t c memo united_states tax_court dna pro ventures inc employee_stock_ownership_plan commissioner of internal revenue respondent petitioner v docket no 21047-14r filed date mark eldridge trustee for petitioner pamela j sewell for respondent memorandum opinion dawson judge in this declaratory_judgment proceeding under sec_7476 petitioner challenges respondent’s date final nonqualification letter unless otherwise indicated all section references are to the internal_revenue_code in effect for the period under consideration and all rule references are to the tax_court rules_of_practice and procedure determining that for its plan_year ending date and its subsequent plan years and the dna pro ventures inc employee_stock_ownership_plan esop or plan was not qualified under sec_401 and that the related trust was not exempt from taxation under sec_501 the broad question before us is whether there was an abuse_of_discretion in respondent’s determination to decide that question we consider whether the esop exceeded the contribution limits under sec_401 and sec_415 and failed to follow the plan terms by not obtaining a proper valuation of the stock for any plan_year as explained hereinafter we conclude that there was no abuse_of_discretion in respondent’s determination background the parties filed a joint motion for leave to submit this case for decision under rule we granted the motion and decide this case on the basis of the pleadings and the stipulated administrative record see rule b we incorporate the stipulated record herein advanced orthopaedic associates p a daniel j prohaska is a medical doctor and an orthopaedic surgeon specializing in sports medicine arthroscopy and knee and shoulder surgery he worked with advanced orthopaedic associates p a advanced orthopaedic between and advanced orthopaedic paid dr prohaska compensation of dollar_figure dollar_figure and dollar_figure for and respectively during each year dr prohaska deferred the maximum amount allowable to the advanced orthopaedic sec_401 plan dna pro ventures inc dr prohaska was also involved with dna pro ventures inc dna a kansas corporation incorporated on date at the time it filed its petition dna had its principal mailing address in iowa dna is the employer plan_sponsor and plan_administrator of the esop dr prohaska and his wife amy were dna directors at the time of its incorporation dr prohaska acted as dna’s chairman and served as its president and treasurer mrs prohaska served as dna’s vice president and secretary dr and mrs prohaska are dna’s only employees the plan on date dna created the esop for the benefit of its employees on date dr prohaska signed the plan on behalf of dna and ryan eldridge signed it as trustee and the esop and the trust were amended in that dr prohaska replaced ryan eldridge as trustee the applicable provisions of the plan are as follows compensation means with respect to any participant and except as otherwise provided herein such participant’s wages as defined in code sec_3401 and all other_payments of compensation by the employer for a calendar_year ending with or within the plan_year the determination_period for which the employer is required to furnish the participant a written_statement under code sec_6041 sec_6051 and sec_6052 form_w-2 wages eligible_employee means any employee except as provided below the following employees shall not be eligible to participate in this plan a employees of affiliated employers unless such affiliated employers have specifically adopted this plan in writing b individuals who are not reported on the payroll records of the employer as common_law employees c employees who are leased employees within the meaning of code sec_414 and sec_414 d employees whose employment is governed by the terms of a collective bargaining agreement between employee_representatives and the employer fiscal_year means the employer’s accounting year of months commencing on january 1st of each year and ending the following december 31st except for the first fiscal_year which commenced november 12th plan_year means the plan’s accounting year of twelve months commencing on january 1st of each year and ending the following december 31st except for the first plan_year which commenced november 12th year_of_service means the computation period of twelve consecutive months herein set forth during which an employee has at least hours_of_service in determining whether an employee has completed a year_of_service for benefit_accrual purposes in the short plan_year the number of the hours_of_service required shall be proportionately reduced based on the number of full months in the short plan_year conditions of eligibility any eligible_employee who was employed on the last day of the first plan_year shall be eligible to participate and shall enter the plan as of the first day of such plan_year any other eligible_employee who has completed one year_of_service and has attained age shall be eligible to participate hereunder as of the date such employee has satisfied such requirements effective date of participation an eligible_employee shall become a participant effective as of the earlier of the first day of the plan_year or the first day of the seventh month of such plan_year coinciding with or next following the date such employee met the eligibility requirements of sec_3_1 c allocation of contribution forfeitures and earnings the company stock account of each participant shall be credited as of each anniversary date with forfeitures of company stock and the participant’s allocable share of company stock including fractional shares purchased and paid for by the plan or contributed in_kind by the employer valuation of the trust fund the administrator shall direct the trustee as of each valuation_date to determine the net_worth of the assets comprising the trust fund as it exists on the valuation_date method of valuation valuations must be made in good_faith and based on all relevant factors for determining the fair_market_value of securities company stock not readily tradeable on an established_securities_market shall be valued by an independent_appraiser meeting requirements similar to the requirements of the regulations prescribed under code sec_170 dna actions on date dna issued shares of class a common_stock to dr prohaska in exchange for a dollar_figure cash contribution and shares of class a common_stock to mrs prohaska in exchange for a dollar_figure cash contribution as of the date_of_issuance the par_value of the class a common_stock was dollar_figure per share on date dna issued big_number shares of class b common_stock to the trust with a par_value of dollar_figure per share the trust then allocated the big_number shares of dna stock to dr prohaska’s esop account in during dna did not pay any salaries wages or other officer’s compensation_for dna issued separate forms w-2 wage and tax statement to dr and mrs prohaska reporting the respective amounts of dollar_figure during its fourth quarter beginning october dna issued forms w-2 for to dr and mrs prohaska reporting the respective amounts of dollar_figure dna deducted a dollar_figure retirement_plan contribution on its form_1120 u s_corporation income_tax return for although dna was the sponsor of the esop it did not file any forms annual return report of employee_benefit_plan for plan years and on date the plan was amended to name mark eldridge trustee replacing dr prohaska and dna then elected mark eldridge as an additional dna vice president internal_revenue_service examination of plan and determination in the internal_revenue_service irs began its examination of the plan on date revenue_agent michael e talley sent dr several times beginning date the irs requested pursuant to form_4564 information_document_request dna to provide numerous documents relating to the examination of the plan for the period date through date participant allocation schedules continued prohaska form 886-a explanations of items determining that the esop was not qualified under sec_401 for the plan years ending date and any related trust was also determined not to be exempt from taxation under sec_501 for the same trust years on date respondent issued a final nonqualification letter letter 1757-a to dna explaining that the esop had failed to follow the terms set forth in the plan documents and therefore was not qualified under sec_401 and the esop trust was not exempt from tax under sec_501 the nonqualification letter states in part as follows in this case the esop had two separate failures to follow its plan document during first the esop sponsored by dna pro ventures allowed dr daniel j prohaska and amy prohaska to participate in the esop as of the plan_year ending date in violation of the terms of the esop plan document regarding eligibility and participation second the esop plan document required the esop to use appraisal rules substantially_similar to those issued under sec_170 when it obtained annual appraisals for the same plan_year the esop however failed to obtain any appraisal for the plan_year or for any plan_year continued employee census reports participant account statements trustee or administrator reports ledgers journals or other financial reports copies of the esop bank statements and copies of the independent appraisal reports however dna did not provide any of these requested documents during dna pro ventures inc transferred stock into the esop without consideration and the stock accrued to the benefit of dr prohaska and mrs prohaska the value of the stock accruing to each participant as reported by the esop substantially exceeded of each dr prohaska’s and mrs prohaska’s compensation from dna pro ventures inc for the year thus the esop failed to comply with sec_401 and sec_415 for the plan_year ending date and is not a qualified_plan within the meaning of sec_401 for the plan_year ending date and all subsequent plan years for the reason stated above it is determined that the esop is not qualified under sec_401 for the plan years ending date and all subsequent plan years as a result the plan is not exempt from taxation under sec_501 for trust years ending date and all subsequent plan years discussion sec_7476 authorizes this court to render the requested declaratory_judgment subject_to the limitations of subsection b neither party disputes that those limitations have been met in this case and we are satisfied that we have jurisdiction over the petition see eg 81_tc_976 in this declaratory_judgment proceeding we review respondent’s determination that the plan was not qualified the standard for our review was enunciated in 92_tc_641 as follows when reviewing discretionary administrative acts however this court may not substitute its judgment for that of the commissioner the exercise of discretionary power will not be disturbed unless the commissioner has abused his discretion ie his determination