                         T.C. Memo. 1999-276



                       UNITED STATES TAX COURT



 CHARLES T. WICKERSHAM AND SANDRA J. WICKERSHAM, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14562-97.                      Filed August 20, 1999.



     George W. Connelly, Jr., and Linda S. Paine, for

petitioners.

     Wanda M. Cohen and R. Scott Shieldes, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined a deficiency of

$97,899 and a penalty pursuant to section 6663(a) of $73,424 with

respect to petitioners' 1989 Federal income tax.1


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

     After concessions,2 the primary issue for decision is

whether Charles T. Wickersham (Mr. Wickersham) is liable for the

fraud penalty pursuant to section 6663(a).   If we so find, we

must decide whether there is a deficiency for 1989.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time they filed

their petition, petitioners, husband and wife, resided in Orange,

Texas.

Mr. Wickersham's Businesses

     In September 1988, Elco International, Inc. (Elco), was

incorporated.   Elco purchased and operated a grain elevator in

Houston, Texas.   Mr. Wickersham and Lester Winfree (Mr. Winfree)

were two of the four owners and directors of Elco.

     During 1989, Mr. Wickersham owned and operated a Ford-

Lincoln-Mercury dealership, an insurance company, and a leasing

company.   He also was involved in commercial property development

and owned 50 percent of a landholding company.

The Peveto

     The Peveto Grain Elevator (the Peveto) is located in Orange,

Texas.   In 1985, G & B Products purchased the Peveto and

converted it from a grain elevator into a grinding facility that

     2
        Respondent concedes that Sandra J. Wickersham is not
liable for the deficiency or the fraud penalty pursuant to sec.
6663 for 1989.
                                  -3-

G & B Products used to grind and bag rice hulls.    On August 8,

1988, the Small Business Administration (SBA) foreclosed on the

Peveto.

     Before February 1989, Mr. Wickersham became interested in

property being auctioned by the Resolution Trust Corporation

(RTC).    He requested to be placed on RTC mailing lists, and as a

result he received a brochure regarding the auction of the Peveto

on February 23, 1989 (the auction).     Mr. Wickersham attended the

auction, and he was the high bidder for the Peveto.

     The terms of the auction did not permit Mr. Wickersham to

purchase the Peveto for the bid price; instead, the rules allowed

Mr. Wickersham to negotiate with the SBA for an opportunity to

purchase the Peveto.   Sometime after the auction, Mr. Wickersham

reached an agreement with the SBA to purchase the Peveto for

$100,000.   On March 27, 1989, by special warranty deed, the SBA

conveyed the Peveto to Mr. Wickersham.

The OCPND

     The Orange County Port and Navigation District (OCPND) is a

governmental entity created by the Texas legislature to

administer the port in Orange County, Texas.    The OCPND board is

composed of five commissioners.

     From May 1988 throughout 1989, the five commissioners on the

OCPND board were Mr. Winfree, Wallace Wayne Frederick (Mr.

Frederick), Walter Mullins, James Smith, and John Young (Mr.

Young).   During this time, the OCPND board held regular and
                                 -4-

"special called" meetings at which the OCPND conducted all

official business.

     On April 10, 1989, the OCPND board held a regular meeting at

which the commissioners discussed the acquisition of a grain

bagging facility.    The OCPND board appointed Mr. Frederick and

Mr. Young to approach Mr. Wickersham about acquiring the Peveto.

Mr. Winfree recused himself from participating in the OCPND's

attempt to acquire the Peveto because of his and Mr. Wickersham's

joint business interest in Elco.

     Sometime after April 10, 1989, Mr. Frederick and Mr. Young

met with Mr. Wickersham and discussed the OCPND's interest in

acquiring the Peveto.    After the first meeting with Mr.

Wickersham, Mr. Young did not participate in the negotiations.

     Mr. Wickersham and Mr. Frederick had several discussions, in

person and via telephone, regarding the sale of the Peveto.    Mr.

Frederick offered Mr. Wickersham $350,000 for the Peveto, but Mr.

Wickersham was firm that he wanted $450,000.    Mr. Frederick told

Mr. Wickersham that a decision regarding the Peveto would be made

at a special meeting of the OCPND board on July 31, 1989.

