                        T.C. Memo. 2006-14



                     UNITED STATES TAX COURT



                  JOHN V. MAHER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9938-03.                 Filed January 31, 2006.


     John V. Maher, pro se.

     Joseph J. Boylan, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined the following

deficiencies and penalties with respect to petitioner’s Federal

income taxes:1



     1
       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.
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                                         Fraud Penalty
          Year      Deficiency           Sec. 6663(a)

          1995        $4,025                $3,019
          1996        21,271                15,954

     After concessions, the principal issue remaining for

decision is whether petitioner is liable for the civil fraud

penalty under section 6663(a).

                            FINDINGS OF FACT

     The parties have stipulated many facts, which we incorporate

herein by this reference.    When he filed his petition, petitioner

resided in Sewaren, New Jersey.

Background

     In 1981, petitioner obtained an undergraduate degree in

industrial engineering from Rutgers University.          In 1985 he began

working for the Internal Revenue Service as a valuation engineer,

a position that he held during the years at issue.         In 2000, as a

result of the troubles described below, petitioner resigned his

position with the Internal Revenue Service.

Fictitious Government Investment Program

     Petitioner has been described as a compulsive gambler.         On

one of his periodic gambling trips to Las Vegas, Nevada,

petitioner falsely represented to a longtime friend, Roy Kieffer,

and various Kieffer family members (collectively, the Kieffers)

that he could invest money for them in a Federal employee

investment program, called “Stopgap Investments”, with a
                              - 3 -

guaranteed 30-percent annual return.   In reality, there was no

such investment program.

     In February 1995, in reliance on petitioner’s

misrepresentations, the Kieffers sent petitioner funds totaling

$9,500 to invest in the fictitious investment program.

Petitioner gambled these funds away.   In February and May 1996,

the Kieffers sent petitioner additional funds totaling $65,000

funds to invest in the fictitious investment program.

Petitioner also gambled these funds away.

     To further his fraudulent scheme and keep the Kieffers at

bay, petitioner gave the Kieffers various fabricated documents.

One of these documents, a doctored memorandum from the Federal

Employees’ Retirement System (FERS) dated March 14, 1995, falsely

described petitioner’s position as “Ass’t Executive Director of

Operations” at the Department of the Treasury.   The document

purported to show that petitioner’s account in the Stopgap

Investments program had been opened for a total of $100,000, with

a guaranteed 30-percent rate of return.   Petitioner also gave the

Kieffers another purported FERS memorandum, dated April 15, 1996,

which indicated that the guaranteed rate of interest had dropped

to 10 percent on an investment of $200,000.   Finally, in 1998,

petitioner gave the Kieffers a version of petitioner’s own

statements of retirement benefits, which had been altered to show
                                - 4 -

an account balance that purportedly included the funds petitioner

had obtained from the Kieffers.

Petitioner’s Bankruptcy, Civil, and Criminal Proceedings

     In September 1996, petitioner filed a petition with the U.S.

Bankruptcy Court for the District of New Jersey under 11 U.S.C.

chapter 7.2   In December 1996, petitioner received a discharge

from his debts in bankruptcy.

     In 1999, the Kieffers sued petitioner in the Superior Court

of New Jersey for the return of the money petitioner had

fraudulently obtained from them.   In 2000, the civil action was

resolved by an order for judgment by consent, dated June 25,

2000, whereby petitioner was ordered to pay the Kieffers $90,000.

The consent judgment required petitioner to pay stated sums on or

before certain specified dates and gave the Kieffers a first

priority lien on funds in his Thrift Savings Plan and FERS

accounts as well as any proceeds he was entitled to receive from

an unrelated personal injury suit.

     On or about October 4, 2000, petitioner entered into a plea

agreement with the United States Attorney for the District of New

Jersey.   He pleaded guilty to a one-count felony information

charging him with devising an artifice and scheme to defraud and

to obtain money through false pretenses, representations, and


     2
       Petitioner did not list any of the Kieffers as creditors
on his bankruptcy petition.
                               - 5 -

promises, all through use of the mails, in violation of 18 U.S.C.

section 1341.

