                              T.C. Memo. 2012-293



                         UNITED STATES TAX COURT



  JOHN ALLEN HATLING AND KATHLEEN ANN HATLING, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20709-10.                          Filed October 22, 2012.



      John Allen Hatling and Kathleen Ann Hatling, pro sese.

      Christina L. Cook and John Schmittdiel, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MARVEL, Judge: In a notice of deficiency dated June 8, 2010, respondent

determined deficiencies in petitioners’ Federal income tax of $15,665, $28,527,

$40,038, and $26,046 for 2001, 2002, 2003, and 2004, respectively. Respondent
                                         -2-

[*2] also determined civil fraud penalties under section 6663(a)1 of $10,245,

$20,852, $30,028, and $15,097 for 2001, 2002, 2003, and 2004, respectively, with

respect to John Allen Hatling. After concessions,2 the sole issue for decision is

whether Mr. Hatling is liable for civil fraud penalties for 2001-03.

                                FINDINGS OF FACT

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

facts is incorporated herein by this reference. Petitioners resided in Minnesota when

they filed their petition.

I.     Background

       Mr. Hatling, a licensed attorney,3 has been practicing law in Minnesota for

approximately 25 years.4 During the years at issue Mr. Hatling operated his own

       1
        Unless otherwise indicated, section references are to the Internal Revenue
Code (Code) in effect for the years at issue, and Rule references are to the Tax
Court Rules of Practice and Procedure. Some monetary amounts have been rounded
to the nearest dollar.
       2
         Petitioners concede the deficiencies for 2001-04 as determined by
respondent in the notice of deficiency. Petitioners also concede the sec. 6663(a)
civil fraud penalty for 2004.
       3
        Mr. Hatling was suspended from the practice of law for a period of 45 days
as a result of his conviction for willfully failing to pay Minnesota State income tax
for 2003. See infra p. 3.
       4
      Mr. Hatling’s work includes estate planning, and he has attended at least one
seminar covering the representation of clients before the Internal Revenue Service
                                                                        (continued...)
                                         -3-

[*3] law practice. Kathleen Hatling was not employed outside the home during the

years at issue.

      In 2008 Mr. Hatling pleaded guilty to a felony charge for willfully failing to

pay Minnesota State income tax for 2003 in violation of Minnesota law.5 In his

guilty plea Mr. Hatling admitted that his State income tax return included a “claim

of right” deduction and that, because of this claimed deduction, he reported no

income tax owed on his 2003 State return.

II.   Petitioners’ Tax Reporting

      Mr. Hatling prepared petitioners’ Federal income tax return for each of the

years at issue. Petitioners filed Forms 1040, U.S. Individual Income Tax Return, for

2001-03. On each of their Forms 1040 they reported zero taxable income.

      For each year petitioners’ return included a Schedule C, Profit or Loss From

Business, with respect to Mr. Hatling’s law practice. On those Schedules C Mr.

Hatling reported gross receipts of $187,741, $261,448, and $173,278 for 2001,




      4
       (...continued)
(IRS) and the use of alternative payment options, such as offers-in-compromise.
      5
        Minn. Stat. Ann. sec. 289A.63(1)(b) (West 2007 & Supp. 2012) provides
that “[a] person required to pay or to collect and remit a tax, who willfully attempts
to evade or defeat a tax law by failing to do so when required, is guilty of a felony.”
                                         -4-

[*4] 2002, and 2003, respectively. Mr. Hatling deducted various business

expenses totaling $185,047, $259,404, and $96,773 for 2001, 2002, and 2003,

respectively. The business expense deductions included other expenses of

$99,308, $116,724, and $39,950 for 2001, 2002, and 2003, respectively. Mr.

Hatling reported Schedule C net profits of $2,694, $2,044, and $924 for 2001,

2002, and 2003, respectively.

      Mr. Hatling attached to each of petitioners’ returns a disclosure form--Form

8275, Disclosure Statement, for 2001, and Forms 8275-R, Regulation Disclosure

Statement, for 2002-03. On those Forms 8275 and 8275-R Mr. Hatling explained

that he deducted on his Schedules C expenses of $99,308, $91,726, and $39,950

for 2001, 2002, and 2003, respectively, as claim of right deductions for white

citizens.6 He further explained that the amounts deducted represented

“compensation for personal services actually rendered” pursuant to section

1341(a), that he claimed the deductions on the basis of “a common-law immunity

that renders any money earned from the right of accession immune from taxation”,

and that the Code “defined this immunity as a ‘white citizen’ right”. Although Mr.

