T.C. Memo. 2000-336

UNITED STATES TAX COURT

REBECCA WRIGHT, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

BRIAN W. WRIGHT, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 19878-98, 19879-98. Filed November 1, 2000.

Judy E. Hamilton, for petitioners.

Christine V. Olsen and Timothy F. Salel, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Chief Judge: In these consolidated cases, respondent

determined the following deficiencies: $5,656, $59,908, and

$11,208, respectively, for taxable years 1992 through 1994. 

Respondent also determined that Brian Wright (petitioner) is
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1 Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

liable for the fraud penalty, pursuant to section 6663,1 for

taxable years 1992 through 1994, in the amounts of $4,242,

$44,931, and $8,406, respectively. Alternatively, respondent

determined that petitioners are liable for an accuracy-related

penalty, pursuant to section 6662(a), for the taxable years 1992

through 1994, in the amounts of $1,131, $11,982, and $2,242,

respectively. Petitioners concede the additional income

determined by respondent in the notice of deficiency and present

only the following issues for us to address: (1) Whether

petitioner is liable for the fraud penalty pursuant to section

6663 for 1992, 1993, and 1994; and (2) if the fraud penalty is

not applicable, whether petitioners are liable for the accuracyrelated penalty pursuant to section 6662(a) for 1992, 1993, and

1994. 

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulated facts are incorporated herein by reference and are

found as facts in the instant cases. Petitioners resided in

California at the time they filed their petitions in the instant

cases.
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2 Among the classes that petitioner took were:

Year Class Hours

1988 Corporate Tax II 45

 Advanced Accounting 45

 Audit 45

 Practice 48

 Audit 48

 Theory 48

 Law 48

1991 CPA Exam: Practice I 15

 CPA Exam: Practice II 15

 CPA Exam: Theory 15

 CA State Income Tax 1

 Trust Law & Estate Planning 1

 Investment & Inheritance 1

1993 Chartered Financial Analyst I 60

Petitioners were married, and filed joint tax returns,

during 1992, 1993, and 1994. During those years, petitioner was

a certified financial planner. Petitioner earned a B.S. degree

in business administration from Regis College. After college,

petitioner took numerous accounting and tax classes.2

Petitioner was the defendant in the criminal case of United

States v. Brian Wright, Criminal Case No. 96-1670-H, in the U.S.

District Court for the Southern District of California. On March

13, 1997, after a 1-week jury trial, petitioner was found guilty

of 1 count of bank fraud in violation of 18 U.S.C. secs. 1344 and

2, 27 counts of embezzlement by a bank employee in violation of

18 U.S.C. sec. 656, 1 count of money laundering in violation of

18 U.S.C. secs. 1957 and 2, and 3 counts of filing false tax 
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returns (for the taxable years 1992, 1993, and 1994) in violation

of section 7206(1). 

Petitioner's conviction on the foregoing counts stemmed from

his involvement with trusts established for the benefit of Arleen

Millyard. During November 1978, Mrs. Millyard's husband

established a trust at Security Pacific National Bank because of

her alcoholism and lack of understanding of basic financial

issues. The trust was meant to ensure the physical and financial

well-being of Mrs. Millyard in the event of her husband's demise. 

During 1991, petitioner became a trust officer for Security

Pacific National Bank, which later merged into Bank of America. 

Petitioner was the trust officer for the Millyard trust.

Bank of America has a written policy and internal rules of

conduct that expressly prohibit its trust officers from accepting

cash or gratuities from its customers. Petitioner was provided a

copy of those rules and signed a statement acknowledging

reviewing those rules at the time of his employment. Each year,

Bank of America requires its employees to certify their awareness

of the bank's policies, including the prohibition against

receiving money from trust clients. Each year petitioner signed

a statement that he had read the bank's policies. At trial,

petitioner acknowledged that he was aware that he might lose his 
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job if the bank learned that he was taking money from a trust

client. 

Mrs. Millyard kept a checking account at Bank of America. 

When a trust client sought to remove money from a trust account,

the client would be asked to complete a "Request for Transfer"

form. Petitioner authorized numerous transfers from the trust to

Mrs. Millyard's checking account. Mrs. Millyard wrote many

checks for the benefit of petitioners, which were deposited into

their accounts. 

Petitioner knew that checks in excess of $10,000 would have

been noticed and investigated by Bank of America. Petitioner

also knew that if any of the checks were made out directly to

him, he would lose his job. Checks in amounts less than $10,000

would not appear on the bank's large item report. All of the

checks written by Mrs. Millyard for the benefit of petitioners

were under $10,000. Mrs. Millyard, on occasion, would write

several checks to petitioners over a short period of time. While

each check was less that $10,000, the total amount transferred to

petitioners over such a period was substantially more than

$10,000. On three occasions, Mrs. Millyard wrote multiple checks

on the same day, the total of which exceeded $10,000; however, 
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3 Throughout his embezzlement activity, petitioner caused Mrs.

