                            T.C. Memo. 2005-129



                         UNITED STATES TAX COURT



   WILLIAM S. FAIREY, JR., AND SUSAN R. FAIREY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5680-03.                      Filed May 31, 2005.


     William S. Fairey, Jr., and Susan R. Fairey, pro se.

     Michael D. Zima, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:      Respondent determined deficiencies in

petitioners’ Federal income tax and penalties as follows:

                                               Penalties
     Year        Deficiency     Sec. 6662      Sec. 6663

     1999          $3,456        $691.20          --
                                               1
     2000          46,341       4,094.60        $19,401
     2001           3,566         713.15          --
     1
        Respondent determined that petitioner William S. Fairey, Jr., is
liable for the penalty for fraud with respect to part of the underpayment and
that both petitioners are liable for the negligence penalty with respect to
the remainder of the underpayment.
                                 - 2 -

       Following concessions, the issues for decision are:

       1.   Whether the statute of limitations bars assessment and

collection of petitioners’ tax for 1999.     We hold that it does

not.

       2.   Whether petitioners bear the burden of proof relating to

issues other than fraud.     We hold that they do.

       3.   Whether petitioners had a greater amount of (a) expenses

for William S. Fairey, Jr.’s (petitioner) consulting activity,

(b) unreimbursed employee business expenses, or (c) itemized

deductions than respondent allowed.      We hold that they did not.

       4.   Whether petitioner is liable for the fraud penalty under

section 6663 for 2000.     We hold that he is with respect to the

deficiency caused by the fact that he (a) deducted a purported

$7,500 payment three times on petitioners’ 2000 tax return which

they never paid; and (b) deducted $54,000 of loan repayments as

legal and professional fees.

       5.   Whether petitioners are liable for the accuracy-related

penalty under section 6662(a).     We hold that they are to the

extent discussed below and as reduced by respondent’s

concessions.1




       1
        Respondent conceded that petitioners may deduct $92.49
paid to Media Week and $5,500 paid to Nelson Hesse in 1999, and
an Internet expense of $256.81.
                                 - 3 -

       Unless otherwise stated, section references are to the

Internal Revenue Code.    Rule references are to the Tax Court

Rules of Practice and Procedure.

                          FINDINGS OF FACT

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

       Petitioners are married and resided in Sarasota, Florida, in

1999, 2000, and 2001, and when they filed the petition in this

case.

A.     Petitioner

       1.   Petitioner’s Employment With TruGreen Lawn Care

       Petitioner has a bachelor’s degree in psychology and 45

credit hours toward a master’s degree in biology.    Petitioner was

director of human resources and marketing for TruGreen Lawn Care

(TruGreen) in 1998 and early in 1999 until TruGreen discharged

him.    Petitioner sued TruGreen for wrongful discharge and

received a settlement in 2000 of $100,000 plus payment of $16,500

in legal expenses petitioner incurred in that case.    The law firm

of Nelson Hesse represented petitioner in that lawsuit.

       2.   Petitioner’s Consulting Activity and Volunteer Work

       After being discharged by TruGreen, petitioner offered

consulting services to clients relating to marketing, media, and

public relations in 1999-2001.    Petitioner’s consulting activity

was a sole proprietorship.
                                 - 4 -

     Double Otter, Inc. (Double Otter), was the only client that

paid petitioner for services during the years in issue.

Petitioner obtained national television, print, and Internet

publicity for Double Otter.     Double Otter paid petitioner $9,000

on December 6, 1999, and $27,000 in 2000.

     Petitioner did volunteer work for the Presidential election

campaign of Vice President Gore from August through December

2000.     Petitioner hoped to be appointed to Government service if

the campaign was successful.     After the election, petitioner

resumed his consulting activity.

     3.      Petitioner’s Loans From William H. Davoli and Dana
             Pekas

     William H. Davoli (Davoli) is married to petitioner’s

sister.     Petitioner borrowed $27,000 from Davoli in 2000.

Petitioner repaid $27,000 to Davoli on October 19, 2000.       Dana

Pekas (Pekas) made two loans to petitioner in 2000.     The record

does not show the amount of the first loan.     The second loan was

for $25,000.     Petitioner repaid $27,000 to Pekas in 2000.

     4.      Special Friends Golf Tournament

     Petitioner traveled to Council Bluffs, Iowa, in the fall of

2000 and 2001 to do volunteer work for Zaring Cioffi

Entertainment at the Special Friends Celebration (Special

Friends) golf tournament.     He hoped his volunteer work would lead

to employment.     Special Friends raises money for breast cancer

research and is tax exempt under section 501(c)(3).
                               - 5 -

     Fred Colanino (Colanino) is the founder and executive

director of Special Friends.   Petitioner donated a set of golf

clubs worth $900 to Special Friends in 2000.    Special Friends

sent petitioner a letter acknowledging his donation of the golf

clubs.   Tom Brune (Brune), the treasurer of Special Friends,

signed the letter.

      Petitioner made no contributions by cash, credit card, or

check to Special Friends in 2000.   Special Friends never accepted

contributions made through Visa credit cards.

