T.C. M em o . 2 0 1 8 -2 1 2

UNITED STATES TAX COURT

RICHARD C. M ATHEW S, Pet it i on er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 4 6 7 3 -1 4 , 2 9 39 -1 5
. Fi l edDecem b er 2 6 , 2 01 8
.

Ri ch ardC. M at h ews , p ro s e. W i l l i am F. Cas t o r an dH. El i zab et h H. Do wn s , fo r res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION VASQUEZ, Ju d ge: In th es e co n s ol i d at edcas es , res p o n d en t d et erm in ed d efi ci en ci es an ds ect i o n 6 6 63 ci v i l frau d p en al t i es fo r t ax y ears 2 0 07 an d2 0 0 8 as fo l l o w s :- 2
-

Year Defi ci en cy Ci v il frau dp en al ty 1 s ec. 6 6 6 3 2 0 0 7 $ 6 ,5 5 6 $ 4 ,9 17 .0 0 2 0 0 8 1 6 ,4 05 1 2 ,3 03 .7 5

1 Inth e d efi ci en cy

n o t i ces res p o n d en tal so d et erm i n edthat p et i t i o n er i s l i ab l e fo r s ec. 6 6 6 2 (a) accu racy -rel at edp en al t i es “ i f i ti s d et erm i nedthatan y

p o rt i o n o f t h e u n d erp aym en to f t ax i s n o tdu e t o frau d ”. Th e i s s u e fo r d eci s io n i s wh et h er p et i t i o ner, frau du l en t l y an dwi th th e i n t en t t o ev ad e t ax , o m i tt edi nco m e fro m h i s 2 00 7 an d2 00 8 Fed eral i n co m e t ax retu rn s . Al l s ect i on referen ces are t o th e In t ern al Rev en ue Co de i n effect fo r t h e y ears i n i s su e, an dRu l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re. FINDINGS OF FACT So m e o f t h e fact s h av e b een d eem eds t i p u l at edu n d er Ru l e 9 1 (f) an dare s o fo u n d. W e i n co rp o rat e t h e s t i pu l at i o n o f fact s an dth e at t ach edex h i b i t s b y th i s referen ce. Pet i t io n er res i d edi n Ark an sas wh en th e p et it i o n s i n th es e cas es were fi led
. Pet i t io n er’ s Back g ro un d Pet i t i o ner d ro p p edo u t o f h ig h s ch oo l aft er co m p l et in g th e 1 0t h g rad e. He th en jo i n edth e U.S. Arm y an dd i s co v eredh e h ada kn ackfo r co m p ut ers . Us i n g [* 2 ]- 3
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[* 3 ] h i s co m

p u t er s k i l ls , p et it i on er h el p ed co ndu ct el ect ro n i c s u rv ei l l an ce fo r a
m i l i taryu n i tu n t i l h e was h o n o rab l y d i sch arg edi n 1 9 77
. Pet i t io n er’ s M u lt i lev el M ark et i n g Bu s in es s In th e l at e 1 9 8 0s o r earl y 1 9 9 0 s p et i t i o n er b eg an p art i ci p at i n g i n m u l t i l ev el
m ark et i n g , a s al es s trat eg y i n wh i ch d is tri bu t o rs recru i ts eco n daryd i s tri b ut o rs t o
s el l p ro du ct s . See Si g n atu re M g m t . Team , LLC v . Do e, 8 7 6 F.3 d8 3 1, 8 3 4 n .1 (6 th Ci r. 2 0 1 7 ). Di s tri b u t ors earn m o n ey fro m d i rect s al es t o cu s t o m ers ; th ey al s o recei v e rev en u e fro m

s al es m ad e b y th e s eco n d ary d i st ri b u t o rs . Id . Do i n g b u s i n es s as M at h ews M ul t i -Sal es , p et i t i o n er p art i ci p at edi n n u m ero us m u l t i l ev el
m ark et i n g v en tu res o v er t he y ears , s el l i n g co ffee, v i t am i ns , an do th er p h y s i cal p ro duct s . Pet i t i o ner ev en tu al l y s hi ft edh i s m u l ti l ev el m ark et i n g act iv i ty t o th e i n t ern et
. Do i ng b u s i n es s as M ath ews M u l t i -Serv i ce o u to f h i s h o m e, p et it i o n er o p erat ed
s ev eral i nt ern et -b as ed , m u l t i lev el m ark et i n g p ro g ram s i n cl u d i n g W eal th Team In t ern at io n al As s oci at i o n (W TIA), Fo rtu n e 5 M in u t es , Gl adCl ub , $ 2 0 M i racl e,
an d It ’ s No M i racl e (co l lect i v el y , M u l t i -Serv i ce p ro g ram s ). Un der m o s to f t h e M u l t i-Serv i ce p ro g ram s , p eo p l e wo u l djo i n wi th the i nt en t i o n o f recru it i n g n ew
m em b ers . If th ey were s u cces s fu l , they wo u l drecei ve a p ercen t ag e o f t h e
m em b ers h i p fees p ai d b y

th ei r recru i t s an dth e recru i t s o f th ei r recru i t s (an ds o- 4
-

[* 4 ] o n ). 1 Fo r ex am

p l e, W T IA h ada m em

b ers h i p fee o f $ 9 9 . Of th at$ 9 9 , p et i t i o n er was req u iredt o “p ay o u t ” $ 9 0 t o t h e m em

ber-recru i t ers . Pet i t i o ner creat ed acco u n t s wi th s ev eral o nl i n e p aym en ts y st em s t o recei v e
m em b ers h i p fees . Th es e o n l i n e p aym en ts y s t em s i n cl u dedPay p al , St o rm

Pay , Safep ay So l u t i o ns , E-Bu l li o n , E-Go l d , an dIn t ern etGo l d
. Aft er recei v i ng th e m em

b ers h i p fees i n th e o n l i ne p aym en ts y s t em s , p et i t i o n er rem i t tedp ort io ns o f t h e fees t o t h e m em b er-recru i t ers wh o were o wed
co m m i s s io n s. Pet i t i o n er th en m o v eds o m e o f t h e rem ai n i n g fu nd s t o a jo i n t ch eck i n g acco un th e h el d wi th h i s fo rm er wi fe, Do n n a M at h ews (M rs . M at h ews ). 2 He g en eral l y d i ds o b y

d ep os i t i n g ch eck s fro m

th e o n li n e p aym en ts y s t em s . Fo r at l eas t on e o f th e o n l i n e p aym en ts y s t em s , p et i ti o n er al so m o v edfu n d s t o h i s b an k
acco u n t s v i a d i rect d ep o si t
. Pet i t i o ner wan t ed t o es t ab l i s h an i nt ern at io n al b us i n es s p res en ce fo r t h e M u l t i-Serv i ce p ro g ram s . He b el i ev edth atb ei n g h ead qu art eredi n t h e Un i ted St at es wo u l dl i m i t h i s ab i li ty t o d o b u s i n es s wo rl dwi de. Un s u re h o w t o o p erat e

1 M em b ers wh o jo i n edth e M u l t i -Serv ice p ro gram s i n i t i al l y recei v ed s o ft ware, b u ti ti s u n cl ear wh atfu n ct i o n th e s o ftware s erv ed . Res p o nd en t h as n o t al l eg edth atthe M u l t i -Serv ice p ro g ram s v i ol at edFed eral o r St at e l aw.

2 Pet i t i o n er an dM rs . M at h ews d i vo rcedo n a d at e n o tes t ab l i s hedb y th e reco rd
.- 5
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[* 5 ] i n t ern at i o n al ly , p et i t i o ner t u rn edt o th e i n t ern et . Hi s o n l i n e res earch
ev en tu al l y

l edh i m t o a Pan am an i an en t i ty

wh os e rep res en t at i v es ad v i s edh i m t o
es t ab l i s h a t ru s ti n Bel ize. Pet i t i o n er b el i ev edthatth e es t ab l i s h m en to f a t ru s ti n Bel i ze wo u l dal l o w h i m

t o d o b u s i n es s an ywh ere. Acco rd i ng l y , i n Sep t em

b er 2 0 0 0 p et it i on er p ai da fee an ds i g n eda t ru s t i n s tru m en t es t ab l i s h i n g th e Cen tu ri o n Tru st . Th e t ru s ti n s tru m en td es i g n at edFi rs t Paci fi c Tru s t Serv i ces , Lt d ., as th e t ru s t ee an d M at h ews M ul t i -Serv ice, p et i t i o n er, M rs . M at h ews , an dth ei r ch il dren as b en efi ci ari es . 3 Pet i ti o n er n ev er fu n d edth e Cen tu ri o n Tru st . No r d i dh e h av e t h e n eces s ary edu cat i o n , ex p eri en ce, o r acu m en t o u n d ers t an dh o w, i f atal l , the ex i s ten ce o f th e Cen turi o n Tru st co u l daffect h i s Fed eral i nco m e t ax l i ab i l i ty . Pet i t i o n er h as n ev er v is it edBel i ze an dd o es n o th av e
an o ffi ce t h ere.

