                          T.C. Memo. 2004-49



                       UNITED STATES TAX COURT



         DONALD R. COOLEY AND CATHY A. COOLEY, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 7464-00, 9452-00L.1       Filed March 5, 2004.


     Donald R. Cooley and Cathy A. Cooley, pro sese.

     Kevin M. Brown, Martin B. Kaye, Michael W. Bitner, and James

A. Kutten, for respondent.



                          MEMORANDUM OPINION


     WELLS, Chief Judge:     In the case at docket No. 7464-00,

respondent determined deficiencies and penalties in income taxes

as follows:


     1
      These cases are consolidated for trial, briefing, and
opinion.
                                 - 2 -

Liability of Donald R. Cooley

     Year         Deficiency     Sec. 6663(a) Penalties

     1989         $2,982.63                $24,584.96
     1990          2,617.74                 28,705.73
     1991            171.92                 14,035.44
     1992             -0-                   21,045.16
     1993          3,007.91                 18,888.44

Liability of Cathy A. Cooley

     Year         Deficiency     Sec. 6663(a) Penalties

     1989          $2,982.63                 -0-
     1990           2,617.74                 -0-
     1991             171.92                 -0-
     1992              -0-                   -0-
     1993           3,007.91                 -0-

     After concessions, the remaining issue to be decided in

docket No. 7464-00 is whether petitioner Donald R. Cooley

(hereinafter referred to individually as petitioner) is liable

for section 6663(a) penalties for fraud with respect to his 1989,

1990, 1991, 1992, and 1993 taxable years.     Respondent did not

determine section 6663(a) penalties against petitioner Cathy A.

Cooley.     In the case at docket No. 9452-00L, we must decide

whether respondent’s determination to proceed with the collection

of Federal income taxes assessed against petitioners for their

1989, 1990, 1991, 1992, 1993, and 1996 taxable years was

appropriate.     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.
                                 - 3 -

                              Background

     The parties submitted the instant case, fully stipulated,

without trial, pursuant to Rule 122.       The parties’ stipulations

of fact are hereby incorporated by this reference and are found

as facts in the instant case.

     Petitioners are husband and wife, filed joint Federal income

tax returns for their 1989, 1990, 1991, 1992, and 1993 taxable

years, and were residents of Springfield, Missouri, when they

filed their petitions.    During the years in issue, petitioner was

a self-employed criminal defense lawyer.      Prior to private

practice, petitioner served as an Assistant United States

Attorney.   Petitioner maintained the records for both his

personal and law firm accounts.    Petitioners employed the cash

method of accounting in determining the income and expenses

reported on their joint Federal income tax returns for the years

in issue.

     Petitioners filed original and amended Federal individual

income tax returns, Forms 1040 and 1040X, as follows:

     Year       Description                  Date Filed

     1989       Tax   return                 4/15/1990
     1989       1st   amended return         1/30/1995
     1989       2nd   amended return         2/15/1995
     1989       3rd   amended return         7/22/1996

     1990       Tax   return                 4/15/1991
     1990       1st   amended return          8/8/1994
     1990       2nd   amended return         1/24/1995
     1990       3rd   amended return         7/22/1996
                                - 4 -

     1991      Tax   return              4/15/1992
     1991      1st   amended return       7/8/1994
     1991      2nd   amended return      1/23/1995
     1991      3rd   amended return      7/22/1996

     1992      Tax   return              4/15/1993
     1992      1st   amended return       7/8/1994
     1992      2nd   amended return       2/2/1995
     1992      3rd   amended return      7/22/1996

     1993      Tax   return              4/15/1994
     1993      1st   amended return      7/11/1994
     1993      2nd   amended return       2/1/1995
     1993      3rd   amended return      7/22/1996

     Petitioners reported their total income and Schedule C gross

receipts on their tax returns for the years in issue, as follows:

                                              Schedule C Gross
     Year                 Total Income           Receipts1

1989 Tax return            $87,508.67         $146,865.99
  1st amended return       168,578.07          206,576.31
  2nd amended return       173,691.86          212,534.90
  3rd amended return       186,846.86              -0-


1990 Tax return             77,398.10          160,472.48
  1st amended return       159,052.72          201,668.98
  2nd amended return       176,100.86              -0-
  3rd amended return       197,600.86              -0-


1991 Tax return             49,747.09           98,469.85
  1st amended return        92,458.05          119,761.49
  2nd amended return        92,997.98              -0-
  3rd amended return       114,947.98              -0-
1
 For the entries marked “-0-", petitioners did not attach a
separate Schedule C to the amended return.
                              - 5 -

1992 Tax return            62,042.31           114,996.02
  1st amended return      134,320.67           158,193.84
  2nd amended return      142,882.18               -0-
  3rd amended return      162,232.18               -0-

