Thursday, March 28, 2013

section 183 hobby loss case


William R. Dodds v. Commissioner, TC Memo 2013-76 , Code Sec(s) 183.

WILLIAM R. DODDS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Case Information: [pg. 682] Code Sec(s): 183 Docket: Dkt. No. 23609-11. Date Issued: 03/13/2013.

Judge: Opinion by Kerrigan, J. Tax Year(s): Years 2007, 2008. Disposition: Decision for Commissioner.


t. A taxpayer may not fully deduct expenses regarding an activity under section 162 or 212 if the activity is [pg. 686] not engaged in for profit. Sec. 183(a), (c);see also Keanini v. Commissioner, 94 T.C. 41, 45 (1990).

Under section 183(a), if an activity is not [*10] engaged in for profit, no deduction attributable to that activity is allowed except to the extent provided by section 183(b).

In relevant part, section 183(b) allows deductions that would have been allowable had the activity been engaged in for profit but only to the extent of gross income derived from the activity (reduced by deductions attributable to the activity that are allowable without regard to whether the activity was engaged in for profit).

Section 183(c) defines an activity not engaged in for profit as “any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.” For expenses to be fully deductible under section 162 or 212, taxpayers must show that they engaged in the activity with the primary objective of making a profit. See Westbrook v. Commissioner, 68 F.3d 868, 875 [76 AFTR 2d 95-7397] (5th Cir. 1995), aff'g per curiam T.C. Memo. 1993-634 [1993 RIA TC Memo ¶93,634]; see also Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207].

Under section 183(d), an activity that consists in major part of the breeding, training, showing, or racing of horses is presumed to be engaged in for profit if the activity produces gross income in excess of the deductions for any two of seven consecutive years, unless the Commissioner establishes to the contrary. See also Wadlow v. Commissioner, 112 T.C. 247, 250 (1999). Petitioner's horse breeding [*11] activity failed to produce income in excess of its deductions at any time during its operation.

Accordingly, the presumption does not apply in this case. The expectation of a profit need not be reasonable, but the taxpayer must conduct the activity with the actual and honest objective of making a profit. Keating v. Commissioner, 544 F.3d 900, 904 [102 AFTR 2d 2008-6638] (8th Cir. 2008), aff'g T.C. Memo. 2007-309 [TC Memo 2007-309].

We give greater weight to objective facts than to the taxpayer's statement of intent. Sec. 1.183-2(a), Income Tax Regs.; see also Keating v. Commissioner, 544 F.3d at 904.

Evidence from years after the years in issue is relevant to the extent it creates inferences regarding the taxpayer's requisite profit objective in earlier years. E.g., Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]; Bronson v. Commissioner, T.C. Memo. 2012-17 [TC Memo 2012-17].

Generally, a taxpayer bears the burden of proving that the requisite profit objective exists. Westbrook v. Commissioner, 68 F.3d at 876; see also Rule 142(a); Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. In order to shift the burden, the taxpayer, among other things, must introduce credible evidence with respect to that issue. Sec. 7491(a)(1); see also Higbee v. Commissioner, 116 T.C. 438, 441 (2001).

Credible evidence is evidence the court would find sufficient upon which to base a decision on the issue in favor of the taxpayer if no contrary evidence were submitted. Rendall v. Commissioner, T.C. Memo. 2006-174 [TC Memo 2006-174], aff'd, [*12] 535 F.3d 1221 [102 AFTR 2d 2008-5589] (10th Cir. 2008); see Higbee v. Commissioner, 116 T.C. at 442-443.

As discussed below, petitioner failed to provide evidence for many of the issues. If we were to consider solely the evidence petitioner presented, we would find that petitioner did not engage in the horse breeding activity for profit as a matter of fact. Therefore, petitioner failed to provide credible evidence within the meaning of section 7491(a)(1), and the burden of proof remains with petitioner.

Section 1.183-2(b), Income Tax Regs., provides a nonexhaustive list of the following nine factors used to determine whether an activity is engaged in for profit:

 (1) whether the taxpayer carries on the activity in a businesslike manner;

(2) the expertise of the taxpayer and his or her advisors;

(3) the time and effort expended by the taxpayer in carrying on the activity;

(4) whether the taxpayer expects that the assets used in the activity might appreciate in value;

(5) whether the taxpayer has had success carrying on other similar activities;

(6) the taxpayer's history of income or losses with respect to the activity;

(7) the amount of occasional profits, if any, which are earned;

(8) the taxpayer's financial sta[pg. 687] tus; and

(9) elements of personal pleasure or recreation. All facts and circumstances are to be taken into account, and no single factor is determinative. Sec. 1.183-2(b), Income Tax Regs.;see also Keating v. Commissioner, 544 F.3d at 904. [*13] 1.

Manner in Which Petitioner Carried On the Activity The fact that the taxpayer carries on an activity in a businesslike manner and maintains complete and accurate books and records may indicate a profit motive. Sec. 1.183-2(b)(1), Income Tax Regs. Characteristics of a businesslike operation include the preparation of a business plan and, in the case of horse breeding and sales, a consistent and concentrated advertising program. Bronson v. Commissioner, T.C. Memo. 2012-17 [TC Memo 2012-17] (citing Golanty v. Commissioner, 72 T.C. 411, 431 (1979), aff'd without published opinion , 647 F.2d 170 (9th Cir. 1981), Keating v. Commissioner, T.C. Memo. 2007-309 [TC Memo 2007-309], and Dodge v. Commissioner, T.C. Memo. 1998-89 [1998 RIA TC Memo ¶98,089], aff'd without published opinion 188 F.3d 507 [84 AFTR 2d 99-6001] (6th Cir. 1999)). The , regulations further provide that a profit motive is indicated when a taxpayer changes operating methods or adopts new techniques with an intent to improve profitability. Sec. 1.183-2(b)(1), Income Tax Regs. Petitioner advertised his horses on the Aeire Meadow Morgans Web site, in national and local magazines, and with his business cards at horse shows and other venues. In those cases where we have found that an animal breeder operated in a businesslike manner, generally the breeder not only participated in shows but engaged in other forms of substantial advertising. See, e.g., Engdahl v. Commissioner, 72 T.C. 659, 667 (1979); Keating v. Commissioner, T.C. Memo. [*14] 2007-309. The taxpayer's advertising efforts, however, may not be insubstantial compared to the cost of the activity. See Bronson v. Commissioner, T.C. Memo. 2012-17 [TC Memo 2012-17]. Because petitioner failed to provide any evidence regarding the cost of his advertising efforts, we are unable to determine that his advertising efforts were substantial compared to the cost of his horse breeding activity. Petitioner failed to provide a business plan that included more than just generalized goals. See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. Petitioner testified: “My initial plan wasn't written, but my plan was to breed grade horses”. When he abandoned that plan, petitioner testified that he was aiming to breed world caliber foals that could become successful show horses. Petitioner's plan is inadequate for us to conclude that he had an established business plan. See Keating v. Commissioner, T.C. Memo. 2007-309 [TC Memo 2007-309] (finding that the taxpayer's plan “to raise good quality horses, well-trained horses, horses that will give *** [the taxpayer] a good reputation, horses that will do well in the market” was inadequate for us to conclude that the taxpayer had an established business plan). Petitioner likewise failed to maintain a budget or to make any financial projections, economic forecast, or other analyses demonstrating financial management or planning. See Keating v. Commissioner, 544 F.3d at 904; Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. Petitioner used profit and loss [*15] statements prepared with QuickBooks, but there is scant evidence that petitioner used them for the important purposes of cutting expenses, increasing profits, and evaluating the overall performance of the operation. See Golanty v. Commissioner, 72 T.C. at 430; Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. Petitioner retained all receipts and insured his buildings and some of the horses. Petitioner, however, commingled the financial affairs of his horse breeding activity with his personal finances. Although QuickBooks allowed petitioner to separate his personal finances from his breeding activity, he paid all the expenses of the horse activity from his personal account. This commingling of personal and activity funds is not indicative of businesslike practices. See Montagne v. Commissioner, T.C. [pg. 688] Memo. 2004-252 [TC Memo 2004-252], aff'd, 166 Fed. Appx. 265 [97 AFTR 2d 2006-992] (8th Cir. 2006). Perhaps the most important indication of whether an activity is being performed in a businesslike manner is whether the taxpayer implements methods for controlling losses, including efforts to reduce expenses and generate income. See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]; Dodge v. Commissioner, T.C. Memo. 1998-89 [1998 RIA TC Memo ¶98,089]. Petitioner provided no evidence showing that he tried to reduce his expenses, abandoned specific activities that had proven unprofitable, or implemented any cost-cutting measures. Rather, petitioner maintained a steady [*16] pace of losses which skyrocketed to six figures in 2004, and petitioner continued to hemorrhage money from 2004 to 2011, including the years at issue. Petitioner's failure to produce any significant income was a key factor in his failure to earn a profit. See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]; Dodge v. Commissioner, T.C. Memo. 1998-89 [1998 RIA TC Memo ¶98,089]. Petitioner contends that he made changes in his operations over the years in an effort to increase his income. Those changes involved switching from the Pearsons' stallion in 2000 and then switching to national, world champion, or grand national stallions in 2004. Petitioner did not produce any evidence demonstrating that he made a careful and thorough investigation of the potential profitability of these changes before making them.See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207] (citing Taube v. Commissioner, 88 T.C. 464, 481 (1987)). On balance, we are not persuaded that petitioner carried on his horse activity in a businesslike manner. This factor weighs against a profit objective. 2.

Expertise of Petitioner and His Advisors The taxpayer's expertise, research, and extensive study of an activity, as well as his or her consultation with experts, may be indicative of a profit motive.See sec. 1.183- 2(b)(2), Income Tax Regs. As a successful accountant, petitioner did not need to seek further business and tax advice when he started his breeding [*17] activity. Petitioner had knowledge about raising horses and other large farm animals from growing up on a farm, but his knowledge was not extensive; there is no indication that he garnered any horse breeding experience at that time. During the course of his horse breeding activity, petitioner consulted with persons who were knowledgeable about horse breeding, including professional breeders, a professional trainer, and a professional horseman, and petitioner followed the advice they gave him. See id.; see also Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. Petitioner spent time studying the Morgan bloodlines, but the record does not indicate that petitioner spent an extensive amount of time studying the bloodlines. Petitioner, however, hired a trainer who lacked experience with Morgan horses. On balance, this factor weighs slightly in favor of a profit objective. 3.

Time and Effort Petitioner Expended in Carrying On the Activity The taxpayer's devotion of much of his or her personal time and effort to carrying on an activity may indicate a profit motive, particularly if the activity does not involve substantial personal or recreational aspects. Sec. 1.183-2(b)(3), Income Tax Regs. Although petitioner continued to maintain his accounting practice, he spent over 1,500 hours each year working on his horse breeding activity, often performing hard manual and menial tasks such as feeding and [*18] walking the horses and mucking stalls. See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207] (the taxpayers demonstrated the requisite profit objective when they spent 20 hours a week doing hard manual and menial tasks in their horse activity). This factor weighs in favor of a profit objective. 4.

Expectation That the Horses May Appreciate in Value An expectation that assets used in the activity will appreciate in value may indicate a profit motive even if the taxpayer derives no profit from current operations. Sec. 1.183-2(b)(4), Income Tax Regs. Petitioner credibly testified that he expected his horses would appreciate because of his successful breeding program and that he [pg. 689] believed he could eventually produce a “golden cross” Morgan horse capable of garnering stud fees exceeding $10,000 and a sale price exceeding $100,000. Petitioner also provided some evidence that his 18-acre property increased in value over time, from an estimated $207,000 in 2002 to an estimated $361,900 in 2009.

A profit objective, however, may be inferred from such expected appreciation of the activity's assets only where the appreciation exceeds operating expenses and would be sufficient to recoup the accumulated losses of prior years. Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]; see Golanty v. Commissioner, 72 T.C. at 427-428. The appreciation of petitioner's horse breeding assets does not [*19] begin to approach the amount of losses petitioner has reported since the beginning of his horse activity.

Petitioner also failed to provide any evidence linking his 18-acre property's increase in value to his horse breeding activity. Without more information, we cannot conclude that the property increased in value because of petitioner's horse breeding activity. On balance, this factor is neutral. 5.

Petitioner's Success in Similar Activities Section 1.183-2(b)(5), Income Tax Regs., provides, in pertinent part: “The fact that the taxpayer has engaged in similar activities in the past and converted them from unprofitable to profitable enterprises may indicate that he is engaged in the present activity for profit”. Although petitioner successfully ran his accounting practice, his work as an accountant is not sufficiently similar to operating a horse breeding activity to indicate that he could do so successfully. See Berry v. Commissioner, T.C. Memo. 2000-109 [TC Memo 2000-109]. This factor weighs against a profit objective. 6.

