                  T.C. Memo. 1999-195



                UNITED STATES TAX COURT



              ELLA FREIDUS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 24197-97.                      Filed June 16, 1999.



     On the facts, Held: R has established by clear and
convincing evidence that at least part of F's underpayment
for the taxable years 1987 and 1988 is attributable to fraud
with the intent to evade tax and that F's failure to file
her 1989 and 1990 tax returns is attributable to fraud. See
secs. 6651(f), 6653(b), I.R.C.

     Held, further, R's determination that F is liable for
the additions to tax under sec. 6653(b)(1)(A) and (B),
I.R.C., for the 1987 taxable year, sec. 6653(b)(1)(A),
I.R.C., for the 1988 taxable year and sec. 6651(f), I.R.C.,
for the 1989 and 1990 taxable years is sustained.



Richard H. Champion, for petitioner.

Monica E. Koch and Richard Wright, for respondent.
                                             - 2 -


                    MEMORANDUM FINDINGS OF FACT AND OPINION

        NIMS, Judge: Respondent determined deficiencies, additions

to tax, and penalties for 1987, 1988, 1989, and 1990 with respect

to petitioner's Federal income taxes as follows:
                                                Additions to Tax
Year   Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1) Sec. 6653(b)(1)(B) Sec. 6654(a)   Sec. 6651(f)
1987    $100,446        $75,335                           $68,257           $5,392
1988     380,065                        $285,049                            24,447
1989     260,661                                                            17,628       $195,496
1990   1,338,617                                                            87,642      1,003,963

        Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.                                  All

Rule references are to the Tax Court Rules of Practice and

Procedure.        All dollar amounts are rounded to the nearest dollar.

        The parties have agreed that the proper amounts of

petitioner's income tax deficiencies are $31,554, $226,297,

$42,521, and $835,656 for the 1987, 1988, 1989, and 1990 taxable

years, respectively.             The parties have further agreed that

petitioner is liable for the addition to tax under section

6654(a) for the 1987, 1988, 1989, and 1990 taxable years.

        After these concessions by both parties, the sole issue for

decision is whether petitioner is liable for the additions to tax

for fraud under section 6653(b)(1)(A) and (B) for the 1987

taxable year and section 6653(b)(1) for the 1988 taxable year and

the additions to tax for fraudulent failure to file timely income

tax returns under section 6651(f) for the taxable years 1989 and

1990.      In the event we should determine that petitioner is not
                                - 3 -


liable for the additions to tax under sections 6651(f) and

6653(b), the parties have stipulated that petitioner would then

be liable for the accuracy-related penalty attributable to

negligence or disregard of rules or regulations under section

6662(a) for the 1987, 1988, 1989, and 1990 taxable years.

                          FINDINGS OF FACT

     Petitioner resided in Cold Spring Harbor, New York, when the

petition was filed.    Petitioner is married to Jacob Freidus.

Petitioner maintained separate finances from Mr. Freidus during

the years in issue.

     Prior to her marriage to Mr. Freidus in 1967, petitioner was

an art dealer who collected art for an art gallery she owned on

Long Island, New York.    She was also an agent for a well-known

Russian artist.    During the operation of her art gallery,

petitioner maintained books and records and filed tax returns.

     Petitioner was a successful real estate investor and fine

art collector.    Petitioner engaged in several profitable real

estate transactions prior to her marriage to Mr. Freidus.     Upon

petitioner's marriage to Mr. Freidus, petitioner received 7

properties from him.

     Petitioner collected jewelry, antique rugs, and Picasso

ceramics during the years in issue.     Items in petitioner's art

collection have often been displayed in museums throughout the

world.
                                - 4 -


       Prior to her marriage to Mr. Freidus, petitioner regularly

filed Federal income tax returns.     While petitioner was aware of

her duty to file income tax returns and the consequences arising

for failing to file, she did not file Federal income tax returns

for her 1987, 1988, 1989, and 1990 taxable years.    Petitioner was

also aware of her right to request extensions to file her tax

returns, but did not request extensions to file her returns.     The

last return petitioner filed was for the 1980 taxable year.

Petitioner also knew of her obligation to make estimated tax

payments, but failed to do so for the 1987, 1988, 1989, and 1990

taxable years.

       Petitioner believed that a 1990 return, if prepared, would

indicate that she owed taxes.    Petitioner also believed that she

would owe taxes for 1987 had a return been prepared.

