1These cases are consolidated for trial, briefing, and

opinion.

 

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:
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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-

1For 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-

1For 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

1The 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 (L1058) 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 -

2Petitioners 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.

3Sec. 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...)

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
- 17 -

3(...continued)

fraud of such spouse.

4The 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). 

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.
- 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
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5Rounding to the nearest percentage point.

6These 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).

7The 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”. 

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’
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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
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8SEC. 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.

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
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9We 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).

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
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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.
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10Sec. 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.

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.
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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.
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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.