                        T.C. Memo. 2014-174



                   UNITED STATES TAX COURT



            HECTOR SANCHEZ, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 9729-12.                           Filed August 28, 2014.



William E. Taggart, Jr., and Jason J. Galek, for petitioner.

Michael Skeen, Randall G. Durfee, and Sara E. Sexton, for respondent.
                                         -2-

[*2]        MEMORANDUM FINDINGS OF FACT AND OPINION1


       LARO, Judge: The sole issue before the Court is whether petitioner is

liable for a fraud penalty under section 66632 for 2005, 2006, 2007, and 2008

(years at issue). Petitioner resided in California when he filed his petition.

                               FINDINGS OF FACT3

       Petitioner is a citizen of Mexico and attended primary school there through

the third grade. Approximately 40 years ago petitioner came to the United States,

and he was a resident alien of the United States during the years at issue.

Petitioner speaks English but not fluently.


       1
        This case was tried before Judge Diane L. Kroupa in March 2014. On June
16, 2014, Judge Kroupa retired from the Tax Court. On June 18, 2014, the Court
issued an order informing the parties of Judge Kroupa’s retirement and proposing
to reassign this case to another judicial officer of the Court for purposes of
preparing the opinion and entering the decision based on the record of trial, or,
alternatively, allowing the parties to request a new trial. On July 10, 2014, the
parties filed a joint response consenting to the reassignment of this case. On July
23, 2014, the Court issued an order assigning this case to Judge David Laro.
       2
       Unless otherwise indicated, section references are to the Internal Revenue
Code in effect for the years at issue, and Rule references are to the Tax Court
Rules of Practice and Procedure. Some dollar amounts in tables have been
rounded.
       3
       Because of the reassignment of this case for purposes of preparing the
opinion and entering the decision, we did not have an opportunity to observe the
demeanor of the witnesses. We therefore make no inferences of credibility, except
that which may be judged from the written record.
                                           -3-

[*3] I.         Cash for Cans

          Around 20 years ago petitioner started a sole proprietorship called Cash for

Cans. Cash for Cans pays individuals for recyclable material, aggregates these

materials, and sells them to processors at a premium. California sets a cash

redemption value (CRV) for various recyclable materials such as aluminum, glass,

and certain plastics, including but not limited to polyethylene terephthalate (PET)

and high-density polyethylene (HDPE). In California retailers must collect the

CRV from consumers as a deposit when they sell products with recyclable

packaging. Consumers may then redeem the CRV by returning the recyclable

material to a recycler (such as Cash for Cans), which is required by law to pay the

consumer at least the CRV.

          The State of California requires recyclers to keep daily logs. For each

transaction the daily log shows the type and weight of material received, the

amount paid, and the customer’s name and signature. In addition, the State of

California requires recyclers to complete shipping reports. The shipping report

contains the shipment date, the shipper’s information, the receiver’s information,

the type and weight of material delivered, and the CRV refund amount. State of

California auditors inspect the business premises of recyclers to ensure that they

purchase only materials that are part of the California redemption program and to
                                         -4-

[*4] ensure that they maintain the required records. Auditors can issue a citation

to the recycler if it is not in compliance with California law. State auditors visited

Cash for Cans on several occasions during the years at issue.

      Cash for Cans maintained daily logs during each of the years at issue.

Every day, three or four employees ran Cash for Cans’ recycling operations.

Customers would bring recyclable materials to Cash for Cans, and an employee

would verify that the materials were California redemption materials before

sorting them into baskets. The materials were then weighed and the customer

given a handwritten ticket for the amount due to him. For each year at issue,

petitioner paid his customers the minimum CRV rate set by the State.

      For each transaction a Cash for Cans employee would also fill out an entry

on the daily log, which the customer was required to sign. The customer then

redeemed the handwritten ticket for cash at a window, which was generally

attended by petitioner or a member of his family. At the end of each day the daily

logs were tallied to calculate the total amount of each material purchased and the

total amount paid. Cash for Cans maintained these daily logs in its office.

Petitioner’s daughter, Rocio Sanchez, created monthly summaries from these daily

logs. At the end of the year, Rocio Sanchez used these monthly summaries to
                                        -5-

[*5] generate a spreadsheet which listed (in pounds) the total amount of each

material that Cash for Cans had purchased every month (materials summary).

