                                  T.C. Memo. 2013-107


                          UNITED STATES TAX COURT




           JOSEPH E. LACINY AND MARY A. LACINY, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent




      Docket No. 7710-09.                              Filed April 15, 2013.




      William Randolph Shump, for petitioners.

      Bradley C. Plovan and Nancy M. Gilmore, for respondent.




             MEMORANDUM FINDINGS OF FACT AND OPINION


      THORNTON, Judge: Respondent determined the following deficiencies and

penalties with respect to petitioners’ Federal income tax:1


      1
       Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect for the years at issue, and all Rule references are to the Tax Court
                                                                           (continued...)
                                          -2-

[*2]                                                      Penalties
                                               Sec. 6663               Sec. 6662
             Year           Deficiency        (Mrs. Laciny)           (Mr. Laciny)

             1996            $14,758            $11,069                $2,952
             1997             31,524             23,643                 6,305
             1998             42,305             31,729                 8,461
             1999             17,585             13,189                 3,517

The issues for decision are: (1) whether petitioners failed to report certain income

during the years at issue; (2) whether Mrs. Laciny is liable for a civil fraud penalty

under section 6663(a), or alternatively whether she and Mr. Laciny are liable for an

accuracy-related penalty under section 6662(a), for each year at issue; and (3)

whether the period of limitations on assessment expired before respondent issued

the notice of deficiency.

                                FINDINGS OF FACT

       The parties have stipulated some facts, which we incorporate herein by this

reference. When they filed their petition, petitioners resided in Maryland.

Petitioners’ Business

       Petitioners started Sta-Cool Air Conditioning & Heating, Inc. (Sta-Cool), in

April 1973. During the years at issue they were Sta-Cool’s operating managers


       1
        (...continued)
Rules of Practice and Procedure. Dollar amounts have been rounded to the nearest
dollar.
                                        -3-

[*3] and the sole shareholders. Mary Thompson was employed as Sta-Cool’s

bookkeeper. As part of her duties, she paid company expenses by writing company

checks, which Mrs. Laciny usually signed. Mary Thompson had no signature

authority to sign Sta-Cool’s business checks. Mrs. Laciny reviewed and maintained

Sta-Cool’s accounting records and instructed its accountants, including Mary

Thompson, as to which accounting ledger accounts various expenses should be

charged to and how they should be classified.

      Under Mrs. Laciny’s direction Sta-Cool manipulated its books and records

and paid on petitioners’ behalf personal expenses of $37,019, $49,029, $59,186,

and $35,394 for tax years 1996, 1997, 1998, and 1999, respectively. Mrs. Laciny

also caused Sta-Cool to reimburse petitioners certain amounts for personal expenses

during these same years. During 1996 through 1999 Mrs. Laciny caused Sta-Cool

to pay petitioners a total of $93,616, $161,647, $181,859, and $144,843,

respectively, not including reimbursements and other nontaxable payments. On

their individual tax returns, however, petitioners reported income from Sta-Cool

totaling $84,957, $89,539, $126,707, and $144,511, respectively, for these same

years.2



      2
       The parties have stipulated these amounts; we have been unable, however, to
duplicate these amounts from the evidence in the record.
                                         -4-

[*4]   In 1997 petitioners lent Sta-Cool $22,675 so that it could satisfy a judgment

lien that Cobb Construction Co. held. Purportedly in repayment of this loan Sta-

Cool paid petitioners $24,000 in 1997 and $25,000 in 1998. On their 1998 joint

income tax return petitioners reported $10,675 of interest income with respect to

this loan.

       During the years at issue petitioners owned two properties in Clinton,

Maryland, and White Plains, Maryland (the business properties), which they rented

to Sta-Cool for business purposes. On petitioners’ 1996, 1997, 1998, and 1999 tax

returns they reported receiving rental income totaling $28,319, $16,000, $25,241,

and $30,006, respectively. During its fiscal years ended March 31, 1996 through

1999, Sta-Cool reported deductions for rent paid of $32,948, $36,260, $41,501, and

$41,441, respectively.

       For the years at issue Shelby Bowles, C.P.A. prepared petitioners’ and Sta-

Cool’s income tax returns using information that Mrs. Laciny provided.

