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Monday, July 30, 2012
Friday, July 27, 2012
Tax Court rejection of an "offer in compromise"
The the decision to accept or reject an "offer in compromise", as well as the terms and conditions agreed to, are left to the discretion of the Commissioner., Sec. 301.7122- 1(a)(1), (c)(1), Proced. & Admin. Regs. The Commissioner will usually compromise a liability only if the liability exceeds the taxpayer's reasonable collection potential. Kreit Mech. Assocs., Inc. v. Commissioner, 137 T.C. 123, 134 (2011). Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469 F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006). An "offer in compromise" is only rejected by the Tax Court only if it was arbitrary, capricious, or without sound basis in fact or law.
A-Valey Engineers, Inc. v. Commissioner, TC Memo 2012-199 ,
Code Sec(s) 6330; 6404; 7122.
A-VALEY ENGINEERS, INC., Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s):
6330; 6404; 7122
Docket: Docket
No. 17863-09L.
Date Issued:
07/17/2012
HEADNOTE
XX.
Reference(s): Code Sec. 6330; Code Sec. 6404; Code Sec. 7122
Syllabus
Official Tax Court Syllabus
Counsel
Shelley C. Dugan, for petitioner.
Harry J. Negro, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: The petition in this case was filed in
response to a notice of determination concerning collection action sustaining a
final notice of intent to levy with respect to income tax and accuracy-related
penalties for tax years ending September 30, 1998 through 2000. The issues for
decision are:
(1) whether petitioner was entitled to challenge assessed
accuracy-related penalties at its collection due process (CDP) hearing. We hold
petitioner was not;
(2) whether a settlement officer abused his discretion in
rejecting petitioner's request for abatement of interest. We hold that he did
not; and
(3) whether either settlement officer 1 assigned to this
case abused his or her discretion in rejecting petitioner's proposed
offers-in-compromise. We hold that the settlement officers did not.
FINDINGS OF FACT
At the time its petition was filed, petitioner was a
Pennsylvania corporation which had its principal place of business in
Pennsylvania. Lothar Budike, Sr., is the president of petitioner, and he and
his wife, Alexandra Budike, own 100% of the company stock. Petitioner reports
its Federal income tax on a fiscal year ending September 30.
After an audit, respondent determined deficiencies in
petitioner's income tax for the taxable years ending September 30, 1998 through
2000. Respondent also determined accuracy-related penalties for those tax
years. On March 8, 2006, petitioner filed a petition with the Tax Court at
docket No. 4839-06 disputing the deficiencies and penalties. On November 20,
2008, the Court entered a stipulated decision under which petitioner was liable
for deficiencies totaling $214,051 and accuracy-related penalties totaling
$21,405.
On February 3, 2009, a Letter 1058, Final Notice—Notice of
Intent to Levy and Notice of Your Right to a Hearing, was sent to petitioner
for the unpaid tax liabilities for the taxable years ending September 30, 1998
through 2000. In response, petitioner timely submitted a Form 12153, Request
for a Collection Due Process or Equivalent Hearing. On the Form 12153
petitioner stated that it “should not be responsible for interest and
penalties”.
On April 15, 2009, a CDP hearing was held with the first
settlement officer. During the CDP hearing petitioner raised the issues of
penalty abatement and interest abatement. The settlement officer advised
petitioner that he could not consider penalty and interest abatement because
petitioner had signed a stipulated decision for the years at issue. Petitioner
also inquired about an offer-in-compromise. The settlement officer explained
the process and requested that petitioner submit a Form 656, Offer in
Compromise (OIC), if interested in pursuing an OIC.
A few weeks after the CDP hearing, the settlement officer
received petitioner's OIC. The OIC proposed to settle petitioner's outstanding
liabilities for $27,000, and petitioner made a $5,400 payment toward the
$27,000 when it submitted the OIC. 2 Petitioner also submitted a Form 433-B,
Collection Information Statement for Businesses, business checking account
statements for the period January 1 through March 31, 2009, and a copy of a
Form 1120, U.S. Corporation Income Tax Return, for the taxable year ending
September 30, 2008, which was signed by Mr. Budike on April 20, 2009.
On June 17, 2009, the settlement officer advised petitioner
that the OIC would not be accepted because petitioner's Form 1120 submitted
with the OIC showed loans to shareholders of $443,887 as of October 1, 2007,
and $468,888 as of September 30, 2008. The Form 1120 showed no loans from
shareholders to the corporation at either the beginning or end of the taxable
year. In addition, petitioner's returns for the periods ending September 30,
2006 and 2007, reported loans to shareholders of $451,000 and $441,000,
respectively. Petitioner's representative asserted that the tax returns were in
error and that Mr. and Mrs. Budike were actually lending petitioner money.
Petitioner provided the settlement officer with a letter from its accountant
which stated that the loans to shareholders reported on petitioner's Federal
income tax returns for the taxable years 2005, 2006, 2007, and 2008 did not
accurately reflect petitioner's financial position. Mr. Budike also submitted a
letter which asserted that petitioner owed Mr. and Mrs. Budike money.
On July 10, 2009, the settlement officer mailed petitioner a
Notice of Determination Concerning Collection Action Under Section 6320 3
and/or 6330 which rejected petitioner's OIC and sustained respondent's
collection action in full. On July 27, 2009, petitioner filed a petition for
lien or levy action under sections 6320(c) and 6330(d). The petition alleges
that: (1) respondent erred because he did not abate penalties; (2) respondent
erred because he did not abate interest; and (3) respondent abused his
discretion in not approving petitioner's OIC.
Respondent later acknowledged that the settlement officer
had incorrectly determined that petitioner could not raise the interest
abatement claim during the CDP hearing. As a result, on November 10, 2009,
respondent filed a motion to remand the case for a new CDP hearing on the
interest abatement issue. On November 16, 2009, we issued an order granting
respondent's motion.
On March 3, 2010, the settlement officer met with petitioner
to consider the interest abatement issue. Petitioner requested that interest
and penalties for the taxable years ending September 30, 1998 through 2000, be
abated in full. Petitioner stated that the revenue agent assigned to the audit
of petitioner's returns was biased against petitioner and that he overstated
income and denied expenses because of this bias. 4 Petitioner also made various
claims that the Appeals officer assigned to the income tax deficiency case
sought to cover up improper actions taken by the revenue agent and repeatedly
delayed the Appeals process. However, the settlement officer determined that
delays during the prior Appeals process were the fault of petitioner.
After considering the information petitioner provided, the
settlement officer determined that there was no delay attributable to the
actions of respondent's officers or employees. On March 10, 2010, the
settlement officer issued a Supplemental Notice of Determination Concerning
Collection Action Under Section 6320 and/or 6330 (supplemental notice of
determination) denying petitioner's request for interest abatement. The
settlement officer's supplemental notice of determination specifically
discussed interest abatement under section 6404.
On October 20, 2009, petitioner submitted a second OIC,
proposing to settle its outstanding liabilities for $18,000 5 on grounds of
doubt as to collectibility and effective tax administration. 6 As with the
first OIC, petitioner also submitted a
Form 433-B, business checking account statements for the
period January 1 through March 31, 2009, and a copy of an income tax return on
Form 1120 for the taxable year ending September 30, 2008, signed by Mr. Budike
on July 10, 2009. The Form 1120 submitted with the second OIC (second 2008 Form
1120) was different from the Form 1120 submitted with the first OIC (first 2008
Form 1120); 7 while both Forms 1120 showed loans to shareholders of $443,887 as
of October 1, 2007, the second 2008 Form 1120 showed no loans to shareholders
at the end of the taxable year and loans from shareholders of $252,112 at the
end of the taxable year. 8
Although petitioner's second OIC was submitted before the
case was remanded to the Appeals Office on November 16, 2009, petitioner's
second OIC was not considered at the second CDP hearing. 9 On January 20, 2011
(after the case was restored to our general docket following the second CDP
hearing), petitioner filed a motion requesting that the Court remand this case
to the Appeals Office for consideration of petitioner's second OIC. Respondent
did not object to petitioner's motion, and we granted petitioner's motion to
remand on January 24, 2011.
A different settlement officer was assigned to consider the
second OIC on remand. This settlement officer scheduled a CDP hearing for May
3, 2011, and requested the following be provided by petitioner and Mr. and Mrs.
Budike: (1) substantiation of all loans made to and/or received from
petitioner's shareholders;
(2) copies of bank statements for all business and personal
accounts for the period April 1, 2010, through March 31, 2011; (3) an income
and expense statement for the period April 1, 2010, through March 31, 2011; (4)
copies of petitioner's amended Forms 1120; (5) a copy of petitioner's Form 1120
for the taxable year ending September 30, 2010; (6) a list of all of
petitioner's real property; and (7) a list of all of petitioner's accounts
receivable. Petitioner's representative sent a letter stating that petitioner
had already provided all required documentation with the submission of the
second OIC. At the CDP hearing on May 3, 2011, the settlement officer advised
petitioner's representative that petitioner had not provided the documents and
information requested. Petitioner's representative again stated that sufficient
information had already been provided with the submission of the second OIC.
On June 1, 2011, the Appeals Office issued a supplemental
notice of determination rejecting petitioner's second OIC on grounds of doubt
as to collectibility because “The Settlement Officer could not fully evaluate
the merits of *** [the] OIC” because petitioner did not provide the requested
information. The supplemental notice of determination also stated that “Your
request for consideration of the OIC under *** [effective tax administration]
can not be considered because the liability is owed by a corporation.” The case
returned to our general docket, and a trial was held on November 15, 2011.
OPINION
I. Abatement of Penalties Petitioner asserts that respondent
erred by not abating the accuracy-related penalties assessed for the taxable
years ending September 30, 1998 through 2000. Petitioner's only argument is
that it was entitled to challenge the underlying penalty liabilities in a CDP
hearing.
Section 6330 generally provides that the Commissioner cannot
proceed with the collection of taxes by way of a levy on a taxpayer's property
until the taxpayer has been given notice of and the opportunity for an
administrative review of the matter and, if dissatisfied, with judicial review
of the administrative determination. Sego v. Commissioner, 114 T.C. 604, 608
(2000). A taxpayer may challenge the existence or amount of an underlying
liability in a CDP hearing under section 6330 if the taxpayer did not receive
any statutory notice of deficiency for such tax liability or did not otherwise
have an opportunity to dispute such tax liability. Sec. 6330(c)(2)(B); Sego v.
Commissioner, 114 T.C. at 609. The term “underlying tax liability” includes
penalties assessed under the deficiency procedures. See Katz v. Commissioner,
115 T.C. 329, 338-339 (2000).
Respondent argues that petitioner had an opportunity to
challenge the penalties in the prior Tax Court case, which resulted in entry of
a stipulated decision. As a result, respondent asserts that petitioner was not
entitled to challenge the existence or amounts of the accuracy-related penalties
in the CDP hearing. Petitioner claims respondent's argument is disingenuous
because “petitioner did not know and could not have known the amount of
interest and penalties that would be assessed as the case was 10 years old and
that many of the delays and setbacks were due to and the fault of the IRS.”
We find petitioner's argument unconvincing. Plainly,
petitioner had the opportunity to dispute its liability for the
accuracy-related penalties during the prior Tax Court case but chose to agree
to a stipulated decision. Petitioner was therefore not entitled to challenge
the existence or amount of the penalties during any later CDP hearing. See Katz
v. Commissioner, 115 T.C. at 339 (”If a taxpayer has been issued a notice of
deficiency or had the opportunity to litigate the underlying tax liability ***
the taxpayer is precluded from challenging the existence or amount of the
underlying tax liability.”).
II. Abatement of Interest Petitioner asserts that respondent
erred by not abating interest assessed for the taxable years ending September
30, 1998 through 2000. Considering the facts of this case, we find that there
was no abuse of discretion in denying petitioner's request for abatement of
interest.
The Commissioner is permitted to abate the assessment of
interest on any deficiency attributable to any unreasonable error or delay by
an officer or employee of the IRS in performing a ministerial or managerial
act. 10Sec. 6404(e)(1)(A). A ministerial act is a procedural or mechanical act
that does not involve the exercise of judgment or discretion by the
Commissioner. Sec. 301.6404-2(b)(2), Proced. & Admin. Regs. A managerial
act is “an administrative act that occurs during the processing of a taxpayer's
case involving the temporary or permanent loss of records or the exercise of
judgment or discretion relating to management of personnel.” Sec.