is unreasonable arbitrary or capricious whether the commissioner has abused his discretion is a question of fact and petitioner’s burden_of_proof of abuse_of_discretion is greater than that of the usual preponderance_of_the_evidence 82_tc_989 73_tc_182 further i n order for a plan to be qualified both its terms and its operations must meet the statutory requirements id pincite respondent’s determination is presumed to be correct and the burden_of_proof is on petitioner see rule a to prevail petitioner must prove that respondent abused his discretion see buzzetta constr corp v commissioner t c pincite petitioner has failed to do so sec_401 enumerates requirements which must be met in order for a_trust to be considered a qualified_trust entitled to preferential tax treatment under sec_501 see michael c hollen d d s p c v commissioner tcmemo_2011_2 aff’d per curiam 437_fedappx_525 8th cir ronald r pawlak p c v commissioner tcmemo_1995_7 its terms and its operations must meet the statutory requirements buzzetta constr corp v commissioner t c pincite if a qualified_plan meets all of the sec_401 requirements then the plan is exempt from taxation under sec_501 see michael c hollen d d s p c v commissioner tcmemo_2011_2 we need not discuss specifically the qualification of the related trust under sec_501 because the exemption of the trust under sec_501 follows from the qualification of the plan under sec_401 see id a qualified_plan must meet the sec_401 requirements in both form and operation 620_f2d_700 9th cir aff’g 68_tc_826 sec_1_401-1 income_tax regs a form failure occurs when a plan document does not contain required language or terms see michael c hollen d d s p c v commissioner tcmemo_2011_2 an operational failure occurs when a plan in operation does not meet the sec_401 requirements see 92_tc_1173 and a plan fails to follow the terms of the plan document see michael c hollen d d s p c v commissioner tcmemo_2011_2 in general a qualification failure pursuant to sec_401 is a continuing failure because allowing a plan to requalify in subsequent years would be to allow a plan to rise phoenix-like from the ashes of such disqualification and become qualified for that year 70_tc_1001 see also martin fireproofing profit-sharing_plan tr v commissioner t c pincite9 as explained below the esop failed to satisfy the sec_401 requirements in two separate ways either of which is sufficient for the plan to not be qualified see sec_401 sec_4975 clearly respondent has not abused his discretion contribution limits sec_401 provides that a_trust is not qualified if the plan provides for benefits or contributions which exceed the limitations of sec_415 for the plan_year a participant’s annual_additions were limited to the lesser_of dollar_figure or of the participant’s_compensation see sec_415 annual_additions are the sum of employer contributions employee contributions and forfeitures sec_415 an allocation of stock to a participant’s account is an employer_contribution sec_1_415_c_-1 income_tax regs participant’s_compensation is the compensation of the participant from the employer for the year sec_415 a plan that allows contributions that exceed the contribution limits of sec_415 is not a qualified_plan under sec_401 see eg van roekel farms inc v commissioner tcmemo_2000_171 aff’d f app’x 8th cir in addition a sec_415 failure is a continuing failure that disqualifies the plan for a future year even when there is not a separate independent sec_415 failure in the future year martin fireproofing profit-sharing_plan tr v commissioner t c pincite5 neither dr prohaska nor mrs prohaska received any compensation_for his or her services as a dna officer_or_employee during accordingly their contribution limits were zero because dna improperly transferred to dr prohaska’s esop account big_number shares of dna’s class b common_stock in with a dollar_figure par_value per share the annual_addition to his account was dollar_figure more than his contribution limit under sec_415 accordingly because dr prohaska’s esop account received an annual_addition in excess of the sec_415 limitation the esop failed the requirements of sec_401 and was not a qualified_plan for moreover because the sec_415 failure is a continuing failure the esop failed sec_401 for and was not a sec_401 qualified_plan for all subsequent plan years failure to obtain appraisals sec_401 provides that in the case of an esop an independent_appraiser must perform all valuations of securities that are not readily_tradable on an established_securities_market and that the standards for appraisers are similar to those set forth in the regulations promulgated under sec_170 as set forth above section of the plan document requires a good-faith valuation to determine the fair_market_value of the securities similarly section of the plan document requires that valuation of the trust fund be made on each valuation_date despite these requirements the esop did not obtain any annual appraisals in and resulting in an operational failure rendering the esop not a sec_401 qualified_plan because the esop was not a definite written program see sec_1_401-1 income_tax regs moreover because the failure to follow the plan is a continuing failure the esop was also not qualified for the plan years ending date and in sum because the esop was not a qualified_trust it was not exempt from tax pursuant to sec_501 for any year conclusion we conclude that there was no abuse_of_discretion in respondent’s determination that the plan was not qualified under sec_401 for its year and subsequent plan years and that the trust was not exempt under sec_501 we so hold any contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


internal_revenue_service number release date index number ----------------------------------------------------- --------------------------------------------- ----------------------- ----------------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------------- id no -------------- ---------------------------------------------------- telephone number ---------------------- refer reply to cc psi b01 plr-111154-13 date date legend x --------------------------------------------------- ------------------------------------------------------ country d1 d2 ----------------- --------------------------- ----------------- dear ---------------------- this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x was organized under the laws of country on d1 x failed to timely file form_8832 entity classification election to be treated as a disregarded_entity for federal tax purposes effective d2 x represents that it acted reasonably and in good_faith x also represents that granting the relief requested will not prejudice the interests of the government law and analysis plr-111154-13 sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes an eligible_entity with at least two members can elect to be classified as either an association or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association if all members have limited_liability unless the entity makes an election to be treated otherwise a foreign eligible_entity with a single member having limited_liability may elect to be treated as a disregarded_entity pursuant to the rules of sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as a disregarded_entity for federal tax purposes effective d2 x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form this ruling is contingent on the owner of x filing within days of this letter all required returns including amended returns for all open years consistent with the requested relief these returns may include but are not limited to the following forms plr-111154-13 i forms information_return of u s persons with respect to certain foreign_corporations ii forms return of u s persons with respect to certain foreign_partnerships and iii forms information_return of u s persons with respect to disregarded entities such that these forms reflect the consequences of the relief granted in this letter a copy of this letter should be attached to any such returns except as specifically set forth above we express no opinion concerning the federal tax consequences of the facts described above under any other provision of the internal_revenue_code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely associate chief_counsel passthroughs special industries by david r haglund david r haglund chief branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


t c memo united_states tax_court steven h toushin petitioner v commissioner of internal revenue respondent docket no filed date angelo ruggiero and michael r esposito for petitioner karen p wright and donna c hansberry for respondent memorandum opinion dean special_trial_judge this case was assigned pursuant to sec_7443a of the code and rule sec_180 sec_181 and sec_183 1all rule references are to the tax_court rules_of_practice and procedure all section references are to the internal_revenue_code as amended and in effect during the years in issue the case is before the court on petitioner's motion for partial summary_judgment filed date pursuant to rule respondent determined deficiencies in petitioner's federal_income_tax and additions to tax as follows additions to tax sec_6661 -- -- dollar_figure sec_6653 dollar_figure big_number big_number deficiency dollar_figure big_number big_number year the statutory notice in this case was issued on date petitioner's motion is directed only to the deficiency and additions to tax determined under the notice for the year the normal 3-year statute_of_limitations under sec_6501 has expired for taxable_year based upon the allegations in respondent's amended answer the deficiency and additions to tax determined by respondent for the year may only be assessed if the fraud exception of sec_6501 applies in his motion petitioner alleges that based upon the affidavits submitted the facts stipulated by the parties and the pleadings and attachments thereto respondent as a matter of law cannot meet her burden of proving fraud and the court must enter summary_judgment in favor of petitioner for the year for the reasons set out below we find that there is a genuine issue of material fact as to whether there is an understatement_of_tax due to fraud with respect to petitioner's tax_return for the year background the facts set forth below are based on the stipulation of facts with attached exhibits first supplemental stipulation of facts with attached exhibits and the affidavits submitted by the parties petitioner resided in chicago illinois at the time the petition in this case was filed operation of the businesses from may of through december of petitioner was president and owner of percent of the stock of entertainment amusement inc an illinois corporation hereinafter referred to as e a of illinois e a of illinois operated a business known as the bijou theatre located