T.C. M em o . 2 0 1 9 -8 5

UNITED STATES TAX COURT

SHAHRAM KOHAN AND YONINA KOHAN, Pet i t i on ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 8 8 30 -1 7
. Fi l edJ u l y 9 , 2 0 1 9.

Ri ch ardS. Kes t enb au m , fo r p et i t io n ers . J am es P.A. Cal i gu re an dM o n i ca E. Ko ch , fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION LAUBER, J u d g e: Th e In t ern al Rev en u e Serv i ce (IRS o r res p o n d en t ) d et erm i n ed d efi ci en ci es i n Fed eral i n co m e t ax an d p en al t i es fo r p et it i on ers ’ 2 0 08 an d 2 0 0 9 t ax y ears . Fo r p et it i o n er h u s b an d , the IRS d et erm in edd efi ci en ci es , frau d- 2
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[* 2 ] p en al t i es u nd er s ect i o n 6 6 6 3 , an dal t ern at i v e accu racy -rel at edp en al t i es u n d er
s ect i on 6 6 6 2 (a) as fo ll o ws : 1 Pen al t i es

Year Defi ci en cy Sec. 6 6 6 3 Sec. 6 6 6 2 (a) 2 0 0 8 $ 1 1 4 , 1 8 4 $ 8 5,6 3 8 $ 2 2,8 3 7 2 0 0 9 1 19 ,7 0 5 8 9 ,6 6 5 2 3 ,9 4 1 Th e IRS i s s u eda s ep arat e n o t i ce o f d efi ci en cy t o p et it i on er wi fe, d et erm i n i n g th e
s am e d efi ci en ci es b u to n l y accu racy -rel at edp en al t i es . Pet i t i o ners h av e co nced ed th e d efi ci en ci es , s o th e qu es t i o n we m u s td eci d e i s wh et h er p et i ti o n er h u s b an d , fo r each y ear at i s s u e, i s l i ab l e fo r frau d
. Pet i t i o ners co n t en dth atas s es s m en to f t h e am o un t s s ho wnab o v e i s b arred b y th e t h ree-y ear p eri o do f l i m it at i o n s i n s ect i o n 6 5 0 1 (a). Becau s e we fi ndth at th e u n derp aym en ts were du e t o frau d , th ere i s n o p eri o do f l i m it at io n s , an dth e t ax fo r 2 0 0 8 an d 2 0 0 9 “ m ay

b e as s es s ed* * * atan y

t i m e.” Sec. 6 5 01 (c)(1 ). W e wi l l
acco rd i n g l y

s u s tai n th e d efi ci en ci es an dfrau d p en al t i es d et erm i n ed b y res po n d en t .

1 Al l s t atut o ry

referen ces are t o th e In t ern al Rev en u e Co de i n effect fo r t h e y ears i n i s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rt Ru l es o f Pract i ce an d Pro cedure. W e ro u n d al l d o l l ar am o u n t s t o the n eares t d o l l ar.- 3
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[* 3 ] FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n s o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed b y th is referen ce. Pet i t i o n ers res i dedi n New Yo rk wh en th ey fi l edth ei r p et i t i o n . A. Th e Den t al Pract i ce Pet i t i o ner h u s b an d (Dr. Ko h an ) was b o rni n Iran an d i m m i g rat edt o t h e Un it edSt at es . He at t en d edYes h i v a Un i v ers i t y i n New Yo rkan dd en tal s ch o o l atNew Yo rkUn iv ers i t y . Aft er d en t al s ch o o l h e jo in edth e p ract i ce o f an o t h er d en t i s t , Dr. M ag i d , i n Fl us h i n g, New Yo rk
. Two y ears l at er, i n 2 0 0 1 , Dr. Ko h an acq u i redDr. M ag i d ’ s p ract i ce as wel l
as th e b u i l di n g i n wh i ch th e p ract ice was co n du ct ed
. Al t h o u g h Dr. Ko h an ’ s b ro th er was l i s t edas th e p u rch as er o n th e t i tl e cert i fi cat e fo r t h e p ro p erty , h i s b ro t h er ap p ears t o h av e act edas a n o m i n ee. Dr. Ko h an p ai d n o ren tt o h is b ro t h er, m ad e al l m o rt gag e p aym en t s o n th e d en t al o ffi ce b u i l di n g , an dd efray edthe ex p en s es o f
m ai n t ai n i n g i t . Th e d en t al o ffi ce b u i l di ng i n cl u d eda res i d en t ial p o rt io n t h atwas o ccup i ed b y o n e o r m o re t en an t s. Atn o t i m e aft er 2 0 0 1 d i dDr. Ko han o r h i s b ro t h er rep o rt
ren t al i n co m e fro m t h es e t en an t s . Dr. Ko h an t es t i fi edth ath e al l o wedthe t en an t s- 4
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[* 4 ] t o l iv e i n th e b u il d i n g ren t free b ecau se t h ey were “ t ak i n g care o f t h e p ro p ert y
an d wat ch i n g i t .” W e d i dn o tfi n d t h i s t es t i m o n y cred i b le. Fro m 2 00 1 t o th e p res en tDr. Ko h an co ndu ct edh i s d en t al p ract ice fro m th i s b u i l d i n g as a s o l e p ract i t i on er. Du ri n g t h e t ax y ears ati s s ue h e wo rk edb et ween 4 0 an d5 0 h o u rs a week(ex cl u d i n g Fri d ay aft ern o on s , Satu rd ay s , an dJ ewi s h h o l i
d ay s ), s eei n g b et ween 4 0 an d5 0 p at i en t s each d ay . He h adtwo fu l l -t im e em p l o y ees --a d en t al as s i s t an tan dan o ffi ce m an ag er--an ds ev eral p art -t i m e s t aff. Th e o ffi ce m an ag er, Tam ay

ra Ro dri g uez, h an d l ed t h e m ai l , m ai nt ai n edp at i en treco rd s , co l l ect edp aym en t s , an dreco rd edth o s e p aym en t s o n p at i en t s ’ ch art s . Sh e h adn o trai n in g as an acco u n t an t o r t ax p ro fes s i o n al
. Dr. Ko h anaccep tedp aym en tfro m p at ien t s b y

cas h , ch eck , an dcred itcard
. He d i d n o t m ai n tai n a s ep arat e b u s i n es s acco u n tfo r t h e d en t al p ract i ce, s o al l d ep o s i t s were m ad e i n t o h is p ers o n al b an kacco u n t . Cas h p aym en t s were t y p i cal l y p l aced i n a b o x in Dr. Ko han ’ s o ffi ce. He wo u l do ccas i o n al ly u s e t hi s cas h t o p ay fo r h i s em

p l o y ees ’ l u n ch es o r g i v e t h em cas h b o n u s es . He t o o k t h e res to f t h e cas h h o m e wi th h i m . Paym en t s b y

ch eck were m an u al ly

d ep o s i t edi nt o Dr. Ko h an ’ s b an k acco u nt . M s . Ro dri g uez t y

p i cal l y ap p l i eda s tam

p en d o rs em en to n th e b acko f t h e- 5
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[* 5 ] ch eck s an d fi l l edo u td ep o s i ts l i p s . Ei t h er s h e o r Dr. Ko h anwen tt o h i s b an k t o d ep os i tth e ch eck s . Dr. Ko h anrecei vedfro m h i s p at ien t s a l arg e v o l u m e o f cred i t cardp ay m en t s , wh i ch were el ect ro n i cal l y d ep o si t edi n t o h is b an kacco u n t. Fo r 2 0 0 8 h e recei v ed1 8 8 d i s t i n ctcred i t cardp aym en t s t o tal i n g $ 98 ,6 3 9 . Fo r 2 0 0 9 h e recei v ed 2 1 2 d i st i n ctcred i tcardp aym en t s t o tal i ng $ 1 2 2 ,9 6 8
. M an y o f Dr. Ko h an ’ s p at i en t s h add en t al i ns u ran ce, an di n t h o se i n s t an ces h e wo u l dch arg e t h e p at i en t s the ap p ro p ri at e co p aym en t s atth e t i m e o f s erv i ce, th en recei v e ad d i t i o n al p aym en t s fro m th e i n s uran ce co m

p an y . M ajo r i n s uran ce
co m p an i es i s s u edth es e ch eck s twi ce m o nt h l y . Wh en th e i n s uran ce ch eck s arri v ed i n the m ai l , M s . Ro dri g u ez wo u l d reco rdth e p aym en t s o n t he p at i en t s ’ ch art s an d
s etth e ch eck s as i d e t o b e d ep o s i t edal o ng wi t h o t h er ch eck s . Un l i k e p aym en t s th atp at i en t s rem i t t edb y

