Court Opinion

ID: 4336462
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:52:01.824486+00
Date Added: 2024-06-11T14:47:01.387528
License: Public Domain

T.C. Memo. 2007-109

                       UNITED STATES TAX COURT

           PATRICIA B. PATERSON, ET AL.1 Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket Nos.    8093-04, 8094-04,   Filed April 30, 2007.
                   22397-04.

     Thomas Edward Brever, for petitioners.

     David W. Sorenson and Lisa R. Woods, for respondent.

             MEMORANDUM FINDINGS OF FACT AND OPINION

     KROUPA, Judge:    Respondent determined deficiencies in

petitioners’ Federal income taxes and fraud penalties under

     1
      This case is consolidated for briefing, trial and opinion
with the cases of George M. Paterson, Docket No. 8094-04, and
George M. Paterson, Docket No. 22397-04. Mr. and Mrs. Paterson
are referred to collectively as petitioners.
                                    -2-

section 6663 for 1997 and 1998 (the years at issue).2

       Respondent determined that petitioner Patricia B. Paterson

(Mrs. Paterson) was liable for a $53,168 deficiency and a $39,876

fraud penalty for 1997.       For 1998, respondent determined that

Mrs. Paterson was liable for a $16,402 deficiency and a

$12,301.50 fraud penalty.

       Respondent determined that petitioner George M. Paterson

(Mr. Paterson) was liable for a $125,280 deficiency and a $93,960

fraud penalty for 1997.       For 1998, respondent determined that Mr.

Paterson was liable for a $88,257 deficiency and a $66,192.75

fraud penalty.

       There are three issues for decision.      The first issue is

whether petitioners understated their income in the amounts

respondent determined for the years at issue.        We hold that they

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

fraud penalties for the years at issue.         We hold that they are.

The third issue is whether the limitations period bars respondent

from assessing petitioners’ taxes for the years at issue.        We

hold that it does not.

                             FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

       2
      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, unless otherwise
indicated.
                                  -3-

incorporated by this reference.    Petitioners resided in Eden

Prairie, Minnesota, at the time they filed the petitions.

     Petitioners are married and were married during the years at

issue.    Petitioners filed the tax returns for the years at issue

as married filing separately.

Mr. Paterson’s Bookmaking Activities

     Mr. Paterson stipulated that he has been a professional

bookmaker for about 20 years including the years at issue.         Mr.

Paterson has a criminal history.    He was convicted of tax evasion

in 1979.    He also recently pleaded guilty to another criminal

fraud charge relating to Form 730, Tax on Wagering, that he filed

for years other than the years at issue.       Mr. Paterson expected

at the time of trial that he might have to serve time for these

criminal offenses.

     Mr. Paterson conducted his illegal activities with two sons

from a previous marriage.    The three of them took bets at one

son’s apartment in Eden Prairie, Minnesota.       The primary assets

of the bookmaking enterprise were three cellular phones.       Mr.

Paterson had no credit history because he dealt solely in cash

and had no credit card, so Mrs. Paterson obtained them in her

name.    Mr. Paterson’s customers called these phones to place

bets.

     Mr. Paterson had between 50 and 75 regular customers who bet

with him.    These customers bet on college and professional

football and usually called Mr. Paterson to bet on Saturdays and

Sundays, the highest volume days.       Mr. Paterson charged his
                                 -4-

customers a 10-percent commission, called vigorish, on bets that

his customers lost.3

     Mr. Paterson did not accept bets on other sports, except a

few on World Series games.   He occupied himself during the

football off-season by gambling on golf and cards.   He won as

much as $2,000 at a time on golf and card games but did not

report any of these winnings on his tax returns.

     Mr. Paterson tried to avoid being caught at his illegal

activities.   He accepted mainly cash from his customers and used

code numbers to identify his customers in case his bookmaking

business was ever raided.    In addition, he destroyed his records

of who each customer was and how much each customer bet weekly.

He instead kept a tally of profit in his head.