Petitioner's History of Income or Losses A history of continued losses with respect to an activity may indicate a lack of a profit motive. See sec. 1.183-2(b)(6), Income Tax Regs. While a series of losses during the initial or startup stage of an activity may not necessarily indicate [*20] a lack of a profit motive, a record of large losses over many years is persuasive evidence that the taxpayer did not have such a motive. Golanty v. Commissioner, 72 T.C. at 426; Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207].

An activity's cumulative losses should not be of such a magnitude that an overall profit on the entire operation, including recoupment of past losses, could not possibly be achieved. Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), aff'd, 379 F.2d 252 [19 AFTR 2d 1566] (2d Cir. 1967); Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. If losses are sustained because of unforeseen or fortuitous circumstances beyond the control of the taxpayer, such losses would not be an indication of the lack of a profit motive. See sec. 1.183-2(b)(6), Income Tax Regs. Petitioner realized no profits whatsoever in 17 years of engaging in his horse breeding activity. He contends that his losses are not an indication that he lacked a profit objective because the losses were caused by factors beyond his control.

Petitioner cites unexpected deaths, miscarriages, stillborn foals, and the negative effect of the recession on horse sales. We acknowledge that horse breeding is a speculative activity, but these events hardly account for an unbroken string of 17 years of losses. Furthermore, petitioner did not show that his horse breeding activity would have been profitable if events beyond his control had not [*21] occurred. See Burger v. Commissioner, 809 F.2d 355, 360 [59 AFTR 2d 87-431] n.8 (7th Cir. 1987), aff'g T.C. Memo. 1985-523 [¶85,523 PH Memo TC]; Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207].

Petitioner also contends that because he switched from trying to breed grade horses to world caliber horses in 2004, his horse breeding activity was in its initial or startup stage in tax years 2007 and 2008. Petitioner, however, continuously maintained a horse breeding activity from 1995 through 2011 with the same knowledge, equipment, and space. The only change petitioner made was from trying to produce one caliber of horse to trying to produce another caliber of horse. We are unconvinced by [pg. 690] this argument, and we decline to “reset the clock” in 2004 simply because petitioner altered the goal of his horse breeding activity. Petitioner further contends that he could potentially earn a substantial profit with one outstanding horse.

The possibility of a speculative profit in a taxpayer's horse activity, however, is insufficient to outweigh the absence of profits for a sustained period of years. See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]; see also Chandler v. Commissioner, T.C. Memo. 2010-92 [TC Memo 2010-92], aff'd, 481 Fed. Appx. 400 [110 AFTR 2d 2012-6059] (9th Cir. 2012); McKeever v. Commissioner, T.C. Memo. 2000-288 [TC Memo 2000-288]. This factor weighs heavily against a profit objective. [*22] 7. Amount of Petitioner's Occasional Profits The amount of profits in relation to the amount of losses incurred may provide useful criteria in determining the taxpayer's intent. Sec. 1.183-2(b)(7), Income Tax Regs. Petitioner never earned a profit from his horse breeding activity. This factor weighs against a profit objective. 8. Petitioner's Financial Status Substantial income from sources other than the activity may indicate that the activity is not engaged in for profit. Sec. 1.183-2(b)(8), Income Tax Regs. A taxpayer with substantial income unrelated to the activity can more readily afford a hobby. Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. This is particularly true if the losses from the activity might generate substantial tax benefits. Golanty v. Commissioner, 72 T.C. at 429; Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207].

Petitioner's substantial income from his accounting firm allowed him to continue his horse breeding activity despite 17 years of substantial losses. See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207]. Petitioner's horse breeding activity also generated generous tax savings in the form of net losses that offset petitioner's substantial accounting income. This factor weighs against a profit objective. [*23] 9. Elements of Personal Pleasure or Recreation The presence of personal motives and recreational elements in carrying on an activity may indicate that the activity is not engaged in for profit. Sec. 1.183- 2(b)(9), Income Tax Regs. Petitioner argues that neither he nor his family members rode his horses and that his horse breeding activity required him to engage in hard manual labor. We question, however, whether he would have continued his money-losing horse breeding activity for 17 years unless he received some satisfaction from the work. See Foster v. Commissioner, T.C. Memo. 2012-207 [TC Memo 2012-207] (the taxpayers' horse activity involved hard work, but the taxpayers would not have continued the losing horse activity for many years had they not received satisfaction from the work). It is more likely that such satisfaction, rather than a profit objective, accounts for petitioner's persistence. On balance, this factor is neutral. Conclusion After weighing all the facts and circumstances in the light of the relevant factors, we conclude that petitioner did not engage in his horse breeding activity for the years at issue with the requisite profit objective. Petitioner's many years of losses without a meaningful plan for recouping them are most persuasive. See id. [*24]

Accordingly, we sustain respondent's determination regarding petitioner's horse breeding activity.

Accuracy-Related Penalties Under Section 6662(a) Respondent determined that petitioner is liable for accuracy-related penalties pursuant to section 6662(a) for tax years 2007 and 2008. Section 6662(a) adds to a tax 20% of any underpayment attributable to, among other things, (1) negligence or disregard of rules or regulations within the meaning of section 6662(b)(1); or (2) any substantial understatement of income tax within the meaning of section 6662(b)(2). A substantial understatement of income tax is defined as an understatement that exceeds the greater of $5,000 or 10% of the [pg. 691] income tax required to be shown on the return for the taxable year. Sec. 6662(d)(1)(A). The Commissioner bears the burden of production with respect to this penalty. Sec. 7491(c). This burden is satisfied if the Commissioner comes forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty. Higbee v. Commissioner, 116 T.C. at 446. Respondent determined that petitioner should have reported $58,092 on his 2007 Federal income tax return and $70,846 on his 2008 Federal income tax return. Respondent also determined that petitioner understated his income tax by $39,685 for tax year [*25] 2007 and by $47,757 for tax year 2008, which are both greater than $5,000 and greater than 10% of the income tax required to be shown on the returns for the taxable years.

Thus, respondent has carried his burden to show that petitioner substantially understated his income tax for tax years 2007 and 2008. If a taxpayer had reasonable cause for and acted in good faith regarding part of the underpayment, no penalty is imposed on that part. See sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.

An important factor for demonstrating reasonable cause and good faith is the extent of the taxpayer's effort to determine the proper tax liability. Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioner, a successful accountant, did not provide any evidence regarding what, if any, effort he made to determine his proper tax liability at the time of filing his 2007 or 2008 tax return. Each year petitioner sustained significant losses from his horse breeding activity, and any gross income he received from that activity was substantially lower than his losses. Yet, he did not seek advice about whether to continue to treat his horse activity as engaged in for profit. Petitioner is well educated and familiar with Federal income tax laws and regulations. His experience, knowledge, and education weigh against him. See Brown v. Commissioner, T.C. Memo. 2011-83 [TC Memo 2011-83], aff'd, 693 F.3d 765 [110 AFTR 2d 2012-5881] (7th Cir. 2012).

Petitioner failed to show that he had reasonable cause for and acted in good faith regarding the underpayment. [*26] We hold that petitioner is liable for the substantial understatement penalty under section 6662(a) and (b)(2). We need not address the applicability of the penalty on the grounds of negligence or disregard of rules or regulations within the meaning of section 6662(b)(1) for tax years 2007 and 2008. See sec. 1.6662-2(c), Income Tax Regs. Contentions we have not addressed are irrelevant, moot, or meritless. To reflect the foregoing, Decision will be entered for respondent.

              TC Memo 2013-79 - TC Memo 201




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IRS examination - secondary evidence


Steven D. Cox v. Commissioner, TC Memo 2013-75 , Code Sec(s) 61; 446. STEVEN D. COX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Case Information: [pg. 673] Code Sec(s): 61; 446 Docket: Dkt. No. 26960-11. Date Issued: 03/12/2013.


