Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Throughout this opinion, all amounts have been rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. The petitioners, Robert G. Bacon (Mr. Bacon), and Barbara Bacon (Mrs. Bacon), are husband and wife. At the time they filed their petition in this case, they resided in Cinnaminson, New Jersey.
Mr. Bacon is a high school graduate. He briefly attended college as a part-time student where he completed courses in Accounting I and II. Mrs. Bacon is a college graduate.
In 1980, Mr. Bacon purchased a bar/restaurant called the Jug Handle Inn under the name of Radtam, Inc., a corporation (Radtam). Mr. Bacon was the sole *304 shareholder of Radtam during the years in issue. The primary source of income for the Jug Handle Inn during this time period was from the sale of food, beer, and liquor. The Jug Handle Inn also derived revenue from lottery sales.
Petitioners timely filed joint Federal income tax returns for each of the years in issue. Petitioners reported adjusted gross income on their Federal income tax returns for the years in issue as follows: *305 from two of Radtam's bank accounts.
On or about October 19, 1989, petitioners paid Collective Federal Savings Bank $ 10,657 to modify the terms of their loan agreement on property located at 218 E. 18th Street, North Beach Haven, New Jersey. Petitioners paid with a cashier's check, which was paid for with a check drawn on the Radtam lottery account at Security Savings & Loan. *308 $ 15,850
In 1991, Mr. Bacon purchased a bar/restaurant called the Whistler's Inn under the name Bradam, Inc. (Bradam). Mr. Bacon was the sole shareholder of Bradam in 1991. The primary source of income for Whistler's Inn was from the sale of food, beer, and liquor.
Respondent determined deficiencies for the years *312 in issue by using the bank deposit method. Bank deposits are prima facie evidence of income. See DiLeo v. Commissioner, 96 T.C. 858">96 T.C. 858, 869 (1991), affd. 959 F.2d 16">959 F.2d 16 (2d Cir. 1992). Of course, when utilizing this method, all nontaxable sources of deposits must be taken into account. See id. Under the bank deposits method: (1) Bank deposits are totaled; (2) nonincome deposits, redeposits, or transfers are eliminated; (3) an excess of deposits, as adjusted, over reported income is considered to be unreported income; (4) cash expenditures that did not come from deposited funds or nontaxable sources are added to the amount of underreported income; and (5) deductible expenses not accounted for in the taxpayer's return are allowed. *313 1988 1989 1990 1991
____ ____ ____ ____
$ 362,461 $ 226,693 $ 500,851 $ 236,417
The parties have stipulated that if a bank deposit analysis is to be used, then the following adjustments must be made to respondent's bank deposit analysis in the notice of deficiency: and
Petitioners argue that respondent's bank deposit method is fundamentally flawed. Admittedly, there have been a significant number of adjustments to respondent's bank deposit analysis, and the computations involve considerable detail. Nevertheless, the facts in the record, most of which were stipulated, support respondent's final computations as adjusted. Indeed, on brief, petitioners focus their factual dispute on only four specific matters in the bank deposit analysis. We address each of the specific factual matters that petitioners dispute.
A. CASH ON HAND
Petitioners assert that respondent should reduce their 1988 unreported taxable income under the bank deposit analysis by $ 35,000. According to petitioners, the adjustment is necessary because they had $ 35,000 cash on hand at the beginning of the year.
An adjustment to respondent's bank deposit analysis would be appropriate if petitioners had less than $ 35,000 at the end of *318 the year. If petitioners started with $ 35,000 cash at the beginning of the year but had less than $ 35,000 at the end of the year, then the difference could have been nontaxable source of deposits to petitioners' bank accounts or a nontaxable source of cash expenditures by petitioners. However, Mr. Bacon testified that he kept substantial amounts of cash on hand at all times during the years in issue. Indeed, petitioners prepared a loan application dated March 8, 1990, which reflected $ 35,000 cash on hand. There is no credible evidence that petitioners' cash on hand was less than $ 35,000 at the end of any of the years in issue. On the basis of the record, we cannot conclude that an adjustment to respondent's bank deposit analysis is justified for cash on hand.
