1 Cases of the following petitioners are consolidated

herewith: Door Control Services, Inc., docket No. 10140-94;

Jimmy Don and Sharon L. Gilchrist, docket No. 10132-94.

T.C. Memo. 1996-508

UNITED STATES TAX COURT

DOOR CONTROL SERVICES, INC., ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9936-94, 10132-94, Filed November 14, 1996.

 10140-94.

J. W. Tyner, for petitioners.

Stephen C. Coen, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION

FOLEY, Judge: By notices of deficiency dated March 16,

1994, respondent determined the following deficiencies and

additions to tax with respect to petitioners' Federal income

taxes:

Jimmy Don and Sharon L. Gilchrist, docket No. 10132-94

 Additions to Tax 

Year Deficiency Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6653(b)(1) Sec. 6661

 

1986 $34,608 $25,956 

1 -- $8,652

1987 23,644 17,733 

2 -- 5,911

1988 38,316 -- -- $28,737 9,579

1 50 percent of the statutory interest due on $34,608.

2 50 percent of the statutory interest due on $23,644.

Door Control Services, Inc., docket Nos. 9936-94 and 10140-94

 Additions to Tax 

Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6653(b)(1) Sec. 6661

1985 $1,681 $841 -- 

1 -- --

1986 31,378 -- $23,534 

2 -- $7,845

1987 21,025 -- 15,769 

3 -- 5,256

1988 27,336 -- -- -- $20,502 6,834

1 50 percent of the statutory interest due on $1,681.

2 50 percent of the statutory interest due on $31,378.

3 50 percent of the statutory interest due on $21,025.

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure. The only issue in these cases is whether petitioners

are liable for the additions to tax for fraud.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. At

the time the petitions were filed, Jimmy Don and Sharon L.
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Gilchrist resided, and Door Control Services, Inc., had its

principal place of business, in Ben Wheeler, Texas.

In 1973, the Gilchrists entered into the business of

servicing automatic doors. On October 18, 1984, Door Control

Services, Inc. (Door Control), was incorporated under Texas law. 

The Gilchrists were the only directors, officers, and

shareholders of the corporation. From 1973 to 1988, the business

was located in Tyler, Texas, where the Gilchrists resided with

their four young children. In October of 1988, the family and

the business moved to Ben Wheeler, Texas.

Mr. and Mrs. Gilchrist were both involved in conducting the

business. While Mrs. Gilchrist managed administrative matters,

Mr. Gilchrist supervised the corporation's employees. Mrs.

Gilchrist deposited Door Control's cash receipts in bank

accounts, wrote corporate checks, and maintained financial

records for the corporation. The Gilchrists hired Earl D. Crim,

Jr., a certified public accountant, to prepare corporate and

individual Federal income tax returns relating to the years in

issue. 

At the beginning of each year, Mr. Crim typically would

execute an engagement letter with each of his clients. 

Consistent with that practice, in each year that he prepared

returns for petitioners, he sent an engagement letter to the

Gilchrists (concerning their individual return) and one to Door

Control (concerning its corporate return). The engagement
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letters expressed the terms under which Mr. Crim would prepare

the returns. Every engagement letter specified that Mr. Crim

would prepare the tax returns based solely on the information

provided by the Gilchrists and would not audit the Gilchrists'

records to ascertain the accuracy of the information provided. 

The Gilchrists routinely executed the engagement letters and

returned them to Mr. Crim. After receiving the letter, Mr. Crim

would begin to gather information to prepare the return. Each

year, he asked petitioners to provide relevant documentation,

such as deposit slips and bank account records. In addition, at

the end of each year he sent the Gilchrists a questionnaire that

solicited additional information necessary to prepare their

individual return. 

