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understatement of income, inadequate records, implausible or
inconsistent explanations of behavior, concealing assets, and
failure to cooperate with tax authorities. Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.
1984-601. Dealing in cash is also considered a “badge of fraud”
by the courts because it is indicative of a taxpayer’s attempt to
avoid scrutiny of his finances. See id. at 308. Whether a
taxpayer has consistently underreported income over an extended
period of time is also a relevant factor in analyzing whether the
taxpayer had a fraudulent intent in understating his tax
liability. Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th
Cir. 1984), affg. T.C. Memo. 1982-603.
Respondent’s burden regarding the underpayment of tax in
support of the fraud penalty has been met. Petitioners have
conceded more than $450,000 in overstatements of cost of goods
sold, and we have found clear and convincing evidence, for the
reasons set forth above, that approximately $1.5 million more was
overstated by petitioners in 1997. Those overstatements resulted
in substantial understatements of petitioners’ tax liability for
that year.
The evidence in this case also establishes the existence of
several “badges of fraud” in petitioners’ financial dealings.
Petitioners understated their income in 1997 by approximately
$2 million, and the record shows that they understated their
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