Robert J. Belanger v. Commissioner , 2020 T.C. Memo. 130 ( 2020 )

T.C. Memo. 2020-130UNITED STATES TAX COURT
ROBERT J. BELANGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25306-14. Filed September 10, 2020.
William J. Lovett, for petitioner.
Patrick F. Gallagher, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
ASHFORD, Judge: By statutory notice of deficiency dated July 2, 2014,
respondent determined deficiencies in petitioner’s Federal income tax and civil
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[*2] fraud penalties pursuant to section 6663(a)1 for the 1999 and 2000 taxable
years (years at issue) as follows:
Penalty
Year Deficiency sec. 6663(a)
1999 $129,668 $97,251
2000 61,499 46,124
The issues for decision for the years at issue are: (1) whether respondent timely
mailed a notice of deficiency to petitioner, (2) whether petitioner had additional
income from Number One Foundations, a business he reported on his 1999 and
2000 Federal income tax returns as a sole proprietorship, and (3) whether
petitioner is liable for civil fraud penalties. We resolve these issues in
respondent’s favor.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts and the attached exhibits are incorporated herein by this reference. Petitioner
resided in Massachusetts when his petition was timely filed with the Court.
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. Some monetary amounts are rounded
to the nearest dollar.
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[*3] I. Petitioner and His Business Endeavors
Petitioner was born in 1945 in Quebec, Canada, and spoke only French
when he moved to Massachusetts as a child. He learned English around age 10 or
11 while attending elementary school in Massachusetts. He never graduated from
high school, having left high school after the 10th grade. However, he went to a
trade school and took up carpentry.
During the 1970s or 1980s petitioner founded Number One Foundations, a
construction company that primarily installed concrete foundations. Since its
founding and through at least the years at issue Number One Foundations was
petitioner’s unincorporated business. During the years at issue petitioner was also
the sole shareholder of Capital Leasing of Cape Cod, Inc. (Capital Leasing), an S
corporation.2 Capital Leasing was in the business of leasing trucks and vehicles
and selling materials and supplies to others who also did foundation installation
work. At all relevant times, the business addresses of Number One Foundations
and Capital Leasing, as well as the telephone number of Number One
Foundations, were the same as petitioner’s home address and telephone number in
Centerville, Massachusetts.
2
Petitioner incorporated Capital Leasing on January 8, 1997.
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[*4] During the years at issue petitioner spent approximately six to seven days
per week, 10 to 12 hours per day, on work related to Number One Foundations.
He ran the footing crew, which included loading and unloading planks, setting
them up, and pouring concrete. He also handled job proposals and customer
invoices, including mailing and tracking the invoices and receiving customers’
payments.
In 1985 or 1986 petitioner’s son Steven, who also lived in Centerville,
Massachusetts, began working for him in connection with Number One
Foundations. With the goal of someday taking over the business, over time Steven
assumed responsibility for some of the operational aspects of Number One
Foundations.3 By 1999 Steven had opened two business bank accounts, over
which he had sole signature authority, for Number One Foundations at Cape Cod
Five Cents Savings Bank (Cape Cod Five).4 During the years at issue he
maintained those accounts and was responsible for paying Number One
Foundation’s expenses, including its payroll. He maintained business insurance
for Number One Foundations under his name. He was also responsible for driving
3
At a time after the years at issue not established by the record, Steven
purchased Number One Foundations from petitioner.
4
During the years at issue petitioner also had a personal checking account
with Cape Cod Five.
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[*5] a truck, dispatching foundation panels, and ordering materials. During the
years at issue Number One Foundations paid Steven a weekly salary of $600-
$800.
Unlike for Capital Leasing, petitioner did not use QuickBooks or other
accounting software to maintain Number One Foundations’ books and records;
instead, petitioner adopted the following recordkeeping system that involved using
the stairs inside his house: (1) he placed job proposals on the first or bottom step;
(2) once a job proposal was accepted by a customer, he placed the work order for
the job on the next higher step; (3) once the job was completed and an invoice was
sent requesting payment he placed the work order for that job on the next higher
step; and (4) once payment was received he stamped the work order “PAID” and
placed the order in a box. When it was time to prepare his 1999 return,
petitioner’s girlfriend, Julie Charapezza, took the box with the 1999 paid work
orders, added up the 1999 payments to arrive at Number One Foundations’ gross
receipts for 1999, and then provided that total gross receipts figure to him. When
it was time to prepare his 2000 return, petitioner had Nancy Lucean add up the
2000 payments as reflected on the 2000 paid work orders to arrive at Number One
Foundations’ gross receipts for 2000, and then she provided that total gross
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[*6] receipts figure to him.5 Number One Foundations’ gross receipts were
$1,220,154 and $1,477,905 for 1999 and 2000, respectively.
During the years at issue Number One Foundations’ customers routinely
paid by check, and these checks were made payable to Number One Foundations,
petitioner, or Steven6 and received by petitioner at his Centerville, Massachusetts,
home. Petitioner instructed Steven weekly as to what to do with customers’
checks; he instructed Steven to go to Cape Cod Five (and other banks) to (1) cash
customers’ checks and bring the cash back to him, (2) negotiate the checks for
treasurer’s checks payable to him or Steven,7 and/or (3) deposit a portion of the
5
Ms. Charapezza died in December 2000.
6
Specifically, the checks in the record indicate “Robert Belanger”, “Bob
Belanger”, “Robert Belanger No. 1 Foundations”, “Robert Belanger d/b/a No. 1
Foundations”, “No. One Foundations Robert Belanger”, “Belanger Foundations”,
“Steven Belanger”, “Steve Belanger”, “Steve Belanger & #1 Foundations”,
“Number 1 Foundations Steve Belanger”, “Steve Belanger DBA No. 1
Foundations”, “No. 1 Foundations Stephen Belanger”, “No 1 Foundations Steven
Belanger”, “#1 Foundations Stephen Belanger”, “Number One Foundations”, “No.