in chicago illinois the bijou theatre exhibited movies sold video cassettes and beginning in sold other items in the lobby of a building located on north wells street in chicago on date a business by the name of entertainment amusement inc was incorporated in the state of california e a of california e a of california changed its name to 2on date days prior to the hearing on this motion respondent filed a response to petitioner's reply to respondent's objection to petitioner's motion for partial summary_judgment attaching an affidavit from special_agent james mcguire and a transcript of the record of the proceedings in united_states v toushin no cr n d ill verdict rendered date reversed and remanded 899_f2d_617 7th cir we have not found it necessary to rely on the transcript submitted by respondent in reaching our decision on this motion savage management inc savage on date on corporation papers filed with the state the president of e a of california and later of savage was listed as walter killeen two hundred shares of stock of e a of california were issued in the name of walter killeen on date e a of california and subsequently savage operated under the name of the screening room from date through march of checking account number in the name of walter killeen company was maintained at oak trust savings bank oak trust in chicago petitioner was along with walter killeen a signatory on this account from through the year petitioner also maintained his personal checking account number at oak trust petitioner was a signatory on other oak trust checking accounts held in the names of e a of illinois toushin 3on the savage form_1120 u s_corporation income_tax return filed date there are attached schedules declaring petitioner to be the sole shareholder of the reporting_corporation for fiscal_year ending date see infra note 4fictitious business name statements were filed with the san francisco county superior court first by e a and then by savage 5based upon a visual examination of copies of canceled checks that are exhibits stipulated by the parties all the checks written on this account appear to be signed by petitioner 6the parties have stipulated and attached as exhibits copies of bank statements cancelled checks deposit slips and associated miscellaneous items for this account for the years through company real_estate management gold distribution company and walter killeen company in addition to the various oak trust accounts petitioner was signatory on a checking account in the name of anthony j medina jr co at northern trust company in chicago and for part of the year had signature_authority on a checking account in the name of toushin company at chemical bank in new york city petitioner's cash transactions on his individual federal_income_tax return form_1040 filed for the year petitioner reported income from wages capital_gains from the sale of films and rental income during e a of illinois loaned dollar_figure in cash to petitioner the parties have stipulated that petitioner wrote no checks to cash during cashed no salary checks during that year and received no cash back on deposits in despite the apparent paucity of sources of cash during the year petitioner came into possession of relatively large amounts of currency he deposited dollar_figure in cash into his 7the parties have stipulated copies of various bank records as exhibits associated with these respective checking accounts 8the parties have stipulated copies of various bank records as exhibits associated with these respective checking accounts 9we have determined from the stipulation that petitioner's wages were paid_by check since petitioner has raised no argument to the contrary for purposes of this motion we will assume that the other income items reported on the return were also paid_by check personal checking account dollar_figure in cash into the walter killeen checking account and currency in the amount of dollar_figure into the anthony j medina jr co account in addition petitioner made various expenditures of cash for personal items during and purchased with currency personal money orders totaling dollar_figure from oak trust10 of the personal money orders purchased by petitioner during the year money orders totaling dollar_figure were used to pay expenses of savage and another were deposited into accounts of savage management inc with the exception of a de_minimis amount the funds deposited into the walter killeen co account during and were used to pay expenses of savage also with the exception of a de_minimis amount the funds deposited in the northern trust account in the name of anthony j medina jr co in and were used to pay expenses of savage the criminal investigation and subsequent proceedings sometime in the year petitioner came under investigation by the criminal_investigation_division of the irs 10the parties have stipulated as an exhibit a copy of a document containing pages pertinent to the year the pages are separately titled personal money orders purchased with cash by steven toushin at the oak bank and trust and personal money orders purchased with cash by steven toushin at the oak bank and trust handwriting examined also stipulated are exhibits consisting of photocopies of money orders and other associated materials on date special agents of the irs served petitioner with a subpoena related to the investigation on date savage formerly e a of california filed a form_1120 u s_corporation income_tax return for the fiscal_year ending fye date petitioner signed the return as pres included in the gross_receipts reported on the return of savage were all currency and money order deposits to the killeen and medina account sec_12 and all expenditures by money order for corporate expenses13 on date petitioner was indicted in the united_states district_court for the northern district of illinois on counts of violations of sec_7206dollar_figure in the indictment petitioner was accused of filing false individual income_tax returns which understated his taxable_income for each of the 11petitioner dated his signature as on schedule j of the return line h indicates that an individual or entity owns of the voting_stock of savage the reporting_corporation also attached to the return is a schedule entitled other business deductions on which it is noted that the individual with ownership of savage voting_stock is steven toushin the record contains no documentation on the change_of corporate presidency or nominal ownership of savage stock from mr killeen to petitioner 12reported gross_receipts of savage also included deposits of money orders into various bank accounts at the hibernia bank held in the name of either e a of california or savage 13the corporate expenses were deducted at the appropriate place on the form_1120 14united states v toushin no 87cr206-1 n d ill filed date years and after a jury trial petitioner was convicted on all counts he appealed his convictions see 899_f2d_617 7th cir and the case was reversed and remanded by the court_of_appeals on date petitioner signed a plea agreement with the government in the agreement he acknowledged that during the year he received income from skimming cash proceeds from e a of illinois petitioner further acknowledged that he knew he was required to report as income but knowingly did not include the skimmed proceeds on his joint individual tax_return for the year the district_court accepted petitioner's plea entered judgment against him on count one and dismissed counts two and three concerning the years and in her notice_of_deficiency respondent determined that petitioner had unreported income for the years and attributable to funds diverted from e a of illinois further respondent affirmatively alleges in her amended answer that petitioner in all years received and fraudulently failed to report income in the form of diverted receipts or in the alternative constructive dividends from e a of illinois discussion arguments of the parties in support of his motion for partial summary_judgment petitioner argues that as a matter of law respondent cannot show fraud for the year because a respondent cannot show an understatement_of_tax for the year and b if there is an understatement_of_tax respondent cannot show that it is due to petitioner's fraud of the dollar_figure total cash expenditures ascribed to him in petitioner argues that dollar_figure was from sources reported on his return leaving respondent with dollar_figure of excess expenditures to treat as unreported incomedollar_figure he relies on the filing of the savage return in to explain the source of these funds petitioner argues that the correct analysis requires that the amounts reported on savage's return be removed from respondent's cash expenditures analysis for petitioner then would have nontaxable sources in excess of cash expenditures respondent can prove that petitioner understated his income in only if respondent can persuade this court that petitioner and not savages sic or even entertainment amusement inc should have reported the cash contends petitioner 15although this argument is raised in the relevant facts portion of petitioner's motion rather than that part denominated law and argument we shall nevertheless treat it as if it were legal argument 16the cash expenditures respondent computed for petitioner include the deposits to the killeen and medina accounts and cash expenditures_for money orders which were reported on savage's fye return petitioner further argues that even if the court is persuaded that he understated his income reporting the income on the savage return negates as a matter of law fraudulent intent on his part respondent's argument in reply does not address petitioner's allegation that there is no understatement_of_tax she frames the question to be decided solely as an issue of intent according to respondent there is a genuine issue of material fact as to petitioner's fraudulent intent in filing his form_1040 since intent is at issue respondent concludes that the matter is not appropriate for summary_judgment standard for granting summary_judgment the standard for granting a motion for summary_judgment under rule is stated in the rule itself a decision shall be rendered if the pleadings answers to interrogatories depositions admissions and any other acceptable materials together with the affidavits if any show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law rule b the moving party has the burden of showing the absence of a genuine issue as to any material fact see 78_tc_412 and cases cited therein 17rule is derived from fed r civ p therefore authorities interpreting the latter will be considered by the court in applying our rule 78_tc_412 in 477_us_317 the supreme court described the showing that must be made by the moving party a party seeking summary_judgment always bears the initial responsibility of informing the court of