Tandon v. Commissioner

T.C. Memo. 1998-66

UNITED STATES TAX COURT

MAHENDRA K. TANDON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13628-96. Filed February 18, 1998.

Mahendra K. Tandon, pro se.

Carol A. Szczepanik, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined the following

deficiencies in and additions to petitioner's Federal income

taxes:
Additions to Tax
Sec. Sec. Sec. Sec. Sec. Sec. Sec.
6653 6653 6653 6653 Sec. 6653 6653 6653
Year Deficiency (b)(1)(A) (b)(1)(B) (b)(1) (b)(2) 6661(a) (a)(1)(A) (a)(1) (a)(1)(B)
1
1985 $19,969 --- --- $17,334 $4,992 --- --- ---
2 3
1986 45,045 $34,567 --- --- 11,261 $346 ---
4 5
1987 13,068 9,474 --- --- 6,997 768 ---
1988 19,914 --- --- 20,425 --- 4,979 --- $9 ---
 - 2 -

1
50 percent of the statutory interest on $11,062.
2
50 percent of the statutory interest on $38,125.
3
50 percent of the statutory interest on $20,434.
4
50 percent of the statutory interest on $12,632.
5
50 percent of the statutory interest on $16,508.

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 income from his medical

practice for 1985, 1986, 1987, and 1988 in the amounts of

$22,540.91, $79,792.16, $30,463.14, and $62,532.00, respectively;

(2) whether petitioner underreported rental income for 1985,

1986, 1987, and 1988 in the amounts of $1,763, $4,195, $3,960,

and $3,125, respectively;

(3) whether petitioner is entitled to deductions for

depreciation; wage, lease, and car and truck expenses; and

business and mortgage interest in amounts greater than those

respondent allowed in the statutory notice of deficiency;

(4) whether petitioner is entitled to a deduction for

general sales tax on motor vehicles in 1986;

(5) whether petitioner is entitled to deductions for

partnership losses in 1985, 1986, and 1987;

(6) whether petitioner is entitled to an investment tax

credit in 1985;

1
Petitioner concedes that he was not entitled to a
dependency exemption for Guru Prasad Tandon which he took on his
1985 tax return.
 - 3 -

(7) whether petitioner is entitled to a dependency exemption

for Anupam Tandon (Anupam) in 1986;

(8) whether petitioner is liable for additional self-

employment tax in 1986 and 1987;

(9) whether petitioner is liable for the additions to tax

for fraud for 1985, 1986, 1987, and 1988 to the extent there is

any unreported medical practice and/or rental income;

(10) whether petitioner is liable for the additions to tax

for negligence for 1986, 1987, and 1988; and

(11) whether petitioner is liable for the additions to tax

for a substantial understatement for 1985, 1986, 1987, and 1988.

Finally, if we decide that petitioner did not fraudulently

fail to report income in 1985, 1986, 1987, and 1988, we must

decide whether the periods of limitations for assessing taxes for

these years have expired.

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. Petitioner resided in

Mayfield Heights, Ohio, at the time he filed his petition.

Petitioner prepared his own tax returns for the years in issue.2

Petitioner has three children--Manoj, Harsh, and Parag.

During the years in issue, Manoj was a teenager. Guru Prasad

2
Unless otherwise indicated, all descriptions refer to the
1985, 1986, 1987, and 1988 tax years.
 - 4 -

Tandon was petitioner's father. He died in 1987. Petitioner has

a sister named Indira Khana (Ms. Khana).

Petitioner's Medical Practice

Petitioner was a medical doctor and conducted his medical

practice out of a clinic located at 4620 St. Clair Avenue,

Cleveland, Ohio (St. Clair property). Petitioner's medical

practice primarily consisted of workers' compensation

examinations, the treatment of industrial accidents and personal

injuries, and consulting with attorneys on medical malpractice

cases. During 1985, 1986, and 1987, petitioner operated his

medical practice as a sole proprietorship called St. Clair

Medical Center.3 Petitioner used the cash basis method of

accounting to report his medical receipts on Schedule C of his

tax returns. From October of 1985 through February of 1990,

Angela Paolella Alshabani (Ms. Alshabani) was petitioner's

secretary.

In 1988, Ms. Khana incorporated petitioner's medical

practice under the name Superior Industrial Medical Center, Inc.

(Superior).4 Ms. Khana never received any money from Superior.

