DocketNumber: Docket No. 9913-10.
Citation Numbers: 104 T.C.M. 234, 2012 Tax Ct. Memo LEXIS 244, 2012 T.C. Memo. 246
Judges: HALPERN
Filed Date: 8/27/2012
Status: Non-Precedential
Modified Date: 4/18/2021
An appropriate order will be issued, and decision will be entered for respondent.
P failed to file tax returns for 2003 and 2004. R prepared substitutes for returns under
HALPERN,
2003 | $14,595 | $10,581 | $3,649 | $377 |
2004 | 21,342 | 15,473 | 5,336 | 612 |
By answer to amended petition, *245 respondent supported by specific averments his determination of additions to tax under
The issues for decision for 2003 and 2004 (years in issue) are whether petitioner: (1) underreported his income, (2) is liable for additions to tax for *248 failures to (A) pay tax timely and (B) pay estimated income tax, and (3) is liable for an addition to tax for fraudulent failure to file or, alternatively, for nonfraudulent failure to file.2*246 We must also decide whether to make absolute this Court's order dated June 14, 2011, directing petitioner to show cause why a penalty should not be imposed upon him under
At the time he filed the petition and amended petition, petitioner lived in Texas.
From at least 1999 to 2009, petitioner operated a pool-cleaning business. He did not file Federal income tax returns for taxable years 1999-2004.3 He filed Federal income tax returns for taxable years 2005-08, engaging a tax return preparer to prepare those returns.
Respondent assigned Revenue Agent Mark Tae to examine petitioner's liability for the years in issue. By letter dated March 7, 2008, Revenue Agent Tae informed petitioner that the IRS had not received his tax returns for the years in issue and that he had scheduled a March 17, 2008, meeting to discuss the matter. In response, petitioner sent a letter, dated March 11, 2008, stating that he would not attend that meeting and denying that he is (1) liable for the "so-called income tax or any other internal revenue tax" and (2) a taxpayer under the Internal Revenue Code. He also stated that he had "filed returns *247 in past years out of total ignorance of the tax laws." Petitioner subsequently sent to Revenue Agent Tae a document claiming sovereign immunity from, among other things, "any administrative action, civil or criminal" brought by the IRS.
Petitioner did not provide to Revenue Agent Tae records or other information concerning his taxable income for the years in issue. Therefore, to determine petitioner's income for those years, Revenue Agent Tae inquired of a credit bureau and, on the basis of the received information, he had summonses served on five financial institutions. One of those summoned financial institutions, JPMorgan Chase & Co. (JPMorgan Chase), informed him that, in the years in issue, petitioner had not maintained an account in his name, but he may *250 have had signature authority with respect to the bank account of "Freedom Church of Revelation Restoration Ministries" (bank account). Revenue Agent Tae had summonses served on JPMorgan Chase requesting information concerning that account.
Upon receiving the requested records, Revenue Agent Tae examined the deposits made to the bank account, over which petitioner, indeed, held sole signature authority, and copies of canceled checks. *248 Noticing that memo lines of several deposited checks referenced "pool services", he sent 21 third-party contact letters to issuers of those checks requesting additional information. He received several responses, all of which confirmed that petitioner had serviced their swimming pools during the years in issue and either that they remitted to him checks made out to "FCR" or petitioner's company name was "FCR".
Revenue Agent Tae then reconstructed petitioner's income for the years in issue under the so-called bank deposits method. To reconstruct petitioner's income for each year in issue, he prepared a schedule of the net deposit and individual item amount of "checks that was [sic] received by [petitioner] and deposited to a bank account under the name of Freedom Church of Revelation", the source of each deposit (i.e., interest payment, name of issuer of check), the check number, and the memo text (i.e., Revenue Agent Tae's notation of an *251 interest payment, memo line of deposited checks). To the sum of those deposits he added undeposited items from third parties (customers),4 and he subtracted interest credited to the account and identifiable nontaxable deposits. He believed that, for *249 each year in issue, the resulting sum represented the year's unreported gross income from petitioner's pool-cleaning business.
