Monroy v. Commissioner

T.C. Memo. 1996-540

UNITED STATES TAX COURT

ERNESTO H. MONROY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4239-95. Filed December 16, 1996.

Towner S. Leeper and John E. Leeper, for petitioner.

T. Richard Sealy III, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Chief Judge: Respondent determined deficiencies in,

and penalties on, petitioner's Federal income taxes as follows:

Year Deficiency Sec. 6663(a)

1990 $416,765.00 $312,573.75
1991 $370,588.00 $277,941.00
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Unless otherwise indicated, 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.

After concessions, the issues for decision are: (1) Whether

petitioner had unreported income in 1990 in the amount of

$941,671; (2) whether petitioner had unreported income in 1991 in

the amount of $563,877; and (3) whether petitioner is liable for

the fraud penalty for 1990 and 1991.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. At the

time the petition was filed, petitioner resided in Leon, Mexico.

Petitioner is a citizen of Mexico. Petitioner married Maria del

Carmen Yurietta Valdes (Yurietta) in 1959; they had five

children. Petitioner and Yurietta were separated in 1974, and

Yurietta is not a party to this proceeding.

Petitioner filed Forms 1040, U.S. Individual Income Tax

Returns, for 1988 through 1991. On those returns, petitioner

stated that he resided in San Antonio, Texas. Petitioner claimed

single as his filing status.

On December 27, 1989, petitioner applied for a mortgage on

4 Morning Downs, a residence located in the "Dominion", an

exclusive country club in San Antonio, Texas. Petitioner

purchased the home for $673,956, paying $5,302.65 as a down
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payment. He named his employer on the mortgage application as TV

Cable de Leon (Cable Leon) in Leon, Mexico. He listed his

income, including salary and interest, as $30,000 per month.

Petitioner thought it would be a good idea to purchase lots

in the Dominion, build homes on the lots, and sell the homes. On

July 16, 1990, he purchased 31 unimproved residential lots in the

Dominion for $1,147,000, paying $248,229.21 as a downpayment to

Alamo Title Company (Alamo Title). In 1990, petitioner formed

Interservice, Inc. (Interservice), a Texas corporation, to assist

with his plans to build homes on the lots. Petitioner was the

sole shareholder of Interservice. Petitioner and Interservice

did not build homes on the lots. An Interservice ledger for the

year ended October 31, 1991, shows a sale of four of the lots for

$160,000.

In June 1990, petitioner and Gordon Sitton formed Monroy &

Sitton (M&S). M&S purchased cable equipment and shipped it to

petitioner's cable business in Mexico. For Federal income tax

purposes, M&S filed as an S corporation, and the returns showed

losses for 1990 and 1991. The losses were subsequently

disallowed pursuant to an agreement among M&S, petitioner, and

respondent.

Various documents named petitioner as the owner, president,

and main stockholder of Cable Leon. He is also named as the

owner of an administration company, a construction company, and a

real estate company. Petitioner prepared a "Statement of
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Financial Condition as of November 15, 1990." He listed the

total value of his assets as $11,380,365. Included in his assets

were his business interests as follows:

Business Name % Ownership Market Value Cost

TV Cable de Leon 100% $3,500,000 $ 500,000
Monne-building owner 100% 300,000 140,000
Acoco-Cable Admin. 100% 210,000 120,000
Celsa-Cable Constr. 100% 210,000 120,000
Locator-Mexico 100% 500,000 500,000
Iisa-Commercial Bldg. 100% 700,000 650,000
$5,420,000 $2,030,000

Petitioner listed his "Sources of Cash" as: salary (gross),

$150,000; rental income, $888; dividend and interest income,

$160,000; and dividends and distributions from business,

$390,000. Petitioner's other assets included automobiles

consisting of three Mercedes Benzs and one Jaguar with a total

value of $215,000.

In November 1990, petitioner became interested in purchasing

a controlling interest in an automobile dealership. As part of

the negotiations, petitioner wrote a check for $50,000 to the

owner of the dealership. The deal was never completed, and

petitioner did not acquire an interest in the dealership.

Throughout 1990, petitioner received transfers of funds from

Mexico that totaled $867,738. He deposited the funds in various

accounts.

Petitioner became interested in purchasing a bank in San

Antonio, Texas. Petitioner filed an application with the Texas

Department of Banking to purchase the Bank of Leon Springs. The
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application was signed by petitioner and notarized on July 3,

1991. Petitioner named Cable Leon as his employer, stating that

he had been employed there since 1954 and that he was the main

stockholder and president of the board. Information that

petitioner provided on his individual financial statement

included total assets of $14,831,800, a portion of which was

represented by $7,500,000 in "notes and accounts receivable

considered good and payable".

