Monday, July 30, 2012
Friday, July 27, 2012
The the decision to accept or reject an "offer in compromise", as well as the terms and conditions agreed to, are left to the discretion of the Commissioner., Sec. 301.7122- 1(a)(1), (c)(1), Proced. & Admin. Regs. The Commissioner will usually compromise a liability only if the liability exceeds the taxpayer's reasonable collection potential. Kreit Mech. Assocs., Inc. v. Commissioner, 137 T.C. 123, 134 (2011). Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006). An "offer in compromise" is only rejected by the Tax Court only if it was arbitrary, capricious, or without sound basis in fact or law.
A-Valey Engineers, Inc. v. Commissioner, TC Memo 2012-199 , Code Sec(s) 6330; 6404; 7122.
A-VALEY ENGINEERS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Code Sec(s): 6330; 6404; 7122
Docket: Docket No. 17863-09L.
Date Issued: 07/17/2012
Reference(s): Code Sec. 6330; Code Sec. 6404; Code Sec. 7122
Official Tax Court Syllabus
Shelley C. Dugan, for petitioner.
Harry J. Negro, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: The petition in this case was filed in response to a notice of determination concerning collection action sustaining a final notice of intent to levy with respect to income tax and accuracy-related penalties for tax years ending September 30, 1998 through 2000. The issues for decision are:
(1) whether petitioner was entitled to challenge assessed accuracy-related penalties at its collection due process (CDP) hearing. We hold petitioner was not;
(2) whether a settlement officer abused his discretion in rejecting petitioner's request for abatement of interest. We hold that he did not; and
(3) whether either settlement officer 1 assigned to this case abused his or her discretion in rejecting petitioner's proposed offers-in-compromise. We hold that the settlement officers did not.
FINDINGS OF FACT
At the time its petition was filed, petitioner was a Pennsylvania corporation which had its principal place of business in Pennsylvania. Lothar Budike, Sr., is the president of petitioner, and he and his wife, Alexandra Budike, own 100% of the company stock. Petitioner reports its Federal income tax on a fiscal year ending September 30.
After an audit, respondent determined deficiencies in petitioner's income tax for the taxable years ending September 30, 1998 through 2000. Respondent also determined accuracy-related penalties for those tax years. On March 8, 2006, petitioner filed a petition with the Tax Court at docket No. 4839-06 disputing the deficiencies and penalties. On November 20, 2008, the Court entered a stipulated decision under which petitioner was liable for deficiencies totaling $214,051 and accuracy-related penalties totaling $21,405.
On February 3, 2009, a Letter 1058, Final Notice—Notice of Intent to Levy and Notice of Your Right to a Hearing, was sent to petitioner for the unpaid tax liabilities for the taxable years ending September 30, 1998 through 2000. In response, petitioner timely submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing. On the Form 12153 petitioner stated that it “should not be responsible for interest and penalties”.
On April 15, 2009, a CDP hearing was held with the first settlement officer. During the CDP hearing petitioner raised the issues of penalty abatement and interest abatement. The settlement officer advised petitioner that he could not consider penalty and interest abatement because petitioner had signed a stipulated decision for the years at issue. Petitioner also inquired about an offer-in-compromise. The settlement officer explained the process and requested that petitioner submit a Form 656, Offer in Compromise (OIC), if interested in pursuing an OIC.
A few weeks after the CDP hearing, the settlement officer received petitioner's OIC. The OIC proposed to settle petitioner's outstanding liabilities for $27,000, and petitioner made a $5,400 payment toward the $27,000 when it submitted the OIC. 2 Petitioner also submitted a Form 433-B, Collection Information Statement for Businesses, business checking account statements for the period January 1 through March 31, 2009, and a copy of a Form 1120, U.S. Corporation Income Tax Return, for the taxable year ending September 30, 2008, which was signed by Mr. Budike on April 20, 2009.
On June 17, 2009, the settlement officer advised petitioner that the OIC would not be accepted because petitioner's Form 1120 submitted with the OIC showed loans to shareholders of $443,887 as of October 1, 2007, and $468,888 as of September 30, 2008. The Form 1120 showed no loans from shareholders to the corporation at either the beginning or end of the taxable year. In addition, petitioner's returns for the periods ending September 30, 2006 and 2007, reported loans to shareholders of $451,000 and $441,000, respectively. Petitioner's representative asserted that the tax returns were in error and that Mr. and Mrs. Budike were actually lending petitioner money. Petitioner provided the settlement officer with a letter from its accountant which stated that the loans to shareholders reported on petitioner's Federal income tax returns for the taxable years 2005, 2006, 2007, and 2008 did not accurately reflect petitioner's financial position. Mr. Budike also submitted a letter which asserted that petitioner owed Mr. and Mrs. Budike money.
On July 10, 2009, the settlement officer mailed petitioner a Notice of Determination Concerning Collection Action Under Section 6320 3 and/or 6330 which rejected petitioner's OIC and sustained respondent's collection action in full. On July 27, 2009, petitioner filed a petition for lien or levy action under sections 6320(c) and 6330(d). The petition alleges that: (1) respondent erred because he did not abate penalties; (2) respondent erred because he did not abate interest; and (3) respondent abused his discretion in not approving petitioner's OIC.
Respondent later acknowledged that the settlement officer had incorrectly determined that petitioner could not raise the interest abatement claim during the CDP hearing. As a result, on November 10, 2009, respondent filed a motion to remand the case for a new CDP hearing on the interest abatement issue. On November 16, 2009, we issued an order granting respondent's motion.
On March 3, 2010, the settlement officer met with petitioner to consider the interest abatement issue. Petitioner requested that interest and penalties for the taxable years ending September 30, 1998 through 2000, be abated in full. Petitioner stated that the revenue agent assigned to the audit of petitioner's returns was biased against petitioner and that he overstated income and denied expenses because of this bias. 4 Petitioner also made various claims that the Appeals officer assigned to the income tax deficiency case sought to cover up improper actions taken by the revenue agent and repeatedly delayed the Appeals process. However, the settlement officer determined that delays during the prior Appeals process were the fault of petitioner.
After considering the information petitioner provided, the settlement officer determined that there was no delay attributable to the actions of respondent's officers or employees. On March 10, 2010, the settlement officer issued a Supplemental Notice of Determination Concerning Collection Action Under Section 6320 and/or 6330 (supplemental notice of determination) denying petitioner's request for interest abatement. The settlement officer's supplemental notice of determination specifically discussed interest abatement under section 6404.
On October 20, 2009, petitioner submitted a second OIC, proposing to settle its outstanding liabilities for $18,000 5 on grounds of doubt as to collectibility and effective tax administration. 6 As with the first OIC, petitioner also submitted a
Form 433-B, business checking account statements for the period January 1 through March 31, 2009, and a copy of an income tax return on Form 1120 for the taxable year ending September 30, 2008, signed by Mr. Budike on July 10, 2009. The Form 1120 submitted with the second OIC (second 2008 Form 1120) was different from the Form 1120 submitted with the first OIC (first 2008 Form 1120); 7 while both Forms 1120 showed loans to shareholders of $443,887 as of October 1, 2007, the second 2008 Form 1120 showed no loans to shareholders at the end of the taxable year and loans from shareholders of $252,112 at the end of the taxable year. 8
Although petitioner's second OIC was submitted before the case was remanded to the Appeals Office on November 16, 2009, petitioner's second OIC was not considered at the second CDP hearing. 9 On January 20, 2011 (after the case was restored to our general docket following the second CDP hearing), petitioner filed a motion requesting that the Court remand this case to the Appeals Office for consideration of petitioner's second OIC. Respondent did not object to petitioner's motion, and we granted petitioner's motion to remand on January 24, 2011.
A different settlement officer was assigned to consider the second OIC on remand. This settlement officer scheduled a CDP hearing for May 3, 2011, and requested the following be provided by petitioner and Mr. and Mrs. Budike: (1) substantiation of all loans made to and/or received from petitioner's shareholders;
(2) copies of bank statements for all business and personal accounts for the period April 1, 2010, through March 31, 2011; (3) an income and expense statement for the period April 1, 2010, through March 31, 2011; (4) copies of petitioner's amended Forms 1120; (5) a copy of petitioner's Form 1120 for the taxable year ending September 30, 2010; (6) a list of all of petitioner's real property; and (7) a list of all of petitioner's accounts receivable. Petitioner's representative sent a letter stating that petitioner had already provided all required documentation with the submission of the second OIC. At the CDP hearing on May 3, 2011, the settlement officer advised petitioner's representative that petitioner had not provided the documents and information requested. Petitioner's representative again stated that sufficient information had already been provided with the submission of the second OIC.
On June 1, 2011, the Appeals Office issued a supplemental notice of determination rejecting petitioner's second OIC on grounds of doubt as to collectibility because “The Settlement Officer could not fully evaluate the merits of *** [the] OIC” because petitioner did not provide the requested information. The supplemental notice of determination also stated that “Your request for consideration of the OIC under *** [effective tax administration] can not be considered because the liability is owed by a corporation.” The case returned to our general docket, and a trial was held on November 15, 2011.
I. Abatement of Penalties Petitioner asserts that respondent erred by not abating the accuracy-related penalties assessed for the taxable years ending September 30, 1998 through 2000. Petitioner's only argument is that it was entitled to challenge the underlying penalty liabilities in a CDP hearing.
Section 6330 generally provides that the Commissioner cannot proceed with the collection of taxes by way of a levy on a taxpayer's property until the taxpayer has been given notice of and the opportunity for an administrative review of the matter and, if dissatisfied, with judicial review of the administrative determination. Sego v. Commissioner, 114 T.C. 604, 608 (2000). A taxpayer may challenge the existence or amount of an underlying liability in a CDP hearing under section 6330 if the taxpayer did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability. Sec. 6330(c)(2)(B); Sego v. Commissioner, 114 T.C. at 609. The term “underlying tax liability” includes penalties assessed under the deficiency procedures. See Katz v. Commissioner, 115 T.C. 329, 338-339 (2000).
Respondent argues that petitioner had an opportunity to challenge the penalties in the prior Tax Court case, which resulted in entry of a stipulated decision. As a result, respondent asserts that petitioner was not entitled to challenge the existence or amounts of the accuracy-related penalties in the CDP hearing. Petitioner claims respondent's argument is disingenuous because “petitioner did not know and could not have known the amount of interest and penalties that would be assessed as the case was 10 years old and that many of the delays and setbacks were due to and the fault of the IRS.”
We find petitioner's argument unconvincing. Plainly, petitioner had the opportunity to dispute its liability for the accuracy-related penalties during the prior Tax Court case but chose to agree to a stipulated decision. Petitioner was therefore not entitled to challenge the existence or amount of the penalties during any later CDP hearing. See Katz v. Commissioner, 115 T.C. at 339 (”If a taxpayer has been issued a notice of deficiency or had the opportunity to litigate the underlying tax liability *** the taxpayer is precluded from challenging the existence or amount of the underlying tax liability.”).
II. Abatement of Interest Petitioner asserts that respondent erred by not abating interest assessed for the taxable years ending September 30, 1998 through 2000. Considering the facts of this case, we find that there was no abuse of discretion in denying petitioner's request for abatement of interest.
