T.C. Mem o. 2 01 5- 58

UNITED STAT ES TAX COURT
ALAA I. MUSA, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 27 99 6- 12
. Fi le d M arch 25 , 20 15
.
Tim ot hy L. Bal dwi n, fo r pe ti ti on er. Mi ch ael T. Shel to n a ndEli zab eth S . McBr eart y , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud ge : By not ic e o f de fic ie nc y date d Au gu st21 , 20 12 , res po nd en t de te rm in edde fic ie nc ie s i n a ndpe na lt ie s wi th res pe ctto pe ti ti on er’s Fed eral in co m e ta x a s fo ll ows : 1

All m on et ary am ou nt s ar e ro un de d t o t he ne ares t d ol la r. 1- 2 -

[* 2] Year Defi ci en cy Pen al ty se c. 66 63 (a) 20 06 $1 06 ,89 9 $8 0,1 74 20 07 13 0,7 71 98 ,07 8 20 08 14 6,9 81 11 0,2 36 20 09 14 7,8 47 11 0,8 85 20 10 96 ,16 6 72 ,12 5 Afte r co nc es si on s, the is su es rem ai ni ng forde ci si on are: (1 ) whe th er p et it io ne r is li ab le forth e se ct io n 6 66 3( a) civ il frau d p en al ty 2 fo r ta x years 2 00 6- 10 , or i n t he alt ern at iv e, whe th er p et it io ne r is li ab le forth e se ct io n 6 66 2( a) ac cu racy-rela te d p en al ty for t ax y ears 20 06 -1 0 fo r an y po rti on s o f th e und erp aym en ts forth os e ta x years f orwhi chth e ci vi l fr au d p en al ty is n ot su st ai ne d; an d

3 (2 ) whe th er p et it io ne r is en ti tl edto ad di ti on al de du ct io ns cla im edon Sch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , inth e fo ll owi ng am ou nt s an d fo r th e fo ll owi ng types of e xp en se s: All sec ti on refe ren ces are t o t he Int ern al Rev enue Co de (Co de ) in effe ctfor 2 th e y ears at i ss ue . All R

ul e ref eren ces are t o the Tax C ou rt Rul es of P ract ic e an d Pro cedur e. Pet it io ne r st at edinhi s p retria l m em or an du m th atth e se c. 66 62 (a) a ccu racy- 3 rel at edpe na lty

“ sh ou ldbe pro pe rly im

po se d o n t he Pet it io ne r”. The Co urt in te rp ret s thi s s ta te m en t t o m eanth atpe ti ti on er co nc ed es he is li ab le forth e se c. 66 62 (a) p en al ty if he is fou ndno t l iabl e fo r th e se c. 66 63 (a) c iv il frau d p en al ty.- 3 -

[* 3] Y e a r W a g e s 1 N o n e m p l o y e e

c o m p e n s a t i o n V e h i c l e M e a l s & e n t e r t a i n m e n t T r a v e l C o s t o f g o o d s s o l d 2 0 0 6 --- $ 3 7 , 7 0 0 $ 8 , 4 6 0 $ 6 8 5 --- --- 2 0 0 7 --- 3 7 , 7 0 0 8 , 5 8 4 1 , 6 5 1 --- --- 2 0 0 8 --- 6 5 , 8 6 6 4 , 3 2 9 3 , 0 0 5 --- --- 2 0 0 9 --- 7 9 , 4 8 4 3 , 3 0 0 2 , 7 5 8 $ 7 , 5 8 9 --- 2 0 1 0 $ 7 5 , 9 0 0 7 5 , 8 7 5 4 , 7 8 2 3 , 4 1 4 4 7 8 $ 4 8 , 7 4 8 2 R e s p o n d e n t f

i l e d a m o t i o n f

o r p a r t i a l s u m m a r y j u d g m e n t o n M a r c h 4 , 2 0 1 4 , 1 w h i c h t h e C o u r t g r a n t e d b y o r d e r d a t e d M a r c h 2 7 , 2 0 1 4 , a n d w h i c h w e i n c o r p o r a t e b y r e f e r e n c e . I n o u r M a r c h 2 7 , 2 0 1 4 , o r d e r , w e a g r e e d w i t h r e s p o n d e n t t h a t t h e d u t y o f c o n s i s t e n c y a p p l i e s t o p r e v e n t p e t i t i o n e r f r o m d e d u c t i n g a d d i t i o n a l w a g e s f o r t a x y e a r s 2 0 0 6
- 0 9 b e c a u s e t h e p e r i o d o f l i m i t a t i o n s f o r c o l l e c t i o n o f e m p l o y m e n t t a x f o r t h o s e p e r i o d s h a s n o w e x p i r e d , a n d r e s p o n d e n t i s b a r r e d b y l a w f r o m c o l l e c t i n g t h e a d d i t i o n a l e m p l o y m e n t t a x a t t r i b u t a b l e t o t h o s e w a g e s . S e e s e c . 6 5 0 1 ( a ) , ( b ) ( 2 ) ; s e e a l s o K i e l m a r v . C o m m i s s i o n e r , 8 8 4 F . 2 d 9 5 9 , 9 6 5 ( 7 t h C i r . 1 9 8 9 )
. B o t h p e t i t i o n e r a n d r e s p o n d e n t r e f e r t o t h e p r o p e r t r e a t m e n t o f a d d i t i o n a l c o s t o f 2 g o o d s s o l d ( C O G S ) a s “ d e d u c t i o n s ”
. T h e C o u r t n o t e s t h a t C O G S i s n o t t r e a t e d a s a d e d u c t i o n f

r o m g r o s s i n c o m e b u t i s r a t h e r s u b t r a c t e d f r o m g r o s s r e c e i p t s i n o r d e r t o a r r i v e a t g r o s s i n c o m e . M e t r a C h e m C o r p . v . C o m m i s s i o n e r , 8 8 T . C
. 6 5 4 , 6 6 1 ( 1 9 8 7 ) ; s e c . 1
. 6 1
- 3 ( a ) , I n c o m e T a x R e g s . FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Pe ti ti on er re si de d in W is co ns in at t he ti m e h e fi le d h is pe ti ti on . In20 05 pe ti ti on er fo rm edCas ab la nc a Res taur an t, LLC (Ca sabl an ca), a si ng le -m em

be r li m it edli ab il ity

co m pa ny form edinth e St at e o f W is co ns in . For- 4 -

[* 4] th e y ears at i ss ue pe ti ti on er re po rte d C as ab la nc a’s in co m e an d e xp en se s o n Sch edul es C at ta ch edto hi s i nd iv idua l re tu rn s. I. Cas ab la nc a’s Ope rat io ns Cas ab la nc a u se d M ic ro s Syste m s In c. (Mi cro s) , an i ndus try-st an da rdpo in tof -s al e syst em , to ful fil l cu st om ers ’ fo odan d drin k o rd ers . Cas ab lanc a’s st aff
en te redcu st om ers ’ or de rs in to co m pu te r te rm in al s af

te r en te rin g i n afou r-d ig it pe rs on al id en ti fic at io n n um be r un ique to eachst aff m em be r. The M ic ro s co m pu te rs th enrou te d e ach ord er t o t he ki tc he n o r ba r, as ap pl ic ab le
. Add it io na ll y , each ord er was reco rd edby a cent ral co m pu te r in anoff

ic e b el ow the
res taur an t. At the en d o f anem

pl oyee’s sh iftth e Mi cro s s y st em pri nt eda “ ch eck ou t rep ort” th atto ta le d t he gro ss rece ip ts fro m anin di vi du al wait er’s s hi ft, i nc lu di ng bi ll s p ai d b y

cas h o r cre di t ca rd . The ch eck ou t re po rt i nd ic at edth e am ou ntof t ip in co m e due to a wait er, wh o wo ul d t he n re cei ve anequi va le ntam ountof c as h. Any rem ai ni ng cas h a ndth e ch eck ou t re po rts were turne d o ve r to m an ag em en t. Dur in g 2 00 6 a nd20 07 pe ti ti on er p rin te d d ai ly sale s re po rts fro m Mi cro s an d st ap le d t he cred itcardrece ip ts to each sal es rep ort. Fo r 20 08 , 20 09 , and20 10 pe ti ti on er g en erat edon ly m on th ly sale s re po rts .- 5 -

[* 5] Afte r cl os in g t he res taur an t ea chni gh t, p et it io ne r st ap le d t og ethe r an d ret ai ne d a ll of t he cred itcardrece ip ts inth e ev en t a c us to m er p ay in g b y cred itcard di sp ut eda tr an sa ct io n. Cr ed itcardpa ym en ts were au to m at ic al ly dep os it edin to Cas ab la nc a’s bu si ne ss op erat in g a cco un t, en di ng in19 09 , at U.S. Ban k (o pe rat in g acco un t). Pe ti ti on er thr ew away th e cas h re cei pt s an d c he ck ou t re po rts . He ge ne ral ly too k t he cas h re cei ve d h om e wit h h im each ni gh t an d p la ceditina sa fe in hi s re si de nc e. Duri ng th e y ears at i ss ue pe ti ti on er n ev er d ep os it edm or e th ana de m in im is am ou ntof C as ab la nc a’s cas h re cei pt s i nt o t he op erat in g a cco un t o r an y ot he r ba nkacco un t. The no ti ce o f de fic ie nc y

de te rm in edsi gn ifi can t ad jus tm en ts to Cas ab la nc a’s gr os s re cei pt s as rep orte d o n t he Sch edul es C. Befo re tria l the pa rti es en te redin to a st ip ul at io n o f se tt le d i ss ue s wh ere t he y ag reedth atCas ab la nc a’s gr os s re cei pt s were u nd erre po rte d a s fo ll ows :
Year Gro ss rece ip ts pe r

or ig in al return Gro ss rece ip ts pe r

pa rti es ’ ag reem en t Adju st m en t 20 06 $3 69 ,02 1 $7 99 ,46 3 $4 30 ,44 2 20 07 51 2,9 82 92 5,4 63 41 2,4 81 20 08 58 4,1 89 1,0 47 ,56 0 46 3,3 71 20 09 96 9,8 16 1,1 89 ,07 5 21 9,2 60 20 10 1,2 44 ,40 7 1,3 39 ,45 8 95 ,05 1- 6 -

[* 6] II. Cas ab la nc a’s Payrol l an d P et it io ne r’s Fam il y Mem be rs Pet it io ne r hi redPay ch ex , Inc . (Paychex ), a le ad in g n at io na l p ayro ll pr ov id er, t o p ro vi de pa yro ll servi ces forCas ab la nc a. Pay ch ex pro vi de d v ari ou s se rv ic es to Cas ab la nc a, in cl ud in g (1 ) withh ol di ng in co m e ta x fo r in di vi du al
em pl oyees, (2 ) is su in g F orm s W-2, Wage an d Tax Sta te m en t, an d F orm s W-3, Tran sm it ta l o f W ag e an d Tax Sta te m en ts , and(3) fil in g F orm s 9 41 , Em pl oyer’s Qua rte rly Fede ral Tax R eturn. Each em pl oyee ad de d t o C as ab la nc a’s pa yro ll
co m pl et eda Fo rm

W -4 , Em pl oyee’s W ithh ol di ng All owa nc e Certi fic at e. Add it io na ll y , so m e em

pl oyees c om

pl et edW is co ns in Fo rm s WT-4, Em pl oyee’s W is co ns in W ithh ol di ng Exem pt io n C ert ifi cat e/

