T.C. Memo. 2014-174
UNITED STATES TAX COURT
HECTOR SANCHEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9729-12. Filed August 28, 2014.
William E. Taggart, Jr., and Jason J. Galek, for petitioner.
Michael Skeen, Randall G. Durfee, and Sara E. Sexton, for respondent.
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[*2] MEMORANDUM FINDINGS OF FACT AND OPINION1
LARO, Judge: The sole issue before the Court is whether petitioner is
liable for a fraud penalty under section 66632 for 2005, 2006, 2007, and 2008
(years at issue). Petitioner resided in California when he filed his petition.
FINDINGS OF FACT3
Petitioner is a citizen of Mexico and attended primary school there through
the third grade. Approximately 40 years ago petitioner came to the United States,
and he was a resident alien of the United States during the years at issue.
Petitioner speaks English but not fluently.
1
This case was tried before Judge Diane L. Kroupa in March 2014. On June
16, 2014, Judge Kroupa retired from the Tax Court. On June 18, 2014, the Court
issued an order informing the parties of Judge Kroupa’s retirement and proposing
to reassign this case to another judicial officer of the Court for purposes of
preparing the opinion and entering the decision based on the record of trial, or,
alternatively, allowing the parties to request a new trial. On July 10, 2014, the
parties filed a joint response consenting to the reassignment of this case. On July
23, 2014, the Court issued an order assigning this case to Judge David Laro.
2
Unless otherwise indicated, section references are to the Internal Revenue
Code in effect for the years at issue, and Rule references are to the Tax Court
Rules of Practice and Procedure. Some dollar amounts in tables have been
rounded.
3
Because of the reassignment of this case for purposes of preparing the
opinion and entering the decision, we did not have an opportunity to observe the
demeanor of the witnesses. We therefore make no inferences of credibility, except
that which may be judged from the written record.
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[*3] I. Cash for Cans
Around 20 years ago petitioner started a sole proprietorship called Cash for
Cans. Cash for Cans pays individuals for recyclable material, aggregates these
materials, and sells them to processors at a premium. California sets a cash
redemption value (CRV) for various recyclable materials such as aluminum, glass,
and certain plastics, including but not limited to polyethylene terephthalate (PET)
and high-density polyethylene (HDPE). In California retailers must collect the
CRV from consumers as a deposit when they sell products with recyclable
packaging. Consumers may then redeem the CRV by returning the recyclable
material to a recycler (such as Cash for Cans), which is required by law to pay the
consumer at least the CRV.
The State of California requires recyclers to keep daily logs. For each
transaction the daily log shows the type and weight of material received, the
amount paid, and the customer’s name and signature. In addition, the State of
California requires recyclers to complete shipping reports. The shipping report
contains the shipment date, the shipper’s information, the receiver’s information,
the type and weight of material delivered, and the CRV refund amount. State of
California auditors inspect the business premises of recyclers to ensure that they
purchase only materials that are part of the California redemption program and to
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[*4] ensure that they maintain the required records. Auditors can issue a citation
to the recycler if it is not in compliance with California law. State auditors visited
Cash for Cans on several occasions during the years at issue.
Cash for Cans maintained daily logs during each of the years at issue.
Every day, three or four employees ran Cash for Cans’ recycling operations.
Customers would bring recyclable materials to Cash for Cans, and an employee
would verify that the materials were California redemption materials before
sorting them into baskets. The materials were then weighed and the customer
given a handwritten ticket for the amount due to him. For each year at issue,
petitioner paid his customers the minimum CRV rate set by the State.
For each transaction a Cash for Cans employee would also fill out an entry
on the daily log, which the customer was required to sign. The customer then
redeemed the handwritten ticket for cash at a window, which was generally
attended by petitioner or a member of his family. At the end of each day the daily
logs were tallied to calculate the total amount of each material purchased and the
total amount paid. Cash for Cans maintained these daily logs in its office.
Petitioner’s daughter, Rocio Sanchez, created monthly summaries from these daily
logs. At the end of the year, Rocio Sanchez used these monthly summaries to
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[*5] generate a spreadsheet which listed (in pounds) the total amount of each
material that Cash for Cans had purchased every month (materials summary).
