Polidori v. Commissioner

T.C. Memo. 1996-514

UNITED STATES TAX COURT

LAWRENCE J. POLIDORI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1902-95. Filed November 19, 1996.

Sherwin C. Peltin, for petitioner.

J. Paul Knap, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WRIGHT, Judge: Respondent determined deficiencies in and

additions to petitioner's Federal income tax as follows:1

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 2 -

Additions to Tax
Year Deficiency Sec. 6661 Sec. 6653 (b)

1980 $113,469 -- $64,650
1981 39,563 -- 28,150
1982 40,360 $10,090 25,125
1983 19,561 4,890 9,781
1984 19,286 4,822 9,643
1985 41,813 10,453 20,907
1986 21,143 5,286 12,907

After concessions, the issues for decision are:

(1) Whether certain deposits to a foreign bank account

constitute unreported income to petitioner. We hold that they

do.

(2) Whether petitioner is liable for additions to tax for

fraud under section 6653(b) for 1980 and 1981, under section

6653(b)(1) and (2) for 1982 through 1985, and under section

6653(b)(1)(A) and (B) for 1986. With respect to taxable years

1980 through 1984, we hold that he is. With respect to taxable

years 1985 and 1986, we hold that he is not.

(3) Whether petitioner is liable for the addition to tax

under section 6661 for a substantial understatement in income tax

for taxable years 1982, 1983, 1984, 1985, and 1986. To the

extent provided for herein, we hold that he is.

(4) Whether the period of limitations has expired for

assessment and collection of the deficiencies in and additions to

petitioner's Federal income tax for any year at issue. With

respect to taxable years 1980 through 1984, we hold that it has

not. With respect to taxable years 1985 and 1986, we hold that

it has.
 - 3 -

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and attached exhibits are incorporated

herein. At the time the petition was filed, petitioner resided

in Ozona, Florida.

Petitioner and his former spouse2 were husband and wife

throughout the years at issue. They filed joint Federal

individual income tax returns for taxable years 1980, 1981, 1982,

1983, 1984, and 1985. Despite being married, petitioner filed

his 1986 Federal individual income tax return using the filing

status of "head of household."

Petitioner was a practicing dentist throughout the years at

issue. During that period, both he and his former spouse were

co-owners of a foreign bank account (the foreign account) located

in the Bahamas. From time to time, petitioner opened subsidiary

accounts within the foreign account for various investment

purposes. Neither petitioner nor his former spouse made

withdrawals from the foreign account prior to 1986.3 On

September 1986, petitioner opened a second foreign account with

the same Bahamian bank. Unlike the first foreign account,

2
Petitioner's former spouse, Fern M. Polidori, is not a
party in this case.
3
The parties have stipulated that neither petitioner nor his
former spouse withdrew funds from the foreign account prior to
1986. The account records, however, indicate that at least one
cash withdrawal was made on September 29, 1981, in the amount of
$300.
 - 4 -

however, petitioner was the sole owner of this second account.

The first foreign account was closed in November 1986.4

During the years at issue, petitioner made 66 deposits to

the foreign account. Many intra-account transfers were also

made. The aggregate annual deposits to the foreign account were

as follows:

Year Number of Deposits Amount Deposited

1980 6 $202,000
1981 15 42,031
1982 17 52,016
1983 10 24,205
1984 5 17,695
1985 12 51,484
1986 1 1,096

More specifically, individual deposits to the foreign account

were as follows:5

Taxable Year 1980

Date Deposits

2/12/80 $ 20,000.00
6/4/80 10,000.00
6/23/80 80,000.00
6/30/80 12,000.00
7/14/80 70,000.00
11/24/80 10,000.00
total $202,000.00

4
Throughout the remainder of this opinion, no distinction is
made between these two foreign accounts.
5
Some pages of the account records are partially illegible,
and asterisks are used where figures could not be determined.
 - 5 -

Taxable Year 1981

Date Deposits

5/20/81 $ 4,000.00
5/28/81 1,500.00
6/9/81 3,874.00
6/29/81 2,425.00
7/14/81 2,300.00
7/22/81 2,400.00
8/*/81 12,505.23
8/21/81 800.00
8/31/81 2,300.00
9/3/81 1,300.00
9/15/81 1,400.00
9/23/81 1,000.00
9/29/81 3,473.**
11/19/81 1,300.00
11/30/81 1,453.60
total $42,031.**

