DocketNumber： Docket Nos. 34853-84, 34408-85
Judges： Hamblen
Filed Date： 3/29/1989
Status： Precedential
Modified Date： 11/14/2024
*42
In May 1984, P was arrested for speeding in Florida. The arresting officer found $ 610,712.42 in cash in the automobile P was driving, as well as some marijuana, two controlled substances, drug paraphernalia, and P's passport. P claimed ownership of the cash. P further, through certain "drug ledgers," was linked with drug purchases totaling $ 3,053,430 made in 1983 and 1984. Using the cash-expenditures method of income reconstruction, R determined that P had unreported income from drug trafficking for 1983 in the amount of the drug purchases, and for 1984 in the amount of the drug purchases, the cash found in his possession, and estimated living expenses for that year. P objected to the admission of the drug ledgers as hearsay. P further refused to appear at trial, claiming a blanket
*662 Respondent determined deficiencies and additions to tax in petitioner's Federal income taxes as follows:
| Additions to tax | ||||
| Sec. | Sec. | Sec. | ||
| Year | Deficiency | 6653(b)(2) | 6654 | |
| 1983 | $ 861,136 | $ 430,568 | $ 52,737 | |
| 1984 | 963,717 | 481,859 | 60,589 | |
The issues for determination are:
1. Whether petitioner had unreported income for the years in issue in the amount determined by respondent.
2. Whether petitioner is liable for the addition to tax under section 6653(b) for fraud.
3. Whether petitioner is liable for the failure to pay addition to tax under
FINDINGS OF FACT
Some of the facts are stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioner*45 resided in Chatsworth, California, when he filed his petition in this case.
Petitioner met William Muniz (hereinafter referred to as Muniz) at the Flying Tigers Air Museum in Paris, Texas, sometime in March 1980. At that time, Muniz was repairing a DC-4 to prepare the airplane to fly to Colombia, South *663 America, to pick up a load of marijuana to bring back to this country.
Petitioner at that time was involved with the crew of a different DC-4 which also was being prepared to fly to Colombia, South America, for a load of marijuana to be brought back to the United States. The pilot of petitioner's airplane asked Muniz to teach petitioner the duties of a flight engineer so that he could go along on that mission.
Muniz and petitioner were together in Paris, Texas, in March and April 1980, off and on for a period of between 4 to 6 weeks. During this time, petitioner told Muniz that petitioner recently had returned from Colombia, South America, where he had gone on a "scouting mission" for the landing strip there and procedures and/or techniques in coming into Colombia and leaving with marijuana. Petitioner's passport reflects that he made a trip to Colombia, *46 South America, in 1979.
During the time Muniz and petitioner were together in Paris, they exchanged stories on how each man previously had smuggled marijuana across the border from Mexico into the United States.
While in Paris, Texas, petitioner was called "Chuch," "Chuck," and a couple of other derivatives of "Chuch." Muniz heard petitioner's friends and certain unnamed Mexicans call petitioner a name which sounded something like "Chack."
After he left Paris, Texas, Muniz did not see petitioner again until August 1982.
At this meeting petitioner told Muniz that petitioner had just flown in a load of marijuana from Mexico to Colorado in an Aero Commander airplane recently purchased by petitioner. He also told Muniz that petitioner wanted to hire a new pilot to do the same thing. Petitioner wanted to replace the old pilot because petitioner was having trouble getting the money for the marijuana the pilot was given to sell.
Petitioner hired Muniz to pilot petitioner's airplane to smuggle marijuana into the United States from Mexico. Muniz was to be paid $ 50,000 for this purpose.
After this meeting, petitioner returned to California to collect additional money from the sale of the*47 marijuana he *664 recently had smuggled into the country. One week later, Muniz flew to San Diego to begin the new drug smuggling venture with petitioner.
Petitioner was in charge of running the whole operation pertaining to the smuggling of marijuana from Mexico to Colorado in his Aero Commander. Other individuals were involved with petitioner in this endeavor, *48 In September 1982, Muniz flew petitioner's airplane to Guadalajara, Mexico, to bring back a 600- to 850-pound load of marijuana. The mission was aborted, however, when Muniz's guide was not able to locate the landing strip there. Muniz returned to the United States and landed in McAllen, Texas, where the plane was met by agents of the U.S. Customs Service, the Drug Enforcement Administration (hereinafter referred to as DEA), and others. Since there was no contraband on the plane, the Government agents let Muniz go on his way.
