Thorpe's signature indicating

agreement with the figures, dated June 26, 1987.    Thorpe did not

sign June 2, 1987 II.    The signature pages of June 2, 1987 I and

June 2, 1987 II are one and the same; petitioner attached the

signature page of June 2, 1987 I to the first page of June 2,

1987 II.

     Petitioner knew O’Meara would rely on Heirs III and June 2,

1987 II.   O’Meara relied on Heirs III and June 2, 1987 II in

reaching the conclusion that the $100,000 bonus was fully

deductible.   He would not have allowed the deduction without

having received these documents.    O’Meara determined that no

additional tax was due from INI and issued a no-change letter

closing the appeal on July 21, 1987.
                              - 18 -


Settlement Between Petitioner and Burke’s Estate

     Early in 1988, respondent became aware of the inconsistency

between the estate’s and INI’s treatment of the payments that INI

had made to the estate.   The IRS contacted Thorpe regarding the

estate’s failure to file Federal income tax returns for the

$100,000 “bonus” from INI.   Scanlon-Hull had never seen a Form

1099 for any of the bonus payments.    Petitioner had previously

told Thorpe that the taxable estate was going to be less than

$300,000, so that a Form 706 would not be required.    Thorpe told

petitioner that the IRS was asking Burke's estate to file an

income tax return reporting $100,000 of income from INI.    In a

letter dated February 25, 1988, petitioner urged Thorpe not to

file any tax returns until petitioner had had the opportunity to

review and discuss them with him to ensure consistency with INI's

treatment of the payments.

     Around February 1988, Thorpe retained Laurel Peterson

(Peterson) and Rodney Kleedehn (Kleedehn) as new counsel for

Burke’s estate.   In May 1988, petitioner met with Peterson,

Kleedehn, and Scanlon-Hull to discuss a settlement between

petitioner and the estate.   During the settlement negotiations,

petitioner urged Thorpe to file an income tax return for the

estate declaring bonus income from INI.    Petitioner offered to

pay the estate's income tax liability attributable to reporting

the payment received from INI as a bonus.    Thorpe and the estate
                               - 19 -


rejected petitioner's offer.   Burke’s estate filed Federal income

tax returns treating the payments from INI as payments pursuant

to the buy-sell agreement.

     By letter dated July 7, 1988, petitioner proposed a

settlement under which he would amend his returns to show INI's

payments to the estate as bonus income to himself.   Furthermore,

under petitioner’s proposed settlement, the estate would accept

$25,176, plus interest, as payment in full for Burke's stock.

The form of agreement prepared by petitioner was never signed,

but the estate negotiated a check from petitioner in the amount

of $15,176 bearing the notation that it was in full settlement of

any claims against INI or petitioner, exclusive of tax, interest,

or penalties arising from the stock purchase or petitioner's

conduct.4

     Ultimately, Burke's estate was paid $150,029.   INI made

payments totaling $90,741 to Burke’s estate and Burke’s

creditors.   Petitioner made payments to the estate in the amount

of $57,676, and rendered legal services to Thorpe on a personal

matter for which petitioner would have charged $1,612.    Only one

of the checks in evidence bears a notation that it was a payment

on the stock purchase.   No check bears a notation that it was a

payment on the bonus.

     4
       In addition to the $15,176 check, petitioner endorsed to
the estate a check payable to petitioner, drawn on INI’s account,
in the amount of $10,000.
                               - 20 -


The Audit Reopened

     By letter dated November 21, 1989, the IRS reopened its

audit of INI.   Petitioner responded by submitting to the IRS a

signed statement that purported to explain the events that led to

his settlement with the Burke estate.    This statement had several

documents attached, including a letter from petitioner to Thorpe

dated November 30, 1984.     The letter sets out a purchase price

of $37,500 for Burke's stock, and provides that bonuses in the

amounts of $12,500 and $100,000 would be paid to Burke, for a

total to the estate of $150,000.    It gives petitioner credit for

having already paid $6,382 against the $37,500 purchase price for

the stock and calls for a $30,757 note, with interest at the rate

of 14 percent and payments over a 2-year period.    The letter

states that petitioner and Burke had agreed to pay excess INI

profits out in bonuses instead of allowing the profits to

accumulate with the corporation.    Page 2 of the letter also calls

for Thorpe's signature to indicate agreement.    Thorpe did not see

the November 30, 1984, letter until sometime in 1986.    Thorpe

refused to sign the November 30, 1984, letter because the letter

was dated 1984 and misrepresented the arrangement between

petitioner and the estate.    Petitioner told the IRS that the

November 30, 1984, letter constituted the actual reformation of

the buy-sell agreement.    Petitioner admitted at trial that the

November 30, 1984, letter is not the actual agreement.
                                - 21 -


