                        T.C. Memo. 1996-243



                      UNITED STATES TAX COURT



               PAUL L. TREGRE, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No.   5464-94.                      Filed May 23, 1996.



     William C. Gambel and Julia M. Pearce, for petitioner.

     Kathleen O. Lier, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge:   Respondent determined deficiencies in and

additions to petitioner’s Federal income taxes as follows:1



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                       - 2 -

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

1980        $3,360         $1,680                 --              --

1981         3,431          1,716                 --              --
                                                                   1
1982         5,209            --                $2,605
                                                                   2
1983         4,823            --                 2,412
       1
        50 percent of the interest due on $5,209.
       2
        50 percent of the interest due on $4,823.

       The issues for decision are:

       (1) Whether petitioner is entitled to deduct various

Schedule C expenses for each taxable year at issue.            We hold that

he is not.

       (2) Whether petitioner is entitled to an investment tax

credit for taxable year 1982.          We hold that he is not.

       (3) Whether petitioner is liable for the addition to tax

under section 6653(b), for taxable years 1980 and 1981, and

section 6653(b)(1) and (2), for taxable years 1982 and 1983.              We

hold that he is.

       (4) Whether the period of limitations has expired for

assessment and collection of the deficiencies in and additions to

tax for each taxable year at issue.            We hold that it has not.

       (5) Whether the equitable doctrine of laches bars assessment

and collection of the deficiencies in and additions to tax for

each taxable year at issue.         We hold that it does not.
                                 - 3 -

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and exhibits attached thereto are

incorporated herein.     At the time the petition was filed in this

case, petitioner resided in Metairie, Louisiana.

     Petitioner and his spouse2 filed a joint Federal income tax

return for taxable year 1980 on April 16, 1981.    The couple

timely filed joint Federal income tax returns for taxable years

1981, 1982, and 1983.

     In 1957, petitioner began working for Avondale Shipyards,

Inc. (ASI).   During the early 1970's, petitioner was the

assistant superintendent of ASI’s paint department (occasionally

the paint department).    Petitioner became the superintendent of

the paint department in 1975 and remained in that position

throughout the years at issue.

     Besco Exporting Corporation (Besco) was a manufacturer of

industrial chemicals.    During the years at issue, Besco was owned

by James Tubre (Tubre) and Seligman Kahn (Kahn).    In promoting

its products, Besco routinely sought to gain "in the yard" status

with its customers.    "In the yard" status meant physical and

ongoing access to customer job sites.    This practice enabled

Besco to make first-hand field observations of the particular



     2
      Petitioner’s spouse is not a party to this proceeding.
                                - 4 -

needs of its customers.    It also enabled Besco to be more

responsive to its customers' demands.    Perhaps the most

significant aspect of possessing "in the yard" status, however,

was the influence that could be had on the purchasing agents of

Besco's customers.

     In 1964, Besco began supplying ASI with various chemical

products.   Besco attained "in the yard" status at ASI shortly

thereafter.   Besco’s business relationship with ASI developed

over the ensuing years, and sales to ASI constituted between 30

and 40 percent of Besco’s total business during the years at

issue.    Many of ASI’s departments purchased products from Besco,

including the paint department.

     At sometime during the early 1970's, while petitioner was

assistant superintendent of the paint department, petitioner

approached Tubre and inquired about the possibility of selling

Besco products to customers other than ASI.    Tubre approved of

this idea and verbally authorized petitioner to represent Besco

and market its products.    Tubre’s consent to petitioner’s request

was motivated by Tubre's desire to expand Besco.

     Petitioner was unsuccessful in generating orders for Besco’s

products from sources outside ASI, and his efforts eventually

ceased.   Subsequently, petitioner approached Tubre and requested

that Besco pay petitioner an unspecified amount for petitioner's

involvement in causing ASI's paint department to purchase
                                - 5 -

products from Besco.   In response to this request, Tubre informed

petitioner that it was necessary that he discuss the matter with

Kahn and George Steiner (Steiner).3     Besco eventually sought the

advice of its accountant, Edmund Lee (Lee).     Tubre claims that

Lee informed him that such an arrangement was acceptable but that

it was imperative to make it appear that the payments were not

based upon Besco’s sales to ASI.     Tubre further claims that Lee

instructed him to pay petitioner by check, characterize each

payment as a commission, and issue a Form 1099 Misc. with respect

to each taxable year in which any payment is made.

