Michael T. Sestak

United States Tax Court
T.C. Memo. 2022-41MICHAEL T. SESTAK,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 17285-18. Filed April 25, 2022.
—————
Michael T. Sestak, pro se.
Joel D. McMahan and A. Gary Begun, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WEILER, Judge: This case arises from a statutory notice of
deficiency issued to petitioner for tax year 2012. The issues for decision
are: (1) whether petitioner is entitled to a deduction with respect to a
loss on the sale of his foreign real estate holdings as part of his criminal
forfeiture with the United States and (2) whether petitioner is liable for
the civil fraud penalty under section 6663. 1
FINDINGS OF FACT
This case was tried during the Jacksonville, Florida, remote trial
session of the Court. At trial the parties stipulated most of the relevant
facts, which are so found, including the bribery proceeds petitioner
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure. All monetary amounts
are rounded to the nearest dollar.
Served 04/25/22
2
[*2] received during tax year 2012. Petitioner is a U.S. citizen and
resided in Florida when he timely filed his Petition.
On November 15, 2000, petitioner received a bachelor of arts
degree in social sciences and history from Thomas Edison State College.
On January 27, 2003, he received a master of arts degree in politics from
New York University, and in August 2009 he received a diploma from
the U.S. War College Distance Education Program.
Petitioner was employed by the U.S. Department of State from
May 2003 until March 2014 and had had previous overseas assignments
in Bogota, Colombia, Madrid, Spain, and Krakow, Poland. Between
August 2010 and September 2012 petitioner was employed as a consular
officer by the State Department at the U.S. Consulate in Ho Chi Minh
City, Vietnam. While employed as a consular officer, he served as chief
of the Consulate’s Nonimmigrant Visa Unit. Petitioner’s responsibilities
included reviewing U.S. visa applications, conducting interviews, and
issuing U.S. visas to applicants.
In 2010 petitioner met a fellow U.S. citizen and resident of
Vietnam named Binh Vo. Mr. Vo and petitioner devised a scheme
whereby they would receive compensation in exchange for petitioner’s
facilitating approval of nonimmigrant visas to the United States
through his position as a consular officer. Petitioner agreed to accept
compensation from applicants—or their families—in exchange for
approval of nonimmigrant visas to the United States.
This scheme required petitioner to use fake or code names, special
email accounts, and cellphones for communication with Mr. Vo. Mr. Vo
would inform petitioner in advance of the identity of each foreign
national who agreed to pay money in exchange for a U.S. visa, and
petitioner would then attempt to personally handle the applicant’s visa
application, including conducting the applicant’s interview. In several
instances petitioner issued visas to applicants who had been previously
denied visas. From February to September 2012 petitioner approved 410
visa applications directed to him by Mr. Vo and others participating in
the fraudulent scheme.
Initially, petitioner was compensated for his part in this
fraudulent scheme in cash, which he stored in a safe at his residence in
Vietnam. However, as the bribery proceeds continued to grow, petitioner
asked Mr. Vo to maintain custody of them and to assist him in moving
the funds to petitioner’s bank account in Thailand. This request involved
3
[*3] making wire transfers of funds through intermediaries in China
and elsewhere. In all petitioner received wire transfers totaling
$3,227,501 to his bank account in Thailand during 2012.
In an attempt to hide his bribery proceeds from the U.S.
Government, petitioner acquired real property in Thailand, and from
June to December 2012 he purchased nine real estate properties for a
total of approximately $3.2 million. Petitioner also arranged for his
sister—who lived in the United States—to receive $150,000 of his
bribery proceeds, which she used to purchase a home in Yulee, Florida.
On or about September 24, 2012, petitioner submitted signed
responses to a “Questionnaire for National Security Positions (SF86
Format)” in which he falsely claimed he held no foreign financial
interests and did not own, anticipate owning, or plan to purchase real
estate in a foreign country. On October 19, 2012, petitioner was
interviewed by two diplomatic security special agents from the State
Department in the District of Columbia. During his interview, petitioner
was asked by the special agents whether he was aware of any State
Department officials who had unexpectedly come into a lot of money, not
in line with regular salary, while he was stationed at the U.S. Consulate
in Ho Chi Minh City. At the time of his interview with the special agents,
petitioner gave false answers in an effort to conceal the existence of the
fraudulent scheme and the proceeds derived therefrom.
In early 2013 petitioner timely filed his 2012 Form 1040, U.S.
Individual Income Tax Return, reporting therein wages of $122,029 as
an employee of the State Department. However, petitioner failed to
report on this tax return the $3,227,501 in bribery proceeds he received.
Petitioner is a well-educated man who had been employed by the State
Department and worked overseas for many years. Consequently, we find
that when he filed his 2012 tax return, he knew (or should have
otherwise known) that he was required to recognize his bribery proceeds
as income; and he intentionally did not do so to continue his
participation in the fraudulent scheme.
The State Department uncovered the fraudulent scheme, and
petitioner was arrested by local authorities in Thailand. Petitioner was
then extradited to the United States, where he was subsequently named
a defendant in a criminal complaint filed in the U.S. District Court for
the District of Columbia, in a case brought by the U.S. Department of
Justice. Ultimately, petitioner pleaded guilty to one count of conspiracy
to commit offenses against the United States and to defraud the United
4
[*4] States, one count of bribery of a public official, and one count of
conspiracy to engage in a monetary transaction in property derived from
specified unlawful activity.
On November 1, 2013, petitioner entered into a written plea
agreement with the United States. As part of the plea agreement he also
executed a preliminary consent order of forfeiture imposing a forfeiture
money judgment of $6,021,441 in favor of the United States, which
included forfeiture of his real estate holdings in Thailand and other
assets held by his co-defendants. Under his plea agreement, he agreed
that his real estate holdings in Thailand represented bribery proceeds
traceable to the fraudulent visa scheme, constituted property involved
in the conspiracy to engage in a monetary transaction to which he
pleaded guilty, and were subject to forfeiture pursuant to 18 U.S.C.
§ 981(a)(1)(C), 18 U.S.C. § 982(a)(1) and (6), 21 U.S.C. § 853(p), and
28 U.S.C. § 2461. Pursuant to the written plea agreement and under the
terms of the preliminary consent order of forfeiture, petitioner agreed to
cooperate and voluntarily sell his real estate holdings in Thailand and
to transfer the net proceeds to the United States to satisfy a portion of
the money judgment entered against him.
As part of his plea agreement petitioner retained an independent
appraiser and agent to appraise, market, and sell the real estate
holdings in Thailand. Subject to the approval of the United States, the
properties were to be sold at any price and only to unrelated third
parties. It was also agreed that in the event the net proceeds from the
sale of the real estate holdings in Thailand collectively exceeded
$3,255,840, then 50% of the excess would be used by petitioner to pay
any federal income tax due for tax years 2012 and 2013. Ultimately,
petitioner sold his real estate holdings during 2013 to 2015, and in
connection with the sales of his real estate holdings in Thailand and
other criminal forfeitures, the United States received $1,551,134. 2
The IRS first corresponded with petitioner by letter dated
September 21, 2015, concerning the civil resolution of his criminal
proceedings. The IRS audited petitioner’s 2012 return, and through IRS
Letter 950 (a 30-day letter) dated December 6, 2017, along with Form
4549–A, Income Tax Examination Changes, the IRS first asserted the
civil fraud penalty against petitioner. Revenue Agent (RA) Janett
2 During its investigation the United States identified the Yulee, Florida,
property owned by petitioner’s sister as being purchased using funds originating from
his bribery proceeds. However, at no time did the United States move to foreclose on
the Yulee, Florida, property.
5
[*5] Ballentine, during the audit, made the initial determination to
assert the civil fraud penalty under section 6663 against petitioner.
RA Ballentine obtained prior written supervisory approval to assert the
civil fraud penalty pursuant to section 6663 from her immediate
supervisor, Patrick L. Freeman, Jr., before she formally communicated
the penalty to petitioner.
