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

UNITED STATES TAX COURT
BENAVIDES & CO., P.C., Pet i ti o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t AL BENAVIDES AND LOUISE A. BENAVIDES, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 6 7 6 1 -1 4 , 6 8 4 0-1 4
. Fi l edSep t em b er 9 , 2 0 1 9
. Al Ben av id es (an o ffi cer), fo r p et i t i o n er Ben av i d es & Co ., P.C. Al Ben av id es an dLo u is e A. Ben av id es , p ro s es e. Dav i dW . So ren s en , fo r res p o nd en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION PUGH, Ju d g e: In thes e co n s ol i d at edcas es res p o n den td et erm i n ed th e fo l l o w i n g d efi ci en ci es an d p en al t i es i n n ot i ces o f d efi ci en cy i s s uedt o Ben av i d es- 2
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[* 2 ] & Co ., P.C. (BCO), an dM r. an dM rs . Ben av i des (p et i t i o n ers ) o n J an u ary 3 , 2 0 1 4 : 1 Do ck et No . 6 7 6 1-1 4

Year Defi ci en cy Pen al ty s ec. 6 66 3 (a) 2 0 0 3 $ 4 6,7 2 5 $ 35 ,0 4 4 2 0 0 4 8 6 ,4 0 2 6 4 ,8 0 2 2 0 0 5 9 2 ,9 6 2 6 9 ,7 2 2 Do ck et No . 6 8 4 0-1 4

Year Defi ci en cy Pen al ty s ec. 6 66 3 (a) 2 0 0 3 $ 7 7,5 9 7 $ 27 ,0 2 9 2 0 0 4 8 1 ,0 9 2 1 9 ,2 2 1 2 0 0 5 9 1 ,1 7 3 2 7 ,1 7 0 Th e i s s u es fo r d eci si o n are wh et h er: (1 ) BCO h adu n rep o rt edi n co m e fro m
an acco u nt i n g an dt ax p rep arat i o n b u s i n es s o f $ 19 5 ,3 5 9 , $ 1 0 2,5 8 4 , an d$ 2 1 5 ,5 8 0 fo r t ax y ears 2 0 03 , 2 0 0 4 , an d2 0 0 5 , res p ect i v el y ; (2 ) BCO i s en ti t ledt o a n et
o p erat i n g l o s s (NOL) carry fo rward fro m 2 0 0 3 ; (3 ) p et i t i o n ers recei v ed

1 Un l es s o th erwi s e i n d i cat ed , s ect i on referen ces are t o the In t ern al Rev en u e Co d e o f 1 9 8 6 , as am en d ed , i n effect fo r t h e y ears i n i s s u e. Ru le referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re, an dm o n et ary am o u n ts are ro u n d ed t o the n eares td ol lar.- 3
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[* 3 ] co n st ru ct iv e d iv i d en ds o f $ 1 9 5 , 3 5 9 , $ 1 3 2 , 5 8 4 , 2 an d$ 2 1 5,5 8 0 fo r t ax y ears 2 0 0 3 , 2 0 0 4 , an d 2 0 0 5, res p ect iv el y , t o acco u n tfo r g ro s s recei p t s th atwere

“ d i vert ed ” fro m

BCO t o o th er acco u n t s o r en t i t i es th ey o wn edan dco n tro l l ed ; (4 ) p et i t i o n ers h adu n rep o rt ed i n co m e fro m Su n ri s e, a p art n ers hi p th atth ey o wn ed , o f $ 1 23 ,9 3 1 , $ 8 8 ,5 9 3 , an d$ 6 6 ,6 2 8 fo r t ax y ears 2 0 0 3 , 2 0 04 , an d 2 0 0 5 , res p ect i vel y ; (5 ) M r. Ben av i d es h ads el f-em pl o ym en t i n co m e t o refl ecth i s s h ares
o f p art n ers h ip i n co m e fro m Su n ri s e o f $ 4 2 ,2 19 , $ 1 1 0 ,3 3 2 , an d$ 8 2,5 9 1 fo r t ax y ears 2 0 0 3 , 2 0 0 4, an d2 00 5 , res p ect i v el y ; (6 ) M rs . Ben av i d es h ads el fem pl o y m en ti n co m e t o refl ecth er s h ares o f p art n ers h i p i nco m e fro m Su n ri s e o f $ 4 0 ,5 6 4 , $ 1 06 ,0 06 , an d$ 7 9 ,3 5 2 fo r t ax y ears 2 0 0 3 , 2 0 0 4 , an d2 0 0 5 , res p ect i v el y ; (7 ) BCO i s l i ab l e fo r frau d p en al t i es u n der s ect io n 6 6 6 3 (a) o f $ 3 5 ,0 4 4, $ 6 4,8 0 2 , an d $ 6 9 ,7 2 2 fo r t ax y ears 2 0 0 3, 2 0 0 4 , an d2 0 05 , res pect i v el y , wi th res pect t o i ts
u n rep o rt edt ax ab l e i n co m e; (8 ) p et i t i o n ers are l i ab l e fo r frau dp en al t i es u n der
s ect i on 6 6 6 3 (a) o f $ 2 7 ,0 2 9 , $ 1 9 ,2 2 1 , an d$ 2 7 , 1 7 0 fo r t ax y ears 2 0 0 3 , 2 0 04 , an d 2 0 0 5 , res p ect i v el y , wi th res p ectt o u n rep o rt edco n s tru ct i v e d i v i den ds fro m BCO;

2 Th e d i fferen ce b et ween BCO’ s u n rep o rt edi n co m e an dp et i t i o n ers ’ co n st ru ct i v e d iv i d en ds d et erm i n edb y res p o n d en tfo r 2 0 0 4 i s at tri b ut ab l e t o res p o n d en t’ s fai l u re t o i n cl ud e i n BCO’ s u n rep ort edi n co m e a p aym en to f $ 3 0 ,0 0 0 fro m J eff So rg thatp et i t i o n ers rep o rt edo n a d i fferen ten t i ty ’ s retu rn (Su nri s e M an ag em en t an d Dev el op m en t , LLC (Su n ri s e), d i s cu s s edb el o w). Res p o n d en t d et erm i n edth atth i s was a p aym en t t o BCO b u tfai ledt o i ncl u d e i t i n u n rep o rt ed i n co m e wh en cal cu l at i n g BCO’ s d efi ci en cy .- 4
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[* 4 ] an d (9 ) as s es s m en tan dco l l ect i o n o f t he t ax d efi ci en ci es are b arredb y th e
s t atu te o f l i m i tat i o n s . FINDINGS OF FACT I. Back gro u n d So m e o f t h e fact s h av e b een s ti p u lat ed , an dth e s t i p u l at edfact s are i n co rp o rat edi n o u r fi n d in g s b y th i s referen ce. BCO’ s p ri n ci p al o ffi ce was i n M o n tan a du ri n g th e y ears i n i s s u e. Pet i t i o n ers l iv edi n W as h i n g t o n wh en th ey t i m el y fi l edth ei r p et i t i o n . M r. Ben av i d es g radu at edfro m W as h i n g t on St at e Un i vers i ty wi th a d eg ree i n acco u nt i n g i n 1 9 7 1 an db ecam e a cert i fi edp ub l i c acco un t an t(C.P.A.) i n 1 9 7 6
. He was en g ag edi n th e b u s i n es s o f p rep ari ng i n co m e t ax retu rn s an dp ro v i d i n g t ax ad v ice fro m

1 9 7 6 thro ug h th e y ears i n i s s u e. Pet i ti o n ers m arri edb efo re th e y ears i n i ss u e an drem ai n edm arri edatth e t i m e o f t ri al
. M r. Ben av i d es o rg an i zedBCO as a p ro fes s io n al s erv ices co rp o rat i on i n 1 9 9 1 u n d er t h e l aws o f M o nt an a an dwas th e s o l e o wn er an dm an ag er. A
s ub ch ap t er C co rp o rat i o n , BCO fi l edFo rm s 1 1 2 0 , U.S. Co rp o rat i o n In co m e Tax Retu rn , s i n ce i t s o rg an izat i o n . Duri ng th e y ears i n i ss u e i to ffered v ari o us t ax an d
acco u n t in g s erv i ces , i n cl u d in g th e p rep arat i o n an dfi li n g o f Fed eral i n co m e t ax retu rn s , acco u nt in g an dad v i s o ry s erv i ces , an dt ax ad v is o ry s erv i ces . Th es e- 5
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[* 5 ] s erv i ces were p erfo rm edb y M r. Ben av i d es an dth ree s t aff acco u n t an t s wh o
wo rk edu n d er h i m

an d ath i s d i rect i o n du ri n g th e y ears i n i s s u e. M rs . Ben av i d es p erfo rm edcl eri cal wo rk

atBCO, i ncl u d i n g d at a en try an ds o m e b o o kk eep i n g . Pet i t i o ners fo rm edSu n ri s e i n 2 0 0 0 as a p art n ers h ip u n der t h e l aws o f M o n tan a wi th M r. Ben av i d es as a 5 1 % p art n er an d M rs . Ben av i d es as a 4 9 % p art n er. Su n ri s e was a real es t at e m an ag em en tan dd ev el o p m en tb us i n es s i n Kal i s p el l , M o n t an a. Ital s o act edas a b i l l-p ay i ng en t i ty fo r t h ree o r fo u r o f BCO’ s cl i en ts . Th ey

wo u ld p ay

Su n ri s e, an dSu n ri s e wo u l dp ay v en d o rs an dco n tract o rs fo r s erv i ces rel at ed t o th o s e i n di v i du al s . Su n ri s e rep o rt edth e p aym en ts i t recei ved
as i n co m e an dthe p aym en ts i t m ad e as b u s i n es s ex p en s es . Su n ri s e p erfo rm edth i s
s am e fu nct i o n fo r p et i t i o n ers wh en th ey rem o d el edan d m ad e i m p ro v em en ts t o th ei r h om e an do b t ai n edo ther s erv i ces , p ay i n g the p ers o n al s erv i ce p ro vi d ers fo r p et i t i o n ers an dd educt i n g th e p aym en t s as b us i n es s ex p en ses . Bu tp et i t i o ners d i d
n o trei m b u rs e Su n ri s e fo r t h es e ex p en s es . Res p o n d en td et erm in edth atSu nri s e p ai dv en d o rs an do th er t h ird p art i es $ 1 9 0 ,0 4 5 , $ 2 08 ,1 5 6 , an d$ 2 68 ,6 0 9 i n 2 0 0 3 , 2 0 0 4 , an d2 0 0 5 , res p ect i v el y , fo r g o o d s an ds erv i ces p ro v i d edt o p et i t i o ners o r fo r th ei r p ers o n al res i d en ce an d fo r o th er i t em s d et erm in edt o b e fo r p et i t i o n ers ’ p ers o n al u s e o r p ers o n al ex p en s es .- 6
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[* 6 ] M r. Ben av i d es al s o o wn edo r co n tro l l edo th er LLCs an dp artn ers h ip s th at h el dreal p ro p ert y

i n an daro u n dth e Kal is p el l area, i n cl u di n g an en t i ty cal l edLaJ am Pro pert i es , L.P. (La-J am ). La-J am was a p art ners h i p o wn ed b y p et i ti o n ers th atacq u i redei g h tacres o f l an dad jacen tt o p et i ti o n ers ’ res id en ce i n 2 0 0 4 . In 2 0 0 4 Su n ri s e p ai dfo r co n st ru ct i o n o f a 3 ,5 0 0 -s qu are-fo ot s ho p o n La-J am ’ s l an d th atp et i t i o n ers u s edfo r s t o rag e. Ap artfro m h ol d i n g th e l an d , La-J am d i dn o t
co n du ct an y

b u s i n es s act iv it i es . In 2 0 1 1 M r. Ben av i d es en t ereda g u i l ty p l ea t o o n e co u n t o f as s is t i n g i n th e p rep arat i o n o f a fal s e o r frau du l en ti n co m e t ax retu rn i n v i o l at i o n o f s ect i o n 7 2 0 6 (2 ). Th e o ffer o f p ro o f fi l edb y th e U.S. At to rn ey

fo r t h e Di st ri cto f M o n t an a i n M r. Ben av i d es ’ cri m i n al cas e s t at edth atM r. Ben av i d es , th ro ug h BCO,
co l l ect ed“ fees fo r s erv i ces ” fro m a cl i en t , p u rch as ed a p ers o n al i t em fo r th e cl i en t , an d th enas s i st edi n p rep ari n g th e cl i en t’ s t ax retu rn cl ai m i n g a b u s i n es s ex p en s e d educt i o n fo r t h e co s t o f t h e p ers o n al i t em m is ch aract eri zedas “ fees .” M r. Ben av i d es was i m

p ri so n edfo r 1 2 m o n th s an do n e d ay , was o n s up erv i s edrel eas e fo r o n e y ear, an d p ai da $ 25 ,0 0 0 fi n e. II. BCO’ s Tax Retu rn s an dRes p o n d en t ’ s Det erm in at io n s BCO fi l edFo rm s 1 1 20 fo r t h e y ears i n i s s ue. Su n ri s e fi l edFo rm s 1 0 6 5 , U.S. Retu rn o f Part ners h i p In co m e, fo r t h e y ears i n i ss u e. M r. Ben av i d es o r a- 7
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[* 7 ] BCO em

p l oy ee wo rk i n g ath i s d i rect i on p rep aredth e Fo rm s 1 1 2 0 an d 1 0 6 5 fo r 2 0 0 3 an d 2 0 0 4; Bri en Krep s , a C.P.A. wh o wo rk edfo r BCO as i t s ch i ef fi nan ci al o ffi cer, p rep aredth e Fo rm s 1 1 2 0 an d1 0 6 5 fo r 2 00 5 . BCO rep o rt ed i n co m e an d ex pen s es o n th e cas h b as i s fo r i n co m e t ax p u rp os es . Itu sedth e
acco u n t in g s o ft ware Pract i ce Ti m e Bi l l i n g So ft ware (PACS) t o acco u n tfo r al l
acco u n t s recei vab l e an dp aym en t s . Itu s ed th e Acco u n t an t ’ s Tri al Bal an ce (ATB) p ro g ram t o d et erm i ne i t s i n co m e fo r t ax p urp o s es . BCO d i dn o trep o rtas t ax ab l e i nco m e al l o f t h e p aym en t s i trecei v edfo r t h e
s erv i ces i tp ro v i d edt o cl i en t s. Itrep ort edp aym en t s th atwere d ep o si t edi n t o BCO
acco u n t s an den tered i n to th e ATB p ro g ram ; i td i dn o t rep o rtp aym en ts al l ocat ed t o M r. Ben av i d es i n d i v i du al l y o r t o Su n ri se o r o th er en t i t i es th atM r. Ben av i d es
o wn edo r co n tro l l ed
. Th e m ech an i cs o f t he p aym en tal l o cat io n s were s i m p l e. Fi rs t, M r. Ben av i d es wo u l dd eci d e wh ata cl i en ts ho u ldb e b i l ledfo r t h atm o n th (fo r wh at
wo rkan datwh atrat e). Wh en p aym en t s were recei v ed , M r. Krep s wo u l d reco rd th em i n PACS. M r. Ben av i d es rev i ewedal l p aym en t s recei v edan dd eci d edwh i ch p aym en t s were t o b e d ep o s i t edi n t o BCO acco u n ts an dwh ich p aym en t s were t o b e d ep os i t edi n t o o th er acco u n t s o wn edo r co n tro l l edb y p et i t i o n ers . Am o u n t s d ep os i t edi n t o BCO acco u n t s th en were reco rd ed i n th e ATB p ro g ram , ty p i cal l y b y- 8
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[* 8 ] M rs . Ben av i d es . Sh e al so ty p i cal l y wo ul d p rep are d ep o s i ts l i p s fo r th e
v ari o u s acco u n t s al th o ug h s o m et i m es o th er cl eri cal s t aff p rep aredth em . BCO al s o recei v edm erch an d i s e o r s erv i ces fro m cl i en ts i n ex ch an g e fo r i t s
acco u n t in g s erv i ces . Th e m erch an d i s e o r s erv ices were u s edb y M r. Ben av i d es o r
o th er s t aff m em

bers . Th es e were referred t o as “ trad es ” an dwere reco rd edi n PACS as redu ct i o n s i n th e cl i en t ’ s acco u n t recei v ab le. Th ey were n o treco rd edi n th e ATB p ro g ram . M o n th l y an d an n ual l y , M r. Krep s p rep areds p read s h eet s t h atreco n ci l edth e
acco u n t s recei vab l e fro m th e t w o acco u n t in g s y s t em s t o each cl i en t ’ s p aym en t s . He reco rd edal l cas h recei p t s th atwere n o td ep o si t edi n t o co rp orat e acco u n t s b u t i n s t eadwere d ep o s it edel s ewh ere o r cas h ed . An dh e t rack edth e p aym en t s v i a trad es an dwh eth er t h e t rad es were u s edb y p et i t io n ers o r BCO s t aff. OnJ an u ary

