T.C. Mem o. 2 01 6- 11 8

UNITED STAT ES TAX COURT
JOHN FINNEGAN AND JOAN FINNEGAN, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 86 37 -1 3. Fi le d J un e 1 6, 2 01 6.

Ja redJ. Sch arf, fo r pe ti ti on ers . Mi ch ael J. De Ma to s, Ro se E. Gole , andGenn ady Zil be rm an , for
res po nd en t. MEMORANDUM FINDINGS OF FACT AND OPINION W ELLS, Ju dg e: On Feb ru ary 7, 2 01 3, re sp on de ntis su edpe ti ti on ers a no ti ce o f de fic ie nc y

de te rm in in g d efi ci en ci es an d s ect io n 6 66 2( a) accu racy- 1

Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 Co de of 1 98 6, as am en de d a ndas i n e ffec t fo r th e y ears inis su e, an d R ul e refe ren ces are t o t he Tax C ou rt Rul e o f Prac ti ce an d P ro cedur e.- 2 -

[* 2] rel at edpe na lt ie s fo r th e ta xabl e y ears 19 94 th ro ug h 2 00 1. Pe ti ti on ers co nt en d th atth e as se ss m en ts are t im e b arre d b y th e th ree- y ear p eri odof l im it at io ns of
se ct io n 6 50 1( a). Rel y in g o n Al le n v . Comm is si on er, 1 28 T.C. 37 (20 07 ),
res po nd en t co un te rs th atth e li mit at io ns pe rio d re m ai ns op enun de r se ct io n 65 01 (c)( 1) be cau se pe ti ti on ers ’ return p rep arer , Duan e Howe ll , pre pa redeach return fa ls el y

or f rau du le nt ly w it h t he in te ntto ev ad e ta x. Acco rd in gl y , we m us t de ci de whet he r res po nd en t h as pro ve d c le arl y an d c on vi nc in gl y

th atpe ti ti on ers ’ returns were p rep aredfal se ly or frau du le nt ly w it h t he in te ntto ev ad e ta x. Prel im in ary Mat te rs Pet it io ne rs ha ve ob

jecte d t o t he adm is si onin to ev id en ce o f certa in te st im on y an d d oc um en ts . On th e g ro un ds of r el ev an cy , pet it io ne rs ob ject t o t he te st im on y of I nt ern al Rev enue Serv ic e Sp eci al Agen t As hc ro ft a ndof Gl en Ro bi ns , Mr. Howe ll ’s form er as so ci at e. Res po nd en t as se rts th atth e te st im on y is 2
ev id en ce o f Mr. Ho well ’s m odus op eran di an d t hu s re le va ntto th e que st io n o f frau du le ntin te nt .

Des pi te th e Co urt’s i ns tru ct io ns at t ria l, p et it io ne rs di d n otbri ef the 2 ev id en ti ary m at te rs ina se pa rat e ev id en ti ary se ct io n o f th ei r op en in g b rie f. Pet it io ne rs di d, h owe ve r, in cl ud e a fo ot no te to “ av oi d awaiv er” o f th ei r arg um en t. The foo tn ot e d is cu ss es he ars ay ob jecti on s, b utno t re le va nc y . W e n ev erthe le ss ad dr es s p et it io ne rs ’ rel ev an cy ob jecti on s d is cu ss edinth ei r res po nd in g b rie f.- 3 -

[* 3] Tria ls be fo re the Tax C ou rt a re co nduc te d i n a cco rd an ce wi th th e Fed eral Ru le s o f Evi de nc e, Ru le 14 3( a), whi chpro vi de th e g en eral rul e th atall rel ev an t 3
ev id en ce i s ad m is si bl e, Fed . R. Evi d. 4 02 . Rele va ntev id en ce i s ev id en ce h av in g

“ an y ten de nc y to m ak e a fac t m or e o r le ss pro babl e th anitwou ldbe witho utth e ev id en ce” a nd“ th e fac t i s o f co ns eque nc e in de te rm in in g t he act io n.” Fed . R. Evi d. 4 01 . Res po nd en t o ffer edMr. Ro bi ns ’ an d S pe ci al Agen t As hc ro ft’s te st im on y to pro ve th atwhen Mr. Ho well pre pa redfrau du le ntreturns , he r ou ti ne ly
us edcert ai n e nt rie s an d m etho ds whi chals o app ear o n p et it io ne rs ’ returns . Pet it io ne rs ’ reas on in g fo r why the tes ti m on y is no t re le vant , th atMr. Ro bi ns di d
no t p rep are p et it io ne rs ’ returns an d S pe ci al Agen t As hc ro ft d idno t i nv es ti ga te pe ti ti on ers ’ returns , is m is pl aced . “ Evi de nc e o f a p ers on ’s hab itor a n or ga ni zat io n's rou ti ne pra ct ic e m ay be adm it te d t o p ro ve th aton a pa rti cu la r oc cas io n t he pe rs on or o rg an iz at io n a ct edinacco rd an ce wi th th e h ab itor r ou ti ne pr act ic e.” Fed . R. Evi d. 4 06 . W e fi ndth e te st im on y of M r. Ro bi ns an d S pe ci al Age ntAsh cro ft r el ev an t. Whethe r Mr. Ho well ha d ahabi t o r ro ut in e whe n frau du le nt ly prep ari ng returns an d wh ethe r pe ti ti on ers ’ returns di sp la y ele m en ts of The rul e in effe ctdu rin g t ria l i n t he in st an t ca se read s: “ [T]rial s b efo re the 3 Co urt wi ll be co nduc te d i n a cco rd an ce wi th th e ru le s o f ev id en ce ap pl ic ab le in tri al s wi th ou t a ju ry

inth e Uni te d S ta te s Di st ric t Co urt fo r th e Dis tri ctof Co lu m bi a”. The Dis tri ctCo urt’s l oc al rul es do no t i nc lu de an y pro vi si on affe ct in g th e ap pl ic ab il it y

of F ed eral Ru le s o f Evi de nc e ci te d i n t he in st an t o pi ni on .- 4 -

[* 4] th athabi t o r ro ut in e are fact s o f co ns eque nc e m ak in g i t m or e o r le ss pro babl e th atMr. Ho well pre pa redpe ti ti on ers ’ returns fal se ly or frau du le nt ly w it h the in te nt to ev ad e ta x. Furth erm or e, th e te st im on y is no t n eed le ss ly cum

ul at iv e b ecau se Mr. Ro bi ns an d S pe ci al Agen t As hc ro ft t es ti fie d a s t o d iff eren t as pe ct s o f Mr. Howel l’s m etho ds of f

rau d. On the gro un ds of r el ev an cy an d h ears ay , pet it io ne rs als o o bjec te d t o t he adm is si on of M r. Howel l’s af fid av itan d p rev io us tes ti m on y inth e cri m in al tri al of Tim ot hy Mit ts , Mr. Howe ll ’s form er em pl oyee. As in th e cas e o f th e te st im on y di sc us se d abo ve , pet it io ne rs ’ rel ev an cy ob jecti on is m is pl aced . Mr. Howel l’s st at em en ts are re le va ntinde te rm in in g h is m ot iv e an d i nt en t wh enm ak in g c ert ai n en tri es inpe ti ti on ers ’ returns . W e al so de te rm in e th atth es e d oc um en ts are n ot in adm is si bl e h ears ay . Hears ay is adm is si bl e as sp eci fie d b y a Fed eral st atut e, as pr es cri be d b y

th e Supr em e Co urt, o r as pro vi de d i n t he Fed eral Ru le s o f Evi de nc e. Fed . R. Evi d. 8 02 . There is no di sp ut e th atMr. Ho well ’s affi da vi t an d h is pri or te st im on y are h ears ay , bu t re sp on de ntco nt en ds th atth es e d oc um en ts are adm is si bl e p ur su an t t o ru le 80 4( b) (3 ) of th e Fed eral Ru le s o f Evi de nc e. Und er th is ex cep ti on , hea rs ay

is adm is si bl e if

: (1 ) th e d ecl aran t o f th e st at em en t i s un av ai labl e; (2) th e st at em en t, wh enm ad e, was “ so co nt rary to the de cl aran t’s pr op rie ta ry

