                               T.C. Memo. 1995-487



                             UNITED STATES TAX COURT



           JACK R. PREWITT AND SHELLEY PREWITT, Petitioners v.
               COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 3665-92.               Filed October 10, 1995.



       Jack R. Prewitt and Shelley Prewitt, pro sese.

       Howard P. Levine, for respondent.



                     MEMORANDUM FINDINGS OF FACT AND OPINION

       GERBER, Judge:        Respondent determined deficiencies in and

additions to Federal income tax for petitioners' 1980 through

1983 taxable years as follows:

                                      Additions to Tax
                            Sec.        Sec.         Sec.        Sec.
Year       Deficiency      6653(b)   6653(b)(1)   6653(b)(2)     6661

1980        $5,393       $3,745.50      ---            ---        ---
1981         3,235        1,617.50      ---            ---        ---
                                                        1
1982        10,622           ---     $6,879.50                 $2,655.50
                                                        1
1983        91,531           ---     45,765.50                 22,882.75
       1
           50 percent of the interest due on the deficiency.
                                  - 2 -

The 1980 through 1982 deficiencies are attributable solely to

respondent's determination that no investment tax or business

energy credits are allowable for the 1983 year, and hence, none

are available to carry back to 1980 through 1982.           The issues

remaining for our consideration are:        (1) Whether petitioners are

entitled to deduct various expenses paid by checks drawn on the

account of petitioner's S corporation; (2) whether $90,000 of

income received by petitioner in 1982 was repaid to a related

corporation during 1983, and if any amount was repaid, whether it

results in a deduction for petitioners; (3) whether petitioners

are liable for additions to tax for fraud under section 6653(b);1

and (4) whether the periods for assessment of income taxes had

expired before the notice of deficiency was issued.

                          FINDINGS OF FACT2

     Petitioners resided in St. Petersburg, Florida, at the time

their petition was filed.3   Petitioners filed joint Federal

income tax returns and amended returns on the following dates:

     Year      Original   Filed           Amended   Filed
     1980      Mar. 25,   1983            Dec. 4,   1985
     1981      Mar. 25,   1983            Dec. 4,   1985
     1982      Mar. 10,   1984            Dec. 4,   1985
     1983      June 23,   1984            Dec. 4,   1985


     1
       Section references are to the Internal Revenue Code in
effect for the taxable years under consideration. Rule
references are to this Court's Rules of Practice and Procedure.
     2
       The parties' stipulation of facts and the attached
exhibits are incorporated by this reference.
     3
       Jack R. Prewitt maintained his residence in St.
Petersburg, Florida, but at the time the petition was filed, he
was incarcerated in the Federal Prison Camp located on Tyndall
Air Force Base, which is situated in the State of Florida.
                               - 3 -

The amended returns for 1980 through 1982 claimed refunds of tax

attributable to the carryback of investment tax and business

energy credits from the 1983 taxable year.   The 1983 amended

return sought a refund of tax based on claims to deductions for

management fees and investment tax and business energy credits in

the amount of $11,500 each.   Petitioners also amended their 1979

return on December 4, 1985, to "remove" investment tax and

business energy credits that had originally been carried back

from the 1982 taxable year.

     Jack R. Prewitt (petitioner) took courses at Purdue

University's school of estate planning and is knowledgeable in

tax matters.   Around 1978, petitioner purchased, for $25,000, an

insurance agency named "U.S. Estate Services, Inc." (Estate) from

his partner, Norbert Roy (Roy).   Roy was petitioner's tutor in an

estate planning business, in which life insurance was used to

fund the payment of estate tax.   Petitioner focused his business

activity in the area of estate planning for farm owners.   He

advertised in magazines oriented to farming, obtained leads, and

then proceeded to sell insurance designed to pay the estate tax

on farms (illiquid assets).   His business expanded to the point

where eight or nine planners (salespeople) were involved in the

business.   Eventually, petitioner's business became the number

one such life insurance agency operating under a large insurance

underwriter.

     Because the premium on the amount of insurance needed to

fund the estate tax liability for a farm was beyond the means of
                               - 4 -

many farmers, petitioner's selling strategy included conversion

of whole life policies into universal life or annuity devices.

Farmers with whole life policies were persuaded to surrender the

policy and withdraw the cash surrender value, or some portion

thereof, to purchase other forms of insurance in larger amounts.

