                            T.C. Memo. 1997-473



                          UNITED STATES TAX COURT



            WILLIAM W. HOWARD, Petitioner v. COMMISSIONER
                    OF INTERNAL REVENUE, Respondent



       Docket No. 24572-95.                   Filed October 16, 1997.



       William W. Howard, pro se.

       Michael A. Pesavento, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       BEGHE, Judge:     Respondent determined the following

deficiencies in and additions to petitioner's Federal income tax:


                                             Additions to Tax
Year        Deficiency             Sec. 6651(a)(1)     Sec. 6654
1987         $102,525                  $25,631           $5,537
1988           46,332                   11,583            2,964
                               - 2 -


     All section references are to the Internal Revenue Code as

in effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

     The issues for decision are whether, for the years 1987 and

1988, petitioner had unreported embezzlement income, and whether

he is liable for additions to tax for his failures to file income

tax returns and make estimated tax payments.   We hold that

petitioner had unreported embezzlement income, and that he is

liable for the additions to tax.1

                         FINDINGS OF FACT

     We find and incorporate the stipulated facts and exhibits.

Petitioner resided in Lakeland, Florida, at the time he filed his

petition.

     Petitioner is a graduate of Emory University School of Law

and prior to 1987 had practiced law in the State of Florida for

22 years.   In the early 1970's, petitioner became acquainted with

the family of Zelda Willey Putman (Mrs. Putman), who lived in his

neighborhood.   Over the years petitioner became a close friend of

the Putmans; Mrs. Putman's daughters called petitioner "Uncle

Bill".




     1
       Respondent has conceded that petitioner's embezzlement
income for 1988 is slightly less than the amount determined in
the statutory notice of deficiency.
                               - 3 -


     Petitioner drafted Mrs. Putman's will, which left her entire

estate to her three daughters in equal shares.     The will also

named petitioner sole personal representative of Mrs. Putman's

estate.

     On April 20, 1987, Mrs. Putman died in a house fire in

Winter Haven, Florida.   The fair market value of all assets owned

by Mrs. Putman at the time of her death was approximately

$518,000.

     On April 30, 1987, petitioner was appointed by the Circuit

Court of Polk County to serve as the personal representative of

her estate.   On May 1, 1987, petitioner opened an estate trust

account at the Barnett Bank of Polk County in Winter Haven,

Florida, for Mrs. Putman's estate.     Petitioner deposited into

this account the proceeds from the sale of estate assets.

Petitioner was the sole authorized signatory on the estate trust

account.

     Jesse Putman, Mrs. Putman's husband, was not a named

beneficiary of the will, and he relinquished his statutory

elective share in his wife's estate.     However, he was entitled to

receive and retain life insurance and homeowner's insurance

proceeds in the amount of $170,900, less $51,500 to be paid to

the daughters.   Petitioner advised Mr. Putman that marshaling all

assets into a "gross" cash estate would be in the best interest

of the beneficiaries and would simplify computation of the estate

taxes due the Internal Revenue Service.     Mr. Putman agreed and
                               - 4 -


handed over the insurance proceeds to petitioner, which he

deposited into his own personal trust account.

     Petitioner told the Putmans that the estate would be

processed in approximately 6 months to a year, and that in the

interim they could get cash advances as necessary for important

expenses.   From May 1987 to May 1988, the Putmans periodically

requested and received cash advances from petitioner.    In May

1988, petitioner misrepresented to the Putmans that the probate

judge had restricted their allowances to $1,000 each per month

until the estate was settled, which he promised would be any day.

In July 1988, petitioner misrepresented to the Putmans that the

judge had "frozen" the assets of the estate, and that they could

not get any money from it.   On September 15, 1988, petitioner

admitted to the Putmans that he could not disburse the estate

moneys to them.

     Petitioner's deposits from the estate trust account into

three separate bank accounts owned or controlled by him,2 when

netted against payments made to the beneficiaries of the estate,

amounted to $272,425 in 1987, and to $145,547 in 1988.    These are

the amounts respondent has determined, after giving effect to

respondent's concession, see supra note 1, that are included in

petitioner's gross income for these years.




     2
       Only petitioner, and perhaps one of his secretaries, had
signature authority over these three accounts.
                               - 5 -


     The three bank accounts were in the following names:

William Howard P.A. Trust, William Howard P.A., and Heartland

Management.   Petitioner was the sole shareholder, officer, and

director of Heartland Management, a corporation which held title

to real property that was used by petitioner as a personal

residence and did not generate any income during 1987 and 1988.

William Howard P.A. was a Florida professional services

corporation, of which petitioner was the sole shareholder,

officer and director.   Neither petitioner nor William Howard P.A.

nor Heartland Management filed Federal income tax returns for the

years 1987 and 1988.

