Gerald A. Sadler v. Commissioner ( 1999 )

113 T.C. No. 4UNITED STATES TAX COURT
GERALD A. SADLER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1046-98. Filed July 29, 1999.
P, a tax attorney, was the president and sole
shareholder of six corporations. P prepared his own
Forms W-2 for 1989 and 1990 from these corporations.
The Forms W-2 listed large amounts of Federal income
tax withheld. The corporations did not deposit with
the IRS or withhold any Federal income taxes on the
wages earned by P. On his tax returns for 1989 and
1990, P reported the correct tax imposed under subtitle
A; however, P also reported as withholdings the amounts
listed on the false Forms W-2.
Held: P had an "underpayment" of tax for 1989 and
1990. See sec. 6664(a), I.R.C.; sec. 1.6664-2, Income
Tax Regs.
Held, further, P is liable for the fraud penalty
for 1989 and 1990.
Held, further, the periods of limitation on
assessment for 1989 and 1990 did not expire.
- 2 -
Gerald A. Sadler, pro se.
Derek B. Matta and Gordon P. Sanz, for respondent.
VASQUEZ, Judge: Respondent determined the following
deficiency in and penalties on petitioner's Federal income tax:
Penalties
Year Deficiency Sec. 6663
1989 $19,797.59 $44,473.19
1990 -- 19,500.00
By amendment to answer, respondent increased the amount of
the fraud penalty for 1989 to $55,947.37.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. After concessions,1 the issues for decision are (1)
whether petitioner is liable for the fraud penalty for 1989 and
1990, and (2) whether the periods of limitation for 1989 and 1990
have expired.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time he filed his
petition, Gerald A. Sadler (Mr. Sadler) resided in Houston,
Texas.
1
Respondent concedes that there is no deficiency for 1989.
- 3 -
Petitioner's Background
From 1972 until December 17, 1996, petitioner was a licensed
attorney who practiced law in Texas. As part of his practice,
petitioner prepared tax returns and forms for clients including:
(1) Forms 1040, U.S. Individual Income Tax Return, (2) Forms W-2,
Wage and Tax Statement, (3) Forms W-4, Employee's Withholding
Allowance Certificate, (4) Forms 940, Employer's Annual Federal
Unemployment (FUTA) Tax Return, and (5) Forms 941, Employer's
Quarterly Federal Tax Return.
Petitioner was admitted to practice before this Court. On
at least two occasions, he represented clients before this Court.
Petitioner's Businesses
During the years in issue, petitioner was president and the
100-percent shareholder of the following corporations: (1) Jerry
Sadler, Attorney at Law, P.C.; (2) the Law Offices of Jerry
Sadler, P.C.; (3) Sixty Eleven Kirby Corp.;2 (4) Jay Ess, P.C.;
(5) J.S., P.C. doing business as Jerry Sadler, Attorney at Law,
P.C.; and (6) GEE A. ESS, P.C. (altogether, petitioner's
corporations).
During the years in issue, petitioner's corporations were
having financial problems. Payroll checks of petitioner's
employees were bouncing.
2
This corporation was formerly known as Airtop Heating and
Air Conditioning, Inc.
- 4 -
Petitioner's Taxes
Petitioner prepared and timely filed his Forms 1040 for 1989
(1989 original return) and 1990 (1990 return). Prior to April
15, 1990, petitioner prepared and filed a Form 1040X, Amended
U.S. Individual Income Tax Return, for 1989 (1989 amended
return).
Petitioner prepared the Forms W-2 that he attached to his
1989 original return, 1989 amended return, and 1990 return. The
Forms W-2 listed the following amounts as Federal Income tax
withheld:
Year Employer Federal Income Tax Withheld
1989 Law Offices of
Jerry Sadler, P.C. $39,500
1989 Jerry Sadler,
Attorney at Law, P.C. 13,720
1989 Sixty Eleven
Kirby Corp. 16,380
1990 J.S., P.C. doing
business as Jerry
Sadler, Attorney at
Law, P.C. 26,000
During the years in issue, petitioner's corporations did not
deposit with the Internal Revenue Service (IRS) any Federal
income taxes on the wages earned by petitioner. Petitioner
solely was responsible for making these deposits.
On his 1989 original return, petitioner (1) reported a
$22,056.50 tax liability and $39,500.00 of Federal income tax
withheld and (2) claimed a $17,443.50 refund. The IRS assessed
- 5 -
petitioner's tax liability of $22,056.50 and issued petitioner a
$17,191.45 refund check.3
On his 1989 amended return, petitioner (1) reported a
$19,796.14 additional tax liability and $35,096.49 of additional
Federal income tax withheld, and (2) claimed an additional refund
in the amount of $15,300.35. The IRS did not assess the
additional tax liability reported on the 1989 amended return.
