T.C. Mem o. 2 01 3- 25 1

UNITED STAT ES TAX COURT

RODNEY ERIC MCC LELLA N, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 1 43 00 -1 1, 1 43 14 -1 1. File d Oct ob er 3 1, 2 01 3. 1

Ci nd y L. Ho, forpe ti ti on er. Kael yn J . Rom ey , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION LARO, Ju dg e: In ano ti ce o f de fic ie nc y , res po nd en t d et erm in ed de fic ie nc ie s i n p et it io ne r’s Fed eral in co m e ta x fo r 20 06 an d 2 00 7 a s wel l as frau d

The se cas es are co ns ol id at edforpu rp os es of tria l, b rie fin g andop in io n. 1-2
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[* 2] pe na lt ie s u nd er s ect io n 6 66 3( a) o r al te rn at iv el y ne gl ig en ce p en al ti es un de r se ct io n 6 66 2 a s fo ll ows : 2
Year Defi ci en cy Frau d p en al ty se c. 66 63 (a) Accu racy-rela te d p en al ty se c. 66 62 20 06 $8 6,2 11 $3 9,2 79 .75 $6 ,76 7.6 0 20 07 80 ,39 6 49 ,11 9.7 5 2,9 80 .60 Pet it io ne r, whi le res id in g i n C al ifo rn ia , pet it io ne d thi s C ou rt f or red et erm in at io n. Aft er co nc es si on s, the on ly rem ai ni ng is su e fo r us to de ci de is whe th er p et it io ne r is li ab le forth e fraudpe na lt ie s u nd er s ect io n 6 66 3( a) fo r 20 06
an d 2 00 7. We ho ldth athe is
. FINDINGS OF FACT The parti es ’ st ip ul at io n o f fac ts with a cco m pa nyin g e xh ib it s, the ir
supp le m en ta l s ti pu la ti on of f act s wi th acco m

pa nyin g e xh ib it s, an d the ir s eco nd
supp le m en ta l s ti pu la ti on of f act s wi th acco m

pa nyin g e xh ib it s ar e in co rp or at ed he rei n b y th is refe ren ce. We fin d the fact s ac co rd in gl y .

Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 2 Co de ineffe ctforth e y ears at i ss ue .-3
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[* 3] I. R.E. McCl el lan En te rp ris es R.E. McCl el lan En te rp ris es (REM) i s a c on st ru ct io n drywall bu si ne ss own edan d o pe rat edso le ly by pe ti ti on er. Inhi s ro le as R EM’s so le own er, pe ti ti on er co nduc te d a ll bi ll in g, i nv oi ci ng , andcu st om er d ep os it s fo r REM. Pet it io ne r was als o a ct iv el y in vo lv edinth e d ay -to -d ay m an ag em en t o f th e bu si ne ss an d t im el y

pa idm on th ly rentch eck s, i ns ur an ce b il ls , ut il ity bi ll s an d ot he r work e xp en se s. Pet it io ne r fo un de d REM in 19 94 . By 20 06 an d 2 00 7, the tax y ears at i ss ue , pe ti ti on er h adgro wn REM in to a su cces sf ul drywall bu si ne ss . For b ot h t ax y ears , REM b ro ug htinm or e th an$1 m il li onof g ro ss rece ip ts each y ear and , acco rd in g t o pe ti ti on er, b us in es s was “bu sy”. II. Pet it io ne r’s bu si ne ss an d re co rdke ep in g p ract ic es for20 06 an d 2 00 7 Pet it io ne r ha d s ol e co nt ro l o ve r REM’s as se ts an d re co rd s fo r th e ta x years atis su e. Inth e 2 00 6 and20 07 ti m efra m e, REM h adon ly one bankacco un t, o ve r whi chpe ti ti on er h adso le si gn at ory au th or ity an d c on tro l. Inad di ti on , pet it io ne r al on e p rep aredan d m ai nt ai ne d R EM’s bo ok s an d re co rd s fo r th e y ears at i ss ue . As p artof k eep in g R EM’s fin an ci al reco rd s, p et it io ne r m ai nt ai ne d c us to m er in vo ic es , tra ck edcu st om er p aym en ts by m ak in g n ot at io ns onth e in vo ic es , and
reco rd edin co m e an d e xp en se s i n ahand writ te n l ed ge r.-4
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[* 4] III. Prep arat io n o f Pet it io ne r’s 20 06 an d 2 00 7 t ax returns The Law Offic es of S te ve n M os ko wit z, LLP (Mo sk owi tz ) (fo rm erl y Mo sk owi tz & Cu i, LLP an d M os ko wit z & Ni xd or f), p rep aredpe ti ti on er’s t ax returns fortax ab le y ears 20 01 th ro ug h 2 01 0. Mo sk owi tz pre pa redpe ti ti on er’s 2 00 6 and20 07 returns us in g o nl y in fo rm at io n p et it io ne r ha d p ro vi de d i n atax org an iz er que st io nn ai re. Pet it io ne r di d n otpro vi de Mo sk owi tz with h is 20 06 an d 2 00 7 l ed ge rs . In ad di ti on , Mo sk owi tz di d n otpe rfo rm anin de pe nd en t au di t o f REM’s b oo ks an d re co rd s. IV. Pet it io ne r’s hi st ory of n on co m

pl ianc e an d p rio r au di ts Pet it io ne r ha s a h is to ry

of n on co m

pl ianc e wit h S ta te an d F ed eral tax laws
an d h as ha d s ev eral au di ts th atres ul te d i n t ax de fic ie nc ie s. Th es e in cl ud e th e au di ts of h is 20 02 Fed eral in co m e ta x re tu rn , hi s 2 00 0 thr ou gh 20 03 Cal ifo rn ia
em pl oym en t t ax returns , andhi s 2 00 1 C al ifo rn iain co m e ta x re tu rn . A. Pet it io ne r’s hi st ory of d el in qu en t t ax fil in gs Pet it io ne r ha s a l on g h is to ry of d el in qu en t t ax fil in gs . W ith the ex cep ti on of th e 2 00 6 and20 07 tax y ears , pet it io ne r fi le d h is Fed eral in co m e ta x re tu rn s l at e ev ery y ear b etween19 99 an d 2 00 9. Fo r m an y of t ho se y ears , pet it io ne r al so fai le d to pay th e ta x re po rte d a s due .-5
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[* 5] B. 20 02 Fed eral tax return aud it In20 06 th e IRS au di te d p et it io ne r’s 20 02 Fed eral in co m e ta x re tu rn , whi ch Mo sk owi tz ha d p rep ared . In a m em or an du m da te d Au gu st21 , 20 03 , Mo sk owi tz qu es ti on edpe ti ti on er’s ab il ity to supp ort h im se lf i n the li gh t o f th e n earl y $9 0,0 00 lo ss rep orte d fo r 20 02 . Peti ti on er t ol d M os ko wit z th athe ha d re cei ve d m on et ary supp ort fr om

fam il y an d fr ie nd s. Inad di ti on , pet it io ne r ex ecu te d an e co no m ic real ity st at em en t fo r 20 02 st at in g tha t h is pe rs on al li vi ng ex pe ns es were co ve red by “ lo w cos t l iv in g e xp en se s p lu s h el p fr om fam il y an d fr ie nd s” , anda supp le m en ta l ec on om ic real ity st at em en t s ta ti ng th at“ I di d n otpay m y m at eri al bi ll inful l ea chm on th . Also I fact or edin vo ic es (Adv an ce o n i nv oi ce p rio r to pa ym en t). Ba si cal ly rob be d P et er t o p ay Pau l.” IRS R ev enue Agen t Ro na ld a Turne r (Ag en t Tu rn er) was ass ig ne d t o pe rfo rm th e 2 00 2 aud it . Agen t Tu rn er d is co ve redth atpe ti ti on er h adfai le d t o rep ort n earl y

$7 9,0 00 inde po si ts an d h adun de rrep orte d h is in co m e b y ne arl y $2 34 ,00 0. Pe ti ti on er re fu se d t o m eetwith Ag en t Tu rn er t o o fferanex pl an at io n fo r th e unr ep orte d i nc om e an d a ls o re fu se d t o p ro vi de do cu m en ts . The o nl y ex pl an at io n fo r th e d is crep an ci es pe ti ti on er p ro vi de d Ag en t Tu rn er was hi s

“ acri m on io us di vo rce” . Thu s, Ag en t Tu rn er h adto ob ta insupp orti ng do cum en ts by thi rd -p arty

su m m on se s. Th e 2 00 2 aud itres ul te d i n ade fic ie nc y de te rm in at io n.-6
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[* 6] C. The Cal ifo rn iaEm pl oym en t Dev el op m en t Dep art m en t au di t The Cal ifo rn iaEm

pl oym en t Dev el op m en t Dep art m en t (EDD) au di te d pe ti ti on er’s returns for20 00 th ro ug h 2 00 3. Pe ti ti on er re ta in edMs . Lori Sch na ll 3 to ass is t h im

reg ard in g the EDD Audi t. Ina le tt er t o M s. Sc hn al l, p et it io ne r st at ed th athe ne ed ed30 to 60 day s t o g o o ve r hi s re co rd s b ecau se th ey were “ atro ci ou s”
. As a re su ltof the au di t, the EDD det erm in edth atpe ti ti on er o wedanad di ti on al $1 23 ,29 0.1 4 i n S ta te tax es . Fol lo win g the EDD aud itpe ti ti on er en ga ge d In de pe nd en t St affi ng So lu ti on s (I SS) t o h el p h im pay hi s emplo y ees an d p rep are em pl oym en t t ax returns . D. Cal ifo rn iaFran ch is e Tax Bo ardau di t The Cal ifo rn iaFran ch is e Tax Bo ard(FTB) au di te d p et it io ne r’s Sta te tax return fo r 20 01 . The FTB au di t al so res ul te d i n a dd it io na l t ax es du e. Des pi te th e m

ul ti pl e au di ts of p et it io ne r’s Sta te an d F ed eral tax returns for 20 00 to 20 03 , pet it io ne r di d n otch an ge hi s ac co un ti ng pra ct ic es . Peti ti on er ad m it s th atfor20 06 an d 2 00 7, h e co nt in ue d t o u se th e sam e acc ount in g m etho ds th athe ha d u se d fo r 20 02
.

At the ti m e p et it io ne r so ug htMs . Sch na ll ’s ass is tanc e wit h re ga rdto th e 3 EDD aud it , Ms . Sch na ll ha d the same addres s as Mo sk owi tz ’s Cas tro Vall ey of fic e.-7
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[* 7] V. 20 06 an d 2 00 7 IR S au di ts A. His to ry

of t he au di ts IRS R ev enue Agen t Lau ra Athe rto n (Ag en t Athe rto n) was a ss ig ne d t o aud it pe ti ti on er’s 2 00 6 t ax return. Th e 2 00 6 aud itev en tu al ly exp an de d t o i nc lu de pe ti ti on er’s 2 00 7 t ax return. Thro ug ho utth e au di t p et it io ne r ro ut in el y de lay edinpro du ci ng do cu m en ts , pr oduc edin co m

pl et e d oc um en ts , andfai le d t o p ro du ce d oc um en ts alt og ethe r. In pe ti ti on er’s fi rs t m eet in g wi th Agen t Athe rto n, p et it io ne r pr oduc edon ly a ha nd writ te n l ed ge r an d afew b an k s ta te m en ts for20 06 . To ob ta inREM’s
co m pl et e 2 00 6 b an k s tate m en ts an d d ep os itit em s, Ag en t Athe rto n h adto is su e a su m m on s t o B an k o f Am eri ca. Inad di ti on , pet it io ne r di d n otpro vi de Agen t Athe rto n wi th REM’s 2 00 6 in vo ic es un ti l h is th irdin te rv ie w. Whe n a sk edho w he k ep t trackof h is cu st om ers ’ ba lanc es us in g tho se in vo ic es , pet it io ne r rep li edth athe ha d a“ m ag ic m em ory ”. Afte r Age ntAth ert on di sc ov eredpe ti ti on er’s unr ep orte d i nc om e, pe ti ti on er st op pe d c om

pl y in g wi th do cu m en t re qu es ts alt og ethe r. All inall , Agen t Athe rto n is su eda to ta l o f si x i nf

orm at io n d oc um en t re qu es ts an d s umm on edpe ti ti on er’s
reco rd s twice inco nn ect io n wi th th e 2 00 6 and20 07 au di ts . Agen t Athe rto n a ls o ha d t o s umm onad di ti on al reco rd s fr om pe ti ti on er’s cu st om ers , in cl ud in g S ut co-8
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[* 8] Co ns tru ct io n andMag al lo n C on st ru ct io n C o., as well as p et it io ne r’s le nd er, In dyMac Ba nk
. B. 20 06 au di t fi nd in gs Age ntAth ert on ’s rev ie w of p et it io ne r’s bo ok s an d re co rd s re ve al ed
nu m ero us in co ns is te nc ie s an d s ub st an ti al un rep orte d i nc om e. Fo r in st an ce, Ag en t Ath ert on ’s in it ia l re vi ew of pe ti ti on er’s 2 00 6 l ed ge r rev eal edth atpe ti ti on er’s 2 00 6 ta x re turnrep orte d app ro xi m at el y $9 0,0 00 m or e in gro ss rece ip ts th anth e am ou nt reco rd edinpe ti ti on er’s l ed ge r. Pet it io ne r was un ab le to acco un t fo r th is di sc rep an cy . Age ntAth ert on ’s ana lysis of R EM’s m on th ly cash flo w acco rd in g t o the le dg er al so rev eal edpaym en ts si gn ifi can tl y inex ces s o f de po si ts . Upo n fu rth er an al y si s, Ag en t Athe rto n d is co ve redth atpe ti ti on er h adun de rrep orte d i nc om e b y withd rawi ng cas h wh ende po si ti ng cu st om er ch eck s, b y us in g the “

joi ntch eck ”
m etho d, an d b y

fai li ng to reco rdcert ai n c he ckde po si ts as r ecei pt s. 1. Unr ep orte d c as h wi th dr awal s Pet it io ne r un de rrep orte d h is in co m e b y ex cl ud in g c as h wi th dr awal s fr om gr os s re cei pt s, u si ng th atcas h t o p ay lab orex pe ns es , andth ende du ct in g the lab or pa ym en ts as b us in es s ex pe ns es .-9
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[* 9] Pet it io ne r ro ut in el y withdrew cas h wh il e d ep os it in g c he ckpaym en ts fro m REM’s cu st om ers . Whe ne ve r pe ti ti on er wi th dr ew cas h fr om a ch eckde po si t, h e m ad e a n ot at io n o n the cu st om er i nv oi ce s ig ni fy in g the withd rawal . Howev er, REM’s l ed ge r wou ldoft enreco rdon ly the de po si t am ou ntne t o f th e cas h withd rawnas r ecei pt s. In it ia ll y , pet it io ne r to ldAgen t Athe rto n tha t h e m os tl y rece iv edpaym en ts fro m hi s cu st om ers by checkan d tha t h e p ai d e xp en se s al so m os tl y by check
. Pet it io ne r al so de ni edpay in g e xp en se s wi th cas h. Inad di ti on , pet it io ne r cl ai m ed th athe m ad e d ep os it s i n fu ll m os t o f th e ti m e an d o nl y pu ll edcas h o ut oc cas io na ll y . Howev er, Ag en t Athe rto n’s au di t re ve al edth atth ro ug ho ut20 06 , pet it io ne r withd rew a t ot al of $ 16 3,0 00 incas h wh il e m ak in g c he ckde po si ts forREM, $1 18 ,40 0 o f whi chwas n otreco rd edinREM’s le dg er as rece ip ts . Peti ti on er n ev er withd rew $ 10 ,00 0 o r m or e, th ou gh he freque nt ly m ad e cas h wi th dr awal s s li gh tl y un de r $1 0,0 00 . The fo ll owi ng tab le su m m ari zes th e cas h a m ou nt s p et it io ne r withh el d fr om

ch eck s i n 2 00 6: Date Payer Check amount Cash out 2/23 Pacific State B ank Memo: Escola r $10,075.00 $5,000 3/2 Palomino & Sons, Inc. 17,000.00 8,000-1 0-

