T.C. Memo. 2002-183
UNITED STATES TAX COURT
CHARLES Y. AND JIN Y. CHOI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2983-98. Filed July 31, 2002.
A. Jerry Busby, for petitioners.
Rick V. Holser, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent determined deficiencies in,
additions to, and penalties on petitioners’ Federal income tax as
follows:
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Charles Y. Choi
Addition to Tax
Year Deficiency Sec. 6663
1991 $59,106 $44,330
Charles Y. and Jin Yi Choi
Additions to Tax and Penalties
Year Deficiency Sec. 6651(a)(1) Sec. 6663
1992 $49,624 -— $37,218
1993 34,177 $39,613 25,633
The issues remaining for our consideration are: (1) Whether
Charles Y. Choi (petitioner) understated income for the taxable
year 1991; (2) whether petitioners understated income for the
taxable year 1992; (3) whether petitioner is liable for the civil
fraud penalty under section 66631 for the taxable years 1991; (4)
whether petitioners are liable for an addition to tax for
delinquent filing of their return for 1993; (5) whether
petitioners are liable for self-employment tax on their earnings
from Gene’s Modern Market; and (6) whether petitioners provided
over one-half of the support of James Choi during 1991 and 1992
so as to be entitled to claim him as a dependent.
FINDINGS OF FACT
Petitioner and Jin Y. Choi were married in 1992 and resided
in California at the time their petition was filed. During 1991
through 1993, petitioner was the sole proprietor of Gene’s Modern
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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Market (Gene’s), a full-service grocery store. Petitioner
reported Gene’s income and expenses using the cash basis method
of accounting. Gene’s was open for business Monday through
Sunday from 9 a.m. to 9 p.m. Petitioners, along with
petitioner’s brother, father, and mother, worked at Gene’s.
In addition to selling grocery items, Gene’s cashed payroll
checks, personal checks, and third-party checks for a fee of 1
percent of the face amount of the check or $1 for checks under
$100. Gene’s did not charge a check-cashing fee if cash was
returned in connection with the purchase of groceries. The cash
petitioners used for check cashing was from sales of merchandise,
fees from cashing checks, and the proceeds of checks drawn on
Gene’s deposit account.
Two cash registers were available and used at Gene’s.
Although petitioner retained the cash register tapes, he did not
report sales based on them or reconcile the amount of cash in the
register at the end of a day’s operations. Instead, petitioner
fabricated daily sales summary sheets for Gene’s, which were used
to reflect the gross receipts for Gene’s. The fabrication of
gross receipts was accomplished by marking up the cost of
inventory and the cost of purchases by 25 percent. Petitioner
did not physically account for Gene’s inventory during the years
in issue. Petitioner did not provide his bookkeeper, Michael
Kim, with information about cash purchases or cash sales of
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Gene’s. Petitioner provided the daily summary sheets to Mr. Kim
every month.
Petitioner knew that the amounts of gross receipts provided
to Mr. Kim were less than the actual gross receipts for Gene’s.
As an example, the cash register tapes for August 1, 1992,
totaled $2,925.72, whereas petitioner’s summary sheets given to
Mr. Kim reflected total sales of $1,325.42. Mr. Kim prepared
yearly summaries based on the daily summary sheets received from
petitioner and used the summaries to prepare the Schedules C,
Profit or Loss From Business, for Gene’s that were included with
petitioners’ Federal income tax returns. Petitioner did not
provide Mr. Kim with the register tapes from Gene’s. In
addition, Mr. Kim was provided with inaccurate (understated)
records of cash inventory purchases.
Petitioner’s method of accounting for Gene’s receipts and
expenditures caused the omission and understatement of income for
the years in issue. During the examination of petitioners’
Federal income tax returns, petitioner estimated and represented
to respondent’s agent that he had understated Gene’s gross
receipts by approximately $15,000 per month. Petitioner, on the
basis of the actual cash register receipts, determined that
Gene’s gross receipts during 1991 and 1992 were $50,000 to
$60,000 per month or $600,000 to $720,000 per year, respectively.
On the Schedules C of the 1991 and 1992 income tax returns, gross
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receipts of approximately $592,000 and $508,000, respectively,
were reported.
The cash used in the operation of Gene’s was maintained in a
safe, and petitioner counted the cash daily. No record of the
cash transactions or cash on hand was maintained, and the cash
received from customers of Gene’s was not deposited in the bank
accounts maintained for Gene’s. Some of the cash receipts from
the operation of Gene’s were used to pay petitioners’ and their
family’s household and other living expenses.