Hatling testified he did not believe that there were any available favorable tax


      6
       In preparing petitioners’ tax returns Mr. Hatling claimed a claim of right
deduction for each year in the amount of gross income that was not offset by
business expense deductions.
                                         -5-

[*5] deductions that were based on race, he claimed these deductions on petitioners’

returns to delay the assessment and payment of petitioners’ correct Federal income

tax liabilities.

III.   Notice of Deficiency

       On June 8, 2010, respondent issued to petitioners the notice of deficiency for

2001-04. Using the bank deposits method of reconstructing income, respondent

determined that Mr. Hatling failed to report Schedule C gross receipts of $7,131 and

$62,059 for 2001 and 2003, respectively. Respondent also determined that Mr.

Hatling overreported his gross receipts by $1,577 for 2002. Respondent disallowed

$79,540, $143,679, and $32,0047 of Mr. Hatling’s claimed business expense

deductions for 2001, 2002, and 2003, respectively.8



       7
      For 2003 in addition to disallowing a claimed business expense deduction of
$32,004, respondent also disallowed $2,323 of claimed cost of goods sold.
       8
        On his 2001 Schedule C Mr. Hatling reported the following as other
expenses: “Education, Professional” expenses of $793, “Contributions” of $150,
“Dues & Subscriptions” of $2,376, “Banking & Credit Charges” of $672, “Legal
Library” expenses of $2,791, “Interest” expenses of $6, “Postage” expenses of
$1,599, “Telephone” expenses of $11,008, and expenses of $79,913 under an entry
entitled “See Line 48 Other Expenses”, for total other expenses of $99,308. On the
2001 Form 8275, however, Mr. Hatling purported to claim a claim of right
deduction of $99,308. In the notice of deficiency respondent determined that only
$79,913 of Mr. Hatling’s claimed other business expenses deduction, rather than the
entire amount, was attributable to his claim of right deduction. Respondent
                                                                       (continued...)
                                        -6-

[*6] Accordingly, respondent determined that Mr. Hatling had Schedule C net

profits of $89,365, $144,146, and $167,410 for 2001, 2002, and 2003,

respectively.9 Respondent also determined that Mr. Hatling was liable for civil

fraud penalties under section 6663(a) and that underpayments of $13,660, $27,803,

and $40,038 for 2001, 2002, and 2003, respectively, were due to fraud.



      8
       (...continued)
categorized the remainder, $19,395, as other business expenses and disallowed
$2,539 of this amount.

       On his 2002 Schedule C Mr. Hatling reported the following as other
expenses: “Education, Professional” expenses of $897, “Contributions” of $922,
“Dues & Subscriptions” of $2,223, “Banking & Credit Charges” of $688, “Legal
Library” expenses of $6,272, “Interest” expenses of $5,702, “Postage” expenses of
$1,322, “Telephone” expenses of $6,972, and expenses of $91,726 under an entry
entitled “Claim of Right Pursuant to IRC 1341(a)(5)(B) See Form 8275 attached”,
for total other expenses of $116,724. In the notice of deficiency respondent
determined that Mr. Hatling deducted $91,726 as a claim of right deduction.
Respondent categorized the remainder, $24,998, as other business expenses and
disallowed $6,624 of this amount.

      On his 2003 Schedule C Mr. Hatling reported other expenses of $39,950
under an entry entitled “Claim of right pursuant to IRC § 1341(a)(5)(B). See Form
8275 attached”. Respondent disallowed the entire amount of the claimed other
expenses Mr. Hatling deducted.
      9
        For 2001 respondent also determined that petitioners failed to report $2,820
in gross profits from rents and $80 of dividend income. For 2002 respondent also
determined that petitioners failed to report $27,166 in gross profits from rents, $23
of dividend income, and $376 of capital gain. For 2003 respondent also determined
that petitioners failed to report $6,759 in gross profits from rents, $63 of dividend
income, and $159 of capital gain.
                                         -7-

[*7]                                  OPINION

       If any part of an underpayment on a return is due to fraud, section 6663(a)

imposes on the taxpayer filing the return a penalty equal to 75% of the part of the

underpayment attributable to fraud. To prove that a taxpayer is liable for the

penalty, the Commissioner must prove by clear and convincing evidence that (1) an

underpayment of tax exists, and (2) some part of the underpayment is attributable to

fraud. See secs. 6663(a), 7454(a); Rule 142(b); DiLeo v. Commissioner, 96 T.C.