One Foundations”, “# 1 Foundations”, “#1 Foundation Co.”, “Foundations No. 1”,
“A1 Foundation”, “A 1 Forms”, “No. 1 Forms”, or “No. 1 Foundations” as the
payee.
7
The record includes numerous Cape Cod Five checks each titled
“Treasurer’s Check” although at trial a testifying witness (and petitioner’s posttrial
opening brief) sometimes referred to these checks as cashier’s checks. A
treasurer’s check is a check issued by a bank’s officer on the bank’s own account;
it is synonymous with a cashier’s check. See Nasdaq, Treasurer’s check,
(continued...)
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[*7] checks and receive the remainder in cash and/or treasurer’s checks. When
Steven got a treasurer’s check (and he got multiple treasurer’s checks on the same
day on several occasions), no single check was for an amount greater than $10,000
although in the aggregate the checks may have totaled more than $10,000. In
1999 Steven negotiated customers’ checks for 30 treasurer’s checks from Cape
Cod Five, 19 checks payable to petitioner totaling $105,489 and 11 checks
payable to himself totaling $38,500. In 2000 he negotiated customers’ checks for
21 treasurer’s checks from Cape Cod Five, 4 checks payable to petitioner totaling
$20,565 and 17 checks payable to himself8 totaling $83,700.9 Petitioner also on
occasion negotiated customers’ checks for treasurer’s checks from various banks.
With some of the cash, Number One Foundations’ undocumented laborers were
7
(...continued)
https://www.nasdaq.com/glossary/t/treasurer-check (last visited July 7, 2020). For
uniformity we refer to these types of checks as treasurer’s checks throughout the
opinion.
8
One of the 17 checks payable to Steven is payable to Steven and Rita
Brown. The record does not reflect who Ms. Brown is.
9
In 1998 Steven negotiated customers’ checks for 32 treasurer’s checks, 27
checks payable to petitioner, 4 checks payable to Steven, and 1 check payable to
Steven’s wife. As discussed infra p. 12, many of the 1998 treasurer’s checks
payable to petitioner needed to be reissued.
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[*8] paid wages “under the table”, and consequently, no Federal employment taxes
were withheld and paid on these wages.10
II. Tax Reporting of Number One Foundations
Petitioner prepared and filed his Federal income tax returns for the years at
issue with the assistance of Nicholas Allen, a self-employed certified public
accountant.11 In preparing returns Mr. Allen would typically receive income and
expense information from his clients, including Forms W-2, Wage and Tax
Statement, Forms 1098, Mortgage Interest Statement, and Forms 1099-MISC,
Miscellaneous Income, and prepare worksheets summarizing the information
provided. Additionally, he would maintain a file for each client containing copies
of whatever information he was provided, together with a copy of the filed return.
For 1999 petitioner provided Mr. Allen with handwritten ledger sheets that listed
in pertinent part “Total Income” of $86,544 (“Totals for Year” of $126,767, “Less
10
We use the term “Federal employment taxes” throughout this opinion to
refer to the taxes imposed under the Federal Insurance Contributions Act, secs.
3101-3128, and the Federal Unemployment Tax Act, secs. 3301-3311, and Federal
income tax withholding, secs. 3401-3406. During the years at issue petitioner paid
wages “under the table” to Number One Foundations’ undocumented laborers
totaling approximately $3,000 weekly.
11
Petitioner also prepared and filed with Mr. Allen’s assistance the 1999 and
2000 Federal income tax returns, i.e., Forms 1120-S, U.S. Income Tax Return for
an S Corporation, of Capital Leasing.
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[*9] Int Income” of $223 and “Less[] Personal Deposits” of $40,000). For 2000
petitioner provided Mr. Allen with a handwritten worksheet that listed in pertinent
part “Deposits Income” of $90,606 and “1099’s” of $111,431. Petitioner did not
provide Mr. Allen with any supporting documentation, such as Forms 1099,
receipts, invoices, or bank statements, although three of Number One
Foundations’ customers issued 2000 Forms 1099-MISC showing payments to
Number One Foundations totaling $111,431.12
Steven also prepared and filed his 1999 and 2000 Federal income tax
returns with Mr. Allen’s assistance, and he, like petitioner, provided Mr. Allen
with only handwritten ledger sheets or worksheets of his income and expenses for
the years at issue, which Mr. Allen in turn used to create handwritten spreadsheets
to help him prepare these returns.13 Mr. Allen’s spreadsheets listed in pertinent
part income attributable to Number One Foundations of $800,327 (“Form 1099”
12
One 2000 Form 1099-MISC showed a payment of $96,776 with the
recipient name “Robert Belanger No. 1 Foundations” and Steven‘s taxpayer
identification number (TIN). A second 2000 Form 1099-MISC showed a payment
of $2,520 with the recipient name “Bob Belanga” and petitioner’s TIN. A third
2000 Form 1099-MISC showed a payment of $12,135 with the recipient name
“Bob Belanger” and petitioner’s TIN.
13
Mr. Allen did not create similar handwritten spreadsheets for petitioner for
the years at issue because the information he received from petitioner was less
than what Steven provided and thus he could easily use petitioner’s information to
prepare petitioner’s returns for the years at issue.