Millyard to write numerous checks to him, to his investment and

bank accounts, and to petitioner Rebecca Wright. Most of the

checks were written to petitioners’ bank or investment accounts. 

During 1992, 1993, and 1994 petitioners received the following

amounts from Mrs. Millyard:

Date Check No. Payee Amount

10/14/92 1042 Rebecca Wright $9,000

11/3/92 1201 San Diego County CU 7,800

12/4/92 1282 San Diego County CU 2,000

12/23/92 1389 Brian Wright 1,000

1/21/93 1318 San Diego County CU 7,500

1/21/93 1319 Brian Wright 2,500

2/26/93 1356 San Diego County CU 1,000

4/5/93 1407 Charles Schwab, Inc. 8,500

4/16/93 1406 Charles Schwab, Inc. 8,500

4/24/93 1410 Charles Schwab, Inc. 7,500

4/30/93 1408 Charles Schwab, Inc. 5,500

5/5/93 1446 20th Century Fund 9,000

5/15/93 1447 Charles Schwab, Inc. 9,000

5/18/93 1450 20th Century Fund 8,500

5/28/93 1451 Charles Schwab, Inc. 8,500

5/28/93 1452 20th Century Fund 8,500

6/9/93 1454 Charles Schwab, Inc. 8,500

7/3/93 1499 20th Century Fund 8,500

7/6/93 1495 Rohr Credit Union 9,500

7/26/93 1497 Rohr Credit Union 8,500

8/2/93 1564 San Diego County CU 8,500

9/12/93 1565 San Diego County CU 7,500

9/27/93 1498 Charles Schwab, Inc. 8,500

9/30/93 1487 Charles Schwab, Inc. 8,500

9/30/93 1599 San Diego County CU 1,000

11/10/93 1486 Charles Schwab, Inc. 8,500

12/10/93 1655 San Diego County CU 7,500

3/12/94 1337 Rebecca Wright 9,500

3/26/94 1738 Rebecca Wright 8,500

4/15/94 1716 Rebecca Wright 200

6/14/94 1739 Brian Wright 9,500

7/19/94 1740 Brian Wright 8,500

(continued...)

each individual check was in an amount below the detection

threshold of $10,000.3
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(...continued)

8/4/94 1765 Rebecca Wright 1,000

9/21/94 1996 Rebecca Wright 1,000

Each year, Bank of America conducted a review of its trust

accounts. Petitioner prepared the reports for Mrs. Millyard's

trust accounts. One item on the report is the total amount

withdrawn or distributed from the trust during a given year. On

the report for the period April 1993 through April 1994,

petitioner falsely reported the amount transferred from Mrs.

Millyard's trust. During the period April 1993 through April

1994, Mrs. Millyard withdrew substantial amounts from her trusts,

e.g., $23,500 on May 5, 1993, $35,000 on July 1, 1993, $10,000 on

November 10, 1993, and $23,500 on February 2, 1994. Petitioner

reported that Mrs. Millyard withdrew only $23,500 from the trust. 

Bank of America would have been concerned had it seen that

approximately $100,000 had been taken from the trust. Another

item on the annual trust report inquired whether the trust

officer faced any potential conflict of interest or legal

noncompliance. Petitioner wrote "non-applicable" on the report,

but he knew that accepting money from Mrs. Millyard presented a

potential conflict of interest. 

Petitioner knowingly engaged in a scheme to obtain money

from a federally insured bank by making false statements or
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promises. Petitioner embezzled funds of the bank and acted with

intent to injure or defraud the bank. Petitioner engaged in 

monetary transactions using money he knew was obtained through

criminal activity. Petitioner's 1992, 1993, and 1994 tax returns

were false as to a material matter. Petitioner did not believe

his tax returns for 1992, 1993, and 1994 to be true and correct

as to every material matter and willfully subscribed to the false

returns with the intent to violate the law. Petitioner knew that

the funds he embezzled were not gifts. 

