                           T.C. Memo. 1997-552



                         UNITED STATES TAX COURT



                  ROBERT T. SCHIRLE, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13684-95.                       Filed December 18, 1997.



     Gary Kuwada and Steve Mather, for petitioner.

     Steven M. Roth and Louise C. Pais, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:      Respondent determined the following

deficiencies in, additions to, and penalties on petitioner's

Federal income taxes:

                               Additions to Tax          Penalties
                            Sec.      Sec.      Sec.       Sec.
     Year   Deficiency     6651(a)   6653(b)    6661      6663(a)

     1988    $14,942        ---    $12,811    $3,736        ---
     1989     39,369      $7,597     ---        ---      $19,961
     1990    120,677        ---      ---        ---       57,533
     1991    128,225      36,402     ---        ---       96,169
                                 - 2 -


     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.

     Petitioner, an attorney, maintained a personal injury law

practice in the Koreatown section of Los Angeles.    Respondent

contends, among other things, that petitioner received and cashed

over 160 checks throughout the years in issue, failed to report

the income from these checks, and fraudulently and with the

intent to evade taxes understated his income from his law

practice for the years in issue.    Petitioner contends that he

never received the proceeds from these checks.    Rather, he argues

that his office manager, who had effective control of the law

office, cashed the checks, paid the clients and the medical

providers, and kept any remaining amounts without petitioner's

knowledge.

     After concessions, the issues for decision are:1


     1
        On Oct. 24, 1996, the parties filed a stipulation of
settled issues. In that stipulation, the parties agreed as
follows: (1) If any of the insurance settlement checks at issue
in this case are found to constitute previously unreported gross
receipts of petitioner for the years at issue, petitioner's gross
income from each included check is equal to one-third of the face
amount of the check; (2) no portion of two checks for $7,200 and
$1,880 in 1989 is to be considered income to petitioner; and (3)
there was a duplication of insurance settlement checks in the
computation of the total amount of checks in 1990 in the amount
of $15,000. Therefore, the total amount of settlement checks for
1990 should be $258,965.
     On brief, petitioner admits that he omitted from income
settlement checks that were deposited into his Mitsui
Manufacturers Bank account in 1991.
     Furthermore, respondent determined that petitioner is liable
                                                   (continued...)
                              - 3 -


     (1) Whether petitioner failed to report income from his law

practice in 1988, 1989, 1990, and 1991 in the amounts of $14,074,

$68,648, $238,665, and $57,708, respectively;2

     (2) whether petitioner failed to timely file his Federal

income tax returns for the 1989 and 1991 tax years:

     (3) whether petitioner is liable for an addition to tax for

fraud pursuant to section 6653(b) for the 1988 tax year; and

     (4) whether petitioner is liable for penalties for fraud

pursuant to section 6663 for the 1989, 1990, and 1991 tax years.

     Finally, if we decide that petitioner did not fraudulently

fail to report income, we must decide whether petitioner

substantially omitted gross income in 1989 and 1990 so as to

render section 6501(e) applicable, and, if not, whether the

limitations periods for assessing taxes for those years have

expired.

                        FINDINGS OF FACT

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

The stipulations of facts and attached exhibits are incorporated




     1
      (...continued)
for additional self-employment taxes pursuant to sec. 1402 for
each of the years in issue. This issue will be resolved under
Rule 155 computations for any year in which we find that there
are increases in petitioner's taxable income.
     2
        Respondent's determination of unreported income entails
four components: (1) 162 cashed settlement checks, (2) a $3,000
cash deposit in 1989, (3) 12 checks deposited into a client trust
account, and (4) a yearend ledger adjustment.
                                - 4 -


herein by this reference.    Petitioner resided in North Hollywood,

California, at the time he filed his petition.

Petitioner's Law Practice

     Petitioner is an attorney.    He was admitted to practice in

California in 1978.    From 1979 through 1981, he worked with

another attorney in Van Nuys, California.    Petitioner became a

sole practitioner in 1982.    His first office was in Encino,

California, and in 1983, he moved to Woodland Hills, California.

He kept this office open through 1991.    He had no employees at

either location.    Petitioner handled some personal injury cases

in the Encino office but did not have a negotiator.    At the

Woodland Hills location, petitioner sublet an office from another

attorney and shared secretarial services.    During 1988 and 1989,

petitioner had very few clients at the Woodland Hills office, and

during 1990 and 1991, he had no clients at that office.

     Petitioner met Won Koo Yoon, a.k.a. Philip Yoon (hereinafter

Mr. Yoon), in 1987.    At that time, Mr. Yoon was working in a

travel agency preparing immigration filings predominantly for

Korean clients.    Mr. Yoon had attended school in Korea and

immigrated to the United States as a young adult.    Mr. Yoon did

not have a law degree, and he never worked in a law firm before

meeting petitioner.

