TAX COURT OPINION

Case: Milton H. Baxley, II
Docket Number: 17937-10
Judge: Goeke
Opinion Type: bench
Filed: 12/29/2014
Pages: 14

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 MILTON H. BAXLEY, II, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 17937-10. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Jacksonville, Florida on December 4, 2014, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. December 29, 2014 SERVED Dec 30 2014 Capital Reporting Company 3 1 2 Bench Opinion by Judge Joseph Robert Goeke December 4, 2014 3 Milton H. Baxley, II v. Commissioner 4 5 Docket No. 17937-10 THE COURT: The Court has decided to render 6 Oral Findings of Fact and Opinion in this case and 7 8 the following represents the Court's Oral Findings of Fact and Opinion. The Oral Findings of Fact and 9 Opinion shall not be relied upon as precedent in any 10 11 12 13 14 15 16 17 18 19 20 other case. ! This opinion is rendered pursuant to Rule 152 of the Tax Court's Rules of Practice and Procedure and Rule references hereinafter are to the Tax Court Rules of Practice and Procedure. The opinion is also authorized by Internal Revenue Code section 7459(b) and references to the Internal Revenue Code hereinafter will be simply by section number. The present case is before the Court based upon voluminous stipulations of fact and exhibits. 21 Petitioner failed to appear and did not offer any 22 23 24 25 testimony in support of his position. Respondent called a witness in support of Respondent's burden to establish the addition of tax for fraudulent failure to file. Apart from the burden of Respondent to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 support the fraudulent failure to file addition to tax the burden of proof remains on the Petitioner pursuant to Rule 142(a). The present case is before the Court based upon our jurisdiction to review Notices of Deficiency after a timely petition has been filed. The Notice of 7 Deficiency was issued to the Petitioner on May 12, 8 2010 and Petitioner timely.filed before this Court a 9 petition seeking relief from the determinations in 10 11 12 13 14 15 16 17 18 19 20 21 22 23 that notice. The Respondent determined deficiencies and additions to tax for the years 2000 through 2008 in the Notice of Deficiency at issue and the amounts of those determinations including the additions to tax under section56651(a)(2), 6654 and 6651(f) are all set forth. in Respondent's pretrial memorandum which is incorporated here and by this reference and which 7 is made a part of the record. The Petitioner was a resident of the State of Florida at the time the petition was filed in this case. The Petitioner did not file federal income tax returns for any of the years at issue before the 24 Court and did not request or receive an extension to 25 file income tax returns for any of those years. Nor 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 did the petition pay any federal income tax for those years with the .exception of 2008 for which a small amount of tax was withheld from payment the 4 Petitioner received of wages in the amount of $2,142. 5 6 7 8 During the years at issue the Petitioner received compensation for labor and services he performed prior to the years at issue. This compensation was in the form of annuity payments from 9 Genworth Financial. The evidence demonstrates that 10 at least some of these payments were deposited by the 11 Petitioner into his trust account for his clients as 12 13 14 15 16 17 18 19 20 21 22 opposed to being deposited into his. normal account of receipts. Petitioner received Social Security payments for the years 2005, 2006 and 2008 and obviously did not include those in any amounts of income he would have reported had he filed a return. Petitioner was admitted to practice law before the Florida Bar in 1973. He was a successful practitioner in personal injury law through 1995. In 1996 Petitioner became involved representing a client who was in the business of·orchestrating tax schemes and this led the Petitioner to file correspondence 23 with the Internal Revenue Service after he had filed 24 25 an income tax return for 1995. The return Petitioner filed for 1995 showed wages of $327,637.98 which, in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 fact, included receipts from his law practice. 2 Petitioner then took a deduction on the return on 3 4 5 6 7 8 9 10 11 12 13 14 15 16 line 23A for the entire amount of these receipts and reported 3 that he had no income. He then sought a refund of the entire amount of estimated tax payments of $29, 000 he had paid .in 1995. When contacted by the Internal Revenue Service relative to this obviously specious return he asserted that he was not subject to federal income tax in a letter to the Internal Revenue Service in May of 1997. He subsequently did not file federal income tax returns throughout the rest of the decade and became involved in facilitating the sale of tax fraudulent schemes by representing persons who paid for these schemes through his association with an individual names Eddie Ray Conn and an organization called American 17 Rights Litigators. 18 19 These associations ultimately led to federal government seeking an injunction against the 20 Petitioner for his involvement in these activities 21 22 23 24 pursuant to section 7402(a) and 7408. A preliminary injunction was granted as a result of the complaint filed by the federal government on December 29, 2003. This injunction was Guated- by the United States 25 District iof the Middle District of Florida. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 Petitioner was convicted of criminal contempt for 2 3 4 5 6 7 8 9 violating the preliminary injunction in the United States Middle District of Florida and his conviction for contempt was affirmed by the 11th Circuit Court of Appeals which issued the opinion on April 24, 2007. The information is relevant because it was established that throughout the course of the years in question when Petitioner failed to file he was involved in litigation where he was enjoined from 10 making the very arguments that he purported to use as 11 12 13 14 15 the basis for his failure to file in taking those positions in his representation of persons buying the services of American Rights Litigators or the other defendants who were the subject of the complaint filed by the federal government in the Middle 16 District of Florida. 17 18 A permanent injunction was issued against him in July of 2006 by the United States District 19 Court of the Middle District of Florida and that 20 21 22 23 24 25 injunction was also affirmed by the ll" Circuit Court of Appeals. Petitioner violated that injunction and was i rison a result of a conviction for contempt for violating that injunction. He was in prison from December, 2006 through March of 2008. Petitioner was involved in the sale of real 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 estate which he jointly owned with his spouse, Sandra Baxley. The sale of property took place in July of 2007 and Petitioner failed to report any of the gained proceeds from that sale as he failed to file an income tax return for 2007. In 2003 and 2005 Petitioner purchased several luxury items demonstrating that he had the resources to pay his federal income taxes. 9 Petitioner maintained several checking accounts, some 10 11 12 in the name of his law office and at least two different accounts, his trust accounts. The evidence demonstrates that at least some of the proceeds that 13 Petitioner received from Gehworth Financial which 14 15 16 17 18 were income were deposited into the trust account. Respondent's Notice of Deficiency computes income against the Petitioner based upon the bank deposit method which is set forth in the attachments to the Notice of Deficiency. The evidence supporting 19 4he deposits as determined by Respondent in the Notice 20 21 22 23 24 25 of Deficiency has been stipulated by the parties and is consistent with the bank records which are stipulated as evidence for the Court. Petitioner has not contested that any of the amounts computed by Respondent in the Notice of Deficiency based upon the bankkg deposit methodology were, in fact, non-taxable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 items. 1 2 The issues before the Court are as follows. 3 Whether the Petitioner received gross receipts as 4 5 6 7 8 9 10 11 12 determined in the Notice of Deficiency for the years 2000 thróugh 2008 based upon the use of the bank deposits analysis; whether Petitioner is entitled to a deduction for one-half of his self-employment tax which deduction is computational based upon the determination that Petitioner received self- employment income as determined by the bank deposits analysis; whether Petitioner is entitled to the standard deduction, which is also computational; 13 whether Petitioner received Social Security benefits 14 15 as previously described for the years 2005 through 2008 whiëh amounts have been stipulated for which 16 Petitioner has offered no defense; whether Petitioner 17 18 19 20 21 22 23 24 is entitled to a dependency .exemption for himself as determined in the Notice of Deficiency which is also purely a computational adjustment; whether Petitioner received wages in the ænount of $2,142 in 2008 which amount has been stipulated and therefore is no longer in dispute; whether Petitioner received capital gain income from the sale of real property in 2007 in the amount of S161,836 which sale has been the subject of 25 Stipulation of Facts in evidence in the record and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 for which Petitioner has not contested the amount; 2 whether Petitioner is liable for self-employment tax 10 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18. 19 20 21 22 23 24 25 based upon his receipts as determined by the bank deposits method; and whether the Petitioner is subject to the addition to tax for failure to pay under section 6651(a)(2) for the years in question. Finally, Respondent has determined, as stated previously, that Petitioner is subject to the addition to tax under section 6651(f) for fraudulent failure to file for all the years in question. In the alternative responded would assert the addition to tax for failure to file should the Court determine that the ;fraudulent failure to file penalty is inappropriate. Finally, Respondent has also determined that Petitioner is subject to the addition to tax under section 6654(a) for estimated tax payments which follows from the stipulated income items in the bank deposit method and the other amounts in dispute. Since Petitioner has not contested the bank deposits analysis and the records underlying that analysis have been stipulated, we find that Respondent may use this indirect method of proof given the fact that the Petitioner failed to file returns or support his position with any reference of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 his income. Respondent' s reconstruction of the taxpayer's income need only be reasonable in light of 3 all the surrounding facts and circumstances. 