Midwest Medical Aesthetics Center

United States Tax Court

T.C. Memo. 2024-32

MIDWEST MEDICAL AESTHETICS CENTER,
Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent

KATHLEEN M. STEGMAN,
Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent

__________

Docket Nos. 20763-17, 22545-17. Filed March 25, 2024.

__________

Kathleen M. Stegman (an officer), for petitioner in Docket No. 20763-17.

Kathleen M. Stegman, pro se in Docket No. 22545-17.

Shaina E. Boatright, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARIS, Judge: By notice of deficiency dated July 7, 2017,
respondent determined deficiencies in the federal income tax of Midwest
Medical Aesthetics Center (Midwest Medical) of $84,392, $146,529,
$185,786, $161,409, and $85,982 and civil fraud penalties under

Served 03/25/24
 2

[*2] section 6663 1 of $63,021.75, $109,896.75, $139,339.50, $121,056.75,
and $64,486.50 for tax years 2006, 2007, 2008, 2009, and 2010,
respectively. Respondent additionally determined that Midwest Medical
is liable for an addition to tax pursuant to section 6651(a)(1) of
$18,578.60 for tax year 2008. Midwest Medical was a professional
association that was taxed as a corporation.

By notice of deficiency dated July 12, 2017, respondent
determined deficiencies in the federal income tax of Kathleen M.
Stegman (Ms. Stegman, collectively with Midwest Medical, petitioners)
of $60,231, $91,418, $82,182, and $40,666 and civil fraud penalties
under section 6663 of $45,173.25, $68,563.50, $61,636.50, and
$30,499.50 for tax years 2006, 2007, 2008, and 2010, respectively.
Respondent additionally determined that Ms. Stegman is liable for an
addition to tax pursuant to section 6651(a)(1) of $23,067.75 for tax year
2007.

After concessions, discussed below, the issues for decision are: 2

1. Whether Midwest Medical overstated costs of goods sold
(COGS) for tax years 2006 through 2009;

2. Whether Ms. Stegman failed to report income for tax years
2006, 2007, 2008, and 2010;

3. Whether Midwest Medical overstated corporate expenses
for tax years 2006 through 2010;

4. Whether Ms. Stegman is entitled to a deduction for the
business use of her home for tax year 2010;

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure. Some dollar
amounts are rounded to the nearest dollar.
2 The parties filed a Stipulation of Settled Issues contemporaneously with trial.

Any concessions are described below. Two computational issues are sustained to the
extent the Court sustains respondent’s other adjustments and will not be discussed
further: (1) any adjustments to Ms. Stegman’s itemized deductions and exemptions
and (2) any adjustments resulting from Ms. Stegman’s adjusted gross income for self-
employment.
 3

[*3] 5. Whether Ms. Stegman is subject to the passive loss
limitation of section 469 for tax year 2010;

6. Whether Ms. Stegman is entitled to passive losses related
to real estate for tax years 2006, 2007, 2008, and 2010;

7. Whether Ms. Stegman is entitled to a deduction for bad
debt expense for tax year 2006 or 2007;

8. Whether late filing additions to tax apply for tax year 2007
on Form 1040, U.S. Individual Income Tax Return, and for
tax year 2008 on Form 1120, U.S. Corporation Income Tax
Return;

9. Whether Midwest Medical is liable for civil fraud penalties
under section 6663 for tax years 2006, 2007, 2008, 2009,
and 2010;

10. Whether Ms. Stegman is liable for civil fraud penalties
under section 6663 for tax years 2006, 2007, 2008, and
2010; and

11. Whether the period of limitations for assessment has
expired.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The First
through Fifth Stipulations of Facts and the Exhibits attached thereto
are incorporated herein by this reference. Ms. Stegman resided in
Kansas when she timely filed her Petition. Midwest Medical was a
professional association that was taxed as a corporation and operated in
Kansas, until it dissolved in 2019.

I. Criminal Convictions

On October 9, 2014, a federal grand jury indicted Ms. Stegman on
five counts of tax evasion in violation of section 7201, covering tax years
2007, 2008, 2009, and 2010, and one count of conspiracy to evade the
payment of corporate and personal taxes, defraud the United States of
money, and obstruct and impede the lawful functions of the Internal
Revenue Service (IRS). Counts 1 through 3 were for tax evasion for tax
years 2008, 2009, and 2010 concerning Midwest Medical, counts 4 and 5
were for tax years 2007 and 2008 concerning Ms. Stegman individually,
 4

[*4] and count 6 was for the conspiracy charge. The indictment was
amended/superseded to change the name of the corporate entity from
“Midwest Medical Aesthetics Center, Inc.” to “Midwest Medical
Aesthetics Center.”

Petitioners provided no income records in response to a summons
issued in the criminal investigation, and a Midwest Medical employee
testified during the criminal trial that Ms. Stegman paid the employee
to destroy client files which contained income receipts. Also during the
criminal trial, a local attorney and Midwest Medical client testified that
Ms. Stegman requested that the client pay cash for the services she
received from Midwest Medical. When the client advised Ms. Stegman
that she did not have cash, Ms. Stegman suggested that the client go to
the nearby branch of her bank and withdraw cash to use as payment.

The case was tried in early 2016 and on April 12, 2016, the jury
found Ms. Stegman guilty on four counts of tax evasion under section
7201, specifically, tax evasion for personal income tax for tax years 2007
and 2008, and tax evasion for corporate income tax for tax years 2008
and 2009. The jury acquitted Ms. Stegman of the charge of tax evasion
for corporate income tax for tax year 2010 and the conspiracy charge.

On September 19, 2016, the federal district court acquitted Ms.
Stegman of evasion of corporate tax on the grounds that the indictment
and the jury instructions were flawed in attributing to Ms. Stegman the
loss due and owing by the corporation. The prosecutors did not put on
evidence to pierce the corporate veil, so the indictment and the jury
instructions attributed the tax to the wrong legal person. On October 20,
2017, the U.S. Court of Appeals for the Tenth Circuit affirmed the
District Court’s decision. 3

On October 18, 2016, the federal district court sentenced Ms.
Stegman to 51 months in prison, a $100,000 fine, and restitution of
$68,733. Although the court vacated the counts related to the corporate
tax, it included the corporate tax evasion in computing the tax loss and

3 As noted in the Tenth Circuit’s opinion:

[T]he district court explained, it chose to acquit Stegman of the
corporate tax evasion counts not due to a lack of “proof beyond a
reasonable doubt that this corporation evaded taxes,” but rather
because “the indictment itself was flawed in attributing the loss as due
and owing by Ms. Stegman, when actually it was due and owing by the
corporation.”
United States v. Stegman, 873 F.3d 1215, 1221 (10th Cir. 2017).
 5

[*5] determining the length of Ms. Stegman’s sentence. Ms. Stegman’s
sentence included enhancements for “sophisticated means” due to the
use of multiple limited liability companies (LLCs), and for obstruction of
justice because Ms. Stegman attempted to influence a witness’
testimony and destroyed records. 4

II. Midwest Medical’s Operations

A. General Background

Ms. Stegman opened Midwest Medical in 1997 to provide medical
spa services to clients. Ms. Stegman was a registered nurse in Kansas
with an undergraduate degree in business, a master’s degree in
marketing, and a nursing degree. Medical spas or “med spas” are like
conventional spas. However, a med spa performs some procedures that
are quasi-medical because they require a consultation by a doctor or
nurse practitioner, they use medical equipment (like ultrasounds), they
require a medical license to administer, or they involve a substance such
as botox, which requires FDA approval or a physician prescription.
Midwest Medical specialized in microdermabrasion, permanent
makeup, botox and fillers, and laser hair removal. In 2006 Midwest
Medical added liposuction, performed by a medical doctor, to its
procedures. The oversight of med spas is state-specific. Med spa
treatments are elective and generally not covered by insurance.

Ms. Stegman organized Midwest Medical as a Kansas
corporation, initially named Midwest Medical Aesthetics Center, Inc., in
1997. At the time of its incorporation, Ms. Stegman was the sole
incorporator and the sole director of the corporation. Ms. Stegman failed
to organize Midwest Medical as a professional association, failed to
include a physician as supervisor, and failed to include a physician as a
part owner as required by the Kansas Board of Healing Arts. Upon
notice, on January 16, 1998, Ms. Stegman filed a certificate of
amendment with the Kansas secretary of state to reflect a change from
a corporation to a professional association, and a name change from
Midwest Medical Aesthetics Center, Inc., to Midwest Medical Aesthetics
Center, P.A. Ms. Stegman signed the certificate of amendment as
president and secretary of Midwest Medical.

4 Additionally, in June 2018 Ms. Stegman pleaded guilty to a violation of 21

U.S.C. § 331 for receiving in interstate commerce and causing the receipt in interstate
commerce of a misbranded drug and delivering and proffering the misbranded drug for
pay with the intent to defraud and mislead.
 6

[*6] Ms. Stegman was a director and the majority shareholder for all
the years Midwest Medical filed with the Kansas secretary of state. She
employed three different doctors to fill the role of supervising physician
during the years at issue. The doctors were also minority shareholders
but only during the time that they were employed at Midwest Medical
as supervising physicians.

The supervising physicians purportedly oversaw the medical
procedures and signed off on the medical protocols. The supervising
physicians did not control the business side of Midwest Medical. Ms.
Stegman was always the majority shareholder, and she made the
decisions for Midwest Medical regarding all banking, finance,
marketing, and employment.

Midwest Medical was open weekdays from 10 a.m. to 5 p.m. and
typically had three to five employees in addition to the doctor. During
the years at issue Midwest Medical maintained the client files on
premises, stored in a file cabinet at the front desk. Client files were
typically shredded every two years, either by Ms. Stegman or by an
employee under her direction.

B. Midwest Medical Recordkeeping, Banking, and Gross
Receipts

Ms. Stegman managed the business of Midwest Medical and did
all the paperwork and marketing. During the years at issue Midwest
Medical had a commercial checking account at North American Savings
Bank (NASB) with account number ending in 7044. Ms. Stegman was
the only signer on the account and handled the banking exclusively,
making all bank deposits.

Midwest Medical permitted clients to pay for services with a
credit card, cash, or a check, but cash was Ms. Stegman’s preferred
payment method. Clients often made checks payable to Ms. Stegman
individually, rather than to Midwest Medical. When clients paid by
check, Ms. Stegman directed them to leave the payee line blank, and she
directed her employees to tell clients the same. At Ms. Stegman’s
direction, an employee would then use a stamp kept at the front desk to
insert “Kathleen Stegman” into the payee line of the checks. Ms.
Stegman then deposited the client checks payable to Kathleen Stegman
 7

[*7] into her individual bank account or the bank account of Samson,
LLC (Samson). 5

Midwest Medical accepted cash for services, and it received cash
daily. There was a sign on the front desk advertising that customers
could pay cash. Ms. Stegman personally collected both the cash and
client checks at the end of each day. However, Ms. Stegman did not
deposit the cash Midwest Medical received from clients into Midwest
Medical’s NASB account. Instead, she used the cash for personal
purchases. She did so either directly or by first converting the cash into
money orders. Ms. Stegman purchased at least 571 money orders
between 2007 and 2009, in amounts totaling $272,749. Some of those
money orders were made payable to Ms. Stegman’s family, friends, and
business associates without their knowledge. Ms. Stegman frequently
used money orders to purchase items for her personal use.

Midwest Medical used carbon copy receipt books to document
transactions. Upon request, it provided clients with one carbon copy of
the receipt. During the years at issue, Midwest Medical purchased more
than 350 receipt books, enough for more than 18,000 transaction
receipts.

C. Business Expenses

1. Depreciation Expense

In 2007 Midwest Medical acquired a CoolTouch laser under a
long-term lease agreement with Sterling National Bank. Midwest
Medical deducted the lease payments it made to Sterling National Bank
in tax years 2007 through 2010. Midwest Medical also listed the same
CoolTouch laser on its depreciation schedule, with a cost basis of
$82,300, and deducted a depreciation expense for each of tax years 2007
through 2010.

In August 2007 Ms. Stegman withdrew $79,012.79 from the
Midwest Medical NASB account and used it to purchase a cashier’s
check payable to Chicago Title, which she then used to purchase rental

5 Samson was a single member LLC owned by Ms. Stegman. Ms. Stegman

owned various LLCs over the years. The only other LLC relevant here is Opportunity
Meets Preparation, LLC (Opportunity Meets Preparation), another single member
LLC.
 8

[*8] real estate for herself. On a handwritten expense sheet 6 for August
2007, Ms. Stegman indicated the $79,012.79 was for “cap equipment.”
For tax years 2007 through 2009 Midwest Medical’s depreciation
schedule included a line item for equipment, with a cost basis of
$79,012.79, purchased on August 31, 2007.