In preparing the individual returns, Mr. Crim relied on

Forms 1099, bank statements, and answers provided in the

questionnaire. In preparing the corporate returns, Mr. Crim

determined Door Control's gross income and deductions by

examining Mrs. Gilchrist's handwritten explanations on deposit

slips and check stubs. For each year, Mr. Crim would total Door

Control's deposit slips, subtract receipts that appeared (based

on Mrs. Gilchrist's handwritten notes) to be nontaxable, and

report the remainder as Door Control's gross income. He would

also total check stubs that appeared (based on Mrs. Gilchrist's

handwritten notes) to be deductible and report the resulting

amounts as deductions on the return. The Gilchrists generally
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did not provide, and Mr. Crim never requested, copies of the

checks deposited to and drawn on the corporate account. Once a

return was prepared, Mr. Crim would meet with the Gilchrists to

discuss the return and obtain their signatures. 

In 1989, the Internal Revenue Service selected for audit

Door Control's 1986, 1987, and 1988 corporate returns. The audit

was assigned to Revenue Agent Jeff C. Caid. In the course of his

examination, Revenue Agent Caid reconciled deposit records for

Door Control's corporate checking account with Forms 1099

received by Door Control from some of its large clients. He

found that some of the income received by the corporation had not

been deposited in the corporate checking account. Revenue Agent

Caid suspected that corporate income had been diverted to the

Gilchrists' individual bank account, and he commenced an audit of

their 1986, 1987, and 1988 individual returns.

Revenue Agent Caid met with Mr. Gilchrist three times in

August and September of 1989. During the course of the

examination, he asked Mr. Gilchrist for the number and location

of the personal and corporate bank accounts in use during 1986,

1987, and 1988. Mr. Gilchrist told him that they kept corporate

funds separate from personal funds and that they had only one

personal account entitled the "D and S Farms Account". Revenue

Agent Caid discovered, however, that the Gilchrists had three,

rather than one, personal bank accounts. 
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Subsequent to the discovery of the undisclosed personal

accounts, Revenue Agent Caid and Special Agent Chisenhall of the

Internal Revenue Service's Criminal Investigation Division met

with the Gilchrists and examined all of petitioners' bank

records. The agents found that Door Control failed to report,

and diverted into the Gilchrists' personal accounts, corporate

income of $94,983.42 in 1986, $66,173.01 in 1987, and $105,891.87

in 1988. The Gilchrists had not provided Mr. Crim with any

information concerning this income.

On May 25, 1990, the Gilchrists met with Revenue Agent Caid

and Special Agent Chisenhall and agreed to write and sign

affidavits. Mr. Gilchrist admitted in his affidavit: (1) Door

Control's 1986, 1987, and 1988 corporate returns were "not true,

correct, and accurate"; (2) he and Mrs. Gilchrist misclassified

personal expenses as business expenses; (3) Door Control paid and

deducted personal expenses of the Gilchrists; and (4) on

individual returns for 1986, 1987, and 1988, he failed to report

personal income but deducted associated expenses. Mrs. Gilchrist

adopted Mr. Gilchrist's statement in her own affidavit.

On its 1985, 1986, and 1987 corporate returns, Door Control

carried back a net operating loss from 1988 and deducted a

portion of this loss on each return. In addition, on its 1986,

1987, and 1988 corporate returns, Door Control (1) reported

taxable income of $0, $6,997, and ($22,932), respectively, and
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(2) paid and deducted the Gilchrists' personal expenses in the

following amounts: 

Year Truck Expense Travel/Entertainment Utilities Total 

1986 $1,317 $2,076 $3,782 $7,175

1987 2,907 4,513 11,858 19,278

1988 1,694 1,987 2,305 5,986

On their 1986, 1987, and 1988 individual returns, the

Gilchrists reported gross income of $11,237, $13,144, and ($582),

respectively. In each year, they reported that they received no

dividend income. The parties, however, have stipulated: 

(1) Door Control made payments relating to the Gilchrists'

personal expenses; (2) the Gilchrists deposited into their

personal bank accounts corporate income of $94,983.42 in 1986,

$66,173.01 in 1987, and $105,891.87 in 1988; and (3) the payments

for personal expenses and diverted corporate income are taxable

to the Gilchrists as constructive dividends. 

