T.C. Summary Opinion 2003-127
UNITED STATES TAX COURT
DARRELL L. GAINES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8751-01S. Filed September 11, 2003.
Vic Devlaeminck, for petitioner.
Nhi T. Luu-Sanders, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code
in effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the years in issue. Rule references
are to the Tax Court Rules of Practice and Procedure. The
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decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority.
In a notice of deficiency mailed on April 13, 2001,
respondent determined deficiencies in petitioner’s Federal income
taxes and imposed penalties as follows:
Year Deficiency Sec. 6662 Penalty Sec. 6663 Penalty
1993 $9,177 --- $6,882.75
1994 5,701 $1,140.20 4,275.75
1995 4,172 834.40 3,129.00
Different amounts are asserted in respondent’s amended
answer. After discovery of unspecified errors in the
calculations of those amounts, the parties agree that, as
properly computed, the deficiencies and penalties here in dispute
are as follows:
Year Deficiency Sec. 6662 Penalty Sec. 6663 Penalty
1993 $6,952 --- $5,214.00
1994 6,147 $1,282.00 4,808.00
1995 6,824 2,103.00 7,887.00
The issues for decision are: (1) Whether petitioner
underreported his income during each year in issue; and, if so,
(2) whether the underpayment of tax required to be shown on
petitioner’s return for each year is due to fraud or, for 1994
and 1995, as an alternative to fraud, whether the underpayment of
tax required to be shown on petitioner’s return is due to
negligence.
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Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioner resided in Vancouver,
Washington.
Petitioner began working as a paper boy at the age of nine.
Upon graduation from high school, he enlisted in the United
States Marine Corps. After being discharged from the Marines he
worked for a variety of companies and eventually became self-
employed. His earnings from these various occupations as
reported to the Social Security Administration are listed below:
Year Employer Wages
1962 Seaside Assembly of God $183.48
U.S. Marine Corps 93.60
Nicolai Co. 66.72
1963 U.S. Marine Corps 789.19
1964 U.S. Marine Corps 1,106.48
1965 U.S. Marine Corps 1,469.10
1966 U.S. Marine Corps 716.60
Intl. Paper Co. 12.00
Boise Cascade Corp. 302.92
Nu-Lam Wood Products, Inc. 5.00
Van-Port Panel Co. 81.60
1967 John A. Sundwall 40.50
Pacific Wood Treating Corp. 59.00
Brand-S Corp. 6.80
1968 Fort Vancouver Plywood Co. 71.55
Kilpatrick, Inc. 419.13
Young Gabco, Inc. 73.78
Pacific Maritime Assoc. 807.42
Brimer Construction Co. 199.50
1969 Brimer Construction Co. 83.00
John Barchek 25.20
Portco Corp. 49.55
Vanply, Inc. 8.46
Precision Wood Products, Inc. 80.75
Wheels of Man, Inc. 527.43
Metal Tech Corp. 84.80
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Swan Mfg. Co. 44.10
George Zent & Sons 23.60
Del Monte Corp. 385.28
James River Corp. of Nevada 26.08
Jarman Co. Corp. 258.19
Floating Marine Ways, Inc. 133.40
1970 Fort Vancouver Plywood Co. 216.64
Timber Inspection Bureau, Inc. 22.50
Pacific Southern Foundries 26.92
Western Wirebound Box Co. Corp. 59.48
Alpine Veneers, Inc. 162.68
1971 Fort Vancouver Plywood Co. 7,800.00
1972 Fort Vancouver Plywood Co. 9,000.00
1973 Fort Vancouver Plywood Co. 10,800.00
1974 Fort Vancouver Plywood Co. 13,200.00
1975 Fort Vancouver Plywood Co. 14,100.00
1976 Fort Vancouver Plywood Co. 15,300.00
1977 Fort Vancouver Plywood Co. 16,500.00
1978 Fort Vancouver Plywood Co. 17,700.00
1979 Fort Vancouver Plywood Co. 6,389.38
1980 --- ---
1981 Stevenson Co Ply, Inc. 13,691.34
1982 Stevenson Co Ply, Inc. 4,916.25
1983 --- ---
1984 CA Miami Elevator Co. 3,773.06
1985 Kelly Services, Inc. 28.00
High Cascade Lumber Corp. 158.34
1986 --- ---
1987 Vanalco, Inc. 340.00
1988 Timberline Forest Products 678.00
1989 Lamplighter Homes, Inc. 2,479.96
1990 Lamplighter Homes, Inc. 1,154.68
Loren Enterprises 1,165.42
D & R Remodeling-Decorating 426.79
All States Plastic Co., Inc. 681.00
K-M Services, Inc. 112.75
Multnomah Plywood Corp. 890.76
1991 Fort Vancouver Plywood Co. 1,350.00
1992 --- ---
1993 Self-employed, Grand Video 2,369.00
1994 Self-employed, Grand Video 1,833.00
1995 Self-employed, Grand Video 3,924.00
Total: $159,484.16
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Petitioner purchased a house in 1972. On January 22, 1982,
he mortgaged the house to secure a loan of approximately $22,400.
