Wednesday, October 31, 2012

New York Offers in Compromise



The New York State Offer in Compromise Program

The New York State Offer in Compromise Program allows qualifying, financially distressed taxpayers the opportunity to put overwhelming tax liabilities behind them by paying a reasonable amount in compromise. The Tax Department will not necessarily, however, accept every offer in compromise (also referred to as offer throughout this publication).

The Commissioner of Taxation and Finance is empowered to compromise taxes for qualifying taxpayers under Tax Law sections 171.15th, for liabilities considered fixed and final; 171.18th-a, for liabilities still subject to administrative review; and 171.18th-d, for certain joint personal income tax liabilities. Under section 171.15th, if the tax portion of the liability is more than $100,000 (not including penalties and interest), compromises must be approved by a New York State Supreme Court justice. Other standards set forth in the Tax Law, and requirements in Parts 5000 and 5005 of the New York State Official Compilation of Codes, Rules, and Regulations (NYCRR), are described below. In most cases, to be eligible for an offer in compromise, taxpayers must be insolvent (liabilities exceed assets), and the Tax
Department’s ability to collect more than the amount offered must be in doubt. In addition, taxpayers making an offer must have filed all applicable New York State tax returns. The taxpayer should make a reasonable monetary offer based on his or her financial situation. If an offer is withdrawn or rejected, any money sent in by the taxpayer with the offer in compromise will be promptly refunded without interest or, at the taxpayer’s request, applied to the tax liability. In addition, collection activities may continue while an offer is under review.

Insolvency

A taxpayer is considered insolvent when the taxpayer’s liabilities, including tax liabilities, exceed the fair market value of his or her assets. The taxpayer must conclusively demonstrate this insolvency.

Collectibility

The department, after an evaluation, determines an amount that it realistically expects could be collected within a reasonable period of time from the taxpayer’s assets. The amount acceptable in compromise cannot be less than what could be expected to be collected from the taxpayer over that period through legal proceedings, such as levies, income executions, and seizures.

Offer in compromise forms

Form DTF4, Offer in Compromise (For Liabilities Not Fixed andFinal and Subject to Administrative Review), or DTF4.1, Offer in Compromise (For Fixed and Final Liability), must be filed to request an offer in compromise.
A completed Form DTF5, Statement of Financial Condition andOther Information, must be submitted with the last three years of federal income tax returns, a credit report less than 30 days old, the last 12 months of bank statements, and Form DTF4 or DTF4.1 to:

NYS TAX DEPARTMENT
OIC PROGRAM
PO BOX 5100
ALBANY NY 12205-0100

Offers in compromise when the liabilities are considered fixed and final (Tax Law
section 171.15th)

Offers under this subdivision apply to tax liabilities for which further administrative or judicial review is not available. Therefore, the primary consideration is collectibility. An offer would be considered if the taxpayer has been discharged from bankruptcy within the last year or is shown to be insolvent. The amount accepted cannot
be less than what could realistically be expected to be collected from the taxpayer through legal proceedings.

Offers in compromise when the liabilities are still subject to administrative review (Tax Law
section 171.18th-a)

Offers under this subdivision apply to tax liabilities that are still subject to administrative review, and are not fixed and final. The offer may be based on doubt as to the taxpayer’s liability for the taxes due, or doubt as to the taxpayer’s ability to pay the taxes due, in full, over a reasonable period.

Trust tax liabilities

For trust tax liabilities (e.g., withholding tax, sales tax), an amount less than the tax amount owed, exclusive of penalties and interest, will not normally be accepted. However, upon evaluation of the facts of the specific case, the department may determine that a lesser amount is acceptable if it is in the best interest of all parties
concerned. The department considers whether the business is still in operation, and whether the trust taxes were actually collected.

Joint income tax liabilities

For joint income tax liabilities, the taxpayers may file an offer jointly on one Form DTF4 or DTF4.1, or may each file a separate offer.If only one taxpayer’s offer is accepted and paid, the remaining taxpayer continues to be liable for the outstanding balance of the liability. An accepted offer forgives further payment only for the taxpayer whose offer was accepted.