858, 873 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992). If the Commissioner proves

that any part of an underpayment is attributable to fraud, then the entire

underpayment shall be treated as attributable to fraud unless the taxpayer shows by

a preponderance of the evidence that a part was not so attributable.10 See sec.

6663(b).

I.     Underpayment of Tax

       In the notice of deficiency respondent determined deficiencies in

petitioners’ joint 2001, 2002, and 2003 Federal income tax of $15,665, $28,527,

and $40,038, respectively. Petitioners have conceded that they underpaid their tax

by these amounts, and we so find. See Norris v. Commissioner, T.C. Memo.


       10
         In the case of a joint return the sec. 6663(a) penalty does not apply with
respect to a spouse unless some portion of the underpayment is due to the fraud of
that spouse. See sec. 6663(c).
                                        -8-

[*8] 2011-161, slip op. at 11-12; Payne v. Commissioner, T.C. Memo. 2005-130,

slip op. at 10-11, aff’d, 211 Fed. Appx. 541 (8th Cir. 2007).

II.   Fraudulent Intent

      A.     Introduction

      If fraud is determined for multiple taxable years, the Commissioner’s burden

“applies separately for each of the years.” Temple v. Commissioner, T.C. Memo.

2000-337, slip op. at 24-25, aff’d, 62 Fed. Appx. 605 (6th Cir. 2003). The

Commissioner satisfies this burden by showing that “the taxpayer intended to evade

taxes known to be owing by conduct intended to conceal, mislead or otherwise

prevent the collection of taxes.” DiLeo v. Commissioner, 96 T.C. at 874; see also

Morse v. Commissioner, 419 F.3d 829, 832 (8th Cir. 2005), aff’g T.C. Memo.

2003-332. Fraud “does not include negligence, carelessness, misunderstanding or

unintentional understatement of income.” United States v. Pechenik, 236 F.2d 844,

846 (3d Cir. 1956).

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

consideration of the entire record. See DiLeo v. Commissioner, 96 T.C. at 874.

Fraud is never presumed and must be established by independent evidence of

fraudulent intent. See Baumgardner v. Commissioner, 251 F.2d 311, 322 (9th Cir.

1957), aff’g T.C. Memo. 1956-112. Fraud may be shown by circumstantial
                                          -9-

[*9] evidence because direct evidence of the taxpayer’s fraudulent intent is seldom

available. See Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989); Gajewski v.

Commissioner, 67 T.C. 181, 199-200 (1976), aff’d without published opinion, 578

F.2d 1383 (8th Cir. 1978). The taxpayer’s entire course of conduct may establish

the requisite fraudulent intent. See Stone v. Commissioner, 56 T.C. 213, 223-224

(1971). Any conduct likely to mislead or conceal may constitute an affirmative act

of evasion, see Spies v. United States, 317 U.S. 492, 499 (1943), and an intent to

mislead may be inferred from a pattern of such conduct, see Webb v.

Commissioner, 394 F.2d 366, 379 (5th Cir. 1968), aff’g T.C. Memo. 1966-81.

However, fraud is not proven when a court is left with only a suspicion of fraud, and

even a strong suspicion is not sufficient to establish a taxpayer’s liability for the

fraud penalty. See Olinger v. Commissioner, 234 F.2d 823, 824 (5th Cir. 1956),

aff’g in part, rev’g in part on another ground 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).

      B.     Badges of Fraud

      Because it is difficult to prove fraudulent intent by direct evidence, the

Commissioner may establish fraud by circumstantial evidence, which includes

various “badges of fraud” (hereinafter, factors) on which the courts often rely. See
                                          - 10 -

[*10] Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C.

Memo. 1984-601; DiLeo v. Commissioner, 96 T.C. at 875. These factors focus on

whether the taxpayer engaged in certain conduct that is indicative of fraudulent

intent, such as: (1) understating income; (2) failing to maintain adequate records;

(3) offering implausible or inconsistent explanations; (4) concealing income or

assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal

activities; (7) providing incomplete or misleading information to the taxpayer’s tax

return preparer; (8) offering false or incredible testimony; (9) filing false

documents, including filing false income tax returns; (10) failing to file tax returns;

and (11) engaging in extensive dealings in cash.11 See Bradford v. Commissioner,

796 F.2d at 307-308; Parks v. Commissioner, 94 T.C. 654, 664-665 (1990);

Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); Lipsitz v. Commissioner, 21

T.C. 917 (1954), aff’d, 220 F.2d 871 (4th Cir. 1955); see also Morse v.

