Brendt L. Smith - Page 13

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          underreported income in both years; namely, $64,327 in 1995 and             
          $40,562 in 1996.  Accordingly, respondent has met his burden of             
          showing by clear and convincing evidence that petitioner had                
          underpayments of tax in 1995 and 1996.                                      
               On the question of whether these underpayments are                     
          attributable to fraud, respondent has demonstrated several badges           
          of fraud, as follows.  Petitioner failed to report income in both           
          years, indicating a pattern of underreporting.  The unreported              
          amounts were substantial in relation to petitioner’s reported               
          gross receipts; namely, $64,327 of unreported income versus                 
          reported gross receipts of $12,652 in 1995, and $40,562 of                  
          unreported income versus reported gross receipts of $37,311 in              
          1996.  The magnitude of the unreported amounts makes it virtually           
          impossible that they could have been due to mere mistake or                 
          inadvertence.                                                               
               Petitioner’s records were clearly inadequate.  While he was            
          able to substantiate certain expenses, petitioner did not                   
          maintain or produce regular books or records from which the                 
          income from his Schedule C businesses could be ascertained.                 
               Petitioner gave numerous implausible explanations for his              
          failure to report income.  He offered three inconsistent                    
          explanations for his failure to report the $37,800 in income that           
          he received from Johnson Controls, Inc., in 1995.  Moreover, his            
          claim that he did not receive the Form 1099-MISC from Johnson               






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