B.   Susan Fairey’s Employment and Employee Expenses

     Susan Fairey had been a kindergarten and first grade teacher

for 24 years as of the date of trial.   The Sarasota County School

System hired her in August 1998 to serve as a first grade teacher

at Philippi Shores Elementary School.   Susan Fairey taught at

Phillippi Shores Elementary School during 1999, 2000, and 2001.

     Using a rented truck, Susan Fairey delivered a load of

materials to her classroom in August 1998, including two filing

cabinets, a table and chairs, children’s tables, easels, two

large book stands, and room decorations.

     During each of the years in issue, Susan Fairey received

$250 from her school, $100 from the State of Florida, and $50

from her Parent Teacher Association to buy items for her

classroom.   Susan Fairey received no other reimbursements in

those years for her employment-related expenses.
                                 - 6 -

     Susan Fairey bought items for her classroom during the years

in issue from stores such as Target, Wal-Mart, K-Mart, Publix,

and Albertsons.     The record does not show the costs of those

items.   Petitioners paid the following amounts in 1999 to buy

items for personal use, Susan Fairey’s classroom, and

petitioner’s business activities (the amounts for each are not

specified in the record):

     Seller                                  1999      2000

     Target                                $945.51   $629.28
     Wal-Mart                               673.23    558.44
     Phar-Mor                               457.74    124.31
     Sam’s Wholesale Club                   451.54     90.12
     Toys By Nature                         337.02    203.26
     Office Depot                           236.06     63.91
     Everything Educational                 127.19    288.31
     Scholastic Books                        58.40     77.80
     Learning Depot                          30.97     19.68
     Albertson’s                            327.39     --
     Publix                                  49.86     --
     Walgreen’s                              --       100.26
     K-Mart                                  --        70.77

     Austin Fairey, petitioners’ daughter, attended Phillippi

Shores Elementary School during the years in issue.     Susan Fairey

bought various educational materials for Austin during those

years.

C.   Petitioners’ Income Tax Returns

     Petitioner prepared petitioners’ income tax returns from

1988 through 2001 using computer spreadsheet and tax preparation

software.     Petitioner classified their checks into categories

such as business expenses, employee business expenses, and
                               - 7 -

itemized deductions and entered amounts into the spreadsheet

software.   He entered the totals from the spreadsheet software

for each category into the tax return preparation software.

     Petitioners included a Schedule C, Profit or Loss From

Business, for petitioner’s consulting activity with their income

tax returns for 1999, 2000, and 2001.    Petitioners reported that

petitioner had business expenses of $19,700 in 1999, $123,908 in

2000, and $13,532 in 2001 which resulted in losses of $10,600 in

1999, $96,642 in 2000, and $11,028 in 2001.

     Petitioners deducted $5,500 that petitioners paid to Nelson

Hesse on February 8 and April 16, 1999, on their 1999 income tax

return in two places:   On the Schedule C as a legal or

professional expense; and on the Schedule A, Itemized Deductions,

as a miscellaneous itemized deduction for attorney’s and

accountant’s fees.

     Petitioners deducted their $900 charitable contribution

twice on their 2000 income tax return:   As a contribution of

property; and as a contribution of cash.

     Petitioners deducted $7,500, which they claim to have paid

to Special Friends in 2000 (but which they never paid), in three

places on their 2000 return:   On the Schedule A as an itemized

charitable deduction; and on the Schedule C as an advertising

expense and as an office expense.
                                - 8 -

     On their 2000 tax return, petitioners deducted $16,500

(which they never paid) for legal expenses twice:   As a

Schedule C legal or professional expense; and as a miscellaneous

itemized deduction for attorney’s fees.

     Petitioners deducted loan repayments of $27,000 to Davoli

and $27,000 to Pekas in 2000 as legal and professional expenses

on the Schedule C for petitioner’s consulting activity.

     Petitioners deducted the $2,535 cost of a computer on their

2000 income tax return twice:   As a depreciation expense; and as

an office expense.

D.   Respondent’s Examination and Determination

     1.   Examination of Petitioners’ 1999 Tax Return

     On July 13, 2001, respondent’s revenue agent Joan

Hughs (Hughs) sent a letter to petitioners in which she invited

them to a conference as part of the audit of their 1999 income

tax return and requested copies of all Forms W-2 they had

received, records of the Schedule C gross receipts, a brief

history of the Schedule C business, statements from their

employers of their reimbursement policies, records of all of

their employee business expenses, legal and professional

expenses, office expenses, supplies expenses, other expenses,

repair receipts, appointment books, and records of travel, meal,

and entertainment expenses.
                                 - 9 -

     Petitioner showed some of those documents to Hughs at a

meeting on August 24, 2001.   However, he did not provide a

history of the Schedule C business or statements of employee

reimbursement policies from the employers.    Immediately after

that meeting, Hughs asked petitioners to provide documentation of

their employee business expenses, depreciation, travel expenses,

and telephone expenses not later than October 1, 2001.

