Source: http://oicattorney.blogspot.com/2010/02/
Timestamp: 2017-07-23 14:51:16
Document Index: 43350377

Matched Legal Cases: ['§ 7809', '§ 7122', '§ 7809', '§ 301', '§ 1331', '§ 1346', '§ 1346', '§ 1346', '§ 1346', '§ 7422', '§ 1346', '§ 7422', '§ 7422', '§ 7422', '§ 1346', '§ 7122', '§ 7122', '§ 7122', '§ 7809', '§ 7122', '§ 7809', '§ 301', '§ 301', '§ 7433', '§ 7433', '§ 7433', '§ 7422', '§ 301', '§ 301', '§1', '§ 1341', '§ 666', '§ 1951', '§ 1344', '§ 7203', '§ 666', '§ 1951', '§ 7809']

IRS Tax Attorney: February 2010
Second, 26 U.S.C. § 7809(b)(1) provides for the placement of funds offered in compromise in a deposit fund account, and more importantly here, for the return of such funds to the maker of the offer upon rejection by the Secretary. The statute specifically states that sums offered under the provisions of 26 U.S.C. § 7122 would be deposited with the Treasurer in a deposit fund account, and “the Secretary shall refund to the maker of such offer the amount thereof.” See 26 U.S.C. § 7809(b)(1) (emphasis added). This framework is also outlined in the Internal Revenue's own regulations. Specifically, 26 C.F.R. § 301.7122-1(h) provides:2010-1 ustc ¶50,240Code Sec. 7122, Code Sec. 7433 DEBORAH SLUTTER, Plaintiff v. UNITED STATES OF AMERICA, Defendant.IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. CIVIL ACTION. NO. 08-3046. February 19, 2010.MEMORANDUM STENGEL, J. : Deborah Slutter brought this case against the United States of America seeking the return of $20,000 which she offered in compromise for the full discharge of her tax indebtedness for tax years 2003, 2004, and 2005. The Internal Revenue Service rejected the offer initially and on appeal, and applied the sum to the $57,242.67 she owed the government for those tax years. The defendant has filed a motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. For the following reasons, I will grant the motion and enter judgment in favor of the defendant.I. BACKGROUNDOn August 28, 2007, with the assistance of a certified public accountant, Miss Slutter submitted IRS Form 656, 1 entitled Offer in Compromise, to the Internal Revenue Service together with a lump-sum payment of $20,000. See Compl. ¶ 4; see also Pl. Ex. A. Three months later, the government rejected the offer and retained the money. Id. ¶ 5. A month later, Miss Slutter appealed the decision but her appeal was denied the following April. 2 She received notice from the Internal Revenue Service that part of the $20,000 payment was used to satisfy her liability for tax year 2003, and the remaining amount, i.e., $9,649.45, was characterized as an overpayment and applied toward her liability for tax year 2004. Id. ¶¶ 6, 7; see also Compl. Ex. D at 3. Miss Slutter then filed this complaint characterizing the government's decision to retain the lump sum offer as an “outrageous abuse of discretion and a violation of its own regulations.”II. STANDARD FOR JUDGMENT ON THE PLEADINGSRule 12(c) of the Federal Rules of Civil Procedure provides that “[a]fter the pleadings are closed - but early enough not to delay trial - a party may move for judgment on the pleadings.” The applicable standard on a motion for judgment on the pleadings is the same as the standard applied to a motion filed pursuant to FED.R.CIV.P. 12(b)(6). Spruill v. Gillis , 372 F.3d 218 (3d Cir. 2004)). Such a motion cannot be granted “unless the moving party has established that there is no material issue of fact to resolve, and that it is entitled to judgment in its favor as a matter of law.” Rosenau v. Unifund Corp. , 539 F.3d 218, 221 (3d Cir. 2008) (citing Jablonski v. Pan Am. World Airways, Inc. , 863 F.2d 289, 290-291 (3d Cir.1988)). In reviewing a 12(c) motion, the court must view the facts in the pleadings and the inferences drawn therefrom in the light most favorable to the non-moving party. Id. III. DISCUSSIONThe first obstacle to Miss Slutter's recovery is the government's entitlement to sovereign immunity. The United States is immune from suit, unless it consents to be sued by waiving its sovereign immunity. Lehman v. Nakshian , 453 U.S. 156, 160 (1981); see also United States v. Testan , 424 U.S. 392, 399 (1976) (the United States, including its agencies and its employees, can be sued only to the extent that it has expressly waived its sovereign immunity). Moreover, when a plaintiff seeks to sue the United States, she may not rely on the general federal question jurisdiction of 28 U.S.C. § 1331 , but must identify a specific statutory provision that waives the government's sovereign immunity from suit. Such a waiver must be “unequivocally expressed,” and any waiver will be strictly construed in favor of the sovereign. United States v. Nordic Village, Inc. , 503 U.S. 30, 33-34 (1992); see also Clinton County Comm'rs v. United States EPA , 116 F.3d 1018, 1021 (3d Cir. 1997) (same). Where the sovereign has waived immunity, no suit can be maintained unless it is in exact compliance with the terms of the statute under which the sovereign has consented to be sued. United States v. King , 395 U.S. 1, 4 (1969). A plaintiff bears the burden of asserting specific provisions waiving the sovereign immunity of the United States. Holloman v. Watt , 708 F.2d 1399, 1401 (9th Cir. 1983).Miss Slutter asserts that jurisdiction is conferred on this court by the provisions of 28 U.S.C. § 1346(a)(1) . See Compl. ¶ 3. That section provides that the district courts shall have original jurisdiction of:(1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.28 U.S.C. § 1346(a)(1) . The defendant insists that Miss Slutter has not established that an explicit waiver of the United States' sovereign immunity exists because the cited statute is a general grant of jurisdiction to the court and is not a cause of action by itself. I do not agree.The United States Supreme Court recognized that 28 U.S.C. § 1346(a)(1) waives the government's sovereign immunity from suit by authorizing federal courts to adjudicate “any civil action against the United States for the recovery of any internalrevenue tax alleged to have been erroneously or illegal assessed or collected.” United States v. Williams , 514 U.S. 527, 530 (1995). Despite its spacious terms, however, Section 1346(a)(1) must be read in conformity with other statutory provisions placing requirements or restrictions on such actions which limit and determine the scope of this grant of jurisdiction. Koss, et al. v. United States of America , 69 F.3d 705, 707 (3d Cir. 1995) (citing United States v. Dalm , 494 U.S. 596, 601 (1990)). In its alternative argument, the defendant suggests that this action be considered a claim for a tax refund, and that § 1346(a)(1) be read in conformity with 26 U.S.C. § 7422 . 3 I am not persuaded.In order to bring a suit for refund under 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422 , the taxpayer must first exhaust her administrative remedies by paying the tax assessment fully and then timely filing a claim for refund with the Internal Revenue Service. See 26 U.S.C. § 7422(a) ; Dalm , 494 U.S. at 601-602; Flora v. United States , 357 U.S. 63, 68 (1958); Koss , 59 F.3d at 708. As the defendant points out, Miss Slutter has not fulfilled either of these jurisdictional prerequisites, and her claim would fail.Nevertheless, I do not agree with the defendant that Miss Slutter is seeking a tax “refund” as that term is typically used in tax cases. Miss Slutter is not seeking the return by the government of excess taxes that she paid. Instead, she availed herself of a legal mechanism outlined in the Internal Revenue Code which allowed her to present the government an offer-in-compromise of her tax liability. It is that payment of $20,000 of which she seeks the return due to the government's rejection of her offer, not any excess taxes paid. Thus, the $20,000 cannot be characterized as a traditional tax “return,” as contemplated in § 7422 . Rather, it is the consideration which accompanied her offer-incompromise ultimately rejected by the government.I find that three sections in particular of the Internal Revenue Code, when read in conformity with § 1346(a)(1) , provide the statutory provisions necessary to determine the scope of the court's authorization to adjudicate these types of cases. Koss , 69 F.3d at 707.First, 26 U.S.C. § 7122 gives the Secretary of the Treasury, or his delegate, the authority to compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense. 26 U.S.C. § 7122(a) . The statute further states that the Secretary shall prescribe guidelines for officers and employees of the Internal Revenue Service to determine whether an offer-incompromise is adequate and should be accepted to resolve a dispute. 26 U.S.C. § 7122(c) .Second, 26 U.S.C. § 7809(b)(1) provides for the placement of funds offered in compromise in a deposit fund account, and more importantly here, for the return of such funds to the maker of the offer upon rejection by the Secretary. The statute specifically states that sums offered under the provisions of 26 U.S.C. § 7122 would be deposited with the Treasurer in a deposit fund account, and “the Secretary shall refund to the maker of such offer the amount thereof.” See 26 U.S.C. § 7809(b)(1) (emphasis added). This framework is also outlined in the Internal Revenue's own regulations. Specifically, 26 C.F.R. § 301.7122-1(h) provides:Deposits. Sums submitted with an offer to compromise a liability or during the pendency of an offer to compromise are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments… . If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest, after the conclusion of any review sought by the taxpayer with Appeals. Refund will not be required if the taxpayer has agreed in writing that amounts tendered pursuant to the offer may be applied to the liability for which the offer was submitted.26 C.F.R. § 301.7122-1(h) (emphasis added). I note that the regulation places no onus on the taxpayer to “flag” the money offered in compromise as a deposit in order to receive the money back, as instructed on IRS form 656, see supra pp. 1-2, n. 1. To the contrary, these sections of the Internal Revenue Code and the Internal Revenue Regulations clearly support Miss Slutter's contention that the payment she offered in compromise of her tax liability should have been returned to her once that offer was rejected.Finally, 26 U.S.C. § 7433(a) specifically waives sovereign immunity limited to actions seeking damages in connection with any collection of tax that involves the reckless, intentional, or negligent disregard of any provision or regulation under the Internal Revenue Code:If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States . Except as provided in section 7432 , such civil action shall be the exclusive remedy for recovering damages resulting from such actions.See 26 U.S.C. § 7433(a) (emphasis added). That Miss Slutter did not receive the $20,000 back from the government upon the rejection of her offer-in-compromise tends to prove that an officer or employee of the Internal Revenue Service disregarded the above provisions of the Tax Code either recklessly, intentionally, or negligently.The final obstacle to Miss Slutter's recovery, however, is a fatal one. Title 26 of the United States Code, Section 7433 is subject to a requirement that all administrative remedies within the Internal Revenue Service available to the plaintiff be exhausted before bringing suit here. See 26 U.S.C. § 7433(d) . The framework for these administrative remedies is outlined in 26 C.F.R. 301.7433-1(d). 