                                  T.C. Memo. 2016-144



                            UNITED STATES TAX COURT



                   ROBERT L. SCHWARTZ, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13153-11.                             Filed August 1, 2016.



      Robert L. Schwartz, pro se.

      Louis H. Hill and Gary R. Shuler, Jr., for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      RUWE, Judge: Respondent determined a $297,391 deficiency in

petitioner’s 2007 Federal income tax and a $223,043.25 fraud penalty under

section 6663.1 The issues for decision are: (1) whether petitioner received


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

[*2] $806,739.33 of unreported income in 2007 and (2) whether petitioner is liable

for a fraud penalty under section 6663.2

                               FINDINGS OF FACT

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

facts and the attached exhibits are incorporated herein by this reference.

      At the time the petition was filed, petitioner was incarcerated in Kentucky.

      Petitioner graduated from law school in 1966 and was admitted to the Ohio

bar in 1967. Petitioner spent the first two years of his legal career as an examiner

with the Internal Revenue Service’s (IRS) estate tax department before becoming a

sole practitioner specializing in personal injury civil litigation for approximately

40 years.3




      1
      (...continued)
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
      2
        In the notice of deficiency respondent made adjustments to petitioner’s
taxable Social Security benefits, self-employment tax, Schedule A, Itemized
Deductions, standard deduction, and exemptions for the taxable year 2007. These
adjustments are strictly computational and will be controlled by our resolution of
the issues.
      3
       In 2014 petitioner was permanently disbarred from the practice of law by
the Supreme Court of Ohio.
                                         -3-

[*3] Beverly W. Hersh’s Estate

      On or about May 9, 2003, petitioner was given a power of attorney for the

financial affairs of a wealthy, elderly friend and client named Beverly W. Hersh.

Petitioner assisted Mrs. Hersh in preparing several codicils to her will and

arranged for the preparation of three trust agreements and subsequent amendments

thereto by a Cincinnati law firm. As of December 13, 2003, pursuant to Mrs.

Hersh’s estate plan (i.e., her will and trust agreements as amended), her adjusted

gross estate was to be placed in the Beverly W. Hersh Trust (Hersh Trust).

Thereafter, the Hersh Trust would distribute the balance of Mrs. Hersh’s adjusted

gross estate as follows: (1) 20% to Hadassah Hospital (Hadassah); (2) 30% to the

Beverly W. Hersh Charitable Trust (charitable trust); and (3) 50% to the Hersh

revocable trust. Petitioner was named executor of Mrs. Hersh’s estate and trustee

for the trusts and was responsible for the distribution of Mrs. Hersh’s adjusted

gross estate according to her will and amended trust agreements.

      The money designated for the charitable trust was to be distributed to

organizations with section 501(c)(3) status, like Hadassah. The money designated

for the Hersh revocable trust was to be distributed at the sole discretion of

petitioner as trustee to or on behalf of individuals or to organizations in a manner

which would assist them with overcoming financial and substance abuse issues, to
                                          -4-

[*4] live more fulfilling lives, and to provide benefits to those individuals who had

assisted and befriended Mrs. Hersh during her lifetime.

      Article II, sec. 2.2, of the Hersh revocable trust agreement establishes

limitations on petitioner’s discretion in his capacity as trustee as follows:

      2.2 Distribution Restrictions. Grantor has established this Trust
      Agreement with the intention of providing * * * [petitioner] with a
      wide latitude of discretion to make charitable and noncharitable
      distributions to individuals and other entities as * * * [petitioner]
      determines. However, Grantor desires to place certain limitations on
      the discretion of * * * [petitioner] to ensure that the income and
      principal of the trust estate (other than as provided for in Section
      4.2[4]) will fulfill the intentions of the Grantor in establishing this
      Trust Agreement and ensure that [the] trust estate will not be taxable
      to * * * [petitioner] in any manner, whatsoever. To this end, * * *
      [petitioner] shall not have the discretion to make distributions of the
      trust estate:

              (a) To * * * [petitioner] (other than as provided for in Section
      4.2);

              (b) To creditors of * * * [petitioner];

              (c) To creditors of * * * [petitioner]’s estate;

             (d) To or for the benefit of any individual, in trust or otherwise,
      within six degrees of lineal or collateral consanguinity or affinity to
      * * * [petitioner]; or

            (e) To any entity that one or more of the parties listed above in
      Sections 2.2(a) - (d) owns an equity interest.

