TAX COURT OPINION

Case: Tommy Ho Ching Cheng
Docket Number: 15027-02
Judge: Haines
Opinion Type: memo
Filed: 04/12/2006
Pages: 10

T.C. Memo. 2006-74 UNITED .STATES TAX COURT TOMMY HO CHING CHENG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 15027-02. Filed April 12, 2006. David C. Holtz and Steven R. Mather, for petitioner. Alan H. Cooper, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION HAINES, Judge: Respondent determined a deficiency in petitioner's 1996 Federal income tax of $459,500 and an addition to tax under section 6651(f) of $344,625.¹ The issues for ¹ Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to.the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar. - 3 - America account)·. The remaining three accounts were not in petitioner's name but were subject to his control: (1) "Bona Trust" account at Cathay Bank (the Bona Trust account); (2) "Amex Hospitality" account at Citizens Bank (the Amex Hospitali'ty account); and (3) the "Amex Professional Services Group" account at East West Bank (the Amex Services account). Petitioner did not make estimated tax payments or file a Federal income tax return for 1996.. B. Criminal Tax Investigation Petitioner was the subject of a criminal investigation regarding his 1995 tax return and his failure to file tax returns for 1993, 1994, and 1996. The criminal investigation was conducted by Special Agent Fred Bautista (Special Agent Bautista). As a result of the.investigation, criminal charges were filed against petitioner, one count under section 7.201 for an attempt to evade or defeat tax in 1995 and three. counts under section 7203 for willful failure to file tax returns in 1993, 1994, and 1996. On October 12, 2001, petitioner pleaded guilty to the charges. As part of the plea agreement, petitioner admitted to receiving income of at least $645,253 in 1996.2 Petitioner was sentenced to 33 months on the count under section 2 The plea agreement was under seal at .the time of trial and was not considered by the Court. this admission by petitioner as.part of established by independent evidence. See infra p. 14. See infra p. 17. However, the plea agreement was - 5 - initially calendared for the Court's Los Angeles trial session beginning September 8, 2003. On August 4, 2003, respondent filed a motion to continue, which was granted on August 27, 2003. On August 8, 2003, petitioner's counsel filed a motion to withdraw as counsel, which was granted on August 27, 2003. From August 27, 2003 through March 16, 2005, petitioner proceeded pro se. The case was recalendared for the Court's Los Angeles trial session beginning March 15, 2004. On March 1, 2004, petitioner (cid:16)042filed a motion to continue, stating: "The Petitioner moves this Honorable Court to grant * * * [a motion to continue] due to: a. Incarceration[;] b. To hire an attorney[;] c. Review records with C.P.A.[; and] d. Receive bank records." Petitioner's motion was granted on March 2, 2004. The case was recalendared for the Court's Los Angeles trial session beginning October 4, 2004. On August 20, 2004, petitioner filed his second motion to continue, asking the Court .to grant his motion "due to the following(s) [sic]: 1. Currently Incarcerated at the Federal Prison[;] 2. To retain/hire an Attorney[;] Review records/files with the C.P.A.[; and] 4. Receive Bank records." Petitioner's motion was granted on September 14, 2004. The case was recalendared for the Court's Los Angeles trial session beginning March 14, 20Ò5. On February 28, 2005, petitioner filed his third motion to continue, asking the Court - 7 - 10. Petitioner has made arrangements to retain the services of Steve Mather and David Holtz * Petitioner's attorneys in turn have engaged the services of Lilly Hsu, C.P.A. work. to do the accounting * *. 11. Once Petitioner is released from incarceration and can galn access to his records, Petitioner can assist Petitioner's counsel the case for trial. in preparing * * * * * * * * 14. * * Through no fault of his own, Petitioner has been unable to prepare the case for trial, has been unable to gain access to Petitioner's or Respondent's records, and has been unable to assist counsel in the preparation of the case for trial. The Court heard arguments on petitioner's fourth motion for continuance, during which respondent objected to the motion on the basis of the prior history of continuances and petitioner's impending deportation. After a brief hearing, the Court denied petitioner's motion.3 OPINION A. Petitioner's Fourth Motion for Continuance Petitioner contends that the Court should have granted his fourth motion for continuance filed on March 16, 2005. Petitioner argues that "severe prejudice [will result] to petitioner's case due to petitioner's unavoidable inability to 3 Also on Mar. 16, 2005, respondent filed a motion to dismiss for lack of prosecution. Following the entry of appearance by counsel for petitioner and petitioner's filing of posttrial briefs, the Court denied respondent's motion. - 9 - Rule 133; Schaefer v. Commissioner, T.C. Memo. 1998-163, affd. without published opinion 188 F.3d 514 (9th Cir.. 1999); Harris v. Commissioner, T.C. Memo. 1992-638. From March 1, 2004, when petitioner filed his first motion for continuance, through March 16, 2005, when petitioner filed his fourth motion,. petitioner has asserted that he has been unable to review his records on account of his incarceration. This ground for continuance did not arise within 30 days of trial (cid:16)042and thus does not justify granting petitioner's motion. See Rule 133. Petitioner, acting pro se, filed his third motion for continuance on February 28, 2005, which was denied on March 2, 2005. While the record is unclear, it is likely that petitioner hired Mr. Holtz and Mr. Mather, who in turn hired an accountant, sometime after the third motion was denied, or within 2 weeks of trial. In addition, Mr. Holtz and Mr. Mather were nöt recognized by the Court as petitioner's representatives until they filed an entry of appearance on March 16, 2005, the day of trial. Petitioner had more than 1-1/2 years