T.C. M em o . 2 0 1 9 -1 4 2

UNITED STATES TAX COURT

SEYED-J ALIL GHADIRI-ASLI AND M OJ D EH NAJ LE-RAHIM , Pet i t io n ers v .

COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 5 8 55 -1 5
. Fi l edOct o b er 2 3 , 2 0 1 9
.
Sey ed -J al i l Gh ad i ri -As l i an d M o jd eh Najl e-Rah i m , p ro s es e. 1 Seb as t i an Vo t h an dKev i n R. Ov ei s i , fo r res p o nd en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION THORNTON, Jud g e: Res p o n d en td et erm i n edd efi ci en ci es an dfrau d p en al t i es u n d er s ect i o n 6 6 6 3 wi t h res p ectt o p et it i o n ers ’ Fed eral i n co m e t ax fo r

1 St ev en R. M at h er rep res en t ed p et i t i o n ers atth e t ri al o f t h i s cas e. M r. M at her wi t h drew as p et i t io ners ’ co un s el o n J an u ary 3 0 , 2 0 1 9. Th ereaft er, p et i t i o n ers act edp ro s es e.- 2

-

[* 2 ] t ax ab l e y ears 2 0 0 9, 2 0 1 0 , an d 2 0 1 1 (y ears ati s s u e) as fo l l o ws : 2

Year Defi ci en cy Pen al t y s ec. 6 6 63 1 2 00 9 $ 10 6 ,0 5 2 $ 7 0 ,8 7 4 2 01 0 1 9 7 ,4 2 1 1 1 6 ,5 7 0 2 01 1 1 4 8 ,2 4 7 1 0 9 ,6 8 5

1 Res p o n d en td et erm i n ed , as an al t ern at i v e t o t h e frau d p en al t i es , th at p et i t i o n ers are l iab l e fo r s ec. 6 6 6 2 (a) accu racy -rel at edp en al t i es o f $ 2 , 3 10 , $ 8 ,3 9 8, an d $ 4 0 0 fo r t ax ab l e y ears 2 0 0 9 , 2 0 1 0 , an d2 0 1 1, res p ect iv el y .

2 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedure, u n les s o t h erwi s e i n d i cat ed . M o n et ary am o u n t s are ro un d edt o t h e n eares td o l l ar.- 3

-

[* 3 ] Aft er co n ces si o ns , 3 t h e i s s u es fo r d eci si o n are wh et h er p et i t i o n ers , h u s b an d

an d wi fe: (1 ) fai l edt o rep o rti n co m e recei ved b y p et it i on er M o

jd eh Najl e-Rah i m ’ s (Dr. Najl e-Rah i m) m ed i cal p ract i ce; (2 ) o v ers t at edDr. Najl e-Rah i m ’ s m ed i cal p ract i ce’ s d edu ct i o n s ; an d(3 ) fai l edt o rep o rtp et i t i o ner Sey ed -J al i l Gh ad i ri -As l i ’ s 2 0 1 0 l aws u i ts et tl em en tp ro ceed s as i n co m e. Al s o ati s s u e i s wh et h er p et i t i o n ers are l i ab l e fo r t h e s ect i o n 6 6 63 ci v i l frau dp en al t y (o r al t ern at i v el y

th e s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al t y ).

3 W i t h res p ectt o t ax ab l e y ear 2 0 0 9 , p et i t i o n ers co n ced e i n fu l l res p o n d en t ’ s d i s al lo wan ce o f (1 ) l os s es fro m Fo rm 4 7 9 7 , Sal es o f Bu s in es s Pro p ert y , o f $ 9 ,1 0 0 ; (2 ) m ed ical , d en t al , an d i n s u ran ce p rem i um i t em i zedd edu ct io n s o f $ 2 8 ,7 2 0 ; an d (3 ) ex em p t i o n s o f $ 1 5 ,8 18 . Res p on d en tco n ced es a s el f-em p l o y ed h eal th i n s u ran ce d edu ct i o n o f $ 9 ,7 0 0 . W i t h res p ectt o res p o n d en t ’ s ad ju s t m en to f $ 6 ,0 0 0 reg ard i n g a ch ari t ab le co nt ri b u t i o n d educt i o n , each p art y co n ced es $ 3 ,0 0 0
. W i t h res p ect t o t ax ab l e y ear 2 0 1 0 , p et i t i on ers co n ced e i n fu l l res po n d en t ’ s d i s al lo wan ce o f (1 ) m ed i cal , d en t al , an d i ns u ran ce p rem i u m i t em i zed d edu ct i o n s o f $ 2 4,9 3 7 ; (2 ) ex em

pt i o n s o f $ 1 0 ,9 5 0 ; an d(3 ) a real es t at e l o s s (aft er p as s i v e l i m i tat i on ) o f $ 2 5 ,0 0 0. Res p o n d en tco n ced es a s el f-em p l o y ed h eal th i n s u ran ce d educt i o n o f $ 1 6,8 0 0 . W i t h res p ectt o res p o nd en t ’ s ad ju s t m en to f $ 2 , 7 00 reg ard i n g a ch ari t ab le co nt ri b u t i o n d educt i o n , each p art y co n ced es $ 1 ,3 5 0
. W i t h res p ect t o t ax ab l e y ear 2 0 1 1 , p et i t i on ers co n ced e i n fu l l res po n d en t ’ s d i s al lo wan ce o f (1 ) m ed i cal , d en t al , an d i ns u ran ce p rem i u m i t em i zed d edu ct i o n s o f $ 1 9,5 0 0 ; (2 ) ex em

pt i o n s o f $ 1 1 ,1 0 0 ; an d(3 ) a real es t at e l o s s (aft er p as s i v e l i m i tat i on ) o f $ 2 5 ,0 0 0. Res p o n d en tco n ced es a s el f-em p l o y ed h eal th i n s u ran ce d educt i o n o f $ 2 2,0 0 0 . W i t h res p ectt o res p o nd en t ’ s ad ju s t m en t s o f $ 2 ,7 0 0 , reg ard i n g a ch ari t ab le co nt ri b u t i o n d educt i o n , each p art y co n ced es $ 1 ,3 5 0
.- 4

-

[* 4 ] FINDINGS OF FACT 4 So m e fact s h av e b een s t ip u l at ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s
an d th e at t ach edex h i b i t s are i n co rp o rat edb y th i s referen ce. Wh en th ey p et i t i o n ed th i s Co u rt , p et i t i o ners res i d edi n Cal i fo rn i a. I. M r. Gh ad i ri -As l i ’ s Back g ro un dan dLaws u i tSet t l em en t M r. Gh ad i ri -As l i h o l d s a b ach el o r o f s ci en ce d eg ree i n i n du s t ri al an d

m an u fact u ri n g en g i n eeri n g . Aft er co l l eg e h e wo rk edfo r s ev eral d i fferen t fi rm s i n th e aero s p ace i n du s t ry

b efo re t ak i n g a p o s i t i o n wi t h Deu t s ch En gi n eered Co n n ect i n g Dev i ces (Deu t s ch ), wh ere h e wo rk edas an i n du s t ri al en gi n eer fro m 2 0 0 3 t o 2 0 0 7 . In t h i s cap aci t y h e h ads i g n i fi can tm an ag em en t res p on s ib i l i t i es an d
was al s o res p o n si b le fo r fi n d i n g m an u fact u ri n g m at eri al s , redu ci n g co s ts , creat i n g
s y s t em s , m o d i fy i n g ex i s ti n g d es i g n s , an d fi x in g m an u fact u ri n g erro rs . M r. Gh ad i ri -As l i l efth i s p o s i t i o n wi t h Deu t s ch u n d er ci rcu m s t an ces h e
s t at edth ath e was n o tp erm i t tedt o d i s cu s s . Inan y ev en t , th e ci rcu m s t an ces o f h i s l eav i ng cau s edh i m

s i g n i fi can t p h y s i cal an d m en t al h eal t h p ro b l em s . In2 0 0 7 M r.

4 Pet i t i on ers ’ s eri at i m an s weri n g b ri ef fai l edt o s etfo rt h o b j ect i on s t o res p o n d en t’ s p ro p o s edfi n d i n g s o f fact as d i rect edb y Ru l e 1 5 1 (e)(3 ). Acco rd i n gl y , we d eem p et i t i o n ers t o h av e co n ced edres po n d en t ’ s p ro p os ed fi n d i n g s o f fact as co rrect ex cep tt o th e ex t en t th atp et i t io n ers ’ p ro p os ed fi n d i n g s o f fact are cl earl y i n co n s i s t en tth erewi t h. See J o n s o n v . Co m m i s s i o n er, 1 1 8 T.C. 1 0 6 , 1 0 8 n .4 (2 0 0 2), aff’ d , 3 5 3 F.3 d1 1 8 1 (1 0 t h Ci r. 2 00 3 ).- 5
-

[* 5 ] Gh ad i ri -As li fi l eda l aws u i tag ai n s t Deu t s ch an dan i nd i v i du al n am edPau l Ti t co m b e, al l eg i n g , am o n g o t h er t h i n g s, em p l o ym en t d is cri m i n at i on an d wro n g fu l t erm i n at i o n . Th e l aws u i ts et tl edi n 2 0 1 0 fo r $ 9 0 ,0 0 0
. Th e s et t l em en t ag reem en t , s i gn edAp ri l 2 7 , 2 0 10 , s t at es : “ Th e Part i es ag ree t h atth e Set t l em en tam ou n ti s t o
co m p en s at e Gh ad i ri [M r. Gh ad i ri -As l i ] fo r al l eg edem o t i o n al d i s t res s . Gh ad i ri [M r. Gh ad i ri -As l i ] al l eg es thatth ere were p h y s ical m an ifes t at i o n s th ereo f.” Th e $ 9 0 ,0 0 0 s et t l em en t am o u ntwas p ai db y ch eckm ad e p ay ab l e t o M r. Gh ad i ri -As l i ’ s at t o rn ey ’ s cl i en ttru s tfu n d acco u n t . So m et i m e l at er i n 2 0 1 0 M r. Gh ad iri -As l i recei v eda ch eckfro m

h i s at t orn ey ’ s l aw fi rm

fo r $ 5 5 ,0 0 0 , rep res en t i n g th e $ 9 0 ,0 0 0 s et t l em en t am o u ntl es s at t o rn ey ’ s fees o f $ 3 5 , 0 0 0 . Pet i t i o n ers rep o rt edn o p arto f t he s et t lem en tp ro ceed s an dcl ai m edn o d edu ct i o n fo r at t o rn ey ’ s fees o n th ei r 2 01 0 Fed eral i n co m e t ax retu rn . Du ri n g th e y ears ati ss u e M r. Gh ad i ri -As li was u n em p lo y ed . He as si s t edi n
m ai n t ai n i n g t h e m ari tal h om e an dcari n g fo r h i s an dDr. Najl e-Rah i m ’ s ch i l dren . In ad d it i o n , as d is cu s s edi n m ore d et ai l b el o w, h e as si s t edDr. Najl e-Rah i m i n ad m i n is trat i v e as p ect s o f h er m ed i cal p ract i ce, i ncl u d i n g h an d l i n g cert ai n t ax d o cu m en t s an dd ep o s i ti n g ch eck s .- 6

-

[* 6 ] II. Dr. Najl e-Rah i m ’ s Back g ro u n d Dr. Najl e-Rah i m

earn ed h er m ed i cal d eg ree i n 1 99 5 . In 2 00 6 s h e was cert ifi edas a s p eci al i s ti n i n fect i o u s d i s eas e b y th e Am eri can Bo ardo f In t ern al M ed i ci n e, an di n 2 0 07 s he s t art edh er o wnm ed i cal p ract i ce fo cu s in g o n i n fect i ou s d i s eas e. Du ri n g th e y ears ati s s u e s h e o p erat edth e p ract i ce as a s o l e p ro p ri et ors h i p . As an i n fect i o us d i s eas e s p eci al i s t , Dr. Najl e-Rah i m d i ag n o s edan dtreat ed
co m m u n icab le d i seas es s u ch as p n eu m o ni a, en d o card it is , m en in g i t i s , an ds ep s i s . To b eg i n d iag n o s i s an dtreat m en to f a p at i en t , Dr. Najl e-Rah i m wo ul d s p eakwi t h th e p at i en tan drev i ew al l o f h i s o r h er reco rd s , i n cl u d i n g l ab an d rad i o l og y rep o rt s . Dep en d i n g o n th e ci rcu m s t an ces , s h e wo ul d o rd er ad d i t i o n al t es t s, s u ch as b l o o do r u ri n e t es t s , o r p res cri b e m ed i cat i o n. Sh e wo u ldfo l lo w up b y ch eck i n g th e res u l t s o f an y

t es t s o rd ered , rev i ewi n g th e p ro g res s o f t h e p at i en t , an d ad ju s t i n g th e t reat m en t as n eces sary . Dr. Najl e-Rah i m reco rd edal l o f t h e s erv i ces s h e p ro v id edt o h er p at i en t s o n “ face s h eet s ” th atwere i ncl u d edi n th e p at i en t s ’ ch art s . Dr. Najl e-Rah i m

was co m p en s at edfo r h er s erv i ces m ai n l y b y p aym en t s fro m M ed i care, M ed i-Cal , an di n s u ran ce co m pan ies (t h i rd -p art y

p ay o rs ), as wel l
as co p aym en t s m ad e b y

p at i en ts
.- 7
-

[* 7 ] Dr. Najl e-Rah i m ’ s ren tfo r h er m ed i cal p ract ice was n o m o re t han $ 4 0 0 p er
m o nt h u n t i l Feb ru ary

2 0 1 1 , wh en i ti ncreas edt o $ 1 ,0 0 0 p er m o n th

. III. M ed i cal Pract i ce Ad m in i s t rat io n A. Bi l li n g Dr. Najl e-Rah i m

d i d n o tm ai n t ai n b o ok s an dreco rd s fo r h er m ed i cal p ract i ce o r em

pl o y a b oo kk eep er. To ad m i n i s ter b i l l i n g an d co ll ectfees fro m th i rd -p art y p ay o rs fo r t h e s erv ices s h e p ro v i ded , Dr. Najl e-Rah i m h i redan o u t s i de
co m p an y , C&L Pro fes s i on al Bi l l i n g Serv i ces (C&L). C&L was es t ab l i s h edi n 1 9 9 8 b y Can d ace M acSween , a reg i s t eredn u rs e,
an d Lo i s Kah o i l u a, an ex peri en cedb u s i n es s ad m i n i s trat o r i n t h e h eal t h i ndu s t ry . C&L em p l oy ed1 5 i n d i v i dual s an dp ro v i d edb i l l i n g s erv i ces fo r 3 5 t o 4 0 d o ct o rs each y ear i n a wi d e v ari et y o f p ract i ces , i n cl u d i n g g en eral p ract i t i o n ers , card i o l o g i s t s , en d o cri n o l og is t s , an dg en eral s u rg eo n s . Fo r i ts s erv i ces C&L ch arg ed a fee o r co m

m i s s i o n o f 6 % o f t h e p aym en ts th e cl i en t -d o ct o r recei v ed fro m p ay o rs . Dr. Najl e-Rah i m

wo u ld g en eral l y

b eg i n t h e b i l l i ng p ro ces s b y m ai li n g
co p ies o f h er p at i en t s’ face s h eet s t o C&L, wh i ch wo u l dthen s can th em an den t er th e i n fo rm at i o n i n t o it s co m p u ter s y s tem
. C&L wo u l des t ab l i s h a reco rdfo r each p at i en tan di d en t i fy

the m ed i cal p ro cedu res p erfo rm edwi t h a cu rren tp ro cedu ral- 8

-

[* 8 ] t erm i n o l o g y

co d e. A cl ai m

wo ul d t h en b e g en erat ed , ei t h er o n p ap er o r el ect ro ni cal l y , an ds en t t o the p ay o r t o res p o n d, “ h o p efu l l y wi t h a p aym en t ,” as M s . M acSween s t at ed