Responsible person

A taxpayer assessed as a responsible person liable for the
collection and payment of trust taxes for a business may
compromise his or her trust tax liability separately from the
business. Any or all of the responsible persons may apply for
an individual offer in compromise. The department will make a
separate determination on each offer, based on the circumstances
of each responsible person who applies. If the offer is accepted,
the payments made toward the offer will reduce the business’s
liability by that same amount. While the taxpayer’s responsible
person assessments are abated upon full payment of the accepted
offer, the business’s assessments and the assessments of any
other responsible person will remain open and collectible, less all
payments made under the offer.
If a business applies for an offer in compromise and the
responsible persons do not apply individually, acceptance of the
business’s offer would have no effect on a responsible person’s
liability other than reducing his or her individual liability by an
amount equal to that paid by the business

Offers in compromise when the liabilities concern
certain joint personal income tax liabilities (Tax Law
section 171.18th-d)

To qualify for an offer under this subdivision, a taxpayer must
have a liability on a previously filed joint income tax return and, at
the time of the offer, the taxpayer and his or her spouse must be
separated under a decree of divorce or separate maintenance or
a written separation agreement, or a judicial decree of separation,
or living apart and not considered married under section 7703(b)
of the Internal Revenue Code. It must also be determined that the
collection of the spouse’s share of the liability from the taxpayer
cannot be accomplished within a reasonable period without
imposing substantial economic hardship on the taxpayer.

Offer in compromise withdrawal

The taxpayer or the taxpayer’s representative may withdraw an
offer before an official review has been completed and before a
final decision has been made on the offer. In some cases, such
as when a taxpayer fails to supply requested information, the
department considers the offer to be withdrawn as incomplete and
advises the taxpayer in writing of the decision.

Offer in compromise acceptance

Upon acceptance of an offer, written notification will be provided to
the taxpayer or the taxpayer’s designated representative specifying
the terms and conditions. Under the terms of the accepted offer,
the taxpayer agrees to remain fully compliant with all Tax Law
requirements, including filing returns and paying tax when
required for the next five years. Any state tax refunds payable
to the taxpayer for periods prior to and including the calendar
year in which the offer is accepted will be applied to the original
outstanding liability. Any excess will be refunded to the taxpayer.
The taxpayer(s) waive(s) any statute of limitations defenses
to the assessment and collection of the liability sought to be
compromised and further waives(s) any statute of limitations
defenses against the issuance of new assessment(s) for the
compromised liability in the event the taxpayer(s) fail(s) to comply
with the terms of the Offer in Compromise.
The taxpayer also agrees to forfeit any current capital loss or net
operating loss credits taken on any future New York State tax
returns.

Offer in compromise rejection

Written notification is provided if an offer is rejected. Examples of
reasons for rejection include, but are not limited to:
• The taxpayer does not meet the statutory requirements set forth
in the New York State Tax Law.
• The taxpayer submits false or misleading information.
• The taxpayer submits a frivolous offer.
• The taxpayer fails to make full financial disclosure.
• There is evidence that assets were transferred for less than the
fair market value.
• The taxpayer shows a lack of a good faith effort to repay the
liability.
• The tax liability sought to be compromised directly relates to a
crime for which the taxpayer has pleaded or been found guilty.
Depending on the circumstances, the department may reconsider
a rejected offer if there is a material change in the taxpayer’s
circumstances, if the department misinterpreted information
contained in the original offer, or if the taxpayer offers a substantial
increase in the amount that was originally offered.



Defaulted offers

If a taxpayer fails to abide by all of the terms and conditions
of the offer in compromise, the offer is in default. Upon default
and revocation, the original liability is reinstated, including all
appropriate penalty and interest, minus any payments received on
the offer.

Offers made to the Internal Revenue Service

The New York State Offer in Compromise Program is distinct from
similar programs offered by the federal government. For example,
the guidelines for the acceptance of offers differ. However, the
department will accept a copy of the federal offer in compromise
collection information statement as part of the application process.
If you have questions about the New York State Offer in
Compromise Program, please call (518) 457-9086 from 8:00 a.m.
to 4:25 p.m. (eastern time), Monday through Friday. For forms and
other information, see Need help?

Personal Income Tax Information Center: 1 800 225-5829

From areas outside the U.S. and outside Canada: (518) 485-6800

Text Telephone (TTY) Hotline (for persons with
hearing and speech disabilities using a TTY): 1 800 634-2110


www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com

civil fraud not criminal fraud 6663



John A. Hatling, et ux. v. Commissioner, TC Memo 2012-293 , Code Sec(s) 1341; 6663.