301.6404-2(b)(1), Proced. & Admin. Regs.
Congress did not intend the interest abatement statute to be
used routinely; rather, interest abatement is granted “where failure to abate
interest would be widely perceived as grossly unfair.” Lee v Commissioner, 113
T.C. 145, 149 (1999) (quoting H.R. Rept. No. 99-426, at 844 (1985), 1986-3 C.B.
(Vol. 2) 1, 844, and S. Rept. No. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3)
1, 208). This Court has jurisdiction under section 6404(h) to review the
Commissioner's decision as to whether taxpayers are entitled to abatement of
interest for the relevant tax years. Gray v. Commissioner, 138 T.C. , (slip op.
at 17-21) (Mar. 28, 2012) (”Our jurisdiction to review denials of section 6404
interest abatement requests made in section 6330 proceedings is well
established.”). To prevail, a taxpayer must prove that the Commissioner abused
his discretion by exercising it arbitrarily, capriciously, or without sound
basis in fact or law. Woodral v. Commissioner, 112 T.C. 19, 23 (1999). In
reviewing for abuse of discretion, we generally consider only the arguments,
issues, and other matters that were raised at the hearing or otherwise brought
to the attention of the Appeals Office. Giamelli v. Commissioner 129 T.C. ,
107, 115 (2007); Tinnerman v. Commissioner T.C. Memo. 2010-150 [TC Memo
2010-150], aff'd, 448 , Fed. Appx. 73 (D.C. Cir. 2012).
During the March 3, 2010, CDP hearing on the first remand, petitioner
argued that abatement of interest was warranted because of various improper
actions taken by the revenue agent and the Appeals officer assigned to
petitioner's deficiency case which caused delays. 11 After considering
petitioner's arguments, the settlement officer determined that delays during
the prior Appeals process were the fault of petitioner and denied petitioner's
request for abatement of interest.
Considering the record, we do not believe that petitioner
has proved that any ministerial or managerial error occurred, or that
respondent otherwise abused his discretion in denying petitioner's request for
abatement of interest. Petitioner has accused IRS employees of a multitude of
illegal, delay-causing activities but has provided no evidence that such
activities actually occurred. We therefore find respondent did not abuse his
discretion in denying petitioner's request for abatement of interest.
III. Rejection of Petitioner's OICs A taxpayer may raise
collection alternatives such as an OIC at a CDP hearing, and the Commissioner
is authorized to compromise any civil case arising under the internal revenue
laws. Secs. 6330(c)(2)(A)(iii), 7122(a). Section 301.7122-1(b), Proced. &
Admin. Regs., sets forth three grounds for the compromise of a liability: (1)
doubt as to liability; (2) doubt as to collectibility; or (3) promotion of
effective tax administration. The only ground for us to consider is doubt as to
collectibility. 12
I
Petitioner asserts that both settlement officers abused
their discretion by: (1) “Using a erroneous/invalid Tax Return to make their
evaluations and determinations”; (2) delaying review of the second OIC; and (3)
requesting additional information from petitioner before considering the second
OIC. Petitioner's first and third arguments both relate to the first 2008 Form
1120, which reported that Mr. and Mrs. Budike owed $468,888 to petitioner as a
result of loans made to shareholders. We will therefore consider those
arguments together, after first addressing petitioner's second argument.
A. Delay in the Processing and Review of Petitioner's Second
OIC Petitioner claims respondent acted arbitrarily and maliciously because he
refused to process and review the second OIC timely even though he had it in
his possession. Petitioner also argues that the second OIC should be deemed to
be accepted by respondent because of the delay.
Regarding deemed acceptance of the second OIC by respondent,
petitioner mistakenly cites section 523(b) 13 of the proposed Tax Relief Act of
2005, which would have amended section 7122(f) to provide:
Any offer-in-compromise submitted under this section shall
be deemed to be accepted by the Secretary if such offer is not rejected by the
Secretary before the date which is 24 months after the date of the submission
of such offer (12 months for offers-in-compromise submitted after the date
which is 5 years after the date of the enactment of this subsection). *** S.
2020, 109th Cong., sec. 523(b) (2005). This proposed statute led petitioner to
incorrectly believe that the second OIC should have been accepted or rejected
within 12 months.
A version of S. 2020 sec. 523(b) was enacted in the Tax
Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, sec.
509(b)(2), 120 Stat. at
This section does not exist in the final public law. 363.
However, the enacted statute allows for a 24-month period for the Secretary to
reject an OIC, providing:
Any offer-in-compromise submitted under this section shall
be deemed to be accepted by the Secretary if such offer is not rejected by the
Secretary before the date which is 24 months after the date of the submission
of such offer. For purposes of the preceding sentence, any period during which
any tax liability which is the subject of such offer-in-compromise is in
dispute in any judicial proceeding shall not be taken into account in
determining the expiration of the 24-month period. Id. Petitioner submitted its
second OIC on October 20, 2009, and it was rejected on June 1, 2011. Therefore,
the second OIC was properly rejected within 24 months of the date on which it
was submitted and petitioner's argument fails. See sec. 7122(f). We therefore
find the second OIC was not deemed to be accepted by respondent.
We also reject petitioner's related claim that respondent
arbitrarily and maliciously delayed consideration of the second OIC. While
petitioner did submit the second OIC before the March 3, 2010, CDP hearing, it
provided no evidence that it sought to raise the second OIC during that
hearing. 14 Shortly thereafter the case was restored to our general docket
until the second remand on January 24, 2011, during which time respondent was
unable to consider the second OIC. We also note that respondent did not object
to petitioner's motion to remand for consideration of the second OIC and
promptly held a CDP hearing regarding the second OIC after the motion was
granted. Considering these facts, we find that respondent did not arbitrarily
and maliciously delay consideration of the second OIC.
B. Alleged Loans to Shareholders Petitioner claims the
second settlement officer requested additional information from petitioner
before the third CDP hearing solely because the first 2008 Form 1120 (submitted
with the first OIC, but not filed with the IRS) showed outstanding loans to
shareholders totaling $468,888 as of September 30, 2008. Similarly, petitioner
faults the first settlement officer for rejecting the first OIC on account of
the loans to shareholders reflected on the first 2008 Form 1120 because the
first 2008 Form 1120 was never filed with the IRS. Petitioner asserts that the
settlement officers “were so determined to punish the Taxpayer and prove that
*** [it] did something wrong that they knowingly, willfully and malicious used
and relied on an erroneous/invalid Tax Return and not the official Tax Return
logged into the IRS Computer System to make their final evaluations and
determinations”. Petitioner also asserts that the second settlement officer
made a blanket request for information which would have no impact on the case
resolution. Petitioner claims such actions were in violation of Internal
Revenue Manual protocol.
We disagree with petitioner. Although it is true that the first
2008 Form 1120 was never filed with the IRS as petitioner's tax return, it was
submitted with petitioner's first OIC. That Form 1120, as well as the Forms
1120 for the taxable years ending September 30, 2006 and 2007 (which were filed
with and processed by the IRS), all reported outstanding loans to shareholders
in excess of $440,000. In addition, the second 2008 Form 1120 (which was filed
with the IRS) reported loans to shareholders of $443,887 as of October 1, 2007.
The settlement officers encountered evidence in the
administrative record that outstanding loans to petitioner's shareholders may
have existed at the time the first and second OICs were filed. As a result,
both settlement officers requested information from petitioner which was not
available to the settlement officers internally. 15
A thorough verification of the taxpayer's *** [Collection
Information Statement], Form 433-A and/or Form 433-B, involves reviewing
taxpayer submitted documentation and information available from internal sources.
As a general rule, additional documentation should not be requested when the
information is readily available from internal sources or it would not change
the recommendation.
In addition, IRM pt. 5.8.5.3.1.3 (Oct. 22, 2010), states
that
If not present in the file when assigned for investigation
and internal sources are not available or indicate a discrepancy, appropriate
documentation should be requested from the taxpayer either verbal or written,
to verify the information on the *** [Collection Information Statement]. A
request for additional information and verification should be based on the
taxpayer's circumstances and the information must be necessary to make an
informed decision on the acceptability of the taxpayer's OIC. Do not make a
blanket request for information that would have no impact on the case
resolution. Do not request any information that is available internally.
The first settlement officer was told by petitioner's
representatives that the outstanding loans to shareholders reported on
petitioner's tax returns were incorrect. Petitioner also supplied that
settlement officer with a letter from its accountant which stated that the
filed tax returns were incorrect, as well as a letter from Mr. Budike which
stated that petitioner actually owed Mr. and Mrs. Budike money. In spite of the
letters, the settlement officer rejected petitioner's first OIC as a result of
the outstanding loans to shareholders reported on the first 2008 Form 1120 and
other prior filed tax returns. The second settlement officer requested the
following information from petitioner and Mr. and Mrs. Budike to substantiate
petitioner's claims regarding the loans to shareholders as stated on the second
2008 Form 1120: (1) substantiation of all loans made to and/or received from
petitioner's shareholders; (2) copies of bank statements for all business and
personal accounts for the period April 1, 2010, through March 31, 2011; (3) an
income and expense statement for the period April 1, 2010, through March 31,
2011; (4) copies of petitioner's amended Forms 1120;
(5) a copy of petitioner's Form 1120 for the taxable year
ending September 30, 2010; (6) a list of all of petitioner's real property; and
(7) a list of all of petitioner's accounts receivable. When petitioner refused
to submit the requested information, the settlement officer rejected the second
OIC.
Both settlement officers encountered multiple pieces of
evidence in the administrative record which stated that outstanding loans to
shareholders payable to petitioner existed, including the first Form 1120.
Additional information relevant to the shareholder loan issue was then
requested, and both OICs were rejected when petitioner failed to provide
satisfactory evidence that no loans to shareholders existed. The information
requested of petitioner was not available to the settlement officers internally
(indeed, many of the internally available records stated that loans to
shareholders existed), and no blanket request from petitioner was made. We
therefore find the respondent's determinations were not arbitrary, capricious,
or without sound basis in fact or law.
IV. Conclusion We hold that petitioner was not entitled to
challenge assessed accuracy-related penalties at its CDP hearing. We further
hold that respondent did not abuse his discretion in rejecting petitioner's
request for an abatement of interest or in rejecting petitioner's proposed
OICs. We therefore sustain respondent's determinations.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we conclude they are
moot, irrelevant, or without merit.
To reflect the foregoing, Decision will be entered for
respondent.
1
As described infra,
two settlement officers were assigned to this case at different times
2
Petitioner's OIC
stated that the bases for the OIC were both doubt as to collectibility and
effective tax administration. With regard to the effective tax administration
claim, petitioner stated that payment of the tax liability would result in an
economic hardship for Mr. and Mrs. Budike.
3
Unless otherwise
indicated, all section references are to the Internal Revenue Code in effect at
all relevant times.
4
Petitioner alleged
numerous illegal activities undertaken by the revenue agent in connection with
the investigation into petitioner's tax returns.
5
Over a 12-month
period petitioner fully paid the $18,000 proposed OIC.
6
As with the first
OIC, the effective tax administration ground for the second OIC was based on
petitioner's claim that payment of the tax liability would result in an
economic hardship for Mr. and Mrs. Budike.
7
The relationship
between the two Forms 1120 for the taxable year ending September 30, 2008, is
somewhat complex. While petitioner's representatives believed the first 2008
Form 1120 was filed with the Internal Revenue Service (IRS), petitioner never
actually filed the first 2008 Form 1120 but only sent it to the first
settlement officer with the first OIC. The second 2008 Form 1120 was the only
Form 1120 for the taxable year ending September 30, 2008, which was actually
filed with and processed by the IRS.
8
The second 2008 Form
1120 did not show any loans from shareholders at the beginning of the taxable
year ending September 30, 2008.
9
The only issue
considered at the second CDP hearing was petitioner's request for abatement of
interest.
10
Such a determination
under sec. 6404 may be made in a sec. 6330 CDP hearing. Gray v. Commissioner,
138 T.C. , (slip op. at 17-21) (Mar. 28, 2012). We note that (as was the case
in Gray) the settlement officer's supplemental notice of determination specifically
discussed interest abatement under sec. 6404 in denying petitioner's request
for interest abatement.
