COLE v. COMM., Cite as 107 AFTR 2d 2011-XXXX, 03/28/2011 ________________________________________ Scott C. Cole and Jennifer A. Cole, Petitioners-Appellants, v. Commissioner of Internal Revenue, Respondent-Appellee. Case Information: Code Sec(s): Court Name: In the United States Court of Appeals For the Seventh Circuit, Docket No.: No. 10-2194, Date Argued: 10/22/2010 Date Decided: 03/28/2011. Prior History: Disposition: HEADNOTE . Reference(s): OPINION In the United States Court of Appeals For the Seventh Circuit, Appeal from the United States Tax Court. No. 17275-08—Diane L. Kroupa, Judge. Before Kanne, Tinder, and Hamilton, Circuit Judges. Judge: TINDER, Circuit Judge. Appellants Scott C. and Jennifer A. Cole (a married couple from Brownsburg, Indiana) ran into trouble with the Internal Revenue Service (IRS) in 2003, when a revenue agent began auditing their 2001 joint tax return. Through this audit, the agent discovered a web of corporate and partnership entities serving dubious purposes, undocumented financial transactions, and inconsistent reports regarding the Coles' income. Incongruously, although Scott engineered much of the financial and legal tangle that landed him and Jennifer in hot water with the IRS, Scott is a licensed Indiana attorney with a practice focused on business planning and tax matters. We outline the confusing maze of entities and financial dealings below, but be forewarned that much of it makes little business or legal sense as the Coles fail to dispel the perception underlying the Tax Court's finding that the perplexing arrangements served as nothing but after-the-fact attempts to avoid taxation on the substantial income Scott earned in 2001. Background Scott and his brother Darren T. Cole formed a partnership called the Bentley Group on February 2, 1998. Under the partnership agreement, each was entitled to an “equal share of the net profits and losses ... unless all partners agree to a different proportion.” The Cole brothers, as licensed Indiana attorneys, did business as Cole Law Offices. Scott incorporated Scott C. Cole, P.C. (SCC) on October 28, 1997, as an Indiana professional corporation. Scott filed SCC's first and only tax return for tax year 2000 on March 25, 2005. SCC was declared the 99% owner of the Bentley Group (with Darren the remaining 1% owner) in the Bentley Group's 2001 tax return, filed November 10, 2004. Scott does not explain why he purportedly divested his interest in the group (or why his brother divested all but 1% of his interest), but the only documentary evidence of the transfer is that Bentley Group 2001 tax return filed in 2004. The Indiana Secretary of State administratively dissolved SCC on September 5, 2001, for failing to file mandated business entity reports. Scott also created JAC Investments, LLC. Scott reported on JAC's 2001 tax return that Jennifer Cole owned 50% of JAC and her family trust owned another 49%. Scott reported owning the remaining 1%, yet he generated all of JAC's income from legal services he performed independent of the Bentley Group. The Bentley Group's operations appeared to hum modestly along prior to 2001. Darren managed the practice; his wife Lisa worked as a paralegal. As noted above, Scott's practice involved business planning and taxation. He created limited liability companies, prepared corporate and individual tax returns, and represented clients before the IRS. The trio had signature authority over the group's checking account. Scott and Darren agreed to deem withdrawals beyond amounts earned as borrowed money. In 1999, the group reported total income at $46,121 and deductions of $46,609 (including rent, repairs, and maintenance and other businessrelated deductions) for an ordinary income loss of $488. In 2000, the group reported $69,698 in total income and $68,393 in deductions for an ordinary income gain of $1,305. This unexceptional pattern of business changed drastically in 2001. From one perspective, 2001 was the group's banner year financially. Yet the Coles' bungled management of their revenue bonanza turned their partnership's good fortunes into a fiscal calamity. A substantial portion of the 2001 revenue—a whopping $1.2 million—came from the group's biggest client: the co-trustees of the George Sandefur Living Trust. Trustees Constance J. Gestner and Terri L. Haynes made four payments of $300,000 between June 18, 2001, and July 5, 2001, for Scott's legal services for the trust. The trustees made the first check payable to “Scott Cole and Associates” and the other three checks payable to “Cole Law Office.” All four checks were deposited into the Bentley Group's account. Gestner signed an affidavit on April 12, 2005, stating that the trustees “retained Scott Cole as the Attorney to represent the Trust and to help us with any and all Trust and Estate matters.” The affidavit states that she was “fully advised by Scott Cole that his Attorney's fee would exceed the usual and ordinary maximum fee for legal services of an unsupervised administration of an estate of ten percent (10%),” that she consented to Scott's $1.2 million fee, and that she was “very satisfied with the legal representation of Scott Cole.” For tax year 2001, the Bentley Group reported $1,583,900 in gross receipts and ordinary income with no deductions. Despite Scott's financial windfall in 2001, he filed for bankruptcy in 2002, but in that proceeding failed to disclose any interest in the Bentley Group, Cole Law Offices, or any other law practice. As noted above, tax year 2001 was the year the Cole brothers maintained to the IRS that they transferred 99% of their ownership interest in the Bentley Group to Scott's professional corporation SCC (which also became defunct in 2001). But don't forget that the Bentley Group's 2001 return wasn't filed until near the end of 2004, well after the Coles learned that an audit was underway. The timing of this financial sleight of hand did not go unnoticed by the IRS or by the Tax Court judge. The IRS began auditing the Coles' 2001 joint return in 2003. After meeting with Scott fairly early in the audit process, the IRS learned of the brothers' involvement with the Bentley Group and the investigation expanded to include Darren and Lisa's 2001 joint tax return. The IRS was not favorably impressed with the Bentley Group's belated 2001 tax return. Although the 2001 return reported Darren with a 1% interest and SCC with a 99% interest in the Bentley Group, the return also reported no “distribution of property or a transfer ... of a partnership interest during the tax year.” The Bentley Group's 2000 return declared each Cole brother as a 50% owner of the group. The Cole brothers did not file employment tax returns or report the purported divestment of their Bentley Group interest on their respective joint tax returns filed with their spouses. Although the Bentley Group's 2001 return was not filed until November 2004, SCC did not exist as of September 5, 2001, and never filed a 2001 return. Scott and Jennifer's 2001 joint tax return reported $100,358 in total income and $100,276 in adjusted gross income. Through various deductions, exemptions, and credits, they took their reported taxable income down to $18,265 with a tax liability of $505. Both Scott and Jennifer signed the self-prepared return on April 11, 2002. Yet in 2001, Scott withdrew $1,173,263 from the Bentley Group's bank account. Darren and Lisa withdrew $198,308. Despite the lack of documentation, Scott and Jennifer argue that Scott's withdrawals were “investment loans” from the Bentley Group. For example, Scott made or authorized transfers of $340,000 and $300,000 to J&D Investments, LLC. Scott also “invested” $150,000 in Larkin Investments, LP. Testimony at trial indicated that both companies were managed by Scott's friends. Scott also loaned $10,000 to his brother Mark Cole for Mark's roofing company. Scott also loaned $125,865.50 to MR Parts, LLC (operated by Scott's church colleagues) and $10,400 to Houses Restored to Homes, LLC (managed by Scott's father). Scott also gave his mother $50,000 from the Bentley account to invest in MR Parts. Scott loaned his father $40,000 from the Bentley account and told his father to pay him back by giving $40,000 to Scott's church in Scott's name. Scott and Jennifer claimed a $40,000 charitable deduction yet did not report any of that money as taxable wages or self-employment income. The IRS auditors discovered separate from the Bentley Group that JAC had total deposits of $95,446 in 2001. Nearly all of the deposits were checks made out to Scott, not JAC. The IRS determined that only $15,794 was nontaxable, but the Coles only reported self-employment tax on $1,162 of JAC's income. Scott also deposited $79,294 into Jennifer's checking account in 2001, of which $59,264 was from Scott's legal practice. This money paid for school tuition, music lessons, and residential landscaping. None of these deposits were reported as income. Because the Coles did not maintain adequate books and records, IRS auditors reconstructed their 2001 earnings by employing two well-established indirect methods of identifying a person's income. The first was the “specific items” method, which examines evidence of specific amounts of a taxpayer's unreported taxable income, such as the Coles' withdrawals from the Bentley Group's bank account and other sources. See United States v. Medel, 592 F.2d 1305, 1314 n.8 (5th Cir. 1979); 35A Am. Jur. 2d Federal Tax Enforcement § 1208. Second, the IRS performed a “bank deposits” analysis of the Coles' income from other sources. This method assumes that all money deposited in a taxpayer's account in a certain period constitutes income, taking into account known nontaxable sources and deductible expenses. See Clayton v. Comm'r, 102 T.C. 632, 645 (1994) (citing DiLeo v. Comm'r, 96 T.C. 858, 867 (1991), aff'd 959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992));Estate of Mason v. Comm'r , 64 T.C. 651, 656 (1975) (citing e.g., Boyett v. Comm'r, 204 F.2d 205 [43 AFTR 915] (5th Cir. 1953)); 35 Am. Jur. 2d Federal Tax Enforcement § 860. On April 11, 2008, the IRS mailed Scott and Jennifer a deficiency notice. The Commissioner ultimately determined that Scott and Jennifer omitted $1,215,183 in income and $1,329,268 in self-employment income from their 2001 return after allocating Bentley Group-related income between Scott and Darren. The Commissioner assessed a $556,187 income tax deficiency and a $417,140 fraud penalty against Scott and Jennifer. The Commissioner also charged Darren and Lisa with a $102,227 income tax deficiency and a $76,670 fraud penalty. Scott and Jennifer petitioned the Tax Court for relief on July 14, 2008, and their case was consolidated with Darren and Lisa's case. After a trial, the Tax Court found that Scott and Jennifer understated their 2001 income. Cole v. Comm'r, T.C.M. 2010-31, 2010 WL 610701 [TC Memo 2010-31] (Feb. 22, 2010). The court found that the Coles could not avoid tax liability by merely assigning their income to others. All of the money deposited into the Bentley Group's account was allocated to the Cole brothers by the court because of the lack of credible evidence supporting the claim that the brothers assigned the group's income to SCC or that they were not the group's partners. The decision also determined that the Cole brothers failed to maintain adequate records of their income, thus justifying the Commissioner's indirect reconstruction of their incomes. The court found the Commissioner's reconstruction of the Coles' income (using the specific items and bank deposits methods) to be reasonable and substantially accurate and that the Coles failed to produce credible evidence showing otherwise. The court also found that “clear and convincing” evidence supported its finding that the Coles' underpayment was due to fraud and that the Coles failed to show that any portion was not due to fraud. The court found “that Scott and Jennifer used a scheme where they assigned income to an LLC to conceal the true nature of the earnings subject to income and self-employment taxes.” The Tax Court entered a final decision against the Coles on February 23, 2010, assessing a $556,187 deficiency and a $417,140 fraud penalty against Scott and Jennifer for tax year 2001. The court also assessed a $102,227 deficiency and a $76,670 fraud penalty against Darren and Lisa for tax year 2001. Only Scott and Jennifer Cole appealed. 