                      113 T.C. No. 4



                UNITED STATES TAX COURT



            GERALD A. SADLER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 1046-98.                       Filed July 29, 1999.


     P, a tax attorney, was the president and sole
shareholder of six corporations. P prepared his own
Forms W-2 for 1989 and 1990 from these corporations.
The Forms W-2 listed large amounts of Federal income
tax withheld. The corporations did not deposit with
the IRS or withhold any Federal income taxes on the
wages earned by P. On his tax returns for 1989 and
1990, P reported the correct tax imposed under subtitle
A; however, P also reported as withholdings the amounts
listed on the false Forms W-2.

     Held: P had an "underpayment" of tax for 1989 and
1990. See sec. 6664(a), I.R.C.; sec. 1.6664-2, Income
Tax Regs.

     Held, further, P is liable for the fraud penalty
for 1989 and 1990.

     Held, further, the periods of limitation on
assessment for 1989 and 1990 did not expire.
                                 - 2 -


     Gerald A. Sadler, pro se.

     Derek B. Matta and Gordon P. Sanz, for respondent.



     VASQUEZ, Judge:   Respondent determined the following

deficiency in and penalties on petitioner's Federal income tax:

                                                  Penalties
     Year               Deficiency                Sec. 6663

     1989               $19,797.59                $44,473.19
     1990                   --                     19,500.00

     By amendment to answer, respondent increased the amount of

the fraud penalty for 1989 to $55,947.37.

     Unless otherwise indicated, 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.   After concessions,1 the issues for decision are (1)

whether petitioner is liable for the fraud penalty for 1989 and

1990, and (2) whether the periods of limitation for 1989 and 1990

have expired.

                         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 he filed his

 petition, Gerald A. Sadler (Mr. Sadler) resided in Houston,

Texas.


     1
         Respondent concedes that there is no deficiency for 1989.
                                - 3 -


Petitioner's Background

     From 1972 until December 17, 1996, petitioner was a licensed

attorney who practiced law in Texas.    As part of his practice,

petitioner prepared tax returns and forms for clients including:

(1) Forms 1040, U.S. Individual Income Tax Return, (2) Forms W-2,

Wage and Tax Statement, (3) Forms W-4, Employee's Withholding

Allowance Certificate, (4) Forms 940, Employer's Annual Federal

Unemployment (FUTA) Tax Return, and (5) Forms 941, Employer's

Quarterly Federal Tax Return.

     Petitioner was admitted to practice before this Court.    On

at least two occasions, he represented clients before this Court.

Petitioner's Businesses

     During the years in issue, petitioner was president and the

100-percent shareholder of the following corporations:    (1) Jerry

Sadler, Attorney at Law, P.C.; (2) the Law Offices of Jerry

Sadler, P.C.; (3) Sixty Eleven Kirby Corp.;2 (4) Jay Ess, P.C.;

(5) J.S., P.C. doing business as Jerry Sadler, Attorney at Law,

P.C.; and (6) GEE A. ESS, P.C. (altogether, petitioner's

corporations).

     During the years in issue, petitioner's corporations were

having financial problems.   Payroll checks of petitioner's

employees were bouncing.




     2
        This corporation was formerly known as Airtop Heating and
Air Conditioning, Inc.
                                  - 4 -

Petitioner's Taxes

     Petitioner prepared and timely filed his Forms 1040 for 1989

(1989 original return) and 1990 (1990 return).     Prior to April

15, 1990, petitioner prepared and filed a Form 1040X, Amended

U.S. Individual Income Tax Return, for 1989 (1989 amended

return).

     Petitioner prepared the Forms W-2 that he attached to his

1989 original return, 1989 amended return, and 1990 return.        The

Forms W-2 listed the following amounts as Federal Income tax

withheld:

   Year        Employer              Federal Income Tax Withheld

   1989     Law Offices of
            Jerry Sadler, P.C.                $39,500

   1989     Jerry Sadler,
            Attorney at Law, P.C.              13,720

   1989     Sixty Eleven
            Kirby Corp.                        16,380

   1990     J.S., P.C. doing
            business as Jerry
            Sadler, Attorney at
            Law, P.C.                          26,000

     During the years in issue, petitioner's corporations did not

deposit with the Internal Revenue Service (IRS) any Federal

income taxes on the wages earned by petitioner.     Petitioner

solely was responsible for making these deposits.