The above table suggests that petitioner was not employed for the
entire year in 1982 and was not employed at all during 1983.
Soon after obtaining the loan, petitioner stopped making the
required monthly payments. On March 18, 1984, with a loan
repayment arrearage of approximately $4,000, petitioner’s house
was sold in a foreclosure sale. Petitioner lived with a friend
for several months thereafter, but soon moved in with his parents
at their house. In 1993, while petitioner was living with his
parents, they deeded their house and a rental property that they
owned to petitioner. Later in 1993, petitioner’s father was
denied State-assisted medical benefits because, according to
State authorities, he transferred assets without adequate
consideration.
Petitioner and another individual formed a partnership in
1979 for the purpose of constructing several houses on land owned
by petitioner. Petitioner obtained financing for the
construction projects from a local bank. The truck that
petitioner had purchased for use in the partnership’s business
was repossessed. On his 1979 and 1980 Federal income tax
returns, petitioner reported adjusted gross incomes of $3,758 and
($45,697), respectively.
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On March 16, 1991, petitioner traded an unimproved 5-acre
parcel of land that he owned for Grand Video, a video rental
business with a store located in Vancouver, Washington. The
selling price for the business, which did not include the land or
building in which the store was located, was $30,000. On his
1991 Federal income tax return, petitioner reported a $53,000
basis in the land and claimed a long-term capital loss of $23,000
as a result of the acquisition of Grand Video. Petitioner owned
and operated Grand Video as a sole proprietorship from the date
he acquired it throughout the years in issue.
Grand Video’s store was typically open from 10:30 in the
morning until midnight, 7 days a week. Initially, petitioner was
the only person who worked in the store. He eventually hired
employees to assist him. At first, petitioner paid his employees
“under the table”; that is, in cash, without withholding for
Federal and State income and employment taxes. He failed to file
the requisite Federal and State employment tax forms until
examined by State employment tax authorities. As a result of the
State audit, petitioner was determined to be an unregistered
employer from June 1993 through July 1995. He was fined $500,
plus penalties and interest.
Petitioner used unnumbered, duplicate receipts to track
video rentals at Grand Video. When a video was rented,
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petitioner filled out a receipt, gave one copy to the customer,
and placed the other copy in a drawer. When the video was
returned, petitioner matched it to the receipt and wrote the
letter “R” on the receipt to indicate that the video had been
returned. These receipts were examined each month by Washington
State officials to determine petitioner’s Washington State excise
tax liability, which apparently was based in some part on gross
receipts.
During the years in issue, Grand Video’s video rental prices
ranged from $1 to $3.50 per day. Many customers paid by check,
but most transactions were in cash; credit cards were not
accepted. The cash register in Grand Video’s store was used to
hold cash and make change, but not to record income from rental
and sales transactions.
Petitioner maintained several bank accounts during the years
in issue. One checking account was dedicated to Grand Video (the
business account). Many business expenses, including rent,
utilities, and store maintenance were paid by checks drawn on the
business account. Other business expenses were paid by cash and
recorded in a cash journal, but income received in cash was not.
Entries in the cash journal, including the cost of the journal
itself (i.e., $5.25), range from $.89 for a drill bit to $879.39
for “new carpet”.
