T.C. Mem o. 2 01 3- 13 3

UNITED STAT ES TAX COURT

GARY L. WARD AND MARIE V. WARD, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 25 63 -0 9, 1 70 51 -1 0. File d M ay 29 , 20 13
. Gary L. W ardan d M ari e V. W ard , pro ses e. In gaC. Plu ci ns ki , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION KERRIGAN, Ju dg e: In the se co ns ol id at edcas es res po nd en t d et erm in edth e fo ll owi ng de fic ie nc ie s, p en al ti es , andad di ti on s t o t ax :- 2 -

[* 2] Year Defi ci en cy Add it io ns to tax se c. 66 51 (a)( 1) Pen al ty

se c. 66 63 20 02 $4 26 ,98 3
--- $3 20 ,23 7 20 03 35 7,0 51
--- 26 7,7 88 20 04 60 8,2 47
--- 45 2,9 91 20 05 1,1 33 ,90 7 $2 83 ,12 1 85 1,9 68 20 06 1,0 92 ,58 5 27 2,9 11 82 0,2 80 20 07 1,0 82 ,07 9
--- 82 7,9 27 Inth e an swe r, res po nd en t as se rte d i nc reas edde fic ie nc ie s an d i nc reas edpe na lt ie s pu rs ua ntto sec ti on 62 14 (a) a s fo ll ows :

Year In crea se d de fic ie nc y In crea se d pe na lty se c. 66 63 20 02 $4 32 ,66 5 $3 24 ,49 9 20 03 42 7,3 59 32 0,5 19 20 04 61 5,7 94 45 8,6 51 All sec ti on refe ren ces are t o the Int ern al Rev enue Co de ineffe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d Pro cedur e. All m on et ary am ou nt s ar e ro un de d t o the ne ares t d ol lar. The is su es forco ns id erat io n are: (1) whet he r pe ti ti on ers are l iabl e fo r ta x on sel f-em

pl oym en t i nc om e p et it io ne r hu sb an d e arn edfor tax y ears 20 01 th ro ug h 20 06 ; (2 ) whe th er p et it io ne rs are l iabl e fo r in co m e ta x o n $ 32 0,6 70 of wa ge s- 3 -

[* 3] pe ti ti on er h us ba ndearn edfortax y ear 2 00 7; (3) whet he r pe ti ti on ers are l iabl e fo r in co m e ta x o n fl owt hr ou gh in co m e fro m W ard , Inc ., for t ax y ears 20 02 th ro ug h 20 07 ; (4 ) whe th er p et it io ne rs are l iabl e fo r in co m e ta x fo r fl owt hr ou ghin co m e fro m W ard -Nil ss on , Inc ., for t ax y ears 20 05 th ro ug h 2 00 7; (5) whet he r pe ti ti on ers are l iabl e fo r in co m e ta x fo r fl owt hr ou ghin co m e fro m W ardCo ns ul ti ng , Inc ., for ta x years 2 00 6 and20 07 ; (6 ) whe th er p et it io ne rs are l iabl e fo r in co m e ta x fo r flo wth ro ug h i nc om e fro m W ardNil ss on Ent erp ris es , Inc ., for t ax y ear 2 00 7; (7) whe th er p et it io ne rs are l iabl e fo r in co m e ta x a ttrib ut ab le to th e g ai n re co gn iz edon th e sa le of s to ckfortax y ear 2 00 3; (8) whethe r pe ti ti on ers are l iabl e fo r ta x o n a ne t capi ta l g ai n o f $1 90 ,00 0 fo r ta x year 20 07 ; (9 ) whe th er p et it io ne r hu sb an d i s li ab le forfrau d p en al ti es pu rs ua ntto sec ti on 66 63 forall y ears inis su e, or , inth e al te rn at iv e, whe th er p et it io ne rs are l iabl e fo r ne gl ig en ce o r subs tant ia l
un de rs ta te m en t p en al ti es un de r se ct io n 6 66 2( a) fo r al l years i n i ss ue ; an d (1 0) whe th er p et it io ne rs are l iabl e fo r ad di ti on s t o t ax un de r se ct io n 6 65 1( a)(1 ) fo r ta x y ears 20 05 an d 2 00 6. FINDINGS OF FACT So m e o f th e fac ts are s ti pu la te d andare s o fo un d. Pe ti ti on ers res id edin Utah at t he ti m e th e p et it io ns inth es e co ns ol id at edcas es were fi le d. Pe ti ti on ers- 4 -

[* 4] were m arri edat t he ti m e th e p et it io ns were fi le d andrem ai n m arri ed
. Pet it io ne rs fil edjoi ntFed eral in co m e ta x re turn s fo r al l t ax y ears inis su e. Pet it io ne r wife reque st edrel ie f fro m th e li ab il it ie s fo r in co m e ta x and ad di ti on s t o t ax de te rm in edby resp on de ntforall tax y ears inis su e und er s ect io n 60 15 (b ) or(f). Res po nd en t d et erm in edth atpe ti ti on er wi fe i s en ti tl edto rel ie f
un de r se ct io n 6 01 5( b) to th e ex te ntth e d efi ci en ci es an d a dd it io ns to tax are at tri bu tabl e to erro ne ou s i te m s o f pe ti ti on er h us ba nd . Peti ti on er hus ba ndag rees th atpe ti ti on er wi fe i s en ti tl edto rel ie f fro m th e li ab il it ie s fo r in co m e ta x and ad di ti on s t o t ax to th e fu ll es t ex te ntall owe d b y th e la w. Gary L. W ard(pe ti ti on er) g radua te d fr om Ste ve ns Hena gar Co ll eg e wit h a de gr ee i n a cco un ti ng inth e 1 97 0s . For o ve r 25 y ears he pre paredFed eral in co m e ta x re turn s fo r co m