In 2009 Ms. Stegman purchased a couch and a desk from a gallery
for $10,500. Ms. Stegman did not install the furniture at Midwest
Medical but instead used the furniture in her home. Nevertheless, she
characterized the purchase as a business expense, and Midwest Medical
deducted depreciation for the furniture on its Form 1120.

2. Vehicle Expense

On the handwritten expense sheets Ms. Stegman provided to
Midwest Medical’s accountant, she used the abbreviation “MB” to
denote payments she categorized as supplies expenses. These payments
were for the lease of two Mercedes Benz vehicles. The vehicle payments
Ms. Stegman identified as supplies expenses were included in Midwest
Medical’s COGS calculation by the accountant. Midwest Medical also
paid the insurance premiums on both vehicles.

Ms. Stegman drove one of the vehicles. She sometimes permitted
one employee to drive the vehicle but normally only when the employee
was running personal errands for Ms. Stegman. Ms. Stegman does not
have an event log showing where she drove the vehicle. When filling out
vehicle insurance forms, she listed the purpose of the vehicles as
“pleasure.” Ms. Stegman also listed one or both vehicles as personal
assets on various loan applications unrelated to Midwest Medical’s
business. Ms. Stegman allowed a nonemployee friend to drive the other
vehicle.

3. Payments to Samson

During the years at issue Midwest Medical made various
payments to Samson. Midwest Medical deducted $36,243 and $4,000 in

6 Each month Ms. Stegman prepared a handwritten expense sheet for Midwest

Medical, which she then provided to Midwest Medical’s accountant. Midwest Medical’s
accountant used the expenses as listed and characterized by Ms. Stegman to prepare
monthly financial statements and Midwest Medical’s annual Forms 1120. See infra
Part IV.A.
 9

[*9] 2008 and 2010, respectively, as payments made to Samson for
leased equipment. However, Samson did not own any equipment.

4. Management Fees

In 2010 Midwest Medical deducted $118,500 in payments for
management fees. The total management fees comprise the following:
twelve checks totaling $90,000 were payable to Ms. Stegman (one of
these, for $3,000, was made payable to Ms. Stegman, but the register
recorded it as paid to Samson), one check for $6,000 was payable to cash
(the register recorded it as paid to Ms. Stegman), and one check for
$22,500 was payable to another entity. Ms. Stegman originally
characterized these payments as equipment expenses. She later told her
individual return preparer that they were management fees paid to
Samson.

5. Encompass Construction Group

On December 16, 2010, National Numismatic issued an invoice to
Kathleen Stegman for an order of 35 ounces of gold Australian
Kangaroos for $50,575. On December 20, 2010, Midwest Medical made
a $50,575 payment to Encompass Construction Group (ECG), a company
owned by Ms. Stegman’s then boyfriend and codefendant in her criminal
trial. On December 23, 2010, ECG sent a $50,575 check to National
Numismatic for gold. National Numismatic recorded the purchase in
Ms. Stegman’s precious metals account.

In response to an IRS summons, Ms. Stegman did not provide an
invoice from ECG for the $50,575 payment. Initially, when questioned
by the IRS, ECG’s owner indicated that he could not provide an invoice
because his computer had crashed. In a second interview, he provided a
handwritten invoice, which indicated the payment was for two things:
$7,375 for construction work and $42,000 for a two-year maintenance
contract.

ECG’s owner told the IRS that he had completed construction
work for Midwest Medical during the last two weeks of 2010. Midwest
Medical’s employees told the IRS that no construction work was done in
2010 but some was completed in 2012. The handwritten invoice
indicated that the two-year maintenance contract was to maintain the
lasers at Midwest Medical. However, Midwest Medical made payments
to technicians to repair the lasers during the period purportedly covered
by the maintenance contract. Further, ECG’s bookkeeper had no
 10

[*10] recollection of a $50,000 payment, and she did not create an
invoice for such a payment.

6. Ms. Stegman’s Personal Expenditures

During the years at issue Midwest Medical consistently paid Ms.
Stegman’s personal expenses and treated them as business expenses on
its tax returns. For example, Ms. Stegman categorized a $69,750
payment to Xurex Nano-Coatings as a supplies expense paid to Radiance
(a vendor that supplied products to Midwest Medical). Xurex Nano-
Coatings was a personal investment of Ms. Stegman’s. Similarly,
Midwest Medical paid $20,925 to SA Investors, another of Ms.
Stegman’s personal investments, and Ms. Stegman categorized the
payment as a supplies expense. As another example, during 2007
Midwest Medical paid $1,864 toward the mortgage for Ms. Stegman’s
property at 2242 E. 70th St.

Between 2006 and 2010 Midwest Medical paid $720,672 of Ms.
Stegman’s personal expenditures by check. During the years at issue
Midwest Medical claimed $712,766 of Ms. Stegman’s personal
expenditures as business expenses, including payments for vehicles,
salon services, personal utilities, personal tax preparation fees, personal
investments, computer repair fees, shopping, and construction of an
invisible dog fence, as well as payments directly to Ms. Stegman, to her
boyfriend, and to her rental business partner.

D. Board of Health License Investigation

Contemporaneously with the IRS criminal investigation7 the
Kansas Board of Healing Arts investigated Midwest Medical. During the
same period Ms. Stegman instructed one of her employees to destroy
documents and client records, and she paid the employee in cash to stay
after hours and shred files.

III. Ms. Stegman’s Individual Income

A. Distributions, Diverted Funds, and Wage Income

From 2006 to 2010 Ms. Stegman received distributions exceeding
$1.8 million from Midwest Medical in cash or through payment of her
individual expenses with corporate funds. Ms. Stegman did not report

7 See discussion infra Part V.B.
 11

[*11] dividend income from Midwest Medical for any of the tax years
examined.

In 2007 Ms. Stegman deposited $5,000 of Midwest Medical client
payments into the Opportunity Meets Preparation U.S. Bank account.
In 2009 Ms. Stegman deposited $4,798 of Midwest Medical client
payments into her personal Bank of America account. From 2006
through 2009 Ms. Stegman deposited a total of $168,765 of Midwest
Medical client payments into her Samson account.

Ms. Stegman used her personal credit cards to pay a significant
amount of her personal expenses, as well as some Midwest Medical
expenses. Midwest Medical then paid Ms. Stegman’s personal credit
card bills. During the years at issue Midwest Medical paid $269,086 of
personal expenses that Ms. Stegman charged on her credit cards.

As the holder of the credit cards, Ms. Stegman received rewards
checks from several of the credit card companies. She either cashed the
rewards checks and used the cash for personal expenses or deposited
them into her personal bank accounts. During the years at issue she
cashed or deposited credit card reward checks totaling $14,072.24.

Ms. Stegman failed to deposit $658,388 in cash payments into
Midwest Medical’s bank account during tax years 2006 through 2009.
She used the $658,388 cash for personal expenses, either directly or by
first converting the cash into money orders.

Midwest Medical’s payroll records show that Ms. Stegman
received the following amounts in excess of what was reported on her
Forms W–2, Wage and Tax Statement: $14,728, $5,523, and $15,467 for
tax years 2006, 2007, and 2008, respectively. For tax year 2010 Midwest
Medical filed with the IRS Form W–2 for Ms. Stegman reporting wages
of $47,369. On her 2010 Form 1040 Ms. Stegman reported $31,243 in
wages, and she enclosed with her return a Form W–2 reporting an
amount different from that on the Form W–2 Midwest Medical filed with
the IRS. The amount recorded in Midwest Medical’s general ledger
matched the Form W–2 it filed with the IRS.

In 2009 Ms. Stegman paid $2,687 to Midwest Medical. During the
years at issue Ms. Stegman deposited approximately $3,600 of rental
income into Midwest Medical’s accounts.
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[*12] B. Rental Income

Beginning in 2003, Ms. Stegman and a friend purchased
distressed properties together. Ms. Stegman told the IRS that she
worked 40 hours per week at Midwest Medical, and for this reason her
business partner did most of the work related to the rental properties.

During the years at issue Ms. Stegman had multiple rental
properties, including properties in Kansas, Missouri, and the Las Vegas,
Nevada, area. For tax years 2006, 2007, and 2008 she reported her
rental income and expenses on Schedules E, Supplemental Income and
Loss. She deducted mileage expenses related to her rental properties.
However, she did not provide a mileage log. In addition to her rental
properties, Ms. Stegman owned two parcels of vacant land. For tax years
2007 and 2008 she reported the vacant lots on her Schedules E as rental
properties, deducting mortgage interest and taxes related to the vacant
lots.

For tax year 2010 Ms. Stegman claimed to be a real estate
professional, and she reported her rental income and expenses on a
Schedule C, Profit or Loss From Business. On her 2010 Schedule C she
commingled the income and expenses from her rental properties with
income and expenses from her other business activities, including Nu
Skin, cosmetic activities, and Midwest Medical’s $118,500 payment for
purported management fees. Ms. Stegman told her accountant by fax
that she spent more than 750 hours on her rental activities, but she did
not provide a log for the time she spent on those activities.

Ms. Stegman owned a second home, at Wildwood Lake in
Henderson, Nevada. She purchased the home in 2003. From 2003 to
2006 the property was a second residence. Ms. Stegman rented the
property for one year beginning in 2007 and ending in 2008. However,
renting the property was against the homeowners association (HOA)
covenants, and, upon notice, Ms. Stegman did not rent the property
again. In 2009 Ms. Stegman deducted expenses related to the Wildwood
Lake property on her Schedule E.

C. Capital Gains

During the years at issue Ms. Stegman sold several properties. In
2006 she sold a property located in Las Vegas, Nevada, and reported a
$38,736 capital loss on Schedule D, Capital Gains and Losses. She
purchased the property in December 2004 for $498,565 and sold it in
January 2006 for $590,000. She invested approximately an additional
 13

[*13] $47,983 to upgrade and maintain the property. The seller paid her
$2,016 in addition to the $590,000 purchase price to cover county tax,
HOA fees, and sewer charges. Ms. Stegman never rented the property,
nor is there any evidence that she ever used the property.

Also in 2006, Ms. Stegman received $104,950 from Chicago Title
Co. related to a September 2006 sale of property at 4206 Georgia Ave.
The closing statement labeled the payments “payoff.” A third party
owned the property. Before the sale, the third-party owner had executed
promissory notes in favor of Ms. Stegman. One promissory note, dated
July 19, 2005, stated that the third-party owner promised to pay Ms.
Stegman $70,000 plus $9,950 interest on or before September 30, 2006,
or upon sale of the property, whichever was sooner. A second promissory
note, dated June 1, 2006, stated that the third-party owner promised to
pay Ms. Stegman $25,000 and no interest on or before September 30,
2006, or upon sale of the property, whichever was sooner.

In 2008 Ms. Stegman received $41,813 from the sale of property
at 107 South 16th Street. Ms. Stegman had a $24,076 cost basis in the
property, but she did not report the sale on her 2008 Schedule D. Sale
proceeds of $41,813 from Chicago Title Co. relating to the property were
deposited into the Opportunity Meets Preparation bank account. Ms.
Stegman did not report this property as a rental on any tax returns
during the years at issue. She reported a $29,407 capital loss carryover
from tax year 2007 on her 2008 Schedule D.

In 2010 Ms. Stegman sold vacant land at 18 Queen’s Gap. She
reported a $39,980 loss from the sale of this property on her 2010 Form
4797, Sales of Business Property. Ms. Stegman was issued Form
1099–A, Acquisition or Abandonment of Secured Property, relating to
this property indicating that she received $250,523 in debt forgiveness
upon foreclosure. She reported this as the sale amount. Ms. Stegman
reported the cost basis of the property as $290,503. However, the closing
documents from her purchase of the land show that the cost was
$290,503 before a seller incentive of $28,990. In addition, Ms. Stegman
reported a $751,191 capital loss carryover on her 2010 Schedule D. Her
accountant told the IRS that this carryover was a net operating loss
shown on Ms. Stegman’s 2009 Form 1040.