Taxable Year 1982

Date Deposits

2/17/82 $3,200.00
2/26/82 2,103.40
3/11/82 1,000.00
4/7/82 2,138.40
5/12/82 3,649.00
6/16/82 1,000.00
6/22/82 1,500.00
7/27/82 1,225.00
8/18/82 6,700.00
10/5/82 5,500.00
10/15/82 3,000.00
10/18/82 2,000.00
11/18/82 3,500.00
11/19/82 6,500.00
12/15/82 3,000.00
12/15/82 3,200.00
12/30/82 2,800.00
total $52,015.80
 - 6 -

Taxable Year 1983

Date Deposits

1/5/83 $2,000.00
3/8/83 2,500.00
5/31/83 2,400.00
6/8/83 1,500.00
*/*/83 3,395.00
*/*/83 2,000.00
*/*/83 4,110.00
*/*/83 3,300.00
11/*/83 3,000.00
11/*/83 2,900.00
1
total $27,105.00
1
The parties stipulated that deposits to the foreign account
in 1983 totaled $24,205, but a review of the account records
indicates that their stipulation failed to account for the
$2,900 deposit on 11/*/83.

Taxable Year 1984

Date Deposits

4/19/84 $ 2,393.00
4/30/84 2,915.20
5/30/84 4,069.30
6/1*/84 2,717.70
9/5/84 5,600.00
total $17,695.20

Taxable Year 1985

Date Deposits

1/*/85 $ 9,340.50
2/*/85 1,049.00
2/*/85 998.25
2/*/85 931.00
*/*/85 3,428.42
5/3/85 3,388.55
5/24/85 3,183.60
7/1/85 4,517.50
11/14/85 1,235.80
11/14/85 4,444.37
12/12/85 17,289.57
12/12/85 1,677.40
total $51,483.96
 - 7 -

Taxable Year 1986

Date Deposits

4/2/86 $1096.00
total $1096.00

The account records indicate that most of the 66 deposit

transactions involved the deposit of multiple checks.

During the years at issue, the foreign account earned the

following amounts of interest:

Year Interest Earned

1980 $ 7,503
1981 33,286
1982 33,594
1983 24,408
1984 30,539
1985 48,621
1986 36,886

In 1980, petitioner also realized a short-term capital gain in

the amount of $13,117.23 from assets contained in the foreign

account.

Petitioner used a professional accountant to prepare his tax

returns for each year at issue. He did not, however, provide the

accountant with information pertaining to the existence of the

foreign account. Consequently, the accountant did not include,

and petitioner did not report on his returns for any taxable year

at issue, either the interest earned on the foreign account or

the short-term capital gain realized in 1980.6 Petitioner

6
Similarly, petitioner did not file a Form 90-22.1 (report
of foreign bank and financial account) with regard to the foreign
account for any taxable year at issue.
 - 8 -

reported the following amounts of gross income for the taxable

years at issue:

Year Gross Income

1980 $77,539
1981 70,185
1982 60,665
1983 57,343
1984 104,827
1985 55,367
1986 66,994

The tax returns petitioner filed for each taxable year at

issue include a Schedule B. Each Schedule B specifically

inquires as to whether petitioner maintained a foreign bank

account at any time during the corresponding taxable year.7

Instructions contained on each Schedule B require the answer to

this inquiry to be indicated by marking a box labeled either

"Yes" or "No." Petitioner left the blocks corresponding to this

inquiry blank on his returns for each taxable year at issue,

except years 1984 and 1985. With respect to taxable years 1984

and 1985, petitioner explicitly indicated on each Schedule B that

he did not maintain a foreign bank account at any time during the

year.