1 Analysis The Coles' 71-page brief identifies 15 issues for review in a scattergun approach that does not serve them well. See United States v. Lathrop, No. 10-1099, 2011 WL 710469, at 4 (7th Cir. Mar. 2, 2011) (noting that presenting “nearly a dozen sources of error, effectively ignoring our advice that the equivalent of a laser light show of claims may be so distracting as to disturb our vision and confound our analysis” (citations omitted)). The brief contains no discussion of the standard of review, few citations to authority, generally no citation to evidence aside from their own trial testimony, and by and large fails to contain an argument beyond generalized assertions of error. The Coles' arguments predominantly consist of a series of items the Tax Court supposedly overlooked. Repeatedly they support their arguments by stating that the IRS “does not know” something about their financial arrangements. A litigant's “brief must contain an argument consisting of more than a generalized assertion of error, with citations to supporting authority.” Anderson v. Hardman, 241 F.3d 544, 545 (7th Cir. 2001). Appellants must set forth in their brief “contentions and the reasons for them, with citations to the authorities and parts of the record on which the appellant relies.” Fed. R. App. P. 28(a)(9)(A). Complete failure to comply “with Rule 28 will result in dismissal of the appeal.” Anderson, 241 F.3d at 545–46 (citing McCottrell v. EEOC, 726 F.2d 350, 351 (7th Cir. 1984)). We ascertain two issues addressed in a manner beyond a mere generalized assertion of error precluding their appeal's dismissal: (1) whether the Tax Court erred in finding that the Coles omitted income from their 2001 joint tax return, and (2) whether the Tax Court erred in imposing a fraud penalty. Pursuant to our well-established precedent, the Coles' other underdeveloped ““skeletal” arguments,” if not specifically discussed herein, are deemed waived.Hernandez v. Cook Cnty. Sheriff's Office , No. 10-1440, 2011 WL 650752, at 5 (7th Cir. Feb. 24, 2011) (citation omitted). We also note that Scott, a licensed attorney, represented himself on appeal. Although Scott does not expressly ask for special treatment as a pro se litigant in his brief, at argument he hinted that his pro se status should be considered. We note that pro se litigants who are attorneys are not entitled to the flexible treatment granted other pro se litigants. Lockhart v. Sullivan, 925 F.2d 214, 216 n.1 (7th Cir. 1991) (citation omitted); Socha v. Pollard, 621 F.3d 667, 673 (7th Cir. 2010) (citation omitted). But Jennifer is also an appellant and pro se litigants may not represent their spouse, or anyone else, on appeal. Swanson v. Citibank, N.A., 614 F.3d 400, 402 (7th Cir. 2010) (dismissing a plaintiff's husband from a lawsuit because the plaintiff purported to represent him pro se (citations omitted)). Because Jennifer did not sign the Coles' opening (and only) brief prior to argument, we were prepared to dismiss her appeal. We informed Scott of this at oral argument on October 22, 2010. The Coles moved to amend their brief's signature page to add Jennifer's signature on November 8, 2010. We granted the motion on November 12, 2010, allowing Jennifer's pro se appeal to proceed along with Scott's, but the brief and argument demonstrated that Scott structured the appellate presentation on their behalf. A. The Coles' omission of income There are two layers to the standard governing our review of the Tax Court's finding that the Coles omitted income from their 2001 joint tax return. First, we have long held that “the Commissioner's tax deficiency assessments are entitled to the “presumption of correctness.” This presumption imposes upon the taxpayer the burden of proving that the assessment is erroneous.” Pittman v. Comm'r, 100 F.3d 1308, 1313 [78 AFTR 2d 96-7262] (7th Cir. 1996) (quoting Gold Emporium, Inc. v. Comm'r, 910 F.2d 1374, 1378 [66 AFTR 2d 90-5462] (7th Cir. 1990)). To rebut the presumption of correctness and shift the burden to the Commissioner, the Coles “must demonstrate that the Commissioner's deficiency assessment lacks a rational foundation or is arbitrary and excessive.” Pittman, 100 F.3d at 1313 (citing Ruth v. United States, 823 F.2d 1091, 1094 [61 AFTR 2d 88-1041] (7th Cir. 1987)). The Coles could do this by demonstrating that the Commissioner failed to make an evidentiary showing or failed to present evidence linking them to the “alleged unreported income.” Pittman, 100 F.3d at 1313. Second, we limit our review of factual conclusions to “whether the tax court was “clearly erroneous.””Coleman v. Comm'r , 16 F.3d 821, 825–26 [73 AFTR 2d 94-1209] (7th Cir. 1994) (quoting Nickerson v. Comm'r, 700 F.2d 402, 405 [51 AFTR 2d 83-738] (7th Cir. 1983)). A factual finding “can be reversed as clearly erroneous only when “the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.”” Coleman, 16 F.3d at 826 (quoting Anderson v. Bessemer, 470 U.S. 564, 573, (1985)). Of course, we review questions of law de novo. Pittman, 100 F.3d at 1312. But because the Coles do not, for the most part, raise errors of law, and focus instead on the factual finding of whether they omitted income from their 2001 joint tax return, our review of that finding is governed by the clearly erroneous standard. Basic principles of tax law underlie this case. I.R.C. § 61(a)(1)–(2) states: Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: ((1)) Compensation for services, including fees, commissions, fringe benefits, and similar items; [and] ((2)) Gross income derived from business; .... Another thirteen examples follow § 61(a)(1)–(2), further refining the Internal Revenue Code's broad definition of “gross income.” In Comm'r v. Glenshaw Glass Co., 348 U.S. 426 [47 AFTR 162] (1955), the Supreme Court held that Congress used such language to define gross income (with somewhat different wording and under a different section) “to exert in this field “the full measure of its taxing power.””Id. at 429 (citations omitted). Thus, “the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted.” Id. at 430 (citations omitted). Starting at I.R.C. § 101, the Code lists dozens of items specifically excluded from the definition of gross income, including “Certain death benefits,” “Gifts and inheritances,” “Interest on State and local bonds,” and “Compensation for injuries or sickness.”See I.R.C. §§ 101, 102, 103, and 104. The Coles do not raise an exception or argue that the money they earned in 2001 is not gross income. Their dispute with the IRS (and the Tax Court decision) is about whether they or some other entity actually earned the income in question. The Coles' 2001 joint tax return reported adjusted gross income of $100,276, taxable income of $18,265, and a tax liability of $505. Yet, the Coles have produced no records supporting these figures. The evidence presented to the Tax Court showed that the Coles actually made a tremendous amount of money in 2001 that they did not report on their 2001 joint return. Scott, via his representation of the Sandefur Trust and others, helped the Bentley Group earn $1,430,802 in taxable deposits in 2001 as determined by the IRS and found by the Tax Court. Scott also made a decent amount of money independent of the Bentley Group as documented by the $79,652 in taxable deposits in JAC's bank account, all from Scott's legal services. Yet Scott only reported selfemployment tax on $1,162 of income for a self-employment tax liability of $164. The Coles do not directly challenge the presumption of correctness granted the Commissioner's deficiency assessment or our clearly erroneous standard for reviewing the Tax Court's factual findings. Internal Revenue Code section 6001 requires taxpayers to “keep such records, render such statements, make such returns, and comply with such rules and regulations” as required by the Commissioner. When a taxpayer fails to regularly use an accounting method, “or if the method used does not clearly reflect income,” I.R.C. § 446(b) allows the Commissioner to determine taxable income via a method that in its discretion “does clearly reflect income.” See Webb v. Comm'r, 394 F.2d 366, 371–72 [21 AFTR 2d 1150] (5th Cir. 1968) (holding that because a taxpayer's “records did not clearly reflect his income, the Commissioner was authorized to use such methods as in his opinion clearly reflected that income” (citing 26 U.S.C. § 446(b)); Factor v. Comm'r, 281 F.2d 100, 117 [6 AFTR 2d 5028] (9th Cir. 1960) (holding that an “undisputed rule is that, because of the failure of the taxpayer to keep books clearly reflecting his income, the Commissioner had the right to compute the income” using a method the Commissioner believes accurately reflects income (citations omitted)). Courts have long approved of the “bank deposits” and the “specific items” methods. See United States v. Merrick, 464 F.2d 1087, 1092 [30 AFTR 2d 72-5270] (10th Cir. 1972) (affirming a tax evasion conviction—challenged on sufficiency of the evidence—that was established by the specific items method); United States v. Stein, 437 F.2d 775, 779–81 [27 AFTR 2d 71-639] (7th Cir. 1971) (holding that a tax evasion conviction could be proved on “a bank deposits analysis” (citations omitted)). The reconstruction of a taxpayer's income need only be reasonable in consideration of the case's circumstances and facts. See Bradford v. Comm'r, 796 F.2d 303, 306 [58 AFTR 2d 86-5532] (9th Cir. 1986). The Commissioner's reconstruction of the Coles' income shows that they omitted $1,215,183 of income and $1,329,268 of self-employment income from their 2001 return. The Coles failed at the Tax Court to rebut the assessment's presumption of accuracy and fail on appeal to show clear error in the court's finding that because the Coles did not produce credible documentary or other evidence showing otherwise, the Commissioner's reconstruction