DocketNumber： Docket No. 5464-94.
Filed Date： 5/23/1996
Status： Non-Precedential
Modified Date： 11/20/2020
*249 Decision will be entered for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WRIGHT, (3) Whether petitioner is liable for the addition to tax under section 6653(b), for taxable years 1980 and 1981, and section 6653(b) (1) and (2), for taxable years 1982 and 1983. We hold that he is. (4) Whether the period of limitations has expired for assessment and collection of the deficiencies in and additions to tax for each taxable year at issue. We hold that it has not. (5) Whether the equitable doctrine of laches bars assessment and collection of the deficiencies in and additions to tax for each taxable year at issue. We hold that it does not. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein. At the time the petition was filed in this case, petitioner resided in Metairie, Louisiana. Besco Exporting Corporation (Besco) was a manufacturer of industrial chemicals. During the years at issue, Besco was owned by James Tubre (Tubre) and Seligman Kahn (Kahn). In promoting its products, Besco routinely sought to gain "in the yard" status with its customers. "In the yard" status meant physical and ongoing access to customer job sites. This practice enabled Besco to make first-hand field observations of the particular needs of its customers. It also enabled Besco to be more responsive to its customers' demands. Perhaps the most significant aspect of possessing "in the yard" status, however, was the influence that could be had on the purchasing agents of Besco's customers. In 1964, Besco began supplying ASI with various chemical products. Besco attained "in the yard" status at ASI shortly thereafter. Besco's business relationship with ASI developed*252 over the ensuing years, and sales to ASI constituted between 30 and 40 percent of Besco's total business during the years at issue. Many of ASI's departments purchased products from Besco, including the paint department. At sometime during the early 1970's, while petitioner was assistant superintendent of the paint department, petitioner approached Tubre and inquired about the possibility of selling Besco products to customers other than ASI. Tubre approved of this idea and verbally authorized petitioner to represent Besco and market its products. Tubre's consent to petitioner's request was motivated by Tubre's desire to expand Besco. Petitioner was unsuccessful in generating orders for Besco's products from sources outside ASI, and his efforts eventually ceased. Subsequently, petitioner approached Tubre and requested that Besco pay petitioner an unspecified amount for petitioner's involvement in causing ASI's paint department to purchase products from Besco. In response to this request, Tubre informed petitioner that it was necessary that he discuss the matter with Kahn and George Steiner (Steiner). *253 claims that Lee informed him that such an arrangement was acceptable but that it was imperative to make it appear that the payments were not based upon Besco's sales to ASI. Tubre further claims that Lee instructed him to pay petitioner by check, characterize each payment as a commission, and issue a Form 1099 Misc. with respect to each taxable year in which any payment is made. Following the consultation with Lee, Besco began making payments to petitioner based on Besco's sales to ASI's paint department. Each payment was in the form of a check and was characterized by Besco as a commission. The frequency, pattern, and amount of such payments are not determinable from the record; however, during the 6-year period ending with 1979, Besco paid petitioner the following amounts in connection with Besco's sales to the paint department: *254 Similarly, during the years at issue, Besco paid petitioner the following amounts in connection with its sales to the paint department: Besco reported all payments to the Internal Revenue Service (IRS) on Forms 1099 Misc. Petitioner, in turn, reported receipt of the above amounts on his returns for each respective taxable year. In 1974, Tubre had a meeting with an ASI vice president named Clark. During the course of that meeting, Clark instructed Tubre to cease paying ASI employees for their involvement in "in the yard" activities. Tubre informed petitioner, Kahn, and Steiner of his conversation with Clark. He also told petitioner that Besco intended to comply with Clark's directive. The payments, however, continued despite Tubre's reservations. Sometime during or before 1984, the IRS initiated an investigation of ASI. As part of that investigation, an IRS special agent (Balash) examined petitioner's returns for the taxable years at issue. Balash met with Tubre on at least two occasions during the course of her investigation. On one occasion, Tubre informed Balash that petitioner "serviced" various*255 accounts for Besco and that Besco's payments to petitioner resulted from such service. *256 at issue. That income is reflected on a Schedule C attached to petitioner's returns. The Schedule C's attached to petitioner's returns for 1980, 1981, and 1982 characterize the "main business activity" which gave rise to the income from Besco as "commissions". The Schedule C attached to petitioner's return for 1983 characterizes the "main business activity" which gave rise to the income from Besco as "industrial sales". On each Schedule C, petitioner offset the income received from Besco with various expenses that he allegedly incurred in connection with earning such income. The following table lists petitioner's alleged Schedule C expenses for each taxable year at issue: *257 Additionally, petitioner