cas h , ch eck , o r cred i tcard , p aym en t s rem it t edb y th e i n s u ran ce co m

p an i es were rep o rt edb y

th em t o th e IRS o n Fo rm s 1 0 9 9 -M ISC, M i s cel lan eo u s In co m e. Dr. Ko h an was aware o f t h i s d i s t i n ct i o n. B. Tax Retu rn Prep arat i o n M s . Ro dri g u ez d i d n o t p rep are Dr. Ko han ’ s i n co m e t ax retu rn s . Onth e reco m m en d at i on o f an o t h er d en t i s t , Dr. Ko h anh i redBes s Fan , a cert ifi edp ub l i c acco u nt an t, t o p rep are h i s p ers o n al t ax retu rn s an dth e p ayro l l t ax retu rn s fo r h i s- 6
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[* 6 ] d en tal p ract i ce. M s . Fan p rep aredth es e ret u rn s u s i n g wo rk s heet s th atDr. Ko h an p ro v i d edt o h er. M s . Ro dri g u ez p l aced al l Fo rm s 1 0 99 -M ISC t h atth e o ffi ce recei v edfro m i n s u ran ce co m

p an i es i n to a fo ld er, wh i ch Dr. Ko h an s up p li edt o M s . Fan att ax t i m e. M s . Ro dri g u ez al s o p rep aredex p en s e s u m m ari es fo r t h e d en t al p ract i ce b y g o i n g th ro u g h Dr. Ko h an ’ s ch eckb o okan dm ak i n g a l i sto f wh at s he b el i ev edt o b e b u s in es s ex p en s es . Dr. Ko h an s up pl i edth es e ex p en s e s u m m ari es t o M s . Fan
. Dr. Ko h ant o ldM s. Fan th ath i s d en t al p ract i ce d eri v ed m o s to f i t s i nco m e fro m i n s u ran ce co m

p an y p aym en t s. He s up pl i edh er wi t h a l i s to f al l s u ch p ay m en t s , t o g et h er wi t h th e fo l d er co n tai n i ng th e Fo rm s 1 0 9 9 -M ISC. Fo r 2 0 0 9 Dr. Ko h an p ers o n al l y

t al li edup th e i n s u ran ce co m p an y p aym en t s o n an ad d i n g m ach i n e an d p ro vi dedthe reg i s t er t ap e t o M s . Fan
. Aft er rev i ewi n g t h e i n co m e wo rk s h eet s M s . Fan n o t edth e ab s en ce o f an y
co p aym en t s . Sh e as k edDr. Ko h an t o s up pl y th e d o l l ar am o u n t s o f co p aym en t s h e h ad recei v edfro m

p at i en t s . Hav i n g k ep t n o reco rd s o f co paym en t s , Dr. Ko h an
m ad e an es t i m at e fo r each y ear. He i n fo rm edM s . Fan th ath e h adrecei v edco p ay m en t s o f $ 2 0 ,0 0 0 fo r 2 0 0 8 an d$ 3 1 ,0 43 fo r 2 0 0 9 . He d i dn o td i s cl o s e t o h er an y
o f t h e o th er p aym en t s h e h adrecei v edfro m p at i en t s wh o p ai db y cas h , ch eck , o r cred i tcard
.- 7
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[* 7 ] Dr. Ko h anl i kewi s e fai l edt o d i scl o s e t o M s . Fan , fo r p u rp os es o f p rep ari n g p ayro l l t ax retu rn s , the act u al am ou n t s o f wag es h e h adp ai dh i s s t aff. Fo r 2 0 0 9 M s . Fan p rep ared , u s i n g th e i n fo rm at i o n Dr. Ko h an h ads up p l i edt o h er, Fo rm W
3 , Tran sm i t t al o f W ag e an dTax St at em en t s . Th is fo rm an d t h e acco m p an y i n g Fo rm s W -2 , W ag e an dTax St at em en t , rep ort edth atth e d en t al p ract i ce fo r 2 0 0 9 h ad p ai dt o t al wag es o f $ 2 1 ,5 7 3 , co n si s t i n g o f $ 1 0,1 7 9 t o M s . Ro dri g u ez an d $ 1 1 ,3 9 4 t o Perl a Varg as , a d en t al as s i st an t . Th o s e two i n d i v idu al s du ri ng 2 0 0 9 actu al l y recei v edwag es o f $ 2 8 ,5 4 4 an d$ 2 7 , 9 3 1 , res p ect i v el y . Dr. Ko han al s o
em pl o y eddu ri n g 2 0 0 9 atl eas t t h ree o t her i n d i v idu al s , wh o wo rk edp art -t i m e atth e fro n t d es ko r as d en t al as s i s t an t s . Th e p ay ro l l t ax retu rn s rep o rt edn o wag es p ai d t o an y o f t h es e s t aff m em

bers
. M s . Fan p rep aredp et i t i o n ers ’ p ers on al i n co m e t ax retu rn s u s i n g th e i n fo rm at i o n Dr. Ko han p ro vi dedt o h er ab o u tth ei r i n co m e an dex p en s es . Sh e d i dn o t i n d ep en den t l y

v eri fy th e ex p en s es s h o wno n M s . Ro dri gu ez’ ex p en s e wo rk s h eet s . Dr. Ko h an d i d n o t s up p l y M s . Fan , b efo re s h e p rep ared p et i t i o n ers ’ 2 0 08 an d2 0 0 9 retu rn s , an y

b an kreco rd s t h atwo u l den ab le h er t o co nfi rm th e g ro s s recei p t s o f t h e d en tal p ract i ce. OnSch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s , fo r 2 0 0 8 , p et it i o n ers rep o rt ed g ro s s p ro fi to f $ 3 45 ,6 5 2 fro m th e d en t al p ract i ce, rep res en t i n g g ro s s recei p t s o f- 8
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[* 8 ] $ 3 7 5 ,6 6 9 l es s co s to f g o o d s s o l d o f $ 3 0,0 17 . Th e g ro s s recei p t s co ns i s t edo f th e i n s u ran ce co m

p an y p aym en t s rep o rt edo n Fo rm s 1 0 9 9 -M ISC, p l u s $ 2 0 ,0 0 0 o f p at i en tco p aym en t s as es t i m at edb y Dr. Ko h an . Pet i t i o n ers rep o rt ed t ot al b u s i n es s
ex p en s es o f $ 29 2,4 8 5, i ncl u d i ng “ ot h er” ex p en s es o f $ 1 4 1 ,9 9 9, l eav i n g n eti n co m e o f $ 5 3 ,1 6 7 fro m t h e d en t al p ract i ce. Aft er cl ai m i n g i t em i zed d edu ct i o n s an d p ers o n al ex em

p ti o n s fo r t h em s el v es an dth ei r ch i l dren , p et i t i o n ers rep o rt edt ax ab l e i n co m e o f zero fo r 2 0 08
. Onth ei r Sch edu l e C fo r 2 0 09 , p et i t i o n ers rep o rt edg ro s s p ro fi to f $ 4 3 8 ,0 5 6 fro m th e d en t al p ract i ce, rep res en t in g g ro s s recei p t s o f $ 4 6 4,7 3 8 l es s co s to f g o o d s
s o l do f $ 2 6 ,6 8 2 . Th e g ro s s recei p t s co n si st edo f t h e i n s uran ce co m pan y p aym en t s rep o rt edo n Fo rm s 1 0 9 9 -M ISC, p l us $ 3 1 ,0 4 3 o f p at i en tco p aym en t s as es t i m at ed b y Dr. Ko h an . Pet i t i o ners rep ort edt o t al b u s i nes s ex p en s es o f $ 34 6 ,9 6 7 , i n cl u d i n g

“ o ther” ex pen s es o f $ 1 6 6 ,7 42 , p ro du ci n g n et i nco m e o f $ 9 1 ,0 8 9 fro m th e d en t al p ract i ce. Aft er cl ai m i ng i t em i zedd edu ct i o n s an dp ers o n al ex em p t i o n s fo r t h em s el v es an dth ei r ch i l dren , p et i t i o n ers rep o rt edt ax ab l e i nco m e o f $ 74 2 fo r 2 0 0 9
. Pet i t i o ners g av e l arg e s u m s t o rel i g i o u s o rg an i zat i o n s duri n g 2 0 0 8 an d 2 0 0 9 , s o m e o f wh i ch t h ey cl ai m edas ch ari tab l e co n t ri b u ti o n d edu ct i o n s o n t h ei r t ax return s . Fo r 2 0 0 8 th ey tran s ferred $ 6 3 , 1 1 2 t o rel i g i o u s o rg an i zat i o n s ; o f t h i s
s u m , $ 1 7 ,6 0 2 was p ai dt o an o rg an i zat io n o p erat edb y Dr. Ko han ’ s b ro th er. Fo r- 9
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[* 9 ] 2 0 0 9 th ey

tran sferred $ 9 2 ,0 9 3 t o rel i g i o u s o rg an i zat i o ns ; o f t h i s s u m , $ 2 8 , 6 0 8
was p ai d t o th e o rg an i zat i on o perat edb y Dr. Ko h an ’ s b ro t h er. C. IRS Ex am i n at io n Th e IRS s el ect edp et i t i o n ers ’ 2 00 8 an d 2 00 9 retu rn s fo r ex am i nat i o n . Dr. Ko h an was u n co o p erat i ve du ri n g th e au d i tp ro ces s, b o t h i n s up p l y i n g d o cu m en t s
an d i n an s weri n g qu es t i on s . Th e rev en u e ag en t(RA) as s i g n edt o co n du ctth e ex am i n at i o n m ad e s ev eral req u es t s fo r b us i n es s reco rd s o f t h e d en t al p ract i ce. Aft er b ei n g n o t ifi edth atp et i
t i on ers ’ retu rn s were b ei n g ex am in ed , M s . Fan u s edth ei r b an ks t at em en ts t o creat e a g en eral l ed g er o f t h ei r i nco m e an dex p en s es . Th e RA i n terv i ewedM s . Fan an d rel i edo n h er g en eral l ed g er t o p erfo rm a b an kd ep o s i t s an al y si s . Th e RA i n t erv i ewed Dr. Ko h an an d as kedh im a n um b er o f qu es t i on s ab o u t i t em s o n p et i t i o n ers ’ retu rn s . He d ecl i nedt o an s w er t h es e qu es t i o n s , i n s i s t i n g th at th e RA d i rect al l qu es t i on s t o M s . Fan . Th e RA ex pl ai n edth at s he h adal read y i nt erv i ewedM s . Fan , wh o was u n ab l e t o an s wer t h e qu es t i o n s . Dr. Ko han s t i l l refu s edt o co o p erat e. Dr. Ko h anfal s el y t o ldth e RA t h ath e was ren t i n g the d en t al
o ffi ce b u i l d i n g fro m a rel at iv e, b u trefu s edt o i d en t i fy t h atrel at i v e o r s t at e h o w
m u ch ren th e was p ay i n g .- 1 0 -

[* 1 0 ] Th e RA al s o i n t erv iewedM s . Ro dri g u ez. Sh e i nfo rm edth e RA t h ata recei p t s b o o kwas k ep t i n th e b as em en to f t h e d en t al o ffi ce b u i l d i n g an d t h atal l p ay m en t s recei v edb y

th e p ract i ce, i n cl u d i n g p aym en t s m ad e b y cas h , ch eck , an d cred i tcard , were reco rd edi n p at i en t s ’ fi les . Dr. Ko h anwi t h h el dth i s i n fo rm at i o n
an d th es e d o cu m en t s fro m th e RA an dfro m

M s . Fan
. Th e RA’ s an al y si s o f p et i t i o n ers ’ b an k d ep os i t s an d M s . Fan ’ s g en eral l ed
g er rev eal ed t h atp et i t i o ners h adu n d ers t at edthe g ro s s recei p t s o f Dr. Ko h an ’ s d en tal p ract i ce b y

$ 2 9 5 ,2 7 6 an d$ 24 4 ,7 8 7 fo r 2 0 0 8 an d2 0 0 9 , res p ect i v el y . Th es e
u n d ers t at em en t s were at tri b u t ab l e t o p et i t i o n ers ’ fai l u re t o rep o rtan y o f t h e p ay m en t s th atp at i en ts m ad e b y cas h , ch eck , o r cred i t card , ap artfro m co p aym en t s o f $ 2 0 ,0 0 0 an d$ 3 1 ,0 4 3 th atDr. Ko h an h ades t i m at edfo r 2 00 8 an d 2 00 9
. Th e RA al s o m ad e s i g n i fi can t ad ju s t m en t s t o th e ex p en ses rep o rt edo n Dr. Ko h an ’ s Sch edu l es C. Th e l arg es tad ju st m en t s were t o th e “ o t h er ex p en s es ” o f t h e d en tal p ract i ce, wh i ch p et i ti o ners h adrep o rt ed as $ 1 4 1,9 9 9 fo r 2 0 0 8 an d$ 1 6 6 ,7 4 2 fo r 2 0 0 9 . Th e RA fo u n d m o re t h an h al f o f th es e d edu ct i o n s t o b e u n s ubs t an t i at ed , res u l ti n g i n d i s al l owan ces o f $ 9 9 ,4 2 0 an d$ 9 4 , 9 14 , res p ect i v el y . Th e RA m ad e a
n u m b er o f o t h er ad

ju s tm en t s , a few o f wh i ch were fav o rab l e t o p et i t i o n ers (e.g
. , a $ 3 3 ,2 4 3 up wardad

ju s t m en tt o co sto f g o o ds s o l d fo r 2 0 0 8 ). Al l i n al l , the RA d e-- 1 1 -

[* 1 1 ] t erm i n edth atp et i t i o n ers h adu n d ers t at ed t hei r t ax ab l e i nco m e b y $ 3 6 6 ,1 8 5 fo r 2 0 0 8 an d b y $ 3 8 0,1 2 4 fo r 2 0 0 9
. D. Tax Co u rtPro ceed i n gs OnJ u ne 8 , 2 0 17 , th e IRS i s s u edn o t i ces o f d efi ci en cy t o p et i t i o n ers , d et erm i n i n g th e d efi ci en ci es an dp en al t i es s etfo rth ab o v e. See s up ra p . 2 . Pet i t i o n ers t i m el y pet i ti o n edfo r red et erm i n at i on o f t h e d efi ci en ci es an d p en al t i es , i n i t i al l y p ro ceed in g p ro s e. When p et i t i o n ers d i dn o tres po n d t o i n fo rm al d i s co v eryrequ es ts , res po nd en ts erv edfo rm al d i sco v ery . Wh en p et i ti o n ers i g n oredres po n d en t’ s fo rm al d is co v ery

req u es t s , res p o n d en t fi l ed , o n M arch 2 1 , 2 0 1 8 , m o t i o n s t o
co m p el res p o n s es t o i n t erro g at o ri es an d t o co m p el p ro du ct i o n o f d o cu m en t s . W e g ran t edth o s e m o t i o n s an dd i rect edp et i t i o n ers t o p ro duce t he req ues t edi n fo rm at i on b y Ap ri l 2 3 , 2 0 1 8 , wh i ch th ey fai l edt o d o . 2 Attri al Dr. Ko h an d i d n o td i s p u t e t h ath e s ub s t an t i al l y u n derrep ort edth e i n co m e o f h i s d en t al p ract i ce. He t es t i fi edth at t h e u n d errep o rt i n g was n o th i s fau l t ,

2 OnM ay 1 0 , 2 0 1 8, o ne weekb efo re t h i s cas e was i n i t i al ly s ch edu l edt o b e tri ed , co u n sel en t eredan ap p earan ce fo r p et i ti o n ers an dth ereaft er co op erat edfu l l y wi th res p o n d en t ’ s co u n s el i n p rep ari n g t he cas e fo r t ri al . OnSep tem ber 2 6 , 2 0 1 8 , co u ns el fo r p et i ti o n ers m o v edth at we rel i ev e th em o f cert ai n d eem edad m is s i o n s , u rg i n g th atth ey d i d n o tu n d ers t an dth e co n s equ en ces o f n o tt i m el y res p o n d i n g t o res p o n d en t’ s req u es tfo r ad m is s i o n s s erv edup o n th em i n Feb ru ary

2 0 1 8 . See Ru l e 9 0 (c), (f). W e t o o kth atm o t i o n u n d er ad vi s em en tan d wi l l g ran ti t, fi n d i n g n o p reju d i ce t o res p o n den tb ecau se t h e m at t ers co vered b y h i s req u es t s fo r adm i s s i o n s were am p l y ad dres sed b y t es ti m o n y

attri al
.- 1 2 -

[* 1 2 ] u rg i n g th ath e d o es n otkn o w m u ch ab o u tb u s i n es s , th ath e k ep t v ery p o o r
reco rd s , an dth ath e rel i edo n M s . Ro dri g uez t o k eep h i s b o ok s an d o n M s . Fan t o p rep are p ro p er t ax retu rn s . He t es t i fi edth at h e d i dn ot rev i ew week ly o r m o n t h l y b an k d ep o s i t s fo r t h e d en t al p ract i ce an dh adn o i d ea h o w m u ch m o n ey

h e was
m ak i n g. W e d i dn o t fi n dDr. Ko h an ’ s t es t i m o n y cred ib l e. Al t h o u g h h e t es ti fi edth at h i s fi n an ci al ci rcu m s tan ces were t i g h tdu ri ng 2 0 0 8 an d2 0 0 9, h e s p en t m on ey qu i te l i beral l y . He an dh is fam il y m ad e an n u al tri p s t o Fl o ri d a an d Is rael . He p ai dth e
m o rt g ag e o n h i s m o t h er’ s h o u s e duri n g 2 0 0 8 an d2 0 0 9 , res u l t i n g i n an nu al ex p en d i tu res o f $ 6 1 ,3 1 3 an d$ 6 5 ,3 63 , res p ect i v el y . He tran s ferred l arg e s u m s t o rel i
g i o u s o rg an i zat i o n s du ri n g 2 0 0 8 an d2 0 0 9 , res ul t i n g i n an n ual ex p en di tu res o f $ 6 3 ,1 1 2 an d$ 9 2 ,0 9 3 , res pect i v el y . Of tho s e s u m s, m o re t h an $ 4 6 ,0 0 0 was tran s ferred t o an o rg an i zat i o n o p erat edb y h i s b ro t h er, wh o h el dt it l e t o th e d en t al o ffi ce b u i l d i n g . Th e t es t i m o n y

attri al s h o wed t h atDr. Ko han t o o kd el i b erat e s t ep s t o co n ceal as s et s an di n co m e. Al th o u g h h i s b ro t h er h el dt i t l e t o th e d en t al o ffi ce b u i l d
i n g du ri n g 2 0 0 8 an d 2 0 0 9 , Dr. Ko h an p ai d h i s b ro th er n o ren t . Rat h er, Dr. Ko h an
m ad e al l m o rt g ag e p aym en t s an dd efray edal l m ai n ten an ce ex p en s es o n thatp ro p ert y , i n d i cat i ng th at h e was t h e o wn er i n s ub s t an ce an dth ath i s b ro t h er was a- 1 3 -

[* 1 3 ] m ere n o m i n ee. In 2 0 1 5, du ri n g th e IRS i n v es t i g at i o n o f Dr. Ko h an , h i s b ro th er d i v es t edh i m s el f o f l eg al t i t le t o t h e d en t al o ffi ce b u i l d i n g b y tran s ferri n g i t fo r n o co n s i d erat i o n t o wh atap p ears t o h av e b een a s h el l co rp o rat io n . Th e RA’ s b an k dep o s i t s an al y s i s s h o w edth atDr. Ko h an freq u en tl y wro t e l arg e ch eck s t o h i m sel f o n h i s b an kacco u n t , h el d t h o s e ch eck s fo r a few d ay s , an d th en u seda ch eck -cas h i n g s erv i ce t o co n v ertth e ch eck s t o cas h . M s . Fan t es t i fi ed
as t o h er u n d ers t an d i n g th atDr. Ko h an ’ s p u rp os e i n d o i n g t hi s was t o art ifi ci al l y redu ce t h e b an k acco u n tb al an ce t h atwo ul db e v i si b l e t o h i s cred i t o rs . Dr. Ko h an t es t i fi edth ath e d idth is i n res p o n s e t o t h e 2 0 0 8 fi n an ci al cri s i s , wi t h drawi ng cas h wi th th e i n ten tt o red ep o s itth e ch eck s o n ce t h e b an k i n g s y s t em retu rn edt o n o rm al
. W e d i dn o tfi n dh is t es t i m o n y cred i b l e. OPINION A. Li m i t at i o n s Peri o d o n As s es s m en t Sect io n 6 5 0 1 (a) g en eral l y req u i res th e IRS t o as s es s a t ax wi t h i n t h ree y ears aft er t h e fi l i n g o f a ret urn . Th e p eri o do f l im i t at io n s i s ex t en d edt o s i x y ears wh ere th e t ax p ay er o m it s fro m

g ro s s i n co m e an am o u n t“ i n ex ces s o f 2 5 p ercen t o f t h e
am ou n to f g ro ss i n co m e s t at ed i n th e ret urn .” Sec. 6 5 0 1(e)(1 )(A)(i ). Th e n o t i ces
o f d efi ci en cy i n th i s cas e were i s s u edm o re t h an s ev en y ears aft er t h e p eri o do f- 1 4 -

[* 1 4 ] l i m i t at i o n s b eg an t o ru n . Res po n d en tco n ced es th atas s es s m en t o f t he d efi ci en ci es wo ul d b e t i m e b arred u n d er t h e g en eral ru l es o f s ect i o n 6 5 01 (a)
an d (e). Sect io n 6 5 0 1 (c)(1 ) p ro v i d es , h o wev er, t h at wh ere a t ax p ay er h as fi l ed“ a fal s e o r frau du l en treturn wi t h t h e i n t en t t o ev ad e t ax ,” t h ere i s n o p eri o do f l i m i
t at i o n s , an d t h e t ax “ m ay

b e as ses s ed* * * atan y

t i m e.” In th e cas e o f a jo i n t retu rn , frau db y ei t h er t ax p ay er s u s p en d s i n d efi n it el y th e p eri o d o f l im i t at io n s fo r b o th t ax p ay ers . See Ri ch ard s o n v . Co m m i ss i o n er, T.C. M em o . 2 0 0 6 -6 9 , 9 1 T.C.M . (CCH) 9 8 1 , 9 9 6 (“ [W ] h ere a jo i n tretu rn i s fi l ed , frau db y o n e s p o us e wi l l
s erv e t o l i ftth e s t atu t e o f l i m i tat i o n s as t o , an d p erm i tas s es s m en tag ai n s t , b o t h
s p o u ses . ”), aff’ d , 5 09 F.3 d 7 3 6 (6 t h Ci r. 2 0 0 7 ); s ee al s o Bal l ardv . Co m m is s i o n er, 7 4 0 F.2 d6 5 9, 6 6 3 (8 t h Ci r. 1 9 84 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o . 1 9 8 2
- 4 4 6
.

“ [T] h e d et erm i n at i o n o f frau dfo r p u rp os es o f t h e p eri o d o f l i m i t at i o n s o n
as s es s m en tu n d er s ect i o n 6 50 1 (c)(1 ) i s th e s am e as th e d et erm i n at i o n o f frau dfo r p u rp os es o f t he p en al t y

u n der s ect i o n 6 6 6 3 .” Neel y v . Co m m i s s i o n er, 1 16 T.C. 7 9 , 8 5 (2 0 0 1 ). Whet h er t he u n d erp aym en t s ati s su e were due t o frau d t h u s d et er-- 1 5 -

[* 1 5 ] m in es b o t h wh et h er Dr. Ko h an i s l i ab l e fo r t h e ci v i l frau d p en al t y an d wh et h er res p on d en tcan as s es s t h e d efi ci en ci es th atp et i t i o n ers h av e co n ced ed
. 3 B. Ci v i l Frau dPen al t y

“ If an y p arto f an y

u n d erp aym en to f t ax req u i red t o b e s h o wno n a retu rn i s du e t o frau d,” s ect i on 6 6 6 3 (a) i m p o s es a p en al t y

o f 7 5 % o f t h e p o rt i o n o f th e u n d erp aym en tdu e t o frau d . Res p o n d en th as th e b urd en o f p ro v i n g frau d , an dh e
m u stp ro ve i tb y

cl ear an dco n vi n ci ng ev i d en ce. Sec. 7 45 4 (a); Ru l e 1 4 2 (b ); Ri ch ard so n , 5 0 9 F.3 dat 7 4 3
. To s u s t ai n h i s b u rd en , res p o n d en tm u s t es t ab l i s h two el em en t s : (1 ) t h atth ere was an u n d erp aym en t o f t ax fo r each y ear at i s s u e an d (2 ) t h atatl eas t s o m e p ort io n o f t h e u n d erp aym en tfo r each y ear was du e t o frau d. Heb ran k v . Co m

m is s io n er, 8 1 T.C. 6 4 0 , 6 4 2 (1 9 8 3). Wh ere t h e Co m

m is s i o n er d et erm i nes frau d p en al t i es fo r m u l t i p le t ax y ears , h i s b u rd en o f p ro vi n g frau d“ ap p li es s ep arat el y fo r each o f t h e y ears .” Van o v er v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -7 9 , 1 0 3 T.C.M . (CCH) 1 4 1 8 , 1 4 2 0 (qu o t i n g