Commissioner, T.C. Memo. 2003-332, slip op. at 8-9. The existence of any one

factor is not dispositive, but the existence of several factors is persuasive

circumstantial evidence of fraud. See Niedringhaus v. Commissioner, 99 T.C. 202,

211 (1992); Petzoldt v. Commissioner, 92 T.C. at 700. We may also consider


      11
       These factors are not exclusive. See Niedringhaus v. Commissioner, 99
T.C. 202, 211 (1992).
                                         - 11 -

[*11] a taxpayer’s intelligence, education, and tax expertise in deciding whether the

taxpayer acted with fraudulent intent. Iley v. Commissioner, 19 T.C. 631, 635

(1952).

       Respondent determined that Mr. Hatling’s underpayments of $13,660,

$27,803, and $40,038 for 2001, 2002, and 2003, respectively, were due to fraud.

Respondent contends that Mr. Hatling has admitted his fraudulent intent with

respect to these underpayments by virtue of petitioners’ stipulation that Mr. Hatling

claimed the claim of right deductions on petitioners’ joint returns to delay the

assessment and payment of Federal income tax, despite his knowledge that no claim

of right deduction was available. Mr. Hatling’s testimony corroborated petitioners’

stipulation.

       While we give some weight to Mr. Hatling’s stipulation in our analysis, we

do not rely exclusively on the stipulation in deciding whether the fraud penalty

should apply. Respondent also contends that the following factors are present in

this case: (1) Mr. Hatling underreported petitioners’ income for 2001-04; (2) Mr.

Hatling failed to maintain adequate records for 2001-03; and (3) Mr. Hatling filed

false return documents for 2001-03. Additionally, respondent contends that Mr.

Hatling’s conviction for willfully failing to pay Minnesota income tax provides
                                         - 12 -

[*12] evidence of fraud. Because we decide the existence of fraudulent intent on

the basis of the entire record, we analyze each factor below.

             1.     Understating Income

      A pattern of substantially underreporting income for several years is strong

evidence of fraud, particularly if the understatement is not satisfactorily explained or

is not due to innocent mistake. See Holland v. United States, 348 U.S. 121, 137-

139 (1954); Spies, 317 U.S. at 499; Webb v. Commissioner, 394 F.2d at 379;

Kurnick v. Commissioner, 232 F.2d 678, 681 (6th Cir. 1956), aff’g T.C. Memo.

1955-31; Morse v. Commissioner, slip op. at 9. As this Court has stated: “[i]t is

well settled that a fraudulent understatement of income can be accomplished by

means of an overstatement of deductions.” Drobny v. Commissioner, 86 T.C. 1326,

1349 (1986), aff’d, 113 F.3d 670 (7th Cir. 1997); see also Foxworthy, Inc. v.

Commissioner, T.C. Memo. 2009-203, slip op. at 49.

      On petitioners’ tax returns for 2001-03 Mr. Hatling reported zero taxable

income. Respondent also introduced into evidence petitioners’ 2004 Federal

income tax return, on which Mr. Hatling reported zero taxable income. Mr. Hatling

underreported petitioners’ taxable income by $38,814, $82,543, $127,788, and

$91,121 for 2001, 2002, 2003, and 2004, respectively.
                                        - 13 -

[*13] Petitioners contend that Mr. Hatling did not understate petitioners’ income for

the years at issue because he accurately reported gross receipts with respect to his

law practice on the relevant Schedules C. Petitioners correctly contend that Mr.

Hatling reported a substantial portion of the gross receipts reflected on the law

practice’s profit and loss statements for the years at issue.12 However, Mr. Hatling

also claimed significant business expense deductions, including the claim of right

deductions. Mr. Hatling has admitted that he knew he was not entitled to the

deductions he claimed under his claim of right theory and that he claimed the

deductions to delay payment of Federal income tax. Thus the record not only

establishes that Mr. Hatling did not incur expenses to the extent claimed but also

that Mr. Hatling deliberately claimed false deductions to delay payment of his




      12
         For each of the years at issue the record contains two versions of profit and
loss statements with respect to Mr. Hatling’s law practice: a copy petitioners
provided during the audit process (audit P&L statement) and a copy they provided
during formal discovery (discovery P&L statement). Petitioners reported gross
receipts with respect to Mr. Hatling’s law practice on the documents as follows:

   Year      Audit P&L statement        Discovery P&L statement          Return

   2001             $187,627                      $187,741               $187,741
   2002              261,448                       146,796                261,448
   2003              188,940                       191,836                173,278
                                         - 14 -

[*14] tax.13 In claiming substantial deductions that he knew to be false, Mr.