1993 Tax return           80,189.01            133,856.54
  1st amended return     120,617.78            169,580.03
  2nd amended return     126,808.73                -0-
  3rd amended return     150,708.73                -0-

     Petitioners reported expenses from petitioner’s law

practice, as follows:

     Year                Schedule C Expense1

1989 Tax return              $68,300.46
  1st amended return          46,941.38
  2nd amended return          47,961.27
  3rd amended return             -0-

1990 Tax return               92,195.19
  1st amended return          52,797.01
  2nd amended return             -0-
  3rd amended return             -0-

1991 Tax return               54,033.76
  1st amended return          34,967.03
  2nd amended return             -0-
  3rd amended return             -0-

1992 Tax return               58,116.57
  1st amended return          34,846.96
  2nd amended return             -0-
  3rd amended return             -0-

1993 Tax return               60,627.80
  1st amended return          44,071.96
  2nd amended return             -0-
  3rd amended return             -0-
1
 For the entries marked “-0-", petitioners did not attach a
separate Schedule C to the amended return.

     Petitioners’ Federal income tax returns for 1989, 1990,

1991, 1992, and 1993 understated net income from petitioner’s law
                                - 6 -

practice by overstating business expenses.    Petitioner’s

understatements of net income due to overstated business expenses

were $20,339.19 for taxable year 1989, $39,398.18 for taxable

year 1990, $19,066.73 for taxable year 1991, $23,269.61 for

taxable year 1992, and $16,555.64 for taxable year 1993.

       Petitioners’ original 1989 Federal income tax return

reported a tax of $18,473.30.    In their final amended 1989

Federal income tax return, petitioners reported that their total

tax liability was $53,270.62 of which $51,913.76 had been paid

and $1,356.86 was still due.    Petitioners’ original 1990 Federal

income tax return reported a tax of $16,937.90.    In their final

amended 1990 Federal income tax return, petitioners reported that

their total tax liability was $52,594.07 of which $47,564.02 had

been paid and $5,030.05 was still due.    Petitioners’ original

1991 Federal income tax return reported a tax due of $8,607.61.

In their final amended 1991 Federal income tax return,

petitioners reported that their total tax liability was

$26,959.52 of which $20,513.52 had been paid and $6,446 was still

due.    Petitioners’ original 1992 Federal income tax return

reported a tax due of $11,895.81.    In their final amended 1992

return, petitioners reported that their total tax liability was

$42,715.22 of which $36,715.80 had been paid and $5,999.42 was

still due.    Petitioners’ original 1993 Federal income tax return

reported a tax due of $14,210.40.    In their final amended 1993
                                - 7 -

tax return, petitioner reported that their total tax liability

was $38,072.22 of which $30,897.80 had been paid and $7,184.42

was still due.

     On January 21, 1997, the United States Department of Justice

(Department of Justice) filed an information against petitioner

in the United States District Court for the Western District of

Missouri, alleging that he was guilty of one count of an attempt

to evade or defeat tax, pursuant to section 7201.   The

information alleged:

     That on or about the 15th day of April, 1991, in the
     Western District of Missouri, DONALD R. COOLEY, a
     resident of Springfield, Missouri, did willfully
     attempt to evade and defeat a large part of the income
     tax due and owing by him to the United States of
     America for the calendar year 1990, by filing and
     causing to be filed with the Director, the Internal
     Revenue Service Center, at Kansas City, Missouri, a
     false and fraudulent U.S. Individual Income Tax Return,
     Form 1040, wherein he stated that his taxable income
     for the calendar year 1990, was the sum of $47,520.36,
     and that the amount of tax due and owing thereon was
     the sum of $16,937.90, whereas, as he then and there
     well knew and believed, his taxable income for said
     calendar year was the sum of $167,723.12, upon which
     said taxable income there was owing to the United
     States of America an income tax of $55,058.43.

          In violation of Title 26, United States Code,
     Section 7201.

     On January 21, 1997, petitioner, represented by James R.

Hobbs, Esq., entered into a plea agreement (plea agreement) with

the Department of Justice, pleading guilty to a one count

information of an attempt to evade or defeat tax in violation of

section 7201.    In section A-3 of the plea agreement, petitioner
                               - 8 -

acknowledged that for his 1990 tax year, he attempted to evade or

defeat a tax, that additional taxes were due and owing, and that

his actions were willful.   In section A-7, as part of the plea

agreement, the Department of Justice agreed not to charge

petitioner with any other Federal criminal offenses relating to

his 1988 through 1994 taxable years.   Moreover, in section A-9 of

the plea agreement, petitioner agreed to:

     pay all taxes, interest and penalties found to be
     lawfully owed and due to the Internal Revenue Service
     for the years 1987 through and including 1995, and to
     cooperate with, and provide to, the Internal Revenue
     Service, any documentation necessary for a correct
     computation of all taxes due and owing for those years,
     and further agrees that the Court may make this term a
     condition of any sentence of probation or supervised
     release.

