                  T.C. Memo. 1999-405



                UNITED STATES TAX COURT



             LINDA D. FASON, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 12308-98.               Filed December 14, 1999.




     R disallowed deductions claimed on P’s 1994 income tax
return and determined the civil fraud penalty pursuant to
sec. 6663, I.R.C. In substantiation of these deductions, P
offered two documents which evidence at trial indicated were
not legitimate.
     Held: On the facts, P failed to establish her
entitlement to the deductions claimed and is therefore
liable for the deficiency determined by respondent.
     Held, further, P is liable for the sec. 6663, I.R.C.,
civil fraud penalty.



Linda D. Fason, pro se.

Ric D. Hulshoff, for respondent.
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              MEMORANDUM FINDINGS OF FACT AND OPINION


     NIMS, Judge: Respondent determined a Federal income tax

deficiency for petitioner’s 1994 taxable year in the amount of

$5,846.   Respondent also determined a civil fraud penalty of

$4,385 for 1994, pursuant to section 6663.

     The issues for decision are as follows:

     (1) Whether petitioner has established entitlement to

deductions claimed for medical expenses, charitable

contributions, casualty losses, and employee business or

miscellaneous expenses; and

     (2) whether petitioner is liable for the section 6663 civil

fraud penalty or, in the alternative, the section 6662(a)

accuracy-related penalty.

     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the year in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulations filed by the parties, with accompanying

exhibits, are incorporated herein by this reference.

     Linda D. Fason resided in Lynwood, California, at the time

of filing her petition in this case.   On her 1994 income tax

return, petitioner reported having incurred, and took
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corresponding deductions for, the following expenditures and

losses:   $8,611 for medical expenses, $7,214 for charitable

contributions, $4,659 for casualty losses, and $12,656 for

employee and miscellaneous expenses.

     During an audit of her 1994 return, petitioner provided two

documents for purposes of substantiating her expenses.      The first

was a receipt on letterhead of Richard Hill, Sr., M.D.      The

receipt designates Richard Harden, petitioner’s son, as “patient”

and bears $8,611.37 both as the amount of “charges” and as the

amount “paid”.   A handwritten annotation on the receipt reads:

“Pd by L. Fason cashier chk”.

     The second item provided by petitioner for substantiation

purposes was a document on letterhead of Trinity Baptist Church

entitled “1994 Contribution Statement”.      It states that Linda

Fason contributed $7,214 during 1994.

     On October 10, 1996, respondent sent petitioner a

information document request asking for a copy of the cashier’s

check used to pay Dr. Richard Hill.      Petitioner responded in a

letter dated October 15, 1996:    “Regarding your letter to me

(copy enclosed) about a copy of cashiers check paid to Dr.’s bill

the check had no copy.”

     Respondent then sent a second information document request

on April 16, 1997, again soliciting a copy of the cashier’s check

or, if such was unavailable, verification of the method (i.e.,
                                - 4 -

personal check or cash withdrawal from a bank account) used to

purchase the cashier’s check.    Petitioner’s April 28, 1997,

response letter stated:    “Richard’s med expenses were paid by

cash so I only have the Dr. receipt that I turned in.”

     On May 8, 1997, respondent sent a third communication

informing petitioner that “information provided from Trinity

Baptist Church indicates that they did not receive any

contributions from you during 1994” and that “the information you

provided on the casualty loss is insufficient to verify that a

loss was sustained and due to a casualty or theft.    A list of

items prepared by you does not, by itself constitute

verification.”    Petitioner once again responded by letter on May

17, 1997.    With regard to the contributions, she wrote:   “My

charitable contributions to Trinity Baptist Church was anonymous.

That was my agreement with the church.”    Concerning the casualty

loss, she said:    “Because an earthquake is not a criminal matter

I could not file a police report, to verify my losses.      The items

I lost were too expensive for me to replace at one time so

therefore I don’t have a cancelled check.”

     When the matter came to trial, petitioner appeared and

stated:   “I don’t want to go any further with this.”   She left

the courtroom prior to the presentation of any evidence or

testimony.
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Respondent then proceeded to call Dr. Hill and the financial

secretary of Trinity Baptist Church, Ms. Debra Hannah, as

witnesses.

     Dr. Hill did not recall ever treating Ms. Fason or her son

and did not recognize the name of Richard Harden.   The

handwriting on the receipt did not belong to either Dr. Hill or

his office manager, the only two individuals who prepare receipts

in his practice.   In addition, the receipt did not bear the stamp

customarily placed by Dr. Hill on such documents.

     Ms. Hannah had searched the contribution records of Trinity

Baptist Church for 1993 and 1994, and no record was found of any

gifts from Ms. Fason.   Ms. Fason also was not listed in the past

or present membership records of the church.

                               OPINION

     We must decide whether petitioner has established her

entitlement to the deductions claimed on her 1994 income tax

return and, if not, whether she is liable for the section 6663

civil fraud penalty.

     Respondent contends that petitioner has failed to

substantiate the deductions claimed and is therefore liable for

the deficiencies determined by respondent.   Respondent further

argues that falsified evidence offered by petitioner establishes

an intent to evade tax and, hence, supports imposition of the

civil fraud penalty.    In the alternative, if petitioner’s conduct
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is determined not to rise to the level of fraud, respondent

asserts that petitioner is liable for the accuracy-related

penalty on account of negligence or disregard of rules or

regulations.

     We agree with respondent that the substantiation offered by

petitioner not only falls short of establishing her entitlement

to the claimed deductions but also demonstrates sufficient

fraudulent intent to warrant the civil fraud penalty.