Mrs. Laciny’s Criminal Case

       In 2004 Mrs. Laciny was indicted under section 7206(1) and 18 U.S.C. sec. 2

(2000), for filing false individual and corporate income tax returns for tax years

1995 through 1999. In a superseding indictment filed on March 2, 2005, Mrs.

Laciny was charged with conspiracy under 18 U.S.C. sec. 371 (2000), filing false
                                          -5-

[*5] individual income tax returns for tax years 1998 and 1999, filing false corporate

income tax returns for fiscal years ended March 31, 1998 and 1999, under section

7206(1), and aiding and abetting under title 18 U.S.C. sec. 2.

      On October 12, 2006, Mrs. Laciny signed a plea agreement, attached to

which was a statement of facts which she signed and a worksheet calculating the

“Total Unreported Diverted Funds”.3 Mrs. Laciny pleaded guilty to two counts of

filing false individual income tax returns under section 7206(1) for tax years 1998

and 1999 and two counts of filing false corporate income tax returns under section

7206(1) for 1998 and 1999. Pursuant to her plea agreement Mrs. Laciny was

sentenced to 12 months and 1 day of prison and 1 year of supervised release; she

was also ordered to pay restitution of $195,938.4

      As part of the plea agreement and the attached statement of facts that she

signed, Mrs. Laciny admitted that from 1995 through 2000, to enhance her



      3
        Mr. Laciny was not criminally indicted and was not a party to the plea
agreement. Mrs. Laciny voluntarily agreed to the plea agreement and confirmed
under oath that the plea agreement and the statement of facts were accurate and
truthful.
      4
         Mrs. Laciny agreed to pay this amount as a calculated tax loss for criminal
purposes. The amount included additional Sta-Cool corporate taxes due and owing
for FYE March 31, 1996 through 1999. On May 4, 2007, the U.S. District Court
for the District of Maryland entered an order of satisfaction stating that the ordered
restitution, including principal, interest, and costs, was paid, settled, and satisfied.
                                          -6-

[*6] lifestyle and reduce her personal and corporate income tax liability, she

diverted Sta-Cool moneys using several different methods. She admitted that she

willfully filed false tax returns for tax years 1996, 1997, 1998, and 1999 under

penalty of perjury; that she did not believe the returns to be true and correct as to

every material matter; and that she knew that she was hiding income and that she

would have to pay taxes on it when she reported it. Mrs. Laciny admitted that from

1995 through 1999 she diverted amounts from Sta-Cool to pay for personal items

and services and failed to include these amounts as income on her personal income

tax returns.5 She admitted that she diverted additional funds from Sta-Cool by

repaying herself more than she lent the business and that she failed to report certain

rental income on her personal income tax returns. She also admitted that she caused

Sta-Cool to unlawfully deduct as corporate expenses some amounts that were

diverted to her personal use.6




      5
      Mrs. Laciny admitted that she diverted $47,813 in 1996, $97,048 in 1997,
$114,145 in 1998, and $46,192 in 1999.
      6
       These amounts were: $30,763 for FYE March 31, 1996; $38,228 for FYE
March 31, 1997; $48,910 for FYE March 31, 1998; and $58,332 for FYE March
31, 1999.
                                        -7-

[*7] Notice of Deficiency

      In the notice of deficiency respondent determined that petitioners failed to

report rental income of $4,629, $20,260, $16,260, and $11,435 for tax years 1996,

1997, 1998, and 1999, respectively; income from Sta-Cool of $6,165, $27,759, and

$23,049 for tax years 1996, 1997, and 1998, respectively; income from personal

expenses listed on Sta-Cool’s corporate returns of $37,019, $49,029, $59,186, and

$35,394 for fiscal years ended March 31, 1996, 1997, 1998, and 1999, respectively;

and $15,650 of income from the overpayment of the Cobb Construction loan for tax

year 1998. Respondent determined that Mrs. Laciny was liable for the section 6663

fraud penalty and that Mr. Laciny was liable for the section 6662 accuracy-related

penalty.