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[*10] income of $583,327 and “Cash” of $217,000) for 1999, and income
attributable to Number One Foundations of $1,199,896 (“Form 1099” income of
$736,896 and “Cash” of $463,000) for 2000. Neither Steven nor petitioner
informed Mr. Allen that he had negotiated customers’ checks for treasurer’s
checks payable to him during the years at issue.
Although Number One Foundations was petitioner’s unincorporated
business, he and Steven each attached to their respective returns for the years at
issue Schedules C, Profit or Loss From Business, for Number One Foundations.
Additionally, petitioner’s Schedules C for Number One Foundations for the years
at issue indicated an employer identification number (EIN) ending in 1742, while
Steven’s Schedules C for Number One Foundations for the years at issue indicated
an EIN ending in 7445.
On his 1999 Schedule C for Number One Foundations, petitioner reported
gross receipts of $86,544, cost of goods sold of $4,126, and total expenses of
$13,016 (consisting of $6,292 for car and truck expenses, $200 for legal and
professional services, $556 for office expenses, $2,797 for utilities, and $3,171 for
other expenses, which consisted of $2,865 for telephone and $306 for work
clothes). On his 1999 Schedule C for Number One Foundations, Steven reported
gross receipts of $800,327, cost of goods sold of $348,750, and total expenses of
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[*11] $337,751 (consisting of $32,869 for car and truck expenses, $26,531 for
depreciation and section 179 expenses, $31,051 for insurance, $1,706 for interest
other than mortgage interest, $3,000 for pension and profit-sharing plans, $42,512
for supplies, $17,185 for taxes and licenses, $165 for meals and entertainment,
$1,659 for utilities, $171,286 for wages, and $9,787 for other expenses, which
consisted of $4,895 for telephone, $1,513 for payroll services, $844 for medical
expenses, and $2,535 for “other”). On his 2000 Schedule C for Number One
Foundations, petitioner reported gross receipts of $111,431, cost of goods sold of
$12,165, and total expenses of $33,888 (consisting of $17,190 for advertising,
$225 for legal and professional services, $4,658 for office expenses, $2,500 for
meals and entertainment, $2,679 for utilities, and $6,636 for other expenses, which
consisted of $5,086 for telephone, $500 for work clothes, and $1,050 for fees). On
his 2000 Schedule C for Number One Foundations, Steven reported gross receipts
of $1,199,896, cost of goods sold of $428,715, and total expenses of $502,269
(consisting of $25,531 for car and truck expenses, $35,077 for depreciation and
section 179 expenses, $20,374 for insurance, $3,415 for mortgage interest, $3,000
for pension and profit-sharing plans, $126,877 for rent or lease of vehicles,
machinery, and equipment, $13,071 for repairs and maintenance, $70,439 for
supplies, $17,715 for taxes and licenses, $319 for utilities, $179,260 for wages,
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[*12] and $7,191 for other expenses, which consisted of $3,618 for telephone,
$1,487 for payroll services, $1,152 for medical expenses, and $934 for “other”).
III. Criminal Tax Investigation and Proceedings
In November 2000 Jane Burlingame, the assistant branch manager of Cape
Cod Five’s Centerville, Massachusetts, location, contacted petitioner to inform
him that numerous treasurer’s checks payable to him needed to be reissued
because otherwise the bank would consider the checks abandoned property.
During her conversation with petitioner, Ms. Burlingame asked whether he would
like her to issue one or two treasurer’s checks or open an interest-bearing money
market account or certificate of deposit in his name rather than reissuing
treasurer’s checks payable to him in the same amounts. Petitioner declined her
suggestions and told her that he would send Ms. Charapezza to the bank with the
treasurer’s checks that needed to be reissued.
Ms. Charapezza brought 21 treasurer’s checks totaling $120,903, all
originally negotiated by Steven in 1998, to Cape Cod Five for Ms. Burlingame to
reissue. After Ms. Burlingame reissued the treasurer’s checks, Cape Cod Five’s
security officer, Diane Rowlings, became aware of the transactions. After
conducting an investigation, on or around January 16, 2001, she filed a Suspicious
Activity Report (SAR) with respect to the transactions with the U.S. Department
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[*13] of the Treasury’s Financial Crimes Enforcement Network (also known as
FinCEN).14 Internal Revenue Service (IRS) Special Agent Renee Iantosca
(Special Agent Iantosca) ultimately received and reviewed the information
reflected in the SAR.15 On the basis of this information Special Agent Iantosca
contacted petitioner by phone to arrange to meet with him in person to do an anti-
money-laundering compliance check.16
On March 27, 2001, Special Agent Iantosca (along with IRS Special Agent
Edward Jay (Special Agent Jay)) briefly met with petitioner outside his
Centerville, Massachusetts, home. Special Agent Iantosca reminded him that they
were meeting to question him regarding the treasurer’s checks payable to him that
remained outstanding. He told them that he (and Ms. Charapezza) had purchased
the treasurer’s checks over the years with cash and that he was using them as
14
The SAR also indicated that as of January 16, 2001, there were 22
additional treasurer’s checks payable to petitioner totaling $115,854 still
outstanding. Accordingly, the SAR indicated that the “Violation Amount” was
$236,757.
15
Various documents in the record also refer to Special Agent Iantosca as
IRS Special Agent Renee Flood.
16
This check generally involves having a business or an individual explain
the reasons for engaging in a financial transaction that, for example, appears
structured to avoid the filing of a Currency Transaction Report (CTR), which
banks file when a transaction involves an exchange of cash or currency greater
than $10,000.
