Wednesday, January 29, 2014

6663 NEW CIVIL FRAUD CASE JANUARY 2014


John M. Potter v. Commissioner.
U.S. Tax Court, Dkt. No. 10730-12, TC Memo. 2014-18, January 27, 2014.An individual who operated a gentlemen’s club was liable for tax deficiencies and Code Sec. 6663 fraud penalties for four years at issue. The IRS established that there was some underpayment for each tax year and that some portion of the underpayment for each year was due to fraud. The taxpayer acknowledged that he intentionally underreported his income. He underreported income for multiple years both to evade corporate-level income tax and his own income to conceal that he was skimming hundreds of thousands of dollars annually to his personal bank account. He maintained two sets of books for both himself and for his club which was evidence of fraudulent intent. He wired cash to his personal bank account, and kept the amounts below $10,000 to avoid the bank reporting to the IRS and to conceal income His business had extensive dealings in cash which was a badge of fraud as it was indicative of the taxpayer’s attempt to conceal income and avoid scrutiny of his finances. The taxpayer asserted that he cooperated with the government; however, he did so only when he realized that the search of his business turned up the illicit sales ledgers and unexplained cash.—CCH.
Stephen J. Dunn, for petitioner; John W. Stevens, for respondent.
Discussion
A. Fraud Penalty
“If any part of any underpayment of tax required to be shown on a return is due to fraud,” section 6663(a) imposes a penalty of 75% of the portion of the underpayment due to fraud. Respondent has the burden of proving fraud, and he must prove it by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Richardson v. Commissioner, [ 2008-1 ustc ¶50,101]509 F.3d 736, 743 (6th Cir. 2007), aff'g [ Dec. 56,475(M)] T.C. Memo. 2006-69. To sustain his burden, respondent must establish two elements: (1) that there was some underpayment of tax for each taxable year at issue; and (2) that at least some portion of the underpayment for each year was due to fraud. Hebrank v. Commissioner, [ Dec. 40,488] 81 T.C. 640, 642 (1983).
If a fraud penalty is sought for multiple tax years, respondent's burden of proving fraud “applies separately for each of the years.” Vanover v. Commissioner, [ Dec. 58,990(M)] T.C. Memo. 2012-79, 103 T.C.M. (CCH) 1418, 1420 (quoting Temple v. Commissioner, [ Dec. 54,104(M)] T.C. Memo. 2000-337, aff'd, [ 2003-1 ustc ¶50,411] 62 Fed. Appx. 605 (6th Cir. 2003)). [*7] If respondent proves that a portion of an underpayment is attributable to fraud for a particular year, then “the entire underpayment shall be treated as attributable to fraud” unless the taxpayer shows, by a preponderance of the evidence, that some portion was not so attributable. Sec. 6663(b).
We turn to the second element of the penalty, fraudulent intent. 3
Fraud is intentional wrongdoing designed to evade tax believed to be owing. Neely v. Commissioner, [ Dec. 54,241] 116 T.C. 79, 86 (2001). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Estate of Pittard v. Commissioner, [ Dec. 34,775] 69 T.C. 391, 400 (1977). Fraud is not to be presumed or based upon mere suspicion. Petzoldt v. Commissioner, [ Dec. 45,566] 92 T.C. 661, 699-700 [*8] (1989). However, because direct proof of a taxpayer's intent is rarely available, fraudulent intent may be established by circumstantial evidence. Grossman v. Commissioner, [ 99-2 ustc ¶50,631] 182 F.3d 275, 277-78 (4th Cir. 1999), aff'g [ Dec. 51,589(M)] T.C. Memo. 1996-452. Respondent satisfies his burden of proof by showing that “the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes.” Parks v. Commissioner, [ Dec. 46,545] 94 T.C. 654, 661 (1990). The taxpayer's entire course of conduct may be examined to establish the requisite intent, and an intent to mislead may be inferred from a pattern of conduct. Webb v. Commissioner, [68-1 ustc ¶9341] 394 F.2d 366, 379 (5th Cir. 1968), aff'g [ Dec. 27,918(M)] T.C. Memo. 1966-81; Stone v. Commissioner, [ Dec. 30,767] 56 T.C. 213, 224 (1971).
Circumstances that may indicate fraudulent intent, commonly referred to as “badges of fraud,” include but are not limited to: (1) understating income; (2) maintaining inadequate records; (3) giving implausible or inconsistent explanations of behavior; (4) concealing income or assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal activities; (7) providing incomplete or misleading information to one's tax preparer; (8) lack of credibility of the taxpayer's testimony; (9) filing false documents, including false income tax returns; (10) failing to file tax returns; and (11) dealing in cash. Spies v. United [*9] States, [ 43-1 ustc ¶9243] 317 U.S. 492, 499 (1943); Morse v. Commissioner, [ Dec. 55,366(M)] T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff'd, [ 2005-2 ustc ¶50,533] 419 F.3d 829 (8th Cir. 2005). No single factor is dispositive; however, the existence of several factors “is persuasive circumstantial evidence of fraud.” Vanover v. Commissioner, 103 T.C.M. (CCH) at 1420-1421.
