T.C. M em o . 2 0 2 0 -1 3

UNITED STATES TAX COURT

E DWA RD ANTHONY PURVIS AND M AUREEN HELENA PURVIS, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

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DerekW . Kaczm arek , fo r Edw ardAn tho n y Pu rv i s . DerekW . Kaczm arekan dDav i dR. J o jo l a, fo r M au reen Hel en a Pu rv i s . Al i ci a E. El l io t tan dDerekS. Prat t , fo r res po n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION ASHFORD, J u d g e: By

s t atu to ry n o t i ce o f d efi ci en cy d at edAp ri l 2 7 , 2 0 1 2 , res p o n d en t d et erm i nedd efi ci en ci es i n p et i t i o ners ’ Fed eral i n co m e t ax an d-2
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[* 2 ] ci v i l frau dp en al t i es p u rs u an tt o s ect io n 6 66 3 (a) 1 fo r t h e 2 0 0 5 , 2 00 6 , 2 0 0 7 , an d 2 0 0 8 t ax ab l e y ears (y ears ati s s u e) as fo l l o ws :

Year Defi ci en cy Pen al ty 1 s ec. 6 6 63 (a) 2 0 0 5 $ 91 ,2 5 5 $ 6 8,4 4 1 2 0 0 6 3 20 ,1 8 3 2 4 0,1 3 7 2 0 0 7 6 7 ,8 9 1 5 0 ,9 1 8 2 0 0 8 6 ,9 4 1 5 ,2 0 6

1 In th e n o ti ce o f d efi ci en cy res p o n d en tal s o d et erm i n edth atp et i t i o n ers are l i ab l e fo r accu racy -rel at edp en al t i es u n d er s ec. 6 6 62 (a) i f i ti s “ d et erm i n ed th atth e u n d erp aym en t o f t ax was n o t du e t o frau d .”

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. So m e m o n et ary am ou n t s are ro u n d ed t o the n eares td ol lar.-3
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[* 3 ] Aft er co n ces si o ns b y the p art i es , 2 o ne i s s u e rem ai n s fo r d eci si o n : Wh et h er p et i t i o n ers are l iab l e fo r ci v i l frau d p en al t i es , o r i n the al tern at i v e, accu racy -rel at ed p en al t i es fo r t h e y ears ati s s u e. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s, th e s up p lem en t al s t i p u l at i o n o f fact s , an dth e at t ach edex h ib i t s are i n co rp o rat edh erei n b y

th is referen ce. Pet i t io n ers res i ded i n Ari zo na wh en th ey t i m el y fi l edth ei r p et i t i o n wi th th e Co urt .

2 Th e p art i es ag ree t h atp et i t i o n ers are l i ab l e fo r d efi ci en ci es i n th ei r Fed eral i n co m e t ax as fo l l o w s : Year Defi ci en cy

2 0 0 5 $ 9 0,5 9 1 2 0 0 6 1 7 3,3 1 2 2 0 0 7 2 3 ,4 9 1 2 0 0 8 6 ,9 4 1 Th e p art i es fu rth er ag ree t h atth es e d efi ci en ci es are b as edo n p et i t io n ers ’ fai l u re t o rep o rt(1 ) t ax ab l e i n co m e fro m an en t i ty cal l edNak am i Ch i Gro up M i n i s tri es In t ern at io n al (NCGM I), as fu rt h er d i s cu ss edi n fra p p . 8 -9 , an d (2 ) s ho rt -t erm cap i t al g ai n fro m

th e s al e o f real p ro p ert y

o n W es t Dub l i n Lan e i n Ch an dl er, Ari zo n a (Dub l i n p ro pert y ), al s o as fu rt h er d i s cu s s ed i nfra p . 4 . Th e p art ies al s o ag ree t h atM rs . Pu rv i s i s n o ten t i t l edt o rel i ef fro m jo in tan d s ev eral l i ab i l i ty fo r th e d efi ci en ci es o r p en al t i es u n d er s ec. 6 0 1 5 (b ), (c), o r (f) fo r t h e y ears ati s s u e.-4
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[* 4 ] I. Back g ro u n do n Pet i t i o n ers Pet i t i o ners are co l l eg e g radu at es . M rs . Pu rv i s i s a reg is t ered n urs e. Ov er th e co u rs e o f h er n u rs i ng career s h e h as h el d s ev eral ro l es atth e ex ecu t i v e an d
m an ag em en tl ev el . M r. Pu rv i s h as al s o b een trai n edas a n u rs e (a l i cen s ed p ract i cal n u rs e) an dwo rk edas a n urs e fo r 1 8 y ears u n t i l 2 0 00 wh en , as fu rt h er d i s cu s s edi n fra p p . 5 -7 , h e b eg ans el l i n g s ecu ri t i es an di n v es t m en t s. Th e o n l y p ro fes s i on al l i cen s e M r. Pu rv i s h as h el d i s h i s n u rs in g l i cen s e. Du ri n g th e y ears ati ss u e an dco n t in u i n g up t o t h e t i m e o f t ri al p et i t io n ers
were m arri edan dth ei r p ri m ary res i d en ce was o n W es tSh an n o n St reeti n Ch an d l er, Ari zo n a (Sh an n o n res i d en ce). In J u n e 2 0 0 5 M r. Pu rv is p u rch as edth e Dub l i n p ro p ert y . He l at er s o l d th atp ro p erty , real i zi n g s ho rt -t erm cap i t al g ai n o f $ 8 8 ,4 6 7 i n M arch 2 0 0 6
. Pet i t i o ners m ai n t ai neds ev eral p ers o n al b an k acco u nt s atAri zo n a Fed eral Cred i tUn i o n (AZFCU) an dW as h i n g t o n M u tu al Ban k(W aM u ) duri n g th e y ears at i s su e. AtAZFCU p et i t io ners m ai n t ai n ed a jo in tacco u n tan dM r. Pu rv i s
m ai n t ai n eda s ep arat e acco u n t . In2 0 0 7 an d2 0 0 8 p et i t i o n ers m ai n tai n eda jo i n t
acco u n t 3 an deach m ai n t ai n eda s ep arat e acco u n tatW aM u. In 2 0 0 5 an d2 0 0 6 M r.

3 Th i s acco u n twas i n it i al l y o p en ed i n M r. Pu rv i s ’ n am e o n l y b u t was ch an gedt o a jo i n tacco u n t i n b o t h p et i t i o n ers ’ n am es i n M arch 2 00 8
.-5
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[* 5 ] Pu rv i s al so h ads i g n atu re au th o ri ty o v er NCGM I’ s b an k acco u n t s , as fu rt h er d i s cu s s edi n fra p . 7
. Pet i t i o ners m ai n t ai neds ev eral cred i t card s duri n g th e y ears at i s s ue. Du ri n g 2 0 0 5 p et i t i o n ers m ai n t ai n edth ree cred i tcard s, du ri n g 2 0 06 an d2 0 07 th ey
m ai n t ai n eds i x cred i t card s , an ddu ri n g 2 0 0 8 th ey m ai n t ai nedtwo cred i tcard s . II. Pet i t i o ners ’ In vo l v em en tW i th NCGM I A. Fo rm at i o n o f NCGM I Beg i n n in g i n 2 0 0 0 M r. Pu rv i s b eg an s o l i ci ti n g i n v es t m en t s fro m fam i l y an d fri en ds fo r b ri d g e l o an s t o co m p an i es . He d i dth i s th ro u g h a co m p an y th ath e
s t art edcal l edSo u th ern Gl o bal . In2 0 0 2 h e “ p u t as i d e” So u th ern Gl o b al an d b ecam e i n v o l v edwi th NCGM I. NCGM I was o rg an i zedu n der t h e l aws o f t h e St at e o f Nev ad a as a co rp o rat i o n s ol e 4 b y Greg g W ol fe, M r. Pu rv i s ’ l on g t i m e fri en d, o n Au g u s t 5 , 2 0 02
. Befo re s t art i n g NCGM I, M r. W o lfe h ado wn eda
ro o fi ng b u s i n es s ; l i k e M r. Pu rv i s , h e h ad n o p ri o r ex p eri en ce i n s el li n g s ecu ri t i es
o r i n v es t m en t s . Al th o u gh NCGM I’ s art i cl es o f i nco rp o rat i o n i d en ti fi ed M r. W o lfe
as th e p res id i n g m an ag i n g d i rect o r, h e was s eco n di n co m m an do f NCGM I, b eh i n d

4 Th e In t ern al Rev en u e Serv i ce (IRS) d efi n es a co rp o rat io n s o l e as a “ co rp o rat e fo rm

au th o ri zedu n d er cert ai n s t at e l aws t o en ab l e b on a fi d e rel i g i o u s l ead ers t o h o ldp ro p ert y an d co n du ctb u si n es s fo r t h e b en efi to f a rel i g i ou s en t i t y .” Rev
. Ru l . 2 0 0 4-2 7, 2 0 04 -1 C.B. 6 2 5 , 6 2 6 ; s ee al s o Ho v i n dv . Co m m i s s io n er, T.C. M em o. 2 0 1 2 -2 8 1 , at * 7 n .1 1
.-6
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[* 6 ] M r. Pu rv i s . NCGM I’ s b an kacco u n t s i d en ti fi ed M r. Pu rv i s as th e ex ecu t i v e d i rect o r o r “ s cri b e” o f NCGM I. NCGM I cl ai m edt o p ro v i d e i n v es t m en to p po rtu ni ti es an dm i n is try act i v i t i es . In real i ty i twas an affi n i ty -b as edPo n zi s ch em e; i n v es t o rs ’ fu n ds were u s edt o p ay retu rn s t o o th er i n ves t o rs an d , as d i s cu s sedi n fra p p . 8 -9 , t o p ay s o m e o f p et i t i o n ers ’ p ers o n al ex p en s es . NCGM I’ s i n ves tm en to p p o rtu n i ti es co n s is tedo f s t o ck o fferi n g s an ds h o rt t erm b ri dg e l o an s . Th e s to ck

o fferi n g s i n v o l v edth e s al e o f n o np ub l i cl y trad ed
s t ocki n ACI Ho l d i n g s, In c. (ACI), a Nev ad a co rp orat i o n . M r. Pu rv i s p ro m o t ed th e s al e o f ACI s t ockb y

rep res en t i n g t o i n ves t o rs th atth e s to ck , wh i ch was th en
s el l i n g at8 0 cen t s a s h are, wo u l di n creas e t o $ 3 o r $ 4 a s h are i n 2 00 5 o r earl y 2 0 0 6 wh en th e co m

p an y b ecam e p ub l i cl y

trad ed . Th e b ri d g e l oan s i n vo l v edth e p o o l i n g o f i n v es t o r fu n d s i n v ari o us s el f-d i rect edi nd i v i du al ret i rem en tacco u n t s at two tru s tco m

p an ies ; M r. Pu rv i s , au th o ri zed t o actas th e acco u nth o ld ers ’ ag en to r rep res en t at i v e, wo u l dd i rectth e fu n d s t o co m p an ies o f h i s ch o os i n g. M r. Pu rv i s rep res en t edt o i n v es t o rs th atth ey wo u l d earn a m o n th l y

retu rn o f 2 % o n thei r i n v es t m en to r 2 4 % an n u al l y . He then m ad e l o an s t o v ari o u s co m p an i es i n n eedo f cap i t al
.-7
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[* 7 ] M r. Pu rv i s o ffered th es e i n v es t m en t o p p ortu n i t i es t o i n di v idu al s i n an d
o u t s i d e Ari zo n a, i n cl ud i n g h i s an d M rs . Pu rv is ’ fam i l y an d fri en d s an di nd i v i du al s h e m etatch u rch es . He ad v i s eds o m e o f t h ei r cl o s e fri en d s t o refi n an ce t h ei r h o m es an di n v es tthe eq ui ty wi th NCGM I. 5 In o rd er t o as s u re i n v es t o rs th atth ei r i n v es t m en t s wo u l d b e s ecu re, h e m i s rep res en t edth at h e an dM rs . Pu rv i s h ad
s u ffi ci en tweal th t o p ers on al l y g u aran t ee t h e ret urn o n th ei r i n v es t m en t s i n th e
ev en t o f a p ro b l em . Beg i n n in g i n Ap ri l an den d i n g Sep t em b er 2 00 6 M rs . Pu rv is t o okch arg e o f th e m i n i s try

s i d e o f NCGM I. As th e m i ni s try l ead er s h e m an ag edtwo em p l o y ees
an d l edp ray er m eet i n g s . Th e reco rdrefl ect s th atNCGM I’ s m i ni s try act i v it i es
co n si s t edo f h o s t i n g o n ly a few p ray er m eet i n gs . In 2 0 0 4 , 2 0 0 5 , an d 2 0 06 NCGM I m ai n tai n edtw o b an kacco u n t s atBan ko f Am eri ca an da b an kacco u n t atW el l s Farg o Ban k
. Du ri n g 2 00 5 an d 2 00 6 M r. Pu rv is h ads o l e au th o ri ty o v er an dacces s t o th e Ban ko f Am eri ca acco u n ts an d equ al au th o ri ty

o v er an dacces s t o th e W el l s Farg o acco un twi th M r. W o lfe.

5 Al th o ug h M r. Pu rv i s was th e p ri m ary p ers on wh o s o l i ci t edi n v es t m en t s fro m o th er p eo p l e, M r. W ol fe ad v i s edatl eas t o n e i n v es t o r t o wri te “ do n at io n ” o n ch eck s wri t t ent o NCGM I thatwere i n t en d edt o b e b ri d g e l o an i n v es t m en ts .-8
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[* 8 ] B. Pet i t i o ners ’ Recei p to f In co m e Fro m NCGM I M rs . Pu rv i s recei v eda m o n th l y p ay ch ecko f $ 2 ,5 0 0 fro m Ap ri l t o Sep tem b er 2 0 0 6 as co m

pen s at i o n fo r h er wo rkatNCGM I. M r. Pu rv is , h o wev er,
n ev er recei v eda p ay ch eck fro m NCGM I; i n s t ead , h e wo u l dwri t e h i m s el f ch eck s , tran s fer m o n ey

d i rect l y fro m NCGM I’ s b an k acco u n t s i n to th ei r p ers on al b an k
acco u n t s, t ak e cas h fro m

NCGM I’ s b an kacco un t s , o r h av e NCGM I d i rect l y p ay
s o m e o f t h ei r p ers o n al ex p en s es . Ad di t i o n al l y , M r. Pu rv i s au th o ri zedan d i n s tru ct edTracy Wy at t , h i s as s i s t an tatNCGM I, t o p ay s o m e o f h i s an dM rs . Pu rv is ’ p ers o n al b i l l s , i n cl u d in g th ei r p ers o n al cred i tcard s. Paym en t s m ad e b y

NCGM I o f p et i t i o ners ’ p ers on al ex p en s es du ri n g th e y ears ati s s u e i n cl u d e p aym en t s o f t h ei r m o rt g ag es o n th e Dub li n p ro p ert y an dth e Sh an n o n res id en ce, a car l o an an dcar i n su ran ce, an dp ers o n al cred i t card s . NCGM I fu n d s were al s o u s edt o p u rch as e jewel ry fo r M rs . Pu rv i s an d a To y o t a tru ckan dfo r a d o wnpaym en t o n a n ew h o m e t hatp et i t i o n ers s ou g htt o b uy . 6 In