4 While Miss Slutter appealed the rejection of her offer-in-compromise with the Internal Revenue Service, there is nothing in the record which shows that she filed an administrative claim described in 26 C.F.R. 301.7433-1(e) 5 for the return of the $20,000 submitted with the offer-in-compromise before filing this complaint. Her request for an appeal of the decision rejecting the offer-in-compromise is a separate matter and does not satisfy this requirement. Under these circumstances, this case cannot be maintained due to its noncompliance with the terms of the statute under which the sovereign has consented to be sued. King , 395 U.S. at 4. Because sovereign immunity is jurisdictional in nature, F.D.I.C. v. Meyer , 510 U.S. 471, 475 (1994), and Miss Slutter has failed to meet the jurisdictional prerequisite of exhaustion of administrative remedies, I am constrained to find that the court has no subject matter jurisdiction over this matter. Accordingly, I will grant the defendant's motion.An appropriate Order follows. Footnotes 1 Page 2 of this form contains the following provision: "By submitting this offer, I/we have read, understand and agree to the following conditions: … (b) Any payments made in connection with this offer will be applied to the tax liability unless I have specified that they be treated as a deposit. Only amounts that exceed the mandatory payments can be treated as a deposit. Such a deposit will be refundable if the offer is rejected or returned by the IRS or is withdrawn. I/we understand that the IRS will not pay interest on any deposit." The plaintiff and her CPA both executed this form. The plaintiff argues that this form directly contradicts the IRS's own regulations and statutes, and characterizes the form as a contract of adhesion. While the provision on the form directly contradicts the relevant portions of the Internal Revenue Code and its regulations, see infra pp. 6-7, that is not dispositive here. 2 The notice from the Internal Revenue Service informing Miss Slutter that her appeal was denied contains a typographical error, which the parties have not mentioned. The first sentence reads, "This refers to your offer of $2,000, dated August 28, 2007 to compromise your liability …" See Compl., Exhibit D at 1. All other documents correctly portray Miss Slutter's offer-in-compromise as $20,000. 3 Section 7422 provides "[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected … until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof." 26 U.S.C. § 7422(a) . 4 26 C.F.R. § 301.7433-1(d) provides:(1) Except as provided in paragraph (d)(2) of this section, no action under paragraph (a) of this section shall be maintained in any federal district court before the earlier of the following dates: (i) The date the decision is rendered on a claim filed in accordance with paragraph (e) of this section; or (ii) The date six months after the date an administrative claim is filed in accordance with paragraph (e) of this section.(2) If an administrative claim is filed in accordance with paragraph (e) of this section during the last six months of the period of limitations described in paragraph (g) of this section, the taxpayer may file an action in federal district court any time after the administrative claim is filed and before the expiration of the period of limitations. 5 26 C.F.R. § 301.7433-1(e) provides:(1) An administrative claim for the lesser of $ 1,000,000 ($ 100,000 in the case of negligence) or actual, direct economic damages as defined in paragraph (b) of this section shall be sent in writing to the Area Director, Attn: Compliance Technical Support Manager of the area in which the taxpayer currently resides.(2) Form. The administrative claim shall include:(i) The name, current address, current home and work telephone numbers and any convenient times to be contacted, and taxpayer identification number of the taxpayer making the claim;(ii) The grounds, in reasonable detail, for the claim;(iii) A description of the injuries incurred by the taxpayer filing the claim;(iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable; and(v) The signature of the taxpayer or duly authorized representative.
Return of Offer in Compromise deposits 7122
Karl L. Matthies, et ux. v. Commissioner, 134 T.C. No. 6, Code Sec(s) 61; 402; 6662. ________________________________________KARL L. MATTHIES AND DEBORAH MATTHIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent . Case Information: Code Sec(s): 61; 402; 6662Docket: Docket No. 22196-07.Date Issued: 02/22/2010 Judge: Opinion by THORNTONA return that has a “reasonable basis” is not negligent. Sec. 1.6662-3(b)(1), Income Tax Regs. The “reasonable basis” standard is “significantly higher than not frivolous or not 12 (...continued) and (3) that the “Annual Reserve Increase” was $305,866.76. Petitioners' own brief indicates that at the end of policy year 2, Hartford Life's reserves in the insurance policy were $1,035,030. Petitioners have offered no explanation why the interpolated terminal reserve value was purportedly only $305,866.74 in the light of their representation that Hartford Life maintained a reserve of $1,035,030. patently improper.” Sec. 1.6662-3(b)(3), Income Tax Regs. This standard is satisfied if the return position is reasonably based on various types of enumerated authorities, including statutory provisions, regulations, revenue rulings, and notices published by the IRS, taking into account the relevance and persuasiveness of the authorities and subsequent developments. Secs. 1.6662- 3(b)(3), 1.6662-4(d)(3)(iii), Income Tax Regs. The “reasonable basis” standard is less stringent than the “substantial authority” standard (which entails “an objective standard involving an analysis of the law and application of the law to relevant facts”), which in turn is less stringent than the “more likely than not standard” (which asks whether there is “a greater than 50-percent likelihood of the position being upheld”). Secs. 1.6662-3(b)(3), 1.6662-4(d)(2), Income Tax Regs. The negligence penalty may be inappropriate where an issue to be resolved by the Court is one of first impression involving unclear statutory Bunney v. Commissioner, 114 T.C. 259, 266 (2000); language. Lemishow v. Commissioner, 110 T.C. 110, 114 (1998); Hitchins v. Commissioner, 103 T.C. 711, 719-720 (1994); see Everson v. United States, 108 F.3d 234, 238 [79 AFTR 2d 97-1335] (9th Cir. 1997) (stating that “When a legal issue is unsettled, or is reasonably debatable” a negligence penalty is generally not appropriate). This Court has not previously addressed the tax treatment of a bargain sale of a life insurance policy under section 61 or 402(a) or the application of the “entire cash value” standard under the applicable regulations. In adopting the 2005 final section 402(a) regulations, the IRS stated that it was responding to the question under the then-existing regulations of whether “entire cash value” includes a reduction for surrender charges. T.D. 9223, 2005-2 C.B. 591. Furthermore, the amended section 402(a) regulations, which dispense with the “entire cash value” standard, indicate that for a bargain sale of an insurance contract that occurs before August 29, 2005, the bargain element is includable in income under section 61 but is not treated as a “distribution” under the subchapter of the Code that includes section 402. Sec. 1.402(a)-1(a)(1)(iii), Income Tax Regs. On supplemental brief respondent has modified his original position as to the applicability of this amended regulation. Respondent's shift in this regard, together with his explanation of his reasons for promulgating the amended section 402(a) regulations, is indicative of the uncertainty under the applicable regulations of the tax consequences of the transaction in question. We conclude that petitioners had a reasonable basis for their return position. 13 We hold that petitioners are not liable for the accuracy-related penalty for negligence. Other contentions raised by the parties but not addressed in. this Opinion we deem to be moot or without merit. 14 To reflect the foregoing and concessions by respondent,
no negligence when law is not clear
Dec. 58,137(M)Code Sec. 61, Code Sec. 446, Code Sec. 6501, Code Sec. 6663 Individuals: Income: Reconstruction of income: Specific items method: Penalties: Fraud: Assessment: Limitations T.C. Memo. 2010-31LISA R. AND DARREN T. COLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. SCOTT C. AND JENNIFER A. COLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.UNITED STATES TAX COURT. Docket Nos. 16991-08, 17275-08. Filed February 22, 2010.Darren T. Cole and Scott C. Cole , for petitioners.Stewart Todd Hittinger and Timothy Lohrstorfer , for respondent.MEMORANDUM OPINIONKROUPA, Judge: Respondent determined deficiencies in petitioners' 1 Federal income taxes and fraud penalties under section 6663 2 for 2001. Specifically, respondent determined a $102,227 deficiency and a $76,670 section 6663 fraud penalty against Darren and Lisa Cole for 2001. 3 Respondent also determined a $556,187 deficiency and a $417,140 section 6663 fraud penalty against Scott and Jennifer Cole for 2001.There are two primary issues for decision. The first issue is whether petitioners understated their income in the amounts respondent determined for 2001 as adjusted. We hold that they did. The second issue is whether petitioners are liable for the fraud penalty for 2001. We hold that they are. Because we find fraud, respondent is not time barred from assessing petitioners' taxes for 2001.Background Lisa and Darren Cole resided in California at the time they filed their petition. Jennifer and Scott Cole resided in Indiana at the time they filed their petition.The Bentley Group Petitioners Scott C. Cole (Scott) and Darren T. Cole (Darren) are brothers. Scott and Darren are attorneys who practiced law in Indiana through an entity known as the Bentley Group during 2001. Bentley was the maiden name of Darren's wife, Lisa Cole (Lisa). The brothers formed the Bentley Group in 1998 and also did business under the name Cole Law Offices. The Bentley Group and Cole Law Offices were different names for the same business, but there were no assumed name filings for either entity.The law practice was a family affair, with Scott, Darren, and Lisa all taking an active part in the business. Scott's legal practice focused in part on business planning and taxation. Scott created limited liability companies (LLCs) for his clients, prepared corporate and individual tax returns, and represented clients before the Internal Revenue Service (IRS). Scott and Darren also performed criminal defense work, including work for the public defender's office in Boone County, Indiana. Darren, a graduate of Creighton University School of Law, was responsible for the management of the law practice. Lisa, a