The opinion
T.C. Summary Opinion 2007-31
UNITED STATES TAX COURT
HECTOR PROWSE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17121-05S. Filed March 1, 2007.
Hector Prowse, pro se.
Marc L. Caine, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years at
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
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Respondent determined deficiencies of $3,175.85 and $3,554,
respectively, in petitioner’s Federal income taxes for the years
2002 and 2003, an addition to tax under section 6651(a)(1) for
the year 2002 in the amount of $511.71, an additional tax under
section 72(t) in the amount of $107.85 for the year 2002, a
liability of $2,505 for self-employment tax under section 1401(a)
for the year 2003, and a negligence penalty under section 6662(a)
for both years.
In a trial memorandum, respondent notes that, prior to
trial, respondent conceded a capital gain loss of $9,405 for the
year 2002 that had been disallowed in the notice of deficiency,
and, therefore, petitioner is entitled to a capital loss
deduction of $3,000 for 2002 and a carryover capital loss
deduction of $3,000 to 2003. As a result of this concession, the
deficiencies, the addition to tax, and the penalties were reduced
to the following amounts:
Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662
2002 $1,316 $100 $263
2003 3,138 -- 628
Subsequent to these concessions, respondent filed an answer
alleging that petitioner is liable for the fraud penalty under
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section 6663(a) for the years 2002 and 2003 in the amounts of
$987 and $2,354, respectively.2
After concessions, the issues for decision are: (1) Whether
for 2002 and 2003 petitioner is entitled to deductions for
various expenses on Schedules A, Itemized Deductions; (2) whether
for 2002 and 2003 petitioner is liable for the civil fraud
penalty under section 6663 or, in the alternative, the accuracy-
related penalty under section 6662(a); and (3) whether for 2002
petitioner is liable for the late-filing addition to tax under
section 6651(a)(1).3
2
Respondent’s apparent motivation for asserting fraud was
prompted by this Court’s holding in Prowse v. Commissioner, T.C.
Memo. 2006-120, that petitioner was liable for the sec. 6663(a)
fraud penalty for the year 2001. Sec. 6663(b) provides that, if
any portion of an underpayment is attributable to fraud, the
entire underpayment shall be deemed to be attributable to fraud
except as to the portion the taxpayer establishes is not due to
fraud. Thus, a finding of fraud preempts or trumps the
negligence penalty of sec. 6662(a) determined in the notice of
deficiency. See sec. 6662(b).
3
Two adjustments in the notice of deficiency were not
addressed at trial and are, therefore, deemed conceded. One of
these adjustments relates to $1,078.57 petitioner received during
2002 that he reported as dividend income on his 2002 return. In
the notice of deficiency, respondent determined that the
$1,078.57 was not a dividend but was a distribution from a
qualified plan as defined in sec. 4974(c), and, therefore,
petitioner is liable for the 10-percent additional tax under sec.
72(t). The second adjustment that is also deemed conceded
relates to a $17,725.50 payment petitioner received during 2003
pursuant to a Form 1099-MISC, Miscellaneous Income, from SCI
Engineering & Surveying, P.C., for nonemployee compensation.
Respondent determined that petitioner is liable for self-
employment tax on that distribution under sec. 1401 with a
corresponding deduction for one-half of that tax under sec.
(continued...)
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Background
Some of the facts and exhibits were stipulated, and those
facts are so found. At the time the petition was filed,
petitioner was a legal resident of Middle Village, New York.4
From May 21, 2001, until January 11, 2002, petitioner was
employed as a mechanical HVAC engineer for KeySpan Engineering
Associates (KeySpan Associates). In that capacity, petitioner
worked on several design projects in the office. After
petitioner left KeySpan Associates on January 11, 2002,
3
(...continued)
164(f). A witness from the payor testified at trial regarding
this payment, and the Court is satisfied that respondent
correctly determined the payment to be self-employment income,
which petitioner reported on his return. Petitioner, however,
presented no evidence challenging the determination that
petitioner is liable for self-employment tax on the distribution;
consequently, the Court deems that issue as conceded.
4
Sec. 7491(a) generally shifts the burden of proof to the
Commissioner with regard to any factual issue relevant to
ascertaining the taxpayer’s liability. Sec. 7491(a)(2) limits
this rule only with respect to issues to which the taxpayer has
complied with the requirements for substantiation of any item,
has maintained all records with respect to such items, and has
cooperated with reasonable requests by the Secretary for
witnesses, information, documents, and interviews, etc.,
regarding the matters at issue. Since petitioner did not
cooperate with respondent in providing records to substantiate
the items on his return, the burden of proof does not shift.