     Section B-7 of the plea agreement provided:

     The defendant further acknowledges defendant’s
     understanding of the nature of the offense or offenses
     to which defendant is pleading guilty, and the elements
     thereof, including the penalties provided by law, and
     defendant’s complete satisfaction with the
     representation and advice received from defendant’s
     undersigned counsel.

     Section B-8 of the plea agreement provided:

     Defendant is pleading guilty because defendant is in
     fact guilty. The defendant certifies that defendant
     does hereby admit that the facts set forth below are
     true, and were this case to go to trial, the United
     States would be able to prove those facts beyond a
     reasonable doubt.

     On April 30, 1997, Judge Fernando J. Gaitan, Jr., of the

United States District Court, Western District of Missouri,

entered a judgment against petitioner pursuant to section 7201,
                                - 9 -

and sentenced him to 4 months' incarceration at the Alpha House,

a halfway house located in Springfield, Missouri, followed by 2

years of supervised release.

       On April 4, 2000, petitioners received their notice of

deficiency for their 1989, 1990, 1991, 1992, and 1993 taxable

years.

       On June 27, 1999, respondent issued a Final Notice - Notice

of Intent to Levy and Notice of Your Right to a Hearing, for

petitioners’ 1989, 1990, 1992, 1993, and 1996 taxable years.     The

account summary of the final notice indicated that respondent was

trying to collect the following amounts:

Year      Assessed Balance1    Statutory Additions           Total

1989        $9,664.88                    $0.00            $ 9,664.88
1990         8,129.85                 1,895.48             10,025.33
1992         1,968.42                   396.69              2,365.11
1993             0.00                 2,016.71              2,016.71
1996         2,203.02                   332.19              2,535.21
1
 The assessed balances for 1989, 1990, 1992, and 1993 consists
entirely of accrued interest. The assessed balance for 1996
includes some of the original tax liability, penalties, and
interest.

       On July 23, 1999, petitioners filed a Request for a

Collection Due Process Hearing (request), for their 1989, 1990,

1992, 1993, and 1996 taxable years.     In their request petitioners

contended: “The tax liability figures are still incorrect based

on inaccurate figuring of tax amounts paid and failure to credit

excess tax payments towards amounts owed on other tax years.”

Petitioners also raised a section 6015 defense with respect to
                               - 10 -

petitioner Cathy A. Cooley’s tax liabilities.

     On March 9, 2000, respondent issued to petitioners a Final

Notice of Intent to Levy and Notice of Your Right to A Hearing,

for their 1991 taxable year.   The account summary in the final

notice indicated that respondent was trying to collect an

assessed balance of $2,493.93 and additional penalties and

interest of $1,084.03 for a total of $3,577.96.

     On March 23, 2000, petitioners filed a Request for a

Collection Due Process Hearing, relating to the final notice for

their 1991 taxable year.   In a letter attached to their request

for a section 6330 hearing, petitioners contended that the period

of limitations under section 6501(a) had expired, that respondent

had not issued them a notice of deficiency, and that the amount

of their tax liability had not been determined.

     On July 5, 2000, petitioners petitioned this Court with

respect to the April 4, 2000, notice of deficiency.   That case

was filed as docket No. 7464-00.

     On August 8, 2000, petitioners were sent a Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330 for their 1989, 1990, 1992, 1993, and 1996 taxable

years.   The notice of determination provided:   “Our decision is

that the proposed levy action on 1989, 1990, 1992, 1993, and 1996

was appropriate.”   The notice of determination further indicated

that “These outstanding balances owed are from your voluntarily
                               - 11 -

filed tax returns Form 1040 and Form 1040X.”   Additionally, the

notice of determination indicated that:   “The Service has already

considered and issued a separate determination letter on the

Innocent Spouse issue.”

     Attachment 3193, attached to the notice of determination,

provided:

     Issues Relating to the Unpaid Liabilities:

     The unpaid liabilities shown on the Notice of Intent to
     Levy (L-1058/LT-11) dated 06/27/1999 are from
     voluntarily filed original tax returns, Form 1040, or
     amended returns, Form 1040X.

     •      Review of your account for the years 1989, 1990, 1992,
            and 1993 shows that the outstanding balances owed were
            for accrued interest on your amended returns.
     •      Review of your account for the 1996 year shows that the
            outstanding balance owed included some of your original
            tax liability, penalty, and accrued interest.

                 *    *   *    *    *     *    *

     The Notice of Intent to Levy dated 6/27/1999 did not
     include and [sic] amounts from the pending audit
     adjustments for 1989, 1990, 1992, or 1993. The
     proposed audit adjustments were considered separately
     by the Appeals office. A separate Statutory Notice of
     Deficiency was issued by the Appeals Office on April 4,
     2000, and gave you the right to petition to the Tax
     Court. Those issues are not part of this Collection
     Due Process Hearing. Your claim for Innocent Spouse
     relief has also been considered separately by the
     Appeals Office and a separate determination letter was
     issued. That issue is not part of this Collection Due
     Process hearing.

