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, unless otherwise indicated.
The issues for decision are: (1) Whether petitioners underreported their taxable income for the year 1987 in the amount of $ 130,232; (2) whether petitioners underreported their taxable income for the year 1988 in the amount of $ 85,231; (3) whether the above-mentioned understatements of income for 1987 and 1988 were attributable to fraud by Donald Ferry (petitioner); and (4) whether *514 petitioners are liable for an addition to tax under section 6661 for 1987 and 1988. Respondent has conceded that Sharon Ferry is not liable for the fraud addition.
FINDINGS OF FACT
Preliminary Matters
The stipulated facts and exhibits are incorporated by this reference.
When the petition in this case was filed, petitioners resided in Newark, Delaware. Petitioners are husband and wife and filed joint Federal income tax returns for the years in issue.
On their joint Federal income tax return for 1987, petitioners reported total income of $ 6,920 consisting of wages of $ 4,180.69, interest income of $ 206.31, and unemployment income of $ 2,533. They claimed a child care credit of $ 81 and showed a tax liability of zero. They also claimed (and apparently received as a refund) an earned income credit in the amount of $ 851. Petitioners claimed two children as dependents, Sean D. Ferry and Brent R. Ferry. On line 6 (c) (3), requesting the children's Social Security numbers, petitioners stated, "applied for".
On their joint Federal income tax return for 1988 petitioners reported wages of $ 5,665.10, interest of $ 63.80, and unemployment income of $ 4,920 for a total of $ 10,648.90. *515 They claimed and received as a refund an earned income credit of $ 793. Again, they listed the children as dependents and showed their Social Security numbers as "applied for".
Forms W-2 were attached to the returns. The Forms W-2 for Donald D. Ferry showed wages from Wayanne, 1108 South College Avenue, Newark, Delaware 19713, in the amount of $ 3,910.69 in 1987 and $ 5,665.10 in 1988. These forms were prepared by petitioner himself, not by Wayanne's normal payroll preparer, and petitioner's business associate, Wayne Wilberding, was not aware of them.
Using a combination of the bank deposits and specific items methods, respondent originally determined that petitioners understated their income for 1987 by $ 130,232 and for 1988 in the amount of $ 124,879. Prior to trial, respondent conceded $ 39,648 of the adjustment for 1988. Thus, respondent now claims petitioners' income for 1988 was understated in the amount of $ 85,231.
Respondent determined that petitioners failed to report the following amounts of bank deposits as income for the taxable year 1987:
I.H.R-L LTD bank account
$ 103,514
Ferry Associates bank account
22,503
$ 126,017
plus
Personal expenses paid from
MIT LTD bank account
8,126
Less W-2 reported income from
Wayanne, Inc.
(3,911)
Difference
4,215
1987 understatement
130,232
*516 Respondent determined an understatement based on bank deposits in 1988 as follows:
Based on all the evidence in the record, we hold that the amounts paid by petitioner on behalf of Wayanne and its progeny were investments, not loans.
The Partnership Return
Petitioner prepared the 1986 Form 1065 Federal partnership income tax return for the restaurant and signed the return as a general partner. This return was filed for the tax year ended June*523 30, 1987. The return is filed in the name of Iron Hill Restaurant-Lounge Ltd., employee identification number (EIN) 51-0290454, c/o 404 Arbour Drive, Newark, Delaware 19713 (petitioner's home address). It states the business started February 1, 1986. It states that there are two partners in the partnership, and that it is not a limited partnership. The partnership reported $ 1,011.39 ordinary income.