On his 1990 return, petitioner (1) reported a $5,725 tax
liability and $26,000 of Federal income tax withheld and (2)
claimed a $20,275 refund.
Petitioner's Criminal Conviction
On October 5, 1995, pursuant to a plea agreement, petitioner
pleaded guilty to violating title 18 U.S.C. section 287 (1994)
for the following reason:
[He] made and presented to the United States Treasury
Department a claim against the United States for
payment, which he knew to be false, fictitious, or
fraudulent, by preparing and causing to be prepared, a
U.S. Individual Income Tax Return, Form 1040, for
calendar year 1989, which was presented to the United
States Treasury Department, through the Internal
Revenue Service, wherein he claimed a refund of taxes
in the amount of seventeen thousand four hundred forty-
three and 50/100 dollars ($17,443.50), knowing such
claim to be false, fictitious, or fraudulent.
3
The parties did not explain the difference between the
amount petitioner claimed as a refund and the refund check issued
by the IRS.
- 6 -
OPINION
I. Fraud
The penalty in the case of fraud is a civil sanction
provided primarily as a safeguard for the protection of the
revenue and to reimburse the Government for the heavy expense of
investigation and the loss resulting from a taxpayer's fraud.
See Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Fraud is
intentional wrongdoing on the part of the taxpayer with the
specific purpose to evade a tax believed to be owing. See McGee
v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121(5th Cir. 1975).
The Commissioner has the burden of proving fraud by clear
and convincing evidence. See sec. 7454(a); Rule 142(b). To
satisfy the burden of proof, the Commissioner must show: (1) An
underpayment exists; and (2) the taxpayer intended to evade taxes
known to be owing by conduct intended to conceal, mislead, or
otherwise prevent the collection of taxes. See Parks v.
Commissioner, 94 T.C. 654, 660-661 (1990). The Commissioner must
meet this burden through affirmative evidence because fraud is
never presumed. See Beaver v. Commissioner, 55 T.C. 85, 92
(1970).
A. Underpayment
The parties agree that (1) petitioner's tax liabilities for
1989 and 1990, not including penalties, interest, or credits for
withholding, are $41,852.64 and $5,725, respectively; (2) on the
- 7 -
1989 amended return, petitioner reported $41,852.64 as his tax
liability for 1989; and (3) on the 1990 return, petitioner
reported $5,725 as his tax liability for 1990. Petitioner argues
that, because he showed the correct amount of tax imposed under
subtitle A on his 1989 amended return and 1990 return, there is
no underpayment of tax in this case.
An "underpayment" is the amount by which the tax imposed
exceeds the excess of the sum of the amount shown as the tax by
the taxpayer on his return, plus amounts not so shown that were
previously assessed (or collected without assessment), over the
amount of rebates made. See sec. 6664(a). In making this
computation, "the amount shown as the tax by the taxpayer on his
return" is reduced by the excess of:
(i) The amounts shown by the taxpayer on his
return as credits for tax withheld under section 31
(relating to tax withheld on wages) * * * over
(ii) The amounts actually withheld, * * * with
respect to a taxable year before the return is filed
for such taxable year. [Sec. 1.6664-2(c)(1)(i) and
(ii), Income Tax Regs.]
Section 1.6664-2, Income Tax Regs.,4 takes into
consideration the situation in which a taxpayer overstates the
4
We note that while the regulation was not issued until
after petitioner filed the tax returns at issue in the case at
bar, it does govern the definition of an underpayment with
respect to respondent's penalty determination herein as secs.
1.6664-1 through 1.6664-4, Income Tax Regs., apply to returns,
the due date of which is after Dec. 31, 1989. See sec. 7805(b);
Rice v. Commissioner, T.C. Memo. 1999-65; sec. 1.6664-1(b),
Income Tax Regs.
- 8 -
credit for withholding. See sec. 1.6664-2(g), Example (3),
Income Tax Regs. Accordingly, if a taxpayer overstates the
credit for withholding, the overstatement decreases the amount
shown as the tax by the taxpayer on his return and increases the
underpayment of tax.
Petitioner claimed that he had withholding credits of
$74,596.495 and $26,000 for 1989 and 1990, respectively.
Petitioner attached false Forms W-2, which he prepared, to
substantiate these claims. Petitioner knew that his corporations
did not deposit or withhold, see infra, Federal income taxes on
the wages he earned during 1989 and 1990. Petitioner's
overstatements of withholding resulted in the following
underpayments:
5
Petitioner failed to address the difference between the
amount he claimed as withholding credits on his return
($74,596.49) and the amount he listed as Federal income tax
withheld on his Forms W-2 ($69,600).
