t c memo united_states tax_court joseph c becker and mercy grace castro et al petitioners v commissioner of internal revenue respondent docket nos filed date william r leighton for petitioners sheila r pattison roberta l shumway and brooke s laurie for respondent memorandum findings_of_fact and opinion holmes judge from through mr joseph becker owned at least ten entities in the united_states and another four in the philippines a great we consolidated four cases with this one joseph c becker and mercy grace castro docket number and number mercy grace castro docket number and joseph c becker docket number portion of his income came from tax-return preparation but he himself took a creative approach to his tax-return filing obligations for both himself and these entities and now the commissioner thinks he owes almost dollar_figure million in deficiencies and penalties--including penalties for fraud mr becker however claims he wasn’t up to any mischief and tried to create returns that reflected only the truth--or at least his version of the truth findings_of_fact mr becker and ms mercy castro wed in in harris county texas they had three children during their marriage mr becker and ms castro lived together in houston for most of their marriage but in ms castro moved to the philippines with the children she did not take mr becker with her mr becker did visit her and the children about once or twice a month except during tax season during these years and in ms castro moved back to houston it wasn’t a happily-ever-after ending however that same year the couple formally separated and mr becker moved to the philippines the couple divorced in i mr becker mr becker has an extensive background in federal taxation he received his bachelor’s degree in accounting from the university of north florida and a master’s in business administration in taxation from the university of texas at dallas in he became a licensed cpa in texas and worked for a series of accounting firms before he started his own tax-preparation business in but he soon did things that darkened his reputation the texas state board_of public accountancy suspended his license in and then revoked it entirely in date mr becker nevertheless continued to do accounting work but a state court enjoined him from the unlawful practice of public accounting in date two years later mr becker passed all four parts of the special_enrollment_examination the commissioner was unable to admit him however because texas had revoked his cpa license mr becker then got a license to sell insurance products in texas he maintained that license during all the years at issue ii sale of the becker businesses mr becker and ms castro at first had all their businesses in the united_states in just before the years at issue they decided to recenter their an enrolled_agent is a regular person ie neither a lawyer nor a cpa who--by passing the special enrollment examination--is allowed to represent taxpayers before the internal_revenue_service businesses in the philippines the catalyst mr becker claimed during trial was his father’s death he just wanted to get away a sale of becker’s insurance mr becker first hired a broker to find a buyer for becker’s insurance he ended up selling it to an employee--wayne lee--for dollar_figure mr lee signed a note for the purchase_price payable to mr becker over a 20-year period but whether mr lee paid his debt to mr becker is more controversial mr becker whose testimony we found most credible when he admitted prior wrongdoing claims that for the years at issue mr lee paid only dollar_figure on the promissory note we instead believe mr lee’s testimony that while he was late with some payments he made them every month during each of the years at issue and in the record there are copies of some of the checks to prove it in addition to the note mr lee gave for the purchase_price he borrowed dollar_figure in a business start-up loan from mr becker this loan--whose terms were oral--was payable over five years and mr lee paid it with a series of small checks per mr becker’s instruction mr lee made each check payable to either mr becker or one of his numerous related entities mr lee took over operations at becker’s insurance when the deal closed in date--or at least that was how it was supposed to look we find however that mr becker continued to sell insurance products and earn income from their sale even after he sold becker’s insurance he and ms castro continued to receive 1099s during this time though mr becker claims they didn’t actually receive income but only allowed mr lee to sell insurance under their licenses b sale of becker’s tax service in date mr becker sold becker’s tax service in an asset sale to wealthbuilder financial inc wealthbuilder for dollar_figure million the parties allocated dollar_figure million of the purchase_price to hard assets such as computers and furniture and dollar_figure million to goodwill wealthbuilder also agreed to lease space at champions plaza--another of mr becker’s businesses--where becker’s tax service was located this space included two large offices and a reception area mr becker also secured himself an outsourcing services agreement--technically between bts discount outsourcing inc another of his businesses introduced below and wealthbuilder bts discount outsourcing inc contracted to perform data entry accounting work including review of client files and other administrative services in this way mr becker maintained ties to his old company ms castro also had a license to sell insurance though at the time of trial she was not sure whether it was still active mr becker also continued to hold himself out as an owner of the company he told clients that randall klein--wealthbuilder’s president--was his business partner not the new owner he kept control_over becker’s tax service’s bank accounts--which should have been turned over to mr klein--and he would direct clients to write checks to becker’s tax service so he could deposit them into one of his old firm’s accounts and then move it to one of his personal accounts mr becker neglected to tell mr klein about this and when mr klein found out he filed suit--but that’s for later while ms castro vehemently denied it during trial we find that she also still received checks written on becker’s tax service’s accounts after she moved to the philippines in mr becker claimed at trial they were payments for work ms castro performed but ms castro also denied that she still worked for mr becker after her move back to the philippines and we find her the more credible witness we therefore find it more_likely_than_not that the payments were personal rather than wages iii mr becker’s web of companies although becker’s insurance and becker’s tax service were the main operating businesses that mr becker used he also owned a series of somewhat similarly named businesses to which he added after he decided to leave the country each was in many ways a continuation of another--and we find they were meant to confuse anyone who was looking in order of their formation a becker’s tax service and financial management company inc mr becker incorporated becker’s tax service and financial management company inc in under texas law we have no idea what it did b bts financial management company inc mr becker formed bts financial management company inc bts management in and it elected s corporation4 status at the time of its formation mr becker filed two assumed-name certificates that stated bts management would conduct business under the names becker’s tax service and financial management company inc and national mortgage link ltd during all years at issue mr becker operated as the president of bts management and owned of the shares during this same time bts management had its offices pincite champions plaza drive in houston an s_corporation is a corporation governed under the laws of subchapter_s of the internal_revenue_code s_corporations generally don’t pay federal_income_tax but are like partnerships passthrough entities that channel income and deductions to their owners see 531_us_206 each shareholder must report his respective share of these items on his individual return hill v commissioner tcmemo_2010_268 wl at c becker tax services l p mr becker formed becker note the lack of an apostrophe tax services l p in date though he operated as a tax professional under that name as early as he routinely referred to it as becker’s tax service note the wandering s so we will as well bts management was during all years of becker’s tax service’s existence its general_partner and held a interest jcb family limited_partnership introduced below held the remaining interest as a limited_partner its offices were also located pincite champions plaza drive in houston d jcb family limited_partnership mr becker formed jcb family limited_partnership jcb in during the years at issue ms castro was a limited_partner with a interest and mr becker owned the rest e sarahbelle investments llc mr becker formed sarahbelle investments llc sarahbelle in as a limited_liability_company during each of the years at issue mr becker was sarahbelle’s only member and acted as its president the texas secretary of state we note a discrepancy here the parties did indeed stipulate that jcb was a partner in becker’s tax service before jcb came into existence this seems like it could be a mistake but it is one that does not affect the outcome of the case forfeited sarahbelle’s certificate of formation in date for not paying taxes and fees to the state see tex tax code ann sec_171 west f champions plaza holdings l p mr becker formed champions plaza holdings l p champions plaza in date as a domestic limited_partnership during its existence sarahbelle remained its general_partner and held a interest in the company champions plaza also had two limited partners jcb which held a interest and someone named jann p wellikson who held a interest mr becker formed champions plaza to hold the champions plaza property g professional building llc mr becker formed professional building llc professional building in date as a limited_liability_company the texas secretary of state forfeited professional building’s certificate of formation in it’s not clear from the record who owned professional building h bts discount outsourcing inc mr becker formed bts discount outsourcing inc bts discount in date originally under a different name as a domestic for-profit corporation in texas he formed bts discount to operate a call center in the philippines its offices were also located at champions plaza drive bts discount ceased business operations after it received complaints for violating federal do-not-call-list rules the texas secretary of state forfeited bts discount’s certificate of formation in date we find based on testimony that it is more_likely_than_not that mr becker was the sole owner of this firm i becker’s tax service lp d b a becker’s insurance it’s unclear from the record when or where mr becker formed becker’s tax service lp d b a becker’s insurance becker’s insurance this company should not be confused with becker tax services l p however which like mr becker we’ve been calling becker’s tax service j quality tax financial services inc mr becker formed quality