By information dated March 30, 1993, Mr. and Mrs. Gilchrist

were each charged, pursuant to section 7206(1), with willfully

making and subscribing a return which they did not believe to be

true and correct. The information charged that each of them had

willfully made and subscribed a Form 1040 for 1988 that they did

not believe to be true and correct. It charged specifically that

they failed to report diverted corporate income. Also on March

30, 1993, in accordance with a plea agreement, the Gilchrists

each pleaded guilty to violation of section 7206(1). Pursuant to

the plea agreement, the Gilchrists were required to pay
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restitution in the amount of $115,564.30 or the amount of tax

liability, whichever was less.

On March 16, 1994, respondent issued notices of deficiency

to the Gilchrists and Door Control.

OPINION

Respondent determined that petitioners were liable for

additions to tax for fraud under section 6653(b)(1)(A) and (B) as

in effect for 1986 and 1987, and section 6653(b)(1) as in effect

for 1988. Respondent also determined that Door Control was

liable for an addition to tax for fraud under section 6653(b)(1)

as in effect for 1985. 

Fraud is defined as an intentional wrongdoing designed to

evade tax. Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958);

Miller v. Commissioner, 94 T.C. 316, 332 (1990). The existence

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

of the entire record. Loftin & Woodard, Inc. v. United States,

577 F.2d 1206, 1236 (5th Cir. 1978); Gajewski v. Commissioner, 67

T.C. 181, 199 (1976), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978). Respondent bears the burden of proving

fraud by clear and convincing evidence. Sec. 7454(a); Rule

142(b). To carry her burden of proof, respondent must show that

(1) an underpayment of tax exists and (2) some portion of the

underpayment is due to fraud. Petzoldt v. Commissioner, 92 T.C.

661, 699 (1989). Where respondent determines fraud for several
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years, respondent must separately prove fraud for each year. 

Drieborg v. Commissioner, 225 F.2d 216, 219-220 (6th Cir. 1955).

I. Underpayment

To establish that Door Control is liable for the additions

to tax for fraud, respondent must prove by clear and convincing

evidence that Door Control underpaid taxes relating to 1985,

1986, 1987, and 1988.

On its 1985 return, Door Control claimed a deduction for a

net operating loss carryback from 1988. In 1988, Door Control

reported a $22,932 loss. After adjusting Door Control's 1988

income (i.e., adding $105,891.87 Door Control failed to report),

the corporation did not have a loss in 1988. As a result, Door

Control was not entitled to a net operating loss carryback in

1985, and respondent has established an underpayment relating to

Door Control's 1985 return.

With respect to the 1986, 1987, and 1988 corporate returns,

Door Control understated its taxable income by failing to report

corporate income of $94,983.42 in 1986, $66,173.01 in 1987, and

$105,891.87 in 1988. In addition, Door Control claimed over

$30,000 in deductions in 1986, 1987, and 1988 for nondeductible

expenditures made for the personal benefit of the Gilchrists. 

Consequently, respondent has established that Door Control

underpaid its taxes relating to 1986, 1987, and 1988.

To establish that the Gilchrists are liable for the

additions to tax for fraud, respondent must prove by clear and
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convincing evidence that the Gilchrists underpaid taxes relating

to 1986, 1987, and 1988. In each of these years, the Gilchrists

failed to report income diverted from Door Control and taxable to

them as dividends. During these years, the Gilchrists also

failed to report over $30,000 of expenditures Door Control made

for their personal expenses. Consequently, respondent has

established that the Gilchrists underpaid their taxes relating to

1986, 1987, and 1988.

II. Fraudulent Intent

To establish that petitioners are liable for the additions

to tax for fraud, respondent must prove by clear and convincing

evidence that petitioners intended to evade taxes. This burden

is met where respondent proves conduct intended to conceal,

mislead, or otherwise prevent the collection of taxes. Patton v.

