T.C. Memo. 2006-120

UNITED STATES TAX COURT

HECTOR PROWSE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16562-03. Filed June 12, 2006.

Hector Prowse, pro se.

Marc L. Caine, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: In a notice of deficiency dated July 31,

2003, respondent determined that petitioner was liable for an

income tax deficiency of $5,797 with respect to his 2001 taxable

year. In a letter to this Court dated September 16, 2003, which

we filed as an imperfect petition on September 23, 2003,

petitioner stated his intention to appeal respondent’s
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determination for 2001 as well as determinations for 1999 and

2000 that petitioner alleged respondent had also made. By order

dated September 29, 2003, we ordered petitioner to file a proper

amended petition and to pay the required filing fee on or before

November 28, 2003. On November 12, 2003, we received and filed

petitioner’s amended petition, which again sought a

redetermination of deficiencies for 1999, 2000, and 2001.

On January 12, 2004, we filed respondent’s motion to dismiss

for lack of jurisdiction and to strike as to petitioner’s 1999

and 2000 taxable years. After receiving an extension of time to

object to the motion, petitioner filed no objection, and we

granted the motion on April 16, 2004.

This case was originally calendared for trial at the New

York, New York, trial session commencing on October 25, 2004. 

Following a conference call with the parties, we continued the

case generally.

On April 21, 2005, we filed respondent’s motion for leave to

file amendment to answer to amended petition. In that motion,

respondent acknowledged certain mistakes in the notice of

deficiency and conceded that the correct amount of the income tax

deficiency in the notice of deficiency should have been $5,196. 

In addition, respondent alleged that petitioner is liable for an

“increased” deficiency of $5,784.14, for a total deficiency of
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1All section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

$10,980.14, and for a civil fraud penalty under section 6663(a).1

Respondent alleged in the motion that the reasons for the

increased deficiency and the civil fraud penalty were not evident

when he filed his answer to the amended petition. Respondent

further alleged that petitioner had received fair warning of

respondent’s intention to amend his answer and that petitioner

had ample time to prepare for trial under the circumstances.

By order dated April 26, 2005, we directed petitioner to

file a response to respondent’s motion on or before May 10, 2005. 

No response was received by the deadline, so we granted

respondent’s motion and filed respondent’s amendment to answer on

May 19, 2005.

On June 1, 2005, we held a conference call with the parties

to discuss petitioner’s request for a continuance and

respondent’s request for a date and time certain for the trial. 

Respondent objected to the continuance on a variety of grounds

including petitioner’s failure to document a compelling medical

reason for the request and his continuing failure to cooperate in

preparing the case for trial. We denied petitioner’s request

without prejudice to petitioner’s right to renew the request if

petitioner could document a compelling reason for another

continuance.
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On June 14, 2005, the case was called for trial. Petitioner

did not appear, although he had been in contact with respondent’s

counsel and with the Court in the days leading up to the trial. 

Instead, petitioner submitted a written motion for continuance in

which he claimed that he had had a “heart attack seizure” on June

9, 2005. However, despite repeated warnings from this Court to

petitioner during various pretrial conference calls, he failed to

attach any documentation of the episode or of a current medical

condition sufficient to prevent him from appearing in Court on

June 14. We denied petitioner’s motion.

When the case was called for trial on June 14, 2005,

respondent orally moved under Rule 123(a) for a default judgment

on the underlying deficiency. We granted the motion with respect

to the original deficiency as corrected by respondent but denied

the motion with respect to the additional deficiency and the

civil fraud penalty, matters on which respondent had the burden

of proof. Thereafter, a trial was held on June 14, 2005, to

permit respondent to introduce evidence regarding the additional

deficiency and the civil fraud penalty.

The issues for decision are:

(1) Whether respondent has satisfied his burden of proving

by a preponderance of the evidence that petitioner is liable for

an increased deficiency as alleged by respondent; and
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(2) whether respondent has satisfied his burden of proving

by clear and convincing evidence that petitioner is liable for

the civil fraud penalty under section 6663(a).

