                        T.C. Memo. 1998-209



                      UNITED STATES TAX COURT



    JOHN J. MALONEY and MARY FRANCES MALONEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4421-96.                 Filed June 16, 1998.



     Gregory R. Noonan, for petitioners.

     George D. Curran, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION



     FOLEY, Judge:   In a notice of deficiency issued on January

22, 1996, respondent determined deficiencies, additions to tax,

and civil fraud penalties relating to John and Mary Maloney's

1984 and 1986 Federal income taxes.   The parties have settled all

issues relating to the 1984 tax year.    Among the issues relating
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to the 1986 tax year is whether the period of limitation on

assessment has expired.   We conclude that assessment is barred,

and, therefore, the other issues are moot.     All section

references are to the Internal Revenue Code in effect for 1986,

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

and Procedure.

                          FINDINGS OF FACT

     At the time John Maloney and Mary Maloney filed their

petition, they resided in Perkiomenville, Pennsylvania.      Mr.

Maloney is a mechanical engineer, and from approximately 1969 to

1989, he operated a sole proprietorship and employed the

accounting services of Robert Butler.   Each year, Mr. Maloney

provided Mr. Butler with check stubs, bank statements, and

information relating to his accounts receivable and payable.       Mr.

Butler used this information to prepare balance sheets, income

statements, trial balances, general ledgers, cash disbursement

journals, and, ultimately, petitioners' Federal income tax

returns.   Mr. Maloney believed that Mr. Butler used the accrual

method of accounting to prepare these records and returns.

     From 1984 through 1986, Mr. Maloney was the project engineer

for a prison being constructed in Montgomery County,

Pennsylvania.    During this period, Mr. Maloney on a monthly basis

billed the county, which in turn, paid him by check.     In 1984,

the county paid Mr. Maloney $409,624.55.     In early 1985, the
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county issued Mr. Maloney two Forms 1099 stating that in 1984 it

paid him $445,516.48 and $6,942.35 and a "corrected" Form 1099

stating it paid him $432,000.13.    Mr. Butler prepared Mr.

Maloney's general ledgers and 1984 tax return.    On their return,

petitioners elected accrual as the method of accounting and

reported $409,625 of gross receipts.

     In 1985, the county paid Mr. Maloney $370,734.49.    In early

1986, the county issued Mr. Maloney a Form 1099 stating that in

1985 it paid him $298,788.16.    Petitioners, on their 1985 return,

reported $370,836 of Schedule C gross receipts but did not

identify their method of accounting.

     During 1986, the Internal Revenue Service (IRS) interviewed

Mr. Maloney in connection with a Federal grand jury investigation

into the county's prison construction project.    Mr. Maloney

provided the workpapers that his accountant had prepared and

fully cooperated with the investigation, which continued through

1987.

     In 1986, the county paid Mr. Maloney $927,992.65.    Mr.

Butler recorded on the 1986 general ledger $880,565.83.    In early

1987, the county issued a Form 1099 stating that it paid Mr.

Maloney $844,497.87 in 1986.    After receiving this form, Mr.

Butler changed the amount of gross receipts reflected on the 1986

general ledger from $880,565.83 to $844,497.87.    Subsequently,

the county issued two corrected Forms 1099, each stating that in
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1986 the county paid Mr. Maloney $927,922.65.       On their 1986

return, petitioners reported Schedule C gross receipts of

$844,498, claimed an overpayment of $15,299, and did not identify

their method of accounting.

     On June 27, 1987, petitioners filed an amended 1986 return,

which Mr. Butler had prepared.    On the amended return,

petitioners elected the accrual method of accounting, increased

their taxable income from the original return by $11,538.45, and

stated that they owed $5,769.    The following chart is contained

in the explanation portion of the amended return:

               1099s              Schedule C         Difference

     1985     $298,788.16        $370,744.49         $71,956.33
     1986     +927,992.65        +844,497.87         -83,494.78
     Total   1,226,780.81       1,215,242.36         (11,538.45)

In essence, petitioners calculated their unreported income by

subtracting the amount Mr. Maloney believed they overreported on

their 1985 return (i.e., $71,596.33) from the amount that they

underreported on their 1986 return (i.e., $83,494.78).