3 , 2 0 1 4 , res p o n d en t i s s u eda n o t ice o f d efi ci en cy t o BCO fo r t ax y ears 2 0 0 3 , 2 0 0 4, an d2 00 5 . Res p o nd en td et erm i nedth atBCO u n d ers t at edi t s g ro s s i n co m e b y

fai l i n g t o rep o rtth e fu n d s d i v ert edfro m BCO t o p et i t i o n ers an d
en t i t i es th ey o wn edo r co n tro l l ed , as wel l as th e t rad e i t em s p et i t i o n ers co n v ert ed t o p ers o n al u se, i n th e fo l lo wi n g am o u n ts : $ 19 5 ,3 5 9 fo r 2 00 3 , atl eas t$ 1 0 2 ,5 8 4- 9
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[* 9 ] fo r 2 0 04 , 3 an d$ 21 5 ,5 8 0 fo r 2 0 0 5 (co l l ect i v el y , d i v ert ed g ro s s recei p t s). Res po n d en td et erm i n edth e am o u n t s o f t h e d i v ert edg ro s s recei p t s b y p erfo rm i n g a b an k d ep o s i tan al y s i s o f BCO’ s b an kreco rd s , rev iewi n g i t s co rp o rat e an d fi nan ci al reco rd s , an d in t erv i ewi n g i t s cl i en t s an dem p l o y ees . BCO’ s ad

ju s t i n g jo u rn al en tri es fro m

i t s g en eral l ed g er s h owedth at i th adret ai n edearn i ng s o f at l eas t $4 9 ,9 7 7 fo r 2 00 3 an d$ 65 ,6 3 9 fo r 2 0 0 4 wi tho u tt ak i n g i n t o acco u ntth e d i v ert edg ro s s recei p t s . BCO cl ai m edNOL d edu ct i o n s o f $ 1 1 4 , 2 8 0 an d$ 5 0 ,0 26 fo r 2 0 0 4 an d2 0 05 , res p ect i vel y . Atthe b eg i n n i ng o f 2 0 0 2 BCO rep o rt edaccu m u l at edNOL carry o vers o f $ 7 0 ,8 22 at tri bu t ab l e t o NOLs i n 1 9 9 6 an d1 9 9 7 . BCO cl ai m ed i n creas es i n NOLs o f $ 4 3,5 1 3 fo r 2 0 02 an d$ 6 1 ,8 5 9 fo r 2 0 0 3 . Th ro ug h a b an k d ep os i tan al y s is res p o nd en td et erm i n edth atBCO h adu n d errep o rt ed i t s i n co m e b y $ 1 3 1 ,9 9 4 fo r 2 0 0 2, wh i ch wo ul dh av e el i m i n at edthe NOL th atBCO cl ai m edfo r th aty ear an dal s o ex ti n g u i sh edth e accu m u l at edNOL carry o v ers fro m 1 9 9 6 an d 1 9 9 7 . Li k ewi s e t h e u n d errep o rt edi n co m e fo r 2 00 3 fro m th e d i vert edg ro s s recei p t s wo u l dh av e el i m i n at edth e NOL th atBCO cl ai m edfo r t h aty ear. In th e
n o t i ce o f d efi ci en cy

res p o n d en td i s al lo wed th e NOL carry o v er d edu ct io n s cl ai m ed

3 Res p o n d en td i dn o ts eekt o i n creas e t h e d efi ci en cy t o i n cl u d e i n BCO’ s 2 0 0 4 u n rep o rt edi n co m e t h e $ 30 ,0 0 0 p aym en t fro m J eff So rg t o BCO t h atwas d i v ert edt o Su n ri s e.- 1 0 -

[* 1 0 ] fo r 2 00 4 an d 2 0 05 . Ad d i t i o n al l y , res p o n d en t d et erm i n eds ect i o n 6 6 6 3 (a) frau d p en al t ies o f $ 3 5 ,0 4 4 , $ 6 4 ,8 0 2 , an d $ 6 9 ,7 2 2 fo r 2 0 0 3, 2 0 0 4 , an d2 0 0 5 , res p ect i vel y . Th e l arg es treci p i en to f BCO’ s d i vert edg ro s s recei p t s was Su n ri se. Res po n d en t , i n th e n o t i ces o f d efi ci en cy i s s u edt o p et it i on ers , redu ced Su n ri s e’ s i n co m e b y

$ 98 ,9 8 6 , $ 1 3 6 ,6 48 , an d$ 2 0 3 ,4 8 9 fo r 2 00 3 , 2 0 0 4 , an d 2 0 0 5 , res p ect i vel y , t o rem o v e th e am o u n t s h e d et erm i n edh adb een d i v ert edfro m BCO t o Su nri s e. Res p o n d en td i dn o trem o v e d ep os i t s fro m cl ien t s u s i n g Su nri s e as a b i l l -p ay i n g en t i ty

o r d is al l o wb u s i n es s ex p en se d edu ct i on s fo r Su nri s e’ s p aym en t s
o n b eh al f o f t h o s e i nd i v i du al s . III. Pet i t io n ers ’ Tax Retu rn s an dRes po n d en t ’ s Det erm i nat i o n s Pet i t i o ners t i m el y

fi l edFo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , fo r th e y ears i n i s s u e. M r. Ben av i des p rep aredth o s e ret u rn s , an dp et i ti o n ers s i g n ed th em u n d er p en al ty

o f p erjury . Pet i ti o n ers rep ort edad ju s t edg ro ss i n co m e o f $ 1 5 7 ,6 5 6 , $ 19 4 ,8 8 2 , an d$ 2 3 6 ,0 3 2 fo r t ax y ears 2 0 03 , 2 0 0 4 , an d2 0 05 , res p ect i vel y . Pet i t i on ers d i dn otrep o rtth e d i v ert ed g ro s s recei p t s fro m BCO as qu al i fi edd i v i d en ds o n th ei r jo in tretu rn s . Th e In t ern al Rev en u e Serv i ce (IRS) au d i t edp et i t i o n ers ’ jo i ntretu rn s fo r t h e y ears i n i s s u e. In th e co u rs e o f th e au d i t th e ag en tex am i n i n g p et i t i o ners ’ retu rn s- 1 1 -

[* 1 1 ] d et erm in edth ats ect i o n 6 6 6 3 (a) frau d p en al t i es were warran t ed an dp rep ared a Fo rm 1 1 6 6 1 , Frau dDev el o p m en tReco m m en d at i o n --Ex am in at io n , reco m m en d i n g frau d p en al t i es fo r 2 0 0 3 , 2 0 0 4, an d2 00 5
. 4 Th e Fo rm 1 1 6 6 1 d es cri b es th e al l eg edfrau d , i n cl u d i ng th atM r. Ben av i d es “p u rp o s efu l l y d i dn o t rep o rtth e i n co m e * * * [d i v ert edfro m BCO] o n th e ap p ro p ri at e t ax retu rn s i n
o rd er t o ev ad e t he p ers o n al s erv i ce co rp o rat e t ax an d the ad d it i o n al t ax o n d i v i d en d s t o h i m fro m

the co rp o rat i o n .” Th e “ Pl an o f Act i o n ” o n th e Fo rm 1 1 6 6 1
was t o “ [c] o m

pl et e 3 0 d ay

l et t er wri t eup , i n cl u d i n g ci v i l frau d p en al ty .” Th e Fo rm 1 1 6 6 1 referred o n l y

t o M r. Ben av i d es . Th e ag en t p rep areda s ep arat e Fo rm 1 1 6 6 1 fo r BCO al th o ug h i td o es n ots p eci fy p rep arat i o n o f a 3 0 -d ay

l et t er as a p arto f t h e act i on p l an . OnOct o b er 2 6 , 2 01 1 , th e ex am i n i n g ag en t ’ s s up erv i s o r s i g n edth e Fo rm s 1 1 6 6 1 , i n d i cat i n g ap p ro v al o f t h e reco m m en d ed frau dp en al t i es . Res p o n d en t i s su edrev en u e ag en trep o rt s (RARs ) o n J an u ary 2 5 , 2 0 1 2 , t o BCO an dt o p et i t i o n ers , co m

m u n i cat in g the s ect i o n 6 6 6 3 (a) frau dp en al t i es . Th o s e RARs were l at er am en ded
.

4 W e ex p l ai n wh y

we are reo p en in g th e reco rdt o i n cl u de cert ai n ex hi b i t s rel ev an t t o res p o n d en t ’ s p en al ty d et erm i n at i o n i n fra p p . 4 0 -4 7
.- 1 2 -

[* 1 2 ] OnJ an u ary

3 , 2 0 1 4 , res p o n d en t i s s u edth e n ot i ce o f d efi ci en cy t o p et i t i o n ers fo r t ax y ears 2 0 03 , 2 0 0 4 , an d2 0 0 5 . Res p o n d en t d et erm i n edth atp et i t i o n ers
u n d ers t at edth ei r g ro s s i nco m e b y fai l i n g t o rep o rtth e d iv ert edg ro s s recei p t s fro m BCO as d i v i d en d s o f $ 1 9 5 ,3 5 9 , $ 1 3 2 ,5 8 4 , an d $ 2 1 5 ,5 8 0 fo r t he t ax y ears 2 0 0 3 , 2 0 0 4 , an d2 0 0 5 , res p ect i v el y . Inad di t i o n res p on d en td et erm i n edth atp et i t i o n ers
u n d ers t at edth ei r i n co m e fro m Su n ri s e, m ak i n g fo u r ad

ju s t m en t s : (1 ) d ecreas i n g Su n ri s e’ s g ro s s i n co m e b y th e am o u n t s d et erm i ned t o b e d i v ert edt o Su n ri s e fro m BCO, (2 ) d i s al l o wi ng Su n ri s e’ s d ep reci at i o n d edu ct i on s th atres p o n den t d et erm i n edwere fo r as s et s n o t s h o wnt o b e u s edi n an act iv e t rad e o r b u s i n es s , (3 ) d i s al l o wi n g Su n ri s e’ s s ect i o n 1 7 9 ex pen s e d edu ct i o n s fo r 2 0 0 4 an d 2 0 0 5 b ecau s e th e as s et s were n o t s h own t o b e u s edi n co ndu ct i n g an act i v e t rad e o r b u s i n es s , an d(4 ) d is al lo wi n g cert ai n b u s i n es s ex p en s e d edu ct i o n s cl ai m edb y Su n ri s e t h at res p o n d en ti d en t i fi edas p et i t io n ers ’ p ers o n al ex p en ses p ai db y Su n ri s e. To g et h er t h es e ad ju s t m en t s res u l t edi n i n creas edfl o w th ro u gh i n co m e fro m Su nri s e t o p et i t i o n ers . Res p o n d en tth en ad ju s t ed p et i t io n ers ’ s el fem pl o y m en ti n co m e t o acco u n tfo r t h es e ad ju st m en t s i n o rd in ary

i n co m e fl o wi n g fro m Su nri s e t o p et i t i o n ers . Res p o n d en tal so m ad e co rres p o n d i n g co m p u t at i o n al ad ju s t m en t s t o p et i t i o n ers ’ ad ju s t ed g ro ss i n co m e, i t em i zedd educt i on s , an d
ex em p t i o n s . Las t l y , res p o n d en td et erm i neds ect i o n 6 6 6 3 (a) frau dp en al t i es o f- 1 3 -

[* 1 3 ] $ 2 7 ,0 2 9, $ 1 9 ,2 21 , an d$ 2 7 ,1 7 0 , fo r t ax y ears 2 0 03 , 2 0 0 4 , an d2 0 0 5 , res p ect i vel y , wi th res p ect t o th e u n rep o rt edco n st ru ct i v e d i v id en d s fro m BCO. OPINION I. Bu rd en o f Pro o f Th e t ax p ay er g en eral l y

b ears the b u rd en o f p ro v i n g th atth e Co m m i s s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are erro n eo u s. Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 15 (1 9 33 ). Fo r u n rep o rt ed i n co m e, h o w ev er, t h e Co u rt
o f Ap peal s fo r t h e Ni n th Ci rcu i t , wh ere t h es e cas es are ap p eal ab l e ab s en ta
s t ip u l at i o n t o th e co n trary , g en eral l y req u i res th atth e Co m

m i s s i o n er i n tro du ce
s o m e ev i d en ce l i n k i n g the t ax p ay er wi th i n co m e-p ro duci n g act i v i ty o r d em o n s t rat e th atth e t ax p ay er act u al l y recei v edu n rep o rt edi n co m e. See Rap p v . Co m m i s s i o n er, 7 7 4 F.2 d9 3 2 , 9 3 5 (9 th Ci r. 1 9 8 5 ); Edward s v . Co m m i s s i o ner, 6 8 0 F.2 d1 2 6 8 , 1 2 7 0 (9 th Ci r. 1 9 8 2 ). On ce t h e Co m m i s s i o n er m ak es th i s req u i red th res ho l ds h o wi n g , th e t ax p ay er m u s tp ro v e b y

a p rep on d eran ce o f t h e ev i d en ce th atth e Co m

m i ss io n er’ s d et erm i n at i o n s are arb i traryo r erro n eo u s . Hel v eri n g v . Tay l o r, 2 9 3 U.S. 5 0 7 , 5 1 5 (1 9 35 ); Rap p v . Co m m i s si o n er, 7 7 4 F.2 d at9 3 5 ; To k ars ki v . Co m

m i s s i o n er, 8 7 T.C. 7 4 (1 9 8 6 ). Tax p ay ers al s o b ear t h e b u rd en o f p ro v in g en t i t l em en tt o an y d edu ct i on s cl ai m ed
. INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ); New Co l o n i al Ice Co . v . Hel v eri n g , 2 9 2 U.S. 4 3 5 , 4 4 0- 1 4 -