tax financial services inc plus in date as a domestic for-profit corporation in texas milton chavez and layla becker--mr becker’s daughter--acted as its directors plus was also located at champions plaza drive rene bahamonde one of mr becker’s employees was initially listed in texas records a sec_1040 plus’s president and vice president after some pressing at trial mr becker admitted that by default he must have owned plus k buy the staff inc mr becker formed buy the staff inc buy the staff in date as a for-profit corporation in texas the texas secretary of state forfeited buy the staff’s certificate of formation in date then reinstated it later that same year because mr becker had formed it to continue bts discount’s operations after do- not-call-list violations left it defunct buy the staff sometimes operated as bts discount mr becker testified that he alone owned buy the staff and while ms castro was listed as an officer of buy the staff her role was entirely nominal l becker’s tax service philippines mr becker’s move to the philippines propelled another wave of entities he formed becker’s tax service philippines becker’s tax philippines as a partnership and as he did with each entity he formed opened a bank account in its name becker operated becker’s tax philippines as a call center with his brother-in-law--and its main purpose was to answer becker’s tax service’s calls in houston though it also did some bookkeeping mr becker had some help with his next steps m bts staff for less he met ruth ventura a philippine cpa and attorney in date she helped him set up bts staff for less under philippine law in date one should not confuse this with buy the staff a texas corporation ms ventura then opened a bank account for it ending in at banco de oro unibank bdo in cebu city bts staff for less is also referred to as becker’s staffing for less and was a call center that mr becker operated from the philippines he testified that he personally owned or of bts staff for less ms castro owned and ms ventura owned each of them had signature_authority over bts staff for less’s bank account ms ventura managed the call center for a modest monthly salary it provided services to becker’s tax service in houston and generated income as an outsourcing company in ms castro signed a deed of absolute sale that transferred the cebu city land residence and office to bts staff for less though ms ventura testified during trial that they never recorded the transaction because there would be a big_tax obligation for the transfer that mr becker and ms castro were either unwilling or unable to pay n becker realty and asset management_corporation ms ventura also set up becker realty and asset management_corporation that same year this was another philippine corporation originally formed to hold the philippine properties although not entirely clear we find it more_likely_than_not that mr becker and ms castro split ownership of this one o topline telecare ms ventura formed one last corporation topline telecare topline in she owned of topline and mr becker through a nominee owned the other topline operated a small call center out of mandaue with only employees ms ventura hired and trained the staff she was again compensated to oversee the operation unlike bts staff for less topline hired few employees and kept its own revenue on the rare occasion that topline could not cover its own expenses ms ventura would simply ask mr becker for more money iv mr becker’s and ms castro’s philippine activities taking a step back now when ms castro moved to the philippines in she needed a place to live and so ms ventura helped mr becker and ms castro find a property there to call home they eventually settled on a big_number square- meter tract of land in cebu city mr becker claimed that he and ms castro bought the land in ms castro’s name to meet certain requirements of philippine law before closing on the property ms ventura also helped mr becker and ms castro open numerous philippine bank accounts including account ending in at philippine national bank pnb account ending in at bdo accounts ending in at pnb and at bdo little information on these accounts is contained in the record though we do know mr becker transferred at least some money to them mr becker ms castro and ms ventura were each listed on the pnb and bdo accounts and all three of them had signature_authority over these accounts each time mr becker sent money to the philippines it was deposited into one of their philippine accounts and between and he wired at least dollar_figure million into them becker’s tax philippines was already underway and had been since so mr becker turned his focus to his philippine property and again engaged ms ventura this time to oversee the construction of a house and office there ms ventura withdrew funds from the pnb and bdo accounts to pay for construction materials and labor she also used some of the money to pay her own monthly salary in the end mr becker’s philippines move came with a hefty price tag ms ventura estimated during trial that the land in cebu city cost almost dollar_figure the residence there cost around dollar_figure and the office building cost about dollar_figure mr becker and ms castro completed their home in it was large--at least big_number square feet spread over stories with baths bedrooms a pool a guest house and a 2-bedroom apartment above the garage ms castro and the children lived there and used money from mr becker’s wire transfers to pay their personal living_expenses the office space was two stories and a short walk from the new home when construction wrapped up in mr becker moved key becker’s tax philippines employees there for a moment mr becker’s philippine businesses did quite well but trouble was gathering in date mr klein of wealthbuilder canceled mr becker’s personal_service_contract for committ ing acts of moral turpitude that threatened to damage wealthbuilder’s business reputation in revenge mr becker changed the locks at the champions plaza property to prevent mr klein from entering the offices within the next few months mr becker becker’s tax service and champions plaza were buried in a lawsuit with mr klein and wealthbuilder for among other things fraudulent inducement to purchase and breach of contract mr becker not only lost the revenue from the wealthbuilder contract but also had to divert his other revenue streams trying to defend the suit he got desperate and started to solicit loans from clients to increase his cashflow the trial showed that he received over dollar_figure in these loans he has not paid most of them back and one client even sued him she received a large judgment dollar_figure plu sec_5 interest per year and dollar_figure in exemplary damages mr becker tried to raise money other ways too he filed a claim with one insurance_company after hurricane ike caused some damage to his houston residence while he estimated non-real-estate damage at dollar_figure his insurance_company paid him approximately dollar_figure--about of his expectation for a time he even engaged in a check-kiting scheme--one that had he not been caught would have netted him dollar_figure when mr becker finally moved to the philippines in late he converted the cebu city property into a resort he opened the residence’s bedrooms up to guests started an outdoor bar and tried to convert the first floor of the call center into a nightclub these new money-making plans were not successful v the tax returns for a man in the business of preparing tax returns mr becker had a dismal tax-return preparation record he testified that he used quickbooks to keep track of becker’s tax service’s records he also used quickbooks and at one point another program called accountantsworld to keep track of payroll it didn’t seem to matter though because he did not keep his many entities in compliance with we do note that his insurance_company paid just under dollar_figure for real- estate damages their filing obligations here is each domestic entity’s return status for the through tax years entity becker’s tax service management bts management becker’s tax service jcb sarahbelle champions plaza professional building bts discount plus no return filed no return filed return filed return filed return filed return filed return filed no return filed no return filed no return filed return filed return filed no return filed no return filed n a no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed no return filed return filed return filed no return filed no return filed buy the staff n a his personal returns were not better--he filed them on time but did so without first preparing returns for his flowthrough entities because he needed the money and wanted to get the refund that this was his desire we find entirely credible--but it led him to take some unusual return positions mr becker testified that he alone prepared his personal income-tax return in preparing that return he relied on w-2s and did report interest_income from becker’s tax service but it is unclear whether he even looked at his own bank statements at the time he based his interest deductions from becker’s tax service on purported loans that he admits he has no documentation for he reported on his return that he did not have any interest in or signature_authority over any foreign accounts despite the personal accounts he and ms castro held in the philippines although he claimed that this was because he misunderstood the question he also admitted during trial that his reported cost_of_goods_sold adjustments were not even educated guesses mr becker simply made sure he reported a number high enough to offset any income from the sale of insurance for which he’d received a form_1099 his return is also puzzling he said he prepared it himself yet the return reports another name as the preparer his method of preparing this return we find it more_likely_than_not that this is not true part iii of schedule b interest and ordinary dividends asked very clearly whether he had an interest in or a signature or other authority over a financial_account in a foreign_country such as a bank account securities account or other financial_account during the tax_year was similar to what he had done for guessing he guessed that he had dollar_figure in gross_receipts on his schedule c profit or loss from business for insurance sales and just put an amount he knew would cover whatever the 1099s were he reported that he had dollar_figure in expenses which zeroed out that schedule c one of his deductions was for money he claimed he borrowed from a lender and gave to becker’s tax service but mr becker’s bank statements do not support this tale he claimed during trial that he lent money that year but it too wasn’t reported neither did he report any of his interests or income or deductions from the philippines not his bank accounts not his partnerships and not his corporations he claimed during trial this was just a mistake and that he meant to amend his return we do not find this claim even a little bit credible mr becker’s and returns were similar he testified that he prepared them himself but again at least the return shows a separate preparer mr becker again admitted that he guessed at what gross_receipts he had and made sure