                        T.C. Memo. 2010-31



                      UNITED STATES TAX COURT



           LISA R. AND DARREN T. COLE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          SCOTT C. AND JENNIFER A. COLE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 16991-08, 17275-08.   Filed February 22, 2010.



     Darren T. Cole and Scott C. Cole, for petitioners.

     Stewart Todd Hittinger and Timothy Lohrstorfer, for

respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   Respondent determined deficiencies in

petitioners’1 Federal income taxes and fraud penalties under


     1
      These cases have been consolidated for purposes of trial,
                                                   (continued...)
                                    -2-

section 66632 for 2001.      Specifically, respondent determined a

$102,227 deficiency and a $76,670 section 6663 fraud penalty

against Darren and Lisa Cole for 2001.3      Respondent also

determined a $556,187 deficiency and a $417,140 section 6663

fraud penalty against Scott and Jennifer Cole for 2001.

       There are two primary issues for decision.     The first issue

is whether petitioners understated their income in the amounts

respondent determined for 2001 as adjusted.      We hold that they

did.       The second issue is whether petitioners are liable for the

fraud penalty for 2001.      We hold that they are.   Because we find

fraud, respondent is not time barred from assessing petitioners’

taxes for 2001.

                                Background

       Lisa and Darren Cole resided in California at the time they

filed their petition.      Jennifer and Scott Cole resided in Indiana

at the time they filed their petition.




       1
      (...continued)
briefing, and opinion.
       2
      All section references are to the Internal Revenue Code in
effect for 2001, and all Rule references are to the Tax Court
Rules of Practice and Procedure, unless otherwise indicated.
       3
      Respondent issued petitioners “whipsaw” deficiency notices
because of the inconsistent positions petitioners took. The
amounts provided, however, are the amounts respondent ultimately
determined are due rather than the amounts set forth in the
deficiency notices.
                                  -3-

The Bentley Group

     Petitioners Scott C. Cole (Scott) and Darren T. Cole

(Darren) are brothers.   Scott and Darren are attorneys who

practiced law in Indiana through an entity known as the Bentley

Group during 2001.   Bentley was the maiden name of Darren’s wife,

Lisa Cole (Lisa).    The brothers formed the Bentley Group in 1998

and also did business under the name Cole Law Offices.    The

Bentley Group and Cole Law Offices were different names for the

same business, but there were no assumed name filings for either

entity.

     The law practice was a family affair, with Scott, Darren,

and Lisa all taking an active part in the business.    Scott’s

legal practice focused in part on business planning and taxation.

Scott created limited liability companies (LLCs) for his clients,

prepared corporate and individual tax returns, and represented

clients before the Internal Revenue Service (IRS).    Scott and

Darren also performed criminal defense work, including work for

the public defender’s office in Boone County, Indiana.    Darren, a

graduate of Creighton University School of Law, was responsible

for the management of the law practice.   Lisa, a college

graduate, acted as a paralegal.

     Darren opened a business checking account for Cole Law

Offices but used the Bentley Group’s employer identification

number.   Scott, Darren, and Lisa all had signature authority over
                                 -4-

this account.   The brothers agreed to share equally the law

practice’s profits and losses, though petitioners failed to

present any documentation regarding this sharing arrangement.

Darren and Scott also agreed that they could withdraw money from

the Bentley Group’s account.   Any money withdrawn from the

account other than money they earned for their legal services was

considered “borrowed.”   Petitioners failed to report any money

they withdrew, however, as income for providing legal services

and they also failed to provide any loan documents, notes, or any

other investment account records evidencing loan transactions

between Scott, Darren, and the Bentley Group’s account.

     Scott and Darren advised their individual clients, and they

also advised clients together.   These joint clients were the law

practice’s clients.   Clients made payments either directly to the

respective brother, through the Bentley Group, or to Cole Law

Offices.   Scott also received payment from a client with a check

made payable to Scott C. Cole and Associates even though there

was no such entity.   The brothers did not keep records, nor did

they produce or maintain invoices for their services.   They also

failed to keep records or invoices for Lisa’s paralegal services.

