                        T.C. Memo. 2005-55



                      UNITED STATES TAX COURT



                 JAMES O. JONDAHL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13385-02.             Filed March 24, 2005.


     Jon J. Jensen, for petitioner.

     Inga C. Plucinski, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent determined deficiencies in

petitioner’s 1990, 1991, 1992, and 1993 Federal income taxes of

$25,438, $2,883, $9,883, and $35,876, respectively.    Respondent

also determined fraud penalties under section 66631 for 1990,


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

1991, 1992, and 1993 of $19,078.50, $2,162.25, $7,412.25, and

$26,907, respectively.   After concessions by the parties, the

issues for decision are:

     (1)   Whether assessment of petitioner’s 1990, 1991, 1992,

and 1993 taxes is barred by the period of limitations in section

6501(a).   Because we find that petitioner filed false and

fraudulent returns with the intent to evade tax for 1990, 1991,

1992, and 1993, we hold that assessment is not barred;

     (2)   whether Taxman, Inc. (Taxman), and West Fargo

Investment Corp. (WFIC) should be disregarded because they are

mere alter egos of petitioner.    We hold that they should not;

     (3)   whether petitioner earned real estate commissions of

$56,196, $18,552, $1,566, and $139,080 in 1990, 1991, 1992, and

1993, respectively.   We hold that petitioner earned a real estate

commission of $1,566 in 1992 and that petitioner did not earn

real estate commissions in 1990, 1991, or 1993;

     (4)   whether petitioner realized capital gain of $25,000

from the sale of Jondahl Insurance in 1990 and commissions from

the sale of crop hail insurance in 1990 and 1991 of $12,882 and

$3,142, respectively.    We hold that petitioner received capital

gain of $14,962 and insurance commissions of $10,038 in 1990, and

that petitioner did not earn insurance commissions in 1991;
                                  - 3 -

     (5)   whether in 1990 petitioner realized capital gain of

$20,244 from the repossession of an apartment complex called Lone

Tree Manor.    We hold that he did;

     (6)   whether petitioner had unreported income in 1990 of

$6,000 from the payment of a settlement judgment by Taxman, $310

from the payment to petitioner’s attorney by Taxman, $2,147 from

a repayment of a loan by Taxman, and $3,000 in cash taken from

Taxman.    We hold that he did;

     (7)   whether petitioner had unreported income in 1991 of

$509 (the value of a stereo transferred from Taxman to

petitioner’s girlfriend), $2,052 from a check issued to

petitioner by Taxman, $2,086 from Taxman’s payment for

petitioner’s furniture, and $3,000 in cash taken from Taxman.    We

hold that petitioner had unreported income of $2,052 from a check

issued to petitioner by Taxman, $2,086 from Taxman’s payment for

petitioner’s furniture, and $3,000 in cash taken from Taxman;

     (8)   whether petitioner had unreported income in 1992 of

$1,904 from Taxman’s payment for petitioner’s furniture, $15,000

from Taxman’s payment of petitioner’s income taxes, $3,000 in

cash taken from Taxman, and $10,931 from a certificate of deposit

(CD) in the name of Western Realty Partners, L.P. (WRP).   We hold

that petitioner had unreported income of $3,000 in cash taken

from Taxman and $10,931 from a CD in the name of WRP;
                                 - 4 -

     (9)    whether petitioner had unreported income in 1993 of

$310 from Taxman’s payment for a repair of petitioner’s wife’s

car, $7,000 from WFIC’s payment to petitioner’s sister, $28,660

from WFIC’s purchase of a car, and $3,000 in cash taken from

Taxman.     We hold that petitioner had unreported income of $310

from Taxman’s payment for a repair of petitioner’s wife’s car,

$7,000 from WFIC’s payment to petitioner’s sister, $18,660 from

WFIC’s purchase of a car, and $3,000 in cash taken from Taxman;

     (10)    whether petitioner is entitled to claim head-of-

household filing status in 1990.     We hold that he is not;

     (11)    whether petitioner is liable for self-employment tax

on his unreported crop hail insurance commission in 1990 and real

estate commission in 1992.     We hold that he is; and

     (12)    whether the understatement in each of 1990, 1991,

1992, and 1993 is subject to the fraud penalty under section

6663(a).     We hold that petitioner is liable for the fraud penalty

under section 6663(a) with respect to unreported income of $3,000

in each year.

                           FINDINGS OF FACT

     Some of the facts are stipulated.     The stipulations of fact

and the attached exhibits are incorporated herein by this

reference.     At the time the petition was filed, petitioner

resided in Fargo, North Dakota.
                                  - 5 -

      Petitioner married Lori J. Jondahl (Lori) on August 11,

1983.      In 1986, petitioner and Lori bought a house in Moorhead,

Minnesota, in which they lived until June 1990.      In June 1990,

petitioner moved out of the Moorhead house and into an apartment

in West Fargo, North Dakota, where he lived until December 31,

1993.      On July 9, 1991, petitioner and Lori were granted a

divorce.      Lori was granted custody of the couple’s daughter.   On

October 30, 1993, petitioner married Mary Lee Jondahl (Mary).

Petitioner and Mary are still married.

I.   Petitioner’s Business Activities

      A.     Petitioner’s Tax Preparation Business

      In January 1976, petitioner began preparing Federal and

State tax returns as a sole proprietorship under the name Jondahl

Tax Service, and later under the name Jondahl Financial Services

(JFS).      In 1978, petitioner became an Internal Revenue Service

(IRS) enrolled agent authorized to practice before the IRS.

      B.     Taxman

      In October 1986, Taxman was incorporated by David Garaas,

petitioner’s attorney.      Taxman’s initial directors were Tony

Baasch, an associate of petitioner’s, and Gerald Owen Jondahl

(Mr. Jondahl), petitioner’s father.       At Taxman’s first board of

directors meeting, Mr. Jondahl was elected president, Mr. Baasch

was elected vice president, and Gladys Jondahl (Mrs. Jondahl),

petitioner’s mother, was elected secretary and treasurer.
                                - 6 -

Petitioner ran the day-to-day operations of Taxman.    Mr. Garaas

and Mr. and Mrs. Jondahl were not involved in Taxman’s day-to-day

operations.

     Taxman’s business consisted of preparing Federal and State

tax returns, providing tax advice, and keeping financial books

and records.    Taxman employed several people at any one time

whose duties included preparation of tax returns, accounting

work, maintenance of accounts receivable and payable, making bank

deposits, signing checks, and receptionist tasks.    Taxman

maintained bank accounts in its name, kept corporate records, and

filed corporate tax returns for the years in issue.

     In July 1985, petitioner was sued individually and as sole

proprietor of his tax preparation business.    Two of JFS’s clients

sued petitioner in connection with a tax shelter investment.     In

September 1986, a settlement was reached in which petitioner

initially agreed to pay each couple $6,000.    In connection with

the 1986 lawsuit against him, petitioner was deposed in July

1987.   During the deposition, petitioner stated that Taxman was

organized to take over the assets and liabilities of JFS.

Petitioner testified in the deposition that he had transferred

office equipment worth approximately $10,000, accounts receivable

worth $3,000, and two bank loans totaling approximately $31,000

to Taxman.    Petitioner also stated that no written agreement

existed evidencing the takeover of JFS by Taxman.    After the 1987
                                - 7 -

deposition, the clients who had sued petitioner agreed to accept

$3,000 each in satisfaction of petitioner’s obligations to them.

The two $3,000 payments were made by Taxman in 1990.   Petitioner

did not include the $6,000 paid by Taxman as income to him on his

1990 Federal income tax return.

     Each of Taxman’s corporate returns for its taxable years

ending September 30, 1990, 1991, 1992, and 1993, was completed by

petitioner.    Mr. Jondahl is listed as the majority stockholder on

each return.   Petitioner determined Taxman’s income for its

corporate returns from Taxman’s bank deposits.   During each year

at issue, approximately $3,000 of Taxman’s cash receipts was not

deposited in Taxman’s bank accounts.    Petitioner took possession

of the cash but did not keep records of how it was spent.    Some

of the cash was used by petitioner to pay personal expenses.

Petitioner did not report the cash amounts on his individual tax

returns.   Most of Taxman’s expenses, even amounts less than $2,

were paid by check.   During the 4 years in issue, Taxman issued

over 500 checks to various eating establishments, to Sam’s

Wholesale Club, and for office supplies, snacks, and postage.

     In September 1992, after petitioner was notified that the

IRS was auditing Taxman’s 1990 return, he typed up minutes of

annual directors meetings that he claims took place on October 5,

1987, October 2, 1989, and October 8, 1990. Petitioner claims

that he took handwritten notes of these meetings.   The minutes
                                 - 8 -

reflect that Monica Ramsden, an employee of Taxman, was elected

secretary during the meeting that allegedly took place on October

5, 1987, and that she remained in that capacity until at least

October 7, 1991.   Dianna Jilek, an employee of Taxman from 1988

until 1992, was designated an officer of Taxman and WFIC on the

companies’ annual reports.     Ms. Jilek did not know she was

designated an officer until she saw her name on Taxman and WFIC’s

annual reports.