D. Home Office Deduction

Ms. Stegman reported inconsistently the square footage of both
the portion of her home used in her business and the total area of her
 14

[*14] home. For example, in 2008 and 2009 Ms. Stegman reported that
she used 475 square feet of her home regularly and exclusively for
business, and the total area of her home was 3,802 square feet. In 2010
she reported that she used 602 square feet of her home regularly and
exclusively for business, and the total area of her home was 5,000 square
feet. In 2011 she reported that she used 1,000 square feet of her home
regularly and exclusively for business, and the total area of her home
was 5,000 square feet. Ms. Stegman’s mailing address on her tax returns
did not change from 2008 to 2011.

E. Oil and Gas Lease

Samson received an assignment of rights in an oil and gas well
from Global Equity Funding with an effective date of January 4, 2009,
and a signed date of January 10, 2009. Ms. Stegman paid $203,000 cash
to J&J Operating Co. for the assignment of interest. In tax year 2010
Samson received $22,465.48 in royalty income for its interest in the oil
and gas well. Respondent allowed Ms. Stegman a depletion expense of
15% for her interest in the oil well for tax year 2010. Ms. Stegman did
not contemporaneously claim intangible drilling costs related to the oil
and gas interest for tax year 2010 but attempted to do so for the first
time during her criminal trial. Respondent conceded that substantiated
intangible drilling costs are allowable and are amortized over 60
months.

F. Inconsistent Statements on Loan Applications

On January 18, 2007, Ms. Stegman filled out and signed a loan
application for $397,000 to purchase 211 East Flamingo Road, #719. The
loan application shows an income of $30,000 per month and a net worth
of $2 million.

On July 30, 2007, Ms. Stegman filled out and signed a loan
application for $250,523 to purchase 18 Queen’s Gap. The loan
application shows a base employment income of $12,500 per month and
lists two Mercedes Benz vehicles among her individual assets.

On July 22, 2008, Ms. Stegman filled out and signed a loan
application to purchase a boat with a retail value of $242,000. The loan
application shows a salary of $10,000 per month and $100,000 per year,
and it lists a 2006 Mercedes Benz vehicle among her individual assets.
 15

[*15] G. Bad Debt Expense

During the criminal trial, and again during the trial in these
cases, Ms. Stegman asserted that she had bad debt expenses. Ms.
Stegman did not claim a deduction for either of these bad debt expenses
on the Forms 1040 she filed with the IRS.

First, in 2004 Ms. Stegman purportedly loaned money to
Romantica Excursions, LLC (Romantica). In 2006 the company was
unable to pay its liabilities and closed. Romantica was owned by one of
Ms. Stegman’s ex-husbands and his business partner. Ms. Stegman and
her ex-husband were still married at the time she purportedly made the
loan. The document evidencing the loan shows that Ms. Stegman loaned
$200,000 to her then husband, not to a corporate entity or a partnership.
There is no evidence that Ms. Stegman advanced any funds to either
Romantica or to her ex-husband. Ms. Stegman did not claim a deduction
for this purported loss on her 2006 Form 1040.

Second, beginning around 2003 Ms. Stegman regularly loaned
money to her real estate partner, whom she also considered a friend.
Whenever Ms. Stegman loaned her friend money, the friend would
provide her with a written promissory note. Some of the notes indicated
that the loan was secured with property. However, the parties did not
record any liens in the county records against the properties. Until 2007
Ms. Stegman’s friend always repaid the loans.

The friend filed for bankruptcy protection in November 2007, and
the bankruptcy case was discharged in February 2008. Ms. Stegman
asserts the friend owed her $279,000 at the time of the bankruptcy, for
which she never received payment. Ms. Stegman did not claim a
deduction for this loss on her 2007 Form 1040.

Ms. Stegman received a notice of discharge in bankruptcy. The
bankruptcy filings indicated that Ms. Stegman’s friend had an
outstanding liability of $270,000 to her, but it did not indicate how that
amount was computed. Ms. Stegman received one property out of her
friend’s bankruptcy estate. The bankruptcy filings indicate that the
value received from the receipt of the property was “no money.” The
bankruptcy filings also indicate that Ms. Stegman’s friend paid her
$2,800 in cash just before filing for bankruptcy protection. At no time
was Ms. Stegman in the business of being a lender.
 16

[*16] IV. Tax Return Preparation

A. Midwest Medical

Midwest Medical reported a loss for each tax year from 1997 to
2005. Alan Jones prepared Midwest Medical’s Forms 1120 for tax years
2006 through 2009. He also provided accounting, payroll, and payroll
tax services to Midwest Medical. He began providing accounting and tax
services to Midwest Medical in the late 1990s. Mr. Jones is a certified
public accountant (CPA) and has had his own accounting practice since
1994. Ms. Stegman was the exclusive corporate representative that
dealt with Mr. Jones regarding Midwest Medical’s taxes. No other
corporate representatives were involved in the accounting relationship.
Ms. Stegman typically faxed information to Mr. Jones.

Each month Ms. Stegman would prepare a handwritten ledger or
expense sheet, which listed Midwest Medical’s monthly expenses. On
the handwritten expense sheets Ms. Stegman identified the amount and
characterization of each expense. Mr. Jones or his staff then used the
information Ms. Stegman provided to prepare a monthly summary of
expenses. Mr. Jones did not have access to Midwest Medical’s original
documents, such as receipts or purchase documents, and he did not
review Ms. Stegman’s determination of whether an item was a business
expense, or second guess her other conclusions such as characterization
of expenses or whether an item was depreciable equipment.

Either Mr. Jones or his staff computed Midwest Medical’s income
from Midwest Medical’s bank account records. Ms. Stegman told Mr.
Jones that Midwest Medical did not accept cash, and that she deposited
all client checks for Midwest Medical services into the corporate bank
account. Mr. Jones did not have access to Ms. Stegman’s individual
account records. Mr. Jones regularly asked Ms. Stegman whether she
had provided all the information necessary to prepare Midwest
Medical’s tax returns.

For tax years 2006 through 2010 Mr. Jones or his staff used the
monthly summaries of expenses and bank account records to prepare a
monthly income statement for Midwest Medical. Some months had
expenses broken down by each check; other months had broad expense
categories, which Ms. Stegman had totaled and provided to Mr. Jones.

At the time the corporate tax return was due for tax year 2010,
Ms. Stegman was aware of the audit and the criminal investigation. She
retained a new corporate return preparer, Ray Mendoza, to prepare
 17

[*17] Midwest Medical’s 2010 tax return. Mr. Mendoza prepared the
return using the monthly income statements Mr. Jones had prepared for
Midwest Medical’s tax year 2010.

Midwest Medical timely filed its Forms 1120 for tax years 2006,
2007, 2009, and 2010. Midwest Medical filed its tax year 2008 Form
1120 on October 16, 2009. The return was postmarked on October 13,
2009. Midwest Medical did not request an extension of time to file.

B. Kathleen M. Stegman

Donald Lake prepared Ms. Stegman’s Forms 1040 for tax years
2006, 2007, 2008, and 2010. Mr. Lake did not provide bookkeeping
services to Ms. Stegman. He used both oral statements and written
documentation she provided, including handwritten summaries of
income and expenses related to real estate investments, to prepare her
individual returns. In a fax dated September 30, 2009, Ms. Stegman
identified the amounts of various business deductions for Mr. Lake to
use in preparing her individual return. In a fax dated September 9,
2011, she advised Mr. Lake that her “CPA figured” that 27% of her home
was office space for a home office deduction, $118,500 of income was
“management fees” from Midwest Medical to Samson, and she was an
active real estate investor and spent at least 750 hours per year on real
estate.

Ms. Stegman concluded that she was eligible for various tax
benefits and directed Mr. Lake to prepare her returns to take advantage
of those benefits. For example, for tax year 2010 Ms. Stegman claimed
she met the requirements to be a real estate professional and directed
Mr. Lake to place her rental activities on Schedule C rather than
Schedule E. Mr. Lake would sometimes get frustrated with the amount
of time and research required to convince Ms. Stegman that she did not
qualify for some positions she wanted to take on her tax returns. Mr.
Lake did not review Mr. Jones’s or Mr. Mendoza’s determinations
regarding Midwest Medical.

Ms. Stegman timely filed her Forms 1040 for tax years 2006,
2008, and 2010. Ms. Stegman filed her Form 1040 for tax year 2007 on
October 14, 2008. She did not request an extension of time to file her
2007 return. She filed Form 1040X, Amended U.S. Individual Income
Tax Return, for tax year 2007, which the IRS processed on August 24,
2009.
 18

[*18] For tax year 2006 Ms. Stegman attached to her Form 1040 a
Schedule C–EZ, Net Profit From Business, for Samson, which reported
$1,500 of income. Ms. Stegman did not file Schedules C–EZ or Schedules
C for Samson for tax years 2007 through 2010. On a photocopy of the
2006 Schedule C–EZ Mr. Lake wrote: “No business in 2007, delete form.”

V. Audit, Criminal Investigation, Penalty Approval, and Notice of
Deficiency

A. Audit

On October 29, 2009, the IRS began an audit of Ms. Stegman’s
2007 income tax return and Midwest Medical’s 2007 income tax return.
Revenue Agent Lindsay Carlson (RA Carlson) was assigned to the case.
On November 30, 2009, RA Carlson interviewed Mr. Jones and Mr. Lake
in separate interviews. Mr. Jones and Mr. Lake were unable to answer
many of RA Carlson’s questions, and RA Carlson requested to speak
with Ms. Stegman. RA Carlson offered to conduct the corporate and
individual interviews of Ms. Stegman simultaneously, but Mr. Lake
declined on Ms. Stegman’s behalf, indicating that Ms. Stegman wanted
to “keep things separate.” Mr. Lake was slow to schedule the followup
interview, and RA Carlson was concerned that he was intentionally
causing delays.

On December 29, 2009, RA Carlson interviewed Ms. Stegman
regarding the corporate audit. During the interview, Ms. Stegman told
RA Carlson that 99% of transactions were by credit card. She told RA
Carlson that sometimes Midwest Medical would accept a check but cash
was not accepted. Ms. Stegman told RA Carlson that she deposited all
business receipts into Midwest Medical’s NASB account and that
Midwest Medical paid “maybe a few” personal expenses. Ms. Stegman
claimed that she did not use credit cards to make personal purchases.
Ms. Stegman told RA Carlson that Midwest Medical did not have a
retirement plan and that she received only “minor dividends” from
Midwest Medical. Ms. Stegman told RA Carlson that she wholly owned
Samson and that Samson owned some equipment that it leased to
Midwest Medical for $3,000 per month.

RA Carlson found only 20 withdrawals from Ms. Stegman’s
personal accounts for living expenses. On December 31, 2009, RA
Carlson determined that Midwest Medical paid some of Ms. Stegman’s
personal expenses, but she could not determine whether credit card
charges were business or personal and asked Ms. Stegman to categorize
 19

[*19] the expenses. Ms. Stegman failed to provide the requested
information.

On January 11, 2010, RA Carlson interviewed Ms. Stegman
regarding the individual audit. The interview took place at Mr. Lake’s
home office. Mr. Lake was also present at the interview. Mr. Lake was
difficult in the interview, and RA Carlson threatened to leave if they
failed to cooperate. Ms. Stegman told RA Carlson that at one time she
had $300,000 in cash that was not in a bank account, but at the time of
the interview she had zero remaining. Ms. Stegman alleged the money
was from family gifts (including $70,000 from her mother’s estate), from
ex-husbands, and from past earnings. Ms. Stegman claimed she used
the cash to purchase money orders to pay bills, mortgages, or other
expenses.

Ms. Stegman had three bank accounts: one personal account at
Bank of America, one account at Nevada State Bank for Samson, and
one account at U.S. Bank for Opportunity Meets Preparation. Ms.
Stegman said that Samson and her other entities were not operating
businesses, but they were “just the name of the bank account.” Ms.
Stegman told RA Carlson that she spent 40 hours per week at Midwest
Medical.

Ms. Stegman and her accountants became increasingly
uncooperative as RA Carlson continued the examination. RA Carlson
requested a third interview with Ms. Stegman, but Ms. Stegman
declined. RA Carlson summoned Alan Jones after he failed to provide
requested information. Ms. Stegman also refused to answer RA
Carlson’s followup questions regarding the alleged $300,000 cash.

RA Carlson referred the cases to the IRS Criminal Investigation
Division on or about December 15, 2010. The civil audit was suspended
while the criminal case proceeded to trial.

B. Criminal Investigation

Special Agent Randall Praiswater (SA Praiswater) was assigned
to investigate Ms. Stegman and Midwest Medical. Around the same
time, Revenue Agent Janice Willard (RA Willard) replaced RA Carlson
and was assigned to work with SA Praiswater. RA Willard was a
revenue agent in the Special Enforcement Program, which specializes in
examining returns that appear to have fraudulent intent.
 20

[*20] On January 11, 2011, SA Praiswater contacted Ms. Stegman and
told her that she was the subject of a criminal investigation. SA
Praiswater was unable to interview Ms. Stegman because she invoked
her Fifth Amendment rights. The investigation was expanded to include
tax years 2006 through 2010. SA Praiswater summoned records from
Midwest Medical and Ms. Stegman. He received four boxes of records in
response to the summons, which included only expense information.
Petitioners provided no information from which to reconstruct income.

SA Praiswater and RA Willard interviewed approximately 35
witnesses, including Midwest Medical clients, Mr. Jones, and Mr. Lake.
SA Praiswater interviewed dozens of Midwest Medical clients and sent
a circular letter to 200 payors to determine the sources of income
deposited into Ms. Stegman’s individual and LLC bank accounts. SA
Praiswater received 101 responses from the circular letter. Twenty
responses indicated that the client paid for Midwest Medical procedures
with cash as well as with other payment methods; the remainder
indicated that the client paid only with check or credit card.

SA Praiswater and RA Willard interviewed one client about a
check she wrote for $9,104.88, which was stamped on the payee line with
“Kathleen Stegman” and was deposited into the Samson checking
account. The client confirmed the check was for payment of cosmetic
services rendered at Midwest Medical. The handwritten notes Mr. Lake
submitted to respondent regarding the deposit of the $9,104.88 indicate
that the deposit was from proceeds Ms. Stegman received from the sale
of furniture, not a client payment for Midwest Medical services.

SA Praiswater recommended prosecution against Ms. Stegman
and Midwest Medical for multiple counts of criminal tax evasion,
including on Ms. Stegman’s individual income tax returns and against
Ms. Stegman as the responsible party for causing tax evasion at the
corporate entity level.

C. Supervisory Approval and Civil Penalties

On May 7, 2013, RA Willard’s manager signed a Penalty Approval
Form approving the assertion of penalties against Ms. Stegman as
outlined on the form. The form states that respondent’s primary position
is the assertion of the section 6663 civil fraud penalty and the section
6651(a)(1) failure to file addition to tax.

On May 7, 2013, RA Willard’s manager signed a Civil Penalty
Approval Form approving the assertion of penalties against Midwest
 21

[*21] Medical as outlined on the form. The form states that respondent’s
primary position is the assertion of the section 6663 civil fraud penalty
and the section 6651(a)(1) failure to file addition to tax.

D. Notice of Deficiency

On July 7, 2017, respondent issued Midwest Medical a notice of
deficiency determining deficiencies in income tax of $84,392, $146,529,
$185,786, $161,409, and $85,982 and civil fraud penalties under section
6663 of $63,021.75, $109,896.75, $139,339.50, $121,056.75, and
$64,486.50 for tax years 2006, 2007, 2008, 2009, and 2010, respectively.
Respondent additionally determined that Midwest Medical is liable for
an addition to tax pursuant to section 6651(a)(1) of $18,578.60 for tax
year 2008. Respondent determined the deficiencies for tax years 2006
through 2010 on the basis of the following adjustments: 8

2006 2007 2008 2009 2010
Cost of Goods $28,358 $134,571 $136,843 $72,411 $15,353
Sold P concedes P concedes P concedes P concedes P concedes
4,711 109,896 113,203 70,185
Gross 45,893 174,171 339,156 286,421 1,500
Receipts or P concedes P concedes P concedes P concedes P concedes
Sales
Net 34,255
Operating P concedes
— — — —
Loss
Deduction
Legal and 405 250
Professional P concedes — — P concedes —
Fees
Other Costs– 171,466 75,887 41,656 30,338 42,737
Credit Cards P concedes P concedes P concedes P concedes P concedes
Repairs and 1,037 8,047 6,737 4,220 50,575
Maintenance P concedes P concedes P concedes P concedes P concedes
Telephone 1,219
— — — —
Expense P concedes

8 For purposes of this table, P indicates petitioner Midwest Medical.

Respondent allowed the following deductions for expenses that Midwest Medical
underreported: advertising expenses of $250 for 2009; bank charges of $128, $2,149,
and $2,265 for 2006, 2007, and 2008, respectively; and an equipment rental expense of
$3,000 for 2009. These are notice of deficiency adjustments and will not be further
discussed.
 22

[*22]
Travel 250 3,687 745
— —
Expense P concedes P concedes P concedes
Advertising — — — (250) —
Returns & 4,814 5,850 2,583 986
—
Allowances P concedes P concedes P concedes P concedes
Other (128) (2,149) (2,265)
Expenses–
— —
Bank
Charges
Equipment 294 36,243 (3,000) 4,000
—
Rental P concedes
Insurance 15,553 2,782
Expenses– P concedes P concedes
Liability — — 3,723; —
R concedes
11,830
Other 185 454
Expenses– P concedes P concedes
— — —
Laundry &
Cleaning
Utility 235 84
— — —
Expense P concedes P concedes
Depreciation 32,263 51,620 32,472 12,052
— P concedes P concedes P concedes
15,803 25,284 15,170
Management 118,500
and Director — — — —
Fees
Other 200 100 200 200
Expenses– — P concedes P concedes P concedes P concedes
Gifts
Bad Debts 1,262 — — — —
Total $258,565 $433,241 $629,899 $461,169 $245,662
Adjustments
Total $228,576 $394,255 $520,661 $444,891 $60,535
Concessions

On July 12, 2017, respondent issued Kathleen Stegman a notice
of deficiency determining deficiencies in income tax of $60,231, $91,418,
$82,182, and $40,666 and civil fraud penalties under section 6663 of
 23

[*23] $45,173.25, $68,563.50, $61,636.50, and $30,499.50 for tax years
2006, 2007, 2008, and 2010, respectively. Respondent additionally
determined that Ms. Stegman is liable for an addition to tax pursuant
to section 6651(a)(1) of $23,067.75 for tax year 2007. Respondent
determined the deficiencies for tax years 2006, 2007, 2008, and 2010 on
the basis of the following adjustments: 9

2006 2007 2008 2010
Sch. E Real Estate Loss After $25,000 $23,524 $25,000 $6,163
Passive Limitation
Other Income–MMACI Profit 10,466
Sharing P concedes
Qualified Dividends from Midwest 229,362 511,729 540,460 197,941
Medical
Capital Gain or Loss 111,681 53,354 46,469
Itemized Deductions 3,461 12,826 (1,043) (3,839)
Exemptions 2,200 2,267 1,167
Sch. E Loss–Nonpassive–SA (40,059)
Investors
Sch. C1–Gross Receipts or Sales — — — (149,392)
Sch E1–Royalties Received — — — 387
Sch. C1–Legal and Professional 11,496
— — —
Services
Sch. C1–Depreciation and Sec. 28,753
— — —
179 Expense
Sch. C1–Interest–Mortgage — — — 12,729
Sch. C1–Utilities — — — 2,315
Sch. C1–Repairs and Maintenance — — — 11,277
Sch. C1–Insurance (Other Than 3,869
— — —
Health)
Sch. C1–Taxes and Licenses — — — 7,660
Sch. C1–Commissions and Fees — — — 1,524
Sch. C1–Car and Truck Expenses — — — 6,800

9 For purposes of this table, P indicates petitioner Kathleen Stegman.

Respondent allowed a deduction for tax year 2008 of $40,059 for a nonpassive loss
related to SA Investors, which Ms. Stegman did not claim on her 2008 Form 1040. This
is a notice of deficiency adjustment and will not be further discussed.
 24

[*24]
Sch. C1–Expenses for Business 35,331
— — —
Use of Home
Wages from Midwest Medical — — — 16,126
SE AGI Adjustments — — — 1,953
Total Adjustments $382,170 $550,346 $578,879 $237,562
Total Concessions $10,466 — — —

Petitioners timely petitioned the Court for review.

OPINION

I. Burden of Proof

The Commissioner’s determinations set forth in a notice of
deficiency are generally presumed correct, and the taxpayer bears the
burden of proving those determinations erroneous. 10 Rule 142(a); Welch
v. Helvering, 290 U.S. 111, 115 (1933). When, as here, a case involves
unreported income, the Commissioner’s determination of unreported
income is entitled to a presumption of correctness only once the
Commissioner establishes a “minimal evidentiary showing” that
connects the taxpayer with the income-producing activity or introduces
some substantive evidence demonstrating that the taxpayer received
unreported income. Walquist v. Commissioner, 152 T.C. 61, 67 (2019).
Once the Commissioner introduces some substantive evidence linking
the taxpayer with the income, the presumption of correctness applies
and the burden shifts to the taxpayer to produce substantial evidence
overcoming it. Id. at 67–68; see also United States v. McMullin, 948 F.2d
1188, 1192 (10th Cir. 1991).

In the case of the section 6663 civil fraud penalty, the
Commissioner bears the burden of proof by clear and convincing
evidence. § 7454(a); Rule 142(b); see Petzoldt v. Commissioner, 92 T.C.
661, 699 (1989).

10 Section 7491(a) provides that in certain circumstances the burden of proof

with respect to factual matters may shift to the Commissioner. Petitioners do not argue
that section 7491(a) applies, nor have they shown that they meet its requirements to
shift the burden of proof. Consequently, the burden of proof remains with petitioners,
except as otherwise described herein.
 25

[*25] II. Unreported Income

Under section 61(a), “gross income means all income from
whatever source derived.” See Commissioner v. Glenshaw Glass Co., 348
U.S. 426 (1955). Specifically included in gross income is gross income
derived from compensation for services and from business. § 61(a)(1)
and (2).

A. Midwest Medical

1. Unreported Gross Receipts

In the notice of deficiency, respondent determined that Midwest
Medical had unreported gross receipts of $45,893, $174,171, $339,156,
$286,421, and $1,500 for 2006, 2007, 2008, 2009, and 2010, respectively
from (1) cash receipts, (2) client checks that Ms. Stegman deposited into
her individual bank accounts, and (3) credit card rewards checks related
to Ms. Stegman’s personal credit card accounts. Midwest Medical has
fully conceded that it understated gross receipts as set out in the notice
of deficiency in the amounts previously described. See supra Part V.D.
With the exception described below, of the credit card reward checks
payable to Ms. Stegman’s personal credit card accounts, the Court
sustains respondent’s adjustment.

While stipulations of parties are not to be set aside lightly, the
Court has broad discretion in determining whether to hold a party to a
stipulation, and the Court is not bound by stipulations of fact that
appear contrary to facts disclosed by the record. Estate of Eddy v.
Commissioner, 115 T.C. 135, 137 n.4 (2000).

A purchase incentive, such as credit card rewards or points, is not
income but is a reduction of the purchase price of the goods or services
purchased. Anikeev v. Commissioner, T.C. Memo. 2021-23, at *15. In
determining Midwest Medical’s total amount of unreported income,
respondent included $16,630 in credit card rewards. As credit card
rewards are not income, the Court holds that Ms. Stegman’s credit card
rewards are not includible in Midwest Medical’s income for the years at
issue.

2. Cost of Goods Sold

Ms. Stegman frequently categorized personal expenditures paid
with Midwest Medical funds as supplies expenses, which Mr. Jones then
added into Midwest Medical’s COGS. Respondent allowed as COGS
 26

[*26] expenses which could be verified and for which Midwest Medical
substantiated a business purpose.

Respondent determined that Midwest Medical overstated COGS
by $28,358, $134,571, $136,843, $72,411, and $15,353 for tax years 2006,
2007, 2008, 2009, and 2010, respectively. Midwest Medical has conceded
that it overstated COGS in the amounts previously described. See supra
Part V.D. Midwest Medical disputes only the disallowance of vehicle
expenses.

Ms. Stegman leased two Mercedes Benz vehicles. Respondent
concedes that petitioners substantiated the amounts of the vehicle
leases and the insurance payments. However, respondent contends
these are personal vehicle expenses and not deductible business
expenses.

Vehicle expenses are subject to both section 162 and the stricter
substantiation requirements of section 274(d). For a taxpayer to claim a
business expense deduction for a passenger vehicle, the taxpayer must
substantiate, among other things, the business purpose behind the
deduction by adequate records or by other sufficient evidence
corroborating the taxpayer’s own statements. §§ 274(d), 280F(d)(4).

Ms. Stegman did not substantiate the business purpose of either
Mercedes Benz vehicle. One vehicle was driven primarily by Ms.
Stegman. She indicated she may have driven it to business events, but
she did not provide a log or any specificity about the events she allegedly
attended. A nonemployee drove the second vehicle. Further, on two
separate loan applications Ms. Stegman listed one or both Mercedes
Benz vehicles as personal assets. She also listed the purpose of at least
one of the vehicles as “pleasure” on the insurance application.

Ms. Stegman characterized the vehicle payments as “supplies” on
the handwritten expense sheets she provided to Midwest Medical’s
accountant. Next to the vehicle expenses she wrote “MB” rather than
clearly stating the payments were for vehicle leases. The vehicle
expenses were then reported on Midwest Medical’s Forms 1120 as part
of COGS.

Petitioners did not substantiate the business purpose of the
Mercedes Benz vehicles. Therefore, the Court will sustain respondent’s
adjustments to COGS.
 27

[*27] B. Kathleen Stegman

Respondent determined that Ms. Stegman had unreported
income from (1) wages of $16,126 for tax year 2010, (2) qualified
dividends from Midwest Medical of $229,362, $511,729, $540,460, and
$197,941 for tax years 2006, 2007, 2008, and 2010, respectively,
(3) capital gains of $108,681, $50,354, 11 and $43,469 for tax years 2006,
2008, and 2010, respectively, (4) royalty income of $387 for tax year
2010, and (5) profit-sharing income of $10,466 for tax year 2006. Ms.
Stegman has fully conceded that she received profit-sharing income as
set out in the notice of deficiency in the amount previously described.
See supra Part V.D.

1. Wages

For 2010 Midwest Medical issued Ms. Stegman a Form W–2
reporting $47,369 in wages. Ms. Stegman reported only $31,243 in
wages on her 2010 Form 1040. Respondent increased Ms. Stegman’s
2010 wage income by $16,126. Ms. Stegman did not provide any
evidence supporting a wage income of only $31,243. Respondent’s
adjustment is sustained.

2. Constructive Distributions

In the notice of deficiency, respondent determined that Ms.
Stegman had net unreported distributions from Midwest Medical of
$229,362, $511,729, $550,117, and $197,941 for tax years 2006, 2007,
2008, and 2010, respectively. Respondent determined that during the
years at issue Midwest Medical made distributions to Ms. Stegman in
the form of client checks that Ms. Stegman deposited into her personal
accounts totaling $170,894, credit card rewards totaling $14,072,
Midwest Medical’s cash sales receipts retained by Ms. Stegman totaling
$378,637, payments Midwest Medical made on Ms. Stegman’s personal
credit card bills for personal charges totaling $264,361, amounts paid to
Ms. Stegman in excess of what was reported on her Forms W–2 totaling
$35,748, a payment of $1,864 for the mortgage on one of Ms. Stegman’s
rental properties, and Ms. Stegman’s personal expenditures that
Midwest Medical paid by check totaling $626,455. Respondent also
determined that Ms. Stegman paid Midwest Medical a total of $2,883
during the years at issue. Ms. Stegman did not report any dividend or

11 This amount includes the $9,469 in constructive distributions that

respondent treated as capital gains.
 28

[*28] capital gain income from Midwest Medical on any of the tax
returns respondent examined.

Respondent treated $229,362, $511,729, $540,460, and $197,941
as qualified dividends for tax years 2006, 2007, 2008, and 2010,
respectively. For tax year 2008 respondent determined that Ms.
Stegman’s constructive distributions exceeded Midwest Medical’s
earnings and profits and treated an additional $9,469 12 as capital gain.
Ms. Stegman did not object to respondent’s computation of dividends
and capital gain from the sale or exchange of property.

Distributions of property, including money, from a corporation to
its shareholder are treated as income to the shareholder. The type of
income depends on the extent of the corporation’s earnings and profits.
Sections 61(a)(7), 63, 301(a) and (c), and 316 provide that distributions
of property from a corporation to a shareholder out of the corporation’s
earnings and profits constitute taxable dividends which the shareholder
must include in taxable income. Benavides & Co., P.C. v. Commissioner,
T.C. Memo. 2019-115, at *18–19. If the amount of the distribution
exceeds the corporate earnings and profits, the excess generally
represents a nontaxable return of capital to the extent of the
shareholder’s basis in the stock; and any remaining amount is taxable
to the shareholder as gain from the sale or exchange of property. Id.
at *19. The taxpayer bears the burden of proving that the corporate
entity had insufficient earnings and profits to support the amounts of
constructive dividends determined for the years in issue. Id. at *20 (first
citing Truesdell v. Commissioner, 89 T.C. 1280, 1295–96 (1987); and
then citing Pittman v. Commissioner, T.C. Memo. 1995-243, 1995 WL
329854, at *12, aff’d, 100 F.3d 1308 (7th Cir. 1996)).

Dividends for tax purposes are not always declared in the formal
sense. Courts have identified constructive distributions when a
corporation confers an economic benefit upon a shareholder without a
corresponding expectation of repayment. Id. at *19 (first citing Hood v.
Commissioner, 115 T.C. 172, 179–80 (2000); and then citing

12 Respondent’s calculations of Ms. Stegman’s net unreported distributions are

set forth in Exhibit 2 in the notice of deficiency. Respondent determined Ms. Stegman
had unreported distributions of $550,117 for tax year 2008. However, as set forth in
the notice of deficiency, respondent determined that Ms. Stegman had $540,460 in
qualified dividends and $9,469 in capital gain from unreported distributions for tax
year 2008. Respondent offers no explanation as to the discrepancy in the notice.
Because the discrepancy favors Ms. Stegman, the Court concludes that respondent
concedes the difference.
 29

[*29] Cordes v. Commissioner, T.C. Memo. 2002-124, 2002 WL 1023173,
at *10).

In determining the total amount of constructive distributions,
respondent included $14,072 in credit card rewards from Ms. Stegman’s
personal credit cards. Respondent argues that because Midwest Medical
paid most of the credit card charges, the rewards were “earned” by
Midwest Medical and therefore were a constructive distribution to Ms.
Stegman when she deposited them into her personal accounts or used
them for personal purchases. The credit card rewards were not income
to either Ms. Stegman or Midwest Medical. See supra Part II.A.1.

The credit cards that paid the rewards were Ms. Stegman’s
personal credit cards, and the rewards checks were made payable to Ms.
Stegman. Further, respondent disallowed the deduction for the
payments Midwest Medical made to Ms. Stegman’s credit cards for her
personal expenditures and included those payments as constructive
dividends to Ms. Stegman. The record does not reflect that the credit
card rewards were corporate funds, and no constructive distribution is
warranted.

Ms. Stegman told RA Willard that the cash she used to pay
personal expenses, either directly or by purchasing money orders, was
cash she already had on hand from family gifts (including $70,000 from
her mother’s estate), from ex-husbands, and from past earnings. Ms.
Stegman stated that at one time she had $300,000 in cash that she did
not keep in any bank account and that she used that cash to pay her
personal expenses. However, RA Willard accounted for any cash
payments which she could trace to specific items, such as the
distribution Ms. Stegman received from her mother’s estate. Ms.
Stegman provided no satisfactory explanation as to the source of the
funds or whether the funds were nontaxable or otherwise reported on
her returns.

Ms. Stegman provided no evidence to rebut respondent’s
determination that she received constructive distributions from
Midwest Medical for client payments she deposited into her personal
accounts, payments Midwest Medical made on her personal credit cards,
additional payments from Midwest Medical not reported on her Forms
W–2, the payment on the mortgage for her rental property, and personal
expenditures that Midwest Medical paid by check. Additionally, Ms.
Stegman did not provide any evidence of what basis she may have had
in Midwest Medical or object to respondent’s determination that
 30

[*30] constructive distributions exceeded Midwest Medical’s earnings
and profits in tax year 2008.

Respondent’s adjustment related to constructive distributions
from Midwest Medical to Ms. Stegman is sustained, except to the extent
of the $14,072 respondent included for the credit card rewards.

3. Capital Gains

Section 1221(a) defines a capital asset as “property held by the
taxpayer (whether or not connected with his trade or business),”
followed by a list of exclusions not applicable here. Section 1222(3)
defines long-term capital gain as “gain from the sale or exchange of a
capital asset held for more than 1 year.” And section 1012(a) provides
that the basis of property is the cost of such property, with exceptions
not applicable here. The adjusted basis, for purposes of the issues in
these cases, is the basis as determined under section 1012(a). §§ 1011(a),
1016.

Section 1001 provides rules for determining the amount of and
recognition of gain or loss, which for a gain is determined by the excess
of the amount realized over the adjusted basis, and for a loss by the
excess of the adjusted basis over the amount realized. The amount
realized, as relevant here, is “the sum of any money received plus the
fair market value of the property (other than money) received.”
§ 1001(b). Section 1001(c) provides that, “[e]xcept as otherwise provided
in this subtitle, the entire amount of the gain or loss, determined under
this section, on the sale or exchange of property shall be recognized.”

There are, however, some limitations on capital losses. Section
1211(b) limits capital losses of taxpayers other than corporations to
losses from the sales or exchanges of capital assets to the extent of the
gains from such sales or exchanges, plus (if such losses exceed such
gains) the lower of (1) $3,000, or (2) the excess of such losses over such
gains. Section 262 provides that, “except as otherwise expressly
provided in this chapter, no deduction shall be allowed for personal,
living, or family expenses.” This includes a capital loss from the sale of
a personal residence. See Newton v. Commissioner, 57 T.C. 245, 248
(1971).

For tax year 2006 respondent’s primary position is the
disallowance of Ms. Stegman’s claimed $38,736 deduction from a loss on
the sale of a property in Las Vegas, Nevada. Respondent determined
that the property was a personal residence, not a rental or investment
 31

[*31] property, and therefore no loss deduction was allowed under
section 262. Respondent determined that Ms. Stegman had invested
over $30,000 in cosmetic upgrades to a newly built home, and that it was
unlikely she would have done so unless she purchased the home as a
second residence.

Ms. Stegman provided no evidence that she had ever attempted
to rent the property or that her intention was to hold it for investment.
However, Ms. Stegman already had a second residence in the Las Vegas
area, her Wildwood Lake property, which she purchased in 2003 and
owned at least through 2009. Additionally, there is no legal basis for
determining that a property is a personal residence simply because a
taxpayer has invested in cosmetic upgrades to the property. Therefore,
the Court finds that the property was not a second residence but was
investment property, and Ms. Stegman is entitled to the loss deduction,
subject to the capital loss limitation of section 1211(b).

Respondent’s alternative position is that Ms. Stegman overstated
the loss from the sale of the Las Vegas property. Ms. Stegman reported
a sale price of $590,000 and a cost basis of $628,736. In calculating Ms.
Stegman’s basis in the property, Ms. Stegman’s tax return preparer
used $513,565 as the original cost. Respondent adjusted the original cost
to $498,565 as shown on the State of Nevada Declaration of Value Form
signed by Ms. Stegman. Ms. Stegman’s preparer also capitalized $2,016
of expenses consisting of county taxes, HOA fees, and sewer charges.
However, those expenses were paid by the seller and are not includible
in Ms. Stegman’s cost calculation. And finally, respondent determined a
$90 variance in Ms. Stegman’s capitalized insurance, interest, and taxes
for 2005: the return preparer calculated a total of $28,514; respondent
calculated a total of $28,424. After adjustments, respondent determined
that Ms. Stegman’s cost basis was $611,630, resulting in a loss of
$21,630. Ms. Stegman provided no evidence to refute respondent’s
adjustments to the cost basis of the Las Vegas property. The Court
sustains respondent’s alternative position adjustments to Ms.
Stegman’s capital loss from the sale of the Las Vegas property in tax
year 2006.

For tax year 2006 respondent determined that Ms. Stegman had
$104,950 of capital gain income from the sale of a property at
4206 Georgia Ave. Respondent based his determination on two checks
from Chicago Title Co. to Ms. Stegman for $79,950 and $25,000, which
make up a large portion of the sale proceeds. However, the record
reflects that a third party, not Ms. Stegman, owned the property. This
 32

[*32] third party had executed two promissory notes in favor of Ms.
Stegman which promised to pay $70,000 plus interest of $9,950, and
$25,000 with no interest. The promissory notes stated that the payments
were due on September 30, 2006, or when the property at 4206 Georgia
Ave. was sold, whichever occurred first. The third party sold the
property in September 2006, and Chicago Title Co. paid Ms. Stegman a
payoff amount of $104,950 from the proceeds of the sale. The Court finds
that the $104,950 was not capital gain income to Ms. Stegman. Rather,
$95,000 of it was return of principal, and the remaining $9,950 was
interest income.

