T.C. Memo. 2004-242
UNITED STATES TAX COURT
ST. LUC VALBRUN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19495-02. Filed October 25, 2004.
Steven M. Harris, for petitioner.
D’aun E. Clark and Kenneth A. Hochman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Chief Judge: After petitioner filed an Amended U.S.
Individual Income Tax Return for the 1990 taxable year showing an
increase in tax of $33,255, respondent determined a $26,050 fraud
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penalty under section 66631 for petitioner’s 1990 taxable year.
The sole issue remaining for our consideration is whether
petitioner is liable for the civil fraud penalty under section
6663 for the taxable year 1990.
FINDINGS OF FACT
At the time of the filing of the petition in this case,
petitioner resided in Haiti. For the taxable year 1990,
petitioner derived income in Florida from tax return preparation,
selling automobile insurance, and providing immigration services.
His business activities were conducted predominantly in cash.
Petitioner reported only $7,481 of insurance sales income, $6,235
of bank interest income, and a total tax of $1,479.
Sometime in May or June of 1992, respondent began an audit
of petitioner’s 1990 tax return.2 When initially asked for
records related to his business activities, petitioner did not
produce any income records or bank statements, claiming that they
were lost. Petitioner did produce an organized collection of
checks in connection with his expenses. Later, petitioner’s
accountant produced records relating to petitioner’s insurance
sales and records concerning more than 1,000 customers for whom
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
Respondent also audited the 1989 and 1991 returns, but
those returns are not at issue in this case.
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petitioner had prepared income tax returns,3 but no bank
statements.
From the customer logs provided and various books of
receipt, respondent’s tax examiner (the examiner) computed income
from petitioner’s business activities as follows:
Originally
Business Reported Per Audit Understatement
Insurance sales $7,481 $63,394 $55,913
Tax return preparation -0- 24,000 24,000
Other services -0- 2,480 2,480
7,481 89,874 82,393
In addition, the examiner also determined that petitioner
received interest income from personal loans he made. The
examiner also verified through Forms 1099 that had been received
by respondent that petitioner’s interest income for 1990 was
understated. The examiner verified interest income of $15,414,
resulting in an understatement of interest income of $9,179. The
record does not reflect whether any interest from the personal
loans was included in this amount. Therefore, the actual
understatement of interest income could have been larger than
$9,179.
On August 4, 1997, petitioner pleaded guilty to one count of
willfully making and subscribing a false income tax return under
section 7206(1) for 1990. Petitioner was voluntarily deported
from the United States to Haiti as a result of his guilty plea,
3
Petitioner admitted preparing over 1,500 returns (of which
approximately 20 percent were prepared for free), though there
were records for only 1,080 returns.
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and he agreed to file an amended 1990 tax return. Petitioner’s
accountant and the examiner discussed whether the insurance
income should have been reported on a corporate tax return
because the insurance business had been incorporated sometime
near 1990. Ultimately, however, the income was reported on the
amended return petitioner filed.
On December 7, 1997, petitioner filed the amended return,
reflecting increased income of $99,095, a correct tax of $34,374,
and an increase in tax of $33,255. Respondent determined that
the entire underpayment was attributable to fraud and that
petitioner was liable for civil fraud penalties of $26,050 under
section 6663 for the 1990 taxable year.4
OPINION
If any part of an underpayment is due to fraud, a penalty
equal to 75 percent is imposed on the portion of the underpayment
which is attributable to fraud.5 Sec. 6663(a). Fraud is defined
4
Respondent’s determination of the amount of penalty appears
to be incorrect because the amount is based on the total correct
tax, not the portion of the underpayment attributable to fraud.
Consequently, it does not give petitioner credit for the $1,479
of tax shown on the original return. Therefore, if we find that
the underpayment of tax is attributable to fraud, the penalty
should be based on no more than the total underpayment of
$33,255, not the total correct tax of $34,374.
5
Pursuant to sec. 1.6664-2(c)(2), Income Tax Regs., for
purposes of ascertaining the underpayment on which the sec. 6663
penalty is based, the tax shown on an amended return is not
substituted for the tax shown on the return as originally filed
if the latter was fraudulent.
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as an intentional wrongdoing designed to evade tax believed to be
owing. Edelson v. Commissioner, 829 F.2d 828, 833 (9th Cir.
1987), affg. T.C. Memo. 1986-223. The Commissioner must prove
fraud by clear and convincing evidence. Rule 142(b).
To satisfy this burden, the Commissioner must show (1) that
an underpayment exists, and (2) 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, 660-661 (1990).
The existence of fraud is a question of fact to be resolved
upon consideration of the entire record. DiLeo v. Commissioner,
96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir. 1992). Fraud
is never presumed and must be established by independent evidence
of fraudulent intent. Edelson v. Commissioner, supra. Fraud may
be shown by circumstantial evidence because direct evidence of
the taxpayer’s fraudulent intent is seldom available. Gajewski
v. Commissioner, 67 T.C. 181, 199 (1976), affd. without published
opinion 578 F.2d 1383 (8th Cir. 1978). The taxpayer’s entire
course of conduct may establish the requisite fraudulent intent.
Stone v. Commissioner, 56 T.C. 213, 223-224 (1971).
To decide whether the fraud penalty is applicable, courts
consider several indicia of fraud, or “badges of fraud”, which
include: (1) Understatement of income; (2) inadequate books and
records; (3) failure to file tax returns; (4) implausible or
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inconsistent explanations of behavior; (5) concealment of assets;
(6) failure to cooperate with tax authorities; (7) filing false
Forms W-4; (8) failure to make estimated payments; (9) dealing in
cash; (10) engaging in illegal activity; and (11) attempting to
conceal illegal activity. Bradford v. Commissioner, 796 F.2d
303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988). Although no single factor
is necessarily sufficient to establish fraud, the combination of
a number of factors constitutes persuasive evidence of fraud.
See Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984),
affg. per curiam T.C. Memo. 1982-603; Miller v. Commissioner, 94
T.C. 316, 334 (1990). In addition, this list is nonexclusive.
See Miller v. Commissioner, supra at 334.
The intent to evade taxes is not an element of an offense
under section 7206(1), and thus petitioner is not estopped to
deny fraud because of his conviction. Wright v. Commissioner, 84
T.C. 636, 643 (1985). However, a conviction under 7206(1) is a
probative fact that can be considered and can be persuasive
evidence of the intent to evade tax. Stefansson v. Commissioner,
T.C. Memo. 1994-162; Avery v. Commissioner, T.C. Memo. 1993-344.
Petitioner’s section 7206(1) conviction was a result of a
plea bargain. Petitioner’s counsel suggests that this plea could
be the result of petitioner’s decision to avoid the risk of
receiving a more severe punishment if he lost at trial. No
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evidence has been presented that this was in fact the case, nor
do we need to delve into petitioner’s intentions at the time he
entered into the plea bargain. The conviction, when coupled with
the five indicia of fraud discussed below, provides persuasive
evidence of fraud.
First, petitioner’s understatement of income was
substantial. He failed to report income from tax return
preparation or immigration services. In addition, he failed to
report nearly 60 percent of his interest income and almost 90
percent of his insurance sales income.
Second, petitioner failed to keep adequate books and
records. He initially provided no sales records, customer lists,
or other related documents to the examiner. Even when
petitioner’s accountant provided those documents, they were not
complete. In addition, petitioner did not produce bank
statements or Forms 1099.
Third, petitioner’s explanations of his behavior were
implausible and inconsistent. Petitioner’s excuse provided to
the examiner that his income records were lost was implausible
and inconsistent because those records were subsequently provided
by petitioner’s accountant. In response, petitioner asserts that
the accountant produced “most, but not all”, of the documents
because some had been lost, and therefore there was no intent to
mislead or conceal anything. Even if some of the documents were
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lost, failure to produce the available documents initially was
misleading and inconsistent. We find incongruous the fact that
petitioner claims to have lost records pertaining to income but
was able to produce organized documents to substantiate expenses.
Petitioner’s contention that the omitted income from
insurance sales should have been reported on a corporate tax
return is without effect because the income was not reported by
any entity. Petitioner prepared over 1,500 tax returns.
Petitioner’s knowledge of the tax law belies the argument that he
did not know the proper treatment of his income. Even if
petitioner thought the insurance income should have been reported
on a corporate tax return, that belief does not justify
petitioner’s reporting only a portion of the insurance income on
his individual return and not reporting any income from other
businesses that were not incorporated.
Fourth, petitioner failed to cooperate with the examiner.
Petitioner’s failure to provide available documents relating to
income is a failure to cooperate. Petitioner’s subsequent
cooperation does not make up for his failure to cooperate with
the examiner initially.
Fifth, petitioner’s business was conducted almost
exclusively in cash. While petitioner contends that it was
customary to conduct business in cash in his native Haiti, that
does not justify petitioner’s Florida cash businesses, which
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permitted him to conceal and fail to report income. Conducting a
cash business does not per se prove fraud. When coupled with
attempts to conceal transactions or avoid the requirement of
reporting cash transactions, it becomes more probative. See,
e.g., Beck v. Commissioner, T.C. Memo. 2001-270. Dealings in
cash, however, do heighten the negative effect of inadequate
record keeping, one of the indicia of fraud indicated above.
Ferguson v. Commissioner, T.C. Memo. 2004-90; McGirl v.
Commissioner, T.C. Memo. 1996-313, affd. without published
opinion 131 F.3d 143 (8th Cir. 1997). The businesses in which
petitioner was involved required substantial documentation.
Conducting businesses in cash provided petitioner the opportunity
to conceal his business income.
Fraudulent intent can be shown by circumstantial evidence.
Gajewski v. Commissioner, 67 T.C. 181 (1976). Petitioner’s
knowledge of the tax law undermines any argument that he was
unaware that the income was subject to tax. Petitioner’s actions
and behavior were consistent with an attempt to conceal.
Finally, petitioner pleaded guilty to willfully making a false
return under section 7206(1). After careful review of the
record, we hold that petitioner’s entire course of conduct
demonstrates fraudulent intent.
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Respondent has shown by clear and convincing evidence that
petitioner’s entire $33,255 underpayment of tax was fraudulent
and that petitioner’s underpayment is subject to the penalty
under section 6663(a).
Decision will be entered
under Rule 155.