Regulation of tax return preparers - Loving case

LOVING v. IRS, Cite as 111 AFTR 2d 2013-XXXX, 01/18/2013

SABINA LOVING, et al., Plaintiffs, v. INTERNAL REVENUE SERVICE, et al., Defendants.
Case Information:

Code Sec(s):
Court Name: UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA,
Docket No.: Civil Action No. 12-385 (JEB),
Date Decided: 01/18/2013.
Disposition:
HEADNOTE

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Reference(s):

OPINION

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA,

MEMORANDUM OPINION

Judge: JAMES E. BOASBERG United States District Judge

To close a gap in the federal oversight of tax professionals, in 2011 the Internal Revenue Service began regulating hundreds of thousands of non-attorney, non-CPA tax-return preparers who prepare and file tax returns for compensation. The new regulations require each such preparer to pass a qualifying exam, pay an annual application fee, and take fifteen hours of continuing-education courses each year. Agency action, however, requires statutory authority. The IRS interpreted an 1884 statute as enabling these new regulations. That statute allows the IRS to regulate “representatives” who “practice” before it. Believing that tax-return preparers are not covered under the statute, and thus cannot be so regulated, Plaintiffs — three independent tax-return preparers — brought this suit. Plaintiffs and the Government have now cross-moved for summary judgment. Concluding that the statute's text and context unambiguously foreclose the IRS's interpretation, the Court will grant Plaintiffs' Motion.

I. Background

A. Statutory and Regulatory Framework

This case turns on whether certain tax-return preparers are representatives who practice before the IRS, and thus are properly subject to the new IRS regulations. (Preparers who are attorneys, CPAs, enrolled agents, or enrolled actuaries are otherwise regulated by the IRS and thus have no bone to pick with the new regulations. See 31 C.F.R. § 10.3 (2009).) Before probing that question, however, it helps to know something about the IRS adjudication process. The Court therefore begins by outlining how the IRS resolves disputes about tax liability, then moves to the statutes and regulations at issue in this case.

1. Process for Adjudicating Federal Income Taxes

“The Internal Revenue Service is a bureau of the Department of the Treasury under the immediate direction of the Commissioner of Internal Revenue.” 26 C.F.R. § 601.101(a); see also 26 U.S.C. § 7803(a) (Commissioner of Internal Revenue is part of Treasury Department with duties and powers assigned by Treasury Secretary). Taxpayers can progress through three stages of interaction with the IRS: assessment and collection, examination, and appeals.

First up is assessment and collection. Our federal tax system “is basically one of self-assessment” in which each taxpayer must compute the tax due, file a return showing “facts upon which tax liability may be determined and assessed,” and pay the tax due. 26 C.F.R. § 601.103(a). After such a filing (or a failure to file), the Government performs an “assessment” — that is, “the calculation or recording of a tax liability.” United States v. Galletti, 541 U.S. 114, 122 [93 AFTR 2d 2004-1425] (2004); see 26 U.S.C. §§ 6201–6204. “In most cases, the Secretary accepts the self-assessment and simply records the liability of the taxpayer.... [W]here the Secretary rejects the self-assessment of the taxpayer or discovers that the taxpayer has failed to file a return, the Secretary calculates the proper amount of liability and records it in the Government's books.” Galletti, 541 U.S. at 122. After an assessment, the IRS collects unpaid taxes. See 26 C.F.R. § 601.104(c)(1); see also 26 U.S.C. §§ 6301–6306.

Next, for some lucky taxpayers, comes the IRS audit, known in tax jargon as an “examination.” See 26 C.F.R. §§ 601.103(b), 601.105(a). The IRS may conduct the examination by mail or by in-person interviews, and it will sometimes visit a taxpayer's home or business to examine his books and records. See 26 C.F.R. § 601.105(b). “During the examination of a return a taxpayer may be represented before the examiner by an attorney, certified public accountant, or other representative.” 26 C.F.R. § 601.105(b)(1); see also 26 U.S.C. § 7521(b)(2) (during a taxpayer interview, taxpayer may suspend questioning to consult with “an attorney, certified public accountant, enrolled agent, enrolled actuary, or any other person permitted to represent the taxpayer before the Internal Revenue Service”).

Last, if the taxpayer and the IRS still disagree, the taxpayer can request an in-person conference with an IRS “Appeals office.” See 26 C.F.R. §§ 601.103(b), (c)(1), 601.106. While “[p]roceedings before Appeals are informal,” taxpayers may “designate a qualified representative to act for them.” 26 C.F.R. § 601.106(c). (The taxpayer may then pursue appeals outside the IRS in the U.S. Tax Court, the U.S. Claims Court, or a federal district court. See 26 C.F.R. § 601.103(c)(2)–(3).)

2. Statutory and Regulatory Scheme

With that framework in mind, the Court now outlines the statutory and regulatory scheme at play in this case. Under 31 U.S.C. § 330, originally enacted in 1884, the Treasury Secretary has authority to regulate people who practice before the Treasury Department. 1 As the IRS is a bureau of the Treasury Department, see 26 C.F.R. § 601.101(a), this statute covers practice before the IRS as well. This is so even though the casual student of history knows that the Sixteenth Amendment authorizing the modern federal income tax was not ratified until 1913. In full, the first two subsections of § 330 currently provide:

((a)) Subject to section 500 of title 5, the Secretary of the Treasury may —
((1)) regulate the practice of representatives of persons before the Department of the Treasury; and
((2)) before admitting a representative to practice, require that the representative demonstrate —
((A)) good character;
((B)) good reputation;
((C)) necessary qualifications to enable the representative to provide to persons valuable service; and
((D)) competency to advise and assist persons in presenting their cases.
((b)) After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department, or censure, a representative who —
((1)) is incompetent;
((2)) is disreputable;
((3)) violates regulations prescribed under this section; or
((4)) with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented.
The Secretary may impose a monetary penalty on any representative described in the preceding sentence. If the representative was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the Secretary may impose a monetary penalty on such employer, firm, or entity if it knew, or reasonably should have known, of such conduct. Such penalty shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to, or in lieu of, any suspension, disbarment, or censure of the representative.
(Emphasis added.)

Using this statutory authority, the Secretary publishes regulations governing practice before the IRS in the Code of Federal Regulations, Title 31, part 10. The Treasury reprints those regulations under the name “Treasury Department Circular No. 230.” The meat of Circular 230 is a long list of duties and restrictions relating to practice before the IRS, giving content to statutory terms like “incompetent” and “disreputable.” See 31 C.F.R. §§ 10.20–.38. Circular 230 also lays out sanctions and sets the rules for disciplinary proceedings. See 31 C.F.R. §§ 10.50–.82. These regulations have long applied to attorneys, CPAs, and a handful of other specified tax professionals. See 31 C.F.R. § 10.3 (2009).

In 2011, the IRS extended the reach of Circular 230 by bringing tax-return preparers under its coverage. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. 32,286 (June 3, 2011) (final rule) (“the Rule”); see also Regulations Governing Practice Before the Internal Revenue Service, 75 Fed. Reg. 51,713 (Aug. 23, 2010) (proposed rule). Although technically promulgated by the Treasury Department, this Opinion will usually attribute the new Rule to the IRS. Under the Rule, a tax-return preparer is a person who “prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code.” 26 C.F.R. § 301.7701-15(a); accord 26 U.S.C. § 7701(a)(36); see 31 C.F.R. § 10.2(a)(8) (“Tax return preparer means any individual within the meaning of section 7701(a)(36) and 26 CFR 301.7701-15.”) (emphasis in original). The IRS estimated that the new Rule sweeps in 600,000 to 700,000 new tax-return preparers who were previously unregulated at the federal level. See 76 Fed. Reg. at 32,299.

“Practice” as a tax-return preparer for the most part (and for our purposes) “is limited to preparing and signing tax returns and claims for refund, and other documents for submission to the Internal Revenue Service.” 31 C.F.R. § 10.3(f)(2). (In addition, if the IRS audits a tax return that the preparer signed, the preparer may represent the taxpayer during the examination. See 31 C.F.R. § 10.3(f)(3). Plaintiffs raise no objection to the IRS using such additional practice as a basis for regulation.) The Rule thus encompasses those preparers whose only “appearance” before the IRS is the preparation and submission of tax returns, and this Opinion's subsequent references to tax-return preparers concern this limited role.

Before engaging in such practices, the new regulations force all tax-return preparers to register with the Secretary. This registration requirement is the vehicle by which the Rule adds burdens on tax-return preparers. To initially register, a tax-return preparer must pay a fee and pass a qualifying exam. See 31 C.F.R. §§ 10.4(c), 10.5(b). Then, to maintain her registration, each year the preparer must pay another fee and complete at least 15 hours of continuing-education courses. See 31 C.F.R. §§ 10.6(d)(6), (e)(3). Plus, on pain of censure, suspension, disbarment, or monetary penalties permitted by  § 330(b), the preparer must comply with duties and restrictions imposed on other IRS practitioners.

B. Factual and Procedural History

Plaintiffs are three paid tax-return preparers who were not previously regulated by the IRS. Sabina Loving works on the South Side of Chicago, serving low-income clients. Pls. Mot., Exh. 2 (Decl. of Sabina Loving), ¶ 7. Elmer Kilian has for decades prepared tax returns in his house. Pls. Mot., Exh. 3 (Decl. of Elmer Kilian), ¶ 4. And Giovanni Gambino is a financial planner who prepares tax returns for his clients. Pls. Mot., Exh. 4 (Decl. of Giovanni Gambino), ¶¶ 2, 6. Loving declares that she will have to increase her prices if forced to comply with the Rule, likely losing customers. See Loving Decl., ¶ 13. Kilian and Gambino declare that they will likely close their tax businesses if forced to comply. See Kilian Decl., ¶ 15; Gambino Decl., ¶ 17.

Seeking injunctive and declaratory relief, Plaintiffs sued the IRS, the Commissioner of Internal Revenue, and the United States under the Administrative Procedure Act, 5 U.S.C. §§ 701–706, and the Declaratory Judgment Act, 28 U.S.C. §§ 2201–2202. (As regulated parties, Plaintiffs obviously have standing to challenge the regulations — particularly given the annual fees, the entrance exam, and the hefty continuing-education requirements.) Both sides now move for summary judgment.

II. Legal Standard

Summary judgment may be granted if “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48 (1986); Holcomb v. Powell, 433 F.3d 889, 895 (D.C. Cir. 2006). A fact is “material” if it is capable of affecting the substantive outcome of the litigation. See Liberty Lobby, 477 U.S. at 248; Holcomb, 433 F.3d at 895. A dispute is “genuine” if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. See Scott v. Harris, 550 U.S. 372, 380 (2007); Liberty Lobby, 477 U.S. at 248; Holcomb, 433 F.3d at 895.

Although styled Motions for Summary Judgment, the pleadings in this case more accurately seek the Court's review of an administrative decision. The standard set forth in Rule 56(c), therefore, does not apply because of the limited role of a court in reviewing the administrative record. See Sierra Club v. Mainella, 459 F. Supp. 2d 76, 89–90 (D.D.C. 2006) (citing Nat'l Wilderness Inst. v. Army Corps of Eng'rs, 2005 WL 691775, at 7 (D.D.C. 2005); Fund for Animals v. Babbitt, 903 F. Supp. 96, 105 (D.D.C. 1995), amended on other grounds, 967 F. Supp. 6 (D.D.C. 1997)). “[T]he function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did.” Id. at 90 (citation omitted). “Summary judgment thus serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the APA standard of review.” Id. (citing Richards v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977), cited in Bloch v. Powell, 227 F. Supp. 2d 25, 31 (D.D.C. 2002), aff'd, 348 F.3d 1060 (D.C. Cir. 2003)).

The Administrative Procedure Act requires courts to “hold unlawful and set aside agency action, findings, and conclusions” that are “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. § 706(2)(C). Such claims “are reviewed under the well-known Chevron framework.” Ass'n of Private Sector Colls. & Univs. v. Duncan, 681 F.3d 427, 441 (D.C. Cir. 2012) (citing Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984)). Chevron review entails a two-step inquiry. The first step asks whether “the intent of Congress is clear” — that is, “whether Congress has directly spoken to the precise question at issue.” Chevron, 467 U.S. at 842. “Under the first step of Chevron, the reviewing court must first exhaust the traditional tools of statutory construction to determine whether Congress has spoken to the precise question at issue.” Bell Atl. Tel. Co. v. FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997) (internal quotation marks omitted). “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, 467 U.S. at 842–43. “[I]f the statute is silent or ambiguous with respect to the specific issue,” the reviewing court must proceed to step two, asking whether the agency's interpretation “is based on a permissible construction of the statute.” Id. at 843. The agency's construction at step two is permissible “unless it is arbitrary or capricious in substance, or manifestly contrary to the statute.” Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 711 [107 AFTR 2d 2011-341] (2011) (citation omitted).

