T.C. Summary Opinion 2007-119
UNITED STATES TAX COURT
DONALD RAY HARTLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2380-06S. Filed July 17, 2007.
Donald Ray Hartley, pro se.
Lauren B. Epstein, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Petitioner fraudulently underpaid his Federal income taxes
for 1992, 1993, and 1994 and subsequently agreed to the
assessment of deficiencies for those years. Respondent then
determined civil fraud penalties under section 6663. Despite
petitioner’s stipulation, as well as the record’s independent
demonstration that he filed fraudulent returns with intent to
evade tax, petitioner contends that imposition of civil fraud
penalties would be unfair. Thus, the issue for decision is
whether respondent’s penalty determination should be sustained.
We hold that it should.
Background
Most of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ extensive
stipulation of facts and accompanying exhibits.
At the time that the petition was filed, Donald Ray Hartley
resided in Jacksonville, Florida.
In early 1995, petitioner told his brother-in-law that he
needed someone to help him file several years’ worth of
delinquent Federal income tax returns. Petitioner had not yet
filed for those years because he knew he would owe money.
Petitioner’s brother-in-law introduced him to a man named
Robert Rudolph (Mr. Rudolph), who was then employed by the
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Internal Revenue Service (IRS) as a tax auditor. Mr. Rudolph
told petitioner that he, i.e., Mr. Rudolph, could either prepare
correct returns and petitioner could then pay tax, interest, and
applicable penalties, or he could prepare returns that would
generate refunds, but only if petitioner agreed to split the
refunds with him. Petitioner opted for the second alternative
and agreed to file false returns. Petitioner knew that if he
filed false returns, he would be acting illegally.
Acting pursuant to the foregoing arrangement, petitioner
filed returns with the IRS, fraudulently claiming, among other
things: Head of household filing status; the earned income
credit; a dependency exemption for an individual who was not his
dependent; dependent care expenses that were not paid by
petitioner; a net loss from a nonexistent “Schedule C business”;
and a net loss from farming a nonexistent strawberry farm. As a
result, petitioner received fraudulent refunds totaling
$9,924.36.
Petitioner underpaid his taxes for the years at issue by a
total of $9,918. The underpayment of tax for each of the years
in issue was due to fraud with the intent to evade tax.2
In June 1995, petitioner gave Mr. Rudolph approximately
$2,116 from one of his refund checks. Despite receiving
2
So stipulated. But even without that stipulation, we
would so conclude based on the overwhelming weight of the
evidence.
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additional refund checks, petitioner did not make any further
payments to Mr. Rudolph because he knew that Mr. Rudolph was then
under investigation by the authorities. Apparently so was
petitioner.
In December 1999, petitioner pleaded guilty to one count of
violating 18 U.S.C. sec. 201(c)(1)(A) (bribery of public
officials), and the corresponding judgment was entered in April
2000. Petitioner was sentenced to 3 months’ home detention and 3
years’ probation; petitioner also agreed--as a condition of his
probation--to cooperate with the IRS in the collection of “all
outstanding taxes, interest, and penalties.”
In April 2005, respondent sent petitioner a Form 4549,
Income Tax Examination Changes, showing the proposed changes to
petitioner’s income tax returns for 1992, 1993, and 1994. The
proposed changes resulted in a total balance due, including
interest and civil fraud penalties under section 6663, of
$39,645.20.3 Petitioner objected to imposition of the fraud
penalties but agreed to the adjustments related to the
underpayments of tax.
While his objection to the fraud penalties was being
processed, petitioner submitted a Form 656, Offer in Compromise
(OIC), for all 3 tax years. In the OIC, petitioner offered to
3
The interest owed was calculated only to May 25, 2005,
and the penalty calculations were made only to Apr. 25, 2005.
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pay $9,918.4 His reasons, as stated in the OIC, for thinking
that he should be entitled to relief from interest and penalties
included, inter alia:
By agreeing to enter a plea * * * I spared the government
the time and expense of indicting me.
By entering into a plea agreement, I spared the government
the time and expense of trying me.
* * * * * * *
By completing my probationary period without serious
incident, I spared the government the time and expense of
re-sentencing and incarcerating me.
Petitioner also disputed his ability to pay, and he argued
that it would “create an economic hardship and * * * be unfair
and inequitable” to require him to pay the interest and penalty
portions of his potential liability. Not surprisingly,
petitioner’s OIC was rejected.
