                  T.C. Memo. 2000-48



                UNITED STATES TAX COURT



  MARIO BIAGGI and ESTATE OF MARIE BIAGGI, DECEASED,
        RICHARD BIAGGI, EXECUTOR, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 16697-97.                Filed February 11, 2000.



     P did not report gross income on account of the
receipt of shares of W Corp. stock in 1983 and the sale
of 25,000 W shares in 1985. P is collaterally estopped
from contesting the facts established in his criminal
case, United States v. Biaggi, No. 87 Cr. 265
(S.D.N.Y., Nov. 18, 1988), including extortion,
bribery, and receipt of an unlawful gratuity in
connection with his demand and receipt of W shares, and
filing false income tax returns for failing to report
income from his ownership of W shares.
     1. Held: The fair market value of the W shares
was $11.20 a share; therefore, P omitted from gross
income $1,260,000 in 1983 and $107,000 in 1985.
     2. Held, further, P is liable for additions to
tax on account of fraud under sec. 6653(b)(1) and (2),
I.R.C.
     3. Held, further, P is liable for additions to
tax under sec. 6661, I.R.C.
     4. Held, further, R has met his burden of proof
under sec. 6501(c)(1), I.R.C., and the statute of
                                 - 2 -

       limitations does not bar assessment and collection of
       tax for 1983 and 1985.



       Leonard Bailin, for petitioners.

       Drita Tonuzi and Daniel Rosen, for respondent.



                          MEMORANDUM OPINION


       HALPERN, Judge:   By notice of deficiency dated May 22, 1997,

respondent determined deficiencies in, and additions to,

petitioners' Federal income tax as follows:

                                     Additions to Tax*
Year    Deficiency   Sec. 6653(b)(1)    Sec. 6653(b)(2)   Sec. 6661
1983     $626,647        $313,324             **          $156,662
1985       25,003          77,268             **             6,251

     * Respondent did not determine any additions to tax with
respect to Marie Biaggi under sec. 6653 (b)(1) and (2).
     ** 50% of the interest due on total deficiency.

       Unless otherwise noted, all section references are to the

Internal Revenue Code of 1954 in effect for the years in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

I.   Introduction

       Respondent’s determination of a deficiency for 1983 results

from his adjustment increasing petitioners’ gross income for 1983

by $1,260,000 on account of the receipt by petitioner Mario

Biaggi (petitioner) during that year of 112,500 shares of stock

of Wedtech Corp., a New York corporation (the Wedtech shares and
                               - 3 -

Wedtech, respectively).   Respondent’s determination of a

deficiency for 1985 results from his adjustment increasing

petitioners’ gross income for 1985 by $107,000 on account of the

sale by petitioner of 25,000 of the Wedtech shares (the 25,000

shares).

     At the commencement of the trial in this case, the parties

stipulated that petitioner Richard Biaggi, executor, representing

the Estate of Marie Biaggi, was relieved of all liability for tax

and additions to tax for 1983 and 1985 under section 6013(e) on

account of Marie Biaggi’s status as a so-called “innocent

spouse”.   The Court accepted that stipulation, and we shall

reflect it in our decision.

     At the conclusion of the trial in this case, petitioner

conceded that respondent was correct in adjusting petitioners’

gross income for 1983 to include the value of the Wedtech shares.

However, petitioner does not concede that, when received, the

value of the Wedtech shares was $1,260,000, and we must determine

that value.   Petitioner also conceded that, in 1985, he realized

gain on the sale of the 25,000 shares, which, erroneously, he

failed to report.   He agrees that (1) the amount he realized on

that sale was $387,111, and (2) his adjusted basis in the 25,000

shares is a proportionate amount of the value we determine for

the Wedtech shares.
                                 - 4 -

      We must also determine whether petitioner is liable for the

additions to tax.

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

The stipulation of facts, with accompanying exhibits, is

incorporated herein by this reference.    We need find few facts in

addition to those stipulated and, accordingly, do not separately

set forth those findings.    We include additional findings of fact

in the discussion that follows.

      At the time the petition was filed, petitioner resided in

Bronx County, New York.