New Hire Rep orti ng , if tho se em pl oyees e le ct eddi ffer en t ex em pt io ns forSta te in co m e ta x p ur po se s tha n fo r Fed eral tax pu rp os es . Peti ti on er ad de d e m pl oyees t o a ndrem ov edem pl oyees fr om Cas ab la nc a’s pa yro ll by pla ci ng a te le ph on e cal l t o aPay ch ex rep res en ta ti ve an d rel ay in g t he in fo rm at io n o n t he co m pl et edFo rm s W-4 an d/ orFo rm s WT-4. Pet it io ne r pr ov id edPay ch ex with p ayro ll in fo rm at io n b iwee kl y by call in g a Paychex rep res en ta ti ve an d re la y in g t he pa yro ll nu m be rs ov er the tel ep ho ne . Cas ab la nc a th entra ns ferr edpa yro ll fun ds fro m th e o pe rat in g a cco un t i nt o a pa yro ll acco un t en di ng in57 54 at U.S. Ba nk . Pay ch ex withd rew wit hh ol di ng- 7 -

[* 7] tax es an d s erv ic e fee s fr om th e p ayro ll acco un t an d i ss ue d p ay ch eck s t o em pl oyees wh o wer e o n C as ab la nc a’s pa yro ll
. Pet it io ne r’s imm ed ia te fam il y in cl ud es hi s p aren ts , Iss a (J es se ) an d 4 Fare ezh , andeig htsi bl in gs , bro th ers Ramzi , Nass er, Mo ha m ad , andK.M. , and 5 si st ers Safa a, In te ss ar Ham da n, Han aa, an d Nev een . Non e o f th es e fam il y m em be rs ap pe aredon Cas ab la nc a’s pa yro ll du rin g 2 00 6, 2 00 7, o r 20 08 . Nass er was ad de d t o t he pa yro ll on or abo utMay 27, 2 00 9, an d re m ai ne d o n t he pa yro ll th ro ug h a t l eas t the en d o f 20 10 . Ramzi was a dd edto th e p ayro ll on or abo ut Octo be r 12 , 20 10 , andrem ai ne d o n t he pa yro ll th ro ug h a t l eas t the en d o f 20 10
. W ag e an d i nc om e tr an sc rip ts forNass er an d R amzi refl ectth atCas ab la nc a p ai d th em $3 6,0 00 an d $ 5,1 00 , res pe ct iv el y , in20 10 , whi chis co ns is te ntwith t he
am ount s re po rte d o n t he Pay ch ex reco rd s. Ap artfro m Nass er an d R amzi , no ot he r fam il y m em be rs ap pe aredon Cas ab la nc a’s pa yro ll in20 09 or 2 01 0. Pet it io ne r cl ai m edwage de du ct io ns of $ 20 7,1 50 on Cas ab la nc a’s 20 10 Sch edul e C, b utth e Paychex reco rd s re fle ctwage s p ai d o f on ly $13 1,2 50
. Res po nd en t d is al lo wedth e $ 75 ,90 0 d iff eren ce. On o r ab ou t No ve m be r 25 , 20 13 , Exc ep t fo r pe ti ti on er’s s is te r In te ss ar Ham da n, al l o f pe ti ti on er’s fam il y 4 m em be rs ha ve th e sa m e su rn am e as pe ti ti on er, Mu sa . For s im pl ic ity ’s sak e, th e Co urt wi ll refe r to pe ti ti on er’s fam il y m em be rs by the ir f

irs t n am es on ly. The Co urt re fers to m in orch il dr enby the ir i ni ti al s. 5- 8 -

[* 8] Cas ab la nc a subm it te d a n a m en de d F orm 94 1- X, Adjus te d Em

pl oyer’s Qua rte rly Fede ral Tax R eturn o r Cl ai m for Refu nd , an a m en de d F orm 94 0, Em pl oyer’s Annua l Fe de ral Unem pl oym en t (F UTA) Tax Re tu rn , am en de d F orm W -2 c, Co rrec te d Wage an d Tax Sta te m en ts , andam en de d F orm W -3 c, Tran sm it ta l of Co rrec te d Wage an d Tax Sta te m en ts . Peti ti on er cl ai m edanad di ti on al $7 5,9 00 in wage de du ct io ns for

tax y ear 2 01 0. Th e ad di ti on al wage s cl ai m edres ul t fr om am en de d fi li ng s fo r Je ss e, Nas se r, an d R amzi rep orti ng th atfortax y ear 2 01 0 J es se was pa id$1 5,0 00 in st eadof z ero ($1 5,0 00 ad jus tm en t); Nass er was pa id$6 5,0 00 in st eadof $ 36 ,00 0 ($ 29 ,00 0 a dju st m en t); an d R amzi was p ai d $ 37 ,00 0 i ns te adof $5 ,10 0 ($ 31 ,90 0 a dju st m en t). Nas se r te st ifi edinth is cas e o n M ay 13 , 20 14 . Res po nd en t’s at to rn ey , Mr. Sh el to n, b eg ancro ss -ex am in in g Nas se r reg ard in g wag es he st at edth athe ha d
rece iv eddu rin g the y ears at i ss ue . After Na ss er s ta te d t ha t h e was aware tha t
m on ey he was p ai d i n 2 00 6 c on st itut edwage s, M r. Sh el to n a sk edth e Co urt t o in st ru ctNass er o n h is Fif thAm en dm en t ri gh ts ag ai ns t s el f-i nc riminat io n b ecau se anag en t fr om

th e In te rn al Rev enue Serv ic e Cri min al Inv es ti ga ti on Div is on was pr es en t i n t he co urtro om

du rin g Nas se r’s te st im on y . The Co urt co m pl ie d wi th Mr. Sh el to n’s re qu es t, an d t he Co urt re ces se d u nt il May 14, 2 01 4, t o a ll ow Nas se r to ob ta in in de pe nd en t co un se l. OnMay 14, 2 01 4, co un se l fo r bo th pa rti es ap pe ared- 9 -

[* 9] an d i nf

orm edth e Co urt tha t s ev eral of p et it io ne r’s si bl in gs , in cl ud in g Nas se r, ha d re ta in edRo be rt Da ll m anto rep res en t the ir i nt eres ts inpe ti ti on er’s cas e. The Co urt d eferredtes ti m on y fro m Nass er, Ram zi , andNeve ento all ow M r. Dall m an ti m e to fam il iariz e h im se lf wi thth e fac ts of t he cas e. By ord er d at edJu ne 12 , 20 14 , th e cas e was cal en daredforfurth er tria l o n Aug us t 5 , 20 14 ; b utbe fo re the tri al co m m en ced , th e p art ie s fi le d asec on d
supp le m en ta l s ti pu la ti on of f act s o n Au gu st4, 2 01 4, tha t o bv ia te d t he ne edfor furth er tria l. The sec on d s up pl em en ta l s ti pu lati on of f act s s ta te s tha t Nev een worke d a t Ca sabl an ca i n 2 00 9 a ndRamzi work edat C as ab la nc a fro m 20 07 to 20 10 , andfurth er, tha t Nev eenan d R amzi ass ertth ei r Fi fth Am en dm en t ri gh ts to no t an swe r th e fo ll owi ng qu es ti on s: a. Whe n youwork edat C [as ab la nc a] durin g t he y ears at i ss ue , were y ouaware t ha t you wer e requi redto rep ort al l o f y ou r in co m e to th e IRS? b. Othe r th anth e returns th atC[h arl es ] S[turm ] pr ep aredfory ouin 20 13 , di d youfil e an y

returns with the IRS tha t re po rte d t he in co m e y ousay y ourece iv edfro m C[as ab la nc a] durin g t he y ears at i ss ue ? The sec on d s up pl em en ta l s ti pu la ti on of f act s al so st at es th atNass er ag reedwith th e ab ov e st at em en ts to th e ex te ntth es e st at em en ts wou ldno t b e in co ns is te ntwith li ve tes ti m on y

gi ve n dur in g t ria l. As ares ul t, n ei th er Nas se r no r Ramzi tes ti fie d a s to th e am ou nt s the y

rece iv edas c om

pe ns at io n fr om

Cas ab la nc a in 20 10
.- 10 -

[* 10 ] III. Non em

pl oyee Co m

pe ns at io n Pet it io ne r cl ai m s ad di ti on al de du ct io ns forno ne m pl oyee co m

pe ns at io n o f $3 7,7 00 for20 06 , $3 7,7 00 for20 07 , $6 5,8 66 for20 08 , $7 9,4 84 for20 09 , and $7 5,8 75 for20 10 . Thes e cl ai m edde du ct io ns are at tri bu tabl e to am ou nt s p ai d t o va rio us in di vi du al s, i nc lu di ng be ll y da nc ers , DJs , andun id en ti fie d i nd iv idua ls who were re cru it edto cle anth e res taur an t. Sam an th a Ch ris te ns enis a be ll y da nc er who ha s p erfo rm edat C as ab lanc a m os t Fr id ay ni gh ts si nc e Oct ob er 2 00 5. Sh e was pa id$1 00 foreach pe rfo rm an ce. At s om e p oi ntinti m e, an ot he r be ll y da nc er joi ne d M s. Ch ris te ns eninpe rfo rm in g o n F rid ay ni gh ts , bu t i t i s u nc le ar wh enth e nu m be r of be ll y da nc ers in crea se d fr om

on e to two . ElijahJan se n i s a f orm er Cas ab la nc a b art en de r, se rv er, an d m an ag er. Mr. J an se n c la im s tha t Ca sabl an ca reg ul arl y recrui te d p as se rs by to c on du ctva rio us cle an in g dut ie s atCas ab la nc a. The se in di vi du al s wer e p ai d i n c as h, b utMr. J an se n c ou ldno t s ta te whet he r Cas ab la nc a m ai nt ai ne d re co rd s o f th e am ou nt s p ai d t o the se in di vi du al s. Yu su f Abb as i i s a p ro

ject m an ag er atCat erp il lar Co al Mi ni ng who ha s s ch edul edDJs to pe rfo rm at C as ab la nc a si nc e Sep te m be r 20 09 . Mr. Abb as i cl ai m s tha t the DJs pe rfo rm ev ery Thu rs da y , Frid ay , andSatur day ni gh t an d a re p ai d $ 15 0 i n c as h fo r each pe rfo rm an ce. Mr. Ab ba si was n otaware o f an y reco rd s tha t Ca sabl an ca k ep t fo r th e am ou nt s p ai d t o t he DJs .- 11 -

[* 11 ] IV. Car a ndTruc k, M eal s an d En te rta in m en t, an d Tra ve l Ex pe ns es Pet it io ne r cl ai m s ad di ti on al de du ct io ns forth e fo ll owi ng ex pe ns es inth e fo ll owi ng am ou nt s: Year Car a ndtru ck Mea ls & en te rta in m en t Trav el 20 06 $8 ,46 0 $6 85
--- 20 07 8,5 84 1,6 51
--- 20 08 4,3 29 3,0 05
--- 20 09 3,3 00 2,7 58 $7 ,58 9 20 10 4,7 82 3,4 14 47 8 Pet it io ne r ha s n otsubm it te d any do cu m en ta ti on th atwou ldsubs ta nt ia te th es e ad di ti on al de du ct io ns . V. Co stof Go od s So ld Pet it io ne r al so cla im s h e is en ti tl edto anad di ti on al de du ct io n o f $4 8,7 48 fo r co stof g oo ds so ldfor20 10
. Pet it io ne r’s acco un tant , Charle s Sturm , “pu ll ed 6 th atnu m be r ou t o f th e b lu e” o n t he ba si s o f hi s b el ie f th atCOGS was lo wer fo r ta x y ear 2 01 0 t ha n fo r pr io r y ears an d t he refo re s ho ul d h av e b eenin crea se d b y th e

As we n ot e el se whe re i n t hi s o pi ni on , COGS is no t treat edas ade du ct io n 6 fro m gro ss in co m e b utis rathe r subt ract edfro m gro ss rece ip ts to arri ve at g ro ss in co m e. Metra Ch em