pe ns at io n. Pe ti ti on er was a m em be r of th e Nat io na l Ass oc ia ti on of Tax Prac ti ti on ers du rin g thi s t im e. Thro ug ho uthi s ca reerhe at te nd edan nu al co ur se s i n t ax law an d t ax return p rep arat io n. InMay 201 0 p et it io ne r was ch arg edwith o ne co un t o f ta x e va si on in vi ol at io n o f se ct io n 7 20 1 i n the U.S. Dist ric t Co urt fo r th e Dis tri ctof Ut ah , Cen tra l Div is io n. InSep te m

be r 20 10 pe ti ti on er p le ad edgu il ty to o ne co un t o f ta x e va si on un de r se ct io n 7 20 1. Th e co un t o f ta x e va si onin vo lv eda Fed eral in co m e ta x- 5 -

[* 5] return p et it io ne r pr ep aredin20 07 , whi chrep orte d afic ti ti ou s l ik e-k in d
ex ch an ge th ateli m in at ed$2 m il li on of t ax ab le in co m e fo r pe ti ti on er’s cl ie nt . Pet it io ne rs fil edti m el y

joi ntFed eral in co m e ta x re tu rn s fo r ta x years 2 00 2, 20 03 , and20 07 . Peti ti on ers fil eda joi ntFed eral in co m e ta x re tu rnfor tax y ear 20 04 on Octo be r 17 , 20 05 . Peti ti on ers fil eda joi ntFed eral in co m e ta x re tu rnfor ta x year 20 05 on Apri l 1 1, 2 00 8. Pe ti ti on ers fil eda joi ntFed eral in co m e ta x return fo r ta x year 20 06 onApri l 1 6, 2 00 8. OnSep te m be r 29 , 20 08 , res po nd en t rece iv edad di ti on al joi ntFed eral in co m e ta x re turn s fo r ta x years 2 00 5 thr ou gh 20 07 fro m

pe ti ti on ers , whi chwere m ark ed“ am en de d” . Res po nd en t d idno t pr oc es s the se returns . Pet it io ne r di d n otin tro du ce ev id en ce tha t re co rd s wer e k ep t t o s up po rt h is ta x re turn s o r in co m e earne d b y hi s v ari ou s b us in es se s. Durin g the au di t p ro ces s with re sp on de ntpe ti ti on er d idno t p ro vi de do cu m en tati on to sh ow h ow m uc h in co m e h e earne d dur in g the y ears at i ss ue . W ard , Inc . W ard , Inc ., was i nc or

po rat edinUtah an d e le ct edto be tre at edas a n S
co rp or at io n fo r Fed eral in co m e ta x p ur po se s o n M arch2, 1 99 4. Ward, In c., of fere d t ax return p rep arat io n, b oo kk eep in g, an d p ayro ll servi ces to cli en ts . Dur in g the tax y ears inis su e, pe ti ti on er was th e so le sh areh ol de r, pr es id en t, an d- 6 -

[* 6] di rect orof Ward , Inc ., andhe parti ci pa te d i n the co rp or at io n’s d ay -to -d ay op erat io ns . Peti ti on er al so pro vi de d a cco un ti ng , bo okke ep in g, an d t ax return pr ep arat io n s erv ic es to cli en ts onbe ha lf o f W ard , Inc . W ard , Inc ., m ai nt ai ne d v ari ou s b an k a cco un ts , in cl ud in g asav in gs acco un t an d b us in es s an d c he ck in g a cco un ts , at Br ig ht on Ban k. Pe ti ti on er h adauth or ity to de po si t an d wi th dr aw m on ey fro m th es e b an k a cco un ts . He us edm on ey de po si te d inth es e acc ou nt s t o p ay

pe rs on al an d fa m il y

ex pe ns es . In J anua ry

20 09 pe ti ti on er so ldhi s i nt eres t i n Ward , Inc ., to Andrews Fin an ci al Co rp . W ard , Inc ., di d n otfil e a Fed eral in co m e ta x re tu rnfortax y ear 2 00 2. Fo r ta x year 20 03 W ard , Inc ., fil eda ti m el y Fed eral in co m e ta x re tu rn . On Oct ob er 1 7, 20 05 , W ard , Inc ., fil eda Fed eral in co m e ta x re tu rnfortax y ear 2 00 4. Ward, In c., di d n otfil e a t im el y

Fed eral in co m e ta x re tu rnfortax y ear 2 00 5. OnSep te m be r 29 , 20 06 , pet it io ne r ga ve res po nd en t’s re ve nu e ag en t a c op y of Ward , Inc .’ s Fed eral in co m e ta x re tu rnfor tax y ear 2 00 5. Re sp on de ntdi d n otpro ces s thi s return. OnApri l 7 , 20 08 , res po nd en t’s s erv ic e cen te r in Ogd en , Utah , recei ve d W ard , Inc .’ s Fe de ral in co m e ta x re tu rnfortax y ear 2 00 5. OnApri l 7 , 20 08 , W ard , In c., fil edFed eral in co m e ta x re tu rn s fo r ta x years 2 00 6 and20 07
. Upo n re vi ew of

pe ti ti on ers ’ pe rs on al in co m e ta x re tu rn s i n Ap ril 20 08 , res po nd en t co nduc te d apro m ot er p rep arerin ve st ig at io n o f pe ti ti on er. Thr ou gh- 7 -

