T.C. Memo. 2003-158
UNITED STATES TAX COURT
DUNCAN & ASSOCIATES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10285-02. Filed May 29, 2003.
Michael W. Duncan, for petitioner.
Jason W. Anderson and Kathleen C. Schlenzig, for respondent.
MEMORANDUM OPINION
CHIECHI, Judge: This case is before the Court on respon-
dent’s motion for summary judgment (respondent’s motion).
Petitioner filed a response to respondent’s motion (petitioner’s
response). We shall grant respondent’s motion.
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Background
Pursuant to the Court’s Order issued under Rule 37(c)1 on
January 23, 2003, all of the affirmative allegations in paragraph
2 of the answer, and consequently all of the facts on which
respondent relies in respondent’s motion, are deemed admitted.
Petitioner had a mailing address in Glenview, Illinois, at
the time the petition in this case was filed.
During 1990 and 1991, petitioner, a subchapter C corpora-
tion, engaged in the insurance brokerage business. During those
years, Michael W. Duncan (Mr. Duncan) operated and was the
president, corporate secretary, and sole shareholder of peti-
tioner.
During 1990 and 1991, deposits into petitioner’s bank
accounts totaled $729,261 and $963,097, respectively.
As of December 31, 1989, Mr. Duncan had an outstanding loan
balance of $86,562 with respect to amounts that petitioner had
lent him for which petitioner did not charge Mr. Duncan any
interest. (We shall refer to the interest that petitioner did
not charge Mr. Duncan on his outstanding loan from petitioner as
forgone interest.) During 1990 and 1991, Mr. Duncan did not pay
petitioner any interest on his outstanding loan balance with
petitioner.
1
All Rule references are to the Tax Court Rules of Practice
and Procedure. All section references are to the Internal
Revenue Code (Code) in effect for the years at issue.
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During 1990, petitioner sold a business interest to the
Chicago Board of Trade for $125,000. At the time of that sale,
petitioner’s adjusted basis in that business interest was
$16,081. (We shall refer to the amount petitioner received on
the sale of its business interest (i.e., $125,000) reduced by
petitioner’s adjusted basis in that interest (i.e., $16,081) as
petitioner’s 1990 amount realized.) At all relevant times,
petitioner through Mr. Duncan knew that at least a portion of the
$125,000 that it received during 1990 on the sale of its business
interest constitutes income to petitioner for that year.
On or about April 13 and July 18, 1991, petitioner received
checks totaling $49,500, which were not deposited into any bank
account of petitioner but which Mr. Duncan retained and/or
deposited in his bank account. At all relevant times, petitioner
through Mr. Duncan knew that $40,000 of the total $49,500 in such
checks constitutes income to petitioner for 1991. (We shall
refer to such $40,000 of such checks as petitioner’s 1991 check
amount.)
During 1990 and 1991, respectively, petitioner made payments
or other transfers to or on behalf of Mr. Duncan of amounts
totaling $293,650.112 and $460,263.56. Petitioner failed to
2
Of the $293,650.11 in payments or other transfers to or on
behalf of Mr. Duncan that petitioner made during 1990, $9,610 was
paid to Georgio Armani for the purchase of clothing for Mr.
Duncan.
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record those amounts in its books and records as dividends or, in
the alternative, as compensation to Mr. Duncan.
During 1990 and 1991, respectively, Mr. Duncan made payments
or other transfers to or on behalf of petitioner of amounts
totaling $100,900 and at least $58,780. Those respective amounts
represent petitioner’s nontaxable receipts from Mr. Duncan for
such years.
At a time not disclosed by the record before September 1992,
respondent commenced an examination of petitioner with respect to
its taxable years 1990 and 1991.
At a time not disclosed by the record, petitioner filed
Federal income tax (tax) returns for its taxable years 1990 (1990
return) and 1991 (1991 return). In such returns, petitioner
reported gross receipts of $454,034 and $453,451, respectively.
When petitioner filed its 1990 return and 1991 return, petitioner
through Mr. Duncan knew and understood that each such return
understated petitioner’s income for each such year. To illus-
trate, in its 1990 return and/or 1991 return, petitioner did not
report as income the following: (1) The forgone interest on Mr.
Duncan’s outstanding loan balance with petitioner for 1990 and
1991; (2) petitioner’s 1990 amount realized; and (3) petitioner’s
1991 check amount. In addition, petitioner claimed a deduction
of $9,610 in its 1990 return for “outside services”. However, we
found above that petitioner paid the $9,610 claimed for “outside
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services” to Georgio Armani for the purchase of clothing for Mr.