. An y p aym en two ul d b e s en td i rect l y t o Dr. Najl e-Rah i m

(n o t t o C&L) al o n g wi th an ex p l an at i o n o f b en efi t s , i n d i cat i n g t h e d at e an dl ev el o f s erv i ce, th e p aym en t m et h o dan dam o u n t, an dwh et h er an y res i du al am o u n t was b i ll ab l e t o
an o th er p art y . Other co rres p on d en ce reg ard i ng b i l l i ng i s s u es wo u l dal s o b e s en t d i rect l y t o Dr. Najl e-Rah i m . If th e co rres p o nd en ce rel at edt o a b i l l i n g i s s u e, e.g ., a req u es tfo r ad d i t i o n al i n fo rm at i o n , Dr. Najl e-Rah i m wo u l ds en d a co p y

o f t h e
co rres p o n d en ce t o C&L fo r fo ll o wup . Ab o uto n ce a weekDr. Najl e-Rah i m wo u l d m ai l t o C&L a p ack et
co n tai n i n g co p i es o f t h e ex p lan at i o n o f b en efi t s fo rm s an do t h er co rres p o n d en ce. Up o n recei v in g t he p ack et , C&L wo u l dan al y ze t h e ex p l an at i o n o f b en efi t fo rm s t o d et erm i n e wh et h er t he t h ird -p art y p ay o r h adp ro p erl y

p ai d t h e cl ai m

an d wh et h er an y

ad di ti o n al b i l l i n g s h o u l db e m ad e ei th er t o t h e p at i en to r t o a
s eco n d ary

i n s u ran ce co m

pan y . If Dr. Najl e-Rah i m h ado t h er co rres p o n d en ce reg ard i n g b i l l i ng i s s u es , C&L wo u l dco n t actth e p ay o r t o fo l l o wup . In ad d i t i o n t o p ro vi d i n g b i l l i ng s erv i ces , C&L o fferedco l l ect i o n as si s t an ce t o i ts cl i en t s , i n cl u d i n g Dr. Najl e-Rah i m . Su ch co l l ect io n as s i s tan ce g en eral l y- 9

-

[* 9 ] i n v o l v edreco v eri n g p at i en tco p ay s . C&L wo u l db i l l th e p at i en tfo r co p ay s i f th e d o ct o r h adn o tco l l ect edth em atth e t im e o f s erv i ce. If th e p at i en tfai l edt o
res p o n d t o th ree b i l l s , C&L wo u l dco n s u l twi t h th e cl i en tb efo re t ak i n g an y ad d it i o n al s t ep s . Up o n th e cl i en t ’ s ex p res s req u es t , C&L wo u ld co n t acta
co l l ect i o n ag en cy

(duri n g t h e y ears ati s s u e C&L en g ag edFi n an ci al Deb t Reco v ery ) t o co l l ectan y

u np ai db al an ces o n th e cl i en t ’ s b eh al f. On ce a b i l l was
s en tt o a co l lect i o n ag en cy , C&L wo u l d s ho w i tas a wri t eo ff i n th e m o n t h l y cl i en t
s u m m ary . Sh o u l dth e co ll ect i o n ag en cy ev en tu al l y

co l l ectth e m o n ey , i two u l d k eep a p ercen t ag e an ds en da ch eckt o Dr. Najl e-Rah im fo r th e b al an ce. Atth e en do f each m on t h M s . M acSween an dM s . Kah o i lu a wo u ldrev i ew al l o f C&L’ s cl i en t s’ d o cu m en t at i o n , i n cl u d i n g Dr. Najl e-Rah i m ’ s , t o en su re t h at al l am o u n t s were p ro p erl y b i l l ed . M s . M acSween wo u l d t h en p rep are an ds en da
m o nt h l y s u m m ary t o each cl i en t , i n cl u d i ng Dr. Najl e-Rah i m . Th e d at a rep o rt ed o n Dr. Najl e-Rah i m ’ s m o n t h ly s u m m ary was t ak end i rect ly

fro m th e ex p lan at i o n s o f b en efi t s C&L recei v edfro m h er. Each m on t h l y s umm ary co ns i s t edo f a g en eral l ed g er rep o rtth atran fro m th e fi rs tth ro u gh th e l as td ay o f t h e m o n t h . Th e
s u m m ari es fo r Dr. Najl e-Rah i m ’ s m ed i cal p ract i ce rep o rt edth e d at es Dr. Najl eRah im p erfo rm edm ed i cal s erv i ces ; “ t o t al ch arg es ” (i .e., th e g ro s s ch arg es ) g en erat edb y

the s erv i ces p ro v id ed ; “ co rrect ed ch arg es ”, refl ect in g erro rs th atwere- 1 0 -

[* 1 0 ] s ub t ract edfro m

cl ai m s ; “ wri t eo ffs ”, rep res en t i ng am o un t s th at t h e b i l l ed p ay o rs h adfai ledt o p ay (b u tthatm i g h t s ti l l b e co l l ect ed t hro u g h a co l l ect i o n ag en cy ); “ t o t al p aym en t s ”, rep res en t i ng actu al p aym en t s m ad e du ri n g t h e m o n t h as
s t at edo n each ex p lan at i o n o f b en efi t s ; “ n et ch arg es ”, rep res en t i ng th e d i fferen ce b et ween t o t al p aym en ts an dan y co rrect i o n s ; “ n etp aym en t s ”, rep res en t i n g p aym en t s l es s refu n d s p ai d; an d “ p aym en t refu n ds ”, rep res en t i n g p ay o rs ’
o v erp aym en t cl ai m s ag ai n s tDr. Najl e-Rah i m . At t ach edt o each m o n t hl y s u m m ary was an i n vo i ce s h owi n g t h e t o t al

m o nt h l y p aym en t s recei v edb y

Dr. Najl e-Rah i m , a cal cu l at i o n o f t h e 6 % fee o wed t o C&L, an dan am o u n t du e fo r rei m b u rs em en t o f C&L’ s p o s t ag e ex pen s es . Th e 6 % fee was b as edo n t h e p aym en t s recei v edb y Dr. Najl e-Rah i m as rep o rt edt o C&L o n th e ex p l an at i o n o f b en efi t s fo rm s . C&L al s o p ro v i d edi ts cl i en ts , i n cl u di n g Dr. Najl e-Rah im , wi t h an n u al rep o rt s , s u m

m ari zi ng th e m o n t h l y

rep o rt s . Aft er rev i ewi n g t h e C&L m on t h ly rep o rt s , Dr. Najl e-Rah i m wo u l d
s o m et i m es co n t actM s . Kah o i l u a ab o u ts eem i n g d i s crep an ci es b et ween am o u n t s th atC&L rep o rt edas p aym en t s t o h er an dthe am o u nt s d ep os i t edi n t o p et i t i o n ers ’ b an k acco u n t s . Ono n e o ccas i o n b o t h p et it i o n ers m etwi th M s. M acSween an d M s . Kah o i l u a t o d i s cu s s th es e s eem i n g d i s crep an ci es , wh i ch C&L at t ri bu t edt o- 1 1 -

[* 1 1 ] t i m i n g d ifferen ces b et ween C&L’ s m o n t h ly s u m m ari es an d p et i t i o n ers ’ b an k
s t at em en t s . Des p i t e th es e d i s p u t es , Dr. Najl e-Rah i m al way s t i m el y

p ai d t h e fu l l
am ou n to f C&L’ s fees as s h o wno n each i n v o i ce. 5 B. Paym en t s As n o tedab o v e, t h i rd -p art y p ay o rs b i l l edb y

C&L m ai l edp aym en t s d i rect l y t o Dr. Najl e-Rah i m . M r. Gh ad i ri -As l i as si st edDr. Najl e-Rah i m i n o p en i n g th e
m ai l an dd ep o si t i ng th e ch eck s i n t o p et i t i o ners ’ b an kacco un t s. Du ri n g th e y ears ati ss u e p et i t i o n ers reg u l arl y d ep o s i t edch eck s i n to th ei r b an k i n g acco u nt s b u t fai l edt o m ai n t ai n an y

reco rd s as t o th ei r i nco m e. 1
. M ed i -Cal M ed i -Cal , th e St at e o f Cal i fo rn i a’ s M ed icai d p ro g ram , s erv es l o w-i n co m e i n d i v i du al s . Duri n g th e y ears ati s s u e, M ed i -Cal u seda co n tract o r, Co n du en t , t o ad m i n is t er p aym en t s t o p h y s i ci an s wh o p ro v i d eds erv i ces t o M ed i -Cal p at i en t s . Dr. Najl e-Rah i m

recei v edfro m

M ed i -Cal , th ro u gh Co n duen t , p aym en t s o f $ 9 6 ,1 0 7 i n 2 0 0 9 , $ 1 0 3 ,1 4 1 i n 20 1 0 , an d$ 8 5,8 43 i n 2 01 1
.

5 Onth ei r t ax retu rn s p et i t i o n ers d edu ct edco m m i s si o n s p ai d t o C&L o f $ 2 7 ,7 4 3 fo r 2 0 0 9 , $ 3 4,8 0 0 fo r 2 0 10 , an d $ 2 9 ,6 7 0 fo r 2 01 1
.- 1 2 -

[* 1 2 ] 2
. San Bern ard i n o M ed i cal Gro up San Bern ard i n o M ed ical Gro up i s a m ed i cal g ro up th atco n t ract s wi t h p h y s i ci an s t o p ro v i d e s erv i ces fo r p at i en t s . Itact s as a g o -b et ween fo r d o ct o rs an d p ri v at e i n s u ran ce p ro v i d ers , p ay i n g th e d o ct o rs fo r t h e s erv i ces t hey p ro v i d e. San Bern ard i n o M ed i cal Gro up p ai dDr. Najl e-Rah i m $ 13 ,7 9 1 i n 2 0 0 9 , $ 3 2 ,1 32 i n 2 0 1 0 , an d$ 1 7 ,3 91 i n 2 0 1 1. 6

3
. M ed i care Du ri n g th e y ears ati ss u e M ed i care en g ag edPal m et to GBA, LLC, t o m ak e p aym en t s t o p h y s i ci an s i n Cal i fo rn i a. Acco rd i n g t o th e Fo rm s 1 0 9 9 -M ISC i s s u ed b y Pal m et t o GBA, LLC, Dr. Najl e-Rah i m recei v edM ed icare p aym en t s o f $ 1 9 1 ,5 3 2 i n 2 0 0 9 , $ 2 0 7 ,8 9 3 i n 2 0 1 0, an d $ 23 0 ,7 0 5 i n 2 0 1 1
. IV. Ho u seh ol d Fi n an ces M r. Gh ad i ri -As l i an dDr. Najl e-Rah i m h el d a jo i n tb an kacco u n t , an dth ey each al s o h ads ep arat e b an kacco u n ts . Duri n g the y ears ati s s u e, p et i t i o ners ’ b an k

6 Fo r reas o n s u n ex p l ai nedi n t h e reco rd , San Bern ard i n o M ed i cal Gro up d i d n o trep o rtth e fu l l am o u n t s p ai d t o Dr. Najl e-Rah i m each y ear o n t h e Fo rm s 1 0 99

- M ISC, M i s cel lan eo u s In co m e, th ati tfi l edwi t h th e In t ern al Rev enu e Serv i ce (IRS). Th e Fo rm s 1 0 9 9 -M ISC fai l edt o i n cl u de each y ear’ s fi n al p aym en tm ad e t o Dr. Najl e-Rah i m . Thu s , th e 2 0 0 9 Fo rm 1 09 9 -M ISC rep o rt ed$ 1 3 ,4 3 6 , th e 2 0 1 0 Fo rm 1 0 9 9 -M ISC rep o rt ed$ 31 ,9 3 0 , an dth e 2 0 1 1 Fo rm 1 0 9 9-M ISC rep ort ed $ 1 5 ,3 8 5 . Inth e d et erm i n at io n s i n th e n o t ice o f d efi ci en cy , res p o n d en tu s edth e n u m b ers fro m th e C&L s u m

m ari es rat h er t h an fro m

th es e Fo rm s 1 0 9 9 -M ISC.- 1 3 -

[* 1 3 ] acco u n tb al an ces were g ro wi ng . Pet i ti o n ers each h adatl eas to n e cred i tcard

an d t i m el y p ai d t hei r m o n t h l y b al an ces . Pet i t i o n ers h ada m ort g ag e o n t h ei r h o m e
an d m ad e t h ei r m on t h l y p aym en t s o n t i m e. Du ri n g th e y ears at i s su e, p et i ti o n ers h ad n o fi n an ci al p ro b l em s. V. Prep ari n g an dFi l i n g Pet i t i o ners ’ Fed eral In co m e Tax Retu rn s Pet i t i o ners en g ag edCl in t o n M . Yo un g t o p rep are t h ei r Fed eral i n co m e t ax retu rn s fo r t h e y ears ati s s u e. M r. Yo u n g h as b een a Cal i fo rn i a reg i s t eredt ax retu rn p rep arer s i nce 1 9 92 . Atth e t i m e o f tri al h e h adm o re t h an 1 ,0 0 0 cl i en t s . M r. Yo u n g h as a b ack gro u n di n b u s i n es s fi n an ce. He i s n o ta cert i fi ed p ub l i c acco u n tan to r an en ro ll edag en tan dn ev er h o l d s h i m s el f o u tas an yt h i n g
o th er t han a t ax retu rnp rep arer. He d o es n o t p erfo rm b o o kk eep i n g o r acco u n t i n g
s erv i ces fo r h i s cl ien t s b u t rel i es o n th e accu racyo f t h e i n fo rm at i o n th ey b ri n g h i m . To th aten d, h e ex p ect s cl i en t s t o p ro v i d e h im wi t h th ei r b o o k s an d reco rd s,
as wel l as i n co m e rep o rt i n g fo rm s , s u ch as Fo rm s W -2 , W ag e an dTax St at em en t , o r Fo rm s 1 0 9 9 -M ISC. He al s o p ro vi d es each cl i en tan ex p en s e-rep o rt i n g t em p l at e
o n wh i ch h e rel ies i n p rep ari n g th e cl i en t ’ s i n co m e t ax return . Th e ex p en serep o rt i n g t em

p l at e h as p rep ri n tedex p en s e cat eg o ri es an d s ub cat eg o ri es , as wel l as
s p aces fo r t ax p ay ers t o m ak e cu s t o m i zeden t ri es . M r. Yo u n g i n fo rm s h i s cl i en ts- 1 4 -

[* 1 4 ] th ath e d o es n o twan t t o s ee t h ei r u n d erl y i n g recei p t s u n l es s t h ere i s a