As soon as Muniz saw petitioner following the aborted mission, Muniz suggested that the operation be terminated. Petitioner, however, told Muniz that petitioner was under pressure and that he wanted to follow through with the operation. Petitioner offered Muniz $ 75,000 and some marijuana to sell as an inducement to continue the operation. Furthermore, at the suggestion of the "head man" in Los Angeles, petitioner gave Muniz the Aero Commander. The airplane at the time was worth between $ 30,000 and $ 40,000. Muniz and petitioner parted company sometime after this; Muniz never actually flew a load of marijuana with or for petitioner.
Muniz testified at*49 the trial under a grant of immunity pursuant to an arrangement with the U.S. Attorney, *665 Tucson, Arizona. The terms of the grant of immunity are not in the record.
On March 23, 1984, officers of the Pima County, Arizona, sheriff's office (hereinafter referred to as the sheriff's office) responded to a burglary-in-progress call at a residence at 11481 East Speedway, Tucson, Arizona (hereinafter referred to as the Speedway residence). Upon entering the Speedway residence, the officers observed a large quantity of marijuana. The officers then arrested the persons found on the premises.
An officer with the sheriff's office contacted Roger Wallace, an agent with the DEA in Tucson, about the marijuana found at the Speedway residence. After the DEA agents arrived at the Speedway residence, the sheriff's office asked the DEA to assume jurisdiction over the case.
The DEA agents that day obtained warrants authorizing the search of the Speedway residence and a residence at 521 South Placita Quince, Tucson, Arizona (hereinafter referred to as the Placita Quince residence). Under these search warrants, the DEA agents seized approximately 30,000 pounds of marijuana, drug ledgers *50 and other papers, some weapons, and some drug paraphernalia at the Speedway residence and approximately 10,000 pounds of marijuana, drug ledgers and other papers, and drug paraphernalia at the Placita Quince residence.
Based on the information seized at the Speedway and Placita Quince residences, the DEA agents obtained search warrants on March 26, 1984, for a residence at 1000 North Camino Cordon, Tucson, Arizona (hereinafter referred to the Camino Cordon residence), and 3492 East Calle Chica, *51 Tucson, Arizona (hereinafter referred to as the Calle Chica residence). The DEA agents seized additional drug ledgers at the Camino Cordon and Calle Chica residences.
Jean Sweetser (hereinafter referred to as Sweetser), and Lea M. Petersen (hereinafter referred to as Petersen), leased the Placita Quince residence pursuant to a lease agreement *666 which commenced April 24, 1983. An unidentified male, not petitioner, gave Sweetser money to pay the rental provided for under the lease and to make payments of $ 100 each to herself and to Petersen as compensation for entering into the lease. Although Sweetser and Petersen leased the residence and made the rental payments, neither one of them ever lived there during the time they leased the residence. Petersen began dating petitioner sometime before Christmas 1983, and married him sometime in 1984, but after March 1984.
Seven persons, including Guillermo Soto-Leal (hereinafter referred to a Soto-Leal), Ricardo Bustamante, Israel Valles-Valencia, Sweetser, and Petersen, but not petitioner, were indicted on Federal criminal charges based on information derived from the drug ledgers and other items seized by the DEA agents at the *52 Speedway, Placita Quince, Camino Cordon, and Calle Chica residences (hereinafter referred to as the stash houses). *53 upon motion for directed verdict at the conclusion of the Government's presentation.
At the time of her arrest in connection with the seizure of the 10,000 pounds of marijuana by the DEA at the Placita Quince residence, Petersen gave her resident address as 510 South Grinnell, Tucson, Arizona (hereinafter referred to as the Grinnell residence). At that time, petitioner held legal title to the Grinnell residence.
On May 10, 1984, petitioner was stopped for speeding and arrested by a Florida highway patrol officer in Madison *667 County, Florida. Petitioner was the only person in the automobile when he was arrested. At the time of his arrest, the automobile petitioner was driving contained $ 610,712.42 in U.S. currency, which petitioner acknowledged to be his property, 55.6 grams of marijuana, amounts of diazepam and flurazepam (two controlled substances), drug paraphernalia, and his passport.
On October 9, 1984, petitioner pled guilty to attempted possession of the controlled substances and possession of the drug paraphernalia, both of which are misdemeanor offenses under the laws of the State of Florida.
