Court Opinion

ID: 9955143
Source: CourtListenerOpinion
Date Created: 2024-03-27 19:01:28.577381+00
Date Added: 2024-06-11T08:15:17.513114
License: Public Domain

United States Tax Court

                         T.C. Memo. 2024-36

       KHURRAM SHAHZAD GONDAL AND AROOJ ASMAT,
                      Petitioners

                                  v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                              __________

Docket No. 23964-22.                             Filed March 27, 2024.

                              __________

Khurram Shahzad Gondal and Arooj Asmat, pro se.

Byron M. Huang, for respondent.

                       MEMORANDUM OPINION

       JONES, Judge: During taxable years 2017 and 2018 (tax years at
issue), petitioner Khurram Shahzad Gondal operated several car-for-
hire businesses with a business partner. He and the business partner
contracted with the State of New York to provide medical transportation
services. But they billed New York State for trips they falsely
represented were for medical reasons. Ultimately, Mr. Gondal pleaded
guilty to healthcare fraud in connection with the false claims.

       Following the guilty plea, the Internal Revenue Service (IRS)
opened an examination of Mr. Gondal’s and petitioner Arooj Asmat’s
joint federal income tax returns. The Commissioner determined that
petitioners received constructive dividends from the car-for-hire
businesses during the tax years at issue. The Commissioner also

                           Served 03/27/24
                                           2

[*2] determined that Mr. Gondal was liable for civil fraud penalties
pursuant to section 6663. 1

       Pending before the Court is respondent’s Motion for Summary
Judgment (Motion). (Doc. 14.) The issues for decision are (1) whether
there are deficiencies in income tax due from Mr. Gondal and Ms. Asmat
for the tax years at issue and (2) whether Mr. Gondal is liable for civil
fraud penalties for the tax years at issue. 2 We find in respondent’s favor
on both issues.

                                    Background

I.      Procedural Background

      On October 28, 2022, while residing in New York, Mr. Gondal and
Ms. Asmat timely petitioned this Court, indicating that they dispute a
Notice of Deficiency (NOD) dated August 3, 2022. On the Petition, Mr.
Gondal and Ms. Asmat explained why they disagree with the IRS
determination: “All the mentioned income which are reported in notice
as my personal income are related to my business.” (Doc. 1) (formatting
added). They did not specifically reference the penalties determined in
the NOD.

       On March 6, 2023, respondent filed an Answer (Doc. 8) and
asserted additional facts that went unanswered by Mr. Gondal and Ms.
Asmat. Thus, respondent filed a Motion for Entry of Order that
Undenied Allegations in Answer Be Deemed Admitted pursuant to
Rule 37(c). Petitioners failed to respond after being given a chance to do
so. The Court granted the Motion and ordered that the allegations set
forth in paragraphs 8 through 32 of the Answer be deemed admitted.

       On December 22, 2023, respondent filed the Motion and an
accompanying declaration with exhibits. Once again, petitioners failed
to respond. The following facts are based on the parties’ pleadings, the

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulatory references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure. All monetary
amounts are rounded to the nearest dollar.
        2 Respondent has not moved for summary judgment on the negligence

penalties asserted against both Mr. Gondal (in the alternative) and Ms. Asmat.
(Doc. 14.)
                                   3

[*3] deemed admissions, and the declaration and exhibits attached to
respondent’s Motion.

II.    Mr. Gondal’s Businesses and Reported Income

      During the tax years at issue, Mr. Gondal and his business
partner operated car-for-hire businesses in New York. The businesses
were operated through numerous subchapter C corporations controlled
by Mr. Gondal and the business partner, including (1) All County Med
Cab, Inc.; (2) Four Way Taxi, Inc.; (3) Green Mountain Medical
Transportation, Inc.; (4) Capital Cab Corporation; and (5) All NY Taxi
& Limo, Inc. (collectively Gondal’s Transportation Companies).

      Mr. Gondal and his business partner contracted with the New
York State Department of Health to provide medical transportation
throughout New York. However, as set forth above, they billed the State
of New York for trips they falsely represented were made for medical
reasons. Ultimately, Mr. Gondal pleaded guilty to one count of
healthcare fraud, and his business partner pleaded guilty to defrauding
Medicaid.

       Some of Gondal’s Transportation Companies issued Forms W‒2,
Wage and Tax Statement, to Mr. Gondal during the tax years at issue.
Specifically, Four Way Taxi, Inc. issued a Form W‒2 to Mr. Gondal that
reported wages of $30,000 for tax year 2017. Mr. Gondal’s and Ms.
Asmat’s joint income tax return for tax year 2017 showed total income
of $30,000.

