tcmemo_2011_260 united_states tax_court martin g plotkin petitioner v commissioner of internal revenue respondent docket no filed date sanford j boxerman for petitioner michael d zima for respondent memorandum findings_of_fact and opinion goeke judge respondent determined deficiencies in petitioner’s federal income taxes of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for tax years and respectively as a result of underreported or unreported income that should have been reported on schedule c profit or loss from business and of unpaid self-employment taxes and a disallowed deduction for home mortgage interest for respondent also determined penalties for fraud under section of dollar_figure dollar_figure and dollar_figure for and respectively as well as additions to tax for fraudulent_failure_to_file under section f of dollar_figure and dollar_figure for and respectively respondent further determined additions to tax for failure to pay estimated_taxes under sec_6654 of dollar_figure and dollar_figure for and respectively as well as additions to tax under sec_6651 of dollar_figure and dollar_figure for and respectively petitioner now claims to be entitled to various deductions totaling dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively respondent later conceded that petitioner is not liable for additions to tax under sec_6651 or for self-employment taxes for petitioner conceded that he is not entitled to a deduction for home mortgage interest of dollar_figure for after concessions the issues remaining for decision are whether petitioner underreported schedule c income by dollar_figure dollar_figure and dollar_figure for and respectively we hold that he did 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure whether petitioner is entitled to deductions of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively we hold that he is not whether petitioner failed to report schedule c income of dollar_figure and dollar_figure for and respectively we hold that he failed to report dollar_figure for and dollar_figure for whether petitioner is liable for self-employment taxes of dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively we hold that he is whether petitioner is liable for additions to tax for failure to pay estimated_taxes under sec_6654 for and respectively we hold that he is whether petitioner is liable for fraud penalties under sec_6663 for and and for fraudulent_failure_to_file additions to tax under sec_6651 for and we hold that he is liable for such penalties or additions for and but not liable for findings_of_fact at the time the petition was filed petitioner resided in florida background of petitioner and corporate structure petitioner graduated from the university of pennsylvania wharton school of business in with a bachelor of science degree in economics while attending the wharton school of business petitioner took two accounting classes petitioner also earned a law degree from st louis university in and worked as an attorney on corporate cases for about years medigroup enterprises inc medigroup enterprises was incorporated in the 1960s by harvey friedman the father of petitioner’s ex-wife during the 1970s medigroup enterprises purchased several nursing homes which it owned and operated through related entities in petitioner purchased a controlling_interest in medigroup enterprises the record is unclear on several facts relating to medigroup enterprises and its related entities because of evidentiary gaps multiple changes in control ownership of the entities and similarly named related entities which were not specifically identified in trial testimony medigroup enterprises filed many of its corporate_income_tax returns several years late rolla health care associates l p rhca was a missouri limited_partnership formed in to build and operate a nursing home in rolla missouri rolla nursing home the secretary of the u s department of housing and urban development hud agreed to insure the mortgage on the rolla nursing home rhca was part of a complex and confusing group of partnerships and corporations related to medigroup enterprises at the time of its formation in rhca had two partners the general_partner rolla health care inc which owned a 1-percent interest in rhca and the limited_partner medigroup inc medigroup which owned the remaining 99-percent interest rolla health care inc was incorporated in missouri in by petitioner who was the registered agent and vice president of the corporation by petitioner was the sole officer and member of the board_of directors however between date and date vernon ray lavender mr lavender had become the sole officer and member of the board_of directors mr lavender was a friend of petitioner and had worked with petitioner since medigroup was related to but separate from medigroup enterprises petitioner was the sole director and member of the board_of directors in just as with rolla health care inc mr lavender became the sole officer and member of the board_of directors of medigroup between date and date during medigroup sold its 99-percent stake in rhca to lee kling a st louis businessman in mr kling sold his 99-percent stake in rhca to health facilities investment co ltd health facilities a limited_partnership formed by petitioner in petitioner changed the name of health facilities to autumn years investments l p autumn years also in the 1-percent general_partnership interest in rhca was reallocated among rolla health care inc medigroup and mr lavender in the interests of medigroup and mr lavender in rhca converted from general_partnership interests to limited_partnership interests this change did not affect autumn years’ 99-percent limited_partnership_interest in rhca at some time not clear from the record medigroup came under the ownership of ksfs investment co ksfs a holding corporation whose stock was owned by petitioner petitioner then sold his ksfs stock to mr lavender for dollar_figure in while petitioner estimated the value of the ksfs stock between dollar_figure and dollar_figure petitioner claims to have gone through with the deal because it allowed him to place the responsibility of running the nursing home business upon mr lavender at trial mr lavender admitted that during his business relationship with petitioner mr lavender embezzled significant amounts of money from rhca and related businesses petitioner made each of his three children a 25-percent partner in autumn years other partners included eva sue faenger ms faenger petitioner’s ex-girlfriend with a 20-percent share lynn plotkin petitioner’s ex-wife with a 4-percent share ksfs with a 8-percent share medigroup care centers inc another company related to medigroup enterprises with a percent share and management development associates inc of which petitioner was the sole shareholder with a 1-percent share as of date the three children were unaware that they were members of the partnership lynn plotkin was also unaware she was a partner petitioner signed for lynn plotkin on the partnership formation documents as her custodian even though she has never had a custodian petitioner never drafted schedules k-1 shareholder's share of income deductions credits etc for the partners from to petitioner also failed to draft financial statements prepare partnership tax returns or observe other partnership formalities with respect to autumn years on numerous occasions petitioner wrote himself checks on autumn years’ accounts using the funds to pay personal expenses petitioner also wrote checks on autumn years’ account to various family members and other entities from to autumn years received funds from various entities with ties to petitioner as described below lease between rhca and professional tlc ms faenger and petitioner had a personal relationship from approximately to ms faenger worked in the nursing home business and had experience operating a nursing home petitioner helped ms faenger incorporate professional tlc inc professional tlc by drafting and filing the articles of incorporation and having ms faenger sign the documents the plan was for professional tlc to lease the rolla nursing home from rhca after which ms faenger would operate the nursing home without interference by petitioner and pay rent to rhca the lease provided for monthly rent of dollar_figure in the year beginning date with yearly increases of dollar_figure the amount of these rental payments was decided by petitioner and he was the only party ms faenger dealt with before signing the lease the personal relationship between ms faenger and petitioner had either ended or was in the process of ending at the time the lease was entered into in date professional tlc made the required monthly rent payments under the lease but did not always pay rent directly to rhca many times mr lavender would call ms faenger and tell her that petitioner wanted a portion of that month’s rent payment to be made to a different entity autumn years received some payments directly from professional tlc some checks written by professional tlc to rhca were endorsed over to autumn years and sometimes the rent payments went to ksfs before ksfs would write a check or wire funds to autumn years autumn years also received funds from la mancha properties inc a corporation incorporated by mr lavender which had financial ties to rhca some of the lease payment funds also ended up with quixoti corp quixoti a corporation owned by petitioner whose funds were used in part for petitioner’s personal expenses and which filed its income_tax return several years late autumn years received funds from other companies with ties to petitioner as well rhca failed to file partnership income_tax returns for to at some point rhca stopped making its mortgage payments on the rolla nursing home in hud demanded professional tlc begin paying the entire lease payment directly to hud following the advice of her attorney ms faenger instead made all the lease payments to an escrow account which was paid over to rhca upon the sale of the rolla nursing home in the sale of the rolla nursing home is discussed further below as a result of rhca’s failure to make mortgage payments on a loan which hud had insured mr lavender was convicted of theft of public money as part of a plea agreement mr lavender agreed to cooperate with the government in civil and criminal actions taken against petitioner payments to lynn plotkin home mortgage interest and property taxes and business_expenses a payments to lynn plotkin petitioner seeks to deduct payments made to his ex-wife during to which petitioner claims he made as a result of a corporate obligation he personally guaranteed petitioner and lynn plotkin entered into a stipulation for property settlement child custody child_support maintenance attorney’s fees and court costs divorce agreement in january of pursuant to the divorce agreement petitioner agreed to pay various amounts to lynn plotkin including dollar_figure per month per child for child_support dollar_figure per year per child for schooling and summer programs including years of college religious membership fees and celebration expenses a share of the children’s medical_expenses not covered by insurance attorney’s fees and court costs because of ambiguous language in the divorce agreement it is unclear when the obligation to pay the dollar_figure per month support obligation was to end petitioner also agreed to pay off any notes secured_by the home in which he and lynn plotkin had lived and to repay lynn plotkin should she pay any of these amounts herself petitioner forfeited any rights he