“ m ajo r” q u es t i o n reg ard i n g the d edu ct i b i l it y o f th os e ex p en s es . In p rep ari n g p et it i o n ers ’ Fed eral i n co m e t ax retu rn s M r. Yo u n g wo rk edwi t h M r. Gh ad i ri -As l i , n ev er wi t h Dr. Najl e-Rah i m . So m et i m es , h o wev er, wh en M r. Yo u n g h ada qu es t i o n , M r. Gh ad i ri -As li wo ul d cal l Dr. Najl e-Rah i m fo r an
an s wer. Fo r t h e y ears ati s su e, p et i t i o n ers g av e M r. Yo u n g s o m e, b utn o t al l , o f t h e Fo rm s 1 0 9 9 -M ISC rep o rt i n g i n co m e recei vedb y Dr. Najl e-Rah i m . Pet i ti o n ers
n ev er p ro v i d edM r. Yo u n g an y o f C&L’ s m on t hl y o r an n u al s u m m ari es , an y

C&L i n v o i ces , o r an y b an kreco rd s . M r. Yo u n g was aware t h atp et i t i o ners ’ i nco m e
cam e m o s t l y

fro m Dr. Najl e-Rah i m ’ s m ed i cal p ract ice an dwo u l d p ro b ab l y b e
m ai n l y i n th e fo rm

o f i n s u ran ce p ay o u t s , fo r wh i ch Fo rm s 1 0 9 9-M ISC wo u l dm o s t l i kel y b e i s s u ed . He th erefo re s p eci fi cal l y as k edM r. Gh ad i ri -As l i : “ Th i s i s wh at th e 1 0 99 s y o u s ho w m e ad d edup t o . Do es th i s l o o k accu rat e t o y o u , et cet era, et cet era? ”. M r. Gh ad i ri -As li res po n d ed“ [i ] n th e p os i t i v e th ath e as su m edth es e i n fo rm at i o n p i eces t h atwere g i v en t o h im , p res u m ab l y fro m wh ath e t ol dm e b y h i s s p o u s e, b y

th e d o ct o r, were co rrect
. ” As was h i s cu s t om , i n p rep ari n g each y ear’ s Fed eral i nco m e t ax return M r. Yo u n g p ro v id edp et i t i o n ers wi t h h i s ex p en s e-rep o rt i n g t em p l at e. Wh en M r.- 1 5 -

[* 1 5 ] Gh ad i ri -As l i retu rn edth e co m p l et ed t em

p l at e t o M r. Yo u n g , h e rep res en t ed th atDr. Najl e-Rah i m h ad fi ll edi to u t
. Up o n recei v in g th e fi l l ed -o u tt em p l at e, M r. Yo u n g as k edp et it i on ers t o co n fi rm th e accu racyo f t h e i n fo rm at i o n o n i t . Th ey d i ds o b utp ro v i d edn o o t h er i n fo rm at i o n t o M r. Yo u ng reg ard i n g t h ei r ex p en s es . M r. Yo u n g u s es t ax p rep arat i o n s o ft ware t o p rep are t ax retu rn s . Th e
s o ft ware g en erat es wh atM r. Yo u n g refers t o as “ o v erfl o w s h eet s”, wh i ch p ro v i d e
m o re d et ai l th an wo u l dn o rm al l y b e s een o n a t ax return . Fo r i n s t an ce, wh ereas Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i nes s , h as a l i n e fo r “ Offi ce ex p en s e”, M r. Yo u n g ’ s o v erfl o w s h eet wo u l ds h o w th e v ari o u s co m p o n en t s o f t h e en t ry fo r t h at
s i ng l e l i n e i t em . Aft er p rep ari n g a d raftFed eral i nco m e t ax return , M r. Yo u n g wo u l drev i ew i t w i th M r. Gh ad i ri -As l i

. Th e rev i ew i n cl u d ed a l i n e-b y -l i n e rev i ew o f t h e
am ou n t s en t eredo n th e m ai n t ax fo rm an dth e at t ach eds ch edu les . M r. Gh ad i ri

As l i wo u l dt ak e t h e co m

p l et edt ax fo rm

fo r Dr. Najl e-Rah i m

t o rev i ew. M r. Yo u n g n ev er recei v edan y qu es t i o ns o r co m

m en t s fro m

Dr. Najl e-Rah i m . Wh en M r. Yo un g was p rep ari n g p et it i on ers ’ 2 0 1 0 Fed eral i n co m e t ax retu rn s , M r. Gh ad iri -As li t o l d h i m th ats o m e o f t h e Fo rm s 1 0 9 9-M ISC were i n co rrect , rep o rt i ng $ 4 2 , 0 0 0 o f i n co m e th atp et i t i o n ers h adn ev er recei v ed . M r. Gh ad i ri -As l i wan t edt o kn o w wh atco u ldb e d o n e. M r. Yo u n g ad vi s ed h im th at- 1 6 -

[* 1 6 ] o n e o p ti o n was t o rep o rtth e am o un t s s t at ed o n t h e d i s p u t edFo rm s 1 0 9 9

- M ISC an dth en s ub t ract t h e d i s p u t edam ou n ts as an ad ju s t m en t . Th i s was an ap p ro ach th atM r. Yo u n g h adp rev i o u s l y u s ed . M r. Yo u n g ad v i s edM r. Gh ad i ri

As l i : “ [I] f y ou ’ re qu es t i o n ed , y o up ro v e th aty o ud i dn ’ tactual l y h av e t h at i n co m e.” Aft er a d i s cu s s i o n t h ey ag reed t o u s e t h e d i sp u t edam o u n t s rep ort edo n th e Fo rm 1 0 9 9 -M ISC an dd edu ctth e $ 4 2,0 0 0 o f d i s p u t edi n co m e. 7 VI. Ex am in at i o n o f Pet i t io n ers ’ In co m e Tax Retu rn s In Ap ri l 2 0 1 2 Rev en ue Ag en tJ en n i fer Co t a was as s ig n edt o ex am i n e p et i t i o n ers ’ retu rn s fo r t ax ab l e y ears 2 0 0 9 , 2 0 10 , an d 2 0 1 1 . Sh e b eg an h er
ex am i n at i o n b y

i s su i ng an i n fo rm at i o n d o cu m en t req u es t(IDR) fo r (1 ) p et i t i o n ers ’ Fo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , an do t her t ax fo rm s , (2 ) co p i es
o f p ri o r au di trep o rt s , (3 ) b an kacco u n ti n fo rm at i o n fo r t h e p eri o d b et ween J an u ary 1 an dDecem

b er 3 1 , 2 0 1 0 , (4 ) Fo rm

1 0 4 0 an d Sch edul e C wo rk p ap ers ,

7 Fo r p et it i o n ers ’ t ax ab l e y ear 2 0 1 0, M r. Yo u n g p rep aredtwo Sch edul es C fo r Dr. Najl e-Rah im ’ s m ed i cal p ract i ce b ecau s e s h e p erfo rm edm ed ical s erv i ces at two l o cat i o n s th aty ear. On o n e o f t h e Sch edu l es C, “ M ed i cal Do ct o r 2 n d ”, p et i t i o n ers rep o rt edt o t al g ro ss recei pt s o f $ 4 2,0 00 --t he s am e as th e d i s p u t ed i n co m e cl ai m edo n the fi rs tSch edu l e C. Onth e o t h er Sch edu l e C, “ M ed i cal Do ct o r”, p et i t i o n ers rep o rt ed$ 3 8 5 ,3 9 4 o f g ro ss recei p t s an dd edu ct edas an “ o t h er ex p en s e” $ 4 2,0 0 0 o f “ d i s p u t edi n co m e”. In th e n o t i ce o f d efi ci en cy , res p o n d en t m ad e an ad

ju s tm en treal lo cat i ng th e “ M ed i cal Do ct o r 2 n d ” Sch edu l e C g ro s s recei p t s o f $ 4 2,0 0 0 t o th e o t h er Sch edu l e C, s t at i n g : “ Th e al l ocat i o n o f i n co m e an d ex p en s es t o a s ep arat e Sch edu l e C i s d is reg ard edfo r t ax p u rp os es .”- 1 7 -

[* 1 7 ] (5 ) recei pt s fo r b u s i nes s ex p en s es , an d(6 ) o t h er fi nan ci al i n fo rm at i o n . Rev enu e Ag en t Co t a req u es t edth atp et i t i o n ers p ro v i d e th e i n fo rm at i o n b y th e t i m e
o f an upco m i n g s ch edu l edap p o i n t m en twi t h t h em o n M ay 2 2 , 2 01 2 . Pet i ti o n ers fai l edt o p ro v i d e an y

o f t h e req u es t edd ocu m en t s . OnAu gu s t3 , 2 0 1 2 , Rev en u e Ag en t Co t a s en t p et i ti o ners a s eco n dIDR, req u es t i ng (1 ) co p i es o f em p l o ym en tt ax retu rn s , (2 ) b an ks t at em en ts (wi t h
s p eci fi c b an ks an dacco u n t s i d en t i fi ed ) fo r t h e p eri o db et ween Decem b er 1 , 2 0 0 9 , an d J anu ary

3 1 , 2 0 1 1 , (3 ) Sch edu l e C reco rd s o f i nco m e (s u ch as i nv o i ces ), an d (4 ) reco rd s t o s ub st an t i at e ex p en s es rep o rt edo n Sch edu l e C an dSch edu l e E, Sup p l em en t al In co m e an dLo s s. Th e req u es t edi n fo rm at io n was due at p et i t i o n ers ’

n ex t s ch edu ledap p o i n tm en to n Au g u st1 7 , 2 0 1 2 . Pet i t io n ers p ro vi d eds t at em en ts fo r o n e b an kacco u n tb u tfai l edt o p ro v i d e an y o f t h e o t h er req u es tedd o cu m en t s . OnAu gu s t2 0 , 2 0 1 2, Rev en u e Ag en tCo ta s en tp et i t i on ers a t h i rdIDR, req u es t i ng (1 ) b an k s tat em en t s (ag ai n i n cl u di n g s p eci fi c acco u n t s ) fo r t h e p eri o d s b et ween Decem

b er 1 , 2 0 0 8 , an dJ an u ary

3 1 , 2 0 1 0 , an db et ween Decem b er 1 , 2 0 1 0 , an dJ an u ary

3 1 , 2 01 2 , (2 ) i n fo rm at i o n reg ard in g n o n t ax ab l e i n co m e (s u ch as g i ft s , i n h eri t an ces , l o an p ro ceed s , et c.), (3 ) reco rd s rel at edt o Sch edu l e C i n co m e, (4 ) i n s uran ce p o l i ci es , an d (5 ) reco rd s t o s ub s t an t i at e Sch edul e C an d Sch edu l e E
ex p en s es . Th e req u es t edi n fo rm at io n was du e atp et i t i o n ers ’ n ex ts ch edu l ed- 1 8 -

[* 1 8 ] ap po i n t m en to n Sep t em b er 1 4 , 2 0 1 2 . Pet i t i o n ers fai l edt o p ro v i d e t h e req u es t edd o cu m en t s . OnOct o b er 2 5 , 2 01 2 , Rev en u e Ag en tCo ta s en tp et i t i on ers a fo u rt h IDR, req u es t i ng i n fo rm at i o n fo r t ax ab l e y ears 2 0 09 , 2 01 0 , an d2 0 11 wi t h res p ectt o (1 ) an y n o n t ax ab l e i n co m e, i ncl u d in g d o cu m en t at i o n t o s upp o rt t h ei r cl ai m th ata $ 5 5 ,0 0 0 d ep o s i t m ad e o n M ay 2 0 , 2 0 1 0, was n o tt ax ab l e, 8 (2 ) 2 0 09 an d 2 0 1 1 t ax retu rn wo rkp ap ers , (3 ) d o cu m en t at i o n t o s ubs t an ti at e g ro ss recei p t s i n cl u d edo n Sch edu l e C, (4 ) a l i s t i n g an dco p i es o f al l Fo rm s 1 0 99 -M ISC p et i t i o n ers as s ert ed were i n co rrect , (5 ) C&L reco rd s i n cl u d i n g co n t ract s an d s tat em en t s , (6 ) d o cu m en t at i o n t o s ub s tan t i at e Sch edu l e C an dSch edu l e E ex p en s es , (7 ) b an k
s t at em en t s wi t h res p ectt o the p eri o d s b etw een Decem b er 1 , 2 0 0 8, an dJ an uary3 1, 2 0 1 0 , an db et ween Decem b er 1 , 2 0 1 0 , an dJ an u ary

3 1 , 2 0 1 2, an d (8 ) i nfo rm at i o n reg ard i n g car ex p en s es . Th e req u es t edi n fo rm at i o n was du e atp et i t i o ners ’ n ex t
s ch edu l edap p o i n tm en to n No v em ber 9 , 2 0 1 2 . Pet i t i o n ers fai l edt o p ro v i d e t h e req u es t edd o cu m en t s . Rev en u e Ag en t Co t a h ads ev en m eet i n g s wi t h M r. Gh ad i ri -As l i an d o n e
m eet i n g wi t h b o t h p et it i on ers . M r. Gh ad i ri -As l i p ro v i d eda h an dwri t t en s u m m ary

8 Th i s am o u n tap p ears t o rel at e t o M r. Gh ad i ri -As l i ’ s l aws u i ts et t l em en t , fo r wh i ch h e recei v eda $ 5 5 ,0 0 0 n etp aym en tfro m h is at t o rn ey ’ s fi rm .- 1 9 -

[* 1 9 ] o f wh ath e cl ai m edwere t o t al s fo r o ffi ce ex p en s es b uto t h erwi s e p ro v i d ed

n o s ub s t an t i at io n. He al so p ro v i d ed t h e ex p en s e-rep ort i ng t em p l at e t h at p et i t i o n ers h adg i v ent o M r. Yo u n g . An dal t h o u g h M r. Gh ad i ri -As l i p ro v i d ed Rev enu e Ag en t Co t a wi t h s t at em en t s fo r o n e o f p et it i on ers ’ b an kacco u n t s , p et i t i o n ers d i d n o td i s cl o s e 1 7 o f t h e 1 8 b an kacco u n ts th ey h el di n 2 00 9 an d2 0 1 0
o r 2 0 o f t h e 2 1 b an kacco un t s th ey h el d i n 2 0 1 1. Becau s e p et i t i o n ers p ro v i d edh ard ly an y o f th e i n fo rm at i o n req u es t edi n the IDRs , Rev en u e Ag en t Co t a s umm o n edth ei r b an k acco u ntreco rd s fro m W el l s Farg o Ban k , Ban ko f Am eri ca, W ach o v i a Ban k , an dCh as e Ban k . Rev en u e Ag en t Co t a i d en t i fi edp et i t i o ners ’ b an kacco u nt s b y rev i ewi n g d o cu m en t s , s u ch as th e Fo rm s 1 0 9 9 -M ISC, t h atwere i s s u edb y th es e b an k s rep o rt i n g i n teres t earn edo n p et i t i o n ers ’ b an kacco u n t s. As s h e s u m m o n edi n fo rm at i o n , Rev en u e Ag en tCo t a b ecam e aware o f o t h er b an kacco u n t s , an d h er an al y s i s o f ch eck d i s b urs em en t s i d en t i fi edfu rt h er acco u n t s m ai n t ai n edb y p et i ti o n ers . Pet i t io n ers p ro vi d edal m o s t
n o as si s t an ce t o Rev enu e Ag en tCo t a as s h e i d en t i fi edth ei r b an k acco u n ts
. Rev en u e Ag en t Co t a reco n st ru ct edp et i t io n ers ’ i n co m e an dex p en s es u s i n g th e b an kd ep os i ts m et h o d . As p arto f t hi s an al y s i s s h e rev i ewed al l i t em s d ep os i t edi n t o the b an kacco u n t s t o i d en t i fy th e d at es an ds o u rces o f t h e fu n d s an d th e i d en t i t i es o f t h e p ay o rs . Sh e cal cu l at edp et i t io n ers ’ i n co m e b y ad d i n g al l o f t h e- 2 0 -

