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3. Inadequate Records
4. Failure to Supply Complete Information to Return
Preparer
These two badges are not affected by removal of the deemed
facts from our consideration.
5. Diversion of Corporate Funds
6. Dealings In Cash
Petitioner testified that her husband dealt extensively in
cash as a matter of course in conducting their parking lot
business. These two badges of fraud are less compelling without
the deemed facts.
We conclude that without the deemed facts that are not
otherwise supported by the record, and based on our reevaluation
of petitioner's testimony and the entire record, fraud has not
been proven by clear and convincing evidence. We hold that
petitioners are not liable for the addition to tax for fraud
under section 6653(b) for 1975, 1976, and 1977.
E. Statute of Limitations
1. Background
Petitioners timely filed joint Federal income tax returns
for 1975, 1976, and 1977. Petitioners reported gross income of
$48,893 for 1976 and $70,708 for 1977. Twenty-five percent of
those amounts are $12,223 for 1976 and $17,677 for 1977.
More than 3 but less than 6 years after petitioners' returns
for 1976 and 1977 were due to be filed, petitioners signed Forms
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