T.C. Memo. 1995-514
UNITED STATES TAX COURT
DONALD FERRY AND SHARON FERRY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25901-92. Filed October 30, 1995.
Donald Ferry and Sharon Ferry, pro sese.
Douglas A. Fendrick, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, Judge: Respondent determined deficiencies in and
additions to petitioners' Federal income taxes as follows:
Additions to Tax
Sec. Sec. Sec. Sec.
Year Deficiency 6653(b) 6653(b)(1)(A) 6653(b)(1)(B) 6661
1
1987 $38,956 -- $28,777 $9,593
1988 33,831 $24,779 -- -- 8,259
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1
50 percent of the interest due on the amount of the underpayment
attributable solely to fraud.
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
The issues for decision are: (1) Whether petitioners
underreported their taxable income for the year 1987 in the
amount of $130,232; (2) whether petitioners underreported their
taxable income for the year 1988 in the amount of $85,231; (3)
whether the above-mentioned understatements of income for 1987
and 1988 were attributable to fraud by Donald Ferry (petitioner);
and (4) whether petitioners are liable for an addition to tax
under section 6661 for 1987 and 1988. Respondent has conceded
that Sharon Ferry is not liable for the fraud addition.
FINDINGS OF FACT
Preliminary Matters
The stipulated facts and exhibits are incorporated by this
reference.
When the petition in this case was filed, petitioners
resided in Newark, Delaware. Petitioners are husband and wife
and filed joint Federal income tax returns for the years in
issue.
On their joint Federal income tax return for 1987,
petitioners reported total income of $6,920 consisting of wages
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of $4,180.69, interest income of $206.31, and unemployment income
of $2,533. They claimed a child care credit of $81 and showed a
tax liability of zero. They also claimed (and apparently
received as a refund) an earned income credit in the amount of
$851. Petitioners claimed two children as dependents, Sean D.
Ferry and Brent R. Ferry. On line 6(c)(3), requesting the
children's Social Security numbers, petitioners stated, "applied
for".
On their joint Federal income tax return for 1988
petitioners reported wages of $5,665.10, interest of $63.80, and
unemployment income of $4,920 for a total of $10,648.90. They
claimed and received as a refund an earned income credit of $793.
Again, they listed the children as dependents and showed their
Social Security numbers as "applied for".
Forms W-2 were attached to the returns. The Forms W-2 for
Donald D. Ferry showed wages from Wayanne, 1108 South College
Avenue, Newark, Delaware 19713, in the amount of $3,910.69 in
1987 and $5,665.10 in 1988. These forms were prepared by
petitioner himself, not by Wayanne's normal payroll preparer, and
petitioner's business associate, Wayne Wilberding, was not aware
of them.
Using a combination of the bank deposits and specific items
methods, respondent originally determined that petitioners
understated their income for 1987 by $130,232 and for 1988 in the
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amount of $124,879. Prior to trial, respondent conceded $39,648
of the adjustment for 1988. Thus, respondent now claims
petitioners' income for 1988 was understated in the amount of
$85,231.
Respondent determined that petitioners failed to report the
following amounts of bank deposits as income for the taxable year
1987:
I.H.R-L LTD bank account $103,514
Ferry Associates bank account 22,503
$126,017
plus
Personal expenses paid from
MIT LTD bank account 8,126
Less W-2 reported income from
Wayanne, Inc. (3,911)
Difference 4,215
1987 understatement 130,232
Respondent determined an understatement based on bank
deposits in 1988 as follows:
I.H.R-L LTD bank account $47,458
Ferry Associates bank account 12,175
R.E.P., LTD bank account 24,290
$83,923
plus
Personal expenses paid from
MIT LTD bank account 1,308
1
1988 understatement 85,231
1
Apparently, respondent's concession for 1988 described
above takes into account the Form W-2 wages reported from
Wayanne, Inc.
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Petitioner's theory is that it was not his money. He posits
several possibilities: It was Wayanne's money, already taxed.
