tcmemo_2011_271 united_states tax_court allen powerstein and rita powerstein rosen petitioners v commissioner of internal revenue respondent allen powerstein petitioner v commissioner of internal revenue respondent docket nos filed date mitchell i horowitz and micah g fogarty for petitioners stephen r takeuchi and robert w dillard for respondent memorandum findings_of_fact and opinion laro judge at the heart of these cases is petitioner allen powerstein mr powerstein a former certified public 1these cases were consolidated for purposes of trial briefing and opinion pursuant to rule a accountant c p a who in pleaded guilty to criminal_tax_evasion in violation of sec_7201 at issue are the through joint federal income taxes of petitioners mr powerstein and rita powerstein rosen ms rosen and the individual federal_income_tax of mr powerstein in docket no petitioners petitioned the court to redetermine respondent’s determination of the following federal_income_tax deficiencies and additions to tax additions to tax sec sec sec sec sec year deficiency b b b a b b dollar_figure dollar_figure dollar_figure -0- -0- dollar_figure big_number big_number big_number -0- -0- big_number big_number -0- -0- dollar_figure dollar_figure big_number big_number -0- -0- big_number big_number big_number big_number big_number -0- -0- -0- big_number in his answer respondent adjusted the deficiencies and additions to tax decreasing the amounts for and and increasing the amounts for each of the years through as follows additions to tax sec sec sec sec sec year deficiency b b b a b b dollar_figure dollar_figure dollar_figure -0- -0- -0- big_number big_number big_number -0- -0- dollar_figure big_number -0- -0- dollar_figure big_number big_number -0- -0- big_number big_number big_number big_number -0- -0- -0- big_number 1respondent determined that if the addition_to_tax under sec_6653 applies then the addition_to_tax under sec_6653 applies in an amount equal to percent of the interest payable with respect to the portion of the underpayment that is due to fraud 2unless otherwise indicated section references are to the applicable versions of the internal_revenue_code and rule references are to the tax_court rules_of_practice and procedure some dollar amounts have been rounded in docket no mr powerstein petitioned the court to redetermine respondent’s determination of a dollar_figure deficiency in his federal_income_tax and a dollar_figure fraud_penalty under sec_6663 after concessions by the parties we decide whether the burden_of_proof shifts to respondent with respect to his reconstruction of petitioners’ net_worth for through we hold that it does to the extent stated herein whether petitioners omitted income of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for through respectively we hold that they omitted income of dollar_figure dollar_figure dollar_figure 3in docket no the parties agree that petitioners failed to report interest_income of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for through respectively understated dividend income of dollar_figure dollar_figure and dollar_figure for through respectively received dollar_figure of dividends for of which dollar_figure is excluded from income as a nontaxable distribution failed to report net capital_gains of dollar_figure for failed to report net capital_gains of dollar_figure and instead reported a net_capital_loss of dollar_figure resulting in a dollar_figure adjustment for and overstated capital losses by dollar_figure and dollar_figure for and respectively in docket no the parties agree that for mr powerstein failed to report gross_receipts of dollar_figure on schedule c profit or loss from business is entitled to deduct dollar_figure of legal fees as an expense on schedule c is not entitled to a dollar_figure loss on schedule f profit or loss from farming failed to report capital_gains of dollar_figure is not entitled to a fuel tax_credit of dollar_figure is liable for self-employment_tax of dollar_figure and is not liable for a fraud_penalty under sec_6663 but is liable for an accuracy-related_penalty under sec_6662 we deem petitioners to have conceded that the period of limitations for assessment of their through federal income taxes is open and that ms rosen is not entitled to relief under sec_6013 by virtue of the fact that these issues were not raised at trial or on brief see 117_tc_117 n dollar_figure and dollar_figure for through respectively whether petitioners are entitled to deductions related to mr powerstein’s accounting practice we hold they are to the extent stated herein whether petitioners are entitled to a dollar_figure loss as reported on their schedule f we hold they are not whether petitioners may use special income-averaging provisions pursuant to section we hold they may not whether mr powerstein may deduct dollar_figure of interest which respondent jeopardy-assessed and collected by levy in we hold he may not whether petitioners are liable for additions to tax under sec_6653 for through we hold that mr powerstein is to the extent stated herein and that ms rosen is not and whether petitioners are liable for additions to tax under sec_6661 for through we hold they are i preliminaries findings_of_fact the parties submitted to the court numerous stipulations of fact and accompanying exhibits the stipulated facts and exhibits submitted therewith are incorporated herein by this reference we find the stipulated facts accordingly when their respective petitions were filed petitioners resided in florida ii mr powerstein mr powerstein was raised in brooklyn new york brooklyn and he served in the u s army from date through date he holds a bachelor of business administration degree in accounting from the city college of new york and he has completed work towards a master’s degree he was a c p a from date until at least date between date and mr powerstein was an accountant at various accounting firms and businesses beginning in and at all relevant times he operated a bookkeeping accounting and tax_return preparation business namely allen d powerstein cpa accounting firm iii ms rosen ms rosen was born and raised in brooklyn she graduated from high school and did not attend college over the years ms rosen was mostly a homemaker though she occasionally held a job during some of the years in issue iv petitioners petitioners were married in date and have two children namely madelyn ballard ms ballard and irene powerstein ms i powerstein mr powerstein was the household’s primary income producer and he regularly provided financial assistance to ms ballard into her adult years throughout the years in issue petitioners incurred typical household expenses including amounts for groceries utilities and other necessities petitioners were married until date at which time they legally divorced v the ballards ms ballard and michael ballard mr ballard collectively the ballards were married in and they had at least one child namely k b mr ballard was raised on a farm in arkansas he drank alcohol during the years in issue and he has been convicted of driving under the influence vi coral springs residence petitioners lived in brooklyn until when they moved their family and household property to miami florida they paid dollar_figure for a parcel of land in coral springs florida and subsequently built a home coral springs residence thereon they deposited dollar_figure with respect to that residence and secured a dollar_figure residential_loan first glendale mortgage from glendale federal bank glendale bank after construction of the residence was completed petitioners’ actual cost of constructing that home exceeded its estimated cost by approximately dollar_figure in addition to principal and interest due under the first glendale mortgage petitioners also impounded escrowed dollar_figure per month 4despite their divorce petitioners continued to live together mr powerstein continued to support the family and ms rosen continued to maintain the household 5the first glendale mortgage was issued by first federal savings loan of broward county first federal we refer to first federal and its successors as glendale bank for real_estate_taxes in petitioners moved in to the coral springs residence and they continued to live there through date petitioners refinanced the first glendale mortgage in date with a dollar_figure loan second glendale mortgage from glendale bank at the closing of the second glendale mortgage petitioners escrowed months of real_estate_taxes totaling dollar_figure payments due under the second glendale mortgage impounded dollar_figure per month for real_estate_taxes during petitioners made nine payments against the second glendale mortgage totaling dollar_figure of which dollar_figure was paid through escrow for real_estate_taxes during petitioners made two payments against the second glendale mortgage totaling dollar_figure in early-to-mid-1984 petitioners contracted to sell the coral springs residence to dale underhill mr underhill and mona underhill ms underhill collectively the underhills for dollar_figure the underhills deposited dollar_figure to an interest-bearing account underhill account at atlantic federal savings loan atlantic bank which was jointly held by mr powerstein and mr underhill in trust for ms rosen and ms underhill that deposit served as a downpayment for the purchase of the coral springs residence and as of date the underhill account had earned interest of dollar_figure the underhills leased the coral springs residence beginning in date and continued to do so through date at which time they secured financing to close the sale although the underhills paid rent of dollar_figure per month to petitioners this income was not reported as taxable on petitioners’ federal_income_tax returns after the underhills began leasing the coral springs residence petitioners moved to romeo florida romeo on date the sale of the coral springs residence closed for dollar_figure and petitioners realized net_proceeds of dollar_figure at the closing petitioners were charged dollar_figure for unpaid county taxes from january through date and dollar_figure for taxes related to vii vacation home on date petitioners purchased a residence in lake lure north carolina in or around the powersteins exchanged that property and additional consideration to purchase a second residence in lake lure north carolina vacation home the cost of acquiring the vacation home totaled dollar_figure and petitioners paid dollar_figure of real_estate_taxes on it in viii romeo property a overview in date petitioners purchased an 06-acre wooded parcel of land romeo property in romeo for dollar_figure shortly thereafter the ballards moved to the romeo property to make the land habitable with the help of local workers the ballards cleared the romeo property and installed fences roads and other improvements the ballards left their jobs to move to the romeo property and having earned no wages in received support from petitioners the ballards lived on the romeo property in a tent for approximately months and eventually constructed a wooden cabin which they lived in temporarily b improvements petitioners purchased two mobile homes in and and situated those homes on the romeo property in close proximity first they purchased a mobile home pine street mobile home for dollar_figure which the ballards used as their residence second petitioners purchased a mobile home addison mobile home for dollar_figure which they lived in by date the ballards and petitioners had also improved the romeo property with among other improvements a three-stall barn a pump house fencing and a septic tank c mortgages petitioners mortgaged the romeo property with a dollar_figure loan first sun bank mortgage from sun bank of ocala sun bank in date on or about date petitioners retired the first sun bank mortgage with a second loan second sun bank mortgage for dollar_figure which was secured_by the romeo property the second sun bank mortgage remained until date when petitioners refinanced that mortgage with a dollar_figure loan first mid state mortgage from mid state federal savings and loan mid state petitioners satisfied the first mid state mortgage through a loan second mid state mortgage in or around d farming activities although they lacked experience to do so petitioners became minimally engaged in farming activities after moving to the romeo property without conducting due diligence of the agricultural feasibility of using the romeo property as a farm they purchased among other things a tractor for dollar_figure and a chainsaw for dollar_figure they raised approximately head of cattle horses pigs and chickens and although they sold head of cattle at a livestock market in they mostly used these animals for personal consumption and enjoyment they also attempted to grow several types of crops without success by date petitioners had abandoned their farming