6 In 2 0 0 5 NCGM I’ s p aym en t s an d p u rch as es o n b eh al f o f o r fo r t h e b en efi t o f p et i ti o n ers i n cl u d edm o rt g ag e p aym en ts t o t al i ng $ 2 5 , 5 1 4 , car i n s u ran ce p aym en t s t ot al i n g $ 6 ,5 6 7 , cred i tcardp aym en t s t o t al i n g $ 1 1 3 ,2 6 3 , th e p u rch as e o f jewel ry t o t al i n g $ 1 2 ,9 2 5 an da To y o t a t ru ckfo r $ 3 0 ,9 2 0 , an dthe p ay o ff o f $ 1 1 ,1 3 5 o n a car l o an on a Do d g e Du ran g o. In 2 0 0 6 NCGM I’ s p aym en t s o n b eh al f o f o r fo r t h e b en efi to f p et it i o n ers i n cl u d edm o rt g ag e p aym en t s t o t al i n g $ 4 1 ,5 7 8 , cred i t card paym en t s t o t al in g $ 2 0 0 ,4 9 8, an d a n o n refu n d ab l e d ep o s i to n a n ew h o m e t o t al i n g $ 5 0 ,0 0 0
.-9
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[* 9 ] 2 0 0 5 an d 2 0 06 M r. Pu rv i s wi th drew cas h fro m NCGM I’ s b an kacco u n t s t o t al i n g $ 2 0 7 ,5 0 8 an d$ 25 1 ,7 7 5 , res p ect i v el y . So m et i m e i n 2 0 06 M rs . Pu rv i s kn ew t h atNCGM I was p ay i n g th ei r p ers o nal ex p en s es . Beg i n n in g i n 2 0 0 7 NCGM I’ s b an kacco un t s were cl o s ed o r n o l o n ger i n
u s e. M r. Pu rv i s , h o wev er, co n t i n u edt o s o l i ci ti n v es t m en t s o n b eh al f o f NCGM I du ri n g 2 0 0 7 an d2 0 0 8. In s t eado f d ep o s i ti n g i n v es t o rs ’ fu n ds i n t o NCGM I’ s b an k
acco u n t s, h e wo ul dd ep o s itth em d i rect l y i n t o p et i t i o ners ’ p ers o n al b an kacco u n t s . Du ri n g 2 0 0 7 M r. Pu rv i s d ep o s it edch eck s t o t al i n g $ 5 9 , 5 7 5 an dcas h t o t al i n g $ 2 4 ,7 5 9 t o th ei r p ers o n al b an kacco un t s fro m NCGM I i n v es t o rs ; th es e acco u n t s al s o recei v edwi re t ran s fers t o tal i n g $ 5 4 ,4 2 1 fro m NCGM I i n v es t o rs . Duri n g 2 0 0 8 M r. Pu rv i s d ep o s i t edch eck s t o tal i n g $ 3 5 ,5 3 1 an dcas h t o t al i n g $ 1 0 ,7 8 0 t o th ei r p ers o n al b an kacco u n ts fro m NCGM I i nv es t ors ; thes e acco u n t s al so recei v ed wi re t ran sfers t o t al i n g $ 4 3 ,5 0 0 fro m NCGM I i n ves t o rs . III. In v es t i g at io n s an d Cri m i n al Act i v i ty Beg i n n in g i n 2 0 0 5 NCGM I, M r. Pu rv i s , M r. W o l fe, an do th er b u s i n es s
as s o ci at es o f M r. Pu rv i s an d M r. W ol fe were i n v es t i g at ed b y th e Secu ri t i es Di v is i o n o f t h e Ari zo n a Co rp o rat i o n Co m m is s io n (ACC) fo r v i o l at io n s o f t h e Secu ri t i es Acto f Ari zo n a (Secu ri t i es Act ) (ACC i n v es t i gat i o n ). A co m p l ai n tfro m
a co n cern edp ers o n i n earl y 2 0 0 5 tri g g eredth e ACC i n v es ti g at i o n .-1 0
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[* 1 0 ] In co n n ect i on wi th th e ACC i n v es t i g at i o n, o n o r ab ou tJ u n e 1 0 , 2 0 0 5 , th e ACC i s s u eda s ub p o en a t o Mr. Pu rv i s , reques t i n g th ato n J u n e 2 1, 2 0 05 , h e p ro duce d o cu m en t s an dg iv e t es t i m o n y reg ard i n g h is act i v i t i es wi th res pect t o NCGM I. Th e s ub p o en a req u es t edth atfo r t h e p eri o db eg i n n i n g J ul y 1 , 2 0 0 3 , t o J u n e 2 1, 2 0 0 5 , h e p ro du ce al l d o cu m en ts , reco rd s , b oo k s , an dan y o th er p ap ers , wh et h er s t o redo n el ect ro n i c m ed i a o r o th erwi s e, i n ci d en to r rel at i n g t o h i m s el f, M r. W o l fe, ACI, an dNCGM I (t o n am e a few). Th e s ubp o en a fu rt her p res cri b ed th atth e d o cu m en t s an d reco rd s i n cl ud e b u t n otb e l i m i t edt o (1 ) al l d o cu m en t s o r
reco rd s rel at edt o an y

s o l i ci t at i o n m ad e b y o r o n b eh al f o f h im sel f, M r. W o l fe, ACI, an dNCGM I (t o n am e a few), (2 ) th e co n t acti n fo rm at io n o f al l i nd i v i du al s o r
en t i t i es wh i ch h adb een o ffered o r s o l di n v es tm en t s b y h i m s el f, M r. W o l fe, ACI,
o r NCGM I (t o n am e a few), (3 ) t h e am o u n t s an dd at es o f i n v es t m en t s fo r each o f th o s e i n d i v i du al s an den t i ti es , (4 ) al l l i s t s o f p ro s pect i v e i n v es t o rs , an d (5 ) al l
co n tract s o r ag reem en t s , reco rd s o f p aym en t s , o r co m m u ni cat i o n s , ei th er wri t t en o r el ect ro ni c, b et ween h i m s el f, M r. W o l fe, ACI, an d NCGM I (t o n am e a few). M r. Pu rv i s ret ai n edan at t o rn ey , Al anBas k in , t o rep res en th i m b efo re t h e ACC. M r. Bas k i n was ab l e t o n eg o t i at e an ex ten s i o n o f t i m e u n t i l Au g u s t2 0 0 5 t o
co m p l y wi th th e s ubp o en a. In Au g u s t2 0 0 5 M r. Bas k in ceas edrep res en t i n g M r.-1 1
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[* 1 1 ] Pu rv i s wh en i tb ecam e cl ear t hath e was n o tp lan n i n g o n co m p l y i n g wi th the
s ub p oen a d es p it e M r. Bas k i n ’ s ad v i ce t o th e co n trary . Th e ACC i s s u eda s eco n ds ub p o en a t o M r. Pu rv i s o n Sep t em b er 7 , 2 0 0 5 , req u es t i ng th ato n Sep t em b er 2 0 , 2 0 0 5 , h e p ro duce t he d o cu m en t s p rev io u s l y req u es t edi n th e J u n e 1 0 , 2 0 0 5 , s ub p o en a. Up o n M r. Pu rv i s’ fai l u re t o co m p l y wi th ei th er s ubp oen a, o n o r ab o u tM arch 8 , 2 0 0 6 , th e ACC fi l eda co m p l ai n ti n th e Sup eri o r Co urto f Ari zo n a i n M ari co p a Co u n ty , Ari zo n a (M ari co pa Co un ty co u rt ), ag ai n s tM r. Pu rv i s, s eek i ng t o en fo rce t h e s ubp o en as (s ub p o en a en fo rcem en t act i on ). M r. Pu rv i s ret ai n edan o th er at t orn ey , J o h n M as ten O’ Neal , t o rep res en t h i m i n th e s ub p oen a en fo rcem en tact i o n , b u tb y l et t er t o the ACC d at edJ u n e 2 6, 2 0 0 6 , M r. Pu rv i s s t at edth ath e d i dn o t h av e an y o f t he req u es t edd o cu m en t s o r
reco rd s . OnJ u n e 2 7 , 2 0 0 6, the M ari co p a Co u n ty co u rto rd eredM r. Pu rv is t o
co m p l y wi th th e s ubp o en as . M r. Pu rv i s , h o wev er, fai l edt o ab i d e b y th e o rd er. OnJ u ly 2 6 , 2 0 06 , th e ACC req u es t edth atthe M ari co p a Co u nt y co u rti s s u e
an o rd er t o s ho w cau se wh y M r. Pu rv i s s h o u ld n o t b e h el di n co n t em p tfo r
v i o l at i n g th e co u rt ’ s J u n e 2 7 , 2 0 0 6 , o rd er. On Sep t em b er 2 1 , 2 0 0 6, M r. Pu rv i s , th ro u g h M r. O’ Neal , fi l eda m o t i o n t o v acat e a h eari n g wi th res p ectt o t h e
s ub p oen a en fo rcem en tcas e o n th e b as i s t h ath e h adn o d ocu m en t s o r reco rd s t o p ro duce. On Feb ru ary

1 2 , 2 0 0 7 , aft er an ev id en t i ary h eari n g reg ard i n g wh et h er-1 2
-

[* 1 2 ] M r. Pu rv i s s h o u l db e fo u n di n co n t em pt , M r. Pu rv is fi l eda p o st h eari n g b ri ef, arg u i n g th ath e “ pres en t edco m p el l i ng ev i d en ce d em o n s trat i n g th ath e d o es
n o tp o ss es s n o r co n tro l an y d o cu m en t s res p o n s i v e t o th e ACC’ s s ub p o en a.” M r. Pu rv is n ev er p ro du ced an y o f t h e req u es tedd o cu m en t s o r reco rd s . M ean wh i l e, b eg i n n i ng ap p ro xi m at el y o n e m o nt h aft er th e ACC req ues t ed th atth e M ari co p a Co u n ty co u rti s s u e t h e s h o wcau s e o rd er an d i n an effo rtt o d i s rup tth e ACC i n v es t i gat i o n ag ai n sth i m b y creat i n g co n fl i ct s o f i n t eres t , M r. Pu rv is b eg an i n st i tut in g fri v o l o u s cl ai m s an dl aws u i t s. On J ul y 7 , 2 0 06 , M r. Pu rv is s en ta d o cu m en tt i t l ed“No t i ce o f In t ern at i o n al Co m m erci al Cl ai m

W i th i n Th e Ad m i ral ty ab i n i t i o Ad m i n i s trat i v e Rem ed y ” t o , am on g o th ers , th e at t o rn ey s
an d th e i n v es t i g at o rs h an d l i n g t h e ACC i n ves t i g at i o n, the ju d ge p res i d i n g o v er t h e
s ub p oen a en fo rcem en tact i o n , an d a jo urn al i s tfro m th e Ari zo n a Rep ub li c rep o rt i n g o n th e ACC i n v es t ig at i o n as “ l i b el ees ” (J ul y ad m i ral ty

cl ai m ). Th e J u l y ad m i ral ty cl ai m was m ean tt o s erv e as a “ s el f-ex ecu t i n g co n tract ” i n wh i ch th e l i bel ees ag reedth at th e ACC i n v es t i g at i o n ag ai ns tM r. Pu rv is was n o th i n g m o re th an a “ wi t ch -h u n t, an d , o r a fi s h i n g ex p ed i t i o n”. Th e Ju l y ad m i ral ty cl ai m
as s ert ed th atas a res ul t o f t h e l i b el ees ’ “ fu tu re act s ” an dM r. Pu rv i s ’ “ res u l t i n g l o s s o f freed o m

o r s t an d i n g i n th e co m

m u ni ty am o n g * * * [h i s ] fri en d s , p eers , co l l eag u es , cu s t o m ers , an dp ro s p ect i v e cu s t o m ers ”, t hey wo u l d o we M r. Pu rv i s at-1 3
-

[* 1 3 ] l eas t$ 1 5 m i l l i o n i n d am ag es “p er act ”, “ fo r each o ccu rren ce i n th e fu tu re”,
o r “ fo r en t eri n g o r cau s i n g th e en try o f an y n eg at i v e o r d ero gat o ry

i n fo rm at i o n
* * * [ag ai n s tM r. Pu rv i s ] i n th e p ub l i c reco rd
. ” Th en o n Au gu s t 2 3 , 2 0 0 6 , M r. Pu rv is fi l eda d ocu m en tt i t l ed “ Co nd i t i o n al Accep tan ce” wi th the M ari co p a Co u n ty co u rtag ai n s tth e at t o rn ey s an dth e i n v es t i gat o rs h an dl i n g th e ACC i n v es t i g at i o n (Au gu s tad m i ral ty cl ai m). In Oct ob er 2 0 0 6 M r. O’ N eal
reco m m en d edt o M r. Pu rv i s th ath e wi th draw th e Ju l y an d Au g u s t ad m i ral ty cl ai m s b ecau se t h ey

were u n w arran t edan dfri v o l o u s, b uth e refu sed
. OnOct o b er 3 , 2 0 06 , th e ACC fi l edan ad m in i s trat i ve co m p lai n t ag ai n s t p et i t i o n ers , M r. W o l fe an d h i s wi fe, NCGM I, ACI, an dtwo o th er i n d i v i du al s , 7 al l eg in g m

u l t i p le v i o l at i o n s o f t h e Secu ri t i es Act(s ecu ri t ies act i o n ). M r. O’ Neal al s o rep res en t edp et i t i o n ers i n th i s act i o n. OnNo vem

b er 1 3, 2 0 0 6 , M rs . Pu rv i s (an d o th er u n nam edi n d i v i dual s ) m et wi th an i n d i v i du al n am edM ark h am Dal y i n Co l orad o t o d i s cu s s s trat eg i es reg ard i n g th e J u ly

an dAu g us tad m i ral ty

cl ai m s; h o wt o fi l e a “ l i b el o f rev i ew” act i on , i ncl u d i n g s erv i n g t h e ju d g e p res i d i n g o v er t h e s ub p o en a en fo rcem en t act i on i n o p en co urt ; an dth e p o s s i b i l i ty th atth e J ul y an dAu g u stad m i ral ty

cl ai m s

7 Th e t wo o th er i n di v i du al s were J am es Keat o n , th e p res i d en t , treas urer, d i rect o r, an dm ajo ri ty

s h areh ol d er o f ACI, an d h i s wi fe.-1 4
-

[* 1 4 ] an d t h e p os s i b l e l i b el o f rev i ew act i on wo u l dcau se t h e s ecu ri t ies act i o n t o b e d i s m is s ed
. OnNo vem

b er 1 6, 2 0 0 6 , M r. Pu rv i s fi l edUn i fo rm Co m m erci al Co d e (UCC) fi nan ci n g s t at em en t s wi th the s ecret ary o f s t at e fo r th e St at e o f Co l o rad o ag ai n s t th e s am e p art i es n am edi n the J u l y ad m i ral ty

cl ai m . He th en th e n ex td ay fi l eda d o cu m en tt i t l ed “ Co m

m erci al No t i ce o f Li en ” i n th e U.S. Di s tri ctCo u rt fo r t h e Di s tri cto f Co l o rad o an da d ocu m en t t i t l ed“ Veri fi edPet i t io n fo r Li bel o f Rev i ew” i n the U.S. Di s tri ctCo u rtfo r t h e Di s tri cto f Ari zo n a al s o ag ai ns tth e s am e p art i es
n am edi n t h e J u ly

ad m iral ty

cl ai m . 8 OnDecem

b er 2 1, 2 00 6 , M r. Pu rv i s fi l edan i n v o l u nt ary b an krupt cy

p et i t i on ag ai n s tth e s am e Ari zo n a Rep ub l i c jo urn al i stn am edi n th e Ju l y ad m i ral ty cl ai m (an dth e No v em

b er 1 6 , 2 0 0 6 , fi l i n g s ) i n an at t em ptt o n eg at e wh atth e n ews p ap er art i cl es h adrep o rt edab o u th im
. Wh i l e t h e s ecu ri t ies act i o n was p en d i n g , o n Ap ri l 1 9 , 2 0 0 7, M r. Pu rv i s was i n d i ct edb y

a g ran d jury o f t h e M ari co p a Co un ty co u rto n o n e co un t o f b ri b ery o f a p ub l i c s erv an t (a “ Cl as s 4 ” fel o n y ) an dfo u r co u n t s o f h aras s m en to f a p ub l i c
o ffi cer o r em

p lo y ee (“ Cl as s 5 ” fel o n i es ). Th es e ch arg es res u lt edfro m M r. Pu rv i s ’