     Mr. Paterson attempted to comply with laws regarding

registration of bookmakers with the Internal Revenue Service

(IRS) because he feared that he and his sons would be jailed for

failure to register.   He purchased a “gambling stamp,” Form 11C,

Occupational Tax and Registration Return for Wagering, for 1997

and 1998.   Mr. Paterson also filed monthly Forms 730 with the IRS

for all of 1997 and January through October of 1998.   The Forms

730 indicate that Mr. Paterson reported a total of gross wagers

of $196,500 for 1997 and $210,400 for 1998.

     3
      Vigorish has been described as a means to compensate the
bookmaker for the privilege of placing bets. See United States
v. Pinelli, 890 F.2d 1461, 1465 (10th Cir. 1989). If a bookmaker
is balanced, meaning he or she has an even number of bets on both
sides of the contest, the vigorish will be profit to the
bookmaker. See id.
                                -5-

     Despite Mr. Paterson’s efforts to avoid being caught at his

illegal activities, agents of the Minnesota Gambling Enforcement

Division searched Mr. Paterson’s home and his son’s apartment on

December 12, 1999.   The agents arrested Mr. Paterson and seized

gambling records covering 4 days of betting and three cellular

phones.   The gambling records seized indicate that Mr. Paterson

accepted an average of $96,070.50 of bets each day for those 4

days, a vastly larger amount than the gross wagers Mr. Paterson

reported on the Forms 730.   In fact, the total gross wagers

accepted over those 4 days exceeded the total wagers Mr. Paterson

reported he accepted for the entire year 1997 or the entire year

1998.   Moreover, the seized records did not include a Saturday,

which is generally a high-volume day, and included one partial

day of wagering because the search commenced before the day’s

wagering was complete.

Mrs. Paterson’s Activities

     Mrs. Paterson was aware of her husband’s illegal gambling

activities.   She has worked as a flight attendant for Northwest

Airlines (NWA) for approximately 25 years, but she worked only

limited hours during the years at issue.   In fact, NWA reported

it paid her only $3,105 in 1997 and $16 in 1998.

     Mrs. Paterson helped her husband hide his bookmaking

activities although she did not accept bets herself.   She

obtained the cellular phones in her name that were seized in the
                                 -6-

December 1999 search.4   Mrs. Paterson herself never used these

telephones.

     Mrs. Paterson also assisted her husband in concealing assets

to help hide his bookmaking activity.    Petitioners’ joint bank

accounts had only minimal activity during the years at issue.

Mrs. Paterson kept separate bank accounts and brokerage accounts,

however, solely in her own name.   She made numerous deposits of

large sums totaling thousands of dollars into these accounts

during the years at issue.   Many of these deposits were of cash

or checks made payable to her husband.

     Mrs. Paterson also kept significant assets in her own name

rather than having assets titled in both petitioners’ names or

having assets titled only in Mr. Paterson’s name.    For example,

the home in which she and Mr. Paterson have resided for the past

20 years is solely in Mrs. Paterson’s name, and she is the only

person listed on the mortgage.   She also paid approximately

$34,000 cash in 1997 to buy a Cadillac for her husband to use,

paying with a check drawn on her checking account.   The vehicle

purchase contract was in Mrs. Paterson's name.

     4
      The Court finds petitioners’ testimony that Mrs. Paterson
obtained the cellular phones for a computer business they were
trying to start inconsistent with other evidence in the record.
Neither petitioner reported any income or expenses relating to
the computer business. Presumably phone costs could be expensed
if they were incurred in a trade or business. Moreover,
petitioners have not introduced any evidence corroborating their
testimony concerning the computer business.
                                -7-

Preparation of Mr. and Mrs. Paterson’s Tax Returns

     Both petitioners retained a tax preparer, Mr. Hughes, to

prepare their returns for the years at issue.   Mr. Hughes had

assisted petitioners with their returns for years and knew about

Mr. Paterson’s bookmaking activities.

