t c memo united_states tax_court jo delia hovind petitioner v commissioner of internal revenue respondent docket no filed date james l chase for petitioner jason d laseter for respondent memorandum findings_of_fact and opinion marvel judge in a notice_of_deficiency dated date respondent determined deficiencies in petitioner’s federal_income_tax additions to tax under sec_6651 and civil_fraud penalties under sec_6663 as follows year deficiency dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number additions to tax sec_6651 penalties sec_6663 dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number after concessions the issues for decision are whether and to what extent 1unless otherwise indicated section references are to the internal_revenue_code code in effect for the years at issue and rule references are to the tax_court rules_of_practice and procedure monetary amounts have been rounded to the nearest dollar 2in the notice_of_deficiency respondent made the following adjustments increased gross_receipts on petitioner’s schedules c profit or loss from business for the years at issue determined schedule c business_expenses for the years at issue increased petitioner’s interest_income for increased petitioner’s self-employment_tax for the years at issue disallowed petitioner’s claimed personal_exemption deductions for the years at issue and allowed petitioner a rate reduction credit of dollar_figure for in her petition petitioner assigns error only to respondent’s determinations that she received interest_income in and that she received additional schedule c income during the years at issue ordinarily we deem any issue not raised in the assignments of error in the petition conceded see rule b continued petitioner had unreported schedule c income and expenses collectively net profit attributable to creation science evangelism cse and dinosaur adventure land dal for each of the years at issue whether petitioner is liable for additions to tax under sec_6651 for failing to timely file her income_tax return for each of the years at issue and whether petitioner is liable for the fraud_penalty under sec_6663 for each of the years at issue findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts is incorporated herein by this reference petitioner resided in florida when she filed her petition continued accordingly we conclude that petitioner has conceded the adjustments with respect to her self-employment_tax her personal exemptions and the rate reduction credit while petitioner did not expressly challenge respondent’s determinations with respect to the schedule c expenses we construe petitioner’s argument as relating to the allocation of the schedule c net profit gross_income minus expenses accordingly we address petitioner’s liability for the unreported schedule c net profit and the unreported interest_income in this opinion 3in her petition petitioner contends that respondent has waived the penalties for petitioner offers no support for this contention and in his brief respondent contends that she is liable for both the sec_6651 addition_to_tax and the sec_6663 penalty for i background petitioner and kent e hovind mr hovind married in after marrying petitioner and mr hovind moved to michigan where they both attended midwestern baptist college between and petitioner gave birth to her three children kent andrew hovind eric hovind and marlissa hovind in date petitioner and her family moved to pensacola florida petitioner began attending pensacola christian college and eventually received both her bachelor’s and master’s degrees in music in she received a second master of arts degree in sacred music in petitioner and mr hovind acquired by warranty deed property pincite cummings road cummings road property which they used as their personal_residence during the years at issue ii founding of cse mr hovind established cse in cse purported to be a nondenominational religious_organization that advocated the message of creation science and opposed the theory of evolution cse promoted its message through live lectures by mr hovind and eric hovind mr hovind frequently traveled 4on a date or dates that are not in the record petitioner and mr hovind transferred some of their assets to cse at some point they transferred the cse assets to an unincorporated business_trust organization and later to an alleged auxiliary of the faith baptist church domestically and internationally for speaking engagements and petitioner occasionally accompanied mr hovind on these trips cse also promoted its message through sales of merchandise that customers could purchase at the lectures or order through the mail most of cse’s income derived from sales of merchandise including clothing videotapes dvds cds bumper stickers and mouse pads in addition to merchandise promoting the message of creation science cse sold books and videotapes promoting antigovernment and tax-protester arguments as cse expanded its property holdings cse also generated income by renting its properties 5for example in cse earned gross_receipts from merchandise sales of dollar_figure 6for example cse sold good news for filers a video by joe sweet an individual who promoted the use of unincorporated business_trust organizations to evade federal_income_tax the catalog description states that the video e xplains how income_tax is voluntary for most people mr sweet has been permanently enjoined from o rganizing promoting marketing or selling the tax_shelter plan or arrangement entitled ‘good news for form_1040 filers your compliance is strictly voluntary bad news for the irs ’ and from o rganizing promoting marketing or selling ‘unincorporated business_trust organizations’ a k a ‘ubtos’ or any other abusive_tax_shelter plan or arrangement that incites taxpayers to attempt to violate the internal revenue laws petitioner wrote at least one check drawn on a cse account to mr sweet iii expansion of cse from through cse expanded its operations by purchasing properties surrounding the cummings road property in date mr hovind signed a warranty deed for property pincite cummings road cummings road property in date mr hovind acquired property pincite cummings road cummings road property in date petitioner and mr hovind purchased property pincite north palafox north palafox property from darlene porter in date petitioner and mr hovind purchased property pincite north palafox north palafox property from delores choron 7petitioner drafted and signed two checks drawn on a cse account to pay for the property 8the settlement statement for the north palafox property recites that petitioner and mr hovind were to pay dollar_figure for the property to pay for the property cse gave amsouth two checks drawn on cse accounts totaling dollar_figure in exchange for an official bank check in the same amount petitioner drafted and signed the two checks drawn on the cse accounts petitioner and mr hovind also purchased personal_property from ms porter as partial payment for ms porter’s personal_property cse gave amsouth a check drawn on a cse account in exchange for four official bank checks totaling dollar_figure petitioner drafted and signed the check drawn on a cse account she also drafted and signed a check drawn on a cse account made payable to ms porter 9during petitioner drafted and signed checks drawn on a cse account made payable to ms choron iv development of ministerial trusts in mr hovind decided to change the ownership structure of cse and to that end contacted glenn stoll the director of remedies at lawdollar_figure mr stoll directed clients to form personal ministries which once created could be used to form ministerial trusts to manage ministry assets including management of assets on a tax-free basis mr stoll directed clients to associate each ministerial trust with a corporation soledollar_figure on date mr hovind created a personal ministry using the cse foundation trust package mr stoll provided mr hovind executed formal written trust agreements for two trusts creation science evangelism ministry and the creation science evangelism foundation mr hovind named the director of 10remedies at law is an organization that purports to provide financial advice to religious organizations and individuals during petitioner drafted and signed three checks drawn on a cse account made payable to remedies at law mr stoll has been permanently enjoined from organizing promoting marketing or selling any trust tax_shelter plan or arrangement and from p romoting the false and frivolous position that federal income taxes can be reduced or eliminated by using ‘corporations sole’ and ‘ministerial trusts’ to shelter income 11the internal_revenue_service irs has defined a corporation sole as a corporate form authorized under certain state laws to enable bona_fide religious leaders to hold property and conduct business for the benefit of the religious entity revrul_2004_27 2004_1_cb_625 see also chambers v commissioner tcmemo_2011_114 slip op pincite ecclesiastical enterprises and the firm foundation corporations sole established by mr stoll as trustees in the trust package both the director of ecclesiastical enterprises and the firm foundation are identified as being under the jurisdiction of the kingdom of heaven mr hovind is listed as the ceo manager of creation science evangelism ministry petitioner is listed as the first position successor the trust package included sample warranty deeds that demonstrated how to transfer property to a ministerial trust petitioner and or mr hovind purportedly transferred title of the following properties the cummings road property the cummings road property the cummings road 12on date petitioner and mr hovind signed a warranty deed conveying the cummings road property to the faith baptist fellowship the documentary stamps on the warranty deed indicate that the property was transferred for little or no value on date mr hovind signed a quitclaim_deed on behalf of himself and the faith baptist fellowship transferring the cummings road property to the cummings road trust a ministerial property trust its trustee being director of ecclesiastical enterprises despite these alleged transfers petitioner and mr hovind maintained a homeowner’s insurance_policy on the property from at least date through date cse paid petitioner’s and mr hovind’s insurance premiums from date through date 13on date mr hovind signed a warranty deed conveying the cummings road property to elder kent hovind trustee for faith baptist fellowship for little or no value on date mr hovind as trustee for the faith baptist fellowship signed a warranty deed conveying a portion of the continued property the north palafox property and the north palafox propertydollar_figure v expansion of cse in date cse acquired property pincite cummings road cummings road property dollar_figure in date cse acquired property pincite oleander continued cummings road property to eric hovind on date mr hovind signed a quitclaim_deed conveying another portion of the cummings road property to the cummings road trust a ministerial property trust its trustee being director of ecclesiastical enterprises 14on date mr hovind signed a warranty deed conveying the cummings road property to the faith baptist fellowship the documentary stamps on the warranty deed indicate that the property was transferred for little or no value on date mr hovind signed a quitclaim_deed on behalf of himself and the faith baptist fellowship allegedly transferring the cummings road property to the block cummings subdivision trust a ministerial