II.   Background

      In 1983, petitioner was a member of Congress, from the 19th

District in New York.     Wedtech was a manufacturing company

located in New York City, which received contracts from the

U.S. Department of Defense.    In 1987, petitioner was indicted on,

and in 1988 he was convicted of, various counts arising out of

his relationship with Wedtech.    Among those counts were

(1) racketeering in connection with his demand and receipt of the

Wedtech shares and $50,000 in exchange for influencing public

officials to grant a lease to Wedtech; (2) extortion, bribery,

and receipt of an unlawful gratuity in connection with his demand

and receipt of the Wedtech shares; (3) making false statements in

concealing his ownership of the Wedtech shares; (4) filing false

income tax returns for failing to report income derived from
                               - 5 -

acquisition of the Wedtech shares; and (5) perjury in connection

with falsely testifying before a grand jury.

     The Wedtech shares were not delivered to petitioner, but

were delivered to his son, Richard Biaggi (Richard), who received

the Wedtech shares as petitioner’s nominee.    Richard was

convicted of filing false income tax returns by overstating his

income to include the receipt of the Wedtech shares on his 1983

return and reporting gain from the sale of 25,000 shares on his

1985 return.

     For a detailed discussion of the facts leading to the

convictions of both petitioner and Richard, see United States v.

Biaggi, 909 F.2d 662 (2d Cir. 1990).   In that case, the Court of

Appeals for the Second Circuit affirmed the convictions of

petitioner on all counts and Richard for filing false income tax

returns for 1983 and 1985.   The underlying criminal case against

petitioner and Richard was designated United States v. Biaggi,

No. 87 Cr. 265 (S.D.N.Y., Nov. 18, 1988) (the criminal case).

Petitioner is collaterally estopped from contesting the facts

established in the criminal case.1

1
     By the answer, respondent set forth his defense of
collateral estoppel, based on the criminal case and barring
petitioner from denying certain facts (the estoppel facts)
established in that case. See Rule 39. By the reply,
petitioners denied the applicability of collateral estoppel.
Subsequently, in Petitioners’ Opposition to Respondent’s Motion
for Partial Summary Judgment and Cross Motion for Summary
Judgment in Petitioners’ Favor (the opposition), petitioners
                                                   (continued...)
                                 - 6 -

       Petitioner did not report any gross income on account of

either the receipt of the Wedtech shares in 1983 or the sale of

the 25,000 shares in 1985.     Richard reported the receipt of the

Wedtech shares on his Federal income tax return for 1983 at an

aggregate value of $34,931, or $0.31 a share.    Richard reported

the sale of the 25,000 shares on his Federal income tax return

for 1985, showing a gain of $380,457, an aggregate basis for

those shares of $6,654 and an amount realized of $387,111.

III.    Deficiencies

       A.   Value of Wedtech Shares

       We first must determine the fair market value of the Wedtech

shares.

       In August 1983, Wedtech went public by offering 1,900,000

shares of its stock to the public at $16 a share (the IPO).2

Petitioner received the shares on a date (the valuation date)

sometime between the date of the underwriter’s commitment letter

1
 (...continued)
conceded respondent’s defense of collateral estoppel: “The
petitioners agree that collateral estoppel does apply to most of
the facts decided in the criminal case. However, the essential
issues of intent and tax evasion were never at issue.” The
estoppel facts consist of 64 numbered paragraphs, which are
incorporated herein by this reference and found for purposes of
this case, because petitioner is estopped from denying them.
Petitioner’s fraudulent intent is not established by the estoppel
facts.
2
     There is a discrepancy in the record over the date of the
IPO. We need not resolve the exact date of the IPO to determine
the fair market value of the Wedtech shares on the valuation
date.
                                - 7 -

with respect to the IPO (May 9, 1983) and the date of the IPO.

Respondent valued the Wedtech shares at $11.20 a share in making

the adjustment that led to the deficiency for 1983.

     Petitioner offers no evidence as to the value of the Wedtech

shares on the valuation date other than the amount shown on a

Form 1099 issued to Richard in connection with his receipt of the

shares as a nominee for petitioner.     Apparently, that value,

$0.31 a share, was based upon the book value of Wedtech.