[* 10 ] 3/20 Mulder-Te rpstra, LL C 12,740.00 8,000 4/13 Distinctive Remodel 10,221.25 9,200 4/17 Mulder-Te rpstra, LL C 15,400.00 8,400 5/23 Palomino & Sons, Inc. 11,933.93 9,000 6/6 Distinctive Construction 14,675.00 9,800 6/19 Price Home s Neibaue r Job 21,970.00 9,800 8/31 Pacific State B ank, memo: Postma 12,723.75 9,500 9/16 MJ K B uilders, Inc. 14,933.75 8,000 9/29 GE Whitl ock Construction 17,123.75 6,000 10/11 Sutco Construction, Inc. 51,740.00 8,400 10/12 GE Whitl ock Construction 14,677.50 9,600 10/13 Calvin Andree and Na ncy Andre /Andre Tr

ust 18,042.50 9,600 10/18 MJ K B uilders, Inc. 10,250.00 9,800 11/6 Calvin Andree and Na ncy Andre /Andre Tr

ust 16,215.00 9,800 11/14 Paul & Sheila Va n Kony nenburg 21,726.25 9,800 11/18 GE Whitl ock Construction 17,123.75 9,900 11/22 Paul & Sheila Va n Kony nenburg 11,698.75 6,000 Total $163,600 Pet it io ne r us edth es e cas h wi th dr awal s t o p ay hi s l ab or ers . Thes e cas h pa ym en ts were m ad e in ad di ti on to th e p ayro ll am ou nt s p et it io ne r ha d re po rte d to ISS. Fo r ex am

pl e, pe ti ti on er ad m it s tha t h e p ai d J ua n M anua l Lo pe z $ 55 ,82 5 inex ces s o f wha t h e rep orte d t o IS S. In a dd it io n, p et it io ne r pa idov er 1 0-1 1-

[* 11 ] in de pe nd en t co nt ract or s i n c as h. Pe ti ti on er the n d educ te d the se cas h pa ym en ts as b us in es s ex pe ns es .

2. “ Jo in t Ch eck ” syst em Pet it io ne r al so ob fu sc at edin co m e u si ng th e “ joi ntch eck ” syst em . Und er th e joi ntch ecksyste m , pet it io ne r pu rch as es m at eri al s fr om a m at eri al s s up pl ie r, who th enfil es a li enonth e p ur ch as edm at eri al s. Th e supp li er re le as es th e li en whe n REM’s cu st om er i ss ue s a jo in t ch eckpay ab le to bo th REM an d the supp li er. At tha t p oi nt , pet it io ne r si gn s the ch eckov er t o the supp li er s o tha t the supp li er, rathe r th anpe ti ti on er, rec ei ve s the fun ds fro m th e ch eck . Peti ti on er’s p ract ic e was to ha ve REM’s cu st om ers writ e two ch eck s: on e ch eckto REM t o c ov er o nl y no nm at eri al s co st s an d o ne ch eckto REM an d the m at eri al s s up pl ie r joi nt ly for the
m at eri al s. Fo r ex am

pl e, in 20 06 pe ti ti on er p ai d Del taMat eri al s Supp ly ove r $1 00 ,00 0 i n m at eri al co st s u si ng th e joi ntch eckm etho d. Pe ti ti on er d idno t re po rt th e p aym en t fo r m at eri al s as part o f hi s g ro ss rece ip ts bu t d educ te d tho se m at eri al s co st s as bu si ne ss ex pe ns es .

3. Dep os it s n otrep orte d a s i nc om e Fi na ll y , pet it io ne r un de rrep orte d i nc om e b y so m et im es fai li ng to reco rd ba nkde po si ts . In 2 00 6 p et it io ne r de po si te d app ro xi m at el y $9 4,0 00 inREM’s-1 2-

[* 12 ] bankacco un t wi th ou t re co rd in g i t o n R EM’s le dg er an d wi th ou t re po rti ng it
on hi s re tu rn . C. 20 07 au di t fi nd in gs Age ntAth ert on ’s aud itof p et it io ne r’s 20 07 tax return re ve al edth at pe ti ti on er co nt in ue d m an y of t he same prac ti ces in20 07 . For i ns tanc e, pe ti ti on er co nt in ue d t o wi th dr aw cas h fr om ch eckde po si ts . In 2 00 7 p et it io ne r m ad e cas h withd rawal s t ot al in g $ 24 1,3 00 , of wh ic h $ 15 5,3 50 was n otreco rd edinREM’s le dg er as part o f gr os s re cei pt s. As be fo re, n on e o f pe ti ti on er’s cas h wi th dr awal s equa le d o r ex ceed ed$1 0,0 00 , th ou gh onnu m ero us oc cas io ns pe ti ti on er wi th dr ew am ount s s li gh tl y

les s tha n $ 10 ,00 0. The fol lo win g t ab le su m

m ari zes th e cas h a m ou nt s p et it io ne r withh el d fr om ch eck s i n 2 00 7: Date Payer Check amount Cash out 1/30 Standard Pac ific Homes- -Centra l Valley $26,272.00 $9,200 2/15 Wil liam Mulder Construction 16,355.00 9,300 2/27 McRoy -Wilbur Com munities, Inc. 15,933.75 9,900 3/9 Standard Pac ific Homes- -Centra l Valley 41,185.00 9,800 3/18 Michae l J . Kinch 11,553.75 9,800 3/23 Standard Pac ific Homes- -Centra l Valley 41,892.25 9,800 4/3 McRoy -Wilbur Com munities, Inc. 18,210.00 9,800-1 3-

[* 13 ] 4/2 Mag allon Construction Co. 15,184.00 9,800 4/9 CraigPodesta 27,500.00 9,800 5/2 McRoy -Wilbur Com munities, Inc. 11,381.25 9,900 5/7 Gar

y Tschantz Construction, Inc. 5,750.00 4,450 5/7 Gar

y Tschantz Construction, Inc. 5,750.00 4,450 5/6 CraigPodesta 12,815.00 7,000 5/7 Standard Pac ific Homes- -Centra l Valley 26,002.25 9,800 5/15 GK Commercia l Properties 21,385.00 9,800 5/20 Dea

nn and Ga

ry Autrey 14,527.50 9,500 5/29 Terr

y Alkire 14,900.00 9,100 5/15 Sutco Construction, Inc. 14,240.00 9,200 6/19 J oel W. Geddes, Jr. 29,400.00 2,300 6/26 J org ensen F inance 10,348.00 9,000 7/19 Terr

y Alkire 12,325.00 9,800 7/20 The Gr evembe rgCo., Inc. 11,800.00 9,800 9/20 Palomino & Sons, Inc. 15,187.50 9,800 9/14 Standard Pac ific Homes- -Centra l Valley 46,659.75 9,800 10/8 Pac Nor

thwest Deve lopment, L L C 5,000.00 2,400 10/19 Palomino & Sons, Inc. 5,000.00 5,000 10/14 Palomino & Sons, Inc. 4,000.00 3,000 11/7 Palomino & Sons, Inc. 10,000.00 6,000 11/28 Roman Salazar 10,147.50 8,000 12/22 The Gr evembe rgCo., Inc. 10,500.00 6,000 Total $241,300-1 4-