On October 5, 1992, petitioner, in accordance with a plea

agreement, pleaded guilty to and was convicted of filing false

individual income tax returns for taxable years 1985 and 1990, in

7
Respondent states on brief that petitioner's returns for
1982 and 1986 did not specifically make this inquiry; however, an
examination of those returns shows respondent to be in error.
 - 9 -

violation of section 7206(1). Count one of the plea agreement

reads as follows:

That on or about April 15, 1986, in the State and
Eastern District of Wisconsin,

[Petitioner]

the defendant herein, who, during the calendar year
1985, was a resident of Franksville, Wisconsin, did
willfully make and subscribe a joint federal income tax
return (Form 1040) on behalf of himself and his then-
wife Fern Polidori, for the calendar year 1985, which
return was verified by a written declaration that it
was made under the penalties of perjury, and was filed
with the Internal Revenue Service, which return the
defendant did not believe to be true and correct as to
every material matter in the following respects:

(1) The defendant falsely indicated on the
return that he did not have any financial
accounts in foreign countries during 1985,
whereas, in fact, as the defendant well knew,
he and his then-wife had an account at the
Swiss Bank Corporation (Overseas) Ltd.,
located in Nassau, Bahamas, in which, at
various times during 1985, he had deposits
exceeding $500,000;

(2) The defendant falsely indicated on the
return that he and his then-wife had total
income during the year 1985 of only
$55,367.43, whereas, as the defendant well
knew, he and his wife had total income
substantially in excess of the amount stated
because the defendant and his wife had earned
substantial additional income during 1985 on
their deposits at the Swiss Bank Corporation
(Overseas) Ltd., Nassau, Bahamas, which
income was not reported on the return; and

(3) The defendant falsely indicated on the
return that he and his then-wife had interest
income during 1985 of only $450.76, whereas,
as the defendant well knew, he and his wife
had interest income in excess of the amount
stated.
 - 10 -

All in violation of Title 26, United States Code,
Section 7206(1).

Respondent determined that petitioner fraudulently omitted

from income the interest on the foreign bank accounts for each

taxable year at issue. She also determined that petitioner made

the 66 deposits to the foreign account using unreported income,

and that petitioner failed to report the short-term capital gain

realized in 1980. Respondent thereafter issued the notice of

deficiency, reflecting those determinations, on November 4, 1994.

OPINION

Petitioner concedes that he failed to report gross income

from both the interest earned on the foreign account and the

short-term capital gain that he realized in 1980. He maintains,

however, that respondent is precluded from assessment and

collection of the deficiencies in and additions to tax determined

in the notice of deficiency because the statute of limitations

has expired for each year at issue. Respondent disagrees,

contending that each limitations period remains open because

petitioner filed fraudulent tax returns for the corresponding

taxable years. Respondent further maintains that petitioner has

not established a nontaxable source for the 66 deposits that he

made to the foreign account, and, as a result, such deposits

constitute unreported income taxable to him. Petitioner

disagrees and contends that he has established a nontaxable

source for the deposits at issue.
 - 11 -

For reasons discussed herein, we conclude that, except as to

taxable years 1985 and 1986, the statute of limitations does not

preclude assessment and collection of the deficiencies in and

additions to tax determined by respondent. We further conclude

that petitioner has failed to establish a nontaxable source for

the 66 deposits that he made to the foreign account.

Issue 1. Bank Deposits

Bank deposits are prima facie evidence of income, and

petitioner must show that the funds deposited into the foreign

account were not obtained from a taxable source. Rule 142(a);

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). In order to

satisfy his burden, petitioner contends that he had ample

resources from the liquidation of real estate and other assets to

provide the funds needed to make the deposits at issue. He

contends that a sale of 4 real properties in 1979, a receipt of

several periodic installment and balloon payments, the collection

of a mortgage, and a real property sale in 1984 provided him with

the means needed to make the 66 deposits at issue. He then

contends that this "clearly credible evidence" satisfies his

burden and shifts the burden of coming forward to respondent. We

disagree.

Apparently, petitioner fails to appreciate the extent of his

burden of proof; moreover, he has fallen far short in his attempt

to shift the burden of coming forward to respondent. Petitioner

has indeed presented the Court with evidence suggesting that he
 - 12 -

possessed the financial resources needed to make the 66 deposits

at issue. However, despite his alleged ability to make said

deposits, petitioner has not convinced the Court that the

deposits were made using proceeds that he received from the real

estate transactions he cites. Petitioner has simply identified a

possible source of funds from which the deposits at issue may

have been made. Yet merely identifying a possible source of

funds does not satisfy petitioner's burden. In order to refute

respondent's determination, petitioner must establish that the

bank deposits at issue were made from a nontaxable source of

funds. Rule 142(a); Reaves v. Commissioner, 31 T.C. 690, 718

(1958), affd. 295 F.2d 336 (5th Cir. 1961); Romer v.