had in the home and agreed to provide health insurance for each of the three children through his or her 22d birthday as well as to cause a corporation to enter an agreement to buy lynn plotkin’s interest in the caring group inc a corporation whose stock she owned for dollar_figure in date in anticipation of the divorce agreement lynn plotkin and quixoti entered into an agreement whereby quixoti promised to buy lynn plotkin’s stock in the caring group inc for dollar_figure of the dollar_figure total price dollar_figure plus interest was to be paid in monthly installments of dollar_figure from date to date the guaranteed quixoti payments petitioner personally guaranteed these monthly payments petitioner made multiple payments to lynn plotkin in and which totaled dollar_figure dollar_figure dollar_figure and dollar_figure respectively no single payment was equal to the agreed monthly installment amount of dollar_figure the largest was dollar_figure and the second largest was dollar_figure the payments did not specify whether they were part of the guaranteed quixoti payments or for some other obligation petitioner owed lynn plotkin many of the checks to lynn plotkin had no notation on them while the notation on others appears to read only n p petitioner failed to maintain health insurance for the children and also failed to pay off the outstanding notes on lynn plotkin’s home as required by the divorce agreement lynn plotkin paid the notes off herself and petitioner was required to indemnify her for these payments under the divorce agreement the amounts petitioner owed lynn plotkin for other obligations beside the guaranteed quixoti payments during and were not established during at least part of the period from to each of the children was under the age of and in college petitioner paid all or most of the older two childrens’ tuition however lynn plotkin’s family paid the entire tuition of the youngest child b home mortgage interest and property taxes at one point during their personal relationship petitioner and ms faenger had plans to get married and move into a home together to this end they bought land in rolla missouri and began to build a home on the property the property was titled in ms faenger’s name in date although the dollar_figure downpayment on the land was paid_by petitioner petitioner and ms faenger borrowed money to build the house and became jointly and severally liable on a note for dollar_figure from the american bank of rolla american bank on date petitioner made the loan payments in and petitioner paid interest on the loan financing construction of the home of dollar_figure dollar_figure and dollar_figure respectively in addition petitioner estimates he paid interest of dollar_figure during in he paid property taxes of dollar_figure on the land petitioner now seeks deductions for home mortgage interest and property taxes paid c other business_expenses petitioner claims that he incurred various legal expenses in connection with his business operations one of autumn years’ accounts shows several checks written to charles merz esq mr merz who petitioner testified represented both myself and the companies in several lawsuits that had been filed petitioner claims that he made payments to mr lavender and his companies multiple checks were written to mr lavender out of an autumn years account in and although the purpose of these payments was not established petitioner claims he made a payment pursuant to a personal guaranty to burnett schwartz from a 1980s business transaction a transfer was made to mr schwartz out of an autumn years account in date with a notation that is mostly illegible but appears to read hftc in part the business_purpose of the payments was not established petitioner claims that he made many payments to american bank as personal guarantor of a loan to rhca many checks were written to american bank out of an autumn years account with notations such as rolla health care or rhca petitioner claims that he incurred expenses in connection with assisting kenneth lohse in developing an auto repair business and many checks were written to auto repair businesses out of an autumn years account petitioner also testified that he considered the payments a loan however nothing was written down petitioner claims that he had various other expenses such as maintaining his law license federal express shipping costs and office supply costs various checks were written out of an autumn years account to the missouri supreme court the missouri bar association the missouri department of revenue federal express and office depot petitioner testified he used federal express to send items such as checks to lynn plotkin petitioner did not work as a lawyer during to petitioner claims that during he made payments to quixoti so that quixoti could pay its own business obligations several checks from were written to quixoti out of an autumn years account petitioner claims that in the course of business he incurred automobile repair expenses petitioner did all his traveling by car and on occasion went to see mr lavender by car several checks were written to various auto repair shops out of an autumn years account petitioner also seeks to deduct bank fees of dollar_figure and dollar_figure for and respectively the schedule of checks for an autumn years account shows that during and there were several overdraft charges activity service charges and other such charges sale of the rolla nursing home a dollar_figure commission once rhca stopped making payments on the rolla nursing home mortgage insured by hud hud threatened to foreclose on the property hud eventually set a foreclosure sale for date to avoid foreclosure petitioner and mr lavender subsequently attempted to sell the rolla nursing home petitioner lived with his girlfriend barbara nemec ms nemec at the time ms nemec was a registered dietician who provided nutrition consulting services to various nursing homes petitioner and ms nemec had known each other since or and their personal relationship began in or when ms nemec learned the rolla nursing home was to be sold she expressed interest in trying to find a buyer although ms nemec had no prior real_estate experience her brother bob nemec had significant real_estate experience as owner of a brokerage business ms nemec incorporated ltc brokers consultants inc ltc in illinois on date becoming the president and sole shareholder ltc also employed bob nemec ms nemec also incorporated lv castle investment group inc lv in illinois to act as the parent_corporation of ltc in date rhca executed several documents with ltc which had not yet been incorporated at the time mr lavender signed the documents on behalf of rhca and ms nemec signed on behalf of ltc the documents authorized ltc to act as rhca’s agent for the purpose of selling the rolla nursing home and entitled ltc to a base commission of percent of the selling_price in addition to the base commission ltc would receive an extra percent in return for ltc’s obtaining at its own expense all necessary studies analyses and other information in connection with the sale the documents also called for ltc to receive an additional percent in return for ltc’s agreement that its arrangement with rhca was nonexclusive and that ltc would receive no compensation if rhca sold the facility itself or through another broker mr lavender testified that he thought the initial brokerage fee was to be around or percent which was increased just prior to the sale he further testified that petitioner wanted as large a commission as possible because the commission was the means by which petitioner would be taking his slice of the proceeds at the criminal trial mr lavender testified that he thought the brokerage fee was originally to be around or percent ms nemec found a buyer for the rolla nursing home american capital corp american and ms nemec and bob nemec worked to complete the sale incurring expenses on behalf of ltc in date rhca and american closed on the sale of the rolla nursing home for dollar_figure million rhca’s ownership of the rolla nursing home terminated date mr lavender asked petitioner what should be done with the over dollar_figure million in net_proceeds which rhca received as a result of the sale petitioner told mr lavender to use the proceeds to repair mr lavender’s financial situation and make himself whole as a result of the sale ltc received dollar_figure in commissions via checks which were deposited into ltc’s bank account on date following the sale of the rolla nursing home ltc purchased property in umatilla florida a month or two after ltc purchased the property title was transferred to ms nemec ms nemec and petitioner moved into a home on the property and continue to live there together the state of illinois dissolved both ltc and lv on date for failing to file annual reports or pay annual franchise_taxes the sale of the rolla nursing home was the only real_estate ltc or lv ever sold ltc and lv reported dollar_figure in gross_income on their consolidated corporate_income_tax return for the fiscal_year ending date which was not filed until date the return was prepared by charles bratkowski a certified_public_accountant ms nemec asked petitioner to assist mr bratkowski in preparing the return petitioner did although the extent of his assistance is unclear lv’s consolidated_return reflected gross_receipts of dollar_figure costs of sales of dollar_figure various other deductions of dollar_figure and taxable_income of dollar_figure b dollar_figure payment to american bank a separate issue arose with regard to a dollar_figure payment rhca made to american bank after the sale of the rolla nursing home respondent claims that the dollar_figure was in part used to pay off petitioner’s liability on the loan petitioner and ms faenger had taken out from american bank to build the home in rolla the home which may not have been completed at the time was sold in date with amounts remaining unpaid on the dollar_figure loan ms faenger borrowed dollar_figure from her mother and paid that amount to american bank to be released from liability on the loan although petitioner still remained liable rhca had taken out a loan of dollar_figure from american bank in date and was scheduled to pay back such loan over months in installments of dollar_figure with the last payment being made in date on date rhca paid american bank dollar_figure out of the sale proceeds on the same day amounts of dollar_figure dollar_figure and dollar_figure were credited to rhca’s balance reducing the amount outstanding to zero respondent contends the remaining dollar_figure was used to pay off petitioner’s remaining liability on the dollar_figure home construction loan petitioner’s remaining liability on the loan was paid off at some unknown point although in this case ms faenger testified she did not know how it was paid off during the criminal trial she testified that it was paid out of the proceeds of the nursing home sale the amount of petitioner’s remaining liability at the time the dollar_figure was paid to american bank was not established other information petitioner did not file his or federal_income_tax return until date and had no reason for the delay the return included other income of dollar_figure and taxable_income of dollar_figure quixoti’s corporate_income_tax return reported dollar_figure as a compensation of officers expense the return included other income of dollar_figure and taxable_income of dollar_figure the return included other income of dollar_figure and taxable_income of dollar_figure