[* 1 4 ] (1 9 3 4 ). BCO an d p et i t i o n ers d o n o tco n ten d , an dth e ev i den ce d oes n o t
es t ab l i s h , th atth e b u rd en o f p ro o f s h o u l ds h i ftt o res p o n d en t u n d er s ect i on 7 4 9 1 (a)
as t o an y i s s u e o f fact
. II. BCO’ s Arg u m en ts A. Un rep o rt edIn co m e o f BCO Th e fi rs ti s su e i s wh et h er BCO h adu n rep o rt edi n co m e fro m i t s acco u n t i ng
an d t ax p rep arat i on b u s i n es s o f $ 1 9 5 ,3 5 9 , $ 1 0 2 ,5 84 , an d$ 2 1 5 ,5 80 fo r t ax y ears 2 0 0 3 , 2 0 0 4 , an d 2 0 0 5, res p ect iv el y . Res p o n den tas s ert s th atM r. Ben av i d es d i v ert edg ro s s recei p t s fro m BCO i n th es e am o un t s du ri n g th e res pect i ve y ears i n i s su e an dth erefo re BCO fai l edt o rep ortan dp ay Fed eral co rp o rat e i n co m e t ax o n th es e am o u n t s . A C co rp o rat i o n i s a s ep arat e en ti ty fo r Fed eral i n co m e t ax p u rp o s es s o l o n g
as i ten g ag es i n s o m e l eg i ti m at e b u s i n es s act i v i ty . M o li n e Pro p s . , In c. v . Co m m i s s i o n er, 3 1 9 U.S. 4 3 6 , 4 3 8 -4 3 9 (1 9 4 3). As an i n dep en d en tt ax ab l e en t i t y , a C co rp o rat i o n i s s ub

jectt o Fed eral i n co m e t ax o n i t s t ax ab l e i n co m e. Sec. 1 1 (a). Th e C co rp o rat i o n’ s t ax ab l e i n co m e i s i t s g ro s s i n co m e--wh i ch i n cl u des fees fo r
s erv i ces --l es s al l o w ab l e d edu ct i o n s . Secs . 6 1 (a)(1 ) an d(2 ), 6 3 (a). Pet i t i o ners d o n otd i sp u t e t h atth e g ro s s recei p t s were BCO’ s i n co m e; M r. Ben av i d es read i l y

ad m i t s h e “ red i rect ed ” g ro s s recei p t s fro m BCO t o p u t “ ri g h t- 1 5 -

[* 1 5 ] away ” i n t o h is o th er en t i t i es . Thu s , th e d iv ert edi nco m e--$ 1 9 5 ,3 59 , $ 1 0 2 ,5 8 4 , an d$ 21 5 ,5 8 0 fo r 2 0 0 3 , 2 0 0 4 , an d2 0 0 5 , res p ect i v el y --i n th e fo rm o f ch eck s , cas h p aym en t s , o r t rad es i s g ro s s i n co m e o f BCO. M r. Ben av i d es arg u es , h o wev er, t hatwe s h o u l di g no re t h es e t ran s fers b ecau s e h e wo u l dh av e “ st ri p p ed ” t h e p ro fi t s o u tan yway as d edu ct i bl e
co m p en s at i o n . W e d i s ag ree. Wh i l e BCO co u l dh av e t ak enth e g ro s s recei p t s i n t o
acco u n t as i n co m e an d p ai dth em o u tas co m

p en s at i on , b y

M r. Ben av i d es ’ o wn ad m i s s i o n i t d id n o t . Th e d i v ert edg ro s s recei p t s t h erefo re are p ro p erl y ch aract eri zedas d i s tri b u t i o n s, n o tco m p en s at i o n. A t ax p ay er m ay

n o tav o i dFed eral i n co m e t ax o n earn ed i nco m e s i m p l y b y
as s i g n i n g i tt o an ot her. Hel v eri n g v . Ho rs t , 3 1 1 U.S. 1 1 2 , 1 1 9 (1 9 4 0 ) (“ T he d o m i n an tp u rp o s e o f t he rev en u e l aws i s th e t ax at i o n o f i n co m e t o th o s e wh o earn
o r o th erwi s e creat e t h e ri g h tt o recei v e i tan den jo y th e b en efi to f i twh en p ai d .”); Fl o y dv . Sco fi el d , 1 9 3 F.2 d5 9 4 , 5 9 6 (5 th Ci r. 1 9 5 2 ) (h o l di n g a co rp o rat i o n l i ab l e fo r co rp o rat e t ax o n i n co m e fro m th e s al e o f o i l an d g as d es p i t e l i qu i d at i o n p l an th atd i st ri b u t edacco u n t s recei vab l e t o s h areh o ld ers wh en ch eck s were d el i v ered b efo re d i s s o l u ti o n ). W e h o l d t h at th e d i v ert edg ro ss recei p t s were t h e u n rep o rt ed t ax ab l e i n co m e o f BCO fo r t h e y ears i n i s su e. See, e.g ., Un i t edM ercan t i l e Ag en ci es , In c. v . Co m

m i s s i o n er, 2 3 T.C. 1 1 0 5 , 1 1 12 (1 9 5 5 ) (“ [D] i vert edfu n d s are- 1 6 -

[* 1 6 ] t ax ab l e as i n co m e t o th e co rp o rat io n an d are t ax ab l e as d i vi d en d s t o th e
ex t en to f earn i n g s an d p ro fi t s t o th e o ffi cer-s t o ckho l d ers recei v i n g them .”),
rem an dedo n o th er g ro un d s s ub n o m . Dry bro u g h v . Co m

m i s s i o n er, 2 3 8 F.2 d7 3 5 (6 th Ci r. 1 9 5 6 ); M azzo cch i Bu s Co . v . Co m m i ss i o ner, T.C. M em o. 1 9 93 -4 3 (s u s t ai n in g th e Co m

m i s si o ner’ s d efi ci en cy d et erm i n at i on wh enthe co n tro l l i n g
s h areh o ld er d i v ert ed co rp o rat e i n co m e t o h i m s el f t h atthe co rp o rat i o n fai l edt o rep o rto n i ts t ax retu rn ), aff’ d , 1 4 F.3 d 9 23 (3 dCi r. 1 99 4 ). B. BCO’ s Cl ai m edNOL Dedu ct i o ns A t ax p ay er g en eral l y

m ay d edu ct , as an NOL fo r a t ax ab l e y ear, an am o u n t equ al t o th e s u m

o f t h e NOL carry fo rward s an dcarryb ack s t o th aty ear. Sec. 1 7 2 (a). An NOL i s th e ex ces s o f d edu ct i o n s o ver g ro s s i n co m e, co m p u t edwi th cert ai n m o d i fi cat i o n s s p eci fi edi n s ect i o n 1 7 2 (d ). Sec. 1 7 2 (c). Ab s en tan el ect i o n
u n d er s ect i o n 1 7 2 (b )(3 ), an NOL fo r an y t ax ab l e y ear fi rs tm

u s tb e carri ed b ack2 y ears an dth en carri ed fo rward2 0 y ears . Sec. 1 7 2 (b )(1 )(A), (2 ) an d(3 ). Tax p ay ers b ear t h e b u rd en o f es t ab l i s h in g b ot h th e ex i st en ce o f NOLs fro m p ri o r y ears an dthe am ou n t s th atm ay b e carri edfo rward t o t h e t ax y ears i n i s s u e. See Ru l e 1 4 2 (a); Kei th v . Co m m i s s i o n er, 1 1 5 T.C. 6 0 5 , 6 2 1 (2 0 00 ). W e h av e juri s d i ct i o n t o d et erm i ne t h e co rrect am ou n t o f t ax ab l e i n co m e o r NOL fo r a y ear
n o ti n i s s u e as a p rel im i n ary s t ep i n d et erm i n i n g the co rrect NOL carry o v er t o a- 1 7 -

[* 1 7 ] y ear b efo re u s. Lo n e M an o r Farm s, In c. v . Co m m i ss i o ner, 6 1 T.C. 4 3 6 , 4 40 (1 9 7 4), aff’ dwi th o utp ub li s h edo p i n i o n , 5 1 0 F.2 d9 70 (3 dCi r. 1 97 5 ). Th e o n l y ev i d en ce BCO o ffered t o s ub s tan t i at e i t s NOLs co ns i s t edo f i t s t ax retu rn s fo r t h e t ax y ears i n i s s u e wi th at t ach eds t at em en t s b ri efl y d es cri b i n g h o w i t cal cu l at edi t s NOL carry o v ers , a h an dwri t ten s u m m ary o f i t s h i s to ri cal g ro s s recei p t s an d NOLs th atM r. Ben av i d es p rep areds h o rt l y b efo re tri al , an dM r. Ben av i d es ’ v ag ue t es t i m o n y thath e d i s ag reedwi th res p on d en t ’ s p o s i t i o n . W e d i dn o t fi n dM r. Ben av i d es ’ t es t i m o n y cred i bl e i n an y

res pect . An d BCO’ s t ax retu rn s fo r t h e y ears i n i s s ue are m erel y s t at em en t s o f i t s p o s i t i o n . Th ey can n otb e u s edt o s ub s tan t i at e a cl ai m edd edu ct i o n i n cl u di ng th e am ou n to f
an NOL t o b e carri edfo rward . See Sp ark m an v . Co m m i s s i o n er, 5 0 9 F.3 d1 1 4 9 , 1 1 5 6 -1 1 5 7 (9 th Ci r. 2 0 0 7 ), aff’ g T.C. M em o . 2 0 0 5-1 3 6 ; W il k i n s o n v . Co m m i s s i o n er, 7 1 T.C. 6 33 , 6 3 9 (1 9 7 9 ); Hawk s v . Co m m i s si o n er, T.C. M em o . 2 0 0 5 -1 5 5 , 2 0 0 5 W L 1 5 03 6 8 6 , at* 3 . BCO th erefo re fai l edt o s ub s t an ti at e t h e NOLs fo r 1 9 9 6, 1 99 7 , an d2 0 0 2 . No r d i d BCO s h ow t h atth es e al l eg edNOLs
were n o t al read y

ex h au st edb efo re t h e y ears i n i s s u e. See J o n es v . Co m m i s s i o n er, 2 5 T.C. 1 1 0 0 , 1 1 0 4 (1 9 5 6 ), rev ’ dan drem an d edo n o ther g ro u nd s , 2 5 9 F.2 d3 0 0 (5 th Ci r. 1 9 5 8 ); Po wer v . Co m m i s s i o n er, T.C. M em o. 2 0 1 6 -1 5 7 , at * 13 -* 1 4 (“ Pet i t i on ers m

u s tp ro v e n o to nl y

th atM r. Po wer i n cu rredNOLs i n 1 9 9 9 -2 0 0 2 b u t- 1 8 -

[* 1 8 ] al s o th atth e NOLs were n o tab s o rb eddu ri n g th e p eri o d b eg i n n i n g wi th 1 9 9 7 (t h e earl i es tcarryb acky ear) an den di n g wi th 2 0 0 6 (t h e l as ty ear b efo re t h e fi rs tt ax ab l e y ear i n i ss u e).”); Lei t g en v . Co m m i s s i o n er, T.C. M em o . 1 9 8 1 -5 2 5 , 1 9 8 1 W L 1 0 9 3 7 (“ Th e b u rd en i s o n p et it i on ers t o p ro ve t h ei r i n co m es fo r 1 9 6 9 , 1 9 7 0 , an d1 9 7 1 i n o rd er t o s h o w th atthere was an y p arto f t he al leg ed1 9 7 2 l o s s th atwo u l dn o th av e b een ab s o rb edi n th e t h ree p reced i n g y ears an dth at co u l d h av e b een carri ed o v er t o t h e y ears i n i s s u e.”), aff’ d , 6 9 1 F.2 d5 0 4 (8 th Ci r. 1 9 8 2 ). Th e ev i d en ce s h o ws th atBCO’ s d i v ert edg ro s s recei p t s , i f rep o rt edfo r 2 00 3 , wo u l dh av e p ro duced t ax ab l e i n co m e, n o tan NOL. Th e IRS ex am i n er’ s b an k d ep os i tan al y s is s h owedth atBCO h adu n rep o rt edg ro s s recei p t s fo r 2 0 0 2 as wel l th at , i f rep o rt ed , wo u l dh av e p ro du cedt ax ab l e i n co m e fo r 2 0 0 2 , ev en aft er fu l l y
ex h au s t i n g th e cl ai m ed --b u tu n s ub s t an t i at ed --NOL carry o v ers fro m 1 9 9 6 an d 1 9 9 7 . Acco rd i n g ly , we s u s tai n res p o n d en t ’ s d i s al l o wan ce o f BCO’ s NOL carry o ver d edu ct i o n s t o 2 0 0 4 an d2 0 0 5
. III. Pet i t io n ers ’ Arg um en t s A. Di v ert ed Gro s s Recei p t s as Co n s tru ct i ve Di v i d en d s Wh en a C co rp o rat i o n d i s tri b u t es m o n ey o r p ro pert y t o a s h areh o l d er o u t o f th e co rp o rat io n’ s earn i n g s an dp ro fi t s (E&P), t h e am o u n to f t h e d i s tri b u t i o n
co n st i tu t es a d i v i d en d t hatm u s tb e i n cl u d edi n th e s h areh o l d er’ s t ax ab le i nco m e.- 1 9 -

[* 1 9 ] Secs . 6 1 (a)(7 ), 6 3 , 3 0 1 (a), (c), 3 1 6 . If th e d i s tri b u t i o n ex ceed s th e
co rp o rat i o n’ s E&P, t h e ex ces s g en eral l y rep res en ts a n o n t ax ab l e ret u rn o f cap i t al t o the ex t en to f t h e s hareh o l d er’ s b as is i n th e s t o ck , an dan y rem ai n i n g am ou n ti s t ax ab l e t o th e s h areh o l d er as a g ai n fro m th e s al e o r ex ch an ge o f p ro p erty . Sec. 3 0 1 (c); Tru es d el l v . Co m m i s si o n er, 8 9 T.C. 1 2 8 0 , 1 2 9 4 -1 2 9 5 (1 9 8 7 ). Di v i den d s fo r t ax p u rp o s es are n o tal way s d ecl aredi n th e fo rm al s en s e;
co u rt s h av e i den t i fi edco n s tru ct i v e d i v id en d s wh en a C co rp o rat io n co n fers an
eco n om i c b en efi tup o n a s h areh o l d er wi th o u ta co rres p on d i n g ex p ect at io n o f rep aym en t . See Ho o dv . Co m m i s s i o n er, 1 1 5 T.C. 1 7 2 , 1 7 9 -1 8 0 (2 0 00 ); Co rd es v . Co m m i s s i o n er, T.C. M em o . 2 0 0 2 -1 2 4 , 2 0 02 W L 1 0 2 3 1 73 , at* 1 0 (ci t i n g Irel an dv . Un i ted St at es , 6 2 1 F.2 d7 31 , 7 3 5 (5 th Ci r. 1 9 8 0) (“ Th ere i s n o req u i rem en tth atth e d i v i d en d b e fo rm al l y d ecl aredo r ev en i n t en d edb y the co rp o rat i o n .”) an d W o rt h am M ach . Co . v . Un i t ed St at es , 5 21 F.2 d 1 6 0 , 1 6 4 (1 0t h Ci r. 1 97 5 )). Si m i l arl y , wh en a s h areh o l d er d i v ert s earn edi n co m e fro m h i s cl os el y

h el dC
co rp o rat i o n fo r h i s p ers o n al u s e, co u rt s h av e h el dth atth e d i v ert edi n co m e
co n st i tu t es a co n s tru ct i v e d i s tri b u t i o n t o th e s h areh o l d er. Si m o n v . Co m m i s s i o n er, 2 4 8 F.2 d8 6 9, 8 7 6 -8 77 (8 th Ci r. 1 9 5 7 ) (“ Th e co rp o rat i o n i s l i ab le fo r a s ub s t an t i al t ax up on th e d i v ert edi n co m e i tfai ledt o rep o rt . Fu rt h er t ax wi l l b e co l l ect edfro m- 2 0 -

