T.C. Memo. 2010-58
UNITED STATES TAX COURT
DOUGLAS D. AND BRENDA D. CHILD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11021-06. Filed March 25, 2010.
Dale G. Siler and Michael C. Walch, for petitioners.
R. Craig Schneider, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: Respondent determined a total of $179,4431
in deficiencies in petitioners’ Federal income taxes and a total
1
All numerical amounts are rounded to the nearest dollar.
All section references are to the Internal Revenue Code in effect
for the years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
-2-
of $156,366 in fraud penalties for years 1995 through 2003 (the
years at issue). Petitioner husband (petitioner), a medical
doctor, participated in a tax scheme developed and promoted by
Dennis Evanson in which professional insurance premiums were paid
to an offshore entity and repatriated through a home equity loan.
We are asked to decide several issues. First, we are asked to
decide whether petitioners are entitled to deduct professional
insurance payments and home mortgage interest payments resulting
from the tax evasion scheme.2 We find that they are not entitled
to the deductions. We must also decide whether petitioners
failed to report gross income, which we so find. We must also
decide whether petitioner’s overstating deductions and
underreporting income were attributable to fraud. We hold that
they were attributable to fraud.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioners resided in Utah at
the time they filed the petition.
2
Respondent argues alternatively that petitioners are liable
for the sec. 6662 accuracy-related penalties for taxable years
1995 through 2003. Respondent concedes that petitioner wife is
not liable for the sec. 6663 fraud penalties. Respondent further
concedes that petitioner wife is not liable for the sec. 6662
accuracy-related penalties if petitioner husband is found liable
for the fraud penalties. Because we find that petitioner husband
is liable for the fraud penalties, petitioner wife is not liable
for either the fraud or the accuracy-related penalties.
-3-
I. Dennis Evanson’s Tax Sheltering Schemes
Respondent began examining petitioners’ income tax returns
as part of respondent’s examination of Dennis Evanson (Evanson).
Evanson designed, organized, promoted and sold various schemes to
help his clients shelter income from taxation. He was ultimately
convicted of Federal income tax evasion by a jury in 2008. All
of Evanson’s tax evasion schemes used sham transactions to
transfer clients’ untaxed income to offshore entities Evanson
created and controlled. The funds were typically returned to the
clients disguised as disbursements from fictitious loans to avoid
taxation. Evanson charged his clients an enrollment fee and an
additional fee ranging from 10 to 30 percent of the client’s tax
savings, not a fixed fee.
Evanson’s accountant, Brent Metcalf (Metcalf), created
allocation reports listing each client’s tax savings and
Evanson’s commission. Metcalf also maintained the International
Capital Management (ICM) account, a general ledger showing the
aggregate of the client’s deposits, withdrawals and transfers of
funds among all the different Evanson’s entities. Metcalf was
convicted of promoting a tax fraud scheme in 2008.
A. Fraudulent Insurance Expense Method
One scheme Evanson developed and used was the fraudulent
insurance expense method. Under this method Evanson’s clients
would purchase fictitious insurance from an offshore company
-4-
known as Commonwealth Professional Reinsurance, Ltd.
(Commonwealth), that Evanson established in Nevis, British West
Indies. Evanson was also an agent for Commonwealth. The amount
of the “premium” the client paid for the insurance policy was
based on the amount of income the client wished to shelter from
taxation. The premiums Evanson’s clients paid to Commonwealth
were typically higher than premiums for actual insurance
purchased in the domestic market. Evanson’s clients sought to
further reduce or eliminate their tax liabilities by claiming the
insurance premiums paid to Commonwealth as business expenses.
The funds paid by the Evanson’s client were moved from the
offshore bank account Commonwealth owned to an offshore bank
account controlled by Medcap Management, Ltd. (Medcap), another
entity Evanson created and controlled. The amount paid was also
credited on the ICM account. The client could then invest the
funds in other Evanson entities or could have the funds
repatriated to the client through one of the various schemes
Evanson designed to avoid taxation.
