1970 U.S. Tax Ct. LEXIS 139">*140 54 T.C. 1011">*1011 In these consolidated cases respondent determined deficiencies in petitioners' income tax and additions thereto under section 6653(b)¹ as follows:

1970 U.S. Tax Ct. LEXIS 139">*141 The issues presented for decision are:

(1) Whether petitioner Kathleen C. Vannaman is estopped from denying fraud for the year 1960 by reason of petitioner Robert C. Vannaman's conviction for violating section 7201 for that year.

(2) Whether petitioners' joint return for each of the years 1955 through 1960 was a "false or fraudulent return with the intent to evade tax" within the meaning of section 6501(c)(1), so as to remove the bar of the statute of limitations on assessment and collection of taxes provided by section 6501(a).

(3) Whether any part of any underpayment of tax by petitioners for each of the years 1955 through 1960 was due to fraud within the meaning of section 6653(b).

FINDINGS OF FACT

Petitioners Robert L. Vannaman (hereinafter referred to as Vannaman) and Kathleen C. Vannaman, husband and wife, were legal residents of Eastland, Tex., at the time their petitions were filed. They filed joint Federal income tax returns for each of the years 1955 54 T.C. 1011">*1012 through 1960, and an amended return for 1958, with the district director of internal revenue, Dallas, Tex.

Vannaman was first employed by Gulf Oil Corp. (hereinafter Gulf) on September 3, 1925, as a laborer (later1970 U.S. Tax Ct. LEXIS 139">*142 reclassified as truck driver) at Breckenridge, Tex. On August 19, 1935, he was transferred to Odessa, Tex., and promoted to truck-and-teaming foreman. He remained in that position, which was later reclassified first as zone transportation foreman, then as district transportation foreman, and finally as area transportation foreman, until April 4, 1960, when he was demoted to heavy-duty truck driver. He was discharged by Gulf on February 23, 1961.

Gulf's operations in western Texas were supervised from its office in Odessa, which reported to Gulf's regional office in Fort Worth. Gulf carried out various phases of its operations through independent contractors; the decisions regarding the contractors to whom business should be given and the allocation of the total business among those contractors were made and reviewed annually at the Fort Worth office on recommendations received from superintendents in the field. The superintendent in Odessa was Vannaman's immediate superior.

The Rumbaugh family -- including Addison Craig Rumbaugh (hereinafter Craig Rumbaugh) and Allen E. Rumbaugh (hereinafter Gene Rumbaugh) -- has been engaged in rig building and skidding, oilfield construction, 1970 U.S. Tax Ct. LEXIS 139">*143 and oilfield trucking in the Odessa area since the middle 1930's, and has always done business with Gulf. In fact, Gulf was the Rumbaughs' best customer throughout this period until 1960, and from 1945 through 1955 they were receiving most of Gulf's business in the area. The family did business as R. C. Rumbaugh & Sons until 1946, when they incorporated as Rumbaugh, Inc. Rumbaugh Trucking Co., Inc., was incorporated approximately 1 or 2 years later.

Gene Rumbaugh had been an officer and shareholder in the above corporations, but in 1955 he sold his interests therein and incorporated R & R, Inc. (hereinafter R & R), of which he became president. He owned all of the shares of stock of R & R, except for a small amount owned by his wife and 15 percent purchased and owned by Vannaman and held in Kathleen's name. He and Vannaman also each owned a one-third interest in a partnership, Weaver Construction Co. (hereinafter Weaver), which was formed on April 1, 1956. R & R did not declare any dividends during the years in issue.

Due to his position as the Odessa area transportation foreman, Vannaman was able to influence Gulf's allocation of business among the contractors in his area to1970 U.S. Tax Ct. LEXIS 139">*144 a limited extent. Yet, it was his apparent ability to obtain Gulf business that enabled him to become a shareholder in R & R and a partner in Weaver. R & R's percentage of Gulf business increased from about 5 percent in 1955 to about 15 percent in 54 T.C. 1011">*1013 1956 or 1957; after the first year of Weaver's operations Gulf provided the overwhelming majority of its business.

