T.C. Mem o. 2 01 4- 19 3

UNITED STAT ES TAX COURT
VLADIMIR ROUDAKOV, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 21 00 0- 11
. Fi le d S ep te m be r 23 , 20 14
.
Vlad im ir R ou da ko v, p ro se. Mar ie E. Sm al l an d M on ic a E. Koch , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION COLVIN, Ju dg e: Res po nd en t d et erm in edde fic ie nc ie s i n p et it io ne r’s Fed eral in co m e ta x a ndfrau d p en al ti es as f ol lo ws:- 2 - [* 2] Pen al ty Year Defi ci en cy se c. 66 63 1 19 95 $8 3,7 66 $6 2,8 25 19 96 22 0,6 27 16 5,4 70 19 97 29 ,62 2 22 ,21 7 Am ou nt s h av e b eenrou nd edto th e n eare stdo ll ar. 1 Afte r co nc es si on s, the is su es forde ci si on are: (1 ) Whe th er p et it io ne r omitt ed$2 40 ,96 9, $ 57 1,2 74 , and$9 4,3 95 of g ro ss
rece ip ts fro m

hi s t ax ab le in co m e fo r 19 95 , 19 96 , and19 97 , res pe ct iv el y . W e fi nd th athe fai le d t o re po rt g ro ss rece ip ts to th e ex te ntdi sc us se d b el ow. (2 ) Whe th er p et it io ne r ha d d efi ci en ci es inin co m e ta x fo r 19 95 , 19 96 , and 19 97 inth e am ou nt s d et erm in edinth e n ot ic e o f de fic ie nc y . W e h ol d tha t h e h ad de fic ie nc ie s t o the ex te ntdi sc us se d b el ow. (3 ) Whe th er p et it io ne r is li ab le forth e fraudpe na lty un de r se ct io n 6 66 3 fo r 19 95 , 19 96 , and19 97 . W e h ol d tha t h e is
. Sect io n re fere nc es are t o the Int ern al Rev enue Co de as i n e ffec t dur in g the y ears inis su e. Ru le refe ren ces are t o the Tax C ou rt R ul es of P ract ic e an d Pro cedur e.- 3 -

[* 3] FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Pe ti ti on er was a
res id en t o f New York wh enth e p et it io n was fil ed
. A. Early Years (Pre- 19 95 ) Pet it io ne r is fro m

Ukra in e, whe re h e an d s om e o th er m em be rs of h is fam il y ha d b eeninbu si ne ss with s om e fi na nc ia l s uc ces s. Pet it io ne r an d h is wife ha ve a daug ht er an d aso n. Pe ti ti on er an d h is fam il y imm ig rat edto th e Uni te d S ta te s
aro un d 1 99 0. Pet it io ne r li ve d i n P hi la de lp hi a fro m 19 90 to 19 99 . He li ve d i n a
on e-b edro om

ap artm en t wi th hi s wi fe an d two ch il dr enun ti l 1 99 4. Pe ti ti on er’s
m ot he r cam e to th e Uni te d S ta te s i n 1 99 4. Aft er s he arri ve d, p et it io ne r, hi s wi fe, th e two ch il dr en , andhi s m ot he r li ve d i n atwo -b edro om ap art m en t. Pet it io ne r an d hi s fa m il y

stru gg le d fi na nc ia ll y

du rin g the y ears aft er the y cam e to th e Uni te d St at es , andth ey

li ve d frug al ly. Fro m

19 90 to 19 94 pe ti ti on er atti m es work edina ga s s ta ti onan d i n aon e-h ou r ph ot o s ho p a nddro ve a ta xi cab
. B. Pet it io ne r’s Co m

pu te r Bu si ne ss Fro m

19 95 Thro ug h 1 99 7 Inlat e 1 99 4 p et it io ne r be ga n t o b uy lap to p c om pu te rs who le sa le forres al e to lapt op co m

pu te r ret ai le rs . He op erat edth is bu si ne ss un de r th e n am e “ Payless- 4 -

[* 4] Co m pu te r So ur ce” ( Payless ). He co nt in ue d thi s b us in es s u nt il aro un d 1 99 8 whe n i t ce as edto be pro fit ab le
. 1. Co m pu te r Pu rch as es Pet it io ne r tr av el edth ro ug ho utth e Uni te d S ta te s t o a tt en d c om pu te r au ct io ns to bu y di sc ou nt edco m

pu te rs fro m

va rio us supp li ers . For e xa m pl e, pe ti ti on er at te nd edau ct io ns inCal ifo rn iaan d M arylan d. Pet it io ne r bo ug htso m e co m pu te rs whi chwere b ei ng di sc ou nt edby the
m anuf actur er o r ot he r se ll er. So m et im es co m pu te rs he bo ug htat auc ti on were pa ck ag edinbro ke n o r op en edbo xe s an d wer e so ldas i s. To ass is t wi th res el li ng
co m pu te rs , pet it io ne r le arn edto rep ai r an d re bu il d c om pu te rs . In19 96 pe ti ti on er b ou gh t a p rev io us ly leas ed19 96 Toyota v anto tra ns po rt lapt op co m

pu te rs fro m

hi s n um ero us who le sa le so ur ces an d t o d el iv er the m to ret ai le rs . He con ti nu edto ownan d driv e th is ve hi cl e atth e ti m e o f tr ia l. Pet it io ne r pu rch as edso m e co m pu te rs fro m

