t c memo united_states tax_court anthony g and shirley a olbres petitioners v commissioner of internal revenue respondent docket no filed date edward defranceschi for petitioners ronald f hood for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined the following defi- ciencies in and additions to petitioners' federal_income_tax year deficiency b a b b b a additions to tax sec sec sec sec dollar_figure big_number big_number percent of the interest due on dollar_figure percent of the interest due on dollar_figure dollar_figure big_number -- -- -- -- dollar_figure dollar_figure big_number big_number all section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure the issues remaining for decision are are petitioners liable for each of the years and for the additions to tax for fraud under sec_6653 we hold that they are for and and that they are for to the extent stated herein did respondent make a computational error in determin- ing petitioners' unreported gross_receipts for we hold that respondent did are petitioners liable for each of the years and for the addition_to_tax for a substantial under- statement of income_tax under sec_6661 we hold that they are for and and that they are for to the extent stated herein findings of fact3 some of the facts have been stipulated and are so found petitioners have conceded all of the determinations in the notice_of_deficiency notice for the years at issue except the issues stated an issue as to whether the respective periods of limitations for and have expired and computational issues for involving a disallowed medical_expense_deduction and self-employment_tax our resolution of the period of limita- tions issue for and flows automatically from our findings with respect to the issue regarding the additions to tax for fraud for those years see sec_6501 our resolution of the computational issues for flows automatically from petitioners' concessions on other issues and our finding with respect to the issue regarding an alleged computational error involving petitioners' unreported gross_receipts for that year unless otherwise indicated or needed for clarity our findings_of_fact and opinion pertain to and the years at issue petitioners resided in hampton new hampshire at the time the petition was filed petitioners who were married on date have three children tamara c olbres jason a olbres and tyler m olbres before petitioners were married petitioner anthony g olbres mr olbres attended the center for creative studies in detroit michigan from which he received a bachelor's degree in transpor- tation design and training in industrial design and petitioner shirley a olbres ms olbres completed three years of college at the university of vermont where she studied german and liberal arts shortly after petitioners were married ms olbres took classes in psychology and sociology at a community college petitioners have not taken any courses at the college level in accounting or business petitioners' activities around petitioners started a business interchangeably called design consultants a g olbres design consultants and a g olbres design in which they engaged in designing and fabricating trade_show exhibits exhibits we shall refer to the business in which petitioners engaged as design consultants on date petitioners incorporated design consul- tants under the name white star design inc white star and the following numbers of shares of its no-par common_stock were issued to the individuals indicated mr olbres held shares ms olbres held shares and manuel l olbres held shares on date white star elected to be taxed as an s corpora- tion at the time white star was formed the following individu- als were appointed to the offices indicated mr olbres as president ms olbres as treasurer and manuel l olbres as vice president in addition to designing and fabricating the exhibits design consultants and or white star arranged for certain busi- nesses to perform auxiliary services auxiliary services for their clients including inter alia transporting the exhibits setting up the exhibits hiring on-site personnel at trade shows electrical work floral arranging and telephone services during design consultants and or white star used inter alia greyhound exposition services greyhound for certain auxiliary services and during and they used inter alia mayflower transit inc mayflower to perform those services from sometime in through the years at issue design consultants was located in north berwick maine by around it had approximately to employees mr olbres' responsi- bilities for design consultants consisted of designing ordering materials for supervising the setting up of selling and pricing the exhibits at all relevant times ms olbres who spent time caring for petitioners' children did all of the bookkeeping for design consultants and white star during and clients of design consultants paid it dollar_figure and dollar_figure respectively as payment for services rendered products sold and or certain of the auxiliary ser- vices during clients of design consultants and white star paid them a total of dollar_figure as payment for services rendered products sold and or certain of the auxiliary services when design consultants and or white star arranged to have certain businesses perform the auxiliary services for their clients at least some of those businesses such as greyhound for and mayflower for and paid them commissions greyhound and mayflower paid design consultants and or white star commissions that equaled approximately percent of the payments received by greyhound and or mayflower from clients of design consultants and or white star design consultants and or white star billed their clients for any auxiliary services that those clients received from various businesses including greyhound and mayflower those clients paid design consultants and or white star for those services billed and design consultants and or white star paid those businesses for the auxiliary services that they provided to clients of design consultants and or white star during design consultants received commissions of dollar_figure from greyhound and during and design consul- tants and or white star received commissions of dollar_figure dollar_figure and dollar_figure respectively from mayflower we shall sometime sec_4 all dollar amounts are rounded to the nearest dollar refer collectively to payments from clients of design consultants and or white star and commissions from greyhound and mayflower as design consultants' and or white star's receipts during and petitioners maintained the following personal and business bank accounts bank accounts at indian head bank and trust co indian head kennebunk savings bank kennebunk and the exeter banking company exeter bank type of account indian head checking indian head checking name of account account number a g olbres design design consultants anthony g olbres and shirley a olbres indian head savings a g olbres design consultants indian head savings anthony g olbres and shirley a olbres kennebunk checking kennebunk checking a g olbres gary rohm d b a design consultants design consultants a g olbres kennebunk savings anthony g olbres exeter checking seabrook properties shirley olbres we shall refer to indian head checking account number as the indian head business checking account indian the names of indian head and exeter were changed sometime after the years at issue head checking account number as the indian head per- sonal checking account indian head savings account number as the indian head business savings account indian head savings account number as the indian head personal savings account kennebunk checking account number as the kennebunk olbres-rohm business checking account kennebunk checking account number as the kennebunk business checking account kennebunk savings account number as the kennebunk personal savings account and exeter checking account number as the seabrook properties account on date petitioners closed the indian head business savings account which had a closing balance of dollar_figure on the same date petitioners opened another business savings account at indian head account number under the name a g olbres design consultants anthony or shirley olbres indian head business savings account into which they deposited dollar_figure during petitioners also maintained the following business bank accounts at kennebunk the parties stipulated that the indian head business savings account was a checking account however that stipula- tion is contrary to the record in this case which establishes and we have found that that account is a savings account we may and we shall in this instance disregard stipulations between the parties when the stipulations are clearly contrary to the facts established by record see 93_tc_181 bank type of account name of account account number kennebunk checking white star design inc kennebunk checking white star design inc exhibit design and fabrication we shall refer to kennebunk checking account number as the first kennebunk white star checking account and kennebunk checking account number as the second kennebunk white star checking account petitioners deposited design consultants' and or white star's receipts into the indian head business checking account the indian head business savings account and various other bank accounts that they maintained petitioners made the following the parties stipulated that they deposited all business checks and receipts from business clients into either the indian head business checking account or the indian head business savings account we construe the references in those stipula- tions to business checks and to receipts from business cli- ents to mean receipts of design consultants and or white star other than commissions that they received from businesses that provided the auxiliary services as we construe those stipula- tions they are contrary to the record in this case even if our construction of those stipulations were incorrect in that the references therein refer to all receipts of design consultants and or white star including commissions that they received those stipulations nonetheless would be contrary to the record in this case that record shows and we have found that petition- ers deposited both design consultants' and or white star's receipts from their clients and commission receipts into bank accounts in addition to the indian head business checking account and the indian head business savings account to illustrate petitioners deposited two checks from numismatic professionals inc into the kennebunk personal savings account by way of continued total deposits into the following bank accounts during the years indicated name of account indian head business checking account indian head personal checking account indian head business savings account indian head personal savings account dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number -- -- big_number kennebunk olbres-rohm business checking account big_number big_number big_number kennebunk business checking account kennebunk personal savings account seabrook properties account big_number big_number big_number big_number big_number big_number big_number big_number big_number indian head business savings account first kennebunk white star checking account -- -- -- -- big_number big_number continued further illustration petitioners deposited commissions received from greyhound during into not only the indian head business savings account but also the seabrook properties account we may and we shall in this instance disregard stipulations between the parties where the stipulations are clearly contrary to facts established by the record see cal-maine foods inc v commissioner t c pincite name of account second kennebunk white star checking account -- -- big_number total big_number big_number big_number petitioners treated the funds in the indian head business savings account and the indian head business savings account over which they had complete control as their own funds and they used those