3 Pet i t i on ers d o n o t ch al l en g e res p o n den t ’ s s at i s fact i o n o f s ect i o n 6 7 51 (b )(1 ), wh i ch p ro v i des th at“ [n ] o p en al t y u n d er t h i s t i t l e s h al l b e as ses s edu n l es s th e i n i
t i al d et erm i n at i o n o f s uch as s es s m en t i s p ers o n al l y ap p ro v ed(i n wri t i n g ) b y th e i m m ed i at e s up erv i s o r o f t he i n di v i du al m ak i n g s u ch d et erm i n at i o n.” In an y ev en t, th e RA’ s s up erv i s o r ap p ro v edas s ert i o n o f th e frau dp en al t i es o n M ay 2 6 , 2 0 1 7 , b efo re t h e IRS i ss u edth e n ot i ce o f d efi ci en cy t o Dr. Ko h an . Th atn o t ice co n s t i
tu t edthe fi rs tfo rm al co m m u n i cat i o n t o Dr. Ko h an o f t h e IRS’ d et erm i n at i o n t o as s ertth e frau d p en al t y

ag ai n s th im . See Cl ay

v . Co m m is s i o n er, 1 5 2 T.C. _

_ , _

_ (s l i p o p. at4 2 -4 4 ) (Ap r. 2 4 , 2 0 1 9 ).- 1 6 -

[* 1 6 ] Tem

pl e v . Co m

m i s s i on er, T.C. M em o . 2 0 00 -3 3 7 , aff’ d , 6 2 F. Ap p ’ x 6 0 5 (6 th Ci r. 2 0 0 3 )). If res p o n d en t p ro v es th ats o m e p ort i on o f an u n d erp aym en tfo r a p art i cu l ar y ear was at t ri b u t ab l e t o frau d , th en “ t he en t i re u n d erp aym en ts h al l b e treat ed as at t ri b u t ab l e t o frau d ” u n l es s th e t ax p ay er s ho ws , b y a p rep o n d eran ce o f th e ev i d en ce, t h at t h e b al an ce o f t h e u n d erp aym en twas n o t s o at t ri b u t ab le. Sec. 6 6 6 3 (b ). Pet i t i o ners h av e co n ced edth atth ey u n d erp ai d t h ei r Fed eral i nco m e t ax b y $ 1 1 4 ,1 8 4 i n 2 0 0 8 an d $ 1 1 9 ,7 0 3 i n 2 0 0 9 . Th ey h av e t h u s co n ced edth e fi rs tel em en to f t h e frau d p en al t y . W e t h u s tu rn t o th e s eco n del em en t o f t h e p en al t y , frau du l en t i n t en t . Frau di s i nt en t i o n al wro n g d oi n g d es i g nedt o ev ad e t ax b el i ev edt o b e o wi n g. Neel y , 1 16 T.C. at8 6 . Th e ex is t en ce o f frau di s a qu es t io n o f factt o b e res o l v ed
up o n co n s i d erat i o n o f t h e en t i re reco rd . Es tat e o f Pi t t ardv . Co m m i s s i o n er, 6 9 T.C. 3 9 1 , 4 0 0 (1 9 7 7 ). Frau di s n o tt o b e p res u m edo r b as edup o n m ere s u s p i ci o n . Pet zo l d tv . Co m

m i s s i o n er, 9 2 T .C. 6 6 1 , 6 9 9 -7 0 0 (1 9 8 9). Bu tb ecau s e d i rectp ro o f
o f a t ax p ay er’ s i n t en ti s rarel y av ai l ab l e, frau du l en ti n t en tm ay b e es t ab l is h edb y ci rcu m s t an t i al ev i d en ce. Gro s s m an v . Co m m i ss i o n er, 1 8 2 F.3 d2 7 5 , 2 7 7 -2 7 8 (4 th Ci r. 1 9 99 ), aff’ g T.C. M em o. 1 9 9 6 -4 5 2 . Res p o nd en ts at i s fi es h i s b u rd en o f p ro o f b y s h o wi n g th at“ t h e t ax p ay er i n t en d edt o ev ad e t ax es kn o wnt o b e o wi n g b y- 1 7 -

[* 1 7 ] co ndu ct i n t en d edt o co nceal , m i s l ead , o r o t h erwi s e p rev en tth e co l l ect i o n o f t ax es .” Park s v . Co m

m i s si o n er, 9 4 T.C. 6 5 4 , 6 61 (1 9 9 0 ). Th e t ax p ay er’ s en t i re
co u rs e o f co n du ctm ay

b e ex am i n edt o es t ab l i s h t h e req u i s i t e i n t en t , an dan i n t en t t o m i s l eadm ay

b e i n ferred fro m

a p at t ern o f co n duct . W eb b v . Co m m i s si o n er, 3 9 4 F.2 d3 6 6, 3 7 9 (5 t h Ci r. 1 9 68 ), aff’ g T.C. M em o . 1 9 6 6 -8 1 ; St o ne v . Co m m is
s i on er, 5 6 T.C. 2 1 3 , 2 2 4 (1 9 71 ). Ci rcu m s t an ces t h at m ay

i n d i cat e frau dul en ti n t en t, o ft en referred t o as “b ad
g es o f frau d,” i n cl u d e b u t are n o tl i m i t edt o : (1 ) u n d ers tat i n g i n co m e, (2 ) k eep i n g i n ad equ at e reco rd s , (3 ) g i vi n g i m p l au s i b l e o r i nco n si s t en tex p l an at i o n s o f b eh av i o r, (4 ) co n ceal i n g in co m e o r as s et s , (5 ) fai li n g t o co o p erat e wi th t ax au t h o ri t i es , (6 ) en g ag i n g i n i l leg al act i v i ti es , (7 ) s up p l y i ng i n co m p let e o r m i s l ead i n g i n fo rm at i on t o a t ax retu rn p rep arer, (8 ) p ro v i d i n g t es t i m o n y th at l ack s cred i bi l i t y , (9 ) fi l
i n g fal se d ocu m en t s (i n cl ud i n g fal se t ax return s ), (1 0 ) fai l i n g t o fi l e t ax retu rn s , an d (1 1) d eal i n g i n cas h . See Sch i ff v . Un i t edSt at es , 9 1 9 F.2 d 8 3 0 , 8 3 3 (2 dCi r. 1 9 9 0 ); Brad fo rdv . Co m

m i s s i o n er, 7 9 6 F.2 d3 03 , 3 07 -3 0 8 (9 t h Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 98 4 -6 0 1 ; Park s, 9 4 T.C. at6 6 4 -6 6 5 ; Reck l i t i s v . Co m m i s s i o ner, 9 1 T.C. 8 7 4 , 9 1 0 (1 9 8 8 ); M o rs e v . Co m m i s s i o ner, T.C. M em o . 2 0 03 -3 3 2, 8 6 T.C.M
. (CCH) 6 7 3 , 6 7 5 , aff’ d , 4 1 9 F.3 d8 2 9 (8 th Ci r. 2 0 0 5 ). No s i n g le fact or i s d i s p o s i
-- 1 8 -

[* 1 8 ] t i v e, b utthe ex is t en ce o f s ev eral fact o rs “ i s p ers u as iv e ci rcu m s tan t i al
ev i d en ce o f frau d .” Van o ver, 1 0 3 T.C.M . (CCH) at 1 42 0 -1 4 21
. Sev eral o f t h es e fact o rs are n eu t ral o r i nap p o s i t e h ere. Dr. Ko h an d i dn o t
en g ag e i n i l l eg al act i v i t ies , an d (al t h o u g h h is p at i en t s o ft en p ai di n cas h ) h e d i d
n o th i m s el f d eal ex ten s i vel y i n cas h
. No r d i dh e al t o g et h er fai l t o fi l e t ax retu rn s . Bu t aft er t h o ro u gh rev i ew o f t h e reco rd , we co ncl u d e t hatth e o t h er ei g h tb ad g es o f frau d o v erwh el m i n g l y d em o ns t rat e t h atDr. Ko han act edwi t h frau du l en ti n t en tfo r b o th t ax y ears ati s s u e. 1
. Un d ers t at i ng In co m e A p at t ern o f s ub s t an t ial l y u n d ers t at in g i n co m e fo r m u l ti p l e y ears i s s t ro n g
ev i d en ce o f frau d , p art i cu l arl y i f t h e u n d ers t at em en t s are n o ts at i s fact ori l y ex p l ai n ed . Id ., 1 03 T.C.M . (CCH) at 1 4 2 1
. Pet i t i o n ers u n d ers t at edth e i n co m e fro m Dr. Ko h an ’ s d en t al p ract i ce b y $ 3 6 6 ,1 8 5 fo r 2 0 0 8 an d $ 38 0 ,1 2 4 fo r 2 0 0 9
. Pet i t io n ers h adl it t l e o t h er i n co m e duri n g 2 0 0 8 an d2 0 0 9 , an d t h es e u n ders t at em en t s are l arg e b o t h i n ab so l ut e an di n rel at iv e t erm s . Th es e u n ders t at em en t s were ch iefl y at t ri b u t ab le t o Dr. Ko h an ’ s u n d errep o rt i n g th e g ro s s recei p t s o f h i s d en t al p ract i ce. He u n d errep o rt edh i s Sch edul e C g ro s s recei p ts b y

