T.C. Memo. 1997-374

UNITED STATES TAX COURT

STANLEY L. WADE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

STANLEY L. AND JANET WADE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 4623-94, 4703-94. Filed August 18, 1997.

J. Jay Bullock and Karen Bullock Kreeck, for petitioners.

Joel A. Lopata, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Respondent determined deficiencies in and

additions to petitioners’ joint Federal income taxes and a

deficiency in and additions to petitioner Stanley Wade’s

(petitioner’s) individual Federal income tax, as follows:
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Stanley L. and Janet Wade

Docket No. 4703-94 

 Additions to Tax 

Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661

1982 $131,240 $65,620 * $32,810

1983 156,291 78,146 * 39,073

* 50 percent of interest due on portion of 

 underpayment attributable to fraud.

Stanley L. Wade

Docket No. 4623-94

 Additions to Tax 

Year Deficiency Sec. 6651(a)(1) Sec. 6654

1984 $133,837 $33,459 $8,415

Unless otherwise indicated, 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.

After settlement of some issues, the issues for decision

are: (1) Whether petitioners are liable for the fraud and other

additions to tax, (2) whether petitioner may deduct $230,137 of

claimed business expenses, and (3) whether the period of

limitations bars assessment of the tax deficiencies and additions

to tax for 1982, 1983, and 1984. 

FINDINGS OF FACT

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

petitions were filed, petitioners resided in Salt Lake City,

Utah. 
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During the years in issue, petitioners, as sole proprietors,

owned and operated an apartment rental business in the Salt Lake

City metropolitan area. Petitioners owned seven apartment

complexes consisting of a total of 482 rental units. Petitioners

generally shared responsibility for operating the apartment

rental business and for maintaining and managing the apartments. 

Petitioners did not keep formal books and records with

regard to their apartment rental business, nor did petitioners

hire a bookkeeper or accountant to maintain any books and

records. 

The only records that petitioners maintained of income

relating to their apartment rental business consisted of reports

from apartment managers. The only records that petitioners

maintained of expenses relating to their apartment rental

business consisted of canceled checks and copies of bills. 

Apparently, petitioners maintained no journals or ledgers

relating to their apartment rental business.

On each of March 4, September 29, September 30, and

December 30, 1983, petitioners purchased from various banks a

certificate of deposit, each in the amount of $100,000.

For 1982 and 1983, petitioners prepared for their income tax

return preparer handwritten summaries with respect to rental

income and expenses relating to petitioners' apartment rental

business. On the summary sheets, petitioners' rental income and

most expenses for each year were indicated using the seven
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apartment managers' reports, petitioners' canceled checks, and

the bills. 

Before these summary sheets, however, were given to the

income tax return preparer, petitioner reduced the figures

reflected thereon for rental income by altering the figures that

were initially reflected on the sheets. Petitioner did not

inform his wife nor the income tax return preparer that he had

reduced the figures on the summary sheets for the rental income. 

For 1982 and 1983, the summaries given to the income tax

return preparer did not reflect separate items for repair and

maintenance expenses relating to petitioners' apartment rental

business. 

To prepare petitioners’ Federal income tax returns for 1982

and 1983, petitioners’ income tax return preparer used the above

handwritten summaries reflecting the reduced rental income

figures that petitioner had entered thereon. The income tax

return preparer did not perform any accounting for petitioners,

and he did not have access to any books and records relating to

petitioners' apartment rental business.

On Schedule E of their Federal income tax returns for 1982

and 1983, petitioners claimed specific deductions in the

respective amounts of $265,389 and $350,474 for repair and 

maintenance expenses relating to their apartment rental business. 

Petitioners' 1982 and 1983 joint Federal income tax returns

were filed respectively on April 15, 1983, and April 12, 1984,
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and petitioners’ 1982 and 1983 joint Federal income tax returns

reflected that petitioners owed no Federal income tax.

On audit for 1982 and 1983, respondent determined that

petitioners, on their 1982 and 1983 joint Federal income tax

returns, fraudulently understated their income from their

apartment rental business, and respondent determined for those

years the fraud additions to tax and the substantial

understatement addition to tax.

Respondent's notice of deficiency for petitioners’ tax years

1982 and 1983 was mailed to petitioners on December 15, 1993. 

Respondent's separate notices of deficiency to petitioners for

1984 were also mailed on December 15, 1993. 

Petitioner Janet Wade did not file a petition as to the

notice of deficiency she received for 1984.

During respondent's audit, on April 23, 1993, petitioners

submitted to respondent a copy of a Form 1040 (U.S. Individual

Income Tax Return) that purported to be a copy of petitioners’

1984 joint Federal income tax return that was allegedly filed by

petitioner in 1988 and that reflected a tax due of $386. 

