William F. Middleton - Page 7




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         business deductions for the 1991 taxable year.  Accordingly, for             
         1991, respondent allowed a total of $157,207 of the $254,787 in              
         deductions claimed by petitioner on the 1991 return.                         
                                       OPINION                                        
               The issues we consider arise from circumstances surrounding            
         petitioner’s criminal conviction for Medicaid fraud.  Prior to               
         his indictment, petitioner’s 1989 and 1990 Federal income tax                
         returns did not reflect that he was engaged in the taxi-leasing              
         business or that he received payments for Medicaid related                   
         services.  Petitioner’s 1991 return was due a short time after               
         his indictment.  Following the acceptance of his plea of guilty,             
         petitioner, during 1994, filed amended 1989 and 1990 returns and             
         a delinquent 1991 return.  The above events were the motivation              
         for respondent’s examination of petitioner’s returns, resulting              
         in a determination that petitioner had understated income for                
         1989 and 1990.  Respondent also determined that a portion of                 
         petitioner’s claimed deductions on his amended returns for 1989              
         and 1990 and on his 1991 return should be disallowed.  The fraud             
         penalty was determined for all 3 years.  For 1989 and 1990, the              
         fraud penalty was attributable to respondent’s determination that            
         petitioner failed to report all of his income.  The determination            
         of the fraud penalty for 1991 was based on respondent’s                      
         determination that petitioner intentionally overstated his                   
         deductions.                                                                  






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