                        T.C. Memo. 1996-431



                      UNITED STATES TAX COURT



            GEORGE AND MYRSINI STOTIS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15848-94.                    Filed September 24, 1996.



     Warren M. Burd, for petitioners.

     Kevin J. Kilduff, for respondent.




             MEMORANDUM FINDINGS OF FACT AND OPINION

     CLAPP, Judge:   Respondent determined the following

deficiencies in petitioners' Federal income taxes and penalties:

                               Penalties
          Year   Deficiency   Sec. 6662(a)   Sec. 6663

          1989    $90,116          --        $67,587
          1990      2,541         $508          --
          1991      1,828          360          --
                                 - 2 -

       After concessions by the parties, the issues for decision

are:

       (1)   Whether George Stotis (petitioner) recognized a taxable

gain when he surrendered certain leasehold rights.     We hold that

he did.

       (2)   Whether petitioner is liable for a penalty for fraud

pursuant to section 6663, or whether petitioners are liable for

a penalty pursuant to section 6662(a) for negligence or disregard

of rules or regulations for the taxable year 1989.     We hold that

petitioner is liable for the penalty on a portion of the

underpayment, and petitioners are liable for the penalty on the

remaining portion of the underpayment.

       (3)   Whether petitioners are liable for penalties pursuant

to section 6662(a) for negligence or disregard of rules or

regulations for the taxable years 1990 and 1991.     We hold that

they are.

       All section references are to the Internal Revenue Code in

effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

                           FINDINGS OF FACT

       Some of the facts are stipulated and are so found.   We

incorporate by reference the stipulation of facts, supplemental

stipulation of facts, and attached exhibits.
                                 - 3 -

     Petitioners are husband and wife, and petitioner resided in

New York, New York, at the time the petition was filed.

Petitioners were born in Greece, and they have two daughters,

Maria Stotis (Maria) and Evanthia Stotis (Evanthia).

     Petitioner moved to the United States in 1975.      Since 1975,

petitioner has operated a street vending cart and has sold

pretzels and sodas at various locations in New York City.

     From 1987 through November 1989, petitioner resided in

adjoining rooms 103 and 141 (rooms 103 and 141) at 321 West 33d

Street, New York, New York (the apartment building).

     From 1987 through 1989, Maria and Evanthia lived with Mrs.

Stotis in Greece.   Mrs. Stotis occasionally visited petitioner in

New York, but petitioner was the only individual with a property

interest in rooms 103 and 141.

     Palm View Corp. (Palm View) served as landlord to the

tenants in the apartment building.       Seawall Associates (Seawall)

owned the apartment building.    Seawall wanted to relocate the

tenants and then raze the structure to make room for an office

building.   In 1989, approximately six to ten of the apartment

building units were occupied, and petitioner occupied two of

those units.

     Seawall approached petitioner with the hope that it could

convince him to vacate rooms 103 and 141.      Rather than negotiate

directly with Seawall, petitioner hired Dionysis Spyropoulos

(Spyropoulos), an attorney, to negotiate with Seawall.
                               - 4 -

Petitioner speaks Greek but not English, and Spyropoulos speaks

English and Greek.

     Seawall and petitioner reached an agreement under which

petitioner would surrender his rights in rooms 103 and 141 to

Seawall.   They memorialized their agreement in two separate

documents:   A surrender agreement and a sublease agreement.

     The surrender agreement, dated November 14, 1989, provided

that petitioner would surrender his rights in rooms 103 and 141

in exchange for, among other things, $300,000, $22,500 in legal

fees and expenses, and an apartment at 433 West 34th Street, New

York, New York (new apartment) rent free for 3 years.    Petitioner

and Seawall's and Palm View's authorized representatives signed

the surrender agreement.   Attached to the surrender agreement is

the affidavit of John Caramalis (Caramalis), which indicates that

he is fluent in conversational Greek, and he read and explained,

in the Greek language, all the material terms and conditions of

the surrender agreement to petitioner.