$ 29 5 ,2 7 6 fo r 2 0 0 8 an db y $ 2 4 4 ,7 87 fo r 2 0 0 9 . Al l o f t hes e recei p t s were d ep o s i t edi n to h i s p ers o n al b an k acco u n t , s o h e can no tp l au s i b ly cl ai m- 1 9 -

[* 1 9 ] i g n o ran ce o f t h ei r m ag n i tu d e. See Cl ayt o n v . Co m m i s s i o ner, 1 0 2 T.C. 6 3 2 , 6 4 7 (1 99 4 ) (fi n d i n g frau dwh ere t h ere was a “ s t ead y fl ow” o f u n rep o rt edp aym en t s i n t o th e t ax p ay er’ s p ers o n al b an kacco u n t ). Fo r 2 0 0 8 an d2 00 9 Dr. Ko h anrep o rt edn eti n co m e fro m h i s d en t al p ract ice
o f o n ly $ 5 3 ,1 6 7 an d$ 91 ,0 89 , res p ect i v el y . Bu tdu ri n g t h es e y ears h e m ad e m o rt g ag e p aym en t s o n h i s m o th er’ s h o u s e o f $ 6 1 ,3 13 an d $ 6 5 ,3 6 3 , res pect i v el y , an d p aym en t s t o rel i g i o u s o rg an i zat i o n s o f $ 6 3 ,1 1 2 an d$ 9 2 ,0 93 , res p ect i v el y . Pu t t i n g
as i d e al l o f h i s fam i l y ’ s l i vi n g ex p en s es , th es e p aym en ts al o n e dw arf t h e n eti n co m e h e rep ort edfro m

h i s d en t al p ract ice, wh i ch was h i s o n l y m ean i ng fu l s o u rce
o f i n co m e. Gi v enth es e fact s , we fi n dDr. Ko h an ’ s t es t im on y th ath e “ hadn o i d ea h o w m uch m on ey

h e was m ak i n g ” t o b e wh o l ly i n cred ib l e. Dr. Ko h an ’ s ex p l an at i on fo r h i s u n d errep o rt in g o f g ro s s i n co m e was h i s
s up p os edi n ep ti tu d e atb u si n es s an dh i s rel i an ce o n M s . Ro dri g u ez an d M s. Fan
. W e fi n dth i s ex p l an at i o n i n co n s i s t en twi t h th e o b ject i v e fact s. Th e i n co m e Dr. Ko h an rep o rt ed t o M s . Fan was n o tran d o m o r h ap h azard . Th e o n l y

s t ream o f i n co m e h e i n i t ial l y

rep ort edt o h er co n s i s t ed o f t h e p aym en t s h e recei vedfro m i n s u ran ce co m

p an i es . He kn ew th at t h es e were t h e o nl y p aym en t s th atwo u l db e rep o rt edt o th e IRS o n Fo rm s 1 0 9 9 -M ISC. W e d o n o tth i n ki t a co i n ci d en ce t h at th es e are t h e o n ly

recei p ts th ath e rep o rt edt o M s . Fan
.- 2 0 -

[* 2 0 ] Pro m

p t edb y M s . Fan ’ s i n s i s ten ce t h ath e m us th av e recei v edco p aym en t s fro m h i s i n s u redp at i en t s, Dr. Ko h ans up p l i edes t i m at es o f t h o s e co paym en t s , wh i ch were u n sup p o rt edb y h i s b u s i nes s reco rd s . He d el i b erat el y co nceal edfro m h er al l o th er p aym en t s t h ath i s p at i en t s m ad e b y cas h , ch eck , o r cred i tcard
. Th es e fact s p ro v i d e v ery

s t ro ng ev i den ce o f frau du l en ti n t en t . 2
. M ai n t ai n i ng In ad equ at e Reco rd s Frau du l en ti n t en tcan b e i n ferred fro m a fai lu re t o m ai n t ai n ad equ at e b o o k s
an d reco rd s . See Ark . Oi l & Gas , In c. v . Co m m i s s i o n er, T.C. M em o. 1 9 9 4 -4 9 7 , 6 8 T.C.M . (CCH) 8 8 7 , 8 9 1
. Dr. Ko h an ad m it t edth at h i s reco rd k eep i ng p ract i ces were p o o r. He d i dn o tk eep a g en eral l ed g er fo r h i s d en tal p ract i ce (t h o u gh M s . Fan creat edo n e du ri n g th e IRS au di t ), an dh e k ep t n o recei p t s fo r cas h ex p en d i
tu res . He fai l edt o k eep s ep arat e b an k acco u n t s fo r h i s b us i n es s an dh i s p ers o n al affai rs , s o h i s p ers o n al an d b u s i n es s ex p en s es were co m m i n g l edan dd i ffi cu l tt o
s ep arat e. He d el eg at edt o h i s o ffi ce m an ag er t h e t as k o f co m b in g th ro u g h h i s ch eckb o o ki n an effo rtt o i d en ti fy b u s i nes s ex p en s es . Th i s i s n o t a rel i ab l e m et ho d
o f t rack i ng ex p en s es fo r a b u s in es s . Dr. Ko h an ’ s actual g ro s s recei p t s were reco rd edi n h i s p at i en t s ’ ch art s , o n wh i ch M s. Ro dri g u ez reco rd edal l p aym en t s fro m p at ien t s an d t h ei r i n s urers . Pay
m en t s were al s o track edi n a recei p tb oo kk ep t i n th e b as em en to f th e d en t al o ffi ce- 2 1 -

[* 2 1 ] b u i l d i n g . Bu td es pi t e m u l t i p l e req u es ts fo r h i s b u si nes s reco rd s , Dr. Ko h an d ecl i nedt o p ro v id e an y

o f th es e d ocu m en t s t o th e RA. Dr. Ko h ans o u g htt o at t ri b u t e t h e i n ad equ acy o f h i s b u s i n es s reco rd s t o th e
as s ert ed l acko f a co m

p u t er i n h i s d en t al o ffi ce. W e d i dn o tfi n dh i s t es t i m o n y o n th i s p o i n tcred i b l e. Onh i s Sch edu l es C fo r 2 0 0 8 an d 2 00 9 , Dr. Ko han cl ai m ed ag g reg at e d edu ct i on s o f $ 1 9,6 5 8 fo r co m p u t er s o ft ware an d rel at edex p en s es . As th e o ffi ce m an ag er, M s . Ro dri g u ez o b v i o u s l y kn ew wh et h er t he o ffi ce h ada co m p u t er. W e fi n di ti n co n cei v ab le, o n t h e b as i s o f h er t es t i m o ny , thats h e wo u l dh av e rep o rt edco m

p u ter-rel at edex p en s es t o M s . Fan i f t h e o ffi ce h adn o co m p u ter. Ov eral l , th is s eco ndb ad g e o f frau d fav ors res p o n den t . 3
. Gi v i ng Im

p l au s i b l e o r In co n s is t en tEx p l an at i on s o f Beh av i o r Dr. Ko h ani s a h i g h l y

edu cat edi n di v idu al , b u t h e o ffered t o t h e IRS an dth e Co u rta v ari et y

o f i m p l au si b l e an d i n co n s i s t en tex p l an at io n s ab ou th is i n co m e an d
as s et s. He t o l d t h e RA t h ata rel at i v e o wn edth e d en t al o ffi ce b u i l d i n g an d l eas ed i t to h i m , b u th e refu sed t o i d en t i fy th atrel at i v e o r s p eci fy

the am o u nto f ren tp ai d
. Th e RA’ s i n ves t i g at i on rev eal edth atDr. Ko h an ’ s b ro t her was l is t edas th e o wn er
o n th e t i t l e cert i fi cat e, b u tDr. Ko h an p ai dh is b ro t h er n o ren t(u n l es s h i s p urp o rt ed
co n tri b u t i o n s t o h i s b ro t h er’ s rel i g i o u s o rg an i zat i o n co n s t itu t edd i s gu i s edren t ). Dr. Ko h an ’ s m ak in g al l m o rt g ag e p aym en t s o n th e b u i ld i n g an dd efray i n g al l- 2 2 -