Co rp . v. Co m

m is si on er, 8 8 T.C. 6 54 , 66 1 (1 98 7) ; s ec. 1 .61
- 3( a), In co m e Tax Reg s.- 12 -

[* 12 ] ad di ti on al cla im edam ou nt . Mr. Sturm di d n otha ve an y

so ur ce d oc um en ts th atwou ldsubs tant ia te th e ad di ti on al $4 8,7 48
. VI. Cas ab la nc a’s Acco un ta nt s an d R eturn P rep arer s Pet it io ne r hi redJ& M Acco un ti ng & Tax Serv ic es (J& M) i n e arl y 20 06 to pr ov id e acc ou nt in g a ndtax servi ces forCas ab la nc a. J& M i s p rin ci pa ll y op erat ed by Thom as Jo bi n. J &M p ro vi de s ac co un ti ng , tax return p rep arat io n, an d p ayro ll
se rv ic es for

sm al l- a ndm ed iu m -s iz e b us in es se s an d p rep ares 2,0 00 -2 ,50 0 t ax returns pe r y ear. J &M p rep aredth e fo ll owi ng do cu m en ts : (1 ) Cas ab la nc a’s fin an ci al st at em en ts for20 06 , 20 07 , 20 08 , andpa rt o f 20 09 ; (2 ) pe ti ti on er’s returns fortax y ears 20 06 , 20 07 , and20 08 ; an d (3 ) Cas ab la nc a’s St at e sa le s t ax returns for20 06 , 20 07 , and20 08
. J& M p rep aredm on th ly sale s t ax returns forCas ab lanc a. Pet it io ne r pr ov id edJ& M wit h C as ab la nc a’s sa le s n um be rs m on th ly by

tel ep ho ne . Peti ti on er di d n otpro vi de J& M wit h c op ie s o f th e Mi cro s d ai ly sale s re po rts un ti l af te r th e au di t b eg anin20 09 . The s al es nu m be rs pe ti ti on er p ro vi de d t o J &M wer e far be lo w actua l s al es as r efl ect edon th e Mi cro s re po rts . For e xam pl e, fo r Ja nu ary, Feb ru ary, an d M arch 20 06 , J&M pre pa redsal es tax returns rep orti ng gro ss sal es of $2 7,7 79 , $2 1,9 31 , and$2 7,5 42 res pe ct iv el y , whi le th e Mi cro s re po rts sh ow g ro ss sa le s o f $7 5,2 56 , $5 9,7 45 , and$6 1,8 45 forth os e sa m e m on th s. Th es e- 13 -

[* 13 ] di sc rep an ci es res ul te d i n u nd erre po rti ng of s al es tax co ll ect edby Casab la nc a an d o wedto th e St at e o f W is co ns in . For e xa m pl e, in Jan ua ry , Feb ru ary, an d Mar ch20 06 , pet it io ne r co ll ect ed$4 ,39 6, $ 3,4 86 , and$3 ,61 0, re sp ect iv el y , bu t rep orte d o nl y

$1 ,31 2, $ 1,0 36 , and$1 ,34 1 t o t he Sta te of Wis co ns in . J&M us ed th e m on th ly sale s n um

be rs th atpe ti ti on er ca ll edinto pre pa re p et it io ne r’s Sch edul es C rep orti ng Cas ab la nc a’s gr os s re cei pt s. As a re su lt , gro ss rece ip ts forCas ab la nc a were u nd erre po rte d b y $4 30 ,44 2, $4 12 ,48 1, an d $ 46 3,3 71 for20 06 , 20 07 , and20 08 , res pe ct iv el y , th e y ears for whi chJ& M p rep aredpe ti ti on er’s i nd iv idua l i nc om e ta x re tu rn s. J &M h as a po li cy of rev ie win g t ax returns with c li en ts be fo re fi li ng , exp la in in g i m po rta ntit em s s uc h
as gro ss rece ip ts an d c os t o f go od s s ol d, an d a ll owi ng cli en ts to co rrec t an y erro rs on th e return. Mr . Jo bi n c red ib ly test ifi edth atJ& M wo ul d h av e d on e th e sa m e with p et it io ne r, an d p et it io ne r ne ve r in fo rm edan y on e atJ& M tha t the Sch edul es C were i na ccu rat e. Inad di ti on to m is le ad in g J &M abo utCas ab la nc a’s sa le s, p et it io ne r di d n ot di sc lo se all of h is bankacco un ts to J& M, in cl ud in g t he ba nkacco un t i nt o wh ic h cred itcardpa ym en ts were d ep os it edan d h is pe rs on al acco un t. Earl y inth e rel at io ns hi p b etweenCas ab la nc a an d J &M a ndbe fo re the au di t, Mr . Jo bi n t ol d pe ti ti on er tha t h e sh ou ldde po si t Ca sabl an ca’s ca shrece ip ts in to a bankacco un t,- 14 -

[* 14 ] bu t p et it io ne r adm it te d a t tria l tha t h e d idno t fo ll ow thi s ad vi ce. Mr. J ob in al so to ldpe ti ti on er tha t al l em pl oyees s ho ul d b e ad de d t o C as ab la nc a’s pa yro ll , in cl ud in g p et it io ne r’s fam il y m em be rs . Peti ti on er ch os e n otto he edMr. J ob in ’s advi ce i n t hi s re ga rd . Add it io na ll y , Mr. Jo bi n t ol d p et it io ne r “ earl y on ” th athe
ne ed edto ke ep reco rd s o f bu si ne ss ex pe ns es , su chas r ecei pt s an d m il eag e lo gs . Pet it io ne r’s co us in Jef

f is a co m m erci al rel at io ns hi p m an ag er fo r PNC Ba nk in Mi lwau ke e, W is co ns in . In early 20 09 pe ti ti on er ap pr oa ch edJef f to askfor advi ce o n p ur ch as in g t he bu il di ng ho us in g C as ab la nc a. Whe n p et it io ne r sh owe d Je ff h is tax returns , Jef

f st at ed , he was “ ta ke n aba ck ” b y Cas ab la nc a’s lo w pr of it ab il ity as r efl ect edon th e ta x re turn s. J eff a sk edpe ti ti on er wh ethe r he ha d ot he r in fo rm at io n re ga rd in g C as ab la nc a’s sa le s, atwhi chpo in t h e sh owe d J eff the Mi cro s re po rts . Jeff

no ti ceddi sc rep an ci es be twee n t he am ou nt s t al li edon th e Mi cro s re po rts an d t he am ou nt s re po rte d o n p et it io ne r’s ta x re turn s, an d h e su gg es te d am eet in g wi th J& M. Je ff h ada pr eex is ti ng rel at io ns hi p wi thMr. J ob in , who ha d p rep aredJef

f’s pe rs on al in co m e ta x re tu rn s. Pet it io ne r an d J eff m etwith Mr. J ob in inearl y

20 09 , andJef

f st at edth atMr. J ob in be cam e “ de fen si ve ” whe n qu es ti on edab ou t the tax returns . Jeff ex pl ai ne d t ha t i n h is co nv ers at io n wi th Mr. Jo bi n, h e was “ tryin g t o u nd ers ta ndwher e we’re * * * m is si ng * * * g ro ss sal es nu m be rs off th e [Mi cro s] system

ba ckto th e ta x re tu rn ”. Fo ll owi ng th is m eet in g,- 15 -

[* 15 ] Jef f su gg es te d t o p et it io ne r th athe swi tc h a cco un ta nt s an d re ferr edhi m to Mr. Sturm , with wh om

Jef f ha d apre ex is ti ng bu si ne ss rel at io ns hi p. J eff s ta te d t ha t itwas “ go odpra ct ic e” t o re fer c li en ts to cert ai n a cco un ta nt s, b ecau se th ey co ul d b e

“ a g oo d re ferr al so ur ce” i n re tu rn . Peti ti on er d idno t fo ll ow J eff’s ad vi ce t o h ire Mr. Sturm

un ti l af te r he rece iv edno ti ce tha t h is returns were und er au di t. In20 10 pe ti ti on er fi redJ& M an d h ire d C harle s Sturm & Ass oc ia te s (Sturm), le d b y

Mr. Sturm . Stu rm

do es a gr eatde al of a cco un ti ng workfor
res taur an ts an d p rep ares ap pr ox im at el y 1,4 00 in di vi du al tax returns an nu al ly. Sturm pre pa redpe ti ti on er’s i nd iv idua l i nc om e ta x re tu rn s fo r ta x years 2 00 9 a nd 20 10 an d p rep aredam en de d re tu rn s fo r pe ti ti on er fo r ta x years 2 00 6, 2 00 7, an d 20 08 . For a ll of t he y ears at i ss ue , pet it io ne r fai le d t o m ak e an y est im at edtax pa ym en ts . Mr. Sturm

di d n otbe li ev e th e Mi cro s re po rts were “ co m pl et el y rel iabl e” b ut al so st at edth atth e cre di t ca rdsal es as r efl ect edon th e Mi cro s re po rts m at ch ed de po si ts in to pe ti ti on er’s b an k a cco un t. Rat he r th anus in g t he Mi cro s re po rts , Mr. Sturm us edth e sa le s t ax pa idto th e St at e o f W is co ns in to rev ers e en gi ne er the
am ount s o f sa le s g en erat edat C as ab la nc a. Notall of t he sal es tax co ll ect edby Cas ab la nc a was rem it te d t o t he Sta te of Wis co ns in , andMr. Sturm expr es se d h is be li ef attri al th atde du ct io ns are p erm it te d fo r sa le s t ax , eve n i f th atsal es tax is no t- 16 -

[* 16 ] pa idov er t o t he ap pr op ria te au th or ity . Mr. Sturm adm it te d a t tria l tha t u si ng th is m etho d o f arri vi ng at g ro ss sal es res ul te d i n “ si gn ifi can t” un de rrep orti ng of Cas ab la nc a’s gr os s re cei pt s. Th e am en de d re tu rn s fo r 20 06 , 20 07 , and20 08 an d th e o rig in al returns for

20 09 an d 2 01 0 t ha t M r. Stu rm pre pa redall un de rrep orte d Cas ab la nc a’s gr os s re cei pt s as refl ect edinth e fo ll owi ng tab le :
Year Am en de d a ndori gi na l returns fil edby Mr. Stu rm Gro ss rece ip ts pe r ag reem en t o f th e p art ie s Adju st m en t 20 06 $6 65 ,46 6 $7 99 ,46 3 $1 33 ,99 7 20 07 78 1,1 70 92 5,4 63 14 4,2 93 20 08 85 9,4 04 1,0 47 ,56 0 18 8,1 56 20 09 96 9,8 16 1,1 89 ,07 5 19 ,26 0 20 10 1,2 44 ,40 7 1,3 39 ,45 8 95 ,05 1 Partof t he di sc rep an cy

be twee n t he am ou nt s re po rte d o n t he returns fil edby Mr. Sturm

an d t he am ou nt s ag reedto by the pa rti es aro se fro m th e fac t tha t pe ti ti on er t ol d M r. Stu rm th athe ha d p ai d s om e fam il y m em be rs incas h, an d a s a res ul t, Mr . Stu rm

in crea se d t he wage de du ct io n attrib ut ab le to Cas ab la nc a b y

“ m en ta l ar ithm et ic ”. Mr. Sturm ex pl ai ne d a t tria l tha t the re was no pape r tr ai l t o subs ta nt ia te th e in crea se d wag e d educ ti on . Pet it io ne r di d n otdi sc lo se all of h is ba nkacco un ts to Mr. Sturm . Duri ng tri al Mr. Sturm