college graduate, acted as a paralegal.Darren opened a business checking account for Cole Law Offices but used the Bentley Group's employer identification number. Scott, Darren, and Lisa all had signature authority over this account. The brothers agreed to share equally the law practice's profits and losses, though petitioners failed to present any documentation regarding this sharing arrangement. Darren and Scott also agreed that they could withdraw money from the Bentley Group's account. Any money withdrawn from the account other than money they earned for their legal services was considered “borrowed.” Petitioners failed to report any money they withdrew, however, as income for providing legal services and they also failed to provide any loan documents, notes, or any other investment account records evidencing loan transactions between Scott, Darren, and the Bentley Group's account.Scott and Darren advised their individual clients, and they also advised clients together. These joint clients were the law practice's clients. Clients made payments either directly to the respective brother, through the Bentley Group, or to Cole Law Offices. Scott also received payment from a client with a check made payable to Scott C. Cole and Associates even though there was no such entity. The brothers did not keep records, nor did they produce or maintain invoices for their services. They also failed to keep records or invoices for Lisa's paralegal services.The taxable deposits in the Bentley Group's account for 2001 totaled $1,430,802. The earnings came from many sources involving the efforts of both brothers and Lisa. The Bentley Group received most of its legal fees from Constance J. Gestner and Terri L. Haynes, co-trustees of the George Sandefur Living Trust (Sandefur Trust), which paid Scott $1.2 million in 2001 to represent the trust in all estate matters. The Sandefur Trust paid the fees in four installments of $300,000. The first check was payable to “Scott Cole and Associates,” a fictional business, and the remaining checks were made payable to “Cole Law Offices.”Scott, Darren, and Lisa withdrew in excess of $1 million from the Bentley Group's account during 2001. They then transferred the funds into numerous other accounts with no business explanation for doing so. The brothers were unclear as to which account they used for Interest on Lawyer Trust Accounts (IOLTA) purposes. No records were kept for any of the transfers from the Bentley Group's account. The withdrawals made by or on behalf of Darren or Lisa totaled $198,308, while the withdrawals made by or on behalf of Scott included $1,173,263 in 2001.Scott and Jennifer Cole's Personal Financial Activities Scott did not always deposit his legal services fees into the Bentley Group's account. Scott deposited $79,294 into the personal checking account of his wife, Jennifer Cole (Jennifer), and deposited $6,475 into his personal bank account in 2001. Scott and Jennifer used the funds in these accounts to pay a variety of personal expenses including their children's school tuition and music lessons and residential landscaping.Scott failed to report the legal services fees he generated in 2001 as taxable wage or self-employment income regardless of which account the amounts were credited. In addition, Scott failed to report any amounts he withdrew from the Bentley Group's account as taxable wage or self-employment income even though he withdrew $1 million plus for personal nonbusiness purposes.Scott freely transferred amounts in the Bentley Group's account to his family and friends without keeping sufficient documentation of the transfers or reporting the transactions. For example, he transferred $50,000 from the Bentley Group's bank account to his mother. Scott also lent his father $40,000 from the Bentley Group's account. Scott used this transaction to further convolute the tracing of his income and told his father, rather than paying him back directly, to make a contribution to his church for $40,000 in Scott's name. Scott and Jennifer, thereafter, claimed a $40,000 charitable contribution deduction yet failed to report any of that amount as taxable wage or self-employment income. Scott also lent $300,000 to a friend for options trading and made a loan to his brother Mark for Mark's roofing company. Scott has not provided any records or other documentation to show that any amount withdrawn from the Bentley Group's account was not taxable. In addition, he has failed to show any business purpose for these transfers.Scott also created an LLC known as JAC Investments, LLC (JAC). JAC are the initials for Jennifer A. Cole. JAC reported its principal business activity as “Investments” although there is nothing in the record to show any stock transactions. Rather, JAC operated as a conduit to which Scott transferred and assigned income from his legal services. JAC reported taxable deposits for 2001 of $79,652 and claimed $28,647 of expenses, though none of these expenses have been substantiated. Deposits into JAC's bank account were almost exclusively checks made payable to Scott individually, not JAC. Jennifer is a college graduate and had previously worked as an accountant. In 2001 she was a homemaker and had no income of her own, yet Scott reported her as owning a 99-percent interest in JAC with him owning a 1-percent interest in JAC. Scott reported self-employment tax on only $1,162 of income for 2001.Scott formed and solely owned Scott C. Cole, P.C. (SCC), an Indiana professional corporation in 1997. 4 The Indiana Secretary of State administratively dissolved SCC in 2001 because SCC did not file its required business entity reports. SCC had no assets and did not appear to serve any business purpose. In 2005 Scott filed a tax return for SCC for 2001, the first and only tax return filed for SCC. SCC did not report receiving any income from the Bentley Group's account in 2001. SCC reported gross receipts of $158,553 and taxable income of $738 with a reported tax due of $258.Scott transferred or assigned over $1 million in legal services fees in 2001 from the Bentley Group to at least seven different accounts. Scott commingled amounts in the Bentley Group's account with amounts in other accounts including JAC's account, SCC's account, Jennifer's personal account, Scott's personal account, his father's business account, and his mother's account. Scott and Jennifer failed to report, however, any wages or salaries, Schedule C income, or income from the Bentley Group or Cole Law Offices on their joint tax return for 2001. Instead, the joint tax return reflected only $341 of tax liability and $164 of self-employment tax liability. Scott subsequently filed for bankruptcy in 2002, at which time he failed to disclose any interest in the Bentley Group, Cole Law Offices, or any other law practice.Darren and Lisa Cole's Personal Financial Activities Darren also failed to report the amounts he withdrew from the Bentley Group's account on any tax return for 2001. Darren's primary source of income during 2001 was from the practice of law. This income was paid through the Bentley Group or directly to Darren. Like Scott, Darren transferred his legal services fees to multiple accounts. Darren maintained no bank account in his own name during 2001. Darren deposited checks totaling $24,847, paid to him for legal services he performed, into Lisa's bank account in 2001 but failed to report this amount on their joint tax return for 2001.Scott formed an LLC for Darren and Lisa's benefit known as LRC Investment, LLC (LRC). LRC are the initials for Lisa R. Cole. LRC, similar to JAC, served no business purpose. Darren used it as a conduit to transfer and assign his legal services fees. Darren opened a bank account in LRC's name with an initial $20,000 deposit. No explanation has been given as to where the $20,000 originated or whether it was taxable. Darren and Lisa claimed to be 50-percent partners in LRC. Darren filed an information return for LRC for 2001 reporting LRC's principal business as “Management Consulting” and concealed that he was an attorney. The Bentley Group distributed $145,930 to LRC, which LRC reported as its total gross receipts. No amount was reported on any investment or stock transaction. LRC claimed unsubstantiated expenses of $135,636. In addition to lacking documentation, no claimed expense bore any relationship to the claimed business of LRC.Lisa represented on a car loan application that she was employed by the Bentley Group and that she received a yearly salary of $51,996. Lisa made a similar representation on a home mortgage loan application. Her yearly salary on the mortgage loan application was represented at an increased $72,000 even though the representations were only days apart. In addition, Lisa deposited a total of $138,248 into her personal bank account during 2001. Despite these deposits and representations, Lisa failed to report any wage or self-employment income on any tax return for 2001.Darren and Lisa withdrew a total of $198,308 from the Bentley Group's bank account in 2001 yet failed to report any amount. Lisa received at least $45,527 from the Bentley Group and other sources during 2001 but failed to report even a fraction of this amount. Lisa also made a $28,873 down payment on a house at the same time the Bentley Group's bank account reflected a withdrawal of the same amount, yet she failed to report any of this amount. Instead, Darren and Lisa reported only $10,201 in adjusted gross income on their joint tax return for 2001 and sought a $2,477 refund. They reported two minimal sources of income on the joint tax return. They reported only $2,978 from the Bentley Group and $10,294 from LRC. Darren filed for bankruptcy in 2003, at which time he failed to disclose any interest in the Bentley Group or any other law practice.Respondent's Examination Respondent began an examination of Scott and Jennifer's joint tax return for 2001 in 2003. Respondent assigned the audit to Revenue Agent Loretta Reed. Revenue Agent Reed met with Scott and learned of Scott and Darren's involvement in the Bentley Group, which still had not submitted a tax return for 2001.Revenue Agent Reed thereafter requested, due to Darren's involvement in the Bentley Group, that Darren and Lisa's joint tax return for 2001 be selected for examination. Respondent assigned Revenue Agent Reed to audit Darren and Lisa. Neither Lisa nor Darren cooperated with Revenue Agent Reed during the audit. Darren threatened that Revenue Agent Reed would be arrested if she came upon his property, and Revenue Agent Reed received no response from Lisa after sending audit notices and summonses to her. Revenue Agent Reed eventually obtained audit information by issuing third-party summonses to Darren and Lisa's banks and mortgage company.The Bentley Group's 2001 Information Return, Form 1065 Darren filed the information return for the Bentley Group for 2001 in 2004 after the audit of both partners had begun. The Bentley Group reported gross receipts and ordinary income of $1,583,900. It also reported there were no cash distributions or transfers of partnership interests for the 2001 tax year. This was inconsistent with