                                     OPINION

I. Burden of Proof

      The Commissioner’s determinations are generally presumed correct, and the

taxpayer bears the burden of proving that they are erroneous. Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933). In the case of the fraud penalty under

section 6663, the Commissioner bears the burden of proof. Sec. 7454(a); Rule

142(b).
                                         -8-

[*8] Section 7491(a) provides that if, in any court proceeding, a taxpayer

introduces credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s proper tax liability, and the taxpayer has complied with

all substantiation requirements, maintained all records, and cooperated with all

reasonable requests, then the Commissioner shall have the burden of proof with

respect to that issue.7 Credible evidence is evidence the Court would find sufficient

upon which to base a decision on the issue in the taxpayer’s favor, absent any

contrary evidence. See Higbee v. Commissioner, 116 T.C. 438, 442 (2001).

      Petitioners argue that pursuant to section 7491(a) the burden of proof has

shifted to respondent and that uncertainty on any issue in this case should be

resolved in their favor. We disagree. As discussed in more detail infra, petitioners

have failed to introduce credible evidence to support their claims with respect to any

of respondent’s proposed adjustments. Consequently, section 7491(a) does not

operate to shift the burden of proof.




      7
         Sec. 7491 is effective for court proceedings arising in connection with
examinations commencing after July 22, 1998. Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 3001(a), 112 Stat.
at 726. The record does not establish when the examination commenced that gave
rise to this case. Respondent does not allege that it commenced before July 22,
1998, and for this purpose we assume that it did not.
                                          -9-

[*9] II. Deficiency

      In their brief petitioners contend that respondent made various errors in the

notice of deficiency.8 We will address each alleged error separately.

      A. Constructive Dividends

      Respondent determined that petitioners’ unreported income from Sta-Cool,

their personal expenses reported on Sta-Cool’s returns, and Sta-Cool’s overpayment

of the Cobb Construction loan are taxable to petitioners as constructive dividends.

Petitioners argue that Sta-Cool had insufficient current or accumulated earnings and

profits to support characterizing these distributions as dividends.

      Funds that a corporation distributes to a shareholder with respect to its stock

are taxed to the shareholder as dividends to the extent of the corporation’s

earnings and profits. Secs. 301(c), 316. Any excess is considered to be a

nontaxable return of capital to the extent of the shareholder’s basis in the




      8
        In the notice of deficiency respondent determined that petitioners failed to
report a total of $56,337 of income received from Sta-Cool during the years at issue.
In his reply brief respondent concedes that petitioners’ unreported income should be
reduced by $996 for tax year 1996, $409 for tax year 1998, and $160 for tax year
1999. Petitioners do not dispute that they received unreported income in the
amounts determined after taking into account respondent’s concessions and have not
otherwise shown error in these determinations. Taking into account respondent’s
concessions, we conclude that petitioners failed to report $54,773 of income from
Sta-Cool during the years at issue.
                                        - 10 -

[*10] corporation, and any remaining amount is taxable to the shareholder as a gain

from the sale or exchange of property. See sec. 301(c)(2) and (3); Truesdell v.

Commissioner, 89 T.C. 1280, 1295-1298 (1987). Characterization of a distribution

as a dividend does not depend upon a formal dividend declaration. See Boulware v.

United States, 552 U.S. 421, 429 (2008); Truesdell v. Commissioner, 89 T.C. at

1295; see also Noble v. Commissioner, 368 F.2d 439, 442 (9th Cir. 1966), aff’g

T.C. Memo. 1965-84.

      Corporate funds that a controlling shareholder diverts to personal use are

generally characterized as constructive distributions to the shareholder for tax

purposes. See Erickson v. Commissioner, 598 F.2d 525, 531 (9th Cir. 1979), aff’g

in part, rev’g in part T.C. Memo. 1976-147; Strong v. Commissioner, T.C. Memo.

2005-125. Such a diversion may occur where a controlling shareholder causes a

corporation to pay his or her personal expenses and the payment is made without

expectation of repayment or without a bona fide intent that it be in repayment of a

shareholder loan. See Hood v. Commissioner, 115 T.C. 172, 179-180 (2000); see

also Noble v. Commissioner, 368 F.2d at 443; Clark v. Commissioner, 266 F.2d

698, 710-711 (9th Cir. 1959), aff’g in part, rev’g in part and remanding T.C. Memo.