     On September 11, 1990, petitioner filed an amended Federal

income tax return for 1984 showing additional tax due of $24,917,

attributable to recharacterizing as income to petitioner $50,000

paid by INI to Burke’s estate.    On October 4, 1990, petitioner

filed an amended Federal income tax return for 1986 showing

additional tax due of $6,551, attributable to recharacterizing as

income to petitioner $17,500 paid by INI to Burke’s estate.

Cutshall, who prepared petitioner’s amended returns, told

petitioner that amounts paid by INI to Burke’s estate could not

be changed to a bonus to petitioner.     Nonetheless, Cutshall

prepared petitioner’s amended returns showing amounts paid to

Burke’s estate as income to petitioner.     No return or amended

return has ever been filed by INI to reduce the deduction claimed

on its TYE 9/84 return for the accrual of the $100,000 bonus

payable to Burke’s estate.   Petitioner has not paid the

additional tax liabilities shown on his amended returns.

Criminal Charges

     On March 14, 1991, the Department of Justice presented

proposed charges against petitioner to a grand jury.     The grand

jury found no probable cause to indict petitioner for filing

fraudulent tax returns, but returned a true bill indicting

petitioner on three counts of filing false documents with the IRS

in violation of section 7207.    The alleged false documents

included June 2, 1987 II, Heirs III, and the INI minutes dated
                                - 22 -


May 16, 1984.   Following a jury trial in June 1991, petitioner

was acquitted of all charges.

Petition in Bankruptcy

      On March 15, 1993, petitioner filed a petition under chapter

7 of title 11 of the U.S. Code.    The schedule of debts annexed to

the petition filed in that proceeding listed the IRS as a

creditor in the amount of $86,504 for the taxable years 1984,

1986, and 1987.    On June 22, 1993, the bankruptcy court entered

an order releasing petitioner from all dischargeable debts.

Petitioner was represented in the bankruptcy proceeding by Roger

McShea (McShea).   McShea never received any contact from the IRS

concerning the attempted discharge of petitioner's taxes.

INI

      On October 14, 1991, INI was involuntarily dissolved by the

Alaska commissioner of corporations.     On August 20, 1993,

respondent sent notices of deficiency to INI for TYE 9/84, in

care of petitioner, and to petitioner for 1984 and 1986.       The

deficiency determined against INI is attributable to the

disallowance in full of the deduction claimed in respect of the

$100,000 accrual of the bonus payable to Burke.     On November 16,

1993, petitioner filed a petition with this Court on behalf of

himself and INI.

      The parties have stipulated that INI's current and

accumulated earnings and profits for the years in issue were
                              - 23 -


sufficient to render distributions to petitioner in the amounts

of $50,000 for 1984 and $17,500 for 1986 fully taxable as

dividends.

                              OPINION

Petitioner

     Petitioner contends that respondent’s claims against him for

tax years 1984 and 1986 were discharged in bankruptcy.    We first

address whether we have jurisdiction so to determine.5    As a

Court of limited statutory jurisdiction, see sec. 7442; Neilson

v. Commissioner, 94 T.C. 1, 9 (1990), our subject matter

jurisdiction is generally limited to the redetermination of the

correct amount of a deficiency determined by the Commissioner.

See sec. 6214(a); cf. Swanson v. Commissioner, 65 T.C. 1180, 1184

(1976) (an action commenced in this Court for redetermination of

a deficiency is unrelated to the collection of the tax).     We lack

jurisdiction to determine whether a taxpayer’s liability for

Federal income taxes has been discharged in bankruptcy.

McAlister v. Commissioner, T.C. Memo. 1993-166 (citing Neilson v.