However, a Schedule K-1 (Partner's Share of Income, Credits, Deductions, etc.) is attached, which conflicts with and contradicts the Form 1065. The Schedule K-1 lists the partner's name and address as Iron Hill Restaurant-Lounge Inc., 1108 S. College Ave., Newark, Delaware 19713 (the restaurant's location). The partner's EIN is shown as 23-2353924. However, the partnership's name and address on the Schedule K-1 is I.H.R.L., Ltd., c/o 404 Arbour Dr., Newark, Delaware., with the EIN previously given for Iron Hill Restaurant-Lounge Ltd. on the Form 1065. The Schedule K-1 indicates that the partner (Iron Hill Restaurant-Lounge, Inc.) is not a general partner, that it is a corporation, and that the partner's percentage of profit and loss is "100%". The Schedule K-1 thus shows *524 the partner's distributive share of ordinary income as $ 1,011.39.
Respondent's records show no returns filed for 1987 or 1988 for Iron Hill under either of the two EIN's shown on the partnership return: 51-0290454 or 23-2353924. We find that no such returns were filed for 1987 or 1988. Nor were income tax returns filed from 1980 through the years in issue for R.E.P., Ltd., Real Estate Plus, or Ferry Associates.
In 1984, petitioner opened a bank account at Delaware Savings and Loan Association in the name of "Ferry Associates". Petitioner listed his home address as the business address of Ferry Associates, and monthly bank statements were sent to his home. He represented to the bank that he was the owner of Ferry Associates.
The account was opened under the Social Security number (but not the name) of petitioners' son, Sean Ferry. In 1984, petitioners' sons were 10 and 6 years old.
Petitioners, along with petitioner's parents, had check-signing authority for this account and, in fact, used it as their personal checkbook. I.H.R-L Bank Account
*527 In 1985, petitioner opened a checking account at Second National Federal Savings Bank in the name of I.H.R-L LTD (IHRL). Although I.H.R-L is an abbreviation for Iron Hill Restaurant-Lounge, restaurant funds were not supposed to be deposited in this account, but in the MIT account. Wilberding did not have signature authority on the IHRL account -- in fact, he did not know it existed. Petitioners' home telephone number and home address were listed on the IHRL account, and monthly bank statements were sent there. Petitioner made deposits and had sole check-signing authority.
Petitioner deposited $ 103,514 into the account in 1987 and $ 47,458 in 1988. No one but petitioner used this account.
R.E.P., Ltd.
In February 1988, petitioner opened a checking account at Second National Federal Savings Bank in the name of R.E.P., Ltd. (REP). Petitioner listed his home telephone number and home address on the account, and monthly bank statements were sent to him there. Petitioner had sole check-signing authority.
During 1988 petitioners deposited $ 56,224 into the account. No proceeds from the Iron Hill or Wayanne were supposed to have gone into this account.
Respondent determined in the notice of deficiency that petitioner is liable for the additions to tax for fraud under section 6653(b)(1)(A) and (B) for 1987 and section 6653(b) for 1988. Respondent bears the burden of proof and must establish each element of fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Akland v. Commissioner, 767 F.2d 618">767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo 1983-249">T.C. Memo. 1983-249; Toussaint v. Commissioner, 743 F.2d 309">743 F.2d 309, 312 (5th Cir. 1984), affg. T.C. Memo. 1984-25; Wright v. Commissioner, 84 T.C. 636">84 T.C. 636, 639 (1985).*530 Respondent must prove fraud in each of the years involved. Drieborg v. Commissioner, 225 F.2d 216">225 F.2d 216, 220 (6th Cir. 1955), affg. in part and revg. in part a Memorandum Opinion of this Court dated Feb. 24, 1954.
Respondent must prove by clear and convincing evidence that: (1) An underpayment of tax exists for each of the years in issue, and (2) that some part of the underpayment is due to fraud. Sec. 7454(a); Rule 142(b); Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 698-699 (1989); Hebrank v. Commissioner, 81 T.C. 640">81 T.C. 640, 642 (1983); Mosteller v. Commissioner, T.C. Memo. 1986-505, affd. without published opinion 841 F.2d 1123">841 F.2d 1123 (4th Cir. 1988).