he also claimed expenses large enough to entirely offset those receipts he just pulled a number out of the hat on hi sec_2010 return he claimed two of his children as dependents even though they didn’t live with him mr becker also prepared ms castro’ sec_2010 return ms castro’s return stated that she had dollar_figure in income from consulting activity but when asked continued for all years at issue we find that mr becker failed to report income he received from mr lee for the sale of becker’s insurance and for and he failed to report income he received from mr klein for the sale of becker’s tax service we also find his philippine business activities were completely missing from any return filed in the united_states mr becker prepared returns for becker’s tax service after he sold its assets he consistently deducted outsourcing expenses on becker’s tax service’s returns but this was actually money that he wired to the philippines to support ms castro his children and to build his residence and office building there he also deducted wages paid to ms castro for work she didn’t do he reported many deductions on becker’s tax service_returns if we had to pay if we got something that we paid for--through becker’s tax i would have deducted it we compared mr becker’s personal tax returns and the returns for his various flowthrough entities and found many inconsistencies for example though mr becker had direct interests in bts management and sarahbelle he did not include them on his schedule e supplemental income and loss for continued about it during trial she knew nothing about it mr becker explained that he reported this dollar_figure because it would get her the biggest earned_income_credit and income reported on becker’s tax service’s return and losses reported on champions plaza’s return match amounts reported on jcb’s return but jcb’s return reports positive_income and mr becker and ms castro reported a loss from jcb on their return this all caught the commissioner’s eye vi the audit and investigation in date the commissioner started an investigation of mr becker and becker’s tax service he suspected that either mr becker or his company was preparing false returns or at least aiding the preparation of false returns the revenue_agent ra assigned to the case--ra jenkins--conducted a sworn interview of mr becker as part of the investigation comparing mr becker’s statements during the investigation to his testimony at trial shows some important contradictions for example during his interview with ra jenkins mr becker claimed that all of his insurance business’s income and expenses were deposited into and paid through bank accounts held by becker’s tax service he said that because clients sent the forms to himself and ms castro individually he filed schedules c with his returns just to show how the money flowed through becker’s tax service but during trial he said the money actually went to mr klein’s bank accounts mr becker told ra jenkins that mr klein took control of all becker’s tax service’s bank accounts mr klein credibly testified at trial that he never took control and mr becker changed his story at trial and admitted that mr klein used his own bank account in date ra bruno started to examine mr becker and ms castro’s tax_return the examination was quickly expanded to their and tax years ra bruno then expanded the investigation to becker’s tax service’s returns for the and tax years buy the staff’s returns for the and tax years and plus’s returns for the and tax years she conducted her own interviews during those interviews mr becker claimed that mr lee orally reported to him the gross_receipts and expenses to report on his returns each year but during trial mr becker repeatedly admitted that those numbers were guesses meant to offset income reported on forms so it would not trigger an audit mr becker told ra bruno that when he prepared his personal returns for the years at issue he used bank statements and that the returns showed correct information during trial he said only that he might have reviewed the accounts but really just pulled a number out of the hat mr becker didn’t cooperate with these examinations he promised ra bruno that he would provide tax returns bank statements work papers and other documentation--only to claim later that his records were destroyed by hurricane ike he promised to give her his quickbooks records but never did in the end despite six information document requests idrs from ra bruno mr becker never provided any documents at all ra bruno also issued two idrs to becker’s tax service requesting the partnership_agreement its minute book work papers and other books_and_records mr becker never produced any of those either faced with this complete lack of cooperation ra bruno performed bank- deposits analyses on accounts held by becker’s tax service buy the staff and plus for the and tax years the totals less reductions for nontaxable sources for the and tax years are reflected below wachovia becker’s tax service dollar_figure --- wachovia becker’s tax service dollar_figure big_number chase becker’s tax service dollar_figure big_number wachovia buy the staff dollar_figure --- big_number big_number big_number big_number big_number big_number big_number big_number item deposit nontaxable deposit nontaxable transfers total the combined taxable deposits equal dollar_figure the commissioner then reduced this number by dollar_figure for the balboa insurance co proceeds dollar_figure for a re-deposited cashier’s check dollar_figure for the loan mr becker got from ms rothschild dollar_figure for an additional loan and dollar_figure for the amount mr becker actually did report on his return this brings us to a grand total of dollar_figure in unreported gross_receipts wachovia becker’s tax service wachovia becker’s tax service dollar_figure --- dollar_figure wachovia plus dollar_figure big_number wachovia buy the staff dollar_figure --- big_number big_number big_number big_number big_number big_number big_number big_number item deposit nontaxable deposit nontaxable transfers total the combined taxable deposits equal dollar_figure the commissioner reduced this amount by dollar_figure to account for allowed expenses which produces a grand total of dollar_figure in ordinary_income the commissioner now concedes however that this amount should be reduced by dollar_figure to account for payments mr becker got from balboa insurance ra bruno also disallowed the deductions that mr becker and ms castro claimed on their personal returns as well as the deductions that becker’s tax service claimed on its returns because mr becker never provided any substantiation during the examination mr becker did produce some depreciation schedules for becker’s tax service’s and tax years before trial the commissioner sent three notices of deficiency to mr becker and ms castro for their through tax years in which he determined they owed more than dollar_figure million in tax in one of the notices--for the tax years he stated that he had made a jeopardy_assessment that included large fraud penalties under sec_6663 the commissioner introduced no evidence at trial that the irs employee who made the initial penalty determinations had written approval from his immediate supervisor for the civil_fraud penalty or an alternative accuracy-related_penalty our recent opinion in graev v commissioner graev iii t c because of sec_6213’s restrictions on assessment the deficiency cases that come to our court are typically preassessment but sec_6213 makes an exception for jeopardy assessments under sec_6861 and that section authorizes the commissioner to assess a deficiency even before issuing a notice_of_deficiency if he believes the assessment or its collection will be jeopardized by delay unless stated otherwise all section references are to the internal_revenue_code in effect for the years at issue and all rule references are to the tax_court rules_of_practice and procedure slip op pincite date supplementing 147_tc_460 prompted him to reexamine his files he concluded that he had no record of the initial determination of penalties under sec_6662 for negligence or disregard of rules and regulations for any of the years at issue he also concluded that he had no record of the initial determination of a penalty under sec_6662 for substantial_understatement_of_income_tax for the tax_year for the reasons stated in a separate order we denied the motion as to other penalties and tax years mr becker and ms castro filed these cases we consolidated and tried them in san antoniodollar_figure opinion the parties have settled or conceded many issues those that remain for us to decide are whether becker’s tax service underreported its income for the and tax years whether mr becker and ms castro failed to report income from the sale of becker’s insurance for the and tax years under sec_7482 the presumed appellate venue is determined at the time the petition is filed with the court at the time mr becker and ms castro filed petitions at docket numbers and ms castro resided in texas and mr becker resided in the philippines when they filed petitions at docket numbers and both mr becker and ms castro resided in texas whether mr becker ms castro and becker’s tax service are entitled to certain deductions and cost-of-goods-sold adjustments for the and tax years whether becker’s tax service is entitled to depreciation_deductions for the and tax years and whether mr becker is liable for a civil_fraud penalty under sec_6663 for the and tax years we will address each issue in turn i income issues a underreported income the commissioner asserts that becker’s tax service underreported its income by dollar_figure for and dollar_figure for mr becker did not keep adequate_records of becker’s tax service’s gross receipts--instead he guessed the commissioner was thus justified in reconstructing becker’s tax service’s income see sec_6001 sec_446 one long-accepted method--used by the commissioner here--is a bank-deposits analysis see parks v commissioner the commissioner determined dollar_figure of unreported gross_receipts for but he concedes that the adjustment should be limited to dollar_figure because that is the amount that was included on the examination_report the commissioner concedes that unreported gross_receipts for becker’s tax service should be reduced by dollar_figure for the tax_year for payments mr becker and ms castro received from their insurance_company as a result of damages to their home by hurricane ike t c unexplained deposits are considered prima facie evidence of income where a taxpayer failed to keep adequate_records 87_tc_74 the commissioner must however take into account the sources of deposits 102_tc_632 and he must as he has here subtract from the deposits any income that the taxpayer reported and any nontaxable items to determine gross_income 96_tc_858 aff’d 959_f2d_16 2d cir our first question is what accounts the commissioner can look at here he added up deposits from not only becker’s tax service’s accounts but also those belonging to buy the staff’s and plus’s bank accountsdollar_figure he has two independent reasons for doing this he first argues that deposits to these accounts are attributable to becker’s tax service because mr