management development associates inc ’s and corporate_income_tax returns reported compensation of officers expenses of dollar_figure and dollar_figure respectively petitioner never filed an income_tax return for or petitioner made no estimated_tax payments for tax years and and paid no self-employment taxes for through in petitioner was indicted on three willful violations of sec_7206 --one count with respect to each of his income_tax returns for the years and the u s district_court for the eastern district of missouri convicted petitioner on each count finding that petitioner willfully reported his income falsely for and on date respondent issued a notice_of_deficiency to petitioner for tax years and petitioner timely filed a petition contesting the deficiencies additions to tax and penalties opinion i burden_of_proof generally taxpayers bear the burden of proving by a preponderance_of_the_evidence that the determinations of the commissioner in a notice_of_deficiency are incorrect rule a 290_us_111 deductions are a matter of legislative grace and a taxpayer bears the burden of proving entitlement to any claimed deductions rule a 503_us_79 however on several issues in this case petitioner argues that the burden_of_proof should be placed on respondent we will address these arguments below in conjunction with the related issues ii whether petitioner underreported or failed to report schedule c income for respondent argues that the money deposited into autumn years and quixoti accounts from to should be included as petitioner’s schedule c income petitioner makes several counterarguments detailed below a burden_of_proof petitioner argues that respondent bears the burden of proving that petitioner has deficiencies for to because respondent’s determinations for those years were arbitrary and erroneous see eg 73_tc_394 petitioner claims that autumn years is in fact a sham corporation and that it has no separate identity from that of petitioner as a result petitioner argues that autumn years’ 99-percent limited_partnership_interest in rhca should be imputed to petitioner this would have the effect of making the amounts petitioner received not schedule c income but rather distributions made by rhca to a partner since the funds autumn years received came to it as a holder of a partnership_interest in rhca such distributions would be taxable only to the extent they exceeded petitioner’s basis in his interest in rhca petitioner concludes that because the notice_of_deficiency treated all funds received by autumn years as schedule c income to petitioner rather than as partnership_distributions respondent’s determinations are arbitrary and erroneous and that the burden_of_proof is therefore placed on respondent we disagree petitioner was not a partner in either autumn years or rhca petitioner cites no legal authority for his claim that he should be considered to own autumn years’ 99-percent limited_partnership_interest in rhca the supreme court has observed that while a taxpayer is free to organize his affairs as he chooses once having done so he must accept the tax consequences of his choice whether contemplated or not 417_us_134 petitioner could have made himself a partner of rhca but chose not to petitioner cannot now benefit by redefining the role he created accordingly we find the burden_of_proof remains on petitioner b period of limitations for years with respect to and petitioner contends that the normal 3-year period of limitations to issue a notice_of_deficiency under sec_6501 has expired respondent argues sec_6501 applies because petitioner’s and income_tax returns were fraudulent and the tax may therefore be assessed at any time for reasons stated below we find that petitioner’s returns for and were fraudulent see infra pp taxes for these years may therefore be assessed at any time c payments to autumn years and quixoti accounts from various entities respondent contends that all payments made into autumn years and quixoti accounts from to constitute schedule c income to petitioner petitioner does not dispute the fact that the funds deposited into those accounts are his however petitioner argues that those funds are not schedule c income rather the funds are partnership_distributions to petitioner from rhca taxable only to the extent they exceeded petitioner’s basis in his interest in rhca to this end petitioner again claims that autumn years is in fact a sham corporation and that autumn years’ 99-percent limited_partnership_interest in rhca should be imputed to petitioner however for the same reasons stated hereinabove we find that petitioner does not hold a percent limited_partnership_interest in rhca see supra p therefore the funds deposited into the accounts of autumn years and quixoti did not constitute partnership_distributions to petitioner because petitioner was not a partner of rhca petitioner would have us believe that mr lavender not petitioner ran rhca and made payments to autumn years petitioner as the holder of a 99-percent limited_partner interest while we do believe mr lavender had some control_over rhca as he was able to embezzle significant amounts of money from rhca and was convicted of theft of public money when rhca stopped making mortgage payments on a loan which hud had insured we find that petitioner also had a significant amount of operational control_over rhca and was integral in the running of rhca not only was petitioner active in carrying on the major business of rhca negotiating the lease agreement with ms faenger and professional tlc looking for a buyer of the rolla nursing home before ltc found a buyer he also told mr lavender what to do with the lease payments made to rhca from professional tlc and told mr lavender to make himself whole from the proceeds of the sale of the nursing home petitioner was also able to steer funds from rhca to american bank in to pay off petitioner’s liability for a home construction loan on which petitioner was liable see infra pp we therefore find the payments to petitioner were made as a result of his work in carrying on the business of rhca and related entities instead of taking possession of the funds directly from rhca petitioner diverted the funds through various entities into the accounts of autumn years and quixoti which he fully controlled income is taxable to the taxpayer who earns it 281_us_111 when a taxpayer assigns income to a nominee partnership he controls he is taxable on the income levitt v commissioner tcmemo_1995_ affd without published opinion 101_f3d_691 3d cir we conclude that respondent properly included the payments into the accounts of autumn years and quixoti in petitioner’s schedule c income for and d other deductions petitioner claims that he was entitled to additional deductions from income payments to lynn plotkin petitioner made multiple payments to lynn plotkin in and which totaled dollar_figure dollar_figure dollar_figure and dollar_figure respectively petitioner claims all of these payments went towards paying the dollar_figure monthly payment quixoti was required to pay to lynn plotkin amounts petitioner personally guaranteed petitioner claims such amounts are therefore deductible under sec_162 as ordinary and necessary business_expenses sec_162 provides that in general there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business we disagree with petitioner petitioner failed to establish what obligations to lynn plotkin the payments were being made toward petitioner not only owed lynn plotkin for the guaranteed quixoti payments he also owed her money as a result of his indemnification of her payments on outstanding notes on her home the payments to lynn plotkin may have also been made toward providing the children with health insurance which petitioner failed to supply as had been required by the divorce agreement the money may have also gone toward paying the dollar_figure tuition obligation for the youngest child whose tuition was paid entirely by lynn plotkin’s family the money may have also gone toward paying the dollar_figure per child per month support obligation or any other items petitioner may have been responsible for such as medical_expenses check notations did not specify what obligation the payments were being made toward not only did evidence not establish what obligations the payments were being made toward the amounts of the individual payments do not support a conclusion that they were being made toward the guaranteed quixoti payments no single payment was equal to the agreed monthly installment amount of dollar_figure the largest was dollar_figure and the second largest was dollar_figure we conclude that petitioner has not met his burden of proving that the payments to lynn plotkin were expenses paid in carrying_on_a_trade_or_business therefore petitioner may not deduct those amounts under sec_162 home interest and property taxes petitioner claims sec_163 deductions for interest_paid on the loan financing the construction of the house petitioner planned to live in with ms faenger petitioner also claims a sec_164 deduction for property taxes paid on the property in in and petitioner paid interest on the loan of dollar_figure dollar_figure and dollar_figure respectively in addition petitioner estimates he paid interest of dollar_figure during in petitioner paid property taxes of dollar_figure on the land sec_163 allows a deduction for qualified_residence_interest a qualified_residence is the taxpayer’s principal_residence or one other residence of the taxpayer which is selected by the taxpayer for purposes of the deduction and which is used by the taxpayer as a residence within the meaning of sec_280a sec_163 effective for tax years beginning in sec_1_163-10t temporary income_tax regs fed reg date allows a taxpayer to treat a residence under construction as a qualified_residence for a period of up to months but only if the residence becomes a qualified_residence at the time the residence is ready for occupancy under sec_280a and sec_163 the home may have been considered a qualified_residence had petitioner or ms faenger lived in the home however there was no testimony or other evidence that petitioner or ms faenger ever lived in the home or that the home was completed by the time it was sold in date since there is no evidence to support that the home ever became a qualified_residence of petitioner we find petitioner has not proven his entitlement to deductions under sec_163 for qualified_residence_interest sec_164 allows a deduction for certain taxes including state and local real_property_taxes in general taxes are deductible only by the person upon whom they are imposed see tuer v commissioner tcmemo_1983_441 sec_1_164-1 income_tax regs however we have held that taxpayers who do not hold legal_title to property but who establish they are equitable owners of the property are entitled to deduct property taxes they paid for the property daya v commissioner tcmemo_2000_360 trans v commissioner tcmemo_1999_233 ms faenger held legal_title to the house and was therefore the person upon whom the property_tax was imposed petitioner did not argue that he was the equitable owner of the house therefore we find petitioner has not established his entitlement to a deduction for the property taxes paid business_expenses petitioner claims a number of other sec_162 business_expense deductions petitioner claims deductions for legal expenses in connection with his business operations petitioner means to prove such expenses by a showing that several checks were written to charles merz esq whom petitioner testified represented