     During 1987 and 1988, petitioner wrote large checks from

these three accounts for his personal benefit, spending the bulk

of the Putmans' inheritance.   Among other things, petitioner used

estate proceeds of approximately $132,000 to pay down the

mortgage loan on his personal residence, approximately $47,000 to

pay his personal tax obligations, and approximately $25,000 to

settle a lawsuit unrelated to Mrs. Putman's estate.   Petitioner

also made other expenditures, including the construction of a

boathouse and Jacuzzi, as well as paying himself and his

secretaries salaries from the estate proceeds.   All these

expenditures were made without the knowledge and consent of the

Putmans.
                               - 6 -


     The record includes 28 promissory notes in varying amounts

totaling in excess of the amounts of income charged to petitioner

in the statutory notice, dated from June 30, 1987, through

June 10, 1988, with stated interest of 10 percent, "To be paid

at the time the Estate of Zelda Willey Putman is closed", signed

by petitioner in connection with purported loans to petitioner

from the estate.   Petitioner signed the notes and made the

purported loans to himself without the knowledge or consent

of any of the beneficiaries of the Putman estate.   Petitioner

pledged no collateral to secure any of the alleged loans or any

of the other payments he made to himself from the estate.

     On September 13, 1989, following pleas of nolo contendere,

petitioner was convicted on three counts of grand theft in the

Circuit Court of Polk County, Florida.   In addition to receiving

a prison sentence, petitioner was ordered to pay restitution in

the amount of $516,091 to the estate of Mrs. Putman and $48,978

to Mr. Putman.   In compliance with the judgment and order of

probation, petitioner for a period of 5 years has made timely

monthly payments in the amount of $230 per month toward

restitution to the Putman estate.   In 1990, the Circuit Court of

Polk County entered a civil judgment against petitioner in favor

of each of the Putmans individually in an aggregate amount,

including treble damages, substantially in excess of the Circuit

Court's restitution order in the criminal proceeding, with

interest at 12 percent from July 1, 1988.   In 1990, Petitioner
                               - 7 -


was disbarred by the Florida Supreme Court, on the complaint of

the Florida bar and an uncontested referee's report, for his

misconduct in handling the Putman estate.

                              OPINION

     The primary issue for decision is whether petitioner's

appropriations of estate moneys constitute income from

embezzlement or whether they are loan proceeds.3   To the extent

petitioner embezzled money from the estate, he has income for

those years under section 61(a).   It is well established that

gross income under section 61 includes income earned from illegal

activity, such as the proceeds of embezzlement.    James v. United

States, 366 U.S. 213, 219 (1961); Collins v. Commissioner, T.C.

Memo. 1992-478, affd. 3 F.3d 625 (2d Cir. 1993).

     Petitioner maintains that amounts he appropriated from the

Putman estate are loans and are not proceeds of embezzlement.

He proffers 28 promissory notes in support.   We are entirely

unpersuaded.   Whether the transactions between petitioner and the

estate were loans depends ultimately on whether the beneficiaries


     3
       Respondent does not argue that petitioner is precluded by
the judgments in the criminal, civil, or disciplinary proceedings
against him from arguing that the amounts appropriated by him
should not be included in his gross income. Petitioner does not
argue that the amounts paid to Heartland Management and William
Howard P.A. should be excluded from his gross income on the
ground that they were received by persons other than himself.
The stipulated facts and the entire record require the conclusion
that these names, even if they are entities separate from
petitioner, were alter egos of petitioner and that all receipts
received by them during the years in issue must be attributed to
petitioner.
                                - 8 -


of the estate were aware of and consented to the distributions at

the times they were made.   In order for a distribution of estate

funds to be a loan, there must be evidence of a "consensual

recognition, express or implied, of an obligation to repay".

James v. United States, supra at 219; Katz v. Commissioner, T.C.

Memo. 1990-533 (attorney's withdrawal of funds from an estate he

represented were includable in his gross income despite

promissory notes executed by him payable to the estate).

     Petitioner has the burden of proving the facts that would

support his claim and of overcoming the presumption of

correctness of respondent's determination.   Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).    In the present case, this

burden requires petitioner to prove that the beneficiaries of the

estate not only were aware of his withdrawals of estate funds,

but also consented to them.   Because petitioner has stipulated

that the beneficiaries had no knowledge of his withdrawals--a

lack of knowledge corroborated by the testimony of Mr. Putman and

the two daughters who attended the trial--he cannot carry this

burden.

     Petitioner mishandled Mrs. Putman's estate from its

inception.   He lied to the Putmans about the administration of

the estate, and when the estate would be closed, while he was

secretly misappropriating and spending most of their inheritance

for his own personal benefit.   Petitioner took advantage of what
                                - 9 -


the Putmans believed was his close friendship with them, and his

position as an attorney, to steal their inheritance.4

     Petitioner's engaging in the solitary activity of writing up

promissory notes did not create loans between him and the estate.