Cash for Cans did business primarily with three processors during the years
at issue: Anheuser-Busch Recycling Co. (Anheuser-Busch), for aluminum and
plastic; Western Strategic Material, Inc. (Western Strategic), for glass; and Alco
Iron & Metal Co. (Alco), for scrap materials. Cash for Cans delivered the
recyclable materials to the respective processors by truck. For each truckload of
material, a shipping report was completed. On each shipping report, the processor
recorded the weight of recyclable materials delivered and the total payment
amount (which includes the CRV refund amount and a premium). Cash for Cans
retained a copy of the shipping report for its records. All three processors paid
Cash for Cans exclusively by check. Petitioner was responsible for depositing
these checks and for maintaining sufficient cash on Cash for Cans’ premises to pay
customers.
Petitioner gave Rocio Sanchez the responsibility for tracking Cash for Cans’
expenses. Rocio Sanchez entered all of Cash for Cans’ expenses into a computer
accounting program called QuickBooks and used QuickBooks’ profit and loss
statement function to generate annual expense summaries. Rocio Sanchez did not
track Cash for Cans’ income, nor was she aware of whether anyone else did.
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[*6] Petitioner did not pay Rocio Sanchez for her services but did help pay for her
living expenses in 2006 and 2007.
II. City of Oakland Business Tax Declaration
Petitioner visited the City of Oakland offices to prepare and file a business
tax declaration during each of the years at issue. The business tax declaration is
an annual renewal form that businesses are required to file in order to maintain
their City of Oakland business licenses. Acton Hodgson is a tax representative for
the City of Oakland. He was assigned to assist petitioner in completing his
business tax declaration for each of the years at issue because he was the sole
Spanish speaker in that office. The City of Oakland taxes business on the basis of
a certain percentage of their gross receipts for the previous year. For example, the
2008 and 2009 renewal tax rate was $1.20 per $1,000 of gross receipts for the
prior year. Taxpayers are not required to provide supporting documentation to
substantiate their gross receipts, and the City does not verify the accuracy of the
reported information. Therefore, Mr. Hodgson took the gross receipts reported by
petitioner at “face value”. According to Mr. Hodgson, petitioner calculated his
annual gross receipts using the materials summaries. These materials summaries
provided the total weight of the various materials recycled by Cash for Cans and
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[*7] the rate per pound for each material. For example, Cash for Cans’ 2007
materials summary discloses:
2007 Aluminum Glass PET #1 PET #2
Total weight (lbs.) 429,049 2,799,455 755,172 96,907
Rate (per lb.) $0.39 $0.305 $0.15 $0.8
Therefore, on the basis of the weights and rates set forth in its 2007 materials
summary, Cash for Cans’ gross receipts should have been $1,211,964.29.
Petitioner, however, reported 2007 gross receipts of only $398,467 on his 2008
business tax declaration.
As another example, Cash for Cans’ 2008 materials summary discloses:
2008 Aluminum Glass Plastic HDPE
Total weight (lbs.) 423,605 2,596,335 806,565 65,333
Rate (per lb.)
Jan.-June $1.56 $0.105 $0.90 $0.52
July-Dec. 1.57 0.105 0.92 0.54
Total 663,062 272,615 734,809 34,635
Therefore, on the basis of its 2008 materials summary, Cash for Cans’ gross
receipts equaled $1,705,121. Petitioner, however, reported 2008 gross receipts of
only $284,279 on his 2009 business tax declaration. For each of the years at issue,
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[*8] petitioner filed his City of Oakland business tax declaration before filing his
Federal income tax return.
III. Federal Income Tax Returns
Griselda Robles is the owner of Griselda’s Tax and Bookkeeping Services.4
Ms. Robles prepared petitioner’s Federal income tax returns and his employment
tax returns for the years at issue. She did not perform any bookkeeping, general
accounting, or auditing services for petitioner.
