                           T.C. Memo. 1997-6



                      UNITED STATES TAX COURT



                 KENNETH SIEBERT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17154-94.                      Filed January 2, 1997.



     Kenneth Siebert, pro se.

     Ann S. O'Blenes and John R. Hunter, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notices dated June 28, 1994, respondent

determined deficiencies in and additions to petitioner's Federal

income taxes as follows:
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                                          Additions to Tax
      Year         Deficiency      Sec. 6651(a)(1)    Sec. 6654

      1988          $33,616            $8,404            $330
      1989           44,162            10,972           2,966
      1990            8,376             2,094             551
      1991            8,766             2,192             504
      1992            8,815             2,204             384

      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.

      The issues for decision are as follows:

      1.   Whether petitioner failed to report income for each year

in issue;

      2.   whether petitioner, pursuant to section 1401, is liable

for self-employment tax;

      3.   whether petitioner, pursuant to section 6651(a)(1), is

liable for additions to tax for failure to file timely Federal

income tax returns; and

      4.   whether petitioner, pursuant to section 6654, is liable

for additions to tax for failure to make estimated tax payments.

                              FINDINGS OF FACT

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

Petitioner resided in Plano, Texas, at the time his petition was

filed.

I.   Petitioner's Tax Consulting Practice

      A.     In General

      During the years in issue, petitioner was a self-employed

tax consultant in Dallas, Texas.       Petitioner leased office space
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at the law firm of Hercules & Lavery for approximately $400 per

month, and he referred to the firm approximately a dozen of his

clients who required specialized work.   In early 1989, Hercules &

Lavery asked petitioner to vacate the leased premises after they

discovered that he was holding himself out as a member of their

firm.

     B.   Petitioner's Dealings With James Franz

     In January 1987, James Franz hired petitioner to create a

retirement plan.   He paid petitioner a $10,000 retainer.   On

December 6, 1988, petitioner incorporated Showwalter, Inc.

(Showwalter), under Texas law.    Mr. Franz served as Showwalter's

sole shareholder and director.    Petitioner subsequently created a

profit-sharing plan for Showwalter and prepared and filed an

application with the Internal Revenue Service (IRS) to determine

whether the profit-sharing plan was a qualified plan under the

Internal Revenue Code.

     C.   Petitioner's Dealings With Virginia Shaw

     In December 1987, Virginia Shaw hired petitioner to prepare

her 1987 tax return.   In 1988, she paid him a $5,000 retainer in

five $1,000 monthly installments.    On August 12, 1988, petitioner

filed a request for a 2-month extension of time to file Ms.

Shaw's return.   Petitioner provided the following reason for his

extension request:   "As the preparer, I am behind due to audits

and tax court cases.   The taxpayer should not be penalized
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because of my schedule."    Petitioner's request was granted, and

the return was eventually prepared by petitioner on December 22,

1989.

     D.    Petitioner's Dealings with Margaret Boals

     In January 1988, Mr. Franz received a telephone call from

his mother, Margaret Boals.    She told him that she had received

two notices of deficiency from the IRS demanding a total of

$500,000 in delinquent taxes from her husband's estate.    Mr.

Franz contacted petitioner and on April 13, 1988, took him to see

Ms. Boals.    During his meeting with Ms. Boals, petitioner

suggested that she withdraw all of her money from her financial

accounts and transfer it to him.    Petitioner told Ms. Boals that

the IRS could not seize the money if he held it in his trust

account.

     Ms. Boals agreed to pay petitioner $150 per hour for his

services and, over the course of several weeks, gave petitioner

three checks totaling $312,436.05 which petitioner deposited into

a newly opened trust account.    Petitioner and Ms. Boals agreed

that petitioner would use the funds only when Ms. Boals so

authorized.    Between 1988 and 1989, petitioner wrote, with Ms.

Boals' authorization, checks on the account totaling $109,124.50.

During the same period, however, petitioner also wrote, without

authorization, over $180,000 in checks for a variety of his

personal expenses including:    (1) Repairs and parts for his BMW
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and Jaguar, (2) computer equipment, (3) groceries, (4) rent at

Hercules & Lavery, and (5) travel.       Petitioner also transferred

some of the funds to his wife and daughter.

      On February 4, 1992, petitioner was charged with the felony

offense of misapplication of fiduciary property.      The indictment

alleged that petitioner misapplied Ms. Boals' funds for his

personal benefit.     In June 1992, petitioner was convicted,

sentenced to 6 years probation, and assessed a $10,000 fine.      The

Court of Appeals for the Fifth District of Texas at Dallas upheld

petitioner's conviction on August 2, 1995.      Petitioner

subsequently filed a petition for discretionary review with the

Court of Criminal Appeals for the State of Texas.

II.   Petitioner's Other Businesses

      A.    Computers & Stuff, Inc.

      On June 13, 1988, petitioner used, without authorization,

some of Ms. Boals' money to incorporate under Texas law Computers

& Stuff, Inc. (Computers & Stuff).       Computers & Stuff was created

to sell computer hardware and software to the general public.

Petitioner purchased a quarter-page advertisement for Computers &

Stuff in the 1988-89 Southwestern Bell Yellow Pages.      On December

22, 1989, Computers & Stuff forfeited its right to conduct

business in Texas, because it failed to pay Texas franchise

taxes.     Its corporate charter was subsequently revoked on June

18, 1990.
                                 - 6 -

       B.   Dallas Executive Couriers

       In early 1989, petitioner decided to establish a courier

business.     To obtain the necessary financing, petitioner

persuaded Mr. Franz on March 23, 1989, to sign a letter of

credit.     A letter for ‹60,000 was issued by the Isle of Man Bank

and was secured by the Showwalter pension plan.     On April 19,

1989, petitioner incorporated under Texas law Dallas Executive

Couriers, Inc. (Executive Couriers).     Executive Couriers operated

out of petitioner's office at Hercules & Lavery.     Hercules &

Lavery used, and paid petitioner compensation for, Executive

Courier's services during 1989.     On October 17, 1990, Executive

Couriers forfeited its right to conduct business in Texas,

because it failed to pay Texas franchise taxes.     Its corporate

charter was subsequently revoked on June 17, 1991.

III.    Respondent's Investigation and Determinations

       After petitioner was convicted of misappropriating Ms.

Boals' money, the Dallas district attorney's office notified the

IRS of petitioner's conviction and informed it that petitioner

may not have reported the misappropriated funds on his Federal

income tax returns.     The IRS assigned petitioner's case to

Revenue Agent Jesse Luna.     Agent Luna obtained court records from

the Dallas district attorney's office.     Based on these records,

Agent Luna determined that petitioner had unreported income of

$74,000 and $110,000 in 1988 and 1989, respectively.
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      During the course of his investigation, Agent Luna

discovered that petitioner had not filed Federal income tax

returns for 1988 through 1992.        Agent Luna contacted petitioner

and requested that he produce financial records for those years.

Petitioner stated that he would have to speak with his accountant

and get back to Agent Luna.       Petitioner, however, failed to

contact Agent Luna.      Agent Luna did not make another attempt to

contact petitioner, and he failed to independently obtain

petitioner's bank records and other financial data.

      Agent Luna reconstructed petitioner's income for the years

in issue (in addition to the income for 1988 and 1989 from

misappropriated funds) using the Consumer Price Index (CPI)

Rollover Method as follows:
                         1988     1989       1990      1991       1992

Base year income-1987   $27,842   $27,842   $27,842   $27,842   $27,842
x CPI increase          1.02834   1.05846   1.10806   1.15855   1.18601
Gross income             28,631    29,470    30,851    32,256    33,021

On June 28, 1994, respondent issued two notices of deficiency to

petitioner.     Respondent determined that petitioner was liable for

deficiencies of $33,616, $44,162, $8,376, $8,766, and $8,815 for

1988, 1989, 1990, 1991, and 1992, respectively.           The deficiencies

included self-employment tax of $5,859, $5,978, $4,359, $4,558,

and $4,666 for 1988, 1989, 1990, 1991, and 1992, respectively.

                                  OPINION

I.   Unreported Income

      Generally, the Commissioner's notice of deficiency is

presumed to be correct, and the taxpayer bears the burden of
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proving that it is erroneous.   Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).   Because of this presumption of

correctness, courts will generally not look behind the notice of

deficiency to examine the evidence upon which the determination

was made.   Dellacroce v. Commissioner, 83 T.C. 269, 280 (1984).

The Court of Appeals for the Fifth Circuit, to which appeal of

this case would lie, has noted, however, that "a court need not

give effect to the presumption of correctness in a case involving

unreported income if the Commissioner cannot present some

predicate evidence supporting its determination."     Portillo v.

Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991), affg. in part

and revg. and remanding in part T.C. Memo. 1990-68.     If the

presumption of correctness does not apply, the Commissioner's

determination will be deemed arbitrary, and consequently, she

will bear the burden of proving the correct amount of any taxes

owed.   Sealy Power, Ltd. v. Commissioner, 46 F.3d 382, 386 (5th

Cir. 1995), affg. in part and revg. and remanding in part T.C.

Memo. 1992-168.

     In her notice of deficiency, respondent determined that

petitioner had embezzlement income.     Based on her CPI

calculations, she also determined that petitioner had unreported

self-employment income from his tax consulting practice and other

businesses.   We now address the validity of these determinations.
                                - 9 -

     A.   Embezzlement Income

     Respondent determined that petitioner had embezzlement

income of $74,000 and $110,000 for 1988 and 1989, respectively.

Gross income includes all income from whatever source derived.

Sec. 61(a).   When a taxpayer acquires earnings lawfully or

unlawfully, without recognition of an obligation to repay and

without restriction as to their disposition, taxable income is

deemed to have been received, even though the taxpayer may be

required to repay the money at a later date.     James v. United

States, 366 U.S. 213, 219-220 (1961); North Am. Oil Consol. v.

Burnet, 286 U.S. 417, 424 (1932); Mais v. Commissioner, 51 T.C.

494, 498-499 (1968).    Therefore, embezzled funds constitute

taxable income to the embezzler in the year of embezzlement.

James v. United States, supra at 220.

     Respondent has presented predicate evidence to establish

that petitioner had embezzlement income in 1988 and 1989.      In

1988, petitioner persuaded Ms. Boals to transfer $312,436.05 into

his trust account.    During 1988 and 1989, petitioner used,

without Ms. Boals' authorization, over $180,000 of these funds

for his personal benefit.    He was subsequently convicted of

misappropriating fiduciary property, and his conviction was

upheld on appeal.    Therefore, we conclude that respondent has

presented predicate evidence to establish that petitioner

received embezzlement income in 1988 and 1989.    Accordingly,
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respondent's determination is presumed correct, and petitioner

bears the burden of proving it erroneous.

     Petitioner contends that he earned the embezzled funds as

fees for his services.    Alternatively, he contends that he

borrowed $300,000 from Ms. Boals.      Petitioner failed to introduce

sufficient evidence to support either contention.       Petitioner

also contends that because he has filed a petition for

discretionary review with the Court of Criminal Appeals for the

State of Texas, his conviction is not yet final and may not be

used against him.    He is mistaken.      To be held liable for tax on

embezzled income, there is no requirement that there be a prior

judicial determination that an embezzlement has occurred.       This

Court is permitted to make its own independent determination.

See, e.g., Snavely v. Commissioner, T.C. Memo. 1994-256; Solomon

v. Commissioner, T.C. Memo. 1982-603, affd. 732 F.2d 1459 (6th

Cir. 1984); Beaton v. Commissioner, T.C. Memo. 1980-413, affd.

664 F.2d 315 (1st Cir. 1981).     We have reviewed the record and

determined that petitioner embezzled the funds from Ms. Boals.

Accordingly, we conclude that petitioner received embezzlement

income in 1988 and 1989 and sustain the deficiencies resulting

from that income as determined by respondent.

     B.   CPI Rollover Method Calculations

     Every taxpayer is required to maintain adequate records of

taxable income.     Sec. 6001.   In the absence of such records, the

Commissioner may reconstruct the taxpayer's income by any method
                                - 11 -

that clearly reflects income.    Sec. 446(b); Meneguzzo v.

Commissioner, 43 T.C. 824, 831 (1965).   Because petitioner failed

to produce any records, respondent used the CPI Rollover Method

to reconstruct petitioner's income for the years in issue.     Under

this method, income is computed by multiplying the adjusted gross

income reported on the taxpayer's most recently filed return by

the increase in the CPI, as published by the U.S. Department of

Labor, for the year in issue.    See Moore v. Commissioner, 722

F.2d 193, 196 (5th Cir. 1984), affg. T.C. Memo. 1983-20.     Based

on her CPI calculations, respondent determined that petitioner

had unreported self-employment income of $28,631, $29,470,

$30,851, $32,256, and $33,021 for 1988, 1989, 1990, 1991, and

1992, respectively.

     Respondent has established that petitioner engaged in a tax

consulting practice during 1988 and 1989.   During these years,

Ms. Boals paid petitioner $150 per hour for his services.