Respondent cannot meet her burden of establishing the existence of an underpayment on the basis of petitioner's failure to meet his burden of proving error in the determination of deficiencies. Drieborg v. Commissioner, supra at 218; Parks v. Commissioner, 94 T.C. 654">94 T.C. 654, 660-661 (1990). However, respondent has amply met her burden.
Where a taxpayer*531 fails to keep books and records sufficient to establish the amount of his or her tax liabilities, or if the records maintained do not clearly reflect income, then the Commissioner is authorized to reconstruct income by any method which, in her opinion, clearly reflects the taxpayer's income. Sec. 446; Harbin v. Commissioner, 40 T.C. 373">40 T.C. 373, 377 (1963); sec. 1.446-1(b)(1), Income Tax Regs. The Commissioner may use any reasonable method to compute the income, and no particular method is required. Campbell v. Guetersloh, 287 F.2d 878">287 F.2d 878, 880 (5th Cir. 1961). The Commissioner's method need not be exact but must be reasonable. Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954); Rowell v. Commissioner, 884 F.2d 1085">884 F.2d 1085 (8th Cir. 1989), affg. T.C. Memo 1988-410">T.C. Memo. 1988-410.
The use of the bank deposits method for computing income has long been sanctioned by the courts. Estate of Mason v. Commissioner, 64 T.C. 651">64 T.C. 651, 656-657 (1975), affd. 566 F.2d 2">566 F.2d 2 (6th Cir. 1977). Bank deposits are prima facie evidence of income. *532 Estate of Hague v. Commissioner, 132 F.2d 775">132 F.2d 775 (2d Cir. 1943), affg. a Memorandum Opinion of this Court. The bank deposits method assumes that all money deposited in a taxpayer's bank account during a given period constitutes taxable income, unless shown to derive from a nontaxable source. Price v. United States, 335 F.2d 671">335 F.2d 671, 677 (5th Cir. 1964).
Although requested, petitioner did not supply respondent with books and records showing sources of income. Petitioner told the agent that he and his wife had no bank accounts. Respondent's agent identified their bank accounts through third party information provided from summonses issued to banks in northern New Castle County, Delaware. Although the bank accounts included in respondent's analysis were not in petitioners' names, there was ample evidence to attribute them to petitioners.
All three bank accounts examined were opened by petitioner. He made the deposits in the accounts. On the IHRL and R.E.P., Ltd. accounts petitioner had sole check signing authority; on the Ferry Associates account this authority was shared with Mrs. Ferry and allegedly with petitioner's parents, *533 although there is no evidence they used the account. Petitioners' home address was listed on the accounts, and monthly bank statements were sent there.
There is no credible evidence that the deposits were from nontaxable sources. We simply do not believe that the money came from gifts or loans from petitioner's father. Petitioner failed to call any family members (his mother, sister, or brother-in-law) in an effort to verify his stories. We thus infer that their testimony would have been unfavorable. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158">6 T.C. 1158 (1946), affd. 162 F.2d 513">162 F.2d 513 (10th Cir. 1947).
Petitioner did not produce any evidence of so-called flow-throughs. Neither did he explain away the payment of his personal expenses (sometimes disguised in corporate names) out of the MIT account. Respondent has met her burden of showing the understatements of income for both years in issue.
Fraud is actual, intentional wrongdoing, and the intent is the specific purpose to evade a tax believed to be owing. Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner, 394 F.2d 366">394 F.2d 366, 377 (5th Cir. 1968),*534 affg. T.C. Memo 1966-81">T.C. Memo. 1966-81. Respondent must show that petitioner intended to evade taxes by conduct calculated to conceal, mislead, or otherwise prevent the collection of the tax. Stoltzfus v. United States, supra at 1004; Webb v. Commissioner, supra at 377.