Each year petitioner and Rocio Sanchez provided Ms. Robles with Cash for
Cans’ materials summary, expense summary, and City of Oakland business tax
declaration. Petitioner did not provide Ms. Robles with Cash for Cans’ books and
records or its bank account statements. Instead, petitioner told Ms. Robles the
figures to report as Cash for Cans’ gross receipts and cost of goods sold (COGS).
Ms. Robles noticed that the gross receipts she calculated using the materials
summaries did not reconcile with the amounts reported on the City of Oakland
business tax declarations. When she brought these discrepancies to petitioner’s
attention, however, he instructed her to use the amounts reported on the City of
Oakland business tax declarations. After completing petitioner’s return for each
4
Ms. Robles did not complete college and is not a certified public
accountant (C.P.A.).
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[*9] of the years at issue, Ms. Robles met with petitioner to discuss the completed
return for that year. Ms. Robles always communicated with petitioner in Spanish.
IV. IRS Audit
IRS Revenue Agent Bally Chiu (RA Chiu) was assigned to audit
petitioner’s tax returns for the years at issue. During the audit RA Chiu examined
petitioner’s bank statements and noticed that the deposits were greater than she
would have expected according to Cash for Cans’ reported revenue.
A. Interviews
RA Chiu met with petitioner twice in connection with the audit. Ms. Robles
represented petitioner during the first meeting. The first meeting was an informal
interview that took place in April 2010 at Ms. Robles’ office. Petitioner also gave
RA Chiu a tour of Cash for Cans during this first interview. After the first
interview Ms. Robles provided RA Chiu with Cash for Cans’ materials summaries
for 2007 and 2008, some expense summaries, and some bank statements.
Petitioner, however, did not agree to a second interview. As a result, RA
Chiu had to summon petitioner to appear and present testimony and records. The
summons interview took place on September 30, 2010. The interview was
attended by RA Chiu, IRS attorney Jon Feldhammer, IRS manager Carlos Aguilar,
petitioner, petitioner’s counsel William Taggart, and two interpreters. Petitioner
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[*10] did not bring to the interview the records that respondent had requested in
the summons.
During the interview petitioner initially represented that he had only three
U.S. bank accounts with Bank of America--personal, payroll, and business--and
that he did not have any foreign bank accounts or any other foreign assets. Further
questioning revealed, however, that petitioner’s wife (Rosalia Felis Camacho)
lived in Mexico and that petitioner routinely wired her money to support her and
her four children from a prior marriage. In addition, petitioner admitted that he
had wired approximately $130,000 to his wife in Mexico for the purchase of a
house. Finally, petitioner admitted that he had opened a bank account in Mexico
when he visited but represented that he wired only $500 to $1,000 to that account
and that he closed the account when he returned to the United States.
Regarding his tax returns, petitioner admitted that he provided Ms. Robles
with income information and that Rocio Sanchez provided Ms. Robles with
expense information. When asked how he determined his gross receipts,
petitioner replied that he “just figured it out”. Petitioner admitted, however, that
Anheuser-Busch and Western Strategic kept records of all payments made to him
and that they could provide such records upon request. Petitioner further admitted
that he had requested and received these records in the past. Finally, at one point,
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[*11] petitioner asked for clarification of whether a question pertained to net or
gross income, thus demonstrating an understanding of these concepts.
B. Records
After the summons interview petitioner produced the bank records
requested in respondent’s summons. Petitioner did not, however, provide all of
the documentation that RA Chiu had requested. Therefore, RA Chiu obtained
records of Cash for Cans’ activities directly from Anheuser-Busch and Western
Strategic. RA Chiu also subpoenaed Bank of America for information regarding
petitioner’s home loan.5
RA Chiu used the records from Anheuser-Busch and Western Strategic to
reconstruct Cash for Cans’ gross receipts from those two companies and used
petitioner’s bank records to reconstruct Cash for Cans’ gross receipts from Alco.
