DocketNumber: Docket Nos. 22563-09, 17051-10
Citation Numbers: 2013 T.C. Memo. 133, 105 T.C.M. 1792, 2013 Tax Ct. Memo LEXIS 133
Judges: KERRIGAN
Filed Date: 5/29/2013
Status: Non-Precedential
Modified Date: 11/21/2020
Decisions will be entered under
KERRIGAN,
2002 | $426,983 | — | $320,237 |
2003 | 357,051 | — | 267,788 |
2004 | 608,247 | — | 452,991 |
2005 | 1,133,907 | $283,121 | 851,968 |
2006 | 1,092,585 | 272,911 | 820,280 |
2007 | 1,082,079 | — | 827,927 |
In the answer, respondent asserted increased deficiencies and increased penalties pursuant to
2002 | $432,665 | $324,499 |
2003 | 427,359 | 320,519 |
2004 | 615,794 | 458,651 |
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. All monetary amounts are rounded to the nearest dollar.
The issues for consideration are: (1) whether petitioners are liable for tax on self-employment income petitioner husband earned for tax years 2001 through 2006; (2) whether petitioners are liable for income tax on $320,670 of wages *135 petitioner *134 husband earned for tax year 2007; (3) whether petitioners are liable for income tax on flowthrough income from Ward, Inc., for tax years 2002 through 2007; (4) whether petitioners are liable for income tax for flowthrough income from Ward-Nilsson, Inc., for tax years 2005 through 2007; (5) whether petitioners are liable for income tax for flowthrough income from Ward Consulting, Inc., for tax years 2006 and 2007; (6) whether petitioners are liable for income tax for flowthrough income from Ward Nilsson Enterprises, Inc., for tax year 2007; (7) whether petitioners are liable for income tax attributable to the gain recognized on the sale of stock for tax year 2003; (8) whether petitioners are liable for tax on a net capital gain of $190,000 for tax year 2007; (9) whether petitioner husband is liable for fraud penalties pursuant to
Some of the facts are stipulated and *135 are so found. Petitioners resided in Utah at the time the petitions in these consolidated cases were filed. Petitioners *136 were married at the time the petitions were filed and remain married. Petitioners filed joint Federal income tax returns for all tax years in issue.
Petitioner wife requested relief from the liabilities for income tax and additions to tax determined by respondent for all tax years in issue under
Gary L. Ward (petitioner) graduated from Stevens Henagar College with a degree in accounting in the 1970s. For over 25 years he prepared Federal income tax returns for compensation. Petitioner was a member of the National Association of Tax Practitioners during this time. Throughout his career he attended annual courses in tax law and tax return preparation.
In May 2010 petitioner was charged *136 with one count of tax evasion in violation of
Petitioners filed timely joint Federal income tax returns for tax years 2002, 2003, and 2007. Petitioners filed a joint Federal income tax return for tax year 2004 on October 17, 2005. Petitioners filed a joint Federal income tax return for tax year 2005 on April 11, 2008. Petitioners filed a joint Federal income tax return for tax year 2006 on April 16, 2008. On September 29, 2008, respondent received additional joint Federal income tax returns for tax years 2005 through 2007 from petitioners, which were marked "amended". Respondent did not process these returns.
Petitioner did not introduce evidence that records were kept to support his tax returns or income earned by his various businesses. During the audit process with respondent petitioner did not provide *137 documentation to show how much income he earned during the years at issue.
Ward, Inc., was incorporated in Utah and elected to be treated as an S corporation for Federal income tax purposes on March 2, 1994. Ward, Inc., offered tax return preparation, bookkeeping, and payroll services to clients. During the tax years in issue, petitioner was the sole shareholder, president, and *138 director of Ward, Inc., and he participated in the corporation's day-to-day operations. Petitioner also provided accounting, bookkeeping, and tax return preparation services to clients on behalf of Ward, Inc.
Ward, Inc., maintained various bank accounts, including a savings account and business and checking accounts, at Brighton Bank. Petitioner had authority to deposit and withdraw money from these bank accounts. He used money deposited in these accounts to pay personal and family expenses. In January 2009 petitioner sold his interest in Ward, Inc., to Andrews Financial Corp.
Ward, Inc., did not file a Federal income tax return for tax year 2002. For tax year 2003 Ward, Inc., filed a timely Federal income tax return. On October 17, 2005, Ward, Inc., filed a Federal income tax return for tax year 2004. *138 Ward, Inc., did not file a timely Federal income tax return for tax year 2005. On September 29, 2006, petitioner gave respondent's revenue agent a copy of Ward, Inc.'s Federal income tax return for tax year 2005. Respondent did not process this return. On April 7, 2008, respondent's service center in Ogden, Utah, received Ward, Inc.'s Federal income tax return for tax year 2005. On April 7, 2008, Ward, Inc., filed Federal income tax returns for tax years 2006 and 2007.
