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taxpayer’s failure to keep adequate books and records; (5)
dealing in cash; (6) a taxpayer’s experience and knowledge,
especially knowledge of tax laws; (7) a taxpayer's implausible
explanations of conduct given at trial; and (8) participation in
illegal activities or concealment of an illegal activity.
Solomon v. Commissioner, 732 F.2d 1459, 1461-1462 (6th Cir.
1984), affg. per curiam T.C. Memo. 1982-603; Bahoric v.
Commissioner, 363 F.2d 151, 153-154 (9th Cir. 1966); Niedringhaus
v. Commissioner, 99 T.C. 202, 211 (1992); McCullough v.
Commissioner, T.C. Memo. 1993-70. These indicia are not direct
evidence of fraud, and we consider them in the context of the
surrounding circumstances. King's Court Mobile Home Park, Inc.
v. Commissioner, 98 T.C. 511, 516 (1992); Comparato v.
Commissioner, T.C. Memo. 1993-52.
1. Failure To Report Income Over an Extended Period of
Time
Mr. Beck underreported the income of Beck's Liquors in each
of the years at issue. The greatest portion of the omitted
income is attributable to the inclusion of cash purchases and
disallowance of deductions for payment of personal expenses of
Mr. Beck and his children. Mr. Beck also failed to report as
income the amount of his personal expenses that were paid out of
the corporation's funds. Fraud, however, may not be inferred
from a mere understatement of income, Holland v. United States,
348 U.S. at 139, or from a deficiency in tax due to an honest
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