                                 T.C. Memo. 2017-152



                           UNITED STATES TAX COURT



                   MARGARET KNOWLES, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 21172-14.                            Filed August 7, 2017.



      Cole R. Sheridan, for petitioner.1

      Michael T. Shelton, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: Respondent determined the following deficiencies and

penalties with respect to petitioner’s Federal income tax for tax years 2008-12

(years at issue):



      1
          James T. Runyon represented petitioner at trial.
                                        -2-

[*2]

                                 Addition to tax              Penalties
       Year       Deficiency     sec. 6651(a)(1)     Sec. 6662(a)     Sec. 6663
       2008         $62,205          $15,551            $4,315               -0-
       2009          38,416            9,604             1,740               -0-
       2010          58,306           14,576             2,317           $13,899
       2011          45,618            -0-                -0-             22,877
       2012          11,924            -0-                -0-                8,943

       For tax years 2010-12 respondent determined as an alternative to the fraud

penalty that petitioner was liable for an accuracy-related penalty under section

6662(a) for negligence, or alternatively, for a substantial understatement of income

tax. Unless otherwise indicated, all section references are to the Internal Revenue

Code (Code) in effect for the years at issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure. All monetary amounts are rounded to the

nearest dollar.

       After concessions the issues for our consideration are: (1) whether

petitioner substantiated expenses underlying deductions on her Schedules C, Profit

or Loss from Business, for tax years 2008-11; (2) whether petitioner substantiated

items underlying deductions on Schedules A, Itemized Deductions, for tax years

2011-12; (3) whether petitioner failed to report taxable income for tax years 2008-
                                         -3-

[*3] 09; (4) whether petitioner’s filing status for tax years 2011-12 is single or

married filing separately; (5) whether petitioner is liable for the section 6663(a)

fraud penalty for 2010-12; (6) whether petitioner is liable for the section 6662(a)

accuracy-related penalty for tax years 2008-09 as well as for portions of

underpayments for tax years 2010-12 that are not attributable to fraud; and (7)

whether petitioner is liable for the section 6651(a)(1) addition to tax for failing to

file timely returns for 2008-10.

                                FINDINGS OF FACT

      Some of the facts are stipulated and are so found. The stipulation of facts

and the attached exhibits are incorporated herein. Petitioner resided in Wisconsin

when she filed her timely petition.

Petitioner’s Education and Career

      Petitioner is a psychiatrist. She graduated from John Hopkins Medical

School and completed her residency at the University of Chicago. On April 15,

2002, the State of Illinois issued petitioner a medical license which expired on

July 31, 2011, and has not been renewed. On December 21, 2010, the State of

Wisconsin issued petitioner a medical licence which expired on October 31, 2015,

and has not been renewed.
                                         -4-

[*4] From January 2004 through December 2010 petitioner practiced medicine

as an independent contractor for Associates in Psychiatric Medicine (APM) at its

offices in Glenview, Illinois. Pursuant to her contract with APM, APM provided

her with office space, office furniture, and administrative support services,

including billing to patients and insurance companies. APM collected and

deposited into its bank all proceeds from patients petitioner treated at APM’s

offices. APM kept 40% of those proceeds, distributing the remaining 60% to

petitioner for her services. Each year APM issued her a Form 1099 MISC,

Miscellaneous Income, for the 60% of fees distributed to petitioner.

      Petitioner reported expenses related to the APM contract totaling $143,573,

$155,703, $224,432, and $11,599 for tax years 2008-11, respectively, on her

Schedules C. Petitioner’s 2011 expenses reported on her Schedule C related to

services she rendered at APM’s offices in 2010 but did not receive payment for

until 2011. Petitioner reported gross receipts of $214,888, $261,629, $314,237,

and $10,384 for tax years 2008-11, respectively, on her Schedules C. For tax year

2010 she reported $195,430 as office expenses. Respondent allowed a deduction

for $142,249 of these office expenses.

      During 2011 and 2012 petitioner worked for Ministry Medical Group and

Ministry Health Care Group (Ministry) in Wisconsin. Her salary was above
                                       -5-

[*5] $200,000 for each of those years. She provided Ministry with a temporary

address in Wisconsin. Petitioner entered into a relocation assistance agreement

with Ministry on October 19, 2010. She submitted expenses for temporary

housing. To substantiate the expenses, petitioner provided Ministry with checks

for rent and a security deposit made out to Louise Gustafson, her mother-in-law.