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Typically, petitioner made two or three deposits per week
into the business account. Business account deposits made during
the years in issue are summarized below:
Year Check Deposits Cash Deposits Total
1993 $11,604.36 $12,175.06 $23,779.42
1994 19,210.40 9,962.16 29,172.56
1995 16,771.64 12,680.29 29,451.93
Total $47,586.40 $34,817.51 $82,403.91
Deposits into petitioner’s other bank accounts are
summarized as follows:
Year Check Deposits Cash Deposits Total
1993 $74.16 $52,204.35 $52,278.51
1994 300.00 44,401.00 44,401.00
1995 --- 39,004.00 39,004.00
Total $374.16 $135,609.35 $135,683.51
Before the years in issue, petitioner’s investments were
generally limited to real estate. During this time, he
purchased, rented, and sold several houses. In 1993, petitioner
began investing in securities. In January 1993, petitioner
purchased three U.S. Savings Bonds, each with a face value of
$10,000. Between July 1993 and October 1995, petitioner invested
approximately $158,000 in various mutual funds. Thereafter, it
appears that petitioner’s interest in investing in securities
faded rapidly. On December 5, 1995, petitioner redeemed mutual
fund shares with a net asset value of $119,187.30. On December
20, 1995, petitioner purchased real property for approximately
$83,000.
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Petitioner timely filed his Federal income tax returns for
each year in issue. He reported adjusted gross income of
($1,914) in 1993, $1,844 in 1994, and $3,559 in 1995.
Petitioner’s reported tax liabilities were $362 in 1993, $280 in
1994, and $600 in 1995. Each of the returns petitioner filed
during the years in issue, as well as those filed in 1991 and
1992, includes a Schedule C, Profit or Loss From Business, for
Grand Video. Income, deductions, and profits or losses reported
on the Schedules C are as follows:
1991 1992 1993 1994 1995
Gross income $19,459 $27,998 $47,722 $47,488 $43,956
Deductions 19,629 28,103 45,157 45,504 39,713
Net profit (loss) (170) (105) 2,565 1,984 4,248
With the possible exception of 1995, no deductions are
claimed for wages paid in cash to petitioner’s employees during
any of the years listed above.
Each return was prepared by a paid income tax return
preparer. With respect to the items listed on the Schedules C,
petitioner provided the return preparer with the cash journal and
bank records for the business account. For at least 1995, the
return preparer relied upon petitioner’s statement as to the
amount of income he earned through Grand Video.
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The examination of petitioner’s returns for the years in
issue began in 1996.1 Petitioner failed to report interest
income, rental income, dividend income, and capital gains on his
original returns. On May 7, 1997, petitioner filed Forms 1040X,
Amended U.S. Individual Income Tax Return, for 1993, 1994, and
1995. On the amended returns, petitioner reported additional
income as follows:
1993 1994 1995
Interest income $869 $133 $449
Sch. E net income 199 2,137 677
Dividend income 777 2,377 2,844
Capital gain 1,547 1,518 22,898
Sch. C net income 1,715 --- ---
Total $5,107 $6,165 $26,868
On each amended return, petitioner indicated that he had
“inadvertently omitted” these items of income.
On an application to open an investment account in 1993,
petitioner indicated that his income for that year was between
$30,000 and $49,999. On an application for a credit card that
petitioner applied for in 1995 he indicated that his monthly
gross income from Grand Video was $7,000.
Revenue Agent Keinle (Agent Keinle) conducted the
examination of petitioner’s returns. During the course of the
examination, petitioner provided her with business and personal
1
The provisions of sec. 7491 are not applicable to this
proceeding.
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expense records, the cash journal, asset records, and personal
and business bank records. Agent Keinle concluded that
petitioner’s income for each year in issue could not be
accurately determined from his records, and she decided to
reconstruct petitioner’s income for each year using the net worth
method.