In response to petitioner’s disagreement with the civil
fraud penalties, respondent mailed petitioner a second Form 4549.
This one showed an amount due of only $9,918 and specifically
excluded civil fraud penalties. The Form 4549 noted that
interest would be calculated at the time of assessment.
Petitioner signed the Form 4549 and a Form 870, Waiver of
Restrictions on Assessment and Collection of Deficiency in Tax
4
This amount represented the sum of the underpayments of
tax for the taxable years in issue.
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(waiver), on July 15, 2005. Tax and interest were assessed
thereafter.
On October 13, 2005, respondent mailed to petitioner a
Notice of Federal Tax Lien Filing and Your Right to a Hearing
Under IRC 6320 showing an “Amount Owed” of $11,525.97.
Petitioner responded by mailing a check to respondent for
$11,525.97 on or about October 20, 2005.
The issue of the underpayments of tax having been resolved,
respondent mailed to petitioner on December 13, 2005, the notice
of deficiency from which petitioner appealed to this Court. In
the notice, respondent determined civil fraud penalties under
section 6663(a) for 1992, 1993, and 1994, in the amounts of
$1,974, $3,206.25, and $2,258.25, respectively.
Petitioner contends that because he paid the “Amount Owed”
listed on the Notice of Federal Tax Lien Filing, he should not
have to pay any additional amount; he seeks to have us direct the
IRS to withdraw the lien. He also contends that it would be
unfair to require him to pay any amount in addition to the
underpayments of tax because paying such additional amounts would
deprive him of all assets; he thus seeks relief from the civil
fraud penalties and statutory interest. We address petitioner’s
contentions in turn below.
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Discussion
A. The Federal Tax Lien
Petitioner asks us to direct the IRS to withdraw the tax
lien currently in place for the taxable years 1992, 1993, and
1994. He claims he paid his debt in full and complains that the
lien remains. However, in the context of this action for
redetermination, we lack jurisdiction to consider, much less
grant, the relief requested by petitioner.
The Internal Revenue Service Restructuring and Reform Act of
1998, 112 Stat. 685, Pub. L. 105-206, was enacted into law on
July 22, 1998. Section 3401 of that Act, 112 Stat. 746, grants
this Court jurisdiction to review the Commissioner’s
determination as to the propriety of filing a notice of Federal
tax lien under section 6320 or a proposed levy on property under
section 6330.
In a collection review action, this Court’s jurisdiction
under sections 6320 and 6330 depends, in part, on the issuance of
a notice of determination by respondent’s Office of Appeals after
the taxpayer has requested an administrative hearing following
the issuance by respondent’s collection division of either a
final notice of intent to levy, see sec. 6330(a), or a notice of
filing of Federal tax lien, see sec. 6320(a). See Sarrell v.
Commissioner, 117 T.C. 122, 125 (2001); Moorhous v. Commissioner,
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116 T.C. 263, 269 (2001); Offiler v. Commissioner, 114 T.C. 492,
498 (2000); see also Rule 330(b).
Petitioner never requested an administrative hearing.
Instead, he responded to the Notice of Federal Tax Lien Filing by
mailing in a check. Thus, because petitioner never requested a
hearing, respondent had no occasion to issue a notice of
determination. In short, the petition in this case was filed in
response to a notice of deficiency issued pursuant to section
6213(a) and not a notice of determination under section 6320 or
6330. Therefore, we may not, and we shall not, address the
propriety of the filing of the lien in this case.5
B. The Notice of Deficiency
When petitioner first disputed imposition of the civil fraud
penalties, the IRS bifurcated petitioner’s potential liabilities
into two parts: Underpayments of tax, the assessment of which
was agreed to by petitioner when he signed the Form 4549 and the
waiver in July 2005; and the civil fraud penalties, subsequently
determined in the notice of deficiency sent to petitioner in
December 2005. Our jurisdiction in the instant case is based on
the notice of deficiency.
5
Further on the subject of this Court’s jurisdiction, it
is clear that in an action for redetermination, such as the
present one, matters involving statutory interest under sec. 6601
are not generally before us and will therefore not be considered.
E.g., Bax v. Commissioner, 13 F.3d 54, 56-57 (2d Cir. 1993); Pen
Coal Corp. v. Commissioner, 107 T.C. 249, 255 (1996); LTV Corp.
v. Commissioner, 64 T.C. 589, 597 (1975).