Adv an cedMark et in g S erv ic es in Ph il ad el ph ia . He pai d fo r th os e co m pu te rs by check . It was ve ry un us ua l fo r pe ti ti on er t o p ay

for co m pu te rs by check . Ty

pi cal ly he p ur ch as edco m pu te rs fro m who le sa le rs (e.g ., at au ct io ns ) who di d n otkn ow h im , andth es e se ll ers requi red th athe pa y

incas h.- 5 -

[* 5] Pet it io ne r rare ly too k fam il y m em be rs when he wentto bu y co m pu te rs , bu t
so m et im es he to okon e o r m or e fam il y m em be rs if h e p lann edto st ay ina ho te l. Fo r ex am pl e, fam il y

m em be rs acco m

pa ni edhi m

on tri ps to att en d auc ti on s i n W as hi ng to n, D.C., an d Oce anCit y , Marylan d, dur in g the y ears inis su e. 2. Pe ti ti on er’s Sal es of C om pu te rs Dur in g the y ears inis su e p et it io ne r br ou gh t the lap to p c om pu te rs to Ph il ad el ph iaan d re so ldth em to sev eral ret ai le rs inNew YorkCit y an d New J ers ey . To fi ndbu y ers he co nt act edst or es th atso ldlap to p c om pu te rs . Som et im es he si m pl y dro ve to st or es sel li ng lap to p c om pu te rs an d o ffer edhi s co m pu te rs forsal e. The re were lar ge nu m

be rs of b uyers an d s el le rs of l ap to p c om pu te rs durin g th os e y ears . Prev ai li ng pri ces were wel l u nd ers to odfro m wid el y av ai labl e so ur ces
su chas c om

pu te r m ag azi ne s. Pet it io ne r typic al ly sol d c om pu te rs forab ou t a 5 % to 6% p ro fit . Peti ti on er b el ie ve d tha t i t was cru ci al to pro m pt ly resel l co m

pu te rs he ha d p ur ch as edbe cau se ret ai l p ric es of c om pu te rs so m et im es de cl in edov er t im e. A lo w m arkup he lp edhi m

to qu ic kl y

res el l co m

pu te rs th athe ha d p ur ch as edan d ob ta in rep eatbu si ne ss fro m ret ai l o ut le ts . Som et im es hi s p ro fitwas l es s than 5 % if, fo r ex am pl e, bo xe s h adbe enop en edor d am ag ed
.- 6 -

[* 6] 3. Me ll on Ban k Acc ou nt Payless m ai nt ai ne d aba nkacco un t wi th Mel lo n B an k (M el lo n a cco un t) i n Ph il ad el ph ia . Peti ti on er ro ut in el y de po si te d c he ck s Pa y le ss rece iv edfro m it s
ve nd or s i nt o the Mel lo n a cco un t. The cum ul at iv e am ou nt s o f ch eckde po si ts to th e Mel lo n a cco un t wer e $ 12 5,8 17 , $3 65 ,52 3, an d $ 43 5,8 20 for19 95 , 19 96 , and19 97 , res pe ct iv el y . Thro ug ho ut19 95 an d 1 99 6 p et it io ne r freque nt ly wro te ch eck s fr om th e Me ll on acco un t, o fte n fo r se ve ral th ou sa nddo ll ars , to Adv an cedMark et in g Serv ic es inPh il ad el ph iaforco m pu te r pu rch as es . From m id -1 99 6 thr ou gh 19 97 pe ti ti on er wro te m any

ch eck s fo r cas h o n the Mel lo n a cco un t. 4. Pe ti ti on er’s Use of C as h Pet it io ne r pa idcas h fo r co m pu te rs he bo ug htat auc ti on s. He n ev er p ai d fo r
co m pu te rs he bo ug htat auc ti on s b y ch eckor c red itcard . Thu s, h e to oksubs tant ia l
am ou nt s o f cas h t o the au ct io ns . Reta il ers pa idby checkforco m pu te rs th ey pu rch as edfro m

pe ti ti on er. At h is reque st , pet it io ne r typic al ly recei ve d c he ck s i n
am ou nt s l es s tha n $ 10 ,00 0 e ve n i f itrequi redth e b uyer to is su e m or e th anon e ch eckon a pa rti cu lar da y . He dep os it edso m e o f th e ch eck s i n the Mel lo n a cco un t
an d c as he d s om e atK&A Ch eckCas hi ng Serv ic e (K&A) i n P hi la de lp hi a. Pet it io ne r cas he d c he ck s atK&A inth e fo ll owi ng to ta l am ou nt s:- 7 - [* 7] Year Tot al ch eck s

