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We conclude that respondent has proven by clear and
convincing evidence that Mr. Paterson fraudulently understated
his tax liabilities for the years at issue, and Mr. Paterson has
failed to show that any portion of the underpayments is not due
to fraud. We find that the fraud penalty under section 6663
applies to Mr. Paterson’s underpayments of tax for the years at
issue.
B. Mrs. Paterson’s Liability for the Fraud Penalty
We now consider whether Mrs. Paterson is liable for the
fraud penalty. We agree with respondent that many of the badges
of fraud are present with respect to Mrs. Paterson’s
underpayments. Mrs. Paterson was aware of her husband’s illegal
activities. She facilitated the illegal activities by obtaining
the cellular phones her husband used to accept bets. She also
received the benefit of these illegal activities by accepting and
depositing cash or checks made out to her husband. She concealed
the source of these funds further by depositing them into her
separate bank accounts, not the joint bank accounts that had only
minimal activity. She also kept title solely in her name to the
Patersons’ significant assets, such as their home and bank
accounts and brokerage accounts with considerable funds. Mrs.
Paterson did not maintain adequate records and never told her tax
preparer about the large sums she periodically deposited into her
separate bank accounts. Finally, Mrs. Paterson understated her
income significantly on her tax returns and did not cooperate
with respondent during the audit.
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