Or it was a "pass-through" among various entities. Or it was his
father's or his children's money (which petitioner was holding or
investing for them). Or the money came from gifts or loans from
his parents. Or it was the repayment (without his business
associate's knowledge) of "loans" petitioner had made to the
business. Or it was the movement of funds left over from the
settlement of a lawsuit in 1983.
Family Relations
Sharon Ferry attended St. Joseph's College and Duquesne
University and has a degree in nursing. She took a nursing
refresher course in 1988. Aside from the Form W-2 income of $270
reported in 1987, she was employed only as a babysitter for 3
hours per week at $5 per hour during the years in issue.
Since 1982, petitioners have lived at 404 Arbour Drive,
Newark, Delaware. Sharon Ferry's maiden name is Rowan. She has
two brothers, William and David. Neither brother ever mentioned
to Mrs. Ferry that he was the owner of the house where
petitioners reside.
During 1987, petitioners' sons were ages 13 and 9. They
attended Holy Angels parochial school.
During the years in issue, petitioners had only one
telephone line in their house. Although this number was listed
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under R.E. Plus, it was petitioners' personal and only telephone
number.
Petitioner's parents were working-class people. His mother
did not work outside the home. Mrs. Ferry never saw petitioner's
parents give petitioners a gift by cash or check. Petitioner's
father died in 1989. At time of trial, his mother was in a
nursing home. Petitioner has at least one sister.
In 1987 and 1988, Sharon Ferry had the following credit
cards: Visa, Mastercard, Strawbridge, J.C. Penney, Macy's, and
Sears. Although the accounts were in Mrs. Ferry's name,
petitioner possessed cards with his name on them, which he used.
Sharon Ferry kept a checkbook, which she considered a joint
account, in the name of Ferry Associates. The couple had no
personal joint account in their own names.
The Iron Hill Restaurant
Petitioner was involved in a restaurant known as the Iron
Hill Restaurant and Lounge (Iron Hill). As is true of much of
this case, the nature of petitioner's involvement is unclear.
The legal form of any entity or entities connected with Iron Hill
is also unclear. We do the best we can, given the state of the
record.
Iron Hill opened in 1971 or 1972. Wayne Wilberding was then
the owner and president of Wayanne, Inc. (Wayanne), trading as
the Iron Hill Inn Restaurant. Wilberding met petitioner in 1981,
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when petitioner approached him about investing in the restaurant.
Iron Hill was in arrears with State and Federal taxes. It was
also facing a balloon payment on a mortgage taken out in 1977.
Petitioner convinced Wilberding that he had financial and
business expertise, and outlined a plan to pay off the taxes and
the prime lease. Petitioner would pay Wayanne's debts; in
return, Wayanne would be dissolved and petitioner would become a
50-percent partner in everything connected with the restaurant,
including the 40-year lease and leasehold improvements.
Petitioner paid approximately $47,000 to the Internal Revenue
Service (IRS) in August of 1982 for Wayanne's withholding taxes,
and $25,000 to the State of Delaware.
At trial, petitioner claimed these amounts were loans to
Wayanne, that he is thus a creditor, and therefore any moneys he
took out of the business (which he denies having done) were
simply loan repayments and not taxable income to himself.
Wilberding contends that petitioner was buying a 50-percent
partnership share of the business. Neither a partnership
agreement nor notes evidencing loans are in evidence. Nor are
there any stock agreements or shares or, in fact, anything
showing that any of the entities referred to in this case had any
legal existence.
Petitioner claimed that he created or used various entities
for various aspects of the business. One entity was to buy
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furniture; another to buy the leasehold. Petitioner told
Wilberding that these were all flow-throughs and that this was
the way to get tax savings.1
Petitioner began working at the restaurant in the early
1980's. He worked there 6 to 8 hours per day during the years in
issue, but neither he nor Wilberding was on the payroll.
Petitioner kept the books, counted the receipts, made the
deposits at the bank, and handled tax and other financial
matters. Petitioner told people he was the "business manager" or
"business manager for the creditors". Wilberding handled the
day-to-day operations, such as hiring and scheduling employees,
cooking, and waiting tables.
At various times, petitioner held himself out as owner of
the building in which the restaurant was located, as a creditor,
as a shareholder of Wayanne before the years in issue (claiming
in testimony that he sold his interest to his father in 1986,
which he described as the sale of stock), as an employee (in
1
The IRS agent testified that she located 14 corporations,
13 partnerships, and 3 trusts related to petitioner. Although
petitioner objected that some of them were not his, it is obvious
from a cursory glance at Exhibit AL that many were mentioned by
petitioner himself during the trial, and others seem clearly
related by the names (such as (Don) Ferry Family Trust, Inc.,
Ferry Family Trust, Don Ferry Limited Trust, Restaurant Equipment
& Property Ltd - D. Ferry Ltd. Trust, Gen. Ptr.).
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Forms W-2), and as a partner (signing a partnership return as
"general partner").2
Wilberding considered petitioner to be his 50-percent
partner. Wilberding believed that Wayanne was dissolved in 1983
or 1984, at which time he and petitioner became partners in all
the various entities petitioner had created. At that time some
bank accounts were closed, and other bank accounts were set up
for various aspects of the business. For instance, a payroll
account under the name of "Wayanne, Inc." was changed to "Wayanne
Ltd." The name of the restaurant was changed to Iron Hill
Restaurant, Ltd.
In 1989 Wilberding and petitioner parted ways, and
Wilberding sued petitioner for an accounting. The dispute was
precipitated by a letter from the IRS saying that Wayanne was
being audited.3 Wilberding discovered his name was on purported
returns which he had not signed, and he asked petitioner for an
2
Petitioner testified in a previous trial that his sons
owned an interest in Iron Hill Investments, Inc., but sold their
interest in December 1988, when the children would have been 14
and 10 years of age.
3
It is unclear what years were under audit, whether
returns had been filed for those years and, if so, whether they
were corporate or partnership returns. It is clear that
petitioner told the IRS agent that he had a power of attorney for
the business. Petitioner had removed the records from the
restaurant premises, and met with the revenue agent, giving her
permission to take the records for copying. She later returned
them to Wilberding. Despite some tangential testimony about the
restaurant audit, those returns are not in evidence and appear to
have little or no relevance to this case.
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accounting. On July 23 or 24, when Wilberding's wife went in to
open the restaurant, all the cash registers were gone, the phones
were gone, and the door was padlocked. Petitioner claimed that
other creditors were about to seize the restaurant's assets, and
he had moved first to "protect his father's investment". There
is no documentary evidence or credible testimony to what extent,
if any, petitioner's father had an interest in the business.
Based on all the evidence in the record, we hold that the
amounts paid by petitioner on behalf of Wayanne and its progeny
were investments, not loans.
The Partnership Return
Petitioner prepared the 1986 Form 1065 Federal partnership
income tax return for the restaurant and signed the return as a
general partner. This return was filed for the tax year ended
June 30, 1987. The return is filed in the name of Iron Hill
Restaurant-Lounge Ltd., employee identification number (EIN) 51-
0290454, c/o 404 Arbour Drive, Newark, Delaware 19713
(petitioner's home address). It states the business started
February 1, 1986. It states that there are two partners in the
partnership, and that it is not a limited partnership. The
partnership reported $1,011.39 ordinary income.
However, a Schedule K-l (Partner's Share of Income, Credits,
Deductions, etc.) is attached, which conflicts with and
contradicts the Form 1065. The Schedule K-1 lists the partner's
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name and address as Iron Hill Restaurant-Lounge Inc., 1108 S.
College Ave., Newark, Delaware 19713 (the restaurant's location).
The partner's EIN is shown as XX-XXXXXXX. However, the
partnership's name and address on the Schedule K-1 is I.H.R.L.,
Ltd., c/o 404 Arbour Dr., Newark, Delaware., with the EIN
previously given for Iron Hill Restaurant-Lounge Ltd. on the Form
1065. The Schedule K-1 indicates that the partner (Iron Hill
Restaurant-Lounge, Inc.) is not a general partner, that it is a
corporation, and that the partner's percentage of profit and loss
is "100%". The Schedule K-1 thus shows the partner's distrib-
utive share of ordinary income as $1,011.39.