[* 7] th e in ve st ig at io n i t was de te rm in edth atpe ti ti on er h adhe lp edhi s cl ie nt s reduc e th ei r ta xabl e in co m e an d the ir t ax li ab il ity by creat in g fi ct it io us de du ct io ns . A pat te rnwas fo un d i n wh ic h s ect io n 1 79 de du ct io ns were cl ai m edfor fic ti ti ou s ve hi cl e p ur ch as es . W ard -Nil ss on , Inc . Pet it io ne r in co rp or at edW ard -Nil ss on , Inc ., inUtah on Nov em be r 29 , 20 04
. W ard -Nil ss on , Inc ., elec te d t o b e tr eat edas aflo wth ro ug h e nt ity un de r subc hapt er S fo r in co m e ta x p ur

po se s. Durin g t ax y ears 20 05 th ro ug h 2 00 7 p et it io ne r was th e so le sh areh ol de r, of

fic er, an d d ire ct orof Ward -Nil ss on , Inc . W ard -Nil ss on , Inc ., fil edit s 2 00 5, 2 00 6, an d 2 00 7 F ed eral in co m e ta x re tu rn s o n Ap ril 7, 2 00 8. W ardCo ns ul ti ng , Inc . W ardCo ns ul ti ng , Inc ., was i nc or po rat edinUtah on Sep te m be r 26 , 20 06
. W ardCo ns ul ti ng , Inc ., elec te d t o b e tr eat edas aflo wth ro ug h e nt ity un de r subc hapt er S. In20 06 an d 2 00 7 p et it io ne r was th e so le sh areh ol de r an d p res id en t of W ardCo ns ul ti ng , Inc ., andhe pe rfo rm edpe rs on al servi ces on be ha lf o f th e co rp or at io n. W ardCo ns ul ti ng , Inc ., fil eda de li nque ntFed eral in co m e ta x re tu rnfortax y ear 2 00 6 o n Ap ril 7, 2 00 8. Re sp on de nt ’s servi ce ce nt er i n Og de n, Ut ah , recei ve d two Fo rm s 1 12 0S , U.S. Inco m e Tax Return fo r anS Co rp or at io n, b oth p ur po rti ng- 8 -

[* 8] to be Fed eral in co m e ta x re tu rn s fo r W ardCo ns ul ti ng , Inc ., for 2 00 7. Th e two returns do no t i nc lu de th e sa m e am ou nt s o f gr os s re cei pt s, d educ ti bl e b us in es s ex pe ns es , or o rd in ary bu si ne ss ex pe ns es . W ardNil ss on Ent erp ris es , Inc . W ardNil ss on Ent erp ris es , Inc ., was i nc or po rat edinUtah on Aug us t 3 0, 20 07 . In Se pt em

be r 20 07 W ardNil ss on Ent erp ris es , Inc ., elec te d t o b e tr eat edas a flo wth ro ug h e nt ity

un de r subc hapt er S fo r ta x p ur po se s. Pet it io ne r was th e so le sh areh ol de r in 20 07 , andhe pe rfo rm edpe rs on al servi ces onbe ha lf o f th e co rp or at io n. In20 07 he rece iv ed$1 0,0 00 inco m pe ns at io n fr om

W ardNil ss on Ent erp ris es , Inc ., for t ho se servi ces . W ardNil ss on Ent erp ris es , Inc ., m ai nt ai ne d abu si ne ss ch eck in g a cco un t with B rig ht on Ban k. Pe ti ti on er h adau th or ity to m ak e d ep os it s an d wi th dr awal s fro m th e acc ount . Loans Dur in g t ax y ears 20 02 th ro ug h 2 00 5 p et it io ne r ap pl ie d fo r se ve ral pe rs on al lo an s fr om

Bri gh to n B an k. In20 04 he als o app li edfora lo anfro m W as hi ng to n Fed eral Sav in gs . Peti ti on er s ub m it te d c op ie s o f ta x re tu rn s t o the bank s as part o f th e lo anap pl ic at io n p ro ces s. Th e am ou nt s o f ta xabl e in co m e sh own on th e returns subm it te d t o the bank s wer e g reat er tha n the am ou nt s s ta te d o n p et it io ne rs ’ Fed eral- 9 -

[* 9] in co m e ta x re tu rn s as fil ed . Thes e al te rn at e returns sh owe d s ub st an ti al ly
m or e in co m e th anth e fi le d re tu rn s. Fo r ex am pl e, pe ti ti on ers 20 02 tax return fi le d with re sp on de ntsh owe d g ro ss in co m e o f $4 5,0 10 , andth e 2 00 2 re tu rngi ve n t o the ba nk s s ho wedgro ss in co m e o f $3 07 ,69 9. Oth er Is su es Dur in g t ax y ear 2 00 3 p et it io ne rs rece iv ed$3 ,17 7 i n p ro ceed s fr om th e sa le of st oc k; ho wev er, p et it io ne rs di d n otin cl ud e th is am ounton th ei r Fed eral in co m e ta x re turn . This am ou ntwas i nc lu de d i n the no ti ce o f de fic ie nc y fortax y ear 2 00 3. The no ti ce o f de fic ie nc y

fortax y ear 2 00 7 d et erm in edth atpe ti ti on ers ha d a
ne t capi ta l g ai n o f $1 90 ,00 0 fo r th e p art ia l s al e o f pe ti ti on er’s b us in es s, Ward Nil ss on Ent erp ris es , Inc ., whi chpe ti ti on ers fai le d t o re po rt o n the ir F ed eral in co m e ta x re tu rn . OPINION Unr ep orte d In co m e Sect io n 6 1( a) p ro vi de s tha t g ro ss in co m e in cl ud es “ al l i nc om e fro m wha te ve r so ur ce d eri ve d” . See al so Co m m is si on er v . Glen sh aw Glas s C o., 3 48 U.S. 42 6, 4 30 (19 55 ). Sect io n 1 36 6( a) p ro vi de s tha t i nc om e, lo ss es , deduc ti on s, an d c red it s o f anS co rp or at io n are p as se d thr ou gh pro rat a to it s s ha reh ol de rs on th ei r in di vi du al in co m e ta x re turn s. Th e ch arac te r of eachit em