FINDINGS OF FACT

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

incorporate the stipulated facts into our findings by this

reference. Petitioner resided in Flushing, New York, when his 

petition in this case was filed.

Petitioner’s 2001 Return

During 2001, petitioner was employed by Keyspan Engineering

Associates and by Cosentini Associates.

Petitioner filed a timely Federal income tax return for 2001

on which he reported the income he had earned from his employment

during 2001. On Schedule A, Itemized Deductions, of his 2001

return, petitioner claimed itemized deductions of $31,449.06, and

on Schedule C, Profit or Loss From Business, petitioner claimed a

bad debt deduction of $20,000 and a deduction for legal expenses

of $1,300. The Schedule A itemized deductions that petitioner

claimed on his 2001 return consisted of the following:
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Medical and dental expenses $8,805.87

 Less: adjustment 3,428.96

 Net deduction $5,376.91

State and local income taxes 4,097.60

Charitable gifts 1,510.00

Job expenses 16,293.00

Tax preparation fees 202.16

Other expenses 3,055.00 

 Less: adjustment 914.39

20,464.55

 Total itemized deductions 131,449.06

1Instead of subtracting the $914.39 adjustment, petitioner

added the adjustment in calculating his total itemized

deductions. The mathematically correct total should have been

$29,620.28.

Petitioner attached a statement to his 2001 return

identifying the medical and dental expenses of $8,805.87 as

follows: Dr. Jayesh Patel ($350), emergency room treatment for

left knee pain ($203.97), an operation ($5,900), Dr. Harvey S.

Pallen ($900), and expenses for eyeglasses, medications, and

transportation ($1,451.90). Petitioner also attached to his 2001

return the following documentation of his medical expenses: A

receipt No. 07060 from Mount Sinai Elmhurst Faculty Practice

dated March 9, 2001, for emergency care on 3/3/01, a receipt No.

308431 dated 4/28/01 for $130, a receipt No. 308434 dated 5/1/01

for $40, a bill from Xeron Clinical Laboratories dated 6/16/01

reflecting a handwritten entry by “Mary Patel” reading “Paid

fully 6/20/01”, a letter dated December 28, 2001 bearing the

signature of “Mary S. Posner” and purporting to confirm that the
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$5,900 cost for surgery performed at St. Luke’s/Roosevelt

Hospital on March 13, 2001, had been paid, and a receipt dated

May 25, 2001, from Harvey S. Pallen, DDS, confirming treatment of

petitioner on various dates in May 2001 for a total cost of $900. 

Each of the above-described documents was falsified, and some, if

not all, of the signatures shown on the documents were forged. 

None of the documents substantiated any of petitioner’s claimed

medical expenses for 2001.

The charitable gifts claimed on the Schedule A consisted of

an alleged cash gift to a church and a noncash contribution. The

noncash contribution consisted of claimed donations of property

to the Salvation Army during 2001. To document the contribution,

petitioner attached receipt No. 414, dated December 13, 2001,

purportedly from the Salvation Army, that listed 12 categories of

property, assigned a value to each category, and listed the total

contribution as $1,640. The receipt showed that the contribution

was received by “Juanita Rusell” on December 13, 2001. The

receipt was falsified and does not substantiate petitioner’s

claimed noncash contribution for 2001. Petitioner did not attach

to his 2001 return any substantiation of his alleged cash gift to

the church, and he did not substantiate the gift during the

examination of his return. 

