In the
United States Court of Appeals
For the Seventh Circuit

No. 99-3963

STEVEN H. TOUSHIN,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.



Appeal from the United States Tax Court.
No. 21724-92--Juan F. Vasquez, Judge.


Argued June 7, 2000--Decided August 2, 2000




  Before POSNER, COFFEY and RIPPLE, Circuit Judges.

  COFFEY, Circuit Judge. On October 27, 1988, a
jury sitting in the Northern District of Illinois
convicted the petitioner Steven H. Toushin
("Toushin") of filing false income tax returns
for the taxable years of 1980, 1981, and 1982,
but this court reversed his conviction due to an
improper jury instruction. See United States v.
Toushin, 899 F.2d 617 (7th Cir. 1990). Before his
second trial commenced, Toushin agreed to plea
guilty to one count of filing a false income tax
return for the 1980 tax year, and was sentenced
to time already served.

  Thereafter, on July 1, 1992, the Internal
Revenue Service ("IRS") initiated a civil
proceeding against Toushin to recover unpaid
income taxes. Concluding that Toushin
fraudulently under-reported his income for the
taxable years of 1980, 1981, and 1982, the IRS
issued a notice of tax deficiency and levied
penalties for fraud as well as substantial
underpayment for those years. He then sought
review in the United States Tax Court, which
sustained the IRS’s determination after a four
day bench trial. Toushin appeals the judgment of
the Tax Court, arguing that the court erred in
calculating his unreported income for the tax
years of 1980, 1981 and 1982, and in concluding
that he fraudulently under-reported his income.
We AFFIRM.
I.    BACKGROUND

  During the 1970s, Toushin was a partner in an
enterprise that owned and operated several
theaters, including the Bijou Theater/1 in
Chicago, Illinois. As a result of a dispute among
the partners of the enterprise, the assets were
placed into receivership from 1976 until 1978 in
order that they might achieve a more accurate
accounting of the daily receipts and deposits.

  During this receivership period, Toushin
experienced severe financial difficulties--he
borrowed money from relatives, was frequently
overdrawn on his personal checking account and
took a job as a janitor at his in-law’s business.
When he gained control of the Bijou theater in
1978, his financial situation began to improve
dramatically after he began "skimming cash
proceeds from" the theater./2

  As previously mentioned, on August 8, 1991,
Toushin agreed to plea guilty to filing a false
income tax return for the 1980 tax year. In the
plea agreement, Toushin made several admissions:

during the calendar year 1980, . . . he received
income from skimming cash proceeds from
Entertainment and Amusement, Inc., through
operation of the Bijou Theater, which additional
income he knew he was required to report and
which he knowingly did not inform his accountant
of, thereby evading inclusion of that cash income
on his joint individual tax return for 1980. . .
. He agrees that the amount of the unreported
skimmed cash income for 1980 totalled [sic]
approximately $59,411.35.

  Based in part on this admission, the IRS levied
penalties for fraud and substantial underpayment
for the tax years of 1980, 1981 and 1982, and
also initiated a civil proceeding against Toushin
to recover unpaid taxes for those years. On May
20, 1999, the Tax Court affirmed the IRS’s
determination, concluding that the I.R.S. had
"established by clear and convincing evidence an
underpayment of tax for 1980, 1981, and 1982" and
that the I.R.S. had "clearly and convincingly
proven that the entire underpayments of tax for
1980, 1981, and 1982 were due to fraud."/3
Toushin v. Commissioner, No. 21724-92, T.C. Memo
1999-171, 1999 WL 317336 (U.S. Tax Ct. May 20,
1999). Toushin appeals.

II.    ISSUES

  On appeal, Toushin argues that: (1) the Tax
Court erred in calculating his unreported income
for the 1981 and 1982 tax years; and (2) the
court erred in determining that he fraudulently
underreported his income in the 1981 and 1982 tax
years.

III. ANALYSIS
A. Cash on Hand

  We note at the outset that Toushin on appeal
does not contest the Tax Court’s finding that he
underreported his income in 1980 and that his
underreporting for that year was fraudulent. But
Toushin contends that the Tax Court erred in
calculating his unreported income for 1981 and
1982 by failing to account for cash he had on
hand/4 prior to 1980. He argues that his
unreported income for 1981 and 1982 is
attributable to nontaxable sources, namely
$80,000 cash that he allegedly had in his home
safe as of January 1, 1980./5

  "[W]e apply the same standards of review to a
Tax Court decision that we apply to district
court determinations in a civil bench trial: We
review questions of law de novo; we review
factual determinations, as well as application of
legal principles to those factual determinations,
only for clear error." Cline v. Commissioner, 34
F.3d 480, 484 (7th Cir. 1994). "A finding of fact
can be reversed as clearly erroneous only when
the reviewing court on the entire evidence is
left with the definite and firm conviction that
a mistake has been committed." Coleman v.
Commissioner, 16 F.3d 821, 826 (7th Cir. 1994).
Further, "this court, in determining whether
there is substantial evidence to support a
finding of fact by the Tax Court, must view the
evidence in the entire record in the light which
is most favorable to the finding." Pittman v.
Commissioner, 100 F.3d 1308, 1313 (7th Cir.
1996).