     Mr. Yoon suggested that petitioner open an office in

Koreatown and that Mr. Yoon could help petitioner develop a

client base in the Korean community.    In early 1987, petitioner
                                - 5 -


opened a law office on 7th Street in Koreatown in Los Angeles.

Petitioner moved to Koreatown because he believed that the move

would broaden the base of his practice in the Korean-American

community.   Petitioner, Mr. Yoon, and some part-time help worked

at the 7th Street location.    During this time, petitioner's

practice consisted of immigration filings, default divorce, minor

criminal matters, and a few personal injury cases.    Mr. Yoon

would make initial contacts with clients, obtain information from

them, and act as translator.

     Approximately 6 months later, in 1987, petitioner moved his

practice to 3200 Wilshire Boulevard in Koreatown in Los Angeles.

At the 3200 Wilshire Boulevard location, petitioner and Mr. Yoon

had separate offices.

     Petitioner's association with Mr. Yoon proved fruitful, and

an increasing portion of petitioner's practice was devoted to

personal injury matters.   By 1989, petitioner was handling only

occasional minor criminal matters and immigration filings.

Petitioner did not have a negotiator at any of his offices in

1988.

     In April or May of 1989, petitioner moved his office to 3700

Wilshire Boulevard.   His office is still located there.   During

that time, one of Mr. Yoon's duties was to secure clients for the

firm; he was very successful at this task.    By 1989, petitioner's

practice had expanded to a volume of more than 200 personal

injury cases in the office at any point.    A negotiator was hired
                                - 6 -


to deal with insurance companies.    The ethnic makeup of

petitioner's clientele had changed to the point that

approximately 80 to 90 percent of petitioner's clients were

Koreans, most of whom did not speak English.    Since petitioner

did not speak Korean, he was forced to rely on Mr. Yoon and

employees in the office to communicate with clients.    The

reported gross receipts on petitioner's Schedule C grew as

follows during the years in issue:

          Year             Schedule C Gross Receipts

          1988                      $73,741
          1989                      228,091
          1990                      445,551
          1991 (amended)            708,075

Mr. Yoon departed the firm in 1993.

Mr. Yoon's Role in the Office

     It was at Mr. Yoon's suggestion and coaxing that petitioner

decided to open an office in Koreatown and to develop a client

base in the Korean community.   From the outset, Mr. Yoon assumed

a major role in the office.   Mr. Yoon would make initial contacts

with clients, obtain information, act as translator, and prepare

much of the paperwork relating to the client's matter.      Mr.

Yoon's compensation in the initial stages of his arrangement with

petitioner was sporadic and based on the availability of funds in

the office.

     Mr. Yoon was active in securing clients for the firm.        Mr.

Yoon would locate the client, secure the client's signature on

the retainer agreement, initiate contact with the insurance
                               - 7 -


company, arrange for the client to obtain medical treatment,

handle the processing of the insurance claim, prepare a list to

monitor the period of limitations, review and process the mail,

manage the office, make disbursements to clients, and hire, fire,

and supervise employees.   Petitioner also was involved in some of

these activities.

     Petitioner's primary role was to concentrate on litigation

matters.   After a negotiator was hired, petitioner's time

increasingly was absorbed with the handling of litigation

matters.   Petitioner had very little involvement with a case

prior to litigation.   Petitioner often did not have any contact

with clients or decide which clients the firm would represent.

Petitioner relied on Mr. Yoon and other persons in the office to

pursue the administrative processing of insurance claims.    When

cases went smoothly, petitioner typically had virtually no

involvement with them.

     The vast majority of petitioner's cases were non-English-

speaking Korean clients, many of whom had the same last names.

As a result, petitioner could not distinguish the various cases

in the office.

Report of R. Gerald Markle

     At trial, petitioner presented R. Gerald Markle as an expert

on industry practices involving the relationships between lawyers

and law firm administrators.   Before entering private practice,

Mr. Markle worked for the Office of Trial Counsel of the State
                                 - 8 -


Bar of California from 1979 through 1986.    While with the Office

of Trial Counsel, Mr. Markle prosecuted over 100 formal

disciplinary proceedings against California attorneys, and as a

private practitioner he has defended over 200 attorneys in legal

malpractice matters and formal disciplinary proceedings.    Mr.

Markle's expert report was submitted as his direct testimony.

     In offices with a primarily Asian clientele, an Asian

administrator, who frequently controls access to the client base,

often becomes, in effect, the principal, while the lawyer is the

administrator's employee.   Mr. Yoon's dominance over the

operation of petitioner's law practice, therefore, is consistent

with common practice in personal injury law offices in the Los

Angeles area that have primarily an Asian clientele.

Petitioner's Office Procedures

     The majority of cases handled by petitioner's law firm

during 1988 through 1991 involved personal injury claims.