funds for personal expenditures ms olbres maintained cash receipts journals cash receipts journals cash disbursements journals cash disbursements journals petty cash journals petty cash journals and payroll journals payroll journals for design consultants and or white star around wilson p dennett mr dennett an accountant retained by petitioners created the format for inter alia the cash receipts journals and showed ms olbres how to maintain those journals when design consultants and or white star billed a client for services rendered mr olbres wrote a draft of an invoice and susan rubenstein who worked for petitioners at design consultants and white star as a secretary from date through date and or another member of the office staff typed that invoice and mailed it to the client three copies of each invoice were made one of which was kept in the office of design consultants and or white star one of which was sent to ms olbres at petitioners' house and one of which was sent to the client who was being billed the invoices requested that payment be remitted to petitioners' home address ms olbres maintained invoice logs invoice logs in which she kept track of the invoices that design consultants and or white star sent to their clients and the amounts that those clients paid on those invoices design consultants and or white star did not send invoices to greyhound and or mayflower and consequently commissions received from those businesses were not recorded in the invoice logs ms olbres brought copies of portions of the invoice logs to petitioners' house she periodi- cally destroyed those copies petitioners opened the indian head business savings account around they deposited certain of design consultants' and or white star's receipts into that account and ms olbres recorded those deposits in a bank passbook for that account ms the record is not clear about whether design consultants and or white star sent invoices to other businesses that provided auxiliary services to the clients of design consultants and or white star the parties stipulated that all of the deposits made into the indian head business savings account were recorded not only in a bank passbook for that account but also in the invoice logs that stipulation insofar as it relates to the invoice logs is contrary to the record in this case that record shows and we have found that design consultants and or white star did not send invoices to greyhound and or mayflower and that commissions that were paid to design consultants and or white star by those businesses were not recorded in the invoice logs we may and we shall in this instance disregard stipulations between the parties where the stipulations are clearly contrary to facts established by the record see cal-maine foods inc v commis- sioner t c pincite olbres recorded in the cash receipts journals only those design consultants' and or white star's receipts that petitioners deposited into the indian head business checking account and she did not record in the cash receipts journals their respective receipts that petitioners deposited into the indian head business savings account or any other account she recorded in the invoice logs only those design consultants' and or white star's receipts for which clients were sent invoices petitioners deposited only two checks from mayflower one received in and one received in into the indian head business checking account they deposited all of the other checks received from mayflower during the years at issue as well as all of the checks received from greyhound during into other bank accounts that they maintained including the indian head business savings account consequently the cash receipts journals omitted all of the amounts received by design consul- tants and or white star from greyhound during and most of the amounts that design consultants and or white star received from mayflower during the years at issue as a result of ms olbres' bookkeeping practices a person examining the cash receipts journals and no other written records of design consultants and or white star would have no idea that design consultants and or white star received income in addition to their respective receipts that petitioners deposited into the indian head business checking account moreover a person examining both the cash receipts journals and the invoice logs that ms olbres maintained would have no idea that design consul- tants and or white star received commissions in the amounts paid to them by greyhound and or mayflower during and petitioners leased certain property in north berwick maine north berwick property to kitchen tech for which they received rental income of dollar_figure dollar_figure and dollar_figure respectively and certain property in seabrook new hampshire seabrook property to johnson matthey inc johnson matthey for which they received dollar_figure dollar_figure and dollar_figure respectively during petitioners also re- ceived rental income of dollar_figure from traditional wood works inc and dollar_figure from white star for_the_use_of a building on the north berwick property that had previously been used by design consultants petitioners deposited at least a portion of the rental income that they received from johnson matthey into the seabrook properties account petitioners' accountant mr dennett mr dennett's professional background experience and practice during mr dennett who at the time was a public accountant began his accounting practice around the late 1970's he became qualified as a certified_public_accountant c p a in new hampshire after having unsuccessfully taken the c p a examination approximately seven times beginning in until the time of mr dennett's death in date mr dennett's wife margaret dennett ms dennett worked at mr dennett's office ms dennett's duties included preparing some less complicated tax returns for mr dennett's clients preparing payroll returns checking and proofreading typing entering data into mr dennett's office computer and ensuring that written materials that clients provided to mr dennett's office for use in the preparation of their tax returns were returned to those clients upon completion of that return preparation at least during the 1980's joyce wildes ms wildes also worked in mr dennett's office and assisted him by preparing tax returns during each of the years at issue mr dennett's office prepared approximately tax returns when a client retained mr dennett for tax_return prepara- tion mr dennett generally followed one of the following prac- tices mr dennett met with the client asked for and received information with respect to the client's tax_return and prepared a draft tax_return while the client waited at mr dennett's office mr dennett reviewed written materials that the client left at his office asked any questions that he had based on his review of those written materials by telephoning the it is not clear from the record whether mr dennett's clients generally provided him with oral and or written information with respect to their tax returns client or at a client meeting and prepared the client's tax_return based on the written materials provided by that client and any supplemental information that mr dennett received from the client in answer to his questions or mr dennett met with the client received written materials from the client at that meeting and as a result of the meeting and the written materi- als prepared a draft of the client's tax_return either at that meeting or at a later time in addition to his accounting practice mr dennett was elected annually for approximately years to the position of school treasurer for the town of hampton for of those years mr dennett was elected to the position of treasurer town treasurer for the town of hampton throughout the period from until around mr dennett as town treasurer worked with janet c laplante ms laplante ms laplante who had graduated from high school and attended two years of college was the head bookkeeper for the town of hampton during that period and thereafter until around throughout the period during which ms laplante was head bookkeeper for the town of hampton she was not an accountant as town treasurer mr dennett was required to prepare and provide ms laplante with monthly treasurer's reports trea- surer's reports those reports which were due on the tenth of every month reflected the total_amounts received and paid_by the town of hampton during the month covered by the report and the aggregate amounts received and paid_by the town of hampton during the year to the date_of_the_report it was ms laplante's responsibility to make sure that the books that she and her staff maintained for the town of hampton agreed with the figures in the treasurer's reports in addition ms laplante sent all cash or checks received on behalf of the town of hampton to mr dennett and mr dennett after reviewing what he received deposited the cash and checks into the appropriate bank account s of the town of hampton in a letter of comments and recommendations dated date and prepared by plodzik sanderson an accounting firm retained by the town of hampton to conduct audits of the town that firm made the following comments about ms laplante while she does attempt to maintain some of the required re- cords we do not feel that she possesses the necessary skills to assume responsibility over all bookkeeping and record-keeping functions mr dennett's relationship with petitioners petitioners first retained mr dennett whose office was lo- cated near petitioners' house around and he prepared their joint u s individual income_tax returns returns for the tax- able years through throughout the years during which petitioners retained mr dennett he also prepared unaudited personal and business financial statements for petitioners which petitioners used inter alia in attempting to borrow money in connection with mr dennett's preparation of petitioners' return for each of the years at issue petitioners visited mr dennett's office in order to provide him with certain informa- tion when mr dennett had finished preparing petitioners' return for each of those years based on the information that petitioners provided to him his office telephoned petitioners to inform them that their return was ready petitioners then went to his office and were given the return that mr dennett had pre- pared as well as a cover sheet which inter alia summarized the contents of the return they signed that return and they paid mr dennett's bill each of petitioners' returns for the years at issue was thereafter filed at all relevant times both petitioners knew that it would be unlawful to sign a false return petitioners did not provide mr dennett with complete and accurate information from which he could have prepared a correct return for petitioners for each of the years at issue mr dennett prepared unaudited projected business financial statements unaudited projected business financial statements for design consultants for and for white star for that were dated date and date respectively drafts of two unaudited statements of income and expenditures_for design consultants draft unaudited state- ment of income and expenditures one for and one for and unaudited personal financial statements for petitioners that were dated date date unaudited personal financial statements in preparing the foregoing statements for petitioners mr olbres gave mr dennett the figures to include and mr dennett placed those figures in the proper places and made the necessary calculations the unaudited projected business financial statements for design consultants for contained the following caveats we have compiled the accompanying projected balance_sheet statements of income retained earnings and changes in financial position of a g olbres design as of date and for the year ending in accordance with standards established by the american institute of certified public accountants the accompanying projection and this report was pre- pared for the purpose of selling the business and should not be used for