     The taxable deposits in the Bentley Group’s account for 2001

totaled $1,430,802.   The earnings came from many sources

involving the efforts of both brothers and Lisa.   The Bentley

Group received most of its legal fees from Constance J. Gestner
                                -5-

and Terri L. Haynes, co-trustees of the George Sandefur Living

Trust (Sandefur Trust), which paid Scott $1.2 million in 2001 to

represent the trust in all estate matters.    The Sandefur Trust

paid the fees in four installments of $300,000.    The first check

was payable to “Scott Cole and Associates,” a fictional business,

and the remaining checks were made payable to “Cole Law Offices.”

     Scott, Darren, and Lisa withdrew in excess of $1 million

from the Bentley Group’s account during 2001.    They then

transferred the funds into numerous other accounts with no

business explanation for doing so.    The brothers were unclear as

to which account they used for Interest on Lawyer Trust Accounts

(IOLTA) purposes.   No records were kept for any of the transfers

from the Bentley Group’s account.     The withdrawals made by or on

behalf of Darren or Lisa totaled $198,308, while the withdrawals

made by or on behalf of Scott included $1,173,263 in 2001.

Scott and Jennifer Cole’s Personal Financial Activities

     Scott did not always deposit his legal services fees into

the Bentley Group’s account.   Scott deposited $79,294 into the

personal checking account of his wife, Jennifer Cole (Jennifer),

and deposited $6,475 into his personal bank account in 2001.

Scott and Jennifer used the funds in these accounts to pay a

variety of personal expenses including their children’s school

tuition and music lessons and residential landscaping.
                                -6-

     Scott failed to report the legal services fees he generated

in 2001 as taxable wage or self-employment income regardless of

which account the amounts were credited.    In addition, Scott

failed to report any amounts he withdrew from the Bentley Group’s

account as taxable wage or self-employment income even though he

withdrew $1 million plus for personal nonbusiness purposes.

     Scott freely transferred amounts in the Bentley Group’s

account to his family and friends without keeping sufficient

documentation of the transfers or reporting the transactions.

For example, he transferred $50,000 from the Bentley Group’s bank

account to his mother.   Scott also lent his father $40,000 from

the Bentley Group’s account.   Scott used this transaction to

further convolute the tracing of his income and told his father,

rather than paying him back directly, to make a contribution to

his church for $40,000 in Scott’s name.    Scott and Jennifer,

thereafter, claimed a $40,000 charitable contribution deduction

yet failed to report any of that amount as taxable wage or self-

employment income.   Scott also lent $300,000 to a friend for

options trading and made a loan to his brother Mark for Mark’s

roofing company.   Scott has not provided any records or other

documentation to show that any amount withdrawn from the Bentley

Group’s account was not taxable.   In addition, he has failed to

show any business purpose for these transfers.
                                  -7-
     Scott also created an LLC known as JAC Investments, LLC

(JAC).    JAC are the initials for Jennifer A. Cole.   JAC reported

its principal business activity as “Investments” although there

is nothing in the record to show any stock transactions.     Rather,

JAC operated as a conduit to which Scott transferred and assigned

income from his legal services.    JAC reported taxable deposits

for 2001 of $79,652 and claimed $28,647 of expenses, though none

of these expenses have been substantiated.    Deposits into JAC’s

bank account were almost exclusively checks made payable to Scott

individually, not JAC.    Jennifer is a college graduate and had

previously worked as an accountant.     In 2001 she was a homemaker

and had no income of her own, yet Scott reported her as owning a

99-percent interest in JAC with him owning a 1-percent interest

in JAC.    Scott reported self-employment tax on only $1,162 of

income for 2001.

     Scott formed and solely owned Scott C. Cole, P.C. (SCC), an

Indiana professional corporation in 1997.4    The Indiana Secretary

of State administratively dissolved SCC in 2001 because SCC did

not file its required business entity reports.    SCC had no assets

and did not appear to serve any business purpose.      In 2005 Scott

filed a tax return for SCC for 2000, the first and only tax

return filed for SCC.    SCC did not report receiving any income


     4
      Scott asserts that SCC was a partner in the Bentley Group,
rather than he as an individual. We find no evidence to support
this claim.
                                 -8-

from the Bentley Group’s account in 2001.    SCC reported gross

receipts of $158,553 and taxable income of $738 with a reported

tax due of $258.

