                          T.C. Memo. 2011-114



                      UNITED STATES TAX COURT



         THOMAS F. AND KATHRYN H. CHAMBERS, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 533-09.                  Filed May 31, 2011.



     Scott W. Gross, for petitioners.

     Ronald S. Collins, Jr., John A. Guarnieri, and Arslan Malik,

for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined income tax deficiencies

of $37,594 and $18,769, and fraud penalties pursuant to section

66631 of $28,195.50 and $14,076.75, for petitioners’ 2005 and


     1
      Unless otherwise indicated, section references are to the
                                                   (continued...)
                                - 2 -

2006 tax years, respectively.   The issues we must decide are:

(1) Whether respondent bears the burden of proof on the

additional deficiency respondent has asserted for 2006;2 (2)

whether petitioners must include in their gross income for their

2005 and 2006 tax years the amounts respondent determined on the

basis of the analysis of petitioners’ bank deposits; and (3)

whether petitioners are liable for the fraud penalties pursuant

to section 6663.

                        FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated.

The parties’ stipulations of fact are incorporated in this

opinion by reference and are found accordingly.   At the time they

filed their petition, petitioners resided in Pennsylvania.

Petitioners are husband and wife (hereinafter referred to

individually as Mr. Chambers and Mrs. Chambers, respectively) who

filed joint tax returns for their 2005 and 2006 tax years (the

years in issue).




     1
      (...continued)
Internal Revenue Code of 1986 (Code), as amended and in effect
for the years in issue, and Rule references are to the Tax Court
Rules of Practice and Procedure.
     2
      The notice of deficiency issued to petitioners stated that
respondent had determined a deficiency for 2006 of $12,027, but
in his answer respondent asserts that that number was incorrect
because of a computation error and that the correct amount of
petitioners’ deficiency is $18,769.
                                 - 3 -

     Mr. Chambers is an ordained minister who, during the years

in issue, was the sole pastor of Biblical Church Ministries

(sometimes also referred to as Biblical Church or Biblical Church

and Global Ministries).    Before he founded Biblical Church during

2003, Mr. Chambers had been the senior pastor of Pilgrim Bible

Church since 1991.    He resigned from his position at Pilgrim

Bible Church because he wanted to concentrate more on global

evangelism and planned to be out of the country for many weeks

during the year.   However, about a dozen of his former

congregants at Pilgrim Bible Church asked him to continue leading

them in studying the Bible on Sunday mornings.       Mr. Chambers

agreed to continue leading them in Sunday worship with the

understanding that he would be ministering abroad a number of

weeks during the year and that someone else would lead worship

when he was absent.

     During 2003 Mr. Chambers organized Biblical Church as a

“corporation sole” under Utah law.       He designated himself as

“overseer” of Biblical Church.    As overseer, he had full control

over the corporation sole, including the authority to amend its

articles of corporation sole and appoint his successor.       During

2006 petitioners transferred the ownership of their home from

themselves as individuals to Mr. Chambers as overseer of Biblical

Church, a corporation sole.
                                - 4 -

     Since its inception Biblical Church has held worship

services every Sunday and Bible studies on Wednesday nights.

The Sunday services are held at the home of one of the church

members, and the Wednesday night studies meet at petitioners’

home.    A typical service includes worship music, prayer, and

teaching from the Bible.    The normal attendance at the Sunday

services ranges from 15 to 25 people.    Many of those individuals

attend Biblical Church exclusively as their regular church.      In

addition to leading worship on Sundays and Bible studies on

Wednesdays, Mr. Chambers provides pastoral counseling to the

members of Biblical Church.

     Mr. Chambers followed through on his plans to participate in

many overseas evangelism trips.    In addition to his job as a

pastor at Biblical Church, he is on the staff of e3 Partners,3 an

organization that is exempt from tax pursuant to section

501(c)(3).    Mr. Chambers’ role with e3 Partners is “church

planter”, and his primary responsibility is to lead short-term

mission trips to other countries, where he trains local pastors

and other volunteers in evangelism.

     During each of the years in issue Mr. Chambers led two trips

with e3 Partners and participated in a third trip.    His travels

included:    A trip to Peru during April 2005; trips to two


     3
      The organization was also known as Global Partners during
some of the years in issue. However, to avoid confusion, we will
refer to it only as e3 Partners.
                               - 5 -

different locations in Venezuela from late June to mid-July 2005;

a trip to India that lasted from December 31, 2005, until early

February 2006; a trip to Costa Rica during March 2006; and a trip

to South Africa during July 2006.   His family accompanied him on

the mission trips, and at least five members of his congregation

also participated in at least one trip.    Other congregations sent

volunteers on the trips he led, and he was responsible for

training the members of his team in the United States before they

traveled abroad.

     The team members were responsible for raising their own

funds for each trip, but e3 Partners coordinated fundraising by

receiving donations on behalf of individual team members and

using those donations to pay trip expenses for those team

members.   Portions of the funds raised by all of the team members

were directed to the team leaders, like Mr. Chambers, who were

responsible for handling all of the day-to-day expenses the team

would encounter on the trip.   Before each trip, e3 Partners

deposited funds into a bank account provided by the team leader,

who then withdrew the cash needed for the trip.    All expenses

incurred during the trip had to be documented by receipts, and

the team leader was responsible for returning any unused funds to

e3 Partners at the end of the trip.    During the years in issue

Mr. Chambers received into his personal bank account numerous

deposits to cover trip expenses from e3 Partners, and the parties
                               - 6 -

agree that such funds were properly excluded from petitioners’

income.

     In addition to the funds deposited into petitioners’

personal checking account by e3 Partners on behalf of other team

members, petitioners also conducted their own, separate

fundraising for their missions trips.    Mr. Chambers solicited

donations by personally contacting people through letters or

phone calls.   Some of the individuals he contacted made donations

by writing checks to e3 Partners, but others gave by writing

checks to Biblical Church, which Mr. Chambers would deposit in

one of Biblical Church’s bank accounts.

     During both 2005 and 2006 petitioners maintained a personal

checking account at M&T Bank (M&T account).    Petitioners also

maintained checking accounts for Biblical Church at National Penn

Bank (National Penn account) and the Bank of Lancaster County

(Lancaster account) (collectively, the Biblical Church bank

accounts or the church bank accounts).    Petitioners were the only

authorized signatories for the Biblical Church bank accounts.

The name listed on the church bank accounts was “Biblical Church

and Global Ministries”, but petitioners usually deposited checks

made payable to “Biblical Church” into the National Penn account

and checks made payable to “Global Ministries” into the Lancaster

account.   Biblical Church had two bank accounts because Mr.

Chambers was trying to separate funds for the church itself from
                                - 7 -

funds that were intended to support its overseas mission trips.

He had originally planned to save some of the church funds to

purchase a building; but because he was very passionate about the

mission work, he put most of the money toward missions.