both myself and the companies in several lawsuits that had been filed however no evidence was offered as to what business operations the lawsuits related to there was also no explanation of why petitioner was paying these expenses out of an autumn years account he used for personal expenditures rather than company accounts or why the companies were not claiming the deductions themselves finally petitioner did not explain why the lawyer was representing both petitioner and the companies jointly given such a dearth of supporting evidence we find petitioner has not proven entitlement to a sec_162 deduction for legal expenses petitioner claims deductions for payments made to mr lavender and his companies in and however the business_purpose of the payments was not established therefore we find petitioner has not proven entitlement to a sec_162 deduction for these payments petitioner claims a deduction for a payment he made to burnett schwartz pursuant to a personal guaranty from a 1980s business transaction however no evidence substantiating the guaranty or the business_purpose of the payment was produced therefore we find petitioner has not proven entitlement to a sec_162 deduction for this payment petitioner claims a deduction for payments made to american bank as personal guarantor of a loan made to rhca petitioner did make many payments to american bank out of an autumn years account with notations such as rolla health care and rhca however petitioner failed to produce any evidence that he was the guarantor of any such loan made to rhca or that such payments were made for the purpose petitioner claimed we find petitioner has not proven entitlement to a sec_162 deduction for these payments petitioner claims a deduction for expenses in connection with assisting kenneth lohse in developing an auto repair business several checks were written on an autumn years account to various car repair dealerships however petitioner also testified that he considered the payments a loan in addition other evidence relating to the purpose of the payments was not produced therefore we find petitioner has not proven entitlement to a sec_162 deduction for these payments petitioner claims deductions for various other expenses such as maintaining his law license federal express shipping costs and office supply costs various checks were written on an autumn years account to the missouri supreme court the missouri bar association the missouri department of revenue and federal express one check was written to office depot however petitioner did not establish a business_purpose with respect to the office depot payment and we therefore find he has not proven entitlement to a sec_162 deduction for that payment petitioner testified he used federal express to send items such as checks to lynn plotkin and we have already found petitioner is not entitled to sec_162 deductions for the payments to lynn plotkin petitioner did not work as a lawyer during to therefore the payments made to federal express and for law license fees were not expenses paid_or_incurred in carrying_on_a_trade_or_business and we find petitioner is not entitled to sec_162 deductions for those payments petitioner claims deductions for payments made to quixoti in so that quixoti could pay its own business obligations several checks from were written to quixoti out of an autumn years account however the business_purpose of the payments was not established in addition quixoti funds were used in part to pay personal expenses of petitioner therefore we find petitioner has not proven entitlement to a sec_162 deduction for these payments petitioner claims deductions for automobile repair expenses_incurred in the course of business travel petitioner did all his traveling by car and on occasion went to see mr lavender by car several checks were written to various auto repair shops on an autumn years account however no other evidence was produced and no portion of the payments was listed as personal expenses we find petitioner has not proven entitlement to a sec_162 deduction for these payments petitioner claims deductions for bank fees of dollar_figure and dollar_figure for and respectively the schedule of checks from an autumn years account shows that during and there were several overdraft charges activity service charges and other such charges however the business_purpose of the charges was not established therefore we find petitioner has not proven entitlement to a sec_162 deduction for these charges e conclusion on income we sustain respondent’s determinations that petitioner underreported schedule c income for and by dollar_figure dollar_figure and dollar_figure respectively we also sustain respondent’s determinations that petitioner failed to report schedule c income for of dollar_figure in addition we find petitioner is not entitled to the various deductions he claims iii whether petitioner is liable for self-employment taxes for respondent argues that petitioner is liable for self- employment_taxes for through every individual is subject_to tax equal to percent of net_earnings from self- employment subject_to certain limits on income sec_1401 and sec_1402 net_earnings_from_self-employment includes income derived by an individual from carrying_on_a_trade_or_business and the distributive_share of income or loss from any trade_or_business carried on by a partnership of which the individual is a member sec_1402 an exception exists for distributive shares of any item_of_income or loss of limited partners sec_1402 petitioner’s sole argument is that autumn years has no separate identity from that of petitioner and that he should therefore be deemed to hold a 99-percent limited_partnership_interest in rhca and be entitled to the sec_1402 exception from self-employment taxes for the same reasons previously stated we reject petitioner’s theory that he is a limited_partner in rhca see supra p petitioner was not a partner in rhca in addition petitioner helped to carry on the business of and had a significant amount of operational control_over rhca he negotiated the lease agreement with ms faenger and professional tlc told mr lavender which companies the lease payments should be made to and attempted to find a buyer for the rolla nursing home before ltc did as a result of his work petitioner was paid_by rhca which he attempted to disguise using various entities we find petitioner does not fall under the limited_partner exception and is subject_to self-employment taxes for and of dollar_figure dollar_figure dollar_figure and dollar_figure respectively iv whether petitioner failed to report schedule c income for a burden_of_proof petitioner argues that respondent bears the burden of proving that petitioner has a deficiency for because respondent’s determination for that year was a naked assertion and therefore arbitrary and erroneous it is true that respondent cannot ‘rely solely upon the naked assertion that petitioner received a certain amount of unreported income’ and that a ‘naked assessment without any foundation is arbitrary and erroneous’ senter v commissioner tcmemo_1995_311 quoting 988_f2d_27 5th cir see also 428_us_433 petitioner argues respondent presented no substantive evidence on this issue to support respondent’s deficiency claim we disagree respondent’s determination is supported by the closing documents from the sale of the rolla nursing home checks and statements from the closing and from barbara nemec and lv castle inc american bank loan documents and testimony from petitioner and ms nemec we find this is substantive evidence to support respondent’s deficiency determination and that no naked assertion was made the burden_of_proof therefore remains with petitioner b dollar_figure commission paid_by rhca to ltc respondent claims the dollar_figure commission paid to ltc from rhca after the sale of the rolla nursing home was a tax-avoidance scheme set up by petitioner and that the funds should be imputed to petitioner in support of his argument respondent relies on mr lavender’s testimony that petitioner used the commission as a means to take his slice of the sale events surrounding the incorporation and dissolution of ltc and lv petitioner’s assistance in the preparation of the lv consolidated tax_return the fact that the proceeds were used to buy a house where petitioner now resides and petitioner’s history of using nominees to disguise his income petitioner disputes the testimony of mr lavender and claims that ltc and lv were bona_fide corporations whose employees closed the sale considering the evidence we find petitioner has met his burden_of_proof and that the dollar_figure commission should not be imputed to him we believe mr lavender’s testimony is inconsistent and not credible on this issue he testified that he believed the initial brokerage fee was to be around or percent while at the criminal trial he testified the brokerage fee was originally to be around or percent he further testified that the commission was increased just prior to the sale although he had signed the documents providing for a 14-percent commission in january nearly months before the sale in addition mr lavender admitted to having stolen significant amounts of money which would have otherwise come under petitioner’s control and was testifying for respondent as part of a plea agreement in connection with his conviction for theft of public money ltc and lv were incorporated about a month before the sale closing however ms nemec and bob nemec had been working on behalf of the nonexistent ltc since at least date and there is nothing uncommon about doing work on behalf of a corporation before incorporation see eg 234_f2d_320 5th cir discussing entering contracts on behalf of a corporation before its incorporation the dissolution of lv and ltc in october of for failure_to_file an annual report or pay franchise_taxes the late filing of the lv consolidated tax_return and petitioner’s assistance in preparing that return the fact that ms nemec was petitioner’s girlfriend and also the president and sole shareholder of ltc and the fact that ltc bought the home in which petitioner now resides and transferred title to ms nemec a month or two later are stronger points for respondent considering petitioner’s history of using nominees to avoid tax_liability the facts further suggest that petitioner was pulling the strings at ltc in order to avoid tax on the dollar_figure and to buy himself a home with the money however these facts are also speculative and while we admit the transaction contains indicia of tax_avoidance we find they do not overcome the facts favoring petitioner ltc and lv were validly created corporations they filed a consolidated_income_tax_return showing gross_receipts of dollar_figure and taxable_income of dollar_figure for the fiscal_year ending date other facts more directly counter respondent’s assertion that petitioner was pulling the strings of ltc although ms nemec was petitioner’s girlfriend she had significant contacts in the nursing home industry in addition bob nemec was also an employee of ltc and had significant real_estate experience as owner of a brokerage business it is quite probable that two such siblings would be interested in and capable of working together to sell a nursing home most importantly ms nemec found the buyer for the rolla nursing home and she and bob nemec worked to close the sale although it is a close call we find that petitioner has met his burden of proving that the dollar_figure commission was not part of a tax-avoidance scheme that he set up if there are tax