cas he d Am ou nt 19 95 39 $2 75 ,48 6 19 96 74 54 2,4 48 19 97 11 92 ,14 5 Tota l 12 4 91 0,0 79 5. Bu si ne ss Exp en se s Pet it io ne r tr ie d t o m in im iz e h is bu si ne ss ex pe ns es . After s om e o f hi s in ve nt ory was s to le n i n 1 99 5, h e k ep t h is in ve nt ory inpubl ic st or ag e. He pa id$6 0
a m on th fora st or ag e sp ace b eg in ni ng so m et im e in 19 95
. C. Pet it io ne r’s Tax R eturns for19 95 , 19 96 , and19 97 Pet it io ne r ti m el y

fil edhi s Fe de ral in co m e ta x re turn s, Fo rm 10 40 , U.S. In di vi du al Inc om e Tax Return, fo r ta x years 1 99 5, 1 99 6, an d 1 99 7. Fri edm an Acco un ti ng Serv ic es pre pa redpe ti ti on er’s t ax returns us in g i nf orm at io n h e
supp li ed , in cl ud in g i nc om e an d e xp en se su m m ary st at em en ts forhi s co m pu te r sa le s bu si ne ss . On Sc he du le s C , Pro fitor Lo ss Fro m Bu si ne ss , att ach edto each tax return fo r th e y ears inis su e p et it io ne r id en ti fie d h is pri nc ip al bu si ne ss as “ co m pu te r di st rib ut io n a ndsal es ” an d l is te d h is bu si ne ss na m e as “ Payless Co m pu te r Sal es ”. He rep orte d the fol lo win g o n tho se Sch edul es C:- 8 -

[*8 ] Year Gro ss

rece ip ts Co stof g oo ds

so ld Oth er

ex pe ns es Net p ro fit 19 95 $1 43 ,96 3 $1 12 ,69 2 $1 4,6 50 $1 6,6 21 19 96 33 6,3 91 29 9,5 59 18 ,80 5 18 ,02 7 19 97 43 5,8 20 39 6,1 35 21 ,79 8 17 ,88 7 The 19 95 tax return was fil edun si gn edby pet it io ne r. Pet it io ne r si gn edbo th th e 1 99 6 a nd19 97 tax returns . D. Resp on de nt ’s Exam in at io n o f Pet it io ne r’s Tax R eturns The IRS b eg anin ve st ig at in g p et it io ne r’s ta x re tu rn s i n 1 99 8 b ecau se of a di sc rep an cy

be twee n aFo rm

47 89 , Curren cy

Tran sa ct io n R ep ort, the IRS h ad
rece iv edfro m

K&A an d wh atwas re po rte d o n p et it io ne r’s ta x re tu rn s. Rev enue 1 Age ntCynthi a Ja ck so n (RA Jac ks on ), a ta x c om pl ianc e o ffi cer, i nv es ti ga te d pe ti ti on er’s returns . Upo n re vi ew of curren cy tra ns act io n re po rts (CTR) tha t h ad be enpro du cedby K &A, RA Ja ck so n co nc lu de d tha t the re were ad di ti on al gro ss
rece ip ts forPay le ss th atpe ti ti on er h adno t re po rte d o n h is tax returns . RA Jac ks on reque st edfro m

pe ti ti on er h is ba nkst at em en ts , workpape rs us edto pre pa re h is 19 95 , 19 96 , and19 97 in co m e ta x re tu rn s, an d a ny oth er d at a th atwou ldass is t the Und er 3 1 U.S.C. s ec. 5 31 3( a) (2 00 6) fin an ci al in st itut io ns are re qu ire d t o 1 fil e a cu rren cy

trans act io n re po rt ( CTR) i nv ol vi ng cas h tran sa ct io ns inex ces s o f $1 0,0 00 . K&A fil edth e CTRs with the IRS b ecau se K&A be li ev edth at pe ti ti on er’s tran sa ct io ns were s us pe ct .- 9 -