Pursuant to her analysis, RA Chiu calculated and adjusted Cash for Cans’ gross
receipts as follows:
5
Petitioner owned and resided at 6253 Bromley Ave., Oakland, California, a
four-bedroom two-bathroom house with a two-bedroom one-bathroom back unit,
during the years at issue. In 2008 petitioner rented out a portion of the house for
$980 a month and the back unit for $550 a month. Each month, petitioner made
over $2,000 in mortgage payments on the house.
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[*12] Gross receipts 2005 2006 2007 2008
Aluminum $914,043 $924,241 $1,025,004 $1,003,921
Plastics 753,534 736,561 930,063 992,925
Glass 385,548 376,706 450,485 451,772
Scrap 14,123 -0- 14,038 34,554
Total 2,067,247 2,037,508 2,419,590 2,483,173
Total per return 248,704 363,966 398,467 541,083
Adjustment 1,818,543 1,673,542 2,021,123 1,942,090
Next, RA Chiu used the materials summaries for 2007 and 2008 to calculate
Cash for Cans’ COGS. RA Chiu did not have Cash for Cans’ materials summaries
for 2005 and 2006. Therefore, RA Chiu calculated Cash for Cans’ aluminum and
plastic COGS from the records Anheuser-Busch provided. Western Strategic’s
records, however, did not include similar information for glass, so RA Chiu used
the average cost of glass from 2007 to 2008 to estimate COGS for glass in 2005
and 2006. Pursuant to her analysis, RA Chiu calculated and adjusted Cash for
Cans’ COGS as follows:
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[*13] COGS 2005 2006 2007 2008
Aluminum $616,024 $555,871 $660,918 $676,625
PET #1 (plastic) 579,615 572,323 654,253 721,099
HDPE (plastic) -0- 32,194 32,831 36,729
Other plastics 42,036 -0- -0- -0-
Glass 239,012 233,531 286,171 273,166
Scrap -0- -0- 38,855 57,395
Total 1,476,686 1,393,918 1,673,028 1,765,013
Total per return 88,507 163,785 135,960 283,357
Adjustment (1,388,179) (1,230,133) (1,537,068) (1,481,656)
RA Chiu’s investigation further revealed that petitioner made numerous and
large wire transfers to Mexico in 2007 and 2008. Petitioner wired to his wife over
$300,000 in 2007 and over $100,000 in 2008. In addition, petitioner wired to his
own bank account in Mexico over $10,000 in 2007 and over $15,000 in 2008.
Finally, in 2008 petitioner also wired $6,000 to Juana Duran Garcia and $4,000 to
Jovita Felix Camacho.
C. Audit Results
On February 3, 2012, respondent issued to petitioner a notice of deficiency
for the years at issue. In addition to the gross receipt and COGS adjustments
discussed above, the notice of deficiency made a number of adjustments to
petitioner’s itemized deductions, expenses reported on Schedule C, Profit or Loss
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[*14] From Business, self-employment tax, rental income, and child tax credit.
Respondent determined petitioner’s taxable income, tax, deficiencies, and
penalties for the years at issue as follows:
2005 2006 2007 2008
Taxable income
Per exam $450,163 $460,363 $525,170 $483,612
Per return 8,051 11,277 25,576 11,902
Tax liability
Per exam 158,776 162,673 186,523 171,461
Per return 5,123 6,098 9,059 7,242
Deficiency 153,845 156,575 117,464 164,219
Fraud penalty 115,384 117,431 129,012 119,302
OPINION
Respondent argues that petitioner is liable for the section 6663 fraud
penalties for the years at issue. Fraud is an intentional wrongdoing on the part of
the taxpayer with the specific purpose of evading a tax believed to be owing.
Edelson v. Commissioner, 829 F.2d 828, 833 (9th Cir. 1987), aff’g T.C. Memo.
1986-223; Akland v. Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), aff’g T.C.
Memo. 1983-249. A penalty equal to 75% of the underpayment will be imposed if
any part of the taxpayer’s underpayment of Federal income tax is due to fraud.
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[*15] Sec. 6663(a). Further, if any portion of the underpayment is attributable to
fraud, the entire underpayment will be treated as attributable to fraud unless the
taxpayer establishes by a preponderance of the evidence that part of the
underpayment is not due to fraud. Sec. 6663(b); see Foxworthy, Inc. v.