[* 2 0 ] d ep o s it s t h at were m ad e i n t o each acco u n t an d redu ci n g thi s s u m b y al l i d en t i fi ab l e n o n t ax ab l e d ep o s i t s , fo r ex am p l e b y i d en t i fy i n g tran s fers b et ween
acco u n t s (v i a el ect ro n ic t ran s fers o r ch eck s t ran s ferri n g m o n ey b et ween p et i t i o n ers ’ b an kacco u n t s). Pet i t i o n ers d i dn o tco o p erat e wi t h Rev en ue Ag en t Co t a’ s req u es t s fo r i np u t o n wh ati t em s were n o n t ax ab l e, an dev en aft er b ei n g g i v en th e s u m

m ary i nfo rm at io n t h ey

d i d n o t ex p l ai n wh atp art o f Rev en u e Ag en t Co t a’ s an al y s i s th ey

were d i s p u t i n g . Rev en u e Ag en t Co t a creat eds p read s h eet s s u m m ari zi ng th e fi n d i n g s o f h er b an k d ep o s i t s an al y s i s fo r each y ear at i ss u e. Th e s p read s h eet s i d en t i fi edeach o f p et i t i o n ers ’ b an kacco u n t s an ds h owed(1 ) y earl y b eg i n n i n g an den d i n g b al an ces , (2 ) t o t al d ep o s i t s (l es s i n t eres t ), (3 ) n o n tax ab l e t ran sfers , (4 ) t ax ab l e d ep o s i t s , (5 ) t ax ab l e i n t eres t , (6 ) wi t h drawal s , (7 ) t ran s fers o u t(p ers on al /ren t al ), (8 ) b u s i n es s i n co m e, an d(9 ) “ SE h eal t h”. On th e b as i s o f t h e d i sb u rs em en t s i n d i cat edb y h er b an kd ep o s i ts an al y s i s , Rev en u e Ag en t Co t a co m p u t edDr. Najl eRah im ’ s al lo w ab l e b us i nes s ex p en s es . To s up p l em en th er b an kd ep o s i t s an al y s is , Rev en u e Ag en tCo t a rev i ewed tran s cri p t s o f al l o f t h e Fo rm s 1 0 9 9 -M ISC s ubm i t tedt o th e IRS b y th i rd -p art y p ay o rs wi t h res p ectt o p et i t i o n ers . Sh e al s o s u m m on edC&L t o o b t ai n co p i es o f i n v o i ces s en tt o Dr. Najl e-Rah i m as wel l as t h e m o n t h l y

an dan n u al s u m

m ari es o f- 2 1 -

[* 2 1 ] Dr. Najl e-Rah i m ’ s b il l in g s . Sh e al s o co n t act edM r. Yo u ng t o d i s cu s s h i s p rep arat i o n o f p et i t i o n ers ’ Fed eral i n co m e t ax retu rn s fo r t he y ears ati s s u e. M r. Yo u n g ex p l ai n ed t h e ex p en se d edu ct i o n s cl ai m ed an d s h o wedRev en u e Ag en t Co t a th e o v erfl o w s h eet s h e h adg en erat ed

. Aft er Rev enu e Ag en tCo t a h ads u m m o n edp et it i on ers ’ b an k s , s h e m etwi t h M r. Yo u n g an dM r. Gh ad i ri -As l i . Th e m eet in g was s ho rt . Rev en u e Ag en tCo t a t o l dM r. Yo u n g ab o u tth e u n d ers t at em en t s o f i n co m e s h e h adfo un d

. M r. Yo u n g ’ s
res p o n s e t o Rev enu e Ag en tCo t a, as h e recal l edi tattri al , was : I n eedt o p ro b ab l y

co n fer wi t h m

y cl ien ts o m e m o re * * * an dt al k ab o u tth is . An d at th atp o i n t , I thi n kth at h e [M r. Gh ad i ri -As li ] was s up p o s ed t o b ri n g s o m e ad d i t i o n al co pi es o f b an kreco rd s th atatth at p o i n th e [M r. Gh ad i ri -As l i ] d i dn o th av e y et . So h e [M r. Gh ad i ri

As l i ] d i dn ’ th av e an yt h i n g el s e t o tu rno v er t o h er [Rev en u e Ag en t Co t a] . So we k i n do f ju s ten d edth e m eet i n g, an dwe l eftth e b ui l d in g . M r. Yo u n g t o l d M r. Gh ad i ri -As l i th ath e s ho u l dp ro b ab l y s eekl eg al co un s el . M r. Yo u n g d i dn o ts ee M r. Gh ad i ri -As l i ag ai n u nt i l tri al

. Th e fo l l o w i n g t ab l e s u m

m ari zes th e g ro s s recei p ts p et i t i on ers rep o rt edo n th e Sch edu l es C o f t h ei r Fed eral i n co m e t ax retu rn s as wel l as g ro s s recei p t s (1 ) as cal cu l at edi n th e b an kd ep o s i t s an al y s i s, (2 ) as rep o rt edt o C&L b y Dr. Najl eRah im , an d(3 ) as rep o rt edo n th e Fo rm s 1 0 9 9-M ISC:- 2 2 - Gro s s recei p t s Year Tax retu rn Fo rm s 1 0 9 9 -M ISC C&L Ban kd ep o s i t s an al y s i s 2 0 0 9 $ 4 2 2 , 0 0 0 $ 4 7 3 ,7 3 6 $ 4 5 3 ,0 3 0 $ 4 7 3 ,1 5 6 2 0 1 0 4 2 7 , 3 9 4 6 2 3 ,1 3 7 5 7 0 ,9 0 8 6 4 6 ,0 3 6 2 0 1 1 2 7 5 , 3 2 3 5 1 4 ,3 6 4 5 1 5 ,9 4 9 5 3 9 ,6 5 0 Th e fo l l o w i n g t ab l es s u m m ari ze Dr. Najl e-Rah im ’ s ex p en s e d edu ct i o n s as cl ai m edb y

p et i t i o n ers an d t h e am o un t s res p o n d en tal l o wedup o n co m p l et i o n o f th e ex am i n at i o n fo r t h e y ears ati ss u e: [* 2 2 ]- 2 3 - 2 0 0 9 S c h e d

u l e C E x p e n s e Amo u

nt c l a i me d Amo u

nt a l l o w e d D i f

f e r e n c e A d v e r t i s i n g $ 3 , 0 0 0

- 0

- $ 3 , 0 0 0 C a r a n d t r u c k 3 8 , 2 5 0

- 0

- 3 8 , 2 5 0 C o n t r a c t l a b o r 1 2 7 , 7 4 3 $ 2 6 , 5 2 6 1 , 2 1 7 D ep r e c i a t i o n 1 9 , 4 0 7
- 0

- 1 9 , 4 0 7 I n s u r a n c e 2 0 , 0 0 0 7 , 4 5 0 1 2 , 5 5 0 L e g a l a n d p r o f e s s i o n a l s e r v i c e 5 , 4 0 0

- 0

- 5 , 4 0 0 O f f i c e 3 , 5 0 0

- 0

- 3 , 5 0 0 Re nt o r l e a s e 1 6 , 1 2 0 2 , 9 5 5 1 3 , 1 6 5 S u p p l i e s 2 3 , 3 0 0

- 0

- 2 3 , 3 0 0 T r a v e l 1 2 , 1 0 0

- 0

- 1 2 , 1 0 0 M e a l s a n d e nt e r t a i nme nt 2 , 0 0 0

- 0

- 2 , 0 0 0 W a g e s 2 5 , 0 0 0

- 0

- 2 5 , 0 0 0 O t h e r 2 3 8 , 6 3 0 3 1 , 7 8 1 3 6 , 8 4 9

1 P e t i t i o n e r s r ep o r

t e d t h e C & L b i l l i n g f

e e s a s c o nt

r a c t l a b o r . 2 P e t i t i o n e r s ’ “ o t

h e r e x p e n s e s ” c o n s i s t e d o f $ 6 , 4 0 0 f o r “ c o m m u n i c a t i o n s ” , $ 9 , 3 0 0 f o r “p r o f e s s i o n a l d u e s a n d f e e s ” , $ 5 , 1 0 0 f

o r “ u n i f o r m s a n d u p k e ep ” , a n d $ 1 7 , 8 3 0 f o r “ c o n t i n u i n g e d u c a t i o n ”
. 3 E x p e n s e s a l l o w e d b y r e s p o n d e nt c o n s i s t e d o f $ 9 5 o f “ d u e s ” , $ 1 4 8 f

o r “ t e l ep h o n e e x

p e n s e s ” , a n d $ 1 , 5 3 8 f

o r “ l i c e n s e s a

n d f e e s ”
. [* 2 3 ]- 2 4 - 2 0 1 0 S c h e d u l e C E x p e n s e 1 A m o u n t c l a i m e d A m o u n t a l l o w e d D i f f e r e n c e A d v e r t i s i n g $ 2 , 9 0 0

- 0

- $ 2 , 9 0 0 C a r a n d t r u c k 2 6 , 3 5 0

- 0

- 2 6 , 3 5 0 C o n t r a c t l a b o r 3 4 , 8 0 0 $ 3 6 , 3 3 5 ( 1 , 5 3 5 ) D e p r e c i a t i o n 9 , 5 7 8

- 0

- 9 , 5 7 8 I n s u r a n c e 3 3 , 6 0 0 9 , 3 7 2 2 4 , 2 2 8 L e g a l a n d p r o f

e s s i o n a l s e r v i c e 5 , 6 2 5
- 0

- 5 , 6 2 5 O f f i c e 7 , 1 4 6

- 0

- 7 , 1 4 6 R e n t o r l e a s e 4 2 , 6 2 4 2 , 0 0 0 4 0 , 6 2 4 R e p a i r s a n d m a i n t e n a n c e 1 , 7 3 6

- 0

- 1 , 7 3 6 S u p p l i e s 3 8 , 9 0 0 1 7 0 3 8 , 7 3 0 T a x e s a n d l i c e n s e s 7 2

- 0

- 7 2 T r a v e l 1 2 , 9 6 0

- 0

- 1 2 , 9 6 0 M e a l s a n d e n t e r t a i n m e n t 3 , 0 0 0

- 0

- 3 , 0 0 0 U t i l i t i e s 2 , 8 0 8

- 0

- 2 , 8 0 8 W a g e s 9 3 6

- 0

- 9 3 6 O t h e r 2 1 1 0 , 2 0 7 3 1 , 5 2 4 1 0 8 , 6 8 3

1 A s n o t e d , p e t i t i o n e r s f

i l e d t w o S c h e d u l e s C w i t h t h e i r 2 0 1 0 r e tu r n r e p o r t i n g t h e i n c o m e a n d e x p e n s e s o f D r . N a j l e - R a h i m ’ s m e d i c a l p r a c t i c e . P e t i t i o n e r s r e p o r t e d $ 4 2 , 0 0 0 o f g r o s s r e c e i p t s o n t h e s e c o n d S c h e d u l e C b u t d e d u c t e d a s a n “ o t h e r e x p e n s e ” $ 4 2 , 0 0 0 o f
“ d i s p u t e d i n c o m e ” o n t h e f i r s t S c h e d u l e C
. F o r c l a r i t y ’s s a k e , w e h a v e c o m b i n e d p e t i t i o n e r s ’ r e p o r t e d e x p e n s e s o n t h e t w o S c h e d u l e s C a n d t h e a m o u n t s r e s p o n d e n t a l l o w e d

.

2 W i t h r e s p e c t t o t h e f

i r s t S c h e d u l e C , p e t i t i o n e r s ’ “o t h e r e x p e n s e s ” c o n s i s t e d o f $ 1 4 , 2 0 0 f o r “ c o m m u n i c a t i o n s ” , $ 1 1 , 0 0 0 f o r “ p r o f e s s i o n a l d u e s a n d f

e e s ” , $ 4 2 , 0 0 0 f

o r “ d i s p u t e d i n c o m e ” ( t h i s $ 4 2 , 0 0 0 o f d i s p u t e d i n c o m e m a t c h e s t h e $ 4 2 , 0 0 0 o f g r o s s r e c e i p t s r e p o r t e d o n t h e s e c o n d S c h e d u l e C ) , $ 1 0 , 1 1 5 f o r “ u n i f o r m s a n d u p k e e p ” , a n d $ 2 2 , 8 6 0 f o r “ c o n t i n u i n g e d u c a t i o n ”
. T h e s e c o n d S c h e d u l e C r e p o r t e d “ o t h e r e x p e n s e s ” o f $ 3 , 2 9 5 f o r “ s e c u r i t y ” , $ 4 , 5 7 3 f

o r “ c o m m u n i c a t i o n s ” , a n d $ 2 , 1 6 4 f o r “ i n t e r n e t ”
. 3 E x p e n s e s a l l o w e d b y r e s p o n d e n t c o n s i s t e d o f $ 7 3 8 f o r “ b u s i n e s s r e g i s t r a t i o n ” a n d $ 7 8 6 f o r t h e “ l i c e n s i n g f

e e s ” p a i d t o t h e M e d i c a l B o a r d o f C a l i f o r n i a . [* 2 4 ]- 2 5 - 2 0 1 1 S c h e d

u l e C E x p e n s e Amo u

nt c l a i me d Amo u

nt a l l o w e d D i f

f e r e n c e A d v e r t i s i n g $ 4 , 1 2 0

- 0

- $ 4 , 1 2 0 C a r a n d t r u c k 8 , 4 6 7
- 0

- 8 , 4 6 7 C o n t r a c t l a b o r 3 8 , 6 7 0 $ 3 2 , 4 6 7 6 , 2 0 3 D ep r e c i a t i o n 1 8 , 9 5 6

- 0

- 1 8 , 9 5 6 I n s u r a n c e 2 5 , 5 0 0 9 , 8 2 3 1 5 , 6 7 7 L e g a l a n d p r o f e s s i o n a l s e r v i c e 5 , 3 4 5
- 0

- 5 , 3 4 5 O f f i c e 1 2 , 4 1 0

- 0

- 1 2 , 4 1 0 Re nt o r l e a s e 2 8 , 0 0 0 4 , 4 0 0 2 3 , 6 0 0 Rep a i r s a n d ma i nt e n a

n c e 2 , 3 0 0

- 0

- 2 , 3 0 0 S u p p l i e s 5 , 2 5 0 8 2 5 , 1 6 8 T ax e s a n d l i c e n s e s 4 0 8