Commissioner, 28 T.C. 1228, 1244 (1957).

Petitioner's testimony about his having made the deposits at

issue using proceeds that he received from various real estate

transactions is questionable, and we reject it as such. Although

petitioner's testimony was not contradicted at trial, this Court

is not required to accept a taxpayer's uncontradicted testimony

if we find such testimony improbable, unreasonable, or

questionable. Lovell & Hart, Inc. v. Commissioner, 456 F.2d 145,

148 (6th Cir. 1972), affg. T.C. Memo. 1970-335; MacGuire v.

Commissioner, 450 F.2d 1239, 1244 (5th Cir. 1971), affg. T.C.

Memo. 1970-89; see also Tokarski v. Commissioner, supra.

Furthermore, the size and frequency of the deposits at issue

render petitioner's argument suspect. Of the 66 total deposits,
 - 13 -

53, or 80 percent, were for less than $5,000; 34 were for less

than $3,000. Additionally, most deposits consisted of multiple

checks. This means that the denominations of the checks used to

make the deposits were less than the amounts indicated in the

account records as being the total amount of each transaction.8

Petitioner has not attempted to explain this peculiar pattern of

predominantly small deposits. While it is conceivable that

petitioner deposited the proceeds that he allegedly received from

the real estate transactions into some unidentified account, and

then periodically deposited checks drawn against that account

into the foreign account, we hesitate to reach this conclusion

because petitioner has neither argued nor proved it. It is

equally conceivable that the deposits at issue were made using a

source of funds wholly unrelated to the transactions petitioner

cites. All that is certain is that (1) several real estate

transactions occurred during the years at issue, and (2) 66

predominantly small deposits were made throughout the course of

the 7-year period before the Court. Nothing in the record,

however, other than petitioner's self-serving testimony, links

these facts. While the exhibits petitioner relies upon may in

fact indicate his financial ability to make the deposits at

issue, they do not indicate, or even remotely suggest, that such

8
For example, the account records indicate that 17 deposits
made in 1982 consisted of 35 separate checks.
 - 14 -

deposits were made using proceeds derived from the transactions

described in those exhibits.

By not attempting to trace the subject proceeds to a single

deposit, or even a particular year, petitioner has left a hole in

his argument. Tracing the proceeds from the underlying

transactions to the deposits at issue should not have been a

difficult task for petitioner to accomplish. Canceled checks and

past bank statements might have been persuasive evidence in this

regard. Petitioner's failure to provide corroborative evidence

presumably in his control weighs against him. Tokarski v.

Commissioner, supra; Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir.

1947).

Having rejected petitioner's questionable testimony, and

given his failure to explain the size and frequency of the

deposits at issue, as well as his failure to trace the proceeds

derived from the real estate transactions to such deposits, we

conclude that petitioner has not established that respondent's

determination is erroneous. Accordingly, we resolve this issue

in favor of respondent.

Issue 2. Additions to Tax Under Section 6653(b)

Respondent contends that petitioner is liable for the

addition to tax for civil fraud under section 6653(b) for 1980

and 1981, under section 6653(b)(1) and (2) for 1982, 1983, 1984,

and 1985, and under section 6653(b)(1)(A) and (B) for 1986.
 - 15 -

Specifically, respondent contends that petitioner fraudulently

omitted the interest earned on the foreign account from income

for each taxable year at issue. In contrast, petitioner

maintains that his failure to report the interest was not

fraudulent, but rather the result of his failure to appreciate

the income tax reporting requirements governing interest earned

on foreign accounts.

Respondent bears the burden of proving fraud by clear and

convincing evidence. Sec. 7454(a); Rule 142(b). The burden that

respondent bears in proving fraud under section 6653(b) or

section 6501(c)(1) is one and the same. Estate of Temple v.