3 Parag rap h 1 8 o f t h e d eem eds t ip u l at i o n o f fact s s t at es : “ Pet i t i o n er i n s i s t ed [du ri ng res p o n den t ’ s ci v i l ex am i n at i o n o f h i s 2 0 05 retu rn ] th ato n e o f h i s b u s i n es s es was actu al l y th e b en efi ci ary o f a t ru s t i n Bel i ze, wh en i n factth e t ru e b en efi ci ari es o f t he t ru s t were rel at i ves o f p et i t i o n er.” Ho wev er, t he t ru s t d o cu m en tat t ach edt o th e s ti p u l at i o n s t at es th atM at h ews M u l t i -Serv i ce was th e tru s tb en efi ci ary

“ s o l o n g as h e/ s h e [s i c] l i v es ”, aft er wh i ch t im e p et i t i o ner an dh i s fam i l y wo u l db eco m e b en efi ci ari es . Un d er Ru l e 9 1 (e), t h e Co u rtm ay rel i ev e p art i es o f a s t i p u l at i o n i f ju st i ce s o req u i res . W e wi l l rel i ev e p et i t io n er o f s t ip u l at edp arag rap h 1 8 b ecau s e i t i s co n traryt o th e reco rd . See Cal -M ai n e Fo o d s , In c. v . Co m

m is s io n er, 9 3 T.C. 1 8 1 , 1 95 (1 9 8 9).- 6
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[* 6 ] Pet i t i o n er’ s Tax Retu rn s (2 0 0 4, 2 0 05 , an d2 0 0 6) Us i n g t ax p rep arat i on s o ft ware, p et i t i o n er p rep ared h i s an dM rs . M at h ews ’ jo i n t Fed eral i nco m e t ax retu rn s fo r t ax y ears 2 0 0 4 , 2 0 0 5, an d2 00 6 . Al th o u g h h e d o es no th av e b o o kk eep i n g , acco u n t i ng , o r t ax at i o n ex p eri en ce, p et i t io n er t h o u g h t h e co ul d“ [ju s t] b u y

th e s o ft ware, fi l l i n th e b lan k s , an d fi l e * * * [h i s] t ax es .” Fo r 2 0 0 4 , 2 0 0 5 , an d 2 0 0 6, M rs . M at h ews recei v edFo rm s W -2 , W ag e an dTax St at em en t , fro m

h er em p l o y er. Pet i t i o n er recei v edFo rm s 1 0 9 9 -M ISC, M i s cel lan eo u s In co m e, wh i ch rep o rt edco m m is s i o n s p et i t i o n er h adearn eds el l i n g p h y s i cal p ro du ct s as M at h ews M u lt i -Sal es . Onth ei r 2 0 0 4 ret u rn , p et i t i o n er an dM rs . M at h ews rep o rt edM rs . M ath ews ’ wag e i n co m e. Th e 2 0 0 4 retu rn al s o i n cl u d eda Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i nes s, fo r p et i t i o n er refl ect i n g th e p ri n ci p al b u s i n es s as “ n et wo rk i n g ” an dth e b u s i n es s n am e as “ M at h ews M u l t i Sal es ”. Th e 2 0 0 4 Sch edu l e C rep o rt edg ro s s recei p t s o f $ 3 , 56 0 , co sto f g o o d s s o l d(COGS) o f $ 9 0 0 , g ro s s p ro fi t o f $ 2,6 6 0 , n o
ex p en s es , an dn et p ro fi to f $ 2,6 6 0 . To cal cu l at e h i s g ro s s recei p t s , p et i t i o n er u s ed th e am o un t s l i s t edo n Fo rm s 1 0 9 9 -M ISC h e h adrecei v ed
. Pet i t i o ner an d M rs . M at h ews rep o rt edM rs . M at h ews ’ wag e i nco m e o n thei r 2 0 0 5 retu rn . Th e ret u rnal s o i n cl u d eda Sch edu l e C-EZ, NetPro fi tFro m Bu s i n es s , fo r p et i t i o n er refl ect i n g t h e p ri n ci p al b u s i n es s as “ net wo rk in g ” an dthe b u s i n es s- 7
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[* 7 ] n am e as “ Mat h ews M u l t i Serv i ce”. Th e 2 0 0 5 Sch edu l e C-EZ rep o rt edg ro s s recei p t s o f $ 3 , 31 8 , n o ex p en ses , an dn et p ro fi to f $ 3 ,3 1 8. To cal cu lat e h i s g ro s s recei p t s, p et i ti o n er u sed th e am o u n t s l i s t edo n Fo rm s 1 0 9 9 -M ISC h e h adrecei v ed
. 4 Onth ei r 2 0 0 6 ret u rn , p et i t i o n er an dM rs . M at h ews rep o rt edM rs . M ath ews ’ wag e i n co m e. Th e 2 0 0 6 retu rn d i dn o ti n cl ud e a Sch edu l e C fo r p et i t i o n er an dd i d
n o trep o rtb u si n es s i nco m e o r l o s s es fo r ei th er M at h ews M u l t i -Sal es o r M at h ews M u l t i-Serv i ce. Pet i t i o ner b el i ev edth at9 0 % o f t h e fu n d s h e recei v edthro u g h th e M u l t i

Serv i ce p ro g ram s b el o n gedt o t h e o th er m em b er-recru it ers . Pet it i on er al s o b el i ev edth ath e h add edu ct i b l e ex pen s es wi th res p ect t o t h e M u l t i -Serv i ce p ro g ram s . Onthe b as i s o f t h es e b el iefs , p et i t i o n er d i dn o t rep o rtan y i n co m e fro m th e M u l t i -Serv i ce p ro g ram s o n h i s 2 0 0 4 , 2 00 5 , an d2 0 0 6 retu rn s . Ci v il Ex am i n at i on In Oct o b er 2 0 07 res p o n d en ts el ect edp et i t i o ner’ s 2 0 0 5 retu rn fo r
ex am i n at i o n . Rev en u e Ag en t(RA) Th u rm an Crawfo rdwas as s i g n edt o

4 Becau s e p et it i o n er h adearn ed th e rep o rt edg ro s s recei p t s as M at hews M u l t i-Sal es , i t ap p ears th atth e referen ce t o M at h ews M u l t i-Serv ice o n t h e 2 0 0 5 Sch edu l e C was i n erro r. Res po n d en th as n o tal l eg ed th atp et i ti o n er’ s referen ce t o M at hews M u l t i -Serv i ce was i n t en d edt o co n fu s e t h e In t ern al Rev en u e Serv i ce (IRS) o r t h warta g o v ern m en tal i n ves t i g at i o n . Cf. Yuv . Co m m i s s i o ner, T.C. M em o. 1 9 7 3 -1 8 8 (h o l d i n g t h atth e u s e o f an al i as i n co n du ct i n g b u s i n es s affai rs i n o rd er t o th w arta g o v ern m en t al i n v es t i g at i o n i s ev i d en ce o f frau d).- 8
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[* 8 ] p et i t i o n er’ s ex am i n at i on . Befo re h i s i n it ial m eet i n g wi th p et i t i o n er, RA Crawfo rdv i s i t edW TIA’ s web si t e. 5 A few th i n g s cau g h t h i s ey e. Fo r o n e, t he web s i t e d es cri b edW TIA as a co m p en s at i o n p ro g ram . Seco n d , th e “ A s s o ci at e Term s & Co n di t i o ns ” p ag e s t at ed th atth e ag reem en t was g o v ern ed
u n d er t h e l aws o f Bel i ze. On the b as is o f t h es e d i s co v eri es , RA Crawfo rdb eg an t o
s u s p ectth atW TIA was : (1 ) a s o u rce o f i n co m e t o p et i t i o n er an d(2 ) an o ffs h o re b u s i n es s d es i g nedt o s hi el dp et i t i o n er’ s i n co m e fro m Fed eral t ax at i o n . OnNo vem

b er 2 9, 2 0 0 7 , RA Crawfo rdm etwi th p et i t i o n er ath i s h o m e. Ov er t h e n ex ttwo d ay s , RA Crawfo rdi n t erv i ewedp et it i on er, wh o ad m it tedth at h i s t ax es were a “ m es s ”. RA Crawfo rdas k edp et i t i on er ab o utthe n atu re o f M at hews M u l t i -Serv i ce, wh i ch p et i t i o n er h adrep o rt edas th e b u si n es s n am e o n h i s 2 0 0 5 Sch edu l e C. Pet i t i o n er s t at edth atth e referen ce t o M at h ews M u lt i -Serv i ce
was a m i st ak e, t h ath e h adreal l y m ean t h i s o th er b u s i n es s , M at h ews M u l t i-Sal es , an d th atth e i n co m e rep o rt edo n th e Sch edul e C rel at ed t o h i s co ffee s al es . Pet i t io n er d es cri b edM at h ews M u l t i-Serv ice as an o n l i n e n et wo rk -m ark et i ng b u s i n es s fo r wh i ch h e wro t e m ark et i n g m at eri al . Pet i ti o n er s t at edth ath e recei ved
n o i n co m e fro m M at hews M u l t i -Serv i ce, t h ati twas a b en efi ci ary o f a Bel i ze Tru s t , an dth at“ al l t ax es were h an d l edi n Bel i ze.”

5 W T IA was the m o stp ro m i n en to f t h e M ul t i-Serv ice p ro g ram s.- 9
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[* 9 ] In res p o n s e t o a qu es t i o n ab o u tW TIA, p et i t i o ner s tat edth atth e p ro g ram
was p arto f M at hews M u l t i -Serv i ce. Pet i t i o n er al s o s t at ed th atW TIA u s edPay Pal , In t ern et G o l d, an dSt o rm Pay i n 2 0 05 an dth ath e h ad s ol e acces s t o th es e o n l i n e p aym en t acco u n t s . Pet i t i o n er ad m i t t edth ath e u s eds o m e o f th e fu n d s i n the
o n l i n e p aym en tacco un t s fo r p ers o n al o r “ ot h er” ex p en s es . He al s o s tat edth ath e
co u ldn o trecal l wh et h er fu n d s were t ran s ferred fro m th e Pay pal acco u ntt o b an k
acco u n t s b u t th ath e n ev er p ro vi d edp ers o n al b an k i n fo rm at i o n t o Pay p al
. In an i n fo rm at i o n d o cu m en treq u es ti s s u edt o p et i t i o n er b efo re t h e i n t erv i ew, RA Crawfo rdh adreq u es t edal l b an k s t at em en t s , d eb itan dcred i t
m em o ran d a, an dcan cel edch eck s fo r al l p ers on al an db u si n es s acco un t s fro m Decem b er 1 , 2 0 0 4, thro ug h J an u ary 3 1 , 2 0 0 6 . Onth e fi rs td ay o f t he i n t erv i ew, p et i t i o n er o ffered RA Crawfo rdacces s t o h is o n l i n e b an k in g acco u nt s . RA Crawfo rdd ecl i n ed
. Th e fo l l owi n g d ay p et it i on er p ro v id edRA Crawfo rd wi th p ap er s t at em en t s fo r a jo i n tacco u ntatFi rs t Secu ri ty Ban k, acco u n t n u m

b er en d in g 6 9 6 1 (FSB 6 9 61 acco u n t ). RA Crawfo rd sch edu l ed a t h i rdm eet i n g wi th p et i t i o n er fo r J an u ary 7 , 2 0 0 8
. Befo re t h e m eet i n g , RA Crawfo rdrev i ewed p et it i on er’ s Pay p al acco u n t reco rd s , wh i ch referen cedan acco u n t atFi rs tCo m m u n it y Ban k , acco u n tn u m

ber en d i n g 7 1 8 6 (FCB 7 1 8 6 acco un t ). At th e J an u ary 7 , 2 0 0 8, m eet i n g , RA Crawfo rdas k ed- 1 0 -

[* 1 0 ] p et i t i o n er ab o u t th i s acco u n t . Pet i t i o ner t o l dRA Crawfo rdth at Fi rs t Co m m u n i ty Ban k h ad b eco m e Fi rs tSecu ri ty Ban k , wh ere h e m ai n t ai n edh i s jo in t
acco u n t w i th M rs . M at h ews . Pet i ti o n er d i dn o ti m m ed iat el y i d en t ify th e FCB 7 1 8 6 acco u n tas h i s an d s t at ed th ath e d i dn o tg i ve o n l i ne p aym en ts y s t em s h i s p ers o n al b an k acco un ti nfo rm at i o n . Lat er t hataft ern o o n , p et i t i o n er cal l edRA Crawfo rdan ds t at ed th ath e h ads p o k en wi th a Fi rs tSecu ri ty Ban krep res en t at i v e
an d n o w rem em

bered th atth e FCB 7 1 8 6 acco u n twas a cl o s edM at h ews M u l t i

Serv i ce b an kacco u n t . RA Crawfo rdb el iev edth atp et i t i o n er h add el i b erat el y
co n ceal edth e acco u n t . He i n fo rm edp et i t i o n er t h at th e ex am i nat i o n wo u l d b e
ex p an d edt o t ax y ear 2 0 06
. So m et i m e t h ereaft er, p et i t i o n er as k edt o reco rdal l fu tu re m eet i n g s wi th RA Crawfo rd . RA Crawfo rdco u n t eredwi th an o ffer t o red o an dreco rdth e i n i t i al i n t erv i ew atth e l o cal IRS o ffi ce; p et i ti o ner accep ted . OnFeb ru ary 2 2 , 2 0 0 8 , RA Crawfo rdi n t erv iewedp et i t i o n er, as k i n g the s am e qu es ti o n s as i n th e i n i t ial i n t erv i ew. Pet i t i o n er p ro v i d edm an y o f t h e s am e an s w ers du ri ng th e s eco n d i n t erv i ew as th e fi rs ti n t erv i ew. Ho wev er, h e p ro v i d edd i fferen td et ai l s ab ou th i s
ro l e wi th W T IA. RA Crawfo rd al s o as k edp et i t i o n er ad d i t i o n al qu es t io n s ab ou tth e Cen tu ri o n Tru s t . Pet i t i on er s t at edth ath e l earn edab o utfo rei g n tru s t s fro m the IRS, t he- 1 1 -

[* 1 1 ] i n t ern et , l aw fi rm s , an d o ffs h o re b u si n es s es . Pet i t i o n er, h o w ev er, d i d n o t i d en t i fy wh o atth e IRS h adt o ldh i m ab o u tfo rei g n t ru s t s . He al s o d i dn o ti d en t i fy th e l aw fi rm th atp urp o rt ed ly creat edth e tru st . Aft er t h e i n t erv i ew, RA Crawfo rd
n o t i cedth atthe “ As s o ci at e Term s & Co n d i t i o n s ” o n th e W TIA web s i t e h adb een al t ered t o refl ectth at W T IA was a s ub si d i ary o f t h e Cen tu ri o n Tru s t. In J u l y 2 0 0 8 RA Crawfo rdex p an d edth e ex am i n at i o n t o t ax y ears 2 0 0 3 an d 2 0 0 4 an ds ch edul edan o th er m eet i n g wi th p et i ti o n er fo r earl y Sep t em b er. RA Crawfo rdth en m et wi th a frau d t ech n i cal ad v i s er atth e IRS. Aft er t h i s m eet i n g , RA Crawfo rd referred p et i t i o n er’ s cas e t o res p o n d en t ’ s Cri m in al In v es ti g at i o n Di v is i o n (CID). Sev eral d ay s l at er p et i t i o n er l efta m es s ag e fo r RA Crawfo rd
as k i n g wh et her “ th e 2 0 0 5 y ear am o u n ti n d i sp u te was d o wn t o zero ”. Ina retu rn p h o n e cal l t o p et i ti o n er, RA Crawfo rdcan cel edthe Sep t em b er m eet i ng . 2 0 0 7 Retu rn Pet i t i o ner p rep aredh i s 2 0 0 7 retu rn an d fi l edi to n Oct o b er 1 5 , 2 0 0 8 . Ina b reakwi th p as tp ract i ce, p et i t i o n er an dM rs . M at hews fi l eds ep arat e ret u rn s . Pet i t io n er’ s retu rn i n cl ud eda Sch edu l e C fo r “ Cen turi o n Tru s t/ M at h ews M u l t i

Serv i ce” wi th a p ri n ci pal b us i n es s o f “ O n l i n e Ad m i n / Faci l i tat i on / Co n su l t at i o n ”. Th e 2 00 7 Sch edu l e C rep o rt edg ro s s recei p t s o f $ 5 ,3 2 3 , d ep reci at io n o f $ 1 ,6 1 1 , an d n etp ro fi t o f $ 3 , 7 1 2
.- 1 2 -

[* 1 2 ] CID’ s In i t i al Res earch an dSearch W arran t In No v em

b er 2 0 0 8 CID accep t edRA Crawfo rd ’ s referral . Sp eci al Ag en t (SA) Eri ca W i l l i am s was as s ig n ed as th e l eads p eci al ag en tfo r CID’ s cri m in al i n v es t i g at i o n o f p et i t io n er. Th ro u gh i n t ern etres earch an dan u n derco v er
o p erat i o n , SA W il l iam s co n fi rm edthatp et i ti o n er was the o wn er o f M at h ews M u l t i-Serv i ce an dth at h e recei v edi n co m e fro m th e M u l t i -Serv i ce p ro g ram s . SA W i ll i am s fo u n d i ts i g n ifi can tth ato n e o f t h e p ro g ram web s i t es h ada qu o tat i o n fro m Al Cap o n e, s i g n al i ng t o h er t h atp et i t i o ner m ay h av e i n t en d edt o ev ad e t ax . 6 Onth e m orn i n g o f J u l y

2 1 , 2 0 0 9 , CID ex ecu t eda s earch warran tat p et i t i o n er’ s h o m e. Du ri ng th e ex ecu t i o n o f t h e s earch warran t , p et i ti o n er ag reedt o
s ub m i tt o an i n t erv iew wi th SA W i l l i am s. In res p o n s e t o a qu es t i o n ab o u th i s cas h o n h an d , p et i t i o ner s tat edth ath e h ad $ 2 0 i n h i s p o ck etb u tn o o th er cas h i n h i s h o m e. Lat er t h atm orn i n g , s peci al ag en ts u n co vered tw o fi re s afes . On e fi re s afe h ad$ 3 ,0 0 0 i n cas h an dth e o th er h ad $ 1 0 ,0 0 0 . Pet it i o n er s t at edth ath e h adfo rg o t ten ab o u tth e fi rs tfi re s afe an d th ath e h adn ev er s een th e s eco n dfi re s afe. Wh enSA W i l l i am s th reat en edt o

6 Al Cap o n e was co n v i ct edo f t ax ev as i on . See Un i t edSt at es v . Yt em , 2 5 5 F.3 d3 9 4 , 3 9 7 (7 th Ci r. 2 0 0 1 ).- 1 3 -

[* 1 3 ] qu es t i o n M rs . M at h ews ab o u t th e s eco ndfi re s afe, p et i ti o n er ad m i t t edth at th e $ 1 0,0 0 0 i n the s eco n ds afe was h i s. 7 SA W i l l i am s as k ed p et i ti o n er ab o u t h i s o n li ne m u l t i l ev el m ark et i n g b u s i n es s . Pet i t i o n er s t at edth ath e o p erat eds ev eral p ro g ram s u n d er M athews M u l t i-Serv i ce i ncl u d i n g W TIA, $ 2 0 M i racl e, Fo rtu ne 5 M i nu t es , th e Gl adCl ub , an d It ’ s No M i racl e. Pet i t i on er ex pl ai n edth atM at h ews M u l t i -Serv i ce was th e b en efi ci ary

o f th e Cen tu ri o n Tru s t i n Bel i ze. He ad m i t t ed th atM at h ews M u l t i

Serv i ce recei v edfu n d s th ro u g h Pay p al , E-Go l d , In t ern etGo l d , SafePaySo l u t i o n s , an d St orm Pay . Ad d it i o n al ly , p et i t i o n er ack n owl ed gedth ath e h adn o t rep o rt ed i n co m e fro m

W TIA o n retu rn s fo r atl eas t1 7 y ears b u t co n t en d edth atth e g ro s s recei p t s fro m

the M u l t i -Serv ice p ro g ram s were n o th i s i n co m e. Atan o th er p o i n t i n the i n t erv i ew, p et it i on er s t at edh e d i dn o tkn o w h ow t o rep o rti n co m e fro m th e M u l t i-Serv i ce p ro g ram s . Wh en th e ci v i l ex am i n at i o n cam e up , p et i t i o ner s t at ed th atRA Crawfo rdh add et erm i n edth ath i s u n rep o rt edi n co m e fo r al l o f t h e y ears
u n d er ex am i n at i o n t o t al ed$ 9,0 0 0
. Pet i t i o n er al s o s t at edth atRA Crawfo rdh ad
n o ty ett ak en d edu ct i o n s i nt o co n s id erat i on .