Commissioner, supra).   Petitioner will have to invoke the

jurisdiction of the bankruptcy court to obtain a ruling on the

issue of discharge, if and when respondent attempts to collect


     5
       We always have jurisdiction to decide whether we have
jurisdiction. Sponza v. Commissioner, 844 F.2d 689, 690 (9th
Cir. 1988) (citing Weiss v. Commissioner, 88 T.C. 1036, 1040
(1987)).
                                - 24 -


the additions we determine in this case and the unpaid

underpayments of tax reflected by petitioner’s amended returns

for 1984 and 1986.    See 11 U.S.C. sec. 523(a)(1)(C)

(1994).

     The issue for our decision is whether petitioner is liable

for the addition to tax for fraud.       The fraud addition was

enacted to protect the revenue and to reimburse the Government

for the heavy expense of investigation and the loss resulting

from the taxpayer's fraud.     Helvering v. Mitchell, 303 U.S. 391,

401 (1938).     Before petitioner can be held accountable for the

fraud addition, respondent must prove by clear and convincing

evidence that:     (1) There was an underpayment of tax, and (2)

some part of the underpayment resulted from fraud.       Rule 142(b);

Bagby v. Commissioner, 102 T.C. 596, 607 (1994).

     In the case of income tax for which a timely return was

filed, an underpayment includes a deficiency as defined in

section 6211.    Sec. 6653(c)(1).   Section 6211 defines a

deficiency as “the amount by which the tax imposed * * * exceeds

* * * the amount shown as the tax by the taxpayer upon his

return”.   However, any amount of additional tax shown on an

amended return filed after the due date of the return is also a

deficiency for the purpose of determining an underpayment.        Sec.

301.6653-1(c), Proced. & Admin. Regs.       In this case, respondent

has not determined a deficiency with respect to petitioner, but
                              - 25 -


petitioner filed amended returns after the due date showing

additional tax of $24,917 and $6,551 for 1984 and 1986,

respectively.   Thus, petitioner has underpayments of tax within

the meaning of section 6653(c) for the years in question.    As of

the time of trial, petitioner had not paid the additional taxes

shown on his amended returns for 1984 and 1986.

     If any portion of an underpayment is due to fraud, then

petitioner is liable for a section 6653(b) addition.   The

existence of fraud is a question of fact to be resolved upon

consideration of the entire record.    Gajewski v. Commissioner, 67

T.C. 181, 199 (1976), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978).   Fraud may never be presumed; it must be

established by independent evidence demonstrating the taxpayer’s

fraudulent intent.   Otsuki v. Commissioner, 53 T.C. 96, 106

(1969).   Because direct proof of a taxpayer's intent is rarely

available, fraud may be proved by circumstantial evidence, and

reasonable inferences may be drawn from the facts in evidence.

Spies v. United States, 317 U.S. 492, 499 (1943).

     The courts have developed a nonexhaustive list of

indications of fraudulent intent.   These indications include:

(1) Understating income, (2) maintaining inadequate records, (3)

failing to file tax returns, (4) implausible or inconsistent

explanations of behavior, (5) concealment of income or assets,

(6) failing to cooperate with tax authorities, (7) engaging in or
                               - 26 -


attempting to conceal illegal activities, (8) failing to make

estimated tax payments, (9) filing false documents, (10) dealing

in cash, and (11) experience and knowledge of tax laws.   See

Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford

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

Memo. 1984-601; Wheadon v. Commissioner, T.C. Memo. 1992-633.

     The record in this case contains evidence of at least four

indications of petitioner’s fraudulent intent.

     First, petitioner understated his income tax liability on

his 1984 and 1986 returns as he originally filed them.    The Court

of Appeals for the Ninth Circuit, to which an appeal of the

decision in this case would lie, has held that expenditures of a

corporation constitute constructive dividends if:   (1) The

expenditures do not give rise to a deduction on behalf of the

corporation, and (2) the expenditures create “economic gain,

benefit, or income to the owner-taxpayer.”    P.R. Farms, Inc. v.

Commissioner, 820 F.2d 1084, 1088 (9th Cir. 1987), affg. T.C.