      Cash for Cans did business primarily with three processors during the years

at issue: Anheuser-Busch Recycling Co. (Anheuser-Busch), for aluminum and

plastic; Western Strategic Material, Inc. (Western Strategic), for glass; and Alco

Iron & Metal Co. (Alco), for scrap materials. Cash for Cans delivered the

recyclable materials to the respective processors by truck. For each truckload of

material, a shipping report was completed. On each shipping report, the processor

recorded the weight of recyclable materials delivered and the total payment

amount (which includes the CRV refund amount and a premium). Cash for Cans

retained a copy of the shipping report for its records. All three processors paid

Cash for Cans exclusively by check. Petitioner was responsible for depositing

these checks and for maintaining sufficient cash on Cash for Cans’ premises to pay

customers.

      Petitioner gave Rocio Sanchez the responsibility for tracking Cash for Cans’

expenses. Rocio Sanchez entered all of Cash for Cans’ expenses into a computer

accounting program called QuickBooks and used QuickBooks’ profit and loss

statement function to generate annual expense summaries. Rocio Sanchez did not

track Cash for Cans’ income, nor was she aware of whether anyone else did.
                                        -6-

[*6] Petitioner did not pay Rocio Sanchez for her services but did help pay for her

living expenses in 2006 and 2007.

II.   City of Oakland Business Tax Declaration

      Petitioner visited the City of Oakland offices to prepare and file a business

tax declaration during each of the years at issue. The business tax declaration is

an annual renewal form that businesses are required to file in order to maintain

their City of Oakland business licenses. Acton Hodgson is a tax representative for

the City of Oakland. He was assigned to assist petitioner in completing his

business tax declaration for each of the years at issue because he was the sole

Spanish speaker in that office. The City of Oakland taxes business on the basis of

a certain percentage of their gross receipts for the previous year. For example, the

2008 and 2009 renewal tax rate was $1.20 per $1,000 of gross receipts for the

prior year. Taxpayers are not required to provide supporting documentation to

substantiate their gross receipts, and the City does not verify the accuracy of the

reported information. Therefore, Mr. Hodgson took the gross receipts reported by

petitioner at “face value”. According to Mr. Hodgson, petitioner calculated his

annual gross receipts using the materials summaries. These materials summaries

provided the total weight of the various materials recycled by Cash for Cans and
                                          -7-

[*7] the rate per pound for each material. For example, Cash for Cans’ 2007

materials summary discloses:

            2007             Aluminum           Glass      PET #1      PET #2
     Total weight (lbs.)     429,049       2,799,455       755,172     96,907
     Rate (per lb.)             $0.39           $0.305       $0.15       $0.8

Therefore, on the basis of the weights and rates set forth in its 2007 materials

summary, Cash for Cans’ gross receipts should have been $1,211,964.29.

Petitioner, however, reported 2007 gross receipts of only $398,467 on his 2008

business tax declaration.

      As another example, Cash for Cans’ 2008 materials summary discloses:

                 2008          Aluminum          Glass       Plastic    HDPE
       Total weight (lbs.)     423,605      2,596,335        806,565    65,333
       Rate (per lb.)
         Jan.-June                $1.56          $0.105        $0.90     $0.52
         July-Dec.                 1.57            0.105        0.92      0.54
         Total                 663,062          272,615      734,809    34,635

Therefore, on the basis of its 2008 materials summary, Cash for Cans’ gross

receipts equaled $1,705,121. Petitioner, however, reported 2008 gross receipts of

only $284,279 on his 2009 business tax declaration. For each of the years at issue,
                                        -8-

[*8] petitioner filed his City of Oakland business tax declaration before filing his

Federal income tax return.

III.   Federal Income Tax Returns

       Griselda Robles is the owner of Griselda’s Tax and Bookkeeping Services.4

Ms. Robles prepared petitioner’s Federal income tax returns and his employment

tax returns for the years at issue. She did not perform any bookkeeping, general

accounting, or auditing services for petitioner.