of i nc om e is- 10 -

[* 10 ] de te rm in edas i f itwere re al iz eddi rect ly from th e so ur ce fr om

whi chth e co rp or at io n re al iz editor i nc urredinth e sam e m an ne r as itwas b y th e co rp or at io n. Sec. 1 36 6( b) . A sha reh ol de r’s gr os s i nc om e in cl ud es hi s o r he r pr o ra tash are o f th e S co rp or at io n’s g ro ss in co m e. Sec. 1 36 6( c). Gen eral ly sect io n 1 40 2 d efi ne s “ se lf- em pl oym en t i nc om e” as “ne t ea rn in gs fro m sel f-em pl oym en t.” Se ct io n 1 40 2 d efi ne s n etearn in gs fro m sel f-em pl oym en t as gro ss in co m e d eri ve d fr om an y tra de or b us in es s ca rri edon by suc h i nd iv idua l, le ss th e d educ ti on s al lo wedwhi chare at tri bu tabl e to su chtra de or b us in es s. A tax pa y er i s re qu ire d t o m ai nt ai n a de qu at e b oo ks an d re co rd s s uf fic ie ntto es tabl is h h is or h er i nc om e. See s ec. 6 00 1; DiLeo v. Co m m is si on er, 9 6 T.C. 8 58 , 86 7 (1 99 1) , aff’d, 9 59 F.2d16 (2dCir . 19 92 ). If a t ax pa y er fa il s t o m ai nt ai n the se reco rd s the Co m

m is si on er m ay

de te rm in e in co m e und er the bankde po si ts m etho d. DiLeo v. Co m

mis si on er, 9 6 T.C. at86 7. A b an k d ep os itis pri m a fac ie ev id en ce o f in co m e. Id . at 8 68 . The Co m mis si on er i s n otrequi redto fol lo w any lead s su gg es ti ng th ata ta xp ay er m ig htha ve de du ct ib le ex pe ns es . Id. at87 2. On ce the Co m m is si on er h as m ad e th is pri m a fac ie cas e th e ta xp ay er b ears th e b ur de n o f sh owi ng th atth e d ep os it s m ad e in to hi s o r he r acc ou ntrep res en t n on ta xabl e in co m e. See i d. at86 9. Th e ta xp ay er m us t p res en t cr ed ib le ev id en ce t o s hi ft t he bu rd enof p ro of

to th e Co m

m is si on er u nd er s ect io n 7 49 1( a). Pet it io ne r fai le d t o- 11 -

[* 11 ] do so . Res po nd en t h as th e b ur de n o f pr oo f fo r th e in crea se d d efi ci en ci es as se rte d i n the an swe r. See Ru le 14 2( a)(1 ). Res po nd en t ex am in edFed eral in co m e ta x re tu rn s fo r th e ta x years i n i ss ue fo r pe ti ti on ers ’ fo urS co rp or at io ns : Ward, In c., W ard -Nil ss on , Inc ., W ard Co ns ul ti ng , Inc ., andW ardNil ss on Ent erp ris es , Inc . (co ll ect iv el y , S co rp or at io ns ). Res po nd en t re vi ewedth e S co rp or at io ns ’ gr os s i nc om e, pe ti ti on ers ’ in di vi du al tax returns , andth e d educ ti on s o n the S co rp or at io ns ’ returns . Res po nd en t d ida ba nk de po si ts an al y si s tha t i nc lu de d the bankacco un ts of t he S co rp or at io ns , pe ti ti on er’s p ers on al bankacco un t, an d the W ardFam il y Trus t b an k a cco un ts an d
ex am in edwhet he r th e b an k d ep os it s m at ch edup clo se ly w ith the in co m e whi ch
was rep orte d o n the vario us returns . To pr ep are h is an al y si s, re sp on de ntan al yzed ba nkst at em en ts , ban k d ep os it s, d ep os itsl ip s, an d d ep os itch eck s. Re sp on de nt co m pa redam ou nt s i n the bankacco un ts with the am ou nt s re po rte d o n p et it io ne rs ’ Sch edul es K-1, Sh areh ol de r’s Sh are o f In co m e, Deduc ti on s, Cr ed it s, et c., an d the gr os s re cei pt s re po rte d o n the S co rp or at io ns ’ Fo rm s 1 12 0S . Res po nd en t’s
an al y si s s ho wedth e fo ll owi ng : 1

Thi s t ab le was c on st ru ct edfro m th e te st im on y

of t he fir stwitne ss an d fr om 1 va rio us ex hi bi ts .- 12 -

[* 12 ] Year Sou rce Gro ss rece ip ts Am ounton in co m e ta x return Omit te d g ro ss

