                  T.C. Summary Opinion 2007-31



                     UNITED STATES TAX COURT



                  HECTOR PROWSE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17121-05S.            Filed March 1, 2007.


     Hector Prowse, pro se.

     Marc L. Caine, for respondent.



     COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when the petition was filed.1

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.




     1
       Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years at
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 2 -

     Respondent determined deficiencies of $3,175.85 and $3,554,

respectively, in petitioner’s Federal income taxes for the years

2002 and 2003, an addition to tax under section 6651(a)(1) for

the year 2002 in the amount of $511.71, an additional tax under

section 72(t) in the amount of $107.85 for the year 2002, a

liability of $2,505 for self-employment tax under section 1401(a)

for the year 2003, and a negligence penalty under section 6662(a)

for both years.

     In a trial memorandum, respondent notes that, prior to

trial, respondent conceded a capital gain loss of $9,405 for the

year 2002 that had been disallowed in the notice of deficiency,

and, therefore, petitioner is entitled to a capital loss

deduction of $3,000 for 2002 and a carryover capital loss

deduction of $3,000 to 2003.   As a result of this concession, the

deficiencies, the addition to tax, and the penalties were reduced

to the following amounts:


                               Addition to Tax     Penalty
     Year     Deficiency       Sec. 6651(a)(1)    Sec. 6662

     2002         $1,316           $100             $263
     2003          3,138            --               628


     Subsequent to these concessions, respondent filed an answer

alleging that petitioner is liable for the fraud penalty under
                              - 3 -

section 6663(a) for the years 2002 and 2003 in the amounts of

$987 and $2,354, respectively.2

     After concessions, the issues for decision are:   (1) Whether

for 2002 and 2003 petitioner is entitled to deductions for

various expenses on Schedules A, Itemized Deductions; (2) whether

for 2002 and 2003 petitioner is liable for the civil fraud

penalty under section 6663 or, in the alternative, the accuracy-

related penalty under section 6662(a); and (3) whether for 2002

petitioner is liable for the late-filing addition to tax under

section 6651(a)(1).3


     2
       Respondent’s apparent motivation for asserting fraud was
prompted by this Court’s holding in Prowse v. Commissioner, T.C.
Memo. 2006-120, that petitioner was liable for the sec. 6663(a)
fraud penalty for the year 2001. Sec. 6663(b) provides that, if
any portion of an underpayment is attributable to fraud, the
entire underpayment shall be deemed to be attributable to fraud
except as to the portion the taxpayer establishes is not due to
fraud. Thus, a finding of fraud preempts or trumps the
negligence penalty of sec. 6662(a) determined in the notice of
deficiency. See sec. 6662(b).
     3
       Two adjustments in the notice of deficiency were not
addressed at trial and are, therefore, deemed conceded. One of
these adjustments relates to $1,078.57 petitioner received during
2002 that he reported as dividend income on his 2002 return. In
the notice of deficiency, respondent determined that the
$1,078.57 was not a dividend but was a distribution from a
qualified plan as defined in sec. 4974(c), and, therefore,
petitioner is liable for the 10-percent additional tax under sec.
72(t). The second adjustment that is also deemed conceded
relates to a $17,725.50 payment petitioner received during 2003
pursuant to a Form 1099-MISC, Miscellaneous Income, from SCI
Engineering & Surveying, P.C., for nonemployee compensation.
Respondent determined that petitioner is liable for self-
employment tax on that distribution under sec. 1401 with a
corresponding deduction for one-half of that tax under sec.
                                                   (continued...)
                               - 4 -