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[*14] savings. In response to Special Agent Jay’s asking him why he did not
deposit the moneys into his Cape Cod Five personal checking account so that he
could at least earn some interest, petitioner stated that it was his choice to keep his
moneys in treasurer’s checks and this way if he decided to buy something like a
car he would have the funds to do so. Special Agent Iantosca further questioned
petitioner regarding the funding of the treasurer’s checks. Petitioner replied that
he had purchased multiple treasurer’s checks with cash in smaller amounts on the
same day rather than one big check because he felt like it. He informed them that
they should follow up with Ms. Burlingame at Cape Cod Five because she handled
his banking and thus could answer all of their questions.
Special Agent Iantosca followed up with Cape Cod Five and on the basis of
what she learned from this followup, the anti-money-laundering compliance check
with petitioner shifted to an investigation of Steven. This investigation spanned
2002 to 2005. At a time in 2005 not established by the record, Special Agent
Iantosca referred this investigation to the U.S. Department of Justice (DOJ),
recommending that Steven be prosecuted for filing false Federal income tax
returns.
DOJ authorized the prosecution and on April 5, 2006, Steven was indicted
by a grand jury of the U.S. District Court for the District of Massachusetts on two
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[*15] counts of filing false and fraudulent returns for the years at issue in violation
of section 7206(1). The indictment alleged that these returns underreported the
gross receipts of Number One Foundations. One year later, on April 5, 2007, the
grand jury returned a superseding indictment against petitioner and Steven for one
count of conspiracy to “defraud the United States by dishonest and deceitful
means by attempting to impede, impair, obstruct and defeat the lawful government
functions of the IRS * * * in the ascertainment, computation, assessment, and
collection of” income tax in violation of 18 U.S.C. sec. 371 and one count of
“corruptly endeavor[ing] to obstruct and impede the due administration of the
internal revenue laws” in violation of section 7212(a) for the years at issue. With
respect to the latter count, the indictment alleged that petitioner violated section
7212(a) by (1) hiding gross receipts generated by Number One Foundations from
his tax return preparer, (2) filing returns for the years at issue that failed to report
the actual gross receipts of Number One Foundations, (3) hiding gross receipts of
Number One Foundations by failing to deposit such proceeds into Number One
Foundations’ bank account, (4) structuring the reissuance of certain treasurer’s
checks so as not to trigger the filing of a CTR, and (5) falsely reporting during the
meeting with Special Agents Iantosca and Jay that he or his girlfriend had
purchased the treasurer’s checks.
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[*16] In July 2009 a jury trial was held. In connection with this trial IRS Revenue
Agent Joseph Guidoboni (RA Guidoboni) prepared three separate revenue agent’s
reports.17 He had been assigned in 2006 to assist with DOJ’s prosecution of
petitioner and Steven, and he prepared these reports before petitioner and Steven
testified at the trial and solely for purposes of computing different scenarios of tax
loss. One report attributed all of Number One Foundations’ unreported gross
receipts18 to petitioner as income; another report attributed all of Number One
Foundations’ unreported gross receipts to Steven as income; and the third report
split Number One Foundations’ unreported gross receipts equally between
petitioner and Steven.
Petitioner’s testimony, as well as Steven’s, during the criminal trial related
in pertinent part to how Number One Foundations operated, including the
negotiation of customers’ checks for treasurer’s checks and the use of those
17
A revenue agent’s report, consisting usually of at least a Form 4549-A,
Income Tax Examination Changes, is also referred to as “an examination report”
and commonly called an “RAR”. See Laidlaw’s Harley Davidson Sales, Inc. v.
Commissioner, 154 T.C. ___, ___ (slip op. at 7) (Jan. 16, 2020) (citing Branerton
Corp. v. Commissioner, 64 T.C. 191, 194-195 (1975)).
18
Just as petitioner did in the instant case, he and Steven stipulated in the
criminal case that (among other things) Number One Foundations had gross
receipts of $1,220,154 and $1,477,905 for 1999 and 2000, respectively. A
summary of those gross receipts, i.e., a listing of the 1999 and 2000 customers’
checks, was a stipulated exhibit in the criminal case (as well as in the instant case).
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[*17] treasurer’s checks; to wit, petitioner testified that (1) although he was able to
provide Mr. Allen with detailed information for expense deductions he wished to
claim, he did not have an effective recordkeeping system for Number One
Foundations during the years at issue and (2) in December 1994 a Fleet Bank
branch in Hyannis, Massachusetts, and in April 1999 a Compass Bank branch in
Sandwich, Massachusetts, had made him fill out CTRs because he received
$10,831 and $11,350 in cash, respectively, so he knew as of 1999 that a CTR
needed to be filled out if he received more than $10,000 from a bank.
On July 21, 2009, the jury found petitioner not guilty of conspiracy but
guilty of corruptly endeavoring to obstruct and impede the tax laws.19 He was
sentenced to 21 months of imprisonment plus probation. As part of the terms of
his probation he was required to submit complete and accurate amended Federal
income tax returns for the years at issue to the IRS. Petitioner hired Donald Craig,
a former IRS revenue agent, to assist in this regard. In preparing petitioner’s
amended returns for the years at issue, Mr. Craig reviewed most of the transcripts
from the criminal trial, the computations as reflected in the RARs RA Guidoboni
prepared in connection with that trial, the stipulated summary of Number One
Foundations’ gross receipts, and petitioner’s original returns for the years at issue
19
Steven was acquitted on both counts.
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[*18] and how Mr. Allen prepared them. However, he ultimately prepared
petitioner’s amended returns for the years at issue using only the customers’
checks payable to petitioner and to petitioner and Number One Foundations (as
indicated in the stipulated summary of Number One Foundations’ gross receipts).
