-39-
were substantially underreporting their income. This badge of
fraud applies to both petitioners for each year in issue.
b. Income From Illegal Sources
A taxpayer's receipt of illegal income is a badge of fraud.
Bradford v. Commissioner, supra at 308; United States v.
Hamilton, 620 F.2d 712, 716-717 (9th Cir. 1980). Both
petitioners knew that their income in the years in issue was from
an illegal source.
c. Inadequate Records, Destroying Records, and
Reporting False Information to their Tax
Return Preparer
Failing to maintain accurate records is a badge of fraud.
Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg.
T.C. Memo. 1959-172; Reaves v. Commissioner, 295 F.2d 336, 338
(5th Cir. 1961), affg. 31 T.C. 690 (1958); see Alexander Shokai,
Inc. v. Commissioner, T.C. Memo. 1992-41, affd. 34 F.3d 1480 (9th
Cir. 1994). Destroying records and providing incorrect
information to a tax return preparer are also badges of fraud.
Spies v. United States, 317 U.S. 492, 499 (1943) (destroying
records); Estate of Temple v. Commissioner, 67 T.C. 143, 162-163
(1976) (giving incorrect information to tax return preparer).
Petitioner-wife told Kil Lee to burn the daily sheets he was
storing. Petitioner-husband destroyed daily records of receipts
and gave false weekly summaries of their receipts and false
information about their expenses to their tax return preparer.
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