Judge: Opinion by Marvel, J. Tax Year(s): Years 2004, 2005. Disposition: Decision for Taxpayer in part and for Commissioner in part. HEADNOTE 1. Unreported income—reconstruction of income—bank deposits method— proof. IRS's bank deposits reconstruction of pro se general contractor/longtime nonfiler's unreported income from various cos. for his “qualifier” services was largely upheld: IRS linked taxpayer to income producing activity, such that presumption of correctness attached, via his admissions to receiving and depositing payments from stated cos. into his personal and/or his proprietorship's accounts; IRS [pg. 674] also showed that it was reasonable to use bank deposits method for reconstructing taxpayer's income because he didn't produce books and records or cooperate with IRS; and revenue agent properly computed taxable deposits for 1 year. However, agent wrongly included 1 deposit for other year. Further, taxpayer showed that he was entitled to additional reduction for few other deposits that he, acting as mere conduit transmitted, to client. Reference(s): ¶ 615.047(5) ; ¶ 4465.69(23) Code Sec. 61; Code Sec. 446 2. Gross income—interest—burden of proof and production—information returns. IRS's determination that pro se general contractor/longtime nonfiler had to include in his gross income interest earned on his checking and savings accounts was upheld: interest income was clearly includible under Code Sec. 61(a)(4) ; and IRS established specific amounts at issue via bank statements and Forms 1099-INT, to which taxpayer in turn didn't raise any reasonable dispute that would trigger Code Sec. 6201(d) 's burden of production-shifting provision or otherwise introduce credible evidence contesting IRS's determination. Reference(s): ¶ 615.047(10) ; ¶ 62,015.01(30) Code Sec. 61; Code Sec. 6201 3. Business deductions—ordinary and necessary expenses—construction expenses—substantiation—lost or stolen records. Pro se general contractor/longtime nonfiler's deductions for wage and materials expenses were denied due to lack of substantiation: although taxpayer kept some records and claimed that others were stolen, he didn't make any effort to reconstruct same or substantiate his claims with 3d-party testimony, invoices and receipts, or other secondary evidence, and instead offered only vague testimony about paying some laborers and purchasing materials. Reference(s): ¶ 1625.019(5) Code Sec. 162; Code Sec. 274 4. Failure to timely file returns penalties—burden of proof and production— reasonable cause. Failure to timely file returns penalties were upheld against pro se general contractor/longtime nonfiler: IRS met its burden of production on penalties' applicability via stipulations that taxpayer didn't file for years at issue; and claim that he didn't understand how to complete his returns and couldn't afford to hire return preparer didn't constitute reasonable cause for not filing. Reference(s): ¶ 66,515.14(5) ; ¶ 74,915.03(15) Code Sec. 6651; Code Sec. 7491 5. Failure to pay tax shown due on returns penalties—burden of proof and production—substitute returns. Failure to pay tax shown due on returns penalties were upheld against pro se general contractor/longtime nonfiler for years for which he failed to file returns, but for which IRS prepared substitute returns: IRS met its burden of production on penalties' applicability with account transcripts and other proof that substitute returns were prepared in accord with Code Sec. 6020(b) and that taxpayer didn't pay amounts shown due thereon; and he didn't show he was unable to pay or would have suffered undue hardship if he had. Reference(s): ¶ 66,515.14(15) ; ¶ 74,915.03(20) Code Sec. 6651; Code Sec. 7491 6. Failure to pay estimated tax penalties—burden of proof and production— required annual payment. Failure to pay estimated tax penalties were upheld against pro se general contractor/longtime nonfiler: IRS met its burden of production on penalties' applicability with taxpayer's admissions and account transcripts showing he paid no estimated taxes despite having required annual payments for each year at issue. Reference(s): ¶ 66,545.03(30) ; ¶ 74,915.03(25) Code Sec. 6654; Code Sec. 7491 Syllabus Official Tax Court Syllabus Counsel Steven D. Cox, pro se. Brianna B. Taylor and Peter T. McCary, for respondent. MARVEL, Judge MEMORANDUM FINDINGS OF FACT AND OPINION In a notice of deficiency issued to petitioner on August 26, 2011, respondent determined deficiencies in petitioner's Federal income tax of $48,946 and $6,522 for 2004 and 2005, respectively, and additions [pg. 675] to tax under [*2] sections 6651(a)(1) 1 and (2) and 6654 for 2004 and 2005. The issues for decision are: (1) whether petitioner failed to report gross receipts of $155,227 and $28,815 on Schedules C, Profit or Loss From Business, for 2004 and 2005, respectively; (2) whether petitioner received interest income of $289 and $208 for 2004 and 2005, respectively; (3) whether petitioner is entitled to business expense deductions for the years in issue; and (4) whether petitioner is liable for the additions to tax as determined by respondent for the years in issue. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations of facts are incorporated herein by this reference. Petitioner resided in Georgia when he filed his petition. I. Petitioner's Background and Businesses After graduating from high school petitioner began working as a carpenter. He eventually applied for a general contractor's license. After receiving his general contractor's license petitioner began working as a “qualifier” by allowing construction businesses to use his general contractor's license. During the years in [*3] issue petitioner received payment for his qualifier services from various construction businesses, including Puente Contracting, Inc. (Puente Contracting), Harrington Homes Corp. (Harrington Homes), MCB Shell Contractor, MCB Framing, and Marco Custom Builder. During the years in issue petitioner also worked on smaller construction projects. He provided construction services for individuals and for Creative Coast Builders. II. Petitioner's Bank Accounts 2 A. AmSouth Account During 2004 and 2005 petitioner maintained an account at AmSouth Bank titled in the name of Equity Three Enterprises (AmSouth account). 3 On the account package agreement he identified Equity Three Enterprises as a sole [*4] proprietorship business. Petitioner was the only individual with signatory authority over the AmSouth account. During 2004 petitioner made deposits into the AmSouth account totaling $147,131. The deposits included checks drawn on accounts of petitioner, Puente Contracting, Cheryl N. Lee, and Harrington Homes, as well as a check drawn on Equity Three Enterprises' Bank of America account and made payable to petitioner. During 2005 petitioner made deposits into the AmSouth account totaling $15,404. The deposits included checks drawn on accounts of Puente Contracting, UNITRIN direct, and Marco Custom Builders. B. Suncoast Account During the years in issue petitioner maintained a personal checking and savings account at Suncoast Schools Credit Union (Suncoast account). He was the only individual with signatory authority over the Suncoast account. During the years in issue petitioner earned interest on the funds in his Suncoast account. During 2004 petitioner made deposits into the Suncoast account of $73,700. The deposits included checks drawn on accounts of Equity Three Enterprises, MCB Framing, Marco Custom Builders, Inc., MCB Shell Contractor, and Creative Coast Builders, as well as a $30,000 wire transfer from Wells Fargo. [*5] During 2005 petitioner made deposits of $63,106 into the Suncoast account. The deposits included checks drawn on the accounts of MCB Shell Contractor, Creative Coast Builders, Martha Mejia Masonry, Marco Custom Builder, and Maureen McCormick. 4[pg. 676] III. Reconstruction of Petitioner's Income and the Notice of Deficiency Petitioner failed to file Federal income tax returns for 2004 and 2005. Respondent subsequently performed a bank deposits analysis with respect to petitioner's 2004 and 2005 taxable years. Respondent determined that petitioner made taxable deposits into his AmSouth account of $144,531 and $11,315 for 2004 and 2005, respectively, and made taxable deposits into his Suncoast account of $10,696 and $17,500 for 2004 and 2005, respectively. Accordingly, respondent determined that petitioner made total taxable deposits of $155,227 and $28,815 for 2004 and 2005, respectively. Respondent also had received Forms 1099-INT, Interest Income, from SunCoast, reporting that petitioner received interest income of $289 and $208 for 2004 and 2005, respectively. On the basis of respondent's bank deposits analysis and the third-party payor information, respondent prepared substitutes for returns for petitioner under section 6020(b). [*6] Respondent subsequently mailed to petitioner the notice of deficiency for 2004 and 2005. On the basis of petitioner's bank deposits, respondent determined that petitioner failed to report on Schedules C gross receipts of $155,227 and $28,815 for 2004 and 2005, respectively. On the basis of the Forms 1099-INT filed by SunCoast, respondent determined that petitioner failed to report interest income of $289 and $208 for 2004 and 2005, respectively. Respondent also determined that petitioner was liable for additions to tax under sections 6651(a)(1) and (2) and 6654 for 2004 and 2005. IV. Petitioner's Compliance History Petitioner failed to file Federal income tax returns for 2000 through 2009. The record contains no indication that petitioner has ever filed Federal employment tax returns or made any estimated tax payments. Petitioner's history shows an extended failure to comply with his tax reporting and payment obligations. Petitioner also failed to cooperate with the revenue agent assigned to the examination for his 2004 and 2005 taxable years. OPINION I. Burden of Proof Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that the [*7] determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). The burden of proof shifts to the Commissioner, however, if the taxpayer produces credible evidence to support the deduction or position, the taxpayer complied with the substantiation requirements, and the taxpayer cooperated with the Secretary 5 with regard to all reasonable requests for information. Sec. 7491(a); see also Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001). Petitioner does not contend that section 7491(a)(1) should shift the burden here, and the record establishes that he did not satisfy the section 7491(a)(2) requirements. Accordingly, petitioner bears the burden of proof with respect to all disputed factual issues. II. Petitioner's Unreported Income Section 61(a) defines gross income as “all income from whatever source derived” and includes compensation paid for services, whether furnished by the taxpayer as an employee, a self-employed person, or an independent contractor. A [*8] taxpayer must maintain books and records establishing the amount of his or her gross income. Sec. 6001. If a taxpayer fails to maintain the required books and records, the Commissioner may determine the taxpayer's income by any method that clearly reflects income. See sec. 446(b); Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989). The Commissioner's reconstruction of income “need only be reasonable in light of all surrounding facts and circumstances.” Petzoldt v. Commissioner, 92 T.C. at 687. The Commissioner has great latitude in reconstructing a taxpayer's income. See sec. 446(b); Petzoldt v. Commissioner, 92 T.C. at 687, 693. The Commissioner may [pg. 677] reconstruct a taxpayer's income using third-party information returns.See Parker v. Commissioner, 117 F.3d 785 [79 AFTR 2d 97-2889] (5th Cir. 1997); Ketler v. Commissioner, T.C. Memo. 1999-68 [1999 RIA TC Memo ¶99,068]. The Commissioner also may use bank records and other third-party records to reconstruct a taxpayer's income. See Parkinson v. Commissioner, 647 F.2d 875, 876 [47 AFTR 2d 81-1435] (9th Cir. 1981), aff'g T.C. Memo. 1979-319 [¶79,319 PH Memo TC]; see also Williams v. Commissioner, 999 F.2d 760, 764 [72 AFTR 2d 93-5501] (4th Cir. 1993), aff'g T.C. Memo. 1992-153. As noted above, the Commissioner's deficiency determination normally is entitled to a presumption of correctness. See Rule 142(a). However, the U.S. Court of Appeals for the Eleventh Circuit, to which an appeal in this case would [*9] lie absent a stipulation to the contrary, see ,sec. 7482(b)(1)(A), (2), has held that the Commissioner's determination of unreported income is entitled to a presumption of correctness only if the determination is supported by a minimal evidentiary foundation linking the taxpayer to an income-producing activity, Blohm v. see Commissioner, 994 F.2d 1542, 1549 [72 AFTR 2d 93-5347] (11th Cir. 1993), aff'g T.C. Memo. 1991-636 [1991 TC Memo ¶91,636]. Once the Commissioner produces evidence linking the taxpayer to an income-producing activity, the presumption of correctness applies and the burden of production shifts to the taxpayer to rebut that presumption by establishing that the Commissioner's determination is arbitrary or erroneous. Id.; see also United States v. Janis, 428 U.S. 433, 441-442 [38 AFTR 2d 76-5378] (1976). Petitioner admitted that he received payments from Puente Contracting, MCB Framing, MCB Shell Contractor, Harrington Homes, and Equity Three Enterprises in exchange for the use of his general contractor's license. Petitioner also admitted that he received payments from Ms. Lee, Creative Coast Builders, and Martha Mejia Masonry in exchange for his construction services. He admitted that he deposited the payments into his AmSouth and Suncoast accounts. Respondent introduced into evidence petitioner's bank records, which confirm that petitioner deposited into his accounts payments from his various clients and earned interest income with respect to his Suncoast account. Because this [*10] evidence is sufficient to link petitioner to an income-producing activity, the presumption of correctness applies and he has the burden of producing evidence to rebut that presumption. A. Petitioner's Unreported Gross Receipts The bank deposits method is a permissible method of reconstructing income. See Clayton v. Commissioner, 102 T.C. 632, 645 (1994); see also Langille v. Commissioner, T.C. Memo. 2010-49 [TC Memo 2010-49], aff'd, 447 Fed. Appx. 130 [108 AFTR 2d 2011-7254] (11th Cir. 2011). Bank deposits constitute prima facie evidence of income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The Commissioner need not show the likely source of a deposit treated as income, but the Commissioner “must take into account any nontaxable source or deductible expense of which *** [he] has knowledge” in reconstructing income using the bank deposits method. See Clayton v. Commissioner, 102 T.C. at 645-646. However, the Commissioner need not follow any “leads” suggesting that a taxpayer has deductible expenses. DiLeo v. Commissioner, 96 T.C. 858, 872 (1991), aff'd, 959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992). After the Commissioner reconstructs a taxpayer's income and determines a deficiency, the taxpayer bears the burden of proving that the Commissioner's use of the bank deposits method is unfair or inaccurate. See Clayton v. Commissioner, 102 T.C. at 645; DiLeo v. Commissioner, 96 T.C. at 883. The taxpayer must [*11] prove that the reconstruction is in error and may do so, in whole or in part, by proving that a deposit is not taxable. See Clayton v. Commissioner, 102 T.C. at 645. Petitioner failed to produce any books or records relating to his income for the years in issue. Petitioner also failed to cooperate with respondent and respondent's revenue agent to determine the amounts of his gross [pg. 678] receipts for the years at issue. Although petitioner claims that he maintained records and that these records were stolen, he did not make any attempt to reconstruct these records or to cooperate with respondent to determine the proper amounts of his gross receipts for the years in issue. See, e.g., Jones v. Commissioner, T.C. Memo. 1994-230 [1994 RIA TC Memo ¶94,230], aff'd without published opinion 68 F.3d 460 [76 AFTR 2d 95-7202] (4th Cir. 1995); Famularo v. Commissioner, T.C. Memo. 1984-37 [¶84,037 PH Memo TC]. Therefore, we find that it was reasonable for respondent to use the bank deposits method to reconstruct petitioner's income. Accordingly, petitioner bears the burden of proving that respondent's determinations are arbitrary or erroneous. Petitioner argues that respondent's income reconstruction treated some nontaxable deposits as income. In defending against the Commissioner's reconstruction of income, the taxpayer bears the burden of showing whether and to what extent the Commissioner included deposits derived from nontaxable sources. [*12] Dodge v. Commissioner, 981 F.2d 350, 357 [71 AFTR 2d 93-412] (8th Cir. 1992), aff'g in part, rev'g in part 96 T.C. 172 (1991). Nontaxable items include interaccount transfers, returned checks, and, in some instances, money a taxpayer receives merely as a conduit. See MacGregor v. Commissioner, T.C. Memo. 2010-187 [TC Memo 2010-187], aff'd, __Fed. Appx. __, 111 A.F.T.R.2d (RIA) 2013-314 (9th Cir. Dec. 21, 2012); Taylor v. Commissioner, T.C. Memo. 2009-235 [TC Memo 2009-235]; Estate of Kalichuk v. Commissioner, T.C. Memo. 1964-336 (holding that taxpayers were merely conduits and had not received taxable income where the taxpayers deposited checks into their account on behalf of third parties and transmitted the check proceeds to the third parties shortly thereafter). First, petitioner contends that with respect to the checks from Harrington Homes, he did not receive income equal to the stated amounts of the checks. Petitioner testified that he deposited the checks from Harrington Homes on behalf of one of his clients. He testified that the client did not have a general contractor's license; accordingly, the client used petitioner's general contractor's license. He further testified that after the client received a check from Harrington Homes, the client would present the check to petitioner and petitioner would deposit the check into his account. Petitioner testified that he would retain a percentage of the check amount as a fee for the use of his general contractor's license and that he would [*13] return to the client the balance of the check amount. Petitioner testified that he returned the balance by paying his client with a check drawn on his AmSouth account. During 2004 petitioner deposited into his AmSouth account five checks from Harrington Homes: (1) check No. 5165, dated January 29, 2004, for $68,152; (2) check No. 5190, dated February 12, 2004, for $5,000; (3) check No. 5239, dated February 24, 2004, for $24,012.50; (4) check No. 5241, dated February 25, 2004, for $11,560; and (5) check No. 5335, dated March 30, 2004, for $29,307. Petitioner's AmSouth account statements show that petitioner wrote three large checks during that period: (1) a check credited on January 30, 2004, for $66,150; (2) a check credited on February 26, 2004, for $38,672; and (3) a check credited on April 5, 2005, for $28,307. Petitioner did not deposit into his account any checks from Harrington Homes during 2005. Respondent did not introduce into evidence the canceled checks drawn on petitioner's AmSouth account. Petitioner did not produce any of his own records or call any witnesses to corroborate his testimony that he was not entitled to the full amounts of the checks he deposited from Harrington Homes. Nevertheless, we find petitioner's testimony credible. A review of petitioner's AmSouth account statements shows that in January, February, and April, he wrote checks [*14] drawn on his account that correspond with the amounts of the Harrington Homes checks deposited in January, February, and March. This evidence is consistent with petitioner's testimony regarding his right to income with respect to the Harrington Homes checks. Furthermore, we note that with respect to petitioner's AmSouth account, respondent determined that he had unreported gross receipts of $144,532 and $11,315 during 2004 and 2005, respectively. The discrepancy be[pg. 679] tween the amounts of gross receipts determined for 2004 and 2005 supports a finding that petitioner did not earn gross receipts of $144,532 as determined by respondent. Accordingly, we find that his gross receipts for 2004 must be reduced by $133,129, the amount of funds petitioner, acting as a mere conduit, transmitted to his client. Second, petitioner contends that the $2,600 deposit into his Suncoast account during 2004 does not constitute taxable income because he transferred the funds from one of his business bank accounts. Petitioner's Suncoast account statement shows that on June 25, 2004, he deposited into his account $2,900. Notations on petitioner's account statement, apparently made by respondent's revenue agent, show that petitioner deposited cash of $2,600 as well as a $300 check. Respondent's revenue agent determined that only the cash portion of petitioner's deposit constituted taxable income. [*15] Petitioner's AmSouth account statements do not show any corresponding withdrawals around the time of his cash deposit. In addition, our review of the bank account statements for Equity Three Enterprises and Elkam Construction, Inc., accounts purportedly related to petitioner's business activities do not show any corresponding withdrawals around the time of his cash deposit. Accordingly, we find that respondent's revenue agent properly included the $2,600 cash deposit in petitioner's gross receipts for 2004. Third, petitioner argues that check No. 1009 should be excluded from the calculation of gross receipts. Check No. 1009 is a $95.60 payment from Creative Coast Builders to petitioner dated November 30, 2004. Petitioner testified that he previously had purchased nails for Creative Coast Builders and the $95.60 payment was a reimbursement for that purchase. In the absence of corroborating evidence, we find his testimony regarding the disputed check to be self-serving and unreliable. See Tokarski v. Commissioner, 87 T.C. at 76-77. Petitioner has failed to introduce credible evidence that check No. 1009 constituted nontaxable income. Accordingly, we find that respondent's revenue agent properly included the $95.60 payment in petitioner's gross receipts for 2004. Having decided that respondent acted reasonably in using an indirect method to reconstruct petitioner's income and having considered petitioner's [*16] arguments regarding whether such income constituted taxable income, we now review respondent's calculations of petitioner's taxable income for the years in issue. To prove how respondent calculated petitioner's gross receipts, respondent introduced copies of petitioner's AmSouth and Suncoast bank account statements as well as the revenue agent's spreadsheets. Our analysis of the revenue agent's income reconstruction spreadsheet and petitioner's bank statements convinces us that the revenue agent erroneously included in petitioner's gross receipts check No. 213. Check No. 213 constituted a payment of $1,000 from Ms. Lee to petitioner. Petitioner deposited check No. 213 into his AmSouth account during 2004, but the check was returned, presumably for insufficient funds. Respondent's revenue agent failed to exclude this check in calculating petitioner's gross receipts for 2004. Accordingly, we will reduce petitioner's Schedule C gross receipts for 2004 by $1,000 in addition to the amounts discussed supra pp. 13-14. Our analysis of petitioner's bank account statements and the revenue agent's spreadsheet confirms that the revenue agent properly reconstructed petitioner's Schedule C gross receipts for 2005. Accordingly, we sustain respondent's determination with respect to petitioner's Schedule C gross receipts for 2005. [*17] In summary, we find that petitioner had gross receipts of $21,088 and $28,815 for 2004 and 2005, respectively, that he should have reported on Schedules C. B. Petitioner's Unreported Interest Income Section 61(a)(4) includes interest in a taxpayer's gross income. Petitioner's Suncoast account statements establish that he received interest income for the years in is[pg. 680] sue. Furthermore, respondent introduced Forms 1099-INT with respect to the interest income adjustments, and petitioner has raised no reasonable dispute with respect to the accuracy of the information returns; therefore, the burden of production with respect to the income does not shift to respondent under section 6201(d). 6 Petitioner has failed to introduce any credible evidence contesting respondent's determinations that he received interest income from Suncoast of $289 and $208 in 2004 and 2005, respectively. Because interest must be included [*18] in petitioner's income under section 61, we sustain respondent's determinations with respect to the interest income from Suncoast. III. Business Expenses Generally, a taxpayer is entitled to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business. Sec. 162(a);Am. Stores Co. v. Commissioner, 114 T.C. 458, 468 (2000). An expense is ordinary if it is customary or usual within the particular trade, business, or industry or if it relates to a transaction “of common or frequent occurrence in the type of business involved.” Deputy v. du Pont, 308 U.S. 488, 495 [23 AFTR 808] (1940). An expense is necessary if it is appropriate and helpful for the development of the business. See Commissioner v. Heininger, 320 U.S. 467, 471 [31 AFTR 783] (1943). Personal, living, or family expenses generally are not deductible. See sec. 262(a). Deductions are a matter of legislative grace, and ordinarily a taxpayer must prove that he is entitled to the deductions he claims. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992). A taxpayer must maintain records to substantiate claimed deductions and to establish the taxpayer's correct tax liability. Higbee v. Commissioner, 116 T.C. at 440; see also sec. 6001. The taxpayer must produce such records upon the Secretary's request. Sec. 7602(a); see also sec. 1.6001-1(e), Income Tax Regs. Adequate substantiation must establish the [*19] amount and purpose of a claimed deduction. Higbee v. Commissioner, 116 T.C. at 440; see also Hradesky v. Commissioner, 65 T.C. 87 (1975), aff'd per curiam, 540 F.2d 821 [38 AFTR 2d 76-5935] (5th Cir. 1976). In deciding whether a taxpayer adequately substantiated a claimed deduction, we are not required to accept the taxpayer's “self-serving, unverified, and undocumented testimony.” Shea v. Commissioner, 112 T.C. 183, 189 (1999). When a taxpayer establishes that he paid or incurred a deductible expense but does not establish the amount of the expense, we may estimate the amount of the deductible expense. Cohan v. Commissioner, 39 F.2d 540, 542-544 [8 AFTR 10552] (2d Cir. 1930). However, we cannot estimate the amount unless the taxpayer introduces evidence that he paid or incurred the expense and the evidence is sufficient for us to develop a reasonable estimate. Williams v. United States, 245 F.2d 559, 560 [51 AFTR 594] (5th Cir. 1957). In estimating the amount, we bear heavily upon the taxpayer who failed to maintain and produce the required records. See Cohan v. Commissioner, 39 F.2d at 544. Petitioner contends that he has adequately substantiated his Schedule C expenses because his income and expense records were stolen following the years at issue and because he has introduced evidence, in the form of his own testimony and other documents, showing the expenses he incurred. [*20] When a taxpayer's records have been destroyed or lost due to circumstances beyond the taxpayer's control, the taxpayer may substantiate his expenses by making a reasonable reconstruction of the expenditures or use. See sec. 1.274-taxpayer is required to reconstruct what records he can. See, e.g., Chong v. Commissioner, T.C. Memo. 2007-12 [TC Memo 2007-12], slip op. at 9. If the taxpayer establishes that the records were lost or destroyed because of circumstances be[pg. 681] yond his control, 7 he must nevertheless substantiate his expenditures through secondary evidence. See Boyd v. Commissioner, 122 T.C. 305, 320 (2004). While we acknowledge that petitioner kept some records 8 and that he testified that other records were lost or destroyed, he still had an obligation to substantiate his expenditures. Petitioner made no effort to reconstruct his records [*21] or to substantiate his expenses with secondary evidence such as third-party testimony or invoices and receipts. Petitioner testified that he paid laborers and purchased materials for work on his construction projects, but his testimony was vague and unspecific and we find it insufficient to provide a basis for estimating the expenses. In the absence of corroborating evidence, we are not required to accept petitioner's testimony. See Tokarski v. Commissioner, 87 T.C. at 77. Petitioner has failed to prove that he is entitled to any deductions for business expenses. IV. Additions to Tax If the taxpayer assigns error to the Commissioner's determination that he is liable for an addition to tax, the Commissioner has the burden, under section 7491(c), of producing evidence with respect to the liability of the taxpayer for the addition to tax. See Higbee v. Commissioner, 116 T.C. at 446-447. To meet his burden of production, the Commissioner must come forward with sufficient evidence that it is appropriate to impose the addition to tax. Id. Once the Commissioner meets his burden, the taxpayer must come forward with evidence sufficient to persuade this Court that the determination is incorrect. Id. Respondent determined that petitioner is liable for additions to tax for failure to timely file returns for 2004 and 2005 under section 6651(a)(1). Section [*22] 6651(a)(1) imposes an addition to tax for failure to file a return timely in the amount of 5% of the tax required to be shown on the return for each month during which such failure continues, not to exceed 25% in the aggregate, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The parties stipulated that petitioner failed to file returns for 2004 and 2005. Respondent has satisfied the burden of production under section 7491(c), and petitioner must come forward with evidence sufficient to persuade the Court that respondent's determination is erroneous. Petitioner claims that he did not file his returns because he did not understand how to complete a Federal income tax return and he could not afford to hire a return preparer. Petitioner's explanation does not constitute reasonable cause for his failure to file. See, e.g., Cox v. Commissioner, 54 T.C. 1735, 1744 (1970); Blair v. Commissioner, T.C. Memo. 1991-456 [1991 TC Memo ¶91,456]. Petitioner did not argue that his failure to file returns was due to reasonable cause and not due to willful neglect, and he presented no credible evidence on the issue. Accordingly, we hold that petitioner is liable for section 6651(a)(1) additions to tax for 2004 and 2005. 9 [*23] Respondent also determined that petitioner is liable for additions to tax for failure to pay tax shown on a return under section 6651(a)(2). Section 6651(a)(2) imposes an addition to tax for failure to pay timely the amount of tax shown on a return. The section 6651(a)(2) addition to tax applies only when an amount of tax is shown on a return. Cabirac v. Commissioner, 120 T.C. 163, 170 (2003). Petitioner did not file 2004 and 2005 returns. However, respondent prepared substitutes for returns under section 6020(b). A return made by the Secretary under section 6020(b) is treated as the return filed by the taxpayer for purposes of determining [pg. 682] whether the section 6651(a)(2) addition to tax applies. Sec. 6651(g)(2); Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), aff'd, 521 F.3d 1289 [101 AFTR 2d 2008-1696] (10th Cir. 2008). Respondent introduced into evidence substitutes for returns that satisfy the requirements of section 6020(b), as well as a copy of petitioner's account transcripts. The substitutes for returns and the account transcripts establish that petitioner failed to pay the tax shown on the substitutes for returns. Respondent has satisfied the burden of production under section 7491(c). Petitioner did not introduce any evidence that he was unable to pay the tax owed or that he would have suffered undue hardship if he had paid the tax on the due date. See sec. [*24] 301.6651-1(c), Proced. & Admin. Regs. Accordingly, we hold that petitioner is liable for the section 6651(a)(2) additions to tax for 2004 and 2005. 10 Respondent also determined that petitioner is liable for additions to tax for failure to pay estimated tax under section 6654. Section 6654 imposes an addition to tax for underpayment of a required installment of estimated tax. Each required installment of estimated tax is equal to 25% of the “required annual payment”, which in turn is equal to the lesser of (1) 90% of the tax shown on the taxpayer's return for that year (or, if no return is filed, 90% of his or her tax for such year), or (2) if the taxpayer filed a return for the immediately preceding taxable year, 100% of the tax shown on that return. Sec. 6654(d)(1)(A) and (B). A taxpayer has an obligation to pay estimated tax only if he has a “required annual payment”. Wheeler v. Commissioner, 127 T.C. at 212. Petitioner admitted that he did not make any estimated tax payments for the years in issue. Respondent introduced copies of petitioner's account transcripts which show that petitioner did not make any estimates tax payments. Respondent also introduced evidence that petitioner failed to file Federal income tax returns for 2003-05, and petitioner stipulated that he failed to file returns for 2003-05. On [*25] the basis of this information and the evidence with respect to petitioner's income for the years in issue, we are able to conclude that petitioner had required annual payments for 2004 and 2005. Accordingly, we hold that petitioner is liable for the section 6654(a) additions to tax for 2004 and 2005. 11 We have considered the remaining arguments made by the parties and, to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit. To reflect the foregoing, Decision will be entered under Rule 155. 1   Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in 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   The record contains copies of AmSouth bank account statements purportedly related to petitioner's business activities: (1) an account titled in the name of Equity Three Enterprises, Inc.; (2) an account titled in the name of Equity Three Partners, Inc.; and (3) two accounts, both titled in the name of Elkcam Construction, Inc. Respondent did not include in petitioner's gross receipts any amounts deposited into these accounts. 3   During the years at issue Equity Three Enterprises also maintained a bank account at Bank of America. The record does not contain any bank account statements with respect to this account. 4   Ms. McCormick is petitioner's ex-wife. 5   The term “Secretary” means “the Secretary of the Treasury or his delegate”, sec. 7701(a)(11)(B), and the term “or his delegate” means “any officer, employee, or agency of the Treasury Department duly authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of authority, to perform the function mentioned or described in the context”, sec. 7701(a)(12)(A)(i). 6   Under sec. 6201(d), if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed by a third party and the taxpayer meets certain other requirements, the Commissioner bears the burden of producing reasonable and probative information, in addition to the information return, concerning the deficiency attributable to the income item. The burden shifts to the Commissioner only if the taxpayer fully cooperates with the Commissioner by providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested. See id. 7   Petitioner testified that he kept records of his income and expenses on his computer. He further testified that his brother stole his computer after the years in issue. Petitioner testified that he filed a police report with respect to the theft, but he did not introduce the police report as evidence. 8   While petitioner testified that he maintained records, he also testified that he did not maintain records of his business expenses, that he relied on his bank statements to calculate his business expenses, and that he paid some expenses in cash. Accordingly, although we find that petitioner kept some records, we are unable to find that he maintained adequate records to substantiate his business expenses. Because petitioner made no attempt to reconstruct his expenses, however, we need not delve further into the adequacy of his recordkeeping. 9   The amounts of the sec. 6651(a)(1) additions to tax for 2004 and 2005 must be adjusted to reflect the adjustments to gross receipts calculated in this opinion. 10   The amounts of the sec. 6651(a)(2) additions to tax for 2004 and 2005 must be adjusted to reflect the adjustments to gross receipts calculated in this opinion. 11   The amounts of the sec. 6654(a) additions to tax for 2004 and 2005 must be adjusted to reflect the adjustments to gross receipts calculated in this opinion. © 2





