                               T.C. Memo. 2016-118



                         UNITED STATES TAX COURT



          JOHN FINNEGAN AND JOAN FINNEGAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8637-13.                          Filed June 16, 2016.



      Jared J. Scharf, for petitioners.

      Michael J. De Matos, Rose E. Gole, and Gennady Zilberman, for

respondent.


              MEMORANDUM FINDINGS OF FACT AND OPINION


      WELLS, Judge: On February 7, 2013, respondent issued petitioners a

notice of deficiency determining deficiencies and section 6662(a)1 accuracy-



      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended and as in effect for the years in issue, and Rule
references are to the Tax Court Rule of Practice and Procedure.
                                        -2-

[*2] related penalties for the taxable years 1994 through 2001. Petitioners contend

that the assessments are time barred by the three-year period of limitations of

section 6501(a). Relying on Allen v. Commissioner, 128 T.C. 37 (2007),

respondent counters that the limitations period remains open under section

6501(c)(1) because petitioners’ return preparer, Duane Howell, prepared each

return falsely or fraudulently with the intent to evade tax. Accordingly, we must

decide whether respondent has proved clearly and convincingly that petitioners’

returns were prepared falsely or fraudulently with the intent to evade tax.

                                Preliminary Matters

      Petitioners have objected to the admission into evidence of certain

testimony and documents. On the grounds of relevancy, petitioners object to the

testimony of Internal Revenue Service Special Agent Ashcroft and of Glen

Robins, Mr. Howell’s former associate.2 Respondent asserts that the testimony is

evidence of Mr. Howell’s modus operandi and thus relevant to the question of

fraudulent intent.




      2
       Despite the Court’s instructions at trial, petitioners did not brief the
evidentiary matters in a separate evidentiary section of their opening brief.
Petitioners did, however, include a footnote to “avoid a waiver” of their argument.
The footnote discusses hearsay objections, but not relevancy. We nevertheless
address petitioners’ relevancy objections discussed in their responding brief.
                                         -3-

[*3] Trials before the Tax Court are conducted in accordance with the Federal

Rules of Evidence, Rule 143(a),3 which provide the general rule that all relevant

evidence is admissible, Fed. R. Evid. 402. Relevant evidence is evidence having

“any tendency to make a fact more or less probable than it would be without the

evidence” and “the fact is of consequence in determining the action.” Fed. R.

Evid. 401. Respondent offered Mr. Robins’ and Special Agent Ashcroft’s

testimony to prove that when Mr. Howell prepared fraudulent returns, he routinely

used certain entries and methods which also appear on petitioners’ returns.

Petitioners’ reasoning for why the testimony is not relevant, that Mr. Robins did

not prepare petitioners’ returns and Special Agent Ashcroft did not investigate

petitioners’ returns, is misplaced. “Evidence of a person’s habit or an

organization's routine practice may be admitted to prove that on a particular

occasion the person or organization acted in accordance with the habit or routine

practice.” Fed. R. Evid. 406. We find the testimony of Mr. Robins and Special

Agent Ashcroft relevant. Whether Mr. Howell had a habit or routine when

fraudulently preparing returns and whether petitioners’ returns display elements of

      3
        The rule in effect during trial in the instant case reads: “[T]rials before the
Court will be conducted in accordance with the rules of evidence applicable in
trials without a jury in the United States District Court for the District of
Columbia”. The District Court’s local rules do not include any provision affecting
the applicability of Federal Rules of Evidence cited in the instant opinion.
                                         -4-

[*4] that habit or routine are facts of consequence making it more or less probable

that Mr. Howell prepared petitioners’ returns falsely or fraudulently with the intent

to evade tax. Furthermore, the testimony is not needlessly cumulative because Mr.

Robins and Special Agent Ashcroft testified as to different aspects of Mr.

Howell’s methods of fraud.

      On the grounds of relevancy and hearsay, petitioners also objected to the

admission of Mr. Howell’s affidavit and previous testimony in the criminal trial of

Timothy Mitts, Mr. Howell’s former employee. As in the case of the testimony

discussed above, petitioners’ relevancy objection is misplaced. Mr. Howell’s

statements are relevant in determining his motive and intent when making certain

entries in petitioners’ returns. We also determine that these documents are not

inadmissible hearsay. Hearsay is admissible as specified by a Federal statute, as

prescribed by the Supreme Court, or as provided in the Federal Rules of Evidence.