     Seawall made two payments pursuant to the surrender

agreement.   First, Seawall issued a check in the amount of

$25,000 to Spyropoulos to be held in escrow until petitioner

surrendered rooms 103 and 141 to Seawall.   The escrow agreement

provided that $22,500 went to Spyropoulos for legal fees and

expenses and the remaining $2,500 belonged to petitioner.

Second, Seawall was to pay petitioner $297,500 when he

surrendered rooms 103 and 141 to Seawall.
                               - 5 -

      The sublease agreement, dated November 14, 1989, provided

that petitioner could occupy the new apartment rent free for 3

years.   The fair rental value of the new apartment was $900 per

month.   Petitioner occupied the new apartment during the entire

3-year lease period which began December 1, 1989, and terminated

November 30, 1992.   The sublease agreement makes no reference to

the surrender agreement or the $322,500 payment by Seawall

pursuant to the surrender agreement.   Petitioner and Seawall's

authorized representatives signed the sublease agreement.

     Spyropoulos explained the terms of the surrender agreement

and the sublease agreement to petitioner.    Petitioner never asked

Spyropoulos about the tax consequences of the surrender agreement

or the sublease agreement, and Spyropoulos never provided

petitioner with any tax advice.

     Petitioner surrendered rooms 103 and 141 to Seawall, and

petitioner moved into the new apartment.    In a letter dated

November 17, 1989, petitioner instructed Seawall to disburse the

$297,500 payable under the surrender agreement by certified

checks as follows:   $100,000 to Mrs. Stotis, $100,000 to Maria,

and $97,500 to Evanthia.

     Seawall issued three checks in accordance with petitioner's

instructions.   Seawall's agent hand delivered the three checks to

petitioner.   Prior to Seawall's agent relinquishing control of

the checks, petitioner acknowledged the receipt of each check by

signing the back.
                                - 6 -

     Each check was negotiated in Greece.    Mrs. Stotis and

petitioner endorsed the $100,000 check issued to Mrs. Stotis;

Maria and petitioner endorsed the $100,000 check issued to Maria;

and Evanthia and petitioner endorsed the $97,500 check issued to

Evanthia.

     Seawall issued a Form 1099 to each tenant with whom it

entered into a surrender agreement, including petitioner.      At the

end of 1989, Seawall issued to petitioner a Form 1099 in the

amount of $322,500.

Tax Return Preparation

     Andrew Sotiriou (Sotiriou) prepared petitioners' Federal

income tax returns (Forms 1040) for the taxable years 1985

through the years in issue.    Sotiriou worked as a travel agent,

and he prepared his clients' tax returns as an additional

service.

     Petitioner reported gross income from his vending business

of $11,470, $13,810, and $11,320 for the taxable years 1989,

1990, and 1991, respectively, on Schedules C of petitioners'

Forms 1040.   Sotiriou did not review any documents related to

petitioner's vending business; he merely relied on petitioner's

statements regarding receipts and expenses.

     Petitioner did not report the $322,500 payment from Seawall

for the taxable year 1989.    Petitioner did not report the fair

market rental value of the new apartment for the taxable years

1989, 1990, or 1991.   Petitioner never provided Sotiriou with the
                               - 7 -

Form 1099 issued by Seawall for the taxable year 1989.    Prior to

the audit by respondent, petitioner never told Sotiriou about the

payments received from Seawall or the rent-free apartment

received from Seawall.

     After respondent began the audit of petitioners' Forms 1040,

petitioner told Sotiriou about the amounts received pursuant to

the surrender agreement and the sublease agreement.   Sotiriou

advised petitioner to file amended tax returns and report the

$322,500 and the fair market rental value of the new apartment.

Petitioner rejected Sotiriou's advice.

Respondent's Investigation

     Respondent initiated an audit of petitioners' Forms 1040 for

the years in issue after receiving notice of a Form 1099 that was

not reflected on petitioners' Form 1040 for the taxable year

1989.