      During early January 2011 petitioner and her husband lived at Mrs.

Gustafson’s lake house in Wisconsin. Petitioner provided Ministry a false rental

agreement between her and Mrs. Gustafson. No rental agreement existed, and

Mrs. Gustafson did not charge petitioner and her husband rent.

Big Dog Farms

      Since petitioner was a young child, she has been an amateur horsewoman.

Petitioner sold horses before she started Big Dog Farms (BDF) in Wisconsin, and

she thought she could sell horses as a business. Petitioner started BDF for the

purpose of breeding, selling, and showing horses. Petitioner began operating BDF

no later than 2005. BDF’s operations ceased in 2011. From 2005-11 petitioner

did not maintain a separate bank account for BDF. BDF reported losses as

follows:
                                       -6-

[*6]

                      Year                           Net loss
                     2005                           ($30,207)
                     2006                            (49,345)
                     2007                            (58,556)
                     2008                           (149,060)
                     2009                            (93,500)
                     2010                           (114,785)
                     2011                            (86,466)
                      Total                         (581,919)

       Petitioner owned a horse, Gossip Girl, which she entered in various horse

shows. For 2011 there are invoices for the cost of shipping horses. For tax years

2008-11 petitioner reported expenses related to BDF as follows on her Schedules

C:

                      Year                          Expenses
                     2008                           $149,715
                     2009                              93,500
                     2010                            115,500
                     2011                              86,466

Petitioner reported gross receipts of $655 and $715 for tax years 2008 and 2010,

respectively.
                                       -7-

[*7] Grill Cleaning Business

      For tax years 2010 and 2011 petitioner reported expenses related to a grill

cleaning business on her Schedules C. Schedule C for tax year 2010 reports the

business as Momentum Enterprises. Petitioner reported expenses of $17,050 and

$14,000 for this business on her 2010 and 2011 Schedules C, respectively.

Itemized Deductions

      Petitioner claimed itemized deductions on her Schedules A related to real

estate taxes paid, charitable contributions, and unreimbursed employee expenses

for tax years 2011 and 2012.

      On petitioner’s 2011 and 2012 income tax returns she claimed deductions of

$3,000 and $7,026, respectively, for real estate taxes paid. Respondent disallowed

these deductions in full.

      On petitioner’s 2011 and 2012 income tax returns she claimed deductions of

$5,000 and $12,589, respectively, for charitable contributions. Respondent

disallowed these deductions in full.

      On petitioner’s 2011 return she claimed a deduction of $4,200 for

unreimbursed employee expenses. Respondent disallowed this deduction in full.
                                            -8-

[*8] Unreported Income

      During tax years 2008 and 2009 petitioner deposited six checks into her

personal checking account. In 2008 she deposited checks for $3,000 and $2,000,

and in 2009 she deposited checks for $975, $40, $1,600 and $1,112 into her

personal checking account. Petitioner failed to report these amounts as taxable

income on her 2008 and 2009 returns.

Filing Status

      On January 29, 2011, petitioner married James Gustafson in Lake County,

Illinois. At this time petitioner was employed by Ministry. On January 30, 2011,

petitioner submitted a benefit change form to add Mr. Gustafson to her medical

plan. During 2011-13 petitioner made payroll contributions for health insurance

consistent with the premium charged for an employee spouse plan.

      On or about October 8, 2013, petitioner submitted a benefits change form to

her employer to remove Mr. Gustafson as her spouse and drop his medical

coverage effective January 1, 2014. On December 17, 2014, petitioner submitted

a benefits change form to her employer to remove Mr. Gustafson as the

beneficiary of her life insurance policy.

      Petitioner filed her 2011 and 2012 tax returns as a single filer. When

respondent audited petitioner’s returns, she provided the revenue agent with a
                                         -9-

[*9] copy of a judgment for dissolution of marriage from the 19th Judicial Circuit

Court of Lake County, Illinois (Lake County court), showing that petitioner had

divorced Mr. Gustafson in late 2011. The Lake County court has no record of her

divorce. Mr. Gustafson did not participate in any divorce proceedings in the Lake

County court. The dates on the documents petitioner provided the revenue agent

are inconsistent with the internal practice of the Lake County court. On

petitioner’s document the date of the “filed” stamp is earlier than the date of the

judge’s signature, which contradicts the court’s practice to stamp a document filed

on the day the judge signs it or at a later date. The case numbers shown on the

decree belong to a couple other than petitioner and Mr. Gustafson. The document

has microfilm markings, and documents for 2011 were not microfilmed. The

petition for divorce filed in the Lake County court included the signature of Mr.