11
Respondent denied
petitioner's allegations at trial and the revenue agent's case activity record
indicated that delays during the Appeals process were the fault of petitioner.
12
As discussed supra,
petitioner is not entitled to challenge the underlying liabilities because
petitioner previously entered into a stipulated decision regarding them. In
addition, petitioner has failed to argue or present sufficient evidence to
prevail on grounds of effective tax administration. We thus do not reach the
issue (not addressed by the parties) regarding whether a corporation may be
entitled to an OIC on effective tax administration grounds.
13
This section does
not exist in the final public law.
14
Indeed, petitioner's
January 20, 2011, motion to remand for consideration of the second OIC states
that “On March 3, 2010, Appeals met with Petitioner to consider the interest
abatement issue” and that “On March 9, 2010, Petitioner called the IRS *** to
find out what happened to the second offer-in-compromise.”
15
Internal Revenue
Manual (IRM) pt. 5.8.5.3.1 (Oct. 22, 2010), states that
§ 7122 Compromises.
(a) Authorization.
The Secretary may compromise any civil or criminal case
arising under the internal revenue laws prior to reference to the Department of
Justice for prosecution or defense; and the Attorney General or his delegate
may compromise any such case after reference to the Department of Justice for
prosecution or defense.
(b) Record.
Whenever a compromise is made by the Secretary in any case,
there shall be placed on file in the office of the Secretary the opinion of the
General Counsel for the Department of the Treasury or his delegate, with his
reasons therefor, with a statement of—
(1) The amount of tax assessed,
(2) The amount of
interest, additional amount, addition to the tax, or assessable penalty,
imposed by law on the person against whom the tax is assessed, and
(3) The amount
actually paid in accordance with the terms of the compromise.
Notwithstanding the foregoing provisions of this subsection,
no such opinion shall be required with respect to the compromise of any civil
case in which the unpaid amount of tax assessed (including any interest,
additional amount, addition to the tax, or assessable penalty) is less than
$50,000. However, such compromise shall be subject to continuing quality review
by the Secretary.
(c) Rules for
submission of offers-in-compromise.
(1) New Law Analysis Partial payment required with
submission.
(A) Lump-sum offers.
(i) New Law Analysis In general. The submission of any
lump-sum offer-in-compromise shall be accompanied by the payment of 20 percent
of the amount of such offer.
(ii) New Law Analysis
Lump-sum offer-in-compromise. For purposes of this section, the term “lump-sum
offer-in-compromise” means any offer of payments made in 5 or fewer
installments.
(B) Periodic payment
offers.
(i) New Law Analysis In general. The submission of any
periodic payment offer-in-compromise shall be accompanied by the payment of the
amount of the first proposed installment.
(ii) New Law Analysis
Failure to make installment during pendency of offer. Any failure to make an
installment (other than the first installment) due under such
offer-in-compromise during the period such offer is being evaluated by the
Secretary may be treated by the Secretary as a withdrawal of such
offer-in-compromise.
(2) Rules of
application.
(A) New Law Analysis Use of payment. The application of any
payment made under this subsection to the assessed tax or other amounts imposed
under this title with respect to such tax may be specified by the taxpayer.
(B) New Law Analysis
Application of user fee. In the case of any assessed tax or other amounts
imposed under this title with respect to such tax which is the subject of an
offer-in-compromise to which this subsection applies, such tax or other amounts
shall be reduced by any user fee imposed under this title with respect to such
offer-in- compromise.
(C) New Law Analysis
Waiver authority. The Secretary may issue regulations waiving any payment
required under paragraph (1) in a manner consistent with the practices
established in accordance with the requirements under subsection (d)(3) .
(d) Standards for
evaluation of offers.
(1) New Law Analysis In general.
The Secretary shall prescribe guidelines for officers and
employees of the Internal Revenue Service to determine whether an
offer-in-compromise is adequate and should be accepted to resolve a dispute.
(2) New Law Analysis
Allowances for basic living expenses.
(A) In general. In prescribing guidelines under paragraph
(1), the Secretary shall develop and publish schedules of national and local
allowances designed to provide that taxpayers entering into a compromise have
an adequate means to provide for basic living expenses.
(B) Use of schedules.
The guidelines shall provide that officers and employees of the Internal
Revenue Service shall determine, on the basis of the facts and circumstances of
each taxpayer, whether the use of the schedules published under subparagraph
(A) is appropriate and shall not use the schedules to the extent such use would
result in the taxpayer not having adequate means to provide for basic living
expenses.
(3) Special rules
relating to treatment of offers.
The guidelines under paragraph (1) shall provide that—
(A) an officer or employee of the Internal Revenue Service
shall not reject an offer-in-compromise from a low-income taxpayer solely on
the basis of the amount of the offer,
(B) in the case of an
offer-in-compromise which relates only to issues of liability of the taxpayer—
(i) such offer shall not be rejected solely because the
Secretary is unable to locate the taxpayer's return or return information for
verification of such liability; and
(ii) the taxpayer
shall not be required to provide a financial statement, and
(C) New Law Analysis
any offer-in-compromise which does not meet the requirements of subparagraph
(A)(i) or (B)(i), as the case may be, of subsection (c)(1) may be returned to
the taxpayer as unprocessable.
(e) Administrative
review.
The Secretary shall establish procedures—
(1) for an independent administrative review of any
rejection of a proposed offer-in-compromise or installment agreement made by a
taxpayer under this section or section 6159 before such rejection is
communicated to the taxpayer; and
(2) which allow a
taxpayer to appeal any rejection of such offer or agreement to the Internal
Revenue Service Office of Appeals.
(f) Deemed acceptance
of offer not rejected within certain period.
Any offer-in-compromise submitted under this section shall
be deemed to be accepted by the Secretary if such offer is not rejected by the
Secretary before the date which is 24 months after the date of the submission
of such offer. For purposes of the preceding sentence, any period during which
any tax liability which is the subject of such offer-in-compromise is in
dispute in any judicial proceeding shall not be taken into account in
determining the expiration of the 24-month period.
(f [(g)]) New Law
Analysis Frivolous submissions, etc.
Notwithstanding any other provision of this section, if the
Secretary determines that any portion of an application for an
offer-in-compromise or installment agreement submitted under this section or
section 6159 meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A),
then the Secretary may treat such portion as if it were never submitted and
such portion shall not be subject to any further administrative or judicial
review.
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
Wednesday, July 25, 2012
F-Bar Criminal Case under section 7201
Federal
law requires taxpayers to report annually to the Internal Revenue Service
(“IRS”) any financial interests they have in any bank, securities, or other
financial accounts in a foreign country. 31 U.S.C. § 5314(a). The report is
made by filing a completed form TD F 90-22.1 (“FBAR”) with the Department of
the Treasury. 1 See id. § 5314; 31 C.F.R. §
1010.350. The FBAR must be filed on or before June 30 of each calendar year
with respect to foreign financial accounts maintained during the previous
calendar year, 31 C.F.R. § 1010.306(c), and the Secretary of the Treasury may
impose a civil money penalty on any person who fails to timely file the report,
31 U.S.C. § 5321(a)(5)(A). Moreover, in cases where a person “willfully” fails
to file the FBAR, the Secretary may impose an increased maximum penalty, up to
$100,000 or fifty percent of the balance in the account at the time of the
violation. Id. § 5321(a)(5)(C).
The authority to enforce such assessments has been delegated to the IRS. 31
C.F.R. § 1010.810(g).
The civil and criminal penalties for noncompliance with the FBAR
filing requirements are significant. Civil penalties for a non-willful
violation can range up to $10,000 per violation, and civil penalties for a
willful violation can range up to the greater of $100,000 or 50% of the amount
in the account at the time of the violation. Criminal penalties for violating
the FBAR requirements while also violating certain other laws can range up to a
$500,000 fine or 10 years imprisonment or both. Civil and criminal penalties
may be imposed together. The authority to enforce these assessments has been
delegated to IRS.
Under the offshore voluntary disclosure initiative (OVDI)
currently in effect, IRS won't impose certain penalties on taxpayers with
unreported offshore income if the applicable requirements are met. However,
taxpayers don't qualify for favorable treatment under an OVDI if they fail to
timely disclose their interests—so taxpayers in situations similar to the one
in this case are unlikely to qualify for an OVDI.
Willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information,” and it “can be inferred from a conscious effort to avoid learning about reporting requirements.” United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (internal citations omitted) (noting willfulness standard in criminal conviction for failure to file an FBAR). Similarly, “willful blindness” may be inferred where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability.” United States v. Poole, 640 F.3d 114, 122 [107 AFTR 2d 2011-2163] (4th Cir. 2011) (affirming criminal conviction for willful tax fraud where tax preparer “closed his eyes to” large accounting discrepancies). Importantly, in cases “where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007) (emphasis added). Whether a person has willfully failed to comply with a tax reporting requirement is a question of fact. Rykoff v. United States, 40 F.3d 305, 307 [74 AFTR 2d 94-6999] (9th Cir. 1994); accord United States v. Gormley, 201 F.3d 290, 294 [85 AFTR 2d 2000-514] (4th Cir. 2000) (“[T]he question of willfulness is essentially a finding of fact.”).
Williams, (CA 4 07/20/2012) 110 AFTR 2d ¶ 2012-5639. CA-4 finds that tax evader's failure to file FBARs for Swiss bank accounts was willful.
The Court of Appeals for the Fourth Circuit, reversing the district
court, has held that an admitted tax evader's failure to file FBARs reporting
his interests in two Swiss bank accounts was willful for purposes of the 31 USC
5321(a)(5) civil penalty. Although the district court found it significant that
the taxpayer had no incentive to continue concealing the accounts at that time,
the Fourth Circuit found that the taxpayer's representations on his tax return
and his guilty plea allocution satisfied the government's burden of proof.
Background. Each U.S. person who has a financial interest in or
signature or other authority over any foreign financial accounts, including
bank, securities, or other types of financial accounts, in a foreign country,
if the aggregate value of these financial accounts exceeds $10,000 at any time
during the calendar year, must report that relationship each calendar year by
filing TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (FBAR) with
the Department of the Treasury on or before June 30, of the succeeding year.
Facts. In '93, J. Bryan Williams opened two Swiss bank accounts in the
name of ALQI Holdings, Ltd., a British Corporation (the “ALQI accounts”). From
'93 through 2000, Williams deposited more than $7,000,000 into the ALQI
accounts and earned substantial interest, but didn't report to IRS either the
income from or his interest in the accounts.
By the fall of 2000, the Swiss and U.S. government authorities had
become aware of the assets in the ALQI accounts. At the U.S. government's
request, the Swiss authorities froze the ALQI accounts in November of 2000.
Williams completed a “tax organizer” (essentially, a client
questionnaire to facilitate return preparation) in January of 2001 which had
been provided to him by his accountant in connection with the preparation of
his 2000 tax returns. In the questionnaire, Williams stated that he didn't have
“an interest in or a signature or other authority over a bank account, or other
financial account in a foreign country.” In addition, he similarly indicated on
his 2000 Form 1040 that he had no such interest or authority, and he also
didn't file an FBAR by the June 30, 2001, deadline.
In January of 2002, upon the advice of his attorneys and accountants,
Williams fully disclosed the ALQI accounts to an IRS agent and, in October of
2002, filed his 2001 federal tax return on which he acknowledged his interest
in the ALQI accounts. He also disclosed the accounts to IRS in February of 2003
as part of his application to participate in the Offshore Voluntary Compliance
Initiative, which was rejected. He also filed amended returns for '99 and 2000,
which disclosed details about his ALQI accounts.
In June of 2003, Williams pled guilty to a two-count superseding
criminal information, which charged him with conspiracy to defraud IRS and
criminal tax evasion in connection with the ALQI accounts. As part of the plea,
Williams agreed to allocute to all of the essential elements of the charged
crimes, including that he unlawfully, willfully, and knowingly evaded taxes by
filing false and fraudulent tax returns on which he failed to disclose his interest
in the ALQI accounts, in exchange for which he received a three-level reduction
under the Sentencing Guidelines for acceptance of responsibility.
In January of 2007, Williams finally filed an FBAR for each tax year
from '93 through 2000. IRS then assessed two $100,000 civil penalties against
him for his failure to file an FBAR for 2000, which Williams failed to pay.