the basis for its motion and identifying those portions of the pleadings depositions answers to interrogatories and admissions on file together with the affidavits if any which it believes demonstrate the absence of a genuine issue of material fact in celotex the supreme court held that the moving party in a summary_judgment action need not in all cases introduce evidence negating an essential element of the opponent's claim in order to prevail on the motion if the moving party after adequate time for discovery can make a showing from the record of a complete failure of proof concerning an essential element of the nonmoving party's case and on which the nonmoving party will bear the burden_of_proof at trial there can be 'no genuine issue as to any material fact ' with respect to that claim id pincite-dollar_figure petitioner at page sec_4 and of his reply to respondent's objection to petitioner's motion attempts to bring his case 18see also 780_f2d_1190 5th cir a case cited by the court in 477_us_317 wherein it is stated if the moving party can show that there is no evidence whatever to establish one or more essential elements of a claim on which the opposing party has the burden_of_proof trial would be a bootless exercise fated for an inevitable result within the rule_of celotex by arguing that respondent has offered not a shred of evidence to oppose petitioner's motion petitioner's assertion that at trial respondent must prove fraud by clear_and_convincing evidence is correct rule b sec_7454 56_tc_213 furthermore petitioner is correct in stating that unless respondent proves petitioner's fraud the statute_of_limitations precludes the assessment of any deficiency for tax_year sec_6501 c it is also true that as part of her burden in the trial of a fraud case respondent must first prove an underpayment of some amount of tax sec_6653 as this court has recognized absent an underpayment there is nothing to which the fraud addition may attach apothaker v commissioner tcmemo_1985_445 81_tc_640 first element to be established is an underpayment_of_tax in opposing this motion respondent stressed the intent element and ignored the underpayment element of fraud nevertheless respondent and petitioner have filed with the court stipulated facts and documents related to both elementsdollar_figure 19see also 477_us_242 for a description of the nonmoving party's burden_of_proof once the moving party has made a proper showing under the rule_of celotex corp v catrett supra 20petitioner's written submissions and oral argument at the hearing on this motion suggest that the documents and facts stipulated by the parties are not to be considered as evidence or facts presented by respondent petitioner cannot seriously continued showing of a genuine issue of material fact the underpayment element of fraud in its present state the record shows that petitioner used dollar_figure in cash to purchase money orders in in addition the parties have stipulated to certain cash expenditures_for personal items by petitioner and his deposits of currency to accounts he controlled during petitioner has admitted by way of stipulation that he wrote no checks to cash in got no cash back from deposits in and was paid only dollar_figure in cash as a loan by e a of illinois in an examination of his individual tax_return for the year reveals no apparent source of cash receipts thus petitioner has unexplained currency expenditures_for the year and the record in its present state is devoid of any evidence of nontaxable sources of cash except for the above noted loan the record suggests that the amount by which petitioner's cash expenditure sec_21 exceed his known sources of income for is taxable_income see 91_tc_273 continued argue that stipulations do not fall into the category of pleadings answers to interrogatories depositions admissions and any other acceptable materials rule b under our rules a stipulation shall be treated as a conclusive admission by the parties to the stipulation rule e emphasis supplied see eg noneman v commissioner tcmemo_1978_283 21cash bank_deposits are another form of cash expenditure 91_tc_273 ndollar_figure salls v commissioner tcmemo_1992_547 affd without published opinion 26_f3d_1120 11th cir the intent element of fraud the parties have stipulated for the years and facts similar to those of these facts show an apparent pattern of unexplained at this point in the proceedings cash expenditures and deposits by petitioner petitioner makes much of the stipulation that certain cash amounts possessed by petitioner in were reported as income on the return of savage according to petitioner these cash amounts were earned by savage and since the cash was savage's income petitioner had no duty to report itdollar_figure petitioner concludes that he therefore could not have committed fraud and if he did have a duty to report additional income on 22this argument is without evidence in the record other than the reporting position of savage on the fye return this return position is not binding on the court in answering the question of who earned_income it is our task to consider what was actually done rather than simply the declared purpose of the participants 59_tc_375 23petitioner comes to the erroneous legal conclusion that amounts reported as income by a corporation savage cannot have been income to another party ie himself we will not attempt to catalog all the situations which contradict such a conclusion but cite for consideration 89_tc_1280 amounts diverted from taxpayer's corporation and used for expenses for another business owned by taxpayer were taxable_income to taxpayer burke v commissioner tcmemo_1987_434 affd without published opinion sub nom new resources v commissioner 857_f2d_1471 5th cir taxpayer's use of corporate funds as capital_investment in new corporation stock of which was held in his own name was income to him as a constructive_dividend his personal return his failure to do so was an honest mistake respondent views differently the same evidence respondent argues that the cash amounts represent earnings_of e a of illinois skimmed by petitioner as diverted receipts or constructive dividends that petitioner should have reported as taxable_income on his personal return respondent argues that the savage return only reported the disputed amounts after petitioner discovered he was under criminal investigation by the irs and is itself an act in continuation of petitioner's fraud for the year even where the nonmoving party on a motion for summary_judgment would have the burden_of_proof at trial on an issue she is entitled to have the most favorable inferences drawn in her behalf and to be given the benefit of favorable legal theories invoked by the evidence 477_us_242 597_f2d_406 4th cir the present record indicates a 3-year pattern of unexplained excess cash expenditures by petitioner as well as extensive uses of currency in addition we cannot overlook petitioner's stipulation to pleading guilty to the criminal violation of filing a false individual_income_tax_return for the year in a signed plea agreement with the government petitioner admitted receiving income from skimming cash proceeds from entertainment amusement inc which he knew he was required to report but nevertheless did notdollar_figure finally we have previously described other facts in the record from which a trier of fact might infer attempts by petitioner to conceal assets these are all potential badges_of_fraud dollar_figure conclusion petitioner seems to believe that factual ambiguities in the record require a decision in his favor on this motion however when considering a motion for summary_judgment the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial 477_us_242 accord 61_tc_861 petitioner has neither produced evidence negating an essential element of respondent's case nor has he shown a 24petitioner's criminal conviction for is admissible and may be relevant to prove motive opportunity intent preparation plan knowledge identity or absence of mistake or accident fed r evid b 25see 796_f2d_303 9th cir affg tcmemo_1984_601 recites a nonexclusive list of badges_of_fraud padow v commissioner tcmemo_1987_250 affd without published opinion 843_f2d_1388 4th cir prior conviction for criminal tax violation for first of years was evidence of fraudulent intent for remaining years citing 43_tc_407 n modified 44_tc_408 complete failure of proof in the record on an essential element of respondent's case petitioner has failed to make the initial showing required by rule b and 477_us_317 we as a result find that petitioner has failed to show that there is no genuine issue as to any materialfact and that a decision may be rendered as a matter of law as to the deficiency and additions to tax for the year we therefore deny petitioner's motion for partial summary_judgment an appropriate order will be issued


t c memo united_states tax_court benjamin and sallie campfield petitioners v commissioner of internal revenue respondent docket no filed date andrew b bowman for petitioners carmino j santaniello jr for respondent memorandum findings_of_fact and opinion clapp judge respondent determined deficiencies in and additions to petitioners' federal income taxes as follows additions to tax sec sec sec sec sec year deficiency b b b a b b dollar_figure dollar_figure of the -- -- dollar_figure interest due on dollar_figure dollar_figure dollar_figure of the -- -- dollar_figure interest due on dollar_figure dollar_figure -- -- dollar_figure of the dollar_figure interest on dollar_figure additions to tax for fraud apply only to benjamin campfield by amendment to answer respondent asserted the following increase in the deficiency and additions to tax additions to tax sec sec sec year deficiency b b dollar_figure dollar_figure of the dollar_figure interest due on dollar_figure additions to tax for fraud apply only to benjamin campfield after concessions by the parties the issues for decision are whether petitioners received unreported income of dollar_figure in dollar_figure in and dollar_figure in we hold that they did whether petitioner benjamin campfield is liable for additions to tax for fraud under sec_6653 for the years in issue we hold that he is liable whether the assessments for and are barred by the statute_of_limitations we hold that the assessments are not barred 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 unless otherwise indicated findings_of_fact some of the facts are stipulated and are so found we incorporate by reference the stipulation of facts and attached exhibits benjamin and sallie campfield petitioners are husband and wife and they resided in trumbull connecticut at the time they filed their petition benjamin campfield petitioner was born in sylvania georgia his education did not proceed beyond the seventh grade arturo's inc from through petitioner was the sole shareholder