However, as to fraud under sec. 6663(a), sec. 6663(b) provides
that, with respect to any portion of an underpayment that is
attributable to fraud, the entire underpayment is treated as
attributable to fraud except for any portion of the underpayment
that the taxpayer establishes is not attributable to fraud. Sec.
7454(a) provides that, in any proceeding involving fraud, the
burden of proof as to such issue is upon the Secretary. Thus,
the burden of proof on the fraud issue in this case is on
respondent.
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petitioner thereafter received unemployment compensation from the
State of New York.
In 2003, petitioner was a contract employee working on
behalf of SCI Engineering and Surveying, P.C. In that capacity,
petitioner worked as a cost estimator for projects related to the
U.S. Customs Building in Newark, New Jersey.
On or about June 24, 2004, petitioner filed his Federal
income tax return for the 2002 tax year. On the return,
petitioner reported wages of $8,001.92, taxable interest of
$520.22, ordinary dividends of $1,078.57, and unemployment
compensation of $13,525. His adjusted gross income was $23,126.
On Schedule A of the 2002 return, petitioner claimed
itemized deductions of $16,522, consisting of:
Medical and dental expenses $3,853
Deductible portion $ 2,119
State and local income taxes 416
Charitable gifts 1,910
Job expenses 12,077
Total $16,522
With respect to the $3,853 claimed as medical and dental
expenses on the 2002 return, petitioner included a statement with
his return which listed the $3,853 claimed as medical and dental
expenses as follows:
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Medical and Dental
Dr. Rogers Miles Rose $ 475
Ambulance transportation 109
Elmhurst Hospital 204
Medicines 225
Orthopaedic & Sports Association 330
Dr. Fred D. Cushner 140
Dr. Ambrose Pipia 180
Laboratory services 115
Dr. Guillermo Davila (dentist) 1,075
Southshore Opticians (eyeglasses) 450
Transportation 220
Total (all expenses) $3,523
Thus, petitioner’s medical expenses totaled $3,523; yet, he
claimed $3,853 on his return for 2002. This discrepancy was not
brought up at trial and appears to be a computational error
resulting in a claim for medical expenses of $330 in excess of
the numbers presented to the Court. No explanation was provided
at trial with respect to this discrepancy, nor did respondent
move to reduce the claimed amount to $3,523.
On or about June 15, 2004, petitioner filed his income tax
return for 2003.5 He reported adjusted gross income in the
amount of $18,360. On the return, petitioner reported wages of
$17,725.50 and taxable interest income of $634.74. Petitioner
also attached to the return a Form 1099-MISC, Miscellaneous
5
Although the 2003 tax return was filed late, respondent
did not determine the sec. 6651(a)(1) addition to tax as to that
year, presumably because petitioner’s 1999, 2000, and 2001
returns were under audit at the time the 2003 return was filed,
and petitioner attached a note to the return noting that.
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Income, issued by SCI Engineering, for nonemployee compensation
of $17,725.50.
On Schedule A of the 2003 return, petitioner claimed
itemized deductions of $18,700, consisting of the following:
Medical and dental expenses $2,335
Deductible portion $ 958
Charitable gifts 1,443
Job expenses 16,299
Total $18,700
To substantiate his claimed medical and dental expenses,
petitioner attached to his 2002 and 2003 returns various receipts
purporting to show various medical and dental expenses. All of
the receipts reflected cash payments.
Petitioner claimed an itemized deduction on his 2002 tax
return for State and local taxes in the amount of $416. The
amount was derived from petitioner’s Form W-2, Wage and Tax
Statement, for 2002.
During 2002, petitioner received a distribution from
Donaldson Lufkin & Jenrette in the amount of $1,078.57.
Petitioner attached a Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., to his 2002 tax return. Petitioner, however,
reported this income as dividend income on Schedule B, Interest
and Ordinary Dividends, of his return.
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Petitioner claimed itemized deductions for job expenses and
other miscellaneous items in the amounts of $12,077 and $16,299,
respectively, on his 2002 and 2003 tax returns.
