                       T.C. Memo. 1999-48



                     UNITED STATES TAX COURT



                SKIRVIN G. JOHNSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19196-92.                 Filed February 22, 1999.



     Skirvin G. Johnson, pro se.

     James E. Archie, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Chief Judge:    Respondent determined deficiencies,

additions to tax, and penalties with respect to petitioner's

Federal income tax liabilities as follows:
                                    - 2 -


                                    Additions to Tax and Penalties
                               Sec.        Sec.        Sec.      Sec.
       Year     Deficiency   6651(f)    6653(b)(1)   6663(a)   6661(a)
       1988      $57,695      --         $43,271       --      $14,424
       1989       50,454       --           --       $37,841     --
       1990       19,458     $12,051        --         --        --

     Respondent conceded that there was neither a deficiency in

income tax nor additions to tax due from petitioner for 1988.

After concessions for 1989 and 1990, the issues remaining for

decision are:     (1) Whether petitioner's gross income for 1989

includes a $94,343.16 payment to Johnson McGee Companies, NA,

Inc. (Johnson McGee), and $698.23 in interest earned by

petitioner; (2) if so, whether the underpayment of tax

attributable to those amounts is attributable to fraud; and

(3) whether petitioner's gross income for 1990 includes $26,115

in wages.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.               All

Rule references are to the Tax Court Rules of Practice and

Procedure.

                             FINDINGS OF FACT

     Some of the facts have been stipulated, and the facts set

forth in the stipulation are incorporated in our findings by this

reference.    Skirvin G. Johnson (petitioner) resided in Phoenix,

Arizona, at the time the petition in this case was filed.                He has

a bachelor of business administration degree in marketing and
                               - 3 -


small business management from the University of Texas at

Arlington and a master of business administration degree, with an

emphasis in finance, from the University of Dallas at Irving,

Texas.

     During the first part of 1988, petitioner was employed by

the City of Phoenix, Arizona, as an economic development

specialist in the Phoenix Economic Development Department.    In

this capacity, petitioner oversaw the minority-owned and women-

owned Small Business Enterprise Revolving Loan Program (revolving

loan program) that was charged with promoting minority-owned and

women-owned businesses and with creating and retaining jobs in

Phoenix.   Loans made by the revolving loan program were funded

with Federal Housing and Urban Development (HUD) moneys.

     In March 1988, a loan in the amount of $42,000 was made from

the revolving loan program to Cortez Distribution (Cortez).    The

loan application for this loan was allegedly signed by Everett

Rand (Rand), the general manager of Cortez.   In April 1988, a

similar loan in the amount of $58,000 was made from the revolving

loan program to American Products Company (American Products).

Petitioner was the loan officer for each of these loans and

managed the loan process in both cases.   Hereinafter, the Cortez

and American Products loans will be collectively referred to as

the Phoenix loans.
                                 - 4 -


     When petitioner discontinued his employment with the City of

Phoenix in May 1988, Cindy Lizarraga, an employee of the City of

Phoenix, was given the responsibility of servicing and

maintaining the Phoenix loans.    Upon discovering that the files

for these two loans were incomplete, she took the necessary steps

to obtain copies of the missing documentation.   Ultimately, she

was unable to procure records that established whether the

proceeds of the Phoenix loans were actually used for their

intended purpose.

     In July 1988, petitioner went to work as the assistant

director for business finance in the Economic Development

Division of the City of Austin, Texas (Austin Economic

Development Division).   In this capacity, he had the authority to

generate and service loans primarily funded by HUD.   On

October 9, 1989, the Austin Economic Development Division issued

a check in the amount of $250,000 to fund a loan granted to

Hilary Richard Wright Industries (HRW).   Petitioner managed the

HRW loan, and the loan proceeds were deposited into an account at

Bank of the Hills, the repository and loan servicing agent for

the HRW loan.

     On October 11, 1989, petitioner, in his official capacity

with the City of Austin, directed Bank of the Hills to issue a

cashier's check in the amount of $86,045.11 to Dunn's

International Group (Dunn) to purchase woodworking equipment for
                                - 5 -


HRW.    Petitioner also directed that a cashier's check in the

amount of $94,343.16 be issued to Johnson McGee to purchase

lumber for HRW.    The cashier's checks, dated October 12, 1989,

were forwarded to petitioner's office in accordance with his

request.