B. Fraudulent Mortgage Interest Deduction Method
Most of Evanson’s clients had their money repatriated tax
free through fraudulent loans issued by Cottonwood Financial
Services, LC (Cottonwood), a Utah limited liability company
Evanson established. As with Commonwealth, Evanson was the agent
for Cottonwood. He determined which clients would receive the
-5-
loan distributions and in what amounts. Medcap would then “lend”
the funds to Cottonwood and Metcalf would distribute the funds to
the client. If a client elected to make a payment, the amount
paid was credited to the offshore ICM account, not to the
Cottonwood account. The loans from Cottonwood were frequently
characterized as home equity loans so that the client would claim
a home mortgage interest deduction on his or her personal income
tax return, further reducing or eliminating his or her tax
liability. The home equity loan was designed to have a high
interest rate to create a larger deduction for the client.
II. Petitioners’ Participation in Evanson’s Tax Evasion Schemes
Petitioners were clients of Evanson during the eight years
at issue. Petitioners first met Evanson at a New Year’s party
with some friends. Evanson’s wife is the sister of petitioner
wife’s good friend. Petitioner was a highly compensated medical
doctor specializing in radiology. He felt, however, that his
compensation was relatively low compared to that of other doctors
in his specialty. With Evanson’s assistance petitioners entered
into arrangements with Commonwealth and Cottonwood that followed
the tax evasion scheme just described.
A. Petitioner’s Professional Insurance With Commonwealth
Petitioner entered into a written contract with Commonwealth
for professional insurance on September 30, 1994, while
-6-
petitioner was on vacation in the Cayman Islands. Evanson acted
on Commonwealth’s behalf.
The Commonwealth policy provided petitioner with fictitious
insurance, as provided in Evanson’s tax evasion scheme.
Petitioner already had various “claims made” insurance policies
from insurance companies in Utah. The alleged purpose of the
Commonwealth policy was to supplement petitioner’s claims made
policies by providing retroactive “tail” coverage and increasing
petitioner’s per claim and aggregate coverage limits to $3
million and $5 million ($3/5 million claim limits), respectively.
The Commonwealth policy was unnecessary, however, because all
petitioner’s claims made policies had a retroactive date of July
1, 1988, which was before petitioner began practicing medicine.
All claims were therefore covered by petitioner’s existing claims
made policies.
The Commonwealth policy also did not provide petitioner with
increased $3/5 million claim limits. Instead, the policy limited
Commonwealth’s liability to the amount of premiums petitioner
paid during the year in which the claim occurred. These amounts
ranged during the years at issue from only $30,620 to $50,846,
less than one percent of the alleged $3/5 million claim limits.
Moreover, the premiums petitioner paid to Commonwealth were
between seven and eleven times the premiums he paid for his
claims made policies, which was consistent with Evanson’s tax
-7-
scheme. Commonwealth also never paid a claim against petitioner
during any of the eight years at issue.
Petitioner’s arrangement with Commonwealth was not well
documented. There was no written contract in effect between
petitioner and Commonwealth during the years at issue.
Petitioner did not enter into any written contracts with
Commonwealth aside from the initial agreement executed in
September 1994 that expired a year later in September 1995. In
contrast, all of petitioner’s claims made policies were written.
Petitioner also agreed telephonically to changes in the
Commonwealth premium amount even though his claims made policies
required all changes to be in writing. Additionally, the only
record petitioner produced of the Commonwealth premium payments
was an undated Quicken file he had prepared himself. Petitioner
did not produce any invoices from Commonwealth. Despite the lack
of substantiation, petitioners claimed a total of $282,676 of
business expense deductions for insurance premiums on the
Commonwealth policy for taxable years 1997 through 2003.
B. Petitioners’ Home Equity Loan From Cottonwood
Petitioners also entered into a “Home Equity Line Revolving
Credit Agreement” (home equity loan) with Cottonwood in
furtherance of Evanson’s tax scheme. Petitioners created the
home equity loan on May 31, 1995, eight months after obtaining
the insurance policy from Commonwealth, to repatriate the amounts
-8-
petitioner paid to Commonwealth as “premiums”. Again Evanson
acted on behalf of Cottonwood. Petitioners also executed a
mortgage on their North Logan, Utah, residential property (the
property) in favor of Cottonwood at that time, but Cottonwood did
not record the mortgage.