Consequently, petitioner’s 1999 amended return reported in pertinent part
increased Schedule C gross receipts attributable to Number One Foundations of
$39,731 (resulting in an additional tax liability of $13,682) and petitioner’s 2000
amended return reported in pertinent part increased Schedule C gross receipts
attributable to Number One Foundations of $57,231 (resulting in an additional tax
liability of $20,259).
In August 2011 petitioner submitted these amended returns, together with
payment of the reported additional tax liabilities, to the IRS. The IRS Service
Center in Andover, Massachusetts (Andover Service Center), received these
returns (along with the payment) but returned them to petitioner because,
according to an October 11, 2011, letter that the Andover Service Center sent to
him, the “legal period in which to charge and collect additional tax * * * has
expired” for the years at issue. Thereafter, the amended returns were sent directly
to RA Guidoboni. He reviewed them and then had a discussion about them with
his immediate supervisor, IRS Group Manager William T. Noonan. Mr. Noonan
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[*19] assigned RA Guidoboni to handle closing out petitioner’s case civilly now
that the criminal matter had concluded.
IV. IRS Administrative Proceedings
RA Guidoboni determined that petitioner’s amended returns for the years at
issue were inaccurate. Using the specific item method and relying in pertinent part
on the stipulations from the criminal trial and petitioner’s and Steven’s testimony
at that trial establishing that petitioner had handled collection and disbursement of
Number One Foundations’ accounts receivable, he determined that all of Number
One Foundations’ unreported gross receipts--$333,283 for 1999 and $166,578 for
2000--should be allocated to petitioner.20 He also determined that section 6663(a)
civil fraud penalties should be imposed, and on January 20, 2012, he prepared a
Form 11661, Fraud Development Recommendation - Examination, for Mr.
Noonan’s signature. Mr. Noonan digitally signed the form on March 15, 2012.
The notice of deficiency sent to petitioner on July 2, 2014, reflects those
determinations. Petitioner was formally notified, however, of the proposed
20
RA Guidoboni calculated Number One Foundations’ unreported gross
receipts for the years at issue by taking the difference between Number One
Foundations’ reportable gross receipts as stipulated in petitioner’s criminal case
($1,220,154 for 1999 and $1,477,905 for 2000) and the aggregate gross receipts
attributable to Number One Foundations that petitioner and Steven reported on
their respective Schedules C for the years at issue ($886,871 for 1999 and
$1,311,327 for 2000).
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[*20] changes to his Federal income tax, including the imposition of civil fraud
penalties, via a so-called 30-day letter, dated January 23, 2012, that the IRS sent to
him. The 30-day letter contained in pertinent part the prefatory heading “If you
don’t agree with the proposed changes”, beneath which it explained that petitioner
could request a meeting or a telephone conference with Mr. Noonan, and if after
that meeting or telephone conference he still did not agree with the proposed
changes, he could request a conference with the IRS Office of Appeals (Appeals)
by submitting a formal protest. The letter further advised that if petitioner failed
to reach an agreement with Appeals or if he did not respond to the letter, a notice
of deficiency would be issued to him.
Enclosed with the 30-day letter was (among other documents) an RAR
consisting of Form 4549-A and Form 886A, Explanation of Items. The Form
4549-A was signed by RA Guidoboni on January 17, 2012, and the 30-day letter
was signed by Mr. Noonan.
Mr. Craig submitted to the IRS on petitioner’s behalf a formal protest
disagreeing with the proposed changes. On or around May 8, 2014, Appeals
sustained in full these changes and Appeals then sent to petitioner the July 2,
2014, notice of deficiency.
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[*21] OPINION
I. Statutory Period of Limitations To Assess Tax
As a preliminary matter we address petitioner’s argument (raised only in
passing in his petition and posttrial opening brief) that respondent is barred from
assessing the income tax deficiencies for the years at issue because respondent
issued the July 2, 2014, notice of deficiency after the statutory period of
limitations to assess tax had expired.
Section 6213(a) generally requires the Commissioner to issue a notice of
deficiency before assessing a deficiency in Federal income tax against a taxpayer.
When a taxpayer has filed a return, section 6501(a) generally requires the
Commissioner to assess a deficiency in Federal income tax within three years after
the return was filed. Hence, under these general rules, the Commissioner may
issue a notice of deficiency to a taxpayer only within the same period.
Respondent does not dispute that the three-year period of limitations had
expired before the July 2, 2014, notice of deficiency was sent to petitioner.
However, because, as discussed infra, we find that petitioner’s underpayments
were due to fraud, the Commissioner “is free to determine a deficiency with
respect to all items for the particular taxable year without regard to the [three-year]
period of limitations.” Colestock v. Commissioner, 102 T.C. 380, 385 (1994) (and
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[*22] cases cited thereat); see also Kohan v. Commissioner, T.C. Memo. 2019-85,
at *2 (quoting section 6501(c)(1)). Accordingly, we hold that the July 2, 2014,
notice of deficiency was timely.
II. Unreported Business Income
Section 61(a) defines “gross income” as “all income from whatever source
derived”, including “[g]ross income derived from business”. Sec. 61(a)(2); sec.
1.61-3(a), Income Tax Regs. A taxpayer is required to maintain books or records
sufficient to establish the amount of his or her gross income required to be shown
by such person on any return. See sec. 6001; sec. 1.6001-1, Income Tax Regs. It
is well settled that if the books or records do not clearly reflect income, the
Commissioner is then authorized “to reconstruct income in accordance with a
method which clearly reflects the full amount of income received.” Petzoldt v.