property trust its trustee being director of ecclesiastical enterprises 15on date petitioner and mr hovind signed a quitclaim_deed conveying the north palafox property to the n palafox trust a ministerial property trust its trustee being director of ecclesiastical enterprises 16on date mr hovind signed a quitclaim_deed conveying the north palafox property from the faith baptist fellowship to the n palafox trust a ministerial property trust its trustee being director of ecclesiastical enterprises there is no deed in the record documenting the alleged conveyance of the north palafox property from petitioner and mr hovind to the faith baptist fellowship 17petitioner drafted and signed two checks drawn on a cse account to pay for the cummings road property drive in date cse acquired property pincite cummings road in date cse acquired property pincite oleander drive the creation science evangelism foundation held title to the properties cse built a biblically themed amusement park dal on the acquired propertiesdollar_figure dal featured rides a museum and a science center dal provided tours for visitors and hosted birthday parties dal charged admission for entry to the park sold concessions and offered merchandise for sale vi operation of cse a in general during the years at issue mr hovind and petitioner operated cse as an unincorporated entitydollar_figure cse maintained its primary office pincite cummings drive b bank accounts from date through date cse maintained an account ending in account at amsouth bank from october 18there was no division between the operations or finances of cse and dal employees often performed tasks for both cse and dal dal was not organized as a separate_entity accordingly we find that dal was an asset of cse and its revenue and expenses were properly treated as revenue and expenses of cse 19special agent scott schneider discovered no corporate or partnership documents during the course of his investigation through date cse maintained a money market account ending in account at amsouth bank from date through date cse maintained an account ending in account at regions bank beginning date cse maintained an account ending in account at wachovia bank c petitioner’s role petitioner worked at cse during the years at issue her titles included assistant office manager assistant trust secretary and managing director petitioner was identified as a supervisor on internal documents and directly supervised at least three employees she maintained a regular workspace at cse petitioner’s responsibilities included maintaining records for payroll vacation pay and benefits paying all ministry bills collecting rent providing financial data to mr hovind for future planning keeping the buildings clean and supplied and keeping in contact with mr hovind to make decisions in his absence during the years at issue petitioner also reconciled the bank statements for account she met with mr hovind weekly to keep him informed of 20until employees were paid in cash employee compensation was not characterized as wages instead petitioner and mr hovind referred to the payments as love offerings cse did not withhold payroll_taxes from employee compensation cse’s financial status including current figures for bank_deposits loans payroll expenses and merchandise sales she also issued instructions and memoranda to the entire staff petitioner along with mr hovind was responsible for authorizing all expenditures over dollar_figure petitioner did not receive wages for her services at cse d petitioner’s and mr hovind’s finances although petitioner and mr hovind maintained separate personal bank accounts there was no distinction between their finances and cse’s financesdollar_figure cse paid petitioner’s living_expenses including room and board and provided an automobile petitioner drafted and signed checks drawn on cse bank accounts for 21during the years at issue petitioner and mr hovind maintained the following personal bank accounts from date through date an account at first union national bank later wachovia bank n a presently wells fargo bank n a under the name mrs jo delia hovind kent e hovind account and from date through date an account at sun trust bank under the name dr kent e hovind or jo delia hovind account from date through date petitioner maintained an account at the peoples bank under the name jo hovind account 22for example on a date not apparent from the record mr hovind’s mother died leaving him an inheritance mr hovind deposited the inheritance into a cse account personal expenses including living_expenses her children’s medical_expenses and her children’s tuition at jackson hole bible college and tennessee temple university she drafted and signed checks drawn on cse bank accounts to purchase a piano for her personal_use she drafted and signed at least one check made payable to herself and wrote checks made payable to eric hovind ryan hovind tanya hovind kent andrew hovind danielle hovind and chad hovind petitioner also drafted and signed numerous checks made payable to cash in she drafted and signed nine checks to cash drawn on account totaling dollar_figure in she drafted and signed checks made payable to cash drawn on account totaling dollar_figure in she drafted and signed checks made payable to cash drawn on account totaling dollar_figure in she drafted and signed checks made payable to cash drawn on account totaling dollar_figure in she drafted and signed checks made payable to cash 23for example petitioner drafted and signed checks made payable to j c penney and circuit city 24in petitioner drafted and signed checks drawn on account for kent andrew hovind’s and marlissa hovind’s medical_expenses 25petitioner and mr hovind also lent eric hovind approximately dollar_figure from a cse account drawn on account totaling dollar_figure in she drafted and signed checks made payable to cash drawn on account totaling dollar_figure vii criminal investigation and proceedings on a date not apparent from the record the irs began investigating the operations of cse in special_agent schneider was assigned the case involving cse thereafter he served summonses in an attempt to obtain records from cse neither petitioner nor mr hovind supplied any records in response to the summonses special_agent schneider attempted to obtain the records through summons enforcement but again received no records on date special_agent schneider along with other special agents from the irs criminal_investigation_division executed a search warrant at the cummings road and cummings road properties during execution of the search warrant special_agent schneider asked petitioner whether there was any cash on the premises petitioner informed special_agent schneider that there was approximately dollar_figure in cash however special_agent schneider found dollar_figure in cash on the premises of the dollar_figure approximately dollar_figure was in a safe next to petitioner’s desk and approximately dollar_figure was in a night stand in petitioner and mr hovind’s bedroom in addition to the cash special_agent schneider found an employee list bank records and boxes of checks in and around petitioner’s desk although petitioner was not initially a target of the investigation special_agent schneider eventually expanded the investigation to include petitioner after reviewing the items seized pursuant to the search warrant on date petitioner was indicted on counts of structuring monetary transactions to avoid financial reporting requirementsdollar_figure on date a jury trial commenced in the u s district_court for the northern district of florida pensacola division the jury found petitioner guilty on all counts and the district_court sentenced petitioner to one year and one day of incarceration and three years of supervised release and required her to pay a dollar_figure fine and a dollar_figure special monetary assessmentdollar_figure 26petitioner was indicted on the basis of the checks she had drafted to cash and endorsed tit u s c sec a prohibits an individual from structuring a transaction to avoid a cash transaction report tit u s c sec d imposes a criminal_penalty of a fine imprisonment or both against an individual who structures transactions to evade reporting requirements 27mr hovind was indicted on counts of structuring monetary transactions to avoid reporting requirements counts of willfully failing to deduct and pay federal income and withholding taxes for employees of cse see sec_7202 and sec_1 count of obstructing the administration of the internal revenue laws see sec_7212 the jury found mr hovind guilty on all counts the district_court sentenced mr hovind to months’ incarceration and three years’ supervised continued the district_court subsequently issued forfeiture orders as to petitioner and mr hovind under the forfeiture orders petitioner and mr hovind were liable individually and jointly in the amount of dollar_figure on date the court entered its first order forfeiting substitute property against petitioner and mr hovind which forfeited petitioner’s and mr hovind’s interests in account and propertiesdollar_figure on date the court entered its second order forfeiting substitute property which forfeited petitioner’s and mr hovind’s interests in account dollar_figure viii civil examination in respondent began an examination in respect of petitioner and mr hovind irs revenue_agent alycefaye was assigned to petitioner’s case revenue_agent alycefaye mailed petitioner a letter requesting that petitioner continued release and required him to pay a dollar_figure fine a dollar_figure special monetary assessment and dollar_figure in restitution 28the properties included the and north palafox properties the and cummings road properties and the and oleander road properties 29on date the u s court_of_appeals for the eleventh circuit affirmed petitioner’s and mr hovind’s convictions and the forfeiture orders 305_fedappx_615 11th cir pursuant to fed r evid we take judicial_notice of the court of appeals’ opinion contact her she also attempted to contact petitioner via telephone but received no response revenue_agent alycefaye eventually held a telephone conference with petitioner and an individual representing himself as petitioner’s attorney during the call revenue_agent alycefaye informed petitioner that she had no records of petitioner’s filing tax returns for and petitioner repeatedly stated that she did not have any taxable_income and therefore was not required to file returns for those years petitioner did not provide any records or other information to respondent either before or after the telephone conference consequently respondent used the records seized during the criminal investigation to conduct the examination for petitioner’s and tax years and summoned bank records to conduct the examination for petitioner’s tax yearsdollar_figure ix petitioner’s tax reporting and the notice_of_deficiency petitioner and mr hovind did not file joint federal_income_tax returns for the years at issue in response to respondent’s examination and after respondent’s issuance of a so-called 30-day_letter petitioner on date untimely filed tax returns for the years at issue in addition to her involvement with cse 30with respect to petitioner’s taxable_year the bank records seized during the criminal investigation covered approximately the first six months of petitioner maintained a piano lesson business at her home on the schedules c attached to her form sec_1040 u s individual_income_tax_return petitioner reported business income from her piano