     In April of 1991, a Federal grand jury indicted Mr. Maloney

and Mr. Butler on numerous counts.       In pertinent part, the

indictment states:

     Count 2: THE GRAND JURY FURTHER CHARGES THAT: On or
     about April 8, 1987 * * * John J. Maloney * * * did
     willfully make and subscribe a federal income tax
     return for the year 1986, * * * which tax return he did
     not believe to be true and correct as to every material
     matter in that the return stated that his taxable
     income for this year was $155,923, when in fact and as
     he then well knew, his taxable income was $239,418.
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          In violation of Title 26, United States Code,
     Section 7206(1).

     Count 3: THE GRAND JURY FURTHER CHARGES THAT: On or
     about June 27, 1987 * * * John J. Maloney * * * did
     willfully make and subscribe an amended federal income
     tax return for the year 1986, * * * which tax return he
     did not believe to be true and correct as to every
     material matter in that the return stated that his
     taxable income for this year was $167,461 when in fact
     and as he then well knew, his taxable income was
     $239,418.
          In violation of Title 26, United States Code,
     Section 7206(1).

A jury returned a verdict of guilty with respect to both of the

above counts, and in September of 1992 judgment was entered and

Mr. Maloney was sentenced.    Mr. Butler pleaded guilty to three

counts of violating section 7206(2) (assisting the false filing

of a return) and one count of violating 18 U.S.C. 371 (conspiracy

to defraud the Government).    On January 22, 1996, respondent

issued the notice of deficiency that petitioners now contest.

                               OPINION

     Section 6501(a) provides that, generally, the amount of any

tax must be assessed within 3 years of the filing of a return.

Section 6501(c)(1), however, provides that if the taxpayer files

a false or fraudulent return with the intent to evade tax, the

amount of the tax due may be assessed at any time.    Respondent

concedes that the notice of deficiency was issued after the

expiration of the 3-year period but contends that petitioners

filed false or fraudulent original and amended returns and,

therefore, assessment is not barred.
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     Respondent must establish by clear and convincing evidence

that petitioners filed a false or fraudulent return with the

intent to evade tax.     Botwinik Brothers of Mass., Inc. v.

Commissioner, 39 T.C. 988, 996 (1963); Davis v. Commissioner,

T.C. Memo. 1991-603.   Respondent may prove such intent by

circumstantial evidence, Davis v. Commissioner, supra, which may

include substantial understatement of income, inadequate books

and records, failure to file returns, concealment of assets,

failure to cooperate with tax authorities, and participation or

concealment of illegal activities.       Chin v. Commissioner, T.C.

Memo. 1994-54; see Niedringhaus v. Commissioner, 99 T.C. 202, 211

(1992).

     We must first determine to what extent, if any, Mr.

Maloney's conviction under section 7206(1) collaterally estops

petitioners from asserting exculpatory facts.      The doctrine of

collateral estoppel precludes the relitigation of any issue of

fact or law that is actually litigated and necessarily determined

by a valid and final judgment.     Montana v. United States, 440

U.S. 147, 153 (1979); Wright v. Commissioner, 84 T.C. 636, 639

(1985).   Because the intent to evade tax is not an element of the

crime charged under section 7206(1), a conviction under this

section does not establish, as a matter of law, that a taxpayer

intended to evade tax.     Wright v. Commissioner, supra at 643;
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McCulley v. Commissioner, T.C. Memo. 1997-285; Kaissy v.

Commissioner, T.C. Memo. 1995-474.

     While respondent has established that Mr. Maloney is

estopped from denying that he willfully attested to a return that

he believed understated his 1986 taxable income, respondent has

not established that Mr. Maloney intended to evade tax.    Cf.

McCulley v. Commissioner, supra (concluding that the taxpayer,

who had been convicted under section 7206(1), did not intend to

evade tax because she did not know that embezzlement income was

taxable); Kaissy v. Commissioner, supra (concluding that the

taxpayer, who had been convicted under section 7206(1), did not

intend to evade tax because he relied on his accountant).

     Mr. Maloney knew that on their 1986 return he and Mrs.

Maloney understated their 1986 income.   Mr. Maloney believed,

however, that on their 1985 return they had overstated their 1985

income by approximately the same amount and that, cumulatively,

during the years that he worked for the county, he reported his

total gross receipts.   In addition, the typical indicia of an

intent to evade tax are not present.   Mr. Maloney maintained

excellent records, provided all pertinent information to his

accountant and subsequently to the IRS, cooperated with the IRS's

investigation, and did not employ any scheme, artifice, or device

to conceal income.   Accordingly, the 3-year statute of limitation
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bars assessment, and all other issues raised by the parties are

moot.

     To reflect the foregoing,

                                              Decision will be entered

                                         under Rule 155.