becker through becker’s tax service exercised control_over them there’s something here it’s true that where a taxpayer has dominion and control_over funds they are includable in his gross_income under sec_61 chambers v commissioner tcmemo_2011_ both buy the staff and plus got notices of deficiency from the commissioner but neither filed a petition the commissioner acknowledges the inconsistency of his position and in keeping with irs practice will adjust these firms’ accounts accordingly to reflect the decisions in these cases and prevent double collection wl at and particularly when the commissioner uses a bank-deposits method to reconstruct a taxpayer’s income he may include deposits from any account the taxpayer controls see eg hovind v commissioner tcmemo_2012_281 at price v commissioner tcmemo_2004_103 wl at cohen v commissioner tcmemo_2003_ wl at woodall v commissioner tcmemo_2002_318 wl at a taxpayer has dominion and control_over an account when he has the freedom to use the funds at will see 343_us_130 the commissioner asserts and we agree that mr becker exercised dominion and control_over buy the staff’s accounts and plus’s accounts he had signature_authority over each account and managed the financial affairs of both entities for example mr becker used money from a plus account to pay a liability that did not belong to it and frequently moved funds from buy the staff’s accounts to becker’s tax service’s but the problem for the commissioner is that at most this ties mr becker and not becker’s tax service to each account we cannot find that becker’s tax service itself exercised control_over the entities’ accounts perhaps recognizing this he urges us to find that becker’s tax service controlled the accounts in question through mr becker but offers no legal theory as to how something similar is off with the commissioner’s second argument--that buy the staff is a nominee of either bts discount or mr becker and that plus is a nominee of becker’s tax service or mr becker the nominee theory requires us to determine the true beneficial_owner of a property 211_f3d_280 5th cir we consider the following factors consideration paid_by the nominee property placed in the name of a nominee in anticipation of a suit or occurrence of liabilities while the transferor continues to exercise control_over the property close relationship between transferor and the nominee failure to record conveyance retention of possession by the transferor and continued enjoyment by the transferor of benefits of the transferred property beck v commissioner tcmemo_2001_270 wl at the commissioner makes a reasonably strong case that mr becker was the true beneficial_owner of buy the staff’s and plus’s accounts but this doesn’t mean becker’s tax service was too mr becker controlled buy the staff’s operations and bank accounts the commissioner argues that buy the staff’s business reputation and affairs were often mixed with those of bts discount and that mr becker testified that he would often move money deposited to buy the staff’s accounts to becker’s tax service’s even if this proves mr becker treated these entities as if they were the same it doesn’t make buy the staff a nominee of becker’s tax service and the commissioner doesn’t ever argue that it did--thus not quite asking the right question here it’s much the same for plus--this firm too was in many ways an extension of becker’s tax service but was not its nominee mr becker created plus to continue his tax-preparation activities when becker’s tax service ran into legal problems with wealthbuilder and mr klein he often deposited checks made payable to becker’s tax service and bts discount to plus’s accounts and plus used the same address and shared office space employees and equipment with becker’s tax service we do not find however that this make sec_1040 plus a nominee of becker’s tax service we therefore accept the commissioner’s bank-deposits analysis but only for deposits into becker’s tax service’s own bank accounts there are no nominee problems here of course so the burden now shifts to mr becker to prove that part of the analysis is incorrect see clayton t c pincite he does not bear that burden well he argues vaguely that many deposits included in the commissioner’s analysis are nontaxable but provides no explanation or evidence to suggest that’s the case with one exception he does argue that his taxable deposits should be reduced by dollar_figure--the amount that he repaid after his check-kiting scheme was discovered in aside from the fact that mr becker offered no evidence to corroborate his self-serving testimony that he paid back dollar_figure the income earned from his check-kiting scheme is the result of illegal activity and so there are no carryback deductions for repayments 98_tc_165 69_tc_990 taxpayer not entitled to carryback loss resulting from illegal activity see eg cherry v commissioner tcmemo_2013_3 at mr becker also argues that several deposits are nontaxable and that the commissioner erroneously included in his analysis checks from ferndale surgical for dollar_figure the record does reflect an dollar_figure payment to moody bank during the tax_year that number is much smaller than what mr becker claims mary phan for dollar_figure and maria and anthony miller for dollar_figure he testified that these payments were all loans but no matter each of these deposits though written on a check made payable to becker’s tax service was deposited to plus’s accounts and cannot be considered in these cases for these reasons we agree with the commissioner’s analysis of becker’s tax service’s gross_receipts but only to the extent that it includes deposits made to becker’s tax service’s own bank accounts b income from installment_sales the commissioner asserts that mr becker failed to report income15 from the sale of becker’s insurance of dollar_figure and dollar_figure for the and tax years respectively gross_income includes income from whatever source derived sec_61 aside from the dollar_figure mr becker admits mr lee gave him for the sale mr lee credibly testified that during the years at issue he continued to make payments each month even if they were sometimes delinquent mr becker under sec_453 income from an installment_sale is taken into account under the installment_method under that method a taxpayer generally has income from an installment_sale for the year the installment is received while mr becker seems to argue that the sale of becker’s insurance should be classified as an installment_sale subject_to capital-gains tax he has not provided a legal argument or evidence to support his position he also testified that he did not treat payments as part of an installment_sale when he received them admits he received them but claims that he deposited them into becker’s tax service’s accounts--not his personal accounts--and reported them as ordinary_income mr becker again offers us no evidence to corroborate his testimony and could not have reported the payments as ordinary_income for becker’s tax service’s tax_year because becker’s tax service didn’t file a return for that year the commissioner’s analysis for those same years did not reveal these deposits but the record does show that they made their way into mr becker’s personal accounts we therefore find for the commissioner on this issue ii deductions sec_162 allows a deduction for ordinary and necessary expenses paid_or_incurred in connection with a trade_or_business we presume the commissioner’s determination in the notice is correct--the burden is on the taxpayer to prove his expenses rule a 290_us_111 to do so he must keep sufficient records to substantiate them sec_6001 sec_1_6001-1 income_tax regs when he does not we may estimate some expenses but only if he provides at least some evidence to support an estimate and we are convinced he incurred them 39_f2d_540 2d cir 85_tc_731 under sec_274 certain expenses carry strict substantiation requirements this means that a taxpayer has to show the amount time place and business_purpose of each expense usually in the form of a contemporaneous account book diary or log sec_1_274-5t and c and temporary income_tax regs fed reg date the commissioner determined that mr becker was not entitled to the following claimed expenses cogs returns allowances rent lease meals entertainment travel other dollar_figure --- --- --- --- --- --- --- --- --- --- --- --- dollar_figure dollar_figure big_number --- --- big_number big_number big_number dollar_figure big_number he also determined that becker’s tax service was not entitled to the following claimed expenses outsourcing consulting travel depreciation dollar_figure big_number big_number big_number dollar_figure --- big_number big_number we will address each item separately a mr becker and ms castro cost_of_goods_sold cogs mr becker and ms castro claim that they had a combined total of dollar_figure for the cost_of_goods_sold through their respective insurance businesses during the tax_year mr becker admittedly made up this amount to offset income shown on the 1099s for insurance sales proceeds issued to himself and ms castro mr becker’s tale goes like this before the sale of becker’s insurance 1099s were issued to him and ms castro for payments that were eventually deposited into becker’s tax service’s accounts and reported as its income after the sale 1099s continued to be issued to mr becker and ms castro for sales they didn’t make--proceeds from the sale of insurance were then deposited by mr lee and reported by him mr becker claims that had he not zeroed out his return in this way he would have been stuck paying tax on income he did not receive even if we believed mr becker that’s not how one is supposed to solve the problem one might for example add an explanatory attachment to one’s return instead of intentionally reporting false numbers and even if a taxpayer wanted to solve a possible double_taxation issue in this way we would expect him to prove that income was deposited or transferred into an account other than his own and thereafter correctly reported mr becker has not done so mr becker and ms castro are not entitled to a cogs allowance for the tax_year mr becker’s method also leads to an understatement of self-employment_tax under sec_1401 returns and allowances mr becker claims he is entitled to deductions of dollar_figure for and dollar_figure for for returns and allowances expenses these deductions represent amounts he claims he paid back to plus that were later included on its returns the deductions’ purpose mr becker claims was to again avoid the double counting of income mr becker offers only his incredible testimony as proof he paid these amounts and that is simply not enough we find for the commissioner on these expenses though mr becker labeled this amount other expenses on his schedule c we include it here because he now argues it was a return of income rent mr becker claims that payments of dollar_figure in were valid business deductions for payments made on his lease at champions plaza he also claims that they are reflected on champions plaza’s partnership return rent paid for office space is typically deductible see sec_162 carver v commissioner tcmemo_2009_279 wl at davis v commissioner tcmemo_2006_272 wl at