      For tax year 2018, Four Way Taxi, Inc., issued a Form W‒2 to
Mr. Gondal that reported wages of $12,000. Capital Cab Corporation
issued a Form W‒2 to Mr. Gondal that reported wages of $8,000. For
2018, Mr. Gondal’s and Ms. Asmat’s joint income tax return showed total
income of $22,305.

      That same year, Mr. Gondal filed a single Schedule C, Profit or
Loss From Business, stating that he was a taxi driver. On the
Schedule C, Mr. Gondal reported $20,659 of income and $6,464 of total
expenses, resulting in net taxable income of $14,195 for tax year 2018.

III.   Examination of Petitioners’ Returns

      After Mr. Gondal’s plea agreement, the IRS opened an
examination of Mr. Gondal’s and Ms. Asmat’s joint returns for the tax
years at issue. During the examination, Mr. Gondal and Ms. Asmat did
                                         4

[*4] not provide any books              or   records     relating     to    Gondal’s
Transportation Companies.

      The agent assigned to the examination summoned bank records
for Mr. Gondal and Gondal’s Transportation Companies for the tax
years at issue. The examining agent then conducted a bank deposits
analysis, which revealed that during the tax years at issue, Mr. Gondal
(1) made significant cash withdrawals from Gondal’s Transportation
Companies and (2) paid personal expenses with money from Gondal’s
Transportation Companies.

       The following table—derived from the examining agent’s bank
deposits analysis—reflects Mr. Gondal’s (1) cash and check withdrawals
from the business accounts of Gondal’s Transportation Companies and
(2) payments of personal expenses, also from the business accounts of
Gondal’s Transportation Companies. 3

             Company Name                Type of Transfer      2017         2018
                                         Cash & Check        $14,040         $100
    All County Med Cab
                                         Personal Exp.        23,374        30,348
                                         Cash & Check         87,929        75,557
    Four Way Taxi, Inc.
                                         Personal Exp.       104,397        57,933
                                         Cash & Check         74,460       112,455
    Green Mountain Med. Transp., Inc.
                                         Personal Exp.        33,436        22,688
                                         Cash & Check        196,685       213,578
    Capital Cab Corporation
                                         Personal Exp.       157,258       129,933
                                         Cash & Check                 0     70,686
    All NY Taxi & Limo, Inc.
                                         Personal Exp.          9,546        2,087

        3 The Answer (and thus the deemed admissions) contained several

typographical errors setting forth the amounts of the cash withdrawals and personal
expenses paid. For example, when compared to the NOD and the administrative file,
the Answer transposed several numbers and included the wrong numbers on certain
lines of the chart. (Compare Doc. 8, at 5–6, with Doc. 15, at 15.) We have corrected
these obvious typographical errors. See, e.g., Goodman v. Commissioner, T.C. Memo.
1985-151, 1985 Tax Ct. Memo LEXIS 480, at *1 n.1 (“Since this Court has jurisdiction
to redetermine the correct amount of deficiencies determined by respondent, we may
correct respondent’s typographical error.”); Hayes v. Commissioner, T.C. Memo. 1980-
307, 1980 Tax Ct. Memo LEXIS 281, at *3 n.1 (correcting obvious typographical error
in the parties’ stipulation).
                                     5

[*5] From the bank deposits analysis, the examining agent
determined that Mr. Gondal and Ms. Asmat failed to report the receipt
of constructive dividends totaling $701,125 for taxable year 2017 and
$715,365 for taxable year 2018. The following table reflects total
transfers from Mr. Gondal’s business accounts for the tax years at issue:

                                              2017       2018

            Total Cash & Check Withdrawals   $373,114   $472,376
            Total Personal Expenses Paid      328,011    242,989
            with Business Account Funds
            Total Constructive Dividends     701,125    715,365

There is no evidence that any of the cash withdrawals or personal
expenditures were (1) used for business purposes; (2) used for loan
disbursements; or (3) repaid by Mr. Gondal or Ms. Asmat.

       Mr. Gondal—fraudulently and with the intent to evade tax—
received and failed to report the constructive dividend amounts for the
tax years at issue. Mr. Gondal’s concealment of income through cash
withdrawals and payment of personal expenses from the funds of
Gondal’s Transportation Companies—along with Mr. Gondal’s failure to
maintain complete and accurate records of his business dealings—were
fraudulent, with the intent to evade tax. Mr. Gondal (fraudulently and
with the intent to evade tax) misreported his exemptions, net
investment income tax, self-employment tax, earned income tax credit,
and additional child tax credit for each of the tax years at issue. He also
fraudulently, and with the intent to evade tax, underreported his tax
due by $142,882 for taxable year 2017 and by $138,311 for taxable year
2018.