     2.   Examination of Petitioners’ 2000 Tax Return

     Hughs informed petitioners that their 2000 income tax return

was being audited relating to miscellaneous itemized deductions,

cash contributions, and Schedule C expenses.     Hughs received a

letter on October 9, 2001, stating that petitioner did not know

when he would be available for a meeting and informing Hughs that

he would wait to have his 2000 income tax return audited.

Petitioners did not provide Hughs with any of the documents she

had requested.   Petitioner and Hughs rescheduled the second

meeting for November 26, 2001.    Petitioner called Hughs to

reschedule the November 26 meeting for December 13, 2001.

Petitioner later called Hughs to reschedule the December 13

meeting for January 10, 2002.    Hughs agreed.   Neither petitioner

met with Hughs on January 10, 2002.

     Hughs met with petitioner on February 8, 2002.     Hughs issued

another request for documents to petitioners dated February 21,

2002, seeking substantiation of various expenses and an
                                - 10 -

explanation of the purpose of petitioner’s payment of $27,000 to

Pekas.     Petitioner sent a letter, received by Hughs on April 1,

2002, in which he asked her to answer 28 questions, including

whether she had proof that all administrative steps required by

the Internal Revenue Code had been followed, whether statutory

authority for the audit existed, which Internal Revenue Code

section allowed her to solicit information, whether she could

explain the relevance of the material she sought, and whether

compliance with the audit was voluntary or mandatory.

     On April 2, 2002, Hughs requested additional documents from

petitioners concerning their deduction of legal, travel and

employee business expenses and job search costs for 1999 and

2000.     Petitioner postponed a meeting that Hughs had scheduled.

     On April 30, 2002, petitioner asked that the audit of

petitioners’ 2000 income tax return be reassigned to someone

other than Hughs because petitioners believed that Hughs had lost

her objectivity.

     3.      Examination of Petitioners’ 2001 Tax Return

        Hughs sent a letter dated June 4, 2002, to petitioners and a

second letter to Susan Fairey concerning the audit of

petitioners’ 2001 income tax return.     In those letters, Hughs

requested records of petitioner’s Schedule C income and expenses,

and petitioners’ employee business expenses and itemized

deductions.     Hughs sent copies of a letter to each petitioner
                                - 11 -

inviting them to attend a meeting on June 24, 2002.     Petitioners

did not receive those letters because they were out of town.

     Neither petitioner met with Hughs on June 24, 2002.

Petitioners never submitted any documents to Hughs relating to

2001.

     4.      Petitioners’ Conduct During the Examination

        Susan Fairey did not meet with Hughs at any time during the

audit of petitioners’ 1999, 2000, and 2001 tax returns.

        Petitioners did not submit monthly bank statements to Hughs.

Hughs obtained those records through a summons.     Petitioners

never gave Hughs a history of petitioner’s Schedule C activity,

receipts for petitioners’ claimed employee business expenses, or

receipts for or explanations of the purposes of the travel, meal,

and entertainment expenses, or the other expenses deducted on

their 1999, 2000, or 2001 income tax return.

        Petitioner gave Hughs a copy of a spreadsheet which shows

check No. 4089 from petitioner to Davoli as substantiation of

claimed legal and other professional expenses incurred in 2000.

Petitioners did not give Hughs any other substantiation of their

legal expenses or the dimensions of their home (relating to their

claimed home office deduction) as Hughs had requested.

        Petitioner told Hughs during the audit that petitioners had

paid $7,500 to Special Friends in 2000.     Petitioner gave Hughs a

copy of a letter purportedly from Special Friends which he said
                              - 12 -

supported his charitable contribution deduction of $7,500 in

2000.   That letter purportedly from Special Friends thanked

petitioner for his donation of golf clubs and for an

advertisement placed with the organization’s newsletter and said

that the bill for the advertisement would be charged to

petitioner’s Visa credit card in two installments of $3,750.

     That letter was not an accurate copy of any letter from

Special Friends.   The letter that Special Friends sent to

petitioner acknowledged his donation of golf clubs but did not

mention any other contribution from petitioner.   Petitioners did

not contribute $7,500 to Special Friends in 2000 or provide to

Hughs any record of Visa card payments to Special Friends.

     During the audit, petitioner gave Hughs inconsistent and

incorrect explanations of the purpose of the $27,000 payment to

Pekas in 2000.   He told Hughs that he paid $27,000 to Pekas in

2000 for investment counseling.   Petitioner also told Hughs

during the audit that he paid $27,000 to Davoli in 2000 to obtain

a background investigation so he could qualify for appointed

Government service.   Petitioner told Hughs at a different time

during the audit that the $27,000 payments were for legal fees.

     Respondent issued the notice of deficiency to petitioners

for 1999, 2000, and 2001 on January 16, 2003.
                              - 13 -

                              OPINION

A.   Whether the Statute of Limitations Bars Assessment and
     Collection of Petitioners’ Tax for 1999

     Petitioners contend that the statute of limitations bars

assessment and collection of their tax for 1999 because

respondent issued the notice of deficiency on January 16, 2003.

We disagree.

     Petitioners timely filed their 1999 return on or before

April 15, 2000.   Generally, the Commissioner must assess tax

within 3 years after the due date of a timely filed return, sec.

6501(a) and (b)(1); i.e., in this case, on or before April 15,

2003.   Respondent timely issued the notice of deficiency on

January 16, 2003.   The statute of limitations does not bar

assessment and collection of petitioners’ tax for 1999.

B.   Whether Petitioners or Respondent Bears the Burden of Proof
     for Issues Other Than Fraud

     Respondent bears the burden of proving that petitioner is

liable for fraud.   See sec. 7454(a); Rule 142(b).   Petitioners

contend that respondent bears the burden of proof under section

7491(a) for all other issues as well.   We disagree.

     The burden of proof with respect to a factual issue shifts

from the taxpayer to the Commissioner if, in addition to meeting

other requirements, the taxpayer has:   (1) Complied with

substantiation requirements under the Internal Revenue Code, sec.

7491(a)(2)(A); (2) maintained all records required by the
                                - 14 -

Internal Revenue Code, sec. 7491(a)(2)(B); and (3) cooperated

with reasonable requests by the Secretary for information,

documents, and meetings, id.    Taxpayers bear the burden of

proving that these requirements are met.      See H. Conf. Rept. 105-

599, at 239 (1998), 1998-3 C.B. 747, 993; S. Rept. 105-174, at 45

(1998), 1998-3 C.B. 537, 581.    Petitioners failed to produce, and

thus we infer that they failed to keep, records substantiating

their deductions.    Petitioners did not cooperate with Hughs’s

document requests or produce records during the audit.

     Petitioners contend that they submitted their bank

statements to Hughs.    We disagree.     Hughs obtained those records

through a summons.

     Petitioners contend that they did not meet with Hughs on

January 10, 2002, because they did not know about the meeting.

We disagree.   Petitioner scheduled that meeting.

     Petitioners understandably did not meet with Hughs on June

24, 2002, because they did not receive the letters attempting to

schedule that meeting that Hughs sent them on June 4, 2002.      The

fact that petitioners had a good reason for missing the June 24

meeting does not outweigh their overall pattern of

noncooperation.   Petitioners contend that Hughs did not cooperate

with them during the audit.    That allegation is unconvincing.

     We conclude that the burden of proof does not shift to

respondent under section 7491(a).      Thus, petitioners bear the
                                - 15 -

burden of proof except with respect to the fraud penalty.     See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

C.   Whether Petitioners May Deduct More for Schedule C Expenses
     Than Respondent Allowed

     1.    Advertising Expenses

     Petitioners deducted advertising expenses of $575 for 1999

and $7,500 for 2000 on the Schedules C for petitioner’s

consulting activity.   Petitioner testified that the cost of

printing his business cards is deductible as an advertising

expense.   However, petitioners did not show how much petitioner

had paid to have business cards printed.     Petitioners’ $7,500

advertising expense deduction for 2000 is based on their claim

(which we have rejected) that petitioner paid that amount to

Special Friends.   We conclude that petitioners may not deduct any

amount for advertising expenses for 1999 or 2000.

     2.    Legal and Professional Expenses

     Petitioners deducted legal and professional expenses of

$5,500 for 1999, $59,727 for 2000, and $2,000 for 2001 on the

Schedules C for petitioner’s consulting activity.     Petitioner

paid $5,500 to the Nelson Hesse law firm for representing him in

his lawsuit against TruGreen.     That payment was not related to

petitioner’s consulting activity.2



     2
        Respondent conceded that petitioners may deduct the
$5,500 payment to the Nelson Hesse law firm as an itemized
deduction for 1999.
                              - 16 -

     Petitioners contend that, for 2000, they may deduct $16,500

for legal fees paid by TruGreen to Nelson Hesse, $54,000 for loan

repayments to Davoli and Pekas, $250 to Richard Weldon, and

$221.45 to an unidentified person.     We disagree.   Petitioners may

not deduct as a business expense TruGreen’s payment of $16,500 to

Nelson Hesse or $54,000 of loans repaid to Davoli and Pekas.

     Petitioners did not show that they paid the $250 or the

$221.45 or that those amounts were business expenses.      We

conclude that petitioners may not deduct any amounts for legal

and professional expenses for the years in issue.

     3.   Supplies Expenses

     Petitioners claimed deductions for supplies expenses of

$2,856 for 1999, $4,962 for 2000, and $729 for 2001 on the

Schedules C for petitioner’s consulting activity.      Petitioners

contend that he paid $2,535 in 1999 to buy a computer.

Petitioner was billed $2,535 for that computer.       However, there

is no evidence than petitioners paid that amount or to what

extent he used it for his consulting activity.

     Respondent conceded that petitioners may deduct $92.49 in

1999 for a subscription to Media Week magazine.

    Petitioners offered no evidence substantiating their

deductions for supplies for 2000 or 2001.     We conclude that

petitioners may not deduct more for supplies expenses than

respondent allowed.
                               - 17 -

     4.     Office Expenses

     Petitioners deducted office expenses of $3,091 for 1999 and

$15,109 for 2000 on the Schedules C for petitioner’s consulting

activity.    Of the $3,091 claimed for 1999, petitioner testified

he may deduct $1,037.16 that he paid to the local cable

television company as an office expense because he watched

advertisements on cable television to evaluate whether his

clients could effectively use that medium to advertise.