For the 2002 deduction, the $12,077 claimed was based on
Schedule A of the return, Job Expenses and Most Other
Miscellaneous Deductions, and comprised the following:
Unreimbursed employee expenses $11,270
Tax preparation fees 200
Other expenses 1,070
Total $12,540
Less sec. 67(a) 2-percent limitation (463)
Deduction claimed $12,077
The $11,270 for unreimbursed employee expenses consisted of the
following:
Architectural & engineering plans for
bid on new project $10,585
Parking, tolls, & transportation 135
Lead & asbestos licenses 440
Meals & travel expenses 110
Total $11,270
The $1,070 for other expenses consisted of the following:
Job search $ 300
Telephone calls and faxes 250
Printing resumes 50
Traveling to interviews 350
Mail box and safe deposit box rents 120
Total $1,070
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As to the 2003 deduction, the $16,299 claimed for Job
Expenses and Most Other Miscellaneous Deductions was derived as
follows on Schedule A of the return:
Unreimbursed employee expenses $13,397
Tax preparation fees 100
Other expenses 2,435
Total $15,932
Less sec. 67(a) 2-percent limitation (367)
Deductible amount1 $15,565
1
Petitioner appears to have made a mathematical error
because he claimed $16,299 as a deduction on his return, and,
since the $734 discrepancy was not addressed at trial, it appears
to the Court that the correct mathematical computation is $15,565
and not the $16,299 claimed on Schedule A of petitioner’s return.
The $13,397 in unreimbursed employee expenses consisted of:
Vehicle expenses $13,140
Parking fees, tolls, etc. 140
Meals and entertainment 117
Total $13,397
The other expenses of $2,435 consisted of:
Job search $ 300
Faxes, telephone calls, etc. 250
Printing resumes 50
Traveling for interviews 400
Safety glasses, tools, work gloves, etc. 1,435
Total $2,435
The charitable gifts claimed on Schedules A of petitioner’s
2002 and 2003 tax returns consisted of cash gifts to a church and
noncash contributions of property to the Salvation Army. With
respect to the cash gifts, petitioner’s Schedules A for both
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years showed cash contributions to a church of $10 per week for a
total of $460 and $480 for 2002 and 2003, respectively. With
respect to the noncash contributions, petitioner attached
receipts to his 2002 and 2003 tax returns from the Salvation Army
dated December 30, 2002, and November 23, 2003, respectively.
The receipts listed the items of donated property, assigned a
value to each item, and a total for the contribution. For 2002,
the total was $2,900, and, for 2003, the total was $1,925. The
2002 receipt showed that the contribution was received by “Isabel
Lopez” and the 2003 receipt showed that the contribution was
received by “Patricia Rojas”. Both receipts were from the
Salvation Army at Astoria, New York.
Petitioner did not attach to his 2002 and 2003 returns any
substantiation of his cash gifts to the church, nor did he
substantiate the gifts during the examination of his returns.
Respondent examined petitioner’s 2002 and 2003 tax returns
as a result of respondent’s audit of petitioner’s 2001 return.
Respondent determined fraud under section 6663 for the 2001 tax
year based on the determination that petitioner overstated his
Schedule A itemized deductions and falsified documentation to
substantiate the claimed deductions. A petition was filed with
this Court, and the Court held in Prowse v. Commissioner, T.C.
Memo. 2006-120, that petitioner was liable for an increased
deficiency as well as the civil fraud penalty based on the
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Court’s finding that petitioner fraudulently claimed Schedule A
itemized deductions on his 2001 Federal income tax return.
While the case in Prowse v. Commissioner, supra, was
pending, respondent issued the statutory notice of deficiency,
upon which this case is based, determining that petitioner was
not entitled to any of the claimed itemized Schedules A
deductions on his 2002 and 2003 tax returns.
Following this Court’s opinion involving petitioner’s 2001
tax year and the finding of fraud under section 6663 for that
year, supra note 2, respondent moved in this case to impose the
section 6663 fraud penalty against petitioner for the 2002 and
2003 tax years. In the alternative, respondent asserted an
accuracy-related penalty for both years.
Schedule A Deductions
For the 2 years at issue, petitioner claimed on his income
tax returns deductions on Schedules A. For the year 2002, the
deductions claimed were:
Medical and dental expenses $ 2,119
Taxes 416
Charitable gifts 1,910
Job expenses and other miscellaneous expenses 12,077
Total $16,522
For the year 2003, the claimed deductions were:
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Medical and dental expenses $958
Charitable gifts 1,443
Job expenses and other miscellaneous expenses 18,700
Total $21,101
In the notice of deficiency, respondent disallowed some of
these expenses and, by motion, asserted that petitioner was
liable for fraud under section 6663(a) with respect to some of
the claimed deductions.