issues in connection with the commission paid to ltc respondent may seek to collect from ltc and lv or from ms nemec and bob nemec c dollar_figure paid_by rhca to american bank of the dollar_figure paid to american bank from rhca after the sale of the nursing home a total of dollar_figure was used to pay off the remaining amount of a dollar_figure working_capital loan between american bank and rhca respondent contends that the remaining dollar_figure was used to pay off petitioner’s remaining personal liability on the dollar_figure home construction loan and should be included in petitioner’s income the remaining amount of the dollar_figure loan to ms faenger and petitioner was paid off at some unknown point although in this case ms faenger testified she did not know how it was paid off during petitioner’s criminal trial she testified that it was paid off with the proceeds of the nursing home sale on the same day the dollar_figure payment was made to american bank only dollar_figure was used to pay off the remainder of rhca’s dollar_figure loan american bank was the same bank which lent petitioner and ms faenger the dollar_figure petitioner has offered no evidence as to what the remaining dollar_figure was paid toward in his posttrial brief petitioner merely states it is impossible to determine whether that dollar_figure was paying off the loan obtained by petitioner and ms faenger to construct the home whether it was paying off the rhca working_capital loan some combination of the two or perhaps some other indebtedness in addition to offering no evidence concerning what the dollar_figure was paid toward petitioner offered no evidence showing that he paid off his personal liability for the remaining amount of the dollar_figure loan by some other means there is a dearth of evidence with respect to this issue however because the burden_of_proof is on petitioner who has presented only unsupported speculation we find that the dollar_figure was income to petitioner in petitioner argues that if the dollar_figure is income to him some of the income should be attributed to ms faenger because she was jointly liable with him on the dollar_figure loan however ms faenger had borrowed dollar_figure from her mother to pay to american bank in order to have her liability on the loan discharged therefore the entire dollar_figure is income to petitioner v whether petitioner is liable for additions to tax under sec_6654 for and respondent also determined additions to tax for and for failure to pay estimated_tax sec_6654 provides that a taxpayer’s required_annual_payment is limited to the lesser_of percent of the tax_shown_on_the_return for the taxable_year or if no return is filed percent of the tax for such year or percent of the tax_shown_on_the_return of the individual for the preceding_taxable_year petitioner’s sole argument is that he is not liable for the addition_to_tax because he had no tax_liability for or we have already held petitioner was liable for taxes for both and see supra pp therefore petitioner is liable for sec_6654 additions to tax the amount of those additions to tax shall be determined by the parties in their rule_155_computations in accordance with the other holdings herein vi whether petitioner is liable for the sec_6663 fraud_penalty for and the sec_6651 fraudulent_failure_to_file addition_to_tax for and respondent has the burden of proving fraud by clear_and_convincing evidence see sec_7454 rule b to satisfy the burden_of_proof respondent must show an underpayment_of_tax exists and petitioner intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes see 113_tc_99 94_tc_654 a underpayment_of_tax the clear_and_convincing standard applies not merely to whether an underpayment is attributable to fraud but also to whether an underpayment exists parks v commissioner supra pincite di rocco v commissioner tcmemo_2009_300 declercq v commissioner t c memo where fraud is determined for each of several years the commissioner’s burden applies separately for each of the years roth v commissioner tcmemo_1998_28 considering the facts and law discussed hereinabove we hold that respondent has proven by clear_and_convincing evidence that an underpayment existed in each year for to however we hold respondent has not proven by clear_and_convincing evidence that an underpayment exists for in order to prove an underpayment the commissioner cannot rely on the presumption of correctness of the statutory_notice_of_deficiency see 96_tc_858 affd 959_f2d_16 2d cir fraud is never presumed even if a taxpayer’s testimony is incredible we may still be left with no more than a suspicion of fraud rinehart v commissioner tcmemo_1983_184 suspicion even a strong suspicion of fraud will not sustain the commissioner’s determination wynn v commissioner tcmemo_1995_609 although we previously held that an underpayment_of_tax existed for that holding was based on the fact that the burden_of_proof was on petitioner who offered only speculation as to what the dollar_figure was paid toward and how his home construction loan liability was paid off see supra pp as the burden_of_proof is now on respondent we must consider the strength of respondent’s evidence as well respondent relies on the facts that the home construction loan was paid off rhca paid dollar_figure to american bank after the sale of the nursing home of which only dollar_figure was used to pay off the remaining amount of a dollar_figure working_capital loan between american bank and rhca american bank was the same bank which had given petitioner the home construction loan and ms faenger testified at petitioner’s criminal trial that the loan was paid out of the proceeds of the nursing home sale respondent’s first three points are speculative as there was no evidence showing any part of the dollar_figure was actually paid toward petitioner’s home construction loan additionally respondent never presented evidence showing when the home construction loan was paid off or what petitioner’s remaining liability on the home construction loan was at the time the dollar_figure was paid to american bank while not speculative respondent’s fourth point is marred by the fact that ms faenger gave conflicting testimony during this trial stating that she did not know how the home construction loan was paid off considering the evidence presented we hold that respondent failed to meet his burden to show by clear_and_convincing evidence an underpayment existed b fraudulent intent respondent must prove by clear_and_convincing evidence that a portion of the underpayment for each taxable_year in issue was due to fraud see 79_tc_888 once respondent establishes that any portion of the underpayment is attributable to fraud the entire underpayment is subject_to the 75-percent penalty except with respect to any portion of the underpayment that petitioner establishes is not attributable to fraud see sec_6663 and b the existence of fraud is a question of fact to be resolved upon consideration of the entire record 98_tc_511 the taxpayer’s entire course of conduct may establish the requisite fraudulent intent 56_tc_213 in deciding whether a failure_to_file is fraudulent under sec_6651 we consider the same elements that are considered in imposing the penalty for fraud under sec_6663 102_tc_632 tinnerman v commissioner tcmemo_2006_250 because direct proof of a taxpayer’s intent is rarely available fraud may be proved by circumstantial evidence and reasonably inferred from the facts 317_us_492 99_tc_202 80_tc_1111 certain indicia commonly known as badges_of_fraud constitute circumstantial evidence which may give rise to a finding of fraudulent intent 796_f2d_303 9th cir affg tcmemo_1984_601 a taxpayer’s use of a complex series of financial transactions and nominees is a badge of fraud see graham v commissioner tcmemo_2005_68 affd 257_fedappx_4 9th cir petitioner was connected with an extensive network of corporations and partnerships which had financial dealings with one another and with petitioner petitioner also used autumn years and quixoti to hold money which he used for personal spending he used his control_over rhca and other entities to further conceal the fact that he was receiving income petitioner’s conviction under sec_7206 is also a badge of fraud while the convictions under sec_7206 for years to do not estop petitioner from denying fraud for these years they are persuasive evidence of fraud see morse v commissioner tcmemo_2003_332 affd 419_f3d_829 8th cir parsons v commissioner tcmemo_2000_205 another badge of fraud is keeping inadequate records bradford v commissioner supra pincite in this case petitioner failed to keep any financial records for autumn years or to send schedules k-1 to the partners of autumn years failure_to_file tax returns is also a badge of fraud id pincite petitioner did not file a personal tax_return for he failed to file various tax returns for autumn years rhca a company over which petitioner had a significant amount of control failed to file tax returns for years to petitioner’s to tax returns were not filed until date several of the other entities with ties to petitioner filed late tax returns sometimes many years late an understatement of income is also a badge of fraud id we have already found that petitioner had significant understatements of income for to see supra pp considering the evidence we find respondent has proven by clear_and_convincing evidence that the underpayments for the taxable years to were due to fraud petitioner is therefore subject_to the sec_6663 fraud_penalty for years to and the sec_6651 fraudulent_failure_to_file addition_to_tax for vii conclusion we find petitioner liable for underreporting or failure to report schedule c income for years and of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure respectively further we find petitioner liable for self- employment_taxes for years and of dollar_figure dollar_figure dollar_figure and dollar_figure respectively we also find petitioner liable for estimated_tax additions to tax under sec_6654 for years and finally we find petitioner liable for fraud penalties under sec_6663 for years and and liable for the fraudulent_failure_to_file addition_to_tax under sec_6651 for in reaching our holdings herein we have considered all arguments made and to the extent not mentioned above we conclude they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