8 Th e U.S. Di s tri ctCo u rtfo r Ari zo n a d i s m i s s edwi th p reju di ce t h e act i o n M r. Pu rv is co m

m en cedi n i t s co u rt . Th e reco rdi s s i l en tas t o th e d i s po s i t i on o f t h e act i on h e fi l edi n th e U.S. Di s tri ctCo u rtfo r Co lo rad o .-1 5
-

[* 1 5 ] act i v i t i es fro m

J an u ary 2 0 0 5 th ro u g h Ap ri l 2 0 07 i n v o l v i n g (1 ) M r. Pu rv i s ’ fri en d, Ch an d l er, Ari zo n a, p o l i ce d ep art m en td et ect i v e Brad l ey Fo rward , wh o ret ri ev edco n fi d en t i al cri m in al h i s t o ry an do th er p ers o nal i n fo rm at io n o n s ev eral i n d i v i du al s i n v o l v edwi th th e ACC i n ves t i g at i o n fo r M r. Pu rv i s an d(2 ) t h e fi l i n g
o f t h e J u l y

an dAu g u s tad m i ral ty

cl ai m s ag ai n s tth e ju d g e p res i d in g o ver t h e
s ub p oen a en fo rcem en tact i o n an dth e i n d iv i du al s at th e ACC h an d l i n g t h e ACC i n v es t i g at i o n . Aft er a ju ry tri al , o n M ay

1 , 2 0 0 8 , M r. Pu rv i s was co n vi ct edo n al l
co u nt s i n th e i nd i ct m en t . OnM ay 2 9, 2 0 08 , h e was s en t en cedt o co ncu rren tt erm s
o f 1 1⁄2 y ears ’ i m

p ri s on m en tfo r each o f t h e h aras s m en tco u n t s an d3 y ears ’ p ro b at i o n fro m

th e d at e o f d i sch arg e fro m th e Ari zo n a Dep art m en t o f Co rrect i o n s
an d an $ 1 8 ,0 0 0 fi n e fo r t h e b ri beryco u nt . Hi s co n v ict i o n an ds en t en ce were affi rm edo n ap p eal b y

th e Ari zo n a Co u rto f Ap p eal s. M ean wh i l e, t h e h eari n g fo r t h e s ecu ri t i es act i o n b eg an No v em b er 1 3 , 2 0 0 7 , an d s pan n ed1 5 d ay s o v er No v em b er an dDecem

b er 2 0 07 an dJ an u ary

2 0 0 8 . Inan
o p i n i o n an do rd er d at ed Decem b er 2 2 , 2 0 08 , th e ACC co n cl u d edth atM r. Pu rv i s ’ act i on s an dco n du ctas d es cri b edtherei n co n s ti tut edm u l ti p le v i o l at i o ns o f t h e Secu ri t i es Actan d were g ro u n ds fo r an o rd er o f res ti tu t io n an dan o rd er as s es s i n g ad m i n is trat i v e p en al t i es . Inth e o p i n i o n an do rd er t he ACC o rd eredM r. Pu rv i s t o
ceas e an dd es i s t fro m

h i s act io n s an do rd eredp et i t i o n ers t o p ay ad m i ni s trat i v e-1 6
-

[* 1 6 ] p en al t i es t ot al i n g $ 2 50 , 0 0 0 an dres t i tu t i on i n an am ou n t n o tt o ex ceed $ 1 1 ,0 4 4 ,9 1 2 . Th e ACC’ s o p in i o n an do rd er was reco rd edwi th th e M ari co p a Co u n ty co u rtas a ju d g m en tag ai n s tp et i t i o ners o n J an uary8 , 2 00 9
. 9 OnJ an u ary

1 4 , 2 0 0 9 , M r. Pu rv i s was i n d ict edb y a g ran djury

o f t h e M ari co pa Co u n ty

co urto n 1 co u n to f frau du l en t s ch em es an dart i fi ces (a “ Cl as s 2 ” fel o n y ), 1 co u n t o f i l l eg al co n tro l o f an en t erp ri s e (a “ Cl as s 3 ” fel on y ), 2 1 co u n t s
o f t h eft(“ Cl as s 2 ”, “ Cl as s 3 ”, an d“ Cl as s 4 ” fel on i es ), 2 1 co un t s o f s ecu ri ti es frau d (“ Cl as s 4 ” fel o n i es ), 2 1 co u n t s o f s al e o f u n reg i s tered s ecu ri t i es (“ Cl as s 4 ” fel o n i es ), an d 21 co u n t s o f t ran s act i on s b y u n reg i s tered d eal ers o r s al es m en (“ Cl as s 3 ” fel o n i es ). If co n v i ct edo n al l co u n ts i n th e i n d i ct m en t , h e was faci n g a p o s s i b l e s en t en ce o f 1 0 8 y ears ’ i m pri s o n m en t . In 2 0 1 2 M r. Pu rv i s p l ead edg u i l t y t o tw o co u nt s i n th e i nd i ct m en t: frau du l en ts ch em es an dart i fi ces an di l l eg al
co n tro l o f an en t erp ri s e. As p arto f M r. Pu rv is ’ p l ea ag reem en t, th e Ari zo n a At t o rn ey Gen eral ’ s Offi ce ag reedt o n o tp ro s ecu te M rs . Pu rv i s fo r an y ro le s h e
m ay h av e h adi n th e cri m es ch arg edi n th e i n d i ct m en t . Al s o as p art o f t h e p l ea ag reem en t , the Ari zo n a At t o rn ey Gen eral ’ s Offi ce ag reedt o n o tfi l e ad d it i on al

9 Th e M ari co p a Co u n ty

co u rtan dth e Ari zo n a Co u rto f Ap peal s affi rm edth e ACC’ s o p i n i o n an do rd er ex cep tth atth e Ari zo n a Co u rto f Ap p eal s reduced th e am ou n to f res t i tu ti o n t o n o tex ceed $ 8,1 74 ,5 3 4 (i .e., th e am o u n to f recei p t s i n v es t o rs d ep o s i t edwi th NCGM I).-1 7
-

[* 1 7 ] s ecu ri ti es l aw v io lat i o n ch arg es , frau du len ts ch em es an d art i fi ces ch arg es , m o ney l au n d eri n g ch arg es , o r cri m i n al en terp ri s e ch arg es ag ai n s tM rs . Pu rv i s . On M arch 2 , 2 0 1 2 , M r. Pu rv i s was s en t en ced t o fi v e y ears ’ i m p ri so n m en tp l u s p ro b at i o n fo r s ev en y ears an do rd eredt o p ay res t i tu t i o n o f n otl es s th an $ 3 ,8 1 8 ,9 2 3
. IV. Pet i t i o ners ’ J o in tFed eral In co m e Tax Retu rn s In 2 0 0 8 an d2 0 0 9 the IRS s en t p et i t i o n ers m u l ti p l e l et t ers reg ard i n g th ei r
u n fi l edFed eral in co m e t ax return s fo r 2 0 0 5 an d2 0 0 6, b u t as o f J an u ary 2 00 9 p et i t i o n ers h adn o t fi ledthei r retu rn s fo r an y o f t h e y ears ati s s u e. 1 0 Seek i n g t o
res o l ve t h ei r fi l i n g o b l i g at i o n s an dwh i l e M r. Pu rv i s was i n carcerat ed , M rs . Pu rv i s h i redJ am es Sch m i d t , a cert ifi edp ub l i c acco u n t an t(C.P.A.) an d a l o n g t i m e p art n er atan Ari zo n a b u s i n es s ad vi s ory an d C.P.A. fi rm , t o p rep are t h ei r retu rn s fo r t h e y ears ati s s u e. Pu rs u an tt o th e l et t er s h e s i g n eden g ag i ng M r. Sch m i d t ’ s fi rm , M rs . Pu rv is was res po n s ib l e fo r p ro v i d i n g “ al l th e i n fo rm at i o n req u i redfo r t h e p rep arat i o n o f co m

p l et e an daccu rat e ret u rn s .” Ad di t i o n al ly , acco rd i n g t o th e
en g ag em en tl et t er, s h e h ad“ th e fi n al res p o ns i b i l it y fo r i nco m e t ax return s an d , th erefo re, * * * s h o u ldrev iew t h em carefu ll y b efo re * * * s i g n [i n g ] th em .”

1 0 W e n o te t h at as o f J an uary2 0 0 9 p et it i on ers ’ retu rn fo r 2 0 0 8 was n o t d el i n qu en t .-1 8
-

[* 1 8 ] M rs . Pu rv i s p ro vi dedM r. Sch m i d ta co p y o f p et i t i o n ers ’ fi l edjo i ntFed eral i n co m e t ax retu rn fo r 2 0 04 (2 0 0 4 retu rn ) t o u s e as a t em p lat e fo r fi l i n g th e ret u rn s fo r t h e y ears ati s su e. Th i s retu rn d i dn o trep o rtan y i n co m e fro m

NCGM I b u t rep o rt ed , i n t er al i a, a b u s i nes s l o s s fro m “ co n s ul t i n g ” act i v it i es o f M r. Pu rv i s as refl ect edo n an at t ach ed Sch edu l e C, Pro fi t o r Lo s s Fro m Bu s i n es s . W i th res p ect t o th e 2 00 5 an d2 00 6 retu rn s , M rs . Pu rv i s p ro vi d ed M r. Sch m i dtwi th ex t en s i v e i n fo rm at i o n reg ard i n g d educt i o n s t o b e cl ai m edo n th es e retu rn s i n cl u d i n g , as d is cu s s edb el o w, Fo rm s 1 0 9 8, M ort g ag e In t eres tSt at em en t, Fo rm s 1 0 9 8 -T, Tu i ti o n St at em en t , recei p t s fo r cas h co n tri b u t i o n s t o v ari o u s ch ari t ab le an drel i g io u s o rg an izat i o n s , an d m ed i cal ex p en ses . M rs . Pu rv i s i n fo rm edM r. Sch m i dtth ats h e h adn o i n fo rm at i on p ert ai n i n g t o th e 2 0 0 6 s al e o f th e Dub l i n p ro p ert y

ex cep tth atth e p ro p ert y

was s o l el y

o wn edb y

M r. Pu rv i s as an ag en t fo r NCGM I an dp urch as edwi th NCGM I fu nd s . W i th res p ect t o th e 2 00 5 retu rn , M rs . Pu rv i s p ro v i d edM r. Sch m i d ta Fo rm W -2 , W ag e an dTax St at em en t , th at CPS, In c. (CPS), i s s u edt o h er, two Fo rm s 1 0 9 9 -INT, In t eres tIn co m e, t h atAZFCU i s su edt o p et i ti o n ers (o n e t o M r. Pu rv i s
an d th e o th er t o h er), a Fo rm 1 0 9 8 -T th atAri zo n a St at e Un i v ers i ty i s s u edt o o n e o f p et i t i o n ers ’ ch il dren , th ree Fo rm s 1 0 98 th atCh as e Ho m e Fi n an ce, LLC, i s s u edt o h er wi th res p ectt o th e Sh an n o n res i d en ce, t wo Fo rm s 1 0 9 8 th atCo un trywi d e-1 9
-

[* 1 9 ] Ban k(Co u n trywi d e) 1 1 i s s u edt o h er wi th res p ectt o th e Sh an n o n res i den ce, a Fo rm 1 0 9 8 th atCo un trywi d e i ss u edt o M r. Pu rv i s wi th res p ectt o t h e Dub l i n p ro p erty , M ari co p a Co u n ty p ro p ert y t ax i n fo rm at i o n p ert ai n i n g t o t h e Sh an n o n
res i den ce, an drecei p t s fo r cas h co n tri b u t i o n s t o s ev eral ch ari t ab l e an drel i g i o u s
o rg an i zat i o n s . W i th res p ect t o th e 2 00 6 retu rn , M rs . Pu rv i s p ro v i d edM r. Sch m i d ta Fo rm W -2 th at CPS i s su edt o h er, t w o Fo rm s 1 0 9 9-INT t h atAZFCU i s s uedt o p et i t i o n ers (o n e t o M r. Pu rv i s an dth e o ther t o M rs . Pu rv i s ), a Fo rm 1 0 99 -INT th at Pi n n acl e 1 0 3 1 Ex ch an ge Co . i ss u ed t o M r. Pu rv i s , two Fo rm s 1 0 9 8 th at Co u n trywi d e i s s u edt o h er wi th res p ectt o th e Sh an n on res i d en ce, a Fo rm 1 0 9 8 th atCo u n trywi d e i s s u edt o M r. Pu rv i s wi th res p ectt o th e Dub l i n p ro pert y , two Fo rm s 1 0 9 8 -T th atAri zo n a St at e Un i v ers i ty i s s uedt o o n e o f t h ei r ch il dren , an i t em i zedl i s t o f m ed i cal ex p en s es p ai d, an d recei p t s fo r cas h co n tri b ut i o ns t o two rel i g io u s o rg an i zat i o n s . W i th res p ect t o th e 2 00 7 retu rn , M rs . Pu rv i s p ro v i d edM r. Sch m i d ta Fo rm W -2 th at CPS i s su edt o h er, t w o Fo rm s 1 0 9 9-INT t h atAZFCU i s s uedt o p et i t i o n ers (o n e t o M r. Pu rv i s an dth e o ther t o M rs . Pu rv i s ), M ari co p a Co un ty

1 1 So m e o f t h es e Fo rm s 1 0 9 8 were i s su ed b y Co u n tryw i de Ho m e Lo an s . Fo r co n ven i en ce we wi l l refer t o b o th Co u n trywi de Ban kan d Co u nt ryw id e Ho m e Lo an s as Co u n trywi d e.-2 0
-

[* 2 0 ] p ro p ert y

t ax i n fo rm at i o n p ert ai n in g t o th e Sh an n o n res i d en ce, an d recei p t s fo r cas h co n tri b u t i o n s t o two rel i g i o u s o rg an izat i o ns . W i th res p ect t o th e 2 00 8 retu rn , M rs . Pu rv i s p ro v i d edM r. Sch m i d ta Fo rm W -2 th at CPS i s su edt o h er, a Fo rm 1 0 9 9 -INT th atAZFCU i ss u ed t o h er, a