but as with his other items mr becker offers us only his testimony as substantiation champions plaza’s partnership return indeed reflects dollar_figure in income but that return was never filed all we got was an unsigned copy of an amended form_1065 u s return of partnership income that was provided by mr becker during the commissioner’s examination without other information to substantiate this expense we cannot allow it mr becker also claims for the tax_year that he paid dollar_figure in rent on behalf of plus and can deduct that too he likewise offers us only testimony and therefore has not substantiated his claimdollar_figure even if mr becker could substantiate his claim ordinary and necessary expenses must have been incurred on behalf of the taxpayer’s business not on behalf of another taxpayer’s business 308_us_488 zand v commissioner tcmemo_1996_19 wl at continued meals and entertainment mr becker claims that he is entitled to a dollar_figure deduction for meals and entertainment_expenses for hi sec_2010 tax_year he argues that the commissioner did not dispute the amount in his notice_of_deficiency and thus it is not actually at issue this appears to be true but that does not mean that meals and entertainment_expenses are no longer at issue it just means that because this is a new_matter the burden shifts to the commissioner to prove that mr becker is not entitled to that deduction see rule a heinbockel v commissioner tcmemo_2013_125 at shifting burden to the commissioner where new_matter raised not in notice but see widemon v commissioner tcmemo_2004_162 wl at the commissioner has shown that mr becker had a tendency to make up numbers on his returns that he’s not a credible witness and that he did not keep satisfactory books_and_records it’s also quite clear from the record that mr becker frequently deducted personal expenses--he deducted money he sent to ms castro in the philippines to pay her living_expenses see infra p and he deducted expenses_incurred visiting his family there see infra pp though continued aff’d 143_f3d_1393 11th cir mr becker testified that he used credit-card statements to determine that he had dollar_figure in business deductions we find it more_likely_than_not that either mr becker had no substantiation for the amount or the expenses were personal we find for the commissioner on this issue as well travel mr becker also claims that he personally is entitled to dollar_figure in travel_expenses for hi sec_2010 tax_year travel_expenses are of the type requiring strict substantiation under sec_274 and mr becker admits he has nothing of the sort to substantiate his claims he asserts that he did have records but that they were destroyed when hurricane ike caused flood damage to his home in date this certainly doesn’t explain the lack of documentation for hi sec_2010 tax_year and it doesn’t explain why he provided absolutely no evidence for the remainder of becker’s tax service’s tax_year other mr becker and ms castro claimed a combined total of dollar_figure for dollar_figure for and dollar_figure for in other deductions as with the mr becker asserts that because the commissioner failed to argue this issue in his brief he has conceded the amount he is mistaken while the commissioner admits he left travel_expenses off the questions presented portion of his brief he nonetheless did address and argue the issue in his brief and thus did not concede the issue allowance for cogs for the year mr becker admitted that he just plucked these numbers from his imagination to offset income reported on 1099s issued to himself and ms castro this is no more adequate substantiation for these expenses than it was for cogs b becker’s tax service outsourcing mr becker claims becker’s tax service is entitled to deduct expenses of dollar_figure for and dollar_figure for that are related to the outsourcing of his business to the philippines he claims that he should be allowed a business_expense deduction for the cost of building an office center and residence there-- that the business_purpose of the expenditures is undeniable he claims that the philippine residence was really a guest house for employees and clients he concedes however that he does not have sufficient documentation to identify which of those expenses were ordinary or capital and urges us to simply treat the full amount claimed for each year as a capital_expenditure the problem as the commissioner points out is that even if a portion of each number was a true capital_expenditure we have no way to tell how much becker’s tax service claimed the dollar_figure as other costs on its return but mr becker now argues they were outsourcing expenses ms ventura testified that while she did wire money from becker’s tax service’s accounts to pay for the construction she also wired money to pay ms castro’s living_expenses and her children’s living_expenses ms ventura claimed she kept records but provided only a sample at trial and the remainder is not part of the record we also find it more_likely_than_not that the guest house was never anything more than ms castro’s and mr becker’s personal_residence we thus do not find that mr becker is entitled to either a deduction or a capital_expenditure see eg rogers v commissioner tcmemo_2014_141 at taxpayer loses when personal and business_expenses indistinguishable consulting becker’s tax service claimed a dollar_figure deduction for consulting expenses on its tax_return mr becker argues this amount was the total paid to mr seyad aman he says that mr aman would charge substantial sums on his credit card and the amount would then be reported as income by becker’s tax service becker’s tax service would then reimburse mr aman by check this explanation is strikingly similar to mr becker’s earlier arguments for zeroing out his returns and it likewise is not enough to substantiate the expenses there are no canceled checks in the record showing payments to mr aman much less any that show what those payments were for we sustain the commissioner’s determination travel becker’s tax service claims dollar_figure and dollar_figure in travel_expenses for its and tax years travel_expenses are of the type that require strict substantiation under sec_274 and mr becker admits he has nothing of the sort to substantiate his claims he contends that we should find in his favor because it is obvious that he through becker’s tax service conducted extensive travel to oversee the building of his operations in the philippines we don’t think it’s obvious however we find it instead more_likely_than_not that at least a portion--probably a large portion--of becker’s tax service’s travel costs was for mr becker’s personal trips to the philippines to visit his wife and children and to oversee the construction of his residence--even if he also did work while he was there see sec_1_162-2 income_tax regs we have no way of telling which was which we therefore sustain the commissioner’s disallowance of these travel_expenses depreciation sec_167 generally allows a depreciation deduction for the exhaustion or wear_and_tear of property used in a taxpayer’s trade_or_business or held for the production_of_income mr becker claims that becker’s tax service is entitled to dollar_figure and dollar_figure in depreciation expenses for its and tax years depreciation is determined by using the applicable_depreciation_method convention and the recovery_period sec_168 mr becker did not submit a schedule for the tax_year he did submit as evidence and depreciation schedules--the schedule being part of a return accepted as filed by the commissioner--and asserts that because becker’s tax service still owned the items on that schedule in and we should allow the depreciation_deductions each tax_year stands on its own however and the commissioner is not bound by his treatment of an item for a previous year 113_tc_158 tanzi v commissioner tcmemo_2016_148 at because mr becker did not provide any additional support for his position we sustain the commissioner’s determination iii penalties a fraud sec_6663 imposes a penalty equal to of an underpayment that is attributable to fraud the commissioner determined that mr becker is liable for the civil_fraud penalty under sec_6663 for the and tax years because he filed his tax returns with the intent to evade tax the burden is on the commissioner to show by clear_and_convincing evidence that mr becker underpaid and that the underpayments are attributable to fraud sec_7454 rule b if the commissioner can prove that even any part of an underpayment was attributable to fraud the the entire underpayment shall be treated as attributable to fraud except with respect to any portion of the underpayment which the taxpayer establishes by a preponderance_of_the_evidence is not attributable to fraud sec_6663 fraud is the willful_attempt_to_evade_tax 55_tc_85 we examine the entire record of a case in making our determination see id pincite the badges that show fraudulent intent include understatement of income inadequate records failure_to_file tax returns implausible or inconsistent explanations of behavior concealment of assets failure to cooperate with tax authorities engaging in illegal activities attempting to conceal illegal activities dealing in cash and failing to make estimated_tax payments 91_tc_273 citing 796_f2d_303 9th cir aff’g t c memo our goal is to uncover the taxpayer’s intent did he or did he not intend to evade income_tax while we won’t find fraud when the circumstances merely lead to a suspicion of fraud we may use circumstantial evidence--which includes mr becker’s entire course of conduct see parks t c pincite this entire course is filled with obstacles to any finding other than that mr becker had a fraudulent intent--and filled with them for all four years at issue mr becker consistently understated his income for each year he admitted during trial that he made up massive deductions each year to zero out his returns--fake deductions that amounted to over dollar_figure million over the course of the four years he failed to report income for at least and 2009--remember our earlier findings regarding installment_sales see supra pp he omitted great dollops of income from becker’s tax service’s returns for those years see supra pp and he completely omitted his business activity in the philippines for each of the years before us for he checked no in response to a question on his schedule b that asked whether he had foreign bank accounts or signature_authority on foreign bank accounts mr becker also provided implausible and inconsistent explanations for his behavior examples of these are exhibited through conversations during the commissioner’s examination mr becker admitted during trial that his schedules c were entirely fabricated but he told the ra that mr lee told him to report those numbers he also maintained during the examination that mr klein took control of all becker’s tax service’s bank accounts after the sale but we found out during trial that mr klein opened his own account mr becker also gave inconsistent explanations for his lack of records during the examination he promised to turn in documents requested by the examiner then he changed his mind and said they’d been destroyed by hurricane ike he played a