During the 1991 and 1992 tax years, petitioner maintained
two checking accounts in the name of Gene’s. Petitioner was the
only person with access to the two business accounts. The first
account, No. 162-14996 (the deposit account), was used for
deposits of third-party payroll and personal checks, food stamps,
and WIC vouchers that were received in Gene’s grocery business.
No cash deposits were made with respect to the deposit account
during 1991 or 1992.
The second account, No. 161-17636 (the operating account),
was used for Gene’s operating expenditures. Petitioner’s
practice was to fund the operating account by making withdrawals
from the deposit account. During 1991, petitioner drafted checks
made out to “cash” from the deposit account in the total amount
of $2,045,900, $625,700 of which was deposited into the operating
account. During 1992, petitioner drafted checks made out to
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“cash” from the deposit account in the total amount of
$1,293,600, $582,200 of which was deposited into the operating
account.
In 1992, petitioner purchased a house in Glendale, Arizona,
for $208,250. A downpayment of $41,650 was made on the home.
Petitioner applied for a loan to finance the purchase. He
reflected on the loan application that the net worth of Gene’s
was $269,115 and that his monthly income from Gene’s was $7,197.
In 1994, petitioner sold Gene’s for $259,790.
On their 1991, 1992, and 1993 income tax returns,
petitioners reported net profit from Gene’s of $6,696, $13,363
and $67,126, respectively. On the 1991 and 1992 returns,
petitioners claimed petitioner’s parents and brother as
dependents. Petitioner knew that the gross receipts reported for
1991 through 1993 were understated. He omitted some gross
receipts in order to avoid tax so that he would have more
retained cash.
Respondent conducted a civil examination of petitioners’
income tax returns, and petitioners did not provide the internal
revenue agent with the cash register tapes. Invoices for
purchases by check were presented, but no invoices were provided
for cash purchases. During the examination, petitioner stated
that he was the sole source of support of his parents.
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Because of the inadequacy of petitioners’ records and
accounting practices, respondent reconstructed petitioners’
income using an indirect method. Using the bank deposits and
cash expenditures method, respondent determined that petitioner’s
unreported income for 1991 was as follows:2
Bank Deposit and Expenditures Reconstruction for 1991
Bank Deposit Summary
Acct. no. 162-14996-– $2,066,381
bus. deposit acct.
Acct. no. 161-17636–- 625,700
bus. operating acct.
Acct. no. 166-67322–- 4,600
personal checking acct.
Total gross bank deposits 2,696,681
Add
Personal cash expenditures $16,200
Business cash expenditures 149,602
Subtotal 2,862,483
Subtract
Checks written to cash:
Deposited into operating account $625,700
Amount of checks not deposited 1,420,200
Subtotal 2,045,900
($2,045,900)
Nontaxable income (1,000)
Business gross receipts 815,583
Per audit $815,583
Per return 591,910
Unreported income 223,673
2
All of the amounts used by respondent in the bank deposits
reconstruction for 1991 and 1992 are supported by facts in the
record of this case.
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Respondent determined that petitioners’ unreported income for
1992 using the bank deposits and cash expenditures method was as
follows:
Bank Deposit and Expenditures Reconstruction for 1992
Bank Deposit Summary
Acct. no. 162-14996-– $1,298,435
bus. deposit acct.
Acct. no. 161-17636-– 582,200
bus. operating acct.
Acct. no. 166-67322-– 35,430
personal checking acct.
Total gross bank deposits 1,916,065
Add
Personal cash expenditures 2,700
Business Cash Expenditures 85,671
Subtotal 2,004,436
Subtract
Checks written to cash
Deposited into operating account $582,200
Amount of checks not deposited 711,400
Subtotal 1,293,600
($1,293,600)
Nontaxable deposits (40,998)
Business gross receipts 669,838
Per audit $669,838
Per return 508,049
Unreported income 161,789
During November 1994, respondent began a criminal
investigation of petitioner, and on November 25, 1996, petitioner
waived indictment and pleaded guilty to criminal tax evasion
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under section 72013 for 1992. In the process of his plea
agreement petitioner averred that: (1) He and his spouse had a
substantial income tax due and owing to the United States for the
year 1992; (2) he evaded tax by filing and causing to be filed
with the Internal Revenue Service a false and fraudulent Form
1040, U.S. Individual Income Tax Return, for the calendar year
1992 in which he substantially underreported gross receipts; (3)
he acted willfully, with intent to defraud the Government of the
tax on the additional unreported income. Petitioner was
sentenced to 12 months in prison and required to pay a $20,000
fine.