ote internal_revenue_service release number release date date date uil code org address department of the treasury te_ge exempt_organizations examinations sw third avenue m s portland oregon taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter rev catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter if you write please provide a telephone number and the most convenient time to call if we need to contact you thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f department of the treasury - internal_revenue_service schedule no or exhibit -_ 886a name of taxpayer year period ended 20xx12 20xxk12 20xx12 explanation of items org legend org organization name co-1 motto motto co-11 co-12 director executive director co-13 co-14 xx date xyz state city city co-2 co-3 co-4 co-5 co-15 companies oe oe co-6 co-7 co-8 co-9 co-10 qth 5th pss gt gth trustee trustee executive car car issue should org’s tax-exempt status be revoked on the grounds that its net_earnings inured to the benefit of its executive director facts org org is a motto for children of low-income families and is located in city xyz org was incorporated in the state of xyz on september 19xx and was granted tax-exempt status as a c public charity on february 19xx it operates out of the basement of co-1' and is certified by the state of xyz to provide child care for up to children ages years org s founder and executive director executive director e d represents the entirety of org’s management she hires and fires writes and signs checks accepts payment from parents prepares and signs org’s annual forms and administers payroll there is no board_of directors and there has not been one since 20xx thus e d also represents the closest thing there is to a governing body and is the only person with apparent authority to legally bind org list of the children who received care from 20xx the revenue_agent asked e d for a to 20xx e d provided a list for each year reflecting the following numbers of children cared for full-time full-year part-time and or part-year 20xxx 20xx 20xx the part-time numbers include before-and-after children these were children who were old enough to attend elementary_school and who would be watched for to hours before and to hours after school kek wk ok org is a tenant and is otherwise unaffiliated with the department of the treasury - internal_revenue_service page -1- form 886-acev department of the treasury - internal_revenue_service schedule no or exhibit -_- a name of taxpayer year period ended 20xx12 20xx12 20xx12 explanation of items org during the years under examination if parents and their children met certain criteria they received assistance from the xyz department of human service dhs for each parent dhs mailed a voucher to org on which org indicated how many hours of child care were provided for the child or children and what the total charge was once this voucher was returned to dhs a check would be mailed to org for the amount charged less any co-pay that had been determined for the parent from 20xx through 20xx org charged dollar_figure per child per month for hours of child care and dollar_figure per child per month for hours or more of child care org’s forms 990-ez for the years ended december 20xx 20xx and 20xx report the following 20xx 20xx contributions gifts grants program service revenue other revenue total revenue grants and similar amounts paid benefits paid to or for members salaries compensation benefits professional fees contractors occupancy rent utilities maint printing publications postage other expenses total expenses excess or deficit net assets - beginning of year net assets - end of year the totals of deposits to org’s bank account for each year were as follows 20xx dollar_figure 20xx dollar_figure 20xx dollar_figure the totals of disbursements from org’s bank account for each year were as follows k kk the forms 990-ez which were prepared by e d are not mathematically correct the agent asked during a may 20xx interview if e d had any workpapers to show how she arrived at the figures on the 20xx form 990-ez she did not at that point the agent had not yet seen the 20xx form 990-ez form 886-acrev department of the treasury - internal_revenue_service page -2- department of the treasury - internal_revenue_service schedule no or exhibit form_886 a name of taxpayer explanation of items year period ended 20xx12 20x x12 20xx12 org 20xx dollar_figure 20xx dollar_figure 20xx dollar_figure org was furnished forms for payments from the xyz dhs for each year as follows 20xx dollar_figure 20xx dollar_figure 20xx dollar_figure from org’s bank account each year a number of checks were written and withdrawals were made to pay e d ’s personal expenses checks were written and electronic fund transfers ef ts were made to co-2 and to co-3 for the mortgage on e d ’s personal_residence for about dollar_figure per month checks were written and efts were made to co-2 for e d ’s 20xx car for about dollar_figure per month during 20xx checks were written to co-4 a local car dealership for payment on e d 's 19xx car for dollar_figure per month each month from 20xx through 20xx dollar_figure in efts went to co-5 the agent confirmed during a february 20xx interview with e d that she is the beneficiary of this co-5 account from 20xx through 20xx payments were made to trustee the trustee in e d ’s personal bankruptcy discharged in 20xx and to co-6 e d ’s bankruptcy lawyer these payments totaled dollar_figure over the three years from 20xx through 20xx checks were written and efts were made for utilities at e d ’s personal_residence eg cable electric water natural_gas totaling dollar_figure during these years a number of disbursements were also made for restaurants hotels car rentals clothing retailers pharmacies and other non-motto expenses finally a number of checks were written to cash to executive director and her husband or did not otherwise specify a payee these disbursements and all other identified disbursements made for e d ’s personal expenses have been categorized and totaled below’ 20xx 20xx 20xx mortgage - personal_residence car pmts expenses - car car pmts expenses - car‘ personal bankruptcy costs utilities - personal co-5 retirement account e d ’s insurance_policy the detail of the transactions comprising these amounts is attached at schedules a b and c payments to cq-4 a car dealership for e d ’s 19xx car k k k form 886-acev department of the treasury - internal_revenue_service page -3- department of the treasury - internal_revenue_service schedule no or exhibit - 886a year period ended name of taxpayer 20xx12 20xx12 20xx12 explanation of items org restaurants travel gas stations insurance - personal’ misc credit cards and loans misc retailers other personal expenses checks written to cash misc other unspecified withdrawals total the agent requested in information document requests idrs and receipts and invoices to substantiate the disbursements made from org’s bank account from 20xx through 20xx e d produced very little such substantiation the agent conducted interviews with e d on january 20xx on february 20xx and on may 20xx noteworthy statements made and answers given during these three interviews include the following january 20xx e e e when the agent asked about org’s board_of directors e d replied that there hasn't been a board_of directors since 20xx and that the last board meeting was held in 20xx when the agent asked e d what her position in org is she indicated that she is the owner when the agent asked if there was an auto available to any employee for use including personal_use e d replied no february 20xx continued footnote since e d did not have any compensation reported for herself on either her w2 or the form_990 beyond the there was no payroll from which to deduct insurance payments the payments were made from org’s account irrespective of e d ’s compensation includes a number of purchases of gas in amounts of dollar_figure and dollar_figure also includes hotels car rentals and dollar_figure in 20xx to co-7 and co-8 is for the car car anda includes payments to car org does not own any vehicles also includes payments to co-9 and co-10 payments on credit lines co-13 co-14 co-15 org has no such credit lines all other non-motto related disbursements eg co-10 co-11 co-12 etc nsurance which according to a memo on check stub form 886-a crev department of the treasury - internal_revenue_service page -4- schedule no or exhibit ‘form a department of the treasury - internal_revenue_service explanation of items name of taxpayer org year period ended 20xx12 20xx12 20xx12 e e when the agent asked about the payments made to co-2 and co-3 e d acknowledged that these were for the mortgage on her house and the loan on her car ed acknowledged that the payments to co-5 were for her retirement the agent pointed out that e d completed an co-11 claim form in 20xx in which she stated that her salary was dollar_figure per month yet her 20xx w2 and the 20xx form_990 stated that she only made dollar_figure for the year when asked to explain this e d stated that her salary used to be dollar_figure per month but did not otherwise explain the discrepancy may 20xx e e e e e e ed stated that she and her husband have their own personal bank account aside from org’s account when asked if she sometimes deposits money other than org’s income into org s account she stated that she sometimes did she estimated that this occurred about once a month in 20xx but less often in 20xx and 20xx the agent pointed out that the amounts reported on the forms from xyz dhs for 20xx and 20xx were exactly the same as the amounts reported for program service revenue on the forms 990-ez and that this meant that no income from the parents was reported on the 990-ezs when asked why this was so e d offered no reason and expressed surprise when the agent pointed out that the 20xx bank statements show over dollar_figure in deposits for the year whereas the 20xx form 990-ez shows only dollar_figure in total revenue when asked what other products she purchases at grocery stores besides food e d replied that she purchases hand soaps dishwashing liquid rat traps deodorizers sprays bleach and other cleaning supplies when asked whether she at times purchases food and other wares for herself and her family using org’s bank account e d replied that she has done so but normally does not when asked if there was ever an independent board_of directors or governing body that documented its intent to compensate her any specified sum e d said no e d signed memoranda of contact from these three interviews affirming these answers and statements and affirming that a number of the expenditures she made from org’s bank account were for her personal_use or consumption and not for org form 886-acrev department of the treasury - internal_revenue_service page -5- department of the treasury - internal_revenue_service schedule no or exhibit ‘orm a name of taxpayer explanation of items year period ended 20xx12 20xk12 20xx12 org e d ’s compensation was reported by org on forms and w2 for the years under examination as follows forms forms w2 20xx 20xx 20xx a closing conference was held with e d june 20xx law internal_revenue_code sec_501 provides for exemption from income_tax for corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation except as otherwise provided in subsection h and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of or in opposition to any candidate for public_office sec_501 provides that for purposes of subsection c the term educational_purposes includes the providing of care of children away from their homes if - k substantially_all of the care provided by the organization is for purposes of enabling individuals to be gainfully_employed and k the services provided by the organization are available to the general_public treasury regulations x kk fd was not furnished a w2 for 20xx form 886-acev department of the treasury - internal_revenue_service page -6- form 886a name of taxpayer department of the treasury - internal_revenue_service schedule no or exhibit explanation of items year period ended 2020x12 20xx12 20xx12 org sec_1_501_c_3_-1 of the treasury regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 of the treasury regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals government’s position e_d has benefited inappropriately from her position as executive director of org as org has had no board_of directors since 20xx there has been no oversight of e d ’s custody and use of org’s assets by writing checks directly from org's bank account and setting up electronic fund transfers efts to pay for such things as the mortgage on her and her husband’s personal_residence and the car payment on their car e d has effectively