       Each year petitioner and Rocio Sanchez provided Ms. Robles with Cash for

Cans’ materials summary, expense summary, and City of Oakland business tax

declaration. Petitioner did not provide Ms. Robles with Cash for Cans’ books and

records or its bank account statements. Instead, petitioner told Ms. Robles the

figures to report as Cash for Cans’ gross receipts and cost of goods sold (COGS).

Ms. Robles noticed that the gross receipts she calculated using the materials

summaries did not reconcile with the amounts reported on the City of Oakland

business tax declarations. When she brought these discrepancies to petitioner’s

attention, however, he instructed her to use the amounts reported on the City of

Oakland business tax declarations. After completing petitioner’s return for each


       4
      Ms. Robles did not complete college and is not a certified public
accountant (C.P.A.).
                                        -9-

[*9] of the years at issue, Ms. Robles met with petitioner to discuss the completed

return for that year. Ms. Robles always communicated with petitioner in Spanish.

IV.   IRS Audit

      IRS Revenue Agent Bally Chiu (RA Chiu) was assigned to audit

petitioner’s tax returns for the years at issue. During the audit RA Chiu examined

petitioner’s bank statements and noticed that the deposits were greater than she

would have expected according to Cash for Cans’ reported revenue.

      A.     Interviews

      RA Chiu met with petitioner twice in connection with the audit. Ms. Robles

represented petitioner during the first meeting. The first meeting was an informal

interview that took place in April 2010 at Ms. Robles’ office. Petitioner also gave

RA Chiu a tour of Cash for Cans during this first interview. After the first

interview Ms. Robles provided RA Chiu with Cash for Cans’ materials summaries

for 2007 and 2008, some expense summaries, and some bank statements.

      Petitioner, however, did not agree to a second interview. As a result, RA

Chiu had to summon petitioner to appear and present testimony and records. The

summons interview took place on September 30, 2010. The interview was

attended by RA Chiu, IRS attorney Jon Feldhammer, IRS manager Carlos Aguilar,

petitioner, petitioner’s counsel William Taggart, and two interpreters. Petitioner
                                        - 10 -

[*10] did not bring to the interview the records that respondent had requested in

the summons.

      During the interview petitioner initially represented that he had only three

U.S. bank accounts with Bank of America--personal, payroll, and business--and

that he did not have any foreign bank accounts or any other foreign assets. Further

questioning revealed, however, that petitioner’s wife (Rosalia Felis Camacho)

lived in Mexico and that petitioner routinely wired her money to support her and

her four children from a prior marriage. In addition, petitioner admitted that he

had wired approximately $130,000 to his wife in Mexico for the purchase of a

house. Finally, petitioner admitted that he had opened a bank account in Mexico

when he visited but represented that he wired only $500 to $1,000 to that account

and that he closed the account when he returned to the United States.

      Regarding his tax returns, petitioner admitted that he provided Ms. Robles

with income information and that Rocio Sanchez provided Ms. Robles with

expense information. When asked how he determined his gross receipts,

petitioner replied that he “just figured it out”. Petitioner admitted, however, that

Anheuser-Busch and Western Strategic kept records of all payments made to him

and that they could provide such records upon request. Petitioner further admitted

that he had requested and received these records in the past. Finally, at one point,
                                        - 11 -

[*11] petitioner asked for clarification of whether a question pertained to net or

gross income, thus demonstrating an understanding of these concepts.

      B.     Records

      After the summons interview petitioner produced the bank records

requested in respondent’s summons. Petitioner did not, however, provide all of

the documentation that RA Chiu had requested. Therefore, RA Chiu obtained

records of Cash for Cans’ activities directly from Anheuser-Busch and Western

Strategic. RA Chiu also subpoenaed Bank of America for information regarding

petitioner’s home loan.5

      RA Chiu used the records from Anheuser-Busch and Western Strategic to

reconstruct Cash for Cans’ gross receipts from those two companies and used

petitioner’s bank records to reconstruct Cash for Cans’ gross receipts from Alco.

