                        T.C. Memo. 2009-300



                      UNITED STATES TAX COURT



       DENNIS R. DI RICCO AND CONNIE D. DI RICCO, a.k.a.
            CORNELIA PATRICIA DOHERTY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25097-06.              Filed December 22, 2009.



     Daniel L. Sheehan, for petitioner Dennis R. Di Ricco.

     John C. Suttle, for petitioner Connie D. Di Ricco.

     Catherine G. Chang and Jon D. Feldhammer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax for 1991 and 1992 (years at

issue) and determined that Dennis R. Di Ricco (petitioner) is
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liable for the fraud penalty under section 6663.1   The primary

issue is whether respondent has proven by clear and convincing

evidence that petitioner is liable for the fraud penalty.2     We

hold that he is not.   We therefore need not determine other

issues relating to the deficiencies because the limitations

period for assessment has expired regarding them.

                         FINDINGS OF FACT

     The parties have stipulated some facts.   The seven

stipulations of facts and their accompanying exhibits are

incorporated by this reference and are so found.    Petitioners are

married and resided in California at the time they filed the

petition.

     Petitioner practiced law until 1989.   His legal practice was

split between tax work and helping startup companies go public.

He raised capital for these companies through private placements.

Petitioner would determine the fair market value of a company and

negotiate deals between the company and prospective investors.

Investors provided capital hoping that their initial investment

would multiply in subsequent public offerings.   The stock of one




     1
      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, unless otherwise
indicated.
     2
      Respondent has conceded that petitioners did not receive
constructive dividends. All other adjustments were computational
to reflect increases in petitioners’ adjusted gross income.
                                 - 3 -

such company, Audre, Inc., increased from pennies per share to

over $6 per share.

     Petitioners personally invested in private placements for

some of the companies.   Petitioner’s wholly owned corporation,

Dennis R. Di Ricco, a professional corporation (DPC), also

invested in some of the companies.       Petitioners and DPC

eventually acquired more than 200,000 and 2 million shares of

Audre, Inc., respectively.

     In addition, DPC arranged bridge loans between the companies

and petitioner’s clients.    Some of the bridge loans went into

default after petitioner was arrested in 1988 on charges related

to drug charges against a client.    Petitioner was sentenced to

five years probation, and he feared that any violation of his

probation would result in prison time.       Petitioner’s probation

officer, Danny Martinez, demanded that DPC repay the bridge loans

as a condition of petitioner’s probation.

     DPC needed to sell stock to repay the loans.       The stock was

thinly traded, and petitioner feared that selling it would cause

its value to plummet.    Petitioner and his stockbroker established

multiple nominee accounts to sell the stock while also attempting

to stabilize the market.    DPC then repaid the loans with the

proceeds from the stock sales.

     Mr. Martinez closely monitored DPC’s repayment of the loans.

He inspected petitioner’s stock statements and bank accounts
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during unannounced visits to petitioner’s office.    In addition,

petitioner and his secretary reported every stock sale made by

petitioners, DPC, and the nominee accounts to Mr. Martinez in his

monthly probation reports.

     Petitioner continued to work with startup companies through

his wholly owned corporation, Dennis R. Di Ricco, Inc. (DINC),

after resigning from the California State bar in 1989.    DPC also

continued to own stock and sell stock during the years at issue

even though DPC was not an operating law corporation during this

time.

     The Internal Revenue Service (IRS) audited petitioner, his

wife, or petitioner’s corporations every year from 1982 to 1993.

Revenue Agent Tom Borgo, a childhood acquaintance of petitioner,

audited petitioner and DPC for 1991 and 1992 and referred the

case for criminal prosecution.    The Department of Justice

declined to prosecute the case as a criminal matter and referred

the case for civil examination.    Mr. Borgo began to ask questions

about petitioner’s return for 1993 before it was due.    Petitioner

informed the IRS by letter that he was hesitant to file a

personal return for 1993 without assurances that Mr. Borgo would

not immediately refer him for criminal prosecution.    Mr. Borgo

did, in fact, refer petitioner for criminal prosecution, and

petitioner pled guilty under section 7212(a) to obstruction of

justice for failing to file a personal income tax return for 1993
                               - 5 -

while continuing to seek extensions.    Respondent has not,

however, assessed any unpaid tax for 1993.

     Respondent issued petitioners a deficiency notice for 1991

and 1992 on September 6, 2006, 15 years after the years at issue.

Respondent determined in the deficiency notice that petitioner

was liable for a $118,899 fraud penalty for 1991 and a $1,150,804

fraud penalty for 1992.   Respondent also determined in the

deficiency notice the deficiencies3 in petitioners’ Federal

income tax resulting from the stock sales.    Petitioners timely

filed a petition.

                              OPINION

     Respondent primarily argues that petitioner underreported

income attributable to the stock sales and that the resulting

underpayment of tax is attributable to fraud.    Petitioner

counters that he did not intend to evade tax and believes that

any reportable gains for the years at issue were those of DPC or

DINC, entities that were not otherwise required to file returns.

Petitioner further argues that the deficiencies were determined

after the 3-year limitations period expired for assessing tax

absent fraud.   Sec. 6501(a), (c)(1).   We agree.   None of the

underpayment of tax for either of the years in issue was shown,

by clear and convincing evidence, to be due to fraud.