co ul d n otid en ti fy

m or e th an2 ac co un ts att rib ut ab le to pe ti ti on er,- 17 -

[* 17 ] bu t dur in g t he y ears at i ss ue pe ti ti on er m ai nt ai ne d 1 2 p ers on al an d b us in es s ba nkacco un ts . Like Mr. J ob in ha d d on e b efo re h im , Mr. Sturm to ldpe ti ti on er t o de po si t ca sh in to th e b an k a ndad d h is fam il y m em be rs to th e p ayro ll . Evenaft er be in g a dv is edby a seco ndacco un ta ntas t o t he se m at te rs , pet it io ne r di d n ot imm ed ia te ly beg in de po si ti ng cas h i nt o t he ba nkor a dd in g fa m il y m em be rs to th e pa yro ll
. VII. Pet it io ne r’s Veh ic le Loan App li cat io n Pet it io ne r ap pl ie d fo r a $ 32 ,00 0 v eh ic le lo anat U.S. Ba nkon Apri l 2 7, 20 07 , to fin an ce the pu rch as e o f a 2 00 4 B MW 7 Seri es sed an . Peti ti on er subm it te d t he ap pl ic at io n u nd er Ca sabl an ca’s n am e as a bu si ne ss lo an . The l oa n ap pl ic at io n was pro ces se d b y James Bl om qu is t, wh o a ls o s erv ic edCas ab la nc a’s pa yro ll an d o pe rat in g a cco un ts at U.S. Ba nk . Peti ti on er p ur ch as edth e carfor pe rs on al reas on s al th ou gh he oc cas io na ll y us editforbu si ne ss pu rp os es . Pet it io ne r di d n otke ep an y reco rd s o f th e ti m es he us edth e car forbu si ne ss pu rp os es . The lo anap pl ic at io n was th ree p ag es lo ng , with t he fir stpa ge co nt ai ni ng in fo rm at io n abo utth e ap pl ic an t, the sec on d p ag e co nt ai ni ng si gn atur e li ne s, an d th e th irdpa ge co nt ai ni ng di sc lo su res to th e ap pl ic an t. Pet it io ne r rep res en te d o n th e lo anap pl ic at io n t ha t Ca sabl an ca’s g ro ss an nu al sal es as r ep orte d o n h is m os t- 18 -

[* 18 ] rece nttax return wer e $ 72 0,0 00 . Add it io na ll y , pet it io ne r rep res en te d t ha t hi s g ro ss pe rs on al an nu al in co m e as rep orte d o n h is las t i nc om e ta x re tu rnwas $2 40 ,00 0. Pe ti ti on er fi le d h is 20 06 in di vi du al Fed eral in co m e ta x re tu rnon Apri l 15 , 20 07 , whi chwas 1 2 d ay s b efo re h e ap pl ie d fo r th e v eh ic le lo anat U.S. Ba nk
. Pet it io ne r’s 20 06 in di vi du al Fed eral in co m e ta x re tu rnrefl ect s tha t h e rep orte d $3 69 ,02 1 i n g ro ss sal es on th e 2 00 6 S ch edul e C fo r Cas ab la nc a, $1 8,3 24 inne t pr of itforCas ab lanc a, an d $ 5,0 04 ingro ss in co m e fo r hi m se lf. VIII. Aud it On J un e 5 , 20 09 , res po nd en t s en t p et it io ne r no ti ce tha t h is 20 07 tax return was un de r au di t. InAug us t 2 00 9 t he au di t was ex pa nd edto in cl ud e p et it io ne r’s 20 06 an d 2 00 8 t ax returns . The au di t was in it ia ll y co nduc te d b y

Rev enue Agen t Bryan Ban ni ckbu t was reas si gn edto Rev enue Agen t Sh aro n Val en ti ne (co ll ect iv el y , rev enue ag en ts ) in Jan uary 20 10 fol lo win g M r. Ban ni ck ’s trans fer t o an ot he r IRS d iv is io n. Dur in g t he co ur se of t he au di t the rev enue ag en ts is su edm ul ti pl e in fo rm at io n d oc um en t re qu es ts (IDRs ) to pe ti ti on er an d h is rep res en ta ti ve s, as il lu st rat edinth e fo ll owi ng tab le :- 19 -

[* 19 ] Date is su ed Rec ip ie nt Years co ve red 7/ 7/ 09 AlaaMu sa 20 07 7/ 30 /0 9 AlaaMu sa 20 07 8/ 12 /0 9 AlaaMu sa 20 07 8/ 25 /0 9 W il be rt B au er 20 06 , 20 07 , 20 08 11 /5 /0 9 AlaaMu sa 20 06 , 20 07 , 20 08 8/ 31 /1 1 AlaaMu sa 20 06 , 20 07 , 20 08 9/ 27 /1 1 AlaaMu sa& Ch arl es Sturm 20 06 10 /1 1/ 11 AlaaMu sa& Ch arl es Sturm 20 07 10 /1 1/ 11 AlaaMu sa& Ch arl es Sturm 20 06 10 /1 2/ 11 AlaaMu sa& Ch arl es Sturm 20 09 11 /2 9/ 11 AlaaMu sa& Ch arl es Sturm 20 06 , 20 07 , 20 08 , 20 09 , 20 10 4/ 12 /1 2 AlaaMu sa 20 06 , 20 07 , 20 08 , 20 09 , 20 10 So m e o f th e IDRs were i de nt ic al , exc ep t fo r th e d at es . For e xam pl e, th e fi rs t thr ee IDRs all reque st edth e sa m e in fo rm at io n, an d t he 7/ 30 /0 9 and8/ 12 /0 9 IDR s wer e rei ss ue d a fte r pe ti ti on er fa il edto co m pl y by the de ad li ne inth e 7 /7 /0 9 IDR s. Pet it io ne r di d n otco m

pl y or o nl y pa rti al ly com

pl ie d wi th m an y

of t he IDRs . Mu lt ip le IDRs reque st edba nkst at em en ts , can cel edch eck s, an d d ep os itsl ip s fo r pe ti ti on er’s b an k a cco un ts , “bo th bu si ne ss an d p ers on al , sav in gs an d c he ck in g” , bu t p et it io ne r rep eat ed ly fail edto pro vi de co pi es of v ari ou s b an k a cco un ts ,- 20 -

[* 20 ] in cl ud in g the payro ll acco un t an d h is pe rs on al acco un t. Mr . Ban ni ck
ev en tu al ly iss ue d asu m

m on s t o U.S. Ba nkto ob ta in pe ti ti on er’s b an k re co rd s. Mr. Ba nn ic k a ndMs . Valen ti ne ex am in edpe ti ti on er’s b an k a cco un t re co rd s an d M ic ro s re po rts an d d et erm in edth athe ha d fa il edto rep ort s ig ni fic an t am ou nt s of gro ss rece ip ts . Sin ce p et it io ne r rare ly dep os it edcas h i nt o h is ba nkacco un ts , th e rev enue ag en ts co ul d n otus e h is ba nkacco un t s ta te m en ts to de te rm in e th e am ount s o f cas h t ha t wer e n otrep orte d o n h is tax returns . Ins te ad , th e rev enue ag en ts rel ie d o n C as ab la nc a’s Mi cro s re po rts to de te rm in e th e am ou nt s o f
un rep orte d c as h. Ms . Valen ti ne ve rif ie d t he accuracy of th e Mi cro s re po rts by
co m pa rin g c red itcardtra ns act io ns ap pe ari ng on th e Mi cro s re po rts with c red it cardde po si ts in to pe ti ti on er’s b an k a cco un t fr om 20 06 to 10 . Ms. Val en ti ne ’s
an al y si s fo un d t ha t the cred itcardtra ns act io ns onth e Mi cro s re po rts m at ch edth e de po si ts in to pe ti ti on er’s b an k a cco un t wi th a 1.3 9% v ari an ce. Aft er co nf irming th atth e Mi cro s re po rts accu rat el y refl ect edth e am ou nt s o f cre di t ca rdsal es , Ms . Vale nt in e u se d t he Mi cro s re po rts to de te rm in e th e am ou nt s o f un rep orte d c as h
sa le s.- 21 -

[* 21 ] OPINION I. Bu rd enof P ro of Res po nd en t b ears th e b ur de n o f pr ov in g fr au d b y cle ar an d c on vi nc in g
ev id en ce. See sec . 74 54 (a); Ru le 14 2( b) . To sa ti sf y hi s b ur de n, re sp on de ntm us t sh ow: (1) anun de rp aym en t o f ta x e xi st s, an d (2 ) pe ti ti on er i nt en de d t o e va de ta xe s kno wn t o b e o win g b y co nduc t i nt en de d t o c on ceal , m is le ad , or o th erwi se pr ev en t the co ll ect io n o f ta xe s. See Sad le r v. C omm is si on er, 1 13 T.C. 99 , 10 2 (1 99 9) ; Pa rk s v . Comm is si on er, 9 4 T.C. 6 54 , 66 0- 66 1 (1 99 0) . Frau d i s n ev er im pu te d o r pr es um ed , andth eref or e res po nd en t m

us t m eethi s b ur de n t hr ou gh affi rm at iv e ev id en ce. See Niedrin gh au s v . Comm is si on er, 9 9 T.C. 2 02 , 21 0 (1 99 2) ; Pe tz ol dtv. Co m

m is si on er, 9 2 T.C. 6 61 , 69 9 (1 98 9) ; Be av er v . Co m m is si on er, 5 5 T.C. 8 5, 9 2 (1 97 0) . Frau d m ay be pro ve d b y

cir cum st an ti al
ev id en ce an d re as on ab le in fere nc es dra wn fr om th e fac ts be cau se di rectpro of of a ta xp ay er’s fraudis rare ly avai labl e. Pet zo ld t v . Comm is si on er, 9 2 T.C. at69 9. Onc e res po nd en t h as pro du cedsu ffi ci en t ev id en ce t o e st ab li sh th atan y po rti on of th e und erp aym en t i s at tri bu tabl e to frau d, the en ti re u nd erp aym en t s ha ll be tre at ed
as att rib ut ab le to frau d, ex cep t wi th res pe ctto an y po rti on th ereo f th atpe ti ti on er- 22 -

[* 22 ] est ab li sh es , by a p rep on de ran ce o f th e ev id en ce, i s n otatt rib ut ab le to frau d. See s ec. 6 66 3( b)
. Pet it io ne r be ars th e b ur de n o f pr ov in g h is en ti tl em en t t o t he cla im ed Sch edul e C d educ ti on s. Re sp on de nt ’s det erm in at io n a s t o p et it io ne r’s ta x l iabi li ty is pre su m edco rrec t, an d p et it io ne r be ars th e b ur de n o f pr ov in g o th erwi se . See Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Excl us io ns fro m in co m e are to be na rro wly co ns tru ed . Comm is si on er v . Sch le ie r, 51 5 U.S. 3 23 , 32 8 (1 99 5) . Dedu ct io ns are a m at te r of leg is lati ve gra ce. Dep ut y v. du P on t, 3 08 U.S. 48 8, 4 93 (19 40 ); Ne w Col on ia l Ic e Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (1 93 4) . Taxp ay ers m

us t co m pl y with s pe ci fic requi rem en ts foran y de du ct io ns cl ai m ed . See INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Co lo ni al Ice Co . v. Hel ve rin g, 2 92 U.S. at 4 40 . Taxp ay ers m us t al so m ai nt ai n ad equa te reco rd s t o s ub st an ti at e th e am ount s o f an y cred it s an d d educ ti on s. Sec
. 60 01 ; s ec. 1 .60 01 -1 (a), In co m e Tax Reg s. Sect io n 7 49 1( a)(1 ) pr ov id es anex cep ti onth atsh ift s the bu rd enof p ro of to th e Co m m is si on er as to an y

factua l i ss ue rel ev an t t o atax pa y er’s l iabi li ty if: (1 ) th e ta xp ay er i nt ro du ces cred ib le ev id en ce wi th res pe ctto th atis su e, an d (2 ) th e- 23 -

