- 58 -
F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81. Fraud
may be proven by circumstantial evidence because direct evidence
of the taxpayer's intent is rarely available. Stephenson v.
Commissioner, 79 T.C. 995, 1005-1006 (1982), affd. 748 F.2d 331
(6th Cir. 1984).
The courts have developed a number of objective indicators
or "badges" of fraud. Recklitis v. Commissioner, 91 T.C. 874,
910 (1988). Several badges of fraud are present in this case:
(a) Substantially understating income for several years; (b)
diverting corporate funds; (c) having inadequate books and
records; (d) dealing in large amounts of cash; (e) using
fictitious names; (f) concealing accounts from Resyn's and
petitioners' accountants; and (g) giving false, misleading, and
inconsistent testimony at trial. Bradford v. Commissioner, 796
F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601;
Ruark v. Commissioner, 449 F.2d 311, 312-313 (9th Cir. 1971),
affg. T.C. Memo. 1969-48; Meier v. Commissioner, 91 T.C. at 298.
a. Substantially Understating Income Tax Liability
A pattern of substantially underreporting income tax
liability over several years may be evidence of fraud. Holland
v. United States, 348 U.S. 121, 137-139 (1954); Estate of Mazzoni
v. Commissioner, 451 F.2d 197, 202 (3d Cir. 1971), affg. T.C.
Memo. 1970-37; Rogers v. Commissioner, 111 F.2d 987, 989 (6th
Cir. 1940), affg. 38 B.T.A. 16 (1938). Petitioner substantially
understated income tax liability by $225,591 for 1964, $67,160
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