Commissioner, 67 T.C. 143, 159-160 (1976). Respondent must

establish that petitioner underpaid his taxes for each taxable

year at issue and that some part of that underpayment was due to

petitioner's intent to conceal, mislead, or otherwise prevent the

collection of such taxes. Parks v. Commissioner, 94 T.C. 654,

660-661 (1990); Hebrank v. Commissioner, 81 T.C. 640, 642 (1983).

Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing, effectuated by conduct designed

to conceal, mislead, or otherwise prevent the collection of such

tax. Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968),

affg. T.C. Memo. 1966-81; Mitchell v. Commissioner, 118 F.2d 308,

310 (5th Cir. 1941), revg. 40 B.T.A. 424 (1939); Estate of

Pittard v. Commissioner, 69 T.C. 391 (1977); McGee v.

Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th
 - 16 -

Cir. 1975). The issue of fraud presents a factual question which

must be decided on the basis of an examination of all evidence

contained in the record. Mensik v. Commissioner, 328 F.2d 147

(7th Cir. 1964), affg. 37 T.C. 703 (1962); Stone v. Commissioner,

56 T.C. 213, 224 (1971); Stratton v. Commissioner, 54 T.C. 255,

284, modified 54 T.C. 1351 (1970). Fraud is never presumed; it

must be established by independent evidence of fraudulent intent.

Beaver v. Commissioner, 55 T.C. 85 (1970). Fraud may be proved

by circumstantial evidence and inferences drawn from the record

because direct proof of the taxpayer's intent is rarely

available. Spies v. United States, 317 U.S. 492 (1943); Rowlee

v. Commissioner, 80 T.C. 1111 (1983); Stephenson v. Commissioner,

79 T.C. 995 (1982), affd. 748 F.2d 331 (6th Cir. 1984).

Fraudulent intent may be inferred from a pattern of conduct.

Spies v. United States, supra at 499. A pattern of consistent

underreporting of income, especially when accompanied by other

circumstances showing an intent to conceal, justifies the

inference of fraud. See Holland v. United States, 348 U.S. 121,

137 (1954); Otsuki v. Commissioner, 53 T.C. 96 (1969).

Understatement of Income Tax

In order for respondent to prove fraud with respect to the

taxable years at issue, she must establish by clear and

convincing evidence that an underpayment of tax exists with

respect to such taxable years. Parks v. Commissioner, supra;

Hebrank v. Commissioner, supra. In establishing the existence of
 - 17 -

an underpayment, however, respondent cannot rely on a taxpayer's

failure to overcome the normal presumption of correctness

attributed to the notice of deficiency. Otsuki v. Commissioner,

53 T.C. 96, 106 (1969). In general, for purposes of section

6653(b), the term "underpayment" has the same meaning as the term

"deficiency," as that term is defined in section 6211(a). Sec.

6653(c)(1).

We find that respondent has satisfied this prong of her

burden with respect to taxable years 1980 through 1984.

Respondent, however, has not satisfied her burden with respect to

the existence of an underpayment for taxable years 1985 and 1986.

As to taxable years 1980 through 1983, petitioner's

stipulation that he failed to report gross income from interest

on the foreign bank accounts during those years establishes that

an underpayment exists with respect to each of those years. As

to taxable years 1984, 1985, and 1986, however, respondent has

conceded that petitioner is entitled to deductions for charitable

contributions in the amounts of $25,132.24, $64,982.70, and

$65,352.00, respectively. Accordingly, we address those years in

turn.

With respect to taxable year 1984, an underpayment of tax

exists because the amount of unreported interest income conceded

by petitioner exceeds the amount of the additional charitable

deduction conceded by respondent.
 - 18 -

With respect to taxable year 1985, respondent has not

carried her burden in establishing the existence of an

underpayment. Respondent cannot rely on petitioner's failure to

establish a nontaxable source for the bank deposits discussed

earlier in this opinion in order to satisfy her burden. Otsuki

v. Commissioner, supra. Instead, if the bank deposits are to be

considered in determining whether an underpayment exists,

respondent must establish by clear and convincing evidence that

such deposits were unreported income. She has not done so.

