# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 1996-313

UNITED STATES TAX COURT

RICHARD K. AND CHRISTINE M. MCGIRL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11510-94.

Filed July 11, 1996.

Mark A. Pridgeon, for petitioners.
Jonathan P. Decatorsmith, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge:

Respondent determined the following

deficiencies in and penalties on petitioners' Federal income
taxes:
Year

Deficiency

1989
1990
1991

$13,501
25,904
21,334

Accuracy-related penalties
Sec. 6662(a)
--$30
51

Penalty
Sec. 6663
$10,126
19,316
15,809

As an alternative to the section 6663 fraud penalty, respondent
determined additional accuracy-related penalties pursuant to

- 2 section 6662(a) in the respective amounts of $2,700, $5,181, and
$4,267 for 1989, 1990, and 1991.

All section references are to

the Internal Revenue Code in effect for the years in issue.

All

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

After concessions,1 the issues for decision are:

(1) Whether petitioners overstated the Yogurt Station,
Inc.'s, (Yogurt Station)2 automobile mileage deductions for 1989,
1990, and 1991;
(2) whether petitioners understated the Yogurt Station's
gross income for 1989, 1990, and 1991, as determined by
respondent;
(3) whether petitioners understated the Yogurt Station's
deductions for 1989, 1990, and 1991;
(4) whether petitioners are liable for accuracy-related
penalties under section 6662(a) with respect to the underpayments
of tax resulting from their failure to report dividend income of
$26, $992, and $1,726 for the years 1989, 1990, and 1991,
respectively; and
(5) whether petitioners are liable for penalties for fraud
pursuant to section 6663 for 1989, 1990, and 1991; or in the

1

Petitioners have conceded that they received, but did not
report on their individual Federal income tax returns, taxable
dividend income in the amounts of $26, $992, and $1,726 for the
years 1989, 1990, and 1991, respectively.
2

The Yogurt Station's business activity was reported on Form
1120S, U.S. Income Tax Return for an S Corporation. The record
does not establish whether the Yogurt Station was a validly
formed corporation. However, since the Yogurt Station was wholly
owned by petitioner Richard McGirl, this void in the record does
not affect our decision.

- 3 alternative, whether petitioners are liable for the accuracyrelated penalty under section 6662(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and attached exhibits are incorporated
herein by this reference.
Background
Petitioners, Richard K. McGirl (Mr. McGirl) and Christine M.
McGirl (Mrs. McGirl), were married to each other at all relevant
times and resided in St. Paul, Minnesota, at the time they filed
their petition.
Mrs. McGirl graduated from high school but did not attend
college.

She did not take any accounting or bookkeeping courses

in high school.

Before she worked at Mickey's Diner and the

Yogurt Station, both described below, Mrs. McGirl worked as a
receptionist at a doctor's office, as a secretary at various
places, and as a cashier at a grocery store.
Mr. McGirl graduated from the University of Minnesota with a
bachelor of science degree in American history and industrial
relations.

He did not take any accounting or bookkeeping courses

in college or high school.

Before operating Mickey's Diner and

the Yogurt Station, he worked in a warehouse and as a production
foreman trainee in a foundry.
Mickey's Diner
Mr. McGirl bought Mickey's Diner, a 24-hour diner, before he
started the Yogurt Station.

Mrs. McGirl worked at Mickey's

- 4 Diner, and as part of her duties, she prepared the employees'
payroll records, issued paychecks, and prepared quarterly payroll
tax reports.
The Yogurt Station
The Yogurt Station was formed in 1985; it was wholly owned
by Mr. McGirl during the years in issue.

Petitioners were

involved with the Yogurt Station since its inception.

Income and

expenses were reported for Federal income tax purposes on Forms
1120S.
The Yogurt Station was in the business of operating a fast
food retail store that was located in a shopping mall known as
Bandana Square in St. Paul, Minnesota.
sandwiches, salads, and beverages.

It sold yogurt products,

The storage space available

to the Yogurt Station was inadequate for the business.
Petitioners often drove to pick up food and supplies that vendors
would not deliver.

The Yogurt Station employed several

individuals to provide services on a part-time basis for
compensation.
Mrs. McGirl worked full time at the Yogurt Station and was
responsible for depositing its receipts to the business bank
account and for writing checks to suppliers and employees.

She

was also primarily responsible for tallying the Yogurt Station's
daily receipts.

Mrs. McGirl maintained a notebook in which she

recorded the daily sales figures.

She provided the daily sales

figures to Mr. McGirl.
Mr. McGirl also worked at the Yogurt Station and was

- 5 responsible for performing financial and bookkeeping duties.
also wrote checks to suppliers.

He

Mr. McGirl was responsible for

providing information to the Yogurt Station's accountant so that
he could prepare the corporate income and sales tax returns.
Petitioners used a cash register at the Yogurt Station that
recorded sales on a paper tape.

Mrs. McGirl used the cash

register tape to tally gross sales on a daily basis.

The cash

register had a functioning "X" key that tallied daily sales when
punched.

Petitioners received invoices in connection with many

of their purchases; they recorded the particular invoice numbers
on many of the checks used to pay for the purchases.

Petitioners

did not prepare, maintain, or have a professional prepare any
accounting ledgers, spreadsheets, or similar items in connection
with operating the Yogurt Station.
During the years at issue, the Yogurt Station maintained a
checking account (the business checking account) at Cherokee
State Bank in St. Paul, Minnesota.

Some of the checks written on

the business checking account during the years at issue were for
personal expenditures.

The total deposits to the business

checking account for the years 1989, 1990, and 1991 were
$126,464.21, $146,054.76, and $153,080.77, respectively.

The

parties agree that, with the exception of certain amounts claimed
by petitioners to be loan proceeds, the total deposits to the
business checking account for the years at issue are gross
receipts of the Yogurt Station.