At the time of trial, respondent's computer records

indicated that neither petitioner had filed a Federal income tax

return for 1984 and that neither petitioner had paid any income

tax for 1984. Respondent did not accept or treat the above Form

1040 as "filed" by petitioners in 1993 because the document
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reflected only a copy of petitioner's signature and did not

reflect a signature of petitioner Janet Wade. 

 For 1984, petitioner claims a business expense deduction in

the amount of $230,137 with regard to a consulting fee allegedly

paid to Profiteer Corp. 

On April 12, 1989, as a result of a criminal tax

investigation with regard to petitioners’ Federal income tax

liabilities for 1982 and 1983, petitioners were charged under

section 7206(1) with filing false Federal income tax returns. On

March 26, 1990, the charges against petitioner Janet Wade were

dismissed. Petitioner, however, pleaded guilty to the charges,

and on June 12, 1990, a judgment was entered against petitioner

for the above offenses. 

The parties herein have agreed to the correct amount of

apartment rental income that petitioners should have reported on

their 1982, 1983, and 1984 Federal income tax returns. The

following schedule reflects, for 1982, 1983, and 1984, the rental

income from petitioners' apartment rental business that was

reported on petitioners' joint Federal income tax returns and the

correct rental income as now agreed to by the parties:

 Rental Income As Rental Income As

Year Reported Agreed To 

1982 $1,000,339 $1,244,386

1983 1,125,890 1,380,080

1984 1,407,818* 1,407,818

* This figure reflects income as reported on petitioners’ 

 purported 1984 joint Federal income tax return.
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 OPINION

To establish fraud, respondent has the burden of proving by

clear and convincing evidence that a taxpayer underreported the

correct tax liability and that the taxpayer's underreporting was

due to fraudulent intent. Sec. 7454(a); Rule 142(b); Clayton v.

Commissioner, 102 T.C. 632, 646 (1994); Recklitis v.

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

With regard to fraudulent intent, respondent is required to

prove that a taxpayer intended to evade taxes by conduct intended

to conceal, mislead, or otherwise prevent the collection of

taxes. Zell v. Commissioner, 763 F.2d 1139 (10th Cir. 1985),

affg. T.C. Memo. 1984-152; Parks v. Commissioner, 94 T.C. 654,

661 (1990); Hebrank v. Commissioner, 81 T.C. 640, 642 (1983). 

Generally, fraud is established by circumstantial evidence

because direct evidence of fraud is not available. Clayton v.

Commissioner, supra at 647; Rowlee v. Commissioner, 80 T.C. 1111,

1123 (1983). Courts have developed certain indicia of fraud,

including the following: (1) Understatement of income;

(2) inadequate books and records or alterations of books and

records; (3) failure to file income tax returns; (4) implausible

or inconsistent explanations of behavior; (5) concealed assets;

and (6) failure to cooperate with tax authorities. Bradford v.

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

Memo. 1984-601. 
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Although not dispositive, a conviction for filing false

Federal income tax returns under section 7206(1) is evidence of

fraudulent intent. Wright v. Commissioner, 84 T.C. 636, 643-644

(1985).

Where false or fraudulent Federal income tax returns are

filed with an intent to evade tax, the normal 3-year period of

limitation on assessment does not apply. Sec. 6501(c). Also,

the 3-year period of limitation on assessment does not begin to

run unless a taxpayer’s Federal income tax return is delivered to

and received by respondent. Walden v. Commissioner, 90 T.C. 947,

951 (1988). 

Where a joint Federal income tax return was filed, a finding

that fraud was committed by either spouse keeps the period of

limitation on assessment open with respect to both spouses. 

Vannaman v. Commissioner, 54 T.C. 1011, 1018 (1970).

Generally, taxpayers bear the burden of proving that they

are entitled to claimed deductions. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Taxpayers are expected to

maintain adequate records to substantiate claimed deductions. 

Sec. 6001. In carrying on a trade or business, only ordinary and

necessary business expenses are deductible. Sec. 162(a).

For 1982 and 1983, petitioners argue that they did not

fraudulently intend to evade their correct Federal income tax

liabilities. Petitioners argue that the reductions petitioner

made to the rental income on the summary sheets were based on
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advice he received from his income tax return preparer and that

the reductions represented repair and maintenance expenses of the

apartment rental business that were netted against rental income.

Petitioners also argue that the income tax return preparer

incorrectly, and without their knowledge, decided to deduct on

Schedule E of their income tax returns repair and maintenance

expenses without notifying petitioners. Petitioners argue

further that when they signed and filed their 1982 and 1983 joint

Federal income tax returns, they did not know that the returns

effectively double claimed repair and maintenance expenses and

underreported income from the apartment rental business.