     Petitioners opened the Lancaster account before they had

obtained an employment identification number (EIN) from the

Internal Revenue Service (IRS).    They told the bank

representative that they had applied for an EIN but had not yet

received it.    The bank representative nonetheless allowed them to

open a bank account, and she typed all of the information

required on the new deposit account coversheet but left blank the

space for the EIN.    She then printed out the new deposit account

coversheet, had petitioners sign it, and instructed them to

inform the bank as soon as they received the EIN from the IRS.

The bank representative’s actions in setting up the account,

printing out the new account coversheet, and leaving blank the

space for the EIN were consistent with protocol established by

the Bank of Lancaster County at that time.

     At some point, a nine-digit number was handwritten in the

space for the tax identification number on the new account

coversheet.    The nine-digit number written on the new account

coversheet and subsequently associated with the Lancaster account

is the Social Security number of a minor child unrelated to

petitioners, not the EIN assigned to Biblical Church.    The minor
                                 - 8 -

child who was assigned the Social Security number was not an

account holder at the Bank of Lancaster County when petitioners

created the Lancaster account.

     Several months after they opened the Lancaster account,

petitioners also opened the National Penn account.    Petitioners

supplied National Penn Bank with Biblical Church’s EIN, which

they had obtained from the IRS by the time they opened the

National Penn account.   When petitioners discovered that the EIN

associated with the Lancaster account was incorrect, at some

point during 2006, they closed that account and opened a new

account at Northwest Savings Bank (Northwest account), using a

new EIN.   Biblical Church also maintained an investment account

at LPL Financial during the years in issue.4

     During the years in issue petitioners performed part-time

janitorial work for Superior Walls of America, Ltd. (Superior

Walls).    Petitioners were paid $13 per hour for performing

cleaning services about 15 hours each week.     Mr. Chambers

intended the compensation from Superior Walls as a fundraiser for

his mission trips and for Biblical Church.     He spoke with the

financial controller at Superior Walls and explained his desire

to perform janitorial services as a fundraiser for Biblical

Church.    Pursuant to an agreement with Superior Walls, instead of


     4
      Respondent has not contended that deposits into the
Northwest account or into the investment account at LPL Financial
should be included in petitioners’ income.
                                - 9 -

paying petitioners themselves for the work, Superior Walls paid

Biblical Church directly.    Mr. Chambers executed a Form W-9,

Request for Taxpayer Identification Number and Certification, on

behalf of Biblical Church, which he submitted to Superior Walls,

claiming to be exempt from Federal tax withholding.

     Petitioners later learned that the law required them to

report the compensation from Superior Walls as taxable income,

and they began to report the compensation as income during 2006.5

Petitioners reported their income from Superior Walls during 2006

on a Schedule C attached to their Form 1040, U.S. Individual

Income Tax Return.

     During the years in issue, the deposits into the Biblical

Church bank accounts primarily consisted of numerous small checks

written by individuals.   Members and regular attendees of

Biblical Church wrote checks that accounted for the largest

number of deposits.   Many of those individuals contributed a

regular tithe or offering.    Other checks were written by

individuals who made only a few donations during the years in

issue.   Some checks were written by other churches.   In total,

about 50 individuals and three churches wrote at least one check

to Biblical Church during the years in issue.




     5
      Petitioners concede that compensation of $12,122 that they
received from Superior Walls during 2005 should have been
reported on their return for that year.
                                - 10 -

     During the years in issue, petitioners wrote checks or

otherwise used the funds in the church bank accounts as follows:

                           Lancaster Account

  Date     Check No.                  Payee                 Amount

1/14/05       136           LPL Financial Account 9842     $9,000.00
3/18/05       137           Unknown                           170.00
4/13/05       139           LPL Financial Account 9842      9,000.00
4/14/05    Debit card       Apple Computer                  1,199.92
4/22/05       140           Unknown                         1,039.00
4/22/05       141           LPL Financial Account 9842      7,000.00
5/4/05        142           CMTS                            3,000.00
5/26/05       143           Association for Biblical        2,075.00
                              Research
6/14/05       144           Unknown                          159.00
7/1/05        145           Unknown                        9,000.00
8/4/05       8165           Kathryn Chambers               1,675.00
8/15/05       146           Unknown                        9,500.00
10/31/05      148           Unknown                        8,575.00
11/21/05      147           Unknown                          300.00
2/7/06       19183          Thomas Chambers                1,500.00
2/14/06       149           Best Buy                         849.99
2/28/06       150           Cash                           4,500.00
3/6/06        151           Cash                           8,500.00
3/21/06       152           Cash                           8,000.00
3/30/06       153           Cash                           7,675.00
4/11/06       154           Cash                           4,100.00
4/21/06    Debit card       WAWA                              60.25
6/7/06     Debit card       CHR*CHRISTIAN BK                 430.08
6/15/06    Debit card       DELL CATALOG SALES             1,590.46
7/3/06        157           Trinity Evangelical Divinity   1,000.00
                              School
8/7/06        158           Unknown                        2,210.00
8/22/06       159           Unknown                          100.00
9/7/06        160           Secretary of State                25.00
9/15/06       161           Byers Garage                     601.36
9/18/06       162           Webster, Chamberlain & Bean      258.42

                        National Penn Account

  Date         Check No.                 Payee              Amount

4/8/05           None            Thomas F. Chambers         $2,500
5/26/05          None            Tom Chambers                2,000
6/24/05          None            Thomas Chambers             2,700
                               - 11 -

10/31/05         None           Thomas Chambers             6,500
11/23/05         None           Thomas Chambers             3,000
12/9/05          None           Tom Chambers                3,500
12/30/05         None           Thomas Chambers             1,875
2/28/06          None           Thomas Chambers             4,500
3/6/06           None           CASA                        1,100
3/29/06          None           Thomas Chambers               900
4/18/06          None           Thomas Chambers             3,500
5/1/06           None           Kathryn Anne Chambers         800
6/1/06           None           Thomas F. Chambers          1,000
6/9/06           None           Tom Chambers                1,700

     The IRS reconstructed petitioners’ income for the years in

issue by examining the deposits to the M&T account, the Lancaster

account, and the National Penn account.    The IRS did not include

deposits into the Northwest account when it reconstructed

petitioners’ income.    However, the parties have included bank

statements and canceled checks from the Northwest account among

the stipulated exhibits before the Court.    Those records show

that petitioners used the debit card from the Northwest account

to pay for numerous purchases at Wal-Mart, K-Mart, Staples,

Dollar General, and a variety of other retailers, as well as many

purchases at gas stations and restaurants.    Petitioners wrote

checks on the Northwest account to pay for many household

expenses, including their gas bills, cable bills, and sewer

bills.   They also wrote checks to a tile company, a chimney

sweep, a mattress store, a dentist, a newspaper, a mechanic, and

a cement company.

