                         T.C. Memo. 1995-519



                       UNITED STATES TAX COURT



                 THOMAS L. HOBART, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25649-93.        Filed October 30, 1995.



     Gregory Daniel Smith, for petitioner.

     Linda J. Wise, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Judge:    Respondent determined a deficiency in the

amount of $132,675 in petitioner's Federal income tax for 1988

and an addition to tax pursuant to section 6653(b)(1) in the

amount of $101,783.   Respondent asserted the delinquency and

negligence additions to tax under sections 6651(a)(1) and

6653(a)(1), respectively, in the alternative to the fraud

addition to tax.   Unless otherwise noted, all section references
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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.

     After concessions, the issues for decision are:    (1) Whether

petitioner had unreported income in 1988 and, if so, in what

amount and (2) whether petitioner is liable for the fraud

addition to tax for 1988 or, in the alternative, the delinquency

and negligence additions to tax.


                           FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.    At the

time the petition was filed, petitioner resided in Pensacola,

Florida.

     Petitioner met Linda Nelson (Nelson) around 1987, and they

became engaged to marry.    After their engagement, petitioner

encouraged Nelson to quit her job so that she would have more

time to make wedding plans.    Petitioner promised Nelson that he

would make sure she had access to funds to cover her expenses.

Petitioner and Nelson were married in September 1988.    Nelson

filed for divorce in March 1989, and the divorce was final

July 2, 1990.

     During 1988, petitioner was employed by Zebrowski and

Associates, Inc. (Zebrowski).    Zebrowski was engaged in the

demolition business.   Edward Timothy Sullivan (Sullivan) was the
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owner and president of Zebrowski.   Petitioner was in charge of

the day-to-day operations of Zebrowski's Gulf Coast Division.

     Zebrowski sold the scrap from its demolition jobs to scrap

companies, including Southern Scrap (Southern).   Demolition

companies and other scrap producers would deliver scrap to

Southern.   The scrap would be weighed, and a scale ticket would

be issued indicating the type and the weight of the scrap.     The

scrap seller would take the scale ticket to Southern's office to

request payment.   Southern made payments for scrap by both check

and cash.   Often, a seller requested a large cash payment when

Southern had insufficient cash available in its office.    When

this occurred, Southern would make a check payable to Barnett

Bank for the appropriate amount and an employee would go to

Barnett Bank to cash the check.   The cash would be brought back

to Southern, counted, and distributed to the scrap seller.

     When Zebrowski began selling scrap to Southern, the payments

were made by check and mailed to Zebrowski's Michigan office.

This procedure changed, however, at some point in 1988.

Southern's payments for Zebrowski scrap then included checks made

payable to petitioner and to Nelson, as well as cash.

     During 1988, numerous checks were issued by Southern in

payment for Zebrowski scrap.   Approximately 41 checks were issued

payable to petitioner by Southern in payment for Zebrowski scrap.

At least 17 Southern checks were made payable to Nelson.    Many of

these checks were deposited into a joint bank account maintained
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by petitioner and Nelson.   Because of Southern's practice of

cashing checks payable to Barnett Bank in order to make cash

payments for scrap, 32 cash payments for Zebrowski scrap during

1988 are indicated by 32 checks payable to Barnett Bank. These

checks correspond with various scale tickets relating to

Southern's purchase of Zebrowski scrap.   These cash payments were

delivered to petitioner by Southern employees.

     Petitioner often handled personal transactions in cash,

although he claimed during an interview with a revenue agent to

keep only $100 in cash on hand at any given time.   Nelson's

engagement ring was purchased with approximately $8,000 in cash.

     During 1988, petitioner used a combination of cash and

credit cards to take Nelson on a $10,000 shopping spree.

Nelson's $7,000 wedding dress was paid for by petitioner.

Petitioner paid various wedding expenses totaling approximately

$13,000, including the reception, lodging for some guests, the

cost of tuxedo rentals for the groomsmen, and the cost of several

bridesmaids' dresses.   The couple took a honeymoon trip to Puerto

Vallarta, where they purchased approximately $1,500 of jewelry.

Petitioner bought Nelson's daughter a car.   Before moving into

their own home, petitioner and Nelson lived in a hotel suite that

cost $1,800 per month for approximately 3 months in 1988.   On

October 14, 1988, petitioner and Nelson purchased a 1.41-acre

lot, paying $500 as a deposit, $12,500 at the closing, and the

balance as a deferred note.   Funds from the joint bank account
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were used to pay various expenses, including credit card bills,

doctors' bills, car payments, groceries, traveler's checks for

the honeymoon, and legal expenses for a business in which

petitioner was involved.