lesson business petitioner also reported other income ranging from dollar_figure to dollar_figure attributable to p ersonal use cse residence p ersonal use cse auto and o ccupancy of living space on date respondent issued to petitioner a notice_of_deficiency for the years at issuedollar_figure respondent undertook to reconstruct income generated from cse activities by analyzing deposits into the joint accounts of petitioner and mr hovind petitioner’s and mr hovind’s personal accounts and the cse accounts during the years at issue respondent excluded from taxable net deposits the items that constituted refunds or transfers from another account 31because neither petitioner nor mr hovind cooperated with respondent’s requests for information and records respondent was unable to determine who actually earned the income therefore respondent issued separate notices of deficiency to each of petitioner and mr hovind determining identical deficiencies respondent determined the taxable net deposits into the various bank account sec_32 as follows joint accts personal acct year dollar_figure dollar_figure big_number big_number big_number -0- big_number -0- big_number -0- big_number -0- big_number -0- big_number -0- big_number -0- dollar_figure -0- -0- -0- -0- -0- -0- -0- cse accts net deposits dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number -0- -0- -0- -0- dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number in part on the basis of the deposits analysis summarized above respondent determined that cse had gross receipt sec_33 and deductible expense sec_34 as follows 32respondent determined that all deposits into account a cse account were nontaxable transfers respondent determined that account earned dollar_figure dollar_figure and dollar_figure in interest_income in and respectively respondent did not include the interest_income in calculating cse’s net taxable deposits respondent determined that there were no taxable deposits into account a cse account 33respondent reduced cse’s schedule c gross_receipts by the amounts of gross_receipts petitioner reported on the schedules c attached to her untimely filed returns 34to calculate operating_expenses respondent determined cse’s average operating_expenses for and calculated the ratio of operating_expenses to gross_receipts respondent used this ratio to calculate operating_expenses for year sch c gross_receipts wages salary expense other expenses dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number respondent also determined that petitioner received interest_income of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure in and respectively x tax_court proceedings on date petitioner filed a petition with this court contesting respondent’s determinations mr hovind also filed a petition with this court contesting respondent’s determinations in the separate notice_of_deficiency issued to him respondent filed motions to calendar and consolidate the two cases for trial briefing and opinion on date the court issued an order directing the parties to show cause why the cases should not be calendared and consolidated petitioner responded to this court’s order and objected to the granting of respondent’s motions by order dated date the court denied respondent’s motions to calendar and consolidate consequently we set petitioner’s case for trial during the mobile alabama trial session beginning date opinion i presumption of correctness and burden_of_proof with respect to tax deficiencies a presumption of correctness the commissioner’s deficiency determination ordinarily is entitled to a presumption of correctness see 324_f3d_1289 11th cir aff’g tcmemo_2001_43 however when a case involves unreported income the u s court_of_appeals for the eleventh circuit to which an appeal in this case would lie absent a stipulation to the contrary see sec_7482 has held that the commissioner’s determination of unreported income is entitled to a presumption of correctness only if the determination is supported by a minimal evidentiary foundation linking the taxpayer to an income- producing activity see 994_f2d_1542 11th cir aff’g tcmemo_1991_636 once the commissioner produces evidence linking the taxpayer to an income-producing activity the presumption of correctness applies and the burden of production shifts to the taxpayer to rebut that presumption by establishing that the commissioner’s determination is arbitrary or erroneous id pincite see also 428_us_433 respondent introduced abundant evidence establishing that petitioner was involved in the operations of and had an ownership_interest in cse during the years at issue petitioner managed cse’s financial affairs purchased assets and drafted and signed checks she also supervised employees and made executive decisions in mr hovind’s absence we conclude that respondent laid the requisite minimal evidentiary foundation for the contested unreported income adjustments and that respondent’s determinations are entitled to a presumption of correctness although her argument is not entirely clear petitioner appears to contend that respondent’s determinations are not entitled to the presumption of correctness because respondent acted arbitrarily in allocating of the income from cse to both petitioner and mr hovind respondent contends that he may issue separate notices of deficiency to two taxpayers assigning identical items of income to both taxpayers the commissioner may in notices of deficiency present alternative claims for deficiencies when there is a basis for doing so he may assert in the alternative that the same income was received by different taxpayers 66_tc_101 it is well established that the commissioner may take alternative positions to protect the public fisc see 211_f3d_504 n 9th cir aff’g tcmemo_1998_297 209_f3d_1281 11th cir aff’g in part vacating in part and remanding tcmemo_1999_49 273_f2d_649 9th cir 92_tc_612 n aff’d 920_f2d_1335 7th cir doggett v commissioner t c pincite the commissioner may assert alternative positions as long as he does not act arbitrarily capriciously or in bad faith see 391_f2d_775 8th cir vacating tcmemo_1965_154 revell inc f 2d pincite the commissioner may make alternative determinations against spouses see doggett v commissioner t c pincite the fact that the commissioner has made a separate determination of tax against each of the spouses for the same tax_liability does not negate the presumption of correctness as to either notice smith v commissioner tcmemo_1996_292 slip op pincite respondent issued separate notices of deficiency to petitioner and mr hovind in which he determined in effect that petitioner and mr hovind were each liable for of the net profit generated by cse and its related activities respondent issued the notices of deficiency following an examination during which petitioner and mr hovind failed to cooperate with respondent because neither petitioner nor mr hovind cooperated during the examination respondent did not determine how much of the total net_income was attributable to petitioner and mr hovind respectively although petitioner argues otherwise we find that respondent acted in good_faith in issuing the notices of deficiency to both petitioner and mr hovind on the basis of petitioner and mr hovind’s bank records alone respondent could not determine whether and to what extent petitioner and mr hovind individually were liable for the unreported net_income of cse the actions of petitioner and mr hovind in withholding information resulted in respondent’s determination to assign the same income to each of petitioner and mr hovinddollar_figure furthermore respondent seeks a consistent resolution for both petitioner and mr hovind respondent concedes that the notices of deficiency are intended to assert alternative deficiencies and that the commissioner is seeking to tax the 35as the u s court_of_appeals for the eighth circuit noted in 391_f2d_775 8th cir vacating tcmemo_1965_154 tax cases often involve substantial sums of money and the commissioner is charged with protection of the revenues therefore g ood faith inconsistency buttressed by acceptable argument when considered in the framework of the commissioner’s responsibilities cannot be regarded as an offense which provides a bar to bona_fide tax litigation profit only once see doggett v commissioner t c pincite holdner v commissioner tcmemo_2010_175 slip op pincite we therefore reject petitioner’s arguments and we conclude that respondent’s determinations are entitled to the presumption of correctness b burden_of_proof generally the taxpayer bears the burden of proving that the commissioner’s determinations in a notice_of_deficiency are erroneous see rule a 290_us_111 if however a taxpayer produces credible evidence36 with respect to any factual issue relevant to ascertaining the taxpayer’s tax_liability and satisfies the requirements of sec_7491 the burden_of_proof on any such issue shifts to the commissioner sec_7491 sec_7491 requires a taxpayer to demonstrate that he or she complied with the substantiation requirements maintained all records required under the code and cooperated with reasonable requests by the secretary37 for witnesses information 36credible evidence is evidence the court would find sufficient upon which to base a decision on the issue in the taxpayer’s favor absent any contrary evidence see 116_tc_438 37the term secretary means the secretary_of_the_treasury or_his_delegate sec_7701 and the term or_his_delegate means any officer employee or agency of the treasury_department duly authorized by the secretary_of_the_treasury directly or indirectly by one or more redelegations of authority to continued documents meetings and interviews see also 116_tc_438 the taxpayer bears the burden of proving that all of the sec_7491 requirements have been satisfied 135_tc_471 aff’d 668_f3d_888 7th cir petitioner contends that the burden_of_proof should shift to respondent under sec_7491 because she produced credible_evidence and satisfied the requirements of sec_7491dollar_figure we disagree the record establishes that petitioner did not cooperate with respondent’s reasonable requests and did not maintain the required records accordingly petitioner bears the burden_of_proof see higbee v commissioner t c pincite ii petitioner’s income for the years at issue a applicability of the bank_deposits method gross_income includes all income from whatever source derived sec_61 a taxpayer must maintain books_and_records establishing the amount of hi sec_37 continued perform the function mentioned or described in the context sec_7701 a i 38in her brief petitioner contends only that she introduced credible_evidence and cooperated with all reasonable requests by the secretary she does not address whether she complied with the substantiation requirements or maintained all required records or her gross_income sec_6001 if a taxpayer fails to maintain and produce the required books_and_records the commissioner may determine the taxpayer’s income by any method that clearly reflects income see sec_446 92_tc_661 sec_1_446-1 income_tax regs the commissioner’s reconstruction_of_income need only be reasonable in light of all surrounding facts and circumstances petzoldt v commissioner t c pincite the bank_deposits method is a permissible method of reconstructing income see 102_tc_632 see also langille v commissioner tcmemo_2010_49 aff’d 447_fedappx_130 11th cir bank_deposits constitute prima facie evidence of income see 87_tc_74 the commissioner need not show the likely source of a deposit treated as income but the