Hence, in determining whether an underpayment exists, the bank

deposits may not be considered. Therefore, because the amount of

the additional charitable deduction conceded by respondent for

taxable year 1985 exceeds the unreported interest income conceded

by petitioner for that year, we find that respondent has not

established by clear and convincing evidence that an underpayment

exists for taxable year 1985.

Respondent has also failed to establish the existence of an

underpayment for taxable year 1986. As is the case for taxable

year 1985, and for the same reasons, the bank deposits cannot be

considered when determining whether an underpayment exists for

taxable year 1986. Accordingly, because the amount of the

additional charitable deduction conceded by respondent for

taxable year 1986 exceeds the unreported interest income conceded

by petitioner for that year, we find that respondent has not
 - 19 -

established by clear and convincing evidence that an underpayment

exists for taxable year 1986.

Fraudulent Intent

After establishing the existence of an underpayment, the

second prong of respondent's burden requires that she establish

that some part of that underpayment was due to petitioner's

intent to conceal, mislead, or otherwise prevent the collection

of such taxes. Parks v. Commissioner, supra; Hebrank v.

Commissioner, supra. Over the years, courts have developed a

nonexclusive list of factors that demonstrate fraudulent intent.

These badges of fraud include: (1) Understating income, (2)

maintaining inadequate records, (3) failing to file tax returns,

(4) implausible or inconsistent explanations of behavior, (5)

concealment of income or assets, (6) failing to cooperate with

tax authorities, (7) engaging in illegal activities, (8) an

intent to mislead which may be inferred from a pattern of

conduct, (9) lack of credibility of the taxpayer's testimony,

(10) filing false documents, and (11) dealing in cash. See Douge

v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Webb v. Commissioner, 394 F.2d 366 (5th

Cir.1968), affg. T.C. Memo. 1966-81; Recklitis v. Commissioner,

91 T.C. 874, 910 (1988). Although no single factor is

necessarily sufficient to establish fraud, the combination of a

number of factors constitutes persuasive evidence. Solomon v.
 - 20 -

Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per

curiam T.C. Memo. 1982-603; Beaver v. Commissioner, 55 T.C. 85,

93 (1970). Some conduct and evidence can be classified under

more than one factor. The sophistication, education, and

intelligence of the taxpayer are relevant to this determination.

Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992). Several

of these indicia of fraud are present in this case.

1. Petitioner's Sophistication and Experience.

The sophistication and experience of a taxpayer are relevant

in determining whether fraud exists. Id.; see also Plunkett v.

Commissioner, 465 F.2d 299, 303 (7th Cir. 1972), affg. T.C. Memo.

1970-274; Iley v. Commissioner, 19 T.C. 631, 635 (1952). This

includes the taxpayer's educational background. Simms v.

Commissioner, 422 F.2d 340 (4th Cir. 1970), affg. T.C. Memo.

1968-298. Here, petitioner is an intelligent, educated man. In

addition to practicing dentistry during the years at issue,

petitioner was significantly involved in the real estate market,

leasing and selling various properties. Moreover, the account

statements for petitioner's foreign bank account indicate that he

was an active investor in securities, specifically U.S. Treasury

Bills. Having observed petitioner at trial and considering the

record, we cannot accept his claim of naivete. It is unlikely

that petitioner, as a result of his failure to report the foreign

interest income, would not have realized his income tax
 - 21 -

liabilities were consistently and substantially underreported for

each year at issue.

2. Consistent and Substantial Understatements of Income.

Consistent and substantial understatements of income may be

strong evidence of fraud. Marcus v. Commissioner, 70 T.C. 562,

577 (1978), affd. without published opinion 621 F.2d 439 (5th

Cir. (1980). Moreover, a pattern of consistent underreporting of

income, when accompanied by other circumstances indicating an

intent to conceal income, justifies the inference of fraud.

Holland v. United States, 348 U.S. 121, 137 (1954).

This case involves a 7-year period during which petitioner

failed to report interest earned on his foreign bank account.

Moreover, the amount of unreported income for each year at issue

is substantial in comparison with the amount of gross income

petitioner reported for such years. The following table

illustrates the omitted interest income as a percentage of

petitioner's reported gross income:

Year Percentage of Income
1980 1
9.68
1981 47.43
1982 55.38
1983 42.56
1984 29.13
1985 87.82
1986 55.06
1
Petitioner also did not report a short-term capital gain of
$13,117.23 in 1980. The figure in the table above does not
include the omitted short-term gain.