JOHN ALLEN HATLING AND KATHLEEN ANN HATLING, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Information:
Code Sec(s):1341; 6663
Docket:Dkt. No. 20709-10.
Date Issued:10/22/2012.
Judge:Opinion by Marvel, J.
Tax Year(s):
Disposition:

HEADNOTE

1.
Reference(s): Code Sec. 1341Code Sec. 6663

Syllabus

Official Tax Court Syllabus

Counsel

John Allen Hatling and Kathleen Ann Hatling, pro sese.
Christina L. Cook and John Schmittdiel, for respondent.
MARVEL, Judge

MEMORANDUM FINDINGS OF FACT AND OPINION

In a notice of deficiency dated June 8, 2010, respondent determined deficiencies in petitioners' Federal income tax of $15,665, $28,527, $40,038, and $26,046 for 2001, 2002, 2003, and 2004, respectively. Respondent [*2]also determined civil fraud penalties under section 6663(a) 1 of $10,245, $20,852, $30,028, and $15,097 for 2001, 2002, 2003, and 2004, respectively, with respect to John Allen Hatling. After concessions, 2 the sole issue for decision is whether Mr. Hatling is liable for civil fraud penalties for 2001-03.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference. Petitioners resided in Minnesota when they filed their petition.
I. Background Mr. Hatling, a licensed attorney, 3 has been practicing law in Minnesota for approximately 25 years. 4 During the years at issue Mr. Hatling operated his own [*3] law practice. Kathleen Hatling was not employed outside the home during the years at issue.
In 2008 Mr. Hatling pleaded guilty to a felony charge for willfully failing to pay Minnesota State income tax for 2003 in violation of Minnesota law. 5 In his guilty plea Mr. Hatling admitted that his State income tax return included a "claim of right" deduction and that, because of this claimed deduction, he reported no income tax owed on his 2003 State return.
II. Petitioners' Tax Reporting Mr. Hatling prepared petitioners' Federal income tax return for each of the years at issue. Petitioners filed Forms 1040, U.S. Individual Income Tax Return, for 2001-03. On each of their Forms 1040 they reported zero taxable income.
For each year petitioners' return included a Schedule C, Profit or Loss From Business, with respect to Mr. Hatling's law practice. On those Schedules C Mr. Hatling reported gross receipts of $187,741, $261,448, and $173,278 for 2001, [*4] 2002, and 2003, respectively. Mr. Hatling deducted various business expenses totaling $185,047, $259,404, and $96,773 for 2001, 2002, and 2003, respectively. The business expense deductions included other expenses of $99,308, $116,724, and $39,950 for 2001, 2002, and 2003, respectively. Mr. Hatling reported Schedule C net profits of $2,694, $2,044, and $924 for 2001, 2002, and 2003, respectively.
Mr. Hatling attached to each of petitioners' returns a disclosure form--Form 8275, Disclosure Statement, for 2001, and Forms 8275-R, Regulation Disclosure Statement, for 2002-03. On those Forms 8275 and 8275-R Mr. Hatling explained that he deducted on his Schedules C expenses of $99,308, $91,726, and $39,950 for 2001, 2002, and 2003, respectively, as claim of right deductions for white citizens. 6 He further explained that the amounts deducted represented "compensation for personal services actually rendered" pursuant to section 1341(a), that he claimed the deductions on the basis of "a common-law immunity that renders any money earned from the right of accession immune from taxation", and that the Code "defined this immunity as a `white citizen' right". Although Mr. Hatling testified he did not believe that there were any available favorable tax [*5]deductions that were based on race, he claimed these deductions on petitioners' returns to delay the assessment and payment of petitioners' correct Federal income tax liabilities.
III. Notice of Deficiency On June 8, 2010, respondent issued to petitioners the notice of deficiency for 2001-04. Using the bank deposits method of reconstructing income, respondent determined that Mr. Hatling failed to report Schedule C gross receipts of $7,131 and $62,059 for 2001 and 2003, respectively. Respondent also determined that Mr. Hatling overreported his gross receipts by $1,577 for 2002. Respondent disallowed $79,540, $143,679, and $32,004 7 of Mr. Hatling's claimed business expense deductions for 2001, 2002, and 2003, respectively. 8 [*6]
Accordingly, respondent determined that Mr. Hatling had Schedule C net profits of $89,365, $144,146, and $167,410 for 2001, 2002, and 2003, respectively. 9 Respondent also determined that Mr. Hatling was liable for civil fraud penalties under section 6663(a) and that underpayments of $13,660, $27,803, and $40,038 for 2001, 2002, and 2003, respectively, were due to fraud. [*7] OPINION
