                         T.C. Memo. 2008-222



                       UNITED STATES TAX COURT



                CYNTHIA G. WILCOX, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.    9907-02, 22015-03,   Filed October 1, 2008.
                   22590-04.



     Mitchell I. Horowitz, for petitioner.

     Michael D. Zima, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined the following

deficiencies in income tax and penalties for petitioner’s

respective taxable years:
                                 - 2 -

                                                 Penalty
          Year          Deficiency              Sec. 6663

          1997           $320,441              $240,330.75
          1998            400,372               300,279.00
          1999            334,303               250,727.25
          2000            153,165               114,874.00

The issues we must decide are:    (1) Whether petitioner has

substantiated the existence or amounts of any foreign tax credits

for the taxable years 1997, 1998, 1999, and 2000; (2) whether

respondent has established that petitioner is liable for the

fraud penalty pursuant to section 66631 for taxable years 1997,

1998, 1999, and 2000; and (3) whether petitioner has established

that she is not liable, in the alternative, for a penalty

pursuant to section 6662(a).

                         FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated.

The parties’ stipulations of fact are incorporated herein by

reference and are found as facts.    Petitioner resided in

Washington, D.C., at the times the petitions were filed.

     Petitioner earned a marketing degree from the College of

William & Mary.   She operated her own advertising and consulting

business, Wilcox Advertising, Inc., before the taxable years in

issue.   She closed it down in 1992 or 1993.




     1
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended.
                                - 3 -

     Petitioner filed income tax returns for taxable years 1997,

1998, 1999, and 2000, claiming foreign tax credits for taxes

paid to the Russian Federation.   Petitioner’s tax returns for the

taxable years in issue each list her occupation as “Public

Relations”.   On March 29, 2002, respondent issued a notice of

deficiency to petitioner determining deficiencies in her income

tax for taxable years 1997 and 1998 as set forth above.    On

October 2, 2003, respondent issued a notice of deficiency to

petitioner determining a deficiency in her income tax for taxable

year 1999 as set forth above.   On August 24, 2004, respondent

issued a notice of deficiency to petitioner determining a

deficiency in her income tax for taxable year 2000 as set forth

above.   In each of the notices respondent disallowed petitioner’s

claimed foreign tax credits for lack of substantiation.

     For the taxable years in issue, the record does not contain

any receipts showing the payment of taxes by petitioner to the

Russian Ministry of Taxation or any record of payment from

petitioner’s Russian employer, Multifunctional Cooperative

Energia, also known as Diversified Cooperative Energia (Energia).

The Russian Government informed the U.S. Internal Revenue Service

(IRS) that petitioner was not registered as a taxpayer in the

Moscow tax office and that petitioner did not file income tax

returns in Russia for any of the taxable years in issue.    The

Russian Ministry of Taxation informed the IRS that it had no

record of petitioner on their tax rolls and that she did not pay
                                - 4 -

any income taxes to the Russian Government during the taxable

years in issue.    Energia had not filed tax returns or paid any

taxes in Russia since either 1993 or 1995.

     Petitioner’s accountants, Kirkland, Russ, Murphy & Tapp

(KRMT), prepared petitioner’s income tax returns from information

she furnished.    KRMT made no attempt to verify the information

petitioner provided.

     Petitioner did not maintain any foreign bank accounts or

interests in foreign trusts.    There are no bank statements,

deposit slips, or wire transfer records from any of petitioner’s

bank accounts during the taxable years in issue evidencing a

deposit from Energia or a payment to the Russian Government or

the Moscow city government.

     There are no deposits into any of petitioner’s accounts

during 1997 which match in amount any of the monthly salary or

housing allowance amounts detailed in the letters purporting to

be from Energia that petitioner presented to the IRS, nor in an

amount matching a 1997 bonus which she alleges to have received

from Energia.

     During 1997 there were no deposits into any of petitioner’s

accounts of $9,612, $9,802, $9,900, or $9,960, which are the

amounts of monthly salary payments net of Russian withholding

taxes which petitioner alleges to have paid to the Russian

Government for that taxable year.    Additionally, there was no

deposit into any of petitioner’s accounts during 1997 of
                                - 5 -

$468,520, which is the bonus payment net of Russian withholding

tax petitioner alleges she was paid from Energia.

      During 1998 there was no deposit into any of petitioner’s

accounts of $64,513, which is the total of the 1998 monthly

salary payment net of Russian withholding tax petitioner alleges

she was paid from Energia.

      Petitioner did not offer any written evidence of a contract

for her services indicating the manner in which her bonus or

commissions that she alleges were to be paid by Energia were to

be calculated.   Petitioner did not offer any pay stubs or other

written evidence reflecting payments of salary, bonuses, or

commissions from Energia.    Petitioner did not offer records of

the manner in which her bonus or commission amounts to be paid by

Energia were accruing or the amount and/or value of diamond sales

from which such bonuses or commissions would be computed.

      During 1997 petitioner twice traveled to Russia.   On the

first trip petitioner entered February 4 and departed February

10.   On the second trip petitioner entered March 7 and departed

on an unknown date.

      On May 5, 1998, petitioner gave birth to a son, DK.2    DK

lived with petitioner from the time he was born throughout the

taxable years in issue.   After giving birth to DK, petitioner did




      2
      The Court generally refers to minor children by their
initials. See Rule 27(a)(3).
                               - 6 -

not work for several months.   Petitioner did not travel to Russia

during the last 4 months of 1997 or during 1998.