Neither petitioners nor Cottonwood followed any of the
formalities associated with a home equity loan. There were no
written contracts, notes, mortgages or trust deeds between
petitioners and Cottonwood other than the home equity loan
agreement and the unrecorded mortgage. The Cottonwood home
equity loan had a stated credit limit of $50,000, but petitioners
were able to receive disbursements exceeding the credit limit
without providing updated financial information or updated
property appraisals because the home equity loan was based on the
amount of “premiums” paid to Commonwealth. In fact, the home
equity loan had an unpaid balance in November 2002 of $215,960,
almost four times the stated credit limit. Cottonwood never
filed a notice of default with the Cache County Recorder’s Office
against petitioners’ property even though petitioners failed to
make sufficient payments to reduce the debt. In addition,
petitioners did not pay off the Cottonwood home equity loan when
they sold the property.
Furthermore, petitioners did not list or disclose the
Cottonwood home equity loan on a loan application with Bank of
-9-
Utah on December 19, 2002. Petitioners failed to disclose the
home equity loan even though they made an interest payment to
Cottonwood approximately two months before submitting the loan
application. Petitioners also failed to list or disclose the
Cottonwood home equity loan on an application to refinance the
property with Market Street Mortgage Company (Market Street) in
2003. Petitioners made several changes to the Market Street loan
application but they did not include the home equity loan with
Cottonwood. Petitioners had a duty to review both the Bank of
Utah and the Market Street loan applications and sign under
penalty of perjury that the information provided was true.
Petitioner was credit worthy given his high-income
profession. Petitioners’ residential loans with Bank of Utah and
Market Street had interest rates of 5.625 and 5.375 percent,
respectively. In contrast, the Cottonwood home equity loan had a
stated interest rate of 10.75 percent, which was almost twice the
interest rates on petitioners’ other residential loans. Metcalf,
as a representative of Cottonwood, sent annual letters to
petitioner informing him of accrued interest on the home equity
loan. Petitioner could pay the accrued interest, which he
occasionally did. Petitioners were also unable to document the
home mortgage interest deductions they claimed to Cottonwood.
The parties have stipulated, however, that petitioners claimed a
total of $49,371 of mortgage interest deductions on the
-10-
Cottonwood home equity loan for taxable years 1995 through 2000,
2002 and 2003.
C. Conclusion
We find that petitioners participated in Evanson’s tax
evasion schemes during the years at issue. Petitioner’s conduct
in sending money to the offshore account of Commonwealth or
repatriating those funds to himself through advances on the home
equity loan with Cottonwood followed the tax evasion scheme
Evanson outlined. Petitioner’s participation in the schemes was
also well documented in Evanson’s records. Petitioner was listed
as a client on Evanson’s allocation report and had amounts
credited on the Evanson’s offshore accounts that matched the
“premium” payments made to Commonwealth. Moreover, petitioners
made draws on the Cottonwood line of credit in sufficient amounts
to pay the insurance “premiums” to Commonwealth.
III. Unreported Income Determined Through Bank Account Deposits
Petitioners maintained two personal bank accounts with Zions
Bank in 2002 and 2003. Respondent determined petitioners’
unreported adjusted gross income for taxable years 2002 and 2003
as follows:
-11-
2002 2003
Total Bank $518,944 $353,200
Deposits
Less: (65,407) (12,956)
reduction for
nontaxable
sources
Less: (349,718) (257,158)
income
reported
Net taxable 103,819 83,086
deposits:
Unreported 103,819 83,086
Adjusted
Gross Income:
Respondent determined, based on bank account deposits, that
petitioners had unreported gross income of $103,819 in 2002 and
$83,086 in 2003. Petitioner claimed that the deposits were
interaccount transfers and other nontaxable deposits but produced
at trial evidence of deposits that had already been factored into
respondent’s bank deposit analysis as nontaxable deposits.
