Roudakov v. Comm'r

T.C. Memo. 2014-193
UNITED STATES TAX COURT
VLADIMIR ROUDAKOV, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21000-11. Filed September 23, 2014.
Vladimir Roudakov, pro se.
Marie E. Small and Monica E. Koch, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined deficiencies in petitioner’s
Federal income tax and fraud penalties as follows:
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[*2] Penalty
Year Deficiency sec. 66631
1995 $83,766 $62,825
1996 220,627 165,470
1997 29,622 22,217
1
Amounts have been rounded to the nearest dollar.
After concessions, the issues for decision are:
(1) Whether petitioner omitted $240,969, $571,274, and $94,395 of gross
receipts from his taxable income for 1995, 1996, and 1997, respectively. We find
that he failed to report gross receipts to the extent discussed below.
(2) Whether petitioner had deficiencies in income tax for 1995, 1996, and
1997 in the amounts determined in the notice of deficiency. We hold that he had
deficiencies to the extent discussed below.
(3) Whether petitioner is liable for the fraud penalty under section 6663 for
1995, 1996, and 1997. We hold that he is.
Section references are to the Internal Revenue Code as in effect during the
years in issue. Rule references are to the Tax Court Rules of Practice and
Procedure.
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[*3] FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Petitioner was a
resident of New York when the petition was filed.
A. Early Years (Pre-1995)
Petitioner is from Ukraine, where he and some other members of his family
had been in business with some financial success. Petitioner and his wife have a
daughter and a son. Petitioner and his family immigrated to the United States
around 1990.
Petitioner lived in Philadelphia from 1990 to 1999. He lived in a
one-bedroom apartment with his wife and two children until 1994. Petitioner’s
mother came to the United States in 1994. After she arrived, petitioner, his wife,
the two children, and his mother lived in a two-bedroom apartment. Petitioner and
his family struggled financially during the years after they came to the United
States, and they lived frugally. From 1990 to 1994 petitioner at times worked in a
gas station and in a one-hour photo shop and drove a taxi cab.
B. Petitioner’s Computer Business From 1995 Through 1997
In late 1994 petitioner began to buy laptop computers wholesale for resale to
laptop computer retailers. He operated this business under the name “Payless
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[*4] Computer Source” (Payless). He continued this business until around 1998
when it ceased to be profitable.
1. Computer Purchases
Petitioner traveled throughout the United States to attend computer auctions
to buy discounted computers from various suppliers. For example, petitioner
attended auctions in California and Maryland.
Petitioner bought some computers which were being discounted by the
manufacturer or other seller. Sometimes computers he bought at auction were
packaged in broken or opened boxes and were sold as is. To assist with reselling
computers, petitioner learned to repair and rebuild computers.
In 1996 petitioner bought a previously leased 1996 Toyota van to transport
laptop computers from his numerous wholesale sources and to deliver them to
retailers. He continued to own and drive this vehicle at the time of trial.
Petitioner purchased some computers from Advanced Marketing Services in
Philadelphia. He paid for those computers by check. It was very unusual for
petitioner to pay for computers by check. Typically he purchased computers from
wholesalers (e.g., at auctions) who did not know him, and these sellers required
that he pay in cash.
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[*5] Petitioner rarely took family members when he went to buy computers, but
sometimes he took one or more family members if he planned to stay in a hotel.
For example, family members accompanied him on trips to attend auctions in
Washington, D.C., and Ocean City, Maryland, during the years in issue.
2. Petitioner’s Sales of Computers
During the years in issue petitioner brought the laptop computers to
Philadelphia and resold them to several retailers in New York City and New Jersey.
To find buyers he contacted stores that sold laptop computers. Sometimes he
simply drove to stores selling laptop computers and offered his computers for sale.
There were large numbers of buyers and sellers of laptop computers during
those years. Prevailing prices were well understood from widely available sources
such as computer magazines. Petitioner typically sold computers for about a 5% to
6% profit. Petitioner believed that it was crucial to promptly resell computers he
had purchased because retail prices of computers sometimes declined over time. A
low markup helped him to quickly resell computers that he had purchased and
obtain repeat business from retail outlets. Sometimes his profit was less than 5% if,
for example, boxes had been opened or damaged.