Commissioner, 92 T.C. 661, 687 (1989) (and cases cited thereat). The
Commissioner’s reconstruction need only be reasonable under all the facts and
circumstances. Id.RA Guidoboni determined that all of Number One Foundations’ unreported
gross receipts--$333,283 for 1999 and $166,578 for 2000--constituted business
income to petitioner. Petitioner contends that respondent erred in attributing
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[*23] Number One Foundations’ unreported gross receipts to him alone. We find
that the evidence supports respondent.21
RA Guidoboni used the specific item method to make these determinations.
The specific item method is a Court-approved “method of income reconstruction
that consists of evidence of specific amounts of income received by the taxpayer
and not reported on the taxpayer’s return.” Zang v. Commissioner, T.C. Memo.
2017-55, at *17 (citing Estate of Beck v. Commissioner, 56 T.C. 297, 353-354,
361 (1971)); see also Dyer v. Commissioner, T.C. Memo. 2012-224, at *17 (and
cases cited thereat) (noting that the Court has approved the specific item method
for recomputing taxable income). Petitioner contends that (1) he did not receive
checks in the amounts reflected in the July 2, 2014, notice of deficiency, (2) he did
not exercise dominion and control over customers’ checks made payable to Steven
or Number One Foundations, and (3) the customers’ checks made payable to
Steven or Number One Foundations are not income to him. We disagree.
21
Before trial petitioner filed a motion to shift the burden of proof with
respect to Number One Foundations’ gross receipts on the ground that the July 2,
2014, notice of deficiency was “erroneous, excessive, arbitrary or capricious”. We
are persuaded that the gross receipts in question must be included in petitioner’s
income for the years at issue regardless of which party bears the burden of proof.
Accordingly, we will deny petitioner’s motion to shift the burden of proof.
Petitioner does not otherwise contend that the burden of proof should shift to
respondent under sec. 7491(a), nor has he established that the requirements for
shifting the burden of proof under sec. 7491(a) have been met.
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[*24] The record shows, and we have found, that petitioner founded Number One
Foundations and that since its founding and through at least the years at issue
Number One Foundations was petitioner’s unincorporated business that he (not
Steven) actively controlled and principally managed. To that end, petitioner (not
Steven) received customers’ checks at his Centerville, Massachusetts, home. He
met with Steven weekly and gave him detailed instructions regarding what to do
with those checks; he told Steven to cash some and bring the cash back to him, to
negotiate some for treasurer’s checks (including whether to make the treasurer’s
checks payable to him or Steven), and to deposit portions of some and receive the
remainder in cash and/or treasurer’s checks.22 Moreover, Steven did not retain the
profits from Number One Foundations in a manner consistent with that of a
business owner; in addition to petitioner’s directions on what to do with
customers’ checks, Steven received a weekly salary of $600-$800 from Number
One Foundations. Thus it is inconsequential that Steven controlled Number One
Foundations’ business bank accounts at Cape Cod Five (having sole signature
22
Indeed, the sec. 61(a) gross income definition is to be construed broadly
and has “been held to encompass all ‘accessions to wealth, clearly realized, and
over which the taxpayer[] * * * [has] complete dominion.’” James v. United
States, 366 U.S. 213, 219 (1961) (quoting Commissioner v. Glenshaw Glass Co.,
348 U.S. 426, 431 (1955)).
- 25 -
[*25] authority over those accounts) as that control in turn was always under
petitioner’s control.
Accordingly, we sustain respondent’s determination that Number One
Foundations’ unreported gross receipts of $333,282 and $166,578 for 1999 and
2000, respectively, constituted business income to petitioner.
III. Civil Fraud Penalties
Section 6663(a) provides that “[i]f any part of any underpayment of tax
required to be shown on a return is due to fraud, there shall be added to the tax an
amount equal to 75 percent of the portion of the underpayment which is
attributable to fraud.” The section 6663(a) fraud penalty is a civil sanction
provided primarily as a safeguard for the protection of the revenue and to
reimburse the Government for the heavy expense of investigation and the loss
resulting from the taxpayer’s fraud. Purvis v. Commissioner, T.C. Memo. 2020-
13, at *26 (citing Helvering v. Mitchell, 303 U.S. 391, 401 (1938), and Sadler v.
Commissioner, 113 T.C. 99, 102 (1999)).
The Commissioner has the burden of proving fraud by clear and convincing
evidence. See sec. 7454(a); Rule 142(b). To do so, the Commissioner must prove
for each relevant year that (1) an underpayment of tax exists and (2) the
underpayment was due to fraud. See Sadler v. Commissioner, 113 T.C. at 102;
- 26 -
[*26] Katz v. Commissioner, 90 T.C. 1130, 1143 (1988). When the allegations of
fraud are intertwined with reconstructed unreported income, as they are here, the
Commissioner can satisfy the former burden by either proving a likely source of
the unreported income or (where the taxpayer alleges a nontaxable source)
disproving the nontaxable source so alleged. Parks v. Commissioner, 94 T.C. 654,
661 (1990). The Commissioner can satisfy the latter burden if he shows that the
taxpayer intended to conceal, mislead, or otherwise evade the collection of taxes
known or believed to be owing. Katz v. Commissioner, 90 T.C. at 1143 (and
cases cited thereat). If the Commissioner establishes that any portion of the
underpayment is attributable to fraud, the entire underpayment shall be treated as
attributable to fraud and subject to a 75% penalty unless the taxpayer establishes
by a preponderance of the evidence that some part of the underpayment is not
attributable to fraud. Sec. 6663(b).
The Commissioner bears the burden of production with respect to an
individual taxpayer’s liability for any penalty. Sec. 7491(c). In Frost v.
Commissioner, 154 T.C. ___, ___ (slip op. at 20) (Jan. 7, 2020), we recently held
that the Commissioner’s initial burden of production under section 7491(c)
includes producing evidence that he has complied with the procedural
requirements of section 6751(b) and that once he has satisfied this initial burden
- 27 -
[*27] the taxpayer must come forward with contrary evidence. We address the
burden of production issue first.