     Respondent’s Appeals officer issued a statement in support

of the notice of determination for petitioners’ 1989, 1990, 1992,
                                - 12 -

1993, and 1996 taxable years.    The history of account section of

the Appeals officer’s supporting statement said:   the “IDRS shows

that these CDP account balances are for outstanding balances owed

on their voluntarily filed original and amended returns.

Generally, the taxpayer full [sic] paid the tax, but has not paid

the interest.”   Section three of the Appeals officer’s supporting

statement provided:

     Balancing the Need for Efficient Collection with Any
     Legitimate Concern that the Proposed Collection Action
     is more Intrusive than Necessary:

     The representative states that the taxpayer is not in
     agreement with the final amended return filed on each
     period. It was only a protective action taken by the
     taxpayer. The taxpayer is pursuing that action to contest
     that - including it in his petition to the Tax Court on the
     unassessed audit adjustments and also pursuing interest
     abatement.

     The representative has reviewed transcripts of the
     taxpayer’s account and matched their payments - they
     have no argument with any payments.

     On August 8, 2000, respondent issued petitioners a Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330 (Determination), for petitioners’ 1991 taxable year,

which determined that the tax liabilities reported in the final

notice for 1991 were appropriate.    The notice of determination

provided:

     Summary of Determination:

                 *    *   *      *   *    *    *

     The outstanding balance owed and shown on the L-1058
     dated 03/09/2000 was based on assessments from your
                             - 13 -

     voluntarily filed tax returns Form 1040 and Form 1040X.
     The balance included accrued interest.
               *    *    *    *    *    *    *

     You raised the issue that no notice of deficiency had
     been issued. However, the outstanding balance owed as
     shown in the L-1058 dated 03/09/2000 was based on your
     voluntarily filed original and amended tax returns.

     You raised the issue that the amount due had not been
     determined. However, the outstanding balance owed as
     shown in the L-1058 dated 03/09/2000 was based on your
     voluntarily filed original and amended tax returns.

     The Service has already considered and issued a
     separate determination letter on the Innocent Spouse
     issue.

     Attachment 3193, attached to the notice of determination for

1991, provided:

     Issue Relating to the Unpaid Liabilities:

     You raised the issue “whether the statute of
     limitations under IRC 6501(a) had expired prior to the
     assessment”.

     While the three year statute had expired, two of the amended
     returns you had filed for 1991 had not yet been processed by
     the Service.

     The Service determined that those amended returns could be
     processed since tax may be assessed at any time under IRC
     sec. 6501(c).

     You raised the issue that “no notice of deficiency had been
     issued”.

     The unpaid liability shown on Notice of Intent to Levy (L-
     1058) dated 03/09/2000 was from your voluntarily filed tax
     returns, Form 1040 or Form 1040X.

     The Notice of Intent to Levy dated 03/09/2000 did not
     include amounts from the proposed audit adjustments for 1991
     - since that assessment had not been made. You had
     exercised your appeal rights and the proposed audit
     adjustments were considered separately by the Appeals
     office. A separate Statutory Notice of Deficiency was
                              - 14 -

     issued by the Appeals Office on April 4, 2000, and gave you
     the right to petition to the Tax Court. Those issues are
     not part of this Collection Due Process hearing.

     You raised the issue that “the amount due had not been
     determined”.

     The unpaid tax liability shown on the Notice of Intent to
     Levy (L-1058) dated 03/09/2000 was from your voluntarily
     filed tax returns, Form 1040 or 1040X.

     Review of your account for 1991 shows that the outstanding
     balance owed was for accrued interest on your amended
     return.

     Your claim for Innocent Spouse relief has also been
     considered separately by the Appeals Office and a
     separate determination letter was issued. The Innocent
     Spouse determination is not part of this Collection Due
     Process hearing.

     Respondent’s Appeals officer issued a statement in support

of the 1991 notice of determination.      The 1991 Appeals officer’s

supporting statement said:   “IDRS shows that these CDP account

balances are for outstanding balances owed on their voluntarily

filed original and amended returns.       Generally, the taxpayer full

paid the tax but has not paid the interest.”      Moreover, the

Appeals officer’s supporting statement responded to petitioners’

assertion that no notice of deficiency for 1991 had been issued:

     2. Relevant Issues Presented by the Taxpayer

               *    *    *     *      *      *    *

     The CDP Appeals officer reviewed the IDRS transcripts.
     The outstanding balance owed and shown on L-1058 that
     was issued by COLLECTION on 03/09/2000 is from interest
     assessed and accrued on the voluntarily filed original
     and amended returns.