Clients came to the firm through print and television

advertisements aimed primarily at the Korean community and

through the efforts of Mr. Yoon.    Prospective clients executed

retainer agreements with the “Law Offices of Robert T. Schirle”.

Occasionally, petitioner was present when the client signed the

retainer agreement; other times Mr. Yoon or another member of the

law office, or a combination thereof, was present.    A client file

was established after the client signed the retainer agreement.

An investigation was made, and police reports, medical records,
                                 - 9 -


or other documents relating to the injury were assembled.     Mr.

Yoon would prepare a list of cases with the date of the injury

for the purpose of monitoring the 1-year period of limitations

within which to commence litigation.     A representation letter was

then forwarded from the firm to the insurance company to notify

the insurance company of the claim.      Mr. Yoon then referred the

client to a medical provider for diagnosis and/or treatment.       Mr.

Yoon monitored and assessed the progress of the medical treatment

and any property damages, and the corresponding reports were

forwarded to the insurance companies.     Contact was then made with

the insurance adjuster in an attempt to resolve the claim.       In

1988, this was done by petitioner, and from 1989 through 1991,

this was done by a negotiator employed by the firm.     If the

negotiator reached an acceptable settlement, the settlement draft

was received and a release was prepared for the client to

execute.   If a property damage reimbursement check was received,

the entire amount of the check was forwarded to the person

entitled to the amount.   If a medical payment check was received,

the client's signature was obtained, and the amount was deposited

and held in the firm's client trust account until there was a

final resolution of the claim.    If a bodily injury settlement

check was received, it was associated with the file along with

billing statements from the medical provider.     A disbursement

statement was prepared identifying the amount due to the client,

to the firm for fees and costs, and to the medical provider.       The
                                - 10 -


client was brought into the office to execute the insurance

settlement check for deposit into the firm's client trust

account.    The client's portion of the settlement proceeds was

distributed to the client by check or in cash.    If the medical

provider's bill was for more than one-third of the settlement,

contact was made to obtain the provider's agreement to accept

only the one-third amount.    If the 1-year anniversary of the

accident was approaching and/or if there was no apparent ability

to settle the claim, cases were reviewed for possible litigation.

If necessary, petitioner prepared and filed a complaint.

Recording of Fee Income and Preparation of Tax Returns

     By 1988, the income to petitioner's law practice consisted

primarily of insurance settlement checks from personal injury

cases.     There were three major categories of insurance settlement

checks:    Property damage, medical payment (med-pay), and bodily

injury.    For property damage settlements, the check typically was

deposited into the firm's client trust account, and the proper

amount then was disbursed to the body shop or the client.    On

occasion, a check simply was endorsed over to the body shop or

the client.    Med-pay checks often were received in advance of the

final resolution of the insurance claim.    Accordingly, these

checks typically were deposited into petitioner's client trust

account and were held for a considerable length of time to

determine whether the client ultimately was entitled to keep the

med-pay amount.    The firm earned no fee on med-pay amounts until
                              - 11 -


it was determined that the amount constituted part of the overall

recovery of the client in the case and was not reimbursable.     The

office policy was for bodily injury settlement checks to be held

until they were signed by the client.   Then the amounts were

deposited into the firm's client trust account, and a check was

issued to the client for the client's portion.   At some point,

the amount due to the medical provider then was paid.    This

policy was not followed with respect to the cashed checks at

issue in this case.

     It was petitioner's policy not to cash insurance checks.

There were a few exceptions in 1988 and early 1989 where Mr. Yoon

was authorized to cash a check to pay a client who would have had

difficulty negotiating the firm's check to the client.    Mr. Yoon

cashed such checks with the understanding that the balance would

be retained by Mr. Yoon as part of his compensation.    It was

petitioner's understanding that even in the isolated instances in

which a check was authorized to be cashed, Mr. Yoon recorded the

cashed checks for the purpose of maintaining accurate books for

the firm.   Petitioner believed that even if these amounts were

not reported in the firm's gross income, there was no change to

the firm's net income because any amount that inured to the

benefit of the firm was kept by Mr. Yoon as compensation.

     Mr. Park prepared petitioner's Federal income tax returns

for 1988, 1989, and 1990.   Mr. Hwang prepared petitioner's

Federal income tax return and amended return for 1991.    Both Mr.
                               - 12 -


Park and Mr. Hwang, petitioner's accountants for the years in

issue, were recommended by Mr. Yoon.    The deposits into the

client trust account were included in the general ledger as

receipts of the firm.

     Petitioner's 1988, 1989, and 1990 Federal income tax returns

were all filed more than 3, but less than 6, years prior to

respondent's mailing of the notice of deficiency on July 7, 1995.

Petitioner's 1991 Federal income tax return was filed on October

15, 1992.