     Respondent reached a value of $11.20 a share by taking into

account the initial public offering price, a 2-year restriction

on transferability that applied to the Wedtech shares, and other

contemporaneous transactions.   In determining the value of

unlisted stocks, actual sales made in reasonable amounts at arm's

length, in the normal course of business within a reasonable time

before or after the valuation date are the best criteria of

market value.   See, e.g., Estate of Fitts v. Commissioner, 237

F.2d 729, 731 (8th Cir. 1956), affg. T.C. Memo. 1955-269; Estate

of Andrews v. Commissioner, 79 T.C. 938, 940 (1982).     The

prospectus accompanying the IPO describes three sales on May 13,

1983, aggregating 40,000 shares of Wedtech stock, for $12.50 a

share.   Those shares were restricted in the same manner as the

Wedtech shares.   That prospectus also states that the same shares

were repurchased for $14.80 a share during August 1983.     Those
                              - 8 -

transactions are substantially contemporaneous to the valuation

date and support respondent's valuation.

     Moreover, a public offering price is a factor which can be

taken into account with due regard to be given to the time span

between the valuation date and the sale to the public, and the

contingencies inherent in a contemplated public offering.      See

Messing v. Commissioner, 48 T.C. 502, 509 (1967).    The offering

price of the IPO was $16 a share in August 1983.    The IPO was

also substantially contemporaneous to the valuation date and

lends some support to respondent’s valuation.3

     Petitioner contends that the book value, as of January 1,

1983, of $.31 a share is a better indicator of value than

respondent’s determination of $11.20 a share.    We have long

stated that the book value of a stock is not a reliable basis

from which to determine the stock's fair market value.    See

Evans v. Commissioner, 29 B.T.A. 710 (1934); Peavey Paper Mills

v. Commissioner, T.C. Memo. 1960-237 ("Book value frequently

bears no relationship to actual cash value or fair market value."

(quoting Ketler v. Commissioner, 196 F.2d 822, 827 (7th Cir.

1952), revg. and remanding 17 T.C. 216 (1951))).    Since we

3
     We agree with the Court of Appeals for the Second Circuit
that the public offering price cannot, without adjustment, be
used to determine the fair market value of shares subject to
transfer restrictions. See Biaggi v. United States, 909 F.2d
662, 681 (2d Cir. 1990). However, we do think that the public
offering price does provide a comparable that, with adjustments,
can assist in valuing the shares.
                                - 9 -

believe that the stock was worth more than the book value and

that the valuation date was not January 1, 1983, we disagree with

petitioner’s proposed valuation.

     We find that the fair market value of each of the Wedtech

shares on the valuation date was $11.20.   Therefore, the fair

market value of all of the Wedtech shares on the valuation date

was $1,260,000, as determined by respondent.

     B.   Adjusted Basis in the 25,000 Shares

     Based on our finding that the fair market value of each of

the Wedtech shares was $11.20 on the valuation date, that amount

is petitioner’s adjusted basis in each of the 25,000 shares

disposed of by him in 1985.    Petitioner disposed of 25,000 shares

in 1985, and, therefore, his total adjusted basis in those shares

is $280,000.   He realized $387,111 on that sale, which results in

a gain of $107,000 for 1985.   See sec. 1001(a).

     C.   Conclusion

     For 1983 and 1985, petitioner omitted from gross income

$1,260,000 and $107,000, respectively.   Respondent’s

determinations of deficiencies on account of those omissions are

sustained.
                                 - 10 -

IV.    Additions to Tax

       A.   Section 6653

       Respondent determined that petitioner was liable for

additions to tax for 1983 and 1985 under section 6653(b)(1) and

(2).

             1.   Section 6653(b)(1)

       Section 6653(b)(1) imposes an addition to tax equal to

50 percent of any underpayment in tax if any part of such

underpayment is due to fraud.      Respondent bears the burden of

proving fraud by clear and convincing evidence.      See sec.

7454(a); Rule 142(b).      To prevail under section 6653(b)(1),

respondent must show both (1) an underpayment of tax exists and

(2) some part of the underpayment is due to fraud.      See, e.g.,

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

(2d Cir. 1992).

             a.   Existence of Underpayment

       The first element of section 6653(b)(1) is whether any

underpayment of tax exists.      Section 6653(c)(1) defines an

"underpayment" for purposes of section 6653 as a "deficiency"

defined by section 6211.      We have found that, for 1983,

petitioner understated his income by $1,260,000 and, for 1985,

erroneously failed to report a gain realized on the sale of the

Wedtech shares.     Each omission resulted in a deficiency in tax;
                               - 11 -

petitioner’s omissions, thus, clearly and convincingly establish

underpayments for 1983 and 1985.

          b.    Fraudulent Intent

     The second element of section 6653(b)(1) is the taxpayer's

state of mind, to wit, whether the taxpayer intended to evade tax

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

otherwise prevent the collection of such tax.   See, e.g.,

Recklitis v. Commissioner, 91 T.C. 874, 909 (1988).   The

existence of a fraudulent state of mind is a question of fact to

be determined from the entire record.   See, e.g., id.     Fraud is

never imputed or presumed; it may, however, be proved by

circumstantial evidence, because direct proof of the taxpayer's

intent is rarely available.   See, e.g., id. at 910-911.