Petitioner’s father obtained a favorable judgment from a
civil court in Korea on May 17, 1991, which was appealed, and the
appeal was dismissed on May 18, 1993. The payment of the
judgment was not available to petitioner’s father and mother
until some time during 1993 or 1994.
3
Sec. 7201 provides:
Any person who willfully attempts in any manner to
evade or defeat any tax imposed by this title or the
payment thereof shall, in addition to other penalties
provided by law, be guilty of a felony and, upon
conviction thereof, shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or
imprisoned not more than 5 years, or both, together
with the cost of prosecution.
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OPINION
Although we consider several issues in this case, the two
primary issues involve the reconstruction of petitioners’ income
for 1991 and 1992 and whether any part of the 1991 underpayment
of tax is attributable to fraud.4 The main thrust of
petitioners’ attack focuses on respondent’s use of a bank
deposits analysis to reconstruct petitioners’ income.
Taxpayers are required to maintain records sufficient to
show whether they are liable for Federal income taxes. See sec.
6001; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959
F.2d 16 (2d Cir. 1992). If a taxpayer fails to keep records, the
Commissioner may reconstruct the taxpayer’s income. See sec.
446(b); Holland v. United States, 348 U.S. 121, 130-132 (1954);
Parks v. Commissioner, 94 T.C. 654, 658 (1990).
The records petitioner maintained for purposes of reporting
the income and deductions of Gene’s were inadequate. Petitioners
do not argue that the books and records were accurate or
adequate.5 Petitioner admitted that he understated the gross
4
In a Dec. 21, 2000, order, respondent’s motion for partial
summary judgment was granted, and it was held that “petitioner
Charles Y. Choi is estopped from denying that he is liable for a
fraud penalty, under section 6663, I.R.C., to the extent that
there is any deficiency finally determined to which a fraud
penalty would be applicable for the 1992 taxable year.”
5
Petitioners have attempted to discredit respondent’s bank
deposits reconstruction of income by offering their own
reconstruction using the percentage markup method. The
(continued...)
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receipts on the daily sales summaries. In an interview with a
revenue agent, petitioner estimated that he could have
understated the gross receipts for Gene’s by as much as $15,000
per month. As of the time of trial, petitioner was not able to
produce most of the cash register tapes for Gene’s, and no
records of cash balances, cash receipts, cash expenditures, or
inventories were maintained except for a few invoices for cash
purchases of inventory. Because the records for Gene’s could not
be reconciled with petitioners’ income tax returns, respondent
reconstructed the gross receipts of Gene’s by means of the bank
deposits method coupled with the cash expenditures method.
The bank deposits and cash expenditures methods are
acknowledged methods of reconstructing income. See Parks v.
Commissioner, supra; Nicholas v. Commissioner, 70 T.C. 1057, 1065
(1978). Respondent’s bank deposits analysis reflects that
petitioners had substantial unreported income from Gene’s
business operations during 1991 and 1992. Gene’s was
petitioners’ only source of business income. Respondent’s agent
examined petitioners’ records and also performed an analysis of
bank deposits for the years in issue. The bank deposits analysis
was accomplished by totaling the deposits made to petitioners’
5
(...continued)
percentage markup method of reconstruction is one whereby an
established base, such as cost of goods sold, is marked up to
reconstruct gross sales or gross receipts.
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three bank accounts. Respondent then added petitioners’
identified cash expenditures for personal and business purposes
to the total bank deposits. The total of the bank deposits and
expenditures was next reduced by the total amount of nontaxable
deposits to arrive at petitioners’ annual income from Gene’s.
Finally, the annual income was reduced by the income reported on
petitioners’ returns to arrive at respondent’s determination of
petitioners’ unreported income of $223,673 and $161,789 for 1991
and 1992, respectively.
The items included in respondent’s reduction for nontaxable
items included deposits from the deposit account to the operating
account, transfers from other accounts, gifts, and loans made to
the business or petitioners. The cash for Gene’s check cashing
came from business operations. Some of the cash was from cash
sales of groceries, and some was obtained from the deposit
account.
Respondent did not attempt to separately determine the
amount of gross receipts from cash sales of groceries. In
addition, respondent considered the entire amount of cash
withdrawn from the deposit account to be nontaxable.