III. Analysis

At the threshold, the IRS claims that the Court can bypass the Chevron inquiry altogether because each agency has inherent authority to regulate those who practice before it. See Goldsmith v. Bd. of Tax Appeals, 270 U.S. 117, 122 [5 AFTR 5842] (1926) (“[T]he general words by which the Board is vested with the authority to prescribe the procedure in accordance with which its business shall be conducted include as part of the procedure rules of practice for the admission of attorneys.”). An agency, however, “cannot rely on its general authority to make rules necessary to carry out its functions when a specific statutory directive defines the relevant functions of [the agency] in a particular area.” Am. Petroleum Inst. v. EPA, 52 F.3d 1113, 1119 (D.C. Cir. 1995). Because 31 U.S.C. § 330 specifically defines the Treasury Department's authority to regulate the people who practice before it, that statute controls the inquiry here.

Section 330(a) authorizes the Treasury Secretary to “regulate the practice of representatives of persons before the Department of the Treasury.” In dispute is the IRS's interpretation that tax-return preparers are “representatives” who “practice” before the IRS. The battle here will be fought and won on Chevron step one; Plaintiffs offer no independent argument for why, if the statute is ambiguous, the IRS's interpretation would be “arbitrary or capricious in substance, or manifestly contrary to the statute” under Chevron step two. Mayo Found., 131 S. Ct. at 711. This case then boils down to one question: Is § 330 ambiguous as to whether tax-return preparers are “representatives” who “practice” before the IRS?

“The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole.” Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). These are the sources the Court considers here. In so doing, it concludes that § 330 unambiguously forecloses the IRS's interpretation for three reasons: First, the text of § 330(a)(2)(D) defines the “practice of representatives” in a way that does not cover tax-return preparers. Second, the IRS's interpretation would displace an existing statutory scheme that comprehensively regulates penalties on tax-return preparers. Third, under the IRS's interpretation, a federal statute that remedies abusive practice by tax-return preparers would be relegated to oblivion. After examining the statutory text and context, the Court will resolve other arguments offered by the parties.

A. Text of § 330

The inquiry here begins “where all such inquiries must begin: with the language of the statute itself.” Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 132 S. Ct. 1670, 1680 (2012) (citation omitted). Again, § 330(a) says that “the Secretary of the Treasury may ... regulate the practice of representatives of persons before the Department of the Treasury.”he IRS hurries through Chevron step one, arguing that the statute is ambiguous because it defines neither “representative” nor “practice,” and both terms can have broad meanings. See IRS Mot. at 15–16. That simplistic approach will not fly, however. “Ambiguity is a creature not of definitional possibilities but of statutory context ....” Brown v. Gardner, 513 U.S. 115, 118 (1994). Indeed, the D.C. Circuit has specifically rejected the argument that a statute is ambiguous when it fails to define a broad term. See Goldstein v. SEC, 451 F.3d 873, 878 (D.C. Cir. 2006) (“The lack of a statutory definition of a word does not necessarily render the meaning of a word ambiguous, just as the presence of a definition does not necessarily make the meaning clear.”); id. (“If Congress employs a term susceptible of several meanings, as many terms are, it scarcely follows that Congress has authorized an agency to choose any one of those meanings.”) (emphasis in original).

In any event, while the “practice of representatives” may not be defined in § 330(a)(1), the very next subsection of § 330 provides critical guidance on what the term means. “[B]efore admitting a representative to practice,” § 330(a)(2) allows the Secretary to “require that the representative demonstrate ... (D) competency to advise and assist persons in presenting their cases.” Section 330(a)(2), like  § 330(a)(1), does not disclose who these covered “representatives” are. But it does tell us what the representatives do — what their “practice” is, in the words of both subsections: representatives “advise and assist persons in presenting their cases.” This statutory equating of “practice” with advising and assisting the presentation of a case provides the first strike against the IRS's interpretation. Filing a tax return would never, in normal usage, be described as “presenting a case.” At the time of filing, the taxpayer has no dispute with the IRS; there is no “case” to present. This definition makes sense only in connection with those who assist taxpayers in the examination and appeals stages of the process.

The IRS seems to accept that tax-return preparers are not advising and assisting in presenting a case, focusing its fire instead on the premise of the argument. See IRS Reply at 13 (“It is nonsensical that Congress would authorize the Secretary to ensure the competency of those who present “cases” but not those who prepare returns, particularly where only a fraction of prepared returns are audited and thereafter become “cases” upon appeal before the Service.”); id. at 2 (“Plaintiffs misread 31 U.S.C. § 330(a) because they again claim that the Secretary only has the authority to regulate the “practice” of those who “advise and assist persons in presenting their cases.””). This hardly seems as preposterous as the IRS would lead one to believe. Congress could well desire that those who represent taxpayers in examinations or appeals be more closely regulated than those who merely prepare returns. Just so, drafting a will can be done by anyone of mature age and sound mind, but disputing the will entails litigation in probate court, where representatives must be lawyers admitted to the court's bar. Compare, e.g., D.C. Code § 18-102, with D.C. Code § 20-107(a), and D.C. Super. Ct. R. Civ. P. 101(a).

The IRS also maintains that § 330(a)(2) “is a separate grant of authority” from § 330(a)(1), IRS Mot. at 27, and thus § 330(a)(2)(D) “in no way limits the Service's authority with respect to whom the Secretary may authorize to “practice” before the agency, and the provision has no bearing on the definition of “practice” or the bounds of activities that may be defined as “practice” before the agency.” IRS Reply at 14. As explained above, however, the grant of authority in § 330(a)(1) — which allows the IRS to regulate the “practice of representatives” — uses the same language as the grant of authority in its near neighbor, § 330(a)(2) — which allows the IRS to require certain qualifications before admitting a “representative to practice.” And “[i]t is a well established rule of statutory construction that a word is presumed to have the same meaning in all subsections of the same statute.” Allen v. CSX Transp., Inc., 22 F.3d 1180, 1182 (D.C. Cir. 1994) (internal quotation marks omitted). Since  § 330(a)(2) makes clear that the “practice” of these representatives is “advis[ing] and assist[ing] persons in presenting their cases,” “practice” in § 330(a)(1) must mean the same thing.

B. Broader Statutory Context

Moving beyond the language of § 330, other related statutes also undercut the IRS's interpretation. Statutory language “cannot be construed in a vacuum. It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” Roberts v. Sea-Land Servs., Inc., 132 S. Ct. 1350, 1357 (2012) (citation omitted). Indeed, context can prove dispositive at Chevron step one. See FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132 (2000) (“In determining whether Congress has specifically addressed the question at issue, a reviewing court should not confine itself to examining a particular statutory provision in isolation. The meaning — or ambiguity — of certain words or phrases may only become evident when placed in context.”).

Two aspects of § 330's statutory context prove especially important here. Both relate to § 330(b), which allows the IRS to penalize and disbar practicing representatives. First, statutes scattered across Title 26 of the U.S. Code create a careful, regimented schedule of penalties for misdeeds by tax-return preparers. If the IRS had open-ended discretion under § 330(b) to impose a range of monetary penalties on tax-return preparers for almost any conduct the IRS chooses to regulate, those Title 26 statutes would be eclipsed. Second, if the IRS could “disbar” misbehaving tax-return preparers under § 330(b), a federal statute meant to address precisely those malefactors — 26 U.S.C. § 7407 — would lose all relevance. These two aspects are considered in turn.

1. Penalty Provisions in Title 26

Congress has already enacted a relatively rigid penalty scheme to punish misdeeds by tax-return preparers. Title 26, in fact, has at least ten penalties specific to tax-return preparers, each of which targets particular conduct related to preparing and filing tax returns, and each of which comes with a specific fine:

§ 6694(a): For an understatement of tax liability due to an unreasonable position, the greater of $1000 or 50% of the income that the preparer earned on the return;
§ 6694(b): For an understatement of tax liability due to willful or reckless conduct, the greater of $5000 or 50% of the income that the preparer earned on the return;
§ 6695(a): For failing to give a taxpayer a copy of her return without reasonable cause, $50 (with an annual maximum of $25,000);
§ 6695(b): For failing to sign a return without reasonable cause, $50 (with an annual maximum of $25,000);
§ 6695(c): For failing to list an identifying number without reasonable cause, $50 (with an annual maximum of $25,000);
§ 6695(d): For failing to retain a copy or a list of returns without reasonable cause, $50 (with an annual maximum of $25,000);
§ 6695(f): For endorsing or otherwise negotiating a check issued to a taxpayer, $500;
§ 6695(g): For failing to comply with the due-diligence IRS regulations on the earned income tax credit, $500;
§ 6713: For disclosing or otherwise using information the taxpayer shares for use in preparing a tax return,T $250 (with an annual maximum of $10,000); and
§ 7216: For knowingly or recklessly disclosing or otherwise using information the taxpayer shares for use in preparing a tax return, one year in prison or $1000 fine.
Yet if § 330 covers tax-return preparers, the IRS would have the discretion — with few restraints — to impose an array of penalties for this sort of conduct. Section 330(b) allows the Secretary to “impose a monetary penalty on any representative” who “is incompetent,” “is disreputable,” “violates regulations prescribed under” § 330, or, “with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented.” The IRS may set the penalty between $0 and “the gross income derived (or to be derived) from the conduct giving rise to the penalty.” In other words, if the “representatives” that the IRS could penalize under § 330(b) include tax-return preparers, the IRS would be able to punish everything covered by the ten penalties in Title 26 — and more — with considerable discretion over the size of the penalty. That unstructured independence by the IRS would trample the specific and tightly controlled penalty scheme in Title 26. The existing § 330 regulations, moreover, need not actually overlap with the Title 26 scheme; in statutory interpretation, the question is what the statute allows, not what the current regulations say.

When statutes intersect, the specific statutes (in Title 26) trump the general (§ 330). “That is particularly true where ... Congress has enacted a comprehensive scheme and has deliberately targeted specific problems with specific solutions.” RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2071 (2012) (internal quotation marks omitted); see also Brown & Williamson Tobacco, 529 U.S. at 133 (“the meaning of one statute may be affected by other Acts, particularly where Congress has spoken subsequently and more specifically to the topic at hand”). While the general/specific canon most often applies when the general and specific statutes point in opposite directions, the Supreme Court recently stressed that the canon also applies when both statutes authorize similar action, as here: “[T]he canon has full application as well to statutes such as the one here, in which a general authorization and a more limited, specific authorization exist side-by-side.” RadLAX Gateway Hotel, 132 S. Ct. at 2071. Because the U.S. Code already sets forth a comprehensive scheme targeting specific problems with specific solutions, § 330(b) should not be interpreted to allow the IRS to penalize tax-return preparers for conduct while preparing and filing returns.

Another statute confirms that § 330(b) does not authorize penalties on tax-return preparers. Under 26 U.S.C. § 6103(k)(5), the IRS may disclose certain penalties to state and local agencies that license, register, or regulate tax-return preparers. Specifically, § 6103(k)(5) allows the IRS to disclose “information as to whether or not any penalty has been assessed against such tax return preparer under section 6694, 6695, or 7216.” (Emphasis added.) If the IRS may penalize tax-return preparers under § 330(b), as the IRS claims, how curious that § 6103(k)(5) omits  § 330 from the list of penalties reportable to state and local agencies. Indeed, the misdeeds punished by § 330(b) — incompetence, poor reputation, fraud, and regulatory violations — would seem especially relevant to licensing agencies. The better answer, consistent with the general/specific canon, is that § 330(b) does not create a comprehensive penalty scheme against tax-return preparers.

2. Injunction under 26 U.S.C. § 7407

The U.S. Code also permits the IRS to enjoin tax-return preparers under 26 U.S.C. § 7407. If a tax-return preparer has engaged in specified unlawful conduct and injunctive relief is appropriate, § 7407 allows the IRS to sue the preparer to enjoin further violations:

((a)) Authority to seek injunction A civil action in the name of the United States to enjoin any person who is a tax return preparer from further engaging in any conduct described in subsection (b) or from further action as a tax return preparer may be commenced at the request of the Secretary. Any action under this section shall be brought in the District Court of the United States for the district in which the tax return preparer resides or has his principal place of business or in which the taxpayer with respect to whose tax return the action is brought resides....
((b)) Adjudication and decrees In any action under subsection (a), if the court finds —
((1)) that a tax return preparer has —
((A)) engaged in any conduct subject to penalty under section 6694 or 6695, or subject to any criminal penalty provided by this title,
((B)) misrepresented his eligibility to practice before the Internal Revenue Service, or otherwise misrepresented his experience or education as a tax return preparer,
((C)) guaranteed the payment of any tax refund or the allowance of any tax credit, or
((D)) engaged in any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws, and
((2)) that injunctive relief is appropriate to prevent the recurrence of such conduct,
the court may enjoin such person from further engaging in such conduct.