     On October 2, 2008, respondent mailed to petitioners a

notice of deficiency determining deficiencies in income tax of
                                - 12 -

$37,594 and $12,027 and penalties pursuant to section 6663 of

$28,195.50 and $9,020.25 for their 2005 and 2006 tax years,

respectively.    Petitioners timely filed their petition with this

Court.    As noted above, in his answer respondent asserts that

there was a computation error in the notice of deficiency and

that the correct deficiency and penalty under section 6663 for

2006 are $18,769 and $14,076.75, respectively.

                                OPINION

I.   Whether Respondent Bears the Burden of Proof on the
     Additional Deficiency

     Generally, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer has the burden of proving

it incorrect.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).    However, the Commissioner generally bears the burden of

proof with respect to any increases in deficiency.    Rule 142(a).

     The parties agree that petitioners bear the burden of proof

on the amounts determined on the first page of the notice of

deficiency.     However, petitioners contend that respondent has the

burden of proof on the additional amount of deficiency for 2006

asserted in the answer.    Respondent contends that the additional

deficiency should not be considered an increase in deficiency

because the increase was due to a computation error.    We agree

with respondent.

     There is no “increase in deficiency” where the increase

results from a computation error.     Estate of Bowers v.
                              - 13 -

Commissioner, 94 T.C. 582, 595 (1990).   In the instant case, the

“increase in deficiency” resulted from the IRS’ omission of the

2006 deposits into the Lancaster account when the IRS calculated

the total deposits during 2006.   The IRS attached a Form 886A,

Explanation of Items, to the notice of deficiency.   In a table in

that Form 886A labeled “Tax Year 2006”, the IRS included the 2006

deposits into the Lancaster account.   However, in a column of

that table, the IRS erroneously labeled those 2006 deposits 2005

deposits.   The IRS used another table to calculate the total

deposits for 2005.   However, the IRS did not include the 2006

deposits into the Lancaster account when it actually summed the

deposits for either 2005 or 2006.   It is clear from the Form 886A

that the IRS intended to include the 2006 deposits into the

Lancaster account as part of petitioners’ income for that year.

Indeed, it is obvious that the 2006 table in the Form 886A

contains a computation error because the separate amounts in the

table sum to more than the purported total for that year.    This

computation error is similar to that in Estate of Bowers, where

we held that because the increase in deficiency resulted solely

from a computation error, it was unrelated to the burden of

proof, and the correct deficiency would be determined by

computation.   In accordance with Estate of Bowers, we hold that

petitioners bear the burden of proof on the additional deficiency

asserted in the answer.
                               - 14 -

II.   Petitioners’ Tax Liability

      A.    Whether Petitioners Must Include Biblical Church
            Deposits in Their Income

      Respondent contends that Biblical Church is not a church.

Respondent also contends that even if Biblical Church is a

church, money deposited into the church bank accounts was still

income to petitioners because they exercised complete control

over the bank accounts and used money from those accounts to pay

personal expenses.

      The term “church” is not defined in the Code or the

regulations.    We have held that whether an entity is a church is

a fact-specific inquiry that considers primarily the entity’s

religious purposes and the means by which those purposes are

accomplished.    Found. of Human Understanding v. Commissioner, 88

T.C. 1341, 1357 (1987).    The IRS uses the following 14 criteria

(the criteria) to determine whether an entity is a church:

           “(1) a distinct legal existence;

            (2) a recognized creed and form of worship;

            (3) a definite and distinct ecclesiastical government;

            (4) a formal code of doctrine and discipline;

            (5) a distinct religious history;

           (6) a membership not associated with any other church
      or denomination;

            (7) an organization of ordained ministers;

           (8) ordained ministers selected after completing
      prescribed studies;
                              - 15 -

          (9) a literature of its own;

          (10) established places of worship;

          (11) regular congregations;

          (12) regular religious services;

          (13) Sunday schools for religious instruction of the
     young; and

          (14) schools for the preparation of its ministers.
     * * *”

Id. at 1358 (quoting Internal Revenue Manual 7(10)69, Exempt

Organizations Examination Guidelines Handbook 321.3(3) (Apr. 5,

1982)).   Although we have declined to adopt the criteria, we have

stated that they are helpful in deciding the factual question of

whether an entity is a church.   Id.    We recognize that few

traditional churches could satisfy all of the criteria.    See id.

As a minimum threshold, we have held that “‘a church includes a

body of believers or communicants that assembles regularly in

order to worship.’”   Id. at 1357 (quoting Am. Guidance Found.,

Inc. v. United States, 490 F. Supp. 304, 306 (D. D.C. 1980)).

     Biblical Church satisfies many of the criteria.    Mr.

Chambers is an ordained minister, the church has a distinct legal

existence as a corporation sole, the church has been meeting

regularly on Sundays since 2003, its worship services include a

core group of 15 to 25 attendees who exclusively attend Biblical

Church, its worship services are consistently held at the same

place, and Mr. Chambers teaches recognized Christian doctrine.
                                - 16 -

On the basis of the foregoing, we conclude that Biblical Church

is a church.

     We next consider respondent’s contention that, even if

Biblical Church is a church, money deposited into its accounts

was still income to petitioners because they exercised full

control over it and used it to pay personal expenses.

     When a taxpayer fails to keep adequate books and records,

the Commissioner is authorized to determine the existence and

amount of the taxpayer’s income by any method that clearly

reflects income.    See sec. 446(b); Petzoldt v. Commissioner, 92

T.C. 661, 693 (1989).    The Commissioner may use indirect methods,

and he is given latitude in determining which method of

reconstruction to apply.     Petzoldt v. Commissioner, supra at 693.

The Commissioner’s reconstruction of a taxpayer’s income need

only be reasonable in the light of all surrounding facts and

circumstances.     Schroeder v. Commissioner, 40 T.C. 30, 33 (1963);

see also Giddio v. Commissioner, 54 T.C. 1530, 1533 (1970).

     One of the indirect methods of reconstructing income is the

bank deposit method.    “The use of the bank deposit method for

computing income has long been sanctioned by the courts.”     Estate

of Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d

2 (6th Cir. 1977).    Bank deposits constitute prima facie evidence

of income.     Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); see

also Clayton v. Commissioner, 102 T.C. 632, 645 (1994).     When a
                              - 17 -

taxpayer keeps inadequate or incomplete books or records and has

large bank deposits, the Commissioner is not acting arbitrarily

or capriciously by resorting to the bank deposit method.   See

DiLeo v. Commissioner, 96 T.C. 858, 867-868 (1991), affd. 959

F.2d 16 (2d Cir. 1992).

     The bank deposit method of reconstruction assumes that all

of the deposits into a taxpayer’s account are taxable income

unless the taxpayer can show that the deposits are not taxable.