- 6 Corporate Tax Returns
The Yogurt Station reported the following gross receipts,
cost of goods sold, and expenses on its Federal corporate income

- 7 tax returns for the years in issue:
1989

1990

1991

Gross receipts

$70,154

$54,681

$65,582

Cost of goods sold
Purchases/food supplies
Cost of labor
Total

$21,046
5,886
26,932

$13,670
19,534
33,204

$11,640
20,000
31,640

Expenses
Officer compensation
Rent
Taxes
Interest
Depreciation
Legal
Accounting
Vehicle expense
Maintenance
Equipment
Miscellaneous
Phone
Bank charges
Subscriptions
Insurance
Total

$13,925
2,806
8,478
90
9,749
1,500
600
3,825
150
125
75
--------41,323

$6,000
4,800
9,755
--8,307
2,000
1,000
3,900
500
1,000
350
1,000
------38,612

$6,000
1,250
9,163
--9,319
1,100
800
4,125
1,276
700
450
800
75
110
980
36,148

Ordinary income (loss)

1,899

(17,135)

(2,206)

Clarence F. Lauth, a relative of Mrs. McGirl, prepared the
corporate tax returns for the years 1987 through 1991 for
compensation.

Mr. McGirl provided the information used by Mr.

Lauth to prepare the corporate tax returns.

This information was

in the form of a single sheet of paper containing summary figures
of income and expenses (the summary sheet) and a payroll summary;
no breakdown showing how the figures were computed was provided
to Mr. Lauth.

Although he told Mr. Lauth that his figures were

accurate, Mr. McGirl simply wrote numbers on the summary sheet

- 8 without making any attempt to calculate the correct amount or
verify their accuracy.

The corporate tax returns for the years

1989 and 1991 were signed by Mr. McGirl.

The record does not

reflect who signed the 1990 corporate tax return.

The corporate

tax returns made no reference to any business activity other than
the Yogurt Station for all of the years in issue.
Petitioners' Joint Federal Income Tax Returns
Mr. Lauth prepared each of petitioners' joint Federal income
tax returns (joint tax returns) for the years 1989 through 1991.
The information reflected on these joint tax returns was provided
to Mr. Lauth by Mr. McGirl in the form of a single sheet of paper
setting forth total income and deduction figures.

Petitioners

reported the following items of income, adjustments to income,
itemized or standard deductions, and deductions for
exemptions on their joint tax returns for the years in issue:
1989

1990

1991

$13,925
163
2,348
(286)
--1,899
18,049

$19,800
--2,911
--21,500
(17,135)
27,076

$20,800
328
2,550
8,645
--(2,206)
30,117

Adjustments to income

4,000

4,750

5,063

Adjusted gross income

14,049

22,326

25,054

Itemized/standard deductions
Exemptions
Taxable income

6,036
4,000
4,013

5,540
4,100
12,686

5,700
4,300
15,054

604

1,916

2,261

Yogurt Station wages
Taxable interest income
Dividend income
Capital gain (loss)
Other income
Yogurt Station income (loss)
Total income

Tax

- 9 The "Other income" of $21,500 for the year 1990 came from the
settlement of a lawsuit.

The joint tax returns made no reference

to any business activity other than the Yogurt Station for all of
the years in issue.

On August 4, 1992, Mr. McGirl told Mr. Lauth

that he had unreported income and that the underreporting "had
been going on for some time."

During the years in issue, Mr.

McGirl amassed more than $112,000 in savings.
Mr. McAllister's Alleged Loans to Mr. McGirl
It is undisputed that Michael McAllister, a close friend of
Mr. McGirl since childhood, lent him $10,000 sometime during the
years at issue.3

Mr. McGirl issued a $10,000 check to Mr.

McAllister on or about July 7, 1992, a date after Mr. McGirl was
contacted by the Minnesota Department of Revenue (MDR) regarding
a State tax examination of the Yogurt Station.

Mr. McGirl

fabricated promissory notes in which he forged Mr. McAllister's
signature and gave them to his own accountant, Steve Brown.

Mr.

Brown represented Mr. McGirl before the MDR and the Internal
Revenue Service (IRS).

Mr. Brown gave the fabricated promissory

notes to an MDR agent.
Since 1985 and continuing through the years in issue, Mr.
McAllister had significant personal debt, including automobile
loans, home mortgages, and credit cards that were utilized to
3

Mr. McGirl maintains that Mr. McAllister lent him additional
sums of money that eventually made their way into the Yogurt
Station's business checking account and thus should not be
considered gross receipts.

- 10 their full extent and which bore interest at annual rates up to
22 percent.
MDR's Audit of the Yogurt Station
Debora Berg, a tax auditor for the MDR, informed Mr. McGirl
by letter in May of 1992 that she would be examining the Yogurt
Station's State tax liabilities.

The letter asked Mr. McGirl to

provide Ms. Berg with the Yogurt Station's business and
accounting records.

Mr. McGirl called Ms. Berg on May 20, 1992,

and told her he did not have a business checking account, all of
the store's expenses were paid in cash, and he did not keep
receipts or documents.

When Mr. McGirl first met with Ms. Berg

on August 25, 1992, he brought the canceled checks and deposit
slips from the business checking account.

When questioned about

his earlier statement that the Yogurt Station did not have a
checking account or records and that all expenses were paid by
cash, Mr. McGirl told Ms. Berg that he thought she would drop the
audit if he dealt solely in cash.

Mr. McGirl admitted to Ms.

Berg that the numbers on the Yogurt Station's State tax returns
were just guesses.

After inputting the checks and deposits onto

a computer, Ms. Berg discovered that the Yogurt Station's
deposits exceeded the amounts reported on its State tax returns.
Ms. Berg contacted Hubbard Burgess, an IRS representative, and
informed him that she believed the Yogurt Station had unreported
income.4

4

Seven former Yogurt Station employees provided

It was customary for MDR to work jointly with the IRS.

- 11 -

affidavits to the MDR that stated that the cash register worked
properly.
The IRS Audit
Mr. Burgess met with Mr. McGirl and Ms. Berg on November 23,
1992.

Mr. McGirl, for the first time, stated that he had

borrowed money from a friend, Mr. McAllister.

Mr. McGirl did not

state the amount of the alleged loans or produce any
documentation to support their existence at this meeting.

Mr.

McGirl also mentioned for the first time that he was involved
with another business; i.e., the purchase and sale of used
restaurant equipment.

Mr. McGirl never produced the cash

register tapes, invoices, copies of store leases, automobile
logs, or the pieces of paper given to him by Mrs. McGirl on which
she tallied the daily sales.

Other than canceled checks and

invoices submitted in connection with legal expenses, Mr. McGirl
failed to present any supporting documentation to substantiate
the Yogurt Station's expenses.
Petitioners' Check Spreads
Although petitioners did not maintain a cash disbursement
journal in the regular course of their business, they did prepare
check spreads prior to trial, in anticipation of this case.
There is a separate check spread for each year in issue.

