                        T.C. Memo. 2011-260



                      UNITED STATES TAX COURT



                MARTIN G. PLOTKIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17775-08.               Filed November 3, 2011.


     Sanford J. Boxerman, for petitioner.

     Michael D. Zima, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes of $108,652, $61,885, $52,397,

$45,490, and $320,852 for tax years 1991, 1992, 1993, 1994, and

1995, respectively, as a result of underreported or unreported

income that should have been reported on Schedule C, Profit or

Loss From Business, and of unpaid self-employment taxes and a
                               - 2 -

disallowed deduction for home mortgage interest for 1991.

Respondent also determined penalties for fraud under section

66631 of $78,447.75, $46,413.75, and $39,297.75 for 1991, 1992,

and 1993, respectively, as well as additions to tax for

fraudulent failure to file under section 6551(f) of $32,980.25

and $232,617.70 for 1994 and 1995, respectively.   Respondent

further determined additions to tax for failure to pay estimated

taxes under section 6654 of $2,343.73 and $17,515.76 for 1994 and

1995, respectively, as well as additions to tax under section

6651(a)(2) of $11,372.50 and $80,213 for 1994 and 1995,

respectively.   Petitioner now claims to be entitled to various

deductions totaling $267,472, $175,323, $124,356, and $111,773

for 1991, 1992, 1993, and 1994, respectively.   Respondent later

conceded that petitioner is not liable for additions to tax under

section 6651(a)(2) or for self-employment taxes for 1995.

Petitioner conceded that he is not entitled to a deduction for

home mortgage interest of $16,000 for 1991.   After concessions,

the issues remaining for decision are:

     (1)   Whether petitioner underreported Schedule C income by

$302,319, $172,081, and $138,490 for 1991, 1992 and 1993,

respectively.   We hold that he did;



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 3 -

      (2)   whether petitioner is entitled to deductions of

$267,472, $175,323, $124,356, and $111,773 for 1991, 1992, 1993,

and 1994, respectively.    We hold that he is not;

      (3)   whether petitioner failed to report Schedule C income

of $135,611 and $805,246 for 1994 and 1995, respectively.     We

hold that he failed to report $135,611 for 1994 and $217,246 for

1995;

      (4)   whether petitioner is liable for self-employment taxes

of $10,247, $10,658, $10,851, and $11,146 for 1991, 1992, 1993,

and 1994, respectively.    We hold that he is;

      (5)   whether petitioner is liable for additions to tax for

failure to pay estimated taxes under section 6654 for 1994 and

1995, respectively.    We hold that he is;

      (6)   whether petitioner is liable for fraud penalties under

section 6663 for 1991, 1992, and 1993, and for fraudulent failure

to file additions to tax under section 6651(f) for 1994 and 1995.

We hold that he is liable for such penalties or additions for

1991, 1992, 1993, and 1994, but not liable for 1995.

                          FINDINGS OF FACT

      At the time the petition was filed, petitioner resided in

Florida.

1.   Background of Petitioner and Corporate Structure

      Petitioner graduated from the University of Pennsylvania,

Wharton School of Business, in 1963 with a bachelor of science
                                - 4 -

degree in economics.    While attending the Wharton School of

Business, petitioner took two accounting classes.    Petitioner

also earned a law degree from St. Louis University in 1972 and

worked as an attorney on corporate cases for about 2-1/2 years.

     Medigroup Enterprises, Inc. (Medigroup Enterprises), was

incorporated in the 1960s by Harvey Friedman, the father of

petitioner’s ex-wife.    During the 1970s, Medigroup Enterprises

purchased several nursing homes which it owned and operated

through related entities.    In 1980 petitioner purchased a

controlling interest in Medigroup Enterprises.    The record is

unclear on several facts relating to Medigroup Enterprises and

its related entities because of evidentiary gaps, multiple

changes in control/ownership of the entities, and similarly named

related entities which were not specifically identified in trial

testimony.   Medigroup Enterprises filed many of its corporate

income tax returns several years late.

     Rolla Health Care Associates, L.P. (RHCA), was a Missouri

limited partnership formed in 1978 to build and operate a nursing

home in Rolla, Missouri (Rolla nursing home).    The Secretary of

the U.S. Department of Housing and Urban Development (HUD) agreed

to insure the mortgage on the Rolla nursing home.

     RHCA was part of a complex and confusing group of

partnerships and corporations related to Medigroup Enterprises.

At the time of its formation in 1978, RHCA had two partners:      The
                                - 5 -

general partner, Rolla Health Care, Inc., which owned a 1-percent

interest in RHCA, and the limited partner, Medigroup, Inc.

(Medigroup), which owned the remaining 99-percent interest.

     Rolla Health Care, Inc., was incorporated in Missouri in

1978 by petitioner, who was the registered agent and vice

president of the corporation.    By 1987 petitioner was the sole

officer and member of the board of directors.    However, between

December 1987 and March 1989, Vernon Ray Lavender (Mr. Lavender)

had become the sole officer and member of the board of directors.

Mr. Lavender was a friend of petitioner and had worked with

petitioner since 1982.

     Medigroup was related to, but separate from, Medigroup

Enterprises.    Petitioner was the sole director and member of the

board of directors in 1987.    Just as with Rolla Health Care,

Inc., Mr. Lavender became the sole officer and member of the

board of directors of Medigroup between December 1987 and March

1989.

     During 1982 Medigroup sold its 99-percent stake in RHCA to

Lee Kling, a St. Louis businessman.     In 1986 Mr. Kling sold his

99-percent stake in RHCA to Health Facilities Investment Co.,

Ltd. (Health Facilities), a limited partnership formed by

petitioner.    In 1990 petitioner changed the name of Health

Facilities to Autumn Years Investments, L.P. (Autumn Years).

Also in 1990, the 1-percent general partnership interest in RHCA
                               - 6 -

was reallocated among Rolla Health Care, Inc., Medigroup, and Mr.

Lavender.   In 1991 the interests of Medigroup and Mr. Lavender in

RHCA converted from general partnership interests to limited

partnership interests.   This change did not affect Autumn Years’

99-percent limited partnership interest in RHCA.

     At some time not clear from the record, Medigroup came under

the ownership of KSFS Investment Co. (KSFS), a holding

corporation whose stock was owned by petitioner.   Petitioner then

sold his KSFS stock to Mr. Lavender for $500 in 1987.    While

petitioner estimated the value of the KSFS stock between $100,000

and $150,000, petitioner claims to have gone through with the

deal because it allowed him to place the responsibility of

running the nursing home business upon Mr. Lavender.    At trial,

Mr. Lavender admitted that during his business relationship with

petitioner, Mr. Lavender embezzled significant amounts of money

from RHCA and related businesses.

     Petitioner made each of his three children a 25-percent

partner in Autumn Years.   Other partners included Eva Sue Faenger

(Ms. Faenger), petitioner’s ex-girlfriend, with a 20-percent

share, Lynn Plotkin, petitioner’s ex-wife, with a 4-percent

share, KSFS with a .8-percent share, Medigroup Care Centers, Inc.