       Scott transferred or assigned over $1 million in legal

services fees in 2001 from the Bentley Group to at least seven

different accounts.    Scott commingled amounts in the Bentley

Group’s account with amounts in other accounts including JAC’s

account, SCC’s account, Jennifer’s personal account, Scott’s

personal account, his father’s business account, and his mother’s

account.    Scott and Jennifer failed to report, however, any wages

or salaries, Schedule C income, or income from the Bentley Group

or Cole Law Offices on their joint tax return for 2001.    Instead,

the joint tax return reflected only $341 of tax liability and

$164 of self-employment tax liability.    Scott subsequently filed

for bankruptcy in 2002, at which time he failed to disclose any

interest in the Bentley Group, Cole Law Offices, or any other law

practice.

Darren and Lisa Cole’s Personal Financial Activities

       Darren also failed to report the amounts he withdrew from

the Bentley Group’s account on any tax return for 2001.    Darren’s

primary source of income during 2001 was from the practice of

law.    This income was paid through the Bentley Group or directly

to Darren.    Like Scott, Darren transferred his legal services

fees to multiple accounts.    Darren maintained no bank account in
                                 -9-

his own name during 2001.    Darren deposited checks totaling

$24,847, paid to him for legal services he performed, into Lisa’s

bank account in 2001 but failed to report this amount on their

joint tax return for 2001.

     Scott formed an LLC for Darren and Lisa’s benefit known as

LRC Investment, LLC (LRC).    LRC are the initials for Lisa R.

Cole.   LRC, similar to JAC, served no business purpose.   Darren

used it as a conduit to transfer and assign his legal services

fees.   Darren opened a bank account in LRC’s name with an initial

$20,000 deposit.   No explanation has been given as to where the

$20,000 originated or whether it was taxable.    Darren and Lisa

claimed to be 50-percent partners in LRC.    Darren filed an

information return for LRC for 2001 reporting LRC’s principal

business as “Management Consulting” and concealed that he was an

attorney.   The Bentley Group distributed $145,930 to LRC, which

LRC reported as its total gross receipts.    No amount was reported

on any investment or stock transaction.    LRC claimed

unsubstantiated expenses of $135,636.    In addition to lacking

documentation, no claimed expense bore any relationship to the

claimed business of LRC.

     Lisa represented on a car loan application that she was

employed by the Bentley Group and that she received a yearly

salary of $51,996.   Lisa made a similar representation on a home

mortgage loan application.    Her yearly salary on the mortgage
                                 -10-

loan application was represented at an increased $72,000 even

though the representations were only days apart.     In addition,

Lisa deposited a total of $138,248 into her personal bank account

during 2001.   Despite these deposits and representations, Lisa

failed to report any wage or self-employment income on any tax

return for 2001.

     Darren and Lisa withdrew a total of $198,308 from the

Bentley Group’s bank account in 2001 yet failed to report any

amount.   Lisa received at least $45,527 from the Bentley Group

and other sources during 2001 but failed to report even a

fraction of this amount.   Lisa also made a $28,873 down payment

on a house at the same time the Bentley Group’s bank account

reflected a withdrawal of the same amount, yet she failed to

report any of this amount.   Instead, Darren and Lisa reported

only $10,201 in adjusted gross income on their joint tax return

for 2001 and sought a $2,477 refund.      They reported two minimal

sources of income on the joint tax return.      They reported only

$2,978 from the Bentley Group and $10,294 from LRC.     Darren filed

for bankruptcy in 2003, at which time he failed to disclose any

interest in the Bentley Group or any other law practice.

Respondent’s Examination

     Respondent began an examination of Scott and Jennifer’s

joint tax return for 2001 in 2003.      Respondent assigned the audit

to Revenue Agent Loretta Reed.    Revenue Agent Reed met with Scott
                               -11-

and learned of Scott and Darren’s involvement in the Bentley

Group, which still had not submitted a tax return for 2001.

     Revenue Agent Reed thereafter requested, due to Darren’s

involvement in the Bentley Group, that Darren and Lisa’s joint

tax return for 2001 be selected for examination.   Respondent

assigned Revenue Agent Reed to audit Darren and Lisa.    Neither

Lisa nor Darren cooperated with Revenue Agent Reed during the

audit.   Darren threatened that Revenue Agent Reed would be

arrested if she came upon his property, and Revenue Agent Reed

received no response from Lisa after sending audit notices and

summonses to her.   Revenue Agent Reed eventually obtained audit

information by issuing third-party summonses to Darren and Lisa’s

banks and mortgage company.

The Bentley Group’s 2001 Information Return, Form 1065

     Darren filed the information return for the Bentley Group

for 2001 in 2004 after the audit of both partners had begun.    The

Bentley Group reported gross receipts and ordinary income of

$1,583,900.   It also reported there were no cash distributions or

transfers of partnership interests for the 2001 tax year.     This

was inconsistent with all the distributions made to entities and

persons during 2001.   The K-1s attached to the Bentley Group’s

information return also did not reflect reality.   The K-1 on the

late-filed information return reflected that Darren had a 0-

percent interest in the profits and losses of the Bentley Group
                                 -12-

and had only a 1-percent interest in its capital.     The K-1

reflected that Scott’s defunct SCC owned all the profits and

losses of the Bentley Group and had a 99-percent interest in its

capital.     SCC had not filed any tax return for 2001.   There was

no K-1 for Scott individually.

        Neither Scott nor Darren filed employment tax returns for

the Bentley Group, and the Bentley Group claimed no deduction on

the information return for payment of unemployment taxes.       It

also claimed no other expenses normally associated with operating

a law practice.     Further, despite the significant legal services

income the Bentley Group received during 2001, the Bentley Group

did not report any legal services income for 2001.     At trial,

Scott and Darren both asserted that SCC was the only partner of

the Bentley Group.     Neither Darren nor Scott reported any sale of

his interest in the Bentley Group to SCC on his joint tax return.

Deficiency Notices Issued

     Respondent used the specific items method to reconstruct

Scott’s and Darren’s respective incomes from the Bentley Group in

2001.     Respondent used the available records for the withdrawals

that petitioners made from the Bentley Group’s bank account.

Respondent also did bank deposit analyses with respect to their

incomes from other sources.     Respondent determined that

petitioners had omitted wages and self-employment income from

their joint tax returns, and respondent issued petitioners
                                -13-

deficiency notices and asserted fraud penalties against them.

Petitioners timely filed petitions with this Court.

                             Discussion

     We are asked to decide whether petitioners, two attorney

brothers and their spouses, failed to report over $1.5 million in

income from providing legal and tax preparation services, and if

so, whether such underreporting of income was attributable to

fraud.   Petitioners created so many different legal entities and

distributed money to so many entities and individuals in 2001

that petitioners themselves were confused at trial.   Petitioners

failed to keep adequate invoices and records, thus making their

financial dealings even more convoluted.   We begin by discussing

the unreported income.

I.   Unreported Income

     Gross income generally includes all income from whatever

source derived.   Sec. 61(a).   Taxpayers must keep adequate books

and records from which 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); Webb v.

Commissioner, 394 F.2d 366, 371-372 (5th Cir. 1968), affg. T.C.

Memo. 1966-81; Factor v. Commissioner, 281 F.2d 100, 117 (9th

Cir. 1960), affg. T.C. Memo. 1958-94.
                                -14-

     The Commissioner’s determinations are generally presumed

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

determinations are erroneous.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).    Both brothers acknowledge they are

attorneys and earned income from providing legal services.     In

addition, Scott prepared taxes for others and testified that he

understood that income earned from legal services must be

reported on tax returns.    They argue nonetheless that all the

income deposited in the Bentley Group’s account should be

assigned to SCC, a defunct entity, not them individually.

     Taxpayers may not avoid their tax liability on income they

earned by simply assigning income to others.    Trousdale v.

