                        T.C. Memo. 2004-153



                      UNITED STATES TAX COURT



               ROBERT B. KEMP, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 5794-98, 143-00.     Filed June 28, 2004.


     John P. Konvalinka, for petitioner.

     Monica D. Armstrong, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   The issue for decision is whether petitioner

is liable for fraud penalties relating to 1991, 1992, and 1993.

                         FINDINGS OF FACT

     In 1974, petitioner began operating Southeast Trust

Investment Management (Southeast Trust), a sole proprietorship
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registered as an investment adviser with the Securities and

Exchange Commission.   In the mid-1970s, Southeast Trust’s name

was changed to Trust Investment Management (Trust Investment).

As owner and operator of Trust Investment, petitioner managed a

$2 million investment portfolio, including employee benefit

accounts.

     From 1983 through 1993, petitioner, while continuing to

operate Trust Investment, worked as senior vice president for

First Tennessee Investment Management (First Tennessee).    From

1989 through 1993, petitioner deposited a portion of the

management fees he earned from Trust Investment into certificates

of deposit, municipal bonds, and a cash management fund.

     In 1993, First Tennessee terminated petitioner’s employment

for violating bank and corporate policies.   In that year, an FBI

special agent interviewed petitioner relating to petitioner’s

alleged misappropriation of First Tennessee funds (i.e., five

checks totaling approximately $28,000 and made payable to Trust

Investment).

     Petitioner timely filed his 1989 through 1993 Federal income

tax returns.   On the Schedule C, Profit or Loss From Business,

accompanying petitioner’s 1993 return, he deducted, from gross

receipts and sales, $65,586 of returns and allowances.   By letter

dated June 2, 1994, the Internal Revenue Service notified
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petitioner that his 1992 return had been selected for

examination.   On June 13 and July 28, 1994, a revenue agent met

with petitioner relating to the 1992 return.

     On September 15, 1994, petitioner filed 1991, 1992, and 1993

amended returns; reported, on his Schedules C, increased taxable

income of $173,817, $191,595, and $63,628, respectively; and paid

the additional taxes and accrued interest due relating to these

years.   On February 21, 1995, petitioner filed a 1990 amended

return, reported increased Schedule C taxable income of $134,859,

and paid the additional tax and accrued interest due relating to

that year.   On April 8, 1996, petitioner filed a 1989 amended

return, reported increased Schedule C taxable income of $102,506,

and paid the additional tax and accrued interest due relating to

that year.

     In 1996, petitioner was indicted for bank fraud, mail fraud,

money laundering, and, pursuant to section 7206(1),1 willfully

filing false tax returns.   Petitioner was subsequently convicted

of filing false tax returns relating to 1989 through 1992 and

acquitted of bank fraud, mail fraud, and money laundering.   The

conviction was affirmed on appeal.


     1
        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.
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     By notice of deficiency dated December 29, 1997, respondent

determined fraud penalties, pursuant to section 6663, of $44,930

and $16,722 relating to 1992 and 1993, respectively.    On March

27, 1998, petitioner, while residing in Hixson, Tennessee, filed

a petition with this Court relating to 1992 and 1993.

     On October 4, 1999, respondent sent petitioner a second

notice of deficiency in which he determined fraud penalties,

pursuant to section 6663, of $28,407, $31,721, and $41,424

relating to 1989, 1990, and 1991, respectively.   In response,

petitioner, on January 3, 2000, while residing in Hixson,

Tennessee, filed a petition with this Court relating to 1991.

Respondent, on July 17, 2000, assessed the fraud penalties

relating to 1989 and 1990.

     On April 19, 2000, the Court granted petitioner’s motion to

consolidate the two cases.

                             OPINION

     Respondent contends, pursuant to section 6663, that

petitioner, on his 1991, 1992, and 1993 returns, underreported

income with the intent to evade tax.   Petitioner contends that he

did not intend to evade tax and believed he was entitled to defer

a portion of the underreported income.

     Petitioner’s conviction, pursuant to section 7206(1), is a

badge of fraud and estops him from contesting that he
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intentionally filed false 1991 and 1992 returns and that an

underpayment exists for these years.   Bradford v. Commissioner,

796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601;

Considine v. United States, 683 F.2d 1285, 1287 (9th Cir. 1982);

Wright v. Commissioner, 84 T.C. 636, 643-644 (1985).     Respondent

cannot rely solely on petitioner’s conviction to sustain his

burden of establishing fraud but must clearly and convincingly

prove that petitioner intended to evade tax.    Sec. 7454(a); Rule

142(b); Parks v. Commissioner, 94 T.C. 654, 660-661 (1990);

Wright v. Commissioner, supra at 643-644.    This burden is met

where respondent proves conduct intended to conceal, mislead, or

otherwise prevent the collection of tax.     Parks v. Commissioner,

supra at 661.   Fraud is not to be imputed or presumed but rather

must be established by some independent evidence.     Beaver v.

Commissioner, 55 T.C. 85, 92 (1970).

     Respondent has failed to meet his burden.    Respondent did

not present any witnesses or introduce sufficient evidence to

establish that any portion of the underreported income is

attributable to fraud.   See sec. 6663(b); Petzoldt v.

Commissioner, 92 T.C. 661, 698-699 (1989).     Instead, respondent

focused on petitioner’s criminal indictment for bank fraud, for

which petitioner had been acquitted, and income petitioner
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asserted he set aside in an attempt to satisfy reserve

requirements relating to employee benefit accounts he managed.

     Respondent questioned petitioner about whether he had

embezzled from First Tennessee five checks made payable to Trust

Investment (i.e., representing a relatively small portion of the

underreported income in issue).   Petitioner failed to report the

proceeds from these checks, but respondent did not establish that

petitioner embezzled these amounts or intended to evade tax.

     Respondent further challenged petitioner’s assertion that a

portion of the underreported income was attributable to funds

petitioner set aside (i.e., into certificates of deposit,

municipal bonds, and a cash management fund) in an attempt to

satisfy reserve requirements.   Petitioner acknowledged that he

did not formally set up a reserve account but established that he

believed he could defer income on amounts set aside and

subsequently report these amounts as income when they were no

longer needed to meet reserve requirements.   Petitioner’s

contention, regarding the reserve account, related to only a

portion of petitioner’s underreported income (e.g., petitioner

deducted, as returns and allowances, on his returns only the

amounts set aside in 1993).   Inexplicably, respondent failed to

address (i.e., did not question petitioner or his accountant and
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did not address on brief) the remaining amount of underreported

income.

     The typical indicia of an intent to evade tax are not

present.   Petitioner maintained adequate records, made all

pertinent information available to the Internal Revenue Service,

and cooperated with the Internal Revenue Service’s investigation.

In short, petitioner understated his income, but respondent has

not established that petitioner intended to evade tax.

Accordingly, we reject respondent’s determinations.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,



                                              Decisions will be entered

                                         for petitioner.