Pursuant to a forfeiture proceeding in the State of Florida, petitioner*54 acknowledged that at least $ 105,000 of the $ 610,712.42 found in his possession when he was arrested was contraband. Consequently, pursuant to Florida law, petitioner forfeited the $ 105,000 to the State of Florida.
On or about May 11, 1984, John Gay (hereinafter referred to as Gay) interviewed petitioner at the Madison County, Florida, jail (hereinafter referred to as the jail). At that time and beyond, Gay was an Internal Revenue agent, specifically a Special Enforcement Program agent, working out of the Jacksonville, Florida, District Office of the Internal Revenue Service. As a Special Enforcement Program agent, Gay examined mainly people allegedly involved in illegal activities, specifically smuggling in marijuana or cocaine. Gay advised petitioner that Gay was a revenue agent and was concerned with the civil matters of the case, that is, the taxation of the money found in petitioner's possession when he was arrested.
At the time Gay interviewed petitioner at the jail, Gay did not give petitioner any "
Based on information Gay received from a special agent with the Criminal Investigation Division of the Internal Revenue Service, Tucson, Arizona, Gay concluded that petitioner was involved with the marijuana smuggling operation discovered at the stash houses in Tucson, Arizona. Portions of the drug ledgers allegedly pertaining to petitioner were sent to Gay by that special agent.
On or about May 17, 1984, Gay telephoned (602) 745-1028. A woman answered; Gay identified himself and asked to speak to petitioner. Petitioner came to the telephone and spoke to Gay. Gay identified petitioner as being the individual on the telephone from the sound of his voice which Gay recognized from their prior conversation and from the context of their conversation. The telephone number 745-1028 is contained *56 within several of the drug ledgers seized at the stash houses in conjunction with the names "Chuck," "Chack," or "Cha." The word "Chuck" and/or "Chack" also was associated in several of the drug ledgers with a list of drug purchases made between June 24, 1983, and March 21, 1984, totaling $ 3,053,430.
This telephone number is an unlisted number at the Grinnell residence, assigned to petitioner's mother. Petitioner and a former spouse purchased the Grinnell residence in 1974. This former spouse executed a quit claim deed in 1975 conveying all of her right, title, and interest in the Grinnell residence to petitioner. Petitioner executed a deed of trust and assignment of rents as to the Grinnell residence on or about June 21, 1977, for which a deed of release and full reconveyance in petitioner's favor was executed on January 16, 1980. Petitioner executed a quit-claim deed on May 17, 1984, conveying to his mother his interest in the Grinnell residence. The record does not establish what, if any, consideration petitioner's mother gave him for this property interest or its fair market value at the time of the conveyance.
Using the cash-expenditures method of income determination and*57 the drug ledgers found at the stash houses, Gay determined that petitioner had unreported income for 1983 and 1984 in the following amounts: *669
| 1983 | |
| Marijuana Purchases | |
| Date | Amount |
| June 24, 1983 | $ 18,000 |
| June 29, 1983 | 66,500 |
| July 5, 1983 | 18,000 |
| July 10, 1983 | 42,000 |
| July 11, 1983 | 11,000 |
| July 12, 1983 | 4,000 |
| July 12, 1983 | 19,000 |
| July 14, 1983 | 59,000 |
| July 16, 1983 | 58,700 |
| July 17, 1983 | 40,000 |
| July 27, 1983 | 44,200 |
| July 29, 1983 | 20,000 |
| July 30, 1983 | 50,000 |
| Aug. 15, 1983 | 209,750 |
| Aug. 24, 1983 | 140,000 |
| Aug. 29, 1983 | 75,000 |
| Aug. 29, 1983 | 47,000 |
| Sept. 2, 1983 | 17,000 |
| Sept. 7, 1983 | 30,000 |
| Sept. 8, 1983 | 75,500 |
| Sept. 15, 1983 | 20,000 |
| Oct. 21, 1983 | 75,000 |
| Dec. 6, 1983 | 140,000 |
| Dec. 9, 1983 | 19,000 |
| Dec. 18, 1983 | 439,000 |
| 1,737,650 | |
| 1984 | |
| Marijuana Purchases | |
| Date | Amount |
| Jan. 4, 1984 | $ 12,480 |
| Jan. 11, 1984 | 164,800 |
| Feb. 15, 1984 | 500,000 |
| Feb. 18, 1984 | 36,000 |
| Feb. 25, 1984 | 142,500 |
| Mar. 7, 1984 | 119,000 |
| Mar. 16, 1984 | 250,000 |
| Mar. 21, 1984 | 91,000 |
| Cash in possession of petitioner at time of arrest in Madison | 610,712 |
| County, Florida, on May 10, 1984 | |
| Estimated personal living expenses ($ 1,000 times 12) | 12,000 |
| 1,938,492 | |
*670 Following*58 his arrest in Madison County, Florida, on May 10, 1984, petitioner paid the following amounts to attorneys or hospitals:
| Payee | Amount paid | Date | |||||||||||||||||||||||||||||||
| Lewis & Roca | $ 50,000.00 | June 1984 | |||||||||||||||||||||||||||||||
| Lewis & Roca | 24,550.00 | Oct. 1984 | |||||||||||||||||||||||||||||||
| Martin S. Page | 16,000.00 | Aug. 1984 | |||||||||||||||||||||||||||||||
| Edwin B. Browning, Jr. | 15,000.00 | Aug. 1984 | |||||||||||||||||||||||||||||||
| Michael J. Brown | 53,500.00 | 1984 | |||||||||||||||||||||||||||||||
| Steven Bosse | 2,000.00 | 1984 | |||||||||||||||||||||||||||||||
| St. Luke's Hospital | 6,228.65 | 1984 | |||||||||||||||||||||||||||||||
