T.C. Memo. 2004-153
UNITED STATES TAX COURT
ROBERT B. KEMP, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5794-98, 143-00. Filed June 28, 2004.
John P. Konvalinka, for petitioner.
Monica D. Armstrong, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: The issue for decision is whether petitioner
is liable for fraud penalties relating to 1991, 1992, and 1993.
FINDINGS OF FACT
In 1974, petitioner began operating Southeast Trust
Investment Management (Southeast Trust), a sole proprietorship
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registered as an investment adviser with the Securities and
Exchange Commission. In the mid-1970s, Southeast Trust’s name
was changed to Trust Investment Management (Trust Investment).
As owner and operator of Trust Investment, petitioner managed a
$2 million investment portfolio, including employee benefit
accounts.
From 1983 through 1993, petitioner, while continuing to
operate Trust Investment, worked as senior vice president for
First Tennessee Investment Management (First Tennessee). From
1989 through 1993, petitioner deposited a portion of the
management fees he earned from Trust Investment into certificates
of deposit, municipal bonds, and a cash management fund.
In 1993, First Tennessee terminated petitioner’s employment
for violating bank and corporate policies. In that year, an FBI
special agent interviewed petitioner relating to petitioner’s
alleged misappropriation of First Tennessee funds (i.e., five
checks totaling approximately $28,000 and made payable to Trust
Investment).
Petitioner timely filed his 1989 through 1993 Federal income
tax returns. On the Schedule C, Profit or Loss From Business,
accompanying petitioner’s 1993 return, he deducted, from gross
receipts and sales, $65,586 of returns and allowances. By letter
dated June 2, 1994, the Internal Revenue Service notified
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petitioner that his 1992 return had been selected for
examination. On June 13 and July 28, 1994, a revenue agent met
with petitioner relating to the 1992 return.
On September 15, 1994, petitioner filed 1991, 1992, and 1993
amended returns; reported, on his Schedules C, increased taxable
income of $173,817, $191,595, and $63,628, respectively; and paid
the additional taxes and accrued interest due relating to these
years. On February 21, 1995, petitioner filed a 1990 amended
return, reported increased Schedule C taxable income of $134,859,
and paid the additional tax and accrued interest due relating to
that year. On April 8, 1996, petitioner filed a 1989 amended
return, reported increased Schedule C taxable income of $102,506,
and paid the additional tax and accrued interest due relating to
that year.
In 1996, petitioner was indicted for bank fraud, mail fraud,
money laundering, and, pursuant to section 7206(1),1 willfully
filing false tax returns. Petitioner was subsequently convicted
of filing false tax returns relating to 1989 through 1992 and
acquitted of bank fraud, mail fraud, and money laundering. The
conviction was affirmed on appeal.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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By notice of deficiency dated December 29, 1997, respondent
determined fraud penalties, pursuant to section 6663, of $44,930
and $16,722 relating to 1992 and 1993, respectively. On March
27, 1998, petitioner, while residing in Hixson, Tennessee, filed
a petition with this Court relating to 1992 and 1993.
On October 4, 1999, respondent sent petitioner a second
notice of deficiency in which he determined fraud penalties,
pursuant to section 6663, of $28,407, $31,721, and $41,424
relating to 1989, 1990, and 1991, respectively. In response,
petitioner, on January 3, 2000, while residing in Hixson,
Tennessee, filed a petition with this Court relating to 1991.
Respondent, on July 17, 2000, assessed the fraud penalties
relating to 1989 and 1990.
On April 19, 2000, the Court granted petitioner’s motion to
consolidate the two cases.
OPINION
Respondent contends, pursuant to section 6663, that
petitioner, on his 1991, 1992, and 1993 returns, underreported
income with the intent to evade tax. Petitioner contends that he
did not intend to evade tax and believed he was entitled to defer
a portion of the underreported income.
Petitioner’s conviction, pursuant to section 7206(1), is a
badge of fraud and estops him from contesting that he
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intentionally filed false 1991 and 1992 returns and that an
underpayment exists for these years. Bradford v. Commissioner,
796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601;
Considine v. United States, 683 F.2d 1285, 1287 (9th Cir. 1982);
Wright v. Commissioner, 84 T.C. 636, 643-644 (1985). Respondent
cannot rely solely on petitioner’s conviction to sustain his
burden of establishing fraud but must clearly and convincingly
prove that petitioner intended to evade tax. Sec. 7454(a); Rule
142(b); Parks v. Commissioner, 94 T.C. 654, 660-661 (1990);
Wright v. Commissioner, supra at 643-644. This burden is met
where respondent proves conduct intended to conceal, mislead, or
otherwise prevent the collection of tax. Parks v. Commissioner,
supra at 661. Fraud is not to be imputed or presumed but rather
must be established by some independent evidence. Beaver v.
Commissioner, 55 T.C. 85, 92 (1970).
Respondent has failed to meet his burden. Respondent did
not present any witnesses or introduce sufficient evidence to
establish that any portion of the underreported income is
attributable to fraud. See sec. 6663(b); Petzoldt v.
Commissioner, 92 T.C. 661, 698-699 (1989). Instead, respondent
focused on petitioner’s criminal indictment for bank fraud, for
which petitioner had been acquitted, and income petitioner
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asserted he set aside in an attempt to satisfy reserve
requirements relating to employee benefit accounts he managed.
Respondent questioned petitioner about whether he had
embezzled from First Tennessee five checks made payable to Trust
Investment (i.e., representing a relatively small portion of the
underreported income in issue). Petitioner failed to report the
proceeds from these checks, but respondent did not establish that
petitioner embezzled these amounts or intended to evade tax.
Respondent further challenged petitioner’s assertion that a
portion of the underreported income was attributable to funds
petitioner set aside (i.e., into certificates of deposit,
municipal bonds, and a cash management fund) in an attempt to
satisfy reserve requirements. Petitioner acknowledged that he
did not formally set up a reserve account but established that he
believed he could defer income on amounts set aside and
subsequently report these amounts as income when they were no
longer needed to meet reserve requirements. Petitioner’s
contention, regarding the reserve account, related to only a
portion of petitioner’s underreported income (e.g., petitioner
deducted, as returns and allowances, on his returns only the
amounts set aside in 1993). Inexplicably, respondent failed to
address (i.e., did not question petitioner or his accountant and
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did not address on brief) the remaining amount of underreported
income.
The typical indicia of an intent to evade tax are not
present. Petitioner maintained adequate records, made all
pertinent information available to the Internal Revenue Service,
and cooperated with the Internal Revenue Service’s investigation.
In short, petitioner understated his income, but respondent has
not established that petitioner intended to evade tax.
Accordingly, we reject respondent’s determinations.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decisions will be entered
for petitioner.