Memo. 1984-549; Meridian Wood Prod. Co. v. United States, 725

F.2d 1183, 1191 (9th Cir. 1984); Palo Alto Town & Country

Village, Inc. v. Commissioner, 565 F.2d 1388, 1391 (9th Cir.

1977), remanding T.C. Memo. 1973-223.   INI made payments to

Burke’s estate, which petitioner originally contended were made

in respect of a bonus that INI owed to Burke on the date of his

death.   We are unpersuaded.   The evidence in the record, contrary
                              - 27 -


to petitioner’s self-serving testimony, convinces us that the

payments INI made to Burke’s estate were in satisfaction of

petitioner’s contractual obligation to purchase Burke’s shares in

INI from the estate.   The buy-sell agreement provides, in clear

and unambiguous language, that petitioner was obligated to

purchase Burke's shares from his estate for $150,000.    Moreover,

petitioner and Thorpe agreed shortly after Burke's death that

petitioner was bound by the buy-sell agreement.   The payments are

therefore not deductible as a business expense to INI.     The

payments conferred a benefit on petitioner to the extent that he

was relieved of the obligation to pay for Burke’s shares with his

personal funds.   Thus, the payments give rise to a constructive

dividend to petitioner.   INI’s earnings and profits are

sufficient to render the payments fully taxable as a dividend.

     Petitioner may well have had grounds for rescission or

reformation of the buy-sell agreement by reason of Burke’s

nondisclosure of his adverse medical history, which led to Mutual

Life’s refusal to honor the life insurance policy on Burke’s

life.   However, petitioner never sought relief from his

obligation in any court, nor did he ever take the position that

he was not bound by the terms of the buy-sell agreement, as

amended.   Burke’s estate may have had grounds for a quantum

meruit claim for a portion of the $100,000 bonus that was
                                - 28 -


arguably earned prior to Burke’s death.      However, neither Thorpe

nor any other heir ever pursued any such claim.

     Petitioner caused INI to make payments to Burke's estate to

satisfy his obligation under the buy-sell agreement.      Later,

petitioner attempted to recharacterize these payments as a bonus,

rather than payments for the stock.      This attempted

recharacterization, if accepted, would have served two purposes:

First, it would have preserved or given rise to an income tax

deduction to INI, which petitioner would now own outright, for

compensation paid and payable; second, it would have eliminated

petitioner's personal tax liability for the constructive

dividends arising from INI's payments that were used to help

petitioner pay for Burke's stock.    When petitioner filed his

income tax returns for 1984 and 1986, he understated his income

to the extent he failed to include the constructive dividend

amounts.   Petitioner filed amended returns only after respondent

had begun an income tax audit of Burke's estate and Thorpe had

refused to file fiduciary income tax returns for the estate

showing a bonus received rather than payments under the buy-sell

agreement.

     Second, petitioner’s explanations of his behavior have been

implausible and inconsistent.    Shortly after Burke’s death,

petitioner told Thorpe that petitioner would buy Burke's stock

from the estate, in accordance with the buy-sell agreement, but
                              - 29 -


that INI did not owe Burke a bonus.    Later, petitioner caused INI

to make payments to Burke's estate in lieu of payments to be made

by petitioner personally.   Petitioner characterized the payments

made by INI as a bonus to Burke’s estate, giving rise to a

deduction for INI and income to the estate.   When Thorpe refused

to report the payments as a bonus on the estate’s tax returns,

petitioner recharacterized the payments from INI to Burke's

estate as constructive bonus payments to petitioner and filed

amended personal returns showing income therefrom.   Thus,

petitioner has tried to adopt three different characterizations

of the payments he made, and the payments he caused INI to make,

in satisfaction of his obligations under the buy-sell agreement.

The only explanation for these recharacterizations is found in

petitioner’s attempts to change the tax consequences of the

transaction as originally agreed to by Burke and petitioner, and

confirmed by Thorpe and petitioner following Burke’s death.

Thorpe testified that petitioner then proposed a modification to

the deal "to avoid paying some taxes".

     Third, following the delays occasioned by Cutshall’s refusal

to allow Becker to interview petitioner and her failures to

produce requested documents, petitioner, once he began to deal

directly with Becker, submitted documents that he had falsified.