all the distributions made to entities and persons during 2001. The K-1s attached to the Bentley Group's information return also did not reflect reality. The K-1 on the late-filed information return reflected that Darren had a 0-percent interest in the profits and losses of the Bentley Group and had only a 1-percent interest in its capital. The K-1 reflected that Scott's defunct SCC owned all the profits and losses of the Bentley Group and had a 99-percent interest in its capital. SCC had not filed any tax return for 2001. There was no K-1 for Scott individually.Neither Scott nor Darren filed employment tax returns for the Bentley Group, and the Bentley Group claimed no deduction on the information return for payment of unemployment taxes. It also claimed no other expenses normally associated with operating a law practice. Further, despite the significant legal services income the Bentley Group received during 2001, the Bentley Group did not report any legal services income for 2001. At trial, Scott and Darren both asserted that SCC was the only partner of the Bentley Group. Neither Darren nor Scott reported any sale of his interest in the Bentley Group to SCC on his joint tax return.Deficiency Notices Issued Respondent used the specific items method to reconstruct Scott's and Darren's respective incomes from the Bentley Group in 2001. Respondent used the available records for the withdrawals that petitioners made from the Bentley Group's bank account. Respondent also did bank deposit analyses with respect to their incomes from other sources. Respondent determined that petitioners had omitted wages and self-employment income from their joint tax returns, and respondent issued petitioners deficiency notices and asserted fraud penalties against them. Petitioners timely filed petitions with this Court.Discussion We are asked to decide whether petitioners, two attorney brothers and their spouses, failed to report over $1.5 million in income from providing legal and tax preparation services, and if so, whether such underreporting of income was attributable to fraud. Petitioners created so many different legal entities and distributed money to so many entities and individuals in 2001 that petitioners themselves were confused at trial. Petitioners failed to keep adequate invoices and records, thus making their financial dealings even more convoluted. We begin by discussing the unreported income.I. Unreported Income Gross income generally includes all income from whatever source derived. Sec. 61(a) . Taxpayers must keep adequate books and records from which their correct tax liability can be determined. Sec. 6001 . When a taxpayer fails to keep records, the Commissioner has discretion to reconstruct the taxpayer's income by any reasonable means. Sec. 446(b) ; Webb v. Commissioner , 394 F.2d 366, 371-372 (5th Cir. 1968), affg. T.C. Memo. 1966-81; Factor v. Commissioner , 281 F.2d 100, 117 (9th Cir. 1960), affg. T.C. Memo. 1958-94.The Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving that these determinations are erroneous. Rule 142(a); Welch v. Helvering , 290 U.S. 111, 115 (1933). Both brothers acknowledge they are attorneys and earned income from providing legal services. In addition, Scott prepared taxes for others and testified that he understood that income earned from legal services must be reported on tax returns. They argue nonetheless that all the income deposited in the Bentley Group's account should be assigned to SCC, a defunct entity, not them individually.Taxpayers may not avoid their tax liability on income they earned by simply assigning income to others. Trousdale v. Commissioner , 16 T.C. 1056, 1065 (1951), affd. 219 F.2d 563 (9th Cir. 1955). When a taxpayer creates an entity as a pure tax avoidance vehicle, the assignment of income theory applies to tax the taxpayer for the income attributed to the entity. See Jones v. Commissioner , 64 T.C. 1066, 1076 (1975). There is no written evidence for 2001 to suggest that SCC was involved with the Bentley Group. In fact, SCC was a defunct corporation that had been dissolved in 2001. The only document suggesting that SCC was a partner of the Bentley Group was the K-1 attached to the Bentley Group's information return for 2001, but this return was not filed or prepared until after Scott and Darren were being audited. All other evidence, including testimony at trial, shows that Scott and Darren were the only two partners of the Bentley Group in 2001. Furthermore, not only was SCC defunct in 2001 but it reported no taxable income and paid no income tax in 2001. Accordingly, we find any money deposited into the Bentley Group's account is income allocated to Scott and Darren, not SCC.Petitioners failed to maintain adequate records of their income. Revenue Agent Reed therefore collected financial information through third-party summonses issued to their banks and mortgage lenders. The Commissioner may use indirect methods of reconstructing a taxpayer's income. Holland v. United States , 348 U.S. 121 (1954). The reconstruction of a taxpayer's income need only be reasonable in light of all surrounding facts and circumstances. Giddio v. Commissioner , 54 T.C. 1530, 1533 (1970). The specific items and bank deposits methods of income reconstruction used by the Commissioner have long been sanctioned by the courts. Clayton v. Commissioner , 102 T.C. 632, 645 (1994); Estate of Mason v. Commissioner , 64 T.C. 651, 656 (1975), affd. 566 F.2d 2 (6th Cir. 1977).The bank deposits method assumes that all money deposited in a taxpayer's bank account during a given period constitutes income, but the Commissioner must take into account any nontaxable sources or deductible expenses of which the Commissioner has knowledge. Clayton v. Commissioner , supra at 645-646. The burden is on petitioners to show that respondent's method of computation is unfair or inaccurate. See DiLeo v. Commissioner , 96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). We now focus on respondent's reconstruction of each couple's income for 2001.A. Scott and Jennifer—Unreported Income Scott and Jennifer filed a joint tax return for 2001 and reported gross income of $100,276, taxable income of $18,265, and a tax liability of $505. Respondent determined, however, that Scott received legal services and tax preparation fees far in excess of what they reported. The Sandefur Trust paid Scott $1.2 million for his legal services, though Scott and Jennifer did not report any of the amount on their joint tax return. In addition, Scott withdrew $1,173,263 from the Bentley Group's account in 2001, but failed to report any of the withdrawals as income. Scott claims he lent most of this money to his father, friends, and brothers and mistakenly asserts that loan proceeds are tax-exempt. Scott's misconception about amounts lent to others does not absolve Scott from paying taxes on income he earned by providing legal services.In addition, JAC had taxable deposits of $79,652, all coming from Scott's legal services fees, yet Scott reported self-employment tax on only $1,162 of income for 2001. Moreover, a total of $79,294 was deposited into Jennifer's personal bank account in 2001, of which $59,264 was from Scott's legal services and tax preparation fees. Neither Scott nor Jennifer reported these deposits as income. Instead, Scott and Jennifer failed to report, in toto, over $1 million in legal services fees. They failed to report any of the legal services fees, yet they claimed a $40,000 charitable contribution deduction for amounts of legal services fees they had contributed to their church.Respondent determined that Scott and Jennifer omitted $1,215,183 of income from their joint tax return for 2001. Respondent also allocated income for self-employment tax purposes between the brothers and determined that Scott had $1,329,689 of unreported self-employment income for 2001 after reviewing the checks deposited into the Bentley Group's account for 2001.We conclude that the specific items and bank deposits methods respondent used to reconstruct Scott and Jennifer's income for 2001 were reasonable and substantially accurate. Scott and Jennifer have introduced no documentary evidence to show otherwise. Any inaccuracies in the income reconstruction are attributable to Scott and Jennifer's failure to maintain books and records. Accordingly, we find Scott and Jennifer had unreported income in the amounts respondent determined in the deficiency notices as adjusted.B. Darren and Lisa—Unreported Income Darren and Lisa reported $10,201 of adjusted gross income and claimed a $2,477 refund on their joint tax return for 2001. Darren testified that all of his income from the practice of law went through the partnership, yet he reported only $2,978 of the money deposited in the Bentley Group's account and $10,294 of the money deposited in LRC's account. Darren and Lisa withdrew, however, a total of $198,308 from the Bentley Group's account in 2001. Moreover, Lisa represented that she was employed and paid by the law practice, but she failed to report any income. Lisa also made a $28,873 down payment on her house directly from funds in the Bentley Group's account but failed to report any of this amount as income.Darren and Lisa have failed to explain several omissions of income and have failed to substantiate the claimed expenses on their joint tax return. Darren and Lisa reported LRC received gross receipts of $145,930 in 2001, all coming from the Bentley Group, yet they offset the gross receipts with $135,636 of unsubstantiated expenses. We find it inconsistent that Darren and Lisa would be able to pay such excessive amounts of expenses for LRC if they had only a small amount of reportable income. The records support respondent's determination that Darren and Lisa omitted $261,684 of income from their joint tax return for 2001.Darren earned significant legal fees working for a law practice that had ordinary income in excess of $1.5 million. Respondent determined that Darren had $198,282 of self-employment income from the practice of law, yet Darren failed to report any self-employment income. Lisa also failed to report any earnings from the Bentley Group on their joint tax return. This conflicts with her representations about her earnings on loan and mortgage documents. Moreover, the record reflects she received funds from the Bentley Group in 2001 yet failed to report any income. Deposits totaling $138,248 were made into Lisa's bank account in 2001, and only $21,550 can be attributed to nontaxable sources. Lisa also made a $28,873 down payment on her house directly from the Bentley Group's account. Respondent determined that Lisa earned $74,399 of self-employment income in 2001.We conclude that the specific items and bank deposits methods respondent used to reconstruct Darren and Lisa's income were reasonable and substantially accurate. Darren and Lisa have introduced no documentary evidence to show otherwise. Any inaccuracies in the income reconstruction are attributable to Darren and Lisa's failure to maintain books and records and to their failure to cooperate with respondent during the audit. We find Darren and Lisa had unreported income