During her examination, Agent Keinle interviewed petitioner
on at least five occasions. Relying upon information that
petitioner provided during these interviews, information
contained in his records, and information obtained from third
parties, she computed his net worth and unreported income as
follows (For convenience, amounts are rounded to the nearest
dollar.):
Year ending 12/31/92 12/31/93 12/31/94 12/31/95
Total assets $164,346 $240,370 $308,216 $378,660
Total liabilities (16,120) (52,367) (85,077) (114,270)
Net worth 148,226 188,003 223,139 264,389
Beginning net worth --- (148,226) (188,003) (223,139)
Net worth increase --- 39,777 35,136 41,251
Adjustments --- (21,765) (12,970) (6,299)
Corrected AGI --- 18,011 22,166 34,951
AGI per original return --- (7,964) (4,408) (2,841)
Unreported income --- 25,975 26,574 37,792
The assets included in the above computations are as
follows:
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Year ending 12/31/92 12/31/93 12/31/94 12/31/95
Cash on hand $200 $200 $200 $200
Cash in banks2 55,201 98,859 142,041 109,560
Personal residence --- 459 459 459
Investment property --- --- --- 83,189
Rental property 20,000 20,306 20,306 20,306
Business assets 87,145 107,099 132,063 151,128
Goodwill 1,000 1,000 1,000 1,000
Prepaid expenses --- --- --- 670
Automobiles 800 12,447 12,147 12,147
The increases in petitioner’s net worth from year to year
are not attributable to gifts, inheritances, or nontaxable
sources of income. In one interview, petitioner told Agent
Keinle that at the beginning of 1993 he had $60,000 in cash in a
safe in his house and approximately $40,000 in cash in that safe
at the end of 1995 (petitioner’s cash hoard). At a subsequent
interview, petitioner estimated that he had $165,000 in cash in
his safe, but later suggested that this figure was a lifetime
high, rather than the amount in the safe at the start of 1993.
Agent Keinle interviewed third parties, reviewed petitioner’s
financial records, and examined petitioner’s tax returns, but she
was unable to corroborate petitioner’s claim that he had
accumulated a cash hoard. She rejected petitioner’s claim of the
existence of a cash hoard and gave him no credit for such in her
net worth analysis.
2
The parties stipulated that “cash in banks” includes
petitioner’s investment accounts and securities.
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Petitioner’s returns for the years in issue also gave rise
to a criminal tax investigation conducted by Special Agent Dan
Wardlaw. Petitioner told Special Agent Wardlaw that he had
approximately $140,000 in cash in his safe at the beginning of
1993, but only $5,000 to $10,000 at the end of 1995.
Discussion
A taxpayer has a duty to maintain adequate records to show
whether or not the taxpayer is liable for Federal income tax.
Sec. 6001. If a taxpayer fails to maintain or produce such
records, the Commissioner may compute a taxpayer’s income and
income tax liability by a variety of indirect methods, including
the net worth method as used by respondent in this case. See,
e.g., Holland v. Commissioner, 348 U.S. 121 (1954); Petzoldt v.
Commissioner, 92 T.C. 661 (1989).
Petitioner’s records for Grand Video consist of the business
account and a cash journal. The cash journal does not record
income, and by comparing the annual business account deposits to
the gross income reported on Grand Video’s Schedule C it is clear
that not all of the income from Grand Video was deposited into
the business account. Furthermore, although there was a cash
register in Grand Video’s store, it was not used to record rental
and sales transactions. Because petitioner’s records do not
adequately demonstrate the amount of income he earned each year,
it was appropriate for respondent to use an indirect method to
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reconstruct petitioner’s income for those years. See Giddio v.
Commissioner, 54 T.C. 1530 (1970).
According to respondent, the increase in petitioner’s net
worth from year to year is attributable to unreported income
received by petitioner during those years. Respondent contends
that one likely source of omitted income is Grand Video.
Petitioner contends that respondent’s net worth analysis is
flawed because it fails to take into account petitioner’s cash
hoard. According to petitioner, respondent’s failure to account
for his cash hoard results in an overstatement of the increase in
his net worth for each year in issue, which in turn results in an
overstatement of his income for those years. Otherwise,
petitioner agrees with the items included in respondent’s net
worth analysis for each year.
At trial, petitioner estimated that as of the beginning of
1993 he had approximately $150,000 in cash in his safe at home.
He claims that he saved between 80 and 90 percent of his earnings
over the years and that those savings were reduced to cash and
placed into his safe. He further claims that he profited from
various real estate transactions and other investments over the
years, and that those profits were likewise converted to cash and
placed into his safe. This claim, however, is contradicted by
other evidence in the record. For example, petitioner claims
that the partnership he established in 1979 was profitable, but
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his Social Security records, his Federal income tax returns for
1979 and 1980, and his former partner, who testified at trial,
indicate otherwise.
A claim of the existence of a cash hoard is often “met with
some suspicion”, De Venney v. Commissioner, 85 T.C. 927, 933
(1985), and we are more than somewhat suspicious of petitioner’s
claim in this case. Ignoring for the moment petitioner’s
inconsistent statements as to the amount of his cash hoard, after
careful consideration of other evidence in the record we, like
respondent, reject his claim.
