TAX COURT OPINION

Case: Raghvendra Singh & Kiran Rawat
Docket Number: 11063-09
Judge: Holmes
Opinion Type: bench
Filed: 11/02/2011
Pages: 17

UNITED STATES TAX COURT WASHINGTON, DC 20217 RAGHVENDRA SIÑGH & KIRAN RAWAT, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) Docket No. 11063-09. Order of Service of Transcript 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 petitioners and to respondent a copy of transcript of Holmes at San Francisco, California on October 7, 2011, containing his oral the conclusion of trial. the trial of findings of fact and opinion rendered after the above case before Judge Mark V. the pages of the (Signed) Mark V. Holmes Judge Dated: Washington, D.C. November 2, 2011 $ERVED NOV - 9 2011 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 3 BENCH OPINION BY JUDGE MARK V. HOLMES SINGH & RAWAT V. COMMISSIONER· DOCKET NO. 11063-09 OCTOBER 7, 2011 THE COURT: In the case of Raghvendra Singh & Kiran Rawat v. Commissioner, Docket No. 11063-09, the Court has decided to render oral findings of fact and opinion, and the following represents the Court's oral findings of fact and opinion. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code of 1986 as amended and Rule 152 of the Tax Court's Rules of Practice and Procedure. The parties did reach a stipulation in this case in which the government conceded the deficiency for the 2000 tax year, leaving the years still at issue to be 1997 through 1999 and 2001 and 2002. These returns were unusual oh their face because Mr. Singh had reported more than $3 million in expenses on his Schedule Cs and only $165,000 in cash receipts. This obviously is a way to catch the attention of the Commissioner, which he did, and who issued him a very large notice of deficiency. For 1997, 1998, 1999, 2001 and 2002, the petitioners filed joint Forms 1040. The 2001 and 2002 returns were not received until April 12, 2004. In Heritage Reporting Corporation (202) 628-4888 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 4 each of those returns, the petitioners reported the wages of Kiran Rawat, who ide tified herself as a nurse. For all the years exc pt 2001, Petitioner Singh identified his occupation as engineer. In addition to his reported wages, ranging from $50,000 to $83,000, petitioners reported interest income from M the}1,000 to $2,500 range. Except for 1997, for each of the years, petitioners also included a Schedule C for a nursing registry business. This busihess was operated by Petitioner Singh under the name of Nursing Association of America. He also had a travel business which he op,erated under the name of T avel Magic. His travel business provided travel arrangements such as airline tickets to customers, but it was his nursing registry business that produced most of the family's income. This business provided nurses to institutions such as nursing homes that temporarily needed nurses to fill particular shifts. An institution in need of one op more nurses to cover a particular shift would call Singh or NAA and request a nurse for a particular shift 'or shifts at a particular location. The registry would try to place a nurse for the shift. The registry would then charge the institutions a premium over and above the hourly rate Heritage Reporting Corporation (202) 628-4888 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 5 that Singh would pay to the nurse who worked the shift. The nurses were placed in institutions by the registry but were not paid by!the institution. Instead they were paid by the nursing registry. That in turn would bill the institution for the nurses' services and be paid directly by the institution. Remarkable, for all these years while receiving hundreds of thousands of dollars in cash flow, no returns were filed by Mr. Singh and Ms. Rawat reflecting the gross receipts received from the nursing registry business or the much smaller travel business until after the Commissioner started makin questions about their unfiled returns. The 1997 return, for instance, was not filed until 2001. The petitioners failed to maintai or even to submit for examination by the Commissioner complete and adequate books and accounts of their ihcome-producing activities for each of the years in question as required by the Code. The Court found credible the testimony of the. IRS revenue agent that there was an exceptional lack of cooperation in this case from Mr. Singh in particular. The IRS exam ended up relying on third party summonses and records from customers of the nursing registry as well as banks and other third Heritage Reporting Corporation (202) 628-4888 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 6 party reports for determininé the sources of the Singhs' income. I'll organize this somewhat lengthy bench opinion into three parts. Oné is dealing with items that were uncontested or minor. The second is the problem of gross receipts for Mr. Singh's business and the difficulty that this causes for the calculation of his taxable income. And the * hird are the points relating to the statute of limitations and to the fraud penalty that the Commissioner asserts. There