Revenue Agent Tae determined that, during 2003, total deposits of $49,974 were made to the bank account, from which he subtracted $378, representing interest, the difference being unreported net deposits from pool cleaning. He further concluded that petitioner also received from customers $2,983 for pool cleaning services rendered, none of which was deposited into the bank account. He determined the net deposits plus undeposited items from customers, totaling $52,579, to be petitioner's 2003 unreported gross income from his pool-cleaning business.
Revenue Agent Tae determined that, during 2004, total deposits of $69,889 were made to the bank account, from which he subtracted $495 and $500, representing interest and gifts, respectively, the difference being unreported net deposits from pool cleaning. *250 He further concluded that petitioner also received from customers $1,961 for pool cleaning services rendered, none of which was deposited into the bank account. He determined the net deposits plus undeposited items from customers, totaling $70,855, to be petitioner's 2004 unreported gross income from his pool-cleaning business.
Revenue Agent Tae could not identify, for either year in issue, any business expenses paid from the bank account.
Respondent prepared substitutes for returns under
Respondent issued the notice on January 27, 2010, from his Small Business and Self-Employed Office, Dallas, Texas. It was signed on his behalf by Janet A. Miller, "Technical Services, Gulf States Area". In an attachment to the notice, respondent explained that, for each year in issue, his determination of a deficiency in tax was principally due to his adjustments increasing petitioner's gross receipts from his pool-cleaning business plus unreported interest income. Respondent also explained his determination of additions to tax under
Petitioner used the Court's informal discovery procedures to, among other things, *252 request of respondent the following: * * * * * * *
Petitioner moved for permission to orally examine Revenue Agent Tae and Ms. Miller. Respondent objected, and we denied the motion. In our order doing so, we stated: Respondent represents, and we agree, that petitioner's allegations of error in the petition raise meritless legal theories and the scope of the proposed depositions is to further advance his meritless arguments, which are not relevant to the subject of this case. We shall deny the motion to take depositions. We also advise petitioner to consult
Petitioner further attempted to use the Court's formal discovery procedures—his motion to compel production of documents—to make requests similar to those he made using informal discovery. Respondent objected, and we denied the motion. In our order so doing, we stated: In the objection, respondent lists petitioner's assignments of error and objects that all of petitioner's theories are meritless. We agree. Petitioner's request for production of documents is not reasonably calculated to lead to the discovery of admissible evidence and is unduly burdensome and otherwise inappropriate. * * *
*256 We advised petitioner to read the authorities cited by respondent in his response to the motion and again advised him to examine
Petitioner *255 failed to appear for trial of the case. Respondent proceeded, and the trial was concluded without petitioner's participation.
Petitioner disobeyed the Court's order at the conclusion of the trial to file a brief. Petitioner did file a motion to dismiss for lack of subject matter jurisdiction, stating as grounds, among others, the following: That declarant's occupation in life is operating a swimming pool cleaning and handyman service. These activities are not taxable revenue activities. That the free exercise and enjoyment of the God-given and constitutionally secured right to lawfully acquire property and/or compensation in Federal Reserve notes, by lawfully contracting my own labor in innocent and harmless activities cannot be (and therefore has not been) taxed for revenue purposes. I deny being subject to any internal revenue tax including the so-called income tax.
*257 He summarized his argument as follows: For the reasons stated herein, declarant denies being a "taxpayer" as that term is very narrowly defined in the Internal Revenue Code at
We issued an order directing petitioner to show cause why the Court should not impose upon him a penalty under
Respondent contends that petitioner had unreported gross receipts of $52,579 and $70,855 for the years in issue, from his pool-cleaning business. He also contends that petitioner received and failed to report for the years in issue interest income of $378 and $495, which was credited to a bank account held in the name of Freedom Church of Revelation Restoration Ministries over which petitioner held signature authority. Respondent arrives at his conclusions on the basis of the bank deposits analysis prepared by Revenue Agent Tae. Taking into account computational adjustments, respondent determined deficiencies in tax of $14,595 and $21,342 for the years in issue.
*258 Petitioner bears the burden of proof.
Where a taxpayer fails to maintain adequate records, the Commissioner may reconstruct his income by using the bank deposits method.