3
Petitioner used the names St. Clair Medical Center and
St. Clair Industrial Hospital (St. Clair IH) interchangeably.
4
During 1988, Superior conducted business under the name
of St. Clair Industrial Medical Center (St. Clair IMC).
 - 5 -

During 1988, petitioner handled the banking and supervised

the clerical staff of Superior. Petitioner or his employees made

all bank deposits of receipts for Superior. Petitioner prepared

the 1988 Federal corporate tax return for Superior. Petitioner

reported $50,000 in income from Superior on his 1988 tax return.

During the years in issue, petitioner maintained the

following bank accounts in the names of the following persons or

entities:
Account Name(s) on Account

AmeriTrust #10045-1693 (AT #1 account) St. Clair IH
AmeriTrust #90344-4278 (AT #9 account) Petitioner and St. Clair IH
AmeriTrust #30345-2842 (AT #3 account) St. Clair IH, c/o petitioner1
First Federal Savings #250208704 Superior, d.b.a. St. Clair IMC
Society National Bank #447-8346 Petitioner2
AmeriTrust #48070-9845 (AT #4 account) Petitioner
Huntington Bank #466-478048-7 Manoj Tandon
Independent Savings Bank #03-0-002248 Manoj Tandon3
1
In or about Oct. of 1988, the account holder name on the AT #3 account changed from St.
Clair IH to St. Clair IMC.
2
On July 18, 1985, petitioner added his father as additional depositor to the Society
National Bank account.
3
Petitioner had a power of attorney to make withdrawals out of this account.

Petitioner deposited receipts from his medical practice into

the above listed bank accounts as follows:
Account 1985 1986 1987 1988

AT #1 $4,070.00 --- --- ---
AT #9 2,051.85 $16,864.13 --- ---
AT #3 147,704.48 132,635.25 $153,407.41 $30,496.15
First Federal Savings --- --- 2,319.44 ---
Society National Bank 19,270.00 55,040.92 56,403.28 13,390.89
AT #4 --- --- 2,087.00 ---
Huntington Bank --- --- --- 1,048.36
Independent Savings Bank --- --- --- 67,596.16

Total 173,096.33 204,540.30 214,217.13 112,531.56

On May 9, 1985, petitioner wrote a check to cash in the

amount of $24,000 from the AT #3 account. Petitioner paid

attorney fees for his divorce proceedings from the AT #3 account.

During 1987, petitioner paid his son Manoj's tuition to Ohio
 - 6 -

State University from the AT #3 account. Petitioner paid his

alimony and child support obligations from the AT #3 account and

the First Federal Savings account. Petitioner used the

Independent Savings Bank account to pay his personal expenses.

Rental Property and Income

In addition to the space in the St. Clair property where

petitioner conducted his medical practice, the St. Clair property

had two residences and garages available to rent (the rental

property). During the years in issue, petitioner rented parts of

the rental property to Robert McMillan, Jeanine Sinclair, James

L. (Leon) and Sharyn Hamm, Ellis Vest, and his secretary Ms.

Alshabani (the renters). The renters paid the following rental

payments to petitioner:

Renter 1985 1986 1987 1988

Martin McMillan $750 $1,050 $1,350 $1,350
Jeanine Sinclair 300 300 300 200
Leon Hamm 313 1,920 1,710 225
Ellis Vest 25 --- --- ---

Total 1,388 3,270 3,360 1,775

The Audit and Criminal Investigation

Prior to September of 1988, the Internal Revenue Service

(IRS) began examining petitioner's 1984, 1985, and 1986 tax

returns. In October or November of 1988, Revenue Agent Maureen

Lippert (Ms. Lippert) took over petitioner's examination. On

March 1, 1989, Ms. Lippert informed petitioner's attorney that

she had expanded the examination to include petitioner's 1987 tax
 - 7 -

year. On or about March 9, 1989, petitioner filed an amended

return for 1987 reporting an additional $56,000 of income. On or

about May 12, 1989, after Guru Prasad Tandon (petitioner's

father) had died, Forms 1040EZ (the Forms 1040EZ) were filed for

1985, 1986, and 1987 in the name of Guru Prasad Tandon to report

the rental income from the rental property.

Petitioner told Ms. Lippert that he deposited all of his

medical practice receipts into one checking account at AmeriTrust

and that he lost all of his records for 1985 in a flood.

In late 1989, the Examination Division referred petitioner's

case to the Criminal Investigation Division. In November of

1989, Special Agent Daniel Dever (Mr. Dever) began a criminal

investigation of petitioner. Shortly thereafter, an amended 1988

corporate tax return for Superior, reporting additional income,

was filed. Petitioner told Mr. Dever that he reported all items

deposited into his bank accounts on his tax returns. Petitioner

later admitted to Mr. Dever that he did not report some medical

service income from AARP and the Ohio Industrial Commission and

Bureau of Workers' Compensation on his tax returns.