It was the conversion from one type of insurance to another or to

an annuity that generated revenue for petitioner.

     In 1981, Roy sought to become reaffiliated with petitioner.

Petitioner and Roy became loosely affiliated, in that they each

operated separate insurance agencies and shared some common

overhead and administrative expenses.   During September 1982, Roy

introduced petitioner to Dean Cooper (Cooper), who along with Roy

had a plan to acquire a small insurance company with 5,000

policyholders, named "United Savings Life" (United), of Hinsdale,

Illinois.

     On September 24, 1982, Mid-Continent Acquisitions Corp. was

organized for the purpose of acquiring insurance companies, and

Mid-Continent Marketing Corp. was organized for the purpose of

marketing insurance.   Petitioner was a director and officer of

both corporations.

     In order to acquire United, new customers were solicited and

persuaded to surrender their life insurance policies and invest

the cash surrender value in securities (shares of stock or debt

instruments denoted "money multiplier notes") issued by the

corporations formed by Roy, Cooper, and petitioner.   The money

received by the Mid-Continent corporations from sale of the
                                - 5 -

securities was supposed to be used to purchase United, but,

instead, it was paid out to employees and officers as salary and

bonuses.    The corporations did not fund the purchase of United or

reinvest the securities proceeds in assets or income-producing

entities.   Mid-Continent Acquisitions attempted to sell

$21,600,000 of money multiplier notes, and Mid-Continent

Marketing attempted to sell $8,640,000 of money multiplier notes.

Farmers were told that they would receive a guaranteed income of

15 percent from their Mid-Continent securities investment.

Essentially, the farmers had invested their life insurance cash

surrender values in what had evolved into a Ponzi scheme.

     Of approximately $3 million of the Mid-Continent

corporations' securities sold during 1982 and 1983 (approximately

$600,000 during 1982), over $1 million went to petitioner, Roy,

and Cooper as salaries and bonuses.     After the Mid-Continent

corporations were organized, petitioner continued to operate

Estate, an S corporation.

     Petitioners included $110,000 of income from the Mid-

Continent corporations on their 1982 income tax return.     That

income was reflected in the category "Other income" as

"Reimbursement of Pre-Incorporation Expenses".     Petitioner did

not incur preincorporation expenses in connection with the

organization of the Mid-Continent corporations.     No documentation

concerning said preincorporation expenses was provided to the

corporation income tax return preparer, J. Richard Home (Home), a

Certified Public Accountant.   Home required petitioner, Roy, and
                                - 6 -

Cooper to sign documents indicating that they each received a

total of $110,000 in reimbursed preincorporation expenses from

the Mid-Continent corporations.   Petitioner, in the same

document, acknowledged a $100,000 account payable of Mid-

Continent Acquisition Corp. to petitioner.   Home prepared the

1982 Federal income tax returns for the Mid-Continent

corporations and petitioners.   The preincorporation expenses

reported by petitioners and the others were set up on the Mid-

Continent corporations' books as an intangible asset, which was

to be amortized over 60 months.

     Home did the bookkeeping for Estate, and when petitioner

made a payment with business funds that could not be identified

as having a business purpose, no deduction for such amount was

claimed on the S corporation's return.   For 1982 and 1983,

$108,000 and $121,000, respectively, fell into the nondeductible

category, and Home reflected the amounts as loans to shareholders

on financial records and tax returns for Estate.   The total

amount of loans outstanding as of the end of Estate's 1983 year

was $229,000.

     During August and September 1983, petitioner received a

$6,265.25 salary check from each of the two Mid-Continent

corporations.   Withholding tax had been taken from the salary

checks, and the payments were recorded in the corporate payroll

journals.   During November 1983, following a meeting between

petitioner and Roy, the bookkeeper was told to change the salary
                                 - 7 -

entries to management fees and to refund the withholding to

petitioner.

     For 1983, petitioner received $60,000 from the Mid-Continent

corporations, which was not reported on petitioners' 1983 income

tax return.   Petitioner, during 1983, received $21,000 in

management fees from the Mid-Continent corporations, which he

failed to report on petitioners' 1983 income tax return.

Petitioner did not advise Home of the management fees received

from the Mid-Continent corporations.

