                        T.C. Memo. 2001-232



                      UNITED STATES TAX COURT



                RICHARD P. CONSOLE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14972-97.                  Filed September 5, 2001.


     Richard P. Console, pro se.

     Steven W. Ianacone, for respondent.



                        MEMORANDUM OPINION


     LARO, Judge:   Respondent determined the following

deficiencies, additions to tax, and accuracy-related penalty with

respect to petitioner’s Federal income taxes:
                                             - 2 -
                                                                          Accuracy-
Related
                                        Additions to Tax                      Penalty
    Year   Deficiency   Sec. 6653(b)(1)(A) Sec. 6661(a)    Sec. 6653(b)      Sec. 6663
                             1
    1986    $104,596             $78,447         $26,149       ––-               ---
                             1
    1987      56,197              42,148          14,049       —–-               ---
    1988      50,951               —--            12,737     $38,213             ---
    1989      64,805               ---             ---         ---             $48,604
    1992       8,130               —--             —--         —--               ---

             1
               Additionally, sec. 6653(b)(1)(B) imposes an addition of 50
      percent of the interest due on the deficiency.

      Following a trial at which neither party presented any

substantive evidence relating to respondent’s determinations, we

must decide whether petitioner is liable for those amounts.                           We

hold he is.     Section references are to the Internal Revenue Code

in effect for the subject years, and Rule references are to the

Tax Court Rules of Practice and Procedure.                 Petitioner resided in

New Jersey when his petition was filed.

                                           Background

      On November 21, 2000, respondent moved the Court under Rule

91(f) to issue an order directing petitioner to show cause why

proposed facts in evidence should not be accepted as established.

Three days later, the Court granted respondent’s motion and

ordered petitioner to file with the Court by December 8, 2000, a

response under Rule 91(f)(2) showing why the matters set forth in

respondent’s motion papers should not be deemed admitted for

purposes of this case.             After petitioner failed to respond to the

substance of our order, we ordered that the facts and evidence

set forth in respondent’s motion papers be deemed established for

purposes of this case.
                                - 3 -

     Petitioner is considered under Rule 91(f) to have stipulated

the following relevant facts:

          9. During each of the taxable years 1986,    1987,
     1988 and 1989, the petitioner was a shareholder   and
     officer of Console, Wood and Curico, P.C. a law   firm
     incorporated under the laws of the state of New   Jersey.

          10. During the [sic] each of the taxable years
     1986, 1987, 1988 and 1989, the petitioner followed a
     practice of bringing bills for his personal expenses to
     the law office for payment with checks drawn on the
     bank accounts of the law firm.

          11. All checks in payment of these personal bills
     were coded by being marked with the letter “A”.

          12. Checks so coded were entered in the cash
     disbursement journal of the law firm and charged to an
     account labeled “RPC”.

          13. The above practice was elicited from the
     petitioner during his testimony at a court appearance
     where he was on trial for insurance fraud.

          14. Petitioner would meet with his accountant and
     petitioner would decide the nature of the item,
     business or personal, and would direct the accountant
     where to deduct the items determined to [be] business.

          15. All items determined to be personal by the
     petitioner were charged to petitioner as additional
     income and reported on his personal return.

          16. Based on a review of the accountant’s work
     papers, the law firm’s cash disbursement journal, the
     cancelled checks coded with an “A”, discussions with
     the accountant and the court testimony of petitioner,
     there was an excess of personal expenses of petitioner
     paid by the law firm over the amounts reported as
     income by petitioner for the taxable years 1986, 1987,
     1988 and 1989.

          17. Petitioner’s fraudulent omission of specific
     items of income on his income tax returns filed for the
     taxable years 1986, 1987, 1988 and 1989 is a part of a
     four year pattern of intent to evade taxes.
                         - 4 -

     18. The petitioner understated his taxable income
on his income tax returns for the taxable years 1986,
1987, 1988 and 1989, in the amounts of $209,192.00,
$145,966.00, $181,965.00 and $231,448.00, respectively.

     20. The petitioner understated his income tax
liabilities on his income tax returns for the taxable
years 1986, 1987, 1988 and 1989, in the amounts of
$104,596.00, $56,197.00, $50,951.00 and $64,805.00,
respectively.

