                               T.C. Memo. 1995-509



                            UNITED STATES TAX COURT



       MICHAEL K. WOLFE AND ROSEMARIE E. WOLFE, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 16773-93.                        Filed October 25, 1995.



       Michael K. Wolfe and Rosemarie E. Wolfe, pro sese.

       Franklin R. Hise, for respondent.




                               MEMORANDUM OPINION

       KÖRNER, Judge:       Respondent determined deficiencies in and

additions to petitioners' Federal income taxes for the years and

in the amounts as follows:

                                 Additions to Tax Under Section
Year Deficiency   6653(b)(1)    6653(b)(2) 6653(b)(1)(A) 6653(b)(1)(B)   6654

1984   $30,600    $15,300          *               0         --          $1,924
1985   221,060    112,980          *               0         --          12,686
1986    65,392          0          --        $32,696          *           3,165

*50 percent of the interest payable on the portion of the
deficiency attributable to fraud.
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     All statutory 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, except as otherwise

noted.

     During the taxable years 1984, 1985, and 1986 (the period

involved herein), and when the petition was filed, petitioners

Michael K. Wolfe and Rosemarie E. Wolfe were residents of Texas.

Petitioner Rosemarie E. Wolfe did not appear at the hearing of

this case, but was represented by her husband, petitioner Michael

K. Wolfe.

     Petitioners' taxable years 1985, 1986, and 1987 were

investigated by the Internal Revenue Service during 1989 and

1990.    After this examination, petitioners accepted adjustments

by respondent to their income tax liability for the years 1985

and 1986.    Thereafter, respondent received information concerning

the possible receipt of additional and fraudulent income by

petitioners in the years 1984, 1985, and 1986, and the

examination of these years was reopened in 1992.    As a result,

substantial additional deficiencies and additions to tax for

fraud were determined by respondent, and are contained in the

notice of deficiency that was issued herein, as detailed above.

Such deficiencies and additions to tax were computed, at

petitioners' request, on the basis of petitioners being married

and filing jointly.
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     Prior to the years in issue, petitioner Rosemarie Wolfe was

married to Jose Escalante, on two separate occasions, and they

have three children.    During the years in issue here, however,

Jose Escalante was married to Susan Escalante (now Susan Myers).

     During the years 1984, 1985, and 1986, Susan Escalante was

employed by the Spring Branch Savings & Loan Association in Texas

as a branch manager.    She was not a loan officer.   Nevertheless,

during that period she abstracted large amounts of money from the

savings and loan association (hereinafter Spring Branch), and

during the years in question caused the following amounts of

money to be transferred, with their complicity, to one or both of

petitioners, or to others who in turn remitted the money to one

or both of petitioners:

                 1984           1985           1986

             $100,000         $512,000       $199,278

     All the above proceeds were received by petitioners or

deposited in a bank account or bank accounts controlled by them.

Petitioners were also the sole owners of and controlled the

business known by the name of Deli, Etc., in Cypress, Texas, and

controlled bank accounts of that organization.

     Susan Escalante later pled guilty to both criminal and civil

charges in connection with these abstractions, inter alia, from

Spring Branch.   Upon audit, respondent's statutory notice

increased petitioners' income by the above amounts, after giving
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credit to the amounts previously agreed to for 1985 and 1986 in

the case of each petitioner.

     Petitioners were later charged criminally in Texas with

theft, or theft by receiving, in connection with the above

takings from Spring Branch.    Petitioner Rosemarie Wolfe pled

guilty and was sentenced to prison; petitioner Michael Wolfe

likewise pled guilty, and was placed on probation for 10 years.

     Petitioners were also sued civilly by Spring Branch as the

result of the above abstractions, and others, and they consented

in 1990 to the entry of judgment against them, jointly or

separately, of a total of some $1,300,000, with interest, costs

and attorney's fees.

     With respect to the funds stolen or illegally received by

petitioners in the years in question, some were apparently used

by petitioners for their personal purposes, and some were

invested in the business that they operated as Deli, Etc.

     In the original examination by respondent of petitioners'

taxable years 1985, 1986, and 1987, petitioners did not furnish

detailed information about their income or assets, and did not

disclose the illegal acquisition of funds for which they later

pled guilty and liable, both criminally and civilly.    In the

later examinations by respondent, which for the first time

included the year 1984, petitioners attempted to conceal their

participation in the theft of these funds, as well as the

identity of at least eight bank accounts where they had stowed
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funds in different places in Texas.       They likewise attempted to

conceal the fact that petitioner Rosemarie Wolfe was the owner of

Deli, Etc., where some of the funds from Spring Branch went.

They did not disclose any taxable income for the years in

question, and they filed no income tax returns for those years.

       Petitioners fraudulently failed to report any income or pay

the required tax thereon for 1984, 1985, and 1986.       As to the

statutory notice of deficiency herein, petitioners contest only

the inclusion in their gross income of their illegally acquired

receipts from Spring Branch, as well as the additions to tax.

