                                T.C. Memo. 2012-194



                          UNITED STATES TAX COURT



               SCOTT M. ERIKSEN, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 30768-09, 4527-10,              Filed July 12, 2012.
                   4900-10, 4902-10.



      Richard Carl Eriksen, Fred A. Foley, and Michelle Aaron (specially

recognized), for petitioners.

      Alicia A. Mazurek and Alexandra E. Nicholaides, for respondent.




      1
       Cases of the following petitioners are consolidated herewith: Tina E.
Aginaga, a.k.a. Tina E. Aginaga-Dove, docket No. 4527-10; Mitchell L. Hardin and
Stephanie A. Hardin, docket No. 4900-10; and Jeffrey L. Kesselring and Arleen L.
Kesselring, docket No. 4902-10.
                                          -2-

             MEMORANDUM FINDINGS OF FACT AND OPINION


      LARO, Judge: After the three-year period of limitations on assessment under

section 6501(a) had expired, respondent issued to petitioners notices of deficiency

determining deficiencies in, and section 6662(a) accuracy-related penalties with

respect to, their 1999, 2000, 2001, and/or 2002 Federal income tax.2 Petitioners are

sheriff’s deputies (deputies) or employees with the Oakland County Sheriff’s

Department (OCSD) who argue that the assessments were time barred by the three-

year period of limitations in section 6501(a). Relying on Allen v. Commissioner,

128 T.C. 37 (2007), respondent counters that the limitations period remains open

under section 6501(c) because petitioners’ return preparers prepared each return at

issue falsely or fraudulently with intent to evade tax.

      The threshold issue for decision is whether respondent has clearly and

convincingly proven that any of petitioners’ returns was false or fraudulent. We

hold that respondent has not met his burden with respect to petitioners Scott M.

Eriksen, Mitchell L. Hardin and Stephanie A. Hardin, or Jeffrey L. Kesselring and

Arlene L. Kesselring, and that assessment against these petitioners is time barred.


      2
        Unless otherwise indicated, section references are to the applicable versions
of the Internal Revenue Code (Code), and Rule references are to the Tax Court
Rules of Practice and Procedure. Some dollar amounts are rounded.
                                        -3-

We hold that respondent has met his burden with respect to petitioner Tina E.

Aginaga, a.k.a. Tina Aginaga-Dove (Deputy Aginaga), and that the period of

limitations on her 1999 through 2002 returns remains open. Given that holding,

Deputy Aginaga concedes respondent’s deficiency determinations with respect to

her 1999 through 2002 Federal income taxes in the respective amounts of $495,

$675, $803, and $825. We also decide whether Deputy Aginaga is liable for

accuracy-related penalties under section 6662(a) and (b)(1) for 1999 through 2002

on account of negligence or disregard of rules or regulations. We hold she is.

                               FINDINGS OF FACT

I.    Preliminaries

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

and the accompanying exhibits are incorporated herein by this reference. Each

petitioner or couple resided in Michigan when he, she, or they petitioned the Court.

II.   Petitioners

      Petitioners worked for OCSD in Michigan at all relevant times. Scott M.

Eriksen (Deputy Eriksen), Deputy Aginaga, Mitchell L. Hardin (Deputy Hardin),

and Jeffrey L. Kesselring (Deputy Kesselring) (collectively deputy petitioners)

worked as deputies in the corrective services division of OCSD, administering care
                                        -4-

and custody to inmates in the Oakland County (county) main jail or one of its

satellite jails. Stephanie L. Hardin (Ms. Hardin) was employed as a clerk or cashier,

and Arleen L. Kesselring (Ms. Kesselring) worked as a technician. We refer to

Deputy Hardin and Ms. Hardin as the Hardins as they were married during the years

at issue. We refer to Deputy Kesselring and Ms. Kesselring as the Kesselrings for

the same reason.

III.   Tax Return Preparers and Preparation of Returns

       A.    Mr. Kern

       James Kern graduated from the Detroit College of Business in 1965 with a

bachelor of science degree and a major in accounting and tax. He eventually

became an enrolled agent with the Internal Revenue Service (IRS), and he

represented clients before the IRS. He sometimes held himself out to clients and to

staff as a former IRS employee though he was not.

       Mr. Kern began preparing tax returns in college, and he continued to do so

throughout much of his career. He operated a sole proprietorship accounting firm

from the late 1970s until sometime in 1998, when he partnered with his then

girlfriend to form Kern Weyn Associates, Inc. (KWA). Mr. Kern specialized, to an

extent, in preparing tax returns for law enforcement personnel. His clientele

included, but was not limited to, employees of OCSD, the Michigan State Police,
                                          -5-

the Wayne County Sheriff’s Office, and the Detroit Police Department. Mr. Kern

prepared upwards of 3,000 tax returns in or around 2001, including between 300

and 400 returns for law enforcement employees. Many law enforcement clients

were personal friends with whom Mr. Kern associated socially.

      As a result of knowledge Mr. Kern acquired from preparing officers’ tax

returns, he devised a generic questionnaire that he used to prepare returns for law

enforcement clients. The questionnaire referenced deductions allegedly available to

law enforcement personnel, including expenses for ammunition, equipment, boots,

and mileage driven to and from court or the gun range.3 While the set of questions

made Mr. Kern’s practice efficient, it lent itself to inaccuracies with its one-size-fits-

all approach. In particular, the questionnaire targeted cash outlays but failed to

determine the deductibility of those items for Federal income tax purposes. For




      3
         OCSD deputies, including deputy petitioners, attended the shooting range at
least once per month for qualification purposes. They also used their personal
vehicles to guard prisoners off site or to attend training exercises, and they could
request reimbursement from the county for related mileage expenses. Deputy
petitioners rarely (if ever) used their personal vehicles to attend court, though each
Federal income tax return at issue reported that they did. Petitioners established at
trial that the expense category “mileage to court” also included mileage to guard
prisoners off site and mileage to and from the gun range.
                                         -6-

example, the survey did not question whether expenses incurred were ordinary,

necessary, or otherwise reimbursable by OCSD or the county.4

       Mr. Kern often claimed deductions for clients, including deputy petitioners,

without receipts or supporting documentation. At least in part, he determined his

client’s entitlement to deductions on the basis of the completed questionnaire and

sometimes through a question and answer session. He often estimated expenses,

using receipts, information returns, and copies of canceled checks to establish the

amounts and deductibility of certain items only when that information was provided

to him. He relied on the employee’s Form W-2, Wage and Tax Statement, for

information on employer-reimbursed expenses, but he never questioned clients

about employers’ reimbursement policies. Nor did he investigate the same on his

own.