Such failure to report substantial amounts of income over a

number of years is effective evidence of fraud. Marcus v.
 - 22 -

Commissioner, supra. Petitioner's failure to report the interest

income also presents a consistent pattern from which an inference

of fraud may be drawn. Holland v. United States, supra.

3. Implausible or Inconsistent Explanations of Behavior.

Implausible or inconsistent explanations of behavior may be

a badge of fraud. Bradford v. Commissioner, supra. Petitioner

testified that he did not report the interest earned on the

foreign account because he believed that such income was not

reportable until it was physically received, instead of merely

being credited to his account. It was because of this belief,

petitioner further testified, that he did not inform his

accountant about the foreign account or the interest earned

thereon. This explanation is implausible, and, in light of

petitioner's sophistication, we find it to be without merit.

Furthermore, this explanation is particularly difficult to accept

in light of petitioner's testimony regarding interest income that

he received from domestic sources. Although petitioner testified

that he could not recall what he believed to be the proper tax

treatment of domestic interest income during the years at issue,

petitioner testified that he relied on his accountant to treat

such interest properly when preparing his returns. It seems

inconsistent to us that petitioner would rely on his accountant

to treat his domestic interest income properly while at the same

time preventing his accountant from providing similar treatment

to his foreign interest income.
 - 23 -

4. Concealment of Income or Assets.

The concealment of income or assets is an indicium of fraud.

Bradford v. Commissioner, supra at 307-308. Petitioner created

and maintained an interest bearing foreign bank account to which

he made numerous deposits during the years at issue. When

petitioner filed his tax returns for taxable years 1980, 1981,

1982, 1983, and 1986, he concealed the existence and content of

that account by leaving blank that portion of each Schedule B

which specifically inquired as to the existence of such assets.

Similarly, when he filed his tax returns for taxable years 1984

and 1985, petitioner concealed the existence and content of the

foreign account by explicitly stating on each Schedule B that he

did not maintain a foreign account during the taxable year.

Through these representations, petitioner concealed the interest

earned on the foreign account. Such concealment is evidence of

fraud. Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986).

Additionally, petitioner concealed the existence of the

foreign account from his accountant. Concealment of information

from an accountant is evidence of fraud. Korecky v.

Commissioner, 781 F.2d 1566, 1569 (11th Cir. 1986), affg. T.C.

Memo. 1985-63. Reliance upon an accountant to prepare accurate

returns may negate fraudulent intent if the accountant has been

supplied with all the information necessary to prepare the

returns. Estate of Temple v. Commissioner, 67 T.C. 143, 162

(1976). This has not occurred in the instant case.
 - 24 -

5. Filing False Documents.

Fraud may also be inferred when a taxpayer files false

documents. Bradford v. Commissioner, supra. Petitioner's return

for taxable year 1984 explicitly states that he did not maintain

a foreign bank account during the taxable year. Petitioner

contends, however, that it was never his intention to make such

an express representation. Instead, petitioner claims that he

cannot explain why his Schedule B for 1984 states that he did not

maintain a foreign bank account during the taxable year.

Petitioner blames his accountant for the statement on the return,

contending that the accountant, or someone under his control, is

responsible for making it without petitioner's authority or

direction. We do not accept petitioner's argument regarding this

statement on the return. Moreover, although petitioner's

accountant testified that the statement in question might be the

result of an error on his part, we attribute little weight to his

testimony as we found it to be lacking in credibility.

6. Lack of Credibility of Taxpayer's Testimony.

A taxpayer's incredible testimony also supports an inference

of fraud. Bradford v. Commissioner, supra. We have difficulty

accepting as credible much of petitioner's testimony. For the

most part, it is self-serving and implausible.

7. Conclusion.

Petitioner primarily argues that he misunderstood the income

tax reporting requirements for foreign interest income. At issue
 - 25 -

here, however, is not simply a case involving a taxpayer's

misunderstanding of the tax law; rather, it involves a tax

evasion scheme that spans a multi-year period during which

petitioner consistently and substantially understated his income.