Petitioner conceded that he and his family watched cable

television for personal pleasure.

     Petitioners contend that they may deduct $2,054 in 1999 for

the purchase of a second computer in addition to the one

mentioned above.    There is no documentary evidence showing how

much petitioners paid for the second computer.

     Petitioners contend that they may deduct $15,109 for 2000

consisting of payments for cable television, $7,500 allegedly

paid to Special Friends, and other unspecified expenses.    We

disagree.    Petitioners have not shown that they paid these

amounts or that these amounts were for office expenses related to

petitioner’s consulting activity.    We conclude that petitioners

may not deduct any office expenses for the years in issue.

     5.     Travel, Meals, and Entertainment Expenses

     Petitioners deducted expenses for travel of $2,196 for 1999,

$9,823 for 2000, and $2,500 for 2001 on the Schedules C for
                              - 18 -

petitioner’s consulting activity.    They also deducted expenses

for meals and entertainment of $457 for 1999, $1,780 for 2000,

and $575 for 2001.

     No deduction is allowed for expenses for travel, meals,

entertainment, or lodging unless the taxpayer substantiates by

adequate records or sufficient evidence corroborating the

taxpayer’s own statement, the amount, time and place, and

business purpose of the expense.    Sec. 274(d).   Petitioners

offered no evidence showing how much they spent for petitioner’s

consulting activity.

     Hughs asked petitioners to provide documentation for

petitioner’s travel, entertainment, meals, and lodging expenses.

Petitioners did not give that documentation to respondent or

offer it as evidence.   We infer that petitioner did not keep a

contemporaneous log of those expenses.    We conclude that

petitioners may not deduct expenses for travel, meals, or

entertainment for the years in issue because they have not met

the substantiation requirements of section 274(d).

     6.   Utility Expenses

     Petitioners deducted electricity expenses of $949 for 1999

and $444 for 2000 for their residence on the Schedules C for

petitioner’s consulting activity.    Petitioners did not offer any

evidence showing that petitioner used any part of their home
                               - 19 -

exclusively for his consulting activity as required to deduct

home office expenses under section 280A(c).

     Petitioners contend that Hughs never asked them for the

dimensions of their home or of the space in their home petitioner

used for business.   We disagree.   Hughs did so in a letter to

petitioners dated July 13, 2001.    We conclude that petitioners

may not deduct any amount for utility expenses for the years in

issue.

     7.   Car and Truck Expenses

     Petitioners deducted car and truck expenses of $3,910 for

2000 and $4,209 for 2001 on the Schedules C for petitioner’s

consulting activity.   The only evidence on this issue is

petitioner’s testimony that he visited stores that he thought

might carry Double Otter’s products.    We conclude that

petitioners may not deduct any car or truck expenses for the

years in issue.

     8.   Depreciation

     Petitioners deducted depreciation of $11,898 for 2000 on the

Schedule C for petitioner’s consulting activity on the basis of

his claimed purchase of (a) a computer for $3,999, and (b) an

Internet service for $7,899.   There is no evidence that

petitioner paid or is entitled to deduct these amounts.     We

conclude that petitioners may not deduct depreciation for 2000.
                                - 20 -

     9.   Other Expenses

     Petitioners deducted miscellaneous expenses of $4,240 for

1999, $3,431 for 2000, and $3,360 for 2001 on the Schedules C for

petitioner’s consulting activity.    These amounts include payment

for telephone service.     Respondent concedes that petitioners paid

$3,101.61 for telephone service in 1999 but contends that

petitioners may not deduct any of this amount.    We agree because

petitioners provided no basis to allocate between business and

personal telephone use.    See sec. 262(b) (charge for basic

telephone service to a residence is deemed personal).

Petitioners contend that they may deduct payments for computer

printing supplies.    We disagree because there is no evidence

showing how much petitioners paid for computer printing supplies.

     Respondent concedes that petitioners paid and may deduct

$285.35 for Internet service in 2000.

     Petitioners deducted for 2000 insurance expense of $955,

rent or lease payments of $3,720, and repairs and maintenance of

$1,256.   Respondent contends that petitioners may not deduct any

of these amounts.    We agree because there is no evidence

substantiating these deductions.

     We conclude that petitioners may not deduct more

miscellaneous expenses on the Schedules C than allowed by

respondent.
                               - 21 -

     10.    Conclusion

     We conclude that petitioners may not deduct more Schedule C

expenses for petitioner’s consulting activity for the years in

issue than allowed by respondent.3

D.   Whether Petitioners Are Entitled to More Itemized Deductions
     Than Respondent Allowed

     1.     Susan Fairey’s Employee Business Expense Deductions

     Petitioners contend that they may deduct unreimbursed

employee business expenses of $2,277.90 for 1999, $2,686.49 for

2000, and $965.37 for 2001 for Susan Fairey.4   Petitioners

contend that it is reasonable for them to deduct those amounts

because they equal 28 percent of petitioners’ total expenditures

for 1999, 30 percent for 2000, and 16 percent for 2001.5      We

disagree.    Petitioners have not given any convincing

justification for basing their deductions on these percentages.

     Hughs asked petitioners how much Susan Fairey spent for her

classroom.    Petitioners did not timely produce any records except

some canceled checks payable to retailers that sell items that


     3
        In light of this conclusion, we need not decide whether
petitioner operated his consulting activity for profit.
     4
        Teachers may deduct up to $250 for unreimbursed education
expenses as above-the-line deductions for tax years beginning in
2002 or 2003. Sec. 62(a)(2)(D). For the years in issue, those
expenses were deductible only to the extent unreimbursed employee
business expenses and other itemized deductions exceeded 2
percent of adjusted gross income.
     5
        The total of petitioners’ business expenditures for 2001
is not in evidence.
                                - 22 -

could be for personal use.   Petitioners have not shown how much

of the payments to those stores was for school supplies.6

     If the taxpayer establishes that he or she paid a deductible

expense but cannot substantiate the precise amount, we may

estimate the amount of a deductible expense, bearing heavily on

the taxpayer whose inexactitude is of his or her own making.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).      The

10 checks that were admitted in evidence, bank statements, and

other evidence do not show how much Susan Fairey paid for items

for her classroom, and she did not testify as to the amounts of

those expenses.   Susan Fairey received $400 during each year in

issue to buy school supplies.    We have no basis to estimate how

much she spent each year in excess of $400.

     Petitioners contend that respondent had copies of all of

petitioners’ checks and bank statements nearly 2 years before

trial and that Hughs and respondent’s counsel, Michael Zima

(Zima), made conflicting statements about those records.    We



     6
        On the morning of trial, petitioners for the first time
gave respondent copies of additional canceled checks for the
years in issue and what petitioner said was a summary of those
checks. The checks and the summary were not admitted in evidence
because petitioners did not provide them to respondent 14 days
before the first day of the trial calendar as ordered by the
Court in granting respondent’s motion to compel production of
documents and as required by the standing pretrial order. See
Rules 104(c)(2), 131(b). Admission into evidence of the checks
would not affect the result on this issue, however, because the
checks do not show whether the expenditures related to Susan
Fairey’s classroom.
                               - 23 -

disagree.   Neither Hughs nor Zima had copies of all of

petitioners’ checks and bank statements at any time.      Zima saw

about 15 checks which he included in the stipulation of facts.

Hughs saw 30 to 40 checks, but petitioner did not allow her to

copy or keep them.   Those statements do not conflict.

     We conclude that petitioners may not deduct any unreimbursed

employee business expenses for Susan Fairey for the years in

issue.

     2.     Petitioner’s Deductions for Employee Business Expenses

     Petitioners contend that petitioner may deduct unreimbursed

employee business expenses for 1999.    We disagree.    Although

petitioner was an employee of TruGreen for a short time in 1999,

there is no evidence that he had any unreimbursed employee

business expenses in 1999.

     3.     Charitable Contribution Deductions and Other Itemized
            Deductions

     Petitioners have not shown that they are entitled to more

charitable contribution deductions or other itemized deductions

than respondent allowed.

E.   Whether Petitioner Is Liable for the Fraud Penalty for 2000

     1.     Contentions of the Parties and Background

     Respondent contends that petitioner is liable for the fraud

penalty under section 6663 for 2000 because petitioner

fraudulently deducted (a) $7,500, which he never paid, in three

places on the 2000 return, and (b) $59,727 for legal and
                                 - 24 -

professional fees which were loan repayments to Davoli and

Pekas.7

         Respondent has the burden of proving fraud by clear and

convincing evidence.     See sec. 7454(a); Rule 142(b).   Respondent

must establish that:     (a) Petitioner underpaid tax for 2000, and

(b) some part of the underpayment is due to fraud.     See sec.

6653(b).     If respondent shows that any part of an underpayment is

due to fraud, the entire underpayment is treated as due to fraud

unless the taxpayer shows by a preponderance of the evidence that

part of the underpayment is not due to fraud.     See sec. 6663(b).

     Fraud is the intentional evasion of a tax believed to be

owing.     Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968),

affg. T.C. Memo. 1966-81.      Fraud is never presumed; it must be

established by affirmative evidence.      Beaver v. Commissioner, 55

T.C. 85, 92 (1970).