or p ecu ni ary in te res t” th atitwou ldon ly hav e b eenm ad e b y a- 5 -

[* 5] reas on ab le pe rs on if the pe rs on be li ev editto be tru e; an d (3 ) th e st at em en t “ is
supp orte d b y

co rro bo rat in g c irc um st an ces th atcle arl y in di cat e it s tru st worth in es s, if i t i s o ffer edina cri m in al cas e as on e th atten ds to ex po se th e d ecl aran t t o cri m in al li ab il it y .” Fed . R. Evi d. 8 04 (b )(3 ). Inth e in st an t ca se we fin d t ha t the fir strequi rem en t i s m etbe cau se Mr. Howel l was un av ai labl e. Fed . R. Evi d. 8 04 (a)( 5) . The Co urt m ay rel y on co un se l’s re pr es en ta ti on s as to th e wit ne ss ’ av ai labi li ty. See, e.g ., Haeri v. Co m m is si on er, T.C. Mem o. 1 98 9- 20 . Res po nd en t’s co un se l re pr es en ts th ateffo rts to pro cu re Mr . Howel l’s at te nd an ce b eg aneig htm on th s b efo re tria l an d i nc lu de d cal ls to Mr. Ho well , hi s the n re pr es en ta ti ve , no ti ces vi a certi fie d m ai l, an d 1 0
se pa rat e at te m

pt s m ad e b y

rev enue ag en ts an d apri va te pro ces s s erv er t o s erv e Mr. Ho well with asubp oe na . Peti ti on ers co nt en d t ha t re sp on de ntsh ou ldhave le ve rag edMr. Ho well ’s pl ea b arg ai n wi th th e Uni te d S ta te s i n h is cri m in al cas e to co m pe l h im to tes ti fy . The t es t, h owe ve r, is no t wh ethe r res po nd en t u se d a ll
m ean s athi s d is po sa l t o p ro cu re a wi tn es s, b utrathe r whe th er h e u se d re as on ab le
m ean s. Be cau se res po nd en t was un ab le to pro cu re Mr . Howel l’s at te nd an ce o r te st im on y de sp it e p ro ces s an d o th er re as on ab le m ean s, we d et erm in e Mr. Ho well
was un av ai labl e attri al
.- 6 -

[* 6] The sec on d re qu ire m en t i s m etbe cau se Mr. Ho well ’s st at em en ts ex po se hi m to cri min al li ab il it y

an d c iv il li ab il it y

fro m form er cl ie nt s. See Uni te d S ta te s v . Sco po , 86 1 F .2d33 9, 3 48 (2dCir . 19 88 ); Un it edSta te s v . Cha n, 1 84 F. Sup p. 2 d 33 7, 3 42 (S.D.N.Y. 20 02 ). At le as t o ne cli en t h as alr eady in st ig at edleg al pr oc eed in gs ag ai ns t M r. Howel l, u si ng hi s s ta te m en ts at t he Mi tt s tria l. See , e.g., Mo or e v . Howel l, d oc ke t No . 25 41 -1 0 (N.J . Sup er. Ct . May 1, 2 01 5) . The fac t tha t Mr. Ho well tes ti fie d p ur su an t t o apl ea ag reem en t d oe s n otren de r hi s s tate m en ts un rel iabl e o r in adm is si bl e. See Sc op o, 8 61 F.2dat 3 48 . Fin al ly, Mr. Ho well ’s st at em en ts are co rro bo rat edby pet it io ne rs ’ te st im on y reg ard in g h is rol e in th e pr ep arat io n o f th e returns , Mr. Ro bi ns ’ te st im on y reg ard in g o ffi ce ro ut in es , and Sp eci al Agen t As hc ro ft’s t es ti m on y ab ou t M r. Howel l’s m odus op eran di
. Acco rd in gl y , we admit i nt o e vi de nc e: Exh ib it57 , th e tr an sc rip t o f Mr. Howel l’s t es ti m on y

inth e Mi tt s tria l; Exh ib it63 , Mr. Howe ll ’s affi da vi t s ta ti ng th athe frau du le nt ly prep aredpe ti ti on ers ’ returns ; an d t he tes ti m on y of S pe ci al Age ntAsh cro ft a ndMr. Ro bi ns . 4

Pet it io ne rs ad di ti on al ly objec t t o t he in tro du ct io n i nt o e vi de nc e o f a m yria d 4 of ot he r do cu m en ts . W e su st ai n p et it io ne rs ’ ob jecti on s, as we di d n otrel y on th os e d oc um en ts inm ak in g o urde te rm in at io ns an d t he y ha ve no be ari ng on ou r de ci si on .- 7 -

[* 7] FINDINGS OF FACT I. Pet it io ne rs So m e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e p art ie s’ st ip ul at io ns are i nc or po rat edinth is op in io n b y refer en ce an d are fo un d a cco rd in gl y . Duri ng ta xabl e y ears 19 94 th ro ug h 2 00 1, p et it io ne rs Jo hn an d J oa n F in ne ga n re si de d i n Mo ns ey , New York . In 2 00 3 p et it io ne rs m ov edfro m New Yorkto Flo rid a. At the ti m e o f th e fi li ng of t he pe ti ti on , pet it io ne rs res id edinOrm on d B each , Flo rid a. Dur in g t he y ears inis su e p et it io ne r Jo anFin ne ga n was a fu ll -ti m e em pl oyee of Ro ck la ndCo un ty Comm un ity Co ll eg e an d p et it io ne r Jo hn Fin ne ga n was em pl oyed as a pl um

be r fo r se ve ral New YorkCit y co ntract in g fi rm s. Pe ti ti on ers own edth ei r ho m e in Mo ns ey , New York , anda ren ta l p ro pe rty in Dayto naBeac h, Fl or id a, whi chth ey

ha d p ur ch as edin19 88 forap pr ox im at el y $6 0,0 00 (co nd o)
. Pet it io ne rs di d n otvi si t the co nd o dur in g t he fir st10 y ears of o wne rs hi p. To ren t th e co nd o, p et it io ne rs ex cl us iv el y us edth e se rv ic es of a n i nd ep en de ntbu si ne ss , Co nd o R en ta ls of Dayto na . Peti ti on ers were n otaffi li at edwith C on do Ren ta ls of Dayto naex cep t as cu st om ers . Con do Ren ta ls of Dayto naha nd le d t he pro cu rem en t
an d s cree ni ng of r en te rs , cred itrep ort s cree ni ng , anddra fti ng of c on tra ct s. Pet it io ne rs ’ annu al co stform an ag em en t s erv ic es for th e co nd o re m ai ne d b el ow $1 1,6 00
.- 8 -

[* 8] Afte r th ei r or ig in al acco un ta ntm ov edaway , pet it io ne rs hi redMr. Ho well to pr ep are t he ir r eturns . Mr. Howel l ad vi se d p et it io ne rs th atth ey sh ou ldform

a pa rtn ers hi p t o re po rt the ir r en ta l ac ti vi ty. Mr. Ho well in co rrec tl y ex pl ai ne d t ha t fo rm in g t he pa rtn ers hi p wo ul d a ll ow p et it io ne rs to co nt rib ut e m on ey s the y rece iv edfro m

th e co nd o re nt al s t o aKeog h/ se lf- em pl oym en t re ti rem en t p lan acco un t. With Mr. Ho well ’s hel p, p et it io ne rs form eda pa rtn ers hi p n am ed

“ Jo m arjen ”, whi chap pe ars inev ery Sch edul e E, Sup pl em en ta l In co m e an d Lo ss , of pe ti ti on ers ’ Fo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, fo r th e y ears in is su e. Pet it io ne rs di d n otdra ft apa rtn ers hi p a gr eem en t fo r Jo m arjen , andth e fi li ng ad dr es s fo r th e p artne rs hi p re tu rnch an ge d fr om y ear t o year. Oth er tha n c reat in g Jo m arjen , pet it io ne rs di d n otch an ge an yth in g c on cern in g t he op erat io n o f th ei r ren ta l i nv es tm en t. Co nd o R en ta ls of Dayto naco nt in ue d t o m an ag e th e ren ti ng of th e co nd o a ndm ad e p aym en ts of t he ren ta l re ve nu es to pe ti ti on er J oan F in ne ga n, is su in g h er Fo rm s 1 09 9- MIS C, Mi sc el la ne ou s In co m e, rathe r th anto Jo m arjen . If, fo r an y reas on , pet it io ne rs co m

m un ic at eddi rect ly w ith t he ir t en an ts , th ey di d s o in di vi du al ly, an d n otas J om arjen . Peti ti on ers ne ve r tr an sf erre d t it le of the co nd o to Jo m arjen . Pet it io ne rs ne ve r wro te ch eck s t o J om arjen , andJo m arjenne ve r wro te- 9 -