       Mr. Kern had minimal (if any) contact with many of his clients during the

years at issue. He made light of unethical conduct to his partners and staff, stating

on one occasion that claiming deductions for items that did not appear to be

deductible was “not wrong until you get caught”. He met with each petitioner or

couple once during the years at issue, and he was unable at trial to recall preparing


       4
        There was in effect a countywide policy during the years at issue whereby
petitioners could seek reimbursement for qualifying job-related expenses.
                                           -7-

any return at issue. Nor did Mr. Kern adopt a fixed fee schedule; his clients set the

price for Mr. Kern’s services and paid him what they thought his services were

worth.

         B.       Mr. Redinger

         Curt Redinger earned a college degree in math and business from Michigan

Technological Institute in 1990. He became a certified public accountant in the

mid-1990s and was a member in good standing during the years at issue. After

working at small and mid-sized accounting firms for the better part of 12 years, Mr.

Redinger desired to go into business for himself, and he engaged a business broker

to perform due diligence and find a suitable practice to acquire.

         Mr. Redinger purchased KWA, including its client list, in November 2001.5

Having been trained as a corporate return preparer, Mr. Redinger was unfamiliar

with preparing individual tax returns. To guide Mr. Redinger in the preparation of

such returns, Mr. Kern stayed on with KWA as a contract employee for two years.

During the 2002 filing season Mr. Kern prepared most (but not all) individual

income tax returns for the 2001 taxable year.

         For the most part, Mr. Redinger adopted Mr. Kern’s practice of eliciting

information from his clients and reporting that information on tax returns without


         5
             We refer to KWA and Mr. Redinger’s successor firm collectively as KWA.
                                         -8-

substantiation. Mr. Redinger gathered information to prepare his clients’ tax returns

from answers given in response to questionnaires. Mr. Redinger often (but not

always) estimated his client’s current year deductions using amounts the individual

claimed on his or her prior year’s tax return. He did not meet with his clients every

year; and when he did, he did not seek substantiation of claimed deductions, merely

confirming with his clients that their expenses were “the same as it has been” or

“about the same” as last year.

      To facilitate the return preparation process, Mr. Kern supplied Mr. Redinger

with a list of deductions that Mr. Kern believed taxpayers were entitled to claim

according to their occupation (i.e., police officers received one set of deductions;

firemen another). Among the expenses targeted for law enforcement officers were

side-arm purchases, ammunition, cell phones, uniform cleaning, court-related travel,

and on-the-job meals. Mr. Redinger used the outline as a starting point for

preparing clients’ returns, and he generally adjusted each taxpayer’s return

according to that taxpayer’s situation. Mr. Redinger did not investigate the

reimbursement policies of OCSD or the county on his own.

      C.     Preparation of Nonparty Witnesses’ Returns

      Mr. Kern, and on occasion Mr. Redinger, instructed his staff to use prior

year’s itemized deductions when preparing law enforcement clients’ current year’s
                                         -9-

tax returns.6 Employees were also directed to allocate police officers a charitable

contribution deduction equal to 1.5% of their gross (total) income. This amount was

not based on actual donations but was determined from industry standards of

amounts individuals donated to charities. We note that petitioners’ ratios of

charitable contribution deductions to total income reported for each year at issue do

not equal 1.5%.7

      During the years at issue Michael Summers (Deputy Summers) and Timitre

Kyriakides (Deputy Kyriakides) worked at OCSD and had their personal income tax

returns prepared by Mr. Kern or Mr. Redinger. Among the returns prepared were

the 1999 through 2002 personal income tax returns for Deputy Summers and the

2001 through 2003 personal income tax returns for Deputy Kyriakides. Deputy

Summers, during an in-person meeting with Mr. Kern, felt encouraged to claim a

deduction for a gun he did not purchase. He later stopped using KWA as a return

preparer because he was opposed to claiming a deduction for a fictitious firearm.

      6
       Petitioners’ returns do not report identical deductions year to year; nor are
we able to discern any statistical significance from the deductions claimed across
multiple years.
      7
        The ratio of charitable contributions to total income, rounded to the nearest
one-tenth of 1% percent ranges for Deputy Eriksen for 1999 through 2002 from
2.9% to 3.6%; for Deputy Aginaga for 1999 through 2002 from 2.5% to 3.9%; and
for the Hardins for 2000 through 2002 from 2.6% to 4.0%. The Kesselrings’ ratios
for 2001 and 2002 were 1.7% and 6.9%, respectively.
                                        - 10 -

Deputy Kyriakides’ 2001 through 2003 returns claimed itemized deductions for

weapons, ammunition, a cell phone, and protective equipment for which he did not

provide receipts or substantiation. Respondent made an offer of proof at trial of the

testimony of approximately 150 fact witnesses who would have testified to

experiences with Messrs. Kern and/or Redinger similar to those testified to by

Deputies Summers and Kyriakides.

IV.   Criminal Prosecution of Messrs. Kern and Redinger

      Respondent’s Criminal Investigation Division (CID) investigated KWA.