B. LOAN TO TADEUSZ RAS
Respondent increased petitioners' 1989 unreported income under the bank deposit analysis by $ 64,000 due to an alleged transfer from Mrs. Bacon to Tadeusz Ras (Mr. Ras). Petitioners argue that the alleged transfer should be eliminated from the bank deposit analysis, since no transfer ever took place.
Mr. Ras is Mr. Bacon's cousin and has been continuously employed by Radtam since 1991. When Mr. Ras started *319 working for Mr. Bacon in 1991, he was paid approximately $ 5 to $ 6 per hour. Mr. Ras cared for Mr. Bacon's grandmother before he was employed by Radtam.
We do not find Mr. Ras' explanation to be credible. On the basis of the facts, we find that petitioners provided Mr. Ras with $ 64,000 and that he in turn executed a mortgage on the house in the amount of $ 64,000.
C. REAL ESTATE DEPOSITS
Petitioners argue that respondent should reduce their unreported taxable income under the bank deposit analysis by $ 9,000 for 1988 and $ 4,000 for 1990. According to petitioners, they issued checks totaling $ 13,000 to make deposits on unconsummated real estate transactions. This resulted, according to petitioners, in the return of $ 13,000 of nontaxable funds that were either redeposited or cashed.
Petitioners have not established that these transactions ever took place or that the amounts in question were returned to them. No adjustment to respondent's bank deposit analysis is necessary for this item.
D. LOANS PAYABLE TO MRS. BACON
Petitioners argue that respondent should reduce their unreported taxable income under the bank deposit analysis by $ 319,109. Petitioners allege that such an adjustment is necessary because *321 in 1989 Radtam owed Mrs. Bacon $ 319,109. Petitioners argue that, to the extent that the bank deposit analysis indicates the underreporting of income from Radtam, petitioners should be given credit for $ 319,109 as being for the repayment of previous loans from Mrs. Bacon. Respondent argues that petitioners have not substantiated that Radtam owed Mrs. Bacon $ 319,109 in 1989.
To support petitioners' contention, petitioners rely on Radtam's Federal income tax return for the fiscal year ended June 30, 1989. Page four of the income tax return included a balance sheet which listed "Mortgages, notes, bonds payable in less than 1 year" (notes payable) of $ 319,109. The income tax return does not identify the persons or entities to whom Radtam owed $ 319,109. Petitioners' C.P.A., Jerome Collins, prepared the June 30, 1989, Federal income tax return. *322 Mr. Collins testified that he did not see any documents that would indicate that the corporation owed Mrs. Bacon $ 319,109. *324 None of those income tax returns contained any balance sheet information. The lack of balance sheet information on subsequent Radtam Federal income tax returns suggests that Mr. Collins did not have sufficient *323 detail to prepare the balance sheets and that a note payable to Mrs. Bacon never existed.
The evidence does not support petitioners' assertion that Radtam owed Mrs. Bacon $ 319,109 in 1989, and we do not believe petitioners' assertion in this regard. Thus, we find that the bank deposit analysis does not have to be adjusted for this item.
II. FRAUD
The next issue is whether any part of the underpayment of income tax for each year in issue is due to fraud. Respondent's notice of deficiency determined that petitioners *325 are liable for the addition to tax for fraud imposed under section 6653(b)(1) *326 for the taxable year 1988 and penalties under section 6663(a) for the taxable years 1989, 1990, and 1991. Each section imposes an addition to tax or penalty equal to 75 percent of the portion of an underpayment that is attributable to fraud. Additionally, each section provides that if any portion of an underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud, unless the taxpayer proves that some portion of the underpayment is not due to fraud. Finally, in the case of a joint return, the fraud penalty does not apply with respect to a spouse unless some part of the underpayment is due to fraud of such spouse. See secs. 6653(b)(3) for 1988 and 6663(c) for the years 1989, 1990, and 1991.