claimed an investment tax credit in the amount of $ 821 for the purchase of a Corvette automobile in 1982. Petitioner claimed similar expenses against the income he received from Besco during the period 1974 through 1979. During the course of Balash's investigation, Tubre and Kahn admitted that they had lied with respect to petitioner's involvement in Besco's sales to customers other than ASI. Subsequently, Besco pled guilty to one count of violating section 7206(1) for filing a return containing a false statement with respect to its payments to petitioner. In April 1987, petitioner was indicted on four counts of tax fraud for violating section 7206(1) by taking false deductions with respect to the income received from Besco. Petitioner was thereafter convicted on each count based on a plea of nolo contendere. In April 1992, an internal revenue agent initiated an examination of petitioner's tax returns for the taxable years at issue. Subsequently, respondent determined that petitioner is not entitled to a deduction for the Schedule C expenses claimed for any taxable year at issue. Respondent further disallowed the investment tax credit claimed in 1982 *258 for the purchase of the Corvette automobile. OPINION Petitioner advances two alternative arguments in response to respondent's determination of the deficiencies in and additions to tax set forth in the notice of deficiency. *259 Respondent rejects petitioner's arguments, contending instead that the statute of limitations does not prevent assessment and collection of the taxes at issue because petitioner filed fraudulent returns with respect to each taxable year at issue and, as a result, assessment and collection may be accomplished "at any time" pursuant to section 6501(c) (1). Respondent also maintains that petitioner's argument with respect to the applicability of the doctrine of laches is without merit. For reasons discussed herein, we find that neither the statute of limitations nor the doctrine of laches precludes assessment and collection of the deficiencies in and additions to tax determined by respondent. Respondent's determinations are presumed correct, and petitioner bears the burden of proving otherwise. Rule 142(a); Petitioner essentially restricts his entire argument to a contention that respondent has failed to establish that petitioner fraudulently claimed deductions for the Schedule C expenses at issue. Whether respondent has met her burden with respect to the issue of fraud, however, is irrelevant with respect to the instant issue. That respondent must prove fraud does not mean that petitioner is free from the burden on the underlying deficiencies. Petitioner concedes that he is unable to substantiate the expenses at issue. He contends that all evidence pertaining to such expenses was provided to his accountants, who in turn relinquished possession of such evidence to the Government during the grand jury phase of the criminal investigation against him. Respondent, however, has informed the Court that she requested and received all evidence used by the grand jury and that no such records*261 were among the materials she received. We find that having failed to provide substantiation of the Schedule C expenses, petitioner has not carried his burden of proof on this issue. Accordingly, respondent's determination is sustained. Respondent also determined that petitioner is not entitled to an investment tax credit in the amount of $ 821 for 1982 because it has not been established that petitioner acquired any qualified investment property during the taxable year. As noted above, respondent's determinations are benefited by a presumption of correctness and petitioner bears the burden of proving the contrary. Rule 142(a); Petitioner has not offered any evidence with respect to the investment tax credit claimed on the purchase of his Corvette automobile. Again, petitioner restricts his entire argument to the contention that the statute of limitations precludes respondent's assessment and collection of the taxes at issue. Petitioner simply does not address the components of the underlying deficiencies. *262 Accordingly, respondent is sustained on this issue. Respondent bears the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). The burden that respondent bears in proving fraud under section 6653(b) or section 6501(c) (1) is one and the same. The issue of fraud presents a factual question which must be decided on the basis of an examination of all the evidence in the record. Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing, effectuated by conduct designed to conceal, mislead, or otherwise prevent the collection of such tax. Fraudulent intent may be inferred from a pattern of conduct. Petitioner correctly points out that respondent cannot properly rely on the presumption of correctness generally accorded her determinations in order to satisfy her burden with respect to an issue of fraud. See The parties agree that, in order to prove fraud, respondent must establish that (1) an underpayment exists and (2) petitioner intended to evade taxes known to be owing by conduct designed to conceal, mislead, or otherwise prevent the collection of taxes. See Respondent has clearly and convincingly established that an underpayment of tax exists. An underpayment*267 can be accomplished by an overstatement of deductions. Both Tubre's and Kahn's testimony at trial is convincing. Tubre described a series of events involving petitioner dating back to the early 1970's. He testified that petitioner first sought to promote Besco's products to customers other than ASI but that this endeavor proved unsuccessful. Tubre*268 