T.C. Memo. 1999-405
UNITED STATES TAX COURT
LINDA D. FASON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12308-98. Filed December 14, 1999.
R disallowed deductions claimed on P’s 1994 income tax
return and determined the civil fraud penalty pursuant to
sec. 6663, I.R.C. In substantiation of these deductions, P
offered two documents which evidence at trial indicated were
not legitimate.
Held: On the facts, P failed to establish her
entitlement to the deductions claimed and is therefore
liable for the deficiency determined by respondent.
Held, further, P is liable for the sec. 6663, I.R.C.,
civil fraud penalty.
Linda D. Fason, pro se.
Ric D. Hulshoff, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
NIMS, Judge: Respondent determined a Federal income tax
deficiency for petitioner’s 1994 taxable year in the amount of
$5,846. Respondent also determined a civil fraud penalty of
$4,385 for 1994, pursuant to section 6663.
The issues for decision are as follows:
(1) Whether petitioner has established entitlement to
deductions claimed for medical expenses, charitable
contributions, casualty losses, and employee business or
miscellaneous expenses; and
(2) whether petitioner is liable for the section 6663 civil
fraud penalty or, in the alternative, the section 6662(a)
accuracy-related penalty.
Unless otherwise indicated, all section references are to
sections of the Internal Revenue Code in effect for the year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations filed by the parties, with accompanying
exhibits, are incorporated herein by this reference.
Linda D. Fason resided in Lynwood, California, at the time
of filing her petition in this case. On her 1994 income tax
return, petitioner reported having incurred, and took
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corresponding deductions for, the following expenditures and
losses: $8,611 for medical expenses, $7,214 for charitable
contributions, $4,659 for casualty losses, and $12,656 for
employee and miscellaneous expenses.
During an audit of her 1994 return, petitioner provided two
documents for purposes of substantiating her expenses. The first
was a receipt on letterhead of Richard Hill, Sr., M.D. The
receipt designates Richard Harden, petitioner’s son, as “patient”
and bears $8,611.37 both as the amount of “charges” and as the
amount “paid”. A handwritten annotation on the receipt reads:
“Pd by L. Fason cashier chk”.
The second item provided by petitioner for substantiation
purposes was a document on letterhead of Trinity Baptist Church
entitled “1994 Contribution Statement”. It states that Linda
Fason contributed $7,214 during 1994.
On October 10, 1996, respondent sent petitioner a
information document request asking for a copy of the cashier’s
check used to pay Dr. Richard Hill. Petitioner responded in a
letter dated October 15, 1996: “Regarding your letter to me
(copy enclosed) about a copy of cashiers check paid to Dr.’s bill
the check had no copy.”
Respondent then sent a second information document request
on April 16, 1997, again soliciting a copy of the cashier’s check
or, if such was unavailable, verification of the method (i.e.,
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personal check or cash withdrawal from a bank account) used to
purchase the cashier’s check. Petitioner’s April 28, 1997,
response letter stated: “Richard’s med expenses were paid by
cash so I only have the Dr. receipt that I turned in.”
On May 8, 1997, respondent sent a third communication
informing petitioner that “information provided from Trinity
Baptist Church indicates that they did not receive any
contributions from you during 1994” and that “the information you
provided on the casualty loss is insufficient to verify that a
loss was sustained and due to a casualty or theft. A list of
items prepared by you does not, by itself constitute
verification.” Petitioner once again responded by letter on May
17, 1997. With regard to the contributions, she wrote: “My
charitable contributions to Trinity Baptist Church was anonymous.
That was my agreement with the church.” Concerning the casualty
loss, she said: “Because an earthquake is not a criminal matter
I could not file a police report, to verify my losses. The items
I lost were too expensive for me to replace at one time so
therefore I don’t have a cancelled check.”
When the matter came to trial, petitioner appeared and
stated: “I don’t want to go any further with this.” She left
the courtroom prior to the presentation of any evidence or
testimony.
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Respondent then proceeded to call Dr. Hill and the financial
secretary of Trinity Baptist Church, Ms. Debra Hannah, as
witnesses.
Dr. Hill did not recall ever treating Ms. Fason or her son
and did not recognize the name of Richard Harden. The
handwriting on the receipt did not belong to either Dr. Hill or
his office manager, the only two individuals who prepare receipts
in his practice. In addition, the receipt did not bear the stamp
customarily placed by Dr. Hill on such documents.
Ms. Hannah had searched the contribution records of Trinity
Baptist Church for 1993 and 1994, and no record was found of any
gifts from Ms. Fason. Ms. Fason also was not listed in the past
or present membership records of the church.
OPINION
We must decide whether petitioner has established her
entitlement to the deductions claimed on her 1994 income tax
return and, if not, whether she is liable for the section 6663
civil fraud penalty.
Respondent contends that petitioner has failed to
substantiate the deductions claimed and is therefore liable for
the deficiencies determined by respondent. Respondent further
argues that falsified evidence offered by petitioner establishes
an intent to evade tax and, hence, supports imposition of the
civil fraud penalty. In the alternative, if petitioner’s conduct
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is determined not to rise to the level of fraud, respondent
asserts that petitioner is liable for the accuracy-related
penalty on account of negligence or disregard of rules or
regulations.
We agree with respondent that the substantiation offered by
petitioner not only falls short of establishing her entitlement
to the claimed deductions but also demonstrates sufficient
fraudulent intent to warrant the civil fraud penalty.