commissioner must take into account any nontaxable source or deductible expense of which he has knowledge in reconstructing income using the bank_deposits method see clayton v commissioner t c pincite however the commissioner need not follow any leads suggesting that a taxpayer has deductible expenses 96_tc_858 aff’d 959_f2d_16 2d cir after the commissioner reconstructs a taxpayer’s income and determines a deficiency the taxpayer bears the burden of proving that the commissioner’s use of the bank_deposits method is unfair or inaccurate see clayton v commissioner t c pincite the taxpayer must prove that the reconstruction is in error and may do so in whole or in part by proving that a deposit is not taxable see id respondent introduced credible_evidence that petitioner did not maintain adequate books_and_records with respect to her income although the record contains evidence that she maintained some records with respect to the operations of cse these records alone do not clearly reflect cse’s income see 348_us_121 petitioner did not maintain any records with respect to other income and or her proper share of cse’s income therefore we find that it was reasonable for respondent to use an indirect method ie the bank_deposits method to reconstruct her income for each year at issue respondent reconstructed petitioner’s income using the bank_deposits method respondent analyzed petitioner’s bank records and prepared schedules that summarized the deposits to disbursements from and other transactions occurring in petitioner’s and cse’s bank accounts during the years at issue and identified deposits that were not taxabledollar_figure respondent has properly reconstructed petitioner’s income using the bank_deposits method for the years at issue accordingly the burden_of_proof falls on petitioner to demonstrate that respondent’s determinations are arbitrary or erroneous b petitioner’s arguments petitioner does not assign error to respondent’s use of the bank_deposits method or respondent’s reconstruction_of_income petitioner contends only that respondent may not assign the unreported income to her because the unreported income is attributable entirely to mr hovind although her argument is not entirely clear petitioner appears to argue that the doctrine_of collateral_estoppel precludes respondent from relitigating the issue of whether she may be assigned any of the unreported income from cse because courts in prior cases have held that mr hovind alone is responsible for cse’s income petitioner also contends that she neither earned nor was responsible for the unreported income and therefore respondent acted erroneously in attributing the unreported income to petitioner we address each of petitioner’s arguments below 39revenue agent alycefaye credibly testified that she eliminated from taxable_income the items she identified as nontaxable such as interaccount transfers or returned checks c collateral_estoppel in general under the doctrine_of collateral_estoppel once an issue of fact or law is actually and necessarily determined by a court of competent jurisdiction that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation 440_us_147 collateral_estoppel is a judicially created equitable principle the purposes of which are to protect parties from unnecessary and redundant litigation to conserve judicial resources and to foster certainty in and reliance on judicial action id pincite the following five conditions must be satisfied before we may apply collateral_estoppel in the context of a factual dispute t he issue in the second suit must be identical in all respects with the issue decided in the first suit the issue in the first suit must have been the subject of a final judgment entered by a court of competent jurisdiction the person against whom collateral_estoppel is asserted must have been a party or in privity with a party in the first suit the parties must actually have litigated the issue in the first suit and resolution of the issue must have been essential to the prior decision and the controlling facts and applicable legal principles must remain unchanged from those in the first suit 130_tc_222 see also 133_tc_87 90_tc_162 aff’d 904_f2d_525 9th cir the party asserting collateral_estoppel as an affirmative defense in this case petitioner bears the burden_of_proof see rule a petitioner did not affirmately plead collateral_estoppel in her pleadings as required by rule however respondent did not object to petitioner’s raising the collateral_estoppel argument and respondent argued the issue on brief under these circumstances we consider the issue to have been raised and tried by consent of the parties see rule b see also 103_tc_525 aff’d 100_f3d_778 10th cir in support of her argument petitioner relies on this court’s opinion in hovind v commissioner tcmemo_2006_143 aff’d 228_fedappx_966 11th cir and the opinion of the u s bankruptcy court for the northern district of florida in 197_br_157 bkrtcy n d fla petitioner also relies on the transcript of mr hovind’s sentencing proceedings before the u s district_court hovind v commissioner tcmemo_2006_143 in hovind this court reviewed the appropriateness of a proposed levy action with respect to mr hovind’s federal_income_tax deficiencies and additions to tax we held that the underlying liability was not properly at issue because mr hovind had received a notice_of_deficiency and a lien notice regarding the liabilities id slip op pincite after reviewing the commissioner’s determination for an abuse_of_discretion we held that the proposed levy action could proceed id slip op pincite in reaching its holding this court made no findings with respect to whether petitioner owned controlled or operated cse mr hovind did not contest and this court did not address the merits of the underlying liabilities consequently the parties did not actually litigate the issue of whether mr hovind alone is responsible for the income of cse 197_br_157 in in re hovind the irs filed a motion to dismiss alleging that mr hovind filed the case in bad faith for the sole purpose of avoiding payment of federal income taxes id pincite the u s bankruptcy court found that mr hovind failed to file tax returns resisted collection efforts and provided false information to the court and therefore it dismissed mr hovind’s petition for bankruptcy under chapter id pincite in its opinion the u s bankruptcy court did not address mr hovind’s liability for the unpaid federal income taxes the parties did not actually litigate the issue of whether mr hovind alone was responsible for cse’s income and the u s bankruptcy court made no findings concerning mr hovind or petitioner’s level of dominion and control_over cse’s operations sentencing transcript in her brief petitioner relies on statements made by the assistant u s attorney and by the presiding judge at mr hovind’s sentencing proceedingsdollar_figure the statements by the assistant u s attorney are not findings_of_fact that were actually and necessarily decided by a court of competent jurisdiction accordingly these statements do not have preclusive effect with respect to statements made by the presiding judge petitioner relies solely on the following statement made by the court in making an upward adjustment to the base level offense on the basis that mr hovind was an organizer and leader of the structuring operation mr hovind as i’ve already indicated was the decision-making authority for the operation and based on the degree of control and influence that he exercised over others including those involved in the financial transactions at issue here i believe i can find and do find that the adjustment for being an organizer and a leader of an otherwise extensive operation is appropriate that he did direct the 40in support of her argument petitioner also cites the transcript of her own sentencing proceedings before the u s district_court petitioner however does not explain why the transcript of her sentencing proceedings should preclude respondent from litigating the issue of whether she bears responsibility for the unreported income at issue in this case activities of those involved in the financial transactions namely those activities of his wife mrs hovind although the presiding judge found that mr hovind direct ed the activities of those involved in the financial transactions this statement related to mr hovind’s role as a director in structuring the cash transactions we find that the presiding judge did not actually and necessarily decide that mr hovind alone exerted control_over cse beyond her statement that mr hovind had decision- making authority the presiding judge made no findings with respect to petitioner’s and mr hovind’s relative involvement with cse because petitioner has not established that she satisfied any of the conditions for collateral_estoppel to apply we reject petitioner’s collateral_estoppel argument d allocation of income sec_61 defines gross_income as all income from whatever source derived including but not limited to the following items compensation_for services including fees commissions fringe_benefits and similar items gross_income derived from business gains derived from dealings in property interest rents the definition is construed broadly and extends to all accessions to wealth clearly realized over which the taxpayer has complete control 348_us_426 as the supreme court explained a gain constitutes taxable_income when its recipient has such control_over it that as a practical matter he derives readily realizable economic value from it 343_us_130 when the commissioner reconstructs income using the bank_deposits method the taxpayer’s gross_income includes deposits into all accounts over which the taxpayer has dominion and control including deposits into the taxpayer’s personal bank accounts see chambers v commissioner tcmemo_2011_14 slip op pincite price v commissioner tcmemo_2004_103 slip op pincite cohen v commissioner tcmemo_2003_42 slip op pincite woodall v commissioner tcmemo_2002_318 slip op pincite woods v commissioner tcmemo_1989_611 aff’d without published opinion 929_f2d_702 6th cir a taxpayer has dominion and control when the taxpayer is free to use the funds at will rutkin u s pincite use of funds for personal purposes indicates dominion and control woods v commissioner tcmemo_1989_611 petitioner testified that she had little involvement with the operation of cse petitioner further testified that she signed checks on behalf of cse only when mr hovind told her to do so she also testified that she did not draft the checks and that she only signed blank checksdollar_figure we find petitioner’s testimony to be self-serving unreliable and not credible petitioner had signatory authority and exercised control_over cse’s accounts she drafted and signed checks drawn on cse accounts during the years at issue her involvement with cse during the years at issue was extensive petitioner supervised employees made executive decisions in mr hovind’s absence and maintained some records the record also contains ample credible_evidence that petitioner managed cse’s financial affairs including evidence that petitioner reconciled cse’s accounts and advised mr hovind on financial matters in affirming petitioner’s and mr hovind’s criminal convictions the u s court_of_appeals for the 11th circuit stated that c ompany documents and records of the transaction sec_41with respect to the checks drawn on account for the period from date through date it appears that mr hovind signed all of the checks it is unclear whether petitioner