was “reasonable and substantially accurate.” Instead, the Coles argue that Scott did not actually earn the money; rather, the Bentley Group earned the money. Against nearly all the evidence, Scott argues that he suddenly stopped owning part of the Bentley Group on January 1, 2001. Scott alleges, without any contemporary documentary evidence, that he divested his Bentley ownership by assigning it to SCC in spite of the evidence that Scott directed more than $1 million of the Bentley Group's funds to other entities and persons in 2001. The Coles also cite Jennifer's purported 50% passive ownership of JAC along with her family trust's purported 49% ownership. According to the Coles, they only owed tax on the 1% of JAC that Scott owned. These arguments fail on several levels. The Coles fail to show that the Tax Court clearly erred in finding (1) that there is insufficient evidence showing SCC's ownership in the Bentley Group and (2) that Scott and Darren were the only Bentley Group partners in 2001. The only documentary evidence of SCC's alleged Bentley Group partnership status was the group's 2001 return. This return was filed in November 2004—long after the Cole brothers became aware that the IRS audit had begun. This return also indicates that during 2001 there was no “distribution of property or a transfer ... of a partnership interest.” Not only are the timing and internal inconsistencies of the Bentley Group's 2001 return suspect given the dramatic increase in the Bentley Group's reported income in 2001 (from $46,121 in 1999, $69,698 in 2000, to $1,583,900 in 2001), SCC failed to file a return for 2001 (thus, paying no income tax) and became a defunct entity in 2001. We find no clear error in the Tax Court's finding that “[t]here is no written evidence for 2001 to suggest that SCC was involved with the Bentley Group.” Nor was the Tax Court clearly in error to find that the Cole brothers' testimony offered to support their after-the-fact explanation of SCC's ownership of Bentley lacked credence. The Coles argue that because Darren signed the Bentley Group's 2001 tax return and the questions on the return were presented to the Bentley Group, the omission of a property distribution or transfer does not show “that a transfer of ownership interest ... did not occur.” The Coles also argue that SCC's administrative dissolution was simply “[d]ue to an oversight.” These excuses fail to show that the Tax Court clearly erred in finding that the Coles did not rebut the presumption of correctness as to the IRS's determination that the money deposited into the Bentley Group's account was “income allocated to Scott and Darren, not SCC.” The Coles' excuses and justifications aside, the Commissioner presented sufficient evidence showing Scott's ownership in the Bentley Group. The Bentley Group did business as “Cole Law Offices,” without mentioning the existence of a corporate partner. Indiana Rule of Professional Conduct 7.5(b) at the time prohibited (it has since been modified) lawyers from practicing “under a name that is misleading as to the identity, responsibility, or status of those practicing thereunder.” The Bentley Group's tax returns for 1999 and 2000—filed before the audit began—list Darren and Scott as the owners. Bentley Group clients wrote checks to Cole Law Offices in 2001. A $300,000 check, made out by the trustees of the Sandefur Trust to “Scott Cole and Associates” on June 18, 2001, was deposited into the Bentley Group's bank account. Even at trial, the Cole brothers could not keep their answers about the Bentley Group's ownership consistent. [Attorney for the Commissioner] Did you practice law in partnership with your brother under the name Bentley Group, DBA Cole Law Offices during the year 2001? [Darren] Yes. Scott later cross-examined Darren on the issue. [Scott] Okay, now you had mentioned that in the year 2001 you did not practice law or you were not a partner with anyone but Scott Cole. Did you mean Scott Cole or Scott Cole professional corporation? [Darren] I guess it would be the corporation. When, you know, you're thinking as far as Disciplinary Commission wise or whatever, I thought of you personally as my partner, on paper Scott Cole PC was the partner. [Scott] So in the year 2000, who were the partners with Cole Law Offices? [Darren] Myself and Scott Cole PC. [Scott] Okay, in the year 2000? [Darren] Oh, myself and you. [Scott] Okay, and then in 2001, who were the partners? [Darren] Myself and Scott Cole PC. The Coles do not show how the Tax Court clearly erred in finding that Scott did not divest his Bentley Group interest in 2001 or that Scott earned the vast majority of the Bentley Group's 2001 income (which thus should be allocated to him) as evidenced by the fact that he directed the withdrawal of $1,173,263 from the group's account. The Coles argue that the Tax Court erred by finding that Scott misreported his interest in the Bentley Group in his 2002 bankruptcy filing. They argue, despite the lack of evidence, that his filing was consistent with the Bentley Group's 2001 return and the purported divestment of his Bentley Group ownership, and that he did not disclose SCC because it was dissolved on September 5, 2001. This spurious argument only accents the game of thimblerig 2 suggested by Scott's legal and financial maneuvering. It goes something like this. Scott did not earn any of the Bentley Group-related income in 2001. Look to the Bentley Group, it earned the income from Scott's legal work. Isn't Scott a Bentley Group partner? No, Scott disclaimed the entirety of his Bentley Group partnership in 2001, and now his personal corporation SCC is the primary owner of all but 1% of the Bentley Group. But wait, don't look to Scott to claim any interest in SCC because SCC disappeared on September 5, 2001, along with, poof!, apparently any obligation Scott believed he had to pay taxes on his 2001 financial windfall. As Darren testified at trial, SCC was at best a Bentley Group partner “on paper” (the paper consisting only of a tax return created after the audit began), but in reality Scott never ended his Bentley Group partnership. Because the Coles do not show how the Tax Court's findings of fact as to the Bentley Group ownership were clearly erroneous, they are dispositive of the arguments that the Bentley Group income was not attributable to the Coles. Ignoring the clearly erroneous standard of review for factual findings such as the ownership of the Bentley Group, the Coles argue that the Tax Court lacked jurisdiction over the Bentley Group. The Coles' theory is the Bentley Group is not a relevant party because the group's 2001 tax return did not list either Scott or Jennifer as Bentley Group partners. Only Darren Cole and SCC were listed as partners. Because Scott and Jennifer were not listed as partners, they contend that they were somehow surprised when the IRS attributed partnership income to them. This lack of notice, the argument goes, prevented the Coles from presenting evidence regarding their tax liability for the group's income. This argument lacks citation to authority. The Coles do not explain what type of notice was necessary to substantively make a difference. And the Coles had notice that the IRS would find Scott at least partially liable for Bentley Group income because the April 11, 2008, deficiency notice attributed the group's income to the Coles. Most importantly, the Coles do not show how the Tax Court clearly erred in finding that Scott was in fact a Bentley Group partner in 2001. Even if Scott had effectively documented his purported divestment of his Bentley Group interest, the divestment lacked economic substance as demonstrated by his continuous dominion and control over the group's assets for personal purposes. Under the assignment of income doctrine, taxpayers may not shift their tax liability by merely assigning income that the taxpayer earned to someone else. Kenseth v. Comm'r, 259 F.3d 881, 884 [88 AFTR 2d 2001-5378] (7th Cir. 2001) (citing Lucas v. Earl, 281 U.S. 111, 114–15 [8 AFTR 10287] (1930); United States v. Newell, 239 F.3d 917, 919–20 [87 AFTR 2d 2001-850] (7th Cir. 2001)). In Lucas, the Supreme Court held that a taxpayer's salary may not escape tax “by anticipatory arrangements and contracts however skilfully devised to prevent the salary when paid from vesting even for a second in the man who earned it.” 281 U.S. at 114–15. Tax law makes “no distinction ... according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.”Id. at 115. In Griffiths v. Helvering, the Court refused to allow “the refinements of title” to determine a taxation issue and focused instead on the “actual command over the property taxed.” 308 U.S. 355, 357 [23 AFTR 784] (1939) (quoting Corliss v. Bowers, 281 U.S. 376, 378 [8 AFTR 10910] (1930)). The Court held that “a lawyer's ingenuity devised a technically elegant arrangement” that created “an intricate outward appearance ... to the simple sale ... and the passage of money.” Griffiths, 308 U.S. at 357. Scott never gave up control of the Bentley Group or its funds as demonstrated by his transferring $1,173,263 in Bentley Group money in 2001. The Coles claim that some of these transfers were investment loans, but they do not explain why Scott gave his mother Bentley Group money and loaned his father $40,000 of Bentley Group funds. The Coles argue that they did not receive any personal benefit from these transactions. But they do not explain how they could not have benefitted when Scott's father gave Scott's church $40,000 and then Scott claimed a $40,000 charitable deduction on the Coles' personal tax return without ever reporting the money as income. As found by the Tax Court, Scott acknowledged that as an attorney he earned income from providing legal services but thought he could avoid reporting that income by depositing that money into the Bentley Group account and assigning his Bentley Group interest to SCC. The Coles fail to show that the court clearly erred in finding that Scott may not avoid tax liability on his income by assigning it to SCC when substantively his Bentley Group ownership never changed as evidenced by Scott's continued dominion and control over the partnership's funds. See Trousdale v. Comm'r, 219 F.2d 563, 567 [46 AFTR 1732] (9th Cir. 1955) (affirming the Tax Court's finding that “the transaction was not in substance and effect the sale of a partnership interest”). The Coles' argument that they did not benefit from the loans is frivolous because “gross income means all income from whatever source derived, including ... [c]ompensation for services.” I.R.C. § 61(a)(1). Even if the Coles provided genuine documentation as to the loans (providing information such as the loans' terms or interest rates) and we were inclined to view them as bona fide loans, Scott would still owe taxes on the income because before he loaned the money, he incurred an undeniable accession to this wealth, clearly realized it, and exercised dominion over it.See Glenshaw Glass Co. , 348 U.S. at 431. A majority of the Bentley Group's income came from the Sandefur Trust for legal representation undoubtedly