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Section 6663(a) provides that if any part of an underpayment
of tax required to be shown on an income tax return is due to
fraud, there shall be added to the tax an amount equal to 75
percent of the portion of the underpayment that is attributable
to fraud. The notice of deficiency determined that petitioner
was liable for the 75-percent penalty based on the entire
underpayment for each of the 3 taxable years in issue.
The Commissioner’s determinations are ordinarily presumed to
be correct, and generally the taxpayer bears the burden of
proving otherwise. Rule 142(a)(1); Welch v. Helvering, 290 U.S.
111, 115 (1933). However, this is not the case when fraud is
alleged. See sec. 7454(a). In that instance, the Commissioner
bears the burden of proving fraud by clear and convincing
evidence. Sec. 7454(a); Rule 142(b).
Fraud is defined 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;
Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986),
affg. T.C. Memo. 1984-601. Fraud is never presumed, but is a
question of fact to be resolved upon consideration of the entire
record. Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd.
without published opinion 578 F.2d 1383 (8th Cir. 1978); see also
Beaver v. Commissioner, 55 T.C. 85 (1970).
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As previously stated, the Commissioner bears the burden of
proving fraud by clear and convincing evidence. Sec. 7454(a);
Rule 142(b). In particular, the Commissioner must prove that the
taxpayer intended to evade taxes known to be owing by conduct
intended to conceal, mislead, or otherwise prevent the collection
of taxes. See Stoltzfus v. United States, 398 F.2d 1002, 1004
(3d Cir. 1968); Rowlee v. Commissioner, 80 T.C. 1111, 1123
(1983). In order to carry this burden, the Commissioner must
prove, for each year before the Court, that (1) an underpayment
of tax exists and that (2) a portion of the underpayment is due
to fraud. Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).
In the instant case, respondent has met his burden and proven
that imposition of the civil fraud penalty for each of the years
in issue is appropriate.
The record in this case clearly supports the finding that
petitioner’s Federal tax returns for 1992, 1993, and 1994 were
fraudulent. In this regard, the record includes an extensive
stipulation of facts that not only details petitioner’s efforts
to commit fraud but also includes petitioner’s express admission
that he filed false returns with intent to evade tax. In short,
petitioner filed fraudulent returns, concealing the fact that he
owed taxes in an attempt to obtain refunds to which he was not
entitled.
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Section 6663(b) provides that if the Commissioner
establishes that any portion of the underpayment is attributable
to fraud, then the entire underpayment is treated as attributable
to fraud, except with respect to the portion of the underpayment
that the taxpayer establishes, by a preponderance of the
evidence, is not attributable to fraud. In this case, the entire
underpayment of tax for each year was due to petitioner’s fraud
--petitioner admits as much--and thus we sustain the imposition
of the 75-percent penalty on the entire amount of each year’s
underpayment.
As previously stated, petitioner does not dispute the fact
that his returns for the years at issue were fraudulent, nor does
he offer any evidence to show that the fraud penalty should be
imposed on less than the entire underpayment for each year.
Rather, petitioner expresses concern that he will suffer economic
hardship if he is required to pay the penalties determined in the
notice of deficiency and statutory interest. He asks the Court
to grant him “any relief to which [he] may be entitled by law,
regulation, or equity.” In other words, petitioner audaciously
asks the Court to relieve him of the consequences of violating
the very laws and regulations that he now attempts
(improvidently, we might add) to invoke.
As for relief based in equity, it is worth noting that
petitioner is seeking to be put in the same position as he would
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have been if he had simply filed his tax returns properly in the
first place. Even if we were permitted to entertain arguments
based solely in equity,6 we would not sanction petitioner’s
egregious violation of the law by permitting him to avoid the
consequences of his own choices; there are too many taxpayers who
unintentionally run afoul of the Internal Revenue Code and yet
are required to pay interest and applicable penalties to even
consider relieving petitioner of liability on equitable grounds.
Further, it was a condition of petitioner’s probation that he
cooperate with the IRS in the collection of all outstanding
taxes, interest, and penalties; we are unclear on how petitioner
is able to say he has satisfied that condition when he proposes
that the penalties associated with his conduct be overlooked.
Petitioner is liable for the 75-percent civil fraud penalty
as determined in the notice of deficiency, and no argument--
legal or equitable--persuades us otherwise.
To reflect our disposition of the disputed issue,
Decision will be entered
for respondent.
6
“The Tax Court is a court of limited jurisdiction and
lacks general equitable powers.” Commissioner v. McCoy, 484 U.S.
3, 7 (1987).