TAX COURT OPINION

Case: Robert S. Chaney
Docket Number: 8765-16
Judge: Morrison
Opinion Type: bench
Filed: 01/22/2018
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 DE ROBERT S. CHANEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 8765-16. 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 petitioner and respondent a copy of the pages of the transcript of trial in the above case before Judge Richard T. Morrison, at Jacksonville, Florida, on December 13, 2017, containing his oral findings of fact and opinion rendered at the conclusion of trial. In accordance with the oral findings of fact and opinion, an order will be issued. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. January 22, 2018 SERVED Jan 23 2018 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Richard T. Morrison December 13, 2017 Robert S. Chaney v. Commissioner of Internal Revenue Docket No. 008765-16 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied on as precedent in any other case. 10 This bench opinion is made pursuant to the 11 authority granted by section 7459(b) of the Internal 12 Revenue Code of 1986, as amended, and Rule 152 of the Tax 13 Court Rules of Practice and Procedure. In this bench 14 opinion all section references are to the Internal Revenue 15 Code of 1986, as amended and in effect for the tax years 16 at issue. All Rule references are to the Tax Court Rules . 17 of Practice and Procedure. 18 On January 11, 2016, respondent mailed a notice 19 of deficiency to petitioner for the tax years 2012, 2013, 20 and 2014, determining deficiencies of $82,111 for 2012, 21 22 23 24 25 $110,400 for 2013, and $18,336 for 2014. The notice also determined petitioner is liable for section-6662 penalties in the amounts of $16,023.20 for 2012, $20,080 for 2013, and $3,467.20 for 2014. The petition in this case was timely filed and we have jurisdiction under section cribers (973)406-2250|operations@escr.ibersmet|www.escribers.net 4 1 2 3 4 5 6 7 8 9 10 11 6214(a). Petitioner was a resident of Florida when he filed the petition. Petitioner bears the burden of proving respondent's determinations in the notice of deficiency are incorrect, Rule 142(a), except for penalties, which will be discussed later. Issue 1. Petitioner claimed Schedule C deductions of $152,555, $198,972, and $84,010, for the respective three years at issue. The notice of deficiency disallowed these deductions. In his motion for sanctions, filed October 27, 2017, respondent urged the Court to sustain various determinations in the notice of 12 deficiency, including the Schedule C adjustments. As will 13 be explained in a separate Order, respondent's motion for 14 15 16 17 18 sanctions is granted. Therefore we hold that the Schedule C deductions for 2012, 2013, and 2014 are disallowed. Issue 2. The notice of deficiency determined that petitioner failed to report taxable pension income of $6,000 for 2012. Petitioner did not challenge this 19 determination in h'is petition. He has therefore waived 20 any challenge to this determination under Rule 34(b). 21 Furthermore, petitioner failed to appear when we tried 22 this case in Jacksonville, Florida, on December 12, 2017. 23 Therefore, petitioner failed to meet his burden of proof. 24 We sustain this $6,000 determination for 2012. 25 Issue 3. Petitioner claimed moving-expense (973)406-2250|operations@escribers.net|vruw.escnbers.net . 5 1 2 3 4 5 6 7 8 9 10 11 deductions of $65,110 in 2012 and $119,717 in 2013. The notice of deficiency disallowed the deductions. We sustain the determination as part of our grant of respondent's motion for sanctions. Issue 4. Petitioner claimed home-mortgage interest deductions on Schedules A in the amounts of $44,880 for 2012, and $29,400 for 2013. The notice of deficiency disallowed these deductions. We sustain the disallowance as part of our grant of respondent's motion for sanctions. Issue 5. Petitioner claimed $11,700 of 12 personal-exemption deductions on his 2013 tax return. The 13 notice of deficiency disallowed these deductions. 14 Petitioner did not challenge this disallowance in his 15 petition. See Rule 34(b). Furthermore he produced no 16 evidence regarding the deductions. We sustain the 17 disallowance. 18 Issue 6. The notice of deficiency determined 19 that petitioner failed to report $13 of interest for 2014. 20 Petitioner did not challenge this determination in his 21 petition. See Rule 34 (b). We sustain the determination. 22 23 Issue 7. Petitioner claimed a $2,500 deduction for student-loan interest on his 2014 return. The notice 24 of deficiency disallowed the deduction. Petitioner did 25 not challenge this determination in his petition. See (973)406-2250loperations@escribersnet|www.esaíbers.net 6 1 2 3 4 5 6 7 8 9 Rule 34(b). Nor did he produce evidence regarding the deduction. We sustain the disallowance. Issue 8. The notice of deficiency determined that petitioner was liable for section-6662 penalties for the three years at issue. At trial respondent conceded that petitioner is not liable for the penalties. We hold that, petitioner is not liable for section-6662 penalties for 2012, 2013, and 2014. Issue 9. The notice of deficiency determined 10 that petitioner owed a 10%-premature-retirement- 11 distribution tax of $600 for 2012 and $817 for 2014. The 12 13 14 15 16 $600 tax for 2012 corresponds to 10% of the $6,000 taxable-pension distribution discussed in issue 2 above. The $817 tax for 2014 corresponds to petitioner's own reporting that he received in that year a $8,166 retirement distribution. Section 72(t) imposes a 10%- 17 premature-retirement-distribution tax. The petition 18 19 failed to allege that the 10% tax does not apply or that any of the exceptions to that tax apply. See Rule 34(b). 