Each

check spread lists the number, date, payee, and amount for each
of the business checks.

The checks are "spread" across the page

- 12 into specific expense categories.

The yearly totals, by

expense category, are as follows:

Auto
Auction
Food
Equipment
Misc.
Personal
Professional
Repair
Supplies
Taxes
Wages
Mike's Loan
Other

1989

1990

1991

$939
370
33,114
2,794
9,406
1,162
2,240
5,089
2,721
6,618
26,073
32,185
36

$1,372
2,460
38,397
6,435
7,142
647
4,042
3,075
2,011
10,437
24,943
42,165
6,799

$2,011
2,650
33,870
635
7,670
4,685
1,200
2,059
2,118
9,006
26,111
38,416
11,774

The "Misc." category includes rent, insurance, and telephone. The
"Other" category includes missing checks not returned with the
bank statement, checks that petitioners could not identify,
loans, including a $5,000 loan in 1990, and a $10,020 check to
Cherokee State Bank in 1991 for an unknown purpose.

The "Mike's

Loan" category consists of checks written by Mr. McGirl to First
Jersey National Bank that were routed into petitioners' Dean
Witter investment accounts.

Of the $26,073 in wages for 1989,

$20,861 was paid to petitioners.5
Mr. McGirl's Automobile Logs
Mr. McGirl deducted an amount attributable to 15,000 miles
of business use of a 1985 Honda on each of the Yogurt Station's

5

Petitioners only reported $13,925 in wages from the Yogurt
Station on their 1989 joint Federal income tax return.

- 13 corporate tax returns for the years in question.

Although Mr.

McGirl produced auto logs at trial, he never presented the logs
to any representative of the IRS or the MDR during their
respective audits.
The original auto logs are composed of 8-½ by 11 inch sheets
of white paper with the following typed headings above four
columns:

Day/Month, Odometer Reading Start, Odometer Reading

End, and Business Purpose.
month.

There is a separate page for each

Each page has rows numbered 1 through 31 (corresponding

to the days of the month) on the left side.

The beginning and

ending mileage columns account for every single mile the
automobile was driven during the 3 years; there are no mileage
gaps between entries.

The auto logs reflect total mileage for

1989, 1990, and 1991 as 13,802, 17,626 and 20,079, respectively.
There is an abbreviated business purpose recorded for every
entry.

Almost all of the entries in the business purpose column

are noted as "auction", "supplies", or "food supplies".
The auto logs are remarkably well preserved; they are not
folded, creased, or crumpled; there are no marks on the papers
that would indicate they were kept on a clipboard.

The pages are

in pristine condition.
Petitioners' Business Records
Petitioners have thrown away almost every contemporaneous
piece of documentary evidence of their business activities, with
the exception of the business checking account and allegedly

- 14 contemporaneously prepared auto logs.

Petitioners maintained no

books or records other than cash register tapes and a calculation
of daily sales (both thrown away).
Mr. McGirl's State Tax Felony Convictions
On March 18, 1994, Mr. McGirl pleaded guilty to count one of
the amended complaint filed by the State of Minnesota charging
him with making and filing 54 false State sales tax returns, each
involving more than $300 in tax, from the period 1988 through
June 1992.
OPINION
Petitioners admit they underreported the gross receipts of
the Yogurt Station, but argue that they should be allowed
offsetting deductions for expenses which they simultaneously
underreported on the Yogurt Station's corporate tax returns.
Petitioners bear the burden of showing that they are
entitled to the additional deductions and that respondent's
determination of the gross income is incorrect.
Welch v. Helvering, 290 U.S. 111 (1933).

Rule 142(a);

Since there is

virtually no documentary evidence to support their claims for
increased deductions other than canceled checks, petitioners'
credibility is crucial in meeting their burden.

We first shall

examine Mr. McGirl's auto logs as they are offered in support of
the Yogurt Station's automobile expense deductions and are the
only allegedly contemporaneous records retained.
1.

Automobile Mileage Deduction

- 15 Mr. McGirl claimed deductions on the Yogurt Station's 1989,
1990, and 1991 corporate income tax returns for automobile
expenses in the amounts of $3,825, $3,900, and $4,125,
respectively.

These expenses were apparently computed by

multiplying 15,000 annual miles by the prevailing standard
mileage rate.

We find that the auto logs offered into evidence

by Mr. McGirl were not contemporaneously made, as required by
section 1.274-5(c)(2)(ii)(a), Income Tax Regs.
Mr. McGirl testified that he only kept track of business
miles on his auto logs, yet every mile driven is accounted for.
Either Mr. McGirl had no personal use whatsoever of his
automobile over a 3-year period or part, if not all, of the auto
logs is a fabrication.

There is no credible evidence in the

record to suggest that Mr. McGirl drove his automobile solely for
business purposes.

Based upon this implausibility and on the

following inconsistencies, we find Mr. McGirl's auto logs to be
fabrications.

Mr. McGirl never offered the auto logs to the MDR

or the IRS when he was examined.

The auto logs show annual

business mileage of 13,802, 17,626, and 20,079 for the years
1989, 1990, and 1991, respectively.

However, the Yogurt Station

claimed exactly 15,000 business miles in each of the years in
issue.

Mr. McGirl never gave the auto logs to Mr. Lauth, his tax

return preparer.

Mr. McGirl saw no need to keep any business

receipts, invoices, books, or records, but maintained that he
kept "very accurate records" of the business use of his car.

Mr.

- 16 McGirl testified that he kept the auto logs underneath the front
seat of his automobile, but the individual pages of the logs are
in pristine condition, totally inconsistent with that manner of
storage.

The auto logs indicate Mr. McGirl's lack of

credibility.

We find that petitioners have not proven that the

Yogurt Station is entitled to automobile expense deductions in
excess of those allowed by respondent.
2.

Unreported Income
Mr. McGirl's explanation of the underreporting of the Yogurt

Station's gross receipts revolves around an alleged business
activity that was not reported on the Yogurt Station's or
petitioners' tax returns and purported loans used to finance the
alleged activity.
a.