     Petitioner rented an apartment and lived “on and off very

often” in Belgium between 1994 and 1997 and again during 1999,

particularly while her son Bradford Hamilton Wilcox, who was born

on March 3, 1979 (Bradley), was going to school in Switzerland.

On May 5, 1997, petitioner married Menachem Josef Kaszirer (Mendy

Kaszirer) and remained married to him throughout the taxable

years in issue.   Mendy Kaszirer is a Belgian citizen.   However,

Mendy Kaszirer’s mother is Russian, and he was born in Russia.

Petitioner continues to share a house in Belgium with her husband

Mendy Kaszirer.

     Petitioner traveled to Russia three times during 1999, the

first entering March 29 and departing April 12, the second

entering April 23 and departing on an unintelligible date, and

the third entering May 31 and departing June 2.    Petitioner was

pregnant during 1999.   Petitioner did not travel to Russia during

2000.   Petitioner’s Russian travel visa was revoked in 2001.

     Mendy Kaszirer and his father, Ignatie Kaszirer, started

Kaszirer Diamonds, N.V., a diamond company which became one of

the largest in the world.   Kaszirer Diamonds declared bankruptcy

during 1996 or thereabouts.

     Mendy Kaszirer had been doing business in Russia for 30

years before 1993.   Mendy Kaszirer spoke Russian fluently.
                                - 7 -

Petitioner was not fluent in Russian during the taxable years in

issue.

       Mendy Kaszirer had great knowledge of the diamond business.

Petitioner knew nothing about the diamond business before meeting

him.    Mendy Kaszirer’s knowledge of the diamond business remained

substantially greater than petitioner’s during the years in

issue.

       Kaszirer Diamonds had business interests in Russia,

including joint ventures, and the company purchased diamonds in

Russia.    Kaszirer Diamonds was one of the major partners in the

“Intertrade” joint venture.    Mendy Kaszirer was one of the

contacts for Kaszirer Diamonds with whom petitioner worked on the

“Intertrade” joint venture.

       Kaszirer Diamonds was one of the partners in the “Victoria”

joint venture.    At trial, petitioner recalled that Kaszirer

Diamonds was a partner in the Victoria joint venture, but she

could not remember with whom she dealt from Star Diamond or the

factory.    Mendy Kaszirer was the party from Kaszirer Diamonds

with whom she dealt on the “Victoria” joint venture.

       Petitioner’s job with Energia was to bring foreign

investment to the Russian diamond trade, primarily through joint

ventures.    Petitioner helped facilitate the following joint

ventures:    Almaz Juvelier Export, which dealt with diamond

polishing and made jewelry; Octoprom, a diamond polishing

operation; Anastasia, which opened a location selling jewelry and

polishing diamonds on Red Square; Imperial Trading, a diamond
                                 - 8 -

polishing operation; and Rosshtern and Ornament Trading, diamond

polishing.

     Petitioner could not recall the names of the partners

involved in Almaz Juvelier Export, Imperial Trading, or Rosshtern

and Ornament Trading.   Mendy Kaszirer knew better than petitioner

the principals of the unnamed diamond company from Belgium owned

by an Indian who was a party to the Rosshtern joint venture.

Mendy Kaszirer met with Gary Harrod in Moscow when Gary Harrod

went there.

     Kaszirer Diamonds owned Quantex Diamonds, Inc., a servicing

agent.   David Josowitz (Mr. Josowitz) was the President of

Quantex Diamonds, Inc. (Quantex), during the taxable years in

issue.   As of December 3, 1998, Mr. Josowitz had worked for

Quantex for at least 20 years.    Mr. Josowitz worked at the office

of Quantex in New York, New York, during the years in issue.    Mr.

Josowitz first met petitioner through Mendy Kaszirer during 1993.

Petitioner worked with Mendy Kaszirer during that time.

Petitioner received wages of $300,000 during 1995 and $395,000

during 1996 from Kaszirer Diamonds.

     Petitioner occasionally visited the offices of Quantex in

New York during the taxable years in issue.   Petitioner had no

assigned duties at Quantex during the years in issue.   While

visiting the Quantex offices in New York during 1997, petitioner

worked on designing a line of jewelry as a personal project.
                                - 9 -

Petitioner sold some jewelry on her own behalf during the taxable

years in issue.   On August 16, 1999, petitioner sold a 5-carat

diamond ring to Cora Diamond Co. for $20,000.   During 1999

petitioner sold a ring for $28,941 through Diacor International.

     Petitioner represented to U.S. Trust Co. of New York that

she had personal property, including jewelry, worth $700,000 as

of November 19, 1998.   Petitioner told U.S. Trust Co. of New York

that she did not accrue any salary during 1997.

     Petitioner owned and operated Millennium Penthouse, Inc.

(Millennium), an S corporation, during all of the taxable years

in issue.   Millennium held title to a condominium at 1965

Broadway, Unit PH1E, New York, New York (1965 Broadway).     The

mortgage on 1965 Broadway called for a monthly payment of

$11,775.80 and monthly maintenance fees of $1,300.   A lease

between Millennium and Quantex for 1965 Broadway called for a

payment of $15,000 per month.   Quantex did not use 1965 Broadway

for any business purpose.   Millennium also held title to a Miami,

Florida, rental property, similar to a strip mall, that had

tenants.

     Only the Forms 1120S, U.S. Income Tax Return for an S

Corporation, filed on behalf of Millennium for 1997 and 1998

report any rental income from Quantex and not of $15,000 per

month.   Only the Forms 1120S filed on behalf of Millennium for

1999 and 2000 report rental income from the tenants of the strip
                               - 10 -



mall in Miami.   Millennium reported a net loss in each of the

taxable years in issue.