[* 23 ] tax pa y er s at is fie s o th er co nd it io ns , in cl ud in g s ub st an ti at io n o f an y it em an d
co op erat io n wi th th e Gov ern m en t’s re qu es ts forwitne ss es , do cu m en ts , othe r in fo rm at io n, an d m eet in gs . Sec. 7 49 1( a)(2 ); s ee al so Ru le 14 2( a)(2 ). The ta xp ay er b ears th e b ur de n o f pr ov in g t ha t h e o r sh e h as m etth e requi rem en ts of
se ct io n 7 49 1( a). Ro lfs v. Co m m is si on er, 1 35 T.C. 47 1, 4 83 (20 10 ), aff’d, 6 68 F.3 d 8 88 (7t h C ir. 2 01 2) . It i s u nc le ar fro m pe ti ti on er’s b rie fs whet he r he ha s
as se rte d b ur de n s hi fti ng un de r se ct io n 7 49 1( a). Howe ve r, pe ti ti on er h as no t de m on st rat edth atth e requi rem en ts of s ect io n 7 49 1( a) h av e b eenm et , and th eref or e th e b ur de n o f pr oo f with re sp ectto th e cl ai m edSch edul e C d educ ti on s
rem ai ns with p et it io ne r. II. Sect io n 6 66 3( a) FraudPen al ty If an y pa rt o f an y

un de rp aym en t o f ta x re qu ire d t o b e sh own on a return i s at tri bu tabl e to frau d, s ect io n 6 66 3( a) i m po se s a p en al ty equ al to 75 % of the po rti onof t he un de rp aym en t wh ic h i s at tri bu tabl e to frau d. Se ct io n 6 66 3( b) pr ov id es th aton ce the Co m m is si on er es tabl is he s tha t an y po rti on of t he
un de rp aym en t i s due to frau d, the en ti re u nd erp aym en t i s t o b e tr eat edas- 24 -

[* 24 ] att rib ut ab le to frau d e xc ep t wi th res pe ctto an y po rti on th atth e ta xp ay er
es tabl is he s, b y

a pr ep on de ran ce o f th e ev id en ce, i s n otatt rib ut ab le to frau d. A. Und erp aym en t o f Tax The fir stpro ng of t he frau d t es t re qu ire s the Co m m is si on er t o p ro ve th at , for each y ear a t i ss ue , th ere i s an un de rp aym en t o f ta x. Th e p art ie s h av e st ip ul at ed th atpe ti ti on er fa il edto rep ort s ig ni fic an t s um s o f gr os s re cei pt s fr om Cas ab la nc a fo r eac h year atis su e. As ex pl ai ne d i n fu rth er d et ai l i nf ra, p et it io ne r is all owe d ad di ti on al Sch edul e C d educ ti on s o f $5 ,20 0 fo r ta x years 2 00 6, 2 00 7, an d 2 00 8,
an d $ 28 ,60 0 fo r ta x years 2 00 9 and20 10 forno ne m pl oyee co m

pe ns at io n. Ap art fro m th es e d educ ti on s, p et it io ne r is no t en ti tl edto an y ad di ti on al de du ct io ns . Afte r ta ki ng in to acco un t the ad di ti on al Sch edul e C d educ ti on s t o wh ic h p et it io ne r is en ti tl ed , an u nd erp aym en t ex is ts foreachof t he tax y ears at i ss ue . B. Frau du le ntInt en t The sec on d p ro ng of t he frau d t es t re qu ire s the Co m m is si on er t o p ro ve th at , fo r eac h year atis su e, atlea stso m e p orti onof t he un de rp aym en t i s due to frau d, de fin edas a n i nt en ti on al wron gd oi ng de si gn edto ev ad e ta x b el ie ve d t o b e o win g. DiLeo v. Co m

mis si on er, 9 6 T.C. 8 58 , 87 4 (1 99 1) , aff’d, 9 59 F.2d16 (2dCir
.- 25 -

[* 25 ] 19 92 ). The ex is te nc e o f frau d i s a que st io n o f fac t t o b e res ol ve d fr om th e
en ti re re co rd . Gajewsk i v . Comm is si on er, 6 7 T.C. 1 81 , 19 9 (1 97 6) , aff’d wit ho ut publ is he d o pi ni on , 57 8 F .2d13 83 (8t h C ir. 1 97 8) . Frau d i s n ev er i m pu te d o r pr es um ed . Beav er v . Comm is si on er, 5 5 T.C. at92 ; Ot su ki v. Co m m is si on er, 5 3 T.C. 96 , 11 2 (1 96 9) . The Co urt m ay ex am in e th e ta xp ay er’s wh ol e co ur se of
co nduc t t o d et erm in e whe th er fraudex is ts . Sto ne v. Co m m is si on er, 5 6 T.C. 2 13 , 22 4 (1 97 1) . There is rare ly dire ctev id en ce o f a t axpa y er’s fraudul en t i nt en t, an d th e Co m m is si on er m ay

pro ve frau du le ntin te ntth ro ug h c irc um st an ti al ev id en ce. Tou sh in v. Co m

mis si on er, 2 23 F.3d64 2, 6 47 (7t h C ir. 2 00 0) , aff’g T.C. Mem o. 19 99 -1 71
. Ove r th e y ears , cou rts ha ve de ve lo pe d ano ne xc lu si ve li stof f act or s tha t de m on st rat e fraudul en t i nt en t. The se ba dg es of f rau d i nc lu de : (1 ) un de rs ta te m en t of in co m e, (2 ) in ad equa te m ai nt en an ce o f rec or ds , (3) im pl au si bl e o r in co ns is te nt
ex pl an at io ns of b eh av io r, (4 ) co nc eal m en t o f as se ts or i nc om e, (5 ) fai lu re t o
co op erat e wit h t ax au th or it ie s, (6 ) en ga gi ng inil le ga l ac ti vi ti es , (7) anin te ntto
m is le adwhi chm ay

be in ferr edfro m

a pa tt ernof c on du ct , (8) lac k o f cre di bi li ty of th e ta xp ay er’s t es ti m on y , (9) fai lu re t o fi le tax returns , (10 ) fi li ng fal se do cu m en ts ,- 26 -

[* 26 ] (11 ) fai lu re t o m ak e es ti m at edtax pa ym en ts , and(12 ) de al in g i n c as h. Se e Sp ie s v . Uni te d S ta te s, 3 17 U.S. 49 2, 4 99 (19 43 ); B rad fo rdv. Co m m is si on er, 7 96 F.2 d 3 03 , 30 7- 30 8 (9 th Cir . 19 86 ), aff’g T.C. Me m o. 1 98 4- 60 1; Niedrin gh au s v . Co m m is si on er, 9 9 T.C. at21 1. A ta xp ay er’s i nt el li ge nc e, educ at io n, an d t ax
ex pe rti se are re le vantforpu rp os es of d et erm in in g fr au du le ntin te nt . See St ep he ns on v. Co m

mis si on er, 7 9 T.C. 9 95 , 10 06 (19 82 ), aff’d, 7 48 F.2d33 1 (6 th Ci r. 19 84 ); I le y

v. Co m m is si on er, 1 9 T.C. 6 31 , 63 5 (1 95 2) . W e co ns id er s ev eral of th es e fac to rs intu rn .

1. Und ers ta te m en t o f In co m e Pet it io ne r ha s co nc ed edth athe un de rrep orte d g ro ss rece ip ts to ta li ng m or e th an$1 .6 m il li on du rin g t he y ears at i ss ue , andas ares ul t h e und erre po rte d h is
own in co m e. Pet it io ne r arg ue s tha t the un de rrep orti ng of i nc om e was no t in te nt io na l b utwas i ns te addu e to care le ss ne ss an d re ck le ss ne ss , whi chhe arg ue s
ne ga te s a f

in di ng of f

rau du le ntin te nt . Peti ti on er at te m pt s t o b la m e Mr. J ob in for th e in accu raci es inhi s t ax returns by argu in g t ha t M r. Jo bi n h adacce ss to hi s fin an ci al reco rd s an d t he Mi cro s re po rts bu t fo r so m e uns pe ci fie d re as onch os e to
un de rrep ort p et it io ne r’s in co m e.- 27 -

[* 27 ] W e fi ndpe ti ti on er’s arg um en ts to be un co nv in ci ng forsev eral reas on s. Fi rs t, Mr . Jo bi n c red ib ly test ifi edth athe di d n otsee th e Mi cro s re po rts un ti l af te r th e co m m en cem en t o f au di t an d fu rth er, p et it io ne r fai le d t o d is cl os e al l o f hi s b an k
acco un ts to Mr. J ob in . Peti ti on er d oe s n otoff er an y expl an at io n a s t o wh y

Mr. Jo bi n o r J& M wo ul d b e m ot iv at edto pre pare g ro ss ly ina ccu rat e returns . Add it io na ll y , pet it io ne r can no t es cap e th e dut y to fil e acc ur at e returns by shi fti ng th e b la m e to Mr. J ob in an d J &M. Se e Me traCh em Co rp . v. Co m

m is si on er, 8 8 T.C. at 6 62 (“ As a g en eral rul e, th e dut y of f il in g a ccu rat e returns can no t b e
av oi de d b y

pl aci ng res po ns ib il ity

on a ta x re tu rnpre pa rer.” ). Seco nd , th e
un de rrep orti ng co nt in ue d a fte r pe ti ti on er ch an ge d a cco un tant s an d e nl is te d S tu rm to pre pa re h is tax returns . Con si st en t fa il ur e to rep ort s ub st an ti al in co m e o ve r
se ve ral y ears is hi gh ly pers ua si ve ev id en ce o f frau du le ntin te nt . See Tem pl e v . Co m m is si on er, T.C. Mem o. 2 00 0- 33 7, af f’d, 62 Fed . App x. 6 05 (6t h C ir. 2 00 3)
. Pet it io ne r’s fai lu re t o re po rt s ub st an ti al in co m e o ve r a fi ve -y ear p eri odis an in di cat io n o f frau d.- 28 -

[* 28 ] 2. In ad equa te Mai nt en an ce o f Rec or ds Pet it io ne r adm it te d a t tria l t o the fol lo win g: (1) de st ro y in g c as h s al es
rece ip ts , (2) ex cl ud in g h is fam il y m em be rs fro m pa yro ll an d p ay in g t he m incas h, fo r whi chhe ke ptno reco rd s, (3 ) fai li ng to ke ep an y reco rd s re la ti ng to am ou nt s pa idincas h t o jan it or s an d p erfo rm ers , (4) fai li ng to ke ep an y reco rd s re la ti ng to
ve hi cl e ex pe ns es , and(5) fai li ng to ke ep reco rd s fo r cl ai m edtra ve l, m eal s, an d
en te rta in m en t ex pe ns es . Pet it io ne r’s pe ti ti onall eg edth atth e Mi cro s re po rts were “ un rel iabl [e]” an d

“un -rec on ci le d” an d the refo re tha t re sp on de nt ’s rel ia nc e o n t he m to reco ns tru ct pe ti ti on er’s g ro ss in co m e was “ il lo gi cal an d e rro ne ou s” . Howev er, p et it io ne r no w arg ue s tha t h e fai le d t o k eep cas h re cei pt s b ecau se th e Mi cro s re po rts cap tu redall of th e in co min g s al es an d t hu s the re was no ne edto ke ep reco rd s o f cas h s al es . Res po nd en t co rrec tl y

po in ts ou t the in co ns is te nc y inpe ti ti on er’s arg um en ts reg ard in g t he Mi cro s re po rts . Peti ti on er’s ex pl an at io n fo r th ro win g a way cas h
rece ip ts is un co nv in ci ng gi ve n h is pri orass ert io ns th atth e Mi cro s re po rts co ul d
no t b e trus te d. Pe ti ti on er al so att em pt s t o e xp la in hi s d es tru ct io n o f cas h s al es
reco rd s b y

arg ui ng th atke ep in g re co rd s o f cas h s al es wou ldha ve be ento o- 29 -