In 1955 Vannaman began "asking favors" of Gene Rumbaugh in return for his promised help in getting Gulf business for R & R and Weaver. During the ensuing years, through 1960, Gene Rumbaugh and R & R purchased three automobiles for Vannaman; drew checks to him for substantial sums because he "requested" that they do so; made available for his use, at no expense to him, an oil company credit card issued to R & R; and at his request purchased miscellaneous items for him. During 1958 and 1959 Weaver purchased liquor and merchandise for him.

The costs of the merchandise purchased by R & R for Vannaman or charged by him to that corporation were charged on its books to general expenses; the checks drawn by R & R to his order were charged to subcontract work, and those drawn during 1957, 1958, and 1959 were included each1970 U.S. Tax Ct. LEXIS 139">*145 year on a Form 1099, U.S. Information Return.

Vannaman also made requests of the other Rumbaughs and their companies for cash, merchandise, supplies, or services. In nearly every month during the years 1955 through 1960 Rumbaugh, Inc.'s employees and subcontractors did substantial amounts of work at its expense on petitioners' residences and their lake cabin. ² These expenditures included the costs of constructing swimming pools, outdoor kitchens, bathhouses, maids' quarters, sidewalks, purchases of furniture and appliances, and the costs of maintenance and repair, including painting. All of this work was requested by Vannaman and approved by Craig Rumbaugh, who was president and later chairman of the board of directors of Rumbaugh, Inc.

1970 U.S. Tax Ct. LEXIS 139">*146 During the years in issue, at Vannaman's request the Rumbaugh companies -- Rumbaugh Trucking Co., Inc., Rumbaugh Construction Co., Inc., and Rumbaugh, Inc. -- purchased various items for him, including two boats, merchandise to use as Christmas gifts, and numerous sides of beef. Craig Rumbaugh gave him about $ 2,000 cash in each of the years 1955, 1956, and 1957, and authorized him to sign his name on charges to Rumbaugh, Inc.'s accounts at the Odessa Athletic Club and Odessa Country Club during 1958 and 1959.

Sometime prior to 1958 Vannaman asked Craig Rumbaugh if he would build a cabin on one of the latter's lots at Lake J. B. Thomas. This request was granted, and Vannaman began construction of the cabin himself. However, a crew from Rumbaugh, Inc., poured the 54 T.C. 1011">*1014 floor, put up the walls and roof, finished the interior, converted a garage into a bedroom, built a garage, and worked on the land. The costs of the materials and labor used in this work were all charged to Rumbaugh, Inc., and were capitalized and depreciated by that corporation, which carried the cabin on its books. However, the cabin was used exclusively by petitioners, and on November 12, 1958, the name1970 U.S. Tax Ct. LEXIS 139">*147 of the lessee of the lot on which it was located was changed to Vannaman from Charles Roland Rumbaugh. The fair market value of the improvements on the lot was at least $ 13,500 at that time.

Petitioners' returns for each of the years 1956 through 1960 were prepared by an accountant from Forms W-2, Forms 1099, partnership returns of Weaver, and a list prepared by Vannaman of income items and deductions. Vannaman did not retain any of these records. In each year the accountant asked him if he had any income other than that reflected in the various documents he supplied; his reply was in the negative.

Petitioners' return for 1957 was audited in 1959 by Revenue Agent Mills. The adjustments made to their reported income for that year were as follows: (1) A 1957 Mercury automobile purchased by R & R for Vannaman was included in taxable income, and (2) an amount reported as dividend income from R & R was changed to commission income. Petitioners agreed to these adjustments. During the course of the audit Vannaman's accountant asked him if he had received any other items of this nature; he answered in the negative.

In early 1961 a special agent began investigation of petitioners' returns1970 U.S. Tax Ct. LEXIS 139">*148 for the years 1955 through 1960. ³ Shortly thereafter Vannaman asked Gene Rumbaugh to tell the investigators that only one car had been bought for him in 1955 rather than the two actually purchased.

Petitioners were interviewed separately on May 4, 1961, by the special agent and Revenue Agent Mills. Neither petitioner was accompanied by an attorney or an accountant.

Vannaman told the agents that his sources of income for the years 1955 through 1960 were his salary from Gulf, dividends from his stock interest in R & R, his distributive share from Weaver, and royalties from a one-third interest he held in a caliche pit. He also revealed that during this period he had received a 1957 Mercury automobile, one Buick automobile, and a check for $ 5,500 in 1956 from R & R and Gene Rumbaugh; a "loan" from Gene Rumbaugh in the form of two checks totaling $ 6,500; "gifts" of swimming pools, a patio, the lake cabin, 1970 U.S. Tax Ct. LEXIS 139">*149 an icebox, and a washing machine from Rumbaugh, Inc.; a boat he "purchased" from Craig Rumbaugh; and Christmas gifts valued at about $ 25 each from various companies. He had not 54 T.C. 1011">*1015 previously mentioned the receipt of these items to his accountant or to the Internal Revenue Service.

In reply to the special agent's inquiry whether he had reported the receipt of these items, Vannaman answered that he did not know they were taxable; he characterized all of these items as gifts. After the special agent reminded him of the audit in 1959 and the resulting inclusion of the 1957 Mercury automobile in his taxable income, the agent asked him why he hadn't reported the items he had received; Vannaman answered that it did not occur to him and that he thought the automobiles and improvements to his lake cabin would be taxable to him when he sold them.

Vannaman did not divulge at this interview the receipt of any other items from the Rumbaughs and their companies, such as another 1955 Buick automobile, furniture, appliances, substantial construction in connection with his residences, beef, cash from Craig Rumbaugh, use of R & R's credit card, merchandise for Christmas gifts, etc. He did1970 U.S. Tax Ct. LEXIS 139">*150 not have any files or records with him at the interview to refresh his memory; however, the items he disclosed were generally limited to the items which, by that time, had been discovered by Mills in his examination of the Rumbaughs.

On January 30, 1963, Vannaman was indicted by a Federal grand jury on five counts of willfully attempting to evade and defeat a large part of the income tax due and owing by him and his wife for each of the years 1956 through 1960 by filing false and fraudulent joint income tax returns in violation of section 7201. He pleaded guilty to the charges in count five (as to the year 1960) on March 21, 1966, and was sentenced on April 1, 1966, to imprisonment for 1 year and payment of a fine of $ 7,500. The prison sentence was suspended, he was placed on probation for 3 years on condition that the fine imposed be paid within 90 days, and the remaining four counts of the indictment were dismissed.

During the years 1955 through 1960 petitioners reported the following amounts of income in addition to Vannaman's salary from Gulf, dividends from Gulf, interest income, royalties, and their distributive share of the income of Weaver:

54 T.C. 1011">*1016 The following table sets forth the items and amounts determined by respondent to have been unreported income received by petitioners for each of the years 1955 through 1960 from the Rumbaughs and their companies and from unidentified sources:

In the notice of deficiency, dated October 11, 1966, respondent also made other minor adjustments to petitioners' taxable income for each of the years 1955 through 1960. ⁴ He further determined that their failure1970 U.S. Tax Ct. LEXIS 139">*153 each year to report part of their income was due to fraud and that they consequently were liable for additions to the tax under section 6653(b).