District court's decision. Following a bench trial, the district court
entered judgment in favor of Williams, finding that the government failed to
establish that Williams willfully failed to timely file an FBAR for 2000. The
court found that: (i) Williams “lacked any motivation to willfully conceal the
accounts from authorities,” since the authorities already knew of the accounts;
and (ii) his failure to disclose the accounts “was not an act undertaken
intentionally or in deliberate disregard for the law, but instead constituted
an understandable omission given the context in which it occurred.”
Fourth Circuit reverses. The Court of Appeals for the Fourth Circuit,
in a 2-1 opinion, found the district court's decision clearly erroneous.
The Fourth Circuit found it significant that, on Williams' 2000 return,
he signed under penalty of perjury that he had “examined this return and
accompanying schedules and statements” and that such were true to the best of
his knowledge—which constitutes prima facie evidence that he knew the contents
of the return. He also admitted to never paying attention “to any of the
written words” on his return, which the Court likened to willful blindness.
This, combined with the fact that he gave false answers both on the tax
organizer and on his return, reflected conduct “meant to conceal or mislead
sources of income or other financial information.”
Willams' guilty plea further confirmed that his failure to timely file
an FBAR for 2000 was willful. He acknowledged in his plea that his failure to
report the ALQI accounts was part of a larger tax evasion scheme. The Court
found that Williams couldn't now claim that he was unaware of or somehow lacked
the motivation to willfully disregard the FBAR reporting requirement.
Dissent. The dissenting judge found that, although the majority opinion
stated the correct standard of review (clear error), it failed to adhere to
that standard and instead substituted its judgment for that of the district
court. The district judge was in a better position to evaluate the credibility
of Williams' testimony, and the district judge also found it significant that
Williams had no “objective incentive” to conceal the ALQU account in June of
2001. Accordingly, the dissenting judge would have affirmed the district court.
.
U.S. v. WILLIAMS, Cite as 110 AFTR 2d 2012-XXXX, 07/20/2012
________________________________________
UNITED STATES OF AMERICA, Plaintiff - Appellant, v. J. BRYAN WILLIAMS,
Defendant - Appellee.
Case Information:
Code Sec(s):
Court Name: UNITED STATES
COURT OF APPEALS FOR THE FOURTH CIRCUIT,
Docket No.: No. 10-2230,
Date Argued: 03/21/2012
Date Decided: 07/20/2012.
Prior History:
Disposition:
HEADNOTE
.
Reference(s):
OPINION
ARGUED: Robert William Metzler, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellant. David Harold Dickieson, SCHERTLER &
ONORATO, LLP, Washington, D.C., for Appellee. ON BRIEF: John A. DiCicco, Acting
Assistant Attorney General, Deborah K. Snyder, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C.; Neil H. MacBride, United States Attorney,
Alexandria, Virginia, for Appellant. Lisa H. Schertler, SCHERTLER &
ONORATO, LLP, Washington, D.C., for Appellee.
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT,
Appeal from the United States District Court for the Eastern District
of Virginia, at Alexandria. Liam O'Grady, District Judge.
(1:09-cv-00437-LO-TRJ)
Before MOTZ, SHEDD, and AGEE, Circuit Judges.
Reversed by unpublished opinion. Judge Shedd wrote the majority
opinion, in which Judge Motz concurred. Judge Agee wrote a dissenting opinion.
Judge: SHEDD, Circuit Judge:
UNPUBLISHED
Unpublished opinions are not binding precedent in this circuit.
The Government brought this action seeking to enforce civil penalties
assessed against J. Bryan Williams for his failure to report his interest in
two foreign bank accounts for tax year 2000, in violation of 31 U.S.C. § 5314.
Following a bench trial, the district court entered judgment in favor of
Williams. The Government now appeals. Because we conclude that the district
court clearly erred in finding that the Government failed to prove that
Williams willfully violated § 5314, we
reverse.
I
In 1993, Williams opened two Swiss bank accounts in the name of ALQI
Holdings, Ltd., a British Corporation (the “ALQI accounts”). From 1993 through
2000, Williams deposited more than $7,000,000 into the ALQI accounts, earning
more than $800,000 in income on the deposits. However, for each of the tax
years during that period, Williams did not report to the IRS the income from
the ALQI accounts or his interest in the accounts, as he was required to do
under § 5314.
By the fall of 2000, Swiss and Government authorities had become aware
of the assets in the ALQI accounts. Williams retained counsel and on November
13, 2000, he met with Swiss authorities to discuss the accounts. The following
day, at the request of the Government, the Swiss authorities froze the ALQI
accounts.
Relevant to this appeal, Williams completed a “tax organizer” in
January 2001, which had been provided to him by his accountant in connection
with the preparation of his 2000 federal tax return. In response to the
question in the tax organizer regarding whether Williams had “an interest in or
a signature or other authority over a bank account, or other financial account
in a foreign country,” Williams answered “No.” J.A. 111. In addition, the 2000
Form 1040, line 7a in Part III of Schedule B asks:
At any time during 2000, did you have an interest in or a signature or
other authority over a financial account in a foreign country, such as a bank
account, securities account, or other financial account? See instructions for
exceptions and filing requirements for Form TD F 90-22.1.
J.A. 131. On his 2000 federal tax return, Williams checked “No” in
response to this question, and he did not file an FBAR by the June 30, 2001,
deadline.
Subsequently, upon the advice of his attorneys and accountants, Williams
fully disclosed the ALQI accounts to an IRS agent in January 2002. In October
2002 he filed his 2001 federal tax return on which he acknowledged his interest
in the ALQI accounts. Williams also disclosed the accounts to the IRS in
February 2003 as part of his application to participate in the Offshore
Voluntary Compliance Initiative. 2 At that time he also filed amended returns
for 1999 and 2000, which disclosed details about his ALQI accounts.
In June 2003, Williams pled guilty to a two-count superseding criminal
information, which charged him with conspiracy to defraud the IRS, in violation
of 18 U.S.C. § 371, and criminal tax evasion, in violation of 26 U.S.C. § 7201,
in connection with the funds held in the ALQI accounts from 1993 through 2000.
As part of the plea, Williams agreed to allocute to all of the essential
elements of the charged crimes, including that he unlawfully, willfully, and
knowingly evaded taxes by filing false and fraudulent tax returns on which he
failed to disclose his interest in the ALQI accounts. In exchange for his
allocution, Williams received a three-level reduction under the Sentencing
Guidelines for acceptance of responsibility. 3
In his allocution, Williams admitted the following:
I knew that most of the funds deposited into the Alqi accounts and all
the interest income were taxable income to me. However, the calendar year tax
returns for §93 through 2000, I chose
not to report the income to my -- to the Internal Revenue Service in order to
evade the substantial taxes owed thereon, until I filed my 2001 tax return.
I also knew that I had the obligation to report to the IRS and/or the
Department of the Treasury the existence of the Swiss accounts, but for the
calendar year tax returns 1993 through 2000, I chose not to in order to assist
in hiding my true income from the IRS and evade taxes thereon, until I filed my
2001 tax return.
....
I knew what I was doing was wrong and unlawful. I, therefore, believe
that I am guilty of evading the payment of taxes for the tax years 1993 through
2000. I also believe that I acted in concert with others to create a mechanism,
the Alqi accounts, which I intended to allow me to escape detection by the IRS.
Therefore, I am -- I believe that I'm guilty of conspiring with the people
would (sic) whom I dealt regarding the Alqi accounts to defraud the United
States of taxes which I owed.
J.A. 55 (emphasis added).
In January 2007, Williams finally filed an FBAR for each tax year from
1993 through 2000. Thereafter, the IRS assessed two $100,000 civil penalties
against him, pursuant to § 5321(a)(5),
for his failure to file an FBAR for tax year 2000. 4 Williams failed to pay
these penalties, and the Government brought this enforcement action to collect
them. Following a bench trial, the district court entered judgment in favor of
Williams, finding that the Government failed to establish that Williams
willfully violated § 5314. The
Government timely appealed.
II
The parties agree that Williams violated § 5314 by failing to timely file an FBAR for
tax year 2000. The only question is whether the violation was willful. The
district court found that (1) Williams “lacked any motivation to willfully
conceal the accounts from authorities” because they were already aware of the
accounts and (2) his failure to disclose the accounts “was not an act
undertaken intentionally or in deliberate disregard for the law, but instead
constituted an understandable omission given the context in which it occurred.”
5 J.A. 378–79. Therefore, the district court found that Williams's violation
of § 5314 was not willful.
We review factual findings under the clearly erroneous standard set
forth in Federal Rule of Civil Procedure 52(a). Walton v. Johnson, 440 F.3d
160, 173–74 (4th Cir. 2006) (en banc). “Our scope of review is narrow; we do
not exercise de novo review of factual findings or substitute our version of
the facts for that found by the district court.” Id. at 173. “If the district
court's account of the evidence is plausible in light of the record viewed in
its entirety, the court of appeals may not reverse it even though convinced
that had it been sitting as the trier of fact, it would have weighed the
evidence differently.” Id. (quoting Anderson v. City of Bessemer City, 470 U.S.
564, 573–74 (1985)). However, notwithstanding our circumscribed review or the
deference we give to a district court's findings, those findings are not
conclusive if they are “plainly wrong.” Id. (quoting Jiminez v. Mary Washington
College, 57 F.3d 369, 379 (4th Cir. 1995)). The clear error standard still
requires us to engage in “meaningful appellate review,” United States v. Abu
Ali, 528 F.3d 210, 261 (4th Cir. 2008), and where objective evidence
contradicts a witness' story, or the story itself is “so internally
inconsistent or implausible on its face that a reasonable factfinder would not
credit it, ... the court of appeals may well find clear error even in a finding
purportedly based on a credibility determination.” United States v. Hall, 664
F.3d 456, 462 (4th Cir. 2012) (citing Anderson, 470 U.S. at 575). Thus, “[a]
finding is clearly erroneous when, although there is evidence to support it,
the reviewing court on the entire evidence is left with a definite and firm
conviction that a mistake has been committed.” F.C. Wheat Maritime Corp. v.
United States, 663 F.3d 714, 723 (4th Cir. 2011).
Here, the evidence as a whole leaves us with a definite and firm
conviction that the district court clearly erred in finding that Williams did
not willfully violate § 5314. Williams
signed his 2000 federal tax return, thereby declaring under penalty of perjury
that he had “examined this return and accompanying schedules and statements”
and that, to the best of his knowledge, the return was “true, accurate, and
complete.” “A taxpayer who signs a tax return will not be heard to claim
innocence for not having actually read the return, as he or she is charged with
constructive knowledge of its contents.” Greer v. Commissioner of Internal
Revenue, 595 F.3d 338, 347 [105 AFTR 2d
2010-977] n. 4 (6th Cir. 2010); United States v. Doherty, 233 F.3d 1275, 1282 [86 AFTR 2d 2000-6691]
n.10 (11th Cir. 2000) (same). Williams's signature is prima facie evidence that
he knew the contents of the return, United States v. Mohney, 949 F.2d 1397, 1407 [68 AFTR 2d 91-5938] (6th
Cir. 1991), and at a minimum line 7a's directions to “[s]ee instructions for
exceptions and filing requirements for Form TD F 90-22.1” put Williams on
inquiry notice of the FBAR requirement.
Nothing in the record indicates that Williams ever consulted Form TD F
90-22.1 or its instructions. In fact, Williams testified that he did not read
line 7a and “never paid any attention to any of the written words” on his
federal tax return. J.A. 299. Thus, Williams made a “conscious effort to avoid
learning about reporting requirements,” Sturman, 951 F.2d at 1476, and his
false answers on both the tax organizer and his federal tax return evidence
conduct that was “meant to conceal or mislead sources of income or other
financial information,” id. (“It is reasonable to assume that a person who has
foreign bank accounts would read the information specified by the government in
tax forms. Evidence of acts to conceal income and financial information,
combined with the defendant's failure to pursue knowledge of further reporting
requirements as suggested on Schedule B, provide a sufficient basis to establish
willfulness on the part of the defendant.”). This conduct constitutes willful
blindness to the FBAR requirement. Poole, 640 F.3d at 122 (“[I]ntentional
ignorance and actual knowledge are equally culpable under the law.”)
