31 T.C. 536">*537 These proceedings have been consolidated.

The Commissioner determined deficiencies in income tax and additions to tax under sections 293 (b), 291 (a), and 294 (d) (2), I. R. C. 1939, ¹ as follows:

Both petitioners, by appropriate assignments of error, contested the adjustments made by respondent in his determination of the deficiencies. Also, each petitioner contested the correctness of the Commissioner's action in his additions to tax under sections 293 (b), 291 (a), and 294 (d) (2).

At the trial of these proceedings petitioners did not appear in person but appeared by counsel and through counsel announced they would not introduce any evidence contesting the correctness of the deficiencies in tax determined by respondent nor his additions to the tax under sections 291 (a) and 294 (d) (2). However, counsel for petitioners announced that petitioners still contested respondent's imposition of additions to tax for fraud under section 293 (b) and demanded proof thereof, as required by law. Whereupon respondent went forward and introduced in evidence the oral testimony of several witnesses and numerous documents to establish his determination of1958 U.S. Tax Ct. LEXIS 17">*20 fraud and in support of his additions to tax under section 293 (b). At the conclusion of the evidence introduced by respondent, petitioners introduced no evidence in rebuttal thereof.

31 T.C. 536">*538 FINDINGS OF FACT.

Jacob C. Ehrlich and Michael Fisher reside in Philadelphia, Pennsylvania. They filed their individual income tax returns for the years 1944, 1945, and 1947 with the then collector of internal revenue for the first district of Pennsylvania at Philadelphia. The petitioners failed to file individual income tax returns for the year 1946.

The petitioners were equal and only partners in a partnership known as Fisher & Ehrlich which, during the taxable years, conducted a wholesale hosiery business at 308 Market Street, Philadelphia. For the years 1944 and 1947 the partnership of Fisher & Ehrlich filed partnership returns of income (Form 1065) reporting net income of $ 42,020.78 and $ 26,265.20, respectively. But the petitioners failed to file partnership tax returns for the years 1945 and 1946.

On or about April 22, 1952, each of the petitioners was convicted in the United States District Court for the Eastern District of Pennsylvania, upon his plea of nolo contendere, of the1958 U.S. Tax Ct. LEXIS 17">*21 crime of willfully and knowingly attempting to defeat and evade his individual income tax liability for the years 1946 and 1947.

The books of the partnership were based on and revealed one bank account only for the business. The books were in balance with this account and the income tax returns of the partnership and the individuals were reconciled with it.

There were, in fact, two bank accounts used by the partnership in its business. The second was designated as the "Fisher and Ehrlich Special Account." It was at one time used as an account for charitable collections. Even during the years in question it was used in part for such charitable collections but during these years it was also used for concealing receipt of business income. Ehrlich at first attempted to conceal the existence of the special bank account and then to deceive the internal revenue agents investigating the tax liabilities as to the business nature and use of that special account.

A book account designated as "Loans and Exchanges" was regularly used to conceal the true nature of sales by the petitioners. Receipts from sales were entered in this account as loans and exchanges instead of being listed as sales, 1958 U.S. Tax Ct. LEXIS 17">*22 thus providing the balance against the cash record necessary to have the books in balance, but greatly understating gross receipts.

In the year 1944, at least $ 13,402.38 was received by the petitioners from transactions identified as sales, which was not reported as receipts from sales or not reported at all by the petitioners. Rather this money was credited to loans and exchanges on their books, or processed through the special bank account, or converted directly to cash.

31 T.C. 536">*539 In the year 1945, at least $ 11,698.22 was received by the petitioners from sales of merchandise, which was not recorded on the partnership books and records as receipts from sales. Rather, this money was deposited in the special bank account or credited to loans and exchanges on their book accounts.

In the year 1946, at least $ 15,618.96 was received by the petitioners for sales of merchandise, which was not recorded on the partnership books as receipts of sales. Rather, this money was deposited in the special bank account or credited to loans and exchanges directly received by the petitioners on cashing the checks.

In the year 1947, at least $ 5,815.75 was received by the petitioners from the sales1958 U.S. Tax Ct. LEXIS 17">*23 of merchandise, which was not recorded on the books of the partnership as sales, in fact, not reported on the books of the petitioners at all, but deposited in the special bank account except for $ 3.25 which was received in cash.

The petitioners' tax returns which were filed for the taxable years 1944, 1945, and 1947 were prepared by accountants who were given the books which were in balance but which did not include the receipts from sales deposited in the special account and which did not include as income the sales concealed in the loans and exchanges account. Although petitioners had substantial amounts of income in 1946, they filed no returns for that year.