     2.      Badges of Fraud

     Courts have developed several objective indicators, or

“badges”, of fraud.     Recklitis v. Commissioner, 91 T.C. 874, 910

(1988).     The following badges of fraud are present in this case

as to petitioner for 2000:     (a) Creating a false document; (b)

deducting the same item several times; (c) giving implausible or

inconsistent explanations to respondent’s examiner and in court



     7
        We discuss respondent’s other contentions relating to
fraud at par. E-3, below.
                               - 25 -

about events during the years in issue; (d) failure to cooperate

with tax authorities; and (e) having false or inadequate books

and records.

          a.   Creating a False Document

     Submitting an altered document to the Commissioner’s agents

to obtain tax benefits is a badge of fraud.     Powell v. Granquist,

252 F.2d 56, 59 (9th Cir. 1958); Bagby v. Commissioner, 102 T.C.

596, 608-609 (1994); see Spies v. United States, 317 U.S. 492,

499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1007 (1982),

affd. 748 F.2d 331 (6th Cir. 1984).     Each party accuses the other

of altering the letter from Special Friends and testifying

falsely about it.

     We decide whether a witness is credible on the basis of

objective facts, the reasonableness of the testimony, and the

demeanor and consistency of statements made by the witness.

Quock Ting v. United States, 140 U.S. 417, 420-421 (1891); Wood

v. Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C.

593 (1964); Pinder v. United States, 330 F.2d 119, 124-125 (5th

Cir. 1964); Concord Consumers Hous. Coop. v. Commissioner, 89

T.C. 105, 124 n.21 (1987).

     Petitioner testified and contends that he received a letter

from Special Friends that acknowledged his purchase of an

advertisement for $7,500.    We disagree.   First, petitioner’s

testimony was contradicted by the credible testimony of Colanino
                              - 26 -

and a letter from Brune to Hughs saying that the letter from

Special Friends to petitioner referred only to the golf clubs and

that Special Friends did not accept Visa payments.     Colanino

reviewed the files of Special Friends and found no record that

petitioner had contributed anything to Special Friends other than

golf clubs.   Second, the program in which petitioner purportedly

bought an advertisement did not include an advertisement relating

to him or acknowledge his purported contribution.

     Petitioners contend that respondent should have called Brune

to testify instead of Colanino.   We disagree.    Respondent

reasonably called Colanino because he was the founder and

executive director of Special Friends.

     Petitioners contend that Colanino is not credible because he

received compensation from Special Friends.     We disagree.    The

fact that Special Friends paid annual compensation to Colanino

does not detract from his credibility.

     Petitioners seek to discredit a letter from Omaha State Bank

stating that Special Friends did not accept credit card payments.

They contend that the letter is not credible because Colanino did

not authenticate it.   We disagree.    Colanino testified that

Special Friends had an account with Omaha State Bank and that

Special Friends never used credit cards.     Petitioners also

contend that Omaha State Bank was not the bank for Special

Friends because it was not mentioned in the Special Friends golf
                                  - 27 -

tournament program for 2000.      We disagree.   Whether Omaha State

Bank was mentioned in the Special Friends event program is not

relevant to whether Special Friends could process credit card

payments.

     Petitioners contend that Hughs admitted that the letter that

she received from Special Friends was a forgery.      We disagree.

Hughs did not admit that the letter she received from Special

Friends was forged.

     These circumstances leave us no alternative but to conclude

that petitioner altered (or caused to be altered) the letter from

Special Friends by adding a paragraph stating that he had

purchased an advertisement in the program for $7,500 payable with

two charges to his Visa card, and misrepresented that the altered

letter was a correct copy.

            b.      Deducting the Same Item Several Times

     Claiming deductions for the same item more than once on the

same return may be a badge of fraud.       See Edwards v.

Commissioner, T.C. Memo. 1995-77.

     Petitioners contend:       (1) That they did not deduct the same

item in several places on their 2000 return; (2) if they did,

they did so because of errors in their tax preparation software;

and (3) it is not a badge of fraud to deduct the same item two or

more times.      We disagree.
                              - 28 -

     Petitioners deducted $7,500 on Schedule A as a charitable

contribution and on Schedule C as an advertising expense and as

an office expense.   Petitioner testified that he merely entered

data in response to questions posed by the software.   We believe

that petitioner fraudulently entered the $7,500 amount three

times.   He had not paid the $7,500 at all and thus should not

have entered the $7,500 amount even once.

     We are not finding fraud merely because petitioner deducted

the $7,500 three times; it is also significant that petitioner

never paid the $7,500.

          c.    Giving Implausible or Inconsistent Explanations

     Implausible or inconsistent explanations of behavior by a

taxpayer can show that the taxpayer had fraudulent intent.

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

affg. T.C. Memo. 1984-601; Korecky v. Commissioner, 781 F.2d

1566, 1568 (11th Cir. 1986), affg. T.C. Memo. 1985-63; Bahoric v.

Commissioner, 363 F.2d 151, 153 (9th Cir. 1966), affg. T.C. Memo.

1963-333; Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980).

Petitioner’s explanations of his alleged payment of $7,500 and

$54,000 for legal and professional expenses were implausible and

inconsistent with his actions.   Deducting his payments to Pekas

and Davoli as legal and professional fees is inconsistent with

petitioner’s testimony that the payments were loan repayments.