Pursuant to her analysis, RA Chiu calculated and adjusted Cash for Cans’ gross

receipts as follows:




      5
       Petitioner owned and resided at 6253 Bromley Ave., Oakland, California, a
four-bedroom two-bathroom house with a two-bedroom one-bathroom back unit,
during the years at issue. In 2008 petitioner rented out a portion of the house for
$980 a month and the back unit for $550 a month. Each month, petitioner made
over $2,000 in mortgage payments on the house.
                                       - 12 -

     [*12] Gross receipts       2005             2006       2007        2008
     Aluminum                $914,043      $924,241 $1,025,004 $1,003,921
     Plastics                  753,534          736,561    930,063     992,925
     Glass                     385,548          376,706    450,485     451,772
     Scrap                      14,123           -0-        14,038      34,554
       Total                 2,067,247    2,037,508       2,419,590   2,483,173
       Total per return        248,704          363,966    398,467     541,083
     Adjustment              1,818,543    1,673,542       2,021,123   1,942,090

      Next, RA Chiu used the materials summaries for 2007 and 2008 to calculate

Cash for Cans’ COGS. RA Chiu did not have Cash for Cans’ materials summaries

for 2005 and 2006. Therefore, RA Chiu calculated Cash for Cans’ aluminum and

plastic COGS from the records Anheuser-Busch provided. Western Strategic’s

records, however, did not include similar information for glass, so RA Chiu used

the average cost of glass from 2007 to 2008 to estimate COGS for glass in 2005

and 2006. Pursuant to her analysis, RA Chiu calculated and adjusted Cash for

Cans’ COGS as follows:
                                      - 13 -

   [*13] COGS                2005          2006           2007          2008
   Aluminum               $616,024      $555,871       $660,918      $676,625
   PET #1 (plastic)         579,615       572,323       654,253       721,099
   HDPE (plastic)             -0-          32,194        32,831         36,729
   Other plastics            42,036            -0-         -0-            -0-
   Glass                    239,012       233,531       286,171       273,166
   Scrap                      -0-              -0-       38,855         57,395
    Total                1,476,686      1,393,918     1,673,028      1,765,013
    Total per return         88,507       163,785       135,960       283,357
   Adjustment           (1,388,179)    (1,230,133)   (1,537,068)   (1,481,656)

      RA Chiu’s investigation further revealed that petitioner made numerous and

large wire transfers to Mexico in 2007 and 2008. Petitioner wired to his wife over

$300,000 in 2007 and over $100,000 in 2008. In addition, petitioner wired to his

own bank account in Mexico over $10,000 in 2007 and over $15,000 in 2008.

Finally, in 2008 petitioner also wired $6,000 to Juana Duran Garcia and $4,000 to

Jovita Felix Camacho.

      C.    Audit Results

      On February 3, 2012, respondent issued to petitioner a notice of deficiency

for the years at issue. In addition to the gross receipt and COGS adjustments

discussed above, the notice of deficiency made a number of adjustments to

petitioner’s itemized deductions, expenses reported on Schedule C, Profit or Loss
                                         - 14 -

[*14] From Business, self-employment tax, rental income, and child tax credit.

Respondent determined petitioner’s taxable income, tax, deficiencies, and

penalties for the years at issue as follows:

                             2005        2006       2007        2008
      Taxable income
       Per exam           $450,163    $460,363    $525,170   $483,612
       Per return             8,051      11,277     25,576      11,902
      Tax liability
       Per exam            158,776      162,673    186,523     171,461
       Per return             5,123       6,098      9,059       7,242
      Deficiency           153,845      156,575    117,464     164,219
      Fraud penalty        115,384      117,431    129,012     119,302

                                      OPINION

      Respondent argues that petitioner is liable for the section 6663 fraud

penalties for the years at issue. Fraud is an intentional wrongdoing on the part of

the taxpayer with the specific purpose of evading a tax believed to be owing.

Edelson v. Commissioner, 829 F.2d 828, 833 (9th Cir. 1987), aff’g T.C. Memo.

1986-223; Akland v. Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), aff’g T.C.

Memo. 1983-249. A penalty equal to 75% of the underpayment will be imposed if

any part of the taxpayer’s underpayment of Federal income tax is due to fraud.
                                        - 15 -

[*15] Sec. 6663(a). Further, if any portion of the underpayment is attributable to

fraud, the entire underpayment will be treated as attributable to fraud unless the

taxpayer establishes by a preponderance of the evidence that part of the

underpayment is not due to fraud. Sec. 6663(b); see Foxworthy, Inc. v.