Special agents with CID executed a search warrant at KWA’s office and seized all

individual tax returns attaching Schedules A, Itemized Deductions. Thereafter, the

U.S. Attorney’s Office for the Eastern District of Michigan filed separate criminal

informations with the U.S. District Court for the Eastern District of Michigan

charging Messrs. Kern and Redinger each with one count of willfully aiding and

assisting in the preparation and presentation to the IRS of a false individual Federal

income tax return.

      Subsequently, Messrs. Kern and Redinger each pleaded guilty to one count of

aiding and assisting in the preparation of a false Federal income tax return in

violation of section 7206(2). In the agreed factual basis for guilty plea, Mr. Kern

admitted to preparing a false 2002 Federal income tax return for Robert C. Turner
                                         - 11 -

and Kelly A. Turner by inflating itemized deductions (charitable contributions) and

business expenses (unreimbursed employee expenses). Mr. Kern also admitted, for

sentencing purposes, to preparing 51 Federal income tax returns claiming improper

deductions and causing a total tax loss to the United States, exclusive of penalties

and interest, of $115,869. Petitioners’ returns were not included among the 51

returns considered as part of Mr. Kern’s guilty plea.

      In the stipulated factual basis for guilty plea, Mr. Redinger admitted to

willfully assisting in the preparation of a false 2001 Federal income tax return for

Derek Meyers and Sarah Meyers, one of whom was an OCSD deputy, by claiming

false unreimbursed employee expenses as itemized deductions. For sentencing

purposes, Mr. Redinger admitted to preparing 34 Federal income tax returns on

which he claimed improper deductions for clients and causing a total tax loss to the

United States of $58,728, not including penalties and interest. Petitioners’ returns

were again not included among the 34 returns considered as part of Mr. Redinger’s

guilty plea. The record is not clear as to whether there is overlap between the false

and fraudulent returns admitted to by Messrs. Kern and Redinger.

      During his plea allocution Mr. Kern stated that not all returns he prepared

were fraudulent. Upon further questioning from the District Court on that point,
                                         - 12 -

Mr. Kern represented that of the 1,900 or so tax returns that he prepared annually,

between 30 and 40 were false. He also maintained that the IRS was, in some

instances, challenging legitimate deductions.

      As part of his criminal plea agreement, Mr. Redinger agreed to disclose to the

IRS false and fraudulent Federal tax returns that he and Mr. Kern prepared. In

furtherance thereof, on November 25, 2008, Mr. Redinger submitted to a revenue

agent in respondent’s civil division a partial list of clients for whom he and Mr.

Kern prepared false tax returns for 1999, 2000, and/or 2001. Petitioners were not

included in that summary, and the record is not clear as to whether Mr. Kern or Mr.

Redinger provided a more comprehensive list to CID at another time. Nor is the

record clear as to whether Mr. Kern agreed to cooperate with the IRS or whether he

participated in preparing Mr. Redinger’s list.

      After conclusion of the criminal cases against Messrs. Kern and Redinger,

CID referred more than 200 Federal income tax returns to the IRS civil division for

examination, including the returns at issue here. The IRS audited between 130 and

150 individual returns, including those of each petitioner or couple. Some

individuals whose returns were referred to the civil division amended their tax

returns to remove falsely claimed deductions. Petitioners did not.
                                         - 13 -

V.    Federal Income Tax Returns and Determination of Deficiencies

      A.       Overview

      Petitioners hired Mr. Kern or Mr. Redinger to prepare their Federal income

tax returns for each year at issue. Generally, each petitioner or couple met with Mr.

Kern or Mr. Redinger once in the first year the return preparer was retained. In

subsequent years each petitioner or couple simply dropped off at KWA’s office

information considered necessary by that taxpayer to prepare his, her, or their tax

returns. Each return claimed deductions for unreimbursed employee expenses and

charitable contributions. Respondent disallowed most of these deductions, and the

parties stipulate that petitioners have not substantiated any of the claimed

deductions.8

      Respondent reflected his determinations in notices of deficiency separately

issued to each petitioner or couple outside the period of limitations on assessment in

section 6501(a). In particular, respondent determined the following deficiencies and

section 6662(a) accuracy-related penalties:




      8
        As discussed more fully below, respondent allowed Deputy Aginaga, the
Hardins, and the Kesselrings each a $250 charitable contribution deduction for each
year at issue. The record is not clear why respondent allowed those deductions
given the parties’ stipulation that the donations were not substantiated.
                                     - 14 -

Scott M. Eriksen (Docket No. 30768-09)

                                                 Penalty
            Year        Deficiency            Sec. 6662(a)

            1999           $266                   $53
            2000            812                   162
            2001          1,086                   217
            2002          1,066                   213

Tina E. Aginaga a.k.a. Tina E. Aginaga-Dove (Docket No. 4527-10)

                                                 Penalty
            Year        Deficiency            Sec. 6662(a)

            1999           $495                   $99
            2000            675                   135
            2001            803                   161
            2002            825                   165

Mitchell L. Hardin and Stephanie A. Hardin (Docket No. 4900-10)

                                                 Penalty
            Year        Deficiency            Sec. 6662(a)

            2000           $262                   $52
            2001            705                   141
            2002            892                   178

Jeffrey L. Kesselring and Arleen L. Kesselring (Docket No. 4902-10)

                                                 Penalty
            Year        Deficiency            Sec. 6662(a)

            2001           $321                   $64
            2002            443                    89
                                         - 15 -

We summarize respondent’s proposed adjustments for each petitioner or couple in

turn.

        B.     Deputy Eriksen

        Mr. Kern prepared, and Deputy Eriksen filed, Federal income tax returns for

1999 through 2002. Respondent selected each return for examination. Deputy

Eriksen claimed for 1999, and respondent disallowed, an unreimbursed employee

expense deduction of $3,056, a charitable contribution deduction of $1,025, and a

deduction for tax preparation fees of $100.9 Deputy Eriksen also claimed the

following itemized deductions, among others:

             Item                 2000               2001                2002

Weapon and ammunition          $1,128               $1,126             $1,046
Uniforms and cleaning             636                  -0-                 -0-
Protective equipment              941                  -0-                -0-
Uniforms and protective
 clothing                          -0-               1,894               1,910
Cell phone and pager              983                  883                 947
Boots and shoes                   197                   -0-                 -0-
Union and/or professional dues    372                  472                 414
Mileage                           694                  944                 882
Professional subscriptions         -0-                 180                 210
Charitable contributions        1,185                1,575               1,785
Tax preparation fees              100                  125                 125


        9
        The record includes a copy of Deputy Eriksen’s 1999 Federal income tax
return and supporting Schedule A. The Schedule A references an attachment that is
not in the record.
                                        - 16 -

Respondent disallowed each of the foregoing itemized deductions and allowed in

lieu thereof the standard deduction for each year.

      C.     Deputy Aginaga

      Mr. Kern prepared, and Deputy Aginaga filed, Federal income tax returns for

1999 through 2002. Those returns claimed, in addition to others, the following

itemized deductions:

           Item                  1999        2000      2001       2002

Weapon and ammunition          $984        $1,025     $1,124     $1,016
Uniforms and cleaning           614           575        -0-         -0-
Protective equipment             -0-          612         -0-        -0-
Uniforms and protective
 clothing                        -0-            -0-    1,866       1,712
Cell phone and pager             -0-           965     1,017       1,194
Boots and shoes                 314            214        -0-         -0-
Union and/or professional dues 660             371       487         492
Mileage                         458            471       -0-          -0-
Education                       230            -0-       -0-          -0-
Professional subscriptions       -0-           -0-       210         195
Charitable contributions        985          1,295     1,725       2,085

On audit of these returns, respondent disallowed each of the foregoing itemized

deductions, except that respondent allowed a charitable contribution deduction of

$250 for each of the years 1999 through 2002.
                                       - 17 -

      D.     The Hardins

      Mr. Kern prepared, and the Hardins filed, Federal income tax returns for 2000

through 2002. Those returns claimed as itemized deductions, in addition to other

items, the following deductions:

                Item                            2000    2001       2002

      Weapon and ammunition         $1,744      $1,226      $1,365
      Uniforms and cleaning                1,261          -0-      1,123
      Protective equipment                   592           -0-       300
      Uniforms and protective clothing       -0-       1,028         -0-
      Cell phone and pager                 1,018       1,085       1,245
      Boots and shoes                        465          -0-        150
      Union and professional dues            371         474         474
      Mileage                              1,137         316         765
      Professional subscriptions              -0-         180         250
      Charitable contributions             1,125       1,385       1,915
      Tax preparation fees                   250          125         -0-

On audit of the Hardins’ 2000 through 2002 returns, respondent disallowed each of

the foregoing itemized deductions, except that he allowed unreimbursed employee

expenses of $474 for each of the years 2001 and 2002 and charitable contribution

deductions of $250 for each of the years 2000 through 2002.10




      10
        Respondent disallowed the Hardins’ claimed itemized deductions for 2000
and allowed in lieu thereof the standard deduction for that year.
                                        - 18 -

      E.     The Kesselrings

      The Kesselrings filed Federal income tax returns for 2001 and 2002. Mr.

Kern prepared the Kesselrings’ 2001 return, and Mr. Redinger reviewed and signed

their 2002 return, though he did not prepare it. Each of those returns was selected

for audit. The Kesselrings claimed, in addition to other deductions, the following

itemized deductions on their 2001 and 2002 Federal income tax returns:

                      Item                          2001        2002

             Weapon and ammunition                  $985       $1,025
             Uniforms, boots, and
              maintenance                             515          510
             Cell phone and pager                     365          365
             Union and professional dues              414          414
             Mileage                                  961          975
             Charitable contributions                 965          945

Respondent disallowed each of the foregoing deductions, except that he allowed the

Kesselrings deductions for unreimbursed employee expenses of $414 for each of the

years 2001 and 2002, and a $250 charitable contribution deduction for each of those

years. Finally, the Kesselrings claimed a deduction for real estate taxes of $7,039

for 2001, of which respondent disallowed $1,942.

VI.   Petitions, Trial, and Petitioners’ Oral Motion for Summary Judgment

      Petitioners petitioned the Court in response to the notices of deficiency, and a

trial was held in Detroit, Michigan. Petitioners moved for summary adjudication
                                         - 19 -

after the presentation of evidence closed, and the Court took that motion under

advisement. We will deny petitioners’ motion because, as we find, the outcome of

these cases turns on whether respondent has proven fraud and not on any legal issue

in controversy. See Rule 121(a).

                                      OPINION

I.    Statute of Limitations

      We begin with an overview of the limitations period for assessment of income

tax. The Commissioner generally must assess any income tax within the three-year

period after a taxpayer files his or her return. Sec. 6501(a). The statute of

limitations in section 6501(a) may be tolled, however, in the case of a false or

fraudulent return with the intent to evade tax. Sec. 6501(c)(1). Tax determined to

be due on a false or fraudulent return may be assessed, or a proceeding in court for

collection of the tax may be begun, at any time. Id. In Allen v. Commissioner, 128

T.C. at 42, we held that section 6501(c) indefinitely extends the period of limitations

on assessment in the case of a false or fraudulent return, even though it is the

preparer and not the taxpayer who intended to evade tax. As we recognized in

Colestock v. Commissioner, 102 T.C. 380, 385 (1994): “[W]here fraud is alleged

and proven, respondent is free to determine a deficiency with respect to all items for

the particular taxable year without regard to the period of limitations.”
                                         - 20 -

      Respondent asserts in his pretrial memorandum of law that the instant cases

are identical to Allen and that the period of limitations is open.11 There are certainly

similarities between Allen and the instant cases, but the two are fundamentally at

odds. Like the return preparer in Allen, Messrs. Kern and Redinger were convicted

of violating section 7206(2). Similar to the returns at issue in Allen, petitioners’

returns were not identified in the criminal case against Mr. Kern or Mr. Redinger.