His earning history over the years, as indicated by Social
Security and income tax records, does not support the
accumulation of cash in any amount claimed by petitioner. See
Petzoldt v. Commissioner, supra at 692. According to petitioner,
he led a frugal lifestyle for most of his adult life and was able
to accumulate cash savings to the extent claimed. Although they
do not provide a complete picture of his earnings, petitioner’s
Social Security records, when coupled with information in the
record regarding his Federal income tax returns filed in years as
far back as 1967, make petitioner’s claim that his frugal
lifestyle allowed him to accumulate a substantial cash hoard
completely incredible. Moreover, if petitioner had access to the
amount of cash he claimed, we think it highly unlikely that he
would have allowed his house to be sold in a foreclosure sale in
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1984, or allowed his truck to be repossessed in 1990. It is
equally unlikely that petitioner, who behaved parsimoniously3
with respect to Grand Video, would be willing, as he claimed at
trial, to forgo the interest that he would have earned on his
cash accumulation if that cash were deposited into an interest-
bearing account, especially in those years where his Social
Security and income records indicate that he had little, if any,
income.
The pattern in which cash deposits were made to petitioner’s
bank accounts also undermines petitioner’s claim to a substantial
cash hoard. According to petitioner, he removed cash from his
safe from time to time and deposited the cash into his personal
bank accounts. His explanation is in sharp contrast to the
pattern of cash deposits revealed by his bank records. Those
records indicate that petitioner made frequent cash deposits into
his personal accounts at regular intervals during the years in
issue.
The foregoing reasons to reject petitioner’s claim that he
had a substantial amount of cash in his safe at the beginning of
1993 are made more compelling after considering that, at the
beginning of 1993, he had in excess of $55,000 on deposit in
3
Petitioner recorded in the cash journal many items costing
less than $1 and testified that even if a Grand Video receipt had
been erroneously completed he would not discard it because each
receipt cost approximately $.20.
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banks. Accepting petitioner’s claim would require a finding
that, at the beginning of 1993, petitioner had cash savings that
substantially exceeded the total amount of his earnings during
the prior 30 years. To the extent that petitioner was able to
accumulate cash savings over the years, we are satisfied that the
$55,201 credit for “cash in banks” that petitioner was given in
respondent’s net worth analysis adequately accounts for those
savings.
We reject petitioner’s claim that respondent’s net worth
analysis is flawed. We find no error in respondent’s failure to
take into account any cash accumulation not already accounted for
in the net worth analysis. Petitioner does not claim that the
analysis is incorrect in any other way. Furthermore, statements
made by petitioner in investment account and credit card
applications support respondent’s computations of petitioner’s
income for at least two of the years in issue. Consequently,
respondent’s determination of the deficiency, as stipulated,4 for
each year in issue is sustained.
Respondent determined that the underpayment of tax required
to be shown on petitioner’s return for each year is issue is due
to fraud. Section 6663(a) imposes a 75-percent penalty on the
portion of any underpayment of tax that is attributable to fraud.
4
The stipulation effectively satisfies the provisions of
sec. 6214(a) with respect to respondent’s claims for increased
deficiencies for 1994 and 1995.
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The Commissioner bears the burden of proof with respect to the
imposition of the fraud penalty for each year. Sec. 7454(a);
Rule 142(b). The Commissioner must establish by clear and
convincing evidence: (1) There is an underpayment of tax; and
(2) some part of the underpayment of tax is due to fraud.
Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986),
affg. T.C. Memo. 1984-601; Powell v. Granquist, 252 F.2d 56, 60-
61 (9th Cir. 1958); Hebrank v. Commissioner, 81 T.C. 640, 642
(1983). If the Commissioner establishes that any portion of an
underpayment is attributable to fraud, then the entire
underpayment is treated as being attributable to fraud, except
with respect to any portion of the underpayment which the
taxpayer establishes by a preponderance of evidence is not
attributable to fraud. Sec. 6663(b).
To prove the existence of an underpayment, the Commissioner
may not rely on a taxpayer’s failure to carry his or her burden
of proof with respect to the underlying deficiency. Parks v.
Commissioner, 94 T.C. 654, 660-661 (1990). However, the
Commissioner need not prove the precise amount of the
underpayment, but only that an underpayment exists. Niedringhaus
v. Commissioner, 99 T.C. 202, 210 (1992); Petzoldt v.
Commissioner, 92 T.C. 661, 699-700 (1989).