Although a jury found petitioner not guilty of three misdemeanor

counts of submission of false statements to respondent, it is
                               - 30 -


clear from the record in this case--and we are convinced--that

petitioner did submit falsified documents to respondent's agents

during the audit and Appeals process.    Petitioner’s intent in

submitting these falsified documents to respondent was to

persuade respondent to accept petitioner's assertion that the

payments by INI to Burke's estate were payments on an accrued

bonus, not payments under the buy-sell agreement.    Cf. Bagby v.

Commissioner, 102 T.C. at 607.    Petitioner admitted he gave the

IRS false documents in order to satisfy the agent and the Appeals

officer that the bonus was deductible, because the "end justifies

the means".    Petitioner also admitted that he "went too far" in

submitting such documents to the IRS.

     The fourth factor indicating that petitioner had fraudulent

intent with respect to the understatements found above is the way

in which he used his experience and knowledge of the tax laws in

this case.    Petitioner tried tax cases as an assistant U.S.

attorney, and he currently maintains a general law practice which

includes corporate and business law.    Although petitioner took

only one law school course on taxation, he is a practicing lawyer

and is more knowledgeable about tax law than the average

taxpayer.    See Wheadon v. Commissioner, T.C. Memo. 1992-633

(holding lawyer accountable for fraud); cf. Sisson v.

Commissioner, T.C. Memo. 1994-545, affd. 108 F.3d 339 (9th Cir.

1996)(holding tax lawyer accountable for fraud).    Scanlon-Hull
                               - 31 -


testified that she told petitioner that he could not

recharacterize payments on the buy-sell agreement as payments on

a bonus and that petitioner told her that Cutshall had advised

him otherwise.   Cutshall testified that, if petitioner had asked

for her advice, she would have told him that he could not so

recharacterize the payments.   Petitioner disregarded Scanlon-

Hull’s position that he could not convert any portion of his

personal obligation to make payments under the buy-sell agreement

into bonus payments from INI to Burke’s estate.   Later when

respondent demanded that INI, petitioner, and Burke’s estate all

treat the INI payments consistently, petitioner attempted to

persuade the estate to file amended returns consistent with his

story that the buy-sell obligation had been renegotiated and

reduced and superseded to that extent by bonus payments from INI.

When the estate refused to go along with petitioner’s story,

petitioner filed amended returns treating the “bonus” payments to

Burke’s estate as “bonus” payments to petitioner.   The fact that

petitioner twice attempted to recharacterize the transaction to

preserve a colorable claim of an income tax deduction for

compensation paid by INI demonstrates that petitioner had enough

knowledge about tax law to understand the tax implications of his

course of conduct.   It was that knowledge that informed his

course of conduct, the driving force of which was his desire to

get $150,000 into the hands of Burke’s estate at the least tax
                                - 32 -


cost to INI and himself.   Petitioner’s willful misrepresentation

to Scanlon-Hull that he had received tax advice from Cutshall,

his decisions not to ask for Cutshall’s advice and to keep her in

the dark at the times of preparation of his original returns, and

to disregard her advice at the time of preparation of his amended

returns, support the inferences we draw from all the evidence in

the record that petitioner intended and attempted to evade his

income tax liabilities.

     A taxpayer is liable for the addition to tax for fraud if he

had the intent to evade taxes at the time he filed his income tax

returns.   Cf. Badaracco v. Commissioner, 464 U.S. 386, 394 (1984)

(fraud committed when original return filed).   A fraudulent

original return is not purged by the subsequent filing of a

correct amended return.    The fraud is committed when the original

return is prepared and filed.    Id.

     We are convinced that petitioner had formed the intent to

evade tax before he filed his 1984 tax return on June 21, 1985.

No later than July 1984, petitioner told Thorpe that Burke’s

estate would not be paid a bonus because the $100,000 bonus was

contingent on the successful completion of the Shaktoolik

contracts.   In September 1984, Mutual Life denied petitioner’s

request for payment under Burke’s life insurance policy.    At some

time in late September or early October 1984, after Mutual Life

denied petitioner’s claim, petitioner proposed to Thorpe that the
                              - 33 -


estate could be paid sooner if INI paid the estate a bonus in

lieu of petitioner’s paying the estate under the buy-sell

agreement.   Petitioner told Thorpe during that conversation that

this proposal would eliminate a layer of taxation.   In October

1984, Thorpe discussed petitioner’s proposal with Scanlon-Hull,

who told him that petitioner’s proposal was illegal and would

give rise to adverse tax consequences to Burke’s estate.    Thorpe

relayed this information to petitioner who then called Scanlon-

Hull to voice his disagreement.

