Beauchamp v. Commissioner

T.C. Memo. 1997-393

UNITED STATES TAX COURT

KIM BEAUCHAMP, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7683-95. Filed August 26, 1997.

John D. Desbrow, for petitioner.

Linette B. Angelastro, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined deficiencies in, an

addition to, and penalties with respect to petitioner's Federal

income tax as follows:

Addition to Tax Penalties
Year Deficiency Sec. 6653(a) Sec. 6662(a)

1988 $67,131 $3,357 ---
1989 83,983 --- $16,797
 - 2 -

1990 79,843 --- 15,969

In the answer, respondent asserted that the additions to tax and

the penalties with respect to petitioner's Federal income tax

should be as follows:

Additions to Tax Penalties
Sec. Sec. Sec. Sec.
Year 6653(a)(1) 6653(b)(1) 6662(a) 6663(a)

1988 $62 $49,424 --- ---
1989 --- --- $829 $59,879
1990 --- --- 368 58,502

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,1 the issues for decision are:

(1) Whether petitioner underreported his medical practice

gross receipts for 1988, 1989, and 1990 in the amounts of

$50,292, $58,971, and $67,488, respectively;

(2) whether petitioner is entitled to deduct various costs

related to real property as ordinary and necessary expenses paid

or incurred during the taxable year in carrying on a trade or

business;

(3) whether petitioner is liable for the addition to tax for

1
Respondent concedes that petitioner substantiated
Schedule A medical expenses in the amount of $3,377 for 1990.
Petitioner concedes that he understated his income in the amounts
of $44,405 and $58,669 for 1989 and 1990, respectively.
Petitioner further concedes that he is not entitled to alimony
deductions for 1988, 1989, and 1990.
 - 3 -

fraud pursuant to section 6653(b)(1) for 1988 and the penalty for

fraud pursuant to section 6663(a) for 1989 and 1990; or in the

alternative, whether petitioner is liable for the addition to tax

for negligence pursuant to section 6653(a)(1) for 1988 and the

accuracy-related penalty pursuant to section 6662(a) for 1989 and

1990; and

(4) whether respondent is barred by the statute of

limitations from assessing the deficiency and penalty for 1989.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

Background Information

Petitioner Kim Beauchamp (Dr. Beauchamp) resided in Sun

Valley, California, at the time he filed his petition. During

the years in issue,2 petitioner was a physician specializing in

obstetrics and gynecology, and he operated a medical practice as

a sole proprietorship. Petitioner employed various persons in

his medical practice and paid them in cash.

Dr. Beauchamp's Tax Returns

Petitioner prepared his own Federal income tax returns for

1988, 1989, and 1990. Petitioner had no formal training in

2
Unless otherwise indicated, all descriptions refer to the
1988, 1989, and 1990 tax years.
 - 4 -

accounting or tax return preparation.

On his Schedules C for 1988, 1989, and 1990, petitioner

listed his principal business or profession as "Med. Doctor &

Home Construction Co", "Medicing [sic] & Construction", and "Med.

Doctor & Contractor", respectively. On each return there was

only one Schedule C.

Petitioner reported $261,269, $270,658, and $317,334 in

gross receipts from his medical practice for 1988, 1989, and

1990, respectively. Petitioner determined his gross receipts for

the years in issue by totaling the amounts reported to him by

Form 1099 payors. During the audit of petitioner in 1991 (the

audit), he told Revenue Agent Harold Jung (Mr. Jung) that 99.9

percent of his patients paid for medical services through

insurance, Medicare, or Medi-Cal; therefore adding up the Forms

1099 was the most appropriate way to determine his gross

receipts.

Petitioner claimed various items on Schedule C of his tax

returns. As costs of goods sold3 (COGS) of his medical practice,

petitioner claimed expenditures for capital improvements to real

property and wages paid in the amounts of $31,176, $38,368, and

3
The use of the term "cost of goods sold" is for
convenience only and does not imply a finding that such amounts
were cost of goods sold.
 - 5 -

$34,080 for 1988, 1989, and 1990, respectively.4 Petitioner did

not carry medical malpractice insurance, and he had no receipts

to show that he paid the $16,101 he claimed for such insurance

for 1988. Petitioner did not keep a log for the car and truck

expenses he claimed.