Petitioner’s Federal Tax Returns

     For taxable years 1995 and 1996, petitioner timely filed

self-prepared Forms 1040, U.S. Individual Income Tax Return.

Petitioner reported gross income of $61,725 and $61,406 on his

1995 and 1996 tax returns, respectively.   He reported none of the

payments he had received from the Kieffers.

Notice of Deficiency

     On April 9, 2003, respondent mailed to petitioner a notice

of deficiency for 1995 and 1996, determining that petitioner had

unreported income of $9,500 for 1995 and $65,000 for 1996 and was

liable for the civil fraud penalty for both years.3

                              OPINION

     At trial, petitioner conceded that he had unreported taxable

income with respect to the Kieffers’ cash payments to him in 1995

and 1996.4   Consequently, the primary issue remaining for

decision is whether petitioner is liable for the section 6663(a)

civil fraud penalty.



     3
       In the notice of deficiency, respondent also disallowed
itemized deductions that petitioner had claimed for unreimbursed
employee expenses. Before trial, the parties settled this issue,
agreeing that petitioner had substantiated stipulated amounts of
expenses, which for 1995 exceeded the expenses claimed on his
return.
     4
       Similarly, the parties have stipulated that the Kieffers’
payments to petitioner were “income” to him.
                                - 6 -

I.   Fraud Penalty

      To sustain his determination of civil fraud, respondent must

show, by clear and convincing evidence, that petitioner intended

to evade taxes known or believed to be owing by conduct intended

to conceal, mislead, or otherwise prevent the collection of

taxes.    Secs. 6663(b), 7454(a); Rule 142(b); see Stoltzfus v.

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

Commissioner, 80 T.C. 1111, 1123 (1983).

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

upon consideration of the entire record.    Estate of Pittard v.

Commissioner, 69 T.C. 391 (1977); Gajewski v. Commissioner, 67

T.C. 181, 199-200 (1976), affd. without published opinion 578

F.2d 1383 (8th Cir. 1978).    Fraud is not to be presumed or based

upon mere suspicion.    Wainwright v. Commissioner, T.C. Memo.

1993-302 (citing Carter v. Campbell, 264 F.2d 930, 935 (5th Cir.

1959)).    Because direct evidence of a taxpayer’s intent is rarely

available, however, fraud may be proven by circumstantial

evidence and reasonable inferences drawn from the facts.    Spies

v. United States, 317 U.S. 492 (1943); Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992); Otsuki v. Commissioner, 53

T.C. 96, 106 (1969).

      Petitioner’s scheme to defraud the Kieffers was

reprehensible, but respondent has not convinced us that

petitioner had any specific intent to evade taxes.   In this
                               - 7 -

proceeding, petitioner has never denied that he fraudulently

misappropriated money from the Kieffers and that it was wrong to

do so, although he alleges that these misdeeds were an isolated

aberration in his conduct.   Petitioner maintains that he always

intended to repay the Kieffers with interest for their

“investments”, and that he eventually did so, with liquidated

damages, albeit pursuant to a consent judgment.   (He alleges

that he would have repaid the Kieffers sooner but lacked the

resources, having gambled himself into bankruptcy and being

legally unable to withdraw funds from his Government retirement

program.5)   Although it betrays a sore lack of judgment (perhaps

aggravated by a gambling compulsion) and does nothing to absolve

him of wrongdoing, petitioner’s testimony in this regard did not

strike us as being dishonest or devious.6

     Petitioner testified that when he filed his tax returns for

1995 and 1996, he believed that he was not required to report

the Kieffers’ payments to him as taxable income, “Because I


     5
       Petitioner alleges that he did not list the Kieffers on
his bankruptcy petition because he intended to repay them in full
and did not seek to have his obligations to them discharged in
bankruptcy.
     6
       We are mindful that in sentencing petitioner for mail
fraud, the presiding judge in the U.S. District Court of New
Jersey stated: “It’s clear to me that that unfortunate
circumstance [of petitioner’s defrauding the Kieffers] was the
result of a gambling compulsion, which doesn’t excuse it, however
you have made complete restitution to the Kiefers [sic], you have
come forward and accepted responsibility and in an extraordinary
way”.
                              - 8 -

thought that if I received the money and I paid them back

readily then that was not a taxable issue.”     Respondent has not

shown with clear and convincing evidence that petitioner’s

understatements of income in 1995 and 1996 were the result of

fraudulent intent rather than of petitioner’s negligence or

misunderstanding of the tax law.     See Carr v. Commissioner, T.C.