any other purpose a compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection we have not examined the projection and accordingly do not express an opinion or any other form of assurance on the accompanying or assumptions we have no responsibility to update this report for events and circumstances occurring after the date of this report virtually identical caveats except for the second paragraph quoted above appeared in a letter addressed to anthony g olbres dba white star design inc that was part of the unaudited projected business financial statements for white star for the unaudited projected financial statements for design consul- tants for reflected projected gross_receipts in an amount that is almost twice as large as the gross_receipts for design consultants reported by petitioners in schedule c profit or loss from business or profession schedule c of their return schedule c and the unaudited projected financial statements for white star for reflected projected gross_receipts in an amount that is almost four times as large as the gross_receipts reported by white star in its form_1120s u s income_tax return for an s_corporation form_1120s the draft unaudited statements of income and expenditures_for design consultants for and reflected gross_receipts and net_income in amounts that are identical to the respective amounts of gross_receipts and net_income reported in petitioners' schedule c and schedule c of petitioners' return the date unaudited personal financial statements contained the following caveats we have compiled the accompanying statement of finan- cial condition of anthony g and shirley a olbres as of date in accordance with standards estab- lished by the american institute of certified public accountants a compilation is limited to presenting in the form of financial statements information that is the represen- tation of the individuals whose financial statements are presented we have not audited or reviewed the accompanying statement of financial condition and accordingly do not express an opinion or other form of assurance on it the date unaudited personal financial statements did not include information with respect to petitioners' checking accounts at indian head or their bank accounts at kennebunk nor did those statements include information with respect to peti- tioners' stockholdings in white star certain bank transactions of petitioners during the years at issue certain loans for which petitioners applied on date petitioners signed a residential_loan application loan application in which they applied for a loan of dollar_figure from the berlin city bank to purchase certain property located in north conway new hampshire north conway property petitioners indicated in that application that the purchase_price of the north conway property was dollar_figure that they intended to make a cash downpayment on that purchase of dollar_figure and that their monthly gross_income was dollar_figure in an attachment to the loan application entitled notes of financial status anthony g and shirley a olbres hampton nh petitioners listed the following four bank accounts the indian head business savings account the indian head personal savings account exeter bank account number and the kennebunk personal savings account in another attachment to the loan application petitioners indicated that they received gross monthly income of dollar_figure and net monthly income of dollar_figure from the lease of the seabrook property to johnson matthey and that they made monthly mortgage and real_property tax_payments of dollar_figure and dollar_figure records relating to exeter bank account number are not part of the record respectively on that property also attached to the loan application were the unaudited projected financial statements for design consultants for that indicated that the gross re- ceipts of design consultants for the remainder of was projected to be dollar_figure on date petitioners signed an application_for a dollar_figure loan from an undisclosed source with respect to the purchase for a total of dollar_figure of two units in cranmore condo- miniums in north conway new hampshire petitioners made a downpayment of dollar_figure on those purchases certain automobiles purchased by petitioners during date petitioners secured a loan from indian head in the amount of dollar_figure for the purchase of a porsche petitioners made monthly payments of dollar_figure on that loan until date when they made a final payment of approximately dollar_figure in date petitioners secured a loan of dollar_figure from indian head for the purchase of a chevrolet blazer peti- tioners made monthly payments of dollar_figure on that loan until on or about date when they made a final payment of approxi- mately dollar_figure on date ms olbres used a treasurer's check in the amount of dollar_figure that she purchased with part of a dollar_figure withdrawal from the indian head business savings account to buy a mercedes benz on date ms olbres withdrew dollar_figure in cash from the indian head business savings account in order to purchase a treasurer's check in the amount of dollar_figure for the purchase of a rolls royce corniche rolls royce on date ms olbres withdrew dollar_figure in cash from the indian head business savings account in order to purchase a treasurer's check for dollar_figure for the purchase of a range rover certain payments with respect to brokerage accounts maintained by petitioners on or about date mr olbres as custodian for each of petitioners' sons under the uniform_gifts_to_minors_act of new hampshire custodian purchased shares in the advantage growth fund for dollar_figure for each of two brokerage accounts at advest inc advest that he maintained as their custodian he paid for those shares by using a treasurer's check that ms olbres had purchased on date with dollar_figure in cash that she had withdrawn from the indian head business savings account on date petitioners purchased shares in the advantage growth fund for dollar_figure and shares in the templeton global fund inc for dollar_figure for their brokerage account at advest they paid for those shares by using two treasurer's checks that ms olbres had purchased on date with dollar_figure that she had withdrawn from the indian head business savings account on or about date petitioners purchased shares in the advantage growth fund for dollar_figure for their brokerage account at advest they paid for those shares by using a trea- surer's check that ms olbres had purchased on date with part of a dollar_figure withdrawal that she had made from the indian head business savings account certain yachts purchased by petitioners in date petitioners agreed to purchase for dollar_figure a pace yacht pace yacht from marina harbor corp marina harbor in that connection on date when the balance of the indian head personal checking account was dollar_figure ms olbres wrote a check for dollar_figure from that account that was payable to marina harbor as a downpayment for the purchase of the pace yacht on date petitioners withdrew dollar_figure from the indian head business savings account and deposited dollar_figure into the indian head personal checking account in date mr olbres entered into a retail installment_sales agreement to finance dollar_figure of the purchase_price of the pace yacht on date ms olbres withdrew dollar_figure from the indian head business savings account and purchased a treasurer's check for dollar_figure payable to marina harbor for a further downpayment on the pace yacht in date petitioners traded in the pace yacht in order to purchase for dollar_figure a 54-foot bertram yacht bertram yacht from norwood marine inc norwood marine petitioners made a deposit of dollar_figure on the purchase of the bertram yacht by using a check drawn on their indian head personal checking account the bill of sale for the bertram yacht indicated that the buyer was shirley a olbres trustee under a_trust agree- ment dated date for the benefit of the h n nautical trust tamara c olbres tyler m olbres jason a olbres on date ms olbres withdrew dollar_figure from the indian head business savings account and purchased a treasurer's check in the amount of dollar_figure payable to norwood marine for a further downpayment on the bertram yacht in addition two receipts from norwood marine indicated that two checks in the amounts of dollar_figure and dollar_figure were received from security marine creditcorp which provided financing to petition- ers for the purchase of the bertram yacht petitioners' returns petitioners filed returns for and that they signed and that mr dennett signed as return preparer in petitioners' schedules c for those years petitioners reported gross_receipts and net profits of design consultants as follows year gross_receipts net profits dollar_figure big_number big_number dollar_figure big_number big_number on line four of schedule c of petitioners' return schedule c petitioners reported dollar_figure of other income which was compensation that white star paid to mr olbres during white star compensation in schedule b interest and dividend income of petitioners' returns for the years at issue petitioners reported interest_income from inter alia the indian head business savings ac- count in schedule e supplemental income schedule of petitioners' returns schedule e for the years at issue petitioners reported the following amounts of rental income with respect to the properties indicated year seabrook property north berwick property dollar_figure big_number big_number although petitioners received dollar_figure of rental income from kitchen tech for the north berwick property that property was not listed as rental property in petitioners' return dollar_figure during white star filed its form_1120s in which it reported gross_receipts of dollar_figure and ordinary_income of dollar_figure in schedule e of their return petitioners reported dollar_figure of income with respect to white star in date petitioners filed form_1045 application_for tentative refund in which they claimed refunds based on an alleged net_operating_loss of dollar_figure that they carried back from to and a large portion of that loss was attributable to an alleged casualty_loss of dollar_figure that peti- tioners claimed with respect to a fire at the seabrook property that occurred on date and a schedule e loss of dollar_figure which consisted of a net_loss of dollar_figure with respect to petitioners' rental properties and the dollar_figure of income that petitioners reported with respect to white star petitioners received refunds for and in the amounts of dollar_figure dollar_figure and dollar_figure respectively respondent's examination of petitioners' returns based on a prime lead referral that was generated because an internal_revenue_service employee observed a rolls royce that after further investigation was determined to belong to peti- tioners revenue_agent karen lyle ms lyle was assigned to examine petitioners' return thereafter ms lyle sent a letter appointment letter to mr dennett who on date had filed form_2848 power_of_attorney and declaration of representative form authorizing him to represent peti- tioners with respect to their taxable_year in the appoint- ment letter ms lyle requested books records savings account passbooks and various other documents relating to petitioners' taxable_year however ms lyle never conducted a field visit with petitioners because revenue_agent leonard r kaply mr kaply replaced her on date mr kaply met date meet- ing with petitioners mr dennett and ms wildes at that meeting petitioners told mr kaply about the types of written materials that ms olbres maintained during for design consultants including the cash receipts journal the cash disbursements journal the petty cash journal and the payroll journal for that year but they failed to mention the invoice log at the date meeting petitioners also informed mr kaply about the existence of the indian head business savings account and told him that all