     Michael Signorile (Signorile), a revenue agent for

respondent, interviewed petitioner on April 8, 1992, and again on

April 29, 1992.   Spyropoulos attended each interview.   Since

Signorile did not speak Greek, Spyropoulos interpreted for

petitioner during the interviews.

     During the April 8, 1992, meeting with Signorile, petitioner

stated that, in exchange for vacating rooms 103 and 141, he

received the new apartment rent free for 3 years and nothing

else.
                                 - 8 -

     Petitioner and Signorile met again on April 29, 1992, and

petitioner brought a copy of the sublease agreement to the

meeting.    Petitioner did not bring a copy of the surrender

agreement to the meeting.     Petitioner again stated that, in

exchange for vacating rooms 103 and 141, he received the new

apartment rent free for 3 years and nothing else.     At Signorile's

request, petitioner signed a written statement to that effect.

Signorile drafted the written statement, and Spyropoulos read the

statement to petitioner before petitioner signed it.

                                OPINION

     The dispute in this case is whether petitioner is liable for

tax on the amounts paid by and/or value received from Seawall

pursuant to the surrender agreement and sublease agreement.

Seawall paid $297,500 to petitioner's family members, $2,500 to

petitioner, and $22,500 to Spyropoulos for legal fees and

expenses.    Seawall also provided petitioner with the new

apartment rent free for 3 years.     We address each in turn.

     Petitioner seems to argue that he should not be taxed on the

$297,500 disbursed to his family because he never received those

moneys.    Respondent argues that the $297,500 is taxable to

petitioner.    We agree with respondent.

     Gross income includes gains derived from dealings in

property.    Sec. 61(a)(3).   Income is taxed to the person that

"earned" the item of income.     Commissioner v. Culbertson, 337

U.S. 733, 739-740 (1949); Helvering v. Horst, 311 U.S. 112, 115-
                                 - 9 -

117 (1940); Lucas v. Earl, 281 U.S. 111, 114-115 (1930).     An item

of income is considered "earned" when the taxpayer has a fixed

and determinable right to the income.     Schneider v. Commissioner,

65 T.C. 18, 26-27 (1975).    For a right to income to be fixed and

determinable "there can be no substantial contingency to * * *

[the] taxpayer's right of receipt or as to the certainty of the

amount to be received."     Schneer v. Commissioner, 97 T.C. 643,

650 (1991).    When income has been assigned to another, "The

choice of the proper taxpayer revolves around the question of

which person * * * in fact controls the earning of the income

rather than the question of who ultimately receives the income."

Vercio v. Commissioner, 73 T.C. 1246, 1253 (1980).     To determine

who controls the earning of the income in the case before us, we

need only look to the general principle that the gain realized

from the sale of property is taxable to the owner of the

property.   See Salvatore v. Commissioner, 434 F.2d 600 (2d Cir.

1970), affg. T.C. Memo. 1970-30.

     Petitioner was the only individual with a property interest

in rooms 103 and 141.     When petitioner, Palm View, and Seawall

executed the surrender agreement, they agreed on the amount of

moneys petitioner would receive in exchange for vacating rooms

103 and 141.    Petitioner obtained a fixed and determinable right

to the income when he vacated rooms 103 and 141 and surrendered

the same to Seawall.    Seawall was ready, willing, and able to

disburse the funds to petitioner.     Petitioner does not deny that
                                 - 10 -

he was entitled to the moneys from Seawall; indeed, he seems to

concede as much.     Petitioner testified that he did not want the

moneys distributed to him, because he feared that he would spend

them.     We conclude that the $100,000 paid to Mrs. Stotis, the

$100,000 paid to Maria, and the $97,500 paid to Evanthia

constitute taxable gain to petitioner on the sale of petitioner's

leasehold interest in rooms 103 and 141.