     Following the consultation with Lee, Besco began making

payments to petitioner based on Besco’s sales to ASI's paint

department.   Each payment was in the form of a check and was

characterized by Besco as a commission.     The frequency, pattern,

and amount of such payments are not determinable from the record;

however, during the 6-year period ending with 1979, Besco paid

petitioner the following amounts in connection with Besco’s sales

to the paint department:

                Year       Amount

                1974       $10,918

                1975        14,955



     3
      Prior to December 1974, Besco was owned equally by Steiner,
Tubre, and Kahn. After Steiner retired in December 1974, Tubre
and Kahn became the sole owners of Besco.
                                 - 6 -

                1976         14,030

                1977         19,152

                1978         18,300

                1979         18,362

Similarly, during the years at issue, Besco paid petitioner the

following amounts in connection with its sales to the paint

department:

                Year        Amount

                1980        $21,315

                1981         25,377

                1982         19,274

                1983         17,642

 Besco reported all payments to the Internal Revenue Service

(IRS) on Forms 1099 Misc.    Petitioner, in turn, reported receipt

of the above amounts on his returns for each respective taxable

year.

     In 1974, Tubre had a meeting with an ASI vice president

named Clark.   During the course of that meeting, Clark instructed

Tubre to cease paying ASI employees for their involvement in "in

the yard" activities.   Tubre informed petitioner, Kahn, and

Steiner of his conversation with Clark.   He also told petitioner

that Besco intended to comply with Clark’s directive.   The

payments, however, continued despite Tubre's reservations.
                                - 7 -

     Sometime during or before 1984, the IRS initiated an

investigation of ASI.    As part of that investigation, an IRS

special agent (Balash) examined petitioner's returns for the

taxable years at issue.    Balash met with Tubre on at least two

occasions during the course of her investigation.    On one

occasion, Tubre informed Balash that petitioner "serviced"

various accounts for Besco and that Besco’s payments to

petitioner resulted from such service.4    This information was

false, and Tubre knew of its falsity at the time he told it to

Balash.

     On December 20, 1984, Balash met with petitioner.    During

the course of that meeting, petitioner represented to Balash that

the income he received from Besco was in exchange for services he

had provided Besco in the form of soliciting business or

providing leads.    In making such representations, petitioner

referred to several of Besco’s customers and indicated that he

had made contact with certain individuals within those

organizations in his efforts to market Besco's products.

     As noted earlier, petitioner reported the income he received

from Besco on his tax return for each taxable year at issue.



     4
      It   is not clear from the record what activities were
involved   in the alleged "servicing" by petitioner. The arguments
advanced   by both parties, however, suggest that such activities
entailed   providing leads to and soliciting business on behalf of
Besco.
                                - 8 -

That income is reflected on a Schedule C attached to petitioner’s

returns.    The Schedule C’s attached to petitioner's returns for

1980, 1981, and 1982 characterize the "main business activity"

which gave rise to the income from Besco as "commissions".    The

Schedule C attached to petitioner’s return for 1983 characterizes

the "main business activity" which gave rise to the income from

Besco as "industrial sales".   On each Schedule C, petitioner

offset the income received from Besco with various expenses that

he allegedly incurred in connection with earning such income.

The following table lists petitioner’s alleged Schedule C

expenses for each taxable year at issue:

Description           1980         1981      1982           1983

Depreciation          $71.70      $71.70   $4,051.45      $72.00

Dues and
  publications         36.00       48.00      --             --

Office supplies       106.58        --        --             --

Office supplies
  and postage           --        147.23      113.20         --

Office expenses         --          --         --         488.00

Telephone             106.94        --         --            --

Travel and
  entertainment    1,412.00    1,781.12     1,549.30      500.00

Utilities             285.78        --         --            --

Utilities and
  telephone             --        480.56      659.73         --

Automobile
 expenses           4,753.16    3,295.33            --       --
                                 - 9 -

Car and truck
 expenses               --         --       1,781.60    9,901.00

Insurance               --         --         800.00         --

  Total             6,772.16     5,823.94   8,955.28   10,961.00



Additionally, petitioner claimed an investment tax credit in the

amount of $821 for the purchase of a Corvette automobile in 1982.

Petitioner claimed similar expenses against the income he

received from Besco during the period 1974 through 1979.

     During the course of Balash's investigation, Tubre and Kahn

admitted that they had lied with respect to petitioner’s

involvement in Besco’s sales to customers other than ASI.

