                         T.C. Memo. 1999-70



                       UNITED STATES TAX COURT



   JANET N. DRUMMOND, A.K.A. JANET N. DE SANTI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

         DARYL DRUMMOND, Petitioner v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket Nos. 26060-96, 26077-96.             Filed March 9, 1999.



     Janet N. Drummond and Daryl Drummond, pro sese.

     Christine V. Olsen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, and additions to, the Federal income tax (tax) of

petitioner Janet N. Drummond, a.k.a. Janet N. De Santi (Ms.

Drummond):
                                 - 2 -


                                     Additions to Tax
                               Sec.           Sec.           Sec.
                                       1
     Year     Deficiency    6653(b)(1)     6653(b)(2)        6654

     1983     $19,113      $9,607            *          --
     1984       9,025       4,513            *         $509
* 50 percent of the interest due on the portion of the underpay-
ment attributable to fraud. Respondent determined that the
entire underpayment for each of the years 1983 and 1984 was due
to fraud.

     Respondent determined the following deficiencies in, and

additions to, the tax of petitioner Daryl Drummond (Mr.

Drummond):

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

          1983     $34,726     $17,363            *
          1984      21,038      10,519            *
* 50 percent of the interest due on the portion of the underpay-
ment attributable to fraud. Respondent determined that the
entire underpayment for each of the years 1983 and 1984 was due
to fraud.

     The issues for decision are:

     (1)    Should the determinations in the notice of deficiency

(notice) issued to Ms. Drummond be sustained?     We hold that they

should.

     (2)    Should the determinations in the notice issued to Mr.

Drummond be sustained?     We hold that they should except to the

extent that respondent's concession on brief that Mr. Drummond's



     1
        All section references are to the Internal Revenue Code
in effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
                               - 3 -


income for 1983 is community property affects those determina-

tions for that year.2

                         FINDINGS OF FACT

     Many of the facts are deemed admitted pursuant to Rule

90(c).3

     Each petitioner resided in California at the time the

respective petitions in these cases were filed.

     For a number of years prior to and during the years at

issue, Ms. Drummond, a college graduate and a certified manage-

ment accountant, was employed by American Business College (ABC),

a vocational college located in San Diego, California, that was

owned and operated by E.D.U.C., Inc. (E.D.U.C.).   Colonel Haller

was the stockholder and chief executive officer of E.D.U.C.

     For a number of years prior to 1983, Ms. Drummond worked as

a supervisor in the business office and the bookkeeping depart-

ment of ABC.   During the years at issue, Ms. Drummond was the

bookkeeper and the comptroller of ABC and vice president of

E.D.U.C.   During those years, Colonel Haller did not visit the

business office of ABC on a daily basis.    Instead, he relied on




     2
        Respondent's concession for 1983 and our holdings in Mr.
Drummond's case at docket No. 26077-96 will require a computation
in that case under Rule 155.
     3
        Unless otherwise indicated, our Findings of Fact and
Opinion pertain to the years at issue.
                               - 4 -


Ms. Drummond to operate that office and the bookkeeping depart-

ment.

     In her supervisory roles at ABC and E.D.U.C., Ms. Drummond

was in charge of all financial aspects of ABC, including cash

flow, preparation of financial statements, general ledger work,

preparation of tax returns, and similar functions, and instructed

other employees of the business office and the bookkeeping

department of ABC in their duties.     Ms. Drummond, inter alia,

wrote checks or caused checks to be written for ABC.     She also

signed checks or caused checks to be signed for ABC.

     Throughout the years at issue, Ms. Drummond generally

received $1,500 semimonthly from ABC.     During approximately the

first six months of 1983, Ms. Drummond wrote checks to herself

from ABC totaling $18,000, which were classified as wages and on

which taxes were withheld.   Around July 1983, Ms. Drummond

removed herself from ABC's payroll, but she continued to receive

from ABC at least $1,500 semimonthly.

