t c memo united_states tax_court michael j downing and sandra m downing petitioners v commissioner of internal revenue respondent docket no filed date ps resided in louisiana a community_property_state shortly before their wedding in they filed for registry la civ code ann art west in st tammany parish where both of them then resided a marriage contract which provided that the intended husband and wife shall be separate in property before the years in issue and ps moved to jefferson parish p-h operated a plumbing business during the years in issue ps filed separate tax returns for the years in issue on which they reported only their respective incomes without regard to louisiana’s usual community_property_laws r determined that substantial amounts of income from p-h’s plumbing business had not been reported on ps’ separate_income tax returns the marriage contract did not have the effect of stopping application of louisiana’s usual community_property_laws for federal_income_tax purposes both ps are liable for the fraud addition_to_tax for both years in issue and there were other miscellaneous adjustments held ps’ marriage contract did have the effect of stopping application of louisiana’s usual community_property_laws for federal_income_tax purposes r has conceded that such a holding would result in p-w’s not being liable for deficiencies and additions to tax for the years in issue r has asserted against p-h increased deficiencies and additions that are intended to apply if all the omitted income were properly reportable by p-h held further r proved by clear_and_convincing evidence that p-h had unreported plumbing business income for and for that each year’s unreported plumbing business income resulted in an underpayment_of_tax for that year and that at least some part of each year’s underpayment_of_tax was due to p-h’s fraud amounts determined sec_6663 i r c held further no portion of the underpayment_of_tax for either year was not due to fraud except to the extent the underpayment resulted from causes other than unreported plumbing business income amounts determined sec_6663 i r c john s ponseti for petitioners susan s canavello for respondent memorandum findings_of_fact and opinion chabot judge by separate notices of deficiency respondent determined deficiencies in individual income_tax and penalties under section fraud against petitioners as follows unless indicated otherwise all section and chapter references are to sections and chapters of the internal_revenue_code_of_1986 as in effect for the years in issue year deficiency1 dollar_figure big_number dollar_figure big_number penalties sec_6663 dollar_figure big_number dollar_figure big_number michael j downing sandra m downing of these totals for michael j downing hereinafter sometimes referred to as michael for dollar_figure is income_tax under ch and dollar_figure is self-employment_tax under ch for dollar_figure is income_tax under ch and dollar_figure is self-employment_tax under ch for sandra m downing hereinafter sometimes referred to as sandra all the amounts are income_tax under ch both sides apparently view the facts in the instant case as leading to michael’s being solely liable for self-employment_tax on any additional net_earnings_from_self-employment regardless of the disposition of the community_property issue that is neither side views sandra’s involvement in the business as resulting in a partnership see sec_1402 petitioners did not file joint returns for either of the years in issue infra note and so sandra does not have joint_and_several_liability for michael’s self-employment_tax see sec_1 b income_tax regs see also 74_tc_1057 affd 661_f2d_53 5th cir in each notice_of_deficiency respondent determined in the alternative to the fraud_penalty that the addition prescribed by sec_6662 applies in an unspecified amount for each year in the answer respondent narrows this determination to the negligence_penalty sec_6662 but the amount remains unspecified at trial and on brief respondent conceded that if petitioners’ marriage contract was effective to take petitioners out of louisiana’s usual community_property matrimonial regime then decision should be entered for sandra that she has no deficiency and no addition_to_tax for any year in issue by amendment to answer respondent asserts in the alternative to the deficiencies and additions to tax determined in the notices of deficiency that if the court determines that petitioners’ marriage contract has this effect and sandra does not have any liability then michael is liable for deficiencies and penalties as follows year deficiency dollar_figure big_number penalties sec_6663 dollar_figure big_number see sec_6214 respondent also asserts in the alternative to sec_6663 additions to tax under sec_6662 see sec_6214 after concessions by both sides the issues for decision3 respondent concedes that petitioners are entitled to deduct as schedule a itemized_deductions the dollar_figure paid_by michael for louisiana income_tax and the dollar_figure of mortgage interest_paid both petitioners had claimed the standard_deduction for married filing separate on their and tax returns on brief petitioners argue that they also are entitled to deduct the dollar_figure paid for real_property_taxes on brief respondent concedes deductibility of this amount respondent concedes that petitioners are entitled to deduct dollar_figure of the dollar_figure disallowed schedule c profit or loss from business telephone expenses for petitioners concede the remaining dollar_figure respondent concedes that petitioners are entitled to deduct dollar_figure of the dollar_figure disallowed schedule c telephone expenses for petitioners concede the remaining dollar_figure petitioners concede the entire dollar_figure inventory adjustment for respondent concedes that petitioners are entitled to additional schedule c car and truck expense deductions for and in the amounts of dollar_figure and dollar_figure respectively respondent also concedes that petitioners are entitled to an additional dollar_figure depreciation expense deduction for on the ford f250 truck respondent concedes that petitioners are entitled to deduct additional schedule c expenses for and in the amounts of dollar_figure and dollar_figure respectively in the notices of deficiency respondent disallowed in full the deductions for schedule c travel and entertainment_expenses petitioners acknowledge on brief that they lack the requisite documents to enable these expenses to be deductible petitioners contend that they did incur these expenses however mr downing simply did not know that he was required to keep a detailed log of who he went to lunch with and what business they discussed we treat this as petitioners’ concession of the adjustment and in effect of the applicability of sec_6662 petitioners concede that michael underreported plumbing business gross_receipts by dollar_figure that is the tax_return continued are as follows whether each petitioner omitted from gross_income his or her respective community_property law one-half interest in the spouse’s earnings whether petitioners had unreported schedule c gross_receipts for the years in issue and if so then in what amounts a whether petitioners are liable for the civil_fraud additions to tax under sec_6663 or b in the alternative if petitioners’ underpayments if any are not due to fraud then whether petitioners are liable for the negligence additions to tax under sec_6662 continued shows gross_receipts of dollar_figure--petitioners acknowledge plumbing business gross_receipts of dollar_figure on brief respondent indicates that respondent’s concessions have the effect of reducing the original deficiency_notice determination by more than one-third as to michael and by more than half as to sandra further concessions were made in the course of certain postbrief proceedings infra note computations will be required under rule unless indicated otherwise all rule references are to the tax_court rules_of_practice and procedure the following adjustments are computational the deduction for exemptions the child_care_credit and the computation of both michael’s self-employment_tax liability and self-employment_tax deduction their resolution depends on our determination of the issues for decision findings_of_fact some of the facts have been stipulated the stipulations and the stipulated exhibits are incorporated herein by this reference when the petition was filed in the instant case petitioners resided in metairie louisiana metairie is in jefferson parish petitioners filed timely calendar_year tax returns for the years in issue using the filing_status married filing separate a michael’s background michael was born in he began working when he wa sec_12 his jobs included cutting lawns and washing cars he initially charged dollar_figure per lawn and about dollar_figure per car michael worked after school on weekends and throughout the summers during high school michael continued to cut lawns he also worked at fasullo’s drug store in addition as part of his schooling after the notices of deficiency were mailed to petitioners petitioners submitted form sec_1040x amended u s individual_income_tax_return for and in which they changed their filing_status from married filing separate to married filing joint and claimed the earned_income_credit sec_6013 prohibits spouses from making a joint_return after they have previously filed separate returns if a notice_of_deficiency has been mailed to either spouse with respect to the tax for that taxable_year and the spouse has filed a petition with the tax_court see 86_tc_433 affd in part and revd in part 851_f2d_1492 d c cir at trial petitioners conceded that their filing_status is married filing separate consequently they are not entitled to the earned_income_credit see sec_32 michael worked half time at jedco for year where he received training in plumbing and auto mechanics michael saved the money that he earned from these jobs he did not deposit this money into a bank because he believed that was inconvenient indeed he did not open a bank account until march of in michael was graduated from high school his first job thereafter was as a courier for suburban coastal corporation after he left suburban coastal corporation he worked at nature tubs and spas where he installed and plumbed spas and installed gas lines toward the end of and beginning of michael went to work at lenny’s plumbing where he worked until the end of at the end of michael began working at milliken michaels inc a company owned by his brother-in-law michael sanderson hereinafter sometimes referred to as sanderson before then michael had been living at his parents’ house when he began working for sanderson he moved into sanderson’s guest house at the end of michael began operating his own plumbing business doing business as michael downing plumbing co hereinafter sometimes referred to as the plumbing business michael continued to conduct the plumbing business as a sole_proprietor during the years in issue michael first had social_security earnings in in the amount of dollar_figure this dropped to dollar_figure in and zero in in when he was graduated from high school he had social_security earnings_of dollar_figure his social_security earnings increased each year until when they reached dollar_figure his and social_security earnings were dollar_figure and dollar_figure respectively michael’s social_security earnings from through totaled dollar_figure b sandra’s background sandra was born in she was graduated from high school in at some point she completed a semester of college in sandra married gary rucker hereinafter sometimes referred to as rucker they had two children rachel born in and sean born in sandra and rucker separated in their divorce became final in rucker paid to sandra dollar_figure of child_support in cash in each year in issue the parties stipulated that these payments were in cash in and on answering brief petitioners contend that dollar_figure of the payments was by check although petitioners’ contentions are presented in great detail petitioners do not direct our attention to any evidence in the record that supports their contentions see rule b and petitioners do not ask to be relieved from the conclusive effect of the parties’ stipulation that the payments were in cash see rule e our findings are in accord with the parties’ stipulations