further testified that petitioner subsequently expressed interest in receiving the kickback payments with respect to purchases ASI's paint department made from Besco. Tubre also testified that petitioner did not perform any activity on behalf of Besco during the years at issue in exchange for the payments petitioner received. Both Tubre and Kahn testified that the payments were made to petitioner out of fear of losing business from ASI's paint department. Tubre further testified that he alone initiated and serviced Besco's accounts with ASI, both within and without the paint department. Tubre also testified that he, on behalf of Besco, lied to Balash, when he told her that the payments to petitioner were in exchange for services performed by petitioner with respect to non-ASI accounts. He also testified that it was out of fear of losing Besco's account with ASI's paint department that prompted him to lie to Balash. The expenses used to offset the kickback payments are attributable to petitioner's alleged activity on behalf of Besco. This is implicit by petitioner's use of the Schedule C to identify the income received from Besco and to claim the alleged expenses as deductions against*269 such income. Respondent, however, has established through the credible testimony of both Tubre and Kahn that petitioner did essentially nothing on behalf of Besco outside ASI during the years at issue. Much the same can be said with respect to petitioner's activity within ASI. Aside from causing the paint department to purchase chemicals from Besco, petitioner did little else not required by his position. At best, the friendship between petitioner and Tubre facilitated Tubre's activity throughout ASI by making access to the facility easier than Tubre would have otherwise experienced absent such friendship. Further, respondent has shown that Besco did not consider the payments it made to petitioner to be anything other than kickbacks tied exclusively to the purchases of Besco products made by the paint department. Petitioner's contention otherwise is not convincing. Tubre viewed the payments as kickbacks when he sought advice regarding such payments from Besco's accountant. In fact, that the payments would be considered kickbacks was his principal concern. Besco, nonetheless, followed the accountant's advice and packaged the payments in a disguise. Yet simply disguising the payments*270 as commissions did not convert them into commissions. Respondent has established that petitioner was not working for or on behalf of Besco outside ASI during the years at issue. Respondent also has established that the payments received by petitioner were kickbacks attributable solely to Besco's sales to ASI's paint department and not commissions as petitioner contends were received in exchange for his services outside the paint department. Therefore, it follows that the expenses allegedly incurred while generating the "commissions" were not so incurred. Petitioner was not servicing accounts for Besco or providing Besco with leads; this activity ceased in the early to mid 1970's after it proved unsuccessful. Similarly, petitioner was not advancing Besco's interests inside ASI in departments other than the paint department. The fact that petitioner conducted a variety of parties that were attended by multiple guests, traveled extensively on behalf of ASI, and took a few trips along with Tubre and Kahn does little to convince us otherwise. Such activity is common among friends, and petitioner, Tubre, and Kahn were undoubtedly friends. There is no credible evidence that suggests that*271 these activities were engaged in by petitioner with an intention of advancing Besco's interests. That petitioner was "capable" of advancing Besco's interests is irrelevant. Accordingly, we conclude that respondent has clearly and convincingly established that an underpayment exists for each of the taxable years at issue. Respondent also has established that at least a portion of each underpayment determined immediately above is attributable to fraud. We find that petitioner's false statements to Balash regarding the source of the expenses at issue to be the most convincing evidence of petitioner's fraudulent intent. Fraud may be inferred where a taxpayer makes false representations. See Fraudulent intent may also be inferred from a pattern of conduct, particularly if such pattern involves the underreporting of income. See The record contains other evidence that supports an inference of fraud. Respondent has established to the satisfaction of the Court that petitioner maintained inadequate or no records with respect to the alleged Schedule C expenses used to offset the income received from Besco during the taxable years at issue. This failure to maintain adequate records may be used to support a finding of fraud. The circumstantial evidence and inferences drawn from the record clearly and convincingly established that petitioner filed fraudulent returns for each taxable year at issue. Accordingly, respondent is sustained on this issue. Petitioner contends that he relied on the advice of his accountants in reducing the income received from Besco by the alleged expenses and that such reliance precludes a finding of fraudulent intent. For petitioner to prevail on his reliance argument, however, he must have provided his accountants with full and correct information. Petitioner maintains that his accountants were fully aware of the "nature" of the payment arrangement between Besco and petitioner when they advised petitioner to take a deduction for the expenses at issue. This contention*276 does little more than suggest that