in the amounts respondent determined in the deficiency notice as adjusted.II. Fraud Penalty We next consider whether any of petitioners is liable for the fraud penalty for 2001. The Commissioner must prove by clear and convincing evidence that the taxpayer underpaid his or her income tax and that some part of the underpayment was due to fraud. Secs. 7454(a) , 6663(a); Rule 142(b); Clayton v. Commissioner , 102 T.C. at 646.Fraud is a factual question to be decided on the entire record and is never presumed. Rowlee v. Commissioner , 80 T.C. 1111, 1123 (1983); Beaver v. Commissioner , 55 T.C. 85, 92 (1970). The Commissioner must show that the taxpayer acted with specific intent to evade taxes that the taxpayer knew or believed he or she owed by conduct intended to conceal, mislead, or otherwise prevent the collection of the tax. Sec. 7454 ; Recklitis v. Commissioner , 91 T.C. 874, 909 (1988); Stephenson v. Commissioner , 79 T.C. 995, 1005 (1982), affd. 748 F.2d 331 (6th Cir. 1984).Direct evidence of fraud is seldom available, and its existence may therefore be determined from the taxpayer's conduct and the surrounding circumstances. Stone v. Commissioner , 56 T.C. 213, 223-224 (1971). Courts have developed several indicia or badges of fraud. These badges of fraud include understating income, failure to deposit receipts into a business account, maintaining inadequate records, concealing income or assets, commingling income or assets, establishing multiple entities with no business purpose, failing to cooperate with tax authorities, and giving implausible or inconsistent explanations for behavior. Spies v. United States , 317 U.S. 492, 499 (1943); Bradford v. Commissioner , 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601. Although no single factor is necessarily sufficient to establish fraud, a combination of several of these factors may be persuasive evidence of fraud. Solomon v. Commissioner , 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603. We will look at each couple to determine whether the fraud penalty applies with respect to either spouse.A. Scott and Jennifer—Fraud Penalty We now consider whether Scott or Jennifer is liable for the fraud penalty. A taxpayer's intelligence, education, and tax expertise are relevant in determining fraudulent intent. Stephenson v. Commissioner , supra at 1006. Jennifer is college educated and worked as an accountant. Scott is an attorney and, as such, took an oath to uphold the law. In addition, Scott's legal practice included tax law and preparing tax returns for others. Scott testified that he understood that income from providing legal services is taxable, yet he failed to report the income as taxable on any return for 2001. In addition, Scott diverted most of the legal fees from the Bentley Group's account into numerous other accounts ostensibly as loans. Scott wants the Court to believe that such substantial withdrawals were loans, yet there is no documentation or records to show that a loan was made or that the person receiving the funds paid any interest. Further, even if such transactions were loans, that would not excuse Scott from reporting his legal services fees as income, whether directly payable to him or as a distributive share.Scott and Jennifer commingled personal and business income without hesitation. Scott deposited earnings from his law practice into JAC's account, in which Jennifer was a 99-percent owner, and into Jennifer's personal account. Jennifer was aware of these deposits and wrote checks from these accounts to pay personal expenses, including her children's school tuition, landscaping payments, and her children's music lessons.Scott and Jennifer did not report any income from the law practice on their joint tax return for 2001 even though more than $1.5 million was deposited into the Bentley Group's account. Scott had unfettered control over the Bentley Group's account and treated the money deposited in the Bentley Group's account as his personal funds. Scott transferred most of the money in the Bentley Group's account to relatives and friends including a transfer of $50,000 to his mother. Scott failed to produce any records documenting his deposits and withdrawals from the Bentley Group's account and has not rebutted respondent's determination that he received over $1 million in legal services fees in 2001. The lack of records indicates that Scott was not concerned with respecting the existence of different entities or the partners in the Bentley Group.Scott also concealed assets. Scott deposited his legal services fees into numerous other accounts to hide income. We divine no business purpose for the LLCs Scott established. It appears they served as conduits to hide income Scott earned from providing legal services and preparing tax returns. Scott did not indicate he practiced law on any return filed or indicate that any income earned would be subject to self-employment taxes. Rather, he generally indicated he was an investor. Scott and Jennifer received over $1.2 million in income in 2001, but their joint tax return reflected only $341 of tax liability. Scott and Jennifer avoided income and self-employment taxes by assigning income from Scott's law practice to JAC and using those funds for personal purposes.Scott also gave inconsistent answers regarding his legal and tax preparation practice. Scott testified that he considered himself a partner in the Bentley Group, and apparently he represented to others that he was a partner. He also represented that he was practicing law under Scott Cole and Associates, Cole Law Offices, and individually. He accepted checks made payable to any of these “persons” and deposited them in the Bentley Group's account regardless to whom the check was made payable. Scott showed little respect for business formalities and effectively made the Bentley Group nothing more than a checking account. Scott asserts that he transferred his entire interest in the Bentley Group to SCC, yet there are no documents to reflect such a transfer. Scott did not even know whether the IOLTA account was a Scott C. Cole account or a Cole Law Offices account. All the while he was transferring his legal services fees into seven different accounts.We find that Scott and Jennifer used a scheme where they assigned income to an LLC to conceal the true nature of the earnings subject to income and self-employment taxes. Scott and Jennifer claimed that JAC was an investment company. If it was an operating company, however, it did not have any employees nor can we find that it was created for any valid business purpose. JAC was merely created in an attempt to avoid taxation.Several of the badges of fraud apply to Scott and Jennifer. We conclude that respondent has proven by clear and convincing evidence that Scott and Jennifer each fraudulently understated their tax liabilities for 2001, and they have failed to show that any portion of the underpayment is not due to fraud. Accordingly, we find that the fraud penalty under section 6663 applies to Scott's and Jennifer's underpayment of tax for 2001 as adjusted.B. Darren and Lisa—Fraud Penalty We now consider whether Darren and Lisa are each liable for the fraud penalty. We agree with respondent that many of the badges of fraud are equally present for Darren's and Lisa's underpayment. Lisa worked as a paralegal at the law practice, and she had access to and signing authority over the Bentley Group's account. Darren, an attorney, was responsible for keeping the financial records of the law practice and prepared the information return for the Bentley Group for 2001. Darren failed to maintain or produce any records, however, evidencing deposits, withdrawals or loan transactions involving the Bentley Group's account. Darren also did not file the requisite information return for the Bentley Group until 2004, after he and Scott were being audited. In addition, the Bentley Group failed to file employment tax returns for Lisa, or any other employees of the law practice. Lisa failed to report any wage income from the Bentley Group.Darren and Lisa both earned substantial amounts from the Bentley Group, yet reported only a nominal amount on their joint tax return. Darren never established a personal account in his name, but, like Scott, established multiple other accounts to avoid paying taxes. Darren and Lisa reported only $10,000 of income on their joint tax return after they claimed $135,636 of unsubstantiated expenses on the information return for LRC. Darren maintained no records to support his withdrawals and transfers to and from the Bentley Group's account. Darren and Lisa reported that the Bentley Group paid LRC $150,000 of income, not an insignificant amount, but there was no written explanation for the payment. Darren and Lisa also failed to cooperate with Revenue Agent Reed. Darren threatened that he would have Revenue Agent Reed arrested if she came on his property, and Lisa was unresponsive after receiving summonses from her.We find that Darren and Lisa, like Scott and Jennifer, used a scheme where they assigned income to an LLC to conceal the true nature of the earnings subject to income and self-employment taxes. Darren and Lisa claimed that LRC was an investment company. If it was an operating company, however, it did not have any employees nor can we find that it was created for any valid business purpose. LRC was merely created in an attempt to avoid taxation. While Darren and Lisa did pay self-employment tax on the $10,000 of net income of LRC, they claimed expenses totaling 92.9 percent of the income. They cannot substantiate these expenses. Perhaps no documentation was kept because LRC had no business purpose and was merely a conduit for the assignment of income.Several of the badges of fraud apply to both Darren and Lisa. We conclude that respondent has proven by clear and convincing evidence that Darren and Lisa each fraudulently understated their tax liabilities for 2001, and they have failed to prove that any portion of the underpayment is not due to fraud. We find that the fraud penalty under section 6663 applies to Darren's and Lisa's underpayment of tax for 2001 as adjusted.III. Limitations Period Because of our findings of fraud, the limitations periods for assessing petitioners' taxes have not expired. See sec. 6501(c)(1) .We have considered all remaining arguments the parties made and, to the extent not addressed, we conclude they are irrelevant, moot, or meritless.To reflect the foregoing,Decisions will be entered for respondent for the reduced amounts . Footnotes 1 These cases have been consolidated for purposes of trial, briefing, and opinion. 2 All section references are to the Internal Revenue Code in effect for 2001, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. 3 Respondent issued petitioners “whipsaw” deficiency notices because of the inconsistent positions petitioners took. The amounts provided, however, are the amounts respondent ultimately determined are due rather than the amounts set forth in the deficiency notices. 4 Scott asserts that SCC was a partner in the Bentley Group, rather than he as an individual. We find no evidence to support this claim.