martha harris a cse employee or mr hovind drafted the checks with respect to the checks drawn on account between date and date it appears that petitioner drafted and signed most of the checks 42special agent schneider testified that petitioner was mr hovind’s right- hand man and that petitioner controlled cse’s finances and made all business decisions in mr hovind’s absence established that petitioner controlled the finances of cse and controlled most of the checks that were cashed 305_fedappx_615 11th cir on the basis of the entire record we find that petitioner exercised dominion and control_over cse bank accounts although we reject petitioner’s argument that mr hovind alone exercised dominion and control_over cse’s accounts the preponderance of credible_evidence in the record demonstrates and we so find that petitioner was actively involved in the operation of cse and that she and mr hovind jointly owned and operated cse respondent has introduced no credible_evidence that petitioner was the sole owner of cse or that mr hovind had only minimal involvement in cse’s operation accordingly we are faced with the task of determining how much of cse’s net profit should be allocated to petitionerdollar_figure neither party introduced any definitive proof regarding a more precise allocation of income between petitioner and mr hovind or credible_evidence regarding the scope of petitioner’s and mr hovind’s involvement in cse in the absence of credible_evidence regarding a more precise basis for allocating the net 43we recognize respondent’s acknowledgment that he is seeking to tax cse’s profits only once petitioner and mr hovind however did not file joint returns for the years at issue and therefore they are not jointly and severally liable for the determined income_tax deficiencies income generated by cse we will allocate income to petitioner in accordance with our finding that petitioner and mr hovind jointly owned and controlled cse because petitioner did not introduce any credible_evidence to support a finding that her ownership_interest in cse was more or less than we shall allocate of the unreported net profit attributable to cse to her as unreported income see eg mckenzie family_trust v commissioner tcmemo_1984_9 accordingly we find that petitioner had unreported income equal to of the net profit attributable to cse defined as cse’s gross_receipts reduced by the schedule c expenses allowed in the notice_of_deficiency for the years at issuedollar_figure because we find that 44neither party addressed the effect of state law on petitioner’s right to income with respect to a joint bank account or an unincorporated business under florida law petitioner and mr hovind likely held their interests in the joint bank accounts and cse as tenancies by the entirety see beal bank ssb v almand assocs so 2d fla see also clements v clements so 2d fla dist ct app when a married couple holds property as a tenancy by the entireties each spouse is said to hold it ‘per tout ’ meaning that each spouse holds the ‘whole or the entirety and not a share moiety or divisible part ’ beal bank ssb so 2d pincite while under state law petitioner may have had the right to the entirety of income in the joint bank accounts and earned by cse the issue in the current proceeding is the appropriate allocation of that income for federal tax purposes because we are convinced that petitioner and mr hovind jointly owned and controlled cse and its related activities we shall allocate only a portion of the net_income to petitioner 45additionally we note that petitioner had income attributable to her piano lesson business that was reported on the schedules c attached to her untimely continued both petitioner and mr hovind had dominion and control_over cse’s accounts during the years at issue and we allocate the income accordingly we also find that petitioner has unreported income equal to of the interest_income earned on cse’s accounts during the years at issue finally we find that petitioner had unreported income equal to of the deposits into her personal account during the years at issue iii sec_6651 additions to tax sec_6651 imposes an addition_to_tax for failure to timely file a return in the amount of of the tax_liability required to be shown on the return for each month during which such failure continues but not exceeding in the aggregate unless it is shown that such failure is due to reasonable_cause and not due to willful neglect see sec_6651 469_us_241 reasonable_cause exists if the taxpayer exercised ordinary business care and prudence but was unable to file the return within the time prescribed by law sec_301_6651-1 proced admin regs willful neglect is a conscious intentional failure or reckless indifference boyle u s pincite continued filed returns the total unreported income allocated to petitioner pursuant to this opinion shall be adjusted appropriately in the rule_155_computations to reflect the income that she reported under sec_7491 respondent has met his burden of production because petitioner admits and the record clearly establishes that petitioner failed to file her and tax returns by the due dates petitioner argues that she had reasonable_cause for failing to timely file her returns because she believed that she was not required to file returns for the years at issue a taxpayer’s mistaken belief that no return is required under the law does not necessarily constitute reasonable_cause for failure_to_file a return see 27_tc_840 5_tc_791 aff’d 159_f2d_269 4th cir a taxpayer who decides not to file a return must use reasonable care to ascertain that no return was necessary see beck chem equip corp v commissioner t c pincite reasonable reliance on the advice of a tax adviser that no return is required to be filed may constitute reasonable_cause for a taxpayer’s failure_to_file the return see boyle u s pincite n the taxpayer must show that the adviser was a competent and qualified professional who had sufficient expertise to justify the taxpayer’s reliance on him the taxpayer provided all necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment see 115_tc_43 aff’d 299_f3d_221 3d cir see also 98_tc_294 petitioner testified that she did not file tax returns for the years at issue on the basis of her mother’s advice petitioner testified that her mother who is not a certified_public_accountant was a tax_return_preparer who had been preparing tax returns for approximately years petitioner further testified that she told her mother how much she earned from piano lessons and that her mother advised her that she did not need to file a return petitioner also testified that she talked to other individuals about whether she was required to file a tax_return petitioner testified that she spoke with john schlabach a certified_public_accountant she testified that she told mr schlabach about her income from the piano lessons and that he advised her that she did not need to file a return she further testified that she did not show either her mother or mr schlabach the checks she had drafted and signed drawn on cse accounts in the absence of corroborating evidence we are not required to accept petitioner’s self-serving testimony see tokarski v commissioner t c pincite furthermore petitioner did not introduce into evidence any documentation regarding her meetings with mr schlabach and petitioner did not call either her mother or mr schlabach as a witness a taxpayer’s failure to call witnesses and produce relevant documentary_evidence within her control supports an inference that such testimony and documentation would not support her position 6_tc_1158 aff’d 162_f2d_513 10th cir petitioner’s testimony is neither credible nor sufficient even if we believed it to establish that petitioner had reasonable_cause for her failure_to_file timely returns for the years at issue we sustain respondent’s determination that petitioner is liable for the sec_6651 additions to tax iv sec_6663 fraud penalties if any part of an underpayment on a return is due to fraud sec_6663 imposes on the taxpayer filing the return a penalty equal to of the part of the underpayment attributable to fraud the commissioner has the burden of proving by clear_and_convincing evidence that the taxpayer is liable for the fraud_penalty see sec_6663 sec_7454 rule b dileo v commissioner t c pincite to carry his burden_of_proof the commissioner must prove by clear_and_convincing evidence that an underpayment_of_tax exists and some part of the underpayment is due to fraud see sec_6663 if the commissioner proves that any part of an underpayment is attributable to fraud then the entire underpayment shall be treated as attributable to fraud unless the taxpayer shows by a preponderance_of_the_evidence that a part was not so attributable see id a underpayment_of_tax in the notice_of_deficiency respondent determined that petitioner underpaid her federal_income_tax by dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively as discussed supra pp we find that petitioner had unreported income equal to of the net profit attributable to cse of the income attributable to deposits into joint accounts and of the income attributable to deposits into her personal account accordingly respondent has proven by clear_and_convincing evidence that petitioner underpaid her federal_income_tax for the years at issue b fraudulent intent introduction if fraud is determined for multiple taxable years the commissioner’s burden applies separately for each of the years temple v commissioner tcmemo_2000_337 slip op pincite aff’d 62_fedappx_605 6th cir the commissioner satisfies this burden by showing that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes dileo v commissioner t c pincite fraud does not include negligence carelessness misunderstanding or unintentional understatement of income 236_f2d_844 3d cir the existence of fraud is a question of fact to be resolved upon consideration of the entire record see dileo v commissioner t c pincite fraud is never presumed and must be established by independent evidence of fraudulent intent see 251_f2d_311 9th cir aff’g tcmemo_1956_112 fraud may be shown by circumstantial evidence because direct evidence of the taxpayer’s fraudulent intent is seldom available see petzoldt v commissioner t c pincite 67_tc_181 aff’d without published opinion 578_f2d_1383 8th cir the taxpayer’s entire course of conduct may establish the requisite fraudulent intent see 56_tc_213 any conduct likely to mislead or conceal may constitute an affirmative act of evasion see 317_us_492 and an intent to mislead may be inferred from a pattern of such conduct see 394_f2d_366 5th cir aff’g tcmemo_1966_81 however fraud is not proven when a court is left with only a suspicion of fraud and even a strong suspicion is not sufficient to establish a taxpayer’s liability for the fraud_penalty see 234_f2d_823 5th cir aff’g in part rev’g in part on another ground tcmemo_1955_9 184_f2d_86 10th cir 66_tc_538 badges_of_fraud because it is difficult to prove fraudulent intent by direct evidence the commissioner may establish fraud by circumstantial evidence which includes various badges_of_fraud hereinafter factors on which the courts often rely see 796_f2d_303 9th cir aff’g tcmemo_1984_601 dileo v commissioner t c pincite the factors focus on whether the taxpayer engaged in certain conduct that is indicative of fraudulent intent such as understating income failing to maintain adequate_records offering implausible or inconsistent explanations concealing income or assets failing to cooperate with tax authorities