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664. Certain indicia of fraud help us decide the existence of
fraud; the presence of several indicia may be persuasive
circumstantial evidence of fraud. These "badges of fraud"
include: (1) The filing of false documents; (2) understatement
of income; (3) maintenance of inadequate records; (4) implausible
or inconsistent explanations of behavior; (5) concealment of
assets; (6) failure to cooperate with tax authorities;
(7) engaging in an illegal activity; (8) attempting to conceal
the illegal activity; and (9) dealing in cash. Bradford v.
Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg.
T.C. Memo. 1984-601; Petzoldt v. Commissioner, 92 T.C. 661, 700
(1989).
Based on our careful review of the record, we conclude that
respondent has clearly and convincingly proven the requisite
fraudulent intent in each of petitioners' relevant years.
Petitioners' clear pattern of intentional underreporting of
taxable income, coupled with their two sets of books and lack of
recordkeeping, leads to a particularly strong inference of fraud.
We also consider it significant that the Lees and Hamalee
(through Mr. Lee) pleaded guilty to State income tax violations.
Although this conviction does not, in and of itself, establish a
fraudulent intent, we consider the crime evidence of a propensity
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