DocketNumber： Docket No. 758-13.
Citation Numbers： 110 T.C.M. 190, 2015 Tax Ct. Memo LEXIS 162, 2015 T.C. Memo. 158
Judges： COHEN
Filed Date： 8/12/2015
Status： Non-Precedential
Modified Date： 11/20/2020
Decision will be entered for respondent.
COHEN,
| 1995 | $199,088 | $149,316.00 | -- |
| 1996 | 188,065 | 141,048.75 | -- |
| 1997 | 86,214 | 64,660.50 | -- |
| 1998 | 180,137 | 135,102.75 | -- |
| 1999 | 323,534 | 242,650.50 | -- |
| 2000 | 507,598 | 380,698.50 | -- |
| 2001 | 358,272 | 268,704.00 | -- |
| 2002 | 322,984 | -- | $242,238 |
*159 As alternatives to the
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in Massachusetts when he filed his petition.
Petitioner, a.k.a. Dan West, is a chemist who holds four chemistry-related U.S. patents. During the years in issue, petitioner used both the kitchen and basement of his home to conduct experiments and went to local public libraries to conduct research. During those years, petitioner's activities included providing research services to health supplement companies and manufacturing mineral, herbal, and chemical supplements, which he sold to them.
The health supplement companies, through their representatives such as Richard Breitbarth of Biophase Laboratories, Inc., would provide raw materials and other resources that petitioner needed for his work. The companies considered petitioner a vendor and were unaware of any charitable organization or purpose with respect to his goods and services.
Petitioner received payments in the form of cash or checks for his services, but he did not provide the health supplement companies with any receipts. Checks *161 for his services were made out to petitioner*164 in his name or to "Dan West". Petitioner asked a company, which was paying $5,000 a month for his services, to increase its payment to $10,000 a month because he believed it to be doing financially better because of his products. With at least one customer, petitioner requested that payments of $10,000 or less be made in cash and that payments over $10,000 be made by check. That customer would send to him "significant" cash payments through Federal Express.
Petitioner's activities also included directly administering supplements to various individuals and groups that came to see him on the porch of his home. A small selection of these customers, who came to form a core group for petitioner, believed their "sole purpose" was to spread the word about his products. They did so by word of mouth in settings such as meetings at their homes or encounters with people on the street. The core group also assisted petitioner in conducting retreats held at petitioner's home and nearby facilities. The core group would first meet with someone before that person could be invited to a retreat, i.e., a person could not just show up.
The retreats were sometimes held bimonthly for approximately 8-24 participants*165 and usually ran over a long weekend (but could last longer). The retreats offered exercise, spirituality, holistic meals, and lectures on health and *162 science. The focal point of the retreats, however, was petitioner's personal administration of his nutritional supplements to the participants.
Participants were charged from $300 to $1,000 to attend a retreat. Petitioner sometimes received payments in cash or by check from participants but, again, did not provide any receipts. Typically the core group, acting as staff, was not charged any retreat fees, and members were reimbursed for travel expenses from the moneys paid by nonstaff participants.
Petitioner did not maintain any books or records of his activities, and the only financial records available were those maintained by banks where he held accounts. Petitioner declined to open a commercial bank account on behalf of a charitable entity and instead used his personal bank accounts to deposit the earnings from his activities. During the eight years in issue, petitioner had control over at least 14 personal bank accounts at nine different banks under several different Social Security numbers. Of these accounts only two were opened by*166 petitioner using his actual Social Security number. The remaining 12 accounts were opened by petitioner with some digits of his Social Security number transposed. Almost all the bank accounts had petitioner's mother, Nancy Burnham, listed as the beneficiary.
