Court Opinion

ID: 6338171
Source: CourtListenerOpinion
Date Created: 2022-05-05 19:02:04.384319+00
Date Added: 2024-06-11T09:25:09.776512
License: Public Domain

United States Tax Court

                          T.C. Memo. 2022-45

       GREGORY J. PODLUCKY AND KARLA S. PODLUCKY,
                        Petitioners

                                   v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                              —————

Docket No. 453-17.                                    Filed May 5, 2022.

                              —————

Gregory J. Podlucky and Karla S. Podlucky, pro sese.

Kirsten E. Brimer, Harry J. Negro, Douglas C. Rennie, Chelsey M. Pear-
son, Francesca M. Ugolini, Curtis C. Pett, Ronald S. Collins, and Laurel
B. Stout, for respondent.

       MEMORANDUM FINDINGS OF FACT AND OPINION

       LAUBER, Judge: During 2003–2006 petitioner Gregory Pod-
lucky extracted more than $30 million from a corporation he controlled
to purchase for himself and his wife luxury jewelry and a mansion,
among other things. In 2009 petitioners were indicted in the U.S. Dis-
trict Court for the Western District of Pennsylvania for crimes including
mail fraud, money laundering, and tax evasion. Both were convicted
and sentenced to lengthy terms of imprisonment.

      After petitioners were remanded to custody, the Internal Revenue
Service (IRS or respondent) completed a civil examination of their 2003–
2006 tax returns. In 2016 the IRS determined deficiencies of $476,123,
$1,189,550, $1,091,254, and $2,024,775, respectively, plus civil fraud
penalties (against Mr. Podlucky only) of $357,092, $892,163, $818,441,
and $1,518,581, respectively. Petitioners dispute these determinations
and contend that Mrs. Podlucky is entitled to relief from joint and

                           Served 05/05/22
                                             2

[*2] several liability under section 6015. 1 For the reasons that follow,
we sustain the IRS’s deficiency and penalty determinations and hold
that Mrs. Podlucky is not entitled to “innocent spouse” relief.

                               FINDINGS OF FACT

       The following facts are drawn from the pleadings, the trial testi-
mony, documents admitted into evidence at trial, and a stipulation of
facts with attached exhibits admitted into evidence under Rule 91(f).
Petitioners Gregory Podlucky (Greg) and Karla Podlucky (Karla), hus-
band and wife, filed joint returns for the four tax years at issue. When
they filed the petition, Greg was incarcerated in Fort Dix, New Jersey,
and Karla resided in Newhall, California.

I.      Background

      Greg is a certified public accountant. He graduated from West
Virginia University in 1984 with a degree in accounting and finance.
After graduating he worked for his father, who owned a brewing com-
pany in Pennsylvania.

       In the 1990s Greg started his own beverage bottling business,
originally called Genesis, Inc. In 1995 he changed the company’s name
to Global Beverage Systems, Inc., and expanded its product line. In
2002 he changed its name to Le-Nature’s, Inc. (LNI). LNI, a C corpora-
tion, specialized in bottling waters, teas, and similar beverages.

      At all relevant times Greg was LNI’s chief executive officer (CEO),
majority shareholder, and chairman of the board. He headquartered
LNI in Latrobe, Pennsylvania, about 12 miles from Ligonier, Pennsyl-
vania, where he and Karla lived. He formed a subsidiary called Tea
Systems International to sell tea concentrate to other bottlers. LNI had
accounts at Merrill Lynch and various banks, and these financial rec-
ords were introduced into evidence at trial.

      During its early years LNI appears to have been successful. It
grew rapidly, employing roughly 100 people by 2004. Greg hired his
brother to serve as the company’s chief operating officer. Under Greg’s

        1 Unless otherwise indicated, all statutory references are to the Internal Reve-

nue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and all Rule references are to the Tax Court Rules of Practice and Procedure. We
round all monetary amounts to the nearest dollar.
                                    3

[*3] leadership LNI reported steadily rising year-over-year revenues
and profits.

      During the tax years at issue LNI had two minority shareholders,
Smith Whiley & Co. (Smith Whiley) and George K. Baum Capital Part-
ners (Baum). Both were private equity funds. Venita Fields, Smith
Whiley’s managing director, had learned about LNI in 1999 from an in-
vestment bank. She was interested in “alternative beverages” as an in-
vestment concept and believed that LNI might be attractive. On her
recommendation Smith Whiley in 2000 invested $10 million in LNI.

        In connection with this investment Smith Whiley was given one
seat on LNI’s board, which was occupied by Ms. Fields. Smith Whiley
purchased another $5 million of LNI stock in 2002. It was then given a
second seat on LNI’s board, which was occupied by Ruth Huet. Both
testified at trial of this case. Baum, the other minority shareholder, held
the third outside seat on LNI’s board. LNI also secured hundreds of
millions of dollars in debt financing from larger financial institutions,
including AIG, Wachovia, Wells Fargo, and Merrill Lynch.

       When recommending the initial investment in LNI, Ms. Fields
envisioned a holding period of about six years. In 2005, as that period
neared its end, Smith Whiley considered cashing out its investment. Ms.
Fields believed, on the basis of quarterly and annual reports furnished
to her, that LNI had enjoyed a “sharp incline in revenues and profits.”
Sale of the LNI stock, she thought, would generate a significant return
on Smith Whiley’s investment.

       Ms. Fields coordinated with Baum, the other minority share-
holder, to investigate possible sale of their stock (or of the company).
They hired an investment banker to estimate LNI’s value and look for
potential buyers. Ms. Fields received expressions of interest from sev-
eral buyers, but no deal ever closed. Ms. Fields testified that Greg “sab-
otaged” the negotiations by refusing to give potential buyers access to
LNI’s accounting records. Rather than sell the company, Greg insisted
on expanding its operations by building a production facility in Florida,
but he never received board authorization to do that.

       In May 2006 the minority shareholders sued LNI in the Delaware
Chancery Court. See George K. Baum Cap. Partners, LP v. Le-Nature’s,
Inc., No. CA2158 (Del. Ch. filed May 16, 2006). They alleged that Greg
had intentionally obstructed their attempts to sell their stock by block-
ing access to LNI’s books and records. A few months later AIG, one of
                                   4

[*4] LNI’s lenders, informed the minority shareholders of its belief that
Greg had forged documents in order to secure loans and had used loan
proceeds to purchase millions of dollars of assets for himself and his
wife.

        After receiving this information, the chancery court in October
2006 removed Greg as CEO and appointed a custodian to take control of
LNI. Salvatore LoBiondo, the custodian’s financial restructuring spe-
cialist, was directed to manage LNI on an interim basis and review its
financial records to determine whether it could continue to operate. Mr.
LoBiondo quickly discovered that LNI had maintained two sets of books:
one set that reported actual sales and profits, and another that reported
fictitious sales and profits. The gap between the two sets of figures was
huge: In one year LNI reported roughly $300 million in revenue, but its
actual revenues were closer to $30 million.

       These findings prompted LNI’s creditors to file an involuntary
bankruptcy petition against it in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. The bankruptcy court granted that
petition and directed Mr. LoBiondo to continue to manage LNI. By the
end of November 2006 Mr. LoBiondo concluded that LNI could not be
resuscitated. The company’s Latrobe and Arizona facilities were closed,
and it ceased operations. The minority shareholders lost virtually all of
their investments, and LNI’s lenders lost more than $600 million.

II.   Criminal Investigation

       In December 2006 the Department of Justice, the IRS Criminal
Investigation Division (CID), and the Postal Inspection Service began
investigating petitioners for criminal wrongdoing. The Government be-
lieved that Greg had supplied LNI’s lenders and minority shareholders
with false financial documents to induce them to invest in LNI. And the
Government believed that Greg had extracted funds from LNI, through
a money laundering scheme, to purchase luxury goods for himself and
his wife.