Gustafson, but he did not sign the document.

      On the date of trial petitioner and Mr. Gustafson were still married. Mr.

Gustafson had filed petitions for divorce in the Circuit Court, Family Court

Branch 3, for Portage County, Wisconsin (Portage County circuit court), in 2015

and 2016. He filed a petition again in 2016 because the 2015 case was dismissed.

In August 2015 petitioner signed under penalty of perjury a financial disclosure
                                        - 10 -

[*10] statement with the Portage County circuit court. This document reports

September 2014 as the date of separation.

Filing of Tax Returns

      Petitioner did not file timely her tax returns for tax years 2008-10. She filed

her 2008-10 returns on August 10, 2011, December 15, 2011, and March 1, 2012,

respectively. Petitioner prepared her own returns. Her Forms 1040, U.S.

Individual Income Tax Return, for 2011 and 2012 requested refunds of $41,392

and $8,551, respectively.

Audit of Petitioner’s Returns

      Respondent issued numerous information document requests and one

summons to petitioner. Respondent’s revenue agent had difficulty setting up a

meeting with her. It took approximately 10 months to schedule a meeting.

Meetings were often rescheduled or postponed. Petitioner did not provide the

agent with documents that would support the returns. Petitioner told the revenue

agent that she filed her 2008 return late because of the death of her father in 2009.

Petitioner’s father died on April 3, 2008.
                                        - 11 -

[*11]                                 OPINION

I.      Burden of Proof

        Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving that those

determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933). The taxpayer likewise bears the burden of proving his or her

entitlement to deductions allowed by the Code and of substantiating the amounts

of claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

sec. 1.6001-1(a), Income Tax Regs. Under section 7491(a), in certain

circumstances the burden of proof may shift from the taxpayer to the

Commissioner. Petitioner has not claimed or shown that she meets the

specifications of section 7491(a) to shift the burden of proof to respondent as to

any relevant factual issue.

II.     Schedules C Expenses

        Deductions are a matter of legislative grace, and a taxpayer must prove his

or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. at

84; New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Section 162(a)

permits a taxpayer to deduct ordinary and necessary expenses incurred during the

taxable year in carrying on a trade or business. An ordinary expense is one that
                                        - 12 -

[*12] commonly or frequently occurs in a taxpayer’s business, Deputy v. duPont,

308 U.S. 488, 495 (1940), and a necessary expense is one that is appropriate and

helpful in carrying on the taxpayer’s business, Welch v. Helvering, 290 U.S. at

113. The expense must directly connect with or pertain to the taxpayer’s business.

Sec. 1.162-1(a), Income Tax Regs. A taxpayer’s general statement that her

expenses were incurred in pursuit of a trade or business is not sufficient to

establish that the expenses had a reasonably direct relationship to any such trade or

business. Ferrer v. Commissioner, 50 T.C. 177, 185 (1968), aff’d per curiam, 409

F.2d 1359 (2d Cir. 1969).

      A.     Associates in Psychiatric Medicine

      For tax years 2008-11 petitioner claimed deductions for numerous expenses

related to her medical practice at APM. Her contract with APM covered her office

space, office furniture, and administrative support services expenses. Her

Schedules C reported car and truck expenses, utilities, office expenses, answering

service expenses, supplies, and legal and professional expenses. Petitioner offered

no testimony explaining how these expenses were work related and provided no

evidence substantiating these expenses. Respondent’s disallowance of expense

deductions allegedly related to petitioner’s medical practice at APM is sustained.
                                         - 13 -

[*13] B.     Big Dog Farms

      A taxpayer may not fully deduct expenses for an activity under section 162

if the activity is not engaged in for profit. Sec. 183(a), (c). If an activity is not

engaged in for profit, no deduction attributable to that activity is allowed except to

the extent provided by section 183(b). Sec. 183(a). Section 183(b) generally

limits deductions for an activity that is not engaged in for profit to the amount of

income that the activity generates. See also sec. 1.183-2(a), Income Tax Regs.

