                        T.C. Memo. 2010-58



                      UNITED STATES TAX COURT



            DOUGLAS D. AND BRENDA D. CHILD, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11021-06.               Filed March 25, 2010.



     Dale G. Siler and Michael C. Walch, for petitioners.

     R. Craig Schneider, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined a total of $179,4431

in deficiencies in petitioners’ Federal income taxes and a total



     1
      All numerical amounts are rounded to the nearest dollar.
All section references are to the Internal Revenue Code in effect
for the years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                  -2-

of $156,366 in fraud penalties for years 1995 through 2003 (the

years at issue).   Petitioner husband (petitioner), a medical

doctor, participated in a tax scheme developed and promoted by

Dennis Evanson in which professional insurance premiums were paid

to an offshore entity and repatriated through a home equity loan.

We are asked to decide several issues.   First, we are asked to

decide whether petitioners are entitled to deduct professional

insurance payments and home mortgage interest payments resulting

from the tax evasion scheme.2   We find that they are not entitled

to the deductions.   We must also decide whether petitioners

failed to report gross income, which we so find.    We must also

decide whether petitioner’s overstating deductions and

underreporting income were attributable to fraud.    We hold that

they were attributable to fraud.

                         FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioners resided in Utah at

the time they filed the petition.


     2
      Respondent argues alternatively that petitioners are liable
for the sec. 6662 accuracy-related penalties for taxable years
1995 through 2003. Respondent concedes that petitioner wife is
not liable for the sec. 6663 fraud penalties. Respondent further
concedes that petitioner wife is not liable for the sec. 6662
accuracy-related penalties if petitioner husband is found liable
for the fraud penalties. Because we find that petitioner husband
is liable for the fraud penalties, petitioner wife is not liable
for either the fraud or the accuracy-related penalties.
                                 -3-

I.   Dennis Evanson’s Tax Sheltering Schemes

      Respondent began examining petitioners’ income tax returns

as part of respondent’s examination of Dennis Evanson (Evanson).

Evanson designed, organized, promoted and sold various schemes to

help his clients shelter income from taxation.    He was ultimately

convicted of Federal income tax evasion by a jury in 2008.     All

of Evanson’s tax evasion schemes used sham transactions to

transfer clients’ untaxed income to offshore entities Evanson

created and controlled.    The funds were typically returned to the

clients disguised as disbursements from fictitious loans to avoid

taxation.    Evanson charged his clients an enrollment fee and an

additional fee ranging from 10 to 30 percent of the client’s tax

savings, not a fixed fee.

      Evanson’s accountant, Brent Metcalf (Metcalf), created

allocation reports listing each client’s tax savings and

Evanson’s commission.    Metcalf also maintained the International

Capital Management (ICM) account, a general ledger showing the

aggregate of the client’s deposits, withdrawals and transfers of

funds among all the different Evanson’s entities.    Metcalf was

convicted of promoting a tax fraud scheme in 2008.

      A.   Fraudulent Insurance Expense Method

      One scheme Evanson developed and used was the fraudulent

insurance expense method.    Under this method Evanson’s clients

would purchase fictitious insurance from an offshore company
                                -4-

known as Commonwealth Professional Reinsurance, Ltd.

(Commonwealth), that Evanson established in Nevis, British West

Indies.   Evanson was also an agent for Commonwealth.    The amount

of the “premium” the client paid for the insurance policy was

based on the amount of income the client wished to shelter from

taxation.   The premiums Evanson’s clients paid to Commonwealth

were typically higher than premiums for actual insurance

purchased in the domestic market.     Evanson’s clients sought to

further reduce or eliminate their tax liabilities by claiming the

insurance premiums paid to Commonwealth as business expenses.

     The funds paid by the Evanson’s client were moved from the

offshore bank account Commonwealth owned to an offshore bank

account controlled by Medcap Management, Ltd. (Medcap), another

entity Evanson created and controlled.     The amount paid was also

credited on the ICM account.   The client could then invest the

funds in other Evanson entities or could have the funds

repatriated to the client through one of the various schemes

Evanson designed to avoid taxation.