[* 2 0 ] t ax p ay ers u nd er t h e co n st ru ct i v e d i v i d en d t h eo ry .”), rev ’ g T.C. M em o . 1 9 5 5 -1 9 4 ; Tru es d el l v . Co m m is s i o n er, 8 9 T.C. at1 3 0 0-1 3 0 1
. Pet i t i o ners b ear t h e b u rd en o f p ro vi n g th at BCO h adi n s u ffi ci en tE&P t o
s up p ortth e am o u n t s o f co n s tru ct i v e d i vi d en ds res p o n d en td et erm i nedfo r t h e t ax y ears i n i s s u e. E.g ., Tru es d el l v . Co m m i s s i o n er, 8 9 T.C. at 1 2 9 5 -1 2 9 6 ; Pi t t m an v . Co m m i s s i o n er, T.C. M em o . 1 9 9 5 -2 4 3 , 1 9 95 W L 3 2 9 8 5 4, at* 1 2 , aff’ d , 1 0 0 F.3 d 1 3 0 8 (7 th Ci r. 1 99 6 ). Th ey fai l edt o p res en tcred i b l e ev i d en ce s h o w i n g th atBCO l ack eds u ffi ci en tE&P t o s up po rtd i v i den dtreat m en t . Attri al p et i t i o n ers p o i n t ed t o a h an dwri t t en s u m

m ary o f BCO’ s ret ai nedearn i n g s fro m 1 9 9 6 t o 2 0 0 8 , an dM r. Ben av i d es t es t ifi ed , co n s i s ten twi th th ats u m m ary , th atBCO n ev er h adret ai n ed
earn i n g s du ri n g th atp eri o d . W e d i dn o t fi n dM r. Ben av i d es cred i b le, an d we are
n o treq u i redt o accep th i s s el f-s erv i n g t es t i m o n y . See Ru arkv . Co m m i ss i on er, 4 4 9 F.2 d3 1 1 , 3 1 2 (9 th Ci r. 1 9 7 1 ), aff’ g T.C. M em o . 1 96 9 -4 8; M on ah an v . Co m m i s s i o n er, 1 0 9 T.C. 2 3 5 , 2 5 7 (1 9 9 7). M o reo v er, o th er ev id en ce refu tes h i s b al das s ert i o n . Ad ju s t i n g jo urn al en tri es i n 2 0 0 3 an d 2 0 0 4 s h owedth at BCO h ad ret ai n ed
earn i n g s o f at leas t$ 4 9,9 7 7 as o f 2 0 0 3 an d $ 6 5 ,6 3 9 as o f 2 0 04 ev en wi th o u t t ak i n g i n t o acco u n t th e d i v ert edg ro s s recei p t s . Th i s , co upl edwi th th e b an k d ep os i tan al y s is s h owi ng th atBCO h ads i g ni fi can tu n rep o rt edi nco m e fo r 2 0 0 2 , i s- 2 1 -

[* 2 1 ] p ers u as i v e ev i d en ce t hatBCO b eg an th e t ax y ears i n i s s u e wi th accu m u l at ed E&P. An dthe d i v ert edg ro ss recei p t s , i f p ro p erl y rep o rt edas BCO’ s i n co m e fo r th e y ears i n i s s u e, wo u ldh av e g en erat edcu rren t E&P du ri n g th o se y ears . See s ec. 1 .3 12 -6 (b ), In co m e Tax Reg s . Th erefo re, we h ol dth atth e d i v ert edg ro s s recei p t s fro m BCO o f $ 1 9 5,3 5 9, $ 1 32 ,5 8 4 , an d$ 2 1 5,5 8 0 are t ax ab l e t o p et i t io n ers as
co n st ru ct i v e d iv i d en ds fo r 2 0 0 3 , 2 0 0 4, an d 2 00 5 , res pect i vel y . See s ec. 3 1 6 ; Pi t t m an v . Co m

m i s s i on er, 1 9 9 5 W L 3 2 9 8 5 4 , at* 1 3-* 1 4
. B. Un rep ort edIn co m e Fro m Su n ri s e Nex t , res p o n d en td et erm i n edth atp et i t i o n ers h adu n rep o rt edi n co m e fro m Su n ri s e o f $ 1 2 3 ,9 31 , $ 8 8 ,5 9 3 , an d$ 6 6 ,6 28 fo r t ax y ears 2 0 0 3, 2 0 0 4 , an d2 0 0 5 , res p ect i vel y , ari s i ng fro m fo u r ad ju s t m en t s . W e co n s i d er each ad ju st m en ti n tu rn . 1
. Gro s s Recei p t s Ad

ju s t m en t s Res p o n d en td et erm i n edth at Su n ri s e erro neo us l y rep o rt edth e d i v ert edg ro s s recei p t s fro m

BCO as i t s o wng ro s s i n co m e fo r each t ax y ear, wh ich th en fl o wed th ro u g h t o p et i t io ners as p art n ers . To av o idd o ub l e-co u nt i n g , res p on d en tredu ced th e g ro s s i nco m e fl owi n g fro m Su n ri s e t o p et i t i o ners fo r each y ear b y th e am o u n t d et erm i n edt o b e BCO’ s g ro ss recei p t s. Attri al M r. Ben av id es ad m i t t edt o d i v ert i n g g ro s s recei p t s fro m BCO t o Su n ri s e fo r each t ax y ear b u t s tat edth atth e
am ou n t s d i v ert edwere d i fferen tfro m res p o nd en t ’ s d et erm i n at io n , as s ert i n g th at- 2 2 -

[* 2 2 ] res p o n d en tg av e p et i t i o n ers t o o m uch o f a red u ct i o n i n i n co m e fro m Su n ri s e. M r. Ben av i d es was n ota cred i b l e wi tn es s , an d n o cred i b l e ev i d en ce s up p o rt s a ch an ge t o res p o n d en t ’ s d et erm i n at i o n s .

2
. Di s al l owedDedu ct i o n s A t ax p ay er m ay

d edu ct“ al l th e o rd in ary

an dn eces s ary

ex pen s es p ai do r i n cu rreddu ri n g th e t ax ab l e y ear i n carry i n g o n an y trad e o r b u s in es s ”. Sec. 1 6 2
. Bu t p ers on al , l i v i ng , an dfam i ly ex p en ses are n o td edu ct ib l e. Sec. 2 6 2 . Fo r an
ex p en d i tu re t o b e an o rd i n ary an dn eces s ary

b u s i n es s ex p en se, g en eral l y th e t ax p ay er m

u s t s ho w a b o n a fi d e b u s i n es s p u rp o s e fo r t h e ex p en d i tu re an da p ro x im at e rel at i on s h ip b et ween the ex p en d i tu re an dth e b u s in es s o f th e t ax p ay er. See Ch al len g e M fg . Co . v . Co m m i s s i o n er, 3 7 T.C. 6 5 0 , 6 6 0 -6 6 1 (1 9 62 ); s ee al s o
s ec. 1 .1 6 2-1 (a), In co m e Tax Reg s . Tax p ay ers are req u i redt o m ai n t ai n s u ffi ci en treco rd s t o es t ab l i s h the
am ou n tan dp u rp o s e o f an y d edu ct i o n . Sec. 6 00 1 ; Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 0 (2 0 0 1 ); s ec. 1 .6 0 0 1 -1 (a), (e), In co m e Tax Reg s. Attri al M r. Ben av i d es m ad e a d is o rg an i zedan dco n fu si n g p res en t at io n th ato ft en l eftu s
s tru g g l i n g t o i d en t ify

th e s p eci fi c ex p en d i tu re h e i n t en dedt o ex p l ai n . He p res en t edth e g en eral l ed g ers o f Su n ri s e an d d ep reci at i o n s ch edu les b u td idn o t
o ffer an y s upp o rt i n g reco rd s fo r an y o f t h e ex p en s es o r d educt i on s . See Ly s en g v .- 2 3 -

[* 2 3 ] Co m

m i s si o n er, T.C. M em o . 2 01 1 -2 26 , 2 01 1 W L 4 3 8 9 64 4 , at* 3 (“ In g en eral , t ax p ay ers m

us t s ub s t an t i at e cl ai m edd educt i o n s wi th ev i d en ce s u ch as i n v o i ces o r recei p t s th at es t ab l i s h th atth e ex p en ses were act ual l y i ncu rred [.] ”). Rep eat ed l y , M r. Ben av i des ch al l en g edad j u s tm en t s m ad e b y

th e IRS i n RARs th at p red at edth e n o t ice o f d efi ci en cy (an d h adb een co n ced edi n th atn o t i ce) i n s t eado f d i rect i n g th e Co urt t o ev i d en ce o f t h e rem ai n i ng ex p en s es . He fel l b acko n h i s
ex cu se t h ath e was n o trep res en t edb y co u n sel , y etwh en co n fro n t edb y qu es t i o n s fro m res p o n d en t h e d em o n st rat eda s o p h i s t i cat edap preci at i o n fo r t he i s s u es . An d , as n o tedab o v e, i n g en eral , we d i dn o tfi n d M r. Ben av i d es t o b e a cred i b l e wi tn es s .

a. Di s al l o wedDep reci at i on an dSect i o n 1 79 Ex pen s es Pet i t i o ners as s ertth atres p o n d en t i n co rrect l y d i s al l o wedd ep reci at i o n d educt i o n s th atfl o w edth ro u g h t o th ei r retu rn s fro m Su n ri se o f $ 3 2 ,8 7 2 , $ 1 7 ,0 8 5 , an d $ 1 1 ,4 9 8 fo r 2 0 0 3 , 2 0 04 , an d2 0 0 5 , res p ect iv el y , an ds ect i o n 1 79 d edu ct i o n s th atfl o wedth ro ug h fro m Su n ri s e o f $ 3 4,9 6 1 an d $ 5 5 ,0 1 6 fo r 2 0 0 4 an d2 0 0 5 , res p ect i vel y . A reas o n ab l e d ep reci at i on d edu ct i o n m ay b e al l o wedfo r t h e “ ex h au s t i o n , wear an d t ear” o f p ro p ert y u s edi n a t rad e o r b u s i n es s . Secs
. 1 6 1 , 1 6 7 (a)(1 ). To
s ub s t an t i at e en t i t l em en t t o a d ep reci at i o n d edu ct i on , a t ax p ay er n o to nl y h as t o
s h o w th atth e p ro p ert y was u s edi n a b u s in es s b utal s o m u stes t ab l i s h th e- 2 4 -

[* 2 4 ] p ro p ert y ’ s d ep reci ab l e b as i s b y s h owi n g th e co s t o f th e p ro p ert y , i t s u s efu l l i fe o r reco v ery

p eri o d , an di t s p rev i o u s l y al l o wab l e d ep reci at i o n . See, e.g ., Cl u ck
v . Co m m i s s i o n er, 1 0 5 T.C. 3 24 , 3 3 7 (1 9 9 5). A t ax p ay er wi th n o cap i t al i n v es t m en ti n p ro p ert y

h as n o ri g h tt o d ep reci at io n d edu ct i o ns wi th res p ectt o th at cap i t al as s et . M i l l er v . Co m m is s i o n er, 6 8 T.C. 7 6 7 , 7 7 5 (1 9 7 7). Cert ai n t ax pay ers m ay el ecti n s t eadt o t reat th e co s t o f cert ai n p ro p ert y u s ed i n an act i v e trad e o r b u s in es s as a cu rren tex p en se i n t h e y ear t h atp ro pert y i s p l aced i n s erv i ce. Sec. 1 7 9 (a), (d ). If t h e p ro pert y i s u sedfo r b o th b u s i n es s an d
o th er p u rp o s es , th enth e p o rt i o n o f t h e co s t th ati s at tri b u tab l e t o t h e b u s in es s u s e i s el i g i b l e fo r ex p en s i n g u n d er s ect i o n 1 7 9 b u t o n l y i f m o re t h an 5 0 % o f t he u s e i s fo r b u s i n es s p u rp o s es (p red o m i n an tu s e req u i rem en t ). See s ec. 1 .1 7 9 -1 (d ), In co m e Tax Reg s . Hei g h t en eds ubs t an t i at i on req u i rem en t s ap p l y t o d educt i on s fo r cert ai n
as s et s. Sec. 2 7 4 (d ); s ee, e.g ., M ears v . Co m m i s s io n er, T.C. M em o . 2 0 1 3 -5 2 , at* 2 2 (co n s i deri n g s ect io n 2 7 4(d ) “ l i s tedp ro p ert y ” req u i rem en t s wi th res p ectt o ap p li cab l e s ect i o n 1 6 7 d educt i o n s ); Si n g h v . Co m m is s io n er, T.C. M em o . 2 0 0 9 -3 6 , 2 0 0 9 W L 3 4 9 7 4 5 , at * 1 (co n s id eri ng l i s tedp ro p erty req u i rem en t s wi th res p ectt o
an ap pl i cab l e s ect i o n 1 7 9 d edu ct i o n ). Pas s en g er au t o m o b i l es an do th er p ro p ert y
u s ed as a m ean s o f t ran sp o rt at i o n are l i st edp ro pert y . Sec. 2 80 F(d )(4 )(A)(i )- 2 5 -

[* 2 5 ] an d (i i ). Li s t edp ro pert y al s o b ro ad l y

i ncl u d es an y

p ro p ert y o f a t y p e g en eral l y u s edfo r en t ert ai n m en t , recreat i o n , o r am u s em en t . Sec. 2 8 0 F(d )(4 )(A)(i i i ). To d eductex p en s es rel at ed t o l i s tedp ro p ert y t ax p ay ers m

u s t
s up p ortth ei r o wns t at em en t s wi th ad d i t i o n al s ub s t an t i at io n th atad equ at el y
es t ab l i s h es th e am o u n t , t i m e, p l ace, an d b u s i n es s p u rp o s e o f each ex p en d i tu re. Sec. 2 7 4(d )(4 ); s ee al s o s ec. 1 .2 7 4 -5 T(b )(6 ), (c)(1 ) an d(2 ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 1 6 -4 6 0 1 7 (No v . 6 , 1 9 8 5 ). Attri al p et it i on ers p res en t ed a d ep reci at i o n s ch edu l e t hats u m m ari zedas s et s d ep reci at edo r ex pen s edu n der s ect i o n 1 7 9 fo r th e t ax y ears i n i s s u e. Th e as s et s i n cl u d e s ev eral tru ck s , an al l -t errai n v eh i cl e (ATV), l awn m ai n t en an ce eq u i p m en t , a cam p i ng trai l er, an das s o rt edequ i p m en t. Pet i t i o n ers o ffered n o d ocu m en t ary
ev i d en ce t o s up po rtth ei r d ep reci at i o n s ch edu l e. Fo r i n s t an ce, n o ev i d en ce b efo re
u s es t ab l i s h es wh o p urch as edth e as s et s , wh en th ey were p u rch as ed , wh atth ey
co s t , an dwh et h er d ep reci ab l e b as es rem ai n eddu ri n g th e t ax y ears i n i s s ue. Wh ati s m o re, p et i t i o n ers fai l edt o es tab l i s h th atthes e as s et s were p red o m i n an t l y u s edi n Su n ri s e’ s real es t at e m an ag em en tan dd ev el o p m en t b u s i n es s . M r. Ben av i d es was v ag u e. He t es t i fi ed , fo r i n s t an ce, t h atth e ATV was
u s ed to s h o w real p ro p ert y fo r s al e, b u tth ere i s n o ev id en ce t h atSu n ri se ev er
m ark et ed , s h o w ed , o r ev en l i s t edp ro pert y fo r s al e du ri n g th e y ears i n i ss u e. M r.- 2 6 -

