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(1) Understatements of Income
Consistent understatement of income with consequent
underpayment of taxes may be strong evidence of fraudulent intent
to evade taxes. Patton v. Commissioner, 799 F.2d 166, 171 (5th
Cir. 1986), affg. T.C. Memo. 1985-148.
Petitioner considered himself to be a successful and
sophisticated businessman. He operated Field Masonry prudently by
filing appropriate tax forms for each of his employees, and
presented himself at trial as a knowledgeable and competent
individual. Nevertheless, he exhibited a pattern of substantially
understating petitioners' 1984, 1985, and 1986 income. Also,
petitioner chose to deduct all personal and business expenses.
Personal expenses are not deductible. Sec. 262. A practice of
claiming personal expenses as business expenses has been held to
justify the imposition of the fraud addition to tax. See, e.g.,
Hicks Co. v. Commissioner, 56 T.C. 982, 1030 (1971), affd. 470 F.2d
87 (1st Cir. 1972); Ramsey v. Commissioner, T.C. Memo. 1984-251.
By attempting to convert nondeductible personal expenses into
deductible business expenses, petitioner fraudulently understated
petitioners' Federal income taxes for the years under consideration
through an overstatement of deductions. See Hicks Co. v.
Commissioner, supra at 1019.
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