No statute of limitations for tax fraud

In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed at any time. See sec. 6501(c)(1). A fraudulent return deprives the taxpayer the bar of the statutory period of limitations for that year. See Badaracco v. Commissioner, 464 U.S. 386, 396 (1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961), affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102 T.C. 380, 385 (1994).


Industrial Electrical and Instrumentation, Inc., v. Commissioner.

Dkt. No. 19355-05 , TC Memo. 2008-84, April 3, 2008.



[Code Sec. 6501]

Statute of limitations: Understatement of income: Fraud. --
The IRS was not barred by the statute of limitations from assessing a tax liability against a corporation for two tax years for amounts received by three of its shareholders for services performed in the name of the corporation. Because the corporation filed false or fraudulent returns for those years by intentionally underreporting its income, there was no statute of limitations on assessing a deficiency against it with respect to such returns.

[Code Sec. 6663]

Penalties: Understatement of income: Fraud penalty. --
A corporation was required to include in income for two tax years amounts received by three of its shareholders for services performed in the name of the corporation. The corporation was also liable for a civil fraud penalty for the two tax years. The indications of fraud were that the corporation understated its gross receipts and taxable income, maintained inadequate records, failed to provide a plausible or consistent explanation for the unreported income, filed false documents by not disclosing the identity of the three shareholders on the corporation's returns, and paid its workers in cash to conceal its activities. Further, the three shareholders concealed income by not depositing checks made out to the corporation into the corporation's bank account but instead cashing them or depositing them into third-party accounts. --CCH.


Robert A. Shupack, for petitioner; W. Robert Abramitis and Justin L. Campolieta, for respondent.


MEMORANDUM FINDINGS OF FACT AND OPINION




OPINION




I. Unreported Income
The Commissioner's determinations generally are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933); Durando v. United States, 70 F.3d 548, 550 (9th Cir. 1995). Once there is evidence of actual receipt of funds by the taxpayer, the taxpayer has the burden of proving that all or part of those funds are not taxable. Tokarski v. Commissioner, 87 T.C. 74 (1986).

There is ample evidence linking petitioner to an income-producing activity (IEI), and respondent has demonstrated that petitioner received unreported income.



II. Fraud
The fraud penalty is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from a taxpayer's fraud. See Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Fraud is intentional wrongdoing on the part of the taxpayer with the specific purpose to evade a tax believed to be owing. See McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975).

The Commissioner has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a); Rule 142(b). To satisfy the burden of proof, the Commissioner must show: (1) An underpayment exists; and (2) the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990). The Commissioner must meet this burden through affirmative evidence because fraud is never presumed. See Beaver v. Commissioner, 55 T.C. 85, 92 (1970).

A. Underpayment

An "underpayment" is the amount by which the tax imposed exceeds the excess of the sum of the amount shown as the tax by the taxpayer on his return, plus amounts not so shown that were previously assessed (or collected without assessment), over the amount of rebates made. See sec. 6664(a).

Petitioner argues that there is no underpayment because the money the Pennys earned performing electrical contracting services was income either to the Pennys or to Omni. Further, petitioner claims that it was not actively engaged in the performance of electrical contracting services during the years at issue but merely allowed the Pennys to use its name, its credit, and Mr. White's electrical contracting license. We disagree.

The Pennys wanted to engage in the electrical contracting business but did not have a license to do so. In fact, the State of Florida enjoined Stewart from being in the electrical contracting business. As a result, the Pennys made a deal with Mr. White whereby they would become officers and shareholders of IEI and thus have access to a license and be able to engage in the electrical contracting business.

Income is be taxed to the individual or entity which earns it. Lucas v. Earl, 281 U.S. 111 (1930). Petitioner cannot contract away its liability for Federal income taxes, nor can it anesthetize us to the fact that it tried to do so. Gibson v. Commissioner, T.C. Memo. 1982-374. Further, taxation of income cannot be escaped by anticipatory arrangements assigning it to someone else. Id. The "Agreement to Qualify" was an anticipatory agreement that attempted to assign all of petitioner's income to the Pennys and/or Omni despite the fact that the work was performed by or on behalf of petitioner.


