T.C. Mem o. 2 01 3- 12 2

UNITED STAT ES TAX COURT

FRANK I. BOHANNON AN D JULIE L. BOHANNON , Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 15 95 6- 06 . File d M ay 7, 2 01 3.

Ro be rt E. Mc Ken zi e, Kath le enM. Lach , andAdam S. Fayne , for pe ti ti on ers . Tim ot hy ShawnSin no tt , Tim ot hy A. Loh rs to rfer , andBri anM. Harri ng to n, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION FOLEY, Jud ge : Th e is su es for de ci si on are wh ethe r res po nd en t i ss ue d a no ti ce o f de fic ie nc y

withi n the ap pl ic ab le li m it at io ns pe rio d, an d i f so , whet he r- 2 -

[* 2] pe ti ti on ers are l iabl e fo r de fic ie nc ie s an d fr au d p en al ti es rel at in g t o 1 99 2, 19 93 , 19 94 , and19 95 (y ears inis su e). FINDINGS OF FACT Mr. Bo ha nn on , a jack- of

-al l-trad es en tre pr en eur, own edan d o pe rat ed va rio us bu si ne ss es du rin g the y ears inis su e. Thes e b us in es se s i nc lu de d: two Sch edul e C co m

pa ni es ; s ev eral subc hapt er S co rp or at io ns ; a p artne rs hi p; an d se ve ral so le pro pr ie to rs hi ps . The co m pani es , forwhi chpe ti ti on ers rep orte d in co m e an d e xp en se s o n S ch edul es C, Pro fitor Lo ss Fro m Bu si ne ss , pro vi de d t ax return p rep arat io n s erv ic es an d s ol d a ndlea se d v ari ou s i te m s (e .g., car s an d ho us eh ol d i te m s) . Pet it io ne rs own edap pr ox im at el y 35 acre s o f la nd , hal f of

whi chwas ti ll ab le , anden te redin to a sh arec ro pp in g a rran ge m en t wi th a lo cal farm er. Purs ua ntto th is arrang em en t, Mr . Boh anno n p ur ch as edsee ds an d fe rti li zer a nd th e farm er p lant edan d h arv es te d c ro ps . Mr. Bo ha nn on als o a tt em pt edto rai se 1 cat fis h i n apo ndon pe ti ti on ers ’ land . In 1 99 3, h e h ire d J on es Fis h Hat ch ery (J on es Fis h) to co ns ul t o n thi s v en tu re. Mr. Bo ha nn on fol lo wedJo ne s Fi sh ’s
Mr. Bo ha nn on an d the farm er were , pu rs ua ntto th ei r arra ng em en t, ea ch 1 res po ns ib le forha lf o f th e co st s o f th ei r ve ntur e an d e nt it le d t o h al f of th e cro ps . Mr. Bo hann on als o p rep aredhi s l an d fo r pl an ti ng , cle aredbru sh , andap pl ie d fert il iz er.- 3 -

[* 3] reco m

m en da ti on s, dred ge d t he po nd , st oc ke d t he po ndwith s ev eral types of fis h, an d u se d a n a erat orto en su re s uf fic ie ntox y ge na ti on . Inth e la te 19 80 s, M r. Bo ha nn on be ga n t o s uf fer fr om ul cera ti ve co li ti s, a ch ro ni c an d i nc ur ab le di se as e. To treathi s d is eas e, du rin g t he y ears inis su e h e to okm ed ic at io ns whi chadve rs el y affe ct edhi s ac um en , att itud e, an d e ndur an ce. Mr. Bo hann on de ci de d t o wo rkfro m ho m e an d, as pa rt o f a l arg er h om e rem od el in g p ro

ject, ad de d aho m e o ffi ce. Lim it edby his co nd it io n, M r. Bo ha nn on reque st edth atMrs . Boh an no n a ss is t wi th bo okke ep in g. Mr s. Bo ha nn onwas a nu rs e an d h adno bo okke ep in g o r bu si ne ss ex pe rie nc e. Neve rth el es s, s he ag reed to writ e ch eck s an d c la ss ify exp en di tu res rel at in g t o h is bu si ne ss es . Peti ti on ers m et ic ul ou sl y