For all quarters of 1988, 1989, and 1990, petitioner failed

to file employment tax returns and pay employment taxes for his

employees. Prior to 1985, petitioner filed employment tax

returns for his employees. Petitioner also failed to file

information tax returns reporting wages paid to his employees.

Dr. Beauchamp's Books and Records

Petitioner did not have a bookkeeper or maintain any formal

books for his medical practice. Petitioner summarized his

expenses for each year on a few sheets of paper. Petitioner

provided these papers to Mr. Jung as support for the Schedule C

expenses he claimed.

Petitioner kept patient billing records; however, he did not

provide these records to Mr. Jung or offer them into evidence at

trial.

Petitioner gave Mr. Jung all the Forms 1099 petitioner had

for 1989. The Forms 1099 showed that petitioner received

4
Petitioner concedes that he is not entitled to claim real
estate activity expenditures as medical practice COGS. In the
notice of deficiency, respondent allowed petitioner these amounts
of wages.
 - 6 -

$267,614 in gross receipts from insurance companies and other

business entities. Mr. Jung reconciled this with the amount

petitioner reported as gross receipts on his tax return.

Petitioner's reported gross receipts for 1989 ($270,658) were

$3,044 more than the total income reported on his Forms 1099

($267,614).

Mr. Jung asked for petitioner's Forms 1099 for 1988 and

1990; however, petitioner told Mr. Jung that he had misplaced

them. Respondent obtained Information Returns Master File

Transcripts (IRP transcripts) which were based upon information

reported to the Internal Revenue Service (IRS) by payors who

filed information returns with the IRS showing that the payors

paid certain amounts (such as wages, interest, and other income)

to petitioner during 1989 and 1990. For 1990, the IRP

transcripts showed that petitioner received $313,735 in gross

receipts from insurance companies and other business entities.

Petitioner's reported gross receipts for 1990 ($317,334) were

$3,599 more than the total income reported on his Forms 1099

($313,735).

Without petitioner's Forms 1099 or IRP transcript for 1988,

respondent was unable to perform a similar comparison for 1988 of

petitioner's reported gross receipts and the amount reported to

the IRS as paid to petitioner by Form 1099 payors.
 - 7 -

Dr. Beauchamp's Bank Accounts

Petitioner told Mr. Jung that he had two bank accounts at

American Pacific State Bank: One account (APSB account #1) which

he used for both business and personal banking; and another

account (APSB account #2) which was a dormant savings account.

Mr. Jung discovered during the audit that petitioner had an

additional bank account at Security Pacific Bank (petitioner's

SPB account).

Mr. Jung summoned information regarding items deposited into

petitioner's three bank accounts. Mr. Jung analyzed petitioner's

bank accounts and determined that, in addition to payments from

Form 1099 payors, petitioner deposited substantial amounts of

personal checks and cash into his three bank accounts.

Mr. Jung prepared schedules of omitted income. Mr. Jung did

not include checks from insurance companies and other Form 1099

payors. Mr. Jung included checks from Joyce Choe (Ms. Choe) in

the schedules, but subtracted those amounts from the total of

unreported income. Mr. Jung excluded all items which he

determined were from nontaxable sources. Mr. Jung determined

that some deposits from business entities which did not issue

Forms 1099 were for medical services--the checks were made

payable to "Dr. Beauchamp" or "Dr. Beauchamp, M.D."; the checks

had indications in the memo section that they were for medical
 - 8 -

services; or the checks were payable in amounts petitioner

normally charged for office visits--so he included these payments

in the schedules.

Respondent determined that petitioner underreported his

gross receipts by the following amounts deposited, in the form of

checks from patients and cash, into his three bank accounts:

Petitioner's
Year APSB Acct. #1 APSB Acct. #2 SPB Acct. Total

1988 $34,082 $415 $15,795 $50,292
1989 37,037 --- 21,934 58,971
1990 53,577 --- 13,911 67,488

Dr. Beauchamp's Real Estate Activity

Ms. Choe was the owner of the following real property (Ms.