Mr. Dever served summonses on various banks for signature

cards, bank statements, deposit tickets, support items for the

deposit tickets, and canceled checks. Mr. Dever contacted all

third-party payors regarding checks deposited into the summonsed

bank accounts and confirmed whether their checks were paid to

petitioner for medical services rendered. Mr. Dever prepared a
 - 8 -

computerized deposit analysis listing all of the third-party

payors who paid petitioner for medical services, the amounts

paid, and the bank account the payment was deposited into. Mr.

Dever subtracted out of his deposit analysis amounts that were

not for medical services. Mr. Dever determined that the amount

of petitioner's medical practice income deposited into the

various bank accounts was greater than the amount reported on

petitioner's 1985, 1986, 1987, and 1988 individual and Superior's

1988 corporate tax returns.

Petitioner's Criminal Tax Convictions

In United States v. Tandon, 111 F.3d 482 (6th Cir. 1997),

the U.S. Court of Appeals for the Sixth Circuit affirmed

petitioner's conviction for wilfully filing false individual

income tax returns for 1986, 1987, and 1988 in violation of

section 7206(1) and for wilfully assisting in the preparation and

presentation of a false corporate income tax return for Superior

for 1988 in violation of section 7206(2).

OPINION

Unreported Income

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
 - 9 -

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, 92 T.C. 661, 693 (1989).

For the years in question, we find that petitioner

maintained inadequate books and records.5 Respondent employed

the bank deposits method of proof to reconstruct petitioner's

gross receipts from his medical practice. This method of proof

is well established. DiLeo v. Commissioner, supra at 867; Estate

of Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d

2 (6th Cir. 1977). Bank deposits are prima facie evidence of

income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate

of Mason v. Commissioner, supra at 656-657. When using the bank

deposits method, the Commissioner is not required to show that

each deposit or part thereof constitutes income, Gemma v.

Commissioner, 46 T.C. 821, 833 (1966), or prove a likely source,

Clayton v. Commissioner, 102 T.C. 632, 645 (1994); Estate of

Mason v. Commissioner, supra at 657. Respondent's determination

5
The scanty evidence petitioner submitted as records
lacked indicia of reliability. See infra.
 - 10 -

is presumed to be correct, and petitioner bears the burden of

proving otherwise. Rule 142(a).

Petitioner argues that there is no unreported income.

Petitioner, however, offers conclusions without argument or

evidence to support them. Additionally, on brief, petitioner

concedes that he underreported his medical practice income by

$17,170.91 in 1985 and $44,401.56 in 1986. Petitioner's

testimony was at times questionable, vague, conclusory, not

credible, and was unsupported by the evidence in the record.

Under these circumstances, we are not required to, and do not,

rely on petitioner's testimony to sustain his burden of

establishing error in respondent's determinations. See Lerch v.

Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989), affg. T.C.

Memo. 1987-295; Tokarski v. Commissioner, supra at 77.

A. Medical Practice Income

Respondent determined that petitioner had unreported income

in 1985, 1986, and 1987 from petitioner's medical practice as

follows:

Year Total Income Reported Income Adjustment1 Unreported Income

1985 $173,096.33 $148,947.76 ($1,607.66) $22,540.91
1986 204,540.30 151,375.44 26,627.30 79,792.16
1987 214,217.13 157,126.69 (26,627.30) 30,463.14
1
Respondent made the above listed adjustments to reconcile the
deposits to the year of receipt.

Petitioner has failed to show that respondent's determination is

incorrect; therefore, we sustain respondent's determination.
 - 11 -

Petitioner's medical practice was incorporated as Superior

in 1988. Petitioner deposited the medical practice's receipts

into various bank accounts. Respondent argues that petitioner

had dominion and control over these accounts; petitioner argues

that he did not.

Unless the nontaxable nature of deposits is established,

gross income includes deposits to bank accounts where the

taxpayer has dominion and control of the funds. See Commissioner

v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Davis v. United

States, 226 F.2d 331, 334-335 (6th Cir. 1955); see also Manzoli

v. Commissioner, T.C. Memo. 1988-299, affd. 904 F.2d 101 (1st

Cir. 1990). The use of money for personal purposes is an

indication of dominion and control. Woods v. Commissioner, T.C.

Memo. 1989-611, affd. without published opinion 929 F.2d 702 (6th

Cir. 1991).