       The check issued to Dunn was endorsed in the name of Wendell

Wilson (Wilson).    The check to Johnson McGee was later endorsed

by petitioner and deposited into the Johnson McGee checking

account at Petra International Banking Corporation (Petra).      This

account was opened by petitioner, and his name was the only name

appearing on the signature card.    During 1989, the funds in the

Johnson McGee account earned $698.23 in interest.

       In October 1989, the Phoenix Economic Development Department

received a letter and cashier's check from Dunn, repaying the

full amount of the Phoenix loan to American Products.    The letter

indicated that Dunn had acquired American Products' assets in a

recent purchase and was repaying the full amount of the $58,000

loan, including interest.    With respect to the Cortez loan, the

City of Phoenix received a cashier's check from Johnson McGee in

full repayment of the loan on or about February 14, 1990.

Following these payments, the Phoenix Economic Development

Department attempted to verify that the loan proceeds were used

for their intended purpose.    Their attempts, however, were

unsuccessful.
                                 - 6 -


     Because the Phoenix Economic Development Department was

unable to contact the principals of Cortez and American Products

or to secure documentation regarding the use of the Phoenix

loans, Detective Ronald Sterrett (Sterrett) of the Phoenix Police

Department Crime Bureau was assigned to investigate the

activities of petitioner regarding the Phoenix loans.     The

investigation resulted in petitioner's arrest on May 16, 1990,

and his indictment on May 23, 1990.

     Sterrett interviewed petitioner following the arrest, and

petitioner made several admissions regarding his connection with

the Phoenix loans and Johnson McGee.     First, petitioner admitted

to filling out forms on behalf of Cortez for the loan.     He also

admitted to forging the signature of Rand on documents submitted

to the revolving loan program as well as to owning a concessions

business he had purchased from Rand.     In addition, petitioner

paid off the Cortez loan using funds from Johnson McGee, a

company he admitted to owning.    With respect to the American

Products loan, petitioner admitted to filling out a check on

behalf of American Products for $50,500, endorsing it, and

depositing it into his personal bank account.

     On his 1988 Federal income tax return, petitioner reported

$40,871 in gross income, and, on his 1989 Federal income tax

return, he reported $47,748 in gross income.     Petitioner did not,

however, report as income any amount relating to the Phoenix
                                - 7 -


loans or the Johnson McGee payment in either year.    In 1990,

petitioner earned $26,115 in wages from the City of Austin but

failed to file a Federal income tax return reporting that income.

       Sterrett's investigation never identified a business named

American Products, and there was only limited evidence that there

was a business operating as Cortez.     The indictment of petitioner

regarding these transactions, however, was later dismissed.

       Following petitioner's arrest and indictment for the Phoenix

loans, Larry Anderson (Anderson), a senior auditor with the City

of Austin, conducted an investigation of loans made by the Austin

Economic Development Division that were managed by petitioner.

Anderson's investigation primarily focused on the HRW loan.

During Anderson's investigation, he discovered a computer

diskette in petitioner's office that contained copies of letters

regarding Cortez, bearing a signature line for Rand.    The

diskette also contained documents regarding HRW and the HRW loan

request, identifying Wilson as one of the primary officers of

HRW.    Wilson was purportedly also related to Dunn, the company

that defrayed the American Products loan.    Additional letters

that were saved to the diskette contained a signature line for

petitioner.

       It would have been improper for petitioner to have a

personal interest in any business that the loan staff was

managing.    Anderson was never able to locate businesses operating
                                 - 8 -


as HRW, Dunn, or Johnson McGee.    His investigation ultimately

revealed that there was no HRW business, business assets, or

security for the HRW loan.

     Accordingly, the HRW loan matter was turned over to the

Austin Police.   During the police investigation, the individuals

listed on the HRW loan documents as officers of HRW denied any

connection with HRW.    The police investigation culminated in

January 1992 with petitioner's indictment on Federal

embezzlement, theft, and fraud charges.