       During the years in issue, petitioner's income consisted of

the following:

            Horse Show
Year          Income       Interest        Capital Gains     Rents
1987         $246,614      $15,027           $195,631      $154,833
1988          104,166       15,427            903,018       127,943
1989          197,287        1,991            380,114        27,802
1990          133,578        7,489          3,179,663         9,184

       Petitioner made the following purchases at Christie's

auctions:
                                   - 5 -


                Date                        Amount
            March 19, 1987                  $3,223
            March 20, 1987                   3,300
            June 24, 1987                    7,205
            October 1, 1987                  3,520
            October 8, 1987                  1,100
            November 12, 1987                4,653
            March 11, 1998                   8,140
            April 9, 1988                    1,760
            May 15, 1990                    36,740
            May 15, 22, 30, 1990           213,950

     Petitioner made the following purchases at Sotheby's

auctions:

                Date                        Amount
            January 20, 1987                $8,425
            January 30, 1987                 2,860
            February 26, 1987               11,110
            May 13, 1987                     1,650
            May 21, 1987                     8,800
            June 23, 1987                   10,230
            September 22, 1987               6,270
            October 6, 1987                    715
            October 7, 1987                 21,104
            November 11, 1987               17,930
            February 9, 1988                 1,430
            February 24, 1988               11,000
            April 23, 1988                   2,420
            May 30, 1990                    24,130
            May 16, 1990                   174,900

     Petitioner paid the following amounts of qualified residence

interest and property taxes for her residence at 40 Dock Hollow

Road, Cold Spring Harbor, New York (Dock Hollow property):

                      Qualified Residence            Real Property
     Year                  Interest                      Taxes
     1987                  $140,502                     $15,000
     1988                   166,909                      20,513
     1989                    50,000                      40,262
     1990                    50,000
                               - 6 -


     Petitioner paid Annette Pores an annual salary of $8,000 for

clerical services rendered for the taxable years 1987, 1988,

1989, and 1990.

     Petitioner maintained records of her finances in an office

located at the Dock Hollow property.

     On or about September 1, 1988, the United States filed suit

to collect the deficiencies determined by the Tax Court in

Freidus v. Commissioner, T.C. Memo. 1979-507, in which Mr.

Freidus was the petitioner.   During 1989, the United States

sought to depose Jacob Freidus and to examine documents in his

possession that described his income and assets.   Mr. Freidus

resisted the efforts of the United States and the United States

was forced to seek the District Court's assistance in conducting

discovery.   The United States also sought documents and

deposition testimony from petitioner.

     As a result of the District Court's order and subpoena

issued to petitioner, three file cabinets and 43 boxes of records

were transferred from her home and delivered to the office of her

attorney beginning on February 23, 1990, at a rate of no more

than two or three boxes per week.   These records were copied and

delivered to the United States, except for approximately 1,900

documents which petitioner claimed were privileged under the
                                - 7 -


Fifth Amendment, attorney-client privilege, and the work-product

doctrine.   At no time was petitioner denied access to her

records.

     Subsequently, Mr. Freidus filed a petition under Chapter 7

of the Bankruptcy Code.    On October 1, 1991, the Bankruptcy Court

entered an order directing that Mr. Freidus and petitioner be

deposed and that they produce numerous documents with respect to

their financial condition.   Petitioner's counsel advised the

United States that petitioner would not submit to a deposition,

invoking her rights under the Fifth Amendment; the United States

did not depose petitioner.   The Bankruptcy Court denied Mr.

Freidus a discharge of his Federal tax liabilities.   Mr. Freidus

presently owes the Internal Revenue Service in excess of $21

million.

     During the years in issue, petitioner traveled extensively.

She flew to auction houses in London.   Petitioner and her husband

traveled to Tokyo, Japan, in early April 1988, at the request of

the Tokyo Metropolitan Art Museum to be present at the opening

ceremony of an exhibition entitled "The 1920's in Japan".

Petitioner also traveled to Russia and France to visit museums to

which she had lent paintings.

     Petitioner now resides in an 8,000 square-foot home on 20

acres, with an in-ground pool, 4 fireplaces, 715 feet of

waterfront and a gazebo.   At the time of trial, the house was on
                                 - 8 -


the market with an asking price of $3,950,000.    The house, known

as "Dark Hollow", has been described in the book The Mansions of

Long Island, as "the most remarkable house on the east coast".

Petitioner purchased this residence around 1967.

     Petitioner employed a live-in married couple to take care of

Dark Hollow during the years in issue.    One of the caretakers,

Johnny Mongkauw, also served as petitioner's    chauffeur, whom Mr.

Freidus paid in cash every week.