For tax year 2008, respondent determined that Ms. Stegman had
$41,813 of capital gain income from the sale of a property at 107 South
16th Street. 13 Ms. Stegman did not report the sale on her 2008 tax
return. Respondent reconstructed the sale proceeds using a $41,813
check from First Federal Savings and Loan Association of Olathe
payable to Opportunity Meets Preparation and deposited into the bank
account of the same. Ms. Stegman did not provide any information
regarding the cost basis of the property or otherwise provide evidence to
suggest that she did not receive $41,813 from the sale of the property.
However, a review of the record reveals that there is some evidence that
Ms. Stegman purchased the property in 2003 for $24,076. Therefore, the
Court sustains respondent’s adjustment to the extent the sale proceeds
exceed Ms. Stegman’s basis of $24,076.

For tax years 2008 and 2009 Ms. Stegman reported capital loss
carryovers from tax year 2006. Respondent disallowed the carryovers
because, after adjustments, respondent determined Ms. Stegman had a
capital gain rather than a capital loss for tax year 2006. For the years
at issue, the Court will allow Ms. Stegman’s capital loss carryovers to
the extent she has any after determining her capital gain or loss for the
tax years at issue consistent with the Court’s holdings in this Opinion.

For tax year 2010 respondent determined that Ms. Stegman had
overstated a capital loss from the sale of property at 18 Queen’s Gap.
Ms. Stegman’s realized $250,523 on the sale, and she reported the cost
basis of the property as $290,503, resulting in a claimed loss of $39,980.
However, respondent determined that, after a seller incentive of
$28,990, Ms. Stegman’s cost basis was $261,513, resulting in a loss of

13 Exhibit 3.1 to the notice of deficiency indicates the property was at 207 South

16th Street. Upon review of the record, this appears to be a typo.
 33

[*33] $10,990. Ms. Stegman provided no evidence to rebut respondent’s
determination.

Additionally, for tax year 2010 Ms. Stegman reported a capital
loss carryover of $751,191. Ms. Stegman’s accountant explained that the
carryover was from a net operating loss shown on Ms. Stegman’s 2009
Form 1040. Respondent determined that this amount was erroneously
reported as a capital loss carryover on Schedule D and disallowed the
loss deduction. Ms. Stegman did not provide any evidence to rebut
respondent’s determination. The Court sustains respondent’s
adjustment to Ms. Stegman’s capital loss from the sale of 18 Queen’s
Gap and respondent’s disallowance of the $751,191 capital loss
carryover on Ms. Stegman’s Schedule D as set forth in the notice of
deficiency.

4. Royalty Income

Ms. Stegman reported $22,010 in royalty income on her 2010
Schedule E, and she claimed a 15% or $3,302 depletion deduction,
resulting in $18,708 of reported net royalty income.

Respondent determined that Samson received $22,465.48 of
royalty income in tax year 2010. Respondent made a $455.48 adjustment
to Ms. Stegman’s royalty income. Respondent allowed Ms. Stegman a
15% or $3,369.82 depletion deduction, resulting in net royalty income of
$19,095.66. Therefore, respondent increased Ms. Stegman’s net royalty
income by $387 for tax year 2010. Ms. Stegman did not provide any
documentation showing that Samson did not receive $22,465.48 in
royalty income. The Court sustains respondent’s royalty income
adjustment as set forth in the notice of deficiency.

Although Ms. Stegman did not claim intangible drilling costs
related to Samson’s interest in the oil and gas well on her 2010 Form
1040, she claims she is eligible for such a deduction. Respondent
conceded that substantiated intangible drilling costs are deductible
expenses. However, Ms. Stegman failed to supply any documentation
related to intangible drilling costs. Because she did not substantiate the
purported intangible drilling costs, the Court holds that Ms. Stegman
cannot claim such a deduction.

III. Midwest Medical’s Business Expenses

Section 162(a) allows as a deduction all ordinary and necessary
business expenses paid or incurred during the taxable year in carrying
 34

[*34] on any activity that constitutes a trade or business. All deductions
are strictly a matter of legislative grace, and taxpayers have the burden
of establishing entitlement to any claimed deduction. See INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290
U.S. at 115. Taxpayers must substantiate claimed deductions and
credits by maintaining records. § 6001; Treas. Reg. § 1.6001-1(a).
Midwest Medical has the burden to meet the requirements of section
162(a) and to substantiate any amounts reported as expenses.

A. Depreciation Expense

Section 167(a) allows as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear of property used in a trade
or business or held for the production of income. To substantiate
entitlement to a depreciation deduction, a taxpayer must show that the
property was used in a business and also must establish the property’s
depreciable basis by showing the cost of the property, its useful life or
recovery period, and its previously allowable depreciation. See, e.g.,
Cluck v. Commissioner, 105 T.C. 324, 337 (1995); WSK & Sons, Inc. v.
Commissioner, T.C. Memo. 2015-204, at *11–12.

Respondent disallowed Midwest Medical’s depreciation expense
deductions for (1) a CoolTouch laser, (2) furniture, and (3) land Ms.
Stegman purchased as a personal investment. In total, respondent
disallowed depreciation deductions of $32,263, $51,620, $32,472, and
$12,052 for tax years 2007, 2008, 2009, and 2010, respectively. Midwest
Medical conceded respondent’s disallowance of a depreciation deduction
for the $79,012.79 of land that Ms. Stegman purchased as a personal
investment, in the amounts previously described. See supra Part V.D.

1. CoolTouch Laser

In 2007 Midwest Medical acquired a CoolTouch laser under a
long-term lease agreement with Sterling National Bank. Midwest
Medical deducted lease payments to Sterling National Bank for tax
years 2007 through 2010. Midwest Medical also listed the same
CoolTouch laser on its depreciation schedule, with a cost basis of
$82,300, and claimed depreciation expense deductions for tax years 2007
through 2010.

Respondent allowed deductions for the payments to Sterling
National Bank as equipment lease expenses for 2007 through 2010.
However, respondent disallowed the depreciation deductions for the
laser for 2007 through 2010.
 35

[*35] Ms. Stegman asserts that Midwest Medical had two such lasers:
one leased and the other purchased. However, she did not provide
purchase documentation for a second laser. Thus, Midwest Medical has
not met its burden to establish it is entitled to any deduction for a second
laser. The Court sustains respondent’s adjustment to depreciation
expenses related to the CoolTouch laser.

2. Furniture

Ms. Stegman purchased a couch and a desk for $10,500 on
November 21, 2009. Midwest Medical included this furniture on its
depreciation schedule for 2010. Respondent disallowed the deduction
because the furniture did not have a business purpose. Although these
items could be considered office furniture, they were not installed at
Midwest Medical. Instead, Ms. Stegman placed them in her home office.
Ms. Stegman did not see clients at her home, and she otherwise failed
to substantiate the business purpose of the assets. The Court sustains
respondent’s adjustment to the depreciation expense related to the
$10,500 of furniture.

B. Equipment Rental Expense

Respondent disallowed deductions for equipment rental expenses
paid to Samson of $294, $36,243, and $4,000 for tax years 2007, 2008
and 2010, respectively. Midwest Medical fully concedes the adjustment
for tax year 2007 in the amount previously described. See supra Part
V.D.

Midwest Medical issued payments to Samson, which Ms.
Stegman classified as payments for equipment on the handwritten
expense sheets she provided to Mr. Jones. Ms. Stegman indicated that
Samson owned some equipment that it leased to Midwest Medical for
$3,000 per month. However, Ms. Stegman did not provide any evidence
showing that Samson owned any equipment that it could rent or lease
to Midwest Medical, or otherwise substantiate the payments. The Court
sustains respondent’s adjustments to equipment rental expenses as set
forth in the notice of deficiency.
 36

[*36] C. Management Fees

For tax year 2010 respondent disallowed a $118,500 deduction for
purported management fees. 14

On September 9, 2011, Ms. Stegman sent Mr. Lake a fax stating
that $118,500 was “to be used as management fees from Midwest paid
to Samson.” In other words, Midwest Medical purportedly paid $118,500
in fees in return for Samson’s providing management services to
Midwest Medical. Midwest Medical deducted $118,500 as a business
expense. However, petitioners did not provide evidence showing that
Samson provided any services to Midwest Medical and did not otherwise
substantiate the business purpose of the payment. In fact, the $118,500
characterized as “management fees” had originally been characterized
by Ms. Stegman as an equipment expense. Midwest Medical’s 2010
return preparer recharacterized the payments as “management fees.”
Moreover, none of the checks resulting in the $118,500 deduction were
made payable to Samson; the checks were made payable to Ms.
Stegman, cash, and another entity.

Midwest Medical frequently paid Ms. Stegman individually, as
opposed to paying her through Samson, and characterization of the
$118,500 as management fees for services Samson provided to Midwest
Medical is inconsistent with other facts. For example, Ms. Stegman told
RA Carlson that Samson was “just the name on a bank account” or that
the payments from Midwest Medical to Samson were for leased
equipment. Further, Ms. Stegman categorized other payments from
Midwest Medical to Samson as “payroll.” For tax year 2006, Ms.
Stegman filed a Schedule C–EZ to report Samson’s income. Mr. Lake
noted on a copy of Ms. Stegman’s 2006 Schedule C–EZ that Samson was
no longer operating and he should delete the Schedule C–EZ for tax year
2007. Unlike tax year 2006, when Ms. Stegman reported Samson’s
income separately on a Schedule C–EZ, for tax year 2010 Ms. Stegman
reported the $118,500 purportedly paid to Samson for management fees
with other unrelated activities on one Schedule C, indicating that

14 Ms. Stegman reported $118,500 in management fees to Samson on her 2010

Schedule C. Respondent removed the management fees from Ms. Stegman’s
Schedule C and included the $96,000 paid to Ms. Stegman (or to cash) in the calculation
of constructive distributions from Midwest Medical to Ms. Stegman, discussed supra
Part II.B.2. The remaining $22,500 was paid to another company. Although
respondent disallowed the deduction for the $22,500 payment because Midwest
Medical did not substantiate it, respondent did not include that amount in the
calculation of constructive distributions to Ms. Stegman.
 37

[*37] Samson was not operating in 2010. Ms. Stegman’s explanation for
the $118,500 in payments is not supported by the record.

The Court sustains respondent’s disallowance of a deduction for
$118,500 in management fees for tax year 2010.

D. Repairs and Maintenance

In the notice of deficiency, respondent disallowed repairs and
maintenance expenses of $1,037, $8,047, $6,737, $4,220, and $50,575 for
tax years 2006, 2007, 2008, 2009, and 2010, respectively. Midwest
Medical fully concedes the adjustments as set forth in the notice of
deficiency for tax years 2006 through 2009 in the amounts previously
described. See supra Part V.D.

The $50,575 adjustment for tax year 2010 relates to Midwest
Medical’s payment to ECG, purportedly for construction work and a two-
year maintenance contract. Midwest Medical did not provide an invoice
from ECG for the $50,575 payment, and ECG’s owner first claimed he
could not provide an invoice because of computer issues, and then
provided a handwritten invoice. Further, the payment was made just
four days after National Numismatic issued Ms. Stegman an invoice for
an order of 35 ounces of gold Australian Kangaroos for $50,575 and three
days before ECG sent a $50,575 check to National Numismatic for gold.
National Numismatic then recorded the purchase in Ms. Stegman’s
precious metals account.

ECG’s owner informed the IRS that he completed the construction
work covered by the payment during the last two weeks of 2010.
However, Midwest Medical employees indicated that no work was done
in 2010 although some work was completed in 2012. The handwritten
invoice indicated that the maintenance contract was to maintain
Midwest Medical’s lasers. However, Midwest Medical made payments
to technicians for laser repair during the same period covered by the
two-year maintenance contract. Further, ECG’s bookkeeper had no
recollection of a $50,000 payment and indicated she had not created an
invoice for such a payment.

Midwest Medical has not met its burden to show that the $50,575
payment was an ordinary and necessary business expense. The record
instead supports the conclusion that the payment was for Ms. Stegman’s
personal investment in gold, which she attempted to disguise as a
business expense by routing the payment through ECG. The Court
 38

[*38] sustains respondent’s adjustment to repairs and maintenance
expenses as set forth in the notice of deficiency.

E. Bad Debt Expense

Respondent disallowed a $1,262 deduction for a bad debt expense
for 2006. This deduction is subject to the substantiation requirements of
section 162. The record does not substantiate a bad debt in 2006. The
Court sustains respondent’s $1,262 adjustment to a bad debt expense
for tax year 2006.