Petitioner's argument is unsupported by the evidence. His

sister, Ms. Khana, Superior's incorporator, testified that

petitioner controlled Superior and that she did not receive a

single penny from the corporation. Petitioner used the AT #3

account and the Independent Savings Bank account to pay for his

personal expenses. Petitioner also had a power of attorney to

make withdrawals out of the Independent Savings Bank account.

Furthermore, the Society National Bank account was in

petitioner's name. Even though petitioner's medical practice was

incorporated in 1988, petitioner continued to deposit medical
 - 12 -

receipts into the AT #3 account, the Society National Bank

account, the Huntington Bank account, and the Independent Savings

Bank account. These deposits totaled $112,531.56. We conclude

that deposits into these accounts constitute income to petitioner

in 1988. After reducing the deposits by the $50,000 petitioner

reported on his tax return, petitioner had $62,531.56 in

unreported income from medical services in 1988.

B. Rental Income

Respondent contends that petitioner received rental income

in the amounts of $1,763, $4,195, $3,960, and $3,125 in 1985,

1986, 1987, and 1988, respectively. Petitioner contends that he

received rental payments as an agent.

Section 61(a)(5) includes in gross income all income from

the rental of property. Ms. Alshabani testified that she rented

property from petitioner and made rental payments to him. Other

renters made their checks payable to petitioner. Petitioner

endorsed these checks.

Petitioner presented no evidence that he paid over any of

the money he received as rent to the "principals" for whom he was

supposedly acting as an agent. Furthermore, it was not until May

of 1989, well after the IRS began investigating petitioner and

petitioner's father had died, that tax returns were filed

reporting that the rental income belonged to petitioner's father.

Although Ms. Alshabani testified that she rented property

from petitioner and paid him rent, there is no evidence of the
 - 13 -

amount of rent she paid to petitioner. Additionally, the rent

checks and receipts for rental payments to petitioner in the

record total less than the amount respondent asserts petitioner

received as rent. After reviewing the evidence and testimony, we

conclude that petitioner had unreported rental income in the

amounts of $1,388, $3,270, $3,360, and $1,775 in 1985, 1986,

1987, and 1988, respectively.

The Deductions

Deductions are a matter of legislative grace, and the

taxpayer has the burden of showing that such taxpayer is entitled

to any deduction claimed. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). Taxpayers must

substantiate amounts claimed as deductions, credits, etc., by

maintaining the records necessary to establish such entitlement.

Sec. 6001; sec. 1.6001-1(a) Income Tax Regs.; see Hradesky v.

Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821

(5th Cir. 1976).

A. Depreciation

On his 1985, 1986, and 1987 tax returns, petitioner claimed

a depreciation deduction of $1,138.50 for a 1985 Chrysler Laser

(the Chrysler). On his 1986 and 1987 tax returns, petitioner

claimed depreciation deductions of $15,600 and $22,800,

respectively, for a 1986 Rolls Royce Silver Spirit (the Rolls

Royce). On his 1985 tax return, petitioner claimed Schedule E

depreciation expenses of $2,713.15 for an oil well and a
 - 14 -

computer. Respondent allowed petitioner $1,543.50 of

depreciation in 1985, 1986, and 1987. Petitioner argues that he

used the Chrysler and the Rolls Royce in his trade or business.

Respondent counters that petitioner has not shown that he used

this property in a trade or business or held it for the

production of income.

Section 167(a) allows a depreciation deduction for the

exhaustion, wear and tear of property used in a trade or business

or property held for the production of income. Petitioner

submitted mileage logs which are supposed to represent a record

of business mileage for the Chrysler and on a 1984 Cadillac.

None of the miles in the log are identified as belonging to the

Rolls Royce. Petitioner did not testify, and presented no

evidence, regarding the business use of the Rolls Royce.

These logs are suspect as they do not appear to be prepared

contemporaneously with the occurrence of the supposed business

travel. See sec. 1.274-5(c), Income Tax Regs. The car the miles

supposedly relate to is often not identified. Petitioner

presented no evidence or testimony on how the mileage documented

in these logs related to his medical practice.6 Furthermore,

petitioner told Ms. Lippert that he lost all of his 1985 records

in a flood, but submitted mileage logs for 1985. Petitioner

6
For example, there are entries for miles driven to a tax
attorney, to "houghnorwood", to a library, to a marina, to the
Tax Court in Wash., D.C., to K-Mart, and on a trip to Columbus.
 - 15 -

appears to have fabricated the logs in order to substantiate his

claimed deductions.

The evidence does not show that petitioner used the

depreciated property in a trade or business or held it for the

production of income; furthermore, petitioner presented no

evidence regarding the Schedule E depreciation expenses. We

therefore sustain respondent's determination on this issue.

