                        T.C. Memo. 2003-332



                      UNITED STATES TAX COURT



                  KEVIN J. MORSE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11735-00.              Filed December 3, 2003.


     Lawrence H. Crosby, for petitioner.

     Blaine Holiday, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes, as well as fraud penalties

pursuant to section 6663,1 for 1991-94 in the following amounts:


     1
      All section references are to the Internal Revenue Code in
effect at all relevant times, and Rule references are to the Tax
Court Rules of Practice and Procedure. Amounts are rounded to
the nearest dollar.
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                                                  Penalty
          Year              Deficiency           Sec. 6663

          1991               $22,527              $16,895
          1992                21,154               15,866
          1993                 5,096                3,822
          1994                30,233               22,675

     After concessions, the issues to be decided are:

     (1) Whether petitioner is liable for the fraud penalty for

each of the years at issue;

     (2) whether the doctrines of res judicata, collateral

estoppel, and/or double jeopardy bar the assessment of

deficiencies and penalties for all years at issue in an amount

greater than $61,700; and

     (3) whether the period for assessing tax for the years at

issue has expired.

                        FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.

     Petitioner resided in Austin, Minnesota, on the date the

petition in this case was filed.       During the years at issue,

petitioner farmed approximately 700 to 800 acres.       He grew

soybeans, corn, and other crops.       These crops were then sold to

various grain elevator companies and canneries in the area.         In

addition, petitioner worked between 25 and 30 hours a week as a

theater manager/projectionist.

     Erik Newhouse of Fast Income Tax and Computer Svc. prepared
                                  - 3 -

petitioner’s Forms 1040, U.S. Individual Income Tax Return, for

1991-94.   On his returns, petitioner reported his adjusted gross

income as follows:

                                 1991        1992        1993        1994
 Wages, salaries, tips, etc.    $7,692      $8,294      $7,267      $6,078
 Interest                          822         233         233       3,258
 Dividends                          18          22          28          32
 Capital gain (loss)              (143)       (143)       (143)        --
 Other gains (losses)              –-        3,729          57          63
 Rents, royalties, etc.         11,056      11,056      11,183      13,998
 Farm income (loss)            (14,988)    (10,051)     (6,766)     (6,073)
 Net operating loss c/o        (16,853)    (15,653)     (5,970)        -–
 Adjustments to income             –-          –-          –-          –-
   Adjusted gross income       (12,396)     (2,513)     (5,889)     17,356

     On the Schedules F, Profit or Loss From Farming, of his

returns, petitioner reported net farm losses for 1991-94 as

follows.

                                 1991        1992        1993        1994
 Income
   Sales of products raised    $90,887     $121,038    $87,642     $55,182
   Cooperative distributions        22          --          69         --
   Agricultural program
     payments                    13,310      14,554      28,317      44,927
   Crop insurance proceeds       14,123         --          --          --
   Other income                     288         281         377         458
     Gross income               118,630     135,873     116,405     100,567
 Expenses                      (133,618)   (145,924)   (123,171)   (106,640)
 Net farm profit (loss)         (14,988)    (10,051)     (6,766)     (6,073)

     In April 1998, petitioner was indicted in the U.S. District

Court for the District of Minnesota on four counts of filing

false tax returns in violation of section 7206(1).           The

indictment charged that for 4 separate years (1991-94) petitioner

willfully made and subscribed to Federal income tax returns
                               - 4 -

(verified by petitioner’s written declaration made under

penalties of perjury) which he did not believe to be true and

correct as to every material matter.    The indictment charged that

the returns falsely stated petitioner’s total income as negative

$12,396 in 1991, negative $2,513 in 1992, negative $5,889 in

1993, and $17,356 in 1994, whereas he knew he was failing to

report additional income of $75,799 in 1991, $39,900 in 1992,

$24,481 in 1993, and $68,713 in 1994.

     Petitioner was tried and convicted on all four counts.    His

conviction was affirmed by the U.S. Court of Appeals for the

Eighth Circuit, United States v. Morse, 210 F.3d 380 (8th Cir.

2000), and his petition for certiorari was denied, 531 U.S. 1079

(2001).   Petitioner was sentenced to imprisonment for a term of

18 months and ordered to pay a fine of $10,000 and to make

restitution of $61,700 to the Internal Revenue Service (IRS).

     With respect to the fine, the judgment specified that

interest on the fine was waived because the court determined that

petitioner did not have the ability to pay interest.    The

judgment did not waive interest with respect to the restitution

petitioner was ordered to make to the IRS.   Petitioner paid the

fine and restitution on or before September 14, 1999.