activity ix petitioners’ support of the ballards a overview during the years in issue mr powerstein furnished considerable support to the ballards by letter dated date petitioners stated that they paid support to the ballards of dollar_figure in and dollar_figure through date this support included rent utility payments food and medical bills b m m the ballards incorporated m m tree service inc m m as equal shareholders on or about date through m m the ballards provided landscaping and tree services in central florida during and mr powerstein provided most if not all of the financing for the startup and operation of m m he purchased various assets for m m including the tractor and the chainsaw which petitioners used in their farming activity c income the ballards received minimal income during the years in issue and they received support in addition to that described above the ballards’ joint_return reported zero wages interest_income of dollar_figure a dollar_figure distributive loss from m m and total income of negative dollar_figure the ballards’ joint_return reported wages of dollar_figure interest_income of dollar_figure a dollar_figure distributive loss from m m and total income of negative dollar_figure the ballards’ joint_return reported wages of dollar_figure interest_income of dollar_figure and total income of dollar_figure the ballards’ joint_return reported wages of dollar_figure interest_income of dollar_figure a dollar_figure net farm loss and total income of dollar_figure the ballards’ joint_return reported wages of dollar_figure interest_income of dollar_figure a dollar_figure net farm loss and total income of dollar_figure x financial arrangement with clients after petitioners moved to the romeo property in mr powerstein continued to operate his accounting firm in south florida and he frequently traveled there by car he was diligent in preparing original and amended federal_income_tax returns for his clients but far from honest he significantly understated income and overstated deductions on his clients’ federal_income_tax returns as early as for example mr powerstein wrote the following letter to two clients in received your recent letter and irs letter regarding the taxes before i explain the real meaning of their letter i must point out that i am not surprised that we got such a letter and that the irs computer is accurate in tracking bank interest reported on 1099s we must carefully reply to the irs and explain what we did and if there is any additional tax to pay and i am not saying there will be we will pay it at the appropriate time here is why i like their letter i reported the ford pension of dollar_figure but showed the entire amount to be non-taxable and the irs did not question this i know you are both aware of this i claimed airlift international as a worthless_security in the amount of dollar_figure however it really cost you dollar_figure irs did not question this i claimed a dollar_figure exclusion for all-savers_certificates at american savings when in fact you never had an all-saver certificate irs did not question this i claimed a dollar_figure exclusion against the merrill lynch dividends these dividends do not qualify for the exclusion irs did not question this i claimed 3-additional exemptions which the irs did not question each exemption is dollar_figure or a total of dollar_figure which we are really not entitled to i claimed a political_party contribution credit of dollar_figure irs did not question this i claimed a residential_energy_credit carryforward from which the irs did not question here is what the irs picked up i reported of the chase federal interest that you earned in on account no irs does not know the account number as they show the number to be 10-zeroes i reported a cd penalty forfeiture of dollar_figure which the irs has no record of receiving from any of our banks i know the irs is correct and we will concede on this point at the time i answer on the chase federal account please understand that the irs sends these letters out to anyone who fails to report the amount shown on the namely in our case chase federal the cd penalty is something else this is a routine letter but important to answer on time just think if they decided to audit the return on all the points i raised in the early part of this letter you would owe a fortune speak to noone at the bank about the irs letter but only that we need an amended for preparing his clients’ amended federal_income_tax returns mr powerstein charged a contingent_fee of one-third to one-half of the amount refunded to his clients he reported the return address on the amended_return as a p o box in his name and the refunds were sent to that address upon receipt of a refund check mr powerstein contacted his client went to the bank with that client deposited the check and took his share xi loan applications in connection with their various mortgages petitioners completed and submitted various bank loan applications that reported income greater than that reported on their joint federal_income_tax returns first they estimated the net_income from the accounting firm for as dollar_figure on a residential_loan application to glendale bank dated date loan application however petitioners reported business income from the accounting firm of only dollar_figure on their joint federal_income_tax return joint_return second they estimated the net_income from the accounting firm for as dollar_figure on a residential_loan application to glendale bank dated date loan application however petitioners reported business income from the accounting firm of only dollar_figure on their joint federal_income_tax return joint_return third they estimated the net_income from the accounting firm for as dollar_figure on a residential_loan application to sun bank dated date loan application however petitioners reported business income from the accounting firm of only dollar_figure on their joint federal_income_tax return joint_return attached to the loan application were purported joint federal_income_tax returns for petitioners for and purported and returns respectively which reported business income from the accounting firm of dollar_figure and dollar_figure respectively the amounts reported as business income from the accounting firm on the purported and returns did not match the amounts reported on the and joint federal_income_tax returns respectively and joint returns that petitioners filed with respondent fourth on a residential_loan application to sun bank dated date loan application petitioners estimated their net_income from the accounting firm as dollar_figure however petitioners reported a business loss from the accounting firm of dollar_figure on their joint federal_income_tax return joint_return xii investments a bank accounts during the years at issue petitioners maintained at least bank accounts most of the accounts were held jointly in petitioners’ names however mr powerstein held certain accounts jointly or in trust for pearl powerstein ms p powerstein his step-mother ann pasternak ms pasternak his aunt or stacey korman ms korman his cousin b investments during the subject years petitioners also purchased more than dollar_figure in stock and debt of various companies included in the stock purchased were shares of charme properties inc charme charme filed a chapter bankruptcy petition on date which the bankruptcy court subsequently converted to a chapter liquidation in charme forfeited its corporate charter with the delaware secretary of state on date though the bankruptcy continued into date when final distributions were made xiii asset transfers between february and date mr powerstein and or ms rosen transferred approximately bank accounts to ms ballard and ms i powerstein either individually or as trustees for k b on date mr powerstein and ms rosen deeded the vacation home to ms ballard and ms i powerstein as joint_tenants for dollar_figure also on date mr powerstein and ms rosen deeded the romeo property to ms ballard and ms i powerstein as joint_tenants for dollar_figure xiv federal tax reporting petitioners filed joint federal_income_tax returns for years before including returns for through through joint returns respectively the joint_return reported wages of dollar_figure interest_income of dollar_figure dividend income of dollar_figure of which dollar_figure was excludable from gross_income business income of dollar_figure a capital_loss of dollar_figure and total income of dollar_figure attached to the joint_return was schedule b interest and dividend income which reported interest earned from all-savers_certificates of dollar_figure the joint_return reported wages of dollar_figure interest_income of dollar_figure dividend income of dollar_figure all of which was treated as nontaxable a business loss of dollar_figure net_capital_gain of dollar_figure and total income of dollar_figure attached to the joint_return was a schedule c which reported income that mr powerstein received from two clients the joint_return reported interest_income of dollar_figure dividend income of dollar_figure of which dollar_figure was excluded from gross_income business income of dollar_figure net_capital_gain of dollar_figure and total income of dollar_figure the joint_return reported interest_income of dollar_figure dividend income of dollar_figure of which dollar_figure was excluded from gross_income a business loss of dollar_figure a net_capital_loss of dollar_figure and total income of dollar_figure the joint_return reported interest_income of dollar_figure dividend income of dollar_figure a business loss of dollar_figure a capital_loss of dollar_figure and total income of dollar_figure the joint_return reported interest_income of dollar_figure dividend income of dollar_figure a business loss of dollar_figure a capital_loss of dollar_figure and total income of dollar_figure attached to the joint_return was a schedule c which reported a dollar_figure loss from the accounting firm and a schedule f on which petitioners reported a dollar_figure loss from growing vegetables and melons also attached to the joint_return was form_4562 depreciation and amortization on which petitioners reported 7-year_property with a depreciable basis of dollar_figure mr powerstein filed an individual federal_income_tax return for return the return reported interest_income of dollar_figure dividend income of dollar_figure a business loss of dollar_figure capital_gains of dollar_figure a farm loss of dollar_figure and total income of negative dollar_figure xv criminal proceeding a preliminary investigation in early the questionable refund detection team qrdt of the atlanta georgia service_center forwarded information to the criminal_investigation_division cid of the internal_revenue_service irs in jacksonville florida indicating that mr powerstein had prepared false federal tax returns on behalf of numerous individuals cid investigated mr powerstein contacted third parties and issued summonses in furtherance of that investigation b search warrant on date special agents with cid executed a search warrant at the addison mobile home three detached outbuildings and automobiles located on the romeo property among the documents seized were financial records related to the accounting firm client files correspondence check registers deposit tickets envelopes containing cash receipts and bank documents and statements cid did not find books records cash disbursement journals or bank reconciliation papers an envelope with more than dollar_figure was also found in the addison mobile home the special agents who executed the search warrant inventoried the seized items by description and location found c jeopardy_assessment respondent determined that collection of the deficiencies allegedly due from petitioners was in jeopardy because among other things mr powerstein was perceived as a flight risk who placed assets beyond the reach of the federal government by transferring them to nominees respondent’s auditor used the net_worth and expenditures method to determine the amounts to be jeopardy-assessed the auditor made these determinations over a 4-day period in which information seized from the romeo property was examined and analyzed for jeopardy_assessment purposes respondent’s auditor calculated petitioners’ increase in net_worth between date and date petitioners’ opening net_worth was determined from the loan application and their ending net_worth was determined by reference to bank account balances as of date the difference between petitioners’ ending and opening net_worth was allocated equally over each of the years through ie the increase in net_worth was divided by additional adjustments were made for each of the years through for living_expenses and available cash the net_worth increase for each of the years through was determined to be business income from the accounting firm on date