Fed. R. Evid. 802. There is no dispute that Mr. Howell’s affidavit and his prior

testimony are hearsay, but respondent contends that these documents are

admissible pursuant to rule 804(b)(3) of the Federal Rules of Evidence. Under

this exception, hearsay is admissible if: (1) the declarant of the statement is

unavailable; (2) the statement, when made, was “so contrary to the declarant’s

proprietary or pecuniary interest” that it would only have been made by a
                                         -5-

[*5] reasonable person if the person believed it to be true; and (3) the statement “is

supported by corroborating circumstances that clearly indicate its trustworthiness,

if it is offered in a criminal case as one that tends to expose the declarant to

criminal liability.” Fed. R. Evid. 804(b)(3).

      In the instant case we find that the first requirement is met because Mr.

Howell was unavailable. Fed. R. Evid. 804(a)(5). The Court may rely on

counsel’s representations as to the witness’ availability. See, e.g., Haeri v.

Commissioner, T.C. Memo. 1989-20. Respondent’s counsel represents that efforts

to procure Mr. Howell’s attendance began eight months before trial and included

calls to Mr. Howell, his then representative, notices via certified mail, and 10

separate attempts made by revenue agents and a private process server to serve

Mr. Howell with a subpoena. Petitioners contend that respondent should have

leveraged Mr. Howell’s plea bargain with the United States in his criminal case to

compel him to testify. The test, however, is not whether respondent used all

means at his disposal to procure a witness, but rather whether he used reasonable

means. Because respondent was unable to procure Mr. Howell’s attendance or

testimony despite process and other reasonable means, we determine Mr. Howell

was unavailable at trial.
                                         -6-

[*6] The second requirement is met because Mr. Howell’s statements expose him

to criminal liability and civil liability from former clients. See United States v.

Scopo, 861 F.2d 339, 348 (2d Cir. 1988); United States v. Chan, 184 F. Supp. 2d

337, 342 (S.D.N.Y. 2002). At least one client has already instigated legal

proceedings against Mr. Howell, using his statements at the Mitts trial. See, e.g.,

Moore v. Howell, docket No. 2541-10 (N.J. Super. Ct. May 1, 2015). The fact that

Mr. Howell testified pursuant to a plea agreement does not render his statements

unreliable or inadmissible. See Scopo, 861 F.2d at 348. Finally, Mr. Howell’s

statements are corroborated by petitioners’ testimony regarding his role in the

preparation of the returns, Mr. Robins’ testimony regarding office routines, and

Special Agent Ashcroft’s testimony about Mr. Howell’s modus operandi.

      Accordingly, we admit into evidence: Exhibit 57, the transcript of Mr.

Howell’s testimony in the Mitts trial; Exhibit 63, Mr. Howell’s affidavit stating

that he fraudulently prepared petitioners’ returns; and the testimony of Special

Agent Ashcroft and Mr. Robins.4




      4
       Petitioners additionally object to the introduction into evidence of a myriad
of other documents. We sustain petitioners’ objections, as we did not rely on
those documents in making our determinations and they have no bearing on our
decision.
                                        -7-

[*7]                           FINDINGS OF FACT

I.     Petitioners

       Some facts have been stipulated and are so found. The parties’ stipulations

are incorporated in this opinion by reference and are found accordingly. During

taxable years 1994 through 2001, petitioners John and Joan Finnegan resided in

Monsey, New York. In 2003 petitioners moved from New York to Florida. At the

time of the filing of the petition, petitioners resided in Ormond Beach, Florida.

       During the years in issue petitioner Joan Finnegan was a full-time employee

of Rockland County Community College and petitioner John Finnegan was

employed as a plumber for several New York City contracting firms. Petitioners

owned their home in Monsey, New York, and a rental property in Daytona Beach,

Florida, which they had purchased in 1988 for approximately $60,000 (condo).

Petitioners did not visit the condo during the first 10 years of ownership. To rent

the condo, petitioners exclusively used the services of an independent business,

Condo Rentals of Daytona. Petitioners were not affiliated with Condo Rentals of

Daytona except as customers. Condo Rentals of Daytona handled the procurement

and screening of renters, credit report screening, and drafting of contracts.

Petitioners’ annual cost for management services for the condo remained below

$11,600.
                                          -8-

[*8] After their original accountant moved away, petitioners hired Mr. Howell to

prepare their returns. Mr. Howell advised petitioners that they should form a

partnership to report their rental activity. Mr. Howell incorrectly explained that

forming the partnership would allow petitioners to contribute moneys they

received from the condo rentals to a Keogh/self-employment retirement plan

account. With Mr. Howell’s help, petitioners formed a partnership named

“Jomarjen”, which appears in every Schedule E, Supplemental Income and Loss,

of petitioners’ Forms 1040, U.S. Individual Income Tax Return, for the years in

issue.