Background

     Some of the facts and exhibits were stipulated, and those

facts are so found.   At the time the petition was filed,

petitioner was a legal resident of Middle Village, New York.4

     From May 21, 2001, until January 11, 2002, petitioner was

employed as a mechanical HVAC engineer for KeySpan Engineering

Associates (KeySpan Associates).   In that capacity, petitioner

worked on several design projects in the office.   After

petitioner left KeySpan Associates on January 11, 2002,


     3
      (...continued)
164(f). A witness from the payor testified at trial regarding
this payment, and the Court is satisfied that respondent
correctly determined the payment to be self-employment income,
which petitioner reported on his return. Petitioner, however,
presented no evidence challenging the determination that
petitioner is liable for self-employment tax on the distribution;
consequently, the Court deems that issue as conceded.
     4
       Sec. 7491(a) generally shifts the burden of proof to the
Commissioner with regard to any factual issue relevant to
ascertaining the taxpayer’s liability. Sec. 7491(a)(2) limits
this rule only with respect to issues to which the taxpayer has
complied with the requirements for substantiation of any item,
has maintained all records with respect to such items, and has
cooperated with reasonable requests by the Secretary for
witnesses, information, documents, and interviews, etc.,
regarding the matters at issue. Since petitioner did not
cooperate with respondent in providing records to substantiate
the items on his return, the burden of proof does not shift.
However, as to fraud under sec. 6663(a), sec. 6663(b) provides
that, with respect to any portion of an underpayment that is
attributable to fraud, the entire underpayment is treated as
attributable to fraud except for any portion of the underpayment
that the taxpayer establishes is not attributable to fraud. Sec.
7454(a) provides that, in any proceeding involving fraud, the
burden of proof as to such issue is upon the Secretary. Thus,
the burden of proof on the fraud issue in this case is on
respondent.
                               - 5 -

petitioner thereafter received unemployment compensation from the

State of New York.

     In 2003, petitioner was a contract employee working on

behalf of SCI Engineering and Surveying, P.C.        In that capacity,

petitioner worked as a cost estimator for projects related to the

U.S. Customs Building in Newark, New Jersey.

     On or about June 24, 2004, petitioner filed his Federal

income tax return for the 2002 tax year.        On the return,

petitioner reported wages of $8,001.92, taxable interest of

$520.22, ordinary dividends of $1,078.57, and unemployment

compensation of $13,525.   His adjusted gross income was $23,126.

     On Schedule A of the 2002 return, petitioner claimed

itemized deductions of $16,522, consisting of:


     Medical and dental expenses       $3,853
     Deductible portion                           $ 2,119
     State and local income taxes                     416
     Charitable gifts                               1,910
     Job expenses                                  12,077
       Total                                      $16,522


     With respect to the $3,853 claimed as medical and dental

expenses on the 2002 return, petitioner included a statement with

his return which listed the $3,853 claimed as medical and dental

expenses as follows:
                                - 6 -

          Medical and Dental

          Dr. Rogers Miles Rose                    $  475
          Ambulance transportation                    109
          Elmhurst Hospital                           204
          Medicines                                   225
          Orthopaedic & Sports Association            330
          Dr. Fred D. Cushner                         140
          Dr. Ambrose Pipia                           180
          Laboratory services                         115
          Dr. Guillermo Davila (dentist)            1,075
          Southshore Opticians (eyeglasses)           450
          Transportation                              220
            Total (all expenses)                   $3,523


Thus, petitioner’s medical expenses totaled $3,523; yet, he

claimed $3,853 on his return for 2002.    This discrepancy was not

brought up at trial and appears to be a computational error

resulting in a claim for medical expenses of $330 in excess of

the numbers presented to the Court.     No explanation was provided

at trial with respect to this discrepancy, nor did respondent

move to reduce the claimed amount to $3,523.

     On or about June 15, 2004, petitioner filed his income tax

return for 2003.5    He reported adjusted gross income in the

amount of $18,360.    On the return, petitioner reported wages of

$17,725.50 and taxable interest income of $634.74. Petitioner

also attached to the return a Form 1099-MISC, Miscellaneous




     5
       Although the 2003 tax return was filed late, respondent
did not determine the sec. 6651(a)(1) addition to tax as to that
year, presumably because petitioner’s 1999, 2000, and 2001
returns were under audit at the time the 2003 return was filed,
and petitioner attached a note to the return noting that.
                              - 7 -

Income, issued by SCI Engineering, for nonemployee compensation

of $17,725.50.