rece ip ts 20 02 W ard , Inc . $1 ,31 5,9 40 ($1 4,8 32 ) $1 ,33 0,7 72 20 03 W ard , Inc . 1,3 47 ,49 0 48 6,4 17 86 1,0 73 20 04 W ard , Inc . 1,9 51 ,74 6 45 0,2 43 1,5 01 ,50 3 20 05 W ard , Inc . 3,2 00 ,22 4 15 5,7 75 3,0 44 ,44 9 20 06 W ard , Inc . 2,8 94 ,38 1 66 ,75 0 2,8 27 ,63 1 20 07 W ard , Inc . 2,6 13 ,53 1 18 7,0 15 2,4 26 ,51 6 20 06 W ard Co ns ul ti ng , In c. 15 2,2 47 12 2 15 2,1 25 20 07 W ard Co ns ul ti ng , In c. 33 9,7 50 44 ,56 0 29 5,1 90 Dur in g t ax y ears 20 02 th ro ug h 2 00 7 p et it io ne r ap pl ie d fo r a num be r of pe rs on al lo an s an d s ub m it te d c op ie s o f hi s p ers on al Fed eral in co m e ta x re tu rn s an d Ward , Inc .’ s Fe de ral in co m e ta x re tu rn s t o the bank s. Th es e ta x re tu rn s wer e no t i de nt ic al to th e returns fil edwith re sp on de nt ; ra th er, the y sh owe d m or e in co m e fro m th e S co rp or at io ns th anth e ta x re tu rn s fi le d wi th res po nd en t. Pet it io ne r di d
no t p ro vi de anex pl an at io n fo r th e d is crep an ci es inin co m e. Dur in g the au di t p et it io ne r pr ov id edrece ip ts forso m e ex pe ns es ; h owe ve r, th es e ex pe ns es oft endi d n otm at chwhatwas re po rte d o n p et it io ne rs ’ Fed eral- 13 -

[* 13 ] in co m e ta x re tu rn s. Per so na l ex pe ns es were d educ te d re gu larly as b us in es s ex pe ns es ; tho se ex pe ns es were d is al lo wed . Som e o f th e b us in es s ex pe ns es were subs tant ia te d; th os e d educ ti on s wer e al lo wed . Peti ti on er d idno t co nt en d tha t furth er d educ ti on s s ho ul d b e al lo wed
. Whi le au di ti ng pe ti ti on ers ’ Fed eral in co m e ta x re tu rn s, re sp on de ntno ti ceda pa tt ernof f

al se pape r tr ai ls in vo lv in g s ect io n 1 79 de du ct io ns an d o th er d educ ti on s. Res po nd en t co nt en ds th atpe ti ti on er was faci li ta ti ng tra ns act io ns by creat in g a fal se pape r tr ai l an d c la im in g fa ls e d educ ti on s o n h is cli en t re tu rn s. Durin g the
au di t re sp on de ntqu es ti on edpe ti ti on er ab ou t the se in co m e d is crep an ci es . Pet it io ne r ex pl ai ne d tha t the in co m e was forth e sa le of c ars ; h owe ve r, he di d n ot sh ow tha t h e h ada li cen se to sel l ca rs an d h e d idno t p ro vi de an y subs tant ia ti on of
car s al es or p ur ch as es . Res po nd en t co nt en ds th atpe ti ti on er, wit h the ass is tanc e o f hi s emplo y ees , advi se d c li en ts th atth ey

co ul d c la im

a se ct io n 1 79 de du ct io n fo r pu rch as in g a ve hi cl e wit ho uttak in g p os se ss io n o f th e v eh ic le . Accor di ng to res po nd en t’s te st im on y , cli en ts were ad vi se d t o wri te a ch eckpay ab le to on e o f th e S
co rp or at io ns . The ch eckwou ldbe de po si te d i nt o o ne of p et it io ne r’s ba nk
acco un ts . Peti ti on er d idno t p ro vi de supp orti ng ev id en ce o r pr ov id e an ex pl an at io n fo r th e se ct io n 1 79 de du ct io ns . Peti ti on er co nt en de d tha t h e o r on e o f- 14 -

[* 14 ] hi s emplo y ees wou ldth enwrit e a ch eckpay ab le to th e in di vi du al inan am ountles s tha n the ori gi na l am ou ntpa idby the cli en t. Pet it io ne r to ldhi s cl ie nt s th atth e d iff

eren ce was th e am ountpa idby the cli en t an d the co stan d s al e o f th e ve hi cl e. Inso m e in st an ces pe ti ti on er co ul d n otpro ve th ata ve hi cl e was actua ll y pu rch as ed . Res po nd en t co nt en de d tha t the re was no ev id en ce t o s ho w th e fu nd s were ac tu al ly retu rn edto th e ta xp ay er. Res po nd en t ci te d an e xa m pl e attri al inwhi chpe ti ti on er p rep areda Fed eral in co m e ta x re tu rnfora bu si ne ss with asec ti on 17 9 d educ ti onth atin vo lv edan al le ge d c ar p ur ch as e. Res po nd en t co nt en ds th atpe ti ti on er p rep aredth e Fed eral in co m e ta x re tu rnforth is bu si ne ss an d tha t the re was un rep orte d i nc om e fo r ta x y ears 20 06 an d 2 00 7 o n the tax return o f th e in di vi du al who own ed50 % of the bu si ne ss . Peti ti on er s en t a l et te r to res po nd en t ex pl ai ni ng th athe was re sp on si bl e fo r al l tran sa ct io ns th atto okpl ace r eg ard in g the se tax returns . Res po nd en t i nqui redab ou t the sec ti on 17 9 d educ ti on an d, af te r fu rth er in ve st ig at io n, d et erm in edth atpe ti ti on er h adatt em pt edto subs tant ia te th e se ct io n 17 9 d educ ti on by usi ng a fal se do cum en t. Res po nd en t re qu es te d fr om th e Uta h Tax Co m m is si on a hi st ory

of t he VIN nu m

be r co nt ai ne d i n the do cu m en t u se d t o subs tant ia te th e se ct io n 1 79 de du ct io n o n the Fed eral in co m e ta x re tu rnof t he- 15 -