         Petitioners did not draft a partnership agreement for Jomarjen, and the filing

address for the partnership return changed from year to year. Other than creating

Jomarjen, petitioners did not change anything concerning the operation of their

rental investment. Condo Rentals of Daytona continued to manage the renting of

the condo and made payments of the rental revenues to petitioner Joan Finnegan,

issuing her Forms 1099-MISC, Miscellaneous Income, rather than to Jomarjen. If,

for any reason, petitioners communicated directly with their tenants, they did so

individually, and not as Jomarjen. Petitioners never transferred title of the condo

to Jomarjen. Petitioners never wrote checks to Jomarjen, and Jomarjen never wrote
                                         -9-

[*9] checks to petitioners. Petitioners did not have a separate office for their

condo rental activity.

      During the years after forming Jomarjen, petitioners did contribute moneys

to a retirement account. Petitioner Joan Finnegan testified that she could not recall

how much they contributed from year to year.5 Mr. Howell mailed letters

instructing petitioners how much they should contribute, but some years

petitioners did not contribute these amounts. Petitioner Joan Finnegan could not

recall whether Mr. Howell’s number appeared on the tax return despite petitioners’

failure to contribute.

      Petitioners’ Forms 1040, Schedules E for tax years 1997, 1998, 1999, 2000,

and 2001 show Gannan Co. in addition to Jomarjen. Gannan Co.’s partnership

returns report petitioners as the sole partnership owners. At trial petitioners

testified that they did not know what Gannan Co. was, that they learned the name

only after the examination of their returns, and that it does not exist. Petitioners

also testified that after following Mr. Howell’s advice, their tax returns became

very thick and they received larger refunds than in years past.




      5
      Although petitioners were able to provide to the Internal Revenue Service
documents from their financial planner related to the account, these documents
were not introduced at trial.
                                       - 10 -

[*10] II.   Returns

      The relevant returns in issue are petitioners’ Forms 1040 and the Forms

1065, U.S. Return of Partnership Income, for Jomarjen and Gannan Co. filed for

tax years 1994 through 2001. The returns include several figures which repeat

across returns and across years, with mostly vague descriptions. The figure $312,

for example, appears in petitioners’ 2001 Form 1040, in all Jomarjen Forms 1065

except for tax year 1996, and every Gannon Co. Form 1065. The figure $364

appears in petitioners’ 1994 Form 1040, all Jomarjen Forms 1065 except for tax

year 2001, and every Gannan Co. Form 1065. The figure $499 appears in every

relevant return except for those filed for 1994. The figure $572 appears in every

relevant Form 1065, as well as petitioners’ Form 1040 for tax years 1995 and

2001. These figures are described on the returns with vague terms such as

“miscellaneous”, “other expenses”, “other income”, “cash contributions”,

“supplies”, “purchases”, and more. The figure $4,896 appears in every partnership

return, except for Jomarjen’s 2001 Form 1065, as “office supplies or expenses”.

Finally, for every Form 1040, petitioners showed net income of $2 on Schedule C,

Profit or Loss From Business.

      The partnerships’ returns are related to petitioners’ returns and show

significant losses. As previously mentioned, Jomarjen appears on petitioners’
                                        - 11 -

[*11] Forms 1040, Schedule E, for 1994 through 2001, and Gannan Co. appears

for 1997 through 2001. The partnerships’ returns filed for those years report

petitioners as 100% owners in the aggregate. Through the years, petitioners

reported losses in excess of $300,000 related to Jomarjen and Gannan Co. There

are also several transfers to Jomarjen noted on petitioners’ Schedules C. Jomarjen

reported gross income in excess of the amounts petitioners received from the

condo rentals, and for tax year 1999, for example, greatly in excess of the amount

shown on the Form 1099-MISC issued by Condo Rentals of Daytona.

      There are connections between the partnerships as well. During 1999

Jomarjen issued to Gannan Co. Forms 1099-MISC reporting nonemployee

compensation of $24,400. Also, Gannan Co. issued a Form 1099-MISC to John

Finnegan reporting nonemployee compensation of $86,000. John Finnegan did

not recall receiving $86,000 from any partnership.

      Petitioners’ returns do not list Mr. Howell as the preparer. Instead, the

preparer changes from year to year, along with the post office box address for the

return preparer. Petitioners are not familiar with the preparer entities on the

preparer lines of the returns.
                                       - 12 -

[*12] III.   Preparation of Petitioners’ Returns

      For the tax years in issue Mr. Howell directly prepared or supervised the

preparation of petitioners’, Jomarjen’s, and Gannan Co.’s returns. Generally, Mr.