respondent jeopardy-assessed taxes additions to tax and interest against petitioners for each of the years through see sec_6861 on date respondent issued a notice of jeopardy_assessment to petitioners for through in the following amounts additions to tax sec sec sec sec sec year deficiency b b b a b b dollar_figure dollar_figure dollar_figure -0- -0- dollar_figure big_number big_number big_number -0- -0- big_number big_number -0- -0- dollar_figure dollar_figure big_number big_number -0- -0- big_number big_number big_number big_number big_number -0- -0- -0- big_number respondent also jeopardy-assessed interest of dollar_figure against petitioners and collected that amount in by levying upon petitioners’ bank accounts in total respondent seized dollar_figure from petitioners’ various accounts after jeopardy_assessment of petitioners’ assets was made respondent continued his criminal investigation by summoning at least banks and interviewing at least witnesses respondent subsequently redetermined petitioners’ net_worth and reflected those determinations in his answer 6respondent took the position that as of date the total_tax additions to tax and interest purportedly due from petitioners for through was dollar_figure total liability as of the date of the trial in these cases respondent has not refunded petitioners the dollar_figure difference between the amount seized dollar_figure and the total liability dollar_figure d indictment a federal grand jury in the u s district_court for the middle district of florida indicted mr powerstein for various federal tax offenses in a 13-count indictment indictment the indictment charged mr powerstein with one count of corruptly obstructing and impeding the due administration of the internal revenue laws by preparing and filing false and fraudulent federal_income_tax returns for himself and clients in violation of sec_7212 eight counts of knowingly and willfully aiding and assisting in the preparation and presentation of materially false income_tax returns of clients in violation of sec_7206 three counts of knowingly and willfully attempting to evade taxes during through in violation of sec_7201 and one count of publishing a false power_of_attorney in violation of u s c sec e plea agreement and sentencing on date mr powerstein signed a plea agreement in which he pleaded guilty to one count of corrupt interference with the administration of the internal revenue laws in violation of sec_7212 and one count of criminal_tax_evasion in violation of sec_7201 in connection with the plea agreement mr powerstein agreed that he prepared and filed false and fraudulent federal_income_tax returns individually and on behalf of his client-taxpayers in order to fraudulently obtain tax refunds mr powerstein agreed that he understated his income by approximately dollar_figure and that he owed the u s treasury approximately dollar_figure of federal_income_tax for mr powerstein admitted to preparing fraudulent forms w-2 wage and tax statement which overstated the federal income taxes withheld for client-taxpayers he also admitted to on several occasions creating false and fraudulent forms w-2 for client-taxpayers that identified firms or business that had never employed paid wages to or withheld federal income taxes from those client-taxpayers in total the district_court found that the total_tax losses attributable to mr powerstein were slightly less than dollar_figure million on date the district_court sentenced mr powerstein to months of imprisonment years of supervised release a fine of dollar_figure and a special assessment of dollar_figure 7the tax losses included federal_income_tax deficiencies and interest for through of dollar_figure tax losses of dollar_figure related to the client-taxpayers for whom mr powerstein prepared fraudulent_returns and tax losses of almost dollar_figure million attributable to mr powerstein’s clients whose returns were not examined we observe that the tax losses are slightly more than dollar_figure million xvi pleadings a docket no notice_of_deficiency and petition by notice_of_deficiency dated date respondent determined deficiencies in petitioners’ through federal income taxes and additions to tax as follows additions to tax sec sec sec sec sec year deficiency b b b a b b dollar_figure dollar_figure dollar_figure -0- -0- dollar_figure big_number big_number big_number -0- -0- big_number big_number -0- -0- dollar_figure dollar_figure big_number big_number -0- -0- big_number big_number big_number big_number big_number -0- -0- -0- big_number the amounts determined in the notice_of_deficiency were equal to those determined in the jeopardy_assessment ie both determinations used the same method for calculating net_worth thus the notice_of_deficiency reports petitioners’ opening net_worth as of date their closing net_worth as of date and the increase or decrease during that time as follows increase decrease stocks bank accounts real_estate total assets dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number total liabilities big_number -0- -0- net_worth big_number big_number big_number respondent then divided the dollar_figure increase to petitioners’ net_worth between and by to arrive at petitioners’ annual net_worth increase or dollar_figure respondent then determined petitioners’ business income as follows increase in net_worth dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure additions personal living_expenses big_number big_number big_number big_number big_number subtractions cash available big_number big_number big_number big_number big_number business income big_number big_number big_number big_number big_number 1we observe that respondent’s calculation of business income does not equal increase in net_worth plus personal living_expenses less cash available petitioners petitioned the court in response to the notice_of_deficiency and the court docketed that case at docket no answer in the answer respondent asserted that because the notice_of_deficiency averaged petitioners’ understatements evenly over through petitioners’ reconstructed taxable_income was overstated for and and understated for and accordingly respondent asserted adjustments to the deficiencies and additions to tax determined to be due from petitioners as follows additions to tax sec sec sec sec sec year deficiency b b b a b b dollar_figure dollar_figure dollar_figure -0- -0- -0- big_number big_number big_number -0- -0- dollar_figure big_number -0- -0- dollar_figure big_number big_number -0- -0- big_number big_number big_number big_number -0- -0- -0- big_number percent of the interest due on the deficiency for purposes of the answer respondent used the net_worth_method to determine increases to petitioners’ through taxable_income as follows net_worth computation cash on hand dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure investments big_number big_number big_number big_number big_number big_number personal assets big_number big_number big_number big_number big_number big_number real_estate big_number big_number big_number big_number big_number big_number additional investments big_number big_number big_number big_number big_number big_number total assets big_number big_number big_number big_number big_number big_number loans and mortgages big_number big_number big_number big_number big_number big_number charge accounts -0- -0- -0- -0- -0- -0- accumulated depreciation big_number big_number big_number big_number big_number big_number total liabilities big_number big_number big_number big_number big_number big_number net_worth big_number big_number big_number big_number big_number big_number less prior year’s net_worth n a big_number big_number big_number big_number big_number net_worth increase n a big_number big_number big_number big_number big_number personal expenses n a big_number big_number big_number big_number big_number less nontaxable income n a big_number big_number adjusted_gross_income n a big_number big_number big_number big_number big_number less itemized_deductions n a big_number big_number big_number big_number big_number less exemptions n a big_number big_number big_number big_number big_number corrected taxable_income n a big_number big_number big_number big_number big_number reported taxable_income n a big_number big_number big_number big_number increase to taxable_income n a big_number big_number big_number big_number big_number a cash on hand respondent determined petitioners’ cash on hand as follows cash in bank sec_12 american savings dollar_figure dollar_figure -0- -0- -0- -0- atlantic bank big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure bankatlantic big_number -0- -0- -0- -0- -0- barnett bank -0- -0- -0- -0- -0- big_number biscayne federal big_number big_number big_number big_number big_number big_number brooklyn federal california federal -0- big_number big_number big_number big_number big_number carteret savings big_number big_number big_number big_number big_number big_number centrust savings -0- -0- -0- big_number big_number big_number citicorp savings big_number big_number big_number big_number big_number big_number city federal savings big_number big_number big_number big_number big_number big_number commonwealth big_number big_number big_number big_number big_number big_number dime saving sec_135 first nationwide big_number big_number big_number -0- -0- -0- first union fund for government inc glendale bank -0- big_number -0- -0- -0- -0- greater new york big_number -0- -0- -0- -0- -0- hollywood federal big_number big_number big_number big_number big_number big_number mid state federal -0- -0- -0- big_number big_number big_number roosevelt bank big_number big_number big_number big_number big_number safra bank big_number big_number big_number big_number big_number big_number sun bank -0- -0- -0- -0- total big_number big_number big_number big_number big_number big_number b investments respondent valued petitioners’ investments in through at dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively included in this determination were shares of charme which petitioners contend are worthless c personal assets respondent valued petitioners’ personal assets as follows description caprice classic -0- -0- -0- dollar_figure dollar_figure dollar_figure international tractor -0- dollar_figure dollar_figure big_number big_number big_number chevy pickup dollar_figure big_number big_number big_number big_number big_number caprice big_number big_number big_number -0- -0- -0- plymouth reliant -0- -0- -0- -0- -0- big_number mercury -0- -0- -0- -0- -0- big_number ford truck -0- -0- -0- -0- -0- big_number dodge aspen -0- -0- -0- big_number big_number -0- ford s w -0- -0- -0- total big_number big_number big_number big_number big_number big_number petitioners contend that they owned additional personal_property including a copier d real_estate respondent valued petitioners’ real_estate as follows description romeo property dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure coral springs residence big_number big_number -0- -0- -0- -0- vacation home big_number big_number big_number big_number big_number big_number addison mobile home -0- big_number big_number big_number big_number big_number well big_number big_number big_number big_number big_number big_number fenceposts big_number big_number big_number big_number big_number big_number crosstie sec_501 pine street mobile home big_number big_number big_number big_number big_number big_number total big_number big_number big_number big_number big_number big_number e loans and mortgages respondent valued petitioners’ loans and mortgages as follows description glendale bank dollar_figure -0- -0- -0- -0- -0- glendale bank -0- dollar_figure -0- -0- -0- -0- sun bank -0- big_number dollar_figure dollar_figure -0- -0- mid state -0- -0- -0- -0- dollar_figure -0- mid state -0- -0- -0- -0- -0- dollar_figure total big_number big_number big_number big_number big_number big_number petitioners contend that there is an additional loan outstanding for dollar_figure from atlantic bank amended answer respondent amended his answer on date amended answer to assert that mr powerstein is collaterally estopped from denying his liability for the additions to tax imposed by sec_6653 and b and the facts necessary to convict him under count sec_1 and of the indictment second amended answer respondent’s net_worth computation determined nondeductible expenditures allocable to petitioners of dollar_figure on the basis of average annual expenditures_for a family of three as determined by the bureau of labor statistics bls in his second amendment to answer second amended answer filed with the court on date respondent revised his determination of petitioners’ nondeductible personal expenditures the second amended answer determined nondeductible personal expenditures allocable to petitioners of dollar_figure using a composite of check registers from