(another company related to Medigroup Enterprises), with a .1-

percent share, and Management & Development Associates, Inc. (of

which petitioner was the sole shareholder), with a .1-percent
                                 - 7 -

share.   As of January 2001, the three children were unaware that

they were members of the partnership.       Lynn Plotkin was also

unaware she was a partner.    Petitioner signed for Lynn Plotkin on

the partnership formation documents as her custodian, even though

she has never had a custodian.    Petitioner never drafted

Schedules K-1, Shareholder's Share of Income, Deductions,

Credits, etc., for the partners.    From 1991 to 1994, petitioner

also failed to draft financial statements, prepare partnership

tax returns, or observe other partnership formalities with

respect to Autumn Years.

      On numerous occasions petitioner wrote himself checks on

Autumn Years’ accounts, using the funds to pay personal expenses.

Petitioner also wrote checks on Autumn Years’ account to various

family members and other entities.       From 1991 to 1994, Autumn

Years received funds from various entities with ties to

petitioner, as described below.

2.   Lease Between RHCA and Professional TLC

      Ms. Faenger and petitioner had a personal relationship from

approximately 1985 to 1990.   Ms. Faenger worked in the nursing

home business and had experience operating a nursing home.

      Petitioner helped Ms. Faenger incorporate Professional TLC,

Inc. (Professional TLC), by drafting and filing the articles of

incorporation and having Ms. Faenger sign the documents.       The

plan was for Professional TLC to lease the Rolla nursing home
                               - 8 -

from RHCA, after which Ms. Faenger would operate the nursing home

without interference by petitioner and pay rent to RHCA.     The

lease provided for monthly rent of $45,000 in the year beginning

September 1, 1990, with yearly increases of $425.   The amount of

these rental payments was decided by petitioner, and he was the

only party Ms. Faenger dealt with before signing the lease.     The

personal relationship between Ms. Faenger and petitioner had

either ended or was in the process of ending at the time the

lease was entered into in August 1990.

     Professional TLC made the required monthly rent payments

under the lease but did not always pay rent directly to RHCA.

Many times Mr. Lavender would call Ms. Faenger and tell her that

petitioner wanted a portion of that month’s rent payment to be

made to a different entity.   Autumn Years received some payments

directly from Professional TLC.   Some checks written by

Professional TLC to RHCA were endorsed over to Autumn Years, and

sometimes the rent payments went to KSFS before KSFS would write

a check or wire funds to Autumn Years.   Autumn Years also

received funds from La Mancha Properties, Inc., a corporation

incorporated by Mr. Lavender which had financial ties to RHCA.

Some of the lease payment funds also ended up with Quixoti Corp.

(Quixoti), a corporation owned by petitioner whose funds were

used in part for petitioner’s personal expenses and which filed

its 1991 income tax return several years late.   Autumn Years
                                 - 9 -

received funds from other companies with ties to petitioner as

well.

     RHCA failed to file partnership income tax returns for 1991

to 1994.     At some point, RHCA stopped making its mortgage

payments on the Rolla nursing home.      In 1994 HUD demanded

Professional TLC begin paying the entire lease payment directly

to HUD.     Following the advice of her attorney, Ms. Faenger

instead made all the lease payments to an escrow account which

was paid over to RHCA upon the sale of the Rolla nursing home in

1995 (the sale of the Rolla nursing home is discussed further

below).     As a result of RHCA’s failure to make mortgage payments

on a loan which HUD had insured, Mr. Lavender was convicted of

theft of public money.     As part of a plea agreement, Mr. Lavender

agreed to cooperate with the Government in civil and criminal

actions taken against petitioner.

     3.     Payments to Lynn Plotkin, Home Mortgage Interest and
            Property Taxes, and Business Expenses

     A.     Payments to Lynn Plotkin

     Petitioner seeks to deduct payments made to his ex-wife

during 1991 to 1994, which petitioner claims he made as a result

of a corporate obligation he personally guaranteed.

     Petitioner and Lynn Plotkin entered into a Stipulation for

Property Settlement, Child Custody, Child Support, Maintenance,

Attorney’s Fees and Court Costs (divorce agreement) in January of

1984.     Pursuant to the divorce agreement, petitioner agreed to
                                - 10 -

pay various amounts to Lynn Plotkin, including $75 per month per

child for child support, $7,000 per year per child for schooling

and summer programs (including 4 years of college), religious

membership fees and celebration expenses, a share of the

children’s medical expenses not covered by insurance, attorney’s

fees, and court costs.   Because of ambiguous language in the

divorce agreement, it is unclear when the obligation to pay the

$75 per month support obligation was to end.    Petitioner also

agreed to pay off any notes secured by the home in which he and

Lynn Plotkin had lived and to repay Lynn Plotkin should she pay

any of these amounts herself.    Petitioner forfeited any rights he

had in the home and agreed to provide health insurance for each

of the three children through his or her 22d birthday, as well as

to cause a corporation to enter an agreement to buy Lynn

Plotkin’s interest in the Caring Group, Inc. (a corporation whose

stock she owned), for $1,100,000.

     In October 1983, in anticipation of the divorce agreement,

Lynn Plotkin and Quixoti entered into an agreement whereby

Quixoti promised to buy Lynn Plotkin’s stock in the Caring Group,

Inc., for $1,100,000.    Of the $1,100,000 total price, $800,000

(plus interest) was to be paid in monthly installments of $11,462

from March 1985 to October 1993 (the guaranteed Quixoti

payments).   Petitioner personally guaranteed these monthly

payments.
                               - 11 -

     Petitioner made multiple payments to Lynn Plotkin in 1991,

1992, 1993, and 1994 which totaled $62,600, $60,000, $40,100, and

$31,000, respectively.   No single payment was equal to the agreed

monthly installment amount of $11,462; the largest was $10,000

and the second largest was $5,000.      The payments did not specify

whether they were part of the guaranteed Quixoti payments or for

some other obligation petitioner owed Lynn Plotkin.     Many of the

checks to Lynn Plotkin had no notation on them, while the

notation on others appears to read only “N/P”.

     Petitioner failed to maintain health insurance for the

children and also failed to pay off the outstanding notes on Lynn

Plotkin’s home, as required by the divorce agreement.     Lynn

Plotkin paid the notes off herself, and petitioner was required

to indemnify her for these payments under the divorce agreement.

The amounts petitioner owed Lynn Plotkin for other obligations

beside the guaranteed Quixoti payments during 1991, 1992, 1993,

and 1994 were not established.    During at least part of the

period from 1991 to 1994 each of the children was under the age

of 22 and in college.    Petitioner paid all or most of the older

two childrens’ tuition; however, Lynn Plotkin’s family paid the

entire tuition of the youngest child.

     B.   Home Mortgage Interest and Property Taxes

     At one point during their personal relationship, petitioner

and Ms. Faenger had plans to get married and move into a home
                              - 12 -

together.   To this end, they bought land in Rolla, Missouri, and

began to build a home on the property.   The property was titled

in Ms. Faenger’s name in April 1988 although the $44,000

downpayment on the land was paid by petitioner.   Petitioner and

Ms. Faenger borrowed money to build the house and became jointly

and severally liable on a note for $425,000 from the American

Bank of Rolla (American Bank) on May 16, 1989.    Petitioner made

the loan payments.

     In 1991, 1992, and 1993 petitioner paid interest on the loan

financing construction of the home of $49,543, $39,271, and

$41,282, respectively.   In addition, petitioner estimates he paid

interest of $40,000 during 1994.    In 1991 he paid property taxes

of $3,270 on the land.   Petitioner now seeks deductions for home

mortgage interest and property taxes paid.

     C.   Other Business Expenses

     Petitioner claims that he incurred various legal expenses in

connection with his business operations.   One of Autumn Years’

accounts shows several checks written to Charles Merz, Esq. (Mr.

Merz), who petitioner testified represented “both myself and the

companies in several lawsuits that had been filed”.

     Petitioner claims that he made payments to Mr. Lavender and

his companies.   Multiple checks were written to Mr. Lavender out

of an Autumn Years account in 1991 and 1992 although the purpose

of these payments was not established.
                                - 13 -

     Petitioner claims he made a payment pursuant to a personal

guaranty to Burnett Schwartz from a 1980s business transaction.

A transfer was made to Mr. Schwartz out of an Autumn Years

account in November 1991 with a notation that is mostly illegible

but appears to read “HFTC” in part.      The business purpose of the

payments was not established.

     Petitioner claims that he made many payments to American

Bank as personal guarantor of a loan to RHCA.     Many checks were

written to American Bank out of an Autumn Years account with

notations such as “Rolla Health Care” or “RHCA”.

     Petitioner claims that he incurred expenses in connection

with assisting Kenneth Lohse in developing an auto repair

business, and many checks were written to auto repair businesses

out of an Autumn Years account.    Petitioner also testified that

he considered the payments a loan; however, nothing was written

down.

     Petitioner claims that he had various other expenses, such

as maintaining his law license, Federal Express shipping costs,

and office supply costs.   Various checks were written out of an

Autumn Years account to the Missouri Supreme Court, the Missouri

Bar Association, the Missouri Department of Revenue, Federal

Express, and Office Depot.   Petitioner testified he used Federal

Express to send items such as checks to Lynn Plotkin.     Petitioner

did not work as a lawyer during 1991 to 1994.
                                  - 14 -

     Petitioner claims that during 1991 he made payments to

Quixoti so that Quixoti could pay its own business obligations.

Several checks from 1991 were written to Quixoti out of an Autumn

Years account.

     Petitioner claims that in the course of business he incurred

automobile repair expenses.       Petitioner did all his traveling by

car, and “on occasion” went to see Mr. Lavender by car.       Several

checks were written to various auto repair shops out of an Autumn

Years account.

     Petitioner also seeks to deduct bank fees of $428 and $223

for 1993 and 1994, respectively.      The schedule of checks for an

Autumn Years account shows that during 1993 and 1994 there were

several overdraft charges, activity service charges, and other

such charges.

4.   Sale of the Rolla Nursing Home

     A.     $588,000 Commission

     Once RHCA stopped making payments on the Rolla nursing home

mortgage insured by HUD, HUD threatened to foreclose on the

property.     HUD eventually set a foreclosure sale for July 14,

1995.     To avoid foreclosure, petitioner and Mr. Lavender

subsequently attempted to sell the Rolla nursing home.

     Petitioner lived with his girlfriend, Barbara Nemec (Ms.

Nemec), at the time.     Ms. Nemec was a registered dietician who

provided nutrition consulting services to various nursing homes.
                               - 15 -

Petitioner and Ms. Nemec had known each other since 1986 or 1987,

and their personal relationship began in 1992 or 1993.

     When Ms. Nemec learned the Rolla nursing home was to be

sold, she expressed interest in trying to find a buyer.    Although

Ms. Nemec had no prior real estate experience, her brother, Bob

Nemec, had significant real estate experience as owner of a

brokerage business.   Ms. Nemec incorporated LTC Brokers &

Consultants, Inc. (LTC), in Illinois on May 23, 1995, becoming

the president and sole shareholder.     LTC also employed Bob Nemec.

Ms. Nemec also incorporated LV Castle Investment Group, Inc.

(LV), in Illinois to act as the parent corporation of LTC.

     In January 1995 RHCA executed several documents with LTC

(which had not yet been incorporated at the time).    Mr. Lavender

signed the documents on behalf of RHCA and Ms. Nemec signed on

behalf of LTC.   The documents authorized LTC to act as RHCA’s

agent for the purpose of selling the Rolla nursing home and

entitled LTC to a base commission of 10 percent of the selling

price.   In addition to the base commission, LTC would receive an

extra 2 percent in return for LTC’s obtaining, at its own

expense, all necessary studies, analyses, and other information

in connection with the sale.   The documents also called for LTC

to receive an additional 2 percent in return for LTC’s agreement

that its arrangement with RHCA was nonexclusive and that LTC
                               - 16 -

would receive no compensation if RHCA sold the facility itself or

through another broker.

     Mr. Lavender testified that he thought the initial brokerage

fee was to be around 2 or 3 percent, which was increased “just

prior to the sale”.   He further testified that petitioner wanted

as large a commission as possible, because the commission was the

means by which petitioner would be taking his slice of the

proceeds.   At the criminal trial Mr. Lavender testified that he

thought the brokerage fee was originally to be around 4 or 5

percent.

     Ms. Nemec found a buyer for the Rolla nursing home, American

Capital Corp. (American), and Ms. Nemec and Bob Nemec worked to

complete the sale, incurring expenses on behalf of LTC.   In June

1995 RHCA and American closed on the sale of the Rolla nursing

home for $4.2 million.    RHCA’s ownership of the Rolla nursing

home terminated June 30, 1995.

     Mr. Lavender asked petitioner what should be done with the

over $1 million in net proceeds which RHCA received as a result

of the sale.   Petitioner told Mr. Lavender to use the proceeds to

repair Mr. Lavender’s financial situation and make himself whole.

     As a result of the sale, LTC received $588,000 in

commissions via checks which were deposited into LTC’s bank

account on July 3, 1995.    Following the sale of the Rolla nursing

home, LTC purchased property in Umatilla, Florida.   A month or
                                - 17 -

two after LTC purchased the property, title was transferred to

Ms. Nemec.    Ms. Nemec and petitioner moved into a home on the

property and continue to live there together.

     The State of Illinois dissolved both LTC and LV on October

1, 1996, for failing to file annual reports or pay annual

franchise taxes.    The sale of the Rolla nursing home was the only

real estate LTC or LV ever sold.    LTC and LV reported $602,962 in

gross income on their consolidated corporate income tax return

for the fiscal year ending June 30, 1996, which was not filed

until June 2001.    The return was prepared by Charles Bratkowski,

a certified public accountant.    Ms. Nemec asked petitioner to

assist Mr. Bratkowski in preparing the return; petitioner did

although the extent of his assistance is unclear.    LV’s

consolidated return reflected gross receipts of $602,962, costs

of sales of $293,139, various other deductions of $143,221, and

taxable income of $166,602.