Hatling deliberately understated petitioners’ income for the years at issue.

Compare Ochs v. Commissioner, T.C. Memo. 1986-595 (finding fraudulent intent

where a taxpayer claimed dependency exemptions for his nonexistent children)

with Porter v. Commissioner, T.C. Memo. 1986-70 (finding no fraudulent intent


      13
         Petitioners also appear to contend the claim of right deductions were not
fraudulent because the deductions clearly were impermissible and therefore Mr.
Hatling could not have been attempting to conceal his income. We reject
petitioners’ contention for several reasons. First, the Code provides that taxpayers
may deduct from income an amount received under a claim of right. See sec. 1341.
Petitioners have failed to convince us that simply by including the claim of right
deductions on their returns, they disclosed that the deductions they were claiming
were clearly improper. Second, while the U.S. Court of Appeals for the Eighth
Circuit, to which an appeal in this case would lie absent a stipulation to the contrary,
see sec. 7482(b)(1)(A), (2), has not addressed the issue of whether a taxpayer’s
disclosure may preclude a finding of fraudulent intent, at least two other Courts of
Appeals, as well as this Court, have held that disclosure does not preclude a finding
of fraudulent intent, see Edelson v. Commissioner, 829 F.2d 828, 832-833 (9th Cir.
1987), aff’g T.C. Memo. 1986-223; Granado v. Commissioner, 792 F.2d 91, 93-94
(7th Cir. 1986), aff’g T.C. Memo. 1985-237; Price v. Commissioner, T.C. Memo.
1996-204; Cloutier v. Commissioner, T.C. Memo. 1994-558. But see Zell v.
Commissioner, 763 F.2d 1139, 1144 (10th Cir. 1985) (“Clearly, where the taxpayer
has informed the IRS of his refusal to file or to pay, and of the reasons for that
refusal, the government has not been deceived. In addition, the disclosure clearly
negates any intent to deceive.”), aff’g T.C. Memo. 1984-152; Raley v.
Commissioner, 676 F.2d 980, 983-984 (3d Cir. 1982) (holding that a taxpayer did
not act with fraudulent intent because he “went out of his way to inform every
person involved in the collection process that he was not going to pay any federal
income taxes”), rev’g T.C. Memo. 1980-571. Third, petitioners deducted the claim
of right deductions with the intent of underreporting their taxable income and
evading their obligation to pay their proper income tax liabilities when due.
                                        - 15 -

[*15] where a taxpayer overstated his deductions but introduced sufficient evidence

to show that he incurred substantial deductible expenses).

      Accordingly, we find that Mr. Hatling substantially underreported petitioners’

income for 2001-04. Given the substantial amounts underreported, Mr. Hatling’s

pattern of underreporting income, and the lack of any credible explanation for the

underreporting, Mr. Hatling’s understatements are persuasive evidence of fraudulent

intent. See, e.g., Morse v. Commissioner, 419 F.3d at 832.

             2.    Failing To Maintain Adequate Records

      The failure to maintain adequate business records supports a finding of fraud.

See Truesdell v. Commissioner, 89 T.C. 1280, 1302-1303 (1987); see also

Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980). “Inadequate or non-existent

records are also a badge of fraud.” Lollis v. Commissioner, 595 F.2d 1189, 1192

(9th Cir. 1979), aff’g T.C. Memo. 1976-15.

      Mrs. Hatling testified that Mr. Hatling and his office manager prepared annual

profit and loss statements for Mr. Hatling’s law practice. The record contains

copies of profit and loss statements with respect to Mr. Hatling’s law practice for

2001-03. The audit P&L statements bear the following dates in the upper left-hand

corner: for 2001, March 25, 2002; for 2002, October 23, 2003; and for 2003,

March 23, 2004.
                                       - 16 -

[*16] For 2001-03 the amounts of gross receipts shown on the profit and loss

statements closely correspond with the amounts of gross receipts Mr. Hatling

reported on his Schedules C. See supra note 11.14 Additionally, the amounts of

expenses shown on the profit and loss statements closely correspond with the

amounts of other business expenses (other than the claim of right deductions) that

Mr. Hatling reported on his Schedules C. See supra note 7. Respondent allowed a

significant amount of Mr. Hatling’s other business expenses.