     21. A part of each deficiency in income tax for
taxable years 1986, 1987, 1988 and 1989, is due to
fraud with intent to evade taxes.

     22. Richard P. Console, the petitioner herein, is
the same person who was the defendant in the criminal
case of United States of America v. Richard P. Console
(District of New Jersey), Case Number 91-42(nhp).

     23. The respondent herein is a party in privity
with the United States of America, the prosecuting
party in the aforesaid criminal case in which the
petitioner herein was the defendant.

     24. The indictment filed on January 10, 1991, in
said criminal case sets forth the following charge
against the defendant, the petitioner herein:

     THE GRAND JURY CHARGES:

                         COUNT ONE

On or about September 8, 1987, in the District of New
Jersey and elsewhere.

               RICHARD P. CONSOLE, Esq.,

the defendant, unlawfully, wilfully and knowingly did
attempt to evade and defeat a large part of the income
tax due and owing by himself to the United States of
America for the calendar year 1986, by preparing and
causing to be prepared, signing and causing to be
signed and filing and causing to be filed with the
Internal Revenue Service, a false and fraudulent 1986
United States Individual Income Tax Return on behalf of
himself, wherein it was stated that his taxable income
for the said calendar year was $145,565.00 and that the
                                - 5 -

     income tax due and owing to the United States of
     America $57,018.00, whereas the defendant then and
     there well knew that his taxable income for the said
     calendar year was approximately $354,756.78 upon which
     taxable income there was then due and owing to the
     United States of America an income tax of approximately
     $161,613.89.

          In violation of Title 26, United States Code,
     Section 7201, and Title 18, United States Code, Section
     2. * * *

          25. The petitioner on August 22, 1995, entered a
     plea of guilty to the charge set forth against him in
     said indictment. * * *

          26. On September 6, 1995, the United States
     District Court entered its judgment pursuant to said
     plea. * * *

          27. Among the issues of fact determined in the
     aforesaid criminal case was whether Richard P. Console,
     the defendant therein, and the petitioner herein, did
     in fact willfully file a false and fraudulent income
     tax return for the taxable year with intent to evade
     and defeat income tax, and whether he did in fact by
     such means understate a part of the income tax due and
     owing by him to United States of America for said year.

          28. During the 1992 tax year, petitioner received
     $0.00 income on his purported Schedule C business and
     listed expenses of $563,871.00 including $554,861.00 in
     attorneys’s fees.

          29. The $554,861.00 in attorney’s fees was paid
     for his criminal defense in the action described in
     paragraphs 22 through 26 above and in a prior criminal
     matter described in paragraph 13 above.

                              Discussion

     We address first whether petitioner is liable for the

deficiencies and additions to tax under section 6661(a) for

substantial understatement.    Respondent’s determination is

presumed correct, and petitioner bears the burden of proving it
                                - 6 -

wrong.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).    Petitioner is deemed to have stipulated that he

understated his income tax liabilities for 1986, 1987, 1988, and

1989 in the amounts shown as deficiencies, and the record

contains no evidence that would support a contrary finding.      Nor

does the record contain any evidence to prove wrong the

deficiency for 1992 or the additions to tax under section

6661(a).    For returns due before January 1, 1990, a taxpayer

whose return contains a substantial understatement of income tax

is liable for an addition to tax under section 6661 equal to 25

percent of the underpayment attributable to the understatement.

Pallottini v. Commissioner, 90 T.C. 498, 500-503 (1988).1

     As to respondent’s determination of these deficiencies and

additions thereto, petitioner relies solely on his argument that

the notice of deficiency is invalid because, he alleges,

respondent impermissibly used grand jury material during the

audit underlying the notice of deficiency.    At trial, petitioner

called two witnesses to attempt to prove this allegation.      The

first witness was a special agent in respondent’s Criminal



     1
       An understatement is substantial if it exceeds the greater
of: (a) 10 percent of the tax required to be reported on the
return or (b) $5,000. Sec. 6661(b)(1)(A)(i) and (ii). An
understatement is reduced to the extent: (1) The position taken
resulting in the understatement was supported by substantial
authority, or (2) the taxpayer adequately disclosed in the
return, or in an attachment, relevant facts relating to his or
her position. Sec. 6661(b)(2)(B)(i) and (ii).
                                 - 7 -

Investigation Division.    He was involved with petitioner’s grand

jury investigation and testified that he had prepared reports and

computations of petitioner’s tax liabilities exclusively for use

in the grand jury proceedings.     He also testified that he was

unaware that any of those reports or computations were used by

respondent in the course of the audit underlying the notice of

deficiency.    The second witness, one of respondent’s revenue

agents, provided no testimony that would support petitioner’s

allegation.