petitioners’ various bank accounts bls and petitioners’ through joint returns in particular respondent recalculated petitioners’ personal expenditures using a combination of bls check registers and petitioners’ tax returns the second amended answer also asserted an increased deficiency if respondent’s personal living_expenses analysis is sustained b docket no on date respondent issued to mr powerstein a notice_of_deficiency which determined a dollar_figure deficiency in mr powerstein’s federal_income_tax and a dollar_figure fraud_penalty under sec_6663 mr powerstein petitioned the court in response to that notice_of_deficiency and the court docketed the case at docket no opinion i burden_of_proof petitioners moved the court in limine to modify the burden_of_proof with respect to amounts shown on respondent’s net_worth schedule because petitioners contended respondent seized but did not return some of their personal and business records we denied petitioners’ motion without prejudice to arguing the point in their opening brief and they again asserted on brief that the burden_of_proof should shift to respondent absent a written stipulation to the contrary these cases are appealable to the u s court_of_appeals for the eleventh circuit see sec_7482 the commissioner’s determinations in a notice_of_deficiency are generally presumed correct and taxpayers must prove those determinations erroneous in order to prevail rule a 290_us_111 in cases involving unreported income however the presumption of correctness does not attach until the commissioner supports his determinations with a minimal ‘evidentiary foundation linking the taxpayer to the alleged income-producing activity ’ 994_f2d_1542 11th cir quoting 596_f2d_358 9th cir revg 67_tc_672 affg tcmemo_1991_636 once the commissioner has produced evidence linking the taxpayers to an income- producing activity the burden_of_proof shifts to the taxpayers to rebut that presumption by establishing that the commissioner’s determinations are arbitrary or erroneous blohm v commissioner supra pincite the court_of_appeals for the eleventh circuit has described the situation in which the burden_of_proof shifts to the commissioner as rare and only occurring where the commissioner has introduced no substantive evidence and the evidence shows that the claimed tax_deficiency arising from unreported income was derived by the government from unreliable evidence 754_f2d_921 11th cir affg tcmemo_1982_489 to satisfy his initial burden of production respondent introduced records which were seized from petitioners or summoned from third parties those records establish that petitioners received but did not report substantial amounts of income between and on the basis of this credible_evidence we are satisfied that respondent has made the requisite showing for his determinations as set forth in the notice_of_deficiency to be entitled to the general presumption of correctness see 87_tc_609 connecting a taxpayer with funds that form the basis of the deficiency is sufficient for the presumption of correctness to attach affd without published opinion 827_f2d_774 11th cir as relevant here the presumption of correctness is modified in several respects first respondent asserted a claim for an increased deficiency in his answer for each of the years through and he bears the burden_of_proof as to those increased deficiencies see rule a second respondent amended his answer to assert that mr powerstein is collaterally estopped from denying liability for the fraud additions to tax for and he bears the burden_of_proof with respect to that newly pleaded matter see id third respondent revised his determination of petitioners’ nondeductible personal expenditures in the second amended answer and he bears the burden_of_proof with respect to that issue see id we have decided the issues herein with these general principles in mind to the extent that we have not specifically addressed whether respondent has met his burden_of_proof with respect to any of the foregoing issues we decline to do so because the record favors respondent ii unreported income a overview gross_income includes all income from whatever source derived including income derived from business sec_61 taxpayers are required to maintain books_and_records sufficient to establish the amount of their federal_income_tax liability see sec_6001 sec_1_6001-1 income_tax regs in the absence of such books_and_records the commissioner is authorized to reconstruct the taxpayers’ income by any method that clearly reflects income sec_446 94_tc_654 one such method that courts have long recognized as reasonable and the method used by respondent in these cases is the net_worth_method see 348_us_121 under the net_worth_method the commissioner reconstructs the taxpayers’ income by determining the taxpayers’ net_worth at the beginning and end of each of the years in issue the difference between those amounts for each successive year is the taxpayers’ annual net_worth increase or decrease the net_worth for each year is then adjusted by adding nondeductible personal expenditures and subtracting nontaxable receipts id pincite an increase in net_worth in any given year creates an inference of taxable_income in that year provided that the commissioner shows a likely source of the unreported income or negates possible nontaxable sources see 355_us_595 in the instant cases petitioners failed to maintain books_or_records from which their federal tax_liabilities could be computed and respondent reconstructed petitioners’ income using the net_worth_method as the starting point for determining petitioners’ net_worth respondent used the net_worth statement included in the loan application respondent then computed petitioners’ net_worth for each of the years from through and determined an aggregate increase in net_worth of dollar_figure respondent attributed the source of this increase to mr powerstein’s accounting firm petitioners challenge the accuracy of respondent’s income reconstruction on four principal grounds first petitioners contend that respondent overstated their opening net_worth by including among other things cash in certain bank accounts which they did not wholly own second petitioners claim that respondent failed to make various adjustments to their net_worth in each of the years in issue third petitioners assert that respondent’s calculation of nondeductible personal expenditures is erroneous duplicative and or unsupported by the record fourth petitioners argue that respondent’s calculation of nontaxable receipts is understated b disputed opening net_worth petitioners cite three reasons for challenging respondent’s computation of their opening net_worth first they contend that respondent’s calculation erroneously included cash in bank accounts held jointly or in trust for ms p powerstein ms pasternak and ms korman second they claim that respondent failed to account for household furnishings which they owned at the start of third they assert that respondent failed to adjust the basis of the coral springs residence for certain additions and improvements we agree with petitioners for the most part and consider their arguments seriatim bank accounts petitioners begin by arguing that respondent incorrectly included in their opening net_worth cash in bank accounts which mr powerstein held jointly with or in trust for ms p powerstein ms pasternak and ms korman first petitioners claim that cash in nine accounts at safra bank was improperly included in their opening net_worth because those accounts were jointly owned with ms p powerstein and that she funded one-half of the initial deposits made to those accounts we agree to satisfy their burden petitioners rely upon the testimony of mr powerstein and bank records for these accounts included in the records are account signature cards which list the owners’ address as being in brooklyn and a letter requesting changes to those accounts that is signed by mr powerstein and ms p powerstein we understand the address referenced in the signature cards to be that of ms p powerstein and we credit mr powerstein’s testimony in the light of the corroborating documentary_evidence accordingly we find that petitioners’ opening net_worth should be reduced by dollar_figure which is ms p powerstein’s share of cash in the accounts held jointly with mr 8the accounts at safra bank claimed to be held jointly with ms p powerstein are account numbers ending and powerstein cf unger v commissioner tcmemo_2000_267 including cash in jointly held bank accounts in a taxpayer’s net_worth where inclusion of those accounts was supported by documentary_evidence second petitioners ascribe error to the inclusion of cash in accounts at brooklyn federal savings loan brooklyn federal and roosevelt savings bank roosevelt bank in their opening net_worth according to petitioners these accounts are not attributable to them because they were jointly owned with and wholly funded by ms pasternak we agree petitioners again rely upon the testimony of mr powerstein and bank records for these accounts the account records for each of the brooklyn federal and roosevelt bank accounts establish that those accounts were held in trust for susan mark mr powerstein’s cousin a signature card for the roosevelt bank account was signed by mr powerstein and ms pasternak and listed separate addresses for each account_holder we again credit mr powerstein’s testimony given the supporting documentary_evidence accordingly we find that petitioners’ opening net_worth for cash on deposit at brooklyn federal and roosevelt bank should be reduced by dollar_figure and dollar_figure respectively cf id 9the accounts alleged to be jointly held with ms pasternak are account number ending at brooklyn federal and account number ending at roosevelt bank third petitioners maintain that an account at citicorp bank citicorp which was held in trust for ms korman and funded by her father is not an asset belonging to themdollar_figure we agree petitioners carry their burden with the testimony of mr powerstein and bank records which establish that this account was held in trust for ms korman we credit mr powerstein’s testimony in the light of the supporting documentary_evidence accordingly we find that petitioners’ opening net_worth for cash held at citicorp should be reduced by dollar_figure see estate of cardulla v commissioner tcmemo_1986_307 household furnishings petitioners next argue that respondent erroneously excluded an allowance for personal household furnishings from their opening net_worth according to petitioners their opening net_worth should be increased to reflect household_items which they moved from brooklyn to the coral springs residence we agree to support this increase in opening net_worth petitioners rely upon a bill of lading from the moving company that transported their furnishings proof of insurance for dollar_figure of personal_property located at the coral springs residence and mr 10the account claimed to be held in trust for ms korman is account number ending at citicorp we observe that mr powerstein testified at trial that the dollar_figure balance in account number ending at atlantic bank was also attributable to ms korman we consider petitioners to have conceded this argument since they do not address it on brief see nicklaus v commissioner t c pincite powerstein’s testimony that the household_items cost approximately dollar_figure we credit mr powerstein’s testimony as reasonable and hold that petitioners’ opening net_worth is increased by dollar_figure basis in the coral springs residence petitioners further argue that their opening net_worth should be increased to reflect dollar_figure of costs incurred in constructing the coral springs residence and dollar_figure of expenses_incurred to improve that property as petitioners see it these additional costs increase their basis in the coral springs residence and thereby affect their opening net_worth we agree in part with respect to the dollar_figure of construction costs petitioners rely upon mr powerstein’s direct testimony his handwritten notes regarding the payment of such expenses in the late 1970s and the loan application all of which support petitioners’ claim that they incurred such expenses given the corroborating evidence we credit mr powerstein’s testimony as reasonable and hold that petitioners’ basis in the coral springs residence is increased by dollar_figure see sec_1016 with respect to the dollar_figure in additional improvements petitioners rely solely upon the testimony and handwritten notes of mr powerstein to establish such an increase to their basis in the coral springs residence we decline to credit this evidence absent further corroborating evidence such as testimony of the contractors who performed the work or receipts for the work performeddollar_figure mr powerstein maintained receipts and records related to a variety of