of the deposits made into that account were transferred from the indian head business checking account petitioners did not inform mr kaply at the date meeting that they deposited checks received by design consultants directly into the indian head business savings account at the date meeting petitioners and mr dennett provided mr kaply with some of the documents requested in the appointment letter that ms lyle had sent to mr dennett they did not provide mr kaply with the cash receipts journal for or bank statements for the indian head business savings account the kennebunk personal savings account and the seabrook proper- ties account in fact mr kaply was not even aware at the date meeting that the seabrook properties account existed he subsequently learned of the existence of that account during the course of his examination of petitioners' taxable_year when he found that petitioners deposited checks written from the seabrook properties account into their indian head personal checking account at the date meeting mr kaply asked mr dennett how he prepared petitioners' return mr dennett gave him a six-page summary summary that covered at least certain expenses of design consultants for and certain income including dollar_figure of rental income from the seabrook property and certain expenses of petitioners including all expenses with respect to the seabrook property for that year the summary did not include information with respect to design consultants' receipts for all of the income amounts and virtually all of the expense amounts that were included in the summary were reported in petitioners' return ms olbres indicated to mr kaply at the date meeting that she gave mr dennett the summary in connection with the preparation of petitioners' return after the date meeting mr kaply prepared a memorandum covering the answers that petitioners and mr dennett provided to his questions during that meeting in that memoran- dum mr kaply indicated that petitioners' return was prepared by mr dennett from books and schedules prepared by ms olbres mr kaply's reference to books and schedules was to the summary that ms olbres provided to mr dennett after the date meeting mr dennett wanted to make certain that the return that he had prepared and that was filed for petitioners was accurate in this connection peti- tioners provided mr dennett with certain written materials relating to that he did not have previously including the cash receipts journal for that year mr dennett and ms wildes used those materials to reconstruct another return for petitioners that was not filed reconstructed return the amount of gross_receipts reflected in schedule c of petitioners' reconstructed return was virtually identical to the amount of gross_receipts reflected in the cash receipts journal for and the amount of gross_receipts reflected in schedule c of the return that petitioners filed for that year on date the day after the date meeting mr kaply submitted form_4564 information_document_request idr to mr dennett requesting the information that he had requested at that meeting as well as additional information with respect to certain of the written materials that petitioners had provided to him at that meeting in the idr mr kaply requested inter alia the following information with respect to the indian head personal checking account including the source of the funds deposited into that account and an explanation of the source of the money deposited into petition- ers' savings accounts approximately one month after sending the idr to mr dennett mr kaply had not received any information with respect to those two inquiries and he decided to summons petitioners' records from indian head kennebunk and hampton co- operative bankdollar_figure thereafter when mr kaply learned of the the record does not contain information with respect to what continued existence of the seabrook properties account he summonsed the bank records with respect to that account when mr kaply received the bank records for the indian head business savings account he discovered that contrary to what petitioners had told him at the date meeting petition- ers had deposited directly into that account checks that they had received from clients of design consultants mr kaply then decided to do an analysis under the bank_deposits method to determine whether petitioners had unreported income for and if so in what amount based on that analysis and his investigation mr kaply determined that petitioners had approxi- mately dollar_figure of unreported income for on date mr kaply telephoned mr dennett date telephone call to schedule another meeting with petitioners mr dennett informed mr kaply during the date telephone call that petitioners wanted mr dennett to meet alone with mr kaply and that they did not intend to attend future meetings when mr kaply advised mr dennett during the date telephone call about the amount of income that he had determined petitioners failed to report for mr dennett told mr kaply that he would contact petitioners about meeting with mr kaply during the date telephone call mr continued bank accounts if any were maintained by petitioners at hampton co-operative bank the record shows only that petitioners obtained two mortgage loans from that bank dennett disclosed to mr kaply that mr olbres had told him that there might be a problem involving unreported income with respect to petitioners' return in date mr kaply and jim bircree who was mr kaply's manager met date meeting with mr dennett and ms wildes about petitioners' return that was being exam- ined although mr dennett had telephoned mr kaply a couple of days after the date telephone call to inform him that petitioners planned to attend the date meeting peti- tioners did not appear at that meeting in anticipation of the date meeting mr kaply prepared a list of questions with respect to the indian head business savings account and two of the accounts maintained by petitioners at kennebunk because he thought that some of the checks deposited into those accounts might represent income not reported by petitioners for mr dennett informed mr kaply at the date meeting that he had no knowledge about whether any of the deposits into those accounts constituted income to petitioners immediately after the date meeting mr kaply enlarged his examination of petitioners' taxable_year to include their taxable_year a few days after the date meeting mr dennett telephoned mr kaply and informed him that he was no longer authorized to represent petitioners in connection with mr kaply's examination of petitioners' taxable_year approxi- mately one week thereafter george d coupounas mr coupounas telephoned mr kaply to advise him that on date petitioners had executed forms authorizing mr coupounas to represent petitioners not only with respect to their taxable_year that was being examined by mr kaply but also with respect to their taxable years and and those forms were sent to mr kaply on date mr kaply and norman murphy mr murphy who was mr kaply's acting manager met date meeting with mr coupounas about petitioners' returns for and that were being examined at that meeting mr kaply asked mr coupounas questions about the indian head business savings account and two of the accounts at kennebunk which were similar to the questions that he had asked mr dennett at the date meeting mr coupounas informed mr kaply and mr murphy at the date meeting that he would answer mr kaply's questions only if mr murphy promised not to refer petitioners' case to respondent's criminal_investigation_division cid when mr murphy declined to make any such promise mr coupounas indicated that he was terminating the date meeting shortly after the date meeting mr kaply turned petitioners' audit over to cid and that division began to investigate not only petitioners' taxable years and but also their taxable_year respondent's special_agent don cote mr cote was assigned to the criminal investigation of those years and mr kaply assisted him in that investigation as part of mr cote's criminal investigation mr cote and mr kaply met in date date meeting with mr dennett and ms wildes at that meeting mr cote asked mr dennett ques- tions regarding inter alia how mr dennett prepared petition- ers' returns for and mr dennett indicated that he met with ms olbres shortly before petitioners' return for each of the years at issue was due she verbally related to him the figures to be used in each of those returns and gave him the summary in connection with his preparation of their return mr dennett placed those figures on the appropriate lines in each such return and made the computations called for by each of those returns mr dennett informed mr cote and mr kaply at the date meeting that petitioners never provided him with any bank statements or bank records in connection with his preparation of petitioners' and returns notice_of_deficiency on date respondent issued a notice to peti- tioners for and and determined that they had unreported income for those years in the amounts of dollar_figure dollar_figure and dollar_figure respectively virtually all of the unreported income for and all of the unreported income for that respondent determined in the notice consisted of certain gross_receipts of design consultants and certain rental income paid to petitioners in addition to certain gross re- ceipts of design consultants the unreported income for that respondent determined in the notice included the dollar_figure of white star compensation and income resulting from the disallowance by respondent of the net_operating_loss that peti- tioners claimed for that year with respect to petitioners' claimed net_operating_loss two of the components that petition- ers claim gave rise to that loss were a casualty_loss resulting from a fire at the seabrook property on date and a schedule e loss of dollar_figure that petitioners claimed in their return with respect to petitioners' claimed casualty_loss respondent determined that for petitioners had a gain of dollar_figure and not a loss resulting from the fire at the seabrook property because the proceeds that petitioners received from their insurance_company as a result of that fire exceeded the basis of the portion of the seabrook property that the fire destroyed with respect to petitioners' claimed schedule e loss of dollar_figure respondent determined that for petitioners had a schedule e gain of dollar_figure and not a loss because for that year they had unreported rental income of dollar_figure they overstated their deductions with respect to their rental property by dollar_figure and their income with respect to their s_corporation white star was understated by dollar_figure respondent's determinations in the notice of design consul- tants' unreported gross_receipts were based on the bank_deposits method analysis conducted by mr kaply as is reflected in the explanation of design consultants' unreported gross_receipts for that is contained in the notice explanation respon- dent determined the total amount that petitioners deposited into their bank accounts for that year and the portion of those deposits that constituted gross_receipts of design consultants in determining the portion of petitioners' total bank_deposits for that constituted gross_receipts of design consultants respondent reduced the total amount of petitioners' bank_deposits that respondent determined for that year by what respondent determined to be petitioners' deposits from nontaxable sources transfers that petitioners made between their bank accounts the total amount of petitioners' rental income and wages con-sisting of the dollar_figure of white star compensation respondent determined that the balance of petitioners' bank_deposits for constituted gross_receipts of design consul- tants for that year respondent then reduced the gross_receipts of design consultants that respondent determined for by income per return in order to determine design consultants' unreported gross_receipts for that year respondent did not respondent first added