     On his 1989 original return, petitioner (1) reported a

$22,056.50 tax liability and $39,500.00 of Federal income tax

withheld and (2) claimed a $17,443.50 refund.     The IRS assessed
                               - 5 -

petitioner's tax liability of $22,056.50 and issued petitioner a

$17,191.45 refund check.3

     On his 1989 amended return, petitioner (1) reported a

$19,796.14 additional tax liability and $35,096.49 of additional

Federal income tax withheld, and (2) claimed an additional refund

in the amount of $15,300.35.   The IRS did not assess the

additional tax liability reported on the 1989 amended return.

     On his 1990 return, petitioner (1) reported a $5,725 tax

liability and $26,000 of Federal income tax withheld and (2)

claimed a $20,275 refund.

Petitioner's Criminal Conviction

     On October 5, 1995, pursuant to a plea agreement, petitioner

pleaded guilty to violating title 18 U.S.C. section 287 (1994)

for the following reason:

     [He] made and presented to the United States Treasury
     Department a claim against the United States for
     payment, which he knew to be false, fictitious, or
     fraudulent, by preparing and causing to be prepared, a
     U.S. Individual Income Tax Return, Form 1040, for
     calendar year 1989, which was presented to the United
     States Treasury Department, through the Internal
     Revenue Service, wherein he claimed a refund of taxes
     in the amount of seventeen thousand four hundred forty-
     three and 50/100 dollars ($17,443.50), knowing such
     claim to be false, fictitious, or fraudulent.




     3
        The parties did not explain the difference between the
amount petitioner claimed as a refund and the refund check issued
by the IRS.
                                 - 6 -

                                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.

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 presumed.     See Beaver v. Commissioner, 55 T.C. 85, 92

(1970).

      A.     Underpayment

      The parties agree that (1) petitioner's tax liabilities for

1989 and 1990, not including penalties, interest, or credits for

withholding, are $41,852.64 and $5,725, respectively; (2) on the
                               - 7 -

1989 amended return, petitioner reported $41,852.64 as his tax

liability for 1989; and (3) on the 1990 return, petitioner

reported $5,725 as his tax liability for 1990.   Petitioner argues

that, because he showed the correct amount of tax imposed under

subtitle A on his 1989 amended return and 1990 return, there is

no underpayment of tax in this case.

     An "underpayment" is the amount by which the tax imposed

exceeds the excess of the sum of the amount shown as the tax by

the taxpayer on his return, plus amounts not so shown that were

previously assessed (or collected without assessment), over the

amount of rebates made.   See sec. 6664(a).   In making this

computation, "the amount shown as the tax by the taxpayer on his

return" is reduced by the excess of:

          (i) The amounts shown by the taxpayer on his
     return as credits for tax withheld under section 31
     (relating to tax withheld on wages) * * * over

          (ii) The amounts actually withheld, * * * with
     respect to a taxable year before the return is filed
     for such taxable year. [Sec. 1.6664-2(c)(1)(i) and
     (ii), Income Tax Regs.]

     Section 1.6664-2, Income Tax Regs.,4 takes into

consideration the situation in which a taxpayer overstates the



     4
        We note that while the regulation was not issued until
after petitioner filed the tax returns at issue in the case at
bar, it does govern the definition of an underpayment with
respect to respondent's penalty determination herein as secs.
1.6664-1 through 1.6664-4, Income Tax Regs., apply to returns,
the due date of which is after Dec. 31, 1989. See sec. 7805(b);
Rice v. Commissioner, T.C. Memo. 1999-65; sec. 1.6664-1(b),
Income Tax Regs.
                               - 8 -

credit for withholding.   See sec. 1.6664-2(g), Example (3),

Income Tax Regs.   Accordingly, if a taxpayer overstates the

credit for withholding, the overstatement decreases the amount

shown as the tax by the taxpayer on his return and increases the

underpayment of tax.

     Petitioner claimed that he had withholding credits of

$74,596.495 and $26,000 for 1989 and 1990, respectively.