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Tuesday, March 26, 2013

Willfulness - section 7206 tax fraud



U.S. v. JINWRIGHT, Cite as 109 AFTR 2d 2012-2729 (683 F.3d 471), 06/22/2012 UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE v. Harriet P. JINWRIGHT, DEFENDANT-APPELLANT; UNITED STATES OF AMERICA, PLAINTIFF-APPELLEE v. Anthony L. JINWRIGHT, DEFENDANT-APPELLANT.Case Information: [pg. 2012-2729] Code Sec(s): Court Name: U.S. Court of Appeals, Fourth Circuit, Docket No.: No. 10-5289; No. 10-5290, Date Decided: 06/22/2012. 

Prior History: District Court affirmed. Tax Year(s): Years 2002, 2003, 2004, 2005, 2006, 2007. Disposition: Decision against Taxpayers. Cites: 683 F.3d 471 , 2012-2 USTC P 50417 . HEADNOTE 1. Tax crimes—conspiracy to defraud U.S.; tax evasion; aiding and abetting; filing false returns—jury instructions—evidence—witness testimony. Married couple/former church co-pastors' convictions for conspiracy to defraud U.S., tax evasion, and aiding and abetting same, and husband's convictions for filing false returns for years during which couple omitted millions of dollars of income, were affirmed. District court's provision of willful blindness instruction was proper in light of husband's denial of knowledge of understatements on their returns and evidence indicating that they purposely avoided learning fact of their liability; and jurors were cautioned that mere showing of recklessness or negligence was insufficient to support willfulness findings. Also, instructions regarding tax treatment of employer-employee payments properly clarified that such payments weren't excludable gifts under Code Sec. 102(a) ; and court's limiting of employee testimony about their beliefs that payments from church to taxpayers constituted gifts was reasonable precaution, in conjunction with foregoing jury instruction, to prevent juror confusion regarding taxability of income from employer.

 Reference(s): ¶ 73,446.514(25) ; ¶ 73,447.505(15) 2. Tax crimes—conspiracy to defraud U.S.; tax evasion; aiding and abetting; filing false returns—U.S. Sentencing Guidelines—restitution. Sentences for married couple/former church co-pastors' conspiracy to defraud U.S., tax evasion, and aiding and abetting same and husband's Code Sec. 7206(1) offenses, for various years during which couple omitted millions of dollars of income, were affirmed: tax loss calculations, reflecting conduct underlying charges of which wife had been acquitted and evidence of losses not contained in indictment but relevant to her conviction, were proper, where losses arose from pattern of underreporting over decade and where wife, due to her increasing role in church, was participant in conspiracy who could reasonably foresee acts by husband in furtherance of it.

 Similarly, district court properly ordered taxpayers to pay restitution based on losses arising from conduct underlying their conspiracy convictions. Also, imposition of sophisticated means enhancement was proper where taxpayers' scheme spanned many years and involved multiple orgs.; and it was within court's discretion to supplement examples in presentence reports with additional facts [pg. 2012-2730] in record. And abuse-of-trust enhancement was warranted where taxpayers, who were entrusted with spiritual well-being and financial stewardship of their congregation, exploited that trust to conceal criminal acts from govt. as well as church, and to maintain extravagant lifestyle at church's expense. Reference(s): ¶ 73,446.516(55) Jinwright OPINION ARGUED: Ann Loraine Hester, FEDERAL DEFENDERS OF WESTERN NORTH CAROLINA, INC., Charlotte, North Carolina; Joshua Daniel Davey, MCGUIREWOODS, LLP, Charlotte, North Carolina, for Appellants. David Alan Brown, Sr., OFFICE OF THE UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee. ON BRIEF: Henderson Hill, Executive Director, FEDERAL DEFENDERS OF WESTERN NORTH CAROLINA, INC., Charlotte, North Carolina, for Appellant Harriet P. Jinwright; Jennifer L. King, MCGUIREWOODS, LLP, Charlotte, North Carolina, for Appellant Anthony L. Jinwright. Anne M. Tompkins, United States Attorney, Craig D. Randall, Assistant United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee. UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT, Appeals from the United States District Court for the Western District of North Carolina, at Charlotte. Frank D. Whitney, District Judge. (3:09-cr-00067-FDW-2; 3:09-cr-00067-FDW-1) Before WILKINSON, NIEMEYER, and KING, Circuit Judge