petitioners’ contrary contentions are rejected during the years in issue sandra worked as a clerk at lcr corporation a plumbing supply house where she earned dollar_figure in and dollar_figure in sandra had social_security earnings at least as far back as her social_security earnings increased from dollar_figure in and dollar_figure in to dollar_figure in her social_security earnings then declined reaching zero in thereafter sandra’s social_security earnings varied greatly from one year to the next sandra’s social_security earnings for through totaled dollar_figure c the marriage contract sandra and michael met in date on date they were married in st tammany parish louisiana louisiana is a community_property_state before their marriage sandra and michael entered into a marriage contract see infra note which made them separate in property one of the reasons they did so was on the advice of sandra’s divorce attorney to prevent rucker from aggregating sandra and michael’s income in an attempt to reduce or eliminate rucker’s child_support payment obligations petitioners executed the marriage contract on date on date the marriage contract was filed for registry in the conveyance records of st tammany parish where petitioners then resided the marriage contract provides as follows i the intended husband and wife shall be separate in property therefore neither of them shall be liable for the debts contracted by the other either before or during their marriage the intended wife shall have the free and exclusive enjoyment of her separate_property and the full administration thereof without the assistance of her husband ii all property and effects of the said husband and wife whether owned by him or her at the time of the celebration of said intended marriage or acquired during said marriage are hereby declared to be separate_property and that of the wife separate and paraphernal property and they and each of them do hereby expressly reserve to themselves individually the entire administration of their respective particular movable and immovable_property and the respective free enjoyment of each of their revenues on date the marriage contract was filed for registry in the conveyance records of jefferson parish louisiana d the plumbing business michael generally worked alone in the plumbing business if he needed help then he hired independent contractors sandra handled all the bookkeeping for the plumbing business she wrote out the invoices and mailed them to customers paid the bills organized the records did the banking and submitted figures to petitioners’ c p a for use in preparing petitioners’ tax returns the plumbing business was on the cash_basis for and sandra computed gross_income for the years in issue by adding the invoices for the work that michael had completed each month and then adding the monthly totals the invoices totaled dollar_figure for and dollar_figure for on the schedules c for the plumbing business michael reported gross_receipts of dollar_figure and gross_receipts of dollar_figure on answering brief petitioners concede that michael should have reported gross_receipts of dollar_figure--dollar_figure more than michael in fact reported supra note table sets forth the amounts of the forms issued to the plumbing business for and the amounts of the corresponding invoices that sandra prepared table customer form_1099 amounts invoice amounts randy bolnar walter martinolich renard j falcon plumbing sizeler property bayona corp metro bank southern foods group totals dollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number table sets forth the amounts of the forms issued to the plumbing business for and the amounts of the corresponding invoices that sandra prepared table customer form_1099 amounts invoice amounts lemaire southern foods r l falcon junior league a-z home vino vino metro bank sizeler bayona maurice’s totals e personal finance sec_1 the houses dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number michael did not own any realty before he married sandra on date he bought a house for dollar_figure on newman avenue hereinafter sometimes referred to as the newman property in metairie jefferson parish michael’s uncle gave dollar_figure to him for a downpayment michael financed the remainder through sanderson pincite percent interest the monthly payment was dollar_figure the act of sale for the newman property states in pertinent part as follows michael j downing a person of the full age of majority and resident of the parish of jefferson state of louisiana the parties do not deal with the question of when petitioners moved their legal residence from st tammany parish to jefferson parish except that they stipulate that during and petitioners were married and residing continued who declared under oath unto me notary that he has been married but once and then to sandra martinolich downing with whom he lives and resides from whom he is separate in property by virtue of a marriage contract which is recorded in the parish of jefferson in the conveyance records the marriage contract was attached to the act of sale which was filed in the conveyance records of jefferson parish on date petitioners’ renovation work on the newman property included painting roof carpeting and doors on date michael sold the newman property for dollar_figure the check for the net_proceeds from this sale in the amount of dollar_figure was made out solely to michael petitioners spent dollar_figure to dollar_figure of this amount before date and the remainder of the dollar_figure by the end of on date michael bought for dollar_figure a house on metairie court parkway hereinafter sometimes referred to as the metairie court property in jefferson parish the metairie court property has been petitioners’ residence since date michael made a downpayment of dollar_figure and financed the remainder initially through mark margavio and then through sanderson pincite continued together in jefferson parish louisiana the parties stipulated that this filing was in the conveyance records of st tammany parish however on brief the parties’ statements are to the effect that this date filing of the newman property act of sale with marriage contract attached was in the jefferson parish conveyance records also the newman property was in jefferson parish under the circumstances we conclude that the parties’ stipulation on this point was in error and our finding reflects that conclusion rather than the parties’ stipulation percent interest the mortgage payment was dollar_figure per month the mortgage payments were made by checks signed by sandra drawn on premier bank account number see infra table the interest portion of these mortgage payments aggregated dollar_figure see supra note as to respondent’s concessions both the act of sale and the mortgage on the metairie court property were recorded in the jefferson parish conveyance records on date unlike the act of sale for the newman property the metairie court property act of sale did not have attached to it a copy of the marriage contract rather the metairie court property act of sale states as follows michael joseph downing a person of the full age of majority and a resident of the parish of jefferson state of louisiana who declared unto me notary that he has been married but once and then to sandra martinolich with whom he is presently living and residing and with whom he is separate in property by virtue of a marriage contract dated date and annexed to act recorded as act no in the parish of jefferson louisiana the newman property act of sale mailing address metairie court parkway metairie la here present accepting and purchasing for himself his heirs and assigns and acknowledging due delivery and possession thereof all and singular the following described property to-wit the metairie court property mortgage includes a similar reference the mortgage also does not have attached to it a copy of the marriage contract the vehicles on date michael bought a new ford f250 truck for the plumbing business he paid dollar_figure in cash and financed the remaining dollar_figure at an interest rate of percent with monthly payments of dollar_figure in petitioners made payments on this loan totaling dollar_figure of this total petitioners paid dollar_figure by check and dollar_figure in cash see supra note as to respondent’s concessions michael continued to use the truck for business purposes in on date michael bought a 500sl mercedes- benz for dollar_figure he did not make a downpayment he financed the car at an interest rate of dollar_figure percent with monthly payments of dollar_figure on date michael bought a c2 porsche for dollar_figure again he did not make a downpayment he financed the car at an interest rate of percent with monthly payments of dollar_figure a mercedes-benz that had been bought by one or both of the petitioners in or was stolen in or cash advances on date petitioners withdrew a dollar_figure cash advance from their american express optima account on date petitioners withdrew a dollar_figure cash advance from their first usa visa account on date petitioners deposited a dollar_figure convenience check issued by at t universal gold mastercard into one of their personal checking accounts f tax returns petitioners timely filed married filing separate_income tax returns for both of the years in issue in each of these tax returns the respective petitioner correctly showed that petitioner’s spouse’s name and social_security_number at the appropriate places their tax returns for through also were married filing separate for and petitioners reported adjusted_gross_income and total_tax as shown in table table michael sandra year adjusted gross total_tax adjusted gross total_tax income income dollar_figure dollar_figure dollar_figure dollar_figure big_number big_number big_number on the and schedules c michael reported gross_receipts cost_of_goods_sold expenses and net profit for the plumbing business as shown in table table year gross_receipts cost_of_goods_sold expenses net profit dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number the tax returns for both petitioners were prepared by jeanne s duhé hereinafter sometimes referred to as duhé a c p a g the audit revenue_agent adoraliese klimkiewicz hereinafter sometimes referred to as klimkiewicz conducted the examination of petitioners’ tax returns she initially examined only michael’s tax_return but about the end of or the beginning of she expanded the examination to include michael’s tax_return klimkiewicz did not begin to audit sandra’s tax returns until sometime between march and may of klimkiewicz’ first meeting with petitioners or their representatives was on or about date when klimkiewicz met with sandra in duhé’s office at klimkiewicz’ request sandra brought to the meeting both business and personal records the major records being the following all the invoices from the plumbing business that were reported on michael’s tax_return adding-machine tapes categorized by month forms the plumbing business and personal bank account statements some credit card statements and some automobile insurance documents at that meeting in response to klimkiewicz’ question about petitioners’ cash on hand at the beginning of sandra said that they would have had cash on hand from the sale of the newman property and that they probably had spent all the newman property proceeds by the end of on date klimkiewicz met with both petitioners and their then representative sean dawson at dawson’s office both petitioners told klimkiewicz that there was a box in which the proceeds from the newman property and other cash savings were kept and that only michael had access to this box michael told klimkiewicz that he alone had a key to the box and that he alone knew the amount of cash in the box he also provided to klimkiewicz a typed statement he had prepared indicating that as of date he had accumulated a cash hoard of roughly dollar_figure in the box when klimkiewicz asked petitioners at this meeting how much cash remained in the box at that time michael told her that while he did not know the exact amount of cash remaining in the box she could determine the amount by subtracting out--presumably from the roughly dollar_figure cash hoard that he said at this meeting had been in the box at the beginning of 1994--the amount that she was proposing as an understatement the