Respondent has shown by clear and convincing evidence that during the taxable years at issue, petitioner engaged in the electrical contracting business and did not report all of its gross receipts on its tax returns. Proceeds of checks that were not deposited into petitioner's checking account were not reported on petitioner's tax return. Instead of depositing the checks into petitioner's bank account, the Pennys, officers and shareholders of petitioner, either cashed the checks at check cashing stores or endorsed them over to Classic or to the Harlan Trust.

.

Accordingly we conclude that petitioner understated its income in both 1999 and 2000.

B. Fraudulent Intent

The Commissioner must prove that a portion of the underpayment for each taxable year at issue was due to fraud. Sec. 7454(a); see also Profl. Servs. v. Commissioner, 79 T.C. 888, 930 (1982). The existence of fraud is a question of fact to be resolved from the entire record. See Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978). Because direct proof of a taxpayer's intent is rarely available, fraud may be proven by circumstantial evidence, and reasonable inferences may be drawn from the relevant facts. See Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984). A taxpayer's entire course of conduct can be indicative of fraud. See Stone v. Commissioner, 56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969). The following badges of fraud have been used to prove fraud: (1) Understating income, (2) maintaining inadequate records, (3) implausible or inconsistent explanations of behavior, (4) concealment of income or assets, (5) failing to cooperate with tax authorities, (6) engaging in illegal activities, (7) an intent to mislead which may be inferred from a pattern of conduct, (8) lack of credibility of the taxpayer's testimony, (9) filing false documents, (10) failing to file tax returns, and (11) dealing in cash. No single factor is necessarily sufficient to establish fraud. A combination of a number of factors constitutes persuasive evidence. Below we discuss the factors that we find to be present.

In the case of a corporation, such as petitioner, the fraudulent activities of a corporate agent or officer may be imputed to the corporation if: (1) The wrongdoer so dominates the corporation that it is, in reality, a creature of his will, his alter ego or, (2) the agent was acting in behalf of, and not against the interests of, the corporation. M.J. Laputka & Sons, Inc. v. Commissioner, T.C. Memo. 1981-730.

1. Understating Income

Petitioner, as we found above, understated its gross receipts in both 1999 and 2000, and as a result also understated its taxable income in both years. Only funds deposited into petitioner's bank account were reported on its return. However, petitioner earned significantly more than was deposited into the account. Petitioner argues that the money from electrical contracting services belonged to Omni or the Pennys individually. We disagree. See supra.

2. Maintaining Inadequate Records

Petitioner kept a "transaction detail" report that was little more than a reflection of the activity of petitioner's corporate account. Petitioner's "transaction detail" report did not reflect the checks that were cashed at check cashing stores or endorsed to Classic or the Harlan Trust. The report did not reflect all of petitioner's business.

3. Implausible or Inconsistent Explanations of Behavior

In his testimony, Mr. White acknowledged that he was aware that petitioner was working on the Archdiocese job and that it was a "significant" job. Mr. White claimed that the income from this work was the Pennys', he did not know how much the job was worth, and it was not his business to know. Despite these claims, Mr. White endorsed a check from the archdiocese payable to petitioner in the amount of $132,332.80.

4. Concealment of Income or Assets

The stockholders and officers of petitioner concealed petitioner's income through various methods. In 1999 officers and shareholders of petitioner endorsed over to Classic checks totaling $300,445 payable to petitioner.18 In 1999, officers and shareholders of petitioner cashed at check cashing stores checks totaling $1,143,655.10 made out to petitioner.19 In 2000, officers and shareholders of petitioner cashed at check cashing stores checks totaling $1,568,7335.50 made out to petitioner.20 Also in 2000, officers and shareholders of petitioner endorsed over to the Harlan Trust checks totaling $851,123 made out to petitioner.21 By not depositing the money in the corporate account and distributing the money from the corporation, petitioner avoided "double taxation" on millions of dollars.