*259 To reconstruct petitioner's income for the years in issue under the bank deposits method, Revenue Agent Tae had summonses served on several financial institutions, through which he identified a bank account held in the name of "Freedom Church of Revelation Restoration Ministries" over which petitioner held signature authority. He also sent 21 third-party contact letters from which he confirmed the existence of petitioner's pool-cleaning business and the deposit in the years in issue of its business receipts to that bank account. Revenue Agent Tae received no information from petitioner; therefore, in preparing the bank deposits analysis, he analyzed the summoned records and contact letters to identify nontaxable deposits and deductible expenses. To calculate net deposits, he reduced the total deposits for each examined year by nontaxable *259 deposits and interest credited to the bank account. He determined that the net deposits for each year in issue plus undeposited items from third parties, i.e., net receipts, constituted unreported gross income from petitioner's pool-cleaning business.
Petitioner does not challenge the facts on which respondent's determinations are based, his methodology in reconstructing petitioner's income, or his calculation of tax. He does not claim that for the years in issue his proceeds from pool cleaning and the interest he earned are any less than respondent determined or that proceeds from providing services and interest are not items of gross income. They *260 are.
Petitioner received $52,957 and $71,350 in unreported gross income for the years in issue, resulting in deficiencies in tax for those years of $14,595 and $21,342, respectively.
In general, the Commissioner bears the burden of producing evidence that it *262 is appropriate to impose the relevant addition to tax.
In the notice, respondent determined that petitioner is liable for each year in issue for additions to tax, under
*263
In neither the petition nor the amended petition does petitioner, for either year in issue, assign error to, or contest in any way, the additions to tax under
We next address whether petitioner is liable *264 for the addition to tax under
We must determine whether petitioner's failure to file his tax returns for the years in issue was fraudulent.
"Where allegations of fraud are intertwined with unreported and indirectly reconstructed income (e.g., under the bank deposits method), it is properly part of the Commissioner's case to investigate and negative reasonable explanations of *265 nontaxable sources advanced by the taxpayer."
Respondent has established by clear and convincing evidence that petitioner underpaid his tax for each year in issue. As detailed in our analysis above, respondent's bank deposits analysis shows by clear and convincing evidence that petitioner underreported his income by $52,957 and $71,350 for the years in issue, by failing to report income from his pool-cleaning business and interest credited to the bank account. Petitioner makes no argument as to nontaxable sources or that he has unclaimed deductions or credits that reduce the tax burden attributable each year to his unreported income.
Respondent has thus shown by clear and convincing evidence *267 that petitioner underreported his gross income and, consequently, underpaid his tax for each year in issue.
The second prong of the fraud test requires the Commissioner to prove that, for each year, the taxpayer's failure to file an income tax return was due to fraud. Fraud for that purpose is defined as "intentional wrongdoing designed to evade tax believed to be owing."
*267 Over the years, courts have developed a nonexclusive list of factors that demonstrate fraudulent intent. Those badges of fraud include: (1) understatement of income, (2) maintenance of inadequate records, (3) failure to file tax returns, (4) implausible or inconsistent explanations of behavior, (5) concealment of income or assets, (6) failure to cooperate *268 with tax authorities, (7) engaging in illegal activities, (8) an intent to mislead which may be inferred from a pattern of conduct, (9) lack of credibility of the taxpayer's testimony, (10) filing false documents, and (11) dealing in cash.
The following factors indicate petitioner's fraudulent intent during each year in issue.
"A pattern of consistent underreporting of income, especially when accompanied by other circumstances showing an intent to conceal, justifies the inference of fraud."
"Concealing assets coupled with a failure to file tax returns is a strong indication of fraud."