The employee business expenses of $16,293 consisted of

vehicle expenses ($12,948), parking fees, tolls, and
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2Similar documents were submitted to substantiate charitable

contributions, medical expenses, and employee business expenses

claimed on petitioner’s 2000 return. At least some of those

documents also appear to have been falsified. 

transportation ($720), classes ($2,300), and one-half of meals

and entertainment expenses totaling $650 ($325). Petitioner

attached to his 2001 return a copy of a letter from the New York

City Public Schools confirming that petitioner had paid $2,300

for classes in asbestos and paint lead abatement. The letter

purported to be signed by Robert Pardi and was dated July 1,

2001. Unfortunately, Mr. Pardi died on December 23, 1999, and

could not possibly have written the July 1, 2001, letter. In

addition, no such classes were offered by the New York City

Public Schools during 2001.2 With respect to the balance of the

employee business expenses, petitioner was not required by either

of his employers to incur travel or client entertainment expenses

during 2001. Even if petitioner had incurred such expenses, each

of his 2001 employers had reimbursement policies that entitled

their employees to obtain reimbursement for any required business

expenses.

To document the Schedule C legal expenses of $1,300 that he

claimed on his 2001 return, petitioner attached to his 2001

return a letter dated May 15, 2001, from Michael E. Greenblatt,

an attorney allegedly employed by Nixon, Hargrave, Devans & Doyle

LLP. However, Mr. Greenblatt never worked for Nixon Hargrave,
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and petitioner was never a client of the firm. To compound the

problem, petitioner submitted to respondent’s counsel, on October

14, 2004, yet another letter to substantiate the $1,300 legal

expense. This letter, dated May 15, 2001, was purportedly

prepared and signed by Paul Rubenfeld and purports to confirm

that Mr. Rubenfeld represented petitioner before the United

States Bankruptcy Court for the Southern District of New York for

a fee of $1,300. The Rubenfeld letter was falsified, and Mr.

Rubenfeld’s signature on the letter was forged. Mr. Rubenfeld

did not represent petitioner before the Bankruptcy Court at any

time during 2001.

On a date that does not appear in the record, the Internal

Revenue Service selected petitioner’s 2002 and 2003 tax returns

for examination. On December 15, 2004, petitioner met with

Revenue Agent Winslow, the agent who was assigned to conduct the

2002 and 2003 examination, and respondent’s counsel to discuss

petitioner’s claim that he was entitled to deductions for 2001

and to review the documentation needed for the examination of

petitioner’s 2002 and 2003 returns. During that meeting,

petitioner admitted that he personally had prepared some of the

third-party documentation that he had attached to his 2001

return.
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3In his motion, respondent conceded a computational mistake

in calculating the original deficiency. The corrected original

deficiency is $5,196.

Notice of Deficiency

In the notice of deficiency, respondent disallowed

petitioner’s Schedule C bad debt deduction of $20,000 and his

Schedule C legal expense deduction of $1,300. As a result of

these adjustments, respondent made a computational adjustment

reducing petitioner’s itemized deductions by $2,195 but did not

otherwise disallow the itemized deductions petitioner had claimed

on Schedule A. Respondent did not assert that petitioner was

liable for any addition to tax or penalty.

Amendment to Answer

After respondent uncovered evidence that petitioner had

overstated his Schedule A itemized deductions and had falsified

documentation to substantiate his Schedules A and C deductions,

respondent amended his answer to the amended petition to assert

an additional deficiency of $5,784.14 (thereby increasing the

total claimed deficiency for 2001 to $10,980.143) resulting from

the complete disallowance of petitioner’s itemized deductions for

lack of substantiation. Respondent also asserted for the first

time that petitioner was liable for the fraud penalty pursuant to

section 6663(a).
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4Although a taxpayer may contend that the burden of proof

should shift to the Commissioner under sec. 7491, sec. 7491 does

not shift the burden of proof in this case. Respondent concedes

that he has the burden of proof with respect to the only open

issues--the increased deficiency and the fraud penalty.

OPINION

I. Burden of Proof

Normally, in a case before this Court, the taxpayer bears

the burden of proof.4 Rule 142(a)(1). However, if the

Commissioner raises a new issue or seeks an increase in a

deficiency, the Commissioner has the burden of proof as to the

new issue or increased deficiency. Id. In addition, in any case

involving the issue of fraud with intent to evade tax, the burden

of proof in respect of that issue is on the Commissioner. Sec.