| Total | *59 1981. Petitioner filed Federal individual income tax returns reflecting income tax liability for the following years:
Petitioner did not file Federal individual income tax returns for his 1970, 1976, 1977, 1979, 1982, 1983, or 1984 years. Petitioner's Federal individual income tax returns for the 1980 and 1981 years show his occupation as "truck driver" and wages of $ 3,156 and $ 6,312, respectively. Other than $ 80 in income from refunds of State and local income taxes, the returns for 1980 and 1981 show no income other than wages. *671 On May 23, 1984, respondent issued a jeopardy assessment against petitioner pursuant to section 6861 based on the alleged drug purchases made in 1983. Respondent further terminated petitioner's 1984 tax year as of May 10, 1984, to collect the taxes then due, pursuant to section 6851. The amount assessed was based on the cash recovered in Florida and the alleged drug purchases made in 1984. Petitioner sought review of these jeopardy and termination assessments*60 in the U.S. District Court, District of Arizona. The District Court entered judgment in favor of the United States, finding that the jeopardy and termination assessments were reasonable. See Respondent issued a notice of deficiency on July 17, 1984, for the 1983 year, and on June 14, 1985, for the 1984 year, in the amounts set forth above. Petitioner timely petitioned this Court for a redetermination of respondent's deficiency determinations. OPINION At the trial, petitioner raised objections on various grounds to certain of respondent's documentary and testimonial evidence which we admitted subject to those objections and further arguments to be presented in the briefs. Since some of this evidence is critical to the outcome of this case, we will address first our determination as to its admissibility. The rules of evidence applicable to Tax Court proceedings are the rules applicable in trials without jury in the U.S. District Court for the District of Columbia. These include the Federal Rules of Evidence *61 (hereinafter referred to as FRE). See At trial, respondent sought to introduce into evidence the drug ledgers which were found at the stash houses. Petitioner *672 objected, arguing that the drug ledgers are hearsay as to petitioner and, therefore, not admissible under *673 Unquestionably, the drug ledgers are hearsay as to petitioner. Respondent contends, however, that the drug ledgers satisfy one or more exceptions to the hearsay rule and, thus, are admissible. For this purpose, respondent relies on *64 *674 To support his arguments that the drug ledgers are admissible under one of the cited hearsay exceptions, respondent asks this Court to take judicial notice of the Soto-Leal criminal proceeding. Under Such findings do not satisfy the two tests of Cf. Here, we are concerned with a preliminary determination regarding the admissibility of evidence, not with the taking of notice as substantive evidence. *70 We next consider whether the drug ledgers are admissible against petitioner in this case. First, respondent contends that the drug ledgers are admissible under For a memorandum or record to be admissible as a business record, it must be (1) made by a regularly conducted business activity; (2) kept in the regular course of that business; (3) the regular practice of that business to make that memorandum; and (4) made by a person with knowledge or from information transmitted by a person with knowledge. It is not essential that the offering witness be the one who prepared the records. Any person in a position to attest to their authenticity is competent to lay the requisite foundation for admissibility. No witness at the instant trial testified as to Soto-Leal's record-keeping system. Furthermore, we agree with petitioner that judicial notice of the criminal proceeding would not support the admission of the drug ledgers under Next, respondent contends that, as suggested by the Court at trial, once seized the drug ledgers became part of a Government report and, as such, are admissible under *679 Lastly, respondent contends that the drug ledgers are admissible under In applying The drug ledgers were identified in the Soto-Leal criminal proceeding as having been written for the most part by a *680 defendant in an enormous drug smuggling operation. The entries were self-incriminating, made with regularity, and relied upon by the writer. See Several of the drug ledgers contained the words "Chuck," "Chack," and/or "Cha." These words were associated in the drug ledgers with an unlisted telephone number registered to petitioner's mother at the Grinnell address. Gay discovered in May 1984 that petitioner could be reached at this number. Therefore, the drug ledgers can be linked to petitioner which further supports their trustworthiness. See The drug ledgers are being offered by respondent both to link petitioner to an illegal, income-producing activity and to support the respondent's *79 determination of unreported income. Therefore, it is clear that the drug ledgers are material. Petitioner, not surprisingly, refused to furnish respondent any information regarding petitioner's income for the years at suit and maintained no records of his own sufficient for respondent to reconstruct his income. In light of the status of