For 1982 and 1983, respondent argues that petitioners

fraudulently understated income from their apartment rental

business on their joint Federal income tax returns and

accordingly that no period of limitations on assessment is

applicable to those years. 

Petitioners agree that for 1982 and 1983 they understated

their taxable income from their apartment rental business and

that they underpaid their Federal income taxes. Accordingly, 

petitioners’ underpayment of their Federal income taxes for 1982

and 1983 is established. 

The evidence indicates and we so conclude that, on the 1982

and 1983 summary sheets, petitioner made the reductions to rental

income from petitioners' apartment rental business to reduce or

eliminate petitioners’ Federal income tax liabilities. Neither
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petitioner Janet Wade nor petitioners' income tax return preparer

was informed of the reductions made by petitioner. 

Petitioner's alleged justification for the reductions on the

summary sheets (namely, to net repair and maintenance expenses

against rental income) is contradicted by the separate deductions

claimed on petitioners’ returns for such expenses. Petitioners'

testimony that the separate deductions for repair and maintenance

expenses were claimed on their returns by their income tax return

preparer without their knowledge is not believable, and we reject

such testimony.

For 1982 and 1983, petitioners maintained inadequate records

with regard to their apartment rental business.

In 1983, petitioners purchased certificates of deposit

totaling $400,000, while petitioners reported on their joint

Federal income tax returns no taxable income for both 1982 and

1983.

Also, for 1982 and 1983, petitioner pleaded guilty to filing

false Federal income tax returns.

On the evidence before us, we conclude that for 1982 and

1983 petitioner intentionally attempted to evade petitioners’

correct joint Federal income tax liabilities, and we sustain

respondent's imposition of the fraud additions to tax against

petitioner.
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 Petitioner’s educational background and his lack of training

in accounting and business do not preclude our imposition of the

fraud additions to tax.

We do not sustain the fraud additions to tax with respect to

petitioner Janet Wade for 1982 and 1983. The evidence does not

establish that petitioner Janet Wade participated in, or knew of,

petitioner's alterations to the summary sheets. 

In light of our finding of fraud as to petitioner for 1982

and 1983, the period of limitations does not bar assessment of

deficiencies against petitioners for those years.

Section 6661 provides for an addition to tax where an

understatement in tax exceeds 10 percent of the tax required to

be shown on the return or $5,000. Sec. 6661. Petitioners have

made no separate argument regarding this addition to tax for 1982

and 1983, and we sustain respondent’s determination thereof. 

For 1984, petitioner apparently argues that the copy of the

Form 1040 that he submitted to respondent in 1993 purportedly

represents a copy of petitioners’ 1984 joint Federal income tax

return that petitioner claims was actually filed in 1988. Thus,

petitioner argues that the period of limitations for 1984 had

expired by the time respondent mailed to petitioner on

December 15, 1993, the notice of deficiency for 1984. 

Alternatively, petitioner argues that for 1984 he is entitled to
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deduct $230,137 as an ordinary and necessary business expense

with respect to funds allegedly paid to Profiteer Corp.

For 1984, respondent argues that petitioner failed to file a 

Federal income tax return, that no period of limitations on

assessment is applicable, and that petitioner has not met his

burden of proving that he paid $230,137 to Profiteer Corp. for

consulting services. 

The evidence indicates that petitioners did not file their

1984 Federal income tax return in 1988 and that the period of

limitations for assessment of tax for 1984 remained open when

respondent mailed to petitioner the notice of deficiency for

1984. Therefore, we conclude that for 1984 the period of

limitations does not bar respondent’s assessment of a deficiency

for that year. 

We also conclude that petitioner is not entitled to deduct

for 1984 the claimed $230,137 consulting fee allegedly paid to

Profiteer Corp. Petitioner has not adequately substantiated the

fact of payment or the nature of the claimed fee. Petitioner's

testimony regarding the claimed fee is contradictory and not

credible.

The addition to tax under section 6651(a)(1) for 1984

applies unless the taxpayer shows that the failure to file an

income tax return was due to reasonable cause and not due to

willful neglect. Sec. 6651(a)(1). Petitioner contends that he
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was instructed by his income tax return preparer not to file any

Federal income tax returns during respondent’s criminal

investigation of petitioners’ 1982 and 1983 returns. Petitioner,

however, has offered no explanation for not filing his 1984

income tax return immediately after the conclusion in 1990 of the

criminal tax proceedings against him. We sustain respondent’s

determination of this addition to tax.

Finally, we sustain for 1984 respondent’s determination

under section 6654 of the addition to tax for the failure of

petitioner to pay estimated taxes. Petitioner did underpay

estimated taxes with regard to income earned in 1984, and

petitioner does not meet any of the exceptions to the requirement

to pay estimated taxes. Sec. 6654(d).

To reflect the foregoing, 

Decisions will be entered

under Rule 155.