Williams's guilty plea allocution further confirms that his violation
of § 5314 was willful. During that
allocution, Williams acknowledged that he willfully failed to report the
existence of the ALQI accounts to the IRS or Department of the Treasury as part
of his larger scheme of tax evasion. This failure to report the ALQI accounts
is an admission of violating § 5314,
because a taxpayer complies with § 5314
by filing an FBAR with the Department of the Treasury. In light of his
allocution, Williams cannot now claim that he was unaware of, 6 inadvertently
ignored, or otherwise lacked the motivation to willfully disregard the FBAR
reporting requirement.
Thus, we are convinced that, at a minimum, Williams's undisputed
actions establish reckless conduct, which satisfies the proof requirement
under § 5314. Safeco Ins., 551 U.S. at
57. Accordingly, we conclude that the district court clearly erred in finding
that willfulness had not been established.
III
For the foregoing reasons, we reverse the judgment of the district
court and remand this case for proceedings consistent with this opinion.
REVERSED
Judge: AGEE, Circuit Judge, dissenting: The majority correctly recites
that we review only for clear error the district court's dispositive factual
finding that Williams' failure to file the FBAR was not willful. Maj. Op. at
9–10. The majority also correctly notes the limited scope of review under that
standard. Id. In my view, however, my colleagues in the majority do not adhere
to that standard, instead substituting their judgment for the judgment of the
district court. As appellate judges reviewing for clear error, we are bound by
the standard of review and therefore I respectfully dissent. We recently
explained how circumscribed our review under the clear error standard must be:
“This standard plainly does not entitle a reviewing court to reverse
the finding of the trier of fact simply because it is convinced that it would
have decided the case differently.” Anderson v. Bessemer City, 470 U.S. 564,
573 (1985). “If the district court's account of the evidence is plausible in
light of the record viewed in its entirety, the court of appeals may not
reverse it even though convinced that had it been sitting as the trier of fact,
it would have weighed the evidence differently.” Id. at 573–74.
“When findings are based on determinations regarding the credibility of
witnesses,” we give “even greater deference to the trial court's findings.” Id.
at 575.
United States v. Hall, 664 F.3d 456, 462 (4th Cir. 2012). Applying this
standard to the case at bar, I conclude the district court's judgment should be
affirmed. The majority opinion rightly points out that there is evidence
supporting the conclusion that Williams' failure to file the FBAR was willful,
particularly if adopting the majority's conclusion that a “willful violation”
can include “willful blindness to the FBAR requirement” or “intentional
ignorance.” Maj. Op. at 12. That evidence could have led a reasonable
factfinder to conclude that the violation was willful, as the majority
believes. 1 But there is also evidence supporting the opposite view. First,
there is Williams' direct testimony that he was unaware of the FBAR requirement
in June 2001 (when it was supposed to be filed) and that he did not willfully
(or recklessly) fail to file it. The district judge, who had the opportunity to
observe Williams' demeanor while testifying, expressly found that “Williams'
testimony that he only focused on the numerical calculations on the Form 1040
and otherwise relied on his accountants to fill out the remainder of the Form
is credible ....” J.A. 379. Significantly, the district court also found that
there was no objective incentive for Williams to continue to conceal the ALQI
account in June 2001, because at that time he knew that the United States
government had requested the ALQI accounts be frozen, and thus Williams knew
the United States government knew about those accounts. As the district court
reasoned, if Williams had known about the FBAR requirement, there would have
been little incentive for him under those circumstances to refuse to comply
with it as of June 2001. Additional evidence supporting the district court's
finding includes the undisputed evidence that, after June 2001, Williams and
his advisors began formal disclosures of the ALQI accounts, including the
filing of amended income tax returns, but they did not backfile FBAR reports.
These disclosures included direct disclosures of the ALQI accounts to the IRS
in January 2002. The district court explained the significance of this
disclosure to the IRS: “[t]hough made after the June 30, 2001” FBAR filing
deadline, the disclosure “indicates to the Court that Williams continued to
believe the assets had already been disclosed. That is, it makes little sense
for Williams to disclose the ALQI accounts merely six months after the deadline
he supposedly willfully violated.” J.A. 378. This was a logical and supported
finding for the district court to make on the record before it. The district
court's decision was set forth in a detailed opinion that fully explained the
evidence supporting its findings. Had I been sitting as the trier of fact in
this bench trial, I may well have decided differently than did the district
judge. But I cannot say that I am left with a “definite and firm conviction”
that he was mistaken. Thus, I cannot agree with the majority that the
Government has established clear error. I also address briefly the two other
grounds for reversal asserted by the United States and rejected by the district
court: collateral estoppel and judicial estoppel. 2Specifically, the Government
points to Williams' criminal conviction and, in particular, the language in his
plea allocution, see Maj. Op. at 6, as requiring a finding that both types of
estoppel apply. I disagree. We review the district court's denial of judicial
estoppel only for abuse of discretion, see Jaffe v. Accredited Sur. & Cas.
Co., 294 F.3d 584, 595 n.7 (4th Cir. 2002), and its denial of collateral
estoppel de novo, Tuttle v. Arlington Cnty. Sch. Bd., 195 F.3d 698, 703 (4th
Cir. 1999). Judicial estoppel generally requires three elements:
First, the party sought to be estopped must be seeking to adopt a
position that is inconsistent with a stance taken in prior litigation. The
position at issue must be one of fact as opposed to one of law or legal theory.
Second, the prior inconsistent position must have been accepted by the court.
Lastly, the party against whom judicial estoppel is to be applied must have
intentionally misled the court to gain unfair advantage.
Zinkand v. Brown, 478 F.3d 634, 638 (4th Cir. 2007) (citations and
internal quotations omitted). Similarly, a party seeking to apply collateral
estoppel must establish five elements:
(1) the issue sought to be precluded is identical to one previously
litigated; (2) the issue [was] actually determined in the prior proceeding; (3)
determination of the issue [was] a critical and necessary part of the decision
in the prior proceeding; (4) the prior judgment [is] final and valid; and (5)
the party against whom estoppel is asserted ... had a full and fair opportunity
to litigate the issue in the previous forum.
Sedlack v. Braswell Servs. Grp., Inc., 134 F.3d 219, 224 (4th Cir.
1998); Collins v. Pond Creek Mining Co., 468 F.3d 213, 217 (4th Cir. 2006).
“The doctrine ... may apply to issues litigated in a criminal case which a
party seeks to relitigate in a subsequent civil proceedings .... [For example],
a defendant is precluded from retrying issues necessary to his plea agreement
in a later civil suit.” United States v. Wight, 839 F.2d 193, 196 (4th Cir.
1987). In my view, the district court correctly concluded that
there remains a factual incongruence between those facts necessary to
[Williams'] guilty plea to tax evasion and those establishing a willful
violation of § 5314. That Williams intentionally
failed to report income in an effort to evade income taxes is a separate matter
from whether Williams specifically failed to comply with disclosure
requirements contained in § 5314
applicable to the ALQI accounts for the year 2000.
J.A. 379. Put differently, Williams never allocuted to failing to file
the FBAR form, and certainly did not admit willfully failing to file it.
Neither his plea agreement nor his allocution even referred to the FBAR or § 5314. Indeed, the Treasury Department
itself notes that the FBAR is a separate reporting requirement and not a tax
return, nor is it to be attached to a taxpayer's tax returns. See J.A. 225,
237, 246. In short, pleading guilty to hiding the existence of the two accounts
for income tax purposes does not necessarily establish that Williams willfully
failed to file a FBAR for 2000. Indeed, other separate and distinct tax
penalties (including penalties for fraud) were separately sought by the IRS
from Williams for his failure to report the income in the accounts, pursuant to
26 U.S.C. §§ 6662 and 6663. See Williams v. Comm'r of Internal Revenue, 97 T.C.M. (CCH) 1422, 4 [TC Memo 2009-81]
(Apr. 16, 2009). The FBAR-related penalty is not a tax penalty, but a separate
penalty for separate conduct. Thus, viewed as distinct issues, collateral
estoppel is inapplicable here because Williams' willfulness in failing to file
the FBAR is not an issue “identical to one previously litigated.” Sedlack, 134
F.3d at 224. Likewise, judicial estoppel is inapplicable because there is
nothing about Williams' stance on willfulness here that is “inconsistent with
[the] stance taken” in his criminal proceedings. Zinkand, 478 F.3d at 638.
Accordingly, I would further hold that the district court did not err in
declining to apply either collateral estoppel or judicial estoppel. For all of
these reasons, I respectfully dissent and would affirm the judgment of the
district court.
________________________________________
1
TD F 90-22.1, which is a form
issued by the Department of the Treasury, is titled “Report of Foreign Bank and
Financial Accounts” and is commonly referred to as the “FBAR.” The regulations
relating to the FBAR were formerly published at 31 C.F.R. §§ 103.24 and 103.27,
but were recodified in a new chapter effective March 1, 2011. See Transfer
& Reorganization of Bank Secrecy Act Regulations, 75 Fed. Reg. 65806 (Oct.
26, 2010). For ease, our citations are to the recodified sections.
________________________________________
2
The IRS rejected the
application and turned it over to the attorney for the United States who was
conducting a grand jury investigation of Williams.
________________________________________
3
Williams also agreed to pay all
taxes and criminal penalties due for tax years 1993 through 2000, but he has
since refused to pay some of those taxes and penalties and has engaged the IRS
in litigation over that issue. See Williams v. Commissioner of Internal
Revenue, 97 T.C.M. (CCH) 1422 [TC Memo
2009-81] (Apr. 16, 2009).
________________________________________
4
The statute of limitations for
assessing penalties for tax years 1993 through 1999 had expired by the time the
IRS assessed the civil penalties. See 31 U.S.C. § 5321(b)(1) and (2).
________________________________________
5
In making its determination,
the district court emphasized Williams's motivation rather than the relevant
issue of his intent. See Am. Arms Int'l v. Herbert, 563 F.3d 78, 83 (4th Cir.
2009) (“[M]alice or improper motive is not necessary to establish
willfulness.”). To the extent the district court focused on motivation as proof
of the lack of intent, it simply drew an unreasonable inference from the
record. In November 2000, Swiss authorities met with Williams to discuss the
ALQI accounts and thereafter froze them at the request of the United States
Government. Although the Government knew of the existence of the accounts,
nothing in the record indicates that, when the accounts were frozen, the
Government knew the extent, control, or degree of Williams's interest in the
accounts or the total funds held in the accounts. As Williams admitted in his
allocution, his decision not to report the accounts was part of his tax evasion
scheme that continued until he filed his 2001 tax return. Thus, his failure to
disclose information about the ALQI accounts on his 2000 tax return in May 2001
was motivated by his desire not to admit his interest in the accounts, even
after authorities had been aware of them for over six months. Rarely does a person
who knows he is under investigation by the Government immediately disclose his
wrongdoing because he is not sure how much the Government knows about his role
in that wrongdoing. Thus, without question, when Williams filed in May of 2001,
he was clearly motivated not to admit his interest in the ALQI accounts.
________________________________________
6
In fact, seven months before
his criminal allocution, Williams sent a letter to the IRS requesting to
participate in the Offshore Voluntary Compliance Initiative “[p]ursuant to Rev. Proc. 2003-11.” J.A. 183–84. On the
first page of Revenue Procedure 2003-11,
the IRS specifically informs applicants that a primary benefit of the Initiative
is that participating taxpayers can avoid penalties for having failed to timely
file an FBAR. Clearly, Williams was aware of the FBAR at the time of his
allocution. Further, to the extent Williams asserts he was unaware of the FBAR
requirement because his attorneys or accountants never informed him, his
ignorance also resulted from his own recklessness. Williams concedes that from
1993–2000 he never informed his accountant of the existence of the foreign
accounts — even after retaining counsel and with the knowledge that authorities
were aware of the existence of the accounts.
________________________________________
1
Some of that evidence, of
course, is subject to two interpretations. For example, the majority reasons
that Williams' reference in his allocution to the “Department of the Treasury”
is necessarily an admission he violated
§ 5314. Because the IRS is a bureau of the Department of the Treasury,
however, the reference in his plea could instead be interpreted as a simple
acknowledgement of that fact. Indeed, there was no reference in the criminal
proceedings to Section 5314 or the FBAR
at all.
________________________________________
2
In light of its holding that
the district court clearly erred in finding the violation not willful, the
majority did not have cause to address either estoppel argument. Because I
would affirm the district court and the Government contends that both types of
estoppel prevent Williams from challenging the willfulness of his violation, it
is necessary to address those points.