     Petitioner was convicted on three counts of theft and money

laundering by a jury verdict.     United States v. Johnson, No. A-

90-Cr-191 (W.D. Tex. 1992).    Petitioner appealed the convictions

to the United States Court of Appeals for the Fifth Circuit,

which remanded the case to the District Court.     United States v.

Johnson, 16 F.3d 69 (5th Cir. 1994), modified 18 F.3d 293 (5th

Cir. 1994).   After a hearing, the District Court ordered a new

trial, but, on appeal, the Fifth Circuit Court of Appeals

reversed.   United States v. Johnson, 95 F.3d 1149 (5th Cir.

1996), cert. denied, 117 S. Ct. 622 (1996).    Petitioner filed an

appeal with the Court of Appeals for the Fifth Circuit regarding

the recent denial of his postconviction relief request.    That

appeal is still pending.

                       ULTIMATE FINDINGS OF FACT
                              - 9 -


     Petitioner received income in 1989 in the amounts of

$94,343.16 and $698.23 in interest earned on those funds and

failed to report those amounts on his Federal income tax return

for 1989.

     Petitioner underpaid his Federal income tax for 1989, and

the underpayment was due to fraud.

                             OPINION

     Respondent determined that petitioner had unreported income

from funds he embezzled in 1989.   With respect to the deficiency,

the burden is upon petitioner to prove that respondent's

determination of unreported income is incorrect.   Nicholas v.

Commissioner, 70 T.C. 1057, 1064 (1978).

     Petitioner has not satisfied this burden.   He testified that

Johnson McGee was owned by his uncle, who was relocating the

Johnson McGee business to the United States from Liberia, and

petitioner indicated that the only reason his name was on the

Johnson McGee account was because he was assisting his uncle.

Petitioner also testified that his uncle was killed attempting to

escape from Liberia and that petitioner continued to control the

Johnson McGee bank account as the executor of his uncle's estate.

This testimony, however, is inconsistent with petitioner's

earlier admission to Sterrett that he was the owner of Johnson

McGee and that he used the funds in the Johnson McGee account to

repay a loan he illegally procured in 1988.   Petitioner has
                                - 10 -


offered no evidence to corroborate his testimony, and, without

more, petitioner's explanation is implausible and not credible.

     Respondent also determined that petitioner's underpayment of

income tax for 1989 was due to fraud.    The penalty in the case of

fraud is a civil sanction provided primarily as a safeguard for

the protection of 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).   Respondent has the burden of proving, by clear and

convincing evidence, an underpayment for 1989 and that some part

of an underpayment for that year was due to fraud.    Sec. 7454(a);

Rule 142(b).   If respondent establishes that any portion of the

underpayment is attributable to fraud, the entire underpayment is

treated as attributable to fraud and subjected to a 75-percent

penalty unless the taxpayer establishes that some part of the

underpayment is not attributable to fraud.    Sec. 6663(b).

Respondent's burden is met if it is shown that the taxpayer

intended to conceal, mislead, or otherwise prevent the collection

of taxes.   Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).

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

upon consideration of the entire record.     King's Court Mobile

Home Park, Inc. v. Commissioner, 98 T.C. 511, 516 (1992).      Fraud

will never be presumed.     Beaver v. Commissioner, 55 T.C. 85, 92

(1970).   Fraud may, however, be proved by circumstantial evidence
                               - 11 -


and inferences drawn from the facts because direct proof of a

taxpayer's intent is rarely available.    Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992).    The taxpayer's entire

course of conduct may establish the requisite fraudulent intent.

Stone v. Commissioner, 56 T.C. 213, 223-224 (1971).

     Under section 61, gross income is defined as "all income

from whatever source derived".   This includes unlawful earnings.

Accordingly, when a taxpayer acquires embezzlement proceeds,

without the consensual recognition of an obligation to repay and

without restriction as to disposition, he has income that he is

required to report.    James v. United States, 366 U.S. 213, 219

(1961).