     During the 1970s and 1980s, petitioner authorized or

consented to the formation of multiple corporations.    Subsequent

to their formation, these corporations did not issue capital

stock, transact business, hire employees, or file tax returns.

Bank accounts were opened, and for a time maintained in the name

of some of these corporations.    These corporations were merely

nominees; all income and expenses flowing therefrom were

chargeable to petitioner.   Petitioner often paid personal

expenses from accounts in the names of her nominee corporations.

Prior to her marriage to Mr. Freidus, petitioner had never

incorporated her businesses.

     Petitioner incorporated Ivory Ranch, Inc. (Ivory Ranch), a

nominee corporation, on January 12, 1978, in the State of Nevada.

Petitioner was its president and only officer.    Ivory Ranch was

subsequently reincorporated in the State of New York on July 22,

1985.   Petitioner was its president and sole shareholder.
                                - 9 -


     Ivory Land, Inc. (Ivory Land) was incorporated in the State

of Nevada on August 6, 1986.    Petitioner was its president,

secretary, treasurer, and director.     This corporation was a

nominee corporation for petitioner.

     An additional corporation, 77 Ivory Corp. (77 Ivory), was

incorporated in the State of New York on April 21, 1976, and was

a nominee corporation for petitioner.

     Petitioner incorporated Ivory Tower Holding Corp. (Ivory

Tower) in the State of New York on August 26, 1977.     Ivory Tower

was established as a holding company for all of petitioner's

other companies and was a nominee corporation for petitioner.

     Ivory Land, Ivory Ranch, 77 Ivory, and Ivory Tower did not

file corporate Federal income tax returns for the years in issue.

     During the years in issue, petitioner signed sale contracts,

deeds, lease agreements, and numerous other related documents

needed to complete her business transactions, and on some

occasions authorized Mr. Freidus to sign them on her behalf.

     Beginning in the 1970s, petitioner employed Edmund Burns

(Burns) to handle her real estate matters.     Petitioner

subsequently made Burns her general counsel for all of her

business transactions.

     On a number of occasions, Burns received proceeds from the

sales of petitioner's assets.    Burns deposited these proceeds in

his law firm's client escrow account, along with deposits from
                               - 10 -


other clients.   If these proceeds were to be held for a long

time, Burns transferred the funds to an interest bearing account

called the Pierpont Fund Money Market at Morgan Guaranty

(Pierpont Account).   The money market account was held under the

identification number of Burns' law firm, the fact of which

petitioner was aware.   The account held only petitioner's funds

and existed only for her benefit and her corporations' benefit.

     With petitioner's consent, Burns disbursed money from her

Pierpont Account and from her client escrow account to various

third parties.   These disbursements were in partial satisfaction

of petitioner's then existing business and personal liabilities.

Only petitioner authorized disbursements from these accounts.

     Burns furnished petitioner with Form 1099 each year for

accrued interest from the Pierpont Account.   Petitioner earned

interest in the amounts of $14,350, $13,637, $1,951, and $6,440

for the taxable years 1987, 1988, 1989, and 1990, respectively.

     During the years in issue, an account in the name of Ivory

Ranch was maintained at Chase Manhattan Bank (Chase).   Petitioner

signed all of its disbursement checks.   Ivory Ranch's net

deposits were as follows: $772,137, $780,254, $71,471, and

$114,361 for the taxable years 1987, 1988, 1989, and 1990,

respectively.    The checks petitioner drew upon this account were

as follows: $13,900, $11,000, $1,500, and $9,120 for the taxable

years, 1987, 1988, 1989, and 1990, respectively.
                                - 11 -


     Ivory Land also maintained an account at Chase.   Its net

deposits were as follows: $1,343,034, $647,998, $515,319 and

$1,805,311 for the taxable years 1987, 1988, 1989, and 1990,

respectively.   Petitioner drew checks upon this account in the

following amounts: $80,875, $59,005, $52,116, and $59,850,

respectively.

     Petitioner maintained an account at Chase in her name during

the years in issue.   Net deposits into this account were as

follows: $138,698, $90,649, $21,419, and $150 for the taxable

years 1987, 1988, 1989, and 1990, respectively.   At least $20,000

of transfers into petitioner's account is directly traceable to

transfers from Ivory Land and Ivory Ranch.   Petitioner's account

also received transfers of proceeds from petitioner's leases and

horse-related activities in the following amounts: $88,092,

$31,015, $8,122, and $8,700 for the taxable years 1987, 1988,

1989, and 1990, respectively.