 OPINION Judge: WILKINSON, Circuit Judge: PUBLISHED Affirmed by published opinion. Judge Wilkinson wrote the opinion, in which Judge Niemeyer and Judge King joined. Anthony and Harriet Jinwright, former co-pastors of Greater Salem Church in North Carolina, appeal their convictions and sentences arising from a tax evasion scheme in which they omitted millions of dollars of taxable income from their jointly filed tax returns. The Jinwrights raise a variety of challenges on appeal. Finding each contention to be without merit, we affirm the judgment of the district court. I. Mr. and Mrs. Jinwright were convicted of conspiracy to defraud the United States in violation of 18 U.S.C. § 371 and of three counts of tax evasion for the years 2005–2007, and aiding and abetting the same, in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2. Mr. Jinwright was convicted (and Mrs. Jinwright acquitted) of three additional counts of tax evasion for the years 2002–2004, as well as six counts of filing a false tax return in violation of 26 U.S.C. § 7206(1). The Jinwrights were also acquitted of several other charges not at issue in this appeal. The Jinwrights' convictions followed a four-week trial that involved the admission of over 90,000 pages of documentary evidence and the testimony of more than 70 witnesses. The facts most relevant to this appeal are summarized here. A. Prior to this litigation, Mr. Jinwright had served as senior pastor of Greater Salem Church (GSC) since 1981. Mrs. Jinwright played an active role in church life during her husband's ministry and began to draw a salary from GSC as a pastor of the church in about 2000. Over the course of their time with GSC, the Jinwrights were co-chairs of the GSC board of directors and served on a number of committees within the church, including those responsible for financial decisions. Mr. Jinwright had final authority over employee salaries and church finances more generally. When Mr. Jinwright first became pastor at GSC, his salary was about $10,000. By 2001, his salary had increased to approximately $148,000. It reached about $300,000 by 2007. Between 2001 and 2007, GSC provided Mr. Jinwright with substantial benefits, in addition to his salary, that he underreported on his tax returns. He received housing allowances of between $130,000 and $160,000 per year, travel allowances of $19,000 to $48,000 per year, payments for his children's tuition and his federal income tax liability, and unlimited use of a luxury car leased by the church in addition to an annual vehicle allowance. Mr. Jinwright also received annual bonuses of $35,000 to $50,000, as well as separate Christmas bonuses. He had use of a GSC credit card and received reimbursements for purported business-related expenses that remained unsubstantiated. Taken together, Mr. Jinwright's total GSC compensation between 2001 and 2007 totaled nearly $3.9 million. During that time, Mrs. Jinwright received similar compensation from GSC in the form of salary, bonuses, allowances, and reimbursements, totaling nearly $1 million. [pg. 2012-2731] The Jinwrights earned more income outside of GSC. Together they earned tens of thousands of dollars in additional income for speaking at other churches that they failed to report to the IRS. Mr. Jinwright established an organization known as A.L. Jinwright Ministries, Inc. (ALJM), purportedly to receive his income from outside speaking engagements. Mrs. Jinwright was responsible for handling ALJM's bank statements and providing the corporation's financial information to the Jinwrights' CPA. Although defendants kept the income earned through this business, GSC paid its operating expenses. Mr. Jinwright also founded the Pastors Consortium. The consortium, with a membership of other pastors, held annual events celebrating the anniversaries of the members' churches. During these celebrations the participants would exchange “gifts” to one another in the form of checks for thousands of dollars. IRS Revenue Agent Linda Polk reconstructed defendants' taxable income for the years 2002–2007 and testified at trial as to her conclusions regarding defendants' income and tax liabilities for those years. She treated as taxable income all GSC compensation by check, all payments for business-related expenses for which there was no substantiation, and payments received by defendants for speaking at other churches. Polk testified that defendants understated their taxable income by $2,486,771 between 2002 and 2007, resulting in a tax deficiency of $664,352 for those years. B. In light of the substantial evidence that the Jinwrights underreported their income from 2002 through 2007, the central dispute at trial concerned the defendants' knowledge of wrongdoing. See Sansone v. United States , 380 U.S. 343, 351 [15 AFTR 2d 611] (1965) (elements of tax evasion under 26 U.S.C. § 7201 are “willfulness; the existence of a tax deficiency, and an affirmative act constituting an evasion or attempted evasion of the tax”) (internal citations omitted). Mr. Jinwright testified that he and Mrs. Jinwright did not intend to evade their tax obligations. To establish that defendants knowingly understated their taxable income, the government introduced evidence of unreported income in the form of allowances, unsubstantiated reimbursements, bonuses and “gifts.” The government also tendered evidence of defendants' extravagant spending that exceeded the income they reported, including over a million dollars spent between 2001–2007 on mortgage and lease payments for two homes and several luxury cars. Between 2001 and 2007, defendants reported total income of slightly more than $1.8 million, but claimed personal deductions of nearly $1.6 million, which would have left them with only about $28,000 to spend per year on nondeductible expenses. Yet the Jinwrights spent substantially more than that. Analysis of defendants' bank accounts revealed that from 2001–2007 the Jinwrights deposited and spent $3 million in excess of their reported income for those years. They also reported income on multiple loan applications between 2000 and 2006 that exceeded the reported income on their corresponding tax returns. They claimed tens of thousands of dollars in deductions for ALJM, even though the corporation had no employees and GSC bore its primary operating costs. The government also presented evidence that the Jinwrights were informed multiple times of their legal duties and continued to breach them. Between 2001 and 2004, GSC undertook several audits to assist the church in obtaining tax-exempt status under I.R.C. § 501(c)(3). The auditors identified several problems with GSC's finances and informed the Jinwrights that they should be reporting their entire compensation package, including reimbursements for unsubstantiated expenses, as well as payments from GSC and other churches designated as “love gifts.” Nonetheless in 2001, for example, the Jinwrights' tax return reported almost $150,000 less than the auditors determined to be Mr. Jinwright's total compensation from GSC for that year. Several GSC employees, including three individuals who worked in the position of finance administrator, similarly told the Jinwrights that the variety of payments they were receiving from GSC constituted taxable income. Yet the Jinwrights failed to inform their personal CPA Terry Lancaster about GSC compensation other than salary and housing allowances, which Lancaster testified he would have included as income in their returns had he known about it. According to the government, the defendants also structured their GSC compensation to conceal it from the IRS. For example, they directed that their non-salary compensation be paid out of the GSC operating account, rather than the payroll account. As a result, those payments were not included on the Jinwrights' W-2 forms and, per Mr. Jinwright's instruction, no 1099 forms were issued to disclose the added income to the IRS. Jacqueline Joyner-Jones, who served as an administrative assistant to the Jinwrights from 2001–2007, testified that the defendants instructed her to forge numerous checks from GSC Women of Faith Ministry, a subsidiary of GSC ministry. The checks were designated as reimbursements [pg. 2012-2732] and included a $15,000 check in 2006 to cover Mr. Jinwright's tax liability. The government presented evidence that defendants instructed GSC employees to alter GSC financial records to mislead both the congregation and the IRS. By 2002, the church began experiencing financial difficulties. According to several former GSC finance administrators, the Jinwrights paired extra months of revenues with fewer months of expenses in GSC's financial reports to conceal the church's level of debt. The financial reports also buried the amount of the Jinwrights' compensation by including all GSC employee salaries in one line item. Several of these misleading reports were submitted to the IRS with GSC's applications for section 501(c)(3) tax-exempt status. Although GSC's section 501(c)(3) application in 2002 understated Mr. Jinwright's total compensation, the IRS nonetheless denied the application on the basis that his compensation was too high. CPA Robert Howze assisted with a second application in 2003, and reported Mr. Jinwright's compensation at more than $600,000 even though Mr. Jinwright had reported only about $280,000 on his tax return. As a result, the IRS began an investigation into the Jinwrights' tax filings and uncovered evidence that between 2002 and 2007 the Jinwrights had understated their taxable income by over $2 million. The government eventually obtained a nineteen-count superseding indictment against the Jinwrights. Their trial resulted in conviction on charges of conspiracy to defraud the United States, tax evasion and aiding and abetting the same, and for Mr. Jinwright, filing false tax returns. C. At sentencing, the district court determined that the Jinwrights had willfully omitted more than $3 million in taxable income from their joint returns, causing a tax loss to the United States and the State of North Carolina of approximately $1.3 million. The court relied on testimony from IRS Agent Polk, who accounted for tax losses from 2002 through 2007, as well as tax losses for the years 1991–1993, 1998–2001, and 2008. In calculating their base offense levels and the amount of restitution each defendant owed, the court held Mrs. Jinwright responsible for losses from 1998–2008, and Mr. Jinwright responsible for losses from 1991–1993 and 1998–2008. The court applied sentencing enhancements for role in the offense (two levels), the use of sophisticated means (two levels), and abuse of a position of trust (two levels). Mr. Jinwright also received a two-level enhancement for obstruction. Each defendant was sentenced within the calculated Guidelines range: Mr. Jinwright to 105 months' imprisonment and restitution in the amount of $1,278,556, and Mrs. Jinwright to 80 months' imprisonment and restitution in the amount of $1,174,921. The Jinwrights appeal their convictions and sentences. They raise a number of challenges and we shall address each in turn. II. [1] The Jinwrights contend that the district court issued two jury instructions that impermissibly relieved the government of its burden of proof. We turn first to the trial court's instruction on willful blindness, against which appellants advance two arguments. First, that the trial evidence did not support the issuance of a willful blindness instruction. Second, that the instruction misstated the legal standard of willful blindness. We review for abuse of discretion both the district court's decision to offer an instruction and the content of that instruction. See United States v. Lighty, 616 F.3d 321, 366, 377 (4th Cir. 2010). The Jinwrights are correct that requests for willful blindness instructions should be handled with caution. Id. at 378. But they come close to seeking the categorical exclusion of such instructions while pointing to no court that has adopted so absolute a rule. There are cases where the evidence demonstrates that a defendant undertook an active and deliberate effort to avoid imbuing himself with the knowledge that would support a criminal conviction. To allow the most clever, inventive, and sophisticated wrongdoers to hide behind a constant and conscious purpose of avoiding knowledge of criminal misconduct would be an injustice in its own right. As much of one, in fact, as a conviction under a plainly impermissible recklessness or negligence standard. See Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2069 (2011) (“The traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge.”). For the reasons that follow, we think the district court properly set a high bar in its instruction for the government to prove willful blindness, while simultaneously recognizing the powerful evidence of such blindness in this case. A. The Jinwrights first contend that the evidence did not support a willful blindness instruction. The trial court issued such an instruction at the government's request and over the Jinwrights' objection. The crimes for which the Jinwrights [pg. 2012-2733] were convicted—both Jinwrights for conspiracy to defraud the United States and tax evasion, Mr. Jinwright also for filing false tax returns—each required the government to prove that the defendants acted willfully. Willfulness with respect to tax crimes has been defined in essence as a knowledge requirement, or the “intentional violation of a known legal duty.” United States v. Pomponio , 429 U.S. 10, 12 [38 AFTR 2d 76-5905] (1976) (per curiam). When applied, the doctrine of willful blindness permits the government to prove knowledge by establishing that the defendant “deliberately shield[ed] [himself] from clear evidence of critical facts that are strongly suggested by the circumstances.” Global-Tech , 131 S. Ct. at 2068–69. Willful blindness may satisfy knowledge in a criminal tax prosecution, where “the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability.” United States v. Poole , 640 F.3d 114, 122 [107 AFTR 2d 2011-2163] (4th Cir. 2011). These conditions were satisfied here. Mr. Jinwright denied knowledge of his legal obligations and testified that he and Mrs. Jinwright did not know that their tax returns contained a deficiency. But the government presented evidence to suggest that defendants were aware of a “high probability” that they were understating their income to the IRS. For example, defendants' tax returns for 2001 to 2007 claimed personal deductions of nearly $1.6 million despite reporting about $1.8 million of taxable income. During those years, defendants deposited into their bank accounts and spent over $3 million more than they reported as income on their tax returns. In addition, the government introduced evidence indicating that the defendants purposely avoided learning the fact of their liability. Between 2002 and 2007, several auditors and GSC administrators advised the defendants that they were underreporting their income, but defendants never raised these concerns with their personal CPA, who could easily have explained the law. The Jinwrights also failed to clarify their alleged confusion regarding the tax treatment of honoraria and “love offerings,” instead simply excluding these payments from income. The Jinwrights' CPA testified that the Jinwrights never informed him of the substantial compensation from GSC that they specifically structured so as not to appear on their W-2s. The government's presentation of evidence that the Jinwrights actually knew of their tax code violations did not preclude it from seeking a willful blindness instruction. United States v. Abbas, 74 F.3d 506, 513 (4th Cir. 1996). In light of Mr. Jinwright's denial of knowledge and the evidence supporting an inference of deliberate ignorance on the part of defendants, the court's provision of a willful blindness instruction was not an abuse of discretion. B. Appellants next take issue with the content of the willful blindness instruction. They contend that the court violated their Fifth Amendment due process rights by allowing the jury to convict them based on recklessness, thereby diminishing the government's burden of proving willfulness. The Fifth Amendment Due Process Clause and the Sixth Amendment jury trial right together require “criminal convictions to rest upon a jury determination that the defendant is guilty of every element of the crime with which he is charged, beyond a reasonable doubt.” United States v. Gaudin, 515 U.S. 506, 510 (1995). A court runs afoul of this protection when it issues an instruction that relieves the government of its burden of proof with respect to an element of a charged offense. See Carella v. California, 491 U.S. 263, 265 (1989) (per curiam). We conclude, however, that “the instructions, taken as a whole, adequately state the controlling law.” United States v. Wills, 346 F.3d 476, 492 (4th Cir. 2003). Appellants rely heavily on the Supreme Court's recent decision in Global-Tech Appliances, Inc. v. SEB S.A., 131 S. Ct. 2060, 2070 (2011), which emphasized that willful blindness has a “limited scope that surpasses recklessness and negligence.” The Court defined a reckless defendant as “one who merely knows of a substantial and unjustified