Officers and shareholders of petitioner exhibited a pattern of concealment of IEI's income during the years at issue. The incidents were not isolated, but were continuous throughout the 2-year period.

5. An Intent To Mislead

The behavior described in relation to the concealment of income also indicates an intent to mislead. Once again, the behavior was continuous on the part of petitioner's officers and shareholders.

6. Filing False Documents

Petitioner's 1999 and 2000 tax returns indicate that Mr. White was the sole shareholder. The two tax returns failed to disclose that the Pennys were shareholders and officers who collectively owned 49 percent of petitioner.22 As we have found, the returns understated petitioner's income by large amounts for both 1999 and 2000.

7. Dealing in Cash

During 1999 and 2000, petitioner dealt in cash. The cashing of checks at check cashing stores has been detailed supra. In addition, petitioner paid its workers in cash. Michael Delucia and Jamie Massey testified that petitioner paid them in cash for their services performed for petitioner.

8. Petitioner's Arguments

Petitioner relies heavily on the argument that the Pennys were not officers of petitioner and that Mr. White was the only officer. Petitioner argues that Mr. White's actions were not fraudulent, and therefore neither were petitioner's. We disagree. Mr. White endorsed a check payable to IEI in the amount of $132,332.80 that he knew was never reported on petitioner's tax return. Mr. White was more involved with petitioner than he claimed. Mr. White knew that petitioner had a major project at LaSalle and work at other locations, yet the documents he turned over to Mr. Cole did not include much of the income those jobs generated for petitioner. Pursuant to Fla. Stat. Ann. sec. 607.0830 (West 2007), a director must discharge his or her duties in good faith, with ordinary care, and in a manner he or she believes to be in the best interests of the corporation. Even if we assume arguendo that Mr. White's conduct on behalf of petitioner was not fraudulent, the Pennys were officers and shareholders of petitioner; and their actions in their capacity as officers and shareholders of petitioner also establish that petitioner is liable for the civil fraud penalty. The Pennys, who were 49-percent shareholders, were, together with Mr. White, the dominant figures of petitioner. See M.J. Laputka & Sons, Inc. v. Commissioner, supra. Petitioner's counsel admitted at trial that Stewart was a "thief, a liar, and a crook". Stewart, however, was the general manager of IEI's Miami branch, a vice president, and together with Lance, Sean, and Donna ran that branch of petitioner on a day-to-day basis.

All of the electrical contracting work that petitioner undertook in 1999 and 2000 was the result of the Pennys' efforts. Pursuant to Florida law, when in the usual course of business of a corporation an officer or other agent is held out by the corporation, or has been permitted to act for it or manage its affairs, in such a way as to justify third persons who deal with him in inferring or assuming that he is doing an act within the scope of his authority, the corporation is bound thereby. Edward J. Gerrits, Inc. v. McKinney, 410 So. 2d 542 (Fla. Dist. Ct. App. 1982).

We conclude that respondent has proven by clear and convincing evidence that petitioner fraudulently underpaid its taxes for 1999 and 2000.

Once the Commissioner establishes that any portion of the underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud and subject to a 75-percent penalty, except with respect to any portion of the underpayment that the taxpayer establishes is not attributable to fraud. Sec. 6663(a) and (b). Petitioner has not proven that any part of either underpayment is not attributable to fraud. Therefore, the underpayments for 1999 and 2000 are subject to the 75-percent penalty.



III. Period of Limitations
Petitioner argues that respondent cannot assess the tax liabilities petitioner reported on its tax returns because the statutory periods of limitations have expired.

In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed at any time. See sec. 6501(c)(1). A fraudulent return deprives the taxpayer the bar of the statutory period of limitations for that year. See Badaracco v. Commissioner, 464 U.S. 386, 396 (1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961), affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102 T.C. 380, 385 (1994).

We found that petitioner filed fraudulent income tax returns for 1999 and 2000; therefore, the periods of limitations on assessment for both of these years remain open.

In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered for respondent.