     Mrs. Paterson gave Mr. Hughes her Forms W-2, Wage and Tax

Statement, from NWA but did not tell him about the large deposits

into her separate bank accounts during the years at issue.   Mr.

Paterson simply told Mr. Hughes how much income he had because

Mr. Paterson kept no records.   Mr. Hughes prepared returns for

Mr. Paterson using the amounts Mr. Paterson gave him even though

Mr. Hughes knew Mr. Paterson was a bookmaker and dealt in cash.

     Petitioners each filed tax returns for the years at issue as

married filing separately.5   Mr. Paterson reported total income

of $46,018 in 1997 and $48,481 in 1998.   Mrs. Paterson reported

total income of $5,947 in 1997 and $1,511 in 1998.

Respondent’s Examination

     Respondent examined the married filing separate returns of

both petitioners.   Neither petitioner cooperated with respondent

during the audit, and respondent issued summonses to each of

them. Both petitioners asserted their Fifth Amendment rights in

response to the summonses and refused to answer any questions or

produce any records to respondent.

     5
      The record does not reflect the dates petitioners filed the
tax returns. We note that respondent did not determine that
either petitioner was liable for the addition to tax under sec.
6651(a)(1) for failure to file timely returns for the years at
issue.
                                -8-

Respondent’s Determination of Petitioners’ Income

     Respondent’s revenue agents determined petitioners’ income.

A different revenue agent was assigned to each petitioner.

Respondent’s revenue agent Ms. Johnson (Revenue Agent Johnson)

was assigned to Mr. Paterson.   Revenue Agent Johnson used the

profit factor method to redetermine Mr. Paterson’s income.

Revenue Agent Johnson began by examining the 4 days of betting

sheets seized in the December 1999 search.   Revenue Agent Johnson

added 10 percent vigorish, the amount charged on a losing bet, to

the bets listed on the sheet that did not carry vigorish and then

added all bets together to find the gross wagers.   Revenue Agent

Johnson then divided the total gross wagers she found, $384,282,

by 4 days of betting to obtain the average daily bet of

$96,070.50.

     Revenue Agent Johnson then used the call records for the

cellular phones to determine the number of days people called Mr.

Paterson to place bets.   Revenue Agent Johnson multiplied the

$96,070.50 average daily bet by the number of days people placed

bets for each year to arrive at the gross wagers for each year.

Finally, Revenue Agent Johnson multiplied the gross wagers for

each year by 4.54 percent.   This percentage represented the

profit a bookmaker would make if his or her books were balanced.

Revenue Agent Johnson determined that Mr. Paterson had gross

income of $357,651.26 in 1997, of which $305,151 Mr. Paterson

failed to report.   For 1998, Revenue Agent Johnson determined
                                 -9-

that Mr. Paterson had gross income of $270,419.24, of which

$215,019 Mr. Paterson failed to report.

     Respondent’s revenue agent Ms. Zamora (Revenue Agent Zamora)

was responsible for handling the determination of Mrs. Paterson’s

income.   Revenue Agent Zamora used the bank deposits method to

reconstruct Mrs. Paterson’s income.      Revenue Agent Zamora used

third-party procedures to obtain bank records and other

documents.   Revenue Agent Zamora added together all the taxable

deposits into Mrs. Paterson’s various separate bank accounts and

subtracted the sources of income reported on the return.      Revenue

Agent Zamora determined that for 1997, Mrs. Paterson had taxable

deposits of $170,579.41, of which $160,637.41 Mrs. Paterson

failed to report.   For 1998, Revenue Agent Zamora determined that

Mrs. Paterson had taxable deposits of $63,343.42, of which

$61,832.42 Mrs. Paterson failed to report.

     Respondent issued deficiency notices to petitioners for 1997

and 1998.    The deficiency notices to Mr. Paterson were dated

April 1, 2004, with respect to 1997 and November 4, 2004, with

respect to 1998.    The deficiency notice to Mrs. Paterson covered

both 1997 and 1998 and was dated April 1, 2004.      Petitioners each

timely filed petitions.    The cases were consolidated for purposes

of trial, briefing, and opinion.