Accordingly, respondent’s approach to reconstructing petitioners’
income was conservative, allowing petitioners the benefit of the
doubt. In addition, some of the cash from cash grocery sales was
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maintained in a safe at Gene’s and was used by petitioner and his
family for personal expenses.
Petitioners argue that additional bank deposits should be
eliminated as nontaxable because they represent cash gifts from
petitioner’s parents. Petitioner, his parents, and several close
relatives testified that petitioner’s parents received cash from
Korea, and that cash gifts were made to petitioner by his
parents. The record reflects that petitioner’s father had
instituted a lawsuit in Korea and that he had won a judgment in
his favor. The record also reveals that the judgment was
appealed and that petitioner’s father was successful on appeal,
but the appeal did not conclude until May 1993. Respondent
points out that under the laws of Korea, petitioner’s parents
were not entitled to expatriate the proceeds of the judgment from
Korea to the United States. There is also evidence in the record
that certain American Express traveler’s checks did not become
available to petitioner’s parents until sometime during 1994.
In an attempt to show that petitioner’s parents had the
means to make gifts, petitioners offered the testimony of close
relatives (uncles, aunts, etc.), each of whom testified that on
specific dates in 1991 and 1992 they received large amounts of
cash ($20,000 to $30,000) on behalf of petitioner’s parents. The
witnesses each stated that they received the cash in stacks of
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$100 bills from unknown individuals who had traveled to the
United States from Korea.
We note at the outset that intrafamily transactions are
subjected to closer scrutiny. Caligiuri v. Commissioner, 549
F.2d 1155, 1157 (8th Cir. 1977), affg. T.C. Memo. 1975-319; Perry
v. Commissioner, 92 T.C. 470, 481 (1989), affd. 912 F.2d 1466
(5th Cir. 1990). The witnesses’ stories were strikingly similar,
and, curiously, none of the witnesses knew the person who gave
them the alleged currency. We also find it curious that the
alleged deliveries of relatively large amounts of currency were
given to different family intermediaries of petitioner’s parents
and that no deliveries were made directly to petitioner’s
parents. Finally, there is no documentary evidence of the
existence of the alleged cash that petitioners argue was infused
into the operation of Gene’s. In particular, the three bank
accounts in this record do not reflect the deposit of any cash.6
With respect to petitioners’ cash gift argument, respondent
notes that the alleged cash was not available from the Choi
families’ Korean lawsuit, at very least, until 1993, whereas all
of the witnesses testified to receiving the money during 1991 and
1992. Because this case involves a reconstruction for 1991 and
1992, it is imperative that petitioners show the infusion of cash
6
The deposit account received check deposits from Gene’s,
and the operating account received transfers from the deposit
account.
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in those years to reduce the amount of the deposits that would be
deemed income. Significantly, respondent points out that his
bank deposits reconstruction represents only check deposits
because no cash was deposited into the deposit account for
Gene’s.
Petitioners attempt to convince us that some of the cash
that was used to cash checks came from petitioner’s parents, as
opposed to cash from the sale of groceries. Admittedly, by
intentionally not relying on the cash register tapes, petitioner
omitted cash sales of groceries from the income reported to
respondent. Respondent, by including all checks that were
deposited into deposit accounts, included some checks that were
exchanged by Gene’s customers for cash only or cash and
groceries. Respondent, however, by eliminating all of the
transfers to the operating account, gave petitioners the benefit
of the doubt by allowing all of petitioners’ expenditures,
including expenses of Gene’s, cash for check cashing, and also
personal expenses of petitioners and their family. Considering
respondent’s conservative approach, it is likely that
respondent’s reconstruction did not capture some portion of the
income derived from the cash sales of groceries. In connection
with respondent’s bank deposits analysis, however, some income
from cash sales may have been included in the cashed checks
deposited in the deposit account. Respondent’s eliminations from
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the bank deposits analysis would have likely addressed any such
inclusion. To the extent any cash from check cashing was a part
of the bank deposits analysis, it is unlikely that it is
attributable to cash gifts from petitioner’s parents.
We find the testimony offered on this point by petitioners
and their relatives to be self-serving, vague, and
uncorroborated. Petitioner’s parents could not recall the
incremental amounts, dates, or total amount allegedly given to
petitioners and/or infused into Gene’s operation. No gift tax
returns were filed by petitioner’s parents, and no record exists
of the alleged transfers. Additionally, during the years under
consideration, petitioner supported his father and mother, both
of whom worked at Gene’s and lived under petitioners’ roof. In
the absence of persuasive evidence and reliable corroboration, we
are not required to accept the self-serving testimony of
interested parties. See Tokarski v. Commissioner, 87 T.C. 74, 77
(1986).