     Petitioner fully authorized Mr. Freidus to act as her agent

during the years in issue.   Mr. Freidus, from time to time,

requested that petitioner give him blank corporate checks affixed

with petitioner's signature.    Petitioner regularly acceded to his

requests.   Petitioner was aware of the expenditures and

investments, which included investments in real estate and

horses, which Mr. Freidus made on her behalf.   Petitioner knew

what checks were being written and what they were used for.
                                - 12 -


Petitioner knew that Mr. Freidus was using the checks to make

investments on her behalf.   Petitioner hoped that Mr. Freidus

would make good investments and earn profits.    Petitioner would

often discuss potential real estate investments with Mr. Freidus

or Burns.   If petitioner approved of a transaction, she signed

all the necessary documents.    Petitioner knew of Mr. Freidus'

investment in horses but usually left the investment decisions to

Mr. Freidus.   When Mr. Freidus would sell or lease a farm or a

horse as her agent, he discussed with petitioner the terms of the

documents that she signed.

     Petitioner owned 16 jumper horses during the years in issue.

Petitioner's annual gross earnings from horse sales are as

follows: $375,000 for a horse named Nimmedor in 1988; $45,000 for

a horse named Urtola and $34,000 for a horse named Gold Falk in

1989; and $175,000 for a horse named Sebastian and $10,000 for a

horse named Le Val Blanc in 1990.    The purchaser of Nimmedor,

Donna Furth, paid the $375,000 sale price by wire transfer to an

Ivory Ranch account at Chase.    The proceeds from the remaining

horse sales were deposited into an account belonging to

petitioner's broker and trainer, Margie Goldstein.    The net

income or loss from petitioner's horse-related activities were as

follows: ($8,886), $216, $12,213, and ($17,171) for the taxable

years 1987, 1988, 1989, and 1990, respectively.
                              - 13 -


     On March 14, 1990, petitioner negotiated the sale of her 65-

carat diamond, the Golden Maharajah.   Petitioner had originally

purchased the Golden Maharajah for $30,000, prior to her marriage

to Mr. Freidus.   She sold the Golden Maharajah for $1.3 million.

Burns deposited the $1.3 million into his firm's client escrow

account.   He then paid $640,280 to various third parties,

$555,000 of which was disbursed to the account of Ivory Land, and

transferred $654,720 into petitioner's Pierpont Account.     Mr.

Freidus was not involved in the sale of the Golden Maharajah.

     Petitioner sold 35 Picasso ceramic pieces on June 26, 1990,

for $500,000.   Burns deposited the $500,000 into his firm's

client escrow account.   Burns disbursed these funds in accordance

with petitioner's instructions to various third parties,

including Sotheby's, Phillips International Corporation, and

Ivory Land.   Mr. Freidus gave no directions regarding the sale of

the Picasso ceramics or the distribution of the sale proceeds.

     On December 27, 1990, petitioner sold 187 Picasso ceramic

pieces for $1,943,330.   Once again, the sale proceeds were

deposited into the client escrow account of Burns' law firm.

Petitioner directed Burns to deposit $1,000,000 into petitioner's

Pierpont Account and to transfer $340,000 to Ivory Land and

$546,000 to Sotheby's Financial Services.

     Petitioner purchased a number of art works by using personal

checks, charge cards, and loan proceeds from Sotheby's.    The
                              - 14 -


costs of her art purchases were as follows: $89,094, $14,850, and

$199,030 in the taxable years 1987, 1988, and 1990, respectively.

In 1988 and 1989, petitioner borrowed a total of $635,069 from

Sotheby's.   Petitioner partially repaid these loans with the

following amounts disbursed from the Ivory Land account: $48,953,

$83,561, $25,843, and $73,074 in 1987, 1988, 1989, and 1990,

respectively.   Petitioner also used funds from the Ivory Land

account to buy various art works from Christie's as follows:

$16,535, $9,906, and $143,610 in 1987, 1988, and 1990,

respectively.

     Petitioner retained Eisner & Lubin on June 5, 1989, to

prepare her and her corporate nominees' 1987 and 1988 tax

returns.   Eisner & Lubin made repeated requests for records and

information to complete petitioner's individual and corporate tax

returns.   Petitioner failed to provide Eisner & Lubin with

adequate records and documentation to prepare the returns for

petitioner and her nominee corporations for the years in issue.

     Petitioner did not timely pay Eisner & Lubin for services

rendered in their attempt to prepare petitioner's income tax

returns for the taxable years 1987 and 1988.   Petitioner's

delinquency in paying Eisner & Lubin for their services for the

1986 and prior taxable years had also been an ongoing problem.

