                       T.C. Memo. 2004-242



                     UNITED STATES TAX COURT



                 ST. LUC VALBRUN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19495-02.           Filed October 25, 2004.


     Steven M. Harris, for petitioner.

     D’aun E. Clark and Kenneth A. Hochman, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GERBER, Chief Judge:   After petitioner filed an Amended U.S.

Individual Income Tax Return for the 1990 taxable year showing an

increase in tax of $33,255, respondent determined a $26,050 fraud
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penalty under section 66631 for petitioner’s 1990 taxable year.

The sole issue remaining for our consideration is whether

petitioner is liable for the civil fraud penalty under section

6663 for the taxable year 1990.

                         FINDINGS OF FACT

     At the time of the filing of the petition in this case,

petitioner resided in Haiti.   For the taxable year 1990,

petitioner derived income in Florida from tax return preparation,

selling automobile insurance, and providing immigration services.

His business activities were conducted predominantly in cash.

Petitioner reported only $7,481 of insurance sales income, $6,235

of bank interest income, and a total tax of $1,479.

     Sometime in May or June of 1992, respondent began an audit

of petitioner’s 1990 tax return.2   When initially asked for

records related to his business activities, petitioner did not

produce any income records or bank statements, claiming that they

were lost.   Petitioner did produce an organized collection of

checks in connection with his expenses.     Later, petitioner’s

accountant produced records relating to petitioner’s insurance

sales and records concerning more than 1,000 customers for whom


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
      Respondent also audited the 1989 and 1991 returns, but
those returns are not at issue in this case.
                                - 3 -

petitioner had prepared income tax returns,3 but no bank

statements.

     From the customer logs provided and various books of

receipt, respondent’s tax examiner (the examiner) computed income

from petitioner’s business activities as follows:

                            Originally
  Business                   Reported        Per Audit   Understatement

Insurance sales               $7,481         $63,394        $55,913
Tax return preparation          -0-           24,000         24,000
Other services                  -0-            2,480          2,480
                               7,481          89,874         82,393

     In addition, the examiner also determined that petitioner

received interest income from personal loans he made.        The

examiner also verified through Forms 1099 that had been received

by respondent that petitioner’s interest income for 1990 was

understated.    The examiner verified interest income of $15,414,

resulting in an understatement of interest income of $9,179.          The

record does not reflect whether any interest from the personal

loans was included in this amount.       Therefore, the actual

understatement of interest income could have been larger than

$9,179.

     On August 4, 1997, petitioner pleaded guilty to one count of

willfully making and subscribing a false income tax return under

section 7206(1) for 1990.   Petitioner was voluntarily deported

from the United States to Haiti as a result of his guilty plea,



     3
      Petitioner admitted preparing over 1,500 returns (of which
approximately 20 percent were prepared for free), though there
were records for only 1,080 returns.
                               - 4 -

and he agreed to file an amended 1990 tax return.    Petitioner’s

accountant and the examiner discussed whether the insurance

income should have been reported on a corporate tax return

because the insurance business had been incorporated sometime

near 1990.   Ultimately, however, the income was reported on the

amended return petitioner filed.

     On December 7, 1997, petitioner filed the amended return,

reflecting increased income of $99,095, a correct tax of $34,374,

and an increase in tax of $33,255.     Respondent determined that

the entire underpayment was attributable to fraud and that

petitioner was liable for civil fraud penalties of $26,050 under

section 6663 for the 1990 taxable year.4

                              OPINION

     If any part of an underpayment is due to fraud, a penalty

equal to 75 percent is imposed on the portion of the underpayment

which is attributable to fraud.5   Sec. 6663(a).   Fraud is defined



     4
      Respondent’s determination of the amount of penalty appears
to be incorrect because the amount is based on the total correct
tax, not the portion of the underpayment attributable to fraud.
Consequently, it does not give petitioner credit for the $1,479
of tax shown on the original return. Therefore, if we find that
the underpayment of tax is attributable to fraud, the penalty
should be based on no more than the total underpayment of
$33,255, not the total correct tax of $34,374.
     5
      Pursuant to sec. 1.6664-2(c)(2), Income Tax Regs., for
purposes of ascertaining the underpayment on which the sec. 6663
penalty is based, the tax shown on an amended return is not
substituted for the tax shown on the return as originally filed
if the latter was fraudulent.
                               - 5 -

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.   The Commissioner must prove

fraud by clear and convincing evidence.    Rule 142(b).

     To satisfy this burden, the Commissioner must show (1) that

an underpayment exists, and (2) 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. 654, 660-661 (1990).

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

upon consideration of the entire record.     DiLeo v. Commissioner,

96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir. 1992).    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, 223-224 (1971).

     To decide whether the fraud penalty is applicable, courts

consider several indicia of fraud, or “badges of fraud”, which

include:   (1) Understatement of income; (2) inadequate books and

records; (3) failure to file tax returns; (4) implausible or
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inconsistent explanations of behavior; (5) concealment of assets;

(6) failure to cooperate with tax authorities; (7) filing false

Forms W-4; (8) failure to make estimated payments; (9) dealing in

cash; (10) engaging in illegal activity; and (11) attempting to

conceal illegal activity.   Bradford v. Commissioner, 796 F.2d

303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Recklitis v.