     Burke’s nondisclosures with respect to his life insurance

application, which led Mutual Life to revoke the policy, caused

petitioner to feel that he had been denied the benefit of his

bargain under the buy-sell agreement.   Out of a misperceived

moral obligation to provide Burke’s heirs with the $150,000 to

which they thought they were entitled, and the desire to become

sole owner of INI at the least tax cost, without having received

the life insurance proceeds, petitioner resolved to pay the heirs

$150,000 and acquire ownership of Burke’s stock in INI.

Petitioner proposed to Thorpe and the estate that INI would pay

the estate a $100,000 bonus and petitioner would be relieved of

$100,000 of his obligation under the buy-sell agreement.    Under

petitioner’s proposal, the estate would receive $150,000, but

petitioner hoped to obtain a deduction for INI and to shield

himself from having to include in income a constructive dividend
                              - 34 -


attributable to the corporation’s discharge of his debt to the

estate.   On Scanlon-Hull’s advice, the heirs refused to go along

with petitioner’s proposal.   Having discussed the matter with

Scanlon-Hull before the end of 1984, petitioner understood that

his proposal was contrary to the terms of the buy-sell agreement

and would create an income tax burden on the estate.   Despite the

heirs’ refusal to cooperate, and Scanlon-Hull’s admonitions,

petitioner instructed Cutshall to prepare and file petitioner’s

1984 Federal personal income tax return, which failed to report

as income INI’s payment of $50,000 to Burke’s estate, premised on

a renegotiation of the buy-sell agreement that, in reality, had

never occurred.   Petitioner was determined to carry out his plan

of reforming the buy-sell agreement, with or without the

cooperation of the heirs.   Petitioner’s conduct subsequent to the

filing of the 1984 and 1986 income tax returns, which includes

obtaining Thorpe’s signature and putting it on falsified

documents that would support the positions petitioner had taken

on his tax returns, and then submitting those documents to

respondent, convinces us that petitioner had formed the

fraudulent intent to evade income taxes on or before the time of

filing of his 1984 Federal personal income tax return, and this

intent continued through the time of filing of his 1986 return.

     We commiserate with petitioner in his partially self-created

predicament, but we do not condone the course of action by which
                              - 35 -


he tried to resolve it.   When Mutual Life refused to honor the

insurance policy on Burke’s life because of Burke’s failure to

disclose his adverse medical history, petitioner may well have

had grounds for reformation or rescission of the buy-sell

agreement.   Petitioner was faced with a dilemma over whether he

should honor what he deemed to be his continuing obligation to

his old friend and coventurer, Burke, or play hardball and

protect his own economic interests at the expense of Burke’s

family.   Petitioner tried to find a middle ground that would

allow full payment of the $150,000 to Burke’s heirs, while

reducing the adverse tax consequences to INI and himself.

Petitioner’s chosen path led him into a brier patch of conflict

between the estate’s and his interests that he attempted to cut

through at the expense of the fisc.    Notwithstanding petitioner’s

conflicted motives, the intent underlying his conduct amounted to

tax fraud.   Petitioner is liable for the addition to tax for

fraudulent understatement under section 6653(b).

INI

      Respondent having issued a notice of deficiency to INI

subsequent to its involuntary dissolution, petitioner’s filing of

the petition on behalf of INI necessarily also occurred

subsequent to the dissolution.   On June 13, 1995, more than 1

year after filing the answer to INI’s petition, and just 1 week

before the date for which the case had been set for trial,
                              - 36 -


respondent filed a motion to dismiss INI as a petitioner for lack

of jurisdiction.   Respondent contends that because INI is a

dissolved corporation, it lacks the capacity to file a petition

with this Court.