[* 2 6 ] Ben av id es al s o as s ert edth atth e t ru ck s o n th e d ep reci at i o n s ch edu l e were rel at ed t o Su n ri s e’ s b u s i nes s b ecau s e p eo p l e “ d on ’ tb u y b i g tru ck s ju s tfo r s p o rt ”. Th atas s ert i o n d efi es l o g i c. He ad m i t tedt o p ers o n al u s e o f s o m e o f t h e as s et s , s u ch as th e l awnequ i p m en t an dth e cam pi n g trai l er. No t o n l y

d i d p et it io n ers fai l t o s at i s fy th e s tri ct sub st an t i at i o n req u i rem en t s fo r t h ei r l is tedp ro p ert y ; th ey fai l ed t o o ffer en o u g h ev id en ce t o s ub s t an t i at e t h ei r d edu ct io n s u n d er a g en eral s t an d ard
. W e, t h erefo re, s u s t ai n res p o n d en t ’ s d i s al l o w an ce o f t he d ep reci at i o n an d s ect i o n 1 7 9 ex p en s e d edu ct i o n s .

b
. Di s al l owedBu s in es s Ex p en s e Dedu ct i o n s Res p o n d en td i s al l o wedo th er b us i n es s ex p en se d educt i on s cl ai m ed b y Su n ri s e t h at res p o n d en ti d en t i fi edas ex pen d i tu res fo r p et i ti o n ers ’ p ers o n al u s e o r
as u n sub s t an t i at ed . Th e am o u n t s d i s al l o wedwere $ 19 0 ,0 4 5, $ 2 0 8 ,1 5 6 , an d $ 2 6 8 ,6 0 9 fo r 2 0 0 3, 2 00 4 , an d2 0 0 5 , res p ect i v el y . Pet i t i o ners arg ue t h atres p o n den ti n co rrect ly d i sal l owedd edu ct i o n s fo r Su n ri s e’ s l eg i t im at e o p erat i n g ex p en s es an d ex p en s es i n cu rredfo r p ay i n g b i l l s fo r
o th ers (b i l l -p ay i n g ex p en ses ). Al l we h av e i n s up p o rto f p et i ti o n ers ’ cl ai m s are M r. Ben av i d es ’ m

u d d l edt es t i m o n y

an dSu n ri s e’ s g en eral l ed g ers , wh ich co n t ai n l i m i ted i n fo rm at i o n an d are u n sup p o rt edb y an y o th er ev i d en ce. Th e reco rdi s d ev oi do f recei p t s , i n v o i ces , can cel edch eck s , o r o th er b us i n es s reco rd s t o- 2 7 -

[* 2 7 ] s ub s t an t iat e t he rep o rt edd edu ct i o n s o r p et i t io n ers ’ cl ai m edrei m b urs em en t s
ev en th o u g h M r. Ben av id es ’ d em ean o r attri al i n d i cat edth ath e u n ders t oo dth e
n eed to h av e s uch b ackup . Fru s trat i n g u s fu rt h er, p et i t i o ners rep eat ed ly tri edt o p ro v e th ei r en t i t l em en tt o th es e d edu ct io n s b y p o i nt i n g o u tp ro b l em s wi th RARs th atp reced edth e n o t ice o f d efi ci en cy an d were ad dres sedi n th e n o t i ce o f d efi ci en cy . Fi rs t , p et i ti o n ers as s ertth atres p o n den t i n co rrect l y d i s al l o w eds o m e o f Su n ri s e’ s o p erat i n g ex pen s e d edu ct i o ns fo r each y ear, i ncl u d i n g au to m o b i l e
ex p en s es , i n s u ran ce, p ro p erty t ax es , an d p ayro l l ex p en s es . Pet i t io n ers d i dn o t d es cri b e i n s u ffi ci en td et ai l th e s p eci fi c n atu re o f t h e v ari o u s o p erat i n g ex p en s es , l etal o ne s ub s t an t i at e t h em wi th an y reco rd s . Fo r ex am

p l e, M r. Ben av i d es t es t i fi ed t o p ay i n g wag es t o an em p lo y ee, b u t th e i n d i v i du al wo rk edfo r BCO, n o tSu n ri s e. W i th o u tcred i b l e reco rd s , we can n o tco n cl ud e t h atp et it i o n ers are en t i t l edt o cl ai m d educt i o n s fo r an y

o f t h es e al l eg edex p en s es . Seco n d , p et i t i o n ers as s ertth atSu n ri se was p ay i ng th e co n s tru ct i o n co s t s fo r
s o m e o f BCO’ s cl ien t s , fo r La-J am , an d fo r p et i t i o n ers th em s el v es , fo r wh i ch Su n ri s e wo u ld b e rei m

bu rs edb u two u l d n o t p ro fi t. Pet i t i o n ers arg u e t h at
res p o n d en t i n co rrect ly

d i s al l oweds o m e o f Su n ri se’ s b i l l -p ay in g ex p en se d educt i o n s b ecau se Su nri se l at er wo u l db e rei m b u rs ed , rei m

b u rs em en ti n co m e an d- 2 8 -

[* 2 8 ] ex pen ses fo r t h e y ears i n i s s u e “ s h o ul dwas h ”, an dres p o n d en t fai l edt o
m at ch up al l i n co m e an dex p en s es i n t h e au d i t . M r. Ben av i d es t es t i fi edth ats o m e
o f Su nri s e’ s ex p en s es th atres po n d en ti d en t i fi edas p et i t io n ers ’ p ers o nal ex p en s es
an d d i sal l o wedas d edu ct i o ns fo r 2 0 0 4 were am o u n t s t h atSu n ri s e p ai dfo r t h e
co n st ru ct i o n o f La-J am ’ s s h o p, b u th e d i dn oti d en t i fy the ex actex p en d i tu res o r th ei r am o u n t s o r p ro v i d e cred i b l e ev i d en ce t h atSu n ri s e was rei m b u rs edb y La-J am
o r p et i ti o n ers . Th e ev i d en ce s h o ws th atres p o nd en tal l o wed the b i l l -p ay i ng ex p en s e d educt i o n s ex cep t as th ey rel at e t o p et i t i o n ers ’ p ers on al ex p en s es o r t o La-J am ’ s
ex p en s es . An dth ere i s n o ev i d en ce t hatp et i ti o n ers (o r La-J am ) rei m b u rs ed Su n ri s e. In an y

ev en t , p et i t i o n ers ’ arg u m en tth atev eryth i n g “ s h ou l d was h ” i s n ot
a s ub st i tu t e fo r s h o wi n g th at th ey d i dwas h o r s ub s t an t i at i n g t h e b u s i n es s ex p en s es Su n ri s e rep o rt ed . Pet i ti o n ers p ro v i dedn o d o cu m en t ary ev id en ce t o p ro ve wh at th es e al l eg edex pen s es were, t h ei r v ari o u s am o u n t s , o r wh en , o r ev en i f, th ey were actu al l y i n cu rred . M oreo v er, p et i t i on ers fai l edt o s h o w thatth e d i s al l o w edb i l l

p ay i n g ex p en s e d edu ct i o n s b o re an y rel at i o n t o Su n ri s e’ s trad e o r b u s i n es s. M an y
o f t h e b i l l -p ay i n g ex p en ses are p ers on al , s u ch as th e h u n dred s o f t h o u s an ds o f d o l l ars s p en tt o rem o d el p et i t i o n ers ’ p ri n ci p al res i d en ce, as wel l as th e m o n ey
s p en t t o b u i l dLa-J am ’ s s h o p d i rect l y ad jacen t t o p et i t i on ers ’ h o m e. Acco rd i n g l y ,- 2 9 -

[* 2 9 ] we wi l l s u s t ai n res p o n den t ’ s d i s al l owan ce o f Su nri s e’ s b u si nes s ex p en s e d educt i o n s o f $ 1 9 0 , 0 4 5 , $ 2 0 8,1 5 6 , an d$ 2 6 8 , 6 0 9 fo r t ax y ears 2 0 0 3, 2 0 04 , an d 2 0 0 5 , res p ect i v el y . C. Sel f-Em

p l o ym en tIn co m e Ad

ju s t m en t s Th e n ex ti s s u e i s wh ether M r. Ben av i d es h adu n rep o rt eds el f-em p l o ym en t i n co m e i n th e am o u n t s o f h i s s hares o f p art n ers h i p i nco m e fro m Su n ri s e o f $ 4 2 ,2 1 9 , $ 1 10 ,3 32 , an d$ 8 2 ,5 9 1 fo r t ax y ears 2 0 0 3 , 2 0 0 4 , an d2 0 0 5 , res p ect i v el y ;
an d s im il arl y , wh et h er M rs . Ben av i d es h adu n rep o rt eds el f-em p lo ym en ti n co m e i n th e am o un t s o f h er s h ares o f p artn ers h ip i n co m e fro m Su n ri s e o f $ 4 0 ,5 64 , $ 1 0 6 ,0 0 6 , an d$ 79 ,3 52 fo r t ax y ears 2 0 03 , 2 00 4 , an d2 0 05 , res p ect i v el y . Sect io n 1 4 0 1 i m

p os es a t ax up o n a t ax p ay er’ s s el f-em p l o ym en ti nco m e. Sel f-em p l o ym en ti n co m e m ean s th e “ n etearn i n g s fro m s el f-em pl o ym en t ” d eri v ed b y an i n d i v i du al du ri ng th e t ax ab l e y ear. Sec. 1 4 0 2 (b ). Sub jectt o ex cep t io n s , th e

“ n etearn i n g s fro m s el f-em p lo y m en t ” i n cl ud e a p art n er’ s d i s tri b u t i v e s h are o f p art n ers hi p trad e o r b u s in es s i n co m e. Sec. 1 4 0 2(a). Becau s e M r. an d M rs . Ben av id es o wn Su n ri s e as p art n ers (5 1 % an d 4 9 %,
res p ect i vel y ), al l o f Su n ri s e’ s trad e o r b u s i n es s i n co m e fl o ws t o th em o n acco u n t
o f t h ei r p art n ers hi p i nt eres t s. Secs . 7 0 1 an d7 0 2 (a). Acco rd in g l y , al l s u ch i n co m e fo r an y t ax ab l e y ear g en eral l y , s ub jectt o l i m i t at i o n s o f s ect io n 1 4 0 2 (b ), wo u l d b e- 3 0 -

[* 3 0 ] s ub jectt o s el f-em

p l o ym en tt ax es . Secs . 1 4 0 1 (a) an d(b ), 1 4 0 2(a) an d(b ); No rwo o dv . Co m

m i s si o ner, T.C. M em o . 2 0 0 0 -8 4 , 2 0 0 0 W L 2 6 7 77 9 , at* 1 (ci t i n g Co k es v . Co m

m i s s i o n er, 9 1 T.C. 2 2 2, 2 2 9 -2 3 0 (1 9 8 8 )). At tri al p et i t i on ers ag reed th atth e ad

j u s t m en t s t o s el f-em

p l o ym en t i nco m e wo u l dd ep en dup o n o u r ru l i n g s wi th res p ect t o th e o th er jo i n tretu rn d et erm i n at i o ns an d d idn o tad v an ce an y
s ep arat e arg u m en t --attri al , o n b ri ef, o r o therwi s e--co n cern i n g th ei r s el fem pl o y m en ti n co m e o r res p o n d en t ’ s d et erm i n at io n s . As we h av e s u s t ai n ed
res p o n d en t’ s d et erm i n at i o n s thatp et i t i on ers h adad d i t i o nal i n co m e fro m Su n ri s e fo r each y ear i n i s s u e, t h atad d i t i o n al i n co m e co n s t i tu t es s el f-em p lo ym en ti n co m e. See s ecs . 1 4 0 1 (a) an d(b ), an d1 4 0 2 (a) an d(b ). Acco rd in g l y , we wi l l s u s t ai n
res p o n d en t’ s d et erm i n at i o n s co n cern i n g s el f-em p l o ym en tt ax es fo r each y ear. IV. Frau d A. Sect i o n 6 6 63 (a) Frau dPen al ty Sect io n 6 6 6 3 (a) p ro v i d es : “ 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 own o n a retu rn i s du e t o frau d , th ere s h al l b e ad d edt o th e t ax an am o u n t equ al t o 7 5 p ercen t o f t h e p o rt i o n o f t h e u nd erp aym en t wh i ch i s at tri b ut ab l e t o frau d.” Frau d , fo r Fed eral t ax p u rp os es , i s an i n ten t i o n al wro ng d o i n g o n th e p art
o f a t ax p ay er wi th t h e s p eci fi c p u rp o s e t o ev ad e a t ax b el i ev edt o b e o wed . Sad l er
v . Co m m i s s i o n er, 1 1 3 T.C. 9 9, 1 0 2 (1 9 9 9 ). Th e frau dp en al ty i s a ci v i l s an ct i o n- 3 1 -

[* 3 1 ] p ro v i d edp ri m ari l y

as a s afeg u ardfo r p ro t ect i o n o f rev en u e an dt o rei m b u rs e th e Go v ern m en t fo r t h e h eav y ex p en s e o f i n v es ti g at i o n an dth e l o s s res ul t in g fro m th e t ax p ay er’ s frau d . Hel v eri n g v . M i t ch el l , 3 0 3 U.S. 3 9 1 , 4 0 1 (1 9 3 8 ); Sad l er v . Co m m i s s i o n er, 1 1 3 T.C. at1 0 2. Res p o n d en td et erm i n eds ect i o n 6 66 3 (a) frau d p en al t i es o f $ 3 5 ,0 44 , $ 6 4 ,8 0 2 , an d$ 6 9,7 2 2 fo r 2 0 0 3 , 2 0 0 4 , an d2 00 5 , res p ect i v el y , wi th res p ectt o BCO’ s u n rep o rt edt ax ab l e i n co m e fo r t h o s e y ears . Res p o nd en td et erm i neds ect i o n 6 6 6 3 (a) frau d p en al t i es o f $ 2 7,0 2 9 , $ 1 9,2 2 1 , an d$ 2 7 , 1 70 fo r 2 0 0 3 , 2 0 0 4, an d 2 0 0 5 , res p ect i v el y , wi th res p ectt o p et i t i o ners ’ fai l u re t o rep o rtd i v i den d s fro m BCO fo r th o s e y ears . Res p o n d en tb ears th e b u rd en o f p ro v in g frau db y cl ear an d
co n vi n ci n g ev id en ce. See s ec. 7 4 5 4 (a); Ru l e 1 4 2 (b ). Res p o nd en t m u s ts at i s fy

h i s b u rd ens ep arat el y

fo r each p et it i o n er fi l i n g th e jo i n t retu rn s . See s ec. 6 6 6 3 (c); Hi ck s Co . v . Co m

m i s s i o n er, 5 6 T.C. 9 8 2 , 1 0 3 0 (1 9 7 1 ), aff’ d , 4 70 F.2 d 8 7 (1 s tCi r. 1 9 7 2 ); Sai dv . Co m

m i s s i on er, T.C. M em o . 2 0 0 3 -1 48 , 2 0 0 3 W L 2 1 2 0 5 2 5 2 , at* 6 (“ Un d er s ect i o n 6 66 3 (c), t h e frau dp en al ty i s i m po s edo n each s p o u s e s ep arat el y , ev en wh en a jo i ntretu rn i s fi l ed [.] ”), aff’ d , 1 1 2 F. Ap p ’ x 6 0 8 (9 th Ci r. 2 0 04 ). To carryh i s b u rd en o f p ro o f, res p o n d en tm u s t s ho w, fo r each y ear, t h at : (1 ) an u n d erp aym en to f t ax ex i s t s an d(2 ) s om e p o rt i o n i s at tri b u t ab l e t o frau d
. See Heb ran kv . Co m

m i s s i o n er, 8 1 T.C. 6 4 0, 6 4 2 (1 9 8 3). An u n d erp aym en tfo r a- 3 2 -

