Bennett v. Comm'r , 108 T.C.M. 641 ( 2014 )

T.C. Memo. 2014-256
UNITED STATES TAX COURT
HAMLET C. BENNETT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15929-10. Filed December 22, 2014.
Hamlet C. Bennett, pro se.
Nhi T. Luu and Kimberly T. Packer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: In two notices, respondent determined deficiencies and
additions to tax as follows:
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[*2] Additions to tax/penalties
Year Deficiency Sec. 6651(f)1 Sec. 6651(a)(2)
1995 $128,770 $93,358.25 $32,192.50
1996 125,550 91,023.75 31,387.50
1997 148,087 107,363.08 37,021.75
1998 223,584 162,098.40 55,896.00
1999 177,637 128,786.83 44,409.25
2000 337,105 244,401.13 84,276.25
2001 280,939 203,680.78 70,234.75
2002 368,152 266,910.20 92,038.00
2003 284,406 206,194.35 71,101.50
1
The amount set forth above for the penalty under section 6651(f) for each
taxable year is at the maximum rate of 75% of the amount required to be shown as
tax on the return. These amounts will be reduced to 72.5% if the Court sustains
the additions to tax under section 6651(a)(2).
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.
Petitioner’s unreported income was determined using bank deposits plus
some specific income items from payments diverted to or for the benefit of
petitioner. The Internal Revenue Service (IRS) prepared substitutes for returns
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[*3] under section 6020(b), but petitioner failed to pay the amounts shown on
those returns. In the answer respondent alleged increased amounts to reflect that
petitioner’s status during 1995 through 2001 was married filing separately, rather
than single as used in the statutory notice. Before trial, respondent reviewed
additional bank records, reduced gross receipts for 1996 through 1998, and
allowed business expense deductions for 1995 through 1998 that had not been
allowed in the notices of deficiency. (Deductions had been allowed in the
statutory notice for the later years.) The issue for decision is whether petitioner’s
failure to file tax returns for the years in issue was fraudulent.
FINDINGS OF FACT
Some of the facts have been deemed stipulated pursuant to Rule 91(f). The
stipulated facts are incorporated in our findings by this reference. Petitioner
alleged a residence in Louisiana at the time he filed his petition.
Petitioner was born in Los Angeles, California. He attended the Art Center
School, studied architecture, and graduated with a bachelor of arts degree in
January 1960. In 1965 he moved to Hawaii. He obtained jobs doing architectural
illustrations of housing tracts that were being developed. Petitioner has been a
licensed architect since 1985.
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[*4] Petitioner married Beverly Bennett in 1970. They were married until her
death in September 2001. From 1971 through 2008, petitioner resided in a house
constructed on seven acres of land in Holualoa, Hawaii, that Beverly Bennett had
obtained during a divorce from her prior husband.
Petitioner designed office buildings and other commercial structures, but
most of his works were luxury residences designed for clients, including
celebrities. He entered into contracts to design houses and, in exchange for his
services, received gross receipts during each of the years in issue.
From 1960 through 1993, petitioner filed income tax returns reporting his
earnings as an architect. Petitioner and Beverly Bennett (Bennetts) filed joint
returns from 1970 through 1993. On the jointly filed returns for 1992 and 1993,
the Bennetts owed approximately $90,000, which they did not pay in full. A
return was prepared for 1994 but apparently was not filed. No returns were filed
for the years in issue in this case.
In the mid-1990s, the Bennetts attended a seminar presented by Royal
LaMarr Hardy, who was a carpet cleaner when petitioner first met him. Hardy
presented various means of avoiding tax liabilities, and the Bennetts decided to try
them. After a proceeding was filed to enforce a summons for petitioner’s business
records, on December 9, 1996, the Bennetts filed a petition in bankruptcy. The
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[*5] bankruptcy petition was filed the day that petitioner was supposed to appear
in a summons enforcement case. However, the Bennetts abandoned the
bankruptcy strategy by failing to file required documents when they realized that
bankruptcy would have adverse consequences to them.
Petitioner established Architects Group Trust (AGT) in 1996, Architects
Management, LLC (AML) in 2001, and Divine Wellness Spiritual Order (DWSO)
in 2003. Attorney Paul Sulla assisted petitioner in establishing the entities.
Petitioner directed that payments be made to these entities for his services,
including:
Amount Entity Year
$96,000 AGT 1999
84,000 AGT 2000
240,000 AML 2001
300,000 AML 2002
Petitioner maintained control over bank accounts and brokerage accounts
into which he deposited gross receipts from his architectural services. Some of the
accounts were in the names of the entities he established. Deposits to those
accounts exceeded $300,000 in 1995, 1996, and 1997; $500,000 in 1998 and
1999; and $1 million in 2000, 2001, 2002, and 2003. Neither petitioner nor the
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[*6] entities he established filed tax returns reporting petitioner’s income for his
architectural services.