Memo. 1978-408.

     Although petitioner was employed with the Internal Revenue

Service as a valuation engineer during the years at issue (a

position from which he has since resigned), we are not prepared

to say that this circumstance, in and of itself, is

circumstantial evidence of fraud.     Respondent does not allege,

and the record does not suggest, that petitioner’s employment

gave him any expertise or specialized knowledge in the tax laws.

Insofar as the record reveals, petitioner had no training or

experience in legal or accounting issues, and his work as a

valuation engineer appears to have been only tangentially

related to substantive tax issues.     We are not persuaded that

petitioner’s general intelligence and sophistication, or the

fact or manner of his preparing his own tax returns for 1995 and

1996 (with errors not totally in his favor, as respondent

concedes), were such as to establish the requisite intent to

evade taxes.   Cf. Liddy v. Commissioner, T.C. Memo. 1985-107

(holding that former White House staff assistant and general
                                - 9 -

counsel of a Presidential reelection committee was not liable

for the civil fraud penalty with respect to his unreported

income from illegal activities, notwithstanding the taxpayer’s

education, professional background, and amoral conduct), affd.

808 F.2d 312 (4th Cir. 1986).

     Respondent contends that petitioner maintained inadequate

records and that this is circumstantial evidence of fraud.

Although petitioner signed no loan agreements or other documents

to evidence an investment or loan transaction with the Kieffers,

we believe that petitioner’s personal relationship with the

Kieffers and the nature of the purported transactions credibly

explain the absence of formal documents memorializing the

Kieffers’ “investments”.7   Respondent does not allege, and the

evidence does not suggest, that petitioner concealed records

from respondent, refused to cooperate with respondent’s

investigation, made misleading statements to IRS agents during

the course of the IRS investigation, destroyed any records, or

altered any entries in his books.

     On the basis of all the evidence in the record, we conclude

that respondent has failed to prove clearly and convincingly


     7
       Additionally, we are not convinced by respondent’s
argument that petitioner’s failure to maintain adequate records
to substantiate employee business expenses is circumstantial
evidence of fraudulent intent to evade tax, particularly in light
of respondent’s concession that for 1995 petitioner has
substantiated more employee business expenses than he claimed on
his 1995 return.
                              - 10 -

that petitioner had the specific intent to evade taxes with

respect to the money he obtained from the Kieffers.

Accordingly, we hold that respondent has not carried his burden

of proving fraud by clear and convincing evidence.

II.   Period for Assessment

      Because we hold that petitioner is not liable for the fraud

penalty, the exception of section 6501(c)(1) (permitting tax to

be assessed at any time in the case of a false or fraudulent

return with the intent to evade) is inapplicable.    At trial,

respondent conceded that the exception of section 6501(e) is

also inapplicable for 1995 because the $9,500 of gross income

petitioner omitted from his 1995 return is less than 25 percent

of the $61,725 of gross income he reported.   Respondent has not

established that any other exception to the general 3-year

limitation period applies for 1995.    Accordingly, respondent is

time barred from assessing petitioner’s 1995 taxes.

      Petitioner has not pleaded or argued the statute of

limitations with respect to respondent’s assessment of his 1996

taxes; we deem petitioner to have conceded any such issue.    In

any event, the exception of section 6501(e) is applicable,

inasmuch as the amount of income petitioner omitted exceeded 25

percent (in fact, over 100 percent) of the gross income stated

on his 1996 return.   Accordingly, respondent is not time barred

from assessing petitioner’s 1996 taxes.
                        - 11 -

To reflect the foregoing and the parties’ concessions,



                                   Decision will be

                              entered under Rule 155.