[* 3 2 ] y ear i s at tri b u t ab l e t o frau di f p et it i o n ers i n t en d edt o co nceal , m i s l ead , o r
o th erwi s e p rev en tthe co l l ect i o n o f t ax es kn o wno r b el i ev edt o b e o wi n g . See Kat z
v . Co m m i s s i o n er, 9 0 T.C. 1 1 30 , 1 1 4 3 (1 9 88 ). If res p o n d en t es t ab l is h es th atan y p o rt i on o f t h e u n d erp aym en t fo r a y ear i s at tri b u t ab l e t o frau d, the en t i re
u n d erp aym en t fo r t h aty ear s h al l b e at tri bu t ab le t o frau dan ds ub jectt o a 7 5 % p en al ty , ex cep twi th res pect t o an y p o rt i on th at p et i t io n ers es t ab li s h (b y a p rep o n d eran ce o f t h e ev i den ce) i s n o tat tri b u t ab l e t o frau d
. See s ec. 6 6 6 3 (a)
an d (b ). 1
. Un derp aym en t o f Tax Fi rs t , res p o n d en t m

u s tm eeth i s b u rd en o f s ho wi n g an u n d erp aym en to f t ax fo r each o f t h e y ears i n i s s u e. Res p o n d en t al l eg es frau du l en tu n d erp aym en t s o f t ax b y BCO an d p et i ti o ners wi th res p ectt o t ax o wedas a co n s equen ce o f t h e d i v ert ed g ro s s recei p ts fro m

BCO. Attri al M r. Ben av i d es ad m i t t edt o d i vert i n g $ 10 0 ,4 8 9 , $ 9 2 ,7 6 4 , an d$ 1 67 ,2 25 o f BCO’ s g ro s s recei p t s t o Su n ri s e i n 2 0 03 , 2 00 4 , an d 2 0 0 5 , res p ect i v el y , 5 an d we h av e h el ds up ra p p . 1 4 -1 6 (BCO) an dp p . 1 8 -2 1

5 W e n o t e t hatM r. Ben av i d es ad m i t t edt o d iv ert i ng g ro s s recei p ts i n am ou n t s s l i g h t l y

d i fferen tfro m

th o s e d et erm i n edb y

res po n d en t(an d fo u n db y th i s Co u rt ), b u tthe cri t i cal p oi n ti s th atp et i t i o n ers d i d n o t d i s p u t e BCO’ s d iv ert ed g ro s s recei p ts . Co m

pu t at i o n s at t ach edt o th e n o ti ces o f d efi ci en cy s h o wth atth o s e d i v ert edg ro s s recei p t s res u l t edi n s o m e u n d erp aym en t s o f t ax atthe co rp o rat e an d s h areh o ld er l ev el s. Fo rm 4 5 49 B, In co m e Tax Ex am i n at io n Ch an g es , i s su edt o (co n ti n u ed ...)- 3 3 -

[* 3 3 ] (p et i t i o n ers ) th attho s e d i v ert edg ro s s recei p t s are t ax ab l e i n co m e t o BCO
an d t ax ab l e co n s tru ct i v e d i v i d en d s t o p et i t i o n ers . Hen ce i ti s n o t d i ffi cu l tt o
co n cl u d e th atres p o nd en t h as carri ed h is b u rd eno f s ho wi ng s o m e u n d erp aym en ts
o f t ax wi th res p ectt o BCO an dp et i t i o n ers . Sp eci fi cal l y , res p o n den ts h owedth at BCO u n d ers t at edi t s t ax ab l e i n co m e b y fai li n g t o rep ortth e d i v ert edg ro s s recei p t s
as co rp o rat e i n co m e o f $ 1 9 5 ,3 5 9 , $ 1 02 ,5 8 4 , an d$ 2 1 5 ,5 8 0 fo r 2 0 0 3 , 2 0 0 4 , an d 2 0 0 5 , res p ect i v el y , an db y erro n eo u sl y

cl ai m in g NOL carry fo rwardd edu ct i o n s fo r 2 0 0 4 an d2 0 0 5 ; an dp et i t i o n ers u n ders tat ed th ei r t ax ab l e i n co m e b y fai li n g t o rep o rtth e d i v ert edg ro s s recei p t s fro m BCO as co n st ru ct iv e d i v id en d s o f $ 1 9 5 ,3 5 9 , $ 13 2 ,5 8 4 , an d$ 2 1 5 ,5 8 0 fo r 2 0 0 3, 2 0 0 4 , an d2 0 0 5 , res p ect i v el y . Co n s equ en t l y , res p o nd en th as es t ab l i s h edth atb o th BCO an d p et i t i o n ers u n d erp ai d th ei r t ax fo r 2 0 0 3 , 2 0 0 4 , an d 2 0 0 5
.

2
. Frau du l en tIn t en t Nex t , we m

us t d et erm i n e wh et h er BCO an dp et i ti o n ers h adfrau dul en t i n t en t . Th e ex is t en ce o f frau d i s a fact u al qu es t i o n, res o lv edup o n co n s id erat i o n o f th e en t i re reco rd . Ki n g ’ s Co u rtM ob i l e Ho m e Park , In c. v . Co m m i s s i on er, 9 8 T.C.

5 (...co n t in u ed ) p et i t i o n ers s h o ws th at ev en aft er red u ci n g Su nri s e’ s g ro s s recei pt s b y th e am o u n t s o f t h e d i v ert edd i vi d en d s p et i t i o n ers u n d errep o rt edi n co m e fl o wi n g th ro ug h fro m Su n ri s e. Th atu n derrep ort ed i n co m e was ad ded t o th e u n d errep o rt edi n co m e fro m th e co n s tru ct i v e d i v i d en d s fro m BCO.- 3 4 -

[* 3 4 ] 5 1 1 , 5 16 (1 9 92 ). Frau dm ay n o tb e p res u m edo r b as ed up on m ere s us 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 rect
ev i d en ce o f frau du l en t i n t en ti s s el d o m av ai l ab l e, frau dm ay b e p ro v enb y ci rcu m s t an t i al ev i d en ce an d reas o n ab l e i nferen ces drawnfro m th e fact s . Brad fo rd
v . Co m m i s s i o n er, 7 9 6 F.2 d3 0 3 , 3 0 7 (9 th Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 98 4 -6 0 1 ; Ni ed ri n g h au s v . Co m

m i ss i o n er, 9 9 T.C. 2 0 2 , 2 1 0 (1 9 9 2 ). 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 i n d i cat i v e o f frau du l en ti n t en t . Di Leo v . Co m m i s s i o n er, 9 6 T.C. 8 5 8 , 8 7 4 (1 9 9 1 ), aff’ d , 9 5 9 F.2 d1 6 (2 dCi r. 1 99 2 ); St o n e v . Co m m i s s i o n er, 5 6 T.C. 2 13 , 2 2 4 (1 9 7 1 ). Co u rt s ro u t in el y

co n s i d er wh eth er t h e fo l l o w i n g “bad g es o f frau d ” are p res en t : (1 ) u n ders t at i n g i n co m e, (2 ) m ai n t ai n i n g i n ad equ at e reco rd s , (3 ) fai l i n g t o fi l e t ax retu rn s , (4 ) g iv in g i m p lau s i b l e o r i n co n s i s ten t ex p l an at i on s o f b eh av i o r, (5 ) co n ceal i n g as s et s , (6 ) fai l i n g t o co o p erat e wi th t ax au th o ri ti es , (7 ) en g ag i n g i n i l leg al act i v i t i es , (8 ) at t em p t i ng t o co n ceal i l l eg al act i v i t i es , (9 ) d eal i ng i n cas h , an d (1 0) fai l i n g t o m ak e es t i m at edp aym en t s . See, e.g
. , Sp ies v . Un i t edSt at es , 3 1 7 U.S. 4 9 2 , 4 9 9 (1 9 4 3 ); Brad fo rdv . Co m m is si o n er, 7 9 6 F.2 d at3 0 7 ; Reck li t i s v . Co m m i s s i o n er, 9 1 T.C. 8 74 , 9 1 0 (1 9 8 8 ); s ee al so M cGraw v . Co m m i s s io n er, 3 8 4 F.3 d9 6 5 , 9 7 1 (8 th Ci r. 2 0 0 4 ) (ci t i n g Sp i es , 3 1 7 U.S. at4 99 , an dBrad fo rdv . Co m m i s s i o n er, 7 9 6 F.2 dat3 0 7-3 0 8 ), aff’ g Bu t l er v . Co m m i s s io n er, T.C. M em o .- 3 5 -

[* 3 5 ] 2 0 0 2 -3 1 4 . Th i s l i s ti s n on ex cl u s i v e, an dn o s i n g le fact or i s d i s p os i t i v e, al th o u g h th e co m

b i n at io n o f s ev eral fact o rs m ay co n s t i tu t e p ers u as i v e ev i d en ce o f frau d. Pet zo l d tv . Co m

m is s i o n er, 9 2 T.C. at7 00
. A co rp o rat i o n act s o n ly

th ro u g h i ts o ffi cers an dcan n otes cap e res po n s i b i l it y fo r t h ei r act s i n th atcap aci ty . Di Leo v . Co m m i s si o n er, 9 6 T.C. at 8 7 5. Wh et h er BCO’ s i n t en twas frau du l en t th erefo re d ep en d s up o n th e i n t en t o f M r. Ben av i d es , i t s s o l e o wn er an dm an ag er. See Ru i d o s o Raci ng As s ’ n, In c. v . Co m m i s s i o n er, 4 7 6 F.2 d5 0 2, 5 0 6 (1 0 th Ci r. 1 97 3 ) (frau do f m ajo ri ty s h areh o l d er i m

p u t edt o
co rp o rat i o n b ecau s e co rp orat io n recei v edt ax b en efi t fro m s h areh ol der’ s frau du l en t act s t o u n ders t at e co rp orat e g ro ss i nco m e), aff’ g i n p art , rem an d i n g i n p artT.C. M em o . 1 9 7 1 -1 9 4; Di Leo v . Co m m i s si on er, 9 6 T.C. at8 7 5 ; Fed erb u s h v . Co m m i s s i o n er, 3 4 T.C. 7 40 , 7 4 9 (1 9 6 0 ) (frau do f s h areh o ld er-o ffi cers i n d i v ert i n g
co rp o rat e i n co m e t o ev ad e co rp o rat e t ax i m p u t edt o co rp o rat io n wh en o ffi cers
o wn edfi ve-s i x th s o f s t o ck ), aff’ d , 3 2 5 F.2 d1 (2 dCi r. 1 9 6 3 ); Do o r Co n tro l Serv s . In c. v . Co m

m is s io n er, T.C. M em o . 1 9 9 6 -5 0 8 (co rp orat e t ax p ay er frau du l en t l y i n t en d edt o u nd erp ay

t ax es wh en i ts ub s tan t i al l y u n d ers t at edi t s t ax l iab i l i ty b y fai l i n g t o rep ort i n co m e d i v ert edt o i t s o nl y tw o s h areh o l d ers wh o were al so i t s
o n l y o ffi cers ).- 3 6 -

[* 3 6 ] a. BCO an d M r. Ben av i des W e n o wtu rn t o th e b ad g es o f frau d . Fi rs t , th e d i v ert edg ro s s recei p ts fro m BCO d em o n s trat e a p at t ern o f co n s i s ten tu n derrep ort i ng o f i n co m e b y b o th BCO
an d M r. Ben av i d es , ev i d en ci n g th ei r i n t en tt o ev ad e b o th co rp o rat e t ax an dt ax o n d i v i d en d s. An dwh i l e a “ m ere u n d ers t at em en t o f i n co m e al o n e i s n ots u ffi ci en tt o p ro v e frau d , th e co n s i s t en t an ds ub s t an ti al u n d ers t at em en to f i n co m e i s , b y i t s el f,
s tro n g ev i d en ce o f frau d .” Tru es d el l v . Co m m i s s i o n er, 8 9 T.C. at1 3 02 (fi n d i n g frau d wh ens o l e s h areh o l d er d i v ert edco rp o rat e fu n ds t o s h areh ol d er’ s p ers o n al
u s e duri n g th ree t ax y ears an d fai l edt o rep o rto n co rp orat e o r i n d i v idu al retu rn s ); Ot s u ki v . Co m

m i s s i o n er, 5 3 T.C. 9 6 , 1 0 7-1 0 8 (1 96 9 ) (h o l d i n g th ata p at t ern o f
o m is s i o n o f g ro s s recei p t s fo r fi v e y ears was “ st ro n g ev i d en ce o f an at t em p tt o d efrau dth e Go v ern m en t ”); s ee al s o Po t t er v . Co m m is si o n er, T.C. M em o . 2 0 1 4 -1 8 , at* 9 (“ A p at t ern of s ubs t an t i al l y u n d errep o rt i n g i n co m e fo r m ul t i p l e y ears i s
s tro n g ev i d en ce o f frau d [.] ”) (ci t i n g Van ov er v . Co m m i s s i o ner, T.C. M em o. 2 0 1 2
- 7 9 , 2 0 1 2 W L 9 5 2 8 7 1 , at* 4 ). Seco n d , BCO an dp et i t i o n ers fai l edt o m ai n t ai n ad equ at e reco rd s . BCO
m ai n t ai n edtwo s et s o f b o o k s t o trackp aym en t s BCO recei v ed --o n e fo r track i n g
acco u n t s recei vab l e an do n e fo r t ax rep o rt i n g --an dth e d iv ert edam ou n ts were n o t rep o rt edo n the b o o k s u s edfo r BCO’ s t ax rep ort i ng o r BCO’ s t ax return s . M r.- 3 7 -

[* 3 7 ] Ben av id es was i n s tru m en t al i n BCO’ s d oub l e b o o kk eep i n g p ract i ces an d i t s fai l u re t o d ep o s ital l o f i t s g ro s s recei p t s i n t o BCO acco u n ts an dp et i t i o ners ’ fai l u re t o rep o rtth e res u l t i n g d i v i d en d s fro m BCO. Th i rd , the t wo s et s o f b o o k s al s o i n di cat e aneffo rtt o co n ceal t ax ab le i n co m e. Po t t er v . Co m

m i s si o ner, at * 1 1 (s tat i n g th atd oub le b o o kk eep i n g at
co rp o rat e t ax p ay er was u s ed t o co n ceal s h areh ol d er’ s d i v ert i n g co rp o rat e recei p t s
an d was “ cl ear ci rcu m s t an t ial ev i d en ce o f frau du l en ti n t en t ”). Fo u rt h , M r. Ben av i d es ’ cri m in al co n v ict i o n --wh i l e n o t i d en t i cal t o t h e frau d al l eg edh ere--i s n o n et h el es s i n di cat i v e o f h i s frau du l en ti n ten tv i s -a-v i s th e IRS
an d Fed eral i n co m e t ax es . In2 0 1 1 M r. Ben av i d es p lead edg u i l ty an d was
co n vi ct edo f as s is t i ng i n th e p rep arat i o n o f a fal s e o r frau dul en ti n co m e t ax retu rn i n v i o l at i o n o f s ect i o n 7 20 6 (2 ). Th e p art ies s t ip u l at edth e o ffer o f p ro o f, wh i ch
s t at es th atM r. Ben av i d es u sed BCO t o co l l ect“ fees fo r s erv i ces ” fro m a cl i en t , p u rch as eda p ers o n al i t em fo r t h e cl i en t , th en as s i s t edi n p rep ari ng th e cl i en t ’ s t ax retu rn cl ai m i n g a b us i nes s ex p en s e d edu ct i o n fo r t h e co s to f t he p ers o n al i tem
m i s ch aract eri zedas “ fees ”. Here t o o M r. Ben av i d es i n t en t io n al l y u s edBCO’ s
o p erat i o n s t o av o i d t ax es --t h is t i m e fo r BCO’ s an dp et i t i o n ers ’ b en efi t --d i v ert i n g BCO’ s i n co m e t o h i d e i tfro m th e IRS.- 3 8 -