     On July 31, 1989, the OCPND board held a special meeting at

which the commissioners again discussed purchasing the Peveto.

Mr. Frederick recommended that the OCPND buy the Peveto for

$450,000.   The board voted to purchase the Peveto from Mr.

Wickersham for $450,000.
                                 -5-

Mr. Wickersham's Accountant

     Since 1984, Jane Whitfield (Ms. Whitfield), a certified

public accountant, has been Mr. Wickersham's return preparer for

his personal and corporate tax returns.    She also gave Mr.

Wickersham general tax advice when he was considering business

deals.    In July 1989, when Mr. Wickersham thought the OCPND board

was going to vote to acquire the Peveto, Mr. Wickersham went to

Ms. Whitfield to discuss how he could save money on the sale of

the Peveto.

     Mr. Wickersham told Ms. Whitfield about the OCPND's interest

in the Peveto and that he was interested in acquiring a piece of

real property owned by a longtime business associate (Ms. Stark).

Ms. Whitfield and Mr. Wickersham discussed the possibility of a

like-kind exchange pursuant to section 1031.

     Mr. Wickersham approached Ms. Stark about selling him some

land she owned in a three-way transaction, and she agreed to the

sale.    Sometime between August 11 and 18, 1989, however, Ms.

Stark's attorney informed Mr. Wickersham that he (the attorney)

had advised Ms. Stark not to go through with the three-way

transaction.

Mr. Wickersham's Tax Attorney

     After learning that Ms. Stark would not participate in the

three-way transaction, Mr. Wickersham spoke with his tax

attorney, Peter Wells (Mr. Wells), and informed him of the
                                 -6-

situation.   Previously, Mr. Wickersham had told Mr. Wells that

the OCPND was pressuring him to sell the Peveto and that the

OCPND had indicated that it wanted to condemn the Peveto.   Mr.

Wells researched the matter and informed Mr. Wickersham that he

needed a letter from the OCPND memorializing a threat of

condemnation.   Mr. Wells advised Mr. Wickersham not to close on

the Peveto until the OCPND gave him a letter memorializing the

threat of condemnation.

The Events Surrounding August 22, 1989

     On or around August 22, 1989, Mr. Wickersham went to the

office of the OCPND board's attorney (Mr. Dies) with a draft

letter prepared by Mr. Wells threatening condemnation of the

Peveto (the draft letter).    At this time, Mr. Wickersham informed

Mr. Dies that Mr. Wells would call Mr. Dies regarding the draft

letter.

     On August 22, 1989, Mr. Wells called Mr. Dies and told Mr.

Dies that Mr. Wickersham was entitled to a letter threatening

condemnation.   Furthermore, Mr. Wells and Mr. Wickersham wanted

Mr. Dies, on behalf of the OCPND, to sign the draft letter.    Mr.

Dies told Mr. Wells that he did not think the draft letter was

appropriate because he did not remember the OCPND's discussing

condemnation of the Peveto.   Mr. Wells' position was that his

client had been threatened with condemnation by Mr. Frederick

during the discussions Mr. Frederick had with Mr. Wickersham.
                                 -7-

     Mr. Dies contacted Mr. Frederick to ask him whether he (Mr.

Frederick) had threatened Mr. Wickersham with condemnation.     Mr.

Frederick replied that he had threatened Mr. Wickersham.     Mr.

Dies then called Mr. Wells and told him that he (Mr. Dies) would

draft a letter to reflect what Mr. Frederick had told him (Mr.

Dies).    Mr. Dies signed the letter he drafted (Mr. Dies' letter

of condemnation), and it was given to Mr. Wickersham at the

closing on the Peveto.

Petitioners' 1989 Tax Return

     Petitioners timely filed a joint individual Federal income

tax return for 1989 (1989 return).     Ms. Whitfield prepared the

1989 return.

     Before Ms. Whitfield's preparation of the 1989 return, Mr.

Wickersham told Ms. Whitfield that he had sold the Peveto under

threat of condemnation.    After learning of this, Ms. Whitfield

researched the deferral of gain under section 1033.     After

researching the issue, she called Mr. Wickersham and told him

that she needed confirmation of the threat of condemnation.     Mr.