[* 15 ] bu si ne ss . The h is to ry sh owe d tha t p et it io ne r ne ve r own edth e rel at ed
ve hi cl e. Pet it io ne rs ’ in co m e ta x re tu rnfor20 04 ha s the same sect io n 1 79 de du ct io n. Pet it io ne r fai le d t o p ro vi de do cu m en ts th atsh owe d tha t an y of t he in co m e fro m res po nd en t’s b an k d ep os it s an al y si s was no t ac tu al ly inc om e. He als o co nt en ds th athe st op pe d p rep ari ng tax returns in19 94 ; h owe ve r, pe ti ti on er co nt in ue d t o s ig n t ax returns as t he pre pa rer. Re tu rn s wer e p rep aredby his
em pl oyees. Pe ti ti on er al so co nt en ds th athe was n otth e o wne r of W ard , Inc .; ho wev er, h e p ro vi de d n o d oc um en ta ti on to supp ort thi s cl ai m an d the st ip ul at io n of fact s es tabl is he s h im

as t he so le sh areh ol de r, pr es id en t, an d d ire ct orof Ward In c., fo r ta xabl e y ears 20 02 th ro ug h 2 00 7. Whe n p et it io ne r was in ve st ig at edhe di d n otpro vi de anex pl an at io n fo r th e se ct io n 1 79 de du ct io ns on hi s cl ie nt s’ Fed eral in co m e ta x re tu rn s. At tria l h e d id
no t p ro vi de an y

ex pl an at io n o r ot he r ev id en ce t o s ho w th atcars were ac tu al ly pu rch as ed
. 2 Pet it io ne r rep eat ed ly und erre po rte d h is in co m e fo r al l t ax y ears inis su e. The re was a co ns is te ntpa tt ernof f ai li ng to rep ort the gro ss rece ip ts as d oc um en te d
Pet it io ne r di d n otpro du ce d oc um en ts th atsh owe d c ars were p ur ch as edor 2 th atch eck s wer e wri tt ento cli en ts returni ng so m e o f th ei r fund s.- 16 -

[* 16 ] inth e b an k d ep os it s an al y si s. Pet it io ne r was no t ab le to subs tant ia te de du ct io ns , andoft enpe rs on al ex pe ns es were d educ te d a s b us in es s ex pe ns es . Pet it io ne r pe rfo rm edservi ces forhi s v ari ou s s ub ch ap te r S co rp or at io ns an d
rece iv edwage s as well as f lo wth ro ug h i nc om e. The n ot ic es of d efi ci en cy in di cat e th atpe ti ti on er re cei ve d c om pe ns at io n fr om

W ard , Inc ., W ard -Nil ss on , Inc ., W ard Co ns ul ti ng , Inc ., andW ardNil ss on Ent erp ris es , Inc . Peti ti on er d idno t s ho w th is in co m e was no t wag es . W e n ot e th atpe ti ti on er wi fe i s en ti tl edto rel ie f un de r se ct io n 6 01 5( b) to th e ex te ntth e d efi ci en ci es an d a dd it io ns to tax are at tri bu tabl e to erro ne ou s i te m s o f pe ti ti on er. The refo re, we fi ndth at(1) pe ti ti on er i s l iabl e fo r ta x o n s el f-em

pl oym en t i nc om e earne d b y hi m for tax y ears 20 01 th ro ug h 2 00 6; 3 (2 ) pe ti ti on er i s l iabl e fo r ta x o n $ 32 0,6 70 of wa ge in co m e earne d b y hi m fortax y ear 2 00 7; an d (3 ) pe ti ti on er i s l iabl e fo r ta x o n fl owthr ou gh in co m e fro m hi s va rio us S co rp or at io ns forall tax y ears inis su e. Oth er Is su es The no ti ce o f de fic ie nc y

in cl ud ed$3 ,17 7 o f ne t capi ta l g ai ns in co m e fo r 20 03 fro m

th e sa le of s to ck . Res po nd en t co nt en ds th atth e st oc k b el on ge d t o

Pet it io ne r di d n otch al le ng e th e ch arac te riz at io n o f hi s i nc om e as sel f- 3 em pl oym en t i nc om e, an d h e d idno t o th erwi se pro vi de ev id en ce t o s up po rt h is bu rd enof p ro of

on th is is su e.- 17 -

[* 17 ] pe ti ti on er wi fe. Pet it io ne rs ha ve no t p ro ve n o th erwi se an d d idno t p ro du ce ev id en ce re ga rd in g the own ers hi p o f st oc k. 4 The rev enue ag en t t es ti fie d tha t the re was a ba nkde po si t o f $1 90 ,00 0 t o W ardNil ss on Ent erp ris es , Inc ., in20 07 . Upo n e xa m in at io n p et it io ne r in di cat ed th athe so lda po rti on of WardNil ss on Ent erp ris es , Inc ., to Mr. Nil ss on for $1 90 ,00 0. Pe ti ti on ers ha ve fai le d t o p ro vi de ev id en ce t o the co nt rary. Sect io n 6 1( a)(3 ) in cl ud es inin co m e g ai ns de riv edfro m de al in gs inpro pe rty. W e fi ndth atpe ti ti on ers rece iv edin co m e fro m th e sa le of s to ckan d fr om th e pa rti al sal e o f W ardNil ss on Ent erp ris es , Inc . W e fi ndth atpe ti ti on ers are l iabl e fo r ta x attrib ut ab le to th e $ 3,1 77 of n etcap it al ga in s i nc om e, an d p et it io ne r is li ab le fortax attrib ut ab le to th e p art ia l s al e o f W ardNil ss on Ent erp ris es , Inc . Sect io n 6 66 3 F rau d P en al ty Frau d i s an in te nt io na l wro ng do in g o n the part o f a t ax pa y er wi th th e sp eci fic purp os e to ev ad e a t ax be li ev edto be owed . Sad le r v. C omm is si on er, 1 13
Pet it io ne r wife reque st edin no cen t s po us e rel ie f pu rs uantto sec . 60 15 (b ) 4 an d/ or(f). Res po nd en t d et erm in edth at , pu rs ua ntto sec . 60 15 (b ), pe ti ti on er wi fe is en ti tl edto rel ie f fro m

joi ntan d s ev eral li ab il ity forth e d efi ci en ci es inin co m e ta x a ttrib ut ab le to erro ne ou s i te m s o f pe ti ti on er fo r th e ta x years a t i ss ue . Pet it io ne r wife is no t en ti tl edto rel ie f pu rs ua ntto sec . 60 15 (b ) or(f) wi th res pe ct to th e ta x i m

po se d re ga rd in g the in co m e o n the sal e o f st oc k a s i t wo ul d s eem to be att rib ut ab le to he r an d s he fai le d t o p ro vi de an y ev id en ce d em on st rat in g tha t i t wou ldbe in equi tabl e to ho ldhe r li ab le forth e ta x.- 18 -

[* 18 ] T.C. 99 , 10 2 (1 99 9) . The p en al ty in the cas e o f frau d i s a c iv il san ct io n pr ov id edpri m ari ly as a s afeg ua rdforpro te ct io n o f rev enue an d t o re im burs e th e Gov ern m en t fo r th e h eav y ex pe ns e o f in ve st ig at io n andth e lo ss res ul ti ng fro m th e ta xp ay er’s fraud . Helv eri ng v. Mi tc he ll , 30 3 U.S. 3 91 , 40 1 (1 93 8) ; Sa dl er v . Co m m is si on er, 1 13 T.C. at 1 02 . The Co m m is si on er h as th e b ur de n o f pr ov in g b y cl ear a ndco nv in ci ng ev id en ce an un de rp aym en t fo r eac h year in is su e an d tha t i t i s du e to frau d. Se c. 74 54 (a); Ru le 14 2( b) . The Co m m is si on er m

us t s ho w th atth e ta xp ay er i nt en de d t o c on ceal , m is le ad , or o th erwi se pre ve ntth e co ll ect io n o f ta xe s. Katz v. Co m

m is si on er, 9 0 T.C. 1 13 0, 1 14 3 (1 98 8) . If th e Co m m is si on er es tabl is he s tha t an y

po rti on of t he un de rp aym en t i s at tri bu tabl e to frau d, the en ti re un de rp aym en t s ha ll be tre at edas a ttrib ut ab le to frau d andsubjec t t o a75 % pe na lty , un le ss th e ta xp ay er es tabl is he s tha t s om e p artof t he un de rp aym en t i s n ot at tri bu tabl e to frau d. Se c. 66 63 (a) and(b) . In the cas e o f a joi ntFed eral in co m e ta x re turn , th e se ct io n 6 66 3 p en al ty “ sh al l n otap pl y with re sp ectto th e sp ou se un le ss so m e p artof t he un de rp aym en t i s due to th e fraudof s uc h s po us e.” Sec
. 66 63 (c). Th e ex is te nc e o f frau d i s a que st io n o f fac t t o b e res ol ve d upo n co ns id erat io n o f th e en ti re re co rd . Kin g’s Co urt M ob il e Hom e Park, In c. v. Co m m is si on er, 9 8 T.C. 5 11 , 51 6 (1 99 2) . Frau d m ay be pro ve d b y

cir cu m st an ti al
ev id en ce an d i nf

eren ces dra wn fr om

th e fac ts be cau se di rectpro of of atax pay er’s- 19 -

[* 19 ] in te ntis rare ly avai labl e. Nied eri ng haus v. Co m m is si on er, 9 9 T.C. 2 02 , 21 0 (1 99 2) . The t ax pa y er’s en ti re co ur se of c on du ctm ay est ab li sh th e requi si te frau du le ntin te nt . DiLeo v. Co m m is si on er, 9 6 T.C. at87 4; Sto ne v. Co m m is si on er, 5 6 T.C. 2 13 , 22 3- 22 4 (1 97 1) . Frau du le ntin te ntm ay be in ferr ed fro m vario us ki nd s o f ci rcum st an ti al ev id en ce, o r “ba dg es of f rau d” , in cl ud in g the
co ns is te ntun de rs ta te m en t o f in co m e, in ad equa te reco rd s, i m pl au si bl e o r in co ns is te ntex pl an at io ns of b eh av io r, co nc eal in g a ss et s, an d fa il ur e to co op erat e with t ax au th or it ie s. Bra df or d v . Comm is si on er, 7 96 F.2d30 3, 3 07 (9t h C ir. 19 86 ), aff’g T.C. Me m o. 1 98 4- 60 1. Pet it io ne r ha d apa tt ernof u nd erre po rti ng hi s i nc om e fo r al l t ax y ears in is su e. Pet it io ne r’s ba nkde po si ts di d n otm at chth e in co m e rep orte d o n p et it io ne rs ’ Fed eral in co m e ta x re tu rn s. Th ere was als o adi sc rep an cy inth e am ou nt s o f in co m e on th e Fed eral in co m e ta x re tu rn s fi le d andth e ta x re tu rn s p ro vi de d t o b an ks as p art of a lo anap pl ic at io n. Th is pa tt ernof u nd ers ta te m en t i s ev id en ce o f frau d. Pet it io ne r fai le d t o m ai nt ai n re co rd s tha t wo ul d d is cl os e h is co rrec t t ax ab le in co m e. Inad di ti on , pet it io ne r was un ab le to expl ai n d ep os it s m ad e in to hi s b an k
acco un ts . Peti ti on er h as a ba ck gr ou ndintax return p rep arat io n andwas i n the bu si ne ss of p rep ari ng tax returns . He was a m em be r of th e Nat io na l As so ci at io n o f- 20 -