Petitioners, in an attempt to discredit respondent’s
reconstruction, offered their own reconstruction of income using
the percentage markup method. They maintain that the percentage
markup method of reconstructing income would more accurately
reflect petitioners’ income for the years in issue. In
particular, petitioners argue that a large percentage of the
checks deposited and included in respondent’s bank deposits
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reconstruction was attributable to check cashing and not to the
sale of merchandise.
Petitioners called Patrick Schindele as an expert witness to
provide a report and to testify in support of their argument.
Mr. Schindele’s report contained a reconstruction of Gene’s gross
receipts using the percentage markup method. His approach,
however, was flawed in several respects. Because of petitioners’
inadequate records, Mr. Schindele’s report, in large part, is
based on assumptions. Many critical assumptions were based on
information provided by petitioners and not developed by Mr.
Schindele’s independent analysis.
Mr. Schindele had to make numerous assumptions in order to
reconstruct the amount that he believed represented Gene’s gross
receipts. The amounts used, however, could not be supported or
verified. He also assumed that only a small portion of
customers’ checks was for the purchase of merchandise.
Conversely, he assumed that either most checks were cashed at
face value or that nominal amounts of grocery purchases were
involved in the transactions. Because of petitioners’ lack of
records, the register tapes in particular, there is no way to
know whether Mr. Schindele’s assumption is correct.
We find Mr. Schindele’s assumption that the majority of
customers who paid by check bought only nominal amounts of
groceries and merely went to Gene’s for cash to be highly
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unlikely. We also note that Gene’s did not receive a check-
cashing fee if cash was returned in connection with the purchase
of groceries. On the basis of the record, this assumption is, at
best, highly speculative.
Mr. Schindele also assumed that the cash from these check
purchases described above was “used to cash payroll checks or for
cash purchases of inventory”. In that way, Mr. Schindele
attempted to neutralize the possibility of income reposing in
customers’ cashed checks. Here again such assumptions are purely
speculative and unverified. We note that the lack of records to
support such assumptions was of petitioner’s own making and was
intended to conceal the true amount of reportable income.
Because petitioner did not account for Gene’s inventory,
either at the beginning or at the end of a taxable year, and
inadequate records were kept of cash purchases, it is not
possible to determine Gene’s cost of goods sold--the base on
which Mr. Schindele employed the percentage markup method.
Mr. Schindele’s report was also flawed in connection with
the amount of the percentage markup used. In that regard, his
trial testimony conflicted with his written report. The report
contains the statement that Mr. Schindele determined the
percentage markup through interviews of petitioners and of “some
of the vendors of Gene’s Market.” Mr. Schindele later testified
that he did not interview any of Gene’s vendors to establish the
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markup of inventory, and thus he based the amount of the
percentage markup entirely on interviews with petitioners.
Because of those flaws and weaknesses, we place no reliance
on petitioners’ expert’s opinion. Moreover, respondent’s bank
deposits analysis was properly and conservatively used.
Therefore, petitioners have not shown that the percentage markup
method they used would more accurately reflects Gene’s gross
receipts for the years in issue. Accordingly, respondent’s
determinations with regard to petitioners’ understatements of
income is upheld for 1991 and 1992.
Having decided that there was unreported income for 1991 and
1992, we now consider, for 1991, whether the understatement was
due to fraud within the meaning of section 6663.7 Respondent
determined that petitioner fraudulently and with intent to evade
income tax understated his income by omitting $223,673 and
$161,789 of gross receipts for 1991 and 1992, respectively.
Fraud is defined as an intentional wrongdoing designed to
evade tax believed to be owing. Edelson v. Commissioner, 829
F.2d 828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223.
Respondent bears the burden of proving fraud by clear and
convincing evidence. Rule 142(b).
In order to prove fraud, the Commissioner must show the
7
Respondent has conceded that petitioner Jin Y. Choi is not
liable for the fraud penalty for the 1991 tax year.
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existence of an underpayment and that the taxpayer intended to
evade taxes known to be owing by conduct intended to conceal,
mislead, or otherwise prevent the collection of taxes. Parks v.
Commissioner, 94 T.C. at 660-661. In this case, respondent has
shown the existence of underpayments for 1991 and 1992.