Respondent's records show no returns filed for 1987 or 1988
for Iron Hill under either of the two EIN's shown on the
partnership return: XX-XXXXXXX or XX-XXXXXXX. We find that no
such returns were filed for 1987 or 1988. Nor were income tax
returns filed from 1980 through the years in issue for R.E.P.,
Ltd., Real Estate Plus, or Ferry Associates.
MIT LTD Bank Account
Iron Hill funds were deposited in two bank accounts: MIT,
Ltd., and Wayanne, Ltd.4 The Wayanne account was used for
payroll, and is not here relevant. The restaurant proceeds not
4
At one point some restaurant proceeds were also deposited
in an account in the name of R.E.P. at First Federal, but that
was closed in or before 1985. The R.E.P. account at issue here
was located at Second National Federal Savings Bank.
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allocated to payroll went into an account at Delaware Savings and
Loan Association in the name of "D. Ferry or W. Wilberding - MIT
Ltd".5 The account was used for food purchases, car purchases,
and other purchases and supplies used in the course of the
restaurant's business. Both petitioner and Wilberding signed the
card, dated January 16, 1985. Although the address on the
signature card is that of the restaurant, during the years in
issue, bank statements were mailed to petitioner's residence.
The EIN shown on the MIT account statement is XXX-XX-XXXX.
Neither petitioner nor Wilberding was paid a salary for his
work at Iron Hill. However, it was petitioner's idea to pay many
of his own and Wilberding's personal expenses from the MIT
account, and this was done.
In 1987, petitioners' personal expenses in the amount of
$8,126 were paid from the MIT account; in 1988, $1,278 was paid.
Checks were written from this account for petitioners' personal
benefit, to Holy Angels parochial school (which petitioners'
children attended); to Macy's, J.C. Penney, and Strawbridge for
credit card purchases; to Wilmington Trust for car payments; to
First Federal Savings and Loan for petitioners' home mortgage
5
MIT stands for Mortgage Investors Trust, which in a prior
lawsuit petitioner admitted was himself.
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payments; and for petitioners' residential utilities and
telephone bills.6
Ferry Associates
In 1984, petitioner opened a bank account at Delaware
Savings and Loan Association in the name of "Ferry Associates".
Petitioner listed his home address as the business address of
Ferry Associates, and monthly bank statements were sent to his
home. He represented to the bank that he was the owner of Ferry
Associates.
The account was opened under the Social Security number (but
not the name) of petitioners' son, Sean Ferry. In 1984,
petitioners' sons were 10 and 6 years old.
Petitioners, along with petitioner's parents, had check-
signing authority for this account and, in fact, used it as their
6
Specifically, we find that petitioners were the owners of
a 1985 Mercury Marquis financed through Wilmington Trust Co.
Petitioner's father was not the owner. Petitioners bought the
car, drove it, obtained insurance for it, and kept it at their
house. Thus, payments to Wilmington Trust in the amount of
$2,250 are income to petitioners.
We also find that petitioners were the beneficial owners of
their residence at 404 Arbour Dr., Newark, Del., where they have
lived since 1982. Specifically, we find that the house was not
owned by petitioner's brother-in-law, David Rowan, by
"Investments Plus, Inc." or by "Iron Hill Investments, Inc." or
by any other entity. Thus, mortgage and tax payments made to
First Federal Savings and Loan totaling $3,249.44, from checks
drawn on the MIT account, were for petitioners' personal expenses
and are income to petitioners, as are payments of telephone and
utility bills at that address.
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personal checkbook.7 In fact, Mrs. Ferry testified under the
assumption that this was their personal, joint bank account.
Petitioners deposited $22,503 into the account in 1987 and
$12,175 in 1988. The account was not supposed to contain any
proceeds from the Iron Hill or Wayanne.
I.H.R-L Bank Account
In 1985, petitioner opened a checking account at Second
National Federal Savings Bank in the name of I.H.R-L LTD (IHRL).
Although I.H.R-L is an abbreviation for Iron Hill Restaurant-
Lounge, restaurant funds were not supposed to be deposited in
this account, but in the MIT account. Wilberding did not have
signature authority on the IHRL account--in fact, he did not know
it existed. Petitioners' home telephone number and home address
were listed on the IHRL account, and monthly bank statements were
sent there. Petitioner made deposits and had sole check-signing
authority.