Howell or one of his associates provided petitioners with a tax organizer for the

year. Petitioners completed the organizer and returned it to Mr. Howell.

Petitioners did not review their individual income tax returns or the partnership

returns for Jomarjen and Gannan Co. after Mr. Howell prepared them. Although

petitioners followed Mr. Howell’s instructions and saved receipts and proof of

expenses they incurred, petitioners disposed of those receipts and records when

they moved to Florida in 2003.

IV.   Duane Howell

      During 1992 through 2003 Mr. Howell prepared approximately 750 to 800

tax returns per year, including individual income tax returns, partnership income

tax returns, and information returns. Mr. Howell began his return preparation

process as many accountants do, by providing his clients with “tax organizers” in

which clients listed their financial and accounting information. He testified at the

Mitts trial, however, that every return he prepared included at least some

fraudulent entries.
                                        - 13 -

[*13] One common fraudulent scheme began with Mr. Howell’s urging certain

clients to set up partnerships. For those with income activities separate from their

salaries, such as rental property owners, the partnerships served to report

purported income from the separate activities. Mr. Howell also set up false

partnerships that were not connected with any existing businesses or activities.

Mr. Howell believed partnerships were less vulnerable to audits than sole

proprietorships reported on Forms 1040, Schedule C, and so he placed false

income and expenses on partnership returns and used the partnership form to

avoid scrutiny from the Internal Revenue Service. The false expense deductions

that Mr. Howell placed on the partnership returns created large losses that flowed

through to the clients’ individual income tax returns, thereby lowering their

income tax liabilities. Mr. Howell prepared Forms 1099-MISC and Forms 1096,

Annual Summary and Transmittal of U.S. Information Returns, that maintained the

appearance of legitimate partnerships, and reported purported payments made by

the partnerships to related partnerships or partners.

      Another scheme consisted of Mr. Howell’s promoting Keogh/self-

employment retirement plans to individuals who had wages and other income. Mr.

Howell used the term “constructive receipt” to describe income reported on his

clients’ returns that actually was not received. Mr. Howell falsified income from
                                       - 14 -

[*14] partnerships and payments made by the partnerships in order for his clients

to claim Keogh/self-employment retirement plan deductions and lower their tax

liabilities. Mr. Howell instructed his clients as to the amounts they should

contribute for the year, but he did not verify whether the contributions were

actually made.

      Mr. Howell did not prepare returns using his own name but rather used

multiple entity names as the purported tax return preparer, including Jon Lea, Inc.,

Don Step, Inc., DPH HowCo, Johnson Units, Inc., John Unit, Inc., Comsulco, and

Comsulco Financial Services Group. Mr. Howell decided which preparer entity

name would be used on each return. Mr. Howell controlled various post office

box addresses which he placed on the preparer address lines on his clients’ returns

and which he changed from year to year. Because the partnerships’ addresses

were also sometimes changed, the Internal Revenue Service Centers where the

returns were filed changed from year to year. Mr. Howell tried to ensure that the

venue where partnership returns were filed differed from the venue where his

clients’ Forms 1040 were filed.

V.    Criminal Investigation and Prosecution

      Before he even began preparing petitioners’ returns, Mr. Howell had been

investigated for and convicted of preparing false returns during the 1980s. As a
                                       - 15 -

[*15] result of his conviction, Mr. Howell lost his certified public accountant’s

(C.P.A.) license. Several years later, the Internal Revenue Service’s Criminal

Investigation Division (CID) once again investigated Mr. Howell, this time

regarding his preparation of tax returns for the years 1992 through 2003.

      Because of his preparation and submission of fraudulent returns during

1992 to 2003, Mr. Howell was indicted in the U.S. District Court for the Southern

District of New York in 2006 for conspiring to commit an offense or to defraud

the United States, 18 U.S.C. sec. 371, and attempting to interfere with the

administration of internal revenue laws, sec. 7212(a); 18 U.S.C. sec. 2. Pursuant

to a plea agreement signed March 14, 2007, Mr. Howell pleaded guilty to both

counts of the indictment.

      CID Special Agents Robert Miranda and Steven Ashcroft were assigned

primary responsibility for the later CID investigation of Mr. Howell and Mr.

Robins. During the investigation, the special agents ordered and examined the

original individual income tax returns and the related partnership returns of Mr.