      CID uncovered evidence that Greg had directed one of his employ-
ees to keep accounting records using two different software systems:
One system was used to record LNI’s actual results, and the other was
used to create fictitious (and much more favorable) results. Greg told
this employee “what he wanted LNI’s sales to be” and instructed her to
create fake invoices to support the fictitious sales numbers. This em-
ployee, who also pleaded guilty to criminal charges, helped Greg
                                          5

[*5] fabricate checks, create fictitious banking records, and generate
false financial statements for LNI. The Government found on Greg’s
computer “templates” that he used to photoshop checks and bank state-
ments. Greg used these bogus documents to induce lenders and poten-
tial investors to advance funds to the business.

       The investigation also revealed that Greg had siphoned money
out of LNI by writing checks on LNI’s accounts and by wiring funds from
those accounts to two shell companies he controlled: GVS Services (GVS)
and Melissa Morgan Capital Corp. (2MC), the latter being named after
his daughter. 2 There is no evidence that GVS or 2MC engaged in any
meaningful business activities. Both were in essence “incorporated
pocketbooks” through which Greg channeled funds in an effort to conceal
LNI’s identity as the source. GVS and 2MC had numerous bank and
brokerage accounts, and their financial records were introduced into ev-
idence at trial.

      The banking records showed that Greg had siphoned more than
$30 million out of LNI to purchase assets for himself and his wife.
Roughly 70% of the assets thus purchased consisted of luxury jewelry—
mostly women’s jewelry—including bracelets, necklaces, diamond rings,
and watches designed by Chopard, Patek Philippe, and Rolex.

        When purchasing jewelry, Greg (or his employee) would often cre-
ate fictitious invoices from LNI’s suppliers. Greg would wire funds from
LNI to a bank account in the name of 2MC or GVS, supposedly in pay-
ment of these invoices. Greg or Karla would then write checks on these
accounts to jewelry vendors. Criminal investigators analyzed these
checks and bank transfers and ascertained that Greg used LNI’s funds
to acquire more than $22 million in jewelry during 2003–2006.

       Greg needed a safe place to store all this jewelry. He directed an
employee to build a “secret room” at LNI’s headquarters in Latrobe. The
secret room was described as “a corner of another room that had been
walled off with cinder block.” To enter the room an individual had to
walk through “a small metal door, lift a rug, and crawl.” Criminal in-
vestigators executed a search warrant and found in the room commer-
cial grade safes stocked with gemstones, necklaces, watches, bracelets,
and diamond rings, as well as filing cabinets cataloging each piece.

          2 Greg created several partnerships related to 2MC; for convenience we refer

to all of these related entities as “2MC.”
                                    6

[*6] Needless to say, LNI’s board of directors did not know about this
secret room or its contents.

       Greg also used company funds to purchase real estate that he di-
verted to his personal use. In 2002 the board of directors approved an
expansion of the Latrobe bottling plant; the new facilities included am-
ple space for conference rooms and employee offices. But Greg insisted
that LNI also purchase a 4.7-acre plot of land (Lot 21) in Ligonier. This
property was 12 miles from the bottling plant, but it was adjacent to
petitioners’ primary residence. LNI never listed Lot 21 as a corporate
asset on its financial statements. The property was zoned for residential
(not commercial) use; at no time did Greg or LNI seek to change its zon-
ing.

      In 2003 LNI transferred Lot 21 to petitioners for $1. At trial Ms.
Huet credibly testified that the board of directors never approved this
transfer. Greg cross-examined Ms. Huet and showed her board meeting
notes that purported to grant approval. Ms. Huet reiterated that the
board never approved the proposal and that the document in question
appeared to be one of many “board document[s] that [Greg] altered.”

       Later that year petitioners applied for, and received, a building
permit to construct on Lot 21 a 12,071-square-foot single-family house.
They hired an architect and a general contractor known in the area for
undertaking “high-end residential projects.” One of the invoices re-
ferred to the property as the “Podlucky Gate House.” The architects and
contractors were generally paid by checks drawn on 2MC or GVS bank
accounts. The house was described as a “mansion” with six bedrooms
and nine baths.

      CID also discovered that Greg was an avid collector of toy trains,
preferring the Lionel brand. In 2005 and 2006 Greg used LNI’s funds to
purchase Lionel trains from a variety of vendors, including Toy Trains
Unlimited, Nicholas Smith Trains, Eastside Trains, and the Train En-
gineer. In 2005 he placed orders totaling $1,066,628, and in 2006 he
placed orders totaling $76,662. He typically purchased two of each item,
leaving one in its original packaging to preserve it in mint condition. He
stored the model trains in LNI’s warehouse. LNI’s board of directors
had no knowledge of, and did not approve, these purchases.

       Finally, CID questioned a $10,772 college tuition payment for pe-
titioners’ son, Jesse Podlucky. In 2004 Jesse attended Saint Vincent
College. On May 3, 2004, Greg wired $750,000 from LNI to one of 2MC’s
                                    7

[*7] bank accounts. Five days later, Karla drew a check on 2MC’s ac-
count for $10,772, payable to Saint Vincent College. This covered two
semesters of tuition, a parking ticket assessed by the school, and other
miscellaneous fees.

       In September 2009 Greg was indicted on counts of mail fraud,
conspiracy to commit money laundering, and attempting to evade or de-
feat tax in violation of section 7201. The tax charges were based on his
failure to report roughly $35 million of income, in the form of construc-
tive distributions from LNI. Greg pleaded guilty to one count of tax eva-
sion (for 2005), as well as one count of conspiracy and mail fraud. He
was sentenced to 20 years’ imprisonment.

       Karla was indicted on counts of money laundering and conspiracy
to commit money laundering. The Government alleged that Karla sold
jewelry during the investigation and attempted to conceal the proceeds
in trusts and shell companies. She was tried in the U.S. District Court
for the Western District of Pennsylvania. In November 2011 she was
found guilty of money laundering and sentenced to 51 months’ impris-
onment. Her conviction was affirmed on appeal. See United States v.
Podlucky, 567 F. App’x 139 (3d Cir. 2014).

      The Government called Brent Nestor to testify as a witness dur-
ing Karla’s criminal trial. At that time Mr. Nestor served as senior vice
president of sales for Van Cleef & Arpels (VCA), working in the com-
pany’s New York office. Mr. Nestor testified about Greg’s jewelry pur-
chases from VCA, explaining that most of the jewelry was custom made
for Karla. To enable these orders to be filled, Mr. Nestor traveled to
Pennsylvania to take Karla’s measurements so that rings, bracelets, and
necklaces could be sized to fit her exactly.

       Mr. Nestor testified that Greg “was quite specific about making
the pieces a certain size to fit his wife” and that Karla had personally
confirmed her own jewelry preferences. He recalled Karla’s writing in
one email that she “like[s] the stones to be the center stars,” that “dia-
mond encrusted bangles are not comfortable,” and that she “like[s] sim-
ple, classic, tailored designs.” With respect to a special “diamond wed-
ding band” request, Mr. Nestor emailed Greg saying that VCA’s
                                           8

[*8] “designer has revised several proposals because we want to make
sure the motifs around the ring are comfortable for Mrs. P to wear.” 3

       If petitioners had a particularly unique or special request, Mr.
Nestor would refer it to Lily Vongwattanakit, VCA’s director of gem pur-
chasing and special orders. Her role was to discuss the request with the
client, take measurements, and send the relevant information to VCA’s
headquarters in Paris. Ms. Vongwattanakit credibly testified during the
Tax Court trial that she met with petitioners to discuss their special
requests and take Karla’s measurements. Ms. Vongwattanakit testified
that she had placed a number of these special orders for petitioners. Pe-
titioners purchased so much jewelry from VCA that its employees called
their orders the “Podlucky Collection.”

        Petitioners also worked closely with Angela Patin, a sales repre-
sentative for Traditional Jewelers. Ms. Patin credibly testified during
the Tax Court trial that Greg generally placed the orders but that the
jewelry “was mostly for Karla.” The jewelry included custom made
rings, earrings, bracelets, and necklaces. Ms. Patin credibly testified
that she took Karla’s measurements so that the jewelry could be sized
to fit her exactly.