Fraud is never to be presumed. Toussaint v. Commissioner, supra at 312; Webb v. Commissioner, 394 F.2d at 377. The existence of fraud is a question of fact to be determined on the basis of the entire record. 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). Fraud, however, can seldom be proved by direct proof of the taxpayer's intention. Fraud can be established by circumstantial evidence and by reasonable inferences drawn from the taxpayer's entire course of conduct. Spies v. United States, 317 U.S. 492">317 U.S. 492, 499 (1943); Toussaint v. Commissioner, 743 F.2d at 312; Gajewski v. Commissioner, supra at 200.*535
Courts frequently list various factors or "badges of fraud" from which fraudulent intent may be inferred. Recklitis v. Commissioner, 91 T.C. 874">91 T.C. 874, 909 (1988). Although such lists are nonexclusive, some of the factors this Court has considered as indicative of fraud are (1) understatement of income, (2) inadequate records, (3) implausible or inconsistent explanations of behavior, (4) concealment of assets, and (5) failure to cooperate with the tax authorities. Niedringhaus v. Commissioner, 99 T.C. 202">99 T.C. 202, 211 (1992) (citing Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601). These indicia are amply present here, as set forth in the findings of fact.
The taxpayer's evasiveness on the stand, inconsistencies in his testimony, and the lack of credibility of such testimony are heavily weighted factors in considering the fraud issue. Toussaint v. Commissioner, supra at 312. Petitioner was not credible. His testimony was highly inconsistent concerning his interest in the restaurant, the purpose of *536 the transfer of funds to or on behalf of Wayanne, and interests purportedly owned by his sons and parents. At one point he denied having created his own Forms W-2, but later said he intended thereby to reflect the personal expenses paid on his behalf from the MIT account. He denied that he had charge accounts, but when confronted with evidence, admitted that he did have cards with his name on them, but said the accounts were in his wife's name. He could not give the Court a straight answer to a simple question, such as "Why did you not have a personal bank account in your own name?"
Moreover, petitioner's testimony was flatly contradicted by Wilberding, an insurance agent (who testified that petitioner represented that the house and car were his), and a revenue agent. Although Mrs. Ferry was evasive, clearly trying hard to avoid the twin pitfalls of perjury and contradicting her husband, she did not corroborate his testimony. She said, for instance, unbelievably, that she did not know who owned her house ("You'll have to ask Don"), but admitted that she had no reason to believe her brother owned it. She also testified that she had never seen any gifts from petitioner's parents.
It*537 is well settled that we are not required to accept a taxpayer's self-serving testimony in the absence of corroborating evidence, particularly where the testimony is unreasonable, improbable, or questionable. Lerch v. Commissioner, 877 F.2d 624">877 F.2d 624, 631-632 (7th Cir. 1989), affg. T.C. Memo 1987-295">T.C. Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688">440 F.2d 688, 689 (9th Cir. 1971), affg. per curiam T.C. Memo 1969-159">T.C. Memo. 1969-159; Niedringhaus v. Commissioner, supra at 212. Petitioner's testimony was unreasonable, improbable, and questionable, and we do not accept it.
The sophistication, education, and intelligence of the taxpayer are also relevant. Halle v. Commissioner, 175 F.2d 500">175 F.2d 500, 503 (2d Cir. 1949), affg. 7 T.C. 245">7 T.C. 245 (1946); Niedringhaus v. Commissioner, supra. Although petitioner is not highly educated, he held himself out as a financial and business expert. He kept books and prepared individual, corporate, and partnership tax returns. He purported to set up trusts, corporations, *538 and partnerships. He prepared Forms W-2 (at least, his own), and held himself out as the person with whom the revenue agent should deal in conducting the Wayanne audit. In testifying, he referred more than once to the gift tax limitation of $ 10,000 per year. We believe he was informed about taxes, and intended to evade them.
We have no doubt that petitioner intended to conceal his assets. The use of multiple entities with names and EIN's, use of his son's Social Security number on the Ferry Associates account (before stating for two consecutive years in issue that the children's numbers were "applied for"), putting his house, automobile, and telephone in other names, and the various other devices employed by petitioner convince us that he intended to conceal his assets.