     On Schedule A of the 2003 return, petitioner claimed

itemized deductions of $18,700, consisting of the following:


     Medical and dental expenses      $2,335
     Deductible portion                          $   958
     Charitable gifts                              1,443
     Job expenses                                 16,299
       Total                                     $18,700


     To substantiate his claimed medical and dental expenses,

petitioner attached to his 2002 and 2003 returns various receipts

purporting to show various medical and dental expenses.       All of

the receipts reflected cash payments.

     Petitioner claimed an itemized deduction on his 2002 tax

return for State and local taxes in the amount of $416.       The

amount was derived from petitioner’s Form W-2, Wage and Tax

Statement, for 2002.

     During 2002, petitioner received a distribution from

Donaldson Lufkin & Jenrette in the amount of $1,078.57.

Petitioner attached a Form 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., to his 2002 tax return.       Petitioner, however,

reported this income as dividend income on Schedule B, Interest

and Ordinary Dividends, of his return.
                              - 8 -

     Petitioner claimed itemized deductions for job expenses and

other miscellaneous items in the amounts of $12,077 and $16,299,

respectively, on his 2002 and 2003 tax returns.

     For the 2002 deduction, the $12,077 claimed was based on

Schedule A of the return, Job Expenses and Most Other

Miscellaneous Deductions, and comprised the following:



     Unreimbursed employee expenses          $11,270
     Tax preparation fees                        200
     Other expenses                            1,070
       Total                                 $12,540
     Less sec. 67(a) 2-percent limitation       (463)
     Deduction claimed                       $12,077


The $11,270 for unreimbursed employee expenses consisted of the

following:


     Architectural & engineering plans for
       bid on new project                    $10,585
     Parking, tolls, & transportation            135
     Lead & asbestos licenses                    440
     Meals & travel expenses                     110
       Total                                 $11,270


The $1,070 for other expenses consisted of the following:


     Job search                              $  300
     Telephone calls and faxes                  250
     Printing resumes                            50
     Traveling to interviews                    350
     Mail box and safe deposit box rents        120
       Total                                 $1,070
                                 - 9 -

     As to the 2003 deduction, the $16,299 claimed for Job

Expenses and Most Other Miscellaneous Deductions was derived as

follows on Schedule A of the return:


     Unreimbursed employee expenses          $13,397
     Tax preparation fees                        100
     Other expenses                            2,435
       Total                                 $15,932
     Less sec. 67(a) 2-percent limitation       (367)
     Deductible amount1                      $15,565
     1
      Petitioner appears to have made a mathematical error
because he claimed $16,299 as a deduction on his return, and,
since the $734 discrepancy was not addressed at trial, it appears
to the Court that the correct mathematical computation is $15,565
and not the $16,299 claimed on Schedule A of petitioner’s return.


The $13,397 in unreimbursed employee expenses consisted of:


     Vehicle expenses                        $13,140
     Parking fees, tolls, etc.                   140
     Meals and entertainment                     117
       Total                                 $13,397


The other expenses of $2,435 consisted of:


     Job search                                 $  300
     Faxes, telephone calls, etc.                  250
     Printing resumes                               50
     Traveling for interviews                      400
     Safety glasses, tools, work gloves, etc.    1,435
       Total                                    $2,435


     The charitable gifts claimed on Schedules A of petitioner’s

2002 and 2003 tax returns consisted of cash gifts to a church and

noncash contributions of property to the Salvation Army.   With

respect to the cash gifts, petitioner’s Schedules A for both
                                - 10 -

years showed cash contributions to a church of $10 per week for a

total of $460 and $480 for 2002 and 2003, respectively.    With

respect to the noncash contributions, petitioner attached

receipts to his 2002 and 2003 tax returns from the Salvation Army

dated December 30, 2002, and November 23, 2003, respectively.

The receipts listed the items of donated property, assigned a

value to each item, and a total for the contribution.    For 2002,

the total was $2,900, and, for 2003, the total was $1,925.     The

2002 receipt showed that the contribution was received by “Isabel

Lopez” and the 2003 receipt showed that the contribution was

received by “Patricia Rojas”.    Both receipts were from the

Salvation Army at Astoria, New York.