4 Schroeder v. Commissioner, 40 T.C. 30 (1963) and 5 Petzoldt v. Commissioner, 92 T. C. 661 (1989) . Based 6 upon long established precedent the bank deposits 7 method is a reasonable circumstantial method of 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 proof. Tokarski v. Commissioner, 87 T.C. 74, 77 (1996) . We find that Respondent's use of the bank deposits method in the present cas-e is both warranted and that given Petitioner's failure to produce any contrary evidence and the overwhelming evidence that has been stipulated that the determinations of income by Respondent are sustained. Likewise, the self- employment tax -f-à±eti given the nature of the income U because of Petitioner's law practice since he was not an employee. The Petitioner' s conviction for his continual activities receiving compensation for legal services even after he was enjoined from espousing e-c-<ows tax protests or arguments demonstrate that he would . be subject to self-employment tax. We now turn to the additions to taw for fraudulent failure to file. Section 6651(f) imposes this addition to tax of up to 75 percent of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 amount of tax required to be shown on the return when the failure to file federal income tax is due to fraud. There are two elements of fraud; the existence of the underpayment and the fraudulent intent with respect to some part of the underpayment. 6 Rule 142(b), Conti v. Commissioner, 39 F.3d 658, 664 7 8 9 10 11 12 13 14 15 16 (6th Mr. 1994). Respondent determined deficiencies on the basis of Petitioner's failure to report taxable income for each of the years in question. The only payment Petitioner made throughout that entire period was $61 withheld from a small amount of income he received in 2008. There is no question that there is an understatement of income and therefore the sole question concerning Petitioner's liability for the addition to tax under section 6651(f) is whether 17 Petitioner's failure to file for all the years in 18 19 20 21 22 23 24 25 question was fraudulent or done with intent. In considering fraud in the context of failure to file, the Court has consistently applied an analysis to the same type of evidence which is analyzed in cases where taxpayers are subject to the fraud penalty having filed returns. Clayton v. Commissioner, 102 T.C. 632, 653 (1994). Fraud is generally established by proving 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 that the taxpayer engaged in an intentional 2 wrongdoing designed to evade tax, believed to be 3 4 5 6 7 owing by conduct intended to conceal, mislead or prevent the collection of taxes. Failure to file in and of itself does not necessarily establish fraud but it can be an indication of fraud when other circumstances establish an intent to conceal or 8 mislead or demonstrate the Petitioner's knowledge 9 that there was a requirement to file federal income 10 11 12 13 14 15 16 17 18 19 20 21 22 tax returns. In the present case the Petitioner's high degree of! education and his obvious awareness of the tax laws are shown by .the fact that he had been a successful attorney for decades prior to his decision to cease filing federal income tax returns. Fraud sometimes cannot be established by direct evidence but can be inferred from the circumstances and other factual evidence. Generally in failure to file situations it is necessary to determine whether the failure to file was intentional based upon the surrounding circumstances. Based upon the stipulated record in the present case which reflects 23 Petitioner's actions and his pe.rsonal education as 24 well as his professional background, we find that the 25 Petitioner failed to file returns for the years in 866.488.DEPO www.CapitaIReportingCompany.com 4 Capital Reporting Company 14 1 2 3 4 5 6 7 8 9 question based upon legal theories he well knew were contrary to established federal law and that his asserted basis for failure to file is a letter he sent to the IRS in 1997 reflects that he intended to avoid paying federal income taxes based upon frivolous and specious legal arguments. The events that transpired over the course of the first decade of this century further support the fact that Petitioner well knew the arguments that 10 he propounded.as the basis for his failure to file as 11 well as the representations that he made to clients 12 13 14 15 16 17 18 19 20 21 22 23 24 25 were specious as these arguments ultimately led to his conviction for failure to comply with injunctions against him. We last turn to the failure to make the estimated tax payments. This adjustment is simply computational given the circumstances of the present case when the Petitioner failed to make any tax payments and was receiving income throughout the years in question and for years prior to the years in question, which would have required him to pay estimated tax payments. Therefore, we sustain the addition to tax under section 6654(a). In conclusion, we sustain Respondent's income adjustments for the reasons stated and the 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting Company 15 additions to tax as determined by Respondent for failure to pay and for fraudulent failure to file. A decision will be entered for Respondent. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 1:13 p.m., the above- ·entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitaIReportingCompany.com