T.C. Memo. 2013-122
UNITED STATES TAX COURT
FRANK I. BOHANNON AND JULIE L. BOHANNON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15956-06. Filed May 7, 2013.
Robert E. McKenzie, Kathleen M. Lach, and Adam S. Fayne, for petitioners.
Timothy Shawn Sinnott, Timothy A. Lohrstorfer, and Brian M. Harrington,
for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: The issues for decision are whether respondent issued a
notice of deficiency within the applicable limitations period, and if so, whether
[*1] petitioners are liable for deficiencies and fraud penalties relating to 1992, 1993,
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1994, and 1995 (years in issue).
FINDINGS OF FACT
Mr. Bohannon, a jack-of-all-trades entrepreneur, owned and operated various
businesses during the years in issue. These businesses included: two Schedule C
companies; several subchapter S corporations; a partnership; and several sole
proprietorships. The companies, for which petitioners reported income and
expenses on Schedules C, Profit or Loss From Business, provided tax return
preparation services and sold and leased various items (e.g., cars and household
items).
Petitioners owned approximately 35 acres of land, half of which was tillable,
and entered into a sharecropping arrangement with a local farmer. Pursuant to this
arrangement, Mr. Bohannon purchased seeds and fertilizer and
the farmer planted and harvested crops.1 Mr. Bohannon also attempted to raise
catfish in a pond on petitioners’ land. In 1993, he hired Jones Fish Hatchery
(Jones Fish) to consult on this venture. Mr. Bohannon followed Jones Fish’s
[*2] recommendations, dredged the pond, stocked the pond with several types of
1
Mr. Bohannon and the farmer were, pursuant to their arrangement, each
responsible for half of the costs of their venture and entitled to half of the crops.
Mr. Bohannon also prepared his land for planting, cleared brush, and applied
fertilizer.
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fish, and used an aerator to ensure sufficient oxygenation.
In the late 1980s, Mr. Bohannon began to suffer from ulcerative colitis, a
chronic and incurable disease. To treat his disease, during the years in issue he took
medications which adversely affected his acumen, attitude, and endurance. Mr.
Bohannon decided to work from home and, as part of a larger home remodeling
project, added a home office. Limited by his condition, Mr. Bohannon requested
that Mrs. Bohannon assist with bookkeeping. Mrs. Bohannon was a nurse and had
no bookkeeping or business experience. Nevertheless, she agreed to write checks
and classify expenditures relating to his businesses. Petitioners meticulously
retained receipts and recorded journal entries, but Mrs. Bohannon incorrectly
classified numerous expenditures. For example, she classified expenditures relating
to architectural services, cabinets, contractor services, and babysitting, respectively,
as professional fees, supplies, repairs, and janitorial expenses. Mr. Bohannon
believed that Mrs. Bohannon was correctly classifying expenditures and did not
review her bookkeeping.
Although Mrs. Bohannon took responsibility for bookkeeping, Mr.
Bohannon, a certified tax practitioner, maintained responsibility for petitioners’ tax
return preparation. He used the yearend numbers Mrs. Bohannon provided to
[*3] prepare his businesses’ tax returns and petitioners’ joint Forms 1040, U.S.
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Individual Income Tax Return. Mrs. Bohannon’s misclassifications caused
petitioners to improperly claim numerous personal expenditures as business
expenses.
In January 1996, respondent began auditing petitioners’ 1992 and 1993
business and personal tax returns, and during the audit petitioners filed their 1994
and 1995 tax returns. Revenue Agent Dean Crawford (RA Crawford) interviewed
Mr. Bohannon several times but did not interview Mrs. Bohannon. In May 1996,
RA Crawford and Revenue Agent Dan O’Sullivan (RA O’Sullivan) visited
petitioners’ home to investigate their farming activities. During the visit Mr.
Bohannon informed the agents about his sharecropping arrangement and his catfish
farming activities. The revenue agents did not examine the catfish pond, and the
sharecropper had not yet planted crops.
In October 1996, respondent assigned Special Agent Steve Perron (Agent
Perron) and Revenue Agent Karen Sheely (RA Sheely) to investigate whether
petitioners had engaged in criminal tax evasion. As part of the investigation Agent
Perron reviewed bank records, including draft documents relating to the years in
issue that Mr. Bohannon had submitted to obtain lines of credit. These documents
reflected more income than was reported to respondent on petitioners’ [*4] tax
returns relating to those years. Petitioners also submitted receipts of their
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expenditures to RA Sheely, who determined that many items were incorrectly
reported on petitioners’ tax returns and performed a source and application of funds
analysis to reconstruct petitioners’ income.
On May 18, 2006, respondent sent petitioners a notice of deficiency.
