T.C. Summary Opinion 2010-70
UNITED STATES TAX COURT
GRANT A. MCDONALD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 583-09S. Filed June 8, 2010.
Grant A. McDonald, pro se.
Rebekah Myers and David W. Sorenson, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined income tax deficiencies and section
6663 fraud penalties for petitioner’s 2004 and 2005 tax years.
In the alternative, respondent determined that if petitioner is
not subject to the fraud penalties, he is liable for accuracy-
related penalties under section 6662(a). Petitioner did not
appear at trial and respondent moved for dismissal for lack of
prosecution, and the Court was disposed to grant the motion as it
related to the income tax deficiencies. With respect to the
fraud penalties, respondent presented evidence in support of his
burden to show that petitioner filed fraudulent returns. We
consider here whether respondent has presented clear and
convincing evidence of fraud for petitioner’s 2004 and 2005 tax
years and/or whether petitioner is subject to the accuracy-
related penalties.
Background
Petitioner resided in Utah at the time his petition was
filed. On Schedule A, Itemized Deductions, of his 2004 Form
1040, U.S. Individual Income Tax Return, petitioner claimed a
$29,897 casualty loss in connection with residential real estate.
Petitioner reported that a “casualty” had reduced the $135,000
value of his residence to $100,100. The $34,900 reported
casualty was reduced to $29,897 on account of various limitations
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placed upon an individual’s casualty loss claims. Petitioner’s
$34,900 casualty loss reduced his $49,027 reported income to an
extent that his tax liability was reduced to $423, thereby
enabling him to obtain an approximately $4,500 refund of the
$4,891 that was withheld from his wage income.
During 2004 petitioner and his wife were separated, and his
wife was living in their residence without petitioner.
Petitioner’s 2004 tax return was audited, and respondent’s
revenue agent examined the claimed casualty loss. Petitioner
explained that during 2004 his wife had dug up the basement. In
support of the casualty loss claim petitioner presented invoices
for repairs, canceled checks, insurance statements, and two
police reports.
The invoice, in the total amount of $34,900, reflected
repair and replacement of the basement cement foundation, outdoor
deck, floors, drapes and window coverings, and appliances,
including a garage door opener, toilets, and other items. The
company name shown on the invoice was Designer Real Estate
(Designer). Respondent’s agent attempted to verify the existence
of Designer by checking the location and attempting to call the
telephone number, but no such enterprise was at the designated
location, and the telephone number was not in service.
Respondent’s agent also considered the police reports
petitioner provided and discovered that one of them reflected
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that the basement floor had been “broken apart” by petitioner’s
wife and her friends. The other police report reflected that
petitioner had reported that some of the doors were unlocked and
that some “furniture * * * or belongings had been stolen.” Only
the basement floor damage, however, was included as part of
petitioner’s casualty loss claim for Federal tax purposes.
Respondent’s agent asked petitioner to substantiate the
payment of the $34,900 to Designer, and petitioner provided
respondent four checks to Designer dated in early 2005 and
totaling $34,900. Respondent’s agent noted that although the
checks were dated in early 2005, they were not cashed until July
and August 2006. The checks were cashed by petitioner’s nephew,
and when respondent’s agent asked petitioner about the delay in
cashing the checks, petitioner admitted that the checks were
backdated in order to show payment to Designer, that Designer was
actually his nephew, and that the arrangement between him and his
nephew was a loan to finance the home repairs and improvements.
Respondent’s agent checked petitioner’s nephew’s tax returns to
determine whether he had reported any income regarding Designer,
and the nephew had not reported any such income.
Respondent’s agent checked petitioner’s bank records and
determined that the issuance and cashing of the four checks,
totaling $34,900, all occurred after respondent’s examination of
petitioner’s 2004 tax return had begun. The agent also
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determined that shortly after petitioner’s nephew cashed the
checks, the same total ($34,900) reappeared in petitioner’s bank
account. Petitioner related other versions of the payment for
the alleged repairs or improvements but offered no proof in
support of his allegations. The agent also became aware that
petitioner had filed for bankruptcy in 2005, and the bankruptcy
filing did not list Designer as a creditor.
Petitioner’s 2005 income tax return was also examined
regarding his contributions and business expenses. The agent
allowed a portion of the contributions and disallowed the
remainder because petitioner was either unable to substantiate
the value of contributed assets or failed to meet the
recordkeeping requirements.
On petitioner’s 2005 Schedule C, Profit or Loss From
Business, he reported $10,352 of income and $40,080 of expenses
and claimed a $29,728 loss from his business. Petitioner
described his business as “Handyman Service”, but gave varying
explanations to the agent as to the type of work actually
performed. The items claimed on petitioner’s Schedule C included
contract labor; depreciation; employee benefits programs; and
travel, meals, and entertainment. The largest deduction was
$18,615 for employee benefits.
Petitioner was unable to substantiate adequately any of the
claimed Schedule C deductions, and respondent’s agent disallowed
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the entire $40,080 claimed, although he did not change the
reported income of $10,352. Petitioner provided oral
explanations of the deductions claimed but did not provide
substantiation or evidence sufficient to satisfy the agent that
any amount was deductible.
Discussion
The Court has already upheld the 2004 and 2005 income tax
deficiencies because of petitioner’s failure to prosecute. The
only question remaining is whether petitioner is liable for
section 6663(a) fraud penalties and/or section 6662(a) accuracy-
related penalties with respect to the adjustments.
