                        T.C. Memo. 2001-26



                      UNITED STATES TAX COURT



             CHARLES JEROME POSNANSKI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17900-98.                    Filed February 7, 2001.


     Charles Jerome Posnanski, pro se.

     Randall B. Pooler, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes and penalties as follows:

                                                  Penalty
          Year              Deficiency          Sec. 6663(a)
          1989               $3,815               $2,861
          1990                5,531                4,148
          1991                5,688                4,266
          1992                5,071                3,803
          1993                4,430                3,317
                              - 2 -



     The issues for decision1 are:    (1) Whether petitioner’s

civil tax liabilities for 1989, 1990, 1991, 1992, and 1993 were

satisfied in his prior criminal proceeding; and (2) whether

petitioner is liable for the fraud penalty under section 66632

for the years 1989, 1990, 1991, 1992, and 1993.

                        FINDINGS OF FACT

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

The stipulation of facts, supplemental stipulation of facts, and

the attached exhibits are incorporated herein by this reference.

Petitioner resided in Cheyenne, Wyoming, at the time he filed his

petition.

     Petitioner was the president and principal owner of the Bank

of Manawa, Wisconsin (the Bank), from June of 1976 through and

     1
      Petitioner and Lois Posnanski filed joint returns for each
of the years in issue. If a joint return is filed, the liability
with respect to the tax is normally joint and several. See sec.
6013(d)(3). The notice of deficiency upon which this case is
based was addressed only to petitioner. Petitioner argues on
brief that his former wife, Lois Posnanski, is liable for half of
any civil tax liability owed by petitioner because she signed the
joint returns for the years in issue and she knew and encouraged
his “retaliation against congressional self-dealing.” Generally,
our jurisdiction over a taxpayer is based on a notice of
deficiency having been sent to the taxpayer and the filing of a
timely petition by that taxpayer. See sec. 6213(a). Neither
occurrence is alleged with respect to Lois Posnanski, and
petitioner alleges no other basis for our jurisdiction.
Accordingly, we find petitioner’s argument without merit.
     2
      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.
                                 - 3 -

including the years in issue.    Petitioner was active in the day-

to-day operations of the Bank and had access to all the computer

programs utilized by the Bank.    During the years in issue,

petitioner and his former wife, Lois Posnanski, maintained two

personal, interest-bearing bank accounts at the Bank.    For each

of the years in issue, petitioner accrued and was paid interest

income on these personal accounts in the following amounts:

                     Year                  Amount
                     1989                $12,334.79
                     1990                 11,116.45
                     1991                 10,999.62
                     1992                  9,320.28
                     1993                  7,493.44

     Toward the end of each year in issue, petitioner accessed

the computer programs at the Bank and deleted information that

would cause his interest income to be included on the computer

disk sent to respondent for purposes of reporting interest paid.

Petitioner further caused Forms 1099-INT, Interest Income, not to

be filed with respondent reporting the actual interest income

earned on his personal account and other accounts for each year

in issue.   On his tax returns for the years in issue, petitioner

reported the following amounts of interest income:

                     Year                   Amount
                     1989                  $785.00
                     1990                    35.00
                     1991                   118.14
                     1992                    31.76
                     1993                    65.62

Petitioner signed tax returns for each of the years in issue with
                               - 4 -

knowledge that the income was not properly reported.

     Toward the end of the calendar year for each of his 1990,

1991, 1992, and 1993 taxable years, petitioner accessed the

computer program utilized by the Bank and created entries for

mortgage loan interest payments which did not exist.   Petitioner

caused false interest expenses to be reported and false Forms

1098, Mortgage Interest Statement, to be filed with respondent

for petitioner’s 1990, 1991, 1992, and 1993 taxable years.

Petitioner utilized the false reported mortgage interest expense

information to claim false deductions on his 1990, 1991, 1992,

and 1993 returns in the following amounts:

                    Year                 Amount
                    1990                 $5,645
                    1991                  7,424
                    1992                  7,294
                    1993                  7,149

     On November 13, 1995, petitioner pleaded guilty to two

counts of an Information in Case No. 95-Cr-188 in the United

States District Court of the Eastern District of Wisconsin.

Count One of the plea agreement charged petitioner with

“knowingly and willfully [scheming] to conceal a material fact

from agencies of the federal government”, in violation of 18

U.S.C. sec. 1001 (1994).   The material fact concealed was the

true amount of interest earned by petitioner, Lois Posnanski, and

petitioner’s mother, Mary Posnanski.   Count One also charged

petitioner with falsifying bank records pertaining to loan
                               - 5 -

interest payments in order to gain a tax deduction.    Count Two of

the plea agreement charged petitioner with willfully aiding and

assisting in the false and fraudulent preparation and

presentation of Mary Posnanski’s 1993 Federal income tax return,

in violation of section 7206(2).    Paragraph 7(e) of the plea

agreement required petitioner “to pay the Internal Revenue

Service those amounts owed for restitution on his personal

restitution.”   An addendum to the plea agreement set forth the

following tax liabilities for petitioner and Lois Posnanski:

                Year                        Amount
                1989                      $3,749.29
                1990                       3,592.41
                1991                       3,194.08
                1992                       2,600.30
                1993                       2,007.16
                  Total                   15,143.24

The addendum specifically stated that the tax liabilities were

caused solely by petitioner.   Petitioner transmitted a check

dated February 12, 1996, payable to the Internal Revenue Service

in the amount of $15,143.24, which was acknowledged as received

by Steven M. Biskupic, the attorney for the United States in

petitioner’s criminal proceeding.