       We consider first the correctness of the deficiencies in

tax.

       In general, the burden of proof is on petitioners to prove

that respondent's determination, as set forth in the notice of

deficiency, is incorrect.    Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933).    Petitioners have admitted the receipt of the

income in question.    Petitioners contend that the money received

from the Spring Branch checks was not embezzlement income, but

rather a loan.    There is not a scrap of evidence in this record

to support that argument.    Neither petitioner testified, nor did

any witness appear on their behalf.       They pled guilty, both

criminally and civilly, to the receipt of the money that

respondent would tax to them here.       Gross income includes income

from all sources, section 61(a).       It is well established that

illegal gain can be taxable income, as in the case of other
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accessions to wealth under the dominion and control of the

taxpayer.   James v. United States, 366 U.S. 213 (1961); Rutkin v.

United States, 343 U.S. 130 (1952).    Section 1 imposes a tax on

individuals for taxable income received.    The liability for the

payment of the income tax is ordinarily on the individual

receiving the income.    Edwards v. Commissioner, 39 T.C. 78

(1962), affd. in part and revd. in part 323 F.2d 751 (9th Cir.

1963).

     The evidence submitted in this case clearly shows the

receipt of the income by petitioners, and in fact they admitted

it in the pleadings.    Petitioners' argument of a "loan" is not

only unsupported by this record, it is clearly contrary to that

record, and we find that respondent's determination with respect

to unreported income must be sustained.

     We next consider the correctness of the imposition of

additions to tax for fraud on petitioners by respondent.    On this

matter, the burden of proof is on respondent, Rule 142(b).     A

failure to file tax returns, without more, is not conclusive

proof of fraud, but may be considered in connection with other

facts.   Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir.

1968); Kotmair v. Commissioner, 86 T.C. 1253, 1260 (1986).

Petitioners' entire course of conduct can be relied on to

establish a fraudulent intent.    Otsuki v. Commissioner, 53 T.C.

96, 106 (1969).
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     Fraud, as used in section 6653(b), means actual intentional

wrongdoing.   Mitchell v. Commissioner, 118 F.2d 308 (5th Cir.

1941), revg. 40 B.T.A. 424 (1939).   The intent required is the

specific purpose to violate a known legal duty, in this case, to

evade a tax believed to be owing.    Stoltzfus v. United States,

supra; Estate of Temple v. Commissioner, 67 T.C. 143, 159 (1976).

Where direct evidence of fraudulent intent is not available, its

existence may be determined from the conduct of the taxpayer and

the surrounding circumstances.   Stone v. Commissioner, 56 T.C.

213 (1971).   The Supreme Court has stated that an "affirmative

willful attempt may be inferred from * * * any conduct, the

likely effect of which would be to mislead or to conceal".      Spies

v. United States, 317 U.S. 492, 499 (1943).    Making false

statements to a revenue agent is evidence of fraud.    United

States v. Beacon Brass Co., 344 U.S. 43 (1952);    United States v.

Newman, 468 F.2d 791, 794 (5th Cir. 1972).

     In the instant case, we need not rely on any presumption of

correctness as to the deficiency in order to conclude that fraud

has been committed by petitioners.   They have admitted the

receipt of the unreported income, and it is clear from the facts

that an income tax was owing thereon, which has not been paid.

We are convinced that petitioners' failure to file returns or pay

the required tax was fraudulent on their part.    The tax was

clearly owing, and petitioners, without any excuse, intentionally

did not file the returns and pay the tax.    In addition, during
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the investigation of their tax liability, petitioners withheld

information from the revenue agents as to the amount of their

income, and also concealed the fact of their prior convictions

for illegally obtaining such income.

     We think respondent has satisfied the burden of proving

fraud in this case by the clear and convincing evidence required

by section 7454(a) and Rule 142(b).    Cf. Green v. Commissioner,

T.C. Memo. 1993-152, affd. without published opinion 33 F.3d 1378

(5th Cir. 1994).

     This leaves for discussion the imposition of additions to

tax by respondent under section 6654 for the failure by

petitioners to pay estimated tax.   Respondent determined that the

addition to tax for failure to pay an estimated tax was

applicable for each of the years here in question, and

petitioners bear the burden of proving that respondent's

determination of the addition to tax is erroneous.    Rule 142(a);

Grosshandler v. Commissioner, 75 T.C. 1 (1980).    The statute is

specific, and unless the taxpayer can bring himself within one of

the four enumerated exceptions thereto, its application is

mandatory.   Estate of Ruben v. Commissioner, 33 T.C. 1071 (1960);

Grosshandler v. Commissioner, supra.     No such showing has been

made in this case, and we therefore sustain respondent on this

issue.

                                      Decision will be entered

                              for respondent.