________________________________________
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
Monday, July 23, 2012
Tax records that a taxpayer must maintain
Burden of Proof
As a general rule, the Commissioner's determinations in a
statutory notice of deficiency are presumptively correct, and taxpayers bear
the burden of proving those determinations erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). The U.S. Court of Appeals
for the Sixth Circuit, to which an appeal in this case would lie barring a
written stipulation to the contrary, has stated that the Commissioner cannot
rely on the presumption of correctness to support deficiency determinations of
unreported income without a "`minimal evidentiary foundation'"
linking the taxpayers with the income-producing activity or to the receipt of
funds. 9 United States v. Walton, 909 F.2d 915, 919 [66 AFTR 2d 90-5379] (6th
Cir. 1990) (quoting Weimerskirch v. Commissioner 596 F.2d 358, 361 [44 AFTR 2d
79-5072] (9th Cir. 1979), rev'g , 67 T.C. 672 (1977)); Richardson v.
Commissioner, T.C. Memo. 2006-69 [TC Memo 2006-69], 91 T.C.M. (CCH) 981, 989
(2006), aff'd, 509 F.3d 736 [100 AFTR 2d 2007-6970] (6th Cir. 2007). Where the
Commissioner carries his burden of production with respect to unreported
income, the burden of proof shifts to the taxpayers to produce "credible
evidence that they did not earn the taxable income attributed to them or of
presenting an argument that the IRS deficiency calculations were not grounded
on a minimal evidentiary foundation." United States v. Walton, 909 F.2d at
919. Taxpayers must prove their entitlement to deductions and losses as well as
the amount of the benefit claimed. See Gatlin v. Commissioner, 754 F.2d 921,
923 [55 AFTR 2d 85-1029] (11th Cir. 1985), aff'g T.C. Memo. 1982-489 [¶82,489
PH Memo TC]; Time Ins. Co. v. Commissioner, 86 T.C. 298, 313-314 (1986); Jordan
v. Commissioner, T.C. Memo. 2009-223 [TC Memo 2009-223], 98 T.C.M. (CCH) 289,
299-300 (2009) (discussing the applicability of Walton to the payment of
expenses), aff'd, ___ Fed. Appx. ___ (6th Cir. Apr. 25, 2012).
Records a taxpayer
needs to maintain for tax purposes
Taxpayers must keep sufficient records to enable the
Commissioner to determine their correct Federal income tax liability Sec. 6001;
Petzoldt v. . Commissioner, 92 T.C. 661, 686-687 (1989). The Commissioner is
simultaneously authorized to examine books, papers, records, or other data
potentially relevant or material in determining the taxpayers' Federal income
tax liability. Sec. 7602(a)(1). Where taxpayers fail to keep such books and
records, the Commissioner is authorized to reconstruct the taxpayers' income
under any method that, in the Commissioner's opinion, clearly reflects income.
S c. 446(b); Petzoldt v. e Commissioner, 92 T.C. at 693. Courts have long
recognized the bank deposits method as a permissible indirect approach to
reconstructing taxable income. See DiLeo v. Commissioner, 96 T.C. 858, 867
(1991), aff'd, 959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992); Estate of Mason
v. Commissioner, 64 T.C. 651, 656 (1975) (and cases cited thereat), aff'd, 566
F.2d 2 [41 AFTR 2d 78-348] (6th Cir. 1977).
Vitautas Kazhukauskas, et ux. v. Commissioner, TC Memo
2012-191 , Code Sec(s) 61; 102; 162; 164; 262; 446; 1401; 6662; 7491; 7602.
VITAUTAS KAZHUKAUSKAS AND VILMA KAZHUKAUSKAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Information:
Code Sec(s): 61;
102; 162; 164; 262; 446; 1401; 6662; 7491; 7602
Docket: Dkt.
No. 4657-10.
Date Issued:
07/11/2012.
Judge: Opinion by
Laro, J.
Tax Year(s):
Disposition:
HEADNOTE
1.
Reference(s): Code Sec. 61; Code Sec. 102; Code Sec. 162;
Code Sec. 164; Code Sec. 262; Code Sec. 446; Code Sec. 1401; Code Sec. 6662;
Code Sec. 7491; Code Sec. 7602
Syllabus
Official Tax Court Syllabus
Counsel
Vitautas Kazhukauskas and Vilma Kazhukauskas, pro sese.
Mindy Y. Chou, Robert D. Heitmeyer, Alexandra E.
Nicholaides, and Alissa Vanderkooi (specially recognized), for respondent.
LARO, Judge
MEMORANDUM FINDINGS OF FACT AND OPINION
Petitioners, while residing in Michigan, petitioned the
Court to redetermine deficiencies respondent determined in their 2006 and 2007
Federal income tax of $62,860 and $33,122, respectively, and accuracy-related
penalties of $12,572 and $6,624, respectively. 1 We are asked to decide the
following issues: (1) whether petitioners underreported gross receipts of
$222,534 and $168,086 on their 2006 and 2007 Schedules C, Profit or Loss From
Business, respectively. We hold they did; (2) whether petitioners may deduct
Schedule C expenses and claim costs of goods sold in addition to those
respondent allowed for 2006 and 2007. 2 We hold they may not; (3) whether
petitioners owe self-employment tax for 2006 and 2007, net of deductions
allowed under section 164(f), in the amounts of $8,749 and $7,672,
respectively. We hold they do; and (4) whether petitioners are liable for
accuracy-related penalties for 2006 and 2007 under section 6662(a) and (b)(2)
for substantial understatements of income tax. We hold they are.
FINDINGS OF FACT
Before trial, respondent's counsel sent to petitioners a
proposed stipulation of facts which respondent proffered petitioners should
agree to under Rule 91(a). Petitioners refused to execute the agreement, and
respondent moved the Court to compel stipulation under Rule 91(f). The Court
granted respondent's motion and ordered petitioners to show cause why the
proposed stipulation of facts, as well as the accompanying exhibits, should not
be deemed established for purposes of this case. See Rule 91(f)(2). Petitioners
failed to respond, and we made our order to show cause absolute by deeming
established (for purposes of this case) the facts and evidence in respondent's
proposed stipulation of facts. 3 See Rule 91(f)(3). Our findings of fact are primarily
derived from the facts and exhibits deemed stipulated, the documents admitted
at trial, and the pleadings. We find the facts and exhibits deemed stipulated
accordingly.
Vitautas Kazhukauskas (petitioner) was born in Lithuania to
Bronislovas Kazhukauskas (father) and Aldona Kazhukauskene (mother). He moved
to the United States in 1990. Vilma Kazhukauskas (Ms. Kazhukauskas), who is a
petitioner in this case, is an accountant with a bachelor's degree in budgeting
that she earned overseas. Petitioners have at all relevant times been U.S.
citizens, and they have two sons, including M.K. Petitioner's mother has at all
relevant times lived in Lithuania, and his father was deceased at the time of
trial.
During the years at issue, petitioners owned V.K. Auto Sales
(VK U.S.) and V.K. Motors, UAB (VK Lithuania). Through those entities,
petitioners operated an import and export business in which VK U.S. purchased
used automobiles mostly at auctions within the United States and exported the
vehicles to VK Lithuania for resale primarily within Lithuania. Petitioners
also bought and sold used vehicles domestically through VK U.S. For the most
part, VK U.S. purchased vehicles with scrap certificates of title and
certificates of title specifying the automobiles were to be used for salvage
purposes only. 4 Some certificates of title indicated the vehicles had been
approved for export, and as discussed below, petitioners shipped numerous
automobiles overseas. The record is unclear the extent to which (if at all) VK
U.S. repaired the vehicles it purchased before resale.
Petitioners' books and records concerning their import and
export business consisted of an amalgamation of receipts, certificates of
title, and bank statements with minimal (if any) logical arrangement. As best
we can tell from the disjointed record in this case, VK U.S. purchased at least
38 vehicles in 2006 and at least 30 vehicles in 2007, with a cost per vehicle
ranging between $330 and $8,453. 5 The information relating to the vehicles
which VK U.S. sold, as well as the proceeds received therefrom, is less clear.
In its domestic operations VK U.S. sold at least 14 vehicles in 2006 and at
least 17 vehicles in 2007. In its international operations VK U.S. shipped at
least 32 vehicles to Lithuania during 2006 and 2007, though the number of
vehicles exported and sold abroad during each year is not readily discernible
from the record. VK Lithuania employed petitioner's mother as a manager or
bookkeeper from May 5, 2006, through at least May 5, 2007.
Petitioners, jointly, individually, or collectively with
M.K., owned at least six bank accounts with JPMorgan Chase Bank, N.A. 6 The
first was a premier savings account titled in petitioners' names (personal
savings account) with a balance that grew from $36,405 on December 28, 2005, to
more than $334,688 on December 27, 2007. The second was a business checking
account titled in the name of VK U.S. (business checking account) with a
balance that fluctuated from $17,064 on December 30, 2006, to $6,796 on December
31, 2007. The third through sixth bank accounts were a blend of checking and
savings accounts, both personal and business, which at all relevant times
reflected a balance of $30 to $520. 7
Throughout 2006 and 2007 VK U.S. received regular advices of
credit from various parties, after which the related funds were
wire-transferred into the business checking account. Many advices of credit
bore the notation "skola", literally translated to mean
"debt" in Lithuanian, though the word's meaning may vary depending
upon the context. Specifically, petitioners received the following wire
transfers during the year at issue:
Amount From Notation
Date
Jan. 20, 2006 $16,971.43 Mother Skola
Feb. 21, 2006 15,971.75 Father Skola
Mar. 22, 2006 17,571.38 Father Skola
Apr. 25, 2006 16,171.13 Petitioner Pervedimas
May 4, 2006 34,143.89 Petitioner Pavedimas
May 26, 2006 14,970.38 Father Skola
June 20, 2006 18,770.72 Mother Skola
Aug. 1, 2006 20,205.57 Mother Skola
Aug. 11, 2006 1,650.00 VK Lithuania UZ Automobilius
Aug. 22, 2006 19,270.39 Mother Skola
<7>
The
record establishes that petitioners owned a bank account
which earned
interest income of
$8,647 in 2006. Our statement of petitioners' accounts
does not
separately identify
this account because the record is not clear that this
account is
not the same as the
personal savings account.
Sept. 1, 2006 12,620.43 Father Skola Sept. 1, 2006 9,970.43
VK Lithuania UZ Automobilius Nov. 1, 2006 11,970.64 Father Skola Nov. 22, 2006
12,275.49 Father Skola 2006 Total 222,533.63 Jan. 31, 2007 $6,590.27 Mother
Skola Feb. 14, 2007 3,370.17 VK Lithuania UZ Automobilius Feb. 28, 2007 8,938.92
VK Lithuania UZ Automobilius Mar. 6, 2007 5,969.84 VK Lithuania UZ Automobilius
Mar. 15, 2007 16,969.96 VK Lithuania Skola, UZ Automobilius Mar. 27, 2007
13,919.63 Father Skola Apr. 2, 2007 17,092.67 Father Skola May 11, 2007
17,719.30 VK Lithuania UZ Automobilius June 22, 2007 8,635.00 As Sampo Pank
Payment for Auto Honda July 3, 2007 12,019.50 Mother Skola July 30, 2007
5,675.00 As Sampo Pank Payment for Hyundai Sept. 21, 2007 14,419.75 VK
Lithuania UZ Automobilius Oct. 9, 2007 12,028.57 Petitioner UZ Automobilius
Oct. 9, 2007 6,301.57 VK Lithuania UZ Automobilius Nov. 7, 2007 12,368.08
Father Skola Dec. 6, 2007 6,067.72 Mother Skola 2007 Total 168,085.95
Petitioners filed joint Federal income tax returns for 2006
and 2007 which Ms. Kazhukauskas prepared. The 2006 return reported interest
income of $9,892, business income of $2, and total income of $9,894. Attached
to the 2006 return was a Schedule C for VK U.S. reporting gross receipts or
sales of $72,636, business expenses of $72,634, and zero cost of goods sold.
The 2007 return reported interest income of $10,208, business income of $3, and
total income of $10,211. Attached to the 2007 return was a Schedule C for VK
U.S. reporting gross receipts or sales of $66,371, business expenses of
$66,368, and zero cost of goods sold. The amounts reported as business income
on the 2006 and 2007 returns were, as petitioners admitted at trial and on
brief, falsified to hide VK U.S.' purported bankruptcy.