Commissioner, T.C. Memo. 2009-203, aff’d, 494 Fed. Appx. 964 (11th Cir. 2012).
Respondent has the burden of proving by clear and convincing evidence
that an underpayment exists for each of the years at issue and that some portion of
the underpayment is due to fraud. See secs. 7454(a), 6663(a); Rule 142(b);
Clayton v. Commissioner, 102 T.C. 632, 646 (1994).
I. Existence of Underpayment
Petitioner’s underpayment of tax arises primarily from his unreported
income from Cash for Cans. In the Court of Appeals for the Ninth Circuit, to
which this case is appealable absent the parties’ stipulation to the contrary, see sec.
7482(b), the Commissioner’s determination as to unreported income in a notice of
deficiency is presumed correct when it is supported by a minimal evidentiary
foundation, Weimerskirch v. Commissioner, 596 F.2d 358, 360-361 (9th Cir.
1979), rev’g 67 T.C. 672 (1977); see also Delaney v. Commissioner, 743 F.2d 670,
671 (9th Cir. 1984) (stating that the Commissioner must produce some substantive
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[*16] evidence demonstrating that the taxpayer received unreported income), aff’g
T.C. Memo. 1982-666.
On the basis of the record, we find that respondent has produced sufficient
evidence to establish that petitioner failed to report gross receipts of over $1.8
million for 2005, $1.6 million for 2006, $2 million for 2007, and $1.9 million for
2008. In addition, respondent has established that petitioner had taxable income
of $450,163 for 2005, $460,363 for 2006, $525,170 for 2007, and $483,612 for
2008. To put things in perspective, petitioner reported on his returns only 1.8%,
2.4%, 4.9%, and 2.5%, respectively, of his taxable income for the years at issue.
Petitioner concedes the deficiencies set forth in the notice of deficiency.
Stated another way, petitioner concedes that he paid only 3.2%, 3.7%, 4.8%, and
4.2%, respectively, of his tax liability for the years at issue. Thus, respondent has
shown by clear and convincing evidence that an underpayment of tax exists for
each of the years at issue.
II. Fraudulent Intent
Fraud is never presumed but must be established by independent evidence
that establishes fraudulent intent. Edelson v. Commissioner, 829 F.2d at 832;
Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Direct evidence of fraud is
seldom available, however, and its existence may therefore be determined from the
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[*17] taxpayer’s conduct and the surrounding circumstances. Stone v.
Commissioner, 56 T.C. 213, 223-224 (1971).
Courts have developed several indicia or “badges of fraud” from which
fraudulent intent can be inferred. These badges of fraud include: (1)
understatement of income; (2) inadequate records; (3) failure to file tax returns; (4)
concealment of assets; (5) failure to cooperate with tax authorities; (6) filing false
documents; (7) failure to make estimated tax payments; (8) engaging in illegal
activity; (9) attempting to conceal illegal activity; (10) dealing in cash; (11)
implausible or inconsistent explanations of behavior; and (12) a pattern of conduct
that evidences an intent to mislead. Spies v. United States, 317 U.S. 492, 499
(1943); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff’g
T.C. Memo. 1984-601. Although no single factor is necessarily sufficient to
establish fraud, a combination of several of these factors may be persuasive
evidence of fraud. Bradford v. Commissioner, 796 F.2d at 307-308; Niedringhaus
v. Commissioner, 99 T.C. 202, 211 (1992).
Several badges of fraud exist in this case which clearly and convincingly
establish fraud for all of the years at issue.6
6
Although dealing in cash is ordinarily a badge of fraud, Cash for Cans paid
its customers in cash as part of its business model. Therefore, under the facts and
(continued...)
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[*18] A. Understatement of Income
Petitioner failed to report over $1 million dollars of gross receipts for each
of the years at issue. See supra section I. On his returns, petitioner reported
taxable income of only $8,051 for 2005, $11,277 for 2006, $25,576 for 2007, and
$11,902 for 2008. This reflected only 1.8%, 2.4%, 4.9%, and 2.5%, respectively,
of his true taxable income.