Petitioner also provided handwritten summaries and explanations
of the unreported income that petitioner had prepared himself.
Petitioner did not produce any admissible receipts, books,
records or other documents identifying the source of the
deposits.
IV. The Deficiency Notice
Respondent issued the deficiency notice for taxable years
1995 through 2003 to petitioners on March 10, 2006. Respondent
-12-
disallowed the deduction for professional insurance premiums
petitioner claimed he paid to Commonwealth during taxable years
1997 through 2003. Respondent also disallowed home mortgage
interest deductions petitioners claimed on the Cottonwood home
equity loan for 1995 through 2000, 2002 and 2003. Respondent
also determined in the deficiency notice that petitioners had
unreported gross income in 2002 and 2003 and that petitioner was
liable for the fraud penalties in the deficiency notice.
Petitioners timely filed a petition to contest the determinations
in the deficiency notice.
OPINION
We are asked to decide whether petitioners, who invested in
a tax evasion scheme, are entitled to deduct professional
insurance premium payments and home mortgage interest payments
stemming from their participation in the scheme. We must also
decide whether petitioners failed to report gross income and
whether petitioner is liable for the fraud penalty. We address
each of these issues in turn.
I. Deductibility of Professional Insurance Premiums
We first address whether petitioners may deduct professional
insurance premiums paid by petitioner, a medical doctor, on the
Commonwealth policy. We begin with general principles of tax
litigation. Deductions are a matter of legislative grace, and
the taxpayer has the burden of proving that he or she is entitled
-13-
to the claimed deductions. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Taxpayers may fully deduct
all ordinary and necessary business expenses paid or incurred
during the taxable year. Sec. 162(a). Where transactions lack a
business purpose and are undertaken solely for tax avoidance
purposes, however, their tax consequences will be determined
based on substance and not form. See Gregory v. Helvering, 293
U.S. 465 (1935). Accordingly, all deductions stemming from a
sham transaction will be disallowed. Derr v. Commissioner, 77
T.C. 708, 730 (1981).
The inquiry into whether a transaction has economic
substance focuses on (1) whether the transaction at issue had any
practical economic consequences other than the creation of tax
benefits and (2) whether the taxpayer had a valid business
purpose or profit motive. ACM Pship. v. Commissioner, 157 F.3d
231, 247-248 (3d Cir. 1998), affg. on this issue T.C. Memo. 1997-
115. The taxpayer bears the burden of proving that the
challenged transaction was not a sham transaction lacking
economic substance. Rule 142(a); Sheldon v. Commissioner, 94
T.C. 738, 753 (1990).
Respondent argues that petitioners are not entitled to
deduct the “premium” payments to Commonwealth because the
insurance arrangement lacked economic substance. We must first
determine, therefore, whether petitioner’s arrangement with
-14-
Commonwealth was a true insurance arrangement with practical
economic consequences. There is no clear set of criteria for
determining whether an insurance arrangement exists and this
Court will consider all of the relevant facts and circumstances.
Sears, Roebuck & Co. v. Commissioner, 972 F.2d 858, 864 (7th Cir.
1992), affg. in part and revg. in part 96 T.C. 61 (1991).
Historically and commonly insurance involves risk-shifting
and risk-distributing. Helvering v. Le Gierse, 312 U.S. 531, 539
(1941). Shifting risk entails the transfer of the impact of a
potential loss from the insured to the insurer. Clougherty
Packing Co. v. Commissioner, 84 T.C. 948, 958 (1985), affd. 811
F.2d 1297 (9th Cir. 1987). If the insured has shifted its risk
to the insurer, then a loss by or a claim against the insured
does not affect it because the loss is offset by the proceeds of
an insurance payment. Id. An insurance premium is generally the
cost for shifting risk. See id.
Petitioner’s arrangement with Commonwealth was not a true
insurance arrangement because it did not effectively shift or
distribute any risk from petitioner to Commonwealth. The policy
that petitioner argues was in effect for the years at issue
limited Commonwealth’s liability. Unlike the asserted $3/5
million claim limits, Commonwealth’s liability was limited to the
amount of premiums petitioner paid during the year of the claim.