Commissioner, 16 T.C. 1056, 1065 (1951), affd. 219 F.2d 563 (9th

Cir. 1955).   When a taxpayer creates an entity as a pure tax

avoidance vehicle, the assignment of income theory applies to tax

the taxpayer for the income attributed to the entity.    See Jones

v. Commissioner, 64 T.C. 1066, 1076 (1975).    There is no written

evidence for 2001 to suggest that SCC was involved with the

Bentley Group.   In fact, SCC was a defunct corporation that had

been dissolved in 2001.    The only document suggesting that SCC

was a partner of the Bentley Group was the K-1 attached to the

Bentley Group’s information return for 2001, but this return was

not filed or prepared until after Scott and Darren were being

audited.   All other evidence, including testimony at trial, shows
                                -15-

that Scott and Darren were the only two partners of the Bentley

Group in 2001.    Furthermore, not only was SCC defunct in 2001 but

it reported no taxable income and paid no income tax in 2001.

Accordingly, we find any money deposited into the Bentley Group’s

account is income allocated to Scott and Darren, not SCC.

     Petitioners failed to maintain adequate records of their

income.    Revenue Agent Reed therefore collected financial

information through third-party summonses issued to their banks

and mortgage lenders.    The Commissioner may use indirect methods

of reconstructing a taxpayer’s income.    Holland v. United States,

348 U.S. 121 (1954).    The reconstruction of a taxpayer’s income

need only be reasonable in light of all surrounding facts and

circumstances.    Giddio v. Commissioner, 54 T.C. 1530, 1533

(1970).    The specific items and bank deposits methods of income

reconstruction used by the Commissioner have long been sanctioned

by the courts.    Clayton v. Commissioner, 102 T.C. 632, 645

(1994); Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975),

affd. 566 F.2d 2 (6th Cir. 1977).

     The bank deposits method assumes that all money deposited in

a taxpayer’s bank account during a given period constitutes

income, but the Commissioner must take into account any

nontaxable sources or deductible expenses of which the

Commissioner has knowledge.    Clayton v. Commissioner, supra at

645-646.    The burden is on petitioners to show that respondent’s
                                -16-

method of computation is unfair or inaccurate.     See DiLeo v.

Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir.

1992).    We now focus on respondent’s reconstruction of each

couple’s income for 2001.

     A.     Scott and Jennifer—Unreported Income

     Scott and Jennifer filed a joint tax return for 2001 and

reported gross income of $100,276, taxable income of $18,265, and

a tax liability of $505.    Respondent determined, however, that

Scott received legal services and tax preparation fees far in

excess of what they reported.    The Sandefur Trust paid Scott $1.2

million for his legal services, though Scott and Jennifer did not

report any of the amount on their joint tax return.    In addition,

Scott withdrew $1,173,263 from the Bentley Group’s account in

2001, but failed to report any of the withdrawals as income.

Scott claims he lent most of this money to his father, friends,

and brothers and mistakenly asserts that loan proceeds are tax-

exempt.    Scott’s misconception about amounts lent to others does

not absolve Scott from paying taxes on income he earned by

providing legal services.

     In addition, JAC had taxable deposits of $79,652, all coming

from Scott’s legal services fees, yet Scott reported self-

employment tax on only $1,162 of income for 2001.    Moreover, a

total of $79,294 was deposited into Jennifer’s personal bank

account in 2001, of which $59,264 was from Scott’s legal services
                               -17-

and tax preparation fees.   Neither Scott nor Jennifer reported

these deposits as income.   Instead, Scott and Jennifer failed to

report, in toto, over $1 million in legal services fees.     They

failed to report any of the legal services fees, yet they claimed

a $40,000 charitable contribution deduction for amounts of legal

services fees they had contributed to their church.

     Respondent determined that Scott and Jennifer omitted

$1,215,183 of income from their joint tax return for 2001.

Respondent also allocated income for self-employment tax purposes

between the brothers and determined that Scott had $1,329,689 of

unreported self-employment income for 2001 after reviewing the

checks deposited into the Bentley Group’s account for 2001.

     We conclude that the specific items and bank deposits

methods respondent used to reconstruct Scott and Jennifer’s

income for 2001 were reasonable and substantially accurate.