are numerous ncontested or minor items. I'll just go through those. In the case of dividends for the 1997 tax year, the Commissioner found unreported dividends of, $12,211, for 1998 $6,334, and for 1999 $3,.551. These were essentially uncontested by the Singh-Rawats, and I find in favor of the government on each of those. There was a state income tax refund for the 1997 year of $3,46Ó. Again there was no contest. The Commissioner prevails on that item. There were also unreported capital gains of $44 in 1997, $336 in 1998, $139 in 1999. Mr. Singh and Ms. Rawat did not contest -l these. I find in favor of the government. The government also asserted that Ms. Rawat Heritage Reporting Corporation (202) 628-4888 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 7 had gross receipts of $1,079 in 1997, $4,738 in 1998 and $538 in 1999. Here I find for the government only for the 1998 and 1999 tax years. In comparing the return as filed to the notice of deficiency, the 1997 alleged underreporting by Ms. Rawat of $1,079 is simply wrong. She did report.it as gross receipts, and the Commissioner erroneously said that she did not in the notice of deficiency. So, on that item, I find for the Rawat-Singhs. There were also unreported third party wages to Ms. Rawat of $381 in 1997, $200 in 1999 and something called a bank reward of $145 in 1999. Again these were based on third party reports. There's essentially no reason that the Singh-Rawats couldn't have stipulated them away, but they didn't, so I find in favor of the government. The government also claimed that Mr. Singh had overstated the rent his business paid. That was an item of $6,720 in 1998, $6,720 again in 1999, $4,371 in 2001 and $3,152 in 2002. There were of course no receipts, no canceled checks, no invoices or other evidence that any of this was paid. Mr. Singh gave conflicting evidence on this point. They may have been homeowner dues. They certainly weren't substantiated by Mr. Singh, and so again I find in Heritage Reporting Corporation (202) 628-4888 8 1 2 3 4 5 6 7 8 favor of the government. On the category of advertising on the · Schedule C nursing business, r, the government disallowed $10,800 in 1998, $12,168 in 1999, $16,348 in 2001 and $13,674 in 2002. Advertising expenses are of course a deductible expense, and here I somewhat reluctantly but do need to find for Mr. Singh in part. Advertising expenses can be estimated by the Court 9 ' under the rule of Cohan v. Commissioner, 39 F.2d 540, 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 544 (Second Cir., 1930), which tells us to make as close an approximation as we.can bearing heavily upon the taxpayer who's inexactitude is of his own making. Here Mr. Singh did point to the fact that he hired, well, he said 1,000 but certainly scores and scores of different nurses judging by the invoices that were in the record, and so his advertising which he said was in local newspapers to seek nurses he probably did incur to some extent. He of course had no receipts, no canceled checks or other proof of payment as to amount, so bearing heavily on the inexactitude for which he is responsible, I find that for the years 1998, 1999, 2001 and 2002 he should be , allowed $3,000 in advertising. It's the best I can do sort of reasoning on that particular point. Getting back to the almost fantastical Heritage Reporting Corporation (202) 628-4888 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 9 expenses that Mr. Singh claimed, the government disallowed bad debt deductions of $42,378 in 2001 and $23,674 in 2002. This featured bad debts in the form of cars left on a piece of property that Mr. Singh didn't own that he claims the City. of Sacramento towed away without compensation. I doubt that story very much. These appear to be completely made up bad debt deductions. They will be disallowed and I will find in favor of the government on that point. He also had unusually large wages paid deductions on the nurses' registry. It again makes sense that a nurses' registry, even one that is being conducted largely off the books, would have substantial wage expenses for the nurses involved. The government gave Mr. Singh a deduction in part for what he claimed. The disallowed portions of the deduction were $17,984 in 1998, $66,543 in 1999, $447,089 in 2001 and $215,594 in 2002. Again the government granted substantial deductions for these. The numbers I just recited were the marginal figures that Mr. Singh wanted. He of course had no proof for this in any sort. I sustain the government's findings in much diminished allowances for this category of deduction. There were also "other expenses" on the Heritage Reporting Corporation (202) 628-4888 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 10 2001, 2002 tax returns that Mr. Singh filed, $85,838 in other expenses of his nursing business for 2001 and $41,803 in 2002. There was dhain no contest, no proof entered by Mr. Singh on thess,expenses. I sustain the government's disallowance of them as well. Under the category of alimony, the government disallowed alimony deductions of $9,600 for Mr. Singh in 1998 and 1999. He claimed at trial that these were garnished wages, but he failed to show whether they were for alimony rather than family support or some other kind of debt and indeed presented no actual proof of hhe garnishment from his wages. I sustain the governbent's disallowance of that exclusion. There was also an addition to income called amount paid on his behalf of $4,091 in 1998. The trial didn't touch upon this, though Mr. Singh contested it as he did all these other expenses, and so the burden being on Mr. Sihgh, I find against him and sustain the inclusion of that amount. Mr. Singh finally claimed casualty losses of $14,563 in 2001, $17,646 in 2002. This featured the cars that were allegedly stol,en by the City of Sacramento as well as miscellaneous business property taken by persons unknown from his back yard. I find Heritage Reporting Corporation (202) 628-4888 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 11 these stories of course fantastic and unbelievable and sustain the government's disallowance of those casualty losses for those ye rs. Moving on to the second part of the opinion, the much contested issue of gross receipts and their use in calculating Mr. Singh'ä taxable income, the government faced with this lack of records by Mr. Singh did the best it could with a bank deposits analysis. As the Ninth Circuit reminded us in Choi v. Commissioner, 379 F.3d 638, 640 (Ninth Cir., 2004), "Under this method, gross income is derived by adding together all bank deposits made by the taxpayer during the tax year in question, subtracting nontaxable amounts and adding expenditures made from cash that were never deposited into the bank. Where the taxpayer fails to maintain adequate records for the government to determine the amount of actual income the government may use indirect methods to establish income, including this bank deposits plus cash expenditures method." I found entirely credible the testimony of Revenue Agent Hong on the points she made. I found that she was completely credïble in talking about the complete lack of cooperation from Mr. Singh during the course of the examination. He of course had no Heritage Reporting Corporation (202) 628 4888 12 records whatsoever. 3 .He appa ently did not . collect the Social. Security numbers or i ue 1099s or W-2s to the nurses whom he was sending off to these nursing homes and. hospitals. . Under those circumstances,. it was of course understandable for. thd Service to summons bank ..records and determine unrepo ted income using total bank deposits and funds avai able for the Singhs ' use. Af ter accounting, for nontaxable, deposits and amóunts available, Ms.1 Hong and the deam at the IRS calculated as best they could what the äxable income of the Singhs from the nursing gegistry business were. Ms. Hong subtracted out of the bank deposits .that she was able to find evidence the workers' compensation and, disability yments that Mr. Singh had been recei-ving, trans erò between banks, bank charges and reversals, a couple of . items of . miscellaneous nontaxable incòme as well as U.S. and state tax refunds and the, return of principal on some certificates of deposit that were being rolled over or transferred from bank .tö bank. She also subtracted out the net amount of wages. that were available for deposit from Ms. Rawat.and M . Singh. (cid:16)042 The resulting conclusions as set forth in the government ' s, answer was that f the taxable income of Mr. Singh from his nurses' registry business was 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 Heritage .Reporting Corporation (202) 628 4888 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 13 $55,661 in 1997, $134,142 in 1998, $595,944 in 1999, $278,559 in 2001 and $181,240 in 2002. I find in favor of the government and conclude from a preponderance of the evidence that they have shown that these were the taxable iñcome items of the Singhs from their nursing registry business for the years in question. This leads me to the third and last part of this bench opinion, which is the question of fraud and the statute of limitations in that the tax years involved were some time ago añd the government relies on the extended statute of limitations for fraud penalties. Section 6663(a) ibposes a penalty of "an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud." "A taxpayer commits fraud when he evades taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes." Parks v. Commissioner, 94 T.C. 654, 661 (1990). The Commissioner introduced no serious evidence that Ms. Rawat committed fraud and therefore we discuss only whether Mr. Singh is liable for the fraud penalty. To impose a henalty for fraud, we must find that the Commissioner has proven by clear and conviñeing evidence that an underpayment of tax has Heritage Reporting Corporation (202) 628-4888 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 ,· .14 occurred and that some portion of the underpayment was due to fraud. See Sec. 6663(a). It's the second element that's often difficult for the Commissioner to prove because he likely does not have direct proof of the taxpayer's intent. This