Petitioner deposited $103,514 into the account in 1987 and
$47,458 in 1988. No one but petitioner used this account.
R.E.P., Ltd.
In February 1988, petitioner opened a checking account at
Second National Federal Savings Bank in the name of R.E.P., Ltd.
(REP). Petitioner listed his home telephone number and home
7
There is no evidence that petitioner's parents used the
account or, indeed, even knew of it.
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address on the account, and monthly bank statements were sent to
him there. Petitioner had sole check-signing authority.
During 1988 petitioners deposited $56,224 into the account.
No proceeds from the Iron Hill or Wayanne were supposed to have
gone into this account.
REP may stand for Real Estate Plus.8 Petitioner was the
actual and beneficial owner of R.E.P., LTD. Throughout 1987 and
1988, petitioners' home utility bills were in the name of R.E.
Plus. This was simply another name for petitioner.
We find and hold that petitioners had unreported income of
$130,232 for 1987 and $85,231 for 1988.
Petitioner did not cooperate during the audit. Although
requested to do so, he did not turn over any personal records to
respondent. He refused to pick up certified mail from the post
office. Moreover, he made false statements to respondent's
agent, Joanne Griffin. He claimed he had no bank accounts, no
credit cards, and no financial interest in any business during
1987 and 1988.
OPINION
The theme of this case could well be: "Oh, what a tangled
web we weave when first we practice to deceive."9 To that end,
8
REP may also stand for "Restaurant Equipment Properties".
9
Sir Walter Scott, "Marmion", canto VI, st. XVII (Little
Brown & Co. 1857).
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petitioner created or participated in numerous entities, bank
accounts, transactions among purported partners and shareholders,
and other purported arrangements (such as loans, leases, flow-
throughs), many of which were fictitious, creating layers of
complexity which appear to have served little or no function
other than an attempt to deceive respondent. Indeed, the web
woven by petitioner is so tangled as to be virtually
impenetrable.
Additions for Fraud
Respondent determined in the notice of deficiency that
petitioner is liable for the additions to tax for fraud under
section 6653(b)(1)(A) and (B) for 1987 and section 6653(b) for
1988. Respondent bears the burden of proof and must establish
each element of fraud by clear and convincing evidence. Sec.
7454(a); Rule 142(b); Akland v. Commissioner, 767 F.2d 618, 621
(9th Cir. 1985), affg. T.C. Memo. 1983-249; Toussaint v.
Commissioner, 743 F.2d 309, 312 (5th Cir. 1984), affg. T.C. Memo.
1984-25; Wright v. Commissioner, 84 T.C. 636, 639 (1985).
Respondent must prove fraud in each of the years involved.
Drieborg v. Commissioner, 225 F.2d 216, 220 (6th Cir. 1955),
affg. in part and revg. in part a Memorandum Opinion of this
Court dated Feb. 24, 1954.
Respondent must prove by clear and convincing evidence that:
(1) An underpayment of tax exists for each of the years in issue,
and (2) that some part of the underpayment is due to fraud. Sec.
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7454(a); Rule 142(b); Petzoldt v. Commissioner, 92 T.C. 661, 698-
699 (1989); Hebrank v. Commissioner, 81 T.C. 640, 642 (1983);
Mosteller v. Commissioner, T.C. Memo. 1986-505, affd. without
published opinion 841 F.2d 1123 (4th Cir. 1988).
Respondent cannot meet her burden of establishing the
existence of an underpayment on the basis of petitioner's failure
to meet his burden of proving error in the determination of
deficiencies. Drieborg v. Commissioner, supra at 218; Parks v.
Commissioner, 94 T.C. 654, 660-661 (1990). However, respondent
has amply met her burden.
Where a taxpayer fails to keep books and records sufficient
to establish the amount of his or her tax liabilities, or if the
records maintained do not clearly reflect income, then the
Commissioner is authorized to reconstruct income by any method
which, in her opinion, clearly reflects the taxpayer's income.