     On February 23, 1996, petitioner entered his guilty plea and

was convicted under 18 U.S.C. sec. 1001 for concealing material

facts from the Internal Revenue Service and under section 7206(2)

for aiding and abetting in the filing of a false Federal income

tax return.   In addition to prison time and other conditions,
                               - 6 -

petitioner was sentenced to pay a fine of $30,000.    At the

arraignment, plea, and sentencing of petitioner, the presiding

United States District Court Judge declared the following as one

of the conditions of petitioner’s criminal sentence:

     You must cooperate with the I.R.S. and submit all
     delinquent tax returns and pay all back taxes and
     interest at the direction of the Probation Officer.
     The Court should note in regard to this condition that
     in determining the sentence that–-the amount of tax
     penalties, civil penalties, the distressed sale of the
     bank, all of these are consequences that flow from your
     action, and are ones that I think are appropriately
     taken into account by the Court.

     On September 8, 1998, respondent issued a notice of

deficiency to petitioner for the years 1989, 1990, 1991, 1992,

and 1993.   The deficiency amounts were higher than in the

addendum to the plea agreement because the tax stated as due in

the addendum did not include the additional income tax resulting

from adjustments to petitioner’s 1990, 1991, 1992, and 1993

income tax liabilities for claiming false mortgage interest

deductions.   Additionally, the notice of deficiency determined a

fraud penalty for each of the years in issue.    The total

deficiency determined by respondent for all 5 years is $24,535, a

$9,391.76 difference from the tax liability of $15,143.24 set

forth in the addendum to the plea agreement.    Petitioner has

conceded the amount of the underpayments set forth in the notice

of deficiency.

     In separate letters dated March 7, 2000, and submitted in
                               - 7 -

lieu of live testimony in the instant case, Mr. Biskupic and

petitioner’s attorney in his criminal proceeding, Robert E.

Meldman, both stated that they believed that petitioner’s civil

tax liabilities were not resolved as a result of the criminal

proceedings.

                              OPINION

     Petitioner has conceded the amounts of the underpayments set

forth in the notice of deficiency.     Petitioner appears to argue

that the doctrine of collateral estoppel applies to bar

respondent from seeking civil tax liabilities against him.

Alternatively, petitioner argues that he is not liable for the

civil fraud penalty.

     Petitioner appears to argue that he is not liable for the

underpayments because the plea agreement in his criminal

proceeding disposed of his civil tax liabilities for the years in

issue.   The doctrine of collateral estoppel 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.”     Montana v. United

States, 440 U.S. 147, 153 (1979).    However, for collateral

estoppel to apply, resolution of the disputed issue must have
                                - 8 -

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

91 T.C. 273, 282 (1988).

     In the instant case, petitioner was found guilty under 18

U.S.C. sec. 1001 for concealing material facts from the Internal

Revenue Service and under section 7206(2) for aiding and abetting

in the filing of a false Federal income tax return.   Establishing

petitioner’s specific tax liabilities is not an element of 18

U.S.C. sec. 1001 or section 7206(2) and therefore no specific

income tax liabilities needed to be determined in petitioner’s

prior criminal proceeding.   See M.J. Wood Associates, Inc. v.

Commissioner, T.C. Memo. 1998-375; Hickman v. Commissioner, T.C.

Memo. 1997-566, affd. 183 F.3d 535 (6th Cir. 1999).    The addendum

to the plea agreement set forth specific tax liability amounts

for the years in issue.    However, it was not essential to the

conviction against petitioner because it was not an element of

the crimes petitioner was convicted of.    See Hickman v.

Commissioner, supra.   The precise amount of petitioner’s tax

liability was not specifically litigated or adjudicated in the

criminal proceeding.

     Petitioner argues that the requirement in paragraph 7(e) of

the plea agreement that he pay restitution to the Internal

Revenue Service reflects the intention that his civil tax

liabilities be included in his criminal proceeding.    However,

paragraph 7(e) does not set forth petitioner’s precise tax
                                - 9 -

liabilities, nor does it limit them to the amounts specified in

the addendum.    Petitioner also argues that his civil tax

liabilities were accounted for in the criminal proceeding by the

United States District Court Judge’s comment that:

     You must cooperate with the I.R.S. and submit all
     delinquent tax returns and pay all back taxes and
     interest at the direction of the Probation Officer.
     The Court should note in regard to this condition that
     in determining the sentence that–-the amount of tax
     penalties, civil penalties, the distressed sale of the
     bank, all of these are consequences that flow from your
     action, and are ones that I think are appropriately
     taken into account by the Court.