the Soto-Leal criminal proceeding at the time of this *681 trial, *80 The portion of the drug ledgers upon which respondent relies were made available to petitioner at the commencement of the jeopardy and termination assessments hearing held in 1984 in the U.S. District Court, District of Arizona. Respondent has satisfied all of the requirements for the admission of the drug ledgers under 2. At trial, petitioner interposed an objection to Agent Gay's testimony relating to statements made by petitioner on May 11, 1984, while in jail in Florida. Petitioner argued that the statements, made while he was in custody, should *682 be excluded because Gay did not give to petitioner the warnings mandated by It has been said that: At the heart of Miranda are the propositions that the The There the Court noted, at 4, that: It is true that a "routine tax investigation" may be initiated for the purpose*83 of a civil action rather than criminal prosecution. To this extent tax investigations differ from investigations of murder, robbery, and other crimes. But tax investigations frequently lead to criminal prosecutions, just as the one here did. In fact, the last visit of the revenue agent to the jail to question petitioner took place only 8 days before the full-fledged criminal investigation concededly began. And, as the investigating revenue agent was compelled to admit, there was always the possibility during his investigation that his work would end up in a criminal prosecution. We reject the contention that tax investigations are immune from the In At the trial, this Court advised the parties that we would take petitioner's Respondent argues that the Court can and should apply a negative inference from petitioner's reliance on a blanket It is well established that the In a civil proceeding we may draw a negative inference from a party's invocation of his We are satisfied here that, although at the time this case was tried no criminal charges against petitioner were pending, a real possibility of future charges being brought did exist. *91 Nor can we assume that all matter to which petitioner could have testified necessarily would have been protected by the In the instant case respondent has presented sufficient other, admissible evidence against petitioner linking him to the illegal sale of marijuana. Thus, we do not need to, nor do we, draw any negative inference from petitioner's assertion of his We believe that, based on this record and the circumstances*92 present here, it is proper for us to draw from petitioner's failure to testify or present other evidence relating thereto the inferences that he did not receive any gifts, legacies, inheritances, or devises in 1983 or 1984 or have any other, nontaxable source of funds for these years; and that he did not have any cash hoard as of January 1, 1983. We will draw no other inferences from petitioner's exercise of his B. THE SUBSTANTIVE ISSUES 1. In the instant case, petitioner filed no Federal income tax returns for the years in suit. Respondent, however, determined that petitioner had taxable income for these years in the amounts set forth above. Petitioner maintained no books and records for 1983 or 1984 sufficient for respondent to determine his income for those years; *94 Petitioner contends that the notices of deficiency are not entitled to a presumption of correctness. Petitioner also argues that the method used by respondent to determine petitioner's tax liability for the years at suit is arbitrary and erroneous. On the basis of the record here, we find that respondent's determination is not arbitrary or erroneous and sustain his determination of petitioner's unreported income as set forth in the notices of deficiency. The general rule is that the taxpayer has the burden of proving the Commissioner's determination of a deficiency to be wrong. Courts have recognized a limited exception to this general rule where respondent alleges that the taxpayer has unreported illegal income. See In The Ninth Circuit stated further that a "deficiency determination which is not supported by the proper foundation of substantive evidence is clearly arbitrary and erroneous." Thus, the Ninth Circuit requires that respondent come forward with substantive evidence establishing a "minimal evidentiary foundation" in all cases involving the receipt of unreported income to preserve the statutory notice's presumption of correctness. The Ninth Circuit has made it clear, however, that once the Government has carried its initial burden of introducing some substantive evidence linking the taxpayer with income-producing*99 activity, the taxpayer has the burden to rebut the presumption of correctness of respondent's deficiency determination by establishing by a preponderance of the evidence that the deficiency determination is arbitrary or erroneous. See Respondent here has introduced admissible, substantive evidence clearly linking petitioner to the sale of marijuana and the receipt of unreported income. Muniz's uncontroverted testimony placed petitioner, at a minimum, in the business of importing marijuana as early as*100 1980, and further linked petitioner to the business of importing and selling marijuana at least through September 1982. Petitioner