Id. at 868.   The Commissioner need not show a likely source of

the income when using the bank deposit method, but the

Commissioner must take into account any nontaxable items or

deductible expenses of which the Commissioner has knowledge.     See

Price v. United States, 335 F.2d 671, 677 (5th Cir. 1964); see

also DiLeo v. Commissioner, supra at 868.   The burden of proof is

on the taxpayer to show that the deposits are not taxable income.

Rule 142(a); Dodge v. Commissioner, 96 T.C. 172, 181 (1991),

affd. in part, revd. in part and remanded on other grounds 981

F.2d 350 (8th Cir. 1992); Reaves v. Commissioner, 31 T.C. 690,

718 (1958), affd. 295 F.2d 336 (5th Cir. 1961).

     Generally, where a taxpayer has dominion and control over

diverted funds, they are includable in the taxpayer’s gross

income under section 61(a).   United States v. Goldberg, 330 F.2d

30, 38 (3d Cir. 1964); Davis v. United States, 226 F.2d 331, 334-

335 (6th Cir. 1955).   We generally have held that when the
                              - 18 -

Commissioner uses the bank deposit method to reconstruct a

taxpayer’s income, the taxpayer’s gross income includes deposits

into all accounts over which the taxpayer has dominion and

control, not just deposits into the taxpayer’s personal bank

accounts.   See Price v. Commissioner, T.C. Memo. 2004-103; Cohen

v. Commissioner, T.C. Memo. 2003-42; Woodall v. Commissioner,

T.C. Memo. 2002-318; Woods v. Commissioner, T.C. Memo. 1989-611,

affd. without published opinion 929 F.2d 702 (6th Cir. 1991).    A

taxpayer has dominion and control over an account when the

taxpayer has the freedom to use its funds at will.   See Rutkin v.

United States, 343 U.S. 130, 137 (1952).

     We have held that deposits made to a lawyer’s “cash

management” accounts were income to the taxpayer where she was

the only signatory on the account, used it to pay personal

expenses, and did not disclose its existence to her law firm’s

accountant.   See Price v. Commissioner, supra.   Additionally, we

have held that deposits made into the account of a taxpayer’s S

corporation, of which he was the sole shareholder, were

includable in his gross income.   See Cohen v. Commissioner,

supra.   Furthermore, we have held that deposits into the accounts

of a purported trust for an investment project were income to a

taxpayer where he had the power to make withdrawals, his Social

Security number was the only one on the accounts, he was one of

two signatories, his business address was on the accounts, and he
                              - 19 -

made transfers into and out of the accounts.   See Woodall v.

Commissioner, supra.   Finally, we have held that deposits made

into the account of a purported church were includable in the

taxpayers’ gross income where the taxpayers were the owners of

the bank accounts, exercised complete control over the funds in

the accounts, and used those funds for personal expenditures.

See Woods v. Commissioner, supra.

      In Woods, we held that it was unnecessary to disregard the

separate existence of the purported church in order to reach our

conclusion that funds deposited in the church’s accounts were

income to the taxpayers.   We stated:

      It is not necessary to disregard the separate existence of
      the church or to challenge the tax status of the church as
      an entity in order to sustain respondent’s determinations in
      this case. Whether they were entitled to the funds or
      embezzled the funds from the church, petitioners exercised
      complete dominion and control over deposits into the various
      bank accounts that were the basis of respondent’s
      determination. * * *

Id.   Respondent contends that we should apply the same reasoning

to hold that all of the funds deposited into Biblical Church’s

bank accounts during the years in issue are includable in

petitioners’ gross income.

      It is undisputed that petitioners were the only signatories

on the Biblical Church bank accounts and that the address listed

on those accounts was that of petitioners.   Mr. Chambers

testified that he used the money in the church bank accounts for

mission trips, mission expenses, other ministry expenses, and
                                - 20 -

church expenses.   Petitioners contend that the large number of

checks written to themselves or to cash, totaling more than

$70,000, were all for use on their mission trips, and they

contend that the dates of those withdrawals line up with the

dates of their mission trips.    Yet many of the withdrawal dates

bear little relationship to the dates of their mission trips.

For instance, Mr. Chambers wrote checks to himself for $6,500 on

October 31, 2005, $3,000 on November 23, 2005, and $3,500 on

December 9, 2005, yet petitioners did not leave on their trip to

India until December 31, 2005.    Petitioners have supplied no

receipts, records, or other evidence to substantiate their

testimony regarding the use of the cash they withdrew from the

Biblical Church bank accounts.

     Petitioners contend that their failure to supply records

from Biblical Church to substantiate their testimony regarding

the use of church funds should be excused because pursuant to

section 7611 the IRS cannot compel them to produce church

records.   Section 7611 sets forth certain procedures with which

the IRS must comply before it can obtain records of a church in

connection with an examination of that church’s tax liability.

However, section 7611(i)(2) provides that those procedural

requirements do not apply to “any inquiry or examination relating

to the tax liability of any person other than a church”.    Courts

generally have held that where the IRS is examining the tax
                              - 21 -

liability of an individual, such as a pastor, rather than the

church itself, section 7611 does not apply.   See St. German of

Alaska E. Orthodox Catholic Church v. United States, 840 F.2d

1087, 1092 n.3 (2d Cir. 1988); Kerr v. United States, 801 F.2d

1162, 1164 (9th Cir. 1986).   We agree.   Accordingly, petitioners’

failure to produce church records that would substantiate their

testimony about how they used the cash withdrawn from the

Biblical Church bank accounts is not excused by section 7611.

     The record suggests that petitioners sometimes used Biblical

Church funds to pay personal expenses.    Although respondent has

not contended that deposits into the Northwest account are

includable in petitioners’ income, the parties nonetheless have

included bank statements and canceled checks from that account in

the evidence before the Court.   Respondent contends that the

statements and canceled checks from the Northwest account show

that petitioners used Biblical Church funds to pay personal

expenses.   Indeed, those records show that petitioners used the

debit card from the Northwest account to pay for numerous

purchases at retail stores, gas stations, and restaurants.

Petitioners wrote checks on the Northwest account to pay for many

household expenses.   Very few of the purchases from the Northwest

account bear any obvious relation to Biblical Church, and

petitioners did not offer any testimony or other evidence to

explain how those purchases were used by the church.
                              - 22 -

     Petitioners contend that even if some of the expenses paid

from the Northwest account were personal, those amounts are not

includable in petitioners’ income because they were for the

purpose of providing a home for Mr. Chambers, a minister of the

gospel, and therefore are exempt from taxation under section 107.

However, in order for a minister’s housing allowance to be exempt

from taxation under section 107, it must be designated as a

housing allowance by an official action of the church in

accordance with section 1.107-1(b), Income Tax Regs., which

provides:

     The term “rental allowance” means an amount paid to a
     minister to rent or otherwise provide a home * * * if such
     amount is designated as rental allowance pursuant to
     official action taken in advance of such payment by the
     employing church or other qualified organization * * *. The
     designation of an amount as rental allowance may be
     evidenced in an employment contract, in minutes of or in a
     resolution by a church or other qualified organization or in
     its budget, or in any other appropriate instrument
     evidencing such official action. The designation referred
     to in this paragraph is a sufficient designation if it
     permits a payment or a part thereof to be identified as a
     payment of rental allowance as distinguished from salary or
     other remuneration.