Petitioner received a letter from Eisner & Lubin dated October

21, 1987, stating that Eisner & Lubin had discontinued
                                - 15 -


preparation of her tax returns for the earlier years and would

not resume work until fees in arrears had been satisfied and a

retainer of $10,000 was paid.    Payments totaling $80,236 were

made during 1989 and 1990 to Eisner & Lubin for professional

services.   Eisner & Lubin performed an additional $40,000 worth

of services for which petitioner was billed.    Eisner & Lubin did

not prepare any requests for extension or tax returns for

petitioner or any of the nominee corporations for any year

subsequent to 1980.

                                OPINION

     The sole issue for decision is whether petitioner is liable

for the additions to tax for fraud under sections 6653(b)(1)(A)

and (B) for the 1987 taxable year and section 6653(b)(1) for the

1988 taxable year and the additions to tax for fraudulent failure

to file timely income tax returns under section 6651(f) for the

1989 and 1990 taxable years.

     Section 6653(b)(1)(A) and section 6653(b)(1), as in effect,

respectively, for the 1987 and 1988 returns in this case impose

an addition to tax equal to 75 percent of the portion of the

underpayment which is attributable to fraud.   Section

6653(b)(1)(B), as in effect for 1987, imposes a further addition

to tax equal to 50 percent of the interest payable under section

6601 with respect to the portion of the underpayment attributable

to fraud.   If any portion of the underpayment is attributable to
                              - 16 -


fraud, then the entire amount of the underpayment is to be

treated as attributable to fraud, except for any portion of the

underpayment which the taxpayer establishes is not due to fraud.

See sec. 6653(b)(2).   In order for the additions to tax for fraud

under section 6653(b) 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).

     Section 6651(a) imposes an addition to tax equal to 5

percent of the amount required to be shown on the return if a

taxpayer fails to file within one month of the date prescribed.

That section further imposes an additional 5 percent addition to

tax for each month or fraction thereof during which such failure

persists, not to exceed 25 percent in the aggregate.   If any

failure to file a return is fraudulent, section 6651(f) increases

the additions to tax imposed under section 6651(a) to 15 percent

of the net amount of tax due for each month that the return is

not filed, up to a maximum of 75 percent.   In this case,

respondent must prove under section 6651(f) that petitioner's tax

liability for 1989 and 1990 exceeds her prepayment credits and

that her failure to file for each taxable year was an attempt to

evade tax.   See secs. 7454, 6651(a)(1), (b)(1), (f); Rule 142(b).

To determine whether petitioner's failure to file her return was
                              - 17 -


fraudulent, we apply the same elements used when considering the

imposition of the addition to tax for fraud under former section

6653(b)(1) and present section 6663(a).   See Clayton v.

Commissioner, 102 T.C. 632, 653 (1994).

     The parties have stipulated that petitioner's income tax

deficiencies are $31,554, $226,297, $42,521, and $835,656 for the

1987, 1988, 1989, and 1990 taxable years, respectively.     On the

record before us, we hold that respondent has established by

clear and convincing evidence that petitioner has an underpayment

for each of the years 1987 and 1988, and has a tax liability

exceeding her prepayment credits for each of the taxable years

1989 and 1990.

     To prove fraudulent intent, respondent must prove by clear

and convincing evidence that the taxpayer intended to evade taxes

that were believed to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of such taxes.     See

Recklitis v. Commissioner, 91 T.C. 874, 909 (1988).      Tax evasion

need not be a primary motive, but respondent may satisfy his

burden by showing that a "'tax-evasion motive play[ed] any part'

in petitioner's conduct".   Id.   Respondent must establish fraud

for each taxable year involved by clear and convincing evidence.

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

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

upon examination of the entire record.    See Parks v.
                              - 18 -


Commissioner, 94 T.C. 654, 660 (1990); Recklitis v. Commissioner,

supra at 909. Fraud is never presumed but must be established by

independent evidence.   See Beaver v. Commissioner, 55 T.C. 85, 92

(1970); Otsuki v. Commissioner, supra at 105.   Fraud may be

proven by circumstantial evidence because direct evidence of the

taxpayer's intent is rarely available.   See Recklitis v.

Commissioner, supra at 909; Rowlee v. Commissioner, 80 T.C. 1111,

1123 (1983).