challenges Muniz's credibility. However, his challenge rests solely on the basis that Muniz was testifying under a grant of immunity. We do not find this a sufficient basis in itself to disregard Muniz's testimony. We observed Muniz's demeanor on the stand and found his testimony to be direct, clear, consistent, and believable. We find him to be a credible witness. The drug ledgers specifically link petitioner to the sale of marijuana in 1983 and 1984. We find it significant that Muniz placed petitioner in the business of smuggling and selling marijuana less than one year prior to the first entry in the drug ledgers which identifies purchases by "Chuck" or "Chack" in June 1983. See Moreover, in the We did not agree with petitioner, citing We find that respondent has met his burden of introducing evidence linking petitioner to the illegal activity upon which the deficiency determination is based. The "naked assessment" cases cited by petitioner are inapplicable in this case because respondent has produced substantive evidence of petitioner's extensive activities in illegally selling marijuana. Petitioner therefore has the burden of proving that respondent's determination is arbitrary or erroneous. Petitioner has failed to carry this burden. Petitioner offered no proof that he was not involved in drug trafficking in 1983 or 1984. He failed to present any witnesses, such as family members or friends, to rebut respondent's evidence regarding the illegal source of income. The failure of a party to call such available witnesses that purportedly have knowledge about relevant facts provides sufficient basis to infer that the testimony of such*103 witnesses would not have been favorable to the party. The record establishes that petitioner was involved in selling drugs during the years in issue. Muniz's testimony places petitioner in the drug trafficking business. Muniz further links petitioner to the nicknames "Chuck" and "Chack." The drug ledgers connect the nicknames "Chuck" and/or "Chack" to an unlisted telephone number at the Grinnell residence. Gay's testimony further connects petitioner to that unlisted telephone number. The nicknames "Chuck" and/or "Chack" are associated in the drug ledgers with a list of drug purchases*104 made between June 24, 1983, through March 21, 1984. From the totality of the record here, we conclude that references to "Chuck" and "Chack" in the drug ledgers are references to petitioner. Moreover, when apprehended on May 10, 1984, police officers found $ 610,712.42, some marijuana, two other controlled substances, and drug paraphernalia in the car driven by petitioner. At that time, petitioner claimed ownership of the money. Subsequently, in a Florida forfeiture proceeding, petitioner admitted that $ 105,000 of the $ 610,712 was contraband. The evidence of petitioner's minimal reported taxable wages for the years prior to 1983 makes it difficult to believe that petitioner could have accumulated a substantial cash hoard from wages. Nor does the record establish any other legal source for the $ 610,712.42 found in his possession when he was arrested, or for the $ 167,278.65 paid out following his arrest on May 10, 1984, to his attorneys and St. Luke's Hospital. On this record, we find that respondent properly included the cost of the purchases of marijuana and the $ 610,712 in petitioner's income for 1983 and 1984. Respondent also included $ 12,000 as income in 1984 as petitioner's*105 personal living expenses. Petitioner presented no evidence to rebut this estimate, and we find the amount reasonable. Therefore, we find that respondent also properly included this amount in petitioner's income for 1984. Petitioner presented no evidence in this case to counter the evidence presented by respondent. Rather, on brief, petitioner argues that respondent has failed to satisfy the *693 essential conditions precedent to the use of the "cash expenditures" method in reconstructing petitioner's income by not giving petitioner credit for the cost of the marijuana allegedly purchased; not making a reasonable attempt to establish petitioner's beginning net worth with respect to 1983 and 1984; and not negating nontaxable sources for the cash-expenditures. We disagree with petitioner's arguments for the following reasons. Consistent with the broad power to compute taxable income, The absence of statutory guidelines suggests that Congress intended that respondent should have great latitude in making determinations of liability, particularly where the taxpayer files no returns and refuses to cooperate in the ascertainment of his income. Thus, respondent is entitled*107 to use any reasonable means of reconstructing income. Further, he is given greater latitude in determining which method of reconstruction to apply where the case involves an illegal enterprise in which the taxpayer has failed to file a return and has kept no records. Nor is mathematical exactitude required of respondent, for if it were, it "would *694 be tantamount to holding that skillful concealment is an invincible barrier to proof." Respondent determined the deficiencies against petitioner using the cash-expenditures method. The "cash-expenditures" method is a variant of the net-worth