OPINION
I. Summary of the Parties’ Arguments
At trial petitioner readily acknowledged receipt of the stipulated
bribery proceeds during tax year 2012. However, he argues that the
liquidation of his real estate holdings in Thailand was not a forfeiture,
because the properties were located outside of the United States and,
therefore, outside the jurisdiction of the U.S. court system. Petitioner
contends that because the proceeds from the sales of his real estate
holdings were voluntarily transferred at a loss to the United States as
part of his plea agreement, he is entitled to deduct the loss from his
bribery proceeds. 3 In furtherance of his argument, petitioner refers the
Court to Stephens v. Commissioner, 905 F.2d 667, 671 (2d Cir. 1990),
rev’g on other grounds 93 T.C. 108 (1989), and contends that his
payments to the United States are appropriately classified as
compensatory and are, therefore, tax deductible. Next, petitioner
contends that he purchased eight of the nine real estate holdings in
Thailand for investment purposes, with the plan to rent the properties
as an income-generating business. Therefore, he concludes that the
liquidation of his real estate holdings resulted in a substantial business
loss.
Finally, petitioner disputes the civil fraud penalty determined
under section 6663 and contends that he should be granted credit for
those funds that he transferred to the United States as part of his plea
agreement for any civil fraud penalty imposed.
In dispute of petitioner’s arguments respondent contends
petitioner is not entitled to a loss deduction for tax year 2012 on the
liquidation of his real estate holdings in Thailand because he is
precluded from deducting losses as a result of the criminal forfeiture and
because the real estate sales occurred in tax years other than the tax
3 Petitioner seeks a deduction against his income equal to the difference
between his acquisition costs (or tax bases) in his real estate holdings, less the amount
realized on the liquidation of the properties.
6
[*6] year in which he received the bribery proceeds. Respondent further
contends—assuming arguendo that he incurred a loss in the tax year at
issue—that petitioner is not entitled to deduct a loss from the criminal
forfeitures of property because allowance of such a deduction would
frustrate established U.S. and state policy.
II. Discussion
Generally, the taxpayer bears the burden of proving that the
Commissioner’s determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Under section 7491(a)(1), “[i]f, in
any court proceeding, a taxpayer introduces credible evidence with
respect to any factual issue relevant to ascertaining the liability of the
taxpayer for any tax imposed by subtitle A or B, the Secretary shall have
the burden of proof with respect to such issue.” See Higbee v.
Commissioner, 116 T.C. 438, 442 (2001). Petitioner has not introduced
credible evidence sufficient to shift the burden of proof to respondent
under section 7491(a) as to any relevant issue in dispute.
A. Gross Income
Section 61 provides that gross income from whatever source
derived is subject to federal income taxation. We have found that gross
income specifically includes income from illegal sources, such as bribes.
Traficant v. Commissioner, 89 T.C. 501 (1987), aff’d, 884 F.2d 258 (6th
Cir. 1989). Taxable income, however, means gross income minus those
deductions allowed by law. I.R.C. § 63.
B. Loss Deduction
Section 165(a) allows a deduction for “any loss sustained during
the taxable year and not compensated for by insurance or otherwise.” In
the case of an individual, the deduction is limited to losses incurred in a
trade or business or in any transaction entered into for profit or to
certain theft or casualty losses. I.R.C. § 165(c). Furthermore, a deduction
arising from a loss on the sale or exchange of a capital asset can be
claimed only to the extent allowed by sections 1211 and 1212. I.R.C.
§ 165(f). A deduction for property forfeited, if allowed, falls under section
165 and not under section 162. See, e.g., Holmes Enters., Inc. v.
Commissioner, 69 T.C. 114 (1977); Holt v. Commissioner, 69 T.C. 75(1977), aff’d per curiam without published opinion, 611 F.2d 1160 (5th
Cir. 1980).
7
[*7] Federal courts consistently have disallowed loss deductions
where the deduction would frustrate a sharply defined federal or state
policy. See, e.g., Wood v. United States, 863 F.2d 417 (5th Cir. 1989);
United States v. Algemene Kunstzijde Unie, N.V., 226 F.2d 115, 119–20
(4th Cir. 1955); Fuller v. Commissioner, 213 F.2d 102 (10th Cir. 1954),
aff’g 20 T.C. 308 (1953); Blackman v. Commissioner, 88 T.C. 677, 682–83
(1987), aff’d without published opinion, 867 F.2d 605 (1st Cir. 1988);
Holmes Enters., 69 T.C. 114. The test of “nondeductibility on public
policy grounds under section 165” is the severity and immediacy of the
frustration of a “sharply defined national or state policy” that would
result from allowance of the deduction. Stephens v. Commissioner, 905
F.2d at 670; Wood v. United States, 863 F.2d 417.