the amount of rental income that respondent determined was not deposited into petitioners' bank accounts during to the total deposits that respondent determined petitioners made into those accounts during that year and that included petitioners' rental income for which respondent determined petitioners had deposited into their bank accounts respondent then reduced such total bank_deposits during as determined by respondent by inter alia the total amount of rental income that respondent determined peti- tioners had for that year include in that income per return figure the dollar_figure of white star compensation that petitioners reported on line four of their schedule c as other income consequently respon- dent determined that for petitioners had dollar_figure of unre- ported gross_receipts of design consultants respondent also determined in the notice that petitioners are entitled to certain deductions for and that they did not claim in their returns for those years and that petition- ers are not entitled to certain of the cost_of_goods_sold and deductions that they claimed in their and returns totaling dollar_figure dollar_figure and dollar_figure respectively with respect to respondent's determinations disallowing inter alia certain of the cost_of_goods_sold and deductions that petitioners claimed respondent's representatives obtained from petitioners and reviewed oral and or written information regard- ing at least certain of those items about which respondent had questions petitioners' criminal trial and conviction on date a grand jury indicted petitioners on three counts of violating sec_7201 by willfully attempting to evade and defeat a large part of the income_tax due and owing by them to the united_states for and petitioners were tried in the u s district_court for the district of new hampshire district_court on date and a jury found petitioners guilty of violating sec_7201 for and acquit- ted them of violating sec_7201 for and jury verdict after the jury verdict petitioners filed a motion for judgment of acquittal with respect to the guilty jury verdict for on date the presiding judge issued a memorandum order in which he granted that motion and a judgment of acquittal was entered on date the court_of_appeals for the first circuit reversed the judgment entered by the district_court and rein- stated petitioners' criminal conviction under sec_7201 for petitioners petitioned the u s supreme court for a writ of certiorari that petition was denied on or about date and petitioners' conviction under sec_7201 for became final opinion respondent bears the burden_of_proof on the fraud issue and that burden must be satisfied by clear_and_convincing evidence sec_7454 rule b petitioners bear the burden of proving that respondent's deficiency determinations and those under sec_6661 are erroneousdollar_figure rule a 290_us_111 petitioners contend on brief that because they are not liable for the additions to tax for fraud the respective periods of limitations for and have expired see sec_6501 c we find below that respondent has established fraud for and consequently the respective periods of limita- tions for each of those years have not expired sec_6501 both petitioners and respondent rely on testimonial and documentary_evidence to support their respective positions in this case mr olbres and ms olbres testified at trial although they were able to recollect understand and recount certain details about the multimillion dollar business which they controlled during the years at issue they had difficulty in remembering comprehending and or recounting details about that business that do not appear to support their position in this case we found mr olbres' testimony to be questionable implau- sible and or vague in certain material respects we found ms olbres' testimony to be questionable evasive vague implausi- ble and or conclusory in certain material respects under such circumstances we are not required to and we generally do not rely on the testimony of either petitioner see 243_f2d_295 1st cir affg tcmemo_1956_1 87_tc_74 ms laplante testified for petitioners while we have no reason to question her credibility based on our observation of her demeanor for the reasons discussed below we are unwilling to rely on her testimony to support petitioners' position in this case ms dennett and mr kaply also were witnesses at trial we found ms dennett's testimony to be credible we also found mr kaply's testimony to be credible and we rely on him to establish facts relating to his examination of petitioners' returns for the years at issue including what mr dennett who unfortunately died prior to trial told him during the course of that examina- tion issues on which respondent has the burden of proof--additions to tax under sec_6653 for and sec_6653 imposes an addition_to_tax equal to percent of the portion of an underpayment that is attributable to fraud and sec_6653 imposes an addition_to_tax equal to percent of the interest due on that portion of the underpayment for sec_6653 imposes an addition_to_tax equal to percent of the portion of the underpayment attributable to fraud for purposes of the foregoing provisions sec_6653 provides that if respon- dent establishes that any portion of an underpayment is due to fraud the entire underpayment is treated as attributable to fraud unless the taxpayer proves that some portion of the underpayment is not due to fraud in order for the additions to tax for fraud to be imposed respondent must prove by clear_and_convincing evidence that an underpayment exists and that some portion of that underpayment is due to fraud sec_7454 rule b 99_tc_202 petitioners concede the under- payment determined by respondent for each of the years at issue except for that portion of the underpayment for that is attributable to a computational error involving the white star compensation that petitioners contend respondent made in determining the unreported gross_receipts of design consultants for that year claimed computational error in light of petitioners' concessions we find that an underpayment exists for each of the years at issue before turning to the question of fraudulent intent we shall address petitioners' contention regarding the amount of the underpayment for insofar as it relates to the white star compensation respondent used the white star compensa- tion as a factor in determining under the bank_deposits method the unreported gross_receipts of design consultants for in addition respondent made a determination in the notice that petitioners have unreported income for of dollar_figure attribut- able to the white star compensation in petitioners' closing statement at the conclusion of trial they contended that for there was a computational error in the bank_deposits method analysis used by respondent to determine design consul- tants' unreported gross_receipts in an objection to a finding of fact proposed by respondent petitioners state the following on brief further the adjustment for 'compensation white star design inc ' adjustment '1 p' for resp ex f is in error the 'big_number is reported on petitioners schedule c part i line sic other income big_number resp ex e as we construe petitioners' position at trial and on brief petitioners contend that respondent made a computational error in applying the bank_deposits method for in that in determin- ing the unreported gross_receipts of design consultants under that method respondent failed to reduce the bank_deposits that respondent determined were design consultants' gross_receipts for that year by the dollar_figure of white star compensation that petitioners reported in their schedule c we agree that respondent made a computational error in applying the bank_deposits method to determine the amount of design consultants' unreported gross_receipts for respondent's determinations in the notice of design consul- tants' unreported gross_receipts were based on the bank_deposits method analysis conducted by mr kaply as is reflected in the explanation respondent determined the total amount that petitioners deposited into their bank accounts for that year and the portion of those deposits that constituted gross_receipts of design consultants in determining the portion of petitioners' total bank_deposits for that constituted gross_receipts of design consultants respondent reduced the total amount of petitioners' bank_deposits that respondent determined for that year by what respondent determined to be petitioners' deposits from nontaxable sources transfers that petitioners made between their bank accounts the total amount of petitioners' rental income and wages consisting of the dollar_figure of white star compensation respondent determined that the balance of peti- tioners' bank_deposits for constituted gross_receipts of design consultants for that year respondent then reduced the gross_receipts of design consultants that respondent determined for by income per return in order to determine design consultants' unreported gross_receipts for that year respondent did not include in that income per return figure the dollar_figure of white star compensation that petitioners reported on line four of their schedule c as other income we find that respondent made a computational error in applying the bank_deposits method to determine design consultants' unreported gross_receipts for computational error in that respondent should have included the white star compensation in that income per return figuredollar_figure accordingly we find that the unreported gross_receipts of design consultants for is dollar_figure and not dollar_figure we further find that the amount of the deficiency and therefore the amount of the underpayment for revised underpayment see sec_6653 should be reduced in the rule computation in order to correct the computational error we shall now turn to the question of fraudulent intent to prove that an underpayment is attributable to the fraudulent intent of the taxpayer respondent must prove that the taxpayer however we sustain respondent's separate determination that petitioners have unreported income for of dollar_figure attribut- able to the white star compensation intended to evade taxes that he or she believed to be owing by conduct intended to conceal mislead or otherwise prevent the collection of such taxes 398_f2d_1002 3d cir 94_tc_654 the existence of fraudulent intent is a question of fact to be resolved upon consideration of the entire record 67_tc_181 affd without published opinion 578_f2d_1383 8th cir although fraudulent intent is never presumed it may be established by circumstantial evidence because direct proof of the taxpayer's intent is rarely available 92_tc_661 80_tc_1111 the taxpayer's entire course of conduct may establish the requisite fraudulent intent rowlee v commissioner supra pincite 53_tc_96 the courts have established a number of badges_of_fraud from which fraudulent intent may be inferred those badges include substantial and consistent understatement of income failure to maintain adequate_records incomplete and erroneous information provided to tax_return_preparer or book- keeper destruction of books_and_records implausible explanation of behavior lack of credibility of the tax- payer's testimony and failure to cooperate with tax authori- ties see 796_f2d_303 9th cir affg tcmemo_1984_601 743_f2d_309 5th cir affg tcmemo_1984_25 301_f2d_484 5th cir affg tcmemo_1959_172 252_f2d_56 9th cir parks v commissioner supra pincite the mere failure to report income is not sufficient to establish fraud petzoldt v commissioner supra pincite petitioners' taxable_year respondent determined that dollar_figure of petitioners' under- payment for is attributable to fraud at the conclusion of the trial in this case petitioners conceded the amount of the underpayment for that year and they also conceded that they are estopped from denying fraud for because of their conviction for criminal_tax_evasion under sec_7201 for that year see 904_f2d_101 1st cir affg tcmemo_1988_299 supplemented by tcmemo_1989_94 