Commissioner, T.C. Memo. 2009-203, aff’d, 494 Fed. Appx. 964 (11th Cir. 2012).

      Respondent has the burden of proving by clear and convincing evidence

that an underpayment exists for each of the years at issue and that some portion of

the underpayment is due to fraud. See secs. 7454(a), 6663(a); Rule 142(b);

Clayton v. Commissioner, 102 T.C. 632, 646 (1994).

I.    Existence of Underpayment

      Petitioner’s underpayment of tax arises primarily from his unreported

income from Cash for Cans. In the Court of Appeals for the Ninth Circuit, to

which this case is appealable absent the parties’ stipulation to the contrary, see sec.

7482(b), the Commissioner’s determination as to unreported income in a notice of

deficiency is presumed correct when it is supported by a minimal evidentiary

foundation, Weimerskirch v. Commissioner, 596 F.2d 358, 360-361 (9th Cir.

1979), rev’g 67 T.C. 672 (1977); see also Delaney v. Commissioner, 743 F.2d 670,

671 (9th Cir. 1984) (stating that the Commissioner must produce some substantive
                                        - 16 -

[*16] evidence demonstrating that the taxpayer received unreported income), aff’g

T.C. Memo. 1982-666.

      On the basis of the record, we find that respondent has produced sufficient

evidence to establish that petitioner failed to report gross receipts of over $1.8

million for 2005, $1.6 million for 2006, $2 million for 2007, and $1.9 million for

2008. In addition, respondent has established that petitioner had taxable income

of $450,163 for 2005, $460,363 for 2006, $525,170 for 2007, and $483,612 for

2008. To put things in perspective, petitioner reported on his returns only 1.8%,

2.4%, 4.9%, and 2.5%, respectively, of his taxable income for the years at issue.

      Petitioner concedes the deficiencies set forth in the notice of deficiency.

Stated another way, petitioner concedes that he paid only 3.2%, 3.7%, 4.8%, and

4.2%, respectively, of his tax liability for the years at issue. Thus, respondent has

shown by clear and convincing evidence that an underpayment of tax exists for

each of the years at issue.

II.   Fraudulent Intent

      Fraud is never presumed but must be established by independent evidence

that establishes fraudulent intent. Edelson v. Commissioner, 829 F.2d at 832;

Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Direct evidence of fraud is

seldom available, however, and its existence may therefore be determined from the
                                          - 17 -

[*17] taxpayer’s conduct and the surrounding circumstances. Stone v.

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

      Courts have developed several indicia or “badges of fraud” from which

fraudulent intent can be inferred. These badges of fraud include: (1)

understatement of income; (2) inadequate records; (3) failure to file tax returns; (4)

concealment of assets; (5) failure to cooperate with tax authorities; (6) filing false

documents; (7) failure to make estimated tax payments; (8) engaging in illegal

activity; (9) attempting to conceal illegal activity; (10) dealing in cash; (11)

implausible or inconsistent explanations of behavior; and (12) a pattern of conduct

that evidences an intent to mislead. Spies v. United States, 317 U.S. 492, 499

(1943); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff’g

T.C. Memo. 1984-601. Although no single factor is necessarily sufficient to

establish fraud, a combination of several of these factors may be persuasive

evidence of fraud. Bradford v. Commissioner, 796 F.2d at 307-308; Niedringhaus

v. Commissioner, 99 T.C. 202, 211 (1992).

      Several badges of fraud exist in this case which clearly and convincingly

establish fraud for all of the years at issue.6

      6
        Although dealing in cash is ordinarily a badge of fraud, Cash for Cans paid
its customers in cash as part of its business model. Therefore, under the facts and
                                                                       (continued...)
                                        - 18 -

[*18] A.     Understatement of Income

       Petitioner failed to report over $1 million dollars of gross receipts for each

of the years at issue. See supra section I. On his returns, petitioner reported

taxable income of only $8,051 for 2005, $11,277 for 2006, $25,576 for 2007, and

$11,902 for 2008. This reflected only 1.8%, 2.4%, 4.9%, and 2.5%, respectively,

of his true taxable income.