     As we have observed, it might

          At first blush * * * seem anomalous that
     respondent would issue a statutory notice of deficiency
     to a taxpayer and then turn around and say that there
     is no taxpayer who can petition this Court for a
     redetermination of the determined deficiency * * *.
     Yet, section 6212(b)(1) is explicit in its language
     which permits respondent * * * to send a notice of
     deficiency to a corporation which has terminated its
     existence * * * [Great Falls Bonding Agency, Inc. v.
     Commissioner, 63 T.C. 304, 306 (1974).]

     Concerning INI’s ability to invoke the Court’s jurisdiction

by filing a petition, our Rules provide that “A case shall be

brought by and in the name of the person against whom the

Commissioner determined the deficiency”.   Rule 60(a).   This Court

has held that if the person against whom the deficiency was

determined lacks the capacity to file a petition with this Court,

the petition must be dismissed for want of jurisdiction.

Brannon’s of Shawnee, Inc. v. Commissioner, 71 T.C. 108, 111

(1978).

     Under Rule 60(c), “The capacity of a corporation to engage

in * * * [litigation before this Court] shall be determined by

the law under which it was organized.”   We look to the laws of

the State of incorporation to determine whether a dissolved

corporation has the capacity to sue.   See Brannon’s of Shawnee,
                                - 37 -


Inc. v. Commissioner, supra.     The capacity of the corporate

petitioner to sue under State law is a prerequisite to our

jurisdiction.    Id.   Under Alaska law, an involuntarily dissolved

corporation lacks capacity to sue, with one limited exception not

relevant here.   Alaska Stat. sec. 10.06.678(b) (Michie 1988).      On

October 14, 1991, INI was involuntarily dissolved by the Alaska

Commissioner of Corporations.     We therefore regard INI as lacking

the capacity to sue at the time petitioner purported to file its

petition with this Court.6

     Although we have some concerns about judicial economy and

efficiency--the record contains all the relevant facts and the

parties have fully briefed and argued the INI issues--petitioner

is not without a remedy.     INI is a dormant--probably dead--

corporation, currently in possession of no assets.     Respondent

     6
       Under Alaska law, compliance with the Corporation Act even
after a suit has been filed is sufficient to allow a corporation
to maintain an action and to prevent dismissal based on the
previous default. See Richardson Vista Corp. v. City of
Anchorage, 14 Alaska 1 (Alaska 1952). Also, so long as the
period of limitations has not expired, the transferees of an
involuntarily dissolved Alaska corporation may reincorporate and
assert the claims of the dissolved corporation. See Alaska
Continental, Inc. v. Trickey, 933 P.2d 528 (Alaska 1997). Under
the Federal Rules of Civil Procedure and the Alaska Rules of
Civil Procedure, the defense of lack of capacity to sue is waived
if not raised “by specific negative averment” in the answer, or
by motion before the answer is filed. Fed. R. Civ. P. 9; Alaska
R. Civ. P. 9; Summers v. Interstate Tractor & Equip. Co., 466
F.2d 42, 49 (9th Cir. 1972); Brown v. Music, Inc., 359 P.2d 295,
301 (Alaska 1961). Thus, in the Federal courts generally, and in
the Alaska State courts, capacity is not a jurisdictional
element, and lack of capacity is an affirmative defense.
                              - 38 -


would be required to pursue petitioner as a transferee to collect

any deficiency that we might determine against INI.    As we

observed in Great Falls Bonding Agency, Inc. v. Commissioner,

supra at 307:

     Dismissal of the instant case for lack of jurisdiction
     will not be the occasion for entry of a decision that
     petitioner [INI] is liable for the determined
     deficiencies. Sec. 7459(d). * * * [Petitioner] will
     thus be free to litigate * * * [his] transferor’s
     liability when * * * [and if his own case is] reached
     for trial.

We shall continue to follow our longstanding rule, under which we

have consistently regarded corporate capacity as a jurisdictional

prerequisite.   See Brannon’s of Shawnee, Inc. v. Commissioner,

supra at 114.   We therefore grant respondent’s motion to dismiss

as to INI for lack of capacity.    Because we lack jurisdiction

over INI, we do not decide INI’s liabilities for tax and

additions to tax.

     To reflect the foregoing,



                                       Decision will be entered

                                  for respondent with respect to

                                  petitioner A. Lee Petersen,

                                  and an order of dismissal will

                                  be issued with respect to

                                  petitioner INI Builders, Inc.