[* 29 ] on ero us , bec au se do in g s o wo ul d h av e requi red“ do zen s upo n d oz en s” of bo xe s. Pet it io ne r’s te st im on y on th is po in t s eem s h y

pe rb ol ic , gi ve n t ha t h is te st im on y refl ect s tha t cr ed itcardrece ip ts fro m th e fi ve y ears at i ss ue fil le d o nl y ei gh t b ox es inhi s o ffi ce. As t o h is fai lu re t o p uthi s fa m il y m em be rs on th e p ayro ll , pet it io ne r arg ue s th athe pa idfam il y

m em be rs incas h b ecau se (1) itis a co m m on pra ct ic e in th e
res taur an t i ndus try, (2) o th er em pl oyees wer e al so no t i nc lu de d o n t he pa yro ll , and (3 ) so m e fam il y

m em be rs su ffer edfro m

ga m bl in g a dd ic ti on s an d h e wis he d t o
co nt ro l the ir c as hf

lo w. Add it io na ll y , pet it io ne r arg ue s tha t h e co ul d n otha ve ha d th e requi si te in te ntto ev ad e ta xe s s in ce p ut ti ng hi s fa m il y m em be rs on th e p ayro ll
wou ldha ve affo rd edhi m ad di ti on al de du ct io ns forwage s p ai d. Th es e arg um en ts
are u nc on vi nc in g. Othe r em pl oyees wer e p ai d i n c as h b uton ly after b ei ng ad de d to th e p ayro ll . Evenif we a ccep t as tru e th atcert ai n fa m il y m em be rs su ffer edfro m ga m bl in g a dd ic ti on s, thi s d oe s n otex pl ai n p et it io ne r’s fai lure t o k eep reco rd s o f
cas h wag es pa idto th os e fam il y m em be rs . Fin al ly, whi le pe ti ti on er wo ul d h av e be enen ti tl edto de du ct io ns forcas h wag es th atwere ac tu al ly pai d t o h is fam il y
m em be rs , hi s ar gu m en t i gn or es th atdo cu m en ti ng de du ct io ns foram ount s p ai d t o- 30 -

[* 30 ] fam il y

m em be rs wou ldhave crea te d apape r tr ai l fo r th os e in di vi du al s, m an y of who m di d n otrep ort i nc om e dur in g t he y ears at i ss ue or r ep orte d i nc om e lo wer th anwhathe no w cla im s the y were p ai d. Pe ti ti on er d idno t o fferan y ex pl an at io n
as to why he di d n otke ep reco rd s o f am ou nt s p ai d t o t he be ll y da nc ers , DJs , and it in eran t wo rk ers . Pet it io ne r al so off

ers in su ffi ci en t ex pl an at io ns forhi s fa il ur e to ke ep reco rd s rel at in g t o v eh ic le , tra ve l, an d m eal s an d e nt ert ai nm en t ex pe ns es . He arg ue s tha t, si nc e “ [r]esp on de ntha s p res en te d n o a lt ern at iv e m etho d t o d is pu te leg it im at e
or di na ry an d n eces sa ry

bu si ne ss ex pe ns es ”, pe ti ti on er s ho ul d b e en ti tl edto de du ct th es e ex pe ns es . This arg um en t i gn or es th atth e b ur de n o f pr ov in g e nt it le m en t t o de du ct io ns fal ls to pe ti ti on er. Insu m , pet it io ne r’s fai lu re t o k eep reco rd s re la ti ng to cas h re cei pt s, am ou nt s pa idincas h t o fa m il y

m em be rs an d o th er wo rk ers , andde du ct io ns cla im edfor
va rio us sec ti on 27 4( d) expe ns es supp orts a fi nd in g o f frau d.- 31 -

[* 31 ] 3. Im

pl au si bl e o r In co ns is te ntExp la na ti on s o f Beh av io r Pet it io ne r pr of

fere d num ero us im

pl au si bl e an d i nc on si st en t ex pl an at io ns as to why hi s fa il ur e to rep ort s ig ni fic an t am ount s o f in co m e fo r th e y ears at i ss ue do es no t ri se to th e le ve l o f frau d. Inhi s p et it io n, p et it io ne r st at edth athe be li ev ed th e Mi cro s re po rts to be “un rel iabl [e]” as a n i nd ic at orof C as ab la nc a’s gr os s s al es , bu t attri al an d i n p os ttria l b rie fin g, p et it io ne r ch arac te riz edMi cro s as be in g “ ve ry
so li d” be cau se it“ cap tu redall sal es trans act io ns ”. Thes e ex pl an at io ns are in co ns is te ntwith e ach an ot he r. Pet it io ne r al so att em

pt s t o p ai nta pi ctur e o f hi m se lf a s a “ y oung m anwith
no bu si ne ss acu m en ” who se fai lu re t o re po rt i nc om e was du e to in ex pe rie nc e an d
na iv et e rat he r th ana frau du le ntin te ntto ev ad e ta xe s. Pet it io ne r te st ifi edth athe di d n otun de rs ta ndtax returns , th e Mi cro s re po rts , or the di ffer en ce b etweengro ss
an d n etsal es , andas ares ul t h e rel ie d o n h is acco un ta ntto he lp hi m co m pl y with hi s t ax rep orti ng requi rem en ts . Peti ti on er p la ces th e b lam e fo r th e in accu rat e ta x returns squa rel y

onth e sh ou ld ers of h is fir stacco un tant , Mr. Jo bi n. Th es e
ex pl an at io ns are i m

pl au si bl e fo r se ve ral reas on s. Fi rs t, p et it io ne r un de rs to odth e requi rem en t t o re po rt a ll of h is in co m e, bu t h e d idno t g iv e Mr. J ob in accu rat e- 32 -

[* 32 ] sal es nu m

be rs ov er the ph on e, no r di d h e g iv e Mr. J ob in th e Mi cro s re po rts
orin fo rm at io n abo utall of h is ba nkacco un ts . If pe ti ti on er tru ly w is he d t o s eek th e h el p o f a s eas on edacco un ta nt , he wo ul d n otha ve in te nt io na ll y m is le d M r. Jo bi n abo utCas ab la nc a’s sa le s. Sec on d, the sal es nu m be rs pe ti ti on er re po rte d b y te le ph on e, whi chhe att rib ut es to a m is un de rs ta nd in g b etweengro ss an d n etsal es , do no t m at chan y

of the am ou nt s ap pe ari ng on th e Mi cro s re po rts . Thi rd , if 7 pe ti ti on er tru ly w ere a n i ne xp eri en cedy ou ng m anwho rel ie d o n h is acco un ta nt s fo r gu id an ce, h e ch os e to fol lo w th ei r advi ce s om ewh atsel ect iv el y , gi ve n t ha t h e di d n otde po si t ca sh in to th e b an k o r ad d h is fam il y m em be rs to pa yro ll aft er b ei ng to ldrep eat ed ly by

bo th Mr. J ob in an d M r. Stu rm to do so . Fin al ly, th e fac t tha t pe ti ti on er co nt in ue d t o u nd erre po rt h is in co m e fo r ta x years 2 00 9 and20 10 aft er ch an gi ng acco un ta nt s d ire ct ly und ercu ts hi s ar gu m en t tha t M r. Jo bi n was at f au lt fo r th e in accu rat e returns , parti cu la rly afterJef f Mu sapu rp orte dl y

m ad e p et it io ne r

Fo r ex am pl e, fo r Ja nu ary 20 08 pe ti ti on er fi le d asal es tax return wi th th e 7 St at e o f W is co ns in th atrep orte d $ 48 ,22 6 i n t ot al sal es , bu t the Mi cro s re po rt f or th atm on threfl ect s n etsal es of $ 63 ,72 6 a ndgro ss rece ip ts of $ 78 ,53 4. Th ere i s n o fig ur e o n t he Janua ry

20 08 Mi cro s re po rt t ha t m at ch es th e $ 48 ,22 6 fi gu re g iv ento th e St at e o f W is co ns in on pe ti ti on er’s s al es tax return.- 33 -

[* 33 ] aware o f di sc rep an ci es inth e returns th atMr. J ob inpre pa red . This fact or fav or s a f in di ng of f

rau du le ntin te nt . 4. Co nc eal m en t o f Ass et s o r In co m e Pet it io ne r co nc eal edhi s i nc om e fro m bo th hi s ac co un ta nt s an d t he IRS. Pet it io ne r adm it te d t o t ak in g c as h fr om Cas ab la nc a h om e wit h h im at t he en d o f each da y an d ra rel y

de po si ti ng any

of i t i nt o t he bank . Bot h M r. Jo bi n a ndMr. Sturm to ldpe ti ti on er t o d ep os itcas h i nt o t he ba nk , adv ic e whi chhe ch os e n otto fo ll ow dur in g t he y ears at i ss ue . Mr. Sturm tes ti fie d a t tria l tha t i t i s s ti ll a

“ st ru gg le ” to co nv in ce p et it io ne r to de po si t ca sh
. Pet it io ne r al so rel ay edfal se sal es nu m be rs ov er the ph on e to Mr. J ob in . It i s well est ab li sh edth ata fai lu re t o p ro vi de on e’s acc ou nt an t wi thco m pl et e rec or ds is
anin di cat io n o f frau d. Ko recky v. Co m mis si on er, 7 81 F.2d15 66 , 15 68 -1 56 9 (1 1t h C ir. 1 98 6) , aff’g p er cu riam T.C. Mem o. 1 98 5- 63 . Peti ti on er ag ai n a tt em pt s to bl am e Mr. J ob in forun de rrep orti ng Cas ab la nc a’s in co m e, by clai m in g t ha t (1 ) he ga ve Mr. J ob in all of t he Mi cro s re po rts an d (2 ) Mr. J ob in ha d a cces s t o h is ba nkst at em en ts inord er t o p rep are h is tax returns an d C as ab la nc a’s Sch edul e C. Mr. J ob in tes ti fie d at tria l tha t h e h adne ve r se enth e “ba nkacco un t i nt o wh ic h t he- 34 -

[* 34 ] cred itcard s wer e b ei ng de po si te d i nt o” bu t tha t h e d idrece iv e b an k st at em en ts , alb ei t l at e, rel at in g t o t he “ op erat in g a cco un t” . It i s u nc le ar fro m th e
reco rdforwhi chba nkacco un t, i f an y , Mr. Jo bi n s aw st at em en ts , bec au se th e pa rti es ha ve st ip ul at edth atth e b an k a cco un t en di ng in19 09 at U.S. Ba nkis th e

“ op erat in g a cco un t” . A revi ew of th e Mi cro s re po rts an d b an k re co rd s fo r th e op erat in g a cco un t re ve al s tha t am ou nt s fr om cred itcardch arg es at C as ab la nc a were d ep os it edin to th e o pe rat in g a cco un t. Ho wev er, Mr . Jo bi n’s t es ti m on y is cred ib le inth e li gh t o f th e fo ll owi ng : (1 ) Cas ab la nc a ret ai ne d 1 1 b an k a cco un ts du rin g t he y ears at i ss ue , inad di ti on to pe ti ti on er’s p ers on al acco un t, (2 ) ne ithe r Mr. J ob in no r Mr. Sturm

was aware o f m or e th antwo of t he se acco un ts , and(3) pe ti ti on er’s p et it io n s ta te s tha t h e g av e Mr. J ob in “ reco nc il edba nkst at em en ts ” b y pe ti ti on er. Itis be li ev ab le th atMr. J ob in saw s om e p orti on of the bankst at em en ts rel at in g t o 1 of t he 11 acco un ts , bu t p et it io ne r’s fai lu re t o p ro vi de Mr. J ob in with st at em en ts forall bu si ne ss acco un ts affi li at edwith C as ab la nc a is ev id en ce o f an in te ntto co nc eal in co m e an d/ orass et s fr om hi s ac co un ta nt . Furth er, ev enif M r. Jo bi n h adacce ss to all of t he ba nkreco rd s, p et it io ne r’s fai lu re t o d ep os itm or e th ana de m in im is am ou ntof c as h i nt o t he ba nkm ean s tha t- 35 -