     B.    $245,000 Payment to American Bank

     A separate issue arose with regard to a $245,000 payment

RHCA made to American Bank after the sale of the Rolla nursing

home.     Respondent claims that the $245,000 was, in part, used to

pay off petitioner’s liability on the loan petitioner and Ms.

Faenger had taken out from American Bank to build the home in

Rolla.     The home (which may not have been completed at the time)

was sold in December 1993, with amounts remaining unpaid on the
                              - 18 -

$425,000 loan.   Ms. Faenger borrowed $30,000 from her mother and

paid that amount to American Bank to be released from liability

on the loan, although petitioner still remained liable.

     RHCA had taken out a loan of $115,000 from American Bank in

December 1990 and was scheduled to pay back such loan over 48

months in installments of $3,028, with the last payment being

made in December 1994.   On June 30, 1995, RHCA paid American Bank

$245,000 out of the sale proceeds.     On the same day, amounts of

$12,729.22, $1,112.43 and $13,912.59 were credited to RHCA’s

balance, reducing the amount outstanding to zero.    Respondent

contends the remaining $217,246 was used to pay off petitioner’s

remaining liability on the $425,000 home construction loan.

     Petitioner’s remaining liability on the loan was paid off at

some unknown point.   Although in this case Ms. Faenger testified

she did not know how it was paid off, during the criminal trial

she testified that it was paid out of the proceeds of the nursing

home sale.   The amount of petitioner’s remaining liability at the

time the $245,000 was paid to American Bank was not established.

5.   Other Information

     Petitioner did not file his 1991, 1992, or 1993 Federal

income tax return until August 1994 and had no reason for the

delay.   The 1991 return included “other income” of $46,560 and

taxable income of $19,680.   Quixoti’s 1991 corporate income tax

return reported $46,560 as a “compensation of officers” expense.
                                - 19 -

The 1992 return included “other income” of $34,269 and taxable

income of $23,519.     The 1993 return included “other income” of

$24,360 and taxable income of $13,610.     Management & Development

Associates, Inc.’s 1992 and 1993 corporate income tax returns

reported “compensation of officers” expenses of $34,269 and

$24,360, respectively.     Petitioner never filed an income tax

return for 1994 or 1995.     Petitioner made no estimated tax

payments for tax years 1994 and 1995 and paid no self-employment

taxes for 1991 through 1994.

      In 1999 petitioner was indicted on three willful violations

of section 7206(1)--one count with respect to each of his income

tax returns for the years 1991, 1992, and 1993.     The U.S.

District Court for the Eastern District of Missouri convicted

petitioner on each count, finding that petitioner willfully

reported his income falsely for 1991, 1992, and 1993.

      On April 22, 2008, respondent issued a notice of deficiency

to petitioner for tax years 1991, 1992, 1993, 1994, and 1995.

Petitioner timely filed a petition contesting the deficiencies,

additions to tax, and penalties.

                                OPINION

I.   Burden of Proof

      Generally, taxpayers bear the burden of proving, by a

preponderance of the evidence, that the determinations of the

Commissioner in a notice of deficiency are incorrect.     Rule
                               - 20 -

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).    Deductions

are a matter of legislative grace, and a taxpayer bears the

burden of proving entitlement to any claimed deductions.      Rule

142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

However, on several issues in this case petitioner argues that

the burden of proof should be placed on respondent.    We will

address these arguments below in conjunction with the related

issues.

II.   Whether Petitioner Underreported or Failed To Report
      Schedule C Income for 1991-94

      Respondent argues that the money deposited into Autumn Years

and Quixoti accounts from 1991 to 1994 should be included as

petitioner’s Schedule C income.    Petitioner makes several

counterarguments detailed below.

      A.   Burden of Proof

      Petitioner argues that respondent bears the burden of

proving that petitioner has deficiencies for 1991 to 1994 because

respondent’s determinations for those years were arbitrary and

erroneous.    See, e.g., Jackson v. Commissioner, 73 T.C. 394

(1979).    Petitioner claims that Autumn Years is in fact a sham

corporation and that it has no separate identity from that of

petitioner.    As a result, petitioner argues that Autumn Years’

99-percent limited partnership interest in RHCA should be imputed

to petitioner.    This would have the effect of making the amounts

petitioner received not Schedule C income but rather
                                - 21 -

distributions made by RHCA to a partner since the funds Autumn

Years received came to it as a holder of a partnership interest

in RHCA.    Such distributions would be taxable only to the extent

they exceeded petitioner’s basis in his interest in RHCA.

Petitioner concludes that because the notice of deficiency

treated all funds received by Autumn Years as Schedule C income

to petitioner, rather than as partnership distributions,

respondent’s determinations are arbitrary and erroneous and that

the burden of proof is therefore placed on respondent.    We

disagree.

     Petitioner was not a partner in either Autumn Years or RHCA.

Petitioner cites no legal authority for his claim that he should

be considered to own Autumn Years’ 99-percent limited partnership

interest in RHCA.    The Supreme Court has observed that while a

taxpayer is free to organize his affairs as he chooses, once

having done so he must accept the tax consequences of his choice,

whether contemplated or not.     Commissioner v. Natl. Alfalfa

Dehydrating & Milling Co., 417 U.S. 134, 149 (1974).     Petitioner

could have made himself a partner of RHCA but chose not to.

Petitioner cannot now benefit by redefining the role he created.

Accordingly, we find the burden of proof remains on petitioner.

     B.     Period of Limitations for Years 1991-93

     With respect to 1991, 1992, and 1993, petitioner contends

that the normal 3-year period of limitations to issue a notice of
                               - 22 -

deficiency under section 6501(a) has expired.    Respondent argues

section 6501(c)(1) applies because petitioner’s 1991, 1992, and

1993 income tax returns were fraudulent and the tax may therefore

be assessed at any time.    For reasons stated below, we find that

petitioner’s returns for 1991, 1992, and 1993 were fraudulent.

See infra pp. 39-44.    Taxes for these years may therefore be

assessed at any time.

     C.   Payments to Autumn Years and Quixoti Accounts From
          Various Entities

     Respondent contends that all payments made into Autumn Years

and Quixoti accounts from 1991 to 1994 constitute Schedule C

income to petitioner.    Petitioner does not dispute the fact that

the funds deposited into those accounts are his.    However,

petitioner argues that those funds are not Schedule C income;

rather, the funds are partnership distributions to petitioner

from RHCA, taxable only to the extent they exceeded petitioner’s

basis in his interest in RHCA.    To this end, petitioner again

claims that Autumn Years is in fact a sham corporation and that

Autumn Years’ 99-percent limited partnership interest in RHCA

should be imputed to petitioner.    However, for the same reasons

stated hereinabove, we find that petitioner does not hold a 99-

percent limited partnership interest in RHCA.    See supra p. 21.