To substantiate to the Texas Department of Banking that

petitioner had adequate assets with which to purchase the bank,

petitioner had his family members, his five children and his

wife, draw up promissory notes. The notes obligated each child

to pay to petitioner $1,250,000 and his wife to pay to petitioner

$1,875,000 over a period of 15 years. Petitioner's accountant,

Dan Boldt (Boldt), prepared a document titled "Ernesto H. Monroy

M., Personal Financial Statement as of February 28, 1991". The

financial statement listed the same business interests as were

listed in the 1990 financial statement, except that the total

market value of the business interests was increased to

$7.5 million. The financial statement represented that

petitioner was holding the stock of certain corporations, valued

at $7.5 million, as collateral for the promissory notes; that

each child owned a 15-percent interest in the stock; and that his

wife owned a 25-percent interest in the stock. After receiving

the application to purchase the bank, the Texas Department of
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Banking requested substantiation on the promissory notes.

Petitioner was notified that he would have to submit his

fingerprints as part of a routine background check by the Federal

Bureau of Investigation. Petitioner did not respond to the

requests and did not purchase the bank. Petitioner subsequently

returned the promissory notes to his family members.

Petitioner entered into an option agreement to purchase a

shopping center in San Antonio for $1,880,000. Correspondence

dated July 19, 1991, provided petitioner's financial information

to a mortgage company in connection with the purchase of the

shopping center. The information that petitioner provided

included salary of $150,000 as acting adviser for Cable Leon and

the other companies in Mexico and dividends and interest of

$1,013,149 from income on notes due him from his children.

Petitioner paid $10,000 for the option but subsequently did not

exercise his right to purchase the property.

In August 1990, petitioner hired Lorena Esquivel (Esquivel)

to work for M&S. After M&S was dissolved in 1991, Esquivel

continued to work for petitioner as an employee of Interservice.

Esquivel acted as a personal assistant to petitioner and was very

involved in his business and personal affairs. Her duties

included assisting petitioner with correspondence and filling out

applications. In May 1991, Esquivel and Boldt interviewed and

hired Gloria Rodriguez (G. Rodriguez) as a bookkeeper.

G. Rodriguez's tasks included setting up vendor and
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administrative files and creating backup for bank statements,

accounts receivable, and notes payable. She worked on

petitioner's personal accounts and business accounts, including

M&S and Interservice. G. Rodriguez gathered information for use

by Boldt, who prepared petitioner's 1990 Federal income tax

return.

As part of G. Rodriguez's duties, she prepared various

ledger sheets reflecting transfers of funds into and out of

petitioner's business and personal accounts. On numerous

occasions, G. Rodriguez inquired as to the source of the funds in

an attempt to perform her duties and to reconcile the accounts.

She was instructed by petitioner to label many of the transfers

as payments from or amounts payable to either "Mexican Company"

or petitioner's wife. She was never told the name of the Mexican

company or the reason that a Mexican company would be

transferring funds to petitioner. She was not aware of any loans

from petitioner's wife. Other financial reports that were

prepared by G. Rodriguez for petitioner listed the source of the

funds as "??" because petitioner would not provide her with the

source of the deposits.

Petitioner left for Mexico in the beginning of July 1991

because his mother was terminally ill. During that same time,

G. Rodriguez was contacted by U.S. Government authorities,

specifically U.S. Customs and the Internal Revenue Service (IRS),

regarding the activities of petitioner. The Government was
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investigating, at least in part, the source of petitioner's

income. G. Rodriguez notified Esquivel about the investigation.

Petitioner did not return to live in the United States after

his mother's death. He had been informed that he was the subject

of an investigation by the U.S. Government. In August 1991,

petitioner summoned G. Rodriguez and Esquivel to Mexico to meet

with him. In Mexico, petitioner, petitioner's daughter Gabriela,

and Esquivel reviewed petitioner's bank accounts and discussed

wire transfers and money orders. A comparison was made between

the records that Esquivel kept in the United States and the

records that Gabriela kept in Mexico.

Sometime during the summer of 1991, petitioner replaced

Boldt with a new accountant, William C. Bradley (Bradley).