Upon review of petitioners' personal income tax returns in April 2008, respondent conducted a promoter preparer investigation of petitioner. Through *139 the investigation it was determined that petitioner had helped his clients reduce their taxable income and their tax liability by creating fictitious deductions. A pattern was found in which
Petitioner incorporated Ward-Nilsson, Inc., in Utah on November 29, 2004. Ward-Nilsson, Inc., elected to be treated as a flowthrough entity under subchapter S for income tax purposes. During tax years 2005 through 2007 petitioner was the sole shareholder, officer, and director of Ward-Nilsson, Inc. *139 Ward-Nilsson, Inc., filed its 2005, 2006, and 2007 Federal income tax returns on April 7, 2008.
Ward Consulting, Inc., was incorporated in Utah on September 26, 2006. Ward Consulting, Inc., elected to be treated as a flowthrough entity under subchapter S. In 2006 and 2007 petitioner was the sole shareholder and president of Ward Consulting, Inc., and he performed personal services on behalf of the corporation.
Ward Consulting, Inc., filed a delinquent Federal income tax return for tax year 2006 on April 7, 2008. Respondent's service center in Ogden, Utah, received two Forms 1120S, U.S. Income Tax Return for an S Corporation, both purporting *140 to be Federal income tax returns for Ward Consulting, Inc., for 2007. The two returns do not include the same amounts of gross receipts, deductible business expenses, or ordinary business expenses.
Ward Nilsson Enterprises, Inc., was incorporated in Utah on August 30, 2007. In September 2007 Ward Nilsson Enterprises, Inc., elected to be treated as a flowthrough entity under subchapter S for tax purposes. Petitioner was the sole shareholder in 2007, and he performed personal services on behalf of the *140 corporation. In 2007 he received $10,000 in compensation from Ward Nilsson Enterprises, Inc., for those services.
Ward Nilsson Enterprises, Inc., maintained a business checking account with Brighton Bank. Petitioner had authority to make deposits and withdrawals from the account.
During tax years 2002 through 2005 petitioner applied for several personal loans from Brighton Bank. In 2004 he also applied for a loan from Washington Federal Savings. Petitioner submitted copies of tax returns to the banks as part of the loan application process. The amounts of taxable income shown on the returns submitted to the banks were greater than the amounts stated on petitioners' Federal *141 income tax returns as filed. These alternate returns showed substantially more income than the filed returns. For example, petitioners 2002 tax return filed with respondent showed gross income of $45,010, and the 2002 return given to the banks showed gross income of $307,699.
During tax year 2003 petitioners received $3,177 in proceeds from the sale of stock; however, petitioners did not include this amount on their Federal income tax return. This amount was included in the notice of deficiency for *141 tax year 2003.
The notice of deficiency for tax year 2007 determined that petitioners had a net capital gain of $190,000 for the partial sale of petitioner's business, Ward Nilsson Enterprises, Inc., which petitioners failed to report on their Federal income tax return.
Generally
A taxpayer is required to maintain adequate books and records sufficient to establish his or her income.
Respondent examined Federal income tax returns for the tax years in issue for petitioners' four S corporations: Ward, Inc., Ward-Nilsson, Inc., *143 Ward Consulting, Inc., and Ward Nilsson Enterprises, Inc. (collectively, S corporations). Respondent reviewed the S corporations' gross income, petitioners' individual tax returns, and the deductions on the S corporations' returns. Respondent did a bank deposits analysis that included the bank accounts of the S corporations, petitioner's personal bank account, and the Ward Family Trust bank accounts and examined whether the bank deposits matched up closely with the income which was reported on the various returns. To prepare his analysis, respondent analyzed bank statements, bank deposits, deposit slips, and deposit checks. Respondent compared amounts in the bank accounts with the amounts reported on petitioners' Schedules K-1, Shareholder's Share of Income, Deductions, Credits, etc., and the gross receipts reported on the S corporations' Forms 1120S. Respondent's analysis showed the following: 1*144
*1442002 | Ward, Inc. | $1,315,940 | ($14,832) | $1,330,772 |
2003 | Ward, Inc. | 1,347,490 | 486,417 | 861,073 |
2004 | Ward, Inc. | 1,951,746 | 450,243 | 1,501,503 |
2005 | Ward, Inc. | 3,200,224 | 155,775 | 3,044,449 |
2006 | Ward, Inc. | 2,894,381 | 66,750 | 2,827,631 |
2007 | Ward, Inc. | 2,613,531 | 187,015 | 2,426,516 |
2006 | Ward Consulting, Inc. | 152,247 | 122 | 152,125 |
2007 | Ward Consulting, Inc. | 339,750 | 44,560 | 295,190 |
During tax years 2002 through 2007 petitioner applied for a number of personal loans and submitted copies of his personal Federal income tax returns and Ward, Inc.'s Federal income tax returns to the banks. These tax returns were not identical to the returns filed with respondent; rather, they showed more income from the S corporations than the tax returns filed with respondent. Petitioner did not provide an explanation for the discrepancies in income.