7454(a); Rule 142(b).

In this case, the only open issues are issues as to which

respondent concedes he has the burden of proof. In order to

satisfy that burden of proof, respondent must prove by a

preponderance of the evidence that he properly disallowed

petitioner’s Schedule A deductions, and he must also prove by

clear and convincing evidence that petitioner is liable for the

fraud penalty under section 6663. Rule 142.

II. Substantiation of Schedule A Deductions

A. Medical and Dental Expenses

Section 213(a) authorizes a taxpayer, if he itemizes his

deductions, to deduct expenses paid during the taxable year for
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the medical care of the taxpayer, the taxpayer’s spouse, or a

dependent to the extent that such expenses exceed 7.5 percent of

adjusted gross income. In this case, petitioner claimed an

itemized deduction for unreimbursed medical and dental expenses

of $8,805.87 on his 2001 return and attached documentation to his

return purporting to substantiate the expenses. When respondent

issued his notice of deficiency, he did not disallow these

expenses, although he did make a computational adjustment to the

amount of the deduction because of adjustments affecting the

calculation of petitioner’s adjusted gross income. However,

after respondent discovered that some of the documentation

attached to petitioner’s 2001 return may have been falsified,

respondent disallowed all of petitioner’s Schedule A expenses,

including his medical and dental expenses, for failure to

substantiate, and he moved to increase the deficiency to reflect

the disallowance.

At trial, respondent convincingly proved that the

documentation attached to petitioner’s 2001 return to document

his medical and dental expenses had been falsified. 

Consequently, the record contains no credible evidence

substantiating petitioner’s medical and dental expenses for 2001,

and we sustain respondent’s determination.
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B. Taxes Paid

Petitioner claimed a deduction for State and local taxes

paid of $4,097.60. In his pretrial memorandum, respondent

conceded that, if petitioner’s allowable itemized deductions are

greater than the standard deduction, petitioner is entitled to a

deduction for the taxes paid.

C. Charitable Contributions

Section 170(a)(1) generally authorizes a taxpayer to claim a

deduction for any charitable contribution made during the taxable

year. On Schedule A to his 2001 return, petitioner claimed a

charitable contribution deduction for cash gifts to a church

($690) and for noncash gifts ($820). The only documentation

produced by petitioner was a receipt, purportedly from the

Salvation Army, regarding the noncash contribution. At trial

respondent convincingly proved that the documentation had been

falsified. Consequently, the record contains no credible

evidence substantiating petitioner’s charitable contributions for

2001, and we sustain respondent’s determination.

D. Unreimbursed Employee Business Expenses and Other 

 Miscellaneous Expense

Section 162(a) authorizes a taxpayer to deduct ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on a trade or business. An “ordinary” expense

is one incurred in a transaction that commonly or frequently

occurs in the type of business involved. Deputy v. du Pont, 308
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U.S. 488, 495 (1940). A “necessary” expense is one that is

“appropriate and helpful” to the taxpayer’s business. Welch v.

Helvering, 290 U.S. 111, 113 (1933). Expenses allowable under

section 162 must be “directly connected with or pertaining to the

taxpayer’s trade or business”. Sec. 1.162-1(a), Income Tax Regs. 

Personal, living, and family expenses are not deductible. Sec.

262(a).

An employee is generally recognized as being in the trade or

business of being an employee, and may deduct employment-related

expenses if the requirements of section 162 are met. 

Commissioner v. Flowers, 326 U.S. 465 (1946). However, “A trade

or business expense deduction is not allowable to an employee to

the extent that the employee is entitled to reimbursement from

his or her employer for an expenditure related to his or her

status as an employee.” Lucas v. Commissioner, 79 T.C. 1, 7

(1982). If an employee could have requested reimbursement under

the plan and fails or forgets to do so, he may not claim a

deduction for the expenses under section 162. Id.; see also

Orvis v. Commissioner, 788 F.2d 1406 (9th Cir. 1986), affg. T.C.

Memo. 1984-533; Kennelly v. Commissioner, 56 T.C. 936, 943

(1971), affd. without published opinion 456 F.2d 1335 (2d Cir.

1972).

In this case, petitioner claimed a deduction for

unreimbursed employee business expenses totaling $16,293. 
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Although petitioner attached some documentation of these expenses

to his 2001 return, respondent has convincingly demonstrated that

the documentation was falsified and that several of the

signatures thereon were forged. In addition, respondent

introduced evidence at trial that petitioner admitted creating

some of the documentation attached to his 2001 return, and he

also convincingly established at trial that both of petitioner’s

employers had reimbursement plans to cover legitimate employee

business expenses during 2001. The record made by respondent and

the complete lack of credible evidence to substantiate

petitioner’s claimed employee business expenses convince us that

respondent has met his burden of proving by a preponderance of

the evidence that these expenses were properly disallowed.

With respect to the remaining miscellaneous expenses claimed

on Schedule A, respondent has adequately demonstrated that

petitioner has failed to substantiate the expenses as required by

section 6001 and related regulations. See sec. 6001; sec.

1.6001-1(a), (e), Income Tax Regs. Consequently, we sustain

respondent’s determination disallowing the expenses.

III. Disallowance of Schedule C Deductions

A. In General

In his notice of deficiency, respondent disallowed

petitioner’s 2001 Schedule C expense deductions and computed the

resulting income tax deficiency. When petitioner failed to
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appear for trial, respondent moved for a default judgment, and we

granted the motion with respect to the original deficiency as

corrected. However, even if we had denied respondent’s motion,

we would still have concluded that respondent’s determination

disallowing petitioner’s Schedule C expenses must be sustained. 

Our reasons are summarized below.

B. Bad Debt Deduction

Section 166(a)(1) authorizes a taxpayer to deduct a business

bad debt that becomes worthless during the year. To be entitled

to the deduction, the taxpayer must prove (1) that a bona fide

debt was created obligating the debtor to pay a fixed or

determinable sum of money, (2) that the debt was created or

acquired in proximate relation to a trade or business, and (3)

that the debt became worthless in the year claimed. See United

States v. Generes, 405 U.S. 93, 96 (1972); Calumet Indus., Inc.

v. Commissioner, 95 T.C. 257, 284 (1990). A debt is bona fide if

it arose “from a debtor-creditor relationship based upon a valid

and enforceable obligation to pay a fixed or determinable sum of

money.” Sec. 1.166-1(c), Income Tax Regs.

In this case, petitioner claimed a bad debt deduction for

compensation that he claimed he was entitled to but did not

receive in connection with his participation in a joint venture

with Thacker Engineering, Inc. (Thacker), beginning in

approximately 1995. Petitioner, a cash basis taxpayer, did not
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report any income from the joint venture on his Federal income

tax returns for 1995-2000. On February 2, 1996, Thacker filed a

voluntary petition for bankruptcy under chapter 11 with the

United States Bankruptcy Court for the Southern District of New

York. Petitioner filed a proof of claim with respect to the

unpaid compensation he claimed was owed to him under the joint

venture agreement with Thacker. Petitioner’s claim was

eventually discharged.

Worthless debts arising from claims of unpaid compensation

are not deductible under section 166 unless the income in

question was reported on the taxpayer’s income tax return for the

year for which the bad debt deduction is claimed or for a prior

taxable year. See sec. 1.166-1(e), Income Tax Regs.; see also

Gertz v. Commissioner, 64 T.C. 598, 600 (1975). In this case,

petitioner did not report the income that is the subject of his

bad debt claim on his 2001 return or on the return of any prior

taxable year. Consequently, respondent properly disallowed

petitioner’s bad debt deduction.