[* 9] ch eck s t o p et it io ne rs . Peti ti on ers di d n otha ve a se parat e o ffi ce fo r th ei r co nd o re nt al act iv it y . Dur in g t he y ears aft er fo rm in g J om arjen , pet it io ne rs di d c on tri bu te m on ey s to a ret ire m en t ac co un t. Pet it io ne r Jo anFin ne ga n t es ti fie d t ha t s he co ul d n otreca ll ho w m uc h t he y co nt rib ut edfro m

y ear t o year. Mr. Howe ll m ai le d l et te rs

5 in st ru ct in g p et it io ne rs ho w m uc h t he y sh ou ldco nt rib ut e, bu t s om e y ears pe ti ti on ers di d n otco nt rib ut e th es e am ou nt s. Pet it io ne r Jo anFin ne ga n c ou ldno t reca ll whet he r Mr. Ho well ’s nu m be r ap pe aredon th e ta x re tu rnde sp it e p et it io ne rs ’ fai lu re t o c on tri bu te . Pet it io ne rs ’ Fo rm s 1 04 0, Sc he du le s E fo r ta x years 1 99 7, 1 99 8, 1 99 9, 2 00 0,
an d 2 00 1 s ho w Gann anCo . inad di ti on to Jo m arjen . Gann anCo .’ s p artne rs hi p returns rep ort p et it io ne rs as t he so le pa rtn ers hi p o wne rs . At tri al pe ti ti on ers te st ifi edth atth ey

di d n otkn ow wh atGann anCo . was, tha t the y learn edth e n am e on ly after t he ex am in at io n o f th ei r returns , andth atitdo es no t ex is t. Pet it io ne rs al so tes ti fie d t ha t af

te r fo ll owi ng Mr. Ho well ’s adv ic e, th ei r ta x re tu rn s b ecame ve ry th ic k andth ey

rece iv edlar ge r refu nd s tha n i n years p as t.

Altho ug h p et it io ne rs were ab le to pro vi de to th e In te rn al Rev enue Serv ic e 5 do cu m en ts fro m

th ei r fi nanc ia l p la nn er rel at edto th e acc ou nt , th es e d oc um en ts were n otin tro du cedat tria l.- 10 -

[* 10 ] II. Returns The rel ev an t re tu rn s i n i ss ue are p et it io ne rs ’ Fo rm s 1 04 0 a ndth e Fo rm s 10 65 , U.S. Retu rnof P artne rs hi p In co m e, fo r Jo m arjenan d Gan na n C o. fi le d fo r ta x years 1 99 4 t hr ou gh 20 01 . The returns in cl ud e se ve ral fig ur es whi chrep eat acro ss returns an d a cro ss y ears , with m os tl y va gu e d es cri pt io ns . The fi gu re $ 31 2, fo r ex am pl e, ap pe ars inpe ti ti on ers ’ 20 01 Fo rm 10 40 , inall Jo m arjenFo rm s 1 06 5
ex cep t fo r ta x year 19 96 , andev ery Gan no n C o. Fo rm 10 65 . The fi gu re $ 36 4 ap pe ars inpe ti ti on ers ’ 19 94 Fo rm 10 40 , all Jo m arjenFo rm s 1 06 5 e xc ep t fo r ta x y ear 2 00 1, an d e ve ry

Gann anCo . Form

10 65 . The fi gu re $ 49 9 app ears inev ery rel ev an t re tu rnex cep t fo r th os e fi le d fo r 19 94 . The fi gu re $ 57 2 app ears inev ery rel ev an t Fo rm

10 65 , as wel l as pe ti ti on ers ’ Fo rm 10 40 fortax y ears 19 95 an d 20 01 . Thes e fi gu res are d es cri be d o n t he returns with v ag ue term s s uc h a s

“ m is cel la ne ou s” , “ ot he r ex pe ns es ”, “ ot he r in co m e”, “ cas h c on tri bu ti on s” ,

“ supp li es ”, “pu rch as es ”, an d m or e. The fi gu re $ 4,8 96 ap pe ars inev ery partn ers hi p return, ex cep t fo r Jo m arjen ’s 20 01 Fo rm 10 65 , as “ of

fic e supp li es or e xp en se s”
. Fi na ll y , for

ev ery Fo rm

10 40 , pet it io ne rs sh owe d n etin co m e o f $2 on Sch edul e C, Pro fitor Lo ss Fro m

Bu si ne ss . The pa rtn ers hi ps ’ returns are re la te d t o p et it io ne rs ’ returns an d s ho w si gn ifi can t l os se s. As pre vi ou sl y m en ti on ed , Jo m arjenap pe ars on pe ti ti on ers ’- 11 -

[* 11 ] Fo rm s 1 04 0, Sc he du le E, for 1 99 4 t hr ou gh 20 01 , andGann anCo . app ears fo r 19 97 th ro ug h 2 00 1. Th e p artne rs hi ps ’ returns fil edforth os e y ears rep ort pe ti ti on ers as 1 00 % own ers inth e ag gr eg at e. Thro ug h t he y ears , pet it io ne rs rep orte d l os se s i n e xc es s o f $3 00 ,00 0 re la te d t o J om arjenan d Gan na n C o. Th ere are a ls o s ev eral tra ns fers to Jo m arjenno te d o n p et it io ne rs ’ Sch edul es C. Jo m arjen rep orte d g ro ss in co m e in ex ces s o f th e am ou nt s p et it io ne rs rece iv edfro m th e co nd o re nt al s, an d fo r ta x year 19 99 , forex am pl e, gr eat ly in ex ces s o f th e am ou nt sh own on th e Fo rm

10 99 -MI SC i ss ue d b y

Co nd o R en ta ls of Dayto na . The re ar e co nn ect io ns be twee n t he pa rtn ers hi ps as we ll . Duri ng 19 99 Jo m arjenis su edto Gann anCo . Forms 10 99 -MI SC re po rti ng no ne m pl oyee co m pe ns at io n o f $2 4,4 00 . Also , Gann anCo . is su eda Fo rm 10 99 -MI SC t o J oh n Fi nn eg anrep orti ng no ne m pl oyee co m

pe ns at io n o f $8 6,0 00 . Jo hn Fin ne ga n d id
no t re cal l re cei vi ng $8 6,0 00 fro m an y pa rtn ers hi p. Pet it io ne rs ’ returns do no t l is t M r. Howel l as th e p rep arer . Ins te ad , th e pr ep arerch an ge s fr om

y ear t o year, alo ng with t he po stoff ic e b ox ad dr es s fo r th e return p rep arer . Peti ti on ers are n otfam il ia r with t he pre pa rer e nt it ie s o n t he pr ep arerli ne s o f th e returns .- 12 -