A. Section 6751(b) Compliance
Section 6751(b)(1) requires the initial determination of certain penalties be
“personally approved (in writing) by the immediate supervisor of the individual
making such determination or such higher level official as the Secretary may
designate.” See Graev v. Commissioner, 149 T.C. 485, 492-493 (2017),
supplementing and overruling in part 147 T.C. 460 (2016); see also Clay v.
Commissioner, 152 T.C. 223, 248 (2019) (quoting section 6751(b)(1)). In Belair
Woods, LLC v. Commissioner, 154 T.C. ___, ___ (slip op. at 24-25) (Jan. 6,
2020), we recently held that “the ‘initial determination’ of a penalty assessment
* * * is embodied in the document by which the Examination Division formally
notifies the taxpayer, in writing, that it has completed its work and made an
unequivocal decision to assert penalties.”
Consistent with our holding in Clay, the January 23, 2012, 30-day letter
with RA Guidoboni’s RAR embodied the initial determination--i.e., the first
formal communication of the conclusion--that assertion of the section 6663 civil
penalties against petitioner for the years at issue was warranted. Mr. Noonan, RA
Guidoboni’s immediate supervisor, approved RA Guidoboni’s RAR by signing the
- 28 -
[*28] 30-day letter on January 23, 2012, and then the letter was sent to petitioner
later that same day. We hold that respondent has introduced evidence that written
supervisory approval of section 6663 civil fraud penalties was given before a
formal communication of those penalties to petitioner and that the evidence is
sufficient to show that he complied with the procedural requirements of section
6751(b). See Flume v. Commissioner, T.C. Memo. 2020-80, at *34.
The burden now shifts to petitioner to offer evidence that written
supervisory approval of the penalties was untimely. See Frost v. Commissioner,
154 T.C. at ___ (slip op. at 22). Petitioner contends that supervisory approval of
the section 6663 civil fraud penalties was not manifested by the 30-day letter
because respondent failed to authenticate that Mr. Noonan signed the 30-day letter
or when he purportedly did so. According to petitioner, written supervisory
approval of the penalties was manifested by Mr. Noonan’s digital signature on the
Form 11661 on March 15, 2012, 51 days after the date of the 30-day letter and
therefore the requisite approval was untimely. Petitioner’s contention, however, is
without merit.
As reflected in the stipulation of facts, the parties agreed that
all exhibits referred to herein and attached hereto may be accepted as
authentic and are incorporated in this stipulation and made a part
hereof; provided, however, that either party has the right to object to
- 29 -
[*29] the admission of any such facts and exhibits in evidence on the
grounds of relevancy and materiality, but not on other grounds unless
expressly reserved herein, and provided, further, that either party may
introduce other and further evidence not inconsistent with the facts
herein stipulated.
The 30-day letter (with RA Guidoboni’s RAR) was a stipulated exhibit that neither
petitioner nor respondent reserved an objection to. Thus, its authenticity--Mr.
Noonan’s signature and the date reflected therein--is incontrovertible, and the
Form 11661 is of no moment. Accordingly, we hold that the penalties here were
approved in writing before the first formal communication to petitioner of those
penalties. See id. at ___ (slip op. at 23) (citing Clay v. Commissioner, 152 T.C. at
249).
B. Section 6663(a) Analysis
We now address whether petitioner is liable for section 6663(a) fraud
penalties for the years at issue.
Petitioner’s submission of amended returns for the years at issue reporting
increased Schedule C gross receipts attributable to Number One Foundations (and
resulting in additional tax liabilities) confirms that he does not dispute that he
underreported his business income for those years (resulting in underpayments for
both years); his dispute centers on the extent of the amounts unreported. Indeed,
respondent is not required to establish the precise amount of the deficiency to
- 30 -
[*30] prove an underpayment. See DiLeo v. Commissioner, 96 T.C. 858, 873
(1991), aff’d, 959 F.2d 16 (2d Cir. 1992). Additionally, as discussed supra pp. 22-
25, petitioner underreported his business income attributable to Number One
Foundations by $333,283 and $166,578 for 1999 and 2000, respectively.
Accordingly, respondent has proven by clear and convincing evidence that
petitioner underpaid his tax liabilities for the years at issue.
Next, we must determine whether respondent has proven by clear and
convincing evidence that any portions of the underpayments are attributable to
fraud. As indicated supra p. 26, fraud for this purpose is defined as intentional
wrongdoing by the taxpayer motivated by a specific purpose of avoiding tax
believed to be owing. Maciel v. Commissioner, 489 F.3d 1018, 1026 (9th Cir.
2007), aff’g in part, rev’g in part T.C. Memo. 2004-28; Neely v. Commissioner,
116 T.C. 79, 86 (2001). Fraud “does not include negligence, carelessness,
misunderstanding or unintentional understatement of income” but does include
any conduct designed to conceal, mislead, or otherwise prevent the collection of
taxes. United States v. Pechenik, 236 F.2d 844, 846 (3d Cir. 1956); see Holland v.
United States, 348 U.S. 121, 139 (1954); United States v. Murdock, 290 U.S. 389,
396 (1933); DiLeo v. Commissioner, 96 T.C. at 874.
- 31 -
[*31] The existence of fraud is a question of fact to be resolved upon
consideration of the entire record. See DiLeo v. Commissioner, 96 T.C. at 874.
Fraud will never be presumed and must be established by independent evidence of
fraudulent intent. Recklitis v. Commissioner, 91 T.C. 874, 909-910 (1988).