[* 2 2 ] m ai n t en an ce ex p en s es were i n co n si st en twi t h h is t es t im o n y th ath i s b ro t h er
o wn edth e p ro p ert y . On e o r m o re t en an t s o ccup i edth e res i d en t i al p o rt i o n o f t h e d en t al o ffi ce b u i l d i n g du ri n g 2 00 8 an d2 00 9 , b u tn ei t h er Dr. Ko han n o r h i s b ro t h er rep o rt edan y
ren t al i n co m e. Dr. Ko h an t es t i fi edthatth e t en an t s were al lo wed t o l iv e ren tfree du ri n g 2 0 0 8 an d2 0 0 9 (an ddu ri n g th e p rev i o u s s ev eny ears ) b ecau s e th ey “ were t ak i n g care o f t h e p ro p ert y an dwat ch i n g i t.” W e fo u n d t h i s t es t i m on y wh o l l y i m p l au s i b l e. Dr. Ko h anal so p ro v i d edi n co ns i s ten t ex p l an at i o n s ab o u th i s p ract i ce o f wri t in g l arg e ch eck s t o h i m s el f o n h i s p ers on al b an kacco u n t . He t o ldM s. Fan th ath e d i dthi s i n o rd er t o redu ce t h e acco u n tb al an ce t h atwo u l d b e v i s i b le t o cred i t o rs . If tru e, t h ati t sel f wo u l db e i n d i cat iv e o f frau d . He t es t i fi edattri al th at h e en gag edi n thi s p ract i ce as a res p o n se t o th e fi n an ci al cri si s , b u twe d i dn o tfi n d th i s t es t i m o n y

cred i b l e. Th e t h i rdb ad g e o f frau dth u s s upp l i es s t ro ng ev i d en ce o f frau du l en t i n t en t . 4
. Co n ceal i n g In co m e o r As s et s A wi l l fu l at t em

pt t o ev ad e t ax m ay

b e i n ferred fro m

a t ax p ay er’ s co n ceal
m en to f i n co m e o r as s et s . Sp i es v . Un i t edSt at es , 3 1 7 U.S. 4 9 2 , 4 9 9 (1 9 43 ). In ad d it i o n t o th e ji g g ery -p o k ery d i s p l ay edb y

h i s ch eck -wri t i n g s ch em e, Dr. Ko h an- 2 3 -

[* 2 3 ] at t em

p t ed t o co n ceal as s et s b y

s h o wi n g h i s b ro t her as th e h o l d er o f t i t l e t o th e d en t al o ffi ce b u i l d i n g. Bu tth e ev i d en ce es tab l is h ed t h atDr. Ko h an ’ s b ro t h er
was a m ere n o m i n ee. Wh en Dr. Ko h an cam e u n der IRS i n v es t i g at i o n , h i s b ro th er tran s ferred t it l e t o th e b u i ld i n g t o wh ats eem s t o h av e b een a s h el l co rp o rat i o n . Dr. Ko h anm ad e l arg e t ran s fers du ri n g 2 0 0 8 an d2 0 0 9 t o o r fo r fam i l y
m em b ers : ro ug h l y $ 4 6 ,0 0 0 t o an o rg an i zat i on co nt ro l l edb y h is b ro t h er an d
ro u g hl y $ 1 3 0,0 0 0 t o p ay

h i s m o t h er’ s m o rt g ag e. He was n o tfo rt h co m i n g ab o u t th es e ex p en d i tu res attri al . Th es e u n ex p l ai n edex p en d i tu res are co n si s ten twi t h Dr. Ko h an ’ s o t h er effo rt s t o co n ceal i nco m e an d as s et s . 5
. Fai l i n g To Co op erat e W i t h Tax Au t h o ri t i es Dr. Ko h and idn o t co o perat e wi t h th e IRS d u ri ng th e ex am in at io n . He d ecl i n edt o p ro du ce t h e recei p t s b o o kk ep ti n t h e b as em en to r t h e p aym en t i n fo rm at i on i n cl u d edo n p at i en t s ’ ch art s . He d ecl i n edt o p ro du ce t h e i n co m e an dex p en s e
s u m m ari es th ath e s up pl i edt o M s . Fan fo r u se i n p rep ari n g h is t ax retu rn s . He refu s edt o an s wer qu es t io ns wh en th e RA cam e t o i n t erv i ew h i m . An dh e fal s el y t o l dh er t h ath e l eas ed t h e d en t al o ffi ce b u i l d i ng fro m a rel at i ve wh om

h e refu s ed t o n am e. Dr. Ko h anan dh i s wi fe were eq ual l y u n co o p erat iv e wi t h res p o n d en taft er fi li n g th ei r p et i t i o n . Res p o n d en tat t em p tedd i s co veryth ro ug h i nfo rm al req u es t s- 2 4 -

[* 2 4 ] fo r d ocu m en t s an dres p o n s es t o i n t erro g at ori es , b u tp et i t i o n ers d idn o t p ro v id e a s i n gl e d ocu m en tt o s ub s t an t i at e ex p en s es u n d erl y in g th ei r cl ai m ed d educt i o n s . InM arch 2 01 8 res p o nd en tfi l ed , an d we g ran t ed , m o t i o ns t o co m p el p ro duct i o n o f d o cu m en t s an d res p o n s es t o i n t erro g at o ri es , b u tp et it i on ers ag ai n refu sedt o res p o nd . Co o p erat i o n b eg an o n l y a weekb efo re t ri al , wh en p et i t i o n ers ret ai n ed co u ns el . Al t h o u gh th ey u lt i m at el y

co n ced edth e d efi ci en ci es , th ey d i d s o
o n l y aft er m o n t h s o f s t o n ewal l in g an du n ju s t i fi edrefu s al s t o co o p erat e wi t h
res p o n d en t’ s co u n s el
. Th i s o b st ru ct i v e b eh av i o r i s a cl ear b ad g e o f frau d. 6
. Pro v i d i n g In co m

p l et e o r M is l ead i n g In fo rm at i o n A t ax p ay er’ s p ro v i s i on o f i n co m p l et e o r m i sl ead i n g i n fo rm at io n t o h i s retu rn p rep arer--i n p art i cu l ar, h i s co n ceal m en to f g ro ss i n co m e--p ro v i d es s t ro n g ci rcu m s t an t i al ev i d en ce o f frau du l en ti n t en t. See M ors e v . Co m m i s s i on er, 4 1 9 F.3 dat 8 33 ; Ko reck y

v . Co m m i s s i o n er, 7 8 1 F.2 d1 56 6 , 1 5 6 8 (1 1 t h Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 9 8 5 -6 3 ; Van o v er, 1 03 T.C.M . (CCH) at 1 42 2
. Dr. Ko h an fai l edt o p ro v i d e M s . Fan wi t h co m p l et e i n fo rm at i o n ab o u th i s g ro ss recei p t s , co n ceal i n g p aym en t s h i s p at i en t s m ad e b y cas h , ch eck , an dcred i tcard . Wh en M s . Fan p res sedh i m

th ath i s i ns u redp at i en t s m us th av e m ad e co p aym en t s , h e s up p li ed h er wi th g u es s t i m at es th atwere u n s up p o rt edb y h i s b us i n es s reco rd s .- 2 5 -

[* 2 5 ] Dr. Ko h anal so g av e M s . Fan fal se i n fo rm at i o n fo r u s e i n p rep ari n g h i s p ay ro l l t ax return s . He u n d ers tat edb y m o re t h an 5 0 % the wag es h e h adp ai dM s . Ro dri g u ez an dM s . Varg as duri n g 2 0 09 , an d h e co nceal edal t o g ether t h e wag es h e h ad p ai dth ree p art -t i m e wo rk ers . Th i s p at t ern o f m i s rep res en t at i o n an dco n ceal
m en ti s a p o werfu l i n d ex o f frau d
. 7
. Lacko f Cred i b i l i ty o f Tax p ay er’ s Tes ti m o n y W e d i dn o t fi n dDr. Ko h an t o b e a cred i b le wi t n es s . He was o ft en ev as i v e
o r d i s m i s s i v e o f qu es t i o n s th atres p o n d en tan dthe Co u rtas k edo f h i m . W e h av e
n o t edab o v e n u m ero u s s p eci fi c p o i n t s o n wh i ch we fo u n dh i s t es t i m o n y t o l ack cred i b i l i ty . Hi s o veral l d efen s e--t h atM s . Ro dri g u ez an dM s. Fan were res po n s i b le fo r h i s u n d errep ort in g o f i n co m e--was equ al l y i m p l au s i b l e. Bo th o f t h em

t es t i fi ed attri al an d were fo rt h co m i n g ab o u tth ei r res p on s ib i l i t i es an di n teract i o n s wi t h Dr. Ko h an . W e fi n di ti n co ncei v ab l e t h atei t h er o f t h em co u l do r wo u l dh av e co n co ct edu n il at eral l y

th e s y s t em at i c u n d errep o rt i n g o f i n co m e th at h e en gi n eered
. 8
. Fi l i n g Fal s e Do cu m en t s Pet i t i o ners h av e s t i pu l at ed t h atth e i n co m e rep o rt ed o n t h ei r 2 0 08 an d2 0 0 9 retu rn s was u n d ers t at edb y m o re t h an $ 30 0 ,0 0 0 p er y ear. Th es e u n d ers t at em en t s were ch iefl y

at t ri b u t ab l e t o Dr. Ko h an ’ s fai l u re t o rep o rtp aym en ts h i s p at i en t s
m ad e b y cas h , ch eck , an dcred itcard . Th es e o m i s s io n s fro m g ro ss i n co m e were- 2 6 -

[* 2 6 ] l arg e i n do l l ar t erm s ($ 2 9 5 ,2 7 6 fo r 2 0 08 an d $ 2 4 4 ,7 8 7 fo r 2 0 09 ) an di n
v o l u m e (1 8 8 d i s t i n ctcred i tcardp aym en t s i n 2 0 0 8 an d2 1 2 i n 2 0 0 9 ). Al l o f t h e ch eck s an dcred i tcardp aym en t s were d ep o s i t ed i n t o Dr. Ko h an ’ s p ers o n al b an k acco un t . He m u s th av e kn o wnth atth i s i n co m e ex i s t ed , i n p artb ecau s e h e s p en ti ts o l i b eral l y t o fu n dh i s fam i l y ’ s l i v i n g ex p en s es , h i s m o t her’ s
m o rt g ag e p aym en t s , an dg en ero u s tran s fers t o rel i gi o u s o rg an i zat i o ns . An db es i des fi l i n g fal s e i n co m e t ax retu rn s , h e cau s edth e fi l i n g o f fal se Fo rm s W -2 an d W -3 b y d el i b erat el y

u n d errep o rt i n g t o M s. Fan th e wag es h e p ai d h i s em p l o y ees . C. Pet i t i o ners ’ Arg um en t s No p en al ty

i s i m p o sed wi t h res p ectt o an y p o rt i o n o f an u n derp aym en ti f t h e t ax p ay er act edwi th reas o n ab le cau s e an d i n g o o d fai t h wi th res p ectth eret o . See
s ec. 6 6 64 (c)(1 ). Th e t ax p ay er g en eral l y b ears th e b u rd en o f p ro v i n g reas o n ab l e
cau s e an d g o o dfai t h . Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. 4 3 8, 4 4 6 (2 0 0 1). Reas
o n ab le cau s e can b e s h o wnb y g o o d -fai t h rel i an ce o n th e ad v i ce o f a qu al i fi edt ax p ro fes s i on al . Sec. 1 .6 6 6 4 -4 (b )(1 ), (c), In co m e Tax Reg s . To es t ab l i s h t h i s d efen s e t h e t ax p ay er m

us t p ro v e t h at : (1 ) t h e ad vi s er was a co m pet en tp ro fes s i o n al wh o h ad s u ffi ci en tex pert i s e t o ju s t i fy rel i an ce; (2 ) t h e t ax p ay er fu l l y d i s cl o s edal l rel ev an t fact s t o t h e ad v i s er; an d(3 ) t h e t ax p ay er actu al l y rel i edi n g o o dfai t h o n- 2 7 -

[* 2 7 ] th e ad v i s er’ s ju d g m en t . Neo n at o l o g y As so cs ., P.A. v . Co m

m i s si o n er, 1 1 5 T.C. 4 3 , 9 9 (2 00 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 0 2 ). Dr. Ko h anco n t en d s t h ath e reas on ab l y rel i edo n M s. Ro dri g u ez t o k eep h i s b o o k s an do n M s . Fan t o p rep are h i s t ax retu rn s . W i t h res p ectt o M s . Ro dri g u ez, p et i t i o n ers o ffered n o ev i d en ce t o s u g g es tth ats h e h ad s uffi ci en t ex p ert i s e t o ju s t i fy rel i an ce. Sh e h adn o b ack g ro un di n acco u nt i n g o r t ax l aw; s he was n o ti n v o l v edi n th e p rep arat i o n o f p et i t i o n ers ’ 2 0 0 8 an d2 0 0 9 ret u rn s ; an d s he cred i b l y t es t i fi edth ats h e co u ldn o th av e as s es s edth e accu racyo f th o s e ret u rn s i f as k edt o d o s o . M s . Fan d i dh av e ex p ert i s e i n t ax an d acco u n t i n g , b u tDr. Ko h an wo efu l l y fai l edt o p ro v i d e h er wi t h the i n fo rm at i o n n eces s ary t o p rep are p et i t i o ners ’ 2 0 0 8
an d 2 0 0 9 t ax retu rn s co rrect l y . Dr. Ko h an t es t i fi edth ath e rel i edo n M s . Ro dri
g u ez t o s up p l y

accu rat e i n fo rm at i o n t o M s. Fan , b u tM s . Ro dri g u ez act edath i s d i rect i o n . He i n s tru ct edh er t o creat e a fo l d er co n t ai ni n g th e i n s u ran ce co m p an y Fo rm s 1 0 9 9 -M ISC, an dh e s upp l i edth is fo l d er t o M s . Fan as t h e b ed ro ckfo r h i s
s ch em e t o rep o rto n l y

th ats t ream

o f i n co m e. M s. Ro dri gu ez accu rat el y reco rd ed al l p aym en t s i n th e p at i en t s ’ ch art s , b u tDr. Ko h an n eg l ect edt o p ro v i d e th ati n fo rm at i o n t o M s . Fan . See Co l e v . Co m m i s s io n er, T.C. M em o . 1 9 98 -4 5 2 , 7 6 T.C.M- 2 8 -

[* 2 8 ] (CCH) 1 05 5 , 1 0 5 9-1 06 0 (fi n d i n g frau dwh ere d o ct o r, i n p rep ari n g t ax retu rn s , fai ledt o u s e b u si n es s reco rd s av ai lab l e t o h i m ). Dr. Ko h anas s ert edthath e t o o ka t o tal l y h an d s -o ff ap p ro ach t o th e p rep arat i on o f h i s t ax retu rn s , b u tthe ev i d en ce d i dn o t s upp o rt t hatas s ert i o n . He p ers o n al l y t al l i edup th e Fo rm

1 0 9 9 -M ISC p aym en t s fo r 2 0 0 9 an ds upp l iedth e reg i s t er t ap e t o M s . Fan . An dh e p ers o n al l y es t i m at edh i s i n su redp at i en t s ’ co p aym en t s wh en M s . Fan p res s edh i m o n th ats ub j ect . M s . Fan m ig hth av e b een m ore ag g res si v e i n ques t i o n i n g Dr. Ko h an ab o u t
o th er p aym en t s h i s p at ien t s m i g h th av e m ad e b y cas h, ch eck , o r cred itcard . Bu t
ev en if s h e were t h o u g h tt o h av e tu rn eda b l i ndey e t o th e p o s s i b l e ex i s ten ce o f ad
d i t i o nal i n co m e, t h at wo u l dn o ti m m u n ize Dr. Ko h an fro m

h i s d el i berat e an di n t en t i o n al fai l u re t o rep o rtth ati n co m e t o h er. Becau se Dr. Ko h an fai ledt o s h o w th ath e rel i edi n g o odfai t h o n th e ad v i ce o f a qu al ifi edt ax p ro fes si o n al , h e i s n o t
en t i t l edt o rel i ef fro m

th e frau dp en al t y

u n d er s ect i o n 6 66 4 (c)(1 ). In s u m , we co n cl u d e t h atres p o n d en th as es t ab l i s h edb y cl ear an d co n v i n ci n g ev id en ce t h atDr. Ko h an ’ s u n d erp aym en t s o f t ax fo r 2 0 0 8 an d2 0 0 9 were at tri b u t ab l e t o frau d . Pet i t i on ers h av e fai l edt o s ub m itcred i b le ev id en ce s h o wi n g th atan y p o rt i o n s o f t h es e u nd erp aym en ts were n o t du e t o frau d . W e t h u s h o l dth at- 2 9 -

[* 2 9 ] p et i t i o n ers are l i ab l e fo r t h e t ax d efi ci en ci es th ey h av e co n ced ed an d t h atDr. Ko h an i s l i ab l e fo r s ect io n 6 6 6 3 ci v il frau dp en al t i es fo r b o t h y ears . 4 To refl ectthe fo reg o i n g , Anap p ro p ri at e o rd er an dd eci s i o n wi l l b e en t eredfo r res p on d en t .

4 Hav i n g co ncl u d ed t h atDr. Ko h an i s l i ab l e fo r t h e frau d p en al t y , we n eed n o tco ns i d er res p o n d en t ’ s al t ern at i v e d et erm in at i o n o f accu racy -rel at edp en al t i es ag ai n s tDr. Ko h anan dh i s wi fe.