Disallowance of Deductions
As a general rule, respondent’s determinations are presumed
correct, and the taxpayer bears the burden of proving that such
determinations are erroneous. See Rule 142(a). Deductions,
moreover, are a matter of “legislative grace”, and “a taxpayer
seeking a deduction must be able to point to an applicable
statute and show that he comes within its terms.” New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). The burden of
proving entitlement to a deduction is therefore on the taxpayer,
see Rule 142(a), and every taxpayer is required to maintain
adequate records to substantiate the existence and amount of any
deduction claimed; see sec. 6001; sec. 1.6001-1(a), Income Tax
Regs.
Applying these principles to the matter at hand, we find
that petitioner here has failed to carry her burden of
establishing that disallowance of the challenged deductions was
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erroneous. With respect to the medical expenses, the only
substantiation offered by petitioner is the purported receipt
from Dr. Richard Hill. Dr. Hill, however, testified that the
document was not a receipt prepared by his office, and we find
his testimony to be credible. As to the charitable
contributions, the sole item offered in substantiation, the 1994
Contribution Statement, is likewise shown by a credible witness
to be lacking in legitimacy. Ms. Debra Hannah, the financial
secretary of Trinity Baptist Church, stated that the contribution
records of the church contained no reference to a gift from
petitioner.
Regarding the casualty losses and business and miscellaneous
deductions, no substantiation other than the lists set forth in
petitioner’s return has been presented. Hence, because
demonstrably fraudulent evidence will not validate a deduction,
nor, of course, will the complete absence of evidence, the
presumption of correctness afforded to respondent’s deficiency
determination is not rebutted. Petitioner is therefore liable
for the deficiency determined by respondent.
Civil Fraud Penalty
Section 6663(a) authorizes the imposition of a civil fraud
penalty and reads as follows: “If any part of any underpayment
of tax required to be shown on a return is due to fraud, there
shall be added to the tax an amount equal to 75 percent of the
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portion of the underpayment which is attributable to fraud.”
Section 6663(b) further provides:
If the Secretary establishes that any portion of an
underpayment is attributable to fraud, the entire
underpayment shall be treated as attributable to fraud,
except with respect to any portion of the underpayment
which the taxpayer establishes (by a preponderance of
the evidence) is not attributable to fraud.
To establish the existence of fraud, respondent bears the burden
of proving by clear and convincing evidence that (1) an
underpayment of income tax exists and (2) some portion of that
underpayment is due to fraud. See sec. 7454(a); Rule 142(b);
Clayton v. Commissioner, 102 T.C. 632, 646 (1994); Recklitis v.
Commissioner, 91 T.C. 874, 909 (1988).
Fraud is generally defined as intentional wrongdoing on the
part of the taxpayer, with the specific purpose of evading tax
believed to be owed. See Powell v. Granquist, 252 F.2d 56, 60
(9th Cir. 1958). Respondent must therefore prove that the
taxpayer “intended to evade tax believed to be owing by conduct
intended to conceal, mislead, or otherwise prevent the collection
of such tax.” Clayton v. Commissioner, supra at 647; Recklitis
v. Commissioner, supra at 909. Nonetheless, respondent “need not
establish that tax evasion was a primary motive of the taxpayer,
but may satisfy the burden by showing that a tax-evasion motive
played any part in the taxpayer’s conduct”. Clayton v.
Commissioner, supra at 647.
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The presence of fraud is a question of fact to be resolved
upon consideration of the entire record. See Recklitis v.
Commissioner, supra at 909. Although fraud is never imputed or
presumed, intent to defraud may be proven by circumstantial
evidence. See Clayton v. Commissioner, supra at 647; Recklitis
v. Commissioner, supra at 909-910.
Here, given our conclusion above regarding the existence of
a deficiency, an underpayment of tax has been established. In
addition, through presentation of circumstantial evidence,
respondent has carried the burden of showing that some portion of
this underpayment is due to fraud. Moreover, because petitioner
has failed to offer any evidence that some part of the deficiency
cannot be attributed to fraud, the section 6663 penalty applies
to the entire underpayment.
This case reveals a specific fraudulent intent on the part
of petitioner to evade tax. Petitioner neglected to maintain
adequate records to substantiate more than $25,000 in deductions.
In addition, evidence of intent to defraud is particularly
apparent in the implausibility and inconsistencies surrounding
the two documents allegedly offered to validate these deductions.
Because testimony at trial indicated that neither document was
legitimate, petitioner presented false evidence for purposes of
misleading the tax authorities. Moreover, statements made by
petitioner with regard to these documents reveal inconsistent
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explanations of her behavior. The medical receipt and
petitioner’s first letter to respondent refer to payment in the
form of a cashier’s check. Petitioner’s second letter to
respondent, in contrast, states that payment was made in cash.
The documentary evidence she offered and her own written
statements are therefore directly contradictory.
Similarly, petitioner offered a contribution statement from
Trinity Baptist Church which designates her by name as a donor.
Then, in her third letter to respondent, petitioner attempts to
explain the church’s lack of information regarding her gifts by
writing that her contributions were anonymous. However, if her
contributions were truly anonymous, so that her giving would not
be reflected in the church records, the church would not have
been able to issue a personal contribution statement. Again,
petitioner’s explanations are contradictory and implausible.
Furthermore, prolonging the examination of her return for
several years with false and conflicting communications can
hardly be deemed cooperation with tax authorities.
Based on these circumstances, we hold that petitioner is
liable for the section 6663 civil fraud penalty, and we need not
reach the alternative question of whether petitioner would be
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liable for the section 6662 accuracy-related penalty.
Respondent’s determinations are therefore sustained both as to
the deficiency and as to the fraud penalty.
To reflect the foregoing,
Decision will be entered
for respondent.