The court may enjoin the person from preparing tax returns, however, only if the preparer is such a habitual offender that an injunction against further violations would be insufficient:

If the court finds that a tax return preparer has continually or repeatedly engaged in any conduct described in subparagraphs (A) through (D) of this subsection and that an injunction prohibiting such conduct would not be sufficient to prevent such person's interference with the proper administration of this title, the court may enjoin such person from acting as a tax return preparer.
26 U.S.C. § 7407(b).

Yet if § 330 covers tax-return preparers, the IRS could sidestep every protection § 7407 affords — judicial review, the demanding standards for the extraordinary remedy of an injunction, and the elevated hurdle for enjoining preparation of tax returns (instead of further violation) — while effectively obtaining the same result. That is because  § 330(b) allows the Treasury Department to “disbar from practice before the Department” a “representative” who engages in the conduct listed in § 330(b) (incompetence, being disreputable, violating regulations, and fraud). Using this authority, the IRS could stop a person from preparing tax returns by “disbarring” her from “practice” before the IRS. Unlike under § 7407, however, disbarment under  § 330 would put everything in the IRS's control (aside from limited judicial review, presumably, under the APA). With § 330(b) and § 7407 leading to the same destination, but  § 330(b) offering a far easier path, it is hard to imagine the IRS turning to § 7407 more than once in a blue moon. The Court will not lightly assume that Congress enacted such a pointless statute.

Two points of caution bear mention here. First, contrary to Plaintiffs' claims, the IRS's interpretation of § 330 would not render § 7407 surplusage because  § 7407 still offers a different remedy: a judicial injunction versus IRS disbarment. For the truly abusive tax-return preparer, perhaps the threat of judicial contempt that comes with an injunction would make § 7407 worth the trouble, even though IRS disbarment would surely be sufficient in almost every case.

Second, the Code's next section, 26 U.S.C. § 7408, might challenge the Court's doubt that Congress enacts duplicative statutes. Section 7408, like § 7407, empowers the IRS to seek injunctions. Although designed to combat tax shelters, § 7408's broad language allows the IRS to enjoin any “violation of any requirement under regulations issued under section 330 of title 31, United States Code” — potentially applying to all of Circular 230, not simply the tax-shelter regulations. Unlike § 7407, which is limited to tax-return preparers, § 7408 allows injunctions against “any person.” Assuming that § 7408 means what is says and is not limited to tax shelters, § 7408 allows injunctive relief against “any person,” including those attorneys and CPAs admittedly regulated under § 330(b). So while  § 7407 and § 330(b) authorize injunctive and disbarment remedies against the same people only if § 330 includes tax-return preparers, § 7408 and  § 330(b) will authorize those remedies against the same people.

Section 7408 thus might seem to undercut the Court's analysis here: Asserting that the IRS would almost never seek an injunction under § 7407 if it can instead disbar under § 330(b), the Court has said that the IRS's interpretation of § 330 makes § 7407 worthless. But § 7408 on its very face similarly empowers the IRS to seek an injunction for attorney or CPA conduct covered by § 330, perhaps suggesting that this injunctive remedy remains useful despite the availability of remedies under § 330(b). On the other hand, a § 7408 injunction is limited to barring further violations — in contrast to a § 7407 injunction which may bar preparation of tax returns — so § 7408 has far less overlap with § 330's disbarment remedy. Despite flagging this issue here, the Court will pursue it no further. The IRS never relied on (or even cited) § 7408, and the Court declines to generate arguments that the Government has failed to make.

Without deciding whether any of these three textual points alone would be dispositive, the Court concludes that together the statutory text and context unambiguously foreclose the IRS's interpretation of 31 U.S.C. § 330.

C. Other Arguments

The IRS also makes a number of nontextual arguments in favor of its interpretation, but none of these can overcome the statute's unambiguous text here. In the land of statutory interpretation, statutory text is king.

Repeatedly, the IRS argues that regulating tax-return preparers is vital, protecting dual federal interests in collecting the revenue due to the United States and in preventing preparers from bungling clients' returns. The Court does not gainsay the importance of such regulation in a field of over 80 million tax returns; indeed, it may very well have significant salutary effects in several related areas. At Chevron step one, however, such policy arguments have no relevance. “The Supreme Court has repeatedly made clear policy considerations cannot override our interpretation of the text and structure of the Act.” SEC v. Johnson, 650 F.3d 710, 715 (D.C. Cir. 2011) (internal quotation marks, alteration, and brackets omitted).

The parties also clash over which way the legislative history cuts. No clear evidence of congressional intent emerges on this case's point of dispute, which is to be expected for a statute first enacted decades before the modern federal income tax and the modern tax-return preparer. This Court will not use “ambiguous legislative history to muddy clear statutory language.” Milner v. Dep't of Navy, 131 S. Ct. 1259, 1266 (2011). In the same vein, the parties point to unenacted bills introduced in recent sessions of Congress that would explicitly grant the IRS authority to regulate tax-return preparers. “[F]ailed legislative proposals,” however, “are a particularly dangerous ground on which to rest an interpretation of a prior statute.” Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 187 (1994). “A bill can be proposed for any number of reasons, and it can be rejected for just as many others.” Solid Waste Agency of N. Cook Cnty. v. Army Corps of Eng'rs, 531 U.S. 159, 170 (2001).

The IRS also argues that various regulations support its interpretation of § 330. For example, the IRS says it has long given preparers “limited practice rights,” proving that preparers “practice” before the IRS. See IRS Mot. at 24–25 (citing 31 C.F.R. § 10.7(c)(1)(viii) (2009)). But regulations promulgated by an agency cannot transform the meaning of the statute.

Finally, the parties scuffle over whether the IRS has changed its interpretation of § 330 over time. Plaintiffs seem to be correct that the new Rule contradicts previous interpretations of § 330. See, e.g., Fraud in Income Tax Return Preparation: Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways & Means, 109th Cong. 24 (2005) (statement of Nancy J. Jardini, Chief, Criminal Investigation Division, IRS) (“Tax return preparers are not deemed as individuals who represent individuals before the IRS ....”). “Agency inconsistency,” however, “is not a basis for declining to analyze the agency's interpretation under the Chevron framework. Unexplained inconsistency is, at most, a reason for holding an interpretation to be an arbitrary and capricious change from agency practice under the Administrative Procedure Act.” Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 981 (2005) (citing 5 U.S.C. § 706(2)(A)). While the Court could find no explanation for the IRS's flip-flop in the new Rule, Plaintiffs have not claimed here that the IRS was arbitrary and capricious. Any change in the IRS's interpretation is therefore irrelevant.

D. Remedy

Plaintiffs seek declaratory and injunctive relief. By failing to object to these remedies, Defendants have forfeited any challenge to them. The Court, moreover, concludes that both remedies are appropriate here.

Plaintiffs first seek a declaratory judgment that Defendants lack statutory authority to promulgate or enforce the new regulatory scheme for “registered tax return preparers” brought under Circular 230 by 76 Fed. Reg. 32,286. The Court will grant this declaratory relief.

Plaintiffs also ask the court to permanently enjoin Defendants from enforcing this IRS registration scheme against tax-return preparers. As the scheme is impermissible, such injunctive relief also appears proper. The Supreme Court, however, has cautioned lower courts deciding whether to issue an injunction to apply the traditional four-factor test instead of a categorical rule, see eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 393–94 (2006), so this Court will do so.

The Supreme Court has said that, under “well-established principles of equity,”
a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.
Id. at 391; see also Monsanto Co. v. Geertson Seed Farms, 130 S. Ct. 2743, 2756 (2010) (same). While the eBay Court articulated the first two requirements as backward looking — requiring that a plaintiff “has suffered” an injury — an injunction is obviously a forward-looking remedy, and in applying the eBay test the Court has properly looked to the future threat of injury. See Monsanto, 130 S. Ct. at 2759–60 (“Most importantly, respondents cannot show that they will suffer irreparable injury if APHIS is allowed to proceed with any partial deregulation, for at least two independent reasons.”) (emphasis added).

Plaintiffs have satisfied all four prongs of this test. Two Plaintiffs declare that they will likely close their tax businesses if forced to comply with the new Rule, see Kilian Decl., ¶ 15; Gambino Decl., ¶ 17, which the Court concludes would be an irreparable injury. No remedy at law would adequately compensate that injury. See Nat'l Mining Ass'n v. Army Corps of Eng'rs, 145 F.3d 1399, 1408–09 (D.C. Cir. 1998) (“Money damages were never sought in this action, and even if the government were somehow found to have waived its sovereign immunity against damage actions, it is hard to see the relevance of such remedies in the context of a pre-enforcement challenge to agency regulations. The plaintiffs did seek (and obtain) a declaration of the [challenged] Rule's invalidity, but this brand of relief is itself more equitable than legal in nature.”). With an invalid regulatory regime on the IRS's side of the scale and a threat to Plaintiffs' livelihood on the other, the balance of hardships tips strongly in favor of Plaintiffs. Finally, the public interest would be served by a permanent injunction because the IRS's new Rule is ultra vires. The Court will therefore grant permanent injunctive relief as well.

IV. Conclusion

For the aforementioned reasons, the Court will grant Plaintiffs' Motion for Summary Judgment and deny Defendants' Motion for Summary Judgment. A separate Order consistent with this Opinion will be issued this day.

JAMES E. BOASBERG

United States District Judge

Date: January 18, 2013

1
  The original 1884 statute said:
[T]he Secretary of the Treasury may prescribe rules and regulations governing the recognition of agents, attorneys, or other persons representing claimants before his Department, and may require of such persons, agents and attorneys, before being recognized as representatives of claimants, that they shall show that they are of good character and in good repute, possessed of the necessary qualifications to enable them to render such claimants valuable service, and otherwise competent to advise and assist such claimants in the presentation of their cases. And such Secretary may after due notice and opportunity for hearing suspend, and disbar from further practice before his Department any such person, agent, or attorney shown to be incompetent, disreputable, or who refuses to comply with the said rules and regulations, or who shall with intent to defraud, in any manner willfully and knowingly deceive, mislead, or threaten any claimant or prospective claimant, by word, circular, letter, or by advertisement.
Act of July 7, 1884, ch. 334, 23 Stat. 236, 258–59.




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sentencing for willfully not filing a tax return

Taxpayer was sentenced to 10 months for pleading guilty to the misdemeanor count of willful failure to file a tax return in violation of 26 U.S.C. § 7203.

U.S. v. MIKSCH, Cite as 111 AFTR 2d 2013-XXXX, 01/16/2013

UNITED STATES of America, v. Mark Wayne MIKSCH.

Case Information:

Code Sec(s):      

Court Name:      United States District Court, E.D. Texas, Beaumont Division,

Docket No.:        Crim. Action No. 1:11-CR-5(3),

Date Decided:   01/16/2013.

Disposition:      

HEADNOTE

.

Reference(s):

OPINION

United States District Court, E.D. Texas, Beaumont Division,

OPINION AFFIRMING JUDGMENT OF MAGISTRATE

Judge: RON CLARK, District Judge.

Defendant Mark Wayne Miksch pled guilty before, and was sentenced by, United States Magistrate Judge Keith F. Giblin on one misdemeanor count of willful failure to file a tax return in violation of 26 U.S.C. § 7203. He then filed a Notice of Appeal with the Fifth Circuit, which was subsequently transferred to this court in accordance with 18 U.S.C. § 3402. A briefing schedule was entered. Mr. Miksch's counsel then moved for leave to withdraw and filed a brief pursuant toAnders v. California , 386 U.S. 783, 87 S.Ct. 1396 (1967).

After careful review of the record, the briefing, and speaking with Mr. Miksch on the record at the January 11, 2013 hearing, the court has no reason to conclude that Mr. Miksch's sentence was unreasonable under the facts of this case. The court affirms the judgment sentencing Mr. Miksch to 10 months.

I. BACKGROUND

Judge Giblin sentenced Mr. Miksch in this misdemeanor case. A plea agreement was entered into between the Government and Mr. Miksch, which provided that Mr. Miksch would receive 12 months probation and no jail time. The plea agreement was rejected by Judge Giblin, and Mr. Miksch was sentenced to 10 months imprisonment with an original self-surrender date of July 3, 2012. Doc. # 150. Because Mr. Miksch had been undergoing cancer treatment, that date has been extended several times and Mr. Miksch has not yet surrendered.

In October 2012, Mr. Miksch's counsel filed anAnders appellate brief and motion to withdraw as counsel. Docs. # 174, 175. This brief does not present any issue on appeal; rather, it “invite[s] this Honorable Court to review the sentence for reasonableness.” Doc. # 174 at 13. Mr. Miksch was afforded the opportunity to respond to theAnders brief and motion to withdraw as counsel. Doc. # 176. In response, Mr. Miksch sent a letter to the court explaining that he was still undergoing cancer treatment. The court entered an Order directing Mr. Miksch to submit any medical documents supporting his claim of ongoing treatment to chambers by January 3, 2013. Doc. # 179. Mr. Miksch did so in a timely manner.