     The CDP Appeals Officer informed the representative
     that the proposed audit adjustments shown in the
                              - 15 -

     Statutory Notice of Deficiency issued on April 4, 2000,
     are not part of this balance owed. This balance owed
     shown on the L-1058 was as of 03/09/2000 and was from
     the taxpayers’ voluntarily filed original and amended
     returns that had been processed by the Service.

     As to petitioners’ contention that the amount due had not

been determined, the Appeals officer said:   “The amount due, as

shown on the L-1058 dated 03/09/2000, had been determined from

their voluntarily filed original and amended returns.”

     On July 5, 2000, after receiving the notice of deficiency,

petitioners filed a petition in this Court which was filed as

docket No. 7464-00.   In their petition, petitioners contended:

     The tax assessed by the Internal Revenue Service is
     incorrect and overstated. Taxpayer believes that the
     records generated by the investigation of the Internal
     Revenue Service would reveal that said assessment is
     premised upon an overstatement of income in taxpayers
     amended returns. Further, taxpayer does not believe
     that the civil penalties assessed him under IRC Section
     6663(a) are applicable to all of the additional
     reported income in the years proposed.

     On September 7, 2000, after receiving the notices of

determination, petitioners filed a petition in this Court, which

was filed as docket No. 9452-00L.   In their petition, petitioners

contended: “The [taxpayers] have petitioned the [T]ax [C]ourt for

the above listed tax years to determine the correct tax

liability, IRS has examined the years in question.   Prior to the

start of collection action, the correct liability should be

determined.”
                              - 16 -

                            Discussion

The Deficiency Case at Docket No. 7464-00

     The only issue we must decide in the case at docket No.

7464-002 is whether petitioner is liable for penalties for fraud

under section 6663(a)3 for the taxable years in issue.4


     2
      Petitioners contend on brief that certain alleged
overpayments and credits should be applied against the income tax
deficiencies in the case at docket No. 7464-00. Petitioners do
not otherwise challenge the income tax deficiencies determined by
respondent in the case at docket No. 7464-00. We shall address
those contentions in the case at docket No. 9452-00L. In the
petition for the case at docket No. 7464-00, petitioners alleged
that “said assessment is premised upon an overstatement of income
in taxpayers amended returns.” Petitioners contend on brief that
certain alleged overpayments should be applied against the income
tax deficiencies in the case at docket No. 7464-00, including the
deficiency of $2,982.63 in 1989, $2,617.74 in 1990, $171.92 in
1991, and $3,007.91 in 1993. Those deficiencies are distinct
from the sec. 6663(a) fraud penalties for petitioner’s 1989,
1990, 1991, 1992, and 1993 tax years.
     3
      Sec. 6663 provides:

     SEC. 6663.   IMPOSITION OF FRAUD PENALTY

          (a) Imposition of Penalty.–If any part of any
     underpayment of tax required to be shown on a return is due
     to fraud, there shall be added to the tax an amount equal to
     75 percent of the portion of the underpayment which is
     attributable to fraud.

          (b) Determination of Portion Attributable to Fraud.–If
     the Secretary establishes that any portion of an
     underpayment is attributable to fraud, the entire
     underpayment shall be treated as attributable to fraud,
     except with respect to any portion of the underpayment which
     the taxpayer establishes (by a preponderance of the
     evidence) is not attributable to fraud.

          (c) Special Rule for Joint Returns.-–In the case of a
     joint return, this section shall not apply with respect to a
     spouse unless some part of the underpayment is due to the
                                                   (continued...)
                               - 17 -

Respondent has the burden of proving by clear and convincing

evidence that petitioner (1) underpaid his tax each year in

issue, and (2) that some part of his underpayment was due to

fraud.   Sec. 6663(a); see Parks v. Commissioner, 94 T.C. 654,

660-661 (1990).

     Regarding whether an underpayment of tax exists for the

years in issue, petitioners stipulated that they understated

taxable income from petitioner’s law practice by overstating

business expenses for his 1989, 1990, 1991, 1992, and 1993

taxable years.    Indeed, for the years in issue, petitioners’

final amended returns reported far more tax than reported on

their original returns.

     Each amended Federal income tax return which reports more

income than the originally filed return is an admission of

underpayment of tax on the original return.    See Badaracco v.

Commissioner, 464 U.S. 386, 399 (1984); Delvecchio v.

Commissioner, T.C. Memo. 2001-130; see also Tandon v.

Commissioner, T.C. Memo. 1998-66; Kalo v. Commissioner, T.C.


     3
     (...continued)
     fraud of such spouse.
     4
      The Tax Reform Act of 1986, Pub. L. 99-514, sec. 1503(a),
100 Stat. 2085, 2742, amended sec. 6653(b) to increase the
addition to tax for fraud from 50 percent to 75 percent. The
Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec.
7721, 103 Stat. 2395, removed the addition to tax for fraud from
sec. 6653(b) and replaced it with sec. 6663. We note that
petitioner’s 1989 Federal income tax was due after the effective
date of sec. 6663(a), Dec. 31, 1989, and therefore all
calculations are made pursuant to sec. 6663(a).
                              - 18 -

Memo. 1996-482, affd. without published opinion 149 F.3d 1183

(6th Cir. 1998); Katerelos v. Commissioner, T.C. Memo. 1996-340.