On the basis of the record, it appears that Mr. Chambers received

no official salary from Biblical Church, and nothing in the

record suggests that Biblical Church took any official action to

designate a housing allowance for Mr. Chambers.   Accordingly,

petitioners’ argument that their personal housing expenses are

exempt from taxation fails.   See Eden v. Commissioner, 41 T.C.

605, 608 (1964).
                              - 23 -

     Petitioners testified that they used the cash they withdrew

from the Biblical Church accounts for their overseas mission

trips, and we believe they may have used some of the cash for

those trips.   However, the evidence also shows that petitioners

sometimes used funds from the church bank accounts to pay their

personal expenses, suggesting the likelihood that they also used

some of the cash they withdrew from the church bank accounts for

trips to pay their personal expenses.   Petitioners produced no

receipts or other documentation to show how the cash was used or

how much money they spent on overseas mission trips.   Because the

burden of proof is on petitioners to produce such records and

because petitioners have failed to produce any documentation, we

conclude that petitioners have failed to meet their burden.

     Petitioners had unfettered access to the funds in the church

accounts, and there is no evidence that the Biblical Church

congregation had any say over how those funds were used.    Indeed,

the only member of the Biblical Church congregation who testified

at trial had no knowledge of the church’s finances, suggesting

that petitioners did not share any information about church

finances with the congregation.   The facts show that petitioners

fully controlled the church accounts, used money in those

accounts at will, including to pay personal expenses, and were

not accountable to anyone in their congregation for their use of

the church funds.   Accordingly, we conclude that petitioners
                               - 24 -

exercised dominion and control over the church bank accounts.

Consequently, all deposits into those accounts, except those from

nontaxable sources, are properly includable in petitioners’ gross

income.   See Price v. Commissioner, T.C. Memo. 2004-103; Cohen v.

Commissioner, T.C. Memo. 2003-42; Woodall v. Commissioner, T.C.

Memo. 2002-318; Woods v. Commissioner, T.C. Memo. 1989-611.

     B.     Reconstructing Petitioners’ Income Using Bank Deposits

     When using the bank deposit method, the IRS may assume that

all money deposited into the taxpayer’s account during a given

period constitutes taxable income, but it is required to take

into account any nontaxable source or deductible expense of which

it has knowledge.    DiLeo v. Commissioner, 96 T.C. at 868.   In the

instant case, respondent’s bank deposit analysis appears to us to

be overzealous, requiring that we review respondent’s

determinations of what items are obviously from nontaxable

sources or constitute deductible expenses.

            1.   Petitioners’ 2005 Tax Year

     Respondent refused to concede that petitioners’ Federal tax

refunds for 2004 should not be included in petitioners’ income

for 2005.    In his reply brief, respondent contends the following:

     The deposited checks in 2005 include federal income tax
     refund checks. In light of the circumstances and facts of
     this case, respondent is unwilling to concede that those
     refunds were correctly and properly made to petitioners.
     Therefore, respondent does not concede that those refunds
     are non-taxable in 2005.
                                     - 25 -

It appears that respondent is contending that petitioners are

liable for deficiencies in income taxes from prior years and is

attempting to recover some of those deficiencies by including

petitioners’ tax refunds from 2004 in their income for 2005.

Respondent cites no authority that would permit such a

determination, and we find none.          Accordingly, we conclude that

petitioners’ Federal tax refunds should not be included in their

income for 2005.

      In addition to petitioners’ Federal tax refunds from 2004

and in addition to those items already conceded by respondent

totaling $205, we also conclude that the following deposits into

petitioners’ personal bank account, the M&T account, during 2005

obviously were nontaxable:

                                                                 Nontaxable
  Date        Payor              Payee             Memo Line      Category1    Amount

2/18/05    Elizabeth R.      Kathryn Chambers     art supplies       B          $6.35
             Chambers
5/16/05    [Illegible]       Jeremy Chambers       prom gel          B           8.50
5/16/05    Erie Insurance    Kathryn Chambers &                      C2         39.00
             Group             Thomas Chambers
5/26/05    Elizabeth R.      Justin Chambers                         A              5.00
             Chambers
8/26/05    Elizabeth R.      Kathryn Chambers                        A              5.00
             Chambers
8/26/05    Cheryl D.         Christy Chambers                        A          25.00
             Chambers
9/6/05     Elizabeth R.      Thomas F. Chambers      B-day           A              5.00
             Chambers
9/14/05    Elizabeth R.      Jeremiah Chambers                       A              5.00
             Chambers
9/14/05    L. Jane Johnson   Tom Chambers          Happy 50th        A3         50.00
10/7/05    Lisa B. Corby     Christy Chambers     mission trip       A          80.00
10/31/05   Joseph B.         Jeremy Chambers         India           A          75.00
             Kirkland III
  Total                                                                        303.85
      1
       The letters correspond to the following nontaxable categories:         (A)
Gifts; (B) reimbursements; and (C) refunds.
                                   - 26 -
      2
        Although the purpose of the check from Erie Insurance Group is not
obvious to us, respondent conceded that a similar check paid to petitioners
during 2006 was nontaxable.
     3
       Although we view purported gifts within the employment context,
including gifts from church members to pastors, with some skepticism, see,
e.g., Banks v. Commissioner, T.C. Memo. 1991-641, the small size and isolated
nature of such a check from a single church member on the occasion of Mr.
Chambers’ birthday lead us to conclude that the transfer proceeded from a
detached and disinterested generosity and is therefore a gift.

     Petitioners contend that a number of other deposits should

also be considered nontaxable (disputed deposits), many of which

petitioners contend are gifts.        However, we conclude that the

disputed deposits are properly included in petitioners’ income.

Although petitioners contend that the disputed deposits are

nontaxable, petitioners have offered no testimony or other

evidence to show that the disputed deposits are indeed

nontaxable.    It is not clear from looking at the list of disputed

deposits that they are as petitioners claim them to be.             Because

petitioners have the burden of proving that such deposits are

nontaxable but have not done so, we conclude that the disputed

deposits are taxable.

     The parties agree that some of the payments into the M&T

account from e3 Partners, also known as Global Partners or Global

Missions, are nontaxable reimbursements.          In the stipulations of

fact, the parties agreed that those reimbursements totaled

$10,826 for 2005.     However, petitioners now contend that the

reimbursements total more.       We are unable to determine how the

parties arrived at the sum of $10,826 and believe it to be an

error.   We may disregard a stipulation where it is clearly
                               - 27 -

contrary to the evidence in the record, and we do so here.      See

Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).

     Petitioners received two types of distributions from e3

Partners during the years in issue.     Mr. Chambers received what

appears to be a regular salary from e3 Partners, which came in

the form of regular checks of $1,000.    During 2005 those checks

were labeled as paid from the e3 Partners’ payroll account.     Mr.

Chambers received other checks from e3 Partners which were

payable in a variety of denominations.    Halfway through 2005, e3

Partners switched to direct deposit for the nonpayroll checks.

During 2006 the sum of those deposits equals exactly the amount

that the parties have agreed constitutes nontaxable

reimbursements.   We therefore assume that those deposits are the

nontaxable reimbursements to which the stipulation refers.      The

sum of those deposits during 2005 is $11,807.80, but that amount

does not include checks that also appear to be reimbursements but

that were received by Mr. Chambers before e3 Partners began

depositing them directly into his account.    Including those

checks increases the total for nontaxable reimbursements to

$15,303.87.    Unless the parties agree to some other amount during

their Rule 155 computations that we order below, we hold that

$15,303.87 is the amount that should be excluded from

petitioners’ income as nontaxable reimbursements from e3 Partners

during 2005.
                                - 28 -

     We also conclude that respondent made several errors in his

calculation of the sum of deposits into the M&T account during

2005.     He made errors in petitioners’ favor when he neglected to

include $4,000 in “cash back” that petitioners received as part

of two deposits.     He also made an error in respondent’s favor

when he neglected to subtract a $1,000 deposit adjustment made by

the bank after petitioners incorrectly recorded a $1,000 deposit

as a $2,000 deposit.     Accordingly, we have adjusted the sum of

deposits listed below to reflect those corrections.     We conclude

that petitioners should include in their gross income for 2005

the deposits to the M&T account as follows:

     Total deposits:                                 $51,890.76
       Less Federal tax refund                         9,051.36
       Less nontaxable items conceded
         by respondent                                   205.00
       Less nontaxable items found
         by the Court                                    303.85
       Less nontaxable reimbursements
         from e3 Partners                             15,303.87
           Amount to be included in gross income      27,026.68

        We now consider the amount from deposits into the Biblical

Church bank accounts that should be included in petitioners’

gross income for 2005.

        Petitioners contend that certain amounts deposited into the

Biblical Church bank accounts during the years in issue are not

includable in petitioners’ income because they represent proceeds

from sales of gold coins that petitioners donated to Biblical

Church.     Mrs. Chambers testified that she inherited cash from her
                              - 29 -

parents, used that cash to purchase gold coins, and later donated

those gold coins to Biblical Church.     She testified that

petitioners then sold those gold coins, on behalf of Biblical

Church, over the course of several years to a man named James

Schlosser.   Petitioners testified that James Schlosser paid for

those coins with checks written on the account of Surgical

Resources Business Trust by the trustee, Leroy E. Glick.      During

the years in issue petitioners deposited those checks, totaling

$30,281, into the Biblical Church bank accounts.

      Petitioners offered no other evidence to substantiate their

testimony about the sale of the gold coins.     The checks from

Surgical Resources Business Trust neither corroborate nor

contradict petitioners’ testimony.     Many of the checks have no

notation in the memo line, but a few contain enigmatic notes such

as:   “Resources - i.e. See attached / Private & Confidential”;

“Lawful Agreement”; or “Lawful/Resources per Agreement.”

      Respondent contends that petitioners’ testimony regarding

the sale of the gold coins was contradictory.     Respondent’s

contention is based on the premise that Mr. Chambers stated that

Mrs. Chambers inherited the gold coins directly from her parents,

which would contradict Mrs. Chambers’ testimony that petitioners

used cash they inherited from Mrs. Chambers’ parents to purchase

the coins.   However, Mr. Chambers never clearly explained where

the gold coins originated.   In addition, he separately testified
                              - 30 -

that petitioners had received cash from the inheritance.

Although petitioners’ testimony regarding the gold coins was

somewhat difficult to follow, we do not find it contradictory.

Nonetheless, because petitioners have the burden of proving that

the $30,281 should not be included in their income and because

petitioners failed to provide any evidence to corroborate their

testimony, we conclude that petitioners have failed to carry

their burden of proof that the income from the Surgical Resources

Business Trust checks should be excluded from petitioners’ gross

income.

     In reviewing respondent’s bank deposit analysis of the

Biblical Church bank accounts, we found that respondent made two

minor transcription errors when he calculated the sum of deposits

into the National Penn account during 2005, which we have

corrected in the totals we set forth below.   We found that

respondent’s calculations of total deposits into the Lancaster

account were accurate, with minor differences due to rounding.

Accordingly, we conclude that petitioners’ gross income for 2005

is as follows:

     Taxable deposits into M&T account             $27,026.68
     Taxable deposits into Lancaster account        67,746.62
     Taxable deposits into National Penn account    21,779.25
       Total                                       116,552.55

The sum of taxable deposits into the three accounts includes the

income from Superior Walls, which the parties have agreed was

taxable.   The sum of $116,552.55 must be reduced by the income
                                      - 31 -

petitioners already reported on their return for 2005, insofar as

any of that income was deposited into any of the three bank

accounts.

            2.    Petitioners’ 2006 Tax Year

      We now proceed to consider respondent’s analysis of

petitioners’ bank deposits during 2006.               In addition to those

items already conceded by respondent in his reply brief totaling

$343.29, we conclude that the following deposits into the M&T

account during 2006 were nontaxable:

                                                                 Nontaxable
  Date        Payor               Payee              Memo Line    Category1    Amount

5/19/06     Yvonne S.         Jeremy Chambers      Congratulations    A        $50.00
              Miller
5/19/06     L. Jane Johnson   Jeremy Chambers      Congratulations    A         50.00
5/19/06     Elizabeth R.      Jeremy Chambers                         A         35.00
              Chambers
5/19/06     Timothy P.        Jeremy Chambers       graduation        A         50.00
              Chambers
5/19/06     Gail J. Reitzel   Jeremy Chambers          gift           A         20.00
5/19/06     Lancaster Bible   Jeremiah Thomas                         C        787.00
              College           Chambers
5/19/06     Elizabeth R.      Christen Chambers     [drawing of a     A             5.00
              Chambers                              birthday cake]
5/30/06     Elizabeth R.      Kathryn Chambers                        A             5.00
              Chambers
5/30/06     Donna J.          Jeremy Chambers      Graduation Gift    A         50.00
              Gregory
6/20/06     Elizabeth R.      Christen Chambers                       A         15.00
              Chambers
9/7/06      Elizabeth R.      Kathryn Chambers                        A         73.00
              Chambers
9/7/06      Pennsylvania      Kathy Chambers                          C         15.00
              Turnpike
              Commission
9/7/06      Paul N.           Thomas F. Chambers     Birthday 06      A         25.00
              Chambers
9/7/06      Elizabeth R.      Thomas F. Chambers     [drawing of a    A             5.00
              Chambers                               birthday cake]
9/26/06     Temitope O        Christy Chambers     Amazon bk refund   C         25.07
              Jegede
  Total                                                                   1,210.07
      1
        The letters correspond to the following nontaxable categories:        (A)
Gifts; (B) reimbursements; and (C) refunds.
                              - 32 -

     Petitioners contend that a number of other deposits also are

nontaxable, many of which petitioners contend are gifts.    As we

explained above, those deposits are properly included in

petitioners’ income because petitioners have the burden of

proving that they are nontaxable but did not do so.

     The parties agree that $47,221 in deposits from e3 Partners

during 2006 should not be included in petitioners’ income because

those deposits represent nontaxable reimbursements.

     We conclude that respondent made an error in calculating the

total deposits into the M&T account during 2006 because he

double-counted one deposit.   Accordingly, we have adjusted the

sum of deposits to reflect that correction.   We conclude that

petitioners should include in their gross income for 2006 the

deposits from the M&T account as follows:

     Total deposits                                $79,561.18
       Less nontaxable items conceded
         by respondent                                   343.29
       Less nontaxable items found
         by the Court                                 1,210.07
       Less nontaxable reimbursements
         from e3 Partners                             47,221.00
           Amount to be included in gross income      30,786.82

     For the reasons explained above, we conclude that

petitioners also must include the deposits into the Biblical

Church bank accounts in their income for 2006.   Upon review of

respondent’s bank deposit analysis of the Biblical Church bank

accounts for 2006, we conclude that respondent neglected to

include one $50 deposit from the National Penn account that we
                              - 33 -

have included in the total we set forth below.   We conclude that

respondent’s reconstruction of deposits into the Lancaster

account was accurate.   Accordingly, we conclude that petitioners’

gross income for 2005 is as follows:

     Taxable deposits into M&T account               $30,786.82
     Taxable deposits into Lancaster account          26,805.75
     Taxable deposits into National Penn account       8,439.00
       Total                                          66,031.57

The sum of taxable deposits into the three accounts includes the

income from Superior Walls that the parties have agreed was

taxable.   The sum of $66,031.57 also must be reduced by the

income petitioners already reported on their return for 2006,

including the income from Superior Walls reported on their

Schedule C, insofar as any of that income was deposited into any

of the three bank accounts.

     In summary, we conclude that petitioners must include the

following amounts from the bank deposit analysis in their income

for the years in issue:

                Year           Amount Includable in Income

                2005                   $116,552.55
                2006                     66,031.57

III. Whether Any Portion of the Underpayment Was Due to Fraud

     Section 6663(a) imposes a penalty “equal to 75 percent of

the portion of the underpayment which is attributable to fraud.”

Taxpayers commit fraud when they “evade taxes known to be owing

by conduct intended to conceal, mislead, or otherwise prevent the
                                - 34 -

collection of taxes.”     Parks v. Commissioner, 94 T.C. 654, 661

(1990); see also Neely v. Commissioner, 116 T.C. 79, 86 (2001).

The Commissioner bears the burden of proving fraud and must

establish it by clear and convincing evidence.     See sec. 7454(a);

Rule 142(b).   To satisfy his burden of proof, the Commissioner

must show that (1) an underpayment in tax exists, and (2) the

taxpayer intended to conceal, mislead, or otherwise prevent the

collection of taxes.     Neely v. Commissioner, supra at 86.   If the

Commissioner establishes that any portion of an underpayment is

attributable to fraud, the entire underpayment is treated as

attributable to fraud.    See sec. 6663(b).

     The existence of fraud is a question of fact to be resolved

upon consideration of the entire record.      King’s Court Mobile

Home Park, Inc. v. Commissioner, 98 T.C. 511, 516 (1992).      Fraud

will never be presumed.     Id.; Beaver v. Commissioner, 55 T.C. 85,

92 (1970).   However, fraud may be proved by circumstantial

evidence and inferences drawn from the facts because direct proof

of a taxpayer’s intent is rarely available.      Spies v. United

States, 317 U.S. 492, 499 (1943); Niedringhaus v. Commissioner,

99 T.C. 202, 210 (1992).    Circumstantial evidence that may give

rise to a finding of fraudulent intent includes:     Understatement

of income, inadequate records, failure to file tax returns,

concealment of assets, failure to cooperate with tax authorities,

filing false documents, failure to make estimated tax payments,
                              - 35 -

engaging in illegal activity, attempting to conceal illegal

activity, dealing in cash, implausible or inconsistent

explanations of behavior, an intent to mislead which may be

inferred from a pattern of conduct, and lack of credibility of

the taxpayer’s testimony.   Spies v. United States, supra at 499.

     Respondent contends that there is sufficient circumstantial

evidence in the record to conclude that petitioners fraudulently

intended to evade taxes for 2005 and 2006.

     Respondent argues that petitioners’ lack of records is

circumstantial evidence of fraud.   Petitioners failed to produce

any Biblical Church records to substantiate their testimony that

they used cash withdrawn from the church bank accounts to fund

their mission trips.   Petitioners contend that pursuant to

section 7611 they were not required to produce church records.

As we explained above, petitioners’ contention is mistaken.

However, petitioners’ mistaken contention indicates little about

whether petitioners had fraudulent intent.   Moreover, the record

does not establish that petitioners failed to keep records; it

merely shows that they failed to give those records to

respondent.   Indeed, petitioners testified that they did keep

records and attempted to introduce such records for the first

time at trial.   We sustained respondent’s objection to the

admission of such records on the basis that petitioners had

failed to produce such records in response to our pretrial order.
                              - 36 -

While petitioners’ course of action could be taken as a lack of

cooperation with respondent, it appears that some of that lack of

cooperation was based upon petitioners’ mistaken understanding of

section 7611.

     Respondent contends that the organization of Biblical Church

as a corporation sole under Utah law shows that petitioners

fraudulently intended to avoid paying taxes.   The Commissioner

has defined a corporation sole as “a corporate form authorized

under certain state laws to enable bona fide religious leaders to

hold property and conduct business for the benefit of the

religious entity.”   Rev. Rul. 2004-27, 2004-1 C.B. 625, 626.   The

corporation sole originated in the common law of England, where

it was used to ensure that property dedicated to the church would

remain so, rather than passing to the heirs of the bishop or

other church leader.   See Terrett v. Taylor, 13 U.S. 43, 46

(1815); Cnty. of San Luis Obispo v. Ashurst, 194 Cal. Rptr. 5, 6-

7 (Ct. App. 1983).   The corporation sole operates to ensure that

property held in the name of the church’s titular head passes, by

operation of law, to his successors in office.   See Cnty. of San

Luis Obispo v. Ashurst, supra at 6-7.