Petitioner Rebecca Wright prepared petitioners' Federal

income tax return for 1992. She made no inquiry into whether the

funds received from Mrs. Millyard were taxable income. On their

income tax return for 1992, petitioners reported adjusted gross

income of $67,927.95. For 1992, petitioners' actual adjusted

gross income was $87,727.95. For 1992, petitioners omitted

embezzlement income of $19,800. For the years 1993 and 1994,

petitioners' returns were prepared by Carolyn Witt, C.P.A. On

their 1993 Federal income tax return, petitioners reported

adjusted gross income of $97,984. For 1993, petitioners' actual

adjusted gross income was $267,484. For 1993, petitioners

omitted embezzlement income of $169,500. On their Federal income

tax return for 1994, petitioners reported adjusted gross income

of $97,984. For 1994, petitioners' actual adjusted gross income
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was $136,184. Petitioners omitted embezzlement income of $38,200

from their 1994 return. Petitioners did not inform Ms. Witt

about any of the embezzlement income.

OPINION

We must decide whether petitioner is liable for the fraud

penalty pursuant to section 6663 for taxable years 1992, 1993,

and 1994. Section 6663 provides:

SEC. 6663. IMPOSITION OF FRAUD PENALTY.

(a) Imposition of Penalty.--If 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.

(b) Determination of Portion Attributable to

Fraud.--If the Secretary establishes that any portion

of an underpayment is attributable to fraud, the entire

underpayment shall be treated as attributable to fraud,

except with respect to any portion of the underpayment

which the taxpayer establishes (by a preponderance of

the evidence) is not attributable to fraud.

(c) Special Rule for Joint Returns.--In the case

of joint return, this section shall not apply with

respect to a spouse unless some part of the

underpayment is due to fraud of such spouse.

The burden of proof in respect of the issue of fraud must be

carried by the Commissioner by clear and convincing evidence. 

See sec. 7454(a); Rule 142(b). To establish the existence of

fraud, respondent must prove by clear and convincing evidence

that petitioner underpaid his income tax and that some part of
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the underpayment was due to fraud. See Clayton v. Commissioner,

102 T.C. 632, 646 (1994); Recklitis v. Commissioner, 91 T.C. 874,

909 (1988). 

Fraud is established by proving that a taxpayer intended to

evade tax believed to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of such tax. The

Commissioner need not establish that tax evasion was a primary

motive of the taxpayer but may satisfy the burden by showing that

a tax-evasion motive played any part in the taxpayer's conduct,

including conduct designed to conceal another crime. See Clayton

v. Commissioner, supra at 647; Recklitis v. Commissioner, supra

at 909. 

Fraudulent intent may be established by circumstantial

evidence and reasonable inferences drawn from the record. See

Clayton v. Commissioner, supra at 647. In Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601, the U.S. Court of Appeals for the Ninth Circuit

articulated a nonexclusive list of factors which demonstrate

fraudulent intent. These "badges of fraud" include: (1)

Understating income; (2) maintaining inadequate records; (3)

failing to file tax returns; (4) giving implausible or

inconsistent explanations of behavior; (5) concealing assets; (6)

failing to cooperate with tax authorities; (7) engaging in
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illegal activities; (8) attempting to conceal illegal activities;

(9) dealing in cash; and (10) failing to make estimated tax

payments. While no single factor is necessarily sufficient to

establish fraud, the existence of several indicia constitutes

persuasive circumstantial evidence. See Bradford v.

Commissioner, supra at 303. 

Many of the foregoing badges of fraud are present. 

Petitioner's substantial understatement of income tax from the

omission of the embezzlement income in 1992, 1993, and 1994 is a

badge of fraud. As conclusively established in the criminal

case, petitioner knew that the funds he received from Mrs.

Millyard were not gifts. Petitioners have stipulated that

petitioner received embezzlement income. Moreover, petitioners

stipulated that they did not report this embezzlement income on

their tax returns. Petitioner understated his income in the

years in issue by 36 percent, 24 percent, and 60 percent,

respectively. Such a pattern of substantial discrepancies

between petitioner's actual income and reported income

constitutes evidence of intent to defraud. See Kohrs v.

Commissioner, T.C. Memo. 1985-115. 

Failure to keep records is another badge of fraud. See

Truesdell v. Commissioner, 89 T.C. 1280, 1302 (1987). Petitioner

did not keep any records of the amounts he embezzled. 
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The illegal nature of petitioner's activities and his

concealment of these illegal activities are additional badges of

fraud. See United States v. Palmer, 809 F.2d 1504, 1505-1506

(11th Cir. 1987); Davis v. Commissioner, T.C. Memo. 1991-333

(embezzler who issued checks for less than $10,000 in order to

avoid detection liable for fraud penalty). Petitioner went to

great lengths to conceal his embezzlement activities. In order

to hide his theft, petitioner caused Mrs. Millyard to write

checks to accounts controlled by him or his wife in amounts less

than $10,000. On three occasions he caused Mrs. Millyard to

write on 1 day several checks for his benefit that totaled over

$10,000. During the period April 1993 through April 1994, Mrs.

