                    T.C. Summary Opinion 2011-26



                        UNITED STATES TAX COURT



         LIONEL W. AND GABRIELE B. HAMMOND, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24658-07S.               Filed March 8, 2011.



     Lionel W. and Gabriele B. Hammond, pro sese.

     L. Katrine Shelton, for respondent.



     RUWE, Judge:     This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

petition was filed.    Pursuant to section 7463(b), the decision to

be entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
                               - 2 -

     Respondent issued a notice of deficiency on July 26, 2007,

in which he determined a deficiency of $10,375 in petitioners’

2004 Federal income tax, an addition to tax of $2,593.75 under

section 6651(a)(1), and an accuracy-related penalty of $2,075

under section 6662(a).   In an amendment to answer filed August

17, 2009, respondent affirmatively asserted that:   (1)

Petitioners are not entitled to claimed dependency exemption

deductions; (2) petitioners are not entitled to a claimed earned

income credit (EIC); and (3) petitioners are liable for the fraud

penalty under section 6663.   The amendment to answer indicates

that:   The corrected amount of petitioners’ tax for 2004 is

$12,788; the tax shown on petitioners’ joint Federal income tax

return for 2004 was a refund request of $2,427; and the

difference between petitioners’ correct amount of tax and the tax

shown on their return for 2004 is $15,215.   As a result,

respondent contends that petitioners are liable for a fraud

penalty under section 6663 of $11,411.25, which is equal to 75

percent of the portion of the underpayment that is attributable

to fraud.   The issues for decision are:

     (1) Whether petitioners underreported gross receipts by

$43,608 on Schedule C, Profit or Loss From Business (Sole

Proprietorship), with respect to petitioner Lionel W. Hammond’s

business;
                                - 3 -

     (2) whether petitioners underreported interest income by

$103;

     (3) whether petitioners have substantiated expenses of

$4,800 for utilities and $8,900 for rent or lease expenses (other

than as home office expenses, a portion of which respondent

acknowledges petitioners are entitled to deduct) claimed on their

Schedule C for 2004;

     (4) whether petitioners are entitled to claim a net

operating loss (NOL) carryback from 2005 on their 2004 Federal

income tax return;

     (5) whether petitioners are entitled to dependency exemption

deductions for 2004;

     (6) whether petitioners are entitled to an EIC for 2004;

     (7) whether petitioners are liable for an addition to tax

under section 6651(a)(1); and

     (8) whether petitioner Lionel W. Hammond is liable for the

civil fraud penalty under section 6663 or, in the alternative,

whether petitioners are liable for the accuracy-related penalty

under section 6662(a).

     During trial the parties agreed to an oral stipulation of

facts and exhibits, which is incorporated herein by reference.

                            Background

     Petitioners resided in California at the time the petition

was filed.   Petitioners were married in 1988.   At trial Lionel W.
                                 - 4 -

Hammond (petitioner) appeared on behalf of his wife and himself.

Gabriele B. Hammond (Mrs. Hammond) did not appear at trial, and

petitioner indicated that she no longer resides in the United

States.

Schedule C Income and Expenses

     Petitioner was a private investigator doing business as L.W.

Hammond Investigations.    During the taxable year 2004 petitioner

provided services to the U.S. courts and the County of Sacramento

for which he was paid compensation of $43,808 and $40,610,

respectively.   Petitioner also received $2,244 as nonemployee

compensation from the California Apartment Association.

     On March 14, 2006, the Internal Revenue Service (IRS)

received petitioners’ 2004 Federal income tax return.    On

Schedule C petitioner reported $43,052 in gross receipts and

deducted $32,550 in total expenses regarding his business.

Petitioner claimed various Schedule C expenses, including $4,800

for utilities and $8,900 for rent or lease expenses, which

respondent disallowed.    Petitioners presented no evidence to

substantiate their entitlement to these claimed deductions.2




     2
      Respondent determined that petitioners are entitled to an
increased expense deduction of $14,573 for home office expenses
for 2004. Petitioners do not contest this determination.
                               - 5 -

Dependency Exemption Deductions and Earned Income Credit

     Petitioners claimed dependency exemption deductions and an

EIC for two minor children, C.W.H. and C.B.H.3    On their return

petitioners indicated that C.W.H. and C.B.H. died during 2004.