       Petitioner knew that his income was substantial. First, petitioner supported

himself, his wife, and her four children with his income. Petitioner also provided

support to Rocio Sanchez in 2006 and 2007. Second, petitioner made over $2,000

a month (over $24,000 a year) in home mortgage payments alone. Third,

petitioner purchased with cash a $130,000 house in Mexico during the years at

issue. We do not believe that petitioner could sustain his lifestyle on the meager

income reported on his returns unless he had other nontaxable sources of income,

which the record does not reveal. We therefore find that petitioner knowingly and

intentionally reported only a tiny fraction of his true income for each of the years

at issue.




       6
      (...continued)
circumstances of this case, we do not treat dealing in cash as a badge of fraud.
                                       - 19 -

[*19] B.    Concealment of Assets

      Petitioner attempted to conceal assets from respondent. During his

summons interview petitioner represented that he did not have any foreign bank

accounts or any other foreign assets. Later, petitioner admitted that he had a bank

account in Mexico but represented he wired only $500 to $1,000 to that account.

Bank records show that petitioner wired to his Mexican account over $10,000 in

2007 and over $15,000 in 2008. Petitioner also admitted to wiring over $130,000

to his wife for the purchase of a house in Mexico. Bank records show that

petitioner wired to his wife over $300,000 in 2007 and $100,000 in 2008.

      C.    Failure To Cooperate With Tax Authorities

      Petitioner did not fully cooperate with respondent during the audit. First,

although he agreed to one interview, petitioner refused any further interviews.

Respondent, therefore, had to summon petitioner to appear for further questioning.

      Second, petitioner did not voluntarily provide respondent with documentary

evidence. Cash for Cans maintained detailed and comprehensive books and

records, as required by California law. However, petitioner produced these

documents only in response to respondent’s summons. As a result, respondent had

to request information directly from Anheuser-Busch and Western Strategic.
                                        - 20 -

[*20] Finally, respondent was forced to subpoena Bank of America for

information pertaining to petitioner’s home mortgage.

      D.     Implausible or Inconsistent Explanations of Behavior

      Petitioner argues that Ms. Robles “prepared grossly erroneous income tax

returns” using numbers that she had “fabricated”. Petitioner further argues that on

audit, Ms. Robles “deftly steered Respondent to the conclusion that Petitioner had

caused her to prepare fictitious returns.”

      Petitioner’s explanation for his understatements of income is unconvincing,

implausible, and inconsistent with the record evidence. Ms. Robles had no

incentive, financial or otherwise, to underreport petitioner’s income. Moreover,

the tax returns that Ms. Robles prepared are consistent with petitioner’s City of

Oakland business tax declarations, which petitioner had personally prepared and

filed beforehand. In response, petitioner blames Mr. Hodgson for “unwittingly

assisting Petitioner to prepare erroneous City of Oakland Business Tax

Declarations.” Mr. Hodgson, however, credibly testified that the City of Oakland

does not verify the accuracy of reported tax information and that he took

petitioner’s numbers at “face value”. In addition, Ms. Robles credibly testified

that when she told petitioner that Cash for Cans’ materials summaries did not

reconcile with its Oakland business tax declarations, he instructed her to use the
                                       - 21 -

[*21] numbers from the Oakland business tax declarations on his Federal income

tax returns. Finally, petitioner admitted during his summons interview that he

provided Ms. Robles with the income information for his Federal income tax

returns. On the basis of the record, we find that petitioner, not Ms. Robles,

fabricated the information on his returns.