     B.   Fraudulent Mortgage Interest Deduction Method

     Most of Evanson’s clients had their money repatriated tax

free through fraudulent loans issued by Cottonwood Financial

Services, LC (Cottonwood), a Utah limited liability company

Evanson established.   As with Commonwealth, Evanson was the agent

for Cottonwood.   He determined which clients would receive the
                                 -5-

loan distributions and in what amounts.      Medcap would then “lend”

the funds to Cottonwood and Metcalf would distribute the funds to

the client.    If a client elected to make a payment, the amount

paid was credited to the offshore ICM account, not to the

Cottonwood account.    The loans from Cottonwood were frequently

characterized as home equity loans so that the client would claim

a home mortgage interest deduction on his or her personal income

tax return, further reducing or eliminating his or her tax

liability.    The home equity loan was designed to have a high

interest rate to create a larger deduction for the client.

II.   Petitioners’ Participation in Evanson’s Tax Evasion Schemes

      Petitioners were clients of Evanson during the eight years

at issue.    Petitioners first met Evanson at a New Year’s party

with some friends.    Evanson’s wife is the sister of petitioner

wife’s good friend.    Petitioner was a highly compensated medical

doctor specializing in radiology.      He felt, however, that his

compensation was relatively low compared to that of other doctors

in his specialty.    With Evanson’s assistance petitioners entered

into arrangements with Commonwealth and Cottonwood that followed

the tax evasion scheme just described.

      A.   Petitioner’s Professional Insurance With Commonwealth

      Petitioner entered into a written contract with Commonwealth

for professional insurance on September 30, 1994, while
                               -6-

petitioner was on vacation in the Cayman Islands.    Evanson acted

on Commonwealth’s behalf.

     The Commonwealth policy provided petitioner with fictitious

insurance, as provided in Evanson’s tax evasion scheme.

Petitioner already had various “claims made” insurance policies

from insurance companies in Utah.    The alleged purpose of the

Commonwealth policy was to supplement petitioner’s claims made

policies by providing retroactive “tail” coverage and increasing

petitioner’s per claim and aggregate coverage limits to $3

million and $5 million ($3/5 million claim limits), respectively.

The Commonwealth policy was unnecessary, however, because all

petitioner’s claims made policies had a retroactive date of July

1, 1988, which was before petitioner began practicing medicine.

All claims were therefore covered by petitioner’s existing claims

made policies.

     The Commonwealth policy also did not provide petitioner with

increased $3/5 million claim limits.    Instead, the policy limited

Commonwealth’s liability to the amount of premiums petitioner

paid during the year in which the claim occurred.    These amounts

ranged during the years at issue from only $30,620 to $50,846,

less than one percent of the alleged $3/5 million claim limits.

Moreover, the premiums petitioner paid to Commonwealth were

between seven and eleven times the premiums he paid for his

claims made policies, which was consistent with Evanson’s tax
                                -7-

scheme.   Commonwealth also never paid a claim against petitioner

during any of the eight years at issue.

     Petitioner’s arrangement with Commonwealth was not well

documented.   There was no written contract in effect between

petitioner and Commonwealth during the years at issue.

Petitioner did not enter into any written contracts with

Commonwealth aside from the initial agreement executed in

September 1994 that expired a year later in September 1995.     In

contrast, all of petitioner’s claims made policies were written.

Petitioner also agreed telephonically to changes in the

Commonwealth premium amount even though his claims made policies

required all changes to be in writing.    Additionally, the only

record petitioner produced of the Commonwealth premium payments

was an undated Quicken file he had prepared himself.    Petitioner

did not produce any invoices from Commonwealth.    Despite the lack

of substantiation, petitioners claimed a total of $282,676 of

business expense deductions for insurance premiums on the

Commonwealth policy for taxable years 1997 through 2003.

     B.   Petitioners’ Home Equity Loan From Cottonwood

     Petitioners also entered into a “Home Equity Line Revolving

Credit Agreement” (home equity loan) with Cottonwood in

furtherance of Evanson’s tax scheme.   Petitioners created the

home equity loan on May 31, 1995, eight months after obtaining

the insurance policy from Commonwealth, to repatriate the amounts
                                 -8-

petitioner paid to Commonwealth as “premiums”.    Again Evanson

acted on behalf of Cottonwood.   Petitioners also executed a

mortgage on their North Logan, Utah, residential property (the

property) in favor of Cottonwood at that time, but Cottonwood did

not record the mortgage.