     On August 17, 2000, respondent sent to petitioner a

statutory notice of deficiency, determining deficiencies in

Federal income tax and fraud penalties for 1991-94.    The
                               - 5 -

deficiencies were based in large part upon respondent’s

reconstruction of petitioner’s income using the bank deposits

method.   Respondent determined that petitioner received

unreported income from crop sales (which he deposited into his

checking account at Farmer’s State Bank).     Specifically,

respondent determined that petitioner’s tax liability for 1991-94

should be increased as follows:

       Adjustment         1991       1992       1993      1994
   NOL carryover        $16,853    $15,653     $5,970       --
   Patronage dividend       --         --         162       --
   Schedule F
    Rent expense            --      10,000        --     $6,912
    Sales of grain       75,800     42,714     26,127    68,713
    Seed expense            --      10,000        --        --
    Taxes paid              --         --         --      2,241
   Self employment       (3,648)    (3,632)    (1,380)   (4,342)
     Total               89,005     74,735     30,879    73,524
   Increase in tax       22,527     21,154      5,096    30,233

     On November 16, 2000, petitioner filed a petition with this

Court, disputing the full amount of the deficiencies and

penalties.   Petitioner now concedes that, on his 1991-94 returns,

he omitted grain sale receipts of $75,799 in 1991, $39,900 in

1992, $24,481 in 1993, and $68,713 in 1994.     Respondent concedes

all other adjustments to Schedule F.   Respondent also concedes

the net operating losses for 1991-93, as well as the patronage

dividend in 1993.
                                  - 6 -

                              OPINION

Issue 1.   Whether Petitioner Is Liable for the Fraud Penalty
           Pursuant to Section 6663(a)

     Respondent contends that petitioner is liable for the fraud

penalty under section 6663(a) for 1991-94.     Section 6663(a)

imposes a penalty in an amount equal to 75 percent of the portion

of any underpayment of tax (required to be shown on a return)

that is attributable to fraud.     In addition, if respondent

establishes that any portion of the underpayment is attributable

to fraud, the entire underpayment is treated as attributable

thereto, except to the extent that petitioner establishes

otherwise.   Sec. 6663(b).

     Respondent bears the burden of proving the applicability of

the civil fraud penalty by clear and convincing evidence.       Sec.

7454(a); Rule 142(b).   To sustain this burden, respondent must

establish both (1) that there was an underpayment of tax for each

taxable year in issue and (2) that at least some portion of the

underpayment for each year was due to fraud.     DiLeo v.

Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir.

1992); Parks v. Commissioner, 94 T.C. 654, 660-661 (1990);

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

     1.    Underpayments of Tax

     An underpayment of tax will exist where unreported gross

receipts exceed the costs of goods sold and deductible expenses.

Where the Commissioner provides clear proof of unreported
                               - 7 -

receipts, the burden of coming forward with offsetting costs or

expenses generally shifts to the taxpayer.    Siravo v. United

States, 377 F.2d 469, 473-474 (1st Cir. 1967); Elwert v. United

States, 231 F.2d 928, 933 (9th Cir. 1956); United States v.

Bender, 218 F.2d 869, 871-872 (7th Cir. 1955); United States v.

Stayback, 212 F.2d 313, 317 (3d Cir. 1954).

     Petitioner has stipulated that he omitted from his Federal

tax returns grain sale receipts of $75,799 in 1991, $39,900 in

1992, $24,481 in 1993, and $68,713 in 1994.   Furthermore,

petitioner’s conviction under section 7206(1) is highly probative

that he received unreported receipts from the sale of crops.

     Petitioner does not assert, and has not provided any

evidence, that the cost of goods sold for any of the years at

issue exceeds the cost of goods sold as reported on his 1991-94

returns.   Thus, respondent has carried the burden of establishing

underpayments by clear and convincing evidence.

     2.    Fraudulent Intent

     Respondent must also prove fraudulent intent.   This burden

is met if it is shown that petitioner intended to evade taxes

known to be owing by conduct intended to conceal, mislead, or

otherwise prevent the collection of such taxes.    Webb v.

Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo.

1966-81.   Fraud is never presumed; it must be established by

affirmative evidence.   Beaver v. Commissioner, 55 T.C. 85, 92
                                - 8 -

(1970).   Since direct evidence of fraud rarely is available,

respondent may prove petitioner’s fraud by circumstantial

evidence.   Scallen v. Commissioner, 877 F.2d 1364, 1370 (8th Cir.

1989), affg. T.C. Memo. 1987-412; Klassie v. United States, 289

F.2d 96, 101 (8th Cir. 1961).