“ Sch edu l e C Su m

m ary ” o f i n co m e an dex p en s es rel at edt o h er act i v it i es as a n u rs e atSp ri n g d al e W es tan dCh ri s Ri d g e Prem i er Care & Reh ab , a Fo rm 1 0 9 9-M ISC, M i s cel lan eo u s In co m e, t h atSp ri n g d al e W es t i s s uedt o h er, a Fo rm 1 0 99 -M ISC th atCh ri s Ri dg e Prem i er Care & Reh ab i s s u edt o h er, t wo Fo rm s 1 0 9 8 that Co u n trywi d e i s s u edt o h er wi th res p ectt o th e Sh an n on res i d en ce, a Fo rm 1 0 9 8 -T th atAri zo n a St at e Un i vers i ty i s s u edt o o ne o f p et i t i o n ers ’ ch i l dren , two Fo rm s 1 0 9 8 -E, Stud en tLo an In t eres tSt at em en t, th atSal li e M ae an dAm eri can Edu cat i o n Serv i ces i s s u edt o o n e o f p et i t i o n ers ’ ch i l dren , recei p t s fo r d en t al ex p en s es p ai d , an d M ari co p a Co u n ty

p ro p ert y t ax an dv al u at i o n i n fo rm at i o n p ert ai n i n g t o th e Sh an n o n res id en ce. Al th ou g h i n p rep ari n g al l o f t h e ret u rn s M r. Sch m i d twas aware o f t h e
ex i s t en ce o f NCGM I an d th e s ecu ri t i es act i o n , M rs . Pu rv i s n ev er t ol d h im th at NCGM I h adactu al l y

m ad e s om e o f t h e ch ari t ab le co nt ri bu t i o n s an dp ai ds o m e o f p et i t i o n ers ’ p ers o n al ex p en s es , i n cl u d i n g m o rt g ag e p aym en t s . Nei th er d i ds h e d i s cl os e t h atfro m

Ap ri l t o Sep t em

ber 2 0 0 6 s h e h adrecei v eda m o n th ly p ay ch eck-2 1
-

[* 2 1 ] o f $ 2 ,5 0 0 fro m NCGM I an dth atM r. Pu rv i s h adrecei v edp aym en ts fro m NCGM I. In s t ead , s h e t o l dM r. Sch m i d tth atal l i nfo rm at i o n n eed edt o cal cu l at e M r. Pu rv i s ’ i n co m e fo r t h e y ears ati s s u e h ad b een s ei zedb y th e ACC wh eni n fact th e o n ly d o cu m en t s s ei zedwere fo r 2 0 0 5 an d 2 0 0 6
. Thu s, wh en p et i t i o n ers s i g n ed
an d fi l edth e ret u rn s fo r t h e y ears ati s s u e, t h ey kn ew t h atth e ret u rn s o m it t edal l th e i n co m e fro m

NCGM I an dcl ai m edcert ai n d edu ct io n s fo r am o u n t s th atwere p ai db y NCGM I, i n cl u d in g ch ari t ab l e co n tri b u t io n s an d m o rt g ag e i n t eres t fo r t h e Dub l i n p ro p ert y an d th e Sh an n o n res i d en ce. Pet i t i o ners ’ 2 0 0 5 , 2 0 06 , an d2 0 0 7 retu rn s were fi l edl at e, o n Feb ru ary 1 6 , M arch 3 0 , an dJ u l y

2 7 , 2 0 0 9 , res p ect i v el y . Pet i t i o n ers ’ 2 00 8 retu rnwas t i m el y fi led (o n ex t en s io n ), o n J u l y 2 7 , 2 0 0 9 . Pet i t i o n ers n ev er at t em p t edt o p rep are
am en d edretu rn s fo r an y

o f t h e y ears at i s su e. Pet i t i o ners ’ 2 0 0 5 retu rn rep o rt edt o t al i nco m e o f $ 1 1 0 , 3 62 , co ns i s t i n g o f

“ [w] ag es , s al ari es , t i p s , et c.” o f $ 1 1 0 ,2 68 (i .e., M rs . Pu rv i s’ t o t al wag es fro m CPS)
an d t ax ab l e i nt eres t o f $ 9 4. Th e ret u rn cl ai m eda d edu ct i o n fo r tui t i o n an dfees p ai do f $ 4 ,0 00 an d i t em i zedd edu ct i o n s o f $ 4 4 ,0 4 0 , co n s i s t i n g o f t h e fo l l o wi n g : (1 ) m ed ical an d d en t al ex p en s es o f $ 1 ,0 2 3 (aft er t he ap p li cat i o n o f t h e 7 .5 % fl o o r i m p o s edb y s ect i o n 2 1 3 (a)), (2 ) t ax es p ai dt o t al i n g $ 4 ,5 32 , (3 ) m o rt g ag e i n t eres t p ai do f $ 2 5 ,0 8 1, (4 ) cas h ch ari t ab l e co n tri b ut i o n s o f $ 9 ,3 2 1 , an d(5 ) un rei m b u rs ed-2 2
-

[* 2 2 ] em p lo y ee b u si n es s ex p en s es o f $ 4 ,0 8 3 (aft er t h e ap p l i cat i o n o f t h e 2 % fl o o r i m p o s edb y s ect i o n 6 7 (a)). Th e ret urn al so rep o rt edfo u r ex em p ti o n s (o n e each fo r p et i t i o n ers an do n e each fo r t h ei r t wo ch i l dren ) an dp aym en t s (Fed eral i nco m e t ax wi th h el dan dth e refu n dam ou n tap p l i edfro m th e 2 00 4 retu rn ) t o tal i n g $ 1 2,5 1 4
. Fi n al l y , th e 2 0 0 5 return rep o rt eda res u l t i n g refu n d o f $ 5 ,8 1 5 (wh ich th ey d i rect ed t o b e ap pl i ed t o th ei r 2 0 06 es t i m at edt ax ). Pet i t i o ners ’ 2 0 0 6 retu rn rep o rt edt o t al i nco m e o f $ 4 9 ,5 2 2, co n si s t i n g o f

“ [w] ag es , s al ari es , t i p s , et c.” o f $ 4 9 ,0 4 8 (i .e., M rs . Pu rv is ’ t o t al wag es fro m CPS)
an d t ax ab l e i nt eres t o f $ 4 74 . Th e ret u rn cl ai m eda d edu ct i o n fo r tu i ti o n an dfees p ai do f $ 4 ,0 00 an d i t em i zedd edu ct i o n s o f $ 6 7 ,4 7 9 , co n s i s t i n g o f t h e fo l l o wi n g : (1 ) m ed ical an d d en t al ex p en s es o f $ 1 0 , 2 8 4 (aft er t h e ap pl i cat io n o f th e 7
. 5 % fl o o r i m p o s edb y s ect i o n 2 1 3 (a)), (2 ) t ax es p ai dt o t al i n g $ 3 ,8 19 , (3 ) m o rt g ag e i n t eres t p ai do f $ 3 1 ,8 8 2, (4 ) cas h ch ari t ab l e co n tri b ut i o n s o f $ 2 1 ,0 5 4 , an d (5 ) u n rei m

b u rs edem

p l o y ee b u si n es s ex p en s es o f $ 4 4 0 (aft er t he ap p l i cat i o n o f t h e 2 % fl oo r i m

po sed b y s ect i o n 6 7 (a)). Th e retu rn al s o rep ort edfo u r ex em p t i o n s (o n e each fo r p et i t i o n ers an do ne each fo r t h ei r t wo ch i l dren ) an dp aym en t s (Fed eral i n co m e t ax wi th h el d , th e refu n dam o u ntap p l iedfro m th e 2 0 0 5 ret u rn , an d cert ai n cred i t s ) t o t al in g $ 6 ,7 0 3 . Fi nal l y , th e 2 0 0 6 retu rn rep o rt eda res u l t i n g refu ndo f $ 6 ,7 03 (wh i ch th ey d i rect edt o b e ap pl i edt o th ei r 2 0 07 es t i m at edt ax ).-2 3
-

[* 2 3 ] Pet i t i o ners ’ 2 0 0 7 retu rn rep o rt edt o t al i nco m e o f $ 2 ,6 6 8 , co n s i s t in g o f

“ [w] ag es , s al ari es , t i p s , et c.” o f $ 2 ,5 4 0 (i .e., M rs . Pu rv i s ’ t o t al wag es fro m CPS)
an d t ax ab l e i nt eres t o f $ 1 28 . Th e ret u rn cl ai m edth e s t an d ardd edu ct i o n o f $ 1 0 ,7 0 0 an drep o rt edfo u r ex em p ti o ns (o n e each fo r p et i t i o ners an do n e each fo r th ei r t wo ch i l dren ) an d p aym en t s (Fed eral i n co m e t ax wi th h el d , th e refu ndam o u n t ap p li edfro m

the 2 0 0 6 retu rn , an dcert ai n cred i ts ) t o tal i n g $ 7 ,0 0 3 . Fi n al ly , th e 2 0 0 7 retu rn rep o rt eda res u l t in g refu n do f $ 7,0 0 3 (wh i ch th ey d i rect edt o b e ap p li edt o th ei r 2 0 0 8 es t i m at edt ax ). Pet i t i o ners ’ 2 0 0 8 retu rn rep o rt edt o t al i nco m e o f $ 3 5 ,5 7 2, co n si s t i n g o f

“ [w] ag es , s al ari es , t i p s , et c.” o f $ 1 ,6 4 0 (i .e., M rs . Pu rv i s ’ t o t al wag es fro m CPS), t ax ab l e i n t eres t o f $ 2 1, an db us i n es s i nco m e o f $ 3 3 ,9 1 1 (i .e., M rs . Pu rv i s ’ n u rs i n g act i vi t i es wi th Sp ri ng d al e W es tan dCh ri s Ri d g e Prem i er Care & Reh ab as refl ect edo n an at t ach ed Sch edu l e C). Th e retu rn cl ai m edd edu ct i o ns fo r o n e-h al f
o f s el f-em

p l o ym en tt ax o f $ 2 , 3 9 6 , s el f-em pl o y edh eal th i n s u ran ce o f $ 7 ,0 0 0 , tu i t i o n an dfees p ai do f $ 4 ,0 0 0 , an di t em i zedd edu ct i o n s o f $ 4 2 ,3 5 3, co n si s t i n g o f th e fo l lo wi n g : (1 ) t ax es p ai dt o t al i n g $ 3 ,2 9 8 , (2 ) m o rt g ag e i n t eres t p ai do f $ 2 7 ,9 6 7 , an d(3 ) cas h ch ari t ab l e co n tri b u t i o ns t o t al i n g $ 1 1 ,0 8 8. 1 2 Th e ret u rn al s o

1 2 Th e t o t al am o u n to f cas h ch ari t ab l e co n tri b ut i o n s i ncl u d es an am o u n t carri ed o ver fro m th e p ri o r y ear.-2 4
-

[* 2 4 ] rep o rt ed fo u r ex em pt i o n s (o n e each fo r p et i t i o n ers an do n e each fo r t h ei r two ch i l dren ) an dp aym en t s (Fed eral i n co m e t ax wi th h el dan d t h e refu ndam o u n t ap p li edfro m

the 2 0 0 7 retu rn ) t o t al i n g $ 7,6 1 8 . Fi nal l y , th e 2 0 0 8 retu rnrep o rt eda
res u l ti n g refu n d o f $ 2,8 2 6 (wh ich th ey d i rect edt o b e ap p l i edt o th ei r 2 0 0 9
es t i m at edt ax ). V. Au d itan dDet erm i n at i o n In o r aro u n dJ u ne 2 0 1 0 t h e IRS s el ect edp et i t i o ners ’ retu rn s fo r th e y ears at i s su e fo r au d it . Th e au d i t was co n du ct edb y IRS Rev en u e Ag en tAl m i ri a Garci a (RA Garci a). Sh e m etwi th M rs . Pu rv i s i n p et i t i on ers ’ res i d en ce fo r an i n i t i al au d i t i n t erv i ew. Up u n ti l ap p ro x im at el y J an u ary 2 01 2 RA Garci a s p o k e v i a t el ep h o n e
an d co rres p o n d ed wi th p et i t i o ners , an dth ey ex ecu t edi n Sep t em

b er o r Oct o b er 2 0 1 1 a Fo rm

8 7 2 , Co n sen t t o Ex t en dthe Ti m e t o As s es s Tax , ex t en d in g th e t i m e fo r t h e IRS t o as s es s t ax fo r 2 0 0 5 an d2 0 0 6
. 1 3 RA Garci a, h owev er, s u m m o n ed NCGM I’ s b an kacco u nt reco rd s , wh i ch s h e u s edt o reco n st ru ctp et i ti o n ers ’ i n co m e fo r 2 0 0 5 an d 2 0 0 6. Sh e al s o i d en ti fi ed i tem s th at were d i s b u rs edfo r t h e b en efi to f p et i t i o n ers . Sh e d et erm in ed , an dp et it i o n ers n o w ag ree, s ee s up ra n ot e 2 , that

1 3 Th e reco rdi s s i l en tas t o th e l en g th o f t h e ex t en si o n . Ho w ev er, acco rd i n g t o RA Garci a’ s cas e act i v i ty reco rd , o n Feb ru ary

2 8, 2 0 1 2 , s h e p rep aredad d i t i o n al Fo rm s 8 7 2 (fo r al l o f t h e y ears ati s s u e) fo r p et i t i o n ers ’ s ig n atu res ; s h e was n ev er ab l e t o s ecu re t h ei r s i g natu res fo r t h es e fo rm s .-2 5
-

[* 2 5 ] cert ai n d i s b u rs em en t s fro m NCGM I’ s b an kacco u n t s were fo r p et i t i on ers ’ b en efi tan dco n s t i tu t e t ax ab l e i n co m e t o th em . Sp eci fi cal l y , s h e d et erm i n edan d p et i t i o n ers n o w ag ree t h atp et i t i o n ers d i dn ot rep o rtt ax ab l e i n co m e fro m NCGM I
o f $ 2 73 ,5 1 4 fo r 2 0 05 , $ 4 8 5 ,3 1 3 fo r 2 00 6 , $ 1 4 3 ,4 32 fo r 2 0 0 7 , an d$ 8 9 ,8 1 1 fo r 2 0 0 8 . Ad d i t i o nal l y , RA Garci a s u m m o n edp et i t i o n ers ’ p ers o n al b an kacco u n t
reco rd s , wh i ch s h e u s edt o reco n s tru ctth ei r i nco m e fo r 2 0 0 7 an d 2 0 0 8
. RA Garci a al s o d et erm i n eddu ri n g th e co urs e o f t he au d i tth ats ect i o n 6 6 6 3 (a) frau d p en al t i es were warran t ed . Th e reco rd i ncl u d es a co m p l et edCi v i l Pen al ty Ap p ro v al Fo rm

fo r s ect i o n 6 6 6 3 (a) frau dp en al t i es as s ert edas th e p ri m ary p o s i t i on an ds ect i o n 6 6 62 (a) accu racy -rel at edp en al t i es as sert edi n the al tern at i v e fo r t h e y ears ati s su e. Th e fo rm i n cl u d es a s i g n atu re o n th e l i n e p ro v i d edo n th e fo rm fo r “ Gro up M an ag er Ap p ro v al t o As s es s Pen al t i es Id en ti fi edAb o v e” d at ed M arch 1 4 , 2 0 1 2 , fi ve d ay s b efo re t h e d at e o f t h e Fo rm 4 54 9 -A, In co m e Tax Di s crep an cy

Ad ju s tm en t s , refl ect i n g th e p ro p o s edch an g es t o p et i t i o n ers ’ Fed eral i n co m e t ax fo r t h e y ears ati s su e, i n cl u d in g t h e i m p o s i t i o n o f s ect i on 6 6 6 3 frau d p en al t i es an d s ect i o n 6 6 62 (a) accu racy -rel at edp en al ti es ; th e Fo rm 4 5 4 9 -A i s at t ach edt o th e Ap ri l 2 7, 2 0 1 2 , n o ti ce o f d efi ci en cy t o p et it i o n ers . 1 4

