                        T.C. Memo. 2000-267



                      UNITED STATES TAX COURT



                    ARMIN UNGER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24681-97.                     Filed August 24, 2000.



     Armin Unger, pro se.

     Carol A. Szczepanik, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes and additions to tax as

follows:
                                         - 2 -
                                               Additions to Tax
                              Sec.       Sec. 6653     Sec. 6653
   Year       Deficiency    6651(f)      (b)(1)(A)     (b)(1)(B)    Sec. 6653(b)(1)
                                                           1
   1987         $6,083        N/A          $4,562.25                     N/A
   1988          3,189        N/A            N/A          N/A          $2,391.75
   1989         29,501      $22,125.75       N/A          N/A            N/A
   1990          1,909        1,431.75       N/A          N/A            N/A
     1
         50 percent of the interest due on $6,083


     The issues for decision are:              (1) Whether petitioner had

unreported taxable income during the years at issue, and (2)

whether petitioner is liable for additions to tax for fraud

(section 6653(b))1 and fraudulent failure to file (section

6651(f)).

                                 FINDINGS OF FACT

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

the time the petition was filed, petitioner resided in Lakewood,

Ohio.      During the years in issue petitioner’s sole source of

income was the sale of illegal drugs.               Petitioner derived

sufficient taxable income from the illegal sale of controlled

substances to require the filing of a Federal income tax return

in each of the years in question.              Petitioner did not file income

tax returns for the tax years 1987 through 1990.

     On July 18, 1994, petitioner pleaded guilty to the felony

offence set out in section 72012 (Attempt to Evade or Defeat Tax)


     1
      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.
     2
         Sec. 7201 provides:
                                                                   (continued...)
                               - 3 -

in relation to his 1989 tax year.   As part of his plea agreement,

petitioner acknowledged:

     (1) he had a substantial income tax due and owing to
     the United States for the year 1989;

     (2) he made an affirmative attempt to evade that tax by
     failing to file an income tax return and pay the taxes
     owing for that year and by engaging in the following
     affirmative acts alleged in the information, namely–-
     dealing extensively in cash and money orders, using
     nominees to make certain expenditures, and structuring
     a currency transaction in excess of $10,000 to avoid
     the filing of a currency transaction report; and

     (3) he acted willfully and with the intent to defraud
     the government of the additional unreported taxes.

     Unger also acknowledges that he engaged in similar
     relevant criminal conduct with respect to his 1987 and
     1990 income taxes.

     Petitioner maintained multiple bank accounts.   Some of the

accounts were held in his own name, numerous accounts were held

jointly with his mother, Helen Unger, and still others were in

his mother’s name alone (collectively petitioner’s bank

accounts).   Petitioner had access to the joint accounts and the

bank accounts styled in his mother’s name and provided funds that


     2
      (...continued)
     SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.

          Any person who willfully attempts in any manner to
     evade or defeat any tax imposed by this title or the
     payment thereof shall, in addition to other penalties
     provided by law, be guilty of a felony and, upon
     conviction thereof, shall be fined not more than
     $100,000 ($500,000 in the case of a corporation), or
     imprisoned not more than 5 years, or both, together
     with the costs of prosecution.
                                - 4 -

were deposited into these accounts.     Petitioner and his mother

maintained joint safe deposit boxes at Sun Bank from 1986 to 1989

and at California Federal Bank during 1990.     Petitioner also

maintained safe deposit boxes in his own name at Huntington Bank

and National City Bank from 1986 to 1990.

     Petitioner purchased 10 automobiles during the period

November 1986 to December 1990.    At least one of the automobiles,

a 1990 Mazda, was purchased with cashier’s checks showing an

individual other than petitioner as the remitter.     That

individual did not consent to the use of her name in the

transaction.    Petitioner maintained message, mobile phone, and

cellular phone service under three different assumed names.

     Petitioner’s sole income-generating activity was illegal

narcotic sales.    However, when interviewed by respondent’s agents

in 1991, petitioner stated that he had no sources of income and

that he was fully supported by his family.     Petitioner did not

keep records of his income-generating activities and used cash

frequently.    Consequently, respondent determined petitioner’s

income by using the “net worth method”.     In making the

determination of petitioner’s opening net worth, respondent

determined the total amount contained in petitioner’s bank

accounts, the amount of other cash on hand, and other known

assets.
                               - 5 -

     Respondent’s net worth calculation is set out in the

appendix.   Amounts in bank accounts held in the name of

petitioner’s mother and held jointly by petitioner and his mother

are included in the net worth analysis.   Inclusion of these

accounts in petitioner’s net worth is supported by the evidence.