      Conduct that may indicate fraudulent intent, commonly

referred to as “badges of fraud”, includes, but is not limited

to:   (1) Understating income; (2) maintaining inadequate records;

(3) giving implausible or inconsistent explanations of behavior,

(4) concealing income or assets, (5) failing to cooperate with

tax authorities, (6) engaging in illegal activities, (7)

providing incomplete or misleading information to one’s tax

preparer, (8) lack of credibility of the taxpayer’s testimony,

(9) filing false documents, including filing false income tax

returns, (10) failing to file tax returns, and (11) dealing in

cash.   Spies v. United States, 317 U.S. 492, 499 (1943); Conti v.

Commissioner, 39 F.3d 658, 662 (6th Cir. 1994), affg. and

remanding on other grounds T.C. Memo. 1992-616; Douge v.

Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Scallen v.

Commissioner, supra; Bradford v. Commissioner, 796 F.2d 303,

307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Recklitis v.

Commissioner, 91 T.C. 874, 910 (1988).   Although no single factor

is necessarily sufficient to establish fraud, a combination of

several factors is persuasive circumstantial evidence of fraud.
                               - 9 -

Bradford v. Commissioner, supra at 307; Petzoldt v. Commissioner,

supra at 700.   An intent to mislead may be inferred from a

pattern of conduct.   Webb v. Commissioner, supra at 379.

     The following badges of fraud are present in this case: (1)

Substantially understating income for several years, (2)

providing incomplete or misleading information to his tax

preparer, and (3) being convicted of filing false returns under

section 7206(1).   Bradford v. Commissioner, supra at 307-308;

Korecky v. Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986),

affg. T.C. Memo. 1985-63; Ruark v. Commissioner, 449 F.2d 311,

312-313 (9th Cir. 1971), affg. T.C. Memo. 1969-48; Wright v.

Commissioner, 84 T.C. 636, 643-644 (1985); Farber v.

Commissioner, 43 T.C. 407, 420 (1965), modified 44 T.C. 408

(1965); Medlin v. Commissioner, T.C. Memo. 2003-224; Le v.

Commissioner, T.C. Memo. 2003-219; Sowards v. Commissioner, T.C.

Memo. 2003-180; Ishler v. Commissioner, T.C. Memo. 2002-79.

     Over a 4-year period, petitioner consistently underreported

large amounts of gross receipts and net income.   Petitioner

provided no explanation for underreporting his gross receipts.     A

consistent pattern of underreporting large amounts of income over

a period of years is substantial evidence bearing upon an intent

to defraud, particularly where the reason for such understatement

is not satisfactorily explained or shown to be due to innocent

mistake.   Holland v. United States, 348 U.S. 121, 137 (1954);
                                - 10 -

Webb v. Commissioner, supra at 379; Lusk v. Commissioner, 250

F.2d 591, 594 (7th Cir. 1958), affg. T.C. Memo. 1955-119;

Schwarzkopf v. Commissioner, 246 F.2d 731, 734 (3d Cir. 1957),

affg. and remanding T.C. Memo. 1956-155; Kurnick v. Commissioner,

232 F.2d 678, 681 (6th Cir. 1956), affg. T.C. Memo. 1955-31.

     Petitioner did not advise his tax preparer of the income

omitted from his returns.    Concealing income from one’s return

preparer can be evidence of fraud.       Korecky v. Commissioner,

supra at 1569; Farber v. Commissioner, supra at 420; Medlin v.

Commissioner, supra; Le v. Commissioner, supra; Sowards v.

Commissioner, supra; Ishler v. Commissioner, supra.

     Moreover, petitioner was convicted of filing false Federal

income tax returns under section 7206(1) for each of the years at

issue.    Section 7206(1) makes it a crime for a taxpayer to

willfully make and submit any return verified by a written

declaration that it is made under the penalties of perjury which

he does not believe to be true and correct as to every material

matter.    Wright v. Commissioner, supra at 639.    A taxpayer who

has been convicted of willfully and knowingly subscribing to a

false income tax return under section 7206(1) is not collaterally

estopped from contesting that he or she is liable for the

addition to tax for fraud because a conviction under section

7206(1) does not require a showing that the taxpayer willfully

attempted to evade tax.     However, a conviction for filing false
                              - 11 -

Federal income tax returns under section 7206(1) is highly

persuasive evidence that the taxpayer intended to evade tax.

Stefansson v. Commissioner, T.C. Memo. 1994-162; Avery v.

Commissioner, T.C. Memo. 1993-344; Miller v. Commissioner, T.C.