Petitioner rented office space from Hercules & Lavery and

referred approximately a dozen of his clients to the firm during

this same period.   In 1988, Virginia Shaw paid petitioner a

$5,000 retainer to prepare her 1987 Federal income tax return.

In addition, petitioner requested an extension of time to file

Ms. Shaw's return, because he was behind on audits and Tax Court

cases.   Moreover, petitioner testified that he was a tax

consultant during 1988 and 1989, and he knew that he had to file

returns for these years.   Therefore, we conclude that respondent
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has provided predicate evidence, corroborated by petitioner's own

testimony, to demonstrate that petitioner received taxable income

in 1988 and 1989 from his consulting practice.   Accordingly, the

presumption of correctness applies to respondent's CPI

calculations with respect to these years, and petitioner bears

the burden of proving them erroneous.

     Petitioner has failed to provide any credible evidence to

carry his burden of proof with respect to these years.

Consequently, we hold that petitioner is liable for the 1988 and

1989 deficiencies attributable to respondent's CPI calculations.

     Respondent has failed to provide predicate evidence,

however, to establish that petitioner received income from his

tax consulting practice, Executive Couriers, or Computers & Stuff

during 1990, 1991, and 1992.   Therefore, respondent's

determinations relating to these years are arbitrary, and she

bears the burden of proof.   See, e.g., Senter v. Commissioner,

T.C. Memo. 1995-311 (concluding that the Commissioner failed to

provide predicate evidence to support her deficiency

determinations based on CPI calculations).   Respondent failed to

present sufficient evidence that petitioner received income in

these years.   Accordingly, we conclude that petitioner is not

liable for the alleged deficiencies relating to unreported income

in 1990, 1991, and 1992.
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II.    Self-Employment Tax

       Respondent determined that petitioner, pursuant to section

1401, is liable for self-employment tax of $5,859, $5,978,

$4,359, $4,558, and $4,666 for 1988, 1989, 1990, 1991, and 1992,

respectively.    Section 1401 imposes a tax on self-employment

income.    Self-employment income consists of gross income from any

trade or business carried on by an individual less allowable

deductions attributable to the trade or business.     Sec. 1402(a).

Respondent's determination that petitioner is liable for self-

employment tax is presumed to be correct, and petitioner bears

the burden of proving that it is erroneous.     Rule 142(a); Kasey

v. Commissioner, 33 T.C. 656, 660 (1960).

       Petitioner introduced no evidence relating to the self-

employment tax issue.    Therefore, petitioner has failed to carry

his burden of proof and is liable for self-employment tax for

1988 and 1989.    He is not liable, however, for self-employment

tax with respect to 1990, 1991, and 1992, because we have

concluded that there are no deficiencies for those years.



III.    Additions to Tax for Failure To File Timely Returns

       Respondent determined that petitioner, pursuant to section

6651(a)(1), was liable for additions to tax for failure to file

timely Federal income tax returns.      Section 6651(a)(1) imposes an

addition to tax for failure to file a timely return, unless it is
                                - 14 -

shown that such a failure is due to reasonable cause and not due

to willful neglect.   Petitioner bears the burden of proving that

his failure to file a timely return was due to reasonable cause

and not due to willful neglect.    Rule 142(a); Baldwin v.

Commissioner, 84 T.C. 859, 870 (1985).   Petitioner, however, did

not dispute his liability for these additions to tax.   As a

result, petitioner has failed to carry his burden of proof and is

liable for the additions to tax for 1988 and 1989.   Petitioner is

not liable, however, for the additions to tax with respect to

1990, 1991, and 1992, because we have concluded that there are no

deficiencies for those years.

IV.   Additions to Tax for Failure To Make Estimated Tax Payments

      Respondent determined that petitioner, pursuant to section

6654, was liable for additions to tax for failure to make

estimated tax payments.   Section 6654 imposes an addition to tax

for failure to make estimated income tax payments.   Petitioner

bears the burden of proving that he paid estimated tax or that

any of the exceptions apply.    Rule 142(a); Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980).   Petitioner, however, did

not dispute his liability for these additions to tax.   Therefore,

petitioner has failed to carry his burden of proof and is liable

for the additions to tax for 1988 and 1989.   Petitioner is not

liable, however, for the additions to tax with respect to 1990,
                                - 15 -

1991, and 1992, because we have concluded that there are no

deficiencies for those years.

     We have considered the other arguments made by petitioner

and respondent and found them to be either irrelevant or without

merit.

     To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