Petitioners had no children during the year in question.

     Petitioner attached two documents entitled “Certificate of

Live Birth” (certificate) to the 2004 return.    The certificates

indicate that C.W.H. was born in 1997 in Sacramento County,

California.   They further indicate that C.B.H. was born during

2004, also in Sacramento County.   A search by the county

clerk/recorder’s office in Sacramento County of the county’s

vital statistics records concluded that (1) no children named

C.W.H. or C.B.H. were born in Sacramento County during the

childrens’ alleged years of birth, and (2) no children with those

names had died in Sacramento County during 2004.    The birth

certificates attached to petitioners’ 2004 return are forgeries

and were not issued by the Vital Records Unit of Sacramento

County.   At trial petitioner conceded that he did not have any

children in 2004.   Petitioner testified that he did not attach

the certificates to the return, even though he signed the return

and the return references the children by name.    Petitioner




     3
      The Court refers to minor children by their initials.     See
Rule 27(a)(3).
                                 - 6 -

provided no credible explanation as to how the false birth

certificates were attached to the return.

Failure To File Timely

      Petitioners’ 2004 return was due on April 15, 2005.      The IRS

received the return on March 14, 2006.       At trial petitioner did

not explain why the return was filed late.       Petitioner signed the

2004 return and completed the attached Schedule C.       Petitioners

presented no evidence that the return was prepared for them by a

return preparer or any other person.

                               Discussion

I.   Schedule C Income and Expenses

      A.   Schedule C Income

      Gross income includes all income from whatever source

derived.    Sec. 61; see Commissioner v. Glenshaw Glass Co., 348

U.S. 426, 430 (1955).    Respondent determined that petitioners

underreported their gross receipts by $43,608 on their 2004

Schedule C.    As a general rule, the Commissioner’s determinations

set forth in a notice of deficiency are presumed correct, and the

taxpayer bears the burden of proving that the determinations are

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

(1933).

      During 2004 petitioner received compensation of $43,808 from

the U.S. courts, $40,610 from Sacramento County, and $2,244 from

the California Apartment Association.       In total, petitioners
                                - 7 -

received more than $86,660 in gross receipts through petitioner’s

business.    On Schedule C, petitioners reported only $43,052 as

gross receipts.    Petitioners failed to include approximately

$43,608 in received gross receipts on Schedule C.

        Petitioners contend that they incurred an NOL in 2005 that

should be used to offset their 2004 income.    In the alternative,

petitioners contend that the amount of gross receipts reported

was correct because portions of the amounts paid to petitioner

were not paid to him as compensation but, instead, constituted

reimbursement for expenses petitioner had incurred while

performing services in the ordinary course of business.

     Petitioners provided no credible evidence to substantiate

their claim to an NOL for 2005.    Petitioners failed to provide

any information regarding the actual dollar amounts of their

business expenses in 2005, the total amount of the NOL incurred

in 2005, or the amount of any NOL available to be carried back to

2004.    Further, petitioners failed to provide any substantiation

of unreimbursed expenses for 2004 in an amount to offset the

unreported gross receipts.    Therefore, we sustain respondent’s

determinations with respect to petitioners’ unreported gross

receipts and the resulting underpayment of tax.
                                 - 8 -

      B.   Schedule C Expenses

      Deductions are a matter of legislative grace, and the

taxpayer has the burden of proving entitlement thereto.     New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).      Section

162(a) allows as a deduction all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

any trade or business.    In general, business expenses, which are

deductible from gross income, include the ordinary and necessary

expenditures directly connected with or pertaining to the

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

      The taxpayer has the burden of establishing his right to the

claimed deduction as an “ordinary and necessary [expense] paid or

incurred during the taxable year in carrying on any trade or

business.”    Kalamazoo Oil Co. v. Commissioner, 693 F.2d 618, 620

(6th Cir. 1982), affg. T.C. Memo. 1981-344.