     In this case, respondent presented clear and convincing

evidence that petitioner embezzled HUD funds in 1989 and did not

report them on his Federal income tax return.   Respondent's

evidence satisfies the burden of proof independent of

petitioner's failure to meet his burden of proof regarding the

deficiency.    Parks v. Commissioner, 94 T.C. 654, 661 (1990)

(stating that "We must be careful in such cases not to bootstrap

a finding of fraud upon a taxpayer's failure to prove

respondent's deficiency determination erroneous").

     In 1988 and 1989, petitioner received HUD funds from loans

to fictitious entities while serving as the loan officer on those

loans.    With respect to the HRW loan, proceeds of the $94,343.16
                               - 12 -


cashier's check to Johnson McGee were deposited in the Johnson

McGee account at Petra, an account that petitioner admittedly

owned and controlled.   He also admitted to using a portion of

those funds to repay the Cortez loan, a loan he admitted

illegally procuring in 1988.

     There is no evidence of a consensual recognition by

petitioner and the City of Austin, express or implied, that

petitioner was obligated to repay the $94,343.16.   See James v.

United States, supra at 219.   In addition, petitioner possessed

unrestricted control over the disposition of those funds and

earned $698.23 in interest from the Johnson McGee account.    See

Rutkin v. United States, 343 U.S. 130, 137 (1952) (stating that

holder has such control over it when he has the "freedom to

dispose of it at will").   He failed, however, to report on his

1989 Federal income tax return any amount related to Johnson

McGee.   The underreporting of income resulted in an underpayment

of tax because there is no suggestion of offsetting deductions in

this case.   The amounts repaid by petitioner have been conceded

by respondent as not includable in income.   Cf. United States v.

Rosenthal, 470 F.2d 837, 842 (2d Cir. 1972) (repayments did not

negate fraud but were designed to keep scheme afloat).

     Fraudulent intent may be inferred from various kinds of

circumstantial evidence or "badges of fraud", including an

understatement of income, inadequate records, implausible or
                               - 13 -


inconsistent explanations of behavior, concealment of income or

assets, filing false documents, engaging in illegal activities,

and attempting to conceal illegal activities.    Niedringhaus v.

Commissioner, supra at 211.   The sophistication, education, and

intelligence of petitioner are also relevant in determining

fraudulent intent.   Id.   A willingness to defraud another in a

business transaction may point to a willingness to defraud the

Government.   Solomon v. Commissioner, 732 F.2d 1459, 1462 (6th

Cir. 1984), affg. per curiam T.C. Memo. 1982-603.   Although no

single factor is necessarily sufficient to establish fraud, the

existence of several indicia is persuasive circumstantial

evidence of fraud.   Beaver v. Commissioner, supra at 93.

     The record in this case is replete with evidence of these

"badges of fraud".   Petitioner was a knowledgeable taxpayer but

understated, in substantial amount, his gross income for 1989.

He embezzled HUD funds and attempted to cloak his activities with

a protracted and integrated course of actions designed to conceal

the embezzlement income.   Specifically, petitioner forged

numerous documents, received embezzled funds, and embezzled more

money to repay the previous embezzlement.   Petitioner disguised

his participation in HUD loans by using false identities,

including those of Rand, American Products, Cortez, Johnson

McGee, and HRW.   Moreover, petitioner's explanation of the

transactions is implausible, and his testimony regarding his
                              - 14 -


uncle is unsupported by corroborating evidence and not worthy of

belief.

     "[C]oncealment of assets or covering up sources of income,

handling one's affairs to avoid making the records usual in

transactions of the kind, and any conduct, the likely effect of

which would be to mislead or conceal" constitute a willful

attempt to evade tax.   Spies v. United States, 317 U.S. 492, 499

(1943).   Accordingly, respondent has proven by clear and

convincing evidence that petitioner is liable for the penalty for

fraud, and petitioner has not proven that any part of the

underpayment is not attributable to fraud.

     Respondent also determined a deficiency with respect to the

$26,115 that petitioner earned in wages in 1990.   Petitioner

offered no proof at trial to disprove respondent's determination.

Accordingly, petitioner has failed to prove respondent's

determinations erroneous with respect to the $26,115 that he

earned in wages in 1990.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