Esquivel sent a letter to Bradley dated October 22, 1991. The

letter accompanied a "summary and copies of deposits received in

our office from Mexico to the best of my knowledge." The summary

amounts for Interservice showed deposits from January 1, 1991,

through July 18, 1991. The 1991 transfers to Interservice from

Mexico totaled $545,423.20. Included in that amount was a $6,000

deposit from Cable Leon. In addition to the $545,423.20 deposits

from Mexico, there were also two July 29, 1991, deposits to

Interservice totaling $3,500. The source of the $3,500 deposits

was "Gabriela Monroy", petitioner's daughter. The 1991

Interservice deposits from Mexico and Gabriela totaled

$548,923.20.
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In December 1991, Esquivel typed a check payable to

petitioner's wife for $48,923.20. The notation on the check was

"Loans $548,923.20, 1st payment $48,923.20" with a balance

showing of $500,000.

Bradley sent to petitioner a letter dated March 11, 1992.

The letter was in response to a request from petitioner. The

letter addressed the accounting and tax status of petitioner and

his business entities. In relation to Interservice, Bradley

stated:

The Federal Income Tax Return for this Company is due
July 15, 1992. It was put on extension to that date
because I do not have the information necessary to
prepare the tax return. Enclosed are copies of letters
dated January 16 and February 20, 1992. I have yet to
receive any information from these requests. From
discussions I have had with Ms. Gloria Rodriguez, your
bookkeeper, it is my understanding that there are no
general ledger, cash receipts or disbursements journals
on this Company and that there is no sharing of
accounting information between Gloria and Lorena in
order to produce this accounting data needed for the
tax return.

Someone is going to have to do the bookkeeping on this
Company for the year ended October 31, 1991 and produce
a balance sheet and income statement for the year with
bank accounts reconciled and capital accounts tied to
the prior year end closing. Gloria is the logical
person to do this, but Lorena is going to have to work
with her and get her accounting data other than bank
statements and canceled checks.

In relation to petitioner's personal account, Bradley stated:

Your tax return is due April 15, 1992. We can, if
necessary obtain an extension of time to August 15,
1992 to file the return if we need the additional time.
We will need a copy of your Mexico tax return for 1991,
interest income you received and all interest expense
paid listed by recipient and purpose of borrowing. I
 - 10 -

will also need the cost and selling price of any assets
you disposed of in 1991. I am equally concerned that
your not having a personal set of books will only add
to confusion in the future. I am aware of a number of
asset disposals you have made so far this year. These
items are business transactions that will need to be
reported for tax purposes but I am concerned that,
without a set of books, it will be much more difficult
to prepare an accurate tax return next year with a
minimal amount of time and effort.

Esquivel and G. Rodriguez compiled a list of all of the

items in petitioner's home. The list included a description of

the items, the quantity of items, and the value of the items.

On July 31, 1992, petitioner filed with the clerk of Bexar County

in San Antonio, Texas, a Uniform Commercial Code (UCC) financing

statement. Attached to the financing statement was the list of

petitioner's household items, a security agreement between

petitioner and his wife, and a note between petitioner and his

wife. The security agreement granted petitioner's wife a

security interest in petitioner's household items. The security

interest was granted in exchange for petitioner's obligation to

pay his wife $214,149.76, purportedly represented by the note.

Petitioner's 1990 Federal income tax return was prepared by

Boldt. The return showed no wage income, interest income of

$21,597, adjusted gross income of $3,722, itemized deductions of

$87,485, and zero tax owing. Petitioner subsequently amended his

1990 return to add Mexican wages of $6,398 and a Mexican tax

refund of $497. The total tax due after the amendment remained

zero. Petitioner's 1991 Federal tax return was prepared by
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Bradley. The return showed no wage income, interest income of

$48,721, adjusted gross income of $79,518, itemized deductions of

$162,312, and zero tax owing.

The IRS began the audit of petitioner's 1990 and 1991

Federal income tax returns in 1992. Petitioner's responses to

the auditing revenue agent's information requests were

inadequate. The revenue agent was informed by Esquivel that

petitioner was working in Mexico and had sold some companies in

Mexico. Esquivel subsequently informed the agent that she had

been advised by Bradley and Nina Henderson (Henderson),

petitioner's attorney, not to provide any information to the IRS.

