                         T.C. Memo. 2000-211



                       UNITED STATES TAX COURT



                   GOLD BAR, INCORPORATED D/B/A
           All AMERICAN TRUCKING COMPANY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10356-98.                        Filed July 10, 2000.


     B. Gray Gibbs, for petitioner.

     Monica J. Miller and Randall Pooler, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   In a notice of deficiency addressed to

petitioner, respondent determined deficiencies and penalties as

follows:

                                         Penalty
           Year       Deficiency       Section 6663
           1993         $8,798           $6,599
           1994         34,661           25,996
           1995         38,206           28,655
                                   - 2 -

        After concessions,1 the issue for our consideration is

whether petitioner is liable for fraud penalties under section

66632 for the 1993, 1994, and 1995 tax years.

                             FINDINGS OF FACT3

     Petitioner is a Florida corporation, with its principal

place of business in Lakeland, Florida.          Petitioner was

incorporated on August 11, 1977, but was inactive until 1981 or

1982.       Petitioner was administratively dissolved on September 26,

1997, for failing to file its annual report and is no longer in

business.       Gregory Golden (Mr. Golden) is petitioner’s president

and sole shareholder.

     During the years at issue, petitioner was engaged in a

transportation business.      Petitioner entered into contracts with

companies such as International Minerals & Chemical Corp. (IMC),

Florida Favorite Fertilizer, and United Road Builders to

transport goods and materials for them.          Petitioner’s primary



        1
       During trial, petitioner conceded all of the unreported
income and overstated expense issues, thereby conceding the tax
deficiencies of $8,798, $34,661, and $38,206 in the 1993, 1994,
and 1995 tax years, respectively. In his brief, respondent
stated that petitioner conceded the tax deficiencies in the
amounts of $6,599, $25,996, and $28,655 for the tax years at
issue. These amounts, however, are incorrect, as they represent
the sec. 6663 penalties and not the deficiencies.
        2
       Section references are to the Internal Revenue Code in
effect for the years at issue, and Rule references are to the Tax
Court Rules of Practice and Procedure.
        3
       The stipulation of facts and exhibits attached thereto are
incorporated herein by this reference.
                               - 3 -

customer was IMC, for which petitioner hauled limestone.

Petitioner had an arrangement with a pool of drivers whom it

treated as independent contractors.    These drivers generally used

their own trucks to transport a given load of goods.    However,

Mr. Golden owned some trailers that he sometimes rented to the

drivers.

     When petitioner’s contract customers had materials to be

transported, petitioner would assign drivers to the job, and the

drivers would transport the materials.    The contracting companies

would pay petitioner for the transportation service, and

petitioner would, in turn, pay the drivers for their services.

The amount paid by petitioner to the drivers was a netted amount.

The gross amount received by petitioner with respect to the loads

transported by the drivers was netted by deductions for:      (1) A

brokerage commission charged by petitioner and (2) certain

expenses for worker’s compensation, liability insurance, fuel

costs, trailer rental, and collision insurance.

     Mr. Golden maintained petitioner’s books and records for the

years at issue.   Mr. Golden graduated from high school but never

took any accounting or college-level courses.    Amongst the

records maintained was a ledger reflecting the activity of each

truck for a particular time period.    The ledger for 1993,

however, had been discarded by Mr. Golden.    The ledgers for the

1994 and 1995 tax years list the number of loads each truckdriver
                                - 4 -

transported within the period, the gross amount earned with

respect to the loads transported within the time period, and the

amount deducted from the gross amount earned for worker’s

compensation, brokerage commission, liability insurance, trailer

rental, collision insurance, and fuel costs.     Each ledger sheet

devoted one line to a driver.    There are columns along the top of

each ledger sheet that include information such as the gross

amount received from IMC or other companies and the expenses or

brokerage commission that was deducted by petitioner.

     Because each payment a driver received for transporting a

load(s) was reduced by some or all of these expenses, the checks

received by the drivers from petitioner were for net proceeds.

For example, during the week of January 17, 1994, driver number

12 hauled 16 loads for IMC.    IMC paid petitioner $1,136.90

($816.90 for the loads that driver number 12 transported plus a

$320 fuel service charge).    Petitioner then deducted $110 for

worker’s compensation, $57 for its brokerage commission, $135.50

for liability insurance and $242.65 for fuel.     Petitioner issued

a check to driver number 12 for $591.75.

     The amounts that petitioner deducted from the drivers’

checks for various expenses were marked up from the actual

expenses that petitioner incurred.      Thus, in the example above,

the worker’s compensation insurance, the liability insurance, and
                               - 5 -

the fuel all cost petitioner less than what it charged the

drivers.

     During the years at issue, petitioner did not have any

operating assets other than cash in a checking account.    Mr.