The Commissioner is permitted to abate the assessment of interest on any deficiency attributable to any unreasonable error or delay by an officer or employee of the IRS in performing a ministerial or managerial act. 10Sec. 6404(e)(1)(A). A ministerial act is a procedural or mechanical act that does not involve the exercise of judgment or discretion by the Commissioner. Sec. 301.6404-2(b)(2), Proced. & Admin. Regs. A managerial act is “an administrative act that occurs during the processing of a taxpayer's case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel.” Sec. 301.6404-2(b)(1), Proced. & Admin. Regs.
Congress did not intend the interest abatement statute to be used routinely; rather, interest abatement is granted “where failure to abate interest would be widely perceived as grossly unfair.” Lee v Commissioner, 113 T.C. 145, 149 (1999) (quoting H.R. Rept. No. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844, and S. Rept. No. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208). This Court has jurisdiction under section 6404(h) to review the Commissioner's decision as to whether taxpayers are entitled to abatement of interest for the relevant tax years. Gray v. Commissioner, 138 T.C. , (slip op. at 17-21) (Mar. 28, 2012) (”Our jurisdiction to review denials of section 6404 interest abatement requests made in section 6330 proceedings is well established.”). To prevail, a taxpayer must prove that the Commissioner abused his discretion by exercising it arbitrarily, capriciously, or without sound basis in fact or law. Woodral v. Commissioner, 112 T.C. 19, 23 (1999). In reviewing for abuse of discretion, we generally consider only the arguments, issues, and other matters that were raised at the hearing or otherwise brought to the attention of the Appeals Office. Giamelli v. Commissioner 129 T.C. , 107, 115 (2007); Tinnerman v. Commissioner T.C. Memo. 2010-150 [TC Memo 2010-150], aff'd, 448 , Fed. Appx. 73 (D.C. Cir. 2012).
During the March 3, 2010, CDP hearing on the first remand, petitioner argued that abatement of interest was warranted because of various improper actions taken by the revenue agent and the Appeals officer assigned to petitioner's deficiency case which caused delays. 11 After considering petitioner's arguments, the settlement officer determined that delays during the prior Appeals process were the fault of petitioner and denied petitioner's request for abatement of interest.
Considering the record, we do not believe that petitioner has proved that any ministerial or managerial error occurred, or that respondent otherwise abused his discretion in denying petitioner's request for abatement of interest. Petitioner has accused IRS employees of a multitude of illegal, delay-causing activities but has provided no evidence that such activities actually occurred. We therefore find respondent did not abuse his discretion in denying petitioner's request for abatement of interest.
III. Rejection of Petitioner's OICs A taxpayer may raise collection alternatives such as an OIC at a CDP hearing, and the Commissioner is authorized to compromise any civil case arising under the internal revenue laws. Secs. 6330(c)(2)(A)(iii), 7122(a). Section 301.7122-1(b), Proced. & Admin. Regs., sets forth three grounds for the compromise of a liability: (1) doubt as to liability; (2) doubt as to collectibility; or (3) promotion of effective tax administration. The only ground for us to consider is doubt as to collectibility. 12
Petitioner asserts that both settlement officers abused their discretion by: (1) “Using a erroneous/invalid Tax Return to make their evaluations and determinations”; (2) delaying review of the second OIC; and (3) requesting additional information from petitioner before considering the second OIC. Petitioner's first and third arguments both relate to the first 2008 Form 1120, which reported that Mr. and Mrs. Budike owed $468,888 to petitioner as a result of loans made to shareholders. We will therefore consider those arguments together, after first addressing petitioner's second argument.
A. Delay in the Processing and Review of Petitioner's Second OIC Petitioner claims respondent acted arbitrarily and maliciously because he refused to process and review the second OIC timely even though he had it in his possession. Petitioner also argues that the second OIC should be deemed to be accepted by respondent because of the delay.
Regarding deemed acceptance of the second OIC by respondent, petitioner mistakenly cites section 523(b) 13 of the proposed Tax Relief Act of 2005, which would have amended section 7122(f) to provide:
Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer (12 months for offers-in-compromise submitted after the date which is 5 years after the date of the enactment of this subsection). *** S. 2020, 109th Cong., sec. 523(b) (2005). This proposed statute led petitioner to incorrectly believe that the second OIC should have been accepted or rejected within 12 months.
A version of S. 2020 sec. 523(b) was enacted in the Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, sec. 509(b)(2), 120 Stat. at
This section does not exist in the final public law. 363. However, the enacted statute allows for a 24-month period for the Secretary to reject an OIC, providing:
Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period. Id. Petitioner submitted its second OIC on October 20, 2009, and it was rejected on June 1, 2011. Therefore, the second OIC was properly rejected within 24 months of the date on which it was submitted and petitioner's argument fails. See sec. 7122(f). We therefore find the second OIC was not deemed to be accepted by respondent.
We also reject petitioner's related claim that respondent arbitrarily and maliciously delayed consideration of the second OIC. While petitioner did submit the second OIC before the March 3, 2010, CDP hearing, it provided no evidence that it sought to raise the second OIC during that hearing. 14 Shortly thereafter the case was restored to our general docket until the second remand on January 24, 2011, during which time respondent was unable to consider the second OIC. We also note that respondent did not object to petitioner's motion to remand for consideration of the second OIC and promptly held a CDP hearing regarding the second OIC after the motion was granted. Considering these facts, we find that respondent did not arbitrarily and maliciously delay consideration of the second OIC.
B. Alleged Loans to Shareholders Petitioner claims the second settlement officer requested additional information from petitioner before the third CDP hearing solely because the first 2008 Form 1120 (submitted with the first OIC, but not filed with the IRS) showed outstanding loans to shareholders totaling $468,888 as of September 30, 2008. Similarly, petitioner faults the first settlement officer for rejecting the first OIC on account of the loans to shareholders reflected on the first 2008 Form 1120 because the first 2008 Form 1120 was never filed with the IRS. Petitioner asserts that the settlement officers “were so determined to punish the Taxpayer and prove that *** [it] did something wrong that they knowingly, willfully and malicious used and relied on an erroneous/invalid Tax Return and not the official Tax Return logged into the IRS Computer System to make their final evaluations and determinations”. Petitioner also asserts that the second settlement officer made a blanket request for information which would have no impact on the case resolution. Petitioner claims such actions were in violation of Internal Revenue Manual protocol.
We disagree with petitioner. Although it is true that the first 2008 Form 1120 was never filed with the IRS as petitioner's tax return, it was submitted with petitioner's first OIC. That Form 1120, as well as the Forms 1120 for the taxable years ending September 30, 2006 and 2007 (which were filed with and processed by the IRS), all reported outstanding loans to shareholders in excess of $440,000. In addition, the second 2008 Form 1120 (which was filed with the IRS) reported loans to shareholders of $443,887 as of October 1, 2007.
The settlement officers encountered evidence in the administrative record that outstanding loans to petitioner's shareholders may have existed at the time the first and second OICs were filed. As a result, both settlement officers requested information from petitioner which was not available to the settlement officers internally. 15
A thorough verification of the taxpayer's *** [Collection Information Statement], Form 433-A and/or Form 433-B, involves reviewing taxpayer submitted documentation and information available from internal sources. As a general rule, additional documentation should not be requested when the information is readily available from internal sources or it would not change the recommendation.
In addition, IRM pt. 126.96.36.199.1.3 (Oct. 22, 2010), states that
If not present in the file when assigned for investigation and internal sources are not available or indicate a discrepancy, appropriate documentation should be requested from the taxpayer either verbal or written, to verify the information on the *** [Collection Information Statement]. A request for additional information and verification should be based on the taxpayer's circumstances and the information must be necessary to make an informed decision on the acceptability of the taxpayer's OIC. Do not make a blanket request for information that would have no impact on the case resolution. Do not request any information that is available internally.
The first settlement officer was told by petitioner's representatives that the outstanding loans to shareholders reported on petitioner's tax returns were incorrect. Petitioner also supplied that settlement officer with a letter from its accountant which stated that the filed tax returns were incorrect, as well as a letter from Mr. Budike which stated that petitioner actually owed Mr. and Mrs. Budike money. In spite of the letters, the settlement officer rejected petitioner's first OIC as a result of the outstanding loans to shareholders reported on the first 2008 Form 1120 and other prior filed tax returns. The second settlement officer requested the following information from petitioner and Mr. and Mrs. Budike to substantiate petitioner's claims regarding the loans to shareholders as stated on the second 2008 Form 1120: (1) substantiation of all loans made to and/or received from petitioner's shareholders; (2) copies of bank statements for all business and personal accounts for the period April 1, 2010, through March 31, 2011; (3) an income and expense statement for the period April 1, 2010, through March 31, 2011; (4) copies of petitioner's amended Forms 1120;
(5) a copy of petitioner's Form 1120 for the taxable year ending September 30, 2010; (6) a list of all of petitioner's real property; and (7) a list of all of petitioner's accounts receivable. When petitioner refused to submit the requested information, the settlement officer rejected the second OIC.
Both settlement officers encountered multiple pieces of evidence in the administrative record which stated that outstanding loans to shareholders payable to petitioner existed, including the first Form 1120. Additional information relevant to the shareholder loan issue was then requested, and both OICs were rejected when petitioner failed to provide satisfactory evidence that no loans to shareholders existed. The information requested of petitioner was not available to the settlement officers internally (indeed, many of the internally available records stated that loans to shareholders existed), and no blanket request from petitioner was made. We therefore find the respondent's determinations were not arbitrary, capricious, or without sound basis in fact or law.
IV. Conclusion We hold that petitioner was not entitled to challenge assessed accuracy-related penalties at its CDP hearing. We further hold that respondent did not abuse his discretion in rejecting petitioner's request for an abatement of interest or in rejecting petitioner's proposed OICs. We therefore sustain respondent's determinations.
In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.
To reflect the foregoing, Decision will be entered for respondent.
As described infra, two settlement officers were assigned to this case at different times
Petitioner's OIC stated that the bases for the OIC were both doubt as to collectibility and effective tax administration. With regard to the effective tax administration claim, petitioner stated that payment of the tax liability would result in an economic hardship for Mr. and Mrs. Budike.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times.
Petitioner alleged numerous illegal activities undertaken by the revenue agent in connection with the investigation into petitioner's tax returns.
Over a 12-month period petitioner fully paid the $18,000 proposed OIC.
As with the first OIC, the effective tax administration ground for the second OIC was based on petitioner's claim that payment of the tax liability would result in an economic hardship for Mr. and Mrs. Budike.
The relationship between the two Forms 1120 for the taxable year ending September 30, 2008, is somewhat complex. While petitioner's representatives believed the first 2008 Form 1120 was filed with the Internal Revenue Service (IRS), petitioner never actually filed the first 2008 Form 1120 but only sent it to the first settlement officer with the first OIC. The second 2008 Form 1120 was the only Form 1120 for the taxable year ending September 30, 2008, which was actually filed with and processed by the IRS.
The second 2008 Form 1120 did not show any loans from shareholders at the beginning of the taxable year ending September 30, 2008.
The only issue considered at the second CDP hearing was petitioner's request for abatement of interest.
Such a determination under sec. 6404 may be made in a sec. 6330 CDP hearing. Gray v. Commissioner, 138 T.C. , (slip op. at 17-21) (Mar. 28, 2012). We note that (as was the case in Gray) the settlement officer's supplemental notice of determination specifically discussed interest abatement under sec. 6404 in denying petitioner's request for interest abatement.