6663 civil fraud penalty case
T.C. Memo. 2010-23LEE E. AND KATHY H. NEWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.UNITED STATES TAX COURT. Docket No. 26844-06. Filed February 16, 2010.Edward I. Kaplan , for petitioners.Andrew R. Moore , for respondent.MEMORANDUM OPINIONMARVEL, Judge: Respondent determined deficiencies in Federal income tax and an addition to tax under section 6651(a)(1) 1 as follows: Addition to tax Year Deficiency 1 sec. 6651(a)(1) 1996 $72,145 -0- 1997 846,531 -0- 2001 473,380 $47,338 2002 229,565 -0- 2003 336,821 -0- 1 The years in dispute are 2001, 2002, and 2003. The deficiencies determined for 1996 and 1997 reflect solely the disallowance of net operating losses from the years in dispute. The only issue for decision is whether the managing member interest of petitioner husband Lee E. Newell (petitioner husband) in a California limited liability company (L.L.C.) that is classified as a partnership for Federal income tax purposes is a limited partnership interest as a limited partner for purposes of applying the passive activity rules under section 469 and related regulations. 2 We hold that it is not.Background The parties submitted this case fully stipulated pursuant to Rule 122. We incorporate the stipulation of facts into our findings by this reference. On the date they petitioned this Court, petitioners resided in California.Petitioner husband is an attorney licensed in Florida, but he does not practice law. His primary business activity involves the management of real estate investments. He spends more than 50 percent of his time and more than 750 hours annually in real property trade or business activities.During 2001, 2002, and 2003 (years at issue) petitioner husband owned all of the stock in California Custom Millworks, Inc. (Millworks), an S corporation. Millworks' business included manufacturing and installing windows, cabinets, doors, trim, and other items of carpentry.During the years at issue petitioner husband actively engaged in the conduct of the trade or business of Millworks as follows: Year Hours 2001 250 2002 300 2003 350 His participation in the trade or business of Millworks was a significant participation activity as defined by section 1.469-5T(c) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). During the years at issue Millworks incurred losses that were distributed to petitioner husband and deducted by petitioners on their Federal income tax returns. 3 Respondent does not challenge the amount of the losses, which were as follows: Year Loss 2001 $458,379 2002 1,270,452 2003 798,431 During the years at issue petitioner husband also owned 33 percent of the member interests in Pasadera Country Club, L.L.C. (Pasadera). Pasadera was formed in 1999 as an L.L.C. under California law to engage in the business of owning and operating a golf course, restaurant, and country club facility. Pasadera is classified as a partnership for Federal income tax purposes.At all relevant times petitioner husband was the managing member of Pasadera 4 and was responsible for hiring and firing all management personnel. As the managing member, he also oversaw the construction of Pasadera's 38,000-square-foot clubhouse; created and administered all membership programs, including advertising and reviewing and approving membership applications; and reviewed, approved, and signed all checks for expenses incurred in the construction and operation of Pasadera. He was also responsible for annual filings with State and county agencies and for any liquor license, compliance, or other legal issues of Pasadera.Petitioner husband negotiated all construction and permanent loans for Pasadera and was personally liable for those loans. As of the date on which the parties submitted the stipulation of facts, petitioner husband remained personally liable for Pasadera's outstanding loan obligations. If Pasadera experienced an operational cash shortfall, he, along with two other members of Pasadera, provided funding to cover the shortfall.Petitioner husband actively engaged in the conduct of the trade or business of Pasadera as follows: Year Hours 2001 450 2002 400 2003 400 Pasadera incurred losses in each of the years at issue. Petitioner husband's distributive shares of the losses, the amounts of which respondent does not dispute, were as follows: Year Loss 2001 $1,882,125 2002 2,104,000 2003 2,034,394 Petitioners deducted the losses on their 2001-03 joint Federal income tax returns.Respondent examined petitioners' 2001-03 income tax returns and determined that the losses from both Millworks and Pasadera had been incurred in a passive activity under section 469 and that the Millworks and Pasadera losses petitioners claimed in each of the years at issue “are suspended and not currently deductible” under section 469(a)(1) . Respondent issued to petitioners a notice of deficiency reflecting the determinations. As a further consequence of respondent's disallowance of the passive activity losses for the years at issue, respondent disallowed petitioners' claimed net operating loss carrybacks to 1996 and 1997 in the notice of deficiency. Petitioners timely petitioned this Court.Discussion A. Passive Activity Losses in General Generally, losses incurred in a trade or business are deductible by a taxpayer under section 165(c)(1) . However, the deduction of a passive activity loss 5 is suspended, i.e., the loss is not deductible in the year incurred, but it may be carried forward to the next taxable year. Sec. 469(a)(1) , (b).A passive activity is any activity that involves the conduct of a trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1) . A taxpayer materially participates in an activity if the taxpayer is involved in the operations of the activity on a regular, continuous, and substantial basis. Sec. 469(h)(1) .When it enacted section 469 , Congress authorized the Secretary to prescribe regulations that specify what constitutes material participation for purposes of section 469 . Sec. 469(l)(1) . Pursuant to that grant of authority, in 1988 the Secretary promulgated temporary regulations under section 469 that apply to the years at issue. Secs. 1 .469-1T through 1.469-11T, Temporary Income Tax Regs., 53 Fed. Reg. 5686 (Feb. 25, 1988). 6 The temporary regulations promulgated under section 469 provide seven tests for determining whether an individual shall be treated as materially participating in an activity. 7 Sec. 1.469-5T(a) , Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). The parties agree that the only material participation test under the temporary regulations applicable to petitioner husband's Millworks and Pasadera activities is the significant participation activity test under section 1.469-5T(a)(4) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Under that test (1) the activity must be a significant participation activity for the taxable year, and (2) the individual's aggregate participation in all significant participation activities during the year must exceed 500 hours. Id. An activity is a significant participation activity only if (1) the activity is a trade or business, (2) the individual participates in the activity for more than 100 hours during the year, and (3) the individual cannot establish material participation under any of the other material participation tests in the regulations. Sec. 1.469-5T(c) , Temporary Income Tax Regs., supra .B. The Parties' Arguments The parties agree that petitioner husband's participation in Millworks and Pasadera satisfies the significant participation activity test of section 1.469-5T(a)(4) , Temporary Income Tax Regs., supra . Despite this agreement, respondent argues that section 469(h)(2) requires petitioner husband's interest in Pasadera, a California L.L.C., to be treated as an interest with respect to which he does not materially participate. Respondent contends that under section 469(h)(2) , which sets forth a special rule for “interests in a limited partnership as a limited partner”, and section 1.469-5T(e) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), petitioner husband's member interest in Pasadera is treated as a limited partnership interest as defined under section 1.469-5T(e)(3)(i)(B) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), and is subject to the restriction contained in section 1.469-5T(e)(1) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988). Respondent's argument assumes that petitioner husband held a limited partnership interest in Pasadera as a limited partner .C. Special Rule for Limited Partnership Interests Section 469(h)(2) provides: “Interests in limited partnerships.—Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.” 8 Section 1.469-5T(e) , Temporary Income Tax Regs., supra , 9 provides:(e) Treatment of limited partners—(1) General rule. Except as otherwise provided in this paragraph (e), an individual shall not be treated as materially participating in any activity of a limited partnership for purposes of applying section 469 and the regulations thereunder to—(i) The individual's share of any income, gain, loss, deduction, or credit from such activity that is attributable to a limited partnership interest in the partnership; and(ii) Any gain or loss from such activity recognized upon a sale or exchange of such an interest.* * * * * * *(3) Limited partnership interest—(i) In general. * * * for purposes of section 469(h)(2) and this paragraph (e), a partnership interest shall be treated as a limited partnership interest if—(A) Such interest is designated a limited partnership interest in the limited partnership agreement or the certificate of limited partnership, without regard to whether the liability of the holder of such interest for obligations of the partnership is limited under the applicable State law; or(B) The liability of the holder of such interest for obligations of the partnership is limited under the law of the State in which the partnership is organized, to a determinable fixed amount (for example, the sum of the holder's capital contributions to the partnership and contractual obligations to make additional capital contributions to the partnership).By its terms section 469(h)(2) applies only if the taxpayer has an interest in a limited partnership as a limited partner. See Garnett v. Commissioner , 132 T.C. ___ (2009). In Garnett we held that an interest in an Iowa L.L.C. was not an “interest in a limited partnership as a limited partner” within the meaning of section 469(h)(2) or the regulations thereunder. Id. at ___, ___ (slip op. at 22-23, 27). In so doing we recognized that Congress enacted section 469(h)(2) to address the statutory constraints on a limited partner's ability to participate in the partnership's business and that a member of an Iowa L.L.C. was not similarly constrained. Id. at ___ (slip op. at 21-23). Because a member of an Iowa L.L.C., unlike a limited partner, was not prohibited by State law from participating in the partnership's business and more closely resembled a general partner, we concluded that a member of an Iowa L.L.C. came within the general partner exception of section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra . Consequently, we held that the special rules of section 469(h)(2) did not apply to an interest in an Iowa L.L.C.We turn then to petitioner husband's interest in Pasadera. Pasadera was formed as an L.L.C. under California law. Under California law, a member of an L.L.C. may participate in the management of the L.L.C. Cal. Corp. Code sec. 17150 (West 2006). 10 Moreover, under Pasadera's operating agreement, the managing member has the right to participate in the management of the L.L.C. 11 Petitioner husband was permitted to participate in the management of Pasadera by California law, and he was required to do so by the operating agreement. In contrast, under California law, a limited partner in a California limited partnership will lose his limited liability if he participates in managing the limited partnership. See Cal. Corp. Code sec. 15507(a) (West 2006).Respondent concedes that petitioner husband substantially participated in managing Pasadera as its managing member. Respondent argues, however, that petitioner husband's interest in Pasadera was a limited partnership interest as that term is defined in section 1.469-5T(e)(3)(i)(B) , Temporary Income Tax Regs., supra , and consequently, section 469(h)(2) applies to his interest. In support of his argument, respondent notes, and petitioners do not dispute, that Pasadera is treated as a partnership for Federal tax purposes under section 301.7701-3(a) and (b), Proced. & Admin. Regs., and that petitioner husband enjoys limited liability under California law.We reject respondent's argument. Respondent's argument fails to recognize that in order for section 469(h)(2) to apply at all, petitioner husband must have held an ownership interest in a limited partnership as a limited partner . See Garnett v. Commissioner , supra ; Gregg v. United States , 186 F. Supp. 2d 1123 (D. Or. 2000). Petitioner husband did not. As we emphasized in Garnett , an L.L.C. is a hybrid form of business entity that shares some of the characteristics of a partnership and some of the characteristics of a corporation. Garnett v. Commissioner , supra at ___ (slip op. at 14); see also 1 Bromberg & Ribstein, Partnership, sec. 1.01(b)(4) (1996). Members of a California L.L.C. can participate directly in management, but they also enjoy limited liability for company debts and liabilities under California law. 12 If we analogize a California L.L.C. to a limited partnership, the members of a California L.L.C. more closely resemble general partners than limited partners. This is particularly true with respect to petitioner husband, who was the managing member of Pasadera. In that capacity he managed the day-to-day operations of Pasadera, functioning just as a general partner would function in a limited partnership.In Garnett v. Commissioner , supra , we did not decide whether an interest in an Iowa L.L.C. could be treated as an interest in a limited partnership for purposes of section 469 and the temporary regulations. 