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a. Substantially Understating Income
A pattern of consistently and substantially underreporting
income over several years is evidence of fraud. Holland v.
United States, 348 U.S. 121, 137-139 (1954); Estate of Mazzoni v.
Commissioner, 451 F.2d 197, 202 (3d Cir. 1971), affg. T.C. Memo.
1970-37. Mr. and Mrs. Reaves did not report or account for
nearly $500,000 over 4 years from the 282 checks. Mr. and Mrs.
Reaves received but did not report constructive dividends from
the First Citizens accounts and the John Chavis checks totaling
$13,814 in 1984, $19,551 in 1985, $89,150 in 1986, and $68,556 in
1987. This badge of fraud applies to Mr. and Mrs. Reaves for
1984, 1985, 1986, and 1987, because they both knew of their
personal expenses paid from the First Citizens accounts and the
John Chavis checks in each of those years. It also applies to
Mr. Reaves because he knew of the 282 checks.
b. Failing to Maintain Adequate Records
A taxpayer's failure to maintain accurate records is a badge
of fraud. Bradford v. Commissioner, supra at 307; Lollis v.
Commissioner, 595 F.2d, 1189, 1192 (9th Cir. 1979), affg. T.C.
Memo. 1976-15; Merritt v. Commissioner, 301 F.2d 484, 487 (5th
Cir. 1962), affg. T.C. Memo. 1959-172. Mr. and Mrs. Reaves
produced no records showing that they received or how they used
the proceeds from the 282 checks, John Chavis checks, or the
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