The 162 Disputed Checks3

     Petitioner was aware that some of the 162 disputed checks

came into his law firm.    Petitioner did not personally cash

settlement checks.   Mr. Yoon frequently paid cash to clients of

the firm.   Mr. Yoon specifically instructed the firm's employees

who witnessed these cash payments not to tell petitioner that

cash disbursements to clients were being made.    In 1988 and early

1989, petitioner authorized Mr. Yoon to cash occasional

settlement checks.   This policy (to petitioner's knowledge)

stopped in 1989 because the office moved to a building in which

one of the firm's banks was located, facilitating immediate

payment or cash availability from insurance settlement checks.



     3
        The checks in dispute are referred to by the item numbers
as marked in the record. Two of the disputed checks are no
longer at issue pursuant to the parties' stipulation of settled
issues. Additionally, items 102 and 103 are not cashed checks
but rather were deposited by petitioner into the Mitsui
Manufacturers Bank account discussed infra.
                              - 13 -


Petitioner authorized Mr. Yoon to take any remaining proceeds

from the authorized checks as salary.    The following table sets

forth the checks which petitioner authorized Mr. Yoon to cash:

     Date Check Negotiated          Check Amount

           4/13/88                     $5,222.20
           7/8/88                       7,000.00
           8/1/89                         500.00
           9/8/89                       6,000.00
           9/26/89                      5,500.00
           9/26/89                      5,500.00
        Total                          29,722.20



There were two additional checks for which petitioner doubted the

authenticity of his signature, but other circumstances indicated

that it was the kind of check which petitioner would have

authorized Mr. Yoon to cash, keeping the firm's net proceeds as

compensation.   These checks are as follows:

     Date Check Negotiated          Check Amount

           3/21/89                      $7,000
           3/21/89                       7,000
        Total                           14,000



     tems 18 through 101 and 104 through 164 were not signed by

petitioner but were endorsed by a signature stamp of petitioner's

name.   Petitioner never authorized the endorsement of any check

by signature stamp.

The Mitsui Manufacturers Bank Client Trust Account

     Petitioner had a client trust account at Mitsui

Manufacturers Bank from November 30, 1987, through December 31,
                                   - 14 -


1991.     Initially, petitioner did not provide copies to his tax

preparers of the 1988 through 1991 bank statements for this

account, although he provided the 1991 statements to Mr. Hwang in

late 1992.     None of the deposits into this account were reflected

on petitioner's 1988, 1989, 1990, and 1991 Federal income tax

returns.     In 1991, petitioner endorsed and deposited insurance

settlement checks into his Mitsui Manufacturers Bank client trust

account.     The gross amounts of these checks are as follows:

             Date of Deposit             Amount

                 5/20/91                 $6,700
                 5/20/91                  7,000
                 5/20/91                  6,500
                 6/26/91                  8,000
                 6/26/91                  5,750
                 7/17/91                  6,500
                 7/17/91                  6,800
                 7/17/91                  8,750
                 7/17/91                  8,750
                 7/17/91                  8,750
                 7/17/91                  9,600
                 7/17/91                  5,000
               Total                     88,100

Petitioner also deposited $3,000 in cash to this account on March

1, 1989.     These amounts also form part of respondent's adjustment

to petitioner's Schedule C gross receipts.

Petitioner's Assets

        During the years in issue, petitioner reported the following

net income from his law practice:

             Year              Net Schedule C Income

             1988                    $10,292
             1989                     36,211
             1990                     96,945
             1991                     65,337
                                     - 15 -



During these same years, petitioner's approximate living expenses

were as follows:

                             1988      1989         1990        1991

Rent                        $3,000    $3,000      $3,000       $3,000
Living expenses             12,000    12,000      24,000       24,000
Car purchase                  ---       ---       10,000         ---
  Total                     15,000    15,000      37,000       27,000


Petitioner lived in an apartment in a commercial building owned

by his parents throughout the years in issue.              Petitioner did not

own any real estate or stock.         Petitioner did not have a gambling

habit, a drug or alcohol problem, or any expensive hobbies.

Petitioner did not make any charitable contributions or have any

significant investments or purchases.