In light of the above, we find that petitioner is liable for the additions to tax for fraud for each of the years in issue. Substantial Understatement Under Section 6661(a)
Section 6661(a) provides that if there is a substantial understatement of income tax for any taxable year, there shall be added to the tax an amount equal to 25 percent of the amount of any underpayment attributable to such understatement. *539 Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498 (1988). The amount of the understatement is equal to the excess of the amount of tax required to be shown on the return for the tax year over the amount of the tax shown on the return. Woods v. Commissioner, 91 T.C. 88">91 T.C. 88, 94 (1988). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return for the taxable year or $ 5,000. Sec. 6661(b)(1).
The amount of the understatement under this section shall be reduced if there was substantial authority for the tax treatment of the item by the taxpayer or if the relevant facts affecting the item are adequately disclosed on the return. Neither exception applies here. Therefore, we find that petitioners are liable for the addition to tax for substantial understatement.
To reflect a concession by respondent,
Decision will be entered under Rule 155.
Footnotes
1. 50 percent of the interest due on the amount of the underpayment attributable solely to fraud.↩
1. Apparently, respondent's concession for 1988 described above takes into account the Form W-2 wages reported from Wayanne, Inc.↩
1. The IRS agent testified that she located 14 corporations, 13 partnerships, and 3 trusts related to petitioner. Although petitioner objected that some of them were not his, it is obvious from a cursory glance at Exhibit AL that many were mentioned by petitioner himself during the trial, and others seem clearly related by the names (such as (Don) Ferry Family Trust, Inc., Ferry Family Trust, Don Ferry Limited Trust, Restaurant Equipment & Property Ltd - D. Ferry Ltd. Trust, Gen. Ptr.).↩
2. Petitioner testified in a previous trial that his sons owned an interest in Iron Hill Investments, Inc., but sold their interest in December 1988, when the children would have been 14 and 10 years of age.↩
3. It is unclear what years were under audit, whether returns had been filed for those years and, if so, whether they were corporate or partnership returns. It is clear that petitioner told the IRS agent that he had a power of attorney for the business. Petitioner had removed the records from the restaurant premises, and met with the revenue agent, giving her permission to take the records for copying. She later returned them to Wilberding. Despite some tangential testimony about the restaurant audit, those returns are not in evidence and appear to have little or no relevance to this case.↩
4. At one point some restaurant proceeds were also deposited in an account in the name of R.E.P. at First Federal, but that was closed in or before 1985. The R.E.P. account at issue here was located at Second National Federal Savings Bank.↩
5. MIT stands for Mortgage Investors Trust, which in a prior lawsuit petitioner admitted was himself.↩
6. Specifically, we find that petitioners were the owners of a 1985 Mercury Marquis financed through Wilmington Trust Co. Petitioner's father was not the owner. Petitioners bought the car, drove it, obtained insurance for it, and kept it at their house. Thus, payments to Wilmington Trust in the amount of $ 2,250 are income to petitioners.
We also find that petitioners were the beneficial owners of their residence at 404 Arbour Dr., Newark, Del., where they have lived since 1982. Specifically, we find that the house was not↩ owned by petitioner's brother-in-law, David Rowan, by "Investments Plus, Inc." or by "Iron Hill Investments, Inc." or by any other entity. Thus, mortgage and tax payments made to First Federal Savings and Loan totaling $ 3,249.44, from checks drawn on the MIT account, were for petitioners' personal expenses and are income to petitioners, as are payments of telephone and utility bills at that address.
7. There is no evidence that petitioner's parents used the account or, indeed, even knew of it.↩
8. REP may also stand for "Restaurant Equipment Properties".↩
9. Sir Walter Scott, "Marmion", canto VI, st. XVII (Little Brown & Co. 1857).↩