Section 213(a) allows a taxpayer who itemizes his or her
deductions to deduct, among other expenses, medical and dental
expenses to the extent such expenses exceed 7.5 percent of
adjusted gross income. In this case, petitioner claimed itemized
deductions for medical and dental expenses in the amounts of
$2,119 and $958 for 2002 and 2003, respectively. Petitioner
attached receipts to his returns in substantiation of these
expenses. Respondent determined that the documentation
petitioner submitted for these expenses was falsified and
disallowed all of petitioner’s claimed Schedule A deductions.
At trial, respondent presented several witnesses, including
doctors who petitioner claimed had provided services. These
doctors testified that no medical services had been provided by
them to petitioner during the years at issue and that the
receipts petitioner relied on were for services provided to him
in prior years that had been altered to reflect dates in 2002 and
2003.
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The Court notes that the receipts offered into evidence are
virtually identical to those provided in substantiation of
claimed expenses on petitioner’s 2001 Federal income tax return,
except for altered dates and slight changes in dollar amounts.
The Court found, in Prowse v. Commissioner, supra, that the 2001
claimed receipts were “falsified, and some, if not all, of the
signatures shown on the documents were forged.” The Court held,
therefore, that none of the documents substantiated any of
petitioner’s claimed medical expenses for 2001. Likewise, the
Court, in this case, holds that none of the receipts in this case
for 2002 and 2003 substantiate or establish petitioner’s claimed
medical and dental expenses for the years at issue. The
documentation in support of these claimed expenses is also held
to be false. Accordingly, the Court sustains respondent’s
disallowance of petitioner’s claimed medical and dental expenses.
Petitioner claimed an itemized deduction on his 2002 tax
return of $416 for State and local income taxes based on the
amounts reported on petitioner’s 2002 Form W-2 issued by KeySpan
Associates. Respondent conceded that, if petitioner’s allowed
itemized deductions are greater than the standard deduction,
petitioner is entitled to a deduction for the State and local
taxes paid for 2002.
Section 170(a)(1) authorizes a taxpayer to claim a deduction
for any charitable contribution during the tax year. Petitioner
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claimed charitable contribution deductions on Schedules A of his
2002 and 2003 tax returns for cash gifts to a church and noncash
gifts. The only documentation produced were two receipts for
2002 and 2003 from the Salvation Army regarding the noncash
contributions.
At trial, respondent challenged the authenticity of both
Salvation Army receipts. A Salvation Army representative
credibly testified that the Salvation Army did not issue,
prepare, or utilize the itemized receipts petitioner presented in
substantiation of the contributions on petitioner’s 2002 and 2003
Federal income tax returns.6 Petitioner offered no explanation
or other evidence to challenge this testimony. Additionally,
petitioner did not testify or otherwise substantiate his claimed
cash contributions to a church. Consequently, there is no
credible evidence to support petitioner’s claimed charitable
contributions for the 2 years at issue. Accordingly,
respondent’s determination on this issue with respect to
petitioner’s 2002 and 2003 tax years is sustained.
Section 162(a) authorizes a taxpayer to deduct ordinary and
necessary business expenses paid or incurred during the taxable
year in carrying on a trade or business. An “ordinary” expense
6
The Salvation Army witness testified that the receipt
forms presented by petitioner were not used by the Salvation Army
during the years at issue due to revisions in the forms that were
required by changes in the Internal Revenue Code.
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is one incurred in a transaction that frequently or commonly
occurs in the type of business involved. Deputy v. Du Pont, 308
U.S. 488, 495 (1940). A “necessary” expense is one that is
“appropriate and helpful” to the taxpayer’s business. Welch v.
Helvering, 290 U.S. 111, 113 (1933). Expenses allowable under
section 162 must be “directly connected with or pertaining to the
taxpayer’s trade or business”. Sec. 1.162-1(a), Income Tax Regs.
Personal, living, and family expenses are not deductible. Sec.
262(a).
An employee is generally recognized as being in the trade or
business of being an employee and may deduct employment-related
expenses if the requirements of section 162 are met.