Millyard withdrew substantial amounts from her trust. On the

report to the bank, petitioner reported that Mrs. Millyard

withdrew merely $23,500 from the trust. The bank would have been

concerned had it seen that approximately $100,000 had been taken

from the trust. By incorrectly reporting the amounts withdrawn

from the trust, petitioner attempted to conceal his embezzlement

activities. 

Petitioner's receipt of embezzlement income by defrauding an

elderly client of her funds was the underpinning of virtually

every count in the indictment against him, including bank fraud,

money laundering, embezzlement, and the filing of false income
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tax returns. There is no question that petitioner sought to

conceal his receipt of Mrs. Millyard's money because of the

illegal nature of his activities. He knew that the receipt of

the funds violated numerous banking and criminal provisions. The

likelihood that petitioner also had the intent to conceal his

illegal activities to avoid being charged with the nontax crimes

does not negate his intent to evade tax. See Clayton v.

Commissioner, supra at 647-648 (Commissioner need not establish

that tax evasion was the primary motive; it is enough to

demonstrate that tax evasion played a role in the taxpayer's

conduct). 

The fact that petitioner concealed his receipt of the funds

from illegal activities from his accountant and return preparer,

Ms. Witt, is relevant to the issue of fraud. See Duffey v.

Commissioner, 91 T.C. 81 (1988); Langworthy v. Commissioner, T.C.

Memo. 1998-218 (taxpayer's failure to be forthcoming with his

return preparer was evidence of fraud). A taxpayer who relies on

others to keep his records and prepare his tax returns may not

withhold information from those persons relative to taxable

events and then escape criminal responsibility for the resulting

false returns. See United States v. O'Keefe, 825 F.2d 314, 318

(11th Cir. 1987); United States v. Garavaglia, 566 F.2d 1056 (6th

Cir. 1977). In preparing petitioners' income tax returns for
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1993 and 1994, Ms. Witt relied on the information provided by

petitioners to prepare those returns.

The sophistication, education, and intelligence of the

taxpayer are relevant considerations in determining whether a

taxpayer has fraudulent intent. See Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992); Stephenson v.

Commissioner, 79 T.C. 995, 1005-1006 (1982), affd. 748 F.2d

331(6th Cir. 1984); Iley v. Commissioner, 19 T.C. 631, 635

(1952). Petitioner was a bank trust officer with a background in

accounting. As a bank trust officer with a degree in business

administration as well as extensive training in accounting,

petitioner was "not a person who could fail to understand what

the law requires for him under the circumstances." Halle v.

Commissioner, 7 T.C. 245, 250 (1946), affd. 175 F.2d 500 (2d Cir.

1949). Given petitioner's education and work experience, "it

asks too much" for the Court to "believe that petitioner had no

idea his embezzlement income was taxable." Myers v.

Commissioner, T.C. Memo. 1980-262 (bank trust officer must have

known embezzled funds were taxable income). Petitioner had the

sophistication to know that he was required to report the funds

he received from Mrs. Millyard on his return.

Petitioner's criminal convictions raise a strong inference

that petitioner possessed the willfulness necessary to satisfy
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4 See Wilson v. Commissioner, T.C. Memo. 1994-454 (declaring

that convictions under sec. 7206 are highly persuasive evidence

of intent to evade taxes); Estate of Sawczak v. Commissioner,

T.C. Memo. 1993-210 (same). 

the intent element. See Wilson v. Commissioner, T.C. Memo. 1994-

454. Indeed, in McGee v. Commissioner, 61 T.C. 249, 260 (1973),

affd. 519 F.2d 1121 (5th Cir. 1975), we stated:

it is a fair inference that a man who will

misappropriate another's funds to his own use through

misrepresentation and concealment will not hesitate to

misrepresent and conceal his receipt of those same

funds from the Government with the intent to evade tax.

Petitioner was convicted of embezzlement in violation of 18

U.S.C. sec. 656, money laundering in violation of 18 U.S.C. sec.

1957, and filing false returns for the years 1992 through 1994 in

violation of section 7206(1).4 Convictions for such crimes are

highly probative of petitioner’s intent to evade taxes because

the activities involve perjury, deceit, breach of fiduciary duty,

and concealment of criminal proceeds. See Williams v.

Commissioner, T.C. Memo. 1992-153. On the basis of the

foregoing, we sustain respondent's determination of the fraud

penalty against petitioner for each year in issue. Consistent

with our holding on this point, we need not consider respondent's

alternative determination that petitioners are liable for

accuracy-related penalties for the years in issue.
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To reflect the foregoing,

Decisions will be entered

pursuant to Rule 155.