Petitioner's inconsistent explanations to Revenue Agent Tae for his failure to file tax returns also furnishes clear and convincing evidence of his attempt to conceal his pool-cleaning business income by failing to file returns. In response to Revenue Agent Tae's inquiry concerning his tax returns for the years in issue, petitioner sent a letter dated March 11, 2008, in which he disputed his obligation to pay income tax and denied his status as a taxpayer under the Internal Revenue Code. However, as of that date (March 2008), petitioner had engaged a tax return *270 preparer to prepare *271 his 2005 and 2006 tax returns and, as far as we can determine, timely filed those returns. Moreover, while disputing throughout the examination his obligation to file returns for the years in issue, petitioner engaged a tax return preparer to prepare his 2007 tax return, and, again we assume, timely filed that return. He later filed a tax return for 2008. Petitioner has not attempted to explain why he believed that he was not a taxpayer in, and thus not required to file returns for, the years in issue but achieved that status in 2005-08. In his March 11, 2008, letter, petitioner informed Revenue Agent Tae that he had "filed returns in past years out of total ignorance of the tax laws." Even if that was true, at the time of that letter, petitioner had already prepared, if not filed, his 2007 return. His explanation for failing to file tax returns could have no other purpose than concealment of his income from the pool-cleaning business and avoidance of paying tax believed to be owed.
Petitioner did not cooperate with Revenue Agent Tae's requests for petitioner's tax returns for the years in issue or his requests for records and information *272 concerning petitioner's tax liability for those years. Petitioner refused to meet with Revenue Agent Tae to discuss petitioner's missing tax returns, instead denying his liability for the "so-called income tax" and claiming sovereign *271 immunity from administrative actions brought by the IRS. Petitioner thus misled Revenue Agent Tae as to the existence of the bank account and the taxable income held therein. Revenue Agent Tae was forced to issue third-party inquiries and summonses to eventually uncover the bank account's existence, its connection with petitioner's pool-cleaning business, and ultimately the taxable business receipts for the years in issue. We conclude that petitioner's failure to cooperate with respondent's agent is indicative of a fraudulent failure to file.
Respondent has proven by clear and convincing evidence that petitioner's failure to file his tax returns for the years in issue was fraudulent. Petitioner has not proven that his failure to do so was due to reasonable cause and not due to willful neglect.
On June 14, 2011, we ordered petitioner to show cause why the Court should not impose a penalty upon him under
Under
As stated
Accordingly, we shall make our order to show cause absolute and impose upon petitioner a penalty under
Petitioner is liable for the deficiencies, penalties, and additions to tax as determined herein.
1. Unless otherwise stated, 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. We round all amounts to the nearest dollar.↩
2. There are also certain computational adjustments that follow from the adjustments at issue, but they are not in controversy, and we need not discuss them.
3. We assume on the basis of his 2005-08 returns that petitioner was a cash basis taxpayer for 1999-2004.↩
4. Undeposited items from third parties represent amounts, identified by Revenue Agent Tae through third-party contact letters, paid to petitioner by customers of his pool-cleaning business, which were not deposited into the bank account.↩
5. The U.S. Court of Appeals for the Fifth Circuit, to which an appeal would lie absent a stipulation to the contrary,
In addition, petitioner makes no argument that, pursuant to
6. While in his motion to compel production of documents petitioner requests copies of all delegation orders applying to the job description, position, and GS level of Ms. Miller (who signed the notice), he concedes: "[He] is The information responsive to this request is necessary because it is petitioner's responsibility to make sure that the agent acting for the government, in this case, Janet A. Miller stays within the bounds of her authority. * * * When challenged, those posing as government officers and agents are required to affirmatively prove whatever authority they claim.
Wheeler v. Commissioner , 521 F.3d 1289 ( 2008 )
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )
Glenn Crain v. Commissioner of Internal Revenue , 737 F.2d 1417 ( 1984 )
Ramon Portillo and Dolores Portillo v. Commissioner of ... , 932 F.2d 1128 ( 1991 )
Priscilla M. Lippincott Adams v. Commissioner of Internal ... , 170 F.3d 173 ( 1999 )
United States v. Massei , 78 S. Ct. 495 ( 1958 )
Goff v. Comm'r , 135 T.C. 231 ( 2010 )
Swain v. Comm'r , 118 T.C. 358 ( 2002 )
Dole v. United Steelworkers , 110 S. Ct. 929 ( 1990 )
Tokarski v. Commissioner , 87 T.C. 74 ( 1986 )
Petzoldt v. Commissioner , 92 T.C. 661 ( 1989 )