     Neither petitioners nor Cottonwood followed any of the

formalities associated with a home equity loan.    There were no

written contracts, notes, mortgages or trust deeds between

petitioners and Cottonwood other than the home equity loan

agreement and the unrecorded mortgage.   The Cottonwood home

equity loan had a stated credit limit of $50,000, but petitioners

were able to receive disbursements exceeding the credit limit

without providing updated financial information or updated

property appraisals because the home equity loan was based on the

amount of “premiums” paid to Commonwealth.   In fact, the home

equity loan had an unpaid balance in November 2002 of $215,960,

almost four times the stated credit limit.   Cottonwood never

filed a notice of default with the Cache County Recorder’s Office

against petitioners’ property even though petitioners failed to

make sufficient payments to reduce the debt.   In addition,

petitioners did not pay off the Cottonwood home equity loan when

they sold the property.

     Furthermore, petitioners did not list or disclose the

Cottonwood home equity loan on a loan application with Bank of
                                 -9-

Utah on December 19, 2002.    Petitioners failed to disclose the

home equity loan even though they made an interest payment to

Cottonwood approximately two months before submitting the loan

application.    Petitioners also failed to list or disclose the

Cottonwood home equity loan on an application to refinance the

property with Market Street Mortgage Company (Market Street) in

2003.   Petitioners made several changes to the Market Street loan

application but they did not include the home equity loan with

Cottonwood.    Petitioners had a duty to review both the Bank of

Utah and the Market Street loan applications and sign under

penalty of perjury that the information provided was true.

     Petitioner was credit worthy given his high-income

profession.    Petitioners’ residential loans with Bank of Utah and

Market Street had interest rates of 5.625 and 5.375 percent,

respectively.    In contrast, the Cottonwood home equity loan had a

stated interest rate of 10.75 percent, which was almost twice the

interest rates on petitioners’ other residential loans.    Metcalf,

as a representative of Cottonwood, sent annual letters to

petitioner informing him of accrued interest on the home equity

loan.   Petitioner could pay the accrued interest, which he

occasionally did.    Petitioners were also unable to document the

home mortgage interest deductions they claimed to Cottonwood.

The parties have stipulated, however, that petitioners claimed a

total of $49,371 of mortgage interest deductions on the
                                -10-

Cottonwood home equity loan for taxable years 1995 through 2000,

2002 and 2003.

       C.   Conclusion

       We find that petitioners participated in Evanson’s tax

evasion schemes during the years at issue.    Petitioner’s conduct

in sending money to the offshore account of Commonwealth or

repatriating those funds to himself through advances on the home

equity loan with Cottonwood followed the tax evasion scheme

Evanson outlined.    Petitioner’s participation in the schemes was

also well documented in Evanson’s records.    Petitioner was listed

as a client on Evanson’s allocation report and had amounts

credited on the Evanson’s offshore accounts that matched the

“premium” payments made to Commonwealth.    Moreover, petitioners

made draws on the Cottonwood line of credit in sufficient amounts

to pay the insurance “premiums” to Commonwealth.

III.    Unreported Income Determined Through Bank Account Deposits

       Petitioners maintained two personal bank accounts with Zions

Bank in 2002 and 2003.    Respondent determined petitioners’

unreported adjusted gross income for taxable years 2002 and 2003

as follows:
                                   -11-

                                  2002           2003
              Total Bank        $518,944       $353,200
            Deposits
              Less:             (65,407)       (12,956)
            reduction for
            nontaxable
            sources
              Less:            (349,718)      (257,158)
            income
            reported
              Net taxable       103,819         83,086
            deposits:
              Unreported        103,819         83,086
            Adjusted
            Gross Income:


Respondent determined, based on bank account deposits, that

petitioners had unreported gross income of $103,819 in 2002 and

$83,086 in 2003.       Petitioner claimed that the deposits were

interaccount transfers and other nontaxable deposits but produced

at trial evidence of deposits that had already been factored into

respondent’s bank deposit analysis as nontaxable deposits.