- 0

- 4 0 8 T r a v e l 1 4 , 2 0 0

- 0

- 1 4 , 2 0 0 M e a l s a n d e nt e r t a i nme nt 2 , 8 5 5
- 0

- 2 , 8 5 5 W a g e s 5 , 4 4 0

- 0

- 5 , 4 4 0 O t h e r 1 5 1 , 7 6 0 2 1 , 0 9 2 5 0 , 6 6 8

1 P e t i t i o n e r s ’ “ o t

h e r e x p e n s e s ” c o n s i s t e d o f $ 1 1 , 7 4 0 f o r “ c o m m u n i c a t i o n s ” , $ 1 0 , 1 5 0 f o r “p r o f e s s i o n a l d u e s a n d f e e s ” , $ 8 , 1 5 0 f

o r “u n i f o r m s a n d u p k e ep ” , a n d $ 2 1 , 7 2 0 f o r “ c o n t i n u i n g e d u c a t i o n ”
. 2 E x p e n s e d e d u c t i o n s a l l o w e d b y r e s p o n d e nt c o n s i s t e d o f $ 7 3 8 f o r t h e “ l i c e n s i n g f

e e s ” p a i d t o t

h e M e d i c a l B o a

r d o f C a l i f

o r n i a , $ 1 2 5 o f “ d

u e s ” , a n d $ 2 2 9 f o r “ t e l ep h o n e e x

p e n s e s ”
. Res p o n d en td et erm i n edth at Dr. Najl e-Rah i m ’ s m ed i cal p ract i ce h ad

u n rep o rt edg ro s s recei p t s o f $ 3 1 ,0 30 fo r 2 0 0 9 , $ 1 4 3,5 1 4 fo r 2 0 1 0 , an d$ 2 4 0 ,6 2 6 [* 2 5 ]- 2 6 -

[* 2 6 ] fo r 2 01 1 . Onthe b as i s o f Rev en u e Ag en t Co t a’ s b an kd ep os i t s an al y s i s , res p o n d en t d et erm i nedth atwi t h res p ectt o h er m ed i cal p ract ice Dr. Najl e-Rah i m p ai db us i n es s ex p en s es o f $ 3 8 , 7 1 2 i n 2 0 0 9, $ 4 9 ,4 0 1 i n 2 0 1 0 , an d$ 4 7,8 6 4 i n 2 0 1 1
. Res po n d en tal s o d et erm in edth atth e $ 9 0 ,0 0 0 o f l aws u its et t l em en tp ro ceed s th at Deu ts ch ag reed t o p ay

M r. Gh ad i ri -As l i i n 2 01 0 s ho u l db e i n cl u d edi n p et i t i o n ers ’ g ro s s i n co m e; res po n d en t al lo w edan i t em i zedd edu ct i o n fo r t h e $ 3 5 , 0 0 0 o f at t o rn ey ’ s fees th ath i s at t o rn ey wi th h el dfro m

th e p ro ceed s . VII. Det erm i n at io n an dAp p ro v al o f Pen al t i es Th e frau dp en al t i es (an dal t ern at i v e s ect i o n 6 6 62 (a) accu racy -rel at ed p en al t i es ) d et erm i n edi n th e n o t i ce o f d efi ci en cy fo r each y ear at i s s u e were p ro p os edb y Rev en u e Ag en tCo t a, wh o ex am i n edp et i t i o n ers ’ retu rn s fo r t h o s e y ears . Th e p en al t i es were ap p ro v edi n wri t i n g b y W i l l i am Gu s t afs o n, Rev en u e Ag en tCo t a’ s i m

m ed i at e s up erv i s o r, b efo re t h ey were fi rs tfo rm al l y co m

m u n i cat ed t o p et i ti o n ers . VIII. No t i ce o f Defi ci en cy OnM arch 1 9 , 2 0 1 5 , res po n d en ti s s u edp et i t i o n ers a n ot i ce o f d efi ci en cy refl ect i n g th e d et erm i n at i o n s d es cri b edab o ve. Pet it i on ers t i m el y p et it i on edth i s Co u rt
.- 2 7 -

[* 2 7 ] IX. Dr. Najl e-Rah i m ’ s Req u es t fo r Rel i ef Un d er Sect i o n 6 0 1 5 OnOct o b er 1 7 , 2 01 8 , Dr. Najl e-Rah i m fi l ed a Fo rm

8 85 7 , Req u es t fo r In n o cen t Sp ou se Rel i ef, req u es t i n g rel i ef fro m jo i ntan ds ev eral l i ab i l i t y fo r each
o f t h e y ears ati s s ue p u rs u an t t o s ect io n 6 0 1 5 . Th i s fi l i n g was m ad e l es s th an two week s b efo re t h e t ri al i n th i s m at t er. On PartIII o f t h e requ es tfo r rel i ef, Dr. Najl eRah im i nd i cat edth at s he an dM r. Gh ad i ri -As l i h adfi l ed jo i n tt ax retu rn s b ecau s e

“ [w] e were m arri edan d we fi l edt o g et h er”, an ds h e ch eck edth e b o x affi rm i n g s h e h ad s ig n edth e jo i ntt ax retu rn s . Qu es t i o n 1 3 o f Part III as k s ab o u tthe ap p l i can t ’ s i n v o l v em en ti n p rep ari n g th e t ax retu rn s . Dr. Najl e-Rah i m ch eck edth e b o x es i n d i cat i n g: “ Yo ug ath eredrecei p t s an d can cel l edch eck s ”, “ Yo u g av e t ax d o cu m en t s (s u ch as Fo rm s W -2 , 1 0 9 9 , et c.) fo r t h e p rep arat i o n o f t h e ret u rn s ”, an d

“ Yo ud i d n o trev i ew t h e ret u rn s b efo re t hey were fi led . Ex p l ai n b el o w wh y y o u d i dn o t rev i ew t h e ret u rn s . ” As h er ex p l an at i o n Dr. Najl e-Rah i m wro t e: “ I fi l l ed
o u ta p ap er p ro v i d edb y

t ax p rep erar [s i c] an dwro te o n t h atp ap er m y ex p en s es
an d i n su ran ces an dm i leag es . M y h u s b an dt o o kth atp ap er wi t h 1 0 9 9 fro m s [s i c] t o the t ax p rep erar [s i c] .” Th e reco rdd o es n otrev eal wh at act i o n , i f an y ,- 2 8 -

[* 2 8 ] res p o n d en th as t ak en wi t h res p ectt o Dr. Najl e-Rah i m ’ s req u es tfo r rel i ef p u rs u an t t o s ect io n 6 01 5
. 9 OPINION I. Bu rd en o f Pro o f Th e Co m m is s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h o se d et erm i n at i o n s erro n eo u s . 1 0 Ru l e 1 4 2 (a); s ee INDOPCO, In c. v . Co m m is si o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ); W el ch v . Hel v eri n g, 2 9 0 U.S. 1 1 1 , 1 15 (1 9 3 3 ). Inth e
cas e o f t h e frau dp en al t y

u n d er s ect i o n 6 6 6 3 , th e Co m m i s s i o n er b ears t he b u rd en
o f p ro o f. Sec. 7 4 54 (a); Ru l e 1 4 2 (b ). In cas es i n v o l v i ng fai l u re t o rep orti n co m e, t he U.S. Co u rto f Ap p eal s fo r th e Ni n th Ci rcu i t , t o wh ich an y ap p eal i n thi s cas e wo u ldo rd i n ari l y l i e, s ee s ec. 7 4 8 2 (b )(1 )(A), h as h el d t h atth e Co m m i s s i o n er m

us tes t ab l i s h “ s o m e ev i den t i ary fo u n dat i o n ” l i n k i ng th e t ax p ay er t o an al l eg edi n co m e-p ro du ci n g act i v i ty b efo re

9 Dr. Najl e-Rah i m ’ s el i g ib i l i t y fo r s ec. 6 0 1 5 rel i ef i s n o tati s s u e i n thi s p ro ceed in g .

1 0 Sec. 7 4 91 (a) p ro v id es th at i n cert ai n ci rcu m s t an ces t h e b u rd en o f p ro o f wi th res p ect t o fact u al m at t ers m ay s h i ft t o t h e Co m

m is s i o n er. Pet i ti o n ers d o n o t arg u e t h ats ec. 7 4 9 1 (a) ap p li es , n o r h av e t h ey s ho wnth atth ey m eet i t s req u i rem en t s t o s h i ftthe b u rd eno f p ro o f. Co n s equ en t ly , th e b u rd en o f p ro o f rem ai n s wi t h p et i ti o n ers , ex cep tas o t h erwi s e d es cri b ed h erei n .- 2 9 -

[* 2 9 ] th e p res u m

p t i o n o f co rrect n es s at tach es t o th e d efi ci en cy d et erm i n at i o n , W ei m ers ki rch v . Co m

m i s s i o n er, 5 9 6 F.2 d 3 58 , 3 61 -3 62 (9 t h Ci r. 1 97 9 ), rev ’ g 6 7 T.C. 6 7 2 (1 9 7 7 ). On ce t h e Co m m i s s i o n er h as es t ab l i s h eds u ch a fo un d at io n , th e b u rd eno f p ro of s h i ft s t o th e t ax p ay er t o p ro v e b y a p rep on d eran ce o f t h e ev i d en ce th atth e IRS’ d et erm in at i o n s are arb i t raryo r erro n eo u s. See Hard y v . Co m m i s s i o n er, 1 8 1 F.3 d1 0 0 2 , 1 0 0 4 (9 t h Ci r. 1 9 9 9 ), aff’ g T.C. M em o . 1 9 9 7 -9 7
. Res po n d en th as es t ab l is h eda s u ffi ci en tev i d en t i ary fo u nd at i o n t o s at i s fy

an y th res ho l db u rd en as rel at es t o h i s d et erm i n at i o n s o f u n rep o rt edi n co m e fro m Dr. Najl e-Rah i m ’ s m ed i cal p ract i ce. II. Gen eral Pri n ci p l es o f In co m e Tax at i o n A. Un rep o rt edIn co m e Un d er s ect i o n 6 1(a), “ g ro s s i n co m e m ean s al l i n co m e fro m wh at ev er s o u rce d eri v ed ”. See Co m

m i s s i o n er v . Gl en s h aw Gl as s Co
. , 3 48 U.S. 4 2 6 (1 9 5 5 ). Th e Sup rem e Co u rth as rep eat ed l y em p h as i zedth e “ ‘ s weep in g s co pe’ o f t hi s s ect i o n [6 1 ] an di t s s t atu t o ry

p red eces s o rs .” Co m

m i ss i o n er v . Sch l ei er, 5 1 5 U.S. 3 2 3 , 3 2 7 (1 9 9 5). Sect io n 6 0 0 1 req u i res t ax p ay ers t o m ai n t ai n s uffi ci en t reco rd s t o al l o w the IRS t o d et erm i n e t h ei r co rrect t ax l i ab i l i t y . Sect i o n 4 4 6(b ) co n fers b ro adp o wers
o n th e Secret ary

an d h i s d el eg at e, i .e., th e Co m m i s s i on er, t o co m

p u t e t he t ax ab l e- 3 0 -

[* 3 0 ] i n co m e o f t ax p ay ers wh o fai l t o k eep ad equ at e b o o k s an dreco rd s . See Pet zo l d tv . Co m

m i s s i o n er, 9 2 T .C. 6 6 1 , 6 9 3 (1 9 8 9 ); s ec. 1
. 4 4 6 -1 (b )(1 ), In co m e Tax Reg s . Th e Co m

m i s s io ner m ay

u s e i n d i rect m et h o d s t o reco ns t ru cti n co m e. Ho l lan d v . Un i t edSt at es , 3 4 8 U .S. 1 2 1 (1 9 5 4 ) (up h o l d i n g th e n etwo rt h m eth o do f
reco n s tru ct i n g i n co m e). Th e reco n s t ru ct i o n n eedo n l y b e reas o n ab l e i n t h e l i g h to f al l s u rro u n d i n g fact s an dci rcu m s t an ces . Pet zo l d tv . Co m m i s s i o n er, 9 2 T.C. at 6 8 7
. Pet i t i o ners fai ledt o k eep ad equ at e reco rd s , an dth ey p ro v i d edh ard l y an y o f th e i n fo rm at i o n Rev en u e Ag en tCo t a req u es t ed fro m th em . Sh e t h erefo re
reco n s tru ct edth ei r i n co m e u s i ng th e b an kd ep os i t s m et h o d. A b an k d ep o s i ti s p ri m a faci e ev id en ce o f i nco m e, an dth e Co m m i s s i o n er n eedn otp ro v e a l i k el y
s o u rce o f that in co m e. To k ars ki v . Co m m is s i o n er, 8 7 T.C. 7 4 , 7 7 (1 9 8 6 ); Es t at e o f M as o n v . Co m

m i ss i o n er, 6 4 T.C. 6 5 1 , 6 5 6-6 5 7 (1 9 7 5 ), aff’ d , 5 6 6 F.2 d2 (6 t h Ci r. 1 9 7 7 ). Co u rt s h av e o ft en accep t edth i s m etho d o f i n co m e reco n s t ru ct i o n i n th e ab s en ce o f ad equ at e b oo k s an dreco rd s . See M i l l s v . Co m m i s s i o ner, 3 9 9 F.2 d 7 4 4 , 7 4 9 (4 t h Ci r. 1 9 6 8 ), aff’ g T.C. M em o. 1 9 6 7 -6 7 ; Cl ayto n v . Co m m i s s i o n er, 1 0 2 T.C. 6 3 2 , 6 4 5 (1 9 9 4 ). Th e b an kd ep o s i t s m et h odas s u m es th atal l m o n ey d ep os i t edi n t o a t ax p ay er’ s b an kacco u n tduri n g a g i v en p eri o d co n s t i tu t es t ax ab l e i n co m e, b u tthe Co m

m i s s i o n er m

u s t t ak e i nt o acco u n tan y n o n t ax ab l e s o u rce o r- 3 1 -

[* 3 1 ] d edu ct i b le ex pen s e o f wh i ch h e h as kn o wl ed g e. Cl ayto n v . Co m m i s s i o n er, 1 0 2 T.C. at6 45 -6 4 6 ; Di L eo v . Co m m i s s i o n er, 9 6 T.C. 8 5 8 , 8 6 8 (1 99 1 ), aff’ d , 9 59 F.2 d1 6 (2 dCi r. 1 9 9 2). Th e Co m m i s s i o n er’ s cal cu l at i o n s n eed n o tb e co m p l et el y
co rrect fo r t h e b an kd ep o s i t s an al y s is t o b e v al id . Di Leo v . Co m m i ss i o n er, 9 6 T.C. at8 6 8
. On ce t h e Co m

m i s s io n er reco n s t ru ct s a t ax p ay er’ s i nco m e an dd et erm i n es a d efi ci en cy , th e t ax p ay er b ears th e b u rd en o f p ro v i n g t h atth e Co m m i s s i o ner’ s u s e
o f t h e b an kd ep o s it s m et h o di s u n fai r o r i n accu rat e. See Cl ayt o n v . Co m m i s s i o n er, 1 0 2 T.C. at6 45 ; Di Leo v . Co m m i s s i o n er, 9 6 T.C. at8 8 2 -8 8 3 . A t ax p ay er m ay d o
s o , i n wh o l e o r i n p art , b y p ro v i n g th ata d ep o s i ti s n o tt ax ab l e. See Di Leo v . Co m m i s s i o n er, 9 6 T.C. at 8 8 2 -8 8 3
. Rev en u e Ag en t Co t a u s edth e l ead s g en erat ed b y h er b an kd ep o s it s an al y si s t o co n tactC&L an dp ro cu re t h ei r m o n t h l y an dan n ual s u m m ari es wh i ch d o cu m en t edDr. Najl e-Rah im ’ s s el f-rep o rt edi n co m e fo r t h e y ears ati s s u e. Rev enu e Ag en t Co t a al s o acq u i redtran scri pt s o f t h e Fo rm s 1 09 9 -M ISC i s s u edt o p et i t i o n ers b y

