                        T.C. Memo. 2002-12



                      UNITED STATES TAX COURT



              HOWARD AND LINDA LEVINE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6398-99.                     Filed January 10, 2002.


     Stuart E. Abrams, for petitioners.

     Rosemarie D. Camacho, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined deficiencies in

petitioners’ Federal income tax liabilities and penalties, as

follows:


                                          Fraud Penalty
           Year            Deficiency       Sec. 6663

           1990             $ 2,108          $ 1,581
           1991              10,063            7,547
           1992              11,136            8,352
           1993              13,411           10,058
                               - 2 -

     After settlement, the only issue for decision1 is whether

petitioner Howard Levine is liable for the fraud penalties for

1990, 1991, and 1992.2

     Hereinafter, references to petitioner in the singular are to

Howard Levine.   Unless otherwise indicated, all references to

sections are to the Internal Revenue Code, and all references to

Rules are to the Tax Court Rules of Practice and Procedure.


                         FINDINGS OF FACT

     At the time they filed their petition herein, petitioners

resided in Dix Hills, New York.

     During 1990 through 1993, petitioner worked for his father’s

accounting firm as a bookkeeper and tax return preparer, and



1
   Due to the fact that petitioner Linda Levine was unable to be
present to testify at the partial trial held on Dec. 5, 2000, we
have reserved for decision whether petitioner Linda Levine
qualifies for relief from liability under sec. 6015(b) for the
Federal income tax deficiencies and the fraud penalties under
sec. 6663 that respondent determined against petitioners
regarding their joint Federal income tax returns for 1990 through
1993.
2
   With regard to 1993, petitioner Howard Levine’s liability for
the fraud penalty is established as a result of petitioner’s
guilty plea to criminal tax evasion under sec. 7201 for the same
year.

     In the alternative to the fraud penalties determined by
respondent, respondent for each year also determined against
petitioners late filing additions to tax and negligence
penalties.

     .
                                - 3 -

petitioner sold insurance and alarm systems.    Petitioner does not

have a college degree.    During these same years, petitioner also

performed bookkeeping and tax return preparation services for his

own clients.

     On April 23, 1990, petitioner applied for an automobile

loan.    On the loan application, petitioner indicated that his

annual income was $120,000.

     During 1990 through 1993, petitioner did not maintain books

and records relating to any of his income-producing activities.

     During 1975 through 1989, Mrs. Levine worked part-time in a

department store.

     For years prior to 1988, petitioners timely filed their

Federal income tax returns.

     For 1990 through 1993, petitioners did not timely file with

respondent their Federal income tax returns that were due, nor

did petitioners make any payments of estimated Federal income

taxes.

     In January of 1994, petitioner was contacted by respondent’s

revenue agent about petitioners’ unfiled 1988 through 1992

Federal income tax returns.3

3
   Respondent’s revenue agent who talked to petitioner in January
of 1994 testified herein that during that conversation petitioner
falsely stated that he already had filed his 1988 through 1992
Federal income tax returns. Petitioner contends that the
testimony of respondent’s revenue agent should be stricken and
excluded from the evidence herein.
                                                   (continued...)
                                - 4 -

     On November 27, 1995, petitioner met with respondent’s

special agents and was advised that he and his wife were under

investigation for possible criminal violation of the Federal

income tax laws regarding their failure to file Federal income

tax returns for 1990 through 1993.      At that meeting, petitioner

represented falsely to respondent’s representatives that he was a

college graduate and a C.P.A.

     On January 5, 1996, petitioners filed late their joint

Federal income tax returns for 1990, 1991, 1992, and 1993.

3
 (...continued)
     The basis for petitioner’s contention is that, during a
subsequent criminal tax prosecution of petitioner, the Government
did not give to petitioner a copy of the revenue agent’s written
summary of the statement petitioner had made during the January
1994 conversation with the revenue agent. Petitioner alleges
that the Government’s failure during the criminal proceeding to
produce to petitioner this document constitutes a violation of
Fed. R. Crim. P. 16(a)(1)(A) and that we should exercise our
discretion in this civil tax proceeding to exclude the testimony
of the revenue agent. Petitioner notes that, in appropriate
circumstances, courts may exclude in civil proceedings evidence
where the evidence was obtained in violation of an individual’s
Fourth Amendment rights. See Tirado v. Commissioner, 689 F.2d
307, 308 (2d Cir. 1982), affg. 74 T.C. 14 (1980); Houser v.
Commissioner, 96 T.C. 184, 195 (1991).

     In this case, we decline to apply the exclusionary rule to
the revenue agent’s testimony. Fed. R. Crim. P. 16 is intended
to encourage full discovery and eliminate unfair surprise at
trial. Because petitioner pled guilty, there was no criminal
trial. Any prejudice to petitioner’s plea negotiations that
occurred as a result of petitioner’s failure to receive the
revenue agent’s summary of petitioner’s January 1994 statements
should have been dealt with in the criminal proceedings. Prior
to the trial herein, petitioner was advised of the substance of
the revenue agent’s testimony, and petitioner had ample time to
prepare for that testimony. The revenue agent’s testimony is
admissible.
                                - 5 -

     On their late-filed joint Federal income tax returns,

petitioners reported Schedule C, Profit or Loss From Business,

income and Form 1099 income relating to petitioner’s work as a

bookkeeper and tax return preparer for his father’s accounting

firm and relating to petitioner’s work as a seller of insurance

and alarm systems.

     Petitioners did not report on the above late-filed joint

Federal income tax returns income petitioner had received for

bookkeeping and tax return preparation services petitioner had

rendered for his own clients.

     Petitioners made no payments with the above late-filed tax

returns.