13 Instead, we focused our analysis on whether a member in an L.L.C. holds his membership interest “as a limited partner”. Specifically, we examined whether a member in an L.L.C. qualifies for the general partner exception set forth in section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra .Section 1.469-5T(e)(1) , Temporary Income Tax Regs., supra , sets forth the general rule that a limited partner shall not be treated as materially participating in any activity of a limited partnership for purposes of applying section 469 and the regulations thereunder. However, section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra , provides:(ii) Limited partner holding general partner interest.—A partnership interest of an individual shall not be treated as a limited partnership interest for the individual's taxable year if the individual is a general partner in the partnership at all times during the partnership's taxable year ending with or within the individual's taxable year (or the portion of the partnership's taxable year during which the individual (directly or indirectly) owns such limited partnership interest).As we pointed out in Garnett v. Commissioner , 132 T.C. at ___ (slip op. at 18), the general partner exception of section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra , is not expressly confined to the situation where a limited partner also holds a general partnership interest. The exception provides that an individual who is a general partner is not restricted from claiming that he materially participated in the partnership. After examining the legislative history of section 469 and taking into account the lack of any prohibition regarding participation in management under State law, we concluded that the general partner exception was broad enough to cover the activity of a taxpayer who holds an interest in an L.L.C. and is authorized by State law to participate in managing the L.L.C. Garnett v. Commissioner , supra at ___ (slip op. at 20-23). We held that the taxpayers who were members of an Iowa L.L.C. held their membership interests in the L.L.C. as “general partners” within the meaning of the temporary regulations. Id. The same reasoning applies to a membership interest in a California L.L.C. And, because the membership interest at issue here is held by the managing member, the reasoning is even more compelling. Unlike the taxpayers in Garnett , whose exact roles in the management of the L.L.C.s were not fleshed out, the parties stipulated that petitioner husband was the L.L.C.'s managing member and, as such, he actively and substantially participated in its management during 2001-03. In addition to the authority conferred by California law to participate in the L.L.C.'s management, petitioner husband was expressly authorized by the operating agreement to act on the L.L.C.'s behalf and to manage the L.L.C.'s operations. In fact, the parties stipulated that petitioner husband handled the day-to-day operations of Pasadera, including hiring and firing employees, negotiating loan agreements and other contracts, overseeing construction, administering membership programs, and reviewing, approving, and signing all checks. As the managing member of the L.L.C., petitioner husband functioned as the substantial equivalent of a general partner in a limited partnership. See id . at ___ (slip op. at 22).In view of the above and consistent with Garnett , we conclude that petitioner husband comes within the general partner exception of section 1.469-5T(e)(3)(ii) , Temporary Income Tax Regs., supra , and consequently did not hold his managing member interest in Pasadera, a California L.L.C., as a limited partner. Because section 469(h)(2) does not apply to petitioner husband's membership interest in Pasadera and because respondent concedes that petitioner husband otherwise met the requirements of the significant participation activity test under section 1.469-5T(a)(4) , Temporary Income Tax Regs., supra , petitioner husband's Pasadera activity was a significant participation activity for the years at issue, and his aggregate participation in all significant participation activities (Millworks and Pasadera) in each of the years at issue exceeded 500 hours. Thus, under the significant participation test of section 1.469-5T(a)(4) , Temporary Income Tax Regs., supra , petitioner husband is treated as materially participating in Millworks and Pasadera during the years 2001-03. We hold therefore that petitioners properly deducted their Millworks and Pasadera losses for 2001-03.To reflect the foregoing,Decision will be entered for petitioners . Footnotes 1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. 2 The parties stipulated that the sec. 6651(a)(1) addition to tax applies to any deficiency determined for 2001. Because we conclude that petitioners are not liable for the deficiency determined for any of the years at issue, petitioners are not liable for the addition to tax. 3 In 2005 Millworks filed for bankruptcy “in which all its assets were disposed, and then liquidated.” 4 The parties stipulated that petitioner husband was the managing member of Pasadera during the years at issue. The First Amended and Restated Limited Liability Company Operating Agreement of Pasadera in effect during the years at issue (operating agreement) stated that the managing member of Pasadera was NCDG Golf, L.L.C. (NCDG Golf). Petitioner husband, as president of NCDG Golf, signed the operating agreement as the managing member. 5 Sec. 469(d)(1) defines a passive activity loss as the amount by which the aggregate losses from all passive activities for the taxable year exceed the aggregate income from all passive activities for the year. 6 Sec. 7805(e)(2) , which was enacted in 1988, provides: “Any temporary regulation shall expire within 3 years after the date of issuance of such regulation.” It applies to any temporary regulation issued after Nov. 20, 1988. Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 6232(b) , 102 Stat. 3735. The sec. 469 temporary regulations were issued on Feb. 19, 1988, before the effective date of sec. 7805(e) . 7 The seven tests in the temporary regulations are as follows:(1) The individual participates in the activity for more than 500 hours during such year;(2) The individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individual's participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;(4) The activity is a significant participation activity (within the meaning of paragraph (c) of this section) for the taxable year, and the individual's aggregate participation in all significant participation activities during such year exceeds 500 hours;(5) The individual materially participated in the activity (determined without regard to this paragraph (a)(5)) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year;(6) The activity is a personal service activity (within the meaning of paragraph (d) of this section), and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year; or(7) Based on all of the facts and circumstances (taking into account the rules in paragraph (b) of this section), the individual participates in the activity on a regular, continuous, and substantial basis during such year.Sec. 1.469-5T(a) , Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). 8 The temporary regulations under sec. 469 provide that an individual is not subject to sec. 469(h)(2) if: (1) The individual participates in the activity for more than 500 hours during the year; (2) the individual materially participated in the activity for any 5 taxable years (whether or not consecutive) during the 10 taxable years that immediately precede the taxable year; or (3) the activity is a personal service activity, which is an activity in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor, and the individual materially participated in the activity for any 3 taxable years (whether or not consecutive) preceding the taxable year. Sec. 1.469-5T(e)(2) , (a)(1), (5), (6), (d), Temporary Income Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988). None of the exceptions applies in this case. 9 Petitioners do not challenge the validity of sec. 1.469-5T , Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988). 10 In addition, no member of an L.L.C. is personally liable for any debt, obligation, or liability of the L.L.C. solely by reason of being a member thereof. Cal. Corp. Code sec. 17101(a) (West 2006). 11 Although petitioner husband was personally liable for some loans of Pasadera, those obligations, as respondent points out, do not alter the fact that petitioner husband's liability as a member of Pasadera was limited to a determinable fixed amount. 12 Nevertheless, petitioner husband obligated himself personally for Pasadera's outstanding loan obligations. 13 In Thompson v. United States , 87 Fed. Cl. 728, 734 (2009), which was decided after we issued our Opinion in Garnett v. Commissioner , 132 T.C. ___ (2009), the U.S. Court of Federal Claims examined sec. 1.469-5T(e)(3) , Temporary Income Tax Regs., 53 Fed. Reg. 5726 (Feb. 25, 1988), and concluded that sec. 1.469-5T(e)(3)(i)(B) , Temporary Income Tax Regs., supra , “literally requires that the ownership interest be in a business entity that is, in fact, a partnership under state law—not merely taxed as such under the Code.” Because the cited portion of the regulation was unambiguous, the Court of Federal Claims concluded that it had to enforce the regulation's plain meaning. Thompson v. United States , supra at 734. Moreover, because sec. 469(h)(2) refers to an interest in a partnership “as a limited partner”, the Court of Federal Claims concluded that “the taxpayer must actually be a limited partner” for the prohibition of sec. 469(h)(2) to apply. Id. The Court of Federal Claims held that (1) once sec. 1.469-5T(e)(3) , Temporary Income Tax Regs., supra , “is read in context and with due regard to its text, structure, and purpose, it becomes abundantly clear that it is simply inapplicable to a membership interest in an LLC”, and (2) even if the regulation could apply to the taxpayer, the taxpayer's interest “would best be categorized as a general partner's interest under §1.469-5T(e)(3)(ii) ”. Id. at 738 (citing Garnett v. Commissioner , supra at ___ (slip op. at 23), with approval).
passive activity case
Seven Important Facts about Claiming the First-Time Homebuyer Credit If you purchased a home in 2009 or early 2010, you may be eligible to claim the First-Time Homebuyer Credit, whether you are a first-time homebuyer or a long-time resident purchasing a new home. Here are seven things the IRS wants you to know about claiming the credit: You must buy – or enter into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you enter into a binding contract by April 30, 2010, you must close on the home on or before June 30, 2010. To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase. To be considered a long-time resident homebuyer you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased. Additionally, your settlement date must be after November 6, 2009. The maximum credit for a first-time homebuyer is $8,000. The maximum credit for a long-time resident homebuyer is $6,500. You must file a paper return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with additional documents to verify the purchase. Therefore, if you claim the credit you will not be able to file electronically. New homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. Buyers of a newly constructed home, where a settlement statement is not available, must attach a copy of the dated certificate of occupancy. Mobile home purchasers who are unable to get a settlement statement must attach a copy of the retail sales contract. If you are a long-time resident claiming the credit, the IRS recommends that you also attach any documentation covering the five-consecutive-year period, including Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.