If any part of an underpayment on a return is due to fraud, section 6663(a) imposes on the taxpayer filing the return a penalty equal to 75% of the part of the underpayment attributable to fraud. To prove that a taxpayer is liable for the penalty, the Commissioner must prove by clear and convincing evidence that (1) an underpayment of tax exists, and (2) some part of the underpayment is attributable to fraud. See secs. 6663(a), 7454(a); Rule 142(b); DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), aff'd, 959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992). If the Commissioner proves that any part of an underpayment is attributable to fraud, then the entire underpayment shall be treated as attributable to fraud unless the taxpayer shows by a preponderance of the evidence that a part was not so attributable. 10 See sec. 6663(b).
I. Underpayment of Tax In the notice of deficiency respondent determined deficiencies in petitioners' joint 2001, 2002, and 2003 Federal income tax of $15,665, $28,527, and $40,038, respectively. Petitioners have conceded that they underpaid their tax by these amounts, and we so find. See Norris v. Commissioner, T.C. Memo. [*8] 2011-161, slip op. at 11-12; Payne v. Commissioner, T.C. Memo. 2005-130 [TC Memo 2005-130], slip op. at 10-11, aff'd, 211 Fed. Appx. 541 [99 AFTR 2d 2007-401] (8th Cir. 2007).
II. Fraudulent Intent A. Introduction If fraud is determined for multiple taxable years, the Commissioner's burden "applies separately for each of the years." Temple v. Commissioner, T.C. Memo. 2000-337 [TC Memo 2000-337], slip op. at 24-25, aff'd, 62 Fed. Appx. 605 [91 AFTR 2d 2003-1806] (6th Cir. 2003). The Commissioner satisfies this burden by showing that "the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes." DiLeo v. Commissioner, 96 T.C. at 874; see also Morse v. Commissioner, 419 F.3d 829, 832 [96 AFTR 2d 2005-5814] (8th Cir. 2005), aff'g T.C. Memo. 2003-332 [TC Memo 2003-332]. Fraud "does not include negligence, carelessness, misunderstanding or unintentional understatement of income." United States v. Pechenik, 236 F.2d 844, 846 [50 AFTR 221] (3d Cir. 1956).
The existence of fraud is a question of fact to be resolved upon consideration of the entire record. See DiLeo v. Commissioner, 96 T.C. at 874. Fraud is never presumed and must be established by independent evidence of fraudulent intent. See Baumgardner v. Commissioner 251 F.2d 311, 322 [1 AFTR 2d 507] (9th Cir. , 1957), aff'g T.C. Memo. 1956-112 [¶56,112 PH Memo TC]. Fraud may be shown by circumstantial [*9] evidence because direct evidence of the taxpayer's fraudulent intent is seldom available. See Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989); Gajewski v. Commissioner, 67 T.C. 181, 199-200 (1976), aff'd without published opinion 578 , F.2d 1383 (8th Cir. 1978). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. See Stone v. Commissioner, 56 T.C. 213, 223-224 (1971). Any conduct likely to mislead or conceal may constitute an affirmative act of evasion, see Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943), and an intent to mislead may be inferred from a pattern of such conduct,see Webb v. Commissioner, 394 F.2d 366, 379 [21 AFTR 2d 1150] (5th Cir. 1968), aff'g T.C. Memo. 1966-81 [¶66,081 PH Memo TC]. However, fraud is not proven when a court is left with only a suspicion of fraud, and even a strong suspicion is not sufficient to establish a taxpayer's liability for the fraud penalty. See Olinger v. Commissioner 234 F.2d 823, 824 [49 AFTR 1526] (5th Cir. 1956), , aff'g in part, rev'g in part on another groundT.C. Memo. 1955-9 [¶55,009 PH Memo TC]; Davis v. Commissioner, 184 F.2d 86, 87 [39 AFTR 1012] (10th Cir. 1950); Green v. Commissioner, 66 T.C. 538, 550 (1976). B. Badges of Fraud Because it is difficult to prove fraudulent intent by direct evidence, the Commissioner may establish fraud by circumstantial evidence, which includes various "badges of fraud" (hereinafter, factors) on which the courts often rely. See [*10] Bradford v. Commissioner, 796 F.2d 303, 307 [58 AFTR 2d 86-5532] (9th Cir. 1986), aff'g T.C. Memo. 1984-601 [¶84,601 PH Memo TC]; DiLeo v. Commissioner, 96 T.C. at 875. These factors focus on whether the taxpayer engaged in certain conduct that is indicative of fraudulent intent, such as: (1) understating income; (2) failing to maintain adequate records;
(3) offering implausible or inconsistent explanations; (4) concealing income or assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal activities; (7) providing incomplete or misleading information to the taxpayer's tax return preparer; (8) offering false or incredible testimony; (9) filing false documents, including filing false income tax returns; (10) failing to file tax returns; and (11) engaging in extensive dealings in cash. 11See Bradford v. Commissioner, 796 F.2d at 307-308; Parks v. Commissioner, 94 T.C. 654, 664-665 (1990); Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); Lipsitz v. Commissioner, 21 T.C. 917 (1954), aff'd, 220 F.2d 871 [47 AFTR 370] (4th Cir. 1955); see also Morse v. Commissioner, T.C. Memo. 2003-332 [TC Memo 2003-332], slip op. at 8-9. The existence of any one factor is not dispositive, but the existence of several factors is persuasive circumstantial evidence of fraud. See Niedringhaus v. Commissioner 99 T.C. 202, , 211 (1992); Petzoldt v. Commissioner, 92 T.C. at 700. We may also consider [*11] a taxpayer's intelligence, education, and tax expertise in deciding whether the taxpayer acted with fraudulent intent. Iley v. Commissioner, 19 T.C. 631, 635 (1952).
