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petitioners filed false documents. Thus, the only badge left is
understating income.
Relying Solely on an Understatement of Income To Establish Fraud
Respondent argues that he can establish fraud by relying
solely on an understatement of income. Respondent cites
Schneider v. Commissioner, T.C. Memo. 1977-179, for the
proposition that substantial amounts of unreported income over a
period of years, without more, are sufficient evidence to
establish fraud by clear and convincing evidence when the case is
based on the specific items method of proof. Respondent is
incorrect.
In Schneider, Mr. Schneider pleaded guilty to filing a false
and fraudulent income tax return for one of the years in issue in
that case. Additionally, Mr. Schneider converted income omitted
from his returns to cash. Thus, in Schneider, we did not base
our finding of fraud solely on an understatement of income. The
criminal tax conviction (which established that the taxpayer
filed false documents) and the conversion of omitted income to
cash further supported our conclusion that Mr. Schneider’s
actions were fraudulent.
The U.S. Court of Appeals for the Fifth Circuit, to which an
appeal in this case would lie, has held that “The mere
understatement of income, standing alone, is not enough to carry
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