     In addition to the $18,000 in checks from ABC that Ms.

Drummond wrote to herself during the first half of 1983, which

were classified as wages, during 1983 and 1984, Ms. Drummond

wrote checks to herself and received funds from ABC in the

respective amounts of $52,277.08 and $39,553.22, which were not

classified as wages.   Ms. Drummond deposited those checks into

her personal checking accounts and was aware of the amount of
                                - 5 -


payments that she received from ABC during each of the years 1983

and 1984.   Ms. Drummond directed employees of ABC not to issue a

Form 1099 to her for either 1983 or 1984.

     Ms. Drummond received $4,669 in interest income during 1984.

She also received during that year $33 in capital gain income

through SFR Three, Ltd.

     At all relevant times, Ms. Drummond was fully aware of the

requirement to report income.   She also was fully aware of the

requirement to file a tax return (return).

     Ms. Drummond, who married Mr. Drummond on December 31, 1984,

filed a return for 1983 around August 19, 1985, in which she

reported $18,000 in wages, but did not report the additional

funds totaling $52,277.08 that she received from ABC during that

year.   Ms. Drummond did not file a return for 1984, and conse-

quently she did not report any of the funds totaling $39,553.22

that she received from ABC during that year.   Nor did she report

the $4,669 in interest income and $33 in capital gain income that

she received during 1984.   Except for a credit in the amount of

$506 that Ms. Drummond requested in her 1983 return be applied to

her 1984 estimated tax, Ms. Drummond made no estimated tax

payments with respect to her taxable year 1984.

     During respondent's civil examination of Ms. Drummond's

taxable years 1983 and 1984, Ms. Drummond presented respondent's
                               - 6 -


agent with a Form 1040X, Amended U.S. Individual Income Tax

Return, for 1983, which was not accurate.

     Ms. Drummond was indicted for and convicted (1) under

section 7206(1) of willfully subscribing to and filing a false

return for 1983 and (2) under section 7203 for failing to file a

return for 1984.

     Mr. Drummond, a graduate of the University of Missouri,

married Betty Drummond in 1958 and remained married to her

through 1983.   In 1960, Mr. Drummond became licensed as a certi-

fied public accountant.   He worked for Haskins and Sells, a major

accounting firm, from 1960 through 1970.    Mr. Drummond operated

his own accounting business for approximately ten years prior to

1983 and continued to operate that business during the years at

issue.

     Mr. Drummond prepared tax returns for various clients for

the taxable years 1982, 1983, and 1984.    During those years, Mr.

Drummond also had a contract to perform audit and accounting

services for E.D.U.C. doing business as ABC, and Mr. Drummond

audited ABC's books.

     During each of the years 1983 and 1984, Mr. Drummond re-

ceived a monthly retainer of $3,500, or a total of $42,000, for

performing accounting services for ABC.    During those years, he

also received checks from ABC that were made payable to him for

additional amounts totaling $57,547 and $77,874, respectively,
                               - 7 -


for performing audits and other work.   Mr. Drummond deposited

those checks into his personal bank and investment accounts or

used some of those checks to purchase cashier's checks.   Ms.

Drummond directed employees of ABC not to issue a Form 1099 to

Mr. Drummond for either 1983 or 1984.   However, Mr. Drummond knew

that the amounts which he received during the years at issue were

classified as "special payroll" on ABC's books.

     Mr. Drummond received gross receipts from his accounting

business for 1983 and 1984 in the amounts of $127,567 and

$119,874, respectively.   Of those total amounts, Mr. Drummond was

aware that he received $99,547 and $119,874 from ABC during 1983

and 1984, respectively.

     During 1983, Mr. Drummond did not incur or pay any sales

costs in his accounting business.    Nor did he incur or pay during

that year any interest expenses in that business.   During 1984,

Mr. Drummond did not incur any legal expenses in his accounting

business.