Respondent determined that Mr. Hatling's underpayments of $13,660, $27,803, and $40,038 for 2001, 2002, and 2003, respectively, were due to fraud. Respondent contends that Mr. Hatling has admitted his fraudulent intent with respect to these underpayments by virtue of petitioners' stipulation that Mr. Hatling claimed the claim of right deductions on petitioners' joint returns to delay the assessment and payment of Federal income tax, despite his knowledge that no claim of right deduction was available. Mr. Hatling's testimony corroborated petitioners' stipulation.
While we give some weight to Mr. Hatling's stipulation in our analysis, we do not rely exclusively on the stipulation in deciding whether the fraud penalty should apply. Respondent also contends that the following factors are present in this case: (1) Mr. Hatling underreported petitioners' income for 2001-04; (2) Mr. Hatling failed to maintain adequate records for 2001-03; and (3) Mr. Hatling filed false return documents for 2001-03. Additionally, respondent contends that Mr. Hatling's conviction for willfully failing to pay Minnesota income tax provides [*12] evidence of fraud. Because we decide the existence of fraudulent intent on the basis of the entire record, we analyze each factor below. 1. Understating Income A pattern of substantially underreporting income for several years is strong evidence of fraud, particularly if the understatement is not satisfactorily explained or is not due to innocent mistake. See Holland v. United States, 348 U.S. 121, 137 [46 AFTR 943]-139 (1954); Spies, 317 U.S. at 499; Webb v. Commissioner, 394 F.2d at 379; Kurnick v. Commissioner , 232 F.2d 678, 681 [49 AFTR 966] (6th Cir. 1956), aff'g T.C. Memo. 1955-31 [¶55,031 PH Memo TC]; Morse v. Commissioner, slip op. at 9. As this Court has stated: "[i]t is well settled that a fraudulent understatement of income can be accomplished by means of an overstatement of deductions." Drobny v. Commissioner, 86 T.C. 1326, 1349 (1986), aff'd, 113 F.3d 670 [79 AFTR 2d 97-2395] (7th Cir. 1997); see also Foxworthy, Inc. v. Commissioner, T.C. Memo. 2009-203 [TC Memo 2009-203], slip op. at 49.
On petitioners' tax returns for 2001-03 Mr. Hatling reported zero taxable income. Respondent also introduced into evidence petitioners' 2004 Federal income tax return, on which Mr. Hatling reported zero taxable income. Mr. Hatling underreported petitioners' taxable income by $38,814, $82,543, $127,788, and $91,121 for 2001, 2002, 2003, and 2004, respectively. [*13] Petitioners contend that Mr. Hatling did not understate petitioners' income for the years at issue because he accurately reported gross receipts with respect to his law practice on the relevant Schedules C. Petitioners correctly contend that Mr. Hatling reported a substantial portion of the gross receipts reflected on the law practice's profit and loss statements for the years at issue. 12 However, Mr. Hatling also claimed significant business expense deductions, including the claim of right deductions. Mr. Hatling has admitted that he knew he was not entitled to the deductions he claimed under his claim of right theory and that he claimed the deductions to delay payment of Federal income tax. Thus the record not only establishes that Mr. Hatling did not incur expenses to the extent claimed but also that Mr. Hatling deliberately claimed false deductions to delay payment of his [*14] tax. 13 In claiming substantial deductions that he knew to be false, Mr. Hatling deliberately understated petitioners' income for the years at issue. Compare Ochs v. Commissioner, T.C. Memo. 1986-595 (finding fraudulent intent where a taxpayer claimed dependency exemptions for his nonexistent children) with Porter v. Commissioner, T.C. Memo. 1986-70 (finding no fraudulent intent [*15] where a taxpayer overstated his deductions but introduced sufficient evidence to show that he incurred substantial deductible expenses).
Accordingly, we find that Mr. Hatling substantially underreported petitioners' income for 2001-04. Given the substantial amounts underreported, Mr. Hatling's pattern of underreporting income, and the lack of any credible explanation for the underreporting, Mr. Hatling's understatements are persuasive evidence of fraudulent intent. See, e.g., Morse v. Commissioner, 419 F.3d at 832. 2. Failing To Maintain Adequate Records The failure to maintain adequate business records supports a finding of fraud. See Truesdell v. Commissioner, 89 T.C. 1280, 1302-1303 (1987); see also Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980). "Inadequate or non-existent records are also a badge of fraud." Lollis v. Commissioner 595 F.2d 1189, 1192 [44 AFTR 2d 79-5057] , (9th Cir. 1979), aff'g T.C. Memo. 1976-15 [¶76,015 PH Memo TC].