[* 12 ] III. Prep arat io n o f Pet it io ne rs ’ Returns Fo r th e ta x years i n i ss ue Mr. Ho well di rect ly prep aredor s up erv is edth e pr ep arat io n o f pe ti ti on ers ’, Jo m arjen ’s, andGann anCo .’ s re tu rn s. Gen eral ly, Mr. Howel l o r on e o f hi s as so ci at es pro vi de d p et it io ne rs with atax org an iz er fo r th e y ear. Pe ti ti on ers co m

pl et edth e o rg an iz er an d re tu rn editto Mr. Ho well
. Pet it io ne rs di d n otrev ie w th ei r in di vi du al in co m e ta x re turn s o r th e p artne rs hi p returns forJo m arjenan d Gan na n C o. af te r Mr. Ho well pre pa redth em . Altho ug h pe ti ti on ers fol lo wedMr. Ho well ’s in st ru ct io ns an d s av edrece ip ts an d p ro of of
ex pe ns es th ey

in cu rred , pet it io ne rs di sp os edof t ho se rece ip ts an d re co rd s wh en th ey m ov edto Flo rid a in 20 03
. IV. Dua ne Howel l Dur in g 1 99 2 t hr ou gh 20 03 Mr. Ho well pre paredap pr ox im at el y 75 0 t o 8 00 ta x re turn s p er y ear, i nc lu di ng in di vi du al in co m e ta x re tu rn s, p artne rs hi p i nc om e ta x re turn s, an d i nf

orm at io n re tu rn s. Mr . Howel l b eg anhi s re tu rnpre pa rat io n pr oc es s as m an y

acco un tant s d o, b y

pro vi di ng hi s cl ie nt s wi th “ ta x o rg an iz ers ” in whi chcli en ts li st edth ei r fi na nc ia l an d a cco un ti ng in fo rm at io n. He t es ti fie d a t the Mi tt s tria l, h owe ve r, th atev ery return h e p rep aredin cl ud edat l eas t s om e frau du le nten tri es .- 13 -

[* 13 ] One co m

m on frau du le ntsch em e b eg anwith M r. Howel l’s urg in g c ert ai n cl ie nt s t o s etup pa rtn ers hi ps . For t ho se with i nc om e act iv it ie s s ep arat e fro m th ei r sa la rie s, s uc h a s re nt al pro pe rty owne rs , th e p artne rs hi ps serve d t o re po rt pu rp orte d i nc om e fro m

th e se pa rat e act iv it ie s. Mr . Howel l al so setup fal se pa rtn ers hi ps th atwere n otco nn ect edwith a ny exi st in g b us in es se s o r act iv it ie s. Mr. Ho well be li ev edpa rtn ers hi ps were l es s v ul ne rab le to au di ts th anso le pr op rie to rs hi ps rep orte d o n F orm s 1 04 0, Sc he du le C, an d s o h e p la cedfal se in co m e an d e xp en se s o n p artne rs hi p re tu rn s an d u se d t he pa rtn ers hi p fo rm to av oi d s cru ti ny from

th e In te rn al Rev enue Serv ic e. The fa ls e expe ns e d educ ti on s th atMr. Ho well pl acedon th e p artne rs hi p re tu rn s cr eat edlar ge lo ss es th atflo wed th ro ug h t o t he cli en ts ’ in di vi du al in co m e ta x re tu rn s, the reb y lo weri ng th ei r in co m e ta x l iabi li ti es . Mr. Howel l p rep aredFo rm s 1 09 9- MIS C an d F orm s 1 09 6, Ann ua l Su m

m ary an d Tra ns m itta l o f U.S. Inf orm at io n R eturns , th atm ai nt ai ne d t he ap pe aran ce o f le gi ti m at e p artne rs hi ps , andrep orte d p ur po rte d p aym en ts m ad e b y th e p artne rs hi ps to rel at edpa rtn ers hi ps or p artne rs . Ano th er s ch em e co ns is te d o f Mr. Ho well ’s pro m ot in g Keo gh /s el fem pl oym en t re ti rem en t p la ns to in di vi du al s wh o h adwage s an d o th er i nc om e. Mr. Howel l u se d t he term

“ co ns tru ct iv e rec ei pt ” to de sc rib e in co m e rep orte d o n h is cl ie nt s’ returns th atactua ll y was n otrece iv ed . Mr. Howel l fa ls ifi edin co m e fro m- 14 -

[* 14 ] pa rtn ers hi ps an d p aym en ts m ad e b y th e p artne rs hi ps inord er fo r hi s cl ie nt s to cla im Keog h/ se lf- em

pl oym en t re ti rem en t p la n d educ ti on s an d l owe r th ei r ta x li ab il it ie s. Mr . Howel l i ns tru ct edhi s cl ie nt s as to th e am ou nt s the y sh ou ld
co nt rib ut e fo r th e y ear, b uthe di d n otve rif y whet he r th e co nt rib ut io ns were actua ll y m ad e. Mr. Ho well di d n otpre pa re re tu rn s u si ng hi s o wn n am e b utrathe r us ed
m ul ti pl e en ti ty nam es as t he pu rp orte d t ax return p rep arer , in cl ud in g J on Lea, In c., Don Ste p, In c., DPH HowCo , Jo hn so n Un it s, In c., Jo hn Uni t, In c., Co m su lc o, an d Co m su lc o F in an ci al Serv ic es Group. Mr . Howel l d eci de d wh ic h p rep areren ti ty
na m e wou ldbe us edon eachreturn. Mr . Howel l co nt ro ll edva rio us po stoff ic e bo x a dd res se s wh ic h h e p la cedon th e p rep arerad dr es s l in es on hi s cl ie nt s’ returns an d wh ic h h e ch an ge d fr om y ear t o year. Becaus e th e p artne rs hi ps ’ ad dr es se s were al so so m et im es ch an ge d, the Int ern al Rev enue Serv ic e Cen te rs wher e th e returns were fi le d c ha ng edfro m y ear t o year. Mr. Howe ll tri edto en su re tha t the
ve nu e whe re p artne rs hi p re tu rn s wer e fi le d d iff eredfro m th e v enue wher e h is cl ie nt s’ Form s 1 04 0 wer e fi le d. V. Cri m in al Inv es ti ga ti on an d P ro se cu ti on Befo re h e ev enbe ga n p rep ari ng pe ti ti on ers ’ returns , Mr. Howe ll ha d b een in ve st ig at edforan d c on vi ct edof p rep ari ng fal se returns du rin g t he 19 80 s. As a- 15 -

[* 15 ] res ul t o f hi s co nv ic ti on , Mr. Howe ll lo sthi s ce rti fie d p ub li c acc ou nt an t’s (C.P.A.) l ic en se . Sev eral y ears lat er, the Int ern al Rev enue Serv ic e’s Cri min al In ve st ig at io n Di vi si on (CID) o nc e ag ai n i nv es ti ga te d M r. Howel l, thi s t im e reg ard in g h is pre pa rat io n o f ta x re tu rn s fo r th e y ears 19 92 th ro ug h 2 00 3. Bec au se of h is pre pa rat io n a ndsubm is si on of f rau du le ntreturns du rin g 19 92 to 20 03 , Mr. Howe ll was i nd ic te d i n t he U.S. Dist ric t Co urt fo r th e So ut he rn Dis tri ctof Ne w Yorkin20 06 forco ns pi rin g t o c omm itanoff en se or t o d efraud th e Uni te d S ta te s, 1 8 U.S.C. s ec. 3 71 , andatt em pt in g t o i nt erfe re wi thth e adm in is tra ti on of i nt ern al rev enue laws , sec . 72 12 (a); 18 U.S.C. sec . 2. Pu rs ua nt to a pl ea ag reem en t s ig ne d M arch 14 , 20 07 , Mr. Howe ll pl ead edgu il ty to b ot h
co un ts of t he in di ctm en t. CID Sp eci al Agen ts Ro be rt M ira nd a an d S te ve n As hc ro ft we re as si gn ed pr im ary res po ns ib il ity

forth e la te r CID i nv es ti ga ti on of M r. Howel l an d M r. Ro bi ns . Duri ng th e in ve st ig at io n, the sp eci al ag en ts ord eredan d e xa m in edth e or ig in al in di vi du al in co m e ta x re tu rn s an d t he rel at edpa rtn ers hi p re tu rn s o f Mr. Howel l’s cl ie nt s, as well as t ran sc rip ts fro m th e In te rn al Rev enue Serv ic e’s In te gr at edDataRetrie va l Syste m . The s pe ci al ag en ts were ab le to id en ti fy
co m m on ch arac te ris ti cs onreturns pre pa redby Mr. Howel l, i nc lu di ng : (a ) la rg e refu nd s an d p artne rs hi p l os se s; (b) pu rp orte d p aym en ts be twee n p artne rs hi ps an d- 16 -