7 Itap p ears fro m

th e reco rdth at p et it io n er was fearfu l th atthe s p eci al ag en ts wo u l d s ei ze t h e cas h. Th e s peci al ag en t s p h o t o grap h ed th e cas h b u t al l o wed pet i ti o n er t o k eep i t
.- 1 4 -

[* 1 4 ] Res p o n d i n g t o a qu es t i o n ab o utth e s t atu s o f h i s 2 0 0 8 Fed eral i n co m e t ax retu rn , p et i t i o n er s t at edth ath e h adfi l eda req u es tfo r an ex ten s i o n o f t i m e t o fi l e b ecau s e h e “ d i dn ’ tkn o w wh at t o d o fo r h i s 2 0 08 t ax es ”. 2 0 0 8 Retu rn Pet i t i o ner p rep aredh i s 2 0 0 8 retu rn an d fi l edi to n Oct o b er 1 5 , 2 0 0 9
. Pet i t io n er an d M rs . M at h ews ag ai n fi l eds ep arat e ret u rn s . Pet i t i o n er’ s retu rn i n cl u d eda Sch edu l e C fo r “ M at h ews M u l t i -Serv i ce” wi th a p ri n ci p al b u si nes s o f

“ i n tern etad v ert i s i n g ”. Th e 2 0 0 8 Sch edu l e C rep o rt edg ro s s recei p t s o f $ 1 0 ,0 0 0
an d n o ex p en s es . Th e $ 10 ,0 00 p et i t i o n er d ecl aredas i n co m e p ert ai n edt o a Fo rm 1 0 9 9 h e h adrecei v edfro m I-NetEn t erp ri s es , wh i ch was n ei th er o wn edb y p et i t i o n er n o r affi l i at edwi th M at h ews M u l t i -Serv i ce. Th us , p et i t i o n er d idn o t rep o rtan y

i n co m e fro m

th e M u l t i -Serv i ce p ro g ram s o n h i s 2 0 08 Sch edu l e C. Pet i t i o ner at t ach edt o h i s 2 0 0 8 retu rn a t y peds t at em en t , i n wh i ch h e wro t e: I h av e p rep aredth i s 1 04 0 t o th e b es to f m y ab i l i ty . In J u l y o f t h i s y ear * * * [CID] t o o kALL m y p ap erwo rk , fi nan ci al s t at em en t s , 1 09 9 s , recei p t s , cred i t cards t at em en ts , b an k s t at em en t s , s t at em en ts fro m ch ari ti es , b u s i n es s ex p en s es , recei p ts fo r b u s i n es s ex pen s es an d p ers o n al d educt i o n s , et c [s ic] , an dev en m y t ax p rep arat i o n s o ft ware d i sk ! In o th er wo rd s , EVERYTHING I wo u l d n eedi n o rd er t o fi l e i n co m e t ax es fo r t h e y ear 2 0 0 8 , l eav i n g m e wi th n o th i n g !
* * * * * * *- 1 5 -

[* 1 5 ] So , th i s i s m y v ery b es teffo rtt o fi l e t h i s return fro m m em o ry ! I kno w fo r a fact th atI h av e o ther d edu ct i o n s , b o th fo r h o m e o ffi ce ex p en ses , p ers o n al d edu ct i o n s, ch ari t ab l e co n tri b u t io n s , an d m u ch m o re, b u tI d o n oth av e acces s t o th e reco rd s * * * [CID] t o o k fro m m y h o m e an dfl at l y

refu s e t o return ! Th erefo re, I res erv e t h e ri g h t t o am en d m y retu rn s , wh en ev er th e i t em s are ret urn edt o m e. CID Ad di t i o n al Res earch an dBan kDep o si ts An al y s i s Aft er t h e ex ecu t i o n o f t h e s earch warran t , SA W i l l i am s s u m m o n ed p et i t i o n er’ s b an kreco rd s fo r 2 0 0 4 th ro u g h 2 0 08 . Us i n g th e b an kreco rd s , SA W i ll i am s p erfo rm eda b an k d ep o s i t s an al y s is
. SA W il l iam s’ an al y s i s i ncl u d ed
o n l y am o u nt s recei v edi n p et i t io n er’ s b an kacco u n t s ; h er an al y s i s d i dn o ti n cl u d e
am ou n t s recei v edi n p et i t io ner’ s o n l i n e p aym en ts y s t em acco u n ts . SA W i l l i am s d et erm i n edth atp et i t i o n er h adu n rep o rt ed g ro s s recei p t s as fo ll o ws :

Year 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 Gro ss recei pt s p er

SA W i l l i am s $ 6 7,3 5 9 .6 7 3 9,1 7 9 .3 2 5 7 ,0 3 6 .2 7 2 7 ,3 5 9 .4 6 5 4 ,3 6 5 .7 0 Gro s s recei p ts as rep o rt ed $ 3 ,5 6 0 3 ,3 1 8

--- 5 ,3 2 3 1 0 ,0 0 0 Un rep o rt edg ro s s

recei p t s $ 6 3 ,7 9 9 .6 7 3 5 ,8 6 1
. 3 2 5 7 ,0 3 6
. 2 7 2 2 ,0 3 6
. 4 6 4 4 ,3 6 5
. 7 0 In th e co u rs e o f h er i n ves t i g at i o n, SA W i l l i am s s u s p ect edth atp et i t i o n er
was s tart in g t o wi thd raw cas h fro m a b u s i n es s ch eck i n g acco u n tatCen t en n i al- 1 6 -

[* 1 6 ] Ban k , acco u n tn um b er en d i n g 4 1 75 (CB 4 1 7 5 acco u n t ), an dd ep o s i ts i m i l ar
am ou n t s o f cas h i n t o th e FSB 6 9 6 1 acco u n t . Pet i t i o n er an d M rs . M at hews p ai d th ei r l i v i n g ex p en s es o u to f t he FSB 6 9 61 acco u n t
. SA W i l l i am s al s o o b t ai neda car l o an ap p l i cat i on , d at edM ay 2 3, 2 0 0 8 , s i gn edb y p et i ti o n er. Th erei n p et i ti o n er s tat edth ath e was em p l o y ed b y M at h ews M u l t i-Serv i ce as a “ net wo rkco n s u l t an t” an d t h ath i s “ G ro s s M o n th l y Sal ary ” was $ 3 ,6 0 0
. Cri m i n al Pro secu t i o n Atth e co n cl u s i o n o f t h e i n v es t i g at io n , SA W i l li am s referred p et it i on er’ s
cas e t o t h e U.S. Dep art m en to f J u s t i ce (DOJ ) wi th a reco m m en d at i o n t o p ro s ecu te p et i t i o n er fo r t ax ev as i o n. Th e DOJ fo rward edth e cas e t o th e U.S. At t orn ey ’ s Offi ce i n th e Eas t ern Di s tri cto f Ark an sas . OnAp ri l 6 , 2 0 1 1 , p et i t i o n er was i n d i ct edfo r t ax ev as io n u nd er s ect i o n 7 2 0 1 an ds ub s cri b in g t o a fal s e ret u rn u n d er
s ect i on 7 2 0 6 (1 ) fo r t ax y ears 2 0 0 4 th ro u g h 2 0 0 8
. Aft er t h e i n d i ct m en twas i s s u ed , a n ew p ro s ecu t o r t o oko v er t h e cas e an d ab an do n edth e t ax ev as i o n ch arg es . Ina s up ers ed i n g i n d i ct m en t , p et i t i o n er was ch arg ed w i th s ubs cri b in g t o fal s e i n co m e t ax retu rn s u n d er s ect i o n 7 2 06 (1 ) fo r- 1 7 -

[* 1 7 ] 2 0 0 4 th ro ug h 2 0 0 8
. 8 Pet i t i o n er was al s o ch arg edwi th i m p ed i n g ad m i n is trat i o n o f t h e i n t ern al rev en u e l aws u n d er s ect i on 7 2 1 2. Aft er a ju ry

tri al , p et i t i o n er was co n v i ct edo f al l ch arg es i n th e s up ers ed i n g i n d i ct m en t an ds en t en ced t o a 2 7 -m o nt h p ri so n t erm . Pet i t i o ner ap p eal edh i s
co n vi ct i o n t o th e U.S. Co urto f Ap p eal s fo r th e Ei g h th Ci rcu it . Th e Co urto f Ap p eal s affi rm edth e Di s tri ctCo u rt ’ s cri m i nal ju d g m en ti n a p ub l i s h edo p in i o n . Un i ted St at es v . M at h ews , 7 6 1 F.3 d8 9 1 (8 th Ci r. 2 0 1 4 ). No t ices o f Defi ci en cy

(2 0 0 7 an d2 0 0 8 ) RA Crawfo rd w as as si g n edt o res p o n d en t ’ s ci v i l ex am i n at i on o f p et i t i o n er’ s 2 0 0 7 an d2 0 0 8 t ax retu rn s . Aft er o b t ai n i n g p et i t i o n er’ s b an ks t at em en ts an d
acco u n t st at em en t s fro m

th e o n l i n e p aym en ts y st em s , RA Crawfo rdd et erm i n ed th atp et i t i o n er h adg ro s s recei p t s fo r 2 0 07 as fo l l o ws :

8 SA W i l li am s t es t i fi edth atth e n ew p ro s ecu to r b el i ev edth e s ec. 7 2 06 (1 ) ch arg es wo u l dm ak e fo r a “ cl ean er cas e” t h an the s ec. 7 2 0 1 ch arg es . As d i s cu s s ed i n fra, s ec. 7 2 0 6 (1 ) d o es n otreq u i re t h e Go vern m en t t o p ro v e t h atth e d efen d an t i n t en d edt o ev ad e t ax . See Un i t edSt at es v . Ts an as , 5 7 2 F.2 d 3 40 , 3 43 (2 d Ci r. 1 9 7 8 ); s ee al so Un i t edSt at es v . Di Varco , 4 84 F.2 d 6 7 0 , 6 7 3 -6 7 4 (7 th Ci r. 1 9 7 3 ); Si rav o v . Un i t edSt at es , 3 7 7 F.2 d4 6 9 , 4 7 2 n . 4 (1 stCi r. 1 96 7 ); Wri g h t v
. Co m m i s s i o n er, 8 4 T.C. 6 36 , 6 4 3 (1 9 8 5 ).- 1 8 - Acco u n t St o rm

Pay , In c. FSB 6 9 6 1 acco u n t SafePay So l u t i o ns E-Go l d CB 4 17 5 acco u n t To t al d ep o s it s Tran s fer fro m

Safep ay So l u t i o ns Tran s fer fro m

E-Go l d No n t ax ab l e b an kd ep o s i t s To t al g ro s s recei p t s Am o u n t $ 3 ,7 8 0
. 9 8 7 9 ,1 5 5
. 1 2 1 5 ,7 0 0
. 0 0 4 3 ,9 8 9
. 0 0 4 ,3 7 1 .5 1 1 4 6 ,9 9 6
. 6 1

1 (1 5 ,7 00 .0 0 )

2 (7 ,2 70 .5 2 )
3 (5 6 ,8 4 2 .1 7 ) 6 7,1 8 3 .9 2

1 Aft er d et erm in i n g th atp et i t io n er’ s Safep ay So l u t i o ns d ep o s i t s were t ran sferred t o p et i t i o n er’ s b an kacco u n t s , RA Crawfo rdd eb i ted th i s am o u n tt o av o i dd oub l e-co u n ti n g i n co m e.