Commissioner v. Flowers, 326 U.S. 465 (1946). However, “A trade
or business expense deduction is not allowable to an employee to
the extent that the employee is entitled to reimbursement from
his or her employer for an expenditure related to his or her
status as an employee.” Lucas v. Commissioner, 79 T.C. 1, 7
(1982). If an employee could have requested reimbursement from
his employer and fails or neglects to do so, he may not claim a
deduction for the expenses under section 162. Id.; see also
Orvis v. Commissioner, 788 F.2d 1406 (9th Cir. 1986), affg. T.C.
Memo. 1984-533; Kennelly v. Commissioner, 56 T.C. 936, 943
(1971), affd. without published opinion 456 F.2d 1335 (2d Cir.
1972).
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Petitioner claimed deductions for unreimbursed employee
business expenses totaling $11,270 and $13,397 for 2002 and 2003,
respectively. Petitioner attached some documentation of these
expenses for both years. However, respondent demonstrated to the
Court’s satisfaction that the documentation did not reflect that
petitioner incurred such expenses.
In that regard, petitioner reported traveling 36,600 miles
during 2002 and deducted expenses based on that mileage.
Respondent established that petitioner’s employers did not expect
or require petitioner to travel as part of his job. Moreover,
respondent also demonstrated at trial that both of petitioner’s
employers had reimbursement plans to cover legitimate employee
business expenses during 2002 and 2003. Petitioner did not
present at trial or on brief a plausible explanation for the
mileage claimed. The complete lack of credible evidence to
substantiate petitioner’s claimed employee expenses and
respondent’s presentation convinces the Court that the
unreimbursed employee business expenses were properly disallowed.
As to the other miscellaneous expenses claimed on Schedules
A of petitioner’s 2002 and 2003 returns such as tax preparation
fees, job search expenses, traveling expenses, and annual fees
for a safety deposit box, petitioner failed to substantiate these
expenses as required by section 6001 and related regulations.
Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. Consequently,
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the Court sustains respondent’s determination disallowing these
expenses.
Section 6663 Penalty
The next issue is whether petitioner is liable for fraud
under section 6663(a) for the years at issue. Generally, in any
case involving the issue of fraud with intent to evade tax, the
burden of proof is on the Commissioner. Sec. 7454(a); Rule
142(b); see supra note 4.
Respondent has the burden of proving by clear and convincing
evidence that (1) petitioner underpaid his tax for each year at
issue, and (2) some part of the underpayment was due to fraud.
Sec. 6663(a); Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).
Fraud means actual, intentional wrongdoing, and the intent
required is the specific purpose to evade a tax believed to be
owing. Candela v. United States, 635 F.2d 1272 (7th Cir. 1980);
Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968);
Mitchell v. Commissioner, 118 F.2d 308 (5th Cir. 1941), revg. 40
B.T.A. 424 (1939); Wilson v. Commissioner, 76 T.C. 623, 634
(1981). The Commissioner must show that the taxpayer intended to
evade taxes by conduct calculated to conceal, mislead, or
otherwise prevent the collection of taxes. Stoltzfus v. United
States, supra; Marcus v. Commissioner, 70 T.C. 562, 577 (1978),
affd. without published opinion 621 F.2d 439 (5th Cir. 1980).
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Fraud is a question of fact that must be considered based on
an examination of the entire record and the taxpayer’s entire
course of conduct. Petzoldt v. Commissioner, 92 T.C. 661, 699
(1989); Recklitis v. Commissioner, 91 T.C. 874, 909-910 (1988);
Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Fraud is
never presumed and must be established by independent evidence of
fraudulent intent. Petzoldt v. Commissioner, supra at 699;
Recklitis v. Commissioner, supra at 909-910. Fraud is never
imputed or presumed, and courts will not sustain fraud on
circumstances that at most create only suspicion. Olinger v.
Commissioner, 234 F.2d 823, 824 (5th Cir. 1956), affg. in part
and revg. in part T.C. Memo. 1955-9; Davis v. Commissioner, 184
F.2d 86, 87 (10th Cir. 1950); Green v. Commissioner, 66 T.C. 538,
550 (1976). Mere suspicion does not prove fraud, and the fact
that the Court does not find the taxpayer’s testimony wholly
credible is not sufficient to establish fraud. Cirillo v.
Commissioner, 314 F.2d 478, 482 (3d Cir. 1963), affg. in part and
revg. in part T.C. Memo. 1961-192; Shaw v. Commissioner, 27 T.C.