[* 9] IRS i n re co nc il in g h is rep orte d g ro ss rece ip ts an d c os t o f go od s s ol d. Pet it io ne r pr ov id edno reco rd s o r do cu m en ts to RA Ja ck so n. RA Ja ck so n re ferr edpe ti ti on er’s cas e to th e Cri m in al Inv es ti ga ti onDiv is io n (CID) o f th e IRS . CID ag en ts co nt act edin di vi du al s wh o h adwrit te n c he ck s t o pe ti ti on er. The CID al so ob ta in edth e Me ll on acco un t re co rd s an d p erfo rm eda de po si ts an al y si s o f th atacco un t. Onth e b as is of t he an al y si s o f pe ti ti on er’s Mel lo n a cco un t d ep os it s an d the CTRs fro m K&A, res po nd en t’s ag en ts co nc lu de d th atpe ti ti on er h adom it te d g ro ss rece ip ts fro m hi s co m pu te r sa le s b us in es s o f $2 40 ,96 9, $ 57 1,2 74 , and$9 4,3 95 for19 95 , 19 96 , and19 97 , res pe ct iv el y . Afte r th e cri m in al co nv ic ti on , pet it io ne r’s cas e was returne d t o RA Jac ks on . Sh e p rep aredth e n ot ic e o f de fic ie nc y forpe ti ti on er’s 1 99 5, 1 99 6, an d 1 99 7 t ax y ears . E. Peti ti on er’s Cri m in al Co nv ic ti on Pet it io ne r was in di ct edinth e U.S. Dis tri ctCo urt fo r th e Eas te rnDis tri ctof Pen ns y lv an iaon two co un ts of wi ll fu ll y fil in g fa ls e ta x re tu rn s und er s ect io n 7 20 6 fo r ta x years 2 00 6 and20 07 . The i nd ic tm en t ch arg edpe ti ti on er wi thfil in g t ax returns on whi chhe ha d re po rte d g ro ss rece ip ts on Sch edul e C o f $3 36 ,39 1 fo r 19 96 when he kn ew hi s g ro ss rece ip ts were ap pr ox im at el y $9 07 ,66 5; an d o f- 10 -

[* 10 ] $4 35 ,82 0 fo r 19 97 , whenhe kn ew hi s g ro ss rece ip ts were ap pr ox im at el y $5 30 ,21 5. OnFeb ru ary 9, 2 00 4, a ju ry fou ndpe ti ti on er g ui lty

on bo th co un ts . OPINION A. Burd enof P ro of Tax pa y ers ge ne ral ly bear the burd enof p ro vi ng th atth e Co m m is si on er's de te rm in at io n i n ano ti ce o f de fic ie nc y is in co rrec t. Ru le 14 2( a); W el chv. Helv eri ng , 29 0 U.S. 1 11 (19 33 ). 2 The Co urt o f App eal s fo r th e Sec on d C irc ui t, t o wh ic h thi s ca se is ap pe al ab le , see sec . 74 82 (b )(1 )(A), h as reco gn iz edanex cep ti on to th e p res um pt io n of co rrec tn es s b y

requi rin g the Co m

m is si on er i n u nr ep orte d i nc om e cas es to pr ov id e ev id en ce l in ki ng th e ta xp ay er wi th a so ur ce o f in co m e. See Ll or en te v. Co m mis si on er, 6 49 F.2d15 2, 1 56 (2dCir . 19 81 ), aff’g i n p art , rev ’g inpa rt a nd
rem an di ng 74 T.C. 26 0 (1 98 0) . Peti ti on er cl earl y is li nk edto th e unr ep orte d in co m e. Pet it io ne r op erat eda co m pu te r res el li ng bu si ne ss an d re cei ve d p aym en ts fro m ret ai l p ur ch as ers of c om

pu te rs . Accor di ng ly, res po nd en t h as sat is fie d h is bu rd enof p ro vi di ng ev id en ce l in ki ng pe ti ti on er t o the un rep orte d i nc om e.

If v ari ou s co nd it io ns are m et , th e b ur de n o f pr oo f can sh iftto th e 2 Co m m is si on er u nd er s ec. 7 49 1( a). Pet it io ne r do es no t co nt en d tho se co nd it io ns ha ve be enm ethe re, an d i t i s ap pa ren t fr om th e rec or d the y

ha ve no t b eenm et .- 11 -

[* 11 ] B. Unre po rte d In co m e Fro m Ch eck s C as he d a t K&A Res po nd en t al le ge s p et it io ne r omitt edgro ss rece ip ts inth e fo ll owi ng
am ou nt s fr om

Sch edul es C fi le d wi thhi s 1 99 5, 1 99 6, an d 1 99 7 i nc om e ta x re tu rn s:

Year Om it te d g ro ss in co m e 19 95 $2 40 ,96 9 19 96 57 1,2 74 19 97 94 ,39 5 Tot al 90 6,6 38 If a t ax pa y er d oe s n otm ai nt ai n a de qu at e b oo ks an d re co rd s, the Co m mis si on er m ay

reco ns tru ctth e ta xp ay er’s i nc om e b y any reas on ab le m etho d whi chcle arl y

refl ect s i nc om e, se c. 44 6( b) ; Ho ll an d v . Uni te d S ta te s, 3 48 U.S. 12 1, 13 0- 13 2 (1 95 4) , in cl ud in g the ba nkde po si ts m etho d, Pa rk s v . Comm is si on er, 9 4 T.C. 65 4, 6 58 (19 90 ); Es ta te of M as on v. Co m m is si on er, 6 4 T.C. 6 51 , 65 6 (1 97 5) , aff’d, 5 66 F.2d2 (6 th Cir . 19 77 ), an d c urren cy tra ns act io n re po rts , Test a v . Co m mis si on er, T.C. Mem o. 1 98 9- 55 6. Pe ti ti on er p ro vi de d n o b oo ks or r eco rd s t o
res po nd en t. Acco rd in gl y , res po nd en t re as on ab ly reli edup on ba nkreco rd s an d the CTRs th atK&A subm it te d t o d et erm in e p et it io ne r’s un rep orte d i nc om e. Pet it io ne r co nt en ds th athi s fr ie nd , Alex an de r Ras on , op erat eda co m pu te r
sa le s b us in es s u nd er a b us in es s n am e si mil ar t o h is an d re cei ve d s om e o f th e pr oc eed s fr om

th e ch eck s ca sh edat K& A, cau si ng co nf us io n abo utwho rece iv ed- 12 -