The existence of fraud is a question of fact to be resolved
upon consideration of the entire record. DiLeo v. Commissioner,
96 T.C. at 874. Fraud is never presumed and must be established
by independent evidence of fraudulent intent. Edelson v.
Commissioner, supra. Fraud may be shown by circumstantial
evidence because direct evidence of the taxpayer’s fraudulent
intent is seldom available. Gajewski v. Commissioner, 67 T.C.
181, 199 (1976), affd. without published opinion 578 F.2d 1383
(8th Cir. 1978). The taxpayer’s entire course of conduct may
establish the requisite fraudulent intent. Stone v.
Commissioner, 56 T.C. 213, 224 (1971).
To decide whether the fraud penalty is applicable, courts
have considered various indicia or “badges of fraud”, which
include: (1) Understatement of income; (2) inadequate books and
records; (3) failure to file tax returns; (4) implausible or
inconsistent explanations of behavior; (5) concealment of assets;
(6) failure to cooperate with tax authorities; (7) engaging in
illegal activities; (9) lack of credibility of the taxpayer’s
testimony; and (10) dealing in cash. Bradford v. Commissioner,
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796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601;
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988). This list is
nonexclusive. Although no single factor is necessarily
sufficient to establish fraud, the combination of a number of
factors constitutes persuasive evidence of fraud. Solomon v.
Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per
curiam T.C. Memo. 1982-603; Miller v. Commissioner, 94 T.C. 316,
334 (1990).
The record in this case supports our holding that petitioner
fraudulently intended to evade 1991 and 1992 income tax.
Petitioner was receiving the proceeds from Gene’s, and he
intentionally and consistently understated that income. His
testimony was evasive and to some extent not credible.
Petitioner fabricated records of income and intentionally
discarded cash register tapes, which would have shown the true
sales of Gene’s. He concealed income by fabricating his daily
sales summary sheets and admitted to respondent’s agents that he
underreported the sales income of Gene’s by approximately $15,000
per month. Petitioner dealt in cash and did not maintain records
of his cash transactions involving the purchase of inventory.
Petitioner pleaded guilty to and was convicted of criminal income
tax evasion under section 7201 for the year 1992. In that
regard, we have already held that petitioner is collaterally
estopped from denying that part of the underpayment for 1992 is
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due to fraud within the meaning of section 6663. See DiLeo v.
Commissioner, supra at 885-886; Amos v. Commissioner, 43 T.C. 50,
54-56 (1964), affd. 360 F.2d 358 (4th Cir. 1965).
Respondent has shown by clear and convincing evidence that
petitioner fraudulently understated income for 1991. The classic
indicia of fraud have been shown in this case. Respondent has
shown: A pattern of fraudulent activity; concealment; and large
consecutive understatements of income. In addition, we have
considered the fact that petitioner pleaded guilty to criminal
tax evasion for 1992, a year in which the pattern of activity and
gravity of the understatement were essentially the same as in
1991.
Respondent also determined that petitioners were liable for
self-employment tax under section 1402 on the earnings from
Gene’s. Earnings from self-employment are income derived by an
individual from any trade or business carried on by the
individual. Petitioners did not brief8 this issue, and there is
nothing in the record showing respondent’s determination to be in
error. Accordingly, petitioners are liable for self-employment
tax on the earnings from Gene’s.
8
With respect to the final two issue discussed in this
opinion, petitioners failed to present argument, reply to
respondent’s argument, or otherwise discuss the issues in their
briefs. Failure to discuss an argument on brief has been held to
constitute an abandonment of the controversy. See Rybak v.
Commissioner, 91 T.C. 524, 566 n.19 (1988).
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Finally, respondent disallowed a dependency exemption that
petitioners claimed for petitioner’s brother, James Choi.
Respondent determined that petitioners were not entitled to claim
the exemption because they had not shown that they provided more
than one-half of the support for James Choi as required under
sections 151(c) and 152(a). Petitioners must show that they
provided more than 50 percent of the support to be entitled to
claim the dependency exemption for 1991 and 1992. See Morrison
v. Commissioner, T.C. Memo. 1975-73; Johnson v. Commissioner,
T.C. Memo. 1974-150.
Respondent contends that the evidence shows that James Choi
worked full time in Gene’s in exchange for the payment of his
living expenses. Petitioners did not brief this issue and have
not shown that they provided more than one-half of James Choi’s
support. Accordingly, we hold that petitioners are not entitled
to the claimed dependency exemption.
To reflect the foregoing,
Decision will be entered
under Rule 155.