UNITED STATES TAX COURT

T.C. Memo. 1996-482

UNITED STATES TAX COURT

JACOB AND YEHIELLA KALO, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20479-94.

Filed October 28, 1996.

Robert W. Siegel, for petitioners.

Timothy S. Murphy, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge:

Respondent determined the following

deficiency in, additions to, and penalty on petitioners' Federal

income taxes:

Year

Deficiency

Sec.

6653(b)(1)

1986

1987

1988

$29,316

-----

----$17,996

Additions to Tax

Sec.

Sec.

6653(b)(1)(A) 6653(b)(1)(B)

$21,987

16,399

---

1

1

---

Penalty

Sec.

6663

-------

- 2 1989

--------$22,664

50 percent of the statutory interest applicable on $29,316 and $21,865

for 1986 and 1987, respectively, from the due date of the return to the date

of assessment of the tax or, if earlier, the date of the payment.

1

All section references are to the Internal Revenue Code in

effect for the years in issue.

All Rule references, unless

otherwise indicated, are to the Tax Court Rules of Practice and

Procedure.

Respondent contends that Dr. Kalo (petitioner) fraudulently

and with the intent to evade taxes understated his interest

income from foreign bank accounts for the 1986, 1987, 1988, and

1989 tax years.

After concessions,1 the issues for decision are

whether petitioner is liable for additions to tax pursuant to

section 6653(b)(1)(A) and (B) for the 1986 and 1987 tax years and

section 6653(b)(1) for the 1988 tax year and for a penalty

pursuant to section 6663 for the 1989 tax year.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and attached exhibits are incorporated

herein by this reference.

Petitioners resided in West

Bloomfield, Michigan, at the time they filed their petition.

1

Respondent concedes that Yehiella Kalo is not liable for

the additions to tax and penalty as determined in the statutory

notice of deficiency. Respondent also concedes the deficiency

for the 1986 tax year. Petitioners filed an amended tax return

prior to the issuance of the notice of deficiency reflecting an

underpayment of $29,316 for the 1986 tax year.

- 3 Petitioners timely filed joint tax returns for all years in

issue.

On or about November 26, 1990, petitioners filed Forms

1040X (Amended U.S. Individual Income Tax Return) for the taxable

years 1986, 1987, 1988, and 1989.

The purpose of these amended

returns was to report interest income from several foreign bank

accounts that had previously been unreported.

On their original

returns, petitioners failed to report a total of $309,320 in

interest income earned from foreign bank accounts over a 4-year

period.

Petitioner Jacob Kalo was a medical doctor with a specialty

in obstetrics and gynecology and a subspecialty in laser surgery.

Petitioner owned and operated five clinics or offices, including

the East Gyn Medical Clinic (the clinic), through his

professional corporation during the years in issue.

During the

taxable years 1986 through 1989, petitioner did not maintain

malpractice insurance coverage.

During 1990 and 1991, petitioner was under investigation by

the Internal Revenue Service Criminal Investigation Division

(CID) for possible Federal income tax violations.

On April 18,

1990, petitioner was interviewed by special agents with the CID.

On September 9, 1992, petitioner was charged by the United States

Attorney for the Eastern District of Michigan with four counts of

willful failure to disclose that he had interests in foreign bank

accounts in violation of section 7203.

On January 29, 1993,

- 4 petitioner, pursuant to a Rule 112 plea agreement, pleaded guilty

to one count of violating section 7203 for the 1987 tax year for

having willfully failed to disclose on his 1987 tax return that

he had interests in foreign bank accounts.

During the interview with special agents of the CID, when

asked about the existence of foreign bank accounts, petitioner

failed to disclose that he had bank accounts in Canada.

When

specifically questioned about bank accounts in Canada, petitioner

stated that he thought he had an account with his father and that

his father's money was in the account.

Petitioner stated that he

did not deal with this account as his father handled all of the

banking transactions for this account.

During the years 1986

through 1989, petitioner did in fact have an account at the Royal

Bank of Canada which earned $255,216 in interest.

During 1986

and 1987, petitioner also had an account at Canada Trust which

earned $836 in interest, and in 1989 had a joint account with his

father at the Bank of Montreal that earned $37 in interest.

During 1986, petitioner also had a London bank account and a

Swiss bank account on which he earned interest of $23,910 and

$10,415 respectively.

During the years 1985 through 1988, petitioner made numerous

cash deposits into bank accounts in Canada, seven of which

exceeded $10,000.