[* 12 ] cas h fr om

ch eck s atK&A. Peti ti on er al so di sp ut es th e te st im on y of J on athan Gers hk ow, the own er o f K&A, th aton ly pet it io ne r rec ei ve d the pro ceed s o f th e ch eck s h e cas he d a t K&A, o n the gro un ds th atth ere i s n o p ho to gr ap hi c ev id en ce o f pe ti ti on er’s cas hi ng ch eck s an d tha t the am ou nt s ca sh edare i n d oubtbe cau se K&A ha d aco rp or at e ad dr es s s ep arat e fro m it s b us in es s l oc at io n. W e d is ag ree. We fou ndcred ib le th e te st im on y of J on atha n Ger sh ko w th at
on ly pet it io ne r rec ei ve d the pro ceed s o f ch eck s p ay ab le to Pay le ss . Peti ti on er d id
no t as si stres po nd en t i n fi nd in g M r. Ras on , andMr. Ras ondi d n ottes ti fy at t he tri al of th is cas e o r of

pe ti ti on er’s cri m in al cas e. Pet it io ne r ha s n otco nv in cedus th athe 3 di d n otrece iv e cas h fr om ch eck s ca sh edat K& A payabl e to Pay le ss inth e am ou nt s th atJo na th anGers hk ow d es cri be d. We fin d tha t p et it io ne r cas he d c he ck s atK&A fo r $5 42 ,44 8 a nd$9 2,1 45 for19 96 an d 1 99 7, re sp ect iv el y . W e th eref or e fi ndth at 4 pe ti ti on er u nd erre po rte d h is gro ss rece ip ts by $54 2,4 48 an d $ 92 ,14 5 fo r 19 96 an d

Pet it io ne r of

fere d n o e xp lana ti on forfai li ng to ass is t re sp on de ntinfin di ng 3 Mr. Ra so n o r fo r th e ab se nc e o f Mr. Ra so n a t h is tri al
. Res po nd en t as se rts th atpe ti ti on er’s unr ep orte d i nc om e is who ll y 4 at tri bu tabl e to ch eck s h e cas he d a t K&A. Ho wev er, the reco rdrefl ect s tha t the to ta l am ou nt s o f ch eck s ca sh edat K& A du rin g 1 99 6 and19 97 are l es s tha n the am ount s o f un rep orte d i nc om e res po nd en t d et erm in edfor th os e y ears inth e n ot ic e of de fic ie nc y . There is no th in g i n the reco rdto reco nc il e th e la rg er am ou nt s ap pe ari ng inth e n ot ic e o f de fic ie nc y .- 13 -

[* 13 ] 19 97 , res pe ct iv el y . W e al so fin d tha t p et it io ne r un de rrep orte d h is gro ss
rece ip ts for19 95 by $24 0,9 69 as r es po nd en t d et erm in edinth e n ot ic e o f de fic ie nc y . 5 C. Whe th er Pe ti ti on er Has Defi ci en ci es inth e Am ou nt s Det erm in edinth e Not ic e o f Defi ci en cy Pet it io ne r di d n otpro vi de co nt em po ran eo us reco rd s o f hi s co st s o f go od s
so ldor e xp en se s. Ho wev er, p et it io ne r te st ifi edth athi s p ro fiton co m pu te r sa le s typic al ly w as ab ou t 5 % to 6%; th atitwas s om et im es les s; an d tha t h e u se d
subs tant ia l am ou nt s o f cas h t o b uy com pu te rs at auc ti on s. We fou ndth is asp ectof hi s t es ti m on y

to be cred ib le . This pro fitrat e is si m il ar t o the ov eral l n etpro fitof ap pr ox im at el y

6% tha t h e rep orte d o n h is tax returns an d tha t was ba se d o n the
rev enue s h e d ep os it edinth e Me ll on Ban k, as sh own inth e fo ll owi ng tab le :

19 95 199 6 19 97 Tot al Pro fit Perc en ta ge s Sal es $1 43 ,96 3 $3 36 ,39 1 $4 35 ,82 0 91 6,1 74 COGS 11 2,6 92 29 9,5 59 39 6,1 35 80 8,3 86 GP 31 ,27 1 36 ,83 2 39 ,68 5 10 7,7 88 11 .77 % Oth er ex pe ns es 14 ,65 0 18 ,80 5 21 ,79 8 55 ,25 3 Net i nc om e 16 ,62 1 18 ,02 7 17 ,88 7 52 ,53 5 5.7 3%