method of establishing unreported taxable income. The net-worth method involves the ascertaining of a taxpayer's net worth at the beginning and end of a tax period, and deriving that part of any increase not attributable to reported income. This method, while effective against taxpayers who channel their income into investment or durable property, is unavailing "against the taxpayer who consumes his self-determined tax free*108 dollars during the year and winds up no wealthier than before." We agree with petitioner that the requirements set forth in We do not agree, however, that respondent's failure here to determine petitioner's beginning and closing net worth for each of the years in suit is necessarily fatal to his case. In a typical net worth case, precise figures are needed for opening and closing net worth for all of the years involved to determine any relevant increase in net worth for these years. However, in the cash-expenditures method, reasonable *695 certainty may be established without a determination of the precise net worth figures, "as long as the proof * * * makes clear the extent of any contribution which beginning resources or a diminution of resources over time could have made to expenditures." Formal net worth statements are not required as long as sources of available funds are identified and quantified. Where the taxpayer has refused to produce books and records requested by respondent's agents, the taxpayer, not respondent, will be held accountable for any procedural or evidentiary consequences flowing from the declination. Petitioner complains about the sufficiency of respondent's investigation; however, he offered respondent no leads whatsoever as to any possible sources of nontaxable receipts for the years in suit. Respondent introduced evidence showing that petitioner filed no Federal individual income tax returns for 1970, 1976, 1977, 1979, and 1982. Respondent introduced further evidence showing that the tax returns petitioner filed for 1969, 1971 through 1975, and 1978 reflected no or only a nominal tax liability and minimal taxes withheld from which we infer that petitioner reported only a marginal amount of taxable income for those years. The tax returns petitioner filed for 1980 and 1981 report taxable wages of only $ 3,156 and $ 6,312, respectively, for those years, and report no interest or dividend*113 income. We infer from this evidence that, for the years prior the years in issue, petitioner could not have accumulated from wages the assets or cash hoard he would have needed to be available at the beginning of the years in issue in order to attribute from those sources the cash expenditures determined here by respondent. The record discloses no other legal source for those expenditures. Nor is there any evidence that petitioner sold any assets before the time he was arrested in Florida. The record contains no evidence that petitioner had any cash hoard at the beginning of the relevant period or received any nontaxable receipts during the years involved in this case. Gay's testimony connects petitioner to the drug ledgers. Muniz's testimony and the drug ledgers link petitioner to the receipt of taxable income from the sale of marijuana as determined by respondent. We believe that, in light of the circumstances present here where petitioner has the burden of proof, has maintained no records, and has refused to cooperate with respondent, and where respondent has connected petitioner through substantive evidence to a *697 likely source for the expenditures and has shown *114 petitioner had no likely source for a decrease in net worth, at a minimum, petitioner has the burden of introducing some substantive evidence showing that at least some of the cash expenditures can be explained by a diminution of his net worth and/or from other nontaxable sources. Cf. Petitioner has the burden of proving error as to respondent's deficiency determination. Petitioner elected to present no evidence on this issue; the failure to do so must fall on his shoulders, not on respondent's. See Petitioner suggests further that the marijuana advanced to him is a nontaxable source for the marijuana purchases. *115 This argument, however, does not survive scrutiny. Petitioner's contention that the "fronting" of the marijuana supplies a nontaxable source for the marijuana purchases of more than twice the amount of taxable income reflected in the notices of deficiency can only be premised on an assumption that petitioner would have sold the marijuana for its cost to him. There is nothing in the record which would indicate that petitioner sold marijuana for philanthropic reasons, expecting no profit for his efforts. Common sense would dictate the conclusion that anyone who is in an illegal and dangerous business such as the dealing of drugs would demand a very large profit for his enormous risks. A 100-percent or better profit ratio does not seem unreasonable considering the nature of the illegal activity involved here. Petitioner presented no evidence establishing a lesser margin-of-profit. Petitioner has the burden of proof. He presented no substantive evidence on which we could base a lesser calculation of unreported income (for example, testimony as