Wickersham gave Ms. Whitfield Mr. Dies' letter of condemnation.

     Ms. Whitfield relied on Mr. Dies' letter of condemnation to

prepare the 1989 return.    On the 1989 return, petitioners fully

disclosed the transaction between the OCPND and Mr. Wickersham

involving the Peveto.    Ms. Whitfield did not include the gain

from the sale of the Peveto in petitioners' income on the 1989

return.    Instead, she prepared a statement entitled "Supplemental
                                -8-

Information, Election under Code Sec. 1033(a)(2) Not to Recognize

Gain from Compulsory or Involuntary Conversions."   In this

statement, Ms. Whitfield reduced the basis in the replacement

properties purchased by Mr. Wickersham by the amount of gain

recognized on the sale of the Peveto.3   Ms. Whitfield and

petitioners signed the 1989 return.

The Criminal Proceedings

     On July 29, 1992, a grand jury returned an eight-count

superseding indictment (the indictment) in the case of United


     3
         The supplemental information statement reads as follows:

     Charles T. Wickersham * * * elected in accordance with
     Code Sec 1033(a)(2) and Reg 1.1033(a)-2 not to
     recognize a realized gain in the amount of $350,000
     from the involuntary conversion of a commercial rental
     property. The realization of gain on, and the
     involuntary conversion of, the business property
     occurred during the taxable year ended December 31,
     1989.

     The property was acquired by the taxpayer on March 2,
     1989, at a cost of $100,000. The property was sold on
     August 22, 1989 for $450,000. The realized gain was
     $350,000.

     Taxpayer elected under Code Sec 1033(a)(2), and Reg.
     1.1033(a)-2 not to recognize the gain on conversion
     since replacement property was acquired, which taxpayer
     claims to be similar or related in service or use to
     the converted property. The adjusted basis of the
     replacement property is as follows:

           Cost of Northway Property          $352,000
           Cost of 16th Street Property         98,000
                Total                         $450,000
           Less: Realized gain not
             recognized per this election     (350,000)
           Basis of replacement property      $100,000
                                   -9-

States v. Wickersham, Criminal No. 1:92-CR-98, in the U.S.

District Court for the Eastern District of Texas.     Count VI of

the indictment charged Mr. Wickersham with willfully making and

subscribing a U.S. individual income tax return, verified under

penalties of perjury and filed with the Internal Revenue Service,

which he did not believe to be true and correct in every material

matter in that the income tax return failed to report a taxable

capital gain of $349,641 realized from the sale of the Peveto to

the OCPND, as he then and there well knew and believed that the

Peveto had not been involuntarily converted and that taxes were

due from any gain so realized from the sale in violation of

section 7206(1).

      After a 6-day trial, the jury found Mr. Wickersham guilty on

count VI of the indictment and acquitted Mr. Wickersham and the

other defendants (Mr. Winfree and Mr. Frederick) on all other

counts.      In United States v. Wickersham, 29 F.3d 191 (5th Cir.

1994), the U.S. Court of Appeals for the Fifth Circuit affirmed

the conviction.

                                 OPINION

I.   Fraud

      The penalty in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from a taxpayer's fraud.
                                -10-

See Helvering v. Mitchell, 303 U.S. 391, 401 (1938).     Fraud is

intentional wrongdoing on the part of the taxpayer with the

specific purpose to evade a tax believed to be owing.    See McGee

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

(5th Cir. 1975).

     The Commissioner has the burden of proving fraud by clear

and convincing evidence.   See sec. 7454(a); Rule 142(b).   To

satisfy the burden of proof, the Commissioner must show:    (1) An

underpayment exists; and (2) the taxpayer intended to evade taxes

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

otherwise prevent the collection of taxes.   See Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990).   The Commissioner must

meet this burden through affirmative evidence because fraud is

never imputed or presumed.    See Beaver v. Commissioner, 55 T.C.

85, 92 (1970).

     A.   Fraudulent Intent

     The Commissioner must prove that a portion of the

underpayment for each taxable year in issue was due to fraud.