     Mr. Yoon had two bank accounts at California Korea Bank and

one account at Security Pacific Bank which had the following

total deposits:

                  Year               Total Deposits

                  1988                 $32,480.59
                  1989                  37,386.09
                  1990                 181,410.86
                  1991                 981,619.50
                    Total            1,232,897.04

     Petitioner had Mr. Richard Rose, an accountant, prepare a

summary of Mr. Yoon's bank accounts.           The net amount of deposits

was determined after an analysis was made by Mr. Rose to

eliminate transfers between accounts, credit memos, transfers

from credit cards, and redeposited checks which would normally
                             - 16 -


constitute nontaxable transfers.   Mr. Yoon also made a $100,000

downpayment on the purchase of a house in October 1990, spent

$17,180 on improvements to the residence made in 1991 and paid

for in early 1992, and at various times during the years in issue

drove an Acura Legend, a Range Rover, and a Lexus.   Mrs. Yoon

worked for a clothing manufacturer in 1988 through 1989, after

which time she gave birth and was not employed.   When petitioner

first became associated with Mr. Yoon, Mr. Yoon had an old

automobile and no appearance of affluence.   Mrs. Yoon's parents

also appeared to be of modest means.   By February 1993, Mr. Yoon

had begun taking steps to relocate to Washington State.   After

petitioner discovered the cashed checks in 1993, he directed the

office staff to open mail and provide it directly to him and not

to Mr. Yoon.

Yearend Ledger Adjustments

     Most of the information necessary to complete petitioner's

returns was provided to the accountants by Mr. Yoon.

Petitioner was aware of a problem created by using the deposits

in the client trust accounts as a starting point for the firm's

gross receipts; i.e., the method overstated income by including

amounts that did not belong to the firm.   There was no problem to

the extent that a settlement check was received and the payments

to the client and medical provider were made in the same year.

The problem arose with respect to amounts collected but

unreimbursed until the following year.   At various times, it
                              - 17 -


could take as long as 5 months to pay medical providers on bodily

injury settlements.   An estimate was made to determine the amount

of the funds held in the client trust accounts at yearend which

did not belong to the firm, and this amount was backed out in

determining the gross receipts on petitioner's Schedule C.     The

accrual entry is the amount that petitioner backed out of gross

income each year to reflect amounts that he believed did not

reflect income.

     The following table compares the amount of petitioner's

“accrual entry” to the yearend balance in petitioner's client

trust accounts for each year in which respondent has proposed an

adjustment:

              Petitioner's      Yearend Trust    Respondent's
   Year       Accrual Entry    Account Balance    Adjustment1

   1988            N/A              N/A               N/A
   1989         $109,000         $112,556           $40,750
   1990          262,207          311,535           153,207
   1991          100,000          109,208          (162,207)
     1
       Respondent's adjustment to petitioner's yearend accrual
   entry is included in respondent's adjustment to petitioner's
 Schedule C gross receipts.

     Petitioner did not review in detail each year's Schedule C

prepared by the accountants but rather focused on the gross

receipts and net income to determine whether the amount seemed

reasonable on the basis of his recollection of the previous year

and the amount of income which petitioner was able to receive

from the firm.
                               - 18 -


                               OPINION

     Respondent based his determination of a deficiency in

petitioner's 1988 Federal income tax entirely on five disputed

insurance checks.   After adjustments, the deficiencies for 1989,

1990, and 1991 are net amounts representing (1) one-third of the

gross receipts from the remainder of the 162 disputed insurance

checks, (2) respondent's reversal of petitioner's yearend ledger

adjustments, which petitioner claims identify amounts in his

client trust account which were not taxable receipts, and (3)

insurance settlement checks deposited into the Mitsui client

trust account in 1991 and a $3,000 cash deposit into that same

account in 1989.

Unreported Income

     Respondent, on the basis of the 162 cashed checks made out

to petitioner's law firm, determined that petitioner had

unreported income for each of the years in issue.

     The Commissioner's determinations are entitled to a

presumption of correctness.   Rule 142(a); Welch v. Helvering, 290

U.S. 111 (1933).    The burden is upon the taxpayer to demonstrate

in the first instance that the Commissioner's determination is

arbitrary and unreasonable in order to deprive it of the

presumption of correctness.    Harbin v. Commissioner, 40 T.C. 373,

376 (1963).
                              - 19 -


     With respect to the years in issue, respondent presented

ample evidence linking petitioner to the income from the

settlement checks.   Respondent offered checks made payable to

petitioner's law firm which were purportedly endorsed by

petitioner.   An income tax deficiency based on petitioner's

failure to report as income one-third of those checks has a

rational foundation.   Therefore, the notice of deficiency is

entitled to a presumption of correctness, and petitioner bears

the burden of proving that no part of the checks is includable in

his gross income.

     Petitioner disputes respondent's income computation from the

settlement checks.   He contends that he could not have earned

substantially more than he reported on his returns throughout the

years in issue.   In support of his position, petitioner points

out that he had no asset accumulation or spending which would

suggest he had income greater than he reported.    Petitioner

established that his lifestyle was far from extravagant.    See

Stewart v. Commissioner, T.C. Memo. 1990-264.     Petitioner's call

to “Show me the money” goes unanswered by respondent.

Furthermore, petitioner's explanation of where the money went is

supported by Mr. Markle's report and Mr. Yoon's significant

accumulation of assets.