B. Wage, Leasing, and Car and Truck Expenses

Section 162 allows a deduction for all of the ordinary and

necessary expenses paid or incurred in carrying on a trade or

business. Respondent did not allow petitioner deductions for

leasing expenses in 1985, 1986, and 1987 or car and truck

expenses in 1985 and 1986.

1. Wage Expenses

Petitioner claimed wage expenses in the amounts of $14,401,

$13,869.04, and $15,998 in 1985, 1986, and 1987, respectively.

Respondent allowed petitioner wage expenses in the amounts of

$11,325, $10,800.04, and $12,000 in 1985, 1986, and 1987,

respectively. Respondent argues that petitioner has failed to

substantiate deductions in amounts greater than those allowed;

petitioner claims that he has substantiated his claimed

deductions.

Petitioner did not testify regarding whom he employed in his

medical practice. Ms. Alshabani testified that she was employed
 - 16 -

by petitioner during the years in issue. At trial, petitioner

submitted Forms W-2 showing the following:

Year Name Wages, Tips, Other Compensation

1985 Ms. Alshabani $2,405.00
Pam Biedenback 2,450.00
1986 Ms. Alshabani 11,401.00
Manoj Tandon 2,456.04
1987 Ms. Alshabani 13,398.00
Manoj Tandon Illegible

Petitioner submitted checks he wrote to Ms. Alshabani, Pam

Biedenback, and Manoj Tandon which totaled the following:

Year Name Total

1985 Ms. Alshabani $2,095.00
Pam Biedenback 2,080.00
1986 Ms. Alshabani 9,073.00
Manoj Tandon 0.00
1987 Ms. Alshabani 10,875.54
Manoj Tandon 0.00

The checks do not support the amounts the Forms W-2 list as

paid by petitioner as wages. Furthermore, there is no evidence

suggesting in what capacity Pam Biedenback worked for petitioner,

and petitioner did not even testify that he employed her. We

find that petitioner has substantiated that he paid Ms. Alshabani

wages in the amounts of $2,095, $9,073, and $10,875.54 in 1985,

1986, and 1987, respectively. Petitioner has not shown that he

is entitled to wage expense deductions in amounts greater than

those allowed by respondent; therefore, we sustain respondent's

determination on this issue.

2. Leasing Expenses
 - 17 -

Petitioner claimed leasing expenses in the amounts of

$4,474.37, $8,123.40, and $12,853.67 in 1985, 1986, and 1987,

respectively, for the 1984 Cadillac and the Rolls Royce.

Respondent disallowed these deductions.

The leasing expenses relate to the 1984 Cadillac and the

Rolls Royce. Petitioner's sister testified that the Rolls Royce

had very low mileage and was usually in the garage. Petitioner

did not testify, and presented no evidence, regarding the

business use of the Rolls Royce. The mileage logs petitioner

submitted supposedly relate to the business use of the 1984

Cadillac; however, as we stated earlier, we do not rely on those

logs. Petitioner has not established that he used the 1984

Cadillac or the Rolls Royce in his business; therefore, we

conclude that petitioner is not entitled to deductions for

leasing expenses in 1985, 1986, or 1987.7

3. Car and Truck Expenses

On his 1985 and 1986 tax returns, petitioner claimed car and

truck expenses of $1,642.34 and $1,279, respectively. Respondent

disallowed these deductions.

Petitioner testified that the car and truck expense

deductions he claimed were for his annual expenses for gasoline.

There is, however, no evidence in the record regarding the amount

7
We note that petitioner attempted to claim both
depreciation deductions and lease expense deductions on the Rolls
Royce.
 - 18 -

petitioner spent on gasoline. We conclude that petitioner has

failed to substantiate his car and truck expenses for 1985 and

1986.

C. Business and Mortgage Interest

Petitioner claimed Schedules C business interest deductions

in the amounts of $2,723.27, $3,097.03, and $2,767.96 in 1985,

1986, and 1987, respectively, and Schedules A mortgage interest

deductions in the amounts of $4,380.20, $6,053.76, $5,066.02, and

$4,949.78 in 1985, 1986, 1987, and 1988, respectively.

Respondent allowed petitioner business interest deductions in the

amounts of $1,861.27, $2,749.03, and $2,419.96 in 1985, 1986, and

1987, respectively, and mortgage interest deductions in the

amounts of $4,287.20, $4,286.76, $4,663.02, and $3,804.78 in

1985, 1986, 1987, and 1988, respectively. Respondent argues that

petitioner has failed to substantiate deductions in amounts

greater than those allowed; petitioner claims that he has

substantiated his claimed deductions.