Scott and Jennifer have introduced no documentary evidence to

show otherwise.   Any inaccuracies in the income reconstruction

are attributable to Scott and Jennifer’s failure to maintain

books and records.   Accordingly, we find Scott and Jennifer had

unreported income in the amounts respondent determined in the

deficiency notices as adjusted.

     B.   Darren and Lisa—Unreported Income

     Darren and Lisa reported $10,201 of adjusted gross income

and claimed a $2,477 refund on their joint tax return for 2001.
                               -18-

Darren testified that all of his income from the practice of law

went through the partnership, yet he reported only $2,978 of the

money deposited in the Bentley Group’s account and $10,294 of the

money deposited in LRC’s account.     Darren and Lisa withdrew,

however, a total of $198,308 from the Bentley Group’s account in

2001.   Moreover, Lisa represented that she was employed and paid

by the law practice, but she failed to report any income.     Lisa

also made a $28,873 down payment on her house directly from funds

in the Bentley Group’s account but failed to report any of this

amount as income.

     Darren and Lisa have failed to explain several omissions of

income and have failed to substantiate the claimed expenses on

their joint tax return.   Darren and Lisa reported LRC received

gross receipts of $145,930 in 2001, all coming from the Bentley

Group, yet they offset the gross receipts with $135,636 of

unsubstantiated expenses.   We find it inconsistent that Darren

and Lisa would be able to pay such excessive amounts of expenses

for LRC if they had only a small amount of reportable income.

The records support respondent’s determination that Darren and

Lisa omitted $261,684 of income from their joint tax return for

2001.

     Darren earned significant legal fees working for a law

practice that had ordinary income in excess of $1.5 million.

Respondent determined that Darren had $198,282 of self-employment
                                -19-

income from the practice of law, yet Darren failed to report any

self-employment income.   Lisa also failed to report any earnings

from the Bentley Group on their joint tax return.    This conflicts

with her representations about her earnings on loan and mortgage

documents.   Moreover, the record reflects she received funds from

the Bentley Group in 2001 yet failed to report any income.

Deposits totaling $138,248 were made into Lisa’s bank account in

2001, and only $21,550 can be attributed to nontaxable sources.

Lisa also made a $28,873 down payment on her house directly from

the Bentley Group’s account.    Respondent determined that Lisa

earned $74,399 of self-employment income in 2001.

      We conclude that the specific items and bank deposits

methods respondent used to reconstruct Darren and Lisa’s income

were reasonable and substantially accurate.    Darren and Lisa have

introduced no documentary evidence to show otherwise.    Any

inaccuracies in the income reconstruction are attributable to

Darren and Lisa’s failure to maintain books and records and to

their failure to cooperate with respondent during the audit.      We

find Darren and Lisa had unreported income in the amounts

respondent determined in the deficiency notice as adjusted.

II.   Fraud Penalty

      We next consider whether any of petitioners is liable for

the fraud penalty for 2001.    The Commissioner must prove by clear

and convincing evidence that the taxpayer underpaid his or her
                                 -20-

income tax and that some part of the underpayment was due to

fraud.   Secs. 7454(a), 6663(a); Rule 142(b); Clayton v.

Commissioner, 102 T.C. at 646.

     Fraud is a factual question to be decided on the entire

record and is never presumed.    Rowlee v. Commissioner, 80 T.C.

1111, 1123 (1983); Beaver v. Commissioner, 55 T.C. 85, 92 (1970).

The Commissioner must show that the taxpayer acted with specific

intent to evade taxes that the taxpayer knew or believed he or

she owed by conduct intended to conceal, mislead, or otherwise

prevent the collection of the tax.      Sec. 7454; Recklitis v.

Commissioner, 91 T.C. 874, 909 (1988); Stephenson v.

Commissioner, 79 T.C. 995, 1005 (1982), affd. 748 F.2d 331 (6th

Cir. 1984).