     During their marriage, Mr. Drummond and Betty Drummond did

not enter into a separate property agreement.   Consequently, the

income that Mr. Drummond received during 1983 from his accounting

business was community property, one-half of which is includible

in Mr. Drummond's income for 1983.
                               - 8 -


     Betty Drummond received wage income of $27,115.37 during

1983, which was community property, one-half of which is

includible in Mr. Drummond's income for 1983.

     During 1984, Mr. Drummond and Ms. Drummond had a joint

Merrill Lynch account from which they received interest income

during that year in the amount of $2,899, one-half of which is

interest income to each of them for that year.   During that year,

Mr. Drummond also received interest income in the amount of $241

from the Bank of San Diego.

     Betty Drummond filed for divorce from Mr. Drummond in 1984.

On October 5, 1984, a bifurcated judgment of dissolution of the

marriage of Mr. Drummond and Betty Drummond was issued.    On July

16, 1985, a final judgment of dissolution of that marriage was

entered.   Pursuant to the property settlement agreement incident

to that divorce, Betty Drummond was awarded $21,890 of precious

metals.

     Mr. Drummond, who has knowledge of tax matters and was

capable of correctly preparing and filing his own returns for

1983 and 1984, prepared his returns for those years and filed

them around September 19 and October 17, 1985, respectively.    Mr.

Drummond reported gross receipts in Schedule C of his 1983 return

in the amount of $70,020.   Those gross receipts consisted of

$42,000 that Mr. Drummond received from ABC and $28,020 that he

received from other clients during 1983.   Mr. Drummond did not
                               - 9 -


report in his 1983 return the additional $57,547 that he received

from ABC during that year.   Mr. Drummond did not report in his

1983 return one-half of the community property wage income

totaling $27,115.37 that Betty Drummond, his spouse during 1983,

received during that year.   Mr. Drummond reported cost of sales

in the amount of $21,890 in Schedule C of his 1983 return even

though he did not incur or pay any sales costs during 1983.     The

amount of cost of sales claimed by Mr. Drummond in Schedule C of

his 1983 return is equal to the amount of precious metals that

Betty Drummond was awarded pursuant to the property settlement

agreement incident to her divorce from Mr. Drummond.    Mr.

Drummond also deducted interest expenses in the amount of $6,669

in Schedule C of his 1983 return, even though he did not incur or

pay any interest expenses in his accounting business.

     Mr. Drummond reported no income in his 1984 return.      He thus

excluded from that return $119,874 that he had received during

1984 from ABC.   Mr. Drummond also did not report in his 1984

return 50 percent of the interest income earned on the joint

Merrill Lynch account that he and Ms. Drummond had during 1984.

Nor did Mr. Drummond report in his return for 1984 the interest

income totaling $241 that he had received during that year from

the Bank of San Diego.

     During respondent's investigation of Mr. Drummond's taxable

years 1983 and 1984, Mr. Drummond made numerous false, mislead-
                               - 10 -


ing, inconsistent, and implausible statements to respondent's

agents about why he failed to report certain income in his 1983

return and why he reported no income in his 1984 return.      One

explanation that Mr. Drummond gave to respondent's agent for his

unreported income for the years at issue related to Harbour

Marine Services in which Mr. Drummond had invested $25,000 during

1982.    Mr. Drummond told respondent's agent that Harbour Marine

Services was a sole proprietorship, which might have losses for

1983 and 1984 that would offset any income that he had for those

years.    At various times, Mr. Drummond told respondent's agent

that Harbour Marine Services had losses for 1983 in the amounts

of $47,000, $70,000, and $400,000.      Although Mr. Drummond in-

formed respondent's agent that Harbour Marine Services was a sole

proprietorship, he knew that it was a corporation because, inter

alia, (1) Harbour Marine Services had filed articles of incorpo-

ration with the California Secretary of State in 1982; (2) Mr.

Drummond had offered stock in Harbour Marine Services to an

individual; (3) Mr. Drummond opened a corporate bank account for

Harbour Marine Services and listed himself as its president; and

(4) Harbour Marine Services' books were maintained as a corpora-

tion.    Moreover, on April 24, 1995, over two years after Mr.

Drummond was convicted under section 7206(1) of filing false

returns for 1983 and 1984, he presented respondent's agent with a

copy of Form 1120, U.S. Corporation Income Tax Return, dated
                               - 11 -


April 24, 1995, for Harbour Marine Services' taxable year 1982.

Mr. Drummond's stock in Harbour Marine Services became worthless

during 1984.

     Other statements that Mr. Drummond made to respondent's

agents to explain his tax situation for 1984 included his false

claim that he did not work during that year.    Mr. Drummond also

told respondent's agent that his 1984 return was not accurate

because he had been in the midst of a messy divorce when it was

filed.   In fact, Mr. Drummond's divorce was finalized, and he had

remarried, long before his 1984 return was filed.    In addition,

at sometime during respondent's examination of Mr. Drummond's

taxable years 1983 and 1984, Mr. Drummond told respondent's agent

that he did not report income from ABC because he was on the

completed contract method.

     Another illustration of misleading statements made by Mr.

Drummond to respondent's agents is his claim relating to D.D. &

Associates.    About a year and a half after the investigation by

respondent of Mr. Drummond's taxable years 1983 and 1984 had

begun, Mr. Drummond informed respondent's agent that the income

that he received from ABC was partnership income from his part-

nership known as D.D. & Associates.     Prior to making that state-

ment to respondent's agent, Mr. Drummond had taken the position

that D.D. & Associates was the name of his accounting business.

Mr. Drummond also told respondent's agent that no return had been
                               - 12 -


filed for D.D. & Associates.   On March 21, 1991, before the

criminal trial of Mr. Drummond and Ms. Drummond, a copy of Form

1065, U.S. Partnership Return of Income, for D.D. & Associates

with respect to the taxable year ended June 30, 1984, was pre-

sented to the assistant U.S. attorney and respondent's agent as

having been filed on September 4, 1984.   In fact, D.D. & Associ-

ates did not file Form 1065 for that taxable year or for the

taxable year ended June 30, 1985.   On April 24, 1995, another

copy of a Form 1065 for D.D. & Associates with respect to the

taxable year ended December 31, 1983, was presented to respon-

dent's agent.    In fact, D.D. & Associates did not file Forms 1065

for the taxable years ended December 31, 1983, and December 31,

1984.

     On April 24, 1995, during respondent's civil examination of

Mr. Drummond's taxable years 1983 and 1984, Mr. Drummond pre-

sented another inaccurate tax return for 1983 to respondent's

agent.   Mr. Drummond has never filed amended returns for 1983 and

1984.

     In early 1985, ABC sued Mr. Drummond and Ms. Drummond for

fraud and conversion.   However, the suit was not pursued because

Colonel Haller died.

     Mr. Drummond was indicted for and convicted under section

7206(1) of willfully subscribing to and filing false returns for

1983 and 1984.
                                - 13 -


     On September 4, 1996, respondent sent a separate notice to

Ms. Drummond and to Mr. Drummond.    Respondent determined, inter

alia, in the notice issued to Ms. Drummond that she received

nonemployee compensation from ABC during 1983 and 1984 which she

did not report for those years, that Ms. Drummond is liable for

1984 for the addition to tax for failure to make estimated tax

payments, and that she is liable for each of the years 1983 and

1984 for the additions to tax for fraud under section 6653(b)(1)

and (2) on the underpayment of tax for each such year.      Respon-

dent determined, inter alia, in the notice issued to Mr. Drummond

that he received nonemployee compensation from ABC during 1983

and 1984 which he did not include in Schedule C of his return for

each of those years and that Mr. Drummond is liable for each of

the years 1983 and 1984 for the additions to tax for fraud under

section 6653(b)(1) and (2) on the underpayment of tax for each

such year.