     Circumstantial evidence of fraud includes: (1) Consistent

and substantial understatement of income, (2) failure to maintain

adequate records, (3) failure to file tax returns, (4)

inconsistent or implausible explanations of behavior, (5)

concealing assets, and (6) failure to cooperate with tax

authorities.   See Bradford v. Commissioner, 796 F.2d 303, 307-308

(9th Cir. 1986), affg. T.C. Memo. 1984-601.   Other badges of

fraud include the failure to make estimated tax payments,

extensive dealings in cash, see Recklitis v. Commissioner, supra

at 910; the awareness of the obligation to file returns, report

income and pay taxes, see Schiff v. United States, 919 F.2d 830,

833 (2d Cir. 1990); and failure to provide tax return preparers

with complete and accurate information, see Korecky v.

Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986), affg. T.C.

Memo. 1985-63.

     In this case, petitioner has willfully failed to file timely

tax returns for the 1987, 1988, 1989, and 1990 taxable years;
                              - 19 -


petitioner was fully aware of her obligation to file tax returns.

Petitioner failed to maintain adequate records of her income-

producing activities.   The parties have stipulated that

petitioner, an experienced and sophisticated businessperson who

maintained books and records for her art business and had

regularly filed tax returns in the past, failed to provide Eisner

& Lubin with complete and accurate records for the taxable years

1987 and 1988, despite repeated insistence that she do so.

     In addition, petitioner rather cavalierly failed to timely

pay her accountants, Eisner & Lubin, for their return preparation

services for the 1987 and 1988 taxable years, an ongoing problem;

petitioner's failure to pay effectively prevented preparation of

petitioner's tax returns for these years.   Petitioner had

adequate funds in her Pierpont Account and in the accounts of her

nominee corporations to pay Eisner & Lubin.   Petitioner knew that

Eisner & Lubin would cease tax return preparation until

petitioner satisfied fees in arrears and paid a $10,000 retainer

as Eisner & Lubin's October 21, 1987, letter indicated.    Burns,

on behalf of petitioner, finally paid Eisner & Lubin in 1989.

The fact that petitioner had sufficient funds to pay Eisner &

Lubin and knew that Eisner & Lubin would cease work until paid,

further suggests a willful failure to file her 1987 and 1988

returns.
                               - 20 -


     Petitioner's failure to file her returns for the years 1987,

1988, 1989, and 1990, establishes a 4-year pattern of substantial

and consistent understatements of income.

     Petitioner's explanations for her failure to file tax

returns and provide her accountants with complete and accurate

information are contradicted by the record.    Petitioner asserts

that her failure to file was caused by the subpoena issued to her

in the collection action against Mr. Freidus which interrupted

the process of gathering information to submit her returns.

Therefore, petitioner maintains that her ultimate failure to file

was caused by the disruption attendant to the collection action

and not by an intent to defraud the government.

     We disagree.   The record indicates that petitioner began

producing documents in response to the subpoena on February 23,

1990.    Since her 1987 and 1988 returns were due prior to this

date, the subpoena could not have caused a disruption in

preparation of these tax returns.    Furthermore, the parties have

stipulated that at no time was petitioner denied access to her

records and that petitioner had custody of all original

documents.    Therefore, petitioner's failure to file her tax

returns cannot be attributed to the collection action against Mr.

Freidus.    Petitioner's implausible explanation is a badge of

fraud.
                                - 21 -


     Petitioner further argues that Mr. Freidus frustrated her

attempts to file by failing to produce necessary documents for

her tax return preparers.   Petitioner testified as follows:

     Q:    Can you tell us why no return was filed in 1987?

     A:    Well, I went -- I did hire three different -- and they
           all got money, but somehow it just never got done
           because Mr. Freidus frustrated them, didn't come up
           with --

     Q:    And can you explain what you mean by that?

     A:    Well, he didn't come up with the things that were
           necessary. He kept them. And for me, it was very
           difficult to start to go up the steps where they were
           kept in the files.

     Petitioner further asserts that Mr. Freidus had overwhelming

control over finances and was abusive, impeding her attempts to

file her returns.   Mr. Freidus testified that he had custody and

control over petitioner's financial documents located at Dark

Hollow.

     However, the evidence fails to establish that Mr. Freidus

substantially impeded petitioner's attempts to file her tax

returns.   Mr. Freidus never denied petitioner access to her

financial documents.   He never advised petitioner not to file her

tax returns.   He never threatened petitioner with physical harm

if she filed her tax returns.

     According to petitioner's testimony, it was too difficult

for her to climb the steps to get her files.   Even if we were to

accept petitioner's excuse, she could have easily requested her
                               - 22 -


secretary, Annette Pores, or petitioner's caretaker, Johnny

Mongkauw, to fetch relevant records.    Furthermore, petitioner has

not presented evidence that Mr. Freidus' behavior prevented

petitioner from requesting extensions to file her tax returns.

