                  T.C. Summary Opinion 2010-70



                      UNITED STATES TAX COURT



                GRANT A. MCDONALD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 583-09S.                Filed June 8, 2010.



     Grant A. McDonald, pro se.

     Rebekah Myers and David W. Sorenson, for respondent.



     GERBER, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined income tax deficiencies and section

6663 fraud penalties for petitioner’s 2004 and 2005 tax years.

In the alternative, respondent determined that if petitioner is

not subject to the fraud penalties, he is liable for accuracy-

related penalties under section 6662(a).    Petitioner did not

appear at trial and respondent moved for dismissal for lack of

prosecution, and the Court was disposed to grant the motion as it

related to the income tax deficiencies.    With respect to the

fraud penalties, respondent presented evidence in support of his

burden to show that petitioner filed fraudulent returns.      We

consider here whether respondent has presented clear and

convincing evidence of fraud for petitioner’s 2004 and 2005 tax

years and/or whether petitioner is subject to the accuracy-

related penalties.

                            Background

     Petitioner resided in Utah at the time his petition was

filed.   On Schedule A, Itemized Deductions, of his 2004 Form

1040, U.S. Individual Income Tax Return, petitioner claimed a

$29,897 casualty loss in connection with residential real estate.

Petitioner reported that a “casualty” had reduced the $135,000

value of his residence to $100,100.    The $34,900 reported

casualty was reduced to $29,897 on account of various limitations
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placed upon an individual’s casualty loss claims.   Petitioner’s

$34,900 casualty loss reduced his $49,027 reported income to an

extent that his tax liability was reduced to $423, thereby

enabling him to obtain an approximately $4,500 refund of the

$4,891 that was withheld from his wage income.

     During 2004 petitioner and his wife were separated, and his

wife was living in their residence without petitioner.

Petitioner’s 2004 tax return was audited, and respondent’s

revenue agent examined the claimed casualty loss.   Petitioner

explained that during 2004 his wife had dug up the basement.     In

support of the casualty loss claim petitioner presented invoices

for repairs, canceled checks, insurance statements, and two

police reports.

     The invoice, in the total amount of $34,900, reflected

repair and replacement of the basement cement foundation, outdoor

deck, floors, drapes and window coverings, and appliances,

including a garage door opener, toilets, and other items.    The

company name shown on the invoice was Designer Real Estate

(Designer).   Respondent’s agent attempted to verify the existence

of Designer by checking the location and attempting to call the

telephone number, but no such enterprise was at the designated

location, and the telephone number was not in service.

     Respondent’s agent also considered the police reports

petitioner provided and discovered that one of them reflected
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that the basement floor had been “broken apart” by petitioner’s

wife and her friends.   The other police report reflected that

petitioner had reported that some of the doors were unlocked and

that some “furniture * * * or belongings had been stolen.”    Only

the basement floor damage, however, was included as part of

petitioner’s casualty loss claim for Federal tax purposes.

     Respondent’s agent asked petitioner to substantiate the

payment of the $34,900 to Designer, and petitioner provided

respondent four checks to Designer dated in early 2005 and

totaling $34,900. Respondent’s agent noted that although the

checks were dated in early 2005, they were not cashed until July

and August 2006.   The checks were cashed by petitioner’s nephew,

and when respondent’s agent asked petitioner about the delay in

cashing the checks, petitioner admitted that the checks were

backdated in order to show payment to Designer, that Designer was

actually his nephew, and that the arrangement between him and his

nephew was a loan to finance the home repairs and improvements.

Respondent’s agent checked petitioner’s nephew’s tax returns to

determine whether he had reported any income regarding Designer,

and the nephew had not reported any such income.

     Respondent’s agent checked petitioner’s bank records and

determined that the issuance and cashing of the four checks,

totaling $34,900, all occurred after respondent’s examination of

petitioner’s 2004 tax return had begun.   The agent also
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determined that shortly after petitioner’s nephew cashed the

checks, the same total ($34,900) reappeared in petitioner’s bank

account.   Petitioner related other versions of the payment for

the alleged repairs or improvements but offered no proof in

support of his allegations.   The agent also became aware that

petitioner had filed for bankruptcy in 2005, and the bankruptcy

filing did not list Designer as a creditor.

     Petitioner’s 2005 income tax return was also examined

regarding his contributions and business expenses.    The agent

allowed a portion of the contributions and disallowed the

remainder because petitioner was either unable to substantiate

the value of contributed assets or failed to meet the

recordkeeping requirements.

     On petitioner’s 2005 Schedule C, Profit or Loss From

Business, he reported $10,352 of income and $40,080 of expenses

and claimed a $29,728 loss from his business.    Petitioner

described his business as “Handyman Service”, but gave varying

explanations to the agent as to the type of work actually

performed.   The items claimed on petitioner’s Schedule C included

contract labor; depreciation; employee benefits programs; and

travel, meals, and entertainment.    The largest deduction was

$18,615 for employee benefits.

     Petitioner was unable to substantiate adequately any of the

claimed Schedule C deductions, and respondent’s agent disallowed
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the entire $40,080 claimed, although he did not change the

reported income of $10,352.    Petitioner provided oral

explanations of the deductions claimed but did not provide

substantiation or evidence sufficient to satisfy the agent that

any amount was deductible.

                             Discussion

     The Court has already upheld the 2004 and 2005 income tax

deficiencies because of petitioner’s failure to prosecute.        The

only question remaining is whether petitioner is liable for

section 6663(a) fraud penalties and/or section 6662(a) accuracy-

related penalties with respect to the adjustments.