     Taxman issued Forms W-2, Wage and Tax Statement, to

petitioner for each year in issue.       Taxman paid petitioner

$12,000, $20,186, $18,208, and $25,008 in 1990, 1991, 1992, and

1993, respectively.

     On September 30, 1994, Mr. Jondahl died.       At the time of his

death, Mr. Jondahl owned 95 percent of Taxman’s stock.       Mr.

Jondahl left his entire estate to Mrs. Jondahl.       In November

1995, petitioner and Mrs. Jondahl sold Taxman to an unrelated

third party.

     C.   WFIC and Petitioner’s Real Estate Business

     On October 12, 1978, petitioner received his real estate

agent’s license.   In January 1985, petitioner began selling real

estate as an agent for WFIC.    WFIC was organized in 1949 as a

real estate corporation by Lester Smith.      Mr. Smith served on

WFIC’s board of directors and as its president from its

incorporation until 1990 or 1991.    Mr. Smith died in 1993.
                                   - 9 -

Sometime around 1988, Mr. Smith transferred the stock of WFIC to

petitioner or petitioner’s sister and brother-in-law2 and moved

WFIC to Taxman’s office space.       Petitioner ran the day-to-day

operations of WFIC from 1988 until 1994.       While petitioner ran

WFIC, WFIC’s primary business was the sale of commercial real

estate.       WFIC maintained a checking account, a savings account,

and an Interest on Real Estate Trust Account (trust account)

throughout the years in issue.       On September 14, 1990, the North

Dakota Real Estate Commission (NDREC) granted petitioner’s

application to be a real estate broker for WFIC.       WFIC did not

hold regular shareholders or directors meetings.       During the

years at issue, WFIC employed two real estate agents in addition

to petitioner.       WFIC paid each agent commissions the agent earned

brokering transactions for WFIC.       Certain of Taxman’s employees,

including petitioner, performed work for WFIC and were paid for

these services by Taxman.       The Taxman employees who also worked

for WFIC did not keep track of the time they spent working for

WFIC.       During 1990, 1991, 1992, and 1993, WFIC transferred at



        2
      Petitioner testified that Mr. Smith transferred the WFIC
stock to petitioner’s sister and brother-in-law because
petitioner’s attorney advised him not to own stock in light of
the lawsuit against him and a potential lawsuit from his former
wife. Respondent alleges that the WFIC stock was transferred to
petitioner’s sister and brother-in-law as nominees for
petitioner. Because the identity of the true owner of WFIC’s
stock does not affect our determinations herein, we do not
address this discrepancy.
                              - 10 -

least $190,240 to Taxman. Petitioner controlled the amounts that

WFIC transferred to Taxman.

     On November 26, 1990, WFIC registered the trade name “Epic

Real Estate” with the State of North Dakota.   In 1990, petitioner

inquired of the NDREC whether it was permissible for him to

advertise under the name Epic Real Estate as a division of WFIC.

He was informed that it was, but that he could not advertise

solely as Epic Real Estate while operating through a corporation.

In a letter dated February 19, 1992, petitioner informed the

secretary of the NDREC that “Epic Real Estate” would no longer be

a division of WFIC but a sole proprietorship under petitioner’s

broker’s license.   On February 19, 1992, petitioner filed an

official notice of change of address and name with the NDREC,

showing a change of business name from “West Fargo Investment

Corporation d/b/a Epic Real Estate” to “Epic Real Estate”.    Also

in February 1992, petitioner changed the name on WFIC’s trust

account, without the knowledge or approval of WFIC’s shareholders

or directors, from “West Fargo Investment Corporation d/b/a Epic

Real Estate” to “James O. Jondahl d/b/a Epic Real Estate”.

Petitioner renewed his broker’s license for 1993 using the name

“Epic Real Estate”.   On September 24, 1993, petitioner changed

the business name with the NDREC back to “West Fargo Investment

Corporation d/b/a Epic Real Estate”.
                               - 11 -

     During the years in issue, petitioner, WFIC, or Epic Real

Estate brokered numerous real estate transactions.    In some of

these transactions, a commission was transferred from WFIC’s

trust account to its checking account.    In 1990, commissions of

$38,446 from two transactions were transferred from WFIC’s trust

account to WFIC’s checking account.     Additional commissions of

$17,700 were paid by check to either petitioner or WFIC.    In

1991, commissions of $18,552 from two transactions were

transferred from WFIC’s trust account to WFIC’s checking account.

In 1992, a brokerage fee of $1,566 was paid by check made out to

petitioner.    In 1993, a brokerage fee of $28,000 was transferred

from WFIC’s trust account to its checking account, and a

commission of $102,080.25 was paid by check to Epic Real Estate.

     WFIC filed Forms 1120, U.S. Corporation Income Tax Return,

for its taxable years ending December 31, 1990, 1991, 1992, and

1993.   Petitioner prepared those returns.   WFIC reported the

commissions from petitioner’s real estate activities in 1990,

1991, 1992, and 1993 as income on its corporate tax returns for

those years.    Respondent does not dispute that WFIC reported all

of the real estate commissions on its corporate returns for the

years in issue.   The commission income was offset by net

operating losses that WFIC held at the time petitioner began

running WFIC.   WFIC did not pay petitioner the real estate

commissions; petitioner’s only salary was from Taxman.
                               - 12 -

     D.   Crop Hail Insurance Business

     On March 11, 1977, petitioner was licensed as an insurance

agent.    From 1977 to December 1990, petitioner sold crop hail

insurance under the names Jondahl Insurance and Jondahl Insurance

Agency (Jondahl Insurance).    Jondahl Insurance entered into

several contracts with Farmer’s Mutual Crop Hail Insurance Co.

(Farmer’s Mutual) between 1983 and 1986 that authorized Jondahl

Insurance to act as an agent of Farmer’s Mutual in certain

counties.    Jondahl Insurance also entered into an agency contract

with Old Republic Insurance Co. in 1989.    A Farmer’s Mutual 1990

policy register reflects that Jondahl Insurance earned $12,881.70

in commissions from Farmer’s Mutual during that year.    The

Farmer’s Mutual 1991 policy register reflects that Jondahl

Insurance earned $3,141.95 in commissions from Farmer’s Mutual

during that year.    Petitioner did not report any commissions

earned from Farmer’s Mutual for the sale of crop hail insurance

on his individual 1990 and 1991 Federal income tax returns.

     In 1990, Gary Ihry of Valley Crop Insurance purchased

Jondahl Insurance for $25,000.3   Mr. Ihry paid Jondahl Insurance

$14,962 in 1990 in partial satisfaction of the purchase price.

The parties stipulated that Farmer’s Mutual paid Jondahl


     3
      It is not apparent in the record how Jondahl Insurance
earned commissions in 1991 from Farmer’s Mutual after selling its
crop hail insurance business to Mr. Ihry in 1990. The record
does not contain Forms 1099 evidencing that Farmer’s Mutual
actually paid petitioner these commissions.
                               - 13 -

Insurance $10,038 in 1990 in satisfaction of the remainder of the

purchase price, in accordance with the terms of the sale.

Petitioner deposited the proceeds from the sale in WFIC’s

checking account.    Petitioner did not report any capital gain

from the sale to Mr. Ihry on his 1990 individual Federal income

tax return.

      E.   Lone Tree Manor Apartments

      On April 1, 1987, petitioner purchased Lone Tree Manor

apartment complex from Investors Real Estate Trust (IRET).      IRET

held the mortgage on Lone Tree Manor until 1990.    The income and

expenses related to the operation of Lone Tree Manor were

reported on petitioner and Lori’s joint Federal income tax

returns for 1987 and 1988.    Lori reported the income and expenses

for Lone Tree Manor on her individual 1989 income tax return.     In

November 1990, IRET repossessed Lone Tree Manor.    Petitioner did

not report any gain resulting from the repossession of Lone Tree

Manor on his 1990 Federal income tax return.    WFIC reported

capital gain of $22,028 from the sale of Lone Tree Manor on its

1990 Form 1120.

II.   Other Expenses

      Petitioner, Taxman, and WFIC each maintained bank accounts.

Petitioner had signatory authority on all these accounts.
                                    - 14 -

     A.      1990

     In 1990, Taxman paid $310 to Garry Pearson, an attorney whom

petitioner consulted regarding his 1982, 1983, and 1984 tax

returns.       Also in 1990, Taxman made two payments totaling $2,147

to West Far-Mor Credit Union in satisfaction of a 1989 loan to

petitioner.         Petitioner did not report either payment as income

on his 1990 tax return.