Memo. 1989-461.

     In First Trust & Sav. Bank v. United States, 206 F.2d 97,

100 (8th Cir. 1953), the U.S. Court of Appeals for the Eighth

Circuit, the court to which an appeal in this case would lie,

cited with approval United States v. Croessant, 178 F.2d 96, 97

(3d Cir. 1949), wherein the U.S. Court of Appeals for the Third

Circuit stated:

     the man who files a wilfully false return has
     endeavored to mislead his government. He creates the
     appearance of having complied with the law, whereas his
     neighbor who has filed no return does no such thing.
     Not only has he created the appearance of complying,
     but that apparent compliance stands a good chance of
     remaining unattacked, for the tax authorities cannot
     possibly audit every taxpayer’s return every year. * *
     * The law has always distinguished between failing to
     disclose useful information and making a disclosure
     which is a lie.

     Petitioner’s intentional filing of a false tax return each

year from 1991 to 1994, reporting amounts of income which he knew

to be false, is a strong indicium of fraudulent intent with

respect to those years.   Klassie v. United States, supra at 102.

Absent some credible evidence that knowingly filing a false

return should not be considered indicative of fraud, a section

7206(1) conviction is highly persuasive of fraud.   Id. at 101;
                               - 12 -

Biaggi v. Commissioner, T.C. Memo. 2000-48, affd. 8 Fed. Appx. 66

(2001); Wilson v. Commissioner, T.C. Memo. 1994-454; Avery v.

Commissioner, supra; Williamson v. Commissioner, T.C. Memo.

1993-246.

     Petitioner has failed to submit credible evidence that he

knowingly filed the false returns for any reason other than to

evade taxes he knew to be owing.   Thus, we conclude that

petitioner fraudulently intended to underpay his tax for each of

the years at issue.

     Further, petitioner has failed to submit credible evidence

showing that any part of the underpayment attributable to the

omitted income is not due to fraud.     To the contrary, the record

establishes by clear and convincing evidence that the entire

underpayment for each year is due to fraud.    Accordingly, we hold

that petitioner is liable for the section 6663 civil fraud

penalty on the entire underpayment for each year at issue.    Sec.

6663(b).

Issue 2.    Whether the Doctrines of Res Judicata, Collateral
            Estoppel, and/or Double Jeopardy Bar Assessment of
            Deficiencies and Interest for All of the Years at Issue
            in an Amount Greater Than $61,700

     Petitioner asserts that the doctrines of res judicata,

collateral estoppel, and/or double jeopardy preclude retrial of,

or estop respondent with respect to, the liabilities before this

Court.   We disagree.
                                 - 13 -

     The doctrine of res judicata bars relitigating the same

cause of action.      The doctrine applies to a claim if it was, or

could have been, litigated as part of the cause of action in a

prior case.    Commissioner v. Sunnen, 333 U.S. 591, 597-598

(1948); Cromwell v. County of Sac, 94 U.S. 351, 352 (1876);

Baptiste v. Commissioner, 29 F.3d 433, 435-436 (8th Cir. 1994),

affg. T.C. Memo. 1992-198; Trost v. Commissioner, 95 T.C. 560,

566 (1990).    The doctrine of res judicata applies only to issues

determined by a court of competent jurisdiction.      Montana v.

United States, 440 U.S. 147, 153 (1979).

     The doctrine of collateral estoppel, or issue preclusion,

provides that once an issue of fact or law is “actually and

necessarily determined by a court of competent jurisdiction, that

determination is conclusive in subsequent suits based on a

different cause of action involving a party to the prior

litigation.”    Id.    The preclusive effect of a prior court’s

factual determination depends on whether the prior court had

jurisdiction to, and did, determine the fact at issue.      Brotman

v. Commissioner, 105 T.C. 141, 153 (1995).      For collateral

estoppel to apply, resolution of the disputed issue must have

been essential to the prior decision.      Meier v. Commissioner, 91

T.C. 273, 282 (1988).

     Petitioner was found guilty of willfully filing false income

tax returns for 1991-94 in violation of section 7206(1).     It was
                                - 14 -

not an essential element of the indictment to charge petitioner

with any specific tax liability or amount.     Instead, he was

charged with receiving income that he knowingly failed to report

on his 1991-94 returns.    Establishing petitioner’s specific tax

liabilities is not an element of section 7206(1), and

consequently no specific income tax liabilities needed to be

determined.     M.J. Wood Associates, Inc. v. Commissioner, T.C.