Petitioner also provided handwritten summaries and explanations

of the unreported income that petitioner had prepared himself.

Petitioner did not produce any admissible receipts, books,

records or other documents identifying the source of the

deposits.

IV.   The Deficiency Notice

      Respondent issued the deficiency notice for taxable years

1995 through 2003 to petitioners on March 10, 2006.       Respondent
                                 -12-

disallowed the deduction for professional insurance premiums

petitioner claimed he paid to Commonwealth during taxable years

1997 through 2003.     Respondent also disallowed home mortgage

interest deductions petitioners claimed on the Cottonwood home

equity loan for 1995 through 2000, 2002 and 2003.     Respondent

also determined in the deficiency notice that petitioners had

unreported gross income in 2002 and 2003 and that petitioner was

liable for the fraud penalties in the deficiency notice.

Petitioners timely filed a petition to contest the determinations

in the deficiency notice.

                                OPINION

      We are asked to decide whether petitioners, who invested in

a tax evasion scheme, are entitled to deduct professional

insurance premium payments and home mortgage interest payments

stemming from their participation in the scheme.     We must also

decide whether petitioners failed to report gross income and

whether petitioner is liable for the fraud penalty.     We address

each of these issues in turn.

I.   Deductibility of Professional Insurance Premiums

     We first address whether petitioners may deduct professional

insurance premiums paid by petitioner, a medical doctor, on the

Commonwealth policy.    We begin with general principles of tax

litigation.   Deductions are a matter of legislative grace, and

the taxpayer has the burden of proving that he or she is entitled
                                -13-

to the claimed deductions.    Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).      Taxpayers may fully deduct

all ordinary and necessary business expenses paid or incurred

during the taxable year.    Sec. 162(a).    Where transactions lack a

business purpose and are undertaken solely for tax avoidance

purposes, however, their tax consequences will be determined

based on substance and not form.    See Gregory v. Helvering, 293

U.S. 465 (1935).    Accordingly, all deductions stemming from a

sham transaction will be disallowed.       Derr v. Commissioner, 77

T.C. 708, 730 (1981).

       The inquiry into whether a transaction has economic

substance focuses on (1) whether the transaction at issue had any

practical economic consequences other than the creation of tax

benefits and (2) whether the taxpayer had a valid business

purpose or profit motive.    ACM Pship. v. Commissioner, 157 F.3d

231, 247-248 (3d Cir. 1998), affg. on this issue T.C. Memo. 1997-

115.    The taxpayer bears the burden of proving that the

challenged transaction was not a sham transaction lacking

economic substance.    Rule 142(a); Sheldon v. Commissioner, 94

T.C. 738, 753 (1990).

       Respondent argues that petitioners are not entitled to

deduct the “premium” payments to Commonwealth because the

insurance arrangement lacked economic substance.      We must first

determine, therefore, whether petitioner’s arrangement with
                                  -14-

Commonwealth was a true insurance arrangement with practical

economic consequences.    There is no clear set of criteria for

determining whether an insurance arrangement exists and this

Court will consider all of the relevant facts and circumstances.

Sears, Roebuck & Co. v. Commissioner, 972 F.2d 858, 864 (7th Cir.

1992), affg. in part and revg. in part 96 T.C. 61 (1991).

     Historically and commonly insurance involves risk-shifting

and risk-distributing.     Helvering v. Le Gierse, 312 U.S. 531, 539

(1941).   Shifting risk entails the transfer of the impact of a

potential loss from the insured to the insurer.        Clougherty

Packing Co. v. Commissioner, 84 T.C. 948, 958 (1985), affd. 811

F.2d 1297 (9th Cir. 1987).      If the insured has shifted its risk

to the insurer, then a loss by or a claim against the insured

does not affect it because the loss is offset by the proceeds of

an insurance payment.     Id.   An insurance premium is generally the

cost for shifting risk.    See id.

     Petitioner’s arrangement with Commonwealth was not a true

insurance arrangement because it did not effectively shift or

distribute any risk from petitioner to Commonwealth.        The policy

that petitioner argues was in effect for the years at issue

limited Commonwealth’s liability.        Unlike the asserted $3/5

million claim limits, Commonwealth’s liability was limited to the

amount of premiums petitioner paid during the year of the claim.