resulting amount would be the amount of cash remaining in the box as of that date at trial michael testified that there was roughly dollar_figure to dollar_figure in the box at the beginning of and that he ran out of money in the box a year after he bought the metairie court property also at the date meeting michael provided to klimkiewicz a written_statement in which he indicated that he did not use any of his cash savings from the time he wa sec_12 until the beginning of by date klimkiewicz was no longer on the case having been succeeded by mia sylve h bank_deposits petitioners maintained four bank accounts in two separate institutions both petitioners were signatories on each of these accounts neither petitioner maintained a separate_account ie an account as to which that petitioner but not the other petitioner was a signatory during the years in issue table shows petitioners’ aggregate deposits into each account by account number in each year in issue account total deposits table dollar_figure big_number big_number big_number big_number dollar_figure big_number n a big_number big_number this account was closed in date of the total deposits in these listed accounts dollar_figure dollar_figure and dollar_figure respectively were in cash the bank accounts listed in table are hereinafter sometimes referred to collectively as the listed accounts all four of the listed accounts were checking accounts the first and third of the listed accounts were in the jefferson guaranty bank the second and fourth were in the premier bank the first and second of the listed accounts were business accounts entitled michael downing plumbing co the third and fourth were personal accounts table sets forth the aggregate of the balances in the listed accounts at the specified dates table dates aggregate amounts date date date dollar_figure big_number big_number i bank_deposits method omitted income tables for and for set forth our findings as to the bank_deposits method for determining unreported income the column headed respondent takes into account respondent’s concessions by stipulation or otherwise including those made in the course of proceedings occurring after the completion of the briefing process the columns headed court-- fraud and court--nonfraud represent respectively our findings based on the clear-and-convincing-evidence burden of although both sides refer to respondent’s analysis as the bank_deposits method it appears that the better term is the bank_deposits and cash_expenditures_method see generally 801_f2d_1020 8th cir for convenience we follow the parties’ terminology and refer to it as the bank_deposits method in the notices of deficiency respondent determined that unreported schedule c gross_receipts were dollar_figure for and dollar_figure for as tables and show respondent’s position now is that unreported schedule c gross_receipts were dollar_figure for and dollar_figure for proof and our findings based on the preponderance_of_the_evidence table item respondent court--fraud court--nonfraud total listed accounts deposits nontaxable transfers gifts expense checks from lcr rebates business expenditures--cash personal living expenditures--cash opening listed accounts balances closing listed accounts balances dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number nontaxable cash big_number big_number big_number net wages--sandra big_number big_number big_number correct sched c gross_receipts reported sched c gross_receipts unreported sched c gross_receipts big_number big_number big_number big_number big_number big_number big_number big_number big_number table item respondent court--fraud court--nonfraud total listed accounts deposits dollar_figure dollar_figure dollar_figure nontaxable transfers big_number big_number big_number returned checks nsf big_number big_number big_number gifts expense checks from lcr rebates business expenditures--cash personal living expenditures--cash opening listed accounts balances closing listed accounts balances big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number nontaxable cash big_number big_number big_number net wages--sandra big_number big_number big_number corrected sched c gross_receipts reported sched c gross_receipts unreported sched c gross_receipts big_number big_number big_number big_number big_number big_number big_number big_number big_number the parties’ disputes about other schedule c items and about schedule a items all have been resolved by stipulations concessions and deemed concessions these resolutions are to be given effect in the computations under rule respondent has shown by clear_and_convincing evidence as to each year in issue that michael understated his plumbing business schedule c gross_receipts this understatement resulted in an underpayment_of_tax and some part of this underpayment_of_tax was due to michael’s fraud opinion i summary conclusions because of its impact on the rest of the case we first deal with the parties’ dispute as to whether each petitioner was required to report on that petitioner’s separate federal_income_tax return in accordance with the splits ordinarily required by louisiana’s community_property regime we agree with petitioners that they were not so required respondent conceded that if we so held then sandra had no deficiencies and no additions to tax that concession will be given effect in our decisiondollar_figure we then consider the fraud issue we agree with respondent that respondent has shown by clear_and_convincing evidence that michael has an underpayment_of_tax for each year and that part of each year’s underpayment is due to michael’s fraud our redeterminations as to amounts agree largely but not entirely with respondent’s determinations as modified by the parties’ stipulations and respondent’s concessions sandra nevertheless remains a party in the instant case 87_tc_804 ii the marriage contract respondent contends that during the years in issue the marriage contract was not effective toward third persons because petitioners failed to properly record it respondent also contends that even if the marriage contract was properly recorded it was nevertheless not effective because petitioners did not conduct their financial affairs in accordance with the contract’s terms petitioners maintain11 that the marriage contract was properly recorded at all relevant times and they complied with the terms of their marriage contract we agree with petitioners that the marriage contract was properly recorded at all relevant times and that it was effective during the years in issuedollar_figure petitioners also maintain that respondent is not a third person protected by the filing_requirements of la civ code ann art west because we conclude that petitioners’ marriage contract was properly recorded at all relevant times we need not address this contention it was apparent before the trial that petitioners’ contentions on this issue if successful would amount to a victory for sandra but would expose michael to the potential of an increased deficiency this conflict between the individual interests of sandra and michael was noted before the trial the court discussed this matter with counsel for both sides and both petitioners ensemble on the basis of the discussion in chambers and the statements on the record the court is satisfied a that petitioners’ counsel had previously explained the conflict to both petitioners and it was again explained in chambers b that both petitioners previously understood the matter and that both petitioners understood the matter continued both questions before us appear to be matters of first impression and both sides maintain that our determination as to the role of the marriage contract depends on louisiana law in the absence of any louisiana court opinion resolving these matters we make our own analysis of what louisiana law provides see 387_us_456 we consider first whether a marriage contract which was properly filed for registry in the parish in which petitioners were domiciled at the time of this filing must also be filed for registry in a different parish for the marriage contract to be effective toward third persons as to movables if petitioners have in the meanwhile become domiciled14 in that different parish continued immediately before and during the trial and c that both petitioners intended that their counsel continue to represent both of them simultaneously in the instant case and continue to present in the instant case contentions which exposed michael to the potential of increased liabilities see rule g both sides treat the matter before us as being controlled entirely by the rules as to movables under the circumstances we limit our determinations to the dispute that the parties present the louisiana statutory term is domiciled from time to time we refer to residing or to moving we intend thereby to deal only with residence that constitutes domicile and with moving that constitutes changes of domicile within the meaning of that term in art unless indicated otherwise all article references are to the articles of the louisiana civil code annotated west a general rules statutes louisiana law provides that a matrimonial regime may be legal contractual or partly legal and partly contractual art under louisiana law the legal regime of community of acquets and gains applies to spouses domiciled in this state art and each spouse owns a present undivided one-half interest in the community_property art as a result a louisiana married_person under the legal regime is taxable under federal_law on one-half the earnings_of his or her spouse 403_us_190 see case of hamner so 2d la app 1st cir revd on a different issue so 2d la the legal regime is commonly referred to as community_property the contractual regime alternative referred to in article is authorized in article as follows a matrimonial agreement is a contract establishing a regime of separation of property or modifying or terminating the legal regime spouses are free to establish by matrimonial agreement a regime of separation of property or modify the legal regime as provided by law the provisions of the legal regime that have not been excluded or modified by agreement retain their force and effect under article art provides the following definition a matrimonial regime is a system of principles and rules governing the ownership and management of the property of married persons as between themselves and toward third persons a matrimonial agreement may be executed by the spouses before or during marriage it shall be made by authentic act or by an act under private signature duly acknowledged by the spouses under article the spouses may without court approval voluntarily partition the community_property in whole or in part in such a case the things that each spouse acquires are separate_property the partition is effective toward third persons when filed for registry in the manner provided by article article entitled effect toward third persons provides in entirety as follows a matrimonial agreement or a judgment establishing a regime of separation of property is effective toward third persons as to immovable_property when filed for registry in the conveyance records of the parish in which the property is situated and as to movables when filed for registry in the parish or parishes in which the spouses are domiciled b effect of the marriage contract the parties initially dispute whether the marriage contract which concededly was filed for registry in st tammany parish on date also had to be filed for registry in jefferson parish at some point before the years in both sides use the term marriage contract rather than the statutory term matrimonial agreement for convenience we will follow the parties’ terminology issue in order to be effective toward third persons as to movables during the years in issuedollar_figure the parties agree that this is a matter of first impression under louisiana law and present this matter to us for decision in the instant case both sides direct our attention to spaht hargrave louisiana civil law treatise matrimonial regimes west 2d ed hereinafter sometimes referred to as spaht hargravedollar_figure both sides agree that the marriage contract was filed for registry in jefferson parish on date but this filing is not effective toward third persons for the years in issue the instant case does not present any question or contention as to