The court held a hearing on January 11, 2013 to address the issue of Mr. Miksch's ongoing cancer treatment. After careful examination of the medical documentation provided, the court concluded that while Mr. Miksch was receiving some follow-up care, there were no surgeries or procedures currently scheduled that would necessitate postponing or changing his 10 month sentence. Taken as a whole, the record indicated no reason to conclude that Mr. Miksch's sentence was unreasonable under the circumstances. The court did extend Mr. Miksch's self-surrender date from January 26, 2013 to February 21, 2013, and stated that it would allow Mr. Miksch to serve his sentence in a split or intermittent manner—i.e., 5 months in jail, followed by 1 week of release to take care of any doctor's appointments, and a return to jail for the remaining 5 months of his sentence.

II. STANDARD OF REVIEW

Anders “established standards for a court-appointed attorney who seeks to withdraw from a direct criminal appeal on the ground that the appeal lacks an issue of arguable merit. After a conscientious examination of the case, the attorney must request permission to withdraw and submit a brief referring to anything in the record that might arguably support the appeal.” United States v. Flores, 632 F.3d 229, 231 (5th Cir.2011). An Anders brief must contain a detailed checklist and outline, and counsel is required to provide a copy of the brief to the Defendant. The brief's Certificate of Service should include a statement that this requirement has been complied with. Id. at 232. In the instant case, counsel's brief complies withAnders and Flores and a copy of the brief was mailed to Mr. Miksch on October 22, 2012. Doc. # 174 at 26.

The brief raises only the argument that Mr. Miksch's sentence was unreasonable. “This Court reviews federal sentences under an abuse-of-discretion standard ... Our review of sentencing decisions is limited to determining whether they are reasonable.” United States v. Fraga, ——F.3d ——, 2013 WL 127840 at 4 (5th Cir. Jan. 10, 2013) (internal quotation omitted). “Under that standard, this court must evaluate whether the ... court procedurally erred before [it] consider[s] the substantive reasonableness of the sentence imposed under an abuse-of-discretion standard.” United States v. Receskey, 699 F.3d 807, 809 (5th Cir.2012) (internal quotation omitted; brackets in original).

III. DISCUSSION

As noted above, the Anders brief does not present any issue on appeal but instead “invites” the court to review Mr. Miksch's sentence for unreasonableness based on: (1) his criminal history category of I; (2) that he has now met his tax obligations to the IRS; (3) his ongoing cancer treatment; and (4) the fact that the charges against both of his co-Defendants were dismissed by the Government.

For the reasons discussed on the record at the January 11 hearing, the court has no reason to conclude that Mr. Miksch's sentence was unreasonable in this case. The 10 month sentence was within the 1 year statutory maximum for this misdemeanor. 26 U.S.C. § 7203. As Mr. Miksch's sentence would be capped at 1 year given this statutory maximum, the sentence is far below the properly calculated 18–24 month Sentencing Guidelines range.

First, with respect to criminal history, Mr. Miksch is in category I. However, he received a point for a 2003 drug conviction in state court and received no points at all for a 1986 Driving While Intoxicated charge. Mr. Miksch may have limited criminal history, but he does have some. Even if he had no criminal history at all, a 10 month sentence is not unreasonable given the seriousness of the charges on which Mr. Miksch was indicted and the tax offense to which he ultimately pled. That he has now paid his obligations to the IRS does not negate the fact that he pled guilty to failing to file his returns.

Second, as discussed at the January 11 hearing, the court finds the record devoid of any evidence that Mr. Miksch will be undergoing any surgical procedure in the near future or requiring any follow-up care beyond routine office visits. Regardless, the court has taken Mr. Miksch's medial condition into account and split the sentence to allow him time to make doctor's appointments in five months' time.

Finally, the court notes that “[t]he government has great discretion in deciding whether, and which offenses, to prosecute ... substantial deference is accorded decisions requiring the exercise of prosecutorial discretion....”United States v. Molina , 530 F.3d 326, 332 (5th Cir.2008) (internal quotation omitted). The court takes no position on whether the Government should have pursued charges against Mr. Miksch's co-Defendants; the simple fact is that it chose not to. That choice does not affect the reasonableness of Mr. Miksch's sentence in this case: disparities among defendants are taken into account under 18 U.S.C. § 3553(a)(6) only where the other defendants have “similar records” and“have been found guilty of similar conduct.” That is not the case here.

IV. CONCLUSION

After careful review of the record and briefing in this case, and after speaking with Mr. Miksch at the January 11, 2013 hearing, the court has no reason to conclude that Mr. Miksch's sentence was unreasonable under the facts of this case. No other non-frivolous issue is presented for appeal. Accordingly, the motion by Mr. Miksch's counsel to withdraw is also granted.

Mr. Miksch has been sentenced by the magistrate to a term of 10 months as to Count 1 of the Amended Information. That judgment is affirmed. To address Mr. Miksch's ongoing follow-up medical treatment needs, the term shall be intermittent. He shall be confined in the custody of the Bureau of Prisons for a term of 5 months, then after a 1 week period of release, shall be confined in the custody of the Bureau of Prisons for an additional 5 months.

Mr. Miksch's self-surrender date is extended to February 21, 2013. Mr. Miksch shall selfsurrender for service of sentence at the institution designated by the Bureau of Prisons before 2:00 p.m. on February 21, 2013.

IT IS THEREFORE ORDERED that the Motion to Withdraw [Doc. # 175] is GRANTED. Gary Bonneaux is permitted to withdraw as counsel for Mr. Miksch after providing him with a copy of this Order.

IT IS FURTHER ORDERED that the Clerk is directed to send a copy of this Order to Mr. Miksch at the following address:

Mark Miksch

21 Tindel

Clear Lake Shores, Texas, 77565

So ORDERED.

homs

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Effective Administration offer in compromise

Lamar D. Pomeroy, et ux. v. Commissioner, TC Memo 2013-26 , Code Sec(s) 6320; 6330; 6702; 7122.

LAMAR D. POMEROY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent DIXIE L. POMEROY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:

Code Sec(s): 6320; 6330; 6702; 7122
Docket: Docket Nos. 11640-11L, 11641-11L.
Date Issued: 01/22/2013
HEADNOTE

XX.

Reference(s): Code Sec. 6320; Code Sec. 6330; Code Sec. 6702; Code Sec. 7122

Syllabus

Official Tax Court Syllabus

Counsel

Warren Neil Nemiroff, for petitioners.
Nicole C. Lloyd, for respondent.

Evidently, COIC prepared the forms for petitioners. Why the forms list

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: These consolidated cases are before the Court on petitions for review of Notices of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (notices of determination). 1 Petitioners seek review of respondent's rejection of their offers-in-compromise and subsequent decision to sustain the collection action.

The collection action stems from unpaid income tax for petitioners' 2003, 2005, 2006, 2007, and 2008 taxable years. The issue for decision is whether respondent's settlement officer abused her discretion in rejecting petitioners' offers- in-compromise because she failed to consider petitioner husband's medical condition and because she determined the reasonable collection potential using future income projections greater than 48 months. 1

Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect at the relevant time. [*3] FINDINGS OF FACT

Some of the facts have been stipulated. 2 The stipulations, with accompanying exhibits, are incorporated herein by this reference except to the extent discussed below. At the time the petition was filed, petitioners resided in Nevada.

Petitioners, LaMar and Dixie Pomeroy, are husband and wife, and both are retired. They have a long history of noncompliance with Federal income tax responsibilities, with unpaid income tax liabilities for the years 1997 through 2009. In addition, Mr. Pomeroy has unpaid liabilities for civil penalties for frivolous submissions assessed under section 6702(a) for the tax years 1999, 2000, 2003, and 2005. Mrs. Pomeroy has unpaid liabilities for civil penalties for frivolous submissions assessed for tax years 1994, 1999, 2000, 2003, and 2005. For tax years 1997 through 2003 and 2006, petitioners did not file income tax returns, and respondent prepared substitutes for returns under section 6020(b). 2

The parties had until June 4, 2012, to submit simultaneous opening briefs and until July 19, 2012, to submit simultaneous answering briefs. Respondent submitted an opening brief, but petitioners did not. Respondent then filed a notice that he was not filing an answering brief. Petitioners had ample time to file their own brief. Because they did not, we conclude they have no objection to respondent's findings of facts, and we will accept them as correct to the extent consistent with the record. See Jonson v. Commissioner,  118 T.C. 106, 108 n.4 (2002), aff'd, 353 F.3d 1181 [93 AFTR 2d 2004-323] (10th Cir. 2003); Bland v. Commissioner, T.C. Memo. 2012-84 [TC Memo 2012-84]. [*4] On May 25, 2010, respondent mailed petitioners a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under I.R.C. 6320 (NFTL). The NFTL informed petitioners that respondent filed a notice of tax lien for the following outstanding Federal income tax liabilities:

Liability

Year

2003 $8,459.25

2005 1,617.04

2006 6,252.43

2007 3,679.21

2008 3,182.67

Petitioners timely mailed a Form 12153, Request for a Collection Due Process or Equivalent Hearing, to the Internal Revenue Service (IRS) Office of Appeals (Appeals), which that office received on or before June 14, 2010. Petitioners' representative, Warren Nemiroff, stated in the request that he objected to the filing of the tax lien on the grounds that it was excessive. Mr. Nemiroff also indicated his intention to file an offer-in-compromise. Settlement Officer Alex Lau initially was assigned to the case.

On August 16, 2010, respondent received petitioners' first Form 656, Offer in Compromise. On this form, petitioners sought to settle their income tax liabilities for tax years 1994, 1996 through 2000, 2002 through 2006, and [*5] 2008 3 and civil penalties for frivolous returns for tax years 2002 through 2005. Petitioners stated that they sought the offer-in-compromise because of doubt as to collectibility. They offered to pay $25,000. Petitioners also submitted a Form 433- A, Collection Information Statement for Wage Earners and Self-Employed Individuals. On this form, along with reporting their assets, petitioners reported that Mr. Pomeroy received income of $5,097.12 per month from his pension and Social Security and that Mrs. Pomeroy received income of $140 per month from Social Security. Their total combined monthly income was $5,237. The offer-in- compromise was sent to respondent's centralized offer-in-compromise (COIC) unit for processing, but Appeals retained jurisdiction over the case.

In a letter dated September 5, 2010, the Memphis, Tennessee, COIC unit requested additional documentation substantiating the expenses and income petitioners reported on the Form 433-A. The COIC unit also requested that petitioners file separate Forms 656 because the original offer included individual liabilities for the frivolous return civil penalties. According to the COIC unit, Mr. Pomeroy's outstanding liabilities for frivolous return penalties were for the 1999, [*6] 2000, 2003, and 2005 tax years, while Mrs. Pomeroy's liabilities for frivolous return penalties were for 1994, 1999, 2000, 2003, and 2005. Petitioners submitted the requested revised Forms 656. Mrs. Pomeroy's revised form listed “Other Federal Tax(es)” for 1994, 1999, 2000, 2003, and 2005 but did not list income tax liabilities. Mr. Pomeroy's revised form listed “Other Federal Tax(es)” for 1999, 2000, 2003, and 2005, and income tax for 1997 through 2009. Neither form stated the offer amount.

On September 29, 2010, Mr. Nemiroff sent a letter to the COIC unit enclosing substantiation requested in the September 5 letter and the revised Forms 656. In this letter, Mr. Nemiroff also stated: “Mr. Pomeroy has suffered a stroke and is near death. This is a case that needs attention, and care. Please move with alacrity.”

On November 29, 2010, Mrs. F. Williams, the offer examiner at the COIC unit, sent each petitioner a letter. The letters asked each petitioner to submit yet a third Form 656 and asked for additional information and substantiation. The third forms were to include the offer amount, type of offer, or offer terms, as well as to identify all outstanding tax liabilities by year that each petitioner was seeking to compromise. In addition, the letter to Mr. Pomeroy stated: “If you would like for your medical condition to be considered while your offer is being reviewed, please [*7] provide a current medical prognosis and diagnosis from your doctor verifying your medical condition and explaining how your medical condition affects you.” The letter to Mrs. Pomeroy contained similar language in the event that she had a medical condition she wished to have considered. Mrs. Williams also informed petitioners that if they did not provide the requested information by December 13, 2010, the “offer may be returned or rejected”.