[* 3 8 ] Las t ly , BCO an dM r. Ben av i d es p ro v id edi n co n s i st en tan di m p l au s i b l e
ex p lan at i o n s fo r t h ei r act i o n s . Fo r ex am p l e, M r. Ben av i d es d i s av o ws an y frau du l en t i n t en t , arg ui n g th at , wh i l e h e m ay h av e “ red i rect ed ” BCO’ s g ro s s recei p t s, th e i n co m e was rep o rt ed“ s o m ewh ere”--wh et her o n p et i t i o n ers ’ jo i n t retu rn s o r t h e ret u rn s o f o n e o f p et i t i o n ers ’ b u s i n es s es . Th i s , M r. Ben av i d es arg u es , i n d i cat es a l ack of frau du l en t i n t en t . M r. Ben av i d es al s o p ro t es t s th ati ti s

“ rat h er s i l l y ” t o s u g g es tth atp et i t i o n ers were t ry i n g t o ev ad e co rp o rat e t ax b ecau s e h e was ju s tp ay i ng reas o n ab l e co m p en s at i o n t o h i m s el f--a p ro ces s h e d es cri b edt o th e Co u rtas “ s tri p p i n g ” t h e t ax ab l e i n co m e o u t o f BCO. M r. Ben av i d es ad m i t s t o “ h u rri ed , s h o rt -ci rcu i t ed b oo kk eep in g p ract i ces ,” b u targ u es th ath e i n t en d edo n l y t o en g ag e i n l eg i t i m at e t ax p l an n i ng b y p ay i n g h i m s el f a reas o n ab l e s al ary . Bu tBCO’ s p ri n ci p al b u si nes s was t ax p rep arat i o n
an d acco un t in g s erv i ces ; M r. Ben av i d es --as a C.P.A. wi th an acco u n ti n g d eg ree
an d d ecad es o f ex p eri en ce i n t ax m at t ers --t h u s s h o u ldkn o w h e can n otju s ti g n o re th e s ep arat e ex i s t en ce o f BCO. See So lo m o n v . Co m m i s s i o n er, 7 3 2 F.2 d1 4 5 9 , 1 4 6 1 -1 4 6 2 (6 th Ci r. 1 9 8 4 ) (h o ld i n g th at t ax p ay er’ s kno wl ed g e an dex p eri en ce as a C.P.A. wh o s e b u si n es s was h an d l i n g t ax m at t ers fo r o th ers s up p ort eda fi n di n g o f frau d), aff’ g p er cu ri am

T.C. M em o . 1 9 8 2 -6 0 3 ; Fran k e v . Co m m i s s i o n er, T.C. M em o. 2 0 1 1 -1 0 (s t at i n g th at t ax p ay er’ s b u s i n es s ex peri en ce as a t ax p rep arer fo r- 3 9 -

[* 3 9 ] s ev eral y ears was a rel ev an t co n s i d erat io n i n d et erm in i ng wh et her h e h ad frau du l en t i n t en t ). To s u g g es tth att ax p ay ers wh o m ad e a l i v i n g h an d l i n g th e t ax an d
acco u n t in g m at t ers o f o th ers s ho u l des cap e t h e frau dp en al ty b ecau s e o f s l op p y b o o kk eep i n g --i t sel f a b ad ge o f frau d --i s ri s i bl e. Th e “ reas o n ab l e co m p en s at i o n ” arg u m en tad v an ced b y

M r. Ben av i d es i s a d o g t h atwi l l n o th u n t . He d i dn o t rep o rtth e d i v ert edg ro s s recei p t s o n h i s p ers o n al retu rn s as co m p en sat i on fro m BCO o r p ay

ap p l i cab l e s el f-em

p l o ym en tt ax es . He can n o ti g no re real i ty o r rewri t e h i s t o ry n ow t h ath e h as b een cau g h to u t. M r. Ben av i d es ’ i n t en t i o n eds t ep s t o l o wer BCO’ s t ax ab l e i nco m e (as wel l as h i s o wn ) are cl ear an dco nv i n ci n g
ev i d en ce o f t h e req u i s i t e frau du l en ti n t en tfo r BCO an dM r. Ben av id es al i k e. W e fi ndam p l e i n d i ci a o f frau dfo r BCO an dM r. Ben av i d es fo r each o f t h e t ax y ears i n i s su e. b
. M rs . Ben av i d es Al th ou g h M rs . Ben av i d es fi l ed jo i n tretu rn s wi th M r. Ben av i d es , t o
es t ab l i s h h er l i ab i l i ty

fo r the frau dp en al t i es res p o n d en tm u s ts h o w th ats o m e p o rt i on s o f t h e u n d erp aym en t s were du e t o h er frau d
. See s ec. 6 6 6 3 (c). Th e
reco rds h o ws th ath er i n v o l v em en twi th BCO an d Su n ri s e was m o re l i m i t ed
. Un l ik e h er h u s b an d , M rs . Ben av i d es was n o ta C.P.A. wi th d ecad es o f t ax- 4 0 -

[* 4 0 ] ex peri en ce, n o r was s h e ano wn er o r m an ag er o f BCO. Du ri n g th e y ears i n i s su e s h e p erfo rm edcl eri cal t as k s atBCO, s u ch as d at a en try an db o o kk eep i n g , m ak i n g en tri es i n the ATB p ro g ram , p rep ari n g d ep o s i ts l i p s , an dd ep os i t i n g fu n d s i n t o BCO’ s an do th er “ v ari ou s ” acco u n t s. Wh il e t h es e t as ks , t o g et h er wi th h er rel at i o n s h i p wi th M r. Ben av i des , s u g g es tthats h e m ay h av e kn o wno f t h e d i v ert ed g ro s s recei p ts , we wi l l n o tp res u m e s o wi th ou tad d i t io n al i n d i ci a o f frau d
. Th erefo re, we h ol dthatres p o n d en th as n o t carri ed h i s b u rd eno f s h owi n g b y cl ear
an d co n v i n ci n g ev i den ce t h atM rs . Ben av id es h ad frau du l en ti n t en t
. B. Sect i o n 6 7 5 1 Fo r cert ai n p en al t i es as s ert edag ai n st i n d i v idu al t ax p ay ers , i n cl u d i n g frau d , th e Co m m i s s i o n er m

u sts h o w th ath e co m

p l iedwi th t h e p ro cedu ral req u irem en t s
o f s ect i o n 6 7 51 (b )(1 ). Sec. 7 4 9 1 (c); Graev v . Co m m i s s i o ner (Graev III), 1 4 9 T.C. 4 8 5 , 4 9 2 -4 9 3 (2 0 17 ), s up p lem en t i n g an do v erru li n g i n p artGraev v . Co m m i s s i o n er (Graev II), 1 4 7 T.C. 4 6 0 (2 0 1 6 ). Sect io n 6 75 1 (b )(1 ) requ i res th e Co m m i s s i o n er t o s h o w th atth e i n it i al d et erm i n at i on o f cert ai n p en al t i es was

“p ers o n al l y

ap p ro v ed(i n wri ti n g ) b y th e i m m ed i at e s up erv i s o r o f t h e i n d i v i du al
m ak i n g s u ch d et erm i n at io n ”. See Graev III, 1 49 T.C. at 4 9 3 ; s ee al s o Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0 , 2 2 1 (2 dCi r. 2 0 1 7 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 2 0 1 5 -4 2
.- 4 1 -

[* 4 1 ] Tri al was h el d , an d t h e reco rdwas cl o s ed b efo re th e i s su an ce o f o u r Op i n i o n i n Graev III, wh i ch o v erru l edi n p arto u r d eci s i o n i n Graev II an d h el dth atth e Co m m i s s i o n er’ s b u rd en o f p ro du ct i o n u nd er s ect i on 7 4 9 1(c) i n cl u d es s h o wi n g
s up erv i s o ry

ap p ro v al as req u i redb y

s ect i o n 6 7 5 1 (b )(1 ). In th e l i g h t o f t he Co u rt ’ s d eci s i o n i n Graev III, we o rd eredth e p art ies t o ad dres s th e effect o f s ect i o n 6 7 5 1 (b )(1 ) o n th es e cas es an dt o d i rect th e Co u rtt o an y ev i d en ce o f s ect i o n 6 7 5 1 (b )(1 ) s up erv i s o ry

ap p ro v al i n th e reco rd . Res p o n d en twas u n ab l e t o d i rect th e Co u rtt o an y

ev i d en ce i n th e reco rd thats at i sfi es h i s b u rd eno f p ro duct i o n wi t h
res p ectt o s ect i o n 6 7 51 (b )(1 ) an dfi l eda m o t i o n t o reo pen th e reco rdt o i n cl u d e a
co m p l et edFo rm

1 1 6 6 1, s i g n edb y th e ex am i n i n g ag en t’ s s up erv i s or, a Pen al ty Ap p ro v al Fo rm

s i gn edb y

the s up erv i so r, an dd ecl arat i o n s b y th e rev en u e ag en t wh o reco m

m en d edth e p en al t i es an dth e rev enu e ag en t ’ s s up erv i so r wh o ap p ro v ed th em . Pet i ti o n ers o b

j ect edt o res p o n d en t ’ s m o t i o n . W e fi rs tm

u s t d et erm i n e wh et h er t o reo p en th e reco rdt o ad m i tth e ad d it i o n al ev i d en ce t h atres p o nd en to ffered . Th e d eci s io n t o reo pen th e reco rdt o ad m i tad d i t i o n al ev i den ce i s wi th i n o u r b ro add i scret i o n . Zen i th Rad io Co rp . v . Hazel t i ne Res earch , In c., 4 0 1 U.S. 3 2 1 , 3 3 1 -3 3 2 (1 9 7 1 ); s ee No r-Cal Ad j u s t ers v . Co m m i s s i o n er, 5 0 3 F.2 d3 5 9 , 3 6 3 (9 th Ci r. 1 9 7 4 ) (“ [T] h e Tax Co u rt ’ s ru l i n g [d en y i n g a m o t i o n t o reo p en th e reco rd ] i s n o ts ub jectt o rev i ew ex cep tup o n a- 4 2 -

[* 4 2 ] d em on s trat i o n o f ex trao rd i n ary ci rcu m s tan ces wh i ch rev eal a cl ear ab u s e o f d i s cret i o n .”), aff’ g T.C. M em o . 1 9 7 1 -2 0 0 . W e “ wi l l n o tg ran ta m o t i o n t o reo p en th e reco rdu n l es s, am o n g o th er req u i rem en t s , th e ev i d en ce rel i edo n i s n o t m erel y
cu m u l at i v e o r i m

p each i n g, the ev i d en ce i s m at eri al t o th e i s s u es i n v o l v ed , an dth e
ev i d en ce p ro b ab l y

wo u l d ch an g e t h e o u t co m e o f th e cas e.” Bu t l er v . Co m m i s s i o n er, 1 1 4 T.C. 2 7 6 , 2 8 7 (2 0 0 0); s ee al s o SEC v . Ro g ers , 7 9 0 F.2 d1 4 5 0 , 1 4 6 0 (9 th Ci r. 1 98 6 ) (t ri al co urt“ s h o u l dt ak e i nt o acco u nt , i n co n s id eri n g a m o t i o n t o h o l do p en th e t ri al reco rd , th e ch aract er o f t h e ad d i t i o n al * * * [ev i d en ce] an d th e effect o f g ran t i n g the m o ti o n ”), o v erru ledo n o th er g ro u n d s b y Pi n t er v . Dah l , 4 8 6 U.S. 6 2 2 (1 98 8 ). W e al s o b al an ce t h e m o vi n g p art y ’ s d il i gen ce ag ai n s tth e p o s s i b l e p reju di ce t o t h e n o n m o v i n g p art y . Inp art i cu l ar we co n s i d er wh et h er
reo p en in g th e reco rdaft er tri al wo u ldp rev en tth e n on m o vi n g p art y fro m
ex am i n i n g an dqu es t i o n i n g t h e ev i d en ce as i t wo u l d h av e du ri n g t h e p ro ceed i n g . Es t at e o f Freed m an v . Co m m i s s i o n er, T.C. M em o . 2 00 7 -6 1 , 2 0 0 7 W L 8 3 1 8 0 2 , at* 1 2 ; M eg i bo w v . Co m m is s i o n er, T.C. M em o . 2 0 04 -4 1 , 2 0 04 W L 3 0 91 5 3 , at * 7
. W e ag ree wi th res p o n d en tth atth e Fo rm 1 1 6 6 1 i s n o t cu m

ul at i v e, i s m at eri al t o the p en al ty

i s s u es i n thi s cas e, an d p ro b ab l y wo u l dch an g e t h e o u t co m e. See Bu t l er v . Co m

m i s si o n er, 1 1 4 T.C. at 2 87 . Reo p en i n g th e reco rdh ere s erv es th e i n t eres t s o f ju s t i ce b ecau se t h e reco rdwas cl o s edi n th i s cas e b efo re we i s s u ed- 4 3 -

[* 4 3 ] Graev III an d b ecau s e p et i t i o n ers n ev er rai s ed s ect io n 6 7 5 1 (b )(1 ) as an i s s u e b efo re t h e reco rd was cl o s ed . W e al s o ag ree wi th res p on d en tth atth e Fo rm 1 1 6 6 1 i s a reco rdk ep ti n th e o rd in ary co u rs e o f b u s i nes s act i v i ty an d i s au th en t i cat edb y th e d ecl arat i on s . See Fed
. R. Ev i d . 8 0 3 (6 ), 9 0 2(1 1 ). Th i s fo rm i s th e t y p e o f
ev i d en ce we ro u t in el y

ad m i tattri al s o l el y

o n th e b as i s o f d ecl arat i o n s s u ch as th o s e p ro ffered
. Pet i t i o ners o b

ject edt o the g ran t i ng o f res p o n d en t ’ s m o t i o n b u td i dn o tp o i n t t o an y s p eci fi c i ss u es o r erro rs wi th res pect t o th e Fo rm 1 16 6 1 . Rat h er, p et i t i o n ers arg u e t h atb ecau s e Ch ai was d eci d eds i x week s b efo re t ri al an ds ect i o n 7 4 9 1 (c) h as l o n g p utth e b u rd en o f p ro du ct i o n o n th e Co m m i s s i o n er wi th res p ectt o p en al t i es , res p o nd en ts h ou l dh av e kn o wn th ath e n eed edt o p uto n thi s ev i d en ce at th e t i m e o f t ri al . Pet i t i o ners al s o o b ject edo n equ i t ab l e g ro u n d s , arg u i n g t h at
res p o n d en t act edi n b ad fai th b y o bject i ng t o p et i t io n ers ’ m o t i o n fo r co n t i n u an ce, th atp et i t i o n ers were p reju d i cedb y p ro ceed in g p ro s es e, an dth atres po n d en t p ro ceed edi n b adfai th b y m ak i n g ev i d en t i ary o bject i o ns attri al an dt ech n i cal l eg al arg u m en t s o n b ri ef. W e d i s ag ree. Wh i le t h e Co u rto f Ap p eal s fo r t h e Seco n d Ci rcu i td i dp ub l is h i t s o p i n io n i n Ch ai a s h o rtt i m e b efo re t h e t ri al i n t h es e
co n so l i d at edcas es , i t was n o tb i n di n g i n th e Ni nt h Ci rcu i t an dco n trad ict edth i s- 4 4 -