of arturo's inc arturo's which operated a cafe and bar under the name club in bridgeport connecticut arturo's was predominantly a cash business during the years through arturo's filed u s_corporation income_tax returns forms for the fiscal years ended date through b k variety from through petitioner operated a convenience store called b k variety located in new haven connecticut petitioner operated b k variety as a sole_proprietorship b k variety was primarily a cash business for which petitioner maintained a separate bank account petitioners reported income and expenses for b k variety on schedules c of their federal_income_tax returns for the taxable years and route property around date petitioner agreed to purchase approximately acres of land together with improvements and various items of personal_property located on route in sylvania georgia route property for a purchase_price of dollar_figure petitioner deposited dollar_figure in cash with john robinson of robinson real_estate to be applied to the purchase_price petitioner purchased a cashier's check at connecticut national bank in bridgeport connecticut on date with dollar_figure in cash the sale of the route property closed on date at the closing petitioner applied the dollar_figure cashier's check to the purchase_price route property around date petitioner agreed to purchase approximately acres of land located on route in sylvania georgia route property for dollar_figure on or about date leroy campfield petitioner's brother gave wilkes williams williams also with robinson real_estate dollar_figure in cash to be applied to the purchase_price of the route property along with the dollar_figure in cash leroy campfield delivered to williams a purchase contract signed by petitioner the sale of the route property closed on or about date at the closing petitioner produced a dollar_figure cashier's check no dated date and a briefcase containing dollar_figure in cash to be applied to the purchase_price the entire dollar_figure in cash consisted of dollar_figure bills williams helped count the dollar_figure and because only dollar_figure was needed to close the sale dollar_figure was returned to petitioner petitioner financed dollar_figure of the route property purchase with a 90-day note given to the sellers payable on date petitioner satisfied the note in with a dollar_figure trustee check drawn on the client account of attorney james m kearns kearns kearns assisted petitioners with their real_estate activities among other things after the closing on the route property williams deposited the dollar_figure in cash along with cashier's check no at a local bank an employee of the bank informed williams that because the deposit involved over dollar_figure in cash the bank would notify the internal_revenue_service irs about the deposit when williams conveyed this information to petitioner petitioner said that it did not matter whether the bank notified the irs campfield farm we will refer to the route property and the route property collectively as the campfield farm the schedules f attached to the petitioners' and federal_income_tax returns listed livestock sales as the principal product of the campfield farm petitioner also sold melons in and but the record does not indicate whether the melons were grown on the campfield farm several pieces of farm equipment were purchased for use on the campfield farm leroy campfield purchased the following equipment from a farm equipment dealer in sylvania georgia equipment price date of purchase a c harrow dollar_figure date planter big_number date combine big_number date the harrow planter and combine were each purchased from the same farm equipment dealer and the dealer prepared a separate invoice for each purchase each of the three invoices shows campfield farm as the purchaser leroy campfield purchased the harrow planter and combine on petitioner's behalf insurance settlement on date petitioner acquired residential rental real_property fire destroyed the property in petitioner demolished the damaged structure and removed it from the property in date petitioner received a net insurance settlement in the amount of dollar_figure petitioners remain the owners of the land without improvements loans and bank accounts in date petitioner borrowed dollar_figure pincite percent annual interest the term of this loan wa sec_5 years on date petitioners obtained a home improvement loan from connecticut national bank cnb loan in the principal_amount of dollar_figure the term of the cnb loan was months pincite percent annual interest petitioner obtained other loans and credit that respondent took into account in the net_worth computations these amounts are not in dispute petitioner maintained an interest-bearing money market account with connecticut national bank from through during several months in and the balance in this account exceeded dollar_figure petitioners maintained other checking accounts but none of these accounts is in dispute on date leroy campfield opened account no located in the bank of screven county account no which had a balance of zero on date dollar_figure on date dollar_figure on date and dollar_figure on date the signature card for account no shows campfield farms leroy campfield as the name of account the only signature on the signature card is that of leroy campfield the signature card and the bank statements show the same sylvania georgia mailing address other assets petitioners owned other assets including real_estate and automobiles the ownership of these other assets is not in dispute petitioners did not receive inheritances gifts or insurance settlements during the years through cash transactions and third-party checks petitioner entered into the following cash transactions during the years in issue mercedes deposit dollar_figure mercedes dollar_figure route property deposit dollar_figure cashier's check route property dollar_figure route property deposit dollar_figure automobile insurance dollar_figure dollar_figure casino chips dollar_figure tractor trailer dollar_figure automobile repairs dollar_figure automobile insurance dollar_figure route property dollar_figure dollar_figure casino chips dollar_figure automobile repairs dollar_figure chevy pickup deposit dollar_figure bmw deposit dollar_figure dollar_figure petitioner paid dollar_figure toward an auto body repair bill using third-party checks he also cashed third-party checks at a grocery store in bridgeport connecticut gambling activities petitioner gambled at tropworld in atlantic city new jersey in and petitioner purchased casino chips on date in the amount of dollar_figure and on date in the amount of dollar_figure tropworld filed a currency transaction report by casinos form_8362 ctr with the irs for each of these purchases tropworld maintained a list accounts detail ratings list account which showed that petitioner purchased casino chips on date in the amount of dollar_figure and on date in the amount of dollar_figure income_tax returns petitioners' accountant david nyden nyden prepared petitioners' u s individual income_tax returns form sec_1040 from through the years in issue each month nyden would go to b k variety arturo's or petitioners' home to pick up monthly financial records for b k variety the records included bank statements check stubs bills and day sheets a day sheet reflected the gross cash receipts and cash payouts for a particular date petitioner summarized the cash transactions on the day sheet and then gave the day sheet to nyden nyden would reconcile the day sheets with bank_deposits into the b k variety bank account nyden used the monthly bank statements and the day sheets to calculate the gross_receipts for b k variety that he reported on petitioners' schedules c for and petitioner used a cash register at b k variety from through but nyden did not use the cash register tapes to prepare petitioners' returns petitioner provided nyden with receipts related to the farming activity conducted on the campfield farm at the end of the year nyden and petitioner would discuss the farm activities and petitioner would give nyden receipts for income and expenses on petitioners' form_1040 for the taxable_year petitioners reported other income of dollar_figure nyden wrote commissions next to the entry of dollar_figure on petitioners' form_1040 for the taxable_year petitioners reported other income of dollar_figure nyden wrote commissions next to the entry of dollar_figure petitioners filed their and federal_income_tax returns on date date and date respectively respondent issued a statutory_notice_of_deficiency dated date for petitioners' taxable years and nyden also prepared the forms for arturo's during the years in issue nyden would go to arturo's or to petitioners' home and pick up bank statements canceled checks check stubs and the day sheets for arturo's nyden used this information to complete the forms respondent's investigation respondent began a criminal investigation of petitioner sometime prior to special_agent edward j burke agent burke with the irs criminal_investigation_division investigated petitioner for the taxable years and agent burke interviewed petitioner and kearns represented petitioner during the interview during that interview petitioner on the advice of counsel invoked his rights under the fifth_amendment to the constitution and refused to answer some of agent burke's questions for example petitioner refused to answer whether he had cash on hand as of date petitioner also refused to answer questions about the source of the income reported as commissions on his and form sec_1040 agent burke served summonses on connecticut national bank and the bank of screven county these banks complied with the summonses and agent burke used the records to prepare the net_worth computations for the taxable years through on date petitioner waived his right to indictment and pled guilty to an information charging him with one count of willfully making and subscribing to a materially false federal_income_tax return for the taxable_year in violation of sec_7206 on date petitioner was sentenced to years' incarceration suspended after months placed on years' probation and fined dollar_figure opinion the dispute in this case focuses on respondent's net_worth computations and respondent's fraud determinations petitioners argue that respondent's net_worth calculations are invalid due to errors petitioners also contend that respondent has failed to prove that petitioner is liable for the fraud additions to tax petitioners dispute only four of the items in respondent's net_worth computations petitioners do not otherwise contest respondent's deficiency determinations or the additions to tax pursuant to sec_6661 we conclude that petitioners have conceded the uncontested items 89_tc_46 net_worth analysis respondent used the net_worth plus expenditures method to