ret ai ne d re cei pt s an d re co rd edjourn al en tri es , bu t M rs . Boh an no n in co rrec tl y

cla ss ifi ednu m ero us ex pe nd itur es . For e xa m pl e, sh e cl as si fie d ex pe nd itur es rel at in g t o arch it ectur al servi ces , cab in et s, co nt ract orservi ces , and babysit ti ng , res pe ct iv el y , as p ro fes si on al fees , supp li es , rep ai rs , andjani to ria l ex pe ns es . Mr. Bo ha nn on be li ev edth atMrs . Boh anno n was co rrec tl y cla ss ifyin g ex pe nd itur es an d d idno t re vi ew he r bo okke ep in g. Altho ug h M rs . Boh an no n t oo k re sp on si bi li ty for b oo kk eep in g, M r. Bo ha nn on , a cert ifi edtax pra ct it io ne r, m ai nt ai ne d re sp on si bi li ty for p et it io ne rs ’ ta x re turnpre pa rat io n. He u se d the y eare ndnu m be rs Mrs . Boh an no n p ro vi de d t o- 4 -

[* 4] pr ep are h is bu si ne ss es ’ ta x re tu rn s an d p et it io ne rs ’ joi ntFo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return. Mr s. Bo ha nn on ’s mis cl as si fic at io ns cau se d pe ti ti on ers to im

pr op erl y cla im nu m ero us pe rs on al ex pe nd itur es as b us in es s ex pe ns es . InJan uary

19 96 , res po nd en t b eg anau di ti ng pe ti ti on ers ’ 19 92 an d 1 99 3 bu si ne ss an d p ers on al tax returns , anddu rin g t he au di t p et it io ne rs fil edth ei r 19 94 an d 1 99 5 t ax returns . Rev enue Agen t Dea n C rawfo rd(RA Cra wfo rd ) in te rv ie wed Mr. Bo hann on sev eral ti m es bu t d idno t i nt erv ie w Mrs . Boh anno n. InMay 199 6, RA Crawf

or d a ndRev enue Agen t Dan O’ Su ll iv an(RA O’Sull iv an ) vi si te d pe ti ti on ers ’ ho m e to in ve st ig at e th ei r farm in g a ct iv it ie s. Durin g t he vi si t M r. Bo ha nn onin fo rm edth e ag en ts ab ou t h is sh arec ro pp in g a rran ge m en t an d h is cat fis h fa rm in g a ct iv it ie s. Th e rev enue ag en ts di d n otex am in e th e cat fis h p on d, an d the sh arec ro pp er h adno t yet pl an te d c ro ps . InOcto be r 19 96 , res po nd en t as si gn edSp eci al Agen t St ev e Perro n (Ag en t Perr on ) an d R ev enue Agen t Kar enSh eel y (RA Sh eel y ) to in ve st ig at e whe th er pe ti ti on ers ha d e ng ag edincri m in al tax ev as io n. As pa rt o f th e in ve st ig at io n Age ntPerro n re vi ewedba nkreco rd s, i nc lu di ng dra ft d oc um en ts rel at in g t o t he y ears inis su e th atMr. Bo ha nn on ha d s ub m it te d t o o bt ai n l in es of c red it . Thes e do cu m en ts refl ect edm or e in co m e th anwas re po rte d t o re sp on de nton pe ti ti on ers ’- 5 -