Mrs. Hatling testified that Mr. Hatling and his office manager prepared annual profit and loss statements for Mr. Hatling's law practice. The record contains copies of profit and loss statements with respect to Mr. Hatling's law practice for 2001-03. The audit PandL statements bear the following dates in the upper left-hand corner: for 2001, March 25, 2002; for 2002, October 23, 2003; and for 2003, March 23, 2004. [*16] For 2001-03 the amounts of gross receipts shown on the profit and loss statements closely correspond with the amounts of gross receipts Mr. Hatling reported on his Schedules C. See supra note 11. 14 Additionally, the amounts of expenses shown on the profit and loss statements closely correspond with the amounts of other business expenses (other than the claim of right deductions) that Mr. Hatling reported on his Schedules C. See supra note 7. Respondent allowed a significant amount of Mr. Hatling's other business expenses.
The record supports a finding that in the course of operating his law practice Mr. Hatling maintained records of his business income and expenses. Respondent has failed to produce sufficient evidence to convince us that Mr. Hatling's business records were inadequate. Accordingly, we decline to find that Mr. Hatling failed to maintain adequate records. [*17] 3. Filing False Documents Fraudulent intent may be inferred when a taxpayer files a tax return intending to conceal, mislead, or prevent the collection of tax. See Spies, 317 U.S. at 499. Filing false documents with the IRS constitutes "an `affirmative act' of misrepresentation sufficient to justify the fraud penalty." Zell v. Commissioner, 763 F.2d 1139, 1146 [56 AFTR 2d 85-5128] (10th Cir. 1985), aff'g T.C. Memo. 1984-152 [¶84,152 PH Memo TC]; see also Ernle v. Commissioner, T.C. Memo. 2010-237 [TC Memo 2010-237], slip op. at 9.
Mr. Hatling prepared and filed petitioners' tax returns for 2001-03. On each of the Schedules C attached to petitioners returns he claimed a substantial claim of right deduction. He has admitted that he knew he was not entitled to the claim of right deductions and that he claimed them to delay the assessment and collection of petitioners' Federal income tax. Accordingly, Mr. Hatling's filing of false income tax returns supports a finding of fraud. 4. Mr. Hatling's State Tax Conviction While a taxpayer's conviction of a State income tax violation does not, by itself, establish fraudulent intent, such a conviction provides "evidence of a propensity to defraud." Lee v. Commissioner, T.C. Memo. 1995-597 [1995 RIA TC Memo ¶95,597]; see also Petzoldt v. Commissioner, 92 T.C. at 701-702. Mr. Hatling pleaded guilty to willfully attempting to evade or defeat payment of his State income tax for 2003. [*18] Mr. Hatling's guilty plea and subsequent conviction supports a finding of fraud in this case.
III. Conclusion Respondent has proven by clear and convincing evidence that Mr. Hatling underpaid his joint tax liabilities for 2001-03. Mr. Hatling's pattern of understating income, his filing of false documents, and his State tax conviction, when coupled with his stipulation and testimony regarding his intention to delay payment of his Federal income tax, provides clear and convincing evidence that part of the underpayment for each year was due to Mr. Hatling's fraud. Therefore, petitioners bear the burden of showing by a preponderance of the evidence what portion of each underpayment, if any, is not attributable to fraud. See sec. 6663(b).
Petitioners appear to contend that the portions of the underpayments arising from Mr. Hatling's claim of right deductions are not attributable to fraud because section 1341 provides for a claim of right deduction, and Mr. Hatling claimed the deductions in good faith. Mr. Hatling testified, however, that he knew the deductions were impermissible and that, at the time of filing petitioners' returns, he expected the IRS to disallow the claim of right deductions and assess petitioners' tax and appropriate penalties. [*19] Given Mr. Hatling's legal education and experience, we reject petitioners' argument that Mr. Hatling claimed the claim of right deductions in good faith. We also note that this Court and other courts have held similar claim of right arguments to be frivolous and groundless. See Pugh v. Commissioner, T.C. Memo. 2009-138 [TC Memo 2009-138]; Sumter v. United States, 61 Fed. Cl. 517, 523-524 [94 AFTR 2d 2004-5379] (2004); United States v. Pugh, 717 F. Supp. 2d 271 [105 AFTR 2d 2010-2662] (E.D.N.Y. 2010). We find that petitioners have failed to introduce any credible evidence to prove that any specific portion of any underpayment was not attributable to fraud. The record overwhelmingly establishes that Mr. Hatling acted with fraudulent intent. Accordingly, we hold that Mr. Hatling is liable for the section 6663(a) fraud penalties as respondent determined.
We have considered all the other arguments made by the parties, and to the extent not discussed above, find those arguments to be irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered for respondent.