See Professional Servs. v. Commissioner, 79 T.C. 888, 930 (1982).

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

the entire record.   See Gajewski v. Commissioner, 67 T.C. 181,

199 (1976), affd. without published opinion 578 F.2d 1383 (8th

Cir. 1978).   Because direct proof of a taxpayer's intent is

rarely available, fraud may be proven by circumstantial evidence,
                               -11-

and reasonable inferences may be drawn from the relevant facts.

See Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson

v. Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331

(6th Cir. 1984).   Mere suspicion, however, does not prove fraud.

See Cirillo v. Commissioner, 314 F.2d 478, 482 (3d Cir. 1963),

affg. in part and revg. in part T.C. Memo. 1961-192; Katz v.

Commissioner, 90 T.C. 1130, 1144 (1988); Shaw v. Commissioner, 27

T.C. 561, 569-570 (1956), affd. 252 F.2d 681 (6th Cir. 1958).

     Over the years, courts have developed a nonexclusive list of

factors that demonstrate fraudulent intent.   These badges of

fraud include:   (1) Understating income, (2) maintaining

inadequate records, (3) implausible or inconsistent explanations

of behavior, (4) concealment of income or assets, (5) failing to

cooperate with tax authorities, (6) engaging in illegal

activities, (7) an intent to mislead which may be inferred from a

pattern of conduct, (8) lack of credibility of the taxpayer's

testimony, (9) filing false documents, (10) failing to file tax

returns, and (11) dealing in cash.    See Spies v. United States,

supra at 499; Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir.

1990); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.

1986), affg. T.C. Memo. 1984-601; Recklitis v. Commissioner, 91

T.C. 874, 910 (1988).   Although no single factor is necessarily

sufficient to establish fraud, the combination of a number of

factors constitutes persuasive evidence.   See Solomon v.
                               -12-

Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per

curiam T.C. Memo. 1982-603.

     Respondent contends that the following establish fraud:    (1)

Mr. Wickersham's sophistication and experience, (2) the context

of the events and a pattern of conduct by Mr. Wickersham, (3) Mr.

Wickersham's lack of credibility, and (4) Mr. Wickersham's

section 7206(1) conviction.

     B.    Mr. Wickersham's "Sophistication"

     The sophistication, education, and intelligence of the

taxpayer are relevant to determining fraudulent intent.   See

Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Stephenson

v. Commissioner, supra at 1006; Iley v. Commissioner, 19 T.C.

631, 635 (1952).   Contrary to respondent's assertion, however,

the sophistication, education, and intelligence of a taxpayer are

not themselves badges of fraud.   These considerations are

relevant to the determination of whether a taxpayer could have

formed the intent necessary to be found liable for the fraud

penalty.   See Niedringhaus v. Commissioner, supra at 211;

Stephenson v. Commissioner, supra at 1006; Iley v. Commissioner,

supra at 635.

     Mr. Wickersham owns and operates a car dealership and

engages in some real estate ventures/transactions.   There is no

evidence suggesting that he had any training in accounting, tax

planning, or tax return preparation.   On the basis of these
                                -13-

facts, we shall not hold Mr. Wickersham to either a high or low

standard while evaluating his actions.

     C.     Context of Events/Pattern of Conduct

     Respondent argues that Mr. Wickersham has a history of using

his knowledge and sophistication to take advantage of others for

personal gain.    Respondent points to two transactions:   (1) Mr.

Wickersham's securing a letter of credit for Mr. Winfree and (2)

Mr. Wickersham's purchasing property from Ms. Stark at a reduced

price.

            1.   The Letter of Credit

     To secure the loan used to fund Elco, each of the four

owners was required to put up a letter of credit.    Mr. Winfree's

bank agreed to issue him a letter of credit, and it was going to

charge him approximately $1,500 for this service.    Mr. Wickersham

offered to get Mr. Winfree a letter of credit for the same price,

and Mr. Winfree accepted.    Mr. Winfree's testimony suggests that

Mr. Winfree allowed Mr. Wickersham, rather than the bank, to make

a profit on the letter of credit as a favor to Mr. Wickersham and

that Mr. Wickersham did not take advantage of Mr. Winfree.4


     4
          Mr. Winfree testified as follows:

          And I came back and told Mr. Wickersham that I was
     ready to go; I had my letter of credit okayed. And he
     said, Well how much are they going to charge you? And
     I told him. And he said, Well, why don't you let me
     make that money?

