TAX COURT OPINION

Case: Timothy R. & Cindy I. Fuller
Docket Number: 13007-05
Judge: Cohen
Opinion Type: memo
Filed: 03/19/2007
Pages: 7

_I A __ j~ RTCORDED S:RJIC E CAL . _ . I STAT . Bs+F . JUDG E ~ FIL Ds.S T .C . Memo . 2007-62 UNITED STATES TAX COUR T TIMOTHY R . AND CINDY I . FULLER, Petitioners V . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 13007-05 . Filed March 19, 2007 . Anthony V . Diosdi and Joy E . Gray , for petitioners . Daniel J . Parent , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge : Respondent determined deficiencies and penalties with respect to petitioners' Federal income tax as follows : Mid MAR 11 20RT - 3 - Petitioners' tax returns for the years in issue were prepared by Wayne Greenfield (Greenfield), an enrolled agent in Chico, California . Petitioners provided Greenfield with schedules of gross receipts, cost of goods sold, and other expenses for 1998, 1999, and 2000 to aid him in the preparation of their tax returns for those years . Petitioner Cindy I . Fuller (Mrs . Fuller) maintained the books and records for both of petitioners' businesses . She prepared the figures to be entered on petitioners' tax returns and provided them to Greenfield . Other than contracts for the purchase of equipment, Mrs . Fuller did not provide to Greenfield any underlying documents to substantiate how petitioners determined the figures that they submitted to him to be entered on their tax returns . Petitioners filed their 1998 Federal income tax return on October 19, 1999 . They filed their 1999 tax return on December 17, 2000 . They filed their 2000 tax return on June 7, 2002, after receiving from the IRS a letter requesting that it be filed . On their Schedules C, Profit or Loss From Business, petitioners understated their gross receipts by $73,624 for 1998, $26,038 for 1999, and $9,931 for 2000 . They overstated their costs of goods sold for materials and supplies by $27,768 for 1998, $49,019 for 1999, and $113,402 for 2000 . They overstated their depreciation expenses by $17,558 for 1998, $26,037 for - 5 - only $10,058 of Schedule C income . Petitioners also submitted to Redding Bank a document entitled " Individual Financial Statement" dated April 5, 2000, in which they represented that they had wages of $150 , 000, business net income of $349,000, and total income of $499,000 for 1999 . They also provided to Redding Bank a profit and loss statement for 1999 indicating gross receipts of $489,049 .55, while petitioners ' filed tax return reported only $441,032 in gross receipts . Petitioners purchased several vehicles in 1999 and 2000 . In April 1999 , they purchased a 1999 GMC van for a monthly payment of $715 .39 . On the credit application for that purchase, petitioners represented that their annual gross income was $350,000 . In September 1999, petitioners made a downpayment of $5,000 to purchase a 2000 Ford pickup truck for a monthly payment of $627 .20 . On their credit application for that purchase, petitioners represented that their gross monthly income from employment was $13,300 . Upon purchase of the 2000 Ford pickup truck, petitioners paid $3,237 . 98 in cash to have off-road alterations made to the vehicle . In August 2000, petitioners made a downpayment of $2,000 to purchase a 2000 Chevrolet pickup truck for a monthly payment of $592 .82 . On the credit application for that purchase, petitioners represented that their combined monthly income was $13,000 . - 7 - From this third-party information, the IRS began to reconstruct petitioners' gross income and expenses . On May 27, 2005, the IRS mailed to petitioners the statutory notice of deficiency . After the notice of deficiency was sent, petitioners' counsel notified the IRS that the previously requested documents were available for review at his office . Petitioners' counsel also provided copies of the documents to the IRS . Much of the information regarding particular payments made by or to petitioners, however, was gathered from third parties, such as from petitioners' bank, and was not evident from the books and records provided by petitioners . Petitioners themselves never provided any explanation of the documents or how they had calculated their gross income and expenses for the years in issue . OPINION The penalty in the case of fraud is a civil sanctio n provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud . Helvering v . Mitchell , 303 U .S . 391, 401 (1938) ; Sadler v . Commissioner , 113 T .C . 99, 102 (1999) . Respondent has the burden of proving, by clear and convincing evidence, an underpayment for those years in issue and that some part of the underpayment for each of those years was due to fraud . Sec . 7454(a) ; Rule 142(b) . - 9 - affg . T .C . Memo . 1984 - 601 . Dealing in cash is also considered a "badge of fraud" by the courts because it is indicative of a taxpayer's attempt to avoid scrutiny of his finances . See id . at 308 . Respondent's burden regarding the underpayment of tax in support of the fraud penalty has been met . Petitioners have conceded overstatements of expenses and of costs of goods sold and understatements of gross receipts for the years in issue . Those misstatements resulted in substantial understatements of petitioners' tax liability for those years . The evidence in this case establishes many "badges of fraud" . It is undisputed that petitioners substantially understated their income for each of the years in issue . For 2000, petitioners did not file a tax return until June 2002, and then only after receiving a letter from the IRS requesting that a 2000 return be filed . Petitioners' substantial understatements of income for all tax years in issue and their initial failure to file a tax return for 2002 are both indicia of fraud . See id . at 307 . Petitioners failed to cooperate with respondent by not responding to several letters from the IRS requesting interviews and information, not submitting documents requested by the IRS agent conducting the audit, and failing to appear at scheduled interviews . Petitioners did not provide the agent with any - 11 - Petitioners ' failure to provide a plausible explanation of their behavior with regard to the calculation of the figures provided to their tax preparer is indicative of fraud . See id . at 307 . Petitioners represented on several loan applications with various financial institutions during the years in issue that they had vastly larger incomes than they had represented either to Greenfield in the course of his preparation of their returns for those years or to the IRS . They also provided a copy of a purported 1998 tax return to Redding Bank that showed income four times the amount that was actually reported to the IRS for 1998 . Petitioners argue that the inconsistent information that they provided to financial institutions consisted of "mere estimations of their income" and thus should not be viewed as evidence of fraudulent intent to conceal income from the IRS , to which petitioners reported substantially lower incomes . However, the large discrepancies in the income that petitioners reported to the IRS and the income reported to the lending institutions, coupled with the 1998 tax return submitted to Redding Bank that was selectively altered to show four times more income to petitioners than the return that was actually filed with the IRS for 1998, are convincing evidence of petitioners' dishonesty and of fraudulent intent to conceal income from the IRS . Petitioners have not presented any plausible explanation of these discrepancies . - 13 - Commissioner , T .C . Memo . 2003-224, affd . 138 Fed . Appx . 298 (11th Cir . 2005) . Petitioners cannot blame Greenfield for the misstatements and errors in reporting their tax liabilities when petitioners provided Greenfield with the incorrect figures to be entered on their tax returns and when they alone possessed the information that would have indicated discrepancies between petitioners' actual tax liabilities and the amounts reported on their returns . See Bacon v . Commissioner , T .C . Memo . 2000-257, affd . without published opinion 275 F .3d 33 (3d Cir . 2001) . Furthermore, petitioners' failure to provide to Greenfield the documentation necessary for his accurate preparation of their tax returns is indicative of fraud . See Medlin v . Commissioner , supra ; Ishler v . Commissioner , T .C . Memo . 2002-79 . Respondent has proven by clear and convincing evidence an underpayment of tax due to fraud for each year . Petitioners have not proven that any part of the underpayments was not attributable to fraud . See sec . 6663(b) . On consideration of the entire record, we conclude that petitioners are liable for the fraud penalties determined under section 6663(a) . To reflect the foregoing and the concessions of the parties , Decision will be entere d under Rule 155 .