     3
      Respondent determined a $158,531 deficiency in petitioners’
Federal income tax for 1991 and a $1,534,406 deficiency for 1992.
Amounts have been rounded to the nearest dollar.
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     We now address fraud.   Fraud is an intentional wrongdoing on

the part of the taxpayer with the specific purpose of evading a

tax believed to be owing.    Edelson v. Commissioner, 829 F.2d 828,

833 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Akland v.

Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo.

1983-249.   The Commissioner bears the burden of proving fraud by

clear and convincing evidence.    Sec. 7454(a); Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.

1984-601.   The clear and convincing standard applies to both the

question whether an underpayment exists and whether that

underpayment is attributable to fraud.    Parks v. Commissioner, 94

T.C. 654, 660-661 (1990).    This high standard precludes the

presumption of correctness that attaches to a deficiency

determination from extending to a fraud determination.    See Smith

v. Commissioner, 926 F.2d 1470, 1474-1475 (6th Cir. 1991), affg.

91 T.C. 1049 (1988).

     Fraud is never presumed and must be established by

independent evidence that establishes fraudulent intent.      Edelson

v. Commissioner, supra at 833; Beaver v. Commissioner, 55 T.C.

85, 92 (1970).   Fraud may be proven by circumstantial evidence

because direct evidence of the taxpayer’s fraudulent intent is

seldom available.   Spies v. United States, 317 U.S. 492 (1943);

Rowlee v. Commissioner, 80 T.C. 1111 (1983); Gajewski v.

Commissioner, 67 T.C. 181, 200 (1976), affd. without published
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opinion 578 F.2d 1383 (8th Cir. 1978).      Mere suspicion is not

enough, however.   Katz v. Commissioner, 90 T.C. 1130, 1144

(1988); Shaw v. Commissioner, 27 T.C. 561, 569-570 (1956), affd.

252 F.2d 681 (6th Cir. 1958).

     Respondent did not establish by clear and convincing

evidence that petitioner fraudulently intended to evade tax.4

See sec. 7454(a); Rule 142(b).    Respondent had more than 15 years

to build a case against petitioner.      Yet respondent did not

provide sufficient evidence to establish that petitioner acted

with the intent to evade tax or that the gains in the nominee

accounts belonged to petitioner.5    Instead, respondent focused on

attacking petitioner’s character6 by presenting to the Court a

string of witnesses who testified to personal grievances they had

with petitioner.   Some of these witnesses had interests adverse

to petitioner based upon their prior representations to the

Government.   We did not find all of respondent’s witnesses

credible, and those that we did find credible failed to establish


     4
      Secs. 6501(c)(1), 6653(b), and 6663 all require the same
elements for respondent to establish fraud. See Rhone-Poulenc
Surfactants & Specialties, L.P. v. Commissioner, 114 T.C. 533,
548 (2000); Mobley v. Commissioner, T.C. Memo. 1993-60, affd.
without published opinion 33 F.3d 1382 (11th Cir. 1994).
     5
      Respondent conceded the constructive dividend issue after a
lengthy trial.
     6
      Respondent stated on brief that “petitioner paralyzed” a
man who was a passenger in a car driven by petitioner. The
accident, which occurred 40 years ago while petitioner was in
college, was investigated, and no one was found to be at fault.
                               - 8 -

fraudulent intent on petitioner’s part.   Moreover, the mere

failure to report income by a taxpayer does not, by itself,

establish fraudulent intent.   Pappas v. Commissioner, T.C. Memo.

1981-639.

     Respondent also relied on petitioner’s plea under section

7212 to argue that petitioner had fraudulent intent.   The fact

that petitioner entered into a plea agreement is not dispositive.

See Carter v. Commissioner, T.C. Memo. 2003-235 (taxpayer

established stock trading account in the name of third party to

circumvent his employer’s prohibition against trading company

stock).   Petitioner’s plea for failure to file a return for 1993

does not establish that petitioner fraudulently omitted income in

1991 or 1992.   Further, a similar admission regarding corporate

returns is consistent with petitioner’s argument that unreported

gains during the years at issue were attributable to DPC.   It is

a fundamental principle of tax law that income is taxed to the

person who earns it.   Commissioner v. Culbertson, 337 U.S. 733,

739-740 (1949); Lucas v. Earl, 281 U.S. 111, 114-115 (1930).

Petitioners reported income from sales of stock on their joint

returns for the years at issue.   Respondent has not established

that petitioners were required to report any additional sales.

     In addition, respondent has not shown that petitioner used

the nominee accounts so that he could fraudulently underreport

his income.   Petitioner had a plausible explanation for why he
                                 - 9 -

established the nominee accounts.    He used the accounts to sell

stocks owned by DPC so that he could repay DPC’s bridge loans

without destroying the stocks’ value.    His actions were not meant

to hide the accounts and fraudulently underreport income.    His

actions were meant to stabilize the value of the stock.

     We find that respondent has not clearly and convincingly

proven fraud on petitioner’s part for the years at issue, and we

so hold.   Our conclusion is based on the record as a whole,

taking into account our determination as to the credibility of

petitioners and the other witnesses presented at trial.

Accordingly, the assessment of tax and penalties for the years at

issue is barred by the statute of limitations.

     To reflect the foregoing,


                                           Decision will be entered

                                      for petitioners.