III.    IRS Examination and Tax Court Proceedings

       Following petitioners’ criminal investigation, the IRS in 2012 in-
itiated a civil examination of their 2003–2006 joint Federal income tax
returns. For these years petitioners reported between $350,000 and
$600,000 of income. The case was assigned to Revenue Agent (RA) Lisa
Gaiser. RA Gaiser reconstructed petitioners’ income by reviewing bank
records, checks, invoices, and other documents obtained during the
criminal investigation. She also relied on the prosecution report that
underlay the Government’s criminal tax evasion charges. Evaluating
this information, RA Gaiser determined that petitioners had received

         3 Respondent filed a Motion in Limine requesting that Mr. Nestor’s prior testi-

mony be admitted under Rule 804(b)(1) of the Federal Rules of Evidence. That provi-
sion provides an exception to the hearsay rules when the declarant is unavailable, the
testimony was given “at a trial,” and the testimony is “now offered against a party who
had . . . an opportunity and similar motive to develop it by direct, cross-, or redirect
examination.” Fed. R. Evid. 804(b)(1). Mr. Nestor resides in Switzerland and was
unavailable at the time of the Tax Court trial. By Order served October 21, 2021, we
granted respondent’s motion.
                                           9

[*9] unreported income during 2003–2006, in the form of constructive
distributions from LNI, as follows:

     Year      Jewelry         Lot 21           Trains      Tuition        Total

     2003    $6,086,621        $347,071            —          —       $6,433,692

     2004     4,552,786       3,322,063            —        $10,772       7,885,621

     2005     2,150,637       3,899,182        $1,066,628     —           7,116,447

     2006     9,959,935       3,418,351           76,662      —       13,454,948

     Total   $22,749,979     $10,986,667       $1,143,290   $10,772   $34,890,708

       RA Gaiser then calculated petitioners’ taxable income using the
rules set forth in section 301. It provides that distributions from a C cor-
poration are taxable as dividends to the extent of the corporation’s earn-
ings and profits (E&P). See §§ 301(c)(1), 316(a). If distributions exceed
E&P, they are nontaxable returns of capital to the extent of the share-
holder’s basis in his stock. See § 301(c)(2). Distributions in excess of
basis are taxed as capital gain. See §§ 301(c)(3), 1001(a).

        Setting aside LNI’s fictitious financial statements, RA Gaiser de-
termined that the company actually had zero E&P during 2003–2006.
She determined that Greg had $3,354,021 of basis in his LNI stock, so a
portion of the 2003 distribution constituted a nontaxable return of capi-
tal. She determined that a dividend of $93,500, which petitioners re-
ported as having been paid by LNI in 2004, should be recharacterized as
capital gain given the absence of E&P. RA Gaiser accordingly deter-
mined for each year additional income in the form of long-term capital
gain, producing deficiencies (after other minor income adjustments) and
civil fraud penalties (against Greg only) as follows:

             Year    Capital Gain          Deficiency       Fraud Penalty

             2003        $3,079,671         $476,123          $357,092

             2004         7,979,121        1,189,550           892,163

             2005         7,116,447        1,091,254           818,441

             2006        13,454,948        2,024,775          1,518,581

             Total   $31,630,187           $4,781,702        $3,586,277
                                          10

[*10] In April 2012 RA Gaiser prepared Form 11661, Fraud Develop-
ment Recommendation–Examination. On that form she recommended
that the IRS assert against Greg fraud penalties under section 6663 for
2003–2006. She forwarded the case file to Renee Zaffino, her supervisor.
Ms. Zaffino signed the form on April 23, 2012, as RA Gaiser’s “Group
Manager.” Susan Harper, an IRS fraud technical advisor, signed the
Form 11661 on May 14, 2012.

      On March 22, 2013, RA Gaiser sent petitioners a 30-day letter.
She attached to that letter Form 4549–A, Income Tax Discrepancy Ad-
justments. These documents communicated to Greg that the IRS pro-
posed to assert fraud penalties against him.

       On November 21, 2016, the IRS issued petitioners a notice of de-
ficiency for 2003–2006. The notice determined deficiencies totaling
$4,781,702 and fraud penalties against Greg totaling $3,586,277. Peti-
tioners timely petitioned this Court, proceeding pro se.

       Throughout these proceedings petitioners have refused to cooper-
ate with respondent in preparing this case for trial. They refused to
stipulate a single document, and they refused to stipulate undisputed
facts, both in violation of Rule 91(a)(1). By Order served July 15, 2021,
we granted respondent’s Motion to deem certain facts, documents, and
information established for purposes of this case. See Rule 91(f).

        Greg has advanced many frivolous arguments and submitted fil-
ings plainly intended to delay these proceedings: He has challenged the
income tax as unconstitutional; he has asserted that we lack personal
and subject matter jurisdiction over him; and he has demanded that we
award him $22 billion in damages for operating as a “Star Chamber
Court.” 4 Greg has filed ten improper appeals from our interlocutory or-
ders. 5

       4  Petitioners improperly attached “exhibits” and other documentary evidence
to their post-trial briefs. By Order served March 23, 2022, we struck these “exhibits”
from the record. We explained that the record had been closed since October 2021 and
that documents cannot be “interjected into the record as attachments to pleadings or
briefs.” We did not consider these documents when preparing this opinion.
        5 Greg initially filed these interlocutory appeals in the U.S. Court of Appeals

for the Third Circuit. After the Department of Justice moved to enjoin him from filing
any more frivolous appeals, he began filing appeals in the U.S. Court of Appeals for
the Ninth Circuit.
                                        11

[*11] Several days before trial Greg filed 3,800 pages of documents.
One of these filings included amended joint Federal income tax returns
for 2003–2006. These amended returns, which were signed by petition-
ers, 6 reported all the additional income determined in the notice of defi-
ciency. In an attachment petitioners explained that “we are amending
our 2003, 2004, 2005 and 2006 tax returns . . . to include all the audit
adjustments as determined by [the IRS].”

        Petitioners alleged that the sentencing court had ordered Greg to
pay restitution of $660 million, that certain of their assets had been for-
feited, and that they were allowed loss deductions that would completely
offset the deficiencies determined by the IRS. They asserted that they
were therefore “rescinding” their petitions, that no trial should be held,
and that this case should be dismissed.

       We informed petitioners that, unless they wished to make a full
concession, the case would proceed to trial. We explained “that in defi-
ciency cases brought pursuant to section 6213 a taxpayer may not with-
draw a petition in order to avoid a decision.” Davidson v. Commissioner,
144 T.C. 273, 274 (2015); Estate of Ming v. Commissioner, 62 T.C. 519,
521 (1974) (“[A] taxpayer may not unilaterally oust the Tax Court from
jurisdiction which, once invoked, remains unimpaired until it decides
the controversy.”). Under Rule 123(d), dismissal of a case, other than a
dismissal for lack of jurisdiction, “shall operate as an adjudication on
the merits.” Thus, if we were to dismiss this case as petitioners sug-
gested, we would be required to enter a decision against them in the full
amounts of the deficiencies and penalties determined in the notice of
deficiency. The case accordingly proceeded to trial.

                                   OPINION

I.    Unreported Income

       Section 61(a) provides that “gross income means all income from
whatever source derived.” In cases of unreported income, the Commis-
sioner must establish an evidentiary foundation connecting the tax-
payer to the income-producing activity, Weimerskirch v. Commissioner,
596 F.2d 358, 361 (9th Cir. 1979), rev’g 67 T.C. 672 (1977), or demon-
strate that the taxpayer actually received income, Edwards v. Commis-
sioner, 680 F.2d 1268, 1270–71 (9th Cir. 1982). Once the Commissioner
has met his threshold burden, the burden shifts to the taxpayer to show

      6   Karla signed the amended returns as “Innocent Spouse KSP.”
                                          12

[*12] that the Commissioner’s determinations are arbitrary or errone-
ous. 7 See Hardy v. Commissioner, 181 F.3d 1002, 1004–05 (9th Cir.
1999), aff’g T.C. Memo. 1997-97; Anastasato v. Commissioner, 794 F.2d
884, 887–88 (3d Cir. 1986), vacating and remanding T.C. Memo. 1985-
101.