Petitioner remained liable for any claims exceeding the amount of
-15-
premiums. Commonwealth never assumed the risk for claims
exceeding the premium payments, nor did petitioner and
Commonwealth distribute the risk to other parties. We find
telling that Commonwealth never paid any claim during any of the
years at issue nor for that matter was the alleged policy to
cover any claims not already covered under petitioner’s claims
made policies. We therefore find that petitioner’s arrangement
with Commonwealth was not a true insurance arrangement with
practical economic consequences.
We find instead that the only economic consequence of
petitioner’s arrangement with Commonwealth was the creation of
tax benefits. Petitioner avoided taxation by transferring income
disguised as “premium” payments to Commonwealth, an offshore
entity. The premium payment amount was based on the amount
petitioner sought to shelter from income rather than on the cost
of shifting risk. Petitioner was able to further reduce his tax
liability by claiming a deduction for the alleged premium
payments. Moreover, the arrangement with Commonwealth followed
Evanson’s fraudulent insurance expense scheme, further indicating
that its main purpose was to avoid taxation. We find therefore
that the Commonwealth transaction was a sham transaction lacking
any economic substance. Accordingly, we hold that petitioner is
not entitled to deduct any “premium” payments to Commonwealth for
1997 through 2003.
-16-
II. Deductibility of Home Equity Loan Interest Payments
We now turn to the deductibility of interest paid on the
Cottonwood home equity loan. Despite a prohibition against
deducting personal interest, a taxpayer may deduct interest paid
on a mortgage on real property of which he or she is the legal or
equitable owner, provided it is qualified residence interest.3
See sec. 163(h).
Respondent argues that petitioners are not entitled to
deduct the payments to Cottonwood because the home equity loan
arrangement was a sham. We agree. The Cottonwood home equity
loan did not have any practical economic consequences other than
tax benefits. We find instead that the home equity loan was not
a legitimate home equity loan. First, the amount of the
Cottonwood loan was never tied to the “home equity” of
petitioners’ property and petitioners were able to borrow in
excess of the credit limit without providing updated financial
information or an updated property appraisal. Petitioners also
did not pay off the loan when they sold the property, which is
the quintessential antithesis of normal business practices.
3
Qualified residence interest is any interest paid or
accrued during the taxable year on acquisition indebtedness or
home equity indebtedness. See sec. 163(h)(3). Home equity
indebtedness is any indebtedness secured by the qualified
residence of the taxpayer to the extent the aggregate amount of
such indebtedness does not exceed the fair market value of the
qualified residence reduced by the amount of acquisition
indebtedness on the residence. See sec. 163(h)(3)(C)(i).
-17-
Second, neither petitioners nor Cottonwood followed standard
protocols with a mortgage. Cottonwood never filed a formal deed
of trust or a notice of default against petitioner, and
petitioners did not disclose the home equity loan on either the
Bank of Utah or the Market Street loan application. Finally, the
loan advances were actually repatriation of amounts petitioners
paid under the fraudulent insurance expense method.
We find that the sole economic consequence of the Cottonwood
arrangement was the generation of mortgage interest deductions.
The interest rate on the Cottonwood home equity loan was almost
double the interest rate on petitioners’ other residential loans
to generate a larger deduction. Furthermore, the arrangement
followed Evanson’s fraudulent insurance expense scheme for
avoiding taxation. Accordingly, we find that the Cottonwood home
equity loan lacked economic substance aside from generating tax
benefits and that petitioners therefore are not entitled to
deduct any “home equity loan interest” payments to Cottonwood
during the years at issue.
III. Unreported Taxable Income for 2002 and 2003
We now address whether petitioner failed to report the
amounts of gross income for 2002 and 2003 that respondent
determined under the bank account deposits method. Gross income
generally includes all income from whatever source derived. Sec.
61(a). Taxpayers must keep adequate books and records from which
-18-
their correct tax liability can be determined. Sec. 6001. When
a taxpayer fails to keep records, the Commissioner has discretion
to reconstruct the taxpayer’s income by any reasonable means.