Disallowance of Deductions

     As a general rule, respondent’s determinations are presumed

correct, and the taxpayer bears the burden of proving that such

determinations are erroneous.   See Rule 142(a).   Deductions,

moreover, are a matter of “legislative grace”, and “a taxpayer

seeking a deduction must be able to point to an applicable

statute and show that he comes within its terms.”     New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).     The burden of

proving entitlement to a deduction is therefore on the taxpayer,

see Rule 142(a), and every taxpayer is required to maintain

adequate records to substantiate the existence and amount of any

deduction claimed; see sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.

     Applying these principles to the matter at hand, we find

that petitioner here has failed to carry her burden of

establishing that disallowance of the challenged deductions was
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erroneous.    With respect to the medical expenses, the only

substantiation offered by petitioner is the purported receipt

from Dr. Richard Hill.    Dr. Hill, however, testified that the

document was not a receipt prepared by his office, and we find

his testimony to be credible.    As to the charitable

contributions, the sole item offered in substantiation, the 1994

Contribution Statement, is likewise shown by a credible witness

to be lacking in legitimacy.    Ms. Debra Hannah, the financial

secretary of Trinity Baptist Church, stated that the contribution

records of the church contained no reference to a gift from

petitioner.

     Regarding the casualty losses and business and miscellaneous

deductions, no substantiation other than the lists set forth in

petitioner’s return has been presented.    Hence, because

demonstrably fraudulent evidence will not validate a deduction,

nor, of course, will the complete absence of evidence, the

presumption of correctness afforded to respondent’s deficiency

determination is not rebutted.    Petitioner is therefore liable

for the deficiency determined by respondent.

Civil Fraud Penalty

     Section 6663(a) authorizes the imposition of a civil fraud

penalty and reads as follows:    “If any part of any underpayment

of tax required to be shown on a return is due to fraud, there

shall be added to the tax an amount equal to 75 percent of the
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portion of the underpayment which is attributable to fraud.”

Section 6663(b) further provides:

     If the Secretary establishes that any portion of an
     underpayment is attributable to fraud, the entire
     underpayment shall be treated as attributable to fraud,
     except with respect to any portion of the underpayment
     which the taxpayer establishes (by a preponderance of
     the evidence) is not attributable to fraud.

To establish the existence of fraud, respondent bears the burden

of proving by clear and convincing evidence that (1) an

underpayment of income tax exists and (2) some portion of that

underpayment is due to fraud.    See sec. 7454(a); Rule 142(b);

Clayton v. Commissioner, 102 T.C. 632, 646 (1994); Recklitis v.

Commissioner, 91 T.C. 874, 909 (1988).

     Fraud is generally defined as intentional wrongdoing on the

part of the taxpayer, with the specific purpose of evading tax

believed to be owed.   See Powell v. Granquist, 252 F.2d 56, 60

(9th Cir. 1958).   Respondent must therefore prove that the

taxpayer “intended to evade tax believed to be owing by conduct

intended to conceal, mislead, or otherwise prevent the collection

of such tax.”   Clayton v. Commissioner, supra at 647; Recklitis

v. Commissioner, supra at 909.    Nonetheless, respondent “need not

establish that tax evasion was a primary motive of the taxpayer,

but may satisfy the burden by showing that a tax-evasion motive

played any part in the taxpayer’s conduct”.    Clayton v.

Commissioner, supra at 647.
                               - 9 -

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

upon consideration of the entire record.    See Recklitis v.

Commissioner, supra at 909.   Although fraud is never imputed or

presumed, intent to defraud may be proven by circumstantial

evidence.   See Clayton v. Commissioner, supra at 647; Recklitis

v. Commissioner, supra at 909-910.

     Here, given our conclusion above regarding the existence of

a deficiency, an underpayment of tax has been established.     In

addition, through presentation of circumstantial evidence,

respondent has carried the burden of showing that some portion of

this underpayment is due to fraud.     Moreover, because petitioner

has failed to offer any evidence that some part of the deficiency

cannot be attributed to fraud, the section 6663 penalty applies

to the entire underpayment.

     This case reveals a specific fraudulent intent on the part

of petitioner to evade tax.   Petitioner neglected to maintain

adequate records to substantiate more than $25,000 in deductions.

In addition, evidence of intent to defraud is particularly

apparent in the implausibility and inconsistencies surrounding

the two documents allegedly offered to validate these deductions.

Because testimony at trial indicated that neither document was

legitimate, petitioner presented false evidence for purposes of

misleading the tax authorities.   Moreover, statements made by

petitioner with regard to these documents reveal inconsistent
                                - 10 -

explanations of her behavior.    The medical receipt and

petitioner’s first letter to respondent refer to payment in the

form of a cashier’s check.   Petitioner’s second letter to

respondent, in contrast, states that payment was made in cash.

The documentary evidence she offered and her own written

statements are therefore directly contradictory.

     Similarly, petitioner offered a contribution statement from

Trinity Baptist Church which designates her by name as a donor.

Then, in her third letter to respondent, petitioner attempts to

explain the church’s lack of information regarding her gifts by

writing that her contributions were anonymous.    However, if her

contributions were truly anonymous, so that her giving would not

be reflected in the church records, the church would not have

been able to issue a personal contribution statement.      Again,

petitioner’s explanations are contradictory and implausible.

     Furthermore, prolonging the examination of her return for

several years with false and conflicting communications can

hardly be deemed cooperation with tax authorities.

     Based on these circumstances, we hold that petitioner is

liable for the section 6663 civil fraud penalty, and we need not

reach the alternative question of whether petitioner would be
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liable for the section 6662 accuracy-related penalty.

Respondent’s determinations are therefore sustained both as to

the deficiency and as to the fraud penalty.

     To reflect the foregoing,



                                        Decision will be entered

                                   for respondent.