1957-129.
                                           - 11 -

[*11] Petitioners’ only evidence of Sta-Cool’s earnings and profits is Sta-Cool’s

corporate income tax returns for the years at issue. But Mrs. Laciny admitted that

she falsified Sta-Cool’s corporate income tax returns, and petitioners offered no

credible evidence to establish Sta-Cool’s current or accumulated earnings and

profits for the years at issue. Petitioners have failed to meet their burden of proving

that there were insufficient earnings and profits to support respondent’s

determinations in the notice of deficiency. See Truesdell v. Commissioner, 89 T.C.

at 1296. Petitioners also failed to prove that any of the constructive distributions

represent nontaxable returns of capital.

      We sustain respondent’s determinations that petitioners’ unreported income

from Sta-Cool, their personal expenses reported on Sta-Cool’s return, and Sta-

Cool’s overpayment of the Cobb Construction loan are taxable to petitioners as

constructive dividends.

      B. Loans To and From Officers

      Petitioners argue that respondent’s adjustments do not account for loans to

and from officers, as reflected on Sta-Cool’s tax returns. Petitioners also argue

that any amounts they received from Sta-Cool as loans should not be treated as

income. Finally, petitioners argue that the loan accounts on Sta-Cool’s balance

sheets do not accurately reflect petitioners’ contributions and that these amounts
                                         - 12 -

[*12] should be increased. Respondent argues that he properly accounted for

loans to and from officers and reduced petitioners’ unreported income

accordingly.

        Petitioners have failed to meet their burden of proving error in respondent’s

determination. On this record we find that respondent properly accounted for

loans to and from officers in computing petitioners’ unreported income from Sta-

Cool.

        C. Unreported Rental Income

        Petitioners argue that respondent’s calculation of rental income paid to them

for tax year 1996 is overstated by $100. We agree, finding the $100 error to be due

to a transcription error between respondent’s calculations and his summary sheet.

Taking this error into account, we find that for 1996 petitioners failed to report

rental income of $4,529 instead of $4,629 as determined in the notice of deficiency.

        Petitioners argue that respondent overstated rental income paid to them

directly in tax years 1997, 1998, and 1999 by $5,000, $12,000, and $12,000,

respectively, because of respondent’s counting certain checks twice. Petitioners are

mistaken. Although respondent’s summary sheet lists some checks twice, they
                                         - 13 -

[*13] appear to be listed this way to account separately for amounts paid with

regard to each separate rental property and are correctly totaled.

      Respondent concedes, however, that because of a computational error the

amount of petitioners’ unreported income for 1997 should be $19,501 instead of

$20,260 as determined in the notice of deficiency.9

III. Section 6663 Penalty

      Respondent determined that Mrs. Laciny is liable for the section 6663 penalty

for tax years 1996, 1997, 1998, and 1999.

      A. Elements

      If any part of any underpayment of a tax required to be shown on a return is

due to fraud, there is an addition to the tax of 75% of the portion of the

underpayment that is attributable to fraud. See sec. 6663(a). When a joint return


      9
         At trial petitioners’ counsel argued that Mrs. Laciny’s restitution payment
should be applied to petitioners’ deficiencies. Respondent’s counsel agreed that the
restitution payment should be applied to any deficiencies determined by this Court
but argued that the restitution payment has no effect on the redetermination of
petitioners’ deficiencies in this case. The District Court, in ordering that Mrs.
Laciny make restitution payments as part of the judgment, did not determine
petitioners’ civil tax liability and did not bar respondent from assessing a greater
amount of civil tax liability against petitioners or from assessing civil fraud
penalties. Accordingly, petitioners’ deficiency or underpayment is not affected by
the restitution payment. See Morse v. Commissioner, 419 F.3d 829, 833-835 (8th
Cir. 2005), aff’g T.C. Memo. 2003-332; Hicks v. Commissioner, T.C. Memo. 2011-
180.
                                         - 14 -

[*14] is filed, the penalty does not apply to a spouse unless some part of the

underpayment is due to the fraud of that spouse. Sec. 6663(c).