expenses associated with petitioners’ investments although mr powerstein’s handwritten notes reference canceled checks and invoices as source documents petitioners did not provide copies of those items accordingly we hold that petitioners’ basis increase in the coral springs residence is limited to dollar_figure c disputed increases to net_worth petitioners next contend that respondent’s determination of their annual net_worth increase for each of the years in issue failed to account for various adjustments to their assets and liabilities we consider petitioners’ contentions in turn cash in banks we previously held that respondent incorrectly included in petitioners’ opening net_worth cash in bank accounts held jointly or in trust for ms pasternak ms p powerstein and ms korman on the basis of the record as a whole and taking into account the parties’ stipulations as to bank accounts which petitioners owned we hold that petitioners’ net_worth for and should be reduced by dollar_figure dollar_figure dollar_figure and 11in the absence of such records we assume that they did not exist or were unfavorable to petitioners’ position see 6_tc_1158 affd 162_f2d_513 10th cir dollar_figure respectivelydollar_figure we also hold that petitioners’ net_worth for should be increased by dollar_figure investments petitioners maintain that their net_worth should be reduced to exclude the value of shares of charme stock which were worthless during the years in issue we disagree taxpayers generally bear the burden of proving that the stock in question was wholly worthless and when it becomes worthless see 326_us_287 sec_1_165-5 income_tax regs we ordinarily treat stock as worthless if it has neither liquidating value nor potential value 71_tc_955 a corporation’s stock has liquidating value if the corporation’s assets exceed its liabilities id a corporation’s stock has potential value if there is a reasonable expectation that it will become valuable in the future 38_bta_1270 affd 112_f2d_320 7th cir where a corporation declare sec_12these adjustments relate to bank accounts at brooklyn federal citicorp roosevelt bank and safra bank the adjustment reflects the parties’ stipulation that petitioners’ bank account should be reduced by dollar_figure for amounts deposited to the underhill account we attribute any difference in amounts to rounding 13included in the adjustment are a reduction in net_worth of dollar_figure related to various bank accounts and an increase in net_worth of dollar_figure as reflected by petitioners’ receipt of a certificate of deposit from california federal bank california federal bankruptcy ceases to conduct business liquidates or has a receiver appointed its stock may be worthless because these events can limit or destroy the stock’s potential value see id that rule however is not absolute see eg 14_tc_1282 45_f2d_556 9th cir revg a memorandum opinion of this court dated date see also scagliotta v commissioner tcmemo_1996_498 storch v commissioner tcmemo_1985_17 in applying the foregoing principles we are unable to agree with petitioners that the charme stock became wholly worthless during any of the years in issue although charme declared bankruptcy in its bankruptcy continued into which suggests that its stock had at least some residual liquidation value in such value might have included for example liquidating distributions to the stockholders after creditors’ claims had been satisfied absent additional facts surrounding the financial viability of charme the assets it held when placed into chapter liquidating bankruptcy the expenses of administration or a fixed and identifiable_event establishing complete worthlessness we decline to accept that the stock was devoid of all present or potential value see 136_f2d_408 5th cir stock is not worthless until the last vestige of value has disappeared accordingly we hold that petitioners’ net_worth includes the dollar_figure value of the charme stock household property we previously held that respondent incorrectly omitted from petitioners’ opening net_worth a dollar_figure allowance for personal household furnishings petitioners now contend that they are entitled to a nondeductible loss to reflect the disposition of that property when they moved from the coral springs residence to the addison mobile home we are not persuaded without elaboration petitioners contend on brief that they disposed of a good amount of these furnishings because the addison mobile home was substantially smaller than the coral springs residence as support for their entitlement to the nondeductible loss petitioners state that they did not claim a charitable_contribution_deduction for that property which suggests that they donated it absent a receipt of the donation or other corroborating evidence we decline to accept petitioners’ self- serving statements we find petitioners’ claims especially implausible given that the property listed in the bill of lading included bedroom furniture electronics living room furniture office furniture and household_items all of which conceivably would have been suitable for use in the addison mobile home on the basis of the record at hand petitioners have not proved their entitlement to a nondeductible loss for personal_property in accordingly we hold that petitioners’ net_worth is increased by dollar_figure for each of the years in issue to reflect petitioners’ household property real_estate a coral springs property we previously held supra p that petitioners’ basis in the coral springs residence should be increased by dollar_figure to account for construction costs related to that home we similarly hold that petitioners’ basis in the coral springs residence for is increased by dollar_figure see sec_1016 b romeo property petitioners contend that respondent understated their basis in the romeo property according to petitioners their basis in the romeo property should be increased by dollar_figure to reflect costs of clearing and improving that property support paid to the ballards and costs of hiring workers to assist in clearing that property petitioners rely upon a number of methods of proof to carry their burden first they rely upon the direct testimony of mr powerstein mr ballard and ms ballard second they offered an appraisal which reported improvements to that property such as a three-stall barn a pump house and a septic tank third they submitted checks receipts and letters establishing that they paid support to the ballards while the romeo property was developed and hired workers to help in the clearing of that land fourth they offered the handwritten notes of mr powerstein listing the expenses_incurred in connection with developing the romeo property we also note that petitioners’ estimates of the cost of developing the romeo property reasonably excluded expenses related to m m and improvements that respondent had credited them with given the overwhelming evidence introduced to corroborate petitioners’ claim we hold that their basis in the romeo property is increased by dollar_figure see id c addison mobile home petitioners maintain that their basis in the addison mobile home should be reduced by dollar_figure from dollar_figure to dollar_figure we disagree in an attempt to meet their burden petitioners rely upon the handwritten notes of mr powerstein showing a purchase_price for the addison mobile home of dollar_figure respondent on the other hand submitted canceled checks establishing that the cost of acquiring the addison mobile home was dollar_figure as compared with mr powerstein’s handwritten schedule we find the checks relied upon by respondent to be more persuasive accordingly we sustain respondent’s determination that petitioners’ basis in the addison mobile home was dollar_figure loans and mortgages petitioners assert that their net_worth should be adjusted to reflect a dollar_figure loan atlantic loan from atlantic bank we agree petitioners submitted evidence showing that they became liable on the atlantic loan in or around first they made a large_deposit to a bank account with atlantic bank on date which we believe reasonably could have included the proceeds from the atlantic loan second petitioners submitted a bank deposit ticket showing that a dollar_figure loan with atlantic bank was repaid in third petitioners presented handwritten notes of mr powerstein showing that a dollar_figure note was taken from atlantic bank accordingly we hold that petitioners’ net_worth should be increased by dollar_figure in and the years during which the atlantic loan was outstanding depreciation respondent determined that petitioners were entitled to adjustments for accumulated depreciation of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure in through respectively petitioners counter that they are entitled to additional_depreciation of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure in through respectively these adjustments stem from petitioners’ alleged use of the addison mobile home and the copier in mr powerstein’s accounting firm as discussed more fully below we conclude that expenses related to the copier but not to the addison mobile home were ordinary and necessary business_expenses of mr powerstein’s accounting firm we thus hold that petitioners’ adjustments for accumulated depreciation in through are dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively d disputed nondeductible personal_expenditure sec_1 overview given the absence of information concerning petitioners’ specific personal living_expenses respondent used bls figures to calculate petitioners’ nondeductible personal living_expenses for through and reflected his determinations in the answer after more than years respondent amended the answer a second time to assert increases in petitioners’ nondeductible personal expenses of dollar_figure the revised expenditures were based on a composite of bls figures and expenditures reflected in petitioners’ three main checking accounts because the adjustments in nondeductible personal living_expenses increased petitioners’ annual net_worth for each of the years through we treat the revised personal nondeductible expenditures as a new_matter on which respondent bears the burden_of_proof see rule a michas v commissioner tcmemo_1992_161 petitioners offered substantial proof to rebut respondent’s imputation of items under the bls and additional adjustments in particular petitioners submitted evidence that proved that they did not make certain expenditures attributed to them under bls or respondent erroneously classified expenses as nondeductible that were in fact deductible although we mostly agree with petitioners’ challenges to respondent’s revised adjustments that agreement is not unlimited we explain seriatim only those adjustments proposed by petitioners with which we disagree or those items that we feel warrant explanation to the extent that we have rejected any adjustment proposed by respondent as to petitioners’ nondeductible personal expenditures we have done so because respondent failed to persuade us that such an adjustment was proper alcoholic beverages respondent imputed to petitioners allowances of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for alcoholic beverages for through respectively although petitioners testified that they did not consume alcohol during the years in issue they also testified that they provided most if not all of the ballards’ support from through mr ballard was described at trial as a social drinker and he was convicted of driving under the influence we thus believe it reasonable to impute expenses for alcoholic beverages to petitioners for through because petitioners supported the ballards at least one of whom consumed alcohol we do not believe it reasonable to impute expenses for alcoholic beverages to petitioners during and because petitioners apparently did not support the ballards during those years and petitioners testified credibly that they did not consume alcohol accordingly we sustain respondent’s determination that nondeductible personal expenses for alcoholic beverages of dollar_figure dollar_figure and dollar_figure for through respectively are imputed to petitioners second glendale mortgage respondent determined that petitioners made four payments on the second glendale mortgage during including two payments totaling dollar_figure from an account with atlantic bank and two payments totaling dollar_figure from other sources petitioners contend that they made only three payments during because it appeared to be petitioners’ custom and habit to make payments around the fifteenth of each month we disagree petitioners were obliged to make payments under the second glendale mortgage until that note was satisfied the sale of the coral springs residence closed on date and the second glendale mortgage was satisfied with the proceeds of that sale regardless of when petitioners customarily paid their