[* 35 ] hi s b an k s ta te m en ts do no t ac cu rat el y refl ectCas ab la nc a’s in co m e an d c ou ld
no t h av e b eenrel ie d o n b y Mr. J ob in inpre pa rin g p et it io ne r’s ta x re tu rn s. Pet it io ne r’s te st im on y

th atMr. J ob in ha d a ll of t he Mi cro s re po rts is si m pl y no t cred ib le , bec au se (1) he ha s n otid en ti fie d a ny reaso n wh y Mr. J ob inwou ld
m is rep ort Ca sabl an ca’s s al es tax nu m be rs , (2) th e am ou nt s re fle ct edon th e Mi cro s rep orts do no t m at chwith a ny sal es nu m be rs rep orte d t o t he Sta te of Wis co ns in , an d (3 ) un de rrep orti ng of i nc om e co nt in ue d a fte r he swi tc he d a cco un ta nt s. Pet it io ne r al so fin an ceda lu xu ry ve hi cl e und er Ca sabl an ca’s n am e, ev en th ou gh he admit te d h e h adsu ffi ci en t ca shto pu rch as e th e v eh ic le ou tri gh t. Usi ng a b us in es s ac co un t t o p ur ch as e o r ho ldpe rs on al ass et s i s i nd ic at iv e o f frau d. See B ran so n v . Comm is si on er, T.C. Mem o. 2 01 2- 12 4 (c it in g B en es v. Co m m is si on er, 4 2 T.C. 3 58 , 38 3 (1 96 4) , aff’d, 3 55 F.2d92 9 (6 th Cir . 19 66 )). Inad di ti on to co nc eal in g h is ownin co m e an d a ss et s, p et it io ne r as si st edhi s fam il y inco nc eal in g i nc om e if

he di d i n fa ctpa y

th em incas h andno t re po rt
co rres po nd in g am ou nt s o n F orm s W-2. Ass is ti ng ot he rs inco nc eal in g i nc om e can be in di cat iv e o f frau du le ntin te nt . W at so n v . Comm is si on er, T.C. Mem o. 1 98 8- 29
.- 36 -

[* 36 ] Insu m , pet it io ne r’s co nc eal m en t o f in co m e fro m th e IRS an d h is
acco un ta nt s, h is fin an ci ng of ave hi cl e und er h is bu si ne ss ’ nam e, an d h is aidto ot he rs inco nc eal in g the ir i nc om e is hi gh ly pro ba ti ve of f rau d. 5. Fai lu re To Co op erat e With Tax Au th or it ie s Pet it io ne r di d n otco op erat e wit h t ax au th or it ie s dur in g t he au di t. The
rev enue ag en ts were fo rcedto is su e m ul ti pl e IDRs forth e sa m e in fo rm at io n a fte r pe ti ti on er fa il edto pro vi de th e reque st eddo cu m en ts ina ti m el y m an ne r. Altho ug h
m an y of the IDRs reque st edne w in fo rm at io n, s ev eral were i de nt ic al be cau se of pe ti ti on er’s fai lu re t o c om pl y with e arl ie r IDRs . Furthe r, pe ti ti on er re pe at ed ly fai le d t o p ro vi de hi s b an k re co rd s, d es pi te reque st s fo r st at em en ts forall of h is
acco un ts , “bo th bu si ne ss an d p ers on al , sav in gs an d c he ck in g” . Mr. Ban ni ckha d to res ort t o i ss ui ng a ba nksu m m on s t o o bt ai n p et it io ne r’s co m pl et e b an k re co rd s. Fai lu re t o c om

pl y with IDR s i s i nd ic at iv e o f frau du le ntin te nt . See, e.g ., McCl el la n v . Comm is si on er, T.C. Mem o. 2 01 3- 25 1 (s ta ti ng th atrev enue ag en t i ss ue d s ix IDRs ); M cKen nav. Co m m is si on er, T.C. Mem o. 1 99 8- 45 (st at in g th atth ree I DRs were i ss ue d) ; Pau v . Comm is si on er, T.C. Mem o. 1 99 7- 43 (st at in g th atfai lu re t o p ro du ce b oo ks an d re co rd s i n re sp on se to on e IDR was in di cat iv e o f- 37 -

[* 37 ] frau du le ntin te nt ); s ee al so Goo d v . Comm is si on er, T.C. Mem o. 2 01 2- 32 3 (fi nd in g l ackof c oo pe rat io n wh ere r ev enue ag en t was for cedto su m m on ta xp ay er’s b an k re co rd s)
.

6. Fai lu re To Fil e Tax Returns Res po nd en t ar gu es th atpe ti ti on er fai le d t o fi le tax returns when he fai le d t o
subm itFo rm s W-2 an d F orm s 1 09 9- MIS C, Mi sc el la ne ou s In co m e, onbe ha lf o f fam il y m em be rs an d n on em

pl oyee co ntract or s wh o wer e p ai d i n c as h. Re sp on de nt furth er ar gu es th atpe ti ti on er fa il edto fil e am en de d t ax returns by w ai ti ng to fil e
am en de d F orm s 9 41 -X un ti l 2 01 3 a nd20 14 aft er p ur po rte dl y di sc ov eri ng th e
erro rs in20 12
. The Co de do es no t g en eral ly requ ire tax pa y ers to fil e am en de d re turn s. See B ad arac co v. Co m

mis si on er, 4 64 U.S. 38 6, 3 97 (19 84 ). Taxp ay ers m ay ch oo se to fil e am en de d re tu rn s t o c orrecterro rs on ori gi na l re tu rn s, b utsu chact io n is no t g en eral ly m an da te d b y th e Co de or t he reg ul at io ns . See, e.g ., Sto rey v. Co m m is si on er, T.C. Mem o. 2 01 2- 11 5, 1 03 T.C.M. (CCH) 1 63 1,1 63 7 (2 01 2) (fi nd in g fi li ng anam en de d re tu rnto be pe rm is si ve , rathe r th anm an da to ry ).- 38 -

[* 38 ] Pet it io ne r fi le d o rig in al tax returns th atwere g ro ss ly ina ccu rat e, bu t h e
ne ve rth el es s fi le d t ax returns . The fai lu re t o fi le am en de d re tu rn s d oe s n otsupp ort a fi nd in g o f in te ntto ev ad e ta xe s. See Tay lo r v. C omm is si on er, T.C. Mem o. 1 99 7- 51 3. Howev er, p et it io ne r was requi redto fil e Fo rm s W-2 an d F orm s 1 09 9- MIS C fo r al l em pl oyees b utfai le d t o d o s o fo r se ve ral in di vi du al s, i nc lu di ng fam il y
m em be rs who were p ai d i n c as h. Th is fai lu re i s i nd ic at iv e o f frau du le ntin te nt . See Hi -Q Pers on ne l, In c. v. Co m m is si on er, 1 32 T.C. 27 9 (2 00 9) (fi nd in g frau du le ntin te ntwher e em pl oyer pa idem

pl oyees i n c as h a ndfai le d t o fi le Fo rm s W -2 or F orm s 1 09 9- MIS C fo r th em). On b al an ce, we fi ndth atpe ti ti on er’s fai lu re to fil e Fo rm s W-2 an d F orm s 1 09 9- MIS C s up po rts a fi nd in g o f frau du le ntin te nt
un de r th is fact or .

7. Fi li ng Fal se Docu m en ts Whi le we reco gn iz e th atpe ti ti on er d idfil e ta x re tu rn s, tho se ori gi na l re tu rn s
un de rrep orte d C as ab lanc a’s gr os s re cei pt s an d h is in co m e b y m or e th an$1 .6
m il li on . The am en de d re tu rn s al so si gn ifi can tl y un de rrep orte d h is gro ss rece ip ts
an d i nc om e. Fil in g fa ls e d oc um en ts in cl ud es fil in g fa ls e in co m e ta x re tu rn s.- 39 -

[* 39 ] W orth v. Co m

m is si on er, T.C. Mem o. 2 01 4- 23 2; Po tt er v . Comm is si on er, T.C. Mem o. 2 01 4- 18 ; M or se v. Co m m is si on er, T.C. Mem o. 2 00 3- 33 2, af f’d, 41 9 F.3 d 8 29 (8t h C ir. 2 00 5) . Peti ti on er al so fil edfal se em pl oym en t t ax returns when he fai le d t o re po rt wa ge s p ur po rte dl y pa idincas h t o fa m il y

m em be rs . Asi de fro m

fil in g fa ls e d oc um en ts with t he IRS, p et it io ne r al so m is le d t hi rd pa rti es . Peti ti on er ad m it s tha t h e d idno t ad d h is fam il y m em be rs to th e p ayro ll
m ai nt ai ne d b y

Pay ch ex . Con se qu en tl y , Cas ab la nc a’s pa y ro ll di d n otaccu rat el y cap tu re em

pl oym en t d at a fo r al l em

pl oyees, wh ic h i n turn m ean t tha t Fo rm s W-2
an d F orm s 1 09 9- MIS C fi le d fo r certa in in di vi du al s wer e ei th er i nc orrector
no ne xi st en t. Furth er, p et it io ne r subm it te d afal se do cu m en t t o U.S. Ba nkwhenhe si gn ed
anap pl ic at io n fo r a carlo anwher ei n h e m at eri al ly mis st at edbo th hi s p ers on al in co m e an d C as ab la nc a’s gr os s an nu al sal es as r ep orte d o n h is las t t ax return. At tri al pe ti ti on er at te m

pt edto sh iftbl am e to a ba nkem pl oyee by tes ti fy in g t ha t M r. Bl om qu is t h adfil le d o utth e lo anap pl ic at io n u si ng in fo rm at io n b as edon ba nk de po si ts in to Cas ab la nc a’s op erat in g a cco un t. Mr . Blo m qu is t d idno t t es ti fy , and pe ti ti on er d idno t o fferan y ev id en ce t o c orro bo rat e h is ownsel f-s erv in g t es ti m on y- 40 -

[* 40 ] on th is po in t. Ho wev er, ev enacce pt in g a s tru e th atitwas M r. Bl om qu is t,
an d n otpe ti ti on er, wh o fi ll edou t the lo anap pl ic at io n, p et it io ne r rep res en te d t ha t th e in fo rm at io n c on ta in edth erei n was co rrec t wh enhe si gn edth e se co ndpa ge of th e th ree- pa ge ap pl ic at io n. Pet it io ne r’s fil in g o f m

ul ti pl e fal se do cu m en ts , in cl ud in g fa ls e in co m e ta x returns , fal se em

pl oym en t t ax returns , fal se pay ro ll rep orti ng , anda fal se lo an ap pl ic at io n, s up po rts a fi nd in g o f frau d.