      The Commissioner bears the burden of proving fraud by clear and convincing

evidence. Sec. 7454(a); Rule 142(b). “‘When fraud is determined for each of

several years, respondent’s burden applies separately for each of the years.”’

Maciel v. Commissioner, T.C. Memo. 2004-28, (quoting Temple v. Commissioner,

T.C. Memo. 2000-337, aff’d, 62 Fed. Appx. 605 (6th Cir. 2003)), aff’d in part,

rev’d in part on other grounds, 489 F.3d 1018 (9th Cir. 2007). To prove fraud, the

Commissioner must establish that (1) an underpayment exists and (2) some portion

of the underpayment is attributable to fraud. DiLeo v. Commissioner, 96 T.C. 858,

873 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992). The Commissioner cannot satisfy his

burden of proving fraud by relying upon the taxpayer’s failure to establish error in

the determination of deficiencies. Parks v. Commissioner, 94 T.C. 654, 660-661

(1990).

      If the Commissioner proves that any portion of an underpayment of tax is

attributable to fraud, the entire underpayment shall be treated as attributable to

fraud, except that if the taxpayer establishes by a preponderance of evidence that

any portion of the underpayment was not attributable to fraud, the fraud penalty

shall not apply to that portion of the underpayment. Sec. 6663(b).
                                         - 15 -

[*15]         1. Underpayment

        To prove the existence of an underpayment, the Commissioner may not rely

on a taxpayer’s failure to carry his or her burden of proof with respect to the

underlying deficiency. Parks v. Commissioner, 94 T.C. at 660-661. The

Commissioner must prove only that an underpayment exists, and not the precise

amount of the underpayment. DiLeo v. Commissioner, 96 T.C. at 873.

        A taxpayer’s conviction pursuant to section 7206(1) estops him or her from

contesting that an underpayment exists for the years at issue in the criminal case.

See Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff’g T.C.

Memo. 1984-601; Kemp v. Commissioner, T.C. Memo. 2004-153. Mrs. Laciny’s

criminal conviction under section 7206(1) estops her from contesting that an

underpayment exists for tax years 1998 and 1999. With regard to tax years 1996

and 1997, Mrs. Laciny acknowledged under oath and while represented by counsel

that on their 1996 and 1997 returns petitioners did not report all of their income and

that this unreported income was subject to significant Federal income tax. This

acknowledgment establishes underpayments by petitioners. See Considine v.

United States, 683 F.2d 1285, 1287 (9th Cir. 1982); Ford v. Commissioner, T.C.

Memo. 2005-18. Further, respondent introduced evidence showing that during tax

years 1996 and 1997 petitioners failed to report income from their rental
                                        - 16 -

[*16] properties, from the personal expenses paid by Sta-Cool, and from Sta-Cool

directly.

       The record clearly establishes that there was an underpayment of petitioners’

tax for each year at issue.

             2. Fraud

       Fraud is an intentional wrongdoing designed to evade tax believed to be

owing. Neely v. Commissioner, 116 T.C. 79, 86 (2001); see Edelson v.

Commissioner, 829 F.2d 828 (9th Cir. 1987), aff’g T.C. Memo. 1986-223; McGee

v. Commissioner, 61 T.C. 249, 256 (1973), aff’d, 519 F.2d 1121 (5th Cir. 1975).

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

the entire record. Estate of Pittard v. Commissioner, 69 T.C. 391, 400 (1977);

Gajewski v. Commissioner, 67 T.C. 181, 199-200 (1976), aff’d without published

opinion, 578 F.2d 1383 (8th Cir. 1978). Fraud is not to be presumed or based

upon mere suspicion. See Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989);

Wainwright v. Commissioner, T.C. Memo. 1993-302. Because direct proof of a

taxpayer’s intent is rarely available, however, fraudulent intent may be established

by circumstantial evidence. Grossman v. Commissioner, 182 F.3d 275, 277-278

(4th Cir. 1999), aff’g T.C. Memo. 1996-452; United States v. Bales, 813 F.2d

1289, 1294 (4th Cir. 1987); Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).
                                          - 17 -

[*17] The taxpayer’s entire course of conduct may be examined to establish the

requisite intent. See Stone v. Commissioner, 56 T.C. 213, 224 (1971); Otsuki v.