Section 163(a) allows a deduction for all interest paid or

accrued within the taxable year on indebtedness. Petitioner

submitted customer records of a loan drawn from the Ohio Savings

Association. There is no evidence of what kind of loan this was;

i.e., whether it related to business or nonbusiness interest.

The records petitioner submitted showed the following amounts of

interest paid by petitioner:
 - 19 -

Date Amount of Interest

1/11/85 $449.90
12/12/85 362.65
12/8/86 310.19
11/21/87 294.77
12/8/87 291.65
1/15/88 291.21
3/2/88 299.27

Petitioner also submitted checks for payments to Ohio Savings on

or about some of those dates. Based on the evidence, we conclude

that petitioner has failed to substantiate business or mortgage

interest deductions in amounts greater than those allowed by

respondent; therefore, we sustain respondent's determination on

these issues.

D. General Sales Tax on Motor Vehicles

On his 1986 tax return, petitioner claimed a Schedule A

general sales tax on motor vehicles deduction of $6,597.10.

Respondent disallowed these deductions. Respondent argues that

petitioner has failed to substantiate the deduction; petitioner

claims that he has substantiated his claimed deductions.

In 1986, section 164(a)(4) allowed a deduction for State and

local general sales taxes. Petitioner submitted a lease

agreement executed between himself and Crestmont Cadillac Corp.

on December 30, 1986, for the Rolls Royce. Under the lease,

petitioner's monthly payment was $1,219.86, of which $63.59 was

separately stated as sales tax. Petitioner submitted a check

dated December 26, 1986, for $1,219.86 payable to Crestmont
 - 20 -

Cadillac. We conclude that petitioner has substantiated that he

paid $63.59 in sales tax on a motor vehicle in 1986 and is

entitled to a deduction in this amount.

E. Partnership Losses

During 1985, 1986, and 1987, petitioner was a 25-percent

partner in a real estate partnership called Horizon Partners.

Petitioner, on his 1985, 1986, and 1987 tax returns, claimed loss

deductions from Horizon Partners in the amounts of $5,191.33,

$4,171.25, and $3,876.25, respectively. Respondent argues that

petitioner has not established his adjusted basis in Horizon

Partners during the years in issue and therefore is not entitled

to deduct any partnership losses. Petitioner argues that he has

established his basis in Horizon Partners.

Section 704(d) allows a partner's distributive share of

partnership loss as a deduction only to the extent of the

adjusted basis in his partnership interest at the end of the

partnership year in which the loss is incurred. Petitioner

testified that in 1983 he invested $6,600 in Horizon Partners.

There is, however, no evidence of the amount of his adjusted

basis during the years in issue or of the adjustments he made to

his basis in previous years. Petitioner did not demonstrate that

he is entitled to deduct his proportionate share of partnership

losses from Horizon Partners in 1985, 1986, or 1987. We
 - 21 -

conclude, therefore, that petitioner is not entitled to

deductions for partnership losses in 1985, 1986, or 1987.

Investment Income Credit

Petitioner claimed a $1,000 investment tax credit on his

1985 tax return for the Chrysler. Respondent disallowed the

credit. Respondent argues that the Chrysler was not a "qualified

investment"; petitioner contends that it was.

In 1985, sections 38(a) and 46(a) allowed an investment tax

credit to a taxpayer making a "qualified investment". A

"qualified investment" must be section 38 property. Sec. 46(c).

Section 38 property is limited to certain property with respect

to which depreciation or amortization is allowable. Sec. 48(a);

sec. 1.48-1(a), Income Tax Regs. As observed above, petitioner

is not entitled to depreciate the Chrysler. Moreover, because

petitioner has not adduced, and we are not aware of, any

authority providing that the expenditure at issue is amortizable,

we conclude it is not. See Mann v. Commissioner, T.C. Memo.

1993-201. Accordingly, we conclude that petitioner is not

entitled to an investment tax credit in 1985.

Dependency Exemption

On his 1986 tax return, petitioner claimed a dependency

exemption for Anupam. Respondent disallowed the exemption.

Respondent argues that petitioner did not prove that he provided
 - 22 -

over one-half of Anupam's support in 1986; petitioner asserts

that he did provide over one-half of Anupam's support.

In 1986, section 151(c)(1) allowed a dependency exemption

for each dependent whose gross income for the calendar year was

less than the exemption amount or who was a qualifying child of

the taxpayer. Section 152(a) defines "dependents" as certain

individuals over one-half of whose support was received from the

taxpayer during the calendar year.