Respondent denied petitioner's allegations at trial and the revenue agent's case activity record indicated that delays during the Appeals process were the fault of petitioner.
As discussed supra, petitioner is not entitled to challenge the underlying liabilities because petitioner previously entered into a stipulated decision regarding them. In addition, petitioner has failed to argue or present sufficient evidence to prevail on grounds of effective tax administration. We thus do not reach the issue (not addressed by the parties) regarding whether a corporation may be entitled to an OIC on effective tax administration grounds.
This section does not exist in the final public law.
Indeed, petitioner's January 20, 2011, motion to remand for consideration of the second OIC states that “On March 3, 2010, Appeals met with Petitioner to consider the interest abatement issue” and that “On March 9, 2010, Petitioner called the IRS *** to find out what happened to the second offer-in-compromise.”
Internal Revenue Manual (IRM) pt. 188.8.131.52.1 (Oct. 22, 2010), states that
§ 7122 Compromises.
The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
Whenever a compromise is made by the Secretary in any case, there shall be placed on file in the office of the Secretary the opinion of the General Counsel for the Department of the Treasury or his delegate, with his reasons therefor, with a statement of—
(1) The amount of tax assessed,
(2) The amount of interest, additional amount, addition to the tax, or assessable penalty, imposed by law on the person against whom the tax is assessed, and
(3) The amount actually paid in accordance with the terms of the compromise.
Notwithstanding the foregoing provisions of this subsection, no such opinion shall be required with respect to the compromise of any civil case in which the unpaid amount of tax assessed (including any interest, additional amount, addition to the tax, or assessable penalty) is less than $50,000. However, such compromise shall be subject to continuing quality review by the Secretary.
(c) Rules for submission of offers-in-compromise.
(1) New Law Analysis Partial payment required with submission.
(A) Lump-sum offers.
(i) New Law Analysis In general. The submission of any lump-sum offer-in-compromise shall be accompanied by the payment of 20 percent of the amount of such offer.
(ii) New Law Analysis Lump-sum offer-in-compromise. For purposes of this section, the term “lump-sum offer-in-compromise” means any offer of payments made in 5 or fewer installments.
(B) Periodic payment offers.
(i) New Law Analysis In general. The submission of any periodic payment offer-in-compromise shall be accompanied by the payment of the amount of the first proposed installment.
(ii) New Law Analysis Failure to make installment during pendency of offer. Any failure to make an installment (other than the first installment) due under such offer-in-compromise during the period such offer is being evaluated by the Secretary may be treated by the Secretary as a withdrawal of such offer-in-compromise.
(2) Rules of application.
(A) New Law Analysis Use of payment. The application of any payment made under this subsection to the assessed tax or other amounts imposed under this title with respect to such tax may be specified by the taxpayer.
(B) New Law Analysis Application of user fee. In the case of any assessed tax or other amounts imposed under this title with respect to such tax which is the subject of an offer-in-compromise to which this subsection applies, such tax or other amounts shall be reduced by any user fee imposed under this title with respect to such offer-in- compromise.
(C) New Law Analysis Waiver authority. The Secretary may issue regulations waiving any payment required under paragraph (1) in a manner consistent with the practices established in accordance with the requirements under subsection (d)(3) .
(d) Standards for evaluation of offers.
(1) New Law Analysis In general.
The Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-in-compromise is adequate and should be accepted to resolve a dispute.
(2) New Law Analysis Allowances for basic living expenses.
(A) In general. In prescribing guidelines under paragraph (1), the Secretary shall develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.
(B) Use of schedules. The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses.
(3) Special rules relating to treatment of offers.
The guidelines under paragraph (1) shall provide that—
(A) an officer or employee of the Internal Revenue Service shall not reject an offer-in-compromise from a low-income taxpayer solely on the basis of the amount of the offer,
(B) in the case of an offer-in-compromise which relates only to issues of liability of the taxpayer—
(i) such offer shall not be rejected solely because the Secretary is unable to locate the taxpayer's return or return information for verification of such liability; and
(ii) the taxpayer shall not be required to provide a financial statement, and
(C) New Law Analysis any offer-in-compromise which does not meet the requirements of subparagraph (A)(i) or (B)(i), as the case may be, of subsection (c)(1) may be returned to the taxpayer as unprocessable.
(e) Administrative review.
The Secretary shall establish procedures—
(1) for an independent administrative review of any rejection of a proposed offer-in-compromise or installment agreement made by a taxpayer under this section or section 6159 before such rejection is communicated to the taxpayer; and
(2) which allow a taxpayer to appeal any rejection of such offer or agreement to the Internal Revenue Service Office of Appeals.
(f) Deemed acceptance of offer not rejected within certain period.
Any offer-in-compromise submitted under this section shall be deemed to be accepted by the Secretary if such offer is not rejected by the Secretary before the date which is 24 months after the date of the submission of such offer. For purposes of the preceding sentence, any period during which any tax liability which is the subject of such offer-in-compromise is in dispute in any judicial proceeding shall not be taken into account in determining the expiration of the 24-month period.
(f [(g)]) New Law Analysis Frivolous submissions, etc.
Notwithstanding any other provision of this section, if the Secretary determines that any portion of an application for an offer-in-compromise or installment agreement submitted under this section or section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A), then the Secretary may treat such portion as if it were never submitted and such portion shall not be subject to any further administrative or judicial review.
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Wednesday, July 25, 2012
Federal law requires taxpayers to report annually to the Internal Revenue Service (“IRS”) any financial interests they have in any bank, securities, or other financial accounts in a foreign country. 31 U.S.C. § 5314(a). The report is made by filing a completed form TD F 90-22.1 (“FBAR”) with the Department of the Treasury. 1 See id. § 5314; 31 C.F.R. § 1010.350. The FBAR must be filed on or before June 30 of each calendar year with respect to foreign financial accounts maintained during the previous calendar year, 31 C.F.R. § 1010.306(c), and the Secretary of the Treasury may impose a civil money penalty on any person who fails to timely file the report, 31 U.S.C. § 5321(a)(5)(A). Moreover, in cases where a person “willfully” fails to file the FBAR, the Secretary may impose an increased maximum penalty, up to $100,000 or fifty percent of the balance in the account at the time of the violation. Id. § 5321(a)(5)(C). The authority to enforce such assessments has been delegated to the IRS. 31 C.F.R. § 1010.810(g).
The civil and criminal penalties for noncompliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation, and civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together. The authority to enforce these assessments has been delegated to IRS.
Under the offshore voluntary disclosure initiative (OVDI) currently in effect, IRS won't impose certain penalties on taxpayers with unreported offshore income if the applicable requirements are met. However, taxpayers don't qualify for favorable treatment under an OVDI if they fail to timely disclose their interests—so taxpayers in situations similar to the one in this case are unlikely to qualify for an OVDI.
Willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information,” and it “can be inferred from a conscious effort to avoid learning about reporting requirements.” United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (internal citations omitted) (noting willfulness standard in criminal conviction for failure to file an FBAR). Similarly, “willful blindness” may be inferred where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability.” United States v. Poole, 640 F.3d 114, 122 [107 AFTR 2d 2011-2163] (4th Cir. 2011) (affirming criminal conviction for willful tax fraud where tax preparer “closed his eyes to” large accounting discrepancies). Importantly, in cases “where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007) (emphasis added). Whether a person has willfully failed to comply with a tax reporting requirement is a question of fact. Rykoff v. United States, 40 F.3d 305, 307 [74 AFTR 2d 94-6999] (9th Cir. 1994); accord United States v. Gormley, 201 F.3d 290, 294 [85 AFTR 2d 2000-514] (4th Cir. 2000) (“[T]he question of willfulness is essentially a finding of fact.”).
Williams, (CA 4 07/20/2012) 110 AFTR 2d ¶ 2012-5639. CA-4 finds that tax evader's failure to file FBARs for Swiss bank accounts was willful.
The Court of Appeals for the Fourth Circuit, reversing the district court, has held that an admitted tax evader's failure to file FBARs reporting his interests in two Swiss bank accounts was willful for purposes of the 31 USC 5321(a)(5) civil penalty. Although the district court found it significant that the taxpayer had no incentive to continue concealing the accounts at that time, the Fourth Circuit found that the taxpayer's representations on his tax return and his guilty plea allocution satisfied the government's burden of proof.
Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (FBAR) with the Department of the Treasury on or before June 30, of the succeeding year.
Facts. In '93, J. Bryan Williams opened two Swiss bank accounts in the name of ALQI Holdings, Ltd., a British Corporation (the “ALQI accounts”). From '93 through 2000, Williams deposited more than $7,000,000 into the ALQI accounts and earned substantial interest, but didn't report to IRS either the income from or his interest in the accounts.
By the fall of 2000, the Swiss and U.S. government authorities had become aware of the assets in the ALQI accounts. At the U.S. government's request, the Swiss authorities froze the ALQI accounts in November of 2000.
Williams completed a “tax organizer” (essentially, a client questionnaire to facilitate return preparation) in January of 2001 which had been provided to him by his accountant in connection with the preparation of his 2000 tax returns. In the questionnaire, Williams stated that he didn't have “an interest in or a signature or other authority over a bank account, or other financial account in a foreign country.” In addition, he similarly indicated on his 2000 Form 1040 that he had no such interest or authority, and he also didn't file an FBAR by the June 30, 2001, deadline.
In January of 2002, upon the advice of his attorneys and accountants, Williams fully disclosed the ALQI accounts to an IRS agent and, in October of 2002, filed his 2001 federal tax return on which he acknowledged his interest in the ALQI accounts. He also disclosed the accounts to IRS in February of 2003 as part of his application to participate in the Offshore Voluntary Compliance Initiative, which was rejected. He also filed amended returns for '99 and 2000, which disclosed details about his ALQI accounts.
In June of 2003, Williams pled guilty to a two-count superseding criminal information, which charged him with conspiracy to defraud IRS and criminal tax evasion in connection with the ALQI accounts. As part of the plea, Williams agreed to allocute to all of the essential elements of the charged crimes, including that he unlawfully, willfully, and knowingly evaded taxes by filing false and fraudulent tax returns on which he failed to disclose his interest in the ALQI accounts, in exchange for which he received a three-level reduction under the Sentencing Guidelines for acceptance of responsibility.
In January of 2007, Williams finally filed an FBAR for each tax year from '93 through 2000. IRS then assessed two $100,000 civil penalties against him for his failure to file an FBAR for 2000, which Williams failed to pay.
District court's decision. Following a bench trial, the district court entered judgment in favor of Williams, finding that the government failed to establish that Williams willfully failed to timely file an FBAR for 2000. The court found that: (i) Williams “lacked any motivation to willfully conceal the accounts from authorities,” since the authorities already knew of the accounts; and (ii) his failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.”
Fourth Circuit reverses. The Court of Appeals for the Fourth Circuit, in a 2-1 opinion, found the district court's decision clearly erroneous.
The Fourth Circuit found it significant that, on Williams' 2000 return, he signed under penalty of perjury that he had “examined this return and accompanying schedules and statements” and that such were true to the best of his knowledge—which constitutes prima facie evidence that he knew the contents of the return. He also admitted to never paying attention “to any of the written words” on his return, which the Court likened to willful blindness. This, combined with the fact that he gave false answers both on the tax organizer and on his return, reflected conduct “meant to conceal or mislead sources of income or other financial information.”
