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Failure to maintain accurate records may be a badge of
fraud. Merrit v. Commissioner, 301 F.2d 484, 487 (5th Cir.
1962), affg. T.C. Memo. 1959-172. Petitioner failed to maintain
any records as to the "commissions" he reported on his 1984 and
1985 Federal income tax returns.
Petitioner kept some records for his various businesses from
which he gave figures to Nyden. These books were never audited.
Petitioner prepared the day sheets for Arturo's and B&K Variety,
and there were no safeguards to assure that all cash receipts
found their way into the books. Nyden never reviewed cash
register tapes. In short, petitioner pretty much could include
the amount of cash that suited him. We find that petitioner's
records were inadequate.
Nyden's preparation of petitioners' Forms 1040 did not
redeem or correct the inadequacy of petitioner's records. Nyden
would prepare petitioners' Forms 1040 using the information
provided by petitioners. Nyden frequently noticed that "the
expenses were just out of whack" with the revenue. Nyden would
discuss the matter with petitioner to determine whether there was
any more income. Thus prompted, petitioner would furnish Nyden
with an additional income figure to plug the gap. Petitioner
never referred to any documents or provided Nyden with any backup
material related to the additional income. For example, Nyden
summarized the income and expenses for the Campfield farm for one
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