whether-- the marriage contract resulted in a matrimonial regime that was partly legal and partly contractual art the marriage contract involved matters prohibited by public policy art the marriage contract violated any of the limits of contractual freedom set forth in art or established under any other louisiana law the marriage contract violated any of the requirements as to form set forth in art or established under any other louisiana law or sandra’s efforts on behalf of the plumbing business result in a recognition of some amount of income to sandra because of the operation of art petitioners’ citations are to the edition the texts and section numbers of the matters petitioners referred to appear to be unchanged in the edition but the page numbers are different article on its face requires that the filing be in the parish of the property’s situs as to immovables and in the parish or parishes of the spouses’ domicile as to movables the filing in st tammany parish complied with the requirements as to movables in although louisiana law permits a filing of a marriage contract that applies to some movables but not to others the marriage contract involved in the instant case applied by its terms to all future acquired movables and to the fruits of all their separate properties thus respondent has not suggested that any later filings would have been required under article merely because of the passage of time or because the movables relevant to and did not exist at the time of the st tammany parish filing see eg article relating to fruits of movables the statute does not provide in terms that a change in domicile requires a change in filing situs as to movables where there already has been a properly sited filing article does refer to the parish or parishes in which the spouses are domiciled emphasis added however comment b to article suggests that the words or parishes merely reflects a recognition that spouses might be domiciled in separate parishes as a result of the repeal of louisiana law which had provided that a married woman has no other domicile than that of her husband spaht hargrave sec n and associated text we have not been directed to and our research has not disclosed anything in the legislative_history of the enactment of article that suggests that the words or parishes were intended to require new filings in the circumstances of the instant casedollar_figure respondent raises the concern that a ruling in favor of petitioners-- would mean that third parties would have to search the conveyance records of each of the parishes in the state of louisiana in order to assure themselves that the parties had not filed a matrimonial agreement that would affect the third parties’ right as to petitioners’ movables respondent submits that this result would be completely contradictory to the purpose of la civ code art west which provides in a clear and straightforward spaht and hargrave note as follows spaht hargrave sec indeed when the legislation was drafted central statewide registry of matrimonial agreements was part of the proposal rendering unnecessary a continuing registration as spouses moved about the state that proposal was defeated howeverdollar_figure the result is that in a mobile society third persons are not well protected with respect to matrimonial agreements that were contracted when the spouses were domiciled elsewhere in a crucial situation a search of the records in parishes would be required to ascertain with certainty that no such agreement was recorded in the state k spaht and c samuel equal management revisited legislative modifications of the matrimonial regimes law la l rev la h b no 5th reg sess fashion that with respect to movables to be effective as to third parties the agreement must be filed in the parish or parishes where the spouses are domiciled the most sensible reading of this article is that third parties are not required to research the records of all parishes but rather are entitled to rely on what is or is not filed for registry in the records of the parish where the spouses are domiciled however respondent overlooks the burdens that respondent’s rule might impose on spouses who move would respondent’s rule require that a refiling be accomplished before or on the date of domicile change or would there be a standard grace period after the domicile change who is better able to negotiate their respective burdens third parties who look to assets to satisfy existing debts or to assure payments of prospective advances of funds or credit or spouses who may not be represented by counsel and may be surprised to learn that a filing they had thought was good-until-revoked-or-modified had in fact been rendered ineffective in this regard the same increase in mobility that creates the danger of imposing more burdens on third persons also creates the danger of removing more protections from unsophisticated spouses we do not mean to make light of the concerns respondent describes we suggest that the weighing of these and contrary concerns are properly within the province of louisiana’s lawmaking structure we decline to go further than what the statute in terms prescribes we conclude that under art the marriage contract was properly recorded and that it was effective during the years in issue we must note however that the foregoing discussion in response to the parties’ focus deals with the rights of third persons as against the spouses’ movables however the question that we must ultimately rule on is not a matter of what assets respondent may look to in order to satisfy the liabilities of either or both petitioners but rather whether each petitioner has a present undivided_interest in the earnings_of the other spouse for it is that present undivided_interest that is the foundation of the community_property federal_income_tax rules 403_us_190 in that light we conclude that spaht’s and hargrave’s analysis which closes the cited section in their treatise spaht hargrave sec is particularly illuminating under civil code article matrimonial agreements do not have to be recorded to be valid it may well suit a couple to deal with third persons as though they were under the legal community regime especially as to contracting debts and alienating assets but to have a different regime as between themselves some persons may simply want to keep such matters private whatever the reason there is nothing to require them to make such agreements public so long as third persons are not injured in the processdollar_figure their heirs of course would not qualify as protected third persons because they would be successorsdollar_figure it is required however that the agreement be in writing and that it be either made by authentic act or by an act under private signature duly acknowledged by the spouses ___________________ comment marital property agreements--being creative with the new legislation la l rev la civ code arts et seq la r s la civ code art the existence of the marriage contract has been conclusively established the text of the marriage contract has been conclusively established on the basis of the record in the instant case we conclude that respondent has not been injured c failure to conform with the contract’s terms respondent contends in the alternative that petitioners’ failure to conform to the terms of their marriage contract rendered the contract ineffective respondent has not directed our attention to any louisiana law or to any other authority for that matter that specifically addresses this issue in fact respondent acknowledges on brief that respondent was unable to find any case that directly addresses this issue in our own search we likewise have been unable to find any authority that supports respondent’s contention nevertheless we need not decide whether in the abstract spouses’ failure to conform to the terms of their marriage contract can render it ineffective because even if respondent is correct we conclude that petitioners substantially conformed to the terms of their marriage contract in evaluating the evidence in the instant case we are mindful that ‘agreements legally entered into have the effect of laws on those who form them r c c art arkansas fuel oil corporation v puccio so 2d la app ’ morgavi v mumme so 2d la quoting succession of caine v tanho land and cattle co so 2d la app c ourts are bound to give effect to all contracts according to the true intent of the parties when the language is clear and leads to no absurd consequences stack v de soto properties inc so 2d la respondent asserts on opening brief that a court may consider evidence on the extent to which the parties to the matrimonial agreement are fulfilling the stipulations of the contract ie whether or not and to what extent the two actually share income notwithstanding the existence of the matrimonial agreement knoepfler v knoepfler so 2d la app respondent argues that the evidence in the instant case clearly shows that petitioners did not comply with the terms of their marriage contract because petitioners commingled all their income into four joint checking accounts petitioners had signature_authority on all bank accounts petitioners transferred funds between the business and personal checking accounts and petitioners paid business_expenses from personal accounts and vice versa petitioners reply that they merely pooled their resources to provide for the expenses of the marriage they point to the fact that they filed separate tax returns for each year in issue and that they bought all their large property and other assets separately as evidence that they did indeed conform to the terms of their marriage contract we agree with petitioners’ conclusions for the following reasons firstly because respondent relies on knoepfler v knoepfler supra and that case has some surface similarities to the instant case it may be appropriate to examine more deeply the setting of knoepfler and the expressed rationale of the louisiana courts knoepfler v knoepfler supra was a dispute about the level of required child_support_obligations the parents having divorced each other and each having married a new spouse the father had been ordered to pay child_support the father moved to decrease the amount of child_support the mother responded with a petition to increase the amount of child_support at the trial_court hearing the father introduced into evidence the matrimonial agreement in which mr knoepfler and his second spouse established a separation of property regime the trial_court disallowed testimony as to the intent behind the agreement the court stated that he was not considering the second wife’s income so 2d pincite the trial_court decreased the amount of child_support the mother appealed assigning as error the trial court’s refusal to consider the income of the father’s second spouse and the trial court’s conclusion that the evidence showed a change_in_circumstances which could justify the reduction so 2d pincite3 the appellate court reversed the reduction of child_support agreeing with the mother on the second assignment of error relating to changes in circumstances so 2d pincite however the appellate court upheld the trial court’s refusal to take into account the income of the father’s second spouse based on the evidence in the record the appellate court stated as follows so 2d pincite we note however that our decision in alt v alt so 2d la app 4th cir does not in any way preclude the taking of evidence on the extent to which the parties to the matrimonial agreement are fulfilling the stipulations of the contract ie whether or not and to what extent the two actually share income notwithstanding the existence of the matrimonial agreement to rule otherwise would enable a parent to circumvent his child_support obligation by executing but never giving effect to a marriage contract establishing a separation of property regime the appellate court explained the suggestion permitting inquiry into the extent to which the parties to the matrimonial agreement are fulfilling the stipulations of the contract as being necessary in order to stop a parent from circumventing his child_support obligation the appellate court did not take the position that such inquiries are proper to test all marriage contracts in the instant case there is not any contention that the marriage contract circumvents any obligation that either petitioner may have toward