Choe's properties):

15149 Mission Hills Road, Mission Hills, Cal.
14850 Ryan Street, Sylmar, Cal.
14708 and 14714 Chatsworth Street, Mission Hills, Cal.
14640 Brand Boulevard, Mission Hills, Cal.
11031 and 11038 Burnet Avenue, Mission Hills, Cal.
11065 Arleta Avenue, Mission Hills, Cal.

Petitioner paid the mortgages on Ms. Choe's properties.

Prior to 1988, petitioner entered into an oral agreement

with Ms. Choe pertaining to real estate related activities.

Under the agreement, petitioner supervised the improvement of Ms.

Choe's properties (including the demolition of existing

structures and the construction of two family residences).5 In

5
Petitioner was not a licensed contractor in the State of
California, but he had a lifelong interest in "tinkering" with
(continued...)
 - 9 -

exchange for improving Ms. Choe's properties, petitioner was

entitled to receive the return of the money he spent to improve

the property and half of any profit on the sale of each improved

parcel. Petitioner, however, did not account to Ms. Choe for

amounts he spent to improve the properties.

Petitioner told Mr. Jung that none of Ms. Choe's properties

were sold during the years in issue. In 1989, the property

located at 11031 Burnet Avenue was sold for $140,000. This

property was purchased for $90,000. Petitioner had been in

charge of the sale. Ms. Choe did not receive any of the $50,000

difference between the cost and sale price of the property.

Petitioner did not report any gain or loss from the sale of real

property nor any income from his real estate activity on his

returns.

OPINION

Unreported Income

Petitioner argues that respondent bears the burden of proof.

Petitioner contends that respondent has not proven by clear and

convincing evidence that the bank deposits in 1988 were not

reported in income and that the deposits in 1988, 1989, and 1990

from businesses which did not issue Forms 1099 are medical

practice income.

The Commissioner's determinations generally are presumed

5
(...continued)
structures.
 - 10 -

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933); Durando v. United States, 70 F.3d 548,

550 (9th Cir. 1995). The U.S. Court of Appeals for the Ninth

Circuit, to which an appeal of this case would lie, has held that

in order for the presumption of correctness to attach to the

notice of deficiency in unreported income cases,6 the

Commissioner must come forward with substantive evidence

establishing "some evidentiary foundation" linking the taxpayer

to the income-producing activity, Weimerskirch v. Commissioner,

596 F.2d 358, 361-362 (9th Cir. 1979), revg. 67 T.C. 672 (1977),

or "demonstrating that the taxpayer received unreported income",

Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982); see

also Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985).

Once there is evidence of actual receipt of funds by the

taxpayer, the taxpayer has the burden of proving that all or part

of those funds are not taxable. Tokarski v. Commissioner, 87

T.C. 74 (1986). The Commissioner must take into account any

nontaxable sources of deposits of which the Commissioner is aware

in determining the portion of the deposits that represents

6
Although Weimerskirch v. Commissioner, 596 F.2d 358 (9th
Cir. 1979), revg. 67 T.C. 672 (1977), was an unreported income
case regarding illegal source income, it is now well established
that the Court of Appeals for the Ninth Circuit applies the
Weimerskirch rule in all cases involving the receipt of
unreported income. See Edwards v. Commissioner, 680 F.2d 1268,
1270-1271 (9th Cir. 1982); Petzoldt v. Commissioner, 92 T.C. 661,
689 (1989).
 - 11 -

taxable income but is not required to trace deposits to their

source. Petzoldt v. Commissioner, 92 T.C. 661, 695-696 (1989).

We examine the record to determine whether there is a

minimal evidentiary foundation supporting respondent's

determination of unreported income. We find that there is.

Every individual liable for tax is required to maintain

books and records sufficient to establish the amount of his or

her gross income. Sec. 6001; DiLeo v. Commissioner, 96 T.C. 858,

867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). Where a taxpayer

fails to maintain or produce adequate books and records, the

Commissioner is authorized to compute the taxpayer's taxable

income by any method that clearly reflects income. Sec. 446(b);

Holland v. United States, 348 U.S. 121 (1954); Webb v.