       To satisfy his burden respondent produced extensive bank rec-
ords, invoices, checks, and receipts gathered during the criminal and
civil examinations. During petitioners’ criminal investigation the Gov-
ernment discovered a “secret room” in LNI’s office building, which con-
tained jewelry worth well in excess of $22 million. 8 The documents in-
troduced into evidence at trial showed that Greg used roughly $11 mil-
lion of LNI’s funds to finance his Lot 21 construction project and spent
$1 million on his toy train collection. During 2003–2006 Greg made
these personal expenditures by writing checks on LNI’s accounts and by
wiring money from LNI to one of the shell companies he controlled.

       The IRS computed the deficiencies for 2003–2006 by reviewing
these records in conjunction with the Government’s prosecution report.
The IRS ultimately determined that Greg, as LNI’s majority share-
holder, received from it constructive distributions of almost $35 million.
Respondent has clearly supplied a threshold evidentiary foundation con-
necting petitioners to unreported income. See Petzoldt v. Commissioner,
92 T.C. 661, 687 (1989) (holding that the IRS has great latitude in re-
constructing a taxpayer’s income, and the reconstruction “need only be
reasonable in light of all surrounding facts and circumstances”).

       Petitioners thus bear the burden of proving that respondent’s de-
terminations of unreported income, as set forth in the notice of defi-
ciency, are “arbitrary or erroneous.” See Hardy, 181 F.3d at 1004; Ana-
stasato, 794 F.2d at 887–88. Petitioners’ submissions have not been a
model of clarity. Early in the case they insisted that the income tax laws
are unconstitutional. More recently they submitted copies of amended
returns reporting all the income determined in the notice of deficiency.

       7  Petitioners assert that the RA lacked authority under section 7608 and that
the evidence introduced at trial is “poisoned fruit of the poisonous tree.” This is a
frivolous argument. Section 7608, which governs certain criminal enforcement actions,
does not limit the Commissioner’s authority to conduct civil examinations under sec-
tion 6201, determine deficiencies under section 6212, or collect taxes under section
6301.
        8 The criminal investigators actually discovered $33,972,473 of jewelry in the

“secret room.” But the IRS determined that only $22,749,979 worth of jewelry had
been constructively distributed to petitioners during the 2003–2006 tax years at issue.
                                   13

[*13] These returns could be taken as admissions by petitioners that
those unreported income numbers are correct. See Badaracco v. Com-
missioner, 464 U.S. 386, 399 (1984) (“An amended return, of course, may
constitute an admission . . . .”); Lare v. Commissioner, 62 T.C. 739, 750
(1974) (“Statements made in a tax return signed by a taxpayer may be
treated as admissions.”), aff’d, 521 F.2d 1399 (3d Cir. 1975).

       At trial petitioners focused much attention on the IRS’s computa-
tions, questioning where the IRS “g[o]t the underpayment numbers
from.” In their post-trial brief they assert that these numbers “were
never corroborated, sustained, and detailed.” But petitioners presented
nothing credible to rebut the overwhelming amount of evidence linking
them to unreported income. They have submitted nothing but general
denials, which are “insufficient to meet [their] burden of nonpersua-
sion.” Anastasato, 794 F.2d at 888.

       Petitioners appear to contend that the IRS had the burden of pro-
ducing evidence to prove (for example) that the jewelry petitioners pur-
chased during 2003–2006 was worth $22,749,979. If that is petitioners’
argument, it is misconceived. Once the Commissioner produces evi-
dence linking taxpayers to unreported income—as respondent did—tax-
payers have the burden of proving that the IRS’s determinations of un-
reported income are “arbitrary and erroneous.” Id. at 887; see Keogh v.
Commissioner, 713 F.2d 496, 502 (9th Cir. 1983) (holding that the tax-
payers failed to prove that the Commissioner’s estimates were arbitrary
or erroneous where they advanced general denials and “self-serving tes-
timony”). Petitioners have not carried this burden; indeed, they made
no genuine effort at trial to do so.

       Petitioners alternatively contend that the assets they purchased
were acquired for LNI’s benefit, not for their own. Greg testified that he
purchased luxury jewelry because LNI was “diversifying [its] product
lines” and “dealing with Tibetan monks in Asia” who “want[ed] hard as-
sets” rather than cash. According to Greg, the monks had access to val-
uable species of tea, which LNI wished to acquire by using jewelry in
“bartering transactions.”

      This testimony was utterly implausible. Greg was unable to tell
the Court where the putative monks resided or confirm that the country
in which they lived produced tea. He could not explain why the monks
would prefer jewelry to the U.S. dollar as a medium of exchange. He
could not explain why Buddhist monks would be eager to acquire
women’s jewelry, particularly jewelry that was sized to fit Karla’s wrist,
                                          14

[*14] neck, and ring finger. And he could not explain why $22 million
of jewelry, if an asset of LNI, was neither shown on its balance sheet nor
brought to the attention of its directors.

       Greg’s testimony about Lot 21 was no more persuasive. He in-
sisted that the “Podlucky Gate House,” situated on land zoned for resi-
dential use, was intended to be used as a “training facility” for LNI’s
staff. He could not explain why LNI would have chosen to build an em-
ployee training facility next door to his house, 12 miles away from the
production facility in Latrobe. He could not explain why LNI needed a
separate training center, when its Latrobe facility had recently been ex-
panded to include ample space for conference rooms and employee of-
fices. He asserted that more space was needed for “300 new sales rep-
resentatives,” but he supplied no evidence that LNI ever considered hir-
ing 300 new workers, which would have quadrupled its workforce. He
could not explain why a training facility would have been configured as
a six-bedroom, nine-bath mansion. And he could not explain why, if the
house really was a training facility for LNI, Lot 21 was transferred to
him personally for $1, without board approval. 9

       Petitioners offered little testimony about the model train collec-
tion, apart from Greg’s assertion that the trains were intended for use
in a company “marketing campaign.” But he offered no evidence that
LNI had ever considered such a campaign, no evidence as to who was
supposed to conduct it, and no explanation as to how model trains could
usefully be deployed to advertise tea-flavored beverages. Assuming ar-
guendo that they could be so used, Greg could not explain why it was
necessary to acquire $1.1 million worth of model trains, including dupli-
cates of each item. 10

        9 Karla testified, in the alternative, that the Podlucky Gate House was in-
tended for use by religious missionaries whom she admired. We did not find that tes-
timony credible. In any event, that would have been a personal use, as opposed to a
business use of the company, and the Lot 21 expenditures would still be constructive
distributions. Cf. Magnon v. Commissioner, 73 T.C. 980, 994 (1980) (“The crucial test
of the existence of a constructive dividend is whether ‘the distribution was primarily
for the benefit of the shareholder.’”).
        10 Greg contended that LNI must have “owned” the model trains because the

bankruptcy court ultimately directed that they be sold for the benefit of creditors. The
conclusion does not follow from the premise. Greg extracted $35 million from LNI at
a time when he was defrauding LNI’s lenders and minority shareholders. Under these
circumstances, the bankruptcy trustee attempted to recoup what he could from the
assets Greg had wrongfully acquired. But this does not negate Greg’s receipt of gross
                                          15

[*15] Petitioners also contested the taxability of the $10,772 tuition
payment. At trial they asserted that this represented a stipend their
son earned for completing an internship with LNI. But they presented
no evidence of an internship agreement; no evidence that LNI’s board of
directors approved any internship or scholarship program; and no evi-
dence that LNI benefited from their son’s services. Nor could petitioners
explain why the tuition (plus a parking ticket and other fees) was paid
out of Greg’s shell company by Karla, who was not an officer of LNI. In
any event, even if LNI were thought to have derived some benefit from
the son’s participation in a college internship, petitioners have not
shown why such a payment—which relieved them of their own tuition
obligation—would be nontaxable. Cf. Hacker v. Commissioner, T.C.
Memo. 2022-16, at *17 (ruling that a shareholder “must include in gross
income payments the corporation made on the shareholder’s behalf”).

