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amounts gave rise to underpayments, the underpayments are not
attributable to fraud. We disagree.
Petitioner’s method of preparing his returns for 1985
through 1988 was erroneous, and petitioner was aware at the time
he signed those returns that the method was erroneous. His
returns for 1985 through 1988 were prepared on the basis of
spreadsheets of the deposits to, and disbursements from, his
personal bank accounts. Petitioner reported income only to the
extent that deposits were made to his personal accounts and,
then, only to the extent that the deposit was not classified as a
“loan”. However, petitioner’s reported income from these
spreadsheets was substantially offset by disbursements from his
personal bank accounts, which he claimed as deductible expenses
on his Schedules C.
Petitioner contends that the fraud penalties should not be
applied to the tax liability which was increased due to the
expenses that respondent disallowed. After reviewing the
spreadsheets that petitioner used to prepare his returns, we are
convinced that many of the expenses that petitioner claimed as
deductions were personal in nature. For example, on Schedule C
of petitioner’s 1985 tax return, he claimed a deduction for
commission expenses of $14,540, which represented the cost of a
ring, earrings, and two necklaces that he purchased for Ms.
95(...continued)
underpayment is not attributable to fraud.
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