[* 16 ] th ei r res pe ct iv e p artne rs ; (c ) th e fi li ng of p artne rs hi p re tu rn s wi th di ffer en t In te rn al Rev enue Serv ic e Cen te rs fro m y ear t o year; (d ) pa rtn ers hi ps who se ad dr es se s ch an ge d e ve ry

y ear; an d (e ) th e is su an ce o f Fo rm s 1 09 9- MIS C to pa rtn ers or o th er p artne rs hi ps . Oth er co m

m on ch arac te ris ti cs of r eturns pre pa redfrau du le nt ly by Mr. Howel l i nc lu de d re pe at in g n um be rs , su chas e xp en se s o f $3 12 , $3 64 , $4 99 , $5 72 , $4 ,89 6, al l o f whi chwere cr eat edby Mr. Howel l an d n otsupp li edby his cli en ts , in co m e o n S ch edul es C th atne tt edto ex act ly $2, d educ ti on s fo r Keo gh /s el fem pl oym en t re ti rem en t p la ns , alo ng with g ua ran te edpa y m en ts ba se d upo n a cl ie nt 's d es ire d re ti rem en t p la n c on tri bu ti onor d educ ti on , andpu rp orte d t ran sf ers be twee n S ch edul es C an d re la te d p artne rs hi ps th atwere re po rte d a s ex pe ns es . VI. Pet it io ne rs ’ Returns an d t he Inv es ti ga ti on As p artof t he in ve st ig at io n, CI D rev ie wedpe ti ti on ers ’ returns . Peti ti on ers ’ returns , ho wev er, d idno t fo rm part o f th e in di ctm en t. Sp eci al Agen t As hc ro ft te st ifi edth atpe ti ti on ers were n otsel ect edas g ran d ju ry witne ss es for

th e pr os ecu ti on of M r. Howel l an d M r. Ro bi ns be cau se th ey were n otpro pe rly in te rv ie wedby CID andth ere wer e al read y a su ffi ci en t n um

be r of cli en t wi tn es se s. On Fe brua ry

7, 2 01 3, re sp on de ntis su edto pe ti ti on ers a no ti ce o f de fic ie nc y fo r th e ta xabl e y ears 19 94 th ro ug h 2 00 1, d et erm in in g d efi ci en ci es an d s ect io n- 17 -

[* 17 ] 66 62 (a) a ccu racy-rela te d p en al ti es . In tho se no ti ces , res po nd en t d is al lo wed th e fo ll owi ng : (1 ) pe ti ti on ers ’ Sch edul e E partn ers hi p l os s d educ ti on s; (2) pe ti ti on ers ’ Sch edul e C d educ ti on s i n t he ir e nt ire ty; an d (3 ) pe ti ti on ers ’ de du ct io ns fo r Keo gh / s el f-em

pl oym en t re ti rem en t p la ns . Res po nd en t co nt en ds th atth es e en tri es are fa ls e o r frau du le ntalt ho ug h t he y are due to Mr. Ho well an d n otto pe ti ti on ers ’ act io ns . On Apr il 19 , 20 13 , pet it io ne rs ti m el y fil eda pe ti ti on with t hi s Co urt. OPINION W e m us t d eci de whethe r res po nd en t h as pro ve d t ha t p et it io ne rs ’ returns were p rep aredfal se ly or frau du le nt ly w it h t he in te ntto ev ad e ta x. I. Lim it at io ns Peri od W e b eg in with a n a na lysis of t he li m it at io ns pe rio d fo r as se ss m en t o f in co m e ta x. Th e Co m

m is si on er g en eral ly m

us t as se ss an y

in co m e ta x wi th in th e th ree- y ear p eri odaft er a t ax pa y er fi le s h is or h er re tu rn . Sec. 6 50 1( a). Inth e cas e of a fal se or f

rau du le ntreturn wi th th e in te ntto ev ad e ta x, h owe ve r, ta x de te rm in edto be du e m ay be ass es se d a t an y

ti m e. Sec. 6 50 1( c)(1 ). In Al le n v . Co m m is si on er, 1 28 T.C. at 4 2, we h el d t ha t s ect io n 6 50 1( c)(1 ) ap pl ie s ev enif i t i s th e p rep arerof t he return, an d n otth e ta xp ay er, wh o fa ls el y or f rau du le nt ly- 18 -

[* 18 ] pre pa redth e return wi th th e in te ntto ev ad e ta x. Bu t s ee BASRP’shi p v . Uni te d S tate s, 1 13 Fed . Cl. 1 81 (20 13 ), aff’d, 7 95 F.3d13 38 Fed . Cir . (20 15 ). 6 II. Fal se or F rau du le ntReturns Frau d i s the in te nt io na l co m mis si on of a n a ctor a ct s fo r th e sp eci fic purp os e of ev ad in g t ax be li ev edto be du e an d o win g. Pe tz ol dtv. Co m m is si on er, 9 2 T.C. 66 1, 6 98 (19 89 ). The d efi ni ti on of f rau d fo r pu rp os es of s ect io n 6 50 1( c)(1 ) is th e sa m e as th e d efi ni ti on of f rau d fo r pu rp os es of t he sec ti on 66 63 frau d p en al ty. Rh on e-Po ul en c Su rfac ta nt s & Sp eci al ti es v. Co m m is si on er, 1 14 T.C. 53 3, 5 48 (2 00 0) . Accor di ng ly, res po nd en t m us t p ro ve foreach return i n i ss ue th at(1) an un de rp aym en t o f ta x e xi st s an d (2 ) th atth e in te nt io n was to ev ad e ta xe s kno wn t o be owi ng by con du ctin te nd edto co nc eal , m is le ad , or o th erwi se pre ve ntth e co ll ect io n o f ta x. Se e Parks v. Co m m is si on er, 9 4 T.C. 6 54 , 66 0- 66 1 (1 99 0)
.
W e se e n o re as on to rev is itAll env. Co m m is si on er, 1 28 T.C. 37 (20 07 ), on 6 acco un t o f BASR P ’shi p v . Uni te d S ta te s, 1 13 Fed . Cl. 1 81 (20 13 ), aff’d, 7 95 F.3d 13 38 (Fed . Cir . 20 15 ). In t he Co urt o f App eal s fo r th e Fed eral Cir cu it ’s op in io n, a pe rs ua si ve di ss en t was fil ed , as wel l as a co nc urrin g o pi ni onth atrel ie d o n s ec. 62 29 , a pr ov is io n i napp li cab le inth e in st an t ca se . Accor di ng ly, ev enincas es ap pe al ab le inth e Fed eral Cir cu it , itis un cl ear wh ethe r, inth e ab se nc e o f th e ap pl ic at io n o f se c. 62 29 , whi chin te rp ret at io n o f se c. 65 01 (c)( 1) wou ldpre va il
. Mo reo ve r, th ere i s n o juris di ct io n fo r ap pe al of a ny deci si on of t he Tax C ou rt t o th e Co urt o f App eal s fo r th e Fed eral Cir cu it . Sec. 7 48 2( a)(1 ). Add it io na ll y , th e pa rti es ha ve no t ci te d B ASR P’sh ip an d d o n otco nt en d we s ho ul d re vi si t Al le n. Thu s, Al le n i s co ntro ll in g p rece de ntinth e in st an t ca se , andwe do no t re vi si t the an al y si s an d c on cl us io n i n t ha t Op in io n.- 19 -