       In the alternative petitioners contend that they are entitled, un-
der section 165, to loss deductions that completely offset the income de-
termined in the notice of deficiency. They allege that the sentencing
court ordered Greg to pay $660 million of restitution and that certain of
their assets were forfeited to the Government following their convictions
in 2011. “Property forfeited pursuant to a taxpayer’s guilty plea,” they
say, “is properly characterized as a loss item.”

       This argument fails for at least three reasons. First, petitioners
have not properly raised this issue. They did not claim section 165 de-
ductions on their original returns, and they did not mention section 165
in the Petition. See Rule 34(b)(4) (“Any issue not raised in the . . . [peti-
tion] shall be deemed to be conceded.”). Rather, they advanced this new
argument one month before trial, in a filing in which they referred to
themselves as “Former Petitioners.” They asserted that the purported
loss deductions obviated the need for trial, demanding that their Tax
Court Petition be “withdrawn” or “rescinded.” They did not submit a
pre-trial memorandum, so respondent had no reason to believe that sec-
tion 165 deductions were actually at issue in this case. To permit peti-
tioners to raise this issue in a post-trial brief, after the trial record
closed, would be prejudicial to respondent.            See Seligman v.

income in the year the property was constructively distributed to him. This resembles
the embezzlement scenario: The fact that an embezzler repays the funds in a later year
does not negate his receipt of gross income in the year of the embezzlement. See Yerkie
v. Commissioner, 67 T.C. 388, 390 (1976) (“Although the proceeds of an embezzlement
are not obtained lawfully, they result in economic gains for the embezzler and, as such,
are included in his gross income for the year in which the funds were misappropriated.”
(citing James v. United States, 366 U.S. 213 (1961))).
                                    16

[*16] Commissioner, 84 T.C. 191, 199 (1985) (finding prejudice where
opposing party had no opportunity to present evidence on issue that was
not raised in the pleadings), aff’d, 796 F.2d 116 (5th Cir. 1986).

       In any event, petitioners have failed to prove that they are enti-
tled to loss deductions. Section 165(a) permits a taxpayer to deduct “any
loss sustained during the taxable year” if “not compensated for by insur-
ance or otherwise.” Assuming arguendo that Greg was ordered to pay
restitution, petitioners offered no evidence that he actually made resti-
tution payments or (if so) how much restitution he paid. And while pe-
titioners assert that their property was forfeited, they offered no evi-
dence to establish which assets were forfeited or the value of such prop-
erty.

       Finally, petitioners have not established that they sustained any
loss during the tax years at issue, i.e., during 2003–2006. See Treas.
Reg. § 1.165-1(d)(1) (providing that loss deductions are allowed “for the
taxable year in which the loss is sustained”). To the contrary, their al-
leged losses would have occurred (if at all) after 2006, when assets were
allegedly “forfeited pursuant to [Greg’s] guilty plea” or when restitution
ordered by the sentencing court was allegedly paid. See Stephens v.
Commissioner, 905 F.2d 667, 671 (2d Cir. 1990) (noting that taxpayers
who repay embezzled funds might be “entitled to a deduction in the year
in which the funds are repaid”), rev’g 93 T.C. 108 (1989); Norman v.
Commissioner, 407 F.2d 1337, 1338 (3d Cir. 1969) (per curiam) (noting
that “restitution [paid] in a subsequent year might provide a proper ba-
sis for a deduction allowable in that year”), aff’g T.C. Memo. 1968-40;
Treas. Reg. § 1.6001-1(a) (requiring taxpayers to identify the deduction,
show that they have met all relevant requirements, and keep books or
records to substantiate the amounts claimed).

II.   Fraud Penalties

       Section 6501(a) generally requires the IRS to assess a tax within
three years after the return was filed. The period of limitations is ex-
tended to six years where the taxpayer omits from gross income an
amount “in excess of 25 percent of the amount of gross income stated in
the return.” § 6501(e)(1)(A)(i). The notice of deficiency in this case was
issued on November 21, 2016, more than six years after the period of
limitations began to run for 2006, the last year at issue.

        However, section 6501(c)(1) provides that, where a taxpayer has
filed “a false or fraudulent return with the intent to evade tax,” there is
                                   17

[*17] no period of limitations, and the tax “may be assessed . . . at any
time.” In the case of a joint return, fraud by either taxpayer suspends
indefinitely the period of limitations for both taxpayers. Vannaman v.
Commissioner, 54 T.C. 1011, 1018 (1970); see Richardson v. Commis-
sioner, 509 F.3d 736, 745 (6th Cir. 2007) (holding that fraud by one
spouse “lifts the statute of limitations” for both), aff’g T.C. Memo 2006-
69; Ballard v. Commissioner, 740 F.2d 659, 663 (8th Cir. 1984) (same),
aff’g in part, rev’g in part T.C. Memo 1982-466.

       “[T]he determination of fraud for purposes of the period of limita-
tions on assessment under section 6501(c)(1) is the same as the deter-
mination of fraud for purposes of the penalty under section 6663 . . . .”
Neely v. Commissioner, 116 T.C. 79, 85 (2001). Whether the underpay-
ments at issue were due to fraud thus determines both whether Greg is
liable for civil fraud penalties and whether respondent can assess the
deficiencies.

      A.     Supervisory Approval

       Section 6751(b)(1) provides that “[n]o penalty under this title
shall be assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the in-
dividual making such determination.” As a threshold matter, respond-
ent must show that he complied with section 6751(b)(1). See Chai v.
Commissioner, 851 F.3d 190, 221 (2d Cir. 2017) (ruling that “compliance
with § 6751(b) is part of the Commissioner’s burden of production” under
§ 7491(c)), aff’g in part, rev’g in part T.C. Memo. 2015-42.

        In Belair Woods, LLC v. Commissioner, 154 T.C. 1, 14–15 (2020),
we explained that the “initial determination” of a penalty assessment is
typically embodied in a letter “by which the IRS formally notifie[s] [the
taxpayer] that the Examination Division ha[s] completed its work and
. . . ha[s] made a definite decision to assert penalties.” Once the Com-
missioner introduces evidence sufficient to show written supervisory ap-
proval, the burden shifts to the taxpayer to show that the approval was
untimely, i.e., “that there was a formal communication of the penalty [to
the taxpayer] before the proffered approval” was secured. Frost v. Com-
missioner, 154 T.C. 23, 35 (2020).

      Respondent has produced the Form 11661 by which RA Gaiser
recommended assertion of fraud penalties against Greg. RA Gaiser’s
immediate supervisor, Ms. Zaffino, signed that form on April 23, 2012.
The recommendation to assert fraud penalties was communicated to
                                          18

[*18] Greg 11 months later, in a 30-day letter dated March 22, 2013,
with an attached Form 4549–A showing the penalty calculation. Re-
spondent has thus met his burden of production by showing timely ap-
proval. See Frost, 154 T.C. at 35. 11

       B.      Existence of Fraud

       “If any part of any underpayment of tax required to be shown on
a return is due to fraud,” section 6663(a) imposes a penalty of 75% of the
portion of the underpayment attributable to fraud. Respondent has the
burden of proving fraud, and he must prove it by clear and convincing
evidence. See § 7454(a); Rule 142(b). To sustain his burden, respondent
must establish two elements: (1) that there was an underpayment of tax
for each year at issue and (2) that at least some portion of the underpay-
ment for each year was due to fraud. See Hebrank v. Commissioner, 81
T.C. 640, 642 (1983).