risk of ... wrongdoing” and a negligent defendant as “one who should have known of a similar risk but, in fact, did not.” Id. at 2071. Unlike the instruction at issue in Global-Tech , however, the one here specifically admonished the jury that it was not enough to find that defendants “were reckless or foolish in failing to recognize what was occurring” and that a “showing of negligence is not sufficient to support a finding of willfulness or knowledge.” The court cautioned the jury that a “willful blindness charge does not authorize you to find that the defendants acted knowingly because they should have known what was occurring, or that in the exercise of hindsight they should have known what was occurring, or because they were negligent in failing to recognize what was occurring.” The trial court's instruction here was thus faithful to the willful blindness standard set [pg. 2012-2734] forth in Global-Tech. Global-Tech synthesized the case law on willful blindness to identify “two basic requirements”: “(1) the defendant must subjectively believe that there is a high probability that a fact exists and (2) the defendant must take deliberate actions to avoid learning of that fact.” Global-Tech, 131 S. Ct. at 2070. The district court included this relevant language here, instructing the jury: “If you find that the defendants were aware of a high probability” that they were violating the law “and that the defendants acted with deliberate disregard to these facts, you may find the defendants acted knowingly” (emphasis added). The Jinwrights were convicted before the Global-Tech decision, but the language of the willful blindness instruction still tracks the factors enumerated there by the Supreme Court. At the end of the day, the trial court's instruction required that defendants' ignorance be “solely and entirely the result of a conscious purpose to avoid learning the truth.” Taken as a whole, the instruction plainly conveyed the government's burden to prove beyond a reasonable doubt conduct that transcended recklessness and negligence, which the evidence shows overwhelmingly the defendants' conduct did. See United States v. Martin , 773 F.2d 579, 584 [56 AFTR 2d 85-5922] (4th Cir. 1985). III. A. The Jinwrights also object to the district court's instructions to the jury regarding the tax treatment of payments from an employer to an employee. As part of its burden of proof on the charged offenses, the government was required to prove that the Jinwrights received income that they did not properly report on their tax returns. See, e.g., Boulware v. United States , 552 U.S. 421, 424 [101 AFTR 2d 2008-1065] (2008) (“One element of tax evasion under § 7201 is “the existence of a tax deficiency.””). To that end, the government sought to establish that GSC made payments to the Jinwrights that they were required to include in gross income as compensation from their employer. During the government's case-in-chief, however, three former GSC employees—business administrator Varnell Gray, administrative assistant Jacqueline Joyner-Jones, and finance administrator Travis Mauney—described payments from GSC to the Jinwrights as “gifts.” Because gifts are excludable from gross income, see I.R.C. § 102(a), the government objected in each instance that this testimony would mislead the jury to conclude that the compensation was nontaxable as a matter of law. The court thus instructed the jury three times during the presentation of evidence, and again during the final jury charge, as follows: Any amount transferred by or for an employer to or for the benefit of an employee is income. Such payments are not gifts under the Internal Revenue Code and may not be excluded from gross income regardless of how the payments by the employer to the employee are characterized. Additionally, payments by an employer to an employee, or on the employee's behalf as reimbursements for business-related expenditures, must be included in the gross income of the employee unless the expenses are ordinary and necessary business expenses, the business nature of the expenses has been substantiated, and any unsubstantiated payments have been returned to the employer. The Jinwrights contend that the instruction unconstitutionally directed the jury to find an element of the offenses charged, namely that the Jinwrights received payments that they were required to report as gross income. See Carella, 491 U.S. at 265. For the reasons that follow, we disagree. A district court may instruct the jury on applicable law and is permitted to “instruct the jury before or after the arguments are completed, or at both times.” Fed. R. Crim. P. 30(c). Here, the court did just that. It is apparent that the relationship between an employer and employee is one that is commonly established for some kind of mutual benefit, a dynamic that is altogether different from the “detached and disinterested generosity” that normally prompts the tender of a gift. Comm'r v. Duberstein, 363 U.S. 278, 285 [5 AFTR 2d 1626] (1960). The instruction at issue correctly explained the relevant tax law, which is clear that payments from an employer to an employee are not gifts, but are presumed to be included in gross income. A taxpayer must report as gross income “all income from whatever source derived,” I.R.C. § 61, unless “excluded by law,” 26 C.F.R. § 1.61-1(a); see Comm'r v. Banks, 543 U.S. 426, 433 [95 AFTR 2d 2005-659] (2005). To be sure, § 102(a) of the Code excludes from gross income “the value of property acquired by gift.” I.R.C. § 102(a). But the Code is explicit that payments from an employer to an employee do not constitute gifts under § 102(a), which “shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.” I.R.C. § 102(c). Absent a clarifying instruction, the jury may have mistaken the testimony from several witnesses that GSC's payments to the Jinwrights [pg. 2012-2735] were “gifts” as a legal conclusion that these payments were nontaxable. To prevent juror confusion, the district court alerted the jury that as a matter of law, payments from an employer to an employee do not qualify as nontaxable gifts, irrespective of the employer's intent. But the jury was left to determine that the Jinwrights did in fact receive payments from their employer, GSC—an uncontroversial point which the Jinwrights essentially conceded. From this factual finding, it followed as a matter of law that GSC's payments to the Jinwrights did not constitute gifts qualifying for exclusion from gross income. B. Although payment from an employer does not qualify as an excludable gift, the jury instruction elaborated that employer reimbursements may qualify for deduction from gross income if certain conditions are satisfied. See I.R.C. § 62(a)(2)(A); 26 C.F.R. § 1.62-2. Appellants argue that the court thus created a presumption that any employer payments were includable gross income, impermissibly shifting the burden to defendants to prove that the unreported payments were deductible reimbursements for substantiated business expenses. But we will not fault the district court for being thorough, as well as accurate, in its explanation of the relevant law. Under the tax law, the “burden of clearly showing the right to the claimed deduction is on the taxpayer.” INDOPCO, Inc. v. Comm'r , 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992) (internal quotation marks omitted). Our sister circuits have consistently applied this principle in criminal tax cases—recognizing that “the burden is on the defendant to prove that he had allowable deductions which were not shown in his return once the Government establishes unreported income.” Elwert v. United States, 231 F.2d 928, 933 [49 AFTR 546] (9th Cir. 1956); see also United States v. Tarwater, 308 F.3d 494, 508 [90 AFTR 2d 2002-6930] (6th Cir. 2002) (“[W]hile the government bears the burden of proof throughout any criminal tax case, the government is not required to negate every possible source of nontaxable income, to track down all possible expenses, or to prove the absence [of] any off-setting costs or deductions.”) (collecting cases); United States v. Nathan, 536 F.2d 988, 991 [38 AFTR 2d 76-5282] (2d Cir. 1976) (“The applicable rule here is that uniformly applied in tax evasion cases—that evidence of unexplained receipts shifts to the taxpayer the burden of coming forward with evidence as to the amount of offsetting expenses, if any.”) (quoting Siravo v. United States, 377 F.2d 469, 473 [19 AFTR 2d 1469] (1st Cir. 1967)). This case is unlike United States v. Mogavero, 521 F.2d 625 [36 AFTR 2d 75-5572] (4th Cir. 1975), where the instruction in a net worth tax prosecution actually shifted to the defendant the government's ultimate burden of proof. Here, it is plain that the government retained its burden of proof on every element of the charges, including the burden to establish that the Jinwrights failed to report income to the IRS. Before the burden shifted to the defendants to demonstrate the deductibility of unreported income, the government established that the Jinwrights received several millions of dollars from their employer that they omitted from gross income. This offer of proof created a presumption that the income was taxable as a matter of law. In turn, the defendants failed to establish that these payments satisfied the reimbursement criteria under a plan qualifying for deduction pursuant to I.R.C. § 62. See 26 C.F.R. § 1.62-2. Because the instruction contained no constitutional infirmity, but correctly guided the jury on the relevant law, it did not constitute an abuse of discretion. IV. In addition to instructing the jury on the tax treatment of employer-employee payments, the trial court limited the defense's ability to cross-examine Gray, Joyner-Jones, and Mauney about their belief that payments from GSC to the Jinwrights constituted gifts. The Jinwrights insist that the court's evidentiary limits burdened their ability to disprove the offense element of willfulness, which for purposes of criminal tax offenses requires “the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty.” Cheek v. United States, 498 U.S. 192, 201 [67 AFTR 2d 91-344] (1991). Appellants argue that the belief within the church community that the GSC payments were nontaxable gifts, even if mistaken on the law, was relevant to show the Jinwrights' own ignorance of their legal duties. A defendant's Fifth Amendment right to due process guarantees “the right to a fair opportunity to defend against the State's accusations,” which, under the Sixth Amendment, includes the “rights to confront and cross-examine witnesses and to call witnesses in one's own behalf.” Chambers v. Mississippi , 410 U.S. 284, 294–95 (1973). The right to cross-examine, however, “is not absolute.” Id. at 295. A trial court retains “discretion in limiting needless or [pg. 2012-2736] confusing inquiry into collateral matters.” United States v. Cole , 622 F.2d 98, 100 (4th Cir. 1980) (per curiam). Moreover, a defendant's Sixth Amendment right ““to be confronted with the witnesses against him”” does “not give defendants a plenary right to elicit friendly testimony.” United States v. Crockett, 813 F.2d 1310, 1313 (4th Cir. 1987) (quoting U.S. Const. amend. VI). Instead, “that is the purpose of the Sixth Amendment right of a defendant “to have compulsory process for obtaining witnesses in his favor.”” Id. (quoting U.S. Const. amend. VI). The decision to limit cross-examination was a reasonable precaution, in conjunction with the jury instruction on employer-employee payments, to prevent juror confusion regarding the taxability of income from GSC. The testimony that the GSC payments were “gifts”—although offered by witnesses called by the government—was favorable to the defense and contrary to the government's effort to establish that the payments were taxable gross income. The defense's desire for the witnesses to elaborate on their beliefs under cross-examination therefore fell outside “the confrontational essence of the Confrontation Clause.” Id. at 1314. Appellants mistakenly conflate a defendant's right to “challenge adverse testimony,” id. at 1314, with his Sixth Amendment right “to have compulsory process for obtaining witnesses in his favor,” U.S. Const. amend. VI, a right with which the district court did not interfere. In fact, the court explicitly invited the Jinwrights to recall the favorable witnesses during their case-in-chief in the event the testimony proved relevant to the defense. Cheek v. United States, 498 U.S. 192 [67 AFTR 2d 91-344] (1991), is not to the contrary. Cheek held that a good faith misunderstanding of one's legal duties is a defense in a criminal tax prosecution “whether or not the claimed belief or misunderstanding is objectively reasonable.” Id. at 202. The trial court in Cheek therefore ran afoul of the Sixth Amendment when it instructed the jury to disregard the defendant's testimony that he misunderstood his obligations under the tax law. Id. at 203. Here, by contrast, the district court did not impede the Jinwrights' good faith defense. In fact, the court admitted, and the jury considered, Mr. Jinwright's testimony that he and Mrs. Jinwright were ignorant that they were violating the tax law. Moreover, Cheek emphasized that it “would of course be proper to exclude evidence having no relevance or probative value with respect to willfulness.” Id. None of the witnesses at issue claimed to have discussed with the Jinwrights his or her belief that the payments from GSC were gifts and no evidence established at that point that the Jinwrights relied on a community-wide misunderstanding of the law. The district court therefore properly concluded that testimony from these witnesses on cross-examination about their own beliefs was not relevant to the Jinwrights' ignorance of the law. Nonetheless, as appellants concede, the trial court left open the possibility of recalling these witnesses during the defense's case once Mr. Jinwright testified and a foundation had been laid for a Cheek defense. Defendants' failure to do so rests squarely on their shoulders. We shall therefore uphold the evidentiary ruling of the district court. V. A. [2] Mrs. Jinwright contends that the district court erred by calculating her tax loss amount at greater than $1 million, resulting in a base offense level of 22. See U.S.S.G. §§ 2T1.1, 2T4.1. The loss amount is critical to sentencing in criminal tax cases simply because the greater the fraud upon the Treasury, the more substantial the punishment. For an offense involving tax evasion or a fraudulent or false return, tax loss is “the total amount of loss that was the object of the offense.” U.S.S.G. § 2T1.1(c)(1). It includes losses arising from relevant criminal conduct that is “part of the same course of conduct or common scheme or plan.” United States v. Fleschner , 98 F.3d 155, 160 [78 AFTR 2d 96-6760] (4th Cir. 1996); see U.S.S.G. § 2T1.1 cmt. n.2. In the case of conspiracy, relevant conduct that occurred during commission of, or in preparation for, the offense of conviction extends to “all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity.” U.S.S.G. § 1B1.3(a)(1)(B). The district court determined that Mrs. Jinwright was responsible for a combined tax loss of $1,174,921 for the years 1998–2008, adopting in large part the loss amounts calculated by IRS Agent Polk. Mrs. Jinwright does not challenge the accuracy of the loss computations, but argues instead that the district court erroneously included loss amounts that were not attributable to her criminal conduct. The jury acquitted Mrs. Jinwright of tax evasion for years preceding 2005 and, according to appellant, thereby discredited any evidence that she had criminal knowledge before 2005. We are not persuaded. Although relevant conduct under the Guidelines “must be criminal conduct,” see United States v. Dove, 247 F.3d 152, 155 (4th Cir. 2001), an acquittal “does not necessarily establish the criminal de- [pg. 2012-2737] fendant's lack of criminal culpability,” United States v. Scott, 437 U.S. 82, 106 (1978) (Brennan, J., dissenting), and a “jury cannot be said to have “necessarily rejected” any facts when it returns a general verdict of not guilty,” United States v. Watts, 519 U.S. 148, 155 (1997) (per curiam). Instead, the “different standards of proof that govern at trial and sentencing” enable the sentencing court to find a fact by a preponderance of the evidence that the jury may not have found beyond a reasonable doubt. Id. at 155. The sentencing court was therefore entitled to “consider conduct of the defendants underlying charges of which they had been acquitted” in determining the appropriate sentence. Id. at 149. What is more, as part of its relevant conduct analysis the district court was required to consider evidence of losses not contained in the indictment but relevant to the offense of conviction. United States v. Hayes , 322 F.3d 792, 801 [91 AFTR 2d 2003-1324]–02 (4th Cir. 2003); see also United States v. Jones, 31 F.3d 1304, 1316 (4th Cir. 1994) (relevant conduct may include criminal acts that preceded the date the convicted offense was committed). Thus the district court did not err in considering Mrs. Jinwright's criminal conduct before 2005. The court moreover provided a “sufficient explanation of its rationale” to support its tax loss finding. United States v. Wilkinson, 590 F.3d 259, 269 (4th Cir. 2010). The district court found a pattern of “long-term conduct” that “went on for, in [the] Court's eyes, approximately a decade.” Unlike the three tax evasion counts of which Mrs. Jinwright was acquitted, both she and her husband were convicted of conspiracy. Although count one of the indictment charged the Jinwrights with conspiring to defraud the United States between 2002 and 2008, the indictment alleged overt acts in furtherance of the conspiracy committed as early as 1991 and 1998. The government presented evidence at trial to support these allegations, offering proof that the Jinwrights underreported their income and filed false joint tax returns beginning in 1991. The district court therefore had ample basis to conclude that losses arising from acts committed before 2002 occurred “as part of the same course of conduct or common scheme or plan.” Fleschner, 98 F.3d at 160. And it held Mrs. Jinwright, as a co-conspirator, responsible for all reasonably foreseeable acts taken by Mr. Jinwright in furtherance of the joint scheme. See U.S.S.G. § 1B1.3(a)(1)(B). The court found that the Jinwrights' tax deficiencies from 1991 to 1993, arising largely from unreported GSC compensation to Mr. Jinwright, were not reasonably foreseeable by Mrs. Jinwright. Thus, it declined to count those amounts in calculating Mrs. Jinwright's tax loss amount. By contrast, the court found that Mrs. Jinwright was “responsible for all the other years ... that's §98 through 2008” because “based on the evidence at trial, she began to get much more involved in the operation of the church and of the A.L. Jinwright Ministries.” Mrs. Jinwright's increasing role at GSC supports the conclusion that by 1998 she was a participant in the conspiracy who could reasonably foresee acts by Mr. Jinwright in furtherance of it. Together with the court's finding that the pattern of criminal conduct spanned about a decade, the court sufficiently explained its inclusion of tax loss amounts for Mrs. Jinwright for 1998–2008. B. Mr. and Mrs. Jinwright argue that the district court erred in calculating the amount of restitution they owed pursuant to the Mandatory Victims Restitution Act (MVRA), 18 U.S.C. § 3663A. Mr. Jinwright was ordered to pay restitution in the amount of $1,278,556 based on tax loss amounts for 1991–1993 and 1998–2008, and Mrs. Jinwright to pay $1,174,921 based on tax loss amounts for 1998–2008. The Jinwrights contend that the district court erred when it ordered them to pay restitution based on losses prior to the years for which they were convicted of criminal conduct. They rely on our observation in United States v. Llamas, 599 F.3d 381, 391 (4th Cir. 2010), that “in the context of a conspiracy, a restitution award under the MVRA is limited to the losses attributable to the specific conspiracy offenses for which the defendant was convicted.” Appellants, however, read too much into Llamas, which merely held that a defendant may not be ordered to pay restitution for losses caused by other similar fraudulent schemes in which he did not participate and for which he was not convicted. It did not pass on the issue before us here. Rather, our precedent suggests that the Jinwrights were appropriately ordered to pay restitution for losses arising from conduct underlying their convictions for conspiracy. The MVRA orders that a defendant make restitution to the “victim of the offense.” 18 U.S.C. § 3663A(a)(1). With respect to “an offense that involves as an element a scheme, conspiracy, or pattern of criminal activity,” a victim is defined broadly to include “any person directly harmed by the defendant's criminal conduct in the course of the scheme, conspiracy, or pattern.” Id. § 3663A(a)(2). We interpreted identi- [pg. 2012-2738] cal language under the other federal restitution statute, the Victim and Witness Protection Act, 18 U.S.C. § 3663(a)(2), as “expanding district courts' authority to grant restitution” with respect to losses arising from conspiracy offenses. United States v. Henoud , 81 F.3d 484, 488 (4th Cir. 1996). Specifically, a district court is authorized to include in restitution the “losses that result from a criminal scheme or conspiracy, regardless of whether the defendant is convicted for each criminal act within that scheme.” Id. at 488. In Henoud we held that the district court did not therefore err by “ordering restitution for losses caused by acts for which the defendant was not convicted.” Id. at 489. Rather, the district court properly looked to the “specific conduct underlying the offense of conviction,” meaning all “acts comprising the scheme to defraud.” Id. We think a similar course is appropriate here and see no basis to distinguish the identical language in the MVRA. The conduct underlying the Jinwrights' conspiracy conviction extended back to 1991, the year the indictment alleges that acts in furtherance of the conspiracy began. As discussed, the district court determined that Mrs. Jinwright participated in the conspiracy—and could reasonably foresee acts in furtherance of it—as early as 1998. As for Mr. Jinwright, the court credited the trial evidence that his pattern of fraudulent conduct began in 1991. This included evidence that beginning in 1991, the Jinwrights' joint return underreported their taxable income and the Jinwrights filed mortgage applications that listed higher income than that reported to the IRS. The district court therefore did not err in including the tax losses for 1991–1993 in Mr. Jinwright's restitution amount. VI. The Jinwrights object to the district court's imposition of a two-level enhancement under section 2T1.1(b)(2) of the Sentencing Guidelines for their use of “sophisticated means.” U.S.S.G. § 2T1.1(b)(2). The enhancement applies to “especially complex or especially intricate offense conduct pertaining to the execution or concealment of an offense.” Id. cmt. n.4. Such conduct may include “hiding assets or transactions, or both, through the use of fictitious entities, corporate shells, or offshore financial accounts.” Id. The district court's decision to apply the sophisticated means enhancement was not in error. The Jinwrights' failure to accurately report their income would not alone support imposition of the sophisticated means enhancement. The enhancement requires some means of execution that separates the offense before us from the ordinary or generic. As the Seventh Circuit has explained, the “average criminal tax fraud ... involves some concealment; “sophisticated” tax fraud must require more.” United States v. Kontny, 238 F.3d 815, 820 [87 AFTR 2d 2001-390]–21 (7th Cir. 2001). On the other hand, a defendant need not utilize the most complex means possible to conceal his fraudulent activities in order for the court to find that he used sophisticated means. United States v. Madoch, 108 F.3d 761, 766 [79 AFTR 2d 97-1329] (7th Cir. 1997). The court need only find “the presence of efforts at concealment that go beyond (not necessarily far beyond ...) the concealment inherent in tax fraud.” Kontny , 238 F.3d at 821. A sentencing court should consider the cumulative impact of the criminal conduct, for the “total scheme” may be “sophisticated in the way all the steps were linked together.” United States v. Jackson, 346 F.3d 22, 25 (2d Cir. 2003); see also United States v. Halloran, 415 F.3d 940, 945 (8th Cir. 2005) (upholding enhancement where “certain aspects of [defendant's] scheme were not especially complex or especially intricate” but “his total scheme was undoubtedly sophisticated”). So it was here. The Jinwrights' scheme spanned many years and involved multiple organizations, including GSC and the Pastors Consortium. The court adopted the presentence report, which identified a variety of sophisticated techniques used by defendants to conceal their tax evasion. The Jinwrights structured their compensation so as to prevent the inclusion of income on their W-2 forms, drawing payments from the GSC operating account, rather than the payroll account. They disguised wages as allowances and reimbursements for which they instructed GSC employees not to issue 1099 forms to disclose additional income to the IRS. They directed GSC employees to manipulate GSC financial records to conceal their income and misrepresented their financial situation to the IRS in GSC's application for section 501(c)(3) tax-exempt status. The Pastors Consortium provided another elaborate way of concealing income through what the court found was a kickback scheme. Specifically, the court found that there was an implied quid pro quo between the consortium members to exchange thousands of dollars from discretionary church funds to speak at each other's church anniversary events. Ample trial evidence supported the district court's conclusion that these actions were proven for purposes of sentencing by a preponderance of the evidence. Taken together, the assorted methods of executing the offense in- [pg. 2012-2739] volved especially intricate offense conduct that rose to the level of sophisticated means. See United States v. Wayland, 549 F.3d 526, 529 (7th Cir. 2008) (holding that scheme of health care fraud, “which lasted nine years and involved a series of coordinated fraudulent transactions, was complex and sophisticated” even if defendant's “individual actions could be characterized as unsophisticated”). Appellants urge, however, that the sentencing court improperly relied on evidence from the trial record that was not included in the presentence reports, such as defendants' use of A.L. Jinwright Ministries as a shell corporation to convert funds donated in support of Mr. Jinwright's ministerial services into additional income. But central to the district court's broad discretion to fashion an appropriate sentence is the ability to find facts and to determine their relevance to the sentencing questions at hand. See United States v. Dean , 604 F.3d 169, 174 (4th Cir. 2010). Although Federal Rule of Criminal Procedure 32 identifies information that should be included in the presentence report, we see nothing there that constrains a sentencing judge's discretion to consider facts in the record but outside the PSR, which in this case was necessarily less comprehensive than the 90,000 pages of documentary evidence admitted at trial. Instead, Rule 32(d) requires that the PSR identify “all applicable guidelines” and “any factor relevant to” the “appropriate kind of sentence.” Fed. R. Crim. P. 32(d). Here the PSR did just that by specifying the applicable provisions of the Guidelines, including all enhancements relevant to the Jinwrights' sentencing. It therefore sufficed that the PSR provided notice that sophisticated means was a factor relevant to sentencing and supplied a non-exhaustive list of defendants' sophisticated techniques that amply supported application of the enhancement in and of themselves. And it was well within the court's discretion to supplement the examples identified in the PSR with additional facts adduced at trial, especially because defendants were able to contest the relevance of those facts at the sentencing hearing and the court explained its finding on the record. See U.S.S.G. § 6A1.3(a) (“When any factor important to the sentencing determination is reasonably in dispute, the parties shall be given an adequate opportunity to present information to the court regarding that factor.”). VII. The district court imposed a two-level enhancement for defendants' abuse of a position of trust “that significantly facilitated the commission or concealment of the offense.” U.S.S.G. § 3B1.3. It is undisputed that as spiritual leaders of the GSC community and custodians of the church's finances, the Jinwrights held a position of trust with respect to GSC's membership. The district court found that they abused their position when committing relevant criminal conduct under U.S.S.G. § 1B1.3, specifically the embezzlement of money from GSC to facilitate the tax evasion offense. As the court found, for three years the Jinwrights routinely instructed Jacqueline Joyner-Jones to forge checks to them from the GSC Women of Faith Ministry. Through this scheme, the Jinwrights unlawfully converted about $60,000 from the GSC coffers and evaded paying taxes on those funds. The Jinwrights argue, however, that an abuse of trust enhancement may not be based on relevant conduct under U.S.S.G. § 1B1.3. We need not pass on the district court's specific justification in isolation, because the wide range of conduct in the record amply supports the enhancement. We may affirm the district court on the basis of ““any conduct [in the record] that independently and properly should result in an increase in the offense level” by virtue of the enhancement.” United States v. Garnett, 243 F.3d 824, 830 (4th Cir. 2001). Such a basis exists here because GSC was a secondary victim of the tax evasion scheme itself. It is well settled in our circuit that “whether a defendant held a position of trust must be examined from the perspective of the victim.” United States v. Godwin , 272 F.3d 659, 671 (4th Cir. 2001). And it is undisputed that the government is the primary victim of the Jinwrights' scheme to avoid paying taxes owed to the IRS. We have recognized, however, that the offense of conviction may harm secondary victims as well. See United States v. Akinkoye, 185 F.3d 192, 204 (4th Cir. 1999); United States v. Turner, 102 F.3d 1350, 1360 (4th Cir. 1996). Although the Jinwrights urge us not to extend the concept of secondary victims to tax crimes, we are not persuaded that the only possible victim of a tax offense is the government. See United States v. Bhagavan , 116 F.3d 189, 193 [79 AFTR 2d 97-2755] (7th Cir. 1997) (rejecting the “notion that there can be only one victim of a tax evasion scheme—the United States”). In this case, GSC was victimized by the Jinwrights' efforts to conceal their tax crimes from detection. The Jinwrights exploited their authority at GSC not only to increase their compensation, but also to defraud the government and to conceal their efforts to evade taxes. A position of [pg. 2012-2740] trust may ““significantly contribute” to the defendant's execution or obfuscation of the offense simply “by making the detection of the offense or the defendant's responsibility for the offense more difficult.”” United States v. Brack, 651 F.3d 388, 393 (4th Cir. 2011) (quoting U.S.S.G. § 3B1.3 cmt. n.1). Here, the Jinwrights used their position of influence to enlist GSC employees and board members to conceal a significant portion of their income from the IRS. They directed several GSC finance administrators to pay their non-salary compensation from the GSC operating account and to exclude it from their W-2s. Exercising his authority over financial matters, Mr. Jinwright overruled employee suggestions that extra compensation be disclosed to the IRS on 1099 forms. By instructing Joyner-Jones to forge checks as a source of additional income, the Jinwrights not only embezzled from the church, but also concealed these receipts from the IRS. The district court also found that the Jinwrights told employees to falsify annual reports in order to conceal the percentage of GSC's operating expenses that were attributable to them. These reports were submitted to the IRS with GSC's application for tax-exempt status in furtherance of the conspiracy to defraud the government. Each of these measures, however, also victimized the GSC congregation, which was financially burdened by the Jinwrights' acts of concealment. In addition to disguising the Jinwrights' total compensation, the falsified reports hid GSC's financial difficulties by offsetting profits for the entire annual period with expenses from only eleven months of the year. As several GSC employees testified, Mr. Jinwright misled the congregation in order to maintain morale and sustain donations to the church. And as the court found at sentencing, he also misrepresented the church's financial health to prevent alterations to the budget and reductions to his compensation. The concealment drove the church deeper into financial crisis by forestalling remedial measures. As the dire financial condition of the church came to the attention of the board, the Jinwrights rebuffed efforts to trim the budget and reduce their compensation. Several board members who called attention to defendants' fraudulent acts were replaced or forced to resign. The abuse of trust enhancement enables the sentencing court to punish those who wield their power to criminally take advantage of those who depend upon them most. As leaders of GSC, the Jinwrights were entrusted with the spiritual wellbeing and financial stewardship of their religious community. They exploited the trust of their unsuspecting congregation to conceal criminal acts from the government, as well as the church, and to maintain an extravagant lifestyle lived at the church's expense. We thus affirm the district court's application of the abuse of trust enhancement. VIII. For the foregoing reasons, the judgment of the district court is AFFIRMED. © 2013 Thomson Reuters/RIA. All rights reserved.    |    Privacy Statement



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