20 Petitioner adduced no proof regarding the 10% tax. We 21 22 sustain the determinations. Issue 10. The notice of deficiency determined 23 that petitioner owes a Medicare tax of $2,364 for 2013. 24 Respondent conceded this adjustment at trial. We hold 25 that petitioner is not liable for a Medicare tax of $2,364 (973)406-2250|operations@escribetsmet|www.escribersaet 7 1 2 3 4 5 6 7 8 9 for 2013. Issue 11. In the amended answer, respondent asserted that portions of the underpayments for the three years at issue are due to petitioner's erroneous claims of deductions for the Schedule C expenses, moving expenses, and home-mortgage expenses. The amended answer asserted that these portions of the underpayments are due to fraud under section 6663. Respondent has the burden of proving by clear and convincing evidence that there is an 10 underpayment of tax due to fraud. Rule 142(b). Fraud may 11 be proven by circumstantial evidence because direct proof 12 of taxpayer's intent is rarely available. Recklitis v. 13 Commissioner, 91 T.C. 874, 910 (1988). 14 15 As we have explained, petitioner is not entitled to the deductions he claimed for Schedule C expenses, 16 moving expenses, and home-mortgage expenses. Therefore, 17 18 19 20 21 22 23 24 25 there are underpayments resulting from these disallowed deductions. The next question to resolve is whether these underpayments are due t,o fraud. Respondent produced clear and convincing evidence that petitioner's Schedule C expenses are fraudulent. Petitioner was employed from 2011 to sometime in 2013 as the president of North American operations for the Isola Group. In this role he had substantial responsibilities. His employment contract with the Isola (973)406-2250|operations@escribersnet|vmy,.escribers.net 8 1 2 3 4 5 6 7 8 9 Group required him to get written approval to operate any outside businesses. Petitioner did not get any written approvals from the Isola Group to conduct any outside businesses. Yet he reported on his tax returns that he operated a Brazilian company, supposedly named Americas Translation Services, in 2012, and then another Brazilian company, supposedly named American Restaurant Services, in 2013. He reported that he operated yet another Brazilian company, supposedly named Americas Mini-Pizza Restaurant 10 Services, in 2014. This was after his employment with the 11 12 13 Isola Group ended. But the record of this case convinces us that all three businesses were fictitious. In addition to the Schedule C deductions for these three years, 14 petitioner used a combination of false Schedule C 15 deductions, false moving-expense deductions, and false 16 home-mortgage deductions over the five tax years, 2010, 17 18 19 2011, 2012, 2013, and 2014, to substantially wipe out his taxable income for each year. Thus, for 2010, petitioner reported (in numbers we round to the nearest $10,000) 20 $190,000 in wages, which he offset with $30,000 in 21 Schedule C losses, $50,000 in moving expenses, and $20,000 22 23 in home-mortgage deductions. In 2011, petitioner reported $90,000 in wages, which he offset with $40,000 in moving 24 expenses and $20,000 in home-mortgage deductions. In 25 2012, petitioner reported $300,000 of wages, which he (973)406-2250|operations@escribetsmetlwwwescribers.net 9 1 2 3 4 5 6 7 8 9 10 11 12 offset with $150,000 in Schedule C losses, $70,000 in moving expenses, and $40,000 in home-mortgage deductions. In 2013, peti'tioner reported $460,000 in wages, which he offset with $200,000 in Schedule C losses, $120,000 in moving expenses, and $30,000 in home-mortgage deductions. And in 2014, petitioner reported $100,000 of wages, which he offset with $80,000 in Schedule C losses. In addition, petitioner did not respond to respondent's requests for information to support the Schedule C deductions or any other deductions. There are several reasons we find that the underpayments resulting from the disallowed Schedule C deductions for 2012, 2013, and 2014,. are due to fraud. 13 First, petitioner did not have the time nor his employer's 14 permission to operate the supposed Schedule C businesses 15 16 for major portions of the periods he supposedly operated them. Second, petitioner reported different names for the 17 Schedule C businesses each year without explanation. 18 Third, the reported addresses of the Schedule C businesses 19 were in Brazil, which was an apparent effort to foil 20 attempts by respondent to confirm the Schedule C 21 deductions. Fourth, the Schedule C deductions were part 22 of a pattern of false deductions designed to substantially 23 wipe out petitioner's taxable income over five years. 