     Although, as Rev. Rul. 2004-27, 2004-1 C.B. at 626,

discusses, corporations sole have been abused by taxpayers trying

to avoid paying taxes, they are also a legitimate form of
                                - 37 -

religious organization recognized in a handful of States.6    Until

May 3, 2004, Utah was one of the States that allowed churches to

organize as corporations sole under its laws.7    Because we have

concluded that Biblical Church was a legitimate church, we reject

respondent’s contention that petitioners’ choice to organize it

as a corporation sole suggests that petitioners fraudulently

intended to evade taxes.

     Respondent draws our attention to petitioners’ failure to

have Biblical Church recognized as a tax-exempt entity under

section 501(c)(3).     However, the Code does not require churches

to apply for tax-exempt status; it grants that status

automatically.   See sec. 508(c).



     6
      States that have corporation sole statutes include:
Alabama, Ala. Code sec. 10A-20-1.01 to .09 (LexisNexis 2009),
Alaska, Alaska Stat. sec. 10.40.010 to .150 (2010), Arizona,
Ariz. Rev. Stat. Ann. sec. 10-11901 to -11908 (2004), California,
Cal. Corp. Code secs. 10000 to 10015 (West 2006), Colorado, Colo.
Rev. Stat. secs. 7-52-101 to -106 (2010), Hawaii, Haw. Rev. Stat.
secs. 419-1 to -9 (2008), Montana, Mont. Code Ann. sec. 35-3-101
to -210 (2009), Nevada, Nev. Rev. Stat. Ann. sec. 84.010 to -.150
(LexisNexis 2010), Oregon, Or. Rev. Stat. sec. 65.067 (2009),
Washington, Wash. Rev. Code. Ann. sec. 24.12.010 to .060 (West
2005), and Wyoming, Wyo. Stat. sec. 17-8-101 to -117 (2009). In
addition, Arkansas and Florida have recognized the common law
corporation sole. See, e.g., City of Little Rock v. Linn, 432
S.W.2d 455 (Ark. 1968); Reid v. Barry, 112 So. 846 (Fla. 1927).
     7
      Utah Code Ann.   sec. 16-7-16 (LexisNexis 2009) provides:
“Notwithstanding any   other provision of this chapter, a
corporation sole may   not be formed or incorporated under this
chapter after May 3,   2004.”
                              - 38 -

     Respondent further contends that Biblical Church’s

organizing documents set it up as a “tax-hostile” entity, showing

that petitioners had no intention of complying with the tax law.

Respondent points specifically to an article from Biblical

Church’s organizing document that states:

     This Corporation Sole is a full-time Ministry and Spiritual
     Order which * * * is mandatorily excepted by an
     “unrestricted” right, as referenced in United States law
     Title 26, §§ 6033(a)(2)(A)(i) and (iii), § 1341(a)(1) and §
     508(c)(1)(A), from any form of taxation and from filing any
     returns or reports/documents * * *.

However, the paragraph respondent cites is largely a recitation

of the tax law applicable to all churches.   Section 6033(a)(3)

provides that all churches have a mandatory exception from filing

the information returns that almost all other tax-exempt

organizations are required to file annually.   Section

508(c)(1)(A) provides that all churches have a mandatory

exception from filing for recognition of their tax-exempt status

under section 501(c)(3).   Those statutes provide the mandatory

exceptions from reporting and exemption from paying tax that

Biblical Church claimed in its articles of corporation sole.

Biblical Church’s reference to those mandatory exceptions does

not establish that petitioners harbored any intent to evade taxes

believed to be owing.

     Respondent contends that petitioners’ attempt to assign the

income they earned from janitorial work at Superior Walls to

Biblical Church is evidence of their intent to conceal income.
                              - 39 -

Petitioners contend that they intended their work for Superior

Walls as a fundraiser for Biblical Church.   The circumstances

surrounding petitioners’ conduct with Superior Walls are

certainly suspect.   However, the fact that petitioners later

learned that they needed to report the income from Superior Walls

on their income tax return and that they did report that income

during 2006 mitigates the suspiciousness of the situation,

suggesting that petitioners had no intent to evade taxes.     In any

case, mere suspicion does not satisfy respondent’s burden of

proof for fraud, which requires clear and convincing evidence.

See Katz v. Commissioner, 90 T.C. 1130, 1144 (1988).

     Finally, and most forcefully, respondent contends that

petitioners’ fraudulent intent to evade taxes is evidenced by the

fact that they opened the Lancaster account using a false

taxpayer identification number.   If the record supported

respondent’s version of events, it would indeed be a badge of

fraudulent intent.   However, petitioners have offered a different

story that is consistent with the uncontested facts.   Both

parties agree that the coversheet setting up the Lancaster

account is typed except for the handwritten EIN.   Respondent’s

witness from the bank8 established that the policies and


     8
      We note that respondent’s witness was not the person who
actually opened the Lancaster account for petitioners, nor did
respondent’s witness work for the Bank of Lancaster County at the
time petitioners opened the account. Rather, respondent’s
                                                   (continued...)
                              - 40 -

procedures in place at that time permitted Bank of Lancaster

County employees to open accounts for customers without an EIN,

as long as those customers agreed to later supply the number.

The employees were instructed to leave blank the EIN field, which

would later be filled in by hand.

     Mr. Chambers testified that several months after petitioners

originally had opened the Lancaster account, he went back to the

Bank of Lancaster County to give the bank the EIN he had received

from the IRS.   However, when he told the bank representative that

he wanted to provide the EIN for Biblical Church, she looked up

the account and told him that the bank already had an EIN in its

system.   Mr. Chambers did not give the Bank of Lancaster County

the EIN he had received from the IRS or verify that the EIN

matched the number in the bank’s system.

     The facts surrounding the EIN associated with the Lancaster

account are certainly suspect, but respondent has the burden of

proof to clearly and convincingly prove fraudulent intent, and he

has not convinced us that his version of events is the one we

should believe.   As stated above, we will not sustain a finding

of fraud on the basis of circumstances which at the most create

only suspicion.   Katz v. Commissioner, supra at 1144.   Moreover,


     8
      (...continued)
witness was a bank employee familiar with the procedures for
opening a new account that were in place at the Bank of Lancaster
County during the period when petitioners opened the Lancaster
account.
                                - 41 -

respondent’s version of events also is somewhat at odds with

other uncontested facts.   For instance, petitioners established

several other bank accounts for Biblical Church, and all of those

accounts have the correct EIN.    Additionally, during 2006,

petitioners discovered that the Lancaster account had the wrong

EIN, at which time they closed it and opened a new account using

a correct EIN.

     Considering all of the facts and circumstances, we conclude

that respondent has failed to prove petitioners’ fraudulent

intent by clear and convincing evidence.    Accordingly, we hold

that petitioners are not liable for the fraud penalty pursuant to

section 6663 for either year.

     In reaching these holdings, we have considered all the

parties’ arguments, and, to the extent not addressed herein, we

conclude that they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                           Decision will be entered

                                     under Rule 155.