Mr. McGirl's Alleged Restaurant Equipment Business

Mr. McGirl testified that he carried on a business6 totally
apart from the Yogurt Station; i.e., the sale of used restaurant
equipment and maintenance of refrigeration equipment.

He

allegedly bought used restaurant equipment at auctions, sometimes
cleaned and fixed it up, and sold the equipment to bars and
restaurants.

This business had no fixed location; Mr. McGirl

supposedly would stop by bars and restaurants and offer to sell
them the used equipment or to perform maintenance on their
refrigeration equipment.

6

All of the alleged business activity

The use of the term "business" is for convenience only and
does not imply a finding that any such business existed.

- 17 was carried on in cash.

No records were kept.

Mr. McGirl

testified that "an ideal trip for me would go - - would be to
leave the Twin Cities empty, if it [the auction] was out of town,
and to buy, clean, fix, and sell on the road then come back
empty-handed except, of course, with money."

Mr. McGirl

testified that some of the money would be spent on supplies,
meals, motels, and gasoline for the automobile.

The money left

over was supposedly given to Mrs. McGirl, who deposited it into
the business checking account.

Mr. McGirl further testified that

the business was carried on for all of the years at issue.
McGirl did not testify concerning this business.

Mrs.

Other than the

fabricated auto logs and his own self-serving testimony, Mr.
McGirl offered no proof of the business' existence.
b.

Purported Loans From Mr. McAllister

Mr. McGirl testified that he borrowed7 a total of $73,500
from Mr. McAllister, a longtime friend.

According to a computer-

generated summary produced by Mr. McAllister after the start of
the MDR audit, Mr. McGirl borrowed money from him 101 times
between September 1988 and March 1991.

The amounts supposedly

borrowed were in either $500 or $1,000 amounts, with two
exceptions.

Mr. McGirl and Mr. McAllister testified that the

loans were always in cash.

According to Mr. McGirl, he borrowed

money from Mr. McAllister before each "auction" trip because he

7

The use of the words "borrowed" and "loan" are for convenience
only and do not reflect a finding that any loans existed.

- 18 needed cash to purchase items at auctions.
Mr. McAllister testified that each of the 101 loans was
evidenced by a separate IOU.

These IOU's supposedly were used by

Mr. McAllister to create the computer-generated summary which was
offered into evidence.

Mr. McAllister testified that he gave the

IOU's to Mr. McGirl when the latter signed a consolidated note
for $63,500, the amount Mr. McGirl allegedly owed to Mr.
McAllister after a $10,000 payment.

However, Mr. McAllister told

Ms. Berg and Mr. Burgess that he never returned any IOU's to Mr.
McGirl.

Petitioners did not offer the IOU's into evidence.

However, respondent offered into evidence IOU's created by Mr.
McGirl which were given to the MDR's criminal investigator, Mr.
Erickson, by petitioners' representative at the time, Mr. Brown.
At trial, Mr. McGirl admitted that he made up the IOU's and
forged Mr. McAllister's signature on them.
The consolidated note for $63,500 was put into evidence.

It

is a demand note with interest at 10 percent, dated July 7, 1992,
with no stated maturity date or payment schedule.

The

consolidated note has no interest on the amounts advanced since
September of 1988.
Mr. McAllister's testimony that he lent Mr. McGirl $73,500
over a 3-year period was vague, incredible, and contradicted in
part by his statements to Ms. Berg.
for all 101 loans was missing.

The alleged documentation

No payments were ever made on the

loans until a single $10,000 payment was made in July 1992, after

- 19 the MDR audit had commenced.

Mr. McAllister testified that the

loans were all made in cash and were made from a cash hoard of
$25,000, checks for cash from his bank accounts, and cash loans
he received from an individual Mr. McAllister initially referred
to simply as "Red".

Mr. McAllister refused to identify who Red

was when he spoke with Ms. Berg.

At trial, Mr. McAllister denied

keeping Red's identity a secret from Ms. Berg.
checks to cash were not offered as evidence.

The canceled
No documentation of

any loan from Red was put into evidence, and although Mr.
McAllister claims he paid Red's estate8 back by check, the
canceled check also was not offered into evidence.

Mrs. McGirl

did not testify concerning the alleged loans.
In summary, Mr. McGirl's explanation of the unreported gross
receipts is that $32,000, $30,500, and $7,000 for the years 1989,
1990, and 1991, respectively, are amounts lent to him by Mr.
McAllister to purchase auction items.

Since the cash remaining

after an auction trip was allegedly deposited into the business
checking account, Mr. McGirl maintains that total deposits
overstate income by the amount of the loans.9

8

9

Therefore, Mr.

Red is apparently deceased.

Mr. McGirl testified: "Well, as I mentioned before, an ideal
trip would be to come back empty-handed. Unfortunately, you
know, I have got a garage full of equipment. I got my basement
full of equipment. I have got - - a friend of mine's garage is
full of equipment." Even if Mr. McGirl's testimony is believed,
he could not deduct the cost of equipment purchased until it was
sold. Mr. McGirl testified that he was in the business of
selling used restaurant equipment and that he used the loans to
(continued...)

- 20 McGirl argues that the understated income should be calculated as
follows:
Year

Total
deposits

McAllister
loans

Reported
deposits

Understated
Income

1989
1990
1991

$126,464
146,055
153,081

$32,000
30,500
7,000

$70,154
54,681
65,582

$24,310
60,874
80,499

c.

Reconstruction of Income

Every individual liable for tax is required to maintain
books and records sufficient to establish the amount of his or
her gross income.

Sec. 6001; DiLeo v. Commissioner, 96 T.C. 858,

867 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

Where a taxpayer

fails to maintain or produce adequate books and records, the
Commissioner is authorized to compute the taxpayer's taxable
income by any method that clearly reflects income.

Sec. 446(b);

Holland v. United States, 348 U.S. 121 (1954); Webb v.
Commissioner, 394 F.2d 366, 371-372 (5th Cir. 1968), affg. T.C.
Memo. 1966-81.

The reconstruction of income need only be

reasonable in light of all surrounding facts and circumstances.
Giddio v. Commissioner, 54 T.C. 1530, 1533 (1970).

The

Commissioner is given latitude in determining which method of
reconstruction to apply when a taxpayer fails to maintain

9

(...continued)
buy the equipment. The purchased equipment would be his
inventory. A taxpayer may not deduct inventory purchases.
Molsen v. Commissioner, 85 T.C. 485, 502 (1985). No documentary
evidence or testimony was offered by petitioners to establish the
cost of the ending inventory for each year in question.

- 21 records.

Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989).

For the years under consideration herein, petitioners
maintained inadequate books and records for the Yogurt Station.
As a result, respondent used the bank deposit method to
reconstruct the Yogurt Station's gross income.

"The bank deposit

method assumes that all money deposited in a taxpayer's bank
account during a given period constitutes taxable income."
v. Commissioner, 96 T.C. at 868.
evidence of income.

DiLeo

Bank deposits are prima facie

Tokarski v. Commissioner, 87 T.C. 74, 77

(1986); Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975),
affd. 566 F.2d 2 (6th Cir. 1977).
Only Mr. McGirl testified at trial about his used restaurant
equipment auction and maintenance business.

No records, no bills

of sale, no original IOU's, or any other document, with the
exception of the fabricated auto logs, were offered to support
Mr. McGirl's testimony.

It is up to petitioners to prove a

nontaxable source of the deposits.

Petitioners stipulated that,

except for loans from Mr. McAllister, all the Yogurt Station's
deposits were income.

Viewing the record as a whole, we find it

improbable and unconvincing that Mr. McAllister provided the
funds as claimed.

We are not required to accept blindly

testimony which patently appears to he "highly improbable or
manifestly unreasonable."

Carmack v. Commissioner, 183 F.2d 1, 2

(5th Cir. 1950), affg. a Memorandum Opinion of this Court.

Mr.

McGirl would have the Court believe that during a period when Mr.

- 22 McAllister had automobile loans, home mortgages, and fully
utilized his credit cards at interest rates up to 22 percent, he
kept a cash hoard of $25,000, lent Mr. McGirl money 101 times at
a rate of 10 percent with no fixed payment schedule, and
consolidated 3 years of loans after receiving one payment of
principal, without adding accrued, yet unpaid interest.

Mr.

McGirl would have the Court believe that he borrowed money almost
weekly during a period when he amassed more than $112,000 in
savings, for an alleged business whose existence he was unable to
document by any reliable evidence.

The record as a whole

contradicts the testimony of Mr. McGirl and Mr. McAllister;
simply put, we do not believe them.
Petitioners have not proven that any purported transfers
were loans.

Therefore, they have not met their burden of proof

in establishing a nontaxable source for the deposits.10
3.

Increased Expenses
Petitioners argue that the Yogurt Station is entitled to

offset its unreported gross receipts with additional expenses
that were not claimed on its corporate tax returns.

Deductions

are a matter of legislative grace; petitioners have the burden of
showing that they are entitled to any deduction claimed.

New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Mr.

10

Even if we accepted Mr. McGirl's testimony that Mr.
McAllister provided him with funds 101 times, which we do not,
petitioners would still have to show that the transfers of funds
truly were loans. Beaver v. Commissioner, 55 T.C. 85, 91 (1970).

- 23 McGirl made up the numbers he provided Mr. Lauth to prepare the
Yogurt Station's corporate tax returns.

At trial, petitioners

put into evidence check spreads that summarized their business
checking account activity by year.11

Other than for attorney's

fees, petitioners failed to provide any invoices, receipts, or
other documentary evidence to substantiate the claimed increased
deductions.

Petitioners testified at trial as to the business

purpose of checks to most payees.

We must decide if the check

spreads, coupled with petitioners' testimony, adequately
substantiate the increased expenses.
We note at the outset that petitioners do not wish to
substitute their check spread category totals for all the
deductions claimed on the Yogurt Station's corporate tax returns;
they only want to substitute selected categories.

This selective

use of the check spread ignores the expenses on the Yogurt
Station's corporate tax returns that are greater than the check
spread totals.

For example, the Yogurt Station's 1989 corporate

tax return has a deduction of $8,478 for taxes; the 1989 check
spread lists total taxes of $6,618.
There are basic problems with the check spreads.

Without

receipts, we are left with petitioners' self-serving testimony

11

Respondent made a hearsay objection to petitioners'
introduction of the check spreads into evidence. This objection
was renewed on brief. As a practical matter, when the
substantiation of 3 years of expenses is at issue and copies of
all checks are in evidence, summarizing the check activity does
assist the Court. Fed. R. Evid. 1006. We shall treat these
check spreads prepared by petitioners as admissible evidence.

- 24 to identify what was purchased and whether it was for business or
personal use.

One of the Yogurt Station's largest suppliers,

Sam's Wholesale Club, is well known for selling nonfood items.
Petitioners wish to deduct as rent three checks payable to
Cherokee State Bank, which is both the Yogurt Station's and
petitioners' personal bank.

There were no leases, documents, or

nonparty testimony explaining why checks were made payable to
Cherokee State Bank.

Petitioners wish to deduct checks, some of

which are in excess of $1,000, payable to individuals and to cash
for maintenance and repair.

Without supporting documentation,

deductions for checks written to cash and to individuals are
highly suspect.
Petitioners claim to have underreported the Yogurt Station's
payment of compensation and wages; the amount allegedly
underreported for 1989 is $6,262.

The 1989 check spread shows

that petitioners were paid $6,936 more than the amount reported
on their return.12

Petitioners want the Yogurt Station to have

an increased deduction for wages, although they have failed to
personally report a corresponding increase in wages.

Their claim

to the additional deduction has not been substantiated.
Petitioners wish to claim deductions for equipment
purchases; it is a separate category on the check spreads.

12

On their respective 1989 returns, petitioners reported
$13,925 as wages from the Yogurt Station and it deducted a like
amount. However, the check spread indicates that the Yogurt
Station paid petitioners $20,861 in 1989.

- 25 Generally, there is no deduction for the purchase of equipment.
On a timely filed tax return, subject to limitations, a taxpayer
can elect to treat the cost of section 179 property as an
expense.

To avail oneself of the benefits of section 179, the

taxpayer must make an irrevocable election on the tax return.
Sec. 179(a), (c).

Petitioners made no such election.

In order

to depreciate an asset, there must be evidence that it was put
into service during the year in question for use in a trade or
business.

Petitioners offered no such evidence.

Although the Yogurt Station's tax returns had no deduction
for auction expenses,13 petitioners seek to deduct checks made
payable to cash under this category.