respondent or any other person that respondent seeks to protect the appellate court in knoepfler did not describe the inquiry in terms of the validity of the marriage contract ie whether the spouse owns a present undivided_interest in the earnings_of the other spouse but only whether the other spouse’s income ought to be taken into account in applying louisiana’s child_support laws so 2d in the instant case the only inquiry is as to the validity of the marriage contract in order to decide whether sandra and michael each had a present undivided_interest in the earnings_of the other secondly all of the opinions cited by respondent discuss commingling in terms of mixing separate_property with community_property not separate_property with separate_property see eg thibodaux v thibodaux so 2d la app 1st cir even so those cases hold that depositing separate funds and community funds into the same bank account does not necessarily extinguish the separate character of either the husband’s or the wife’s separate funds only indiscriminate commingling so that one cannot identify or differentiate among the funds results in the account being deemed community mcmorris v mcmorris so 2d la app 1st cir thus even when separate funds are mixed with community funds it is only when those funds are indiscriminately commingled such that they cannot be traced to their separate source that they are deemed community curtis v curtis so 2d la such treatment is consistent with the presumption of community_property in louisiana see la civ code ann art west applying those holdings to the instant case respondent argues that it is impossible to trace the funds petitioners used from their joint accounts back to the separate funds of either spouse because petitioners did not make any effort to track payments on allegedly separate assets in order to establish what was paid for with separate funds it is unclear from the record however whether petitioners were asked or even attempted to track the payments moreover we do not think such tracking is required unlike in the cases cited above the legal presumption that the spouses are living in community does not apply in the instant case because as we concluded supra petitioners’ marriage contract was properly recorded during the years in issue see spaht hargrave sec_4 further we are not deciding the character of the funds petitioners deposited into their joint accounts but rather we are deciding whether petitioners’ asserted indiscriminate commingling of separate funds with other separate funds invalidates petitioners’ marriage contract we do not think it does thirdly the documents relating to the newman property and the metairie court property list only michael as the owner of those properties while it is true as respondent argues that the fact that property is in the name of only one spouse and there is a statement of paraphernality in the act of sale does not change the presumption that all property acquired during marriage is presumed to belong to the community cheramie v st pierre so 2d la app 1st cir it is also true that if the spouses are living under a separate_property regime the presumption does not apply spaht hargrave sec_4 because we found supra that petitioners properly recorded their marriage contract there is no applicable presumption that petitioners’ property is community_property thus the facts that only michael’s name was on the documents relating to petitioners’ residences and the documents of sale recite that michael was separate in property from his wife support petitioners’ contention that they were complying with the terms of their marriage contract fourthly we note that petitioners filed separate tax returns for the years in issue using the filing_status married filing separate respondent argues that the mere fact that petitioners filed separate tax returns does not prove that petitioners were separate in property under louisiana law we agree this fact however is evidence that petitioners viewed and treated their respective earnings as their separate_property in concluding that louisiana property law determines ownership for purposes of federal income_taxation in the instant case we are aware of our prior decisions holding that in some circumstances we would ignore state law as to property ownership for example we have held that a_trust valid under state law may be treated as a nullity for federal_income_tax purposes if it lacks economic reality see 73_tc_1235 45_tc_360 affd 381_f2d_22 5th cir see also 428_f2d_251 5th cir in those cases we looked at whether there were any economic changes to the donors other than changes to their federal_income_tax liability in furman we indicated that it was the extreme case where we would disregard for federal_income_tax purposes the existence of a_trust valid under state law furman v commissioner t c pincite in the instant case petitioners entered into the marriage contract among other reasons to prevent rucker from aggregating petitioners’ incomes in an attempt to reduce or eliminate his child_support_obligations comparisons of sandra’s and michael’s federal_income_tax returns plainly show that they are not under a community_property marriage regime this is not one of those extreme cases that calls for us to disregard a contract valid under state law for federal_income_tax purposes we conclude that petitioners’ marriage contract was effective during the years in issue we hold for petitioners on this issue iii fraud respondent contends that michael underpaid his taxes for each year in issue and that all or part of his underpayments are due to fraud and thus michael is liable for the fraud penalties under sec_6663 petitioners acknowledge that michael may have underpaid his taxes for each year in issue but maintain that any underpayment was not due to fraud because michael lacked the requisite fraudulent intent we agree with respondent when respondent seeks to impose the penalty under sec_6663 respondent has the burden_of_proof to carry thi sec_21 sec_6663 imposition of fraud_penalty a imposition of penalty -- if any part of any underpayment_of_tax required to be shown on a return is due to fraud there shall be added to the tax an amount equal to percent of the portion of the underpayment which is attributable to fraud b determination of portion attributable to fraud -- if the secretary establishes that any portion of an underpayment is attributable to fraud the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud burden for a year respondent must prove two elements as follows that michael has an underpayment_of_tax for that year and that some part of the underpayment is due to fraud see sec_7454 rule b see eg 264_f2d_930 5th cir 56_tc_213 53_tc_96 dollar_figure each of the elements must be proven by clear_and_convincing evidence see 96_tc_858 affd 959_f2d_16 2d cir 94_tc_654 for this purpose respondent need not prove the precise amount of the underpayment resulting from fraud but only that there is some underpayment and that some part of it is attributable to fraud see eg 466_f2d_11 5th cir 465_f2d_299 7th cir affg tcmemo_1970_274 in carrying this burden respondent may not rely on petitioners’ failure to sec_7454 burden_of_proof in fraud foundation_manager and transferee cases a fraud -- in any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax the burden_of_proof in respect of such issue shall be upon the secretary the elements of fraud under sec_6663 are essentially the same as those we considered under sec_6653 of prior_law see also 114_tc_533 102_tc_632 96_tc_184 n meet their burden of proving error in respondent’s determinations as to the deficiencies see eg 92_tc_661 78_tc_304 and cases cited therein where fraud is determined for each of several years respondent’s burden applies separately for each of the years see 25_tc_940 affd sub nom 250_f2d_798 2d cir 29_bta_247 a mere understatement of income does not establish fraud see 451_f2d_197 3d cir affg t c memos otsuki v commissioner t c pincite in order to establish fraud as to michael respondent must show that michael intended to evade taxes which michael knew or believed were owed by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes see eg 182_f3d_275 4th cir affg tcmemo_1996_452 252_f2d_56 9th cir 73_tc_370 61_tc_249 affd 519_f2d_1121 5th cir this intent may be inferred from circumstantial evidence see powell v granquist f 2d pincite 67_tc_181 affd without published opinion 578_f2d_1383 8th cir including the implausibility of petitioners’ explanations see 796_f2d_303 9th cir and cases cited therein affg tcmemo_1984_601 204_f2d_205 5th cir affg a memorandum opinion of this court dated date a underpayment respondent used the bank_deposits method to determine michael’s income for the years in issue supra note it is well settled that bank_deposits are evidence of income where the deposits were made by the party charged with the income or to an account controlled by the party charged with the income 87_tc_74 the premise underlying the bank_deposits method of income reconstruction is that absent some explanation a taxpayer’s bank_deposits represent income subject_to income_tax dileo v commissioner t c pincite the use of the bank_deposits method of income reconstruction has long been sanctioned by the courts in using this method respondent must take into account any nontaxable deposits or deductible expenses of which respondent has knowledge id we have held that where respondent has the burden_of_proof in a bank_deposits case eg where respondent has determined that a taxpayer has committed tax_fraud then-- respondent can satisfy the burden of proving the first prong of the fraud test ie an underpayment when the allegations of fraud are intertwined with unreported and indirectly reconstructed income in one of two ways parks v commissioner t c pincite respondent may prove an underpayment by proving a likely source of the unreported income 348_us_121 parks v commissioner supra pincite nicholas v commissioner t c alternatively where the taxpayer alleges a nontaxable source respondent may satisfy the burden by disproving the nontaxable source so alleged united_states v massei 335_us_595 parks v commissioner supra pincite dileo v commissioner t c pincite in the notices of deficiency respondent determined that in essence every element of each year’s underpayment was due to fraud on brief respondent’s fraud contentions focus entirely on the unreported schedule c receipts we consider the elements of the bank deposit analysis supra tables and in order to determine whether as to each year in issue respondent has shown by clear_and_convincing evidence that there was unreported schedule c income and that this produced an underpayment_of_tax total listed accounts deposits the parties stipulated that the total bank_deposits were dollar_figure in and dollar_figure in nontaxable transfers the parties stipulated that the nontaxable transfers were dollar_figure in and not less than dollar_figure in dollar_figure of this total dollar_figure was stipulated before trial continued petitioners’ only contentions as to the nontaxable transfers were among the items respondent conceded in the postbrief actions referred to supra note the parties’ postbriefs concessions are taken into account in tables and supra returned checks nsf the parties stipulated that returned checks insufficient funds were not less than dollar_figure in dollar_figure petitioners’ only contention as to the returned checks insufficient funds was among the items respondent conceded in the postbriefs actions referred to supra note gifts the parties stipulated petitioners received as gifts from relatives checks and cash that were deposited totaling no less than dollar_figure in and no less than dollar_figure in dollar_figure on opening brief petitioners contend that sandra calculated that petitioners’ bank_deposits included cash gifts from relatives in the amounts of about dollar_figure in and about dollar_figure in on answering brief petitioners contend continued and dollar_figure was agreed to in proceedings under a motion to reopen the record after the answering briefs were filed of this total dollar_figure was stipulated before trial and dollar_figure was agreed to in the postbriefs actions referred to supra note of this total dollar_figure was stipulated before the trial and dollar_figure was agreed to in the postbriefs actions referred to supra note