     Petitioner relies heavily on his own testimony.    Respondent

frequently reminds this Court that we are not obligated to accept
                             - 20 -


as true the uncorroborated testimony of petitioner.    See Davis v.

Commissioner, 88 T.C. 122, 141 (1987), affd. 866 F.2d 852 (6th

Cir. 1989); Estate of DeNiro v. Commissioner, 795 F.2d 582, 584

(6th Cir. 1986), revg. T.C. Memo. 1985-128.   Petitioner's

testimony, however, generally was credible, and we rely on

petitioner's testimony as it was supported by the record.     See

Diaz v. Commissioner, 58 T.C. 560 (1972) (basing analysis upon

evaluation of the entire record and the credibility of

witnesses); see also Estate of Neff v. Commissioner, T.C. Memo.

1997-186.

     In the instant case, respondent relies on the settlement

checks which were made out to petitioner's law firm.   The

evidence in the record indicating where the proceeds from those

checks went supports petitioner's explanation that, with certain

exceptions,4 Mr. Yoon converted the proceeds to his own use

without petitioner's knowledge.   We conclude, therefore, that the

settlement checks cashed without petitioner's knowledge did not

constitute income to petitioner within the meaning of section 61.

Cf. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

The Mitsui Manufacturers Bank Client Trust Account

     4
        Petitioner admits that he authorized Mr. Yoon to cash
certain of the disputed checks, namely items 1, 2, 9, 13, 15 and
16. Petitioner contends that although up to one-third of the
gross amount of these checks could constitute gross receipts of
the firm, any such amount was given to Mr. Yoon as compensation.
Petitioner has failed to prove that any amount was paid as
compensation to Mr. Yoon.
                               - 21 -


     Respondent contends that one-third of the gross amounts of

the deposits into the Mitsui account (except for checks totaling

$17,500) represent taxable gross receipts of petitioner's law

practice for the 1991 taxable year.     Petitioner admits, on brief,

that he omitted this income from checks that were deposited into

the Mitsui account.

Yearend Ledger Adjustments

     Respondent determined that petitioner's yearend adjustments

to his general ledger were incorrect.    Petitioner contends that

these adjustments were appropriate to account for amounts held in

his client trust account at the Sumitomo Bank which did not

constitute income to petitioner.   Petitioner contends that

substantial med-pay balances existed in the client trust account

in each of the years at issue.

     Petitioner bears the burden of proving that these

adjustments are appropriate.   Rule 142(a).   Petitioner relies on

his own testimony that there were substantial amounts of funds in

the general ledger which belonged to medical providers and

doctors which support the adjustments.    Petitioner claims that

these adjusting entries are fully supportable in concept and

amount.   We disagree.   In concept, petitioner is correct that not

all of the funds in this account constitute income.    Petitioner's

adjustments excluded 96.8 percent, 84.1 percent, and 91.5 percent

of the yearend client trust account balances in 1989, 1990, and
                                 - 22 -


1991, respectively.      Petitioner, however, has failed to prove

that more than two-thirds of the yearend balances did not

constitute income.      To the extent petitioner's yearend

adjustments exceed two-thirds of the yearend balances, we sustain

respondent's determination.5

Fraud

        The addition to tax or penalty in the case of fraud is a

civil sanction provided primarily as a safeguard for the

protection of the revenue and to reimburse the Government for the

heavy expense of investigation and the loss resulting from a

taxpayer's fraud.      Helvering v. Mitchell, 303 U.S. 391, 401

(1938).      Respondent has the burden of proving, by clear and

convincing evidence, an underpayment for each year and that some

part of the underpayment was due to fraud.      Sec. 7454(a); Rule

142(b).      To satisfy his burden of proof, respondent must show two

things:      (1) An underpayment exists; and (2) the taxpayer

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

conceal, mislead, or otherwise prevent the collection of taxes.

Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).      The mere

failure to report income, however, is not sufficient to establish

fraud.      Switzer v. Commissioner, 20 T.C. 759, 765 (1953).     If

        5
        Except for 1991, if no part of an underpayment for a tax
year is due to fraud, respondent is barred from assessing a
deficiency resulting from the yearend ledger adjustment issue
pursuant to sec. 6501(a). See discussion of limitations period,
infra.
                               - 23 -


respondent establishes that any portion of the underpayment is

attributable to fraud, the entire underpayment is treated as

attributable to fraud and subjected to an addition to tax or

penalty, except with respect to any portion of the underpayment

that the taxpayer establishes is not attributable to fraud.      Sec.

6653(b)(2) for 1988; sec. 6663(b) for 1989 through 1991.

     Fraud is intentional wrongdoing on the part of the taxpayer

with the specific purpose to evade a tax believed to be owing.

McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d

1121 (5th Cir. 1975).   The existence of fraud is a question of

fact to be resolved from the entire record.    Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).    Respondent must meet his

burden through affirmative evidence because fraud is never

imputed or presumed.    Beaver v. Commissioner, 55 T.C. 85, 92

(1970).   A taxpayer's entire course of conduct can be indicative

of fraud.   Stone v. Commissioner, 56 T.C. 213, 223-224 (1971);

Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969).      Furthermore,

a taxpayer's fraudulent original return is not purged by the

filing of a subsequent amended return.    Badaracco v.

Commissioner, 464 U.S. 386, 394 (1984).

A.   Underpayment of Tax

     Respondent did not assert fraud with respect to any part of

the underpayments which we have found for 1990.   We have already
                               - 24 -


concluded that petitioner underpaid his taxes in the 1988, 1989,

and 1991 tax years due in part to unreported income from deposits

into the Mitsui account and unsubstantiated wage deductions for

amounts paid to Mr. Yoon.6   We must now determine whether

petitioner had the requisite fraudulent intent with regard to

these underpayments in 1989 and 1991.

B.   Fraudulent Intent

     Next, respondent must prove that a portion of each

underpayment for 1989 and 1991 was due to fraud.    Professional

Servs. v. Commissioner, 79 T.C. 888, 930 (1982).   The existence

of fraud is a question of fact to be resolved upon consideration

of the entire record.    DiLeo v. Commissioner, 96 T.C. 858, 874

(1991), affd. 959 F.2d 16 (2d Cir. 1992).   Fraud is never

presumed but, rather, must be established by affirmative

evidence.    Edelson v. Commissioner, 829 F.2d 828 (9th Cir. 1987),

affg. T.C. Memo. 1986-223.   Fraud may be proved by circumstantial

evidence because direct proof of the taxpayer's intent is rarely

available.   The taxpayer's entire course of conduct may establish

the requisite fraudulent intent.    Stone v. Commissioner, supra at

223-224.

     6
        Respondent does not assert fraud with respect to the
yearend ledger adjustment. Thus, the only remaining
underpayments as to which respondent is asserting fraud are the
$3,000 cash deposit into the Mitsui account in 1989, the checks
deposited in 1991 into the same account, and the amounts from the
cashed checks that petitioner claims went to Mr. Yoon as
compensation.
                              - 25 -


     Over the years, courts have developed a nonexclusive list of

factors that demonstrate fraudulent intent.   These badges of

fraud include:   (1) Understating income, (2) maintaining

inadequate records, (3) failing to file tax returns, (4)

implausible or inconsistent explanations of behavior, (5)

concealment of income or assets, (6) failing to cooperate with

tax authorities, (7) engaging in illegal activities, (8) an

intent to mislead which may be inferred from a pattern of

conduct, (9) lack of credibility of the taxpayer's testimony,

(10) filing false documents, and (11) dealing in cash.    See Spies

v. United States, 317 U.S. 492, 499 (1943); Douge v.

Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Recklitis v. Commissioner, 91 T.C. 874, 910

(1988).   Although no single factor is necessarily sufficient to

establish fraud, the combination of a number of factors

constitutes persuasive evidence.   Solomon v. Commissioner, 732

F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo.

1982-603.   A taxpayer's intelligence, education, and tax

expertise are also relevant for purposes of determining

fraudulent intent.   See Stephenson v. Commissioner, 79 T.C. 995,

1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984); Iley v.

Commissioner, 19 T.C. 631, 635 (1952).   We note that some conduct

and evidence can be classified under more than one factor.
                              - 26 -


     The list of the badges of fraud, however, is illustrative.

We consider the totality of the facts and circumstances of each

case to determine whether there is fraudulent intent.     King's

Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 516

(1992); Recklitis v. Commissioner, supra.

     Respondent contends that the following facts, taken as a

whole, prove that petitioner had the intent to fraudulently evade

paying income tax on at least some part of the underpayment for

the years in issue:   (1) Petitioner was aware of, and was

receiving the proceeds from, the settlement check cashing; (2) he

was an experienced attorney; (3) he failed to maintain adequate

books and records; (4) he allegedly misled the revenue agent; and

(5) he dealt in cash.

     As to the $88,000 in checks petitioner deposited into the

Mitsui account in 1991, petitioner knew of these checks when his

original and amended tax returns were filed.    Additionally, we

find that petitioner was aware that these checks were omitted

from his return in 1991.   His explanation that they were omitted

due to a breakdown in communication with his accountant is

unpersuasive.   Petitioner may have wanted to conceal the Mitsui

account from his accountant in order to prevent Mr. Yoon from

learning of this account; however, that does not provide

justification for omitting income.     We conclude that respondent

has clearly and convincingly proven fraud with regard to the
                                - 27 -


checks deposited into the Mitsui account in 1991 that represent

income to petitioner.