used org's bank account as her own personal bank account in this respect org’s net_earnings have inured to e d ’s benefit the dollar_figure of compensation reported on e d ’s w2 and on the form_990 for the 20xx year would not be a fair compensation_for the executive director of any motto it is worth noting then that e d has indicated that she feels that her actions are at least partially justifiable in that she should receive some compensation_for her work as executive director however it is inappropriate to bypass any sort of payroll system and to compensate one’s self by paying for personal expenses from an employer's bank account there are no controls to protect org's assets in such an arrangement moreover this arrangement circumvents fica and federal_income_tax withholding the summary in the facts section of this report shows personal_use of motto money totaling dollar_figure dollar_figure and dollar_figure for the years 20xx 20xx and 20xx respectively while these amounts may be a fair compensation_for an executive director of a motto they are not reported as such on e d ’s w2s or on org’s forms furthermore the manner in which e d received this money is more advantageous than being on a standard payroll which would be subject_to_withholding and reporting requirements therefore org's net_earnings have inured in substantial part to e d ’s benefit this violates sec_1_501_c_3_-1 of the treasury regulations taxpayer’s position org has not yet indicated its position with respect to this report conclusion form 886-acev department of the treasury - internal_revenue_service page -7- department of the treasury - intemal revenue service schedule no or exhibit ‘form 886a year period ended name of taxpayer explanation of items 20xx12 20xx12 20xx12 org org’s net_earnings have inured to e d ’s benefit rather than being paid an objectively determined level of compensation as an employee e d used org's bank account and the funds in percentage of org’s funds that went to e d net of the amounts reported on her forms w2 and the forms is presented below it as though they were her own a breakdown of the total motto funds disbursed motto funds disbursedto pay e d ’s expenses of disbursements that went to e d 20xx 20xx 20xx the above amounts and percentages represent a substantial amount of inurement this violates sec_1_501_c_3_-1 of the treasury regulations and warrants revocation of org’s tax-exemption effective january 20xx form_1120 u s_corporation income_tax return should be filed for 20xx 20xx 20xx and each year thereafter as if the proposed revocation becomes long as it remains subject_to federal_income_tax final appropriate state officials will be notified of such action in accordance with sec_6104 of the internal_revenue_code form 886-amev department of the treasury - internal_revenue_service page -8- department of the treasury internal_revenue_service te_ge eo examinations commerce street dallas tx tax_exempt_and_government_entities_division legend org organization name uil org address date xx date address address person to contact identification_number contact telephone number in reply refer to te_ge review staff ein certified mail -- returned receipts last date for filing a petition with the tax_court august 20xx dear a final adverse determination_letter as to your exempt status under section this i sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective january 20xx our adverse determination was made for the following reasons to the part individual sec_1_501_c_3_-1 benefit of private shareholders or see treas reg organizations exempt from federal_income_tax under sec_501 of the code are required to operate exclusively for charitable educational or organizations are not operated exclusively for other exempt purposes exempt purposes if the net_earnings of the organization inure in whole or of the in during 20xx organization 20xx and 20xx we have determined your net_earnings inured to the benefit of your founder and principal by regularly paying her personal expenses without contemporaneously recording the expenditures as salary the funds inuring to your founder were substantial in or compensation comparison to your total expenditures and were multiple or repeated over you have not implemented safeguards to prevent a a pattern of years as such you have not recurrence of funds inuring to your founder the operated exclusively for exempt purposes and have operated for benefit of the private interests of your founder in contravention of the requirements of sec_1_501_c_3_-1 gi contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 filed with the appropriate service_center for the year ending these returns should be december 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for the rules for initiating suits for declaratory_judgment however you you also have the right to contact the office_of_the_taxpayer_advocate should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers you can call and or you can contact the taxpayer_advocate from the ask for taxpayer_advocate assistance internal revenue site where the tax_deficiency was determined by calling or writing to service taxpayer_advocate assistance cannot be used as a substitute for established irs procedures the taxpayer_advocate is not able to reverse legal or formal appeals processes etc technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations


tcmemo_2007_194 united_states tax_court ragnhild anne westby petitioner v commissioner of internal revenue respondent docket no 15093-06l filed date ragnhild anne westby pro_se john c schmittdiel for respondent memorandum opinion swift judge in this collection case respondent has moved for summary_judgment on the grounds that no timely raised issue of fact remains that petitioner should not be allowed now to raise a new issue of fact and that respondent should be entitled to judgment as a matter of law unless otherwise indicated all section references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure background respondent determined against petitioner tax deficiencies for and in the respective amounts of dollar_figure and dollar_figure the tax deficiencies related to petitioner’s income and expenses from her solo law practice in as a resident of minnesota petitioner timely filed a petition in this court disputing the above tax deficiencies that respondent had determined in petitioner’s federal income taxes for and westby v commissioner tcmemo_2004_179 on date after a trial and opinion a decision was entered in the above tax_court case reflecting major downward adjustments in the tax deficiencies determined against petitioner by respondent namely the court redetermined tax deficiencies in petitioner’s federal income taxes for and of dollar_figure and dollar_figure respectively on date respondent assessed the above-redetermined and adjusted federal_income_tax deficiencies against petitioner on date respondent mailed to petitioner a notice of tax_lien_filing relating to the above assessed tax deficiencies on date respondent mailed to petitioner a notice_of_intent_to_levy on petitioner’s property to collect the above-assessed tax deficiencies on date petitioner filed late a request for an appeals_office hearing regarding respondent’s date notice of tax_lien_filing and on date petitioner timely filed a request for an appeals_office hearing regarding respondent’s notice_of_intent_to_levy pursuant to petitioner’s request for an appeals_office collection hearing with regard to both the notice of tax_lien_filing and the notice_of_intent_to_levy respondent offered to conduct with petitioner a consolidated collection hearing via either a face-to-face meeting or a telephone call petitioner however did not respond to the invitation for a face-to-face meeting or for a telephone call and respondent’s appeals officer concluded the collection hearing based on his review of the administrative file respondent’s appeals officer reached his conclusion regarding the notice of tax_lien_filing and the notice_of_intent_to_levy with regard to the notice of tax_lien_filing respondent’s appeals officer treated his review of the administrative file and of petitioner’s hearing request as an equivalent_hearing with regard to the notice_of_intent_to_levy respondent’s appeals officer treated the hearing as a sec_6330 collection hearing on date respondent’s appeals_office mailed to petitioner an adverse decision letter relating to the notice of tax_lien_filing and an adverse notice_of_determination relating to the notice_of_intent_to_levy during the above appeals_office collection hearing petitioner raised a number of issues primarily a challenge to the underlying tax deficiencies that had been redetermined by this court petitioner complained about the statutory interest that had accrued during the long period of time from the filing in date of petitioner’s and federal_income_tax returns to the entry in of the above tax_court decision and petitioner made a vague claim to her entitlement to a credit for payments made by her former husband on his federal income taxes for and in her petition herein petitioner challenges only the correctness of the underlying federal_income_tax deficiencies redetermined by this court relating to petitioner’s federal_income_tax liabilities for and in her petition petitioner made no claim for interest abatement petitioner’s petition states only as follows with regard to the basis for her objection to respondent’s proposed collection activity the determination of the deficiency is premised upon an order which has yet to be issued by the united_states tax_court and to the best of petitioner’s knowledge rests with the computation unit the respondent’s proposed computations exceed the scope of the court’s order regarding petitioner’s liability if any moreover the proceeding to make a determination as levy either wages or to lien real_property is already pending as to the initial determination for the same tax years finally the computation and order will impact other tax_liabilities which are the subject of other pending tax_liens not until date in the court hearing that was held herein did petitioner in this case raise any specific issue as to her entitlement to interest abatement under sec_6404 respondent moves for summary_judgment on all issues discussion summary_judgment may be appropriate where there remains no genuine issue of fact and where the moving party is entitled to judgment as a matter of law 122_tc_184 further a party may not avoid summary_judgment by mere allegations of fact rather by affidavit and documents the opposing party has a duty to set forth specific facts showing that there is a genuine issue for trial rule d 477_us_317 under sec_6330 and c petitioner in this collection case is precluded from challenging the underlying tax deficiencies redetermined by the court relating to petitioner’s federal income taxes for and having already challenged those tax deficiencies in a prior tax_court case petitioner cannot now do so in this proceeding see 114_tc_604 because petitioner did not file her request for an appeals_office hearing regarding respondent’s date notice of tax_lien_filing until date and because respondent properly conducted not a sec_6330 collection hearing but rather an equivalent_hearing and issued to petitioner an adverse decision letter no appeal to this court lies with regard thereto rule 116_tc_255 sec_301_6320-1 q a-i5 proced admin regs petitioner’s failure in her petition to raise specifically interest abatement and her failure to claim a credit against her federal income taxes for payments made to respondent by petitioner’s former husband constitute petitioner’s abandonment or concession thereof rule b 117_tc_183 further and alternatively with regard to any claim for interest abatement petitioner is silent as to what action of respondent would support interest abatement ie petitioner has failed to allege any error or delay that occurred in this case as a result of respondent’s performance of a ministerial_act relating to petitioner see sec_6404 rule b applies therein it is provided that any issue not raised in a taxpayer’s petition is to be deemed conceded because petitioner did not raise interest abatement in her petition petitioner may not now do so see 122_tc_280 affd 132_fedappx_919 2d cir the record herein fully supports respondent’s summary_judgment motion against petitioner and respondent’s motion will be granted an appropriate order and decision will be entered in sec_6404 was amended to permit abatement of interest with respect to unreasonable error or delay caused by ministerial and managerial acts of respondent’s employees taxpayer bill of right sec_2 publaw_104_168 110_stat_1457 this amendment is applicable only for tax years beginning after date 2by discussing briefly interest abatement we in no way intend to treat petitioner as having made a formal claim for interest abatement under sec_6404