determine that petitioners had unreported income in and in a case such as this where the determination of unreported income as well as the existence of fraud depends upon respondent's net_worth computations we must examine the validity of respondent's computations in light of the standards set forth in 348_us_121 and 355_us_595 under those standards the commissioner must establish with reasonable certainty an opening net_worth as a starting point from which to calculate future increases in the taxpayer's assets holland v united_states supra pincite in addition to showing an opening net_worth the commissioner must also show a likely source of the unreported income or negate possible sources of nontaxable income id pincite 877_f2d_1129 2d cir 91_tc_1049 affd 926_f2d_1470 6th cir under the net_worth_method income is computed by determining a taxpayer's net_worth at the beginning and end of a period the difference between the amounts is the increase in net_worth an increase in a taxpayer's net_worth plus his nondeductible expenditures less nontaxable receipts may be considered taxable_income holland v united_states supra pincite where the commissioner has determined a deficiency by using the net_worth_method we may adjust a determination of opening net_worth shown by the trial record to be unrealistic 298_f2d_784 3d cir affg in part tcmemo_1960_160 251_f2d_311 9th cir affg tcmemo_1956_112 22_tc_912 affd sub nom 230_f2d_336 7th cir any such adjustments do not invalidate the presumption of correctness attaching to other aspects of the commissioner's deficiency determination if the determination was not arbitrary hoffman v commissioner supra pincite respondent calculated petitioners' net_worth for the years in dispute and we have attached the summary of respondent's calculations as an appendix the parties agree on all but four categories of respondent's net_worth calculations we address below only those categories in dispute the disputed categories include petitioners' opening cash on hand the ownership of funds in the bank of screven county the acquisition of a planter in for use on the campfield farm and petitioner's purchase of casino chips on date and date cash on hand petitioners argue that respondent incorrectly determined cash on hand in the amount of dollar_figure as of date petitioner contends that he had a cash hoard of dollar_figure in a safe-deposit box located at connecticut national bank petitioner contends that the dollar_figure cash hoard consisted of the dollar_figure insurance settlement received in plus accumulated savings according to petitioner he purchased the cashier's check applied to the route property using the dollar_figure in cash for the reasons discussed below we find that petitioner did not maintain a cash hoard of dollar_figure on date petitioner obtained the cnb loan in the amount of dollar_figure petitioner's borrowing of funds during the time that he allegedly had a cash hoard supports the inference that no cash hoard existed see o'connor v commissi412_f2d_304 2d cir affg in part and revg and remanding in part tcmemo_1967_174 223_f2d_83 6th cir revg and remanding a memorandum opinion of this court dated date petitioner maintained an interest-bearing money market account during the years through in and petitioner placed substantial sums of money in this account these transactions indicate that petitioner was not mistrustful of banks and we find it unlikely and improbable that petitioner would forgo interest on the dollar_figure allegedly kept in the safe- deposit box see conti v commissioner tcmemo_1992_616 affd in part and revd and remanded in part 39_f3d_658 6th cir petitioner waited until trial to assert that he had a cash hoard and he made no such claim to respondent's agents petitioner's delay in claiming the existence of a cash hoard is a factor that weighs in respondent's favor see 567_f2d_1206 2d cir petitioners reported adjusted_gross_income of dollar_figure and dollar_figure for the taxable years and respectively we find it unlikely that petitioners could have accumulated a significant cash hoard from this income we find that petitioner did not maintain a cash hoard in the safe-deposit box at connecticut national bank as of date funds in the bank of screven county respondent's net_worth and expenditures computations included cash in banks respondent determined that petitioner owned the funds in account no located in the bank of screven county which had a balance of zero on date dollar_figure on date dollar_figure on date and dollar_figure on date petitioner contends that his brother leroy campfield owned account no on date leroy campfield opened account no the signature card for account no shows campfield farms leroy campfield as the name of account the only signature on the signature card is that of leroy campfield the signature card and the bank statements show the same sylvania georgia mailing address leroy campfield acted on petitioner's behalf when petitioner purchased the route property leroy campfield gave williams dollar_figure on petitioner's behalf and a purchase contract signed by petitioner leroy campfield purchased equipment and supplies on petitioner's behalf the invoices associated with said purchases show campfield farm as the purchaser we find that leroy campfield opened account no on petitioner's behalf and that petitioner owned the funds in account no planter respondent determined that petitioners acquired a planter for dollar_figure on date petitioner stipulated that in he acquired a combine and a harrow for use on the campfield farm leroy campfield purchased the combine and the harrow on petitioner's behalf leroy campfield also purchased a planter but petitioner denies ownership of the planter the combine harrow and planter were each purchased from the same dealer the invoices associated with the purchase of the combine and harrow show campfield farm as the purchaser the invoice associated with the planter shows campfield farm as the purchaser leroy campfield was acting on petitioner's behalf at campfield farm and it seems highly unlikely that he would buy a planter for something other than farm purposes particularly when the planter fits logically into the farm activities we find that petitioner owned the planter purchase of casino chips respondent determined that petitioner purchased casino chips on date in the amount of dollar_figure and on date in the amount of dollar_figure respondent considered these amounts nondeductible personal expenses tropworld filed at least two ctr's that relate to petitioner the first ctr indicates that petitioner purchased dollar_figure of casino chips on date the second ctr indicates that petitioner purchased dollar_figure of casino chips on date the list account maintained by tropworld shows that on date petitioner purchased casino chips in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure which corresponds with the dollar_figure shown on the ctr for that date the list account for date reveals that petitioner purchased casino chips in the amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure which corresponds with the dollar_figure shown on the ctr for that date thus the dollar figures on the list account for date and date corroborate the dollar figures shown on the ctr's filed by tropworld petitioner does not dispute the evidence presented by respondent concerning the purchase of the casino chips on date and date petitioners argues that respondent had a duty to obtain records from tropworld that would reveal petitioner's gambling winnings during and and that by failing to do so respondent's opening cash on hand figure is fatally flawed this argument is without merit respondent need only establish with reasonable certainty petitioners' net_worth as of date any gambling winnings from and will be taken into account in the net_worth calculations petitioners reported no gambling winnings on any_tax returns filed for the years through we find that petitioner incurred nondeductible expenditures of dollar_figure on date and dollar_figure on date for the purchase of casino chips at tropworld we conclude that respondent's net_worth computations meet the first prong of the test in 348_us_121 ie that the opening net_worth be established with reasonable certainty we now turn to the alternative branch of the second prong of the holland test pursuant to which respondent must show a likely source of the unreported income or negate possible sources of nontaxable income whether or not respondent has shown a likely source of petitioners' unreported taxable_income proof of a likely source_of_income is not a prerequisite to use of the net_worth_method when possible sources of nontaxable income are negated 355_us_595 685_f2d_776 2d cir petitioner himself denied receipt of any gifts inheritances or insurance settlements during the years in issue respondent investigated petitioners' banking activities and found no evidence of nontaxable income respondent must also establish that a reasonable investigation of leads to possible sources of nontaxable income has been conducted holland v united_states supra pincite united_states v mastropieri supra pincite we have rejected petitioner's cash hoard claim petitioners made no other claims of nontaxable sources of income once respondent has explored the leads available to her and established a prima facie case she has met this burden petitioner remains quiet at his peril united_states v mastropieri supra pincite quoting holland v united_states supra pincite we conclude that respondent's agents conducted a reasonable investigation of leads to possible sources of nontaxable income we conclude that respondent's net_worth computations meet the standards set forth in holland v united_states supra and united_states v massei supra we conclude that petitioners had unreported income of dollar_figure in dollar_figure in and dollar_figure in we now turn to respondent's fraud determinations fraud the commissioner has the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b first the commissioner must prove the existence of an underpayment 94_tc_654 the commissioner may not rely upon the taxpayer's failure to carry the burden_of_proof as to the underlying deficiency id pincite 92_tc_661 56_tc_297 second the commissioner must show that the taxpayer intended to evade taxes by conduct intended to conceal mislead or otherwise prevent tax collection 398_f2d_1002 3d cir parks v commissioner supra pincite 80_tc_1111 petitioner's conviction under sec_7206 does not collaterally estop him from denying that he fraudulently understated his tax_liabilities however it is evidence to be considered by the trier of fact 84_tc_636 underpayment when the allegations of fraud are intertwined with unreported income and reconstructed income as they are here we must be careful not to bootstrap a finding of fraud upon a taxpayer's failure to prove the