*163 The accounts were opened and closed as follows:
| Rockport | Petitioner | Yes | 9/5/1981 | Open as of | 21 yrs, |
| National | 12/31/2002 | 3 mos. + | |||
| Salem Five | Petitioner | Yes | 12/31/1994 | 7/7/1997 | 2 yrs., |
| Cents | or Burnham | 6 mos. | |||
| Bank- | Petitioner | No | 7/14/1995 | 12/11/1996 | 1 yr., |
| Boston | ATF | 4 mos. | |||
| Breitbarth | |||||
| East | Petitioner | No | 11/22/1995 | 11/18/1996 | 11 mos. |
| Cambridge | TR | ||||
| Burnham | |||||
| First | Petitioner | No | 5/17/1996 | 5/31/1996 | 15 days |
| Federal I | ITF | ||||
| Burnham | |||||
| Boston Safe | Petitioner | No | 5/17/1996 | 6/7/1996 | 22 days |
| Deposit | ITF | ||||
| Burnham | |||||
| Citizens | Petitioner | No | 11/8/1996 | 11/24/1997 | 1 yr. |
| I | trustee for | ||||
| Burnham | |||||
| First | Petitioner | No | 12/9/1996 | 3/11/1998 | 1 yr., |
| Federal II | ITF | 3 mos. | |||
| Burnham | |||||
| Citizens | Petitioner | No | 12/2/1997 | 11/25/1998 | 11 mos. |
| II | trustee for | ||||
| Burnham | |||||
| First | Petitioner | No | 3/11/1998 | 12/15/1998 | 9 mos. |
| Federal III | ITF | ||||
| Burnham | |||||
| Citizens | Petitioner | No | 11/25/1998 | 12/3/1999 | 1 yr. |
| III | trustee for | ||||
| Burnham | |||||
| First | Petitioner | No | 12/15/1998 | 12/17/1999 | 1 yr. |
| Federal IV | ITF | ||||
| Burnham | |||||
| Mt. | Petitioner | No | 12/3/1999 | Open as of | 3 yrs. + |
| Washington*167 | ITF | 12/31/2002 | |||
| Burnham | |||||
| Capital | Petitioner | No | 12/15/1999 | Open as of | 3 yrs. + |
| Crossing | ITF | 12/31/2002 | |||
| Burnham |
*164 The funds petitioner received for his goods and services were deposited into these bank accounts. The deposits, and interest accruing therefrom, were as follows:
| 1995 | $496,050 | $11,352 |
| 1996 | 436,310 | 71,577 |
| 1997 | 163,675 | 107,265 |
| 1998 | 385,203 | 126,928 |
| 1999 | 638,888 | 184,502 |
| 2000 | 1,000,050 | 261,207 |
| 2001 | 549,371 | 372,032 |
| 2002 | 507,155 | 337,053 |
*165 Petitioner did not use these deposited funds for his personal expenses but used Social Security disability payments to support himself.
Petitioner did not file Federal income tax returns for 1995 through 2001. The Internal Revenue Service (IRS) sent an agent to investigate petitioner. The agent went to petitioner's home to meet with him, but petitioner did not want to be interviewed. Several weeks later, around December 31, 2002, the agent was able to conduct an interview with petitioner over the telephone. During the interview, petitioner indicated that he had not filed a tax return since at least the 1970s.
Petitioner explained to the agent that he was looking to save $10 million through donations and when he reached that amount he would have the resources necessary*168 to set up a foundation. He further explained that if he had to pay tax on the donations then he would not be able to fulfill his dream and would give all the money back to the people that donated it. He stated that while he did not maintain business records, he did keep a list of benefactors who provided him with donations. The agent asked for the list but petitioner did not want to provide it.
*166 On April 3, 2003, the Government of the United States indicted petitioner on four counts of tax evasion for the tax years 1996 through 1999 in violation of
Petitioner moved for a new trial, which the District Court denied. He then appealed the trial court decision. On appeal, the Court of Appeals for the First Circuit affirmed the lower court's decision in
On May 12, 2003, petitioner filed articles of organization with the Commonwealth of Massachusetts to incorporate Biogenesis Foundation, Inc. (Biogenesis). The articles provided*169 that Biogenesis had no members, that petitioner served as its sole director and all of its officers, and that its principal office address was the same as petitioner's personal address. On May 14, 2003, Biogenesis officially incorporated.
On behalf of Biogenesis, petitioner submitted Form 1023, Application for Recognition of Exemption Under
A statement attached to Form 1023--regarding Biogenesis' activities and operational information--referred to Biogenesis as "the brainchild of Daniel David West, a self-taught nutritional biochemist" and clarified in a footnote that petitioner was in the process of changing his name legally to Daniel David West. The statement also expressed the "mission" of Biogenesis, as follows: After many years*170 spent refining his technology while at the same time serving the public and raising necessary funds, Mr. West is now in a position to achieve his goals by establishing a foundation with the mission of: 1. Researching epidemiology and environmental health; 2. Developing and testing treatments based on cellular regeneration technology; 3. Educating the public in the maintenance of personal and environmental health and the prevention and treatment of disease; and 4. Providing health products and treatment to those in need, regardless of their financial status.