that the correct total_amounts of cash and checks are dollar_figure in an increase of dollar_figure from the stipulation and dollar_figure in an increase of dollar_figure from the stipulation on answering brief petitioners contend that dollar_figure cash was deposited into the premier bank personal account although petitioners have not directed our attention to evidence of record our examination shows that this deposit is listed on exhibit 40-j p on answering brief petitioners further state that this dollar_figure was for mrs downing’s birthday petitioners have not directed our attention to evidence of record on this latter point which we gather to be an implicit assertion that the dollar_figure was a gift and we have not found any such evidence respondent has the burden of proving by clear_and_convincing evidence that there is an underpayment but respondent cannot properly be charged with negativing theoretical possibilities first asserted on answering brief without foundation in the evidentiary record we are satisfied that the stipulated gift deposits are all that should be allowed except for the dollar_figure discussed in note supra for the following reasons a on neither opening nor answering brief have petitioners directed our attention to any evidence in the record that supports the numbers for which they contend or any other_amounts that exceed the stipulated minima b petitioners do not explain the differences between their contended-for amounts in their opening and answering briefs c sandra testified that her mother typically bought savings bonds for rachel and sean and that her mother kept the bonds until well after the years in issue clearly those gifts whatever their amounts would not have been deposited in any of the listed accounts in or or otherwise spent by petitioners in those years and so no adjustment should be made on account of those gifts or gifts d on answering brief petitioners explain their lack of evidence on this issue by stating that petitioners were unsuccessful in persuading any of the relatives to attend the trial as a witness despite numerous efforts however although petitioners’ witness list includes four close relatives none of these relatives was to testify about gifts from them or from any other relatives they were aware of in or under these circumstances we conclude that the reason petitioners did not have evidence of additional gifts that were deposited is that there were not any such additional gifts we hold that respondent has established by clear_and_convincing evidence the correctness of the table and adjustments on account of gifts expense checks from lcr rebates petitioners do not dispute the adjustments on account of expense reimbursement checks from lcr sandra’s employer and rebate checks as shown in tables and supra business expenditures--cash respondent contends that to the extent petitioners made business expenditures in cash that did not go through bank accounts petitioners had sources of income in addition to the amounts they deposited into the bank accounts petitioners contend a they had nontaxable sources of cash chiefly family gifts discussed supra and the cash hoard discussed infra and b their business cash expenditures amounted to less than the amounts for which respondent contends a --respondent contends petitioners made dollar_figure business expenditures in cash in petitioners contend on answering brief the correct amount is only dollar_figure both sides calculate the cash expenditures by starting with total expenditures reported of dollar_figure both sides subtract from this amount dollar_figure telephone expenses and dollar_figure insurance expenses respondent further subtracts dollar_figure business checks and dollar_figure credit cards totaling dollar_figure petitioners contend that dollar_figure business expenditures were made by check and credit cards thus the difference between the parties on this matter is accounted for entirely by the differences in their contentions as to business expenditures made by check and business expenditures made by credit card respondent’s numbers on these two items are the numbers that the parties stipulated petitioners’ numbers are contrary to the stipulations the stipulations are binding unless the parties agree otherwise or the court relieves a party from the binding effect where justice requires rule e petitioners have not asked to be relieved from these stipulation and nothing has been brought to the court’s attention that leads us to conclude that justice so requires 118_tc_226 we hold that respondent has established by clear_and_convincing evidence the correctness of the adjustment supra table on account of business expenditures made by cash b --respondent contends petitioners made dollar_figure business expenditures in cash in dollar_figure petitioners contend on answering brief the correct amount is zero both sides calculate the cash expenditures by starting with total expenditures reported of dollar_figure both sides subtract from this amount dollar_figure telephone expenses and dollar_figure insurance expenses respondent’s contention on brief was dollar_figure however in the postbriefs proceedings supra note respondent conceded that three checks for ford f250 truck payments total dollar_figure and one check for truck insurance dollar_figure should be added to the stipulated business expenditures made by check this concession reduces pro tanto respondent’s contention as to cash business expenditures respondent further subtracts dollar_figure business checks--dollar_figure plus dollar_figure plus dollar_figure and dollar_figure credit cards totaling dollar_figure petitioners contend that dollar_figure business expenditures was made by checks and credit cards thus the difference between the parties on this matter is accounted for entirely by the differences in their contentions as to business expenditures made by check and business expenditures made by credit card respondent’s numbers on these two items are the numbers that the parties stipulated adjusted to include respondent’s postbriefs concessions supra note as we noted in discussing the cash business expenditures the parties are bound by their stipulations and we hold that respondent has established by clear_and_convincing evidence the correctness of the adjustment supra table on account of business expenditures made by cash personal living expenditures--cash respondent contends that to the extent petitioners made personal living expenditures in cash that did not go through the bank accounts petitioners had sources of income in addition to the amounts they deposited into the bank accounts petitioners contend respondent included certain cash expenditures in this category that are not personal living expenditures and respondent included certain expenditures in this category that are not cash expenditures a --respondent contends that petitioners made dollar_figure personal living expenditures in cash in petitioners contend the correct amount is only dollar_figure respondent treats as a personal cash expenditure the dollar_figure cash downpayment petitioners made for the ford f250 truck we agree with petitioners that the dollar_figure is a business cash expenditure and that it should not be included in the personal_expenditure category the dollar_figure is a part of the dollar_figure business cash expenditures that we have upheld supra the remaining dollar_figure consists of groceries expenditures made by cash petitioners seem to agree that dollar_figure is the correct starting number but propose that that be reduced by percent on the ground that that percentage be deemed to be paid_by credit card based on mrs downing’s testimony r that she typically deposited the cash savings into the bank accounts and then paid the personal bills from there sandra’s testimony reflected on the cited trial transcript page explains as follows a sandra the cash that was deposited into the joint personal checking account that belonged to michael and i sic came from savings that michael had accumulated over the years and gifts from relatives on his side of the family and mine q ponseti why was this cash deposited into the joint personal account a the money was deposited into the checking account to supplement income in order to pay bills q why were these cash deposits not added into the gross_income for and a because it wasn’t gross_income that was earned during those two tax years thus the cited testimony deals with amounts deposited into the bank accounts and does not tell us anything about cash expenditures that bypassed the bank accounts the parties stipulated that during petitioners spent no less than dollar_figure per week on personal grocery expenses for a total of dollar_figure respondent does not contend petitioners spent more than dollar_figure on personal grocery expenses petitioners do not contend they spent less the parties’ stipulated listing of personal living_expenses which petitioner paid_by check shows only three such payments totaling dollar_figure under the category food total personal grocery expenses of dollar_figure less dollar_figure food expenses paid_by check leaves dollar_figure grocery expenses paid_by cash in light of the irrelevance of the only evidence petitioners rely on for their objection we conclude that the foregoing constitutes clear_and_convincing evidence of the correctness of the adjustment supra table on account of personal living expenditures made by cash b --respondent contends for an adjustment of dollar_figure petitioners for an adjustment of dollar_figure both sides agree that petitioners’ dollar_figure cash house downpayment should be included in this adjustment for the same reasons we expressed as to we agree with petitioners and reject respondent’s proposal to include dollar_figure truck payments for the same reasons we express as to we agree with respondent and reject petitioners’ proposal to reduce the dollar_figure groceries to dollar_figure we conclude that the foregoing constitutes clear_and_convincing evidence of the correctness of the adjustment supra table on account of personal living expenditures by cash bank balances the parties have stipulated the opening and closing listed accounts balance totals shown in tables and nontaxable cash as noted supra items and cash expenditures ie expenditures made by cash that did not go through the bank accounts are added to bank_deposits in order to determine the amount of potentially taxable receipts that must be accounted for one way to account for cash expenditures as not having a taxable source in that taxable_year is to determine the amount of cash petitioners had available to them that came from nontaxable sources in the instant cases respondent agrees that petitioners had a substantial amount of cash available to them from nontaxable sourcesdollar_figure we consider seriatim the components of the category of cash from nontaxable sources a the newman property --michael sold the newman property on date the net_proceeds were dollar_figure respondent relying on klimkiewicz’s testimony based on her notes as to what sandra said at a meeting during the audit contends that petitioners spent dollar_figure of these net_proceeds in had dollar_figure left at the beginning of and spent all this dollar_figure in petitioners deny the correctness of klimkiewicz’s notes on this matter and suggest that at most dollar_figure was spent during for the sake of computing numbers only the petitioners will assume the amount of dollar_figure as a result petitioners contend that the correct amount for this component is dollar_figure both sides agree that by the end of petitioners spent all that remained of the newman property proceeds taking into account the conflicting testimony and the fact that this testimonial conflict is solely as to what sandra said to klimkiewicz in as to sandra’s estimate of what petitioners spent out of this source in we conclude and we respondent refers to this category of items as nontaxable undeposited cash emphasis supplied yet for respondent would allow dollar_figure to be subtracted even though respondent would have included only dollar_figure of cash expenditures thus respondent appears to have implicitly accepted petitioners’ contentions and sandra’s testimony that at least in petitioners took money from some cash storage and at least to the extent of dollar_figure dollar_figure minus