commissioner's deficiency determination erroneous parks v commissioner supra pincite respondent offered prima facie evidence of petitioners' net_worth for the reasons discussed above we find that respondent's net_worth computations established substantial amounts of unreported income and consequent underpayment of taxes for and fraudulent intent respondent must prove by clear_and_convincing evidence that petitioner had fraudulent intent id pincite fraud may be proven by circumstantial evidence 79_tc_995 affd 748_f2d_331 6th cir courts have developed various factors or badges that tend to establish fraud circumstantial evidence that may give rise to a finding of fraudulent intent includes understatement of income inadequate or no records concealment of assets implausible or inconsistent explanations of behavior failure_to_file tax returns failure to cooperate with tax authorities dealing in cash engaging in illegal activity and attempting to conceal an illegal activity 796_f2d_303 9th cir affg tcmemo_1984_601 102_tc_632 these badges_of_fraud are nonexclusive 94_tc_316 a taxpayer's entire course of conduct may establish the requisite fraudulent intent 56_tc_213 53_tc_96 the intent to conceal or mislead may be inferred from a pattern of conduct 317_us_492 understatement of income by itself does not establish fraud however a consistent pattern of understating income over a number of years is strong evidence of fraudulent intent to evade the income_tax 451_f2d_197 3d cir affg tcmemo_1970_144 and tcmemo_1970_37 otsuki v commissioner supra pincite petitioners reported income of dollar_figure in dollar_figure in and dollar_figure in petitioners underreported their income by dollar_figure in dollar_figure in and dollar_figure in failure to maintain accurate records may be a badge of fraud merrit v commissioner 301_f2d_484 5th cir affg tcmemo_1959_172 petitioner failed to maintain any records as to the commissions he reported on his and federal_income_tax returns petitioner kept some records for his various businesses from which he gave figures to nyden these books were never audited petitioner prepared the day sheets for arturo's and b k variety and there were no safeguards to assure that all cash receipts found their way into the books nyden never reviewed cash register tapes in short petitioner pretty much could include the amount of cash that suited him we find that petitioner's records were inadequate nyden's preparation of petitioners' form sec_1040 did not redeem or correct the inadequacy of petitioner's records nyden would prepare petitioners' form sec_1040 using the information provided by petitioners nyden frequently noticed that the expenses were just out of whack with the revenue nyden would discuss the matter with petitioner to determine whether there was any more income thus prompted petitioner would furnish nyden with an additional income figure to plug the gap petitioner never referred to any documents or provided nyden with any backup material related to the additional income for example nyden summarized the income and expenses for the campfield farm for one of the years at issue the expenses were just so far out of line with the revenue that nyden asked petitioner if there was any additional income from the farm petitioner responded that there was dollar_figure of additional income petitioner provided no explanation of the source of the dollar_figure of additional income we conclude that petitioner's records did not reflect accurately his income and expenses we have no evidence that petitioner attempted to conceal any particular assets however given respondent's net_worth analysis and petitioner's various business activities we find that petitioner concealed substantial amounts of cash that passed through his hands and never appeared in his records or form sec_1040 we find petitioner's explanations of the circumstances surrounding the alleged cash hoard to be implausible and inconsistent petitioner made little attempt to explain his financial activities to the extent he did so we find those explanations vague and inadequate petitioners filed tax returns for the years in issue but the net_worth analysis indicates substantial unreported income petitioner also pled guilty to criminal charges of willfully making and subscribing to a materially false federal_income_tax return for the taxable_year false or misleading statements to the commissioner's agents can be evidence of fraudulent intent 75_tc_1 petitioner refused to answer some of agent burke's questions pleading the fifth_amendment or on the advice of counsel as for questions that petitioner did answer we do not find petitioner's statements false or misleading a taxpayer's extensive use of cash can be an indication of fraudulent intent bradford v commissioner supra pincite 61_tc_249 affd 519_f2d_1121 5th cir petitioner made cash expenditures of dollar_figure dollar_figure and dollar_figure for the years and respectively petitioner purchased items such as automobiles real_estate and automobile insurance with cash when payment by check would have appeared more conventional petitioner offered no explanation why he used cash for such substantial expenditures respondent has not shown that petitioner was engaged in or attempted to conceal an illegal activity during the taxable years through respondent contends that petitioner's cashing of third-party checks is evidence of fraudulent intent see corrigan v commissioner tcmemo_1994_31 petitioner paid dollar_figure toward an auto body repair bill using third-party checks petitioner also cashed third-party checks at a grocery store in bridgeport connecticut during the taxable years through there is no explanation or accounting by petitioner for this unorthodox use of third-party checks courts have also considered the educational level and sophistication of the taxpayer 75_tc_1 petitioner argues that because his education did not proceed beyond the seventh grade and because he is cognitively limited with a verbal iq of and a performance iq of he is incapable of committing fraud the scope and extent of his business activities which included a farm rental real_estate a cafe and bar and a convenience store and his apparent financial success belie that argument see eg 67_tc_143 in which we found fraud noting that the taxpayer's limited formal education did not prevent him from realizing substantial amounts of income considering the record taken as a whole and reasonable inferences therefrom we conclude that petitioner intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes and that the entire underpayments are attributable to fraud statute_of_limitations the commissioner generally is required to assess tax within years of the date the return is filed sec_6501 there is no limitation period to assess tax if the commissioner proves fraud sec_6501 in light of our holding that respondent has proved fraud under sec_6653 for petitioner we hold that assessment and collection of the deficiencies and additions to tax for substantial_understatement determined against petitioners and of the additions to tax for fraud determined against petitioner are not barred by the statute_of_limitations accordingly we need not reach respondent's alternative argument under sec_6501 for to reflect the foregoing and the concessions by the parties decision will be entered under rule appendix summary - net_worth computation - item particular sec_12 cash on hand dollar_figure dollar_figure dollar_figure dollar_figure cash in banks dollar_figure dollar_figure dollar_figure dollar_figure real_estate dollar_figure dollar_figure dollar_figure dollar_figure motor vehicles dollar_figure dollar_figure dollar_figure dollar_figure business equipment dollar_figure dollar_figure dollar_figure dollar_figure farm equipment -- -- dollar_figure dollar_figure inventory dollar_figure dollar_figure dollar_figure dollar_figure common_stock arturo's dollar_figure dollar_figure dollar_figure dollar_figure loans receivable dollar_figure dollar_figure dollar_figure -- total assets dollar_figure dollar_figure dollar_figure dollar_figure less mortgage loans dollar_figure dollar_figure dollar_figure dollar_figure accum deprec dollar_figure dollar_figure dollar_figure dollar_figure shareholder's loans -- -- -- dollar_figure total liabilities dollar_figure dollar_figure dollar_figure dollar_figure net_worth dollar_figure dollar_figure dollar_figure dollar_figure less net_worth prior yr dollar_figure dollar_figure dollar_figure net_worth inc - decr dollar_figure big_number -dollar_figure nondeductible dollar_figure dollar_figure dollar_figure personal expenditures nonincome adjustments dollar_figure dollar_figure dollar_figure subtotals dollar_figure dollar_figure dollar_figure less exemptions dollar_figure dollar_figure dollar_figure corrected taxable_income dollar_figure dollar_figure dollar_figure less taxable_income reported dollar_figure dollar_figure dollar_figure additional taxable_income dollar_figure dollar_figure dollar_figure


t c summary opinion united_states tax_court willie a and charlotte j morris petitioners v commissioner of internal revenue respondent docket no 4441-09s filed date willie a and charlotte j morris pro_se edwin b cleverdon for respondent thornton judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case unless otherwise noted all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure by notice_of_deficiency dated date respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and a dollar_figure accuracy-related_penalty pursuant to sec_6662 after concessions by both parties the sole issue remaining for decision is whether certain annuity payments that petitioners received during are fully includable in their gross_income background the parties have stipulated some facts which we incorporate herein when they petitioned the court petitioners resided in alabama in willie a morris petitioner retired from kimberly- clark corp kimberly-clark on or about date kimberly-clark distributed dollar_figure from petitioner’s sec_401 account almost all of it in kimberly-clark stock the distributed_amount reflected dollar_figure of petitioner’s after-tax 1respondent has conceded his determination in the notice_of_deficiency that petitioners are taxable on a dollar_figure payment from new york life_insurance co petitioners have not disputed that they failed to report certain interest_income as determined in the notice_of_deficiency although respondent alluded to the sec_6662 accuracy-related_penalty in his pretrial memorandum he did not raise the issue at trial or in his posttrial memorandum brief we deem respondent to have conceded or abandoned this issue contributions dollar_figure of his pretax contributions dollar_figure of employer contributions and dollar_figure of untaxed earnings attributable to these various contributions including dollar_figure of unrealized_appreciation