M ed i care, M ed i -Cal , an dth e i n s uran ce co m p an ies (i .e., th i rd -p art y p ay o rs ) t hatp ai dfo r s erv i ces ren d eredb y Dr. Najl e-Rah i m .- 3 2 -

[* 3 2 ] B. Sub s t an t i at i o n o f Dedu ct i o n s Sect io n 1 6 2 (a) en t i t l es a t ax p ay er t o d edu ct“ al l th e o rd i n ary an dn eces s ary
ex p en s es p ai d o r i n cu rreddu ri n g the t ax ab l e y ear i n carry in g o n an y trad e o r b u s i n es s ”. In g en eral , n o d edu ct i o n i s al lo wed fo r p ers o nal , l i v in g , an d fam i l y
ex p en s es . Sec. 2 6 2
. Th e t ax p ay er b ears th e b u rd en o f es t ab l i s h in g en ti t l em en t t o cl ai m ed d educt i o n s . INDOPCO, In c. v . Co m m i s s i o ner, 5 0 3 U.S. at8 4 ; W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 5 ; s ee Ru l e 1 4 2 (a). Tax p ay ers are req u i red t o m ai n t ai n
s u ffi ci en tb o o k s an d reco rd s t o s ub s t an t iat e t h ei r cl ai m edd educt i o n s . Sec. 6 0 0 1 ;
s ec. 1 .6 0 01 -1 (a), In co m e Tax Reg s . Incert ai n ci rcu m s t an ces , i f a t ax pay er
es t ab l i s h es th ata d edu ct i b l e ex p en s e h as b een p ai do r i n cu rredb u ti s u n ab le t o
s ub s t an t i at e t h e p reci s e am o u n t , we m ay es t i m at e t h e am ou n to f t h e d edu ct i b l e
ex p en s e, b eari n g heav i l y

ag ai n s tth e t ax p ay er res p o ns i b le fo r t h e i n ex act i tu d e. Co h an v . Co m

m i s s i o n er, 3 9 F.2 d5 4 0 , 5 4 3 -5 4 4 (2 dCi r. 1 9 3 0 ). W e can n o t
es t i m at e d edu ct i b l e ex p en s es , h o wev er, u n l es s th e t ax p ay er p res en t s ev id en ce p ro v id i n g a s uffi ci en tb as i s fo r m ak i n g an es ti m at e. Van i cekv . Co m m i s s i o n er, 8 5 T.C. 7 3 1 , 7 4 2 -7 43 (1 9 8 5). W i t h o u t s uch a b as is , an y al l o w an ce wo u l dam o u n tt o
u n g u i d edl arg es s e. W i l li am s v . Un i t edSt at es , 2 45 F.2 d 5 59 , 5 6 0 (5 t h Ci r. 1 9 5 7 ).- 3 3 -

[* 3 3 ] Th e Co h an ru l e i s i n ap p l i cab l e t o ex p en s es g ov ern edb y t he s t ri ct
s ub s t an t i at i o n req u irem en t s o f s ect i o n 2 7 4
. Sect i o n 2 7 4(d ) p ro v i d es th atn o d educt i o n o r cred i t s hal l b e al l owedfo r, i n t er al i a, an y trav el i n g ex p en se o r
en t ert ai n m en tex p en s e, o r an y ex p en s e rel at ed t o l i s t edp ro p erty as d efi n edi n
s ect i on 2 8 0 F(d )(4 ), 1 1 u n l es s th e t ax p ay er s ubs t an t i at es th ro u g h ad equ at e reco rd s o r
s u ffi ci en tev i d en ce co rro b o rat i n g h i s o r h er o wn s tat em en tth e am o u n t o f t h e
ex p en s e, t h e t i m e an d p l ace o f t h e ex p en s e, an dth e b u s i n es s p u rp o s e o f t h e
ex p en s e. A t ax p ay er m ay s at i sfy the “ ad equ at e reco rd s ” t es ti f h e o r s h e m ai n t ai n s
an acco u ntb o o k , a d iary , a l o g , a s t at em en to f ex p en s e, t ri p s h eet s , o r s i m il ar
reco rd s p rep aredato r n ear t h e t i m e o f i n cu rri n g t he ex p en d i tu re an dd o cu m en t ary
ev i d en ce o f cert ai n ex pen d i tu res , s u ch as recei p ts o r p ai db i l l s , th ats h o w each el em en to f each ex p en di tu re o r u s e. See s ec. 1
. 2 74 -5 T(c)(2 ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 1 7 (No v. 6 , 1 9 8 5). In th e ab s en ce o f ad equ at e reco rd s t o es t ab l i s h each el em en t o f an ex p en se u n d er s ect i o n 2 7 4 (d ), a t ax pay er m ay al t ern at i v el y

es t ab l i s h each el em en t : “ (A) By h i s o wns t at em en t , wh et h er wri t t en
o r o ral , co n t ai n in g s p eci fi c i n fo rm at io n i n d et ai l as t o s uch el em en t ; an d (B) By
o th er co rro b orat i v e ev i d en ce s u ffi ci en t t o es t ab li s h s u ch el em en t .” Sec. 1 .2 7 4

-

1 1 Li s t ed p ro p ert y in cl u d es p as s en g er au t o m o b i les , an y o t her p ro p ert y

u s ed as a m ean s o f t ran s p o rt at i o n , an dp ro p ert y g en eral l y u s edfo r p u rp o s es o f en t ert ai n m en t , recreat i o n, o r am u s em en t . Sec. 2 8 0 F(d )(4 ).- 3 4 -

[* 3 4 ] 5 T(c)(3 )(i ), Tem

p oraryIn co m e Tax Reg s ., 5 0 Fed

. Reg . 4 6 0 2 0 (No v. 6 , 1 9 8 5 ). Th e t ax p ay er i s n o t al l o weda d edu ct i o n o r cred i t o n th e b as i s o f ap p ro x i m at i o n s o r un s up p o rt edt es t i m o n y . Id . p ara. (a), 5 0 Fed . Reg . 4 6 0 14
. III. Dr. Najl e-Rah i m ’ s M ed i cal Pract i ce A. Gro s s Recei p t s Res p o n d en td et erm i n edth at Dr. Najl e-Rah i m ’ s m ed i cal p ract i ce h ad

u n rep o rt edg ro s s recei p t s o f $ 3 1 ,0 30 fo r 2 0 0 9 , $ 1 4 3,5 1 4 fo r 2 0 1 0 , an d$ 2 4 0 ,6 2 6 fo r 2 0 1 1 . As s h own i n th e t ab l e b el o w, thes e d et erm i n at i o n s are b as edo n t h e d i fferen ces b et ween th e g ro s s recei p t s as i n d i cat edo n th e C&L s u m m ari es an dthe g ro s s recei p ts p et i t i o n ers ’ rep o rt edo n t hei r Sch edu l es C fo r t h e y ears at i s s u e. Gro s s recei p t s Year C&L Sch edu le C Di fferen ce 2 0 0 9 $ 4 5 3 ,0 3 0 $ 4 2 2 ,0 0 0 $ 3 1 ,0 3 0 2 0 1 0 5 7 0 ,9 0 8 4 2 7 ,3 9 4 1 4 3 ,5 1 4 2 0 1 1 5 1 5 ,9 4 9 2 7 5 ,3 2 3 2 4 0 ,6 2 6 Th e C&L s umm ari es are b as ed o n am o un t s t h atDr. Najl e-Rah i m rep o rt edt o C&L u s i ng th e ex p l an at io n o f b en efi t s fo rm s s h e recei v ed . Pet i t i o n ers as sertth at th e C&L s u m

m ari es d o n otaccu rat el y

refl ectth e am o u n t s recei v edb y Dr. Najl eRah im fo r h er m ed i cal s erv i ces , ev en tho u g h s h e al way s p ai dth e 6 % fee t h atC&L- 3 5 -

[* 3 5 ] cal cu l at edo n t h e b as i s o f t h es e s am e am o u n t s as rep o rt edo n th es e
s u m m ari es . Pet i t i o ners arg ue t h atth e C&L s u m m ari es fai l t o t ak e i n t o acco u n tam o u n t s Dr. Najl e-Rah i m

was o b l i gat edt o refu ndt o M ed i care, M ed i -Cal , an dth e i n s u ran ce co m

p an i es fo r o v erp aym en t s b ecau s e, th ey s ay , the ex p lan at io n o f b en efi t s fo rm s Dr. Najl e-Rah im recei v ed d i dn o trep orto v erp aym en t s . Ho wev er, th ey h av e p ro v i d edn o ev i d en ce t o s up p ortth ei r as s ert i o n . Dr. Najl e-Rah i m
s up p li edC&L al l o f t h e i n fo rm at i o n i tu s edi n p rep ari n g the m on t h l y an dan n u al
s u m m ari es , an dth o s e s u m

m ari es t ak e i n to acco u n t t h e o v erp aym en trefu n d
o b l i g at i o ns . M o reo v er, t h e g ro s s recei p t s i n cl u d edo n C&L’ s m o n t h ly an dan n u al
s u m m ari es are b ro ad l y

co n s i s t en twi t h Rev en u e Ag en tCo t a’ s b an k d ep o s it s
an al y s i s as wel l as th e g ro s s recei p t s rep o rt ed o n Dr. Najl e-Rah im ’ s Fo rm s 1 0 9 9

- M ISC. 1 2 As p arto f h er b an k d ep o s i t s an al y s i s , Rev en u e Ag en tCo t a ex am in edal l i n fl o wan do u t fl ow t ran s act i o n s wi t h res p ectt o p et i t io n ers ’ b an k acco u n t s . Pet i t i o ners arg ue t h at“ t h ere are d i fferen ces b et ween C&L rep o rtan d1 0 9 9 (wh ich are s o m et i m es n otrefl ect i ng al l th e p ai d cl ai m s fo r t h e s am e y ear[)] .”

1 2 In d eed , p et i t i o n ers b en efi t edfro m res p o nd en t’ s u s e o f t h e C&L s umm ari es i n cal cu l at i n g Dr. Najl e-Rah i m ’ s g ro s s recei p ts i n as m u ch as fo r 2 00 9 an d2 0 1 0 th e C&L am o u n t s are l es s t h an t h o s e i n d i cat edb y th e b an kd ep o s i t s an al y s i s o r rep o rt edo n the Fo rm s 1 0 9 9 -M ISC.- 3 6 -

[* 3 6 ] Th ey

fu rt h er as s ertth atth e Fo rm s 1 0 9 9 -M ISC are i n co rrect . Fo r ex am p l e,
o n b ri ef t h ey

as s ert : “ Per res p o n s e t o req u es tfo r ad m i ss i o n n o tal l 1 0 9 9 refl ect s
accu rat e p aym en t s. In s o m e i n s t an ce l i k e [K] ai s er 1 0 9 9 i n 2 0 10 were 1 0 t i m es h i g h er t h an recei vedcl ai m s p aym en t .” Pet it i o n ers , h o wev er, h av e p res en t edn o
ev i d en ce t o s up po rtth ei r cl ai m s . An d , as p rev i o u s l y n o t ed , th e am o un t s rep o rt ed
o n th e Fo rm s 1 0 99 -M ISC are v ery cl os e t o th e am o u n ts cal cu l at edth ro u gh th e b an k d ep o s i t s an al y s i s as wel l as th e am ou n t s rep o rt edo n th e C&L m on t h l y an d
an n ual s u m

m ari es . Onth e b as is o f al l th e ev i d en ce i n th e reco rd , we s u s t ai n res p o n den t ’ s d et erm i n at i o n s wi t h res pect t o Dr. Najl e-Rah i m ’ s g ro s s recei p t s fo r t he y ears at i s su e. B. Bu s i n es s Ex p en s es Onth e b as is o f Rev en u e Ag en tCo t a’ s b an kd ep os i t s an al y s i s , res p o nd en t d et erm i n edth atwi t h res p ectt o h er m ed i cal p ract i ce Dr. Najl e-Rah i m p ai d b u s i n es s ex p en s es o f $ 3 8,7 1 2 i n 2 0 0 9 , $ 4 9,4 01 i n 2 01 0 , an d$ 4 7 ,8 64 fo r 2 0 1 1 . By th ei r o wn ad m is s i o n , p et i t i o n ers m ai n t ai n edn o reco rd s reg ard i n g Dr. Najl eRah im ’ s m ed i cal p ract ice ev en th o u g h th ey d i rect ly h an d ledal l p aym en t s . Pet i t io n ers as s erto n b ri ef t h atth ey “ h ada s h o e b o x o f recei p t s th atM r. Yo u n g d i d

n o tl o o kat ”. Ho wev er, p et i t i o n ers p ro v i d edn o s u ch d ocu m en t at i on t o t h e Co u rt- 3 7 -

[* 3 7 ] t o s ub s tan t i at e an y

o f t h ei r cl ai m edb u s i n es s ex p en s es . 1 3 Infact , attri al Dr. Najl e-Rah i m co n ced edth atthe ren t ex p en s es rep o rt ed o n p et i t i o n ers ’ i nco m e t ax retu rn s were “ m

uch h i g h er” t han th e am o u n ts s h e act u al ly p ai d i n ren t
. 1 4 Pet i t io n ers h av e fai ledt o s h o w th atthey are en t i t l edt o b u s i n es s ex p en s e d educt i o n s g reat er t h an res po n d en th as al l o wed

. IV. M r. Gh ad i ri -As l i ’ s 2 0 1 0 Laws u i tSet tl em en t In 2 0 1 0 M r. Gh ad i ri -As li s et t l edh i s l aws u i t ag ai n s tDeu t s ch an dM r. Ti t co m b e fo r $ 9 0 ,0 00 . Aft er h i s at t o rn ey s n et t ed $ 3 5 ,0 0 0 fo r th ei r fees , M r. Gh ad i ri -As l i recei v ed$ 55 ,0 00
. Pet i t i o n ers fai ledt o rep o rtan y am o u n t o f t h e
s et t l em en tp ro ceed s an d cl ai m edn o as s o ci at edd edu ct i o n o n t h ei r 2 0 1 0 Fed eral i n co m e t ax retu rn . Inth e n o ti ce o f d efi ci en cy , res po n den t ad ju s t ed p et i t io n ers ’ 2 0 1 0 Fed eral i n co m e t ax retu rn t o i n cl u d e th e $ 9 0 ,0 0 0 o f s et tl em en t p ro ceed s i n

1 3 Near t he co n cl u s i o n o f t h e t ri al , p et it i on ers ’ co u n s el o ffered i n t o ev i d en ce co p ies o f s om e d o cu m en t s t h ath adn o tb een ex ch an g edo r i d en t i fi edi n wri t i n g as req u i redb y

o u r s t an d i ng p retri al o rd er d at edSep t em b er 7 , 2 0 1 8 . Res p o n d en t o b ject edt o th e ad m i s s io n o f t h e ev i d en ce o n the b as i s o f p reju d i ce, an dth e Co u rt s u s t ai n edth e o b

ject i o n . M at eri al s n o tp ro v i ded i n co m p l i an ce wi t h o ur p ret ri al o rd ers m ay

b e ex cl u d edfro m

ev i den ce. See, e.g ., Sch aefer v

. Co m m i s s i o n er, T.C. M em o. 1 9 9 8 -1 6 3 , aff’ d , 1 8 8 F.2 d5 1 4 (9 t h Ci r. 1 9 99 ).