      The record supports a finding that in the course of operating his law practice

Mr. Hatling maintained records of his business income and expenses. Respondent

has failed to produce sufficient evidence to convince us that Mr. Hatling’s business

records were inadequate. Accordingly, we decline to find that Mr. Hatling failed to

maintain adequate records.


      14
         With respect to 2002 the gross receipts shown on the audit P&L statement,
$261,448, equal the gross receipts Mr. Hatling reported on the 2002 Schedule C.
However, the gross receipts shown on the discovery P&L statement for 2002 are
$146,796. The difference is attributed to the fact that on the audit P&L statement,
Mr. Halting reported fee income of $261,448, but on the discovery P&L statement,
he reported fee income of only $103,130. Petitioners have not introduced any
evidence to explain this discrepancy. While this discrepancy is suspect, we note
that the audit P&L statement appears accurate and the expense amounts on the
discovery P&L statement are generally consistent with the expense amounts shown
on the audit P&L statement and Mr. Hatling’s Schedule C. Accordingly, this
discrepancy does not compel us to find that petitioners failed to maintain adequate
books and records.
                                           - 17 -

[*17]         3.     Filing False Documents

        Fraudulent intent may be inferred when a taxpayer files a tax return intending

to conceal, mislead, or prevent the collection of tax. See Spies, 317 U.S. at 499.

Filing false documents with the IRS 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.

        Mr. Hatling prepared and filed petitioners’ tax returns for 2001-03. On each

of the Schedules C attached to petitioners returns he claimed a substantial claim of

right deduction. He has admitted that he knew he was not entitled to the claim of

right deductions and that he claimed them to delay the assessment and collection of

petitioners’ Federal income tax. Accordingly, Mr. Hatling’s filing of false income

tax returns supports a finding of fraud.

              4.     Mr. Hatling’s State Tax Conviction

        While a taxpayer’s conviction of a State income tax violation does not, by

itself, establish fraudulent intent, such a conviction provides “evidence of a

propensity to defraud.” Lee v. Commissioner, T.C. Memo. 1995-597; see also

Petzoldt v. Commissioner, 92 T.C. at 701-702. Mr. Hatling pleaded guilty to

willfully attempting to evade or defeat payment of his State income tax for 2003.
                                        - 18 -

[*18] Mr. Hatling’s guilty plea and subsequent conviction supports a finding of

fraud in this case.

III.   Conclusion

       Respondent has proven by clear and convincing evidence that Mr. Hatling

underpaid his joint tax liabilities for 2001-03. Mr. Hatling’s pattern of understating

income, his filing of false documents, and his State tax conviction, when coupled

with his stipulation and testimony regarding his intention to delay payment of his

Federal income tax, provides clear and convincing evidence that part of the

underpayment for each year was due to Mr. Hatling’s fraud. Therefore, petitioners

bear the burden of showing by a preponderance of the evidence what portion of

each underpayment, if any, is not attributable to fraud. See sec. 6663(b).

       Petitioners appear to contend that the portions of the underpayments arising

from Mr. Hatling’s claim of right deductions are not attributable to fraud because

section 1341 provides for a claim of right deduction, and Mr. Hatling claimed the

deductions in good faith. Mr. Hatling testified, however, that he knew the

deductions were impermissible and that, at the time of filing petitioners’ returns, he

expected the IRS to disallow the claim of right deductions and assess petitioners’

tax and appropriate penalties.
                                         - 19 -

[*19] Given Mr. Hatling’s legal education and experience, we reject petitioners’

argument that Mr. Hatling claimed the claim of right deductions in good faith. We

also note that this Court and other courts have held similar claim of right arguments

to be frivolous and groundless. See Pugh v. Commissioner, T.C. Memo. 2009-138;

Sumter v. United States, 61 Fed. Cl. 517, 523-524 (2004); United States v. Pugh,

717 F. Supp. 2d 271 (E.D.N.Y. 2010). We find that petitioners have failed to

introduce any credible evidence to prove that any specific portion of any

underpayment was not attributable to fraud. The record overwhelmingly establishes

that Mr. Hatling acted with fraudulent intent. Accordingly, we hold that Mr. Hatling

is liable for the section 6663(a) fraud penalties as respondent determined.

         We have considered all the other arguments made by the parties, and to the

extent not discussed above, find those arguments to be irrelevant, moot, or without

merit.

         To reflect the foregoing,


                                                        Decision will be entered for

                                                  respondent.