Mrs. Williams did not receive a response, and on or about December 21, 2010, she decided to return the case to Appeals. The COIC unit's determination was that petitioners could fully pay the remaining total liability of $107,919.01 over the remaining period of collections. Her determination was based on the amount of petitioners' income from pension and social security and petitioners' expenses, both as reported and as determined using a local standard. 4 The following table reflects what petitioners reported on their Form 433-A and what Mrs. Williams determined:

Per COIC

Form 433-A

Monthly Income:

    Mr. Pomeroy (pension and Social Security)            $5,097.12    
$5,288.21
    Mrs. Pomeroy (Social Security)                          140.00      
237.20
    Monthly Expenses:                                                      
    Food/Clothing/Miscellaneous  1                        (720.00) (1152.00)
                                                                     
(2,355.00) (1,439.00) [*8] Housing/Utilities Vehicle Operating Costs (983.00) (872.00) Health Insurance (468.00) (431.00) Out-of-Pocket Health Care Costs (100.00) (288.00) Life Insurance (180.00) (197.08) Net Total 431.12 1,146.33 Because Mrs. Williams determined that the remaining statutory periods of collection for Mr. and Mrs. Pomeroy's liabilities were 118 months and 116 months respectively, she determined that Mrs. Pomeroy could pay a total of $132,974.28 and Mr. Pomeroy could pay a total of $135,266.94, each of which exceeded the total liability. Petitioners submitted a third set of Forms 656 in mid-December of 2010. On her form, Mrs. Pomeroy listed income tax for years 1997 through 2009, and “Trust Fund Recovery Penalty” for 1994, 1999, 2000, 2003, and 2005. 5 Mr. Pomeroy's form listed the same years for income tax liabilities and listed the 1999, 2000, 2003, and 2005 tax years for liabilities due to trust fund recovery penalties. Each form offered to pay $12,500. Mrs. Pomeroy also provided a letter stating "1999412” instead of "199412” with the "12” referring to the taxable year ending in December. [*9] that Mr. Pomeroy had suffered a serious stroke and was undergoing inpatient therapy. Mrs. Pomeroy indicated that she had asked the doctor for a prognosis and diagnosis but was not sure she would get it in time to send. This letter, along with the third set of Forms 656, apparently did not reach the COIC unit until after Mrs. Williams decided petitioners could fully pay, but the forms and the letter were forwarded to Appeals.
The new settlement officer assigned to the case, Elizabeth Coppola, reviewed the COIC unit's determination to reject petitioners' offers-in- compromise. During this review, Ms. Coppola approved Mrs. Williams' calculations with respect to monthly income and expenses and the projection of petitioners' monthly income over the remaining period of limitations on collection. Ms. Coppola also reviewed the additional information forwarded to Appeals. She decided, on the basis of her review of all the information petitioners submitted, to reject the offers-in-compromise and sustain the filing of the Federal tax lien. On March 29, 2011, Ms. Coppola called Mr. Nemiroff, who said that he had just arrived at his office and asked if he could call her back. Ms. Coppola agreed but requested that the return call be no later than 3:45 p.m. the same day. Ms. Coppola sent Mr. Nemiroff a fax confirming this request and stating that she had reviewed all of petitioners' information and was sustaining the rejection of the [*10] offers-in-compromise and the filing of the tax lien. The fax further stated that if Mr. Nemiroff did not contact her by 3:45 p.m., she was closing the case. Mr. Nemiroff never returned the phone call.

On April 12, 2011, respondent issued the notices of determination memorializing Ms. Coppola's determinations. Petitioners timely petitioned this Court for review, and a trial was held in Los Angeles, California, on March 21, 2012. At the trial, the Court granted petitioners' oral motion to consolidate the cases for trial, briefing, and opinion.

OPINION

I. Evidentiary Issue Respondent objects to one of the stipulations and its accompanying exhibit on the grounds of relevancy because it was outside the administrative record. This exhibit was a letter from Mr. Pomeroy's doctor briefly describing his medical condition. The letter was dated January 28, 2012, long after the administrative record was closed.

We follow the law of the Court of Appeals for the Ninth Circuit, to which these cases, absent a stipulation to the contrary, are appealable. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 [27 AFTR 2d 71-1583] (10th Cir. 1971). That Court of Appeals has limited the review of the administrative determinations [*11] in collection due process hearings to the administrative record. See Keller v. Commissioner, 568 F.3d 710, 718 [103 AFTR 2d 2009-2470] (9th Cir. 2009) (”our review is confined to the record at the time the Commissioner's decision was rendered”),aff'g in part  T.C. Memo. 2006-166 [TC Memo 2006-166]. Because the letter was not in the administrative record at the time Ms. Coppola made her determination, we sustain respondent's objection.

II. Standard of Review  Section 6330(c)(2)(B) permits challenges to the existence or amount of the underlying liability in collection proceedings only where the taxpayer did not receive a notice of deficiency or otherwise have an opportunity to challenge the liability. If the validity of the underlying tax liability is not properly at issue, we will review the Commissioner's administrative determination for abuse of discretion. Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). However, where the validity of the underlying tax liability is properly at issue, the Court will review the matter de novo. Id.

In their petitions, petitioners asserted: “All taxes, penalties and interest, resulting from same, are in dispute.” Respondent counters on brief: “Petitioners, however, never raised the issue [of the validity of the liabilities] in their pre-trial memorandums nor argued the issue at trial.” We further note that petitioners did not file a posttrial brief. As petitioners neither presented evidence as to the issue [*12] of the underlying tax liabilities nor pursued the issue at trial, we deem the argument as to the underlying liabilities conceded. See Petzoldt v. Commissioner,  92 T.C. 661, 683 (1989). Thus, abuse of discretion is the appropriate standard of review here.

III. Review for Abuse of Discretion  Section 6320(a) and (b) requires the Commissioner to notify a taxpayer in writing upon the filing of a notice of Federal tax lien and to provide the taxpayer with an opportunity for an administrative hearing. An administrative hearing under  section 6320 is conducted in accordance with the procedural requirements of section 6330. Sec. 6320(c).

If an administrative hearing is requested, the hearing is to be conducted by Appeals. Sec. 6320(b)(1). At the hearing, the Appeals officer conducting it must verify that the requirements of any applicable law or administrative procedure have been met. Sec. 6330(c)(1). The taxpayer may raise any relevant issue with regard to the Commissioner's intended collection activities, including spousal defenses, challenges to the appropriateness of the proposed collection actions, and alternative means of collection. Sec. 6330(c)(2)(A); see also Sego v. Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114 T.C. at 180. Taxpayers are expected to provide all relevant information requested by Appeals, [*13] including financial statements, for its consideration of the facts and issues involved in the hearing. Sec. 301.6320-1(e)(1), Proced. & Admin. Regs.

Among the issues that may be raised at Appeals are “offers of collection alternatives”, such as offers-in-compromise and installment agreements.  Sec. 6330(c)(2)(A)(iii). The Court reviews the Appeals officer's rejection of an offer-in-compromise or an installment agreement to decide whether the rejection was arbitrary, capricious, or without sound basis in fact or law and therefore an abuse of discretion. Skrizowski v. Commissioner, T.C. Memo. 2004-229 [TC Memo 2004-229]; see also Keller v. Commissioner, 568 F.3d at 716 (a decision based on an erroneous view of the law or a clearly erroneous assessment of facts is an abuse of discretion).

Section 7122 establishes the authority of the Secretary to compromise tax liabilities. The IRS may compromise a taxpayer's liability on the grounds of doubt as to liability, doubt as to collectibility, or effective tax administration.  Sec. 301.7122-1(b), Proced. & Admin. Regs. Whether an offer is accepted or rejected is left to the discretion of the IRS. Sec. 301.7122-1(c)(1), Proced. & Admin. Regs.

Petitioners sought to compromise their tax liabilities on the basis of doubt as to collectibility. Ms. Coppola determined that petitioners could fully pay their liabilities over the time remaining in the statutory period of collection.  Sec. 6502(a). Petitioners claim that the Appeals officer abused her discretion by [*14] computing their ability to fully pay using projected future income over the remaining statutory period of collection instead of following the guidelines in the Internal Revenue Manual (IRM). 6

The IRM limits Appeals officers to 48 months in computing future income when evaluating offers-in-compromise and the offer is payable in five months or less. IRM pt. 5.8.5.23(2)(A) (Oct. 22, 2010). But in general, a settlement officer will not accept an offer-in-compromise where the taxpayer can fully pay the liability. Id. pt. 5.8.1.1.3(2) (Mar. 16, 2010). To determine whether a taxpayer can fully pay, the Appeals officer makes a computation to determine whether the taxpayer can pay under an installment plan, using the entire period afforded by the statute of limitations for collections. Id. pt. 5.8.5.2(2) (Oct. 22, 2010) (instructing offer evaluators to first determine whether “the taxpayer can full pay through installment agreement guidelines”). In making this determination, the officer projects future income over the course of the period of limitations, not just 48 months. Id. pt. 5.8.1.1.3(2). Thus, in these cases Ms. Coppola did not abuse her discretion in projecting future income over the remaining period. [*15] Petitioners also claim that Ms. Coppola abused her discretion by not considering Mr. Pomeroy's medical condition. This argument appears to be premised on the idea that once Appeals had determined petitioners were able to fully pay the liabilities, Appeals should have considered adjusting income or allowable expenses for life expectancy and/or anticipated medical expenses, respectively, and also considered the offers-in-compromise under the promotion of effective tax administration guidelines. 7

The regulations discuss two scenarios under which the promotion of effective tax administration can be grounds for compromise: (1) if full collection “would cause the taxpayer economic hardship,” and (2) if there are “compelling public policy or equity considerations”.  Sec. 301.7122-1(b)(3)(i) and (ii), Proced. & Admin. Regs. Economic hardship exists where the taxpayer would “be unable to pay his or her reasonable basic living expenses.”  Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs. To determine basic living expenses, the IRS looks at [*16] various factors including age, employment status and history, dependents, reasonably necessary expenses, cost of living, extraordinary circumstances, and other factors raised by the taxpayer. Sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs. Public policy or equity considerations provide a basis for compromise “only where, due to exceptional circumstances, collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner.” Sec. 301.7122-1(b)(3)(ii), Proced. & Admin. Regs. (emphasis added). But in both scenarios, compromise is not appropriate if it “would undermine compliance by taxpayers with the tax law.”  Sec. 301.7122-1(b)(3)(iii), Proced. & Admin. Regs.

The regulations also identify several factors helpful, but not conclusive or exclusive, in determining whether an offer should be accepted under the effective tax administration grounds and whether acceptance would undermine confidence in the tax laws. Sec. 301.7122-1(c)(3), Proced. & Admin. Regs. Such factors include a taxpayer's long-term illness or medical condition that prevents the taxpayer from earning a living and the reasonable foreseeability “that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition”. Sec. 301.7122-1(c)(3)(i)(A), Proced. & Admin. Regs. At the same time, a “history of noncompliance with the filing and payment [*17] requirements of the Internal Revenue Code” indicates that acceptance of the offer would tend to undermine compliance with the tax laws.  Sec. 301.7122- 1(c)(3)(ii)(A), Proced. & Admin. Regs.

The crux of petitioners' argument appears to be that Mr. Pomeroy's medical condition qualified them for offers-in-compromise based on effective tax administration even though they submitted the offers under doubt as to collectibility grounds. Indeed, IRM pt. 5.8.11.4(3) (Sept. 23, 2008) states that, for offers submitted as doubt as to collectibility offers, the settlement officer should also consider the offer as an effective tax administration offer if special circumstances exist even if the collection potential exceeds the liability. Petitioners point to numerous instances in the record to show that Appeals was well aware of Mr. Pomeroy's stroke and should have considered the offers as effective tax administration offers once it determined that petitioners could fully pay the liabilities.

After initially denying that petitioners had informed Appeals of Mr. Pomeroy's stroke, respondent now admits that the record does indeed contain several references. Now respondent contends that Appeals did consider, to the extent that it could, Mr. Pomeroy's medical condition. In evaluating an offer based on effective tax administration, IRM pt. 5.8.11.5(1)(A) (Sept. 23, 2008) [*18] instructs the settlement officer to "[r]equest supporting documentation of the taxpayer's situation”, such as “a doctor's letter or copies of medical expenses.” Mrs. Williams' November 29, 2010, letter stated that if petitioners wanted her to consider Mr. Pomeroy's medical condition they needed to submit verification in the form of a diagnosis and prognosis from a doctor by December 13, 2010. Mrs. Pomeroy wrote a letter in response, which unfortunately is not dated and does not have a date-received stamp. In this letter, she told Mrs. Williams that she was trying to get the letter from the doctor and that her husband was still at an in-patient facility. 8 Petitioners were in the process of obtaining the requested verification, but Mrs. Coppola made her determination and closed the case before they were able to procure the documentation.

Petitioners alerted respondent numerous times that Mr. Pomeroy was gravely ill. The administrative record reflects that Appeals was not only aware that Mr. Pomeroy had suffered a stroke, which could very well have a drastic effect on petitioners' medical expenses, but it was also aware that Mrs. Pomeroy was in the process of trying to get a letter from a physician. Mrs. Williams gave petitioners only 10 business days, between the November 29, 2010, date of the [*19] letter and the December 13, 2010, deadline, to obtain a prognosis or diagnosis from a doctor. 9 Ms. Coppola appears to have done no more than rely on the record as developed by Mrs. Williams and does not appear to have made an appropriate effort to obtain sufficient information from petitioners. In fact, Ms. Coppola appears to have made only one effort to contact petitioners or their counsel, and that one effort was the same day she closed the case. She made no attempt to ascertain the current status of Mr. Pomeroy's health or Mrs. Pomeroy's attempt to obtain a diagnosis or prognosis. 10 Without more information about Mr. Pomeroy's medical condition, the administrative record is insufficient for the Court to properly review it.