     B.      1991

     In January 1991, Taxman issued two checks to petitioner

totaling $2,052.        Petitioner did not report the $2,052 as income

on his 1991 tax return.

     Also in January 1991, petitioner bought several pieces of

furniture from Conlin’s Furniture (Conlin’s).         The total price of

the furniture was $4,034.10.         The cost of the furniture was

charged to petitioner’s Visa card in January and April 1991.

Taxman made all the payments on petitioner’s Visa during 1991 and

1992.       For 1991 and 1992, Taxman paid $2,086 and $1,904,

respectively, toward the furniture purchase.4        Petitioner did not

include the amount paid for the furniture from Conlin’s as income

on his 1991 or 1992 personal income tax return.




        4
      The notice of deficiency states that Taxman paid only
$1,904. However, the credit card statements reflect that Taxman
paid $1,948.10 toward the furniture purchase in 1992. For
simplicity’s sake, we refer to the 1992 amount as $1,904 as
stated in the notice of deficiency.
                                - 15 -

     Taxman occasionally accepted equipment from one of its

clients, Site on Sound Car and Home Electronics (Site on Sound),

in lieu of payment on Site on Sound’s balance due.     In May 1991,

petitioner received a home stereo system as partial payment of

Site on Sound’s balance due.    The stereo was valued at $509.

Petitioner gave the home stereo system to his girlfriend, Melodie

Lane.     He did not report the $509 as income on his personal tax

return for 1991.    Ms. Lane worked in an office of Taxman Express,

a subsidiary of WFIC, for 1 month in early 1992.     Taxman Express

was a business opened by petitioner in 1991 in order to prepare

and e-file tax returns for walk-in customers.     Ms. Lane was never

employed by Taxman.

     C.     1992

     On October 1, 1990, petitioner formed Western Realty

Partners, L.P.-I (WRP).     WFIC was the general partner of WRP and

held a greater-than-95-percent interest in WRP.     On October 5,

1990, Valis R. Garceau, a client of petitioner’s and Taxman’s,

gave petitioner $10,000 to purchase rental real estate on her

behalf.     Petitioner deposited the $10,000 in WFIC’s trust

account.     On the same day, $10,000 was withdrawn from WFIC’s

trust account by check payable to WRP.     A memo on the check read

“V. Garceau CD”.     Petitioner does not dispute that the check was

used to purchase a $10,000 CD.     On May 6, 1991, WRP liquidated

the CD and deposited the funds, $10,418.89, into a new money
                                 - 16 -

market account opened by WRP that same month.     No other deposits

were made into the money market account.     On April 20, 1992,

petitioner closed the money market account and withdrew the

balance ($10,930.58).     Petitioner deposited the $10,930.58 into

his personal bank account.     Petitioner did not report the

$10,930.58 as income on his 1992 income tax return.

     On May 28 and July 24, 1992, Taxman issued checks for $5,000

and $10,000, respectively, to petitioner.     Petitioner used these

checks to purchase cashier’s checks payable to a West Fargo law

firm to pay petitioner’s personal 1983 and 1984 income tax

liabilities.     Petitioner did not report the $15,000 as income on

his 1992 income tax return.

     D.   1993

     On February 17, 1993, Taxman paid $310.43 to Schumacher

Goodyear for repairs done in December 1992 to Mary’s car, a 1991

Ford Probe.      Petitioner did not report the amount paid for the

repairs as income on his 1993 income tax return.

     On October 12, 1993, WFIC issued a check for $7,000 to

petitioner’s sister, Susan Schoeppach.     On October 20, 1993, Ms.

Schoeppach wrote a check for $7,000 to Epic Real Estate.       The

$7,000 Ms. Schoeppach paid Epic Real Estate was used as a

downpayment on an apartment building that Ms. Schoeppach

purchased.     Epic Real Estate brokered Ms. Schoeppach’s purchase
                                - 17 -

of the apartment building and received a real estate commission

of $9,000 for the sale in 1993.

       On October 15, 1993, WFIC purchased a 1993 Buick Riviera

(Buick).    Mary’s 1991 Ford Probe was traded in and its value was

credited to the purchase of the Buick.     The Buick was registered

in Mary’s name, and personalized license plates reading “PURRFCT”

were requested for the Buick.    Petitioner did not report the

value of the Buick as income on his 1993 income tax return.

       In 1994, petitioner represented on both a credit application

and a Uniform Residential Loan Application that he and Mary owned

Taxman, WFIC, and the Buick.

III.    Petitioner’s Criminal Conviction

       On September 11, 1997, a jury convicted petitioner of

intentionally filing false returns under section 7206(1) for

1990, 1991, 1992, and 1993 and of attempting to obstruct and

impede the administration of internal revenue laws from 1985

through 1997 in violation of section 7212(a).     The U.S. District

Court for the District of North Dakota entered its judgment on

December 30, 1997, sentencing petitioner to 6 months’

imprisonment and ordering petitioner to pay the IRS $42,873.24 in
                               - 18 -

restitution.5   The District Court’s judgment was affirmed by the

U.S. Court of Appeals for the Eighth Circuit on August 6, 1999.

     On May 22, 2002, respondent issued a notice of deficiency

for petitioner’s 1990, 1991, 1992, and 1993 years.   Petitioner

timely filed a petition with the Court.

                              OPINION

I.   Expiration of the Period of Limitations

     The first issue we must consider is whether the period of

limitations for each of petitioner’s 1990, 1991, 1992, and 1993

years expired before respondent issued the notice of deficiency

on May 22, 2002.   Petitioner contends that the 3-year period in

section 6501(a) expired and respondent’s assessment is barred.

Respondent argues that the period of limitations in section

6501(a) does not apply pursuant to section 6501(c)(1) and (2)

because petitioner filed false or fraudulent returns with the

intent to evade tax for the years at issue.    Accordingly, our

determination of whether the period of limitations remains open

depends on whether petitioner committed fraud in the filing of

his 1990, 1991, 1992, and 1993 returns.




     5
      On Feb. 18, 1999, petitioner paid in full the $42,873.24
restitution ordered by the District Court. The parties
stipulated that the amount paid as restitution will be credited
to any deficiencies for the years 1990, 1991, 1992, and 1993
after they are redetermined by the Court or agreed upon by the
parties.
                                - 19 -

     The determination of fraud for purposes of section

6501(c)(1) is the same as the determination of fraud for purposes

of the penalty under section 6663.       Neely v. Commissioner, 116

T.C. 79, 85 (2001); Rhone-Poulenc Surfactants & Specialties v.

Commissioner, 114 T.C. 533, 548 (2000).      Respondent has the

burden of showing fraud by clear and convincing evidence.        See

sec. 7454(a); Rule 142(b).

     Petitioner’s conviction under section 7206(1) does not prove

fraud; respondent must show that petitioner intended to evade tax

in filing the false returns.    See Wright v. Commissioner, 84 T.C.

636, 643 (1985).   For Federal tax purposes, fraud entails

intentional wrongdoing with the purpose of evading a tax believed

to be owing.   See Neely v. Commissioner, supra at 86.     In order

to show fraud, respondent must prove:      (1) An underpayment

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 Parks v. Commissioner, 94

T.C. 654, 660-661 (1990).

     A.   Underpayment of Tax

     Respondent must first show by clear and convincing evidence

that petitioner made an underpayment of tax in each of 1990,

1991, 1992, and 1993.   Respondent may not rely on petitioner’s

failure to carry his burden of proof to sustain respondent’s

burden of proving fraud.     See id. at 661.   We conclude that
                                - 20 -

respondent has met this burden.    For 1990, petitioner conceded at

trial that he understated his income by $950.    For 1992,

petitioner conceded that he improperly deducted reimbursed

medical expenses of $18,129.    In addition, for each of the years

at issue, Taxman received $3,000 in cash receipts, and petitioner

took possession of the cash.    The parties stipulated that the

$3,000 of cash taken by petitioner each year was not deposited

into Taxman’s bank account.     Petitioner admits that he controlled

all of the cash and that he used some of it to pay personal

expenses.    He did not keep track of how the cash was spent, and

he did not report the cash on his personal income tax returns.

Petitioner also admits that he used Taxman funds to pay for

furniture.    Although petitioner asserts that some of the amounts

Taxman spent on his personal expenses were intended to be loans

from Taxman, respondent has shown that petitioner did not keep

credible records of some of these purported loans.    Respondent

has also shown that petitioner received income from the sale of

his crop hail insurance business in 1990 that he did not report

on his return.    We therefore conclude that respondent has

presented clear and convincing evidence that petitioner underpaid

his tax for 1990, 1991, 1992, and 1993.

     B.     Fraudulent Intent

     Because direct evidence of fraud is rarely available, fraud

may be proved by circumstantial evidence and reasonable
                                - 21 -

inferences from the facts.     Petzoldt v. Commissioner, 92 T.C.

661, 699 (1989).    Courts have developed a nonexclusive list of

factors, or “badges of fraud”, that demonstrate fraudulent

intent.     Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).

These badges of fraud include:    (1) Understating income, (2)

maintaining inadequate records, (3) implausible or inconsistent

explanations of behavior, (4) concealment of income or assets,

(5) failing to cooperate with tax authorities, (6) engaging in

illegal activities, (7) an intent to mislead which may be

inferred from a pattern of conduct, (8) lack of credibility of

the taxpayer’s testimony, (9) filing false documents, (10)

failing to file tax returns, and (11) dealing in cash.     Id.; see

also Spies v. United States, 317 U.S. 492, 499 (1943); 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.    Niedringhaus v. Commissioner, supra at 211.

Respondent must prove fraud for each year at issue.    See id. at

210; Ferguson v. Commissioner, T.C. Memo. 2004-90.

     Respondent has shown by clear and convincing evidence that

at least portions of the understatements on petitioner’s returns

for 1990, 1991, 1992, and 1993 are due to fraud.    We believe

petitioner took possession of Taxman’s cash receipts for his own

personal use with the intent to evade taxes on that income.
                              - 22 -

Petitioner instructed Ms. Jilek, who regularly deposited Taxman’s

income into its bank account, not to deposit Taxman’s cash

receipts into Taxman’s bank account.   Petitioner also reprimanded

Ms. Jilek when, on occasion, she did deposit the cash.    Instead,

petitioner took possession of the cash, and he admits that he

used some of the cash for his own personal expenses.   He did not

report the amounts used for personal expenses on his individual

tax returns.   Petitioner claims that some of the cash was used

for business expenses, but Ms. Jilek credibly testified that

although she remembers occasionally using cash to buy postage,

she does not remember using cash for any other business expense.

Petitioner did not keep track of how the cash was spent.   Ms.

Jilek was responsible for paying Taxman’s bills, signing checks

drawn on Taxman’s account, and using petitioner’s credit cards to

pay business expenses.   Respondent has shown that it was unusual

for Taxman to pay its expenses in cash.   Even small amounts were

paid by check.   Ms. Jilek could not remember petitioner or

herself using cash to pay Taxman’s expenses, except, sometimes,

for postage.   We do not find petitioner’s testimony that he used

the cash for business purposes credible, and we believe

petitioner took the cash with the intent to conceal income.

     Petitioner understated his income, maintained inadequate

records of amounts he received from Taxman, and concealed income

he received from Taxman.   Petitioner is collaterally estopped
                               - 23 -

from arguing here that he did not willfully file a false income

tax return for each of the years in issue.   We conclude that

respondent has shown by clear and convincing evidence that

petitioner filed false or fraudulent returns with the intent to

evade tax for the years at issue.   Therefore, the 3-year period

of limitations under section 6501(a) does not apply to any of

petitioner’s 1990, 1991, 1992, and 1993 years, and respondent is

not barred from assessing any deficiencies in petitioner’s taxes

for those years.

II.   Burden of Proof6

      Respondent’s determinations in the notice of deficiency are

presumed correct, and petitioner bears the burden of proving that

respondent’s determinations are incorrect.   See Rule 142(a); see

Welch v. Helvering, 290 U.S. 111, 115 (1933); Page v.

Commissioner, 58 F.3d 1342, 1347 (8th Cir. 1995), affg. T.C.

Memo. 1993-398.    Respondent asserted adjustments in an amended

answer that were not made in the notice of deficiency.

Respondent bears the burden of proof with respect to the items of

adjustment not raised in the notice of deficiency.   See Rule

142(a); see Achiro v. Commissioner, 77 T.C. 881, 889 (1981).



      6
      Sec. 7491 does not apply to this case because the
examination of petitioner’s 1990, 1991, and 1992 returns began
before July 22, 1998. See Internal Revenue Service Restructuring
and Reform Act, Pub. L. 105-206, sec. 3001(a), 112 Stat. 726.
The audit was subsequently expanded to include petitioner’s 1993
tax year.
                               - 24 -

Therefore, respondent bears the burden of proving that:    (1)

Petitioner had unreported income in each of 1990, 1991, 1992, and

1993 of $3,000 by means of cash diverted from Taxman; (2)

petitioner had unreported crop hail insurance commission income

in 1990 and 1991 of $12,882 and $3,142, respectively; (3)

petitioner had unreported real estate commission income of

$28,098, $9,276, and $69,540 in 1990, 1991, and 1993,

respectively; and (4) petitioner is liable for self-employment

tax on his unreported commission income.    Petitioner bears the

burden of proof on the remaining adjustments.

III.    Validity of Taxman and WFIC

       Respondent first argues that petitioner used both Taxman and

WFIC as his alter egos and they should be disregarded for tax

purposes.    Essentially, respondent asks us to find that Taxman

and WFIC lack economic substance and are shams.    Respondent

points to petitioner’s control over each corporation, his use of

corporate funds to pay personal expenses, and his inconsistent

representations of his positions in each corporation.     Petitioner

argues that he treated Taxman and WFIC as entities that were

legally separate from himself.

       Respondent does not argue that Taxman and WFIC were not

properly organized under North Dakota law.    However, even though

a corporation is organized under the laws of a State, we may

disregard it for Federal tax purposes if it is no more than a
                                - 25 -

vehicle for tax avoidance and void of a legitimate business

purpose.   Gregory v. Helvering, 293 U.S. 465 (1935); Aldon Homes,

Inc. v. Commissioner, 33 T.C. 582, 596 (1959).    While a taxpayer

is free to adopt the corporate form of doing business, the

corporation must have been organized for a substantial business

purpose or actually engage in substantive business activity in

order to be a viable business entity.     Moline Props., Inc. v.

Commissioner, 319 U.S. 436, 439 (1943) (stating that such

business purposes include gaining an advantage under the laws of

the State of incorporation, avoiding or complying with the

demands of creditors, and serving the creator’s personal or

undisclosed convenience); Aldon Homes, Inc. v. Commissioner,

supra at 597.

     On the other hand, a corporation remains a separate taxable

entity as long as the purpose for which it was formed “is the

equivalent of business activity or is followed by the carrying on

of business by the corporation”.     Moline Props., Inc. v.

Commissioner, supra at 438-439.    The degree of corporate business

purpose required for recognition of a separate corporate

existence is “extremely low.”     Strong v. Commissioner, 66 T.C.

12, 24 (1976), affd. 553 F.2d 94 (2d Cir. 1977); Lukins v.

Commissioner, T.C. Memo. 1992-569.

     The business purposes and activities of Taxman and WFIC were

sufficient to require recognition of them as separate legal
                               - 26 -

entities.   At the time Taxman was incorporated, petitioner was

being sued as an individual and as sole proprietor of his tax

preparation business.    Petitioner’s goal of obtaining limited

liability for his tax preparation business by operating his

business through Taxman is a sufficient business purpose for

Taxman to be recognized as a separate entity.    See Moline Props.,

Inc. v. Commissioner, supra at 438-439.    In addition, Taxman had

employees, filed tax returns, maintained books, records, and a

bank account, and held assets and liabilities.    This level of

ongoing business activity is also sufficient for the Court to

conclude that Taxman was not a sham corporation.    See id.

     WFIC was organized by Mr. Smith in 1949, and from 1988 until

1994, it operated a commercial real estate business.    Until 1991,

Mr. Smith remained actively involved in WFIC’s day-to-day

business operations and had an office in Taxman’s business space.

WFIC maintained books, records, and bank accounts and filed

corporate tax returns.    Petitioner applied for his real estate

broker’s license as an employee of WFIC and ran most of his real

estate transactions through WFIC’s trust account.    WFIC also had

other real estate agents working for it.    These business

activities are sufficient to convince us that WFIC was not a sham

and should be recognized as a corporate entity separate from

petitioner. See id.
                               - 27 -

IV.   Assignment of Income

       Although we have concluded that Taxman and WFIC should be

recognized as separate entities, WFIC’s real estate commission

income during the years at issue may nonetheless be taxable to

petitioner under section 61 and the assignment of income

doctrine.   See Haag v. Commissioner, 88 T.C. 604, 610 (1987),

affd. without published opinion 855 F.2d 855 (8th Cir. 1988).     A

taxpayer may not assign income to a corporation with real and

substantial business activity to avoid tax liability.     Wilson v.

United States, 530 F.2d 772, 778 (8th Cir. 1976).   Two

requirements must be fulfilled in order for a corporation, rather

than its service-performer employee, to be considered the earner

of the income and taxable thereon:

      First, the service-performer employee must be just
      that--an employee of the corporation whom the
      corporation has the right to direct or control in some
      meaningful sense. Second, there must exist between the
      corporation and the person or entity using the services
      a contract or similar indicium recognizing the
      corporation’s controlling position. [Citations and fn.
      ref. omitted.]

Johnson v. Commissioner, 78 T.C. 882, 891 (1982), affd. without

published opinion 734 F.2d 20 (9th Cir. 1984).