Willams' guilty plea further confirmed that his failure to timely file an FBAR for 2000 was willful. He acknowledged in his plea that his failure to report the ALQI accounts was part of a larger tax evasion scheme. The Court found that Williams couldn't now claim that he was unaware of or somehow lacked the motivation to willfully disregard the FBAR reporting requirement.
Dissent. The dissenting judge found that, although the majority opinion stated the correct standard of review (clear error), it failed to adhere to that standard and instead substituted its judgment for that of the district court. The district judge was in a better position to evaluate the credibility of Williams' testimony, and the district judge also found it significant that Williams had no “objective incentive” to conceal the ALQU account in June of 2001. Accordingly, the dissenting judge would have affirmed the district court.
U.S. v. WILLIAMS, Cite as 110 AFTR 2d 2012-XXXX, 07/20/2012
UNITED STATES OF AMERICA, Plaintiff - Appellant, v. J. BRYAN WILLIAMS, Defendant - Appellee.
Court Name: UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT,
Docket No.: No. 10-2230,
Date Argued: 03/21/2012
Date Decided: 07/20/2012.
ARGUED: Robert William Metzler, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant. David Harold Dickieson, SCHERTLER & ONORATO, LLP, Washington, D.C., for Appellee. ON BRIEF: John A. DiCicco, Acting Assistant Attorney General, Deborah K. Snyder, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Neil H. MacBride, United States Attorney, Alexandria, Virginia, for Appellant. Lisa H. Schertler, SCHERTLER & ONORATO, LLP, Washington, D.C., for Appellee.
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT,
Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Liam O'Grady, District Judge. (1:09-cv-00437-LO-TRJ)
Before MOTZ, SHEDD, and AGEE, Circuit Judges.
Reversed by unpublished opinion. Judge Shedd wrote the majority opinion, in which Judge Motz concurred. Judge Agee wrote a dissenting opinion.
Judge: SHEDD, Circuit Judge:
Unpublished opinions are not binding precedent in this circuit.
The Government brought this action seeking to enforce civil penalties assessed against J. Bryan Williams for his failure to report his interest in two foreign bank accounts for tax year 2000, in violation of 31 U.S.C. § 5314. Following a bench trial, the district court entered judgment in favor of Williams. The Government now appeals. Because we conclude that the district court clearly erred in finding that the Government failed to prove that Williams willfully violated § 5314, we reverse.
In 1993, Williams opened two Swiss bank accounts in the name of ALQI Holdings, Ltd., a British Corporation (the “ALQI accounts”). From 1993 through 2000, Williams deposited more than $7,000,000 into the ALQI accounts, earning more than $800,000 in income on the deposits. However, for each of the tax years during that period, Williams did not report to the IRS the income from the ALQI accounts or his interest in the accounts, as he was required to do under § 5314.
By the fall of 2000, Swiss and Government authorities had become aware of the assets in the ALQI accounts. Williams retained counsel and on November 13, 2000, he met with Swiss authorities to discuss the accounts. The following day, at the request of the Government, the Swiss authorities froze the ALQI accounts.
Relevant to this appeal, Williams completed a “tax organizer” in January 2001, which had been provided to him by his accountant in connection with the preparation of his 2000 federal tax return. In response to the question in the tax organizer regarding whether Williams had “an interest in or a signature or other authority over a bank account, or other financial account in a foreign country,” Williams answered “No.” J.A. 111. In addition, the 2000 Form 1040, line 7a in Part III of Schedule B asks:
At any time during 2000, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See instructions for exceptions and filing requirements for Form TD F 90-22.1.
J.A. 131. On his 2000 federal tax return, Williams checked “No” in response to this question, and he did not file an FBAR by the June 30, 2001, deadline.
Subsequently, upon the advice of his attorneys and accountants, Williams fully disclosed the ALQI accounts to an IRS agent in January 2002. In October 2002 he filed his 2001 federal tax return on which he acknowledged his interest in the ALQI accounts. Williams also disclosed the accounts to the IRS in February 2003 as part of his application to participate in the Offshore Voluntary Compliance Initiative. 2 At that time he also filed amended returns for 1999 and 2000, which disclosed details about his ALQI accounts.
In June 2003, Williams pled guilty to a two-count superseding criminal information, which charged him with conspiracy to defraud the IRS, in violation of 18 U.S.C. § 371, and criminal tax evasion, in violation of 26 U.S.C. § 7201, in connection with the funds held in the ALQI accounts from 1993 through 2000.
As part of the plea, Williams agreed to allocute to all of the essential elements of the charged crimes, including that he unlawfully, willfully, and knowingly evaded taxes by filing false and fraudulent tax returns on which he failed to disclose his interest in the ALQI accounts. In exchange for his allocution, Williams received a three-level reduction under the Sentencing Guidelines for acceptance of responsibility. 3
In his allocution, Williams admitted the following:
I knew that most of the funds deposited into the Alqi accounts and all the interest income were taxable income to me. However, the calendar year tax returns for §93 through 2000, I chose not to report the income to my -- to the Internal Revenue Service in order to evade the substantial taxes owed thereon, until I filed my 2001 tax return.
I also knew that I had the obligation to report to the IRS and/or the Department of the Treasury the existence of the Swiss accounts, but for the calendar year tax returns 1993 through 2000, I chose not to in order to assist in hiding my true income from the IRS and evade taxes thereon, until I filed my 2001 tax return.
I knew what I was doing was wrong and unlawful. I, therefore, believe that I am guilty of evading the payment of taxes for the tax years 1993 through 2000. I also believe that I acted in concert with others to create a mechanism, the Alqi accounts, which I intended to allow me to escape detection by the IRS. Therefore, I am -- I believe that I'm guilty of conspiring with the people would (sic) whom I dealt regarding the Alqi accounts to defraud the United States of taxes which I owed.
J.A. 55 (emphasis added).
In January 2007, Williams finally filed an FBAR for each tax year from 1993 through 2000. Thereafter, the IRS assessed two $100,000 civil penalties against him, pursuant to § 5321(a)(5), for his failure to file an FBAR for tax year 2000. 4 Williams failed to pay these penalties, and the Government brought this enforcement action to collect them. Following a bench trial, the district court entered judgment in favor of Williams, finding that the Government failed to establish that Williams willfully violated § 5314. The Government timely appealed.
The parties agree that Williams violated § 5314 by failing to timely file an FBAR for tax year 2000. The only question is whether the violation was willful. The district court found that (1) Williams “lacked any motivation to willfully conceal the accounts from authorities” because they were already aware of the accounts and (2) his failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.” 5 J.A. 378–79. Therefore, the district court found that Williams's violation of § 5314 was not willful.
We review factual findings under the clearly erroneous standard set forth in Federal Rule of Civil Procedure 52(a). Walton v. Johnson, 440 F.3d 160, 173–74 (4th Cir. 2006) (en banc). “Our scope of review is narrow; we do not exercise de novo review of factual findings or substitute our version of the facts for that found by the district court.” Id. at 173. “If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.” Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573–74 (1985)). However, notwithstanding our circumscribed review or the deference we give to a district court's findings, those findings are not conclusive if they are “plainly wrong.” Id. (quoting Jiminez v. Mary Washington College, 57 F.3d 369, 379 (4th Cir. 1995)). The clear error standard still requires us to engage in “meaningful appellate review,” United States v. Abu Ali, 528 F.3d 210, 261 (4th Cir. 2008), and where objective evidence contradicts a witness' story, or the story itself is “so internally inconsistent or implausible on its face that a reasonable factfinder would not credit it, ... the court of appeals may well find clear error even in a finding purportedly based on a credibility determination.” United States v. Hall, 664 F.3d 456, 462 (4th Cir. 2012) (citing Anderson, 470 U.S. at 575). Thus, “[a] finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed.” F.C. Wheat Maritime Corp. v. United States, 663 F.3d 714, 723 (4th Cir. 2011).
Here, the evidence as a whole leaves us with a definite and firm conviction that the district court clearly erred in finding that Williams did not willfully violate § 5314. Williams signed his 2000 federal tax return, thereby declaring under penalty of perjury that he had “examined this return and accompanying schedules and statements” and that, to the best of his knowledge, the return was “true, accurate, and complete.” “A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.” Greer v. Commissioner of Internal Revenue, 595 F.3d 338, 347 [105 AFTR 2d 2010-977] n. 4 (6th Cir. 2010); United States v. Doherty, 233 F.3d 1275, 1282 [86 AFTR 2d 2000-6691] n.10 (11th Cir. 2000) (same). Williams's signature is prima facie evidence that he knew the contents of the return, United States v. Mohney, 949 F.2d 1397, 1407 [68 AFTR 2d 91-5938] (6th Cir. 1991), and at a minimum line 7a's directions to “[s]ee instructions for exceptions and filing requirements for Form TD F 90-22.1” put Williams on inquiry notice of the FBAR requirement.
Nothing in the record indicates that Williams ever consulted Form TD F 90-22.1 or its instructions. In fact, Williams testified that he did not read line 7a and “never paid any attention to any of the written words” on his federal tax return. J.A. 299. Thus, Williams made a “conscious effort to avoid learning about reporting requirements,” Sturman, 951 F.2d at 1476, and his false answers on both the tax organizer and his federal tax return evidence conduct that was “meant to conceal or mislead sources of income or other financial information,” id. (“It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms. Evidence of acts to conceal income and financial information, combined with the defendant's failure to pursue knowledge of further reporting requirements as suggested on Schedule B, provide a sufficient basis to establish willfulness on the part of the defendant.”). This conduct constitutes willful blindness to the FBAR requirement. Poole, 640 F.3d at 122 (“[I]ntentional ignorance and actual knowledge are equally culpable under the law.”)
Williams's guilty plea allocution further confirms that his violation of § 5314 was willful. During that allocution, Williams acknowledged that he willfully failed to report the existence of the ALQI accounts to the IRS or Department of the Treasury as part of his larger scheme of tax evasion. This failure to report the ALQI accounts is an admission of violating § 5314, because a taxpayer complies with § 5314 by filing an FBAR with the Department of the Treasury. In light of his allocution, Williams cannot now claim that he was unaware of, 6 inadvertently ignored, or otherwise lacked the motivation to willfully disregard the FBAR reporting requirement.
Thus, we are convinced that, at a minimum, Williams's undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314. Safeco Ins., 551 U.S. at 57. Accordingly, we conclude that the district court clearly erred in finding that willfulness had not been established.
For the foregoing reasons, we reverse the judgment of the district court and remand this case for proceedings consistent with this opinion.
Judge: AGEE, Circuit Judge, dissenting: The majority correctly recites that we review only for clear error the district court's dispositive factual finding that Williams' failure to file the FBAR was not willful. Maj. Op. at 9–10. The majority also correctly notes the limited scope of review under that standard. Id. In my view, however, my colleagues in the majority do not adhere to that standard, instead substituting their judgment for the judgment of the district court. As appellate judges reviewing for clear error, we are bound by the standard of review and therefore I respectfully dissent. We recently explained how circumscribed our review under the clear error standard must be:
“This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently.” Anderson v. Bessemer City, 470 U.S. 564, 573 (1985). “If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.” Id. at 573–74.