       On August 3, 2021, the examining agent—on a call with his
supervisor—made an initial determination to assert a civil fraud
penalty against Mr. Gondal (and an accuracy-related negligence penalty
under section 6662(a) in the alternative). The examining agent also
made the initial determination to assert an accuracy-related negligence
penalty under section 6662(a) against Ms. Asmat. On August 6, 2021,
the examining agent’s immediate supervisor approved in writing the
assertion of the penalties.

      On October 21, 2021, the Commissioner made his first formal
communication regarding assertion of the penalties in this matter
through issuance of the first revenue agent report. On August 3, 2022,
the IRS issued the NOD for the tax years at issue. The NOD set forth
                                        6

[*6] deficiencies, civil fraud penalties, and accuracy-related penalties as
follows:

                                              2017       2018
               Deficiency: Increase in Tax   $142,882   $138,311
               Section 6663 Penalties         107,162    103,733
               Section 6662 Penalties                     31,434
                                               28,576
               (Alternative Position)

The NOD also stated that Ms. Asmat is not liable for the section 6663
civil fraud penalties for the tax years at issue, but it stated that she is
liable for the negligence penalties pursuant to section 6662(a) and (c).

                                 Discussion

I.    General Principles

      A.     Summary Judgment Standard

       Summary judgment serves to “expedite litigation and avoid
unnecessary and expensive trials.” Fla. Peach Corp. v. Commissioner,
90 T.C. 678, 681 (1988). We may grant summary judgment when there
is no genuine dispute of material fact and a decision may be rendered as
a matter of law. See Rule 121(a)(2); Sundstrand Corp. v. Commissioner,
98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding
whether to grant summary judgment, we construe factual materials and
inferences drawn from them in the light most favorable to the
nonmoving party. Sundstrand Corp., 98 T.C. at 520. The nonmoving
party must respond and may not rest upon mere allegations or denials
in their pleadings. Rule 121(d); see also Celotex Corp. v. Catrett, 477 U.S.
317, 324 (1986).

      Because petitioners did not respond to the Motion, we could enter
a decision against them for that reason alone. See Rule 121(d).
Nevertheless, we will consider the Motion on its merits.

      B.     Burden of Proof

       The Commissioner’s determinations in a notice of deficiency are
generally presumed correct, and the taxpayer bears the burden of
proving them erroneous. Rule 142(a); see Welch v. Helvering, 290 U.S.
111, 115 (1933). In certain circumstances, section 7491 may shift to the
Commissioner the burden of proof on certain factual issues. But that
section applies only if the taxpayer (among other things) “introduces
                                    7

[*7] credible evidence” with respect to those issues. See § 7491(a).
Petitioners have neither claimed, nor introduced credible evidence
sufficient to show, that the burden of proof should shift to respondent
under section 7491(a) as to any relevant factual issue. Therefore,
petitioners generally bear the burden of proof.

II.   Unreported Income

      “[G]ross income means all income from whatever source derived,”
including compensation for services such as wages and salaries, gross
income derived from business, and dividends, among others. See § 61(a);
Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429–31 (1955);
Durland v. Commissioner, T.C. Memo. 2016-133, at *61. Taxpayers
must maintain books and records sufficient to establish their income
and expenses. See § 6001; Treas. Reg. § 1.6001-1(a). If they fail to do so,
the Commissioner may reconstruct income through any reasonable
method that clearly reflects income. See § 446(b); Petzoldt v.
Commissioner, 92 T.C. 661, 693 (1989). We have long accepted the bank
deposits method for this purpose. See Clayton v. Commissioner, 102 T.C.
632, 645–46 (1994). The bank deposits method assumes all deposits are
taxable, but the Commissioner must account for any nontaxable source
or deductible expense of which he has knowledge. Id. Taxpayers bear
the burden of proving a nontaxable source for deposits. Barnes v.
Commissioner, T.C. Memo. 2016-212, at *32–34, aff’d, 773 F. App’x 205
(5th Cir. 2019).