Subsequently, Besco pled guilty to one count of violating section

7206(1) for filing a return containing a false statement with

respect to its payments to petitioner.

     In April 1987, petitioner was indicted on four counts of tax

fraud for violating section 7206(1) by taking false deductions

with respect to the income received from Besco.    Petitioner was

thereafter convicted on each count based on a plea of nolo

contendere.

     In April 1992, an internal revenue agent initiated an

examination of petitioner’s tax returns for the taxable years at

issue.    Subsequently, respondent determined that petitioner is

not entitled to a deduction for the Schedule C expenses claimed

for any taxable year at issue.    Respondent further disallowed the
                             - 10 -

investment tax credit claimed in 1982 for the purchase of the

Corvette automobile.

                             OPINION

     Petitioner advances two alternative arguments in response to

respondent’s determination of the deficiencies in and additions

to tax set forth in the notice of deficiency.5   First, petitioner

argues that assessment and collection of the taxes at issue are

barred by the statute of limitations under section 6501(a).   In

the alternative, petitioner argues that the equitable doctrine of

laches operates to prevent assessment and collection of the taxes

at issue.

     Respondent rejects petitioner’s arguments, contending

instead that the statute of limitations does not prevent

assessment and collection of the taxes at issue because

petitioner filed fraudulent returns with respect to each taxable

year at issue and, as a result, assessment and collection may be

accomplished "at any time" pursuant to section 6501(c)(1).

Respondent also maintains that petitioner’s argument with respect

to the applicability of the doctrine of laches is without merit.



     5
      Petitioner's plea of nolo contendere to criminal tax
evasion does not estop petitioner from challenging the civil
fraud penalties alleged in this case. Hicks Co. v. Commissioner,
56 T.C. 982, 1027 (1971), affd. 470 F.2d 87 (1st Cir. 1972).
Generally, a plea of nolo contendere is inadmissible in a civil
proceeding. Fed. R. Evid. 410. A conviction based on such a
plea, however, is admissible evidence for impeachment purposes.
Hicks Co. v. Commissioner, supra.
                                - 11 -

     For reasons discussed herein, we find that neither the

statute of limitations nor the doctrine of laches precludes

assessment and collection of the deficiencies in and additions to

tax determined by respondent.

Schedule C Expenses

     Respondent's determinations are presumed correct, and

petitioner bears the burden of proving otherwise.    Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).    Moreover,

deductions are a matter of legislative grace, and petitioner

bears the burden of proving that he is entitled to any deduction

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934); Welch v. Helvering, supra at 115.      This

includes the burden of substantiation.    Hradesky v. Commissioner,

65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976).   Additionally, section 6001 requires petitioner to keep

records sufficient to show whether he is liable for tax.

     Petitioner essentially restricts his entire argument to a

contention that respondent has failed to establish that

petitioner fraudulently claimed deductions for the Schedule C

expenses at issue.    Whether respondent has met her burden with

respect to the issue of fraud, however, is irrelevant with

respect to the instant issue.    That respondent must prove fraud

does not mean that petitioner is free from the burden on the

underlying deficiencies.
                               - 12 -

     Petitioner concedes that he is unable to substantiate the

expenses at issue.   He contends that all evidence pertaining to

such expenses was provided to his accountants, who in turn

relinquished possession of such evidence to the Government during

the grand jury phase of the criminal investigation against him.

Respondent, however, has informed the Court that she requested

and received all evidence used by the grand jury and that no such

records were among the materials she received.

     We find that having failed to provide substantiation of the

Schedule C expenses, petitioner has not carried his burden of

proof on this issue.    Accordingly, respondent's determination is

sustained.

Investment Tax Credit

     Respondent also determined that petitioner is not entitled

to an investment tax credit in the amount of $821 for 1982

because it has not been established that petitioner acquired any

qualified investment property during the taxable year.   As noted

above, respondent's determinations are benefited by a presumption

of correctness and petitioner bears the burden of proving the

contrary.    Rule 142(a); New Colonial Ice Co. v. Helvering, supra

at 440; Welch v. Helvering, supra at 115.

     Petitioner has not offered any evidence with respect to the

investment tax credit claimed on the purchase of his Corvette

automobile.    Again, petitioner restricts his entire argument to

the contention that the statute of limitations precludes
                              - 13 -

respondent's assessment and collection of the taxes at issue.

Petitioner simply does not address the components of the

underlying deficiencies.   Accordingly, respondent is sustained on

this issue.