However, because direct proof of a taxpayer’s fraudulent intent is rarely available,
fraud may be established by circumstantial evidence and inferences drawn from
the facts. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992).
Fraudulent intent may be inferred from various kinds of circumstantial
evidence or “badges of fraud”. Bradford v. Commissioner, 796 F.2d 303, 307-308
(9th Cir. 1986), aff’g T.C. Memo. 1984-601. To this end, courts have routinely
considered whether the following badges of fraud are present: (1) a pattern of
understating income, (2) failing to maintain adequate records, (3) offering
implausible or inconsistent explanations of behavior, (4) concealing income or
assets, (5) dealing in cash, (6) providing incomplete or misleading information to
his or her tax return preparer, (7) filing false documents, including filing false
Federal income tax returns, (8) failing to file Federal income tax returns,
(9) failing to cooperate with tax authorities, and (10) engaging in and attempting
to conceal illegal activity. See id.; Niedringhaus v. Commissioner, 99 T.C. at 211.
The existence of any one factor is not dispositive but the existence of several
- 32 -
[*32] factors is persuasive circumstantial evidence of fraud. See Niedringhaus v.
Commissioner, 99 T.C. at 211; Petzoldt v. Commissioner, 92 T.C. at 700.
Numerous badges of fraud are present here. Petitioner consistently and
purposefully had Steven negotiate customers’ checks for treasurer’s checks in
amounts less than $10,000. He personally negotiated customers’ checks for
treasurer’s checks in this way as well. Additionally, when 21 treasurer’s checks
from 1998 needed to be reissued, Ms. Burlingame (the assistant branch manager of
Cape Cod Five’s Centerville, Massachusetts, location) asked petitioner whether he
would like her to issue one or two treasurer’s checks or open an interest-bearing
money market account or certificate of deposit; but he declined her suggestions.
He failed to present any plausible or believable reason for why he negotiated
customers’ checks for treasurer’s checks the way he did. On the basis of the
record before us, we find that during the years at issue petitioner was aware of
CTRs and knowingly negotiated (or had Steven negotiate) customers’ checks for
treasurer’s checks in amounts less than $10,000 to ensure that no CTRs would
need to be prepared and thereby to conceal income; this evidence is a strong
indicator of fraud for the years at issue. See Spies v. United States, 317 U.S 492,
499 (1943) (holding that fraudulent intent may be inferred when a taxpayer
handles his affairs in a manner designed “to avoid making the records usual in
- 33 -
[*33] transactions of the kind”); see also Walters v. Commissioner, T.C. Memo.
1995-543, slip op. at 25 (finding that keeping large sums of money in non-interest-
bearing instruments for a long period allowed the taxpayer to render the money
“virtually undetectable by anyone concerned”).
Petitioner dealt extensively in cash. Customers’ checks would be cashed
and then some of that cash would be used to pay wages “under the table” to
Number One Foundations’ undocumented laborers (and consequently, no Federal
employment taxes were withheld and paid on these wages). See Bradford v.
Commissioner, 796 F.2d at 307-308; Valbrun v. Commissioner, T.C. Memo. 2004-
242, slip op. at 9.
Petitioner does not dispute that he did not maintain adequate books and
records for Number One Foundations during the years at issue; and as a result RA
Guidoboni resorted to the specific item method to determine petitioner’s business
income attributable to Number One Foundations. See Truesdell v. Commissioner,
89 T.C. 1280, 1302-1303 (1987).
Petitioner hired Mr. Allen to prepare his Federal income tax returns for the
years at issue. The record shows, and we have found, that petitioner failed to
disclose the full extent of his business income attributable to Number One
Foundations for the years at issue; he provided Mr. Allen with handwritten ledger
- 34 -
[*34] sheets or a worksheet that listed in pertinent part only conclusory income
totals and did not provide him with any supporting documentation, such as Forms
1099, receipts, invoices, or bank statements. Petitioner thus provided Mr. Allen
with incomplete and misleading information. See Purvis v. Commissioner, at *42-
*43 (and cases cited thereat) (holding that a taxpayer’s failure to provide his tax
return preparer complete and accurate records may reflect a taxpayer’s intent to
conceal and deceive).
Petitioner was found guilty of “corruptly endeavor[ing] to obstruct and
impede the due administration of the internal revenue laws” in violation of section
7212(a) for the years at issue. See Duncan & Assocs. v. Commissioner, T.C.
Memo. 2003-158, slip op. at 16-17 (finding that the taxpayer’s guilty plea to one
count of violating section 7212(a) was indicative of fraud).
Respondent has proven by clear and convincing evidence that for each year
at issue petitioner had an underpayment of tax due to fraudulent intent.
Petitioner contends that he never intended to evade his tax for the years at
issue and that his underreporting was not attributable to any fraudulent acts he
committed but to the negligence of Mr. Allen. As we have already found, see
supra pp. 32-34, petitioner’s actions with respect to Number One Foundations
were indeed purposeful (and resulted in his being found guilty on one count of
- 35 -
[*35] violating section 7212(a)), and he failed to provide Mr. Allen with complete
and accurate information regarding Number One Foundations’ operations, in
particular and as relevant here, its gross receipts for the years at issue. Thus, his
contention lacks merit, and he has not proven that any specific portion of any
underpayment was not attributable to fraud. See sec. 6663(b).
We sustain respondent’s determination that petitioner is liable for the
section 6663(a) civil fraud penalties for the years at issue.
We have considered all of the arguments made by the parties and, to the
extent they are not addressed herein, we find them to be moot, irrelevant, or
without merit.
To reflect the foregoing,
An appropriate order will be issued,
and decision will be entered under Rule
155.