                                OPINION

     Each petitioner bears the burden of proving that all the

determinations in the respective notices, except the additions to

tax for fraud, are in error.    See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      Neither petitioner appeared

at the trial of these cases.4    On the record before us, we find

     4
        The Court nonetheless afforded each petitioner the oppor-
tunity to file a brief, either separately or jointly. They
                                                   (continued...)
                              - 14 -


that neither Mr. Drummond nor Ms. Drummond has established that

the determinations on which each has the burden of proof are

erroneous.   Accordingly, we sustain those determinations except

to the extent that respondent's concession that Mr. Drummond's

income for 1983 is community property affects the determinations

for 1983 with respect to Mr. Drummond on which he has the burden

of proof.

     We now turn to the fraud issue.   In order for the additions

to tax for fraud under section 6653(b)(1) and (2) to apply,

respondent must prove by clear and convincing evidence that an

underpayment exists and that some portion of such underpayment is

due to fraud.   See sec. 7454(a); Rule 142(b); Niedringhaus v.

Commissioner, 99 T.C. 202, 210 (1992).   On the record before us,

we find that respondent has established by clear and convincing

evidence that each petitioner has an underpayment for each of the

years at issue.

     To prove that an underpayment is attributable to the fraudu-

lent intent of a taxpayer, respondent must prove by clear and

convincing evidence that the taxpayer intended to evade taxes

that he or she believed to be owing by conduct intended to

conceal, mislead, or otherwise prevent the collection of such


     4
      (...continued)
decided to file a joint brief. That brief contains numerous
statements and attachments which are not evidence in these cases
and which we consequently disregarded. See Rule 143(b).
                               - 15 -


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

Cir. 1968); Parks v. Commissioner, 94 T.C. 654, 661 (1990); see

also Laurins v. Commissioner, 889 F.2d 910, 913 (9th Cir. 1989),

affg. Norman v. Commissioner, T.C. Memo. 1987-265.    The existence

of fraud is a question of fact to be resolved upon consideration

of the entire record.    See DiLeo v. Commissioner, 96 T.C. 858,

874 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Recklitis v.

Commissioner, 91 T.C. 874, 909 (1988); Gajewski v. Commissioner,

67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978).    Fraud is never presumed or imputed and

should not be found in circumstances which create at most only

suspicion.    See Toussaint v. Commissioner, 743 F.2d 309, 312 (5th

Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner,

92 T.C. 661, 700 (1989); Katz v. Commissioner, 90 T.C. 1130, 1144

(1988).    Direct evidence of the requisite fraudulent intent is

seldom available.    See Petzoldt v. Commissioner, supra at 699;

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

respondent may prove fraud by circumstantial evidence.    See

Toussaint v. Commissioner, supra at 312; Marsellus v. Commis-

sioner, 544 F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-

368; Rowlee v. Commissioner, supra at 1123.

     The courts have identified a number of badges of fraud from

which fraudulent intent may be inferred.    Those badges include

(1) understatement of income; (2) acts designed to conceal
                              - 16 -


income; (3) false, misleading, inconsistent, or implausible

explanations of behavior; (4) failure to cooperate with respon-

dent's agents; (5) failure to file a tax return; (6) willfully

subscribing to and filing a false tax return under section

7206(1); (7) failure to make estimated tax payments; and

(8) failure by the taxpayer to appear at trial, thereby indicat-

ing a deliberate effort to conceal the facts concerning such

taxpayer's tax liability.   See Laurins v. Commissioner, supra at

913; Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.

1986), affg. T.C. Memo. 1984-601; Ruark v. Commissioner, 449 F.2d

311, 312-313 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-

48; Bagby v. Commissioner, 102 T.C. 596, 608 (1994); Niedringhaus

v. Commissioner, supra at 211; DiLeo v. Commissioner, supra at

876; Miller v. Commissioner, 94 T.C. 316, 334 (1990); Petzoldt v.