1
  Unless otherwise indicated, section references are to the Internal Revenue Code (Code) in effect for the years at issue, and Rule references are to the Tax Court Rules of Practice and Procedure. Some monetary amounts have been rounded to the nearest dollar.
2
  Petitioners concede the deficiencies for 2001-04 as determined by respondent in the notice of deficiency. Petitioners also concede the sec. 6663(a) civil fraud penalty for 2004.
3
  Mr. Hatling was suspended from the practice of law for a period of 45 days as a result of his conviction for willfully failing to pay Minnesota State income tax for 2003. See infra p. 3.
4
  Mr. Hatling's work includes estate planning, and he has attended at least one seminar covering the representation of clients before the Internal Revenue Service (IRS) and the use of alternative payment options, such as offers-in-compromise.
5
  Minn. Stat. Ann. sec. 289A.63(1)(b) (West 2007 & Supp. 2012) provides that "[a] person required to pay or to collect and remit a tax, who willfully attempts to evade or defeat a tax law by failing to do so when required, is guilty of a felony."
6
  In preparing petitioners' tax returns Mr. Hatling claimed a claim of right deduction for each year in the amount of gross income that was not offset by business expense deductions.
7
  For 2003 in addition to disallowing a claimed business expense deduction of $32,004, respondent also disallowed $2,323 of claimed cost of goods sold.
8
  On his 2001 Schedule C Mr. Hatling reported the following as other expenses: "Education, Professional" expenses of $793, "Contributions" of $150, "Dues & Subscriptions" of $2,376, "Banking & Credit Charges" of $672, "Legal Library" expenses of $2,791, "Interest" expenses of $6, "Postage" expenses of $1,599, "Telephone" expenses of $11,008, and expenses of $79,913 under an entry entitled "See Line 48 Other Expenses", for total other expenses of $99,308. On the 2001 Form 8275, however, Mr. Hatling purported to claim a claim of right deduction of $99,308. In the notice of deficiency respondent determined that only $79,913 of Mr. Hatling's claimed other business expenses deduction, rather than the entire amount, was attributable to his claim of right deduction. Respondent categorized the remainder, $19,395, as other business expenses and disallowed $2,539 of this amount.
On his 2002 Schedule C Mr. Hatling reported the following as other expenses: "Education, Professional" expenses of $897, "Contributions" of $922, "Dues & Subscriptions" of $2,223, "Banking & Credit Charges" of $688, "Legal Library" expenses of $6,272, "Interest" expenses of $5,702, "Postage" expenses of $1,322, "Telephone" expenses of $6,972, and expenses of $91,726 under an entry entitled "Claim of Right Pursuant to IRC 1341(a)(5)(B) See Form 8275 attached", for total other expenses of $116,724. In the notice of deficiency respondent determined that Mr. Hatling deducted $91,726 as a claim of right deduction. Respondent categorized the remainder, $24,998, as other business expenses and disallowed $6,624 of this amount.
On his 2003 Schedule C Mr. Hatling reported other expenses of $39,950 under an entry entitled "Claim of right pursuant to IRC 1341(a)(5)(B). See Form 8275 attached". Respondent disallowed the entire amount of the claimed other expenses Mr. Hatling deducted.
9
  For 2001 respondent also determined that petitioners failed to report $2,820 in gross profits from rents and $80 of dividend income. For 2002 respondent also determined that petitioners failed to report $27,166 in gross profits from rents, $23 of dividend income, and $376 of capital gain. For 2003 respondent also determined that petitioners failed to report $6,759 in gross profits from rents, $63 of dividend income, and $159 of capital gain.
10
  In the case of a joint return the sec. 6663(a) penalty does not apply with respect to a spouse unless some portion of the underpayment is due to the fraud of that spouse. See sec. 6663(c).
11
  These factors are not exclusive. See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).
12
  For each of the years at issue the record contains two versions of profit and loss statements with respect to Mr. Hatling's law practice: a copy petitioners provided during the audit process (audit PandL statement) and a copy they provided during formal discovery (discovery PandL statement). Petitioners reported gross receipts with respect to Mr. Hatling's law practice on the documents as follows:
   Year        Audit PandL statement       Discovery PandL statement            
Return
   2001             $187,627                         $187,741              
$187,741
   2002              261,448                          146,796               
261,448
   2003              188,940                          191,836               
173,278