     Respondent determined that the $2,500 payment to petitioner,

which Spyropoulos held in escrow, is taxable to petitioner.        We

agree.     The moneys were available to petitioner when he satisfied

the escrow provisions.

     Respondent determined that the $22,500 disbursed by Seawall

to Spyropoulos for legal fees and expenses is taxable to

petitioner.     We agree.   Where a third party pays the expense of a

taxpayer, the payments are treated as income to the taxpayer

unless they can be shown to be loans or other nontaxable items.

Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729 (1929);

O'Malley v. Commissioner, 91 T.C. 352, 358 (1988).      Petitioner

does not argue that the funds paid to Spyropoulos on his behalf

are exempt from petitioners' gross income.     Rather, petitioner

argues that the fee paid to Spyropoulos should be offset against

the gain realized from the sale of his leasehold interest.

        In general, the deductibility of a legal expense depends

upon the purpose for which the expense was incurred.      United

States v. Gilmore, 372 U.S. 39, 48-49 (1963); Lykes v. United
                               - 11 -

States, 343 U.S. 118, 123 (1952).    Legal expenses incurred as

part of the disposition of a capital asset ordinarily are capital

expenditures that are offset against the amount received from the

sale of the capital asset.    Issac G. Johnson & Co. v. United

States, 149 F.2d 851, 852 (2d Cir. 1945); Gunn v. Commissioner,

49 T.C. 38, 51-52 (1967); see also Jasko v. Commissioner, 107

T.C. 30 (1996).    Whether an expenditure is capital in nature or

deductible under sections 162 or 212 is a question of fact.         Gunn

v. Commissioner, supra at 52; Plainfield-Union Water Co. v.

Commissioner, 39 T.C. 333, 337 (1962).

       Petitioner's leasehold interest in rooms 103 and 141 was a

capital asset.    Sec. 1221; Commissioner v. McCue Bros. &

Drummond, Inc., 210 F.2d 752, 753 (2d Cir. 1954), affg. 19 T.C.

667 (1953); Miller v. Commissioner, 48 T.C. 649, 651-652 (1967);

sec. 1.1221-1(a), Income Tax Regs.      Petitioner's sale to Seawall

of his leasehold interest constitutes a sale or exchange.      Sec.

1241.    Petitioner paid Spyropoulos legal expenses for the sole

purpose of disposing of the leasehold interest in rooms 103 and

141.    Thus, the legal expenditures of $22,500 are capital

expenditures that are offset against the gain realized by

petitioner.

       In exchange for vacating rooms 103 and 141, petitioner

received use of the new apartment rent free for 3 years.      The

amount realized from the taxable sale or other disposition of

property is the amount of money received plus the fair market
                               - 12 -

value of property other than money received.     Sec. 1001(b).   We

conclude that the fair market rental value of the new apartment

petitioner received rent free from Seawall constitutes an amount

realized from the disposition of his leasehold interest,

receivable pro rata over the 3-year period as determined by

respondent.    See Alstores Realty Corp. v. Commissioner, 46 T.C.

363, 374 (1966).

       Petitioner argues that the rent on the new apartment, less

the rent on rooms 103 and 141, multiplied by his life span

constitutes "additional rent" that should offset the gain

realized on the disposition of his leasehold interest.

Petitioner argues, in substance, that his increased housing costs

should be deductible.    We do not agree.   Petitioner simply has

chosen a more costly apartment in which to reside.     This

increased expense is a nondeductible personal expenditure.       Sec.

262.

Penalties

       Respondent determined that petitioner is liable for a

penalty for fraud under section 6663 for the taxable year 1989.

Section 6663(a) provides that there shall be added to the tax an

amount equal to 75 percent of the portion of the underpayment

that is attributable to fraud.    Section 6663(b) provides that if

the Commissioner establishes that any portion of an underpayment

is due to fraud, the entire underpayment is treated as

attributable to fraud, unless the taxpayer proves that some
                                - 13 -

portion of the underpayment is not due to fraud.    Respondent

concedes that Myrsini Stotis is not liable for the penalty for

fraud.