Sec. 446; Harbin v. Commissioner, 40 T.C. 373, 377 (1963); sec.
1.446-1(b)(1), Income Tax Regs. The Commissioner may use any
reasonable method to compute the income, and no particular method
is required. Campbell v. Guetersloh, 287 F.2d 878, 880 (5th Cir.
1961). The Commissioner's method need not be exact but must be
reasonable. Holland v. United States, 348 U.S. 121 (1954);
Rowell v. Commissioner, 884 F.2d 1085 (8th Cir. 1989), affg. T.C.
Memo. 1988-410.
The use of the bank deposits method for computing income has
long been sanctioned by the courts. Estate of Mason v.
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Commissioner, 64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2 (6th
Cir. 1977). Bank deposits are prima facie evidence of income.
Estate of Hague v. Commissioner, 132 F.2d 775 (2d Cir. 1943),
affg. a Memorandum Opinion of this Court. The bank deposits
method assumes that all money deposited in a taxpayer's bank
account during a given period constitutes taxable income, unless
shown to derive from a nontaxable source. Price v. United
States, 335 F.2d 671, 677 (5th Cir. 1964).
Although requested, petitioner did not supply respondent
with books and records showing sources of income. Petitioner
told the agent that he and his wife had no bank accounts.
Respondent's agent identified their bank accounts through third
party information provided from summonses issued to banks in
northern New Castle County, Delaware. Although the bank accounts
included in respondent's analysis were not in petitioners' names,
there was ample evidence to attribute them to petitioners.
All three bank accounts examined were opened by petitioner.
He made the deposits in the accounts. On the IHRL and R.E.P.,
Ltd. accounts petitioner had sole check signing authority; on the
Ferry Associates account this authority was shared with Mrs.
Ferry and allegedly with petitioner's parents, although there is
no evidence they used the account. Petitioners' home address was
listed on the accounts, and monthly bank statements were sent
there.
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There is no credible evidence that the deposits were from
nontaxable sources. We simply do not believe that the money came
from gifts or loans from petitioner's father. Petitioner failed
to call any family members (his mother, sister, or brother-in-
law) in an effort to verify his stories. We thus infer that
their testimony would have been unfavorable. Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d
513 (10th Cir. 1947).
Petitioner did not produce any evidence of so-called flow-
throughs. Neither did he explain away the payment of his
personal expenses (sometimes disguised in corporate names) out of
the MIT account. Respondent has met her burden of showing the
understatements of income for both years in issue.
Fraud is actual, intentional wrongdoing, and the intent is
the specific purpose to evade a tax believed to be owing.
Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968);
Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg.
T.C. Memo. 1966-81. Respondent must show that petitioner
intended to evade taxes by conduct calculated to conceal,
mislead, or otherwise prevent the collection of the tax.
Stoltzfus v. United States, supra at 1004; Webb v. Commissioner,
supra at 377.
Fraud is never to be presumed. Toussaint v. Commissioner,
supra at 312; Webb v. Commissioner, 394 F.2d at 377. The
existence of fraud is a question of fact to be determined on the
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basis of the entire record. Gajewski v. Commissioner, 67 T.C.
181, 199 (1976), affd. without published opinion 578 F.2d 1383
(8th Cir. 1978). Fraud, however, can seldom be proved by direct
proof of the taxpayer's intention. Fraud can be established by
circumstantial evidence and by reasonable inferences drawn from
the taxpayer's entire course of conduct. Spies v. United States,
317 U.S. 492, 499 (1943); Toussaint v. Commissioner, 743 F.2d at
312; Gajewski v. Commissioner, supra at 200.
Courts frequently list various factors or "badges of fraud"
from which fraudulent intent may be inferred. Recklitis v.
Commissioner, 91 T.C. 874, 909 (1988). Although such lists are
nonexclusive, some of the factors this Court has considered as
indicative of fraud are (1) understatement of income, (2)
inadequate records, (3) implausible or inconsistent explanations
of behavior, (4) concealment of assets, and (5) failure to
cooperate with the tax authorities. Niedringhaus v.
Commissioner, 99 T.C. 202, 211 (1992) (citing Bradford v.
Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.
Memo. 1984-601). These indicia are amply present here, as set
forth in the findings of fact.
The taxpayer's evasiveness on the stand, inconsistencies in
his testimony, and the lack of credibility of such testimony are
heavily weighted factors in considering the fraud issue.
Toussaint v. Commissioner, supra at 312. Petitioner was not
credible. His testimony was highly inconsistent concerning his
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interest in the restaurant, the purpose of the transfer of funds
to or on behalf of Wayanne, and interests purportedly owned by
his sons and parents. At one point he denied having created his
own Forms W-2, but later said he intended thereby to reflect the
personal expenses paid on his behalf from the MIT account. He
denied that he had charge accounts, but when confronted with
evidence, admitted that he did have cards with his name on them,
but said the accounts were in his wife's name. He could not give
the Court a straight answer to a simple question, such as "Why
did you not have a personal bank account in your own name?"
Moreover, petitioner's testimony was flatly contradicted by
Wilberding, an insurance agent (who testified that petitioner
represented that the house and car were his), and a revenue
agent. Although Mrs. Ferry was evasive, clearly trying hard to
avoid the twin pitfalls of perjury and contradicting her husband,
she did not corroborate his testimony. She said, for instance,
unbelievably, that she did not know who owned her house ("You'll
have to ask Don"), but admitted that she had no reason to believe
her brother owned it. She also testified that she had never seen
any gifts from petitioner's parents.
It is well settled that we are not required to accept a
taxpayer's self-serving testimony in the absence of corroborating
evidence, particularly where the testimony is unreasonable,
improbable, or questionable. Lerch v. Commissioner, 877 F.2d
624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger
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v. Commissioner, 440 F.2d 688, 689 (9th Cir. 1971), affg. per
curiam T.C. Memo. 1969-159; Niedringhaus v. Commissioner, supra
at 212. Petitioner's testimony was unreasonable, improbable, and
questionable, and we do not accept it.
The sophistication, education, and intelligence of the
taxpayer are also relevant. Halle v. Commissioner, 175 F.2d 500,
503 (2d Cir. 1949), affg. 7 T.C. 245 (1946); Niedringhaus v.
Commissioner, supra. Although petitioner is not highly educated,
he held himself out as a financial and business expert. He kept
books and prepared individual, corporate, and partnership tax
returns. He purported to set up trusts, corporations, and
partnerships. He prepared Forms W-2 (at least, his own), and
held himself out as the person with whom the revenue agent should
deal in conducting the Wayanne audit. In testifying, he referred
more than once to the gift tax limitation of $10,000 per year.
We believe he was informed about taxes, and intended to evade
them.
We have no doubt that petitioner intended to conceal his
assets. The use of multiple entities with names and EIN's, use
of his son's Social Security number on the Ferry Associates
account (before stating for two consecutive years in issue that
the children's numbers were "applied for"), putting his house,
automobile, and telephone in other names, and the various other
devices employed by petitioner convince us that he intended to
conceal his assets.
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In light of the above, we find that petitioner is liable for
the additions to tax for fraud for each of the years in issue.
Substantial Understatement Under Section 6661(a)
Section 6661(a) provides that if there is a substantial
understatement of income tax for any taxable year, there shall be
added to the tax an amount equal to 25 percent of the amount of
any underpayment attributable to such understatement. Pallottini
v. Commissioner, 90 T.C. 498 (1988). The amount of the
understatement is equal to the excess of the amount of tax
required to be shown on the return for the tax year over the
amount of the tax shown on the return. Woods v. Commissioner, 91
T.C. 88, 94 (1988). An understatement is substantial if it
exceeds the greater of 10 percent of the tax required to be shown
on the return for the taxable year or $5,000. Sec. 6661(b)(1).
The amount of the understatement under this section shall be
reduced if there was substantial authority for the tax treatment
of the item by the taxpayer or if the relevant facts affecting
the item are adequately disclosed on the return. Neither
exception applies here. Therefore, we find that petitioners are
liable for the addition to tax for substantial understatement.
To reflect a concession by respondent,
Decision will be entered
under Rule 155.