     Petitioner did not attach to his 2002 and 2003 returns any

substantiation of his cash gifts to the church, nor did he

substantiate the gifts during the examination of his returns.

     Respondent examined petitioner’s 2002 and 2003 tax returns

as a result of respondent’s audit of petitioner’s 2001 return.

Respondent determined fraud under section 6663 for the 2001 tax

year based on the determination that petitioner overstated his

Schedule A itemized deductions and falsified documentation to

substantiate the claimed deductions.     A petition was filed with

this Court, and the Court held in Prowse v. Commissioner, T.C.

Memo. 2006-120, that petitioner was liable for an increased

deficiency as well as the civil fraud penalty based on the
                              - 11 -

Court’s finding that petitioner fraudulently claimed Schedule A

itemized deductions on his 2001 Federal income tax return.

     While the case in Prowse v. Commissioner, supra, was

pending, respondent issued the statutory notice of deficiency,

upon which this case is based, determining that petitioner was

not entitled to any of the claimed itemized Schedules A

deductions on his 2002 and 2003 tax returns.

     Following this Court’s opinion involving petitioner’s 2001

tax year and the finding of fraud under section 6663 for that

year, supra note 2, respondent moved in this case to impose the

section 6663 fraud penalty against petitioner for the 2002 and

2003 tax years.   In the alternative, respondent asserted an

accuracy-related penalty for both years.

Schedule A Deductions

     For the 2 years at issue, petitioner claimed on his income

tax returns deductions on Schedules A.   For the year 2002, the

deductions claimed were:


     Medical and dental expenses                      $ 2,119
     Taxes                                                416
     Charitable gifts                                   1,910
     Job expenses and other miscellaneous expenses     12,077
       Total                                          $16,522


For the year 2003, the claimed deductions were:
                               - 12 -

     Medical and dental expenses                           $958
     Charitable gifts                                     1,443
     Job expenses and other miscellaneous expenses       18,700
       Total                                            $21,101


     In the notice of deficiency, respondent disallowed some of

these expenses and, by motion, asserted that petitioner was

liable for fraud under section 6663(a) with respect to some of

the claimed deductions.

     Section 213(a) allows a taxpayer who itemizes his or her

deductions to deduct, among other expenses, medical and dental

expenses to the extent such expenses exceed 7.5 percent of

adjusted gross income.    In this case, petitioner claimed itemized

deductions for medical and dental expenses in the amounts of

$2,119 and $958 for 2002 and 2003, respectively.     Petitioner

attached receipts to his returns in substantiation of these

expenses.   Respondent determined that the documentation

petitioner submitted for these expenses was falsified and

disallowed all of petitioner’s claimed Schedule A deductions.

     At trial, respondent presented several witnesses, including

doctors who petitioner claimed had provided services.     These

doctors testified that no medical services had been provided by

them to petitioner during the years at issue and that the

receipts petitioner relied on were for services provided to him

in prior years that had been altered to reflect dates in 2002 and

2003.
                               - 13 -

     The Court notes that the receipts offered into evidence are

virtually identical to those provided in substantiation of

claimed expenses on petitioner’s 2001 Federal income tax return,

except for altered dates and slight changes in dollar amounts.

The Court found, in Prowse v. Commissioner, supra, that the 2001

claimed receipts were “falsified, and some, if not all, of the

signatures shown on the documents were forged.”    The Court held,

therefore, that none of the documents substantiated any of

petitioner’s claimed medical expenses for 2001.    Likewise, the

Court, in this case, holds that none of the receipts in this case

for 2002 and 2003 substantiate or establish petitioner’s claimed

medical and dental expenses for the years at issue.    The

documentation in support of these claimed expenses is also held

to be false.   Accordingly, the Court sustains respondent’s

disallowance of petitioner’s claimed medical and dental expenses.

     Petitioner claimed an itemized deduction on his 2002 tax

return of $416 for State and local income taxes based on the

amounts reported on petitioner’s 2002 Form W-2 issued by KeySpan

Associates.    Respondent conceded that, if petitioner’s allowed

itemized deductions are greater than the standard deduction,

petitioner is entitled to a deduction for the State and local

taxes paid for 2002.