C. Trade or Business Deduction
Taxpayers are allowed deductions for certain business and
investment expenses pursuant to sections 162 and 212. Petitioner has
not argued that this deduction falls under section 212 as an expense
incurred in the management, conservation, or maintenance of property
held for the production of income (nor could he reasonably make such
arguments), so we limit our analysis here to section 162.
Section 162(a) “allow[s] as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying
on any trade or business.” However, neither the Code nor the regulations
provide a generally applicable definition of a “trade or business.”
Commissioner v. Groetzinger, 480 U.S. 23, 27 (1987); McManus v.
Commissioner, T.C. Memo. 1987-457, 1987 Tax Ct. Memo LEXIS 454,
at *19, aff’d per curiam without published opinion, 865 F.2d 255 (4th
Cir. 1988). Determining the existence of a trade or business “requires an
examination of the facts in each case.” Commissioner v. Groetzinger, 480
U.S. at 36 (quoting Higgins v. Commissioner, 312 U.S. 212, 217 (1941)).
When examining the facts of each case to determine whether a trade or
business exists, we have focused on three factors: (1) whether the
taxpayer undertook the activity intending to earn a profit; (2) whether
the taxpayer is regularly and actively involved in the activity; and
(3) whether the taxpayer’s activity has actually commenced. E.g.,
Weaver v. Commissioner, T.C. Memo. 2004-108, 2004 WL 938293, at *6;
McManus, 1987 Tax Ct. Memo LEXIS 454, at *20.
8
[*8] D. Civil Tax Fraud
“If any part of any underpayment of tax required to be shown on
a return is due to fraud,” section 6663(a) imposes a penalty of 75% of the
portion of the underpayment attributable to fraud. The Commissioner
has the burden of proving fraud, and he must prove it by clear and
convincing evidence. I.R.C. § 7454(a); Rule 142(b). To sustain his
burden, the Commissioner must establish two elements: (1) that there
was an underpayment of tax for each year at issue and (2) that at least
some portion of the underpayment for each year was due to fraud.
Hebrank v. Commissioner, 81 T.C. 640, 642 (1983).
Section 6751(b)(1) provides that “[n]o penalty under this title
shall be assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the
individual making such determination.” As a threshold matter, the
Commissioner must show compliance with section 6751(b)(1). See Chai
v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017) (“[C]ompliance with
§ 6751(b) is part of the Commissioner’s burden of production.”), aff’g in
part, rev’g in part T.C. Memo. 2015-42. Under section 7491(c), the
Commissioner carries “the burden of production in any court proceeding
with respect to the liability of any individual for any penalty.” This
burden requires the Commissioner to come forward with sufficient
evidence indicating that imposition of the penalty is appropriate. See
Higbee, 116 T.C. at 446. The Commissioner’s burden of production under
section 7491(c) includes establishing compliance with section 6751(b)(1).
See Chai v. Commissioner, 851 F.3d at 217, 221–22; Graev v.
Commissioner, 149 T.C. 485 (2017), supplementing and overruling in
part 147 T.C. 460 (2016).
Before trial, the parties stipulated that respondent has met his
initial burden of production under section 7491(c) with respect to the
requirements under section 6751(b)(1) because RA Ballentine obtained
written supervisory approval of the penalty being asserted under section
6663 before the penalty determination was formally communicated to
petitioner. On the basis of the evidence before the Court, we accept this
stipulation as true and find respondent has met his initial burden of
production under section 7491(c) with respect to the requirements of
section 6751(b)(1).
9
[*9] III. Analysis of Petitioner’s Arguments
It is undisputed that petitioner’s real estate holdings in Thailand
were sold at a loss, meaning the funds received were less than the
amount he paid to acquire the properties. The legal question to be
resolved by the Court is whether petitioner is entitled to a tax deduction
for the financial loss against his bribery proceeds received for the tax
year in question.
Petitioner pleaded guilty to one count of conspiracy to commit
offenses against the United States and to defraud the United States and
one count of bribery of a public official. 4 The criminal forfeiture of
petitioner’s funds was made pursuant to 18 U.S.C. § 981, and the district
court ordered him to forfeit to the United States “any property, real or
personal, which constitutes or is derived from proceeds traceable to the
offense of Conspiracy to Commit Bribery, pursuant to 18 U.S.C.
§ 981(a)(1)(C) and 28 U.S.C. § 2461(c).”
In Stephens the taxpayer was convicted and sentenced in a
scheme to defraud Raytheon, a Delaware corporation, of which he was a
principal owner. As part of his sentence, the district court ordered the
taxpayer to make restitution of $1 million to Raytheon. As part of his
settlement agreement with Raytheon, and in connection with two civil
actions, the taxpayer turned over $530,000 in cash held in his name at
a Bermuda bank and signed a promissory note for $470,000. The
taxpayer later claimed as a tax deduction the $530,000 in restitution.
Although this Court denied the deduction, the Court of Appeals for the
Second Circuit reversed and remanded the case, determining the
taxpayer was entitled to a deduction under the circumstances of his
restitution order. Stephens v. Commissioner, 905 F.2d at 674 (“Stephens’
restitution payment was neither a fine or similar penalty, nor paid to
the government. Thus, we hold that neither the public policy exception
to [s]ection 165, precluding a deduction when it would severely and
immediately frustrate public policy to allow it, nor the codification of the
4 We note that Congress does not concern itself with the lawfulness of the
income it taxes; income from criminal enterprises is taxed at the same rate. And it is
true that taxpayers, in some instances, have been allowed deductions against gross
income otherwise illegal under state or federal laws. See Commissioner v. Sullivan,
356 U.S. 27 (1958) (allowing deductions for rent and wages paid to the operator of an
illegal gambling enterprise).
10
[*10] public policy exception to deductibility of expenses pursuant to
[s]ection 162, bars deduction of Stephens’ restitution payment.”).
In this case there was no restitution made by petitioner; rather
the proceeds derived from his bribery scheme with Mr. Vo were subject
to a court-ordered forfeiture. Consequently, petitioner’s reliance upon
Stephens is misplaced since the case is distinguishable. To allow
petitioner a deduction for losses arising out of forfeited proceeds
obtained through illegal activities would undermine public policy by
permitting a portion of the forfeiture to be borne by the Government,
thus taking the “sting” out of the forfeiture. See Tank Truck Rentals,
Inc. v. Commissioner, 356 U.S. 30, 35 (1958); Wood, 863 F.2d at 422;
Holt, 69 T.C. at 81; Farris v. Commissioner, T.C. Memo. 1985-346, aff’d
without published opinion, 823 F.2d 1552 (9th Cir. 1987). In accordance
with these controlling precedents, petitioner is not entitled to a loss
deduction under section 165 for the proceeds (including the proceeds
from the real estate sales) that he later forfeited pursuant to the
forfeiture agreement with the United States.
Petitioner seeks to draw a distinction between his situation and
those prior cases denying deductions for forfeitures on the ground that
his plea agreement called for voluntary sales and forfeiture of funds
along with profit sharing for tax purposes, which deviates from the norm
in punitive actions and indicates a more compensatory approach to the
liquidation of his real estate holdings in Thailand. We think petitioner’s
distinctions are unpersuasive considering the potential angles, as
discussed below.
In Lilly v. Commissioner, 343 U.S. 90 (1952), opticians sought to
deduct payments that they made to eye doctors as ordinary and
necessary business expenses. These payments were made pursuant to
agreements that reflected an established and widespread practice in
that industry, whereby the eye doctors agreed to recommend certain
opticians to their patients and the opticians agreed to pay those
referring eye doctors one-third of the retail sale prices that they received
for the eyeglasses that they sold. The Court of Appeals for the Fourth
Circuit held such payments were nondeductible on the grounds that
they were against public policy. The Supreme Court reversed, however,
holding that the payments did not stand on the same basis as
expenditures that violated some federal or state law or that were
incidental to such violations. The Supreme Court drew a distinction
between these payments, which were at most professionally unethical,
11
[*11] from those of outlawed expenditures, which, by virtue of their
illegality, frustrate federal or state policy.
Petitioner’s proceeds from his fraudulent scheme are not akin to
the payments in dispute in Lilly. The moneys petitioner forfeited were
admittedly the essence of his illegal venture. The forfeiture was
incidental to his violation of federal laws. Therefore, the holding in Lilly
does not support petitioner’s argument.
In Commissioner v. Sullivan, 356 U.S. 27, the Supreme Court
held that an illegal gambling enterprise was a business for federal tax
purposes and that deductions for ordinary and necessary business
expenses involved in operating the enterprise were allowable. The
Supreme Court reasoned that to deny such deductions would result in
taxing the gross receipts of the business rather than its net income. In
Commissioner v. Tellier, 383 U.S. 687 (1966), the taxpayer sought a
deduction for legal fees incurred in the unsuccessful defense of a
criminal prosecution relating to his business. The Commissioner
conceded that the fees were ordinary and necessary business expenses.
The only question was whether the allowance of a deduction would
frustrate public policy. The Supreme Court held that no public policy
was frustrated by allowing these legal fees to be deducted as ordinary
and necessary business expenses.
Sullivan and Tellier stand for the proposition that a taxpayer may
be allowed to deduct legitimate (i.e., ordinary and necessary) business
expenses in the operation of an illegitimate enterprise. That concept is
not determinative in our analysis of this case because we are dealing
with a forfeiture that (as discussed above) does not qualify as an
ordinary and necessary business expense under section 162. 5
Furthermore, the allowance of a loss deduction in this case would
undermine the impact of the sharply defined policy against bribery of a
government official. Accordingly, Sullivan and Tellier are inapposite to
the case here.
Accordingly, we will sustain respondent’s disallowance of
petitioner’s loss deduction claimed with respect to his criminal
5 It is unclear whether petitioner claims his real estate activity was a separate
trade or business, or, as it seems, he is claiming that his real estate activity was part
of his illegitimate bribery business activity. While petitioner does not consider the
transfer of the sales proceeds to the government to be a forfeiture, the preliminary
consent order and our findings which should be with respect thereto reflect otherwise.
12
[*12] forfeiture. Next we will turn to the civil fraud penalty determined
against petitioner under section 6663.
The Commissioner must prove an underpayment of tax in support
of the fraud penalty. To sustain his burden, the Commissioner need not
prove the precise amount of the underpayment attributable to fraud, but
only that a part of the underpayment is attributable to fraud. Estate of
Beck v. Commissioner, 56 T.C. 297, 363–64 (1971). When the allegations
of fraud are intertwined with unreported income and indirectly
reconstructed income, as they are in this case, the Commissioner may
prove an underpayment by proving a likely source of the unreported
income. Id. at 361.
As previously discussed, respondent has shown sources of
unreported income to petitioner, and petitioner has failed to show that
the receipts were offset by deductible costs or expenses. Furthermore
petitioner agrees that he failed to report his bribery proceeds for 2012.
As a result, it is established by clear and convincing evidence that he
has an underpayment for the 2012 tax year.
We now turn to the second element of the penalty, fraudulent
intent. Fraud is intentional wrongdoing designed to evade tax believed
to be owing. Neely v. Commissioner, 116 T.C. 79, 86 (2001). The existence
of fraud is a question of fact to be resolved upon consideration of the
entire record. Estate of Pittard v. Commissioner, 69 T.C. 391, 400 (1977).
Fraud is not to be presumed, nor should a finding of fraudulent intent
be based upon mere suspicion. Petzoldt v. Commissioner, 92 T.C. 661,
699–700 (1989). But because direct proof of a taxpayer’s intent is rarely
available, fraudulent intent may be established by circumstantial
evidence. Id. at 699. The Commissioner satisfies his burden of proof by
showing that “the taxpayer intended to evade taxes known to be owing
by conduct intended to conceal, mislead, or otherwise prevent the
collection of taxes.” Parks v. Commissioner, 94 T.C. 654, 661 (1990). The
taxpayer’s entire course of conduct may be examined to establish the
requisite intent, and an intent to mislead may be inferred from a pattern
of conduct. Webb v. Commissioner, 394 F.2d 366, 379 (5th Cir. 1968),
aff’g T.C. Memo. 1966-81; Stone v. Commissioner, 56 T.C. 213, 224
(1971).
Circumstances that may indicate fraudulent intent, often called
“badges of fraud,” include but are not limited to: (1) understating
income, (2) keeping inadequate records, (3) giving implausible or
inconsistent explanations of behavior, (4) concealing income or assets,
13
[*13] (5) failing to cooperate with tax authorities, (6) engaging in illegal
activities, (7) supplying incomplete or misleading information to a tax
return preparer, (8) providing testimony that lacks credibility, (9) filing
false documents (including false tax returns), (10) failing to file tax
returns, and (11) dealing in cash. See Schiff v. United States, 919 F.2d
830, 833 (2d Cir. 1990); Bradford v. Commissioner, 796 F.2d 303, 307–08
(9th Cir. 1986), aff’g T.C. Memo. 1984-601; Parks, 94 T.C. at 664–65;
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); Morse v.
Commissioner, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d,
419 F.3d 829 (8th Cir. 2005). No single factor is dispositive, but the
existence of several factors is “persuasive circumstantial evidence of
fraud.” Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Petzoldt,
92 T.C. at 700.
According to the record before the Court petitioner’s prior
criminal conviction demonstrates his intent to mislead, conceal, or
otherwise interfere with the IRS’s ability to assess and collect his federal
income tax. 6 Petitioner was employed as a Consular Officer and served
as chief of the Nonimmigrant Visa Unit at the U.S. Consulate in Ho Chi
Minh City, an influential position within the State Department, which
he illegally used for personal financial gain. Furthermore, his use of co-
conspirators to transfer funds through foreign bank accounts in China
and subsequent purchase of real estate holdings in Thailand reflect
petitioner’s sophisticated effort to conceal and otherwise prevent the
collection of tax.
We find that respondent has shown that five “badges of fraud”
exist in this case, including understating income, concealing income or
assets, engaging in illegal activities, dealing in cash, and filing false
documents, including a false tax return. These factors favor a finding of
fraud. Petitioner has provided evidence of his cooperation with U.S.
authorities, including the IRS; however, this evidence is only a single
factor weighing against fraudulent intent.
Furthermore, petitioner does not dispute that he intended to
evade tax by not reporting his bribery proceeds, but he tries to offset the
penalty solely through a reduction of the underpayment amount.
6 Convictions for crimes involving perjury, deceit, breach of fiduciary duty, and
concealment of criminal proceeds are highly probative of the intent to evade tax. See
Wright v. Commissioner, T.C. Memo. 2000-336, 2000 WL 1635407, at *6. Admission of
facts showing fraudulent behavior in a criminal plea agreement is also relevant to
finding fraudulent intent. See Duncan & Assocs. v. Commissioner, T.C. Memo. 2003-
158, 2003 WL 21233527, at *6.
14
[*14] Considering the evidence before the Court, we have no doubt that
petitioner—being a well-educated individual employed by the State
Department and having worked overseas for most of his career—knew
that the bribes were in fact taxable income to him, which he failed to
report with the intent, at least in part, to evade tax.
Petitioner asserted that he is not liable for the fraud penalty
because while incarcerated he directed his tax preparer to file an
amended return for 2012, reporting his bribery proceeds as income.
Petitioner is mistaken on this point. Fraud occurs upon the filing of a
false return with the requisite fraudulent intent, and that conduct
cannot be subsequently purged through the filing of an amended return.
See Badaracco v. Commissioner, 464 U.S. 386, 394 (1984). Furthermore,
respondent furnished a Certification of Lack of Record which showed
that no amended tax return for 2012 has been received from petitioner.
Petitioner’s activities with regard to the receipt of bribery
proceeds and his attempts to hide the activities associated therewith are
“badges of fraud” that clearly and convincingly indicate the civil fraud
penalty under section 6663 applies for the tax year at issue. Accordingly,
we will sustain respondent’s determination of the fraud penalty in this
case.
We have considered all of the arguments that petitioner has
made, and to the extent they are not addressed herein, we find the
arguments to be moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for respondent.