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[*6] 3. Mellon Bank Account
Payless maintained a bank account with Mellon Bank (Mellon account) in
Philadelphia. Petitioner routinely deposited checks Payless received from its
vendors into the Mellon account. The cumulative amounts of check deposits to the
Mellon account were $125,817, $365,523, and $435,820 for 1995, 1996, and 1997,
respectively. Throughout 1995 and 1996 petitioner frequently wrote checks from
the Mellon account, often for several thousand dollars, to Advanced Marketing
Services in Philadelphia for computer purchases. From mid-1996 through 1997
petitioner wrote many checks for cash on the Mellon account.
4. Petitioner’s Use of Cash
Petitioner paid cash for computers he bought at auctions. He never paid for
computers he bought at auctions by check or credit card. Thus, he took substantial
amounts of cash to the auctions. Retailers paid by check for computers they
purchased from petitioner. At his request, petitioner typically received checks in
amounts less than $10,000 even if it required the buyer to issue more than one
check on a particular day. He deposited some of the checks in the Mellon account
and cashed some at K&A Check Cashing Service (K&A) in Philadelphia.
Petitioner cashed checks at K&A in the following total amounts:
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[*7] Total checks
Year cashed Amount
1995 39 $275,486
1996 74 542,448
1997 11 92,145
Total 124 910,079
5. Business Expenses
Petitioner tried to minimize his business expenses. After some of his
inventory was stolen in 1995, he kept his inventory in public storage. He paid $60
a month for a storage space beginning sometime in 1995.
C. Petitioner’s Tax Returns for 1995, 1996, and 1997
Petitioner timely filed his Federal income tax returns, Form 1040, U.S.
Individual Income Tax Return, for tax years 1995, 1996, and 1997. Friedman
Accounting Services prepared petitioner’s tax returns using information he
supplied, including income and expense summary statements for his computer sales
business.
On Schedules C, Profit or Loss From Business, attached to each tax return
for the years in issue petitioner identified his principal business as “computer
distribution and sales” and listed his business name as “Payless Computer Sales”.
He reported the following on those Schedules C:
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[*8] Gross Cost of goods Other
Year receipts sold expenses Net profit
1995 $143,963 $112,692 $14,650 $16,621
1996 336,391 299,559 18,805 18,027
1997 435,820 396,135 21,798 17,887
The 1995 tax return was filed unsigned by petitioner. Petitioner signed both
the 1996 and 1997 tax returns.
D. Respondent’s Examination of Petitioner’s Tax Returns
The IRS began investigating petitioner’s tax returns in 1998 because of a
discrepancy between a Form 4789, Currency Transaction Report, the IRS had
received from K&A and what was reported on petitioner’s tax returns.1 Revenue
Agent Cynthia Jackson (RA Jackson), a tax compliance officer, investigated
petitioner’s returns. Upon review of currency transaction reports (CTR) that had
been produced by K&A, RA Jackson concluded that there were additional gross
receipts for Payless that petitioner had not reported on his tax returns. RA Jackson
requested from petitioner his bank statements, workpapers used to prepare his
1995, 1996, and 1997 income tax returns, and any other data that would assist the
1
Under 31 U.S.C. sec. 5313(a) (2006) financial institutions are required to
file a currency transaction report (CTR) involving cash transactions in excess of
$10,000. K&A filed the CTRs with the IRS because K&A believed that
petitioner’s transactions were suspect.
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[*9] IRS in reconciling his reported gross receipts and cost of goods sold.
Petitioner provided no records or documents to RA Jackson.
RA Jackson referred petitioner’s case to the Criminal Investigation Division
(CID) of the IRS. CID agents contacted individuals who had written checks to
petitioner. The CID also obtained the Mellon account records and performed a
deposits analysis of that account. On the basis of the analysis of petitioner’s
Mellon account deposits and the CTRs from K&A, respondent’s agents concluded
that petitioner had omitted gross receipts from his computer sales business of
$240,969, $571,274, and $94,395 for 1995, 1996, and 1997, respectively.
After the criminal conviction, petitioner’s case was returned to RA Jackson.
She prepared the notice of deficiency for petitioner’s 1995, 1996, and 1997 tax
years.