Respondent has the burden of proving by clear and convincing evidence that an underpayment exists for the years in issue and that some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b); Niedringhaus v. Commissioner, 99 T.C. 202">99 T.C. 202, 210 (1992). Consequently, respondent must establish: (1) Petitioners have underpaid their taxes for each year, and (2) some part of the underpayment is due to fraud. See DiLeo v. Commissioner, 96 T.C. 858">96 T.C. 858, 873 (1991), affd. 959 F.2d 16">959 F.2d 16 (2d Cir. 1992).
Respondent need not prove the precise amount of the underpayment resulting from fraud but only that some portion of the underpayment of tax for each year is due to fraud. See Niedringhaus v. Commissioner, supra at 210.
A. UNDERSTATEMENT OF INCOME
Where allegations of fraud are intertwined with unreported and indirectly reconstructed income, respondent is required to establish a likely taxable source for alleged unreported income or to disprove nontaxable sources alleged *327 by the taxpayer. See DiLeo v. Commissioner, supra 96 T.C. at 873.
The evidence clearly establishes that the Jug Handle Inn was a likely source of unreported income. The evidence also establishes that petitioners had no nontaxable sources that could account for the unreported income. Mr. Bacon originally claimed to have had $ 650,000 in nontaxable cash gifts on hand at the beginning of 1988, which would have been a potential nontaxable source. However, at trial petitioners stipulated that they only had $ 35,000 cash on hand at the beginning of 1988. Petitioners stipulated that they did not receive any gifts, inheritances, legacies, or devises.
Respondent's final bank deposit analysis is based primarily on stipulated facts. The record contains clear and convincing affirmative evidence that petitioners underpaid their 1988, 1989, 1990, and 1991 Federal income taxes.
B. FRAUDULENT INTENT
Respondent must prove that a portion of the underpayment is attributable to the fraudulent intent of petitioners. Fraud is the intentional wrongdoing motivated by a specific purpose to evade a tax known or believed to be owing. See Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968). The existence *328 of fraud is a question of fact to be resolved upon consideration of the entire record. See Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978).
Fraudulent intent can seldom be established by a single act or by direct proof of the taxpayer's intention. It is usually found by surveying the taxpayer's whole course of conduct and is to be proven as any other fact from all the evidence of record and reasonable inferences properly to be drawn therefrom. See Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 106 (1969). Any conduct, the likely effect of which would be to mislead or to conceal may establish an affirmative act of evasion. See Spies v. United States, 317 U.S. 492">317 U.S. 492, 499, 87 L. Ed. 418">87 L. Ed. 418, 63 S. Ct. 364">63 S. Ct. 364 (1943).
The courts have relied upon a number of indicia of fraud in deciding whether an underpayment of tax is due to fraud. While no single factor is necessarily sufficient to establish fraud, the existence of several indicia is persuasive circumstantial evidence of fraud. See Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 700 (1989).
Respondent argues that the following factors or "badges" of fraud are present in this case: (1) A substantial and *329 consistent understatement of income; (2) false statements made by petitioners during their interview with respondent's agents; (3) extensive dealings in cash; (4) failure to maintain adequate records; and (5) failure to furnish their return preparer with accurate information.
1. SUBSTANTIAL AND CONSISTENT UNDERSTATEMENT OF INCOME
The consistent failure to report substantial amounts of income over a number of years, standing alone, is effective evidence of fraudulent intent. See Schwarzkopf v. Commissioner, 246 F.2d 731">246 F.2d 731, 734 (3d Cir. 1957), affg. and remanding on another issue T.C. Memo 1956-155">T.C. Memo 1956-155. In this case, there is a substantial underpayment of tax for each of the years in issue. Over the 4-year period in issue, petitioners failed to report approximately $ 1 million dollars of income.
2. FALSE STATEMENTS
Respondent argues that false statements made at the time petitioners were interviewed by respondent's agents are evidence of fraudulent intent. The Supreme Court has stated that an "affirmative willful attempt may be inferred from * * * any conduct, the likely effect of which would be to mislead or to conceal." Spies v. United States, supra at 499. Making false statements to a revenue *330 agent is evidence of fraud. See United States v. Beacon Brass Co., 344 U.S. 43">344 U.S. 43, 45, 97 L. Ed. 61">97 L. Ed. 61, 73 S. Ct. 77">73 S. Ct. 77 (1952).