Additions to Tax for Fraud

     Respondent bears the burden of proving fraud by clear and

convincing evidence.   Sec. 7454(a); Rule 142(b).   The burden that

respondent bears in proving fraud under section 6653(b) or

section 6501(c)(1) is one and the same.    Ruidoso Racing

Association, Inc. v. Commissioner, 476 F.2d 502, 505, 507 (10th

Cir. 1973), affg. in part and revg. in part T.C. Memo. 1971-194.

Respondent must establish that petitioner underpaid his taxes for

each taxable year at issue and that some part of that

underpayment was due to petitioner's intent to conceal, mislead,

or otherwise prevent the collection of such taxes.    Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990); Hebrank v.

Commissioner, 81 T.C. 640, 642 (1983).    For the reasons set forth

below, we find that respondent has met her burden.

     The issue of fraud presents a factual question which must be

decided on the basis of an examination of all the evidence in the

record.   Mensik v. Commissioner, 328 F.2d 147 (7th Cir. 1964),

affg. 37 T.C. 703 (1962); Stone v. Commissioner, 56 T.C. 213, 224

(1971); Stratton v. Commissioner, 54 T.C. 255, 284 (1970).    Fraud

is never presumed; it must be established by some independent
                               - 14 -

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

85 (1970).    Fraud may be proved by circumstantial evidence and

inferences drawn from the record because direct proof of the

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

317 U.S. 492 (1943); Rowlee v. Commissioner, 80 T.C. 1111 (1983);

Stephenson v. Commissioner, 79 T.C. 995 (1982), affd. 748 F.2d

331 (6th Cir. 1984).

       Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing, effectuated by conduct designed

to conceal, mislead, or otherwise prevent the collection of such

tax.    Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968),

affg. T.C. Memo. 1966-81; Mitchell v. Commissioner, 118 F.2d 308,

310 (5th Cir. 1941), revg. 40 B.T.A. 424 (1939); Estate of

Pittard v. Commissioner, 69 T.C. 391 (1977); McGee v.

Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th

Cir. 1975).

       Fraudulent intent may be inferred from a pattern of conduct.

Spies v. United States, supra at 499.    A pattern of consistent

underreporting of income, especially when accompanied by other

circumstances showing an intent to conceal, justifies the

inference of fraud.    See Holland v. United States, 348 U.S. 121,

137 (1954); Otsuki v. Commissioner, 53 T.C. 96 (1969).    Fraud may

also be inferred where the taxpayer makes false and inconsistent

statements to revenue agents, Grosshandler v. Commissioner, 75

T.C. 1, 20 (1980), or files false documents.    Stephenson v.
                                - 15 -

Commissioner, supra.    Similarly, understated income, inadequate

records, implausible or inconsistent explanations of behavior,

concealment of assets, and failure to cooperate with tax

authorities are all indicia of fraud.       Bradford v. Commissioner,

796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo. 1984-601.

     Petitioner correctly points out that respondent cannot

properly rely on the presumption of correctness generally

accorded her determinations in order to satisfy her burden with

respect to an issue of fraud.    See Petzoldt v. Commissioner, 92

T.C. 661, 700 (1989).   Petitioner fails to recognize, however,

that respondent is not attempting to do so in the instant case.

When respondent's argument is appreciated, it is apparent that

respondent fully recognizes her two-pronged burden.

     The parties agree that, in order to prove fraud, respondent

must establish that (1) an underpayment exists and (2) petitioner

intended to evade taxes known to be owing by conduct designed to

conceal, mislead, or otherwise prevent the collection of taxes.

See Rowlee v. Commissioner, supra.       It is petitioner's argument,

however, that respondent is relying on petitioner’s failure to

substantiate the Schedule C expenses at issue in order to

establish that an underpayment exists.      We disagree.   The

substance of respondent’s argument does not depend on such

reliance.   With respect to establishing fraud, respondent

principally argues that petitioner did not incur the expenses at

issue, not that petitioner failed to substantiate such expenses.
                              - 16 -

As support for this argument, respondent contends that the income

petitioner received from Besco was generated from kickback

payments based solely on purchases ASI's paint department made

from Besco.   It follows, respondent's argument continues, that

petitioner did not maintain a business the nature of which would

have given rise to the expenses claimed by petitioner.