      4
       Article IV, sec. 4.2, of the Hersh revocable trust agreement provides for
reasonable compensation for the trustee.
                                       -5-

[*5] Mrs. Hersh died on May 5, 2005. Shortly after Mrs. Hersh’s death,

petitioner (as executor and trustee) began making distributions from the estate and

disbursing funds through the Hersh revocable trust.

      On or about August 2, 2006, petitioner filed a Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return, on behalf of Mrs. Hersh’s

estate. The Form 706 indicated that Hadassah was to receive approximately

$2,502,469, the charitable trust was to receive approximately $3,756,703, and the

remaining residual estate balance of approximately $6,261,172 was to be

disbursed through the Hersh revocable trust.

      Petitioner sent Hadassah a letter dated September 1, 2005,5 stating that

“Haddessah [sic] was remembered in * * * [Mrs. Hersh’s] trust but it will take

some months before we are ready to make [a] distribution.” Petitioner

subsequently made distributions from the Hersh Trust to Hadassah as follows:

(1) $5,000 on December 26, 2006; (2) $5,000 on January 11, 2008; and (3)

$200,000 on August 28, 2008.




      5
      The letter was addressed to Harold G. Arnwine, Attorney at Law, who
presumably was the attorney and/or agent for Hadassah.
                                         -6-

[*6] Petitioner’s 2007 Tax Return

      Petitioner timely filed a Form 1040, U.S. Individual Income Tax Return, for

the taxable year 2007. Included with petitioner’s Form 1040 was a Schedule C,

Profit or Loss From Business, for his “Law Office”, reporting gross receipts or

sales (on line 1) of $125,702. Petitioner claimed deductions for Schedule C

expenses as follows:

                         Expense                    Amount

                       Advertising                  $1,475
                       Office                       78,537
                       Supplies                      1,839
                       Taxes and licenses           28,142
                       Other                         2,874
                        Total                      112,867

Petitioner reported $12,835 ($125,702 ! $112,867) of business income on line 12

of his Form 1040.

Petitioner’s Criminal Case

      On May 21, 2009, the Government filed a two-count information against

petitioner in the U.S. District Court for the Southern District of Ohio (District

Court). Count 1 of the information charged petitioner with mail fraud under 18

U.S.C. sec. 1341 for knowingly causing to be delivered by mail a letter to

Hadassah which included a material misrepresentation and an omission regarding
                                           -7-

[*7] the distribution to the organization from Mrs. Hersh’s adjusted gross estate.

Count 2 of the information charged petitioner with violating section 7206(1) by

filing a false Federal income tax return for the taxable year 2007.

        On May 21, 2009, petitioner voluntarily pleaded guilty in the District Court

to count 1 (mail fraud) and count 2 (filing a false income tax return for the taxable

year 2007) of the information.6 As part of the plea agreement, petitioner

acknowledged the truth of the following statement of facts:

                                STATEMENT OF FACTS

              *        *          *         *         *          *         *

              Beverly Hersh died on May 5, 2005. The United States Estate
        Tax Return (Form 706) filed on or about August 2, 2006 on behalf of
        the Hersh Estate by * * * [petitioner], Trustee, indicated that
        Hadassah Hospital was to receive approximately $2,502,469 and the
        Hersh Charitable Trust was to receive approximately $3,756,703.
        The remaining residual estate balance of approximately $6,261,172
        was to be disbursed at * * * [petitioner’s] discretion through the
        Hersh Revocable Trust. This trust was also known as the Hersh
        Private Trust or the Hersh Discretionary Trust.

                              COUNT ONE - MAIL FRAUD

              As trustee, * * * [petitioner] did not segregate or take any other
        precautions to invest or otherwise protect the trust funds for the
        required disbursements to Hadassah Hospital and the Hersh
        Charitable Trust as specified per the Hersh trust agreements.

        6
            Petitioner and his attorney signed and dated the plea agreement on May 6,
2009.
                                        -8-

[*8]         Shortly after Mrs. Hersh died, * * * [petitioner] as the
       executor/trustee, began making distributions from the estate and
       disbursing funds through the Hersh Discretionary Trust. He routed
       the majority of the trust funds from the Discretionary Trust through
       accounts or entities he controlled much of which was then used for
       personal expenditures and asset purchases for family members,
       employees, friends and close associates.

              By approximately August 2008, * * * [petitioner] disbursed
       more than $9,000,000 from the Hersh Discretionary Trust which was
       significantly more than 50% of the estate which was allocated.
       Meanwhile, * * * [petitioner] had made distributions totaling less
       than $50,000 to recognized charities through the Hersh Charitable
       Trust. * * * [Petitioner] made the following contributions to
       Hadassah Hospital:

                          December 26, 2006          $5,000
                          January 11, 2008           $5,000
                          August 28, 2008            $200,000

              Despite * * * [petitioner]’s representations made on the Hersh
       Estate Tax Return, * * * [petitioner] distributed nominal percentages
       to Hadassah and the Hersh Charitable Trust even though the estate
       had benefitted from the charitable deductions. It was only after
       investigating agents spoke with * * * [petitioner] on August 6, 2008,
       that * * * [petitioner] made the $200,000 distribution to Hadassah.
       Before that date, * * * [petitioner] knowingly failed to advise
       Hadassah that Mrs. Hersh had bequeathed 20%, or $2,502,469, of her
       estate to the organization despite the representation he made on the
       estate tax return.

              On or about September 1, 2005, a few months after Mrs.
       Hersh’s death, * * * [petitioner] sent a letter to Hadassah advising
       only that Hadassah was remembered by the Hersh trust but it would
       take time before the distribution would be made. He failed to tell
       Hadassah what percentage of the estate was left to the organization.
       * * * [Petitioner] made material misrepresentations and omissions to
                                        -9-

[*9] both the IRS and Hadassah with the intent to defraud Hadassah of
     approximately $2,502,469. He used the United States mail when he
     sent the estate tax return to the IRS, and he also mailed the letter to
     Hadassah dated September 1, 2005.

                COUNT TWO - FILING FALSE TAX RETURNS

              With respect to his personal income tax matters, on April 14,
      2008, * * * [petitioner] willfully subscribed to a United States
      Individual Income Tax Return (Form 1040) for the calendar year
      2007 in Cincinnati, Ohio, which was verified by a written declaration
      that it was made under penalties of perjury. * * * [Petitioner] filed
      this return with the Internal Revenue Service which he knew to be
      false as to a material matter in that the return omitted a substantial
      portion of his gross receipts from his Schedule C and/or
      Miscellaneous Income figures. * * * [Petitioner] reported Schedule
      C-Gross Receipts totaling $125,702 for 2007 whereas his correct
      gross receipts were approximately $932,441. The unreported receipts
      resulted from * * * [petitioner’s] failure to report payments he caused
      to be made to himself for services as the Hersh executor/trustee, from
      money he diverted from Hersh trust funds to care for his mother, and
      unreported income from legal fees pertaining to his other clients’
      personal injury settlements. The investigation revealed that he also
      filed materially false returns for the years 2002 through 2006. His
      total unreported gross receipts for those years was approximately
      $2,533,515.

On June 8, 2010, the District Court entered a judgment in petitioner’s criminal

case and sentenced petitioner to 48 months’ imprisonment.7 Pursuant to the plea

agreement the District Court ordered petitioner to pay restitution totaling


      7
       Petitioner was sentenced to 48 months’ imprisonment for mail fraud and 36
months’ imprisonment for filing a false tax return, to run concurrently. Petitioner
was released from prison on January 17, 2014.
                                       - 10 -

[*10] $3,227,686.12, consisting of $2,292,469 to Hadassah and $935,217.12 to the

IRS.