1 4 W e co ns i der t h e Fo rm

4 5 4 9 -A t o b e p arto f t he Ap ri l 2 7 , 2 0 1 2 , n o t i ce o f d efi ci en cy . See Whi t es el l v . Co m m i s s i o n er, T.C. M em o . 2 0 1 9 -1 2 6 , at * 8
. (co n ti n u ed ...)-2 6
-

[* 2 6 ] OPINION Sect io n 6 6 6 3 (a) p ro v i d es th at“ [i ] f an y p arto f an y

u n d erp aym en to f t ax req u i redt o b e s h o wno n a retu rn i s du e t o frau d , th ere s h al l b e ad d ed t o th e t ax an
am ou n tequ al t o 7 5 p ercen t o f t h e p o rt i on o f t h e u n d erp aym en t wh ich i s at tri b u t ab l e t o frau d .” Th e s ect i o n 6 6 6 3 (a) frau dp en al ty i s a ci vi l s an ct i o n p ro v id edp ri m ari l y as a s afeg u ardfo r t h e p ro t ect i o n o f t h e rev en u e an dt o rei m b u rs e t h e Go v ern m en tfo r t h e h eav y ex p en s e o f i n v es t i gat i o n an dth e l o s s
res u l ti n g fro m

th e t ax p ay er’ s frau d . See Hel veri n g v . M i t ch el l , 3 0 3 U.S. 3 91 , 4 0 1 (1 9 3 8); Sad l er v . Co m

m i s s i o n er, 1 1 3 T.C. 9 9 , 1 0 2 (1 9 9 9 ). Th e Co m m is s i o n er h as th e b u rd en o f p ro v in g frau db y cl ear an dco n v i n ci n g
ev i d en ce. See s ec. 7 4 5 4 (a); Ru l e 1 4 2 (b ). To d o s o , th e Co m m i s s i o n er m

u s tp ro v e fo r each rel ev an ty ear t h at(1 ) anu nd erp aym en t o f t ax ex is t s an d(2 ) th e
u n d erp aym en t was du e t o frau d
. 1 5 See Sad l er v . Co m m is s i o n er, 1 13 T.C. at1 0 2 ;

1 4 (...co n t i nu ed ) Ad d i t i o n al l y , as ex p l ai n edi n fra p p . 2 8 -3 2 , we are reo p en i ng th e reco rdt o ad m it th e Ci v i l Pen al ty

Ap p ro v al Fo rm an d a d ecl arat i o n o f IRS Superv i s o ry In t ern al Rev enu e Ag en t Ti m

Sal sb erryi n s o far as i tau th en ti cat es th e Ci vi l Pen al ty Ap p ro v al Fo rm

fo r p u rp o s es o f Fed . R. Ev i d . 9 02 (1 1 ).
1 5 Ad d i t i on al l y , i n th e cas e o f a jo i n t retu rn , th e s ec. 6 6 63 p en al ty “ s hal l n o t ap p ly wi th res pect t o a s p ou s e u n l es s s o m e p arto f t h e u n d erp aym en ti s du e t o th e frau d o f s u ch s p o u s e.” Sec. 6 6 6 3 (c); s ee al s o St o n e v . Co m m i s s io n er, 5 6 T.C. 2 1 3 , 2 2 7 (1 9 7 1).-2 7
-

[* 2 7 ] Kat z v . Co m

m i s s i o n er, 9 0 T.C. 1 1 3 0 , 1 1 4 3 (1 9 8 8 ). Th e l at ter b u rd en i s m et i f i ti s s h o wnth atth e t ax p ay er i n ten d edt o co n ceal , m i s l ead , o r o th erwi s e ev ad e th e co l l ect i o n o f t ax es kn o wno r b el i ev edt o b e o w i ng . Kat z v . Co m m i s s io n er, 9 0 T.C. at1 1 4 3 (an d cas es ci tedthereat ). If t h e Co m m is s i o n er es t ab li s hes th atan y p o rt i on o f t h e u n d erp aym en t i s at tri b u t ab le t o frau d , th e en ti re u n d erp aym en ts h al l b e t reat edas at tri b ut ab l e t o frau dan ds ub ject edt o a 7 5 % p en al ty , u n l es s th e t ax p ay er es t ab l i s h es b y

a p rep on d eran ce o f t h e ev id en ce t h ats o m e p art o f th e
u n d erp aym en t i s n ot at tri b u t ab l e t o frau d . Sec. 6 6 6 3 (b ). In Fro s t v . Co m

m i s s i o n er, 1 5 4 T.C. _

_ , _

_ (s li p o p . at2 0 ) (J an . 7 , 2 0 2 0 ), we
recen t l y h el dthatthe Co m

m is s i o n er b ears th e i n i ti al b urd en o f p ro du ct i o n u n d er
s ect i on 7 4 9 1 (c) t o o ffer ev i d en ce t h ath e h as co m p l i edwi th t h e p ro cedu ral req u i rem en t s o f s ect i o n 6 7 5 1 (b ) an dth ato n ce h e h as s at i s fi edth is i n i t i al b u rd en th e t ax p ay er m

u stco m e fo rwardwi th co nt raryev i d en ce. W e ad dres s th e b u rd en
o f p ro du ct i o n i s su e fi rs t . I. Sect io n 6 7 5 1 (b ) Co m p l ian ce Sect io n 6 7 5 1 (b )(1 ) req u i res th e i n i t i al d et erm i n at i on o f cert ai n p en al t i es b e

“p ers o n al l y

ap p ro v ed(i n wri ti n g ) b y th e i m m ed i at e s up erv i s o r o f t h e i n d i v i du al
m ak i n g s u ch d et erm i n at io n o r s u ch h i g her l ev el o ffi ci al as th e Secret ary m ay d es i g n at e.” See Graev v . Co m m i s s i o n er (Graev III), 1 49 T.C. 4 8 5, 4 9 2-4 9 3-2 8
-

[* 2 8 ] (2 0 1 7 ), s up p l em en t i n g an do v erru l i n g i n p artGraev v . Co m m i s si o n er (Graev II), 1 4 7 T.C. 4 6 0 (2 0 16 ); s ee al s o Cl ay v . Co m m i s s i o n er, 1 5 2 T.C. 2 2 3 , 2 4 9 (2 01 9 ) (ci t i ng s ect i on 6 7 5 1(b )). In Bel ai r W o o d s, LLC v
. Co m m i s s i o ner, 1 5 4 T.C. _

_ , _

_ (s l i p o p . at2 4 -2 5 ) (J an . 6 , 2 0 2 0), we recen t l y h el dth at“ the ‘ in i t i al d et erm i n at i o n ’ o f a p en al ty as s es sm en t* * * i s em

bo d i edi n th e d ocu m en tb y wh i ch th e Ex am i n at i o n Di v i s i o n fo rm al ly n ot i fi es th e t ax p ay er, i n wri t i n g , th ati t h as co m p l et edi t s wo rkan dm ad e an u neq u i vo cal d eci s i o n t o as s ertp en al t i es .” Tri al o f t h i s cas e was h el d , an dth e reco rdwas cl o s ed , b efo re we i s s u ed Graev III an do v erru l edi n p artGraev II (an di s s u edCl ay ). In th e l i g h to f Graev III, we o rd eredres p o n d en tt o fi l e a res p o n s e ad dres s i ng th e effect o f s ect i o n 6 7 5 1 (b ) o n th i s cas e an dd i rect i n g th e Co u rt t o an y ev i d en ce o f s ect i o n 6 7 5 1 (b )
s up erv i s o ry

ap p ro v al i n t h e reco rdan dp et i ti o n ers t o res p o nd . Res p o n d en tas s ert s th atth ere i s s u ch ev i d en ce i n th e reco rd : (1 ) t h e t es t i m on y o f RA Garci a t h ats h e recei v edth e req u iredap p ro v al s i n wri t i n g an d(2 ) Ex h ib i t9 5 -R, wh i ch i s h er cas e act i vi ty reco rds i g n edb y

M r. Sal sb erry , h er i m

m ed i at e s up erv i s o r, wh en th e cas e
was b ei n g cl o s edt o p rep are t h e n o t i ce o f d efi ci en cy an d “ i n cl u d es referen ces t o th e ci v i l frau d p en al t i es an dth e ag en t ’ s wo rk p ap ers th at d et ai l th e reas o n s fo r
as s ert i n g th e p en al t i es .” Nev ert h el es s , res p o n d en tfi l eda m ot i on t o reo p en th e
reco rdt o o ffer i n t o ev i d en ce (1 ) t h e d ecl arat io n o f M r. Sal s b erryan d (2 ) t he Ci v i l-2 9
-

[* 2 9 ] Pen al ty

Ap pro val Fo rm

fo r t h e y ears ati s s u e, d at edb efo re t h e i s su an ce o f th e n o ti ce o f d efi ci en cy

(an db efo re t h e Fo rm

4 54 9 -A, wh i ch was at t ach edth eret o )
an d s ig n edb y M r. Sal sb erry . Pet i t i o n ers o bject edt o th e i n tro du ct io n o f an y ad d it i o n al ev i d en ce wi th res p ectt o th e p en al t ies an dreq u es t edthatth e Co u rtd en y
res p o n d en t’ s m o t i o n. As an i n i t i al m at t er, we co n cl u d e t h atRA Garci a’ s t es t i m o n y an d h er cas e act i vi ty reco rdare i ns u ffi ci en t t o s at i s fy res po n den t’ s i n i t ial b u rd en o f p ro du ct i o n th ath e co m

p l i edwi th s ect i o n 6 7 5 1 (b )(1 ). RA Garci a’ s t es t i m o n y p ro v i d edn o d et ai ls reg ard i n g th e req ui redap p ro val fo r t h e p en al t i es h ere. Sh e d i dn o ti d en t i fy th e d at e wh en s up erv i s o ry p en al t y ap p ro v al was s ecu red , n o r d i ds h e i d en ti fy wh o g av e th e ap p ro v al ; i n deed , h er t es ti m o n y rel at i ng t o p en al ty

ap p ro val was m o re ab o utth e p en al ty ap p ro v al p ro cedu res g en eral l y . Si m i l arl y , h er cas e act i v i ty
reco rdi s v ag u e as t o p en al ty ap p ro v al ; i td o es n oto u tl i ne wh i ch p en al t i es s h o u l d b e i m p o s ed , n o r d oes i ti n d i cat e s up erv i s o ry p en al ty ap p ro v al was s ecu red(l et al o n e o n a p art i cu l ar d at e). Iti s ap p aren t th atM r. Sal sb erry ’ s s i g n atu re o n th e
cas e act i vi ty

reco rdd at ed M arch 1 4 , 2 0 1 2 , wh i ch i s i m m ed i at el y b el o wthe l i n es fo r “ Cas e Cl os ed ” (an d RA Garci a’ s s i g n ature d at edM arch 1 3 , 2 0 1 2 ), refl ect s ju s t th atan dn o th in g m ore--t h atthe au d i to f p et it i o n ers ’ retu rn s fo r t h e y ears ati s s u e
was cl o s ed
.-3 0
-

[* 3 0 ] W e n o wtu rn t o th e p ro p ri et y o f res p o n d en t ’ s m o t io n t o reo p en th e reco rd
. Reo pen i n g th e reco rdfo r t he s ub m i s s i o n o f ad d i t i o n al ev i d en ce l i es wi th i n th e Co u rt ’ s d i s cret i o n . Zen i th Rad i o Co rp . v . Hazel t i n e Res earch , In c., 4 0 1 U.S. 3 2 1 , 3 3 1 (1 97 1 ); Bu t l er v . Co m m i s s i o n er, 1 1 4 T.C. 2 7 6 , 2 8 6 -2 8 7 (2 0 0 0); s ee al s o No rCal Ad ju s t ers v . Co m

m i s si o n er, 5 0 3 F.2 d3 5 9 , 3 6 3 (9 th Ci r. 1 9 7 4 ) (“ [T] h e Tax Co u rt ’ s ru l i n g [d en y i n g a m o t i on t o reo p en th e reco rd ] i s n o ts ub jectt o rev i ew
ex cep tupo n a d em on s trat io n o f ex trao rd i n ary ci rcu m s t an ces wh i ch rev eal a cl ear ab u se o f d i s cret i o n . ”), aff’ g T.C. M em o . 1 97 1 -2 00 . W e wi ll n o tg ran ta m o t i o n t o
reo p en th e reco rdu n les s , am o n g o ther req u irem en ts , th e ev i d en ce rel i ed o n i s n o t
m erel y cu m u l at i v e o r i m

p each i n g , i s m at eri al t o th e i ss u es i nv o lv ed , an dp ro b ab l y
wo u l dch an g e s o m e as pect o f t h e o u t co m e o f t h e cas e. Bu t l er v . Co m m i s si o n er, 1 1 4 T.C. at2 87 ; s ee al s o SEC v . Ro g ers , 7 90 F.2 d 1 4 5 0 , 1 4 6 0 (9 th Ci r. 1 9 8 6 ) (ex p l ai n i n g th atth e t ri al co u rt“ s h o u l dt ak e i n t o acco u n t , i n co n s i d eri n g a m o t i on t o h o l do p en th e t ri al reco rd , th e ch aract er o f t h e ad d i t i o n al * * * [ev i d en ce] an d th e effect o f g ran t i n g the m o ti o n ”), o v erru ledo n o th er g ro u n d s b y Pi n t er v . Dah l , 4 8 6 U.S. 6 2 2 (1 98 8 ). In rev iewi n g m ot io n s t o reo pen th e reco rd , co u rt s h av e co n s id eredwh en th e
m o vi n g p art y

knew t h ata fact was d i s p ut ed , wh et h er t h e ev id en t i ary i s su e was fo res eeab l e, an dwh et h er t h e m o v i n g p art y h adreas on fo r t h e fai l u re t o p ro du ce-3 1
-

[* 3 1 ] th e ev i den ce earl i er. See, e.g ., Geo rg e v . Co m m i s si o n er, 8 4 4 F.2 d2 2 5 , 2 2 9
- 2 3 0 (5 th Ci r. 1 9 88 ) (an dcas es ci t ed th ereat ) (h o ld i n g t h atrefu s al t o reo pen th e
cas e was n o tan ab u s e o f d i scret i o n b ecau s e t h e i s s u e was fo res eeab le t o th e t ax p ay ers an dth e co u rtco u l ds ee n o ex cu s e fo r t h e t ax p ay ers ’ fai l u re t o p ro du ce
ev i d en ce earl i er), aff’ g Fri n kv . Co m m is s i o n er, T.C. M em o . 1 9 8 4-6 6 9 . W e al s o b al an ce t h e m o v i n g p art y ’ s d i l ig en ce ag ai n stth e p o ss i b l e p reju di ce t o t h e
n o n m o v i n g p art y . Inp art icu l ar we co n s i d er wh et h er reo p en in g th e reco rdaft er tri al wo u l dp rev en tthe n o nm o v i n g p art y fro m ex am i n i n g an d qu es t i o n i n g th e
ev i d en ce as i t w ou l dh av e du ri ng th e p ro ceed i n g . See, e.g
. , Es t at e o f Freed m an v . Co m m i s s i o n er, T.C. M em o . 2 0 0 7 -6 1 ; M eg i bo w v . Co m m i s s i o n er, T.C. M em o . 2 0 0 4 -4 1
. Th e ev i d en ce t h ati s th e s ub jecto f res p on d en t ’ s m o t i o n wo u l dn o tb e
cu m u l at i v e o f an y

ev i d en ce i n th e reco rdan d i two u l dn o tb e i m p each i n g m at eri al
. Res po n d en tb ears th e b u rd en o f p ro du ct i o n wi th res p ectt o p en al t ies an dwo u l d
o ffer t h e ev i d en ce as p ro o f t h atth e req u i rem en t s o f s ect i o n 6 7 5 1 (b )(1 ) h av e b een
m et . Th e s ubjectev i den ce i s m at eri al t o the s o l e i s s ue rem ai n in g i n th e cas e, an d th e o u tco m e o f the cas e wi l l b e ch an g ed i f we g ran tres p o n d en t’ s m o t i o n . Pet i t i o ners arg ue t h atres p o n den tfai l ed t o ex erci se du e d i l i g en ce wh en
res p o n d en t’ s co u n s el fai l edt o s ub m i t p ro of o f wri t t en s up erv i s o ry ap p ro v al b efo re-3 2
-