96_tc_858 affd 959_f2d_16 2d cir petitioners reiterate those concessions on brief petitioners nonetheless contend inconsistently in our view that the amount of the deficiency and the resulting civil penalty may be litigated in subsequent civil proceedings to support that contention petitioners make the following conclusory argument on brief because of the arbitrary nature sic the respondent's determination of the portion of the deficiency attributable to disallowed expenses no fraud_penalty in any of the years in question can be attributable to that portion of the deficiency petitioners presented no evidence showing that the underpayment for that is attributable to those expenses is not due to fraud on the record before us we find that petitioners have failed to show as they must under sec_6653 that the portion of the underpayment for that is attributable to the deductions which respondent disal- lowed is not due to fraud based on our review of the entire record before us we find that petitioners are liable for for the additions to tax under sec_6653 with respect to the portion of the underpayment for that year that respondent determined is attrib- utable to fraud petitioners' taxable years and respondent contends that dollar_figure of the underpayment for underpayment and all of the underpayment for that were determined in the notice are attributable to fraud we have found a revised underpayment and our discussion addresses the parties' contentions regarding respondent's deter- minations under sec_6653 with respect to the underpayment and the revised underpayment petitioners contend that the underpayment and the revised underpayment are not due to fraud but are due to errors in petitioners' returns for and that were made by their accountant mr dennett on whom they relied and to whom they provided complete written materials from which he could have prepared correct returns for those years but did not petition- ers are willing to share some responsibility for what they claim are mr dennett's errors in preparing their and re- turns for example they admit that the cash receipts journals that they claim to have given to mr dennett in connection with his preparation of those returns may have been misleading because those journals did not reflect all of design consultants' and or white star's receipts however they maintain that any errors in those journals which ms olbres was responsible for maintaining would have been due to her negligence and not due to her intent or the intent of mr olbres to commit fraud we turn first to petitioners' contention that ms olbres may have been negligent but not fraudulent in maintaining the cash receipts journals petitioners claim among other things that any errors in maintaining those journals arose because ms olbres was inexperienced and untrained in maintaining the cash receipts journals and because she had certain unidentified distractions for example ms olbres claims that she did not understand that the title cash receipts journal was no longer accurate when she stopped recording all of design consultants' and or white star's receipts in the cash receipts journals that she maintained and instead recorded in those journals only their respective receipts that were deposited into the indian head business checking account on the record before us we are unwilling to accept petitioners' explanations although ms olbres took no college courses in business or accounting around mr dennett created the format for inter alia the cash receipts journals for petitioners and showed ms olbres how to maintain those journals we are incredulous that ms olbres did not understand the meaning of the title cash receipts journal on the record before us we reject petitioners' explanation that it was ms olbres' negligence and not petitioners' fraudulent intent that was responsible for the underpayment and the revised underpayment we turn now to petitioners' claim that although they pro- vided complete written information to mr dennett from which he could have prepared accurate returns for the years in question he made errors in those returns which resulted in the underpayment and the revised underpayment to support their claim petitioners rely on their testimony on the record before us we are unwilling to accept petitioners' explanation at trial of the reasons why the returns in question reflected the underpayment and the revised underpayment by way of illustration of the questions we have about the reliability of ms olbres' testimony she testified about the length of the appointments she had with mr dennett in order to have him prepare petitioners' returns for the years at issue specifi- cally she indicated at trial that she made an appointment with mr dennett she went to each of those appointments she sat down for a minute with mr dennett to review some of petition- ers' deductions and she then left his office ms olbres' testimony about the length of her appointments with mr dennett in order to have him prepare petitioners' returns at issue is contradicted by other evidence in the record including the testimony of mr olbres and ms dennett mr olbres testified inter alia that in order to have mr dennett prepare petition- ers' returns for the years at issue ms olbres and he would go to mr dennett's office we would sit down he would start a piece of paper and a tape and he'd sic ask questions of petitioners ms dennett testified that she reviewed mr dennett's appointment book relating to his meetings with peti- tioners in connection with his preparation of their returns for the years at issue and that that book showed that mr dennett met with petitioners for approximately three hours regarding his return preparation for petitioners for each of those years by way of further illustration of the questions we have about the reliability of ms olbres' testimony and to illustrate similar questions we have about mr olbres' testimony each testified that in connection with mr dennett's preparation of the returns in question they provided mr dennett with complete written materials from which he could have prepared accurate returns that testimony is contradicted by other evidence in the record mr kaply testified that mr dennett informed him that in preparing petitioners' return for each of the years at issue mr dennett met with ms olbres shortly before each such return was due she verbally related to him the figures to be used in each of those returns and gave him the summary in connec- tion with his preparation of their return mr dennett placed those figures on the appropriate lines in each of those returns and made the computations called for by each such return mr kaply further testified that mr dennett advised him that petitioners never provided him with any bank statements or bank records in connection with his preparation of any of petitioners' returns for the years at issue ms dennett's testimony supports mr kaply's testimony regarding what if any materials petitioners provided to mr dennett in connection with his preparation of their return for each of the years at issue she testified that one of her duties in mr dennett's accounting office was to ensure that written materials that clients provided to mr dennett's office for use in the preparation of their returns were returned to those clients upon completion of that return preparation ms dennett further testified that she never saw written materials such as ledgers bank statements and invoice logs belonging to petition- ers and relating to the years at issue which had to be returned to them the preparation of the reconstructed return by mr dennett and ms wildes also calls into question the testimony of ms olbres and mr olbres that they gave complete written materi- als to mr dennett from which he could have prepared accurate returns for the years at issue indeed petitioners did not even provide to mr dennett's office complete written materials from which that office could have reconstructed an accurate return for after the irs began its examination of that taxable_year of petitioners in this connection to assist mr dennett and ms wildes in their reconstruction of petitioners' return petitioners gave mr dennett certain written materials relating to that he did not have previously including the cash receipts journal for that year which petitioners admit did not reflect all of design consultants' receipts for that year petitioners do not dispute that mr dennett and ms wildes accurately reconstructed petitioners' return based on the written materials that they provided to mr dennett's office however the amount of gross_receipts reflected in schedule c of petitioners' reconstructed return was virtually identical to the amount of gross_receipts reflected in the cash receipts journal for and the amount of gross_receipts reflected in schedule c of the return that petitioners filed for that year both of which substantially understated design consultants' receipts for even assuming arguendo that in connection with mr dennett's preparation of their returns for the years at issue petitioners had provided him with the cash receipts journals and the invoice logs which are the only records that would have shown the receipts of design consultants and or white star petitioners' income from design consultants and or white star for and would still have been understated we have found that those written materials did not reflect all of the receipts of design consultants and or white star in that the cash receipts journals omitted inter alia all of the amounts that design consultants and or white star received from greyhound during and most of the amounts that design consultants and or white star received from mayflower during the years at issue and the invoice logs16 did not reflect any receipts from greyhound and or mayflower moreover even assuming arguendo that in connection with mr dennett's preparation of their returns for the years at issue petitioners had provided him with the cash receipts journals and the invoice logs their rental income for and would still have been understated we have found that petitioners understated their rental income in each of the returns at issue petitioners do not claim that their rental income was reflected in the cash receipts journals the invoice logs or any other written records and it appears that none of their rental income was reflected in any such records conse- quently mr dennett must have obtained information regarding the original invoice logs for the years at issue are not part of the record ms olbres claimed at trial that she did not know where they were ms olbres periodically destroyed the copies of portions of the invoice logs for the years at issue that she had brought to petitioners' house petitioners' rental income orally from petitioners and from the summary with respect to their return the summary reflected rental income of dollar_figure from the seabrook property and mr dennett included that income in petitioners' return however petitioners' rental income for that year is dollar_figure mr dennett also included rental income totaling dollar_figure and dollar_figure in petitioners' and schedules e respectively however petitioners' rental income for those years is dollar_figure and dollar_figure respectively it strains credulity that mr dennett would have made errors in all three of petitioners' returns for the years at issue by showing amounts of rental income that understated the rental income that petitioners' received and that were different from the amounts that petitioners provided to him for those years petitioners also contend that the amount of income reflected in each of the returns at issue and the complexity of those returns demonstrate that petitioners must have provided complete written materials to mr dennett in order for him to have pre- pared those returns we disagree although petitioners' returns required certain calculations that appear to be complex eg depreciation and passive_activity_loss limitation the informa- tion that mr dennett needed to perform those