                          T.C. Memo. 1999-219



                        UNITED STATES TAX COURT



      BETTY JUNE DYKSTRA AND PIETER DYKSTRA, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19438-97.               Filed July 2, 1999.



     Betty June Dykstra and Pieter Dykstra, pro sese.

     Allan D. Hill, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:     Respondent determined the following

deficiencies in, penalties on, and additions to petitioners'

Federal income taxes:
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       Betty June Dykstra:

                           Penalties                       Additions to Tax
Year   Deficiency   Sec. 6663 Sec. 6662(a)   Sec. 6651(a)(1)   Sec. 6651(f)   Sec. 6654
1994            *     $5,355        $808          $2,865             $0            $0
1995     33,110            0           0               0         24,372         1,704
*
  Respondent determined a deficiency of $11,684 against both Betty June and Pieter
Dykstra.

       Pieter Dykstra:

                               Penalty                 Additions to Tax
Year      Deficiency        Sec. 6662(a)         Sec. 6651(a)(1)   Sec. 6654
1994             *              $808                 $2,865              $0
1995        25,621                 0                  6,311           1,242
* Respondent determined a deficiency of $11,684 against both
Betty June and Pieter Dykstra.

       Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

       After concessions, the issues for our decision are:                      (1)

Whether petitioners had unreported income from Conoco, Inc.

(Conoco), during 1994 and 1995; (2) whether petitioners were

entitled to their claimed itemized deductions of $17,872 in 1994;

(3) whether petitioner Betty June Dykstra (Mrs. Dykstra) is

liable for the fraud penalty pursuant to section 6663(b) for 1994

and an addition to tax for fraudulently failing to file a Federal

income tax return pursuant to section 6651(f) for 1995; (4)

whether petitioners are liable for the accuracy-related penalty

for negligence pursuant to section 6662(a) for 1994; (5) whether

petitioners are liable for an addition to tax pursuant to section
                                - 3 -


6651(a)(1) for 1994 and 1995;1 and (6) whether petitioners are

liable for an addition to tax for failing to make estimated

Federal income tax payments pursuant to section 6654 for 1995.

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts, supplemental stipulation of facts, and

attached exhibits are incorporated herein by this reference.     At

the time they filed their petition, petitioners resided in

Tulare, California.

     Petitioners filed their 1994 Federal income tax return

(return) on September 11, 1995.    Petitioners did not file a

return for 1995.

Payments from Conoco

     Prior to and during the years in issue, petitioner Pieter

Dykstra (Mr. Dykstra) held an interest in an oil lease from

Conoco.   During this time, Mr. Dykstra was obligated to pay

monthly working costs to Lauck and Associates (Lauck), the

operator of the well.   When Mr. Dykstra failed to make such

payments, Lauck obtained a mechanic's lien against Mr. Dykstra's

interest and notified Conoco that all future royalty payments

should be made to Lauck.



     1
       For 1995, respondent asserted an addition to tax pursuant
to sec. 6651(a)(1) against Mrs. Dykstra in the alternative to an
addition to tax pursuant to sec. 6651(f).
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     Beginning in 1988, Conoco sent Mr. Dykstra's royalty

payments to Lauck in satisfaction of the mechanic's lien.

Despite repeated requests from Mr. Dykstra, Lauck never accounted

to Mr. Dykstra for the amounts received from Conoco.

Embezzled Funds

     Mrs. Dykstra has a high school education.    From March 1,

1994, to December 20, 1995, Mrs. Dykstra was employed as a

bookkeeper and office manager by the Robins Group, Inc. (Robins).

During 1994 and 1995, Mrs. Dykstra embezzled a total of $24,9072

and $53,613, respectively, from Robins.

     Initially, she used the money she took to help pay for trips

to visit her gravely ill grandchild who lived out-of-state.

During this time, Mr. Dykstra was unemployed and suffering from

alcoholism and a gambling addiction.    Later, she used the money

to help her daughter and grandchild with their expenses and to

pay her and Mr. Dykstra's living expenses.

     Mrs. Dykstra initially believed that she would pay Robins

back.    She anticipated receiving a salary increase when promoted

to office manager and a large yearend bonus.    In late December

1995, Mrs. Dykstra realized that she would never be able to repay

the moneys taken, and she confessed to numerous officers of

Robins.    On June 5, 1996, Mrs. Dykstra pleaded guilty to one


     2
       For convenience, all numbers have been rounded to the
nearest dollar.
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count of grand theft under California Penal Code section

487(b)(3)(West 1999).