Duncan. When petitioner filed its 1990 return, petitioner
through Mr. Duncan knew that the deduction of $9,610 claimed for
“outside services” was improper. Petitioner also claimed a
deduction of $25,000 in its 1990 return for alleged contributions
to petitioner’s pension and/or profit sharing plan. However,
petitioner did not make any contributions to petitioner’s pension
and/or profit sharing plan during 1990.
On March 24, 1993, Mr. Duncan spoke with two of respondent’s
revenue agents on behalf of petitioner. During Mr. Duncan’s
conversation with those revenue agents, Mr. Duncan acknowledged
that petitioner would have to pay tax, interest, and fraud
penalties that were attributable to the adjustments made by
respondent to petitioner’s 1990 return and 1991 return. Mr.
Duncan also told respondent’s revenue agents on behalf of peti-
tioner the following with respect to petitioner’s taxable years
1990 and 1991: (1) He believed that petitioner’s books, records,
and returns were incorrect; (2) the worksheets that petitioner
presented to respondent’s examining agents to explain income were
false; (3) petitioner’s accountant prepared an altered set of
books, including journals and ledgers, to conceal the fact that
petitioner had understated its income; and (4) he and one of
petitioner’s employees had participated in the falsification of
invoices, receipts, and check register stubs during respondent’s
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examination.
The fraudulent and corrupt activity of Mr. Duncan and
petitioner’s accountant during respondent’s examination of
petitioner included causing an employee of petitioner to prepare
77 false deposit slips incorrectly identifying amounts totaling
$179,579.36 that were deposited into one of petitioner’s bank
accounts (petitioner’s 1991 deposits) as loans from Mr. Duncan to
petitioner. By presenting such false receipts to respondent’s
examining agents, Mr. Duncan intended to mislead respondent’s
examining agents into believing that certain of petitioner’s
receipts during taxable year 1991 constituted the repayment by
Mr. Duncan of loans made to him by petitioner, rather than income
to petitioner. Furthermore, when initially asked about the
source of petitioner’s 1991 deposits, Mr. Duncan told respon-
dent’s revenue agents on behalf of petitioner that those deposits
had to have been made from his personal account. The fraudulent
and corrupt activity of Mr. Duncan and petitioner’s accountant
during respondent’s examination of petitioner also included
directing an employee of petitioner to create a fictitious
receipt in the amount of $9,610 for petitioner’s taxable year
1990 to document the alleged purchase of an oriental rug from
Georgio Armani, which was then presented to respondent’s examin-
ing agents. In fact, as we found above, the $9,610 that peti-
tioner paid Georgio Armani during 1990 was for the purchase of
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clothing for Mr. Duncan.
On March 31, 1998, Mr. Duncan entered into a plea agreement
with the United States Attorney for the Northern District of
Illinois (Mr. Duncan’s March 31, 1998 plea agreement), in which
Mr. Duncan pleaded guilty to one count of obstructing and imped-
ing the due administration of the Code in violation of section
7212(a).3
In Mr. Duncan’s March 31, 1998 plea agreement, Mr. Duncan
acknowledged that he fraudulently and corruptly obstructed and
impeded, and endeavored to obstruct and impede, the due adminis-
tration of the Code by knowingly creating and causing the cre-
ation of false and fraudulent documents for the purpose of
3
Sec. 7212(a) provides:
SEC. 7212. ATTEMPTS TO INTERFERE WITH
ADMINISTRATION OF INTERNAL REVENUE LAWS.
(a) Corrupt or Forcible Interference.–-Whoever
corruptly or by force or threats of force (including
any threatening letter or communication) endeavors to
intimidate or impede any officer or employee of the
United States acting in an official capacity under this
title, or in any other way corruptly or by force or
threats of force (including any threatening letter or
communication) obstructs or impedes, or endeavors to
obstruct or impede, the due administration of this
title, shall upon conviction thereof, be fined not more
than $5,000, or imprisoned not more than 3 years, or
both, except that if the offense is committed only by
threats of force, the person convicted thereof shall be
fined not more than $3,000, or imprisoned not more than
1 year, or both. The term “threats of force”, as used
in this subsection, means threats of bodily harm to the
officer or employee of the United States or to a member
of his family.
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obstructing and impeding respondent’s examination of petitioner
with respect to its taxable years 1990 and 1991 and for the
purpose of concealing from respondent the falsity of petitioner’s
1990 return and 1991 return.
In Mr. Duncan’s March 31, 1998 plea agreement, Mr. Duncan
also acknowledged that: (1) Petitioner’s 1990 return fraudu-
lently understated petitioner’s income by $125,000; (2) peti-
tioner’s 1991 return understated petitioner’s income by $150,000;
and (3) petitioner’s accounting documents contained entries
falsely reclassifying $125,000 of petitioner’s income for 1990
and $150,000 of petitioner’s income for 1991 as repayments by Mr.
Duncan of loans allegedly drawn from petitioner’s “Loan to
Shareholder” account.
On March 20, 2002, respondent issued to petitioner a notice
of deficiency (notice) with respect to its taxable years 1990 and
1991. In that notice, respondent determined deficiencies in, and
fraud penalties under section 6663(a) on, petitioner’s tax, as
follows:
Fraud Penalty
Year Deficiency Under Sec. 6663(a)
1990 $64,392 $48,294.00
1991 75,726 56,794.50
Respondent further determined in the notice that petitioner
has imputed interest income for 1990 and 1991 under section 7872
of $7,089 and $7,670, respectively, as a result of the forgone
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interest on Mr. Duncan’s outstanding loan balances with peti-
tioner during those respective years.
Respondent also determined in the notice that petitioner
has capital gain income of $108,919 for 1990 as a result of
petitioner’s sale during that year of its business interest to
the Chicago Board of Trade.
Respondent further determined in the notice that petitioner
understated its gross receipts for 1990 and 1991 in amounts
computed as discussed below. Respondent used the bank deposits
method in order to reconstruct petitioner’s gross receipts for
each of the years 1990 and 1991, as follows:
Explanation 1990 1991
Deposits $729,261 $963,097
Nontaxable Receipts from Mr. Duncan (100,900) (58,780)
Amount Received on Sale of (125,000) ---
Business Interest
Repayments to Customers --- (281,614)
Petitioner’s 1991 Check Amount --- 40,000
Gross Receipts $503,361 $662,703[1]
1
Due to a mathematical error, the notice determined that
petitioner’s gross receipts for 1991 totaled $662,903. That
mathematical error shall be corrected in the parties’ computa-
tions under Rule 155.
Petitioner’s 1990 return and 1991 return reported gross receipts
of $454,034 and $453,451, respectively. Consequently, respondent
determined in the notice that petitioner had understated its
gross receipts for 1990 and 1991 by $49,327 and $219,452,4
4
The $219,452 amount by which respondent determined in the
(continued...)
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respectively.
Respondent also determined in the notice to disallow the
deductions petitioner claimed in its 1990 return of $9,610 and
$25,000, respectively, for “outside services” and contributions
to petitioner’s pension and/or profit sharing plan.
Discussion
The Court may grant summary judgment where there is no
genuine issue of material fact and a decision may be rendered as
a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner,
98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).
All of the facts on which respondent relies in respondent’s
motion have been deemed admitted. Those facts include the
material facts on which we may proceed to resolve the issues in
respondent’s motion, including the issue relating to the fraud
penalties under section 6663(a), see, e.g., Doncaster v. Commis-
sioner, 77 T.C. 334, 337 (1981). We conclude that there are no
genuine issues of material fact regarding the issues raised in
respondent’s motion.
With respect to respondent’s determinations that petitioner
has a deficiency in tax for each of the years at issue, on the
4
(...continued)
notice petitioner understated its gross receipts for 1991 is
wrong due to mathematical errors by respondent, including respon-
dent’s mathematical error noted above. The correct amount by
which petitioner understated its gross receipts for 1991 is
$209,252. Respondent’s mathematical errors in the notice shall
be corrected in the parties’ computations under Rule 155.
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record presented, we sustain those determinations5 except to the
5
In petitioner’s response, petitioner does not dispute
respondent’s determinations that it has deficiencies in tax for
the years at issue. In fact, petitioner admits in that response
that “There clearly are monies due and owing the IRS which the
petitioner admits to and wants to settle.”
Petitioner’s response, however, does not address the balance
of the issues presented in respondent’s motion. To illustrate,
petitioner’s response states in part:
The respondent has filed a motion for summary judgment
based upon lack of response and stated allegations and
to this end I (we) request that you consider mitigating
circumstances, as follows:
1. Petitioner does not have funds to hire legal
counsel needed to prepare briefs and re-
sponses to motions.
2. Petitioner records were destroyed in a flood
August 22, 2002, at a warehouse facility in
Glenview, Illinois.
3. Petitioner sustained a disabling injury re-
sulting in two (2) surgeries to his left foot
with continuing care through Mayo Clinic
Rochester, Minnesota.
4. Petitioner requests the court to consider the
six (6) year delay during which the IRS did
not assess outstanding taxes.
5. In excess of 80% of amounts due and owing IRS
are accrued interest and penalties resulting
from the IRS admitting to losing/misplacing
Mr. Duncan’s and Duncan & Associates’ files.
6. Petitioner and legal counsel Mr. Fred Fore-
man, former U.S. attorney for the 7th Dis-
trict, requested on numerous occasions
amounts due and owing the IRS for tax years
1990 and 1991 only to be told that cases
involving fraud or allegations of fraud could
not be paid until concluded. [Reproduced
literally.]
We note that the so-called mitigating circumstances quoted above
in paragraph 2 of petitioner’s response is inconsistent with
petitioner’s petition in which petitioner alleges that its
(continued...)
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extent necessary to correct the mathematical errors discussed
above.6
With respect to the fraud penalty under section 6663(a) that
respondent determined against petitioner for each of its taxable
years 1990 and 1991, section 6663(a) imposes a penalty equal to
75 percent of the portion of any underpayment that is attribut-
able to fraud. For purposes of section 6663(a), if the Commis-
sioner of Internal Revenue (Commissioner) establishes that any
portion of an underpayment is attributable to fraud, the entire
underpayment is to be treated as attributable to fraud, except
with respect to any portion of the underpayment that the taxpayer
establishes by a preponderance of the evidence is not attribut-
able to fraud. Sec. 6663(b). In order for the fraud penalty to
apply, the Commissioner must prove by clear and convincing
evidence, sec. 7454(a); Rule 142(b), that an underpayment exists
and that some portion of such underpayment is attributable to
fraud. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992).
To prove the existence of an underpayment, the Commissioner
may not rely on a taxpayer’s failure to carry his or her burden
of proof with respect to the underlying deficiency. Parks v.
Commissioner, 94 T.C. 654, 660-661 (1990); Petzoldt v. Commis-
5
(...continued)
records for the years at issue “were discarded due to their age”.
6
See supra note 4.
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sioner, 92 T.C. 661, 700 (1989). The Commissioner must prove
only that an underpayment exists, and not the precise amount of
such underpayment. DiLeo v. Commissioner, 96 T.C. 858, 873
(1991), affd. 959 F.2d 16 (2d Cir. 1992); Petzoldt v. Commis-
sioner, supra at 699-700. When an allegation of fraud is inter-
twined with reconstructed unreported income, as is the case here
with respect to a portion of the underpayment for each of the
years at issue, the Commissioner may satisfy such burden by
establishing an underpayment by either: (1) Proving a likely
source of the unreported income or (2) disproving the nontaxable
source(s) that the taxpayer alleges for the unreported income.
Parks v. Commissioner, supra at 661.
Petitioner understated its gross receipts in its 1990 return
and 1991 return by $49,327 and $209,252,7 respectively. In
addition, petitioner did not report as income in its 1990 return
and/or its 1991 return the following: (1) The forgone interest
on Mr. Duncan’s outstanding loan balance with petitioner for 1990
and 1991; (2) petitioner’s 1990 amount realized; and (3) peti-
tioner’s 1991 check amount. Furthermore, the deductions peti-
tioner claimed in its 1990 return of $9,610 and $25,000, respec-
tively, for “outside services” and contributions to petitioner’s
pension and/or profit sharing plan were improper.
In Mr. Duncan’s March 31, 1998 plea agreement, Mr. Duncan
7
See supra note 4.
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acknowledged that petitioner’s 1990 return fraudulently under-
stated petitioner’s income by $125,000 and that petitioner’s 1991
return understated petitioner’s income by $150,000. Moreover, in
petitioner’s response, petitioner admits that “There clearly are
monies due and owing the IRS which the petitioner admits to and
wants to settle.”
On the instant record, we find that respondent has estab-
lished by clear and convincing evidence that there was an under-
payment of petitioner’s tax for each of its taxable years 1990
and 1991.