E. Petitioner’s Criminal Conviction
Petitioner was indicted in the U.S. District Court for the Eastern District of
Pennsylvania on two counts of willfully filing false tax returns under section 7206
for tax years 2006 and 2007. The indictment charged petitioner with filing tax
returns on which he had reported gross receipts on Schedule C of $336,391 for
1996 when he knew his gross receipts were approximately $907,665; and of
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[*10] $435,820 for 1997, when he knew his gross receipts were approximately
$530,215. On February 9, 2004, a jury found petitioner guilty on both counts.
OPINION
A. Burden of Proof
Taxpayers generally bear the burden of proving that the Commissioner's
determination in a notice of deficiency is incorrect. Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933).2
The Court of Appeals for the Second Circuit, to which this case is
appealable, see sec. 7482(b)(1)(A), has recognized an exception to the presumption
of correctness by requiring the Commissioner in unreported income cases to
provide evidence linking the taxpayer with a source of income. See Llorente v.
Commissioner, 649 F.2d 152, 156 (2d Cir. 1981), aff’g in part, rev’g in part and
remanding 74 T.C. 260 (1980). Petitioner clearly is linked to the unreported
income. Petitioner operated a computer reselling business and received payments
from retail purchasers of computers. Accordingly, respondent has satisfied his
burden of providing evidence linking petitioner to the unreported income.
2
If various conditions are met, the burden of proof can shift to the
Commissioner under sec. 7491(a). Petitioner does not contend those conditions
have been met here, and it is apparent from the record they have not been met.
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[*11] B. Unreported Income From Checks Cashed at K&A
Respondent alleges petitioner omitted gross receipts in the following
amounts from Schedules C filed with his 1995, 1996, and 1997 income tax returns:
Year Omitted gross income
1995 $240,969
1996 571,274
1997 94,395
Total 906,638
If a taxpayer does not maintain adequate books and records, the
Commissioner may reconstruct the taxpayer’s income by any reasonable method
which clearly reflects income, sec. 446(b); Holland v. United States, 348 U.S. 121,
130-132 (1954), including the bank deposits method, Parks v. Commissioner, 94
T.C. 654, 658 (1990); Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975),
aff’d, 566 F.2d 2 (6th Cir. 1977), and currency transaction reports, Testa v.
Commissioner, T.C. Memo. 1989-556. Petitioner provided no books or records to
respondent. Accordingly, respondent reasonably relied upon bank records and the
CTRs that K&A submitted to determine petitioner’s unreported income.
Petitioner contends that his friend, Alexander Rason, operated a computer
sales business under a business name similar to his and received some of the
proceeds from the checks cashed at K&A, causing confusion about who received
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[*12] cash from checks at K&A. Petitioner also disputes the testimony of Jonathan
Gershkow, the owner of K&A, that only petitioner received the proceeds of the
checks he cashed at K&A, on the grounds that there is no photographic evidence of
petitioner’s cashing checks and that the amounts cashed are in doubt because K&A
had a corporate address separate from its business location.
We disagree. We found credible the testimony of Jonathan Gershkow that
only petitioner received the proceeds of checks payable to Payless. Petitioner did
not assist respondent in finding Mr. Rason, and Mr. Rason did not testify at the trial
of this case or of petitioner’s criminal case.3 Petitioner has not convinced us that he
did not receive cash from checks cashed at K&A payable to Payless in the amounts
that Jonathan Gershkow described. We find that petitioner cashed checks at K&A
for $542,448 and $92,145 for 1996 and 1997, respectively.4 We therefore find that
petitioner underreported his gross receipts by $542,448 and $92,145 for 1996 and
3
Petitioner offered no explanation for failing to assist respondent in finding
Mr. Rason or for the absence of Mr. Rason at his trial.
4
Respondent asserts that petitioner’s unreported income is wholly
attributable to checks he cashed at K&A. However, the record reflects that the
total amounts of checks cashed at K&A during 1996 and 1997 are less than the
amounts of unreported income respondent determined for those years in the notice
of deficiency. There is nothing in the record to reconcile the larger amounts
appearing in the notice of deficiency.