2 Aft er d et erm in i n g th ats o m e o f p et i t io n er’ s E-Go l dd ep o s i ts were t ran sferred t o p et i t i o n er’ s b an kacco u n t s , RA Crawfo rdd eb i ted th i s am o u n tt o av o i dd oub l e-co u n ti n g i n co m e.

3 Th i s am o un ti s t h e s u m

o f M rs . M at h ews ’ d ep o s i t edwag e i n co m e an dn o nt ax ab l e d ep o s it s . Onth e b as is o f th i s an al y s i s , RA Crawfo rd d et erm i n edthatp et i t i o n er h ad
u n rep o rt edg ro s s recei p t s o f $ 6 1 ,8 61 , th e d i fferen ce b et ween $ 6 7 ,1 8 4 an dth e g ro s s recei p ts rep o rt ed o n p et i t i o ner’ s retu rn . RA Crawfo rd al s o i d en t i fi eda
n u m b er o f o u t go i n g tran s fers fro m p et i t i o n er’ s acco u n t s as p o t en t i al b u s i n es s [* 1 8 ]- 1 9 -

[* 1 9 ] ex pen ses . RA Crawfo rdch aract eri zedthes e ex p en s es as co s to f g oo d s s o l d (COGS) an dd et erm i n edth at , fo r 2 0 0 7 , p et i t io n er h adCOGS o f $ 3 6 ,8 2 7. Fo r 2 0 0 8 RA Crawfo rdd et erm i n edth atp et i t i o n er h adg ro s s recei p t s as fo l l o w s : Acco u nt E-Go l d CB 4 1 7 5 acco u n t To tal Am o u nt $ 5 6 ,6 2 6 .0 6 4 6 ,5 2 2 .4 5 1 0 3,1 4 8 .5 1 Onth e b as is o f th i s an al y s i s , RA Crawfo rd d et erm i n edthatp et i t i o n er h ad
u n rep o rt edg ro s s recei p t s o f $ 9 3 ,1 49 , th e d i fferen ce b et ween $ 1 0 3 , 1 4 9 an dth e g ro s s recei p ts rep o rt ed o n p et i t i o ner’ s retu rn . As h e d i dfo r 2 0 0 7 , RA Crawfo rd al s o i d en t i fi ed a n um

b er o f o ut g o i n g t ran s fers fro m p et i t i o n er’ s acco u n ts as p o t en t i al b u s i n es s ex p en s es . RA Crawfo rdch aract eri zed th es e ex p en s es as COGS
an d d et erm i n edth at , fo r 2 00 8 , p et i t i on er h adCOGS o f $ 3 9 ,0 6 2
. Res p o n d en ti s su edp et it io n er n o t i ces o f d efi ci en cy fo r 2 0 0 7 an d2 0 0 8 refl ect i n g th es e ad

ju s t m en t s . 9 Res p o n d en t d et erm i n edth atp et i t i o n er was l i ab l e fo r

9 Iti s u n cl ear fro m th e reco rdwh y res p o nd en t d i dn o tco n cu rren tl y i s s u e n o t i ces o f d efi ci en cy fo r t ax y ears 2 0 0 4 , 2 0 0 5, an d2 00 6 . OnFeb ru ary 2 4 , 2 0 1 5 , p et i t i o n er s o u g h tred et erm in at i o n o f al l eg ed d efi ci en ci es fo r 2 0 03 , 2 00 4 , 2 0 0 5 , an d 2 0 0 6 . See M at h ews v . Co m m i s s i o n er, T.C. Dkt . No . 6 7 9 9 -1 5 (No v . 1 7 , 2 0 1 5 ). In a m ot io n t o d i s m i s s fo r l acko f ju ri s d i ct i o n, res p o n d en t’ s co u n sel s t at ed (co n ti n u ed ...)- 2 0 -

[* 2 0 ] frau dp en al t i es fo r b o th y ears u n d er s ect i o n 6 6 63 . Res p o n d en td et erm i n ed , i n the al tern at i v e, thatp et i t i o n er was l i ab l e fo r s ect i o n 6 6 6 2 (a) accu racy -rel at ed p en al t i es . Pet i t i o ner t i m el y s ou g h tred et erm in at io n i n thi s Co urt , an d a t ri al was h el di n Li t tl e Ro ck , Ark an s as . OPINION Wh i l e p et i t i o n er d o es n o td is p ut e res p o n den t ’ s d et erm i n at i o ns th ath e h ad
u n rep o rt edi n co m e fo r 2 0 07 an d2 0 0 8 , h e arg u es th atth e p eri o d s o f l im i t at i o n h av e ex p i red
. 1 0 Pet i t i o n er al s o d i s p u t es th e ap pl i cab i l i ty o f t h e s ect io n 6 6 6 3 frau d p en al t i es . Sect io n 6 5 0 1 (a) p ro v i d es , g en eral l y , thatth e am ou n to f an y t ax m us tb e
as s es s edwi thi n th ree y ears o f t h e fi l i n g o f a ret urn . Th e n o t i ces o f d efi ci en cy i n th es e cas es were i s s u edm o re th an th ree y ears aft er t h e rel ev an t retu rn s were fi l ed
. Th erefo re, t h e p eri o d s o f l i m it at i o n fo r t he y ears i n i s s ue h av e ex p i redan d
as s es s m en ti s b arred u nl es s an ex cep t i o n t o the g en eral l i m i t at io n p eri o dap p l i es .

9 (...co n t in u ed ) th at , as o f J u n e 1 9 , 2 01 5 , n o n o t i ces o f d efi ci en cy fo r t h o s e y ears h adb een i s s u ed
. Th e Co u rtg ran t edres po n d en t ’ s m o t i o n an dd is m i s s edth e cas e fo r l acko f juri s d i ct i o n .

1 0 Pet it i o n er rai sed th e p eri o d s o f l i m i t at i o n atth e cal en d ar cal l o f t h e t ri al s es s i on , an dres p o n d en td idn o to b ject . Acco rd i ng l y , we fi n d t h atth e i s s u e was tri ed by co n s en t . See Ru l e 4 1 (b ).- 2 1 -

[* 2 1 ] Res p o nd en t rel i es o n th e s ect i o n 6 5 0 1(c)(1 ) frau dex cep t i o n . 1 1 Un d er
s ect i on 6 5 0 1 (c)(1 ), i f a t ax p ay er fi l es “ a fal s e o r frau du l en t retu rn wi th th e i n t en t t o ev ad e t ax , the t ax m ay b e as s es s ed* * * at an y t i m e.” Th e Co m m is s i o n er h as th e b u rd en o f p ro v in g ex cep t io n s t o th e g en eral l i m i tat i on p eri od . See, e.g ., Harl an v . Co m m i s s i on er, 1 1 6 T.C. 3 1 , 3 9 (2 0 01 ). To
s at i s fy h i s b u rd en i n th es e cas es , res po n d en tm us ts h ow b y

cl ear an dco n v i n ci n g
ev i d en ce t h at : (1 ) an u n d erp aym en tex is t s fo r each y ear an d (2 ) p et i t io n er i n t en d edt o ev ad e t ax es kno wnt o b e o wi n g b y co n du cti n ten d ed t o co n ceal , m i s l ead , o r o th erwi se p rev en tth e co l l ect io n o f t ax es . Sec. 7 4 5 4 (a); Ru l e 1 4 2 (b ); Park s v . Co m

m i s s i o n er, 9 4 T.C. 6 5 4 , 6 6 0 -6 6 1 (1 9 9 0 ). Th i s i s th e s am e as h i s b u rd enu n d er s ect i o n 6 6 6 3 t o p ro v e ap p l i cab i l i ty o f t h e ci v i l frau dp en al ty (wh i ch i s al s o ati s s u e). See, e.g ., Bro wn i n g v . Co m m i s s io ner, T.C. M em o . 2 0 11 -2 6 1 , 2 0 1 1 W L 5 2 8 9 6 3 6, at* 1 0. A. Un d erp aym en t Pet i t i o ner co n ced edth ath e u n d errep o rt ed i n co m e fo r 2 00 7 an d2 0 0 8 . W e
are s at i s fi ed th atres p o n den th as es t ab l i s h edb y cl ear an dco n vi n ci n g ev i d en ce an
u n d erp aym en t o f t ax b y p et i t io n er fo r each o f t h e y ears i n i ss ue.

1 1 Attri al res p o n den tco n ced edth at n o o th er ex cep t io n s t o t h e g en eral l i m i tat i on p eri odap p l y

fo r 2 0 0 7 an d2 0 08
.- 2 2 -

[* 2 2 ] B. Frau du l en tIn t en t Th e s eco n dp ro n g o f t h e frau dt es treq u i res th e Co m m i s s i o n er t o p ro v e t h at , fo r each y ear i n i s s u e, atl eas t s o m e p o rt i o n o f t he t ax p ay er’ s u n derp aym en to f t ax i s du e t o frau d
. See Park s v . Co m m i s s i o n er, 9 4 T.C. at6 61 ; Bu t l er v . Co m m i s s i o n er, T.C. M em o . 2 0 0 2 -3 1 4 , s l i p o p . at8 , aff’ ds ub n o m . M cGraw v
. Co m m i s s i o n er, 3 8 4 F.3 d9 6 5 (8 th Ci r. 2 0 04 ). Frau dfo r t h is p u rp os e i s d efi n edas i n t en t i o n al wro n g d o in g, wi th th e s peci fi c p u rp o se o f av o i d i ng a t ax b el i ev edt o b e
o wi ng . See, e.g ., Di L eo v . Co m m i s s i o n er, 9 6 T.C. 8 5 8 , 8 7 4 (1 9 9 1 ), aff’ d , 9 5 9 F.2 d1 6 (2 dCi r. 1 9 9 2). Th e Co m m i s s i o n er m

u st therefo re p ro v e t hatth e t ax p ay er i n t en d edt o ev ad e t ax b el i ev edt o b e o wi n g b y co n du cti n t en d edt o co n ceal , m i s l ead , o r o th erwi se p rev en tth e co l l ect io n o f t ax . See, e.g ., Bro wn i n g v . Co m m i s s i o n er, 2 0 1 1 W L 5 2 89 6 3 6, at* 1 3 . Frau du l en ti n t en t m u s tex i s tat th e t i m e t h e t ax p ay er fi l es th e retu rn . Gl ei s v . Co m m i s si on er, 2 4 T.C. 9 4 1 , 9 5 2 (1 9 5 5), aff’ d , 2 4 5 F.2 d2 3 7 (6 th Ci r. 1 9 5 7). Th e ex i s t en ce o f frau d i s a qu es t i o n o f fact t o be res ol v ed fro m

the en ti re reco rd . Gajews k i v . Co m m i s si on er, 6 7 T.C. 1 8 1 , 1 9 9 (1 9 7 6), aff’ dwi th ou tp ub l i s h edo p in i o n , 5 7 8 F.2 d1 3 83 (8 th Ci r. 1 9 7 8 ). Becau s e d i rect p ro o f o f a t ax pay er’ s i n t en ti s rarel y av ai l ab l e, frau d m ay

b e p ro v en b y ci rcu m s t an ti al ev i den ce an dreas o n ab l e i n feren ces m ay b e d rawn fro m

th e rel ev an t fact s. Sp i es v . Un i t edSt at es , 3 1 7 U.S. 4 9 2 , 4 99 (1 9 4 3 ); St ep h en s o n v .- 2 3 -