In order to prove fraudulent intent, the Commissioner must
prove by clear and convincing evidence that the taxpayer intended
to evade tax, which the taxpayer believed to be owing, by conduct
intended to conceal, mislead, or otherwise prevent the collection
of such tax. Laurins v. Commissioner, 889 F.2d 910, 913 (9th
Cir. 1989), affg. Norman v. Commissioner, T.C. Memo. 1987-265;
Parks v. Commissioner, supra. The existence of fraud is a
question of fact to be resolved upon consideration of the entire
record. DiLeo v. Commissioner, supra at 874; Gajewski v. Commis-
sioner, 67 T.C. 181, 199 (1976), affd. without published opinion
578 F.2d 1383 (8th Cir. 1978). Fraud is never presumed or
imputed and should not be found in circumstances which create at
most only suspicion. Toussaint v. Commissioner, 743 F.2d 309,
312 (5th Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v.
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Commissioner, supra at 699-700. Direct evidence of the requisite
fraudulent intent is seldom available. Petzoldt v. Commissioner,
supra at 699; Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).
Consequently, the Commissioner may prove fraud by circumstantial
evidence. Toussaint v. Commissioner, supra at 312; Rowlee v.
Commissioner, supra at 1123; see Marsellus v. Commissioner, 544
F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368.
The courts have identified a number of badges of fraud from
which fraudulent intent may be inferred, including (1) the
understatement of income, (2) the making of false and inconsis-
tent statements to revenue agents, and (3) the failure to cooper-
ate with tax authorities. See Bradford v. Commissioner, 796 F.2d
303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Parks v.
Commissioner, 94 T.C. at 664-665. Although no single factor is
necessarily sufficient to establish fraud, the existence of
several indicia constitutes persuasive circumstantial evidence of
fraud. Petzoldt v. Commissioner, 92 T.C. at 700; see Bradford v.
Commissioner, supra at 307.
A corporation can act only through its officers and does not
escape responsibility for acts of its officers performed in that
capacity. DiLeo v. Commissioner, 96 T.C. at 875. It follows
that corporate fraud necessarily depends upon the fraudulent
intent of the corporate officers. Id. Thus, in determining
whether petitioner acted with the requisite fraudulent intent, we
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must consider the actions of Mr. Duncan, petitioner’s president,
corporate secretary, and sole shareholder.
The record in this case contains indicia of fraud by
petitioner. When petitioner filed its 1990 return and 1991
return, petitioner through Mr. Duncan knew and understood that
each such return understated petitioner’s income for each such
year. In order to mislead respondent’s examining agents with
respect to the understatement of petitioner’s income for its
taxable years 1990 and 1991, Mr. Duncan and petitioner’s accoun-
tant directed, prepared, and/or caused others to prepare certain
false documents that were presented to respondent’s examining
agents.8 Moreover, in Mr. Duncan’s March 31, 1998 plea agree-
ment, Mr. Duncan acknowledged that he fraudulently and corruptly
obstructed and impeded, and endeavored to obstruct and impede,
the due administration of the Code by knowingly creating and
causing the creation of false and fraudulent documents for the
purpose of obstructing and impeding respondent’s examination of
petitioner with respect to its taxable years 1990 and 1991 and
for the purpose of concealing from respondent the falsity of
petitioner’s returns for each such year. In Mr. Duncan’s March
31, 1998 plea agreement, Mr. Duncan further acknowledged that
8
On Mar. 24, 1993, Mr. Duncan told respondent’s revenue
agents that he and one of petitioner’s employees had participated
in the falsification of invoices, receipts, and check register
stubs.
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petitioner’s 1990 return fraudulently understated petitioner’s
income by $125,000.9
Based upon our examination of the entire record before us,
we find that respondent has established by clear and convincing
evidence that petitioner through Mr. Duncan intended to evade tax
for petitioner’s taxable years 1990 and 1991, which petitioner
through Mr. Duncan believed to be owing, by conduct intended to
conceal, mislead, or otherwise prevent the collection of such
tax.
We have considered all of petitioner’s contentions, argu-
ments, and requests that are not discussed herein, and we find
them to be without merit and/or irrelevant.
On the record before us, we shall grant respondent’s motion.
To reflect the foregoing,
An order granting respondent’s
motion will be issued, and decision
will be entered under Rule 155.
9
We note that on Mar. 24, 1993, Mr. Duncan acknowledged to
respondent’s revenue agents that petitioner would have to pay
fraud penalties for its taxable years 1990 and 1991.