U..S. v. BATES, 105 AFTR 2d 2010-XXXX, 01/28/2010________________________________________ Court Name: UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,Docket No.: No. 07-2183,Date Decided: 01/28/2010.Disposition: UOPINIONUNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT,ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGANDefendant-appellant Alonzo Bates appeals from the district court's denial of his motion for a new trial under Brady v. Maryland, 373 U.S. 83 (1963). Bates pled guilty to four counts of failing to file a tax return and was convicted on four counts of theft from a program receiving federal funds and one count of bank fraud. The charges related to Bates's use of his city-funded payroll during his three years as a Detroit City councilman. Bates argued before the district court that the government failed to turn over exculpatory and material evidence in the form of handwritten notes by an FBI case agent that contained two purported statements made by Bates's former girlfriend, Verenda Arnold. The statements were not included in the previously disclosed FBI 302 report, authored by the same agent, that detailed the interview with Arnold. The district court rejected Bates's Brady claims regarding both purported statements. For the reasons herein, we affirm.On March 9, 2006, a federal grand jury returned a superseding indictment charging Bates in fourteen counts, including mail fraud, in violation of 18 U.S.C. § 1341 (counts one through four); theft from a program receiving federal funds, in violation of 18 U.S.C. § 666 (counts five through eight); extortion, in violation of 18 U.S.C. § 1951 (count nine); bank fraud, in violation of 18 U.S.C. § 1344 (count ten); and failure to file a tax return, in violation of 26 U.S.C. § 7203 (counts eleven through fourteen). The government alleged that Bates, an elected member of the Detroit City Council, orchestrated a scheme to employ “ghost” employees, including Arnold, who were paid hourly by the city to perform work for the office of Councilman Bates but who actually did not perform their work obligations, thereby stealing money from the city. On August 22, 2006, the first day of trial, Bates pled guilty to all four counts of failure to file a tax return, and the government dismissed the four counts of mail fraud. A jury convicted Bates on four counts of theft from a program receiving federal funds and one count of bank fraud but did not reach a verdict on the extortion count.On January 30, 2007, Bates moved for a new trial, alleging that the government failed to turn over exculpatory evidence prior to trial in violation of Brady. Bates argued that the government did not disclose FBI case agent Michael Haynie's handwritten notes, which indicated that Arnold had said during a government debriefing that Bates did not know that she was not working her assigned twenty hours per week. That statement was not included in the FBI 302 report formally summarizing the debriefing that was authored by Agent Haynie and disclosed to the defense prior to trial. Furthermore, Bates contended that Haynie also omitted from the FBI 302 report the fact that Arnold strongly disagreed with the government's calculation of the hours for which she was wrongfully paid. The government disputed whether Arnold had made the statement relating to Bates's knowledge during the debriefing and argued that Arnold's comment regarding the number of hours billed that she actually worked was made outside the presence of the prosecution team. On the question of whether there was aBradyviolation, the Government argued before the district court that 1) Arnold's statement as to Bates's knowledge was speculative and therefore inadmissible at trial; 2) in light of the overwhelming evidence at trial, the outcome would not have been different even if the evidence had been admitted; and 3) Bates was on notice of the essential facts contained in the handwritten notes.The district court held evidentiary hearings on the motion on March 7 and June 12, 2007, and subsequently denied Bates's motion on July 26, 2007. Regarding whether Arnold made a statement during the debriefing that disputed the percentage of hours billed for which she actually worked, the district court found that Bates did not offer any evidence to refute a contradictory assertion made in the affidavit of Arnold's attorney, Robert Harris. Harris had stated that Arnold never made that statement to the prosecution team but rather had made the claim to Harris outside the presence of the prosecution team. Because Bates did not establish that the prosecution team was even aware that Arnold claimed to have worked at least fifty percent of the hours billed, the district court found that Bates could not establish suppression of that information by the government. 1 Turning to the issue of Arnold's statement regarding Bates's lack of knowledge of her failure to work her billed hours, the district court presumed that Arnold made the statement to the prosecution team during the debriefing. The district court concluded, however, that the government's failure to disclose this information to Bates did not constitute aBradyviolation because Bates was indisputably aware that Arnold might be a source of exculpatory evidence and that he reasonably should have interviewed her on the subject of whether Bates knew of her actual work hours.On September 20, 2007, the district court sentenced Bates to thirty-three months of imprisonment. Bates timely appealed.II.This court “reviews denial of a motion for a new trial based on Brady violations under an abuse of discretion standard,” but reviews “the district court's determination as to the existence of a Brady violation ... de novo.”United States v. Graham, 484 F.3d 413, 416–17 [99 AFTR 2d 2007-2366] (6th Cir. 2007) (citingUnited States v. Jones , 399 F.3d 640, 647 (6th Cir. 2005), and United States v. Miller, 161 F.3d 977, 987 (6th Cir. 1998)).III.Under Brady, “the suppression by the prosecution of evidence favorable to an accused upon request violates due process where the evidence is material either to guilt or to punishment, irrespective of the good faith or bad faith of the prosecution.” 373 U.S. at 87. There is noBrady violation, however, “unless the nondisclosure was so serious that there is a reasonable probability that the suppressed evidence would have produced a different verdict.” Strickler v. Greene, 527 U.S. 263, 281 (1999). As the Court noted in Kyles v. Whitley, “[t]he question is not whether the defendant would more likely than not have received a different verdict with the evidence, but whether in its absence he received a fair trial, understood as a trial resulting in a verdict worthy of confidence.” 514 U.S. 419, 434 (1995). We have held that where the defendant was ““aware of the essential facts that would enable him to take advantage of the exculpatory evidence,”” the government's failure to disclose that evidence does not violate Brady. Spirko v. Mitchell, 368 F.3d 603, 610 (6th Cir. 2004) (citing United States v. Todd, 920 F.2d 399, 405 (6th Cir. 1990)). To be entitled to a new trial, a defendant must also show that the suppressed exculpatory evidence “could not have been discovered earlier with due diligence, and is material.” United States v. Corrado, 227 F.3d 528, 538 (6th Cir. 2000) (citingUnited States v. Frost , 125 F.3d 346, 382 (6th Cir. 1997)).Bates has not shown that he would have been unable to obtain Arnold's statement regarding his knowledge of work hours through reasonable pretrial due diligence. Rather, the record reflects that Arnold's statement and the related testimony that might result from the discovery of that statement were available to Bates from an easily accessible and known source. Bates has himself argued that his knowledge about whether his employees were working the hours for which they billed was a central issue for the defendant at trial, and the record demonstrates that Bates and his counsel were aware that Arnold might have been able to provide information on that issue. Furthermore, given the more than twenty-five year romantic relationship between Bates and Arnold and the “strong emotional attachment” that Arnold still feels for Bates, Bates and his counsel clearly had access to Arnold pretrial. Bates's trial counsel, Steven Fishman, stated that he had “many conversations” with Arnold's lawyer prior to trial and that Arnold's lawyer “kept [him] apprised of what was going on” with Arnold. (Mot. Hr'g Tr. at 77.) In fact, before Arnold pled guilty, Fishman believed that Arnold “was going to stand trial and claim that she didn't misstate her hours, that she worked those hours and she was supposedly going to explain how she was able to have a full-time job plus work the 20 hours a week for which she was paid.” (Mot. Hr'g Tr. at 72.) A reasonable defendant, therefore, “would have pursued that inquiry” by interviewing Arnold prior to trial, “unless, of course, he already knew that the inquiry would not in fact result in exculpatory information.”Spirko , 368 F.3d at 611. Because Bates was aware of the essential facts that would enable him to take advantage of the exculpatory evidence and could have discovered the evidence prior to trial with due diligence, we affirm the district court's denial of Bates's motion for a new trial.Even if this Court were to assume that Bates could not have discovered the evidence prior to trial with due diligence, the record demonstrates that Arnold's statement about Bates's knowledge and related testimony on that topic would not have created a “reasonable probability” of a different verdict.Strickler , 527 U.S. at 281. Bates argues that “Arnold's proposed testimony, like her statements to agents during the debriefing, would have contradicted everything that the Government was arguing about [Bates's] knowledge of the hours worked/billed by his employees.” (Def.'s Br. at 10.) While Arnold's statement and testimony may be viewed as somewhat favorable to Bates, the inconsistencies present in that testimony render it insufficient to have produced a different result at trial. Although Arnold testified at the evidentiary hearing that Bates did not know when she worked fewer than twenty hours per week, she contradicted herself in explaining that Bates was “very hard on” his employees and required that they take notes at meetings to document and prove that they were there. (Evid. Hr'g Tr. at 13.) Furthermore, Arnold testified that while there “were weeks that [she] worked less than 20 hours” (Evid. Hr'g Tr. at 17), Bates approved all of her time sheets. These statements cast significant doubt on Arnold's claim that Bates lacked knowledge about the hours she worked.The record also reveals significant questions regarding Arnold's credibility that would impact the value of her testimony at trial. See Mason v. Mitchell, 320 F.3d 604, 629 (6th Cir. 2003) (approving district court's credibility determination in Brady analysis). First, Arnold's long relationship with Bates, the fact that they have a son together for whom Bates pays child support, and Arnold's “strong emotional attachment” and desire not “to see him go to jail” all demonstrate a bias in favor of Bates. (Evid. Hr'g Tr. at 18, 30–31.) Second, the government has identified several instances of untruthfulness in Arnold's testimony that would undercut its value before a jury, including Arnold's lack of candor regarding whether she worked the midnight shift at the hospital leaving her days free, the nature of her relationship with Bates, and whether she did work for Bates during her hours at the hospital.In light of the inconsistencies in Arnold's testimony and the credibility issues raised by the government, Arnold's statement does not rise to the level of materiality warranting reversal under Brady.IV.For the foregoing reasons, we affirm the district court's denial of defendant Bates's motion for a new trial and affirm his convictions.________________________________________* The Honorable Paul L. Maloney, Chief United States District Judge for the Western District of Michigan, sitting by designation.________________________________________1 Bates raises this argument again on appeal. The district court's conclusion, however, that Bates had not offered any evidence to refute the statement contained in the affidavit of Arnold's attorney that Arnold never made this statement to the prosecution team, is fully supported by the record. Bates does not now cite, nor does a review of the record reflect, any evidence that challenges the district court's finding.
18 U.S.C. § 666 18 U.S.C. § 1951
Second, 26 U.S.C. § 7809(b)(1) provides for the pl...
Karl L. Matthies, et ux. v. Commissioner, 134 T.C....
Dec. 58,137(M)
Code Sec. 61, Code Sec. 446, Code S...
T.C. Memo. 2010-23
LEE E. AND KATHY H. NEWELL, Pe...
U..S. v. BATES, 105 AFTR 2d 2010-XXXX, 01/28/2010...
https://checkpoint.riag.com/app/Checkpoint?usid=22...
ADVANCE RELEASE Documents, In re F. Abir, (Feb. 8,...
SCHUMER, HATCH UNVEIL TARGETED JOB CREATION BILL
Notice 2010-19, 2010-7 IRB, 02/02/2010, IRC Sec(s)...
2010-1 ustc ¶50,190Code Sec. 7201, Code Sec. 7212 ...
News Release 2010-14, 01/29/2010, IRC Sec(s).