Petitioner knew that his income was substantial. First, petitioner supported
himself, his wife, and her four children with his income. Petitioner also provided
support to Rocio Sanchez in 2006 and 2007. Second, petitioner made over $2,000
a month (over $24,000 a year) in home mortgage payments alone. Third,
petitioner purchased with cash a $130,000 house in Mexico during the years at
issue. We do not believe that petitioner could sustain his lifestyle on the meager
income reported on his returns unless he had other nontaxable sources of income,
which the record does not reveal. We therefore find that petitioner knowingly and
intentionally reported only a tiny fraction of his true income for each of the years
at issue.
6
(...continued)
circumstances of this case, we do not treat dealing in cash as a badge of fraud.
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[*19] B. Concealment of Assets
Petitioner attempted to conceal assets from respondent. During his
summons interview petitioner represented that he did not have any foreign bank
accounts or any other foreign assets. Later, petitioner admitted that he had a bank
account in Mexico but represented he wired only $500 to $1,000 to that account.
Bank records show that petitioner wired to his Mexican account over $10,000 in
2007 and over $15,000 in 2008. Petitioner also admitted to wiring over $130,000
to his wife for the purchase of a house in Mexico. Bank records show that
petitioner wired to his wife over $300,000 in 2007 and $100,000 in 2008.
C. Failure To Cooperate With Tax Authorities
Petitioner did not fully cooperate with respondent during the audit. First,
although he agreed to one interview, petitioner refused any further interviews.
Respondent, therefore, had to summon petitioner to appear for further questioning.
Second, petitioner did not voluntarily provide respondent with documentary
evidence. Cash for Cans maintained detailed and comprehensive books and
records, as required by California law. However, petitioner produced these
documents only in response to respondent’s summons. As a result, respondent had
to request information directly from Anheuser-Busch and Western Strategic.
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[*20] Finally, respondent was forced to subpoena Bank of America for
information pertaining to petitioner’s home mortgage.
D. Implausible or Inconsistent Explanations of Behavior
Petitioner argues that Ms. Robles “prepared grossly erroneous income tax
returns” using numbers that she had “fabricated”. Petitioner further argues that on
audit, Ms. Robles “deftly steered Respondent to the conclusion that Petitioner had
caused her to prepare fictitious returns.”
Petitioner’s explanation for his understatements of income is unconvincing,
implausible, and inconsistent with the record evidence. Ms. Robles had no
incentive, financial or otherwise, to underreport petitioner’s income. Moreover,
the tax returns that Ms. Robles prepared are consistent with petitioner’s City of
Oakland business tax declarations, which petitioner had personally prepared and
filed beforehand. In response, petitioner blames Mr. Hodgson for “unwittingly
assisting Petitioner to prepare erroneous City of Oakland Business Tax
Declarations.” Mr. Hodgson, however, credibly testified that the City of Oakland
does not verify the accuracy of reported tax information and that he took
petitioner’s numbers at “face value”. In addition, Ms. Robles credibly testified
that when she told petitioner that Cash for Cans’ materials summaries did not
reconcile with its Oakland business tax declarations, he instructed her to use the
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[*21] numbers from the Oakland business tax declarations on his Federal income
tax returns. Finally, petitioner admitted during his summons interview that he
provided Ms. Robles with the income information for his Federal income tax
returns. On the basis of the record, we find that petitioner, not Ms. Robles,
fabricated the information on his returns.
E. Pattern of Conduct Evidencing an Intent To Mislead
Petitioner engaged in a pattern of conduct evidencing an intent to mislead
respondent for each of the years at issue. Cash for Cans kept detailed and
comprehensive books and records in accordance with California law. Petitioner,
however, elected to estimate his income, rather than relying on Cash for Cans’
business records. Petitioner purported to base his estimates upon Cash for Cans’
materials summaries. The materials summaries, however, were merely a ruse
petitioner used to obfuscate his true income. For instance, Cash for Cans’ 2007
materials summary evidences gross receipts of over $1.2 million. In contrast,
petitioner “estimated” gross receipts of only $398,467 purportedly on the basis of
the 2007 materials summary. As another example, Cash for Cans’ 2008 materials
summary evidences gross receipts of over $1.7 million. In contrast, petitioner
“estimated” gross receipts of only $284,279 purportedly on the basis of the 2008
materials summary.