Therefore, the funds deposited into the accounts of Autumn Years

and Quixoti did not constitute partnership distributions to

petitioner because petitioner was not a partner of RHCA.
                                 - 23 -

     Petitioner would have us believe that Mr. Lavender, not

petitioner, ran RHCA and made payments to Autumn Years/petitioner

as the holder of a 99-percent limited partner interest.    While we

do believe Mr. Lavender had some control over RHCA (as he was

able to embezzle significant amounts of money from RHCA and was

convicted of theft of public money when RHCA stopped making

mortgage payments on a loan which HUD had insured), we find that

petitioner also had a significant amount of operational control

over RHCA and was integral in the running of RHCA.    Not only was

petitioner active in carrying on the major business of RHCA

(negotiating the lease agreement with Ms. Faenger and

Professional TLC, looking for a buyer of the Rolla nursing home

before LTC found a buyer), he also told Mr. Lavender what to do

with the lease payments made to RHCA from Professional TLC and

told Mr. Lavender to make himself whole from the proceeds of the

sale of the nursing home.   Petitioner was also able to steer

funds from RHCA to American Bank in 1995 to pay off petitioner’s

liability for a home construction loan on which petitioner was

liable.   See infra pp. 37-38.    We therefore find the payments to

petitioner were made as a result of his work in carrying on the

business of RHCA and related entities.

     Instead of taking possession of the funds directly from

RHCA, petitioner diverted the funds through various entities into

the accounts of Autumn Years and Quixoti, which he fully
                                - 24 -

controlled.     Income is taxable to the taxpayer who earns it.

Lucas v. Earl, 281 U.S. 111, 114-115 (1930).     When a taxpayer

assigns income to a nominee partnership he controls, he is

taxable on the income.     Levitt v. Commissioner, T.C. Memo. 1995-

464, affd. without published opinion 101 F.3d 691 (3d Cir. 1996).

We conclude that respondent properly included the payments into

the accounts of Autumn Years and Quixoti in petitioner’s Schedule

C income for 1991, 1992, 1993, and 1994.

     D.   Other Deductions

     Petitioner claims that he was entitled to additional

deductions from income.

           1.    Payments to Lynn Plotkin

     Petitioner made multiple payments to Lynn Plotkin in 1991,

1992, 1993, and 1994 which totaled $62,600, $60,000, $40,100, and

$31,000, respectively.     Petitioner claims all of these payments

went towards paying the $11,462 monthly payment Quixoti was

required to pay to Lynn Plotkin, amounts petitioner personally

guaranteed.     Petitioner claims such amounts are therefore

deductible under section 162(a) as ordinary and necessary

business expenses.     Section 162(a) provides that, in general,

“There shall be allowed as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.
                              - 25 -

     We disagree with petitioner.    Petitioner failed to establish

what obligations to Lynn Plotkin the payments were being made

toward.   Petitioner not only owed Lynn Plotkin for the guaranteed

Quixoti payments; he also owed her money as a result of his

indemnification of her payments on outstanding notes on her home.

The payments to Lynn Plotkin may have also been made toward

providing the children with health insurance, which petitioner

failed to supply as had been required by the divorce agreement.

The money may have also gone toward paying the $7,000 tuition

obligation for the youngest child, whose tuition was paid

entirely by Lynn Plotkin’s family.     The money may have also gone

toward paying the $75 per child per month support obligation or

any other items petitioner may have been responsible for, such as

medical expenses.   Check notations did not specify what

obligation the payments were being made toward.

     Not only did evidence not establish what obligations the

payments were being made toward; the amounts of the individual

payments do not support a conclusion that they were being made

toward the guaranteed Quixoti payments.    No single payment was

equal to the agreed monthly installment amount of $11,462; the

largest was $10,000 and the second largest was $5,000.

     We conclude that petitioner has not met his burden of

proving that the payments to Lynn Plotkin were expenses paid in
                                - 26 -

carrying on a trade or business.     Therefore, petitioner may not

deduct those amounts under section 162(a).

     2.    Home Interest and Property Taxes

     Petitioner claims section 163 deductions for interest paid

on the loan financing the construction of the house petitioner

planned to live in with Ms. Faenger.     Petitioner also claims a

section 164 deduction for property taxes paid on the property in

1991.     In 1991, 1992, and 1993 petitioner paid interest on the

loan of $49,543, $39,271, and $41,282, respectively.      In

addition, petitioner estimates he paid interest of $40,000 during

1994.     In 1991 petitioner paid property taxes of $3,270 on the

land.

     Section 163(h)(2)(D) allows a deduction for qualified

residence interest.     A “qualified residence” is the taxpayer’s

principal residence or one other residence of the taxpayer which

is selected by the taxpayer for purposes of the deduction and

which is used by the taxpayer as a residence within the meaning

of section 280A(d)(1).     Sec. 163(h)(4)(A).   Effective for tax

years beginning in 1987, section 1.163-10T, Temporary Income Tax

Regs., 52 Fed. Reg. 48410 (Dec. 22, 1987), allows a taxpayer to

treat a residence under construction as a qualified residence for

a period of up to 24 months, but only if the residence becomes a

qualified residence at the time the residence is ready for

occupancy.
                              - 27 -

     Under sections 280A(d) and 163(h)(4)(A), the home may have

been considered a qualified residence had petitioner or Ms.

Faenger lived in the home.   However, there was no testimony or

other evidence that petitioner or Ms. Faenger ever lived in the

home or that the home was completed by the time it was sold in

December 1993.   Since there is no evidence to support that the

home ever became a qualified residence of petitioner, we find

petitioner has not proven his entitlement to deductions under

section 163(h)(2) for qualified residence interest.

     Section 164 allows a deduction for certain taxes, including

State and local real property taxes.   In general, taxes are

deductible only by the person upon whom they are imposed.    See

Tuer v. Commissioner, T.C. Memo. 1983-441; sec. 1.164-1(a),

Income Tax Regs.   However, we have held that taxpayers who do not

hold legal title to property but who establish they are equitable

owners of the property are entitled to deduct property taxes they

paid for the property.   Daya v. Commissioner, T.C. Memo.

2000-360; Trans v. Commissioner, T.C. Memo. 1999-233.

     Ms. Faenger held legal title to the house and was therefore

the person upon whom the property tax was imposed.    Petitioner

did not argue that he was the equitable owner of the house.

Therefore, we find petitioner has not established his entitlement

to a deduction for the property taxes paid.
                                - 28 -

3.   Business Expenses

      Petitioner claims a number of other section 162(a) business

expense deductions.

      Petitioner claims deductions for legal expenses in

connection with his business operations.      Petitioner means to

prove such expenses by a showing that several checks were written

to Charles Merz, Esq., whom petitioner testified represented

“both myself and the companies in several lawsuits that had been

filed.”    However, no evidence was offered as to what business

operations the lawsuits related to.      There was also no

explanation of why petitioner was paying these expenses out of an

Autumn Years account he used for personal expenditures, rather

than company accounts, or why the companies were not claiming the

deductions themselves.    Finally, petitioner did not explain why

the lawyer was representing both petitioner and the companies

jointly.    Given such a dearth of supporting evidence, we find

petitioner has not proven entitlement to a section 162(a)

deduction for legal expenses.

      Petitioner claims deductions for payments made to Mr.

Lavender and his companies in 1991 and 1992.      However, the

business purpose of the payments was not established.        Therefore,

we find petitioner has not proven entitlement to a section 162(a)

deduction for these payments.
                                - 29 -

     Petitioner claims a deduction for a payment he made to

Burnett Schwartz pursuant to a personal guaranty, from a 1980s

business transaction.   However, no evidence substantiating the

guaranty or the business purpose of the payment was produced.

Therefore, we find petitioner has not proven entitlement to a

section 162(a) deduction for this payment.

     Petitioner claims a deduction for payments made to American

Bank as personal guarantor of a loan made to RHCA.       Petitioner

did make many payments to American Bank out of an Autumn Years

account, with notations such as “Rolla Health Care” and “RHCA”.

However, petitioner failed to produce any evidence that he was

the guarantor of any such loan made to RHCA, or that such

payments were made for the purpose petitioner claimed.       We find

petitioner has not proven entitlement to a section 162(a)

deduction for these payments.

     Petitioner claims a deduction for expenses in connection

with assisting Kenneth Lohse in developing an auto repair

business.   Several checks were written on an Autumn Years account

to various car repair dealerships.       However, petitioner also

testified that he considered the payments a loan.       In addition,

other evidence relating to the purpose of the payments was not

produced.   Therefore, we find petitioner has not proven

entitlement to a section 162(a) deduction for these payments.
                               - 30 -

     Petitioner claims deductions for various other expenses,

such as maintaining his law license, Federal Express shipping

costs, and office supply costs.    Various checks were written on

an Autumn Years account to the Missouri Supreme Court, the

Missouri Bar Association, the Missouri Department of Revenue, and

Federal Express.    One check was written to Office Depot.

However, petitioner did not establish a business purpose with

respect to the Office Depot payment, and we therefore find he has

not proven entitlement to a section 162(a) deduction for that

payment.    Petitioner testified he used Federal Express to send

items such as checks to Lynn Plotkin, and we have already found

petitioner is not entitled to section 162(a) deductions for the

payments to Lynn Plotkin.    Petitioner did not work as a lawyer

during 1991 to 1994.    Therefore, the payments made to Federal

Express and for law license fees were not expenses paid or

incurred in carrying on a trade or business, and we find

petitioner is not entitled to section 162(a) deductions for those

payments.

     Petitioner claims deductions for payments made to Quixoti in

1991 so that Quixoti could pay its own business obligations.

Several checks from 1991 were written to Quixoti out of an Autumn

Years account.    However, the business purpose of the payments was

not established.    In addition, Quixoti funds were used in part to

pay personal expenses of petitioner.    Therefore, we find
                                - 31 -

petitioner has not proven entitlement to a section 162(a)

deduction for these payments.

     Petitioner claims deductions for automobile repair expenses

incurred in the course of business travel.   Petitioner did all

his traveling by car and “on occasion” went to see Mr. Lavender

by car.   Several checks were written to various auto repair shops

on an Autumn Years account.   However, no other evidence was

produced and no portion of the payments was listed as personal

expenses.   We find petitioner has not proven entitlement to a

section 162(a) deduction for these payments.

     Petitioner claims deductions for bank fees of $428 and $223

for 1993 and 1994, respectively.    The schedule of checks from an

Autumn Years account shows that during 1993 and 1994 there were

several overdraft charges, activity service charges, and other

such charges.   However, the business purpose of the charges was

not established.   Therefore, we find petitioner has not proven

entitlement to a section 162(a) deduction for these charges.

     E.   Conclusion on 1991-94 Income

     We sustain respondent’s determinations that petitioner

underreported Schedule C income for 1991, 1992 and 1993 by

$302,319, $172,081, and $138,490, respectively.   We also sustain

respondent’s determinations that petitioner failed to report

Schedule C income for 1994 of $135,611.   In addition, we find

petitioner is not entitled to the various deductions he claims.
                                - 32 -

III.    Whether Petitioner Is Liable for Self-Employment Taxes for
        1991-94

       Respondent argues that petitioner is liable for self-

employment taxes for 1991 through 1994.     Every individual is

subject to tax equal to 15.3 percent of net earnings from self-

employment, subject to certain limits on income.      Secs. 1401 and

1402.    “Net earnings from self-employment” includes income

derived by an individual from carrying on a trade or business and

the distributive share of income or loss from any trade or

business carried on by a partnership of which the individual is a

member.    Sec. 1402(a).   An exception exists for distributive

shares of any item of income or loss of limited partners.      Sec.

1402(a)(13).

       Petitioner’s sole argument is that Autumn Years has no

separate identity from that of petitioner and that he should

therefore be deemed to hold a 99-percent limited partnership

interest in RHCA and be entitled to the section 1402(a)(13)

exception from self-employment taxes.     For the same reasons

previously stated, we reject petitioner’s theory that he is a

limited partner in RHCA.     See supra p. 21.

       Petitioner was not a partner in RHCA.    In addition,

petitioner helped to carry on the business of and had a

significant amount of operational control over RHCA; he

negotiated the lease agreement with Ms. Faenger and Professional
                               - 33 -

TLC, told Mr. Lavender which companies the lease payments should

be made to and attempted to find a buyer for the Rolla nursing

home before LTC did.   As a result of his work, petitioner was

paid by RHCA (which he attempted to disguise using various

entities).   We find petitioner does not fall under the limited

partner exception and is subject to self-employment taxes for

1991, 1992, 1993, and 1994 of $10,247, $10,658, $10,851, and

$11,146, respectively.

IV.   Whether Petitioner Failed To Report Schedule C Income for
      1995

      A.   Burden of Proof

      Petitioner argues that respondent bears the burden of

proving that petitioner has a deficiency for 1995 because

respondent’s determination for that year was a naked assertion

and therefore arbitrary and erroneous.    It is true that

respondent cannot “‘rely solely upon the naked assertion that

* * * [petitioner] received a certain amount of unreported

income’” and that a “‘naked assessment without any foundation is

arbitrary and erroneous’”.    Senter v. Commissioner, T.C. Memo.

1995-311 (quoting Portillo v. Commissioner, 988 F.2d 27, 29 (5th

Cir. 1993)); see also United States v. Janis, 428 U.S. 433, 441

(1976).    Petitioner argues respondent presented no substantive

evidence on this issue to support respondent’s deficiency claim.

We disagree.
                              - 34 -

     Respondent’s determination is supported by the closing

documents from the sale of the Rolla nursing home, checks and

statements from the closing and from Barbara Nemec and LV Castle,

Inc., American Bank loan documents, and testimony from petitioner

and Ms. Nemec.   We find this is substantive evidence to support

respondent’s deficiency determination and that no naked assertion

was made.   The burden of proof therefore remains with petitioner.

     B.   $588,000 Commission Paid by RHCA to LTC

     Respondent claims the $588,000 commission paid to LTC from

RHCA after the sale of the Rolla nursing home was a tax-avoidance

scheme set up by petitioner and that the funds should be imputed

to petitioner.   In support of his argument respondent relies on

(1) Mr. Lavender’s testimony that petitioner used the commission

as a means to take his slice of the sale; (2) events surrounding

the incorporation and dissolution of LTC and LV; (3) petitioner’s

assistance in the preparation of the LV consolidated tax return;

(4) the fact that the proceeds were used to buy a house where

petitioner now resides; and (5) petitioner’s history of using

nominees to disguise his income.   Petitioner disputes the

testimony of Mr. Lavender and claims that LTC and LV were bona

fide corporations whose employees closed the sale.   Considering

the evidence, we find petitioner has met his burden of proof and

that the $588,000 commission should not be imputed to him.
                               - 35 -

     We believe Mr. Lavender’s testimony is inconsistent and not

credible on this issue.   He testified that he believed the

initial brokerage fee was to be around 2 or 3 percent, while at

the criminal trial he testified the brokerage fee was originally

to be around 4 or 5 percent.   He further testified that the

commission was increased “just prior to the sale” although he had

signed the documents providing for a 14-percent commission in

January, nearly 6 months before the sale.   In addition, Mr.

Lavender admitted to having stolen significant amounts of money

which would have otherwise come under petitioner’s control and

was testifying for respondent as part of a plea agreement in

connection with his conviction for theft of public money.

     LTC and LV were incorporated about a month before the sale

closing.   However, Ms. Nemec and Bob Nemec had been working on

behalf of the nonexistent LTC since at least January 1995, and

there is nothing uncommon about doing work on behalf of a

corporation before incorporation.   See, e.g., Frazier v. Ash, 234

F.2d 320 (5th Cir. 1956) (discussing entering contracts on behalf

of a corporation before its incorporation).

     The dissolution of LV and LTC in October of 1996 for failure

to file an annual report or pay franchise taxes, the late filing

of the LV consolidated tax return and petitioner’s assistance in

preparing that return, the fact that Ms. Nemec was petitioner’s

girlfriend and also the president and sole shareholder of LTC,
                               - 36 -

and the fact that LTC bought the home in which petitioner now

resides and transferred title to Ms. Nemec a month or two later

are stronger points for respondent.     Considering petitioner’s

history of using nominees to avoid tax liability, the facts

further suggest that petitioner was pulling the strings at LTC in

order to avoid tax on the $588,000 and to buy himself a home with

the money.    However, these facts are also speculative; and while

we admit the transaction contains indicia of tax avoidance, we

find they do not overcome the facts favoring petitioner.

     LTC and LV were validly created corporations.    They filed a

consolidated income tax return showing gross receipts of $602,962

and taxable income of $166,602 for the fiscal year ending June

30, 1996.    Other facts more directly counter respondent’s

assertion that petitioner was pulling the strings of LTC.

Although Ms. Nemec was petitioner’s girlfriend, she had

significant contacts in the nursing home industry.     In addition,

Bob Nemec was also an employee of LTC and had significant real

estate experience as owner of a brokerage business.     It is quite

probable that two such siblings would be interested in and

capable of working together to sell a nursing home.     Most

importantly, Ms. Nemec found the buyer for the Rolla nursing

home, and she and Bob Nemec worked to close the sale.

     Although it is a close call, we find that petitioner has met

his burden of proving that the $588,000 commission was not part
                              - 37 -

of a tax-avoidance scheme that he set up.   If there are tax

issues in connection with the commission paid to LTC, respondent

may seek to collect from LTC and LV or from Ms. Nemec and Bob

Nemec.

     C.   $245,000 Paid by RHCA to American Bank

     Of the $245,000 paid to American Bank from RHCA after the

sale of the nursing home, a total of $27,754 was used to pay off

the remaining amount of a $115,000 working capital loan between

American Bank and RHCA.   Respondent contends that the remaining

$217,246 was used to pay off petitioner’s remaining personal

liability on the $425,000 home construction loan and should be

included in petitioner’s 1995 income.

     The remaining amount of the $425,000 loan to Ms. Faenger and

petitioner was paid off at some unknown point.     Although in this

case Ms. Faenger testified she did not know how it was paid off,

during petitioner’s criminal trial she testified that it was paid

off with the proceeds of the nursing home sale.    On the same day

the $245,000 payment was made to American Bank only $27,754 was

used to pay off the remainder of RHCA’s $115,000 loan.    American

Bank was the same bank which lent petitioner and Ms. Faenger the

$425,000.

     Petitioner has offered no evidence as to what the remaining

$217,246 was paid toward.   In his posttrial brief petitioner

merely states:   “it is impossible to determine whether that
                               - 38 -

$245,000 was paying off the loan obtained by Petitioner and Ms.

Faenger * * * to construct the home, whether it was paying off

the [RHCA] working capital loan, some combination of the two, or

perhaps some other indebtedness.”    In addition to offering no

evidence concerning what the $217,246 was paid toward, petitioner

offered no evidence showing that he paid off his personal

liability for the remaining amount of the $425,000 loan by some

other means.

      There is a dearth of evidence with respect to this issue.

However, because the burden of proof is on petitioner, who has

presented only unsupported speculation, we find that the $217,246

was income to petitioner in 1995.

      Petitioner argues that if the $217,246 is income to him,

some of the income should be attributed to Ms. Faenger because

she was jointly liable with him on the $425,000 loan.    However,

Ms. Faenger had borrowed $30,000 from her mother to pay to

American Bank in order to have her liability on the loan

discharged.    Therefore, the entire $217,246 is income to

petitioner.

V.   Whether Petitioner Is Liable for Additions to Tax Under
     Section 6654 for 1994 and 1995

      Respondent also determined additions to tax for 1994 and

1995 for failure to pay estimated tax.    Section 6654(d)(1)(B)

provides that a taxpayer’s required annual payment is limited to

the lesser of 90 percent of the tax shown on the return for the
                                  - 39 -

taxable year (or, if no return is filed, 90 percent of the tax

for such year), or 100 percent of the tax shown on the return of

the individual for the preceding taxable year.     Petitioner’s sole

argument is that he is not liable for the addition to tax because

he had no tax liability for 1994 or 1995.     We have already held

petitioner was liable for taxes for both 1994 and 1995.     See

supra pp. 31-32, 38.   Therefore, petitioner is liable for section

6654 additions to tax.   The amount of those additions to tax

shall be determined by the parties in their Rule 155 computations

in accordance with the other holdings herein.

VI.   Whether Petitioner Is Liable for the Section 6663 Fraud
      Penalty for 1991-93 and the Section 6651(f) Fraudulent
      Failure To File Addition to Tax for 1994 and 1995

      Respondent has the burden of proving fraud by clear and

convincing evidence.   See sec. 7454(a); Rule 142(b).    To satisfy

the burden of proof, respondent must show:     (1) An underpayment

of tax exists; and (2) petitioner intended to evade taxes known

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

prevent the collection of taxes.      See Sadler v. Commissioner, 113

T.C. 99, 102 (1999); Parks v. Commissioner, 94 T.C. 654, 660-661

(1990).