     As to the $3,000 cash deposit into the Mitsui account in

1989, respondent merely asserts it was fraudulent and discusses

petitioner's alleged check cashing scheme.     Respondent provided

little evidence to meet the burden of proving that any amount of

this underpayment was due to fraud; therefore, we conclude that

respondent has not clearly and convincingly proven fraud with

regard to the $3,000 cash deposit into the Mitsui account in

1989.

     As to the portion of the underpayment attributable to the

amounts petitioner claimed he paid Mr. Yoon as compensation in

1988 and 1989, we find that these amounts were not omitted with

the intent to evade taxes.     We conclude that respondent,

therefore, has not met his burden of proving fraud by clear and

convincing evidence with regard to any of the portion of the

underpayment attributable to amounts petitioner claimed he paid

to Mr. Yoon as compensation in 1988 and 1989.

Statutory Period of Limitations--1988, 1989, and 1990

        Petitioner's returns for 1988, 1989, and 1990 were filed

more than 3 years before the subject notice of deficiency was

mailed on July 7, 1995.     Therefore, assessment of the

deficiencies and additions determined in the notice is barred by

the expiration of the statutory period of limitations on
                              - 28 -


assessments, sec. 6501(a), unless one of the exceptions to the

period of limitations is applicable; see sec. 6501(c).

     As we have found, petitioner did not submit a fraudulent

return with the intent to evade tax for any of the tax years

1988, 1989, or 1990.   Therefore, the exception contained in

section 6501(c)(1) does not apply.

     Respondent bears the burden of proving that the extended

6-year period of limitations specified in section 6501(e) is

applicable to petitioner's 1988, 1989, and 1990 returns.

Davenport v. Commissioner, 48 T.C. 921, 927-928 (1967); Quantz v.

Commissioner, T.C. Memo. 1990-39.    Respondent did not raise the

application of section 6501(e)(1)(A) for the 1988 tax year.    In

an answer to petitioner's amendment to petition, respondent

raised the application of section 6501(e)(1)(A) for the 1989 and

1990 tax years.   Based on our findings regarding the cashed

checks and the yearend ledger adjustments, respondent has failed

to prove that petitioner omitted gross income in excess of 25

percent of the amount of gross income stated on his return.7

Thus, any assessments relating to the 1988, 1989, or 1990 tax

years are barred by the expiration of the period of limitations

on assessment.



     7
        Respondent did not raise the application of sec.
6501(e)(1)(A) in either of respondent's posttrial briefs.
Accordingly, respondent may have intended to abandon this issue.
See Callahan v. Commissioner, T.C. Memo. 1992-132.
                               - 29 -


Delinquency--Section 6651(a)

     Section 6651(a)(1) provides for an addition to tax of 5

percent per month for each month or part of a month for which a

return is late, the aggregate not to exceed 25 percent.

     A taxpayer has a nondelegable duty to file a timely return

but can avoid the addition to tax for failing to do so by

affirmatively showing that the delinquency was due to reasonable

cause and not due to willful neglect.   Sec. 6651(a).   The

taxpayer bears the burden of proving both (1) that the failure

did not result from willful neglect, and (2) that the failure was

due to reasonable cause.   United States v. Boyle, 469 U.S. 241,

245 (1985).   If the taxpayer does not meet this twin burden, the

imposition of the addition to tax is mandatory.    Heman v.

Commissioner, 32 T.C. 479 (1959), affd. 283 F.2d 227 (8th Cir.

1960).

     Respondent determined that petitioner is liable for a 25-

percent addition to tax under section 6651(a)(1) for the 1989 and

1991 tax years.   As we have already found, the 1989 tax year is

closed pursuant to the statute of limitations; therefore, we

confine our discussion of the addition to tax for failure to

timely file to the 1991 tax year.   Petitioner's 1991 Federal

income tax return was filed on October 15, 1992.   There is no

evidence of a request for an extension for the filing of the 1991

return.   Petitioner argues that respondent has failed to
                              - 30 -


establish that an extension was not filed for 1991.    Petitioner,

however, bears the burden of proof on the issue.    Rule 142(a).

     Petitioner further contends that his return preparer

informed him that an extension to file his 1991 return had been

obtained through October 15, 1992.     Therefore, he argues that his

failure to file a timely return was due to reasonable cause.

Reliance on such erroneous advice from a tax preparer is not

reasonable cause.   United States v. Boyle, supra at 247-248.

Moreover, petitioner is an attorney and should have known of his

obligation to file a timely return.    Thus, “when there is no

question that a return must be filed, the taxpayer has a

personal, nondelegable duty to file the tax return when due.”

United States v. Kroll, 547 F.2d 393, 396 (7th Cir. 1977).       The

addition to tax pursuant to section 6651(a)(1) is sustained.

     To reflect the foregoing,

                                                Decision will be

                                           entered under Rule 155.