2

Petitioner deposited over $230,000 in cash

Fed. R. Crim. P. 11.

- 5 into the Royal Bank of Canada during these years.

By 1989

petitioner had approximately $1 million deposited with the Royal

Bank of Canada and over $3 million in all Canadian accounts

combined.

After the initiation of the criminal investigation by the

IRS, petitioner removed business records from the East Gyn

Medical Clinic.

Petitioner falsely told special agents on

August 23, 1990, that he never removed records indicating cash

payments received at the clinic.

Petitioner instructed an

employee, Minnie Malone, that if anyone asked her about the

records to state that the State of Michigan took them during a

Medicaid audit.

During the April 18, 1990, interview of petitioner by

special agents, Dr. Kalo stated that records used to record cash

payments for the clinic had been seized by the State of Michigan

during a Medicaid audit and were never returned.

In a subsequent

interview by special agents, petitioner stated that the records

had been returned by the State of Michigan.

These records, along

with records from petitioner's other clinics, were summonsed by

Special Agent Kevin Boudreau.

The summonses specifically

requested any records which reflected cash receipts.

At no time

during the CID investigation did petitioner produce any record

reflecting the cash receipts received by the clinic for the years

1986 through 1989.

- 6 In an interview with special agents on August 23, 1990,

petitioner stated that the East Gyn Medical Clinic never had a

day where the cash receipts for a single day were more than

$2,000.

cash.

Petitioner stated that the clinic received very little

On the following day, petitioner asked two employees,

Minnie Malone and Marlene Parsons, to write letters on his behalf

to the IRS stating that the amount of cash received daily at the

clinic ranged from $40 to $800.

Both employees refused to write

the letters as proposed by petitioner because the dollar amounts

he asked them to insert were false.

During the August 23, 1990,

interview, petitioner told special agents that he believed that

the interest income was not taxable until withdrawn from the

bank.

Petitioner then told the agents that his accountant had

told him that the interest was not taxable until withdrawn.

When

asked for the accountant's name, petitioner's attorney

interrupted and stated that it was not the accountant but that

Dr. Kalo just heard or knew of it from someone.

Arthur Sweet was petitioner's tax return preparer.

Sweet was a certified public accountant since 1952.

Mr.

Petitioner

consulted with Mr. Sweet in reference to his tax returns.

Petitioner freely discussed matters with Mr. Sweet.

Petitioner

also called Mr. Sweet and inquired how the changes to the tax law

in 1986 would affect him.

Petitioner never advised Mr. Sweet

that he had bank accounts in Canada, or in other foreign

countries, other than a bank account in Israel, which was

- 7 disclosed on petitioners' 1988 and 1989 tax returns.

In

preparing petitioners' tax returns for the years 1986, 1987,

1988, and 1989, Mr. Sweet specifically asked whether petitioner

had any foreign bank accounts.

Mr. Sweet never told petitioner

that the interest earned from Canadian accounts is not taxable

until it is withdrawn.

John Glancey is a stockbroker and financial adviser who

provided services for petitioner for approximately 12 years,

including the period from 1986 through 1990.

Over this time

period, Mr. Glancey had significant dealings with petitioner,

which included discussions involving foreign interest rates and

foreign investments.

Mr. Glancey found Dr. Kalo to have a better

than average knowledge about these types of investments.

Petitioner did not inform Mr. Glancey that he had an interest in

foreign bank accounts.

In the August 23, 1990, interview, petitioner told special

agents that he was told by an unnamed bank official at an unnamed

Canadian bank that he did not have to pay taxes.

It is not the

policy of the Royal Bank of Canada to give advice to a

nonresident about the taxability of the interest for United

States tax purposes.

OPINION

The addition to tax in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

- 8 investigation and the loss resulting from a taxpayer's fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938).

Respondent has

the burden of proving, by clear and convincing evidence, an

underpayment for each year and that some part of the underpayment

was due to fraud.

Sec. 7454(a); Rule 142(b).

To satisfy her

burden of proof, respondent must show two things:

(1) An

underpayment exists; and (2) the taxpayer intended to evade taxes

known to be owing by conduct intended to conceal, mislead, or

otherwise prevent the collection of taxes.

Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990).

The mere failure to

report income, however, is not sufficient to establish fraud.

Switzer v. Commissioner, 20 T.C. 759, 765 (1953).