                               OPINION

     We are asked to decide whether petitioners, a longtime

bookmaker with a criminal history and his wife, failed to report

income in the amounts respondent determined.      We are also asked
                                 -10-

to decide whether petitioners are liable for fraud penalties with

regard to the unreported income.    Finally, we are asked to decide

whether the limitations period bars respondent from assessing

petitioners’ liabilities.    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, 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.    Where a taxpayer has destroyed

his or her tax records, the Commissioner’s reconstruction need

not be arithmetically precise.     DiMauro v. United States, 706
F.2d 882, 885 (8th Cir. 1983), affg. 81-2 USTC par. 16,373 (D.

Neb. 1981).

     A.   Mr. Paterson’s Unreported Income: Profit Factor Method
     We first discuss respondent’s use of the profit factor

method to reconstruct Mr. Paterson’s income.    The Commissioner’s

determinations are generally presumed correct, and the taxpayer

bears the burden of proving that these determinations are
                                -11-

erroneous.6    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).    Unreported income from wagering activities involves a

special rule, however.    The Commissioner must first present some

evidence connecting the taxpayer with a wagering activity during

the years at issue to obtain the benefit of the presumption of

correctness.    DiMauro v. United States, supra at 884; De

Cavalcante v. Commissioner, 620 F.2d 23, 27-28 (3d Cir. 1980),

affg. Barrasso v. Commissioner, T.C. Memo. 1978-432; Pizzarello

v. United States, 408 F.2d 579, 583 (2d Cir. 1969).    Once the

Commissioner has met this minimal evidentiary foundation, the

burden then shifts to the taxpayer to prove the Commissioner’s

determination was incorrect.    DiMauro v. United States, supra at

884.

       Mr. Paterson stipulated that he operated a professional

bookmaking and wagering business during the years at issue.

Sufficient evidence therefore exists to connect Mr. Paterson with

a wagering activity during the years at issue.    The burden is

thus on petitioners to prove that respondent’s determination was

incorrect.

       We have previously approved the profit factor method as a

reasonable method to determine income from bookmaking activities.

Robinson v. Commissioner, T.C. Memo. 1986-382.    Revenue Agent

Johnson applied the profit factor method as described in Robinson

       6
      This principle is not affected by sec. 7491(a) because
neither petitioner cooperated with respondent’s reasonable
requests during respondent’s examinations. See sec.
7491(a)(2)(B). Accordingly, the burden of proof remains with
petitioners.
                                -12-

to reconstruct Mr. Paterson’s income using 4 days of wagering

records seized in the search.   The wagering records show an

average daily bet of over $96,000, and the profit factor method

suggests net income of approximately $350,000 and $270,000 for

the respective years at issue, while Mr. Paterson reported gross

income of only approximately $45,000 for each year at issue.

This is a vast disparity.   Petitioners make several arguments why

the profit factor method is inappropriate and does not accurately

reflect Mr. Paterson’s income for the years at issue.

     First, petitioners argue that Mr. Paterson’s sons were

involved in the gambling enterprise with him and should be

allocated some of the income.   Petitioners have introduced no

evidence, however, regarding how the resulting income from the

wagering activity was allocated between Mr. Paterson and his

sons.   Mr. Paterson’s sons did not testify at the trial, nor was

any evidence introduced to document what amount, if any, was

attributable to the sons or reported on their returns.   We

conclude that petitioners have failed to prove that respondent

erroneously allocated all of the gambling income to Mr. Paterson.

     Second, petitioners argue that the small sample of 4 days of

wagering cannot be extrapolated to reflect accurately Mr.

Paterson’s overall wagering activity for 2 years.    Petitioners

argue that the profit factor method is inappropriate because it

is based on such a small sample of wagering activity, relying on

Clayton v. Commissioner, 102 T.C. 632, 644 (1994).    We held in

Clayton that the profit factor method was inappropriate because
                                 -13-

the calculation was based on a day of very active wagering on

conference championship games. Id.     We reject petitioners’

argument.   The 4 days of seized wagering records are an accurate

reflection of Mr. Paterson’s wagering activity and can be used to

redetermine Mr. Paterson’s income for the years at issue.       None

of the 4 days involved high profile conference championship games

like those related to the day of wagering records in Clayton.