1 4 Onth ei r t ax retu rn s , p et i t i o n ers cl ai m ed ren tex p en s e o f $ 16 ,1 2 0 , $ 4 2 ,6 2 4 , an d $ 2 8 ,0 0 0 fo r 2 0 0 9 , 2 0 10 , an d2 0 1 1 , res p ect iv el y . Infact , Dr. Najl e-Rah i m ’ s ren twas n o m ore t h an $ 4 0 0 p er m o n t h u n t il Feb ru ary 2 0 1 1, wh en i ti n creas edt o $ 1 ,0 0 0 p er m o n th

.- 3 8 -

[* 3 8 ] p et i t i o n ers ’ g ro s s i n co m e an dal l o wedan i t em i zedd educt i o n fo r th e $ 3 5 ,0 0 0
o f at t orn ey ’ s fees

. Gen eral ly , g ro ss i n co m e i n cl u d es al l i n co m e fro m wh at ev er s o urce d eri v ed , i n cl u d i n g s et t l em en t p ro ceed s. See s ec. 6 1(a); Co m m i ss i o ner v . Sch l ei er, 5 1 5 U.S. at3 2 7 -3 2 8 . As an ex cep t i o n t o th i s g en eral ru l e, s ect i o n 1 04 (a)(2 ) ex cl u d es fro m g ro s s i n co m e “ t he am ou nto f an y d am ag es (o t h er t h an p un i t i v e d am ag es ) recei v ed (wh eth er b y

s u i to r ag reem en tan d wh et h er as l u m p s u m s o r as p eri od i c p aym en t s )
o n acco u n to f p ers on al p h y s i cal i n juri es o r p h y s i cal s i ckn es s ”. Dam ag es recei v ed fo r em o ti o n al d i s tres s are n otex cl u d ab l e fro m g ro s s i nco m e u nl es s th ey are fo r
m ed i cal care at t ri b u t ab l e t o em o t io n al d is t res s. Sec. 1 0 4 (a) (fl u s h l an g u ag e). In d eci d i ng wh et her p et i t i o n ers qu al i fy fo r th e ex cl us i o n u n d er s ect i o n 1 0 4 (a)(2 ), o u r an al y s i s b eg i n s wi t h th e t erm s o f t h e s et t l em en t ag reem en t . See Ri v era v . Bak er W
. , In c., 4 3 0 F.3 d1 2 5 3 , 1 2 5 7 (9 t h Ci r. 2 0 0 5 ) (“ Th u s , wh en d am ag es are p ai dth ro ug h a s et t l em en t ag reem en t , we wi l l l o o k fi rs tt o t h e
u n d erl y i n g ag reem en tt o d et erm i n e wh et h er i tex p res sl y s tat es th at t h e d am ag es
co m p en s at e fo r ‘ p ers o n al p h y s i cal i nju ri es o r p h y s ical s i cknes s ’ u n d er § 1 04 (a)(2 ).”). Th e s et t lem en tag reem en tex pres s ly al l o cat es th e $ 9 0 ,0 0 0
s et t l em en tam ou n tt o “ al l eg ed em o t i o nal d i s t res s ”. No t h i n g i n th e reco rds up p o rt s
a co n cl u si o n th atth e s et t l em en tam o u n t was p ai dfo r p h y s i cal i n juri es o r p h y s i cal- 3 9 -

[* 3 9 ] s i ckn es s . Pet i t i o n ers h av e n o ts h o wnth atan y p arto f t h e s et t l em en t am o u n t
was fo r m ed ical care at t ri b u t ab l e t o em o t i o n al d i s t res s . Co ns equ en t l y , the $ 9 0 ,0 0 0 p aym en t i s n o tex cl u d ab l e u n d er s ect i o n 1 0 4 (a)(2 ). See Do y l e v . Co m m i s s i o n er, T.C. M em o . 2 01 9 -8 ; Barb at o v . Co m m i s s io n er, T.C. M em o . 2 0 16 -2 3
. M o reo v er, i ti s wel l es tab l i s h edth at“ tax ab l e reco v eri es i n l aws u i t s are g ro s s p ro ceed s i n t h ei r en t i ret y t o th e p art y -cl i en t an d t h atas s o ci at ed l eg al fees

--
co n ti n g en to r o t herwi s e--are t o b e t reat ed as d edu ct i o ns .” Ban k s v . Co m m i s s i o n er, 5 4 3 U.S. 4 2 6 (2 00 5 ); Ken s et h v . Co m m i s s i o n er, 1 14 T.C. 3 9 9, 4 1 1 (2 0 0 0 ), aff’ d , 2 5 9 F.3 d8 8 1 (7 th Ci r. 2 0 0 1). Co n s equ en t l y , we s u st ai n res po n d en t’ s d et erm i n at i o n i n cl u d in g the fu l l $ 9 0 ,0 0 0 i n p et i t i o n ers ’ g ro ss i nco m e an dal l o wi n g
an i t em i zedd edu ct i o n wi t h res p ectt o th e $ 3 5,0 0 0 o f at t orn ey ’ s fees

. V. Ci v i l Frau dPen al t y Res p o n d en tas sert s th atfo r each y ear at i s su e b o t h p et i t i o n ers co m m i t t ed frau d wi th res pect t o t h ei r Fed eral i n co m e t ax retu rn s . Co n seq u en t l y , res p o n d en t arg u es , th ey

are l i ab l e fo r frau dp en al ti es u n d er s ect io n 6 66 3
. A. Gen eral Pri n ci p l es If an y p arto f an y

u n d erp aym en to f t ax req u i redt o b e s ho wno n a retu rn i s du e t o frau d, t here i s an ad d i t i on t o t ax o f 7 5 % o f t h e p o rt i o n o f t h e u n d erp aym en t th ati s at tri b u t ab l e t o frau d . See s ec. 6 6 6 3 (a). If t h e Co m m i s s i o n er es t ab li s h es- 4 0 -

[* 4 0 ] th atan y

p ort io n o f t h e u n d erp aym en t i s at t ri b u t ab l e t o frau d, t he en t i re
u n d erp aym en t i s treat ed as du e t o frau du nl es s th e t ax p ay er can es t ab l i s h b y a p rep o n d eran ce o f t h e ev i den ce t h atp o rt i o n o f t he u n d erp aym en twh i ch i s n o t at tri b u t ab l e t o frau d . Sec. 6 6 6 3(b ). Frau di s the i n ten t i o n al wro n g do i n g o f a t ax pay er t o ev ad e t ax b el i ev edt o b e o wi n g . See Pet zo l d tv . Co m m i s s i o n er, 9 2 T.C. at6 9 8 . Frau di s n ev er i m p u t ed
o r p res u m ed . Park s v . Co m m i s s i o n er, 9 4 T.C. 6 5 4, 6 6 0 (1 9 9 0). Th e ex is ten ce o f frau d i s a qu es t io n o f fact t o b e res o l v edup o n co n s i derat i o n o f t he en t i re reco rd

. Id .; Gajews k i v . Co m

m i s s i o n er, 6 7 T.C. 1 8 1 , 1 9 9 (1 97 6 ), aff’ dwi t h o u t p ub l i s h ed
o p i n i o n , 5 7 8 F.2 d1 3 8 3 (8 t h Ci r. 1 9 7 8 ). In th e cas e o f a jo i n tt ax retu rn , s ect io n 6 66 3 d o es n o tap p l y wi th res p ect t o
a s p o us e u nl es s s o m e p arto f t he u n d erp aym en ti s du e t o t h e frau d o f t hats p o u s e. Sec. 6 6 63 (c). Res p on d en t s eek s t o i m p o s e th e s ect i o n 6 6 6 3 frau dp en al t y o n b o t h M r. Gh ad i ri -As l i an dDr. Najl e-Rah i m . Co ns equ en t l y , res p o n d en tm u stp ro v e t h at each s p o u s e co m

m i t t edfrau d

. To es t ab l is h frau d, t he Co m m i s s i on er m

us tp ro ve fo r each y ear at i s s u e t h at : (1 ) an u n d erp aym en to f t ax ex i s t s an d(2 ) t h e t ax p ay er h adfrau du l en t i n t en t , i .e., th atth e t ax p ay er i n ten d edt o ev ad e t ax es kn o wnt o b e o wi n g b y co n du cti n t en d ed t o co n ceal , m i s l ead , o r o t h erwi s e p rev en tth e co l l ect i o n o f t ax es . Park s v .- 4 1 -

[* 4 1 ] Co m

m i s si o n er, 9 4 T.C. at6 60 -6 6 1 ; s ee Cl ayt o n v . Co m m i s s i o n er, 1 0 2 T.C. at6 4 7
. Th e Co m

m i s si o ner m

u s tp ro v e t h es e el em en t s b y cl ear an dco n v i n ci n g
ev i d en ce. Sec. 7 4 5 4 (a); s ee Pet zo l d tv . Co m m i s s i o n er, 9 2 T.C. at6 9 9 . Becau s e d i rect p ro o f o f a t ax p ay er’ s i n t en ti s rarel y av ai l ab l e, frau dul en ti n t en tm ay b e
es t ab l i s h edb y ci rcu m s t an t i al ev i d en ce, an d reas on ab l e i n feren ces m ay b e d rawn fro m th e rel ev an t fact s . Sp ies v . Un i t edSt at es , 3 17 U.S. 4 9 2 , 4 9 9 (1 9 4 3 ); Brad fo rdv . Co m

m i s si o ner, 7 9 6 F.2 d3 03 , 3 0 7 (9 t h Ci r. 1 9 86 ), aff’ g T.C. M em o . 1 9 8 4 -6 0 1 . Th e t ax pay er’ s en t i re co u rs e o f co n ductm ay b e ex am i nedt o es t ab l i s h th e req u i s i t e i n t en t
. St o ne v . Co m m is s i o n er, 5 6 T.C. 2 1 3 , 2 2 4 (1 9 7 1 ); Ot s u k i v . Co m m i s s i o n er, 5 3 T.C. 9 6, 1 06 (1 9 6 9 ); Ro m er v . Co m m i ss i o n er, T.C. M em o . 2 0 0 1 -1 6 8
. B. Sup erv i s o ry

Ap pro v al As a t h res h ol dm at ter, res p o n d en t m u s ts h o wth ath e co m

p l iedwi t h s ect i o n 6 7 5 1 (b )(1 ), wh i ch req ui res th atcert ai n p en al ti es b e p ers on al l y ap p ro v ed i n wri t i n g b y th e i m m ed iat e s up erv i s o r o f t h e i n d i vi du al m ak i n g t he d et erm i nat i on . See Graev v . Co m

m i s si o ner, 1 4 9 T.C. 4 8 5 , 4 9 3 (2 01 7 ), s up p l em en t in g an do v erru l i n g i n p art 1 4 7 T.C. 4 6 0 (2 0 1 6 ). Res p o n d en t h as s at i sfi edh i s b u rd en o f p ro du ct i o n wi th reg ardt o t h e s up erv i so ry ap p ro v al req u irem en to f s ect i o n 6 7 5 1 (b ) (an d p et i t i o n ers d o n o tco n t en do th erwi s e).- 4 2 -

[* 4 2 ] C. Un d erp aym en to f In co m e Tax Res p o n d en tm

u s tp ro v e an u n d erp aym en t o f t ax i n s up p o rto f each frau d p en al ty . To s u s t ai n h i s b u rd en , res p o n d en t n eedn o tp ro v e t h e p reci s e am o u n to f
an y d efi ci en cy

at t ri b u t ab l e t o frau d , b u to n l y th ata p arto f t h e d efi ci en cy i s at tri b u t ab l e t o frau d . See Es t at e o f Beck v . Co m m i s s i o n er, 5 6 T.C. 2 9 7 , 3 6 3 -3 6 4 (1 9 7 1). Becau s e t h e al l eg at i o n s o f frau dare i nt ert wi n edh ere wi t h u nrep o rt ed i n co m e an d i n di rect l y

reco n s tru ct edi n co m e, res p o n den tm ay p ro v e an
u n d erp aym en t b y p ro v i n g a l ik el y s o u rce o f t h e u n rep o rt edi n co m e. See i d . at3 6 1
. As we s t at edi n Sai dv . Co m m is s i o n er, T.C. M em o . 2 0 0 3 -1 4 8 , 8 5 T.C.M . (CCH) 1 3 5 3 , 1 3 5 6 (2 00 3 ), aff’ d , 1 1 2 F. Ap p ’ x 6 0 8 (9 th Ci r. 2 0 0 4 ): Anu n d erp aym en twi l l ex i s twh ere u n rep o rt edg ro s s recei p ts are n o t ex ceed edb y co s t s o f g o od s s o l dan dd edu ct i b l e ex p en s es . In es t ab l i sh i ng th e u n derp aym en t , th e Co m m i s s io n er m ay

n o ts i m p l y rel y o n the t ax p ay er’ s fai l u re t o p ro v e erro r i n th e d efi ci en cy d et erm i nat i o n . Di Leo v . Co m m i s s i o n er, 9 6 T.C. 8 5 8 , 8 7 3 (1 9 9 1), affd . 9 5 9 F.2 d1 6 (2 dCi r. 1 9 9 2 ); Park s v . Co m m i ss i o n er, 9 4 T.C. 6 5 4 , 6 6 0 -6 6 1 (1 9 90 ); Ot s u k i v . Co m m i s s i on er, 5 3 T.C. 9 6 , 1 0 6 (1 9 6 9 ). Ho wev er, up o n cl ear p ro of o f u nrep o rt ed recei p t s , ev en i n a cri m i n al cas e, t h e b u rd en o f co m i n g fo rwardwi t h o ffs et t in g co s t s o r ex p en s es g en eral l y

s h i ft s t o th e t ax pay er. See Si rav o v . Un i t edSt at es , 3 7 7 F.2 d 4 6 9, 4 7 3 -4 74 (1 s tCi r. 1 96 7 ); El wert v . Un i t edSt at es , 2 3 1 F.2 d9 2 8, 9 3 3 (9 t h Ci r. 1 9 5 6 ). As p rev i o u sl y

d i s cu s s ed , res p o n d en th as s h own s o u rces o f u n rep ort ed i n co m e t o p et i ti o n ers fro m Dr. Najl e-Rah im ’ s m ed i cal p ract i ce as wel l as M r.- 4 3 -