calculations eg the cost of petitioners' depreciable_property and rental and other passive_activity_losses sustained by petitioners was information that he had to have obtained from petitioners in further support of their contention that mr dennett made errors in preparing petitioners' returns for the years at issue petitioners offered the testimony of ms laplante throughout the period through around ms laplante as head bookkeeper for the town of hampton worked with mr dennett in his capacity as town treasurer ms laplante testified that during the late 1980's she noticed that mr dennett made a number of mistakes in the treasurer's reports that he was re- quired to prepare and provide to her and that he was three months delinquent in providing her with one of those reports from through around the period during which ms laplante who had graduated from high school and attended two years of college was head bookkeeper for the town of hampton she was not an accountant moreover in a letter of comments and recommenda- tions dated date and prepared by plodzik sander- son an accounting firm retained by the town of hampton to conduct audits of the town that firm made the following comments about ms laplante while she does attempt to maintain some of the required records we do not feel that she possesses the necessary skills to assume responsibility over all bookkeep- ing and record-keeping functions on the record before us we are unwilling to find from ms laplante's testimony that mr dennett made mistakes in his treasurer's reports during the 1980's nor are we willing to infer from her testimony that mr dennett made errors in his preparation of petitioners' returns for the years at issue in order to provide additional support for their contention that mr dennett made errors in his preparation of their returns for the years at issue petitioners assert that mr dennett should have known that their income in each such return was understated because he prepared the unaudited projected financial statements for design consultants for which reflected projected gross_receipts in an amount that is almost twice as large as the gross_receipts reported by petitioners in their schedule c and the unaudited projected financial statements for white star for which reflected projected gross_receipts in an amount that is almost four times as large as those reported by white star in its form 1120sdollar_figure peti- tioners further contend that the date unaudited personal financial statements reflected their assets on a com- plete and accurate basis and that those assets could not have been accumulated with the income that they reported in their returns for the years at issue although mr olbres asked mr dennett to prepare both per- sonal and business unaudited financial statements throughout the approximate 14-year period during which petitioners retained mr dennett mr olbres testified at trial that he did not know the meaning of the term unaudited we are incredulous that mr olbres who was in control of a multimillion dollar business and who had many unaudited financial statements prepared for peti- tioners and their business did not know the meaning of that term with respect to the unaudited projected financial statements for design consultants for those statements were merely projections made by petitioners that included caveats indicating that the figures in those statements were based on representa- tions of petitioners mr dennett took no responsibility for their accuracy and he did not take responsibility to update those figures mr dennett would have had no way of knowing whether or not the projections in those financial statements proved true at the end of that year other than based on informa- tion that petitioners provided to him in this connection it is noteworthy that mr dennett prepared a draft unaudited statement of income and expenditures_for for design consultants based on information provided to him by petitioners and that unlike the unaudited projected financial statements for design consul- tants for that statement reflected gross_receipts and net_income in amounts identical to the gross_receipts and net_income reported in petitioners' schedule c with respect to the unaudited projected financial statements for white star for as with the unaudited projected finan- cial statements for design consultants for those statements were merely projections made by petitioners that included caveats that were virtually identical except for one paragraph not pertinent here to those in the unaudited projected financial statements for design consultants for mr dennett would have had no way of knowing whether or not the projections proved true other than based on information that petitioners provided to him the date unaudited personal financial statements contained caveats indicating that the figures in those statements were based on representations of petitioners and that mr dennett took no responsibility for their accuracydollar_figure we do not believe that mr dennett should have had in mind those unaudited partial-year financial statements of petitioners at the time he was preparing their return for nor do we believe that those unaudited statements should have caused mr dennett to know that the income reported by petitioners in their return was understated or that petitioners could not have accumulated the assets reflected in those unaudited statements with the income that they reported in their returns for the years at issue on the record before us we find that petitioners have not come forward with credible and reliable evidence to contradict respondent's clear_and_convincing evidence establishing the following badges_of_fraud from which petitioners' fraudulent intent may be inferred for and a petitioners the date unaudited personal financial statements did not as petitioners contend provide information on a complete and accurate basis about petitioners' assets because those statements did not include information with respect to petition- ers' checking accounts at indian head or their bank accounts at kennebunk nor did they include information with respect to petitioners' stockholdings in white star substantially understated the gross_receipts of design consul- tants including commissions received from greyhound and or mayflower for each of the years and b petitioners substantially understated the gross_receipts of white star for the year and c petitioners substantially understated their rental income for each of the years and a ms olbres recorded in the cash receipts jour- nals only those design consultants' and or white star's receipts that petitioners deposited into the indian head business checking account and a person examining those journals and no other written records of design consultants and or white star would have no idea that design consultants and or white star received income in addition to their respective receipts that petitioners deposited into the indian head business checking account and b a person examining both the cash receipts journals and the invoice logs that ms olbres maintained would have no idea that design consultants and or white star received commissions in the amounts paid to them by greyhound and or mayflower petition- ers failed to provide mr dennett their accountant with com- plete information from which he could have accurately prepared their and returns the original invoice logs were not available at trial and ms olbres periodically de- stroyed the copies of portions of the invoice logs that she had brought to petitioners' house the testimony in this case of each petitioner was in material respects implausible the testimony of each petitioner was questionable contradicted by other evidence in the record and lacked credibility in certain material respects and petitioners failed to cooperate with respondent's representatives in that inter alia a they failed to provide information that mr kaply had requested at the date meeting with respect to certain bank accounts and approximately one month later mr kaply had to summons that information b they incorrectly told mr kaply at the date meeting that all of the deposits made into the indian head business savings account were transferred from the indian head business checking account and c they did not disclose the existence of the seabrook properties account at the date meeting based on our examination of the entire record before us we find that respondent has established by clear_and_convincing evidence that petitioners intended to evade tax for each of the years and that they knew to be owing by conduct in- tended to conceal mislead or otherwise prevent the collection of such taxes petitioners contend as they did with respect to in a conclusory manner and with no support in the record that assuming arguendo that the court were to find fraudulent intent for and the respective portions of the underpayment and the revised underpayment that are attributable to the deductions that respondent disallowed are not due to fraud we reject that contention on the record before us we find that petitioners failed to show as they must under sec_6653 that the respective portions of the underpayment and the revised underpayment that are attributable to the deductions that respondent disallowed are not due to fraud based on the entire record before us we find that petition- ers are liable for the additions to tax under sec_6653 with respect to the portion of the underpayment for that respondent determined is attributable to fraud and the revised underpaymentdollar_figure issues on which petitioners have the burden_of_proof deficiency determinations petitioners concede the deficiency determination for each of the years at issue except for the portion of the deficiency for that is attributable to the claimed computational error we have sustained petitioners' position with respect to that claimed error accordingly we sustain respondent's defi- ciency determinations for the years at issue except for that portion of the deficiency that is attributable to the computational error we have considered all of petitioners' arguments not dis- cussed herein and we find them to be without merit additions to tax under sec_6661 respondent determined that petitioners are liable for the addition_to_tax under sec_6661 for each of the years at issue petitioners presented no evidence and make no argument about those determinations except for their contention regarding the claimed computational error which we have sustained based on the record before us we find that petitioners have failed to prove that they are not liable for the addition_to_tax under sec_6661 for and except to the extent of the portion of the understatement of income_tax for that is attributable to the computational error accordingly we sustain respondent's determinations under sec_6661 for those years except to that extent to reflect the foregoing decision will be entered under rule