     Direct evidence of fraud is seldom available, and its

existence may therefore be determined from the taxpayer’s conduct

and the surrounding circumstances.      Stone v. Commissioner, 56

T.C. 213, 223-224 (1971).   Courts have developed several indicia

or badges of fraud.   These badges of fraud include understating

income, failure to deposit receipts into a business account,

maintaining inadequate records, concealing income or assets,

commingling income or assets, establishing multiple entities with

no business purpose, failing to cooperate with tax authorities,

and giving implausible or inconsistent explanations for behavior.

Spies v. United States, 317 U.S. 492, 499 (1943); Bradford v.
                                -21-

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601.    Although no single factor is necessarily

sufficient to establish fraud, a combination of several of these

factors may be persuasive evidence of fraud.     Solomon v.

Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per

curiam T.C. Memo. 1982-603.    We will look at each couple to

determine whether the fraud penalty applies with respect to

either spouse.

     A.   Scott and Jennifer—Fraud Penalty

     We now consider whether Scott or Jennifer is liable for the

fraud penalty.    A taxpayer’s intelligence, education, and tax

expertise are relevant in determining fraudulent intent.

Stephenson v. Commissioner, supra at 1006.     Jennifer is college

educated and worked as an accountant.    Scott is an attorney and,

as such, took an oath to uphold the law.     In addition, Scott’s

legal practice included tax law and preparing tax returns for

others.   Scott testified that he understood that income from

providing legal services is taxable, yet he failed to report the

income as taxable on any return for 2001.    In addition, Scott

diverted most of the legal fees from the Bentley Group’s account

into numerous other accounts ostensibly as loans.    Scott wants

the Court to believe that such substantial withdrawals were

loans, yet there is no documentation or records to show that a

loan was made or that the person receiving the funds paid any
                               -22-

interest.   Further, even if such transactions were loans, that

would not excuse Scott from reporting his legal services fees as

income, whether directly payable to him or as a distributive

share.

     Scott and Jennifer commingled personal and business income

without hesitation.   Scott deposited earnings from his law

practice into JAC’s account, in which Jennifer was a 99-percent

owner, and into Jennifer’s personal account.   Jennifer was aware

of these deposits and wrote checks from these accounts to pay

personal expenses, including her children’s school tuition,

landscaping payments, and her children’s music lessons.

     Scott and Jennifer did not report any income from the law

practice on their joint tax return for 2001 even though more than

$1.5 million was deposited into the Bentley Group’s account.

Scott had unfettered control over the Bentley Group’s account and

treated the money deposited in the Bentley Group’s account as his

personal funds.   Scott transferred most of the money in the

Bentley Group’s account to relatives and friends including a

transfer of $50,000 to his mother.    Scott failed to produce any

records documenting his deposits and withdrawals from the Bentley

Group’s account and has not rebutted respondent’s determination

that he received over $1 million in legal services fees in 2001.

The lack of records indicates that Scott was not concerned with
                                 -23-

respecting the existence of different entities or the partners in

the Bentley Group.

     Scott also concealed assets.       Scott deposited his legal

services fees into numerous other accounts to hide income.          We

divine no business purpose for the LLCs Scott established.          It

appears they served as conduits to hide income Scott earned from

providing legal services and preparing tax returns.       Scott did

not indicate he practiced law on any return filed or indicate

that any income earned would be subject to self-employment taxes.

Rather, he generally indicated he was an investor.       Scott and

Jennifer received over $1.2 million in income in 2001, but their

joint tax return reflected only $341 of tax liability.       Scott and

Jennifer avoided income and self-employment taxes by assigning

income from Scott’s law practice to JAC and using those funds for

personal purposes.

     Scott also gave inconsistent answers regarding his legal and

tax preparation practice.   Scott testified that he considered

himself a partner in the Bentley Group, and apparently he

represented to others that he was a partner.       He also represented

that he was practicing law under Scott Cole and Associates, Cole

Law Offices, and individually.    He accepted checks made payable

to any of these “persons” and deposited them in the Bentley

Group’s account regardless to whom the check was made payable.

Scott showed little respect for business formalities and
                                -24-

effectively made the Bentley Group nothing more than a checking

account.    Scott asserts that he transferred his entire interest

in the Bentley Group to SCC, yet there are no documents to

reflect such a transfer.   Scott did not even know whether the

IOLTA account was a Scott C. Cole account or a Cole Law Offices

account.    All the while he was transferring his legal services

fees into seven different accounts.