On audit of the 2006 and 2007 returns, petitioners submitted
to respondent bank statements, advices of credit, shipping container receipts,
and a copy of petitioners' police book, 8 among other items. These records, as
they related to the regularity of VK U.S.' international sales, were
inconsistent in certain material respects. For example, the police book
indicated that petitioners shipped overseas 21 vehicles in 2003, 42 vehicles in
2004, and 1 vehicle in each of the years 2005 through 2007. The receipts, on
the other hand, showed that VK U.S. paid at least $8,100 during 2006 and
$24,550 during 2007 for at least nine shipping containers sent to
Lithuania--suggesting that more vehicles had been shipped than were reported in
the police book.
Respondent's revenue agent Suzanne Owen was assigned to
examine petitioners' returns for the years at issue. During her investigation
Ms. Owen learned of VK Lithuania, a business which petitioner claimed during a
meeting with her to have had no relationship to VK U.S. She analyzed bank
statements petitioners submitted and inventoried wire transfers deposited into
the business checking account in a worksheet that was attached to the notice of
deficiency. The worksheet demonstrated that totals of $222,534 and $168,086
were deposited into the business checking account in 2006 and 2007,
respectively. Ms. Owen noted in her supporting workpapers that bank statements
and related advices of credit indicated that portions of the wire transfers
were from sales of vehicles abroad and in some cases included the vehicle
manufacturer and VIN. Ms. Owen determined on the basis of the foregoing that
petitioners had underreported their 2006 and 2007 Schedule C gross receipts by
$222,534 and $168,086, respectively; i.e., all amounts wire-transferred to
petitioners as gross receipts from sales of vehicles overseas were treated as
income. Ms. Owen determined the most probable source of the income to be sales
of vehicles overseas, on the basis of details contained in the wire transfers,
the shipping container purchases, and information about the vehicles shipped
overseas as sometimes recorded in the police book.
Respondent issued to petitioners a notice of deficiency
determining various adjustments to their income for 2006 and 2007. First,
respondent determined that petitioners' costs of goods sold were increased by
$5,353 for 2006 and $46,604 for 2007. Second, respondent determined that
petitioners underreported their gross receipts for 2006 and 2007 by $222,534
and $168,086, respectively. Third, respondent determined that petitioners'
self-employment taxes for 2006 and 2007 were increased by $17,497 and $15,343,
respectively. Fourth, respondent determined that petitioners were entitled to
self-employment tax deductions for 2006 and 2007 of $8,749 and $7,672,
respectively. Fifth, respondent determined that petitioners were liable for
section 6662(a) accuracy-related penalties for 2006 and 2007 for substantial
understatements of income tax. Petitioners petitioned the Court under section
6213(a) for a redetermination of the deficiencies and accuracy-related
penalties.
OPINION
Respondent introduced ample evidence linking petitioners
with the import and export business (the income-producing activity), and
respondent has shown that petitioners received unreported income during each
year at issue. The record includes advices of credit and bank statements
showing that more than $390,000 was transferred into VK U.S.' checking account
from international sources. The record likewise contains certificates of title,
bills of lading, and receipts showing that petitioners shipped vehicles
purchased at auctions within the United States to VK Lithuania. At trial and on
brief petitioners admitted that they received, but did not report, at least
$110,000 from sales of vehicles in Lithuania. In view of the foregoing, we are
satisfied that respondent has carried his burden of production as to the
unreported Schedule C gross receipts. Accordingly, the notice of deficiency is
presumed correct and petitioners bear the burden of proving otherwise. 10
II. Schedule C Gross Receipts Respondent determined that
petitioners underreported their 2006 and 2007 Schedule C gross receipts by
$222,534 and $168,086, respectively. Petitioners acknowledge on brief that they
failed to report Schedule C gross receipts for 2006 and 2007 in the respective
amounts of $11,620 and $99,090 but claim additional amounts which respondent
attributed to them are excludable from gross income as gifts under section 102.
We will sustain respondent's determinations.
Respondent's revenue agent, Ms. Owen, testified credibly
that petitioners' books and records, including their inventory system, were not
kept in organized fashion or in compliance with internal revenue laws. The
disarray of receipts and other documents that petitioners submitted to the
Court as their books and records reinforces that testimony. Accordingly, we
conclude that respondent was justified in recreating petitioners' gross
receipts using the bank deposits method.
Bank deposits are prima facie evidence of income. Tokarski
v. Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64
T.C. at 656. Under the bank deposits method, the Government assumes that all
deposits into a bank account during any given taxable year constitute taxable
income unless the taxpayers prove that the deposits originated from nontaxable
sources. DiLeo v. Commissioner, 96 T.C. at 868. The Commissioner may (but need
not) show a likely source of unreported income determined through the bank
deposits method, though he must take into account nontaxable items or
deductible expenses which he knows about. Price v. United States, 335 F.2d 671,
677 [14 AFTR 2d 5519] (5th Cir. 1964); DiLeo v. Commissioner, 96 T.C. at 868.
Petitioners bear the burden of establishing that the bank deposits originated
from nontaxable sources. See Price, 335 F.2d at 677.
It is deemed stipulated that petitioners underreported their
gross receipts by $222,534 for 2006 and $168,086 for 2007. A stipulation is
treated, to the extent of its terms, as a conclusive admission by the parties,
unless otherwise permitted by the Court or agreed upon by the parties. Rule
91(e). The Court may permit a party to qualify, change, or contradict a
stipulation upon a showing that the stipulation is contrary to facts disclosed
by the record, see Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976), or
where justice so requires, see Rule 91(e). Petitioners have not asked to be
relieved of the deemed stipulations, and we decline to grant such relief on our
own. The stipulation concerning gross receipts is not contrary to the record
and, as we find, justice would be ill served were the stipulation not enforced.
Petitioners acknowledged at trial and on brief that they
underreported their 2006 and 2007 gross receipts by $11,620 and $99,090,
respectively. We treat those statements as conclusive and binding admissions on
petitioners. See United States v. Burns, 109 Fed. Appx. 52, 58 (6th Cir. 2004)
(statements made on brief may be considered judicial admissions). We thus
conclude petitioners' gross receipts are increased by $11,620 for 2006 and
$99,090 for 2007. As for the remaining gross receipts in controversy, i.e.,
$210,914 for 2006 and $68,996 for 2007 (sometimes collectively referred to as
the disputed gross receipts), 11 we will give effect to the stipulation
treating those amounts as gross receipts.
Petitioners claim that the disputed gross receipts were
nontaxable gifts from petitioner's parents. 12 We are unpersuaded. Respondent
asserts, and we agree, that petitioners have not submitted corroborating
evidence to support their claims that any portion of the disputed gross
receipts was a gift. As we find, the disputed gross receipts reflect the
proceeds of business transactions entered into by VK Lithuania and subsequently
remitted to petitioners. By reason of petitioners' failure to prove that the
disputed gross receipts were gifts and not proceeds from VK Lithuania, we
conclude that justice disfavors allowing petitioners to contradict the
stipulations.
Section 102(a) allows taxpayers to exclude from gross income
the value of property acquired by gift, bequest, devise, or inheritance. The
Supreme Court has defined a gift for statutory purposes as a transfer of
property that proceeds from a "detached and disinterested generosity, out
of affection, respect, admiration, charity or like impulses." Commissioner
v. Duberstein, 363 U.S. 278, 285 [5 AFTR 2d 1626] (1960) (internal citations
and quotation marks omitted). The donor's intent is of critical import in
deciding whether the property transferred was a gift. Id. at 285-286. Such
intent is often outcome determinative because a gift is not recognized as
complete until the donor has evinced a clear and unmistakable intention to
transfer sufficient dominion and control of the property irrevocably and
absolutely. Guest v. Commissioner, 77 T.C. 9, 16 (1981) (quoting Weil v.
Commissioner, 31 B.T.A. 899 (1934), aff'd, 82 F.2d 561 [17 AFTR 666] (5th Cir.
1936)).
Applying those considerations to this case, we decline to
recognize any of the disputed gross receipts as nontaxable gifts. With respect
to wire transfers from petitioner's mother, all of which bore the notation
"skola", petitioner testified that his mother used the word "skola"
to intimate that she expected to be repaid if she needed the funds, and only if
no such need arose would the transfer be considered a gift. 13 By petitioner's
own admission, therefore, his mother did not relinquish dominion and control of
the funds. Rather, she conditioned petitioner's enjoyment of the funds on her
not asking to be repaid--a condition uncertain to be met until the sooner of
her death or the removal of the condition. That condition precludes our
recognizing transfers from petitioner's mother as gifts for Federal income tax
purposes because the gift was not certain to be completed. With regard to wire
transfers from petitioner's father, all of which were similarly designated
"skola", petitioners presented no evidence to suggest his father's use
of the word did not connote an expectation of repayment should the need arise.
In this regard, we are not persuaded that wire transfers from petitioner's
father were completed gifts in 2006 or 2007. 14
We are skeptical for additional reasons that amounts
wire-transferred to petitioners were gifts. Petitioners each testified that
petitioner's parents wire-transferred the disputed gross receipts to them for
the support, care, and education of petitioners' children. Although
petitioner's father was unavailable to testify on the matter, we have no reason
to believe that petitioner's mother was unavailable to be called as a witness.
Insofar as petitioner's mother was not called to testify to her intent at the
time of each transfer and her use of the word "skola", we conclude
such testimony would be damaging to petitioners. See McKay v. Commissioner, 89
T.C. 1063, 1069 (1987) (witness' failure to testify to facts peculiarly within
his knowledge suggests the testimony would be unfavorable),aff'd, 886 F.2d 1237
[64 AFTR 2d 89-5712] (9th Cir. 1989). Nor did petitioners explain why moneys
transferred allegedly to support their children were deposited into the
business checking account and not, for example, one of petitioners' personal
accounts. In the same regard, petitioners did not explain why their claimed
need for support was not met by the more than $300,000 of savings which they
had collected over the years. Given that many of the transfers originated with
petitioner's mother, who was also VK Lithuania's bookkeeper, we question the
donative nature of the transfers. See Commissioner v. Culbertson, 337 U.S. 733,
746 [37 AFTR 1391] (1949) (“[T]he family relationship often makes it possible
for one to shift tax incidence by surface changes of ownership without
disturbing in the least his dominion and control over the subject of the gift
or the purposes for which the income from the property is used.").
Accordingly, we conclude the disputed wire transfers were not gifts.
When viewed in the light of the fact that petitioners owned
and operated VK
Lithuania within Europe, that they routinely purchased
shipping containers to export vehicles, and that they received transfers from
the business checking almost monthly, we agree with respondent that the most
probable source of that income is sales of vehicles abroad. Petitioners
conceded at trial and on brief that they underreported VK U.S.' gross receipts
by $11,620 for 2006 and $99,090 for 2007. Petitioners have failed to establish
a nontaxable source for the disputed gross receipts, and consequently we
conclude that justice does not favor relieving them of the stipulation treating
such amounts as gross receipts. Thus, we hold that petitioners' 2006 and 2007
gross receipts are increased by $222,534 and $168,086, respectively.
III. Schedule C Deductions Petitioners reported on their
2006 and 2007 Schedules C that in connection with VK U.S.' trade or business
they incurred expenses of $72,634 and $66,368, respectively. Respondent allowed
those deductions in full and credited petitioners with cost of goods sold for
2006 and 2007 in the respective amounts of $5,353 and $46,604. As explained on
brief, petitioners claim entitlement to additional trade or business expense
deductions for 2006 and 2007 in the respective amounts of $9,602 and $23,602.
15 Respondent replies that petitioners are not entitled to the additional
deductions claimed because they have not proven that such expenses have not
already been deducted on the 2006 and 2007 returns. We agree with respondent.
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving their entitlement to any deduction claimed. Rule
142(a);INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694]
(1992). Taxpayers are allowed a deduction for ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on a trade or
business. Sec. 162(a). Taxpayers must substantiate amounts claimed as
deductions by keeping the records necessary to establish that they are entitled
to the deductions. Sec. 6001(a); sec. 1.6001-1(a), Income Tax Regs.
Petitioners have failed to factually or legally establish
that they are entitled to deductions over and above those respondent allowed.