Commissioner, 53 T.C. 96, 105-106 (1969). An intent to mislead may be inferred

from a pattern of conduct. Webb v. Commissioner, 394 F.2d 366, 379 (5th Cir.

1968), aff’g T.C. Memo. 1966-81.

      Circumstances that may indicate fraudulent intent, commonly referred to as

“badges of fraud”, include, but are not limited to: (1) understating income, (2)

maintaining inadequate records, (3) giving implausible or inconsistent

explanations of behavior, (4) concealing income or assets, (5) failing to cooperate

with tax authorities, (6) engaging in illegal activities, (7) providing incomplete or

misleading information to one’s tax preparer, (8) giving testimony that lacks

credibility, (9) filing false documents, including filing false income tax returns,

(10) failing to file tax returns, and (11) dealing in cash. Spies v. United States,

317 U.S. 492, 499 (1943); Conti v. Commissioner, 39 F.3d 658, 662 (6th Cir.

1994), aff’g and remanding on other grounds T.C. Memo. 1992-616; Douge v.

Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Scallen v. Commissioner, 877

F.2d 1364, 1370 (8th Cir. 1989), aff’g T.C. Memo. 1987-412; Bradford v.

Commissioner, 796 F.2d at 307-308; Recklitis v. Commissioner, 91 T.C. 874, 910

(1988). Although no single factor is necessarily sufficient to establish fraud, a
                                          - 18 -

[*18] combination of several factors may constitute persuasive circumstantial

evidence of fraud. Bradford v. Commissioner, 796 F.2d at 307; Petzoldt v.

Commissioner, 92 T.C. at 700.

               3. Analysis

         Starting as early as 1995 Mrs. Laciny intentionally engaged in schemes to

divert Sta-Cool moneys to enhance her lifestyle and reduce her personal and

corporate income tax liabilities. Mrs. Laciny caused Sta-Cool to pay third parties

for petitioners’ personal expenses and reclassified the payments as deductible

business expenses; she caused Sta-Cool to reimburse petitioners for personal

expenses as if they were business expenses; she intentionally failed to report Sta-

Cool’s payments of petitioners’ personal expenses as income on petitioners’ income

tax returns; she failed to report the diverted income that she and Mr. Laciny

received on their joint income tax returns; she caused Sta-Cool to pay petitioners

$49,000 purportedly in repayment of a $22,675 loan while reporting $10,675 as

interest; and she caused petitioners to deliberately omit a substantial amount of

rental income from their joint income tax returns. These actions are all badges of

fraud.

         Mrs. Laciny pleaded guilty under section 7206(1) to filing false individual

income tax returns for tax years 1998 and 1999. Mrs. Laciny also pleaded guilty
                                         - 19 -

[*19] under section 7206(1) to filing false corporate tax returns on behalf of Sta-

Cool for tax years 1998 and 1999. Such a conviction is highly persuasive evidence

that Mrs. Laciny intended to evade tax for those years. See Morse v.

Commissioner, 419 F.3d at 833; Stefansson v. Commissioner, T.C. Memo. 1994-

162; Avery v. Commissioner, T.C. Memo. 1993-344; Miller v. Commissioner, T.C.

Memo. 1989-461. Mrs. Laciny admitted in her plea agreement and the attached

statement of facts that she willfully filed false income tax returns for tax years 1996

and 1997 under penalty of perjury, that she did not believe the returns to be true and

correct as to every material matter, and that she knew that she owed substantially

more taxes than she reported.

      Petitioners argue that Mrs. Laciny’s conviction and plea agreement are not

persuasive evidence of fraud because she never had a trial in her criminal case,

had inadequate legal advice, felt pressured to sign the agreement, and did not and

does not agree with the allegations in the agreement and the statement of facts

attached to it. There is no material difference, however, between a judgment of

conviction based on a guilty plea and one rendered after a trial on the merits.

Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68, 75 (1964); Smith v.