Petitioner remained liable for any claims exceeding the amount of
                                -15-

premiums.   Commonwealth never assumed the risk for claims

exceeding the premium payments, nor did petitioner and

Commonwealth distribute the risk to other parties.   We find

telling that Commonwealth never paid any claim during any of the

years at issue nor for that matter was the alleged policy to

cover any claims not already covered under petitioner’s claims

made policies.   We therefore find that petitioner’s arrangement

with Commonwealth was not a true insurance arrangement with

practical economic consequences.

     We find instead that the only economic consequence of

petitioner’s arrangement with Commonwealth was the creation of

tax benefits.    Petitioner avoided taxation by transferring income

disguised as “premium” payments to Commonwealth, an offshore

entity.   The premium payment amount was based on the amount

petitioner sought to shelter from income rather than on the cost

of shifting risk.    Petitioner was able to further reduce his tax

liability by claiming a deduction for the alleged premium

payments.   Moreover, the arrangement with Commonwealth followed

Evanson’s fraudulent insurance expense scheme, further indicating

that its main purpose was to avoid taxation.   We find therefore

that the Commonwealth transaction was a sham transaction lacking

any economic substance.   Accordingly, we hold that petitioner is

not entitled to deduct any “premium” payments to Commonwealth for

1997 through 2003.
                                 -16-

II.   Deductibility of Home Equity Loan Interest Payments

      We now turn to the deductibility of interest paid on the

Cottonwood home equity loan.   Despite a prohibition against

deducting personal interest, a taxpayer may deduct interest paid

on a mortgage on real property of which he or she is the legal or

equitable owner, provided it is qualified residence interest.3

See sec. 163(h).

      Respondent argues that petitioners are not entitled to

deduct the payments to Cottonwood because the home equity loan

arrangement was a sham.   We agree.     The Cottonwood home equity

loan did not have any practical economic consequences other than

tax benefits.   We find instead that the home equity loan was not

a legitimate home equity loan.    First, the amount of the

Cottonwood loan was never tied to the “home equity” of

petitioners’ property and petitioners were able to borrow in

excess of the credit limit without providing updated financial

information or an updated property appraisal.      Petitioners also

did not pay off the loan when they sold the property, which is

the quintessential antithesis of normal business practices.



      3
      Qualified residence interest is any interest paid or
accrued during the taxable year on acquisition indebtedness or
home equity indebtedness. See sec. 163(h)(3). Home equity
indebtedness is any indebtedness secured by the qualified
residence of the taxpayer to the extent the aggregate amount of
such indebtedness does not exceed the fair market value of the
qualified residence reduced by the amount of acquisition
indebtedness on the residence. See sec. 163(h)(3)(C)(i).
                                 -17-

Second, neither petitioners nor Cottonwood followed standard

protocols with a mortgage.     Cottonwood never filed a formal deed

of trust or a notice of default against petitioner, and

petitioners did not disclose the home equity loan on either the

Bank of Utah or the Market Street loan application.     Finally, the

loan advances were actually repatriation of amounts petitioners

paid under the fraudulent insurance expense method.

       We find that the sole economic consequence of the Cottonwood

arrangement was the generation of mortgage interest deductions.

The interest rate on the Cottonwood home equity loan was almost

double the interest rate on petitioners’ other residential loans

to generate a larger deduction.     Furthermore, the arrangement

followed Evanson’s fraudulent insurance expense scheme for

avoiding taxation.     Accordingly, we find that the Cottonwood home

equity loan lacked economic substance aside from generating tax

benefits and that petitioners therefore are not entitled to

deduct any “home equity loan interest” payments to Cottonwood

during the years at issue.

III.     Unreported Taxable Income for 2002 and 2003

       We now address whether petitioner failed to report the

amounts of gross income for 2002 and 2003 that respondent

determined under the bank account deposits method.     Gross income

generally includes all income from whatever source derived.     Sec.

61(a).     Taxpayers must keep adequate books and records from which
                               -18-

their correct tax liability can be determined.    Sec. 6001.    When

a taxpayer fails to keep records, the Commissioner has discretion

to reconstruct the taxpayer’s income by any reasonable means.