[* 3 2 ] tri al . Wh en th i s cas e was s ub m i t tedan dth e reco rdcl o s ed , Graev III (as wel l
as Cl ay ) h adn o t b een i s s u ed . W e ag ree wi th res p o n d en t th atth e Ci v i l Pen al ty Ap p ro v al Fo rm

i s n o tcu m

u l at iv e an di s m at eri al t o th e s o l e i s su e rem ai n i n g i n t h i s
cas e. W e al s o ag ree wi th res p o n d en tth at th e Ci vi l Pen al ty Ap p ro v al Fo rm

i s a
reco rdk ep ti n the o rd i n ary co u rs e o f a b u s in es s act i v i ty an d i s au th en t i cat edb y

th e d ecl arat io n o f M r. Sal s b erry . See Fed . R. Ev i d . 8 0 3 (6 ), 9 02 (1 1 ). W e wi l l ad m i t th e Ci v i l Pen al ty

Ap p ro v al Fo rm i n t o ev i d en ce an d th e d ecl arat i o n fo r p urp o s es o f
au th en t i cat i o n u n d er ru l e 9 0 2 (1 1 ) o f the Fed eral Ru l es o f Ev i d en ce. See Cl o u g h v . Co m m i s s i o n er, 1 1 9 T.C. 1 8 3 , 1 9 0 -1 9 1 (2 0 0 2). W e n o wm

u s t d eci d e wh et h er res p o n d en t’ s ev i d en ce s h o wi n g th atcert ai n p en al t i es were ap p ro v edb efo re a fo rm al co m m u n i cat i o n o f t he p en al t i es t o p et i t i o n ers i s s u ffi ci en tt o s at i s fy h i s i n i t i al b u rd en o f p ro du ct io n . See Fro stv . Co m m i s s i o n er, 1 5 4 T.C. at_

_ (s l i p o p . at2 1). Th e reco rdi n d i cat es th at th e Ap ri l 2 7 , 2 0 12 , n o ti ce o f d efi ci en cy fo rm al l y co m m u n i cat edas s ert i on o f t h e p en al t i es t o p et i ti o n ers . W e al s o kn ow t h at the Ci v il Pen al ty Ap p ro v al Fo rm

was
s i gn edb y M r. Sal sb erryo n M arch 1 4 , 2 0 1 2, ap p ro x i m at el y s i x week s b efo re t h e Ap ri l 2 7 , 2 0 12 , n o ti ce o f d efi ci en cy (an dfi v e d ay s b efo re t he d at e o f t he Fo rm 4 5 4 9 -A, wh i ch was at t ach edt o th e n ot i ce o f d efi ci en cy ). Co n seq u en t l y , we h o l d th atres p o n d en t h as i nt ro du cedev i d en ce t h atwri tt en s up erv i s ory ap p ro v al o f t h e-3 3
-

[* 3 3 ] p en al t i es was g i v en b efo re a fo rm al co m m u n i cat i o n o f t h e p en al t ies t o p et i t i o n ers an dth at th e ev i d en ce i s s u ffi ci en t t o carryh i s i n i t i al b u rd en o f p ro duct i o n u n d er s ect i on 7 49 1 (c) t o s h o wth ath e co m p l iedwi th t h e p ro cedu ral req u i rem en t s o f s ect i o n 6 7 5 1 (b ). Th e b u rd enn o w s h ift s t o p et i ti o ners t o o ffer ev i d en ce s u g g es t i n g t h at wri t ten s up erv is o ry

ap p ro v al o f t h e p en al t i es was u n t i m el y --e.g ., th atth ere was a fo rm al co m

m u n i cat i o n o f t he p en al t i es b efo re th e p ro fferedap p ro val . See Fro s tv . Co m m i s s i o n er, 1 5 4 T.C. at_

_ (s l i p o p . at2 2). Pet i t i o n ers h av e n o t cl ai m ed , n o r d o es th e reco rds up p o rta co n cl u s i on , th atres p o n d en tfo rm al l y co m m u n i cat edh i s i n i t i al p en al ty

d et erm i n at i o n t o p et i t i o n ers b efo re M arch 1 4 , 2 0 1 2 --t h e d at e th at M r. Sal s b errys i gn edth e Ci v i l Pen al ty Ap p ro v al Fo rm . W e t h erefo re h o l dth atthe p en al t i es h ere were ap pro vedi n wri ti n g b efo re t h e fi rs tfo rm al co m m u n i cat i o n t o p et i t i o n ers o f t h os e p en al t i es . See i d . at_ _ (s l i p o p . at2 3 ) (ci t i n g Cl ay v . Co m m i s s i o n er, 1 5 2 T.C. at2 4 9). II. Sect io n 6 6 6 3 (a) Frau d Pen al t i es W e n o wad dres s wh et h er p et i t i o n ers are l iab l e fo r s ect i o n 6 6 6 3 (a) frau d p en al t i es fo r t h e y ears ati s s u e.-3 4
-

[* 3 4 ] A. Un d erp aym en t Pet i t i o ners co n ced e t h atth ey u nd ers t at edth ei r Fed eral i n co m e t ax l i ab i l i t ies fo r t h e y ears ati s su e an dth atth e u n d ers t at em en ts were at tri b u tab l e t o thei r fai l u re t o rep o rts i g n i fi can t am o u n ts o f t ax ab l e i n co m e fro m NCGM I an dfro m

th e s al e o f th e Dub l i n p ro p ert y

i n 2 0 06 . Co n s equ en t ly , p et i ti o ners u n d erp ai dth ei r Fed eral i n co m e t ax l i ab i l i t i es fo r t h e y ears ati s s u e. Acco rd i n g l y , res p o n d en t h as p ro v en b y cl ear an dco n v i n ci n g ev i d en ce t h atp et i t io n ers u n d erp ai d th ei r t ax l i ab i l i t i es fo r th e y ears ati s s u e. B. Frau du l en tIn t en t Nex t , we m

us t d et erm i n e wh et h er res p o n d en th as p ro v en b y cl ear an d
co n vi n ci n g ev id en ce t h at an y p o rt i o n o f t h e u n derp aym en t s i s at tri b u t ab le t o frau d
. As i n di cat eds up ra p . 2 7 , frau dfo r t h i s p u rp o s e i s d efi n edas i n t en t io n al
wro ng d o i n g b y

th e t ax p ay er m o t i v at edb y a s p eci fi c p u rp o s e o f av o id i n g t ax b el i ev edt o b e o wi ng . M aci el v . Co m m i s s i o n er, 4 89 F.3 d 1 0 1 8 , 1 0 2 6 (9 th Ci r. 2 0 0 7 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 2 0 0 4 -2 8 ; Neel y v . Co m m i s s i o n er, 1 1 6 T.C. 7 9 , 8 6 (2 0 0 1 ). Frau d “ d o es n o ti n cl u de n eg l i gen ce, carel es s n es s , m i s u n d ers t an d i n g o r u ni n t en ti o n al u n d ers t at em en to f i n co m e”, b utd o es i n cl u d e
an y co n du ctd es i g n edt o co n ceal , m i s l ead , o r o th erwi s e p rev en tth e co l l ect io n o f t ax es . Un i t edSt at edv . Pech en i k , 2 3 6 F.2 d 8 4 4 , 8 4 6 (3 d Ci r. 1 9 5 6 ); s ee Ho l l an d-3 5
-

[* 3 5 ] v . Un i tedSt at es , 3 4 8 U.S. 1 2 1 , 1 3 9 (1 9 54 ); Un it ed St at es v . M u rd o ck , 2 9 0 U.S. 3 8 9 , 3 9 6 (1 9 3 3 ); Di Leo v . Co m m i s s io ner, 9 6 T.C. 8 5 8, 8 7 4 (1 9 9 1), aff’ d , 9 5 9 F.2 d1 6 (2 dCi r. 1 9 9 2). Th e ex i s t en ce o f frau d i s a qu es t i on o f fact t o b e res ol v ed upo n
co n si d erat io n o f t h e en t i re reco rd . See Di Leo v . Co m m i s s i o n er, 9 6 T.C. at8 7 4
. Frau dwi ll n ev er b e p res u m edan dm u s tb e es t ab li s hedb y

i n dep en d en tev id en ce o f frau du l en t i n t en t . Reck l i t i s v . Co m m i s s i o ner, 9 1 T.C. 8 7 4 , 9 0 9 -9 10 (1 9 8 8 ). Ho wev er, b ecau s e d i rect p ro o f o f a t ax p ay er’ s frau du l en ti nt en ti s rarel y av ai l ab l e, frau d m ay

b e es t ab l i sh edb y

ci rcu m s t an t i al ev i den ce an di n feren ces drawn fro m th e fact s . Ni ed ri n g h au s v . Co m m i s s i o n er, 9 9 T.C. 2 0 2 , 2 1 0 (1 9 9 2 ). Th e t ax p ay er’ s en t i re co u rs e o f co n du ctdu ri n g each rel ev an ty ear an dl ead i n g up t o th e p rep arat i o n o f t h e y ear’ s retu rn m ay es t ab l i s h th e req ui s i t e i n t en t . Di Leo v . Co m m i s s i o n er, 9 6 T.C. at 8 7 4 ; St o n e v . Co m m is s io n er, 5 6 T.C. 2 1 3 , 2 2 4 (1 9 7 1 ). Frau du l en ti n t en tm ay

b e i n ferred fro m

v ari o us k i n d s o f ci rcu m s t an t i al
ev i d en ce o r “ b ad g es o f frau d ”. Brad fo rd v . Co m m i s s io n er, 7 9 6 F.2 d3 0 3 , 3 0 7 -3 08 (9 th Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 9 8 4 -6 0 1 . To th i s en d , co u rt s h av e ro u t i n el y
co n si d eredwh et h er th e fo l l owi n g b ad g es o f frau dare p res en t : (1 ) a p at t ern o f
u n d ers t at i n g i n co m e, (2 ) fai l i n g t o m ai n t ai n ad equ at e reco rd s , (3 ) o fferi n g i m p l au s i b l e o r i n co n s i s t en tex p l an at i o n s o f b eh av io r, (4 ) co n ceal i ng i n co m e o r-3 6
-

[* 3 6 ] as s et s , (5 ) d eal i n g i n cas h , (6 ) p ro v i d i ng i n co m p let e o r m i s l ead i n g i n fo rm at i o n t o h i s o r h er t ax retu rn p rep arer, (7 ) fi l i n g fal s e d o cu m en t s , i n cl u d i n g fi li n g fal s e Fed eral i n co m e t ax retu rn s , (8 ) fai l i ng t o fi l e Fed eral i n co m e t ax retu rn s , (9 ) fai l i n g t o co o p erat e wi th t ax au th o ri t i es , an d(1 0 ) en g ag i n g i n an d at t em p t i n g t o co n ceal i l l eg al act i v i ty . See i d . at3 0 7 -3 0 8 ; Ni ed ri n g hau s v . Co m m i s s i o n er, 9 9 T.C. at 2 1 1
. Th e ex i s t en ce o f an y o n e fact o r i s n o t d i s p o s i t i v e b u tth e ex i s t en ce o f s ev eral fact o rs i s p ers u as i v e ci rcu m s t an t i al ev i d en ce o f frau d
. See Ni ed ri n g h au s v . Co m m i s s i o n er, 9 9 T.C. at2 1 1 ; Pet zo l d tv . Co m m i s si o n er, 9 2 T.C. 6 6 1 , 7 0 0 (1 9 8 9 ). In th e l i g h to f t h e fo reg o i n g , we wi l l ev al u at e p et i t i o n ers ’ co n ductb eg i n n i n g i n 2 0 0 5 an dco n t i nu i n g up t o J ul y 2 0 0 9 , wh en th ey

fi l edth ei r retu rn s fo r 2 00 7 an d 2 0 0 8
. 1
. Pat t ern o f Un d ers t at i n g In co m e

“ A p at t ern of s ubs t an t i al l y u n d errep o rt i n g i n co m e fo r s ev eral y ears i s s tro ng
ev i d en ce o f frau d , p art i cu l arl y i f t h e u n d ers t at em en t s are n o tdue t o i n n ocen t
m i s t ak e o r are n oto therwi s e s at i s fact o ri l y ex pl ai n ed .” Green v . Co m m i s s i o n er, T.C. M em o . 2 01 6 -6 7 , at* 3 6 (an dcas es ci t edth ereat ). Paym en t s recei v edfro m a cl o s el y h el do r co n tro l l edb u s i n es s en t i ty an du s edfo r a t ax p ay er’ s p ers o nal
ex p en s es are i nco m e t o t h e t ax p ay er, an dth e fai l u re t o rep o rtth ati n co m e i s-3 7
-

[* 3 7 ] ev id en ce o f frau d . See Ev an s v . Co m m is si o n er, T.C. M em o . 2 0 1 0-1 9 9 , s l i p
o p . at1 3 , aff’ d , 5 0 7 F. Ap p ’ x 6 4 5 (9 th Ci r. 2 0 1 3). Ad d i t i o nal l y , d is crep an ci es o f 1 0 0 % o r m o re b et ween th e co rrecti nco m e an d t h e rep o rt edi n co m e fo r s ev eral
s u cces s i v e y ears i s s tro n g ev id en ce o f frau dul en ti n t en t. Ro g ers v . Co m m i s s i o n er, 1 1 1 F.2 d9 8 7, 9 8 9 (6 th Ci r. 1 9 40 ), aff’ g 3 8 B.T.A 1 6 (1 9 3 8 ); Co o l ey v . Co m m i s s i o n er, T.C. M em o . 2 0 0 4 -4 9 , s l i p o p . at2 0
. Onth ei r 2 0 0 5 ret u rnp et i t i o n ers rep o rt edg ro s s i n co m e o f $ 11 0 , 3 6 2 ; o n th ei r 2 0 0 6 retu rn they

rep o rt edg ro s s i n co m e o f $ 4 9 , 5 2 2 ; o n th ei r 2 0 0 7 return th ey rep o rt edg ro ss i nco m e o f $ 2 ,6 6 8 ; an do n t h ei r 2 0 0 8 retu rn th ey rep o rt edg ro s s i n co m e o f $ 35 ,5 72 . Ho wev er, i ti s u n d i s p u t edth atp et i t i o n ers recei v edan dfai l ed t o rep o rtt ax ab l e i nco m e fro m NCGM I o f $ 2 7 3 ,5 1 4 fo r 2 0 0 5 , $ 4 8 5,3 1 3 fo r 2 0 0 6 , $ 1 4 3 ,4 3 2 fo r 2 0 0 7, an d$ 89 ,8 1 1 fo r 2 0 0 8 , an dth at th ey recei v edan dfai l edt o rep o rta s h ort -t erm

cap i t al g ai n o f $ 8 8 ,4 6 7 fro m th e s al e o f t h e Dubl i n p ro p ert y i n 2 0 0 6 . Thu s , p et i t io n ers ’ co rrect g ro ss i n co m e fo r 2 0 0 5 , 2 00 6 , 2 0 0 7, an d 2 00 8 was $ 3 8 3 ,8 7 6 , $ 62 3 ,3 0 2 , $ 1 4 6,1 0 0 , an d$ 1 2 5 ,3 8 3 , res p ect i v el y . Th e d i screp an ci es are 2 4 8 % fo r 2 0 0 5 , 1 1 5 9% fo r 2 0 06 , 5 3 7 6 % fo r 2 0 0 7 , an d 2 5 2 % fo r 2 0 08 . Ino th er
wo rd s , p et i t i o n ers ’ u nrep o rt edi n co m e fro m NCGM I fo r 2 0 0 5, 2 0 0 6 , 2 0 07 , an d 2 0 0 8 al o n e rep res en t ed7 1 %, 7 8 %, 9 8 %, an d7 2 % , res p ect i vel y , o f t h ei r co rrect g ro s s i n co m e fo r t h o s e y ears . Yetfo r t h o s e y ears p et i t io n ers cl ai m edd edu ct i o n s-3 8
-

[* 3 8 ] fo r i t em s t hatwere p ai db y NCGM I. Th es e d i s crep an ci es are n o ti nn o cen t
m i s t ak es o r o th erwi s e s at i s fact o ri l y ex p l ai n ed . W e fi n d th atp et it i on ers ’
u n d errep o rt i n g i s b ot h co n s i s t en tan ds ubs t an ti al an d i s a s tro n g i n di cat or o f frau d fo r t h e y ears ati s su e.

2
. Fai l i n g To M ai n t ai n Ad equat e Reco rd s Th e fai l u re t o m ai n tai n ad equ at e reco rd s s up p o rt s a fi n d i n g o f frau d . See Tru es d el l v . Co m

m i s s i o n er, 8 9 T.C. 1 2 8 0 , 1 3 0 2 -1 30 3 (1 9 8 7). Becau se p et i t i o n ers d i dn o t m ai n t ai n accu rat e b oo k s an dreco rd s duri n g th e y ears ati s s ue, RA Garci a h ad t o res o rtt o a b an kd ep o s i t s an al y s i s t o d et erm i ne t h ei r i n co m e u s in g th ei r p ers o n al an dNCGM I’ s b an k acco u n treco rd s . Acco rd i ng l y , we fi n d t h i s fact o r fav o rs a fi n d i n g o f frau d fo r th e y ears at i s s ue.

3
. Im p l au s i b l e o r In co n s i s ten t Ex p l an at io n s o f Beh av i o r A t ax p ay er’ s i m

pl au s i b l e o r i n co n s i s t en tex p l an at i o n s fo r h i s o r h er act i o n s
m ay co ns t i tu te ci rcu m st an t i al ev i d en ce o f frau du l en t i n t en t . See Brad fo rdv . Co m m i s s i o n er, 7 9 6 F.2 dat3 0 7-3 0 8 ; Bah o ri c v . Co m m is si o n er, 3 6 3 F.2 d1 5 1 , 1 5 3 (9 th Ci r. 1 9 6 6 ). Pet i t i o ners cl ai m

th atth ey d i dn o td i s cl o s e NCGM I i nfo rm at i on t o M r. Sch m i dtu n d er t h e ad v i ce o f t h e at t orn ey s wh o rep res en tedM r. Pu rv i s i n
co n nect io n wi th th e m

ul t i p l e-co u n tfel on y

cas e co m m en cedag ai n s th i m

i n 2 0 0 9
.-3 9
-

[* 3 9 ] Ho wev er, t h ere i s ev i d en ce i n th e reco rd , an dwe h av e fo un d , th at M rs . Pu rv is t o l dM r. Sch m i d tthatM r. Pu rv i s s o l el y o wn edth e Dub l i n p ro p ert y as an ag en t fo r NCGM I an dth atNCGM I fu n d s were u s edt o p u rch as e t h e p ro pert y , wh i ch i n tu rn l edM r. Sch m i d tt o d edu ce t h atth e g ai n res u lt in g fro m th e 2 0 0 6 s al e
o f t h e Dub li n p ro p ert y s ho u l dn o tb e rep o rt edo n p et i ti o n ers ’ 2 0 0 6 return . Sh e al s o p ro v i d edM r. Sch m id twi th th e n eces s ary i n fo rm at i o n s o th atp et i t i o n ers co u l d cl ai m d edu ct i o n s fo r m o rt g ag e i n t eres tp ai db y NCGM I wi th res p ectt o th e Dub l i n p ro p erty an dth e Sh an n o n res i den ce i n 2 0 0 5 an d2 0 0 6 an dcas h co n tri b u t i o n s
m ad e t o v ari o u s ch ari t ab l e an drel i g i o u s o rg an izat i o n s b y NCGM I o n th ei r b eh al f. An dy et co n v en i en t l y , M rs . Pu rv i s refrai n ed fro m d i s cl o s i n g thats h e recei veda
m o nt h l y p ay ch eckfro m

NCGM I fro m

Ap ri l t o Sep t em

b er 2 0 0 6 an d thatM r. Pu rv is recei v edp aym en t s fro m NCGM I du ri n g th e y ears ati ss ue, t h atth ey d ep os i t edcas h fro m

NCGM I’ s b an kacco u n t s i n t o th ei r p ers o n al b an k acco u n t s,
an d th atNCGM I p ai ds o m e o f t h ei r p ers o n al ex p en s es . Ad d it i on al l y , M r. Pu rv i s ’ as s ert i o n du ri n g t h e ACC i nv es t ig at i o n , an dm o re
s p eci fi cal l y

du ri n g t he s ub p o en a en fo rcem en t act i o n , th ath e d i dn o th av e an y d o cu m en t s o r reco rd s rel at i n g t o NCGM I i s i n co n s i st en twi th p et i t i o n ers ’ as s ert i o n attri al (an do n b ri ef) t h atal l NCGM I d o cu m en t s n eces s ary t o fi l e accu rat e ret u rn s
were s ei zeddu ri n g t h e ACC i n v es t i g at i o n . Onth e b as i s o f t h e reco rdb efo re u s we-4 0
-

[* 4 0 ] fi n dth atp et i t i on ers ’ p o s i t i o n ch an g es as i t b eco m es ad v an t ag eo us fo r t h em . Acco rd in g ly , we fi n d t h atth i s fact o r fav o rs a fi n d in g o f frau dfo r t he y ears at i s su e. 4
. Co n ceal i n g In co m e o r As s et s In t en tt o ev ad e t ax m ay

b e i n ferred fro m

th e “ co n ceal m en t o f as s et s o r
co v eri n g up s o u rces o f i n co m e”. Sp i es v . Un i t edSt at es , 3 1 7 U.S. 4 9 2 , 4 99 (1 9 43 ). A t ax pay er’ s u s e o f a b u s i n es s en t i ty t o cl o ak th e p ers o n al n atu re o f ex p en s es
ev i d en ces frau d . See Ro m er v . Co m m i s s i o n er, T.C. M em o . 2 0 0 1 -1 6 8 , s l i p o p . at4 5 -4 6 ; s ee al so Ev an s v . Co m m i s s i o n er, s li p o p . at1 2 -1 4 (fi nd i n g th atp aym en t s recei v edfro m

a cl o s el y h el d o r co n tro l l edb u s i n es s en t i ty an du s edfo r a t ax p ay er’ s p ers o n al ex p en s es are i n co m e t o th e t ax p ay er an dth e fai l u re t o rep o rtth ati n co m e i s ev i d en ce o f frau d ). Pet i t i o ners co n ced e t h atth ey fai l edt o rep o rti n co m e fro m NCGM I o n th ei r Fed eral i nco m e t ax return s fo r t h e y ears ati s s u e as wel l as a s h o rt -t erm cap i t al g ai n fro m th e 2 0 0 6 s al e o f th e Dubl i n p ro p ert y o n th ei r 2 0 06 retu rn . Des p i t e t h es e kn o wi n g fai lu res th ey

n ev er m ad e anat t em

p tt o p rep are accu rat e am en d edretu rn s fo r an y o f t h e y ears ati s s ue. Fu rt herm o re, t here i s ev id en ce i n th e reco rd , an dwe h av e fo u n d , th at p et i t i o n ers u s edNCGM I t o p ay s o m e o f t h ei r p ers o n al ex p en s es ; p aym en ts fro m-4 1
-

[* 4 1 ] NCGM I fo r t he b en efi to f p et i t i o n ers i n cl ud edNCGM I’ s p aym en to f t h ei r
m o rt g ag es , car l oan s an d i n s u ran ce, an dp ers o n al cred i t card s , an d the p u rch as e o f jewel ry fo r M rs . Pu rv i s an da d o wnp aym en t o n a n ew h om e t h atth ey s o u g h tt o b u y . Th e reco rdal s o refl ect s , an dwe h av e fo u n d, thatM rs . Pu rv i s b ecam e aware th atNCGM I was p ay i n g s o m e o f p et i t i o n ers ’ p ers o nal ex p en s es s o m et i m e i n 2 0 0 6, b efo re t h e fi l i ng o f an y

o f t he ret u rn s fo r t he y ears ati ss u e. Si n ce NCGM I d i dn o t i s su e Fo rm s W -2 o r Fo rm s 1 0 9 9 t o p et i t i o n ers , th ey were ab l e t o co n ceal th e recei p t o f i nco m e. Acco rd in gl y , th is fact o r fav ors a fi n di n g o f frau d fo r th e y ears ati ss u e. 5
. Deal in g i n Cas h Ex t en s i v e d eal i n g i n cas h t o av o i ds cru t i n y o f a t ax p ay er’ s fi n an ces i s a b ad ge o f frau d . See Brad fo rdv . Co m m i s s io n er, 7 9 6 F.2 dat3 0 7 -3 0 8 . In p art i cu l ar, wh ena t ax p ay er’ s d eal i ng s i n cas h are acco m p an i edb y at t em

p ts t o
co n ceal tran sact i o n s o r av o i dcas h tran s act i o n rep o rt in g req u irem en t s , th atco u rs e
o f co n du cti s p ro b at i ve ev i d en ce o f frau d . See Val b ru n v . Co m m i s s io n er, T.C. M em o. 2 0 0 4 -2 4 2 , s l i p o p . at8 -9
. Th ere i s ev id en ce i n th e reco rd , an d we h av e fo u n d , th atM r. Pu rv i s wi th drew s i g n ifi can tam ou n t s o f cas h fro m NCGM I’ s b an kacco u n ts i n 2 0 0 5 an d 2 0 0 6 . Pet i t i o n ers co n t en dth ats u ch wi th drawal s were n oti nt en d edt o b e-4 2
-

[* 4 2 ] co nceal edb ecau s e t h ey wo u l dd ep o si t th e cas h i n t o th ei r p ers o nal b an k
acco u n t s. Th e p ers o n al b an kacco u n treco rd s o f p et i t i o n ers th atare i n ev i d en ce are t h os e fo r 2 0 07 an d 2 0 0 8. Th u s, g i v en th atth es e reco rd s are i n ev i d en ce, we d o ag ree wi th p et i t i o n ers th atth e factth atth ey d eal ti n cas h i n 2 0 0 7 an d 2 00 8 (m ak i n g s i g n i fi can t d ep o s i t s i n t o an dwi th drawal s fro m th ei r p ers o n al b an k
acco u n t s) was n o t an at t em p tt o co n ceal . Acco rd in g l y , res po n d en th as p ro v en b y cl ear an dco n v i n ci n g ev i d en ce t h atth e y ears fo r wh i ch p et i t i o n ers ’ d eal in g s i n
cas h t ak en d i rect ly

fro m NCGM I are i n d icat i v e o f frau dare o n l y 2 0 05 an d2 0 0 6
. 6
. In fo rm at i o n Pro v i d ed t o Tax Retu rn Prep arer A t ax p ay er’ s fai lu re t o p ro vi d e h i s o r h er t ax retu rn p rep arer co m p l et e an d
accu rat e reco rd s m ay

refl ecta t ax p ay er’ s i n t en tt o co n ceal an d d ecei v e. See Dub o s e v . Co m

m i s s i on er, T.C. M em o . 1 9 9 6 -9 9, s l i p o p . at8 -9 ; Scal l en v . Co m m i s s i o n er, T.C. M em o . 1 9 8 7 -4 1 2 , aff’ d , 8 7 7 F.2 d1 3 6 4 (8 th Ci r. 1 9 8 9 ). Fu rt h erm o re, a t ax p ay er’ s fai l u re t o ev en o ral l y d i s cl o s e t he i n fo rm at i on th ath e o r
s h e kno ws t o h i s o r h er t ax retu rn p rep arer i s ev id en ce o f frau du l en t i n ten t . Van ov er v . Co m

m is s io n er, T.C. M em o . 2 0 1 2 -7 9 , s l i p o p . at1 4 -1 5 (fi n d i n g th atth e t ax p ay er’ s fai lu re t o i n fo rm h i s t ax retu rnp rep arer t h ath e u s edh i s b u s i n es s b an k
acco u n t s t o p ay

p ers o n al ex p en s es an dt o p u rch as e l u x u ry i t em s was ev i den ce o f frau d).-4 3
-

[* 4 3 ] M rs . Pu rv i s h i red M r. Sch m i d tt o p rep are p et i t io n ers ’ jo i n tFed eral i n co m e t ax return s fo r t h e y ears ati ss u e. Th e reco rds h o ws , an dwe h av e fo u n d , th ats h e d i s cu s s edcert ai n i s s u es rel at i n g t o NCGM I wi th h i m b u t fai l edt o d i s cl o s e t h at fro m Ap ri l t o Sep t em

b er 2 0 0 6 s h e recei v ed a m o nt h l y p ay ch ecko f $ 2 ,5 00 fro m NCGM I o r t hatM r. Pu rv i s recei v edp aym en t s fro m NCGM I, th atth ey

d ep os i t ed
cas h fro m NCGM I’ s b an k acco u n t s i n t o th ei r p ers o n al b an kacco un t s , an dth at NCGM I p ai ds o m e o f t h ei r p ers o n al ex p en s es . In d eed , M rs . Pu rv i s as s u redM r. Sch m i dtth ath e co u l d u s e t h e 2 0 0 4 ret u rnas a t em p l at e fo r p rep ari n g th e ret u rn s fo r t h e y ears ati s su e ev en th o u g h th e 2 0 0 4 return d i dn o trep o rtan y i n co m e fro m NCGM I an drep o rt eda Sch edu l e C l o s s fo r a “ co n s u l ti n g ” b us i n es s M r. Pu rv i s h ad
. M o reo v er, s h e t o l dM r. Sch m id t thatal l i n fo rm at i o n n eed edt o cal cu l at e M r. Pu rv is ’ i nco m e fo r t he y ears at i s s u e was s ei zedb y th e ACC wh en i n fact th e o n l y d o cu m en t s s ei zedwere fo r 2 0 0 5 an d2 00 6 . W e fi ndth at p et it i on ers p ro v i d edM r. Sch m i dtwi th i nco m

p l et e an dm i s l ead i n g i n fo rm at i o n . Acco rd i n g l y , thi s fact o r fav o rs a fi n d i n g o f frau d fo r th e y ears at i s s ue.