     Section 170(a)(1) authorizes a taxpayer to claim a deduction

for any charitable contribution during the tax year.    Petitioner
                               - 14 -

claimed charitable contribution deductions on Schedules A of his

2002 and 2003 tax returns for cash gifts to a church and noncash

gifts.   The only documentation produced were two receipts for

2002 and 2003 from the Salvation Army regarding the noncash

contributions.

     At trial, respondent challenged the authenticity of both

Salvation Army receipts.   A Salvation Army representative

credibly testified that the Salvation Army did not issue,

prepare, or utilize the itemized receipts petitioner presented in

substantiation of the contributions on petitioner’s 2002 and 2003

Federal income tax returns.6   Petitioner offered no explanation

or other evidence to challenge this testimony.    Additionally,

petitioner did not testify or otherwise substantiate his claimed

cash contributions to a church.   Consequently, there is no

credible evidence to support petitioner’s claimed charitable

contributions for the 2 years at issue.    Accordingly,

respondent’s determination on this issue with respect to

petitioner’s 2002 and 2003 tax years is sustained.

     Section 162(a) authorizes a taxpayer to deduct ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on a trade or business.    An “ordinary” expense



     6
       The Salvation Army witness testified that the receipt
forms presented by petitioner were not used by the Salvation Army
during the years at issue due to revisions in the forms that were
required by changes in the Internal Revenue Code.
                              - 15 -

is one incurred in a transaction that frequently or commonly

occurs in the type of business involved.   Deputy v. Du Pont, 308

U.S. 488, 495 (1940).   A “necessary” expense is one that is

“appropriate and helpful” to the taxpayer’s business.   Welch v.

Helvering, 290 U.S. 111, 113 (1933).   Expenses allowable under

section 162 must be “directly connected with or pertaining to the

taxpayer’s trade or business”.   Sec. 1.162-1(a), Income Tax Regs.

Personal, living, and family expenses are not deductible.    Sec.

262(a).

     An employee is generally recognized as being in the trade or

business of being an employee and may deduct employment-related

expenses if the requirements of section 162 are met.

Commissioner v. Flowers, 326 U.S. 465 (1946).   However, “A trade

or business expense deduction is not allowable to an employee to

the extent that the employee is entitled to reimbursement from

his or her employer for an expenditure related to his or her

status as an employee.”   Lucas v. Commissioner, 79 T.C. 1, 7

(1982).   If an employee could have requested reimbursement from

his employer and fails or neglects to do so, he may not claim a

deduction for the expenses under section 162.   Id.; see also

Orvis v. Commissioner, 788 F.2d 1406 (9th Cir. 1986), affg. T.C.

Memo. 1984-533; Kennelly v. Commissioner, 56 T.C. 936, 943

(1971), affd. without published opinion 456 F.2d 1335 (2d Cir.

1972).
                              - 16 -

     Petitioner claimed deductions for unreimbursed employee

business expenses totaling $11,270 and $13,397 for 2002 and 2003,

respectively.   Petitioner attached some documentation of these

expenses for both years.   However, respondent demonstrated to the

Court’s satisfaction that the documentation did not reflect that

petitioner incurred such expenses.

     In that regard, petitioner reported traveling 36,600 miles

during 2002 and deducted expenses based on that mileage.

Respondent established that petitioner’s employers did not expect

or require petitioner to travel as part of his job.   Moreover,

respondent also demonstrated at trial that both of petitioner’s

employers had reimbursement plans to cover legitimate employee

business expenses during 2002 and 2003.   Petitioner did not

present at trial or on brief a plausible explanation for the

mileage claimed.   The complete lack of credible evidence to

substantiate petitioner’s claimed employee expenses and

respondent’s presentation convinces the Court that the

unreimbursed employee business expenses were properly disallowed.

     As to the other miscellaneous expenses claimed on Schedules

A of petitioner’s 2002 and 2003 returns such as tax preparation

fees, job search expenses, traveling expenses, and annual fees

for a safety deposit box, petitioner failed to substantiate these

expenses as required by section 6001 and related regulations.

Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.    Consequently,
                                - 17 -

the Court sustains respondent’s determination disallowing these

expenses.

Section 6663 Penalty

     The next issue is whether petitioner is liable for fraud

under section 6663(a) for the years at issue.    Generally, in any

case involving the issue of fraud with intent to evade tax, the

burden of proof is on the Commissioner.    Sec. 7454(a); Rule

142(b); see supra note 4.

     Respondent has the burden of proving by clear and convincing

evidence that (1) petitioner underpaid his tax for each year at

issue, and (2) some part of the underpayment was due to fraud.

Sec. 6663(a); Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).

Fraud means actual, intentional wrongdoing, and the intent

required is the specific purpose to evade a tax believed to be

owing.    Candela v. United States, 635 F.2d 1272 (7th Cir. 1980);

Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968);

Mitchell v. Commissioner, 118 F.2d 308 (5th Cir. 1941), revg. 40

B.T.A. 424 (1939); Wilson v. Commissioner, 76 T.C. 623, 634

(1981).     The Commissioner must show that the taxpayer intended to

evade taxes by conduct calculated to conceal, mislead, or

otherwise prevent the collection of taxes.     Stoltzfus v. United

States, supra; Marcus v. Commissioner, 70 T.C. 562, 577 (1978),

affd. without published opinion 621 F.2d 439 (5th Cir. 1980).
                              - 18 -

     Fraud is a question of fact that must be considered based on

an examination of the entire record and the taxpayer’s entire

course of conduct.   Petzoldt v. Commissioner, 92 T.C. 661, 699

(1989); Recklitis v. Commissioner, 91 T.C. 874, 909-910 (1988);

Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).    Fraud is

never presumed and must be established by independent evidence of

fraudulent intent.   Petzoldt v. Commissioner, supra at 699;

Recklitis v. Commissioner, supra at 909-910.     Fraud is never

imputed or presumed, and courts will not sustain fraud on

circumstances that at most create only suspicion.     Olinger v.

Commissioner, 234 F.2d 823, 824 (5th Cir. 1956), affg. in part

and revg. in part T.C. Memo. 1955-9; Davis v. Commissioner, 184

F.2d 86, 87 (10th Cir. 1950); Green v. Commissioner, 66 T.C. 538,

550 (1976).   Mere suspicion does not prove fraud, and the fact

that the Court does not find the taxpayer’s testimony wholly

credible is not sufficient to establish fraud.     Cirillo v.

Commissioner, 314 F.2d 478, 482 (3d Cir. 1963), affg. in part and

revg. in part T.C. Memo. 1961-192; Shaw v. Commissioner, 27 T.C.

561, 569-570 (1956), affd. 252 F.2d 681 (6th Cir. 1958).

     Although mere suspicion is not enough, fraud may be proven

by circumstantial evidence, and reasonable inferences may be

drawn from the facts because direct evidence is rarely available.

DiLeo v. Commissioner, 96 T.C. 858, 874 (1991), affd. 959 F.2d 16

(2d Cir. 1992); Petzoldt v. Commissioner, supra at 699;
                                - 19 -

DelVecchio v. Commissioner, T.C. Memo. 2001-130, affd. 37 Fed.

Appx. 979 (11th Cir. 2002).

     Circumstantial evidence that may give rise to a finding of

fraud includes:    (1) Understatement of income; (2) inadequate

records; (3) failure to file tax returns; (4) providing

implausible or inconsistent explanations of behavior; (5)

concealment of assets; (6) failure to cooperate with taxing

authorities; (7) filing false Forms W-4, Employee’s Withholding

Allowance Certificate; (8) failure to make estimated tax

payments; (9) dealing in cash; (10) engaging in illegal activity;

(11) attempting to conceal illegal activity; (12) engaging in a

pattern of behavior that indicates an intent to mislead; and (13)

filing false documents.     Bradford v. Commissioner, 796 F.2d 303,

307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992); Christians v.