performed by Scott. Regardless of whether this was an inadvertent error, the first of the four checks was made out to “Scott Cole and Associates,” indicating that the trustees intended to pay Scott for his legal services. As previously noted, co-trustee Gestner signed an affidavit that was included among the documents before the Tax Court declaring that the trustees “retained Scott Cole as the Attorney to represent the Trust.” The fee Scott Cole charged—not the Bentley Group or Cole Law Offices—exceeded the usual fee for such legal services, but Gestner was “very satisfied with” Scott's legal representation, considering his $1.2 million fee to be worthwhile. Another document presented in the Tax Court was a motion before the Shelby County, Indiana, Circuit Court signed by Scott declaring that “Scott Cole worked in his legal capacity to quash any attempt to contest the” trust, among other matters. Scott exercised control over the fees by having the money deposited into the Bentley Group account and then moving $1,173,263 of Bentley Group money in 2001 to other persons and entities. The Coles' attempt to avoid paying taxes on this income by declaring that they did not benefit from the loans and thus somehow assigned the income is a nonstarter. See United States v. Basye, 410 U.S. 441, 447–48 [31 AFTR 2d 73-802] (1973) (noting that two familiar principles of income taxation are “first, that income is taxed to the party who earns it and that liability may not be avoided through an anticipatory assignment of that income, and, second, that partners are taxable on their distributive or proportionate shares of current partnership income irrespective of whether that income is actually distributed to them”); Comm'r v. First Sec. Bank of Utah, 405 U.S. 394, 403–04 [29 AFTR 2d 72-781] (1972) (noting that it is “well established that income assigned before it is received is nonetheless taxable to the assignor”); Comm'r v. Sunnen, 333 U.S. 591, 604 [36 AFTR 611] (1948) (“As long as the assignor actually earns the income or is otherwise the source of the right to receive and enjoy the income, he remains taxable.”). 3 The Coles also do not show how the Tax Court clearly erred in finding that the Coles omitted other income, namely, the funds deposited into accounts held by JAC Investments and Jennifer Cole. The Coles do not explain their failure to report $79,294 in deposits into Jennifer Cole's personal checking account, including $59,264 in legal fees earned by Scott. We do not find clear error in the Tax Court's finding that the Coles failed to report these deposits as income. JAC reported gross receipts of $146,957 in 2001 (with $28,647 in unsubstantiated expenses), yet Scott only reported $1,162 in income for self-employment tax purposes in 2001 and Jennifer reported none at all. The Coles' theory for the tax treatment of this income is that Jennifer owned 50% and her family trust 49% as members. Scott conveniently owned only 1% as a member-manager who ran JAC's day-to-day operations. Yet, as noted above, the assignment of income doctrine prohibits taxpayers from shifting their tax liability by simply assigning income that the taxpayer earned to someone else. Kenseth, 259 F.3d at 884. The deposits into JAC's account were almost exclusively checks written to Scott. And the Coles used the JAC money for personal reasons, such as church tithing and mortgage payments. The Tax Court's finding of fact that the Coles “avoided income and self-employment taxes by assigning income from Scott's law practice to JAC and using those funds for personal purposes” was not clearly erroneous. The Coles raise another jurisdictional argument that bears little mention but we will address it anyway. The Coles argue that the Tax Court erred in taking jurisdiction over JAC Investments because the Commissioner failed to apply the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA) audit and litigation procedures, see I.R.C. §§ 6221–6234, namely by not sending JAC's partners a Notice of Final Partnership Administrative Adjustment. This argument lacks merit. Internal Revenue Code section 6231(g)(2) permits the Commissioner to find that TEFRA does not apply to a partnership based on its tax return. Scott answered “no” to the question on JAC's 2001 return asking whether JAC was subject to TEFRA. The Coles' attempt to raise TEFRA, when Scott expressly stated that JAC was not subject to TEFRA, is misguided. Because none of the Tax Court's findings as to the Coles' unreported income from 2001 were clearly erroneous, we affirm the court's finding that the Coles omitted $1,215,183 of income and $1,329,268 of self-employment income from their 2001 joint tax return. 4 B. The imposition of the fraud penalty We next address the Tax Court's finding that the Coles were liable for the fraud penalty. If any portion of an “underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.” I.R.C. § 6663(a). Unlike the assessment of unreported income, courts do not presume the existence of fraud; rather, the Commissioner carries the burden of proving “by clear and convincing evidence that” an underpayment of taxes “was due to fraud.” Toushin v. Comm'r, 223 F.3d 642, 647 [86 AFTR 2d 2000-5505] (7th Cir. 2000) (citing I.R.C. § 7454(a);Pittman , 100 F.3d at 1319). If the Commissioner proves “that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.” I.R.C. § 6663(b). The fraud determination turns on whether the taxpayer “had an actual, specific intent to evade a tax” owed.Stephenson v. Comm'r , 79 T.C. 995, 1005 (1982),aff'd , 748 F.2d 331 [55 AFTR 2d 85-313] (6th Cir. 1984) (per curiam). Rarely does direct evidence exist of a taxpayer's fraudulent intent. Toushin, 223 F.3d at 647. But “the IRS may establish fraudulent intent through circumstantial evidence.” Id. Like our review of the findings regarding the Coles' unreported income, a tax court's fraud determination is a finding of fact that “will not be set aside unless clearly erroneous.” Id. (quotingPittman , 100 F.3d at 1319). In Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943), the Supreme Court noted that: Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation. Nor would we by definition constrict the scope of the Congressional provision that it may be accomplished “in any manner”. By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. Courts have expanded these examples to include the understatement of income, failure to file tax returns, and implausible or inconsistent explanations of behavior.Bradford , 796 F.2d at 307 (citations omitted). Commingling assets in an attempt to avoid tax liability, filing late tax returns, and failure to maintain adequate personal or corporate business records have also been cited as indications of fraud. United States v. Walton, 909 F.2d 915, 926 [66 AFTR 2d 90-5379] (6th Cir. 1990). Courts also consider relevant the taxpayer's education, intelligence, and tax expertise in determining fraudulent intent. See id. at 927;Stephenson , 79 T.C. at 1006. The Tax Court found the Coles liable for the fraud penalty citing a variety of factors, or “badges of fraud,” to show that the Commissioner proved with clear and convincing evidence that Scott and Jennifer fraudulently understated their 2001 tax liabilities. These findings were not clearly erroneous. The court started with the Coles' education and intelligence as illustrated by Jennifer's prior work as an accountant after earning a college degree and Scott's attorney's license, oath to uphold the law, and his legal practice that included tax law and preparing tax returns. The Coles cannot claim to be unsophisticated or unknowledgeable of the Code's principles. Thus, we reject their claim that the Tax Court used “acts of negligence to show fraud,” particularly considering the number of improper acts identified by the Tax Court. The Tax Court's finding that the Coles omitted $1,215,183 of income and $1,329,268 of self-employment income from their 2001 joint tax return is a longstanding sign of intent to evade taxation. See Spies, 317 U.S. at 499 (noting that “covering up sources of income” allows an inference of “affirmative willful attempt” to evade);Bradford , 796 F.2d at 308 (failing to report taxable income supported a fraud finding). Intensifying this indication of fraud is that Scott's attempt to avoid tax liability for his 2001 windfall took the form of an elaborate shell game through which Scott attempted (although ineptly) to use his knowledge of tax matters to place the income in a defunct entity purportedly free of tax responsibilities. See Walton, 909 F.2d at 926 (noting that “implausible explanations of conduct” is “a strong indication of fraud”). Failing to maintain accurate records “is a strong indicum of fraud with intent to evade taxes.” Toushin, 223 F.3d at 647 (quoting Estate of Upshaw v. Comm'r, 416 F.2d 737, 741 [24 AFTR 2d 69-5594] (7th Cir. 1969)). The Tax Court found that although Scott claimed that he diverted most of his income from his Bentley Group-related legal fees to others ostensibly as loans, the transactions lacked documentation. The Coles also failed to document the alleged transfer of the Bentley Group interest to SCC or his deposits into the Bentley Group account. The lack of records also supported the Tax Court's finding that Scott failed to respect “the existence of different entities or the partners in the Bentley Group.” The Coles' defense is that the records were “lost or misplaced or discarded due to the passage of time” and that an August 19, 2005, storage building fire consumed “many of the records of the Bentley Group.” Regardless of these excuses, Scott testified that he did not retain billing invoices or save the papers he used to prepare his tax returns. And the IRS began auditing their 2001 tax return in 2003, well before the 2005 fire and not long after the Coles filed their joint 2001 income tax return on April 11, 2002. The Coles also do not elaborate on what records they would produce but for the fire or why they did not attempt to reproduce the records. Nor do they explain why the loan recipients did not have records of the transactions or why the Coles did not keep at least some of the records in Scott's home office. And some documents survived as evidenced by the inclusion in the Tax Court record of the Bentley Group partnership agreement and handwritten minutes from an October 5, 1999, meeting of “Cole Law Offices” partners Darren and Scott Cole. The Tax Court's finding that the absence of records suggested fraud was not clearly erroneous. The Coles also commingled business and personal assets. Scott deposited some of his earnings from his legal practice into the JAC account and Jennifer's personal account. Jennifer wrote checks from these accounts to pay for personal expenses, such as school tuition, landscaping, and music lessons. Scott also withdrew $1.17 million from the Bentley Group in 2001 and loaned it to friends and family. The Tax Court did not clearly err in finding that Scott “showed little respect for business formalities and effectively made the Bentley Group nothing more than a checking account.” The Coles also concealed assets by funneling income into multiple business entities that lacked any business purpose. The entities served, as found by the Tax Court, “as conduits to hide income Scott earned from providing legal services and preparing tax returns.” Instead of reporting the income from his law practice, Scott attempted (after the IRS audit began) to assign his interest in his law practice to his personal corporation (for which he disclaimed all but 1% of the ownership) that later that year became defunct. This scheme, as found by the Tax Court, was an attempt to “conceal the true nature of the earnings subject to income and selfemployment taxes.” Scott also misrepresented his occupation (and thus his source of income) by stating on the Coles' 2001 return that he was an investor. Scott directed his income through several entities he undoubtedly controlled. By attempting to minimize his ownership, Scott thought he could report only $505 in tax liability despite earning more than $1.2 million in tax year 2001. This scheme, given Scott's apparent knowledge of tax and business planning matters, is a striking badge of fraud that Scott endeavors to further by advancing spurious arguments on appeal.Walton , 909 F.2d at 927 (agreeing with the district court that the taxpayer's “most incredible, ... most nonsensical, child-like story,” despite his college education and business experience, supported a fraud finding). Finally, the Coles argue “that the Tax Court may have used acts by Darren Cole and Lisa Cole” and an investment company “to cross contaminate Scott and Jennifer Cole, JAC, or Bentley Group and to conclude fraud.” The Coles do not show where the Tax Court confused anything. Putting aside that the Coles raise this issue as a mere possibility, the Tax Court explicitly delineated between Scott and Jennifer's acts and Darren and Lisa's acts suggesting fraud. The Coles' claim that some of the acts suggesting fraud were on account of the Bentley Group or JAC ignores that Scott was a Bentley Group partner and Scott managed JAC's affairs. Thus, the Coles fail to show where the Tax Court committed clear error in finding that the Commissioner proved “by clear and convincing evidence that Scott and Jennifer each fraudulently understated their tax liabilities for 2001.” 5 Conclusion We Affirm the judgment of the Tax Court. ________________________________________ 1 “The Coles” from this point on in our opinion refers to Scott and Jennifer unless otherwise noted. We do not discuss the Tax Court ruling on the liability of Darren and Lisa. ________________________________________ 2 Thimblerig is a game “played with three small cups shaped like thimbles and a small ball or pea that is so quickly shifted from under one cup to under another that the person watching is often misled.” Webster's Third New International Dictionary 2375 (1986). Often the game functions “as a swindling operation.”Id. ________________________________________ 3 The IRS and the Tax Court allocated the vast majority of the 2001 Bentley revenues to Scott rather than splitting them equally with Darren as the partnership agreement stated. This is consistent with the manner in which Scott controlled the subsequent disbursement of those funds, and is not clearly erroneous. ________________________________________ 4 The Coles argue that the Tax Court erred in allowing Revenue Agent Loretta Reed to testify without giving the Coles notice and that she used notes during her testimony. These claims are without merit. The Coles do not show why Reed's use of notes constitutes error. The Coles also had notice. The Commissioner's pretrial memorandum declared an intent to call a revenue agent, which at the time was Jeffrey Nichols. The Commissioner wanted him to discuss the Cole couples' lack of cooperation and the indirect methods of reconstructing their income. At trial, Darren requested the Commissioner call Reed to discuss Darren and Lisa's alleged lack of cooperation. The Coles (all four of them) received notice from the IRS on May 26, 2009, indicating “that it is possible to have Revenue Agent Loretta Reed available for trial.” Reed did not testify until June 18, 2009, giving the Coles ample notice. Scott and Jennifer also fail to show how Reed's testimony caused them prejudice. ________________________________________ 5 Because we affirm the Tax Court's finding that the Coles fraudulently avoided tax liability, the Coles' statute-of-limitations defense fails. I.R.C. § 6501(c)(1) creates an exception for cases of a “fraudulent return with the intent to evade tax.” In such cases, the tax “may be assessed ... at any time.” Id. And even without fraud, the three-year limitations period is extended to six years, where, as here, a taxpayer omits from gross income an amount greater than 25% of the gross income reported on the return. I.R.C.§ 6501(e)(1)(A); see Beard v. Comm'r, No. 09-3741, 2011 WL 222249 [107 AFTR 2d 2011-552], at 1 (7th Cir. Jan. 26, 2011). The IRS issued the Coles' notice of deficiency on April 11, 2008, within six years of April 11, 2002, when the Coles filed their 2001 return Lisa R. Cole, et vir., et al. v. Commissioner, TC Memo 2010-31 , Code Sec(s) 61; 446. ________________________________________ LISA R. AND DARREN T. COLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent SCOTT C. AND JENNIFER A. COLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Case Information: Code Sec(s): 61; 446 Docket: Dkt Nos. 16991-08, 17275-08. Date Issued: 02/22/2010. Judge: Opinion by Kroupa, J. Tax Year(s): Year 2001. Disposition: Decision for Commissioner. HEADNOTE 1. Unreported income—assignment and reconstruction of income—specific items and bank deposits methods—proof. IRS's bank deposits and specific items reconstructions of attorneys/brothers' and their wives' unreported legal services/family law practice income, which they attempted to assign to defunct professional corp. as law practice's sole partner or to other entities or accounts, was upheld. Taxpayers couldn't support assignment to defunct corp. when considering that corp. was dissolved and reported no income or tax during year at issue. Taxpayers also had no valid rebuttal to IRS's reconstruction methods, which were reasonable and supported by overall evidence, including evidence that 1 client alone paid over $1 million for legal services, that there were other unreported taxable deposits for legal services, and that taxpayers made personal withdrawals from practice account. Allegation that some funds were used to make loans was irrelevant and itself showed no error in IRS's determination. Tax Court concluded that any inaccuracies were attributable to taxpayers themselves and their failures to maintain proper books and records or to cooperate with IRS during audit. Reference(s): ¶ 615.047(5) ; ¶ 615.186(15) ; ¶ 4465.69(35) Code Sec. 61 ; Code Sec. 446 2. Fraud penalties—clear and convincing evidence—unreported income—concealment of income. Fraud penalties were upheld against attorneys/brothers and their wives for year they had significant unreported income from family law practice: IRS clearly proved that each taxpayer fraudulently understated his or her liabilities for year at issue, and they failed to rebut same. Fraud evidence as to 1 couple included that husband's legal work included tax work, that his wife also worked as accountant, that they both commingled business and personal funds, and that they reported no income from law practice during subject year but instead concealed same in or through conduit entities and effectively made law practice “nothing more than checking account.” And fraud evidence as to other couple included that husband produced no financial records despite being in charge of practice's finances, that his wife worked as paralegal and also had access to and signatory authority over practice's account, that they both earned substantial amounts from practice yet reported only nominal portion on their return, that they used other entities to transfer or assign foregoing income to, and that they were uncooperative with IRS. [pg. 190] Reference(s): ¶ 66,635.01(15) ; ¶ 66,635.01(20) Code Sec. 6663 3. Limitations periods on assessments—fraud. Limitations periods didn't bar assessments against attorneys/brothers and their wives for year they fraudulently understated their liabilities: Code Sec. 6501(c)(1) 's open-ended period applied. Reference(s): ¶ 65,015.13(45) Code Sec. 6501 Syllabus Official Tax Court Syllabus Counsel Darren T. Cole and Scott C. Cole, for petitioners. Stewart Todd Hittinger and Timothy Lohrstorfer, for respondent. KROUPA, Judge MEMORANDUM OPINION Respondent determined deficiencies in petitioners' 1 Federal income taxes and fraud penalties under section 6663 2 for 2001. Specifically, respondent determined a $102,227 deficiency and a $76,670 section 6663 fraud penalty against Darren and Lisa Cole for 2001. 3 Respondent also determined a $556,187 deficiency and a $417,140 section 6663 fraud penalty against Scott and Jennifer Cole for 2001. There are two primary issues for decision. The first issue is whether petitioners understated their income in the amounts respondent determined for 2001 as adjusted. We hold that they did. The second issue is whether petitioners are liable for the fraud penalty for 2001. We hold that they are. Because we find fraud, respondent is not time barred from assessing petitioners' taxes for 2001. Background Lisa and Darren Cole resided in California at the time they filed their petition. Jennifer and Scott Cole resided in Indiana at the time they filed their petition. The Bentley Group Petitioners Scott C. Cole (Scott) and Darren T. Cole (Darren) are brothers. Scott and Darren are attorneys who practiced law in Indiana through an entity known as the Bentley Group during 2001. Bentley was the maiden name of Darren's wife, Lisa Cole (Lisa). The brothers formed the Bentley Group in 1998 and also did business under the name Cole Law Offices. The Bentley Group and Cole Law Offices were different names for the same business, but there were no assumed name filings for either entity. The law practice was a family affair, with Scott, Darren, and Lisa all taking an active part in the business. Scott's legal practice focused in part on business planning and taxation. Scott created limited liability companies (LLCs) for his clients, prepared corporate and individual tax returns, and represented clients before the Internal Revenue Service (IRS). Scott and Darren also performed criminal defense work, including work for the public defender's office in Boone County, Indiana. Darren, a graduate of Creighton University School of Law, was responsible for the management of the law practice. Lisa, a college graduate, acted as a paralegal. Darren opened a business checking account for Cole Law Offices but used the Bentley Group's employer identification number. Scott, Darren, and Lisa all had signature authority over this account. The brothers agreed to share equally the law practice's profits and losses, though petitioners failed to present any documentation regarding this sharing arrangement. Darren and Scott also agreed that they could withdraw money from the Bentley Group's account. Any money withdrawn from the account other than money they earned for their legal services was considered “borrowed.” Petitioners failed to report any money they withdrew, however, as income for providing legal services and they also failed to provide any loan documents, notes, or any other investment account records evidencing loan transactions be-[pg. 191] tween Scott, Darren, and the Bentley Group's account. Scott and Darren advised their individual clients, and they also advised clients together. These joint clients were the law practice's clients. Clients made payments either directly to the respective brother, through the Bentley Group, or to Cole Law Offices. Scott also received payment from a client with a check made payable to Scott C. Cole and Associates even though there was no such entity. The brothers did not keep records, nor did they produce or maintain invoices for their services. They also failed to keep records or invoices for Lisa's paralegal services. The taxable deposits in the Bentley Group's account for 2001 totaled $1,430,802. The earnings came from many sources involving the efforts of both brothers and Lisa. The Bentley Group received most of its legal fees from Constance J. Gestner and Terri L. Haynes, co-trustees of the George Sandefur Living Trust (Sandefur Trust), which paid Scott $1.2 million in 2001 to represent the trust in all estate matters. The Sandefur Trust paid the fees in four installments of $300,000. The first check was payable to “Scott Cole and Associates,” a fictional business, and the remaining checks were made payable to “Cole Law Offices.” Scott, Darren, and Lisa withdrew in excess of $1 million from the Bentley Group's account during 2001. They then transferred the funds into numerous other accounts with no business explanation for doing so. The brothers were unclear as to which account they used for Interest on Lawyer Trust Accounts (IOLTA) purposes. No records were kept for any of the transfers from the Bentley Group's account. The withdrawals made by or on behalf of Darren or Lisa totaled $198,308, while the withdrawals made by or on behalf of Scott included $1,173,263 in 2001. Scott and Jennifer Cole's Personal Financial Activities Scott did not always deposit his legal services fees into the Bentley Group's account. Scott deposited $79,294 into the personal checking account of his wife, Jennifer Cole (Jennifer), and deposited $6,475 into his personal bank account in 2001. Scott and Jennifer used the funds in these accounts to pay a variety of personal expenses including their children's school tuition and music lessons and residential landscaping. Scott failed to report the legal services fees he generated in 2001 as taxable wage or self-employment income regardless of which account the amounts were credited. In addition, Scott failed to report any amounts he withdrew from the Bentley Group's account as taxable wage or self-employment income even though he withdrew $1 million plus for personal nonbusiness purposes. Scott freely transferred amounts in the Bentley Group's account to his family and friends without keeping sufficient documentation of the transfers or reporting the transactions. For example, he transferred $50,000 from the Bentley Group's bank account to his mother. Scott also lent his father $40,000 from the Bentley Group's account. Scott used this transaction to further convolute the tracing of his income and told his father, rather than paying him back directly, to make a contribution to his church for $40,000 in Scott's name. Scott and Jennifer, thereafter, claimed a $40,000 charitable contribution deduction yet failed to report any of that amount as taxable wage or self-employment income. Scott also lent $300,000 to a friend for options trading and made a loan to his brother Mark for Mark's roofing company. Scott has not provided any records or other documentation to show that any amount withdrawn from the Bentley Group's account was not taxable. In addition, he has failed to show any business purpose for these transfers. Scott also created an LLC known as JAC Investments, LLC (JAC). JAC are the initials for Jennifer A. Cole. JAC reported its principal business activity as “Investments” although there is nothing in the record to show any stock transactions. Rather, JAC operated as a conduit to which Scott transferred and assigned income from his legal services. JAC reported taxable deposits for 2001 of $79,652 and [pg. 192] claimed $28,647 of expenses, though none of these expenses have been substantiated. Deposits into JAC's bank account were almost exclusively checks made payable to Scott individually, not JAC. Jennifer is a college graduate and had previously worked as an accountant. In 2001 she was a homemaker and had no income of her own, yet Scott reported her as owning a 99-percent interest in JAC with him owning a 1-percent interest in JAC. Scott reported self-employment tax on only $1,162 of income for 2001. Scott formed and solely owned Scott C. Cole, P.C. (SCC), an Indiana professional corporation in 1997. 4 The Indiana Secretary of State administratively dissolved SCC in 2001 because SCC did not file its required business entity reports. SCC had no assets and did not appear to serve any business purpose. In 2005 Scott filed a tax return for SCC for 2001, the first and only tax return filed for SCC. SCC did not report receiving any income from the Bentley Group's account in 2001. SCC reported gross receipts of $158,553 and taxable income of $738 with a reported tax due of $258. Scott transferred or assigned over $1 million in legal services fees in 2001 from the Bentley Group to at least seven different accounts. Scott commingled amounts in the Bentley Group's account with amounts in other accounts including JAC's account, SCC's account, Jennifer's personal account, Scott's personal account, his father's business account, and his mother's account. Scott and Jennifer failed to report, however, any wages or salaries, Schedule C income, or income from the Bentley Group or Cole Law Offices on their joint tax return for 2001. Instead, the joint tax return reflected only $341 of tax liability and $164 of self-employment tax liability. Scott subsequently filed for bankruptcy in 2002, at which time he failed to disclose any interest in the Bentley Group, Cole Law Offices, or any other law practice. Darren and Lisa Cole's Personal Financial Activities Darren also failed to report the amounts he withdrew from the Bentley Group's account on any tax return for 2001. Darren's primary source of income during 2001 was from the practice of law. This income was paid through the Bentley Group or directly to Darren. Like Scott, Darren transferred his legal services fees to multiple accounts. Darren maintained no bank account in his own name during 2001. Darren deposited checks totaling $24,847, paid to him for legal services he performed, into Lisa's bank account in 2001 but failed to report this amount on their joint tax return for 2001. Scott formed an LLC for Darren and Lisa's benefit known as LRC Investment, LLC (LRC). LRC are the initials for Lisa R. Cole. LRC, similar to JAC, served no business purpose. Darren used it as a conduit to transfer and assign his legal services fees. Darren opened a bank account in LRC's name with an initial $20,000 deposit. No explanation has been given as to where the $20,000 originated or whether it was taxable. Darren and Lisa claimed to be 50-percent partners in LRC. Darren filed an information return for LRC for 2001 reporting LRC's principal business as “Management Consulting” and concealed that he was an attorney. The Bentley Group distributed $145,930 to LRC, which LRC reported as its total gross receipts. No amount was reported on any investment or stock transaction. LRC claimed unsubstantiated expenses of $135,636. In addition to lacking documentation, no claimed expense bore any relationship to the claimed business of LRC. Lisa represented on a car loan application that she was employed by the Bentley Group and that she received a yearly salary of $51,996. Lisa made a similar representation on a home mortgage loan application. Her yearly salary on the mortgage loan application was represented at an increased $72,000 even though the representations were only days apart. In addition, Lisa deposited a total of $138,248 into her personal bank account during 2001. Despite these deposits and representations, Lisa failed to report any wage or self-employment income on any tax return for 2001. Darren and Lisa withdrew a total of $198,308 from the Bentley Group's bank account in 2001 yet failed to report any [pg. 193] amount. Lisa received at least $45,527 from the Bentley Group and other sources during 2001 but failed to report even a fraction of this amount. Lisa also made a $28,873 down payment on a house at the same time the Bentley Group's bank account reflected a withdrawal of the same amount, yet she failed to report any of this amount. Instead, Darren and Lisa reported only $10,201 in adjusted gross income on their joint tax return for 2001 and sought a $2,477 refund. They reported two minimal sources of income on the joint tax return. They reported only $2,978 from the Bentley Group and $10,294 from LRC. Darren filed for bankruptcy in 2003, at which time he failed to disclose any interest in the Bentley Group or any other law practice. Respondent's Examination Respondent began an examination of Scott and Jennifer's joint tax return for 2001 in 2003. Respondent assigned the audit to Revenue Agent Loretta Reed. Revenue Agent Reed met with Scott and learned of Scott and Darren's involvement in the Bentley Group, which still had not submitted a tax return for 2001. Revenue Agent Reed thereafter requested, due to Darren's involvement in the Bentley Group, that Darren and Lisa's joint tax return for 2001 be selected for examination. Respondent assigned Revenue Agent Reed to audit Darren and Lisa. Neither Lisa nor Darren cooperated with Revenue Agent Reed during the audit. Darren threatened that Revenue Agent Reed would be arrested if she came upon his property, and Revenue Agent Reed received no response from Lisa after sending audit notices and summonses to her. Revenue Agent Reed eventually obtained audit information by issuing third-party summonses to Darren and Lisa's banks and mortgage company. The Bentley Group's 2001 Information Return, Form 1065 Darren filed the information return for the Bentley Group for 2001 in 2004 after the audit of both partners had begun. The Bentley Group reported gross receipts and ordinary income of $1,583,900. It also reported there were no cash distributions or transfers of partnership interests for the 2001 tax year. This was inconsistent with all the distributions made to entities and persons during 2001. The K-1s attached to the Bentley Group's information return also did not reflect reality. The K-1 on the late-filed information return reflected that Darren had a 0-percent interest in the profits and losses of the Bentley Group and had only a 1-percent interest in its capital. The K-1 reflected that Scott's defunct