At times petitioner instructed his clients to purchase assets for him, his
family, or his associates in lieu of paying him directly for his services. For
example, during 2000, he agreed to perform architectural services for a car dealer.
In payment for the services, the dealer purchased two automobiles worth a total of
$100,000 for women friends of petitioner. At other times, petitioner directed that
payments for his services be made to a draftsman or others performing services for
petitioner.
Petitioner established nominee entities and adopted other devices in order to
conceal income he received for his architectural services during the years in issue.
He did so even though his tax adviser and tax return preparer, a certified public
accountant, tried to dissuade him. When foreclosure proceedings were
commenced regarding the mortgage on petitioner’s residence, he provided funds
to a nominee to repurchase the residence in order to conceal his continuing
beneficial ownership.
Petitioner was contacted in 1999 by agents conducting a criminal
investigation of Hardy. He initially provided oral statements to the agents but
refused to sign and tore up the affidavit prepared consistent with those statements.
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[*7] Petitioner adopted a series of frivolous arguments and pursued them even
after he was indicted and convicted and spent years in prison, as described below.
The frivolous theories pursued by him from time to time included: filing tax
returns was “voluntary”; he was not a “person” required to file returns; section 911
and regulations concerning withholding of income tax exclude domestic income of
U.S. citizens; the IRS did not follow proper procedures; and actions were not
properly delegated to IRS employees.
On February 9, 2006, petitioner was indicted on various Federal counts
including income tax evasion in violation of section 7201 for 1999 through 2003.
He was found guilty by a jury, and judgment was entered by the District Court for
the District of Hawaii on August 18, 2008. Petitioner was sentenced to 78 months
in prison. In June 2009, his conviction was affirmed by the Court of Appeals for
the Ninth Circuit, which concluded, among other things, that the evidence during
the criminal trial was sufficient as to willfulness. Petitioner served over five years
of his sentence and was released in November 2013.
OPINION
Petitioner contends that compensation for architectural services he
performed in Hawaii is not subject to income tax and that therefore he was not
required to file returns for the years in issue. Before trial, respondent filed a
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[*8] motion for partial summary judgment that petitioner was collaterally estopped
to deny fraudulent intent for 1999 through 2003 inclusive, years for which
petitioner had been convicted of tax evasion under section 7201. That motion was
granted. In the order granting summary judgment, the Court stated that the
amounts of the deficiencies and penalties for 1999 through 2003 would be
determined on the evidence at trial, as would petitioner’s liabilities, if any, for the
other years in issue. The Court also warned petitioner that his position was
frivolous and that continuation of groundless and frivolous positions might subject
him to a penalty not to exceed $25,000 under section 6673.
Petitioner persisted in his position at trial that his earnings for architectural
services rendered in Hawaii are not taxable because he is a U.S. citizen and has no
foreign earned income taxable under section 911 and related regulations. His
argument is based on inapplicable statutes and circular reasoning. He denies that
“worldwide income” includes domestic income, substituting his own reading of
statutory and regulatory materials for those of every court that has spoken on the
subject in innumerable cases decided over decades. He takes items out of context,
treats “includes” as a term of limitation, and contends that references to certain
categories within a statute or regulation exclude all others. He has not presented
any reason to reject respondent’s recalculated deficiencies and additions to tax or
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[*9] penalties. He has refused to produce evidence of nontaxable bank deposits or
deductible expenses.
Petitioner’s interpretative arguments have been consistently rejected in
strong terms, even in judicial opinions sustaining criminal convictions. See, e.g.,
United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987) (“utterly without
merit”); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) (“inane” and
“preposterous”); United States v. Rice, 659 F.2d 524, 528 (5th Cir. 1981)
(“frivolous non-sequitur”). In Takaba v. Commissioner, 119 T.C. 285, 292
(2002), the taxpayer and his counsel, Paul Sulla (the attorney who assisted
petitioner in establishing entities used to conceal income), were sanctioned under
section 6673(a)(1) and (2), respectively, for arguing, among other things, that a
U.S. citizen residing in Hawaii was not taxable on compensation earned in Hawaii.
No further discussion of petitioner’s stale theories is warranted. See Crain v.
Commissioner, 737 F.2d 1417 (5th Cir. 1984).
Petitioner has conceded all of the facts necessary to sustain the revised
deficiencies, including the bank deposits and his marital status. The section
6651(a)(2) additions to tax are sustained upon the basis of petitioner’s failure to
pay the tax shown on the returns the IRS prepared under section 6020(b). See
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[*10] Cabirac v. Commissioner, 120 T.C. 163, 170 (2003); Tinnerman v.