Whi le th e rec or d s ho ws tha t the va lu e o f ch eck s p et it io ne r cas he d a t K&A 5 du rin g 1 99 5 e xc eed edth is am ount , res po nd en t h as no t as se rte d tha t p et it io ne r ha d an y m or e unr ep orte d i nc om e th anth e am ou ntde te rm in edinres po nd en t’s n ot ic e o f de fic ie nc y . W e d eem

th atres po nd en t h as co nc ed edth is is su e.- 14 -

[* 14 ] Whe n atax pa y er es tabl is he s tha t h e o r sh e in cu rreda de du ct ib le bu si ne ss
ex pe ns e b utdo es no t p ro ve th e p reci se am ou ntof t he ex pe ns e, th e Co urt m ay ap pr ox im at e th e am ou ntall owabl e, be ari ng he av il y ag ai ns t the tax pay er wh os e in ex act itud e is of h is or h er o wn m ak in g. Co ha n v . Comm is si on er, 3 9 F .2d54 0, 54 4 (2 d C ir. 1 93 0) . For t he Co han ru le to ap pl y , th e Co urt m us t h av e so m e b as is fo r es ti m at in g the am ou ntof t he ex pe ns e. Vani cekv. Co m m is si on er, 8 5 T.C. 7 31 , 74 2- 74 3 (1 98 5) . Peti ti on er’s t es ti m on y pro vi de s an ad equa te ba si s fo r us to ap pr ox im at e co st s o f go od s s ol d a ndex pe ns es for Pay le ss att rib ut ab le to sal e pr oc eed s n otde po si te d i n the Mel lo n a cco un t an d i ns te adrece iv edas c as h. 6 On the ba si s o f th e fo reg oi ng , we fin d tha t p et it io ne r’s in co m e is un de rs ta te d by the am ou nt s o f gr os s re cei pt s tha t we fo un d abo ve inth e Dis cu ss io n a t p artB.
The re i s ev id en ce i n the reco rdth atpe ti ti on er ac qu ire d v al uabl e art work 6 du rin g b et te r ti m es forhi s fa m il y be fo re h e cam e to th e Uni te d S ta te s an d tha t the artwork was lat er s to le n. Th ere a ls o i s s om e su gg es ti on inth e rec or d tha t pe ti ti on er re cei ve d a ro un d o r so m ewh atm or e th an$1 00 ,00 0 i n fa mil y m on ey aro un d the ti m e h is m ot he r m ov edto th e Uni te d S ta te s, tha t h e in ve st edth at m on ey , andth atth e m on ey was s ub st an ti al ly los t. Inres po nd en t’s p os ttria l op en in g b rie f, res po nd en t p oi nt s o utth aton th e Sch edul e D, Cap it al Gain s an d Los se s, i nc lu de d wi th pe ti ti on er’s 1 99 7 t ax return, h e rep orte d s el li ng sh ort-t erm cap it al ass et s fo r $2 ,58 8,1 99 an d tha t tho se ass et s h ada co stba si s o f $2 ,69 0,7 18
. The re i s n o e xp lana ti on inth e rec or d fo r th is it em rep orte d o n h is 19 97 return, an d itis no t ap pa ren t h ow, i f atall , itrel at es to th e ci rcu m st an ces refe rredto inth is fo ot no te . Res po nd en t al le ge s n o s ou rce o f un rep orte d i nc om e fo r pe ti ti on er fo r 19 95 -9 7 o th er tha n fr om

ch eck s ca sh edat K& A, andwe ha ve in cl ud edno fact fin di ng or d is cu ss io n re la ti ng to th es e p oi nt s.- 15 -

[* 15 ] Furth er, o n the ba si s o f th e rec or d b efo re u s an d b eari ng he av il y ag ai ns t pe ti ti on er, wh o fa il edto pro vi de co nt em po ran eo us bu si ne ss reco rd s, we as su m e pe ti ti on er h adanov eral l n etpro fitpe rcen ta ge of 1 0%, as s ho wn i n the fol lo win g 7 tabl e:
Year Gro ss rece ip ts

as rep orte d Adju st edgro ss

rece ip ts Net i nc om e

as rep orte d Adjus te d n et

inc om e 19 95 $1 43 ,96 3 $3 84 ,93 2 16 ,62 1 $3 8,4 93 19 96 33 6,3 91 87 8,8 39 18 ,02 7 87 ,88 4 19 97 43 5,8 20 52 7,9 65 17 ,88 7 52 ,79 7 Acco rd in gl y , we fin d tha t p et it io ne r un de rs ta te d h is pro fitfro m op erat in g Payless to th e ex te ntth e ad jus te d n etin co m e am ou nt s s ta te d abo ve ex ceedth e n et in co m e am ou nt s h e rep orte d o n h is tax returns for19 95 , 19 96 , and19 97
. D. Whe th er Pe ti ti on er Is Liab le forth e Pen al ty for FraudUnd er Se ct io n 6 66 3( a) W ith re sp ectto th e se ct io n 6 66 3 p en al ty, res po nd en t h as th e b ur de n o f pr ov in g fr au d b y

cle ar an d c on vi nc in g e vi de nc e. See 7 45 4( a); Ru le 14 2( b)
.