      Respondent argues that petitioner should have included on

his personal tax returns the real estate commissions paid to WFIC

during 1990, 1991, 1992, and 1993 because petitioner was the true

earner of those commissions.   Petitioner argues that WFIC earned

the real estate commissions.   Petitioner has the burden of proof
                                - 28 -

with respect to the $1,566 real estate commission earned in 1992.

Because the notice of deficiency included half the real estate

commission income earned during 1990, 1991, and 1993, petitioner

has the burden of proof with respect to half of the real estate

commissions at issue for those years.     In his amended answer,

respondent asserted the inclusion of the other half of the real

estate commission amounts for 1990, 1991, and 1993; therefore,

respondent has the burden of proof for half the real estate

commissions for those years.

     Petitioner did not present evidence at trial that he and

WFIC executed an employment contract at any time.     However, when

petitioner applied for his real estate broker’s license in 1990,

he stated that he would be an “acting broker for a corporation”,

listing WFIC as his employer.    Likewise, in correspondence

between petitioner and members of the NDREC, petitioner

acknowledged his relationship with WFIC and sought advice

regarding the proper way to advertise.     In addition, petitioner

used WFIC’s trust account to facilitate most of his real estate

transactions.

     In 1990 and 1991, all of petitioner’s real estate

transactions were brokered using WFIC’s trust account, and the

commission amounts were transferred to WFIC’s general account at

the conclusion of each transaction.      These amounts were reported

on WFIC’s 1990 and 1991 corporate tax returns.     Petitioner’s
                                - 29 -

dealings with the NDREC and his customers as an employee of WFIC

tend to show that for purposes of this test, WFIC had the right

to direct petitioner as an employee.      Petitioner’s use of WFIC’s

bank accounts to facilitate the real estate transactions also

demonstrates that WFIC was petitioner’s employer for real estate

matters.   The use of WFIC’s bank accounts and the presence of

WFIC’s name on documents such as settlement statements put WFIC’s

customers on notice that petitioner was operating as an employee

of WFIC.   This conclusion is supported by the fact that

petitioner’s customers wrote checks to WFIC or to Epic Real

Estate as a division of WFIC.    All these facts surrounding

petitioner’s operation of WFIC lead us to conclude that

petitioner has met his burden of proving that WFIC was the true

earner of the real estate commissions in 1990 and 1991, and

respondent has not met his burden of showing that petitioner

earned the 1990 and 1991 real estate commissions.

     In February 1992, petitioner changed his business name with

the NDREC from WFIC d/b/a Epic Real Estate to “James O. Jondahl

d/b/a Epic Real Estate”.   He also changed the name on WFIC’s

trust account to Epic Real Estate.       Petitioner completed one real

estate transaction in 1992.    The documents related to that

transaction reference Epic Real Estate but do not reference WFIC.

The commission, $1,566, was paid out of the WFIC/Epic Real Estate

trust account to petitioner.    Petitioner not only took formal
                              - 30 -

steps to separate his real estate activity in 1992 from WFIC but

also acted as a sole proprietor in the 1992 transaction.    These

facts indicate that WFIC was not the true earner of the 1992

commission.   Petitioner has not met his burden of proving that he

did not earn the 1992 commission of $1,566.

     In 1993, petitioner brokered one transaction for which a

commission of $28,000 was transferred from WFIC’s trust account

to its checking account and another transaction for which Epic

Real Estate received a commission of $102,080.   The documents

related to this second transaction, including a commission check,

referred to Epic Real Estate as a division of WFIC.   Petitioner

deposited the proceeds from the transaction into WFIC’s general

account.   Likewise, in November 1993, petitioner brokered a

transaction for his sister in which Epic Real Estate received a

commission of $9,000.   Petitioner also deposited this check into

WFIC’s general account.   These amounts were reported on WFIC’s

corporate tax return for 1993.   Petitioner changed the business

name with the NDREC back to “West Fargo Investment Corporation

d/b/a Epic Real Estate” on September 24, 1993, indicating his

intent to operate the real estate business through WFIC again.

We conclude that, for the purpose of the 1993 real estate

transactions, petitioner was again an employee of WFIC.

Petitioner has met his burden of proving that WFIC was the true

earner of the real estate commissions in 1993, and respondent has
                                - 31 -

not met his burden of showing that petitioner earned the real

estate commissions.7

     Petitioner argues that expenses associated with the real

estate commission he earned should be taken into account.       The

burden of proving entitlement to deductions is on petitioner.

See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

Because petitioner did not present any evidence that he paid any

expenses or is entitled to any deductions against the real estate

income, we conclude that the full amount of the 1992 commission,

$1,566, is income to petitioner.

V.   Other Adjustments

     A.   Sale of and Commissions From Crop Hail Insurance
          Business

     Petitioner sold crop hail insurance as a sole proprietor

beginning in 1977.     He asserts that in 1986, his crop hail

insurance business was transferred to Taxman, along with his tax

preparation and bookkeeping businesses.     He claims that in 1989,

Taxman transferred the crop hail insurance business to WFIC

because it was confusing for customers to receive crop hail

insurance bills from a company called “Taxman”.     On May 9, 1990,

petitioner entered into a purchase contract with Mr. Ihry to sell



     7
      Respondent did not raise the potential application of sec.
482 to petitioner’s arrangement with WFIC. See, e.g., Haag v.
Commissioner, 88 T.C. 604, 614 (1987), affd. without published
opinion 855 F.2d 855 (8th Cir. 1988). Therefore, we do not
address it.
                               - 32 -

the crop hail insurance business for $25,000.    Respondent argues

that the $25,000 is income to petitioner in 1990.    Petitioner has

the burden of proving that the sale proceeds were not income to

him.    Petitioner maintains that WFIC owned the crop hail

insurance business when it was sold.

       Petitioner did not present any documentation of the

purported transfers of the business to Taxman and to WFIC.      In

the 1987 deposition, petitioner admitted that the transfer to

Taxman was not documented.    The 1990 purchase agreement was

between Mr. Ihry and Jondahl Insurance, not WFIC.    Likewise, the

checks paid for the purchase of the business by Mr. Ihry were

made out to Jondahl Insurance, although petitioner deposited the

checks into WFIC’s bank account.    Jondahl Insurance was a party

to agency agreements with Farmer’s Mutual and Old Republic

Insurance Co. in 1986 and 1989, after its alleged transfer.

Neither Taxman nor WFIC is mentioned on either contract.

Farmer’s Mutual listed “Jondahl Insurance Agency” on its policy

registers for 1990 and 1991.    Petitioner has not shown any

evidence to support his claim that his insurance customers

received bills from Taxman or that any customers were confused as

to the ownership of the business.    In addition, petitioner did

not report capital gain from the sale of the insurance business

on WFIC’s 1990 or 1991 corporate return.
                              - 33 -

     Petitioner did not change any activity with respect to the

crop hail insurance business, formally or informally, after he

allegedly transferred the business to Taxman and WFIC, except

that he deposited the income from the business, including the

sale proceeds, into WFIC’s bank account.   Petitioner’s deposits

of insurance income into WFIC’s bank accounts, in the absence of

any other proof that WFIC held the insurance business, do not

prove that a transfer occurred.   Petitioner alleges that he

reported insurance commissions on Taxman’s and WFIC’s corporate

returns, but he has not presented itemized lists of income for

the corporations.   In addition, petitioner’s failure to inform

his insurance customers that he was acting on behalf of a

corporation is a factor indicating that State law may not have

afforded petitioner corporate liability protection.   See

Hilzendager v. Skwarok, 335 N.W.2d 768, 774 (N.D. 1983).8

     Petitioner also argues that he should not be required to

include the crop hail insurance sale proceeds in his personal

income because an IRS audit of his 1987 individual return

required him to remove certain deductions from his individual


     8
      The parties stipulated that North Dakota law did not allow
corporations to hold insurance licenses until 1995. Our analysis
of North Dakota insurance law, however, revealed no such
limitation. In any case, we do not consider this factor to be
relevant to our determination. Cf. Jones v. Commissioner, 64
T.C. 1066 (1975) (holding that a court reporter’s assignment of
income to her personal service corporation was invalid because
State law did not allow corporations to perform court reporter
services).
                               - 34 -

return.   He claims the IRS characterized the items as corporate

expenses.    The record contains two documents from the audit of

petitioner’s 1987 return, a statement of income tax examination

changes and a partially redacted copy of a letter from the

revenue agent.   Although it is clear that certain deductions were

removed from petitioner’s individual return pursuant to the

audit, neither document refers to the crop hail insurance

business, Taxman, or WFIC.   We find no relevance in the audit

documents regarding the sale of the crop hail insurance business.

     We conclude that petitioner has not met his burden of

proving that the crop hail insurance business was transferred to

Taxman and WFIC.   Consequently, any sale proceeds or commission

income earned by Jondahl Insurance while petitioner owned the

insurance business was properly taxable to petitioner, not WFIC

or Taxman.

     Three checks from Mr. Ihry to Jondahl Insurance are in the

record evidencing the payment of the purchase price, dated May 9,

1990, November 2, 1990, and November 19, 1990, for $1,000,

$3,962, and $10,000, respectively.      The purchase agreement

between petitioner and Mr. Ihry provided that petitioner would

receive commissions from Farmer’s Mutual earned in 1990 and 1991,

and the amount Mr. Ihry owed would be reduced by the amount of

the commissions.   The parties stipulated that Jondahl Insurance

received $10,038 from Farmer’s Insurance in 1990, representing a
                               - 35 -

portion of the commissions earned by Jondahl Insurance between

May and November 1990.   This amount plus the checks issued by Mr.

Ihry (totaling $14,962) equal $25,000.   We conclude that capital

gain of $14,962 and ordinary income from commissions of $10,038

should be included in petitioner’s 1990 income.

     Respondent has introduced Farmer’s Mutual policy registers

for 1990 and 1991 showing that Jondahl Insurance earned insurance

commissions of $12,881.70 in 1990 and $3,141.95 in 1991.

Respondent contends that these amounts are income to petitioner

in addition to the $25,000 sale proceeds.   Because respondent

asserted an increased deficiency in his amended answer based on

the inclusion in income of the insurance commissions, respondent

has the burden of proving that petitioner received the

commissions.   See Rule 142(a).

     Respondent does not explain why petitioner would have

received commission income after he sold the business at the end

of 1990.   From the record before us, it appears that the

commission amounts listed in the Farmer’s Mutual policy registers

may include the amount paid as part of the purchase price

($10,038), which we have already determined was income to

petitioner.    It is also possible that the additional commissions

listed for 1990, to the extent they exceed $10,038 ($2,844), and

the $3,141.95 listed for 1991 were received by Mr. Ihry after the

business was sold or were part of the purchase price, settled by
                               - 36 -

a charge-back between Mr. Ihry and petitioner.    The record does

not show that petitioner in fact received the commissions for

1990 and 1991 beyond the $10,038 paid as part of the purchase

price.    On the basis of the record before us, we conclude that

respondent has not met his burden of showing that the insurance

commissions of $12,881.70 in 1990 and $3,141.95 in 1991 were

income to petitioner.

     B.     Repossession of Lone Tree Manor

     Capital gain of $22,028 was reported on WFIC’s 1990

corporate return as gain from the repossession of Lone Tree

Manor.    Respondent argues that petitioner, not WFIC, should

recognize capital gain of $20,244 from the repossession.

Petitioner does not explain how the amount of capital gain

($22,028) was reached for the purpose of WFIC’s return, and we

afford respondent’s determinations a presumption of correctness.

See Rule 142(a).    Petitioner contends that he bought Lone Tree

Manor in 1987 in his own name for the assumption of a mortgage on

the property held by IRET.    He also claims that in 1989 he

transferred Lone Tree Manor to WFIC in exchange for WFIC’s

assumption of the debt and other consideration.    Petitioner did

present an alleged purchase agreement evidencing the transfer of

Lone Tree Manor to WFIC, but the copy entered into evidence does

not show the date on which it was signed or the date the purchase

was effective.    It is a one-page document that lists Lori as the
                                - 37 -

seller and WFIC as the buyer.     It is signed on behalf of WFIC by

petitioner’s sister, Janeen Conrad.      Petitioner did not produce

any accompanying documents, such as the title to the property,

the IRET mortgage, the canceled note to petitioner, or any Forms

1099 showing interest paid on the IRET mortgage.     The record does

not show that petitioner transferred title to Lone Tree Manor to

Lori (for sale to WFIC) or WFIC.     We do not believe that

petitioner has met his burden of proving that WFIC owned Lone

Tree Manor at any time.     We conclude that capital gain of $20,244

from the repossession of Lone Tree Manor was income to petitioner

for 1990.

     C.     Other Income

     Respondent argues that petitioner received multiple items of

unreported income in each year at issue.      Petitioner argues that

he is not liable for income tax on the unreported items for

various reasons.     Petitioner bears the burden of proving that the

items listed in the notice of deficiency are not taxable to him.

Respondent bears the burden of showing that petitioner received

$3,000 from Taxman in each of 1990, 1991, 1992, and 1993.

            1.    Unreported Income in 1990

     Respondent adjusted petitioner’s 1990 income to include

Taxman’s $6,000 payment of the settlement judgment against

petitioner in connection with his clients’ tax shelter

investments.     Petitioner argues that Taxman assumed the
                               - 38 -

liabilities of the sole proprietorship, including the settlement

judgment, when it took over the business in 1986.   However, in

the 1987 deposition, petitioner stated that the only liabilities

Taxman assumed were two bank loans totaling $31,000.   Petitioner

did not document the transfer of assets and liabilities to Taxman

and has not provided any evidence that Taxman assumed the

settlement liability.

     Petitioner also argues again that the IRS audit of his 1987

tax return required him to treat the settlement judgment payment

as a corporate expense.   The audit papers in the record contain

no reference to the settlement judgment or the liabilities that

were or were not transferred to Taxman.   Petitioner has not met

his burden of proving that Taxman assumed the $6,000 liability;

therefore, the $6,000 payment is compensation income to

petitioner for 1990.

     Taxman paid $310 to the law firm of Pearson, Christensen &

Fischer during 1990.    The payment was for consultations between

petitioner and Mr. Pearson regarding Schedules C, Profit or Loss

From Business (Sole Proprietorship), of petitioner’s personal

income tax returns for 1982, 1983, and 1984.   Petitioner claims

that he did not report the $310 as personal income because Taxman

assumed the liabilities of his sole proprietorship, and he was

instructed in the audit for his 1987 return to place “deductions

of business expenses” on Taxman’s return.   The audit of
                              - 39 -

petitioner’s 1987 return has no relevance to business expenses of

the sole proprietorship in 1982, 1983, and 1984, because any

business expenses taken as deductions for those years were

incurred before Taxman existed.    In addition, we concluded above

that the record does not support that Taxman assumed any

liabilities other than two bank loans.   Therefore, petitioner had

income of $310 in 1990 from Taxman’s payment for petitioner’s

personal legal expenses.

     In 1990, Taxman also repaid a bank loan for $2,000, plus

interest of $147, that had been obtained in petitioner’s name in

July 1989.   Petitioner claims that he obtained the loan in his

own name because Taxman had reached the limit of its line of

credit with the bank.   Petitioner testified that he deposited the

funds into WFIC’s account, and WFIC used the funds until it

received its tax refund in 1990.

     The 1989 bank statements for WFIC, Taxman, and petitioner

are not part of the record.   Petitioner offered no evidence that

Taxman’s credit limit had been reached or that the loan funds

were deposited into WFIC’s bank account.   We give little weight

to petitioner’s testimony on this matter given that he claimed

Taxman had reached the limit of its line of credit but WFIC used

the funds and repaid the loan.    We do not believe petitioner has

met his burden of proving the $2,147 was not repaid on his behalf
                               - 40 -

by Taxman.   Petitioner therefore must include the $2,147 as

compensation income in 1990.

          2.    Unreported Income in 1991

     In 1991, Taxman accepted a stereo worth $509 from a client

in exchange for a corresponding reduction in the client’s bill.

Petitioner then gave the stereo to his girlfriend, Ms. Lane.

Respondent argues that petitioner’s income should be adjusted by

$509 to reflect the value of the stereo.      Petitioner argues that

he gave Ms. Lane the stereo and in exchange she worked in a

Taxman Express office for 1 month.      We believe the stereo was

compensation to Ms. Lane from Taxman.      Ms. Lane credibly

testified that she worked at the Taxman Express office because

she wanted to pay petitioner back for the stereo after she

received it.   We believe the arrangement between petitioner and

Ms. Lane resulted in a benefit to Taxman that is equal to or

greater than the value of the stereo.      As a result, we do not

believe that the value of the stereo is income to petitioner.

     Taxman paid petitioner $2,052 in 1991.     Petitioner argues

that as a result of the 1987 audit, the $2,052 was removed from

his personal Schedule C because it was an expense of Taxman.        He

claims that in order for Taxman to take the expense as a

deduction, the revenue agent advised him that Taxman should

reimburse petitioner for the amount of the expense in 1991.

Therefore, petitioner argues that the $2,052 was not income to
                                - 41 -

him in 1991 because it was a reimbursement of the earlier expense

he paid on behalf of Taxman.

     The statement of income tax examination changes from the

1987 audit disallows a $2,052 deduction from petitioner’s

Schedule C.   This statement is signed by the revenue agent with a

date of December 28, 1990.   The record also includes a portion of

a letter from the IRS to petitioner and Lori explaining that the

$2,052 was removed because it was “not an expense of the * * *

[taxpayer], but an expense of another”.   The only references to a

“reimbursement” on the audit documents are handwritten notes by

petitioner.   No official correspondence from the revenue agent

refers to reimbursement.