Moreover, the 4 days of wagering records did not include a

Saturday, which is generally a high-volume day, but included a

partial day of wagering as the search occurred before that day’s

wagering was complete.   These facts would actually tend to

underestimate Mr. Paterson’s income.       Simply underestimating the

income does not make the method unreliable.

     Third, petitioners argue that the 4 days of wagering records

are inaccurate because some of the wagers were never consummated

because of Mr. Paterson’s arrest.       This fact is irrelevant.

Before the search, Mr. Paterson was engaged in his normal

bookmaking activities and would have collected the wagers absent

the search and his arrest.   Moreover, the unconsummated wagers

and the raid occurred in 1999, not 1997 or 1998, the years at

issue, where the bookmaking activities occurred without

interruption.   We conclude the 4 days of wagering records are an

accurate reflection of Mr. Paterson’s wagering activity even if

some wagers were never consummated.

     Finally, petitioners argue that the profit factor method

disregards Mr. Paterson’s actual losses and that the 4.54-percent
                                 -14-

theoretical profit unreasonably exaggerates Mr. Paterson’s

income.    We disagree.   Mr. Paterson has introduced no evidence of

his actual profit margin or any evidence that would tend to show

respondent’s method was unreasonable or incorrect.    Moreover, the

United States District Court for the District of Nebraska has

found it reasonable to assume a bookmaker’s profits will

generally amount to 4.5 percent of total wagers in the excise tax

context.    DiMauro v. United States, 81-2 USTC par. 16,373 (D.

Neb. 1981).

     In sum, we find Mr. Paterson had unreported income in the

amounts respondent determined in the deficiency notices.     We

conclude that the profit factor method respondent used to

reconstruct Mr. Paterson’s bookmaking income was reasonable and

substantially accurate.    Petitioners have introduced no

documentary evidence to show otherwise.    Any inaccuracies in the

income reconstruction are attributable to Mr. Paterson’s failure

to maintain books and records and to his failure to cooperate

with respondent during the audit.

     B.    Mrs. Paterson’s Unreported Income:   Bank Deposits
           Method
     We next examine respondent’s use of the bank deposits method

to determine Mrs. Paterson’s unreported income.    We have

previously approved the use of the bank deposits method as a

means of income reconstruction.     Clayton v. Commissioner, supra

at 645; DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959
F.2d 16 (2d Cir. 1992).    It is not arbitrary or capricious for

the Commissioner to use the bank deposits method to compute the
                                -15-

income of a taxpayer who has kept no books and records and who

has large bank deposits.    Clayton v. Commissioner, supra at 645;

DiLeo v. Commissioner, supra at 867.    Bank deposits are prima

facie evidence of income.   Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).   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.

     We reiterate that 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. at 115.    Respondent’s agent used

third-party procedures to obtain information about funds

deposited into Mrs. Paterson’s personal bank accounts and

subtracted from these funds the amounts of income Mrs. Paterson

reported on her returns for the years at issue.    Mrs. Paterson

reported a mere $5,947 in 1997 and $1,511 in 1998, while

respondent determined she had unreported income from the cash

deposits of $160,637.41 in 1997 and $61,832.42 in 1998.

Petitioners make two primary arguments why respondent’s

determinations regarding Mrs. Paterson’s unreported income are

erroneous.

     First, petitioners argue that the bank deposits method

double counts income that Mr. Paterson reported on his returns.