Petitioner advances a dubious argument that is more likely a

belated and convenient fabrication designed to facilitate his

evasion scheme than a sincere claim of naivete. Coupling the

consistent pattern of substantial underreporting with the

previously discussed circumstances, all of which indicate an

intent to conceal income, justifies the inference of fraud.

Holland v. United States, 348 U.S. at 137. Accordingly, we

conclude that respondent has shown, by clear and convincing

evidence, that petitioner has underpaid his taxes for each

taxable year at issue, except 1985 and 1986, and that some part

of each underpayment was due to petitioner's intent to conceal,

mislead, or otherwise prevent the collection of such taxes. See

Parks v. Commissioner, 94 T.C. at 660-661. Hence, as to each

taxable year at issue, except 1985 and 1986, we resolve this

issue in respondent's favor. As to taxable years 1985 and 1986,

we resolve this issue in favor of petitioner.

8. Other Matters

Petitioner objects to the introduction into evidence of his

plea agreement, contending that it lacks relevancy and fosters a

prejudicial inference. Although petitioner's conviction for

willful falsification under section 7206(1) is not dispositive on
 - 26 -

the issue of intent to evade tax, it is a fact to be considered

in a trial on the merits. Wright v. Commissioner, 84 T.C. 636,

643-644 (1985). Moreover, petitioner's criminal conviction is

admissible and may be relevant to prove "motive, opportunity,

intent, preparation, plan, knowledge, identity, or absence of

mistake or accident." Fed. R. Evid. 404(b). To be relevant,

evidence must have some "tendency to make the existence of any

fact that is of consequence to the determination of the action

more probable or less probable than it would be without the

evidence." Fed. R. Evid. 401. Although we have found that

respondent failed to prove an underpayment in petitioner's income

taxes for 1985 and 1986, the criminal conviction and plea

agreement are of some relevance to other taxable years at issue

because we have found that the petitioner's evasion scheme

originated in 1980 and continued in succeeding years. See Farber

v. Commissioner, 43 T.C. 407, 421 n.10 modified 44 T.C. 408

(1965); see also Petzoldt v. Commissioner, 92 T.C. 661, 701-702

(1989); McGee v. Commissioner, 61 T.C. 249, 260 (1973), affd. 519

F.2d 1121 (5th Cir. 1975). Even excluding consideration of

petitioner's plea agreement, there is ample evidence in the

record to sustain respondent's determination for each year at

issue, except 1985 and 1986, because respondent has established

petitioner's fraudulent intent for such years by other convincing

evidence.
 - 27 -

Issue 3. Additions to Tax Under Section 6661.

Respondent determined that petitioner is liable for the

addition to tax pursuant to section 6661 for taxable years 1982

through 1986 due to a substantial understatement of income tax

for such taxable years. This determination is benefited by a

presumption of correctness. Rule 142(a). A substantial

understatement is one that exceeds the greater of 10 percent of

the tax required to be shown on the return, or $5,000. Sec.

6661(b)(1). If a taxpayer has substantial authority for the tax

treatment of any item on the return, the understatement is

reduced by the amount attributable to such authority. Sec.

6661(b)(2)(B)(i). Similarly, the amount of the understatement is

reduced for any item adequately disclosed either on the

taxpayer's return or in a statement attached to the return. Sec.

6661(b)(2)(B)(ii).

Petitioner concedes that he is not entitled to an adjustment

pursuant to section 6661(b)(2)(B) for any taxable year at issue.

Accordingly, if, after performing the Rule 155 computation,

petitioner's understatement in tax for any year at issue is

"substantial," as defined by section 6661(b)(1), then the

addition to tax under section 6661 will apply to that year.

Issue 4. Statute of Limitations.

Respondent has established fraud against petitioner for

taxable years 1980 through 1984. Accordingly, the period of

limitations for assessment and collection of the tax remains open
 - 28 -

for such years. Sec. 6501(c)(1). Respondent, however, has not

established fraud against petitioner with respect to taxable

years 1985 or 1986. Accordingly, because the notice of

deficiency was issued on November 4, 1994, the periods of

limitations for taxable years 1985 and 1986 have expired. Sec.

6501(a).

To reflect the foregoing,

Decision will be

entered under Rule 155.