[* 4 4 ] Co u rt ’ s o wnp reced en t i n Graev II. W e d o n o tex p ectp art i es t o an t i ci p at e wh en th i s Co u rt wi l l o verru l e i t s p reced en t . Pet i t i o ners ’ equ i t ab l e arg u m en t s are p art icu l arl y weak
. Pet i t i o n ers were g ran t edtwo co n t in uan ces i n t h es e cas es , g i v i n g them tw o ad di ti o n al y ears t o p rep are fo r t ri al . Wh i l e th e Co u rt i s s ym p at h et i c t o h eal th p ro b l em s faced b y p et i t i o n ers ’ fo rm er at t o rn ey , th o s e h eal th p ro bl em s h adb een n o t edi n th e s eco n d
m o ti o n fo r co n t i n u an ce an dd o n o tex cu s e t h e l acko f p ro g res s i n th es e cas es o v er th e t wo y ears th ey

were co n t i n u ed
. Ob

ject in g t o a m o t io n fo r co n t i n u an ce d o es
n o tco ns t i tu t e b adfai th , n o r d o ev i den t i ary o b ject i o n s o r t ech n i cal arg u m en t s . W e fo u n d M r. Ben av i d es t o b e a t rai n ed t ax p ro fes s i o nal cap ab l e o f rep res en t i ng h i m s el f an dBCO, an do n th e b as i s o f h i s t ri al t es t i m o n y we co n cl u d edth ath e
u n d ers t o o ds ub s t an t iat io n req u i rem en t s . An d wh i l e we reject h i s s tri pp i ng arg u m en t , th atarg u m en tco n fi rm s thath e u nd ers t an d s the t ax ru l es th atwe ap p l i ed ab o ve.Fo r t h e reas o n s s t at edab o v e, we b el i ev e th atju s t i ce fav o rs ex erci s e o f o u r d i s cret i o n t o reo pen th e reco rd . W e t h erefo re wi l l g ran tres p o n den t ’ s m o ti o n i n p artan dreo p en th e reco rdan dad m i tth e Fo rm 1 1 6 6 1 i n t o ev i d en ce. W e al s o wi l l ad m i tth e d ecl arat io n s i n t o ev id en ce fo r t h e p u rp o s e o f au th en t icat i o n u n d er ru le 9 0 2 (1 1 ) o f t h e Fed eral Ru l es o f Ev i d en ce. See Cl o u g h v . Co m m i s s i o ner, 1 1 9 T.C.- 4 5 -

[* 4 5 ] 1 8 3 , 1 90 -1 9 1 (2 00 2 ). (As we ex pl ai n b el o w, we al s o wi ll d en y res p o n d en t ’ s
m o ti o n i n p artan dwi l l n o tad m i tth e Pen al ty Ap p ro v al Fo rm .) 1
. Sup erv i s o ry

Ap p ro v al fo r M r. Ben av i d es Th e Fo rm 1 1 6 61 ev i n ces s up erv i s ory ap p ro v al fo r t h e s ect i o n 6 6 6 3 (a) frau d p en al t i es b efo re th e fo rm al co m m u n i cat io n o f th e i n it ial d et erm i n at i o n t o as s es s th es e p en al t ies ag ai ns t M r. Ben av i d es . See Cl ay v . Co m m is si o n er,1 5 2 T.C. _

_ ,

_ _ - _

_ (s l i p o p . at4 4 -4 5) (Ap r. 2 4 , 2 0 1 9 ). Th e Fo rm 1 1 6 6 1 was s i g n edb y th e
ex am i n i n g ag en t’ s s up erv i s o r b efo re t h e fi rs tRAR was i s su edt o p et i t io n ers an d
ex p res s l y co n t em p l at edth ata 3 0 -d ay

l et t er wo u l d b e p rep aredats o m e p o in t . On th e reco rdb efo re u s we co n cl u d e t h atth e ap p ro v al cam e b efo re res p on d en ts en tt o BCO o r p et i t i o n ers an y

fo rm al co m

m u n icat i o n o f p en al t i es . Id . W e, t h erefo re, h o l dth atres p o n d en th as s at i s fi edh i s b u rd en o f s h owi n g s up erv i s o ry ap p ro v al
u n d er s ect i o n 6 7 5 1 (b )(1 ) fo r t h e s ect i on 6 6 6 3(a) frau dp en al ti es d et erm i n ed ag ai n s tM r. Ben av i d es . See Pal m o l i v e Bl d g. In v’ rs , LLC v . Co m m i s s i o n er, 1 5 2 T.C. _

_ , _

_ - _ _ (s l i p o p . at1 7 -1 8 ) (Feb . 2 8 , 2 0 19 ). 2
. Sup erv i s o ry

Ap p ro v al fo r M rs . Ben av id es W i th res p ect t o M rs . Ben av i d es , h o wev er, we h el dab o v e t hatres po n d en t h as n otcarri edh i s b u rd en o f s h o wi n g b y cl ear an dco n v i n ci n g ev i d en ce t h ats h e h ad frau du l en t i n t en t . Th erefo re, we n eedn o tad dres s co m p l i an ce wi th s ect i o n- 4 6 -

[* 4 6 ] 6 7 5 1 (b )(1 ). Th e Pen al ty Ap p ro v al Fo rm

wi l l n o t ch an g e t h e res u l tas t o M rs . Ben av i d es , an di t i s cu m u l at i v e as t o M r. Ben av i d es . W e t h erefo re wi l l d en y
res p o n d en t’ s m o t i o n i n p artan dn o tad m i tthe Pen al ty Ap p ro v al Fo rm

i n t o th e
reco rd
. 3
. Sup erv i s o ry Ap p ro v al fo r BCO Res p o n d en td o es n otb ear t h e b u rd en o f s h o wi n g co m p l ian ce wi th s ect i o n 6 7 5 1 (b )(1 ) fo r t h e s ect i o n 6 6 6 3 (a) frau dp en al t i es d et erm i n edag ai n s tBCO b ecau s e BCO i s a co rp o rat i o n , n o tan i n d i v i du al . See s ec. 7 4 9 1 (c); Dy n am o Ho l di n g s Lt d. P’ s h i p v . Co m m i s s io n er, 1 5 0 T.C. 2 2 4 , 2 3 1 -2 3 2 (2 0 1 8 ). Nev erth el es s , wi th h i s m o t i o n t o reo p en th e reco rdres p o n d en to ffered a s i m i l ar Fo rm 1 1 6 6 1 fo r t h e s ect i o n 6 6 6 3 (a) frau d p en al t i es d et erm i n ed ag ai ns tBCO t h at
was s ig n edb y th e ex am i n i n g ag en t ’ s s uperv i so r b efo re an RAR was i s su edt o BCO. Th e Fo rm 11 6 6 1 was au th en t i cat edb y th e s am e d ecl arat i on s we h av e ad m i t t edi n t o th e reco rd . Iti s n o tcl ear fro m th e reco rdwh et h er BCO p u t
s up erv i s o ry

ap p ro v al u n d er s ect i o n 6 7 5 1 (b )(1 ) i n i s s ue, b u twe wi l l d eem BCO t o h av e d o n e s o . W e wi l l th erefo re ad m itth e Fo rm 1 16 6 1 i n t o th e reco rdfo r p u rp os es o f s h o w i n g req u i s i t e s uperv i s o ry ap p ro v al o f t h e i n i t i al d et erm i nat i o n t o
as s es s th e s ect i o n 6 6 63 (a) p en al t i es d et erm i n edag ai n s tBCO. Onth e b as i s o f t h i s- 4 7 -

[* 4 7 ] Fo rm

1 1 66 1 an dthe d ecl arat i o n s we h av e al read y ad m i t t ed , we h o l dth at
res p o n d en t co m

pl i edwi th s ect i o n 6 7 51 (b )(1 ) wi th res p ectt o BCO. C. Su m m ary Becau s e res p o n den th as s h o wnb y cl ear an dco n v i n ci n g ev id en ce t h atth e
u n d erp aym en t s at tri b u t ab le t o th e d i v ert edg ro s s recei p t s fo r each o f t h e t ax y ears i n i ss u e are at tri b ut ab l e t o frau d , we s u s tai n res p o n d en t ’ s d et erm i n at i o n s i m p o s i n g frau d p en al t ies u n d er s ect i o n 6 6 6 3 (a) o n BCO’ s an dM r. Ben av i d es ’
u n d erp aym en t s o f t ax rel at i n g t o d i v ert edg ro s s recei p t s . 6 W i th res p ectt o M rs . Ben av i d es , h o wev er, res p o n d en tfai l edt o s h o w b y cl ear an dco n v in ci n g ev i d en ce th ats h e h adfrau du l en ti n ten t ; th erefo re, M rs . Ben av i d es i s n o tl i ab l e fo r t h e
s ect i on 6 6 6 3 (a) frau dp en al ti es . See s ec. 6 6 6 3 (c). V. Li m i t at i o n s Fi n al l y , p et i t i o n ers al s o rai s e a s t atu t e o f l i m i t at io ns arg u m en t , as s ert i n g th at b ecau s e res p o n den t ’ s frau dal l eg at i on i s l i m i t ed t o u n d erp aym en t s o f t ax

6 Res p o n d en td et erm i n edth ats o m e p o rt i o n s o f t h e u n d erp aym en t s o f t ax b y p et i t i o n ers were n o t at tri b u tab l e t o frau d an dd i d n o td et erm i n e frau d p en al t i es o n th o s e am o u n t s . Th es e p o rt i o ns are at tri b u t ab l e t o th e v ari ou s d is al lo wed d educt i o n s fl o w i n g fro m

Su n ri s e t o p et i t i o n ers th ati n creas edSu n ri s e’ s i n co m e. As we ex p l ai n b el o w , th e m ere fact th atres po n den td et erm i n edth ato n ly a p o rt i o n o f t h e u n d erp aym en t s was at tri b u t ab l e t o frau d(t h e co ns tru ct i v e d i vi d en d s res u l ti n g fro m

d i v ert i n g BCO’ s g ro s s recei p t s ) d o es n o t m ean th atres p o n d en ti s b arred b y th e s t atu t e o f l i m i t at i o n s fro m as s es s i n g th e p o rt io n s o f t h e u n d erp aym en t s t h atwere n o tat tri b u t ab l e t o frau d
.- 4 8 -

[* 4 8 ] at tri b u t ab l e t o th e g ro s s recei p t s d i v ert edfro m BCO, t he o th er d efi ci en ci es
are o u t s i d e t h e l i m i tat i o n s p eri o d . A d efi ci en cy i n t ax g en eral l y

m u s tb e as s es s ed wi th i n th ree y ears fro m

th e d at e o n wh i ch th e ret u rn was fi l ed . See s ec. 6 5 0 1 (a). Ho wev er, i f a t ax p ay er fi l es a fal s e o r frau du l en treturn wi th th e i n ten tt o ev ad e t ax , th e t ax m ay b e as s es s edat an y t i m e. Sec. 6 5 01 (c)(1 ). An di n t h e cas e o f a jo i n t retu rn , frau db y

ei th er t ax p ay er s u s p en d s th e p eri o d o f l i m i t at i o n s i n d efi n it el y fo r b o th t ax p ay ers . See Bal l ardv . Co m m i ss i o ner, 7 40 F.2 d 6 5 9 , 6 6 3 (8 th Ci r. 1 9 8 4 ), aff’ g i n p artan drev ’ g i n p artT.C. M em o . 1 9 8 2-4 6 6 ; Hi ck s Co . v . Co m m i s s i o n er, 5 6 T.C. at 1 0 3 0; Ev an s v . Co m m i s s i o n er, T.C. M em o. 2 0 1 0 -1 9 9 , 2 0 1 0 W L 3 5 6 4 7 2 7, at* 5 , aff’ d , 5 0 7 F. Ap p ’ x 6 4 5 (9 th Ci r. 2 0 1 3 ). Res p o n d en tb ears th e b u rd en o f p ro v i n g b y cl ear an dco n v i nci n g ev id en ce th atth is ex cep t i on t o th e l i m i t at i o n s p eri o dap p l ies . See Go u l d v . Co m m i ss i o n er, 1 3 9 T.C. 4 1 8 , 4 3 1 (2 0 1 2 ), aff’ d , 5 5 2 F. Ap p ’ x 2 50 (4 th Ci r. 2 01 4 ). Res p o n d en t ’ s b u rd eni s th e s am e as h i s b u rd en u n d er s ect i on 6 6 6 3(a) t o p ro v e t h e ap p l icab i l i t y
o f t h e frau dp en al ty : Res po n d en tm u s ts h o w th atth ere i s an u n d erp aym en to f t ax fo r each y ear, an dth at s om e p ort i o n o f each u n d erp aym en ti s at tri b u tab l e t o frau d
. Id . As d i s cu s s edab o v e, res p o nd en t h as carri edh i s b urd en u n d er s ect io n 6 66 3 (a)
as t o b o th BCO an dM r. Ben av i d es . Th erefo re, we h ol dth ath e h as carri edh i s b u rd enu n d er s ect i o n 6 5 0 1 (c)(1 ) wi th res p ectt o BCO an dp et i t i o ners .- 4 9 -

[* 4 9 ] Becau s e t he l i m i t at i o n s p eri o d h as n o t cl o s edwi th res p ectt o th e t ax y ears i n i s su e, res p on den tm ay

as ses s an dco l l ectth e t ax h e d et erm i n edt o b e o w i ng fo r th o s e y ears , wh et h er o r n o tat tri b u tab l e t o frau d . See s ec. 6 5 01 (c)(1 ); Lo wy v . Co m m i s s i o n er, 2 8 8 F.2 d5 1 7 , 5 2 0 (2 dCi r. 1 9 6 1 ) (“ [I] f a ret urn b e frau du l en ti n
an y res p ectwi th i n ten tt o ev ad e a t ax , i td ep ri ves th e t ax p ay er o f t h e b ar o f t h e
s t atu te fo r t h aty ear, an dp erm i t s a g en eral reau di to f t he ret u rn th ro u gh o u t , an d wi l l t ol l th e St atu te o f Li m i t at i o n s o n the reau d i to f an y i t em o f t h e t ax . ”), aff’ g T.C. M em o . 1 96 0 -3 2
. VI. Co n cl u s i o n In s u m , b ecau s e we fo u ndcl ear an dco nv i n ci n g ev i den ce o f frau d wi th
res p ectt o BCO’ s d i v ert edg ro s s recei p ts fo r each y ear i n i s su e, res p o n den t ’ s d efi ci en cy

d et erm i n at i on s s etfo rt h i n the n o t i ces o f d efi ci en cy m ay b e as ses s ed ag ai n s tb o th BCO an dp et i t i o n ers , ex cep tth at th e s ect i o n 6 66 3 (a) frau d p en al t i es
m ay n o t b e as s es s eds ep arat el y ag ai n s tM rs . Ben av i d es . W e h av e co n s id eredal l o f t h e arg um en t s m ad e b y th e p art i es an d , t o th e
ex t en tth ey

are n o tad dres s edh erei n , we fi n dth em t o b e m o o t , i rrel ev an t, o r wi th o u tm eri t
.- 5 0 -

[* 5 0 ] 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 s wi l l b e en t ered
.