to hire counsel and an accountant after his first attorney withdrew. His employment of counsel and an.accountant so close to trial does not justify granting.petitioner's motion. See Rule 133; Schaefer v. Commissioner, supra; Harris v. Commissioner, supra. - 11 - and an accountant. Petitioner has presented nothing that would indicate the Court should have granted his fourth motion for continuance. B. Statute of Limitations Petitioner argues that the statute of limitations under section 6501 bars the issuance of respondent's notice of deficiency because the notice was issued more than 3 years after petitioner's 1996 return was due. Petitioner's argument is flawed, both procedurally and substantively. Rule 39 provides that "A party shall set forth in the party's pleading any matter constituting an avoidance or affirmative defense, including * * * the statute of limitations." Petitioner did not raise the statute of limitations as an affirmative defense in his petition, reply, or at trial, but does so for the first time on brief.4 Petitioner's failure to timely raise the statute of limitations amounts to a waiver of this affirmative defense. Because petitioner has waived it, we need not consider his argument further. However, because petitioner seeks to misapply section 6501, we will briefly address it. 4 In his opening brief, petitioner states: "Respondent apparently contends as an affirmative defense that the statute remains open". Respondent and thus the burden is not on respondent apparently made this argument that he failed to plead the statute of affirmative defense, and it is without merit. is not raising an affirmative defense limitations as an in an effort to side-step the fact to plead it. Petitioner - 13 - deficiency determination is normally entitled to a presumption of correctness. Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985); Delaney v. Commissioner, 743 F.2d 670, 671 (9th Cir. 1984), affg. T.C. Memo. 1982-666; Weimerskirch v. Commissioner, 596 F.2d 358, 360 (9th Cir. 1979), revg. 67 T.C. 672 (1977); see Rule 142(a); see also Welch v. Helvering, 290 U.S. 111, 115 (1933). However, in an unreported income case this presumption .arises only when it is supported by some substantive evidence that the taxpayer received unreported income. Rapp v. Commissioner, supra; Delaney v. Commissioner, supra; Weimerskirch v. Commissioner, supra; see also United States v. Janis, 428 U.S. 433, 441-442 (1976). Once the Commissioner has carried his initial burden of introducing some evidence linking the taxpayer with the income-producing activity, the burden shifts to the taxpayer to rebut the presumption by establishing by a preponderance of the evidence that the deficiency determination is arbitrary or erroneous. Rapp v. Commissioner, supra; Adamson v. Commissioner, 745 F.2d 541, 671 (9th Cir. 1984), affg. T.C. Memo. 1982-371; see Rule 142(a). In.his answer, respondent states: [6](c) In this plea agreement, petitioner admitted he had gross income during the calendar year 1996 of at least $645,253.00. * * * * * * * [6)(e) During 1996 the petitioner was in the trade or business of obtaining passports and visas. of $1,138,436 and a Federal income tax deficiency of $459,500 for - 15 - . 1996. D. Addition to Tax Under Section 6651(f) Respondent determined that petitioner is liable for an addition to tax under section 6651(f) of $344,625 for fraudulent failure to file a return in 1996. Petitioner argues that respondent has not met his burden of proof under Rule 142(b) and section 7454(a). Section 6651(f) .imposes an addition to tax of up to 75 percent of the amount of tax required to be shown on the return where the failure to file a Federal income tax return is due to fraud. The Commissioner has the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b); Clayton v. Commissioner, 102 T.C. 632, 646, 652-653 (1994). For this purpose, we consider the same factors under section 6651(f) that are considered in imposing the fraud penalty under section 6663 and former section 6653(b). Clayton v.. Commissioner, supra at 653. Fraud is an intentional wrongdoing designed to evade tax known or believed to be owing. Edelson v. Commissioner, 829 F.2d 828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601. The existence of fraud is a question of fact to be resolved upon consideration of the entire record. DiLeo v. - 17 - fraud. See.Castillo v. Commissioner, 84 T.C. 405, 409-410 (1985). Respondent also established that petitioner failed to make estimated tax payments in 1996. In an attempt to establish the remaining badges of fraud, respondent relies almost entirely on petitioner's plea agreement, the plea hearing transcript, and testimony directed towards those documents. However, at trial, respondent informed the Court that the documents were under the seal of the U.S. District Court for the Central District of California. Respondent further stated that the seal could have been removed but was not because respondent's counsel failed to realize the seal was in place until the week before trial. Respondent provided no authority for our using those documents while they are under seal. The Court informed respondent that it would respect the .seal of a Federal District Court and would not consider the plea agreement or the plea hearing transcript. In an attempt to get into evidence the information contained in those documents, respondent called Special Agent Bautista as a witness. Specifically, Special Agent Bautista testified to admissions purportedly made by petitioner during the plea hearing. However, the testimony was struck from the record because it was.based on Special Agent Bautista's reading of the sealed documents. The purported admissions were not made directly to Special Agent Bautista, and he had no independent recollection of the admissions. In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit. To reflect the foregoing, Decision will be entered for respondent as to the deficiency in income tax and for petitioner as to the addition to tax. 6(...continued) 6651(a)(1), and thus, we do not consider it.