     The statement of the presiding judge does not provide that

the disposition of the criminal case was meant to discharge all

of petitioner’s civil tax liabilities.    Rather, it provides that

petitioner must still account for his civil tax liabilities in

addition to the other conditions of his sentence.    Additionally,

Messrs. Meldman and Biskupic indicate that petitioner’s civil tax

liabilities were not part of the negotiation of the plea

agreement.    In viewing the plea agreement, the remarks of the

presiding judge, and the entire record, we hold that the

disposition of petitioner’s criminal case does not bar respondent

from determining additional civil tax liabilities against

petitioner.   Because petitioner has admitted to the amounts of

the underpayments in the notice of deficiency, he is liable for

those amounts.
                               - 10 -

     The total deficiency determined by respondent for all 5

years is $24,535.    Petitioner has paid $15,143.24 toward these

tax liabilities.    Respondent acknowledges that petitioner paid

this amount.    Therefore, petitioner is liable for the payment of

an additional $9,391.76 in income taxes, plus any penalties which

may apply.    See, e.g., Hickman v. Commissioner, supra.

     Section 6663(a) imposes a penalty for fraud equal to 75

percent of the portion of an underpayment that is attributable to

fraud.    If any portion of an underpayment is attributable to

fraud, then the entire underpayment is treated as due to fraud

unless the taxpayer can establish that some portion of the

underpayment is not attributable to fraud.    See sec. 6663(b).3

     Respondent bears the burden of proving fraud by clear and

convincing evidence.    See sec. 7454(a); Rule 142(b); Sadler v.

Commissioner, 113 T.C. 99, 102 (1999).    To satisfy this burden,

respondent must show that:    (1) An underpayment exists; and (2)

petitioner intended to evade taxes known to be owing by conduct

intended to conceal, mislead, or otherwise prevent the collection

of taxes.    See Parks v. Commissioner, 94 T.C. 654, 660-661

(1990).    We have found, and petitioner admits, that he underpaid

his taxes for the years in issue in the amounts determined in the

notice of deficiency.


     3
      In the case of a joint return, the fraud penalty does not
apply to a spouse unless some portion of the underpayment is due
to the fraud of such spouse. See sec. 6663(c).
                              - 11 -

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

from the entire record.   See DiLeo v. Commissioner, 96 T.C. 858,

874 (1991), affd. 959 F.2d 16 (2d Cir. 1992).   Fraud may be

proven by circumstantial evidence, and reasonable inferences may

be drawn from the relevant facts.   See Spies v. United States,

317 U.S. 492, 499 (1943); Stephenson v. Commissioner, 79 T.C.

995, 1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984).   Any

conduct, the likely effect of which would be to mislead or to

conceal, may establish an affirmative act of evasion.   See Spies

v.United States, supra at 499; Zell v. Commissioner, 763 F.2d

1139, 1145-1146 (10th Cir. 1985), affg. T.C. Memo. 1984-152.    A

pattern of consistent underreporting of income, particularly when

accompanied by other circumstances exhibiting an intent to

conceal, justifies the inference of fraud.   See Parks v.

Commissioner, supra at 664.

     Petitioner understated interest income and claimed false

deductions for mortgage interest payments, resulting in the

consistent underreporting of income tax liabilities for 5 years.

Petitioner intentionally falsified computer records of the Bank

and misled respondent with respect to his correct income tax

liabilities.   Petitioner signed the returns for each year in

issue with full knowledge that he was underreporting his taxable

income.   As a result of his actions, petitioner was criminally

convicted for his underreporting activities, and petitioner
                                - 12 -

admitted in his plea agreement that he “knowingly and willfully

[schemed] to conceal” interest income and that he falsified

computer records to gain tax deductions.

     Petitioner’s only argument is that “The specific intent of

my inaccurate income tax filings was not to avoid income taxes

but to retaliate against congressional self-dealing.”    Petitioner

consistently underreported income and claimed false deductions

with full knowledge that his actions were in violation of a legal

duty to file correct tax returns.    Petitioner’s alleged desire to

retaliate against what he may have perceived to be congressional

wrongs does not change the fact that he intentionally evaded

taxes that he knew he owed, by conduct intended to conceal,

mislead, and prevent the collection of taxes.    See Parks v.

Commissioner, supra at 661.     Respondent has proven by clear and

convincing evidence that petitioner fraudulently underpaid his

taxes for the years in issue.    Because petitioner has failed to

present evidence establishing that any portion of the

underpayments is not attributable to fraud, the entire

underpayments for the years in issue are subject to the 75-

percent penalty.


                                           Decision will be entered

                                      under Rule 155.