When petitioners first met with respondent's special agents regarding the years in question, Mr. Bacon told them that petitioners and their children had received extensive cash gifts from Mr. Bacon's grandfather in $ 10,000 cash increments. According to Mr. Bacon, he received a $ 10,000 cash gift each year since his 18th birthday, his wife received an annual $ 10,000 cash gift since they have been married, and their children each received an annual $ 10,000 cash gift since their birth. Mr. Bacon told respondent's agents that he received the cash gifts through a brother-in-law, that neither petitioners nor their children had ever met their grandfather, that they were told never to tell anyone about the gifts, and that they were never to put the money in the bank. Mr. Bacon told the agents that petitioners had as much as $ 650,000 cash on hand at the beginning of 1988. Mr. Bacon's statement about cash on hand was false. Petitioners stipulated that at the beginning of 1988, they had approximately $ 35,000 cash on hand. Had Mr. Bacon's statements about cash on hand at the *331 beginning of 1988 been true, petitioners would have had a nontaxable source from which to make deposits during the years in issue. We can conceive of no reason for such a false statement other than to mislead the agents.
We find that Mr. Bacon's statements about cash on hand during this interview were intended to mislead the agents.
During the years in issue, petitioners transferred $ 1,478,399 from two Radtam accounts into their personal bank accounts. Despite the significant transfers between Radtam's accounts and personal accounts, petitioners appear to have maintained no records of these transactions. Rather, they argue that they were unaware of the accounting problems being created and that they lacked the technical ability to keep corporate books or prepare tax returns.
Petitioners also deposited $ 590,689 in cash into their personal bank accounts. At trial, Mr. Bacon testified he did not know the source of these significant cash deposits.
While Mr. Bacon testified that he was unaware of the problems created by commingling funds, his testimony is self-serving, and we do not find him to be credible. Mr. Bacon appears to us to be an astute businessman and investor. It would have required relatively little, if any, technical ability to maintain, or hire a bookkeeper to maintain, a record of transfers between corporate and individual *333 accounts or records of the source of petitioners' substantial cash deposits to their personal accounts.
Mrs. Bacon also had a working knowledge of Radtam's books and records. Mrs. Bacon testified about the "settling" of daily cash register receipts and the recording of Radtam's income during the years in issue. Mrs. Bacon prepared disbursement summaries from Radtam's account at Security Savings & Loan, which were furnished to petitioners' accountant. While Mr. Bacon handled most of the deposits, Mrs. Bacon handled some deposits and testified that she may have handled some large cash deposits.
5. FAILURE TO FURNISH THEIR TAX RETURN PREPARER WITH
ACCURATE INFORMATION
The duty of filing accurate returns cannot be avoided by placing responsibility upon an agent. See American Properties, Inc. v. Commissioner, 28 T.C. 1100">28 T.C. 1100, 1116 (1957), affd. 262 F.2d 150">262 F.2d 150 (9th Cir. 1958).
On or about January 6, 1992, Mr. Bacon filed an application for a VISA card listing his occupation as tavern owner of Radtam Inc. t/a Jug Handle Inn and listed his annual salary as $ 299,000. However, Mr. Bacon never reported receiving any salary or dividends from Radtam on his individual Federal income tax returns. *336 fraud on the part of both Mr. and Mrs. Bacon. III. Statute of Limitations
Section 6501(a) provides, generally, for a 3-year period of limitations. However, in the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. See sec. 6501(c)(1). Where a joint Federal income tax return was filed, a finding that fraud was committed by either spouse keeps the period of limitations on assessment open with respect to both spouses. See Vannaman v. Commissioner, 54 T.C. 1011">54 T.C. 1011, 1018 (1970).
Since we have already found that the returns for the years in issue were fraudulent, it follows that the exception found in section 6501(c)(1) applies, and the assessment of taxes for the years in issue is not barred.
