Winston Knauss - Page 37

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          fraud may be proved by circumstantial evidence and reasonable               
          inferences from the facts.  Petzoldt v. Commissioner, supra;                
          Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).  The courts              
          have recognized numerous indicia or “badges” of fraud, including            
          the following:  (1) A pattern of underreporting income; (2)                 
          maintaining inadequate records; (3) giving implausible or                   
          inconsistent explanations of behavior; (4) making false entries;            
          (5) dealing in cash; (6) engaging in illegal activities; and (7)            
          the lack of credibility of taxpayer’s testimony.  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 99           
          T.C. 370 (1992) and T.C. Memo. 1992-616; Douge v. Commissioner,             
          899 F.2d 164, 168 (2d Cir. 1990); Laurins v. Commissioner, 889              
          F.2d 910 (9th Cir. 1989), affg. Norman v. Commissioner, T.C.                
          Memo. 1987-265; Bradford v. Commissioner, 796 F.2d 303, 307-308             
          (9th Cir. 1986), affg. T.C. Memo. 1984-601; Korecky v.                      
          Commissioner, 781 F.2d 1566 (11th Cir. 1986), affg. T.C. Memo.              
          1985-63; Bingham v. Commissioner, T.C. Memo. 1998-102, affd.                
          without published opinion 188 F.3d 512 (9th Cir. 1999).  Although           
          no single factor is necessarily sufficient to establish fraud,              
          the existence of several indicia constitutes persuasive                     
          circumstantial evidence of fraud.  Petzoldt v. Commissioner,                
          supra at 700.  Further, the taxpayer’s background, including his            
          sophistication, experience, and education may be considered                 






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