[* 20 ] Tax Pr act it io ne rs . Giv enhi s educ at io n andworkex pe rie nc e we ex pe ctth at he ha s a wo rk in g kno wled ge of the tax laws an d u nd ers tand s tha t re co rd s s ho ul d b e ke pt . Res po nd en t i nv es ti ga te d p et it io ne rs forfil in g fr au du le nttax returns , and pe ti ti on er was co nv ic te d o f ta x e va si on . At tri al pe ti ti on er s tate d: “ I wil l ad m it th atwe di d abu se sec ti on 17 9.” W ith re sp ectto th e fi ct it io us sec ti on 10 31 li ke
ki ndex ch an ge pe ti ti on er s ta te d: “ W e sc rewedup an d we m is se d ade ad li ne an d we di dn ’t han dl e th aton e ri gh t.” Res po nd en t s ho wedth atth ere was a rep eat edhi st ory of u nd erp aym en t o f ta x du e to un de rrep orte d i nc om e. Pet it io ne r’s ba nkde po si t i nc om e d idno t m at chth e in co m e rep orte d o n h is tax returns . Res po nd en t h as sh own by clearan d c on vi nc in g ev id en ce tha t p et it io ne r in te nd edto av oi d t ax es by con ceal in g i nc om e th ro ug h the S co rp or at io ns . Eventh ou gh pe ti ti on er was co nt rit e, he ha d n o p laus ib le
ex pl an at io n fo r why the in co m e was no t re po rte d. We fin d tha t p et it io ne r is li ab le fo r th e fraudpe na lty

un de r se ct io n 6 66 3 fo r al l t ax y ears inis su e. Ther efo re, pe ti ti on er i s n otli ab le inth e al te rn at iv e fo r ne gl ig en ce o r subs tant ia l
un de rs ta te m en t p en al ti es un de r se ct io n 6 66 2( a) fo r al l years i n i ss ue .- 21 -

[* 21 ] Sect io n 6 65 1( a)(1 ) Add it io n t o Tax Sect io n 6 65 1( a)(1 ) pr ov id es th atinth e cas e o f fai lure t o fi le a ta x re tu rnon th e d at e p res cri be d fo r fi li ng (in cl ud in g any ext en si on of t im e fo r fi li ng ), th ere s ha ll be ad de d t o the tax requi redto be sh own on th e return an am ou ntequa l t o 5 % of th attax foreach m on th or f ract io n the reo f th atfai lure t o fi le co nt inue s, n ot ex ceed in g 2 5% i n the ag gr eg at e, un le ss itis sh ownth atth e fai lu re t o fi le ti m el y is du e to reas on ab le cau se an d n otwil lfu l n eg le ct . See al so Uni te d S ta te s v . Boyle, 46 9 U.S. 2 41 , 24 5 (1 98 5) ; Ba ldwinv. Co m m is si on er, 8 4 T.C. 8 59 , 87 0 (1 98 5) ; Dav is v. Co m

m is si on er, 8 1 T.C. 8 06 , 82 0 (1 98 3) , aff’d wit ho utpubl is he d o pi ni on , 76 7 F .2d93 1 (9 thCir . 19 85 ). A tax pa y er h as th e b ur de n o f pr ov in g tha t the fai lu re to ti m el y fil e was du e to reas on ab le cau se an d n otwil lfu l n eg le ct . See Hig be e v . Co m m is si on er, 1 16 T.C. 43 8, 4 47 (20 01 ). Und er s ect io n 7 49 1( c), the Co m m is si on er b ears th e b ur de n o f pr oduc in g ev id en ce wi th res pe ctto th e li ab il ity of t he tax pay er fo r any

pe na lty . See al so Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 47 . Res po nd en t m etth is bu rd en be cau se pe ti ti on er fi le d p et it io ne rs ’ Fed eral in co m e ta x re tu rn s l at e fo r ta x years 20 05 an d 2 00 6. On ce the Co m m is si on er h as m etth is bu rd en , th e ta xp ay er m us t co m e fo rwardwith p ers ua si ve ev id en ce tha t the Co m m is si on er’s d et erm in at io n i s in co rrec t. Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 47 . Peti ti on er fa il ed- 22 -

[* 22 ] to de m on st rat e rea so nabl e cau se an d l ackof wi ll fu l n eg le ctfor fil in g l at e returns . See s ec. 3 01 .66 51 -1 (c), Pr oc ed . & Adm in . Reg s. Th eref or e p et it io ne r is li ab le forth e ad di ti on s t o t ax un de r se ct io n 6 65 1( a)(1 ) fo r ta x years 2 00 5 and20 06
. Inth e li gh t o f res po nd en t’s co nc es si on pe ti ti on er wi fe i s l iabl e fo r th e ad di ti on s t o ta x u nd er s ect io n 6 65 1( a)(1 ) on ly to the ex te ntth e ad di ti on s t o t ax m ay be vi ewed
as att rib ut ab le to pe ti ti on er wi fe. 5 W e h av e co ns id eredth e o th er ar gu m en ts of t he parti es an d the y are wi th ou t
m eri t o r ne edno t b e ad dr es se d i n v ie w of o ur res ol ut io n o f th e is su es . To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te red
un de r Ru le 15 5.

Pet it io ne r wife fai le d t o p ro vi de an y ev id en ce d em on strat in g tha t i t wo ul d 5 be in equi tabl e to ho ldhe r li ab le forth e ta x.