Petitioner’s amended returns, for the years in issue, are

admissions of underpayments because the amended returns reported

far more income than reported on the original returns.

     We next decide whether petitioner’s underpayments of tax for

the years in issue were due to fraud, which is a question of fact

that must be considered based on an examination of the entire

record and petitioner’s entire course of conduct.      Petzoldt v.

Commissioner, 92 T.C. 661, 699 (1989);     Recklitis v.

Commissioner, 91 T.C. 874, 910 (1988); see also Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983).    Fraud is never presumed

and must be established by independent evidence of fraudulent

intent.   See Petzoldt v. Commissioner, supra at 699; Recklitis v.

Commissioner, supra at 910.   Fraud may be proven by

circumstantial evidence, and reasonable inferences may be drawn

from the facts because direct evidence is rarely available.

Delvecchio v. Commissioner, supra; see DiLeo v. Commissioner, 96

T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir. 1992); see also

Petzoldt v. Commissioner, supra at 699.

     Circumstantial evidence that may give rise to a finding of

fraud includes:   (1) Understatement of income; (2) inadequate

records; (3) failure to file tax returns; (4) providing

implausible or inconsistent explanations of behavior; (5)

concealment of assets; (6) failure to cooperate with taxing
                                - 19 -

authorities; (7) filing false Forms W-4, Employee's Withholding

Allowance Certificate; (8) failure to make estimated tax

payments; (9) dealing in cash; (10) engaging in illegal activity;

(11) attempting to conceal illegal activity; (12) engaging in a

pattern of behavior that indicates an intent to mislead; and (13)

filing false documents.     Bradford v. Commissioner, 796 F.2d 303,

307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; see Christians v.

Commissioner, T.C. Memo. 2003-130; see also Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992).    These “badges of fraud”

are not exclusive.    Niedringhaus v. Commissioner, supra at 211;

see Miller v. Commissioner, 94 T.C. 316, 334 (1990).

Additionally, the taxpayer’s background may be examined to

establish fraud.     Spies v. United States, 317 U.S. 492, 497

(1943); Niedringhaus v. Commissioner; supra at 211; Walters v.

Commissioner, T.C. Memo. 1995-543.

     A consistent pattern of understating large amounts of income

may be strong evidence of fraud.     Camien v. Commissioner, 420

F.2d 283, 287 (8th Cir. 1970), affg. T.C. Memo. 1968-12; see

Delvecchio v. Commissioner, supra (citing Holland v. United

States, 348 U.S. 121, 137 (1954)); see also Roth v. Commissioner,

T.C. Memo. 1998-28; Williams v. Commissioner, T.C. Memo. 1992-153

(“petitioner has consistently and substantially understated his

income, a fact that even, ‘standing alone, is persuasive evidence

of fraudulent intent to evade taxes.’” (quoting Estate of Beck v.

Commissioner, 56 T.C. 297, 364 (1971)), affd. 999 F.2d 760 (4th
                              - 20 -

Cir. 1993); Hughes v. Commissioner, T.C. Memo. 1994-139 (citing

Rogers v. Commissioner, 111 F.2d 987, 989 (6th Cir. 1940), affg.

38 B.T.A. 16 (1938)).   It has been held that discrepancies of 100

percent or more between the correct net income and the reported

net income for 3 successive years provide strong evidence of

fraudulent intent.   Hargis v. Godwin, 221 F.2d 486, 490 (8th Cir.

1955); see Rogers v. Commissioner, supra at 989; see also

Williams v. Commissioner, supra; Adams v. Commissioner, T.C.

Memo. 1979-305.   Moreover, fraudulent understatement of income

may be established by overstatement of Schedule C expenses.

Drobny v. Commissioner, 86 T.C. 1326, 1349 (1986); see Clark v.

Commissioner, T.C. Memo. 1991-313; see also Buchbinder v.

Commissioner, T.C. Memo. 1986-485.

     Petitioners originally reported petitioner’s taxable income

for his 1989, 1990, 1991, 1992, and 1993 taxable years,

respectively as $87,508.67, $77,398.10, $49,747.09, $62,042.31,

and $80,189.01.   On their final amended returns for petitioners’

1989, 1990, 1991, 1992, and 1993 taxable years, respectively,

petitioners reported petitioner’s taxable income as $186,846.86,

$197,600.86, $114,947.98, $162,232.18, and $150,708.73.