[* 19 ] Bec au se res po nd en t al le ge s tha t M r. Howel l, n otpe ti ti on ers , act ed frau du le nt ly, we m

us t d eci de whet he r res po nd en t h as pro ve d c le arl y an d
co nv in ci ng ly tha t M r. Howel l p la cedth e fal se en tri es on pe ti ti on ers ’ returns with th e in te ntto ev ad e ta x. “ Frau d m ay no t b e im

pu te d o r pr es um edbu t m us t al way s be est ab li sh edby ind ep en de ntev id en ce o f frau du le ntin te ntto ev ad e ta x” . Erik se n v. Co m m is si on er, T.C. Mem o. 2 01 2- 19 4, 2 01 2 WL 28 65 87 5, at*8 . Negl ig en ce, ei th er g en eral or g ro ss , is no t s y no nym ou s wi thfrau d b ecau se frau d re qu ire s sc ie nt er. W eb b v . Comm is si on er, 3 94 F.2d36 6, 3 77 -3 78 (5t h C ir. 1 96 8) , aff’g T.C. Mem o. 1 96 6- 81 ; Bruc e Gol db erg , Inc . v. Co m m is si on er, T.C. Mem o. 1 98 9- 58 2. Th e ex is te nc e o f frau d i s a f actua l d et erm in at io n t o b e g le an edfro m th e en ti re re co rd . Gajewsk i v . Comm is si on er, 6 7 T.C. 1 81 , 19 9 (1 97 6) , aff’d, 5 78 F.2 d 1 38 3 (8 th Cir . 19 78 ). Mr. Ho well ’s affi da vi t s tate s tha t h e p rep ared , forth e ta x years i n i ss ue , fal se in co m e ta x re tu rn s fo r pe ti ti on ers an d t he ir p artne rs hi ps . Mr. Howel l d idno t te st ify, howe ve r, so th ere are n o d et ai ls or e xa m pl es id en ti fy in g t he fal se en tri es . Thi s i s n otanin surm ou nt ab le bu rd enforres po nd en t. Fraudul en t i nt en t i s ra rel y sh own by dire ctev id en ce. Co urts ha ve di st il le d fr au du le ntin te ntby vie win g ci rcu m st an ti al ev id en ce i n t he li gh t o f cert ai n i nd ic iaof f rau d. So m e fac to rs th at are f reque nt ly eval ua te d i n d eci di ng whet he r frau du le ntin te ntex is ts are:- 20 -

[* 20 ] un de rs ta te m en ts of t ax , in ad equa te bo ok s an d re co 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, an d m ak in g fa ls e en tri es or a lt erat io ns . See Sp ie s v . Uni te d S ta te s, 3 17 U.S. 49 2, 4 99 (19 43 ) (cri m in al tax ev as io n) ; Br ad fo rd v. Co m m is si on er, 7 96 F.2d30 3, 3 07 -3 08 (9t h C ir. 1 98 6) , aff’g T.C. Mem o. 1 98 4- 60 1; Sol om on v. Co m

m is si on er, 7 32 F.2d14 59 , 14 61 -1 46 2 (6 th Cir . 19 84 ), aff’g T.C. Mem o. 1 98 2- 60 3. We m us t the refo re co ns id er the co nduc t i n the in st an t ca se whi le be in g m in df

ul of the fact or s d et ai le d abo ve an d d eci de whet he r th e ev id en ce is “ so stro ng ” th atfrau d i s the m os t m an ife stex pl an at io n. Bi gg s v . Commis si on er, 44 0 F .2d1, 5 (6t h C ir. 1 97 1) , aff’g T.C. Mem o. 1 96 8- 24 0; see als o R ic ha rd so n v . Co m m is si on er, 5 09 F.3d73 6, 7 43 -7 45 (6t h C ir. 2 00 7) , aff’g T.C. Mem o. 2 00 6- 69
. The Co m m is si on er i s re qu ire d t o p ro ve frau d b y “ cl ear a ndco nv in ci ng ev id en ce.” Se c. 74 54 (a); Ru le 14 2( b) . Clea r an d c on vi nc in g e vi de nc e is “ th at
m eas ur e o r de gr ee o f pr oo f whi chwil l p ro du ce i n t he m in d o f th e tr ie r of fact s a firm be li ef o r co nv ic ti on as t o t he all eg at io ns so ug htto be est ab li sh ed . It i s in te rm ed ia te , bei ng m or e th ana m ere p rep on de ran ce, b utno t the ex te ntof s uc h cert ai nt y as i s re qu ire d b ey on d areas on ab le do ub t as incri m in al cas es .” Ohi o v . Akr onCtr . forRep ro d. Hea lt h, 4 97 U.S. 50 2, 5 16 (19 90 ); Eri ks env. Co m m is si on er, 2 01 2 WL 28 65 87 5, at*8
.- 21 -

[* 21 ] Acco rd in gl y , we m us t d eci de whet he r res po nd en t h as sh own with c le ar an d
co nv in ci ng ev id en ce tha t p et it io ne rs ’ returns in cl ud e fal se en tri es du e to Mr. Howel l’s b adfai th , in te nt io na l wro ng do in g, o r si ni st er m ot iv e an d t ha t the y res ul te d i n a n u nd erp aym en t o f ta x. III. Pet it io ne rs ’ Returns A. Und erp aym en t o f Tax Pet it io ne rs st ip ul at edth atth ey wil l co nc ed e th e d et erm in edde fic ie nc ie s i f
we co nc lu de th atth e p eri odof l im it at io ns is op enun de r se ct io n 6 50 1( c)(1 ). The st ip ul at io ns are b in di ng onth e p art ie s b y vi rtu e o f Ru le 91 (e) andpro ve by clear
an d c on vi nc in g e vi de nc e th atanun de rp aym en t o f ta x e xi st s i n t he in st an t ca se with re sp ectto each y ear i n i ss ue . See Eri ks env. Co m m is si on er, 2 01 2 WL 28 65 87 5, at*9 . Accor di ng ly, itis irr el ev an t tha t re sp on de ntdi d n otch eckwith
ve nd or s o r rev ie w pet it io ne rs ’ cred itcardpu rch as es or c he ck in g a cco un ts to de te rm in e whe th er p et it io ne rs in cu rredth e ex pe ns es de du ct ed . The d et erm in at io n do es no t re su ltfro m

a fai lu re o f pr oo f, bu t fr om th e p art ie s’ st ip ul at io ns th at pe ti ti on ers are l iabl e fo r th e d efi ci en ci es if the pe rio ds of l im it at io ns are o pe n un de r se ct io n 6 50 1( c)(1 ). Add it io na ll y , res po nd en t h as pro vi de d e vi de nc e sh owi ng th e returns in cl ud e erro ne ou s en tri es res ul ti ng inun de rp aym en ts of t ax . Con tra ry to pe ti ti on ers ’- 22 -

[* 22 ] co nt en ti on , res po nd en t i s n otsi m pl y rel y in g o n p et it io ne rs ’ la ckof
reco ll ect io n a ndco nf

us io n abo utth ei r bu si ne ss as h is so le ev id en ce. Pet it io ne rs te st ifi edth atth ey

ha d n o re la ti on sh ip to Gann anCo . eve n t ho ug h t he pa rtn ers hi p ap pe ars on th ei r Sch edul es E from 19 97 -2 00 1. Pe ti ti on ers als o t es ti fie d t ha t Co nd o R en ta ls of Dayto naco nt in ue d t o m an ag e al l o f th e ren ta l dut ie s, yet Jo m arjenrep orte d ann ua l g ro ss rece ip ts an d e xp en se s tha t wer e v as tl y hi gh er tha n pa ym en ts m ad e to pe ti ti on ers , th e ro ug hl y $1 2,0 00 itco stto m an ag e th e co nd o, an d i n 1 99 9, fo r ex am

pl e, th anam ou nt s s ho wn o n t he Fo rm 10 99 -MI SC i ss ue d t o Jo anFin ne ga n. B. Elem en ts of F rau d: Int en t Res po nd en t s ub m it s tha t M r. Howel l p rep aredpe ti ti on ers ’ ta x re turn s frau du le nt ly by

cla im in g fabr ic at edpa rtn ers hi p l os se s, Sc he du le C expe ns es , and ret ire m en t co nt rib ut io n d educ ti on s. To carry hi s b ur de n, re sp on de ntco m pa res pe ti ti on ers ’ returns to Mr. Ho well ’s m odus op eran di incas es inwhi chhe adm it te d to pre pa rin g fr au du le ntreturns . Res po nd en t i nf ers fro m th e si mil ari ti es , as wel l as th e tr ia l t es ti m on y , th atMr. Ho well pre pa redeach return i n i ss ue with t he in te ntto ev ad e ta x. Pet it io ne rs ’ returns di sp la y m an y of t he ch arac te ris ti cs of t he returns whi ch Mr. Ho well adm it te d t o p rep ari ng frau du le nt ly. Pet it io ne rs tes ti fie d t ha t the y were- 23 -

