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income, (2) maintenance of inadequate records, (3) implausible or
inconsistent explanations of behavior, (4) concealment of assets,
(5) failure to cooperate with tax authorities, (6) engaging in an
illegal activity, (7) attempting to conceal the illegal activity,
and (8) dealing in cash. Bradford v. Commissioner, 796 F.2d 303,
307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Petzoldt v.
Commissioner, 92 T.C. 661, 700 (1989).
Respondent’s determination rests primarily on the fact that
the Bank issued to him the STRs as to petitioners, that
petitioners used cashier’s checks to pay for personal expenses,
and that petitioners structured their affairs to avoid the
reporting requirements as to cash transactions over $10,000. See
31 U.S.C. sec. 5313; 31 C.F.R. sec. 103.22 (2000). Respondent
also finds a fraudulent intent on the part of petitioners in the
fact that they underreported their income for each subject year,
that Nanny’s kept inadequate records, and that Nanny’s did not
deposit all of its cash receipts into the business account.
On the basis of our review of the record, we conclude that
respondent has not proven this prong of the two-part test for any
of the subject years. First, we give little weight to the mere
fact that petitioners’ income was understated for each year. As
we view the record, bearing in mind the fact that respondent must
prove fraud by clear and convincing evidence, we conclude that
petitioners’ understatements were more properly attributable to
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