- 9 -
1989
Tax imposed under subtitle A $41,852.64
Tax shown on the return1 ($32,743.85)
Tax previously assessed 0.00
Amount of rebates made 0.00
Balance - (32,743.85)
Underpayment 74,596.49
1
This equals the reported tax liability--$41,852.64--
minus the overstated withholding--$74,596.49.
1990
Tax imposed under subtitle A $5,725.00
Tax shown on the return1 ($20,275.00)
Tax previously assessed 0.00
Amount of rebates made 0.00
Balance - (20,275.00)
Underpayment 26,000.00
1
This equals the reported tax liability--$5,725--minus
the overstated withholding--$26,000.
See sec. 6664; sec. 1.6664-2(g), Example (3), Income Tax Regs.
B. Fraudulent Intent
The Commissioner must prove that a portion of the
underpayment for each taxable year in issue was due to fraud.
See Professional Servs. v. Commissioner, 79 T.C. 888, 930 (1982).
The existence of fraud is a question of fact to be resolved from
the entire record. See Gajewski v. Commissioner, 67 T.C. 181,
199 (1976), affd. without published opinion 578 F.2d 1383 (8th
Cir. 1978). Because direct proof of a taxpayer's intent is
rarely available, fraud may be proven by circumstantial evidence,
and reasonable inferences may be drawn from the relevant facts.
See Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson
- 10 -
v. Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331(6th Cir. 1984). A taxpayer's entire course of conduct can be
indicative of fraud. See Stone v. Commissioner, 56 T.C. 213,
223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106
(1969). The sophistication, education, and intelligence of the
taxpayer are relevant to determining fraudulent intent. See
Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Stephenson
v. Commissioner, supra at 1006; Iley v. Commissioner, 19 T.C.
631, 635 (1952).
Petitioner is a tax attorney who engaged in a fraudulent
refund scheme in order to generate money for his financially
strapped businesses. During the years in issue, payroll checks
issued to employees of petitioner's corporations contained
notations showing the amount of tax withheld from each check.
Payroll checks issued to petitioner contained no notations
regarding taxes being withheld. During the years in issue,
petitioner did not segregate any amounts he allegedly withheld as
taxes from his payroll checks. When questioned by respondent as
to what he did with the funds he allegedly withheld from his own
paychecks, petitioner replied "Spent them."
At trial, petitioner admitted that the withholding amounts
on the Forms W-2 he prepared were "fictitious" because neither he
nor his corporations deposited any of the Federal income taxes he
claims he/his corporations withheld on the wages he earned. We
conclude that petitioner knew that the amounts he listed as
- 11 -
withholding on his Forms W-2 were false, that he knew that these
amounts were not withheld, and that he intentionally reported
false withholding information on his 1989 original return, 1989
amended return, and 1990 return in order to generate refunds for
1989 and 1990 (so as to have extra funds to sustain himself and
his financially strapped businesses).
Petitioner asserts that his testimony was direct, candid,
truthful, credible, and honest. We disagree. His testimony was
evasive and not credible. Additionally, petitioner pleaded
guilty to filing a false claim for a refund of Federal income
taxes.
We conclude that respondent has proven by clear and
convincing evidence that petitioner fraudulently underpaid his
taxes for 1989 and 1990.
Once the Commissioner establishes that any portion of the
underpayment is attributable to fraud, the entire underpayment is
treated as attributable to fraud and subjected to a 75-percent
penalty, except with respect to any portion of the underpayment
that the taxpayer establishes is not attributable to fraud. See
sec. 6663(a) and (b). Petitioner has not proven that any part of
either underpayment is not attributable to fraud. Therefore, the
entire underpayments for 1989 and 1990 are subject to the 75-
percent penalty.
- 12 -
II. Periods of Limitation
Petitioner argues that respondent cannot assess the tax
liabilities petitioner reported on his tax returns due to the
expiration of the statutory periods of limitation.
In the case of a false or fraudulent return with the intent
to evade tax, the tax may be assessed at any time. See sec.
6501(c)(1). If the return is fraudulent, it deprives the
taxpayer of the bar of the statutory period of limitations for
that year. See Badaracco v. Commissioner, 464 U.S. 386, 396
(1984); Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961),
affg. T.C. Memo. 1960-32; see also Colestock v. Commissioner, 102
T.C. 380, 385 (1994).
We found that petitioner filed fraudulent income tax returns
for 1989 and 1990; therefore, the period of limitation on
assessment for each of these years remains open.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.