T.C. Mem o. 2 01 3- 27 9

UNITED STAT ES TAX COURT

JAM IL E. ABDALL AH AND MAJEDA J. ABDALLAH, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 80 23 -1 1. File d Dec em be r 9, 2 01 3.

D. Dou gl as Met cal f, fo r pe ti ti on ers . Rac ha el J. Zep ed a, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION LARO, Ju dg e: The p et it io n i n t hi s ca se in vo lv es pe ti ti on ers ’ Fed eral in co m e ta x fo r 19 99 th ro ug h 2 00 4. Ina no ti ce o f de fic ie nc y da te d F eb ru ary 3,- 2 -

[* 2] 20 11 , res po nd en t d et erm in edde fic ie nc ie s an d fr au d p en al ti es un de r se ct io n 1 66 63 as f ol lo ws: 2 Year Defi ci en cy Pen al ty sec. 6 66 3

19 99 $2 7,0 21 $1 9,8 98 20 00 47 ,34 0 35 ,22 5 20 01 66 ,72 2 49 ,63 7 20 02 59 ,90 5 44 ,92 9 20 03 69 ,99 6 52 ,49 7 20 04 85 ,47 9 50 ,64 4 The is su es forde ci si on are: (1 ) whe th er p et it io ne rs fai le d t o re po rt i nc om e o f $9 4,6 69 for19 99 , $1 56 ,61 6 fo r 20 00 , $2 13 ,56 1 fo r 20 01 , $2 06 ,19 2 fo r 20 02 , $2 25 ,43 4 fo r 20 03 , and $2 70 ,02 0 fo r 20 04 . W e h ol d t ha t p et it io ne rs di d fa il to rep ort ce rta in in co m e fo r al l years atis su e, bu t o nl y to th e ex te ntst at edhe rei n; (2 ) whe th er an y

pa rt o f an y

of p et it io ne rs ’ un de rp aym en ts of t ax for19 99 th ro ug h 2 00 3 was du e to frau d, s uc h tha t u nd er s ect io n 6 50 1( c) t ax m ay be
as se ss edat a ny tim e. W e h ol d t ha t i t was forall y ears ;

Res po nd en t d oe s n otass ertth e frau d p en al ty agai ns t M rs . Abd al lah. 1 Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 2 Co de ineffe ctforth e y ears at i ss ue , andRu le refe ren ces are t o t he Tax C ou rt Ru le s o f Prac ti ce an d P ro cedur e.- 3 -

[* 3] (3 ) whe th er p et it io ne r hu sb an d i s l iabl e fo r th e fraudpe na lt y for19 99 th ro ug h 2 00 4. We ho ldth athe is forall y ears ; (4 ) whe th er p et it io ne rs are en ti tl edto refu nd s o f pa ym en ts of $ 45 ,66 9 fo r 20 02 , $4 7,3 81 for20 03 , and$3 1,9 59 for20 04 . W e h ol d t ha t the y are n ot . Pet it io ne rs res id edinAriz on a whe n t he y fil edth ei r pe ti ti on . FINDINGS OF FACT Mr. Ab da ll ahwas b orn i n Is rael , bu t h as du al cit iz en sh ip by virtue of h is fathe r’s Am eri cancit iz en sh ip . In Is rael Mr. Ab da ll ahatt en de d h ig h s ch oo l wh ere he was trai ne d a s an ele ctric ia n. Aft er h ig h s ch oo l h e d idno t g o o n t o c ol le ge no r ta ke an y co ur se s i n b oo kk eep in g. In19 90 Mr. Ab da ll ahcam e to th e Uni te d S ta te s. Whil e Mr. Ab da ll ah ’s pr im ary la ng ua ge is Arab ic , he a ls o s pe ak s s om e Eng li sh an d S pa ni sh . Mr. Abd al la h i s the so le pro vi de r fo r hi s wi fe an d fo ur ch il dr en . 3 Supe rm at#1 6 In19 91 Mr. Ab da ll ahop en eda laun dr om atwhi chhe na m edSupe rm at#1 6 (Supe rm at ). Sup erm atpro vi de d c oi n- op erat edsel f-s erv ic e laun dry m ach in es , dry cl ean in g s erv ic es , andwash -an d- fo ldservi ces . In ad di ti on to it s l au nd ry servi ces ,
Pet it io ne rs cla im edth ree c hi ldrenas d ep en de nt s o n t he ir 1 99 9 t hr ou gh 3 20 02 returns an d c la im eda fo urth ch il d o n t he ir 2 00 3 a nd20 04 returns .- 4 -

[* 4] Supe rm atals o s ol d l au nd ry supp li es , ph on e car ds , m on ey gra m s, an d v ari ou s fo odit em s. Mr . Abd al la h h adanoff ic e in th e co rn er o f Supe rm at , whi chwas se pa rat edfro m

th e res t o f th e laun dr om atby a bu ll etpr oo f win do w. At th at win do w, cus to m ers m ad e al l m erch an di se pu rch as es , dro pp edoff lau nd ry , and pa idfordry clea ni ng an d was h- an d- fo ldservi ces . Sup erm at ’s reg ul ar b us in es s ho ur s wer e 7 a.m . to 10 p.m . In19 96 Mr. Ab da ll ahso ldSupe rm atbu t re cl ai m editsh ortl y th erea fte r whe n the pu rch as er fa il edto m ak e th e p ur ch as e p aym en ts . W it h t he ex cep ti on of th atbri ef p eri od , Mr. Abd al la h was th e so le own er o f Supe rm at . In ad di ti on , Mr. Abd al la h andanoff

ic e cl ean er wh o c am e o nc e a weekwere Supe rm at ’s on ly
em pl oyees. Fi na ll y , Mr Ab da ll ahm ai nt ai ne d b an k a cco un ts for Supe rm at ’s op erat io ns , whi chwere s ep arat e fro m pe ti ti on ers ’ pe rs on al ba nkacco un ts . Pet it io ne rs ’ Ch eckCas hi ng Acti vi ty Mr. Ab da ll ahbe ga n c as hi ng ch eck s o utof S up erm at ’s corne r of fic e in19 98
. His cu st om ers pri m ari ly cash edpa yro ll ch eck s an d wer e p rimaril y of Hi sp an ic de sc en t. At tria l M r. Abd al la h e xp la in edth atth es e cu st om ers co ul d n otgo to a ba nkbe cau se th ey

di d n otha ve va li d g ov ern m en t-i ss ue d i de nt ifi cat io n. Mr . Abd al la h fu rth er ac kn owl ed ge d t ha t m an y of h is cu st om ers m ay

have be enil le ga l imm ig ran ts . For h is ch eckcas hi ng servi ces Mr. Ab da ll ahch arg eda .75 % fee.- 5 -

[* 5] Fo r th e y ears at i ss ue Mr. Ab da ll ahcas he d m il li on s o f do ll ars ’ worth of ch eck s, the reb y

ge ne rat in g s ub st an ti al fees , whi chco ns ti tu te d p et it io ne rs ’ pr im ary so ur ce o f in co m e. Pet it io ne rs di d n otrep ort the se fees , whi chare as fol lo ws: 4

Year Tot al de po si ts Unr ep orte d i nc om e 1 19 99 $1 3,9 88 ,07 4 $5 9,3 49 20 00 20 ,73 6,7 07 10 4,5 33 20 01 26 ,71 3,9 28 14 6,4 96 20 02 28 ,75 1,9 65 15 4,6 55 20 03 28 ,83 9,4 42 16 9,5 92 20 04 30 ,54 2,3 72 15 5,7 02 Tot al 14 9,5 72 ,48 8 79 0,3 27 Altho ug h c al cu la ti ng th e to ta l am ou ntof c he ck s ca sh edrequi res cert ai n 1 cred itan d d eb itad

jus tm en ts to be m ad e to to ta l d ep os it s, the se ad jus tm en ts are ne gl ig ib le an d d o n otde tra ctfro m de m on st rat in g t he sh eer m ag ni tu de of M r. Abd al la h’s ch eckcas hi ng act iv it ie s. Mr. Ab da ll ahm ai nt ai ne d b an k a cco un ts for hi s ch eckcas hi ng act iv it y se pa rat e fro m

pe ti ti on ers ’ pe rs on al acco un ts an d s ep arat e fro m Supe rm at ’s op erat in g a cco un ts . Every week the ba nkwou ldde li ve r a cas h s hi pm en t t o Supe rm atinanarm or edve hi cl e. Mr. Ab da ll ahth ende po si te d t he ch eck s tha t h e
Fo r 19 99 th ro ug h 2 00 1, re sp on de ntcal cu la te d t ot al de po si ts by add in g 4 to ge th er al l ch eckde po si ts inpe ti ti on ers ’ ch eckcas hi ng bankacco un ts . Res po nd en t the n d et erm in edpe ti ti on ers ’ un rep orte d i nc om e b y ap pl y in g a.75 % fee t o t he to ta l d ep os it s an d a dju st in g fo r ba nkfees an d b adch eck s. Fo r 20 02 th ro ug h 2 00 4 re sp on de ntba se d M r. Abd al la h’s t ot al ch eckde po si ts an d un rep orte d i nc om e o n p et it io ne rs ’ am en de d 2 00 2, 2 00 3, an d 2 00 4 re tu rn s, fu rth er di sc us se d i nf

ra.- 6 -

[* 6] cas he d d ai ly. Mr. Ab da ll ahdi d n otke ep reco rd s o f th e ch eck s h e cas he d, h is fees earn ed , no r an y

ot he r rec or ds forhi s ch eckcas hi ng act iv it y . Fo r th e y ears at i ss ue , two si gn s atSupe rm atadve rti se d M r. Abd al la h’s ch eckcas hi ng servi ces . The fi rs t s ig n was di rect ly abo ve th e o ffi ce wi nd ow th ro ug h wh ic h M r. Abd al la h c as he d c he ck s, s ol d m erch an di se , andrece iv ed cl ot hi ng fordry clea ni ng . This si gn was app ro xi m at el y th ree f eetby two fe et , had a y el lo w bac kg ro un d, an d a dv ert is edch eckcas hi ng inbo th Eng li sh an d S pa ni sh in redfon t. The sec on d s ig n was on th e fro ntdo or , was ap pr ox im at el y th e sa m e si ze as th e d oo r, an d was als o re d a ndy el lo w. Pet it io ne r Hire s Es se x P et ers as Ac co un tant Afte r op en in g S up erm atin19 91 Mr. Ab da ll ahbe ga n fi li ng Fed eral in co m e ta x re turn s. Mr . Abd al la h h as alwa y s re li edonanacco un ta ntto pre pa re h is returns . Ess ex Pet ers is anacco un ta ntof 2 5 years’ ex pe rie nc e. He is no t a c ert ifi ed publ ic acco un tant(C.P.A.), no r anen ro ll edag en t wi th th e In te rn al Rev enue Serv ic e (IR S), n or

do es he ha ve an y

ot he r of fic ia l l ic en se th atall ows hi m to pr ep are t ax returns . Furt he r, Mr. Pe te rs ha s n o e xp eri en ce o r tr ai ni ng infor en si c acco un ti ng .- 7 -

[* 7] In20 00 Mr. Pet ers be ga n t ak in g h is lau nd ry to Supe rm atforwash -an d- fo ld
se rv ic es ev ery m on th . In 2 00 2 M r. Abd al la h l earn edth atMr. Pet ers was the
acco un ta ntfora ne arb y

ba r, Patric k’s. At t he ti m e, ha vi ng en de d h is rel at io ns hi p with h is pri oracco un ta ntin19 99 , Mr. Abd al lah was th ree years b eh in d i n fi li ng hi s Fe de ral in co m e ta x re tu rn s. Aft er l earn in g t ha t M r. Pet ers was an a cco un ta nt , Mr. Ab da ll ahhi redhi m

to pre pa re h is 19 99 , 20 00 , and20 01 Fed eral in co m e ta x returns . InDecem be r 20 02 Mr. Pet ers als o h el pe d M r. Abd al lah i nc or po rat e Supe rm atas a n S co rp or at io n c al le d Vu vo , Inc . (Vuv o) . Mr. Pet ers furth er pr ep aredMr. Ab da ll ah ’s 20 02 , 20 03 , and20 04 Fed eral in co m e ta x re turn s, as well
as Vuv o’s 2 00 3 and20 04 Fed eral in co m e ta x re tu rn s. Mr. Ab da ll ahsi gn edth e returns Mr. Pet ers pre pa red , th ereb y cert ifyin g fo r each th at“ [u ]nde r pe na lty of p erjury , I de cl are t ha t I h av e ex am in edth is return a nd
acco m panyin g s ch edul es an d s ta te m en ts , andto th e b es t o f m y kn owl ed ge an d be li ef, the y

are tru e, co rrec t, an d c om pl et e.” Mr. Ab da ll ah ’s returns forth e y ears 19 99 th ro ug h 2 00 4 re po rte d g ro ss in co m e, in co m e ta x, an d t ot al tax li ab il ity as fo ll ows :- 8 -

[* 8] Year Tot al in co m e In co m e ta x (b efo re cr ed it s) Tot al tax

(in cl ud in g F ICA/ SECA) 19 99 $1 3,8 83 -0
- $9 79 20 00 9,7 18 -0
- 74 8 20 01 9,3 37 -0
- 1,0 78 20 02 9,2 17 -0
- 1,0 75 20 03 34 ,09 0 -0
- 50 3 20 04 30 ,03 5 -0
- 81 Tot al 10 6,2 80 -0
- 4,4 64 Inad di ti on to hi s Fe de ral tax returns , Mr. Abd al la h a ls o e m pl oyed Mr
. Pet ers to pre pa re Supe rm at ’s fin an ci al st at em en ts , Cit y of Tem pe sal es tax returns , an d S tate of Ari zo nasal es tax returns on a m on th ly bas is st art in g i n 2 00 3. Mr
. Abd al la h fu rth er em

pl oyed Mr . Pet ers to pre pa re h is an nu al Sta te of Ari zo na in co m e ta x re tu rn s. To pre pare Mr . Abd al la h’s Ci ty, St at e, an d F ed eral tax returns , as wel l as Supe rm at ’s fin an ci al st at em en ts , Mr. Abd al lah a ll eg ed ly gav e Mr. Pe te rs a bo x fi ll edwith S up erm at ’s ban k s ta te m en ts , comm is si on ch eck s fr om m on ey gra m s, p ur ch as e rec ei pt s fo r laun dry supp li es , andch eckstub s fo r ex pe ns es pa id . Accor di ng to Mr. Pet ers , m os t o f Supe rm at ’s exp en se s wer e d oc um en te d b y ch eckstub s o r ba nkst at em en ts . Eve ry m on th , Mr. Pet ers wou ldvi si t Supe rm atto dro p o ff h is lau nd ry , Supe rm at ’s fin an ci al st at em en ts , andMr. Ab da ll ah ’s Cit y an d S ta te sal es tax- 9 -

[* 9] returns fora pr io r m on th . Duri ng th es e v is it s M r. Pet ers wou ldals o p ic k up a bo x o f Supe rm at ’s ban k s ta te m en ts an d v ari ou s re cei pt s t o p rep are t he ne xt
m on th ’s bo ok s an d re co rd s. Mr . Pet ers returne d S up erm at ’s ban k s ta te m en ts by at ta ch in g the m

to th e fi na nc ia l s ta te m en ts he ha d p rep ared . Mr. Abd al la h t he n pl acedth e fi na nc ia l s ta te m en ts an d b an k re co rd s i n abi nd er. Whi le th e rec or d i s un cl ear wh ethe r Mr. Pe te rs ev er re tu rn edth e v ari ou s re cei pt s an d c he ckstub s t o Mr. Ab da ll ah , th es e rec or ds are n o l on ge r av ai labl e. Fin al ly, Mr. Pe te rs adm it te d th athe oft endra nkat P atric k’s b efo re m ak in g t he se m on th ly vis it s. Befo re J ul y

20 04 Supe rm at ’s fin an ci al st at em en ts di d n otin cl ud e pe ti ti on ers ’ ch eckcas hi ng in co m e. Mr. Ab da ll ahne ve r to ldMr. Pet ers hi s fe e fo r ch eckcas hi ng servi ces , no r di d M r. Pet ers in qu ire as t o t he fee ev enaft er h e le arn edof t he ch eckcas hi ng in co m e. Cri m in al Cas e fo r 20 04 Return a ndRes ul ti ng Ple a Agr eem en t InSep te m

be r 20 05 th e IRS be ga n acri m in al in ve st ig at io n re la ti ng to pe ti ti on ers ’ 20 04 return. On Oct ob er 1 3, 2 00 5, M r. Abd al la h was in te rv ie wedby IRS Spe ci al Agen t KenHud so n a ndSupe rv is ory Sp eci al Agen t Ir is Bo ha nn on . The i nt erv ie w las te d
ne arl y two ho ur s, an d M r. Abd al la h v ol un ta ril y an swe redth e IRS Agen ts ’ qu es ti on s. Als o dur in g t ha t i nt erv ie w, Mr. Abd al lah turne d o ve r th e b in de r of- 10 -

[* 10 ] fin an ci al st at em en ts th atMr. Pet ers ha d p rep aredforSupe rm atin20 03 an d 20 04 . After the in te rv ie w with t he IRS, Mr . Abd al la h t erm in at edhi s b us in es s rel at io ns hi p wi th Mr. Pet ers . The IRS al so in te rv ie wedMr. Pet ers inOcto be r 20 05 . Accor di ng to Mr. Pet ers , th e IRS ne ve r reque st edfro m hi m a co py of p et it io ne rs ’ reco rd s dur in g t he Octo be r 20 05 in te rv ie w; an d b ecau se hi s co m pu te r was lat er s to le n, the se reco rd s were n o l on ge r av ai labl e whe n t he IRS i nt erv ie wedhi m ag ai n app ro xi m at el y

two y ears lat er. Mr. Ab da ll ahun de rs to odth athe co ul d g o t o p ris on if c on vi ct edof c riminal ta x fr au d. OnAug us t 5 , 20 08 , Mr. Abd al la h e nt eredin to a pl ea ag reem en t wi th th e Gov ern m en t i n o rd er t o a vo idgo in g t o p ris on an d t o p utanen d t o t he cri m in al
cas e. Inth e p le a ag reem en t M r. Abd al lah p le ad edgu il ty to v io la ti ng sec ti on 72 06 (1 ), “ W il lfu ll y

Mak in g a ndSubs cri bi ng a Mat eri al ly Fals e Return, St at em en t orOth er Do cu m en t” . As pa rt o f th e p le a ag reem en t, Mr . Abd al lah a dm it te d t ha t he “ kn owi ng ly andin te nt io na ll y un de rrep orte d [h is ] in co m e to th e In te rn al Rev enue Serv ic e in ord er t o p ay les s i n t ax es .” Inad di ti on , th e p le a ag reem en t pr ov id edth at“ th is ag reem en t d oe s n otpre cl ud e th e Uni te d S tate s fr om in st itut in g an y ot he r ci vi l o r adm in is tra ti ve pro ceed in gs ” b utth at“ [n ]oth in g i n t hi s ag reem en t- 11 -

[* 11 ] sh al l b e co ns tru edto sat is fy , set tl e, orco m pr om is e an y

civ il tax li ab il it y , in cl ud in g a dd it io ns to tax , in te res t an d p en al ti es , th atth e d efen da ntm ay owe t o t he IRS a s t o h is fed eral in co m e ta x re turn s.” Th e p le a ag reem en t fu rth er p ro vi de d th at“ th e d efen dantsh al l re ta in th e ri gh t t o a ss ertan y an d a ll de fen se s i n a ny civ il ta x aud it , con tro ve rs y , app eal or l it ig at io n.” Fin al ly, th e p le a ag reem en t re qu ire d Mr. Ab da ll ahto fil e am en de d re tu rn s fo r 20 02 , 20 03 , and20 04
. On Dec em

be r 24 , 20 08 , th e U.S. Dis tri ctCo urt fo r th e Dis tri ctof Ari zo na en te reda jud gm en t an d afin e o f $1 0,0 00 ag ai ns t M r. Abd al la h. Th e jud ge m en t pr ov id edth atMr. Ab da ll ah“ [h as ] be ensen te nc edinacco rd an ce wi th th e te rm s o f th e p le a ag reem en t an d t ha t * * * [he ha s] waiv ed* * * [h is ] rig htto ap pe al an d t o co ll at eral ly atta ck

th is m at te r.” Mr. Ab da ll ahhi redJo el Rube n, a C .P.A. with 47 y ears ’ ex pe rie nc e in
acco un ti ng an d apa rtn er atPat er & R ub en , to pre pa re h is am en de d re turn s fo r 20 02 , 20 03 , and20 04 . Accor di ng to Mr. Rube n, the reco rd s fo r th os e y ears were

“ ve ry sh al lo w” an d M r. Abd al la h’s i nc om e an d e xp en se s fo r th os e y ears ha d t o b e recr eat ed . He als o t es ti fie d t ha t the re was no ev id en ce tha t a s y st em forke ep in g tra ckof c he ckcas hi ng in co m e h adbe eninpl ace. M r. Abd al la h’s am en de d re tu rn s rep orte d t ax ab le in co m e an d t ax li ab il it y as f ol lo ws:- 12 -

[* 12 ] Year Tot al in co m e

(am en de d) In co m e ta x (a m en de d)

(b efo re cr ed it s) Tot al tax (am en de d)

(in cl ud in g F ICA/ SECA) 20 02 $1 66 ,69 4 $3 1,3 33 $4 6,2 06 20 03 19 2,8 72 32 ,69 6 47 ,63 2 20 04 17 3,1 64 26 ,36 9 32 ,04 0 On M arch 13 , 20 09 , pet it io ne rs m ad e v ol un tary pa ym en ts of $ 45 ,66 9 to ward s the ir 2 00 2 t ax li ab il ity , $4 7,3 81 to ward s the ir 2 00 3 t ax li ab il it y , and $3 1,9 59 to ward s the ir 2 00 4 t ax li ab il it y . Pet it io ne rs ’ Oth er As se ts Inlat e 1 99 8 p et it io ne rs pu rch as eda pi ece o f rea l p ro pe rty onW . Dub li n S t. in Ch an dl er, Ari zo na . In ea rly 20 00 pe ti ti on ers pu rch as edan ot he r pi ece o f pr op erty , onE. Pueb lo Ave. i n C ha nd le r, Ariz on a. Pet it io ne rs pu rch as edth is pr op erty for$1 38 ,00 0 a ndm ad e a d ownpa ym en t o f $7 ,50 0. Inearl y 20 03 pe ti ti on ers pu rch as edy etan othe r pi ece o f pr op erty , onE. Scor pi o P la ce i n Ch an dl er, Ari zo na . Peti ti on ers pu rch as edth is pro pe rty for $ 23 4,3 84 an d m ad e a do wnp aym en t o f $4 6,8 77 . In m id -2 00 3 p et it io ne rs so ldth ei r W . Dub li n S t. pr op erty . Pet it io ne rs ’ Loan Ap pl ic at io ns In20 02 Mr. Ab da ll ahsubm itte d a“ Uni fo rm Res id en ti al Loan App li cat io n” (Fre dd ie Mac Fo rm

65 ) to Sp ectru m

Fin an ci al Group, i n wh ic h h e rep orte d h is- 13 -

[* 13 ] m on th ly inc om e fro m Supe rm atas $ 9,0 00 . In 2 00 3 M r. Abd al la h s ub m it te d y etan ot he r “ Uni fo rm

Res id en ti al Loan App li cat io n” (Fred di e Ma c Fo rm 65 ) to Sp ectru m Fin an ci al Group, i n wh ic h h e al so rep orte d h is m on th ly inc om e fro m Supe rm atas $ 9,0 00 . In b oth app li cat io ns Mr. Ab da ll ahdi sc lo se d t ha t h e h ad
m on th ly m ortg ag e p aym en ts on hi s W. Dubl in St. p ro pe rty of $ 85 2 a ndad di ti on al
m on th ly loan p aym en ts of $ 79 2. Fi na ll y , Mr. Abd al la h s ig ne d t he ap pl ic at io ns , th ereb y cert ifyin g “ th atth e in fo rm at io n p ro vi de d i n t hi s ap pl ic at io n i s tru e an d
co rrec t as of t he date setforth op po si te * * * [h is ] si gn atur e[] onth is ap pl ic at io n”
an d a ckno wled gi ng hi s “un de rs ta nd in g t ha t an y in te nt io na l o r ne gl ig en t
m is rep res en ta ti on (s ) of

th e in fo rm at io n c on ta in edinth is ap pl ic at io n m ay res ul t i n ci vi l l iabi li ty and/o r cri m in al pe na lt ie s i nc lu di ng , bu t n otli m it edto , fin e o r im pr is on m en t o r bo th un de r th e p ro vi si on s o f Tit le 18 , Uni te d S ta te s C od e, Sect io n 1 00 1, et . seq .”. OPINION The pri m ary is su e in th is cas e is whet he r Mr. Ab da ll ahfrau du le nt ly
un de rrep orte d h is in co m e wit h re ga rdto hi s 1 99 9 t hr ou gh 20 04 returns . The pa rti es ha ve st ip ul at edor o th erwi se co nc ed edonbri ef tha t M r. Abd al la h fa il edto rep ort i nc om e o f $5 9,3 49 for19 99 , $1 04 ,53 3 fo r 20 00 , $1 46 ,49 6 fo r 20 01 , $1 54 ,65 5 fo r 20 02 , $1 69 ,59 2 fo r 20 03 , and$1 55 ,70 2 fo r 20 04
.- 14 -

[* 14 ] I. Perc ep ti on of Witne ss es W e o bs erv e th e can do r, si nc eri ty, an d d em ean orof e ach witne ss inord er t o ev al ua te hi s t es ti m on y

an d t o a ss ig n wei gh t t o t ha t t es ti m on y forth e p rimary pu rp os e o f fi nd in g d is pu te d fa ct s. HIE Hol di ng s, In c. v. Co m m is si on er, T.C. Mem o. 2 00 9- 13 0, 9 7 T.C.M . (CCH) 1 67 2, 1 73 3 (2 00 9) , aff’d wit ho utpubl is he d op in io n, 5 21 Fed . App x. 6 02 (9t h C ir. 2 01 3) . W e d et erm in e th e cre di bi li ty of eac h witne ss , weig h e ach pi ece o f ev id en ce, draw ap pr op ria te in fere nc es , andch oo se be twee n c on fli ct in g i nf

eren ces infin di ng th e fac ts of acas e. Id . W e wil l n ot acce pta witne ss ’ te st im on y at f ace v al ue if we fi ndth atou r im pr es si on of t he witne ss , coupl edwith o urrev ie w of the cred ib le fact s atha nd , con ve y s t o u s an un de rs ta nd in g c on tra ry

to th e sp ok enword . Id. (ci ti ng Neon at ol og y Ass oc s., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 84 -8 7 (2 00 0) , aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) ). Dur in g t ria l we h eardth e te st im on y of f ou r fac t wi tn es se s: Mr. Pet ers , Mr. Abd al la h, Re ve nu e Age ntJo hn Sch iff er (Ag en t Sc hi ffer ), an d M r. Rube n. As
ex pl ai ne d m or e fu ll y

be lo w, we foundth atMr. Pet ers an d M r. Abd al la h l ack ed cred ib il it y

as t o t he m at eri al is su es . Also m or e fu ll y ex pl ai ne d b el ow, we fo un d Age ntSch iff

er’s an d M r. Rube n’s t es ti m on y to be of l im it edhe lp fu ln es s. The refo re, we rel y

pri m ari ly on t he reco rdbu il t b y th e p art ie s thr ou gh th ei r st ip ul at io n o f fac ts an d e xh ib it s.- 15 -

[* 15 ] A. Mr. Pe te rs As t o M r. Pet ers , pet it io ne rs ’ acco un ta nt , we per cei ve d h im to be ge ne ral ly
un tru st worth y

an d fo un d h is tes ti m on y

to be in cred ib le with re ga rdto m at eri al
as pe ct s o f th is cas e. Mr. Pet ers ’ te st im on y was i nt ern al ly inc on si st en t an d
co nt rad ic te d b y

th e d oc um en tary

ev id en ce an d s ti pu la te d fa ct s. Inad di ti on , Mr. Pet ers de m on st rat eda la ckof u nd ers ta nd in g o f Fed eral tax laws . W e il lu strat e th es e o bs erv at io ns th ro ug h t he fol lo win g e xa m pl es . Fi rs t, o f si gn ifi can ce t o thi s ca se is whet he r Mr. Ab da ll ahfrau du le nt ly
un de rrep orte d i nc om e fro m ch eckcas hi ng . Mr. Abd al lah c la im s tha t h e p ro vi de d in fo rm at io n o n c he ckcas hi ng in co m e to Mr. Pet ers so th atMr. Pet ers co ul d re po rt pe ti ti on ers ’ co rrec t i nc om e. Mr. Pet ers ess en ti al ly den ie s thi s an d s ta te s tha t h e was , for th e m os t p art , un aware th atpe ti ti on ers ha d s ub st an ti al ch eckcas hi ng in co m e. Mr. Pet ers cla im edth athe ne ve r sa w any chec k c as hi ng si gn s wh il e at Supe rm at . W e fi ndth is cla im to be hi gh ly im

pr ob ab le gi ve n t he si ze, p ro m in en t lo cat io n, an d p ro m in en t co lo r sc he m e o f th e two ch eckcas hi ng si gn s, the reg ul ar li ne of c us to m ers ou ts id e th e ch eckcas hi ng an d l au nd ry dro po ff win do w, andMr. Pet ers ’ freque ntan d re gu la r vi si ts ov er m any y ears . Furt he r, Mr. Pe te rs no ti ced th atth e es tabl is hm en t ac ro ss th e st reetoff eredch eckcas hi ng servi ce b ut in cred ib ly fail edto no ti ce tha t h is owncli en t o ffer edth e sa m e se rv ic e.- 16 -

[* 16 ] Seco nd , Mr. Pet ers tes ti fie d t ha t h e fi rs t l earn edof M r. Abd al la h’s ch eck
cas hi ng act iv it ie s i n Jul y

20 04 , when he cam e acr os s a b an k s ta te m en t fr om pe ti ti on ers ’ ch eckcas hi ng acco un t en di ng in44 06 . Howev er, Sch edul e C, Pro fit
an d Lo ss fro m

Bu si ne ss , of p et it io ne rs ’ 20 03 return s ho ws i nc om e fro m

“ Ph on ecar ds , Mo ne y gr am s, [a nd ] Ch eck in g C as hi ng [si c]”. W he n que st io ne d ab ou t thi s, M r. Pet ers adm it te d t ha t h e was aware o f a s m al l am ou ntof c he ck
cas hi ng act iv ity

be fo re 2 00 4 andth athe saw c us to m ers cas hi ng ch eck s as earl y as 20 02 . Mr. Pet ers furth er t es ti fie d t ha t af te r di sc ov eri ng th e ch eckcas hi ng acco un t en di ng in44 06 , he b eg anrep orti ng ch eckcas hi ng in co m e in subs eque ntm on th s, bu t d idno t d o s o fo r pr io r m on th s b ecau se th e Ju ly 200 4 b an k s ta te m en t s ho wed
anop en in g b al an ce o f zer o. Inreal it y , th e Ju ly 200 4 b an k s ta te m en t s ho wedan op en in g b al an ce o f ne arl y $1 50 ,00 0, an d p rio r ba nkst at em en ts fro m th atacco un t sh owe d d ep os it s wer e m ad e as earl y as Ap ril of 2 00 3. Whenqu es ti on edab ou t the Ju ly 200 4 o pe ni ng ba la nc e, Mr. Pe te rs adm it te d t ha t h is pri orst at em en t h adbe en fal se , andth atalt ho ug h h e sh ou ldha ve ask edfor earl ie r ba nkst at em en ts , he f ai le d to do so . Mr. Pet ers als o c la im edth athe was n otaware o f pe ti ti on ers ’ ot he r ch eck
cas hi ng acco un ts ; h owe ve r, th e b an k s tate m en t fo r pe ti ti on ers ’ ch eckcas hi ng acco un t en di ng in76 87 was att ach edto Supe rm at ’s Nov em be r 20 04 fin an ci al st at em en ts . Fin al ly, Mr. Pe te rs tes ti fie d t ha t al th ou gh he kn ew Mr. Ab da ll ah- 17 -

[* 17 ] in cu rredsi gn ifi can t ex pe ns es forcas h s hi pm en ts by arm or edve hi cl e, Mr. Pet ers ne ve r qu es ti on edwhatth os e ex pe ns es were fo r. The co nt rad ic to ry an d
ev er-c ha ng in g n atur e o f Mr. Pe te rs ’ te st im on y sev erel y un de rm in es hi s cr ed ib il ity . Thi rd , Mr. Pet ers ass is te d M r. Abd al la h wi th a dubi ou s m etho d fo r reduc in g se lf- em pl oym en t t ax es . Mr. Pet ers tes ti fie d t ha t M r. Abd al la h a sk edhi m to in co rp or at e Supe rm atinord er t o re du ce M r. Abd al la h’s Fe de ral tax li ab il it y an d th athe advi se d M r. Abd al la h t ha t b y in co rp or at in g S up erm atas a n S co rp or at io n (i.e ., Vuv o) , Mr. Abd al la h wo ul d n otbe requi redto pa y sel f-em pl oym en t t ax es . Altho ug h i nc or

po rat in g a ndbe co m in g a n e m pl oyee of Vuv o wo ul d re li ev e Mr. Abd al la h o f fi li ng sel f-em pl oym en t t ax returns un de r se ct io n 1 40 1, Vu vo an d M r. Abd al la h wo ul d b e requi redto pa y So ci al Securit y

an d M ed ic are t ax es on Mr. Abd al la h’s wag es pu rs ua ntto sec ti on s 3 10 1 a nd31 11 at t he same rates . Mr. Pet ers att em

pt edto av oi d t he tax es im po se d b y sec ti on s 3 10 1 a nd31 11 by rep orti ng no wage s fo r Mr. Ab da ll ahan d re po rti ng all of Vu vo ’s pro fitas di st rib ut io ns of i nc om e fo r 20 03 an d 2 00 4. Gi ve n t ha t M r. Abd al la h wo rk edlo ng ho ur s atSupe rm ateach da y , Mr. Pet ers ’ advi ce t o d is gu is e wag es as d is tri bu te d
earn in gs inord er t o a vo idpa yro ll tax es run s co nt rary to Fe de ral tax laws . See Sp ic er Acco un ti ng , Inc . v. Un it edSta te s, 9 18 F.2d90 , 93 (9t h C ir. 1 99 0) (ho ld in g th ata ta xp ay er s ho ul d n otbe pe rm it te d t o e va de FICA an d F UTA by- 18 -

[* 18 ] ch arac te riz in g c om pe ns at io n p ai d t o i ts sh areh ol de r as di vi de nd s, ra th er tha n wag es ); Ve te rin ary Surg ic al Co ns ul ta nt s, P.C. v . Comm is si on er, 1 17 T.C. 14 1, 14 5- 14 6 (2 00 1) (ho ld in g t ha t wh ere an o ffi cer o f anS co rp or at io n p erfo rm s subs ta nt ia l s erv ic es , th e rem un erat io n re cei ve d fo r th os e se rv ic es is wage s s ub ject to Fed eral em

pl oym en t t ax an d n otdi st rib ut io ns of c or po rat e in co m e), aff

’d sub
no m . Yeag le Drywall Co . v. Co m m is si on er, 5 4 F ed . App x. 1 00 (3dCir .20 02 ). Fi na ll y , th e cav al ie r m anne r in whi chMr. Pet ers pra ct ic es acco un ti ng do es no t i ns pi re o urco nf

id en ce i n h is tes ti m on y . Mr. Pet ers tes ti fie d t ha t h e was no t su re wh ethe r sa le s o f ph on e car ds were t ax ab le forsal es tax purp os es an d a dm it te d th atin st eadof r es earc hi ng th e is su e, he m erel y gu es se d. Mr . Pet ers ’ care le ss pr act ic e furth er co nt rib ut es to th e num ero us erro rs inth e fi na nc ia l s ta te m en ts an d ta x re turn s tha t h e p rep ared . For e xa m pl e, Supe rm at ’s Ju ly andAug us t 2 00 3 p ro fit
an d l os s s ta te m en ts sh owe d s al es of $ 3,2 86 an d $ 2,3 20 , res pe ct iv el y , y etit s C ity of Tem pe sal es tax returns rep orte d s al es of o nl y $1 ,00 0 a nd$8 99 , res pe ct iv el y . As an othe r ex am

pl e, Supe rm at ’s Feb ru ary 20 04 pro fitan d l os s s ta te m en t s ho wed to ta l s al es of $ 4,1 64 , y etit s St at e o f Ariz on a sa le s t ax return re po rte d t ot al sal es of
on ly $56 0. Whenqu es ti on edab ou t the se di sc rep an ci es , Mr. Pet ers adm it te d t ha t he fil edth e ci ty andSta te sal es tax returns be fo re cr eat in g t he pro fitan d l os s- 19 -

[* 19 ] st at em en ts an d t ha t h e m erel y gu es se d wh atth e sa le s amoun ts wou ldbe
. Fo r th e rea so ns st at edab ov e, we ch oo se no t t o c red itMr. Pet ers with re li ab le te st im on y . B. Mr. Ab da ll ah As t o M r. Abd al la h, we fo un d p orti on s o f hi s t es ti m on y to be in cred ib le as to m at eri al asp ect s o f th is cas e. Fo r ex am pl e, Mr. Ab da ll ahtes ti fie d t ha t h e n ev er lo ok edat h is tax returns an d tha t h e wou ldjus t wri te a ch eckfor what ev er Mr . Pet ers to ldhi m

he owed . W e fi ndithi gh ly unl ik el y th atMr. Ab da ll ah , an ex pe rie nc edbu si ne ss m anwho op erat eda pr of it ab le bu si ne ss form an y

y ears , si gn edhi s re tu rn s u nd er p en al ty of pe rjury with ou t t ak in g n ot ic e o f hi s re po rte d gr os s i nc om e. 5 C. Oth er Witn es se s As fo r Age ntSch iff

er an d M r. Rube n, we fo un d t he ir t es ti m on y to be cred ib le bu t o f li m it edhe lp fu ln es s. Ag en t Sc hi ffer ’s tes ti m on y was n othe lp fu l be cau se he was n ei th er i nv ol ve d i n t he in ve st ig at io n n or ot he rwis e p ers on al ly

On h is 19 99 th ro ug h 2 00 4 re tu rn s M r. Abd al la h re po rte d i nc om e o f 5 $1 3,8 83 for19 99 , $9 ,71 8 fo r 20 00 , $9 ,33 7 fo r 20 01 , $9 ,21 7 fo r 20 02 , $3 4,0 90 for 20 03 , and$3 0,0 35 for20 04 , forto ta l re po rte d i nc om e o f $1 06 ,28 0. Fo r th os e sa m e y ears Mr. Ab da ll ahfai le d t o re po rt c he ckcas hi ng in co m e o f $5 9,3 49 for 19 99 , $1 04 ,53 3 fo r 20 00 , $1 46 ,49 6 fo r 20 01 , $1 54 ,65 5 fo r 20 02 , $1 69 ,59 2 fo r 20 03 , and$1 55 ,70 2 fo r 20 04 , forto ta l u nr ep orte d i nc om e o f $7 90 ,32 7.- 20 -

[* 20 ] fam il ia r with the cas e. Mr. Rube n’s t es ti m on y was n othe lp fu l b ecau se hi s factua l kno wled ge was l im it edto ev en ts th atoc cu rredaft er the y ears at i ss ue . II. St atut e o f Lim it at io ns on Ass es sm en t A cen tra l i ss ue inth is cas e is whet he r th e p eri od s o f li m it at io ns on as se ss m en t h av e ex pi redforth e 1 99 9 t hr ou gh 20 03 returns . It i s u nd is pu te d t ha t pe ti ti on ers om it te d s ub st an ti al in co m e o n a ll fiv e returns su chth atth e si x- y ear li mit at io ns pe rio d s etforth insec ti on 65 01 (e) wo ul d app ly. It i s fu rth er un di sp ut edth atas t o t ho se y ears , m or e th ansi x years h av e el ap se d b etweenwhen th e returns were fi le d a ndwhen res po nd en t i ss ue d t he no ti ce o f de fic ie nc y . The is su an ce o f a v al idno ti ce o f de fic ie nc y is aness en ti al pre requi si te to th e juri sd ic ti on of t hi s C ou rt i n ade fic ie nc y act io n. Lai ng v. Un it edSta te s, 4 23 U.S. 16 1, 1 65 n.4 (19 76 ). For a no ti ce o f de fic ie nc y

to be va li d, i t m

us t b e se ntto th e ta xp ay er b efo re the pe rio d o f li m it at io ns forass es sm en t h as ex pi red . See s ec. 62 13 (a). Th eref

or e, whe th er re sp on de ntha s i ss ue d ava li d n ot ic e o f de fic ie nc y , an d c on se qu en tl y , whethe r th is Co urt h as de fic ie nc y juri sd ic ti onov er the se fiv e y ears , dep en ds onwhet he r th e li m it at io ns pe rio ds on ass es sm en t ar e li fte d u nd er se ct io n 6 50 1( c) upo n afin di ng of f rau d.- 21 -

[* 21 ] III. Sect io n 6 66 3 F rau d P en al ty Sect io n 6 66 3( a) p ro vi de s tha t “ [i]f any pa rt o f an y

un de rp aym en t o f ta x requi redto be sh own on a return i s due to frau d, the re s ha ll be ad de d t o t he tax an am ou ntequa l t o 7 5 p erce ntof the po rti onof t he un de rp aym en t tha t i s at tri bu tabl e to frau d.” A. Und erp aym en t o f Tax Inord er t o e st ab li shli ab il it y forth e fraudpe na lt y

un de r se ct io n 6 66 3( a), the Co m m is si on er m

us t p ro ve by clearan d c on vi nc in g e vi de nc e th atanun de rp aym en t of tax ex is ts . See s ec. 7 45 4( a); Ru le 14 2( b)
. Pet it io ne rs ’ un de rp aym en t o f ta x a ris es fro m th ei r un rep orte d i nc om e. In th e Co urt o f App eal s fo r th e Nin th Cir cu it , to whi chth is cas e is ap pe al ab le ab se nt th e p art ie s’ st ip ul at io n o th erwi se , see sec . 74 82 (b ), th e Co m mis si on er’s de te rm in at io n a s t o u nr ep orte d i nc om e in a no ti ce o f de fic ie nc y is pre su m ed
co rrec t o nl y

when itis supp orte d b y

a m in im al ev id en ti ary fo un da ti on , W ei m ers ki rch v. Co m

mis si on er, 5 96 F.2d35 8, 3 60 -3 61 (9t h C ir. 1 97 9) , rev ’g 67 T.C. 67 2 (1 97 7) ; s ee al so Dela ne y v. Co m m is si on er, 7 43 F.2d67 0, 6 71 (9t h C ir. 19 84 ) (s ta ti ng th atth e Co m m is si on er m

us t p ro du ce s om e subs ta nt iv e ev id en ce de m on st rat in g t ha t the tax pa y er re cei ve d u nr ep orte d i nc om e), aff ’g T.C. Mem o. 19 82 -6 66
.- 22 -

[* 22 ] On the ba si s o f ou r rev ie w of the en ti re re co rd , we fin d t ha t re sp on de ntha s pr oduc edsu ffi ci en t ev id en ce t o e st ab li sh th atpe ti ti on ers di d n otrep ort i nc om e o f $5 9,3 49 for19 99 , $1 04 ,53 3 fo r 20 00 , $1 46 ,49 6 fo r 20 01 , $1 54 ,65 5 fo r 20 02 , $1 69 ,59 2 fo r 20 03 , and$1 55 ,70 2 fo r 20 04 . For 1 99 9 t hr ou gh 20 03 th e p art ie s ha ve st ip ul at edth e ab ov e-s tate d a m ou nt s o f un rep orte d i nc om e. Fo r 20 04 pe ti ti on ers ha ve admitte d, b y vi rtu e o f th ei r 20 04 am en de d re tu rn , th atth ey fai le d to rep ort $ 15 5,7 02 of i nc om e. The p art ie s h av e al so co nc ed edon bri ef thi s un rep orte d i nc om e am ou ntfor20 04 . To pu t thi ng s i n p ers pe ct iv e, fo r th e si x y ears at i ss ue , pet it io ne rs rep orte d o n t he ir o rig in al returns to ta l i nc om e o f on ly $1 06 ,28 0, i .e., 12 %, of the ir a ctua l t ot al in co m e o f $8 96 ,60 7. On the ba si s o f th e p art ie s’ st ip ul at io ns an d c on ces si on s, we h ol d t ha t res po nd en t h as cle arl y

an d c on vi nc in gl y

est ab li sh edth e und erp aym en t el em en t o f
se ct io n 6 66 3. 6 B. Frau du le ntInt en t The Co m m is si on er m

us t p ro ve by clearan d c on vi nc in g e vi de nc e th atth e ta xp ay er fraudul en tl y

in te nd edto un de rp ay

hi s t ax es . See s ec. 7 45 4( a); Ru le

Purs ua ntto sec . 1.6 66 4- 2( c)(2 ), In co m e Tax Reg s., fo r pu rp os es of 6 as cert ai ni ng th e und erp aym en t o n wh ic h t he sec . 66 63 pe na lt y is ba se d, the tax sh own on anam en de d re turnis no t s ub st itut edforth e ta x s ho wn o n t he return a s or ig in al ly file d i f th e o rig in al return was frau du le nt .- 23 -

[* 23 ] 14 2( b) . Whe th er an un de rp aym en t o f ta x i s at tri bu tabl e to frau d i s a qu es ti on of f

actto be res ol ve d o n t he ba si s o f th e rec or d a s a wh ol e. Park s v . Co m m is si on er, 9 4 T.C. 6 54 , 66 0 (1 99 0) ; Gajews ki v. Co m m is si on er, 6 7 T.C. 1 81 , 19 9 (1 97 6) , aff’d wit ho utpubl is he d o pi ni on , 57 8 F .2d13 83 (8t h C ir. 1 97 8)
. Frau d i s d efi ne d a s the in te nt io na l co m m is si on of a n a ctor a ct s fo r th e sp eci fic pu rp os e o f ev ad in g t ax be li ev edto be owi ng . Petz ol dtv. Co m m is si on er, 9 2 T.C. 66 1, 6 98 (19 89 ). Frau du le ntin te ntis ne ve r im pu te d n orpre su m edbu t m us t al way s b e es tabl is he d b y

in de pe nd en t ev id en ce. Id . at 6 99
. 1. 20 04 7 Mr. Ab da ll ahadm it te d t o fr au d o n h is 20 04 return i n c on ne ct io n wi th hi s cri m in al cas e. As an in it ia l m at te r, we ad dr es s wh ethe r th e jud gm en t ag ai ns t M r. Abd al la h i n t he cri m in al cas e es to ps hi m fro m li ti ga ti ng th e ex is te nc e o f frau d fo r 20 04 . W e h ol d tha t i t d oe s n ot . The Ariz on a Dis tri ctCo urt ju dg m en t h el d M r. Abd al la h c riminal ly liab le
un de r se ct io n 7 20 6( 1) . Sect io n 7 20 6( 1) pro vi de s tha t an y pe rs on who “ [w]ill fu ll y m ak es an d s ub sc rib es an y return * * * whi chco nt ai ns or i s v eri fie d b y a writ te n de cl arat io n t ha t i t i s m ad e und er the pe na lt ie s o f pe rjury, andwhi chhe do es no t

The pa rti es ag ree t ha t the no ti ce o f de fic ie nc y is ti m el y for 20 04
. 7- 24 -

[* 24 ] be li ev e to be tru e an d c orrectas t o e ve ry m at eri al m at te r * * * s ha ll be gu il ty of a fel on y ”. InCo ns id in e v . Uni te d S ta te s, 6 83 F.2d12 85 , 12 87 (9th C ir. 1 98 2) , th e Co urt o f App eal s fo r th e Nin thCir cu ithe ldth ata pr io r cri m in al co nv ic ti on un de r se ct io n 7 20 6( 1) wil l n otest op a pa rty from lat er co nt es ti ng civ il frau d b ecau se an

“ in te ntto ev ad e ta xe s” was n ota ne ces sa ry ele m en t o f th e cri m in al co nv ic ti on . Thu s, M r. Abd al la h’s cr im in al co nv ic ti on un de r se ct io n 7 20 6( 1) do es no t es to p hi m fro m ch al le ng in g t he pe na lty

forciv il frau d u nd er s ect io n 6 66 3( a). The Ariz on a Dis tri ctCo urt ju dg m en t, h owe ve r, al so in co rp or at edth e te rm s of th e p le a ag reem en t, an d a s p artof t he pl ea ag reem en t M r. Abd al la h a dm it te d th athe “ in te nt io na ll y

un de rrep orte d [h is ] in co m e * * * inord er t o p ay les s i n ta xe s” . There fo re, Mr . Abd al la h h as adm it te d t o fr au d- -i.e ., th athe in te nt io na ll y un de rrep orte d i nc om e fo r th e sp eci fic pu rp os e o f ev ad in g t ax . See Pet zo ld t v . Co m m is si on er, 9 2 T.C. at69 8 (“ Frau d i s d efi ne d a s an in te nt io na l wro ng do in g de si gn edto ev ad e ta x b el ie ve d t o b e o win g.” ).

2. 19 99 to 20 03 Si nc e fraudis rare ly adm it te d a ndth e ta xp ay er’s i nt en t i s ra rel y av ai labl e, frau d m ay

be pro ve n b y

cir cum st an ti al ev id en ce an d re as on ab le in fere nc es dra wn fro m th e fac ts . Brad fo rdv. Co m m is si on er, 7 96 F.2d30 3, 3 07 (9t h C ir. 1 98 6) ,- 25 -

[* 25 ] aff’g T.C. Me m o. 1 98 4- 60 1. Whethe r frau d e xi st s i n agi ve n s itua ti onis a factua l d et erm in at io n t ha t m us t b e m ad e aft er re vi ewin g t he pa rti cu lar fac ts an d ci rcu m st an ces of the cas e. Bu ss el l v . Comm is si on er, T.C. Mem o. 2 00 5- 77 , 89 T.C.M. (CC H) 10 32 , 10 38 (20 05 ), aff’d, 2 62 Fed . App x. 7 70 (9t h C ir. 2 00 7)
. The in te ntto co nc eal or m is le adm ay be in ferr edfro m

a pa tt ernof c on du ct . See S pi es v. Un it edSta te s, 3 17 U.S. 49 2, 4 99 (19 43 ). Fro m 19 99 th ro ug h 2 00 4 Mr. Ab da ll ah ’s bu si ne ss pra ct ic es an d p at te rnof b eh av io r di d n otm at eri al ly ch an ge . There fo re, Mr . Abd al lah’s ad m is si on th athe in te nt io na ll y un de rrep orte d in co m e fo r th e sp eci fic pu rp os e o f ev ad in g t ax for20 04 is cir cu m st an ti al ev id en ce of hi s fr au du le ntin te ntfor19 99 th ro ug h 2 00 3. Inde te rm in in g wh ethe r a t ax pay er h adth e requi si te frau du le ntin te nt , cou rts ha ve als o re li edon cert ai n i nd ic ia(ba dg es ) of frau d. Th es e b ad ge s i nc lu de : (1 )
un de rs ta ti ng in co m e; (2) m ai nt ai ni ng in ad equa te reco rd s; (3) fai li ng to fil e ta x returns ; (4 ) gi vi ng im

pl au si bl e o r in co ns is te ntex pl an at io ns of b eh av io r; ( 5)
co nc eal in g a ss et s; (6) fai li ng to co op erat e with t ax auth or it ie s; (7) en ga gi ng in il le ga l ac ti vi ti es ; (8 ) at te m pt in g t o c on ceal il le ga l ac ti vi ti es ; an d (9 ) de al in g i n cas h. Br ad fo rdv. Co m

m is si on er, 7 96 F.2dat 3 07 -3 08 . The p res en ce o f se ve ral ba dg es is pe rs ua si ve cir cum st an ti al ev id en ce o f frau d. Bu ss el l v . Comm is si on er,- 26 -

[* 26 ] 89 T.C.M. (CCH) a t 1 03 8. Se ve ral ba dg es of f rau d e xi stinth is cas e whi ch cl earl y an d c on vi nc in gl y

est ab li sh frau d i n a ll fiv e y ears . a. Und ers ta ti ng Inc om e Mr. Ab da ll ahcas he d m il li on s o f do ll ars ’ worth of c he ck s t ot al in g $1 3,9 88 ,07 4 i n 1 99 9, $ 20 ,73 6,7 07 in20 00 , $2 6,7 13 ,92 8 i n 2 00 1, $ 28 ,75 1,9 65 in 20 02 , and$2 8,8 39 ,44 2 i n 2 00 3. Pe ti ti on ers adm itth atth ey fai le d t o re po rt c he ck
cas hi ng in co m e o f $5 9,3 49 for19 99 , $1 04 ,53 3 fo r 20 00 , $1 46 ,49 6 fo r 20 01 , $1 54 ,65 5 fo r 20 02 , and$1 69 ,59 2 fo r 20 03 . In co nt ras t, o n t he ir o rig in al returns pe ti ti on ers rep orte d i nc om e o f on ly $13 ,88 3 fo r 19 99 , $9 ,71 8 fo r 20 00 , $9 ,33 7 fo r 20 01 , $9 ,21 7 fo r 20 02 , and$3 4,0 90 for20 03 . To pu t thi ng s i n p ers pe ct iv e, pe ti ti on ers rep orte d m erel y 19 % of t he ir i nc om e fo r 19 99 , 9% fo r 20 00 , 6% fo r 20 01 , 6% fo r 20 02 , and17 % for20 03 . Peti ti on ers ’ om it te d i nc om e, whi ch
co m pl et el y dwar fs th e in co m e th atth ey di d re po rt, c on st itut es stro ng ev id en ce o f frau d. Park s v . Comm is si on er, 9 4 T.C. at66 4 (“ A pat te rnof c on si st en t un de rrep orti ng of i nc om e, es pe ci al ly whe n a cco m pa ni edby oth er ci rcu m st an ces sh owi ng anin te ntto co nc eal , just ifi es th e in fere nc e o f frau d.” ); B ran so n v . Co m m is si on er, T.C. Mem o. 2 01 2- 12 4, 1 03 T.C.M. (CCH) 1 68 0, 1 68 6 (2 01 2) (“ A pa tt ernof s ub st an ti al ly und erre po rti ng in co m e fo r se ve ral y ears is stro ng ev id en ce of frau d, p art ic ul arl y

if the reas on forth e und ers tate m en ts is no t s at is fact or il y- 27 -

[* 27 ] ex pl ai ne d o r du e to in no cen t m is ta ke .”); Po wers te in v. Co m m is si on er, T.C. Mem o. 2 01 1- 27 1, 1 02 T.C.M. (CCH) 4 97 , 51 5 (2 01 1) (fi nd in g s tro ng ev id en ce o f frau du le ntin te ntwher e, ov er a p eri odof f iv e y ears , “pe ti ti on ers fai le d t o re po rt o r acco un t fo r m or e th an$4 50 ,00 0 o f in co m e”). Mo reo ve r, Mr. Ab da ll ahcert ifi edun de r pe na lt y of p erjury

th athe rev ie wed hi s re tu rn s an d t ha t t o t he be stof h is kn owl ed ge hi s re turn s wer e tr ue , correct , and
co m pl et e. Havi ng rev ie wedhi s re turn s, M r. Abd al la h m us t h av e se enth athe 8 rep orte d s ig ni fic an tl y

les s i nc om e th anhe was a ctua ll y m ak in g. Mr. Ab da ll ahkn ew hi s ch eckcas hi ng in co m e was subs ta nt ia l fo r th e fo ll owi ng reas on s. Fi rs t, Mr . Abd al la h kne w th atfees ge ne rat edfro m hi s ch eck
cas hi ng bu si ne ss were h is pri m ary so ur ce o f in co m e, with wh ic h h e si ng le ha nd ed ly sup po rte d h is wife an d t hr ee ch il dr en(fo ur ch il dr enin20 03 an d 20 04 ). Seco nd , pet it io ne rs m ad e subs ta nt ia l i nv es tm en ts , parti al ly w ith t he ir o wn fund s. Fo r ex am

pl e, in 20 00 an d 2 00 3 p et it io ne rs pu rch as edtwo pi eces of r eal pr op erty for$1 38 ,00 0 a nd$2 34 ,38 4 a ndm ad e d ownpa ym en ts of $ 7,5 00 an d $4 6,8 77 , res pe ct iv el y , with t he ir o wn fu nd s. Th ird , pet it io ne rs m ad e m on th ly
By si gn in g t he returns , Mr. Abd al la h c ert ifi edth at“ [u ]nde r pe na lt ie s o f 8 pe rjury, I decl are tha t I h av e ex am in edth is return a ndacco m pa nyin g s ch edul es an d s tate m en ts , andto th e b es t o f m y kn owl ed ge an d b el ie f, th ey are tru e, co rrec t, an d c om pl et e.”- 28 -

[* 28 ] m ortg ag e p aym en ts of $ 85 2- -i.e ., ann ua l p aym en ts of $ 10 ,22 4- -o n the ir
res id en ce atW . Dub li n S t. To p utth in gs inpe rs pe ct iv e, du rin g 1 99 9 t hr ou gh 20 03 pe ti ti on ers pa idm or e in m ortg ag e an d d ownpa ym en ts alo ne th anth ey rep orte d a s i nc om e.

b. Mai nt ai ni ng Ina de qu at e Rec or ds Tax pa y ers are re qu ire d t o k eep su chreco rd s as are n eces sa ry for th e de te rm in at io n o f ta x. Se e se c. 60 01 . W e fi ndth atMr. Ab da ll ah ’s reco rd s wer e po or , in ad equa te , andin co m pl et e. On b rie f, pe ti ti on ers co nc ed e th atMr. Ab da ll ah

“ di d n otke ep co nt em

po ran eo us reco rd s o f th e fee s h e co ll ect edwhen he cas he d ch eck s” , th athi s re co rdke ep in g was de fic ie nt , andth at“ [t]he re i s n o d oubtth at Mr. Ab da ll ahwas apo orreco rdke ep er”. Fu rth er, Mr . Abd al la h t es ti fie d t ha t ev ery m on th he th rew al l o f Supe rm at ’s reco rd s- -i.e ., ban k s ta te m en ts , comm is si on ch eck s, p ur ch as e rec ei pt s, an d c he ckstub s- -to ge th er i n abo x wh ic h h e th enga ve to Mr. Pet ers . W ith t he ex cep ti on of s om e b an k s ta te m en ts , th es e rec or ds are n ow lo st . At al l t im es be fo re the y were l os t, the se reco rd s wer e ei th er i n M r. Abd al la h’s p os se ss io n o r in th e p os se ss io n o f anag en t u nd er h is co nt ro l. Fu rth er, Mr. Ab da ll ahfai le d t o k eep reco rd s o f th e ch eck s h e cas he d, h is fees earn ed , or an y ot he r rec or ds for

hi s ch eckcas hi ng act iv it y . Mr. Abd al la h’s fa il ur e to
m ai nt ai n a de qu at e rec or ds is in di cat iv e o f frau d. Se e, e.g ., Sco ttv. Co m m is si on er,- 29 -

[* 29 ] T.C. Mem o. 2 01 2- 65 , 10 3 T.C.M . (CCH) 1 31 0, 1 31 7 (2 01 2) (fi nd in g ta xp ay er’s “ fai lure t o k eep or p ro du ce ad equa te reco rd s t o s up po rt h is tax return po si ti on s t o b e anin di ci um of f rau d” ).
c. Giv in g Implau si bl e o r In co ns is te ntExp la na ti on s o f Beh av io r As we s ta te d e arl ie r, Mr. Ab da ll ahcla im edin cred ib ly tha t h e n ev er l oo ke d athi s t ax returns . Mr. Abd al la h, h owe ve r, cert ifi edun de r pe na lt y of p erjury

th at he rev ie wedhi s re tu rn s an d t ha t t o t he be stof h is kn owl ed ge , hi s re turn s wer e true , co rrec t, an d c om

pl et e. Thu s, ei th er h e li edto th e IRS on hi s re tu rn s o r he li edto th is Co urt dur in g tria l. Eve n i f we were t o c red itMr. Ab da ll ah ’s tes ti m on y th athe di d n otrev ie w hi s re tu rn s (wh ic h we d o n ot ), ex pe rie nc e an d c omm on sen se ren de r itdi ffi cu ltfor
us to be li ev e th ata reas on ab le pe rs on wou ldno t h av e n ot ic edth athi s re po rte d t ax li ab il it ie s wer e o rd ers of m ag ni tu de lo wer tha n wh aton e wou ldex pe ctfro m hi s earn in gs . For t he si x years a t i ss ue , Mr. Abd al la h p ai d z ero in co m e ta x b utha d
ne arl y $9 00 ,00 0 o f to ta l i nc om e. W il lfu l i gn or an ce an d re ck le ss di sr eg ardof t he tru th are ci rcum st an ti al ev id en ce o f frau d. Se e Uni te d S ta te s v . Hend ers on , 72 1 F.2 d 2 76 , 27 9 (9 th Cir . 19 83 ) (fi nd in g t ha t wi ll fu l i gn or an ce i ns tru ct io ns ha ve be enfou ndap pr op ria te infrau d c as es ) (ci ti ng Uni te d S ta te s v . Hanl on , 54 8 F .2d- 30 -

[* 30 ] 10 96 , 11 00 n.7 (2dCir . 19 77 ) (h ol di ng th ata factfin de r m ay in fer fr au d fro m reck le ss di sr eg ardof t he tru th )). Fi na ll y an d s ig ni fic an tl y , Mr. Abd al la h s ub mit te d l oan app li cat io ns to Sp ectru m Fin an ci al Group i n 2 00 2 a nd20 03 wher ei n h e rep res en te d t ha t h e was m ak in g $ 9,0 00 a m on th --i .e. $1 08 ,00 0 ay ear- -th ro ug h S up erm at . In co nt ras t, Mr . Abd al la h s ub m it te d t ax returns in20 02 an d 2 00 3 re pr es en ti ng th athe m ad e o nl y $9 ,21 7 a nd$3 4,0 90 th ro ug h S up erm at , res pe ct iv el y . Stro ng ev id en ce o f frau du le ntin te ntex is ts wher e th e ta xp ay er re po rts subs ta nt ia ll y hi gh er i nc om e o n hi s l oa n app li cat io ns th anonhi s Fe de ral in co m e ta x re tu rn s. See Po wers te in v. Co m m is si on er, 1 02 T.C.M. (CCH) a t 1 51
. Mo reo ve r, by sig ni ng bo th ap pl ic at io ns , Mr. Abd al la h t wice cert ifi edth at th e in fo rm at io n h e p ro vi de d was co rrec t an d t wice ackno wled ge d t ha t
m is rep res en ta ti on s co ul d re su ltina vi ol at io n o f 18 U.S.C. sec . 10 01
. In e ss en ce, 9 Mr. Ab da ll aheit he r m ad e fraudul en t re pr es en ta ti on s t o t he IRS u nd er p en al ty of pe rjury or h e m ad e fraudul en t re pr es en ta ti on s t o S pe ctru m Fin an ci al Group i n vi ol at io n o f 18 U.S.C. sec . 10 01 , or b oth.