Howell’s clients, as well as transcripts from the Internal Revenue Service’s

Integrated Data Retrieval System. The special agents were able to identify

common characteristics on returns prepared by Mr. Howell, including: (a) large

refunds and partnership losses; (b) purported payments between partnerships and
                                        - 16 -

[*16] their respective partners; (c) the filing of partnership returns with different

Internal Revenue Service Centers from year to year; (d) partnerships whose

addresses changed every year; and (e) the issuance of Forms 1099-MISC to

partners or other partnerships.

      Other common characteristics of returns prepared fraudulently by Mr.

Howell included repeating numbers, such as expenses of $312, $364, $499, $572,

$4,896, all of which were created by Mr. Howell and not supplied by his clients,

income on Schedules C that netted to exactly $2, deductions for Keogh/self-

employment retirement plans, along with guaranteed payments based upon a

client's desired retirement plan contribution or deduction, and purported transfers

between Schedules C and related partnerships that were reported as expenses.

VI.   Petitioners’ Returns and the Investigation

      As part of the investigation, CID reviewed petitioners’ returns. Petitioners’

returns, however, did not form part of the indictment. Special Agent Ashcroft

testified that petitioners were not selected as grand jury witnesses for the

prosecution of Mr. Howell and Mr. Robins because they were not properly

interviewed by CID and there were already a sufficient number of client witnesses.

      On February 7, 2013, respondent issued to petitioners a notice of deficiency

for the taxable years 1994 through 2001, determining deficiencies and section
                                         - 17 -

[*17] 6662(a) accuracy-related penalties. In those notices, respondent disallowed

the following: (1) petitioners’ Schedule E partnership loss deductions; (2)

petitioners’ Schedule C deductions in their entirety; and (3) petitioners’ deductions

for Keogh/ self-employment retirement plans. Respondent contends that these

entries are false or fraudulent although they are due to Mr. Howell and not to

petitioners’ actions. On April 19, 2013, petitioners timely filed a petition with this

Court.

                                       OPINION

         We must decide whether respondent has proved that petitioners’ returns

were prepared falsely or fraudulently with the intent to evade tax.

I.       Limitations Period

         We begin with an analysis of the limitations period for assessment of

income tax. The Commissioner generally must assess any income tax within the

three-year period after a taxpayer files his or her return. Sec. 6501(a). In the case

of a false or fraudulent return with the intent to evade tax, however, tax

determined to be due may be assessed at any time. Sec. 6501(c)(1). In Allen v.

Commissioner, 128 T.C. at 42, we held that section 6501(c)(1) applies even if it is

the preparer of the return, and not the taxpayer, who falsely or fraudulently
                                       - 18 -

[*18] prepared the return with the intent to evade tax. But see BASR P’ship v.

United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 Fed. Cir. (2015).6

II.   False or Fraudulent Returns

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

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

661, 698 (1989). The definition of fraud for purposes of section 6501(c)(1) is the

same as the definition of fraud for purposes of the section 6663 fraud penalty.

Rhone-Poulenc Surfactants & Specialties v. Commissioner, 114 T.C. 533, 548

(2000). Accordingly, respondent must prove for each return in issue that (1) an

underpayment of tax exists and (2) that the intention was to evade taxes known to

be owing by conduct intended to conceal, mislead, or otherwise prevent the

collection of tax. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).


      6
        We see no reason to revisit Allen v. Commissioner, 128 T.C. 37 (2007), on
account of BASR P’ship v. United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d
1338 (Fed. Cir. 2015). In the Court of Appeals for the Federal Circuit’s opinion, a
persuasive dissent was filed, as well as a concurring opinion that relied on sec.
6229, a provision inapplicable in the instant case. Accordingly, even in cases
appealable in the Federal Circuit, it is unclear whether, in the absence of the
application of sec. 6229, which interpretation of sec. 6501(c)(1) would prevail.
Moreover, there is no jurisdiction for appeal of any decision of the Tax Court to
the Court of Appeals for the Federal Circuit. Sec. 7482(a)(1). Additionally, the
parties have not cited BASR P’ship and do not contend we should revisit Allen.
Thus, Allen is controlling precedent in the instant case, and we do not revisit the
analysis and conclusion in that Opinion.
                                        - 19 -

[*19] Because respondent alleges that Mr. Howell, not petitioners, acted

fraudulently, we must decide whether respondent has proved clearly and

convincingly that Mr. Howell placed the false entries on petitioners’ returns with

the intent to evade tax. “Fraud may not be imputed or presumed but must always

be established by independent evidence of fraudulent intent to evade tax”. Eriksen

v. Commissioner, T.C. Memo. 2012-194, 2012 WL 2865875, at *8. Negligence,

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

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

T.C. Memo. 1966-81; Bruce Goldberg, Inc. v. Commissioner, T.C. Memo. 1989-

582. The existence of fraud is a factual determination to be gleaned from the

entire record. Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), aff’d, 578

F.2d 1383 (8th Cir. 1978).