      To be engaged in a trade or business within the meaning of section 162(a),

an individual taxpayer must be involved in the activity with continuity, regularity,

and the primary purpose of deriving a profit. Commissioner v. Groetzinger, 480

U.S. 23, 35 (1987). Deciding whether a taxpayer is carrying on a trade or business

requires an examination of all of the facts in each case. Id. at 36.

      A taxpayer must conduct the activity with the requisite profit motive or

intent for the activity to be considered a trade or business. See id. at 35-36; see

also Churchman v. Commissioner, 68 T.C. 696, 701 (1977). The taxpayer

generally bears the burden of proving that the requisite profit objective existed.

Westbrook v. Commissioner, 68 F.3d 868, 876 (5th Cir. 1995), aff’g T.C. Memo.

1993-634; see also Rule 142(a); Foster v. Commissioner, T.C. Memo. 2012-207.

Although a reasonable expectation of profit is not required, the taxpayer’s profit
                                        - 14 -

[*14] objective must be actual and honest. Dreicer v. Commissioner, 78 T.C. 642,

644-645 (1982), aff’d without published opinion, 702 F.2d 1205 (D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs. Whether a taxpayer has an actual and honest

profit objective is a question of fact to be answered from all of the relevant facts

and circumstances. Hastings v. Commissioner, T.C. Memo. 2002-310; sec. 1.183-

2(a), Income Tax Regs.

      The pertinent regulations set forth a nonexhaustive list of factors that may

be considered in deciding whether the taxpayer had a profit objective. These

factors include: (1) the manner in which the taxpayer carries on the activity; (2)

the expertise of the taxpayer or his advisers; (3) the time and effort expended by

the taxpayer in carrying on the activity; (4) the expectation that assets used in the

activity may appreciate in value; (5) the success of the taxpayer in carrying on

other similar or dissimilar activities; (6) the taxpayer’s history of income or losses

with respect to the activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) the elements of personal

pleasure or recreation. Sec. 1.183-2(b), Income Tax Regs.; see also Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), aff’d without published opinion, 647

F.2d 170 (9th Cir. 1981). No single factor or group of factors is determinative.

Golanty v. Commissioner, 72 T.C. at 426. While the focus of the test for whether
                                        - 15 -

[*15] a taxpayer engaged in an activity with the intent to make a profit is the

subjective intent of the taxpayer, greater weight is given to objective facts than to

the taxpayer’s mere statement of his or her intent. Sec. 1.183-2(a), Income Tax

Regs.; see also Stasewich v. Commissioner, T.C. Memo. 2001-30. A final

determination is made only after a consideration of all of the relevant facts and

circumstances.

      We do not believe it necessary to analyze each of the factors enumerated in

section 1.183-2(b), Income Tax Regs., to determine whether petitioner operated

BDF with an actual and honest objective of making a profit. Rather, we focus on

the factors we believe more important and applicable in this case.

             1.     Manner in Which Taxpayer Carries On Activity

      Carrying on an activity in a businesslike manner may indicate a profit

objective. Sec. 1.183-2(b)(1), Income Tax Regs. There is no evidence that

petitioner maintained books and records or conducted BDF in a manner similar to

that of a profitable horse enterprise. BDF did not have a separate bank account.

Petitioner’s business plan is summary, and there is no evidence to show when the

plan was written.
                                          - 16 -

[*16]           2.   Expertise of the Taxpayer or Advisors

        Consultation with experts may indicate a profit motive. Id. para. (b)(2).

Petitioner testified that many of the expenses pertaining to the farm were used to

pay “the professionals”, including veterinarians, trainers, and riders. Petitioner did

not identify these professionals or produce any evidence that supports a finding

that she hired professionals to advise her with respect to the activity.

                3.   Expectation of Appreciation in Value

        An expectation that assets used in an activity may appreciate in value may

indicate a profit motive. Id. para. (b)(4). Petitioner provided no evidence

regarding the assets held by BDF and whether these assets are expected to

appreciate. She provided an appraisal of one horse, Gossip Girl, but the appraisal

is not dated.