[* 4 3 ] Gh ad i ri -As l i ’ s 2 0 10 l aws u i ts et tl em en t . As a res u lt , i ti s es t ab l i s h edb y cl ear
an d co n v i n ci n g ev i den ce t h atp et i t i o n ers h ad an u nd erp aym en to f t ax fo r each y ear ati ss u e. D. Frau du l en tIn t en t Frau du l en ti n t en tm ay

b e i n ferred fro m

v ari o us k i n d s o f ci rcu m s t an t i al
ev i d en ce, o r “ b ad g es o f frau d ”, i n cl u di n g t h e co n s i s t en tu nd ers t at em en to f i n co m e, i n ad equ at e reco rd s , fai l u re t o fi l e t ax retu rn s , i m pl au s i b l e o r i n co n s is t en t
ex p lan at i o n s o f b eh av i o r, co n ceal m en to f i nco m e o r as s et s , an dfai l u re t o
co o perat e wi th t ax au t h o ri t ies . See Es t at e o f Tro m p et er v . Co m

m is si o n er, 2 7 9 F.3 d7 6 7 , 7 7 3 (9 t h Ci r. 2 0 0 2 ), v acat i n g an drem an d i n g 1 1 1 T.C. 5 7 (1 9 9 8); Brad fo rdv . Co m

m i s si o ner, 7 9 6 F.2 dat3 0 7-3 0 8. Al t h o u gh n o s i n g l e fact o r i s
n eces s ari l y

s u ffi ci en tt o es t ab l i s h frau d , a co m b i nat i on o f s ev eral fact ors i s p ers u as i v e ci rcu m s tan t i al ev i d en ce o f frau d . Brad fo rdv . Co m m i s s i o ner, 7 9 6 F.2 d at3 0 7 -3 0 8 . Ani n t en tt o m i s leadm ay b e i n ferred fro m

a p at t ern o f co n du ct , s ee Sp i es v . Co m

m i s s i o n er, 3 1 7 U.S. at4 99 (“ [W ] e wo ul dth i n kaffi rm at iv e wi l l fu l at t em p tm ay b e i n ferred fro m

co n du ct [.] ”), o r fro m

a t ax p ay er’ s en t i re co urs e o f
co n du ct , s ee St o n e v . Co m m is s i o n er, 5 6 T.C. at2 2 3 -2 2 4
. Al t h o u g h m ere
u n d errep o rt i n g o f g ro s s recei p ts o r i n co m e i s i n s u ffi ci en t t o s up po rta fi n d i n g o f frau d, “ rep eat edu n ders t at em en t s i n s ucces si v e y ears wh en co up l edwi t h o th er- 4 4 -

[* 4 4 ] ci rcu m st an ces s h o wi n g an i n t en tt o co n ceal o r m i s s t at e t ax ab l e i n co m e p res en ta b as i s o n wh i ch th e Tax Co u rt m ay p ro p erl y i n fer frau d .” Fu rn i sh v . Co m m i s s i o n er, 2 6 2 F.2 d7 2 7 , 7 2 8 -7 2 9 (9 th Ci r. 1 95 8 ), aff’ g i n p artan d rem an d i n g 2 9 T.C. 2 7 9 (1 9 57 ). A t ax p ay er’ s b ack g ro u n d an dth e co n t ex to f t h e ev en t s i n qu es ti o n m ay

b e co n s i d eredci rcu m s t an t i al ev i d en ce o f frau d . Ni ed ri n g h au s v . Co m m i s s i o n er, 9 9 T.C. 2 02 , 2 1 1 (1 9 9 2 ); s ee Sp i es , 3 17 U.S. at4 9 7 ; Un i t edSt at es
v . M u rd o ck , 2 9 0 U.S. 3 89 , 3 9 5 (1 9 3 3 ). Th e fact s i n th i s cas e i n cl u d e m an y b ad g es o f frau d . Ov er t h e t h ree y ears at i s su e p et i t i o n ers co ns i s t en t ly an ds ub s t an t i al l y u n d ers t at edth ei r i n co m e an d
o v ers t at ed ex p en s es . Si g ni fi can t l y , th e u n d ers tat em en t s o f g ro s s recei pt s g rew each y ear, fro m

$ 3 1 ,0 3 0 i n 2 0 0 9 , t o $ 1 4 3 ,5 1 4 i n 2 0 1 0 , t o $ 2 4 0,6 2 6 i n 2 01 1 . Th e g ap b et ween the i n co m e recei v edan dth atrep o rt edo n p et i t i o n ers ’ return each y ear i s t oo s ub s t an t i al fo r t h em t o h av e o verl o o k edwh en th ey s i g n ed t h e ret u rn s . Pet i t io n ers h av e o ffered n o ex p l an at i o n ex cep tt o co n ten d , wi t h o u ts up p o rt i n g
ev i d en ce, t hatthe fi n an ci al d o cu m en t at io n u s edb y res p o nd en t , i .e., th e b an k
reco rd s , C&L m o nt h l y

an dan n u al s umm ari es , an dFo rm s 1 09 9 -M ISC, are i n accu rat e. Pet i t i o ners ’ reco rd s were i n ad equat e. Dr. Najl e-Rah i m m ai n t ai n edn o b o o k s
o r reco rd s wi t h res pect t o h er m ed i cal p ract i ce. Sh e recei v edi n v oi ces as wel l as- 4 5 -

[* 4 5 ] m on t h l y

an dan n u al s umm ari es p ro v i dedb y C&L an dp ai dC&L’ s
co m m i s s io n s as cal cu lat edo n t h e b as i s o f t h e i nfo rm at i o n i n th is d o cu m en t at i o n . Al th o u g h p et i t i o n ers d edu ct ed t h es e co m m i s s i o n s fo r t ax p u rp o s es , th ey fai l edt o i n cl u d e i n g ro s s i n co m e, o r ap p ri s e th ei r t ax p rep arer ab o u t , s ub s t an t i al am o u n t s o f i n co m e refl ect edi n th i s s am e d o cu m en t at i o n. Pet i t i o ners co n ceal edi nco m e. M r. Gh ad iri -As l i p ro v i d ed o n l y s o m e o f Dr. Najl e-Rah i m ’ s Fo rm s 1 09 9 -M ISC t o M r. Yo u n g , wh o p erfo rm edn o i n d ep en d en t
rev i ew o f h i s cl ien t s ’ t ax m at eri al s b u trel iedo n th e accu racyo f t h e i n fo rm at i o n p et i t i o n ers g av e h i m . M o reo v er, p et i t i o n ers p ro v i d edM r. Yo u n g fal s e i n fo rm at i o n ab o utth ei r b u s i n es s ex p en s es , i n cl u d i n g (b y way o f ex am p le) ren tex p en s es th at Dr. Najl e-Rah i m

ackno wl ed g es were m

uch h i g h er t h an th e ren t s s he act u al l y p ai d

. Pet i t io n ers ’ g i v i n g fal s e i n fo rm at i o n t o th ei r retu rn p rep arer i s a b ad g e o f frau d

. See Co l e v . Co m

m i s s i on er, T.C. M em o . 1 9 9 8 -4 52
. Pet i t i o ners were u n co o p erat i v e du ri n g Rev en u e Ag en tCo t a’ s ex am i n at i o n . As i d e fro m

p ro vi di n g b an ks t at em en t s fo r o n l y o n e b an kacco un tfo r o n e y ear, th ey fai l edt o p ro v i d e Rev en u e Ag en tCo t a an y o f t h e d o cu m en t s req u es t edi n fo u r IDRs , i ncl u d i n g an y

reco rd s fo r t h ei r n u m ero u s o th er b an kacco u n t s , an y C&L
reco rd s , an y

o f t h e Fo rm s 1 0 99 -M ISC Dr. Najl e-Rah im recei v ed , o r an y

reco rd s t o
s ub s t an t i at e t h ei r cl ai m ed ex p en s es . Pet i t i o n ers ’ l acko f co o p erat i o n wi th Rev en u e- 4 6 -

[* 4 6 ] Ag en t Co t a’ s req u es t s n eces s i t at edh er s u m m o n in g th i rd p art i es t o o b t ai n th e i n fo rm at i o n an d t o p rep are a b an kd ep os i t s an al y s i s . Al th ou g h p et i t i o n ers l ackex p ert i se i n t ax l aw, th ey are s o p hi s t i cat edan d i n t el l i g en tp ro fes si o nal s . Dr. Najl e-Rah i m i s a s p eci al i sti n i n fect i o u s d i s eas e an d h as s u cces s fu l l y

o p erat ed h er o wn m ed i cal p ract i ce fo r y ears . Carefu l at t en t i o n t o d et ai l i s req u iredi n h er p ro fes si o n b o t h t o d i ag n o s e an dcare fo r p at i en t s an dt o p ro p erl y p rep are t he p ap erwo rkn eces s ary t o o p erat e h er p ract i ce. Sh e k ep th er p at i en t s ’ fi l es o rg an i zed , n o t ju s tt o p ro p erl y treat th em

b u tal so s o t hats h e co u ld tran s m i tth em

t o C&L s o as t o t i m el y

recei v e p aym en t fo r h er s erv i ces . Dr. Najl eRah im was ab l e t o m ai n t ai n fi l es co nt ai n i n g th e ex p l an at i o n o f b en efi ts fo rm s an d t i m el y tran sm i tth em

t o C&L. In d eed , th es e reco rd s were m ai nt ai neds o accu rat el y th atres p o n d en t’ s ad

ju s t m en twi t h res pect t o th e C&L b i l l i n g ex p en s e fo r each o f th e y ears ati s s u e was m i n i m al

. Li k ewi s e, M r. Gh ad i ri -As l i i s a wel l -educat edp ro fes s i o n al . Hi s m o s trecen t
em pl o y m en ti n v o lv eds i g n i fi can tm an ag em en t res p o n s i b i l i t i es as an i n dus t ri al
en g in eer. Aft er l eav in g thatp os i t io n , h e was i n t i m at el y i n v o l v edi n t h e ad m i n is trat i v e as p ect s o f Dr. Najl e-Rah i m ’ s m ed i cal p ract i ce, i n cl u d i n g d ep o s i t i n g p aym en t s fro m

th e m ed i cal p ract i ce i n t o p et i t i o n ers ’ b an kacco un t s an d wo rk i n g wi th M r. Yo u n g i n p rep ari n g th e t ax retu rn s .- 4 7 -

[* 4 7 ] In th ei r arg u m en t s, p et i t io n ers at tem p tt o s h i ftres p o n s i b i l i t y

t o M r. Yo u n g
an d as sertth atth ey were n o t res p o n s i b l e fo r t h e ex p en s es rep o rt edo n th ei r i n co m e t ax return s fo r t h e y ears ati ss u e. Attri al Dr. Najl e-Rah i m t es ti fi ed t h ats h e d i dn o t
m ak e v ari o u s ex p en s e en t ri es o n th e 2 0 1 0 b u s i n es s ex p en s e t em p lat e. Fo r
ex am p l e, s h e d en i edth ats h e wro t e i n th e o ffi ce ren tex p en s es o f $ 3 6,0 0 0 o r p o s t ag e ex p en s es o f $ 4 ,5 0 0 . Onb ri ef p et i t i o ners as sertth at wi t h res p ect t o th e b u s i n es s ex p en s e t em

p l at e, “ Dr. Rah im

d os e [s i c] n o tb el i ev e t h at t h es e n u m b ers cl earl y wri tt en an dd o s e [s i c] n o trecal l al l th e ex p en s es wi t h wri t t en n u m b ers i n fro n t o f t h em . Per res po n d en t , th ere was a wi l l fu l b l i n dn es s , b utp er Dr. Rah i m i t
was an u n wi l l in g b l i nd fo l d .” Co n t i n u i n g , p et i t i o n ers as s ertth atth ey “ t ru s tedthei r t ax p rep arer an dd i d n o t h av e kn o w l ed g e ab o u t t ax p rep arat i o n an d[S] ch edu l e C.” Pet i t i o ners ’ u n s up p o rt edas s ert i o ns l ackcred i b i l i t y . At t ri al M r. Yo u n g cred i b l y t es t ifi edth atM r. Gh ad i ri -As l i i n fo rm edh i m t h atDr. Najl e-Rah i m
co m p l et edth e b u s i n es s ex p en s e t em p l at e. Co n s i s t en twi t h t h att es t im o n y , o n h er Fo rm 8 8 5 7 Dr. Najl e-Rah im

s t at edu n d er p en al t i es o f p erju ry : “ I fi l l ed o uta p ap er p ro v id edb y

t ax p rep erar [s ic] an dwro t e o n th at p ap er m y ex p en s es an di n s u ran ces
an d m i l eag es . M y

h u s b an dt o o kth at p ap er wi t h 1 0 99 fro m s [s i c] t o th e t ax p rep erar [s i c] .”- 4 8 -

[* 4 8 ] M r. Gh ad i ri -As l i ackn owl ed g edattri al th ath e h adn o t p ro v i d edM r. Yo u n g wi th al l o f t h e Fo rm s 1 0 9 9-M ISC rep o rt i n g p aym en t s t o Dr. Najl e-Rah i m . In ci rcu m s t an ces s uch as th i s “ [r] el i an ce o n a b o ok k eep er o r acco un t an t i s n o d efen s e t o frau di f t h e t ax p ay er fai l edt o p ro vi d e th e acco u n t an t‘ wi t h al l o f th e d at a
n eces s ary fo r m ai n t ai n i n g co m

pl et e an daccu rat e reco rd s.’ ” Ko reck y v . Co m m i s s i o n er, 7 8 1 F.2 d1 5 6 6 , 1 5 6 9 (1 1 t h Ci r. 1 9 8 6 ) (qu o t i ng M erri t tv . Co m m i s s i o n er, 3 0 1 F.2 d4 8 4 , 4 8 7 (5 t h Ci r. 1 9 6 2 ), aff’ g T.C. M em o . 1 9 5 9 -1 7 2 ), aff’ g p er cu ri am

T.C. M em o. 1 9 8 5 -6 3
. Bo t h p et i t i o n ers p art i ci p at edi n th i s frau d. Dr. Najl e-Rah im rep o rt edu n t ru e b u s i n es s ex p en s es , an db o t h p et i t i o n ers p art i ci p at edi n co n ceal i n g thei r i n co m e. Res po n d en th as p ro v en b y cl ear an dco nv i n ci n g ev id en ce t h atfo r each y ear at i s su e p et i t i o n ers h adan u n d erp aym en to f t ax du e t o frau du l en ti n t en t
. Pet i t i o n ers h av e n o tp ro v en t h at an y

s p eci fi c p o rt i o n o f an y

u n d erp aym en to f t ax was n o t at tri b u t ab l e t o frau d . See s ec. 6 6 6 3 (b ). Co n s equ en t l y , we h o l dthatfo r each y ear ati ss u e p et i t i o n ers are l i ab l e fo r t he s ect io n 6 66 3 frau dp en al t y b as ed upo n th e
u n d erp aym en t s t o b e d et erm i n edi n th e Ru l e 1 5 5 co m p u tat i on s . VI. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al t y Res p o n d en th as d et erm i ned , as an al t ern at i v e t o the s ect i o n 6 6 6 3 frau d p en al ty , accu racy -rel at ed p en al t i es p u rs u an t t o s ect i o n 6 6 6 2 (a). Sect i o n 6 6 6 2 (a)- 4 9 -

[* 4 9 ] i m p o s es a p en al t y

equ al t o 2 0 % o f t h e p o rt i o n o f an u n derp aym en tth ati s at tri b u t ab l e t o , i n t er al ia, (1 ) n eg l i g en ce o r (2 ) an y s ub s t an t i al u n d ers t at em en to f i n co m e t ax . Sec. 6 6 6 2 (a) an d(b )(1 ) an d (2 ). Ho wev er, t h e accu racy -rel at ed p en al ty “ s h al l n o tap p l y

t o an y p o rt i o n o f an u n derp aym en to n wh i ch a p en al t y i s i m p o s edu n d er s ect i o n 6 6 6 3 .” Sec. 6 6 62 (b ). As we h av e al read y h el dth at p et i t i o n ers are l iab l e fo r t he s ect i o n 6 6 6 3 frau d p en al t y , th e s ect i o n 6 6 6 2 (a)
accu racy -rel at edp en al ty

i s n otap p l i cab l e. To refl ectthe fo reg o i n g an d t h e p art ies co n ces s i o n s , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5.