561, 569-570 (1956), affd. 252 F.2d 681 (6th Cir. 1958).
Although mere suspicion is not enough, fraud may be proven
by circumstantial evidence, and reasonable inferences may be
drawn from the facts because direct evidence is rarely available.
DiLeo v. Commissioner, 96 T.C. 858, 874 (1991), affd. 959 F.2d 16
(2d Cir. 1992); Petzoldt v. Commissioner, supra at 699;
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DelVecchio v. Commissioner, T.C. Memo. 2001-130, affd. 37 Fed.
Appx. 979 (11th Cir. 2002).
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
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; Niedringhaus v.
Commissioner, 99 T.C. 202, 211 (1992); Christians v.
Commissioner, T.C. Memo. 2003-130. However, these “badges of
fraud” are not exclusive. Niedringhaus v. Commissioner, supra at
211; 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 income may be strong evidence of fraud. Delvecchio
v. Commissioner, supra (citing Holland v. United States, 348 U.S.
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121, 137 (1954)); Camien v. Commissioner, 420 F.2d 283, 287 (8th
Cir. 1970), affg. T.C. Memo. 1968-12.
Respondent contends that the following badges of fraud exist
in this case: (1) Inadequate records; (2) implausible or
inconsistent explanations; (3) a pattern of behavior indicating
an intent to mislead; and (4) filing false documents. On brief,
petitioner presented frivolous and irrelevant arguments as to the
credibility of the various witnesses, ignoring the documentation
and receipts at issue. The Court agrees with respondent.
The record establishes without a doubt that petitioner
maintained and presented inadequate and false records with
respect to the deductions claimed on his 2002 and 2003 returns.
Respondent clearly and convincingly showed, through the use of
credible witnesses, that a substantial number of documents
attached to petitioner’s 2002 and 2003 returns in an effort to
establish the propriety of his deductions for both years were
forged or falsified. Moreover, the documents presented for this
case are strikingly similar to those submitted to substantiate
petitioner’s claimed 2001 deductions in Prowse v. Commissioner,
T.C. Memo. 2006-120, and which the Court likewise found were
altered. Several professionals, such as doctors, testified at
trial that, while they had provided services to petitioner in
prior years, they had not provided services to petitioner as
purportedly claimed on the receipts that were submitted to the
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Court for the years at issue in this case. That testimony was
corroborated by persons who maintained the books and records,
including billings for services rendered. At trial, petitioner
admitted to fabricating a receipt for his 2002 return by reusing
a doctor’s form that had been used for his 2001 tax return. In
an attempt to mislead respondent and the Court, petitioner went
to great lengths to provide a variety of implausible and
unconvincing arguments regarding the receipts at issue.
The totality of the evidence clearly and convincingly
establishes to the Court’s satisfaction that petitioner
deliberately overstated his deductions for 2002 and 2003 and
falsified documents supporting the overstated and unsubstantiated
deductions to mislead respondent and to evade his proper income
tax liability for 2002 and 2003.
Respondent determined that petitioner’s actions constituted
fraud, and the Court sustains that determination. Therefore,
petitioner is liable for the section 6663(a) penalties for 2002
and 2003.7
Section 6651 Addition to Tax
Section 6651(a)(1) provides for an addition to tax for
failure to file timely Federal income tax returns unless the
taxpayer shows that such failure was due to reasonable cause and
7
Accordingly, there is no need to address respondent’s
alternative argument that petitioner is liable for the accuracy-
related penalty under sec. 6662(a) for both years.
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not willful neglect. United States v. Boyle, 469 U.S. 241, 245
(1985); Baldwin v. Commissioner, 84 T.C. 859, 870 (1985); Davis
v. Commissioner, 81 T.C. 806, 820 (1983), affd. without published
opinion 767 F.2d 931 (9th Cir. 1985). Under section 7491, the
Secretary has the burden of production in any court proceeding
with respect to the liability of any individual for any penalty,
addition to tax, or any additional amount under that title of the
Internal Revenue Code.
Petitioner’s 2002 Federal income tax return was due to be
filed on April 15, 2003. It was filed on June 24, 2004.
Petitioner did not advance any reason for his failure to file the
income tax return for that year timely. Accordingly, petitioner
is liable for the addition to tax under section 6651(a) for 2002.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.