Section 6663(a) provides for a 75-percent penalty for any
portion of an underpayment attributable to fraud. Fraud is
defined as an intentional wrongdoing designed to evade tax
believed to be owing. Petzoldt v. Commissioner, 92 T.C. 661, 698
(1989). Fraudulent intent is defined as “‘actual, intentional
wrongdoing, and the intent required is the specific purpose to
evade a tax believed to be owing.’” Estate of Temple v.
Commissioner, 67 T.C. 143, 159 (1976) (quoting Mitchell v.
Commissioner, 118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A.
424 (1939)). If any portion of the underpayment is attributable
to fraud, the entire underpayment will be treated as attributable
to fraud unless the taxpayer establishes by a preponderance of
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the evidence that part of the underpayment is not due to fraud.
Sec. 6663(b).
Respondent has the burden of proving by clear and convincing
evidence that an underpayment exists for each of the years in
issue and that some portion of the underpayment is due to fraud.
See sec. 7454(a); Rule 142(b). Fraud is never presumed but must
be established by independent evidence that establishes
fraudulent intent. Beaver v. Commissioner, 55 T.C. 85, 92
(1970). The following indicia have been developed by the courts
as “badges of fraud” from which fraudulent intent can be
inferred: (1) Understating income; (2) maintaining inadequate
records; (3) engaging in a pattern of behavior that indicates an
intent to mislead; (4) concealing assets; (5) providing
implausible or inconsistent explanations of behavior; (6) filing
false documents; and (7) failing to provide documents to the
Commissioner during examination. Bradford v. Commissioner, 796
F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Cooley
v. Commissioner, T.C. Memo. 2004-49. Although no single factor
is necessarily sufficient to establish fraud, a combination of
several of these factors may be persuasive evidence of fraud.
See Bradford v. Commissioner, supra at 307-308.
With those principles in mind, we first consider
petitioner’s 2004 tax year and his claimed casualty loss
deduction. Petitioner claimed a $34,900 casualty loss that
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reduced $49,027 in income to such an extent that his tax
liability was reduced to $423, thereby enabling petitioner to
obtain an approximately $4,500 refund of the $4,891 that was
withheld from his wage income. Respondent has shown that the
only damage to petitioner’s home was to the basement foundation
and was intentionally caused by his wife. Other than repairs for
that damage, all of the alleged repairs to petitioner’s home
appear to be renovations or improvements.
Section 165(a) permits deductions for losses not compensated
for by insurance or otherwise. Section 165(c) limits the losses
of individuals to those incurred in a trade or business or any
transaction entered into for profit, or those arising from fire,
storm, shipwreck, or other casualty, or from theft. To deduct a
loss as a casualty, petitioner must have incurred damage by or as
a proximate result of a fire, storm, shipwreck, or other
casualty, and he must establish the amount of the loss resulting
from the casualty as distinguished from other causes. A casualty
has been defined as the total or partial destruction of property
resulting from an identifiable event of a sudden or unexpected
nature. Matheson v. Commissioner, 54 F.2d 537, 539 (2d Cir.
1931), affg. 18 B.T.A. 674 (1930); Axelrod v. Commissioner, 56
T.C. 248, 256 (1971); Durden v. Commissioner, 3 T.C. 1, 3 (1944).
Respondent has shown that petitioner did not sustain a
casualty loss and the only damage to petitioner’s home was
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intentionally caused by a resident/owner. More significantly,
respondent has shown that the evidence petitioner offered in
support of his claimed casualty loss deduction was fabricated
after the fact and wholly false and fraudulent. It is clear that
petitioner falsely claimed the $34,900 deduction on his 2004
return. Moreover, petitioner continued his pattern of fraud and
deceit by submitting backdated fabricated and false documentation
of home repair.
Respondent has met the standard of showing by clear and
convincing evidence that petitioner intentionally filed a false
return for 2004. We accordingly hold that petitioner is liable
for the section 6663(a) fraud penalty on the entire underpayment
for his 2004 tax year.
With respect to the 2005 tax year, respondent disallowed
some of petitioner’s contribution deductions for lack of complete
substantiation or failure to meet the technical requirements for
deduction. Respondent also disallowed all of petitioner’s
claimed Schedule C business deductions of $40,080 but did not
disturb the $10,352 of income petitioner reported on the 2005
Schedule C. By accepting the income, respondent accepts that
petitioner did have a business and/or business income. The
circumstances regarding the 2005 tax year are different from
those for 2004 in that respondent has not shown for 2005 that
petitioner intentionally and knowingly attempted to evade tax.
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In addition, respondent’s adjustments are more technical and more
in line with a routine disallowance for lack of substantiation or
for failure to meet legal requirements. For 2005 there is no
shown pattern of deception as there was for 2004 and no showing
that petitioner intentionally attempted to evade the tax owing.
Accordingly, we hold that respondent has not shown that
petitioner is liable for the section 6663(a) penalty for 2005.
Respondent, in the alternative, determined that petitioner was
liable for the section 6662(a) accuracy-related penalty for 2005.
To sustain that penalty, respondent has the burden of production.
See sec. 7491(c). There is no question that respondent has met
the burden of production with respect to the accuracy-related
penalty for 2005. Respondent met that burden by evidence showing
that petitioner failed to maintain adequate records and/or to
substantiate the disallowed contribution and business deductions
claimed on his 2005 tax return. Under the circumstances of this
case where petitioner failed to come forward and show reasonable
cause for the underpayment, petitioner is liable for the section
6662(a) accuracy-related penalty for the 2005 tax year.
To reflect the foregoing,
An appropriate order of dismissal
and decision will be entered.