      E.     Pattern of Conduct Evidencing an Intent To Mislead

      Petitioner engaged in a pattern of conduct evidencing an intent to mislead

respondent for each of the years at issue. Cash for Cans kept detailed and

comprehensive books and records in accordance with California law. Petitioner,

however, elected to estimate his income, rather than relying on Cash for Cans’

business records. Petitioner purported to base his estimates upon Cash for Cans’

materials summaries. The materials summaries, however, were merely a ruse

petitioner used to obfuscate his true income. For instance, Cash for Cans’ 2007

materials summary evidences gross receipts of over $1.2 million. In contrast,

petitioner “estimated” gross receipts of only $398,467 purportedly on the basis of

the 2007 materials summary. As another example, Cash for Cans’ 2008 materials

summary evidences gross receipts of over $1.7 million. In contrast, petitioner

“estimated” gross receipts of only $284,279 purportedly on the basis of the 2008

materials summary.
                                       - 22 -

[*22] Petitioner provided the materials summaries to Ms. Robles, but did not

provide her with Cash for Cans’ business records. In addition, when Ms. Robles

realized that the information petitioner provided was inconsistent, he instructed

her to use his “estimated” figures from Cash for Cans’ Oakland business tax

declarations.

      Petitioner’s treatment of business income sharply contrasts with his

treatment of business expenses. Petitioner instructed Rocio Sanchez to track all of

Cash for Cans’ business expenses. She complied by entering all of Cash for Cans’

expenses into an accounting computer program and using the program to generate

annual expense summaries. Petitioner provided Ms. Robles with these expense

summaries to prepare his Federal tax returns.

      Petitioner alleges that the inaccuracies in his tax returns were due to his

inability to read an income tax return, his “low proficiency in English”, and his

“rudimentary education”. These alleged shortcomings, however, did not prevent

petitioner from reporting reasonably accurate business expenses for the years at

issue. Petitioner’s contention is without merit.

      In conclusion, several badges of fraud are present in this case. Considering

all the facts and circumstances, we find that respondent has proven by clear and

convincing evidence that petitioner fraudulently intended to evade taxes.
                                        - 23 -

[*23] Accordingly, petitioner is liable for the section 6663 fraud penalties for all

of the years at issue.

III.   Reasonable Cause

       We now turn to the reasonable cause defense. The fraud penalty does not

apply to any portion of an underpayment if a taxpayer shows that there was

reasonable cause for, and that the taxpayer acted in good faith with respect to, that

portion. Sec. 6664(c)(1). The determination of whether a taxpayer acted with

reasonable cause and in good faith depends on the pertinent facts and

circumstances, including the taxpayer’s efforts to assess his or her proper tax

liability, the knowledge and experience of the taxpayer, and the reliance on the

advice of the professional. Sec. 1.6664-4(b)(1), Income Tax Regs. Reasonable

cause may exist where a taxpayer relies upon professional advice if the taxpayer

proves by a preponderance of the evidence that: (1) the adviser was a competent

professional who had sufficient expertise to justify the taxpayer’s reliance on him;

(2) the taxpayer provided necessary and accurate information to the adviser; and

(3) the taxpayer actually relied in good faith on the adviser’s judgment.

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299

F.3d 221 (3d Cir. 2002).
                                        - 24 -

[*24] Petitioner argues that he qualifies for the reasonable cause defense because

he relied upon Ms. Robles to prepare his returns for the years at issue. Petitioner

further argues that his reliance is justified because he has only “a third grade

education” and is “functionally illiterate both in Spanish and English”. We

disagree.

      Generally, the responsibility to file accurate returns and pay tax when due

rests upon the taxpayer and cannot be delegated. Pritchett v. Commissioner, 63

T.C. 149, 173-175 (1974); Kooyers v. Commissioner, T.C. Memo. 2004-281.

Petitioner has introduced no evidence regarding Ms. Robles’ credentials, including

any evidence that she is a California licensed tax return preparer, as he alleges.

Rather, the record reflects that Ms. Robles did not finish college and that she is not

a C.P.A. Accordingly, petitioner has failed to prove that Ms. Robles was a

competent tax adviser.

      More importantly, petitioner failed to provide Ms. Robles with Cash for

Cans’ books and records and knowingly provided her with erroneous information

instead. We therefore find that petitioner did not rely on Ms. Robles’ “judgment”,

nor did he act in good faith. Petitioner has failed to prove that he had reasonable

cause within the meaning of section 6664(c). Accordingly, we sustain
                                           - 25 -

[*25] respondent’s determination that petitioner is liable for the section 6663 fraud

penalties for all of the years at issue.

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

the extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                          Decision will be entered for

                                                    respondent.