Commissioner, 799 F.2d 166, 171 (5th Cir. 1986), affg. T.C. Memo.

1985-148. Fraudulent intent is not to be imputed or presumed but

rather must be established by some independent evidence. Beaver

v. Commissioner, 55 T.C. 85, 92 (1970); Otsuki v. Commissioner,

53 T.C. 96, 106 (1969). 

Because direct proof of the taxpayer's intent is rarely

available, fraudulent intent may be established by circumstantial

evidence and reasonable inferences drawn from the facts. Spies

v. United States, 317 U.S. 492, 498 (1943); Stephenson v.

Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th

Cir. 1984). Indicia of fraud include consistent underreporting
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of income tax liability, Holland v. United States, 348 U.S. 121,

137-139 (1954); concealing income from return preparers, Korecky

v. Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986), affg. T.C.

Memo. 1985-63; diverting corporate funds to the taxpayer's

personal use, United States v. Thetford, 676 F.2d 170, 175 (5th

Cir. 1982); using a corporation to disguise the personal nature

of expenses, Truesdell v. Commissioner, 89 T.C. 1280, 1302-1303

(1987); and failing to cooperate with tax authorities, Bradford

v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986); Petzoldt v.

Commissioner, supra at 700.

The Gilchrists' conduct during the years in issue is laden

with these indicia of fraud. The Gilchrists substantially

understated their individual tax liability during the years in

issue by failing to report income diverted from Door Control. 

These diversions were concealed from their return preparer. In

addition, the Gilchrists misclassified personal entertainment,

travel, and utility expenses as business expenses and used Door

Control to deduct such expenses. During the examination, Mr.

Gilchrist provided numerous false and misleading answers to

Revenue Agent Caid's questions. As a result, we conclude that

the Gilchrists intended to evade taxes.

With respect to Door Control's corporate returns, the

requisite intent to evade taxes is similarly present. A

corporation can act only through its officers and does not escape

responsibility for acts of its officers performed in that
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capacity. Federbush v. Commissioner, 34 T.C. 740, 749 (1960),

affd. 325 F.2d 1 (2d Cir. 1963); DiLeo v. Commissioner, 96 T.C.

858, 875 (1991), affd. 959 F.2d 16 (2d Cir. 1992). It follows

that corporate fraud necessarily depends upon the fraudulent

intent of the corporate officers. Auerbach Shoe Co. v.

Commissioner, 216 F.2d 693 (1st Cir. 1954), affg. 21 T.C. 191

(1953); Federbush v. Commissioner, supra at 749. 

Door Control substantially understated its tax liability by

failing to report income diverted to the Gilchrists' personal

bank accounts. Door Control also claimed deductions for the

payment of personal expenses of the Gilchrists. All of these

transactions were concealed from petitioners' return preparer. 

In addition, Mr. Gilchrist, in his capacity as an officer of Door

Control, misled Revenue Agent Caid when he told him that

corporate funds were kept separate from personal funds. These

facts establish that Door Control intended to evade taxes

relating to 1986, 1987, and 1988.

On its 1985 return, Door Control claimed a carryback of a

net operating loss from 1988. The reported loss resulted from

Door Control's failure to report $105,891.87 of income. Where a

deficiency is caused by the carryback of a fraudulent loss, the

deficiency is attributable to fraud. Toussaint v. Commissioner,

T.C. Memo. 1984-25, affd. 743 F.2d 309 (5th Cir. 1984). As a

result, we conclude that Door Control intended to evade tax

relating to 1985.
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Petitioners contend that they relied on their accountant and

were negligent, but not fraudulent, in understating their income. 