Respondent need not establish that tax evasion was a primary

motive of petitioner but may satisfy his burden by showing that a

tax-evasion motive played any part in petitioner's conduct,

including conduct also serving to conceal another crime.     See

Spies v. United States, 317 U.S. 492, 499 (1943)("If the tax-

evasion motive plays any part in such conduct the offense may be

made out even though the conduct may also serve other purposes

such as concealment of other crime."); Recklitis v. Commissioner,

supra at 910.

     Petitioner was convicted under section 7206(1) of willfully

making false statements on his Federal income tax returns for
                              - 12 -

1983 and 1985 subscribed under penalties of perjury.    Those

convictions do not collaterally estop him from challenging

respondent’s allegations of civil fraud.    Nevertheless, those

convictions create powerful inferences that petitioner possessed

the willfulness necessary to satisfy the intent element of

section 6653(b)(1).   See Wilson v. Commissioner, T.C. Memo. 1994-

454; Avery v. Commissioner, T.C. Memo. 1993-344; Estate of

Sawczak v. Commissioner, T.C. Memo. 1993-210, affd. 46 F.3d 70

(11th Cir. 1995).

     In addition to those inferences, petitioner is collaterally

estopped from denying the following facts established in his

criminal trial:   The Wedtech shares were paid to petitioner as a

bribe to influence him to use the power of his office to secure

Government contracts for Wedtech.    The Wedtech shares were paid

to him in response to extortionate demands by him.    Petitioner

knew that, if the shares were received by him in his own name,

his income for 1983 would exceed the statutory cap on income

provided for under rules of the U.S. House of Representatives.

For that reason, petitioner agreed to have the Wedtech shares

registered in the name of Richard.     When the Wedtech shares were

issued, petitioner knew that, under the circumstances, he was the

owner of those shares, that Richard was not, and that Richard

received those shares as a nominee for petitioner.    When the

Wedtech shares were issued, petitioner knew that, as owner of
                               - 13 -

those shares, he was required to report the value of those shares

as income for 1983, as he had been advised by his accountant.    In

1985, Richard, as petitioner’s nominee, sold the 25,000 shares

and improperly reported the gain on his income tax return.

Petitioner did not report any gain in connection with the sale of

the 25,000 shares.

     Putting together the willfulness established by petitioner’s

convictions for violating section 7206(1) and the facts that

petitioner is estopped from denying, we find that petitioner had

the requisite fraudulent intent both with respect to 1983 and

1985; i.e., the intent to evade tax believed to be owing by

conduct intended to conceal, mislead, or otherwise prevent the

collection of such tax.    Even if we were to disregard the facts

that petitioner is estopped from denying, we would reach the same

conclusion, based on the evidence directly presented in this

case.   Petitioner intended to omit income to satisfy the

Congressional requirements restricting his outside income to less

than 30 percent of his Congressional salary.    In the process of

deceiving Congress, petitioner intended to understate his income

on his tax returns.

     Petitioner argues that there was no tax evasion and no loss

of revenue to respondent because Richard, as his nominee,

reported the income from the receipt of the Wedtech stock and

1985 sale of such stock.    However, we have long held that a
                               - 14 -

taxpayer may be liable for an addition to tax for fraud, even

where he causes the income to be reported on the returns of

family members or others and pays the taxes due thereon.    See

Hecht v. Commissioner, 16 T.C. 981, 987 (1951); Lang v.

Commissioner, T.C. Memo. 1961-134 (taxpayer could not excuse

himself of understatement of tax due to fraud by shifting his

income to family members).   In any event, petitioner never

instructed his son to report the receipt of the stock or its sale

in 1985 and merely assumed his son properly reported the income.