     Petitioner owned all of the outstanding shares of Harbour

Group, Inc.    During 1996 petitioner purchased all of the shares

of Harbour Group, Inc., from Harbour Group, Ltd., a British

Virgin Islands company, for $900,000, a price later decreased to

$700,000.   Harbour Group, Inc., was incorporated as a C

corporation, and effective January 1, 1997, became an S

corporation.   Harbour Group, Inc., owned petitioner’s residence

at 917 Anchorage Road in Tampa, Florida.   Harbour Group, Inc.,

also owned two boats valued at $350,000.   Mendy Kaszirer was an

agent for Harbour Group, Inc., and one of three individuals

petitioner knew were involved with Harbour Group, Inc.

     With the assistance of an attorney, petitioner applied for

and received an exemption certificate so that Harbour Group,

Inc., would not be required to withhold any tax under sections

897 and 1445 upon the payment of the purchase price of the home

at 917 Anchorage Road in Tampa, to Harbour Group, Ltd., B.V.I.

     Petitioner’s plans were for Blue Diamond Trading, Inc. (Blue

Diamond), to be a wholesale diamond business in Miami, Florida.

Mendy Kaszirer was involved in operating Blue Diamond.     Mendy

Kaszirer helped procure and sell diamonds for Blue Diamond.

Petitioner was the president and secretary of Blue Diamond.     The

monthly statements for Blue Diamond’s corporate checking account

at Mellon National Bank were mailed to petitioner and retained by
                               - 11 -

her accountant.   Petitioner wrote most, if not all, of the checks

on Blue Diamond’s corporate checking account.    Petitioner acted

on behalf of Blue Diamond in directing an accountant to prepare

and file tax returns on Blue Diamond’s behalf.    Blue Diamond paid

petitioner $50,000 on December 23, 1998, and $25,000 on April 6,

1999.   Blue Diamond had ceased operations by August 1999.   In

August 1999 petitioner, as president of Blue Diamond, entered

into a wire transfer agreement with United National Bank.    During

June and July of 2000 petitioner paid herself travel expenses out

of Blue Diamond’s corporate checking account.    Blue Diamond paid

insurance premiums on behalf of petitioner, which Blue Diamond

treated as salary payments.

     Mendy Kaszirer acted as the trustee and was a beneficiary of

several trusts.   Mendy Kaszirer acted as trustee on behalf of the

K Trust and the J & O Trust (Kaszirer family trusts).    Mendy

Kaszirer’s three sisters were other beneficiaries of the Kaszirer

family trusts.    The Kaszirer family trusts held real property

worth approximately $100 million.    Mendy Kaszirer was accused by

several Kaszirer family members of stealing the Kaszirer family

fortune, including stealing diamonds from the family business and

embezzling funds from a Kaszirer Diamonds, N.V. bank account.

During 1997 Ignatie Kaszirer, Orlie Kaszirer Rechdiner, Anita

Kaszirer Rosenberg, and Henri Rosenberg filed two lawsuits, Index

Nos. 122134/97 and 401578/97, in the Supreme Court of the State

of New York against Mendy Kaszirer.     The purpose of the lawsuits
                               - 12 -

was to forcibly remove Mendy Kaszirer as a trustee of various

family trusts of which they were beneficiaries.     The trust

lawsuits against Mendy Kaszirer settled without trials.3

     During 1999 Mendy Kaszirer was accused of breaking Belgian

laws.    Mendy Kaszirer was arrested in the United States during

1999 and extradited to Belgium.

     During 1999 while petitioner’s audit was assigned to Revenue

Agent Theodore Curtis (Agent Curtis), KRMT provided three letters

to the IRS dated January 29, 1998.      Petitioner represented those

letters to be from Energia (Energia letters).

     On February 24, 2000, petitioner informed KRMT that she did

not have documentation for taxes paid to Russia.     On June 4,

2001, petitioner provided to the IRS several Forms 3 allegedly

issued by Energia relating to her taxable years 1997 and 1998.

Form 3 is the Russian equivalent of a Form W-2, Wage and Tax

Statement.    The Energia letters and Forms 3 that petitioner’s

representatives provided to the IRS during the audit did not

contain a KRMT Bates stamp number.

     The Energia letters each contain a stamp or seal purporting

to be the corporate seal of Energia.     The purported stamp or seal

on the Forms 3 differed from the seal registered by Energia with

the Russian Government.    The letterhead on the Energia letters



     3
      Petitioner moved that the settlement documents be admitted
into evidence under seal. We granted petitioner’s motion and the
documents are admitted solely for the purpose of proving the
existence of settlements, not for the terms of the settlements.
                             - 13 -

did not include a mailing address, telephone number, facsimile

number, or electronic mail address for Energia.

     U.S. Trust Co. of New York provided only personal loans to

its clients, not commercial loans.    Petitioner led Diane Katz, a

loan officer at U.S. Trust Co. of New York, to believe that

petitioner was moving back to New York to live at 1965 Broadway,

which petitioner was purchasing, and that petitioner would be

working in New York City.

     Petitioner represented to U.S. Trust Co. of New York that

her monthly living expenses were $35,000.   U.S. Trust Co. of New

York determined that petitioner’s living expenses were more

accurately $100,000 per month.

     Petitioner produced letters for loan companies indicating

she was employed during 1998 by Quantex and Blue Diamond.

Petitioner produced letters for loan companies indicating she was

employed during 1999 by Anchor Diamond Importers, Inc. (Anchor

Diamond).