Respondent rejects petitioner's contention that such income was

generated in the form of commissions received in exchange for

various activities that petitioner performed while advancing

Besco's interests.   Despite petitioner's fleeting recognition of

this formulation of respondent's argument, petitioner limits his

argument to the contention that respondent is relying on

petitioner’s failure to substantiate the expenses at issue in

order to establish that an understatement exists.

     Respondent has clearly and convincingly established that an

underpayment of tax exists.   An underpayment can be accomplished

by an overstatement of deductions.     Estate of Temple v.

Commissioner, 67 T.C. 143, 161 (1976).    The testimony elicited at

trial demonstrates that the income petitioner received from Besco

during the years at issue was derived exclusively from

petitioner's status as superintendent of ASI's paint department;

petitioner was not furthering Besco's interests outside ASI in

any material fashion.   As superintendent of the paint department,

petitioner was in a position to influence the department's

purchasing decisions, particularly decisions involving suppliers.
                                - 17 -

Using this power to influence, petitioner caused the paint

department to purchase various chemical compounds from Besco.      In

exchange, Besco paid petitioner certain amounts of money.      This

is a classic kickback situation, and petitioner's attempt to

camouflage the payments as commissions must fail.

     Both Tubre's and Kahn's testimony at trial is convincing.

Tubre described a series of events involving petitioner dating

back to the early 1970's.   He testified that petitioner first

sought to promote Besco's products to customers other than ASI

but that this endeavor proved unsuccessful.    Tubre further

testified that petitioner subsequently expressed interest in

receiving the kickback payments with respect to purchases ASI's

paint department made from Besco.    Tubre also testified that

petitioner did not perform any activity on behalf of Besco during

the years at issue in exchange for the payments petitioner

received.   Both Tubre and Kahn testified that the payments were

made to petitioner out of fear of losing business from ASI's

paint department.   Tubre further testified that he alone

initiated and serviced Besco's accounts with ASI, both within and

without the paint department.    Tubre also testified that he, on

behalf of Besco, lied to Balash, when he told her that the

payments to petitioner were in exchange for services performed by

petitioner with respect to non-ASI accounts.    He also testified

that it was out of fear of losing Besco's account with ASI's

paint department that prompted him to lie to Balash.
                               - 18 -

     The expenses used to offset the kickback payments are

attributable to petitioner's alleged activity on behalf of Besco.

This is implicit by petitioner's use of the Schedule C to

identify the income received from Besco and to claim the alleged

expenses as deductions against such income.   Respondent, however,

has established through the credible testimony of both Tubre and

Kahn that petitioner did essentially nothing on behalf of Besco

outside ASI during the years at issue.   Much the same can be said

with respect to petitioner's activity within ASI.    Aside from

causing the paint department to purchase chemicals from Besco,

petitioner did little else not required by his position.     At

best, the friendship between petitioner and Tubre facilitated

Tubre's activity throughout ASI by making access to the facility

easier than Tubre would have otherwise experienced absent such

friendship.   Further, respondent has shown that Besco did not

consider the payments it made to petitioner to be anything other

than kickbacks tied exclusively to the purchases of Besco

products made by the paint department.   Petitioner's contention

otherwise is not convincing.   Tubre viewed the payments as

kickbacks when he sought advice regarding such payments from

Besco's accountant.   In fact, that the payments would be

considered kickbacks was his principal concern.   Besco,

nonetheless, followed the accountant's advice and packaged the

payments in a disguise.   Yet simply disguising the payments as

commissions did not convert them into commissions.
                                - 19 -

     Respondent has established that petitioner was not working

for or on behalf of Besco outside ASI during the years at issue.

Respondent also has established that the payments received by

petitioner were kickbacks attributable solely to Besco's sales to

ASI's paint department and not commissions as petitioner contends

were received in exchange for his services outside the paint

department.   Therefore, it follows that the expenses allegedly

incurred while generating the "commissions" were not so incurred.

Petitioner was not servicing accounts for Besco or providing

Besco with leads; this activity ceased in the early to mid 1970's

after it proved unsuccessful.    Similarly, petitioner was not

advancing Besco's interests inside ASI in departments other than

the paint department.   The fact that petitioner conducted a

variety of parties that were attended by multiple guests,

traveled extensively on behalf of ASI, and took a few trips along

with Tubre and Kahn does little to convince us otherwise.    Such

activity is common among friends, and petitioner, Tubre, and Kahn

were undoubtedly friends.   There is no credible evidence that

suggests that these activities were engaged in by petitioner with

an intention of advancing Besco's interests.    That petitioner was

"capable" of advancing Besco's interests is irrelevant.