A taxpayer can avoid liability for fraud by establishing reliance

on an accountant where the accountant was provided with adequate

information from which to prepare the returns. Estate of Temple

v. Commissioner, 67 T.C. 143, 162 (1976); Morris v. Commissioner,

T.C. Memo. 1992-635, affd. without published opinion 15 F.3d 1079

(5th Cir. 1994). Petitioners rely on Compton v. Commissioner,

T.C. Memo. 1983-647, as support for their contention. In

Compton, the taxpayer understated income derived from his logging

business. We determined that the understatements were due to the

negligence of the taxpayer's return preparer. The taxpayer had

provided his accountant with all information necessary to

accurately calculate his tax liability. The accountant, however,

understated the taxpayer's income, as well as the taxpayer's

deductions. When the Internal Revenue Service commenced an audit

of the taxpayer's returns, he cooperated fully. We concluded

that the taxpayer was not liable for the addition to tax for

fraud.

The present case is readily distinguishable from Compton. 

The Gilchrists, unlike the taxpayer in Compton, did not give

their return preparer all the information necessary to accurately

calculate their tax liability. Mr. Crim was not informed that

corporate income had been deposited into personal accounts. In

addition, the Gilchrists, unlike the taxpayer in Compton, did not
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fully cooperate with revenue agents. Mr. Gilchrist withheld

information concerning the number and location of their personal

bank accounts. The Gilchrists also gave inconsistent

explanations with respect to various items. Moreover, the

engagement letters executed by the Gilchrists explicitly stated

that Mr. Crim would simply prepare the returns from information

provided and would not be responsible for investigating the

accuracy of such information. Thus, petitioners had the burden

of providing accurate information to Mr. Crim.

Furthermore, the disparity between the gross income reported

on the individual returns (i.e., ranging from ($582) to $13,144)

and the amounts omitted (e.g., diverted corporate income of

$94,983.42 in 1986, $66,173.01 in 1987, and $105,891 in 1988) is

so great that the Gilchrists could not reasonably have overlooked

it when they signed the returns. Estate of Temple v.

Commissioner, supra at 163-164. Consequently, the Gilchrists'

contention is unpersuasive. 

The Gilchrists also contend that imposition of the additions

to tax for fraud under section 6653(b) following their conviction

under section 7206(1) constitutes a second punishment for the

same offense in violation of the Double Jeopardy Clause of the

Fifth Amendment of the United States Constitution. We disagree. 

Where the addition to tax under section 6653(b) is assessed

following a conviction under section 7201 for criminal tax

evasion, the addition to tax does not constitute a second
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punishment. Ianniello v. Commissioner, 98 T.C. 165 (1992). 

Moreover, where the addition to tax is assessed following a

conviction under section 7206(1) for willfully making a false

return, the addition to tax under section 6653(b) does not relate

to the same offense. See McNichols v. Commissioner, T.C. Memo.

1993-61, affd. 13 F.3d 432 (1st Cir. 1993). Consequently, we

conclude that the Gilchrists' contention is without merit. 

Finally, the Gilchrists contend that the criminal proceeding

determined that they owe no more than $115,564.30 and that

respondent is collaterally estopped to collect tax, including

additions to tax, in excess of that amount. At the Gilchrists'

sentencing hearing, the presiding judge carefully explained that

the amount of tax ultimately assessed could exceed $115,564.30

and that the Gilchrists would be obligated to pay the additional

amount. The judge explained as follows:

THE COURT: * * * if, for example, you have your

contest with the Internal Revenue Service and it is

determined that you owe $80,000, then the total

restitution you would have to pay would be $80,000. If

it is $180,000, you would still owe the Government

$180,000, 115 of which would be this restitution; do

you understand?

MRS. GILCHRIST: Yes, sir.

MR. GILCHRIST: (Nods.)

As a result, we conclude that the U.S. District Court did not

determine that the tax owed, including additions to tax, could

not exceed $115,564.30, and respondent is not collaterally

estopped.
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Accordingly, we hold that petitioners are liable for the

additions to tax for fraud as determined by respondent.

We have considered all other arguments made by petitioner

and respondent and found them to be either irrelevant or without

merit.

To reflect the foregoing,

Decisions will be entered

under Rule 155.