[* 23 ] un fam il ia r with t he Gann anCo . partn ers hi p a ndth atth ey ha d n ev er o wne d
orop erat edan y

bu si ne ss or p ro fit -s eek in g v en tu re t it le d Gan na n C o. Yetth e pa rtn ers hi p i s l is te d o n p et it io ne rs ’ Sch edul es E andFo rm s 1 09 9- MIS C, on e o f whi chsh ows Gann anCo . di st rib ut in g t ho us an ds of d ol la rs to Jo hnFin ne ga n t ha t he di d n otreca ll rece iv in g. Pe ti ti on ers co nt en d t ha t M r. Howel l m ay ha ve m ad e a m is ta ke an d t ha t the pa rtn ers hi p b el on ge d t o a no th er cl ie nt . W e fi ndsu chan in fere nc e im

pl au si bl e. Mr. Ho well tes ti fie d t ha t o ne of h is m etho ds forpro du ci ng frau du le ntreturns in vo lv edfab ric at in g p artne rs hi ps with fabr ic at edgu aran te ed pa ym en ts , whi chwou ldth enjus ti fy de du ct in g re ti rem en t co nt rib ut io ns th athi s cl ie nt s d idno t, i n fa ct , eve r m ak e. The re pe at edap pe aran ce o f Gan na n C o. o n pe ti ti on ers ’ returns an d d oc um en ts , alo ng with M r. Howel l’s t es ti m on y , cle arl y in di cat es to us th atth e Gan na n e nt rie s o n p et it io ne rs ’ returns were m ad e frau du le nt ly w it h the in te ntto ev ad e ta x. Pet it io ne rs co nt en d t ha t the factth atpe ti ti on ers ’ in di vi du al an d p artne rs hi p returns were “ co ns is te ntwith” ot he r frau du le ntreturns pre paredby Mr. Howel l i s subjec ti ve an d n otpro ba ti ve . Res po nd en t, h owe ve r, pr ov id es sp eci fic ele m en ts of pe ti ti on ers ’ returns th atm at chMr. Ho well ’s m odus op eran di . Suc h e le m en ts in cl ud e: (1) Sch edul e C i nc om e o f $2 (th e b al an ce b ei ng tra ns ferr edov er t o a pa rtn ers hi p) , (2) two ne w partn ers hi ps th atpe ti ti on ers di d n otform un ti l en ga gi ng- 24 -

[* 24 ] Mr. Ho well ’s servi ces , (3) anen ti re p artne rs hi p wi th whi chpe ti ti on ers were un fam il ia r, (4 ) rep eat in g e nt rie s o f certa infig ur es th atMr. Ho well tes ti fie d h e ro ut in el y us edwhenfab ric at in g re tu rn s, (5 ) larg e p artne rs hi p l os se s, an d (6 ) de du ct io ns forKeog h/ se lf- em pl oyed re ti rem en t ac co un ts when pe ti ti on ers earn ed wag es . Pet it io ne rs co nt en d t ha t re sp on de ntfai le d t o o fferev id en ce tha t the rep eat in g fi gu res are fa ls e o r frau du le nt , andth atbe cau se rep et it io n i s n otby its el f pr oo f of frau d, the ir e xi st en ce i s n otpro ba ti ve . On th e co ntrary, Mr. Howel l te st ifi edth at$4 ,89 6, fo r ex am pl e, was a fi gu re h e ro ut in el y en te redforoff

ic e ex pe ns e d educ ti on s b y

est im at in g $ 10 0 s pe ntpe r week , eve n wh entax pay ers di d
no t i nc uran y

off ic e ex pe ns es . Peti ti on ers tes ti fie d tha t the y rare ly comm

un ic at ed with t he ir t en an ts an d c la im edno ho m e o ffi ce. Als o, the fig ur es ’ freque nc y an d rep et it io n i s, b y

it se lf, a dd it io na l ev id en ce tha t the y are n otba se d o n re cei pt s o r in fo rm at io n p ro vi de d b y

pe ti ti on ers . W e b el ie ve su chfig ur es wou ldflu ctua te
an nu al ly if th ey

were ac tu al ly inc urred
. Pet it io ne rs ’ returns als o i nc lu de ele m en ts to av oi d d et ect io n. Su chele m en ts by the m se lv es wou ldbe rel ev an t, an d t he y are ev enm or e so inth e in st an t ca se be cau se Mr. Ho well tes ti fie d t ha t the y were p artof h is m odus op eran di . The ad dr es se s fo r pe ti ti on ers ’ pa rtn ers hi ps ch an ge d o ve r th e y ears , oft endi ffer in g fr om- 25 -

[* 25 ] th e juri sd ic ti on s wh ere p et it io ne rs fil edth ei r in di vi du al Fo rm s 1 04 0. Sp eci al Agen t As hc ro ft t es ti fie d t ha t m ai li ng tax returns to di ffer en t Se rv ic e Cen te rs co ul d d el ay

an y cro ss -y ear o r cro ss -return c om pa ris on s an d d oe s d el ay ob ta in in g o rig in al returns du rin g a n e xamin at io n. Pet it io ne rs ’ returns als o s ho w, from y ear t o year, di ffer en t re tu rnpre pa rers with d iff eren t ad dr es se s. Pet it io ne rs co nt en d t hi s m erel y sh ows th atMr. Ho well
was trying to co nc eal hi s i de nt it y be cau se hi s C .P.A. li cen se ha d b eenrev ok edan d th atth e co nc eal m en t ev id en ce the refo re l ack s an y pro ba ti ve va lu e. W e d o n ot ag ree. Mr . Howel l’s at te m pt in g t o a vo idde te ct io n i s p ro ba ti ve . The fac t tha t the ad dr es se s, an d n oton ly the nam es , cha ng edfro m y ear t o year is furth er ev id en ce th atres po nd en t’s i nf

eren ce i s the co rrec t o ne to dra w. Co m pa rin g t he in st an t ca se to Erik se n v . Comm is si on er, 2 01 2 WL 28 65 87 5, is in st ru ct iv e. Erik se n i nv ol ve d s ix tax pa y ers who se return p rep arer was c on vi ct ed of pre pa rin g fa ls e an d fr au du le ntreturns with t he in te ntto ev ad e ta x. InErik se n, th e ta xp ay ers ’ returns were n otin cl ud edam on g t he 51 returns co ns id eredas p art of th e p rep arer ’s gu il ty ple a. Id . at * 4. Al th ou gh th e p rep arertes ti fie d i n Eri ks en , he was u nabl e to reca ll at t ria l p rep ari ng an y of t he returns th ere i n i ss ue . Id. at*2
. The Co urt h el d fo r fi ve of t he tax pa y ers bu t ag ai ns t the si xt h. Th e k ey di st in ct io n of th e si xth t ax pa y er, al th ou ghsh e h adno t co m m it te d fr au d h ers el f, was h er- 26 -

[* 26 ] tes ti m on y

th athe r return i nc lu de d d educ ti on s fo r expe ns es sh e h adno t i n factin curred . Id. at*1 2. Th e Co m mis si on er the n e st ab li sh edth atth e ex pe ns es were o f th e type the pre parer h adpl ead edgu il ty to fabr ic at in g. Id . Viewi ng th es e fact s i n c on

jun ct io n wi th ot he r ba dg es of f rau d, the Co urt d et erm in edth atth e si xt h ta xp ay er’s returns were fa ls e o r frau du le nt . Id. Pet it io ne rs co nt en d t ha t Eri ks enst an ds forth e p ro po si ti on th at , to est ab li sh frau d, the Co m

m is si on er m

us t p ro ve a “ di rectli nk ” b etweenth e co m m is si on of frau d anda ta xp ay er’s return. Pe ti ti on ers stro ng ly im pl y th atth e o nl y

way to es tabl is h s uc h adi rectli nkis th ro ug h t he pre parer’s t es ti m on y . In Eri ks en , th e Co m m is si on er es tabl is he d t he ex is te nc e o f frau d b y m at ch in g t he in co rrec t in fo rm at io n o n t he tax pa y er’s return t o t he pre pa rer’s m odus op eran di . In o th er wor ds , eve n t ak in g p et it io ne rs ’ co nt en ti on in to acco un t, the re ar e way s o f pr ov id in g a n e vi de nt ia ry

li nkth atdo no t i nv ol ve a pr ep arer ’s sp eci fic tes ti m on y as to a pa rti cu la r ta xp ay er. Pet it io ne rs als o c on te ndth atth ei r ci rcu m st an ces are s im il ar t o t ho se of t he fir stfiv e Erik se n t ax pa y ers be cau se , witho uta co nn ect io n o r di rectli nkbe twee n Mr. Ho well ’s wron gd oi ng an d p et it io ne rs or t he ir p artne rs hi ps , res po nd en t’s
ev id en ce ri se s o nl y