      Mr. Howell’s affidavit states that he prepared, for the tax years in issue,

false income tax returns for petitioners and their partnerships. Mr. Howell did not

testify, however, so there are no details or examples identifying the false entries.

This is not an insurmountable burden for respondent. Fraudulent intent is rarely

shown by direct evidence. Courts have distilled fraudulent intent by viewing

circumstantial evidence in the light of certain indicia of fraud. Some factors that

are frequently evaluated in deciding whether fraudulent intent exists are:
                                        - 20 -

[*20] understatements of tax, inadequate books and records, implausible or

inconsistent explanations of behavior, and making false entries or alterations. See

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

v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff’g T.C. Memo. 1984-

601; Solomon v. Commissioner, 732 F.2d 1459, 1461-1462 (6th Cir. 1984), aff’g

T.C. Memo. 1982-603. We must therefore consider the conduct in the instant case

while being mindful of the factors detailed above and decide whether the evidence

is “so strong” that fraud is the most manifest explanation. Biggs v. Commissioner,

440 F.2d 1, 5 (6th Cir. 1971), aff’g T.C. Memo. 1968-240; see also Richardson v.

Commissioner, 509 F.3d 736, 743-745 (6th Cir. 2007), aff’g T.C. Memo. 2006-69.

      The Commissioner is required to prove fraud by “clear and convincing

evidence.” Sec. 7454(a); Rule 142(b). Clear and convincing evidence is “that

measure or degree of proof which will produce in the mind of the trier of facts a

firm belief or conviction as to the allegations sought to be established. It is

intermediate, being more than a mere preponderance, but not the extent of such

certainty as is required beyond a reasonable doubt as in criminal cases.” Ohio v.

Akron Ctr. for Reprod. Health, 497 U.S. 502, 516 (1990); Eriksen v.

Commissioner, 2012 WL 2865875, at *8.
                                         - 21 -

[*21] Accordingly, we must decide whether respondent has shown with clear and

convincing evidence that petitioners’ returns include false entries due to Mr.

Howell’s bad faith, intentional wrongdoing, or sinister motive and that they

resulted in an underpayment of tax.

III.   Petitioners’ Returns

       A.    Underpayment of Tax

       Petitioners stipulated that they will concede the determined deficiencies if

we conclude that the period of limitations is open under section 6501(c)(1). The

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

and convincing evidence that an underpayment of tax exists in the instant case

with respect to each year in issue. See Eriksen v. Commissioner, 2012 WL

2865875, at *9. Accordingly, it is irrelevant that respondent did not check with

vendors or review petitioners’ credit card purchases or checking accounts to

determine whether petitioners incurred the expenses deducted. The determination

does not result from a failure of proof, but from the parties’ stipulations that

petitioners are liable for the deficiencies if the periods of limitations are open

under section 6501(c)(1).

       Additionally, respondent has provided evidence showing the returns include

erroneous entries resulting in underpayments of tax. Contrary to petitioners’
                                        - 22 -

[*22] contention, respondent is not simply relying on petitioners’ lack of

recollection and confusion about their business as his sole evidence. Petitioners

testified that they had no relationship to Gannan Co. even though the partnership

appears on their Schedules E from 1997-2001. Petitioners also testified that

Condo Rentals of Daytona continued to manage all of the rental duties, yet

Jomarjen reported annual gross receipts and expenses that were vastly higher than

payments made to petitioners, the roughly $12,000 it cost to manage the condo,

and in 1999, for example, than amounts shown on the Form 1099-MISC issued to

Joan Finnegan.

      B.     Elements of Fraud: Intent

      Respondent submits that Mr. Howell prepared petitioners’ tax returns

fraudulently by claiming fabricated partnership losses, Schedule C expenses, and

retirement contribution deductions. To carry his burden, respondent compares

petitioners’ returns to Mr. Howell’s modus operandi in cases in which he admitted

to preparing fraudulent returns. Respondent infers from the similarities, as well as

the trial testimony, that Mr. Howell prepared each return in issue with the intent to

evade tax.