During the audit petitioner provided receipts for some expenses; however, these expenses often did not match what was reported on petitioners' Federal *145 income tax returns. Personal expenses were deducted regularly as business expenses; those expenses were disallowed. Some of the business expenses were substantiated; those deductions were allowed. Petitioner did not contend that further deductions should be allowed.
While auditing petitioners' Federal income tax returns, respondent noticed a pattern of false paper trails involving
Respondent contends that petitioner, with the assistance of his employees, advised clients that they could claim a
Respondent cited an example at trial in which petitioner prepared a Federal income tax return for a business with a
Respondent inquired about the
Petitioner *147 failed to provide documents that showed that any of the income from respondent's bank deposits analysis was not actually income. He also contends that he stopped preparing tax returns in 1994; however, petitioner continued to sign tax returns as the preparer. Returns were prepared by his employees. Petitioner also contends that he was not the owner of Ward, Inc.; however, he provided no documentation to support this claim and the stipulation of facts establishes him as the sole shareholder, president, and director of Ward Inc., for taxable years 2002 through 2007.
When petitioner was investigated he did not provide an explanation for the
Petitioner repeatedly underreported his income for all tax years in issue. There was a consistent pattern of failing to report the gross receipts as documented *148 in the bank deposits analysis. Petitioner was not able to substantiate deductions, *148 and often personal expenses were deducted as business expenses. Petitioner performed services for his various subchapter S corporations and received wages as well as flowthrough income. The notices of deficiency indicate that petitioner received compensation from Ward, Inc., Ward-Nilsson, Inc., Ward Consulting, Inc., and Ward Nilsson Enterprises, Inc. Petitioner did not show this income was not wages. We note that petitioner wife is entitled to relief under
The notice of deficiency included $3,177 of net capital gains income for 2003 from the *149 sale of stock. Respondent contends that the stock belonged to *149 petitioner wife. Petitioners have not proven otherwise and did not produce evidence regarding the ownership of stock. 4
The revenue agent testified that there was a bank deposit of $190,000 to Ward Nilsson Enterprises, Inc., in 2007. Upon examination petitioner indicated that he sold a portion of Ward Nilsson Enterprises, Inc., to Mr. Nilsson for $190,000. Petitioners have failed to provide evidence to the contrary.
Fraud is an intentional wrongdoing on the part of a taxpayer with the specific purpose to evade a tax believed to be owed.
Petitioner had a pattern of underreporting his income for all tax years in issue. Petitioner's bank deposits did not match the income reported on petitioners' Federal income tax returns. There was also a discrepancy in the amounts of income on the Federal income tax returns filed and the tax returns provided to banks as part of a loan application. This pattern of understatement is evidence of fraud.
Petitioner failed to maintain records that would disclose his correct taxable income. In addition, petitioner was unable to explain deposits made into his bank accounts. Petitioner has a background in tax return preparation and was in the business of preparing tax returns. He was a member of the National Association of *152 Tax Practitioners. Given his education and work experience we expect that he has a working knowledge of the tax laws and understands that records should be kept.
Respondent investigated petitioners for filing fraudulent tax returns, and petitioner was convicted *153 of tax evasion. At trial petitioner stated: "I will admit that we did abuse
Respondent showed that there was a repeated history of underpayment of tax due to underreported income. Petitioner's bank deposit income did not match the income reported on his tax returns. Respondent has shown by clear and convincing evidence that petitioner intended to avoid taxes by concealing income through the S corporations. Even though petitioner was contrite, he had no plausible explanation for why the income was not reported. We find that petitioner is liable for the fraud penalty under
Under
We have considered the other arguments of the parties and they are without merit or need not be addressed in view of our resolution of the issues.
To reflect the foregoing,
1. This table was constructed from the testimony of the first witness and from various exhibits.
2. Petitioner did not produce documents that showed cars were purchased or that checks were written to clients returning some of their funds.↩
3. Petitioner did not challenge the characterization of his income as self-employment income, and he did not otherwise provide evidence to support his burden of proof on this issue.↩
4. Petitioner wife requested innocent spouse relief pursuant to
5. Petitioner wife failed to provide any evidence demonstrating that it would be inequitable to hold her liable for the tax.↩
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )
Robert W. Bradford v. Commissioner of Internal Revenue , 796 F.2d 303 ( 1986 )
Helvering v. Mitchell , 58 S. Ct. 630 ( 1938 )
United States v. Boyle , 105 S. Ct. 687 ( 1985 )
Commissioner v. Glenshaw Glass Co. , 75 S. Ct. 473 ( 1955 )
Davis v. Commissioner , 81 T.C. 806 ( 1983 )
King's Court Mobile Home Park, Inc. v. Commissioner , 98 T.C. 511 ( 1992 )