Petitioner attached false Forms W-2, which he prepared, to

substantiate these claims.   Petitioner knew that his corporations

did not deposit or withhold, see infra, Federal income taxes on

the wages he earned during 1989 and 1990.   Petitioner's

overstatements of withholding resulted in the following

underpayments:




     5
        Petitioner failed to address the difference between the
amount he claimed as withholding credits on his return
($74,596.49) and the amount he listed as Federal income tax
withheld on his Forms W-2 ($69,600).
                                - 9 -

     1989

     Tax imposed under subtitle A                       $41,852.64
     Tax shown on the return1           ($32,743.85)
     Tax previously assessed                   0.00
     Amount of rebates made                    0.00
     Balance                                           - (32,743.85)

     Underpayment                                        74,596.49
     1
       This equals the reported tax liability--$41,852.64--
     minus the overstated withholding--$74,596.49.

     1990

     Tax imposed under subtitle A                        $5,725.00
     Tax shown on the return1           ($20,275.00)
     Tax previously assessed                   0.00
     Amount of rebates made                    0.00
     Balance                                           - (20,275.00)

     Underpayment                                        26,000.00
     1
       This equals the reported tax liability--$5,725--minus
     the overstated withholding--$26,000.

See sec. 6664; sec. 1.6664-2(g), Example (3), Income Tax Regs.

     B.     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,

and reasonable inferences may be drawn from the relevant facts.

See Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson
                              - 10 -

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

(6th Cir. 1984).   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).   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).

     Petitioner is a tax attorney who engaged in a fraudulent

refund scheme in order to generate money for his financially

strapped businesses.   During the years in issue, payroll checks

issued to employees of petitioner's corporations contained

notations showing the amount of tax withheld from each check.

Payroll checks issued to petitioner contained no notations

regarding taxes being withheld.   During the years in issue,

petitioner did not segregate any amounts he allegedly withheld as

taxes from his payroll checks.    When questioned by respondent as

to what he did with the funds he allegedly withheld from his own

paychecks, petitioner replied "Spent them."

     At trial, petitioner admitted that the withholding amounts

on the Forms W-2 he prepared were "fictitious" because neither he

nor his corporations deposited any of the Federal income taxes he

claims he/his corporations withheld on the wages he earned.     We

conclude that petitioner knew that the amounts he listed as
                              - 11 -

withholding on his Forms W-2 were false, that he knew that these

amounts were not withheld, and that he intentionally reported

false withholding information on his 1989 original return, 1989

amended return, and 1990 return in order to generate refunds for

1989 and 1990 (so as to have extra funds to sustain himself and

his financially strapped businesses).

     Petitioner asserts that his testimony was direct, candid,

truthful, credible, and honest.   We disagree.   His testimony was

evasive and not credible.   Additionally, petitioner pleaded

guilty to filing a false claim for a refund of Federal income

taxes.

     We conclude that respondent has proven by clear and

convincing evidence that petitioner fraudulently underpaid his

taxes for 1989 and 1990.

     Once the Commissioner establishes that any portion of the

underpayment is attributable to fraud, the entire underpayment is

treated as attributable to fraud and subjected to a 75-percent

penalty, except with respect to any portion of the underpayment

that the taxpayer establishes is not attributable to fraud.    See

sec. 6663(a) and (b).   Petitioner has not proven that any part of

either underpayment is not attributable to fraud.   Therefore, the

entire underpayments for 1989 and 1990 are subject to the 75-

percent penalty.
                               - 12 -

II.   Periods of Limitation

      Petitioner argues that respondent cannot assess the tax

liabilities petitioner reported on his tax returns due to the

expiration of the statutory periods of limitation.

      In the case of a false or fraudulent return with the intent

to evade tax, the tax may be assessed at any time.     See sec.

6501(c)(1).   If the return is fraudulent, it deprives the

taxpayer of the bar of the statutory period of limitations for

that year.    See Badaracco v. Commissioner, 464 U.S. 386, 396

(1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961),

affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102

T.C. 380, 385 (1994).

      We found that petitioner filed fraudulent income tax returns

for 1989 and 1990; therefore, the period of limitation on

assessment for each of these years remains open.

      In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

      To reflect the foregoing,

                                          Decision will be entered

                                     under Rule 155.