Sec. 446(b); Erickson v. Commissioner, 937 F.2d 1548, 1553 (10th
Cir. 1991), affg. T.C. Memo. 1989-552; Factor v. Commissioner,
281 F.2d 100, 117 (9th Cir. 1960), affg. T.C. Memo. 1958-94.
We have previously approved the use of the bank deposits
method as a means of income reconstruction. Clayton v.
Commissioner, 102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96
T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). The bank
deposits method assumes that all money deposited into a
taxpayer’s bank account during a particular period constitutes
taxable income. Clayton v. Commissioner, supra at 645. The
Commissioner must take into account, however, any known
nontaxable source or deductible expense. Id. at 645-646. The
taxpayer bears the burden of demonstrating that the
Commissioner’s determination is erroneous. Mallette Bros.
Constr. Co. v. United States, 695 F.2d 145, 148-149 (5th Cir.
1983); Kling v. Commissioner, T.C. Memo. 2001-78; Seidenfeld v.
Commissioner, T.C. Memo. 1995-61.
Respondent determined through bank deposits analysis that
petitioners failed to report taxable deposits in 2002 and 2003.
Petitioners claim that the deposits were interaccount transfers
or other nontaxable deposits, such as refunds and reimbursements.
-19-
In keeping with petitioners’ failure to maintain adequate records
to substantiate the Evanson’s transactions, petitioners did not
produce the receipts or otherwise present any books, records, or
other testimony that would support this assertion. The only
evidence petitioner presented identifying the deposits at issue
was documents that petitioner prepared himself.4 Petitioners
produced no corroborating evidence other than petitioner’s own
self-serving testimony, which we are not required to accept, and
which we do not, in fact, find to be credible. See Niedringhaus
v. Commissioner, 99 T.C. 202, 219 (1992). We therefore find that
petitioners have failed to meet their burden, and we sustain
respondent’s determination that petitioners failed to report
income in the amounts respondent determined for 2002 and 2003.
IV. Section 6663 Fraud Penalty
We next consider whether petitioner is liable for the
section 6663 fraud penalties. Fraud is an intentional wrongdoing
on the part of the taxpayer with the specific purpose of evading
a tax believed to be owing. Edelson v. Commissioner, 829 F.2d
828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Akland v.
Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo.
1983-249. A penalty equal to 75 percent of the underpayment will
be imposed if any part of the taxpayer’s underpayment of Federal
4
Petitioner produced at trial evidence that had already been
factored into respondent’s bank deposit analysis as nontaxable
deposits.
-20-
income tax is due to fraud. See sec. 6663(a). Further, if any
portion of the underpayment is attributable to fraud, the entire
underpayment will be treated as attributable to fraud unless the
taxpayer establishes by a preponderance of the evidence that part
of the underpayment is not due to fraud. Sec. 6663(b).
Respondent has the burden of proving by clear and convincing
evidence that an underpayment exists for each of the years in
issue and that some portion of the underpayment is due to fraud.
See sec. 7454(a); Rule 142(b). Fraud is never presumed but must
be established by independent evidence that establishes
fraudulent intent. Edelson v. Commissioner, supra at 832; Beaver
v. Commissioner, 55 T.C. 85, 92 (1970). Courts have developed
several indicia, or “badges of fraud,” from which fraudulent
intent can be inferred. They include: (1) understating income;
(2) maintaining inadequate records; (3) engaging in a pattern of
behavior that indicates an intent to mislead; (4) concealing
assets; (5) providing implausible or inconsistent explanations of
behavior; (6) filing false documents; and (7) failing to provide
documents to the Commissioner during examination. Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.
1984-601; Cooley v. Commissioner, T.C. Memo. 2004-49. Although
no single factor is necessarily sufficient to establish fraud, a
combination of several of these factors may be persuasive
evidence of fraud. Bradford v. Commissioner, supra at 307-308;
-21-
Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984),
affg. per curiam T.C. Memo. 1982-603; Niedringhaus v.
Commissioner, supra at 211.