      On their Schedule C for 2004 petitioners claimed deductions

of $4,800 for utilities and $8,900 for the rent or lease of other

business property, which respondent disallowed.    Petitioners have

provided no evidence supporting their entitlement to deduct the

claimed expenses.    Accordingly, we sustain respondent’s

determination.

II.   Interest Income

      Respondent determined that petitioners failed to report

interest income of $103 on their 2004 return.    Petitioners failed
                                - 9 -

to challenge this determination in the petition or at trial.

Therefore, we sustain respondent’s determination.

III.    Dependency Exemption Deductions and EIC

       Petitioners claimed dependency exemption deductions and an

EIC for two minor children on their 2004 return.    In support,

petitioner attached a birth certificate for each child to the

return.    The attached certificates were forgeries, and the

children did not exist.    Petitioner has conceded that he did not

have any children in 2004.    Petitioners are not entitled to

dependency exemption deductions with respect to C.W.H. and C.B.H.

       Petitioners attached to their return a Schedule EIC, Earned

Income Credit, showing C.W.H. and C.B.H. as qualifying children;

their year of birth as 2004; and that each child “died” during

2004.    The children, however, did not exist in 2004.   Clearly,

petitioners are not entitled to an EIC with respect to C.W.H. and

C.B.H.

       As a result of the foregoing, we sustain respondent’s

determination of the increased deficiency.

IV.    Section 6651(a) Addition to Tax

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

to timely file a Federal income tax return, unless the taxpayer

shows that such failure was due to reasonable cause and not

willful neglect.    United States v. Boyle, 469 U.S. 241, 245

(1985); Baldwin v. Commissioner, 84 T.C. 859, 870 (1985); Davis
                               - 10 -

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

opinion 767 F.2d 931 (9th Cir. 1985).    An individual taxpayer is

required to file a tax return on or before the 15th day of April

following the close of the calendar year.     Sec. 6072(a).

Petitioners’ 2004 Federal income tax return was required to be

filed by April 15, 2005.    However, their return was not filed

until March 14, 2006.   Petitioners failed to present any credible

documentary or testimonial evidence to establish either that

their 2004 return was timely filed or that their late filing was

due to reasonable cause and not willful neglect.     Accordingly, we

sustain respondent’s determination and hold that petitioners are

liable for the addition to tax under section 6651(a)(1).

V.   Penalties Under Sections 6663 and 6662

      If the fraud penalty under section 6663 applies to any

portion of an underpayment, then the penalty under section 6662

will not apply to any portion of the underpayment on which the

fraud penalty is imposed.    Sec. 6662(b).   If the fraud

penalty under section 6663 applies to either petitioner, then the

penalty under section 6662(a) will not be applicable to either

petitioner.   Sec. 6662(b); see, e.g., Zaban v. Commissioner, T.C.

Memo. 1997-479.   Thus, we begin with our consideration of the

fraud penalty with respect to petitioner.
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Fraud Penalty Under Section 6663

     Section 6663(a) provides:   “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

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

Sam Kong Fashions, Inc. v. Commissioner, T.C. Memo. 2005-157.

The Commissioner bears the burden of proving fraud by clear and

convincing evidence.   Sec. 7454(a); Rule 142(b).    To satisfy this

burden, the Commissioner must establish that (1) an underpayment

exists, and (2) some portion of the underpayment is attributable

to fraud.   DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), affd.

959 F.2d 16 (2d Cir. 1992).   Because we have already held that an

underpayment exists, we must decide whether any portion of such

underpayment was attributable to fraud.   “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.”     Sec. 6663(b).

In the case of a joint return, the section 6663 penalty “shall

not apply with respect to a spouse unless some part of the

underpayment is due to the fraud of such spouse.”     Sec. 6663(c).

Therefore, one spouse may be held liable for the penalty without
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the other spouse sharing in the liability solely because he or

she was a party to a joint return.

     Fraud has been defined as an “‘intentional wrongdoing on the

part of a taxpayer motivated by a specific purpose to evade a tax

known or believed to be owing.’”     Moran v. Commissioner, T.C.