                4.   History of Income or Losses

        A history of substantial losses may indicate that the activity is not

conducted for profit. See id. para. (b)(6). Petitioner reported a net loss for every

year of BDF’s operation. We have held that the startup phase of horse breeding

may be 5 to 10 years. See Engdahl v. Commissioner, 72 T.C. 659, 669 (1979).

BDF was allegedly in the business not only of breeding horses but also of selling

and showing horses, and petitioner testified that she sold several horses for profit
                                         - 17 -

[*17] before BDF opened. BDF, however, had substantial losses all of its years of

operation.

             5.     The Taxpayer’s Financial Status

      Substantial income from sources other than the activity may indicate that an

activity is not engaged in for profit, particularly if the losses from the activity

generate substantial tax benefits and there are personal or recreational elements

involved. Sec. 1.183-2(b)(6), Income Tax Regs. Petitioner is a medical doctor

who had significant income during the tax years at issue, and the losses from BDF

generated substantial tax benefits for her.

             6.     Conclusion

      After considering all the applicable facts and circumstances, we conclude

that petitioner did not operate BDF with the actual and honest objective of making

a profit. Petitioner is not entitled to deductions for her BDF-related expenses that

she reported on her Schedules C for 2008-11.

      C.     Grill Cleaning Business

      For tax years 2010 and 2011 petitioner reported numerous expenses related

to her alleged grill cleaning business, Momentum Enterprises. Petitioner testified

that Momentum Enterprises was a business but that her adviser told her not to

claim it as one. Petitioner did not produce evidence supporting these expenses.
                                        - 18 -

[*18] However, petitioner provided two bills of sale for a trailer that was

purportedly used for the grill cleaning business. The bills of sale appear to be for

the same trailer, and it appears that at least one of the bills of sale may have been

altered. Petitioner conceded this issue in her posttrial brief. Respondent’s

disallowance of deductions for these expenses is sustained.

III.   Schedule A Deductions

       A.    Real Estate Taxes

       Section 164(a)(1) allows a deduction for real property taxes paid. Petitioner

claimed deductions for real estate taxes paid of $3,000 and $7,026 for tax years

2011 and 2012, respectively. Respondent disallowed her deductions for both 2011

and 2012 in full. Petitioner produced printouts from a Portage County, Wisconsin

website showing property taxes due for a parcel of land in Amherst, Wisconsin.

Petitioner provided no evidence to show that she paid these property taxes.

Respondent’s disallowance of these deductions is sustained.

       B.    Charitable Contributions

       A charitable contribution shall be allowable as a deduction only if verified

under regulations prescribed by the Secretary. Sec. 170(a)(1). For tax year 2011

petitioner claimed a charitable contribution deduction of $5,000 for the

contribution of designer clothing to the Log Church. For tax year 2012 petitioner
                                       - 19 -

[*19] claimed a $12,589 deduction for the contribution of cash to unidentified

recipients.

      For noncash contributions, a taxpayer must maintain for each contribution a

receipt from the donee showing the name of the donee, the date and location of the

contribution, and a description of the donated property in detail reasonably

sufficient under the circumstances. See sec. 1.170A-13(b)(1), Income Tax Regs.

In addition to the aforementioned requirements, for donations of property other

than money in excess of $500 but less than $5,001, a taxpayer must substantiate

the following: the manner of acquisition, the proper date of acquisition, and the

cost or the basis of the donated property. Id. para. (b)(3). Deductions are not

allowed for cash contributions unless the donor maintains as a record of such

contribution a bank record or a written communication from the donee showing

the name of the donee organization, the date of the contribution, and the amount of

the contribution. Sec. 170(f)(17).

      Petitioner did not substantiate her charitable contributions for tax years

2011 and 2012. Respondent’s disallowance of these deductions is sustained.

      C.      Unreimbursed Employee Expenses

      For 2011 petitioner claimed a deduction of $4,200 for unreimbursed

employee expenses. A taxpayer must show the relationship between the
                                      - 20 -

[*20] expenditures and his or her employment. See Joseph v. Commissioner, T.C.

Memo. 2005-169. For such expenses to be deductible, the taxpayer must not have

the right to reimbursement from his or her employer. See Orvis v. Commissioner,

788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533. Petitioner did

not substantiate these expenses or show that they were not reimbursable by her

employer. Respondent’s disallowance of this deduction is sustained.