     On September 25, 1989, a one-count information was filed in

the Circuit Court of Escambia County, Florida, charging

petitioner with theft of property valued at over $100,000.    The

charges stemmed from petitioner's misappropriation of Zebrowski

funds.    Also on September 25, 1989, a three-count information was

filed charging petitioner with check forgery, uttering forged

instruments, and theft of property valued between $300 and

$20,000.    This information related to petitioner's forgery of a

check in the amount of $5,695 made payable to Sullivan.    Both

informations related to petitioner's activities between

January 1, 1988, and March 31, 1989.    The charges against

petitioner carried a possible jail sentence of over 30 years.

All charges against petitioner were consolidated for trial.    The

jury returned verdicts of guilty on all counts.    On April 11,

1990, the court entered its judgment and sentence in petitioner's

case.    Petitioner was placed on probation for 20 years, directed

to perform 50 hours of community service for each year of

probation, and ordered to pay court costs of $284.50 and to pay

restitution of $446,571.   Zebrowski subsequently filed a civil

suit seeking restitution relating to petitioner's criminal
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convictions.   Summary judgment was entered in favor of Zebrowski

on March 2, 1993.

     Petitioner's 1988 Federal income tax return was filed on

July 19, 1991.    Petitioner filed in 1988 using single status but

has since conceded that his filing status should have been

married.   Petitioner reported income of $31,400 from wages,

salaries, tips, etc., on his return, as well as $218 of taxable

interest income.    Petitioner did not include any of the funds he

had misappropriated from Zebrowski in his income reported for

1988.

     The Internal Revenue Service (IRS) began an investigation of

petitioner during 1992.    Petitioner failed to provide any income

records other than four or five bank statements and a copy of a

tax return in response to IRS document requests.


                               OPINION

Unreported Income

     Respondent has argued that the doctrine of collateral

estoppel bars petitioner from denying the receipt and the amount

of unreported income set forth in the notice of deficiency.

Because of the lack of identity of issues and uncertainty of when

the misappropriated amounts determined in the prior litigation

were taken, the application of collateral estoppel in this case

is problematic.    Detailed analysis of that issue is less
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efficient than simply deciding the case on the evidence otherwise

in the record.

     Under section 61, gross income includes "all income from

whatever source derived."    It is well established that stolen

funds are includable in the year in which they are

misappropriated.    James v. Commissioner, 366 U.S. 213, 219-220

(1961); Lydon v. Commissioner, 351 F.2d 539, 545 (7th Cir. 1965),

affg. T.C. Memo. 1964-27.

     As a general rule, petitioner has the burden of proving that

respondent's determination is erroneous.    Rule 142(a); Webb v.

Commissioner, 872 F.2d 380, 381 (11th Cir. 1989), affg. T.C.

Memo. 1988-80.    In cases involving unreported income, the Court

of Appeals for the Eleventh Circuit has stated that the

deficiency determination must be supported by "some evidentiary

foundation linking the taxpayer to the alleged income-producing

activity."    Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir.

1993) (quoting Weimerskirch v. Commissioner, 596 F.2d 358, 362

(9th Cir. 1979), revg. 67 T.C. 672 (1977)), affg. T.C. Memo.

1991-636.    The required showing is minimal.    Carson v. United

States, 560 F.2d 693, 697 (5th Cir. 1977).      The evidence here

clearly connects petitioner to the receipt of funds diverted from

Zebrowski.    Thus, petitioner must show that the amount of

unreported income determined by respondent is excessive.

     Petitioner argues that the indictment under which he was

convicted related to activities during 1988 and 1989.      Because
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the 1989 tax year is not before the Court, petitioner asserts

that respondent cannot rely on petitioner's conviction to

establish theft activity during 1988.    The evidence presented at

trial, however, demonstrates that petitioner was involved in

theft activity during 1988.   In order to misappropriate Zebrowski

funds, petitioner used his position with Zebrowski to request

changes in the way Southern paid for Zebrowski scrap.    Instead of

having Southern make the checks payable to Zebrowski and mailing

the payments to the Michigan office, petitioner requested that

payment be made by checks payable to petitioner or Nelson.

During the trial, respondent introduced 58 Southern checks dated

during 1988 made payable to petitioner or Nelson that represent

payments for Zebrowski scrap.   Petitioner also requested that

Southern make cash payments for Zebrowski scrap.    As was

Southern's practice, large cash payments were often obtained from

checks made payable to Barnett Bank.    Respondent introduced 32

Southern checks made payable to Barnett Bank during 1988 that

represented payments for Zebrowski scrap.    Testimony at trial

indicated that petitioner was the recipient of these cash

payments.