mortgage they were obligated for the pro_rata share of the mortgage up until the date of repayment we are satisfied that the amounts imputed to petitioners regarding the fourth mortgage payment covered date and sustain respondent’s determination that petitioners made four payments on the second glendale mortgage during totaling dollar_figure first sun bank mortgage respondent determined that petitioners made nine payments of approximately dollar_figure on the first sun bank mortgage during including four payments totaling dollar_figure from an account with atlantic bank and five payments totaling dollar_figure from other sourcesdollar_figure according to petitioners only seven payments were due under the first sun bank mortgage during and respondent has not proved that petitioners made any more than three payments under that mortgage we conclude that petitioners made seven payments under the first sun bank mortgage payment due on that loan began on date and continued until date when petitioners retired the first sun bank mortgage with the proceeds of the second sun bank mortgage thus petitioners were required to make payments under the first sun bank mortgage for the 7-month period between march and date and for the first days of date accordingly we hold that petitioners incurred dollar_figure of nondeductible personal expenditures in related to the first sun bank mortgage dollar_figure times months dollar_figure petitioners contend that each of the seven payments paid under the first sun bank mortgage reduced the principal due on 14monthly payments of approximately dollar_figure were calculated as total payments of dollar_figure divided by months 15the product of the items may not equal the total because of rounding that note we agree the first sun bank mortgage provided for monthly payments of principal and interest because the record does not contain a copy of the note on which the first sun bank mortgage was based we are forced to estimate the proper allocation between principal and interest on that note the short-term semiannual-compounding applicable_federal_rate afr in effect for was percentdollar_figure see revrul_84_163 1984_ 2_cb_179 assuming a principal_amount of dollar_figure an interest rate of percent and a 3-year term we find that principal due under the first sun bank mortgage was more than dollar_figure we limit the principal reduction to the amount petitioners proposed real_estate_taxes respondent imputed to petitioners real_estate tax_payments for the coral springs residence of dollar_figure and dollar_figure in and respectively with respect to petitioners counter that imputing real_estate_taxes to them is improper because the first and second glendale mortgages impounded real_estate_taxes of dollar_figure per month and petitioners prepaid months of real_estate_taxes totaling dollar_figure petitioners concede that dollar_figure of real_estate_taxes should be imputed to them in we agree with petitioners that they paid real_estate_taxes through the 16we use the short-term afr because the term of the first sun bank mortgage wa sec_3 years see sec_1274 we use the semiannual-compounding convention as that most closely approximating the average daily interest rate for first and second glendale mortgages and we hold that they need impute real_estate_taxes only in the amount conceded with respect to petitioners contend that respondent’s imputation of real_estate_taxes is improper because those real_estate_taxes were paid from the closing proceeds on the sale of the coral springs residence we disagree the settlement statement with respect to the sale of the coral springs residence to the underhills made two adjustments related to real_estate_taxes first petitioners were assessed dollar_figure for unpaid county taxes from january through date second petitioners were charged dollar_figure for taxes related to thus petitioners paid dollar_figure of real_estate_taxes with respect to the coral springs residence which is the amount respondent imputed to them accordingly we sustain respondent’s imputation of dollar_figure in real_estate_taxes to petitioners for improvements to romeo property petitioners contend that their nondeductible personal expenditures should be reduced by amounts expended to improve the romeo property we agree we have held that petitioners incurred dollar_figure in connection with improving the romeo property and those costs were already included in the increased basis of the romeo property accordingly we hold that petitioners’ nondeductible personal expenditures should be reduced by dollar_figure summary on our review of the record as a whole and with due regard to respondent’s burden_of_proof we conclude that petitioners’ nondeductible personal expenditures_for through were dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively e disputed nontaxable receipt sec_1 overview as asserted in the answer respondent’s net_worth computation adjusted petitioners’ nontaxable receipts only for federal_income_tax refunds for each of the years through the parties have stipulated that petitioners received additional nontaxable receipts as follows qualified_reinvested_dividends of dollar_figure and dollar_figure in and respectively and nontaxable distributions of dollar_figure in petitioners also contend that they are entitled to further adjustments for nontaxable items including a 60-percent deduction on the net_capital_gain from the sale of the coral springs residence certain interest_income an inheritance allegedly received from ms p powerstein and a deduction for dual-income taxpayers filing a joint_return gain on the sale of the coral springs residence after accounting for settlement charges and credits due to the underhills petitioners realized dollar_figure on the sale of the coral springs residence petitioners’ basis in the coral springs residence was dollar_figure therefore their net_capital_gain on the sale of the coral springs residence is dollar_figure dollar_figure less dollar_figure see sec_1001 the parties agree and we conclude that petitioners are entitled to a 60-percent deduction on that gain see sec_1202 allowing individual taxpayers a percent deduction for net capital_gains accordingly we hold that petitioners may exclude dollar_figure dollar_figure times percent interest_income petitioners contend that they are entitled to exclude dollar_figure of interest_income which they purportedly earned on an all-savers certificate issued by safra bank they cite no legal support for their entitlement to such an exclusion instead referring the court to their joint_return on which they excluded dollar_figure of interest_income sec_128 allows for the exclusion_from_gross_income of interest earned on a depository_institution tax- exempt savings certificate sometimes referred to as an all- savers certificate in the case of a joint_return the excludable amount during any taxable_year is limited to dollar_figure less the aggregate amount the taxpayers received in prior years sec_128 thus taxpayers were entitled to a one-time dollar_figure exclusion_from_gross_income for interest_paid on an all-savers certificate because petitioners claimed a dollar_figure exclusion on their joint_return we hold that they are not entitled to a similar exclusion for inheritance petitioners contend that they are entitled to exclude ms p powerstein’s share of nine bank accounts held at safra bank as nontaxable inheritance we are not persuaded petitioners did not establish that mr powerstein was a beneficiary under ms p powerstein’s will if she died testate or as an heir at law if she died intestate we thus hold that petitioners may not exclude as nontaxable income the balances of accounts held jointly with ms p powerstein cf morrow v commissioner tcmemo_1967_242 crediting a taxpayer’s claim that amounts received as inheritance should be excluded from his net_worth where that testimony was corroborated with a copy of the state estate_tax_return filed by the decedent’s estate married couple’s deduction petitioners further contend that they are entitled to a married couple’s deduction for we agree for taxpayers filing a joint_return sec_221 allows dual-income married couples a deduction equal to percent of the lesser_of dollar_figure or the qualified_earned_income of the spouse with the lower qualified_earned_income for the taxable yeardollar_figure estate of johnson v commissioner tcmemo_2001_182 affd without 17the term qualified_earned_income is defined as an amount equal to the excess of a the earned_income of the spouse for the taxable_year over b an amount equal to the sum of the certain deductions allowable under sec_62 and properly allocable to or chargeable against earned_income sec_221 published opinion 129_fedappx_597 11th cir ms rosen earned dollar_figure of income in which is less than the income that mr powerstein earned in his accounting firm accordingly petitioners are entitled to a married couple’s deduction for of dollar_figure f summary on the basis of the foregoing we determine increases in petitioners’ taxable_income as follows net_worth computation cash on hand dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure investments big_number big_number big_number big_number big_number big_number personal assets big_number big_number big_number big_number big_number big_number real_estate big_number big_number big_number big_number big_number big_number additional investments big_number big_number big_number big_number big_number big_number total assets big_number big_number big_number big_number big_number big_number loans and mortgages big_number big_number big_number big_number big_number big_number charge accounts -0- -0- -0- -0- -0- -0- accumulated depreciation big_number big_number big_number big_number big_number big_number total liabilities big_number big_number big_number big_number big_number big_number net_worth big_number big_number big_number big_number big_number big_number less prior year’s net_worth n a big_number big_number big_number big_number big_number net_worth increase n a big_number big_number big_number big_number big_number personal expenses n a big_number big_number big_number big_number big_number nondeductible loss -0- -0- -0- -0- -0- -0- less nontaxable income n a big_number big_number big_number adjusted_gross_income n a big_number big_number big_number big_number big_number less itemized_deductions n a big_number big_number big_number big_number big_number less exemptions n a big_number big_number big_number big_number big_number corrected taxable_income n a big_number big_number big_number big_number big_number reported taxable_income n a big_number big_number big_number big_number increase to taxable_income n a big_number big_number big_number big_number big_number it follows that petitioners’ income for through is increased by dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively see sec_61 iii deductions a overview having determined the increases to petitioners’ taxable_income under the net_worth_method we now examine the additional components of petitioners’ taxable_income for the years in issue although the parties agreed to many of the additional components of adjusted_gross_income petitioners contend that they are entitled to deductions related to mr powerstein’s accounting firm and their farming activity respondent apparently relies upon the general presumption afforded the notice_of_deficiency not addressing these issues with any real precision we consider petitioners’ contentions in turn b schedule c expense sec_1 home_office expense petitioners allege that mr powerstein kept an office in the addison mobile home that qualified as his principal_place_of_business and that they are entitled to a deduction for home_office expenses for through dollar_figure as a general_rule a 18although petitioners assert that they are entitled to a home_office deduction with respect to the coral springs residence for they abandon that argument because according to them the benefit of the depreciation deduction in will be offset continued taxpayer is not allowed a deduction for expenses related to property that a taxpayer occupies as his or her residence sec_280a an exception to the general_rule is found in sec_280a which provides that an expense that is allocable to a portion of the taxpayer’s dwelling that is used exclusively on a regular basis as the taxpayer’s principal_place_of_business will be allowed as a deduction in deciding whether a home_office qualifies as a taxpayer’s principal_place_of_business we consider the relative importance of the activities performed at each business location and the amount of time spent at each location 506_us_168 the location where a taxpayer contacts clients is an important indicator of the principal_place_of_business id although we are satisfied that mr powerstein worked on client matters from the addison mobile home we are not persuaded that