                                OPINION

The Conoco Payments Are Income

     Respondent received Forms 1099 stating that petitioners

earned $2,398 and $2,031 in 1994 and 1995, respectively, from

Conoco.   Respondent determined that these amounts were includable

in petitioners' taxable income.    Petitioners did not report these

amounts on their 1994 return.

     Petitioners argue that these amounts were never received by

them but rather were paid to the well's operator, Lauck, in

satisfaction of a mechanic's lien filed against petitioners'

interest.   Petitioners claim that Lauck kept more than it was

owed from the royalty payments and failed to forward the excess

to petitioners.    Petitioners, therefore, contend that they should

not be taxed on the royalty payments they never received.

     It is well settled that income is taxed to the person who

earns it and enjoys the benefit of it when paid.   See Helvering

v. Horst, 311 U.S. 112, 119 (1940); Corliss v. Bowers, 281 U.S.

376, 378 (1930); cf. Commissioner v. P.G. Lake, Inc., 356 U.S.

260, 267 (1958); Old Colony Trust Co. v. Commissioner, 279 U.S.

716, 729 (1929).   Petitioners do not dispute that royalties were

paid by Conoco to Lauck in satisfaction of a valid mechanic's
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lien filed against their interest and, therefore, were paid for

petitioners' benefit.

     Petitioners' only argument is that Conoco paid Lauck in

excess of the mechanic's lien and that Lauck never remitted the

excess to petitioners.   Petitioners presented no evidence at

trial as to the amount of Lauck's lien.   Additionally,

petitioners failed to establish the exact amounts Lauck received

from Conoco in satisfaction of Lauck's lien.   Petitioners have

failed to prove that respondent's determination is incorrect.3

See Rule 142(a).   Accordingly, we find that petitioners had

unreported income from Conoco of $2,398 and $2,031 in 1994 and

1995, respectively.

Disallowed Itemized Deductions

     In the notice of deficiency, respondent disallowed certain

itemized deductions totaling $17,872 claimed by petitioners on

their 1994 return.


     3
        We note that the U.S. Court of Appeals for the Ninth
Circuit, to which this case is appealable, has held that in order
for the presumption of correctness to attach to the notice of
deficiency in unreported income cases, respondent must come
forward with substantive evidence establishing "some evidentiary
foundation" linking the taxpayer to the income-producing
activity. Weimerskirch v. Commissioner, 596 F.2d 358, 361-362
(9th Cir. 1979), revg. 67 T.C. 672 (1977); see also sec.
6201(d)(as amended). Based on the evidence presented at trial,
including Mr. Dykstra's testimony and documentary evidence, we
conclude that respondent has adequately shown a connection
between Mr. Dykstra and the oil lease. Respondent's
determination, therefore, is entitled to the presumption of
correctness.
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     At trial, petitioners presented no testimony as to the

legitimacy of these claimed itemized deductions.   Further, on

brief, petitioners failed to address their entitlement to these

itemized deductions.   Accordingly, we treat this issue as

conceded by petitioners.    See Petzoldt v. Commissioner, 92 T.C.

661, 683 (1989).

Fraud

     Respondent determined that Mrs. Dykstra was liable for the

fraud penalty pursuant to section 6663(a) for 1994 and an

addition to tax for her fraudulent failure to file a return

pursuant to section 6651(f) for 1995.   Mrs. Dykstra admits that

she embezzled funds from Robins and failed to report the funds on

her 1994 return.   She also admits that she never filed a return

for 1995.   Mrs. Dykstra, however, claims that she did not know

that embezzled funds were taxable; therefore, she did not possess

the requisite fraudulent intent in 1994 or 1995.

     In order to prove fraud and fraudulent failure to file,

respondent must demonstrate by clear and convincing evidence that

Mrs. Dykstra intended to evade taxes believed to be owing by

conduct intended to conceal, mislead, or otherwise prevent the

collection of such taxes.   See Parks v. Commissioner, 94 T.C.

654, 660-661 (1990).   Where a taxpayer claims ignorance of the

law, respondent must negate that claim by clear and convincing
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evidence.    See Cheek v. United States, 498 U.S. 192, 202 (1991);

see also Niedringhaus v. Commissioner, 99 T.C. 202, 217 (1992).

       Respondent has failed to carry the burden of proof.    Mrs.

Dykstra is not a savvy taxpayer or a sophisticated businesswoman.