Petitioners have not met

their burden of showing that this side business existed.
After carefully reviewing the 1989, 1990, and 1991 check
spreads, based on the observations made above, we conclude that
they are unreliable as substantiation for additional expenses.
Based on the record as a whole, and as discussed below, we find
that petitioners' testimony lacks credibility.
are simply too little, too late.

The check spreads

In fact, were we to rely on

them, we would allow petitioners fewer total deductions than
respondent has already allowed in her notice of deficiency.

We

find insufficient evidence in the record to justify allowance of
any deductions in excess of those claimed on the Yogurt Station's

13

The store's returns made no mention at all of an auction
(sale of used restaurant equipment) business.

- 26 tax returns; petitioners have failed to prove the Yogurt
Station's entitlement to additional deductions for unclaimed
business expenses.

Accordingly, we sustain respondent's

determination of the deficiencies for 1989, 1990, and 1991.
4.

Civil Fraud Penalty
The addition to tax in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the
revenue and to reimburse the Government for the heavy expense of
investigation and the loss resulting from a taxpayer's fraud.
Helvering v. Mitchell, 303 U.S. 391, 401 (1938).

Respondent has

the burden of proving, by clear and convincing evidence, an
underpayment for each year and that some part of the underpayment
was due to fraud.

Sec. 7454(a); Rule 142(b); Katz v.

Commissioner, 90 T.C. 1130, 1143 (1988); Otsuki v. Commissioner,
53 T.C. 96, 105 (1969).

If respondent establishes that any

portion of the underpayment is attributable to fraud, the entire
underpayment is treated as attributable to fraud and subjected to
a 75-percent addition to tax or penalty, except with respect to
any portion of the underpayment that the taxpayer establishes is
not attributable to fraud.

Sec. 6663(b).

Fraud is intentional wrongdoing on the part of the taxpayer
with the specific purpose to evade a tax believed to be owing.
McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d
1121 (5th Cir. 1975).

The existence of fraud is a question of

fact to be resolved from the entire record.

Gajewski v.

- 27 Commissioner, 67 T.C. 181, 199 (1976), affd. without published
opinion 578 F.2d 1383 (8th Cir. 1978).

Respondent's burden is

met if she shows that petitioners intended to evade taxes known
to be owing by conduct intended to conceal income, mislead, or
otherwise prevent the collection of taxes.

Stoltzfus v. United

States, 398 F.2d 1002, 1004 (3d. Cir. 1968); Rowlee v.
Commissioner, 80 T.C. 1111, 1123, (1983).

Respondent must meet

this burden through affirmative evidence because fraud is never
imputed or presumed.

Toussaint v. Commissioner, 743 F.2d. 309,

312 (5th Cir. 1984), affg. T.C. Memo. 1984-25; Beaver v.
Commissioner, 55 T.C. 85, 92 (1970).

Petitioners' entire course

of conduct can be indicative of fraud.

Stone v. Commissioner, 56

T.C. 213, 224 (1971); Otsuki v. Commissioner, supra at 105-106.
A.

Underpayment of Tax

Even if all of petitioners' arguments regarding additional
unclaimed deductions and alleged loans were accepted, there would
still be an underreporting of income in 1990 and 1991.

This

underreporting would give rise to an underpayment of tax for both
1990 and 1991.

Therefore, we next consider whether respondent

has shown an underpayment for 1989 as well.
The Commissioner can satisfy her burden of proving the first
prong of the fraud test; i.e., an underpayment, when the
allegations of fraud are intertwined with unreported and
reconstructed income in one of two ways.

The Commissioner may

prove an underpayment by proving a likely source of the

- 28 unreported income.

Holland v. United States, 348 U.S. 121

(1954); Parks v. Commissioner, 94 T.C. 654, 661 (1990).
Alternatively, where the taxpayer alleges a nontaxable source,
the Commissioner may satisfy her burden by disproving the
nontaxable source so alleged.

United States v. Massei, 355 U.S.

595 (1958); Parks v. Commissioner, supra.
We find that respondent has proven by clear and convincing
evidence a likely source of the underreported deposits; i.e.,
that they are income from the Yogurt Station's business.
We also find that respondent has disproved, by clear and
convincing evidence, the nontaxable source alleged by
petitioners.

Mr. McGirl's explanation of loans from Mr.

McAllister is implausible and incredible.

The McAllister loans

were supposedly included in the Yogurt Station's deposits.

In

1991, the alleged loans were only $7,000, yet the Yogurt
Station's deposits substantially increased from the previous year
when the alleged loans were $30,500.
explained by petitioners.
and incredible.

This inconsistency was not

Mr. McAllister's testimony was vague

Further, we find it implausible that Mr.

McAllister would have a $25,000 cash hoard given his financial
situation during the years in question.

Thus, respondent has

proven, by clear and convincing evidence, that an underpayment of
tax existed with respect to each of the years under

- 29 consideration.14
B.

Fraudulent Intent

Next, respondent must prove that a portion of such
underpayment was due to fraud.

Professional Servs. v.

Commissioner, 79 T.C. 888, 930 (1982).
Because direct proof of a taxpayer's intent is rarely
available, fraud may be proven by circumstantial evidence and
reasonable inferences may be drawn from the relevant facts.
Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson v.
Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th
Cir. 1984).

An intent to conceal or mislead may be inferred from

a pattern of conduct, Spies v. United States, supra at 499, or
from a taxpayer's entire course of conduct, Stone v.
Commissioner, 56 T.C. 213, 223-224 (1971).
Over the years, courts have developed a nonexclusive list of
factors that demonstrate fraudulent intent.
fraud include:

These badges of

(1) Understating income, (2) maintaining

inadequate records, (3) failing to file tax returns, (4)
implausible or inconsistent explanations of behavior, (5)
concealment of income or assets, (6) failing to cooperate with
tax authorities, (7) engaging in illegal activities, (8) an
14

Since petitioners' alleged additional expenses are less than
the unreported income for each of the years in issue, we need not
concern ourselves with the line of cases that state that even in
criminal tax evasion cases where the Government bears the burden
of proof beyond a reasonable doubt, "evidence of unexplained
receipts shifts to the taxpayer the burden of coming forward with
evidence as to the amount of offsetting expenses, if any."
Siravo v. United States, 377 F.2d 469, 473 (1st Cir. 1967).