      The evidence before us demonstrates that Mr. Gondal and Ms.
Asmat had unreported income for the tax years at issue. Mr. Gondal’s
and Ms. Asmat’s jointly filed Federal income tax return for tax year 2017
showed total income of $30,000 based on a Form W‒2 issued to
Mr. Gondal. Mr. Gondal’s and Ms. Asmat’s 2018 federal income tax
return showed total wage income of $22,305, largely based on Forms
W‒2 issued to Mr. Gondal. That year, Mr. Gondal filed a single Schedule
C reporting net taxable income of $14,195.

       However, through a bank deposits analysis of Mr. Gondal’s and
the Gondal’s Transportation Companies’ bank accounts for the tax years
at issue, the Commissioner determined that petitioners’ income was
significantly higher. Specifically, Mr. Gondal withdrew cash and paid
personal expenses totaling $701,125 and $715,365 from Gondal’s
Transportation Companies for taxable years 2017 and 2018,
respectively.
                                   8

[*8] The examining agent concluded—and we agree—that these
payments constituted constructive dividends. See Magnon v.
Commissioner, 73 T.C. 980, 993–94 (1980) (“Where a corporation confers
an economic benefit on a shareholder without the expectation of
repayment, that benefit becomes a constructive dividend, taxable to the
shareholder, even though neither the corporation nor the shareholder
intended a dividend.”). Mr. Gondal and Ms. Asmat did not report these
constructive dividends on their federal income tax returns for the tax
years at issue.

       Further, there is no evidence—and petitioners have not argued—
that the cash withdrawals and personal expenditures were (1) used for
business purposes; (2) treated as loans; or (3) repaid by petitioners.
Petitioners have failed to establish a nontaxable source for the
unreported deposits. And Mr. Gondal has neither argued nor shown that
any amount should not be subject to the civil fraud penalty. Thus,
Mr. Gondal and Ms. Asmat failed to meet their burden, and we will
sustain the Commissioner’s determinations.

III.   Penalties

       Next, we examine the Commissioner’s civil fraud penalty
determinations. First, we examine whether the Commissioner complied
with the procedural requirements of section 6751(b)(1). Then, we turn
to the civil fraud penalties pursuant to section 6663.

       A.    Penalty Approval Under Section 6751(b)(1)

       The Commissioner bears the burden of production with respect to
an individual taxpayer’s liability for any penalty, requiring the
Commissioner to come forward with sufficient evidence indicating that
the imposition of the penalty is appropriate. See § 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446–47 (2001). As part of that burden, the
Commissioner must produce evidence of compliance with the procedural
requirements of section 6751(b)(1). See Graev v. Commissioner, 149 T.C.
485, 492–93 (2017), supplementing and overruling in part 147 T.C. 460
(2016). Section 6751(b)(1) requires the initial determination of certain
penalties to be “personally approved (in writing) by the immediate
supervisor of the individual making such determination.” See Graev, 149
T.C. at 492–93.

      The parties do not dispute that the requirements of section
6751(b) were met. Further, the record establishes that the IRS secured
timely supervisory approval to assert each of the penalties. See Chai v.
                                   9

[*9] Commissioner, 851 F.3d 190, 220–21 (2d Cir. 2017), aff’g in part,
rev’g in part T.C. Memo. 2015-42. Accordingly, respondent has satisfied
his burden with respect to section 6751(b).

      B.     Section 6663 Civil Fraud Penalties

       Section 6663(a) imposes a penalty equal to 75% of an
underpayment of tax if any part of the underpayment is due to fraud.
Once the Commissioner establishes that part of an underpayment is due
to fraud, the entire underpayment is treated as “attributable to fraud,”
except to the extent the taxpayer establishes that some part is not. See
§ 6663(b). This section does not apply with respect to a spouse filing a
joint return unless some part of the underpayment is due to the fraud of
the spouse. § 6663(c). Respondent alleges that only Mr. Gondal is liable
for fraud, not Ms. Asmat.

       The Commissioner must prove fraud by “clear and convincing
evidence.” See § 7454(a); Rule 142(b); Castillo v. Commissioner, 84 T.C.
405, 408 (1985) (“The burden of proving fraud is on respondent, and he
must do so by clear and convincing evidence.”). To carry that burden, the
Commissioner must show that (1) an underpayment of tax exists for the
year at issue and (2) some part of the underpayment is attributable to
fraud. See DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), aff’d, 959
F.2d 16 (2d Cir. 1992). Deemed admissions are sufficient to satisfy the
Commissioner’s burden of proof as to fraud. See Doncaster v.
Commissioner, 77 T.C. 334, 337 (1981); see also Voccola v.
Commissioner, T.C. Memo. 2009-11, 2009 WL 103367, at *8 (observing
that the Commissioner can satisfy his burden of proof as to section 6663
fraud penalties by deemed admissions).

       Respondent contends that the underpayment resulting from Mr.
Gondal’s failure to report constructive dividends from the Gondal
Transportation Companies is attributable to Mr. Gondal’s fraud. As set
forth supra Background Part III, respondent has clearly and
convincingly demonstrated that Mr. Gondal has an underpayment of
tax. Thus, the first element of the civil fraud penalty has been
established.

      Next, we must determine whether Mr. Gondal had the requisite
fraudulent intent. DiLeo, 96 T.C. at 873. Fraud is an intentional
wrongdoing on the part of the taxpayer, with the specific purpose of
evading a tax believed to be owing. Petzoldt, 92 T.C. at 698. Fraud is
never presumed and must be established by independent evidence of
                                   10

[*10] fraudulent intent. See Frazier v. Commissioner, 91 T.C. 1, 12
(1988); Baumgardner v. Commissioner, 251 F.2d 311, 322 (9th Cir.
1957), aff’g T.C. Memo. 1956-112. Fraud may be shown by
circumstantial evidence; direct evidence of a taxpayer’s fraudulent
intent is seldom available. See Petzoldt, 92 T.C. at 699. The taxpayer’s
entire course of conduct may establish the requisite fraudulent intent.
See Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992). Fraudulent
intent may also be inferred when a taxpayer files a document intending
to conceal, mislead, or prevent the collection of tax. Durland v.
Commissioner, T.C. Memo. 2016-133, at *79.

       Courts often rely on various “badges” of fraud to find
circumstantial evidence of fraud. Bradford v. Commissioner, 796 F.2d
303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Campfield v.
Commissioner, T.C. Memo. 1996-383, 1996 WL 467816, at *9, aff’d, 133
F.3d 906 (2d Cir. 1997) (unpublished table decision). These badges focus
on whether the taxpayer engaged in certain conduct that is indicative of
fraudulent intent, such as (1) understating income; (2) failing to
maintain adequate records; (3) offering implausible or inconsistent
explanations; (4) concealing income or assets; (5) failing to cooperate
with tax authorities; (6) engaging in illegal activities; (7) providing
incomplete or misleading information to the taxpayer’s tax return
preparer; (8) offering false or incredible testimony; (9) filing false
documents, including filing false income tax returns; (10) failing to file
tax returns; and (11) engaging in extensive dealings in cash. See
Bradford v. Commissioner, 796 F.2d at 307–08; Parks v. Commissioner,
94 T.C. 654, 664–65 (1990); Recklitis v. Commissioner, 91 T.C. 874, 910
(1988). The existence of any one badge is not dispositive, but the
existence of several badges is persuasive circumstantial evidence of
fraud. Niedringhaus, 99 T.C. at 211.

       Several badges of fraud are evident in this case. Mr. Gondal
understated his income with the intent to evade taxes. Specifically, he
concealed the understatement through cash withdrawals and payment
of personal expenses from business accounts. He then failed to report a
substantial amount of money he received, which we have determined
constituted constructive dividends. Mr. Gondal did so fraudulently and
with the intent to evade tax. Relatedly, Mr. Gondal—fraudulently and
with the intent to evade tax—misreported his exemptions, net
investment income tax, self-employment tax, earned income tax credit,
and additional child tax credit. In addition, Mr. Gondal (fraudulently,
and with the intent to evade tax) underreported his tax due. He also
failed to maintain adequate records or submit them in connection with
                                  11

[*11] the examination, which was done fraudulently and with the intent
to evade tax.

       Accordingly, respondent has demonstrated by clear and
convincing evidence that Mr. Gondal had fraudulent intent when he
underpaid his income tax. Mr. Gondal has neither argued nor shown
that any amount should not be subject to the civil fraud penalty.
See, e.g., Kamal v. Commissioner, T.C. Memo. 2023-80, at *28. Thus, the
Court holds that Mr. Gondal is liable for the section 6663 civil fraud
penalties on the entire underpayment of tax for each of the tax years at
issue.

IV.   Conclusion

      In conclusion, we will grant respondent’s Motion for Summary
Judgment (Doc. 14), and we sustain the Commissioner’s deficiency
determinations as to Mr. Gondal and Ms. Asmat. We also sustain the
Commissioner’s determinations of civil fraud penalties as to Mr. Gondal.

       We have considered all of the arguments made by the parties, and
to the extent not mentioned above, we conclude that they are moot,
irrelevant, or without merit.

      To reflect the foregoing,

      An appropriate order will be issued.