Accordingly, we conclude that respondent has clearly and

convincingly established that an underpayment exists for each of

the taxable years at issue.
                                - 20 -

     Respondent also has established that at least a portion of

each underpayment determined immediately above is attributable to

fraud.   We find that petitioner's false statements to Balash

regarding the source of the expenses at issue to be the most

convincing evidence of petitioner's fraudulent intent.   Fraud may

be inferred where a taxpayer makes false representations.    See

Grosshandler v. Commissioner, 75 T.C. 1 (1980).    After Balash

initiated her investigation, she arranged to meet and discuss the

kickback payments with Tubre.    Tubre informed petitioner of his

pending meeting with Balash, and petitioner in turn requested

that Tubre, knowing such information to be false, inform Balash

that petitioner was involved with several of Besco's accounts.

Tubre complied with petitioner's request but refused to cooperate

further.    After requests by petitioner, however, Tubre provided

petitioner with the names of several Besco customers which

petitioner could represent to Balash as having given rise to the

kickback payments.   At a meeting between petitioner and Balash on

December 20, 1984, petitioner used these names in attempt to

explain the income received from Besco and justify the expenses

at issue.   The record clearly shows, however, that petitioner

knew these representations were false at the time he made them.

While petitioner contends otherwise, there is no doubt that

petitioner's lie was designed to justify his claiming the expense

deductions.   If petitioner had actually incurred the expenses at

issue and honestly believed that such expenses were deductible,
                               - 21 -

we are confident he would not have lied and encouraged others to

lie with respect to the activities that gave rise to such

expenses.

     Fraudulent intent may also be inferred from a pattern of

conduct, particularly if such pattern involves the underreporting

of income.    See Holland v. United States, 348 U.S. 121 (1954);

Spies v. United States, 317 U.S. 492 (1943); Otsuki v.

Commissioner, 53 T.C. 96 (1969).    We find that the record clearly

indicates that petitioner engaged in a pattern of underreporting

his income.    During a period when petitioner knew his income from

Besco was based solely on the purchases his department made from

Besco, petitioner offset such income with various expenses known

not to exist.    As this pattern involves consistent and

substantial understatements of income, we conclude that it is

strong evidence of fraud.    See Marcus v. Commissioner, 70 T.C.

562, 577 (1978), affd. without published opinion 621 F.2d 439

(5th Cir. 1980).

     The record contains other evidence that supports an

inference of fraud.    Respondent has established to the

satisfaction of the Court that petitioner maintained inadequate

or no records with respect to the alleged Schedule C expenses

used to offset the income received from Besco during the taxable

years at issue.    This failure to maintain adequate records may be

used to support a finding of fraud.     Bradford v. Commissioner,

796 F.2d 303 (9th Cir. 1986); Woodham v. Commissioner, 256 F.2d
                              - 22 -

201 (5th Cir. 1958), affg. T.C. Memo. 1955-319; Parsons v.

Commissioner, 43 T.C. 378 (1964).   While this indicia of fraud is

less compelling than are petitioner's false representations and

pattern of underreported income, it further solidifies the

inference of fraudulent intent in the instant case.    Balash

testified that during her initial meeting with petitioner on

December 12, 1984, petitioner informed her that he did not

maintain business records.   Balash further testified that

petitioner subsequently told her that he had given his records of

the alleged Schedule C expenses to his accountants.    No records

have been produced, however; nor is there credible evidence in

the record that explains their absence.   Petitioner contends that

all such records were relinquished to the possession of the

Government for use by the grand jury during the criminal phase of

the investigation against him.   Respondent, however, informed the

Court that she requested and received all evidence used by the

grand jury and that no such records were among the materials she

received.   We find respondent's statement credible.   Moreover,

petitioner's accountant and preparer of his 1983 return testified

that he could not recall whether petitioner provided him with

records of the alleged expenses at issue.

     The circumstantial evidence and inferences drawn from the

record clearly and convincingly established that petitioner filed

fraudulent returns for each taxable year at issue.     Accordingly,

respondent is sustained on this issue.
                                - 23 -

     Petitioner contends that he relied on the advice of his

accountants in reducing the income received from Besco by the

alleged expenses and that such reliance precludes a finding of

fraudulent intent.   For petitioner to prevail on his reliance

argument, however, he must have provided his accountants with

full and correct information.    Estate of Temple v. Commissioner,

67 T.C. 143 (1976); see Morris v. Commissioner, T.C. Memo. 1992-

635, affd. without published opinion 15 F.3d 1079 (5th Cir.