such activity entitles petitioners to home_office expense deductions for an accountant such as mr powerstein soliciting business and collecting information from client-taxpayers is as important a function of that trade_or_business as analyzing the underlying information to report on the returns to be filed with the irs mr powerstein testified that he spent considerable continued by recapture of that depreciation upon the sale of the coral springs residence in time servicing clients in south florida yet he did not elaborate on the amount of time he spent at each location or the functions he performed while there nor did petitioners offer any evidence indicating the amount of time and the relative importance of the activities that mr powerstein performed in the addison mobile home as compared to work conducted in south florida we are particularly skeptical of petitioners’ claim that mr powerstein used the addison mobile home as his principal_place_of_business in the light of the fact that he did not meet with clients there moreover on schedules c attached to the through joint returns petitioners reported that they were not deducting expenses for an office in their home their reporting we believe is indicative of mr powerstein’s state of mind during the years in issue we doubt that mr powerstein would not have claimed a home_office expense deduction if he regarded that residence as his principal_place_of_business especially because he so liberally claimed deductions to which he was not entitled or failed to report income altogether we thus hold that petitioners are not entitled to deduct expenses associated with the addison mobile home including utilities expenses copier petitioners contend that they are entitled to a dollar_figure depreciation deduction in connection with a copier which mr powerstein purchased in for his accounting firm attached to the joint_return was form_4562 which reported 7-year_property with a depreciable basis of dollar_figure mr powerstein however recorded that the purchase_price of the copier was dollar_figure we credit mr powerstein’s testimony and in the light of his handwritten cash disbursements journal we hold that the copier’s depreciable basis was dollar_figure depreciating the copier by a straight-line method over years we hold that petitioners are entitled to a depreciation deduction of dollar_figure for dollar_figure divided by years dollar_figure see sec_167 sec_168 through d additional legal expenses petitioners deducted dollar_figure as legal fees on schedule c attached to the joint_return petitioners contend that they are entitled to additional deductions of dollar_figure for legal fees incurred in connection with mr powerstein’s accounting firm they refer the court to two separate exhibits which purport to be cashier’s checks issued to various law firms but are actually checks or deposit slips for accounts that mr powerstein held at california federal accordingly we hold that petitioners have failed to prove their entitlement to additional deductions for legal fees because they have not proved that these fees were paid 19whereas petitioners contend that their net_worth should be increased by dollar_figure to reflect ownership of the copier we limit the increased net_worth for that copier to the purchase_price of the copier or dollar_figure or that they were ordinary and necessary expenses see sec_162 d schedule f expenses attached to the joint_return was schedule f on which petitioners reported that they were engaged in the trade_or_business_of_farming respondent determined that petitioners were not engaged in the trade_or_business_of_farming during and that they could not claim depreciation and expenses as deductions on schedule f we agree with respondent sec_162 allows as a deduction all the ordinary and necessary expenses paid_or_incurred in carrying on any activity that constitutes a trade_or_business sec_212 allows as a deduction all the ordinary and necessary expenses paid_or_incurred in carrying on an activity for the production_or_collection_of_income or management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_183 generally limits deductions for an activity not entered into for profit to the amount of the activity’s gross_income sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 to be engaged in a trade_or_business the taxpayer must conduct the activity with continuity regularity and for the primary purpose of realizing income or profit 480_us_23 while a reasonable expectation of profit is not required the objective facts and circumstances must demonstrate an actual and honest objective to realize a profit 62_f3d_356 11th cir affg in part and revg in part tcmemo_1993_519 sec_1_183-2 income_tax regs greater weight is given to objective facts than a taxpayer’s mere statement of his or her intent to make a profit sec_1_183-2 income_tax regs applying the above principles we conclude that petitioners were not engaged in the trade_or_business_of_farming they did not consult with an expert or conduct any research on developing the romeo property into a farm although they raised a modest number of cattle pigs horses and chickens they did not establish that they intended to profit from raising these animals nor did they establish that they intended to profit from raising crops which never grew because of drought conditions although an appraisal performed for sun bank states that some farming is planned in the future we are not persuaded on the basis of the record at hand that petitioners’ farming activity rose to the level of being engaged in as a trade_or_business on balance we believe petitioners’ farming activity was more consistent with rural living and not with the trade_or_business_of_farming we hold that petitioners were not engaged in the trade_or_business_of_farming because we have found that petitioners’ farming activity did not constitute a trade_or_business or was not entered into for profit it follows that expenses associated with that activity are limited to the amount of the activity’s gross_income see sec_183 given that petitioners reported zero gross_income from their farming activity on schedule f attached to the joint_return it follows that they are not entitled to any deduction in connection with their farming activity iv income_averaging petitioners contend that for and they are entitled to special income-averaging provisions afforded taxpayers under section that section which was repealed for tax years beginning after date by the tax_reform_act_of_1986 publaw_99_514 100_stat_2117 allows for averaging of damages arising from causes of action for breach of contract or breach of fiduciary duty petitioners’ unreported income is attributable to mr powerstein’s accounting firm and not to an award of damages for breach of contract or breach of fiduciary duty thus section is not applicable v interest_expense mr powerstein contends that he is entitled to a dollar_figure interest_expense_deduction for interest that respondent jeopardy- assessed during respondent answers that the interest is nondeductible personal_interest within the purview of sec_1_163-9t temporary income_tax regs fed reg date regulation mr powerstein urges the court to invalidate the regulation on the basis of our reasoning in 106_tc_31 revd and remanded 141_f3d_936 9th cir we decline to do so we had occasion to carefully consider the validity of the regulation in 119_tc_44 a court-reviewed opinion in robinson we concluded that the regulation was valid that our opinion in redlark should no longer be followed and that interest_paid on individual tax_liabilities relating to income from a sole_proprietorship is to be treated as nondeductible personal_interest id pincite while we are not aware of any decision in the court_of_appeals for the eleventh circuit deciding the validity of the regulation we note that our decision in robinson is consistent with opinions of the courts of appeals for the fourth fifth sixth seventh eighth and ninth circuitsdollar_figure we see no reason to disturb our decision 20see 349_f3d_225 5th cir affg tcmemo_2002_309 190_f3d_791 7th cir revg tcmemo_1998_92 180_f3d_721 6th cir 173_f3d_533 4th cir 141_f3d_936 9th cir revg and remanding 106_tc_31 65_f3d_687 8th cir in robinson and therefore we reject petitioners’ invitation to invalidate the regulation it follows that interest respondent jeopardy-assessed is nondeductible personal_interest vi additions to tax a fraud respondent determined that petitioners are liable for additions to tax for fraud under sec_6653 and with respect to their through joint returns for and sec_6653 imposed a 50-percent addition_to_tax on any portion of an underpayment_of_tax that is due to fraud and sec_6653 imposed a 50-percent addition_to_tax on any interest payable under sec_6661 with respect to any portion of an underpayment_of_tax that is attributable to fraud for and sec_6653 imposed a 75-percent addition_to_tax on any portion of an underpayment_of_tax due to fraud and sec_6653 imposed a 50-percent addition_to_tax on any interest payable under sec_6661 with respect to any portion of an underpayment_of_tax that is attributable to fraud for sec_6653 imposed a 75-percent addition_to_tax where any portion of an underpayment_of_tax is due to fraud for all years in the case of a joint_return the additions to tax imposed by sec_6653 and do not apply to a spouse unless some part of the underpayment is attributable to the fraud of that spouse sec_6653 as in effect for and sec_6653 as in effect for through the commissioner bears the burden of establishing fraud by clear_and_convincing evidence sec_7454 rule b clear_and_convincing evidence is that degree of proof that produces ‘a firm belief or conviction as to the allegations sought to be established it is intermediate being more than a mere preponderance but not the extent of such certainty as is required beyond a reasonable doubt as in criminal cases it does not mean clear and unequivocal ’ 497_us_502 quoting cross v ledford n e 2d ohio to carry his burden the commissioner must prove as to each taxpayer for each year in which fraud is alleged that an underpayment_of_tax existed and each taxpayer intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection of such taxes 781_f2d_1566 11th cir affg tcmemo_1985_63 94_tc_654 we consider whether respondent has met his burden as to each of mr powerstein and ms rosen mr powerstein a collateral_estoppel we begin by recognizing that mr powerstein was convicted of income_tax evasion under sec_7201 for as a result mr powerstein is collaterally estopped from denying civil_fraud with respect to see 708_f2d_243 6th cir affg tcmemo_1981_1 we next consider whether mr powerstein is liable for additions to tax for fraud for and we hold he is b underpayment_of_tax the commissioner can prove an underpayment_of_tax stemming from unreported and indirectly reconstructed income by among other means proving a likely source of the unreported income 96_tc_858 affd 959_f2d_16 2d cir to satisfy his burden respondent submitted into evidence records showing that petitioners deposited and or invested substantial sums of money in bank accounts investments and real_estate respondent also established that petitioners received these moneys in connection with mr powerstein’s accounting firm the record clearly and convincingly establishes that petitioners understated their income by more than dollar_figure we find that respondent has clearly and convincingly proven the first element of fraud c fraudulent intent whether a portion of the underpayment_of_tax is attributable to fraud is a question of fact to be resolved on the basis of the record as a whole parks v commissioner supra pincite fraud has been defined as the intentional commission of an act or acts for the specific purpose of evading taxes believed to be owing 92_tc_661 ‘fraud implies bad faith intentional wrong doing and a sinister motive ’ 394_f2d_366 5th cir quoting 264_f2d_930 5th cir affg tcmemo_1966_81 fraud is never imputed or presumed but must be established by clear_and_convincing evidence that establishes fraudulent intent petzoldt v commissioner supra pincite fraud need not be established by direct evidence because such evidence is rarely available but can be shown by surveying the taxpayer’s entire course of conduct and drawing reasonable inferences therefrom 440_f2d_1 6th cir affg tcmemo_1968_240 we may infer fraud from any conduct the likely effect of which would be to mislead or to conceal 317_us_492 courts often rely upon certain indicia or badges_of_fraud in deciding whether a taxpayer acted with fraudulent intent these badges_of_fraud include a pattern of understating income giving implausible or inconsistent explanations of behavior concealing income and or assets failing to cooperate with taxing authorities an intent to mislead which may be inferred from a pattern of conduct providing false documents and dealing