engaging in illegal activities providing incomplete or misleading information to the taxpayer’s tax_return_preparer offering false or incredible testimony filing false documents including filing false income_tax returns failing to file tax returns and engaging in extensive dealings in cashdollar_figure see bradford v commissioner f 2d pincite 94_tc_654 91_tc_874 21_tc_917 aff’d 220_f2d_871 4th cir see also morse v commissioner tcmemo_2003_332 aff’d 419_f3d_829 8th cir the existence of any one factor is not dispositive but the existence of several factors is persuasive circumstantial evidence of fraud see 99_tc_202 petzoldt v commissioner t c pincite respondent contends that the following factors are present in this case petitioner understated her income for the years at issue petitioner failed to maintain adequate_records for the years at issue petitioner offered implausible or inconsistent explanations with regard to her role at cse and her recordkeeping during the years at issue petitioner concealed income and assets for the years at issue petitioner failed to cooperate with tax authorities regarding the years at issue petitioner engaged in and concealed illegal activities during the year sec_46these factors are not exclusive see 99_tc_202 at issue petitioner failed to timely file returns for the years at issue and petitioner engaged in extensive dealings in cash during the years at issuedollar_figure a understating income a pattern of substantially underreporting income for several years is strong evidence of fraud particularly if the reason for the understatements is not satisfactorily explained or due to innocent mistake see holland u s pincite- spies u s pincite webb v commissioner f 2d pincite on her untimely filed returns petitioner reported taxable_income of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively respondent determined that petitioner underreported her taxable_income by dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively we have found that petitioner is responsible for of the net profit attributable to cse of the income attributable to deposits into joint accounts and of the income attributable to deposits into her personal 47respondent also contends that petitioner filed false documents for the years at issue because we find that respondent has proven that the other factors are present in this case we need not address whether petitioner filed false documents for the years at issue account petitioner failed to report over of her total taxable_income for each of the years at issue we find that petitioner substantially underreported her income for and given the amount of her underreporting her pattern of underreporting income and her lack of any satisfactory explanation for underreporting petitioner’s understatements are persuasive evidence of fraudulent intent b failing to maintain adequate_records the failure to maintain adequate_records supports a finding of fraud see 89_tc_1280 see also 75_tc_1 although we consider the taxpayer’s level of expertise a taxpayer is not excused from keeping accurate records when the taxpayer has experience operating his or her own business 781_f2d_1566 11th cir aff’g tcmemo_1985_63 in a letter attached to her untimely filed returns petitioner wrote i have not kept financial records as i did not know that i needed to do so petitioner introduced no records of her income and did not substantiate the amounts she claimed as income on her tax returns although petitioner claimed that she was unaware of the obligation to keep financial records we reject this explanation as not credible accordingly petitioner’s failure to keep and or provide records of income and expenses is indicative of fraud c implausible or inconsistent explanations a taxpayer’s implausible or inconsistent explanations for his or her actions may constitute circumstantial evidence of fraudulent intent see bradford v commissioner f 2d pincite 363_f2d_151 9th cir 81_fedclaims_772 a taxpayer’s filings and testimony may provide evidence of implausible or inconsistent explanations see goldston v commissioner tcmemo_2011_9 slip op pincite petitioner gave implausible and inconsistent explanations for her conduct throughout the trial and on brief she testified that she wrote checks only at the direction of mr hovind but later testified that mr hovind frequently traveled and that she had implied permission to write checks she also testified that she merely signed blank checks and that ms harris was the individual primarily responsible for drafting the checks at trial however petitioner acknowledged that she drafted and signed numerous checks drawn on cse’s accounts petitioner repeatedly asserted that she had little to no involvement with the operation of cse although the record is replete with evidence that petitioner worked at cse in a managerial capacity and acted as coowner of the business with mr hovind petitioner continued to refer to cse’s payment of her personal expenses as nontaxable love offerings although she filed returns acknowledging that some part of those payments was taxable as income to her finally petitioner argues that she lacked the intent to evade tax and therefore we cannot find her liable for the civil_fraud penalties she points to the fact that she filed amended returns once she was made aware of her federal filing obligations petitioner also contends that any fraudulent intent during the years at issue was attributable to mr hovind however we find that it is more reasonable to infer from petitioner’s course of conduct that her true intention was to conceal substantially_all of her income and to take her chances that the fraud would not be discovered our finding is supported by the fact that she did not amend her returns until after respondent began a civil investigation in respect of her furthermore the record shows that petitioner was an active_participant in the operation of cse and along with mr hovind engaged in a course of conduct designed to conceal and mislead petitioner’s assertion of implausible and inconsistent explanations is circumstantial evidence of her fraudulent intent d concealing assets or income an intent to evade tax may be inferred from concealment of assets or covering up sources of income spies u s pincite engaging in transactions likely to mislead or conceal is evidence of fraudulent intent id see also simco auto pump co v commissioner tcmemo_1999_235 slip op pincite aff’d without published opinion 238_f3d_422 6th cir a taxpayer’s use of a business to conceal the personal nature of expenses is evidence of fraud see 42_tc_358 aff’d 355_f2d_929 6th cir evans v commissioner tcmemo_2010_199 slip op pincite romer v commissioner tcmemo_2001_168 slip op pincite during the years at issue petitioner and mr hovind acquired property using funds in cse’s accounts while some properties initially were titled in petitioner’s and mr hovind’s names other properties initially were titled in mr hovind’s name alone or in cse’s name petitioner and mr hovind titled the properties in different names even though they used their shared funds to purchase the properties and petitioner drafted and signed checks to purchase the properties through a series of transactions petitioner and mr hovind purportedly transferred the properties to the faith baptist fellowship and later to various ministerial trusts petitioner signed many of the documents that purported to transfer for little to no value properties she and mr hovind had purchased the dates of transfer coincide with actions and inquiries by respondent with respect to petitioner mr hovind and cse while petitioner signed documents purportedly transferring the properties she and mr hovind continued to occupy control and rent the properties furthermore the district_court found that petitioner maintained ownership interests in all of the properties purportedly transferred to the ministerial trust respondent introduced evidence that petitioner willfully concealed these assets from the irs additionally petitioner wrote checks drawn on cse’s accounts to herself to her children and to cash she used the funds in cse’s accounts to pay personal living_expenses for herself and her family members thereby disguising her personal expenses as business_expenses see eg romer v commissioner tcmemo_2001_168 slip op pincite we find that petitioner concealed income by engaging in purported transactions to transfer properties and by using business bank accounts to pay her personal living_expenses e failing to cooperate with tax authorities failure to cooperate with revenue agents during an investigation is a badge of fraud see korecky v commissioner f 2d pincite9 525_f2d_741 9th cir aff’g in part rev’g in part 60_tc_199 grosshandler v commissioner t c pincite such failure is persuasive evidence of a taxpayer’s guilty knowledge see 79_tc_888 with respect to respondent’s criminal investigation petitioner testified that she copied all bank records payroll records and bank statements and delivered them to special_agent schneider petitioner further testified that she did not know how much cash was on the premises when special_agent schneider arrived to conduct his investigation and that she did not have access to the cash on the premises with respect to respondent’s examination petitioner testified that she was not contacted by anyone from the irs concerning her personal income_tax until date petitioner testified that she attempted to cooperate with revenue_agent alycefaye’s investigation and that revenue_agent alycefaye did not specifically request that petitioner provide any records although petitioner testified that she cooperated with respondent’s revenue agents we find petitioner’s testimony to be self-serving and not credible in contrast respondent introduced credible_evidence that petitioner provided no records to special_agent schneider and that petitioner misled special_agent schneider about the amounts of and her access to cash hoards at the cummings road propertydollar_figure respondent also introduced credible_evidence that petitioner and her attorney attempted to impede revenue_agent alycefaye’s civil investigation of petitionerdollar_figure petitioner attempted to cooperate with respondent only after she had already exerted considerable resistance to respondent’s collection efforts see 252_f2d_56 9th cir petitioner’s failure to cooperate with tax authorities is indicative of fraud f engaging in or concealing illegal activities engaging in illegal activity even if the taxpayer is not charged with a tax crime is circumstantial evidence of fraud niedringhaus v commissioner 48petitioner signed a notice attempting to discourage respondent’s criminal investigators from entering her properties or performing their official duties the notice purported to warn federal agents that petitioner would pursue legal remedies against the federal agents who interfered 49revenue agent alycefaye testified that although she did not specifically request any records from petitioner during a telephone conference with petitioner and her attorney she attempted to request records but petitioner repeatedly interrupted and cut off her requests she further testified that petitioner provided no records or documentation during the course of the examination t c pincite see also asbury v commissioner tcmemo_2011_107 slip op pincite langille v commissioner tcmemo_2010_49 slip op pincite in petitioner was convicted of structuring transactions in order to avoid cash transaction reporting requirements the record supports a finding that petitioner