     Petitioner has shown that an expense of $2,052 was

disallowed on his 1987 personal return.   However, he has not

shown that he actually paid the expense on Taxman’s behalf in

1987, that it was a properly deductible expense of Taxman, or

that the revenue agent instructed him that reimbursement was an

appropriate course of action.    We do not believe that petitioner

has met his burden of proving that the $2,052 Taxman paid him in

1991 was reimbursement for an expense petitioner paid in 1987.

Therefore, the $2,052 is income to petitioner in 1991.

     During 1991, petitioner bought furniture using a credit card

issued in his name.   All of the payments on the credit card

during 1991 and 1992 were made by Taxman.   In 1991, Taxman paid
                                - 42 -

$2,086 toward the price of the furniture.     Petitioner argues that

the amounts Taxman paid for his furniture were loans to him.

     Petitioner claims that the loans were recorded on the “loan

schedule as a note receivable” and the balance sheet on Taxman’s

1991 corporate return.    Respondent entered into the record a

document that appears to be a schedule of loans from Taxman and

WFIC to petitioner.    For 1991, the schedule shows no loans from

Taxman to petitioner and $29,800 in loans from WFIC to

petitioner.    Taxman’s 1991 corporate tax return does not reflect

any new loans to petitioner in 1991.     WFIC’s 1991 corporate

return lists receivables of $29,800, and a purported schedule of

loans from WFIC to Taxman also states that WFIC lent Taxman

$29,800 in 1991.    Taxman’s balance sheets, filed with its tax

returns for 1991 and 1992, do not list these amounts as

liabilities.

     Whether a withdrawal of funds from a corporation creates a

true debtor-creditor relationship is a factual question to be

decided on the basis of all of the relevant facts and

circumstances.     Haag v. Commissioner, 88 T.C. at 615.   For

disbursements to constitute true loans, there must have been an

unconditional obligation on the part of the transferee to repay

the money and an unconditional intention on the part of the

transferor to secure repayment at the time that the funds were

transferred.     Id. at 615-616; see also Haber v. Commissioner, 52
                               - 43 -

T.C. 255, 266 (1969), affd. 422 F.2d 198 (5th Cir. 1970).    Courts

have focused on certain objective factors to distinguish bona

fide loans from disguised dividends, compensation, and

contributions to capital.   The factors considered relevant for

purposes of identifying bona fide loans include (1) the existence

or nonexistence of a debt instrument; (2) provisions for

security, interest payments, and a fixed payment date; (3)

treatment of the funds on the corporation’s books; (4) whether

repayments were made; (5) the extent of the shareholder’s

participation in management; and (6) the effect of the “loan” on

the transferee’s salary.    Haber v. Commissioner, supra at 266.

When the individual is in substantial control of the corporation,

as petitioner is in this case, special scrutiny of the situation

is necessary.    Id.; Roschuni v. Commissioner, 29 T.C. 1193, 1202

(1958), affd. 271 F.2d 267 (5th Cir. 1959).

     From the record, it is possible that WFIC lent money to

Taxman in 1991, which then lent the amounts to petitioner for his

furniture purchase.   However, although petitioner has shown that

WFIC may have lent amounts to Taxman during 1991, he has not

shown any evidence of a loan from Taxman to himself during 1991.

He does not claim that a debt instrument was created, and none is

in the record.   Petitioner has provided no evidence that he

offered anything as security for the loan, interest payments on

the principal amount, or fixed payment dates.   As we stated
                              - 44 -

above, the loan was not recorded on Taxman’s books, and there is

no evidence that petitioner repaid any of the $2,086.    Although

petitioner was not a shareholder of Taxman, he controlled the

management and day-to-day operations of Taxman.    The shareholders

did not participate at all in the business.   The record does not

reflect how, if at all, the loans affected petitioner’s salary

from Taxman.   We conclude that Taxman’s payment of petitioner’s

credit card debt in 1991 for his furniture did not create a loan

between petitioner and Taxman.   Instead, the $2,086 payment

should be treated as compensation to petitioner and included in

his 1991 income.

          3.    Unreported Income in 1992

     As mentioned above, Taxman paid $1,904 toward petitioner’s

furniture purchase in 1992.   Taxman also paid $15,000 toward

petitioner’s personal tax liability from an earlier year.

Petitioner claims the $15,000 was reflected in two promissory

notes he executed between Taxman and himself.     No debt instrument

was created for the furniture payment.   The record contains no

evidence that petitioner gave security for the loans or provided

for fixed payment dates.   However, the loan schedule for Taxman

and WFIC that is in the record and Taxman’s 1992 corporate return

reflect that Taxman lent petitioner a total of $20,856 in 1992.

This amount is more than the two loans petitioner argues he

received from Taxman in 1992 and may include additional loans for
                                - 45 -

that year not challenged by respondent.   The loan schedule

provides for an interest rate of 7 percent and shows that

petitioner purportedly repaid some of the debt in a later year.

We believe petitioner has proven that he borrowed $1,904 and

$15,000 from Taxman in 1992.    Therefore, these amounts were not

income to petitioner in 1992.

     Respondent also determined in the notice of deficiency that

petitioner was required to include in income the balance of WRP’s

money market account ($10,931) that he withdrew in April 1992.

The parties stipulated that the $10,000 given to petitioner by

Ms. Garceau was not used for real estate investments as Ms.

Garceau intended.   As we understand petitioner’s argument, he

asserts that in 1995, he repaid Ms. Garceau the $10,000 plus 8

percent interest, borrowing the funds necessary to do so from

WFIC.   He claims a promissory note in the record for $13,674.35

(which approximately equals $10,000 plus 8 percent interest,

compounding annually over 5 years) evidences the transaction.

However, petitioner has not shown that he actually repaid Ms.

Garceau or WRP.   The record does not contain petitioner’s or

WFIC’s bank statements for 1995, and we cannot verify that

$13,674.35 was withdrawn from either of them.   Ms. Garceau did

not testify, and petitioner’s testimony on this matter was

unsupported by the record.   In addition, the purported debt for

$13,674.35 is not reflected on WFIC’s 1992 loan schedule or
                                - 46 -

corporate tax return.    Therefore, we agree with respondent that

petitioner must report the $13,674.35 as compensation received in

1992.

           4.     Unreported Income in 1993

     In 1993, Taxman paid $310 to repair a 1991 Ford Probe owned

by Mary.   Petitioner argues that the $310 was an expense of

Taxman because he used the car on business trips.     Specifically,

petitioner testified that he “thinks” he used Mary’s car “a

couple of times for business trips.”     Petitioner offered no

evidence beyond his testimony on the business trips for which he

used Mary’s car.    Given the uncertainty with which he testified

and his lack of proper record keeping, petitioner has not met his

burden of proving that the $310 for the car repair was not

compensation to him in 1993.

     In 1993, WFIC, doing business as Epic Real Estate, brokered

a real estate transaction for petitioner’s sister, Ms.

Schoeppach.     As part of the transaction, WFIC issued a check for

$7,000 to Ms. Schoeppach.     Eight days later, Ms. Schoeppach paid

Epic Real Estate $7,000 as a downpayment.     Respondent determined

in the notice of deficiency that the $7,000 payment by WFIC to

Ms. Schoeppach was income to petitioner.      Petitioner argues that

after the transaction was completed, he canceled Ms. Schoeppach’s

$7,000 debt to WFIC because Epic Real Estate received a $9,000

commission which WFIC reported on its 1993 corporate return.
                              - 47 -

Petitioner claims he canceled the debt because he thought the

$9,000 commission was “inappropriate”.   Because petitioner was an

agent of WFIC, his unilateral decision to effectively reduce

WFIC’s commission by $7,000 without an adequate explanation shows

that the $7,000 was in substance compensation from WFIC to

petitioner, who then gave it as a gift to his sister.

Consequently, the $7,000 is compensation includable in

petitioner’s 1993 income.

     In October 1993, petitioner paid for the Buick with WFIC’s

funds.   Respondent includes the price of the car in petitioner’s

income in the notice of deficiency.    Petitioner claims that the

car was purchased for WFIC’s business use and that a mileage log

was kept for business purposes.   He also claims that Mary

reported compensation income on her 1993 and 1994 personal tax

returns and received Forms W-2 in 1993 and 1994 for her use of

the Buick.

     Petitioner did not produce either Mary’s 1993 tax returns or

Forms W-2 or her 1994 Forms W-2 or tax returns.   The purported

mileage log of automobile use for 1993 is in the record.     First,

we do not find the mileage log to be a credible representation of

petitioner’s and Mary’s use of the Buick.   The mileage log

includes entries for the months of July, November, and December

1993, but the Buick was not purchased until October 15, 1993,

according to the purchase contract.    In addition, the mileage log
                               - 48 -

lists the beginning mileage (as of July 1993) as 7,660, but the

purchase contract and odometer statement filed with the State and

signed by Mary list the mileage at the time of the sale as 7,435.