If respondent

establishes that any portion of the underpayment is attributable

to fraud, the entire underpayment is treated as attributable to

fraud and subjected to an addition to tax or penalty, except with

respect to any portion of the underpayment that the taxpayer

establishes is not attributable to fraud.

Sec. 6653(b)(2) for

1986 through 1988 and sec. 6663(b) for 1989.

Fraud is intentional wrongdoing on the part of the taxpayer

with the specific purpose to evade a tax believed to be owing.

McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d

1121 (5th Cir. 1975).

The existence of fraud is a question of

fact to be resolved from the entire record.

Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).

Respondent must meet her

- 9 burden through affirmative evidence because fraud is never

imputed or presumed.

(1970).

Beaver v. Commissioner, 55 T.C. 85, 92

A taxpayer's entire course of conduct can be indicative

of fraud.

Stone v. Commissioner, 56 T.C. 213, 223-224 (1971);

Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969).

Furthermore,

a taxpayer's fraudulent original return is not purged by the

filing of a subsequent amended return.

Badaracco v.

Commissioner, 464 U.S. 386, 394 (1984).

A.

Underpayment of Tax

Petitioners admitted in their amended returns that they had

underreported, in their original returns, interest income from

foreign banks for each year in issue.

Although the filing of

those amended returns is not an admission of fraudulent intent,

it is an admission of an underpayment of tax for each of those

years.

B.

See id. at 399.

Fraudulent Intent

Next, respondent must prove that a portion of such

underpayment for each taxable year was due to fraud.

Professional Servs. v. Commissioner, 79 T.C. 888, 930 (1982).

Fraud may be proved by circumstantial evidence because direct

proof of the taxpayer's intent is rarely available.

The

taxpayer's entire course of conduct may establish the requisite

fraudulent intent.

(1971).

Stone v. Commissioner, 56 T.C. 213, 223-224

- 10 Over the years, courts have developed a nonexclusive list of

factors that demonstrate fraudulent intent.

fraud include:

These badges of

(1) Understating income, (2) maintaining

inadequate records, (3) failing to file tax returns, (4)

implausible or inconsistent explanations of behavior, (5)

concealment of income or assets, (6) failing to cooperate with

tax authorities, (7) engaging in illegal activities, (8) an

intent to mislead which may be inferred from a pattern of

conduct, (9) lack of credibility of the taxpayer's testimony,

(10) filing false documents, and (11) dealing in cash.

See Spies

v. United States, 317 U.S. 492, 499 (1943); Douge v.

Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Recklitis v. Commissioner, 91 T.C. 874, 910

(1988).

Although no single factor is necessarily sufficient to

establish fraud, the combination of a number of factors

constitutes persuasive evidence.

Solomon v. Commissioner, 732

F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo.

1982-603.

A taxpayer's intelligence, education, and tax

expertise are also relevant for purposes of determining

fraudulent intent.

See Stephenson v. Commissioner, 79 T.C. 995,

1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984); Iley v.

Commissioner, 19 T.C. 631, 635 (1952).

We note that some conduct

and evidence can be classified under more than one factor.

- 11 a.

Petitioner's Sophistication and Experience

Dr. Kalo was an educated person.

Additionally, he was

familiar with the tax law and had a better than average knowledge

of foreign investments.

Petitioner's knowledge in this area is

sufficient that we believe petitioner knew enough to, at a

minimum, ask for tax advice regarding foreign interest.

We find

that Dr. Kalo did not inform his accountant or his financial

advisor of his foreign bank accounts and that this failure to

inform, from a taxpayer with petitioner's sophistication,

indicates fraud.

b.

Consistent and Substantial Understatements of Income

The mere failure to report income is not sufficient to

establish fraud.

Merritt v. Commissioner, 301 F.2d 484, 487 (5th

Cir. 1962), affg. T.C. Memo. 1959-172; Parks v. Commissioner,

supra at 664.

However, consistent and substantial understatement

of income may be strong evidence of fraud.

Marcus v.

Commissioner, 70 T.C. 562, 577 (1978), affd. without published

opinion 621 F.2d 439 (5th Cir. 1980).

Moreover, a pattern of

consistent underreporting of income, when accompanied by other

circumstances indicating an intent to conceal income, justifies

an inference of fraud.

137 (1954).

Holland v. United States, 348 U.S. 121,

Petitioners argue that during the years in issue

they reported and paid, on their original income tax returns,

over 94 percent of their tax liability and that this indicates

- 12 lack of an intent to evade taxes.

unpersuasive.

We find petitioners' argument

In the instant case, petitioners' understatements

are both consistent and substantial; they are evidence of fraud.

c.

