TAX COURT OPINION

Case: John V. Maher
Docket Number: 9938-03
Judge: Thornton
Opinion Type: memo
Filed: 01/31/2006
Pages: 6

CAL. T.C. Memo. 2006-14 UNITED STATES TAX COURT JOHN V. MAHER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 9938-03. Filed January 31, 2006. John V. Maher, pro se. Joseph J. Boylan, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION THORNTON, Judge: Respondent determined the following deficiencies and penalties with respect to petitioner's Federal income taxes:¹ ¹ Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. SERVED .JAN 3 1 2006 - 3 - guaranteed 30-percent annual return. In reality, there was no such investment program. In February 1995, in reliance on petitioner's misrepresentations, the Kieffers sent petitioner funds totaling $9,500 to invest in the fictitious investment program. Petitioner gambled these funds away. In February and May 1996, the Kieffers sent petitioner additional funds totaling $65,000 funds to invest in the fictitious investment program. Petitioner also gambled these funds away. To further his fraudulent scheme and keep the Kieffers at bay, petitioner gave the Kieffers various fabricated documents. One of these documents, a doctored memorandum from the Federal Employees' Retirement System (FERS) dated March 14, 1995, falsely described petitioner's position as "Ass't Executive Dire.ctor of Operations" at the Department of the Treasury. The document purported to show that petitioner's account in the Stopgap Investments program had been opened for a total of $100,000, with a guaranteed 30-percent rate of return. Petitioner also gave the Kieffers another purported FERS memorandum, dated April 15, 1996, which indicated that the guaranteed rate of interest had dropped to 10 percent on an investment of $200,000. Finally, in 1998, petitioner gave the Kieffers a version of petitioner's own statements of retirement benefits, which had been altered to show promises, all through use of the mails, in violation of 18 U.S.C. - 5 - section 1341. Petitioner's Federal Tax Returns For taxable years 1995 and 1996, petitioner timely filed self-prepared Forms 1040, U.S. Individual Income Tax Return. Petitioner reported gross income of $61,725 and $61,406 on his 1995 and 1996 tax returns, respectively. He reported none of the payments he had received from the Kieffers. (cid:16)042Notice of Deficiency On April 9, 2003, respondent mailed to petitioner a notice of deficiency for 1995 and 1996, determining that petitioner had unreported income of $9,500 for 1995 and $65,000 for 1996 and was liable for the civil fraud penalty for both years.3 OPINION At trial, petitioner conceded that he had unreported taxable income with respect to the Kieffers' cash payments to him in 1995 and 1996.4 Consequently, the primary issue remaining for decision is whether petitioner is liable for the section 6663(a) civil fraud penalty. 3 In the notice of deficiency, respondent also disallowed itemized deductions that petitioner had claimed for unreimbursed employee expenses. Before trial, the parties settled this issue, agreeing that petitioner had substantiated stipulated amounts of expenses, which for 1995 exceeded the expenses claimed on his return. 4 Similarly, the parties have stipulated that the Kieffers' payments to petitioner were "income" to him. proceeding, petitioner has never denied that he fraudulently misappropriated money from the Kieffers and that it was wrong to do so, although he alleges that these misdeeds were an isolated aberration in his conduct. Petitioner maintains that he always intended to repay the Kieffers with interest for their "investments", and that he eventually did so, with liquidated damages, albeit pursuant to a consent judgment. (He alleges that he would have repaid the Kieffers sooner but lacked the (cid:16)042resources, having gambled himself into bankruptcy and being legally unable to withdraw funds from his Government retirement program.5) Although it betrays a sore lack of judgment (perhaps aggravated by' a gambling compulsion) and does nothing to absolve him of wrongdoing, petitioner's testimony in this regard did not strike us as being dishonest or devious.6 Petitioner testified that when he filed his tax returns for 1995 and 1996, he believed that he was not required to report the Kieffers' payments to him as taxable income, "Because I 5 Petitioner alleges that he did not list the Kieffers on his.bankruptcy petition because he intended to repay them in full and did not seek to have his obligations to them discharged in bankruptcy. that "It's clear to me that that unfortunate 6 We are mindful in sentenCing petitioner for mail the presiding judge in the U.S. District Court of New fraud, Jersey stated: circumstance [of petitioner's defrauding the Kieffers] was the result of a gambling compulsion, which doesn't excuse it, however you have made complete restitution to the Kiefers [sic], you have come forward and accepted responsibility and in an extraordinary way". _ 9 _ counsel of a Presidential reelection committee was not liable for the civil fraud penalty with respect to his unreported income from illegal activities, notwithstanding the taxpayer's education, professional background, and amoral conduct), affd. 808 F.2d 312 (4th Cir. 1986). Respondent contends that petitioner maintained inadequate records and that this is circumstantial evidence of fraud. Although petitioner signed no 1.oan agreements or other documents to evidence an investment or loan transaction with the Kieffers, we believe that petitioner's personal relationship with the Kieffers and the nature of the purported transactions credibly explain the absence of formal documents memorializing the Kieffers' "investments".7 Respondent does not allege, and the evidence does not suggest, that petitioner concealed records from respondent, refused to cooperate with respondent's investigation, made misleading statements to IRS agents during the course of the IRS investigation, destroyed any records, or altered any entries in his books. On the basis of all the evidence in the record, we conclude that respondent has failed to prove clearly and convincingly 7 Additionally, we are not convinced by respondent's that petitioner's failure to maintain adequate records argument to substantiate employee business expenses is circumstantial evidence of of respondent's concession that substantiated more employee business expenses than he claimed on his 1995 return. for 1995 petitioner has fraudulent intent to evade tax, particularly in light To reflect the foregoing and the parties' concessions, - 11 - Decision will be entered under Rule 155.