in cash see id 99_tc_202 no single factor is dispositive though the existence of several indicia is competent evidence of fraud see niedringhaus v commissioner supra pincite in determining the existence of fraud we may look to evidence of prior and subsequent similar acts reasonably close to the years at issue tipton v commissioner tcmemo_1994_624 citing 386_f2d_630 3d cir i understatements of income the consistent and substantial_understatement of income over several years is strong evidence of fraudulent intent korecky v commissioner supra pincite citing 301_f2d_484 5th cir affg t c memo between and petitioners failed to report or account for more than dollar_figure of income which mr powerstein earned through his accounting firm the evidence clearly and convincingly establishes that petitioners substantially understated their taxable_income from through the failure to report this income is strong evidence of fraud ii implausible explanations of behavior giving implausible or inconsistent explanations of behavior may implicate fraudulent intent 796_f2d_303 9th cir affg tcmemo_1984_601 mr powerstein consistently exhibited implausible behavior suggesting fraudulent intent as a college graduate and a c p a mr powerstein is knowledgeable in tax matters and was capable of preparing accurate returns for through nevertheless he omitted from each of the through joint returns substantial income earned from the accounting firm in preparing petitioners’ joint returns for those years mr powerstein also understated capital_gains overstated capital losses and or omitted interest and dividend incomedollar_figure mr powerstein also exhibited implausible behavior in the loan applications that he submitted to banks each of those loan applications reported income substantially higher than that reported to respondent for federal_income_tax purposes first mr powerstein reported on the loan application that he expected to earn dollar_figure of income from his accounting firm yet the joint_return reported that he earned only dollar_figure from that business second although he reported on the loan 21although respondent does not contend that the rental income petitioners received in connection with the coral springs residence was taxable to them we observe that such income is ordinarily taxable see sec_61 application that he expected to earn dollar_figure from his accounting firm the joint_return reported that he earned only dollar_figure from that business third the loan application estimated income from his accounting firm of dollar_figure but the joint_return claimed a loss of dollar_figure from that business fourth attached to the loan application were the purported and returns each of which reported income different from that reported on the corresponding and joint_return filed with respondent we find it implausible that an uncorrupted individual would attach false tax returns to a loan application we also doubt that mr powerstein’s gross underestimation of his income was harmless also indicative of fraud is that mr powerstein was unable to offer any logical explanation for his behavior he evaded basic questions about the letter he drafted to his clients he was unable to rationalize the differences in income reported on the loan applications submitted to banks and the joint returns filed with respondent he sought to explain his actions by suggesting that he neglected himself and his personal federal_income_tax returns to place his clients’ needs first we doubt that placing his clients’ needs above his own would lead him to file false returns absent fraudulent intent such behavior supports a consistent pattern of fraud before_1984 and continuing throughout iii concealment of income or assets fraud may be implicated where a taxpayer conceals assets or income spies v united_states u s pincite petitioners’ use of nominees to place assets beyond the reach of the federal government supports a finding of fraudulent intent between february and date mr powerstein and ms rosen transferred approximately bank accounts to ms ballard and ms i powerstein individually or in trust for k b they transferred the vacation home and the romeo property to ms ballard and ms i powerstein for dollar_figure on the record as a whole we believe it reasonable to conclude that petitioners transferred these assets in an attempt to place them beyond the reach of the government such acts favor a finding of fraudulent intent iv accurate returns the failure_to_file accurate tax returns may indicate fraudulent intent mr ballard testified credibly that amounts reported as loans from shareholders on the federal_income_tax returns for m m were stretched for example mr ballard attributed expenses provided by mr powerstein as consisting of dollar_figure for a tractor dollar_figure for a chainsaw and then amounts for ropes fertilizer and other equipment mr powerstein also purchased other items such as a riding lawnmower for dollar_figure on date the and returns for m m reported that mr and ms ballard made more than dollar_figure in loans to that company even though neither individual had the financial wherewithal to contribute such moneys v illegal activities a criminal conviction for engaging in illegal activities may be probative of fraudulent intent bradford v commissioner supra pincite we consider it significant that mr powerstein pleaded guilty to income_tax evasion under sec_7201 for although his conviction does not decidedly establish fraudulent intent with respect to through and we consider that crime evidence of a propensity to defraud see 61_tc_249 affd 519_f2d_1121 5th cir in connection with the plea agreement mr powerstein admitted to preparing forms w-2 that overreported federal income taxes withheld for client-taxpayers he wrote a letter during that acknowledged either explicitly or implicitly that he mischaracterized his client-taxpayers’ federal tax treatment of dividends pension distributions political_party contributions and basis mr powerstein also deliberately misrepresented the investments of those client-taxpayers to the irs and claimed exemptions to which he admitted that they were not entitled although this letter is direct evidence of his fraud for we also rely on that letter as evidence of mr powerstein’s attempts to conceal and mislead the government in determining his client- taxpayers’ federal_income_tax liabilities cf 509_f3d_736 6th cir considering a taxpayer’s actions after returns have been filed to determine his earlier state of mind affg tcmemo_2006_69 such behavior favors a finding of fraudulent intent vi dealing in cash a taxpayer’s use of cash evidences fraudulent intent because it demonstrates a desire to avoid detection of income-producing activities bradford v commissioner f 2d pincite mr powerstein kept numerous bank accounts and he dealt with many of his clients in cash both before and after the years at issue such dealings in cash favor a finding of fraudulent intent vii summary after applying the foregoing factors we are satisfied that respondent has clearly and convincingly proved that mr powerstein filed the through and joint returns intending to conceal mislead or otherwise prevent the collection_of_taxes respondent has therefore satisfied the second prong of the fraud test as to mr powerstein for each of the years and we hold that mr powerstein is liable for an addition_to_tax equal to percent of the underpayment_of_tax for that year see sec_6653 harvey v commissioner tcmemo_1999_229 with respect to additions to tax under sec_6653 for sec_6653 for and and sec_6653 and b for and mr powerstein is liable for those additions to tax only on the portions of the underpayments attributable to fraud see harvey v commissioner supra the burden of proving by a preponderance_of_the_evidence that a portion of the underpayment for each year is not attributable to fraud lies with mr powerstein otherwise the entire underpayment is subject_to the fraud addition_to_tax d portion of underpayment attributable to fraud petitioners contend that the portions of the underpayments attributable to the gain on the sale of the of the coral springs residence their farming activity capital_gains on the sale or disposition of certain stock and relatively small amounts of interest and dividend were not attributable to fraud we agree in part with respect to that portion of the deficiency from the gain on the sale of the coral springs residence we conclude that the underpayment was not attributable to fraud attached to the joint_return was form_2119 sale_or_exchange of principal_residence which reported the selling_price of the coral springs residence and petitioners’ perceived basis in that property as evidenced by the fact that form_2119 was filed albeit incorrectly we do not believe that petitioners reported the sale of the coral springs residence intending to conceal mislead or otherwise prevent the collection of tax as to that portion of the deficiency attributable to their alleged farming activity we find that the underpayment is not attributable to fraud petitioners attached to the joint_return schedule f alerting respondent to their farming activity and respondent disallowed those losses in connection with his criminal investigation of mr powerstein although petitioners’ position regarding the status of their farming activity as a trade_or_business was wrong it was not entirely unreasonable and did not rise to the level of intending to mislead conceal or otherwise prevent the collection of tax accordingly we hold that the portion of the underpayment attributable to petitioners’ farming activity was not attributable to fraud as to that portion of the deficiency attributable to capital_gains interest_income and dividend income which mr powerstein overlooked in preparing the and joint returns we conclude that those underpayments were attributable to fraud mr powerstein devised a scheme to conceal his income from respondent as evidenced by mr powerstein’s letter to two clients in he misstated capital_transactions interest_income and dividend income which he believed the irs was unable to track we believe that petitioners employed a similar strategy on their joint returns omitting such gains and income allowed mr powerstein to further conceal his income fraudulently in an attempt to conceal mislead and otherwise frustrate the collection_of_taxes we thus hold that portions of the underpayment attributable to unreported capital_gains and to interest and dividend income are attributable to fraud it follows that mr powerstein is liable for additions to tax under sec_6653 for sec_6653 for and and sec_6653 and b for and to the extent stated herein ms rosen on our review of the record we are not convinced that respondent has carried his burden of proving fraud by clear_and_convincing evidence as to ms rosen although she signed the through joint returns which substantially understated petitioners’ income and aided the fraudulent transfer of assets to family members we are left with only a suspicion of fraud on her part she did not understand accounting was unfamiliar with the bank accounts and recordkeeping of mr powerstein and was not involved with the accounting firm whatsoever while we have our suspicions as to whether mr powerstein explained the nuances of his fraudulent scheme to ms rosen such suspicions do not warrant imposition of the fraud addition_to_tax absent more compelling evidence see 19_fedappx_90 4th cir in this regard respondent has failed to satisfy his burden_of_proof with respect to ms rosen we therefore hold that she is not liable for fraud additions to tax for through b sec_6661 respondent determined that petitioners are liable for additions to tax under sec_6661 for through for tax returns due on or before date sec_6661 imposed an addition_to_tax for substantial understatements of income_tax equal to percent of the underpayment attributable to the understatement 90_tc_498 the amount of the sec_6661 addition_to_tax was subsequently increased to percent for returns due on or after date an understatement is substantial if it exceeds the greater of percent of the tax required to be reported on the return or dollar_figure sec_6661 an understatement is reduced to the extent that the understatement is attributable to any item which is supported by substantial_authority or adequately disclosed in the return or in a statement attached to the return sec_6661 petitioners did not adequately disclose the amounts leading to the understatements on their through returns nor have they cited any authority to support the understatements we therefore sustain respondent’s determination that petitioners are liable for additions to tax under sec_6661 vii epilogue we have considered all arguments raised by the parties and to the extent not discussed herein we conclude that they are irrelevant moot or without merit to reflect the foregoing decisions will be entered under rule