Some factors have no application here. For example, because this case was submitted fully stipulated, petitioner had no occasion to testify and his credibility cannot be evaluated. Other factors may be regarded as neutral. After thorough review of the record, we conclude on balance that the “badges of fraud” overwhelmingly demonstrate that petitioner acted with fraudulent intent for each tax year at issue.
1. Understating Income
A pattern of substantially underreporting income for multiple years is strong evidence of fraud, particularly if the understatements are not satisfactorily explained. Vanover v. Commissioner, 103 T.C.M. (CCH) at 1421. Petitioner admitted in his 2009 guilty plea that he substantially underreported the income of Potter's Pub for 2002-05. He underreported this income both to evade the corporate-level income tax and to conceal the fact that he was skimming hundreds [*10] of thousands of dollars of corporate income annually into his personal bank account.
 This factor weighs heavily in favor of finding fraudulent intent.
2. Maintaining Inadequate Records
Fraudulent intent can be inferred from a failure to maintain adequate books and records, including the maintenance of false books and records. See Ark. Oil & Gas, Inc. v. Commissioner, [ Dec. 50,162(M)] T.C. Memo. 1994-497, 68 T.C.M. (CCH) 887, 891. Double bookkeeping provides clear circumstantial evidence of fraudulent intent. See Spies, 317 U.S. at 499; Medlin v. Commissioner, [ Dec. 55,246(M)] T.C. Memo. 2003-224, aff'd, 138 Fed. Appx. 298 (11th Cir. 2005).
3. Concealing Income or Assets
A willful attempt to evade tax may be inferred from a taxpayer's concealment of income or assets. Spies, 317 U.S. at 499. The pattern of structuring bank deposits is clearly emblematic of an intent to conceal income. See McClellan v. CommissionerT.C. Memo. 2013-251, at *27-*28. By systematically manipulating both his business and personal income, petitioner was able to accumulate substantial assets (including cash) that he likewise concealed.
[*12] 4. Providing Incomplete or Misleading Information
Evidence that a taxpayer provided incomplete or misleading information to his return preparer is further circumstantial evidence of fraud. Morse v. Commissioner, 419 F.3d at 833; Vanover v. Commissioner, 103 T.C.M. (CCH) at 1042. A taxpayer acts fraudulently when he conceals income from his return preparer. See Korecky v. Commissioner, [ 86-1 ustc ¶9232] 781 F.2d 1566 (11th Cir. 1986), aff'g [ Dec. 41,878(M)] T.C. Memo. 1985-63.
Once a fraudulent return has been submitted, however, subsequent conduct, such as filing amended returns, does not purge the original fraudulent conduct. Badaracco v. Commissioner, 464 U.S. 386, 393-394 (1984). Initial acts of supplying false records to his return preparer for 2002-05 constitute clear evidence of his fraudulent intent.
5. Filing False Income Tax Returns
 Petitioner pleaded guilty under section 7206(1) to one count of filing a false income tax return on behalf of Potter's Pub for 2002.
[*14] 6. Extensive Dealings in Cash
Extensive dealings in cash are a badge of fraud because they are indicative of a taxpayer's attempt to conceal income and avoid scrutiny of his finances. See Evans v. Commissioner, T.C. Memo. 2010-199, 100 T.C.M. (CCH) 215, 218, aff'd, 507 Fed. Appx. 645 (9th Cir. 2013). Fraudulent intent may be inferred when a taxpayer handles his affairs in a manner designed “to avoid making the records usual in transactions of the kind.” Spies, 317 U.S. at 499.
. These wire transfers were invariably made in amounts less than $10,000 in order to avoid detection. During the search of Potter's Pub Federal agents seized more than $200,000 in cash from the premises. Although conducting a cash business does not necessarily prove fraud, “[w]hen coupled with attempts to conceal transactions or avoid the requirement of reporting cash transactions, it becomes more probative.”Valbrun v. Commissioner, T.C. Memo. 2004-242, 88 T.C.M. (CCH) 385, 387.
[*15] Petitioner contends that he lacked fraudulent intent because he is uneducated and unsophisticated and had to hire tax professionals to file his personal and corporate tax returns. Petitioner's lack of education and sophistication is irrelevant. In this context the tax laws he violated are not esoteric. Petitioner knowingly concealed more than $2 million in business gross receipts in an effort to evade tax he knew to be owing. He was sophisticated enough to structure his wire transfers in amounts under $10,000 in the hope of escaping bank reporting to the IRS. And he knowingly failed to provide his tax professional with the clandestine sales ledgers that he personally prepared and which he knew recorded the actual receipts of his business.
Petitioner asserts that he “went to extraordinary lengths to cooperate with the Government.” But he began to cooperate only after he knew that the jig was up. It was only after the search of his business turned up the illicit sales ledgers and $200,000 in unexplained cash that petitioner provided his accountant with the books and records needed to prepare amended returns. These efforts may have helped petitioner in his negotiations with the Department of Justice in his criminal [*16] tax case. But they do not purge the fraudulent intent that accompanied the original filing of his false individual tax returns for 2002-05. 5