[* 14 ] Inad di ti on , pet it io ne r co nt in ue d t o m ak e unr ep orte d b an k d ep os it s. In20 07 pe ti ti on er d ep os it edne arl y $8 4,0 00 in to REM’s b an k a cco un t wi th ou t re co rd in g i t inREM’s le dg er o r rep orti ng itonhi s 2 00 7 re turn . D. 20 06 an d 2 00 7 aud itres ul t s umm ary All inall , Agen t Athe rto n d et erm in edth atpe ti ti on er h adun de rrep orte d in co m e b y

ov er $ 14 6,0 00 for20 06 an d o ve r $1 90 ,00 0 fo r 20 07 . The fo ll owi ng tabl e su m m ari zes Agen t Athe rto n’s ca lc ul at io n o f pe ti ti on er’s unr ep orte d i nc om e fo r th e y ears at i ss ue : 2006 2007 Book inc om e $928 ,658 .43 $836 ,667 .12 Add: I nco m e f

rom cust om erdep osi ts notre porte d inboo ks 94,3 88.5 0 83,8 99.2 8 W it hhe ld cas h omitt ed f rom rec ei pts re porte d i n bo oks 1 118, 400. 00 155, 350. 00 Acc ount ing error s - - - 2,47 0.00 Subt ra ct : Non-taxab le in come re porte d as ta xab le 27,2 20.5 0 50,9 24.4 6 T ota ls : I nco m e pe r e xaminat ion 1,11 4,22 6.43 1,02 7,46 1.94 I nco m e pe r r eturn 967, 845. 00 836, 616. 00 Pet it ion er ’s unr epo rt ed i nco m e 146, 381. 43 190, 845. 94 This figure inc ludes source s of nontaxable income such a s petitioner’s B ank of America 1 loans and travel funds.-1 5-

[* 15 ] Pet it io ne r co nc ed es res po nd en t’s d et erm in at io ns of t he am ou nt s o f
un de rrep orte d i nc om e. VI. Pet it io ne r’s un di sc lo se d a ss et s an d b an k a cco un t Pet it io ne r own edsev eral ass et s wh ic h wer e o m it te d fr om hi s 2 00 6 and20 07 returns . Peti ti on er wai te d u nt il hi s thi rdin te rv ie w with Ag en t Athe rto n b efo re di sc lo si ng th athe own edsev eral in ve st m en t p ro pe rti es inW as hi ng to n o n wh ic h h e was co ns tru ct in g h om es to sel l fo r a p ro fit . Peti ti on er ex pl ai ne d tha t s om e o f th e pr op ert ie s wer e in hi s n ie ce’s n am e in ord er t o s hi el d tho se ass et s fr om hi s d iv or ce pr oc eed in gs . Peti ti on er fu rth er d is cl os edth athe co nt ro ll edan ot he r ba nkacco un t inhi s s on ’s nam e fro m

whi chhe pa idth e co ns tru ct io n c os ts of t he W as hi ng to n pr op ert ie s. VII. Pet it io ne r’s ex pl an at io n fo r th e 2 00 6 and20 07 un rep orte d i nc om e Pet it io ne r as se rts th athi s fa il ur e to rep ort al l h is in co m e was du e to ci rcu m st an ces inhi s p ers on al li fe, i nc lu di ng m ed ic al pro bl em s, a d iv or ce, an d the ai li ng he al th of h is fathe r, rathe r th anfrau d. A. Pet it io ne r’s m ed ic al pro bl em s Pet it io ne r cl ai m s tha t h e su ffer edfro m a va rie ty of m ed ic al co nd it io ns whi chim pe de d h is ab il ity

to ke ep accu rat e b oo ks an d re co rd s. Th es e m ed ic al
co nd it io ns in cl ud e st ro ke , trans is ch em ic att ack s (TIAs ), hydro cep ha lu s (a .k.a.-1 6-

[* 16 ] ve ntric ul om eg al y ), an d s tre ss syndr om e. Pet it io ne r, ho wev er, n ev er m en ti on edth es e h eal th is su es no r an y co gn it iv e d is ab il ity

to Agen t Athe rto n u nt il aft er the 20 06 an d 2 00 7 aud it s wer e co m pl et e. 1. Stro ke Pet it io ne r su ffer eda st ro ke in19 99 an d h as no t s uf fere d ano th er o ne si nc e. 2. TIA Pet it io ne r de sc rib es a TIA as e ss en ti al ly a min is tro ke with a tt en da nt sym pt om s s uc h a s co nf

us io n, fa ti gu e, he ad ach e, an d d iz zi ne ss . Suc h e pi so de s wou ldlas t o nl y

sev eral day s. Acco rd in g t o Dr. J oh n Warwic k, p et it io ne r’s pr im ary care ph y si ci ansi nc e 1 99 4, p et it io ne r su ffer edfro m TIA epi so de s i n 2 00 3
an d 2 00 4. Ho wev er, o ffi ce v is ittes ts rev eal ed“ m in im al ne ur ol og ic or p hysic al fin di ng s”
. 3. Hy dr oc ep ha lu s Hy dr oc ep ha lu s i s an en larg em en t o f th e v en tri cl es inth e st or ag e uni t o f th e br ai n. Dr. Warwicktes ti fie d tha t p et it io ne r ex pe rie nc edco gn it iv e im pa irment fro m hydro cep ha lu s i n e arl y

20 00 an d tha t s y

m pt om s p eak edin20 03 -2 00 4. Bec au se of h is hydro cep ha lu s, p et it io ne r ex pe rie nc edsh ort ep is od es of c og ni ti ve im pa irment app ro xi m at el y

on ce ev ery two to th ree m on th s. Acco rd in g t o Dr. W arwi ck , pet it io ne r co ul d driv e a car, co m m un ic at e, an d g en eral ly tak e car e o f-1 7-

[* 17 ] hi m se lf dur in g s uc h e pi so de s. In20 03 pe ti ti on er re cei ve d ave ntric ul og ram fo r hi s h y dr oc ep ha lu s fo ll owi ng whi chhe ex pe rie nc edrap idim pr ov em en t i n sym pt om s. 4. Stres s s ynd ro m e Dr. W arwi ckals o d ia gn os edpe ti ti on er wi th stres s s yndro m e, whi chis ch arac te riz edby exces si ve adren al in e cau se d b y vario us li fe fa ct or s. Pet it io ne r ex pe rie nc edep is od es of s tre ss syndr om e fro m 19 94 th ro ug h 2 00 5, wi th each ep is od e la st in g fo r a d ay

or t wo. Acco rd in g t o Dr. Warwick , any cog ni ti ve im pa irment wo ul d b e li m it edto bl un te d a ffec t an d t em po rary m em ory

lo ss . Dr. W arwi ckpro sc rib edpe ti ti on er Well bu tri n, a m oo d s tabi li zer, t o h el p h im m an ag e hi s s tre ss . 5. Pet it io ne r’s of fic e v is it s i n 2 00 6 and20 07 Pet it io ne r so ug htm ed ic al tre atm en t fr om Dr. W arwi ckonat l eas t fo ur oc cas io ns in20 06 an d o ne oc cas io n i n 2 00 7. Dr. Warwick ’s m ed ic al reco rd s an d
no te s fr om

20 06 an d 2 00 7 s ho w no m en ti onof p et it io ne r’s 19 99 stro ke , TIA, hydro cep ha lu s, s tre ss syndr om e, orass oc ia te d s y m pt om s dur in g tho se off

ic e v is it s. Dr. W arwi ck ’s reco rd s al so sh ow tha t i n 2 00 7 p et it io ne r m ad e anoff ic e v is it to ob ta ina le tt er t o the IRS v eri fy in g h is m ed ic al co nd it io n. Dr. Warwicktes ti fie d th athe dra fte d s uc h alet te r to th e IRS forpe ti ti on er. Pet it io ne r, on th e o th er h an d,-1 8-

[* 18 ] cla im s tha t h e d idno t h av e an y let te rs fro m

Dr. W arwi ck

reg ard in g h is he al th pro bl em s an d the ir i m pa ctonhi s ab il ity

to co nduc t h is bu si ne ss . B. Pet it io ne r’s di vo rce Pet it io ne r fu rth er at tri bu te s h is in accu rat e ta x re tu rn s t o h is “ m es sy di vo rce” . Peti ti on er an d h is form er wi fe l eg al ly sep arat edinm id -2 00 5, an d the ir di vo rce was fin al iz edinDecem be r 20 06 . Accor di ng to pe ti ti on er, the di vo rce was de va st at in g, l efthi m

“ ex tre m el y

de pr es se d” , andm ad e itdi ffi cu ltforhi m to op erat e h is bu si ne ss . Peti ti on er fu rth er cl ai m s tha t the fin an ci al im pl ic at io ns of t he di vo rce e xt en de d i nt o 2 00 7, tho ug h h e d idno t ex pl ai n wh y or h ow. C. Heal th pro bl em s o f Pet it io ne r’s fathe r Fi na ll y , pet it io ne r at tri bu te s the in accu raci es inhi s t ax returns to hi s fa th er’s po orhe al th . Accor di ng to pe ti ti on er, h is fathe r su ffer edfro m Alzh ei m er’s d is eas e in20 06 an d re qu ire d s ig ni fic an t as si st an ce fr om pe ti ti on er. OPINION I. Perc ep ti on of wi tn es se s Dur in g o urtri al we he ardth e te st im on y fro m Agen t Athe rto n, Ag en t Tu rn er, Dr. W arwi ck , andpe ti ti on er. As the tri er o f fac t, o urch arg e is to rev ie w th e cred ib il ity

of wi tn es se s an d e va lu at e th e rel iabi li ty of ev id en ce fo r pu rp os es of fin di ng di sp ut edfact s. Indi sc ha rg in g tha t dut y , we ob se rv e th e truthf ul ne ss ,-1 9-

[* 19 ] can do r, an d d em ean orof e ach witne ss to ev al ua te hi s o r he r te st im on y . HIE Hol di ng s, In c. v. Co m

m is si on er, T.C. Mem o. 2 00 9- 13 0, 9 7 T.C.M . (CCH) 1 67 2, 17 33 (20 09 ), aff’d, 5 21 Fed . App x. 6 02 (9t h C ir. 2 01 3) . W e wei gh th e ev id en ce, dr aw ne ces sa ry

in fere nc es , andres ol ve di sp ut edfact s wi th a vi ew to ward
as cert ai ni ng th e tr

ut h. Id
. W e fo un d the tes ti m on y

of Ag en t Tu rn er, Ag en t Athe rto n, an d Dr. Warwick to be in fo rm edan d c red ib le . The t es ti m on y of Ag en t Tu rn er an d Ag en t Athe rto n was supp le m en te d b y

ex te ns iv e au di t d oc um en tati on an d h el pf ul to un de rs tand in g pe ti ti on er’s ex cl us io n o f cu st om er ch eck s fr om hi s s al es rece ip ts , withd rawal of
cas h fr om cu st om er d ep os it s, an d u nd ers ta te m en t o f gr os s re cei pt s. Si m il arl y , Dr. W arwi ck ’s tes ti m on y

was c orro bo rat edby pet it io ne r’s m ed ic al reco rd s. Th e cred ib le tes ti m on y

of t he se witne ss es cle arl y an d c on vi nc in gl y

est ab li sh es th at pe ti ti on er ac te d wi th frau du le ntin te nt ; the same tes ti m on y als o s ho ws tha t pe ti ti on er l ack edreas on ab le cau se forun de rrep orti ng hi s i nc om e. As t o p et it io ne r, we ge ne ral ly foundhi s t es ti m on y to be sel f-s erv in g, im pr ob ab le , in te rn al ly inc on si st en t, an d c on tra di ct edby doc um en tary ev id en ce an d s ti pu la te d fa ct s. We ill us tra te th es e co nt rad ic ti on s thr ou gh th e fo ll owi ng ex am pl es .-2 0-

[* 20 ] Fi rs t, p et it io ne r m ad e co nt rad ic to ry st at em en ts reg ard in g h is us e o f cas h i n co nduc ti ng REM’s b us in es s. In it ia ll y , pet it io ne r rep res en te d t o Ag en t Athe rto n th athe pa idex pe ns es m os tl y by checkan d o nl y

rare ly w ithd rew cas h fr om ch eck s. Howev er, as REM’s rec or ds sh ow, p et it io ne r withd rew o ve r $1 60 ,00 0 i n c as h fro m ch eck s i n 2 00 6 andov er $ 24 0,0 00 in20 07 . Peti ti on er l at er ad m it te d t o m ak in g the se cas h wi th dr awal s b utst at edth atth ey were u se d t o p ay

lab or ex pe ns es . Seco nd , pet it io ne r’s pa tt ernof b eh av io r be li es hi s t es ti m on y reg ard in g h is
un de rs tand in g o f th e IRS rep orti ng requi rem en t fo r cas h wi th dr awal s. Pet it io ne r te st ifi edat tria l tha t h is un de rs tand in g was th atcas h wi th dr awal s o ve r $5 ,00 0 m us t be rep orte d t o the IRS. Ho wev er, p et it io ne r’s bo ok s an d re co rd s s ho w th athe al way s wi th dr ew le ss th an$1 0,0 00 reg ard le ss of t he ch eck ’s face a m ou nt . It co ul d
no t b e a m ere c oi nc id en ce tha t p et it io ne r withd rew b etween$9 ,00 0 and$9 ,90 0 i n ov er 1 0 i ns tanc es in20 06 an d i n 2 0 i ns tanc es in20 07 . Peti ti on er’s p at te rnlea ds
us to co nc lu de th atpe ti ti on er was well aware o f th e $ 10 ,00 0 thr es ho ldth atwou ld tri gg er the bank ’s rep orti ng requi rem en t t o the IRS. See , e.g., 3 1 C .F.R. se c. 10 10 .31 1 (2 01 1)
. Thi rd , th e st ip ul at edfact s co nt rad ic t p et it io ne r’s te st im on y th athe rece iv ed he lp inke ep in g R EM’s bo ok s an d re co rd s. Th ro ug ho utth e 2 00 6 and20 07 au di ts-2 1-

[* 21 ] an d i n s ti pu la te d fa ct s, p et it io ne r rep res en te d tha t h e was th e so le ke ep er o f
reco rd s fo r REM atall ti m es . At tri al , ho wev er, p et it io ne r te st ifi edth atin20 06 he hi reda bo okke ep er fo r th ree t o fo urm on th s t o a ss is t h im inm ai nt ai ni ng hi s b oo ks
an d re co rd s. Acco rd in g t o p et it io ne r, he pa idhe r in cas h b utha d n o re co rdof h er em pl oym en t an d d idno t re po rt h is paym en ts to he r as a bu si ne ss ex pe ns e. Whe n qu es ti on edab ou t wh y

he ne ve r m en ti on edth is bo okke ep er u nt il tri al , pet it io ne r cl ai m edth athe ha d “ co m pl et el y for go tt enab ou t h er u nt il ov er the week en d”
. Fo urth , pet it io ne r’s te st im on y th atDr. W arwi ckne ve r dr aft edan y let te rs co nc ern in g h is m ed ic al co nd it io n i s co nt rad ic te d b y Dr. W arwi ck ’s tes ti m on y th at he ha d draft eda le tt er o n p et it io ne r’s be ha lf a ndby D r. W arwi ck ’s m ed ic al
reco rd s. We cred itDr. W arwi ck ’s tes ti m on y . In the li gh t o f hi s t es ti m on y an d
m ed ic al reco rd s, wh ic h s ho w th atpe ti ti on er’s m ed ic al pro bl em s h adlar ge ly been
res ol ve d b y

20 06 an d 2 00 7, we b el ie ve th atDr. W arwi ck ’s let te r was un fav or ab le to pe ti ti on er. II. Sect io n 6 66 3 fr au d p en al ty Sect io n 6 66 3( a) i m

po se s a 7 5% p en al ty on the po rti on of a ny un de rp aym en t of tax att rib ut ab le to frau d. Se ct io n 6 66 3( b) pro vi de s tha t wh ere the Co m m is si on er es tabl is he s tha t an y po rti onof a n u nd erp aym en t o f ta x i s at tri bu tabl e to frau d, the en ti re u nd erp aym en t i s treat edas a ttrib ut ab le to frau d-2 2-

[* 22 ] ex cep t wi th res pe ctto th e p orti on of t he un de rp aym en t tha t the tax pay er es tabl is he s, b y

a pr ep on de ran ce o f th e ev id en ce, i s n otatt rib ut ab le to frau d. The Co m m is si on er b ears th e in it ia l b ur de n o f es tabl is hi ng frau d b y cle ar an d c on vi nc in g e vi de nc e. Sec. 7 45 4( a); Brad fo rdv. Co m m is si on er, 7 96 F.2d30 3, 30 7 (9 thCir . 19 86 ), aff’g T.C. Me m o. 1 98 4- 60 1; Sch arri ng haus env. Co m m is si on er, T.C. Mem o. 2 01 2- 35 0 a t * 34 . Clea r an d c on vi nc in g e vi de nc e is :

“ th atm eas ur e o r de gr ee o f pr oo f whi chwil l p ro du ce i n the m in d o f th e tr ie r of

fact s a f irm be li ef o r co nv ic ti on as t o the all eg at io ns so ug htto be est ab li sh ed . It i s i nt erm ed ia te , bei ng m or e th ana m ere pr ep on de ran ce, b utno t t o the ex te ntof s uc h c ert ai nty as i s re qu ire d be y on d areas on ab le do ub t as incri m in al cas es . It d oe s n otm ean cl ear andun equi vo cal .” Sch arri ng haus env. Co m

m is si on er, at*3 4 (quo ti ng Ohi o v . Akro n C tr. fo r Rep ro d. Heal th , 49 7 U.S. 5 02 , 51 6 (1 99 0) ). To carry hi s b ur de n, the Co m

m is si on er m

us t pr ov e fo r eac h year inwhi chfrau d i s al le ge d tha t (1 ) anun de rp aym en t o f ta x ex is te d and(2) a po rti onof t he un de rp aym en t was att rib ut ab le to frau d. Pe tz ol dt v. Co m m is si on er, 9 2 T.C. 6 61 , 69 8 (1 98 9) ; Sc ha rri ng haus env. Co m mis si on er, at *3 4. Be cau se res po nd en t h as m ethi s b ur de n wi th cle ar an d c on vi nc in g e vi de nc e, an d b ecau se pe ti ti on er h as fai le d t o s ho w any po rti on of t he un de rp aym en t was no t at tri bu tabl e to frau d, we s us ta inth e frau d p en al ty.-2 3-

[* 23 ] A. Exi st en ce o f un de rp aym en t fo r 20 06 an d 2 00 7 Res po nd en t d et erm in edth atpe ti ti on er h adun de rrep orte d h is in co m e b y $1 46 ,38 2 fo r 20 06 an d $ 19 0,8 46 for 20 07 . Peti ti on er co nc ed es th e res ul ti ng un de rp aym en ts . B. Und erp aym en ts att rib ut ab le to frau d Frau d i s d efi ne d a s the in te nt io na l co m m is si on of a n a ctor a ct s fo r th e sp eci fic purp os e o f ev ad in g t ax be li ev edto be owi ng . Petz ol dtv. Co m m is si on er, 92 T.C. at 6 98 ; Sc ha rri ng haus env. Co m m is si on er, at*3 6- *3 7. Whethe r a p orti on of th e und erp aym en t o f ta x i s at tri bu tabl e to frau d i s a que st io n o f fac t t o b e res ol ve d o n the ba si s o f th e rec or d a s a wh ol e. Park s v . Comm is si on er, 9 4 T.C. 65 4, 6 60 (19 90 ); S ch arri ng haus env. Co m m is si on er, at*3 6. Fraudul en t i nt en t i s ne ve r im pu te d o r pr es um edbu t m us t al way s b e es tabl is he d b y in de pe nd en t ev id en ce. Pet zo ld t v . Comm is si on er, 9 2 T.C. at69 9. Bec au se frau d i s ra rel y

adm itte d andth e ta xp ay er's in te ntis rare ly avai labl e, frau d m ay

be pro ve n b y

cir cum st an ti al ev id en ce an d re as on ab le in fere nc es dra wn fro m th e fac ts . Id. The in te ntto co nc eal or m is le adm ay be in ferr edfro m

a pa tt ern of co nduc t. Id
. The re ar e se ve ral , no ne xc lu si ve “ba dg es of f rau d” fro m

whi chth e Co urt
m ay in fer atax pa y er’s fraudul en t i nt en t, i nc lu di ng : (1 ) un de rs ta ti ng in co m e, (2 )-2 4-

[* 24 ] m ai nt ai ni ng in ad equa te reco rd s, (3 ) fai li ng to fil e ta x re tu rn s, (4 ) gi vi ng im pl au si bl e o r in co ns is te ntex pl an at io ns of b eh av io r, (5 ) co nc eal in g a ss et s, (6 ) fai li ng to co op erat e wit h t ax au th or it ie s, (7 ) en ga gi ng inil le ga l ac ti vi ti es , (8) at te m pt in g t o c on ceal il le ga l ac ti vi ti es , and(9) de al in g e xt en si ve ly in ca sh
. Brad fo rdv. Co m

m is si on er, 7 96 F.2dat 3 07 -3 08 ; Sc harri ng haus env. Co m m is si on er, at*3 7. Al th ou gh no si ng le fact oris ne ces sa ril y su ffi ci en t t o es tabl is h fr au d, the co m

bi na ti onof anu m

be r of fact or s co ns ti tu te s p ers ua si ve ev id en ce. Garav ag li a v . Comm is si on er, T.C. Mem o. 2 01 1- 22 8, 1 02 T.C.M. (CCH) 28 6, 3 02 (20 11 ), aff’d, 5 21 Fed . App x. 4 76 (6t h C ir. 2 01 3) . After th or ou gh ly exam in in g the reco rd , we fou ndth e p res en ce o f se ve ral in di ci a o f frau d
su chas: (1) un de rs ta ti ng in co m e, (2 ) m ai nt ai ni ng in ad equa te reco rd s, (3 ) gi vi ng im pl au si bl e expl an at io ns of b eh av io r, (4 ) co nc eal in g a ss et s, (5 ) fai li ng to co op erat e wit h t ax au th or it ie s, an d (6 ) de al in g e xt en si ve ly in ca sh . The p res en ce of si x o f th e n in e fac to rs co nv in ces us th atpe ti ti on er h arb or edth e requi si te frau du le ntin te nt . 1. Und ers ta te m en t o f in co m e The un de rs ta te m en t o f in co m e te nd s t o i nd ic at e fraudul en t i nt en t. Bra df or d v. Co m m is si on er, 7 96 F.2dat 3 07 -3 08 . This is esp eci al ly true wher e th ere i s a pa tt ernof u nd ers ta ti ng in co m e o ve r m ul ti pl e y ears . Hol landv. Un it edSta te s, 3 48-2 5-

[* 25 ] U.S. 12 1, 1 39 (19 54 ). Pet it io ne r co nc ed es th athe un de rs ta te d h is in co m e b y $2 33 ,00 0 fo r 20 02 , $1 46 ,38 2 fo r 20 06 , and$1 90 ,84 6 fo r 20 07 . This fact orweig hs ag ai ns t p et it io ne r. 2. Mai nt ai ni ng in ad equa te reco rd s The fai lu re t o m ai nt ai n a de qu at e rec or ds is in di cat iv e o f frau du le ntin te nt . Brad fo rdv. Co m

m is si on er, 7 96 F.2dat 3 07 -3 08 . Peti ti on er d idno t m ai nt ai n accu rat e rec or ds of R EM’s fin an ci al affai rs . Firs t, p et it io ne r fai le d t o re co rdinhi s le dg er $ 11 8,4 00 of r ecei pt s fo r 20 06 an d $ 15 5,3 50 for 20 07 , whi chhe withd rew as cas h fr om

cu st om er ch eck s. Pet it io ne r furth er fa il edto reco rdinhi s l ed ge r as rece ip ts bankde po si ts of $ 94 ,38 8.5 0 fo r 20 06 an d $ 83 ,89 9.2 8 fo r 20 07 . In ad di ti on , pet it io ne r adm it s tha t h e p ai d h is em pl oyees a dd it io na l ca sh no t re fle ct ed inhi s p ayro ll reco rd s wi th ISS. Pet it io ne r’s cu lp ab il ity

form ai nt ai ni ng in accu rat e rec or ds is in crea se d b y th e res ul ts of h is pri ortax au di ts : the 20 02 Fed eral au di t, the EDD aud it , andth e FTB au di t. Des pi te th e fac t tha t al l thr ee au di ts res ul te d i n t ax de fic ie nc ie s, pe ti ti on er co nt in ue d t o u se th e sa m e acc ou nt in g andbo okke ep in g m etho ds . The
res ul ts of t he se au di ts , coupl edwith p et it io ne r’s fai lu re t o re fo rm REM’s
acco un ti ng pra ct ic es , m ak e itsi m pl y im po ss ib le to fin d tha t p et it io ne r act edin-2 6-

[* 26 ] go odfai th . Peti ti on er’s p ract ic e o f m ai nt ai ni ng in ad equa te an d i na ccu rat e reco rd s wei gh s ag ai ns t h im
. 3. Im

pl au si bl e expl an at io ns Giv in g i m

pl au si bl e o r in co ns is te ntex pl an at io ns of b eh av io r is in di cat iv e o f frau d. Id . Peti ti on er’s ex pl an at io ns forhi s b eh av io r are im pl au si bl e an d in co ns is te nt . Apartfro m pe ti ti on er’s s el f-s erv in g t es ti m on y , no th in g i n the reco rd in di cat es th atin20 06 an d 2 00 7 h e su ffer edfro m m ed ic al co nd it io ns th atim pa ire d hi s ab il ity

to m ai nt ai n a de qu at e b us in es s re co rd s. Pet it io ne r’s pr im ary care ph y si ci an , Dr. W arwi ck , tes ti fie d tha t p et it io ne r no lo ng er ex pe rie nc edsym pt om s fro m th e 1 99 9 s tro ke , TIAs, st res s s ynd ro m e, orhydro cep ha lu s as of 2 00 6 and 20 07
. Age ntAth ert on tes ti fie d tha t wh enqu es ti on edab ou t h is ab il ity to ke ep tra ck of REM’s fi nanc es fro m

th e sc an t re co rd s, p et it io ne r cl ai m edth athe ha d “ m ag ic
m em ory ”. Mo reo ve r, pe ti ti on er d idno t cl ai m to have ha d h eal thpro bl em s unt il aft er the au di t was co m

pl et ed
. Fi na ll y , pet it io ne r act iv el y an d s uc ces sf

ul ly m an ag edREM’s b us in es s affa irs in20 06 an d 2 00 7, i n wh ic h h e b ro ug htinov er $ 1 m il li on of b us in es s p er y ear. Pe ti ti on er was in ti m at el y in vo lv edinREM’s act iv it ie s, i nc lu di ng bi dd in g o n-2 7-

[* 27 ] ne w pro

jects , m ai nt ai ni ng REM’s b oo ks , pre pa rin g c us to m er i nv oi ces , and pa y in g e xp en se s. Pet it io ne r’s cl ai m

th atm ed ic al co nd it io ns pre ve nt edhi m fro m ke ep in g accu rat e b us in es s re co rd s i s i nc on si st en t wi th Dr. W arwi ck ’s andAgen t Ath ert on ’s tes ti m on y

an d h ig hl y

im pl au si bl e in th e li gh t o f th e fac t tha t h e si ng le
ha nd ed ly andsu cces sf

ul ly m an ag edev ery as pe ctof R EM’s bu si ne ss op erat io ns fo r th e y ears at i ss ue . This fact orweig hs ag ai ns t p et it io ne r. 4. Co nc eal in g a ss et s Co nc eal in g a ss et s i s fu rth er i nd ic at iv e o f frau d. Br ad fo rdv. Co m m is si on er, 79 6 F .2dat 3 07 -3 08 . Peti ti on er co nc eal edth e fu ll ex te ntof h is in co m e b y ke ep in g itoff REM’s b oo ks insev eral way s. Fi rs t, p et it io ne r ke ptin co m e o ff h is bo ok s b y no t re co rd in g c as h wi th dr awnfro m ch eckde po si ts . Peti ti on er’s p atte rnof withd rawi ng cas h a m ou nt s ju stsh ort o f th e $ 10 ,00 0 b an k re po rti ng th res ho ld , reg ard le ss of t he ch eck ’s face a m ou nt , is em bl em at ic of h is in te ntto co nc eal in co m e. Next , pet it io ne r ke ptsi gn ifi can t i nc om e o ff the bo ok s u si ng th e joi nt ch ecksyste m

form at eri al ex pe ns es y etde du ct edth os e am ou nt s as bu si ne ss ex pe ns es . Fin al ly, pe ti ti on er al so co nc eal edsev eral W as hi ng to n i nv es tm en t pr op ert ie s h el d i n h is ni ece’s n am e an d abankacco un t i n h is so n’s n am e whi ch
co nt ai ne d the fun ds us edto de ve lo p tho se pro pe rti es . Taken to ge th er, the se-2 8-

[* 28 ] act io ns co ns ti tu te a de li be rat e an d m etho di cal att em ptto co nc eal in co m e an d
as se ts . This fact orweig hs ag ai ns t p et it io ne r. 5. Fai lu re t o c oo pe rat e wit h t ax au th or it ie s Fai li ng to co op erat e with t ax au th or it ie s i s i nd ic at iv e o f frau d. Id
. Pet it io ne r was un co op erat iv e wit h Ag en t Athe rto n dur in g the co ur se of t he 20 06
an d 2 00 7 aud it s. Pet it io ne r pr oduc edin co m pl et e d oc um en ts or s im

pl y ig no red Age ntAth ert on ’s do cu m en t re qu es ts . All i n a ll , Agen t Athe rto n i ss ue d ato ta l o f si x i nf orm at io n d oc um en t re qu es ts , su m m on edpe ti ti on er’s rec or ds twi ce, an d
su m m on edad di ti on al reco rd s an d i nf orm at io n fr om

m ul ti pl e th irdparti es . Pet it io ne r al so m ad e m is rep res en ta ti on s t o Ag en t Athe rto n, i nc lu di ng st at em en ts th athe rare ly deal t i n c as h andth atREM g en eral ly con du ct edit s b us in es s u si ng on ly check s. Th is fact or

weig hs ag ai ns t p et it io ne r. 6. Ext en si ve de al in gs incas h Ext en si ve de al in g i n c as h i s i nd ic at iv e o f frau d. Sc ha rri ng haus env. Co m m is si on er, at*3 7. Pe ti ti on er d eal t ex te ns iv el y incas h b y

withh ol di ng cas h whe n d ep os it in g c he ck s. In20 06 an d 2 00 7 p et it io ne r ro ut in el y withd rew fro m ch eckde po si ts cas h t ot al in g o ve r $1 60 ,00 0 i n 2 00 6 andov er $ 24 0,0 00 in20 07 ; he als o u se d the cas h t o p ay hi s emplo y ees onto p o f rep orte d p ayro ll ex pe ns es . Thi s fa ct or

als o wei gh s ag ai ns t p et it io ne r.-2 9-

[* 29 ] 7. Co nc lu si on On the ba si s o f ou r fi nd in g tha t s ix of t he ni ne fact or s wei ghag ai ns t pe ti ti on er, we co nc lu de th atres po nd en t h as pro ve n b y cle ar an d c on vi nc in g ev id en ce tha t p et it io ne r act edwith fr au du le ntin te nt . C. Sect io n 6 66 4 re as on ab le cau se Und er s ect io n 6 66 4( c)(1 ), frau d p en al ti es do no t ap pl y to an y po rti on s o f th e un de rp aym en ts of t ax for whi chpe ti ti on er p ro ve s re as on ab le cau se an d g oo d fa ith. Sect io n 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s., i nt erp ret s “ reas on ab le cau se ” as : The de te rm in at io n o f whe th er a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t al l p ert in en t fa ct s an d c irc um st an ces * * * Gen eral ly, th e m os t im po rta ntfact oris th e ex te ntof t he tax pay er's effo rt t o a ss es s the ta xp ay er's pro pe r ta x l iabi li ty. Cir cu m st an ces th atm ay in di cat e reas on ab le cau se an d g oo d fa ith i nc lu de anho ne stmis un de rs tand in g of factor l aw th atis reas on ab le inli gh t o f al l o f th e fac ts an d ci rcu m st an ces , in cl ud in g the ex pe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er. * * * Pet it io ne r carrie s the bu rd ento pro ve by a prep on de ran ce o f th e ev id en ce tha t h e act edwith re as on ab le cau se an d g oo d fa ith. Se e se c. 66 63 (b ). Pet it io ne r arg ue s tha t h e m eet s the sec ti on 66 64 (c)( 1) reas on ab le cau se de fen se be cau se hi s d im in is he d m en ta l an d p hysic al cap aci ty precl ud es a fi nd in g of frau d. Pe ti ti on er h as fai le d t o m eethi s b ur de n b y a pr ep on de ran ce o f th e ev id en ce. The reco rdco nt ai ns no cred ib le ev id en ce tha t p et it io ne r’s m ed ic al-3 0-

[* 30 ] co nd it io ns in te rfer edwith h is ab il ity to co nduc t h is bu si ne ss affa irs in20 06
an d 2 00 7. Durin g tho se y ears , pet it io ne r si ng le -h an de dl y pe rfo rm edall of R EM’s
co re m an ag em en t an d a cco un ti ng fun ct io ns , bi d fo r ne w pro jects , andbro ug htin
ov er $ 1 m il li on of b us in es s p er y ear. REM ’s su cces s d em on st rat edth atpe ti ti on er ad equa te ly andco m

pe te nt ly m an ag edREM’s b us in es s af fai rs durin g the y ears at is su e. Furth erm or e, pe ti ti on er d idno t m en ti on an y m ed ic al im

pe di m en ts du rin g th e 2 00 6 and20 07 au di ts an d e ve n e xt ol le d h is “ m ag ic m em ory ” dur in g i nt erv ie ws with Ag en t Athe rto n. Dr. Warwick ’s tes ti m on y an d m ed ic al reco rd s s ho w th atan y di m in is he d c ap aci ty resu lt in g fr om pe ti ti on er’s 1 99 9 s tro ke , TIA, str es s s yndro m e, orhydro cep ha lu s h adlar ge ly beenres ol ve d b efo re 2 00 6 and20 07 . In 2 00 6 and 20 07 pe ti ti on er s ou gh t m ed ic al tre atm en t fr om Dr. W arwi ckonat l eas t fi ve se pa rat e o ccas io ns , y etonno oc cas io n d idpe ti ti on er m en ti onth athe su ffer edfro m th e m ed ic al co nd it io ns th athe no w arg ue s i m pa ire d h is co gn it iv e ab il it ie s. Fi na ll y , pet it io ne r arg ue s tha t h e was go in g thr ou gh a di ffi cu ltpe rio d be cau se of h is di vo rce andth e p oo r he al th of h is fathe r. Whi le we cred itth is part of hi s t es ti m on y , pet it io ne r ha s fa il edto est ab li sh th atth es e p ers on al ev en ts cau se d hi s u nd ers ta te d i nc om e. Fir st , we no te th atpe ti ti on er s uc ces sf ul ly ran REM ’s bu si ne ss affa irs inth os e sa m e y ears . Seco nd , pet it io ne r’s di vo rce, wh ic h was-3 1-

[* 31 ] fin al iz edby 200 6, ca nn otacco un t fo r hi s 2 00 7 d efi ci en cy . Thir d, pe ti ti on er’s p rio r au di ts est ab li sh eda lo ng hi st ory of k eep in g i na ccu rat e rec or ds
an d u nd erre po rti ng hi s t ax li ab il it ie s tha t p red at es hi s d iv or ce an d h is fathe r’s po or he al th . For t he se reas on s, we d o n otfin d c red ib le pe ti ti on er’s arg um en t tha t h is 20 06 an d 2 00 7 u nd erp aym en ts were due to th es e p ers on al ev en ts . Inth e li gh t o f th e fo reg oi ng di sc us si on , we are co nv in cedth atpe ti ti on er’s
un de rrep orti ng of i nc om e fo r th e y ears at i ss ue was a ttrib ut ab le to frau d. Th e reco rdals o fa il s t o e st ab li sh by a prep on de ran ce o f th e ev id en ce tha t p et it io ne r act edreas on ab ly andingo odfai th . Con se qu en tl y , we su st ai n re sp on de nt ’s de te rm in at io ns of t he frau d p en al ti es .

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ __ Any argu m en ts no t d is cu ss edinth is op in io n are i rrel ev an t, m oo t, o r la ck in g inm eri t. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te redfor
res po nd en t.