Memo. 1998-375.    Petitioner contends that in the restitution

order incorporated in the judgment of the criminal proceeding the

District Court adjudicated the amounts of tax, interest, and

penalties he owed.     These contentions are not supported by the

record.   Petitioner was ordered to pay a fine and make

restitution to the IRS for years 1991-94.     The District Court did

not adjudicate the amount of petitioner’s civil tax liabilities

or make ultimate findings of fact upon which estoppel could be

grounded.     Consequently, the doctrines of res judicata and

collateral estoppel do not apply.     See Hickman v. Commissioner,

183 F.3d 535, 538 (6th Cir. 1999), affg. T.C. Memo. 1997-566.

     Next, petitioner argues that the imposition of the civil

fraud addition to tax on top of his prison sentence and fine

relating to his criminal conviction would constitute double

jeopardy and would violate the U.S. Constitution.     Petitioner

maintains that subjecting him to the fraud penalty in this case
                              - 15 -

would cause him to be punished twice for the same offense in

violation of the double jeopardy clause.   We disagree.

     The double jeopardy clause “protects only against the

imposition of multiple criminal punishments for the same

offense.”   Hudson v. United States, 522 U.S. 93, 99 (1997).     The

Supreme Court has held that Congress may impose both criminal and

civil sanctions with regard to the same acts without violating

the double jeopardy clause of the U.S. Constitution.      Id.;

Kennedy v. Mendoza-Martinez, 372 U.S. 144 (1963); Spies v. United

States, 317 U.S. 492 (1943); Helvering v. Mitchell, 303 U.S. 391,

399 (1938); I & O Publg. Co. v. Commissioner, 131 F.3d 1314 (9th

Cir. 1997), affg. Ward v. Commissioner, T.C. Memo. 1995-286;

United States v. Alt, 83 F.3d 779 (6th Cir. 1996); Grimes v.

Commissioner, 82 F.3d 286 (9th Cir. 1996); Ianniello v.

Commissioner, 98 T.C. 165, 176-187 (1992).   The fraud penalties

“are provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from the taxpayer’s fraud.”

Helvering v. Mitchell, supra at 401.   The civil tax penalty for

fraud is not a punishment for purposes of the Double Jeopardy

Clause of the Fifth Amendment.   Id. at 398; see also McNichols v.

Commissioner, 13 F.3d 432 (1st Cir. 1993), affg. T.C. Memo.

1993-61; Ianniello v. Commissioner, supra at 176-185.
                               - 16 -

     Imposing the fraud penalty under section 6663 on petitioner

for the years at issue does not violate the Double Jeopardy

Clause.    Barnette v. Commissioner, 95 T.C. 341 (1990); Starling

v. Commissioner, T.C. Memo. 1989-392, affd. 954 F.2d 729 (11th

Cir. 1992).

     Finally, petitioner argues that he has paid the $61,000

restitution ordered by the District Court and that the Government

cannot be permitted to recover twice on the same tax liability.

This Court has jurisdiction to determine whether a deficiency or

overpayment exists.    Should it ultimately be determined that

petitioner has made payments in excess of any redetermined tax

liability, this Court has jurisdiction to decide the correct

amount of any overpayment in the taxable years before the Court.

Sec. 6512(b).    That is so whether payments were made under the

District Court’s restitution order or for any other reason.      See

M.J. Wood Associates, Inc. v. Commissioner, supra.

Issue 3.    Whether, Pursuant to Section 6501, the Period for
            Assessing Tax Has Expired for the Years at Issue

     Generally, the Commissioner must assess tax within 3 years

after the due date of a timely filed return.    Sec. 6501(a).

However, if the return is false or fraudulent with the intent to

evade tax, the tax may be assessed at any time.    Sec. 6501(c)(1).

Since the notice of deficiency was mailed to petitioner more than

3 years after the due dates of the 1991-94 returns, respondent

bears the burden of proving that an exception to the 3-year limit
                              - 17 -

on the time to assess tax applies.     Wood v. Commissioner, 245

F.2d 888, 893-895 (5th Cir. 1957), affg. in part and revg. in

part T.C. Memo. 1955-301; Bardwell v. Commissioner, 38 T.C. 84,

92 (1962), affd. 318 F.2d 786 (10th Cir. 1963).    Because

respondent has proved that petitioner’s underpayment of tax for

each year at issue was due to fraud, the assessment of tax

deficiencies for each year involved is not barred by the statute

of limitations.   Sec. 6501(c)(1); Meier v. Commissioner, 91 T.C.

at 303.

     To reflect the foregoing and concessions by respondent,


                                           Decision will be entered

                                     under Rule 155.