     On audit for 1990 through 1993, utilizing specific items of

income that had been deposited by petitioner into bank accounts,

the existence of which accounts petitioner had not disclosed to

respondent’s representatives, respondent determined that

petitioners had not reported on the above Federal income tax

returns the income petitioner had received from the bookkeeping

and tax return preparation services petitioner had rendered for

his own clients.

     The schedule below reflects the total net business income

reported on petitioners’ joint Federal income tax returns for

1990, 1991, 1992, and 1993, as late filed on January 5, 1996, the

income that was earned by petitioner for bookkeeping and tax
                                   - 6 -

return preparation services that was not reported on petitioners’

late-filed Federal income tax returns, and petitioners’ total

corrected net business income for each year, as well as

petitioners’ Federal income tax liabilities as reported.4

Respondent made no adjustments to the expenses claimed on

petitioners’ late-filed joint Federal income tax returns, and

petitioners have submitted no credible evidence as to their

entitlement to additional expenses.


              Net Business                                     Tax
           Income Reported   Omitted       Corrected         Liability
    Year      On Return      Income    Net Business Income   Reported

    1990        $43,548      $ 5,800          $49,348         $10,762

    1991         31,367      16,200            47,567          7,428

    1992         16,435      28,968            45,403          2,339

    1993         16,605      42,825            59,530          2,346



      On August 11, 2000, petitioner pled guilty in Federal District

Court to one count of a four-count felony indictment under section

7201 for income tax evasion relating to petitioners’ Federal income

tax returns for 1990 through 1993.         Petitioner’s guilty plea

related to 1993.




4
   Due to settlement of a number of adjustments, petitioner’s
corrected Federal income tax liabilities for each of the years in
issue will be determined in a Rule 155 computation.
                                 - 7 -

                                OPINION

     To establish fraud, respondent has the burden of proving by

clear and convincing evidence that the taxpayer made an

underpayment of Federal income taxes and that the taxpayer's

underpayment was due to fraudulent intent.   Sec. 7454(a); Rule

142(b); Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990),

affg. in part, revg. in part, and remanding an Order of this Court;

Schaffer v. Commissioner, 779 F.2d 849, 857 (2d Cir. 1985), affg.

in part and remanding Mandina v. Commissioner, T.C. Memo. 1982-34;

Clayton v. Commissioner, 102 T.C. 632, 646 (1994); Recklitis v.

Commissioner, 91 T.C. 874, 909 (1988).

     Because there is rarely direct proof of fraudulent intent,

respondent may sustain his burden utilizing circumstantial

evidence.    Douge v. Commissioner, supra; Schaffer v. Commissioner,

supra; Clayton v. Commissioner, supra at 647; Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983).

     Courts have developed certain indicia of fraud, including the

following:   (1) Understatements of income; (2) inadequate books and

records; (3) failure to file income tax returns; (4) implausible or

inconsistent explanations of behavior; (5) concealed assets;

(6) failure to cooperate with tax authorities; (7) dealing in cash;

(8) filing false documents; and (9) false statements.     United

States v. Klausner, 80 F.3d 55, 62 (2d Cir. 1996); Douge v.

Commissioner, supra (citing Bradford v. Commissioner, 796 F.2d 303,
                                 - 8 -

307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601); O’Connor v.

Commissioner, 412 F.2d 304, 310 (2d Cir. 1969), affg. in part and

revg. in part T.C. Memo. 1967-174.

     A taxpayer’s experience, knowledge, and ability as a

bookkeeper and tax return preparer are also factors to be

considered with respect to fraudulent intent.    O’Connor v.

Commissioner, supra.

     Petitioner admits that on petitioners’ 1993 joint Federal

income tax return he fraudulently failed to report a substantial

amount of income he earned in 1993, and in related criminal

proceedings petitioner pled guilty to tax evasion with regard

thereto.

     With regard to 1990, 1991, and 1992, petitioner acknowledges

that he carried on a separate business out of his home performing

bookkeeping and tax return preparation services for his own clients

and that on his late-filed joint Federal income tax returns for

those years he did not report such income.

     Petitioner contends generally, however, that the Forms 1099

that he received in 1990, 1991, and 1992 from insurance companies

overstated the actual amounts that petitioner received from the

companies and therefore that the amounts of income relating thereto

were overstated on petitioners’ 1990, 1991, and 1992 joint Federal

income tax returns.    Petitioner claims that such Form 1099

overstatements of income might more than offset the omitted income
                                - 9 -

relating to his bookkeeping and tax return services.   Petitioner’s

vague allegations regarding overreported Form 1099 income are not

credible.   Among other things, petitioner did not identify

specifically which Forms 1099 reflected overstatements of income,

and petitioner did not indicate any specific amounts of alleged

overstatements.

     Petitioner’s training and work as a bookkeeper and tax return

preparer, his failure to keep records of his bookkeeping and

personal tax return preparation activities, his misstatements to

respondent’s representatives, his pattern of filing petitioners’

income tax returns late, only after contact by respondent, and of

reporting thereon only Form 1099 income, not income from his

personal bookkeeping and tax preparation activities, taken together

indicate strongly and establish that petitioner fraudulently filed

the 1990, 1991, and 1992 joint Federal income tax returns.

     Petitioner argues that respondent has not satisfied his burden

of proving fraud by clear and convincing evidence.   Rule 142(b).

Certainly, some questions remain.   Better documentation and more

effort could have been expended by respondent’s representatives to

rebut petitioner’s contention that the Form 1099 income was

overstated.   We believe, however, and conclude that petitioner’s

fraud has been proven in a clear and convincing manner.
                              - 10 -

     Due to the remaining issue to be resolved, regarding

Mrs. Levine,


                                   An appropriate order will

                              be issued.