     The Commissioner has the burden of proving fraud by clear

and convincing evidence.   Sec. 7454(a); Rule 142(b).   First, the

Commissioner must prove the existence of an underpayment.     Parks

v. Commissioner, 94 T.C. 654, 660 (1990).    The Commissioner may

not rely upon the taxpayer's failure to carry the burden of proof

as to the underlying deficiency.    Id. at 660-661; Petzoldt v.

Commissioner, 92 T.C. 661, 700 (1989); Estate of Beck v.

Commissioner, 56 T.C. 297, 363 (1971).     Second, the Commissioner

must show that the taxpayer intended to evade taxes by conduct

intended to conceal, mislead, or otherwise prevent tax

collection.   Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d

Cir. 1968); Parks v. Commissioner, supra at 661; Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983).

     For the reasons discussed above, we find that respondent has

established substantial amounts of unreported income and

consequent underpayment of tax for 1989.

     Respondent must prove by clear and convincing evidence that

petitioner had fraudulent intent.    Parks v. Commissioner, supra

at 664.   Fraud may be proven by circumstantial evidence.

Stephenson v. Commissioner, 79 T.C. 995, 1005-1006 (1982), affd.

748 F.2d 331 (6th Cir. 1984).    A taxpayer's entire course of

conduct may establish the requisite fraudulent intent.      Stone v.
                               - 14 -

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

Commissioner, 53 T.C. 96, 105-106 (1969).     The intent to conceal

or mislead may be inferred from a pattern of conduct.     Spies v.

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

     A taxpayer's failure to give complete information to his tax

return preparer may be evidence of fraudulent intent.     Korecky v.

Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986), affg. per

curiam T.C. Memo. 1985-63.    Petitioner surrendered rooms 103 and

141 to Seawall in exchange for $322,500 and use of an apartment

rent free for 3 years.    Petitioner initially concealed the

$322,500 payment and the rent-free apartment from Sotiriou, his

return preparer.   Petitioner eventually told Sotiriou about the

$322,500 payment and the rent-free apartment, but only after

respondent initiated an audit of petitioners' Forms 1040.

Sotiriou then advised petitioner to file amended tax returns, but

petitioner refused.

     Petitioner also failed to give Sotiriou a copy of the Form

1099.   We conclude that petitioner either intentionally withheld

the Form 1099 from Sotiriou or failed to maintain a copy of the

Form 1099.   Failure to maintain accurate records may be evidence

of fraudulent intent.    Merritt v. Commissioner, 301 F.2d 484, 487

(5th Cir. 1962), affg. T.C. Memo. 1959-172.

     False or misleading statements to respondent's agents may be

evidence of fraudulent intent.    Grosshandler v. Commissioner, 75

T.C. 1, 20 (1980).    At the first meeting with Signorile,
                              - 15 -

petitioner stated that, in exchange for surrendering rooms 103

and 141, he received the new apartment rent free for 3 years and

nothing else.   Petitioner knew this to be false.    At the second

meeting with Signorile, petitioner again stated that, in exchange

for surrendering rooms 103 and 141, he received the new apartment

rent free for 3 years and nothing else.    Petitioner also signed a

statement to that effect.   Also at the second meeting, petitioner

produced a copy of the sublease agreement, but he did not produce

a copy of the surrender agreement.     We conclude that petitioner

attempted to mislead Signorile.