Respondent determined that petitioners had understated taxable income by $0,
$22,500, $171,713, and $157,963 relating to 1992, 1993, 1994, and 1995,
respectively. Respondent further determined that petitioners had deficiencies of
$37,268, $45,436, $88,116, and $130,577 relating to 1992, 1993, 1994, and 1995,
respectively. In addition, respondent determined that petitioners were liable for
section 6663 fraud penalties.2 On August 16, 2006, petitioners, while residing in
Indiana, filed their petition with the Court. Trial in this case commenced September
10, 2012. On October 11, 2012, the Court filed the parties’ stipulation of settled
issues, which provided that petitioners are entitled to additional deductions and
credits (i.e., which petitioners had failed to claim on tax returns) and that
“[r]espondent agrees that petitioners’ understatements of income for the
2
Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect during the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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[*6] taxable years 1992, 1993, 1994, and 1995 are no more than $9,008.00,
$23,862.00, $25,820.00, and $3,263.00, respectively.”
OPINION
Section 6501(a) provides that, generally, the amount of any tax must be
assessed within three years of the filing of a return. Respondent contends that,
pursuant to section 6501(c)(1), the period to assess petitioners’ tax liabilities relating
to the years in issue remains open because petitioners filed false or fraudulent returns
with the intent to evade tax. Fraudulent intent may be inferred from “badges of
fraud” including a taxpayer’s maintaining inadequate records, failure to cooperate
with tax authorities, intent to mislead, and dealing in cash. See Gould v.
Commissioner, 139 T.C. ___, ___ (slip op. at 49) (Nov. 26, 2012); Petzoldt v.
Commissioner, 92 T.C. 661, 700-702 (1989). Respondent must, but has failed to,
establish by clear and convincing evidence that petitioners intended to evade tax.
See sec. 7454(a); Rule 142(b); Pittman v. Commissioner, 100 F.3d 1308, 1313 (7th
Cir. 1996), aff’g T.C. Memo. 1995-243; Petzoldt v. Commissioner, 92 T.C. at 699.
Respondent’s primary contention is that Mr. Bohannon, a certified tax
practitioner, reduced petitioners’ tax liabilities by deliberately classifying personal
expenditures as business expenses. Mr. Bohannon, however, credibly testified that
[*6] he did not pay close attention to how these expenditures were classified. When
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preparing tax returns relating to the years in issue, he trusted and relied on Mrs.
Bohannon’s classifications. While Mr. Bohannon’s reliance on Mrs. Bohannon (i.e.,
to properly classify expenditures) may have been imprudent, it was not, as
respondent contends, “willful blindness”. Any underpayments were directly
attributable to Mrs. Bohannon’s failure to properly classify expenses, not to Mr. or
Mrs. Bohannon’s intent to evade tax. See Petzoldt v. Commissioner, 92 T.C. at 700
(stating that the existence of fraud may not be found under “‘circumstances which at
most create only suspicion’” (quoting Davis v. Commissioner, 184 F.2d 86, 87 (10th
Cir. 1950), remanding a Memorandum Opinion of this Court)).
Respondent further contends, but has failed to establish, that petitioners were
not conducting crop and catfish farming activities during the years in issue. In
addition, respondent contends that petitioners’ intent to evade tax is “demonstrated
by petitioners claiming numerous personal expenses as business expenses * * * after
the audit began.” We are not convinced that petitioners were aware of the
misclassifications at the time they filed their 1994 and 1995 tax returns. Indeed,
petitioners were fully cooperative during the audit process and provided respondent
with additional documentation which ultimately resulted in respondent’s reducing
[*7] the alleged cumulative understatement of income, relating to the years in issue,
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from $352,176 to $61,953. See Gould v. Commissioner, 139 T.C. at ___ (slip op. at
49).
Petitioners maintained meticulous records, rarely used cash, and did not
conduct their businesses in a manner designed to conceal income. See id.; cf.
Petzoldt v. Commissioner, 92 T.C. at 700-702 (stating that “failure to maintain or
present records to respondent’s agents” and “dealing in cash” were evidence of
fraudulent intent). Simply put, petitioners made mistakes recording their
expenditures, did not intend to evade tax, and are not liable for fraud penalties
pursuant to section 6663. See secs. 6663(a), 7454(a); Rule 142(b); Pittman v.
Commissioner, 100 F.3d at 1313; Petzoldt v. Commissioner, 92 T.C. at 699.
Accordingly, the extended limitations period set forth in section 6501(c)(1) is
not applicable, and respondent’s determinations and adjustments relating to 1992,
1993, 1994, and 1995 are barred.
Contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered
for petitioners.