  Toushin argued before the Tax Court that "he
had a cash hoard [cash on hand] of at least
$80,000 in his home safe as of [January 1,
1980]." But the Tax Court found his testimony
less than credible:

Petitioner admitted in his guilty plea that he
had unreported skimmed income from the Bijou in
1980 totaling $59,411. This figure was computed
based on cash on hand of $0 as of January 1,
1980. By his plea, petitioner thus implicitly
admitted that he had no cash hoard [cash on hand]
as of January 1, 1980. Additionally, there is
ample evidence that petitioner experienced
serious financial problems between 1976 and 1978
when his assets were in receivership.
Petitioner’s allegations of a cash hoard was
inconsistent, implausible, and not supported by
objective evidence in the record.
  Upon review of the record, we agree with the
Tax Court and are convinced that the court had a
reliable basis on which to find that Toushin did
not have any cash on hand as of January 1, 1980.
The record reflects that he was forced to borrow
money from relatives in 1975 and 1976, worked as
a janitor in 1976, overdrew his checking account
in 1978 and 1979, had about $75 in his checking
account at the end of 1979 and had closed his
savings account in 1979. Furthermore, Toushin
borrowed money from his business enterprise
(Entertainment & Amusement, Inc.) in 1979, failed
to make timely payments on his credit cards in
1978 and 1979, paid for a plane ticket in 1979 in
installment payments and was denied a loan in
1979 after furnishing a financial statement that
did not list any cash as an asset. Toushin also
borrowed money from his in-laws in 1979 to
purchase a condominium but failed to repay the
loan through December of 1979. Indeed, Toushin’s
dire economic circumstances prior to January 1,
1980 are highly inconsistent with his allegation
that he had $80,000 cash on hand. Thus, in light
of the substantial evidence of his difficult
economic situation, we conclude that the Tax
Court’s conclusion that he had no cash on hand as
of January 1, 1980 was not clearly erroneous./6
We are of the opinion that the Tax Court’s
calculation of his unreported income for the tax
years of 1981 and 1982 was proper.


  B.   Fraud

  Next, Toushin contends that the Tax Court erred
in finding that his underpayment of tax in 1981
and 1982 was due to fraud under 26 U.S.C. sec.
6653./7 Specifically, he claims that his
underpayment of taxes was, in fact, due to a good
faith mistake as he reported his unreported
income on the corporate return of an adult
theater business he owned in California.

  The IRS bore the burden of proof to establish
by clear and convincing evidence that Toushin’s
underpayment (or "any part" of his underpayment)
of tax in 1981 and 1982 was due to fraud. See 26
U.S.C. sec. 7454(a); Pittman, 100 F.3d at 1319.
Furthermore, "[a] finding of fraud by the Tax
Court is a finding of fact that will not be set
aside unless clearly erroneous." Pittman, 100
F.3d at 1319.

  To establish fraud, the IRS must demonstrate by
clear and convincing evidence that the taxpayer
intended to evade taxes that he knew or believed
he owed. See Pittman, 100 F.3d at 1319; Granado
v. Commissioner, 792 F.2d 91, 93 (7th Cir. 1986).
Because there is rarely direct evidence of a
taxpayer’s state of mind, the IRS may establish
fraudulent intent through circumstantial
evidence. See Pittman, 100 F.3d at 1319. Indeed,
"’[t]here is nothing novel about establishing a
crime through the use of circumstantial evidence,
for . . . circumstantial evidence is not less
probative than direct evidence, and, in some
cases is even more reliable.’" United States v.
Ranum, 96 F.3d 1020, 1026 (7th Cir. 1996)
(quoting United States v. Hatchett, 31 F.3d 1411,
1421 (7th Cir. 1994)). "[C]ommon sense should be
used to evaluate what reasonably may be inferred
from circumstantial evidence." United States v.
Briscoe, 896 F.2d 1476, 1506 (7th Cir. 1990)
(citation omitted).

  In Spies v. United States, the Supreme Court
stated that:

We would think affirmative willful attempt [to
defeat and evade taxes] may be inferred from
conduct such as keeping a double set of books,
making false entries or alterations, or false
invoices or documents, destruction of books or
records, concealment of assets or covering up
sources of income, handling of one’s affairs to
avoid making the records usual in transactions of
the kind, and any conduct, the likely effect of
which would be to mislead or to conceal.

317 U.S. 492, 499 (1943); see Pittman, 100 F.3d
at 1319.

  In this case, the Tax Court found, and we
agree, that Toushin exhibited several indicia of
fraud:

The evidence establishes that petitioner
consistently and substantially understated his
income in 1980, 1981 and 1982. Petitioner
maintained inadequate records for . . . his
businesses. Petitioner destroyed existing records
at the Bijou and instructed [the manager of the
Bijou] to destroy any records kept. . . .
Petitioner attempted to disrupt the IRS’s
criminal investigation by sending [the manager of
the Bijou] on vacation and counseling [him] to
lie to agents when questioned. . . .

  We find that [the IRS] has clearly and
convincingly proven that the entire underpayments
of tax for 1980, 1981, and 1982 were due to
fraud.

See also Estate of Upshaw v. Commissioner, 416
F.2d 737, 741 (stating that "a consistent pattern
of understatement of substantial amounts of
income" and "[t]he failure to keep such accurate
records is a strong indicum of fraud with intent
to evade taxes"). We also note that Toushin
admitted to "skimming cash proceeds" from the
Bijou Theater and pled guilty to filing a false
income tax return for 1980. The record is replete
with evidence in support of the Tax Court’s
finding that Toushin clearly demonstrated that he
deliberately evaded paying taxes. The Tax Court
did not commit clear error in concluding that the
IRS clearly and convincingly demonstrated that
his underpayment of tax in 1981 and 1982 was due
to fraud. See Pittman, 100 F.3d at 1320.

  Because Toushin’s arguments on appeal are
utterly meritless, we also give Toushin 14 days
to show cause why he should not be sanctioned for
filing a frivolous appeal. See Fed. R. App. P.
38; Cohn v. Commissioner, 101 F.3d 486, 487 (7th
Cir. 1996) (per curiam).

  The judgment of the Tax Court is

AFFIRMED.



/1 An adult sex business was conducted in the Bijou
Theater, which included the selling of sex
paraphernalia and booths for sexual encounters.

/2 As the Tax Court found, with the cash he skimmed
from the Bijou, during 1978 and 1979, Toushin
"pa[id] for family expenses. . . . [and] gave his
wife $400 (later $600) a week in ’walking around
money.’ He made cash purchases of expensive items
such as a luxury automobile and a mink coat. He
also paid for the family’s vacations in cash."

/3 The IRS had determined that Toushin underreported
his income by $59,411 in 1980, $57,656 in 1981
and $43,757 in 1982. Commonly referred to as the
"cash method," the IRS calculated his unreported
income as the amount that his cash expenditures
exceeded his sources of cash (including cash on
hand at the beginning of the tax period in
question) for the particular year. See United
States v. Hogan, 886 F.2d 1497, 1509 (7th Cir.
1989).

/4 Commonly referred to as "cash hoard."

/5 Toushin contends that his $80,000 cash on hand
was comprised of: $40,000 he earned from the
Bijou from 1971 to 1975; a $30,000 check dated
April 19, 1978 that he received from the Bijou
receiver; a $3720 check dated March 8, 1979 that
he received from the Bijou receiver; a $1438
money order from Amalgamated Bank in July 1978;
and a $5000 inheritance from his grandmother in
1976.

/6 Toushin also contends that the appearance of
financial difficulties are explained by the fact
that he tried to hide assets from his wife to
make himself look impoverished at the time of his
divorce. Contrary to his assertion, the Tax Court
found Toushin’s testimony about his financial
troubles "vague and contradictory." Because we
defer to the Tax Court on credibility findings,
see Fed. R. Civ. P. 52(a); Cline, 34 F.3d at 487;
Gold Emporium, Inc. v. Commissioner, 910 F.2d
1374, 1379 (7th Cir. 1990), and based on the
above recounted evidence in the record, we are
convinced that the Tax Court was justified in
rejecting his argument.

/7 In 1980 and 1981, 26 U.S.C. sec. 6653(b) provided
that "[i]f any part of any underpayment . . . of
tax required to be shown on a return is due to
fraud, there shall be added to the tax an amount
equal to 50 percent of the underpayment." In
1982, section 6653(b)(1) & (2) provided the same
penalty plus a penalty amount "equal to 50
percent of the interest payable under section
6601 [Interest on Underpayments]."