     Anchor Diamond paid for health insurance for petitioner.

The amounts reflected on the Form W-2 issued by Anchor Diamond

with respect to petitioner were not money paid directly to her

but were for amounts paid to a health insurance company for

petitioner’s insurance.

     Petitioner received Forms W-2 from Quantex for 1997 and 1998

reflecting wages of $10,200 and $3,600, respectively.   Those

amounts were not salary paid directly to petitioner but were
                               - 14 -

amounts paid to a health insurance company for petitioner’s

insurance.

     Petitioner asked Mr. Josowitz to write a letter asserting

that she had an accrued bonus of $422,648 from Quantex as of

March 25, 1998.   Petitioner did not have an accrued bonus from

Quantex, and Quantex never made a payment of $422,648 to

petitioner or one of her corporations.

     Petitioner asked Mr. Josowitz to write a letter asserting

that her expected income from Quantex would be $450,000 for 1997,

plus a $12,000 monthly housing allowance.    As president, Mr.

Josowitz received a salary of $60,000 annually from Quantex.     He

did not receive a living allowance.

     Petitioner asked Mr. Josowitz to write a letter asserting

that she had requested that Quantex transfer $450,000 in funds it

was holding for her in 1997.

     Quantum Diamonds, Inc. (Quantum), was incorporated in the

United States.    Mr. Josowitz was the vice president of Quantum.

Mr. Josowitz was the only person authorized to write checks on

the bank account of Quantum.    Petitioner did not work for

Quantum.   Quantum did not pay petitioner a salary during 1997.

Quantum did pay for petitioner’s health insurance during 1997.

The stock of Quantum was owned by some or all of the following

members of the Kaszirer family:    Ignatie Kaszirer, Mendy

Kaszirer, and Bruno Goldberger.
                                - 15 -

Petitioner asked Mr. Josowitz to write a letter asserting that

she received a salary from both Quantex and Quantum Diamonds.

     Petitioner asked Mr. Josowitz to write a letter asserting

that her living allowance was $15,000 per month for 1998.

     Quantex made payments to Millennium at petitioner’s request.

Quantex did not use 1965 Broadway (owned by Millennium) for any

business purpose.

     Quantex lacked any relationship with petitioner or Energia

by which it could obtain credit for any amounts it owed Energia

for paying petitioner.    Quantex had no relationship with any

joint venture from Russia by which Quantex could obtain credit

for any amount it owed the Russian joint venture for paying a

third party, such as petitioner.

     Heinrich and Cecilia Kremer (the Kremers) were Belgian

citizens.    Petitioner met the Kremers in Belgium.    The Kremers

and petitioner developed a relationship, and petitioner became

“like a goddaughter” to them.

     The Kremers did not have green cards which would have

allowed them to reside in the United States for more than 90 days

at a time.    U.S. banks would not grant loans or sell mortgages to

nonresidents who lack green cards.       Petitioner allowed the

Kremers to purchase in petitioner’s name a house in which to

live.   The Kremers reimbursed petitioner for construction draws

on the house.
                               - 16 -

     Blue Diamond paid for health insurance for both of the

Kremers.   Blue Diamond also paid for health insurance for

petitioner.   Diane Katz at U.S. Trust Co. of New York received a

letter from Heinrich Kremer, as president of Blue Diamond, saying

that petitioner was due a bonus of $432,640.

     In addition to her minor son DK and her son Bradley,

petitioner has a daughter whose married name is Stacey Gaulding.

Many of the personal expenses of petitioner and her three

children, such as car payments, pool service payments, cellular

telephone bills, automotive insurance, college and law school

tuition, health insurance, and medical expenses, were paid out of

the corporate bank accounts of Harbour Group, Inc., and Blue

Diamond.   KRMT did not advise her to pay personal living expenses

or those of her children out of the corporate bank account of

Harbour Group, Inc.

     The IRS audited petitioner’s returns for taxable years 1997

through 2000.   Agent Curtis was assigned to the audit for

petitioner’s 1997 taxable year.    On May 28, 1999, as part of that

audit Agent Curtis requested all documents used to determine the

amount of gross income of $966,000 reflected on the Form 1116,

Foreign Tax Credit, attached to petitioner’s 1997 income tax

return.    The only documents petitioner and her representatives

provided were the Energia letters listing amounts paid to

petitioner and amounts of tax withheld during taxable year 1997

and the Forms 3 relating to taxable years 1997 and 1998.     Agent
                                - 17 -

Curtis questioned the validity of the Energia letters submitted

by petitioner’s representatives.

     Petitioner never provided the IRS with a calculation showing

how her bonus or commission amounts from Energia were derived.

Petitioner did not submit any data from either her financial

accounts for taxable years 1997 through 2000 or the accounts of

Energia showing actual payments to petitioner by Energia or

deductions of income tax by Energia.     Neither petitioner nor her

representatives ever provided to the IRS:    Documentation of the

payment of income tax to the Russian Government by or on behalf

of petitioner for any of taxable years 1997 through 2000;

documentation from the Russian Government confirming receipt of

alleged tax payments made on petitioner’s behalf for taxable

years 1997 through 2000; or documentation of the payments from

Energia to petitioner during any of taxable years 1997 through

2000 inclusive showing where petitioner’s alleged compensation

from Energia was deposited or deposit slips showing the deposits

of the alleged income into petitioner’s accounts.