dollar_figure deposited that money into the bank accounts have found--tables and that respondent has shown by clear_and_convincing evidence that not more than dollar_figure of petitioners’ expenditures came from the newman property net_proceeds and that none of petitioners’ expenditures came from this source b credit card advances --both sides agree that petitioners received two credit card cash advances totaling dollar_figure in petitioners contend on answering brief that they received two additional cash advances of dollar_figure and dollar_figure in however in the postbriefs actions referred to supra note petitioners concede that the credit card amount of dollar_figure is really just a transfer and not a cash advance and the dollar_figure amount was used to pay off a credit card debt as such it should not be counted as a credit card advance for respondent does not allow and petitioners do not contend for credit card advances thus the allowance of dollar_figure credit card advances for and nothing for is agreed to by both sides c child_support --the parties stipulated that petitioners received dollar_figure in cash child_support payments for rachel and sean in each year and supra note d refund of deposit on house --the parties stipulated that in petitioners received a refund of a dollar_figure deposit on a house e michael’s accumulated savings --originally michael told respondent’s revenue_agent that at the beginning of he had a cash hoard of dollar_figure which he had accumulated over the years at trial michael testified that he had roughly around to big_number in the cash_box at the beginning of and that he ran out of money a year after i bought the metairie court house which he bought on date respondent allowed as a starting cash hoard only the remaining net_proceeds of the sale of the newman property together with the credit card advances child_support and deposit refund and treated the entire allowed amount as having been spent in respondent has not allowed any starting cash hoard petitioners do not appear to have taken any position as to how much of their claimed cash hoard was spent in except for sandra’s testimony that she had told klimkiewicz that all the remaining net_proceeds of the sale of the newman property had been spent by the end of how much was spent in and how much was spent consistent with michael’s above-quoted testimony in early on brief petitioners appear to have abandoned michael’s dollar_figure contention and instead adopted as their position michael’s above-quoted trial testimony i for cash hoard considerations pointing toward cash hoard include the following respondent has already accepted the idea that petitioners kept a large amount of cash someplace not necessarily in a box for some period of time--viz the dollar_figure- plus remainder of the newman property proceeds which was used from time to time during respondent has already accepted the idea that petitioners on occasion deposited nontaxable cash receipts into the bank accounts as noted supra respondent agrees that for petitioners should be allowed to subtract more in nontaxable cash than petitioners’ cash expenditures ii against cash hoard considerations pointing against cash hoard include the following petitioners’ claim of cash hoard even if accepted in entirety would explain only a small fraction of the otherwise-unexplained omitted income in the context of clear_and_convincing evidence of substantial omitted income in on the record herein it is difficult to credit michael’s testimony as to any specific amount michael’s testimony as to the cash hoard especially in light of his acknowledged earlier statements seems to be tailored to his time-to-time perceptions of what suits his purposes rather than his best recollection of the actual events michael’s written_statement to klimkiewicz at the date meeting was specific in describing why he estimated he had a date cash hoard of dollar_figure at trial he on cross-examination michael testified as follows q canavello mr downing is this a typewritten statement that you provided to the revenue_agent at the july meeting in not the handwritten part just the typing part a perusing documents oh yes it is q thank you i’d like you to read this sentence right here to me please at the beginning of this -- this little paragraph here a i did not use any of my savings until that q yes thank you and on the second page would you read for me please -- would you read me the numbers -- this part of it please from here to here a approximate through estimated savings big_number approximate between and estimated annual savings big_number q yes a times five years equals big_number approximate through estimated savings while employed at millican milliken michaels big_number sale of house in profit approximately big_number total of big_number q so now these would be the items that you listed in your statement that you just identified this statement here that you brought to that meeting as being the amounts that added up to what was in the cash_box a approximately a rough estimate q thank you very much so then when you prepared that statement your estimate of what was in the cash_box as at the beginning of was dollar_figure a i was speculating -- or estimate explained the dollar_figure as a rough estimate at trial he testified that the correct date amount was roughly dollar_figure to dollar_figure he did not explain in his testimony why his rough estimates at trial differed from his rough estimate to klimkiewicz by about dollar_figure to dollar_figure nor did petitioners clarify this substantial difference on brief on numerous occasions michael borrowed--sometimes from family and sometimes from business lenders--amounts for short terms and for long terms in the case of borrowings from business lenders michael incurred substantial interest_expenses michael incurred these expenses without seeking to earn income on what he contended were large amounts in his cash hoard because he neither earned on his claimed cash hoard nor used his cash hoard to reduce borrowings when opportunities were presented it is evident that michael’s actions were not significantly affected by any evaluation of opportunity cost iii analysis in 85_tc_927 we stated that-- we cannot fail to note that the existence of a cash hoard is endlessly claimed by taxpayers to explain the existence of otherwise unexplained sources of funds it is rare indeed that a taxpayer successfully proves this contention in devenney the taxpayers’ evidence prevailed completely not only did it overcome the commissioner’s fraud contentions but it also resulted in our holding that the taxpayers had no deficiencies id pincite the record in the instant case is far different from that in devenney although we are not willing to conclude that respondent has shown by clear_and_convincing evidence that petitioners had no cash hoard other than the items respondent specifically allowed we are satisfied that any such cash hoard carryover into was not sufficient to substantially affect the amount of unreported income and there was not any cash hoard carryover into our findings in tables and supra incorporate these conclusions on the lines labeled nontaxable cash net wages--sandra the parties have agreed that sandra’s net wages ie form_w-2 wage and tax statement wages less withheld taxes are as shown supra in tables and conclusions we conclude and we have found that respondent has shown by clear_and_convincing evidence that michael understated his plumbing business schedule c gross_receipts by the amounts set forth in tables and supra in the columns headed court-- fraud --about dollar_figure for and about dollar_figure for 1995--and that these understatements of receipts resulted in understatements of income which in turn resulted in underpayments of tax for each year we hold for respondent on this issue b fraudulent intent respondent contends that the following indicia of fraud are present in the instant case petitioners failed to report substantial amounts of income petitioners failed to keep adequate books_and_records and petitioners made inconsistent and implausible explanations regarding the alleged nontaxable sources of deposits to their bank accounts during and petitioners maintain that michael had no intention to underreport income michael provided the records he had to respondent throughout the administrative process and the alleged inconsistent statements make no sense at all courts have identified numerous factors sometimes referred to as indicia of fraud or badges_of_fraud which may be persuasive circumstantial evidence of fraud see eg 99_tc_202 we focus on those indicia that appear to be most significant in the context of the record in the instant case failure to report substantial amounts of income although mere understatement of income alone is not sufficient to prove fraud the consistent and substantial_understatement of income is by itself strong evidence of fraud 89_tc_1280 70_tc_562 affd without published opinion 621_f2d_439 5th cir for michael reported dollar_figure of schedule c gross_receipts from the plumbing business respondent has shown by clear_and_convincing evidence that michael should have reported at least dollar_figure supra table we conclude that the dollar_figure difference is a substantial underreporting for michael reported dollar_figure of schedule c gross_receipts from the plumbing business respondent has shown by clear_and_convincing evidence that michael should have reported at least dollar_figure supra table we conclude that the dollar_figure difference is a substantial underreporting for the years in issue michael failed to report an aggregate of about percent of his schedule c gross_receipts from the plumbing business failure to keep adequate books_and_records taxpayers are required to maintain books_and_records sufficient to show their tax_liabilities see sec_6001 failure to do so is another indicium of fraudulent intent see bradford v commissioner f 2d pincite respondent contends that petitioners’ records for the plumbing business were incomplete and inconsistent for respondent points to the fact that the total amount of the adding machine tape--the amount michael purportedly reported on the schedule c for that year--was dollar_figure more than the amount actually reported on the schedule c respondent also points to the fact that sandra omitted from four of the invoices dollar_figure when she was calculating the monthly totals for respondent points to the fact that seven of the forms issued to the plumbing business exceeded by dollar_figure the amounts listed on their corresponding invoices thus respondent concludes petitioners obviously were not concerned with having an accurate record of the income from the plumbing business their method of record keeping or lack thereof is another badge of fraud for and petitioners reply on answering brief as follows the volume of records checks invoices bank statement sic bank deposit slips the purchase agreements the sale agreements the mortgages the amortization schedule the social_security statement the marriage agreement etc are a silent testimony as to the efforts that petitioners have made to accurately determine and substantiate the tax_return that was filed petitioners concede that michael understated gross_receipts for the plumbing business by dollar_figure in they attribute this understatement to a computational error that occurred when sandra added together the invoices petitioners argue however that because michael was a cash_basis taxpayer and because they did not receive in the dollar_figure that was listed on the invoices but not included on the adding machine tape they did not have to report that income for that year this seems to be inconsistent with petitioners’ dollar_figure concession petitioners further argue that for the discrepancies between the amounts reported on the forms and the amounts listed on the corresponding invoices were simply due to timing considerations we are somewhat puzzled by some of the assertions by both sides firstly petitioners were cash_basis taxpayers the schedules c for both years show that the plumbing business was on the cash_basis respondent’s reconstruction_of_income and michael’s self-employment_tax are cash-basis determinations accordingly michael was required to report gross_income from the plumbing business when it was received not when the work was completed