similar game when it came to becker’s tax service’s records mr becker said he had backup files for becker’s tax service but then said that the records couldn’t be produced after all--because they’d been seized shortly after his check-kiting scheme came to light mr becker took steps to conceal his assets he filed a zeroed-out or low- tax_return for each year at issue he also filed zeroed-out returns for plus for the and tax years--and made it appear that a cpa had prepared them we also find that mr becker’s complicated scheme of entities most of which have like-sounding names was meant to confuse and distort ownership in the event someone--like the commissioner--ever looked too closely over the course of his examination the commissioner uncovered at least domestic entities in which mr becker held direct or indirect interests--many of which were doing business under two different names he used at least different bank accounts to commingle funds from these entities he tried to conceal his ownership of plus he filled in mr bahamonde’s name as its director registered agent president and vice president but mr bahamonde testified that he never acted in these capacities nor did he know he was listed and he tried to conceal all of his activity in the philippines by not reporting or disclosing it in any way on even a single return mr becker also failed to cooperate with the examining agent and lied during the examination and during trial the commissioner’s examination spanned more than two years and for those two years mr becker delayed and failed to produce documents and changed his explanations over time during trial he insisted that money sent to ms castro while she was living in the philippines was payment for work she performed for mr becker’s many entities but ms castro credibly denied the truth of these statements and claimed she didn’t work for mr becker or his entities during those years mr becker was evasive during trial and seemingly reluctant to answer questions specifically about his control_over the philippine entities we also consider a taxpayer’s level of sophistication in tax matters see neidringhaus v commissioner 99_tc_202 brown v commissioner tcmemo_2013_275 at scharringhausen v commissioner tcmemo_2012_350 at mr becker’s trade was tax preparation but he failed to properly report his own tax and for many of his entities he filed no tax returns at all see supra pp it’s unlikely that a tax professional such as he would accidently or even negligently report or not report his taxes in this manner we find instead by clear_and_convincing evidence that mr becker attempted to use his vast tax-preparation experience to help him evade his own legal obligations b sec_6751 all of this would normally lead to a holding that sustains the commissioner’s civil_fraud penalty determinations for the through tax years but we held in graev iii t c at slip op pincite that compliance with sec_6751 --which requires written supervisory approval of an initial penalty determination--is part of the commissioner’s burden of production on penalties under sec_7491 the commissioner never even mentioned sec_6751 before or at trial even though mr becker and ms castro put the penalties at issue in their pleadings and hotly contested them on their merits today we denied the commissioner’s motion to reopen the record this makes these cases among those that have to consider what consequences such failures to anticipate graev iii have sec_6751 has been in the code for nearly years graev iii didn’t create new law it interpreted a section of the code that was in existence at the time of the trial in these cases and we didn’t say that our interpretation had only prospective effect see eg 509_us_86 when the court applies a rule_of federal_law in a case that rule must be given full retroactive effect in all cases still open on direct review and as to all events regardless of whether such events predate or postdate announcement of the rule hajro v u s citizenship immigration servs 811_f3d_1086 9th cir silence on the issue of prospectivity indicates that the decision is to be given retroactive effect these precedents mean that we have to treat our construction of sec_6751 in graev iii as being the correct construction of that section as of the date of this trial as well but mr becker and ms castro didn’t mention sec_6751 either might this mean that the commissioner could still win on the penalty because it was not placed in issue the answer to this question is in 127_tc_200 aff’d 521_f3d_1289 10th cir that case began with the commissioner’s determination that the taxpayer was liable for three additions to tax id pincite in his petition mr wheeler noted his assertion that he was not liable for any additions to tax without saying why or specifying each of the additions at issue id pincite n he presented no relevant testimony or arguments id pincite we found that the record lacked any evidence that mr wheeler had filed a return for the year in question or that the commissioner had prepared a substitute return under sec_6020 b --a prerequisite for the failure- to-timely-pay addition_to_tax under sec_6651 id pincite the record similarly lacked any evidence that mr wheeler had a required_annual_payment for the preceding tax year--a prerequisite for the addition_to_tax for underpaying estimated_tax id pincite because sec_7491 places the burden of production for any penalty or addition_to_tax on the commissioner we held that the commissioner must lose when there is no evidence in the record that he met these prerequisites id pincite it’s the same here we now know that sec_6751 requires the commissioner to show by stipulation or other evidence that the initial determination of a penalty was approved in writing by the immediate supervisor of the irs employee who made the initial determination of such assessment graev iii t c at slip op pincite we now also know that sec_7491 makes this showing part of the commissioner’s burden of production the commissioner introduced no such evidence that he complied with sec_6751 just as in wheeler this means the commissioner loses on the penalties heredollar_figure thus even though mr becker’s fraud is evident we hold that he and ms castro are not liable for civil_fraud penalties or accuracy-related_penalties in these cases decisions will be entered under rule the commissioner asserted as an alternative to fraud penalties that mr becker and ms castro were liable for accuracy-related_penalties under sec_6662 for all of the years at issue except for for ms castro mr becker and ms castro challenged the sec_6662 penalties in their petition so they are before the court and the commissioner has the burden of production see sec_7491 rule b 127_tc_200 aff’d 521_f3d_1289 10th cir the record contains no evidence that the commissioner complied with sec_6751 for these penalties either which means he didn’t meet his burden for them if he had we would’ve treated them as conceded because mr becker and ms castro didn’t address them in their brief see mcneil v commissioner tcmemo_2011_150 wl at n aff’d 451_fedappx_622 8th cir


t c memo united_states tax_court john r peacock petitioner v commissioner of internal revenue respondent docket no 6168-02l filed date noel w spaid for petitioner karen n sommers for respondent memorandum findings_of_fact and opinion foley judge the issue for decision is whether respondent may proceed with his proposed collection activity relating to petitioner’s tax_liability findings_of_fact petitioner failed to file his federal_income_tax return on date respondent sent petitioner a notice_of_deficiency on date respondent sent petitioner a second notice which corrected a typographical error in the date notice petitioner did not file a petition with the court to challenge either notice on date respondent assessed a dollar_figure deficiency and pursuant to sections and a dollar_figure addition_to_tax and a dollar_figure addition_to_tax respectively on date respondent sent a form 668-w c notice_of_levy on wages salary and other income notice_of_levy to petitioner’s employer united airlines united the notice_of_levy required united to relinquish a portion of petitioner’s pay to satisfy his tax_liability respondent on date sent petitioner a final notice--notice of intent to levy and notice of your right to a hearing relating to his tax_liability on date petitioner sent respondent form request for a collection_due_process_hearing in which petitioner alleged that the tax_liability had been fully paid on date the appeals officer held a conference with petitioner the appeals officer reviewed transcripts of petitioner’s income_tax account and payroll records the payroll records indicated that between date and date united pursuant to an unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue assignment deducted dollar_figure from petitioner’s wages in an attempt to determine where the dollar_figure had been sent the appeals officer wrote to united and to the california franchise tax board on the basis of respondent’s records and those provided by the state of california the appeals officer determined that levy payments totaling dollar_figure and dollar_figure had been applied to petitioner’s and income_tax accounts respectively and that in the state of california had received dollar_figure in levy payments relating to petitioner’s state_income_tax liabilities united and petitioner did not provide any documentation of payments received by respondent other than the payments reflected on respondent’s records on date respondent sent petitioner a notice_of_determination concerning collection action s under sec_6320 and or relating to in response on date petitioner while residing in san diego california filed his petition with the court opinion petitioner contends that respondent erred in determining his tax_liability because respondent used married_filing_separately filing_status rather than married_filing_jointly status petitioner however received a statutory_notice_of_deficiency relating to and thus is precluded from raising his filing_status sec_6330 see 114_tc_176 petitioner further contends that respondent failed to apply petitioner’s levy payments ie the amounts withheld from his wages by his employer to his tax_liability we disagree the record did not establish that respondent’s calculation of the unpaid tax was incorrect united deducted dollar_figure from petitioner’s wages but forms certificate of assessments payments and other specified matters relating to petitioner’s income_tax account indicate an unpaid assessed balance due of dollar_figure see 115_tc_35 stating courts have held that form_4340 provides at least presumptive evidence that a tax has been validly assessed under sec_6203 before deciding to proceed with collection respondent provided petitioner with transcripts relating to his tax_liability took adequate steps to determine the correct amount of petitioner’s unpaid tax and gave due consideration to petitioner’s contentions accordingly respondent committed no error and may proceed with the proposed collection activity contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered for respondent