     The IRS representative in Bonn, Germany, needed the address

of Energia to assist Agent Curtis in his efforts to obtain

information from the Russian tax authorities.    On or about

October 18, 1999, Agent Curtis requested the address from

petitioner’s representatives.    Gary Hardie (Mr. Hardie) of KRMT

was a representative of petitioner during the audit of

petitioner’s income tax returns for years 1997 through 2000.
                                - 18 -

On December 29, 1999, Mr. Hardie told Agent Curtis that Energia

was out of business and no longer existed.

     Before completing the audit for petitioner’s taxable year

1997, Agent Curtis was assigned to a management detail.    The IRS

assigned the audit of petitioner’s taxable year 1997 to Revenue

Agent Susan Miradakis (Agent Miradakis).    Agent Miradakis asked

petitioner’s representatives, both orally and in writing, to

provide proof of petitioner’s alleged income from Energia during

the years in issue.

     Agent Miradakis requested the address of Energia from

petitioner’s representatives.    Petitioner later admitted that the

claim that Energia was out of business was not true, and, on July

18, 2000, represented that “City of Moscow, Lubjanka Str. 22/24”

was the current address of Energia in Moscow.    Petitioner claimed

that Energia had been at the address provided on July 18, 2000,

“for the last several years.”    The address provided did not match

a street address for Energia petitioner provided to Popular

Mortgage Co. on April 9, 1999, only 1-1/2 years earlier.

     The Unified Residential Loan Application that petitioner

submitted to Popular Mortgage Co. during 1999 included a

telephone number for Energia.    Petitioner never provided a

telephone number for Energia to the IRS.    During the audit

petitioner never provided addresses or phone numbers of her

managers or coworkers at Energia.
                              - 19 -

     Agent Miradakis asked petitioner’s representatives, both

orally and in writing, to provide information as to petitioner’s

foreign travel for taxable years 1997, 1998, and 1999.

Petitioner’s representative sent copies of pages from

petitioner’s passport to Agent Miradakis.   The copies were

largely illegible, a fact acknowledged by petitioner’s

representative at the time.   In the light of the poor quality of

the copies, the IRS examiner asked petitioner’s representatives

to set forth in writing the dates of petitioner’s travel to

Russia during the taxable years in issue.

     Petitioner’s representatives refused to provide a written

schedule of petitioner’s travel, stating that:    (1) The

information was “apparent in the passport we provided you”;

(2) the entries and departures from Russia were in the back of

her passport, starting on page 36; and (3) they did not believe

the information was material to any issue concerning petitioner’s

income tax liabilities.   Petitioner refused to provide documents

relating to her foreign travels aside from a copy of her passport

unless the IRS promised that her matters were solely civil in

nature.

     During the audit Agent Miradakis requested information

concerning Millennium and Harbour Group, Inc.    Specifically,

Agent Miradakis requested that petitioner produce the Form 1120S

filed on behalf of the two corporations for taxable years 1997

and 1998.
                                - 20 -

     During the audit Agent Miradakis asked petitioner to produce

the general ledgers and proof of “Additional Paid-in Capital” for

Harbour Group, Inc., for taxable years 1996, 1997, and 1998, and

Millennium for taxable years 1997 and 1998.    For each company,

Agent Miradakis also requested a 1998 schedule of the Accumulated

Adjustments Accounts and documentation showing that distributions

made to petitioner during taxable year 1998 were nontaxable

distributions.   Additionally, if additions to Additional Paid-in

Capital had been made, then Agent Miradakis requested petitioner

to produce documentation of any additions which were from

petitioner’s own funds.   Petitioner’s representatives responded

that information relating to petitioner’s S corporations was

almost completed and should be available within a few days of May

1, 2001.   Neither the Forms 1120S nor any of the other requested

information was ever produced to Agent Miradakis during the

audit.

     On or about October 30, 2001, through her representative,

petitioner told Agent Miradakis that there would be no further

cooperation in the audit unless the IRS would guarantee in

writing that her matters were solely civil in nature.    At some

point during 2001, petitioner and her representatives did cease

all cooperation in the audit.    All the documentary evidence

relating to financial institutions was procured by the IRS

through summonses issued by Special Agent Coffman to the

respective financial institutions or to KRMT.
                              - 21 -

     Special Agent Coffman issued a summons to KRMT during early

2002, requesting all documents KRMT had received from petitioner

regarding the preparation of income tax returns for 1997 through

2000.   KRMT promptly sent Special Agent Coffman two or three

banker’s boxes.   KRMT did not withhold any documents from its

file relating to petitioner on any grounds (including privilege)

and represented that the boxes were the complete file.     All

documents in the files were stamped with a KRMT Bates stamp

number, and there are no missing Bates stamp numbers in the

documents provided.

     Petitioner initially told accountant Jack Kirkland of KRMT

that the amount of Russian tax withheld from petitioner’s alleged

pay from Energia was 52 percent of her gross wages for taxable

year 1997.   Petitioner told Mr. Hardie of KRMT that the

withholding rate on her wages from Energia during taxable year

1998 had been 52 percent.   On February 24, 2000, petitioner told

KRMT that the withholding rate on her income from Energia was 51

percent during taxable year 1999 and that she thought it had been

51 percent during taxable year 1998.   The withholding percentages

were revised downward before the preparation of petitioner’s

1997, 1998, and 1999 income tax returns.   The percentages of

alleged gross income claimed to have been withheld reported on

the respective tax returns were 31.3 percent for taxable year

1996, 39.9 percent for taxable year 1997, 33.5 percent for
                               - 22 -

taxable years 1998 and 1999, and 28.9 percent for taxable year

2000.

     Petitioner, through her representative, indicated to the IRS

that the Energia letters submitted previously to the IRS bore the

official stamp of the Russian Ministry of Taxation and were

“substantially similar to a Form W-2”.   The Energia letters

submitted to the IRS did not purport to bear the stamp of the

Russian Ministry of Taxation but purported to bear the stamps of

Energia and of the notary who certified the authenticity of the

translator’s signature.

     On February 12, 2001, petitioner’s representative

communicated to Agent Miradakis that the withholding form used by

the Russian Ministry of Taxation was a new form in taxable year

2000 and had not been in existence during the years in issue.

Agent Miradakis learned from the Russian Ministry of Taxation

that the Form 3 had been in use during the taxable years in

issue.   Agent Miradakis informed petitioner’s representative that

she had learned that Form 3 had been in use during the taxable

years in issue.   Agent Miradakis obtained a copy of a blank Form

3 from the Russian Ministry of Taxation and gave one to

petitioner’s representative.   Later in the audit, petitioner

retracted her statement that Form 3 had not been in use during

the taxable years in issue, blaming confusion.   After receiving a

blank Form 3 from Agent Miradakis, petitioner presented to the

IRS the Forms 3 relating to taxable years 1997 and 1998.
                              - 23 -

     Petitioner claimed during the audit that an agent from the

Russian Ministry of Taxation visited the Energia office every 2

weeks to collect her withholding tax.    Agent Miradakis later

learned that such a visit was impossible; taxes were withheld by

the Russian payor and then paid over to a special account.

Petitioner, through her representative, told Agent Miradakis that

petitioner’s Russian income taxes were collected every 2 weeks by

an agent at the place of business.     Agent Miradakis directed that

the IRS make inquiries of accountants from Russia as to how

Russians paid their taxes.   As a result of the inquiries, Agent

Miradakis was informed that Russian withholding taxes were

deposited by the withholder to a special bank account, not

collected personally.

     Petitioner questioned the authenticity of documents provided

to the IRS from the Russian Ministry of Taxation, claiming that

they lacked the Ministry’s official seal.    Petitioner claimed

that, on the basis of her experience, an official Government seal

should appear to the left of the signature block on documents

from the Russian Ministry of Taxation.    Agent Miradakis

investigated petitioner’s claim regarding the placement of seals

on Russian Ministry of Taxation correspondence.    Agent Miradakis

was informed that the Russian Ministry of Taxation did not

typically place seals on their correspondence.    Agent Miradakis

viewed other letters from the Russian Ministry of Taxation, none

of which had an official seal of the Ministry.
                               - 24 -

     The Energia letters state that taxes were withheld pursuant

to Russian law.   The letters do not make any mention of the use

of third-party conduits to pay petitioner her salary or her

bonuses during the taxable years in issue.

     Petitioner told KRMT that Alex Cohen Consulting, Inc., had

no operations during 1999.   Alex Cohen Consulting, Inc., had a

corporate checking account and paid fees to the Florida

Department of State as late as September 10, 2000.    Alex Cohen

Consulting, Inc., paid petitioner $9,500 on December 14, 1998.

Federal income tax returns (Forms 1120S) were filed on behalf of

Alex Cohen Consulting, Inc., for all of the taxable years in

issue reporting gross receipts of $40,000 for 1997.    Petitioner

deposited money into and wrote checks on an account in the name

of Alex Cohen Consulting, Inc., throughout all of the taxable

years in issue.

     The files KRMT provided to Special Agent Coffman contained

no evidence of any payments by a Russian entity to petitioner.

     At trial, petitioner claimed to have received a diploma from

the Wharton Business School.   Petitioner misspelled Wharton as

“Wartan” on the Uniform Residential Application she submitted to

Popular Mortgage Co.

     For taxable year 1997 petitioner reported adjusted gross

income of $947,385 and had $360.57 withheld from her income and

paid over to the IRS.   Petitioner claimed estimated tax payments
                              - 25 -

of $11,880 for taxable year 1997, stemming from either her 1996

tax return or estimated payments made during taxable year 1997.

     For taxable year 1998 petitioner reported adjusted gross

income of $1,251,394 and had $352.56 withheld from her income and

paid over to the IRS.   Petitioner claimed estimated tax payments

of $25,560 for taxable year 1998.

     For taxable year 1999 petitioner reported adjusted gross

income of $1,073,450 and had zero withheld from her income.

Petitioner claimed estimated tax payments of $24,450 for taxable

year 1999.

     For taxable year 2000 petitioner reported adjusted gross

income of $721,694 and had zero withheld from her income.

Petitioner claimed estimated tax payments of $26,173 during

taxable year 2000, including $13,373 applied from her claimed

overpayment from taxable year 1999.

     Petitioner did not call her husband, Mendy Kaszirer, to

testify at trial.   Petitioner did not call any witnesses from

Energia or any of the entities which participated in the joint

ventures on which she worked to testify at the trial.   Petitioner

did not call a witness from the City of Moscow government or the

Russian Government to testify at trial.   Petitioner claims to

have spent many days with the mayor of Moscow.
                                   - 26 -

                                   OPINION

     Payment of taxes to a foreign Government may give rise to

either a deduction or a credit.         See secs. 164, 901.4   Section

164(a)(3) provides that a deduction is allowed for foreign income

taxes.   In lieu of the section 164 deduction, section 901(a) and

(b)(1) permits a taxpayer to elect a credit for foreign income

tax which meets the requirements set forth in the statute and the

regulations promulgated thereunder.

     Petitioner claims foreign tax credits during the taxable

years in issue on account of foreign income tax she contends was

     4
      SEC. 164.       TAXES.

          (a) General Rule.--Except as otherwise provided in this
     section, the following taxes shall be allowed as a deduction
     for the taxable year within which paid or accrued:

                  *      *     *    *     *    *    *

                (3) State and local, and foreign, income, war
           profits, and excess profits taxes.



     SEC. 901.    TAXES OF FOREIGN COUNTRIES AND OF POSSESSIONS
                  OF UNITED STATES.

          (b) Amount allowed.--Subject to the limitation of
     section 904, the following amounts shall be allowed as the
     credit under subsection (a):

                (1) Citizens and domestic corporations.--In the
           case of a citizen of the United States and of a
           domestic corporation, the amount of any income, war
           profits, and excess profits taxes paid or accrued
           during the taxable year to any foreign country or to
           any possession of the United States; * * *
                              - 27 -

withheld on her behalf by Energia and paid to the Russian

Federation.   Petitioner has the burden of proving that she is

entitled to the foreign tax credits she claims.

     The purpose of the foreign tax credit is the reduction of

international double taxation.   See Am. Chicle Co. v. United

States, 316 U.S. 450, 452 (1942); Nissho Iwai Am. Corp. v.

Commissioner, 89 T.C. 765, 776 (1987).     Nonetheless, permitting a

credit for foreign income taxes “paid or accrued” is “an act of

grace on the part of Congress”, and a taxpayer seeking to benefit

from such a credit must prove that all the conditions upon which

its allowance depends have been fulfilled.     Irving Air Chute Co.

v. Commissioner, 143 F.2d 256, 259 (2d Cir. 1944), affg. 1 T.C.

880 (1943).   With respect to income tax withheld at the source,

such conditions include establishing that the foreign income tax

for which credit is claimed was not only withheld, but paid over

to the foreign taxing authority.   Cont. Ill. Corp. v.

Commissioner, 998 F.2d 513, 516-517 (7th Cir. 1993), affg. on

this point T.C. Memo. 1991-66; Norwest Corp. v. Commissioner,

T.C. Memo. 1995-453.   Regulations require the taxpayer to submit

“the receipt for each such tax payment”.    Sec. 1.905-2(a)(2),

Income Tax Regs.

     The legislative history of the Tax Reform Act of 1986, Pub.

L. 99-514, 100 Stat. 2085, clearly states that a foreign tax

credit will be allowed only when the taxpayer is able to document

not only that the foreign taxes have been withheld, but also that
                              - 28 -

they have been paid.   H. Conf. Rept. 99-841 (Vol. II), at II-594

(1986), 1986-3 C.B. (Vol. 4) 1, 594.    The conference report

states:

         The conferees intend that the amount of any
    withholding tax paid be positively established through
    documentation   provided   in    accordance   with   the
    requirements of Code section 905(b) and Treas. reg. sec.
    1.905-2. In this regard, the conferees emphasize that
    the mere fact that withholding took place does not
    necessarily constitute adequate proof of the amount of
    tax paid.

The conference report specifically addresses prior caselaw,

stating that the rule set forth in Lederman v. Commissioner, 6

T.C. 991 (1946), which suggested that payment is proved ipso

facto by the act of withholding, is subject to abuse.

     Petitioner failed to produce any credible evidence of tax

paid to the Russian Government.    She did not produce a receipt as

contemplated in the regulations.    Petitioner provided no

testimony by anyone involved in payment of the alleged foreign

taxes in issue from either Energia or the Russian tax

authorities.   Petitioner relies solely on the Energia letters and

the Forms 3.

     The Russian Government informed the IRS that petitioner was

not a taxpayer and had not filed with them, although petitioner

asserts that she was not required to file in Russia since she

claimed no deductions or refunds.    Also, Energia had not filed

tax returns since either 1993 or 1995.    On the basis of the

record, we hold that petitioner has not met her burden of proving
                              - 29 -

that the tax she claims was paid to the Government of Russia was

in fact paid.   Consequently, we hold that petitioner is not

entitled to foreign tax credits under section 901 for the taxable

years in issue.

Section 6663 Penalty

     The Commissioner has the burden of proving fraud by clear

and convincing evidence.   Sec. 7454(a); Rule 142(b).   To satisfy

this burden, the Commissioner must show:   (1) An underpayment

exists; and (2) the taxpayer intended to evade taxes known to be

owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of taxes.   Parks v. Commissioner, 94 T.C.

654, 660-661 (1990).   The Commissioner must meet that burden

through affirmative evidence because fraud is never imputed or

presumed.   Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989).    If

the Commissioner establishes that any portion of an underpayment

in a particular year is attributable to fraud, the entire

underpayment is treated as attributable to fraud, except with

respect to any portion of the underpayment which the taxpayer

establishes (by a preponderance of the evidence) is not

attributable to fraud.   Sec. 6663(b).

     Section 6663(a) imposes a penalty equal to 75 percent of the

portion of any underpayment which is attributable to fraud.     The

penalty in the case of fraud is a civil sanction imposed

primarily as a safeguard for the protection of the revenue and to

reimburse the Government for the heavy expense of investigation
                              - 30 -

and the loss resulting from a taxpayer’s fraud.    Helvering v.

Mitchell, 303 U.S. 391, 401 (1938).    Fraud is an intentional

wrongdoing on the part of the taxpayer with the specific purpose

to evade a tax believed to be owing.    McGee v. Commissioner, 61

T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975).    The

existence of fraud is a question of fact to be resolved from the

entire record.   Gajewski v. Commissioner, 67 T.C. 181, 199

(1976), affd. without published opinion 578 F.2d 1383 (8th Cir.