Failure to Maintain Adequate Books and Records

Failure to maintain adequate books and records of income may

be indicative of fraud.

Truesdell v. Commissioner, 89 T.C. 1280,

1302 (1987); Gajewski v. Commissioner, 67 T.C. at 200.

Respondent showed at trial that accurate records of cash receipts

for petitioner's medical practice were not maintained.

Respondent contends that this along with other evidence shows

that petitioner “skimmed” profits from his medical practice.

Respondent has not convinced us that any fraud was committed by

petitioner's professional corporation or by petitioner regarding

the profits from that corporation; we will not, therefore, base a

finding of fraud on the evidence regarding “skimming” presented

in that regard.

d.

Attempts to Conceal Activities

Petitioners contend that the principal point in their favor

is that they did not attempt to conceal their assets.

They argue

that if petitioners' returns for the years in issue had been

audited it would have been obvious that assets were unaccounted

for and the whereabouts of those assets would have been easy to

determine.

Petitioners therefore argue that because the assets

and income were readily discoverable there could not have been a

- 13 fraudulent intent to conceal the income.

We disagree.

There is

ample evidence in the record that petitioner did in fact make

attempts to conceal his interest income.

Question 10 on Schedule

B of petitioners' tax returns for the years in issue asks:

“At

any time during the tax year, did you have an interest in or a

signature or other authority over a financial account in a

foreign country (such as a bank account, securities account, or

other financial account)?”

For the years 1986 and 1987,

petitioner answered this question in the negative.

For the years

1988 and 1989, petitioner answered yes to this question but only

listed a bank account in Israel.

In signing the returns,

petitioner represented, under penalty of perjury, that he

examined the schedules accompanying the returns and that they

were “true, correct, and complete” to the best of his knowledge.

His answers to this question indicate an attempt to conceal his

foreign accounts which is a strong indication of fraud.

e.

Intent To Mislead

False and inconsistent statements to respondent's agents

during the course of their investigation indicate fraudulent

intent.

Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980).

Petitioner failed to mention any Canadian bank accounts when

questioned about foreign accounts and when specifically

questioned about Canadian accounts only mentioned that he thought

that he had a Canadian account, but that the money was his

- 14 father's.

By 1989 and prior to this interview, petitioner had in

excess of $3 million in Canadian bank accounts.

His explanation

could only be seen as an attempt to mislead the agents and

frustrate their investigation.

We find that petitioner intended

to mislead special agents during their investigation, and this

indicates fraud.

f.

Filing False Documents

This factor supports a finding of fraud for the same reasons

discussed in subsection (d) of this Opinion.

Petitioner's

attempt to argue that he was misinformed about the taxability of

the interest is not persuasive.

Petitioner told special agents

that he was told by an unnamed bank official that the interest

was not taxable until withdrawn, yet petitioner could not name

the official or the bank.

An official from the Royal Bank of

Canada testified that it is not the policy of the bank to advise

clients on the taxability of interest in the United States.

We

find that petitioner intentionally withheld information regarding

his foreign bank accounts from his accountant in an attempt to

evade taxes.

This is strong evidence of fraud.

See Korecky v.

Commissioner, T.C. Memo. 1985-63, affd. 781 F.2d 1566, 1569 (11th

Cir. 1986).

g.

Other Factors

We also consider it significant that petitioner pleaded

guilty to violation of section 7203 for the 1987 tax year for

- 15 having willfully failed to disclose that he had interests in

foreign bank accounts.

Although this conviction does not, in and

of itself, establish a fraudulent intent, we consider the crime

as evidence of fraud, especially when combined with other factors

taken from the record as a whole.

Petzoldt v. Commissioner, 92

T.C. 661, 701-702 (1989); McGee v. Commissioner, 61 T.C. 249, 260

(1973), affd. 519 F.2d 1121 (5th Cir. 1975).

C.

Conclusion

We find that respondent has clearly and convincingly proven

fraud on the part of petitioner for all of the years in issue,

and we so hold.

This conclusion is based on the record as a

whole and reasonable inferences therefrom, taking into account

our determination as to the credibility of petitioner and the

other witnesses presented at trial.

Petitioner has failed to

show that any portion of the underpayment was not due to fraud.

Therefore, we sustain respondent's determination that Dr. Kalo is

liable for the fraud additions for 1986 through 1988 and for the

fraud penalty for 1989.

Decision will be entered

under Rule 155.