t c summary opinion united_states tax_court robert david wuerth cynthia wuerth petitioners v commissioner of internal revenue respondent docket no 28637-09s filed date robert david wuerth and cynthia wuerth pro sese stewart todd hittinger for respondent cohen judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case respondent determined deficiencies and penalties as follows penalty year deficiency sec_6662 dollar_figure dollar_figure big_number dollar_figure after concessions the issues remaining for decision are whether petitioners are entitled to deduct a casualty_loss for relating to damage to their real_property and whether petitioners are liable for penalties under sec_6662 for and all section references are to the internal_revenue_code code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure background some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in indiana at the time the petition was filed robert david wuerth petitioner and cynthia wuerth purchased a home in newburgh indiana in the two-story house has an attached three-car garage and is on a wooded lot of approximately acre during the years in issue petitioner taught graduate courses in accounting at various online universities and was licensed as a certified_public_accountant c p a petitioner performed many of his duties as an adjunct instructor from a home_office in petitioners’ residence devry university one of petitioner’s employers paid petitioner’s earnings to wuerth asset management llc wuerth management a limited_liability_company petitioners formed in and classified as a partnership for federal tax purposes petitioners each owned percent of wuerth management from the time it was formed through the years in issue the ownership structure of wuerth management did not change on date petitioners’ property both lot and improvements suffered damage as a result of a tornado petitioners filed a claim under their homeowners insurance_policy for the sustained damage the policy had a dollar_figure deductible and petitioners received insurance reimbursements totaling dollar_figure petitioners paid outside contractors dollar_figure for cleanup and repairs following the tornado petitioner cleaned up part of the property over the course of the next several years petitioners jointly filed their self-prepared form_1040 u s individual_income_tax_return for on form_4684 casualties and thefts included with their form_1040 petitioners claimed a casualty_loss of dollar_figure relating to their residence and a casualty_loss relating to a damaged vehicle wuerth management also claimed a casualty_loss deduction of dollar_figure for petitioners’ residence on the form_1065 u s return of partnership income that petitioner prepared as he believed this was necessary because he used a portion of the residence as a home_office petitioners’ form_1040 indicates that they determined the amount of the real_property casualty_loss using a fair_market_value of dollar_figure for the real_property before the tornado and dollar_figure after the tornado less dollar_figure in insurance proceeds petitioner calculated these values using his own research and personal estimates of the financial damage caused by the storm on the wuerth management forms for and numerous other deductions were claimed for purported business_expenses including television service travel and meals and entertainment these deductions reduced the income from wuerth management that passed through to petitioners and was reported on their and form sec_1040 in the internal_revenue_service irs examined petitioners’ returns for and during the course of the examination petitioner hired an appraiser to determine the value of the indiana real_property both before and after the tornado the appraiser had not personally appraised the property before the damage occurred and relied on the statements petitioner made regarding its previous condition the appraiser ultimately determined that the market_value of the property before the tornado was dollar_figure and after the tornado was dollar_figure the appraisal report included numerous errors including misstating the calculations for the pre-tornado value of the real_property as totaling dollar_figure and dollar_figure at different points in the report the irs sent petitioners a notice_of_deficiency on date in the notice the irs determined that petitioners sustained the full amount of the loss claimed for their vehicle and dollar_figure of the loss claimed for the real_property for the irs disallowed deductions that wuerth management claimed for and that resulted in an increase to petitioners’ income as reported on their and form sec_1040 petitioners provided documentation as substantiation for some of the claimed expenses and respondent conceded that petitioners were entitled to some deductions beyond what was allowed in the notice during the trial petitioners conceded that they were not entitled to the remaining claimed deductions for and with the exception of the casualty_loss deduction for their real_property claimed for discussion casualty_loss deduction relating to real_property for the parties agree that petitioners sustained a casualty_loss in within the meaning of sec_165 that section provides that in the case of an individual the deduction under sec_165 shall be limited to losses of property not connected with a trade_or_business or a transaction entered into for profit if such losses arise from fire storm shipwreck or other_casualty sec_165 deductions for casualty losses are limited to those not_compensated_for_by_insurance_or_otherwise sec_165 respondent agrees that petitioners’ property suffered damage from a severe tornado and as a result petitioners’ property lost value however respondent disputes petitioners’ assertion that they are entitled to a greater deduction for for casualty_loss than was allowed in the notice_of_deficiency the amount of a casualty_loss deduction is generally computed as the excess of the fair_market_value of the property immediately before the casualty over the fair_market_value of the property immediately after the casualty limited by the adjusted_basis of the property 305_us_468 46_tc_751 affd 387_f2d_420 8th cir sec_1_165-7 income_tax regs these respective values shall generally be ascertained by competent appraisal sec_1_165-7 income_tax regs alternatively the amount of a casualty_loss may be established by reasonable repair costs paid to restore property to its precasualty condition sec_1_165-7 income_tax regs the cost of repairs alternative however must be calculated using the actual repair costs not estimates 70_tc_391 as a general_rule taxpayers have the burden of proving that they are entitled to the deductions that they claim rule a 292_us_435 under sec_7491 the burden_of_proof shifts to respondent if petitioners complied with requirements to substantiate an item maintained all required records and presented credible_evidence as to a factual issue petitioners have not done so and thus the burden has not shifted for petitioners divided the real_property casualty_loss deduction they claimed between their form_1040 and the form_1065 that was filed for wuerth management petitioners have presented no evidence and made no argument that any portion of their indiana real_property was the property of a business_entity we agree with respondent that the property and the casualty_loss were personal essentially petitioners present three methods of valuation to justify their assertion that the casualty_loss was greater than the amount that the irs allowed in the notice_of_deficiency first petitioners argue that the costs of clearing fallen trees from the property exceeded the allowed deduction petitioner testified that he received several estimates of approximately dollar_figure to clean up what he claims is only percent of the property with the remaining percent already addressed by petitioner himself if repair costs are to be used as an alternative method of valuation the taxpayer must substantiate the actual costs not merely provide estimates 57_tc_714 sec_1_165-7 income_tax regs the only actual uncompensated expenditure petitioner claimed to have made was dollar_figure to a landscaping company to clear some fallen trees and debris in petitioners did not present any receipt into evidence to substantiate this or any other expense relating to the cleanup of their property the evidence presented is insufficient to justify a casualty_loss for higher than the deduction allowed in the notice_of_deficiency second petitioner argues that his estimate of the damages used to derive the figure as reported on the tax returns is accurate although petitioner argues that he used a sophisticated appraisal method his description of how he arrived at the values used is riddled with approximations that are not substantiated by any evidence other than petitioner’s flat assertions petitioner claims that he began with a fair_market_value for the property before the tornado of dollar_figure he concluded that the property lost percent of its value because of a decrease in the property’s aesthetic value because of the fallen trees which he admits is simply a hypothesized value rather than a justifiable calculation he also subtracted dollar_figure for lot clearing costs and dollar_figure for landscaping fix up costs based on the same estimates described above finally he subtracted dollar_figure for profit on real_estate to cover high inherent risk in all totaling dollar_figure in losses these self-serving estimates did not use any recognized method of real_property valuation are only conjecture and do not justify petitioners’ casualty_loss deduction beyond that allowed by respondent petitioner also presented at trial photographs of the property taken before the tornado and others taken after which show fallen trees and other damage these photos are insufficient to show the extent of the damage or to determine the monetary harm caused to the property by the casualty third petitioners offer as evidence an appraisal completed in date this appraisal however merely serves as a restatement of petitioners’ unsubstantiated estimates the appraiser did not personally evaluate the property before the tornado damage and relied heavily on petitioner’s statements to justify the retrospective appraisal of the property the appraiser also relied on the estimates petitioner obtained for cleanup and excavation costs described above to determine the value of the property immediately after the loss the information petitioner provided to the appraiser is extremely favorable to petitioners’ position as to the amount of the casualty_loss and is not corroborated by any other evidence we need not consider an expert’s opinion when that expert is merely an advocate for one of the parties see 94_tc_570 furthermore the appraisal report has numerous errors including calculations showing the pre-tornado value of the home as dollar_figure dollar_figure and dollar_figure such errors call into question the reliability of the appraisal and thus the report does not provide adequate support for petitioners’ position see eg 115_tc_506 petitioner makes numerous accusations of improper behavior by irs agents and attempts to discredit the valuation the irs used during administrative appeals these arguments are irrelevant we review the merits of the case de novo and do not consider any record created during internal irs appeals procedures see 62_tc_324 petitioners have not proven that the amount of the casualty_loss sustained after accounting for insurance proceeds is greater than the amount allowed in the notice_of_deficiency we therefore sustain respondent’s determination as to the casualty_loss deduction relating to the real_property for sec_6662 penalty sec_6662 and b and imposes a 20-percent accuracy-related_penalty on any underpayment of federal_income_tax attributable to taxpayers’ negligence or disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the code and defines disregard as any careless reckless or intentional disregard disregard of rules or regulations is careless if taxpayers do not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule_or_regulation sec_1_6662-3 income_tax regs a substantial_understatement_of_income_tax exists if the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties see 116_tc_438 however once the commissioner has met the burden of production the burden_of_proof remains with the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause or substantial_authority see rule a higbee v commissioner supra pincite considering the inaccuracy of the items on the returns and the amounts of the resulting underpayments of tax respondent has satisfied the burden of producing evidence that the penalties are appropriate the accuracy-related_penalty under sec_6662 is not imposed with respect to any portion of the underpayment as to which taxpayers acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner supra pincite the decision as to whether taxpayers acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all of the pertinent facts and circumstances see sec_1_6664-4 income_tax regs petitioners did not provide any evidence that they relied on professional advice see sec_6662 petitioner admits that the basis for the valuation of the property was his own approach based on estimates and intuition rather than any accepted methods of valuation or professional assistance despite his background as an instructor in accounting and licensed c p a petitioner did not determine a reasonable value for the damage to the property furthermore petitioner’s testimony with respect to the now conceded personal expenses that petitioners deducted as business_expenses demonstrates a lack of a reasonable attempt to comply with the law petitioners are therefore liable for the penalties imposed for and we have considered the other arguments of the parties and they are either without merit or need not be addressed in view of our resolution of the issues for the reasons explained above decision will be entered under rule


number release date internal_revenue_service index numbers - ---------------------------------------- ------------------------------------- ------------------------- ------------------------- --------------------- department of the treasury washington dc person to contact ----------------------------------------------------- -------- telephone number -------------------- refer reply to cc psi - plr-100343-06 date date legend x ------------------------------------- --------- -------------- ------------------ ---------- d1 country dear -------------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations for x to file an election to be treated as a disregarded_entity under the laws of country was acquired by a single owner with limited_liability on d1 x intended to be treated as a disregarded_entity for federal tax purposes effective d1 however x did not timely file a form_8832 entity classification election according to the information submitted all of the interest in x an entity formed sec_301_7701-3 provides that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes under sec_301_7701-3 except as provided in sec_301 b unless it elects otherwise a foreign eligible_entity is classified as an association if all members have limited_liability sec_301_7701-3 provides that for purposes of sec_301_7701-3 a sec_301_7701-3 provides that an election under sec_301_7701-3 member of a foreign eligible_entity has limited_liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member will be effective on the date specified on form_8832 or on the date filed if no such date is specified on the form the effective date specified on form_8832 cannot be more than days prior to the date the form is filed and cannot be more than months after the date on which the form is filed sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the rules governing automatic extensions of time for making certain elections sec_301_9100-3 sets forth the standards the commissioner will use to based on the facts submitted and representations made we conclude that the determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 under sec_301_9100-3 a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 and elect to be treated as a disregarded_entity for federal tax purposes effective d1 a copy of this letter should be attached to the form_8832 the federal tax consequences of the transaction described above under any other provision of the code except as specifically set forth above no opinion is expressed or implied as to sec_6110 provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer on whose behalf it was requested in accordance with the power_of_attorney on file with this office a copy of this sincerely letter is being sent to x’s authorized representative enclosures copy of this letter copy for sec_6110 purposes heather c maloy associate chief_counsel passthroughs and special industries


cca_2018082716093847 id uilc number release date from sent monday date pm to cc bcc subject fw request for written response hi ----------- you have asked for our recommendation of whether we think an assessment of the penalty provided for under sec_6695 on the individual ssn of a co-owner of an s-corporation s-corp could be a legal hazard you have also asked whether we are aware of any situations where the owner of an s-corp can be held personally liable for the penalty provided for under sec_6695 below we have provided a summary of the relevant code sections and regulations to assist you with your decision we did not find any cases where the owner of an s-corp was held personally liable for the penalty provided for under sec_6695 sec_6695 generally provides that any person who is a tax_return_preparer with respect to any return or claim_for_refund who fails to comply with due diligence requirements imposed by the secretary of treasury by treasury regulations with respect to certain credits shall pay a penalty of dollar_figure for each failure subject_to adjustments for inflation sec_1_6695-2 sets forth the due diligence requirements that a tax_return_preparer must comply with to avoid the penalty under sec_6695 generally a tax_return_preparer must complete and submit with the filed tax_return a form_8867 paid preparer’s due diligence checklist and retain a copy of the form_8867 see sec_1_6695-2 in addition the preparer must not know or have reason to know that any of the information used to compute the relevant credit or credits is incorrect and must make reasonable documented inquiries concerning the correctness of the information temporary_regulation sec_1_6695-2t a effective for tax returns or claims for refund filed tax years beginning after date provides that a person who is a tax_return_preparer as defined in sec_7701 of a tax_return or claim_for_refund under the code with respect to determining the eligibility for or the amount of certain credits and who fails to satisfy the due diligence requirements of paragraph b of this section will be subject_to a penalty as prescribed in sec_6695 for each such failure sec_7701 defines tax_return_preparer as any person who prepares for compensation or who employs one or more persons to prepare for compensation any return of tax imposed by this title or any claim_for_refund of tax imposed by this title subject_to certain exceptions not relevant here this definition applies when the term is used in title_26 where not otherwise distinctly expressed or manifestly incompatible with the intent thereof see also sec_301_7701-15 the treasury regulation in effect prior to date did not provide a cross- reference to sec_7701 for the definition of tax_return_preparer see sec_1_6695-2 effective date to date however because neither sec_6695 nor its related regulations at that time give any indication that the definition under sec_7701 is manifestly incompatible with their intent we conclude that sec_7701 also provides the correct definition of tax_return_preparer for the purposes of sec_6695 prior to the issuance of the temporary_regulation temporary_regulation sec_1_6695-2t b provides generally that the tax_return_preparer must not know or have reason to know that any information used by the tax_return_preparer in determining the taxpayer’s eligibility for or the amount of any credit described in paragraph a of this section and claimed on the return or claim_for_refund is incorrect we think that this specific knowledge requirement would present a legal hazard for assessing the penalty provided for under sec_6695 directly on the ssn of the co-owner of the s-corp however we do not have enough facts in our possession to make a recommendation in your specific case the regulations provide a special rule for a firm that employs a tax_return_preparer subject_to the penalty provided for under sec_6695 sec_1 c provides that a firm that employs a tax_return_preparer subject_to a penalty under sec_6695 is also subject_to penalty if and only if- one or more members of the principal management or principal officers of the firm or a branch office participated in or prior to the time the return was filed knew of the failure to comply with the due diligence requirements of this section the firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements of this section or the firm disregarded its reasonable and appropriate compliance procedures through willfulness recklessness or gross indifference including ignoring facts that would lead a person of reasonable prudence and competence to investigate in the preparation of the tax_return or claim_for_refund with respect to which the penalty is imposed see also sec_1_6695-2t irm for tax years ending on or after date and before date irm for tax years beginning after date the s-corp may be a tax_return_preparer within the definition of sec_7701 if it employs a person who prepares a tax_return for compensation the s-corp may be the proper person on which to assess the penalty under sec_6695 pursuant to sec_1_6695-2 if one of the requirements set forth in that section are met we do not have enough facts in our possession to make a recommendation as to whether the s-corp in your case meets these requirements in addition there are likely legal hazards with assessing the penalty provided for under sec_6695 pursuant to sec_1_6695-2 directly on the ssn of the co-owner of the s- corp because it is the s-corp that employees the preparers and not the co-owner please let me know if you have any questions or would like to discuss further thanks -------------------- ---------------- ------------------------------------------ -------------------------------- ----------------------