The amended return filed for each year in issue in this case
demonstrates that petitioner underpaid his tax on the original
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return filed for each of those years. In addition to the amended
returns, an underpayment of tax for each year is further
demonstrated by respondent’s net worth analysis, the validity of
which is supported by evidence in the record that establishes
both the existence of a likely source of unreported income (i.e.,
Grand Video), and the implausibility of petitioner’s claim to the
existence of a cash hoard not taken into account in the net worth
analysis. See Parks v. Commissioner, supra at 661. Respondent
has met his burden of establishing an underpayment of tax for
each year in issue by clear and convincing evidence.
Respondent must also establish that a portion of the
underpayment of tax for each year is due to fraud. Fraud will be
found if, at the time petitioner filed his return for each year
in issue, he “intended to evade taxes known to be owing by
conduct intended to conceal, mislead, or otherwise prevent the
collection of such taxes.” Rowlee v. Commissioner, 80 T.C. 1111,
1123 (1983).
Because fraudulent intent is seldom established by direct
evidence, it may be reasonably inferred from circumstantial
evidence, including evidence of a taxpayer’s course of conduct.
See United States v. Walton, 909 F.2d 915, 926 (6th Cir. 1990);
Rowlee v. Commissioner, supra; Stone v. Commissioner, 56 T.C.
213, 224 (1971). Conduct that may indicate fraudulent intent,
commonly referred to as “badges of fraud”, includes, but is not
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limited to: (1) Repeated understatements of income over a period
of years, (2) inadequate books and records, (3) implausible or
inconsistent explanations of behavior, (4) concealment of
income or assets, (5) dealing in cash, and (6) engaging in
illegal activities. See Bradford v. Commissioner, supra;
Niedringhaus v. Commissioner, supra at 211. In one manner or
another, petitioner’s course of conduct throughout the years in
issue is described by these badges of fraud.
Petitioner consistently understated his income for the 3
years before us in this case. In 1993, the income he reported on
his Federal income tax return is substantially less than the
income he listed on an application to open an investment account.
Similarly, the gross income that petitioner reported on the
Schedule C included with his 1995 return is substantially less
than the business income he listed on a credit card application.
Petitioner’s principal source of income during the years in
issue was his sole proprietorship, Grand Video. Most of Grand
Video’s rentals and sales were cash transactions. The store had
a cash register, but it was not used to record rental and sales
income. Petitioner did not deposit all of the income from Grand
Video into the business account, and his cash journal does not
record cash income. Petitioner could have tracked Grand Video’s
cash income through the use of the cash register, the business
account, or his cash log, but he elected not to do so. The
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business records that petitioner maintained for Grand Video are
hardly adequate to establish the amount of Grand Video’s gross
income for any of the years in issue. Petitioner’s failure to
keep adequate books and records of his predominately cash
business provides strong support for the imposition of the fraud
penalties in this case.
Additional support for the imposition of the fraud penalties
is found in the inconsistent and implausible claims that
petitioner made as to the existence of a substantial accumulation
of cash in his safe. Petitioner made no less than three
different estimates of the amount of cash he had accumulated in
his safe at the beginning of 1993 and the amount that remained at
the close of 1995. We note that his initial claim, i.e., $60,000
at the beginning of 1993 and $40,000 at the close of 1995, even
if true, would have had only a slight effect on respondent’s net
worth computations when spread over the 3-year period. Our view
of petitioner’s cash hoard claim has been set forth above, and
there is no point in repeating it here. Suffice it to say that
petitioner’s inconsistent and implausible claims that he
possessed a substantial cash hoard strongly support the
imposition of the fraud penalties in this case.
Lastly, we cannot ignore petitioner’s practice of paying his
employees “under the table” until he was examined and fined by
Washington State authorities in 1995. His conduct in this regard
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suggests that he had little respect for Federal and State tax
requirements. Furthermore, petitioner concealed these cash
payments not only by his failure to file the requisite Federal
and State employment tax returns, but by not claiming such
payments as deductible expenses on Grand Video’s Schedules C.
Petitioner’s willingness to give up what would otherwise be
allowable deductions strongly suggests the existence of
unreported cash income.
After careful consideration, we find that respondent has
satisfied his burden of showing that the underpayment of tax
required to be shown on petitioner’s return for each year in
issue is due to fraud.
Reviewed and adopted as the report of the Small Tax
Division.
To reflect the foregoing,
Decision will be
entered for respondent.