      Petitioners’ returns display many of the characteristics of the returns which

Mr. Howell admitted to preparing fraudulently. Petitioners testified that they were
                                        - 23 -

[*23] unfamiliar with the Gannan Co. partnership and that they had never owned

or operated any business or profit-seeking venture titled Gannan Co. Yet the

partnership is listed on petitioners’ Schedules E and Forms 1099-MISC, one of

which shows Gannan Co. distributing thousands of dollars to John Finnegan that

he did not recall receiving. Petitioners contend that Mr. Howell may have made a

mistake and that the partnership belonged to another client. We find such an

inference implausible. Mr. Howell testified that one of his methods for producing

fraudulent returns involved fabricating partnerships with fabricated guaranteed

payments, which would then justify deducting retirement contributions that his

clients did not, in fact, ever make. The repeated appearance of Gannan Co. on

petitioners’ returns and documents, along with Mr. Howell’s testimony, clearly

indicates to us that the Gannan entries on petitioners’ returns were made

fraudulently with the intent to evade tax.

      Petitioners contend that the fact that petitioners’ individual and partnership

returns were “consistent with” other fraudulent returns prepared by Mr. Howell is

subjective and not probative. Respondent, however, provides specific elements of

petitioners’ returns that match Mr. Howell’s modus operandi. Such elements

include: (1) Schedule C income of $2 (the balance being transferred over to a

partnership), (2) two new partnerships that petitioners did not form until engaging
                                         - 24 -

[*24] Mr. Howell’s services, (3) an entire partnership with which petitioners were

unfamiliar, (4) repeating entries of certain figures that Mr. Howell testified he

routinely used when fabricating returns, (5) large partnership losses, and (6)

deductions for Keogh/self-employed retirement accounts when petitioners earned

wages.

      Petitioners contend that respondent failed to offer evidence that the

repeating figures are false or fraudulent, and that because repetition is not by itself

proof of fraud, their existence is not probative. On the contrary, Mr. Howell

testified that $4,896, for example, was a figure he routinely entered for office

expense deductions by estimating $100 spent per week, even when taxpayers did

not incur any office expenses. Petitioners testified that they rarely communicated

with their tenants and claimed no home office. Also, the figures’ frequency and

repetition is, by itself, additional evidence that they are not based on receipts or

information provided by petitioners. We believe such figures would fluctuate

annually if they were actually incurred.

      Petitioners’ returns also include elements to avoid detection. Such elements

by themselves would be relevant, and they are even more so in the instant case

because Mr. Howell testified that they were part of his modus operandi. The

addresses for petitioners’ partnerships changed over the years, often differing from
                                         - 25 -

[*25] the jurisdictions where petitioners filed their individual Forms 1040.

Special Agent Ashcroft testified that mailing tax returns to different Service

Centers could delay any cross-year or cross-return comparisons and does delay

obtaining original returns during an examination.

      Petitioners’ returns also show, from year to year, different return preparers

with different addresses. Petitioners contend this merely shows that Mr. Howell

was trying to conceal his identity because his C.P.A. license had been revoked and

that the concealment evidence therefore lacks any probative value. We do not

agree. Mr. Howell’s attempting to avoid detection is probative. The fact that the

addresses, and not only the names, changed from year to year is further evidence

that respondent’s inference is the correct one to draw.

      Comparing the instant case to Eriksen v. Commissioner, 2012 WL 2865875,

is instructive. Eriksen involved six taxpayers whose return preparer was convicted

of preparing false and fraudulent returns with the intent to evade tax. In Eriksen,

the taxpayers’ returns were not included among the 51 returns considered as part

of the preparer’s guilty plea. Id. at *4. Although the preparer testified in Eriksen,

he was unable to recall at trial preparing any of the returns there in issue. Id. at *2.

The Court held for five of the taxpayers but against the sixth. The key distinction

of the sixth taxpayer, although she had not committed fraud herself, was her
                                       - 26 -

[*26] testimony that her return included deductions for expenses she had not in

fact incurred. Id. at *12. The Commissioner then established that the expenses

were of the type the preparer had pleaded guilty to fabricating. Id. Viewing these

facts in conjunction with other badges of fraud, the Court determined that the sixth

taxpayer’s returns were false or fraudulent. Id.

      Petitioners contend that Eriksen stands for the proposition that, to establish

fraud, the Commissioner must prove a “direct link” between the commission of

fraud and a taxpayer’s return. Petitioners strongly imply that the only way to

establish such a direct link is through the preparer’s testimony. In Eriksen, the

Commissioner established the existence of fraud by matching the incorrect

information on the taxpayer’s return to the preparer’s modus operandi. In other

words, even taking petitioners’ contention into account, there are ways of

providing an evidentiary link that do not involve a preparer’s specific testimony as

to a particular taxpayer.