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

is necessarily sufficient to establish fraud, the combination of

a number of factors constitutes persuasive evidence of fraud.

See 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).   In addition, this list is nonexclusive.

See Miller v. Commissioner, supra at 334.

     The intent to evade taxes is not an element of an offense

under section 7206(1), and thus petitioner is not estopped to

deny fraud because of his conviction.     Wright v. Commissioner, 84

T.C. 636, 643 (1985).   However, a conviction under 7206(1) is a

probative fact that can be considered and can be persuasive

evidence of the intent to evade tax.     Stefansson v. Commissioner,

T.C. Memo. 1994-162; Avery v. Commissioner, T.C. Memo. 1993-344.

     Petitioner’s section 7206(1) conviction was a result of a

plea bargain.   Petitioner’s counsel suggests that this plea could

be the result of petitioner’s decision to avoid the risk of

receiving a more severe punishment if he lost at trial.    No
                                 - 7 -

evidence has been presented that this was in fact the case, nor

do we need to delve into petitioner’s intentions at the time he

entered into the plea bargain.    The conviction, when coupled with

the five indicia of fraud discussed below, provides persuasive

evidence of fraud.

     First, petitioner’s understatement of income was

substantial.   He failed to report income from tax return

preparation or immigration services.     In addition, he failed to

report nearly 60 percent of his interest income and almost 90

percent of his insurance sales income.

     Second, petitioner failed to keep adequate books and

records.    He initially provided no sales records, customer lists,

or other related documents to the examiner.    Even when

petitioner’s accountant provided those documents, they were not

complete.   In addition, petitioner did not produce bank

statements or Forms 1099.

     Third, petitioner’s explanations of his behavior were

implausible and inconsistent.    Petitioner’s excuse provided to

the examiner that his income records were lost was implausible

and inconsistent because those records were subsequently provided

by petitioner’s accountant.    In response, petitioner asserts that

the accountant produced “most, but not all”, of the documents

because some had been lost, and therefore there was no intent to

mislead or conceal anything.    Even if some of the documents were
                               - 8 -

lost, failure to produce the available documents initially was

misleading and inconsistent.   We find incongruous the fact that

petitioner claims to have lost records pertaining to income but

was able to produce organized documents to substantiate expenses.

     Petitioner’s contention that the omitted income from

insurance sales should have been reported on a corporate tax

return is without effect because the income was not reported by

any entity.   Petitioner prepared over 1,500 tax returns.

Petitioner’s knowledge of the tax law belies the argument that he

did not know the proper treatment of his income.   Even if

petitioner thought the insurance income should have been reported

on a corporate tax return, that belief does not justify

petitioner’s reporting only a portion of the insurance income on

his individual return and not reporting any income from other

businesses that were not incorporated.

     Fourth, petitioner failed to cooperate with the examiner.

Petitioner’s failure to provide available documents relating to

income is a failure to cooperate.   Petitioner’s subsequent

cooperation does not make up for his failure to cooperate with

the examiner initially.

     Fifth, petitioner’s business was conducted almost

exclusively in cash.   While petitioner contends that it was

customary to conduct business in cash in his native Haiti, that

does not justify petitioner’s Florida cash businesses, which
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permitted him to conceal and fail to report income.    Conducting a

cash business does not per se prove fraud.    When coupled with

attempts to conceal transactions or avoid the requirement of

reporting cash transactions, it becomes more probative.    See,

e.g., Beck v. Commissioner, T.C. Memo. 2001-270.    Dealings in

cash, however, do heighten the negative effect of inadequate

record keeping, one of the indicia of fraud indicated above.

Ferguson v. Commissioner, T.C. Memo. 2004-90; McGirl v.

Commissioner, T.C. Memo. 1996-313, affd. without published

opinion 131 F.3d 143 (8th Cir. 1997).   The businesses in which

petitioner was involved required substantial documentation.

Conducting businesses in cash provided petitioner the opportunity

to conceal his business income.

     Fraudulent intent can be shown by circumstantial evidence.

Gajewski v. Commissioner, 67 T.C. 181 (1976).    Petitioner’s

knowledge of the tax law undermines any argument that he was

unaware that the income was subject to tax.    Petitioner’s actions

and behavior were consistent with an attempt to conceal.

Finally, petitioner pleaded guilty to willfully making a false

return under section 7206(1).   After careful review of the

record, we hold that petitioner’s entire course of conduct

demonstrates fraudulent intent.
                             - 10 -

     Respondent has shown by clear and convincing evidence that

petitioner’s entire $33,255 underpayment of tax was fraudulent

and that petitioner’s underpayment is subject to the penalty

under section 6663(a).


                                   Decision will be entered

                              under Rule 155.