24 25 Respondent also produced clear and convincing evidence that petitioner's moving expenses are fraudulent. [973)406-2250|operationseescribersmet|wwwescribers.net 10 1 2 3 4 5 6 7 8 9 Petitioner reported huge moving-expense deductions for 2012 and 2013. Yet during 2012, and at least a portion of 2013, the record shows that he was employed at the offices of the Isola Group in Chandler, Arizona, as the president of North American operations. A lease agreement showed that he was a residential tenant in Arizona for the period from January 1, 2012, to December 31, 2013. Furthermore, for 2010 he had also claimed a suspiciously huge amount for moving expenses: $49,693. The moving-expense 10 deductions cannot be considered in isolation. Petitioner 11 12 13 14 had a five-year pattern of taking bogus deductions to wipe out his taxable income. He failed to produce any documents to respondent to support his deductions. We find that the underpayments resulting from the disallowed 15 moving-expense deductions for 2012 and 2013 are due to 16 fraud. 17 18 19 Respondent also produced clear and convincing evidence that petitioner's home-interest deductions are fraudulent. Petitioner was a residential tenant during 20 2012 and 2013, the years in which petitioner claimed a 21 home-interest deduction. Furthermore, petitioner reported 22 23 24 on his returns that his interest payments were not reflected on third-party information returns that would be filed by a bank showing that he made interest payments to 25 the bank. Yet he supplied no information on the returns cribers $73)406-2250loperations@escribers;net|www.esaibers.net 11 to support his claim that he made the payments. The deductions are suspicious on their own; they are doubly suspicious when considered in the context with petitioner's five-year pattern of bogus deductions. We find that the underpayments resulting from the disallowed home-interest deductions for 2012 and 2013 are due to fraud. Section 6751(b) provides that there can be no assessment of a penalty unless the initial determination 1 2 3 4 5 6 7 8 9 10 of such assessment is personally approved in writing by 11 12 the immediate supervisor of the individual making such determination or a higher-level official predesignated in 13 writing. The fraud penalty was first asserted in an 14 15 16 17 amendment to answer signed by respondent's counsel and his supervisor. Thus respondent has satisfied section 6751(b). Issue 12. From the onset of these proceedings 18 up until the trial, at which he failed to attend, 19 petitioner's position has been that the notice of 20 deficiency is invalid because it contradicts a letter he 21 22 received from the IRS dated November 16, 2015. In that letter, the IRS stated that it had conducted an 23 examination of tax year 2013 and asserted only one minor 24 adjustment to petitioner's return. We have already warned 25 petitioner in a prior order that he could not rely on this } cribers (973)406-2250[operations@escribers;net|www.escobers.net 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 letter to avoid discovery in the case. Although we discussed the letter in that prior order, petitioner did not introduce the letter at trial. It is therefore not a part of the trial record. Petitioner has waived any argument based on the letter by his failure to introduce the letter or attend the trial. Nor would his argument have had any success. The letter is not the type of document, such as a closing agreement, that has a binding effect on the IRS. See Opine Timber v. Commissioner, 64 T.C. 700, 712 (1975), aff'd without opinion, 552 F. 2d 368 (5th Cir. 1977); Maloney v. Commissioner, T.C. Memo. 1986-91. Nor is it the type of document that can give rise to the application of the theory of equitable estoppel. See First National Bank of Montgomery v. United 15 States, 176 F.Supp. 768, 772 (M.D. Ala. 1959), aff'd, 358 16 F.2d 625 (5th Cir. 1966); Warner v. Commissioner, 526 F.2d 17 1 (9th Cir. 1976). There is also a larger question of 18 whether equitable estoppel can ever operate against the 19 government. See Savoury v. United States AG, 449 F.3d 20 1307, 1318 (11th Cir. 2006); but see Emerson v. 21 Commissioner, 67 T.C. 612, 617 (1977). Furthermore, the 22 23 traditional prerequisites for equitable estoppel are absent from the trial record. See Norfolk S. Corp. v. 24 Commissioner, 104 T.C. 13, 60 (1995), aff'd, 140 F.3d 240 25 (4th Cir. 1998). The November 2015 letter does not (973)406-2250|operations@escribers.net|www.escribers.net 13 purport to be respondent's final word about tax years 2012, 2013, and 2014. It was therefore not misleading for the IRS to later issue the notice of deficiency. No evidence shows that petitioner reasonably relied on the letter to his detriment. The factual predicates for equitable estoppel are missing from·the trial record. A decision will be entered under Rule 155. An order will be also issued granting respondent's motion for sanctions. 1 2 3 4 5 6 7 8 9 10 This concludes the oral findings of fact and 11 opinion. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 3:50 p.m., the above-entitled matter was concluded.) $73)406-2250|operations@escribersaiet|www.esaibersmet