                IN THE UNITED STATES COURT OF APPEALS
                          FOR THE FIFTH CIRCUIT



                               No. 96-60157



     GABRIEL GUTIERREZ; CONNIE GUTIERREZ,

                                                  Petitioners-Appellants,

            versus


     COMMISSIONER OF INTERNAL REVENUE,

                                                  Respondent-Appellee.




         Appeal from the United States District Court for the
                      Northern District of Texas
                                 (648-93)


                         December 9, 1996
Before REAVLEY, GARWOOD and BENAVIDES, Circuit Judges.*

PER CURIAM:

     Appellants      Gabriel   Gutierrez    and     wife   Connie   Gutierrez

(taxpayers) appeal the decision of the Tax Court holding that there

were deficiencies in taxpayers' 1986 and 1987 income tax returns.

Taxpayers contend that the three-year statute of limitations bars

collection of the deficiencies because they were not assessed



     *
      Pursuant to Local Rule 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in Local Rule 47.5.4.
within three years after the returns were filed.          Internal Revenue

Code (IRC) § 6501(a).       It is not disputed that the tax for these

years was not assessed within the three-year period provided for in

section 6501(a), but the Tax Court held that taxpayers had waived

the limitations issue.      We disagree, and conclude that the finding

of waiver is without adequate support and constitutes an abuse of

discretion.

     In their petition in the Tax Court, taxpayers specifically

pleaded the three-year statute of limitations with respect to the

1986 and 1987 years.        The Internal Revenue Service (IRS) in its

answer admitted this but pleaded that the fraud exception, IRC §

6501(c)(1), and the provision providing a six-year period, in case

the return omits from gross income an amount properly includable

therein which is in excess of 25% of the amount of gross income

stated in the return, section 6501(e)(1), were applicable.                 In

reply to the IRS’s answer, taxpayers specifically denied the

allegations of fraud and 25% understatement of gross income.

     In the IRS's trial memorandum, it listed as issues, among

others, the amount of" gross receipts" from Gabriel Gutierrez's law

practice which were omitted from the 1986 and 1987 returns and the

amount of taxpayers’ “rental income” which was omitted from the

1986 and 1987 returns, as well as whether Gabriel Gutierrez was

liable for penalties for fraud in connection with the 1986 and 1987

returns.      At   trial,   neither   taxpayers   nor   the   IRS   expressly

addressed the limitations issues.         Contrary to the Tax Court, we

                                      2
are unable to conclude that in these circumstances taxpayers waived

the limitations defense which they had pleaded, and which the

government had joined issue on, it being undisputed that the three-

year period had run, and the government solely relying on the fraud

and 25% understatement of gross income exceptions.                         ". . .

[W]here, as here, the Commissioner seeks to rely on an exception to

the normal three-year statute of limitations, he bears the burden

of proving by a preponderance of the evidence that he is entitled

to invoke that exception."      Armes v. C.I.R., 448 F.2d 972, 975 (5th

Cir. 1971).       Having pleaded and put the IRS on notice of the

defense    of    limitations,   and       the    three-year      period     having

indisputably expired, taxpayers did not waive this defense by

failing to more specifically or expressly raise it. If there was

any waiver, it was by the IRS.

     The Tax Court in finding waiver also relied on a stipulation

filed after trial (while the record was held open for certain bank

records) but well before the Tax Court rendered its decision on the

merits.    This stipulation specified the amount of deficiencies in

tax for the years 1985, 1986, 1987, and 1988.                     Of course, a

deficiency is not inconsistent with collection of the tax being

barred    by    limitations.    The   Tax       Court   seized   on   the    words

"petitioners . . . are liable for" in the stipulation.                    However,

taxpayers alleged and submitted a supporting affidavit before the

Tax Court that this was not intended to waive their limitations



                                      3
defense, and was not the result of any sort of compromise with the

IRS in respect to that defense, but was merely intended to specify

the agreed amount of the deficiency; and the IRS in response did

not allege to the contrary before the Tax Court.          Nor did the IRS

take the position below that it in any way relied to its detriment

on that stipulation in respect to the matter of limitations.             We

also note that taxpayers appeared pro se before the Tax Court and

that although taxpayer Gabriel Gutierrez is an attorney, he is not

a tax attorney.

     The Tax Court found that the IRS had not established fraud in

respect to the years 1986 and 1987.         Nor does the evidence before

the Tax Court suffice to establish an understatement of gross

income in excess of 25% of the amount of gross income shown on the

returns for those years.       See Armes at 974-975.

     Accordingly, the judgment of the Tax Court is reversed, and

the cause is remanded to the Tax Court with instructions to enter

judgment   that   collection     of   the   1986   and   1987   income   tax

deficiencies (and any additions to tax or interest for those years)

is barred by limitations.         The judgment of the Tax Court is

otherwise affirmed.

                                               REVERSED and REMANDED




                                      4