     Petitioner argues that he is not fluent in English, and he

did not realize that he was required to report the amounts

received from Seawall.   Courts have considered the educational

level and sophistication of the taxpayer when considering the

Commissioner's fraud determination.     Id. at 19.   When Seawall

initially approached petitioner about vacating rooms 103 and 141,

petitioner contacted Spyropoulos.    Spyropoulos represented

petitioner when the surrender agreement and sublease agreement

were negotiated.   Spyropoulos spoke fluent Greek, and he

explained the agreements to petitioner.    The affidavit of

Caramalis attached to the surrender agreement indicates that

Caramalis read and explained to petitioner, in the Greek

language, the terms of the surrender agreement.      On November 14,

1989, petitioner entered into the surrender agreement and the

sublease agreement with Seawall.    When it came time for
                              - 16 -

petitioner to receive payment pursuant to the surrender

agreement, petitioner instructed Seawall to issue certified

checks to Mrs. Stotis, Maria, and Evanthia.   Spyropoulos attended

petitioner's meetings with Signorile, and Spyropoulos interpreted

for petitioner.   During those meetings, petitioner realized the

important differences between the surrender agreement and the

sublease agreement.   Petitioner produced the sublease agreement

which seemingly corroborated his story that he received from

Seawall the new apartment rent free for 3 years and nothing else.

Petitioner withheld the surrender agreement that contained the

provisions for payment of $322,500 by Seawall.    Petitioner signed

a written statement that he received from Seawall the new

apartment rent free for 3 years and nothing else.    Spyropoulos

read the statement to petitioner before petitioner signed it.      We

find that petitioner understood the negotiations with Seawall,

the surrender agreement, the sublease agreement, the statements

he made to Signorile, and the written statement that he signed

for Signorile.

     Petitioner testified that he received tax advice from

Spyropoulos.   We need not accept uncorroborated testimony at face

value if it is questionable, improbable, or unreasonable.     Quock

Ting v. United States, 140 U.S. 417, 420-421 (1891); Fleischer v.

Commissioner, 403 F.2d 403, 406 (2d Cir. 1968).     We find

petitioner's testimony questionable and improbable.    Spyropoulos

contradicted petitioner's testimony disclaiming any knowledge of
                              - 17 -

tax law.   Petitioner's testimony was vague, and he remembered few

specifics surrounding the surrender agreement, the sublease

agreement, and the meetings with Signorile.   Petitioner could not

remember signing the surrender agreement.   We also give less

weight to petitioner's testimony because of his prior efforts to

mislead Sotiriou and Signorile.

     Considering the record taken as a whole and reasonable

inferences therefrom, we conclude that petitioner intended to

evade taxes known to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of taxes, and that

the portion of the underpayment for the taxable year 1989

attributable to the $322,500 paid by Seawall pursuant to the

surrender agreement is attributable to fraud.   Respondent has

conceded that the underpayment of tax attributable to the rent-

free use of the new apartment is not attributable to fraud.

     Respondent determined that petitioners are liable for a

penalty under section 6662(a) for any portion of the underpayment

for the taxable year 1989 not attributable to fraud, and for the

entire underpayments for the taxable years 1990 and 1991.

Section 6662(a) imposes a penalty equal to 20 percent of the

portion of the underpayment that is attributable to negligence.

     We have held that the underpayment attributable to the

unreported $322,500 is attributable to petitioner's fraud.     This

holding makes moot respondent's alternative determination as to

petitioners pursuant to section 6662 that the underpayment of tax
                              - 18 -

attributable to the unreported $322,500 is attributable to

negligence.   See sec. 6662(b); Niedringhaus v. Commissioner, 99

T.C. 202, 220 (1992).   However, the portion of the underpayment

of tax attributable to the rent-free use of the new apartment in

1989 is not insulated from the section 6662 penalty.

          Petitioners argue that petitioner reasonably relied on

the advice of Spyropoulos as to the tax ramifications of the

surrender agreement and the sublease agreement.    Spyropoulos did

not provide petitioners with tax advice.    Petitioners' argument

that they reasonably relied on Spyropoulos is without merit.    We

conclude that the portion of the underpayment of tax attributable

to the rent-free use of the new apartment in 1989, and the entire

underpayments of tax for the taxable years 1990 and 1991 are

attributable to negligence.

     To reflect the foregoing and the concessions by the parties,

                                           Decision will be entered

                                    under Rule 155.