Commissioner, T.C. Memo. 2003-130.       However, these “badges of

fraud” are not exclusive.     Niedringhaus v. Commissioner, supra at

211; Miller v. Commissioner, 94 T.C. 316, 334 (1990).

Additionally, the taxpayer’s background may be examined to

establish fraud.    Spies v. United States, 317 U.S. 492, 497

(1943); Niedringhaus v. Commissioner; supra at 211; Walters v.

Commissioner, T.C. Memo. 1995-543.       A consistent pattern of

understating income may be strong evidence of fraud.       Delvecchio

v. Commissioner, supra (citing Holland v. United States, 348 U.S.
                              - 20 -

121, 137 (1954)); Camien v. Commissioner, 420 F.2d 283, 287 (8th

Cir. 1970), affg. T.C. Memo. 1968-12.

     Respondent contends that the following badges of fraud exist

in this case:   (1) Inadequate records; (2) implausible or

inconsistent explanations; (3) a pattern of behavior indicating

an intent to mislead; and (4) filing false documents.   On brief,

petitioner presented frivolous and irrelevant arguments as to the

credibility of the various witnesses, ignoring the documentation

and receipts at issue.   The Court agrees with respondent.

     The record establishes without a doubt that petitioner

maintained and presented inadequate and false records with

respect to the deductions claimed on his 2002 and 2003 returns.

Respondent clearly and convincingly showed, through the use of

credible witnesses, that a substantial number of documents

attached to petitioner’s 2002 and 2003 returns in an effort to

establish the propriety of his deductions for both years were

forged or falsified.   Moreover, the documents presented for this

case are strikingly similar to those submitted to substantiate

petitioner’s claimed 2001 deductions in Prowse v. Commissioner,

T.C. Memo. 2006-120, and which the Court likewise found were

altered.   Several professionals, such as doctors, testified at

trial that, while they had provided services to petitioner in

prior years, they had not provided services to petitioner as

purportedly claimed on the receipts that were submitted to the
                               - 21 -

Court for the years at issue in this case.   That testimony was

corroborated by persons who maintained the books and records,

including billings for services rendered.    At trial, petitioner

admitted to fabricating a receipt for his 2002 return by reusing

a doctor’s form that had been used for his 2001 tax return.    In

an attempt to mislead respondent and the Court, petitioner went

to great lengths to provide a variety of implausible and

unconvincing arguments regarding the receipts at issue.

     The totality of the evidence clearly and convincingly

establishes to the Court’s satisfaction that petitioner

deliberately overstated his deductions for 2002 and 2003 and

falsified documents supporting the overstated and unsubstantiated

deductions to mislead respondent and to evade his proper income

tax liability for 2002 and 2003.

     Respondent determined that petitioner’s actions constituted

fraud, and the Court sustains that determination.   Therefore,

petitioner is liable for the section 6663(a) penalties for 2002

and 2003.7

Section 6651 Addition to Tax

     Section 6651(a)(1) provides for an addition to tax for

failure to file timely Federal income tax returns unless the

taxpayer shows that such failure was due to reasonable cause and


     7
       Accordingly, there is no need to address respondent’s
alternative argument that petitioner is liable for the accuracy-
related penalty under sec. 6662(a) for both years.
                                - 22 -

not willful neglect.     United States v. Boyle, 469 U.S. 241, 245

(1985); Baldwin v. Commissioner, 84 T.C. 859, 870 (1985); Davis

v. Commissioner, 81 T.C. 806, 820 (1983), affd. without published

opinion 767 F.2d 931 (9th Cir. 1985).    Under section 7491, the

Secretary has the burden of production in any court proceeding

with respect to the liability of any individual for any penalty,

addition to tax, or any additional amount under that title of the

Internal Revenue Code.

     Petitioner’s 2002 Federal income tax return was due to be

filed on April 15, 2003.    It was filed on June 24, 2004.

Petitioner did not advance any reason for his failure to file the

income tax return for that year timely.    Accordingly, petitioner

is liable for the addition to tax under section 6651(a) for 2002.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                           Decision will be entered

                                      under Rule 155.
