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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
below.
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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