[* 5] ta x re tu rn s re la ti ng to th os e y ears . Peti ti on ers als o s ub mitte d re cei pt s o f th ei r ex pe nd itur es to RA Sh eel y , who de te rm in edth atm an y it em s wer e in co rrec tl y rep orte d o n p et it io ne rs ’ ta x re tu rn s an d p erfo rm eda so ur ce an d app li cat io n o f fund s an al y si s t o re co ns tru ctpe ti ti on ers ’ in co m e. On M ay 18 , 20 06 , res po nd en t s en t p et it io ne rs a no ti ce o f de fic ie nc y . Res po nd en t d et erm in edth atpe ti ti on ers ha d u nd ers ta te d t ax ab le in co m e b y $0 , $2 2,5 00 , $1 71 ,71 3, an d $ 15 7,9 63 rel at in g t o 1 99 2, 1 99 3, 1 99 4, an d 1 99 5, res pe ct iv el y . Res po nd en t furth er d et erm in edth atpe ti ti on ers ha d d efi ci en ci es of $3 7,2 68 , $4 5,4 36 , $8 8,1 16 , and$1 30 ,57 7 re la ti ng to 19 92 , 19 93 , 19 94 , and19 95 , res pe ct iv el y . In ad di ti on , res po nd en t d et erm in edth atpe ti ti on ers were l iabl e fo r se ct io n 6 66 3 fr au d p en al ti es . On Au gu st16 , 20 06 , pet it io ne rs , whi le res id in g i n 2 In di an a, fi le d the ir p et it io n wi th th e Co urt. Tri al inth is cas e co m m en ced Sep te m be r 10 , 20 12 . On Oct ob er 1 1, 2 01 2, the Co urt fi le d t he pa rti es ’ st ip ul at io n of set tl edis su es , whi chpro vi de d t ha t p et it io ne rs are en ti tl edto ad di ti on al de du ct io ns an d c red it s (i .e., whi chpe ti ti on ers ha d fa il edto cla im on tax returns ) an d tha t “ [r]esp on de ntag rees th atpe ti ti on ers ’ un de rs ta te m en ts of i nc om e fo r th e

Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 2 Rev enue Co de ineffe ctdu rin g the y ears inis su e, an d a ll Ru le refe ren ces are t o the Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 6 -

[* 6] tax ab le y ears 19 92 , 19 93 , 19 94 , and19 95 are n o m or e th an$9 ,00 8.0 0, $2 3,8 62 .00 , $2 5,8 20 .00 , and$3 ,26 3.0 0, re sp ect iv el y .” OPINION Sect io n 6 50 1( a) p ro vi de s tha t, g en eral ly, th e am ou ntof a ny tax m us t b e as se ss edwithi n thr ee years o f th e fi li ng of areturn. Re sp on de ntco nt en ds th at , pu rs ua ntto sec ti on65 01 (c)( 1) , th e p eri odto ass es s p et it io ne rs ’ ta x l iabi li ti es rel at in g t o the y ears inis su e rem ai ns op enbe cau se pe ti ti on ers fil edfal se or frau du le ntreturns with the in te ntto ev ad e ta x. Fraudul en t i nt en t m ay be in ferr ed fro m “ba dg es of f

rau d” in cl ud in g atax pa y er’s m ai nt ai ni ng in ad equa te reco rd s, fai lu re t o c oo pe rat e wit h t ax au th or it ie s, i nt en t t o m is le ad , andde al in g i n c as h. Se e Gou ldv. Co m

m is si on er, 1 39 T.C. __

_, _

__(sl ip op . at 4 9) (Nov . 26 , 20 12 ); Pet zo ldt v . Comm is si on er, 9 2 T.C. 6 61 , 70 0- 70 2 (1 98 9) . Res po nd en t m us t, b utha s fai le d t o, es tabl is h b y

cle ar an d c on vi nc in g e vi de nc e th atpe ti ti on ers in te nd edto ev ad e ta x. Se e se c. 74 54 (a); Ru le 14 2( b) ; Pi ttm anv. Co m m is si on er, 1 00 F.3d 13 08 , 13 13 (7t h C ir. 1 99 6) , aff’g T.C. Mem o. 1 99 5- 24 3; Pet zo ld t v . Comm is si on er, 92 T.C. at 6 99 . Res po nd en t’s p rimary

co nt en ti on is th atMr. Bo ha nn on , a cert ifi edtax pr act it io ne r, reduc edpe ti ti on ers ’ ta x l iabi li ti es by del ib erat el y cla ss ifyin g p ers on al ex pe nd itur es as b us in es s ex pe ns es . Mr. Bo ha nn on , ho wev er, cre di bl y tes ti fie d tha t- 7 -