[* 2 3 ] Co m

m i s si o n er, 7 9 T.C. 9 9 5 , 1 0 0 6 (1 9 82 ), aff’ d , 7 4 8 F.2 d3 3 1 (6 th Ci r. 1 9 8 4 ). A t ax p ay er’ s en ti re co u rs e o f co n ductcan b e i nd i cat i v e o f frau d . St o n e v . Co m m i s s i o n er, 5 6 T.C. 2 13 , 2 2 3 -2 2 4 (1 9 7 1 ); Ot s u ki v . Co m m is s i o n er, 5 3 T.C. 9 6 , 1 0 5 -1 0 6 (1 9 6 9 ). Th e s o p h is t i cat i o n , edu cat io n , an di n tel l ig en ce o f t h e t ax p ay er are rel ev an tt o d et erm i ni n g frau du len ti nt en t . See Ni edri ng h au s v . Co m m i s s i o n er, 9 9 T.C. 2 0 2 , 2 1 1 (1 9 9 2 ); St ep hen s o n v . Co m m is s i o n er, 7 9 T.C. at1 0 0 6 ; Il ey v . Co m m i s s i o n er, 1 9 T.C. 6 31 , 6 3 5 (1 9 5 2 ). Ov er t h e y ears , co u rt s h av e d ev el op ed a n o n ex cl u s i v e l i s to f fact ors th at d em o n s trat e frau du l en t i n t en t. Th es e b ad g es o f frau di n cl u d e: (1 ) u nd ers t at i n g i n co m e, (2 ) m ai n t ai n in g i n ad equ at e reco rd s , (3 ) i m p l au s i b le o r i n co n s i s t en t
ex p lan at i o n s o f b eh av i o r, (4 ) co n ceal m en t o f i n co m e o r as s et s , (5 ) fai l in g t o
co o perat e wi th t ax au th o ri t ies , (6 ) en gag i n g i n i l l eg al act i v i t i es , (7 ) an i n t en tt o
m i s l eadwh i ch m ay

b e i nferred fro m

a p at t ern o f co n du ct , (8 ) l acko f cred i bi l i ty o f th e t ax p ay er’ s t es t i m o ny , (9 ) fi l i n g fal s e d o cu m en t s , (1 0 ) fai l i n g t o m ak e es t i m at ed t ax p aym en t s , an d(1 1 ) d eal i n g i n cas h . See Sp i es v . Co m m i ss i o n er, 3 1 7 U.S. at 4 9 9 ; M cGraw v . Co m

m i s si o ner, 3 8 4 F.3 dat9 7 1 ; Do u ge v . Co m m is si o n er, 8 9 9 F.2 d1 6 4 , 1 6 8 (2 dCi r. 1 9 90 ); Brad fo rdv . Co m m i ss i o n er, 7 9 6 F.2 d3 0 3, 3 0 7 -3 0 8 (9 th Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 9 8 4 -6 0 1 ; Reck l it i s v . Co m m i s s i on er, 9 1 T.C. 8 7 4 , 9 1 0 (1 9 8 8). Al th ou g h n o s i n g l e fact o r i s n eces s ari l y s uffi ci en t t o es tab l i s h- 2 4 -

[* 2 4 ] frau d , th e co m

b i n at i o n o f a n u m

b er o f fact o rs co n s t i tu t es p ers uas i v e
ev i d en ce. So l o m o n v . Co m m i s s i o ner, 7 3 2 F.2 d1 4 5 9 , 1 4 6 1 (6 th Ci r. 1 98 4 ), aff’ g p er cu ri am T.C. M em o . 1 98 2 -6 0 3 ; Pet zo ld t v . Co m m is s i o n er, 9 2 T.C. 6 6 1 , 7 0 0 (1 9 8 9). W e fi n dth atres p o n d en th as fai l edt o p ro v e b y cl ear an dco n v i n ci n g
ev i d en ce t h atp et i t i on er h adth e s p eci fi c i n ten tt o ev ad e t ax b el i ev edt o b e o wi n g wh en h e fi l edh is 2 00 7 an d2 00 8 retu rn s . Befo re p ro ceed i ng wi th o u r an al y si s, we wi l l co m m en to n th e cred i b i l i ty

o f th e p art i es ’ wi tn es s es . “ As a t ri er o f fact , i ti s o u r dut y t o l i st en t o th e t es t i m o n y , o b s erv e t h e d em ean o r o f t h e wi tn es s es , wei g h th e ev id en ce, an d d et erm i n e wh at we b el i ev e.” Kro pp v . Co m m i s s i o n er, T.C. M em o . 2 0 0 0 -1 4 8 , 2 0 0 0 W L 4 7 2 8 4 0 , at* 3 . InDi az v . Co m

m is s i o n er, 5 8 T.C. 5 6 0, 5 6 4 (1 9 7 2), we o b s erv ed th atth e p ro ces s o f d i st i l li n g tru th fro m th e t es t i m o n y

o f wi tnes s es , wh o s e d em ean o r we
o b s erv e an d wh o s e cred i b i l it y we ev al u at e, i s the d ai l y

g ri s t o f ju d i ci al l i fe. Th es e
s t at em en t s reg ard i n g o u r ro l e as a t ri er o f fact are p art i cu l arl y ap t h ere. Pet i t i o ner l i ed o n n u m ero u s o ccas i o n s t o RA Crawfo rd an dSA W i l l iam s du ri n g res p o n d en t’ s ci v i l ex am i n at i o n an dcri m i n al i n v es t i g at i o n . Ho wev er, we d o
n o tb el i ev e h e d i d s o i n th i s p ro ceed i n g . Befo re t ri al , p et i t i o n er h ads erv eda
s ub s t an t i al p ri s o n s en ten ce s t emm i n g i n l arg e p artfro m h is b eh av io r du ri n g th e- 2 5 -

[* 2 5 ] au di tan dcri m i n al i n ves t i g at i o n. W e b el i ev e t h i s ex p eri en ce i m p res sed
up o n p et i t i o n er t h e i m

p o rt an ce o f t el l i n g the t ru th . Attri al p et i t i o n er ad m i t t edt o
m ak i n g m i st ak es ; h e was res p ect fu l t o ward s res p on d en tan dres p o n den t ’ s wi tn es s es ; an d h e was co o p erat i v e wi th th e Co u rt . Hi s t es ti m o n y was co n v i n ci n g
an d wi th s t o o d cro s s-ex am i nat i o n . W e wi l l th erefo re cred i t , as s p eci fi edb el o w, p o rt i on s o f p et i t io n er’ s t es t i m o n y . RA Crawfo rd an dSA W i l l i am s al s o t es ti fi ed attri al . W e fo u n deach o f th em t o b e h o n es t , fo rt h ri g h t , an dcred i b l e. Ho wev er, we d i s ag ree wi th th ei r
co n cl u s i o n s ab o u tp et i t i o n er’ s frau du l en ti n t en t. Pet i t i o ner i s n o t a s o p h i s t i cat edt ax p ay er o r fi n an ci al l y as tu te. He dro p p ed
o u to f h ig h s ch o o l aft er t h e 1 0 th g rad e an dh as n o trai ni n g o r ex p eri en ce i n b o o kk eep i n g , t ax at io n , o r acco u n t i n g . Attri al h e ap p eared co n fu s edab o utth e
n atu re o f h is t ax l i ab i l i t i es an d , ato n e p o in t , cred ib l y t es t ifi ed : “ [I] t ’ s o v er m

y h ead
. ” Gi v en p et i t io n er’ s l acko f s o p h is t i cat i o n, we qu es t i o n wh et h er h e kn ew th ere was a “ t ax o wi n g ” fro m th e M u l t i -Serv i ce p ro g ram s wh en h e p rep aredh i s 2 0 0 7 an d2 0 0 8 retu rn s . Pet i t i o n er co n s i s t en t ly m ai n t ai n edthro u g h ou ttri al th ath e

“ d i dn ’ t kn o w” h o w t o rep o rti n co m e fro m th e M u l t i -Serv i ce p ro g ram s . Th i s t es t i m o ny i s co n s is t en twi th h i s s t at em en t s t o SA W i l l i am s du ri n g th e Ju l y 2 0 0 9- 2 6 -

[* 2 6 ] i n t erv iew. Pet i t i o n er’ s t es t i m o n y al s o acco rd s wi th th e g en eral co nfu s i o n p et i t i o n er ex p res s edi n the t y peds t at em en th e at t ach edt o h i s 2 0 08 retu rn . Fro m th e reco rd , i tap p ears th atth e s o u rce o f p et i t i o ner’ s co n fu s io n was h i s b el i ef t h at9 0 % o f t h e fu n d s h e recei v edthro u g h th e M u l t i -Serv i ce p ro g ram s b el o n g edt o the m em

b er-recru i t ers . Pet i t i o ner t es t i fi edt o th is b el i ef attri al , an d SA W i ll i am s co nfi rm edth atth e M u l t i -Serv i ce p ro g ram s req u i redp ay o u t s t o i t s
m em b ers . 1 2 Th e reco rdal so refl ect s th atp et i t i o n er b el i ev edh e h ad d edu ct i b l e
ex p en s es wi th res p ectt o the M u l t i -Serv i ce p ro g ram s . No t es t ak en b y

RA Crawfo rdan dSA W i l l i am s du ri n g th ei r res pect i v e i n v es t i g at i o n s co rro b o rat e p et i ti o n er’ s co n fu s i o n ab o u tth e t ax ab i li ty o f t h e M u l t i