W e rec og ni ze p et it io ne r fai le d t o re po rt s al es pro ceed s al on g wi th th e co st 7 of pu rch as in g the go od s fo r un rep orte d s al es . W e b el ie ve th ere a re s om e ad di ti on al de du ct ib le bu si ne ss expe ns es ass oc ia te d wi th th e unr ep orte d s al es th at were n ev er re po rte d e ithe r. Co ns eque nt ly, th e o ve ral l n etpro fitpe rcen ta ge we us e is weig ht edm or e to wardth e o ve ral l g ro ss pro fitpe rcen ta ge of 1 1.7 7% tha t pe ti ti on er re po rte d o n h is tax returns .- 16 -

[* 16 ] 1. Ba ck gr ou nd Res po nd en t co nt en ds th atpe ti ti on er i s l iabl e fo r th e p en al ty for fraudun de r
se ct io n 6 66 3( a) fo r 19 95 , 19 96 , and19 97 . Res po nd en t m us t es tabl is h tha t: (a) p et it io ne r un de rp ai d t ax foreach y ear i n i ss ue an d (b ) so m e p artof t he
un de rp aym en t i s due to frau d. Se e 6 65 3( b) ; Pa rk s v . Comm is si on er, 9 4 T.C. at 66 0- 66 1; Pet zo ldt v . Comm is si on er, 9 2 T.C. 6 61 , 69 9 (1 98 9) . W e fo un d i n p artC of th e Dis cu ss io n tha t p et it io ne r un de rp ai d t ax for 19 95 , 19 96 , and19 97 . If
res po nd en t s ho ws tha t an y pa rt o f anun de rp aym en t i s due to frau d, the en ti re
un de rp aym en t i s treat edas due to frau d u nl es s p et it io ne r sh ows by a prep on de ran ce of th e ev id en ce tha t p artof t he un de rp aym en t i s n otdu e to frau d. Se e 6 66 3( b)
. Frau d i s the in te nt io na l ev as io n o f a t ax be li ev edto be owi ng . W eb b v
. Co m mis si on er, 3 94 F.2d36 6, 3 77 (5t h C ir. 1 96 8) , aff’g T.C. Mem o. 1 96 6- 81
. Frau d i s n ev er p res um ed ; i t m us t b e es tabl is he d b y

affi rm at iv e ev id en ce. Bea ve r v. Co m mis si on er, 5 5 T.C. 8 5, 9 2 (1 97 0) . The Co m m is si on er m ay

pro ve frau d b y ci rcu m st an ti al ev id en ce b ecau se di rectev id en ce o f th e ta xp ay er’s i nt en t i s ra rel y
av ai labl e. See St ep he ns on v. Co m m is si on er, 7 9 T.C. 9 95 , 10 05 -1 00 6 (1 98 2) , aff’d, 74 8 F .2d33 1 (6 th Cir . 19 84 ).- 17 -

[* 17 ] 2. Ba dg es of F rau d Co urts ha ve de ve lo pe d s ev eral ob jecti ve in di cat or s, o r “ba dg es ”, of frau d. Rec kl it is v. Co m

mis si on er, 9 1 T.C. 8 74 , 91 0 (1 98 8) . The fo ll owi ng ba dg es of frau d a re p res en t i n thi s ca se as t o p et it io ne r fo r th e y ears inis su e: (1) subs tant ia l
am ou nt s o f un rep orte d i nc om e o ve r se ve ral y ears ; (2 ) in ad equa te bo ok s an d
reco rd s; (3) de al in g i n l arg e am ou nt s o f cas h; an d (4 ) co nc eal m en t o f in co m e o r
as se ts . See, e.g ., Brad fo rdv. Co m m is si on er, 7 96 F.2d30 3, 3 07 (9t h C ir. 1 98 6) , aff’g T.C. Me m o. 1 98 4- 60 1. An ot he r ba dg e o f frau d, fi li ng fal se in co m e ta x returns , is pre se ntwith re sp ectto 19 96 an d 1 99 7. Se e Sp ie s v . Uni te d S ta te s, 3 17 U.S. 49 2, 4 99 (19 43 ); P ot te r v. C omm is si on er, T.C. Mem o. 2 01 4- 18 , at * 13 ; Laci ny v. Co m