     Section 6663(a) provides for a 75-percent penalty for any

portion of an underpayment attributable to fraud.      Fraud is

defined as an intentional wrongdoing designed to evade tax

believed to be owing.   Petzoldt v. Commissioner, 92 T.C. 661, 698

(1989).   Fraudulent intent is defined as “‘actual, intentional

wrongdoing, and the intent required is the specific purpose to

evade a tax believed to be owing.’”       Estate of Temple v.

Commissioner, 67 T.C. 143, 159 (1976) (quoting Mitchell v.

Commissioner, 118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A.

424 (1939)).   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
                                 - 7 -

the evidence that part of the underpayment is not due to fraud.

Sec. 6663(b).

     Respondent has the burden of proving by clear and convincing

evidence that an underpayment exists for each of the years in

issue and that some portion of the underpayment is due to fraud.

See sec. 7454(a); Rule 142(b).    Fraud is never presumed but must

be established by independent evidence that establishes

fraudulent intent.    Beaver v. Commissioner, 55 T.C. 85, 92

(1970).   The following indicia have been developed by the courts

as “badges of fraud” from which fraudulent intent can be

inferred:    (1) Understating income; (2) maintaining inadequate

records; (3) engaging in a pattern of behavior that indicates an

intent to mislead; (4) concealing assets; (5) providing

implausible or inconsistent explanations of behavior; (6) filing

false documents; and (7) failing to provide documents to the

Commissioner during examination.     Bradford v. Commissioner, 796

F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Cooley

v. Commissioner, T.C. Memo. 2004-49.     Although no single factor

is necessarily sufficient to establish fraud, a combination of

several of these factors may be persuasive evidence of fraud.

See Bradford v. Commissioner, supra at 307-308.

     With those principles in mind, we first consider

petitioner’s 2004 tax year and his claimed casualty loss

deduction.    Petitioner claimed a $34,900 casualty loss that
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reduced $49,027 in income to such an extent that his tax

liability was reduced to $423, thereby enabling petitioner to

obtain an approximately $4,500 refund of the $4,891 that was

withheld from his wage income.    Respondent has shown that the

only damage to petitioner’s home was to the basement foundation

and was intentionally caused by his wife.    Other than repairs for

that damage, all of the alleged repairs to petitioner’s home

appear to be renovations or improvements.

     Section 165(a) permits deductions for losses not compensated

for by insurance or otherwise.    Section 165(c) limits the losses

of individuals to those incurred in a trade or business or any

transaction entered into for profit, or those arising from fire,

storm, shipwreck, or other casualty, or from theft.     To deduct a

loss as a casualty, petitioner must have incurred damage by or as

a proximate result of a fire, storm, shipwreck, or other

casualty, and he must establish the amount of the loss resulting

from the casualty as distinguished from other causes.    A casualty

has been defined as the total or partial destruction of property

resulting from an identifiable event of a sudden or unexpected

nature.   Matheson v. Commissioner, 54 F.2d 537, 539 (2d Cir.

1931), affg. 18 B.T.A. 674 (1930); Axelrod v. Commissioner, 56

T.C. 248, 256 (1971); Durden v. Commissioner, 3 T.C. 1, 3 (1944).

     Respondent has shown that petitioner did not sustain a

casualty loss and the only damage to petitioner’s home was
                                - 9 -

intentionally caused by a resident/owner.    More significantly,

respondent has shown that the evidence petitioner offered in

support of his claimed casualty loss deduction was fabricated

after the fact and wholly false and fraudulent.    It is clear that

petitioner falsely claimed the $34,900 deduction on his 2004

return.   Moreover, petitioner continued his pattern of fraud and

deceit by submitting backdated fabricated and false documentation

of home repair.

     Respondent has met the standard of showing by clear and

convincing evidence that petitioner intentionally filed a false

return for 2004.    We accordingly hold that petitioner is liable

for the section 6663(a) fraud penalty on the entire underpayment

for his 2004 tax year.

     With respect to the 2005 tax year, respondent disallowed

some of petitioner’s contribution deductions for lack of complete

substantiation or failure to meet the technical requirements for

deduction.    Respondent also disallowed all of petitioner’s

claimed Schedule C business deductions of $40,080 but did not

disturb the $10,352 of income petitioner reported on the 2005

Schedule C.    By accepting the income, respondent accepts that

petitioner did have a business and/or business income.    The

circumstances regarding the 2005 tax year are different from

those for 2004 in that respondent has not shown for 2005 that

petitioner intentionally and knowingly attempted to evade tax.
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In addition, respondent’s adjustments are more technical and more

in line with a routine disallowance for lack of substantiation or

for failure to meet legal requirements.    For 2005 there is no

shown pattern of deception as there was for 2004 and no showing

that petitioner intentionally attempted to evade the tax owing.

     Accordingly, we hold that respondent has not shown that

petitioner is liable for the section 6663(a) penalty for 2005.

Respondent, in the alternative, determined that petitioner was

liable for the section 6662(a) accuracy-related penalty for 2005.

To sustain that penalty, respondent has the burden of production.

See sec. 7491(c).   There is no question that respondent has met

the burden of production with respect to the accuracy-related

penalty for 2005.   Respondent met that burden by evidence showing

that petitioner failed to maintain adequate records and/or to

substantiate the disallowed contribution and business deductions

claimed on his 2005 tax return.    Under the circumstances of this

case where petitioner failed to come forward and show reasonable

cause for the underpayment, petitioner is liable for the section

6662(a) accuracy-related penalty for the 2005 tax year.

     To reflect the foregoing,


                                 An appropriate order of dismissal

                          and decision will be entered.
