T.C. Memo. 2002-12
UNITED STATES TAX COURT
HOWARD AND LINDA LEVINE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6398-99. Filed January 10, 2002.
Stuart E. Abrams, for petitioners.
Rosemarie D. Camacho, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies in
petitioners’ Federal income tax liabilities and penalties, as
follows:
Fraud Penalty
Year Deficiency Sec. 6663
1990 $ 2,108 $ 1,581
1991 10,063 7,547
1992 11,136 8,352
1993 13,411 10,058
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After settlement, the only issue for decision1 is whether
petitioner Howard Levine is liable for the fraud penalties for
1990, 1991, and 1992.2
Hereinafter, references to petitioner in the singular are to
Howard Levine. Unless otherwise indicated, all references to
sections are to the Internal Revenue Code, and all references to
Rules are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
At the time they filed their petition herein, petitioners
resided in Dix Hills, New York.
During 1990 through 1993, petitioner worked for his father’s
accounting firm as a bookkeeper and tax return preparer, and
1
Due to the fact that petitioner Linda Levine was unable to be
present to testify at the partial trial held on Dec. 5, 2000, we
have reserved for decision whether petitioner Linda Levine
qualifies for relief from liability under sec. 6015(b) for the
Federal income tax deficiencies and the fraud penalties under
sec. 6663 that respondent determined against petitioners
regarding their joint Federal income tax returns for 1990 through
1993.
2
With regard to 1993, petitioner Howard Levine’s liability for
the fraud penalty is established as a result of petitioner’s
guilty plea to criminal tax evasion under sec. 7201 for the same
year.
In the alternative to the fraud penalties determined by
respondent, respondent for each year also determined against
petitioners late filing additions to tax and negligence
penalties.
.
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petitioner sold insurance and alarm systems. Petitioner does not
have a college degree. During these same years, petitioner also
performed bookkeeping and tax return preparation services for his
own clients.
On April 23, 1990, petitioner applied for an automobile
loan. On the loan application, petitioner indicated that his
annual income was $120,000.
During 1990 through 1993, petitioner did not maintain books
and records relating to any of his income-producing activities.
During 1975 through 1989, Mrs. Levine worked part-time in a
department store.
For years prior to 1988, petitioners timely filed their
Federal income tax returns.
For 1990 through 1993, petitioners did not timely file with
respondent their Federal income tax returns that were due, nor
did petitioners make any payments of estimated Federal income
taxes.
In January of 1994, petitioner was contacted by respondent’s
revenue agent about petitioners’ unfiled 1988 through 1992
Federal income tax returns.3
3
Respondent’s revenue agent who talked to petitioner in January
of 1994 testified herein that during that conversation petitioner
falsely stated that he already had filed his 1988 through 1992
Federal income tax returns. Petitioner contends that the
testimony of respondent’s revenue agent should be stricken and
excluded from the evidence herein.
(continued...)
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On November 27, 1995, petitioner met with respondent’s
special agents and was advised that he and his wife were under
investigation for possible criminal violation of the Federal
income tax laws regarding their failure to file Federal income
tax returns for 1990 through 1993. At that meeting, petitioner
represented falsely to respondent’s representatives that he was a
college graduate and a C.P.A.
On January 5, 1996, petitioners filed late their joint
Federal income tax returns for 1990, 1991, 1992, and 1993.
3
(...continued)
The basis for petitioner’s contention is that, during a
subsequent criminal tax prosecution of petitioner, the Government
did not give to petitioner a copy of the revenue agent’s written
summary of the statement petitioner had made during the January
1994 conversation with the revenue agent. Petitioner alleges
that the Government’s failure during the criminal proceeding to
produce to petitioner this document constitutes a violation of
Fed. R. Crim. P. 16(a)(1)(A) and that we should exercise our
discretion in this civil tax proceeding to exclude the testimony
of the revenue agent. Petitioner notes that, in appropriate
circumstances, courts may exclude in civil proceedings evidence
where the evidence was obtained in violation of an individual’s
Fourth Amendment rights. See Tirado v. Commissioner, 689 F.2d
307, 308 (2d Cir. 1982), affg. 74 T.C. 14 (1980); Houser v.
Commissioner, 96 T.C. 184, 195 (1991).
In this case, we decline to apply the exclusionary rule to
the revenue agent’s testimony. Fed. R. Crim. P. 16 is intended
to encourage full discovery and eliminate unfair surprise at
trial. Because petitioner pled guilty, there was no criminal
trial. Any prejudice to petitioner’s plea negotiations that
occurred as a result of petitioner’s failure to receive the
revenue agent’s summary of petitioner’s January 1994 statements
should have been dealt with in the criminal proceedings. Prior
to the trial herein, petitioner was advised of the substance of
the revenue agent’s testimony, and petitioner had ample time to
prepare for that testimony. The revenue agent’s testimony is
admissible.
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On their late-filed joint Federal income tax returns,
petitioners reported Schedule C, Profit or Loss From Business,
income and Form 1099 income relating to petitioner’s work as a
bookkeeper and tax return preparer for his father’s accounting
firm and relating to petitioner’s work as a seller of insurance
and alarm systems.
Petitioners did not report on the above late-filed joint
Federal income tax returns income petitioner had received for
bookkeeping and tax return preparation services petitioner had
rendered for his own clients.
Petitioners made no payments with the above late-filed tax
returns.
On audit for 1990 through 1993, utilizing specific items of
income that had been deposited by petitioner into bank accounts,
the existence of which accounts petitioner had not disclosed to
respondent’s representatives, respondent determined that
petitioners had not reported on the above Federal income tax
returns the income petitioner had received from the bookkeeping
and tax return preparation services petitioner had rendered for
his own clients.
The schedule below reflects the total net business income
reported on petitioners’ joint Federal income tax returns for
1990, 1991, 1992, and 1993, as late filed on January 5, 1996, the
income that was earned by petitioner for bookkeeping and tax
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return preparation services that was not reported on petitioners’
late-filed Federal income tax returns, and petitioners’ total
corrected net business income for each year, as well as
petitioners’ Federal income tax liabilities as reported.4
Respondent made no adjustments to the expenses claimed on
petitioners’ late-filed joint Federal income tax returns, and
petitioners have submitted no credible evidence as to their
entitlement to additional expenses.
Net Business Tax
Income Reported Omitted Corrected Liability
Year On Return Income Net Business Income Reported
1990 $43,548 $ 5,800 $49,348 $10,762
1991 31,367 16,200 47,567 7,428
1992 16,435 28,968 45,403 2,339
1993 16,605 42,825 59,530 2,346
On August 11, 2000, petitioner pled guilty in Federal District
Court to one count of a four-count felony indictment under section
7201 for income tax evasion relating to petitioners’ Federal income
tax returns for 1990 through 1993. Petitioner’s guilty plea
related to 1993.
4
Due to settlement of a number of adjustments, petitioner’s
corrected Federal income tax liabilities for each of the years in
issue will be determined in a Rule 155 computation.
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OPINION
To establish fraud, respondent has the burden of proving by
clear and convincing evidence that the taxpayer made an
underpayment of Federal income taxes and that the taxpayer's
underpayment was due to fraudulent intent. Sec. 7454(a); Rule
142(b); Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990),
affg. in part, revg. in part, and remanding an Order of this Court;
Schaffer v. Commissioner, 779 F.2d 849, 857 (2d Cir. 1985), affg.
in part and remanding Mandina v. Commissioner, T.C. Memo. 1982-34;
Clayton v. Commissioner, 102 T.C. 632, 646 (1994); Recklitis v.
Commissioner, 91 T.C. 874, 909 (1988).
Because there is rarely direct proof of fraudulent intent,
respondent may sustain his burden utilizing circumstantial
evidence. Douge v. Commissioner, supra; Schaffer v. Commissioner,
supra; Clayton v. Commissioner, supra at 647; Rowlee v.
Commissioner, 80 T.C. 1111, 1123 (1983).
Courts have developed certain indicia of fraud, including the
following: (1) Understatements of income; (2) inadequate books and
records; (3) failure to file income tax returns; (4) implausible or
inconsistent explanations of behavior; (5) concealed assets;
(6) failure to cooperate with tax authorities; (7) dealing in cash;
(8) filing false documents; and (9) false statements. United
States v. Klausner, 80 F.3d 55, 62 (2d Cir. 1996); Douge v.
Commissioner, supra (citing Bradford v. Commissioner, 796 F.2d 303,
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307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601); O’Connor v.
Commissioner, 412 F.2d 304, 310 (2d Cir. 1969), affg. in part and
revg. in part T.C. Memo. 1967-174.
A taxpayer’s experience, knowledge, and ability as a
bookkeeper and tax return preparer are also factors to be
considered with respect to fraudulent intent. O’Connor v.
Commissioner, supra.
Petitioner admits that on petitioners’ 1993 joint Federal
income tax return he fraudulently failed to report a substantial
amount of income he earned in 1993, and in related criminal
proceedings petitioner pled guilty to tax evasion with regard
thereto.
With regard to 1990, 1991, and 1992, petitioner acknowledges
that he carried on a separate business out of his home performing
bookkeeping and tax return preparation services for his own clients
and that on his late-filed joint Federal income tax returns for
those years he did not report such income.
Petitioner contends generally, however, that the Forms 1099
that he received in 1990, 1991, and 1992 from insurance companies
overstated the actual amounts that petitioner received from the
companies and therefore that the amounts of income relating thereto
were overstated on petitioners’ 1990, 1991, and 1992 joint Federal
income tax returns. Petitioner claims that such Form 1099
overstatements of income might more than offset the omitted income
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relating to his bookkeeping and tax return services. Petitioner’s
vague allegations regarding overreported Form 1099 income are not
credible. Among other things, petitioner did not identify
specifically which Forms 1099 reflected overstatements of income,
and petitioner did not indicate any specific amounts of alleged
overstatements.
Petitioner’s training and work as a bookkeeper and tax return
preparer, his failure to keep records of his bookkeeping and
personal tax return preparation activities, his misstatements to
respondent’s representatives, his pattern of filing petitioners’
income tax returns late, only after contact by respondent, and of
reporting thereon only Form 1099 income, not income from his
personal bookkeeping and tax preparation activities, taken together
indicate strongly and establish that petitioner fraudulently filed
the 1990, 1991, and 1992 joint Federal income tax returns.
Petitioner argues that respondent has not satisfied his burden
of proving fraud by clear and convincing evidence. Rule 142(b).
Certainly, some questions remain. Better documentation and more
effort could have been expended by respondent’s representatives to
rebut petitioner’s contention that the Form 1099 income was
overstated. We believe, however, and conclude that petitioner’s
fraud has been proven in a clear and convincing manner.
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Due to the remaining issue to be resolved, regarding
Mrs. Levine,
An appropriate order will
be issued.