In such cases, we can remand collection due process cases to Appeals to develop the record. See Wadleigh v. Commissioner, 134 T.C. 280, 299 (2010) (remanding “to clarify and supplement the administrative record” when we determined that the administrative record was “insufficient to enable us to properly evaluate whether the Appeals Office abused its discretion”);Hoyle v. [*20] Commissioner, 131 T.C. 197, 204-205 (2008) (remanding so that Appeals could clarify the record as to why it determined that all requirements of applicable law were met). Accordingly, we remand these cases to the Appeals Office to allow the parties to clarify and supplement the record as appropriate. We will retain jurisdiction to preserve petitioners' rights to judicial review of the final administrative determination. See Wadleigh v. Commissioner, 134 T.C. at 299.

The Court has considered all of petitioners' contentions, arguments, requests, and statements. To the extent not discussed herein, the Court concludes that they are moot, irrelevant, or without merit.

To reflect the foregoing,

An appropriate order will be issued.

1
 
2
 
2
 
3
  This Form 656 did not include the 2007 tax year, one of the years that was the subject of the NFTL.
4
  Because Mrs. Williams determined that petitioners could fully pay their liabilities with future income, she did not calculate the equity in their assets.
5
   petitioners as having trust fund recovery penalties as opposed to civil penalties for frivolous submissions is unclear. We note also that apparently because of a typographical error the form, as to the trust fund recovery penalty, refers to
6
  We note that petitioners' counsel raised this issue during a pretrial hearing. We then asked respondent to address the issue, which respondent did on brief.
8
  As Mrs. Pomeroy testified at trial: "[W]hen you have a family member that is almost on their death bed, it gets kind of hard to do everything[.]"
9
  As a practical matter, petitioners would have had less than 10 business days, as the letter presumably took some time to travel from Tennessee to Nevada and any response would take some time to travel back from Nevada to Tennessee.
10
  We note that at the time of the trial, Mr. Pomeroy was still at the rehabilitation facility and had recently broken his hip.
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civil fraud 6663

Owen G. Fiore v. Commissioner, TC Memo 2013-21 , Code Sec(s) 6663; 7454.

OWEN G. FIORE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .

Case Information:

Code Sec(s):       6663; 7454

Docket:                Docket No. 12790-07.

Date Issued:       01/17/2013

HEADNOTE

XX.

Reference(s): Code Sec. 6663; Code Sec. 7454

Syllabus

Official Tax Court Syllabus

Counsel

Owen G. Fiore, pro se.

Andrew R. Moore, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HOLMES, Judge: Owen Fiore was a tax lawyer with a small but prominent practice. He went to prison for evasion of his 1999 taxes—he admitted to fraud— but the Commissioner now claims he can prove Fiore filed fraudulent 1996 and [*2] 1997 returns. The parties agree on the deficiencies and dispute only the existence of fraud.

FINDINGS OF FACT

A. Fiore's Rise in the Legal Profession Fiore graduated from Loyola University of Los Angeles (now Loyola Marymount University) in June 1956 with an accounting degree. He enrolled in the University's law school that summer. After a short stint preparing income tax returns at Ernst & Ernst (now Ernst & Young), he was ordered to active duty with the U.S. Air Force in fall 1956. He trained to be an auditor in Texas, and then returned to Los Angeles to work for the Air Force Auditor General and worked there until he finished law school in 1961.

Fiore started his legal career at the Los Angeles firm of Kindel & Anderson in 1961. The firm elected him to partnership in 1966, and his practice came to focus on estate planning. He moved to another L.A. firm—Agnew, Miller & Carlson—in 1969 and remained there until 1982, when he moved to Northern California and joined Hopkins, Mitchell & Carley. In 1987 he formed a new law partnership with Robert Hales. As he moved from firm to firm, his clients followed. He became well known in his field, and as the decades flowed by he gained national prominence, speaking at numerous conferences across the country [*3] and, more importantly to his partners, he made it rain—bringing in substantial business for every firm he worked for. He rarely appeared at the office, and his days were a whirl of client meetings and conferences. Administrative details and accounting were someone else's problem—that is, until he dissolved his partnership with Hales to form a solo practice in 1988. He hired Pat Sadler as his legal secretary. Fiore describes her as “my gal Friday”—a loyal, long-term employee who did her best to administer the firm effectively. She answered the phone, opened the mail, made appointments with Fiore's clients, took dictation and—this will be important—made bank deposits. She did not, however, have the time or expertise to handle the firm's accounting. She also wasn't much of a “computer person” and failed to take advantage of the software that could improve firm recordkeeping. But the new firm prospered, and Fiore hired two associate attorneys—John Ramsbacher and Leslie Daniels. B. Accounting at the Fiore Law Group Fiore himself took on the responsibility for his firm's accounting. But he neglected that responsibility, choosing at every opportunity to focus on client development, marketing, and the sophisticated pleasure of solving his clients' complex problems. [*4] His sophistication did not extend to his management of the firm's finances. Fiore came to rely on a three-checkbook method of accounting—one for the general account, one for the client trust fund, 1 and one for minor expenses such as filing fees. The preponderant flow of dollars was thus through the general account. Client billings went into the general account; payroll, office rent, and the firm's other expenses came out of that account. Fiore even handled payroll in a way that would have been familiar to lawyers of a hundred years before—writing out checks to each associate and employee by hand on paydays. At the end of each year, he would write out a W-2 for each employee by hand.

Fiore gave only himself access to the general account. Only he was allowed to open the general-account bank statements, even though he often failed to do so. (We find this otherwise unbelievable finding true because the IRS revenue agent conducting the audit of Fiore's returns received several unopened bank statements in response to his request for documents.) [*5] Fiore did use legal billing software known as the Tussman Program. The Tussman Program can track billable hours, generate bills, and produce financial reports—but Fiore failed to use all, or even much, of its potential. Fiore and his associates did enter their billable hours into the program, and Sadler did print out computer-generated bills to send to clients each month. But Fiore adjusted the computer-generated bills—sometimes billing more and sometimes less—before sending them out. He took the time to write a letter with each bill to explain what work was done; he didn't take the time to update the program's database to reflect what was actually billed after adjustments. This meant that the firm's computer records did not reflect the amounts actually billed to clients. But it was the program's financial-reporting feature that was left most spectacularly underused. Bills were mailed out to the clients, and the clients would send checks to Fiore. Sadler would then deposit the checks into the general account. But she kept track of the deposits in a WordPerfect document on her computer—listing the client name, client number, and amount of payment. She would then put a copy of the bill and deposit slip in a three-ring binder, organized alphabetically by client. Each year, she or another employee would set up a new three-ring binder, often with the help of temporary file clerks. Sadler never used the binders to add up the [*6] annual fees and never used them for financial reports with the Tussman Program—she didn't know how. And she never added up the annual deposits from the general-account bank statements. C. The Road to Prison By the end of the century, Fiore's practice was flourishing. But in 1995 his personal expenses started to swell: He paid $150,000 to settle a malpractice claim, and $85,000 in cash for a cabin in Idaho. (He was still a resident of Idaho when he filed his Tax Court petition years later.) He sold his principal residence in Portola Valley that same year and moved to a home he owned in Sea Ranch—150 miles from the San Jose office. He had a mortgage, and of course a tax bill for that house, but instead of enduring epic commutes every day, he rented an apartment closer to his office for more than $2,000 a month. And flashing on the horizon was the prospect of retirement.

The storm broke in 1996, when the Commissioner began an audit of Fiore's 1993-95 tax returns. Revenue Agent Lila Wong—a relatively recent IRS hire— asked Fiore for an appointment in June 1996; the meeting didn't happen until October. Fiore brought only handwritten deposit records to that first meeting. Wong asked Fiore to try again, and this time to bring bank records and [*7] substantiation for his business expenses. Fiore brought only payroll records and a calendar, but no bank records or other documents to substantiate income and expenses. Wong was new, but not newborn, and pressed Fiore again and again. Fiore promised to get his bank statements together and reconstruct his business expenses by January 1997, but ended up canceling that meeting—he said he had hired a CPA to handle the audit. But he never provided any power of attorney to Agent Wong, so she couldn't discuss the audit with anyone other than Fiore. She wanted to move the audit along, but here her inexperience showed, and she skipped a critical step for an audit like this one: She did not try to verify Fiore's income. She did not conduct (or arrange for) a bank-deposits analysis, but closed the audit after denying the business-expense deductions for lack of substantiation. The Commissioner sent Fiore a notice of deficiency for more than $1.2 million in September 1997. Fiore settled in 1999 for roughly $200,000.

Fiore did not let the audit swamp him. He continued to bring in clients, and he began buying up Idaho real estate. He bought five lots near his cabin for $100,000 cash in 1997. He bought a log house for $200,000 and built a $150,000 barn—with $75,000 down and financing for the rest—in 1998. He wrote—tellingly— in a letter asking for a loan that his firm “generates over 1.5 million in legal fees each year.” We can also be sure he had a reasonable notion of his income from [*8] other evidence, especially his talks in 1999 with Ramsbacher—one of the associates he had hired—when he decided to promote the younger man to partner. In early 1999 Fiore laid out discussion points for the proposed partnership in a memo. He wrote that “we will continue to be able to develop monthly fees in excess of $100,000 per month (1998 results, over $1.5 million in gross receipts).” He emphasized his plans to transition to a “less active role in the firm” by 2002. To back up his firm-income estimates, Fiore had a staff member produce a Tussman-generated report for Ramsbacher's review in January 1999. The report showed over $1.5 million in income for 1998. In the course of the partnership discussions, Ramsbacher expressed his concerns about the shipwreck that was the firm's bookkeeping. Fiore agreed to allow Ramsbacher to clean it up if he were made partner.

In July 1999 Ramsbacher and Fiore agreed to form a partnership. Ramsbacher took immediate steps to put the firm's affairs in order. He started out by hiring Paychex to handle payroll. Then he tried to use Quickbooks for firm accounting, only to discover that he wasn't a “computer person” either. But he at least recognized his shortcoming and hired someone to run Quickbooks for the firm. He also dealt with any staff issues and oversaw the day-to-day management [*9] of the firm. This arrangement actually seemed to work. It allowed Fiore to do what he did best—bring in the business—while Ramsbacher took care of the rest. The firm looked steady, but Fiore had not tied down his administrative problems after his first close call with the IRS. In the years immediately before Ramsbacher took over the accounting—1996 through 1999—Fiore did not report all his taxable income on his returns:

                 Actual income        Reported income        Unreported income

  1996            $476,923               197,225                   279,698

  1997             572,291               215,750                   356,541

  1998             534,851               192,069                   342,782

  1999             572,108                57,442                   514,666

This time the IRS caught on. Verna Scott was the revenue agent that the Commissioner assigned to audit Fiore's 1998 return. She had years of experience in bookkeeping and business before going to the IRS, and with her more experienced eye immediately spotted something unusual about Fiore's return: His reported expenses were mostly rounded to the nearest hundred. She wrote Fiore to ask for his 1997 and 1999 returns, and for the firm's payroll reports, bank statements, books and records, and substantiation for business expenses. She set a [*10] date for their first meeting and gave Fiore a deadline to call if he needed to reschedule. Fiore hewed to the same tack he had in the earlier audit, and said he needed to reschedule. He explained that he was in Idaho and would call her back in mid-July when he returned to his office in California. He never called Scott back, so she called his office in late July to learn that he had been in the office earlier that month, but had returned to Idaho. She was persistent, and asked the firm to call him in Idaho and tell him to call her. Fiore did call her, but said he didn't know when they could meet, but that he would send documents by August 15. He instead sent her—after August 15—his 1997 and 1999 returns, the firm's 1998 payroll reports, and a handwritten list of checks. He did not send the other documents she had asked for and that he had promised to give.

Scott tried again. She set a meeting for September 22 and asked him again to bring the rest of the documents. Fiore brought 1998 bank statements for the general law-firm account—except for July's. Scott did a bank-deposits analysis and discovered that the deposits were “quite a bit higher” than the reported income, even using only 11 months of statements. When asked why this was the case, Fiore was less than forthright. He claimed that the excess deposits were attributable to transfers and nontaxable deposits. They weren't. Scott then asked Fiore how he calculated his law-firm income, and he replied that he used a [*11] spreadsheet—which he never provided. As for business expenses, the handwritten check register Fiore provided previously didn't match most of his expenses. He brought an Amex year-end summary to the meeting, but it didn't have enough information for Scott to verify the deductibility of the expenses he claimed.