     We find that Scott and Jennifer used a scheme where they

assigned income to an LLC to conceal the true nature of the

earnings subject to income and self-employment taxes.   Scott and

Jennifer claimed that JAC was an investment company.    If it was

an operating company, however, it did not have any employees nor

can we find that it was created for any valid business purpose.

JAC was merely created in an attempt to avoid taxation.

     Several of the badges of fraud apply to Scott and Jennifer.

We conclude that respondent has proven by clear and convincing

evidence that Scott and Jennifer each fraudulently understated

their tax liabilities for 2001, and they have failed to show that

any portion of the underpayment is not due to fraud.

Accordingly, we find that the fraud penalty under section 6663

applies to Scott’s and Jennifer’s underpayment of tax for 2001 as

adjusted.
                                -25-

     B.   Darren and Lisa—Fraud Penalty

     We now consider whether Darren and Lisa are each liable for

the fraud penalty.    We agree with respondent that many of the

badges of fraud are equally present for Darren’s and Lisa’s

underpayment.   Lisa worked as a paralegal at the law practice,

and she had access to and signing authority over the Bentley

Group’s account.   Darren, an attorney, was responsible for

keeping the financial records of the law practice and prepared

the information return for the Bentley Group for 2001.    Darren

failed to maintain or produce any records, however, evidencing

deposits, withdrawals or loan transactions involving the Bentley

Group’s account.   Darren also did not file the requisite

information return for the Bentley Group until 2004, after he and

Scott were being audited.    In addition, the Bentley Group failed

to file employment tax returns for Lisa, or any other employees

of the law practice.    Lisa failed to report any wage income from

the Bentley Group.

     Darren and Lisa both earned substantial amounts from the

Bentley Group, yet reported only a nominal amount on their joint

tax return.   Darren never established a personal account in his

name, but, like Scott, established multiple other accounts to

avoid paying taxes.    Darren and Lisa reported only $10,000 of

income on their joint tax return after they claimed $135,636 of

unsubstantiated expenses on the information return for LRC.
                                -26-

Darren maintained no records to support his withdrawals and

transfers to and from the Bentley Group’s account.    Darren and

Lisa reported that the Bentley Group paid LRC $150,000 of income,

not an insignificant amount, but there was no written explanation

for the payment.    Darren and Lisa also failed to cooperate with

Revenue Agent Reed.    Darren threatened that he would have Revenue

Agent Reed arrested if she came on his property, and Lisa was

unresponsive after receiving summonses from her.

     We find that Darren and Lisa, like Scott and Jennifer, used

a scheme where they assigned income to an LLC to conceal the true

nature of the earnings subject to income and self-employment

taxes.    Darren and Lisa claimed that LRC was an investment

company.    If it was an operating company, however, it did not

have any employees nor can we find that it was created for any

valid business purpose.    LRC was merely created in an attempt to

avoid taxation.    While Darren and Lisa did pay self-employment

tax on the $10,000 of net income of LRC, they claimed expenses

totaling 92.9 percent of the income.    They cannot substantiate

these expenses.    Perhaps no documentation was kept because LRC

had no business purpose and was merely a conduit for the

assignment of income.

     Several of the badges of fraud apply to both Darren and

Lisa.    We conclude that respondent has proven by clear and

convincing evidence that Darren and Lisa each fraudulently
                                 -27-

understated their tax liabilities for 2001, and they have failed

to prove that any portion of the underpayment is not due to

fraud.   We find that the fraud penalty under section 6663 applies

to Darren’s and Lisa’s underpayment of tax for 2001 as adjusted.

III. Limitations Period

     Because of our findings of fraud, the limitations periods

for assessing petitioners’ taxes have not expired.      See sec.

6501(c)(1).

     We have considered all remaining arguments the parties made

and, to the extent not addressed, we conclude they are

irrelevant, moot, or meritless.

     To reflect the foregoing,


                                             Decisions will be entered

                                        for respondent for the reduced

                                        amounts.