department of the treasury washington dc person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc ita - plr-132724-05 date date internal_revenue_service number release date index number ------------------------- ------------- --------------------------------- ------------------------------------------------- ----------------------------- ------------------------ ein ---------------- - dear --------------- dear --------------- this letter is in reference to a form_1128 application to adopt change or retain a tax_year submitted on behalf of the above-named taxpayer for permission to adopt an accounting_period for federal_income_tax purposes ending november effective date the taxpayer has requested that the form_1128 be considered timely filed under the authority contained in sec_301_9100-3 of the procedure and administration regulations sec_1_442-1 of the income_tax regulations provides that in order to secure the commissioner's consent to a change in annual_accounting_period the taxpayer must file an application on form_1128 with the commissioner within such time and in such manner as is provided in administrative procedures published by the commissioner section of revproc_2002_39 2002_1_cb_1046 provides that a taxpayer must file a form_1128 on or before the due_date not including extensions of the federal_income_tax return for the first effective tax_year thus the taxpayer’s form_1128 requesting to adopt an accounting_period under revproc_2002_39 to a tax_year ending date was due on or before date the information furnished indicates that the application_for the change in accounting_period was filed late because of an error or misunderstanding however this application_for sec_301_9100-3 relief was filed within days of the return's due_date sec_301_9100-3 provides that requests for extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 automatic extensions such as the present situation must be made under the rules of sec_301_9100-3 requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government based on the facts and representations made and evidence provided it is held that the taxpayer has acted reasonably and in good_faith and that the granting of relief will not prejudice the interests of the government accordingly the requirements of the regulations for the granting of relief have been satisfied in this case and the taxpayer's late filed form_1128 requesting permission to adopt a taxable_year ending november effective november ------- is considered timely filed the ruling contained in this letter is based upon facts and representations submitted and evidence provided by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party this office has not verified any of the material submitted in support of the request for a ruling verification of the factual information representations and other data may be required as part of an examination process this ruling addresses the granting of sec_301_9100-3 relief only no opinion is expressed or implied concerning the tax consequences of any other matter specifically no opinion is expressed as to whether the taxpayer is permitted under the internal_revenue_code and applicable regulations to adopt the tax_year requested in the subject form_1128 in accordance with the provisions of a power_of_attorney currently on file we are sending a copy of this letter_ruling to the taxpayer’s authorized representative this ruling is directed only to the taxpayer that requested it sec_6110 provides that it may not be used or cited as precedent enclosures copy of this letter copy for sec_6110 purposes sincerely yours william a jackson branch chief branch office of associate chief_counsel income_tax accounting


department of the treasury internal_revenue_service washington d c date number info release date cc psi uil conex dear i am responding to your inquiry dated date on behalf of your constituent on the definition of a highway vehicle for federal excise_tax purposes wrote about a notice of proposed rulemaking this proposed rule was published in the federal_register on date copy enclosed although we do not respond to individual comments during the rulemaking process we will consider your constituent’s comments before we finalize the regulations i appreciate your constituent’s comments thank you for forwarding her letter as you requested i am responding directly to response if you have any questions please contact me at and have enclosed a copy of that sincerely associate chief_counsel passthroughs and special industries by richard a kocak chief branch enclosures department of the treasury internal_revenue_service washington d c dear i am responding to your letter to rulemaking on the definition of a highway vehicle for federal excise_tax purposes about a notice of proposed this proposed rule was published in the federal_register on date copy enclosed although we do not respond to individual comments during the rulemaking process we will consider your comments before we finalize the regulations i appreciate your comments if you have any questions please contact me at sincerely associate chief_counsel passthroughs and special industries by richard a kocak chief branch enclosure cc


department of the treasury internal_revenue_service washington d c date cc dom fs fi p tl-n-5079-97 number release date uilc memorandum for deborah a butler assistant chief_counsel field service cc dom fs subject from internal_revenue_service national_office field_service_advice this field_service_advice responds to your memorandum dated date requesting reconsideration of a prior field_service_advice issued date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend authority city conduit borrower series a series b dollar_figurea dollar_figureb dollar_figurec issue whether the sanctions imposed by i r c ' b apply where bonds purported to be tax-exempt but the bond-financed facility was never actually used in a manner qualifying for tax-exempt_financing conclusion i r c ' b applies where bonds purported to be tax-exempt but the bond- financed facility was never used in a permissible manner the change in use relevant for application of sec_150 is a change in the purported use of the bond proceeds rather than a physical change in use facts although the facts of the prior fsa are incorporated by reference the most pertinent details are repeated below the authority issued series a bonds in the amount of dollar_figurea the city issued series b bonds in the amount of dollar_figureb the proceeds from the series a and series b bonds referred to collectively as the abonds were loaned to the conduit borrower an i r c ' 501_c_3_organization the conduit borrower used dollar_figurec of the proceeds to purchase existing rental storage facilities that were leased to the general_public the financing documents state that interest on the bonds is tax-exempt you ask us to assume that the bond financed facility is used in an unrelated_trade_or_business as defined in sec_513 law and analysis under i r c ' a gross_income does not include interest on a state_or_local_bond sec_103 provides that sec_103 does not apply to any private_activity_bond unless it is a qualified_bond under sec_141 sec_141 provides that qualified bonds include qualified c bonds sec_145 provides that except as otherwise provided in sec_145 the term qualified_501_c_3_bond means any private_activity_bond issued as part of an issue ifb all code references are to the internal_revenue_code_of_1986 unless otherwise noted all property which is to be provided by the net_proceeds of the issue is to be owned by a 501_c_3_organization or a governmental_unit and such bond would not be a private_activity_bond ifb a c organizations were treated as governmental units with respect to their activities which do not constitute unrelated trades_or_businesses determined by applying sec_513 and b paragraphs and of sec_141 were applied by substituting percent for percent each place it appears and net_proceeds for proceeds each place it appears thus the private_activity_bond rules set forth in sec_141 are incorporated by reference in sec_145 with certain modifications sec_150 provides for certain consequences where there is a change in use of facilities financed with bonds that purported to be tax-exempt private_activity_bonds when issued specifically sec_150 provides that in the case of any facility for which financing is provided from the proceeds of a bond which when issued purported to be a tax-exempt qualified_501_c_3_bond if any portion of such facility is used in a trade_or_business of any person other than a 501_c_3_organization or a governmental_unit but continues to be owned by a 501_c_3_organization then the owner of that portion is treated as engaged in an unrelated_trade_or_business as defined in sec_513 with respect to that portion in addition sec_150 provides that no deduction is allowed for interest on financing described in sec_150 which accrues during the period beginning on the date the facility is used in a trade_or_business of any person other than a 501_c_3_organization or a governmental_unit and ending on the date the facility is not so used the legislative_history of this section states that the consequences under sec_150 of the code apply in addition to any loss of tax exemption h_r conf_rep no 99th cong 2d sess vol c b ii-733 you do not seek advice regarding the taxability of interest on the bonds rather your sole question is whether sec_150 is applicable where bond proceeds finance a facility that from the date_of_issuance is never used in a manner qualifying for tax-exempt_financing in other words does sec_150 deny a deduction for interest where there is no physical achange in use with respect to a bond-financed facility from the plain language of the statute the sanctions imposed by sec_150 apply where bonds purported to be tax-exempt but the financed facility is subsequently used impermissibly as stated in the prior fsa a s ection b a describes a financing_transaction involving bonds purported to be tax- exempt when issued and bond financed property which while owned by a 501_c_3_organization is used in a trade_or_business of a person other than a 501_c_3_organization or a governmental_unit there is no language in the statute that suggests that a physical change in use of the bond-financed facility must occur before sec_150 applies you have asked for clarification of the advice rendered in the prior fsa due to a concern that it contains a statement that may conflict with the rule enunciated above specifically the statement in question states that aa change from a permissible use to an impermissible use is required for sec_150 based on our discussion below we do not believe that this statement is inconsistent with the overall conclusion reached in the prior fsa rather than a change in physical use of the financed facility the change in use contemplated in the prior fsa is the change from a purported tax-exempt purpose to a use not qualifying for tax-exempt_financing the prior fsa was not meant to imply that sec_150 requires the bond-financed facility to be physically used in a permissible manner and then changed to an impermissible use if the bonds purported to be tax-exempt at the time of issuance and the financed facility is subsequently used in a manner not qualifying for tax-exempt_financing sec_150 applies this is consistent with the conclusion of the prior fsa that athe statute only requires that the issuer expect at issuance that the bond will be tax-exempt it does not require that the bond financed facility actually be used in a permissible use such interpretation is also supported by the legislative_history of this section which states that ainterest becomes nondeductible if property financed with the proceeds of the bonds is used in a manner not qualifying for tax-exempt_financing at any time before the bonds are redeemed s rep no 99th cong 2d sess vol c b case development hazards and other considerations our advice is limited to the narrow issue raised in your date memorandum namely whether sec_150 requires an actual change from a permissible to impermissible use as discussed herein the statute only requires that the bonds purported to be tax-exempt and the proceeds were subsequently used in an impermissible manner this position is supported by the plain language and legislative_history of the statute accordingly the litigation hazards with respect to this narrow legal issue are minimal we do not however express any opinion as to the litigation hazards presented by your factual determinations for instance you have asked us to assume that the bond financed facility was used in an unrelated_trade_or_business as contemplated by sec_150 and sec_513 the prior fsa indicated that additional development was necessary to verify this determination as no additional facts have been presented with this request for reconsideration we cannot opine on the merits of your factual assumptions that said we are certainly willing to supplement this advice as additional facts are made available please call if you have any further questions by carol p nachman special counsel financial institutions products branch cc