F. Credit Card Expense

As set forth in the notice of deficiency, respondent disallowed
Midwest Medical’s deductions for credit card expenses of $171,466,
$75,877, $41,656, $30,338, and $42,737 for tax years 2006, 2007, 2008,
2009, and 2010, respectively. Respondent determined that the
disallowed deductions were payments for credit card charges related to
Ms. Stegman’s personal expenditures, not for legitimate business
expenses. Midwest Medical fully concedes that it overstated credit card
expenses in the amounts set forth in the notice of deficiency as
previously described. See supra Part V.D.

IV. Kathleen Stegman’s Deduction for Business Use of Home

Ms. Stegman claimed a $36,070 deduction for the business use of
her home (home office deduction) for tax year 2010, consisting of $5,370
in operating expenses, $6,140 in depreciation, and $24,560 of carryover
of excess casualty losses and depreciation from 2009. Respondent
disallowed $35,331 of the deduction, resulting in a home office deduction
of $739.

In general, taxpayers are not permitted deductions related to the
use of a dwelling unit which is used by the taxpayer during the taxable
year as a residence. § 280A(a). However, section 280A(c)(1)(A) provides
an exception to section 280A(a) for “any item to the extent such item is
allocable to a portion of the dwelling unit which is exclusively used on a
regular basis . . . as the principal place of business for any trade or
business of the taxpayer.”

During the various years for which Ms. Stegman claimed home
office deductions, the square footage she reported varied for both the
portion of the home used for the business and the total area of the home.
To determine Ms. Stegman’s home office deduction, respondent used the
 39

[*39] square footage amounts, as reported by Ms. Stegman on various
tax returns, that resulted in the most conservative home office deduction
percentages: 475 square feet for the portion used for business and 5,000
square feet for the total area of the home. These amounts resulted in
$2,938 in allowable operating expenses and $932 in allowable
depreciation related to the home office deduction. However, because
after other adjustments Ms. Stegman’s business profit before the home
office deduction was only $739, respondent limited Ms. Stegman’s 2010
home office deduction to $739 of operating expenses. The remaining
allowable operating expenses and depreciation expense of $2,199 and
$932, respectively, were available for carryover to tax year 2011.

Additionally, respondent determined that there was neither a
depreciation expense carryover nor a loss carryover from 2009 and
therefore disallowed $26,206 of the deduction. Ms. Stegman provided no
evidence to substantiate a larger deduction than what respondent
allowed. The Court sustains respondent’s adjustment related to Ms.
Stegman’s home office deduction.

V. Kathleen Stegman’s Rental Real Estate Activities

Ms. Stegman owned many rental properties during the years at
issue. For tax years 2006, 2007, and 2008 she reported her rental
property income and expenses on Schedules E. For tax year 2010 she
concluded that she was in the real property business, and she therefore
reported income and expenses from her real estate on Schedule C.

Rental activities are per se passive. § 469(c)(2). However, if
taxpayers can show they are in the real property business by meeting
the requirements of section 469(c)(7)(B), then the rental activity will not
be per se passive. Under section 469(c)(7)(B), a taxpayer is considered to
be in the real property business if:

(i) more than one-half of the personal services
performed in trades or businesses by the taxpayer during
such taxable year are performed in real property trades or
businesses in which the taxpayer materially participates,
and
(ii) such taxpayer performs more than 750 hours of
services during the taxable year in real property trades or
businesses in which the taxpayer materially participates.

Other than Ms. Stegman’s unsupported position on her 2010
Form 1040, nothing in the record or briefing supports her position that
 40

[*40] she meets the requirements of section 469(c)(7)(B). The Court
finds that Ms. Stegman’s real estate activities are per se passive under
section 469(c)(2) and are subject to the passive activity rules.

Respondent disallowed all real estate loss deductions Ms.
Stegman claimed for the years at issue. 15 Although section 469(i)
permits taxpayers to claim deductions for up to $25,000 of passive
activity losses attributable to rental real estate activities, the $25,000
exception is reduced (but not below zero) by 50% of the amount by which
the taxpayer’s adjusted gross income for the taxable year exceeds
$100,000. § 469(i)(3).

The Court sustains respondent’s adjustments to Ms. Stegman’s
rental real estate activities to the extent that, after taking into account
adjustments consistent with this Opinion, her passive activity losses are
limited by section 469(i)(3).

VI. Kathleen Stegman’s Bad Debt Expense

Section 166 provides in general that taxpayers are allowed a
deduction for a debt that becomes worthless within the taxable year.
However, business bad debts and nonbusiness bad debts are treated
differently. While a taxpayer may claim an ordinary deduction for a
business bad debt, a taxpayer with a nonbusiness bad debt must treat
the loss as a capital loss, and therefore the loss is deductible to the extent
of any capital gains plus, if the losses exceed such gains, an additional
amount equal to the lesser of $3,000, or the excess of the loss over gains
for the tax year. §§ 166(d)(1), 1211(b). A nonbusiness debt is “a debt
other than—(A) a debt created or acquired (as the case may be) in
connection with a trade or business of the taxpayer; or (B) a debt the loss
from the worthlessness of which is incurred in the taxpayer’s trade or
business.” § 166(d)(2).

Ms. Stegman did not claim deductions for any bad debt expenses
on her Forms 1040 filed for the years at issue. She claimed these bad
debt expenses for the first time during her criminal trial, and again in
her case before the Court.

15 RA Willard allowed deductions for rental expenses to the extent they could

be verified and disallowed unsubstantiated rental expenses. Because Ms. Stegman is
ineligible for passive activity losses for all tax years at issue, these adjustments to
expenses will not be discussed further.
 41

[*41] A. Romantica

Ms. Stegman claims a deduction for a bad debt expense for tax
year 2006 related to a purported loan to Romantica. The loan document
purportedly evidencing Ms. Stegman’s 2004 loan to Romantica shows
that the loan was actually to Ms. Stegman’s ex-husband. Ms. Stegman
provided no evidence that the loan was to Romantica. Consequently, the
debt was not a business debt, and any 2006 loss from the bad debt would
be limited under section 1211(b).

Additionally, respondent found no evidence that Ms. Stegman
actually loaned funds to either her ex-husband or Romantica other than
the purported loan document. Ms. Stegman did not provide any evidence
to show that she transferred any funds, and thus, did not substantiate
the loan amount or the bad debt. The Court holds that Ms. Stegman
cannot deduct a bad debt expense for tax year 2006 for the purported
loan to her ex-husband.

B. Real Estate and Related Loans

Ms. Stegman claims a bad debt expense deduction for tax year
2007 16 for amounts her friend purportedly owed her related to their real
estate dealings. Ms. Stegman’s friend filed for bankruptcy protection in
2007. Ms. Stegman estimates that her friend owed her $279,000 at the
time the bankruptcy petition was filed; the bankruptcy filings show a
$270,000 liability to Ms. Stegman. Neither Ms. Stegman nor the
bankruptcy filing explain how the purported debt was computed.
Additionally, the bankruptcy filings show that Ms. Stegman’s friend
paid her $2,800 in cash just before filing the bankruptcy petition, and
that Ms. Stegman received real property from the bankruptcy estate.
Ms. Stegman has not substantiated the amount of the purported bad
debt expense. The Court holds that Ms. Stegman cannot deduct a bad

16 Ms. Stegman asserts she is entitled to a bad debt expense deduction for tax

year 2007. The Court notes that Ms. Stegman’s friend’s bankruptcy proceedings did
not conclude until 2008. A bankruptcy petition is not conclusive evidence of a debt’s
total worthlessness, because the debtor may have assets remaining permitting the
debtor to pay all or a portion of some debts to creditors. Barrett v. Commissioner, T.C.
Memo. 1996-199, slip op. at 21, aff’d per curiam, 107 F.3d 1 (1st Cir. 1997)
(unpublished table decision). Therefore, there may not be certainty as to the amount
of any bad debt until the bankruptcy proceedings conclude. See id. The Court does not
decide whether Ms. Stegman’s loans to her friend became worthless, if at all, in tax
year 2007, or in another year at issue, because the Court sustains respondent’s
disallowance of the bad debt expense deduction for lack of substantiation.
 42

[*42] debt expense for tax year 2007 for the amounts Ms. Stegman’s
friend purportedly owed her.

VII. Additions to Tax and Penalties

A. Compliance with Section 6751(b)

Respondent determined that petitioners are liable for section
6663(a) fraud penalties and section 6651(a)(1) additions to tax. In
general, the Commissioner bears the burden of production with respect
to penalties and additions to tax. § 7491(c). As part of that burden,
respondent must produce evidence of compliance with the procedural
requirements of section 6751(b)(1). See Graev v. Commissioner, 149 T.C.
485, 493 (2017), supplementing and overruling in part 147 T.C. 460
(2016). Section 6751(b)(1) requires the initial determination of certain
penalties to be “personally approved (in writing) by the immediate
supervisor of the individual making such determination.” See Graev, 149
T.C. at 492–93; see also Clay v. Commissioner, 152 T.C. 223, 248 (2019)
(quoting § 6751(b)(1)), aff’d, 990 F.3d 1296 (11th Cir. 2021).

Where the taxpayer has challenged the Commissioner’s penalty
determination, the Commissioner must come forward with evidence of
proper penalty approval as part of his initial burden of production under
section 7491(c). Frost v. Commissioner, 154 T.C. 23, 34 (2020). Once the
Commissioner makes that showing, the taxpayer must come forward
with contrary evidence. Id. The supervisory approval must be secured
no later than the date on which the IRS issues the notice of deficiency.
Minemyer v. Commissioner, No. 21-9006, 2023 WL 314832, at *5 (10th
Cir. Jan. 19, 2023), aff’g in part, rev’g and remanding in part T.C. Memo.
2020-99. 17

Regarding Midwest Medical, respondent produced a copy of the
Civil Penalty Approval Form signed by the immediate supervisor of RA
Willard on May 7, 2013. By signing the form, RA Willard’s immediate
supervisor approved the imposition of both the section 6663 civil fraud
penalties for tax years 2006 through 2010 and the section 6651(a)(1)
addition to tax for tax year 2008. Respondent issued Midwest Medical
the notice of deficiency on July 7, 2017.

17 An appeal in these cases would ordinarily lie to the Court of Appeals for the

Tenth Circuit, see § 7482(b), and therefore its precedent governs these cases, see Golsen
v. Commissioner, 54 T.C. 742, 756–57 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).
 43

[*43] Regarding Ms. Stegman individually, respondent produced a copy
of the Penalty Approval Form signed by the immediate supervisor of RA
Willard on May 7, 2013. By signing the form, RA Willard’s immediate
supervisor approved the imposition of both the section 6663 civil fraud
penalties for tax years 2006, 2007, 2008, and 2010 and the section
6651(a)(1) addition to tax for tax year 2007. Respondent issued Ms.
Stegman the notice of deficiency on July 12, 2017.

Petitioners do not argue, and the record does not support a
conclusion, that respondent issued the notice of deficiency before the
date the examining agent’s manager signed the Penalty Approval
Forms. Accordingly, respondent has satisfied the burden with respect to
section 6751(b).

B. Section 6651(a) Addition to Tax

Section 6651(a)(1) imposes an addition to tax for failure to timely
file a federal income tax return unless it is shown that the failure is due
to reasonable cause and not due to willful neglect. See also Higbee v.
Commissioner, 116 T.C. 438, 447 (2001). The addition to tax is equal to
5% of the amount required to be shown as tax on the delinquent return
for each month or fraction thereof during which the return remains
delinquent, up to a maximum addition of 25% for returns more than four
months delinquent. § 6651(a)(1). Under section 7491(c) the
Commissioner bears the burden of producing evidence with respect to
the liability of the taxpayer for any addition to tax. See Higbee, 116 T.C.
at 446. The burden of proving reasonable cause and lack of willful
neglect falls on the taxpayer. See § 6651(a); Higbee, 116 T.C. at 446–47.

For tax year 2008 Midwest Medical filed its Form 1120 on October
16, 2009, which was after the due date of March 15, 2009. See § 6072(b).
For tax year 2007 Ms. Stegman filed her Form 1040 on October 14, 2008,
which was after the due date of April 15, 2008. See § 6072(a).
Respondent has thus met his burden of production with respect to both
Midwest Medical for tax year 2008 and Ms. Stegman for tax year 2007.