The amounts of restitution, if any, that petitioner made after filing his original tax returns have no bearing on the issues currently before the Court— namely, the tax deficiencies and penalties for which petitioner is liable for the tax years 2002-05. That is not to say that petitioner will not receive credit, when respondent proceeds to collect the tax liabilities sustained in this case, for any restitution payments he has made that have not been previously accounted for.
[*17] But such collection matters are generally not within our jurisdiction in a deficiency proceeding commenced under section 6213(a)See Abdallah v. Commissioner,T.C. Memo. 2013-279, at *32-*34.
B. Section 6651(a)(1) Additions to Tax
Respondent assessed late-filing additions to tax under section 6651(a)(1) for 2002 and 2003. Petitioner's Forms 1040 for both years were indisputably filed late. He did not file his 2002 return until April 26, 2004, and he did not file his 2003 return until February 7, 2005. Petitioner in his briefs did not address the late-filing additions to tax, and we deem this issue conceded. See, e.g.Gmelin v. Commissioner, T.C. Memo. 1988-338, 55 T.C.M. (CCH) 1410, 1421 n.19 (finding one of the Commissioner's arguments to have been abandoned when he failed to address it on brief), aff'd without published opinion, 891 F.2d 280 (3d Cir. 1989).
C. Conclusion
For the reasons set forth above, we conclude that respondent has established by clear and convincing evidence that petitioner's underpayments of tax were attributable to fraud for the taxable years 2002-05. Petitioner has failed to submit credible evidence showing that any portions of these underpayments were not due to fraud. Accordingly, we hold that petitioner is liable for the tax deficiencies and [*18] section 6663 civil fraud penalties for 2002-05, and for the section 6651(a)(1) late-filing additions to tax for 2002 and 2003.
To reflect the foregoing,
Decision will be entered for respondent.

Footnotes
1
All statutory references are to the Internal Revenue Code as in effect for the tax years at issue. All rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.
2
Federal law requires financial institutions to report currency transactions in excess of $10,000 as well as multiple currency transactions that aggregate more than $10,000 in a single day. These transactions are reported to the IRS on Currency Transaction Reports. See 31 C.F.R. sec. 103.22 (2000).
3

4

5
Petitioner errs in relying on Avenell v. Commissioner, T.C. Memo. 2012-32, 103 T.C.M. (CCH) 1180. In that case the taxpayer deposited payments due his corporation into his personal bank account. In concluding that the Commissioner failed to prove fraud by clear and convincing evidence, we relied on the taxpayer's cooperation with authorities (including his voluntary disclosure of an offshore bank account) and his credible testimony that his actions stemmed, not from an intent to evade tax, but from an intent to shield his company's assets from judgment collection. See id., 103 T.C.M. (CCH) at 1181-1182.





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

No comments: