T.C. Memo. 2006-74
UNITED STATES TAX COURT
TOMMY HO CHING CHENG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15027-02. Filed April 12, 2006.
David C. Holtz and Steven R. Mather, for petitioner.
Alan H. Cooper, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined a deficiency in
petitioner’s 1996 Federal income tax of $459,500 and an addition
to tax under section 6651(f) of $344,625.1 The issues for
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
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decision are: (1) Whether the Court should reconsider its denial
of petitioner’s fourth motion for continuance; (2) whether the
statute of limitations under section 6501(a) bars the issuance of
a notice of deficiency; (3) whether petitioner has an income tax
deficiency for 1996; and (4) whether petitioner is liable for an
addition to tax under section 6651(f).
FINDINGS OF FACT
At the time the petition was filed, petitioner resided in
Diamond Bar, California.
Petitioner was born in Hong Kong in 1951 and moved to the
United States in 1982. Petitioner resided in the United States
from 1982 until his deportation on March 17, 2005.
A. Petitioner’s Business Activities
During 1996, petitioner earned income from his trade or
business of obtaining U.S. passports and Republic of Marshall
Islands (Marshall Islands) passports for various individuals.
Petitioner also sought foreign investors for his trade or
business and used their investments as a basis for obtaining
marketing investment visas which would allow the foreign
investors to visit the United States.
During 1996, petitioner deposited funds received from his
business activities into seven bank accounts. Four of these
accounts were in petitioner’s name, three at Cathay Bank (the
Cathay Bank accounts) and one at Bank of America (the Bank of
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America account). The remaining three accounts were not in
petitioner’s name but were subject to his control: (1) “Bona
Trust” account at Cathay Bank (the Bona Trust account); (2) “Amex
Hospitality” account at Citizens Bank (the Amex Hospitality
account); and (3) the “Amex Professional Services Group” account
at East West Bank (the Amex Services account).
Petitioner did not make estimated tax payments or file a
Federal income tax return for 1996.
B. Criminal Tax Investigation
Petitioner was the subject of a criminal investigation
regarding his 1995 tax return and his failure to file tax returns
for 1993, 1994, and 1996. The criminal investigation was
conducted by Special Agent Fred Bautista (Special Agent
Bautista). As a result of the investigation, criminal charges
were filed against petitioner, one count under section 7201 for
an attempt to evade or defeat tax in 1995 and three counts under
section 7203 for willful failure to file tax returns in 1993,
1994, and 1996. On October 12, 2001, petitioner pleaded guilty
to the charges. As part of the plea agreement, petitioner
admitted to receiving income of at least $645,253 in 1996.2
Petitioner was sentenced to 33 months on the count under section
2
The plea agreement was under seal at the time of trial
and was not considered by the Court. See infra p. 17. However,
this admission by petitioner as part of the plea agreement was
established by independent evidence. See infra p. 14.
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7201 and 1 year on each of the counts under section 7203, with
all terms running concurrently. Petitioner was also ordered to
pay restitution to 19 individuals.
C. Respondent’s Determinations
Following the criminal investigation, respondent conducted a
civil investigation of petitioner’s 1996 taxable year. Agent Bob
Golub (Agent Golub) conducted the investigation on respondent’s
behalf. Respondent used the bank deposits method to reconstruct
petitioner’s income for 1996. Respondent determined that
petitioner had total unreported income of $1,138,436, as
reflected by the following: (1) Deposits into the Cathay Bank
accounts totaling $369,761; (2) deposits into the Bank of America
account totaling $106,670; (3) withdrawals from the Bona Trust
account totaling $550,000; (4) withdrawals from the Amex
Hospitality account totaling $26,000; and (5) withdrawals from
the Amex Service account totaling $86,005.
On June 21, 2002, respondent mailed petitioner a notice of
deficiency for the tax year 1996. As reflected in the notice of
deficiency, respondent determined that petitioner had an income
tax deficiency of $459,500 and was liable for an addition to tax
under section 6651(f) of $344,625 for fraudulent failure to file.
D. Procedural History
On September 23, 2002, petitioner filed his petition with
this Court contesting respondent’s determinations. The case was
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initially calendared for the Court’s Los Angeles trial session
beginning September 8, 2003. On August 4, 2003, respondent filed
a motion to continue, which was granted on August 27, 2003. On
August 8, 2003, petitioner’s counsel filed a motion to withdraw
as counsel, which was granted on August 27, 2003. From August
27, 2003 through March 16, 2005, petitioner proceeded pro se.
The case was recalendared for the Court’s Los Angeles trial
session beginning March 15, 2004. On March 1, 2004, petitioner
filed a motion to continue, stating: “The Petitioner moves this
Honorable Court to grant * * * [a motion to continue] due to: a.
Incarceration[;] b. To hire an attorney[;] c. Review records
with C.P.A.[; and] d. Receive bank records.” Petitioner’s motion
was granted on March 2, 2004.
The case was recalendared for the Court’s Los Angeles trial
session beginning October 4, 2004. On August 20, 2004,
petitioner filed his second motion to continue, asking the Court
to grant his motion “due to the following(s) [sic]: 1. Currently
Incarcerated at the Federal Prison[;] 2. To retain/hire an
Attorney[;] Review records/files with the C.P.A.[; and] 4.
Receive Bank records.” Petitioner’s motion was granted on
September 14, 2004.
The case was recalendared for the Court’s Los Angeles trial
session beginning March 14, 2005. On February 28, 2005,
petitioner filed his third motion to continue, asking the Court
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to grant his motion “due to: a/ Incarceration[;] b/ To hire an
attorney[;] c/ Review records with the C.P.A.[;and ] d/ Receive
bank records.” Respondent objected, noting the two previous
motions to continue on the same grounds and petitioner’s
impending deportation. The Court denied petitioner’s motion to
continue on March 2, 2005.
Calendar call was held on March 14, 2005. At that time,
petitioner was still incarcerated. David C. Holtz (Mr. Holtz)
attempted to file another motion to continue on petitioner’s
behalf. Mr. Holtz had not filed an entry of appearance with the
Court, and the Court informed him that he would not be heard
until he filed an entry of appearance. Mr. Holtz refused to file
an entry of appearance, stating that he intended to file an entry
of appearance only if the motion for continuance would be
granted. The trial was then scheduled for March 16, 2005.
On March 16, 2005, Steven R. Mather (Mr. Mather) and Mr.
Holtz filed an entry of appearance. At that time, petitioner
filed his fourth motion to continue. In the motion, petitioner
states:
7. Petitioner is currently scheduled to be
released from custody on March 17, 2005, but will be
escorted to the airport and immediately deported from
the United States.
* * * * * * *
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10. Petitioner has made arrangements to retain
the services of Steve Mather and David Holtz * * *.
Petitioner’s attorneys in turn have engaged the
services of Lilly Hsu, C.P.A. to do the accounting
work.
11. Once Petitioner is released from
incarceration and can gain access to his records,
Petitioner can assist Petitioner’s counsel in preparing
the case for trial.
* * * * * * *
14. * * * Through no fault of his own, Petitioner
has been unable to prepare the case for trial, has been
unable to gain access to Petitioner’s or Respondent’s
records, and has been unable to assist counsel in the
preparation of the case for trial.
The Court heard arguments on petitioner’s fourth motion for
continuance, during which respondent objected to the motion on
the basis of the prior history of continuances and petitioner’s
impending deportation. After a brief hearing, the Court denied
petitioner’s motion.3
OPINION
A. Petitioner’s Fourth Motion for Continuance
Petitioner contends that the Court should have granted his
fourth motion for continuance filed on March 16, 2005.
Petitioner argues that “severe prejudice [will result] to
petitioner’s case due to petitioner’s unavoidable inability to
3
Also on Mar. 16, 2005, respondent filed a motion to
dismiss for lack of prosecution. Following the entry of
appearance by counsel for petitioner and petitioner’s filing of
posttrial briefs, the Court denied respondent’s motion.
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testify. * * * The injustice to petitioner by the Court’s failure
to grant the motion for continuance is profound.”
While petitioner’s first three motions for continuance are
not in issue, they provide important context. All three motions
were filed approximately 2 weeks before the respective calendar
calls and listed the same four grounds for continuance: (1)
Petitioner’s incarceration; (2) to allow petitioner to hire an
attorney; (3) to give petitioner the time to review records with
an accountant; and (4) to give petitioner time to receive bank
records.
Petitioner’s fourth motion for continuance was not filed
until March 16, 2005, on the morning of trial and 2 days after
calendar call. Essentially, the fourth motion offers three
grounds for continuance. Two of the grounds are: (1) Petitioner
has been unable to review his records on account of his
incarceration; and (2) petitioner recently hired counsel and an
accountant to help in the preparation of the case.
Rule 133 provides that a motion for continuance filed within
30 days of the trial date will be denied unless the ground for
continuance arose during that period or there is a good reason
for not making the motion sooner. See Higginbotham v.
Commissioner, T.C. Memo. 2005-270; Smith v. Commissioner, T.C.
Memo. 2004-198. Employment of an attorney or an accountant
shortly before trial ordinarily is not grounds for a continuance.
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Rule 133; Schaefer v. Commissioner, T.C. Memo. 1998-163, affd.
without published opinion 188 F.3d 514 (9th Cir. 1999); Harris v.
Commissioner, T.C. Memo. 1992-638.
From March 1, 2004, when petitioner filed his first motion
for continuance, through March 16, 2005, when petitioner filed
his fourth motion, petitioner has asserted that he has been
unable to review his records on account of his incarceration.
This ground for continuance did not arise within 30 days of trial
and thus does not justify granting petitioner’s motion. See Rule
133.
Petitioner, acting pro se, filed his third motion for
continuance on February 28, 2005, which was denied on March 2,
2005. While the record is unclear, it is likely that petitioner
hired Mr. Holtz and Mr. Mather, who in turn hired an accountant,
sometime after the third motion was denied, or within 2 weeks of
trial. In addition, Mr. Holtz and Mr. Mather were not recognized
by the Court as petitioner’s representatives until they filed an
entry of appearance on March 16, 2005, the day of trial.
Petitioner had more than 1-1/2 years to hire counsel and an
accountant after his first attorney withdrew. His employment of
counsel and an accountant so close to trial does not justify
granting petitioner’s motion. See Rule 133; Schaefer v.
Commissioner, supra; Harris v. Commissioner, supra.
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Petitioner’s third ground for continuance is that he was set
to be released on March 17, 2005, and would be better able to
prepare for trial after his release. While petitioner was set to
be released from incarceration on March 17, 2005, he was to be
immediately deported. Petitioner’s counsel represented that,
upon order of this Court, petitioner would be allowed back into
the country for 60 days to prepare for and attend trial.
However, they offered no proof of this assertion. Additionally,
there is nothing to indicate that petitioner would come back to
the United States to prepare for or attend trial. Petitioner has
repeatedly filed motions for continuance within approximately 2
weeks of trial and has apparently failed to take any steps in
preparation for trial since his first attorney withdrew.
Considering the history of this case, we doubt petitioner would
be more likely to prepare for trial after deportation. We find
that petitioner’s release from incarceration, given his immediate
deportation, does not justify granting petitioner’s motion.
The Court has wide discretion to consider the prejudice to
all parties to a case when ruling on a motion for continuance.
Morris v. Slappy, 461 U.S. 1, 11-12 (1983) (trial court granted
broad discretion on matters of continuance); Schaefer v.
Commissioner, supra; Harris v. Commissioner, supra. Any
prejudice to petitioner was the result of his own delay in
preparation for trial and his procrastination in hiring counsel
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and an accountant. Petitioner has presented nothing that would
indicate the Court should have granted his fourth motion for
continuance.
B. Statute of Limitations
Petitioner argues that the statute of limitations under
section 6501 bars the issuance of respondent’s notice of
deficiency because the notice was issued more than 3 years after
petitioner’s 1996 return was due. Petitioner’s argument is
flawed, both procedurally and substantively.
Rule 39 provides that “A party shall set forth in the
party’s pleading any matter constituting an avoidance or
affirmative defense, including * * * the statute of limitations.”
Petitioner did not raise the statute of limitations as an
affirmative defense in his petition, reply, or at trial, but does
so for the first time on brief.4 Petitioner’s failure to timely
raise the statute of limitations amounts to a waiver of this
affirmative defense. Because petitioner has waived it, we need
not consider his argument further. However, because petitioner
seeks to misapply section 6501, we will briefly address it.
4
In his opening brief, petitioner states: “Respondent
apparently contends as an affirmative defense that the statute
remains open”. Respondent is not raising an affirmative defense
and thus the burden is not on respondent to plead it. Petitioner
apparently made this argument in an effort to side-step the fact
that he failed to plead the statute of limitations as an
affirmative defense, and it is without merit.
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Section 6501(a) provides: “Except as otherwise provided in
this section, the amount of any tax imposed by this title shall
be assessed within 3 years after the return was filed (whether or
not such return was filed on or after the date prescribed)”.
(Emphasis added.) Section 6501(a) thus provides a 3-year period
of limitations on the assessment of tax running from the date
when a return was filed--it does not provide a period of
limitations within which a notice of deficiency must be issued.
Because petitioner did not file a return, respondent may issue a
notice of deficiency at any time and the period of limitations on
assessment remains open indefinitely. See sec. 6501(c)(3).
Petitioner’s argument has no merit.
C. Petitioner’s Federal Income Tax Deficiency
Respondent determined that petitioner had unreported income
of $1,138,436 in 1996, and a corresponding Federal income tax
deficiency of $459,500. Petitioner asserts that because
respondent failed to produce sufficient evidence of petitioner’s
receipt of taxable income, the notice of deficiency is not
entitled to a presumption of correctness. Therefore, petitioner
argues, respondent bears the burden of proof with respect to the
unreported income at issue. In making this argument, petitioner
ignores his own admission.
The Court of Appeals for the Ninth Circuit, to which an
appeal of this case would lie, has held that the Commissioner’s
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deficiency determination is normally entitled to a presumption of
correctness. Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir.
1985); Delaney v. Commissioner, 743 F.2d 670, 671 (9th Cir.
1984), affg. T.C. Memo. 1982-666; Weimerskirch v. Commissioner,
596 F.2d 358, 360 (9th Cir. 1979), revg. 67 T.C. 672 (1977); see
Rule 142(a); see also Welch v. Helvering, 290 U.S. 111, 115
(1933). However, in an unreported income case this presumption
arises only when it is supported by some substantive evidence
that the taxpayer received unreported income. Rapp v.
Commissioner, supra; Delaney v. Commissioner, supra; Weimerskirch
v. Commissioner, supra; see also United States v. Janis, 428 U.S.
433, 441-442 (1976). Once the Commissioner has carried his
initial burden of introducing some evidence linking the taxpayer
with the income-producing activity, the burden shifts to the
taxpayer to rebut the presumption by establishing by a
preponderance of the evidence that the deficiency determination
is arbitrary or erroneous. Rapp v. Commissioner, supra; Adamson
v. Commissioner, 745 F.2d 541, 671 (9th Cir. 1984), affg. T.C.
Memo. 1982-371; see Rule 142(a).
In his answer, respondent states:
[6](c) In this plea agreement, petitioner admitted
he had gross income during the calendar year 1996 of at
least $645,253.00.
* * * * * * *
[6](e) During 1996 the petitioner was in the trade
or business of obtaining passports and visas.
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* * * * * * *
[6](m) Petitioner admitted in his plea agreement
that in 1996 he had income from his trade or business
of obtaining U.S. passports and of obtaining Republic
of the Marshall Island passports for various
individuals.
[6](n) Petitioner had income in 1996 from his
trade or business of obtaining legitimate U.S.
passports for residence outside of the United States,
including residence of the Marshall Islands.
In his reply to answer, petitioner states:
6(a) through (c), inclusive. Admits.
* * * * * * *
6(e). Admits.
* * * * * * *
6(m). Admits.
6(n). Admits.
Petitioner’s admissions are sufficient for respondent to carry
his initial burden of connecting petitioner with the income-
producing activity. Thus, the burden is on petitioner to show
that respondent’s deficiency determination is arbitrary or
erroneous. See Rule 142(a).
Petitioner’s argument focused exclusively on respondent’s
alleged inability to connect petitioner with the income-producing
activity. Petitioner did not produce any evidence that would
indicate respondent’s determinations were incorrect. Petitioner
has failed to meet his burden of proof. Therefore, we sustain
respondent’s determination that petitioner had unreported income
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of $1,138,436 and a Federal income tax deficiency of $459,500 for
1996.
D. Addition to Tax Under Section 6651(f)
Respondent determined that petitioner is liable for an
addition to tax under section 6651(f) of $344,625 for fraudulent
failure to file a return in 1996. Petitioner argues that
respondent has not met his burden of proof under Rule 142(b) and
section 7454(a).
Section 6651(f) imposes an addition to tax of up to 75
percent of the amount of tax required to be shown on the return
where the failure to file a Federal income tax return is due to
fraud. The Commissioner has the burden of proving fraud by clear
and convincing evidence. Sec. 7454(a); Rule 142(b); Clayton v.
Commissioner, 102 T.C. 632, 646, 652-653 (1994). For this
purpose, we consider the same factors under section 6651(f) that
are considered in imposing the fraud penalty under section 6663
and former section 6653(b). Clayton v. Commissioner, supra at
653.
Fraud is an intentional wrongdoing designed to evade tax
known or believed to be owing. Edelson v. Commissioner, 829 F.2d
828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.
1984-601. The existence of fraud is a question of fact to be
resolved upon consideration of the entire record. DiLeo v.
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Commissioner, 96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir.
1992); Recklitis v. Commissioner, 91 T.C. 874, 909 (1988). Fraud
is rarely established by direct evidence, and various kinds of
circumstantial evidence may be relied upon to establish fraud.
Bradford v. Commissioner, supra at 307; Stone v. Commissioner, 56
T.C. 213, 224 (1971).
Courts have developed several indicia, or “badges of fraud”,
from which fraud may be inferred. See Bradford v. Commissioner,
supra at 307-308; Clayton v. Commissioner, supra at 647;
Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992). Although
no single badge is necessarily sufficient to establish fraud, the
existence of several badges may be persuasive circumstantial
evidence of fraud. Niedringhaus v. Commissioner, supra.
Respondent argues the following badges of fraud are present: (1)
Failing to file tax returns; (2) understating income; (3)
maintaining inadequate books and records; (4) sophistication in
business affairs; (5) concealing assets; (6) dealing in large
amounts of cash; (7) engaging in illegal activities; and (8)
failing to make estimated tax payments.5
Petitioner’s plea of guilty to three counts under section
7203 conclusively establishes petitioner’s willful failure to
file tax returns in 1993, 1994, and 1996, which is a badge of
5
Respondent framed the badges of fraud in a different
manner. However, several of the badges alleged by respondent
were repetitive, and are thus listed only once.
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fraud. See Castillo v. Commissioner, 84 T.C. 405, 409-410
(1985). Respondent also established that petitioner failed to
make estimated tax payments in 1996.
In an attempt to establish the remaining badges of fraud,
respondent relies almost entirely on petitioner’s plea agreement,
the plea hearing transcript, and testimony directed towards those
documents. However, at trial, respondent informed the Court that
the documents were under the seal of the U.S. District Court for
the Central District of California. Respondent further stated
that the seal could have been removed but was not because
respondent’s counsel failed to realize the seal was in place
until the week before trial. Respondent provided no authority
for our using those documents while they are under seal. The
Court informed respondent that it would respect the seal of a
Federal District Court and would not consider the plea agreement
or the plea hearing transcript. In an attempt to get into
evidence the information contained in those documents, respondent
called Special Agent Bautista as a witness. Specifically,
Special Agent Bautista testified to admissions purportedly made
by petitioner during the plea hearing. However, the testimony
was struck from the record because it was based on Special Agent
Bautista’s reading of the sealed documents. The purported
admissions were not made directly to Special Agent Bautista, and
he had no independent recollection of the admissions.
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In his posttrial briefs, respondent continued to rely on
information contained in the plea agreement, the plea hearing
transcript, and Special Agent Bautista’s testimony despite being
informed that the sealed documents would not be considered and
after the testimony was struck from the record.
The only other information used by respondent in an attempt
to establish fraud was the testimony of Agent Golub. Agent Golub
offered general statements that petitioner failed to maintain
adequate books and records, concealed assets and income, and
dealt heavily in cash. However, there is nothing in the record
to provide any detail with respect to Agent Golub’s testimony.
Respondent failed to provide sufficient information that would
allow the Court to consider these purported badges of fraud.
Respondent did not present fact witnesses or introduce clear
and convincing evidence to establish that petitioner’s failure to
file a return in 1996 was due to fraud. Instead, respondent
relied on sealed documents, testimony struck from the record, and
vague testimony of one of his agents. We find that respondent
failed to meet his burden of proving fraud by clear and
convincing evidence. Therefore, we hold that petitioner is not
liable for an addition to tax under section 6651(f) for
fraudulent failure to file.6
6
Respondent has not argued in the alternative that
petitioner is liable for an addition to tax under sec.
(continued...)
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In reaching our holdings, we have considered all arguments
made, and, to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent as to the
deficiency in income tax and
for petitioner as to the
addition to tax.
6
(...continued)
6651(a)(1), and thus, we do not consider it.