Petitioners’ returns understated petitioner’s taxable income for

his 1989, 1990, 1991, 1992, and 1993 taxable years, respectively,

by $99,338.19, $120,202.76, $65,200.89, $100,189.87, and

$70,519.72.   The discrepancies for the years in issue were 114
                              - 21 -

percent,5 155 percent, 131 percent, 161 percent, and 88 percent,

respectively.6   We conclude from the foregoing understatements of

income that petitioner engaged in a pattern of consistently

understating his gross receipts and overstating his business

expenses for the years in issue and that petitioner’s consistent

pattern of substantially understating income is a strong

indicator of fraud.

     Petitioner failed to maintain adequate records, although he

indicated that he maintained his own records for both his

business and personal accounts.   In their amended Federal income

tax returns, petitioners admitted that petitioner kept inadequate

records which resulted in understatements of income.7   Cf.

Badarraco v. Commissioner, 464 U.S. 386 (1984).   Petitioner

claimed that the understatements during the years in issue were

due to:   Inaccurate calculations of income, some of which were

from a trust account, double counting and miscalculating

deductions, and failure to properly account for certain stock

transfers.   We conclude that the admissions on petitioners’


     5
      Rounding to the nearest percentage point.
     6
      These percentages are calculated by taking the excess of
the income reported on the final amended return over the income
reported on the original return, and dividing that amount by the
amount reported on the original return. See, e.g., Williams v.
Commissioner, T.C. Memo. 1992-153, affd. 999 F.2d 760 (4th Cir.
1993).
     7
      The admissions were reported on petitioner’s amended
Federal income tax returns (Form 1040X) in the section entitled
“Part II Explanation of Changes to Income, Deductions, and
Credits”.
                              - 22 -

amended returns indicate that petitioner did not keep adequate

business records and that his inadequate record keeping

constitutes an indicium of fraud.   Niedringhaus v. Commissioner,

99 T.C. at 211 (1992).

     “The sophistication, education, and intelligence of the

taxpayer are relevant to determining fraudulent intent.” Sadler

v. Commissioner, 113 T.C. 99, 104 (1999); see Niedringhaus v.

Commissioner, supra at 211; see Scallen v. Commissioner, T.C.

Memo. 1987-412, affd. 877 F.2d 1364 (8th Cir. 1989).    Throughout

the years in issue, petitioner was an attorney, and we may

consider this fact in deciding whether petitioner acted with

fraudulent intent.   Petitioner began his legal career as an

Assistant United States Attorney, charged with the duty to

enforce the laws of the United States.    After serving as an

Assistant United States Attorney, petitioner engaged in private

practice as a criminal defense lawyer.    We conclude that

petitioner’s professional experiences provided him with knowledge

that engaging in a pattern of consistently failing to report

significant amounts of income is unlawful and that he has a legal

obligation to accurately report income.

     Petitioner contends that a section 6663(a) penalty should

not be levied against him for his 1990 taxable year.    We conclude

that petitioner’s contention is without merit.    Petitioner

pleaded guilty to an attempt to evade or defeat tax pursuant to
                               - 23 -

section 72018 for 1990.   As a former Federal prosecutor and

criminal defense lawyer, he should have been aware of the

implications of such a plea agreement.   Moreover, because

petitioner pleaded guilty to an attempt to evade or defeat tax

pursuant to section 7201, he is collaterally estopped from

challenging respondent’s determination that there was an

underpayment for his 1990 taxable year due to fraud under section

6663(a).    See Kisting v. Commissioner, 298 F.2d 264, 272 (8th

Cir. 1962) (not reversible error for the Court to admit

taxpayer's nolo contendere plea into evidence), affg. T.C. Memo.

1961-3; DiLeo v. Commissioner, 96 T.C. 858, 885-886; Stone v.

Commissioner, 56 T.C. 213, 221 (1971); Moore v. Commissioner,

T.C. Memo. 2001-77; see also Knoff v. Commissioner, T.C. Memo.

1992-624.

     Based on the foregoing, we hold that respondent has clearly

and convincingly established that petitioner is liable for

penalties for fraud under section 6663(a) for the taxable years

in issue.   Because section 6663(a) applies, we need not address

respondent’s alternative argument under section 6662(a).     As



     8
      SEC. 7201.   ATTEMPT TO EVADE OR DEFEAT TAX.

          Any person who willfully attempts in any manner to
     evade or defeat any tax imposed by this title or the payment
     thereof shall, in addition to other penalties provided by
     law, be guilty of a felony and, upon conviction thereof,
     shall be fined not more than $100,000 ($500,000 in the case
     of a corporation), or imprisoned not more than 5 years, or
     both, together with the costs of prosecution.
                               - 24 -

noted, supra, petitioners do not contest respondent’s nonfraud

deficiency determinations.9   Additionally, petitioners contended

in their petitions that several alleged overpayments and a refund

should be applied against their liabilities in both their

deficiency case and in their levy case.    We address those

contentions in the portion of this opinion addressing their levy

case below.