13
  Petitioners also appear to contend the claim of right deductions were not fraudulent because the deductions clearly were impermissible and therefore Mr. Hatling could not have been attempting to conceal his income. We reject petitioners' contention for several reasons. First, the Code provides that taxpayers may deduct from income an amount received under a claim of right.See sec. 1341. Petitioners have failed to convince us that simply by including the claim of right deductions on their returns, they disclosed that the deductions they were claiming were clearly improper. Second, while the U.S. Court of Appeals for the Eighth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2), has not addressed the issue of whether a taxpayer's disclosure may preclude a finding of fraudulent intent, at least two other Courts of Appeals, as well as this Court, have held that disclosure does not preclude a finding of fraudulent intent, see Edelson v. Commissioner, 829 F.2d 828, 832-833 (9th Cir. 1987), aff'g T.C. Memo. 1986-223; Granado v. Commissioner, 792 F.2d 91, 93-94 (7th Cir. 1986), aff'g T.C. Memo. 1985-237; Price v. Commissioner, T.C. Memo. 1996-204; Cloutier v. Commissioner, T.C. Memo. 1994-558. But see Zell v. Commissioner, 763 F.2d 1139, 1144 (10th Cir. 1985) ("Clearly, where the taxpayer has informed the IRS of his refusal to file or to pay, and of the reasons for that refusal, the government has not been deceived. In addition, the disclosure clearly negates any intent to deceive."), aff'g T.C. Memo. 1984-152; Raley v. Commissioner, 676 F.2d 980, 983-984 (3d Cir. 1982) (holding that a taxpayer did not act with fraudulent intent because he "went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes"), rev'g T.C. Memo. 1980-571. Third, petitioners deducted the claim of right deductions with the intent of underreporting their taxable income and evading their obligation to pay their proper income tax liabilities when due.
14
  With respect to 2002 the gross receipts shown on the audit PandL statement, $261,448, equal the gross receipts Mr. Hatling reported on the 2002 Schedule C. However, the gross receipts shown on the discovery PandL statement for 2002 are $146,796. The difference is attributed to the fact that on the audit PandL statement, Mr. Halting reported fee income of $261,448, but on the discovery PandL statement, he reported fee income of only $103,130. Petitioners have not introduced any evidence to explain this discrepancy. While this discrepancy is suspect, we note that the audit PandL statement appears accurate and the expense amounts on the discovery PandL statement are generally consistent with the expense amounts shown on the audit PandL statement and Mr. Hatling's Schedule C. Accordingly, this discrepancy does not compel us to find that petitioners failed to maintain adequate books and records.


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