Petitioners have introduced no evidence to support this argument,
                                 -16-

however.   Petitioners have failed to prove the portion of

deposits in Mrs. Paterson’s separate bank accounts that were

attributable to Mr. Paterson’s bookmaking activities.       Absent any

documentary evidence, we decline to speculate as to the extent of

any double counting of income.    Moreover, respondent’s profit

factor method used to determine Mr. Paterson’s income may

underestimate Mr. Paterson’s income.       We note that one of the 4

days used in the method was just a partial day, and none of the

days used in the method was a Saturday, a high-volume day.       Thus,

any potential double counting of income may be offset by

underestimating some of Mr. Paterson’s income, and we shall not

speculate further.

     Second, petitioners argue that some of the deposits Mrs.

Paterson made into her bank accounts during the years at issue

are nontaxable or are loans.   Petitioners argue that these

deposits include a $160,000 gain on the sale of stock, insurance

reimbursement for stolen jewelry, a $50,000 loan, and $6,900 of

gain on the sale of other stock.7       Petitioners have introduced no

documentary evidence to support their claims and rely only on

their uncorroborated, self-serving testimony, which we are not

required to accept and which we do not find to be credible.       See

     7
      Petitioners argue on brief that the amounts representing
gain on the sale of stock are nontaxable. We surmise that
petitioners mean that the deposits in Mrs. Paterson’s account are
the proceeds of stock sales and she should be taxed only to the
extent the proceeds exceed her basis. There is no evidence that
after the stock sales, cash was transferred from Mrs. Paterson’s
securities account into her bank account. Instead, proceeds from
securities transactions remained in the securities account to be
reinvested.
                                 -17-

Neidringhaus v. Commissioner, 99 T.C. 202, 219 (1992).      In

addition, petitioners argue that a good friend of Mrs. Paterson

“loaned” her $50,000 because the memo notation on the check said

“loan-taxes.”   Petitioners did not have the friend testify or

produce any documentation regarding this “loan.”      The failure of

a party to introduce evidence which, if true, would be favorable

to that party gives rise to the presumption that the evidence

would be unfavorable if produced.       Wichita Terminal Elevator Co.

v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513

(10th Cir. 1947).     Petitioners have not proven that any of these

items are nontaxable deposits or are loans.      Petitioners have

also introduced no evidence to support that Mrs. Paterson is

entitled to any additional expenses or losses.

      In sum, we find that Mrs. Paterson had unreported income in

the amounts respondent determined in the deficiency notice.

II.   Fraud Penalty

      We next consider whether either petitioner is liable for the

fraud penalty for the years at issue.      The Commissioner must

prove by clear and convincing evidence that the taxpayer

underpaid his or her income tax and that some part of the

underpayment was due to fraud.    Sec. 6663(a); Clayton v.
Commissioner, 102 T.C. 646.     If the Commissioner establishes

that any portion of an underpayment is attributable to fraud, the

entire underpayment is treated as attributable to fraud, except

to the extent the taxpayer establishes by a preponderance of the
                                -18-

evidence that a portion of the underpayment is not due to fraud.

Sec. 6663(b); Smoll v. Commissioner, T.C. Memo. 2006-157.

     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, maintaining inadequate records, concealing income or

assets, failing to cooperate with tax authorities, engaging in

illegal activities, filing false documents, and dealing in cash.

Spies v. United States, 317 U.S. 492, 499 (1943); Bradford v.
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.
                                 -19-

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

curiam T.C. Memo. 1982-603.

     A.    Mr. Paterson’s Liability for the Fraud Penalty

     We now consider whether Mr. Paterson is liable for the fraud

penalty.   We agree with respondent that several badges of fraud

are present with respect to Mr. Paterson’s underpayments of tax.

Mr. Paterson earned his income through an illegal wagering

enterprise.    Mr. Paterson routinely destroyed his wagering

records after each football game to avoid being held accountable

for his illegal activities.    He was arrested for his activities,

was convicted of tax evasion, and pleaded guilty to filing false

and fraudulent Forms 730.    Mr. Paterson dealt in cash

exclusively.    He did not keep records of the cash he received

from his customers and did not maintain a bank account that would

allow tracking of his income.    Mr. Paterson also concealed

assets.    He shielded his property by not taking title to assets,

such as the home in which he resided with Mrs. Paterson and the

Cadillac he drove.    In addition, the primary asset of his

wagering enterprise was the cellular phones, which were

registered in his wife’s name.    Mr. Paterson provided incomplete

and false information to his return preparer, simply telling his

return preparer how much income to report instead of providing

him documentation.    Mr. Paterson also failed to report his golf

or card game winnings on his returns.    Finally, Mr. Paterson

failed to cooperate with respondent during the audit.
                                 -20-

     We conclude that respondent has proven by clear and

convincing evidence that Mr. Paterson fraudulently understated

his tax liabilities for the years at issue, and Mr. Paterson has

failed to show that any portion of the underpayments is not due

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

applies to Mr. Paterson’s underpayments of tax for the years at

issue.

     B.     Mrs. Paterson’s Liability for the Fraud Penalty

     We now consider whether Mrs. Paterson is liable for the

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

of fraud are present with respect to Mrs. Paterson’s

underpayments.    Mrs. Paterson was aware of her husband’s illegal

activities.    She facilitated the illegal activities by obtaining

the cellular phones her husband used to accept bets.    She also

received the benefit of these illegal activities by accepting and

depositing cash or checks made out to her husband.    She concealed

the source of these funds further by depositing them into her

separate bank accounts, not the joint bank accounts that had only

minimal activity.    She also kept title solely in her name to the

Patersons’ significant assets, such as their home and bank

accounts and brokerage accounts with considerable funds.      Mrs.

Paterson did not maintain adequate records and never told her tax

preparer about the large sums she periodically deposited into her

separate bank accounts.    Finally, Mrs. Paterson understated her

income significantly on her tax returns and did not cooperate

with respondent during the audit.
                               -21-

     We conclude that respondent has proven by clear and

convincing evidence that Mrs. Paterson fraudulently understated

her tax liabilities for the years at issue and Mrs. Paterson has

failed to prove that any portion of the underpayments is not due

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

applies to Mrs. Paterson’s underpayments of tax for the years at

issue.

III. Limitations Period

     Petitioners argue that the 3-year limitations period under

section 6501(a) has expired and that respondent is therefore

barred from assessing petitioners’ taxes for the years at issue.

Respondent issued deficiency notices to petitioners on April 1,

2004 (with respect to Mrs. Paterson’s liability for both years

and Mr. Paterson’s liability for 1997) and November 4, 2004 (with

respect to Mr. Paterson’s liability for 1998).   The limitations

period commences on the date the return is filed.    Sec. 6501(a).

Returns filed before the due date are deemed filed on the due

date.8   Sec. 6501(b).

     In the case of false and fraudulent returns with the intent

to evade tax, the tax may be assessed at any time.   Sec.

6501(c)(1).   Because we have found that petitioners are each

liable for the fraud penalty under section 6663, we hold that the

limitations period for assessing petitioners’ taxes is extended

     8
      Although the dates petitioners filed the returns are not
evident from the record, the earliest the returns would be
treated as filed is Apr. 15, 1998 and 1999, respectively. Sec.
6501(b).
                                 -22-

indefinitely.   See sec. 6501(c)(1); Sam Kong Fashions, Inc. v.

Commissioner, T.C. Memo. 2005-157.      Accordingly, respondent is

not barred from assessing petitioners’ deficiencies.       See sec.

6501(c)(1).

     Respondent would not be barred from assessing petitioners’

taxes for the years at issue even if we had not found that

petitioners had filed false and fraudulent returns.       The

limitations period is extended to 6 years if a taxpayer omits

from gross income an amount that is 25 percent of the amount the

taxpayer stated in the return.    Sec. 6501(e)(1)(A).     Both

petitioners omitted from gross income amounts vastly in excess of

25 percent of the amounts stated on the returns, and the

limitations period would be extended to 6 years.      Respondent

issued deficiency notices within 6 years of the due dates of the

returns and is thus not barred from assessing petitioners’ taxes.

     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.