Commissioner, supra at 700; Recklitis v. Commissioner, supra at

910; Smith v. Commissioner, 91 T.C. 1049, 1059-1060 (1988), affd.

926 F.2d 1470 (6th Cir. 1991); Stringer v. Commissioner, 84 T.C.

693, 715 (1985), affd. without published opinion 789 F.2d 917

(4th Cir. 1986); Castillo v. Commissioner, 84 T.C. 405, 409

(1985).   In addition, the taxpayer's background, including the

sophistication, experience, and education of the taxpayer, and

the context of the events in question may be considered circum-

stantial evidence of fraud.   See Plunkett v. Commissioner, 465

F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo. 1970-274;
                              - 17 -


Niedringhaus v. Commissioner, supra at 211.   Although no single

factor is necessarily sufficient to establish fraud, the exis-

tence of several indicia constitutes persuasive circumstantial

evidence of fraud.   See Bradford v. Commissioner, supra at 307;

Petzoldt v. Commissioner, supra at 700.

     The record in this case is replete with indicia of fraud on

the part of Ms. Drummond and on the part of Mr. Drummond, includ-

ing the following.   Ms. Drummond, a college graduate and a

certified management accountant, was fully aware of the require-

ment to report income and to file tax returns for the years at

issue.   She nonetheless did not report a substantial amount of

income in her 1983 return and did not report any income for 1984

because she did not file a return for that year.    Ms. Drummond

was the bookkeeper and the comptroller of ABC and vice president

of E.D.U.C.   In those supervisory roles, Ms. Drummond wrote

certain checks or caused certain checks to be written for ABC to

herself and to Mr. Drummond, the amounts of which they did not

report as income for the years at issue.   She also caused herself

to be removed from ABC's payroll and directed ABC's employees not

to issue a Form 1099 to her or to Mr. Drummond.    Ms. Drummond

thereby took acts designed to conceal the income that was paid to

her and to Mr. Drummond.   Ms. Drummond willfully subscribed to

and filed a false tax return for 1983 and failed to file a tax

return for 1984, for which she was convicted under sections
                              - 18 -


7206(1) and 7203, respectively.   Ms. Drummond failed to make

required estimated tax payments for 1984.   She also failed to

appear at trial, which we believe was a deliberate effort by her

to conceal the facts concerning her tax liability for the years

at issue.

     Mr. Drummond, a college graduate and a certified public

accountant, has knowledge of tax matters and was capable of

correctly preparing and filing his tax returns for 1983 and 1984.

He nonetheless substantially understated his income in each of

those returns.   Mr. Drummond gave false, misleading, inconsis-

tent, and implausible explanations of his behavior to respon-

dent's agents during their examination of his taxable years 1983

and 1984 and thereby did not cooperate with those agents.     Mr.

Drummond willfully subscribed to and filed a false tax return for

each of the years at issue, for which he was convicted under

section 7206(1).   He also failed to appear at trial, which we

believe was a deliberate effort by him to conceal the facts

concerning his tax liability for the years at issue.

     Based on our examination of the entire record in these

cases, we find that respondent has established by clear and

convincing evidence that each petitioner intended to evade taxes

for each of the years 1983 and 1984, which each petitioner

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

otherwise prevent the collection of such taxes.   We further find
                             - 19 -


on that record that each petitioner is liable for each of the

years 1983 and 1984 for the additions to tax for fraud under

section 6653(b)(1) and (2) on the underpayment of tax that each

petitioner has for each of those years.

     To reflect the foregoing and the concession of respondent

with respect to Mr. Drummond for 1983,

                                          Decision will be entered

                                   for respondent in docket No.

                                   26060-96.

                                          Decision will be entered

                                   under Rule 155 in docket No.

                                   26077-96.