OPINION

Since the returns were filed more than 3 years prior to the date of mailing the notice of deficiency, the deficiencies are barred under section 6501(a)⁵1970 U.S. Tax Ct. LEXIS 139">*154 unless respondent can show that each of petitioners' joint returns was a "false or fraudulent return with the intent to evade tax" within the meaning of section 6501(c)(1). ⁶ And, of course, in 54 T.C. 1011">*1017 order to sustain the additions to tax under section 6653(b), ⁷ respondent must establish fraud.

Petitioners -- who filed separate petitions, were represented by separate counsel, and filed separate briefs -- did not testify on their own behalf or present any other witnesses at the trial. While not admitting that he received unreported income, Vannaman does not contest any of the specific adjustments to income made in the notice of deficiency and concedes that if fraud is established the deficiencies must stand. Kathleen likewise1970 U.S. Tax Ct. LEXIS 139">*155 does not dispute the specifics of the deficiencies, but does contend that even if her husband's fraud is established the statute of limitations bars assessment of the deficiencies against her. For reasons discussed below we reject this argument. Consequently, there is no issue as to the deficiencies themselves, and the only issue presented is whether fraud has been established.

The burden of proving fraud is placed upon respondent by statute. Sec. 7454(a). ⁸ To satisfy this burden, respondent must establish fraud by clear and convincing evidence. Drieborg v. Commissioner, 225 F.2d 216">225 F.2d 216, 225 F.2d 216">218 (C.A. 6, 1955), reversing on another issue a Memorandum Opinion of this Court. In addition, fraud must be proven for each year for which respondent seeks to avoid the statute of limitations and sustain an addition to the tax for fraud. W. A. Shaw, 27 T.C. 561">27 T.C. 561, 27 T.C. 561">570 (1956), affd. 252 F.2d 681">252 F.2d 681 (C.A. 6, 1958).

1970 U.S. Tax Ct. LEXIS 139">*156 We shall first deal with the arguments raised only on Kathleen's behalf: (1) That her husband's conviction under section 7201 for willfully attempting to evade or defeat their income tax for 1960 does not estop her from denying fraud for that year; (2) that in the absence of proof that she committed fraud, the statute of limitations bars assessments of the deficiencies against her even if her husband's fraud is established; and (3) that in no event is she liable for the additions to the tax since she "has been neither accused, indicted nor convicted of fraud in any criminal proceeding, nor has there been any attempt by Respondent to bring before this tribunal any evidence of fraud on her part." As support for each of these arguments, Kathleen relies upon our opinion in Henry M. Rodney, 53 T.C. 287">53 T.C. 287 (1969). We agree with her first argument, but reject the latter two.

In Rodney, as here, the husband had been convicted of willfully attempting to evade income tax. We held that the husband's conviction 54 T.C. 1011">*1018 did not collaterally estop his wife, who had filed joint returns with him, from denying that any part of the underpayments of tax was due to1970 U.S. Tax Ct. LEXIS 139">*157 fraud; then, on the merits of the case, we held that respondent had failed to prove fraud for any of the years involved. Also see C.B.C. Super Markets, Inc., 54 T.C. 882">54 T.C. 882 (1970). However, nothing in our opinions in Rodney and C.B.C. Super Markets, Inc., suggests that fraud on the part of a wife who files joint returns must be proven to satisfy sections 6501(c)(1) and 6653(b). Neither of those sections limits its consequences to the actions of the particular taxpayer; section 6501(c)(1) speaks of "a false or fraudulent return" and section 6653(b) speaks of "any part of any underpayment * * * due to fraud." Thus, even if the joint-filing husband is the only one who committed fraud in filing the return and making any underpayment -- and that may not be the case here, considering that a substantial part of the unreported income represents the value of improvements to both petitioners' residences -- the bar of the statute of limitations still is removed from the deficiencies determined against the wife, and she is liable for the additions to the tax by virtue of the joint and several liability provisions of section 6013(d)(3).

We reiterate that all1970 U.S. Tax Ct. LEXIS 139">*158 we held in Rodney was that an innocent wife is entitled to rebut respondent's assertion of her husband's fraud. Therefore, even though Vannaman is estopped from denying that he committed fraud as to 1960 -- recognizing this to be true, he has conceded the deficiency and addition to the tax for that year -- Kathleen may do so. But if respondent affirmatively proves, by clear and convincing evidence, that Vannaman did commit fraud for each of the years in issue, that showing is sufficient to render Kathleen -- as well as Vannaman -- liable for the deficiencies and additions.

Turning now to the substantive issue of whether fraud has been established, we note that our Findings reflect that petitioners failed to report substantial amounts of taxable income for each of the years in issue. Although such substantial understatement of income is some evidence of fraud, Schwarzkopf v. Commissioner, 246 F.2d 731, 734 (C.A. 3, 1957) (effective evidence), and Kurnick v. Commissioner, 232 F.2d 678, 681 (C.A. 6, 1956) (highly persuasive evidence), both affirming Memorandum Opinions of this Court; Tsuneo Otsuki, 53 T.C. 96">53 T.C. 96, 53 T.C. 96">107 (1969)1970 U.S. Tax Ct. LEXIS 139">*159 (strong evidence), this fact alone may not be sufficient to establish fraud. John Marinzulich, 31 T.C. 487">31 T.C. 487, 31 T.C. 487">490 (1958); Foster v. Commissioner, 391 F.2d 727, 733 fn. 10 (C.A. 4, 1968), modifying a Memorandum Opinion of this Court; Merritt v. Commissioner, 301 F.2d 484, 487 (C.A. 5, 1962), affirming a Memorandum Opinion of this Court. However, repeated understatements of income in successive years, coupled with other circumstances -- so-called badges of fraud -- showing intent to conceal or misstate taxable income, present 54 T.C. 1011">*1019 a basis from which fraud may be inferred. Id.; Furnish v. Commissioner, 262 F.2d 727, 728-729 (C.A. 9, 1958), remanding on another issue 29 T.C. 279">29 T.C. 279 (1957); Anderson v. Commissioner, 250 F.2d 242, 250 (C.A. 5, 1957), remanding on another issue a Memorandum Opinion of this Court, certiorari denied 356 U.S. 950">356 U.S. 950 (1958); 225 F.2d 216">Drieborg v. Commissioner, supra at 219. While we do not agree with respondent's1970 U.S. Tax Ct. LEXIS 139">*160 contention that the manner in which Vannaman used his position with Gulf for his personal gain -- even if it can be characterized as defrauding his employer -- is, by itself, probative of an intent to deprive the Treasury of its deserved revenues, we nevertheless find numerous indicia of an attempt to defraud the Government.

Petitioners contend that Vannaman's statements to the special agent -- i.e., that he considered the items he received to be nontaxable "gifts" and that he thought the automobiles and property improvements would be taxable when they were sold -- negate the existence of "bad faith, intentional wrongdoing, and a sinister motive," L. Glenn Switzer, 20 T.C. 759">20 T.C. 759, 20 T.C. 759">765 (1953), necessary for a determination of fraud. While it is true that a taxpayer's bona fide ignorance of the proper tax treatment to be accorded questioned transactions, or negligence in regard thereto, may be sufficient to preclude a finding of fraud, Ench v. Commissioner, 325 F.2d 1017 (C.A. 3, 1964), affirming per curiam a Memorandum Opinion of this Court; Clyde M. Booher, 28 T.C. 817">28 T.C. 817, 28 T.C. 817">823 (1957); Cleveland Thurston, 28 T.C. 350">28 T.C. 350, 28 T.C. 350">355-356 (1957);1970 U.S. Tax Ct. LEXIS 139">*161 Walter M. Ferguson, Jr., 14 T.C. 846">14 T.C. 846, 14 T.C. 846">849 (1950), we are not convinced that such is the case here.

If Vannaman truly believed that the items he received were nontaxable gifts, then there is no explanation for his failure to reveal to the special agent the receipt of many of them. While petitioners would have us believe that this failure was due to Vannaman's lack of records and faulty memory, it is inconceivable that he merely forgot items as significant as a 1955 Buick automobile, substantial improvements to his residential properties, cash received in the amount of $ 2,000 a year, and use of R & R's credit card. This is especially so in light of his disclosure of two other automobiles, construction of his lake cabin, an icebox, and a washing machine. Furthermore, Vannaman attempted to persuade Gene Rumbaugh to lie about having purchased the 1955 Buick, which Vannaman allegedly "forgot." Finally, it appears that the only items Vannaman "remembered" were those that already had been discovered in a concurrent examination of the Rumbaughs.

Each year Vannaman listed items of income and deductions for his accountant's use in preparing petitioners' returns. 1970 U.S. Tax Ct. LEXIS 139">*162 However, none of the items of unreported income described in our Findings were included on any of these lists, even though the accountant asked him each year whether he had any other income. Vannaman never even questioned him about their taxability.

54 T.C. 1011">*1020 Vannaman's alleged belief that the cars and improvements were taxable when he sold them is inconsistent with his tax returns for the years in issue. In March 1956 petitioners moved from a residence for which substantial improvements had been paid for by Rumbaugh, Inc., yet none of their returns report the "income" attributable to such improvements. Similarly, none of petitioners' returns report the "income" from the sale of any of the three cars purchased for them in 1955 and 1957. But even more damning to petitioners is the fact that only 2 years prior to the interview at which Vannaman expressed this belief, he had been informed, and he agreed, that an automobile purchased for him by R & R in 1957 was taxable to him in that year. From this and all of the above we can only conclude that Vannaman's expressed justifications for not reporting the substantial amounts of income received from the Rumbaughs and their companies1970 U.S. Tax Ct. LEXIS 139">*163 were calculated to intentionally mislead the special agent investigating his returns.

In summary, respondent has shown by clear and convincing evidence that each of petitioners' income tax returns for 1955 through 1960 was false and fraudulent and that at least a part of the underpayment in each year was due to such fraud. We are satisfied that the fraudulent intent existed at the time the returns were filed. Since Vannaman agreed to render assistance to the Gulf suppliers in return for the cash and property he received, he obviously knew such items were not gifts. And his failure to report any gain on the disposition of the house and automobiles negates any possible inference that he believed he had no taxable income until he sold them. That he continued to omit the income after the examination of his 1957 return in 1959, when he conceded the taxability of the value of a Mercury automobile, shows a deliberate intent to hide his true tax liability. His studied efforts to conceal his "ill-gotten" gains from the accountant who prepared his returns and the agents of the Internal Revenue Service, as well as his efforts to induce Gene Rumbaugh to lie on his behalf, confirm the existence1970 U.S. Tax Ct. LEXIS 139">*164 of an intent to cheat which existed at the time each of the returns was filed. See Elmer J. Benes, 42 T.C. 358">42 T.C. 358, 42 T.C. 358">383 (1964), affd. 355 F.2d 929">355 F.2d 929 (C.A. 6, 1966), certiorari denied 384 U.S. 961">384 U.S. 961 (1966). Vannaman was present in the courtroom at the time of the trial, but he did not testify or introduce any rebuttal evidence. "The only permissible inference from such a mass of unexplained omissions and understatements is that they were deliberate and not inadvertent or the result of mistake." Madeline V. Smith, 32 T.C. 985">32 T.C. 985, 32 T.C. 985">987 (1959); Max Cohen, 9 T.C. 1156">9 T.C. 1156, 9 T.C. 1156">1164 (1947), affd. 176 F.2d 394">176 F.2d 394 (C.A. 10, 1949). We hold that respondent has made the requisite showing to lift the bar of the statute of limitations and to sustain the imposition of the additions to the tax for fraud.

Decisions will be entered under Rule 50.