     A criminal investigation of Cooper was begun in Illinois,

involving activity similar to that of the Mid-Continent

corporations, and he resigned from the corporations.      Thereafter,

around August 2, 1983, the State of Indiana, where petitioner and

the corporations did business, issued a cease and desist order,

based on alleged securities violations, against the corporations,

prohibiting them from selling shares of stock.      After the court

order, the Mid-Continent corporations were, for all practical

purposes, no longer operating.

     Petitioner personally continued the business activity of the

Mid-Continent corporations after the cease and desist order.

Obligations of the Mid-Continent corporations were paid with

checks drawn on his S corporation's (Estate) checking account as

follows:

                                      1983            1984
Helicopter                          $30,297.50      $8,172.17
Expense reimbursement
 to Ballinger                            2,680.50      ---
Payments to the Mid-Continent
 corporations' customers                  ---       26,001.58
                                - 8 -

Legal and accounting                    ---         10,979.51

These payments were made in order to continue petitioner's

insurance sales business activity during and after the ruin of

the Mid-Continent corporations.

     After the situation of the Mid-Continent corporations began

to deteriorate, Roy and petitioner considered purchasing an

insurance agency to generate business and to ameliorate their

problems.    Home was requested to evaluate the Riley Insurance

Agency (Riley), and he supplied a report, dated August 29, 1983,

to Roy and petitioner.    After some negotiations through legal

counsel, an agreement was reached, and Roy paid $500 as earnest

money or a downpayment sometime during the period September

through November 1983.

     On March 28, 1984, Roy executed a written contract with Gwen

Riley to pay $135,000 for Riley.    The $135,000 price had been

formulated and agreed upon during 1983.       The $134,500 balance of

the contract price was remitted by Roy to Gwen Riley during March

1984.   Roy and petitioner had agreed in 1983 to each end up

owning one-half of Riley, and that agreement was committed to

writing during April 1984.    Petitioner paid Roy $67,500 for one-

half of Riley by checks during the spring of 1984.

     Petitioner claims a $90,000 offset against his 1983 income

for repayment of preincorporation expenses reimbursement received

in 1982.    Petitioner and Roy agreed to pay $5,000 per month to

the Mid-Continent corporations from the revenues of Riley.      The

agreements were reduced to writings that recited that the Mid-
                                - 9 -

Continent corporations were to be repaid a total of $180,000,

which Roy and petitioner had received as reimbursements of

preincorporation expenses.

     During a June 1, 1984, meeting, Home was advised by

petitioner that petitioner and Roy had purchased Riley and they

had given their interests in Riley to the Mid-Continent

corporations to repay a portion of the reimbursement of

preincorporation expenses that had been paid to petitioner and

Roy in earlier years.   Petitioner and Roy were not on good terms

and had an acrimonious relationship.    In a June 11, 1984, letter,

investors of the Mid-Continent corporations were advised that

Riley had been purchased.    Roy advised policyholders of his

company (American Planning Associates, Inc.) that his company had

purchased Riley.   Petitioner, who was president of International

Financial Consultants, Inc. (International), by a January 16,

1985, letter to his policyholders, advised that International had

purchased Riley.

     Riley had about 4,000 active and inactive client files, and

the clients' identities were essential to its business.    The

clients of Riley, an Indiana insurance agency, were split between

Roy (A through K) and petitioner (L through Z).    Petitioner

advised Home that he purchased the interest in Riley during

November 1983 and sold it to the Mid-Continent corporations

during December 1983.   Petitioner, on his 1983 income tax return,

reported that he purchased Riley during November 1983 for $67,500

and that he sold it during December 1983 for $90,000.    Home
                              - 10 -

reviewed this transaction before reporting it on petitioners'

1983 return and reached the conclusion that the sale to the Mid-

Continent corporations occurred during 1983.   Home believed that

the downpayment was low, but that it was an installment sale that

occurred during 1983.   In subsequent research, Home discovered a

revenue ruling (Rev. Rul. 234, 1953-2 C.B. 29) that permitted,

for tax purposes, installment sales of intangibles.

     Home prepared petitioners' 1983 income tax return and relied

on representations of petitioner in preparing the return.