kimberly-clark distributed petitioner’s dollar_figure of after-tax contributions directly to him the dollar_figure balance of petitioner’s sec_401 account was rolled over to olde discount brokerage in a time and manner not revealed by the record at least some of these assets were ultimately transferred to coosa pines federal credit_union coosa pines and apparently used to purchase annuities on form 1099-r distributions from pensions annuities retirement or profit-sharing_plans iras insurance contracts etc coosa pines reported that in it made annuity distributions to petitioner totaling dollar_figure on their joint federal_income_tax return filed date petitioners reported these payments but excluded dollar_figure as representing a recovery_of investment respondent disallowed this exclusion discussion the parties disagree as to whether respondent correctly determined that the entire dollar_figure of annuity payments from coosa 2petitioner testified that these annuities were purchased from four different insurance_companies and that coosa pines was the distribution unit the record is otherwise silent about these transactions pines is includable in petitioners’ gross_income petitioners have the burden_of_proof see rule a from the sparse evidence in the record it appears that the annuity payments in question were paid out of an individual_retirement_account ira such distributions must be included in the distributee’s gross_income pursuant to the annuity rules of sec_72 see sec_408 those rules generally include in the annuitant’s gross_income any amount_received_as_an_annuity sec_72 but allow tax-free recovery_of the annuitant’s investment_in_the_contract sec_72 the excludable_portion of amounts received as an annuity may be determined by applying an exclusion_ratio as provided under sec_72 the internal_revenue_code provides a simplified_method for taxing annuity payments received under a qualified_employer_retirement_plan see sec_72 petitioners contend that they properly applied this simplified_method in excluding dollar_figure of the annuity_payment from gross_income as respondent notes there is a threshold question whether the simplified_method applies because it is unclear that the annuity payments in question were made from a 3petitioners have not claimed or shown that they meet the requirements of sec_7491 to shift the burden_of_proof to respondent as to any factual issue 4even if the annuity payments were not paid out of an ira they would still be taxable according to the sec_72 rules and our analysis would not be significantly different qualified_employer_retirement_plan within the meaning of sec_72 we need not resolve that issue however because even if we were to assume for the sake of argument that the simplified_method is available to petitioners they have nevertheless failed to establish that they had any investment_in_the_contract a taxpayer’s investment_in_the_contract consists of his or her nondeductible_contributions see 108_tc_54 hall v commissioner tcmemo_1998_ for this purpose an employee’s investment_in_the_contract includes amounts contributed by the employer but only to the extent that such amounts were includable in the gross_income of the employee sec_72 consequently employee or employer contributions that are not includable in the employee’s gross_income are not included in the employee’s investment_in_the_contract in claiming the dollar_figure exclusion petitioners apparently treated the investment_in_the_contract as being dollar_figure petitioners have produced no evidence however to support a dollar_figure investment_in_the_contract the evidence shows that petitioner’s dollar_figure of after-tax contributions was distributed 5petitioners apparently assumed that there were expected monthly payments under the annuity dividing the purported dollar_figure investment_in_the_contract by they determined that the excludable_portion of each monthly payment would be dollar_figure multiplying this amount by months yielded the dollar_figure annualized amount which they seek to exclude to him shortly after his retirement from kimberly-clark and was not part of the amount of his sec_401 account that was rolled over into his ira the evidence strongly suggests that the remaining dollar_figure of petitioners’ sec_401 account represented amounts contributed by petitioner and kimberly-clark and earnings thereon that were not previously includable in petitioner’s income it appears that the annuities in question were acquired with these pretax amounts accordingly we conclude that petitioner’s investment_in_the_contract is zero and consequently that petitioners are entitled to exclude no portion of the annuity payments from gross_income petitioners argue that their reporting position for is correct because they treated the annuity payments the same way for tax years through they allege that although the internal_revenue_service audited their income_tax returns for and respondent has not previously challenged their treatment of the annuity payments any failure by respondent to challenge petitioners’ treatment of annuity 6at the time of petitioner’s retirement in applicable law did not permit an after-tax contribution to be rolled over from a sec_401 account to an ira sec_402 as in effect for rollovers of after-tax contributions to an ira were not permitted until following the passage of the economic_growth_and_tax_relief_reconciliation_act_of_2001 publaw_107_16 115_stat_123 we do not understand petitioners to contend that these after-tax contributions were used to purchase the annuities in question in any event these after-tax contributions obviously fall far short of the dollar_figure that petitioners assert as the investment_in_the_contract payments in prior years however does not preclude respondent’s determination for the year at issue see 60_tc_368 a prior determination cannot serve to relieve a petitioner of his burden of proving error in the commissioner’s present determination affd 519_f2d_1280 10th cir 55_tc_28 the mere acceptance or acquiescence in returns filed by a taxpayer in previous years creates no estoppel against the commissioner nor does the overlooking of an error in a return upon audit create any such estoppel mora v commissioner tcmemo_1972_123 see 381_us_68 auto club of mich v commissioner 353_us_180 77_tc_765 petitioners further argue that the period of limitations has run with regard to transactions that occurred in and that they cannot be expected to produce documentation from that year in support of their federal_income_tax return petitioners are mistaken sec_6501 generally requires the commissioner to assess tax within years after a return is filed petitioners filed their tax_return on date respondent issued the notice_of_deficiency on date pursuant to sec_6503 the mailing of the notice_of_deficiency tolled the limitations_period until days after our final_decision petitioners are required to retain records so long as the contents thereof may become material in the administration of any internal revenue law see sec_1 e income_tax regs for the reasons described above we sustain respondent’s determination regarding the taxation of the annuity payments to reflect the foregoing and the parties’ concessions decision will be entered under rule


department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------- id no ------------- telephone number --------------------- refer reply to cc psi b02 plr-149686-10 date date internal_revenue_service number release date index number -------------------- -------------------- --------------------------------------- ---------------------------------------------- legend x state date date -------------------- --------------- ---------------- ------ ------------------------- ---------------------- dear --------------- this responds to a letter dated date submitted on behalf of x by x’s authorized representative requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated in state on date it was intended that x elect s_corporation treatment effective date however a form_2553 election by a small_business_corporation was not timely filed for x sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective generally if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one-half months of a corporation's taxable_year then the corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is made plr-149686-10 sec_1362 provides that if an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making the election for the taxable_year or no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make the election then the secretary may treat the election as timely made for such taxable_year and sec_1362 shall not apply based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective date accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective date within days following the date of this letter then such election will be treated as timely made for x's taxable_year beginning date a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely melissa c liquerman chief branch office of the associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ---------------------------------------- ---------------------------------------- ------------------------------------------- -------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact -------------------- id no ------------- telephone number -------------------- refer reply to cc psi b02 plr-136215-08 date date legend x date state dear ---------- ---------------------------------------- ------------------------ ------------------------- -------- this is in response to a letter dated date and subsequent correspondence submitted by x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as an association_taxable_as_a_corporation for federal tax purposes according to the information submitted x was formed on date under the laws of state x intended to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date however x inadvertently failed to timely file the proper election sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes sec_301_7701-3 provides that unless the entity elects otherwise a domestic eligible_entity with a single owner is disregarded as an entity separate from its owner sec_301_7701-3 provides that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on the form sec_301_7701-3 provides that an plr-136215-08 election made under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make an election to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date x should make the election by filing a properly executed form_8832 with the appropriate service_center a copy of this letter should be attached to the form except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent plr-136215-08 pursuant to the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely curt g wilson deputy associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes