1 These cases have been consolidated for trial, briefing and

opinion.

T.C. Memo. 2008-195 

UNITED STATES TAX COURT

MIGUEL AND TRINIDAD ROBLETO, Petitioners v.

 COMMISSIONER OF INTERNAL REVENUE, Respondent

 MIGUEL ROBLETO, Petitioner v.

 COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 10945-06, 10946-06.1 Filed August 18, 2008.

Jan Pierce, Daniel Kleid (specially recognized), and 

Darin Wisehart (specially recognized), for petitioner Miguel 

Robleto.

Trinidad Robleto, pro se.

Kelley A. Blaine, for respondent.
-2-

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: For 2000, 2001, and 2002 respondent

determined deficiencies in petitioners’ joint Federal income

taxes, additions to tax, and fraud as follows:

Year Deficiency

Addition to tax

Sec. 6651(a)(1)

 Penalty 

Sec. 6663

2000 $79,029 $19,757 $59,272

2001 231,209 57,508 172,551

2002 175,997 --- 131,998

Respondent also determined a deficiency in petitioner Miguel

Robleto’s (Miguel) 2003 individual Federal income tax, additions

to tax, and a fraudulent failure to file as follows:

 Additions to Tax Penalty 

Deficiency Sec. 6651(a)(2) Sec. 6654 Sec. 6651(f)

 

 $211,139 * $5,849 $153,075 

 * To be computed.

All section references are to the Internal Revenue Code in

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

Tax Court Rules of Practice and Procedure.

The primary issues for decision involve the amount of gross

receipts Miguel received each year in his business and whether

the fraud penalties determined by respondent should be sustained

against Miguel. Additional issues for 2000, 2001, and 2002

relating to whether petitioner Trinidad Robleto should be charged
-3-

with any portion of the fraud penalties we sustain and whether

petitioner Trinidad Robleto is entitled to relief from joint

liability under section 6015(f) from joint liability for tax

deficiencies, additions to tax, and penalties have been separated

for trial and are not addressed herein. Consistently therewith,

in this opinion we generally do not refer to petitioner Trinidad

Robleto.

FINDINGS OF FACT

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

At the time the petition was filed, petitioners lived in

Oregon. 

From approximately 1988 until sometime in 1996 Miguel was

employed by the Oregon Department of Motor Vehicles (DMV) as a

counter clerk and as an administrator of written tests relating

to safe driving laws and practices. Those tests are required to

obtain Oregon drivers’ licenses.

From 1996 until late 1999 Miguel had a number of jobs

working for Home Depot and Goodwill Industries and in

construction working with concrete. Miguel was not well

educated, and until 2000 Miguel had not owned a business. Miguel

was not familiar with accounting and bookkeeping, and he was not

trained in business management. 

Even though tests for Oregon drivers’ licenses were

administered by DMV without a fee or charge to applicants, in
-4-

2000 the Oregon DMV initiated a pilot program to allow approved

third-party examiners to administer the required DMV written

knowledge and behind-the-wheel driving tests and to charge fees

for their services. This program was initiated on account of

difficulties many Spanish-speaking individuals had in obtaining

Oregon drivers’ licenses. In particular delays often occurred at

DMV in finding someone who could speak Spanish to explain the

drivers’ license application process and to administer in Spanish

the written and the driving tests. It was the objective of DMV

that through the pilot program and the additional Spanish

language assistance which would be available through third-party

examiners the number of immigrant Spanish-speaking individuals

who would obtain Oregon drivers’ licenses would greatly increase. 

During the years involved, in order to obtain an Oregon

driver’s license applicants had to show proof of: (1) Their

name; (2) their date of birth; (3) their Oregon residency; and

(4) passing grades on the DMV written test and the behind-thewheel 2.7-mile driving test. Applicants did not have to prove

they were legal residents of the United States.

On January 20, 2000, Miguel was approved by DMV to own and

to operate a business that would participate in the DMV pilot

program. Miguel’s business name was Drive Master Examiners

(DME). In view of his employment background with the DMV and his
-5-

fluency in Spanish, Miguel viewed this pilot program as an

excellent opportunity to establish his own business. 

Miguel formed and operated DME as a sole proprietorship, and

from early 2000 through 2003 DME was extremely profitable. 

Occasionally, busloads of migrant farm workers would arrive from

Oregon fields to take the driving tests administered by DME.

Upon successful completion of the tests administered by DME,

customers would take to DMV a written statement which DME had

given them verifying that they had passed the written and the

driving tests, and they would obtain their drivers’ licenses.

During 2000 and the first 10 months of 2001 DME conducted

the written tests and the driving tests. In late 2001 DMV

required third-party examiners such as DME to stop offering the

written tests. Thereafter through November of 2003 DME continued

to offer the behind-the-wheel driving tests. 

Generally, DME customers used their own automobiles to take

the driving tests. However, where a DME customer did not have

access to an automobile to use for the driving test, for an

additional fee Miguel would allow the customer to rent from him

the van he owned in 2000 and 2001 or the Toyota Camry he owned in

2002 and 2003.

In 2000 and 2001, because most DME customers did not want to

use a large van to take their driving tests and because most DME
-6-

customers had their own vehicles, only about 10 percent of DME

customers rented Miguel’s van for the driving tests.

In 2002 and 2003, when Miguel owned the Toyota Camry, more

DME customers were willing to rent Miguel’s Camry to take their

driving tests, and Miguel’s rental of the Camry to customers for

that purpose increased to approximately 25 percent of all

customers who took the driving test in 2002 and to approximately

30 percent of all customers who took the driving test in 2003.

DME used two other individuals, Manuel and Hilda, to assist

in conducting driving tests, and the fees received for their

services were shared 50/50 with Miguel. 

Under the DMV pilot program, in 2000, 2001, 2002, and 2003

DME conducted more than 27,000 written tests and driving tests

for customers, and thousands of Spanish-speaking individuals

obtained Oregon drivers’ licenses through DME.

Monthly, DME was required to report to DMV the results of

each written and each driving test administered and whether each

customer passed or failed the test. The monthly reports DME

submitted to DMV indicate that during 2000, 2001, 2002, and 2003

DME (through Miguel, Manuel, and Hilda) conducted a total of both

the written and the driving test as follows:
-7-

 Year and Number of Tests 

 Name 2000 2001 2002 2003

 Miguel 2,895 5,859 4,016 4,666

 Manuel 350 2,866 3,450 3,467

 Hilda 74 --- —-- --- 

 Total tests 3,319 8,725 7,466 8,133

Unfortunately, the monthly reports DME prepared and

submitted to DMV were not required to and did not report the

amounts of the fees DME received for administering the tests. 

For a few months in 2003 petitioner Trinidad Robleto began

giving, and charging a fee for, classroom instruction relating to

safe driving laws and practices. Each classroom session

generally consisted of 10 to 12 students. 

Also during the years before us, DME apparently offered for

an additional fee some behind-the-wheel driver training, but the

evidence does not indicate the extent thereof.

Miguel generally worked 6 days a week primarily

administering driving tests. 

As stated, the monthly logs submitted to DMV did not include

the amounts of fees DME received in each year, and the evidence

before us is somewhat conflicting and incomplete in that regard. 

Some evidence indicates that Miguel charged $25 for each driving

test. Other evidence indicates that he charged $36 or $40 for a

driving test. Some customers appeared to have been charged $80

for a driving test and a classroom session. A few customers
-8-

appear to have been charged as much as $195, apparently for a

combination of the services DME offered. 

Occasionally Miguel offered discounts to customers who could

not afford to pay the fees DME charged. Migrant workers and

students under 21 years of age apparently were often given

significant fee discounts.

Complicating our fact finding as to the amounts of fees and

income Miguel received through DME is the fact that other than

the logs submitted monthly to DMV Miguel did not maintain any

regular books and records regarding DME. In particular, no

records were maintained of fees charged, income earned, or

expenses incurred in the business. 

Also complicating our task is the fact that most of the fees

DME charged its customers were received in cash. Miguel retained

large amounts of cash throughout his home and in his automobile,

and he deposited large amounts of cash into his bank accounts at

three different banks. Miguel paid many expenses in cash. 

Using records obtained from the banks, it is established

that most of the bank deposits that Miguel made relating to fees

collected by DME indicate that the fees DME received from

customers generally were in the range of $25 to $40.

Some DME customers paid with checks, and approximately 1 to

2 percent of all deposits made into Miguel’s bank accounts

represented deposits of checks. Bank records relating to
-9-

petitioners’ bank accounts reflect that most of the checks

deposited into Miguel’s bank accounts were in the amount of

approximately $40. 

A number of times during 2000, 2001, and 2002 the Oregon

Depart of Transportation audited various third-party examiners

who were participating in the program in which DME was

participating and determined that the average third-party

examiner was charging approximately $35 for a driving test and an

additional $25 where the customer rented the examiner’s

automobile. 

In 2002 Miguel used cash from DME to make a downpayment on

and to purchase a parcel of real estate in Hillsboro, Oregon. 

Miguel purchased the property, but the title thereto was placed

in Miguel’s brother’s name. 

Miguel titled in his brother’s name the van and the Camry

that he purchased.

During the years in issue Miguel took his family on

vacations to Italy, Hawaii, and Nicaragua. 

From March 2000 to August 2003 Miguel withdrew from his bank

accounts at Bank of America a total of $313,022.

At trial Miguel estimated that his best guess of the gross

receipts of DME was between $249,000 and $436,800 a year. 

As a side activity, Miguel prepared some tax returns for DME

customers for a fee. 
-10-

As stated, for each year in issue Miguel maintained no

record-keeping system nor any records of the fees and of the cash

he received in his business. Miguel kept essentially no records

of the expenses incurred. Miguel did not use a cash register,

and he did not provide receipts to his customers. 

Into three separate bank accounts Miguel made a number of

$10,000 cash deposits; and Miguel made a point of discussing with

Bank officials his understanding that because the cash deposits

were not over $10,000, no reporting of the deposits was needed. 

In April 2003 Miguel and petitioner Trinidad Robleto

untimely filed their 2000 and 2001 joint Federal income tax

returns and Miguel timely filed his 2002 Federal income tax

return; all three returns had been prepared by an accountant

Miguel hired. The accountant prepared the tax returns in 2003

using incomplete and estimated information Miguel provided to

him. Miguel provided the preparer with no business records of

DME and told the preparer that the figures he (Miguel) provided

were estimates of his income and expenses. 

Miguel did not provide the accountant with a DME general

ledger or other business records. Miguel did not provide the

accountant with the number of driving tests conducted each year

or the fees charged for the tests. Miguel did not disclose to

the accountant the fact that he (Miguel) also prepared tax

returns for a fee. 
-11-

On the 2000, 2001, and 2002 Federal income tax returns

Miguel reported gross receipts of $34,939, $58,080, and $80,860,

respectively, or total gross receipts for all 3 years of only

$173,879. 

For 2003 Miguel has never filed a Federal income tax 

return. Generally, Miguel estimated expenses claimed on the 

tax returns from canceled checks written during the year.

In September 2003 officials of the Federal Office of

Immigration & Customs Enforcement (Customs Enforcement) and

Oregon law enforcement investigated Miguel on suspicion that

Miguel was creating and selling false documents to his customers

showing they were residents of Oregon. Search warrants were

executed on petitioners individually and on petitioners’ home,

DME’s office, bank accounts, and the Camry automobile. As a

result of the search warrants, Customs Enforcement seized from

Miguel a total of $898,629 in cash, computers, and the limited

records that were found. The cash seized from Miguel was found

in the following locations:

 Location Amount 

A safe in petitioners’ home $474,745

3 Bank of America accounts 191,717

2 Wells Fargo accounts 119,925

2 U.S. Bank accounts 88,338

Miguel’s automobile 13,000

Miguel’s wallet 3,231

Trinidad Robleto’s purse 2,500

Floor of petitioners’ home 470

Other 4,703
-12-

The $898,629 in cash that was seized was money Miguel had

received in his business. At the time of the seizures Miguel

informed Customs Enforcement and/or Oregon law enforcement

officials that he charged each of his customers a total of $80 if

the customer took a driving test and rented his vehicle for the

test ($40 for the driving test and $40 for the car rental).

As indicated, bank records relating to DME business

activities and to Miguel’s banking activities that were obtained

during the seizure and through summonses served on the banks

reflected that the amounts of most checks deposited into Miguel’s

bank accounts during the years in issue ranged from $25 to $46. 

On September 20, 2004, Miguel was indicted in Oregon State

court on various criminal counts relating to the operation of

DME.

After a bench trial in November 2005, Miguel was acquitted

of all charges brought against him. In the judgment of

acquittal, the Oregon State court ordered that the $898,629 in

cash seized from Miguel be returned to Miguel unless subject to a

levy by respondent.

Immediately upon Miguel’s acquittal, respondent initiated a

jeopardy audit of petitioners’ joint 2000, 2001, and 2002 Federal

income tax returns and of Miguel’s 2003 individual Federal income

taxes. 
-13-

As a result of the audit, respondent determined that Miguel

underreported his gross receipts from DME on his 2000, 2001, and

2002 Federal income tax returns and that Miguel’s income from DME

for 2003 was substantial, requiring Miguel to file a 2003 Federal

income tax return. 

In calculating Miguel’s income from DME and using the

monthly logs which Miguel submitted monthly to DMV, respondent

charged Miguel with $80 in income for each test listed on the

monthly logs, even though respondent’s revenue agent knew that

Miguel had told Customs Enforcement that his fee was $40 per

driving test and an additional $40 only if a customer rented

Miguel’s vehicle to take the test. On audit respondent did not

attempt to estimate and did not charge Miguel with any additional

fee income for car rentals, for behind-the-wheel driver training,

for classroom instruction, and for tax return preparation. 

On January 16, 2006, respondent made jeopardy assessments

based on the above audit against petitioners relating to their

2000, 2001, 2002, and 2003 Federal income taxes in a total amount

of over $1 million. Pursuant to a jeopardy levy that was

executed, respondent seized the $898,629 being held by Customs

Enforcement and applied it to the Federal income taxes,

penalties, and interest assessed against petitioners. 

During respondent’s audit, Miguel did not cooperate with

respondent. 
-14-

Respondent determined that petitioners for 2000, 2001, and

2002 and Miguel for 2003 had total gross receipts from DME,

unreported gross receipts, and tax deficiencies as follows:

Reported Sch C Redetermined Unreported Tax deficiency

Year gross receipts gross receipts gross receipts determined 

2000 $34,939 $265,520 $230,581 $79,029

2001 58,080 699,120 641,040 231,209

2002 80,860 597,280 516,420 175,997

2003 --- 650,640 650,640 211,139 

On March 9, 2006, respondent mailed to petitioners the

notice of deficiency for 2000, 2001, and 2002 and to Miguel the

notice of deficiency for 2003 in which respondent determined the

above tax deficiencies and the fraud penalties and additions to

tax for each year.

With regard to the fraud penalties, respondent determined

that all of the tax deficiencies for each year were attributable

to fraud of both Miguel and petitioner Trinidad Robleto. Also,

as an alternative to the fraud penalties for each year,

respondent determined that petitioners for 2000, 2001, and 2002

and Miguel for 2003 were liable for the negligence additions to

tax on the entire tax deficiency for each year.

Respondent also made a number of other computational

adjustments to petitioners’ reported expenses and deductions none

of which is in dispute. 

Respondent now acknowledges that on the basis of the trial

evidence it would be appropriate to lower the amount of DME’s fee
-15-

2 Petitioners make no argument that they qualify for a shift

in the burden of proof under sec. 7491(a).

income to at least $46 per driving test in 2000, 2001, and 2002,

not the $80 per test that respondent used for each year in the

notices of deficiency. However, on brief respondent stands on

his determinations of DME’s gross receipts and the tax deficiency

determined for each year, which are based on the evidence that

petitioner earned additional income from car rentals, from

behind-the-wheel driver training, from classroom instruction, and

from tax return preparation that was not included in any amount

in respondent’s income figures reflected in the notices of

deficiency.

OPINION

Generally, as to the proper calculation of taxpayers’

income, taxpayers bear the burden of proof, and the

Commissioner’s determinations are entitled to a presumption of

correctness. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933); Durando v. United States, 70 F.3d 548, 550 (9th Cir.

1995). The Commissioner’s use of indirect methods to establish

or to estimate a taxpayer’s income may be imprecise, but errors

do not necessarily render the computation arbitrary. Marcello v.

Commissioner, 380 F.2d 509 (5th Cir. 1967), affg. T.C. Memo.

1964-303 and T.C. Memo. 1964-304.2 
-16-

Where the Commissioner asserts a civil tax fraud penalty,

the Commissioner bears the burden of proving fraud by clear and

convincing evidence. Sec. 7454(a); Rule 142(b). As applicable

to the instant case, to establish civil tax fraud respondent must

prove that Miguel underreported his Federal income tax liability

for each year and that the underreported tax, or a part thereof,

was attributable to fraudulent intent on Miguel’s part.

As to the other penalties and additions to tax at issue,

under section 7491(c) respondent bears the burden of production.

Miguel’s Income

Under section 6001 taxpayers are required to maintain

records that enable the Commissioner to determine the taxpayers’

correct Federal income taxes. If taxpayers do not maintain or

provide the Commissioner with adequate records, the Commissioner

may reconstruct their income using various methods of proof. 

Sec. 446(b); Holland v. United States, 348 U.S. 121, 130-132

(1954); Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965); McHan

v. Commissioner, T.C. Memo. 2006-84. One method the Commissioner

may use to reconstruct a taxpayer’s income is described as the

unit method of proof. See, e.g., Salami v. Commissioner, T.C.

Memo. 1997-347; Maltese v. Commissioner, T.C. Memo. 1988-322;

Stanoch v. Commissioner, T.C. Memo. 1959-132. Under the unit

method of proof, income is determined or estimated by multiplying
-17-

known prices for business transactions in which the taxpayer

engaged by the number of business transactions.

For purposes of calculating Miguel’s income from DME and his

Federal income tax liabilities for the years in issue, the

dispute centers primarily around the amounts of the fees DME

charged its customers for the written and driving tests. As

stated, in his notices of deficiency respondent simply multiplied

the number of tests reflected in the logs DME submitted to DMV

each year by $80. Miguel does not seriously dispute the number

of tests reflected in respondent’s calculations. Miguel

contends, however, that all the evidence indicates that DME’s fee

was only $25 per test in 2000, $35 per test in 2001, and $40 per

test in 2002 and 2003, and that only 10-35 percent of the

customers paid Miguel an extra rental fee for use of Miguel’s van

or Camry. 

Petitioners make additional arguments as to why the fees

used in respondent’s calculations of the tax deficiencies are

overstated. Petitioners note that many customers (particularly

migrant workers and students) received discounts from Miguel and

paid no more than $25 per test and rarely a rental fee, that some

customers at the time they took the tests did not have the full

amount of cash for the fee that was due and never paid Miguel the

balance, and that fees associated with the tests administered by
-18-

Miguel’s assistants were split one-half with the assistants,

resulting in Miguel’s receiving only approximately $25 therefor.

Respondent makes additional arguments as to why the $80 per

test used in his calculations of petitioners’ income and tax

deficiencies should be sustained even though the evidence is

clear that $80 per test significantly overstates DME’s fee in a

large majority of the cases. Respondent notes that Miguel

obviously had additional income not included in any amount in

respondent’s calculations (namely, income from the rental of

Miguel’s van or Camry, income from behind-the-wheel driver

training, income from classroom instruction, and income from

Miguel’s tax return preparation activity). Respondent argues

that even though we have no clue as to the amount of such

additional income, the mere fact that Miguel concedes some such

income justifies the $80-per-test amount used in respondent’s

deficiency calculations for each year.

The evidence is certainly unclear as to the amounts of the

fees DME received from its customers. We summarize below some of

the evidence relating just to the amounts of the fees DME charged 

customers and the apparent related service:

 

 
-19-

 Source of evidence Nature of service Fee

Miguel’s statements before 

trial Driving test $40

Driving test & car rental 80

Miguel’s trial testimony:

 For 2000 Driving test 25

Driving test & car rental 50

 For 2001 Driving test 35

Driving test & car rental 70

 For 2002-2003 Driving test 40

Driving test & car rental 80

 Migrant workers Driving test & car rental 25

 Students under 21 Driving test 25

Driving test & car rental 50

Trial witness Written & driving tests 25

DME May 2003 advertisement Driving test 40

Under-21 driving test 25

Most bank deposits Written & driving tests 25-46

We note other evidentiary problems in establishing the fees

DME received. Some customers who took the tests did not pay for

them. Some customers wrote checks for the tests but their checks

bounced, and DME never was paid. Miguel occasionally offered

customers special discounts based on, for example, inability to

pay. 

Without records, we certainly are disadvantaged in our

effort to calculate petitioners’ correct income for the years

before us with any precision and confidence. We think it

significant, however, that respondent’s revenue agent
-20-

3 We do not charge Miguel with $163,370 in estimated fee

income relating to classroom instruction provided by petitioner

Trinidad Robleto in 2003. For 2003 petitioners did not file a

joint Federal income tax return, and the evidence is inadequate

(continued...)

acknowledged at trial that on the basis of the trial evidence a

fee closer to $40 per test would be more appropriate than the $80

used for each year in respondent’s notices of deficiency.

On brief Miguel recomputes for 2000, 2001, and 2002, and he

computes for 2003, his income for each of the 4 years in issue. 

Over the 4-year period, Miguel computes a total cumulative gross

income of $1,041,722, which reflects and acknowledges a 4-year

understatement of gross receipts of over $860,000. We largely

agree with Miguel’s revised computations. They are largely

consistent with the credible evidence. Rather than respondent’s

approach of sticking with the erroneous $80-per-test figure in

lieu of using reasonably accurate per-test fee amounts and making

estimates based on the evidence of other income, Miguel’s

recomputations make reasonable estimates of fee income from car

rentals and classroom instruction. 

In summary, Miguel now calculates and the evidence

indicates, and we so find, that in 2000, 2001, 2002, and 2003

Miguel received gross receipts from written and driving tests he

administered and a share of the gross receipts from tests

administered by Manuel and Hilda and fees for car rentals in the

following amounts and calculated as follows:3
-21-

3(...continued)

to charge any portion of petitioner Trinidad Robleto’s estimated

total fees for classroom instruction to Miguel.

Miguel’s test fees and rentals:

 2000 2001 2002 2003 

 

No. of written tests $1,102 $4,375 --- ---

Rate @ 25 25 --- ---

 Receipts 27,550 109,375 --- ---

No. of driving tests 1,793 1,484 $4,016 $ 4,666

Rate @ 32 35 40 40

 Receipts 57,376 51,940 160,640 186,640

No. of car rentals 10% 179 148 --- ---

Rate @ 32 35 --- ---

Receipts 5,728 5,180 --- ---

No. of car rentals 25% --- --- 1,004 ---

Rate @ --- --- 40 ---

Receipts --- --- 40,160 ---

No. of car rentals 30% --- --- --- 1,400

Rate @ 40

Receipts --- --- --- 56,000

 Total gross receipts $90,654 $166,495 $200,800 $242,640

Miguel’s share of Manuel & Hilda’s test fees:

 2000 2001 2002 2003 

No. of Manuel’s tests $350 $2,866 $3,450 $3,467

 Rate @ 32 34 40 40

 Receipts 11,200 97,444 138,000 138,680

 Miguel’s 1⁄2 share 5,184* 45,067* 63,820* 64,140*

No. of Hilda’s tests $74 --- –-- –-- 

 Rate @ 32 --- --- ---

 Receipts 2,368 --- --- ---

 Miguel’s 1⁄2 share 1,184 --- --- --- 

 

 

 * Discounted by approximately 7 percent for nonpaying customers.

In a more summary format, the total fees to be charged to

Miguel in each year are as follows:
-22-

 Source 2000 2001 2002 2003 

Knowledge tests $27,550 $109,375 --- ---

Driving tests 57,376 55,448 $200,800 $242,640

Miguel’s share of Hilda’s fees 1,184 --- --- ---

Miguel’s share of Manuel’s fees 5,728 45,067 63,820 64,140

 Total gross fees $97,022 $209,890 $264,620 $306,780 

For 2000, 2001, and 2002 respondent made only computational

adjustments to petitioners’ reported expense deductions and

exemptions, and any dispute with regard thereto will be addressed

in the Rule 155 computations. For 2003 Miguel claims $46,533 in

current business expenses and $3,300 in depreciation on the

Toyota Camry he purchased in 2001 for $16,500. At trial

respondent did not challenge these claimed expenses for 2003, and

we allow them.

Fraud Penalties

Fraudulent intent is defined as “‘actual, intentional

wrongdoing, and the intent required is the specific purpose to

evade a tax believed to be owing.’” Estate of Temple v.

Commissioner, 67 T.C. 143, 159 (1976) (quoting Mitchell v.

Commissioner, 118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A.

424 (1939)). Whether respondent has established Miguel’s

fraudulent intent is to be analyzed on the basis of all of the

facts and circumstances in evidence. See Stratton v.

Commissioner, 54 T.C. 255, 284 (1970). 

Fraud is never to be imputed or presumed. However, “its

proof may depend to some extent upon circumstantial evidence, and
-23-

may rest upon reasonable inferences properly drawn from the

evidence of record.” Stone v. Commissioner, 56 T.C. 213, 224

(1971); see also Rowlee v. Commissioner, 80 T.C. 1111, 1123

(1983); Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982),

affd. 748 F.2d 331 (6th Cir. 1984).

Courts have developed several objective “badges” of fraud, 

including: (1) Dealing in cash; (2) inadequate records; (3)

concealment of assets; (4) understatement of income; and

(5) failure to cooperate with tax authorities. Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601. 

Miguel concedes and we have concluded that for 2000, 2001,

and 2002 Miguel substantially underreported his income and his

taxes and that he earned substantial income in 2003 and was

required to file a 2003 Federal income tax return. Thus, with

regard to the fraud, we need only decide whether Miguel’s

underreporting for 2000, 2001, and 2002 and nonfiling for 2003

were due to fraudulent intent.

Miguel argues that he was overwhelmed by all the customers

he had, that he was totally inept in handling the financial

aspects of his business, that he could not even pay his utility

bills on time, that he had unopened envelopes of cash lying

around his home and office, and that the preparation and filing

of his and his wife’s 2000, 2001, and 2002 joint Federal income
-24-

tax returns surely constituted negligence, perhaps even gross

negligence, but not fraud. For 2003 Miguel contends that because

of the seizure of his records in the fall of 2003, he had no

records or other information with which he could file his 2003

Federal income tax return, and he did not get the records back

until sometime in 2006.

The evidence as to badges of fraud in this case are strong--

substantial unreported income, inadequate books and records,

concealment of ownership of assets, cash transactions, and cash

hoarding. 

Dealing in large amounts of cash and not keeping any records

thereof often go hand in hand with intentional underreporting of

income and taxes. Noteworthy are Miguel’s placement of assets in

nominee names and Miguel’s lack of cooperation. 

Miguel’s cash on hand, assets purchased, and vacations taken

are not consistent with total gross receipts reported on the

2000, 2001, and 2002 tax returns of only $173,879. Cash of

$898,629 was seized from petitioners in the fall of 2003. 

Petitioners’ Bank of America accounts show disbursements of

$313,022. These available funds of over $1.2 million are

approximately $1.1 million more than the gross receipts reported

on petitioners’ tax returns for 4 years before us.

We emphasize that even using petitioners' and our
-25-

recalculation of Miguel’s income, for the 4-year period a

cumulative understatement is reflected of over $860,000.

Miguel relies on Westby v. Commissioner, T.C. Memo. 2004-

179, in which the taxpayer maintained extensive records of income

and expenses and cooperated in the Commissioner’s audit for the

years in issue and in which the Commissioner had not conducted a

comprehensive audit. Westby provides no support to Miguel. 

Miguel emphasizes how busy he was, that he could not be

bothered with record keeping and taxes. 

Respondent emphasizes that Miguel himself was a tax return

preparer and that he hired an accountant to prepare his tax

returns for 2000, 2001, and 2002 but knowingly failed to provide

the preparer with adequate records to prepare accurate returns. 

Respondent adds that over a 4-year period Miguel failed to

maintain records of business income, appears to have structured

bank deposits to avoid cash reporting requirements, and Miguel

used nominee names in purchasing property to hide his ownership

of the properties from tax and other law enforcement authorities.

For the reasons stated by respondent, we sustain

respondent’s determination against Miguel of the fraud penalties 

for 2000, 2001, 2002, and 2003, and we conclude that the fraud

penalties apply to the entire tax deficiency for each year that

we sustain herein.
-26-

With regard to 2003, the evidence is clear and convincing

that Miguel’s failure to file for 2003 was caused by the same

fraudulent intent that caused him to file erroneous 2000, 2001,

and 2002 Federal income tax returns.

Section 6651(a)(1) and (2) and Section 6654 Additions to Tax

Miguel makes no specific arguments contesting the above

additions to tax, and we sustain each of them. See Funk v.

Commissioner, 123 T.C. 213, 217-218 (2004). 

Decisions will be entered

under Rule 155.