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F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601;
Petzoldt v. Commissioner, 92 T.C. at 700.
The following badges of fraud are present in this case: (1)
Substantially understating income over a period of years,(2)
maintaining inadequate records; (3) dealing in cash; (4)
providing incomplete or misleading information to petitioners’
tax preparer, (5) filing false returns, (6) engaging in a pattern
of behavior which indicates an intent to mislead, (7) dishonesty
in a business transaction. Spies v. United States, 317 U.S. 492,
499 (1943); Conti v. Commissioner, 39 F.3d 658, 662 (6th Cir.
1994), affg. and remanding on other grounds T.C. Memo. 1992-616;
Scallen v. Commissioner, supra; Bradford v. Commissioner, supra
at 307-308; Korecky v. Commissioner, 781 F.2d 1566, 1569 (11th
Cir. 1986), affg. T.C. Memo. 1985-63; Ruark v. Commissioner, 449
F.2d 311, 312-313 (9th Cir. 1971), affg. T.C. Memo. 1969-48;
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); Wright v.
Commissioner, 84 T.C. 636, 643-644 (1985); Farber v.
Commissioner, 43 T.C. 407, 420 (1965), modified 44 T.C. 408
(1965); Middleton v. Commissioner, T.C. Memo. 2002-164.
1. Failure To Report Substantial Amounts of Income
“Although mere understatement of income alone is not
sufficient to prove fraud, the consistent and substantial
understatement of income is, by itself, strong evidence of
fraud.” Truesdell v. Commissioner, 89 T.C. 1280, 1302 (1987);
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