     Petitioner argues that his reliance on his accountants is a

defense to fraud.   “Reliance on a bookkeeper or accountant is no

defense to fraud if the taxpayer failed to provide the accountant

‘with all of the data necessary for maintaining complete and

accurate records’”.    Korecky v. Commissioner, 781 F.2d 1566, 1569

(11th Cir. 1986) (quoting Merritt v. Commissioner, 301 F.2d 484,

487 (5th Cir. 1962), affg. T.C. Memo. 1959-172), affg. T.C. Memo.

1985-63.   Since petitioner admits that he never told his

accountants that he owned the Wedtech stock, his reliance on his

accountants is not a defense to fraud.

           c.   Conclusion

     We sustain respondent’s additions to tax on account of fraud

under section 6653(b)(1).
                                - 15 -

            2.   Section 6653(b)(2)

     Under section 6653(b)(2), a separate addition to tax (equal

to 50 percent of the interest payable under section 6601) is

determined with respect to "the portion" of the underpayment

attributable to fraud.    Respondent bears the burden of proving

the specific portion of the underpayment of tax that is

attributable to fraud for purposes of applying the section

6653(b)(2) addition to tax.    See DiLeo v. Commissioner, 96 T.C.

at 873; Franklin v. Commissioner, T.C. Memo. 1993-184.       In all

other respects, respondent's burdens are identical under section

6653(b)(1) and (2).

     Respondent asserts that the entire underpayments for both

1983 and 1985 are due to fraud.       For the above stated reasons, we

find that respondent has clearly and convincingly established

that the entire underpayments are due to fraud.      As petitioner's

unreported income from the receipt of the Wedtech shares is the

sole source of the underpayment for 1983, the entire underpayment

for 1983 is due to fraud.    Similarly for 1985, as the unreported

gain from the sale of 25,000 shares is the sole source of

petitioner's underpayment in 1985, the entire underpayment is due

to fraud.    Accordingly, we sustain respondent's determinations of

additions to tax under section 6653(b)(2) for 1983 and 1985 on

the total underpayments for those years.
                               - 16 -

     B.   Section 6661

      Respondent also determined that petitioner substantially

understated his income tax liability and is liable for the

additions to tax under section 6661 for 1983 and 1985.    The

amount of an addition to tax for a substantial understatement of

income tax for a taxable year, which addition is assessed after

October 21, 1986, equals 25 percent of the amount of any

underpayment attributable to such substantial understatement.

See sec. 6661(a); Pallottini v. Commissioner, 90 T.C. 498, 500-

503 (1988).    A substantial understatement of income tax is

defined as an understatement of tax that exceeds the greater of

10 percent of the tax required to be shown on the return for the

year or $5,000.    See sec. 6661(b)(1)(A).

      Petitioner's understatement of income tax is substantial

according to section 6661(b)(1)(A).     Petitioner had no authority

for his failure to report the understatement of income in 1983 or

1985, nor did petitioner disclose any facts pertaining to such

income on his 1983 and 1985 returns or in a statement attached to

his returns.    Therefore, petitioner is liable for the section

6661 additions to tax.

V.   Statute of Limitations

      Petitioners timely made the returns here in question.

Respondent issued his notice of deficiency on May 22, 1997, more

than 3 years after the last of those returns was filed.
                               - 17 -

       Section 6501(a) provides, generally, that any tax must be

assessed within 3 years of the date on which the tax return was

filed.    That general rule has an exception for fraud, which

states, in relevant part:    "In the case of a false or fraudulent

return with the intent to evade tax, the tax may be assessed

* * * at any time."    Sec. 6501(c)(1).   Respondent has the burden

of proof with regard to the additions to tax for fraud.     See sec.

7454(a); Rule 142(b).    In order to carry his burden as to fraud,

respondent must prove that some part of the underpayment for each

of the years in question is due to fraud with the intent to evade

tax.    See sec. 7454(a); Rule 142(b).    The elements of fraud that

respondent must prove under section 6501(c)(1) are the same

elements essential for imposing a fraud penalty under section

6653(b).    See Estate of Temple v. Commissioner, 67 T.C. 143, 159-

160 (1976); Mobley v. Commissioner, T.C. Memo. 1993-60, affd.

33 F.3d 1382 (11th Cir. 1994).

       In view of our finding that petitioner's understatement of

tax for both 1983 and 1985 was the result of fraud, we find that

respondent has met his burden under section 6501(c)(1) for each

year in issue.    Therefore, the statute of limitations does not

bar assessment and collection of tax for those years.


                                            Decision will be entered

                                     under Rule 155.