petitioner's accountants conspired to defraud the Government. It does not, however, address whether petitioner provided his accountants with full and correct information regarding the alleged expenses at issue. Petitioner, not his accountants, handled his affairs. The record lacks sufficient evidence for us to conclude that petitioner provided his accountants with full and correct information so as to justify petitioner's reliance on an accountant's advice. Because petitioner's return preparer for 1983 testified that he could not recall how petitioner informed him of the alleged expenses at issue, and because petitioner declined to testify, all that is available to evaluate petitioner's contention is petitioner's argument itself. While we have little doubt that petitioner's accountants, particularly Lee, were apprised of the nature of the payment arrangement between Besco and petitioner, we refrain from concluding that these accountants instructed petitioner to take deductions for expenses knowing that such expenses were not incurred. We find petitioner's argument with respect to reliance on his tax advisers to be without merit. Petitioner asserts that the statute of limitations under section 6501(a) precludes assessment and collection of the deficiencies in and additions to tax determined by respondent. Respondent, on the other hand, contends that the statute of limitations does not bar assessment and collection because petitioner filed fraudulent returns for each taxable year at issue. Section 6501(a) provides the general rule that a tax must be assessed within 3 years of the filing of a return. Section 6501(c) (1) provides an exception to the general rule in cases where a false or fraudulent return is filed by a taxpayer with the intent to evade tax. If the exception set forth in section 6501(c) (1) is applicable, assessment may be made at any time. As we have concluded that respondent has established by clear and convincing evidence that petitioner fraudulently intended to evade paying taxes known to be owing for each of the taxable years at issue, the limitations period is extended indefinitely pursuant to section 6501(c) (1) for each such year. Accordingly, respondent is sustained on this issue. Petitioner alternatively argues that the equitable doctrine of laches operates*278 to preclude respondent's assessment and collection of the deficiencies in and additions to tax at issue in the instant case. Respondent disagrees and contends that the doctrine of laches must yield to the indefinite limitations period imposed by section 6501(c)(1). The doctrine of laches prohibits a party from asserting a claim following an unreasonable delay by such party when there has been a change in circumstances during such delay which would result in severe prejudice against an opposing party should the claim be permitted. See In the present case, section 6501(c) (1), which we have determined to be applicable, expressly authorizes respondent to assess deficiencies against petitioner "at any time". Accordingly, respondent is sustained on this issue. To reflect the foregoing, 1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩ 1. 50 percent of the interest due on $ 5,209.↩ 2. 50 percent of the interest due on $ 4,823.↩ 2. Petitioner's spouse is not a party to this proceeding.↩ 3. Prior to December 1974, Besco was owned equally by Steiner, Tubre, and Kahn. After Steiner retired in December 1974, Tubre and Kahn became the sole owners of Besco.↩ 4. It is not clear from the record what activities were involved in the alleged "servicing" by petitioner. The arguments advanced by both parties, however, suggest that such activities entailed providing leads to and soliciting business on behalf of Besco.↩ 5. Petitioner's plea of nolo contendere to criminal tax evasion does not estop petitioner from challenging the civil fraud penalties alleged in this case. Hicks Co. v. Commissioner ( 1971 ) Marcus v. Commissioner ( 1978 ) Ruidoso Racing Association, Inc. v. Commissioner of ... ( 1973 ) Hradesky v. Commissioner ( 1975 ) United States v. Manufacturers Hanover Trust Co. ( 1964 ) New Colonial Ice Co. v. Helvering ( 1934 ) Guaranty Trust Co. v. United States ( 1938 ) Albert E. Albertson v. T.J. Stevenson & Company, Inc. ( 1984 ) George C. McGee v. Commissioner of Internal Revenue ( 1975 ) richard-h-foster-and-sara-b-foster-t-jack-foster-jr-and-patricia ( 1985 ) Stratton v. Commissioner ( 1970 ) McGee v. Commissioner ( 1973 ) Rowlee v. Commissioner ( 1983 ) Robert W. Bradford v. Commissioner of Internal Revenue ( 1986 ) Frank J. Hradesky v. Commissioner of Internal Revenue ( 1976 ) Spies v. United States ( 1943 ) Mensik v. Commissioner ( 1962 )Additions to Tax Year Deficiency Sec. 6653(b) Sec. 6653(b)(1) Sec. 6653(b)(2) 1980 $ 3,360 $ 1,680 -- -- 1981 3,431 1,716 -- -- 1982 5,209 -- $ 2,605 1983 4,823 -- 2,412 *250 to an investment tax credit for taxable year 1982. We hold that he is not. Year Amount 1974 $ 10,918 1975 14,955 1976 14,030 1977 19,152 1978 18,300 1979 18,362 Year Amount 1980 $ 21,315 1981 25,377 1982 19,274 1983 17,642 Description 1980 1981 1982 1983 Depreciation $ 71.70 $ 71.70 $ 4,051.45 $ 72.00 Dues and publications 36.00 48.00 -- -- Office supplies 106.58 -- -- -- Office supplies and postage -- 147.23 113.20 -- Office expenses -- -- -- 488.00 Telephone 106.94 -- -- -- Travel and entertainment 1,412.00 1,781.12 1,549.30 500.00 Utilities 285.78 -- -- -- Utilities and telephone -- 480.56 659.73 -- Automobile expenses 4,753.16 3,295.33 -- -- Car and truck expenses -- -- 1,781.60 9,901.00 Insurance -- -- 800.00 -- Total 6,772.16 5,823.94 8,955.28 10,961.00 Footnotes
Authorities (28)