- 30 intent to mislead which may be inferred from a pattern of
conduct, (9) lack of credibility of the taxpayer's testimony,
(10) filing false documents, and (11) dealing in cash.

See Douge

v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford v.
Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.
Memo. 1984-601; Recklitis v. Commissioner, 91 T.C. 874, 910
(1988).

Although no single factor is necessarily sufficient to

establish fraud, the combination of a number of factors
constitutes persuasive evidence.

Solomon v. Commissioner, 732

F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo.
1982-603.

We note that some conduct and evidence can be

classified under more than one factor.

The sophistication,

education, and intelligence of the taxpayer are relevant to this
determination.

Niedringhaus v. Commissioner, 99 T.C. 202, 211

(1992).
a.

Petitioners' Sophistication and Experience

Mr. McGirl attempts to counter evidence of fraud with the
defense that he had no accounting or bookkeeping training and was
ignorant as to all recordkeeping and tax reporting requirements.
We are not impressed with Mr. McGirl's attempt to characterize
himself as an inexperienced and unknowledgeable business person.
Mr. McGirl has a college education.

He operated a restaurant

before petitioners started the Yogurt Station.

The record shows

that he managed to accumulate more than $112,000 in savings in
just 3 years of the Yogurt Station's operation.

Even if we were

to believe in Mr. McGirl's naivete, which we do not, the record

- 31 is still replete with indica of fraud on his part.
b.

Consistent and Substantial Understatements of
Income

The mere failure to report income is not sufficient to
establish fraud.

Merritt v. Commissioner, 301 F.2d 484, 487 (5th

Cir. 1962), affg. T.C. Memo. 1959-172; Parks v. Commissioner,
supra at 664.

However, consistent and substantial understatement

of income may be strong evidence of fraud.

Marcus v.

Commissioner, 70 T.C. 562, 577 (1978), affd. without published
opinion 621 F.2d 439 (5th Cir. 1980).

Moreover, a pattern of

consistent underreporting of income, when accompanied by other
circumstances indicating an intent to conceal income, justifies
the inference of fraud.
137 (1954).

Holland v. United States, 348 U.S. 121,

Even if we were to subtract the alleged loans,

petitioners have admitted to understating the Yogurt Station's
gross income in the amounts of $24,310, $60,874, and $80,499 for
1989, 1990, and 1991, respectively.

These understatements are

both consistent and substantial; they are evidence of fraud.
c.

Failure to Maintain Adequate Books and Records

Failure to maintain adequate books and records of income is
indicative of fraud.

Truesdell v. Commissioner, 89 T.C. 1280,

1302 (1987); Gajewski v. Commissioner, 67 T.C. at 200.

Although

Mr. McGirl had owned and operated a restaurant for over a decade,
he claims that invoices, receipts, and cash register tapes were

- 32 treated as "garbage".
less adequate ones.

Petitioners kept no books or records, much
Mr. McGirl attempts to blame his tax return

preparer for failing to instruct him on bookkeeping requirements
when, in fact, he requested no such instruction.

Mr. McGirl

always claimed to have support for the expense and income numbers
listed on the summary sheets given to the tax return preparer.
No evidence has been presented to show that the Yogurt Station's
corporate tax returns did not accurately reflect the information
provided to the tax return preparer.

Although Mrs. McGirl wrote

down the daily sales figure and gave it to Mr. McGirl, he
promptly discarded it.

Mr. McGirl's destruction of the Yogurt

Station's business records is evidence of fraud.
d.

Implausible or Inconsistent Explanations of
Behavior

Mr. McGirl has made many implausible and inconsistent
statements.

We find Mr. McGirl's claims to be self-serving and,

at least in part, incredible.

A partial listing of such

implausible or inconsistent testimony and behavior follows:
(a) Mr. McGirl's auto logs purport to show 100 percent
business usage of his automobile;
(b) Mr. McGirl purported to keep detailed auto logs while
discarding other business records;
(c) Mr. McGirl testified that the cash register was dropped
in the first year of the Yogurt Station's existence and was never
repaired or replaced.

Although he amassed more than $112,000 in

savings, Mr. McGirl testified that it was not economically

- 33 feasible to get the cash register repaired, and petitioners never
replaced it;
(d) Mr. McGirl testified to and offered into evidence a loan
summary which shows 101 separate loans over a 3-year period.

At

all times, petitioners had more in savings than they allegedly
owed.

According to petitioners' exhibits, a $1,000 check was

written on February 21, 1989, to their savings account.

Yet 2

days later, on February 23, 1989, Mr. McGirl allegedly borrowed
$1,000 from Mr. McAllister.

On July 7, 1989, Mr. McGirl wrote a

$1,500 check for deposit into the savings account and then
supposedly borrowed $1,000 on the same day.

This pattern of

borrowing money shortly after depositing money into savings is
repeated over the 3-year period.
(e) Mr. McGirl claimed that he did not make up the numbers
on the Yogurt Station's corporate tax returns, but instead
"guesstimated" them.

According to Mr. McGirl, a guesstimate is a

number that he believes is accurate, erring on the conservative
side.

Mr. McGirl's guesstimates of income and expense, when

considered as a whole, showed a net loss over a 3-year period
while petitioners accumulated more than $112,000 in savings.
When questioned by Ms. Berg as to how he came up with the
numbers, Mr. McGirl said "he just guessed, he pulled the numbers
'out of the air.'"
(f) Mr. McGirl testified that he saw no need to keep
records, receipts, invoices, cash register receipts, leases, or
any other business records.

- 34 Any one statement might be overlooked or rationalized, but the
cumulative effect of such testimony is indicative of fraud on the
part of Mr. McGirl.
e.

Intent to Mislead

Misleading statements to an investigating agent may be
evidence of fraud.

Gajewski v. Commissioner, supra at 200.

Mr.

McGirl admits that he fabricated IOU's and gave them to his
representative while he was being audited by the MDR.

In hopes

of avoiding a State audit, Mr. McGirl told Ms. Berg that the
Yogurt Station had no checking account and that he paid all bills
by cash.
f.

Lack of Credibility of Mr. McGirl's Testimony

A taxpayer's lack of credibility, inconsistent testimony, or
evasiveness are factors in considering the fraud issue.
Toussaint v. Commissioner, 743 F.2d at 312.

Although Mr. McGirl

had operated two restaurants and was responsible for their
finances, he testified "I am not even sure I know--if I know what
an invoice is."
savings.

Petitioners amassed more than $112,000 in

Monthly brokerage statements were entered into evidence

that clearly show the magnitude of their savings.

Mr. McGirl

wrote checks almost weekly on the business checking account to
the savings account during the years in question; the checks were
for $1,000 to $5,000 each.

Petitioners' own check spreads detail

and total the amounts put into the savings account.

Yet, the

following colloquy took place between Mr. McGirl and respondent's
attorney at trial:

- 35 Q

Now, during the time period that is the
subject of this case, 1989 through 1991, you
had an account with Dean Witter, a liquid
asset fund, didn't you?

A

Yes.

Q

And you made some deposits to that account
over the course of those three years?

A

Yes.

Q

Can you estimate for me what the amount of
those deposits were?

A

I couldn't possibly.

Q

Would you say it is closer to $100, $1,000,
$10,000, $100,000?

A

I made those deposits. I believe I told Mike
[Mr. McAllister] I was doing it on a monthly
basis. This is the money that was earmarked
to repay Mike. The amount, I have no idea.

Q

You have no idea how much you put into this
liquid assets account?

A

I have no idea.

Mr. McGirl's auto logs, for the reasons detailed above, show his
lack of credibility.

Both Mr. and Mrs. McGirl testified that the

cash register broke in the first year of the Yogurt Station's
operation and that they never had it repaired.

The cash register

supposedly was unreliable because it would randomly repeat
entries.

However, when Mr. McGirl was being investigated by Mr.

Erickson, a criminal investigator for the MDR, seven former
Yogurt Station employees provided affidavits that stated that the
cash register worked properly, and that it did not repeat
entries.

After the MDR audit was underway, Mr. McGirl told Mr.

- 36 Lauth, his tax return preparer, that he had unreported income and
that it had been going on for some time.
Mr. McGirl testified that he conservatively "guesstimated"
the store's gross income and expenses.

Mr. McGirl's guesstimates

of gross income and expense were so far off the mark that we
conclude that they were not good faith estimates at all.

Even if

we were to believe the loan story, petitioners still saved more
than $38,000 in excess of the alleged loan proceeds.

Even when

the alleged loans ended, the Yogurt Station's deposits kept
increasing.
Mr. McGirl testified that:

(1) He did not know if he was

the sole owner of Mickey's Diner; (2) he had no idea if his
corporation had stock; (3) he cannot remember the name on the
Yogurt Station's tax return; and (4) neither the MDR or the IRS
auditors ever asked to see his auto logs.

The above statements,

when taken as a whole, show Mr. McGirl's lack of credibility and
are evidence of fraud.
g.

Dealing in Cash

Mr. McGirl testified that his purported side business and
alleged borrowings were transacted exclusively in cash.

The

existence of cash transactions is difficult to disprove.
However, the exclusive use of cash when conducting business
transactions, when coupled with a lack of recordkeeping, is
evidence of fraud.
h.

Other factors

We also consider it significant that Mr. McGirl pleaded

- 37 guilty to State sales tax violations.

Although this conviction

does not, in and of itself, establish a fraudulent intent, we
consider the crime evidence of a propensity to defraud.

Petzoldt

v. Commissioner, 92 T.C. at 701-702 (1989), McGee v.
Commissioner, 61 T.C. 249, 260 (1973), affd. 519 F.2d 1121 (5th
Cir. 1975).
To summarize, after carefully reviewing all of the facts and
circumstances present in this record, we conclude that respondent
has clearly and convincingly proven that an understatement of tax
for 1989, 1990, and 1991 was due to fraud on the part of Mr.
McGirl.

Petitioners have failed to show that any portion of the

underpayment was not due to fraud.

Therefore, we sustain

respondent's determination that Mr. McGirl is liable for the
penalty for fraud under section 6663(a) for all of the years
under consideration.
C.

Mrs. McGirl Not Liable for Fraud

Mrs. McGirl's testimony was not fully credible.

Her support

of Mr. McGirl's statement that the cash register was broken and
that it was economically infeasible to repair it demonstrates
that part of her testimony was not plausible.
Fraud is never presumed or imputed; it must be established
by independent evidence that establishes a fraudulent intent on
the taxpayer's part.

Otsuki v. Commissioner, 53 T.C. at 106.

Even if Mrs. McGirl's testimony is not credible in all respects,
we may still be left with no more than a suspicion of fraud.
Jenkins v. Commissioner, T.C. Memo. 1995-563.

We shall not

See

- 38 sustain respondent's determination of fraud when we are only left
with a suspicion of fraud.

Green v. Commissioner, 66 T.C. 538,

550 (1976); see Comparato v. Commissioner, T.C. Memo. 1993-52.
Fraud cannot be imputed from one spouse to another.

Sec.

6663(c).15
Respondent has failed to show that Mrs. McGirl was
responsible for understating income, destroying the Yogurt
Station's invoices and records, misleading the MDR or IRS agents,
or that she was in any way involved in creating the fabricated
auto logs.
Respondent has not affirmatively established, by clear and
convincing evidence, that Mrs. McGirl intended to evade taxes.
We cannot conclude on this record that Mrs. McGirl committed
fraud where respondent has failed to adduce evidence showing
intentional wrongdoing.
5.

Negligence Penalty on Unreported Taxable Dividends
Petitioners admit they omitted the dividend income from

their joint Federal income tax returns.

Petitioners have offered

no evidence that they were not negligent or had reasonable cause
to omit the dividend income.

In fact, petitioners' briefs fail

to address the negligence issue at all.

15

We cannot be sure if

Since we have upheld respondent's determination of fraud with
respect to Mr. McGirl, we cannot also find him liable for
negligence. Therefore, we cannot find Mrs. McGirl liable for
negligence as she filed a joint return with Mr. McGirl and he
would be jointly liable for any negligence penalty imposed on his
wife. See Aflalo v. Commissioner, T.C. Memo. 1994-596.

- 39 petitioners intended to abandon the issue, but in any case
respondent's determination of the applicable penalty as to these
items must be sustained as petitioners have failed to satisfy
their burden of proof on this issue.
To reflect the foregoing,
Decision will be entered
under Rule 155.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Ade7089941fa75df0. Public record. Not legal advice.