Peter S. Pau and Susanna H. Pau - Page 20

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          corporation nor the officer reported income from the sale of the            
          airplane or the diversion of the sale proceeds.  We held both               
          taxpayers were liable for the civil fraud penalty, because they             
          failed to report the income with the intention of evading Federal           
          income tax.  In Mitchell, as in the case before us, the                     
          taxpayers' conduct occurred in only 1 year, and the conduct                 
          related to a single transaction.  See also Taylor v.                        
          Commissioner, T.C. Memo. 1993-546.                                          
               Petitioners cite Stone v. Commissioner, 22 T.C. 893 (1954),            
          arguing that respondent cannot establish fraud in reliance on               
          unreported income for 1 year.  However, that case does not stand            
          for such a broad proposition.  Rather, in Stone, we held that,              
          without more, a gross understatement of income in 1 year did not            
          establish that "there was fraud with intent to evade tax in this            
          instance."  Id. at 904 (emphasis added).  In the case before us,            
          respondent relied on a number of factors to prove fraud, as shown           
               2.  Inadequacy of Books and Records                                    
               In October of 1995, petitioner met with Clement for the                
          first time, presenting Sand Hill's records of expenses to                   
          establish petitioners' entitlement to deductions claimed on their           
          Schedules C.  Clement found the records adequate to verify each             
          and every expense claimed for Sand Hill.  However, petitioner               
          presented no records for Sand Hill's income and conceded that his           
          handling of the income of Sand Hill was entirely inadequate.                

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