The petitioners concealed substantial gross and net income in each of the years 1944, 1945, 1946, and 1947, with fraudulent intent to defeat and evade the payment of their individual income taxes for those years.

Part of the deficiency in each of the taxable years is due to fraud with intent to evade tax.

OPINION.

As has already been stated, at the trial of these consolidated proceedings petitioners did not appear in person but appeared by counsel. They offered no evidence in support of their assignments of error contesting1958 U.S. Tax Ct. LEXIS 17">*24 the correctness of the Commissioner's determinations of the tax in his deficiency notices. It is, of course, well understood that the determination of the tax by the Commissioner is presumed to be correct and where the taxpayer offers no evidence to establish that the Commissioner's determination is in error, it will be sustained because of the presumption of its correctness. This rule of law was recognized by petitioners' counsel at the trial.

We, therefore, sustain the Commissioner's determination of the deficiencies in tax of each of the petitioners for each of the taxable years.

For one of the taxable years, 1946, petitioners filed no returns. Because of such failure to file returns for that year the Commissioner 31 T.C. 536">*540 determined additions to tax against each petitioner under section 291 (a). To this action of the Commissioner each petitioner assigned error, as follows:

(e) The Commissioner erroneously determined that the petitioner is liable for a penalty of 25% of the tax for the year 1946 under the provisions of Section 291 (a) of the 1939 Internal Revenue Code.

However, petitioners offered no evidence at the hearing giving any explanation as to why they failed to1958 U.S. Tax Ct. LEXIS 17">*25 file income tax returns for the year 1946. The statute does not impose any burden of proof on the Commissioner to sustain his determination of additions to tax under section 291 (a). Therefore, the Commissioner's determination as to additions to tax under section 291 (a) is sustained for lack of any evidence to show that petitioners' failure to file returns for 1946 was due to reasonable cause and not due to willful neglect.

The Commissioner also, in his deficiency notice, determined against each petitioner additions to tax under section 294 (d) (2) for the taxable years 1945, 1946, and 1947. The situation with reference to these additions to tax is substantially the same as that which relates to the addition to tax under section 291 (a) discussed above. Petitioners have offered no evidence whatever in contest of the Commissioner's determination. Therefore, it is approved for lack of any evidence to show its incorrectness.

As has already been stated, the sole question contested at the trial was whether or not the deficiency of petitioners for each of the years involved was due in whole or in part to fraud on the part of petitioners with intent to evade the payment of tax. The1958 U.S. Tax Ct. LEXIS 17">*26 forms which the fraudulent actions of a taxpayer may take in his attempts to evade his share of the tax liabilities are numerous. The purpose and intent of his actions are seldom the object of direct evidence. Rather, all actions incident to the false returns and evasion must be considered. From these the fraudulent intent may be deduced. M. Rea Gano, 19 B. T. A. 518 (1930); Joseph V. Moriarity, 18 T.C. 327 (1952), affd. (C. A. D. C., 1953) 208 F.2d 43.

While the burden is placed by the statute and court authorities upon the Commissioner to prove fraud by clear and convincing evidence, this proof, as stated above, must necessarily, in many cases, be indirect. It must be gleaned from all circumstances of the petitioner's conduct. One of these circumstances is the understatement of income by the taxpayer. This is particularly true if the understatement follows a pattern over a period of years. In Arlette Coat Co., 14 T.C. 751, 756 (1950), we said:

Where over a course of years an intelligent taxpayer and business man has received income in substantial amounts, 1958 U.S. Tax Ct. LEXIS 17">*27 as shown by this record, and has failed to report that income, and where no books or records were kept by him and no tenable explanation was offered for the failure to report the income received, 31 T.C. 536">*541 the burden of the respondent, in our judgment, is fully met. We think this conclusion is amply supported by authority. * * *

We are convinced by the evidence introduced by respondent at the trial that petitioners, in their returns for 1944, 1945, and 1947, understated their income and that this understatement followed a pattern over a period of years. It is impossible to believe that petitioners could have done this innocently and in good faith. In 1946, although they had very substantial amounts of net income, they filed no returns at all. At the trial petitioners did not appear and give any reason for their failure to file returns for 1946. It is clear they knew they should have filed returns for 1946. They also falsified their accounts and attempted to conceal their income by methods of bookkeeping.

Therefore, upon the facts set forth in our Findings of Fact we made an ultimate finding that "[part] of the deficiency in each of the taxable years is due to fraud with intent1958 U.S. Tax Ct. LEXIS 17">*28 to evade tax." That finding has the effect of sustaining the Commissioner's determination of additions to tax for fraud under section 293 (b). We so hold.

Decisions will be entered for the respondent.