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[*13] 1997, respectively. We also find that petitioner underreported his gross
receipts for 1995 by $240,969 as respondent determined in the notice of
deficiency.5
C. Whether Petitioner Has Deficiencies in the Amounts Determined in the
Notice of Deficiency
Petitioner did not provide contemporaneous records of his costs of goods
sold or expenses. However, petitioner testified that his profit on computer sales
typically was about 5% to 6%; that it was sometimes less; and that he used
substantial amounts of cash to buy computers at auctions. We found this aspect of
his testimony to be credible. This profit rate is similar to the overall net profit of
approximately 6% that he reported on his tax returns and that was based on the
revenues he deposited in the Mellon Bank, as shown in the following table:
Profit
1995 1996 1997 Total Percentages
Sales $143,963 $336,391 $435,820 916,174
COGS 112,692 299,559 396,135 808,386
GP 31,271 36,832 39,685 107,788 11.77%
Other expenses 14,650 18,805 21,798 55,253
Net income 16,621 18,027 17,887 52,535 5.73%
5
While the record shows that the value of checks petitioner cashed at K&A
during 1995 exceeded this amount, respondent has not asserted that petitioner had
any more unreported income than the amount determined in respondent’s notice of
deficiency. We deem that respondent has conceded this issue.
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[*14] When a taxpayer establishes that he or she incurred a deductible business
expense but does not prove the precise amount of the expense, the Court may
approximate the amount allowable, bearing heavily against the taxpayer whose
inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d 540,
544 (2d Cir. 1930). For the Cohan rule to apply, the Court must have some basis
for estimating the amount of the expense. Vanicek v. Commissioner, 85 T.C. 731,
742-743 (1985). Petitioner’s testimony provides an adequate basis for us to
approximate costs of goods sold and expenses for Payless attributable to sale
proceeds not deposited in the Mellon account and instead received as cash.6
On the basis of the foregoing, we find that petitioner’s income is understated
by the amounts of gross receipts that we found above in the Discussion at part B.
6
There is evidence in the record that petitioner acquired valuable artwork
during better times for his family before he came to the United States and that the
artwork was later stolen. There also is some suggestion in the record that
petitioner received around or somewhat more than $100,000 in family money
around the time his mother moved to the United States, that he invested that
money, and that the money was substantially lost. In respondent’s posttrial
opening brief, respondent points out that on the Schedule D, Capital Gains and
Losses, included with petitioner’s 1997 tax return, he reported selling short-term
capital assets for $2,588,199 and that those assets had a cost basis of $2,690,718.
There is no explanation in the record for this item reported on his 1997 return, and
it is not apparent how, if at all, it relates to the circumstances referred to in this
footnote. Respondent alleges no source of unreported income for petitioner for
1995-97 other than from checks cashed at K&A, and we have included no
factfinding or discussion relating to these points.
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[*15] Further, on the basis of the record before us and bearing heavily against
petitioner, who failed to provide contemporaneous business records, we assume
petitioner had an overall net profit percentage of 10%,7 as shown in the following
table:
Gross receipts Adjusted gross Net income Adjusted net
Year as reported receipts as reported income
1995 $143,963 $384,932 16,621 $38,493
1996 336,391 878,839 18,027 87,884
1997 435,820 527,965 17,887 52,797
Accordingly, we find that petitioner understated his profit from operating
Payless to the extent the adjusted net income amounts stated above exceed the net
income amounts he reported on his tax returns for 1995, 1996, and 1997.
D. Whether Petitioner Is Liable for the Penalty for Fraud Under Section 6663(a)
With respect to the section 6663 penalty, respondent has the burden of
proving fraud by clear and convincing evidence. See 7454(a); Rule 142(b).
7
We recognize petitioner failed to report sales proceeds along with the cost
of purchasing the goods for unreported sales. We believe there are some
additional deductible business expenses associated with the unreported sales that
were never reported either. Consequently, the overall net profit percentage we use
is weighted more toward the overall gross profit percentage of 11.77% that
petitioner reported on his tax returns.
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[*16] 1. Background
Respondent contends that petitioner is liable for the penalty for fraud under
section 6663(a) for 1995, 1996, and 1997. Respondent must establish that:
(a) petitioner underpaid tax for each year in issue and (b) some part of the
underpayment is due to fraud. See 6653(b); Parks v. Commissioner, 94 T.C.
