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the evidence was insufficient for us to conclude that
petitioners’ actions were fraudulent. Katz v. Commissioner, 90
T.C. 1130, 1144 (1988); Shaw v. Commissioner, 27 T.C. 561, 569-
570 (1956), affd. 252 F.2d 681 (6th Cir. 1958).
Although we concluded that respondent failed to prove that
Vernon and Janet intended to file false Forms 1040, U.S.
Individual Income Tax Return, and 1099-MISC, Miscellaneous
Income, on the basis of the evidence it was reasonable for
respondent to believe that the Court could find that petitioners
filed false Forms 1040 and 1099. Furthermore, it was reasonable
for respondent to believe that the Court could find that
petitioners falsified the books and records of TECO and that the
inaccurate records of TECO, listing improper deductions and uses
of TECO funds, were part of a scheme to conceal petitioners’ true
income and expenses. Additionally, it was reasonable for
respondent to believe that the Court could find that petitioners
filed false tax returns because they knew that the amount of
income listed on their Forms 1040 and 1099 was understated and
that nondeductible expenses were categorized as deductible items
in TECO’s books and records.
At trial, the Court had to determine the credibility of the
witnesses, including petitioners, and reconcile the conflicting
documentary and testimonial evidence. Johnson v. Commissioner,
T.C. Memo. 1999-237, affd. without published opinion 246 F.3d 674
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