t c memo united_states tax_court beverlee cochrane petitioner v commissioner of internal revenue respondent docket no filed date beverlee cochrane pro_se rick v hosler for respondent memorandum opinion chiechi judge respondent determined the following defi- ciencies in and additions to petitioner’s federal_income_tax tax additions to tax section section year deficiency a dollar_figure dollar_figure --- big_number big_number dollar_figure big_number big_number big_number big_number --- the issues remaining for decision are have the respective periods of limitations under sec_6501 expired with respect to petitioner’s taxable years and we hold they have not is petitioner liable for the addition_to_tax under sec_6651 for each of the years and we hold that she is is petitioner liable for the addition_to_tax under sec_6654 for each of the years and we hold that she is to the extent stated herein some of the facts have been stipulated and are so found petitioner who was single during the years at issue resided in phoenix arizona at the time the petition was filed petitioner requested and received extensions of time until date and date respectively within which to file her and tax returns and included tax_payments with those requests in the amounts of dollar_figure and dollar_figure respec-- ‘a11 section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure - - tively the internal_revenue_service service has no record that petitioner filed her and tax returns on those respective dates or on any other dates nor does the service have a record that petitioner filed tax returns for and tax was withheld in the amounts of dollar_figure and dollar_figure from the wages that petitioner received during and respec- tively no tax was withheld from the dollar_figure of wages that peti- tioner received during each of the years and no tax was withheld for petitioner’s taxable_year because she received no wages during that taxable_year on date respondent sent petitioner a notice_of_deficiency notice with respect to her taxable years and and a separate notice with respect to her taxable years and in those notices respondent determined inter alia that petitioner had failed to file tax returns for the years at issue that she is liable for additions to tax under sec_6651 for those years and that she is liable for additions to tax under sec_6654 for her taxable years and petitioner bears the burden of showing error in the determi- nations in the notices see rule a 290_us_111 we reject petitioner’s argument that the standard of proof applicable in criminal proceedings is control- ling in the instant case before addressing each of the issues remaining for decision we note that we have considered all of petitioner’s contentions and arguments that are not discussed herein and we find them to be baseless without merit and or irrelevant period of limitations although not pled in the petition petitioner argues that the respective periods of limitations under sec_6501 with respect to her taxable years through have expired that is because according to petitioner she timely filed her tax returns for those years and the notices with respect to those years were not issued until date we reject petitioner’s contention except for petitioner’s self-serving uncorroborated and conclusory testimony that she timely filed her tax returns for the years through the record is devoid of evidence supporting petitioner’s position under sec_6501 in fact although petitioner also argues on brief about her taxable_year petitioner conceded at trial that she did not file a tax_return for that year therefore we find that petitioner also conceded that the period of limitations under sec_6501 with respect to petitioner’s taxable_year has not expired petitioner also conceded at trial that she is liable for the addition_to_tax under sec_6651 for assuming arguen- do that petitioner had not made the foregoing concessions with respect to her taxable_year on the record before us we would nonetheless find that petitioner has failed to establish that the period of limitations under sec_6501 with respect to has expired and that she is not liable for the addition_to_tax under sec_665l1 a for that year - - official records of the service that are part of the record in this case show that petitioner did not file tax returns for any of the years through we are not required to and we shall not accept petitioner’s testimony that she timely filed her tax returns for those years see 440_f2d_688 9th cir affg per curiam tcmemo_1969_ 87_tc_74 on the record before us we find that petitioner has failed to establish that she filed tax returns for the years through accordingly we hold that the respective periods of limitations under sec_6501 with respect to those years have not expired addition_to_tax for failure_to_file sec_6651 imposes an addition_to_tax for failure_to_file a tax_return on the date prescribed for filing that addition_to_tax does not apply if it is shown that the failure_to_file was due to reasonable_cause and not due to willful neglect see sec_6651 petitioner contends that she is not liable for the additions to tax under sec_6651 for the years through ’ sservice records also show that petitioner did not file a tax_return for see supra note for petitioner’s conces-- sions regarding as we indicated supra note petitioner concedes that she is liable for the addition_to_tax under sec_665l a for her taxable_year -- - in support of her position petitioner states inter alia why did it take respondent nine years to notify peti- tioner that they did not have her returns on file for the years through if in fact they did not have the returns unless respondent through laxity and clerical bungling lost track of petitioner’s returns or else deceitfully and intentionally with malice aforethought submerged petitioner’s returns and de- ferred contact with her all the while tabulating penalties and interest that would have been far less significant had the total lines been timely drawn the notice_of_deficiency sent to petitioner in january of clearly witnesses that the potential for stun- ning penalties and interest is increased proportionate to the delay in notification if the irs is allowed to collect monies for alleged unfiled returns from years past when taxpayers are only required to keep them for three what’s to stop them from seeking to collect for returns they claim to have no record of that date back years or more the taxpayer should have some means of protect- ing him-or herself from the burden of filing proof when the date of notification exceeds the requirement date for keeping such return if respondent can’t keep track of a taxpayer in this high-tech age when every- thing about everyone is easily knowable and privacy rights are flagrantly violated by legions of both professional and personal snoops--many of them employed by respondent then respondent deserves to lose any revenue that would accrue from its assessments whether taxpayer has proof of filing or not if re- spondent deliberately defers contact with a taxpayer in order to subsequently collect greater penalties and interest then this would constitute not only malicious intent but fraud it is convenient----and necessary in the absence of proof---for respondent to assert that petitioner did not file taxes for the years through though it is impossible to prove such assertion in fact peti- tioner would not dare willfully omit a filing in view of the harassment visited upon her by respondent in - j- years when her returns did not bear the signature of a professional preparer the provisions of sec_6651 cannot even apply to petitioner because petitioner did in fact file her returns and respondent has offered no proof to the contrary nor can it if the burden_of_proof rests with petitioner there is a standoff and the case should be dismissed we find petitioner’s contentions and arguments under sec_6651 to be baseless without merit and or irrelevant on the record before us we find that petitioner has not shown that her failure_to_file tax returns for her taxable years through was due to reasonable_cause and not to willful neglect consequently we sustain respondent’s determinations that petitioner is liable for additions to tax under sec_6651 for those years addition_to_tax for failure to pay estimated_tax sec_6654 imposes an addition_to_tax for failure to pay estimated_tax the addition_to_tax under sec_6654 is mandatory unless the taxpayer establishes that one of the excep- tions in sec_6654 applies see 75_tc_1 petitioner contends that she is not liable for the additions to tax under sec_6654 for the years through in support of that contention petitioner argues in petitioner prepaid over of the estimated_taxes owed in thus no further estimated payments were required and no penalty was due therefor in in no tax was due thus no estimated_tax payment was required in no estimated_taxes were required to be paid from through exceptions to the underpayment penalty under sec_6654 apply for and sec_6654 provides in pertinent part e exceptions -- where tax is small amount --no addition_to_tax shall be imposed under subsection a for any taxable_year if the tax_shown_on_the_return for such taxable_year or if no return is filed the tax reduced by the credit allowable under sec_31 is less than dollar_figure where no tax_liability for preceding_taxable_year --no addition_to_tax shall be imposed under sub- section a for any taxable_year if-- a the preceding_taxable_year was a taxable_year of months b the individual did not have any liability for tax for the preceding_taxable_year and c the individual was a citizen or resident_of_the_united_states throughout the preceding_taxable_year the parties made various concessions at trial as well as in the stipulation of facts and the supplemental stipulation of facts filed in this case consequently computations under rule will be necessary on the present record we find that petitioner is liable for the additions to tax under sec_6654 for and except to the extent that the rule_155_computations in this case establish that the exception provided in either sec_6654 or sec_6654 e applies for any such year to reflect the foregoing and the concessions of the parties decision will be entered under rule