Fiore had sailed into a maelstrom. Scott scheduled another meeting for October 5. Fiore asked to reschedule. Scott agreed. Fiore called to reschedule for October 30, and then called to reschedule again. Scott issued a summons for Fiore's bank records. She got them and determined that Fiore had failed to report over $300,000 in income for 1998. She told him of her findings and opened an audit of his 1999 tax year. Out went an information document request for 1999. Fiore didn't respond. Out went a summons for his 1999 bank records. In came a bank-deposits analysis, and Scott again discovered a substantial amount of unreported income.

This was too much. Scott decided to refer the case to the Criminal Investigation Division of the IRS to determine whether there was fraud. Special Agent Lisa Sasso took over the investigation. She started by requesting copies of Fiore's 1996 and 1997 tax returns from IRS Service Center—but they were missing the Schedules C. Unlike the civil agents, Sasso didn't ask for meetings—she just [*12] showed up unannounced at Fiore's office in March 2002. She read Fiore his rights and asked him questions about his billing procedures, books and records, and business expenses. After her initial visit, she requested documents for the 1996 and 1997 tax years. Fiore sent her some documentation, but didn't cough up any work papers to tie his information to his return. So Sasso sent a summons to Fiore's bank and then she did a bank-deposits analysis for 1996 and 1997. She determined that he had failed to report taxable income for those years, but chose to exclude Fiore's possible inflation of his business expenses from her case against him. She explained: [I]t's a lot more difficult to prove in a criminal case expense items on the tax return, especially if the taxpayer doesn't know or have books and records to show where he determined the numbers came from. So what I would have had to do is recreate all his books and records in order to determine the numbers on the tax return. *** So I was trying to find specific expenses and show [a] pattern. But it was too difficult to do that for a criminal case and the burden of proof, so we just went with the income. The bottom was now in sight. In November 2003, a grand jury indicted Fiore on four counts of tax evasion, one for each year from 1996 through 1999. He pled guilty only to the count arising from the 1999 tax year—and admitted to “knowingly and willfully understat[ing] the business receipts” for that year. In exchange, the government dropped the charges for 1996-98. He agreed, however, [*13] that the 1996-98 understatements were “relevant conduct” for the purposes of sentencing. He also agreed to pay restitution for the underpayments from 1996-99. On the other hand, in his plea agreement he preserved his right to contest civil IRS penalties:

Though I have agreed to an amount of restitution and tax loss amount as part of the agreed-upon disposition of this case, I agree that this agreement with respect to restitution and tax loss amount does not bar the Internal Revenue Service from making a civil determination with respect to additional taxes, interest and penalties for which I may be liable, nor will it bar me from civilly contesting any liabilities as determined by the Internal Revenue Service including asserting the statute of limitations as a bar to liability. At his 2005 sentencing hearing, Fiore emphasized that his 1999 guilty plea didn't apply to 1996-98:

I recognize that I brought this on myself relating to one year, 1999. I deny strongly as I can in this situation that the prior years, other than being relevant conduct for purposes of determining apparently the so-called tax loss, which I've fully paid, that the prior years have anything to do with or anywhere near the same conduct that I pled guilty to. Fiore was sentenced to 18 months in the federal prison at Lompoc, California. He was released in October 2006. He is no longer a member of the bar. D. Civil Penalties After closing out the criminal case, the IRS got back to work on Fiore's civil tax liability. Scott had never opened an examination of the years at issue in [*14] this case—1996 and 1997. She thought that she couldn't open the 1996 tax year because the statute of limitations had expired. And by the time she got through the 1998 audit, she thought that she would have trouble completing an audit of the 1997 tax year before the statute of limitations expired for it as well. After consulting with her manager, she decided not to audit the 1997 return. But Fiore's guilty plea made the Commissioner think he had a way back to those years. Revenue Agent Charles Tonna helped put together the notice of deficiency. He explained at trial:

Well, primarily, of course, was the fact that Mr. Fiore had actually pled guilty to tax evasion in regards to the last year, 1999, and I reviewed, of course, his plea agreement, which gave details on what he admitted as to how he had committed that crime, and since the facts were pretty much the same in the earlier three years, I relied partially on the plea agreement to establish that he had the same fact pattern in the first three years as well. *** [T]he plea agreement was the primary or the most important factor in determining that fraud applied. In addition to tax evasion in a year not at issue, he looked to the loan application disclosing $1.5 million in annual receipts from 1998. And he cited the 1993-95 deficiencies, Fiore's pattern of undereporting income, and Fiore's perhaps intentional failure to use his computer program's full capabilities as other factors showing fraud. [*15] Tonna mailed out a notice of deficiency in March 2007. It determined deficiencies in tax and the fraud penalty for 1996-99. During pretrial preparation Fiore conceded the underpayments for all four years and the fraud penalty for 1998 and 1999. But he contests the fraud penalty for 1996 and 1997.

OPINION

Section 6663 2 imposes a penalty equal to 75% of an underpayment that is attributable to fraud. The Commissioner has the burden of proving fraud, and he can meet it only with clear and convincing evidence that the taxpayer underpaid and that the underpayment was attributable to fraud. Sec. 7454(a); Tax Court Rule 142(b). If the Commissioner succeeds in proving that even part of the underpayment is due to fraud, “the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.” Sec. 6663(b). Fraud also extends the statute of limitations on assessment indefinitely. Sec. 6501(c)(1).

Fraud is the “willful attempt to evade tax,” and we make that determination by looking at the entire record of a case. Beaver v. Commissioner, 55 T.C. 85, 92 [*16] (1970). Did Fiore commit tax fraud in 1996 and 1997? Or, more precisely, did the Commissioner establish by clear and convincing evidence that Fiore willfully attempted to evade tax in 1996 and 1997? There are many factors which can indicate fraud, including: understatement of income, inadequate records, concealing assets, failure to cooperate with tax authorities, mischaracterizing the source of income, and implausible or inconsistent explanations of behavior. See Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943); Bradford v. Commissioner, 796 F.2d 303, 307 [58 AFTR 2d 86-5532]-08 (9th Cir. 1986), aff'g T.C. Memo. 1984-601 [¶84,601 PH Memo TC]; Meier v. Commissioner, 91 T.C. 273, 297-98 (1988). We won't find fraud where the circumstances merely lead to a suspicion of fraud. Parks v. Commissioner, 94 T.C. 654, 664 (1990). But we may use circumstantial evidence—including Fiore's entire course of conduct. See id.

With these background principles in mind, we look at the factors that the Commissioner and Fiore point us to. [*17] Education and business knowledge One of the most important, if only because it floats over everything else, is that Fiore was, until his conviction, a highly respected tax attorney. And he was a highly respected tax attorney with a solid accounting background as well. Failure to keep adequate books and records This is especially important here, because Fiore's main defense is that he was a horrible recordkeeper. The three-checkbook method of accounting, handwritten employee paychecks, and other misuse of 1970s-era technology clearly show a failure to keep adequate books and records. And we have often cited bad recordkeeping as a factor in favor of finding fraud. See, e.g., Robleto v. Commissioner, T.C. Memo. 2008-195 [TC Memo 2008-195], 2008 WL 3833661, at *10, aff'd, 471 Fed. Appx. 576 [109 AFTR 2d 2012-1299] (9th Cir. 2012); Kim v. Commissioner T.C. Memo. 2000-83 [TC Memo 2000-83], 2000 WL , 267777, at *6; Lee v. Commissioner, T.C. Memo. 1995-597 [1995 RIA TC Memo ¶95,597], 1995 WL 750122, at *8. But maybe something else was going on here. Sadler credibly testified regarding Fiore's hectic-yet-successful attempts at client development. And Fiore was accustomed to relying on the support of larger law firms and their well-organized accounting departments. [*18] Failure to cooperate with tax authorities If the Commissioner had only chaotic books to offset Fiore's expertise, we would not find clear and convincing evidence of fraudulent intent. But the proof of how Fiore reacted to the civil audits advances the Commissioner's case. Fiore was a master of delay during the audits and the criminal investigation, repeatedly rescheduling meetings and giving up documents only grudgingly or not at all. He offered implausible explanations about nontaxable deposits and transfers into his general account. Still, he was constantly traveling to develop business, to set up his Idaho retirement, and to advise his clients. He shouldn't have canceled so many meetings with the IRS, but—though it edges the Commissioner closer to proof of fraud here—it's not quite clear and convincing given Fiore's consistency in poor recordkeeping. Pattern of consistent underreporting This case is about fraud for two years—1996 and 1997. Much of the Commissioner's case is built upon Fiore's behavior in years other than 1996 or 1997. But a pattern of underreporting in years not at issue does tend to show fraud. See Ferguson v. Commissioner T.C. Memo. 2004-90 [TC Memo 2004-90], 2004 WL 605224, at , *15; Plunkett v. Commissioner, T.C. Memo. 1970-274 [¶70,274 PH Memo TC], 1970 Tax Ct. Memo LEXIS 83, at *25, aff'd, 465 F.2d 299 [30 AFTR 2d 72-5122] (7th Cir. 1972). The Commissioner [*19] specifically identifies the 1993-95 deficiencies as the start of the pattern of noncompliance. But there's a problem with this argument—the 1993-95 deficiencies were based only on inflated expenses; 3 the 1996 and 1997 deficiencies were based only on unreported income. 4 So while there's some ground for suspicion of fraud, there wasn't much of a pattern yet—Fiore wasn't alerted to the possibility of unreported income by the earlier deficiencies, because only disallowed expenses were at issue. And unlike 1993-95, no expenses were disallowed for 1996-97.

Fiore's underreporting of his income gained momentum in 1998. The amount of the deficiency increased and there was written evidence of Fiore's knowledge of actual receipts—the loan application and the Tussman printout for partnership negotiations. And Fiore admitted in a plea agreement to criminal tax evasion for the 1999 tax year. The Commissioner points to Fiore's plea agreement as an admission of fraud for 1996 and 1997. See, e.g., Marretta v. Commissioner, [*20]  T.C. Memo. 2004-128 [TC Memo 2004-128], 2004 WL 1172873, at *4, aff'd, 168 Fed. Appx. 528 [97 AFTR 2d 2006-1206] (3d Cir. 2006); Ferguson, 2004 WL 605224 [TC Memo 2004-90], at *16; Price v. Commissioner, T.C. Memo. 1996-204 [1996 RIA TC Memo ¶96,204], 1996 WL 204504, at *5. In those cases, however the taxpayers got indicted for tax evasion for several years, agreed to plead guilty for the last year, and then got the other years dismissed. In the plea agreements in those cases, the taxpayers expressly admitted an intent to evade taxes for all the years of the indictment, despite being convicted for the last year alone.

Fiore was shrewder in his negotiation. He anticipated the government's strategy and crafted his plea accordingly. He didn't admit to tax evasion for any year other than 1999—the year of his conviction. Of course, the lack of an admission in the plea agreement doesn't foreclose a finding of fraud—but Fiore's plea agreement doesn't help the Commissioner establish fraud clearly and convincingly, either. And his 1999 conviction doesn't clearly establish that his returns for 1996 or 1997 were fraudulent. See Corson v. Commissioner, T.C. Memo. 1965-214 [¶65,214 PH Memo TC], 1965 Tax Ct. Memo LEXIS 115, at *18 (”Petitioner's conviction for filing false and fraudulent returns for the later years *** carries no presumption of fraud as to the earlier years”), aff'd, 369 F.2d 367 [18 AFTR 2d 6098] (3d Cir. 1966) This factor is neutral. [*21] Willful Blindness So far, then, it's not clear whether Fiore had fraudulent intent. But underlying all the factors discussed above is another important question—was Fiore willfully blind to the unreported income?

Willful blindness is a relatively underdeveloped area of law in Tax Court jurisprudence—at least in fraud cases. In Fields v. Commissioner, T.C. Memo. 1996-425 [1996 RIA TC Memo ¶96,425], 1996 WL 530108, at *14, we mentioned willful blindness. Fields received advice from his attorney that he should report commission income and ignored the advice. Id. We reasoned that Fields's “lack of regard for [his attorney's] advice was for the primary purpose of evading taxes.” Id. We added that, although not necessary to the conclusion, fraudulent intent can be found by reasonable inference drawn from proof that a taxpayer deliberately closed his or her eyes to what would otherwise have been obvious to him or her *** a trier of fact may infer that an individual knew of his or her evasion of tax from his or her willful blindness to the existence of that fact. Id. Fields doesn't offer much guidance on how to apply the willful blindness standard to Fiore. Willful blindness wasn't the focus of the case and was mentioned only in passing.

We have addressed willful blindness—without calling it that—in the context of the failure to use available records in fraud cases. InCole v. Commissioner, [*22]  T.C. Memo. 1998-452 [1998 RIA TC Memo ¶98,452], 1998 WL 892751, the taxpayer ran a medical practice that received cash and check payments daily. The business receipts were recorded daily on “day sheets” and totaled for each day, month, and year by his secretary. Id., 1998 WL 892751 [1998 RIA TC Memo ¶98,452], at *2. They included the patient name, the service provided, the fee for that service, and whether the patient paid by cash or check. Id. Cole had access to the day sheets, as well as the business bank statements, but did not use them in preparing his return. Id. We found fraud based in part upon his failure to use the business records that were available to him. Id., 1998 WL 892751 [1998 RIA TC Memo ¶98,452], at *6.