Memo. 2005-66 (quoting Stoltzfus v. United States, 398 F.2d 1002,

1004 (3d Cir. 1968)); see also Langworthy v. Commissioner, T.C.

Memo. 1998-218.    The Commissioner must prove by clear and

convincing evidence that the taxpayer intentionally engaged in

wrongdoing with the specific intent to avoid a tax that he knew

to be owing.   Akland v. Commissioner, 767 F.2d 618, 621 (9th Cir.

1985), affg. T.C. Memo. 1983-249.    Courts consider a taxpayer’s

entire course of conduct in determining fraudulent intent.     DiLeo

v. Commissioner, supra at 874; Petzoldt v. Commissioner, 92 T.C.

661, 699 (1989).    Because direct evidence is rarely available,

fraud may be proven by circumstantial evidence.     DiLeo v.

Commissioner, supra at 874; Chase v. Commissioner, T.C. Memo.

2004-142.

     Courts have adopted several objective badges that serve as

evidence of fraud by the taxpayer, which may include:    (1)

Dealing in cash; (2) understatement of income; (3) concealment of

assets; (4) inadequate recordkeeping; (5) implausible or

inconsistent explanations of behavior; (6) filing false

documents; and (7) failure to cooperate with tax authorities.
                              - 13 -

See Robleto v. Commissioner, T.C. Memo. 2008-195 (citing Bradford

v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg.

T.C. Memo. 1984-601); Hoover v. Commissioner, T.C. Memo. 2006-82.

     (i) Understatement of Income

     Petitioner failed to report gross receipts of $43,608 from

his private investigation business and interest income of $103,

and he improperly claimed dependency exemption deductions and an

EIC in order to understate his Federal income tax liability for

2004.

     Petitioner conceded that he did not have any children in

2004.   Even though petitioners had no children, petitioner

claimed dependency exemption deductions and an earned income

credit on the return as if he did.     Petitioner’s knowledge of the

fact that he had no dependent children is evidence that he knew

that the claimed dependency exemption deductions and EIC were

based on fraud and that he acted willfully.    Petitioner’s false

deductions and understatement of income are evidence of his

fraudulent intent in the filing of the return.

     (ii) Inadequate Recordkeeping

     Petitioner alleged that he failed to report income on the

return because he received the payments as reimbursement of

business expenses.   However, petitioner has provided no evidence

that supports this contention.   Petitioner has provided no

relevant supporting documentation, such as invoices or statements
                              - 14 -

from the County of Sacramento or the U.S. courts, in order to

show that the amounts were paid to him as reimbursement.

     (iii) Filing False Documents

     The filing of false documents is evidence of fraudulent

intent.   Hoover v. Commissioner, supra.   Forged birth

certificates for fictitious children were attached to

petitioners’ return.   Petitioner was in control of the return

before its filing, as evidenced by the fact that he prepared,

signed, and mailed the return.

     Petitioners did not use the services of a return preparer,

and petitioner provided no credible evidence that anyone other

than he prepared the 2004 return.

     Petitioner failed to provide any credible explanation with

respect to how the fraudulent birth certificates came to be

attached to the return, other than their having been attached by

petitioner.   That the return filed bears the names of the

children listed on the birth certificates, coupled with the fact

that petitioner completed and signed the return, supports our

conclusion that petitioner attached the false documents to the

return.

     The foregoing convinces us that petitioner filed a false and

fraudulent return for 2004 with the intent to evade tax.
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Accordingly, we hold that petitioner is liable for the fraud

penalty under section 6663 for $11,411.25.4

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.




     4
      Our finding of fraud applies only to petitioner, who failed
to establish that any portion of the underpayment was not
attributable to fraud. No direct evidence of fraud by Mrs.
Hammond was presented, and respondent on brief offers no reason
for finding that she is liable for the fraud penalty. Having
found that petitioner is liable for the fraud penalty under sec.
6663, we need not consider respondent’s alternative argument
regarding the accuracy-related penalty under sec. 6662(a).