IV.   Unreported Income

      Respondent contends that petitioner failed to report income of $5,000 and

$3,727 for tax years 2008 and 2009, respectively.2 Respondent made these

adjustments using the specific-item method of reconstructing income.3 The

specific-item method is an indirect method of income reconstruction that consists

of evidence of specific amounts of income received by a taxpayer and not reported

on the taxpayer’s return. See Estate of Beck v. Commissioner, 56 T.C. 297, 353-

354, 361 (1971). Specific items may be evidenced by canceled checks. See



      2
       Respondent has made a concession and adjustments since issuing the notice
of deficiency.
      3
       The Commissioner must establish a rational foundation for the assessment
to preserve the presumption of correctness. See Zuhone v. Commissioner, 883
F.2d 1317, 1325 (7th Cir. 1989) (citing Ruth v. United States, 823 F.2d 1091,
1094 (7th Cir. 1987)), aff’g T.C. Memo. 1988-142. Respondent has established a
rational foundation.
                                        - 21 -

[*21] Schwarz v. Commissioner, T.C. Memo. 1981-94. Petitioner deposited six

checks into her personal checking account that were not included in her taxable

income. Gross income, for purposes of calculating taxable income, includes all

income from whatever source derived. Sec. 61(a). Petitioner provided no

evidence to show these six checks were not taxable income when she received

them. Respondent’s inclusion of these six checks in petitioner’s taxable income is

sustained.

V.    Filing Status

      A taxpayer’s filing tax status determines the rate of income tax owed by a

taxpayer. See sec. 1. Married individuals may elect to file a joint return or

separate returns. See secs. 1(d), 6013(a). Generally, marital status is determined

at the close of a taxable year. Sec. 7703(a). An individual legally separated from

his or her spouse under a decree of divorce or of separate maintenance shall not be

considered married. Sec. 7703(a)(2).

      There is no credible evidence that petitioner and Mr. Gustafson were not

married at the end of tax years 2011 and 2012. Mr. Gustafson testified credibly

that he is still married to petitioner. Under penalty of perjury petitioner signed a

financial disclosure statement reporting her separation from her husband as of

September 2014. Petitioner’s divorce documents are not records of the Lake
                                        - 22 -

[*22] County court. Petitioner’s employment records for 2011 and 2012 include

Mr. Gustafson as her spouse for the purpose of employee benefits. We conclude

that petitioner’s correct filing status for tax years 2011 and 2012 is married filing

separately.

VI.   Fraud Penalty

      Fraud is an intentional wrongdoing on the part of a taxpayer with the

specific purpose to evade a tax believed to be owed. Sadler v. Commissioner, 113

T.C. 99, 102 (1999). The penalty in the case of fraud is a civil sanction provided

primarily as a safeguard for protection of revenue and to reimburse the

Government for the heavy expense of investigation and the loss resulting from the

taxpayer’s fraud. Helvering v. Mitchell, 303 U.S. 391, 401 (1938); Sadler v.

Commissioner, 113 T.C. at 102. The Commissioner has the burden of proving by

clear and convincing evidence an underpayment for each year at issue and that the

underpayment is due to fraud. Sec. 7454(a); Rule 142(b). The Commissioner

must show that the taxpayer intended to conceal, mislead, or otherwise prevent the

collection of taxes. Katz v. Commissioner, 90 T.C. 1130, 1143 (1988).

      If the Commissioner establishes that any portion of the underpayment is

attributable to fraud, the entire underpayment shall be treated as attributable to

fraud and subject to a 75% penalty, unless the taxpayer establishes that some part
                                        - 23 -

[*23] of the underpayment is not attributable to fraud. Sec. 6663(a) and (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 may be proved by circumstantial evidence and inferences

drawn from the facts because direct proof of a taxpayer’s intent is rarely available.

Niederinghaus v. Commissioner, 99 T.C. 202, 210 (1992). The taxpayer’s entire

course of conduct may establish the requisite fraudulent intent. DiLeo v.

Commissioner, 96 T.C. 858, 874 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992); Stone

v. Commissioner, 56 T.C. 213, 223-224 (1971).

