                         T.C. Memo. 2007-62



                      UNITED STATES TAX COURT



           TIMOTHY R. AND CINDY I. FULLER, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13007-05.              Filed March 19, 2007.



     Anthony V. Diosdi and Joy E. Gray, for petitioners.

     Daniel J. Parent, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies and

penalties with respect to petitioners’ Federal income tax as

follows:
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                                                Penalty
     Year              Deficiency          I.R.C. Sec. 6663

     1998               $43,020               $32,265.00
     1999                42,510                30,672.75
     2000                49,029                36,771.75

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions by the parties, the sole issue for

decision is whether petitioners’ underpayments of taxes for the

years in issue were due to fraud and subject to the civil fraud

penalty under section 6663 or, in the alternative, whether

petitioners are liable for the accuracy-related penalty pursuant

to section 6662 for substantial understatements in their Federal

tax liability for the years in issue.

                        FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioners resided in Vacaville, California, at the time that

they filed their petition.

     Petitioners operated a residential painting business known

as Custom Painting during 1998, 1999, and 2000.   In early 2000,

petitioners began an additional business known as TC’s Discount

Parts, in which they sold motorcycle accessories.
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     Petitioners’ tax returns for the years in issue were

prepared by Wayne Greenfield (Greenfield), an enrolled agent in

Chico, California.    Petitioners provided Greenfield with

schedules of gross receipts, cost of goods sold, and other

expenses for 1998, 1999, and 2000 to aid him in the preparation

of their tax returns for those years.    Petitioner Cindy I. Fuller

(Mrs. Fuller) maintained the books and records for both of

petitioners’ businesses.    She prepared the figures to be entered

on petitioners’ tax returns and provided them to Greenfield.

Other than contracts for the purchase of equipment, Mrs. Fuller

did not provide to Greenfield any underlying documents to

substantiate how petitioners determined the figures that they

submitted to him to be entered on their tax returns.

     Petitioners filed their 1998 Federal income tax return on

October 19, 1999.    They filed their 1999 tax return on

December 17, 2000.    They filed their 2000 tax return on June 7,

2002, after receiving from the IRS a letter requesting that it be

filed.

     On their Schedules C, Profit or Loss From Business,

petitioners understated their gross receipts by $73,624 for 1998,

$26,038 for 1999, and $9,931 for 2000.    They overstated their

costs of goods sold for materials and supplies by $27,768 for

1998, $49,019 for 1999, and $113,402 for 2000.    They overstated

their depreciation expenses by $17,558 for 1998, $26,037 for
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1999, and $14,683 for 2000.    They overstated their car and truck

expenses by $11,273 for 1998, $7,120 for 1999, and $6,714 for

2000.   They also overstated their workers’ compensation insurance

expenses by $2,008 for 1999.

     Petitioners overstated their expenses for telephone and cell

phone expenses for 1998 by $4,420, reported those expenses

correctly for 1999, and understated those expenses by $437 for

2000.   Petitioners also understated their labor expenses by

$3,265 for 1999 and $2,493 for 2000.    Despite these instances

where petitioners understated their deductible expenses, the

combined discrepancies listed above substantially decreased

petitioners’ reported net income and income tax liability.     Due

to the understatement of net income reported on their tax

returns, petitioners claimed and received earned income tax

credits of $3,730 for 1998 and $3,770 for 1999.

     In various loan applications with Redding Bank of Commerce

(Redding Bank) from 1998 through 2000, petitioners represented

that they had a monthly income of between $5,000 and $6,556.

Petitioners also provided to Redding Bank a copy of a 1998

Form 1040, U.S. Individual Income Tax Return, that did not match

the return that was actually filed with the IRS by petitioners

for that year.   The 1998 return that was provided to Redding Bank

listed petitioners’ Schedule C income as $44,005, while the

return that was actually filed by petitioners for 1998 reported
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only $10,058 of Schedule C income.     Petitioners also submitted to

Redding Bank a document entitled “Individual Financial Statement”

dated April 5, 2000, in which they represented that they had

wages of $150,000, business net income of $349,000, and total

income of $499,000 for 1999.   They also provided to Redding Bank

a profit and loss statement for 1999 indicating gross receipts of

$489,049.55, while petitioners’ filed tax return reported only

$441,032 in gross receipts.

     Petitioners purchased several vehicles in 1999 and 2000.     In

April 1999, they purchased a 1999 GMC van for a monthly payment

of $715.39.   On the credit application for that purchase,

petitioners represented that their annual gross income was

$350,000.   In September 1999, petitioners made a downpayment of

$5,000 to purchase a 2000 Ford pickup truck for a monthly payment

of $627.20.   On their credit application for that purchase,

petitioners represented that their gross monthly income from

employment was $13,300.   Upon purchase of the 2000 Ford pickup

truck, petitioners paid $3,237.98 in cash to have off-road

alterations made to the vehicle.   In August 2000, petitioners

made a downpayment of $2,000 to purchase a 2000 Chevrolet pickup

truck for a monthly payment of $592.82.    On the credit

application for that purchase, petitioners represented that their

combined monthly income was $13,000.
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     From December 21, 2001, to November 17, 2003, an IRS agent

sent to petitioners, collectively and individually, several

letters requesting interviews and scheduling appointments to

discuss their 1998, 1999, and 2000 tax years.    Petitioners did

not meet with the IRS agent during that period.    On January 6,

2004, petitioners scheduled a meeting with the IRS agent for

January 30, 2004, in Vallejo, California, which location was

chosen for petitioners’ convenience.    The agent traveled

approximately 180 miles from Redding, California, to Vallejo for

the meeting, but petitioners failed to appear.

     On February 4, 2004, the IRS sent to petitioners summonses

directing them to appear on March 4, 2004, to be interviewed and

to produce documents regarding their 1998, 1999, and 2000 tax

years.   Petitioners did not appear on March 4, 2004, or produce

the requested documents.   On May 21, 2004, the IRS provided to

petitioners’ counsel copies of document requests previously sent

to petitioners.   Petitioners still failed to provide any of the

requested information.   On February 11, 2005, petitioners were

served with additional summonses requiring their appearance on

March 1, 2005.    The IRS agent again traveled to Vallejo to meet

with petitioners, but petitioners again failed to appear.

     In 2002, the IRS began issuing summonses to Redding Bank and

to petitioners’ paint suppliers in order to obtain information

regarding petitioners’ tax liability for the years in issue.
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From this third-party information, the IRS began to reconstruct

petitioners’ gross income and expenses.

       On May 27, 2005, the IRS mailed to petitioners the statutory

notice of deficiency.    After the notice of deficiency was sent,

petitioners’ counsel notified the IRS that the previously

requested documents were available for review at his office.

Petitioners’ counsel also provided copies of the documents to the

IRS.    Much of the information regarding particular payments made

by or to petitioners, however, was gathered from third parties,

such as from petitioners’ bank, and was not evident from the

books and records provided by petitioners.    Petitioners

themselves never provided any explanation of the documents or how

they had calculated their gross income and expenses for the years

in issue.

                               OPINION

       The penalty in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from the taxpayer’s fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938); Sadler v.

Commissioner, 113 T.C. 99, 102 (1999).    Respondent has the burden

of proving, by clear and convincing evidence, an underpayment for

those years in issue and that some part of the underpayment for

each of those years was due to fraud.    Sec. 7454(a); Rule 142(b).
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If respondent establishes that any portion of the underpayment is

attributable to fraud, the entire underpayment is treated as

attributable to fraud and subjected to a 75-percent penalty,

unless the taxpayer establishes that some part of the

underpayment is not attributable to fraud.    Sec. 6663(b).

Respondent must show that the taxpayer intended to conceal,

mislead, or otherwise prevent the collection of taxes.     Katz v.

Commissioner, 90 T.C. 1130, 1143 (1988).

     The existence of fraud is a question of fact to be resolved

upon consideration of the entire record.     King’s Court Mobile

Home Park, Inc. v. Commissioner, 98 T.C. 511, 516 (1992).      Fraud

will never be presumed.   Id.; Beaver v. Commissioner, 55 T.C. 85,

92 (1970).   Fraud may, however, be proved by circumstantial

evidence and inferences drawn from the facts because direct proof

of a taxpayer’s intent is rarely available.     Niedringhaus v.

Commissioner, 99 T.C. 202, 210 (1992).     The taxpayer’s entire

course of conduct may establish the requisite fraudulent intent.

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

intent may be inferred from various kinds of circumstantial

evidence, or “badges of fraud”, including the consistent

understatement of income, inadequate records, failure to file tax

returns, implausible or inconsistent explanations of behavior,

concealing assets, and failure to cooperate with tax authorities.

Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986),
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affg. T.C. Memo. 1984-601.    Dealing in cash is also considered a

“badge of fraud” by the courts because it is indicative of a

taxpayer’s attempt to avoid scrutiny of his finances.    See id. at

308.

       Respondent’s burden regarding the underpayment of tax in

support of the fraud penalty has been met.    Petitioners have

conceded overstatements of expenses and of costs of goods sold

and understatements of gross receipts for the years in issue.

Those misstatements resulted in substantial understatements of

petitioners’ tax liability for those years.

       The evidence in this case establishes many “badges of

fraud”.    It is undisputed that petitioners substantially

understated their income for each of the years in issue.     For

2000, petitioners did not file a tax return until June 2002, and

then only after receiving a letter from the IRS requesting that a

2000 return be filed.    Petitioners’ substantial understatements

of income for all tax years in issue and their initial failure to

file a tax return for 2002 are both indicia of fraud.    See id. at

307.

       Petitioners failed to cooperate with respondent by not

responding to several letters from the IRS requesting interviews

and information, not submitting documents requested by the IRS

agent conducting the audit, and failing to appear at scheduled

interviews.    Petitioners did not provide the agent with any
                               - 10 -

requested documentation until after the notice of deficiency was

sent to them.    The documentation eventually provided by

petitioners was inadequate, leaving the IRS to depend

substantially on the records of third parties in the course of

its audit of petitioners.    Petitioners knew that there was

insufficient documentation to support the figures entered on

their tax returns, they failed to cooperate with the IRS’s

multiple requests for interviews, and they presented no plausible

explanation, written or oral, regarding their computation of

their tax liabilities for the years in issue.    Petitioners’

refusal to cooperate with respondent in determining their correct

tax liability (until this case was being prepared for trial) is a

further indication of fraud.    Bradford v. Commissioner, supra at

307.

       Mrs. Fuller provided Greenfield, who prepared petitioners’

tax returns for the years in issue, with totals for gross

receipts, costs of goods sold, and other expenses to be used for

preparing returns for the tax years in issue, but she did not

provide him with any information regarding how the figures she

provided were calculated or with substantiating documentation

other than some contracts for the purchase of equipment.

Petitioners still have not provided to the IRS or to this Court

any plausible explanation of how they arrived at the figures

reported on their tax returns or how the misstatements occurred.
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Petitioners’ failure to provide a plausible explanation of their

behavior with regard to the calculation of the figures provided

to their tax preparer is indicative of fraud.   See id. at 307.

     Petitioners represented on several loan applications with

various financial institutions during the years in issue that

they had vastly larger incomes than they had represented either

to Greenfield in the course of his preparation of their returns

for those years or to the IRS.   They also provided a copy of a

purported 1998 tax return to Redding Bank that showed income four

times the amount that was actually reported to the IRS for 1998.

Petitioners argue that the inconsistent information that they

provided to financial institutions consisted of “mere estimations

of their income” and thus should not be viewed as evidence of

fraudulent intent to conceal income from the IRS, to which

petitioners reported substantially lower incomes.   However, the

large discrepancies in the income that petitioners reported to

the IRS and the income reported to the lending institutions,

coupled with the 1998 tax return submitted to Redding Bank that

was selectively altered to show four times more income to

petitioners than the return that was actually filed with the IRS

for 1998, are convincing evidence of petitioners’ dishonesty and

of fraudulent intent to conceal income from the IRS.    Petitioners

have not presented any plausible explanation of these

discrepancies.
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     Petitioners attempt to shift the responsibility for the

understatements of their tax liabilities to Greenfield and claim

that Greenfield should have conducted his own investigation into

the accuracy of the information that petitioners provided to him

in the course of his preparation of their returns.   However, in

the course of his preparation of petitioners’ tax returns,

Greenfield was not provided with documentation to support

petitioners’ calculations of the figures given to him other than

some contracts for the purchase of equipment.   Petitioners’

reliance on Greenfield to discover the errors in the reported

figures is no defense to fraud because they failed to provide

Greenfield with complete and accurate information regarding their

income and expenses.   See Korecky v. Commissioner, 781 F.2d 1566,

1569 (11th Cir. 1986), affg. per curiam T.C. Memo. 1985-63;

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

T.C. Memo. 1959-172.

     Although Greenfield testified that “it was obvious that the

[1998] tax return wasn’t correct”, he was able to reach this

conclusion only after petitioners provided him with their books

and records after the returns had been filed.   The responsibility

of filing accurate returns remains principally with the

taxpayers, especially where the taxpayers have taken an active

and controlling role in the process of preparing the tax returns

and the information used for their preparation.   See Medlin v.
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Commissioner, T.C. Memo. 2003-224, affd. 138 Fed. Appx. 298 (11th

Cir. 2005).   Petitioners cannot blame Greenfield for the

misstatements and errors in reporting their tax liabilities when

petitioners provided Greenfield with the incorrect figures to be

entered on their tax returns and when they alone possessed the

information that would have indicated discrepancies between

petitioners’ actual tax liabilities and the amounts reported on

their returns.   See Bacon v. Commissioner, T.C. Memo. 2000-257,

affd. without published opinion 275 F.3d 33 (3d Cir. 2001).

Furthermore, petitioners’ failure to provide to Greenfield the

documentation necessary for his accurate preparation of their tax

returns is indicative of fraud.   See Medlin v. Commissioner,

supra; Ishler v. Commissioner, T.C. Memo. 2002-79.

     Respondent has proven by clear and convincing evidence an

underpayment of tax due to fraud for each year.    Petitioners have

not proven that any part of the underpayments was not

attributable to fraud.   See sec. 6663(b).   On consideration of

the entire record, we conclude that petitioners are liable for

the fraud penalties determined under section 6663(a).

     To reflect the foregoing and the concessions of the parties,


                                         Decision will be entered

                                    under Rule 155.
