- 14 - 2. Consistent and Substantial Understatements of Income On the Forms 1040X, petitioners reported increased net profit from Monterey of $80,214 and $54,778 for 1987 and 1988, respectively. The amended Schedules C show that, originally, petitioners underreported Monterey’s gross sales by $540,266 and $393,980 for 1987 and 1988, respectively. Those are large amounts compared to the amounts originally reported. A consistent pattern of underreporting large amounts of income is evidence of fraud. See Holland v. United States, 348 U.S. 121, 137 (1954). Two years of substantial understatement may support a finding of fraud. See Kelley v. Commissioner, T.C. Memo. 1991- 324 (1991), affd. 988 F.2d 1218 (11th Cir. 1993). 3. Control of Books and Records Joseph prepared the Schedules C, on which Monterey’s income was understated. Monterey’s system of bookkeeping centered around the peg board, in which was recorded all checks written with respect to Monterey’s business and all deposits of moneys received with respect to that business. Together with the vendor ledger cards, sales invoices, and bank statements, the peg board provided sufficient information to prepare accurately the Schedules C. Entries on adding machine tapes used by Joseph to prepare the Schedule C for 1988 convince us that Joseph did use the peg board to prepare the Schedule C for 1988. Also, Joseph testified that he looked at statements for Monterey’s bankPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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