Sec. 446(b); Erickson v. Commissioner, 937 F.2d 1548, 1553 (10th

Cir. 1991), affg. T.C. Memo. 1989-552; Factor v. Commissioner,

281 F.2d 100, 117 (9th Cir. 1960), affg. T.C. Memo. 1958-94.

     We have previously approved the use of the bank deposits

method as a means of income reconstruction.     Clayton v.

Commissioner, 102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96

T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992).      The bank

deposits method assumes that all money deposited into a

taxpayer’s bank account during a particular period constitutes

taxable income.   Clayton v. Commissioner, supra at 645.     The

Commissioner must take into account, however, any known

nontaxable source or deductible expense.     Id. at 645-646.    The

taxpayer bears the burden of demonstrating that the

Commissioner’s determination is erroneous.     Mallette Bros.

Constr. Co. v. United States, 695 F.2d 145, 148-149 (5th Cir.

1983); Kling v. Commissioner, T.C. Memo. 2001-78; Seidenfeld v.

Commissioner, T.C. Memo. 1995-61.

     Respondent determined through bank deposits analysis that

petitioners failed to report taxable deposits in 2002 and 2003.

Petitioners claim that the deposits were interaccount transfers

or other nontaxable deposits, such as refunds and reimbursements.
                                 -19-

In keeping with petitioners’ failure to maintain adequate records

to substantiate the Evanson’s transactions, petitioners did not

produce the receipts or otherwise present any books, records, or

other testimony that would support this assertion.    The only

evidence petitioner presented identifying the deposits at issue

was documents that petitioner prepared himself.4    Petitioners

produced no corroborating evidence other than petitioner’s own

self-serving testimony, which we are not required to accept, and

which we do not, in fact, find to be credible.     See Niedringhaus

v. Commissioner, 99 T.C. 202, 219 (1992).    We therefore find that

petitioners have failed to meet their burden, and we sustain

respondent’s determination that petitioners failed to report

income in the amounts respondent determined for 2002 and 2003.

IV.   Section 6663 Fraud Penalty

      We next consider whether petitioner is liable for the

section 6663 fraud penalties.    Fraud is an intentional wrongdoing

on the part of the taxpayer with the specific purpose of evading

a tax believed to be owing.     Edelson v. Commissioner, 829 F.2d

828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Akland v.

Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo.

1983-249.   A penalty equal to 75 percent of the underpayment will

be imposed if any part of the taxpayer’s underpayment of Federal


      4
      Petitioner produced at trial evidence that had already been
factored into respondent’s bank deposit analysis as nontaxable
deposits.
                                 -20-

income tax is due to fraud.   See sec. 6663(a).   Further, if any

portion of the underpayment is attributable to fraud, the entire

underpayment will be treated as attributable to fraud unless the

taxpayer establishes by a preponderance of the evidence that part

of the underpayment is not due to fraud.   Sec. 6663(b).

     Respondent has the burden of proving by clear and convincing

evidence that an underpayment exists for each of the years in

issue and that some portion of the underpayment is due to fraud.

See sec. 7454(a); Rule 142(b).    Fraud is never presumed but must

be established by independent evidence that establishes

fraudulent intent.   Edelson v. Commissioner, supra at 832; Beaver

v. Commissioner, 55 T.C. 85, 92 (1970).    Courts have developed

several indicia, or “badges of fraud,” from which fraudulent

intent can be inferred.   They include:   (1) understating income;

(2) maintaining inadequate records; (3) engaging in a pattern of

behavior that indicates an intent to mislead; (4) concealing

assets; (5) providing implausible or inconsistent explanations of

behavior; (6) filing false documents; and (7) failing to provide

documents to the Commissioner during examination.    Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.

1984-601; Cooley v. Commissioner, T.C. Memo. 2004-49.      Although

no single factor is necessarily sufficient to establish fraud, a

combination of several of these factors may be persuasive

evidence of fraud.   Bradford v. Commissioner, supra at 307-308;
                               -21-

Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984),

affg. per curiam T.C. Memo. 1982-603; Niedringhaus v.

Commissioner, supra at 211.