W e n ot e th ata vi ol at io n o f 18 U.S.C. sec . 10 01 (20 06 ) is a Fed eral cri m in al 9 of fen se , whi chco ul d re su ltinim pr is on m en t fo r up to fiv e y ears . Howev er, as th e is su e is no t b efo re the Co urt, we d o n otad dr es s wh ethe r Mr. Ab da ll ah ’s lo an ap pl ic at io ns res ul te d i n s uc h avi ol at io n.- 31 -

[* 31 ] Hav in g e st ab li sh edth atMr. Ab da ll ahkn ew he was u nd erre po rti ng in co m e, we ne edno t m ak e a g reatleap t o c on cl ud e th atMr. Ab da ll ahin te nd edto un de rp ay hi s t ax es . Whe n fi na nc ia l i nc en ti ve s ex is te d fo r hi m to rep ort h ig h i nc om e, su ch
as on lo anap pl ic at io ns , Mr. Abd al la h re po rte d s ig ni fic an t m on th ly inc om e. Whe n fin an ci al in cen ti ve s ex is te d fo r hi m to rep ort l ow i nc om e, su chas o n h is tax returns , Mr. Abd al la h re po rte d m in im al in co m e. Fo r th e fo reg oi ng reas on s, re sp on de ntha s cl earl y an d c on vi nc in gl y es tabl is he d t ha t M r. Abd al la h h arb or edfrau du le ntin te nt . C. Po rti on of Un de rp aym en t At tri bu tabl e to Frau d Onc e th e Co m

m is si on er “ es tabl is he s tha t an y po rti on of a n 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 edas a ttrib ut ab le to frau d, ex cep t wi th res pe ctto any po rti on of t he un de rp aym en t, wh ic h t he tax pa y 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.” Sec. 66 63 (b ); s ee al so Sch arri ng haus env. Co m mis si on er, T.C. Mem o. 2 01 2- 35 0, at *3 5 (“ [The Co m

m is si on er] nee d o nl y

pro ve cle arl y

an d c on vi nc in gl y

th atth ere i s a de fic ie nc y

an d ‘at l eas t s om e p artof t he de fic ie nc y was due to frau d.’” (quo ti ng Cl arkv. Co m

m is si on er, 2 66 F.2d69 8, 7 17 (9t h C ir.1 95 9) , rem an di ng T.C. Mem o.1 95 7- 12 9) ). Res po nd en t h as est ab li sh edby clearan d c on vi nc in g e vi de nc e th atat l eas t p artof e ach of M r. Abd al la h’s u nd erp aym en ts is att rib ut ab le to frau d.- 32 -

[* 32 ] In a dd it io n, M r. Abd al lah h as fai le d t o e st ab li shby a prep on de ran ce o f th e ev id en ce tha t an y

po rti on of a ny un de rp aym en t i s n otatt rib ut ab le to frau d. Thus , Mr. Ab da ll ah ’s ent ire un de rp aym en t fo r eac h o f 19 99 th ro ug h 2 00 4 i s at tri bu tabl e to frau d. Fi na ll y , bec au se we fin d t ha t p et it io ne rs ’ returns for19 99 th ro ug h 2 00 3 were fr au du le nt , th e li m it at io ns pe rio d o n a ss es sm en t i s l ift edun de r se ct io n 65 01 (c). Th eref

or e, th e n ot ic e o f de fic ie nc y was v al idan d t he Co urt h as de fic ie nc y

juri sd ic ti on ov er the se fiv e y ears . IV. Refu ndof P et it io ne rs 20 02 , 20 03 , and20 04 Paym en ts Und er the tax reg im e Co ng res s cr eat ed , “ Co ng res s h as * * * es tabl is he d a de ta il edrefundsch em e th atsubjec ts co m pl ai ni ng tax pay ers to vario us requi rem en ts be fo re the y canbri ng su it .” Uni te d S ta te s v . Cli nt woo d El kh orn Mi ni ng Co ., 55 3 U.S. 1 , 11 (20 08 ). In p os tp aym en t ci rcu m st an ces , “ [a] tax pa y er se ek in g arefu ndof t ax es erro ne ou sl y or u nl awfu ll y

ass es se d o r co ll ect edm ay br in g a n a ct io n a ga in stth e Gov ern m en t ei th er i n Un it edSta te s d is tri ctco urt o r in th e Uni te d S ta te s C ou rt o f Fed eral Cla im s.” Id . at 4 (ci ti ng 28 U.S.C. sec
. 13 46 (a)( 1) ). In c on tra st , th e Tax Co urt’s p rin ci pa l juris di ct io n i s o ve r pr ep aym en t

“ de fic ie nc y

cas es ”, pu rs uantto sec ti on 62 13 (a).- 33 -

[* 33 ] W ith re ga rdto th e Tax Co urt’s o ve rp aym en t juris di ct io n, s ect io n 6 51 2( b) (1 ) pr ov id es : [I]f th e Tax Co urt fi nd s tha t the re i s n o d efi ci en cy an d fu rth er fi nd s th atth e ta xp ay er h as m ad e anov erp aym en t o f in co m e ta x fo r th e sa m e ta xabl e y ear * * * or f in ds th atth ere i s a d efi ci en cy bu t tha t the ta xp ay er h as m ad e anov erp aym en t o f su chtax , th e Tax Co urt s ha ll ha ve juri sd ic ti on to de te rm in e th e am ou ntof s uc h o ve rp aym en t * * * The ex is te nc e o f de fic ie nc ie s fo r 20 02 , 20 03 , and20 04 is un di sp ut ed
. Rathe r, th e p art ie s d is pu te th e ex is te nc e o f anov erp aym en t o f ta x. Se ct io n 66 65 (a)( 2) pro vi de s tha t “ an y refe ren ce i n thi s t it le [26 of t he Uni te d S ta te s C od e (to whi chsec ti on 65 12 be lo ng s) ] to ‘ ta x’ im po se d b y th is ti tl e sh al l b e d eem ed al so to refe r to th e ad di ti on s t o t he tax , add it io na l am ou nt s, an d p en al ti es pro vi de d by thi s ch ap te r.” There fo re, anov erp aym en t o f ta x u nd er s ect io n 6 51 2( b) (1 ) 1 0 requi res paym en t i n e xc es s o f th e d efi ci en cy pl us an y pe na lt ie s an d a dd it io ns to ta x. Pe ti ti on ers ’ vo lu nt ary pa ym en ts of $ 45 ,66 9 fo r 20 02 , $4 7,3 81 for20 03 , and $3 1,9 59 for20 04 do no t co m e cl os e to co ve rin g t he ir d efi ci en ci es of $ 45 ,66 9 fo r 20 02 , $4 7,3 81 for20 03 , and$3 1,9 59 for20 04 pl us th e 7 5% fr au d p en al ti es . 1 1 Co ns eque nt ly, th ere i s n o o ve rp aym en t o f ta x fo r 20 02 , 20 03 , or 2 00 4, an d t hi s

“ [T]his ch ap te r” re fers to Ch ap te r 68 , Add it io ns to th e Tax , Add it io na l 1 0 Am ou nt s, an d As se ss ab le Pen al ti es , to whi chsec . 66 63 be lo ng s. On b rie f, res po nd en t co nc ed es th es e reduc edde fic ie nc y am ou nt s fo r 20 02 , 1 1 20 03 , and20 04
.- 34 -

[* 34 ] Co urt l ack s juris di ct io n t o o rd er a re fundof p et it io ne rs ’200 2, 2 00 3, o r 20 04 pa ym en t. See sec . 65 12 (b )(1 ) an d (2 ). V. Mr. Pe te rs ’ Subp oe na Res po nd en t s ub po en aedMr. Pet ers to co m pe l h im to tes ti fy at tria l. Res po nd en t s erv edMr. Pet ers with t he subp oe nabu t d idno t p ro vi de pe ti ti on ers or th e Co urt wi th pro of

of s erv ic e. Pet it io ne rs all eg e th atres po nd en t fa il edto fol lo w th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e, cl ai m res ul ti ng pre

jud ic e, an d s eek to strik e Mr. Pe te rs ’ te st im on y . Res po nd en t ar gu es th athe is su edMr. Pet ers ’
subp oe nainacco rd an ce wi thth e Ru le s. Res po nd en t s erv edMr. Pet ers with t he subp oe nabu t d idno t p ro vi de pro of of servi ce t o t he Co urt. Ru le 21 (b )(3 ) pr ov id es th atth e p ers on servi ng a subp oe na

“ sh al l m ak e p ro of

th ereo f to th e Co urt p ro m pt ly andinan y

ev en t wi th in th e ti m e in whi chth e p ers on serve d m us t re sp on d.” Rul e 2 1( b) (3 ) fu rth er p ro vi de s tha t

“ Fai lu re t o m ak e p ro of

of s erv ic e d oe s n otaffe ctth e v al id it y of t he servi ce.” W e fi ndth atres po nd en t v io la te d R ul e 2 1 b y no t p ro vi di ng pro of

of s erv ic e to th e Co urt. Ho wev er, we d ecl in e to strik e Mr. Pe te rs ’ te st im on y be cau se pe ti ti on ers were n otpre

jud ic ed . Res po nd en t l is te d M r. Pet ers as apo te nt ia l witne ss inhi s p retria l m em or an du m . Furt he r, ab se nta cl ai m of p riv il eg e, whi ch- 35 -

[* 35 ] pe ti ti on ers ha ve no t as se rte d, n ot hi ng ba rs Mr. Pet ers fro m tes ti fy in g o n res po nd en t’s b eh al f witho utbe in g s ub po en aed
. 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 redun de r Ru le 15 5.