303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Niedringhaus v.
Commissioner, 99 T.C. 202, 211 (1992); Recklitis v. Commissioner, 91 T.C. 874,
911 (1988). Upon examination of the entire record, we conclude that Mr.
Burke's underpayment of Federal income taxes for 1985, 1986, and 1987 is
attributable to fraud.
Mr. Burke substantially understated his income on the delinquent returns
for the taxable years in issue. Such consistent and substantial
understatement of income constitutes strong evidence of fraudulent intent.
Grudin v. Commissioner, 536 F.2d 295, 296 (9th Cir. 1976), affg. T.C. Memo.
1974-251; Ruark v. Commissioner, 449 F.2d 311, 313 (9th Cir. 1971), affg. T.C.
Memo. 1969-48; Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962),
affg. T.C. Memo. 1959-172; Otsuki v. Commissioner, 53 T.C. 96, 107-108 (1969).
The failure by a knowledgeable taxpayer to maintain adequate records is
also evidence of fraud. Galant v. Commissioner, 26 T.C. 354, 364-365 (1956).
There were no adequate records kept to reflect the nature of the transactions
in issue. Mr. Burke held several insurance licenses and had extensive
experience in the insurance business. He was obviously aware, therefore, of
the need to maintain adequate books and records. His accountant repeatedly
warned him of the inadequacy of the Burke Insurance Agencies' books and
records. For instance, in a letter to Mr. Burke dated June 19, 1986, Mr.
Silver states:
Over the past year or so it has become extremely difficult
to properly account for the results of operations for both
companies. In addition to no longer having an idea of how much
you owe to insurance companies for premiums collected, I have to
seriously question your position that your draw is nothing more
than loans from the company to you.
Failure to file Federal income tax returns may be persuasive
circumstantial evidence of fraudulent intent. Marsellus v. Commissioner, 544
F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368; Castillo v.
Commissioner, 84 T.C. 405, 409 (1985); Grosshandler v. Commissioner, 75 T.C.
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