sec_451 sandra testified however that she computed gross_income for the years in issue by adding together the invoices for the work michael had done each month and then adding together the monthly totals in addition the parties stipulated in relevant part as follows attached as exhibit 39-j are copies of adding machine tapes which petitioner sandra downing provided with the invoices she identified to respondent’s revenue_agent as gross_receipts reported on the schedule c for michael downing plumbing company thus it appears that sandra calculated gross_receipts from the plumbing business as if michael were an accrual basis taxpayer if this is so then the adding machine tape totals for the years in issue were not the proper amounts to report on the schedules c as gross_receipts because those totals reflect the amounts due for work done not the amounts received for the work as such sandra’s computational error in adding together the invoices for is irrelevant to the determination of the amount that should have been reported on the schedule c nevertheless this error in bookkeeping suggests that petitioners’ records for the years in issue are insufficient to show michael’s tax_liabilities secondly petitioners for the first time on answering brief appear to argue that the adding machine tape totals represent the amounts received by the plumbing business not the total amount of the invoices in response to respondent’s proposed finding of fact that sandra understated by a total of dollar_figure the amounts of four invoices shown on the adding machine tapes petitioners claim that they did not have to report that dollar_figure because they did not receive it if petitioners did not receive the dollar_figure in then they are correct that michael was not required to report that amount on the schedule c however as stated above sandra testified that she calculated gross_receipts by adding together the invoices not the receipts and the parties stipulated that sandra provided to the revenue_agent copies of the adding machine tapes along with the invoices used to calculate gross_receipts for the plumbing business we do not know whether petitioners did not realize until answering brief that they calculated gross_receipts incorrectly or whether they incorrectly described their method of calculation lastly because petitioners were cash_basis taxpayers it would not be surprising to find that the amount reported on a form_1099 is different from the total amount of the corresponding invoices the form_1099 amount may be less in situations where the customer paid only part or some of the invoices the form_1099 amount may be greater than the total amount of the corresponding invoices in situations where the customer paid for services rendered in prior years thus it is possible as petitioners contend that the discrepancies are due to timing considerations petitioners however have not provided us with any records from which we can ascertain the actual relationships between the form_1099 amounts and michael’s plumbing business receipts for the years in issue accordingly based on the record as a whole we conclude that michael’s books_and_records are sufficiently confused so that they do not reliably show the gross_receipts from the plumbing business and consequently michael’s tax_liabilities for the years in issue inconsistent and implausible explanations petitioners attribute a significant portion of their bank_deposits for the years in issue to michael’s cash hoard respondent maintains that petitioners’ explanations and behavior do not support petitioners’ contention petitioners contend that the inconsistent statements were due to the selective hearing of klimkiewicz petitioners sum up their contentions as follows the alleged inconsistent statements are discussed throughout this reply brief and there is no need to repeat these same arguments it should also be mentioned that all of these alleged inconsistent statements are also arguably the self-serving testimony of the revenue_agent we agree with respondent firstly michael’s testimony at trial is inconsistent with the written_statement michael provided to klimkiewicz regarding the amount of cash remaining in the box at the beginning of at trial michael testified that there was roughly dollar_figure to dollar_figure cash in the box at the beginning of during the date meeting however michael provided to klimkiewicz a prepared detailed statement in which he declared that he had a total of dollar_figure in cash at the beginning of at trial michael acknowledged that he prepared this written_statement and that he presented it to klimkiewicz at their date meeting when questioned at trial about this substantial discrepancy michael replied that when he prepared the written_statement in he was speculating this conflict is not attributable to any asserted selective hearing by klimkiewicz we also note that michael testified that he ran out of cash a year after he bought the metairie court property michael bought the metairie court property in march of at the date meeting when klimkiewicz asked michael how much remained in the box at the time of the meeting michael told her to subtract out from the alleged dollar_figure that existed at the beginning of the amount she was proposing as a deficiency and that would be the amount remaining in the box at that time on brief petitioners state that they do not dispute that at that meeting michael did make this statement petitioners do not contend that klimkiewicz’s selective hearing was incorrect as to this point this statement to klimkiewicz was made more than years after michael bought the metairie court property and more than a year after all of the cash from the box had been spent according to michael’s trial testimony as we indicated supra part a e ii of this opinion michael’s trial testimony and his oral and written statements to respondent’s agent during the audit seem to be tailored to his shifting perceptions of what suits his purposes rather than to his best recollections of actual events secondly it has long been established that a taxpayer’s recurring need to borrow money is inconsistent with the claim to a secret hoard 204_f2d_205 276_f2d_122 5th cir affg tcmemo_1958_37 respondent points to petitioners’ extensive borrowing--a total of dollar_figure respondent says our calculations are slightly less with interest rates ranging from percent to dollar_figure percent--as being inconsistent with having a cash hoard when asked why he financed the cars michael replied the reason why i finance everything is because listening to mike sanderson that’s so successful was -- his big thing was use other people’s money and put down as little as possible or nothing and that’s what i was doing on answering brief petitioners assert that this strategy is not an uncommon one as many ‘financial gurus’ explain at seminars that this is one way to make money while we do not doubt that this is one way to make money we strongly doubt michael intended to do so by paying high interest rates while earning no interest_income on the alleged cash hoard moreover in response to the court’s question whether michael had noticed that during the early 1980s banks were advertising interest rates of percent or higher on savings deposits michael stated i’ve never been one to look at anything like that to -- no concern we cannot reconcile this statement with michael’s alleged desire to make money in the manner that sanderson allegedly did we believe michael’s testimony on this point was incredible michael’s incredible explanations of his behavior constitute an additional badge of fraud bradford v commissioner f 2d pincite boyett v commissioner f 2d pincite in addition between date and date petitioners took a total of dollar_figure in cash advances petitioners paid an annual percentage rate of dollar_figure percent on at least dollar_figure of that amount all of the cash advances were taken before michael bought the metairie court property when according to michael’s testimony he had cash remaining in the box petitioners have not provided and we cannot discern any reasonable explanation for their willingness to pay high interest rates on cash advances when they allegedly had a substantial cash hoard based on the foregoing indicia of fraud we conclude that respondent has proved by clear_and_convincing evidence that some or all of the underpayments of tax that result from michael’s failure to report all of his plumbing business schedule c gross_receipts were due to michael’s fraud we have so found we hold for respondent on this issue c amounts burdens of proof in parts ii-a and ii-b of this opinion respondent had the burden of proving by clear_and_convincing evidence that there were underpayments of tax some part of which was due to michael’s fraud respondent carried this burden for each year in issue under sec_6663 the entire underpayment_of_tax for each year is treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud as we noted supra in the notices of deficiency respondent determined that in essence every element of each year’s underpayment was due to fraud on brief respondent’s fraud contentions focus entirely on the unreported schedule c gross_receipts we treat this as respondent’s concession that the fraud_penalty applies only to so much of the underpayment as results from the unreported schedule c receipts on the basis of the preponderance_of_the_evidence we conclude that for each year in issue the fraud_penalty applies to all of the underpayment that results from the unreported schedule c receipts in general petitioners have the burden of proving by a preponderance_of_the_evidence that the deficiencie sec_30 are less than the amounts respondent determined in the notices of deficiency see rule a 290_us_111 dollar_figure however respondent has the burden_of_proof for purposes of the instant case deficiency is the same as underpayment compare sec_6211 with sec_6664 sec_7491 which shifts the burden_of_proof to the commissioner if the taxpayer meets certain conditions does not apply in the instant case because the examination of petitioners’ tax returns began in or before the date effective date of sec_7491 internal_revenue_service restructuring and reform act of publaw_105_206 sec a 112_stat_726 with respect to new_matter including increased deficiencies rule a because all of our redeterminations except fraud have been made on the basis of the preponderance_of_the_evidence it is not necessary to decide which side has the burden_of_proof as to any item see eg 111_tc_273 110_tc_189 ndollar_figure and cases cited therein our preponderance-of-the-evidence findings as to omitted schedule c receipts are shown in the right-most columns of tables and supra all other adjustments whether related to adjustments in the notices of deficiency or other matters have been resolved by way of concessions or stipulations these redeterminations stipulations and concessions are to be given effect in the rule_155_computations and will govern whether any part of the deficiency for either of the years in issue is not due to fraud to the extent that any part of the deficiency for either of the years in issue is not due to fraud see part iv of this opinion iv negligence in the notices of deficiency respondent determined in the alternative to the fraud penalties under sec_6663 that michael is liable for the negligence penalties under sec_6662 respondent contends that michael’s substantial omissions of income and other factors set forth above eg michael’s failure to keep adequate books_and_records clearly show that the negligence penalties apply in the instant case petitioners do not appear to contest thisdollar_figure accordingly we conclude that sec_6662 applies for each year in issue to that portion if any of michael’s underpayments determined in the rule computation to be attributable to items other than the unreported schedule c gross_receipts to take account of the parties’ concessions and the foregoing decision will be entered under rule petitioners argued that reasonable_cause excused their failure to report one-half of their respective spouse’s income on their separate tax returns because we concluded that petitioners properly filed for registry their marriage contract so as to keep their respective incomes the separate_property of the income-earning spouse we need not address this defense to the negligence_penalty