Petitioner does not explain the discrepancies.

     Second, WFIC is listed as the purchaser of the Buick on the

purchase contract, but Mary is listed as the purchaser on the

odometer disclosure statement, the damage disclosure statement,

and the application for certificate of title and registration of

a motor vehicle, all filed with the North Dakota Department of

Transportation Motor Vehicles Division.   Mary either signed or

filled out each official document filed with the Motor Vehicles

Division.    A draft registration application is included in the

record listing WFIC as the car’s owner, but it is noted “12/3

changed to Mary Jondahl”.

     Third, the Buick was issued personalized license plates

reading “PURRFCT”.    Fourth, a 1991 Ford Probe, titled in Mary’s

name, was traded in and $10,100 was credited to the purchase of

the Buick.   Lastly, petitioner and Mary filled out and signed two

loan applications that list the Buick as an asset personally

owned by them.   The title to the Buick is not part of the record.

All of these facts in the record indicate that petitioner and his

wife, not WFIC, were the true owners of the Buick.   The record
                               - 49 -

shows that WFIC paid $18,660 toward the cost of the Buick.9

Petitioner must include this amount as compensation in 1993.

            5.   Cash Receipts of $3,000 From Taxman

     Respondent argues that petitioner must report $3,000 of

compensation for each of 1990, 1991, 1992, and 1993, representing

Taxman’s cash receipts petitioner used for his own personal

expenses.   Because the issue was raised in an amended answer,

respondent has the burden of proving the $3,000 was income to

petitioner in each year.

     We found above that respondent has proven by clear and

convincing evidence that petitioner fraudulently used at least a

portion of the $3,000 for his own personal expenses.    Petitioner

argued at trial that he used some of the cash to pay for business

expenses of Taxman.   Respondent has shown that petitioner did not

keep any records of these business expenses and that the income

and offsetting expenses were not reported on Taxman’s corporate

returns.    Ms. Jilek credibly testified that she could not recall

an instance, other than occasional purchases of postage, in which

she or petitioner paid an expense of Taxman in cash.    Even small

expenses were paid by check.    In addition, Ms. Jilek testified

that she did not know how petitioner spent the cash.    This is



     9
      The purchase price of the Buick was $27,800, plus tax of
$885 and “license and fees” of $75, totaling $28,760. This
amount was reduced by the value of the Ford Probe trade-in,
$10,100, for a net amount payable by WFIC of $18,660.
                                  - 50 -

particularly persuasive in light of the fact that petitioner

trusted Ms. Jilek with all other financial aspects of Taxman,

including making her a signatory on its bank accounts and his

personal credit cards.      Petitioner’s testimony on this matter is

self-serving.    He does not address the $3,000 adjustments in his

posttrial briefs.      Respondent has met his burden of proving that

petitioner used the $3,000 each year for personal expenses.

Therefore, we find that petitioner must include $3,000 of

compensation income for each of 1990, 1991, 1992, and 1993.

     D.     Head of Household for 1990

     Petitioner filed his 1990 individual income tax return

claiming head of household filing status.       Respondent denied this

filing status in the notice of deficiency.       A taxpayer may file

as the head of a household only if he is not married or is

legally separated under a decree of divorce or separate

maintenance at the close of the taxable year, he maintains a

household which constitutes the principal place of abode of his

child for more than half the taxable year, and he furnishes over

half the cost of maintaining the household during the taxable

year.     Sec. 2(b).   Petitioner lived with Lori and their daughter

until June 1990.       Petitioner and Lori were granted a divorce on

July 9, 1991.     Petitioner did not show that he and Lori were

legally separated at the end of 1990.       In addition, petitioner

did not present evidence that he provided more than half of the
                              - 51 -

cost of maintaining a household for his daughter in 1990.    We

conclude that petitioner did not meet his burden of proving that

he is entitled to claim head of household status for 1990.

     E.   Self-Employment Tax on Commission Income

     Respondent argues that petitioner is liable for self-

employment taxes on the commissions he earned from his real

estate and crop hail insurance activities.    Section 1401 imposes

tax on self-employment income.   Section 1402 defines net earnings

from self-employment as the gross income derived by an individual

from the carrying on of any trade or business by such individual

less allowable deductions attributable to such trade or business.

Respondent argues that petitioner is a “qualified real estate

agent” within the meaning of section 3508, and that he is liable

for self-employment taxes on real estate and insurance

commissions he earned.   Respondent has the burden of proof with

respect to petitioner’s liability for self-employment tax.

     We found above that WFIC, not petitioner, earned the real

estate commissions in 1990, 1991, and 1993.   Therefore,

petitioner is not liable for self-employment taxes on real estate

commissions in 1990, 1991, and 1993.   Because petitioner earned a

real estate commission as a sole proprietor in 1992, he is liable

for self-employment tax on the commission regardless of whether

he is a “qualified real estate agent” under section 3508.    We

also found that petitioner earned crop hail insurance commissions
                                - 52 -

of $10,038 in 1990.   He is therefore liable for self-employment

tax on $10,038 in 1990.

     F.   Section 6663(a) Fraud Penalty

     If respondent shows that any portion of an underpayment is

due to fraud, the entire underpayment will be treated as

attributable to fraud for purposes of the penalty under section

6663(a), except any portion of the underpayment that petitioner

establishes by a preponderance of the evidence is not

attributable to fraud.    See sec. 6663(b); Knauss v. Commissioner,

T.C. Memo. 2005-6.    We held above that respondent proved by clear

and convincing evidence that petitioner used at least some of

Taxman’s cash for his own personal expenses with the intent to

evade taxation on the income.    We also held that respondent has

proven that petitioner used all of Taxman’s $3,000 in cash

receipts for personal expenses.    Petitioner’s lack of record

keeping, blatant efforts to hide the existence of the cash, and

use of the cash for personal expenses show that he intentionally

concealed all of Taxman’s cash receipts and took possession of

the money with the intent to evade taxes.       Therefore, the

section 6663(a) fraud penalty for each year applies to the

portion of the deficiency in petitioner’s tax attributable to the

$3,000 understatement of income.

     Respondent argues that the fraud penalty applies to the

entire amounts of the deficiencies.      An analysis of whether
                              - 53 -

petitioner has shown by a preponderance of the evidence that

certain items were not fraudulent is necessary.   We found above

that many of the adjustments respondent made were appropriate

because petitioner failed to present enough evidence to the

contrary to meet his burden of proof.   However, we believe that

petitioner has shown by a preponderance of the evidence that the

remaining adjustments were not the result of fraud.   Petitioner

was negligent in his failure to provide documentation of certain

loans from Taxman and WFIC and his failure to properly document

the transfer of his sole proprietorship to Taxman, but he did not

intend to evade tax on these items.    While petitioner’s attempts

to conceal his use of at least $3,000 of Taxman’s cash receipts

each year indicates fraudulent intent, the other adjustments do

not rise to the level of fraud.   Petitioner, albeit incorrectly,

reported gain from the sale of Lone Tree Manor on WFIC’s

corporate return.   He also had plausible explanations for each

item of other income identified by respondent, although he did

not produce supporting documentation.   Petitioner did show that

WFIC and Taxman kept corporate records, and the record includes

various loan schedules and corporate tax returns.   A review of

the record shows that petitioner’s actions with respect to the

other items respondent adjusted were the result of negligence,

but the records petitioner did maintain and the separate

corporate accounts refute a fraudulent intent for the other
                              - 54 -

adjustments.   A high level of negligence does not alone prove

fraud.   Fraud may not be imputed or presumed from “‘circumstances

which at most create only suspicion.’”   Webb v. Commissioner, 394

F.2d 366, 377 (5th Cir. 1968) (quoting Carter v. Campbell, 264

F.2d 930, 935-936 (5th Cir. 1959)), affg. T.C. Memo. 1966-81.

     “Fraud implies bad faith, intentional wrongdoing and a
     sinister motive. * * * Negligence, whether slight or
     great, is not equivalent to the fraud with intent to
     evade tax named in the statute. The fraud meant is
     actual, intentional wrongdoing, and the intent required
     is the specific purpose to evade a tax believed to be
     owing. Mere negligence does not establish either. * * *”
     [Id.]

If we leave aside petitioner’s concealing $3,000 in cash each year,

his explanations for the other adjustments, while not establishing

that the items should not be included as income, refute an

assertion that he had fraudulent intent in omitting the items from

his returns.   As a result, the section 6663(a) fraud penalty is not

sustained with respect to the remaining adjustments.

     To reflect the foregoing and concessions by the parties,


                                         Decision will be entered

                                    under Rule 155.