Golden and his wife, Phyllis, were the only ones with signatory

authority on petitioner’s checking account.   Checks that came in

from contracting companies such as IMC and Florida Favorite

Fertilizer were deposited in petitioner’s account, and the

Goldens wrote checks to pay the drivers and to pay expenses.

Deposits into petitioner’s checking account totaled $1,185,100.20

and $1,203,921 during 1994 and 1995, respectively.   In 1993,

1994, and 1995, checks totaling $270,000, $186,000, and $202,100,

respectively, were drawn from petitioner’s account to Mr. Golden.

     Amos Jackson, a tax consultant, prepared the 1993, 1994, and

1995 tax returns for petitioner.   Mr. Golden provided Mr. Jackson

with the amounts of money petitioner had received from the

corporations for which petitioner performed transportation

services and also told Mr. Jackson that he had paid out equal

amounts to the drivers.   Mr. Golden did not provide Mr. Jackson

with the ledgers or any other books or records regarding

petitioner.

     Petitioner’s reported gross receipts for 1993, 1994, and

1995 were $1,336,876.73, $1,140,870, and $1,169,111,

respectively.   Petitioner’s returns reflected deductions for
                               - 6 -

expenses in the same amounts, resulting in no taxable income

reported for 1993, 1994, and 1995 Federal income tax purposes.

                              OPINION

     Respondent determined that petitioner fraudulently failed to

report income by overstating its expenses and/or underreporting

its gross receipts on its 1993, 1994, and 1995 tax returns,

resulting in underpayments of $8,798, $34,661, $38,206,

respectively.   Respondent determined that the entire underpayment

for each year is attributable to fraud.   Therefore, respondent

determined that petitioner is liable for civil fraud penalties

under section 6663 in the amounts of $6,599, $25,996, and

$28,655, respectively.

     Section 6663(a) provides that if any part of an underpayment

is due to fraud there shall be added to the tax an amount equal

to 75 percent of the portion of the underpayment which is

attributable to fraud.   Fraud is defined as an intentional

wrongdoing designed to evade tax believed to be owing.    See

Edelson v. Commissioner, 829 F.2d 828, 833 (9th Cir. 1987), affg.

T.C. Memo. 1986-223.   Respondent has the burden of proving fraud

by clear and convincing evidence.   See Rule 142(b).   To satisfy

this burden, respondent 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
                                - 7 -

prevent the collection of taxes.   See 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.   See 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.    See Edelson v.

Commissioner, supra.    Fraud may be shown by circumstantial

evidence because direct evidence of the taxpayer’s fraudulent

intent is seldom available.   See 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.   See Stone v.

Commissioner, 56 T.C. 213, 223-224 (1971).

     In determining whether a corporation has acted fraudulently,

the Court must consider the fraudulent intent of the

corporation’s officers.   See DiLeo v. Commissioner, supra at 874.

The fraud of a sole or dominant shareholder can be attributed to

the corporation.   See Benes v. Commissioner, 42 T.C. 358, 383

(1964), affd. 355 F.2d 929 (6th Cir. 1966).    “A corporation can

act only through the individuals who are its officers or

employees.”   Kahrahb Restaurant, Inc. v. Commissioner, T.C. Memo.

1992-263.   Thus, we must consider the fraudulent intent through
                                - 8 -

the actions of Mr. Golden, petitioner’s president and sole

shareholder.

     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

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.   See 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).    This list is

nonexclusive.   See Miller v. Commissioner, 94 T.C. 316, 334

(1990).

     As an initial matter, petitioner concedes that it overstated

its business expenses claimed as deductions on its corporate

income tax returns for 1993, 1994, and 1995.   Petitioner further

concedes that it failed to report income on its 1994 and 1995

income tax returns.   These concessions result in petitioner’s

being liable for deficiencies in income tax for its 1993, 1994,

and 1995 tax years, and respondent has therefore met his burden

of showing petitioner’s understatement of taxes for 1993, 1994,

and 1995.
                                 - 9 -

     With regard to whether petitioner intended to evade taxes

known to be owing by conduct intended to conceal, mislead, or

otherwise prevent the collection of taxes, we must look at Mr.

Golden’s conduct to determine whether it exhibited any of the

“badges of fraud”.

     Petitioner’s ledgers were set up in such a way that neither

income nor expenses were recorded.       The ledger recorded the loads

that the drivers had transported and the gross amounts received

by petitioner from the contracting companies as consideration for

the transportation of those loads.       These gross receipts were

then reduced by expenses that petitioner charged to the driver.

The driver would then receive a check for the net proceeds.       The

ledgers did not indicate the cost to petitioner of the various

expenses that were deducted from the drivers’ checks.       The

ledgers did not indicate the markup on petitioner’s various

expenses.   Yet Mr. Golden testified that he was aware that there

was a markup and aware that petitioner was earning a profit on

these items.   This profit was not recorded anywhere in

petitioner’s books or records.