Since petitioner knew that she had the right to file requests for

extensions to file her returns, she must have deliberately chosen

not to request the extensions.   Therefore, petitioner has failed

to establish that Mr. Freidus prevented her from timely filing

her tax returns.

     The failure to make estimated tax payments supports a

finding of fraud.   See Bradford v. Commissioner, 796 F.2d at 308.

Petitioner deliberately and consistently failed to pay estimated

taxes for all 4 years in issue as evidenced by the fact that

petitioner was fully aware of her obligation to estimate her tax

liability and make estimated tax payments.

     Concealing assets coupled with a failure to file tax returns

is a strong indication of fraud.   Using her secret Pierpont

Account, accounts of third parties, and nominee corporations,

petitioner employed a strategy designed to conceal assets from

potential creditors, including respondent.   Assets in the

Pierpont Account consisted mainly of proceeds from petitioner's

income-producing activities.   The record shows that petitioner

arranged to have the sale proceeds from the Golden Maharajah

diamond and Picasso ceramics wired into the Pierpont Accounts.
                               - 23 -


The funds were then disbursed per petitioner's instructions to

various third parties, including petitioner's nominee

corporations.   Assets in the Pierpont Account would be difficult

to trace to petitioner because the account was held under the

identification number of Burns' law firm.    We agree with Burns'

testimony at trial that the Pierpont Account effectively hid

petitioner's assets from potential creditors, including

respondent.

     Petitioner asserts that a purpose of the Pierpont Account

was to protect petitioner's assets from the consequences of

voluntarily giving Mr. Freidus blank signed checks drawn upon her

corporate bank accounts.    The record, however, shows behavior

inconsistent with petitioner's alleged purpose.    Petitioner

testified that she knew what checks were being written and what

they were used for.   Petitioner knew that Mr. Freidus was using

the checks to make investments on her behalf.    Petitioner hoped

that Mr. Freidus would make good investments and earn profits.

Petitioner would often discuss potential real estate investments

with Mr. Freidus or Burns.    If petitioner approved of a

transaction, she signed all necessary documents.    Petitioner knew

of Mr. Freidus' investment in horses, but she usually left the

investment decisions to him.    If petitioner truly needed

protection, she could easily have canceled the checks or closed

the corporate accounts.    She certainly would not have given Mr.
                              - 24 -


Freidus authority to invest on her behalf or have approved

transactions entered into on her behalf had she not wished him to

do so.   Overall, petitioner did not behave like a person needing

protection from the spending habits of her husband.

     Moreover, a substantial amount of proceeds from the sale of

the Golden Maharaja diamond and the sale of Picasso ceramics that

were wired into the Pierpont Account were disbursed to

petitioner's corporate accounts.   For instance, petitioner

disbursed $555,000 to Ivory Land upon the sale of the Golden

Maharaja in March 1990.   Petitioner also disbursed a total of

$223,125 to Ivory Land upon the sale of the 35 Picasso ceramics

in June of 1990.   On December 27, 1990, when petitioner sold 187

Picasso ceramic pieces for $1,943,330, petitioner directed Burns

to transfer $340,000 to the Ivory Land account.   Transferring

these amounts from the safety of the secret Pierpont Accounts

into the Ivory Land corporate account exposed the transferred

amounts to the blank corporate checks in Mr. Freidus' possession

and is therefore inconsistent with petitioner's stated purpose of

hiding assets from Mr. Freidus.

     Due to petitioner's inconsistent behavior, we conclude that

protection from the consequences of voluntarily giving Mr.

Freidus blank signed checks drawn upon her corporate bank

accounts was not a purpose of the Pierpont Account.   We further

conclude that petitioner's inconsistent and implausible
                                - 25 -


explanations of behavior are a badge of fraud.    Petitioner notes

on brief that the Pierpont Account was needed to prevent Mr.

Freidus from making unauthorized purchases on petitioner's behalf

at art auctions.   However, this self-serving assertion is not

supported by the record.

     Petitioner's use of nominee corporations is further evidence

of asset concealment.    See Jones v. Commissioner, T.C. Memo.

1994-230, affd. without published opinion 68 F.3d 460 (4th Cir.

1995) (finding that a taxpayer's use of alter ego corporations to

conduct personal as well as business transactions was evidence of

asset concealment).     The record shows that the corporate accounts

were mere repositories for proceeds derived from petitioner's

income producing activities.    In addition to proceeds from sales

of her Golden Maharajah Diamond and Picasso Ceramics which were

deposited into the Ivory Land account, petitioner also deposited

proceeds from horse sales into the Ivory Ranch account.    Since

petitioner's nominee corporations did not file returns, tracing

and attributing income to petitioner would be severely impeded.

     Petitioner argues that the corporations were formed solely

to hold title to real property and to insulate her from personal

liability.    Once again, petitioner's assertion is contradicted by

the record.   The parties have stipulated that the corporate

accounts were used to pay petitioner's personal expenses.

Petitioner also used corporate funds to invest in fine art and to
                              - 26 -


harbor proceeds from income producing activities.   As noted

above, petitioner partially repaid loans from Sotheby's with

substantial amounts disbursed from the Ivory Land account.

Petitioner also used funds from the Ivory Land account to buy

various art pieces from Christie's.    Like the Pierpont Account,

we think petitioner used her corporate nominees to conceal

assets.

     Further evidence of asset concealment is the fact that

petitioner deposited proceeds from horse sales into an account

belonging to petitioner's broker and trainer, Margie Goldstein,

once again making it difficult for respondent to trace these

proceeds to petitioner.

     Petitioner argues that her entire course of conduct fails to

demonstrate that the deficiencies were due to an intent to evade

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

1968), and Nelon v. Commissioner, T.C. Memo. 1997-49, for

support.   Instead of supporting petitioner's position, Stoltzfus

v. United States, supra, reinforces respondent's position.     In

that case, the Court affirmed the judgment of the District Court

denying the taxpayer's request for a refund of civil fraud

penalties imposed pursuant to section 6653(b) of the 1954 Code.

The taxpayer had failed to file returns from 1943 through 1958.

Like petitioner, the taxpayer had extensive business experience,

a keen awareness of financial matters and was aware of his duty
                              - 27 -


to file returns, report income, and pay taxes.   See id. at 1005.

The taxpayer's total gross income for his 1954 taxable year

dictated the inference that he knew he owed taxes for that year.

In the case before us no inference is necessary because

petitioner herself testified that had she prepared and filed tax

returns for the 1987 and 1990 taxable years, she would have owed

taxes.

     Furthermore, Nelon v. Commissioner, supra, is

distinguishable.   In that case, the taxpayer, a high school

dropout and inexperienced in bookkeeping and financial matters,

operated a logging business as a sole proprietorship.   The

taxpayer's income from his logging business could easily be

traced from the Forms 1099 supplied by payers.   The taxpayer

joined a tax protester group and did not file tax returns under

the belief that he was not subject to Federal income tax.     The

Commissioner asserted that the taxpayer was liable for the

addition to tax for fraud, contending that the following facts

established fraud: (1) Failure to file tax returns for 5

consecutive years; (2) consistent failure to report substantial

amounts of income; (3) failure to maintain books and records of

his logging business; (4) failure to pay estimated taxes; and (5)

cashing, rather than depositing, checks derived from his logging

business.   We held that the Commissioner did not clearly and

convincingly establish that the taxpayer's underpayment was due
                                - 28 -


to fraud.   We stated that the record did not "show any

affirmative acts of concealment or misrepresentation so as to

constitute fraud, such as filing false information or attempting

to mislead respondent."   Id.

     Unlike the taxpayer in Nelon v. Commissioner, supra,

petitioner is an astute businessperson possessing adequate skill

in maintaining adequate books and records.   Furthermore,

petitioner acknowledges that she is under an obligation to file

returns and pay Federal income taxes.    Petitioner's income is not

easy to trace, but rather difficult to establish due to her

surreptitious use of secret accounts and nominee corporations.

Therefore, unlike Nelon v. Commissioner, supra, the record here

contains ample evidence of affirmative acts of concealment so as

to constitute fraud.

     Overall, in her extended testimony before us, petitioner

impressed us as being a strong-minded businesswoman fully capable

of managing her affairs, including the filing of accurate and

timely tax returns.

     Based on the foregoing, we hold that respondent has

established by clear and convincing evidence that at least part

of petitioner's underpayment for the taxable years 1987 and 1988

is attributable to fraud with the intent to evade tax.    We

further hold that petitioner's failure to file her 1989 and 1990

tax returns is attributable to fraud because petitioner's failure
                             - 29 -


to file was essential to her clandestine concealment of assets

and various sources of income related thereto.     Accordingly,

respondent's determination that petitioner is liable for the

additions to tax under section 6653(b)(1)(A) and (B) for the 1987

taxable year, section 6653(b)(1) for the 1988 taxable year, and

section 6651(f) for the 1989 and 1990 taxable years is sustained.

     To reflect the foregoing,

                                      Decision will be

                                 entered under Rule 155.