During the audit, the revenue agent was informed by petitioner or

petitioner's representative that the source of petitioner's

income was loans from Mexico. That explanation was contradicted

by Boldt, who informed the agent that there were no loans from

Mexico. In 1994, Bradley provided the agent with documents that

were represented to substantiate the loans. The documents were

in Spanish and consisted of a ledger sheet from a Mexican company

that listed loans to petitioner from December 1989 through

December 1990 of approximately 3,085,342,000 pesos; a promissory

note from petitioner to the Mexican company for 3,085,342,000

pesos dated December 1, 1990; and two invoices for interest due

to the Mexican company on the promissory notes. The invoices

were dated December 1990 and January 1992, numbered 008 and 017,
 - 12 -

respectively, and both invoices listed petitioner's address as

Ave. Hidalgo, #407 in Toluca, Mexico.

Respondent determined the deficiencies in petitioner's

Federal income tax by using the source and application of funds

method.

OPINION

Respondent argues that the 1990 and 1991 transfers from

Mexico and the 1990 downpayment to Alamo Title were unreported

taxable income to petitioner from petitioner's business interests

in Mexico. Respondent also argues that petitioner underpaid his

taxes for both years due to fraud. Petitioner contends that the

transfers and downpayment were nontaxable loans from a Mexican

corporation and his family.

The penalty in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from the taxpayer's fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Respondent has

the burden of proving, by clear and convincing evidence, an

underpayment for each year and that some part of an underpayment

for each year was due to fraud. Sec. 7454(a); Rule 142(b). If

respondent establishes that any portion of the underpayment is

attributable to fraud, the entire underpayment is treated as

attributable to fraud and subjected to a 75-percent penalty
 - 13 -

unless the taxpayer establishes that some part of the

underpayment is not attributable to fraud. Sec. 6663(b).

Respondent's burden is met if it is shown that the taxpayer

intended to conceal, mislead, or otherwise prevent the collection

of taxes. 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.

The existence of fraud is a question of fact to be resolved

upon consideration 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 will never be

presumed. Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Fraud

may, however, be proved by circumstantial evidence because direct

proof of the taxpayer's intent is rarely available. The

taxpayer's entire course of conduct may establish the requisite

fraudulent intent. Stone v. Commissioner, 56 T.C. 213, 223-224

(1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969).

A pattern of consistent underreporting of income for a number of

years, when accompanied by other circumstances showing an intent

to conceal, justifies the inference of fraud as to each of the

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

Otsuki v. Commissioner, supra.

Under section 61, gross income includes "all income from

whatever source derived." Where a taxpayer keeps no books and

records, or the taxpayer fails to file a return from which his
 - 14 -

income tax liability can be assessed, respondent may reconstruct

the taxpayer's income by using any method that, in the opinion of

respondent, clearly reflects income. Sec. 446(b); Moore v.

Commissioner, 722 F.2d 193 (5th Cir. 1984), affg. T.C. Memo.

1983-20. The source and application of funds method of

determining a taxpayer's gross income is well accepted. United

States v. Johnson, 319 U.S. 503, 517 (1943); Meier v.

Commissioner, 91 T.C. 273, 295-296 (1988). In this case, the

evidence of unreported income originated from respondent's source

and application analysis.

The parties stipulated to a source and application of funds

analysis that "correctly reflects petitioner's understatement of

gross income for the taxable year 1990, except that petitioner

contends that loans in the amount of $867,738.00 from a Mexican

corporation should be included as a source of funds, and that the

source of the $248,229.00 Alamo Title item was a loan from

Mexico". The parties also stipulated to a source and application

of funds analysis that "correctly reflects petitioner's gross

income for the taxable year 1991," except that petitioner

contends that loans made to Interservice Corporation should not

be included as an application of funds. For 1990, the stipulated

analysis includes an "understatement before disputed item" in the

amount of $941,671 and an "understatement after disputed items"

as ($174,296). For 1991, the "understatement after disputed

item" is shown as $25,454. Petitioner has thus stipulated that
 - 15 -

there was an understatement for 1991, and the existence of an

understatement for 1990 depends on whether the two identified

items were income, as respondent contends, or loans, as

petitioner contends. As a result of the stipulation, the

validity of respondent's indirect method of reconstructing

petitioner's taxable income is not genuinely in dispute.

Petitioner asserts that respondent has not satisfied her

burden of proof because she did not investigate all of the

possible nontaxable sources of funds, specifically the alleged

loans from Mexico. We agree that respondent may not disregard

explanations of petitioner that are reasonably susceptible of

being checked. "But where relevant leads are not forthcoming,

the Government is not required to negate every possible source of

nontaxable income, a matter peculiarly within the knowledge of

the defendant." Holland v. United States, supra at 138.

Petitioner was not forthcoming with relevant leads.

Petitioner did not offer to respondent the explanation that the

understated income was attributable to loans until well into the

audit. Once petitioner claimed that the source of the income was

loans, petitioner gave respondent inconsistent explanations of

the source of the loans. Petitioner alternated between asserting

that the loans were from Mexican companies or from his wife, from

whom he has been separated for 20 years. Petitioner, through

Bradley, did not provide any substantiation to support the loans

until approximately 2 years after the audit began. The timing of
 - 16 -

the information and the claim that the loans were from Mexico

made it difficult to investigate.

Respondent substantiates her assertion of unreported income

with information on deposit slips and with petitioner's

statements that he was the owner of and had income from Cable

Leon on numerous documents, including the mortgage application

for the home in the Dominion, the Statement of Financial

Condition that petitioner prepared, the application to the Texas

Department of Banking, and the information provided in connection

with the attempted purchase of the shopping center. Petitioner

represented on various documents that he was the sole owner of

several other businesses and that he had substantial income from

Cable Leon.

Respondent's agent examined petitioner's bank accounts,

deposit slips, and the financial reports prepared by

G. Rodriguez. The source of the funds on the documents was often

left blank. At least one deposit slip showed the source of the

funds was Cable Leon. Respondent interviewed Boldt and

G. Rodriguez. Neither of them was aware of any loans from

Mexican companies or petitioner's wife.

Petitioner admits that the Mexican businesses exist. It is

his assertion, however, that the stock in the businesses is not

in his name. Petitioner testified that he is a playboy and that

his father did not trust him with the family fortune. He asserts

that his father put his share of the family assets into a Mexican
 - 17 -

corporation, Grupo Empresarial Monyurri (Grupo), and gave

petitioner's wife and children the stock of Grupo. He testified

that he is not good with numbers but, when he had an idea for a

business, he would pitch it to his family and they would give him

the money in the form of a loan. Petitioner previously asserted

that the loans were from a Mexican company, although he did not

provide an explanation as to why a Mexican company would loan

money to petitioner or to Interservice.

Petitioner asserts that it is "totally believable and

consistent that petitioner was able to borrow $1,115,967 from his

family and his family's corporation", because banks were willing

to lend money to petitioner. Petitioner cites various loans,

including the loans on the house and lots in the Dominion, to

corroborate this assertion.

The bank loans that petitioner received were based on

information provided on loan applications. Petitioner stated on

the loan application for the house in the Dominion that his gross

monthly income was $30,000. According to petitioner's testimony,

however, his family was aware that he did not have income. It is

not credible that loans in the amounts claimed would be made to

someone with no income from which to repay the loans.

Petitioner also argues that two sets of documents

substantiate his claim of loans in 1990, the UCC financing

statement and the ledger sheet, with promissory notes in Spanish,

given to respondent in 1994 during the audit. G. Rodriguez
 - 18 -

testified that petitioner obtained the UCC financing statement to

protect his personal items from levy for unpaid taxes. Her

testimony is consistent with the sequence of events established

by the evidence.

The ledger sheet and promissory notes that were given to

respondent in 1994 are unreliable. G. Rodriguez and the revenue

agent both testified that they had been informed that there were

no loans from petitioner's family. The documents were not

provided to the IRS until 1994, 2 years after the agent requested

the information. Additionally, the address on the December 1990

invoice was listed as Ave. Hidalgo, #407 in Toluca, Mexico.

Petitioner was residing in San Antonio at the Dominion in 1990.

The address on the invoice was the address that petitioner used

after returning to Mexico in 1991.

Petitioner also argues that the 200,000,000 pesos deposited

in his account at Banca Cremi was a loan and that petitioner

planned to use the proceeds of that loan to pay back the family

loans. The only document in evidence on this point is a deposit

slip in Spanish for 200,000,000 pesos deposited into a bank

account. There are no loan documents or any indication that the

deposit was a loan or that the proceeds were going to be used in

any particular manner. Further, using petitioner's exchange rate

of 2,889 pesos per dollar, the 200,000,000 pesos would convert to

approximately $69,228, an amount insignificant in comparison to

the total amount that petitioner claims to owe his family.
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Petitioner argues that the deposits to Interservice in 1991

could not have come from him because the amounts were not

recorded as loans from shareholders on the books. On brief,

petitioner's position is that the amounts in issue are loans from

his wife. Petitioner supports this assertion by pointing to a

check from petitioner to his wife, which is purportedly a payment

on the loans owed to his wife.