is why Tax Court has allowed the Commissioner to prove fraud with "circumstantial evidence and reasonable inferences drawn from the facts." Meyer v. Commissioner, 91 T.C. 273, 297 (1988). We've identified various indicia of fraudulent intent over the years. These include understatement of income, ina equate records, failure to file tax returns, implausible or inconsistent explanations of behavior, concealment of assets, failure to cooperate with tax authorities, engaging in illegal activities or attempting to conceal illegal activities, dealing in cash and failing to make estimated tax payments. The Commissioner must prove fraud for each year in issue. If the Commissioner meets his burden as to any portion of the underpayment, then we have to, treat the entire underpayment as attributable to fraud except to the extent the taxpayer establis es: by a preponderance of the evidence that a portion of the underpayment was not due to fraud. Heritage Reporting Corporation (202) 628-4888 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 15 In each of the years at issue in the Singh- Rawat cases there is obviously a very considerable unde.rstatement of income. There is also a complete absence of records, a failure to file timely tax returns, indeed a failure to file any tax returns until the Commissioner began poking around in the Singhs' business. On Mr. Singh's part, there was of course an absolute failure to cooperate and clear evidence that he was simply running this business off the books during the years in question, paying nurses in cash and issuing no or few 1099s or W-2s. Finally and perhaps most persuasively to me, there was just the fantastic testimony that Mr. Singh gave with his alleged casualty loss of 200 cars that he had somehow bought that were taken by the City of Sacramento on property he didn't own. That was in the 2001 tax year. There was the story of nearly $20,000 in business property he claimed a theft loss for in 2002 that was allegedly stoleh by persons unknown from his back yard without any explanation of what the property was or why it was sitting in his back yard waiting to be stolen. Indeed, for 2001 and 2002, Mr. Singh actually admitted to making up numbers to try to reduce the probability of audit. Although he tries to pin the blame on his tax return preparer, he's Heritage Reporting Corporation (202) 628-4888 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 16 responsible for such misrepresentations on his own return. And indeed there was the explanation for all the years in question of the mismatch between reported cash income and the incredible cash expenditures by saying that the resulting gargantuan cash shortfall was made up by gifts from unnämed friends in unnamed amounts to the tune of millióñs and millions of dollars. Well, enough. I cóñclude that by clear and convincing evidence the Commissioner has shown fraud on the part of Mr. Singh for each of the tax years in question. Mr. Singh doesn't stop though. He goes on to claim that the statute of limitations has run because the government either discovered or should have discovered his fraud earlier on and he claims under those circumstances that a three-year statute of limitations applies from the time that the fraud should have been or was detected. Well, this is simply wrong. Although the Singhs have alleged that the adjustments proposed by the Commissioner are barred by the statute of limitations under 6501(a) which generally sets a three-year rule for the assessment of tax after the return was filed, under Section 6503(a), the running Heritage Reporting Corporation (202) 628-4888 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 i 17 of the period of limitations is suspended during the period of time that assessment is prohibited and from the 1997 through 2002 years the Commissioner reasonably relies upon an exception even to this running of the period in the case of a false or fraudulent return with the intent to evade tax or under Section 6501(c)(2) in the case of a willful attempt to evade tax. Under·those circumstances a tax may be assessed at any time. :Simply put, there is no discovery rule constraining t e Commissioner under the Code. However, there are,some things that the Singhs and Rawats did that are only negligent and not fraudulent. Specifically, I find that their failure to report dividend, capital gains, state income tax returns and Ms. Rawat's unreported wages for 1997 and 1999 and the bank reward for 1999 were the failure to report things that were on information returns from third parties, and so only the negligence penalty should apply to those items. This is technically a split decision, and so again I will, together with the order sending the transcript to the parties, issue an order setting a deadline for the submission of computations under Rule 1$5. This concludes the = Court's oral findings of Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fact and opinion in this casè. (Whereupon, at 10:40 a.m. , the bench opinion in the above-entitled matter was concluded. ) 18 // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888