Notice of Deficiency

       On February 3, 2011, petitioner executed a Form 872, Consent to Extend

the Time to Assess Tax, extending the time for assessment of his 2007 income tax

to June 30, 2012. On March 11, 2011, respondent issued to petitioner a notice of

deficiency for the taxable year 2007. In the notice of deficiency respondent used

the bank deposits method to determine petitioner’s 2007 income as follows:

          Description                  Account                   Amount

       Legal settlements         US Bank (4968)               $156,055.64
       Hersh deposits            US Bank (4968)                482,768.07
       Legal settlements         Fifth Third Bank (0239)       153,384.29
       Hilda Schwartz            US Bank (4114)                 91,490.00
       Legal settlements         Fifth Third Bank (7240)           743.33
       Cashed checks (Hersh)     Various                        48,000.00
        Total                                                  932,441.33

Respondent subtracted from this total the amount petitioner reported as gross

receipts or sales on his 2007 Schedule C ($125,702) to determine that petitioner

had underreported his income by $806,739.33. Petitioner timely filed a petition

disputing respondent’s determinations in the notice of deficiency.
                                         - 11 -

[*11]                                  OPINION

I. Jurisdiction

        Petitioner argues in his opening brief that this Court lacks jurisdiction over

the matter sub judice because the IRS chose to “review the tax deficiency and

related issues” in District Court and thus this proceeding is duplicative. Petitioner

further argues that he has already paid more than $1.3 million in District-Court-

ordered restitution, some of which was to the IRS.

        A Federal District Court may order restitution to the victim of a criminal

offense. 18 U.S.C. sec. 3663(a) (2012). An order to pay restitution is a criminal

penalty rather than a civil penalty. Creel v. Commissioner, 419 F.3d 1135, 1140

(11th Cir. 2005). Although restitution is based upon an estimate of civil tax

liability, it is not determinative of civil tax liability. See Morse v. Commissioner,

419 F.3d 829, 833-835 (8th Cir. 2005), aff’g T.C. Memo. 2003-332; Hickman v.

Commissioner, 183 F.3d 535, 537-538 (6th Cir. 1999), aff’g T.C. Memo. 1997-

566. The restitution statute specifically contemplates that a civil claim may be

brought after the criminal prosecution by providing that the amount paid under a

restitution order “shall be reduced by any amount later recovered as compensatory

damages for the same loss by the victim in * * * any Federal civil proceeding”. 18

U.S.C. sec. 3664(j)(2) (2012). Furthermore, any amount paid to the IRS as
                                         - 12 -

[*12] restitution for taxes owed must be deducted from any civil judgment the IRS

obtains to collect the same tax deficiency. See United States v. Tucker, 217 F.3d

960, 962 (8th Cir. 2000). The implication is that a civil judgment must be entered

before the IRS reduces a taxpayer’s tax liability by restitution paid. Muncy v.

Commissioner, T.C. Memo. 2014-251, at *12, vacated and remanded on other

grounds, 637 F. App’x 276 (8th Cir. 2016).8

      Petitioner’s voluntary plea agreement specifically states that “this agreement

does not resolve any civil liability that may arise as a result of the conduct

described in Counts One and Two of the Information.” The plea agreement also

states that it “binds only the United States Attorney for the Southern District of

Ohio and does not bind any other federal, state, or local prosecuting authority.”

The criminal judgment refers to the restitution payments as “criminal monetary

penalties” and makes no mention of civil liabilities or penalties. Furthermore,

there is no evidence that petitioner has satisfied any criminal restitution related to

unpaid taxes or received a discharge. Accordingly, petitioner’s plea agreement




      8
        The judgment ordering petitioner to pay restitution was entered on June 8,
2010, before August 16, 2010, the effective date of secs. 6201(a)(4) and
6213(b)(5). See Firearms Excise Improvement Act of 2010, Pub. L. No. 111-237,
sec. 3(c), 124 Stat. at 2498.
                                         - 13 -

[*13] and criminal judgment ordering restitution do not limit respondent’s

assessment and collection of petitioner’s civil tax liability for his taxable year

2007.

II. Unreported Income

        The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving that the

determinations are in error. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). For the presumption of correctness to attach with respect to

unreported income, the Commissioner’s determination must be supported by

“some evidentiary foundation linking the taxpayer to the alleged income-

producing activity.” Blohm v. Commissioner, 994 F.2d 1542, 1548-1549 (11th

Cir. 1993) (quoting Weimerskirch v. Commissioner, 596 F.2d 358, 362 (9th Cir.

1979), rev’g 67 T.C. 672 (1977)), aff’g T.C. Memo. 1991-636; see also United

States v. Walton, 909 F.2d 915, 919 (6th Cir. 1990). Once the Commissioner has

produced evidence linking the taxpayer to an income-producing activity, the

burden of proof shifts to the taxpayer to prove by a preponderance of the evidence

that the Commissioner’s determinations are arbitrary or erroneous. Helvering v.

Taylor, 293 U.S. 507, 515 (1935); Tokarski v. Commissioner, 87 T.C. 74, 176-177

(1986).
                                       - 14 -

[*14] To satisfy this initial burden of production, respondent introduced a bank

deposits analysis for petitioner’s bank accounts. These records show that

petitioner received unreported income. Furthermore, respondent has shown that

petitioner’s law practice is the likely source of the unreported income--

specifically, legal settlements and fees from the administration of Mrs. Hersh’s

estate. On the basis of this credible evidence, we are satisfied that respondent’s

determinations in the notice of deficiency are entitled to their general presumption

of correctness.

      Section 61(a) defines gross income to mean “all income from whatever

source derived”. A taxpayer is required to maintain sufficient books and records

establishing the amount of his or her income. Sec. 6001; sec. 1.6001-1(a), Income

Tax Regs. When a taxpayer fails to keep sufficient books of account or such

books of account do not clearly reflect income, the Commissioner is authorized to

determine his or her income “under such method as, in the opinion of the

Secretary, does clearly reflect income.” Sec. 446(b); Petzoldt v. Commissioner, 92

T.C. 661, 686-687 (1989); sec. 1.446-1(b)(1), Income Tax Regs. Where the

taxpayer does not maintain adequate records as to the amount and source of his or

her income, the Commissioner may appropriately employ the bank deposits

method to estimate the taxpayer’s income. Estate of Mason v. Commissioner, 64
                                       - 15 -

[*15] T.C. 651, 656 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977). The IRS has great

latitude in reconstructing a taxpayer’s income, and the reconstruction need “only

be reasonable in light of all surrounding facts and circumstances.” Petzoldt v.

Commissioner, 92 T.C. at 687.

      Bank deposits are prima facie evidence of income. Tokarski v.

Commissioner, 87 T.C. at 77. The bank deposits method assumes that all deposits

into a taxpayer’s bank account are taxable unless the taxpayer can show that the

deposits are not taxable. DiLeo v. Commissioner, 96 T.C. 858, 868 (1991), aff’d,

959 F.2d 16 (2d Cir. 1992). This presumption is rebutted to the extent that

deposits are shown to include nontaxable amounts, and “the Government must

take into account any non-taxable source * * * of which it has knowledge.” Price

v. United States, 335 F.2d 671, 677 (5th Cir. 1964).

      After the Commissioner reconstructs a taxpayer’s income and determines a

deficiency, the taxpayer bears the burden of proving that the Commissioner’s use

of the bank deposits method is unfair or inaccurate. See Clayton v. Commissioner,

102 T.C. 632, 645 (1994); see also Estate of Mason v. Commissioner, 64 T.C. at

657. The taxpayer must prove that the reconstruction is in error, and may do so, in

whole or in part, by proving that a deposit is not taxable. Estate of Mason v.

Commissioner, 64 T.C. at 657. Nontaxable sources include funds attributable to
                                        - 16 -

[*16] “loans, gifts, inheritances, or assets on hand at the beginning of the taxable

period.” Burgo v. Commissioner, 69 T.C. 729, 743 n.14 (1978) (quoting

Troncelliti v. Commissioner, T.C. Memo. 1971-72). A bank deposits analysis is

not invalidated even if the Commissioner’s calculations are not entirely correct.

DiLeo v. Commissioner, 96 T.C. at 868.

      Respondent used the bank deposits method to reconstruct petitioner’s 2007

gross income. A comparison of respondent’s bank deposits analysis and the gross

receipts or sales that petitioner reported on his Schedule C reveals a large

disparity. On his Schedule C petitioner reported gross receipts or sales of

$125,702. Using the bank deposits method respondent determined petitioner’s

gross income to be $932,441.33, an understatement of $806,739.33.

      On the basis of the record, we hold that petitioner underreported his 2007

income by $806,739.33. Petitioner does not dispute receiving the deposits

identified in respondent’s bank deposits analysis. As part of his 2009 guilty plea,

petitioner acknowledged under oath that he “reported Schedule C-Gross Receipts

totaling $125,702 for 2007 whereas his correct gross receipts were approximately

$932,441.” Petitioner also acknowledged under oath that “[t]he unreported

receipts resulted from * * * [his] failure to report payments he caused to be made

to himself for services as the Hersh executor/trustee, from money he diverted from
                                        - 17 -

[*17] Hersh trust funds to care for his mother, and unreported income from legal

fees pertaining to his other clients’ personal injury settlements.”

      Petitioner’s argument on brief, as we understand it, is that all bank deposits

in excess of the amounts reported on his 2007 tax return are reimbursements by

the Hersh estate for his personal outlay of estate expenses and/or expense

categories not included on the tax return. Petitioner further argues that all income

and expenses were explained on separate “worksheets” which were subsequently

summarized on his tax return. To support this argument petitioner offered copious

amounts of photocopied receipts from various vendors, including: Abercrombie &

Fitch, Carx Auto Service, CVS Pharmacy, Dick’s Sporting Goods, Foot Locker,

Home Depot, Kroger, Macy’s, Meijer, Smoothie King, Target, Wal-Mart, and

Walgreens. However, petitioner did not provide testimony about these receipts or

explain how these expenditures relate to Hersh trust expenses and/or his law

practice. We find petitioner’s testimony and argument on brief to be conclusory,

improbable, vague, and contradictory to the statement of facts underlying his

voluntary plea agreement. See Lovell & Hart, Inc. v. Commissioner, 456 F.2d

145, 148 (6th Cir. 1972) (stating that the Tax Court is not required to accept a

taxpayer’s testimony if it is improbable, unreasonable, or questionable), aff’g T.C.
                                       - 18 -

[*18] Memo. 1970-335. Accordingly, we hold that petitioner underreported his

2007 income by $806,739.33.

III. Section 6663 Fraud Penalty

      Respondent determined in the notice of deficiency that petitioner is liable

for a civil fraud penalty under section 6663. If any part of an underpayment on a

return is due to fraud, section 6663(a) imposes on the taxpayer filing the return a

penalty equal to 75% of the part of the underpayment attributable to fraud. To

prove that the taxpayer is liable for the section 6663 penalty the Commissioner

must prove by clear and convincing evidence that (1) an underpayment of tax

exists, and (2) some part of the underpayment is due to fraud. Sec. 7454(a); Rule

142(b); DiLeo v. Commissioner, 96 T.C. at 873. If the Commissioner proves that

any portion of the underpayment is attributable to fraud, then the entire

underpayment shall be treated as attributable to fraud unless the taxpayer shows by

a preponderance of the evidence that a portion was not so attributable. Sec.

6663(b).

      A. Underpayment

      Respondent performed a bank deposits analysis to reconstruct petitioner’s

2007 gross income. As discussed previously, petitioner’s allegation of a

nontaxable source of the unreported income was improbable and contrary to the
                                       - 19 -

[*19] statement of facts underlying his voluntary plea agreement. The record

before the Court clearly and convincingly establishes that petitioner underpaid his

tax by $297,391. See Parks v. Commissioner, 94 T.C. 654, 661-664 (1990).

      B. Fraudulent Intent

      The second prong of the fraud test requires the Commissioner to show that a

portion of the underpayment is attributable to fraud. Fraud for this purpose is

defined as intentional wrongdoing by the taxpayer with the specific purpose of

avoiding tax believed to be owed. Stoltzfus v. United States, 398 F.2d 1002, 1004

(3d Cir. 1968); Neely v. Commissioner, 116 T.C. 79, 86 (2001). Put differently,

imposition of the civil fraud penalty is appropriate upon a showing that the

taxpayer intended to evade taxes believed to be owing by conduct designed to

conceal, mislead, or otherwise prevent the collection of taxes. DiLeo v.

Commissioner, 96 T.C. at 874.

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

consideration of the entire record. See id. Fraud will never be presumed and must

be established by independent evidence of fraudulent intent. Recklitis v.

Commissioner, 91 T.C. 874, 909-910 (1988). However, because direct proof of a

taxpayer’s intent is rarely available, fraud may be established by circumstantial

evidence. Scallen v. Commissioner, 877 F.2d 1364, 1370 (8th Cir. 1989), aff’g
                                        - 20 -

[*20] T.C. Memo. 1987-412. In determining fraudulent intent, we consider the

taxpayer’s entire course of conduct and reasonable inferences that may be drawn

from the facts. Parks v. Commissioner, 94 T.C. at 664; Bacon v. Commissioner,

T.C. Memo. 2000-257, aff’d without published opinion, 275 F.3d 33 (3d Cir.

2001).

      The Commissioner may establish fraud by circumstantial evidence, which

includes various “badges of fraud” on which the courts often rely. See DiLeo v.

Commissioner, 96 T.C. at 875. These factors focus on whether the taxpayer

engaged in conduct that is indicative of fraudulent intent, such as: (1) under-

stating income; (2) maintaining inadequate records; (3) failing to file tax returns;

(4) offering implausible or inconsistent explanations of behavior; (5) concealing

income or assets; (6) failing to cooperate with tax authorities; (7) engaging in

illegal activities; (8) dealing in cash; (9) failing to make estimated tax payments;

and (10) filing false documents, including filing false income tax returns. See

Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff’g T.C.

Memo. 1984-601; Parks v. Commissioner, 94 T.C. at 664-665; Recklitis v.

Commissioner, 91 T.C. at 910; Lipsitz v. Commissioner, 21 T.C. 917 (1954),

aff’d, 220 F.2d 871 (4th Cir. 1955). An intent to mislead may be inferred from a
                                        - 21 -

[*21] pattern of conduct. See Webb v. Commissioner, 394 F.2d 366, 379 (5th Cir.

1968), aff’g T.C. Memo. 1966-81.

      Numerous badges of fraud are present in this case and demonstrate that

petitioner intentionally evaded the payment of tax that he knew to be owed.

Petitioner substantially understated his income for 2007 by $806,739.33. He

maintained inadequate records. Throughout the proceedings before this Court

petitioner offered implausible and inconsistent explanations for his behavior.

Petitioner also acknowledged in the District Court, while under oath, that he

underreported gross receipts for 2002-06 by approximately $2,533,515 and

underreported income for the taxable year 2007 by over $806,000.

      Petitioner’s conviction under section 7206(1) is highly probative. Section

7206(1) makes it a crime for a taxpayer to willfully make and submit any return

verified by a written declaration that it is made under the penalties of perjury

which he does not believe to be true and correct as to every material matter. A

taxpayer who has been convicted of willfully and knowingly subscribing to a false

income tax return under section 7206(1) is not collaterally estopped from

contesting that he is liable for fraud because a conviction under section 7206(1)

does not require a showing that the taxpayer willfully attempted to evade tax. See

Morse v. Commissioner, T.C. Memo. 2003-332. However, a conviction for filing
                                        - 22 -

[*22] a false Federal income tax return under section 7206(1) is highly persuasive

evidence that the taxpayer intended to evade tax. See Morse v. Commissioner,

419 F.3d at 833. Petitioner’s intentional filing of a false tax return for the taxable

year 2007, reporting an amount of income which he knew to be false, is a strong

indication of fraudulent intent. Petitioner offered no credible evidence to show

that his filing of a false return should not be considered indicative of fraud. We

conclude that the record, when taken as a whole, clearly and convincingly

establishes that petitioner acted with fraudulent intent and that his 2007

underpayment was due to fraud. Petitioner has failed to submit credible evidence

showing that some specific part of the underpayment is not due to fraud, and we

hold that petitioner is liable for the section 6663 civil fraud penalty. See sec.

6663(b).

      In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit.

      To reflect the foregoing,


                                                            Decision will be entered

                                                     for respondent.