Both G. Rodriguez and Esquivel testified that they traveled

to Mexico to meet with petitioner and his daughter. G. Rodriguez

testified that the reason for the meeting was to "create backup"

for the transfers of money to petitioner and Interservice so that

it appeared that the money was not income to petitioner.

Esquivel testified that the purpose of the trip was to compare

numbers. G. Rodriguez testified that, while she and Esquivel

were in Mexico, petitioner gave instructions to record the

amounts as transfers from a "Mexican Company". Approximately

2 months after the trip to Mexico, Esquivel sent to Bradley a

letter listing the deposits to Interservice from Mexico.

Esquivel did not indicate in the letter to Bradley that the

deposits were loans. On an Interservice ledger sheet, the

amounts were listed as payable to a "Mexican Company" and

Gabriela Monroy. One of the deposits was listed as from Cable

Leon.

The evidence supports respondent's assertion that the

deposits to Interservice were not loans but income to petitioner
 - 20 -

that petitioner had caused to be deposited in Interservice's

account. The Interservice check to petitioner's wife as a

purported loan payment, standing alone, is insufficient without

supporting documentation or a credible explanation as to why

petitioner's wife would make loans in excess of half a million

dollars to Interservice, particularly when Interservice did not

build any homes. Petitioner has failed to give a credible

explanation of why deposits that are purportedly loans from his

wife would have come from Cable Leon or his daughter. Esquivel's

testimony that she traveled to Mexico just to compare numbers is

not credible.

The evidence is clear and convincing that the stipulated

amounts received by petitioner and amounts petitioner received as

deposits to Interservice constituted income and not loans. Thus,

respondent has proven an understatement of income. Even in

criminal cases, where the Government bears the burden of proof

beyond a reasonable doubt, proof of unreported income is

sufficient to establish an underpayment of tax absent proof by

the taxpayer of offsetting expenses. See, e.g., United States v.

Hiett, 581 F.2d 1199, 1202 (5th Cir. 1978); Elwert v. United

States, 231 F.2d 928, 933-936 (9th Cir. 1956); United States v.

Bender, 218 F.2d 869, 871 (7th Cir. 1955). A fortiori, that

proof is sufficient in this civil case.

Respondent has established a likely source of income,

petitioner's business interests in Mexico. Respondent
 - 21 -

investigated the leads that were forthcoming and reasonably

susceptible of being checked. Respondent has satisfied the

standards set forth in Holland v. United States, 348 U.S. 121

(1954). Moreover, respondent's evidence that petitioner had

unreported income is clear and convincing, whereas petitioner's

claim that the funds stipulated as having been received by him

were loans is simply not credible. Respondent has proven by

clear and convincing evidence an understatement.

Respondent, of course, must also prove fraudulent intent.

Fraudulent intent may be inferred from various kinds of

circumstantial evidence, or "badges of fraud", including an

understatement of income, inadequate records, implausible or

inconsistent explanations of behavior, and failure to cooperate

with tax authorities. Bradford v. Commissioner, 796 F.2d 303,

307 (9th Cir. 1986), affg. T.C. Memo. 1984-601. A willingness to

defraud another in a business transaction may point to a

willingness to defraud the Government. Solomon v. Commissioner,

732 F.2d 1459, 1462 (6th Cir. 1984), affg. T.C. Memo. 1982-603.

The facts in this case include many "badges of fraud".

Petitioner kept inadequate books and records for his personal

accounts and Interservice. Petitioner gave inconsistent

explanations for the sources of income, alternating between loans

from his wife and loans from Mexican companies. Petitioner

failed to cooperate with the IRS, providing no explanation for

the unreported income for almost 2 years and then failing to
 - 22 -

provide credible substantiation. Petitioner denied that he had

instructed anyone to fabricate loan documents, but he testified

that the promissory notes for $7.5 million were created and

delivered to the Texas Department of Banking as part of his plan

to acquire the bank and that his family did not owe him money at

that time.

Additionally, Esquivel testified that she never submitted

false information about petitioner's finances to anyone or any

entity. She admitted to sending information relating to

petitioner's purchase of the shopping center that stated that

petitioner's income was $150,000 annually. She then testified

that petitioner had no income. Petitioner's and Esquivel's

testimony are inconsistent, improbable, and unworthy of belief.

Respondent has proven by clear and convincing evidence an

underpayment of tax due to fraud for each year. Petitioner has

not proven that any part of the underpayment is not attributable

to fraud. See sec. 6663(b).

Decision will be entered

for respondent.