Serv i ce p ro g ram

i n co m e. In an act i v i ty

l og d at edAu g u s t2 1, 2 0 0 8 , RA Crawfo rd d es cri b eda v o i ce m es sag e fro m p et i t i on er i n wh i ch p et i t i o n er as k edwh et h er “ t h e 2 0 0 5 y ear am o u nti n d i s pu t e was d o wnt o zero ”. In a m em o ran du m reco u n t i n g th e J u l y 2 0 0 9 i n t erv i ew, SA W il li am s n o t edp et i t i o n er’ s s tat em en t th at , fo r al l y ears
u n d er ex am i n at i o n atthe t i m e (2 0 0 4 th ro u g h 2 0 0 6 ), h i s t o t al u nrep o rt edi n co m e

1 2 SA W il l iam s t es ti fi ed : “ W eal th Team In t ern at i o nal As so ci at i o n [W TIA] , I b el i ev e, was m ay

b e a $ 9 9 fee, o n e-t i m e fee fo r o n e en try , an dth en o n ce y o u * * * recru i t o th ers t o jo i n an dy o uh el p them recru it , b as ed o n y o u r l ev el i n th e p ro g ram , y o uwo u l d g etp ay o u ts fo r * * * y o u r effo rt s . ”- 2 7 -

[* 2 7 ] was n o m o re th an $ 9,0 0 0 b efo re t ak i n g d edu ct i o n s i n to co n s i d erat i on . 1 3 SA W i ll i am s al s o reco u n t ed p et i ti o n er’ s s t at em en tth ath e “ d i dn ’ t kn o w wh att o d o fo r h i s 2 0 0 8 t ax es ”. It is res p o n d en t ’ s b u rd en t o p ro v e t h atp et i t i o n er u n d errep o rt edg ro s s recei p t s o n h is 2 0 0 7 an d2 0 0 8 retu rn s wi th th e s p eci fi c p u rp o s e o f av o i d in g a t ax

“ kn o wnt o b e o wi n g ”. See Di Leo v . Co m m i s si o n er, 9 6 T.C. at8 7 4. Becau s e p et i t i o n er h as d em o n s trat edg en u i n e co n fu s i o n ab o u t th e cal cu l at i o n o f h i s t ax l i ab i l i t i es , res p o nd en t m

us t n eg at e t h e p o s s i b i l it y th atth e u nd errep o rt i n g was at tri b u t ab l e t o a m i s u n d ers t an d i n g . See Ch eekv . Un i t ed St at es , 4 9 8 U.S. 1 9 2 , 2 0 2 (1 9 9 1); Ni ed ri ng h au s v . Co m m i s s i o n er, 9 9 T.C. at 2 1 6 -2 17 ; M cCu l l ey v . Co m m i s s i o n er, T.C. M em o . 1 9 9 7 -2 8 5 . Th e m is un d ers t an d i n g n eedn o tb e
o b ject i vel y reas on ab l e, t h ou g h reas o n ab l en es s m ay b e rel ev an tfo r p urp o s es o f
as s es s i n g th e cred i b i l i ty

o f t h e cl ai m . See Ch eek , 4 9 8 U.S. at2 0 2-2 0 4 ; Ni ed ri n g h au s v . Co m

m i ss i o n er, 9 9 T.C. at2 1 6 -2 1 7
. In th es e cas es , th e m i s u n d ers t an d i n g was p et i ti o ner’ s b el i ef t h at h is g ro s s recei p t s fro m

the M u l t i -Serv ice p ro g ram s d i d n o tg en erat e t ax l i ab i l it i es b ecau s e 9 0 % was o wedt o o th er m em b ers an db ecau s e h e h ado th er d edu ct i bl e ex p en s es .

1 3 SA W il l iam s l at er d et erm i n edth atp et i t i o n er’ s u n rep o rt ed g ro s s recei p t s fo r 2 0 0 4 , 2 0 05 , an d 2 0 0 6 t o t al ed$ 1 5 6 ,6 9 7 .2 6
.- 2 8 -

[* 2 8 ] Hav i n g o b s erv edp et it i o n er at tri al , we fi n d p et i t i o n er’ s m i s u n d ers t an d i n g cred i b l e i n th e l i g h to f h i s b ack g ro u n dan d s o p h i s t i cat i o n l ev el . Aft er a t h o ro u g h
rev i ew o f th e reco rd , we al s o fi n d th atp et i t i o n er’ s m i s u n d ers t an di n g was n o t
co rrect edb efo re h e fi l edh i s 2 0 0 7 an d2 0 0 8 retu rn s . 1 4 To b e s u re, t h i s i s a cl os e cas e. As th e Co u rt o f Ap p eal s fo r t h e Ei g h th Ci rcu i to b s erv edi n i ts o p i n i on affi rm i n g p et i t io n er’ s co n vi ct i o n s u n der s ect i o n s 7 2 0 6 (1 ) an d7 2 1 2 , p et it i o n er’ s “ rep o rt edg ro ss recei p t s were a s m al l fract io n o f t h e recei p t s d ep os i t edi n t o h i s b an k acco u n t
. ” M at h ews , 7 61 F.3 d at 8 9 4
. Fu rt h erm o re:

M at h ews [p et i t i o n er] rep eat ed l y l iedt o IRS ag en t s du ri n g th e au d i t. He fai l edt o d i s cl o s e o n e o f h i s b an kacco u n t s an dd en i ed recei v i n g co m

p en s at i o n fro m

o n e o f h is b us i n es s es . Duri n g th e s earch o f h i s h o m e, h e l i edab o utth e p res en ce o f $ 1 3 ,0 0 0 i n cas h . He was m i s l ead i ng an dev as i v e ab o uth i s b us i n es s o p erat i o n s, co n t in u al ly

ch an g i n g k ey

d et ai l s ab o u th i s ro l e an dth e fl o w o f fu n d s . He cl ai m edm o n ey

fro m o n e o f h i s b u s i n es s es was actu al l y i nco m e fro m a t ru s ti n Bel i ze. * * * [Id . at8 9 4 -8 9 5 .]

1 4 Attri al res p o n den ti n tro du ced a M arch 2 0 08 car l o an ap p l i cat io n i n wh i ch p et i t i on er rep o rt ed a m o n t h l y “ Gro s s Sal ary ” o f $ 3 ,6 0 0 as ev i d en ce t h at p et i t i o n er kn ew h i s i nco m e fro m M at h ews M u lt i -Serv i ce was t ax ab le. Ho wev er, i t i s u n cl ear fro m

th e reco rdwh at“ Gro s s Sal ary ” m ean s i n t h i s co nt ex t , as n ei th er p art y co n t en d s p et i ti o n er was a s al ari edem p l o y ee o f M at h ews M u l t i -Serv i ce. Gi v enth i s g ap i n th e reco rd , we d ecl i n e t o draw an y i n feren ces fro m th i s d o cu m en t . Fu rt h erm o re, i f “ Gro s s Sal ary ” m ean s “ gro s s recei p t s ”, t hi s d o cu m en t d o es no tes t ab l i s h th at p et i t io n er kn ew h e h adp o s i t iv e n eti n co m e fro m th e M u l t i

Serv i ce p ro g ram s .- 2 9 -

[* 2 9 ] In m an y

cas es , th es e fact s m i g h ts up p o rtan i n feren ce t h atp et i t i o n er fi l ed fal s e an dfrau du l en t retu rn s wi th th e i n t en t t o ev ad e t ax . See, e.g ., Ru arkv . Co m m i s s i o n er, 4 4 9 F.2 d3 1 1 (9 th Ci r. 1 9 71 ) (h o l d i ng th at g ro s s u n ders t at em en to f i n co m e, co up l edwi th m i s s t at em en t s duri n g au d i t , i s a s u ffi ci en tb as i s fo r a fi n d i n g
o f frau d ), aff’ g p er cu ri am T.C. M em o . 1 9 6 9 -4 8 ; Fu l l er v . Co m m i s s io n er, T.C. M em o. 2 0 0 7 -6 2 (h ol d i n g th at un d ers t at edi n co m e, o v ers t at edd edu ct i o n s , an d fai l u re t o co o p erat e wi th th e Co m m i s s i o n er ju s t i fy a fi n d in g o f frau d ); s ee al s o s ec. 6 5 0 1 (c)(1 ). Ho wev er, t h e ex i s ten ce o f frau d i s a qu es t i o n o f fact t o b e res o l v ed fro m th e en t i re reco rd , Gajews k i v . Co m m i s s i o n er, 6 7 T.C. at1 9 9 , an dthe
s o p h is t i cat i o n , edu cat i o n , an di n t el l i g en ce o f t h e t ax p ay er are rel ev an tt o d et erm i n i n g frau du len ti n ten t , s ee Ni ed ri n g h au s v . Co m m i ss i o ner, 9 9 T.C. at2 1 1 ; St ep h en so n v . Co m

m i s s i o n er, 7 9 T.C. at1 0 0 6 ; Il ey v . Co m m is s i o n er, 1 9 T.C. at 6 3 5 . M o reo ver, co ndu cto f t h e t ax p ay er, ev en th o u g h rep reh en s i b le, wi l l n o t ju s t ify a fi n d i n g o f frau du n l es s th e frau dul en ti n t en t i s s h o wn t o h av e ex is t ed wh en th e ret u rn was m ad e. Ho l m es v . Co m m i s s i o n er, T.C. M em o . 2 0 1 2 -2 5 1 , at
* 3 7 , aff’ d , 5 9 3 F. Ap p ’ x 6 9 3 (9 th Ci r. 2 0 15 ); Barri er v . Co m m i s s i o n er, T.C. M em o. 1 9 8 3 -2 5 8 ; Sem

p l e v . Co m

m i s s i o ner, a M em o ran dum Op i n io n o f t h i s Co u rt d at edAu g . 2 8, 1 9 5 1 , 1 9 5 1 Tax Ct . M em o LEXIS 1 2 4 , at* 1 8.- 3 0 -