8. Fai lu re To Mak e Est im at edTax Pa y m en ts Pet it io ne r fai le d t o m ak e an y est im at edtax pa ym en ts for 20 06 , 20 07 , 20 08 , 20 09 , or 2 01 0. Se ct io n 6 65 4( d) (1 )(A) re qu ire s qua rte rly ins ta ll m en t p aym en ts of 25 % of t he requi redan nu al pa y m en t. The requi redan nu al pa ym en t i s the les se r of 90 % of t he tax du e fo r th e y ear o r 10 0% o f th e ta x s ho wn o n t he pre ced in g year’s return. Se c. 66 54 (d )(1 )(B) . Peti ti on er’s fai lu re t o m ak e an y est im at edtax pa ym en ts forth e y ears at i ss ue is in di cat iv e o f frau du le ntin te nt .- 41 -

[* 41 ] 9. Deal in g i n C as h Pet it io ne r de al t ex te ns iv el y incas h dur in g a ll of t he y ears at i ss ue . He adm it te d t o n ev er d ep os it in g m or e th ana de m in im is am ou ntof c as h i nt o t he ba nk
. Pet it io ne r cl ai m s tha t h is fam il y m em be rs , per fo rm ers , andit in eran t s tre etwork ers were al l p ai d i n c as h, b uthe ke ptno reco rd s o f an y am ou nt s p ai d i n c as h t o t he se in di vi du al s. No r di d h e k eep rece ip ts forbu si ne ss expe ns es he no w cla im s wer e pa idincas h. Deal in g i n c as h i s ev id en ce o f frau du le ntin te nt“be cau se it de m on st rat es a de si re t o a vo idde te ct io n o f in co m e-p ro du ci ng act iv it ie s.” Po wers te in v. Co m

mis si on er, T.C. Mem o. 2 01 1- 27 1 (c it in g B rad fo rdv. Co m m is si on er, 7 96 F.2dat 3 08 ); s ee al so McC le ll anv. Co m m is si on er, T.C. Mem o. 2 01 3- 25 1 (u si ng cas h t o p ay em pl oyees i n e xc es s o f rep orte d p ayro ll wag es was e vi de nc e o f frau du le ntin te nt ). C. Co nc lu si on Insu m , m ul ti pl e b ad ge s o f frau d a re p res en t. Fo r al l t ax ab le y ears at i ss ue , pe ti ti on er: (1) un de rrep orte d h is in co m e, (2 ) m ai nt ai ne d i na de qu at e rec or ds , (3)
co nc eal edin co m e an d a ss et s fr om bo th hi s ac co un ta nt s an d t he IRS, (4 ) fai le d t o fil e Fo rm s W-2 an d F orm s 1 09 9- MIS C, (5 ) fi le d fa ls e d oc um en ts , (6) fai le d t o- 42 -

[* 42 ] m ak e es ti m at edtax pa y m en ts , and(7) de al t ex te ns iv el y incas h. Durin g t he
au di t p et it io ne r fai le d t o c oo pe rat e wit h re ve nu e ag en ts . Fin al ly, he ha s o ffer ed in co ns is te ntan d i m

pl au si bl e ex pl an at io ns to th e IRS an d t o t he Co urt fo r hi s be ha vi or . Con si de rin g a ll of t he fact s an d c irc um st an ces , we fin d t ha t p et it io ne r is li ab le forth e se ct io n 6 66 3 c iv il frau d p en al ty for eac h year atis su e. Co ns eque nt ly, th e en ti re am ou ntof the un de rp aym en t fo r eac h t ax ab le y ear a t i ss ue is att rib ut ab le to frau d. Pe ti ti on er h as no t s ho wn tha t an y po rti on of a ny un de rp aym en t i s n otdu e to frau d. Se e se c. 66 63 (b ). III. Cl ai m edSch edul e C Deduc ti on s Pet it io ne r arg ue s h e is en ti tl edto ad di ti on al de du ct io ns for(1) wage s p ai d t o fam il y m em be rs for 20 10 , (2) no ne m

pl oyee co m

pe ns at io n p ai d fo r al l years at is su e, (3 ) ve hi cl e ex pe ns es forall y ears at i ss ue , (4) m eal s an d e nt ert ai nm en t
ex pe ns es forall y ears at i ss ue , (5) tra ve l ex pe ns es for20 09 an d 2 01 0, an d (6 ) co st of go od s s ol d fo r 20 10 . Und er the Co ha n ru le , wher e a t axpa y er i s ab le to de m on st rat e th athe or s he ha s p ai d o r in cu rreda de du ct ib le ex pe ns e b utcan no t
subs ta nt ia te th e p reci se am ou nt , th e Co urt m ay est im at e th e am ou ntof t he ex pe ns e if t he tax pa y er p ro du ces cred ib le ev id en ce p ro vi di ng a reas on ab le ba si s fo r th e- 43 -

[* 43 ] Co urt t o d o s o. Co ha n v . Comm is si on er, 3 9 F .2d54 0, 5 44 (2dCir . 19 30 ); Van ic ekv. Co m

m is si on er, 8 5 T.C. 7 31 , 74 3 (1 98 5) . The Co urt i s n otpe rm it te d t o
us e th e Co han ru le to est im at e certa in ex pe ns es un de r se ct io n 2 74 , andth e ta xp ay er m

us t s tri ct ly sub st an ti at e su chex pe nd itur es . Sec. 2 74 (d ). Pet it io ne r di d n otsubs ta nt ia te th e ad di ti on al wage de du ct io n c la im edfor 20 10 foram ou nt s p ur

po rte dl y pa idto Jes se , Nass er, an d R amzi . Non e o f th e
na m edin di vi du al s t es ti fie d a s t o t he am ou nt s the y rece iv eddu rin g t ho se y ears . Furth er, wag e an d i nc om e tr an sc rip ts an d P ay ch ex reco rd s d o n otsubs ta nt ia te th e ad di ti on al wage s. Pet it io ne r of fers on ly his ownsel f-s erv in g t es ti m on y th athe pa idhi s fa th er an d b ro th ers anad di ti on al $7 5,9 00 forwhi chhe no w cla im s
en ti tl em en t t o ade du ct io n. Th e Co urt re qu ire s s om e b as is on whi chanest im at e
un de r th e Co ha n ru le m ay be m ad e. Vani cekv. Co m m is si on er, 8 5 T.C. at74 3 (ci ti ng W il li am s v . Uni te d S ta te s, 2 45 F.2d55 9 (5 th Cir . 19 57 )). Pet it io ne r ha s
no t p ro vi de d e vi de nc e upo n wh ic h we m ay ba se su chanest im at e fo r wag es pa id to Jes se , Nass er, an d R amzi , andacco rd in gl y , he i s d en ie d a ny add it io na l de du ct io n fo r wag es pa idin20 10
.- 44 -

[* 44 ] Pet it io ne r al so cla im s d educ ti on s fo r no ne m pl oyee co m

pe ns at io n p ai d t o be ll y da nc ers , DJs , andit in eran t wo rk ers hi redto cle anCas ab la nc a dur in g t he y ears at i ss ue . At tri al Ms . Chr is te ns encred ib ly test ifi edth atsh e was pa id$1 00 fo r be ll y da nc in g m os t Fr id ay

ni gh ts at C as ab la nc a b eg in ni ng in20 05 . Ms. Ch ris te ns endi d n otst at e whe n a no th er d an cer b eg anpe rfo rm in g a lo ng si de he r. Acco rd in gl y , bea rin g h eav il y ag ai ns t the tax pa y er wh os e in ex act itud e is of h is
own m ak in g, we al lo w pet it io ne r anad di ti on al de du ct io n o f $5 ,20 0 fo r eac h year atis su e fo r th e am ou nt s p ai d t o M s. Ch ris te ns en . Sim il arl y , Mr. Abb as i cr ed ib ly te st ifi edth atpe ti ti on er p ai d DJ s $ 15 0 fo r pe rfo rm in g o n Thur sd ay , Frid ay , and Satur da y ni gh ts . Howev er, Mr . Abb as i was no t h ire d t o c oo rd in at e th e DJs un ti l 20 09 , andth e Co urt cann otrel y on hi s t es ti m on y

fortax ab le y ears forwhi chhe do es no t h av e fi rs th an d kno wled ge . Accor di ng ly, pe ti ti on er i s al lo wedan ad di ti on al de du ct io n o f $2 3,4 00 forbo th 20 09 an d 2 01 0. Mr . Jan se n’s t es ti m on y di d n otgi ve th e Co urt a r el iabl e b as is up on whi chto est im at e th e am ou nt s p ai d t o it in eran t cl ean ers , andpe ti ti on er’s fai lu re t o k eep reco rd s o f th es e am ou nt s l ead s
us with n o c ho ic e b utto de ny any ad di ti on al de du ct io ns cla im edforam ou nt s p ai d to th es e in di vi du al s.- 45 -

[* 45 ] Pet it io ne r al so cla im s d educ ti on s fo r ex pe ns es rel at in g t o v eh ic le s, m eal s
an d e nt ert ai nm en t, an d t rav el du rin g t he y ears at i ss ue . Peti ti on er m us t s tri ct ly
subs ta nt ia te th es e am ou nt s und er s ect io n 2 74 (d ); the Co urt i s n otpe rm itte d t o u se th e Co ha n ru le to est im at e su chex pe ns es . See s ec. 2 74 (d ). Pet it io ne r ha s n ot of fere d a ny sub st an ti at in g d oc um en ts forth es e expe ns es bu t ra th er al le ge s tha t

“ acco un t b oo ks (le dg ers ) were p ro vi de d t o t he Agen t dur in g t he co ur se of t he
ex am in at io n” . It ap pe ars pe ti ti on er i s ar gu in g h is pro vi si on of d oc um en ts to th e
rev enue ag en ts du rin g t he au di t i s s uf fic ie ntto subs ta nt ia te hi s ex pe ns es un de r
se ct io n 2 74 (d ). Mo reo ve r, pe ti ti on er’s p et it io n i nd ic at es th athe ha d o th er co pi es of th e acc ou ntbo ok s an d l ed ge rs th athe pro vi de d t o re sp on de ntbe fo re tria l, b ut he fai le d t o p ro vi de co pi es of t he se do cum en ts to th e Co urt. Pet it io ne r ha s n ot
co m e cl os e to m eet in g t he subs ta nt ia ti on requi rem en ts un de r se ct io n 2 74 (d ), an d he is no t en ti tl edto any

ad di ti on al de du ct io ns forth e cl ai m edve hi cl e, m eal s an d
en te rta in m en t, an d trav el ex pe ns es . Fi na ll y , pet it io ne r cl ai m s an ad di ti on al de du ct io n fo r ta x year 20 10 for COGS. As n ot edels ewh ere i n t hi s o pi ni on , COGS is subt ract edfro m gro ss
rece ip ts to arri ve at g ro ss in co m e an d t he refo re n ottre at edas d educ ti on s fr om- 46 -

[* 46 ] gro ss in co m e. Metra Ch em Co rp . v. Co m

m is si on er, 8 8 T.C. at66 1; sec . 1.6 1- 3( a), In co m e Tax Reg s. Pet it io ne r an d re sp on de nten te redin to a st ip ul at io n of set tl edis su es be fo re tria l wh erei n t he y reac he d an a gr eem en t o n g ro ss rece ip ts fo r ta x year 20 10 . Ass um in g a rg ue nd o t ha t p et it io ne r di d n otco nc ed e th e ad di ti on al cla im edCOGS whe n h e st ip ul at edCas ab la nc a’s 20 10 gro ss rece ip ts , we fi ndth athe ha s n otsubs ta nt ia te d t he ad di ti on al cla im edco st s. Mr . Stu rm te st ifi edat t ria l tha t thi s n um be r was pu ll ed“ ou t o f th e b lu e” an d h as no ba si s i n real ity . Accor di ng ly, pe ti ti on er i s n oten ti tl edto anad jus tm en t fo r COGS fo r 20 10
. Inreac hi ng ou r ho ld in gs , we hav e co ns id eredall arg um en ts m ad e, an d, t o th e ex te ntno t m en ti on edab ov e, we co nc lu de th ey are m oo t, i rrel ev an t, o r witho ut
m eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.