     We now apply these criteria to petitioner’s situation to

determine whether there are any badges of fraud.   First,

petitioner’s nonreporting of income and claiming of sham

deductions resulted in an underpayment for each of the years at

issue.   We find petitioner’s nonreporting of income and

overstating deductions to be indicia of fraud.

     Additionally, petitioner failed to maintain adequate records

to substantiate the income as well as the deductions.    Petitioner

failed to produce documents to substantiate the taxable deposits

at issue.   He also failed to produce all insurance policies that

were in effect during the years at issue, including claims made

policies, despite respondent’s issuance of a subpoena.

Petitioner argues that the Commonwealth policy was unwritten and

could be modified orally in contrast to his claims made policies,

which required changes to be in writing.   We find it hard to

believe that petitioner would have relied on an unwritten policy

with Commonwealth particularly given the substantial amounts of

the “premium” payments.   Equally telling is the lack of records

for the inflated home equity loan arrangement.   Petitioner

brazenly claimed “interest” deductions on a home equity loan that
                                -22-

had exceeded the $50,000 credit limit.     We find petitioner’s

failure to maintain adequate records to be an indicium of fraud.

     The sham transactions petitioner participated in were

designed by Evanson to mislead the Internal Revenue Service (IRS)

into treating otherwise taxable income as nontaxable.     In fact,

Evanson was convicted of tax evasion for organizing and promoting

the transactions.    As part of Evanson’s tax evasion schemes,

petitioner made payments disguised as insurance premiums to an

offshore entity.    The funds were returned to him disguised as

loan advances to avoid taxation.    Petitioner further reduced or

eliminated his taxable income by claiming sham deductions from

the transactions.    The tax evasion schemes also enabled

petitioner to conceal income.    Petitioner had amounts credited on

Medcap’s offshore accounts that matched the “premium” payments he

had made to Commonwealth.    We find that petitioner participated

in Evanson’s schemes to mislead the IRS and conceal assets and

that his participation is an indicium of fraud.

     Petitioner also provided implausible explanations of his

behavior in an attempt to conceal the fraudulent nature of the

Evanson’s transactions.   For example, petitioner claimed that the

Commonwealth policy provided supplemental insurance even though

the policy was unwritten and failed to provide coverage beyond

his existing claims made coverage.     Petitioner was unable to

explain how he could receive loan advances on the Cottonwood home
                               -23-

equity arrangement in excess of the credit limit without

providing updated financial information and without Cottonwood’s

filing a notice of default.   We find petitioner’s implausible

explanations to be indicia of fraud.

     Petitioner filed false documents when he failed to report

the Cottonwood home equity loan on loan applications submitted to

Bank of Utah and Market Street in 2002 and 2003, respectively.

Petitioner claims that his failures to disclose the Cottonwood

home equity loan on both documents were inadvertent oversights

and that someone else prepared the paperwork.   He asks us to

ignore his obligation to verify the accuracy of the documents

before he signed them under penalties of perjury.   We are not

disposed to turn a blind eye to such oversights, especially when

a tax scheme is being used to inflate deductions and deflate

income.   We find petitioner’s failure to disclose the Cottonwood

home equity loan to be an indicium of fraud.

     Finally, petitioner did not respond to a subpoena issued by

respondent.   We find petitioner’s failure to cooperate with

respondent to be a further indicium of fraud.

     Most of the badges of fraud upon which this Court

customarily relies are present in this case.    Respondent has also

established that petitioner received unreported income and

claimed false deductions and that the nondisclosure of the income

and the claiming of sham deductions resulted in an underpayment
                               -24-

for each of the years at issue.   Considering all the facts and

circumstances, we find that respondent has proven by clear and

convincing evidence that petitioner fraudulently intended to

evade taxes.   Accordingly, petitioner is liable for the section

6663 fraud penalties for the years at issue.

     Because of our holding regarding the fraud penalties under

section 6663, we need not address whether petitioner is liable

for the accuracy-related penalties under section 6662.

     We have considered all other arguments in rendering our

decision and to the extent they are not mentioned, we find them

to be irrelevant, moot or meritless.

     To reflect respondent’s concessions,


                                           An appropriate decision

                                      will be entered.