m is si on er, T.C. Mem o. 2 01 3- 10 7, at*1 7- *2 0. a. Subs tant ia l Un de rrep orte d In co m e A pat te rnof s ub st an ti al ly und erre po rti ng in co m e fo r se ve ral y ears is stro ng
ev id en ce o f frau d. Ho ll an d, 3 48 U.S. at 1 37 -1 39 ; Sp ie s, 3 17 U.S. at 4 99
. Pet it io ne r subs tant ia ll y

un de rrep orte d h is in co m e fo r 19 95 , 19 96 , and19 97
. b. In ad equa te Bo ok s an d R eco rd s A tax pa y er’s fai lure t o m ai nt ai n a ccurat e rec or ds or c on ceal m en t o f rec or ds
m ay be a ba dg e o f frau d. Me rri ttv. Co m m is si on er, 3 01 F.2d48 4, 4 87 (5t h C ir. 19 62 ), aff’g T.C. Me m o. 1 95 9- 17 2; Reav es v. Co m m is si on er, 2 95 F.2d33 6, 3 38- 18 -

[* 18 ] (5 th Cir . 19 61 ), aff’g 3 1 T.C. 6 90 (19 58 ); Gro ss ha nd le r v. C omm is si on er, 7 5 T.C. 1, 2 0 (1 98 0) . Peti ti on er n ev er s up pl ie d a ny bo ok s an d re co rd s t o re sp on de nt du rin g the ex am in at io n o r fo r pu rp os es of thi s ca se .

c. Deal in g i n Lar ge Am ou nt s o f Cas h A tax pa y er’s u se of c as h t o c on ceal in co m e is ev id en ce o f frau d. Br ad fo rdv. Co m mis si on er, 7 96 F.2dat 3 07 -3 08 . Peti ti on er’s co m pu te r res al e b us in es s d eal t al m os t ex cl us iv el y

incas h. He ca sh edch eck s b etween19 95 an d 1 99 7 i n the
cu m ul at iv e am ou ntof $ 91 0,0 79 an d p ur ch as edco m pu te rs forres al e u si ng cas h. d. Co nc eal m en t o f In co m e Att em pt s t o c on ceal in co m e fro m th e In te rn al Rev enue Serv ic e b y
ne go ti at in g c he ck s fo r le ss th an$1 0,0 00 are an in di ci a o f frau d. Se e Gan dy v. Co m mis si on er, T.C. Mem o. 1 99 7- 53 2, af f’d, 19 9 F .3d44 0 (5 th Cir . 19 99 ). Duri ng each of t he y ears at i ss ue pe ti ti on er ca sh eda la rg e num be r of ch eck s atK&A in
am ou nt s l es s tha n $ 10 ,00 0. Whena sa le ex ceed ed$1 0,0 00 pe ti ti on er ev en reque st edth atth e p ur ch as er i ss ue m or e th anon e ch eckso th atno ch eckex ceed ed $1 0,0 00 . Suc h p ur

po se fu l b eh av io r is anin di cat io n p et it io ne r was att em pt in g t o
co nc eal in co m e an d i t i s an in di ci a o f frau du le ntin te nt .- 19 -

[* 19 ] e. Cri m in al Co nv ic ti on forFil in g F al se Tax R eturns Pet it io ne r was fou ndgu il ty of vi ol at in g s ect io n 7 20 6( 1) for th e ta xabl e y ears 19 96 an d 1 99 7. Se ct io n 7 20 6( 1) m ak es ita cri m e fo r a t ax pa y er t o wi ll fu ll y m ak e
an d s ub m itan y

return v eri fie d b y

a writ te n d ecl arat io n tha t i t i s m ad e und er the pe na lt ie s o f pe rjury whic h h e d oe s n otbe li ev e to be tru e an d c orrectas t o e ve ry
m at eri al m at te r. Wrig htv. Co m m is si on er, 8 4 T.C. 6 36 , 63 9 (1 98 5) . Whi le no t di sp os it iv e o n the is su e o f frau d, p et it io ne r’s co nv ic ti on is a fact or we m ay co ns id er rel ev an t. See id . at 6 33 -6 44 . The Supr em e Co urt h as de fin ed“ wil lfu ll y ”, as us ed in sec ti on 72 06 (1 ), as “ a v ol un tary , in te nt io na l v io la ti on of akn own leg al du ty.” Uni te d S ta te s v . Pom

po ni o, 4 29 U.S. 10 , 12 (19 76 ). W e th in k p et it io ne r’s in te nt io na l fi li ng of f

al se tax returns for19 96 an d 1 99 7 i s an in di cat io n tha t h e h ad frau du le ntin te ntwith re sp ectto th os e ta x years. 3. Co nc lu si on W e co nc lu de th atres po nd en t h as pro ve n b y cle ar an d c on vi nc in g e vi de nc e th atpe ti ti on er fraudul en tl y un de rp ai d t ax for19 95 , 19 96 , and19 97
. To re fle ctth e fo reg oi ng an d the co nc es si on s o f res po nd en t,
Deci si on wil l b e en te redun de r Ru le 15 5.