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Courts have relied on certain indicia (badges) of fraud in
deciding whether a taxpayer had the requisite fraudulent intent.
These badges include: (1) Understating income, (2) maintaining
inadequate records, (3) failing to file tax returns, (4) giving
implausible or inconsistent explanations of behavior,
(5) concealing assets, (6) failing to cooperate with tax
authorities, (7) engaging in illegal activities, (8) attempting
to conceal illegal activities, and (9) dealing in cash.
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); see also
Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986),
affg. T.C. Memo. 1984-601. These badges are nonexclusive.
Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992). The
taxpayer’s education and business background are also relevant to
the determination of fraud. Id. Bearing these general
principles in mind, we turn to the indicia of fraud that are
relevant to the instant case. The presence of several badges is
persuasive circumstantial evidence of fraud. Beaver v.
Commissioner, supra at 93.
1. Understating Income
Understating income is indicative of fraudulent intent.
Bradford v. Commissioner, supra.
Petitioner understated the 1996 gross income. The existence
of that understatement was clearly and convincingly established
by respondent at trial, where respondent showed that BBL’s income
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