     On the record before us, we are unpersuaded that respondent

relied on any grand jury material in the formulation of the

notice of deficiency.     We hold that the notice of deficiency is

valid.    Accordingly, we sustain respondent’s determination as to

the deficiencies and the additions to tax under section 6661(a).

     We turn next to respondent’s determination that petitioner

is liable for the additions to tax for fraud under section

6653(b) and an accuracy-related penalty for fraud under section

6663.    Respondent must prove this determination by clear and

convincing evidence.    Sec. 7454(a); Rule 142(b); Castillo v.

Commissioner, 84 T.C. 405, 408 (1985); Rowlee v. Commissioner, 80

T.C. 1111, 1113 (1983).    An addition to tax (or accuracy-related

penalty) for 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
                                - 8 -

resulting from the taxpayer's fraud.”    Helvering v. Mitchell, 303

U.S. 391, 401 (1938).

     Fraud denotes intentional wrongdoing on the part of the

taxpayer with the specific purpose of evading a tax known or

believed to be owing.    Petzoldt v. Commissioner, 92 T.C. 661, 698

(1989).    Fraud is shown by proof that the taxpayer intended to

conceal, mislead, or otherwise prevent the collection of his or

her taxes and that there is an underpayment of tax.    Spies v.

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

States, 398 F.2d 1002, 1005 (3d Cir. 1968); Webb v. Commissioner,

394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81;

Rowlee v. Commissioner, supra at 1123.    Thus, in order to sustain

his burden as to fraud, respondent must prove that:    (1)

Petitioner underpaid his taxes for the relevant years, and (2)

some part of each underpayment was due to fraud.2

     It is well settled in this Court that the Commissioner may

establish fraud by relying upon matters deemed admitted under

Rule 90.    Marshall v. Commissioner, 85 T.C. 267 (1985); Morrison

v. Commissioner, 81 T.C. 644, 651 (1983); Doncaster v.

Commissioner, 77 T.C. 334, 336 (1981).    The Commissioner may also

establish fraud by relying on facts deemed to be stipulated under


     2
      If respondent establishes that some part of the
underpayment for a year is due to fraud, all of the underpayment
is deemed attributable to fraud unless petitioner proves
otherwise. See sec. 6653(b)(2), as in effect for 1986 through
1988; sec. 6663(b), as in effect for 1989.
                                - 9 -

Rule 91(f).    Ambroselli v. Commissioner, T.C. Memo. 1999-158.     On

the basis of our review of the record, we conclude that

respondent has clearly and convincingly proven both prongs of the

two-part test for fraud.   Petitioner is deemed under Rule 91(f)

to have stipulated that “a part of each deficiency for 1986,

1987, 1988, and 1989, was due to fraud with the intent to evade

taxes”.    As to 1986, petitioner is also deemed to have stipulated

that he pled guilty to a violation of section 7201.    Petitioner’s

conviction of criminal tax evasion for 1986 under section 7201

collaterally estops him from denying that his underpayment of

income tax for 1986 was due to fraud for purposes of section

6653(b).    See, e.g., Johnson v. Sawyer, 47 F.3d 716, 722 (5th

Cir. 1995); Gray v. Commissioner, 708 F.2d 243 (6th Cir. 1983),

affg. T.C. Memo. 1981-1; Castillo v. Commissioner, supra at 409-

410; Brooks v. Commissioner, 82 T.C. 413, 431 (1984), affd.

without published opinion 772 F.2d 910 (9th Cir. 1985); Amos v.

Commissioner, 43 T.C. 50 (1964), affd. 360 F.2d 358 (4th Cir.

1965).    We sustain respondent’s determinations of the additions

to tax and the accuracy-related penalty for fraud.

                                          Decision will be entered

                                     for respondent.