Commissioner, T.C. Memo. 2006-250, slip op. at 16.
We must decide, however, whether petitioner’s failure to file returns for
1995 through 1998, years for which collateral estoppel does not apply, was
accompanied by an intent sufficient to sustain the section 6651(f) penalty. Section
6651(f) provides a penalty of 75% of the amount required to be shown as tax on
unfiled returns if the failure to file the returns is fraudulent. The civil fraud
penalty is a 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 the taxpayer’s fraud. Helvering v. Mitchell, 303 U.S.
391, 401 (1938). Respondent has the burden of proving fraud by clear and
convincing evidence. See sec. 7454(a); Rule 142(b).
In applying section 6651(f) to determine whether petitioner’s failure to file
tax returns was fraudulent, we consider the same elements considered in cases
involving former section 6653(b) and present section 6663. See Clayton v.
Commissioner, 102 T.C. 632, 653 (1994); Niedringhaus v. Commissioner, 99 T.C.
202, 211-213 (1992). Fraud may be proved by circumstantial evidence, and the
taxpayer’s entire course of conduct may establish the requisite fraudulent intent.
Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Circumstantial evidence of
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[*11] fraud includes “badges of fraud” such as those present here: a longtime
pattern of failure to file returns, failure to report substantial amounts of income,
failure to cooperate with taxing authorities in determining the taxpayer’s correct
liability, implausible or inconsistent explanations of behavior, and concealment of
assets. See, e.g., Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.
1986), aff’g T.C. Memo. 1984-601; Powell v. Granquist, 252 F.2d 56, 60 (9th Cir.
1958); Grosshandler v. Commissioner, 75 T.C. 1, 19-20 (1980); Gajewski v.
Commissioner, 67 T.C. 181, 199-200 (1976), aff’d without published opinion, 578
F.2d 1383 (8th Cir. 1978).
Petitioner admits that he received payments for architectural services
performed during each of the years in issue, and the specific items of diverted
income and the bank deposits have been deemed stipulated because he did not
deny them. Bank deposits are prima facie evidence of income. See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C.
651, 656-657 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977). Proof of gross receipts in
the amounts shown by the bank deposits analysis for each of the years in issue in
this case is sufficient to satisfy respondent’s burden of showing that petitioner had
an obligation to file returns. See secs. 1, 6011, 6012.
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[*12] We reject any inference that petitioner’s persistence in his frivolous theories
demonstrates sincerity or good faith or is otherwise a defense to the charge of
fraud. Petitioner filed tax returns for decades before 1995, stopping only after he
faced large tax liabilities for 1993 and 1994. He “discovered” his various
frivolous arguments in alleged reliance on a carpet cleaner turned tax adviser,
while disregarding the cautionary advice of his certified public accountant. He
adopted various means of concealing income by diverting income to nominees or
to entity accounts. He rejects the judgments of the courts, including a jury verdict,
a District Court judgment, and an appellate court opinion that he was criminally
responsible for his conduct. A person with his education and skills could be
expected to abandon unsuccessful arguments if acting in good faith. We conclude
that petitioner’s failure to file for each year in issue was due to fraud. See Miller
v. Commissioner, 94 T.C. 316, 332-336 (1990); Chase v. Commissioner, T.C.
Memo. 2004-142; Tonitis v. Commissioner, T.C. Memo. 2004-60; Madge v.
Commissioner, T.C. Memo. 2000-370, aff’d, 23 Fed. Appx. 604 (8th Cir. 2001);
Greenwood v. Commissioner, T.C. Memo. 1990-362.
Petitioner was warned of the possibility of a penalty under section 6673 if
he persisted in his contention that he was not required to file returns and pay tax
on his income for architectural services performed in Hawaii. Under these
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[*13] circumstances, section 6673(a)(1) provides for a penalty not in excess of
$25,000 when proceedings have been instituted or maintained by the taxpayer
primarily for delay or the taxpayer’s position is frivolous or groundless. It may
seem that an additional $25,000 on top of the amounts petitioner already owes will
not change his position. However, serious sanctions also serve to warn other
taxpayers to avoid pursuing similar tactics. See Coleman v. Commissioner, 791
F.2d 68, 71-72 (7th Cir. 1986); Takaba v. Commissioner, 119 T.C. 295. An
award of $25,000 to the United States will be included in the decision to be
entered here.
To reflect the change in petitioner’s filing status for 1995 through 2001 and
respondent’s revised bank deposits analysis,
Decision will be entered
under Rule 155.