The net worth calculation is supported by the evidence and

accurately shows petitioner’s net worth and expenditures and

establishes that petitioner had net taxable income of $33,685,

$24,647, $108,609, and $18,038 for the years 1987, 1988, 1989,

and 1990, respectively.

                              OPINION

     When a taxpayer keeps no books, or keeps books that are

inadequate, section 446(b) authorizes the Internal Revenue

Service to compute the taxpayer’s income by any method that

clearly reflects income.   See sec. 446(b).   The “net worth

method” has been accepted by the courts as satisfying this

legislative mandate.   Holland v. United States, 348 U.S. 121

(1954).   The Supreme Court described the method as follows:

          In a typical net worth prosecution, the
     Government, having concluded that the taxpayer’s
     records are inadequate as a basis for determining
     income tax liability, attempts to establish an “opening
     net worth” or total net value of the taxpayer’s assets
     at the beginning of a given year. It then proves
     increases in the taxpayer’s net worth for each
     succeeding year during the period under examination and
     calculates the difference between the adjusted net
     values of the taxpayer’s assets at the beginning and
     end of each of the years involved. The taxpayer’s
     nondeductible expenditures, including living expenses,
     are added to these increases, and if the resulting
                                - 6 -

       figure for any year is substantially greater than the
       taxable income reported by the taxpayer for that year,
       the Government claims the excess represents unreported
       taxable income. [Id. at 125.]

       The Commissioner’s determination of tax liability, if

calculated according to an acceptable procedure, such as the net

worth method, is presumptively correct and places the burden of

producing contrary evidence upon the taxpayer.     See Helvering v.

Taylor, 293 U.S. 507 (1935); Traficant v. Commissioner, 884 F.2d

258, 263 (6th Cir. 1989), affg. 89 T.C. 501 (1987); Calderone v.

United States, 799 F.2d 254, 258 (6th Cir. 1986).     Generally, the

taxpayer will bear the burden of proving by a preponderance of

the evidence that the Commissioner’s determination is “arbitrary

and excessive.”    Helvering v. Taylor, supra at 515; Traficant v.

Commissioner, supra at 263; Calderone v. United States, supra at

258.

       Petitioner testified on his own behalf.   We do not find

petitioner to be a credible witness.    Petitioner’s testimony was

self-serving, unbelievable, and uncorroborated.     Petitioner’s

testimony at trial also contradicted prior statements he had

made.    Petitioner did not call any other witnesses to testify,

nor did he introduce any documents into evidence that would tend

to show that respondent’s determination was “arbitrary and

excessive.”

       Petitioner challenges certain items that were included in

the net worth computation.    We will address each of these items.
                               - 7 -

     In the net worth computation, respondent characterized a

$6,200 payment made by petitioner in 1989 to Ms. Owca as a gift.

Petitioner disputes respondent’s characterization of his $6,200

payment to Ms. Owca and claims the expenditure was an investment.

Ms. Owca is petitioner’s former girlfriend.    Petitioner also

disputes respondent’s characterization of a $10,000 payment made

in 1988 to Mr. C. Owca as a loan receivable.    Petitioner claims

that he actually made the check out for $10, gave it to Ms. Owca,

and that Ms. Owca then altered it to $10,000.    Petitioner’s

explanations in both instances are unbelievable.    The $6,200

payment to Ms. Owca was made by a check containing the notation

that it was a gift.   This was corroborated by Ms. Owca.   The

$10,000 check was drawn on an account in the names of petitioner

and Helen Unger (petitioner’s mother).   It bears a notation that

it was a loan, and the check does not appear to have been

altered.

     On brief, petitioner disputes the accuracy of respondent’s

use of $5,000 cash on hand as of December 31, 1986.    The amount

of opening cash on hand on December 31, 1986, was determined on

the basis of petitioner’s prior representations.    Respondent’s

use of this amount of beginning cash on hand in the net worth

analysis does not render the analysis unreliable.    See United

States v. Giacalone, 574 F.2d 328, 333 (6th Cir. 1978).

     Petitioner also disputes the inclusion in the net worth

computation of bank accounts that were held jointly with his
                                - 8 -

mother, or in her own name.    However, the evidence shows that

petitioner transferred significant amounts of money to his

mother’s accounts and had access to and control over those bank

accounts.    During the years in issue, Helen Unger was retired and

had a modest income.    Her gross income, which conceivably could

have been a source of some funds deposited to those accounts, was

subtracted from respondent’s net worth computation in arriving at

petitioner’s understatement of income.

     When ownership or the source from which assets are purchased

by a taxpayer and his family are confused, the Commissioner is

permitted to resort to the use of a consolidated net worth

statement.   See Smith v. Commissioner, 31 T.C. 1 (1958); Lias v.

Commissioner, 24 T.C. 280 (1955), affd. 235 F.2d 879 (4th Cir.

1956).   Under the consolidated method, the combined taxable

income of the taxpayer and his family group is determined by

taking the increase in their combined net worth during each year,

adding personal expenses paid each year, and making proper

adjustments.    From the combined taxable net income determined

under this method, the income reported for the other members of

the family group is deducted, leaving the taxable net income of

the taxpayer.    See Lias v. Commissioner, supra; Friedman v.

Commissioner, T.C. Memo. 1968-145, affd. 421 F.2d 658 (6th Cir.

1970).
                                 - 9 -

     After considering the entire record, we find nothing that

would support the conclusion that respondent’s determination is

arbitrary or excessive.    Indeed, we find the items shown in the

consolidated net worth calculation set out in the appendix to be

supported by the record.   Therefore, we sustain respondent’s

determination of deficiencies in each of the years in question.

     Respondent also determined that petitioner is liable for an

addition to tax for fraud for each of the years 1987, 1988, 1989,

and 1990.   Respondent bears the burden of proof on this issue.

See sec. 7454(a); Rule 142(b).    In order to discharge the burden,

respondent must prove by clear and convincing evidence that:    (1)

An underpayment exists for each year in issue, and (2) some

portion of the underpayment for that year is due to fraud.     See

sec. 7454(a); Clayton v. Commissioner, 102 T.C. 632 (1994);

Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989).    On the basis

of respondent’s net worth computation and the evidence supporting

it, we find that respondent has clearly and convincingly

established that petitioner had taxable income on which there was

an underpayment of tax for each of the years in issue.

     In order to show that some portion of an underpayment is due

to fraud, respondent must also show that petitioner intended to

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

mislead, or otherwise prevent the collection of taxes.   See

Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968);
                               - 10 -

Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).   “Fraud * * *

requires intentional wrongdoing. * * * To establish liability,

the Commissioner [has] to show knowing falsehood”.    Laurins v.

Commissioner, 889 F.2d 910, 913 (9th Cir. 1989), affg. Norman v.

Commissioner, T.C. Memo. 1987-265.

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

upon consideration of the entire record.   See Gajewski v.

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

opinion 578 F.2d 1383 (8th Cir. 1978).   Fraudulent intent is

rarely established by direct evidence.   As a consequence, courts

have inferred fraudulent intent from various kinds of

circumstantial evidence.   Some of the indicia of fraud that have

been recognized include:   (1) Understatement of income, (2)

failure to keep adequate records, (3) failure to file tax

returns, (4) implausible or inconsistent explanations of

behavior, (5) concealing assets, (6) failure to cooperate with

tax authorities, (7) engaging in illegal activities, (8)

attempting to conceal illegal activities, and (9) dealing in

cash.    See Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th

Cir. 1986), affg. T.C. Memo. 1984-601.   Petitioner did all of

these.

     While willful failure to file does not in itself establish

liability for additions to tax on account of fraud, such failure

may be properly considered in connection with other facts in
                               - 11 -

determining whether any deficiency or underpayment of tax is due

to fraud.   See Stoltzfus v. United States, supra.    The consistent

and substantial understatement of income is itself evidence of

fraud.    See Laurins v. Commissioner, supra.   Petitioner has been

convicted of tax evasion under section 7201 for his 1989 tax

year.    His conviction was the result of a plea of guilty.   “A

guilty plea is as much a conviction as a conviction following

jury trial.    The elements of criminal tax evasion and civil tax

fraud are identical.”    Gray v. United States, 708 F.2d 243, 246

(6th Cir. 1983), affg. T.C. Memo. 1981-1.    This Court and

numerous other Federal courts “have held that a conviction for

Federal income tax evasion, either upon a plea of guilty, or upon

a jury verdict of guilt, conclusively establishes fraud in a

subsequent civil tax fraud proceeding through application of the

doctrine of collateral estoppel.”    Id.; see also Fontneau v.