Commissioner, T.C. Memo. 1995-402, aff’d without published opinion, 116 F.3d

492 (11th Cir. 1997). Mrs. Laciny voluntarily agreed to the plea agreement and
                                         - 20 -

[*20] confirmed under oath that the plea agreement and the statement of facts were

accurate and truthful. She cannot credibly contest those admissions now. We find

the plea agreement and the statement of facts to be highly persuasive evidence of

fraud.

         Furthermore, during the years at issue Mrs. Laciny reviewed and maintained

Sta-Cool’s accounting records and instructed Sta-Cool’s accountants, including

Mary Thompson, as to which accounting ledger accounts various expenses should

be charged and how they should be classified. These actions allowed Mrs. Laciny

to conceal income and maintain inadequate records. Her claim of accounting

ignorance is undercut by the fact that it was under her direction that Sta-Cool paid

personal expenses on petitioners’ behalf during the years at issue. Mrs. Laciny also

provided all of the information that Shelby Bowles relied upon in preparing

petitioners’ and Sta-Cool’s tax returns. Mrs. Laciny has admitted that this

information was incomplete and misleading. Mrs. Laciny’s testimony regarding

her belief that all of the unreported income was a return of capital investments

made in prior years contradicts her earlier admission that she knew she was hiding

income and that she would have to pay taxes on the income when she reported it.

Such inconsistent explanations and lack of credibility in testimony are badges of

fraud.
                                         - 21 -

[*21] Petitioners argue that Mrs. Laciny’s acts lack the specific intent necessary to

support a finding of fraud by clear and convincing evidence. They argue that Mrs.

Laciny was not trained to enter information into Sta-Cool’s accounting program and

that she relied on Mary Thompson to maintain Sta-Cool’s books and records and

Shelby Bowles to prepare Sta-Cool’s and petitioners’ tax returns. They also argue

that there was no fraud because Mrs. Laciny believed that all of the unreported

income was a return of capital investments made in prior years. Finally, petitioners

argue that Mrs. Laciny was “at most * * * unsophisticated and clumsy”.

      We do not find petitioners’ arguments convincing. For the reasons explained

above, we find and conclude that respondent has established by clear and

convincing evidence that a portion of petitioners’ underpayment was attributable to

Mrs. Laciny’s fraud for each of the years at issue.

      Petitioners have failed to show that any portion of the underpayment was not

attributable to fraud. Accordingly, we sustain respondent’s determination that Mrs.

Laciny is liable for the section 6663 penalty for each year at issue.10




      10
        Respondent concedes that Mr. Laciny is not liable for the sec. 6662
accuracy-related penalty for any year in which Mrs. Laciny is liable for the sec.
6663 fraud penalty.
                                          - 22 -

[*22] IV. Statute of Limitations

      Petitioners timely filed individual Federal income tax returns for tax years

1996, 1997, 1998, and 1999. Respondent mailed the notice of deficiency on

December 29, 2008. Petitioners allege that the period of limitations on assessment

has expired for each year at issue.

      Generally the amount of any tax must be assessed within three years after a

return is filed. See sec. 6501(a). In the case of a false or fraudulent return with the

intent to evade tax, however, tax may be assessed “at any time”. Sec. 6501(c)(1).

In the case of a joint return, proof of fraud against either spouse tolls the limitations

period as to both spouses. See Hicks Co. v. Commissioner, 56 T.C. 982, 1030

(1971), aff’d, 470 F.2d 87 (1st Cir. 1972); Evans v. Commissioner, T.C. Memo.

2010-199, aff’d, __ Fed. Appx. __, 2013 WL 491010 (9th Cir. Jan. 2, 2013).

      As previously discussed, respondent proved by clear and convincing evidence

that Mrs. Laciny filed petitioners’ tax returns for the years at issue with the

fraudulent intent to evade tax. Accordingly, respondent is not time barred

from assessing tax liabilities against petitioners for any of the years at issue. See

Romer v. Commissioner, T.C. Memo. 2001-168.
                                        - 23 -

[*23] We have considered all other arguments advanced by petitioners for a

contrary result and find them to be moot, irrelevant, or without merit.

      To reflect the foregoing,


                                                 Decision will be entered

                                        under Rule 155.