      A.   Underpayment of Tax.

      The clear and convincing standard applies not merely to

whether an underpayment is attributable to fraud, but also to

whether an underpayment exists.      Parks v. Commissioner, supra at
                               - 40 -

660-661; Di Rocco v. Commissioner, T.C. Memo. 2009-300; DeClercq

v. Commissioner, T.C. Memo 1982-386.      Where fraud is determined

for each of several years, the Commissioner’s burden applies

separately for each of the years.    Roth v. Commissioner, T.C.

Memo. 1998-28.    Considering the facts and law discussed

hereinabove, we hold that respondent has proven by clear and

convincing evidence that an underpayment existed in each year for

1991 to 1994.    However, we hold respondent has not proven by

clear and convincing evidence that an underpayment exists for

1995.

     In order to prove an underpayment, the Commissioner cannot

rely on the presumption of correctness of the statutory notice of

deficiency.   See DiLeo v. Commissioner, 96 T.C. 858, 873 (1991),

affd. 959 F.2d 16 (2d Cir. 1992).    Fraud is never presumed; even

if a taxpayer’s testimony is incredible, we may still be left

with no more than a suspicion of fraud.      Rinehart v.

Commissioner, T.C. Memo. 1983-184.      Suspicion, even a strong

suspicion, of fraud will not sustain the Commissioner’s

determination.    Wynn v. Commissioner, T.C. Memo. 1995-609.

     Although we previously held that an underpayment of tax

existed for 1995, that holding was based on the fact that the

burden of proof was on petitioner, who offered only speculation

as to what the $245,000 was paid toward and how his home

construction loan liability was paid off.     See supra pp. 37-38.
                              - 41 -

As the burden of proof is now on respondent, we must consider the

strength of respondent’s evidence as well.    Respondent relies on

the facts that:   (1) The home construction loan was paid off; (2)

RHCA paid $245,000 to American Bank after the sale of the nursing

home, of which only $27,754 was used to pay off the remaining

amount of a $115,000 working capital loan between American Bank

and RHCA; (3) American Bank was the same bank which had given

petitioner the home construction loan; and (4) Ms. Faenger

testified at petitioner’s criminal trial that the loan was paid

out of the proceeds of the nursing home sale.

     Respondent’s first three points are speculative, as there

was no evidence showing any part of the $245,000 was actually

paid toward petitioner’s home construction loan.    Additionally,

respondent never presented evidence showing when the home

construction loan was paid off or what petitioner’s remaining

liability on the home construction loan was at the time the

$245,000 was paid to American Bank.    While not speculative,

respondent’s fourth point is marred by the fact that Ms. Faenger

gave conflicting testimony during this trial, stating that she

did not know how the home construction loan was paid off.

Considering the evidence presented, we hold that respondent

failed to meet his burden to show by clear and convincing

evidence an underpayment existed.
                                - 42 -

       B.   Fraudulent Intent

       Respondent must prove by clear and convincing evidence that

a portion of the underpayment for each taxable year in issue was

due to fraud.     See Professional Servs. v. Commissioner, 79 T.C.

888, 930 (1982).     Once respondent establishes that any portion of

the underpayment is attributable to fraud, the entire

underpayment is subject to the 75-percent penalty, except with

respect to any portion of the underpayment that petitioner

establishes is not attributable to fraud.      See sec. 6663(a) and

(b).    The existence of fraud is a question of fact to be resolved

upon consideration of the entire record.       King’s Court Mobile

Home Park, Inc. v. Commissioner, 98 T.C. 511, 516 (1992).      The

taxpayer’s entire course of conduct may establish the requisite

fraudulent intent.     Stone v. Commissioner, 56 T.C. 213, 223-224

(1971).

       In deciding whether a failure to file is fraudulent under

section 6651(f), we consider the same elements that are

considered in imposing the penalty for fraud under section 6663.

Clayton v. Commissioner, 102 T.C. 632, 653 (1994); Tinnerman v.

Commissioner, T.C. Memo. 2006-250.       Because direct proof of a

taxpayer’s intent is rarely available, fraud may be proved by

circumstantial evidence and reasonably inferred from the facts.

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

Commissioner, 99 T.C. 202, 210 (1992); Rowlee v. Commissioner, 80
                              - 43 -

T.C. 1111, 1123 (1983).   Certain indicia, commonly known as

badges of fraud, constitute circumstantial evidence which may

give rise to a finding of fraudulent intent.     Bradford v.

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

1984-601.

     A taxpayer’s use of a complex series of financial

transactions and nominees is a badge of fraud.     See Graham v.

Commissioner, T.C. Memo. 2005-68, affd. 257 Fed. Appx. 4 (9th

Cir. 2007).   Petitioner was connected with an extensive network

of corporations and partnerships which had financial dealings

with one another and with petitioner.   Petitioner also used

Autumn Years and Quixoti to hold money which he used for personal

spending.   He used his control over RHCA and other entities to

further conceal the fact that he was receiving income.

     Petitioner’s conviction under section 7206(1) is also a

badge of fraud.   While the convictions under section 7206(1) for

years 1991 to 1993 do not estop petitioner from denying fraud for

these years, they are persuasive evidence of fraud.    See Morse v.

Commissioner, T.C. Memo. 2003-332, affd. 419 F.3d 829 (8th Cir.

2005); Parsons v. Commissioner, T.C. Memo. 2000-205.

     Another badge of fraud is keeping inadequate records.

Bradford v. Commissioner, supra at 307-308.    In this case,

petitioner failed to keep any financial records for Autumn Years

or to send Schedules K-1 to the partners of Autumn Years.
                               - 44 -

       Failure to file tax returns is also a badge of fraud.     Id.

at 307.    Petitioner did not file a personal tax return for 1994.

He failed to file various tax returns for Autumn Years.    RHCA, a

company over which petitioner had a significant amount of

control, failed to file tax returns for

years 1991 to 1994.    Petitioner’s 1991 to 1993 tax returns were

not filed until August 1994.    Several of the other entities with

ties to petitioner filed late tax returns, sometimes many years

late.

       An understatement of income is also a badge of fraud.     Id.

We have already found that petitioner had significant

understatements of income for 1991 to 1994.    See supra pp. 22-32.

       Considering the evidence, we find respondent has proven by

clear and convincing evidence that the underpayments for the

taxable years 1991 to 1994 were due to fraud.    Petitioner is

therefore subject to the section 6663 fraud penalty for years

1991 to 1993 and the section 6651(f) fraudulent failure to file

addition to tax for 1994.

VII.    Conclusion

       We find petitioner liable for underreporting or failure to

report Schedule C income for years 1991, 1992, 1993, 1994, and

1995 of $302,319, $172,081, $138,490, $135,611, and $217,246,

respectively.    Further, we find petitioner liable for self-

employment taxes for years 1991, 1992, 1993, and 1994 of $10,247,
                             - 45 -

$10,658, $10,851, and $11,146, respectively.   We also find

petitioner liable for estimated tax additions to tax under

section 6654 for years 1994 and 1995.   Finally, we find

petitioner liable for fraud penalties under section 6663 for

years 1991, 1992, and 1993, and liable for the fraudulent failure

to file addition to tax under section 6651(f) for 1994.

     In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

     To reflect the foregoing,



                                         Decision will be entered

                                   under Rule 155.