United States, 654 F.2d 8, 10 (1st Cir. 1981) (guilty plea);

Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68, 75-76 (1964)

(guilty plea).    We therefore hold that petitioner is collaterally

estopped from asserting he is not liable for the addition to tax

prescribed in section 6651(f) in relation to his 1989 tax year.

     Petitioner argues he did not intend to evade taxes he knew

to be owing.    He claims that he wanted to, and intended to,

eventually pay his taxes.    He claims that he failed to file

returns only because he believed that if he filed returns, it
                               - 12 -

would expose his criminal activity to other law enforcement

agencies.   We do not find petitioner’s testimony in this regard

to be truthful.   Indeed, petitioner’s plea of guilty to tax

evasion for 1989 and his admissions in his plea agreement belie

his argument.

     Petitioner’s plea agreement in part states:

     (2) he made an affirmative attempt to evade that tax by
     failing to file an income tax return and pay the taxes
     owing for that year and by engaging in the following
     affirmative acts alleged in the information, namely –-
     dealing extensively in cash and money orders, using
     nominees to make certain expenditures, and structuring
     a currency transaction in excess of $10,000 to avoid
     the filing of a currency transaction report; and

     (3) he acted willfully and with the intent to defraud
     the government of the additional unreported taxes.

     Unger also acknowledges that he engaged in similar
     relevant criminal conduct with respect to his 1987 and
     1990 income taxes. [Emphasis added.]

Petitioner’s admission that he engaged in similar criminal

conduct with respect to the 1987 and 1990 tax years, along with

the other evidence, is sufficiently clear and convincing that

petitioner’s understatements of tax for 1987 and 1990 were due to

fraud and that his failure to file returns for those years was

fraudulent.

     The same pattern of fraud existed both before and after the

1988 tax year.    Petitioner admitted to illegal narcotics

trafficking, conducted his business almost exclusively in cash,

used aliases, kept and produced no records of his transactions,
                              - 13 -

hid assets in his mother’s name, lied to respondent’s agents

about the source of his income, and consistently failed to file

income tax returns.   This pattern constitutes clear and

convincing evidence that petitioner’s understatement of tax for

1988 was also due to fraud.

     We hold that petitioner is liable for the additions to tax

for fraud for 1987, 1988, 1989, and 1990 as determined in the

notice of deficiency.



                                           Decision will be entered

                                       for respondent.
                                             - 14 -

                                            Appendix
                                      Net Worth Computation



Assets:                         12/31/86     12/31/87      12/31/88       12/31/89       12/31/90
Cash on hand                   $5,000.00     $5,000.00     $5,000.00      $5,000.00     $24,000.00
Balance in bank accounts      129,884.69    150,593.57    166,477.42     219,350.78     241,174.21
Automobiles                    15,333.41     43,865.29     44,929.79      92,297.20      62,358.87
Real estate                    52,500.00     52,500.00     52,500.00      52,500.00      52,500.00
Loan receivable--C. OWCA           -0-           -0-       10,000.00      10,000.00      10,000.00
  Total assets                202,718.10    251,958.86    278,907.21     379,147.98     390,033.08


Liabilities:
Charge cards–-VISA                311.23      1,504.43      1,192.36          -0-         2,237.27
  Total liabilities               311.23      1,504.43      1,192.36          -0-         2,237.27


Net worth                      202,406.87   250,454.43    277,714.85     379,147.98     387,795.81
Net worth at beginning of year      N/A     202,406.87    250,454.43     277,714.85     379,147.98
  Change in net worth               N/A      48,047.56     27,260.42     101,433.13       8,647.83


Add:
Personal living expenses           N/A       15,739.85     21,587.60      35,340.02      24,700.10
Nondeductible losses (vehicles)    N/A            -0-          952.50      1,662.50      15,628.09
  Balance                          N/A       63,787.41     49,800.52     138,435.65      48,976.02


Less:
Gross income reported–-H. Unger     N/A      (6,413.00)    (12,335.00)                  (16,805.00)
       (16,138.00)
Depreciation expenses              N/A         (800.00)       (800.00)      (800.00)       (800.00)
Understatement of rental
  expense                          N/A       (2,843.00)    (1,430.00)      (1,733.20)        -0-
Nontaxable sources                 N/A      (20,046.56)   (10,588.87)     (10,488.73)   (13,999.55)
  Understatement of income          N/A       33,685.00                    24,647.00     108,609.00
        18,038.00
    (rounded)