1994).   In this case, petitioner's alleged reliance does not

preclude a finding of fraudulent intent.

     Petitioner maintains that his accountants were fully aware

of the "nature" of the payment arrangement between Besco and

petitioner when they advised petitioner to take a deduction for

the expenses at issue.   This contention does little more than

suggest that petitioner's accountants conspired to defraud the

Government.   It does not, however, address whether petitioner

provided his accountants with full and correct information

regarding the alleged expenses at issue.    Petitioner, not his

accountants, handled his affairs.    The record lacks sufficient

evidence for us to conclude that petitioner provided his

accountants with full and correct information so as to justify

petitioner's reliance on an accountant's advice.    Because

petitioner's return preparer for 1983 testified that he could not

recall how petitioner informed him of the alleged expenses at

issue, and because petitioner declined to testify, all that is
                              - 24 -

available to evaluate petitioner's contention is petitioner's

argument itself.   While we have little doubt that petitioner's

accountants, particularly Lee, were apprised of the nature of the

payment arrangement between Besco and petitioner, we refrain from

concluding that these accountants instructed petitioner to take

deductions for expenses knowing that such expenses were not

incurred.

     We find petitioner's argument with respect to reliance on

his tax advisers to be without merit.

Statute of Limitations

     Petitioner asserts that the statute of limitations under

section 6501(a) precludes assessment and collection of the

deficiencies in and additions to tax determined by respondent.

Respondent, on the other hand, contends that the statute of

limitations does not bar assessment and collection because

petitioner filed fraudulent returns for each taxable year at

issue.

     Section 6501(a) provides the general rule that a tax must be

assessed within 3 years of the filing of a return.   Section

6501(c)(1) provides an exception to the general rule in cases

where a false or fraudulent return is filed by a taxpayer with

the intent to evade tax.   If the exception set forth in section

6501(c)(1) is applicable, assessment may be made at any time.     As

we have concluded that respondent has established by clear and

convincing evidence that petitioner fraudulently intended to
                                - 25 -

evade paying taxes known to be owing for each of the taxable

years at issue, the limitations period is extended indefinitely

pursuant to section 6501(c)(1) for each such year.    Accordingly,

respondent is sustained on this issue.

Laches

     Petitioner alternatively argues that the equitable doctrine

of laches operates to preclude respondent's assessment and

collection of the deficiencies in and additions to tax at issue

in the instant case.    Respondent disagrees and contends that the

doctrine of laches must yield to the indefinite limitations

period imposed by section 6501(c)(1).

     The doctrine of laches prohibits a party from asserting a

claim following an unreasonable delay by such party when there

has been a change in circumstances during such delay which would

result in severe prejudice against an opposing party should the

claim be permitted.    See Albertson v. T.J. Stevenson &   Co., 749

F.2d 223, 233 (5th Cir. 1984).    It is well settled that the

United States is not subject to the defense of laches in

enforcing its rights.    Guaranty Trust Co. v. United States, 304

U.S. 126, (1938); United States v. Thompson, 98 U.S. 486 (1878).

"[L]aches may not be asserted against the United States when it

is acting in its sovereign capacity to enforce a public right or

protect the public interest".    United States v. Popovich, 820

F.2d 134, 136 (5th Cir.).   The timeliness of Government claims is

governed by the statute of limitations enacted by Congress.     See
                             - 26 -

United States v. Summerlin, 310 U.S. 414, 416, (1940); Chevron,

U.S.A., Inc. v. United States, 705 F.2d 1487, 1491 (9th Cir.

1983); Foster v. Commissioner, 80 T.C. 34, 229 (1983), affd. in

part and vacated in part 756 F.2d 1430 (9th Cir. 1985); Saigh v.

Commissioner, 36 T.C. 395, 424-425 (1961); United States v.

Manufacturers Hanover Trust Co., 229 F. Supp. 544, 545-546

(S.D.N.Y. 1964).

     In the present case, section 6501(c)(1), which we have

determined to be applicable, expressly authorizes respondent to

assess deficiencies against petitioner "at any time".

Accordingly, respondent is sustained on this issue.

     To reflect the foregoing,

                                        Decision will be

                                   entered for respondent.