     Petitioner produced no reliable evidence at trial to show

that respondent's determination is incorrect.    Although

petitioner initially denied the receipt of any unreported income,

in the alternative, petitioner asks us to include in his income

only those amounts that are represented by checks payable to him.
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We reject this argument, because he controlled all of the

misappropriated funds.

     Petitioner asserts that a number of individuals, including

Sullivan, Nelson, and Southern employees, received the funds in

question.   Sullivan denied receiving any of the proceeds from the

Southern checks.   Although from the record none of the witnesses

seems completely innocent, the preponderance of the evidence is

that Sullivan was a victim of petitioner's misappropriation.

Petitioner was convicted not only of misappropriating funds from

Sullivan's company, Zebrowski, but also of forging the

endorsement on a check payable to Sullivan.     Sullivan, on behalf

of Zebrowski, filed a civil suit seeking restitution from

petitioner.   Petitioner produced no evidence in support of his

contention that other Southern employees received some of the

funds in question.

     Petitioner argues that the checks payable to Nelson should

not be included in his income.    "The power to dispose of income

is the equivalent of ownership of it.     The exercise of that power

to procure the payment of income to another is the enjoyment, and

hence the realization, of the income by him who exercises it."

Helvering v. Horst, 311 U.S. 112, 118 (1940).     A taxpayer is not

relieved of the obligation to pay taxes on income merely by a

transfer of that income to another.      United States v. Basye, 410

U.S. 441, 449-451 (1973).   Petitioner was the "force and fulcrum"

behind the thefts that made the benefits to Nelson, as well as
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petitioner, possible.   See Davis v. Commissioner, T.C. Memo.

1991-333.

     Petitioner has failed to offer any credible evidence that he

did not receive the amounts determined by respondent.

Respondent's determination of the deficiency will be sustained.


Fraud

     The 75-percent addition to tax 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 the

taxpayer's fraud.   Sec. 6653(b)(1); Helvering v. Mitchell, 303

U.S. 391, 401 (1938).   Respondent has the burden of proving, by

clear and convincing evidence, that some part of an underpayment

for 1988 was due to fraud.   Sec. 7454(a); Rule 142(b).   This

burden is met if it is shown that the taxpayer intended to

conceal, mislead, or otherwise prevent the collection of such

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

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

affg. T.C. Memo. 1966-81.    Once the Commissioner has established

that some portion of an underpayment is due to fraud, the entire

underpayment is treated as attributable to fraud unless the

taxpayer can show that some portion of the underpayment is not

due to fraud.   Sec. 6653(b)(2).
                              - 11 -

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

upon consideration of the entire record.   Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).   Fraud will never be

presumed.   Beaver v. Commissioner, 55 T.C. 85, 92 (1970).     Fraud

may be proved, however, by circumstantial evidence because direct

proof of the taxpayer's intent is rarely available.   The

taxpayer's entire course of conduct may establish the requisite

fraudulent intent.   Spies v. United States, 317 U.S. 492, 499

(1943); Stone v. Commissioner, 56 T.C. 213, 223-224 (1971);

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

     The following facts that indicate fraud in this case have

been established by clear and convincing evidence:

(1) Petitioner's misappropriation of funds from Zebrowski (see,

e.g., Solomon v. Commissioner, T.C. Memo. 1982-603, affd. 732

F.2d 1459 (6th Cir. 1984)); (2) petitioner's understatement of

his taxable income by failing to report the misappropriated funds

on his 1988 return (see Davis v. Commissioner, supra);

(3) petitioner's frequent dealings in cash (Bradford v.

Commissioner, 796 F.2d 303, 308 (9th Cir. 1986), affg. T.C. Memo.

1984-601; Petzoldt v. Commissioner, 92 T.C. 661, 702 (1989));

(4) petitioner's implausible denial of the receipt of the

misappropriated funds and failure to explain expenditures that

far exceeded his reported income (see, e.g., Bahoric v.

Commissioner, 363 F.2d 151, 153 (9th Cir. 1966), affg. T.C. Memo.
                                - 12 -

1963-333); and (5) petitioner's failure to provide complete and

accurate income records to the tax authorities (Grosshandler v.

Commissioner, 75 T.C. 1, 20 (1980)).

     Because respondent has proven by clear and convincing

evidence that some portion of the underpayment is due to fraud,

the burden is on petitioner to prove the amount of the

underpayment not attributable to fraud.    Petitioner has stated

two arguments in this regard:    (1) That he did not receive any of

the stolen funds or (2) that, if he did receive any of the funds,

his unreported income was only in the amount of the Southern

checks payable to him.   We have rejected both of these arguments.

     Respondent's determination regarding the addition to tax for

fraud will be sustained.   Because we have upheld respondent's

fraud determination, we need not examine the alternative

additions to tax asserted by respondent.


                                           Decision will be entered

                                     for respondent.