8. The same accountant prepared petitioners' individual Federal income tax returns and the corporate Federal income tax return for another entity owned by petitioners called Bradam.↩
13. We eliminated a $ 5,007 item in respondent's bank deposit analysis for corporate expenditures on petitioners' behalf because the proposed adjustment was not supported by the record. The omission has the effect of reducing petitioners' unreported income by $ 5,007.
17. Mr. Collins also prepared petitioners' individual Federal income tax returns for the years 1988, 1989, 1990, and 1991.↩
18. Although he never asked petitioners about this, Mr. Collins testified that he thought the $ 319,109 was rent that Radtam owed Mrs. Bacon. If that were true, payments of rental amounts due from prior years would appear to be income to Mrs. Bacon in the year received.↩
19. Mr. Collins testified that Radtam's Federal income tax returns were not prepared or filed timely because details regarding cash disbursements were not available. Each of these income tax returns contained a Form 8275, Disclosure Statement. The instructions to Form 8275 provide:
Form 8275 is used by taxpayers and income tax return preparers
to disclose items or positions, except those taken contrary to a
regulation, that are not otherwise adequately disclosed on a tax
return for purposes of avoiding certain penalties. The form is
filed to avoid the portions of the accuracy-related penalty due
to disregard of rules or to a substantial underpayment of income
tax if the return position has a reasonable basis. It can also
be used for disclosures relating to the preparer penalties for
understatements due to unrealistic positions or disregard of
rules.
The description of the items disclosed in Part I, General Information, of the form was the same for each year. The description provided was as follows: Gross receipts, Cost of Sales, Payroll and other Expenses.
The instructions for completing Part II of the form, Detailed Explanation, provide that a taxpayer's disclosure must include:
(1) A description of the relevant facts and the nature of the
controversy affecting the tax treatment of the item, or
(2) A concise description of the legal issues presented by these
facts.
The detailed explanation provided on Radtam's Federal income tax returns for its fiscal years ending 1990, 1991, and 1992 was the same for each year. The explanation provided was as follows: "Payroll, Sales and some expenses were established by other estimates and means. Due to certain records which could not be reconstructed or documented."
Account No. XX-XX0672.Account No. XX-XX0672.
↩ The Federal income tax returns for the fiscal years ending June 30, 1993 and 1994, also did not contain any balance sheet information.
21. Sec. 6653(b) provides, in part:
SEC. 6653(b). Fraud. --
(1) In general. -- If any part of any underpayment
* * * of tax required to be shown on a return 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.
The record is unclear on how the parties arrived at this
26. Mr. Bacon testified that he did not want to confuse the credit card company with the fact that he did not draw a salary but instead had substantial rental income. On their 1991 income tax return, petitioners reported $ 135,000 gross rents from property located at Route 73, Cinnaminson, N.J. (the property rented to Radtam on which the Jug Handle Inn is located). Petitioners' total net rental income reported for 1991 was $ 65,277. Petitioners reported gross rental receipts of $ 368,930, rental expenses, other than depreciation of $ 221,217, and depreciation of $ 82,435 on their Schedule E, Supplemental Income and Loss Schedule.↩
1. During the years in issue, the only wage or salary income
from Bradam and Radtam reported by petitioners on their Federal
income tax returns consisted of wages reported by Mrs. Bacon.
From petitioners' First Fidelity account, No. XXX6161, aFrom petitioners' First Fidelity account, No. XXX6161, a
payment of $ 76,509 was made on Apr. 1, 1988; a $ 94,950 payment on May
1, 1988; and a $ 40,035 payment on June 1, 1988. From petitioners'
Security Savings & Loan account, No. XXXXX1019, a payment of $ 64,311Security Savings & Loan account, No. XXXXX1019, a payment of $ 64,311
was made on Nov. 27, 1988, and a $ 7,504 payment was made on Nov. 30,
1. Because of a typographical error in respondent's bank deposit analysis, "$ 15,580" should be "$ 15,850". As a result, petitioners' total unreported gross income is increased by $ 270.↩
1. Because of a typographical error in respondent's bank
deposit analysis, "$ 115,627" should be "$ 115,267". As a result,
petitioners' total unreported gross income is decreased by $ 360.↩