     Further, Mr. Golden, on behalf of petitioner, directed Mr.

Jackson, petitioner’s tax return preparer, to claim that

petitioner’s expenses were equal to its income, despite the fact

that Mr. Golden testified that he had a “fee” that he charged for

everything and that he charged the drivers a brokerage
                              - 10 -

commission.   Thus, it is obvious that petitioner’s expenses could

not have been equal to its income because petitioner was earning

a profit due to the markups and the brokerage commission.

Additionally, petitioner was unable or unwilling to provide Mr.

Jackson with the ledgers or any documentation of petitioner’s

actual expenses, and Mr. Jackson never reviewed any books,

records, or documents of petitioner.   Instead, Mr. Golden orally

reported to the preparer the gross receipts and expenses of

petitioner.

     During the 1993, 1994, and 1995 tax years, petitioner

reported taxable income of $0.   Yet, between 1993 and 1995, Mr.

Golden was able to personally draw cash totaling more than

$650,000 from petitioner’s account.    It strains credibility that

Mr. Golden thought he could withdraw this sum of money from

petitioner, yet honestly believe that petitioner had no taxable

income during these years.

     Petitioner argues that Mr. Golden’s lack of education and

accounting knowledge exculpate him from fraudulent intent.    A

limited education is not, in and of itself, enough to shield a

taxpayer from the fraud penalty.   See Estate of Temple v.

Commissioner, 67 T.C. 143 (1976) (a taxpayer’s ignorance and

limited education did not shield him from the fraud penalty).

The record indicates that while Mr. Golden did not have a college

education or an accounting background, his control over
                                - 11 -

petitioner’s books and his establishment of the method of

accounting indicates that he had sufficient knowledge of how to

account for the income and expense of petitioner.    This is

especially true given the fact that Mr. Golden calculated the

gross receipts and expense items and simply provided Mr. Jackson,

petitioner’s return preparer, with the two amounts to be inserted

onto the returns.

     According to Mr. Golden’s own testimony, he was aware that

as a consequence of marking up items, petitioner was earning a

profit.   Yet he maintains that petitioner was simply a

“passthrough” corporation and therefore he did not believe that

there was any taxable income.    Mr. Golden, however, knew that

petitioner’s income was not being reported by some other

individual or entity.4   We find it difficult to believe that Mr.

Golden could identify a corporation as a passthrough entity

without knowing that the income and expense items would

necessarily have to be passed through to someone or some other

entity who would report that income on a tax return.    Nothing in




     4
       Petitioner resisted attempts by respondent to determine
whether any of petitioner’s income was reported individually by
Mr. and Mrs. Golden. Petitioner’s failure to produce any
evidence supporting its allegation that it was a passthrough
entity gives rise to the presumption that any evidence regarding
this passthrough theory, if produced, would be unfavorable. See
Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158
(1946), affd. 162 F.2d 513 (10th Cir. 1947).
                              - 12 -

the record indicates that the profit being earned by petitioner

was being passed through and reported as income by anyone.

     Mr. Golden admits that each item of expense charged to the

drivers by petitioner was marked up, and he attempts to explain

that this markup was not shown as income on its returns because

it covered “administrative costs associated with this service.”

Petitioner introduced no evidence of any administrative costs,

and given the fact that the only two people involved in

petitioner’s business were Mr. and Mrs. Golden, we think it is

unlikely that any administrative costs were incurred by

petitioner regarding these marked-up expenses.

     The fact that petitioner may have deposited all of its

income and the fact that petitioner cooperated with respondent

does not militate against a finding of fraud.

     We agree with respondent that the underpayment in each of

the years at issue is attributable to the fraud of Mr. Golden and

is therefore attributed to petitioner.   The record shows that

petitioner engaged in a 3-year pattern of understating income and

overstating expenses.   Petitioner failed to keep adequate records

and concealed the income from petitioner’s tax return preparer by

providing him only with unsubstantiated income and expense

amounts.   Mr. Golden possessed sufficient education and knowledge

of his duty to report petitioner’s income.   He provided

implausible explanations, such as that petitioner was simply a
                             - 13 -

“passthrough” entity, yet did not provide any evidence of where

this income was “passed on” to.

     Based upon these indicia, we hold that respondent has

carried the burden of showing by clear and convincing evidence

that petitioner’s failure to report income for 1993, 1994, and

1995 was fraudulent with the intent to evade tax.    Petitioner, on

the other hand, has failed to show that any portion of its

underpayment was not due to fraud.    Accordingly, we sustain

respondent’s determination that petitioner is liable for the

penalties for fraud under section 6663(a) for all the years under

consideration.

     To reflect the foregoing,


                                 Decision will be entered for

                         respondent.