As in Allen, each notice of deficiency in these cases was issued after expiration of

the three-year period of limitations in section 6501(a). Both Allen and the instant

cases concern claimed itemized deductions. The parallels between Allen and the

instant cases mostly end there.

      Unlike these cases, Allen was submitted to the Court for decision without

trial under Rule 122. Id. at 37. Among the stipulated facts agreed to by the Allen

parties was that Mr. Allen’s returns were false and fraudulent and that the return

preparer falsified the returns with intent to evade tax. Id. at 38. The absence of a

stipulation that petitioners’ returns were prepared with intent to evade tax

distinguishes Allen from the instant cases in a key respect. When Mr. Allen

stipulated that his returns were fraudulent, the issue for decision shifted from

      11
        The Court directed the parties to file before trial a memorandum of law as to
whether the period of limitations remains open on the basis of the Court’s holding in
Allen v. Commissioner, 128 T.C. 37 (2007).
                                          - 21 -

whether the returns were fraudulent (a factual determination) to whether section

6501(c) held open the period of limitations on assessment (a legal determination).

The stipulated false or fraudulent returns became the direct evidence necessary to

prove fraud by clear and convincing evidence. Petitioners have made no such

concessions of fraud here. To the contrary, they profoundly challenge that

allegation. Respondent is correct that Allen is relevant insofar as section 6501(c)

tolls the statute of limitations for false or fraudulent returns, but that fraud must be

clearly and convincingly proven.

II.   Parties’ Arguments

      The point of contention between the parties is whether any return at issue was

falsely or fraudulently prepared. Petitioners assert that their returns were not false

or fraudulent and that section 6501(c) is inapposite. To support their claim,

petitioners maintain that deductions claimed on the returns in question were for

ordinary and necessary expenses of their business as OCSD employees and that any

deductions claimed later determined to be nondeductible were claimed in good faith.

Implicit throughout petitioners’ argument is that the returns at issue may have been

negligently prepared but were not fraudulent. On the other hand, respondent relies

on Allen to support his allegation that the return preparers prepared petitioners’
                                         - 22 -

returns fraudulently and that the statute of limitations on assessment is tolled under

section 6501(c).

III.   Whether Any of Petitioners’ Returns Were Fraudulent

       A.    Overview

       Respondent, if he is to prevail, must prove by clear and convincing evidence

that each return at issue was false or fraudulent. See secs. 6501(c), 7454(a); Rule

142(b). A mere preponderance of the evidence will not sustain a finding of fraud--

what is needed is clear and convincing evidence of fraud. Gano v. Commissioner,

19 B.T.A. 518, 532-533 (1930). Clear and convincing evidence is

       “that measure or degree of proof which will produce in the mind of the
       trier of facts a firm belief or conviction as to the allegations sought to
       be established. It is intermediate, being more than a mere
       preponderance, but not the extent of such certainty as is required
       beyond a reasonable doubt in criminal cases. It does not mean clear
       and unequivocal.” * * *

Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502, 516 (1990) (quoting Cross v.

Ledford, 161 Ohio St. 469 (1954)); see also Hobson v. Eaton, 399 F.2d 781, 784

n.2 (6th Cir. 1968).

       Fraud is the intentional commission of an act or acts for the specific purpose

of evading tax believed to be due and owing. Petzoldt v. Commissioner, 92 T.C.

661, 698 (1989). Fraud may not be imputed or presumed but must always be
                                         - 23 -

established by independent evidence of fraudulent intent to evade tax. Id. at 699.

Negligence, either general or gross, is not synonymous with fraud because fraud

requires scienter. Webb v. Commissioner, 394 F.2d 366, 377-378 (5th Cir. 1968),

aff’g T.C. Memo. 1966-81; Bruce Goldberg, Inc. v. Commissioner, T.C. Memo.

1989-582, 58 T.C.M. (CCH) 519, 530 (1989). Whereas negligence or gross

negligence bespeaks breach of duty of care, “[f]raud implies bad faith, intentional

wrong doing and a sinister motive.” Davis v. Commissioner, 184 F.2d 86, 87 (10th

Cir. 1950), remanding a Memorandum Opinion of this Court. The existence of

fraud is a factual determination to be gleaned from the entire record. Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), aff’d without published opinion, 578 F.2d

1383 (8th Cir. 1978).

      A fraud determination for purposes of the section 6501(c) period of

limitations on assessment is the same as assessing a taxpayer’s liability for the

section 6663 fraud penalty. Rhone-Poulenc Surfactants & Specialties, L.P. v.

Commissioner, 114 T.C. 533, 548 (2000). Thus, respondent must prove for each

return at issue that (1) an underpayment of tax exists, and (2) the return preparer

intended to evade taxes known to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of tax. See Parks v. Commissioner, 94

T.C. 654, 660-661 (1990). We consider each element in turn.
                                          - 24 -

      B.     Underpayment of Tax

      Each petitioner or couple concedes liability for respondent’s determined

deficiencies if we conclude that the period of limitations is open under section

6501(c). Petitioners argue that the mere fact that they stipulated respondent’s

deficiency determinations does not satisfy respondent’s burden of proving an

underpayment of tax for each year at issue. Specifically, petitioners rely on Parks v.

Commissioner, 94 T.C. at 661, in which we cautioned against bootstrapping a

finding of fraud upon a taxpayer’s failure to prove the Commissioner’s

determinations erroneous. Petitioners cite Parks out of context.

      In Parks we stated that “[w]here * * * respondent has prevailed on the issue

of the existence of a deficiency by virtue of a taxpayer’s failure to carry his burden

of proof, respondent cannot rely on that failure to sustain his burden of proving

fraud. We must be careful in such cases not to bootstrap a finding of fraud upon a

taxpayer’s failure to prove respondent’s deficiency determinations erroneous.” Id.

at 660-661 (citations omitted). Petitioners’ deficiencies do not result from a failure

of proof but from the parties’ stipulations that petitioners are liable for the

deficiencies if the period of limitations is open under section 6501(c). These

stipulations are binding on the parties by virtue of Rule 91(e) and prove by clear and

convincing evidence that an underpayment of tax exists with respect to each
                                         - 25 -

petitioner or couple and for each year at issue. Cf. Gold Bar, Inc. v. Commissioner,

T.C. Memo. 2000-211, 80 T.C.M. (CCH) 33, 35-36 (2000) (taxpayer’s concession

that it overstated business expense deductions and omitted income satisfied the

underpayment prong of the fraud penalty).

      C.     Fraudulent Intent

             1.     Overview

      Since fraudulent intent is rarely confirmable with direct evidence, courts have

distilled fraudulent intent by viewing circumstantial evidence in the light of certain

indicia of fraud. Among the factors to be evaluated in determining whether a return

preparer acted with fraudulent intent are: (1) Understatements of tax; (2) inadequate

books and records; (3) implausible or inconsistent explanations of behavior; (4)

failure to cooperate with, or failure to provide access to records to, tax authorities;

(5) making false entries or alterations; (6) keeping a double set of records; and (7)

any other conduct the likely effect of which is to mislead or to conceal. See Spies v.

United States, 317 U.S. 492, 499 (1943) (criminal tax evasion); Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986) (civil fraud penalty), aff’g

T.C. Memo. 1984-601; Solomon v. Commissioner, 732 F.2d 1459, 1461-1462 (6th

Cir. 1984) (civil fraud penalty), aff’g T.C. Memo. 1982-603. When balancing these

factors, we look to evidence that is “so strong” that fraud is the most manifest
                                        - 26 -

explanation. Biggs v. Commissioner, 440 F.2d 1, 5 (6th Cir. 1971), aff’g T.C.

Memo. 1968-240; see also Richardson v. Commissioner, 509 F.3d 736, 743-745

(6th Cir. 2007), aff’g T.C. Memo. 2006-69.

             2.     Respondent’s Theory of Fraud

      Respondent submits that Mr. Kern or Mr. Redinger prepared petitioners’ tax

returns fraudulently by claiming fabricated itemized deductions and understating

petitioners’ income. To carry his burden, respondent relies on the general practice

of Messrs. Kern and Redinger to claim deductions on the basis of client responses

to questions without supporting records. Respondent infers from this course of

conduct, as well as the trial testimony of Deputy Kyriakides and Deputy Summers

and the proffered testimony of 150 fact witnesses, that each return at issue in these

cases was prepared with the intent to evade tax. Respondent persuasively argues

that some law enforcement officers acted fraudulently, but the generalizations on

which he relies to meet his burden are neither clear nor convincing evidence that

petitioners’ returns were fraudulent. On the other hand, petitioners’ testimony raises

a suspicion of fraud in the cases of Deputy Eriksen, the Hardins, and the Kesselrings

or presents an overt admission of fraud in the case of Deputy Aginaga. We consider

each petitioner or couple in turn.
                                        - 27 -

             3.     Deputy Eriksen, the Hardins, and the Kesselrings

      When taken as a whole, the testimony of Deputy Eriksen, the Hardins, and

the Kesselrings undercuts respondent’s theory that their returns were false or

fraudulent. Preliminarily, we note that petitioners were not named in the criminal

informations filed in the District Court, and they were not listed among the clients

for whom Mr. Redinger prepared false or fraudulent returns. As far as the record is

concerned, petitioners’ returns were first implicated during CID’s investigation,

though CID never conclusively determined the returns to be false or fraudulent.

Respondent’s theory is further called into doubt given Mr. Kern’s plea allocution in

which he stated that of the 1,900 or so returns he prepared annually, between 30 and

40, or between 1.6% and 2.1%, were false or fraudulent. We also view

respondent’s theory with heightened skepticism in view of statements Mr. Kern

made to the District Court that the IRS challenged legitimate deductions.

      At the same time, the fact that Mr. Kern’s and Mr. Redinger’s application of

Federal income taxation law was amiss cannot plausibly be denied. They enabled

clients to claim deductions on the basis of responses to questions targeting alleged

cash outlays but did not require records substantiating those expenses. Taxpayers

must maintain records substantiating deductions claimed. See sec. 6001; sec.

1.6001-1(a), (e), Income Tax Regs. Messrs. Kern and Redinger wrongfully relied
                                       - 28 -

on estimates to prepare many of their clients’ tax returns. Taxpayers are generally

prohibited from estimating vehicle expenses and expenses covered by section

274(d). Sanford v. Commissioner, 50 T.C. 823, 828 (1968), aff’d, 412 F.2d 201

(2d Cir. 1969). Messrs. Kern and Redinger claimed deductions for petitioners for

uniform cleaning and mileage even though the county reimbursed such expenses.

Trade or business deductions are not allowed for reimbursable expenses. Lucas v.

Commissioner, 79 T.C. 1, 7 (1982); see also Coplon v. Commissioner, 277 F.2d

534, 535 (6th Cir. 1960), aff’g T.C. Memo. 1959-34. Messrs. Kern and Redinger

concluded that clients’ expenses for weapons, ammunition, protective gear, cell

phone, and clothing were deductible. They did not analyze whether those expenses

were nondeductible personal expenses, see sec. 262, or whether they were ordinary

and necessary expenses related to deputy petitioners’ trade or business as OCSD

employees, see sec. 162(a). We conclude that these methods connote negligence

but are not clear and convincing evidence of fraud.

      Deputies Eriksen, Hardin, and Kesselring testified to purchasing weapons,

ammunition, protective equipment, flashlights, handcuffs, and cold weather gear.

They likewise testified to donating cash, clothing, and household items to various

charitable organizations, including churches, the Salvation Army, Goodwill, the
                                        - 29 -

USO, Ducks Unlimited, and Trout Unlimited, among others.12 We found this

testimony general, vague, and perhaps coordinated, yet respondent did not examine

Deputy Eriksen, Hardin, or Kesselring to such a degree as to destroy his credibility.

As to claimed deductions for weapons, ammunition, protective equipment, and

professional subscriptions, respondent did not offer evidence that Deputies Eriksen,

Hardin, and Kesselring did not purchase such items. Such an allegation might have

been easily proven by, for example, introducing bank records, credit card

statements, and/or gun records as to whether each deputy petitioner purchased the

claimed items. See 18 U.S.C. sec. 923(g)(1)(A) (2012) (requiring firearms dealers

to maintain records of firearms sales ). Respondent introduced no such evidence.

      Respondent misplaces reliance on petitioners’ inability to substantiate the

expenses claimed on their returns to prove fraud.13 The Court of Appeals for the

      12
         Although we seriously question whether these charitable contributions were
made, respondent did not clearly and convincingly sustain his burden of proof on
this issue. If the contributions were never made, as respondent suggests, he could
have met his burden by summoning records from the organizations to which the
donations were allegedly made or by offering bank records showing a lack of
conforming proof. See sec. 7602(a)(2). No such evidence was presented.
      13
         Respondent asserts that petitioners ignored “trial subpoenas” issued before
trial, which we understand to refer to subpoenas duces tecum directing petitioners to
produce certain documentary evidence. Relying on Wichita Terminal Elevator Co.


                                                                        (continued...)
                                         - 30 -

Sixth Circuit, the court to which an appeal of these cases would most likely lie, has

cautioned that “‘Failure to contest an adjustment made in determining the deficiency

is not proof of fraud. The Commissioner cannot sustain his burden of proof on a

fraud issue by statements made in his notice of deficiency.’” Drieborg v.

Commissioner, 225 F.2d 216, 218-219 (6th Cir. 1955) (quoting Joseph v.

Commissioner, 32 B.T.A. 1192, 1204 (1935)), aff’g in part a Memorandum Opinion

of this Court; see also Parks v. Commissioner, 94 T.C. at 660-661. We are careful

to not condition a finding of fraud on petitioners’ lack of substantiation because

respondent bears the burden of producing affirmative evidence of fraud.

      The criminal convictions of Messrs. Kern and Redinger, the implausibility

and inconsistency of their testimony, and the testimony of Deputies Summers and

Kyriakides each weigh in favor of fraud. But those general factors, absent a more

direct link to petitioners, merely heighten our suspicion of fraud. A suspicion of

fraud, no matter how strong, is insufficient to sustain a finding of fraud. See

Drieborg v. Commissioner, 225 F.2d at 219-220; Katz v. Commissioner, 90 T.C.


      13
        (...continued)
v. Commissioner, 6 T.C. 1158 (1946), aff’d, 162 F.2d 513 (10th Cir. 1947),
respondent claims that petitioners’ failure to produce such records gives rise to a
presumption that those documents would be unfavorable to them. We decline to
draw such an inference. The record does not include copies of the trial subpoenas
and it does not specify the scope of documents requested.
                                         - 31 -

1130, 1144 (1988); Shaw v. Commissioner, 27 T.C. 561, 569-570 (1956), aff’d,

252 F.2d 681 (6th Cir. 1958); Rinehart v. Commissioner, T.C. Memo. 1983-184, 45

T.C.M. (CCH) 1185, 1195 (1983). Respondent has not proven by clear and

convincing evidence that the returns of Deputy Eriksen, the Hardins, or the

Kesselrings were prepared with the intent to evade tax.14 Accordingly, we hold that

assessments of Deputy Eriksen’s, the Hardins’, and the Kesselrings’ tax are time

barred. Given that holding, we need not and do not address Deputy Eriksen’s, the

Hardins’, or the Kesselrings’ liability for the deficiencies and accuracy-related

penalties.

             4.     Deputy Aginaga

      Respondent asserts, and we agree, that Deputy Aginaga testified honestly and

credibly. Her testimony, however, serves as the direct evidence that each of her

returns for 1999 through 2002 was false and fraudulent. Deputy Aginaga’s trial

testimony establishes that she “never” purchased a gun or ammunition during any

year at issue and that she explained as much to Mr. Kern. Deputy Aginaga’s

statements on brief are consistent on this point in that she stated that “she did not


      14
         Our result in these cases would not change even if respondent was allowed
to call each of the 150 witnesses whose testimony he proffered. Circumstantial
evidence of this nature, without a more direct link to the taxpayers’ returns, is not
necessarily sufficient to sustain a finding of fraud.
                                         - 32 -

actually purchase a gun or ammunition during the years at issue.” Yet each return

claimed as an unreimbursed employee expense deduction amounts for weapons and

ammunition. By Deputy Aginaga’s admission, therefore, each of her returns at issue

contained false or fraudulent deductions for a weapon and ammunition. We regard

Deputy Aginaga’s admissions as direct evidence of Mr. Kern’s willingness to

commit fraud with intent to evade tax as it relates to each of her returns.

      When viewed against the other indicia of fraud exhibited by Mr. Kern, the

preparer who prepared each of Deputy Aginaga’s returns, we are convinced that

each of Deputy Aginaga’s returns at issue was false or fraudulent. To be sure, Mr.

Kern prepared Deputy Aginaga’s 1999 through 2002 Federal income tax returns and

claimed deductions for weapon and ammunition thereon even though he was

forewarned that such purchases had not been made. Such misconduct resulted in

understatements of income tax on each of Deputy Aginaga’s 1999 through 2002

Federal income tax returns. The entries were admittedly fictitious and obviously not

able to be substantiated with supporting records. We infer from this course of

conduct, as well as Deputy Aginaga’s admissions, that Mr. Kern intended to evade

taxes known to be owing from Deputy Aginaga by conduct intended to conceal,

mislead, or otherwise prevent the collection of tax. On the basis of the foregoing,
                                          - 33 -

we conclude that respondent has clearly and convincingly proven that deductions for

a weapon and ammunition for each year at issue were claimed with fraudulent

intent.

          Once respondent has produced sufficient evidence to establish that a portion

of Deputy Aginaga’s underpayment was attributable to fraud, and we conclude he

has, section 6501(c)(1) holds open the periods of limitations for those years. See

Allen v. Commissioner, 128 T.C. at 42; Rhone-Poulenc Surfactants & Specialties,

L.P. v. Commissioner, 114 T.C. at 548. In view of our holding that the period of

limitations is open on account of the false or fraudulent nature of each of Deputy

Aginaga’s 1999 through 2002 Federal income tax returns, Deputy Aginaga concedes

the deficiencies respondent determined for each of those years. Accordingly, we

hold that there are respective deficiencies in Deputy Aginaga’s 1999 through 2002

Federal income taxes of $495, $675, $803, and $825.

IV.       Deputy Aginaga’s Liability for Accuracy-Related Penalties

          Respondent also contends that Deputy Aginaga is liable for accuracy-related

penalties for each of the years 1999 through 2002 for negligence or disregard of

rules or regulations, substantial understatements of income tax, or substantial

valuation misstatements. See sec. 6662(a) and (b)(1), (2), and (3). Because only

one accuracy-related penalty may be imposed with respect to any given portion of
                                        - 34 -

an underpayment, see sec. 1.6662-2(c), Income Tax Regs., we construe

respondent’s position as stating alternate grounds for the accuracy-related penalties.

Our query focuses on whether Deputy Aginaga acted with negligence or disregard

of rules or regulations.

      Pursuant to section 7491(c), respondent bears the burden of production with

respect to Deputy Aginaga’s liability for the section 6662(a) penalties. This means

that respondent “must come forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty.” Higbee v. Commissioner, 116 T.C.

438, 446 (2001). Deputy Aginaga testified that she claimed deductions which she

did not incur and filed her Federal income tax returns for each of the years at issue

without reviewing them. Consequently, we conclude that respondent has met his

burden of production for determining accuracy-related penalties due to negligence or

disregard of rules or regulations.

      For purposes of section 6662, the term “negligence” includes any failure to

make a reasonable attempt to comply with the income tax provisions of the Code.

Sec. 6662(c). Disregard of rules or regulations includes any careless, reckless, or

intentional disregard of rules or regulations. Id. Deputy Aginaga admitted at trial

that she did not review any of her 1999 through 2002 Federal income tax returns,

and she admitted to signing those returns without reviewing them. She accepted
                                        - 35 -

that expenses claimed for weapons and ammunition were false and incorrect. The

record as a whole establishes that Deputy Aginaga filed each of her tax returns with

reckless disregard for rules and regulations. The false deductions claimed on

Deputy Aginaga’s returns are as much attributable to her failure to review those

returns as they are to Mr. Kern’s fraudulent preparation of them. Accordingly, we

conclude that the accuracy-related penalties apply absent a mitigating affirmative

defense.

      Deputy Aginaga claims on brief that the accuracy-related penalties do not

apply because she meets the reasonable cause defense of section 6664(c)(1). We

are not persuaded. As support for her position, Deputy Aginaga generally relies on

section 1.6664-4, Income Tax Regs. (and the included examples). That section

states as a general rule that the most important factor to be evaluated in deciding

whether a taxpayer acted with reasonable cause and in good faith is the extent to

which the taxpayer sought to assess his or her proper tax liability. Sec. 1.6662-

4(b)(1), Income Tax Regs. Deputy Aginaga goes on to state that she “missed” the

falsely claimed deductions for a weapon and ammunition “because she didn’t not

[sic] review her tax returns.”

      A taxpayer is charged with knowledge and awareness of and responsibility

for the items reported on his or her Federal tax returns. Allen v. Commissioner, 128
                                         - 36 -

T.C. at 41 (citing Magill v. Commissioner, 70 T.C. 465, 479-480 (1978), aff’d, 651

F.2d 1233 (6th Cir. 1981)). Where an individual claims ignorance of an item

leading to an understatement of tax, the taxpayer must prove (at a minimum) that he

or she fulfilled a duty of inquiry with respect to whether the correct liability was

reported on the return. Cf. Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th

Cir. 1989) (duty of inquiry in innocent spouse cases), aff’g T.C. Memo. 1988-63.

Deputy Aginaga acknowledged on brief that she neglected her duty of inquiry by not

reviewing her 1999 through 2002 Federal income tax returns. We refuse to excuse

such neglect on the grounds of reasonable cause. Accordingly, we hold that Deputy

Aginaga is liable for accuracy-related penalties under section 6662(a) of $99, $135,

$161, and $165 for 1999 through 2002, respectively.

      In reaching our decision, we have considered all arguments made, and to the

extent that we have not specifically addressed them, we conclude they are moot,

irrelevant, or without merit.

      To give effect to the foregoing,


                                                      Appropriate orders and decisions

                                                  will be entered.