engaged in this illegal activity to conceal income from federal authorities and we so find petitioner’s participation in illegal activities is persuasive circumstantial evidence of fraud g failing to file returns failure_to_file tax returns even over an extended period does not establish fraud per se see grosshandler v commissioner t c pincite an extended pattern of failing to file tax returns however may be persuasive circumstantial evidence of fraud see 544_f2d_883 5th cir aff’g tcmemo_1975_368 see also runkle v commissioner tcmemo_2005_112 slip op pincite untimely filing of tax returns also may be persuasive circumstantial evidence of fraud see 70_tc_562 aff’d without published opinion 621_f2d_439 5th cir energy_research generation inc v commissioner tcmemo_2011_45 slip op pincite petitioner did not file her federal tax returns for the years at issue until after revenue_agent alycefaye contacted her about the civil audit and respondent issued her a 30-day_letter petitioner did not timely file tax returns for and petitioner’s untimely filing of her tax returns over an extended period is circumstantial evidence of fraud h extensive dealings in cash extensive dealings in cash to avoid scrutiny of a taxpayer’s finances is a badge of fraud see bradford v commissioner f 2d pincite fraudulent intent may be inferred when a taxpayer handles his or her affairs in a manner designed to avoid making the records usual in transactions of the kind spies u s pincite in particular when a taxpayer’s dealings in cash are accompanied by attempts to conceal transactions or avoid cash transaction reporting requirements that course of conduct is probative evidence of fraud see valbrun v commissioner tcmemo_2004_242 slip op pincite during the years at issue petitioner drafted and signed checks made payable to cash petitioner was the individual at cse primarily responsible for drafting and signing checks to cash and the individual who went to the bank to withdraw the cash from cse’s accounts in addition respondent introduced credible evidence that petitioner had access to large amounts of cash and that petitioner stored large amounts of cash in her desk and in her bedroom petitioner was indicted on and convicted of counts of structuring monetary transactions to avoid financial reporting requirements on the basis of her extensive history of drafting and signing checks to cash special_agent schneider testified that petitioner wrote checks to cash in amounts less than dollar_figure in order to avoid currency transaction reporting requirements petitioner engaged in extensive cash transactions and was the individual primarily responsible for engaging in those cash transactions we find that she engaged in these cash transactions in order to avoid financial reporting requirements petitioner’s extensive dealings in cash are persuasive circumstantial evidence of fraud c conclusion respondent has proven by clear_and_convincing evidence that petitioner underpaid her tax_liabilities for and and that some part of her underpayment for each year was due to fraud petitioner bears the burden of showing by a preponderance_of_the_evidence what portion of each underpayment if any is not attributable to fraud see sec_6663 petitioner has not argued or introduced any credible_evidence to prove that any specific_portion of any underpayment was not attributable to frauddollar_figure the record overwhelmingly establishes that she acted with fraudulent intent accordingly we hold that petitioner is liable for the sec_6663 fraud penalties we have considered all the other arguments made by the parties and to the extent not discussed above find those arguments to be irrelevant moot or without merit to reflect the foregoing decision will be entered under rule 50in the notice_of_deficiency respondent considered the amounts of income petitioner reported in her late-filed returns and subtracted those amounts in calculating her underpayments


t c memo united_states tax_court sandra l mcbrayer petitioner v commissioner of internal revenue respondent docket no filed date robert j gumser for petitioner thomas a dombrowski for respondent memorandum opinion goldberg special_trial_judge respondent determined a deficiency in petitioner's federal_income_tax in the amount of dollar_figure unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue - - after concessions the issues for decision are whether petitioner is entitled to deduct expenses in the amount of dollar_figure incurred in the rental of formal wear for the tax_year and whether petitioner is entitled to deduct dollar_figure for luggage stolen in some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference at the time the petition was filed petitioner resided in san diego california petitioner a teacher in san diego was named california state teacher of the year in in petitioner was named national teacher of the year for her work in educating homeless children after receiving the national teacher of the year award from the president of the united_states petitioner took a year-long paid sabbatical from her teaching job in san diego in order to lecture on the importance of educating homeless children petitioner reported dollar_figure in gross_receipts from her speaking engagements as a lecturer on schedule c of her federal_income_tax return petitioner deducted the following expenses totaling dollar_figure on schedule c petitioner concedes that she is not entitled to deduct schedule c expenses in the amount of dollar_figure for home maintenance and dollar_figure of the amount deducted as uniform dry clean rental car and truck expenses sdollar_figure depreciation utilities big_number other expenses uniform dry cleaning rental dollar_figure luggage destroyed traveling maintenance of residence while out of town big_number conferences big_number big_number total big_number in a notice_of_deficiency dated date respondent disallowed dollar_figure of the following schedule c expenses uniform dry clean rental--dollar_figure luggage destroyed while traveling--dollar_figure and maintenance of residence while out of town--dollar_figure deductions are a matter of legislative grace and a taxpayer seeking a deduction must establish her entitlement to the deduction claimed 292_us_435 sec_162 allows a deduction for all the ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business sec_262 however denies a taxpayer a deduction for personal living or family_expenses rental clothing deductions petitioner contends that she rented formal clothing on various occasions while lecturing petitioner always inquired about the occasion beforehand in order to be appropriately dressed petitioner claimed deductions in the amount of dollar_figure for q4e- formal clothing rental expenses on schedule c of her tax_return the cost of clothing has generally been considered a nondeductible personal_expense pursuant to sec_262 see 74_tc_1266 similarly courts have denied deductions even when taxpayers have shown that the clothing would not have been purchased but for the employment see 49_tc_557 in 30_tc_757 we listed three criteria which must be met in order for clothing to be deductible as an ordinary and necessary business_expense the clothing is required or essential in the taxpayer's employment the clothing is not suitable for general or personal wear and the clothing is not so worn additionally a taxpayer is required to substantiate the deduction through the maintenance of books_and_records or other_sufficient_evidence in order to be entitled to a deduction under sec_162 see sec_1_6001-1 income_tax regs in this case petitioner could not recall specific events for which she rented the formal wear petitioner proffered three receipts which she claimed substantiated her rental expenses when asked about the first two rental receipts petitioner stated t'm not sure of the first one but the second one - - looking at the date i believe that i was in washington going to a white house event the receipts contained no description of the merchandise which was either rented or purchased petitioner was also unable to recall what type of formal wear the receipts represented the third receipt proffered by petitioner was undated and did not include the name of the business accordingly we find that petitioner did not adequately substantiate her claimed expenses and does not qualify for a clothing deduction under sec_162 upon the basis of the record we hold that petitioner is not entitled to deduct clothing rental expenses for the tax_year sec_165 deduction--luggage on her federal_income_tax return petitioner claimed a schedule c expense deduction in the amount of dollar_figure for luggage destroyed while traveling at trial petitioner testified that the luggage was not destroyed but had been stolen at reagan national airport petitioner testified that she placed two pieces of luggage outside of a bathroom stall at reagan national airport in and that when she came out of the stall the luggage was gone one of these receipts dated date listed the transaction as a sale -- - petitioner estimated that the approximate value of the lost luggage was dollar_figure sec_165 allows a taxpayer to deduct losses sustained during the taxable_year which were not otherwise compensated in the case of an individual taxpayer the sec_165 deduction is limited to losses_incurred in a trade_or_business losses_incurred in any transaction entered into for profit and losses arising from fire storm shipwreck other_casualty or from theft see sec_165 the amount of the deduction for any loss cannot exceed the adjusted_basis of the property as provided in sec_1011 see sec_165 to be entitled toa deduction under sec_165 a taxpayer is required to substantiate the deduction through the maintenance of books_and_records or other_sufficient_evidence see sec_1_6001-1 income_tax regs petitioner provided the court with three receipts a receipt for a green piece of luggage model number dated date in the amount of dollar_figure a receipt for a green piece of luggage model number dated date in the amount of dollar_figure and a receipt for a black leather garment bag dated date in the amount of dollar_figure dollar_figureit is unclear from the record how petitioner calculated this deduction it is apparently based on the initial cost of the luggage which petitioner claimed was stolen additionally petitioner apparently did not claim a schedule c deduction for the loss of the contents of the luggage - petitioner testified that the receipts represented expenses_incurred to replace the two pieces of luggage apparently stolen at reagan national airport petitioner initially claimed a schedule c deduction in the amount of dollar_figure for luggage that was destroyed while traveling at trial petitioner testified that the luggage had not been destroyed but had been stolen it is well settled that we are not required to accept petitioner's self-serving testimony in the absence of corroborating evidence see 99_tc_202 petitioner failed to submit corroborating evidence such as a police report such evidence would have been helpful in establishing the items stolen and the date of the theft petitioner also failed to establish that her loss was uncompensated by insurance and what the fair_market_value of the luggage or her adjusted_basis in the luggage would have been pursuant to sec_165 upon the basis of the record we find that petitioner has failed to establish that her luggage had been stolen the amount of the loss and that the loss was not compensated for by insurance we therefore hold that petitioner is not