*168 After additional requests for information and concerns about petitioner's being the sole director were addressed (petitioner added two directors on November 21, 2003, neither of whom was from the original core group), the IRS granted Biogenesis tax-exempt status under
Petitioner filed a 2002 Form 1040, U.S. Individual Income Tax Return, apparently on or about October 7, 2003, even though the return is dated November 9, 2007. In that return he reported $28 of gross income and zero tax owed.
Biogenesis filed a 2003 Form 990, Return of Organization Exempt From Income Tax, dated November 10, 2004. Revenue was reported*171 as $321,000 from contributions and gifts and $312,724 from other investment income. No income-producing activities were listed. Expenses consisted of $246,705 of legal fees and $600 of travel. The organization's primary exempt purpose was listed as "MEDICAL RESEARCH IN CELLULAR REGENERATION".
Biogenesis retroactively filed Forms 990, dated October 26, 2011, for its tax years 1996 through 2002. Each of these Forms 990 listed the organization's primary exempt purpose as "RESEARCH IN CELL REGENERATION". The reported revenue for each tax year corresponded to each year's "total deposited" amount shown in the table
Petitioner testified that his longstanding goal is to amass $10 million and that, once it is achieved, he would then "hire a legal team, a nonprofit team, accountants, and do it*172 right", i.e., form a charitable organization. This objective, he claimed, was his reason for running profit-motivated activities for the years in issue and for stockpiling his earnings in his personal bank accounts. Bank deposits, however, are prima facie evidence of income,
In his petition, petitioner argued that the deposited funds for the years in issue were not his income but were either: (1) gifts or contributions to his organization, or (2) program income of his charitable organization exempt from taxation under
Thus petitioner's only remaining argument regarding this issue is that the income is exempt from*173 taxation under (A) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. (B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.
Although petitioner did not file for
Respondent first contends that petitioner is collaterally estopped from raising this issue for the years 1996 through 1999*174 because he raised the identical issue in his prior criminal appeal. The facts for all years, however, are relevant to our determinations of whether a
To qualify for a
Petitioner*175 failed to show any distinct existence of an organization before 2003. During the years in issue, neither petitioner nor his core group maintained financial records, kept minutes, drafted organizing documents or bylaws, requested an employer identification number, or put in place any structures that would be expected from a continuing organization.
*173 Petitioner argues that his then activities functioned as a social welfare organization and therefore were tax exempt under
Petitioner also failed to meet the filing requirements of
Petitioner did not maintain records in order to disclose this information, he failed to file Form 990 for 1995, and he filed Forms 990 for the other years in issue egregiously late. The 1996 Form 990 was filed on October 26, 2011. Assuming a calendar year (because petitioner elected no other accounting period),*177 that form was required to be filed by May 15, 1997, and thus was filed over 14 years late. Petitioner's failure to undertake any organizational formalities gives rise to a negative inference against his current "retrospective" position.
The most apparent organizational flaw, however, is that before 2003 there was no separation between petitioner and his activities. Petitioner was the sole researcher, analyst, producer, service provider, and scientist (and was later defined as the only director and officer). No one in the core group besides petitioner could have made a going concern of the alleged organization's reported primary exempt purpose--research in cell regeneration--during the years in issue. (Conspicuously, cell-regeneration research was never mentioned at trial by petitioner, the core-group witnesses, or anyone else.)
Even more compromising is that petitioner was the only "member" of his group with control over the alleged organization's funds held in his personal bank *175 accounts. No one else, including the alleged organization, could have used the funds for any purpose, charitable or otherwise. He amassed approximately $5.6 million within an eight-year period, none of which*178 went toward any charitable use.
A civic organization has been construed as "a movement of the citizenry or of the community."
Ultimately, petitioner did not treat his activities for the years in issue as a separate entity. In an effort to avoid taxation, petitioner is belatedly trying to make an organization appear where none had existed. Because there was no organization for the years in issue, petitioner is not entitled to tax-exempt status, and the sums deposited in his bank accounts and related interest are taxable income to him.
The fraud penalties of
To sustain the 75% penalty provided by
Petitioner has conceded his receipt of gross income for each year, including 2002, in the amounts set forth in our findings, and he did not argue any entitlement to deduct expenses related to that income beyond those deductions respondent already permitted. Because his income for the years in issue has been determined to be taxable and because he reported and paid no tax in 2002 when he should have paid tax of $322,984, respondent's burden of proving the underpayment for 2002 has been met.
As to respondent's second burden, fraud may be proven by circumstantial evidence, and the taxpayer's entire*180 course of conduct may establish the requisite fraudulent intent.
"Consistent failure to report substantial amounts of income over a number of years is, standing alone, highly persuasive evidence of fraudulent intent." *178
Badges of petitioner's fraudulent intent include*181 his failure to report over $5.6 million of income and his dealings in cash. He also failed to maintain records of any nature, failed to file tax returns for 1995 through 2001, and filed a false *179 2002 return that understated income. His failure to report income and to file returns adds to his other attempts to conceal income such as his use of the alias "Dan West" to which business checks were made payable, his constant shifting of bank accounts that were opened with false Social Security numbers, and his asking for cash payments on fees of $10,000 and under.
Additionally, petitioner's testimony often lacked credibility, was inconsistent, and suggested fraud. His explanation about accidentally transposing his Social Security number on 12 of the 14 bank accounts he opened was strikingly implausible given that he deals daily in exacting numbers, formulas, and calculations as a chemist. If, as he alleged, these*182 Social Security number mistakes are just some "innocent tendency" of his behavior (which we do not believe they are), then he should have written his Social Security number down when going to open accounts for funds that are apparently very important to him.
Petitioner also testified that the frequent transfers of funds to and among his various bank accounts were "not that big a deal" because "the organization's *180 money * * * was always held in no more than two accounts at a time" and "even though there were 14 accounts, if you divide by two, that's seven years of two accounts at a time". At one period during the years in issue, however, he simultaneously held six active accounts. Moreover 10 of his 14 accounts were open for less than 1 1/2 years, five of those 10 were open for less than a year, and two of those five were open for less than a month. We infer that petitioner's transfers to these numerous accounts were attempts to conceal income despite his unsupported claim that he was "interest-rate" shopping.
An example of petitioner's inconsistent testimony is his statement that "I'm not a chemist, but I have enough chemistry background to work with people who really are chemists",*183 even though he had stipulated that he is a chemist holding four patents. He also testified that he "pretty much" had records identifying everyone who had contributed money to him so that he could return the money if he did not reach his goal of amassing $10 million. Within minutes of that testimony, however, he renounced his statement that he kept records of his contributors and instead stated that he would rely on checks and his memory to identify them.
In another example, regarding the possibility of his dipping into the deposited funds, petitioner testified that "over $300,000 of those canceled checks *181 was money contributed or given by my family, my parents, my father, my grandmother, my uncle. So, that's over $300,000 of my own money in the '90s going towards the house." Yet later he testified that his parents and grandmother were poor. He did not offer any explanation as to how his parents and grandmother could be poor yet contribute large amounts of money.
These inconsistencies and the other determined badges clearly and convincingly prove fraud. Once the Commissioner establishes that any portion of an underpayment is attributable to fraud, the entire underpayment is treated as*184 attributable to fraud, except with respect to any portion of the underpayment that the taxpayer establishes, by a preponderance of the evidence, as not attributable to fraud.
Collateral estoppel precludes relitigation of any issue of fact or law that was actually litigated and necessarily determined by a valid and final judgment.
For 1996 through 1999, respondent relies on collateral estoppel and petitioner's conviction under
Petitioner's convictions under
Regarding the remaining years for which collateral estoppel does not apply --1995, 2000, and 2001--we must decide whether petitioner was required to file returns and, if so, whether his failure to do so was accompanied by an intent sufficient to sustain the
Consequently, the penalties under
In reaching our decision, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Helvering v. Mitchell , 58 S. Ct. 630 ( 1938 )
United States v. George , 448 F.3d 96 ( 2006 )
Ben Klein v. Commissioner of Internal Revenue , 880 F.2d 260 ( 1989 )
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )
Stephenson v. Commissioner , 79 T.C. 995 ( 1982 )
Tokarski v. Commissioner , 87 T.C. 74 ( 1986 )
John L. Stephenson v. Commissioner of Internal Revenue , 748 F.2d 331 ( 1984 )
The Erie Endowment v. United States , 316 F.2d 151 ( 1963 )
Robert W. Bradford v. Commissioner of Internal Revenue , 796 F.2d 303 ( 1986 )
Andrew Toussaint and Isela C. Toussaint v. Commissioner of ... , 743 F.2d 309 ( 1984 )
Commissioner of Internal Revenue v. Lake Forest, Inc. , 305 F.2d 814 ( 1962 )
Montana v. United States , 99 S. Ct. 970 ( 1979 )