Petitioner, for 1983, advised Home that he had made repayments of

amounts received from the Mid-Continent corporations, and Home

claimed $90,000 as repayment of the reimbursement of

preincorporation expenses.   The $90,000 was one-half of the

claimed value of Riley that Roy and petitioner placed in the Mid-

Continent corporations.

     Petitioner also advised Home that he had incurred expenses

during 1983 on behalf of the Mid-Continent corporations that

could be considered repayment of amounts received from the

corporations.   Home, however, did not include them on the 1983

return because petitioner did not provide the details or

specifics for the expenditures.

     The State of Indiana did not pursue the securities charges

on which the cease and desist order had been based; however, the

Federal Government ultimately prosecuted, convicted, and

sentenced to prison petitioner, Cooper, and Roy.   Petitioner was

indicted on June 9, 1988, on numerous counts, including one count
                              - 11 -

of conspiracy to commit fraud and numerous counts of mail fraud

and for filing a false 1983 income tax return in violation of

section 7206(1).   The indictment, among other charges, alleged

that petitioner, on or about June 29, 1984, filed a materially

false 1983 income tax return by failing to report a substantial

amount of income in addition to that stated on the income tax

return.   At the hearing under rule 11 of the Federal Rules of

Criminal Procedure, petitioner admitted that he received and

willfully failed to report a $21,000 management fee.     On May 2,

1990, petitioner pled guilty to filing a materially false 1983

income tax return under section 7206(1), and he was sentenced to

concurrent 3-year terms of imprisonment, along with the condition

that he make restitution to the crime victims.

                              OPINION

     This case is factually convoluted because of the maze of

entities, principals, and transactions involved.    The primary

factual pattern involves petitioner's odyssey from being a

successful insurance salesman to his involvement in a Ponzi

scheme and, ultimately, to his incarceration.    Initially,

petitioner successfully sold insurance to farmers until he became

reinvolved with his insurance business mentor, Roy.    Roy, in

turn, introduced Dean Cooper to petitioner.   With the

introduction of Roy and Cooper, petitioner's business activity

became complicated.   In addition to an S corporation through

which petitioner operated his life insurance agency, Roy's

insurance agency became affiliated with petitioner through and in
                               - 12 -

combination with the Mid-Continent corporations.    Those

corporations were intended to generate capital for the purchase

of an insurance company, but evolved into shells for a Ponzi

scheme.

     Petitioners have agreed that they failed to report $81,000

of income for 1983.    Petitioners, however, contend that they are

entitled to deduct expenses of the Mid-Continent corporations

that were paid during and after the corporations ceased

operation.    To the extent those amounts were paid, payment was

made with checks from petitioner's S corporation and petitioners

seek to deduct the amounts on their individual 1983 income tax

return.   Finally, petitioners contend that they are entitled to a

$90,000 deduction for their 1983 tax year in connection with the

purchase and disposal of Riley.    This amount has been

characterized as a refund or repayment to the Mid-Continent

corporations of the preincorporation payments petitioner had

received during 1982.    We address each of these matters

separately.

     Payments of the Mid-Continent Corporations' Expenses--

Petitioner admits that he failed to report $81,000 ($60,000 plus

$21,000) of income from the Mid-Continent corporations for 1983,

but contends that he paid corporate expenses which more than

offset the $81,000 of unreported income.    No deduction for such

expenses was reported or claimed on his 1983 return.

     First, it must be noted that the payments proven by

petitioners total about $78,000.    In that regard, about $33,000
                              - 13 -

of the payments were made by checks dated in 1983 and about

$45,000 of the payments were made by checks dated in 1984.

Petitioners' individual return was filed on a calendar year basis

and, accordingly, the 1984 payments ($45,000) would not be

deductible for the 1983 taxable year.

     Ordinarily, for a payment to be deductible under section

162, it must be made by the taxpayer as an ordinary and necessary

expense of the taxpayer's own business.   Betson v. Commissioner,

802 F.2d 365, 368 (9th Cir. 1986), affg. in part and revg. in

part T.C. Memo. 1984-264; Gantner v. Commissioner, 91 T.C. 713,

725 (1988), affd. 905 F.2d 241 (8th Cir. 1990); Lohrke v.

Commissioner, 48 T.C. 679, 684-685 (1967).

     The initial obligation for the $33,000 of payments in 1983

(reimbursement of salesmen's expenses of $2,680.50 and helicopter

expense of $30,297) was that of the Mid-Continent corporations.

The payments, however, were made by checks drawn on the checking

account of petitioner's S corporation at a time when the Mid-

Continent corporations had ceased operations and were under a

court order not to operate.   In order to continue the sale of

insurance and his flow of income, petitioner had to see to the

payment of the outstanding obligations of the Mid-Continent

corporations to salespeople and suppliers of goods and services.

Although he was no longer involved in the Ponzi type activity,

petitioner continued to exploit the customer lists from Riley

and, in general, to sell term insurance to farmers.   There is no
                              - 14 -

suggestion that petitioner had other choices or means of

continuing income-producing activity.

     Generally, expenditures by a substantial shareholder for the

benefit of his corporation are deemed capital and are not

deductible due to a lack of connection with the

shareholder/taxpayer's own trade or business.     Deputy v. du Pont,

308 U.S. 488 (1940).   However, where a taxpayer makes

expenditures to protect or promote his own business, the

expenditure may be deductible, "even though the transaction

giving rise to the expenditures originated with another person

and would have been deductible by that person if payment had been

made by him."   Lohrke v. Commissioner, supra at 685 (and cases

cited therein).

     In this case, the expenditures were made to protect and

promote petitioner's insurance business.    Here the income-

producing asset consisted of the names of clients and potential

clients.   Following the cease and desist order, the clients could

no longer be sold securities of the Mid-Continent corporations,

and petitioner pursued the sale of insurance.    Because Riley's

assets had been intermingled within the Mid-Continent

corporations' assets, the Mid-Continent corporations' obligations

were associated with Riley's client list and its use.      Payment of

the corporations' obligations was necessary to protect

petitioners' own insurance business.    Accordingly, the

expenditures pass the Lohrke test.
                              - 15 -

     The question remains, however, whether petitioner is

entitled to the deduction even though payment was made with

checks drawn on the account of his S corporation.   A review of

the S corporation's returns for the fiscal years ended March 31,

1983 and 1984, does not reflect that expenses in similar

categories were claimed in amounts approaching those claimed by

petitioners regarding the Mid-Continent corporations.    For

example, no amount was claimed for the helicopter for the 1982

fiscal year, and $7,900 was claimed for the 1983 fiscal year,

whereas the amount paid for the helicopter during 1983 and

claimed by petitioners is $35,355.50.

     In addition, it was the practice of Home, the accountant, to

classify expenditures of petitioner, which were not Estate's

business expenses, as loans to shareholders.   In that connection,

for 1982 and 1983, $108,000 and $121,000 fell into the

nondeductible category, and Home reflected the amounts as

shareholder loans on financial records and tax returns for

Estate.   The total loans outstanding as of the end of Estate's

1983 year were $229,000.

     Under these circumstances, we find that petitioner has shown

that the amounts being claimed have not been deducted in

connection with petitioner's S corporation and that the

expenditures, although made by the S corporation, were made on

petitioner's behalf.   Because petitioners report income and

expenses on a calendar year basis, they are entitled to deduct

only those payments made during the 1983 year--$33,000.
                                - 16 -

     The $90,000 Riley Transaction--Petitioner, during 1982, had

received $110,000 from the Mid-Continent corporations for alleged

reimbursement of preincorporation expenses.    Petitioner did not

actually incur preincorporation expenses, but reported the

$110,000 as income on petitioners' 1982 joint Federal income tax

return.   For 1983, petitioners claimed a $90,000 repayment to the

Mid-Continent corporations of the preincorporation expenses.     The

amount is reflected on Schedule D by an entry that reported a

sale of petitioner's interest in Riley during December 1983 for

$90,000, and a purchase of the interest during November 1983 for

$67,500; a short-term capital gain of $22,500 is reported for the

transaction.    In another part of petitioners' 1983 return, the

$90,000 is reflected as a repayment of reimbursed

preincorporation expenses and used to reduce other income.

     Petitioner explains the Schedule D reporting of this

transaction was intended to reflect a contribution of Riley to

the Mid-Continent corporations.    The Riley scenario is

convoluted.    Initially, the $110,000 was taken from the Mid-

Continent corporations as reimbursement for preincorporation

expenses, when none was actually incurred.    We surmise that this

approach was used to provide some tax benefit.    The

"contribution" of Riley by petitioner and Roy, which was

characterized as a refund of the reimbursement, is without

substance.    Petitioner and Roy each divided the 4,000 or so

customers of Riley and proceeded to earn income from selling

insurance to Riley customers.    The only asset of Riley, with any
                                - 17 -

value, was its customer list.    Accordingly, the contribution of

the remaining shell, after removal of the customer list, was a

mere gesture without substance.

      Petitioner's and Roy's promise to pay some or all of the

proceeds from the receipts due to use of the customer lists is

but a promise and does not constitute an event for which a

deduction is allowable.   The Mid-Continent corporations were

controlled by petitioner and Roy.    Moreover, petitioner has not

shown that payments were made to the Mid-Continent corporations

that would entitle petitioners to a deduction for repayment of

reimbursed preincorporation expenses for their 1983 taxable year.

Accordingly, petitioners are not entitled to any part of the

$90,000 claimed and disallowed by respondent.   In addition,

because we have found that no value was in fact transferred to

the Mid-Continent corporations in the form of Riley, petitioners

are not required to report the short-term capital gain

attributable to that transaction.

     Additions to Tax for Fraud--Respondent determined that

underpayments on petitioners' returns for 1980, 1981, 1982, and

1983 were due to fraud within the meaning of section 6653(b).

Fraud is defined as an intentional wrongdoing designed to evade

tax believed to be owing.   Miller v. Commissioner, 94 T.C. 316,

332 (1990) (citing Powell v. Granquist, 252 F.2d 56 (9th Cir.

1958)).   Respondent has the burden of proving, by clear and

convincing evidence, that an underpayment exists for each of the

years at issue, and that some portion of the underpayment is due
                              - 18 -

to fraud.   Sec. 7454(a); Rule 142(b).   To meet this burden,

respondent must show that petitioners intended to evade taxes

known to be owing by conduct intended to conceal, mislead, or

otherwise prevent the collection of taxes.     Stoltzfus v. United

States, 398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner,

394 F.2d 366, 378 (5th Cir. 1968), affg. T.C. Memo. 1966-81;

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

need not prove the precise amount of the underpayment resulting

from fraud--only that some part of the underpayment of tax for

each year at issue is attributable to fraud.     Lee v. United

States, 466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v.

Commissioner, 465 F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo.

1970-274.   Petitioners concede that there was unreported income

for each year at issue.   We accordingly must decide whether any

part of the underpayments was due to fraud.     Hebrank v.

Commissioner, 81 T.C. 640 (1983).

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

upon consideration of the entire record.     Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978); Estate of Pittard v.

Commissioner, 69 T.C. 391 (1977).   Fraud is not to be imputed or

presumed, but rather must be established by some independent

evidence of fraudulent intent.   Beaver v. Commissioner, 55 T.C.

85, 92 (1970); Otsuki v. Commissioner, 53 T.C. 96 (1969).       Fraud

may not be found under "circumstances which at the most create

only suspicion."   Davis v. Commissioner, 184 F.2d 86, 87 (10th
                               - 19 -

Cir. 1950); Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).

However, fraud may be proved by circumstantial evidence and

reasonably inferred from the facts, because direct proof of the

taxpayer's intent is rarely available.    Spies v. United States,

317 U.S. 492 (1943); Rowlee v. Commissioner, supra; Stephenson v.

Commissioner, 79 T.C. 995 (1982), affd. 748 F.2d 331 (6th Cir.

1984).    A taxpayer's entire course of conduct may establish the

requisite fraudulent intent.    Stone v. Commissioner, 56 T.C. 213,

223-224 (1971); Otsuki v. Commissioner, supra at 105-106.     The

intent to conceal or mislead may be inferred from a pattern of

conduct.    See Spies v. United States, supra at 499.

     Courts have relied on several indicia of fraud when

considering the section 6653(b) addition to tax.   Although no

single factor may conclusively establish fraud, the existence of

several indicia may be persuasive circumstantial evidence of

such.    Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir.

1984), affg. per curiam T.C. Memo. 1982-603; Beaver v.

Commissioner, supra at 93.

     Circumstantial evidence that may give rise to a finding of

fraudulent intent includes:    (1) Understating income; (2) keeping

inadequate or no records; (3) failing to file tax returns;

(4) maintaining implausible or inconsistent explanations of

behavior; (5) concealing assets; (6) failing to cooperate with

tax authorities; (7) filing false Forms W-4; (8) failing to make

estimated tax payments; (9) dealing in cash; (10) engaging in

illegal activity; and (11) attempting to conceal an illegal
                                - 20 -

activity.   Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.

1986), affg. T.C. Memo. 1984-601; see Douge v. Commissioner, 899

F.2d 164, 168 (2d Cir. 1990).    These "badges of fraud" are

nonexclusive.    Miller v. Commissioner, supra at 334.    Both the

taxpayer's background and the context of the events in question

may be considered as circumstantial evidence of fraud.       United

States v. Murdock, 290 U.S. 389, 395 (1933); Spies v. United

States, supra at 497; Plunkett v. Commissioner, supra at 303.

     Respondent argues that petitioners knowingly failed to

report $81,000 ($60,000 plus $21,000) for 1983 and that

petitioner pled guilty to violating section 7206(1) with respect

to the $21,000 item.    Although petitioner pled guilty to

violation of section 7206(1), he is not estopped to deny that his

1983 tax return was fraudulent within the meaning of section

6653(b).    Wright v. Commissioner, 84 T.C. 636 (1985).

Petitioner, however, is estopped to deny that he filed a

materially false return under section 7206(1).      Id.

     Petitioners do not deny that the $81,000 was omitted;

however, they assert that they failed to claim more than $80,0004

of deductions on their 1983 return.      The $81,000 omission is

probative evidence.    Petitioners' contention that they were

entitled to unclaimed and offsetting deductions for 1983 does not

lessen the impact of petitioners' intentional failure to report

income.



     4
       We have found that the amount allowable for 1983 totals
$33,000.
                                - 21 -

     Several other indicia of fraud are extant here.    There was

some concealment and deception.     Petitioner's records were, to

some extent, inadequate or intentionally misstated.     Petitioner

was not an innocent bystander in the events that, ultimately,

caused his incarceration.     He was involved in fraudulent activity

concerning the Mid-Continent corporations, and he failed to

report $60,000 of so-called reimbursed preincorporation expenses,

which he knew was includable in income from his 1982 reporting of

the $110,000 amount.   We have also considered petitioner's

background and level of sophistication in taxation.

     Respondent has clearly and convincingly proven that

petitioners' 1983 joint Federal income tax return was fraudulent

within the meaning of section 6653(b).     In this regard, the

entire underpayment is due to fraud.

     Respondent also determined an addition for fraud for each of

the years 1980 through 1982; however, no evidence was offered at

trial or arguments made on brief in support of that

determination.   Accordingly, we hold that respondent has not

shown that petitioners' 1980, 1981, and 1982 returns were

fraudulent.

     Period for Assessment--Respondent's notice of deficiency for

the taxable years 1980 through 1983 was mailed November 20, 1991.

Petitioners have placed in issue whether the period for

assessment has expired with respect to the years before the

Court.   The last of the returns for the years in question was

filed on June 23, 1984.     Accordingly, the normal 3-year period
                             - 22 -

for assessment would have expired prior to respondent's issuance

of the November 20, 1991, notice of deficiency.       Sec. 6501(a).

     With respect to the 1983 taxable year, respondent has proven

that the return was fraudulent within the meaning of section

6653(b), and, accordingly, section 6501(c)(1) would apply.       That

section provides that tax may be assessed at any time in the case

of a fraudulent return filed with intent to evade tax.

Accordingly, the period for assessment had not expired with

respect to the 1983 taxable year at the time respondent issued

the notice of deficiency to petitioners.

     With respect to 1980 through 1982, we have found that the

addition to tax for fraud is not applicable.       The 1980 through

1982 taxable years are in issue solely due to the carryback of

credits from the 1983 taxable year.    Petitioners have conceded

that they are not entitled to the disallowed credits, and but for

the expiration of the assessment period, respondent's

determination would be sustained.

     Section 6501(j), however, provides that deficiencies

attributable to a credit carryback may be assessed at any time

before the expiration of the period for assessing a deficiency

for the taxable year from which the credit emanates.

Accordingly, we find that the period for assessment had not

expired for the 1980 through 1982 taxable years at the time

respondent issued the notice of deficiency to petitioners.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