The Levy Case at Docket No. 9452-00L

     The issue we must decide in the case at docket No. 9452-00L

is whether respondent may proceed with the collection of

petitioners’ tax liabilities for the years in issue pursuant to

section 6330.

     The two notices of determination address self-reported

liabilities, as well as accrued interest and statutory additions

to tax, for petitioners’ 1989, 1990, 1991, 1992, 1993, and 1996

taxable years.   The two notices of determination do not address

the deficiencies and penalties in the case at docket No. 7464-00.

     Petitioners contend that respondent should have credited an

alleged refund and several alleged overpayments against the

liabilities for the years in issue.     Petitioners allege that

there was an overpayment of Federal income tax for their 1992


     9
      We note that respondent made adjustments to   petitioners’
capital gain and dividend income in the notice of   deficiency,
reallocating income between those two categories.    Petitioners
did not contest this issue and it is deemed to be   conceded. See
Rule 34(b)(4); Nicklaus v. Commissioner, 117 T.C.   117, 120 n.4
(2001).
                               - 25 -

taxable year of $3,126.40.   Petitioners also allege that a $2,564

refund was due for their 2001 taxable year, and that respondent

applied that refund against the deficiencies in the instant case.

Petitioners further allege that respondent notified them in a

letter, dated March 28, 2002, that a $4,215 overpayment had been

applied against the deficiencies in their 1991, 1992, and 1993

taxable years.

     Respondent’s notice of determination indicated that the

liabilities shown on the final notice of intent to levy for

petitioners’ 1992 taxable year were based on their tax returns.

Respondent’s final notice of intent to levy showed that

petitioners’ liabilities for their 1992 taxable year totaled

$2,365.11, which reflects an assessed balance of $1,968.42 and

statutory additions of $396.69.   The Appeals officer’s supporting

statement and the notice of determination indicate that those

liabilities consisted of interest that had accrued on taxes

reported on petitioners’ original and amended returns.    The

Appeals officer also indicated that “Generally, the taxpayer full

[sic] paid the tax but has not paid the interest.”   Petitioners

reported a tax liability of $42,714.42 on their final amended

1992 tax return, and petitioners have paid at least that amount

for their 1992 taxable year.   However, the April 4, 2000 notice

of deficiency indicates that the income tax for petitioners’ 1992

taxable year was $39,498.02.   Respondent did not determine a

deficiency in income tax for that year.
                                 - 26 -

     Respondent issued the notice of deficiency on April 4, 2000,

and the two notices of determination on August 8, 2000.        When

respondent issued the two notices of determination, respondent

was aware that petitioners’ income tax for their 1992 taxable

year was $39,498.02.     Respondent’s records show that petitioners

paid at least $42,714.42 for their 1992 taxable year, and,

therefore, petitioners overpaid their taxes by $3,216.40 for

their 1992 taxable year.

     We conclude from our analysis of respondent’s records that

the Appeals officer did not properly consider petitioners’

payments for the 1992 taxable year against their liabilities in

issue which respondent seeks to collect.     Petitioners may

challenge the existence or amount of their underlying tax

liability pursuant to section 6330(c)(2)(B),10 which includes

their “self-assessed” liabilities reported on their amended

returns.     Montgomery v. Commissioner, 122 T.C. __ (2004)(slip op.

at 11-12).     Consequently, we remand the instant case to the

Appeals officer to credit petitioners’ $3,216.40 payment against

the liabilities in issue.


     10
          Sec. 6330(c)(2)(B) provides:

     (B)     Underlying liability.–-The person may also raise at the
             hearing challenges to the existence or amount of the
             underlying tax liability for any tax period if the
             person did not receive any statutory notice of
             deficiency for such tax liability or did not otherwise
             have an opportunity to dispute such liability.
                              - 27 -

     Petitioners additionally contend that the $2,564 refund

claimed on their Form 1040 for their 2001 taxable year should be

applied against their liabilities in the instant case.

Petitioners also contend that an alleged overpayment of $4,215.41

should be applied against their tax liabilities.   Petitioners

attached a document to their brief, purportedly from the Internal

Revenue Service, dated March 28, 2002, which indicated that an

overpayment of $4,215.41 was applied against the deficiencies in

their 1991, 1992, and 1993 taxable years.   The document does not

indicate the year to which the alleged overpayment relates.

     Petitioners’ 2001 Form 1040 and the March 28, 2002, letter

are not part of the record in this fully stipulated case.   See

Rule 91(e).   We shall not examine documents that are not part of

the record.   Accordingly, petitioners’ overpayment and refund

claims are unsubstantiated.

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, or moot.
                        - 28 -

To reflect the foregoing,


                                 Decision will be entered

                            for respondent in docket No.

                            7464-00.

                                 An appropriate order will

                            be issued in docket No. 9452-00L.