And in Spill v. Commissioner, T.C. Memo. 1989-213 [¶89,213 PH Memo TC], 1989 Tax Ct. Memo LEXIS 213, the taxpayer owned Filly's Fashions, a clothing store in Brooklyn. 5 Filly's employed a bookkeeper who kept two sets of books. Id., 1989 Tax Ct. Memo LEXIS, at *4. The first set purported to record daily cash receipts, but merely recorded what was deposited into the business bank account. Id. The *18 n.6. (Brooklyn was apparently rough before it became hip.) [*23] second set of books included a record of all daily sales—including amounts diverted elsewhere. Id. We reasoned that “fraud is evidenced by the fact that petitioners kept a record of daily sales which they did not use in preparing their returns.” Id. at *17.

Willful-blindness fraud is more thoroughly described in criminal law.See generally Ira P. Robbins, “The Ostrich Instruction: Deliberate Ignorance as a Criminal Mens Rea,” 81 J. Crim. L. & Criminology 191 (1990). An old English case, Regina v. Sleep, 169 Eng. Rep. 1296 (1861), was the first to name the concept, but it made its way to America by the late 19th century. See, e.g., People v. Brown, 16 P. 1 (1887). Willful blindness started showing up more frequently in the 1970s. The Comprehensive Drug Abuse Prevention and Control Act of 1970, Pub. L. No. 91-513, sec. 401, 84 Stat. at 1260 (current version at 21 U.S.C. sec. 841(a) (2006)), prohibits the knowing importation of controlled substances and the knowing possession of such substances with intent to distribute. 21 U.S.C. sec. 841(a)(1) (emphasis added). Savvy drug traffickers saw a convenient defense to the knowledge element in deliberate ignorance. Prosecutors got around this problem through jury instructions equating deliberate ignorance with actual knowledge. The instruction spread to other prosecutions, including tax crimes. United States v. Egenberg, 441 F.2d 441, 444 [27 AFTR 2d 71-1046] (2d Cir. 1971). [*24] United States v. Jewell, 532 F.2d 697 (9th Cir. 1976), has been widely adopted as a framework for evaluating willful-blindness crimes. 6 Jewell and a friend drove a rented car from Los Angeles to Tijuana to “have a good time.” While they were enjoying themselves at a Tijuana bar, a man who identified himself as “Ray” approached them and offered marijuana for sale. They declined. Ray then offered to pay them $100 for driving a car north across the border. Jewell accepted the offer, but his friend didn't want any part of it and drove the rented car back to L.A. alone. When Jewell picked up the car, he opened up the trunk and noticed a secret compartment. He didn't check what was inside, even though he suspected contraband was there. He got busted when a border patrol agent found 110 pounds of marijuana in the secret compartment, and was charged with knowingly possessing marijuana. 21 U.S.C. sec. 841(a)(1). The trial court gave a willful-blindness jury instruction, 7 and Jewell was convicted.

(continued...) [*25] See Jewell, 532 F.2d at 699. On appeal, Jewell argued that positive knowledge of the hidden marijuana was necessary to convict him. The Ninth Circuit affirmed the trial court, adopting the Model Penal Code definition of “knowingly”. 8 The court also noted that, “the required state of mind differs from positive knowledge only so far as necessary to encompass a calculated effort to avoid the sanctions of the statute while violating its substance.”Id. at 704.

Later cases listed three elements for willful blindness : awareness of a high probability of criminal circumstances, deliberate avoidance of steps to confirm these criminal circumstances and the deliberate avoidance be motivated by a desire to avoid criminal responsibility. [*26] See, e.g., United States v. Heredia, 429 F.3d 820, 824 (9th Cir. 2005). But courts applied the factors inconsistently. Some courts required only the first two elements, 9 others all three. 10

The Ninth Circuit—where appeal of this case would lie—revisited willful blindness in United States v. Heredia, 483 F.3d 913 (9th Cir. 2007) (en banc). Heredia borrowed her aunt's car to drive her mother to a nearby town. She suspected that drugs might be in the car because it reeked of laundry detergent, the passengers carried a lot of cash and acted nervous, and her aunt's boyfriend was a pothead. At a border-control checkpoint, an officer stopped the vehicle and discovered 350 pounds of marijuana wrapped in dryer sheets (an odor-masking technique). Heredia was charged with possession of a controlled substance with intent to distribute under 21 U.S.C. section 841(a)(1). The court gave the jury a [*27] deliberate-ignorance instruction 11 -without the motivation-to-avoid-criminal-responsibility element—and she was convicted. Prior to rehearing the caseen banc, a majority of a three-judge panel from the Ninth Circuit overturned Heredia's conviction because they concluded the government had failed to establish that Heredia “deliberately avoided confirming her suspicion in order to provide herself with a defense.” Heredia, 429 F.3d at 828. Judge Kozinski dissented, arguing that the third prong was not necessary for a finding of willful blindness.Id. at 830-35. Upon rehearing en banc, the court held that the “two-pronged instruction *** met the requirements of Jewell and, to the extent some of our cases have suggested more is required *** they are overruled.” Heredia, 483 F.3d at 920. It reasoned that “the requirement that defendant have deliberately avoided learning the truth, provides sufficient protections for defendants.” Id. In other words, the third element—that the deliberate avoidance be motivated by a desire to avoid criminal responsibility—need not be met for a willful blindness finding in the Ninth Circuit. [*28] Judge Easterbrook has weighed in on the debate as well. In United States v. Ramsey, 785 F.2d 184 (7th Cir. 1986), scamsters running a Ponzi scheme “portray[ed] themselves as more gullible than the victims” and invoked a willful-blindness defense. Id. at 186. The trial court's jury instruction was upheld, but Judge Easterbrook did one better—offering a better instruction that would be “simple, but sufficient”:

You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear of what he would learn, you may conclude that he acted knowingly, as I have used that word. Id. at 190. Judge Easterbrook's approach forgoes the motivation-to-avoid-criminal-prosecution element as well. Of course, the case before us is a civil, rather than criminal, matter. But we do look to Jewell and similar cases for guidance about willful blindness. See, e.g., Christians v. Commissioner, T.C. Memo. 2003-130 [TC Memo 2003-130], 2003 WL 21000920, at *7; Medieval Attractions N.V. v. Commissioner, T.C. Memo. 1996-455 [1996 RIA TC Memo ¶96,455], 1996 WL 583322, at *59. And since the beyond-a-reasonable-doubt standard of criminal law is more stringent than the Commissioner's clear-and-convincing burden for finding civil fraud, we think meeting the criminal standard is more than sufficient [*29] to show the fraudulent intent behind false statements on tax returns that we're looking for here. We therefore hold that the Commissioner can meet his burden of showing fraudulent intent to evade taxes with clear and convincing evidence that a taxpayer was: aware of a high probability of unreported income or improper deductions, and deliberately avoided steps to confirm this awareness.

There is clear and convincing evidence that Fiore was aware of a high probability of unreported income for 1996 and 1997. Notwithstanding his busy schedule and administrative shortcomings, he must have known that there was a very high probability that he wasn't reporting all of his income. His educational background and work experience would alert him to the likely outcome of his haphazard income-estimation method—that he was likely failing to report substantial amounts of income. Fiore knew he was neglecting firm administration and running a high risk of not reporting taxable income.

And more importantly Fiore was certainly aware he was burning through a lot of cash. In 1995 he paid $150,000 to settle a malpractice claim and $85,000 for his Idaho cabin. He also started renting his closer-to-work apartment in 1995 for over $2,000 a month (while paying a mortgage at the same time). The pattern[*30] continued into 1997, when he paid $100,000 for Idaho land, and then into 1998—when he paid $350,000 for a log house and barn. We find that he was thinking about his not-enough-cash problem in 1996 and 1997. And not paying all his taxes was a convenient solution—at least temporarily.

We also find that Fiore deliberately avoided steps to confirm the possibility of unreported income. He could have easily confirmed whether his estimates of gross income were correct by checking his business-account bank statements. He also had a three-ring binder for each taxable year that included a copy of all the bills and deposit slips. Fiore's failure to check the bank statements and binders before accounting for his income and preparing his taxes makes his case analogous toCole and Spill—Fiore, like the taxpayers in those cases, had access to available records that he failed to use in preparing his returns.

Fiore in fact admitted to willful blindness “not for the purpose of defrauding the government, but rather, sadly, for the purpose of getting and keeping clients.” At the very least, this is an admission that he believed his time was better spent on getting clients than confirming whether he reported all his income—even when he suspected that at least some taxable income wasn't being properly reported. We therefore find that Fiore was willfully blind, weighing in favor of finding fraud. [*31] And with particular weight given to this willful blindness we find that the Commissioner has met his burden of proving by clear and convincing evidence that Fiore filed fraudulent returns. We cannot accept that a person of Fiore's intelligence, training, and experience was not aware when he filed his returns for 1996 and 1997—at a time when he knew his need for cash was ballooning—that there was a high probability that he was underreporting his income. And we find that he deliberately avoided steps that would have confirmed that underreporting, since all he had to do was read his monthly bank statements to verify the accuracy of his estimates of taxable income that he put on his returns.

Decision will be entered under Rule 155.

1

  California law requires that attorneys maintain a client trust-fund account. Retainers remain in the account until earned. Any interest earned is taken by the State to pay for legal services to the indigent. Cal. Bus. & Prof. Code sec. 6211 (West 2003 & 2013 Supp.). Because Fiore rarely obtained retainers—he preferred to bill clients after work was complete—the client trust fund had very little money in it.

2

  Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue.

3

  The lack of unreported income from 1993-95 may be due to Agent Wong's oversight—she failed to perform a bank-deposits analysis. But it's the Commissioner's burden here, and we decline to make any finding that Fiore had unreported income in 1993-95 when the IRS didn't look for it.

4

  As explained in the facts section, the 1996 and 1997 tax years were never subjected to full audit because of IRS oversight, so there may have been improper expenses here as well. But we won't draw inferences in favor of finding fraud when it's the Commissioner's burden.

5

  Fraud was not the only mischief going on--after a business dispute, a competitor threatened to “qbury” Spill, and Filly's soon burned to the ground. Spill v. Commissioner, T.C. Memo. 1989-213, 1989 Tax Ct. Memo LEXIS 213, at *18. Spill found a new location for his store, but shortly after he moved there, it was firebombed. Id. We were careful to note that the competitor was killed before the trial when, after defaulting on a loan from an unregulated segment of the financial industry, he was killed in an “accident”. See id., 1989 Tax Ct. Memo LEXIS, at *18 n.6. (Brooklyn was apparently rough before it became hip.)

6

  “Since Jewell was decided in 1976, every circuit—with the exception of the D.C. Circuit—has adopted its central holding. Indeed, many colloquially refer to the deliberate ignorance instruction as the `Jewell instruction.” United States v. Heredia, 483 F.3d 913, 918 (9th Cir. 2007) (en banc).

7

  The instruction allowed the jury to find that the government met its burden if “the defendant was not actually awarethat there was marijuana in the vehicle he was driving when he entered the United States his ignorance in that regard was solely and entirely a result of his having made a conscious purpose to disregard the nature of that which was in the vehicle, with a conscious purpose to avoid learning the truth.”

8

  “To act `knowingly' *** is not necessarily to act only with positive knowledge, but also to act with an awareness of the high probability of the existence of the fact in question.” United States v. Jewell, 532 F.2d 697, 700 (1976).

9

  See, e.g., United States v. Stadtmauer, 620 F.3d 238, 257 [106 AFTR 2d 2010-6206] (3d Cir. 2010); United States v. Sdoulam, 398 F.3d 981, 993 n.8 (8th Cir. 2005); United States v. Jaffe, 387 F.3d 677, 681 (7th Cir. 2004); United States v. Espinoza, 244 F.3d 1234, 1242 (10th Cir. 2001); United States v. Scott, 159 F.3d 916, 922 (5th Cir. 1998).

10

  See, e.g., United States v. Puche, 350 F.3d 1137, 1148-49 (11th Cir. 2003); United States v. Willis, 277 F.3d 1026, 1031 [89 AFTR 2d 2002-627]-32 (8th Cir. 2002); United States v. Delreal-Ordones, 213 F.3d 1263, 1268-69 (10th Cir. 2000); United States v. Pac. Hide & Fur Depot, Inc., 768 F.2d 1096, 1098 (9th Cir. 1985).

11

  The relevant part of the jury instruction read as follows: “You may find that the defendant acted knowingly if you find beyond a reasonable doubt that the defendant was aware of a high probability that drugs were in the vehicle driven by the defendant and deliberately avoided learning the truth.” Heredia, 483 F.3d at 917.

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