[* 3 0 ] In th es e cas es , th e reco rdes tab l i s h es th atp et i ti o n er was an u n s o p h i s t i cat ed t ax p ay er wi th l i t t le, i f an y , fi nan ci al acu m en . Wh il e p et i ti o ner b eh av ed rep reh en s i bl y

duri n g res p on d en t ’ s ci v i l ex am i n at io n an dcri m i n al i n ves t i g at i o n (wh ich , fo r t h e m o s tp art , p ert ai n edt o t ax y ears n o ti n i s s u e), we b el i ev e h e was g en ui n el y co nfu s edab o u t th e t ax ab i l i ty o f th e M u l t i -Serv i ce p ro g ram i n co m e wh en h e fi l edh is 2 00 7 an d2 00 8 retu rn s . See Ch eek , 4 98 U.S. at2 0 2 -2 0 4
. Acco rd in g ly , h i s m i s co nductduri n g res p on d en t ’ s ci v i l ex am i n at io n an dcri m i n al i n v es t i g at i o n d o es n o tes t ab l is h th ath i s 2 00 7 an d 2 00 8 retu rn s were frau du l en t
. W i th res p ect t o p et i t i o n er’ s cri m i n al cas e, a s ect i o n 7 2 06 (1 ) co n vi ct i o n d o es
n o tco ll at eral l y

es t o p a t ax pay er fro m d en y i n g t h ath i s retu rn s were frau du l en t
. Wri g h t v . Co m

m i ss i o n er, 8 4 T.C. 6 3 6 (1 98 5 ); Wh ead on v . Co m m i s s i o n er, T.C. M em o. 1 9 9 2 -6 3 3 ; Co x v . Co m m i s s i o n er, T.C. M em o. 1 9 8 5 -3 2 4 . Un d er s ect i o n 7 2 0 6 (1 ) i ti s a cri m e t o wi l l fu l l y m ak e an ds ub m i tan y

retu rn v eri fi edb y a wri t t en d ecl arat io n th ati s m ad e u n d er p en al t i es o f p erjury wh ich th e t ax p ay er d o es n o t b el i ev e t o b e t ru e an dco rrect as t o ev ery m at eri al m at ter. Th e i n t en tt o ev ad e t ax es i s n o tan el em en to f t h e cri m e ch arg ed u n d er s ect i o n 7 2 0 6(1 ), wh i ch

“p en al i zes th e fi l i ng o f a fal s e retu rn ev en th o u gh th e fal s i ty wo u l dn o t p ro du ce t ax co n s equ en ces .” Un it edSt at es v . Ts an as , 5 7 2 F.2 d3 4 0 , 3 4 3 (2 d Ci r. 1 9 7 8 ); s ee al s o Un i tedSt at es v . Di Varco , 4 8 4 F.2 d6 7 0 , 6 7 3-6 7 4 (7 th Ci r. 1 9 73 ); Si rav o v .- 3 1 -

[* 3 1 ] Un i t edSt at es , 3 7 7 F.2 d 46 9 , 4 7 2 n .4 (1 s t Ci r. 1 9 6 7); Wri gh tv . Co m m i s s i o n er, 8 4 T.C. at 6 4 3
. Thu s , al th o ug h p et i t i o ner’ s co n v ict i o n u n d er
s ect i on 7 2 0 6 (1 ) m ay

b e ev i den ce o f frau du len ti nt en t , i t d o es n o tes t ab l i s h as a
m at t er o f l aw t h ath e i n ten d edt o ev ad e t ax es . See Wri g h t v . Co m m i s s io n er, 8 4 T.C. at6 4 3
. Hav i n g co n s i d eredal l o f t h e fact s an dci rcu m s tan ces o f t hes e co n s ol i d at ed
cas es , we fi n dth atres p o n d en tfai l edt o p ro ve b y cl ear an d co n v i n ci n g ev i den ce th atp et i t i o n er fi l ed fal s e an d frau du l en tretu rn s wi th th e i n t en t t o ev ad e t ax fo r 2 0 0 7 an d2 0 0 8 . W e n o w ad dres s wh et h er we wi ll rel i ev e p et i t i o n er o f fo u r
s t ip u l at edp arag rap h s th ats ay o th erwi s e. C. St i p ul at edParag rap h s 6 3 , 6 4 , 6 5 , an d6 6 Befo re t ri al an d p u rs uan tt o Ru l e 9 1 (f), we d eem eds t i p u l at ed , i n t er al i a, p arag rap h s 6 3 , 6 4 , 6 5 , an d 6 6 aft er p et i t i o n er d i dn o tres po n d t o o u r o rd er t o s h o w
cau s e wh y p ro po s edfact s an dev i d en ce s h o ul dn otb e accep t edas es t ab l i s h ed
. Parag rap h 6 3 s t at es thatp et i t i o n er “ frau dul en t l y an d wi th i nt en tt o ev ad e t ax , o m it t edi nco m e fro m

h i s 2 0 0 7 an d2 0 0 8 i n co m e t ax retu rn s ”. Parag rap h 6 4 s t at es th atth e d efi ci en ci es i n th es e cas es “ are du e t o p et i t i o n er’ s frau du len t i nt en tt o
ev ad e t ax .” Parag rap h s 6 5 an d6 6 s t at e t h at , fo r 2 0 0 7 an d2 0 0 8, p et i t i o n er i s l i ab l e- 3 2 -

[* 3 2 ] fo r d efi ci en ci es o f $ 6 ,5 5 6 an d$ 1 6 ,4 0 5 , res p ect i v el y , an dfo r s ect i on 6 6 6 3 p en al t i es o f $ 4 ,9 1 7 an d $ 1 2 ,3 0 3 .7 5 , res p ect i v el y . 1 5 Gen eral ly , th e Co u rt“ w i l l n o tp erm i t a p arty t o a s t i pu l at i o n t o qu al i fy , ch an ge, o r co n trad i cta s t i p u l at i o n i n wh ol e o r i n p art , ex cep t* * * wh ere ju s t i ce req u i res ”, Ru l e 9 1 (e), o r “ g o o dcau s e i s s h o wn ”, Sai gh v . Co m m i s s i o n er, 2 6 T.C. 1 7 1 , 1 7 6 (1 9 5 6); s ee al s o Bai l Bo n d s b y M arv i n Nel s on , In c. v . Co m m i s s i on er, 8 2 0 F.2 d1 5 43 , 1 5 4 7 (9 th Ci r. 1 9 8 7 ) (s t i p u l at i o n s s h o ul db e en fo rced“ u n les s
m an i fes ti n

ju st i ce wo u l dres u l t ”), aff’ g T.C. M em o. 1 9 86 -2 3 . Ind eci d i ng wh et h er t o al l o wa p art y t o s etas id e o r m o d i fy a s t i p u lat i o n , we l oo k atfact o rs s u ch as i n co n v en i en ce t o th e Co urt an dp o s s i bl e i n ju s t ice t o th e m o v i n g p art y i f t h e
s t ip u l at i o n were en fo rced . Do rch es t er In du s . In c. v . Co m m i s s i o n er, 1 0 8 T.C. 3 2 0 , 3 3 4 -3 3 5 (1 9 9 7 ) (ci ti n g Ad am s v . Co m m i s s i o n er, 8 5 T.C. 3 5 9 , 3 7 5 (1 9 8 5 )), aff’ d wi th o u tp ub l i s hedo p i n i o n , 2 0 8 F.3 d 2 05 (3 d Ci r. 2 00 0 ).

1 5 Atth e cal en d ar cal l res p o n d en t ’ s co u n s el s t at edthatth e d eem ed s t ip u l at i o n o f fact s “ es t ab l i sh es b o th the d efi ci en cy an dth e ci v il frau dp en al ty i n th e cas e.” Ho w ev er, res p o n den t ’ s co un s el al so s t at ed th atres p o n den twas p rep aredt o try th e cas e i f t he Co u rtwas n o twi l l i n g t o d et erm in e d efi ci en ci es an d ci v i l frau dp en al t i es o n th e b as i s o f t h e s t ip u l at i o n. Th e Co u rti n fo rm edth e p art i es th ata t ri al wo u l db e n eces s ary , an da fu l l -d ay tri al co m m en cedl at er th atweek
.- 3 3 -

[* 3 3 ] In th e cas es atb ar, s t ip u l at edp arag rap h s 6 3 th ro u g h 6 6 are l eg al
co n cl u s i o n s an d/ o r s t at em en ts o f u l t i m at e fact 1 6 wh i ch we h av e fo u n d t o b e
co n traryt o th e reco rd . If we en fo rcedth e d eem eds t i p u l at edp arag rap h s ag ai n s t p et i t i o n er, we wo u ld effect i v el y p recl u d e h i m fro m

co nt es t i n g res p o n den t ’ s d et erm i n at i o n s. Becau s e we d o ub t th atp et i t i o n er fi l edfal s e an dfrau du l en tretu rn s wi th th e i n ten tt o ev ad e t ax fo r t h e y ears i n i s s u e, t hi s res u l two u l db e m an ifes t l y
u n ju s t . Acco rd i ng l y , we wi l l rel i ev e p et i t io n er o f s t i p u l at edp arag rap h s 6 3 , 6 4 , 6 5 , an d 6 6
. D. Co n cl u si o n Hav i n g fai l edt o es t ab l i s h b y cl ear an dco n v i n ci ng ev i d en ce t h atp et i t i o n er fi led fal s e an dfrau du l en treturn s wi th th e i n t en tt o ev ad e t ax fo r 2 0 0 7 an d2 0 0 8 , res p o n d en t i s b arred b y

th e s ect i o n 6 5 0 1 (a) l im it at i o n s p eri o dfro m as s es si n g d efi ci en ci es an dal t ern at i v e s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al t i es ag ai n s t p et i t i o n er fo r t h os e y ears . 1 7 In reach i ng o u r d eci s io n , we h av e co ns i d ered al l

1 6 An u lt i m at e fact g en eral l y refers t o “ a fact u al co n cl u s i o n d eri v edfro m i n t erm ed i at e fact s .” See Bl ack ’ s Law Di ct i o n ary 7 1 1 (1 0t h ed . 2 01 4 ).
1 7 Aft er tri al , res p o n d en tfi l eda m o t i o n t o reo p en the reco rd t o i n tro du ce ev i d en ce o f co m

p li an ce wi th the wri t t en s up erv i s o ry ap p ro v al req u i rem en tu n d er s ec. 6 7 51 (b ). W e wi l l d en y res p o n d en t ’ s m o t i o n as m o o t
.- 3 4 -

[* 3 4 ] arg u m en t s m ad e b y th e p art i es , an d t o th e ex t en tn otm en t i o n edo r ad dres s ed , th ey

are i rrel ev an t , m o o to r wi tho u tm eri t
. To refl ectthe fo reg o i n g , Anap p ro p ri at e o rd er wi ll b e i s s u ed , an dd eci s i on s wi l l b e en t eredfo r p et i t i o ner.