C. Deduction for Legal Expenses

As explained earlier in this opinion, section 162 authorizes

a taxpayer to claim a deduction for ordinary and necessary

business expenses paid or incurred during the taxable year to

carry on a trade or business. Petitioner claimed a deduction for

legal expenses of $1,300 on his 2001 Schedule C and attached to
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his return a letter purporting to substantiate the deduction. 

The letter was falsified. During the pendency of this case,

petitioner submitted another letter from a different lawyer

purporting to substantiate the deduction. That letter was also

falsified. The record contains no other document to substantiate

the expense. Respondent properly disallowed the deduction.

IV. Fraud Penalty

Section 6663 authorizes the Commissioner to impose a 75-

percent penalty on a taxpayer if any part of an underpayment is

due to fraud. The Commissioner must prove a taxpayer’s liability 

for the fraud penalty by clear and convincing evidence. Sec.

7454(a); Rule 142(b).

In order for the Commissioner to prove that a taxpayer is

liable for the fraud penalty, he must establish that (1) an

underpayment of tax exists, and (2) some part of the underpayment

is due to fraud. DiLeo v. Commissioner, 96 T.C. 858, 873 (1991),

affd. 959 F.2d 16 (2d Cir. 1992). Fraud is established by

showing that the taxpayer intended “to evade tax believed to be

owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of such tax.” Recklitis v. Commissioner,

91 T.C. 874, 909 (1988).

The existence of fraud is a question of fact to be resolved

upon consideration of the entire record. DiLeo v. Commissioner,

supra at 874. Fraud is never presumed and must be established by
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independent evidence of fraudulent intent. Beaver v.

Commissioner, 55 T.C. 85, 92 (1970). Fraud may be shown by

circumstantial evidence because direct evidence of the taxpayer’s

fraudulent intent is seldom available. Gajewski v. Commissioner,

67 T.C. 181, 200 (1976), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978). The taxpayer’s entire course of conduct

may establish the requisite fraudulent intent. Stone v.

Commissioner, 56 T.C. 213, 223-224 (1971).

Courts have relied upon a number of indicia or badges of

fraud in deciding whether an underpayment of tax is due to fraud. 

See, e.g., Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th

Cir. 1986), affg. T.C. Memo. 1984-601; Clayton v. Commissioner,

102 T.C. 632, 647 (1994); Petzoldt v. Commissioner, 92 T.C. 661,

700 (1989). Although no single badge is necessarily sufficient

to establish fraud, the existence of several badges of fraud

constitutes persuasive circumstantial evidence of fraud. 

Petzoldt v. Commissioner, supra at 700.

Respondent contends that the following badges of fraud are

present in this case: (1) Inadequate records, (2) providing

implausible or inconsistent explanations of behavior, (3) pattern

of behavior indicating an intent to mislead, and (4) filing false

documents. We agree with respondent.

The record clearly and convincingly establishes that

petitioner maintained inadequate records with respect to the
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deductions claimed on his 2001 returns. Respondent clearly and

convincingly proved that a substantial number of documents 

attached by petitioner to his 2001 return in an effort to

convince respondent that his deductions were proper had been

forged and falsified. Respondent also proved that petitioner

submitted at least one other forged document during the pendency

of this case. That document conflicted with another forged

document that petitioner had attached to his 2001 return. 

Respondent elicited testimony at trial establishing that

petitioner admitted preparing at least some of the forged

documents. The totality of the evidence clearly and convincingly

establishes that petitioner deliberately overstated his

deductions for 2001 and falsified documents supporting the

overstated and unsubstantiated deductions to mislead respondent

and to evade his proper income tax liability for 2001.

Respondent has met his burden of proving that petitioner is

liable for the fraud penalty, and, consequently, we sustain

respondent’s determination.

Decision will be entered under

Rule 155.