1978).

     However, fraud need not be established by direct evidence,

which is rarely available, but may be proved by surveying the

taxpayer’s entire course of conduct and drawing reasonable

inferences therefrom.   Spies v. United States, 317 U.S. 492, 499

(1943).   Courts have relied on a number of indicia or badges of

fraud in deciding whether to sustain the Commissioner’s

determinations with respect to the additions to tax for fraud.

Although no single factor may be sufficient to establish fraud,

the existence of several indicia may be persuasive circumstantial

evidence of fraud.   Solomon v. Commissioner, 732 F.2d 1459, 1461

(6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603; Beaver v.

Commissioner, 55 T.C. 85, 93 (1970).

     Circumstantial evidence that may give rise to a finding of

fraudulent intent includes:   Understatement of income, inadequate

records, failure to file tax returns, concealment of assets,
                              - 31 -

failure to cooperate with tax authorities, filing false

documents, failure to make estimated tax payments, engaging in

illegal activity, attempting to conceal illegal activity, dealing

in cash, implausible or inconsistent explanations of behavior, an

intent to mislead which may be inferred from a pattern of

conduct, and lack of credibility of the taxpayer’s testimony.

Spies v. United States, supra at 499.   The taxpayer’s background

and the context of the events in question may be considered

circumstantial evidence of fraud.   Spies v. United States, supra

at 497; Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.

1986), affg. T.C. Memo. 1984-601; Niedringhaus v. Commissioner,

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

     Respondent’s assertion of fraud primarily relies on a theory

that petitioner never worked for Energia and provided forged

documents to support her claim that she did work for Energia.

Respondent alleges that petitioner’s income actually comes from

working for Kaszirer Diamonds or is simply money embezzled from

Kaszirer Diamonds or Kaszirer family trusts with the help of her

husband.   Petitioner responds that she is the victim of slander

on the part of her brother-in-law and that she worked for Energia

and had taxes withheld and any failure to pay taxes to the

Russian Ministry of Taxation is due to fraud on the part of

Energia.

     Respondent makes much of petitioner’s inability to prove

conclusively that she actually worked for Energia and of her
                              - 32 -

implausible explanation of how she was paid by Energia.

Respondent contends that adequate proof was presented showing

that petitioner did not work for Energia.   Respondent argues that

since petitioner did not work for Energia, any documents from

Energia must be forgeries and petitioner’s income tax

deficiencies for the taxable years in issue must be a product of

fraud.   However, we conclude on the basis of the record that

respondent has not proved by clear and convincing evidence that

petitioner did not work for Energia.   Consequently, respondent’s

contentions, which largely flow from respondent’s proposition

that petitioner was never employed by Energia, while they raise

suspicions, remain unproved by clear and convincing evidence.

     Respondent also contends that the Forms 3 provided by

petitioner are forgeries since petitioner claimed the Form 3 was

not in use during taxable years 1997 and 1998 and the documents

were not provided until after respondent furnished petitioner

with a blank sample.   Similarly, respondent takes the absence of

Bates stamp numbers on the Energia letters to mean they were not

a part of KRMT’s files at the time of preparing petitioner’s tax

returns.   Respondent contends that petitioner forged the letters

or persuaded someone in Russia to produce them to support her

claimed employment and foreign tax credits.   However, respondent

did not provide any testimony by an employee of the Russian

Ministry of Taxation or a document expert or provide any other
                               - 33 -

clear and convincing evidence to prove any of the letters or

forms are in fact forgeries.

     While the circumstances do arouse substantial suspicion, we

are mindful that it is respondent’s burden to prove fraud by

clear and convincing evidence.   We find respondent’s contentions

without clear and convincing support in the record.    While much

of the evidence upon which respondent relies contributed to our

holding on the deficiency issues, the evidence is not

sufficiently persuasive, on a clear and convincing basis, to

prove that petitioner’s contentions are actually false.

Accordingly, we hold that respondent has failed to carry

respondent’s burden of proof on a clear and convincing basis.

Consequently, we hold that petitioner is not liable for the fraud

penalty under section 6663.

Section 6662 Penalty

     Respondent argues, in the alterative to the fraud penalty,

that petitioner is liable for the accuracy-related penalty under

section 6662.   Respondent bears the burden of production under

section 7491(c) and must come forward with sufficient evidence

that it was appropriate to impose the penalty.     See Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).

     A taxpayer may be liable for a 20-percent penalty on any

underpayment of tax attributable to negligence or disregard of

rules or regulations.   Sec. 6662(a) and (b)(1).   “Negligence” is

any failure to make a reasonable attempt to comply with the
                              - 34 -

provisions of the Internal Revenue Code, and “disregard” means

any careless, reckless or intentional disregard.   Sec. 6662(c).

Negligence also includes any failure by a taxpayer to keep

adequate books and records to substantiate items properly.    See

sec. 1.6662-3(b)(1), Income Tax Regs.

     As to the issue of negligence, we conclude that respondent

has met the burden of production.   The evidence shows that

petitioner failed to keep adequate books and records of her

unique employment relationship and entitlement to foreign tax

credits.   Accordingly, we sustain respondent’s determination that

petitioner is liable for the accuracy-related penalty.

     We have considered all of petitioner’s contentions, and to

the extent they are not addressed herein, they are irrelevant,

moot, or without merit.

     To reflect the foregoing,


                                         Decisions will be entered

                                    under Rule 155.