SCC owned all the profits and losses of the Bentley Group and had a 99-percent interest in its capital. SCC had not filed any tax return for 2001. There was no K-1 for Scott individually. Neither Scott nor Darren filed employment tax returns for the Bentley Group, and the Bentley Group claimed no deduction on the information return for payment of unemployment taxes. It also claimed no other expenses normally associated with operating a law practice. Further, despite the significant legal services income the Bentley Group received during 2001, the Bentley Group did not report any legal services income for 2001. At trial, Scott and Darren both asserted that SCC was the only partner of the Bentley Group. Neither Darren nor Scott reported any sale of his interest in the Bentley Group to SCC on his joint tax return. Deficiency Notices Issued Respondent used the specific items method to reconstruct Scott's and Darren's respective incomes from the Bentley Group in 2001. Respondent used the available records for the withdrawals that petitioners made from the Bentley Group's bank account. Respondent also did bank deposit analyses with respect to their incomes from other sources. Respondent determined that petitioners had omitted wages and self-employment income from their joint tax returns, and respondent issued petitioners deficiency notices and asserted fraud penalties against them. Petitioners timely filed petitions with this Court. Discussion We are asked to decide whether petitioners, two attorney brothers and their spouses, failed to report over $1.5 million [pg. 194] in income from providing legal and tax preparation services, and if so, whether such underreporting of income was attributable to fraud. Petitioners created so many different legal entities and distributed money to so many entities and individuals in 2001 that petitioners themselves were confused at trial. Petitioners failed to keep adequate invoices and records, thus making their financial dealings even more convoluted. We begin by discussing the unreported income. I. Unreported Income Gross income generally includes all income from whatever source derived. Sec. 61(a). Taxpayers must keep adequate books and records from which their correct tax liability can be determined. Sec. 6001. When a taxpayer fails to keep records, the Commissioner has discretion to reconstruct the taxpayer's income by any reasonable means. Sec. 446(b); Webb v. Commissioner, 394 F.2d 366, 371-372 [21 AFTR 2d 1150] (5th Cir. 1968), affg. T.C. Memo. 1966-81 [¶66,081 PH Memo TC]; Factor v. Commissioner, 281 F.2d 100, 117 [6 AFTR 2d 5028] (9th Cir. 1960), affg. T.C. Memo. 1958-94 [¶58,094 PH Memo TC]. The Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving that these determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). Both brothers acknowledge they are attorneys and earned income from providing legal services. In addition, Scott prepared taxes for others and testified that he understood that income earned from legal services must be reported on tax returns. They argue nonetheless that all the income deposited in the Bentley Group's account should be assigned to SCC, a defunct entity, not them individually. Taxpayers may not avoid their tax liability on income they earned by simply assigning income to others. Trousdale v. Commissioner, 16 T.C. 1056, 1065 (1951), affd. 219 F.2d 563 [46 AFTR 1732] (9th Cir. 1955). When a taxpayer creates an entity as a pure tax avoidance vehicle, the assignment of income theory applies to tax the taxpayer for the income attributed to the entity. See Jones v. Commissioner, 64 T.C. 1066, 1076 (1975). There is no written evidence for 2001 to suggest that SCC was involved with the Bentley Group. In fact, SCC was a defunct corporation that had been dissolved in 2001. The only document suggesting that SCC was a partner of the Bentley Group was the K-1 attached to the Bentley Group's information return for 2001, but this return was not filed or prepared until after Scott and Darren were being audited. All other evidence, including testimony at trial, shows that Scott and Darren were the only two partners of the Bentley Group in 2001. Furthermore, not only was SCC defunct in 2001 but it reported no taxable income and paid no income tax in 2001. Accordingly, we find any money deposited into the Bentley Group's account is income allocated to Scott and Darren, not SCC. Petitioners failed to maintain adequate records of their income. Revenue Agent Reed therefore collected financial information through third-party summonses issued to their banks and mortgage lenders. The Commissioner may use indirect methods of reconstructing a taxpayer's income. Holland v. United States, 348 U.S. 121 [46 AFTR 943] (1954). The reconstruction of a taxpayer's income need only be reasonable in light of all surrounding facts and circumstances. Giddio v. Commissioner, 54 T.C. 1530, 1533 (1970). The specific items and bank deposits methods of income reconstruction used by the Commissioner have long been sanctioned by the courts. Clayton v. Commissioner, 102 T.C. 632, 645 (1994); Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2 [41 AFTR 2d 78-348] (6th Cir. 1977). The bank deposits method assumes that all money deposited in a taxpayer's bank account during a given period constitutes income, but the Commissioner must take into account any nontaxable sources or deductible expenses of which the Commissioner has knowledge. Clayton v. Commissioner, supra at 645-646. The burden is on petitioners to show that respondent's method of computation is unfair or inaccurate. See DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992). We now [pg. 195] focus on respondent's reconstruction of each couple's income for 2001. A. Scott and Jennifer—Unreported Income Scott and Jennifer filed a joint tax return for 2001 and reported gross income of $100,276, taxable income of $18,265, and a tax liability of $505. Respondent determined, however, that Scott received legal services and tax preparation fees far in excess of what they reported. The Sandefur Trust paid Scott $1.2 million for his legal services, though Scott and Jennifer did not report any of the amount on their joint tax return. In addition, Scott withdrew $1,173,263 from the Bentley Group's account in 2001, but failed to report any of the withdrawals as income. Scott claims he lent most of this money to his father, friends, and brothers and mistakenly asserts that loan proceeds are tax-exempt. Scott's misconception about amounts lent to others does not absolve Scott from paying taxes on income he earned by providing legal services. In addition, JAC had taxable deposits of $79,652, all coming from Scott's legal services fees, yet Scott reported self-employment tax on only $1,162 of income for 2001. Moreover, a total of $79,294 was deposited into Jennifer's personal bank account in 2001, of which $59,264 was from Scott's legal services and tax preparation fees. Neither Scott nor Jennifer reported these deposits as income. Instead, Scott and Jennifer failed to report, in toto, over $1 million in legal services fees. They failed to report any of the legal services fees, yet they claimed a $40,000 charitable contribution deduction for amounts of legal services fees they had contributed to their church. Respondent determined that Scott and Jennifer omitted $1,215,183 of income from their joint tax return for 2001. Respondent also allocated income for self-employment tax purposes between the brothers and determined that Scott had $1,329,689 of unreported self-employment income for 2001 after reviewing the checks deposited into the Bentley Group's account for 2001. We conclude that the specific items and bank deposits methods respondent used to reconstruct Scott and Jennifer's income for 2001 were reasonable and substantially accurate. Scott and Jennifer have introduced no documentary evidence to show otherwise. Any inaccuracies in the income reconstruction are attributable to Scott and Jennifer's failure to maintain books and records. Accordingly, we find Scott and Jennifer had unreported income in the amounts respondent determined in the deficiency notices as adjusted. B. Darren and Lisa—Unreported Income Darren and Lisa reported $10,201 of adjusted gross income and claimed a $2,477 refund on their joint tax return for 2001. Darren testified that all of his income from the practice of law went through the partnership, yet he reported only $2,978 of the money deposited in the Bentley Group's account and $10,294 of the money deposited in LRC's account. Darren and Lisa withdrew, however, a total of $198,308 from the Bentley Group's account in 2001. Moreover, Lisa represented that she was employed and paid by the law practice, but she failed to report any income. Lisa also made a $28,873 down payment on her house directly from funds in the Bentley Group's account but failed to report any of this amount as income. Darren and Lisa have failed to explain several omissions of income and have failed to substantiate the claimed expenses on their joint tax return. Darren and Lisa reported LRC received gross receipts of $145,930 in 2001, all coming from the Bentley Group, yet they offset the gross receipts with $135,636 of unsubstantiated expenses. We find it inconsistent that Darren and Lisa would be able to pay such excessive amounts of expenses for LRC if they had only a small amount of reportable income. The records support respondent's determination that Darren and Lisa omitted $261,684 of income from their joint tax return for 2001. Darren earned significant legal fees working for a law practice that had ordinary income in excess of $1.5 million. Re- [pg. 196] spondent determined that Darren had $198,282 of self-employment income from the practice of law, yet Darren failed to report any self-employment income. Lisa also failed to report any earnings from the Bentley Group on their joint tax return. This conflicts with her representations about her earnings on loan and mortgage documents. Moreover, the record reflects she received funds from the Bentley Group in 2001 yet failed to report any income. Deposits totaling $138,248 were made into Lisa's bank account in 2001, and only $21,550 can be attributed to nontaxable sources. Lisa also made a $28,873 down payment on her house directly from the Bentley Group's account. Respondent determined that Lisa earned $74,399 of self-employment income in 2001. We conclude that the specific items and bank deposits methods respondent used to reconstruct Darren and Lisa's income were reasonable and substantially accurate. Darren and Lisa have introduced no documentary evidence to show otherwise. Any inaccuracies in the income reconstruction are attributable to Darren and Lisa's failure to maintain books and records and to their failure to cooperate with respondent during the audit. We find Darren and Lisa had unreported income in the amounts respondent determined in the deficiency notice as adjusted. II. Fraud Penalty We next consider whether any of petitioners is liable for the fraud penalty for 2001. The Commissioner must prove by clear and convincing evidence that the taxpayer underpaid his or her income tax and that some part of the underpayment was due to fraud. Secs. 7454(a), 6663(a); Rule 142(b); Clayton v. Commissioner, 102 T.C. at 646. Fraud is a factual question to be decided on the entire record and is never presumed. Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983); Beaver v. Commissioner, 55 T.C. 85, 92 (1970). The Commissioner must show that the taxpayer acted with specific intent to evade taxes that the taxpayer knew or believed he or she owed by conduct intended to conceal, mislead, or otherwise prevent the collection of the tax. Sec. 7454; Recklitis v. Commissioner, 91 T.C. 874, 909 (1988); Stephenson v. Commissioner, 79 T.C. 995, 1005 (1982), affd. 748 F.2d 331 [55 AFTR 2d 85-313] (6th Cir. 1984). Direct evidence of fraud is seldom available, and its existence may therefore be determined from the taxpayer's conduct and the surrounding circumstances. Stone v. Commissioner, 56 T.C. 213, 223-224 (1971). Courts have developed several indicia or badges of fraud. These badges of fraud include understating income, failure to deposit receipts into a business account, maintaining inadequate records, concealing income or assets, commingling income or assets, establishing multiple entities with no business purpose, failing to cooperate with tax authorities, and giving implausible or inconsistent explanations for behavior. Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943); Bradford v. Commissioner, 796 F.2d 303, 307-308 [58 AFTR 2d 86-5532] (9th Cir. 1986), affg. T.C. Memo. 1984-601 [¶84,601 PH Memo TC]. Although no single factor is necessarily sufficient to establish fraud, a combination of several of these factors may be persuasive evidence of fraud. Solomon v. Commissioner, 732 F.2d 1459, 1461 [53 AFTR 2d 84-1276] (6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603 [¶82,603 PH Memo TC]. We will look at each couple to determine whether the fraud penalty applies with respect to either spouse. A. Scott and Jennifer—Fraud Penalty We now consider whether Scott or Jennifer is liable for the fraud penalty. A taxpayer's intelligence, education, and tax expertise are relevant in determining fraudulent intent. Stephenson v. Commissioner, supra at 1006. Jennifer is college educated and worked as an accountant. Scott is an attorney and, as such, took an oath to uphold the law. In addition, Scott's legal practice included tax law and preparing tax returns for others. Scott testified that he understood that income from providing legal services is taxable, yet he failed to report the income as taxable on any return for 2001. In addition, Scott diverted most of the legal fees from the Bentley Group's account into numerous other accounts ostensibly as loans. Scott wants the Court to believe that such substantial withdrawals were loans, yet there [pg. 197] is no documentation or records to show that a loan was made or that the person receiving the funds paid any interest. Further, even if such transactions were loans, that would not excuse Scott from reporting his legal services fees as income, whether directly payable to him or as a distributive share. Scott and Jennifer commingled personal and business income without hesitation. Scott deposited earnings from his law practice into JAC's account, in which Jennifer was a 99-percent owner, and into Jennifer's personal account. Jennifer was aware of these deposits and wrote checks from these accounts to pay personal expenses, including her children's school tuition, landscaping payments, and her children's music lessons. Scott and Jennifer did not report any income from the law practice on their joint tax return for 2001 even though more than $1.5 million was deposited into the Bentley Group's account. Scott had unfettered control over the Bentley Group's account and treated the money deposited in the Bentley Group's account as his personal funds. Scott transferred most of the money in the Bentley Group's account to relatives and friends including a transfer of $50,000 to his mother. Scott failed to produce any records documenting his deposits and withdrawals from the Bentley Group's account and has not rebutted respondent's determination that he received over $1 million in legal services fees in 2001. The lack of records indicates that Scott was not concerned with respecting the existence of different entities or the partners in the Bentley Group. Scott also concealed assets. Scott deposited his legal services fees into numerous other accounts to hide income. We divine no business purpose for the LLCs Scott established. It appears they served as conduits to hide income Scott earned from providing legal services and preparing tax returns. Scott did not indicate he practiced law on any return filed or indicate that any income earned would be subject to self-employment taxes. Rather, he generally indicated he was an investor. Scott and Jennifer received over $1.2 million in income in 2001, but their joint tax return reflected only $341 of tax liability. Scott and Jennifer avoided income and self-employment taxes by assigning income from Scott's law practice to JAC and using those funds for personal purposes. Scott also gave inconsistent answers regarding his legal and tax preparation practice. Scott testified that he considered himself a partner in the Bentley Group, and apparently he represented to others that he was a partner. He also represented that he was practicing law under Scott Cole and Associates, Cole Law Offices, and individually. He accepted checks made payable to any of these “persons” and deposited them in the Bentley Group's account regardless to whom the check was made payable. Scott showed little respect for business formalities and effectively made the Bentley Group nothing more than a checking account. Scott asserts that he transferred his entire interest in the Bentley Group to SCC, yet there are no documents to reflect such a transfer. Scott did not even know whether the IOLTA account was a Scott C. Cole account or a Cole Law Offices account. All the while he was transferring his legal services fees into seven different accounts. We find that Scott and Jennifer used a scheme where they assigned income to an LLC to conceal the true nature of the earnings subject to income and self-employment taxes. Scott and Jennifer claimed that JAC was an investment company. If it was an operating company, however, it did not have any employees nor can we find that it was created for any valid business purpose. JAC was merely created in an attempt to avoid taxation. Several of the badges of fraud apply to Scott and Jennifer. We conclude that respondent has proven by clear and convincing evidence that Scott and Jennifer each fraudulently understated their tax liabilities for 2001, and they have failed to show that any portion of the underpayment is not due to fraud. Accordingly, we find that the fraud penalty under section 6663 applies to Scott's and Jennifer's underpayment of tax for 2001 as adjusted. [pg. 198] B. Darren and Lisa—Fraud Penalty We now consider whether Darren and Lisa are each liable for the fraud penalty. We agree with respondent that many of the badges of fraud are equally present for Darren's and Lisa's underpayment. Lisa worked as a paralegal at the law practice, and she had access to and signing authority over the Bentley Group's account. Darren, an attorney, was responsible for keeping the financial records of the law practice and prepared the information return for the Bentley Group for 2001. Darren failed to maintain or produce any records, however, evidencing deposits, withdrawals or loan transactions involving the Bentley Group's account. Darren also did not file the requisite information return for the Bentley Group until 2004, after he and Scott were being audited. In addition, the Bentley Group failed to file employment tax returns for Lisa, or any other employees of the law practice. Lisa failed to report any wage income from the Bentley Group. Darren and Lisa both earned substantial amounts from the Bentley Group, yet reported only a nominal amount on their joint tax return. Darren never established a personal account in his name, but, like Scott, established multiple other accounts to avoid paying taxes. Darren and Lisa reported only $10,000 of income on their joint tax return after they claimed $135,636 of unsubstantiated expenses on the information return for LRC. Darren maintained no records to support his withdrawals and transfers to and from the Bentley Group's account. Darren and Lisa reported that the Bentley Group paid LRC $150,000 of income, not an insignificant amount, but there was no written explanation for the payment. Darren and Lisa also failed to cooperate with Revenue Agent Reed. Darren threatened that he would have Revenue Agent Reed arrested if she came on his property, and Lisa was unresponsive after receiving summonses from her. We find that Darren and Lisa, like Scott and Jennifer, used a scheme where they assigned income to an LLC to conceal the true nature of the earnings subject to income and self-employment taxes. Darren and Lisa claimed that LRC was an investment company. If it was an operating company, however, it did not have any employees nor can we find that it was created for any valid business purpose. LRC was merely created in an attempt to avoid taxation. While Darren and Lisa did pay self-employment tax on the $10,000 of net income of LRC, they claimed expenses totaling 92.9 percent of the income. They cannot substantiate these expenses. Perhaps no documentation was kept because LRC had no business purpose and was merely a conduit for the assignment of income. Several of the badges of fraud apply to both Darren and Lisa. We conclude that respondent has proven by clear and convincing evidence that Darren and Lisa each fraudulently understated their tax liabilities for 2001, and they have failed to prove that any portion of the underpayment is not due to fraud. We find that the fraud penalty under section 6663 applies to Darren's and Lisa's underpayment of tax for 2001 as adjusted. III. Limitations Period Because of our findings of fraud, the limitations periods for assessing petitioners' taxes have not expired. See sec. 6501(c)(1). We have considered all remaining arguments the parties made and, to the extent not addressed, we conclude they are irrelevant, moot, or meritless. To reflect the foregoing, Decisions will be entered for respondent for the reduced amounts. ________________________________________ 1 These cases have been consolidated for purposes of trial, briefing, and opinion. ________________________________________ 2 All section references are to the Internal Revenue Code in effect for 2001, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. ________________________________________ 3 Respondent issued petitioners “whipsaw” deficiency notices because of the inconsistent positions petitioners took. The amounts provided, however, are the amounts respondent ultimately determined are due rather than the amounts set forth in the deficiency notices. ________________________________________ 4 www.irstaxattorney.com 888-712-7690