7
. Fi l i n g Fal s e Do cu m en ts

“ Frau du len ti n t en tm ay

b e i n ferred wh en a t ax pay er fi l es a d o cu m en t i n t en d i n g t o co n ceal , m is l ead , o r p rev en tth e co ll ect i o n o f t ax . Fi li n g fal se d o cu m en t s wi th th e IRS co n s t i tu t es ‘ an “ affi rm at i ve act ” o f m i s rep res en tat i o n-4 4
-

[* 4 4 ] s u ffi ci en tt o ju s t i fy the frau dp en al ty .’ ” Du rl an d v . Co m m i s si o n er, T.C. M em o. 2 0 1 6 -1 3 3 , at * 7 9 (ci t at i o n o m i t t ed ) (qu o ti n g Zel l v . Co m m i ss i o n er, 7 6 3 F.2 d1 1 3 9 , 1 1 4 6 (1 0 th Ci r. 1 9 8 5 ), aff’ g T.C. M em o . 1 9 8 4 -1 5 2). Pet i t i o n ers fi l ed Fed eral i nco m e t ax return s fo r t h e y ears ati s s u e, an d fo r each y ear t h ey kn o wi n g l y
o m it t eds i g n ifi can tam o un t s o f i n co m e fro m NCGM I. Acco rd i n g ly , th i s fact o r fav o rs a fi n d i n g o f frau d fo r th e y ears at i s s ue.

8
. Fai l i n g To Fi l e Fed eral In co m e Tax Retu rn s Wh i l e fai li n g t o fi l e Fed eral i n co m e t ax retu rn s, ev en o v er an ex t en ded p eri o d , d o es n o tes tab l i s h frau dp er s e, an ex t en d edp at t ern o f fai li ng t o fi l e t ax retu rn s m ay

b e p ers u as i ve ev i d en ce o f frau d . Ho v i n dv . Co m m i ss i o ner, T.C. M em o. 2 0 1 2 -2 8 1 , at * 5 5 (an dcas es ci t edth ereat ). Th e u n t i m el y fi li n g o f t ax retu rn s al s o m ay

b e p ers u as i v e ci rcu m s t an t i al ev i d en ce o f frau d . Id . Pet i t i o n ers d i dn o t fi l e t h ei r Fed eral i n co m e t ax retu rn s fo r t h e y ears ati s s ue u n t i l aft er t h ey
were co nt act edo n m

u l t i p le o ccas i o n s b y

th e IRS i n 2 0 0 8 an d2 0 0 9 reg ard i n g th ei r
u n fi l edretu rn s fo r 2 0 0 5 an d2 0 0 6 . Pet i t i o ners d i dn o tt i m el y fi l e t h ei r retu rn s fo r 2 0 0 5 , 2 0 0 6 , an d 2 0 0 7. Acco rd i n g ly , th i s fact or fav o rs a fi n d i n g o f frau dfo r 2 0 0 5 , 2 0 0 6 , an d2 0 0 7
.-4 5
-

[* 4 5 ] 9
. Fai l i n g t o Co o perat e W i th Tax Au th o ri t i es Fai l i n g t o co o p erat e wi th IRS rev en ue ag en t s du ri n g an au d i ti s p ers u as i ve
ev i d en ce o f a t ax p ay er’ s frau dul en t i n t en t . Ko reck y v . Co m m is s i o n er, 7 8 1 F.2 d 1 5 6 6 , 1 5 6 8 -1 5 6 9 (1 1 th Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 98 5 -6 3 ; Pro f’ l Serv s. v . Co m m i s s i o n er, 7 9 T.C. 8 88 , 9 3 2 -9 3 3 (1 9 8 2 ). Th e reco rds h o ws , an dwe h av e fo un d , th at al th o u gh RA Garci a s u m m o n ed NCGM I’ s an dp et i t i o n ers ’ p ers o n al b an kacco un treco rd s , p et i t i o ners were l arg el y
co o perat i v e du ri n g th e au d i to f t h ei r retu rn s fo r t he y ears at i ss u e; th ey s p ok e v i a t el ep ho n e an d co rres p on d edwi th RA Garci a, M rs . Pu rv is m etwi th h er i n th ei r
res i den ce, an dthey

ex ecu t eda Fo rm

8 7 2 wi th res p ectt o 2 0 0 5 an d 2 0 0 6
. On b al an ce, we fi n dth at th i s fact o r d o es n o twei g h i n fav o r o f a fi n di ng o f frau dfo r th e y ears ati s s u e.

1 0. En g ag i n g i n an dAt t em p t i ng To Co n ceal Il l eg al Act i v i ty Th e i l leg al n atu re o f a t ax p ay er’ s act i v i t ies an dh i s o r h er co n ceal m en to f th o s e i l l eg al act iv i t i es are i n d i cat i v e o f frau d . Ni ed ri n g hau s v . Co m m i s s io n er, 9 9 T.C. at2 1 1 ; Wri g h tv . Co m m i s s i o n er, T.C. M em o . 2 0 0 0 -3 36 , s l i p o p . at1 2
. Th e reco rds h o ws , an dwe h av e fo un d , th at M r. Pu rv i s u s edNCGM I as a
v eh icl e t h ro ug h wh ich t o p ay s o m e o f p et i t i o n ers ’ p ers o n al ex p en s es . M rs . Pu rv i s
was aware o f th es e p aym en t s s t art i n g s o m et im e i n 2 0 0 6. Wh en the ACC-4 6
-

[* 4 6 ] i n v es t i g at i o n co m

m en cedag ai n s t NCGM I, M r. Pu rv i s, M r. W o lfe, an do t h er b u s i n es s as s o ci at es o f M r. Pu rv i s an dM r. W o l fe, M r. Pu rv i s wen t t o g reatl en g t h s t o thwarti t . M r. Pu rv i s fai l ed t o co m p l y wi th s ub p o en as th atthe ACC i s s u edt o h i m , wh i ch p ro m

p t edth e s ub p o en a en fo rcem en tact i o n . Ul t i m at el y , h e n ev er p ro duced an y

o f t h e req ues tedd o cu m en t s o r reco rd s . He fi l edth e Ju l y an dAu g u st ad m i ral ty cl ai m s ; th es e were fri v o l o u s an dm erel y an o th er at tem

ptt o d i s rup tth e ACC i n v es t i gat i o n ag ai n s th i m . Sh o rt l y aft er t h e s ecu ri t i es act io n co m m en ced ag ai n s tp et i t i o n ers , M r. W o l fe an dh i s wi fe, NCGM I, ACI, an dtwo o th er i n d i v i du al s , M r. Pu rv i s fi l edUCC fi n an ci ng s t at em en ts ag ai n s t th e s am e p art i es
n am edi n t h e J u ly

ad m iral ty

cl ai m . He al s o fi l ed an i n v o l un t ary b an krup t cy p et i t i o n ag ai n s tth e Ari zo n a Rep ub l i c jo u rn al i stn am edi n th e Jul y ad m i ral ty

cl ai m i n an at t em

p tt o n eg at e wh atth e n ews p ap er art i cl es h adrep ort edab o u th i m . Ul t i m at el y , M r. Pu rv i s was fo u n dt o b e i n v i o l at i o n o f t h e Secu ri t ies Actan dwas
o rd eredt o ceas e an d d es i s tfro m h i s act i on s , an d p et i t i o n ers were o rd eredt o p ay ad m i n is trat i v e fees t ot al i n g $ 2 5 0 ,0 0 0 an d res ti tu t i o n o f o v er $ 8 m i l l i o n . Fu rt herm o re, wh i le t h e s ecu ri t i es act io n was p en d i n g, i n 2 0 0 7 M r. Pu rv i s
was i n d i ct edo n o ne co u n to f b ri b ery o f a p ub l i c s erv an tan d fo u r co u n ts o f h aras s m en to f a p ubl i c o ffi cer o r em p l o y ee. Ul ti m at el y , h e was co n v i ct edb y a jury o n al l co u n ts i n th e i n d i ct m en t an dwas s en t en cedt o co n cu rren t t erm s o f 1 1⁄2-4 7
-

[* 4 7 ] y ears ’ i m

p ri s on m en tfo r each o f t h e h aras s m en t co u n t s an d3 y ears ’ p ro b at i o n aft er d i s ch arg e fro m p ri s o n an dan $ 1 8 ,0 00 fi n e fo r t h e b ri beryco u n t . He was al s o l at er i n d i ct edi n 2 0 0 9 o n 1 co u n t o f frau du l en ts ch em es an d art i fi ces , 1 co u n to f i l l eg al co n tro l o f anen t erp ri s e, 2 1 co u n t s o f t h eft , 2 1 co u n t s o f
s ecu ri t i es frau d , 2 1 co u n t s o f s al e o f u n reg i st ereds ecu ri t ies , an d 2 1 co u n t s o f tran s act io n s b y

u n reg i s t eredd eal ers o r s al es m en . Ul t i m at el y , h e p l ead edg u i l ty t o frau du l en t s ch em es an dart i fi ces an di l l eg al co n tro l o f an en t erp ri s e an d was
s en t en cedt o fi v e y ears ’ i m p ri s o n m en t p lu s p ro b at i on fo r s ev en y ears an do rd ered t o p ay res t i tu t i o n o f n o tl es s t h an $ 3 ,8 1 8 ,9 2 3 . As p arto f h i s p l ea ag reem en t , th e p ro s ecu to r’ s o ffi ce ag reedt o n o tp ro s ecu t e M rs . Pu rv is fo r an y ro l e s h e m ay

h av e h ad i n th e cri m es ch arg edi n th e i n d ict m en t o r fi l e ad d it i on al s ecu ri t i es l aw
v i o l at i o n ch arg es , frau dul en ts ch em es an dart i fi ces ch arg es , m on ey l au n d eri n g ch arg es , o r cri m i nal en t erp ri s e ch arg es ag ai n s th er. Th e reco rds up p o rt s a fi n d i n g th atp et i t i o ners en g ag edi n i l l eg al act iv i ty du ri n g th e y ears ati s su e an d at t em p tedt o co n ceal th atact iv i ty . Acco rd in g l y , thi s fact or fav o rs a fi n d i n g o f frau dfo r t h e y ears at i ss u e. C. Co n cl u si o n Nu m ero u s b ad g es o f frau dare p res en t i n th is cas e. W e co n cl u de t hat
res p o n d en t h as p ro ven b y cl ear an dco n v in ci n g ev i d en ce th at p et it io n ers u n d erp ai d-4 8
-

[* 4 8 ] th ei r t ax l i ab i l i ti es fo r th e y ears ati s s u e an dth ats o m e p ort i on o f t h e
u n d erp aym en t s was du e t o frau d . Acco rd in g ly , we h o l dth atp et i t i o ners are l i ab l e fo r t h e s ect i o n 6 6 6 3 (a) frau dp en al t i es fo r t h e y ears ati s s u e. 1 6 III. Reas o n ab l e Cau s e W e n o wad dres s p et i t i on ers ’ reas o n ab l e cau s e d efen s e. Sect io n 6 66 4 (c)(1 ) p ro v id es th at“ [n ] o p en al ty s h al l b e i m

p o s ed u n d er s ect i o n * * * 6 6 6 3 wi th res p ect t o an y p o rt i o n o f an u n d erp aym en ti f i ti s s ho wnth atth ere was a reas o n ab l e cau s e fo r s u ch p o rt io n an dth atth e t ax p ay er act edi n g o o dfai th wi th res p ectt o s uch p o rt i on .” Th e d et erm in at i o n o f wh et h er t h ere i s reas on ab l e cau s e an dth e t ax p ay er act edi n g o o dfai th d ep en ds up o n th e p ert i n en t fact s an d ci rcu m s tan ces o f a p art i cu l ar cas e. Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . W e co n s i d er, am o n g o t h er fact ors , th e ex p eri en ce, edu cat i o n , an ds o ph i s t i cat i o n o f t he t ax p ay er, t h e t ax p ay er’ s effo rt s t o as s es s h i s o r h er p ro p er t ax l i ab i l i ty , an d th e t ax p ay er’ s rel i an ce o n th e ad v i ce o f a p ro fes s i o n al . Id . Reas on ab l e cau s e m ay ex i s t wh ere th e t ax p ay er rel i es o n p ro fes s i on al ad v i ce i f t h e t ax p ay er p ro v es b y a p rep o n d eran ce o f t h e ev i den ce t h at : (1 ) t h e ad v i s er was a co m p et en tp ro fes s i o nal wh o h ad s u ffi ci en tex pert i s e t o ju s t i fy th e t ax p ay er’ s rel i an ce o n h i m o r h er;

1 6 Onth e b as i s o f o u r h o l d i n g , we n eedn o t ad dres s res p o n d en t ’ s al tern at i v e p o s i t i on th atp et i t io n ers are l i ab l e fo r accu racy -rel at edp en al t i es p u rs u an tt o s ec. 6 6 62 (a).-4 9
-

[* 4 9 ] (2 ) t h e t ax p ay er p ro v id edn eces s ary an daccu rat e i n fo rm at i o n t o the ad v i ser;
an d (3 ) th e t ax p ay er act ual l y rel i edi n g o o dfai th o n th e ad vi s er’ s ju d g m en t. Neo nat ol o gy

As so cs ., P.A. v . Co m

m i ss i on er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 02 ); s ee al s o Es tat e o f Tem p l e v . Co m

m i s s i o ner, 6 7 T.C. 1 4 3 , 1 6 2 (1 97 6 ) (“ Wh i l e a t ax p ay er’ s rel i an ce up o n h i s acco u n tan t t o p rep are accu rat e retu rn s m ay

i n d icat e an ab s en ce o f frau du l en ti n t en t, * * * th i s i s tru e i n th e fi rs t i n s t an ce o n l y

i f t h e acco u n tan th as b een s up p l i edwi th al l th e i n fo rm at io n
n eces s ary t o p rep are t h e ret urn s.”). Pet i t i o ners co n t en dth atth ey qual i fy fo r th e reas o n ab l e cau s e d efen s e b ecau s e th ey

rel i edo n M r. Sch m i d tt o p rep are t h ei r return s fo r t h e y ears ati s s u e. Th ei r co n t en t i o n l ack s m eri t . As we h av e al read y fo u n d , s ee s up ra p p. 4 2 -4 3 , p et i t i o n ers fai l edt o p ro vi de M r. Sch m i d twi th co m pl et e i n fo rm at io n an d kn o wi n g l y m i s l edh i m ab o ut th ei r i n co m e an d d edu ct io n s fo r th e y ears ati s s u e. W e t herefo re fi nd th at p et i t io n ers d i dn o trel y o n M r. Sch m i d t ’ s “

ju d g m en t ”, n o r d i dth ey acti n g o o dfai th. Pet i t i o n ers h av e fai l ed t o p ro v e t h at th ey h ad
reas on ab l e cau s e wi th i n th e m ean i n g o f s ect i o n 6 6 6 4 (c). Acco rd i n g l y , we s u s t ai n
res p o n d en t’ s d et erm i n at i o n reg ard i n g th e s ect i on 6 6 6 3(a) frau dp en al ti es .-5 0
-

[* 5 0 ] W e h av e co n s id eredal l o f t h e arg um en t s m ad e b y th e p art i es an d , t o th e
ex t en tth ey

are n o tad dres s edh erei n , we fi n dth em t o b e m o o t , i rrel ev an t, o r wi th o u tm eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.