First, petitioners have failed to establish that the expense deductions to
which they claim entitlement were not already claimed on the 2006 and 2007
returns. See Avery v. Commissioner, T.C. Memo. 1993-344 [1993 RIA TC Memo
¶93,344], 66 T.C.M. (CCH) 305, 313 (1993) (no deduction for real estate taxes
paid when taxpayers failed to prove the expenses were not already allowed as
deductions). Second, portions of the expense deductions petitioners claim
entitlement to in their petition, including shipping fees, shipyard fees,
taxes, and duties, are not deductible because the supporting receipts suggest
the expenses were ordinary and necessary business expenses of VK Lithuania and
not VK U.S. See Welch v. Helvering, 290 U.S. at 114 (taxpayers may not deduct
expenses of another entity). Petitioners introduced no evidence concerning which
counterparty bore the duties, fees, and taxes due upon arrival in Lithuania.
Third, taxpayers are required to keep records sufficient to
establish the amounts of the deductions they claim. Sec. 6001; sec.
1.6001-1(a), Income Tax Regs. Even though we may estimate the amount of an
expense where taxpayers introduce evidence demonstrating that they paid or
incurred a deductible expense but cannot substantiate the precise amount, see
Cohan v. Commissioner, 39 F.2d 540, 544 [8 AFTR 10552] (2d Cir. 1930), we
decline to do so here because petitioners have not persuaded us that such
expenses were not already deducted on their 2006 or 2007 return. Fourth,
petitioners have not persuaded us that receipts for postage, utilities, and
other similar items are not nondeductible personal expenses. See sec. 262
(deductions for personal, living, and family expenses are not allowed). Fifth,
petitioners did not explain how (if at all) the expenses claimed as deductions
were ordinary and necessary to their import and export business. See sec.
162(a). On the basis of the foregoing, we conclude that petitioners have failed
to establish that they are entitled to trade or business expense deductions in
addition to those respondent has already allowed. Accordingly, we hold petitioners
may not deduct trade or business expenses in addition to those respondent has
already allowed.
IV. Cost of Goods Sold Notwithstanding the fact that
petitioners reported zero cost of goods sold for each year at issue, respondent
credited petitioners with costs of goods sold for 2006 and 2007 of $5,353 and
$46,604, respectively. Petitioners allege in the petition they are entitled to
costs of goods sold above and beyond those allowed in the notice of deficiency.
We will sustain respondent's determinations.
Gross income is defined in section 61(a) to include “[g]ross
income derived from business”. Sec. 61(a)(2). A manufacturing or merchandising
business, such as VK U.S., calculates gross income by subtracting cost of goods
sold from gross receipts and adding investment income and proceeds from
ancillary operations or sources. Sec. 1.61-3(a), Income Tax Regs. The cost of
goods sold is determined under the taxpayer's regular method of accounting,see
id., and includes the items acquired for resale and the cost of producing items
for resale adjusted for opening and closing inventories, see Hultquist v.
Commissioner T.C. Memo. 2011-17 [TC Memo 2011-17], 101 , T.C.M. (CCH) 1054,
1056 (2011); sec. 1.162-1(a), Income Tax Regs. 16 In contrast, section 162
allows taxpayers a deduction for all ordinary and necessary business expenses
incurred or paid during the taxable year. Sec. 162(a). Thus, cost of goods sold
is an offset to gross receipts for purposes of computing gross income, and
deductions are subtracted from gross income in arriving at taxable income. See
B.C. Cook & Sons, Inc. v. Commissioner, 65 T.C. 422, 428-429 (1975), aff'd,
584 F.3d 53 (5th Cir. 1978).
Petitioners have not proved they are entitled to costs of
goods sold above and beyond those allowed by respondent. Taxpayers bear the
burden of substantiating Memo. 2009-22, 97 T.C.M. (CCH) 1090, 1092 [TC Memo
2009-22] (2009). Petitioners do not specify the amounts of costs of goods sold
being claimed; nor do their records permit us to differentiate between costs
generally incurred and costs relating to vehicles sold such that we might
calculate costs of goods sold on our own initiative. Although we may estimate
charges to gross income for items such as cost of goods sold,see Cohan v.
Commissioner, 39 F.2d at 540 [8 AFTR 10552]; Jackson v. Commissioner, T.C.
Memo. 2008-70 [TC Memo 2008-70], 95 T.C.M. (CCH) 1258, 1262 (2008), we decline
to do so. Petitioners' records do not allow us to differentiate between the
costs of goods sold they incurred and those respondent has already credited
them for. Moreover, Ms. Kazhukauskas testified that she reported costs of goods
sold as "supplies" on the 2006 and 2007 Schedules C, amounts which
respondent allowed as deductions in arriving at taxable income. Thus,
petitioners have been credited for costs of goods sold they substantiated on
audit as well as additional amounts in the form of a tax-effected deduction.
Accordingly, we hold that petitioners are not entitled to claim cost of goods
sold for 2006 or 2007 in addition to that allowed in the notice of deficiency.
V. Self-Employment Tax Respondent determined that
petitioners are liable for self-employment tax under section 1401 for each year
at issue. Section 1401 imposes a tax on the self-employment income of
individuals. See sec. 1401(a) and (b). Self-employment income generally means
the gross income derived by an individual from carrying on a trade or business,
less the allowable deductions attributable to that trade or business. Sec.
1402(a) and (b); sec. presented no evidence to suggest that the Schedule C
gross income earned from VK U.S. (less the allowable deductions) is not
self-employment income. Therefore, petitioners are liable for self-employment
tax for 2006 and 2007 of $17,497 and $15,343, respectively, and they are
entitled to deductions for one-half of the self-employment tax paid in the
respective amounts of $8,749 and $7,672 as determined by respondent. See sec.
164(f).
VI. Accuracy-Related Penalties Respondent determined for
each year at issue that petitioners are liable for a 20% accuracy-related
penalty for a substantial understatement of income tax under section 6662(a)
and (b)(2). There is a substantial understatement of income tax for any year in
which the amount of the understatement exceeds the greater of 10% of the tax
required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). Under section
7491(c), respondent bears the burden of producing sufficient evidence that
imposition of the penalty is appropriate. See Higbee v. Commissioner, 116 T.C.
438, 446 (2001). Once respondent carries his burden of production, petitioners
bear the burden of proving that the penalties are inappropriate because of
reasonable cause, substantial authority, or other affirmative defenses. Id. at
446-447. The single most important factor to be considered when determining
whether to excuse taxpayers from the accuracy-related penalty on account of
reasonable cause is the extent to which the taxpayers sought to compute their
proper tax liability. Sec. 1.6664-4(b)(1), Income Tax Regs.
Respondent has met his burden of production because
petitioners' failure to report funds wire-transferred to them resulted in an
understatement of income tax for each year in an amount of more than $5,000 and
more than 10% of the tax required to be shown on the return. See Park v.
Commissioner, 136 T.C. 569, 583 (2011) (the Commissioner met his burden of
production by showing that failure to report income resulted in an
understatement of income tax for each year at issue of more than $5,000 and
more than 10% of the tax required to be shown on the return). Thus, petitioners
bear the burden to prove that the accuracy-related penalty should not be imposed
on account of reasonable cause or substantial authority. We will sustain
respondent's determinations with respect to the accuracy-related penalties.
Among the deemed stipulated facts were that petitioners
underreported their respective gross receipts for VK U.S. for 2006 and 2007 by
$222,534 and $168,086 and that they lacked reasonable cause for failing to
report those gross receipts. Those stipulations are treated as a binding and
conclusive admission that may be qualified, changed, or contradicted only where
justice requires it. See Rule 91(e). Petitioners have not asked to be relieved
of the deemed stipulations, and we decline to grant such relief on our own.
Petitioners conceded that VK U.S.' 2006 and 2007 gross receipts were
underreported by more than $100,000, and they also admitted to falsely
reporting VK U.S.' profits because, as they claimed on brief, they did not want
to show that the business was facing bankruptcy. On the basis of these facts,
we are convinced that justice requires that the deemed stipulation be binding
upon petitioners and that they made no effort to accurately report their 2006
or 2007 Federal income tax liability. Accordingly, we hold petitioners are
liable for accuracy-related penalties in the amounts respondent determined.
The Court has considered all of petitioners' arguments for a
contrary result, and to the extent not discussed herein, we conclude those
arguments are irrelevant, moot, or without merit.
To give effect to the foregoing,
Decision will be entered for respondent.
1
Unless otherwise
indicated, section references are to the applicable version of the Internal
Revenue Code, and Rule references are to the Tax Court Rules of Practice and
Procedure. Some dollar amounts are rounded.
2
Respondent allowed
petitioners all trade or business expense deductions claimed on their 2006 and
2007 Federal income tax returns (2006 return and 2007 return, respectively), as
well as offsets to their 2006 and 2007 gross receipts for costs of goods sold
of $5,353 and $46,604, respectively.
3
Among the facts
deemed stipulated were that petitioners underreported their respective gross
receipts for 2006 and 2007 by $222,534 and $168,086 and that petitioners lacked
reasonable cause for failing to report those gross receipts.
4
A scrap certificate
of title signifies that the vehicle to which it relates is not to be titled or
registered and is to be used for parts or scrap metal only. See Mich. Comp.
Laws Serv. sec. 257.222(8) (LexisNexis 2001 & Supp. 2012).
5
We examined the records
submitted at trial and summarized VK U.S.' purchases using the associated
vehicle identification number (VIN).
6
Two accounts named
Vilma Kazhukauskene as a joint account holder or a d.b.a. owner of VK U.S. It
is our understanding that Vilma Kazhukauskene and Ms. Kazhukauskas are the same
individual, and we collectively refer to both as Ms. Kazhukauskas. We note that
the parties' redaction of all but the first three digits of financial account
numbers prevented us from more precisely describing petitioners' accounts.
7
The record
establishes that petitioners owned a bank account which earned interest income
of $8,647 in 2006. Our statement of petitioners' accounts does not separately
identify this account because the record is not clear that this account is not
the same as the personal savings account.
8
A police book is
defined under Michigan law to mean a bought and sold registry for each vehicle
a dealer handles. Mich. Comp. Laws Serv. sec. 257.41a (LexisNexis 2001).
9
While the factual
allegations deemed admitted under Rule 91(f) establish that petitioners
underreported their 2006 and 2007 gross receipts, respondent still must produce
evidence linking petitioners with that income.
10
Petitioners do not
allege, and the record does not establish, that the burden of proof as to
factual matters should shift to respondent under sec. 7491(a).
11
To calculate the
disputed 2006 gross receipts, we subtracted the amount conceded by petitioners
on brief, or $11,620, from the unreported gross receipts as determined in the
notice of deficiency, or $222,534. We calculated the challenged 2007 gross
receipts in the same way; that is, we subtracted the amount petitioners
conceded on brief, or $99,090, from the unreported gross receipts as determined
in the notice of deficiency, or $168,086.
12
Notwithstanding the
literal translation of "skola" to mean debt, petitioner testified on
direct at trial that there was not a loan between him and his mother.
13
Petitioner's
specific testimony was: “The money was given to me and because of that she
felt--in case if she need those monies back she put the word, skola, meaning
that I be owing to her in case if she needs [it]. If not this will be as a
gift.”
14
Although the record
establishes that petitioner's father was deceased at the time of trial, the
record does not specify whether he died in 2007. On this subject, we are unable
to discern whether purported gifts from the father were completed in 2007, in
which case these amounts may have been nontaxable to petitioners, or at some point
thereafter. This failure of proof is borne by petitioners.
15
We calculated the
additional deductions which petitioners claim they are entitled to for 2006 by
subtracting the amount allowed as a deduction and claimed on the 2006 Schedule
C, or $72,634, from the amount petitioners claim on brief they are entitled to,
or $82,236. We calculated the additional deductions to which petitioners claim
entitlement for 2007 the same way; that is, we subtracted the amount allowed as
a deduction and claimed on the 2007 Schedule C, or $66,368, from the amount
petitioners claim on brief they are entitled to deduct, or $89,970.
16
Certain small
business owners with average annual receipts of $1 million or less, as VK U.S.
was during the years at issue, neednot take inventories at the beginning and
end of each taxable year. See Rev. Proc. 2001-10, sec. 4.01, 2001-1 C.B. 272,
273.
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