“When findings are based on determinations regarding the credibility of witnesses,” we give “even greater deference to the trial court's findings.” Id. at 575.
United States v. Hall, 664 F.3d 456, 462 (4th Cir. 2012). Applying this standard to the case at bar, I conclude the district court's judgment should be affirmed. The majority opinion rightly points out that there is evidence supporting the conclusion that Williams' failure to file the FBAR was willful, particularly if adopting the majority's conclusion that a “willful violation” can include “willful blindness to the FBAR requirement” or “intentional ignorance.” Maj. Op. at 12. That evidence could have led a reasonable factfinder to conclude that the violation was willful, as the majority believes. 1 But there is also evidence supporting the opposite view. First, there is Williams' direct testimony that he was unaware of the FBAR requirement in June 2001 (when it was supposed to be filed) and that he did not willfully (or recklessly) fail to file it. The district judge, who had the opportunity to observe Williams' demeanor while testifying, expressly found that “Williams' testimony that he only focused on the numerical calculations on the Form 1040 and otherwise relied on his accountants to fill out the remainder of the Form is credible ....” J.A. 379. Significantly, the district court also found that there was no objective incentive for Williams to continue to conceal the ALQI account in June 2001, because at that time he knew that the United States government had requested the ALQI accounts be frozen, and thus Williams knew the United States government knew about those accounts. As the district court reasoned, if Williams had known about the FBAR requirement, there would have been little incentive for him under those circumstances to refuse to comply with it as of June 2001. Additional evidence supporting the district court's finding includes the undisputed evidence that, after June 2001, Williams and his advisors began formal disclosures of the ALQI accounts, including the filing of amended income tax returns, but they did not backfile FBAR reports. These disclosures included direct disclosures of the ALQI accounts to the IRS in January 2002. The district court explained the significance of this disclosure to the IRS: “[t]hough made after the June 30, 2001” FBAR filing deadline, the disclosure “indicates to the Court that Williams continued to believe the assets had already been disclosed. That is, it makes little sense for Williams to disclose the ALQI accounts merely six months after the deadline he supposedly willfully violated.” J.A. 378. This was a logical and supported finding for the district court to make on the record before it. The district court's decision was set forth in a detailed opinion that fully explained the evidence supporting its findings. Had I been sitting as the trier of fact in this bench trial, I may well have decided differently than did the district judge. But I cannot say that I am left with a “definite and firm conviction” that he was mistaken. Thus, I cannot agree with the majority that the Government has established clear error. I also address briefly the two other grounds for reversal asserted by the United States and rejected by the district court: collateral estoppel and judicial estoppel. 2Specifically, the Government points to Williams' criminal conviction and, in particular, the language in his plea allocution, see Maj. Op. at 6, as requiring a finding that both types of estoppel apply. I disagree. We review the district court's denial of judicial estoppel only for abuse of discretion, see Jaffe v. Accredited Sur. & Cas. Co., 294 F.3d 584, 595 n.7 (4th Cir. 2002), and its denial of collateral estoppel de novo, Tuttle v. Arlington Cnty. Sch. Bd., 195 F.3d 698, 703 (4th Cir. 1999). Judicial estoppel generally requires three elements:
First, the party sought to be estopped must be seeking to adopt a position that is inconsistent with a stance taken in prior litigation. The position at issue must be one of fact as opposed to one of law or legal theory. Second, the prior inconsistent position must have been accepted by the court. Lastly, the party against whom judicial estoppel is to be applied must have intentionally misled the court to gain unfair advantage.
Zinkand v. Brown, 478 F.3d 634, 638 (4th Cir. 2007) (citations and internal quotations omitted). Similarly, a party seeking to apply collateral estoppel must establish five elements:
(1) the issue sought to be precluded is identical to one previously litigated; (2) the issue [was] actually determined in the prior proceeding; (3) determination of the issue [was] a critical and necessary part of the decision in the prior proceeding; (4) the prior judgment [is] final and valid; and (5) the party against whom estoppel is asserted ... had a full and fair opportunity to litigate the issue in the previous forum.
Sedlack v. Braswell Servs. Grp., Inc., 134 F.3d 219, 224 (4th Cir. 1998); Collins v. Pond Creek Mining Co., 468 F.3d 213, 217 (4th Cir. 2006). “The doctrine ... may apply to issues litigated in a criminal case which a party seeks to relitigate in a subsequent civil proceedings .... [For example], a defendant is precluded from retrying issues necessary to his plea agreement in a later civil suit.” United States v. Wight, 839 F.2d 193, 196 (4th Cir. 1987). In my view, the district court correctly concluded that
there remains a factual incongruence between those facts necessary to [Williams'] guilty plea to tax evasion and those establishing a willful violation of § 5314. That Williams intentionally failed to report income in an effort to evade income taxes is a separate matter from whether Williams specifically failed to comply with disclosure requirements contained in § 5314 applicable to the ALQI accounts for the year 2000.
J.A. 379. Put differently, Williams never allocuted to failing to file the FBAR form, and certainly did not admit willfully failing to file it. Neither his plea agreement nor his allocution even referred to the FBAR or § 5314. Indeed, the Treasury Department itself notes that the FBAR is a separate reporting requirement and not a tax return, nor is it to be attached to a taxpayer's tax returns. See J.A. 225, 237, 246. In short, pleading guilty to hiding the existence of the two accounts for income tax purposes does not necessarily establish that Williams willfully failed to file a FBAR for 2000. Indeed, other separate and distinct tax penalties (including penalties for fraud) were separately sought by the IRS from Williams for his failure to report the income in the accounts, pursuant to 26 U.S.C. §§ 6662 and 6663. See Williams v. Comm'r of Internal Revenue, 97 T.C.M. (CCH) 1422, 4 [TC Memo 2009-81] (Apr. 16, 2009). The FBAR-related penalty is not a tax penalty, but a separate penalty for separate conduct. Thus, viewed as distinct issues, collateral estoppel is inapplicable here because Williams' willfulness in failing to file the FBAR is not an issue “identical to one previously litigated.” Sedlack, 134 F.3d at 224. Likewise, judicial estoppel is inapplicable because there is nothing about Williams' stance on willfulness here that is “inconsistent with [the] stance taken” in his criminal proceedings. Zinkand, 478 F.3d at 638. Accordingly, I would further hold that the district court did not err in declining to apply either collateral estoppel or judicial estoppel. For all of these reasons, I respectfully dissent and would affirm the judgment of the district court.
TD F 90-22.1, which is a form issued by the Department of the Treasury, is titled “Report of Foreign Bank and Financial Accounts” and is commonly referred to as the “FBAR.” The regulations relating to the FBAR were formerly published at 31 C.F.R. §§ 103.24 and 103.27, but were recodified in a new chapter effective March 1, 2011. See Transfer & Reorganization of Bank Secrecy Act Regulations, 75 Fed. Reg. 65806 (Oct. 26, 2010). For ease, our citations are to the recodified sections.
The IRS rejected the application and turned it over to the attorney for the United States who was conducting a grand jury investigation of Williams.
Williams also agreed to pay all taxes and criminal penalties due for tax years 1993 through 2000, but he has since refused to pay some of those taxes and penalties and has engaged the IRS in litigation over that issue. See Williams v. Commissioner of Internal Revenue, 97 T.C.M. (CCH) 1422 [TC Memo 2009-81] (Apr. 16, 2009).
The statute of limitations for assessing penalties for tax years 1993 through 1999 had expired by the time the IRS assessed the civil penalties. See 31 U.S.C. § 5321(b)(1) and (2).
In making its determination, the district court emphasized Williams's motivation rather than the relevant issue of his intent. See Am. Arms Int'l v. Herbert, 563 F.3d 78, 83 (4th Cir. 2009) (“[M]alice or improper motive is not necessary to establish willfulness.”). To the extent the district court focused on motivation as proof of the lack of intent, it simply drew an unreasonable inference from the record. In November 2000, Swiss authorities met with Williams to discuss the ALQI accounts and thereafter froze them at the request of the United States Government. Although the Government knew of the existence of the accounts, nothing in the record indicates that, when the accounts were frozen, the Government knew the extent, control, or degree of Williams's interest in the accounts or the total funds held in the accounts. As Williams admitted in his allocution, his decision not to report the accounts was part of his tax evasion scheme that continued until he filed his 2001 tax return. Thus, his failure to disclose information about the ALQI accounts on his 2000 tax return in May 2001 was motivated by his desire not to admit his interest in the accounts, even after authorities had been aware of them for over six months. Rarely does a person who knows he is under investigation by the Government immediately disclose his wrongdoing because he is not sure how much the Government knows about his role in that wrongdoing. Thus, without question, when Williams filed in May of 2001, he was clearly motivated not to admit his interest in the ALQI accounts.
In fact, seven months before his criminal allocution, Williams sent a letter to the IRS requesting to participate in the Offshore Voluntary Compliance Initiative “[p]ursuant to Rev. Proc. 2003-11.” J.A. 183–84. On the first page of Revenue Procedure 2003-11, the IRS specifically informs applicants that a primary benefit of the Initiative is that participating taxpayers can avoid penalties for having failed to timely file an FBAR. Clearly, Williams was aware of the FBAR at the time of his allocution. Further, to the extent Williams asserts he was unaware of the FBAR requirement because his attorneys or accountants never informed him, his ignorance also resulted from his own recklessness. Williams concedes that from 1993–2000 he never informed his accountant of the existence of the foreign accounts — even after retaining counsel and with the knowledge that authorities were aware of the existence of the accounts.
Some of that evidence, of course, is subject to two interpretations. For example, the majority reasons that Williams' reference in his allocution to the “Department of the Treasury” is necessarily an admission he violated § 5314. Because the IRS is a bureau of the Department of the Treasury, however, the reference in his plea could instead be interpreted as a simple acknowledgement of that fact. Indeed, there was no reference in the criminal proceedings to Section 5314 or the FBAR at all.
In light of its holding that the district court clearly erred in finding the violation not willful, the majority did not have cause to address either estoppel argument. Because I would affirm the district court and the Government contends that both types of estoppel prevent Williams from challenging the willfulness of his violation, it is necessary to address those points.
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Monday, July 23, 2012
Burden of Proof
As a general rule, the Commissioner's determinations in a statutory notice of deficiency are presumptively correct, and taxpayers bear the burden of proving those determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). The U.S. Court of Appeals for the Sixth Circuit, to which an appeal in this case would lie barring a written stipulation to the contrary, has stated that the Commissioner cannot rely on the presumption of correctness to support deficiency determinations of unreported income without a "`minimal evidentiary foundation'" linking the taxpayers with the income-producing activity or to the receipt of funds. 9 United States v. Walton, 909 F.2d 915, 919 [66 AFTR 2d 90-5379] (6th Cir. 1990) (quoting Weimerskirch v. Commissioner 596 F.2d 358, 361 [44 AFTR 2d 79-5072] (9th Cir. 1979), rev'g , 67 T.C. 672 (1977)); Richardson v. Commissioner, T.C. Memo. 2006-69 [TC Memo 2006-69], 91 T.C.M. (CCH) 981, 989 (2006), aff'd, 509 F.3d 736 [100 AFTR 2d 2007-6970] (6th Cir. 2007). Where the Commissioner carries his burden of production with respect to unreported income, the burden of proof shifts to the taxpayers to produce "credible evidence that they did not earn the taxable income attributed to them or of presenting an argument that the IRS deficiency calculations were not grounded on a minimal evidentiary foundation." United States v. Walton, 909 F.2d at 919. Taxpayers must prove their entitlement to deductions and losses as well as the amount of the benefit claimed. See Gatlin v. Commissioner, 754 F.2d 921, 923 [55 AFTR 2d 85-1029] (11th Cir. 1985), aff'g T.C. Memo. 1982-489 [¶82,489 PH Memo TC]; Time Ins. Co. v. Commissioner, 86 T.C. 298, 313-314 (1986); Jordan v. Commissioner, T.C. Memo. 2009-223 [TC Memo 2009-223], 98 T.C.M. (CCH) 289, 299-300 (2009) (discussing the applicability of Walton to the payment of expenses), aff'd, ___ Fed. Appx. ___ (6th Cir. Apr. 25, 2012).
Records a taxpayer needs to maintain for tax purposes
Taxpayers must keep sufficient records to enable the Commissioner to determine their correct Federal income tax liability Sec. 6001; Petzoldt v. . Commissioner, 92 T.C. 661, 686-687 (1989). The Commissioner is simultaneously authorized to examine books, papers, records, or other data potentially relevant or material in determining the taxpayers' Federal income tax liability. Sec. 7602(a)(1). Where taxpayers fail to keep such books and records, the Commissioner is authorized to reconstruct the taxpayers' income under any method that, in the Commissioner's opinion, clearly reflects income. S c. 446(b); Petzoldt v. e Commissioner, 92 T.C. at 693. Courts have long recognized the bank deposits method as a permissible indirect approach to reconstructing taxable income. See DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), aff'd, 959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992); Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975) (and cases cited thereat), aff'd, 566 F.2d 2 [41 AFTR 2d 78-348] (6th Cir. 1977).
Vitautas Kazhukauskas, et ux. v. Commissioner, TC Memo 2012-191 , Code Sec(s) 61; 102; 162; 164; 262; 446; 1401; 6662; 7491; 7602.
VITAUTAS KAZHUKAUSKAS AND VILMA KAZHUKAUSKAS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Code Sec(s): 61; 102; 162; 164; 262; 446; 1401; 6662; 7491; 7602
Docket: Dkt. No. 4657-10.
Date Issued: 07/11/2012.
Judge: Opinion by Laro, J.
Reference(s): Code Sec. 61; Code Sec. 102; Code Sec. 162; Code Sec. 164; Code Sec. 262; Code Sec. 446; Code Sec. 1401; Code Sec. 6662; Code Sec. 7491; Code Sec. 7602
Official Tax Court Syllabus
Vitautas Kazhukauskas and Vilma Kazhukauskas, pro sese.
Mindy Y. Chou, Robert D. Heitmeyer, Alexandra E. Nicholaides, and Alissa Vanderkooi (specially recognized), for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Petitioners, while residing in Michigan, petitioned the Court to redetermine deficiencies respondent determined in their 2006 and 2007 Federal income tax of $62,860 and $33,122, respectively, and accuracy-related penalties of $12,572 and $6,624, respectively. 1 We are asked to decide the following issues: (1) whether petitioners underreported gross receipts of $222,534 and $168,086 on their 2006 and 2007 Schedules C, Profit or Loss From Business, respectively. We hold they did; (2) whether petitioners may deduct Schedule C expenses and claim costs of goods sold in addition to those respondent allowed for 2006 and 2007. 2 We hold they may not; (3) whether petitioners owe self-employment tax for 2006 and 2007, net of deductions allowed under section 164(f), in the amounts of $8,749 and $7,672, respectively. We hold they do; and (4) whether petitioners are liable for accuracy-related penalties for 2006 and 2007 under section 6662(a) and (b)(2) for substantial understatements of income tax. We hold they are.
FINDINGS OF FACT
Before trial, respondent's counsel sent to petitioners a proposed stipulation of facts which respondent proffered petitioners should agree to under Rule 91(a). Petitioners refused to execute the agreement, and respondent moved the Court to compel stipulation under Rule 91(f). The Court granted respondent's motion and ordered petitioners to show cause why the proposed stipulation of facts, as well as the accompanying exhibits, should not be deemed established for purposes of this case. See Rule 91(f)(2). Petitioners failed to respond, and we made our order to show cause absolute by deeming established (for purposes of this case) the facts and evidence in respondent's proposed stipulation of facts. 3 See Rule 91(f)(3). Our findings of fact are primarily derived from the facts and exhibits deemed stipulated, the documents admitted at trial, and the pleadings. We find the facts and exhibits deemed stipulated accordingly.
Vitautas Kazhukauskas (petitioner) was born in Lithuania to Bronislovas Kazhukauskas (father) and Aldona Kazhukauskene (mother). He moved to the United States in 1990. Vilma Kazhukauskas (Ms. Kazhukauskas), who is a petitioner in this case, is an accountant with a bachelor's degree in budgeting that she earned overseas. Petitioners have at all relevant times been U.S. citizens, and they have two sons, including M.K. Petitioner's mother has at all relevant times lived in Lithuania, and his father was deceased at the time of trial.
During the years at issue, petitioners owned V.K. Auto Sales (VK U.S.) and V.K. Motors, UAB (VK Lithuania). Through those entities, petitioners operated an import and export business in which VK U.S. purchased used automobiles mostly at auctions within the United States and exported the vehicles to VK Lithuania for resale primarily within Lithuania. Petitioners also bought and sold used vehicles domestically through VK U.S. For the most part, VK U.S. purchased vehicles with scrap certificates of title and certificates of title specifying the automobiles were to be used for salvage purposes only. 4 Some certificates of title indicated the vehicles had been approved for export, and as discussed below, petitioners shipped numerous automobiles overseas. The record is unclear the extent to which (if at all) VK U.S. repaired the vehicles it purchased before resale.
Petitioners' books and records concerning their import and export business consisted of an amalgamation of receipts, certificates of title, and bank statements with minimal (if any) logical arrangement. As best we can tell from the disjointed record in this case, VK U.S. purchased at least 38 vehicles in 2006 and at least 30 vehicles in 2007, with a cost per vehicle ranging between $330 and $8,453. 5 The information relating to the vehicles which VK U.S. sold, as well as the proceeds received therefrom, is less clear. In its domestic operations VK U.S. sold at least 14 vehicles in 2006 and at least 17 vehicles in 2007. In its international operations VK U.S. shipped at least 32 vehicles to Lithuania during 2006 and 2007, though the number of vehicles exported and sold abroad during each year is not readily discernible from the record. VK Lithuania employed petitioner's mother as a manager or bookkeeper from May 5, 2006, through at least May 5, 2007.
Petitioners, jointly, individually, or collectively with M.K., owned at least six bank accounts with JPMorgan Chase Bank, N.A. 6 The first was a premier savings account titled in petitioners' names (personal savings account) with a balance that grew from $36,405 on December 28, 2005, to more than $334,688 on December 27, 2007. The second was a business checking account titled in the name of VK U.S. (business checking account) with a balance that fluctuated from $17,064 on December 30, 2006, to $6,796 on December 31, 2007. The third through sixth bank accounts were a blend of checking and savings accounts, both personal and business, which at all relevant times reflected a balance of $30 to $520. 7
Throughout 2006 and 2007 VK U.S. received regular advices of credit from various parties, after which the related funds were wire-transferred into the business checking account. Many advices of credit bore the notation "skola", literally translated to mean "debt" in Lithuanian, though the word's meaning may vary depending upon the context. Specifically, petitioners received the following wire transfers during the year at issue:
Amount From Notation
Jan. 20, 2006 $16,971.43 Mother Skola
Feb. 21, 2006 15,971.75 Father Skola
Mar. 22, 2006 17,571.38 Father Skola
Apr. 25, 2006 16,171.13 Petitioner Pervedimas
May 4, 2006 34,143.89 Petitioner Pavedimas
May 26, 2006 14,970.38 Father Skola
June 20, 2006 18,770.72 Mother Skola
Aug. 1, 2006 20,205.57 Mother Skola
Aug. 11, 2006 1,650.00 VK Lithuania UZ Automobilius
Aug. 22, 2006 19,270.39 Mother Skola
The record establishes that petitioners owned a bank account
interest income of $8,647 in 2006. Our statement of petitioners' accounts
separately identify this account because the record is not clear that this
not the same as the personal savings account.
Sept. 1, 2006 12,620.43 Father Skola Sept. 1, 2006 9,970.43 VK Lithuania UZ Automobilius Nov. 1, 2006 11,970.64 Father Skola Nov. 22, 2006 12,275.49 Father Skola 2006 Total 222,533.63 Jan. 31, 2007 $6,590.27 Mother Skola Feb. 14, 2007 3,370.17 VK Lithuania UZ Automobilius Feb. 28, 2007 8,938.92 VK Lithuania UZ Automobilius Mar. 6, 2007 5,969.84 VK Lithuania UZ Automobilius Mar. 15, 2007 16,969.96 VK Lithuania Skola, UZ Automobilius Mar. 27, 2007 13,919.63 Father Skola Apr. 2, 2007 17,092.67 Father Skola May 11, 2007 17,719.30 VK Lithuania UZ Automobilius June 22, 2007 8,635.00 As Sampo Pank Payment for Auto Honda July 3, 2007 12,019.50 Mother Skola July 30, 2007 5,675.00 As Sampo Pank Payment for Hyundai Sept. 21, 2007 14,419.75 VK Lithuania UZ Automobilius Oct. 9, 2007 12,028.57 Petitioner UZ Automobilius Oct. 9, 2007 6,301.57 VK Lithuania UZ Automobilius Nov. 7, 2007 12,368.08 Father Skola Dec. 6, 2007 6,067.72 Mother Skola 2007 Total 168,085.95
Petitioners filed joint Federal income tax returns for 2006 and 2007 which Ms. Kazhukauskas prepared. The 2006 return reported interest income of $9,892, business income of $2, and total income of $9,894. Attached to the 2006 return was a Schedule C for VK U.S. reporting gross receipts or sales of $72,636, business expenses of $72,634, and zero cost of goods sold. The 2007 return reported interest income of $10,208, business income of $3, and total income of $10,211. Attached to the 2007 return was a Schedule C for VK U.S. reporting gross receipts or sales of $66,371, business expenses of $66,368, and zero cost of goods sold. The amounts reported as business income on the 2006 and 2007 returns were, as petitioners admitted at trial and on brief, falsified to hide VK U.S.' purported bankruptcy.
On audit of the 2006 and 2007 returns, petitioners submitted to respondent bank statements, advices of credit, shipping container receipts, and a copy of petitioners' police book, 8 among other items. These records, as they related to the regularity of VK U.S.' international sales, were inconsistent in certain material respects. For example, the police book indicated that petitioners shipped overseas 21 vehicles in 2003, 42 vehicles in 2004, and 1 vehicle in each of the years 2005 through 2007. The receipts, on the other hand, showed that VK U.S. paid at least $8,100 during 2006 and $24,550 during 2007 for at least nine shipping containers sent to Lithuania--suggesting that more vehicles had been shipped than were reported in the police book.
Respondent's revenue agent Suzanne Owen was assigned to examine petitioners' returns for the years at issue. During her investigation Ms. Owen learned of VK Lithuania, a business which petitioner claimed during a meeting with her to have had no relationship to VK U.S. She analyzed bank statements petitioners submitted and inventoried wire transfers deposited into the business checking account in a worksheet that was attached to the notice of deficiency. The worksheet demonstrated that totals of $222,534 and $168,086 were deposited into the business checking account in 2006 and 2007, respectively. Ms. Owen noted in her supporting workpapers that bank statements and related advices of credit indicated that portions of the wire transfers were from sales of vehicles abroad and in some cases included the vehicle manufacturer and VIN. Ms. Owen determined on the basis of the foregoing that petitioners had underreported their 2006 and 2007 Schedule C gross receipts by $222,534 and $168,086, respectively; i.e., all amounts wire-transferred to petitioners as gross receipts from sales of vehicles overseas were treated as income. Ms. Owen determined the most probable source of the income to be sales of vehicles overseas, on the basis of details contained in the wire transfers, the shipping container purchases, and information about the vehicles shipped overseas as sometimes recorded in the police book.
Respondent issued to petitioners a notice of deficiency determining various adjustments to their income for 2006 and 2007. First, respondent determined that petitioners' costs of goods sold were increased by $5,353 for 2006 and $46,604 for 2007. Second, respondent determined that petitioners underreported their gross receipts for 2006 and 2007 by $222,534 and $168,086, respectively. Third, respondent determined that petitioners' self-employment taxes for 2006 and 2007 were increased by $17,497 and $15,343, respectively. Fourth, respondent determined that petitioners were entitled to self-employment tax deductions for 2006 and 2007 of $8,749 and $7,672, respectively. Fifth, respondent determined that petitioners were liable for section 6662(a) accuracy-related penalties for 2006 and 2007 for substantial understatements of income tax. Petitioners petitioned the Court under section 6213(a) for a redetermination of the deficiencies and accuracy-related penalties.
Respondent introduced ample evidence linking petitioners with the import and export business (the income-producing activity), and respondent has shown that petitioners received unreported income during each year at issue. The record includes advices of credit and bank statements showing that more than $390,000 was transferred into VK U.S.' checking account from international sources. The record likewise contains certificates of title, bills of lading, and receipts showing that petitioners shipped vehicles purchased at auctions within the United States to VK Lithuania. At trial and on brief petitioners admitted that they received, but did not report, at least $110,000 from sales of vehicles in Lithuania. In view of the foregoing, we are satisfied that respondent has carried his burden of production as to the unreported Schedule C gross receipts. Accordingly, the notice of deficiency is presumed correct and petitioners bear the burden of proving otherwise. 10
II. Schedule C Gross Receipts Respondent determined that petitioners underreported their 2006 and 2007 Schedule C gross receipts by $222,534 and $168,086, respectively. Petitioners acknowledge on brief that they failed to report Schedule C gross receipts for 2006 and 2007 in the respective amounts of $11,620 and $99,090 but claim additional amounts which respondent attributed to them are excludable from gross income as gifts under section 102. We will sustain respondent's determinations.
Respondent's revenue agent, Ms. Owen, testified credibly that petitioners' books and records, including their inventory system, were not kept in organized fashion or in compliance with internal revenue laws. The disarray of receipts and other documents that petitioners submitted to the Court as their books and records reinforces that testimony. Accordingly, we conclude that respondent was justified in recreating petitioners' gross receipts using the bank deposits method.
Bank deposits are prima facie evidence of income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. at 656. Under the bank deposits method, the Government assumes that all deposits into a bank account during any given taxable year constitute taxable income unless the taxpayers prove that the deposits originated from nontaxable sources. DiLeo v. Commissioner, 96 T.C. at 868. The Commissioner may (but need not) show a likely source of unreported income determined through the bank deposits method, though he must take into account nontaxable items or deductible expenses which he knows about. Price v. United States, 335 F.2d 671, 677 [14 AFTR 2d 5519] (5th Cir. 1964); DiLeo v. Commissioner, 96 T.C. at 868. Petitioners bear the burden of establishing that the bank deposits originated from nontaxable sources. See Price, 335 F.2d at 677.
It is deemed stipulated that petitioners underreported their gross receipts by $222,534 for 2006 and $168,086 for 2007. A stipulation is treated, to the extent of its terms, as a conclusive admission by the parties, unless otherwise permitted by the Court or agreed upon by the parties. Rule 91(e). The Court may permit a party to qualify, change, or contradict a stipulation upon a showing that the stipulation is contrary to facts disclosed by the record, see Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976), or where justice so requires, see Rule 91(e). Petitioners have not asked to be relieved of the deemed stipulations, and we decline to grant such relief on our own. The stipulation concerning gross receipts is not contrary to the record and, as we find, justice would be ill served were the stipulation not enforced.
Petitioners acknowledged at trial and on brief that they underreported their 2006 and 2007 gross receipts by $11,620 and $99,090, respectively. We treat those statements as conclusive and binding admissions on petitioners. See United States v. Burns, 109 Fed. Appx. 52, 58 (6th Cir. 2004) (statements made on brief may be considered judicial admissions). We thus conclude petitioners' gross receipts are increased by $11,620 for 2006 and $99,090 for 2007. As for the remaining gross receipts in controversy, i.e., $210,914 for 2006 and $68,996 for 2007 (sometimes collectively referred to as the disputed gross receipts), 11 we will give effect to the stipulation treating those amounts as gross receipts.
Petitioners claim that the disputed gross receipts were nontaxable gifts from petitioner's parents. 12 We are unpersuaded. Respondent asserts, and we agree, that petitioners have not submitted corroborating evidence to support their claims that any portion of the disputed gross receipts was a gift. As we find, the disputed gross receipts reflect the proceeds of business transactions entered into by VK Lithuania and subsequently remitted to petitioners. By reason of petitioners' failure to prove that the disputed gross receipts were gifts and not proceeds from VK Lithuania, we conclude that justice disfavors allowing petitioners to contradict the stipulations.
Section 102(a) allows taxpayers to exclude from gross income the value of property acquired by gift, bequest, devise, or inheritance. The Supreme Court has defined a gift for statutory purposes as a transfer of property that proceeds from a "detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses." Commissioner v. Duberstein, 363 U.S. 278, 285 [5 AFTR 2d 1626] (1960) (internal citations and quotation marks omitted). The donor's intent is of critical import in deciding whether the property transferred was a gift. Id. at 285-286. Such intent is often outcome determinative because a gift is not recognized as complete until the donor has evinced a clear and unmistakable intention to transfer sufficient dominion and control of the property irrevocably and absolutely. Guest v. Commissioner, 77 T.C. 9, 16 (1981) (quoting Weil v. Commissioner, 31 B.T.A. 899 (1934), aff'd, 82 F.2d 561 [17 AFTR 666] (5th Cir. 1936)).
Applying those considerations to this case, we decline to recognize any of the disputed gross receipts as nontaxable gifts. With respect to wire transfers from petitioner's mother, all of which bore the notation "skola", petitioner testified that his mother used the word "skola" to intimate that she expected to be repaid if she needed the funds, and only if no such need arose would the transfer be considered a gift. 13 By petitioner's own admission, therefore, his mother did not relinquish dominion and control of the funds. Rather, she conditioned petitioner's enjoyment of the funds on her not asking to be repaid--a condition uncertain to be met until the sooner of her death or the removal of the condition. That condition precludes our recognizing transfers from petitioner's mother as gifts for Federal income tax purposes because the gift was not certain to be completed. With regard to wire transfers from petitioner's father, all of which were similarly designated "skola", petitioners presented no evidence to suggest his father's use of the word did not connote an expectation of repayment should the need arise. In this regard, we are not persuaded that wire transfers from petitioner's father were completed gifts in 2006 or 2007. 14
We are skeptical for additional reasons that amounts wire-transferred to petitioners were gifts. Petitioners each testified that petitioner's parents wire-transferred the disputed gross receipts to them for the support, care, and education of petitioners' children. Although petitioner's father was unavailable to testify on the matter, we have no reason to believe that petitioner's mother was unavailable to be called as a witness. Insofar as petitioner's mother was not called to testify to her intent at the time of each transfer and her use of the word "skola", we conclude such testimony would be damaging to petitioners. See McKay v. Commissioner, 89 T.C. 1063, 1069 (1987) (witness' failure to testify to facts peculiarly within his knowledge suggests the testimony would be unfavorable),aff'd, 886 F.2d 1237 [64 AFTR 2d 89-5712] (9th Cir. 1989). Nor did petitioners explain why moneys transferred allegedly to support their children were deposited into the business checking account and not, for example, one of petitioners' personal accounts. In the same regard, petitioners did not explain why their claimed need for support was not met by the more than $300,000 of savings which they had collected over the years. Given that many of the transfers originated with petitioner's mother, who was also VK Lithuania's bookkeeper, we question the donative nature of the transfers. See Commissioner v. Culbertson, 337 U.S. 733, 746 [37 AFTR 1391] (1949) (“[T]he family relationship often makes it possible for one to shift tax incidence by surface changes of ownership without disturbing in the least his dominion and control over the subject of the gift or the purposes for which the income from the property is used."). Accordingly, we conclude the disputed wire transfers were not gifts.
When viewed in the light of the fact that petitioners owned and operated VK
Lithuania within Europe, that they routinely purchased shipping containers to export vehicles, and that they received transfers from the business checking almost monthly, we agree with respondent that the most probable source of that income is sales of vehicles abroad. Petitioners conceded at trial and on brief that they underreported VK U.S.' gross receipts by $11,620 for 2006 and $99,090 for 2007. Petitioners have failed to establish a nontaxable source for the disputed gross receipts, and consequently we conclude that justice does not favor relieving them of the stipulation treating such amounts as gross receipts. Thus, we hold that petitioners' 2006 and 2007 gross receipts are increased by $222,534 and $168,086, respectively.
III. Schedule C Deductions Petitioners reported on their 2006 and 2007 Schedules C that in connection with VK U.S.' trade or business they incurred expenses of $72,634 and $66,368, respectively. Respondent allowed those deductions in full and credited petitioners with cost of goods sold for 2006 and 2007 in the respective amounts of $5,353 and $46,604. As explained on brief, petitioners claim entitlement to additional trade or business expense deductions for 2006 and 2007 in the respective amounts of $9,602 and $23,602. 15 Respondent replies that petitioners are not entitled to the additional deductions claimed because they have not proven that such expenses have not already been deducted on the 2006 and 2007 returns. We agree with respondent.
Deductions are a matter of legislative grace, and taxpayers bear the burden of proving their entitlement to any deduction claimed. Rule 142(a);INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992). Taxpayers are allowed a deduction for ordinary and necessary business expenses paid or incurred during the taxable year in carrying on a trade or business. Sec. 162(a). Taxpayers must substantiate amounts claimed as deductions by keeping the records necessary to establish that they are entitled to the deductions. Sec. 6001(a); sec. 1.6001-1(a), Income Tax Regs.
Petitioners have failed to factually or legally establish that they are entitled to deductions over and above those respondent allowed. First, petitioners have failed to establish that the expense deductions to which they claim entitlement were not already claimed on the 2006 and 2007 returns. See Avery v. Commissioner, T.C. Memo. 1993-344 [1993 RIA TC Memo ¶93,344], 66 T.C.M. (CCH) 305, 313 (1993) (no deduction for real estate taxes paid when taxpayers failed to prove the expenses were not already allowed as deductions). Second, portions of the expense deductions petitioners claim entitlement to in their petition, including shipping fees, shipyard fees, taxes, and duties, are not deductible because the supporting receipts suggest the expenses were ordinary and necessary business expenses of VK Lithuania and not VK U.S. See Welch v. Helvering, 290 U.S. at 114 (taxpayers may not deduct expenses of another entity). Petitioners introduced no evidence concerning which counterparty bore the duties, fees, and taxes due upon arrival in Lithuania.
Third, taxpayers are required to keep records sufficient to establish the amounts of the deductions they claim. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Even though we may estimate the amount of an expense where taxpayers introduce evidence demonstrating that they paid or incurred a deductible expense but cannot substantiate the precise amount, see Cohan v. Commissioner, 39 F.2d 540, 544 [8 AFTR 10552] (2d Cir. 1930), we decline to do so here because petitioners have not persuaded us that such expenses were not already deducted on their 2006 or 2007 return. Fourth, petitioners have not persuaded us that receipts for postage, utilities, and other similar items are not nondeductible personal expenses. See sec. 262 (deductions for personal, living, and family expenses are not allowed). Fifth, petitioners did not explain how (if at all) the expenses claimed as deductions were ordinary and necessary to their import and export business. See sec. 162(a). On the basis of the foregoing, we conclude that petitioners have failed to establish that they are entitled to trade or business expense deductions in addition to those respondent has already allowed. Accordingly, we hold petitioners may not deduct trade or business expenses in addition to those respondent has already allowed.
IV. Cost of Goods Sold Notwithstanding the fact that petitioners reported zero cost of goods sold for each year at issue, respondent credited petitioners with costs of goods sold for 2006 and 2007 of $5,353 and $46,604, respectively. Petitioners allege in the petition they are entitled to costs of goods sold above and beyond those allowed in the notice of deficiency. We will sustain respondent's determinations.
Gross income is defined in section 61(a) to include “[g]ross income derived from business”. Sec. 61(a)(2). A manufacturing or merchandising business, such as VK U.S., calculates gross income by subtracting cost of goods sold from gross receipts and adding investment income and proceeds from ancillary operations or sources. Sec. 1.61-3(a), Income Tax Regs. The cost of goods sold is determined under the taxpayer's regular method of accounting,see id., and includes the items acquired for resale and the cost of producing items for resale adjusted for opening and closing inventories, see Hultquist v. Commissioner T.C. Memo. 2011-17 [TC Memo 2011-17], 101 , T.C.M. (CCH) 1054, 1056 (2011); sec. 1.162-1(a), Income Tax Regs. 16 In contrast, section 162 allows taxpayers a deduction for all ordinary and necessary business expenses incurred or paid during the taxable year. Sec. 162(a). Thus, cost of goods sold is an offset to gross receipts for purposes of computing gross income, and deductions are subtracted from gross income in arriving at taxable income. See B.C. Cook & Sons, Inc. v. Commissioner, 65 T.C. 422, 428-429 (1975), aff'd, 584 F.3d 53 (5th Cir. 1978).
Petitioners have not proved they are entitled to costs of goods sold above and beyond those allowed by respondent. Taxpayers bear the burden of substantiating Memo. 2009-22, 97 T.C.M. (CCH) 1090, 1092 [TC Memo 2009-22] (2009). Petitioners do not specify the amounts of costs of goods sold being claimed; nor do their records permit us to differentiate between costs generally incurred and costs relating to vehicles sold such that we might calculate costs of goods sold on our own initiative. Although we may estimate charges to gross income for items such as cost of goods sold,see Cohan v. Commissioner, 39 F.2d at 540 [8 AFTR 10552]; Jackson v. Commissioner, T.C. Memo. 2008-70 [TC Memo 2008-70], 95 T.C.M. (CCH) 1258, 1262 (2008), we decline to do so. Petitioners' records do not allow us to differentiate between the costs of goods sold they incurred and those respondent has already credited them for. Moreover, Ms. Kazhukauskas testified that she reported costs of goods sold as "supplies" on the 2006 and 2007 Schedules C, amounts which respondent allowed as deductions in arriving at taxable income. Thus, petitioners have been credited for costs of goods sold they substantiated on audit as well as additional amounts in the form of a tax-effected deduction. Accordingly, we hold that petitioners are not entitled to claim cost of goods sold for 2006 or 2007 in addition to that allowed in the notice of deficiency.
V. Self-Employment Tax Respondent determined that petitioners are liable for self-employment tax under section 1401 for each year at issue. Section 1401 imposes a tax on the self-employment income of individuals. See sec. 1401(a) and (b). Self-employment income generally means the gross income derived by an individual from carrying on a trade or business, less the allowable deductions attributable to that trade or business. Sec. 1402(a) and (b); sec. presented no evidence to suggest that the Schedule C gross income earned from VK U.S. (less the allowable deductions) is not self-employment income. Therefore, petitioners are liable for self-employment tax for 2006 and 2007 of $17,497 and $15,343, respectively, and they are entitled to deductions for one-half of the self-employment tax paid in the respective amounts of $8,749 and $7,672 as determined by respondent. See sec. 164(f).
VI. Accuracy-Related Penalties Respondent determined for each year at issue that petitioners are liable for a 20% accuracy-related penalty for a substantial understatement of income tax under section 6662(a) and (b)(2). There is a substantial understatement of income tax for any year in which the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). Under section 7491(c), respondent bears the burden of producing sufficient evidence that imposition of the penalty is appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once respondent carries his burden of production, petitioners bear the burden of proving that the penalties are inappropriate because of reasonable cause, substantial authority, or other affirmative defenses. Id. at 446-447. The single most important factor to be considered when determining whether to excuse taxpayers from the accuracy-related penalty on account of reasonable cause is the extent to which the taxpayers sought to compute their proper tax liability. Sec. 1.6664-4(b)(1), Income Tax Regs.
Respondent has met his burden of production because petitioners' failure to report funds wire-transferred to them resulted in an understatement of income tax for each year in an amount of more than $5,000 and more than 10% of the tax required to be shown on the return. See Park v. Commissioner, 136 T.C. 569, 583 (2011) (the Commissioner met his burden of production by showing that failure to report income resulted in an understatement of income tax for each year at issue of more than $5,000 and more than 10% of the tax required to be shown on the return). Thus, petitioners bear the burden to prove that the accuracy-related penalty should not be imposed on account of reasonable cause or substantial authority. We will sustain respondent's determinations with respect to the accuracy-related penalties.
Among the deemed stipulated facts were that petitioners underreported their respective gross receipts for VK U.S. for 2006 and 2007 by $222,534 and $168,086 and that they lacked reasonable cause for failing to report those gross receipts. Those stipulations are treated as a binding and conclusive admission that may be qualified, changed, or contradicted only where justice requires it. See Rule 91(e). Petitioners have not asked to be relieved of the deemed stipulations, and we decline to grant such relief on our own. Petitioners conceded that VK U.S.' 2006 and 2007 gross receipts were underreported by more than $100,000, and they also admitted to falsely reporting VK U.S.' profits because, as they claimed on brief, they did not want to show that the business was facing bankruptcy. On the basis of these facts, we are convinced that justice requires that the deemed stipulation be binding upon petitioners and that they made no effort to accurately report their 2006 or 2007 Federal income tax liability. Accordingly, we hold petitioners are liable for accuracy-related penalties in the amounts respondent determined.
The Court has considered all of petitioners' arguments for a contrary result, and to the extent not discussed herein, we conclude those arguments are irrelevant, moot, or without merit.
To give effect to the foregoing,
Decision will be entered for respondent.
Unless otherwise indicated, section references are to the applicable version of the Internal Revenue Code, and Rule references are to the Tax Court Rules of Practice and Procedure. Some dollar amounts are rounded.
Respondent allowed petitioners all trade or business expense deductions claimed on their 2006 and 2007 Federal income tax returns (2006 return and 2007 return, respectively), as well as offsets to their 2006 and 2007 gross receipts for costs of goods sold of $5,353 and $46,604, respectively.
Among the facts deemed stipulated were that petitioners underreported their respective gross receipts for 2006 and 2007 by $222,534 and $168,086 and that petitioners lacked reasonable cause for failing to report those gross receipts.
A scrap certificate of title signifies that the vehicle to which it relates is not to be titled or registered and is to be used for parts or scrap metal only. See Mich. Comp. Laws Serv. sec. 257.222(8) (LexisNexis 2001 & Supp. 2012).
We examined the records submitted at trial and summarized VK U.S.' purchases using the associated vehicle identification number (VIN).
Two accounts named Vilma Kazhukauskene as a joint account holder or a d.b.a. owner of VK U.S. It is our understanding that Vilma Kazhukauskene and Ms. Kazhukauskas are the same individual, and we collectively refer to both as Ms. Kazhukauskas. We note that the parties' redaction of all but the first three digits of financial account numbers prevented us from more precisely describing petitioners' accounts.
The record establishes that petitioners owned a bank account which earned interest income of $8,647 in 2006. Our statement of petitioners' accounts does not separately identify this account because the record is not clear that this account is not the same as the personal savings account.
A police book is defined under Michigan law to mean a bought and sold registry for each vehicle a dealer handles. Mich. Comp. Laws Serv. sec. 257.41a (LexisNexis 2001).
While the factual allegations deemed admitted under Rule 91(f) establish that petitioners underreported their 2006 and 2007 gross receipts, respondent still must produce evidence linking petitioners with that income.
Petitioners do not allege, and the record does not establish, that the burden of proof as to factual matters should shift to respondent under sec. 7491(a).
To calculate the disputed 2006 gross receipts, we subtracted the amount conceded by petitioners on brief, or $11,620, from the unreported gross receipts as determined in the notice of deficiency, or $222,534. We calculated the challenged 2007 gross receipts in the same way; that is, we subtracted the amount petitioners conceded on brief, or $99,090, from the unreported gross receipts as determined in the notice of deficiency, or $168,086.
Notwithstanding the literal translation of "skola" to mean debt, petitioner testified on direct at trial that there was not a loan between him and his mother.
Petitioner's specific testimony was: “The money was given to me and because of that she felt--in case if she need those monies back she put the word, skola, meaning that I be owing to her in case if she needs [it]. If not this will be as a gift.”
Although the record establishes that petitioner's father was deceased at the time of trial, the record does not specify whether he died in 2007. On this subject, we are unable to discern whether purported gifts from the father were completed in 2007, in which case these amounts may have been nontaxable to petitioners, or at some point thereafter. This failure of proof is borne by petitioners.
We calculated the additional deductions which petitioners claim they are entitled to for 2006 by subtracting the amount allowed as a deduction and claimed on the 2006 Schedule C, or $72,634, from the amount petitioners claim on brief they are entitled to, or $82,236. We calculated the additional deductions to which petitioners claim entitlement for 2007 the same way; that is, we subtracted the amount allowed as a deduction and claimed on the 2007 Schedule C, or $66,368, from the amount petitioners claim on brief they are entitled to deduct, or $89,970.
Certain small business owners with average annual receipts of $1 million or less, as VK U.S. was during the years at issue, neednot take inventories at the beginning and end of each taxable year. See Rev. Proc. 2001-10, sec. 4.01, 2001-1 C.B. 272, 273.
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