       Where the Commissioner determines fraud penalties for multiple
tax years, his burden of proving fraud “applies separately for each of the
years.” Vanover v. Commissioner, T.C. Memo. 2012-79, 103 T.C.M.
(CCH) 1418, 1420 (quoting Temple v. Commissioner, T.C. Memo. 2000-
337, 80 T.C.M. (CCH) 611, 618, aff’d, 62 F. App’x 605 (6th Cir. 2003)). If
the Commissioner proves that some portion of an underpayment for a
particular year was attributable to fraud, then “the entire underpay-
ment shall be treated as attributable to fraud” unless the taxpayer
shows, by a preponderance of the evidence, that the balance was not so
attributable. § 6663(b).

       For the reasons stated previously, respondent has carried his bur-
den of proving by clear and convincing evidence that Greg underreported
his income and underpaid his tax for 2003–2006. On August 24, 2021,
we granted respondent’s Motion for Partial Summary Judgment regard-
ing the existence of fraud for 2005. Because Greg was convicted of tax

        11 In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066

(9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020), the Ninth Circuit considered
the timeline for obtaining supervisory approval of “assessable penalties,” which are not
subject to deficiency procedures. The court held that, for an assessable penalty, super-
visory approval is timely if secured before the penalty is assessed or “before the rele-
vant supervisor loses discretion whether to approve the penalty assessment.” Id.
at 1074. The court suggested that, in a deficiency case such as this, the deadline for
securing supervisory approval would be the issuance of the notice of deficiency. Id.
at 1071 n.4. If that analysis were adopted here, supervisory approval of the fraud pen-
alties was clearly timely: Approval was secured in April 2012, and the notice of defi-
ciency was not issued until November 2016.
                                    19

[*19] evasion for that year, he is collaterally estopped from denying that
his underpayment for 2005 was due to fraud. See DiLeo v. Commis-
sioner, 96 T.C. 858, 885 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992); see also
Anderson v. Commissioner, 698 F.3d 160, 164–65 (3d Cir. 2012), aff’g
T.C. Memo. 2009-44; United States v. Schiff, 240 F. App’x 738 (9th Cir.
2006). At trial respondent thus bore the burden of proving that at least
some portions of the underpayments for 2003, 2004, and 2006 were due
to fraud.

       Fraud is intentional wrongdoing designed to evade tax believed
to be owing. Neely, 116 T.C. at 86. The existence of fraud is a question
of fact to be resolved upon consideration of the entire record. Estate of
Pittard v. Commissioner, 69 T.C. 391, 400 (1977). Fraud is not to be
presumed or based upon mere suspicion. Petzoldt, 92 T.C. at 699–700.
But because direct proof of a taxpayer’s intent is rarely available, fraud-
ulent intent may be established by circumstantial evidence. Id. at 699.
The Commissioner satisfies his burden of proof by showing that “the
taxpayer intended to evade taxes known to be owing by conduct intended
to conceal, mislead, or otherwise prevent the collection of taxes.” Parks
v. Commissioner, 94 T.C. 654, 661 (1990). The taxpayer’s entire course
of conduct may be examined to establish the requisite intent, and an
intent to mislead may be inferred from a pattern of conduct. Webb v.
Commissioner, 394 F.2d 366, 379 (5th Cir. 1968), aff’g T.C. Memo. 1966-
81; Stone v. Commissioner, 56 T.C. 213, 224 (1971).

       Circumstances that may indicate fraudulent intent, often called
“badges of fraud,” include but are not limited to: (1) understating in-
come, (2) keeping inadequate records, (3) giving implausible or incon-
sistent explanations of behavior, (4) concealing income or assets, (5) fail-
ing to cooperate with tax authorities, (6) engaging in illegal activities,
(7) supplying incomplete or misleading information to a tax return pre-
parer, (8) providing testimony that lacks credibility, (9) filing false doc-
uments (including false tax returns), (10) failing to file tax returns, and
(11) dealing in cash. See Schiff v. United States, 919 F.2d 830, 833 (2d
Cir. 1990); Bradford v. Commissioner, 796 F.2d 303, 307–08 (9th Cir.
1986), aff’g T.C. Memo. 1984-601; Parks, 94 T.C. at 664–65; Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988); Morse v. Commissioner, T.C.
Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d, 419 F.3d 829 (8th Cir.
2005). No single factor is dispositive, but the existence of several factors
“is persuasive circumstantial evidence of fraud.” Vanover, 103 T.C.M.
(CCH) at 1420–21. We conclude that at least eight of these badges
demonstrate that Greg acted with fraudulent intent during 2003, 2004,
and 2006.
                                  20

[*20]        1.    Understating Income

       A pattern of substantially understating income for multiple years
is strong evidence of fraud, particularly if the understatements are not
satisfactorily explained. See Vanover, 103 T.C.M. (CCH) at 1421. Greg
understated his income by $3,120,163 for 2003, $7,904,784 for 2004,
$7,184,409 for 2005, and $13,480,876 for 2006. The volume of this in-
come was extremely large relative to the income that Greg actually re-
ported for each year, which was between $350,000 and $600,000.

       During 2003–2006 Greg created false financial records to induce
lenders and investors to advance funds to LNI. The Third Circuit stated
that Greg’s scheme “bilked LNI’s investors and banks of more than $628
million.” Podlucky, 567 F. App’x at 141. He then extracted $35 million
of loan proceeds from the company to purchase luxury jewelry and a
mansion for himself and his wife. Given the source of this income, the
substantial amounts underreported, and Greg’s pattern of underreport-
ing, these understatements are persuasive evidence of fraudulent in-
tent.

             2.    Keeping Inadequate Records

       Greg not only failed to supply adequate records of his assets and
income but actively falsified documents during 2003–2006. He told one
of his employees “what he wanted [LNI’s] sales to be” and directed her
to “create fake invoices to support the fictitious sales numbers.” To-
gether they fabricated checks, created fictitious bank statements, and
generated fraudulent financial statements for LNI. Greg’s computer
contained “templates” that he used to photoshop bank checks and other
documents.

       As part of this scheme Greg maintained two sets of books for LNI.
He instructed his employee to use two separate software systems: one to
track the company’s actual results and the other to store the fraudulent
accounting records. Needless to say, Greg did not inform LNI’s inves-
tors, creditors, or outside shareholders that the records he supplied to
them were false.

       Greg also took steps to conceal LNI’s identity as the source of
funds used to purchase jewelry and fund the Podlucky Gate House.
Most of the payments to jewelers, architects, and contractors were
drawn on bank accounts of shell companies under Greg’s control, to
which he had wired funds from LNI. He fabricated invoices from sup-
pliers to create an illusory justification for these transfers. The
                                    21

[*21] creation of fictitious records supplies strong evidence of fraudulent
intent.

             3.     Giving Implausible or Inconsistent Explanations

       Greg offered to the IRS and the Court a variety of implausible and
inconsistent explanations about his income and assets. At trial he ar-
gued that he purchased diamond rings and necklaces, sized specifically
for Karla, because LNI was engaging in “barter” transactions with “Ti-
betan monks in Asia” who “want[ed] hard assets” rather than cash. And
he advanced the wholly implausible argument that a six-bedroom, nine-
bath mansion was intended to be used as a “training facility” for LNI’s
employees. As a certified public accountant and CEO of a large corpo-
ration, Greg must have known that these theories were untenable.

             4.     Concealing Income or Assets

       A willful attempt to evade tax may be inferred from a taxpayer’s
concealment of income or assets. Spies v. United States, 317 U.S. 492,
499 (1943). Greg intentionally concealed LNI’s true accounting records
in a set of books to which only he (and his partners in crime) had access.
He falsified LNI’s revenues and profits, and he concealed the fact that
he was funneling LNI’s funds to shell companies to purchase personal
assets.