to the street value of the marijuana which the drug ledgers *698 indicate petitioner purchased). The drug ledgers substantiate the*116 amount of the drug purchases. Absent substantive evidence from petitioner showing respondent's determination erroneous, under the facts present here, we uphold respondent's determination. Petitioner's alternative argument that respondent failed to give petitioner credit for his costs of goods also must fail. Respondent reconstructed petitioner's income for 1983 and 1984 primarily on the basis of the amount of money he paid for the marijuana he purchased in those years. Petitioner did not provide any records from which respondent could determine either net sales or inventory. Therefore, respondent did not have sufficient information for 1983 and 1984 to determine petitioner's cost of goods sold or net profit. Nor does the record here contain this information. We would distort income if, on this record, we allowed petitioner an expense for cost of goods sold in the manner suggested by petitioner. Based on the record here, we find respondent's method to be reasonable and hold for him on this issue. 2. Petitioner presented no evidence contesting respondent's determination that he is subject to self-employment tax under section 1401. Respondent found that*117 petitioner earned income in the amount of $ 1,737,650 for 1983 and $ 1,938,492 for 1984. We find petitioner subject to self-employment tax on this amount. 3. Respondent determined that petitioner is liable for additions to tax under section 6653(b)(1) and (2) for fraudulently understating his income in 1983 and 1984. Section 6653(b)(1) provides that if any part of the underpayment is due to fraud, there will be an addition to tax equal to 50 percent of the entire underpayment. The addition imposed by section 6653(b)(2), however, applies only to the portion of the underpayment that is attributable to fraud. Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing. 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. Sec. 7454(a); Rule 142(b). To meet*118 this burden, respondent must show that petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. The existence of fraud is a question of fact to be resolved upon consideration of the entire record. *700 *120 Courts have relied on a number of indicia of fraud in deciding section 6653(b) cases. Although no single factor is necessarily sufficient to establish fraud, the existence of several indicia is persuasive circumstantial evidence of fraud. A pattern of underreporting income over an extended period of time is indicative of fraud. Respondent cannot rely on the taxpayer's failure to prove error in respondent's determination to meet his burden of proving fraud. In After a thorough examination of the record in this case, we conclude that petitioner intended to evade taxes which he knew he owed by conduct intended to conceal, mislead, *701 and prevent the collection of taxes. A number of the badges of fraud listed in Petitioner did not file returns for 1982 through 1984 even though during those*123 years he was actively engaged in drug dealing. His failure to file for 2 consecutive years although he received large amounts of income "is persuasive circumstantial evidence of fraud." Petitioner's repeated failure to file, coupled with failure to maintain or present records to respondent's agents is further evidence of an attempt to conceal income and manifests an intent not to pay the tax. The unreported income here was from illegal sources, another circumstance which may be considered in the overall evaluation of petitioner's fraudulent intent. Other evidence of petitioner's intent to evade tax is reflected by the circumstances of the understatement. Petitioner was convicted of various crimes relating to his transactions with the New York City Board of Education. The activity here involves the selling of an illegal substance; this can be considered in determining whether*125 he deliberately failed to report the receipt of income from this activity and to file returns for 1983 and 1984. In addition, to explain the $ 610,712 in cash found in his possession when he was arrested, petitioner told Gay that he was in the gold and jewelry business and needed large amounts of cash to buy gold. The record contains no evidence that petitioner ever was involved in any legal occupation other than truck driving. We find his gold business explanation totally implausible and another indicia of fraud. Additional badges of fraud present here are dealing in cash, failure to file estimated payments, and failure to cooperate with respondent's agent in his attempt to reconstruct petitioner's taxable income for the years in suit. The evidence produced by respondent here clearly and convincingly proves petitioner's fraudulent intent to evade taxes for both 1983 and 1984. The unreported income is the sole source of the deficiency. Accordingly, we are compelled to find petitioner liable for the addition to tax under section 6653(b)(1) and (2) for*126 both years as determined by respondent. 4. Respondent also determined that petitioner is liable for additions to tax under To reflect the foregoing. Footnotes
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