The promissory notes evidence no more than an inchoate intention

to repay the amounts petitioner withdrew from the estate.   Such

an intention, even if there was one, cannot transform

misappropriations into loans.    Moore v. United States, 412 F.2d

974, 978-980 (5th Cir. 1969).   As the court stated:

     The reasoning of James is that while an embezzler has a
     legal obligation to repay and may intend to repay, his
     legal obligation and intent are not the same as an
     actual agreement between lendor and borrower entailing
     "consensual recognition" of an obligation to repay and
     exact conditions of repayment. * * * The absence of a
     consensual agreement between the party providing the
     money and the party receiving it is fatal to the
     Trustee's contention that the money should be excluded
     from gross income on a loan theory. Therefore, it must
     be treated as income. [Id.; Katz v. Commissioner,
     supra.]

     Petitioner's writing up of promissory notes was insufficient

to create a consensual relationship between him and the

beneficiaries of the estate.    Petitioner's stipulation that the

beneficiaries of the estate were unaware of his withdrawals



     4
       Even if petitioner continues to make the monthly
"restitution" payments of $230 per month for the rest of his
life, these amounts are so small that the monthly payments will
never begin to reduce the principal obligation to any extent. It
is unfortunate for Mrs. Putman's heirs that the obligations that
will be generated by our decision herein may interfere with
petitioner's ability to pay his obligations under the outstanding
criminal and civil judgments.
                              - 10 -


requires the conclusion that no consensual relationship was

formed.   Petitioner's withdrawals constitute embezzlement income

and are not proceeds of loans.5

     Petitioner argues that he needed no consents from the

beneficiaries to his withdrawals of estate proceeds; because he

had "legal title" to the estate assets as personal representative

he was only borrowing from himself.    Petitioner's argument is an

incorrect statement of Florida law:

     The personal representative may hold legal title, but
     does not hold beneficial title to the assets and has
     no right to dispose of estate assets for his own use.
     The estate assets are not the personal representative's
     property, but are held by the personal representative
     for the benefit of the estate and ultimately for
     distribution to the beneficiaries. [State v. Lahurd,
     632 So. 2d 1101, 1103 (Fla. Dist. Ct. App. 1994),
     review denied 639 So. 2d 978 (Fla. 1994)].

In State v. Lahurd, supra, the defendant argued that he could not

be criminally charged with grand theft for converting estate

proceeds, inasmuch as he had legal title to such proceeds, and no

one can steal from himself.   The court clarified the limited

nature of the legal title held by a personal representative,

holding "that a personal representative does take the 'property

of another' when he or she converts estate assets to his or her



     5
       The parties unnecessarily argue over the timing of the
writing up of the promissory notes. Whether they were prepared
contemporaneously with the withdrawals, as petitioner maintains,
or simultaneously in preparation for trial, as respondent
maintains, is irrelevant. In either event, no loans between
petitioner and the estate resulted, inasmuch as the essential
consensual relationship was lacking.
                              - 11 -


own use", id., so that a personal representative can be charged

with grand theft for converting estate assets without the consent

or approval of the estate's beneficiaries, id. at 1101-1103.

     Although Mr. Howard had legal title to the estate assets in

his capacity as personal representative, he had no right to

dispose of the estate assets for his personal use.   Mr. Howard

has stipulated and the record clearly shows that he spent the

money he withdrew from the estate for his personal use.    Under

State v. Lahurd, supra, when a personal representative converts

estate proceeds for personal use, such proceeds are the “property

of another”.   Consequently, Mr. Howard was not merely borrowing

money from himself, and he did need consents from the

beneficiaries to create legitimate loans between the estate and

himself.

     We also hold that petitioner is liable for the additions to

tax under sections 6651(a)(1) and 6654.   If a taxpayer fails to

file a return by the due date and cannot show that the failure is

due to reasonable cause and not willful neglect, then section

6651(a)(1) imposes an addition equal to 5 percent of the

underpayment of tax for each month such failure continues, not to

exceed 25 percent in the aggregate.    Petitioner bears the burden

of proving that his failure to file a timely return was due to

reasonable cause and not willful neglect.    Rule 142(a); United

States v. Boyle, 469 U.S. 241, 245 (1985).    Petitioner did not

file income tax returns for 1987 and 1988.   He has offered no
                              - 12 -


evidence or argument in explanation or mitigation.       Accordingly,

we hold him liable for additions to tax under section 6651(a)(1).

     Section 6654 imposes an addition to tax for failure to pay

estimated income tax.   When there has been a failure to pay

estimated tax, the addition under section 6654 is mandatory and

no inquiry is made as to possible reasonable cause or lack of

willful neglect.   Grimes v. Commissioner, 82 T.C. 235, 237

(1984).   Petitioner also has the burden of proving that he is not

liable for this addition to tax.   Rule 142(a); Habersham-Bey v.

Commissioner, 78 T.C. 304, 319-320 (1982).    Petitioner has failed

to explain why he should not be held liable for the addition.

Accordingly, we hold him liable for the addition to tax under

section 6654 for the years in issue.

     To reflect the foregoing and respondent's concession,


                                            Decision will be entered

                                       under Rule 155.