660-661; Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989). We found in part C
of the Discussion that petitioner underpaid tax for 1995, 1996, and 1997. If
respondent shows that any part of an underpayment is due to fraud, the entire
underpayment is treated as due to fraud unless petitioner shows by a preponderance
of the evidence that part of the underpayment is not due to fraud. See 6663(b).
Fraud is the intentional evasion of a tax believed to be owing. Webb v.
Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), aff’g T.C. Memo. 1966-81.
Fraud is never presumed; it must be established by affirmative evidence. Beaver v.
Commissioner, 55 T.C. 85, 92 (1970). The Commissioner may prove fraud by
circumstantial evidence because direct evidence of the taxpayer’s intent is rarely
available. See Stephenson v. Commissioner, 79 T.C. 995, 1005-1006 (1982), aff’d,
748 F.2d 331 (6th Cir. 1984).
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[*17] 2. Badges of Fraud
Courts have developed several objective indicators, or “badges”, of fraud.
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988). The following badges of
fraud are present in this case as to petitioner for the years in issue: (1) substantial
amounts of unreported income over several years; (2) inadequate books and
records; (3) dealing in large amounts of cash; and (4) concealment of income or
assets. See, e.g., Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986),
aff’g T.C. Memo. 1984-601. Another badge of fraud, filing false income tax
returns, is present with respect to 1996 and 1997. See Spies v. United States, 317
U.S. 492, 499 (1943); Potter v. Commissioner, T.C. Memo. 2014-18, at *13;
Laciny v. Commissioner, T.C. Memo. 2013-107, at *17-*20.
a. Substantial Underreported Income
A pattern of substantially underreporting income for several years is strong
evidence of fraud. Holland, 348 U.S. at 137-139; Spies, 317 U.S. at 499.
Petitioner substantially underreported his income for 1995, 1996, and 1997.
b. Inadequate Books and Records
A taxpayer’s failure to maintain accurate records or concealment of records
may be a badge of fraud. Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir.
1962), aff’g T.C. Memo. 1959-172; Reaves v. Commissioner, 295 F.2d 336, 338
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[*18] (5th Cir. 1961), aff’g 31 T.C. 690 (1958); Grosshandler v. Commissioner, 75
T.C. 1, 20 (1980). Petitioner never supplied any books and records to respondent
during the examination or for purposes of this case.
c. Dealing in Large Amounts of Cash
A taxpayer’s use of cash to conceal income is evidence of fraud. Bradford v.
Commissioner, 796 F.2d at 307-308. Petitioner’s computer resale business dealt
almost exclusively in cash. He cashed checks between 1995 and 1997 in the
cumulative amount of $910,079 and purchased computers for resale using cash.
d. Concealment of Income
Attempts to conceal income from the Internal Revenue Service by
negotiating checks for less than $10,000 are an indicia of fraud. See Gandy v.
Commissioner, T.C. Memo. 1997-532, aff’d, 199 F.3d 440 (5th Cir. 1999). During
each of the years at issue petitioner cashed a large number of checks at K&A in
amounts less than $10,000. When a sale exceeded $10,000 petitioner even
requested that the purchaser issue more than one check so that no check exceeded
$10,000. Such purposeful behavior is an indication petitioner was attempting to
conceal income and it is an indicia of fraudulent intent.
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[*19] e. Criminal Conviction for Filing False Tax Returns
Petitioner was found guilty of violating section 7206(1) for the taxable years
1996 and 1997. Section 7206(1) makes it a crime for a taxpayer to willfully make
and submit any return verified by a written declaration that it is made under the
penalties of perjury which he does not believe to be true and correct as to every
material matter. Wright v. Commissioner, 84 T.C. 636, 639 (1985). While not
dispositive on the issue of fraud, petitioner’s conviction is a factor we may consider
relevant. See id. at 633-644. The Supreme Court has defined “willfully”, as used
in section 7206(1), as “a voluntary, intentional violation of a known legal duty.”
United States v. Pomponio, 429 U.S. 10, 12 (1976). We think petitioner’s
intentional filing of false tax returns for 1996 and 1997 is an indication that he had
fraudulent intent with respect to those tax years.
3. Conclusion
We conclude that respondent has proven by clear and convincing evidence
that petitioner fraudulently underpaid tax for 1995, 1996, and 1997.
To reflect the foregoing and the concessions of respondent,
Decision will be entered under
Rule 155.