In order for petitioner to establish that he provided more

than one-half of his claimed dependent's support, he must first

show by competent evidence the total amount of support furnished

by all sources for the year in issue. Blanco v. Commissioner, 56

T.C. 512, 514 (1971). Petitioner has not offered evidence of the

total amount of support provided Anupam in 1986. Without proper

substantiation, the Court cannot conclude from the record that

more than one-half of Anupam's support was provided by

petitioner. It is therefore impossible to conclude that

petitioner provided more than one-half of Anupam's support for

1986. Accordingly, we sustain respondent's determination.8

Self-Employment Tax

Respondent argues that petitioner had additional self-

employment income in 1986 and 1987 based on petitioner's

8
We note that petitioner testified, and argued, that
Anupam was both petitioner's brother and his cousin.
 - 23 -

unreported income from his medical practice plus the disallowed

Schedules C deductions. Petitioner argues that he paid the

maximum amount of Social Security tax, and no amount is due.

Section 1401 imposes self-employment tax on self-employment

income. Section 1402 defines net earnings from self-employment

as the gross income derived by an individual from the carrying on

of any trade or business by such individual less allowable

deductions attributable to such trade or business.

We agree with respondent. We conclude that petitioner is

liable for additional self-employment tax in 1986 and 1987 in

accordance with section 1401 based upon petitioner's additional

self-employment income from his unreported income from his

medical practice plus the disallowed deductions.

Addition to Tax for Fraud

The addition to tax 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 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).
 - 24 -

The Commissioner has the burden of proving fraud by clear

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

the 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).

For 1985, if any part of the underpayment is due to fraud,

section 6653(b)(1) imposes an addition to tax equal to 50 percent

of the underpayment, and section 6653(b)(2) imposes a separate

addition to tax, equal to 50 percent of the interest payable

under section 6601, determined on the portion of the underpayment

attributable to fraud. For 1986 and 1987, if any part of the

underpayment is due to fraud, section 6653(b)(1)(A) imposes an

addition to tax equal to 75 percent of the portion of the

underpayment attributable to fraud, and section 6653(b)(1)(B)

imposes a separate addition to tax, equal to 50 percent of the

interest payable under section 6601, determined on the portion of

the underpayment attributable to fraud. For 1988, if any part of

the underpayment is due to fraud, section 6653(b)(1) imposes an

addition to tax equal to 75 percent of the portion of the
 - 25 -

underpayment attributable to fraud. For 1986, 1987, and 1988, 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 an addition to tax except

with respect to any portion of the underpayment that the taxpayer

establishes is not attributable to fraud. Sec. 6653(b)(2).

A. Underpayment of Tax

The filing of an amended return reporting additional income

is an admission of an underpayment of tax. See Badaracco v.

Commissioner, 464 U.S. 386, 399 (1984). Petitioner's 1987

amended return is an admission that he underreported, in his

original returns, $56,000 of income in 1987. Additionally, on

brief, petitioner concedes that he underreported his income from

his Schedules C medical practice by $17,170.91 in 1985 and

$44,401.56 in 1986. Furthermore, respondent 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 prove that a portion of such

underpayment for each taxable year was due to fraud.

Professional Servs. v. 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
 - 26 -

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) failing to file tax

returns, and (11) dealing in cash. See Spies v. United States,

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
 - 27 -

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. Petitioner's Sophistication and Experience

Petitioner is a medical doctor. We shall not hold

petitioner to either a high or low standard while evaluating his

actions.

2. 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

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

substantial understatements 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's understatements during the years in issue are

consistent and substantial; they are evidence of fraud.

3. Failure To Maintain Adequate Books and Records
 - 28 -

Failure to maintain adequate books and records may be

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

1302 (1987); Gajewski v. Commissioner, 67 T.C. at 200. As we

found earlier, petitioner failed to maintain adequate books and

records. This is evidence of fraud.

4. Intent To Mislead

Misleading statements to an investigating agent may be

evidence of fraud. See Gajewski v. Commissioner, supra at 200.

Petitioner misled Ms. Lippert--he told her that he deposited all

medical receipts in one bank account when in fact he deposited

medical receipts into at least seven accounts (including his own

personal accounts). Petitioner also misled Mr. Dever--petitioner

told Mr. Dever that he reported all items deposited into his bank

accounts on his tax returns, but he later admitted that he did

not report some of these items. This is evidence of fraud.

5. Lack of Credibility

Petitioner's lack of credibility is a factor in considering

the fraud issue. See Toussaint v. Commissioner, 743 F.2d 309,

312 (5th Cir. 1984), affg. T.C. Memo. 1984-25. As we stated

earlier, petitioner's testimony was at times questionable, vague,

conclusory, not credible, and unsupported by the evidence in the

record. This is evidence of fraud.

6. Filing False Documents (The Criminal Tax
Conviction)
 - 29 -

Although not dispositive, petitioner's convictions under

section 7206(1) are probative evidence that he intended to evade

his taxes. See Wright v. Commissioner, 84 T.C. 636, 643-644

(1985).

7. Other Factors

A taxpayer's practice of regularly depositing large portions

of his business receipts from his sole proprietorship into his

personal bank accounts may be evidence of fraud. See Farber v.

Commissioner, 43 T.C. 407 (1965), supplemented by 44 T.C. 408

(1965). During the years in issue, petitioner regularly

deposited large amounts of receipts from his medical practice

(whether it was a sole proprietorship or a corporation) into his

personal bank accounts; e.g., the AT #4 account, the AT #9

account, and the Society National Bank account. Petitioner made

these deposits in an attempt to conceal his income. This is

evidence of fraud.

C. Conclusion

After reviewing all of the facts and circumstances, we

conclude that respondent has clearly and convincingly proven

that all of the underpayments of tax resulting from petitioner's

unreported medical practice income and rental income for each of

the years in issue were due to fraud on the part of petitioner.

Therefore, we sustain respondent's determination that petitioner

is liable for additions to tax for fraud pursuant to section

6653(b) for 1985, 1986, 1987, and 1988.
 - 30 -

Additions to Tax for Negligence

Respondent determined that petitioner is liable for

additions to tax for negligence for 1986 and 1987 pursuant to

section 6653(a)(1)(A) and (B) and for 1988 pursuant to section

6653(a)(1).9 "Negligence" includes any failure to make a

reasonable attempt to comply with the provisions of the Code, and

the term "disregard" includes any careless, reckless, or

intentional disregard. Sec. 6653(a)(3). Furthermore, negligence

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

ordinarily prudent person would do under the circumstances.

Neely v. Commissioner, 85 T.C. 934, 947 (1985). Failure by a

taxpayer to keep adequate records may justify imposition of the

addition 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, 92 T.C. 899, 917 (1989). 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.

Petitioner has the burden of proving he is not liable for the

addition to tax. Rule 142(a).

9
Respondent determined the additions to tax for negligence
on underpayments attributable to adjustments to income that were
not fraudulent; i.e., all the adjustments except for those
related to the unreported income.
 - 31 -

Petitioner argues that he provided all of his records to the

IRS during his audit, fully cooperated with the IRS, and did not

disregard any rules or regulations. Petitioner's alleged

cooperation and conclusory statement do not prove that he was not

negligent. As we stated above, petitioner failed to maintain

adequate records of his income and expenses. We conclude that

petitioner is liable for the additions to tax for negligence for

1986, 1987, and 1988 as determined by respondent to the extent of

any underpayment decided for those years that was not due to

fraud.

Addition to Tax for a Substantial Understatement

Respondent determined that petitioner is liable for

additions to tax for substantial understatements for 1985, 1986,

1987, and 1988 pursuant to section 6661. An understatement is

the difference between the amount required to be shown on the

return and the amount actually shown on the return and is

substantial if it exceeds the greater of (1) 10 percent of the

tax required to be shown on the return for a taxable year, or (2)

$5,000. Sec. 6661(b)(1) and (2)(A). The understatement is

reduced to the extent that the taxpayer has (1) adequately

disclosed his or her position or (2) has substantial authority

for the tax treatment of an item. Sec. 6661; sec. 1.6661-6(a),

Income Tax Regs. Petitioner has the burden of proving he is not

liable for the addition to tax. Rule 142(a).
 - 32 -

Petitioner's only argument is that he did not understate his

taxes in 1985, 1986, 1987, and 1988 and, thus, should not be

charged with the substantial understatement addition to tax.

Contrary to petitioner's assertions, we found that he did

understate his taxes for all of the years in issue. Based on our

findings in this case, we conclude that there was a substantial

understatement in each of the years in issue, and respondent's

determination is sustained to the extent of any underpayment

decided for those years.

Period of Limitations

Petitioner argues that the deficiencies and additions to tax

are barred by the expiration of the statutory period 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.

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

deprives the taxpayer of the bar of the statutory period 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.").
 - 33 -

We found that petitioner filed fraudulent income tax returns

for 1985, 1986, 1987, and 1988; therefore the period of

limitations on assessment for each of these years remains open.

To reflect the foregoing,

Decision will be entered

under Rule 155.