entitled to deduct dollar_figure pursuant to sec_165 respondent is sustained on this issue to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ----------------------- ---------------------------- ---------------------------------- department of the treasury washington dc person to contact ------------------------ id no ------------ telephone number -------------------- refer reply to cc fip b02 plr-146747-08 date legend taxpayer -------------------------------------------------------------------- ------------------------- employer ------------------------------------------------------------------- -------------------------------------------- company a state year year year year dear ------------------ ----------------------------- ---------- ------- ------- ------- ------- this is in reply to a letter dated date and subsequent correspondence dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for taxpayer to file a written representation under sec_1_7872-15 of the income_tax regulations if this written representation under sec_1_7872-15 is considered plr-146747-08 timely filed and the other requirements under sec_1_7872-15 are satisfied then an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 facts employer is a state non-profit corporation established in year employer is a tax-exempt_organization under sec_501 of the internal_revenue_code_of_1986 as amended code in year employer met with a consulting team from company a to consult on matters relating to the retention and recognition of key employer employees the consulting team recommended and implemented employer’s split-dollar_life_insurance plan sdp company a intended for the sdp to be subject_to the regulations under sec_1_7872-15 the split-dollar regulations and designed the plan to utilize nonrecourse premium loans to the employee participants secured_by the policy the loans the loans were to each have a stated_interest rate equal to the applicable_federal_rate afr so as not to be below-market split-dollar loans under the split-dollar regulations in year taxpayer entered into a split-dollar_life_insurance arrangement the arrangement with employer as a participant in the sdp at the time taxpayer entered into the arrangement taxpayer had no prior experience with or knowledge of split- dollar life_insurance arrangements or sdps taxpayer was the borrower on the loan and the employer lent money to taxpayer to pay the premiums on the policy at the time the arrangement was entered into calculations prepared by company a projected that the proceeds of the insurance_policy securing the loan were expected to be sufficient to pay all interest and principal due on the loan company a was instrumental in implementing the sdp and the loans under the plan company a was responsible for drafting the documents advising taxpayer regarding the set-up of the arrangement and directing taxpayer regarding the many documents that required taxpayer’s signature taxpayer represents however that company a did not advise taxpayer regarding the resulting tax consequences if the payments on the loan were treated as contingent payments under the split-dollar regulations after the sdp was implemented employer contracted with company a to serve as the sdp’s third party administrator tpa as tpa company a was responsible for administering the sdp and providing employer and taxpayer with ongoing guidance related to the sdp taxpayer represents that because taxpayer lacked knowledge and experience with split-dollar_life_insurance arrangements taxpayer relied on company a’s information representations and conclusions regarding the arrangement plr-146747-08 taxpayer further represents that company a was aware of taxpayer’s reliance on its expertise regarding the arrangement prior to filing taxpayer’s year tax_return the return corresponding to the taxable_year in which employer made the first split-dollar loan to taxpayer under the arrangement taxpayer was not advised by company a that unless the parties to the arrangement filed a written representation pursuant to sec_1_7872-15 and ii of the regulations payments on the loan would be treated as contingent payments for purposes of the split-dollar regulations unbeknownst to taxpayer company a also failed to advise employer that employer and taxpayer were both required to file a written representation so that the loan payments would not be treated as contingent payments under sec_1_7872-15 since year taxpayer has filed tax returns as if the election had been made and the written representation had been filed pursuant to sec_1_7872-15 and ii in year employer informed taxpayer that employer’s new tpa discovered that a written representation should have been filed with both employer’s and taxpayer’s tax returns for the taxable_year in which the first loan was made employer further informed taxpayer that at the time the written representation was required to be filed employer was unaware of the requirement because prior tpas had failed to advise them to make such a filing employer explained the necessity of filing a written representation to ensure that payments on the loan were not treated as contingent payments and asked taxpayer to file an extension of time for filing the written representation as employer had done for itself taxpayer makes the following representations the granting of relief under sec_301_9100-3 would not result in taxpayer having a lower tax_liability in the aggregate for all years to which the election applies than taxpayer would have had if the election had been timely made taking into account the time_value_of_money taxpayer did not knowingly choose not to file the election taxpayer did not use hindsight in requesting relief finally taxpayer represents that it is not seeking to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 in support of this requested ruling taxpayer has submitted the affidavits of taxpayer employer’s controller employer’s vice president of human resources and the owner of employer’s current tpa regarding the events that led to taxpayer’s failure to make the regulatory election pursuant to sec_1_7872-15 and ii law and analysis sec_1_7872-15 of the regulations provides that except as provided in sec_1_7872-15 if a payment on a split-dollar loan is nonrecourse to the borrower the payment is a contingent payment for purposes of sec_1_7872-15 plr-146747-08 sec_1_7872-15 provides that an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under sec_1_7872-15 if the parties to the split-dollar_life_insurance arrangement represent in writing that a reasonable person would expect that all payments under the loan will be made sec_1_7872-15 describes the time and manner requirements for providing the written representation required by sec_1_7872-15 sec_1 d ii provides in part that the written representation be signed by both the borrower and lender not later than the last day including extensions for filing the federal_income_tax return of the borrower or lender whichever is earlier for the taxable_year in which the lender makes the first split-dollar loan under the split-dollar_life_insurance arrangement sec_301_9100-1 defines election to include an application_for relief in respect of tax a request to adopt change or retain an accounting_method or accounting_period the term does not include an application_for an extension of time for filing a return under sec_6081 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulation or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 sets forth parameters for determining whether under particular facts and circumstances the commissioner will grant an extension of time for regulatory elections that do not meet the requirements for an automatic_extension under sec_301_9100-2 sec_301_9100-3 provides that when a taxpayer does not meet the requirements for an automatic_extension under sec_301_9100-2 the taxpayer must provide evidence satisfactorily establishing that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the government sec_301_9100-3 provides that subject_to sec_301_9100-3 a taxpayer will be deemed to have acted reasonably and in good_faith if the taxpayer satisfies at least one of the following five criteria i the request for relief was made before the service discovered the failure to make the regulatory election ii the failure to make the election was due to intervening events beyond the taxpayer’s control iii after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied on the written advice of the service or v the taxpayer reasonably relied upon a qualified_tax professional including a tax professional employed by the taxpayer and that tax professional failed to make or failed to advise the taxpayer to make the election plr-146747-08 sec_301_9100-3 provides that a taxpayer has not reasonably relied on a qualified_tax professional if the taxpayer knew or should have known that the professional was either i not competent to render advice on the regulatory election or ii not aware of all relevant facts sec_301_9100-3 provides that a taxpayer will not be deemed to have acted reasonably and in good_faith if taxpayer does one of the following i seeks to alter a return position for which an accuracy-related_penalty has been or could be imposed under sec_6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested ii was informed in all material respects of the required election and the subsequent tax consequences but chose not to make the election or iii uses hindsight in requesting relief sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and taxpayer’s representations we conclude that taxpayer has satisfied the requirements for granting a reasonable extension of time to file the written representation as required under sec_1 d i and ii taxpayer is therefore granted a period of time not to exceed days from the date of this letter to prepare and have both parties sign the written representation provided that the written representation is timely signed by both parties as required by this letter and filed with the taxpayer’s tax_return for year the written representation will be deemed effective for all years in which the arrangement has been in effect in accordance with sec_1_7872-15 a copy of the written representation should be attached to taxpayer’s tax_return for any subsequent taxable_year in which employer makes a split-dollar loan to taxpayer to which the representation applies except as specifically ruled upon above no opinion is expressed concerning any federal_income_tax consequences relating to the facts herein under any other provision of the code this ruling is limited to the timeliness of the filing requirement of the written representation under sec_1_7872-15 and ii no opinion is expressed with regard to whether taxpayer satisfied the other requirements under sec_1_7872-15 and ii the loan treatment requirements under sec_1_7872-15 or whether payments under the loan are otherwise noncontingent payments for purposes of sec_1_7872-15 no opinion is expressed with regard to whether the tax_liability of taxpayer is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time plr-146747-08 value of money upon audit of the federal_income_tax returns involved the director’s office will determine such tax_liability for the years involved if the director’s office determines that such tax_liability is lower that office will determine the federal_income_tax effect this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely david b silber david b silber chief branch office of associate chief_counsel financial institutions and products