She admittedly stole money and initially concealed her theft from

her employer.    Mrs. Dykstra's defrauding of her employer,

however, does not automatically lead to the conclusion that she

intended to defraud the Federal Government.

       There is no evidence that Mrs. Dykstra withheld information

from or attempted to mislead respondent during his investigation.

In fact, it appears that once Mrs. Dykstra was informed that

embezzled funds were taxable, she fully admitted to owing the

tax.    She did not maintain two sets of books or attempt to

conceal assets.    At trial, she answered questions freely,

honestly, and without evasion.    Mrs. Dykstra testified that she

did not know that embezzled income was taxable, and we found her

testimony credible.

       While it may be reasonable to conclude that an embezzler is

a type of individual who would understate her income on her

return to avoid paying taxes, we are unable to find on the record

before us any clear and convincing evidence that Mrs. Dykstra

refrained from reporting income which she knew to be taxable.

We, therefore, conclude that Mrs. Dykstra is not liable for the
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fraud penalty pursuant to section 6663(a) or an addition to tax

for fraudulent failure to file pursuant to section 6651(f).

Accuracy-Related Penalty

     In the alternative, respondent determined that petitioners

were liable for the accuracy-related penalty for negligence

pursuant to section 6662(a) for their failure to report the 1994

embezzled income.   Respondent also determined that petitioners

were liable for the accuracy-related penalty for negligence

pursuant to section 6662(a) for their claim of certain itemized

deductions on their 1994 return.

     Section 6662(a) provides for a penalty equal to 20 percent

of the portion of the underpayment which is attributable to

negligence.   See sec. 6662(b)(1).   Negligence is the lack of due

care or failure to do what a reasonable and ordinarily prudent

person would do under the circumstances.   See Neely v.

Commissioner, 85 T.C. 934, 947 (1985).

     Generally, taxpayers are charged with knowledge of the law.

See Niedringhaus v. Commissioner, supra at 222.    While ignorance

of the law is a defense to fraud, it does not always negate

negligence.   See id.   To avoid a negligence penalty, taxpayers

must take reasonable steps to determine the law and apply it.

See id.

     Petitioners bear the burden of proving that respondent's

determination as to the negligence penalty is erroneous.   See
                                - 10 -


Rule 142(a).    Petitioners failed to present evidence

demonstrating that they exercised reasonable care in determining

their tax liability for 1994.    We find that petitioners are

liable for the accuracy-related penalty under section 6662(a) for

1994 for the portion of the underpayment related to their

embezzled income and disallowed itemized deductions.

Failure To File

     Section 6651(a)(1) imposes an addition to tax for failure to

file a return within the date prescribed therefor, unless it is

shown that such failure is due to reasonable cause and not due to

willful neglect.    The amount added to the tax under this section

is 5 percent for each month or fraction thereof during which the

return is late up to a maximum of 25 percent.    See sec.

6651(a)(1).

     Petitioners' 1994 return was received by respondent on

September 11, 1995, and thus was filed on that date (over 4

months late).     See sec. 6072(a); Sanderling, Inc. v.

Commissioner, 67 T.C. 176, 178-179 (1976), affd. in part 571 F.2d

174 (3d Cir. 1978); Pryor v. Commissioner, T.C. Memo. 1994-287;

Grossman v. Commissioner, T.C. Memo. 1986-439.    Petitioners admit

that they never filed a return for 1995.

     In regard to 1994, petitioners assert that their return was

"accepted" by respondent; therefore, they should not be liable

for the addition to tax for failure to file.    Petitioners'
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argument is without merit.   For 1995, petitioners argue that they

were unable to file a return because they were notified that they

were under audit and were in the midst of the appeal process.      We

do not believe that these circumstances demonstrate reasonable

cause for failure to file a return.       We conclude that petitioners

are liable for the additions to tax pursuant to section

6651(a)(1) for 1994 and 1995.

Failure To Pay Estimated Income Tax

     Respondent determined that petitioners were liable for an

addition to tax for their failure to pay estimated Federal income

tax under section 6654(a) in 1995.       This addition to tax is

mandatory in the absence of a showing by petitioners that a

statutory exception applies.    See Grosshandler v. Commissioner,

75 T.C. 1, 20-21 (1980).   Petitioners failed to present any

evidence demonstrating that a statutory exception applies in this

case.   Accordingly, we sustain respondent's determination.

     To reflect the foregoing,

                                             Decision will be entered

                                      under Rule 155.