Petitioner’s testimony that the computer software is to blame for
                               - 29 -

multiple deductions of the same amounts is inconsistent with his

spreadsheets, which show that he entered the same amounts more

than once on his spreadsheets.

            d.   Failure To Cooperate With Tax Authorities

     A taxpayer’s failure to cooperate with the Commissioner’s

examining agents is a badge of fraud.    Bradford v. Commissioner,

supra.    Petitioners did not meet with Hughs as she requested or

provide the substantiation she requested.    We conclude that

petitioners did not cooperate with Hughs.

            e.    Having False or Inadequate Books and Records

     A taxpayer’s failure to maintain accurate records or

concealment of records may be a badge of fraud.    Id. at 308;

Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg.

T.C. Memo. 1959-172; Reaves v. Commissioner, 295 F.2d 336, 338

(5th Cir. 1961), affg. 31 T.C. 690 (1958); Grosshandler v.

Commissioner, supra.    As discussed above, petitioners failed to

produce, and thus we infer that they failed to keep, records

substantiating their deductions.

     3.     Whether Petitioner’s Deduction of $16,500 TruGreen Paid
            to Nelson Hesse or $471.45 Paid to an Individual Not
            Otherwise Identified in the Record Was Fraudulent

     Respondent contends that petitioner’s deductions for 2000 of

$16,500 paid to Nelson Hesse for legal and professional services

and $471.45 paid to an individual not otherwise identified in the

record were fraudulent for the same reasons that his deductions
                               - 30 -

of $7,500 that he claimed to have paid to Special Friends and

$54,000 that he paid to Davoli and Pekas were fraudulent.      We

disagree.    Petitioner’s conduct relating to the $7,500 and

$54,000 items was materially different from that relating to the

$16,500 and $471.45 items.    Petitioner altered or caused to be

altered a document that he gave to Hughs to support his claim

that he paid $7,500 to Special Friends, and he misrepresented to

Hughs that Pekas and Davoli provided services for which he paid

$54,000.    Petitioner took affirmative steps to conceal the truth

with respect to those deductions.    In contrast, with respect to

petitioner’s deduction of $16,500 that TruGreen paid to Nelson,

respondent showed only that petitioner did not make that payment;

there was no accompanying intentionally misleading conduct.

Similarly, respondent has failed to show that the $471.45

deduction was fraudulent.

     4.     Conclusion

     Respondent has proven by clear and convincing evidence that

petitioner is liable for the fraud penalty under section 6663 for

2000 with respect to the deficiency caused by the fact that

petitioner (a) fraudulently deducted $7,500 three times on

petitioners’ 2000 tax return although they never paid that amount

to Special Friends; and (b) fraudulently deducted $54,000 of loan

repayments to Davoli and Pekas as legal and professional fees.
                                - 31 -

F.   Whether Petitioners Are Liable for the Accuracy-Related
     Penalty for the Years in Issue

     In the alternative to fraud as to petitioner for 2000, and

with respect to petitioner for 1999 and 2001 and Susan Fairey for

1999-2001, respondent determined and contends that petitioners

are liable for the accuracy-related penalty under section 6662.

     The Commissioner bears the burden of production with respect

to penalties and additions to tax.       Sec. 7491(c).   To meet the

burden of production, the Commissioner must produce evidence

showing that it is appropriate to impose the particular penalty

but need not introduce evidence of defenses such as reasonable

cause or substantial authority.    Higbee v. Commissioner, 116 T.C.

438, 446 (2001); H. Conf. Rept. 105-599, at 241 (1998), 1998-3

C.B. 747, 995.

     Respondent has met the burden of production for the

accuracy-related penalty under section 6662 because the record

establishes that petitioners deducted amounts for each year in

issue that they were not entitled to deduct and that petitioners

failed to produce, and thus we infer that they failed to keep,

records of claimed unreimbursed employee business expenses, and

travel and entertainment expenses.

      Petitioners did not address this issue at trial or on

brief.   We deem it conceded.   See Levin v. Commissioner, 87 T.C.

698, 722-723 (1986), affd. 832 F.2d 403 (7th Cir. 1987);

Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976).        We
                             - 32 -

conclude that petitioners are liable for the accuracy-related

penalty under section 6662(a) for 1999-2001 except with respect

to petitioner to the extent he is liable for fraud for 2000.8

G.   Whether Respondent Should Be Sanctioned

     Petitioners assert that respondent engaged in, and should be

sanctioned for, the following conduct:   (1) Hughs refused to

answer 28 written questions from petitioners; (2) Hughs expanded

the audit without authority; (3) Hughs said petitioners are tax

protesters; (4) respondent refused petitioners’ request for a

different auditor; (5) petitioners did not receive a copy of the

answer until respondent filed a motion for entry of order that

undenied allegations in answer be deemed admitted; (6) respondent

initiated formal discovery before informal discovery was

complete; (7) respondent’s counsel had records from petitioners’

bank which he denied that he had; and (8) respondent’s counsel at

trial altered a document created by petitioners.   We disagree.

Petitioners have not shown or argued convincingly that respondent

should be sanctioned.

     To reflect concessions and the foregoing,


                                               Decision will be

                                         entered under Rule 155.



     8
        Respondent concedes that the accuracy-related penalty
under sec. 6662 does not apply to disallowed deductions for which
respondent determined fraud against petitioner.