      Petitioners also contend that their circumstances are similar to those of the

first five Eriksen taxpayers because, without a connection or direct link between

Mr. Howell’s wrongdoing and petitioners or their partnerships, respondent’s

evidence rises only to the level of “a suspicion of fraud”. We do not agree. We
                                        - 27 -

[*27] think that petitioners’ circumstances are most similar to those of the sixth

Eriksen taxpayer. Respondent has already shown that petitioners’ returns include

significant errors, namely, Jomarjen’s gross income above and beyond the

revenues collected by Condo Rentals of Daytona and the Gannan Co. partnership’s

entries on petitioners’ returns. Respondent provided additional testimony that

identified specific figures in petitioners’ returns, e.g., $4,896, which were frequent

fabrications of Howell’s. Additionally, the preparer in Eriksen testified in his plea

allocution that not all returns he prepared were fraudulent. Id. at *4. Mr. Howell

testified that every return he prepared included at least some fraudulent entries,

and because of these false entries, was “dirty”.

      Respondent having produced sufficient evidence to establish that a portion

of each of petitioners’ underpayments is attributable to fraud, we conclude the

periods of limitations for those years remain open pursuant to section 6501(c)(1).7

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

Specialties, L.P. v. Commissioner, 114 T.C. at 548. Because we hold that the

period of limitations is open on account of the false and fraudulent nature of each


      7
       We reach this conclusion without drawing any inference from petitioners’
lack of books and records for the years in issue. Petitioners testified credibly that,
when they moved from New York to Florida in 2003, they disposed of all the
receipts and other records and retained only the tax returns.
                                        - 28 -

[*28] of petitioners’ Federal income tax returns for 1994 through 2001, petitioners

concede the deficiency respondent determined for each of those years.

Accordingly, we hold that there are deficiencies in petitioners’ Federal income tax

for 1994 through 2001 of $32,697, $3,024, $7,940, $15,853, $18,641, $15,217,

$16,720, and $13,909, respectively.

IV.   Penalties

      Respondent also determined that petitioners are liable for accuracy-related

penalties. See sec. 6662(a). Pursuant to section 7491(c),8 respondent bears the

burden of production with respect to petitioners’ liability for section 6662(a)

penalties. This means that respondent “must come forward with sufficient

evidence indicating that it is appropriate to impose the relevant penalty”. Higbee

v. Commissioner, 116 T .C. 438, 446 (2001).

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

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

Sec. 6662(c). This includes failing to make “a reasonable attempt to ascertain the

correctness of a deduction, credit or exclusion on a return which would seem to a


      8
        Sec. 7491(c) is effective for examinations commencing after July 22, 1998.
It is unclear from the record when the examination of petitioners’ returns began.
In the interest of thoroughness, we assume it began after petitioners’ filing of their
2001 Form 1040.
                                         - 29 -

[*29] reasonable prudent person to be ‘too good to be true’ under the

circumstances”. Sec. 1.6662-3(b)(1)(ii), Income Tax Regs. Taxpayers should be

able to show, at a minimum, that they fulfilled a duty of inquiry with regard to

whether their return properly reported their tax liability. Eriksen v. Commissioner,

2012 WL 2865875.

      Petitioners testified that they signed and filed the returns Mr. Howell

prepared for them without reading them. We do not doubt this testimony, as

petitioners filed returns for an entire partnership, which was also reflected on their

personal return, without noticing that it was wholly unrelated to their affairs.

Petitioners were unfamiliar with even the most basic line items on the returns,

such as their professions, addresses, and total income. Respondent has shown that

petitioners failed to fulfill their duty of inquiry. See id. Petitioners’ failure to

review the returns is especially reckless considering that the sizes of their returns

and refunds grew significantly when they became clients of Mr. Howell. These

were signals that Mr. Howell’s changes may have been “too good to be true” and

petitioners should have made reasonable attempts to ascertain the correctness of

the new deductions. See sec. 1.6662-3(b)(1)(ii), Income Tax Regs. Petitioners, in

fact, recognize that a lack of review can give rise to an inference of negligence,

and are silent as to any defense against the penalties. Consequently, we conclude
                                         - 30 -

[*30] that respondent has met his burden of production for determining

accuracy-related penalties due to negligence or disregard of rules or regulations.

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

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

irrelevant, or without merit.

      To give effect to the foregoing,


                                                        Decision will be entered for

                                                  respondent.