                                                     (continued...)
                                -14-

            2.   The Transaction With Ms. Stark

     After Ms. Stark backed out of the three-way transaction, she

offered to sell the property Mr. Wickersham was interested in to

him at a reduced price.    Mr. Wickersham later purchased Ms.

Stark's property at a reduced price.

            3.   Conclusion

     Respondent's position on brief is that "While each of these

instances does not present technically inappropriate behavior,

petitioner's pattern of conduct resonates strongly in the context

of tax fraud."    We agree with respondent that neither of these

transactions constituted inappropriate behavior; however, we

disagree with respondent's ultimate conclusion regarding these

transactions.    While a taxpayer's entire course of conduct can be

indicative of fraud, see Stone v. Commissioner, 56 T.C. 213, 223-

224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969),

we conclude that these two transactions are not a pattern of

fraudulent conduct by Mr. Wickersham, and they are not indicative

of fraud.

     D.     Mr. Wickersham's Credibility

     Respondent argues that portions of Mr. Wickersham's

testimony are implausible and not credible.    At trial, we had the



     4
      (...continued)
          And I said, Well, how are you going to do it? He
     said, Well, I have some money on deposit there; I'll
     just pledge it, and I won't even have to disturb the --
     drawing the interest on it; I'll just make this extra
     $1,500. So that was all right with me. I wrote him a
     check for $1,500, and that's the way that came about.
                                  -15-

opportunity to observe Mr. Wickersham, and we found his testimony

generally to be credible.   Furthermore, many of the witnesses

corroborated much of Mr. Wickersham's testimony.   Mr.

Wickersham's testimony does not indicate the presence of a

fraudulent intent.

     E.    The Section 7206(1) Conviction

     Respondent contends that Mr. Wickersham's conviction under

section 7206(1) is evidence that Mr. Wickersham intended to evade

taxes.

     While a conviction under section 7206(1) is a factor to be

considered, it is not dispositive, and this Court has

consistently interpreted the "due to fraud" language contained in

section 6663 to require proof of specific intent to evade a tax

believed to be owing.   See Wright v. Commissioner, 84 T.C. 636,

639, 644 (1985).   A conviction under section 7206(1) does not

establish as a matter of law that the taxpayer violated a legal

duty with the intent to evade taxes because the intent to evade

taxes is not an element of the crime charged under section

7206(1).   See id. at 641, 643.

     F.    Conclusion

     Apart from Mr. Wickersham's conviction under section

7206(1), the other badges of fraud are noticeably absent from the

case at bar.   Furthermore, petitioners fully disclosed the

transaction involving the Peveto on the 1989 return.     The only

evidence respondent adduced to establish fraud is Mr.

Wickersham's conviction under section 7206(1).
                                  -16-

      While the section 7206(1) conviction may raise our

suspicions, mere suspicion does not prove fraud, and we cannot

find that respondent sustained his heavy burden to prove fraud by

clear and convincing evidence.     See Rinehart v. Commissioner,

T.C. Memo. 1983-184.   After reviewing all of the facts and

circumstances, we conclude that respondent has failed to prove

clearly and convincingly that for 1989 Mr. Wickersham intended to

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

mislead, or otherwise prevent the collection of taxes.

Accordingly, we do not sustain the fraud penalty for 1989.

II.   Period of Limitations/Deficiency for 1989

      Respondent issued the statutory notice of deficiency in the

case at bar more than 6 years after petitioners filed the 1989

return.    The 1989 return is not a false or fraudulent tax return

with the intent to evade tax.     See supra pp. 10-17.      Therefore,

section 6501(c)(1) is inapplicable to the case at bar, and the

assessment of any deficiency for 1989 is barred by the expiration

of the period of limitations provided by section 6501.

Accordingly, the issue of whether there is a deficiency for 1989

is moot.

      To reflect the foregoing,

                                              Decision will be entered

                                         for petitioners.