[* 7] he di d n otpa y

clo se att en ti on to ho w th es e expe nd itur es were cl as si fie d. Whe n p rep ari ng tax returns rel at in g t o t he y ears inis su e, he tru st edan d re li edon Mrs . Boh an no n’s cl as si fic at io ns . Whi le Mr. Bo hann on ’s rel ianc e o n M rs . Bo ha nn on (i.e ., to pro pe rly clas si fy ex pe nd itur es ) m ay

ha ve be enim

prud en t, i t was no t, as res po nd en t co nt en ds , “ wil lfu l b li ndne ss ”. Any un de rp aym en ts were d ire ct ly at tri bu tabl e to Mrs . Boh an no n’s fa il ur e to pro pe rly clas si fy ex pe ns es , no t t o M r. or Mrs . Boh an no n’s i nt en t t o e va de tax . See Pet zo ldt v . Comm is si on er, 9 2 T.C. at 70 0 (s ta ti ng th atth e ex is te nc e o f frau d m ay no t b e fo un d u nd er “ ‘circu m st an ces whi chat m os t cr eat e o nl y su sp ic io n’” (quo ti ng Davi s v . Comm is si on er, 1 84 F.2d 86 , 87 (10 th Cir . 19 50 ), rem an di ng a Mem or an du m Opi ni on of thi s C ou rt) ). Res po nd en t fu rth er co nt en ds , bu t h as fai le d t o e st ab li sh , th atpe ti ti on ers were no t co nduc ti ng cro p a ndcat fis h fa rm in g a ct iv it ie s dur in g t he y ears inis su e. In ad di ti on , res po nd en t co nt en ds th atpe ti ti on ers ’ in te ntto ev ad e ta x i s “ de m on st rat ed by pet it io ne rs cla im in g n um ero us pe rs on al ex pe ns es as b us in es s ex pe ns es * * * aft er the au di t b eg an .” W e are no t co nv in cedth atpe ti ti on ers were awar e o f th e m is cl as si fic at io ns at t he ti m e th ey fil edth ei r 19 94 an d 1 99 5 t ax returns . Ind eed , pe ti ti on ers were fu ll y

co op erat iv e dur in g t he au di t p ro ces s an d p ro vi de d re sp on de nt with a dd it io na l d oc um en ta ti on whi chul ti m at el y res ul te d i n re sp on de nt ’s reduc in g- 8 -

[* 8] th e al le ge d c um

ul at iv e und ers ta te m en t o f in co m e, rel at in g t o t he y ears inis su e, fro m $3 52 ,17 6 t o $ 61 ,95 3. Se e Gou ldv. Co m mis si on er, 1 39 T.C. at _

__(sl ip op . at49 ). Pet it io ne rs m ai nt ai ne d m et ic ul ou s re co rd s, ra rel y us edcas h, an d d idno t co nduc t the ir b us in es se s i n am an ne r de si gn edto co nc eal in co m e. See i d.; cf. Pet zo ldt v . Comm is si on er, 9 2 T.C. at70 0- 70 2 (s tati ng th at“ fai lu re t o m ai nt ai n o r pr es en t re co rd s t o re sp on de nt ’s age nt s” an d “ de al in g i n c as h” were ev id en ce o f frau du le ntin te nt ). Sim

pl y pu t, p et it io ne rs m ad e m is ta ke s re co rd in g t he ir ex pe nd itur es , di d n otin te ndto ev ad e ta x, an d a re n otli ab le forfrau d p en al ti es pu rs ua ntto sec ti on66 63 . See s ecs . 66 63 (a), 7 45 4( a); Ru le 14 2( b) ; Pi tt m anv. Co m mis si on er, 1 00 F.3dat 1 31 3; Pet zo ld t v . Comm is si on er, 9 2 T.C. at69 9. Acco rd in gl y , th e ex te nd edli m it at io ns pe rio d s etforthinsec ti on 65 01 (c)( 1) is no t ap pl ic ab le , andres po nd en t’s d et erm in at io ns an d a dju st m en ts rel at in g t o 19 92 , 19 93 , 19 94 , and19 95 are b arre d. Co nt en ti on s we h av e n otad dr es se d a re i rrel ev an t, m oo t, o r m eri tl es s. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red fo r pe ti ti on ers .