to th e le ve l o f “ a su sp ic io n o f frau d” . W e d o n otag ree. We- 27 -

[* 27 ] th in k t ha t p et it io ne rs ’ ci rcu m st an ces are m os t s im il ar t o t ho se of t he si xt h Erik se n t ax pa y er. Res po nd en t h as alr eady sh own th atpe ti ti on ers ’ returns in cl ud e si gn ifi can t erro rs , nam el y , Jo m arjen ’s gro ss in co m e ab ov e an d b ey on d t he
rev enue s co ll ect edby Con do Ren ta ls of Dayto naan d t he Gann anCo . partn ers hi p’s
en tri es on pe ti ti on ers ’ returns . Res po nd en t p ro vi de d a dd it io na l t es ti m on y th at id en ti fie d s pe ci fic fig ur es inpe ti ti on ers ’ returns , e.g., $ 4,8 96 , whi chwere fre qu en t fab ric at io ns of Ho well ’s. Add it io na ll y , th e p rep arerinErik se n t es ti fie d i n h is pl ea al lo cu ti on th atno t al l re tu rn s h e p rep aredwere fraudul en t. Id . at * 4. Mr . Howel l te st ifi edth atev ery return h e p rep aredin cl ud edat l eas t s om e fraudul en t en tri es , an d b ecau se of the se fal se en tri es , was “ di rty”. Res po nd en t h av in g p ro du cedsu ffi ci en t ev id en ce t o e st ab li sh th ata po rti on of each of p et it io ne rs ’ un de rp aym en ts is att rib ut ab le to frau d, we co nc lu de th e pe rio ds of l im it at io ns forth os e y ears rem ai n o pe n p ur su an t t o s ect io n 6 50 1( c)(1 ). 7 See Al le n v . Comm is si on er, 1 28 T.C. at 4 2; Rh on e-Po ul en c Su rfac ta nt s & Sp eci al ti es , L.P. v. Co m

m is si on er, 1 14 T.C. at 5 48 . Becau se we ho ldth atth e pe rio d o f li m it at io ns is op enon acco un t o f th e fal se an d fr au du le ntna tu re o f eac h
W e rea chth is co nc lu si on witho utdra win g a ny inf eren ce fr om

pe ti ti on ers ’ 7 la ckof b oo ks an d re co rd s fo r th e y ears inis su e. Pet it io ne rs tes ti fie d c red ib ly tha t, whe n the y

m ov edfro m

New Yorkto Flo rid a in 20 03 , th ey di sp os edof a ll th e rece ip ts an d o th er re co rd s an d re ta in edon ly the tax returns .- 28 -

[* 28 ] of p et it io ne rs ’ Fed eral in co m e ta x re tu rn s fo r 19 94 th ro ug h 2 00 1, p et it io ne rs co nc ed e th e d efi ci en cy

res po nd en t d et erm in edfor each of t ho se y ears . Acco rd in gl y , we ho ldth atth ere a re d efi ci en ci es inpe ti ti on ers ’ Fed eral in co m e ta x fo r 19 94 th ro ug h 2 00 1 o f $3 2,6 97 , $3 ,02 4, $ 7,9 40 , $1 5,8 53 , $1 8,6 41 , $1 5,2 17 , $1 6,7 20 , and$1 3,9 09 , res pe ct iv el y . IV. Pen al ti es Res po nd en t al so de te rm in edth atpe ti ti on ers are l iabl e fo r acc ur acy-rela te d pe na lt ie s. See sec . 66 62 (a). Pu rs ua ntto sec ti on74 91 (c), res po nd en t b ears th e 8 bu rd enof p ro du ct io n wi thres pe ctto pe ti ti on ers ’ li ab il ity forsec ti on 66 62 (a) pe na lt ie s. Th is m ean s tha t re sp on de nt“ m us t co m e fo rwardwith s uf fic ie nt ev id en ce i nd ic at in g t ha t i t i s ap pr op ria te to im po se th e rel ev an t p en al ty”. H ig be e v. Co m m is si on er, 1 16 T .C. 43 8, 4 46 (20 01 ). Fo r pu rp os es of s ect io n 6 66 2, the term “ ne gl ig en ce” i nc lu de s an y fai lu re t o m ak e a rea so nabl e at te m

ptto co m pl y with t he in co m e ta x p ro vi si on s o f th e Co de
. Sec. 6 66 2( c). Thi s i nc lu de s fa il in g t o m ak e “ a rea so nabl e at te m ptto asc ert ai n t he
co rrec tn es s o f a d educ ti on , cred itor e xc lu si on on a return wh ic h wo ul d s eem to a
Sec. 7 49 1( c) i s ef

fect iv e fo r ex am in at io ns co m m en ci ng aft er J ul y

22 , 19 98
. 8 It i s u nc le ar fro m

th e rec or d wh enth e ex am in at io n o f pe ti ti on ers ’ returns be ga n. Inth e in te res t o f th or ou gh ne ss , we ass um e itbe ga n a fte r pe ti ti on ers ’ fil in g o f th ei r 20 01 Fo rm

10 40
.- 29 -

[* 29 ] reas on ab le pru de ntpe rs on to be ‘ to o g oo d t o b e true ’ un de r th e ci rcu m st an ces ”. Sec. 1 .66 62 -3 (b )(1 )(i i), In co m e Tax Reg s. Taxpa y ers sh ou ldbe ab le to sh ow, ata m in im

um , th atth ey

ful fil le d adu ty of in qu iry withreg ardto whe th er the ir r eturn p ro pe rly repo rte d t he ir t ax li ab il it y . Erik se n v . Comm is si on er, 20 12 W L 28 65 87 5. Pet it io ne rs tes ti fie d t ha t the y si gn edan d fi le d t he returns Mr. Ho well pr ep aredforth em

witho utread in g t he m . W e d o n otdo ub t thi s t es ti m on y , as pe ti ti on ers fil edreturns foranen ti re p artne rs hi p, wh ic h was als o re fle ct edon th ei r pe rs on al return, wi th ou t n ot ic in g t ha t i t was who ll y un rel at edto th ei r affa irs
. Pet it io ne rs were u nf

am il ia r with e ve n t he m os t b as ic li ne it em s o n t he returns , su chas the ir p ro fes si on s, ad dr es se s, an d t ot al in co m e. Res po nd en t h as sh ownth at pe ti ti on ers fai le d t o fu lfi ll th ei r du ty of in qu iry. See id . Peti ti on ers ’ fai lu re t o rev ie w th e returns is esp eci al ly reckl es s co ns id eri ng th atth e si zes of t he ir r eturns an d re fund s g rew s ig ni fic an tl y when th ey

be cam e cl ie nt s o f Mr. Ho well . Thes e were s ig na ls th atMr. Ho well ’s chang es m ay ha ve be en“ to o g oo d t o b e true ” an d pe ti ti on ers sh ou ldha ve m ad e rea so nabl e at te m pt s t o a sc ert ai n t he co rrec tn es s o f th e n ew de du ct io ns . See s ec. 1 .66 62 -3 (b )(1 )(i i), In co m e Tax Reg s. Pet it io ne rs , in fact , reco gn iz e th ata la ckof r ev ie w cangi ve ris e to anin fere nc e o f ne gl ig en ce, an d a re s il en t as to an y

de fen se ag ai ns t the pe na lt ie s. Co ns eque nt ly, we co nc lu de- 30 -

[* 30 ] th atres po nd en t h as m ethi s b ur de n o f pr oduc ti on forde te rm in in g accu racy-rela te d p en al ti es du e to ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns . Inreac hi ng ou r de ci si on , we hav e co ns id eredall arg um en ts m ad e, an d t o t he
ex te ntth atwe ha ve no t s pe ci fic al ly addres se d t he m , we con cl ud e th ey are m oo t, irr el ev an t, o r witho utm eri t. To g iv e eff

ectto th e fo reg oi ng , Deci si on wil l b e en te redfor
res po nd en t.