      Fraudulent intent may be inferred from various kinds of circumstantial

evidence, or “badges of fraud”, including, but not limited to, the consistent

understatement of income, filing false documents, including false income tax

returns, engaging in illegal activities, concealing assets, engaging in extensive

dealings in cash, implausible or inconsistent explanations of behavior, inadequate

records, and failure to cooperate with tax authorities. Bradford v. Commissioner,

796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Toussaint v.

Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), aff’g T.C. Memo. 1984-25;

Parks v. Commissioner, 94 T.C. 654, 664-665 (1990). The existence of any one

factor is not dispositive, but the existence of several factors may be persuasive
                                       - 24 -

[*24] circumstantial evidence of fraud. See Niedringhaus v. Commissioner, 99

T.C. at 211; Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).

      We have sustained respondent’s determination of petitioner’s deficiencies

for tax years 2010-12. Respondent has therefore satisfied the burden of proving

an underpayment of tax for tax years 2010-12. We must determine whether

petitioner’s underpayments were due to fraud.

      A.     Tax Year 2010

      Respondent contends that petitioner claimed false deductions of $53,181 for

office expenses related to APM on her 2010 Schedule C. Respondent contends

that petitioner claimed a deduction for office expenses related to APM that she did

not pay. For 2010 respondent allowed petitioner to claim some APM-related

office expenses as deductions, but not all of them. We agree that petitioner’s

expenses were not substantiated, but there is not clear and convincing evidence

that petitioner had fraudulent intent with respect to this deduction. Her lack of

records does not necessarily mean petitioner inflated those expenses with an intent

to avoid Federal income tax. See Ericson v. Commissioner, T.C. Memo. 2016-

107, at *46. There were other unsubstantiated expenses on petitioner’s Schedule

C for 2010 that were not subject to the fraud penalty. We do not sustain the fraud

penalty for tax year 2010.
                                         - 25 -

[*25] B.     Tax Years 2011-12

      For tax years 2011-12 respondent contends that petitioner claimed false

deductions that offset her income and caused underpayments and a false filing

status that reduced her tax rate and caused underpayments.

      Filing false documents with the Internal Revenue Service constitutes an

“affirmative act of misrepresentation sufficient to justify the fraud penalty.” Zell

v. Commissioner, 763 F.2d 1139, 1146 (10th Cir. 1985), aff’g T.C. Memo. 1984-

152; see also Ernle v. Commissioner, T.C. Memo. 2010-237, slip op. at 9. For tax

years 2011-12 petitioner filed her tax returns as a single filer, even though she was

still married. In support of her filing status of single, petitioner provided the

revenue agent with fraudulent documents pertaining to her divorce.

      Petitioner repeatedly underreported her income for all tax years at issue and

failed to maintain records to substantiate her deductions. There was a consistent

pattern of overstated deductions. This pattern of overstating deductions is

evidence of fraud. See Bruce Goldberg, Inc. v. Commissioner, T.C. Memo. 1989-

582, 58 T.C.M. (CCH) 519, 529 (1989) (“[F]raud may sometimes be inferred from

a pattern of overstating deductions[.]”).

      Petitioner was not a credible witness. Her testimony was inconsistent. She

was uncooperative during the audit process. Petitioner testified that she gave the
                                          - 26 -

[*26] revenue agent documents supporting her returns, but the revenue agent

credibly testified that she did not. The record includes documents which are false.

The maxim “falsus in uno, falsus in omnibus”4 applies to the actions and testimony

of petitioner. Her testimony conflicts with other testimony and evidence. If she

was not truthful about her filing status, it leads us to conclude that she was not

truthful about the various deductions she claimed for tax years 2011-12.

      For tax years 2011-12 petitioner claimed numerous deductions on Schedules

A and C, which resulted in her requesting a refund. Petitioner’s repeated

concealment of income by overstating deductions exemplifies a pattern of

fraudulent behavior, and her explanations are implausible and unpersuasive. See

McGraw v. Commissioner, 384 F.3d 965, 971 (8th Cir. 2004) (“[A] consistent

pattern of sizeable underreporting of income, inadequate records, and

unsatisfactory explanations for such underreporting of income also can establish

fraud.”), aff’g Butler v. Commissioner T.C. Memo. 2002-314.

      Petitioner provided Ministry with false checks and a false rental agreement

in order to receive reimbursement for relocation expenses. A taxpayer’s

willingness to defraud another in a business transaction may point towards a


      4
          False in one thing, false in all. Black’s Law Dictionary 720 (10th ed.
2014).
                                        - 27 -

[*27] willingness to defraud the Government. Solomon v. Commissioner, 732

F.2d 1459 (1984), aff’g T.C. Memo. 1982-603.

      Respondent has shown by clear and convincing evidence that petitioner is

liable for the fraud penalty under section 6663 for tax years 2011-12. Petitioner is

not liable, in accordance with respondent’s alternative position, for negligence or

substantial understatement penalties under section 6662(a) for tax years 2011-12.

VII. Section 6662(a) Penalty

      Section 6662(a) imposes a 20% penalty on any portion of an underpayment

of tax attributable to, among other things, negligence or disregard of rules or

regulations. See also sec. 6662(b)(1). Negligence includes any failure to make a

reasonable attempt to comply with the provisions of the Code, including a failure

to keep adequate books and records and/or to substantiate items properly. See sec.

6662(c); see also sec. 1.6662-3(b)(1), Income Tax Regs. Negligence has also been

defined as a lack of due care or failure to do what a reasonable person would do

under the circumstances. See Allen v. Commissioner, 925 F.2d 348, 353 (9th Cir.

1991), aff’g 92 T.C. 1 (1989). The term “disregard” indicates any careless,

reckless, or intentional disregard. See sec. 6662(c).

      The Commissioner bears the burden of production with respect to the

applicability of an accuracy-related penalty. See sec. 7491(c). To satisfy this
                                         - 28 -

[*28] burden, the Commissioner must produce sufficient evidence showing that it

is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438,

446 (2001). Once the Commissioner has met the burden of production, the burden

of proof remains on the taxpayer, including the burden of proving that a penalty is

inappropriate. See id. at 446-447.

      Respondent has met the burden of production and has established that

petitioner failed to maintain adequate records for her claimed deductions on

Schedules A and C for tax years 2008-10 and that she failed to report income for

tax years 2008 and 2009. Petitioner has not shown any reasonable cause for those

failures. See sec. 6664(c)(1). Petitioner is liable for the accuracy-related penalties

under section 6662(a) for tax years 2008-10.

VIII. Section 6651(a)(1) Addition to Tax

      Section 6651(a)(1) provides that in the case of failure to file a tax return on

the date prescribed for filing (including any extension of time for filing), there

shall be added to the tax required to be shown on the return an amount equal to 5%

of that tax for each month or fraction thereof that failure to file continues, not

exceeding 25% in the aggregate, unless it is shown that the failure to file timely is

due to reasonable cause and not willful neglect. See also United States v. Boyle,

469 U.S. 241, 245 (1985); Baldwin v. Commissioner, 84 T.C. 859, 870 (1985);
                                        - 29 -

[*29] Davis v. Commissioner, 81 T.C. 806, 820 (1983), aff’d without published

opinion, 767 F.2d 931 (9th Cir. 1985). A taxpayer has the burden of proving that

the failure to timely file was due to reasonable cause and not willful neglect. See

Higbee v. Commissioner, 116 T.C. at 447.

      Under section 7491(c), the Commissioner bears the burden of producing

evidence with respect to the liability of the taxpayer for any penalty. See also

Higbee v. Commissioner, 116 T.C. at 446-447. Respondent met this burden

because petitioner filed her Federal income tax returns late for tax years 2008-10.

Once the Commissioner has met this burden, the taxpayer must come forward with

persuasive evidence that the Commissioner’s determination is incorrect. Rule

142(a); Higbee v. Commissioner, 116 T.C. at 447. Petitioner failed to demonstrate

reasonable cause and lack of willful neglect for filing late returns. See sec.

301.6651-1(c), Proced. & Admin. Regs. Petitioner told the revenue agent that her

2008 return was late because of the death of her father in 2009, but petitioner’s

father died on April, 3, 2008. Petitioner is therefore liable for the additions to tax

under section 6651(a)(1) for tax years 2008-10.

      We have considered the other arguments of the parties, and they are either

without merit or need not be addressed in view of our resolution of the issues.
                                  - 30 -

[*30] To reflect the foregoing,


                                           Decision will be entered

                                  under Rule 155.