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[*22] Petitioner provided the materials summaries to Ms. Robles, but did not
provide her with Cash for Cans’ business records. In addition, when Ms. Robles
realized that the information petitioner provided was inconsistent, he instructed
her to use his “estimated” figures from Cash for Cans’ Oakland business tax
declarations.
Petitioner’s treatment of business income sharply contrasts with his
treatment of business expenses. Petitioner instructed Rocio Sanchez to track all of
Cash for Cans’ business expenses. She complied by entering all of Cash for Cans’
expenses into an accounting computer program and using the program to generate
annual expense summaries. Petitioner provided Ms. Robles with these expense
summaries to prepare his Federal tax returns.
Petitioner alleges that the inaccuracies in his tax returns were due to his
inability to read an income tax return, his “low proficiency in English”, and his
“rudimentary education”. These alleged shortcomings, however, did not prevent
petitioner from reporting reasonably accurate business expenses for the years at
issue. Petitioner’s contention is without merit.
In conclusion, several badges of fraud are present in this case. Considering
all the facts and circumstances, we find that respondent has proven by clear and
convincing evidence that petitioner fraudulently intended to evade taxes.
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[*23] Accordingly, petitioner is liable for the section 6663 fraud penalties for all
of the years at issue.
III. Reasonable Cause
We now turn to the reasonable cause defense. The fraud penalty does not
apply to any portion of an underpayment if a taxpayer shows that there was
reasonable cause for, and that the taxpayer acted in good faith with respect to, that
portion. Sec. 6664(c)(1). The determination of whether a taxpayer acted with
reasonable cause and in good faith depends on the pertinent facts and
circumstances, including the taxpayer’s efforts to assess his or her proper tax
liability, the knowledge and experience of the taxpayer, and the reliance on the
advice of the professional. Sec. 1.6664-4(b)(1), Income Tax Regs. Reasonable
cause may exist where a taxpayer relies upon professional advice if the taxpayer
proves by a preponderance of the evidence that: (1) the adviser was a competent
professional who had sufficient expertise to justify the taxpayer’s reliance on him;
(2) the taxpayer provided necessary and accurate information to the adviser; and
(3) the taxpayer actually relied in good faith on the adviser’s judgment.
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299
F.3d 221 (3d Cir. 2002).
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[*24] Petitioner argues that he qualifies for the reasonable cause defense because
he relied upon Ms. Robles to prepare his returns for the years at issue. Petitioner
further argues that his reliance is justified because he has only “a third grade
education” and is “functionally illiterate both in Spanish and English”. We
disagree.
Generally, the responsibility to file accurate returns and pay tax when due
rests upon the taxpayer and cannot be delegated. Pritchett v. Commissioner, 63
T.C. 149, 173-175 (1974); Kooyers v. Commissioner, T.C. Memo. 2004-281.
Petitioner has introduced no evidence regarding Ms. Robles’ credentials, including
any evidence that she is a California licensed tax return preparer, as he alleges.
Rather, the record reflects that Ms. Robles did not finish college and that she is not
a C.P.A. Accordingly, petitioner has failed to prove that Ms. Robles was a
competent tax adviser.
More importantly, petitioner failed to provide Ms. Robles with Cash for
Cans’ books and records and knowingly provided her with erroneous information
instead. We therefore find that petitioner did not rely on Ms. Robles’ “judgment”,
nor did he act in good faith. Petitioner has failed to prove that he had reasonable
cause within the meaning of section 6664(c). Accordingly, we sustain
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[*25] respondent’s determination that petitioner is liable for the section 6663 fraud
penalties for all of the years at issue.
In reaching our holdings, we have considered all arguments made, and, to
the extent not mentioned above, we conclude they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered for
respondent.