In posttrial briefing, petitioners claim that if there was a late
filing “it was solely because of the ineptness of the preparer without Ms.
Stegman’s knowledge.” However, the failure to timely file a tax return
is not excused by a taxpayer’s reliance on an agent, and such reliance is
not reasonable cause for a late filing under section 6651(a)(1). United
States v. Boyle, 469 U.S. 241, 252 (1985). Petitioners provided no
evidence to support a finding of reasonable cause or lack of willful
 44

[*44] neglect. Accordingly, the Court sustains respondent’s section
6651(a)(1) addition to tax as to Midwest Medical for tax year 2008 and
as to Ms. Stegman for tax year 2007.

C. Section 6663 Fraud Penalties

Respondent determined that petitioners are liable for section
6663(a) fraud penalties for all years at issue.

1. Collateral Estoppel

The Tax Court has consistently held that a conviction for criminal
tax evasion under section 7201 after a trial on the merits collaterally
estops the convicted taxpayer from subsequently denying liability for
civil tax fraud for the tax year to which the conviction relates. Gray v.
Commissioner, 708 F.2d 243, 246 (6th Cir. 1983), aff’g T.C. Memo.
1981-1; see also Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir.
2012), aff’g T.C. Memo. 2009-44; DiLeo v. Commissioner, 96 T.C. 858,
885 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992); Marretta v. Commissioner,
T.C. Memo. 2004-128, 2004 WL 1172873, at *4, aff’d, 168 F. App’x 528
(3d Cir. 2006).

Ms. Stegman’s prior criminal conviction under section 7201 for
the taxable years 2007 and 2008 is conclusive and binding. By reason of
that prior criminal conviction, Ms. Stegman is estopped, under the
doctrine of collateral estoppel, from arguing that she is not liable for the
section 6663(a) civil fraud penalty for tax years 2007 and 2008.

Although Ms. Stegman is collaterally estopped from challenging
her liability for each civil fraud penalty for tax years 2007 and 2008, the
amount of each underpayment, and the components of the
underpayment to which the penalty applies, remain issues for trial. See
Philpott v. Commissioner, T.C. Memo. 2012-307, at *2 (finding the
applicability, but not the amount, of the fraud penalty was determined
against the taxpayer by grant of the Commissioner’s motion for partial
summary judgment on the basis of the taxpayer’s conviction under
section 7201); Williams v. Commissioner, T.C. Memo. 2011-89, slip op.
at 36 (finding the taxpayer’s conviction for tax evasion satisfied the
Commissioner’s burden of proving fraud and the taxpayer was “liable
for the civil fraud penalty except to the extent that [the taxpayer]
prove[d] part of the underpayment was not attributable to fraud”), aff’d,
498 F. App’x 284 (4th Cir. 2012).
 45

[*45] Thus, respondent is required to prove the underlying deficiencies
for Ms. Stegman’s individual tax years 2007 and 2008. Respondent has
met this burden. See discussion supra Parts II, IV–VI. Ms. Stegman did
not provide any evidence to show, and the record does not otherwise
establish, that any part of either underpayment is not due to fraud.
Accordingly, the Court sustains respondent’s imposition of civil fraud
penalties under section 6663 against Ms. Stegman for tax years 2007
and 2008.

Respondent also asserts that Ms. Stegman’s activities in these
cases are consistent throughout the individual and corporate cases for
all the years in issue. Therefore, respondent argues the fraud penalties
should be sustained for all periods under the doctrine of collateral
estoppel because the behavior resulting in the criminal conviction was
present throughout all the tax years in issue in these cases. The Court
declines to so hold.

2. Civil Fraud Penalty Analysis 18

Section 6663(a) imposes a penalty equal to 75% of the taxpayer’s
underpayment of federal income tax that is due to fraud. Fraud is an
intentional wrongdoing on the part of the taxpayer with the specific
purpose of evading a tax believed to be owing. Petzoldt, 92 T.C. at 698;
Hacker v. Commissioner, T.C. Memo. 2022-16, at *32. An underpayment
for a tax year is attributable to fraud if the taxpayer intended to conceal,
mislead, or otherwise prevent the collection of taxes known or believed
to be owing. See Katz v. Commissioner, 90 T.C. 1130, 1143 (1988).

Respondent has the burden of proving fraud by clear and
convincing evidence. See § 7454(a); Rule 142(b). To carry that burden of
proof, respondent must show that (1) an underpayment of tax exists and
(2) some portion of the underpayment is attributable to fraud. See
Hebrank v. Commissioner, 81 T.C. 640, 642 (1983); Benavides & Co.,
P.C., T.C. Memo. 2019-115, at *31. As to the first element, respondent
has clearly and convincingly demonstrated for each year at issue that

18 Respondent argues that it is appropriate in these cases to pierce the

corporate veil and attribute Ms. Stegman’s fraudulent intent to Midwest Medical. The
Court applies a different standard in determining whether a corporation has the
requisite fraudulent intent for section 6663 civil fraud penalties; therefore, the Court
will not address respondent’s arguments regarding piercing the corporate veil. The
Court notes that corporate-veil-piercing arguments were necessary in the criminal
trial because the indictment attributed Midwest Medical’s tax due and owing to Ms.
Stegman. The factual situation in the case before the Court is different in that
respondent does not attribute Midwest Medical’s tax deficiencies to Ms. Stegman.
 46

[*46] an underpayment of tax exists for Midwest Medical and for Ms.
Stegman. See discussion supra Parts II–VI. Respondent has satisfied
the first element of the fraud penalty.

The Court now turns to the second element of the fraud penalty:
whether petitioners had the requisite fraudulent intent. Fraud is a
question of fact to be resolved upon consideration of the entire record.
DiLeo, 96 T.C. at 874. Fraud is never presumed and must be established
by independent evidence. Hacker, T.C. Memo. 2022-16, at *32. Because
direct evidence of fraudulent intent is seldom available, fraud may be
proven by circumstantial evidence and reasonable inferences drawn
from the facts. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992);
Benavides & Co., P.C., T.C. Memo. 2019-115, at *34. The taxpayer’s
entire course of conduct may be indicative of fraudulent intent.
Niedringhaus, 99 T.C. at 210.

Circumstances that may indicate fraudulent intent, commonly
referred to as “badges of fraud,” include but are not limited to
(1) understating income; (2) maintaining inadequate records; (3) giving
implausible or inconsistent explanations; (4) concealing income or
assets; (5) failing to cooperate with authorities; (6) engaging in illegal
activities; (7) providing incomplete or misleading information to one’s
tax return preparer; (8) lack of credibility of the taxpayer’s testimony;
(9) filing false documents, including false income tax returns; (10) failing
to file tax returns; and (11) dealing in cash. Hacker, T.C. Memo. 2022-16,
at *33. This list is nonexclusive, and no single factor is dispositive;
however, “the existence of several factors is persuasive circumstantial
evidence of fraud.” Vanover v. Commissioner, T.C. Memo. 2012-79, 2012
WL 952871, at *4; see also Benavides & Co., P.C., T.C. Memo. 2019-115,
at *35.

A corporation can act only through its officers, and therefore it
cannot escape responsibility for the acts of its officers when they are
acting on behalf of the corporation. DiLeo, 96 T.C. at 875; Benavides &
Co., P.C., T.C. Memo. 2019-115, at *35. Whether Midwest Medical’s
intent was fraudulent therefore depends upon the intent of Ms.
Stegman, its majority owner and sole manager. See Benavides & Co.,
P.C., T.C. Memo. 2019-115, at *35 (collecting cases); see also Ruidoso
Racing Ass’n, Inc. v. Commissioner, T.C. Memo. 1971-194, 1971 Tax Ct.
Memo LEXIS 137, at *63–65, aff’d in part, remanded in part, 476 F.2d
502 (10th Cir. 1973).
 47

[*47] Respondent argues that petitioners’ fraudulent intent is
demonstrated by several badges of fraud, including understating
income, keeping inadequate records, implausible or inconsistent
explanations of behavior, concealing income or assets, failing to
cooperate with authorities, engaging in illegal activities, and dealing
extensively in cash. In addition, respondent asserts that Ms. Stegman
acted fraudulently when she caused Midwest Medical to claim false
depreciation expenses.

The Court agrees. Ms. Stegman caused Midwest Medical to
understate its taxable income, and she also understated her own taxable
income. See discussion supra Parts II–VI. During the IRS examination,
Ms. Stegman attempted to conceal her use of corporate funds for
personal expenses by insisting that Midwest Medical did not accept cash
payments and by claiming that she paid her personal expenses with
$300,000 cash that she had available from other sources. After a few
interviews with RA Carlson, Ms. Stegman and her tax return preparers
refused to continue cooperating with the authorities. Respondent then
had to obtain information through summonses and third-party
interviews.

Ms. Stegman purposely provided incomplete and misleading
information to both her personal return preparer and Midwest Medical’s
return preparers, including concealing income, overstating expenses,
and claiming she qualified for certain tax return positions when she did
not. Both Midwest Medical and Ms. Stegman dealt extensively in cash.
Ms. Stegman preferred clients to pay cash, and she even urged them to
pay cash over other payment methods. Ms. Stegman herself used cash
diverted from Midwest Medical to purchase money orders she then used
for personal expenses and purchases. Petitioners did not provide any
income documentation during the audit or the criminal investigation or
at trial. The IRS obtained copies of some receipts from Midwest
Medical’s clients and had to use bank account analyses to reconstruct
the incomes of both Midwest Medical and Ms. Stegman.

Ms. Stegman took intentional steps to lower both Midwest
Medical’s and her own individual taxable income, and this is clear and
convincing evidence of the requisite fraudulent intent for Midwest
Medical and Ms. Stegman alike. The Court finds indicia of fraud for
Midwest Medical and for Ms. Stegman for each of the tax years in issue.

Once fraud is established with respect to any portion of an
underpayment of tax, the fraud penalty applies to the whole
 48

[*48] underpayment unless the taxpayer establishes by a
preponderance of the evidence that a portion of the underpayment is not
attributable to fraud. See § 6663(b); Hacker, T.C. Memo. 2022-16, at *32;
Benavides & Co., P.C., T.C. Memo. 2019-115, at *32.

Petitioners have not shown that any portion of the
underpayments is not attributable to fraud. Therefore, the Court
sustains respondent’s imposition of the civil fraud penalty under section
6663 against Midwest Medical for tax years 2006 through 2010 and
against Ms. Stegman for tax years 2006, 2007, 2008, and 2010.

VIII. Period of Limitations

The Commissioner must generally assess a deficiency in tax
within three years from the date on which the return was filed.
§ 6501(a). However, if a taxpayer files a false or fraudulent return with
the intent to evade tax, the tax may be assessed at any time. § 6501(c)(1).
The Commissioner bears the burden of proving an exception to the
general limitations period. See Gould v. Commissioner, 139 T.C. 418,
431 (2012), aff’d per curiam, 552 F. App’x 250 (4th Cir. 2014); Harlan v.
Commissioner, 116 T.C. 31, 39 (2001). Respondent’s burden of proof
under section 6501(c)(1) is the same as his burden to prove applicability
of the section 6663 civil fraud penalty. Gould, 139 T.C. at 431; Browning
v. Commissioner, T.C. Memo. 2011-261, slip op. at 25. Thus, because the
Court sustained the application of the fraud penalties as to Ms. Stegman
and Midwest Medical for all the years at issue, these tax years remain
open for the assessment of tax.

IX. Conclusion

Midwest Medical is liable for deficiencies as respondent
determined in the notice of deficiency dated July 7, 2017, for tax years
2006, 2007, 2008, 2009, and 2010 to the extent discussed herein.
Additionally, respondent’s imposition of civil fraud penalties under
section 6663 for tax years 2006, 2007, 2008, 2009, and 2010 is sustained
to the extent of Midwest Medical’s underpayments of tax, and
respondent’s determination of an addition to tax under section
6651(a)(1) for tax year 2008 is sustained as set forth above.

Ms. Stegman is liable for deficiencies as respondent determined
in the notice of deficiency dated July 12, 2017, for 2006, 2007, 2008, and
2010 to the extent discussed herein. Additionally, respondent’s
imposition of civil fraud penalties under section 6663 for tax years 2006,
2007, 2008, and 2010 is sustained to the extent of Ms. Stegman’s
 49

[*49] underpayments of tax, and respondent’s determination of an
addition to tax under section 6651(a)(1) for tax year 2007 is sustained
as set forth above.

The Court has considered all the arguments made by the parties,
and to the extent they are not addressed herein they are considered
unnecessary, moot, irrelevant, or otherwise without merit.

To reflect the foregoing,

Decisions will be entered under Rule 155.