       The clearest indication that Greg attempted to conceal assets is
that he built a “secret room” to hide assets. He hid more than $20 mil-
lion of jewelry in this “secret room,” tucked away behind a cinderblock
wall in LNI’s headquarters, which could be entered only by walking
through “a small metal door, lift[ing] a rug, and crawl[ing].” Greg’s en-
tire course of conduct reveals a deliberate intent to conceal income and
assets.

             5.     Failure to Cooperate with Tax Authorities

       Throughout these proceedings Greg refused to cooperate with re-
spondent in preparing this case for trial. He refused to stipulate undis-
puted facts and exhibits (e.g., the tax returns that petitioners them-
selves filed) in violation of Rule 91(a)(1). He made frivolous arguments
and submitted filings intended to delay proceedings: He challenged the
income tax as unconstitutional; he asserted that the Court lacks per-
sonal and subject matter jurisdiction over him; and he demanded that
the Court award him $22 billion in damages for operating as a “Star
Chamber Court.” This obstructive behavior is a badge of fraud. See
                                    22

[*22] Curtis v. Commissioner, T.C. Memo. 2013-12, 105 T.C.M. (CCH)
1100, 1104 (holding that the “assertion of frivolous arguments” and “tax-
protestor beliefs demonstrate a clear intent to evade” tax), aff’d, 648
F. App’x 689 (9th Cir. 2016).

             6.     Engaging in Illegal Activities

       During 2003–2006 Greg falsified LNI’s financial records to induce
investors and lenders to advance funds to the business. He extracted
$35 million from the company to purchase luxury jewelry and a man-
sion. In September 2009 he was indicted for multiple crimes and
pleaded guilty to tax evasion, mail fraud, and conspiracy. These illegal
activities are definite badges of fraud. See Catlett v. Commissioner, T.C.
Memo. 2021-102, at *19; Le v. Commissioner, T.C. Memo. 2020-27, 119
T.C.M. (CCH) 1165, 1173.

             7.     Lack of Credibility of Taxpayer’s Testimony

       We did not find Greg to be a credible witness. We have noted
above numerous specific points on which we found his testimony to lack
credibility. His primary defense—that he purchased inherently per-
sonal assets for LNI’s benefit—was wholly implausible in the light of the
illegal accounting scheme that he concealed from LNI’s investors and
creditors.

             8.     Filing False Documents

       Greg filed false income tax returns for 2003–2006, omitting more
than $30 million of gross income. As a certified public accountant, he
must have recognized his obligation to report this income, which enabled
his lavish spending and lifestyle. He also supplied auditors, lenders,
and potential investors with fraudulent documents that he fabricated or
caused to be fabricated. These false documents furnish additional evi-
dence of fraudulent intent.

       We conclude that respondent has established by clear and con-
vincing evidence that the underpayments of tax for 2003–2006 were at-
tributable to fraud. Greg did not establish, “by a preponderance of the
evidence,” that any portions of the underpayments were not attributable
to fraud. See § 6663(b). We thus sustain respondent’s determinations
that (1) Greg is liable for civil fraud penalties for 2003–2006 and (2) the
notice of deficiency for 2003–2006 was timely under section 6501(c)(1).
                                       23

[*23] III.    “Innocent Spouse” Relief

       Married taxpayers may elect to file a joint Federal income tax re-
turn. § 6013(a). After making this election, each spouse is jointly and
severally liable for the entire tax due for that year. § 6013(d)(3); Butler
v. Commissioner, 114 T.C. 276, 282 (2000). But in certain circumstances
a spouse who has filed a joint return may seek relief from joint and sev-
eral liability under section 6015.

        Section 6015(b) specifies procedures for relief from liability for all
joint filers, and subsection (c) specifies procedures to limit liability for
taxpayers who are no longer married or are living separately. Karla is
not eligible for relief under subsection (c) because she remains married
to, and continues to live with, Greg. 12 See § 6015(c)(3)(A)(i). However,
Karla contends that she meets the requirements of subsection (b). She
bears the burden of proving that she is entitled to relief. See Rule 142(a);
Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff’d, 101 F. App’x 34 (6th
Cir. 2004).

       Section 6015(b)(1) provides that a requesting spouse shall be re-
lieved of joint and several liability for a particular year if: (1) the re-
questing spouse filed a joint return, (2) the return contains an under-
statement of tax attributable to an erroneous item of the nonrequesting
spouse, (3) the requesting spouse did not know and had no reason to
know about the understatement, (4) it would be inequitable to hold the
requesting spouse liable for the deficiency attributable to the under-
statement, and (5) the requesting spouse’s claim for relief is timely.
Failure to meet any one of these requirements precludes relief under
section 6015(b). Alt, 119 T.C. at 313. We find that Karla does not meet
the second, third, or fourth requirement.

       A.     Whether the Understatement is Attributable to Karla

       A requesting spouse is not eligible for relief under section 6015(b)
if the understatement of tax is attributable to her own erroneous items.
§ 6015(b)(1)(B). In this case the understatements arose out of Greg’s
extraction of funds from LNI, which he used to finance his and Karla’s
lavish lifestyle. Although Greg directed the scheme, causing LNI to
make constructive distributions of property, Karla played a crucial role.

        12 Although Greg was sentenced to 20 years’ imprisonment, he was evidently

released early. Greg and Karla now share an address in Colorado, and they appeared
together for the remote trial.
                                    24

[*24] Karla had signature authority over the bank accounts of 2MC, a
shell company that Greg deployed to carry out his fraud. One step in
the arrangement involved Greg’s wiring money from LNI to 2MC. Karla
would then draw money from 2MC’s accounts to purchase jewelry and
to pay for services related to the Podlucky Gate House.

      During 2003–2006 Karla signed at least 100 checks on behalf of
2MC. The amounts ranged from $60 to $500,000, and the checks were
made out to her, Greg, Traditional Jewelers, Blackstone Fine Jewelers,
Fine Gems International, and VCA, as well as architects and contractors
involved in the Lot 21 construction. Karla signed at least $6,628,139 in
checks during these years. These payments far exceeded the total in-
come that petitioners reported on their joint returns for 2003–2006,
which was between between $350,000 and $600,000 annually.

       At trial Karla conceded that some of the jewelry belonged to her.
She stated that Greg had purchased the jewelry after securing a $5 mil-
lion investment for LNI in 2000, and that she “assumed [all the jewelry]
was being purchased with that $5 million.” She argued that respondent
“never differentiated between [her] personal jewelry and the investment
jewelry for Le-Nature’s.”

       We did not find this line of argument persuasive. As the person
seeking relief from joint and several liability, Karla bears the burden of
proving that she is entitled to relief. See Rule 142(a); Alt, 119 T.C.
at 311. Petitioners did not carry their burden to prove that any of the
jewelry was “investment jewelry” purchased for LNI’s benefit. In any
event, it was Karla’s responsibility, not respondent’s, to “differentiate[]
between [her] personal jewelry and the investment jewelry.” She did not
produce any documents or other information that could enable the Court
to determine which (if any) pieces were actually purchased as an invest-
ment for LNI.

       While Karla may not have acted with fraudulent intent, the evi-
dence shows that the ill-gotten gains were attributable to her, at least
in part. She signed more than 100 checks on behalf of 2MC. These
checks, made out to jewelry vendors, architects, and contractors, totaled
more than $6 million and benefited her personally. We conclude that
Karla has failed to establish that any portion of the understatements is
not attributable to her.
                                    25

[*25] B.     Knowledge or Reason to Know

        Section 6015(b)(1)(C) provides that a requesting spouse may be
eligible for relief if she establishes that “she did not know, and had no
reason to know,” about the understatement of tax. The “reason to know”
test is subjective. See Butler, 114 T.C. at 284. We consider several fac-
tors, including the requesting spouse’s involvement in the events lead-
ing to the understatement and the existence of expenditures that are
“lavish or unusual when compared to the family’s past income levels.”
Ibid.

       As explained above, Karla was directly involved in the transac-
tions that led to the understatements of tax, because she signed more
than $6 million of checks to jewelry vendors and contactors working on
their mansion. At trial Karla downplayed her role. Although she
acknowledged that she had signed many checks, she said that Greg was
“very secretive” and that she did not “kn[o]w the extent of his pur-
chases.” She said that she had no “social life outside of church” and
“would never ostentatiously wear the sort of pieces [of jewelry] that Greg
Podlucky was buying.” She testified that, because Greg had stashed
most of the jewelry in LNI’s secret room, she thought that the jewelry
belonged to LNI.

       We did not find this testimony credible. VCA’s senior vice presi-
dent of sales (Mr. Nestor) and VCA’s director of gem purchasing and
special orders (Ms. Vongwattanakit) both testified that they had trav-
eled to Pennsylvania specifically to take Karla’s measurements. Indeed,
Mr. Nestor testified that Greg “was quite specific about making the
pieces a certain size to fit his wife.” After sizing Karla’s neck, fingers,
and wrists, Mr. Nestor and Ms. Vongwattanakit helped petitioners de-
sign custom made diamond rings, earrings, bracelets, and necklaces.
Petitioners ordered so much jewelry that VCA’s employees referred to
their stash as the “Podlucky Collection.”

       Although Greg served as VCA’s main point of contact, Mr. Nestor
received emails in which Karla specified her jewelry preferences. She
wrote in one email that she “like[s] the stones to be the center stars,”
that “diamond encrusted bangles are not comfortable,” and that she
“like[s] simple, classic, tailored designs.” These are not the observations
of a spouse who did not “kn[o]w the extent of [her husband’s] purchases.”

       Ms. Patin, a sales representative for Traditional Jewelers, simi-
larly testified about her business relationship with petitioners. She
                                         26

[*26] credibly testified that petitioners ordered custom made rings, ear-
rings, bracelets, and necklaces for Karla and that she took Karla’s meas-
urements so that the jewelry could be sized to fit her exactly. Although
Greg at times ordered men’s watches, Ms. Patin testified that the jew-
elry “was mostly for Karla.” During 2003–2006 Karla signed at least 20
checks to Traditional Jewelers, totaling more than $1,900,000.

       These jewelry purchases alone vastly exceeded the income that
petitioners reported for 2003–2006, which ranged between $350,000 and
$600,000. These expenditures were plainly “lavish or unusual when
compared to the family’s past income levels.” Butler, 114 T.C. at 284.
Considering her husband’s purported income, a reasonable person in her
position would have questioned their ability to buy all this jewelry, not
to mention an $11 million mansion. See Price v. Commissioner, 887 F.2d
959, 965 (9th Cir. 1989) (discussing the requesting spouse’s “duty of in-
quiry”). As we have repeatedly held, “[s]ection 6015 does not protect a
spouse who turns a blind eye to facts readily available to her.” Porter v.
Commissioner, 132 T.C. 203, 212 (2009); see Guth v. Commissioner, 897
F.2d 441, 444 (9th Cir. 1990) (noting that in unreported income cases
the requesting spouse must show that “she had no knowledge of the
transactions leading to the understatement”), aff’g T.C. Memo. 1987-
522. For all these reasons we conclude that Karla knew or should have
known, when signing the 2003–2006 returns, that the returns signifi-
cantly understated their tax. 13

       C.      Equitable Considerations

       Under section 6015(b)(1)(D), a requesting spouse may be eligible
for relief if she establishes, based on “all the facts and circumstances,”
that it would be “inequitable” to be held liable for the tax. “[T]he equi-
table factors we consider[] under section 6015(b)(1)(D) are the same eq-
uitable factors we consider under section 6015(f).” Alt, 119 T.C. at 316.
We generally consider: (1) marital status, (2) economic hardship, (3) sig-
nificant benefit, (4) subsequent compliance with Federal tax laws, (5) le-
gal obligation to pay the outstanding tax liability, (6) knowledge or rea-
son to know about the understatement, and (7) mental or physical
health. See Rev. Proc. 2013-34, § 4.03(2), 2013-43 I.R.B. 397, 400–03
(listing these seven factors for consideration in determining whether

        13 This is not a case where Karla’s knowledge is “negated” because of spousal

abuse or lack of access to household finances. Cf. Robinson v. Commissioner, T.C.
Memo. 2020-134, 120 T.C.M. (CCH) 217, 224 (concluding that the spouse’s knowledge
was negated because her husband “prevented [her] from questioning the payment of
tax reported as due”).
                                           27

[*27] equitable relief should be granted under section 6015(f)); see also
Treas. Reg. § 1.6015-2(d). 14

       We find that five of these factors are neutral. But the third and
sixth factors weigh heavily against relief. As explained above, Karla
knew or had reason to know about the understatements of tax. And she
also derived a “significant benefit” from those understatements.

       The “significant benefit” factor requires the Court to consider
whether the requesting spouse benefited in excess of normal support.
See Robinson, 120 T.C.M. (CCH) at 224; Rev. Proc. 2013-34, § 4.03(2)(e),
2013-43 I.R.B. at 402. If the understatement enabled the requesting
spouse to purchase “luxury assets” or live a “lavish lifestyle,” then this
factor weighs against relief. Rev. Proc. 2013-34, § 4.03(2)(e), 2013-43
I.R.B. at 402; see Alt, 119 T.C. at 314 (finding that the requesting spouse
benefited from the understatement where it enabled her to pay for land,
antiques, and her child’s college tuition).

        Petitioners understated their income by $3,120,163 for 2003,
$7,904,784 for 2004, $7,184,409 for 2005, and $13,480,876 for 2006.
These understatements enabled them to purchase massive amounts of
luxury jewelry and an $11 million mansion. These were plainly “luxury
assets” incident to a “lavish lifestyle,” and Karla failed to prove that
Greg made all these spending decisions. See Rev. Proc. 2013-34,
§ 4.03(2)(e). Indeed, Karla herself issued more than $6 million in checks
to jewelry vendors and contractors. We find that the “significant bene-
fit” factor weighs heavily against relief.

       In sum, we conclude that the “reason to know” and “significant
benefit” factors cut decisively against Karla’s claim for relief under sec-
tion 6015(b). No equitable factor (from the revenue procedure or other-
wise) weighs in favor of relief. Weighing these seven factors, we con-
clude that Karla has failed to carry her burden of proving that it would
be “inequitable” to be held liable for the tax. Karla is therefore not eli-
gible for relief under section 6015(b). See Alt, 119 T.C. at 313 (noting
that the section 6015(b)(1) requirements are “conjunctive,” and “a

         14 Rev. Proc. 2013-34, which modified and superseded Rev. Proc. 2003-61, 2003-

2 C.B. 296, applies to requests for equitable relief under section 6015(f) that were filed
on or after September 16, 2013. Although we are not bound by the guidelines set forth
in Rev. Proc. 2013-34, we consult those guidelines in considering whether a taxpayer
is entitled to equitable relief under section 6015(f). See Pullins v. Commissioner, 136
T.C. 432, 438–39 (2011).
                                           28

[*28] failure to meet any one of them prevents a requesting spouse from
qualifying for relief”). 15

        We have considered all remaining arguments the parties made
and, to the extent not addressed, we find them to be irrelevant or mer-
itless.

        To implement the foregoing,

        Decision will be entered for respondent.

         15 Karla did not argue that she is eligible for relief under section 6015(f). But

even if she had, her claim would fail for several reasons. First, Rev. Proc. 2013-34,
which specifies the procedures governing equitable relief under section 6015(f), sets
forth seven “threshold conditions” that a requesting spouse must satisfy to be eligible
for relief. Rev. Proc. 2013-34, § 4.01, 2013-43 I.R.B. at 399–400. Karla cannot satisfy
the seventh condition, which requires that the tax liability be attributable to an item
of the non-requesting spouse. See supra pp. 23–24. Assuming arguendo that Karla
could surmount this threshold hurdle, her claim for equitable relief would fail for the
reasons discussed in the text.