Commissioner, 394 F.2d 366, 371-372 (5th Cir. 1968), affg. T.C.

Memo. 1966-81. The reconstruction of income need only be

reasonable in light of all surrounding facts and circumstances.

Giddio v. Commissioner, 54 T.C. 1530, 1533 (1970). The

Commissioner is given latitude in determining which method of

reconstruction to apply when a taxpayer fails to maintain

records. Petzoldt v. Commissioner, supra at 693.

For the years in question, petitioner maintained inadequate

books and records. Petitioner's bookkeeping consisted of a few

sheets of paper which lacked indicia of reliability. Respondent

employed the specific items method of proof to reconstruct

petitioner's gross receipts from his medical practice. This
 - 12 -

method is a direct method of proof, and it has been approved by

this Court. See Schooler v. Commissioner, 68 T.C. 867 (1977);

Schaaf v. Commissioner, T.C. Memo. 1991-530.

Respondent began the analysis by examining petitioner's

Forms 1099 from 1989 and IRP transcripts for 1989 and 1990.

Respondent determined that the amounts reported by petitioner as

medical practice gross receipts were virtually identical to the

amounts reported on the Forms 1099 and the IRP's. Respondent

then analyzed specific items deposited into petitioner's bank

accounts during 1988, 1989, and 1990. These deposits included

cash and personal checks from patients which were gross receipts

from petitioner's medical practice. Respondent prepared

schedules of omitted income for these items. The schedules show

that petitioner did not report substantial amounts of medical

practice gross receipts.

This case is distinguishable from Weimerskirch v.

Commissioner, supra, where "the Commissioner did not attempt to

substantiate the charge of unreported income by any other means,

such as by showing * * * [the taxpayer's] net worth, bank

deposits, cash expenditures, or source and application of funds."

Id. at 362. Additionally, in Weimerskirch, the taxpayer was not

shown by admissible evidence to have actually possessed any of

the funds that the Commissioner determined to be taxable income.

In the instant case, respondent has substantiated the

determination with predicate evidence. See Blohm v.
 - 13 -

Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993), affg. T.C.

Memo. 1991-636 (once the Commissioner made a minimal evidentiary

showing, the deficiency determination was presumed correct).

Respondent's analysis of petitioner's bank deposits and

petitioner's concession that he did not report income of $44,405

and $58,669 for 1989 and 1990, respectively, connect petitioner

with the funds forming the basis of the deficiency. The burden

of proof, therefore, lies with petitioner to show error in

respondent's determinations. See Schad v. Commissioner, 87 T.C.

609, 620 (1986), affd. without published opinion 827 F.2d 774

(11th Cir. 1987) (connecting the taxpayer with the funds that

form the basis of the deficiency is sufficient to give him the

burden of proving the deficiency determination erroneous).

Petitioner did not present any evidence or argument, other

than that respondent bears the burden of proof, to prove that he

did not omit from income any of the cash or checks listed in the

schedules of omitted income, or that these funds were not taxable

income, during the years in issue. Petitioner has not met his

burden; therefore, we find that petitioner had unreported income

in the amounts of $50,292, $58,971, and $67,488 for 1988, 1989,

and 1990, respectively.

Mortgage Interest, Property Tax, and Real Estate COGS

Petitioner claimed deductions for mortgage interest and

property taxes paid relating to Ms. Choe's properties on his

Schedule A and claimed as costs of goods sold the expenditures
 - 14 -

relating to his improvements of Ms. Choe's properties on the same

Schedule C he used for his medical practice. Petitioner concedes

that he could not combine his real estate activity and medical

practice on one Schedule C, and that he was not entitled to

deduct or treat as costs of goods sold the expenditures of his

real estate activity on his medical practice Schedule C.

Petitioner also concedes that he was not entitled to deduct the

mortgage interest and property taxes on his Schedule A.

Petitioner argues, however, that: He was in the

construction business; he incurred expenses relating to his

improvements of Ms. Choe's properties in connection with this

separate business; these expenses were deductible pursuant to

section 162; therefore, he can offset these expenses against his

medical practice income.7 Respondent asserts that petitioner has

not shown he was in a trade or business; consequently, section

162 does not support his claimed deductions. Respondent further

argues, in the alternative, that should we find that petitioner

was in a trade or business, then his real estate activity

expenditures must be capitalized.

Taxpayers are allowed a deduction for ordinary and necessary

expenses paid or incurred in carrying on a trade or business.

7
Petitioner's argument, basically, seems to be that he
made the mistake of combining the expenses of his two businesses
on one Schedule C and deducting the mortgage interest and real
estate taxes related to Ms. Choe's properties on his Schedule A
instead of his Schedule C.
 - 15 -

Sec. 162(a). The Supreme Court has stated that "to be engaged in

a trade or business, * * * the taxpayer's primary purpose for

engaging in the activity must be for income or profit. A

sporadic activity, a hobby, or an amusement diversion does not

qualify." Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

The taxpayer bears the burden of showing he had the required

profit motive. Rule 142(a); Golanty v. Commissioner, 72 T.C.

411, 426 (1979), affd. without published opinion 647 F.2d 170

(9th Cir. 1981).

Whether a taxpayer has the required profit motive is to be

determined on the basis of all the facts and circumstances of

each case. Allen v. Commissioner, 72 T.C. 28, 34 (1979). Some

of the relevant factors to be considered in determining whether

an activity is engaged in for profit for the purposes of section

162 are: (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other similar or dissimilar activities; (6) the

taxpayer's history of income or losses with respect to the

activity; (7) the amount of occasional profits, if any, which are

earned; (8) the financial status of the taxpayer; and (9) whether

elements of personal pleasure or recreation are involved. See

Thomas v. Commissioner, 792 F.2d 1256, 1258 (4th Cir. 1986),
 - 16 -

affg. 84 T.C. 1244 (1985); Carter v. Commissioner, 645 F.2d 784,

787 (9th Cir. 1981), affg. T.C. Memo. 1978-202; Cooper v.

Commissioner, 88 T.C. 84, 107-109 (1987); Seaman v. Commissioner,

84 T.C. 564, 589 (1985); Gestrich v. Commissioner, 74 T.C. 525,

529 (1980), affd. without published opinion 681 F.2d 805 (3d Cir.

1982); Engdahl v. Commissioner, 72 T.C. 659, 666 (1979);

Churchman v. Commissioner, 68 T.C. 696, 702 (1977); Eppler v.

Commissioner, 58 T.C. 691, 699 (1972), affd. without published

opinion 486 F.2d 1406 (7th Cir. 1973); Purdy v. Commissioner, 12

T.C. 888, 892 (1949); sec. 1.183-2(b), Income Tax Regs. No one

factor is controlling. Dunn v. Commissioner, 70 T.C. 715, 720

(1978), affd. 615 F.2d 578 (2d Cir. 1980). While the focus of

the test is on the subjective intention of the taxpayer, greater

weight is given to the objective facts than to the taxpayer's

mere statement of his or her intent. Dreicer v. Commissioner, 78

T.C. 642, 645 (1982), affd. without published opinion 702 F.2d

1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.

We find the following facts to be significant in our

determination of whether petitioner had a profit motive: (1)

Petitioner failed to carry on the activity in a businesslike

manner; (2) petitioner did not maintain adequate books and

records for his real estate activity or account to Ms. Choe for

any amounts spent to improve her properties; (3) petitioner had

no income from the activity (petitioner testified that he made no

profit on the sale of the 11031 Burnet property, and he never
 - 17 -

reported any gains or losses from his real estate activity); (4)

the expected amount of profits from the activity was relatively

insignificant when compared to other sources generating

substantial income (petitioner reported gross income from his

medical practice of $261,269, $270,658, and $329,629 for 1988,

1989, and 1990, respectively); (5) petitioner enjoyed the

activity as evidenced by his lifelong interest in "tinkering"

with structures; (6) petitioner was not a licensed contractor in

the State of California; and (7) petitioner's time commitment to

his medical practice (he testified that he spent "24 hours a day"

treating patients) left him with little time to devote to a

second trade or business.

After considering all the facts and circumstances in this

case, we find that petitioner's real estate activity was not an

activity engaged in for profit; therefore, petitioner was not

entitled to deduct any real estate activity COGS, mortgage

interest payments, and property tax payments as ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.8

Civil Fraud

The addition to tax in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

8
We note that in so holding, and in light of petitioner's
concessions, supra, we need not decide whether these amounts need
to be capitalized or whether petitioner substantiated payments of
these amounts.
 - 18 -

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from a taxpayer's fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Fraud is

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 Commissioner has the burden of proving fraud by clear

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

his burden of proof, 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. See Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990). The Commissioner must

meet this burden through affirmative evidence because fraud is

never imputed or presumed. Beaver v. Commissioner, 55 T.C. 85,

92 (1970).

A. Underpayment of Tax

Petitioner conceded that he underreported income for 1989

and 1990. We are satisfied that the Commissioner has established

by clear and convincing evidence an underpayment of tax by

petitioner for each of the years in issue.

B. Fraudulent Intent

The Commissioner must also prove that a portion of the

underpayment was due to fraud. Professional Servs. v.
 - 19 -

Commissioner, 79 T.C. 888, 930 (1982). 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). Because direct

proof of a taxpayer's intent is rarely available, fraud may be

proven by circumstantial evidence and reasonable inferences may

be drawn from the relevant facts. Spies v. United States, 317

U.S. 492, 499 (1943); Stephenson v. Commissioner, 79 T.C. 995,

1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984). A taxpayer's

entire course of conduct can be indicative of fraud. Stone v.

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

Commissioner, 53 T.C. 96, 105-106 (1969). The sophistication,

education, and intelligence of the taxpayer are relevant to

determining fraudulent intent. See Niedringhaus v. Commissioner,

99 T.C. 202, 211 (1992); Stephenson v. Commissioner, supra at

1006; Iley v. Commissioner, 19 T.C. 631, 635 (1952).

Over the years, courts have developed a nonexclusive list of

factors that demonstrate fraudulent intent. These badges of

fraud include: (1) Understating income, (2) maintaining

inadequate records, (3) implausible or inconsistent explanations

of behavior, (4) concealment of income or assets, (5) failing to

cooperate with tax authorities, (6) engaging in illegal

activities, (7) an intent to mislead which may be inferred from a

pattern of conduct, (8) lack of credibility of the taxpayer's

testimony, (9) filing false documents, (10) awareness of the
 - 20 -

obligation to file returns, (11) failing to file tax returns,

(12) failing to make estimated tax payments, and (13) dealing in

cash. See Spies v. Commissioner, supra at 499; Douge v.

Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Recklitis v. Commissioner, 91 T.C. 874, 910

(1988). Although no single factor is necessarily sufficient to

establish fraud, the combination of a number of factors

constitutes persuasive evidence. Solomon v. Commissioner, 732

F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo.

1982-603. We note that some conduct and evidence can be

classified under more than one factor.

1. Reliance on Return Preparer

Petitioner argued that his longtime close friend Kwang Kim

prepared his return and that petitioner relied upon Mr. Kim. We

found that petitioner, and not Mr. Kim, prepared the returns.

This argument does not support petitioner.

2. Petitioner's Sophistication and Experience

Petitioner is a medical doctor who had no formal training in

accounting or tax return preparation. On the basis of these

facts, we shall not hold petitioner to either a high or low

standard while evaluating his actions.

3. Consistent and Substantial Understatements of Income

The mere failure to report income is not sufficient to

establish fraud. Merritt v. Commissioner, 301 F.2d 484, 487 (5th
 - 21 -

Cir. 1962), affg. T.C. Memo. 1959-172. Consistent and

substantial understatement of income, however, may be strong

evidence of fraud when coupled with other circumstances. Marcus

v. Commissioner, 70 T.C. 562, 577 (1978), affd. without published

opinion 621 F.2d 439 (5th Cir. 1980). A pattern of consistent

underreporting of income, when accompanied by other circumstances

indicating an intent to conceal income, may justify the inference

of fraud. Holland v. United States, 348 U.S. at 139.

Petitioner concedes that he omitted gross income of $44,314

and $58,668 for 1989 and 1990, respectively.9 The

understatements for all 3 years in issue are consistent and

substantial; they are evidence of fraud.

4. Failure To Maintain Adequate Books and Records

Failure to maintain adequate books and records may be

indicative of fraud. Truesdell v. Commissioner, 89 T.C. 1280,

1302 (1987); Gajewski v. Commissioner, supra at 200. Petitioner

did not have a bookkeeper or maintain any formal books of account

for his medical practice. Petitioner summarized his expenses for

each year on a few sheets of paper. Petitioner maintained client

billing records, but he failed to provide them to Mr. Jung or

offer them into evidence at trial. All of this is evidence of

fraud.

9
We note that the amounts petitioner omitted for 1989 and
1990 are larger than what he concedes and that he also omitted
gross income for 1988.
 - 22 -

5. Implausible or Inconsistent Explanations of Behavior

Petitioner made implausible and inconsistent statements.

Examples of such implausible or inconsistent testimony and

behavior are:

(a) Petitioner testified that he did not prepare his own

returns; however, in his amended petition and his reply to answer

to amended petition he repeatedly claimed that he prepared his

own returns, and at audit he told Mr. Jung that he prepared his

own returns;

(b) petitioner told Mr. Jung at audit that none of Ms.

Choe's properties were sold during 1988, 1989, and 1990, but he

testified at trial that some of Ms. Choe's properties had indeed

been sold;

(c) petitioner testified that the reason he did not give

some of his records to Mr. Jung was because they were lost in

1994 during the Northridge earthquake, yet the earthquake which

petitioner claimed destroyed the records occurred 3 years after

the audit.

The cumulative effect of such testimony is indicative of

fraud on the part of petitioner.

6. Intent To Mislead

Misleading statements to an investigating agent may be

evidence of fraud. See Gajewski v. Commissioner, 67 T.C. at 200.

Petitioner attempted to mislead Mr. Jung when he stated that his

patients exclusively paid for his services through insurance
 - 23 -

companies and that totaling the Forms 1099 was the most accurate

way to determine gross receipts. In fact, petitioner's patients

often paid him directly in cash and by check.

Petitioner told Mr. Jung that he had bank accounts only at

American Pacific State Bank. In fact, petitioner had another

bank account--petitioner's SPB account--which Mr. Jung discovered

on his own during the audit. This is evidence of fraud.

7. Lack of Credibility of Petitioner's Testimony

A taxpayer's lack of credibility, inconsistent testimony, or

evasiveness are factors in considering the fraud issue.

Toussaint v. Commissioner, 743 F.2d 309, 312 (5th Cir. 1984),

affg. T.C. Memo. 1984-25. Petitioner's testimony often consisted

of answers like: "I, you know, I can't, I don't, I can't

recall," and "I don't remember that, no, I don't know. I must

have. I'm not sure." In fact, petitioner seemed to know very

little very often. Petitioner also was reluctant to testify.

Petitioner's testimony, when taken as a whole, demonstrated his

lack of credibility and is evidence of fraud.

8. Other Factors

Petitioner had two employees during the years in issue. He

paid those employees in cash; he did not file employment tax

returns; and he failed to pay their employment taxes. Petitioner

knew that employment tax returns were due because he had filed

them in earlier years. Petitioner also failed to file

information tax returns for these employees.
 - 24 -

Petitioner claimed $6,406 of child care costs as a business

expense on his Schedule C for 1990. Petitioner claimed expenses

for medical malpractice insurance when in fact he did not carry

such insurance. Petitioner also dealt in cash.

After reviewing all of the facts and circumstances, we

conclude that respondent has clearly and convincingly proven that

a portion of petitioner's underpayments of tax for 1988, 1989,

and 1990 was due to fraud on the part of petitioner.

Once the Commissioner establishes that a portion of the

underpayment is attributable to fraud, the entire underpayment is

treated as attributable to fraud except for any portion of the

underpayment which the taxpayer establishes is not attributable

to fraud. Secs. 6653(b)(2), 6663(b).

We find that the portion of each underpayment attributable

to petitioner's claiming COGS for his real estate activity is not

due to fraud. Petitioner believed that his real estate activity

was a trade or business. Furthermore, petitioner disclosed on

his 1988, 1989, and 1990 Schedules C that his principal business

or profession was "Med. Doctor & Home Construction Co", "Medicing

[sic] & Construction", and, "Med. Doctor & Contractor",

respectively. Combining his medical practice gross receipts and

real estate activity COGS on one Schedule C appears to have been

a mistake by petitioner and was not due to fraud.

We conclude, therefore, that petitioner is liable for an

addition to tax for fraud pursuant to section 6653(b)(1) for
 - 25 -

1988, and penalty for fraud pursuant to section 6663(a) for 1989

and 1990, for the part of each underpayment attributable to

unreported gross receipts from petitioner's medical practice and

the alimony deductions he claimed.

Negligence

Respondent argues that petitioner is liable for the addition

to tax for negligence for 1988 and the accuracy-related penalty

for negligence for 1989 and 1990 on any portion of the

underpayments not found to be attributable to fraud.

For 1988, section 6653(a)(1) imposes an addition to tax

equal to 5 percent of the entire underpayment if any part of it

was due to negligence. For 1989 and 1990, section 6662(a)

imposes an accuracy-related penalty equal to 20 percent of the

portion of the underpayment attributable to negligence. See sec.

6662(b)(1). Neither section applies to any portion of an

underpayment on which an addition to tax or penalty for fraud is

imposed.

The term "negligence" includes any failure to make a

reasonable attempt to comply with the provisions of the Code.

Secs. 6653(a)(3), 6662(c). Negligence also has been defined as a

lack of due care or the failure to do what a reasonable and

ordinarily prudent person would do under the circumstances. See

Crocker v. Commissioner, 92 T.C. 899, 916 (1989); Neely v.

Commissioner, 85 T.C. 934, 947-948 (1985). Failure by a taxpayer

to keep adequate records may justify imposition of the addition
 - 26 -

to tax for negligence. See Lysek v. Commissioner, 583 F.2d 1088,

1094 (9th Cir. 1978), affg. T.C. Memo. 1975-293; Crocker v.

Commissioner, supra at 917. Failure to maintain adequate records

also indicates disregard of the rules or regulations that require

a taxpayer to keep permanent records sufficient to establish,

inter alia, the taxpayer's gross income and deductions. See

Crocker v. Commissioner, supra at 917.

We have found that petitioner failed to keep or maintain

adequate records. We conclude that petitioner is liable for an

addition to tax due to negligence pursuant to section 6653(a)(1)

for 1988, and for the accuracy-related penalty pursuant to

section 6662(a) for 1989 and 1990 for the part of the

underpayments that we have not found to be attributable to

fraud.10

Statute of Limitations for 1989

Petitioner argues that the deficiency and penalty for 1989

are barred by the statute of limitations because respondent has

not proven that petitioner's actions were fraudulent.

In the case of a false or fraudulent return with the intent

to evade tax, the tax may be assessed at any time. Sec.

10
We note that petitioner concedes that he is liable for
the addition to tax for negligence for 1988 and the accuracy-
related penalty for 1990 regarding Schedule C items in the
amounts of $35,422 and $47,109, respectively. We also note that
petitioner did not argue on brief that he is not liable for the
addition to tax for negligence and the accuracy-related penalty
regarding his "real estate COGS".
 - 27 -

6501(c)(1). If the return is fraudulent in any respect, it

deprives the taxpayer of the bar of the statute of limitations

for that year. Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir.

1961), affg. T.C. Memo. 1960-32; see also Colestock v.

Commissioner, 102 T.C. 380, 385 (1994) ("Thus, where fraud is

alleged and proven, respondent is free to determine a deficiency

with respect to all items for the particular taxable year without

regard to the period of limitations.").

We found that petitioner filed a fraudulent income tax

return for 1989; therefore the period of limitations on

assessment for that year remains open.

To reflect the foregoing,

Decision will be entered

under Rule 155.