We now apply these criteria to petitioner’s situation to
determine whether there are any badges of fraud. First,
petitioner’s nonreporting of income and claiming of sham
deductions resulted in an underpayment for each of the years at
issue. We find petitioner’s nonreporting of income and
overstating deductions to be indicia of fraud.
Additionally, petitioner failed to maintain adequate records
to substantiate the income as well as the deductions. Petitioner
failed to produce documents to substantiate the taxable deposits
at issue. He also failed to produce all insurance policies that
were in effect during the years at issue, including claims made
policies, despite respondent’s issuance of a subpoena.
Petitioner argues that the Commonwealth policy was unwritten and
could be modified orally in contrast to his claims made policies,
which required changes to be in writing. We find it hard to
believe that petitioner would have relied on an unwritten policy
with Commonwealth particularly given the substantial amounts of
the “premium” payments. Equally telling is the lack of records
for the inflated home equity loan arrangement. Petitioner
brazenly claimed “interest” deductions on a home equity loan that
-22-
had exceeded the $50,000 credit limit. We find petitioner’s
failure to maintain adequate records to be an indicium of fraud.
The sham transactions petitioner participated in were
designed by Evanson to mislead the Internal Revenue Service (IRS)
into treating otherwise taxable income as nontaxable. In fact,
Evanson was convicted of tax evasion for organizing and promoting
the transactions. As part of Evanson’s tax evasion schemes,
petitioner made payments disguised as insurance premiums to an
offshore entity. The funds were returned to him disguised as
loan advances to avoid taxation. Petitioner further reduced or
eliminated his taxable income by claiming sham deductions from
the transactions. The tax evasion schemes also enabled
petitioner to conceal income. Petitioner had amounts credited on
Medcap’s offshore accounts that matched the “premium” payments he
had made to Commonwealth. We find that petitioner participated
in Evanson’s schemes to mislead the IRS and conceal assets and
that his participation is an indicium of fraud.
Petitioner also provided implausible explanations of his
behavior in an attempt to conceal the fraudulent nature of the
Evanson’s transactions. For example, petitioner claimed that the
Commonwealth policy provided supplemental insurance even though
the policy was unwritten and failed to provide coverage beyond
his existing claims made coverage. Petitioner was unable to
explain how he could receive loan advances on the Cottonwood home
-23-
equity arrangement in excess of the credit limit without
providing updated financial information and without Cottonwood’s
filing a notice of default. We find petitioner’s implausible
explanations to be indicia of fraud.
Petitioner filed false documents when he failed to report
the Cottonwood home equity loan on loan applications submitted to
Bank of Utah and Market Street in 2002 and 2003, respectively.
Petitioner claims that his failures to disclose the Cottonwood
home equity loan on both documents were inadvertent oversights
and that someone else prepared the paperwork. He asks us to
ignore his obligation to verify the accuracy of the documents
before he signed them under penalties of perjury. We are not
disposed to turn a blind eye to such oversights, especially when
a tax scheme is being used to inflate deductions and deflate
income. We find petitioner’s failure to disclose the Cottonwood
home equity loan to be an indicium of fraud.
Finally, petitioner did not respond to a subpoena issued by
respondent. We find petitioner’s failure to cooperate with
respondent to be a further indicium of fraud.
Most of the badges of fraud upon which this Court
customarily relies are present in this case. Respondent has also
established that petitioner received unreported income and
claimed false deductions and that the nondisclosure of the income
and the claiming of sham deductions resulted in an underpayment
-24-
for each of the years at issue. Considering all the facts and
circumstances, we find that respondent has proven by clear and
convincing evidence that petitioner fraudulently intended to
evade taxes. Accordingly, petitioner is liable for the section
6663 fraud penalties for the years at issue.
Because of our holding regarding the fraud penalties under
section 6663, we need not address whether petitioner is liable
for the accuracy-related penalties under section 6662.
We have considered all other arguments in rendering our
decision and to the extent they are not mentioned, we find them
to be irrelevant, moot or meritless.
To reflect respondent’s concessions,
An appropriate decision
will be entered.