Testimony dealing with IRS abuses

http://waysandmeans.house.gov/hearings.asp?formmode=view&id=7965

2009 IRS Summertime Tax Tip 2009-20

August 27, 2009


Employee vs. Independent Contractor - Ten Tips for Business Owners



IRS Summertime Tax Tip 2009-20

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

6. If you can direct or control only the result of the work done --and not the means and methods of accomplishing the result --then your workers are probably independent contractors.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding - with the IRS.

10. You can learn more about the critical determination of a worker's status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

[Under section 7206 an individual was properly convicted of aiding and assisting in the preparation of false tax returns, preparing and filing false tax returns, and impeding the IRS in its due administration of the federal tax laws. IRS agents were properly allowed to remain in the courtroom during the trial after the individual invoked the rule of sequestration because they aided the orderly presentation of the case, which they could not have done without hearing the evidence introduced during the course of the trial. Evidence showing that prior to the commencement of the trial, the court held one of the individual's clients in civil contempt for violating an order to provide documents to the IRS, did not unfairly prejudice the individual. The jury indicated that the individual only impeded the IRS by filing tax returns stating zero income and zero taxes due and owing. Finally, governmental witnesses' testimonies concerning the individual's conduct and tax protestor theories were relevant to the jury's determination regarding whether he had acted in good faith. None of the witnesses actually stated that the individual was a tax protestor.

United States of America, Plaintiff-Appellee v. Louis Wayne Ratfield, Defendant-Appellant. 2009-2 USTC ¶50,592

U.S. Court of Appeals, 11th Circuit; 07-13537, August 18, 2009.

..
Before: Edmondson, Black and Siler, Circuit Judges.

Before EDMONDSON, BLACK and SILER, * Circuit Judges.

PER CURIAM: Louis Wayne Ratfield appeals his conviction for preparing and filing false tax returns, specifically, (1) aiding and assisting in the preparation of false federal tax returns for trusts and estates (IRS Form 1041), in violation of 26 U.S.C. § 7206(2) (Counts 1-20); (2) aiding and assisting in the preparation of false individual and joint federal tax returns (IRS Form 1040), in violation of 26 U.S.C. § 7206(2) (Counts 21-42); (3) filing false federal income tax returns in violation of 26 U.S.C. § 7206(1) and 18 U.S.C. § 2 (Counts 43-45); (4) impeding the Internal Revenue Service in violation of 26 U.S.C. § 7212(a) (Count 46); and (5) willfully and knowingly disobeying and resisting the lawful orders issued by a United States District Judge for the Southern District of Florida during proceedings held in United States v. Louis W. Ratfield and LWR Financial Services Trust, Case No. 01-cv-8816, by committing acts that he knew to have been enjoined, or by failing to perform acts that he had been ordered to perform, in violation of 18 U.S.C. § 401(3) (Counts 47-56). 1 A jury returned a verdict convicting Ratfield on all counts of the indictment except for Count 50. 2

We have had oral argument in this case and the parties are intimately familiar with the facts, so we will not extensively review the facts. Ratfield raises three issues on appeal: (1) whether the district court abused its discretion by allowing IRS revenue agent-witnesses to remain in the courtroom during the trial after Ratfield invoked the rule of sequestration; (2) whether the district court abused its discretion by admitting evidence showing that six years before Ratfield's trial commenced, the district court held one of Ratfield's clients in civil contempt for violating an order to provide documents to the IRS; and (3) whether the district court abused its discretion by admitting testimony from IRS agents that Ratfield was a tax protester, that his arguments were frivolous, and that trusts he set up were abusive and a sham. We address these arguments in turn.


I.


Ratfield argues the district court abused its discretion by allowing two IRS agents to remain in the courtroom after Ratfield invoked the sequestration rule, Fed. R. Evid. 615.

Rule 615 provides, in relevant part, "At the request of a party the court shall order witnesses excluded so that they cannot hear the testimony of other witnesses." Nevertheless, the rule "does not authorize exclusion of ... an officer or employee of a party which is not a natural person designated as its representative by its attorney, or [] a person whose presence is shown by a party to be essential to the presentation of the party's cause." A decision regarding who will be excused from the rule of sequestration is within the trial judge's discretion and will be reversed only upon a clear showing of abuse of discretion. United States v. Alvarado, 647 F.2d 537, 540 (5th Cir. Unit A June 1981) 3 (finding the trial court did not abuse its discretion in excusing two drug enforcement agent-witnesses from sequestration requirements).

The district court did not abuse its discretion in deciding to allow the two IRS agents to remain in the courtroom during trial. Agent Grimes testified as a fact witness, an expert witness regarding trusts and taxation, and as a summary witness regarding Ratfield's evolving theories of the taxation of common law trusts. Agent Grimes' testimony aided the jury in understanding the significance of Ratfield's statements, the testimony of the other revenue agents, and the testimony of Ratfield's clients. Her testimony also permitted the other revenue agents to testify primarily as fact witness and avoid repetitive testimony regarding tax laws. Agent Grimes summarized Ratfield's evolving theories regarding the taxation of common law trusts, based on the testimony of other witnesses and documents introduced into evidence. 4 She could not have done so had she not heard the evidence introduced during the course of the trial.

Agent Lottman testified about his calculation of Ratfield's taxable income and also as a summary witness regarding the total tax loss to the Government. 5 There was little, if any, overlap in the testimony of Agents Grimes and Lottman because they focused on different aspects of the case. Consequently, we find unpersuasive Ratfield's contention they tailored their testimony to bolster each other or the testimony of the eleven other IRS agents, who testified regarding their audits of Ratfield's clients and their individual dealings with Ratfield.

The jury was able to view and assess the credibility of these witnesses. The district court's decision to allow Agent Grimes and Agent Lottman to remain in the courtroom aided the orderly presentation of the case. There were adequate grounds to permit both IRS agents to remain in the courtroom, so we find no abuse of discretion in excusing them from the sequestration rule.


II.


Ratfield argues the district judge abused his discretion by allowing the jury to hear evidence that he had previously decided the issues against the defendant's position in a prior, related case. According to Ratfield, the introduction of this evidence, which concerned one of the Government's witnesses, was so prejudicial as to make the trial unfair. Additionally, he argues the attempt at a curative instruction was insufficient to cure the prejudice.

District court rulings on the admissibility of evidence are reviewed for a clear abuse of discretion. United States v. Brannan, 562 F.3d 1300, 1306 (11th Cir. 2009). In determining whether the district court erred in failing to exclude relevant evidence under Fed. R. Evid. 403, we give deference to the discretion of the district judge, looking "at the evidence in a light most favorable to its admission, maximizing its probative value and minimizing its undue prejudicial impact." United States v. Elkins, 885 F.2d 775, 784 (11th Cir. 1989).

Ratfield fails to show how he was unfairly prejudiced by Frederick Crawford's testimony, which was only relevant to Count 46, impeding the IRS in violation of 26 U.S.C. § 7212(a). During trial, the Government introduced court documents, which had been signed by Judge Hurley six years earlier, that included (1) an order to Crawford, one of the Government's witnesses in Ratfield's case, to produce documents to the IRS, (2) an order to show cause related to the order to produce documents, and (3) an order incarcerating the witness for failure to comply. Ratfield argues Crawford and the Government purposefully mentioned the judge by name numerous times during the testimony to prejudice Ratfield. After Ratfield objected, Judge Hurley instructed the jury that they should not take it as any indication of what he thinks their verdict should be in the case. The judge then instructed the jury as follows:
Ladies and gentlemen, as you can imagine, there are lots of things that come before The Court. This is the first time I realized that I had any prior involvement dealing with Mr. Crawford and Mr. Crawford's relationship with Mr. Ratfield.

I want to make sure the jury understands that they cannot in any way take that as indicating that I have any view at all in terms of what the verdict should be as to Mr. Ratfield or whether the Government has proof in terms of Mr. Ratfield's situation.

The only thing I was looking at obviously with Mr. Crawford is the statute that requires people to turn over books and records, and if they have the ability to do it and don't do it, the Court has what is called civil contempt power which effectively says to someone, if you don't turn it over, you will be held in jail until you do turn it over. It is a coercion to say to somebody you have the key to the jail cell yourself, you get out by turning over the records if you have them.

I want to be very clear. I want to really emphasize to the jury they should not in any way, number one, consider that I have any view at all on the merits in terms of the charges against Mr. Ratfield. I assure you I do not. Those are matters for you, the jury, to decide. The fact that there is some prior proceeding that was related principally to Mr. Crawford as he indicated to us.

There is no reason to conclude the jury did not follow the district court's instructions and consider Crawford's evidence only with respect to Count 46 and not with regard to the criminal contempt charges. 6 Moreover, the jury indicated on the special verdict form, that the only manner in which Ratfield impeded the IRS was by filing tax returns stating zero income and zero taxes due and owing. Therefore, the district court did not abuse its discretion in admitting the evidence.


IIII.


Ratfield argues he was unfairly prejudiced when numerous IRS agents were permitted to testify that he was a tax protester, that his arguments were frivolous, and the trusts he set up were abusive and a sham. Ratfield also contends the prejudice was compounded when the judge instructed the jury that he was allowing the testimony about Ratfield being a tax protester because the good faith defense is not available to someone making tax protester arguments.

In determining whether the district court erred in failing to exclude relevant evidence under Rule 403, we give deference to the discretion of the district judge, looking at the evidence in a light most favorable to its admission, and will reverse only upon a clear showing of abuse of discretion. Elkins, 885 F.2d at 784; Brannan, 562 F.3d at 1306.

The district court did not abuse its discretion in allowing the IRS agents' testimony. At trial, the ultimate issue the jury decided with respect to the charges relating to the filing of false tax returns (Counts 1-46) was whether Ratfield acted in good faith. Contrary to Ratfield's claims, none of the Government's witnesses testified Ratfield was actually a tax protester. The record shows that Dr. Olson, one of Ratfield's clients, testified that he asked Ratfield if he wanted to go down the path of what looked like being a tax protester. Agent Grimes testified the arguments Ratfield made to the IRS were "protester type arguments."

Likewise, none of the witnesses opined that Ratfield's arguments were frivolous in the sense that he did not have a good faith belief in them. Instead, they testified they treated his arguments as frivolous, which meant they were not required to provide a point-by-point refutation to his theories on income taxation or his challenges to their authority to conduct audits.

Agent Grimes explained that the IRS defined an "abusive trust" as a trust set up to avoid taxes. The other agents accurately applied the terms "sham" and "abusive" in that manner in their testimony. The IRS agents testified that, based upon their training and experience as revenue agents, they recognized the trusts Ratfield had set up for his clients were abusive because the person who controlled the trust was also the beneficiary. Moreover, the evidence was overwhelming that Ratfield set up the trusts so that he and his clients could reduce or eliminate their income tax payments.

The only issue was whether Ratfield acted in good faith. The district court gave a comprehensive instruction on the good faith defense and specifically instructed the jury:
Let me tell you, I've said before that in this tax area, the Government must prove that someone acted willfully.

When the issue of good faith has been raised, that requires the Government to prove that the person did not have a good faith subjective belief that they were following the law or that, to show that they misunderstood the law.

Now, I've explained this before. The reason for this in the one area of the law is that Congress recognizes that the tax laws are complex, so if somebody has a good faith belief that they are not violating the law, even though their position may seem really quite extraordinary, if they hold that in good faith, if they really believe that, that is a complete defense.

Now, I'm allowing this testimony about tax protest in because that good faith defense is not available if what someone is really doing is just acting as a tax protester.

In other words, the theory of the good faith defense is that somebody intends to follow the tax laws, but they just misunderstand them, and they in good faith believe what they are doing is not a violation of the law.

If somebody is really against paying tax at all, and they are just making up language, that good faith doesn't apply.

But I want to be sure that the jury understands these issues are issues for the jury to decide. They are factual issues.

And in allowing the agent to testify about this concept, I am not in any way suggesting that you need to accept these categorizations.

It is for the jury to make those ultimate determinations as to whether the Government has or has not proven that Mr. Ratfield did not have a good faith belief, and again, it will be for the jury to decide whether this tax protester issue is in place in this case or not.

Based on our review of the record, the Government's witnesses did not opine whether Ratfield acted in good faith. The witnesses' testimony concerned Ratfield's conduct, his evolving theories on the IRS's authority to tax and the taxation of trusts and the fact that they advised him his theories lacked any support in the law. This testimony was relevant to the jury's determination whether Ratfield acted in good faith. Ratfield's argument he was unfairly prejudiced by the IRS agents' testimony and the jury instruction on the good faith defense is without merit. We conclude the district court did not abuse its discretion.

AFFIRMED.

* Honorable Eugene E. Siler, Jr., United States Circuit Judge for the Sixth Circuit, sitting by designation.

1 On March 15, 2007, the district court granted the Government's motion to dismiss Counts 16, 21, 27, 29 and 36 of the indictment with prejudice.

2 The jury failed to indicate a verdict for Count 50 on the verdict form, so it was dismissed with prejudice.

3 In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this Court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to the close of business on September 30, 1981.

4 In tax evasion cases, courts permit IRS agents to testify as summary witnesses. See, e.g., United States v. Stierhoff, 549 F.3d 19, 28 (1st Cir. 2008) ( "We hold, therefore, that in a tax evasion case, a summary witness may be permitted to summarize and analyze the facts of record as long as the witness does not directly address the ultimate question of whether the accused did in fact intend to evade federal income taxes."); United States v. Gold, 743 F.2d 800, 817 (11th Cir. 1984) ( "[T]his court has expressly approved the use of expert legal testimony in a case where an IRS agent merely stated his opinion as an accountant with regard to the tax consequences of a transaction, and did not attempt to assume the role of the court.") (internal quotation omitted).

5 Ratfield also argues the district court erred by allowing Agent Lottman to testify as to the ultimate issue in the case, which Ratfield describes as whether he impeded the IRS from determining the correct tax due. Ratfield complains the admission of Lottman's expert opinions was unduly prejudicial, violating Fed. R. Evid. 403, and Lottman should not have been allowed to tell the jury what verdict to reach. This claim was not raised in the district court, thus it is subject to plain error review. See Fed. R. Crim. P. 52(b); United States v. Pielago, 135 F.3d 703, 708 (11th Cir. 1998).

The jury was instructed that the ultimate issue in Count 46 was whether Ratfield had specifically intended to impede and obstruct the IRS by, inter alia, having his clients file tax returns and other documents that he knew to be false and frivolous. The district court instructed the jury that in order to find Ratfield guilty of Count 46, it would have to find beyond a reasonable doubt that Ratfield knowingly endeavored to obstruct or impede the IRS and that he did so corruptly. A review of the record shows Agent Lottman did not offer any testimony regarding his opinion about what Ratfield intended, so he did not invade the jury's province as fact-finder.

6 At trial, the evidence was overwhelming that Ratfield violated the preliminary and permanent injunctions.

Evidence. --Fraud and False Statements: Evidence

Defendant's records, voluntarily produced to revenue agents in investigation of his income tax liability, were not suppressible as evidence in proving assistance in the preparation of fraudulent returns for others. There was no evidence that the records were obtained by misrepresentation.

J.P. Dupont, DC, 59-1 USTC ¶9204, 169 FSupp 572.

Motion to suppress evidence of wilfully preparing false returns was denied.

L.H. Kupper, DC, 60-1 USTC ¶9235, 179 FSupp 264.

E.G. Austin, DC, 63-1 USTC ¶9157, 209 FSupp 101.

A motion by defendant to suppress as evidence papers seized by IRS inspectors was granted where the warrant for his arrest on a complaint charging him with making false statements was unlawful, the arrest itself was unlawful, and the search and seizure were unreasonable.

L.M. Bayley, DC, 65-2 USTC ¶9610.

All materials seized by the IRS under a defective search warrant were suppressed and the defendants' convictions (one convicted of willfully subscribing to a false corporate return, the other convicted of aiding in preparation of a false return, and both convicted of conspiracy) were reversed. The warrant used to seize corporate records authorized an unlawful general search of the business premises and thus the warrant was impermissibly general in scope. Total suppression was required since no portion of the warrant was particularized.

J.B. Cardwell, CA-9, 82-2 USTC ¶9470, 680 F2d 75.

A bingo hall operator's conviction for filing a false tax return was reversed because it was based on evidence obtained in violation of his Fourth Amendment rights against unreasonable search and seizure. The evidence was seized pursuant to a search warrant for records pertaining to the taxpayer's illegal gambling activities, but was unrelated to his bingo operation; instead, it revealed his failure to report income during a year that preceded his involvement in any gambling operation. The government's argument that the warrant covered the records at issue because they established the taxpayer's overall financial condition, showed that a charitable organization functioned as his alter ego, and demonstrated that his bingo operation was permeated by fraud was rejected as overbroad. The government also failed to prove that the inevitable discovery doctrine exempted the records from the exclusionary rule since it failed to show that it would have uncovered the records during its civil investigation of the taxpayer.

D. Ford, CA-6, 99-2 USTC ¶50,724, 184 F3d 566.

The IRS was entitled to retain copies of financial documents that it had seized from a chiropractic office pursuant to a valid search warrant, but it could not retain similar documents that had been seized from the taxpayer's residence because the seizure was not authorized by a warrant. A co-tenant's permission was inadequate because the taxpayer retained full authority over the records and did not relinquish any authority or control to him.

J.L. Marvin, CA-8, 85-2 USTC ¶9858.

The testimony of the taxpayer's wife was sufficient to establish probable cause to seize records relating to his car rental business that were used as evidence to convict him of tax evasion and fraud. The wife's statements to IRS agents did not constitute testimony to which the privilege against adverse spousal testimony applied nor did the privilege for confidential marital communication apply because the wife did not inform the IRS of any communicative utterance by the taxpayer.

A.M. Lefkowitz, CA-9, 80-2 USTC ¶9722.

The taxpayer's motion to suppress evidence obtained from him by an IRS agent who failed to state the criminal nature of the investigation was dismissed since the taxpayer was properly given his Miranda warnings and the information was voluntarily given without any fraud or deceit by the agent.

D.C. Potter, DC, 75-1 USTC ¶9328, 385 FSupp 681.

In a prosecution for falsely claiming automobile expense deductions on a taxpayer's returns for 1956-1958, it was error to admit returns for earlier years as evidence of wilfulness where it was not claimed that the prior returns violated the law. The court also erred in precluding the defendant from introducing his copies of the W-2 forms filed with his returns and in not permitting him to prove that statements made by a witness for the prosecution and allegedly in the possession of the government were in existence.

A.J. Accardo, CA-7, 62-1 USTC ¶9170, 298 F2d 133.

Evidence of federal income tax fraud was admissible even though derived from inadmissible evidence of a nontax offense. That evidence had been seized during the course of an illegal search by county officials five months before the alleged fraud was perpetrated. The derivative evidence was cleansed of taint by the lapse of time. Moreover, exclusion of the evidence of tax fraud would not have achieved "substantial deterrence" of unlawful conduct by law enforcement officers since, under the facts, the local authorities could not have foreseen this prosecution at the time of the defendant's arrest.

T.A. Paepke, CA-7, 77-1 USTC ¶9302, 550 F2d 385. After remand, unreported District Court decision was aff'd in unreported CA-7 opinion, 7/12/79.

On the trial of an individual charged with wilfully and knowingly assisting salesmen in preparing false income tax returns by advising them that they did not have to report commissions, the trial court erred in refusing to require the salesmen to deliver to the defendant reports of Internal Revenue Service agents making adjustments to their income.

J.F. Hull, CA-5, 63-2 USTC ¶9821, 324 F2d 817.

Evidence that a certified public accountant who prepared salesmen's returns deducted expenses, which should have been capitalized, was not sufficient to prove willful violation of the law. However, evidence that he advised the salesmen not to report commissions was a violation.

J.F. Hull, CA-5, 66-1 USTC ¶9259, 356 F2d 919.

It was not error to refuse to admit evidence of income tax overpayment. Although this evidence might have aided the defendant's defense that he relied on his accountant in good faith, it could have had no impact on the case as a whole because the evidence suggested that he withheld relevant data from the accountant.

L.E. Johnson, CA-5, 77-2 USTC ¶9622, 558 F2d 744.

Even assuming that certain documentary evidence was exculpatory, its production during (instead of before) the trial did not result in an unfair trial. The jury considered the evidence in arriving at its verdict and there would have been no point in ordering a new trial during which a different jury would have to consider the same evidence.

J. Kaplan, CA-3, 77-1 USTC ¶9441, 554 F2d 577.

Certain invoices and cancelled checks admitted to prove that the defendant had failed to report gross income from his business, which were allegedly obtained through the use of information taken from illegally seized records, should not have been suppressed as "fruit" of the illegal seizure.

A.B. Carsello, CA-7, 78-2 USTC ¶9580, 578 F2d 199. Cert. denied, 11/27/78.

The evidence was sufficient to support the jury's conclusion that the defendant was a party in a scheme to conceal corporate income, which fact was the basis of the criminal actions. The fact that the defendant did not sign or file the corporate returns was not material.

A. Maius, CA-6, 67-2 USTC ¶9521, 378 F2d 716. Cert. denied, 389 US 905.

A 1961 income tax return was admissible as evidence in a trial involving the willful making of fraudulent returns in 1963-1965 as it was intended to show a pattern of overstatement of deductions. It was also proper to admit as evidence a 1965 income item that was reported in the taxpayer's 1964 return, admission being only to show knowledge and willfulness.

C. Bishop, CA-9, 73-2 USTC ¶9674, 485 F2d 248.

The taxpayer's conviction on two counts involving false statements in an offer to compromise his civil tax liability was reversed. The trial court had erroneously received in evidence an exhibit offered by the government wherein the taxpayer admitted a prior felony conviction for tax fraud, which had no connection with the charge that he had made false statements and could only be prejudicial since he had not elected to take the stand.

A.S. Birns, CA-6, 68-1 USTC ¶9365, 395 F2d 943.

The trial court did not err by admitting evidence of other related income tax crimes, since the evidence helped to establish the taxpayer's intent and also the other elements of the crime of willfully aiding and advising in the preparation of false and fraudulent tax returns.

L.V. Amos, CA-8, 74-1 USTC ¶9447, 496 F2d 1269.

A taxpayer's conviction for claiming false estimated tax payments on his return, with the aid of IRS employees, was affirmed. The manner in which the IRS gathered evidence (from the IRS employees and taxpayer's accountant) was not a ground for reversal.

D. Lopez, CA-2, 70-1 USTC ¶9115, 420 F2d 313. Decision remanded on another issue, CA-2, 70-2 USTC ¶9488, 428 F2d 1135.

Taxpayer's conviction for willfully and knowingly aiding and assisting in the fraudulent preparation of tax returns was upheld. Evidence of an IRS agent's return preparation procedures was properly excluded. Also, taxpayer's noncriminal activity was properly excluded as being irrelevant.

W.P. Dobbs, CA-5, 75-1 USTC ¶9210, 506 F2d 445.

The government should have produced, at trial, its audits of the defendant in response to a defense request. The case was remanded for the trial judge to inspect the contents of the audit.

G.F. Brown, CA-5, 78-2 USTC ¶9550, 574 F2d 1274. Cert. denied, 439 US 1118.

The evidence was not sufficient to show that a defendant was involved in a conspiracy to conceal the name of the winner of a twin double at a racetrack and to prepare a false Form 1099. However, the fact that the government did not offer proof of the conspiracy's existence at regular intervals during the period charged did not preclude another defendant's conviction.

T. Cantone, CA-2, 70-1 USTC ¶9394, 426 F2d 902.

Taxpayer's conviction for conspiring to conceal the fact that he was the actual winner of horse races for purposes of reporting his winnings on Form 1099 was upheld.

The appellate court, in affirming taxpayer's conviction for making and subscribing to false income tax returns, held that the District Court did not err by not requiring the government to introduce evidence of all items which the jury might find to be an allowable reduction of his income.

R.H. Lawhon, CA-5, 74-2 USTC ¶9634, 499 F2d 352.

During a criminal prosecution of a return preparer, it was not reversible error to introduce into evidence a chart summarizing the testimony of the preparer's clients. Although the chart contained inadmissible portions, the fact that the jury did not unduly rely upon it was shown by that body's acquittal of the preparer on five of the thirteen items with which the chart dealt.

W.R. Conlin, CA-2, 77-1 USTC ¶9291, 551 F2d 534. Cert. denied, 434 US 831.

Falsified information on taxpayer's return indicating that sums had been deposited with the Federal Reserve bank was material, even though the IRS relies primarily on information supplied it by the bank.

H.M. Romanow, CA-1, 75-1 USTC ¶9153, 509 F2d 26.

The lower court did not err in admitting testimony of the taxpayer's failure to file tax returns for the six years preceding 1968, since such evidence was relevant to the issue of willfulness, which must be proved whether the offense charged is failure to file or false filing.

K.L. Snow, CA-9, 76-1 USTC ¶9227, 529 F2d 224. Cert. denied, 429 US 821.

The taxpayer's conviction for filing false federal tax returns was reversed because the trial judge erred in excluding the taxpayer's testimony concerning allegedly inconsistent statements made by a government witness.

W.E. McLaughlin, CA-9, 82-1 USTC ¶9105, 663 F2d 949.

The Government's failure to disclose certain exculpatory evidence that the accountant's employee was responsible for the preparation of the false returns of two of the prosecution's witnesses until near the close of the presentation of the defense did not warrant an automatic reversal. The suppression of such evidence was not complete, but merely late, and was not prejudicial because the judge offered the defendant a continuance. Moreover, the evidence would not have been helpful because the jury was already aware of this fact from the testimony of these two witnesses at trial.

O.H. Miller, CA-9, 76-1 USTC ¶9228, 529 F2d 1125. Cert. denied, 426 US 924.

The evidence was sufficient to sustain the conviction under the net worth method of calculating income as applied by the Commissioner; the evidence was sufficient to show willfulness on the part of the taxpayer to evade taxes; and the trial court did not commit prejudicial error when it permitted an IRS agent to testify that the taxpayer had been previously investigated for possible tax fraud in connection with his returns for 1958 and 1959 since it was made clear that no criminal liability ever attached.

M. Stone, CA-8, 76-1 USTC ¶9310, 531 F2d 939. Cert. denied, 429 US 824.

The U.S. Supreme Court remanded a case involving the government's failure to produce certain material in its possession when requested to do so by the defendant's attorney. The case was remanded for reconsideration in light of a decision in a nontax case ( Agurs, 427 US 97).

J.M. McCrane, Jr., SCt, 76-2 USTC ¶9517, 427 US 909, vacating and rem'g CA-3, 76-1 USTC ¶9147, 527 F2d 906.

On remand, the Third Circuit again held that the government should have produced the evidence in its possession. The defendant's request for material that could be used to impeach prosecution witnesses, including, but not limited to, any standards used by the government in declining prosecution of similar cases, was sufficiently specific under Agurs.

J.M. McCrane, Jr., CA-3, 77-1 USTC ¶9376, 547 F2d 204.

Motion for a new trial on the grounds of newly discovered evidence was denied. The evidence, had it been disclosed to the defendant promptly, would not have affected the outcome of the case.

J.M. McCrane, Jr., CA-3, 78-2 USTC ¶9600.

The appellate court held that handwriting exemplars, taken from two prosecution witnesses during taxpayer's trial for willfully and knowingly filing a false tax return at the request of the prosecution and outside the presence of the court, the jury, and defense counsel, for examination by the Government's expert, were properly admitted into evidence since neither witness was on trial, and defense counsel had an opportunity to cross-examine each individual concerning the circumstances in which he made the exemplars.

V.M. Pastore, CA-2, 76-2 USTC ¶9513, 537 F2d 675.

It was not error to admit into evidence documents that the defendant had turned over to the government in compliance with a subpoena issued pursuant to a grand jury investigation of other persons. He had waived his privilege against self-incrimination by complying with the subpoena. Nor did admission of the documents violate the secrecy of grand jury proceedings.

J.E. Penrod, CA-4, 79-2 USTC ¶9728, 609 F2d 1092. Cert. denied, 446 US 917, 100 SCt 1850.

Out-of-court declarations made by one defendant in a false statements case were properly introduced against the other defendant. The statements were not hearsay because they were offered to prove their falsity rather than their truth.

R.L. Fox, CA-5, 80-1 USTC ¶9337, 613 F2d 99.

Tape-recorded statements of a partner which were not given "under an oath subject to the penalty of perjury" were hearsay. The prejudice resulting from the use of the hearsay at trial to support the government's conviction of the partnership's accountant was not harmless when balanced against "the marginal evidence developed by the government." The use of the hearsay evidence supporting a partner's conviction on two counts also was not harmless error for the same reason; however, the prejudice resulting from his conviction on a third count was harmless when balanced against overwhelming evidence that he had received unreported partnership payments.

D.E. Day, CA-6, 86-1 USTC ¶9394.

A former IRS agent and his brother were properly convicted of a number of offenses, including filing false returns. Exemplars of the former agent's handwriting were properly authenticated. Statements of one conspirator that implicated the other were properly admitted. Admission of the former agent's returns to show acquisition of wealth was not enough, in and of itself, to mandate reversal.

F. Mangan, CA-2, 78-1 USTC ¶9349, 575 F2d 32.

A false return conviction was affirmed. Willfulness was established by the defendant's use of false names and his surreptitious use of cash. It was not improper to admit testimony of a prosecution witness who had testified differently in the past or to deny a motion for severance. Notebooks seized at the defendant's gas station were properly admitted.

F.W. Holladay, CA-5, 78-1 USTC ¶9218, 566 F2d 1018.

A false return conviction was affirmed. Failure to report substantial amounts of gross livestock receipts on Schedule F, Form 1040, rendered the return materially false. Truthful reporting is required on the schedule even though it was not expressly promulgated by any regulation. Nor did government implications of underpayment of taxes alter the rule that tax liability is immaterial to false returns prosecutions.

M.A. Taylor, CA-5, 78-1 USTC ¶9474, 574 F2d 232. Cert. denied, 99 SCt 251.

A corporate vice president, who reported as "ordinary business losses" on Schedule C his losses in connection with numerous stock option and commodity futures transactions, was properly convicted on two counts of willfully making and subscribing false federal income tax returns. The evidence established the false characterization of his trading activity and business name on Schedule C, which suggested that the vice president knew that accurate descriptions would trigger inspection and ultimate disallowance of the ordinary loss deductions by the IRS. The evidence also established that the vice president's education and professional experience suggested an extraordinary sophistication with respect to tax matters, and he reported trading losses in prior and subsequent years as "capital losses" and caused his father to so report his losses from similar activity.

P.H. Diamond, CA-4, 86-1 USTC ¶9356, 788 F2d 1025.

A labor union official was properly convicted of filing a false return. The evidence given by an accomplice was not inherently implausible. Alleged government misconduct could not vitiate the conviction; it was acceptable to pay informant fees to the accomplice, it was irrelevant that the government submitted evidence to the jury related to items of unreported income in excess of the limitation imposed by the court and the defendant was not harmed by the late disclosure of exculpatory material. The lower court did not err in denying his request for a special verdict. The jury instructions adequately defined a gift and were sufficient even though they did not state that the offense could not have been willful if the defendant believed that the items in question were gifts to him.

D.E. Shelton, CA-9, 79-1 USTC ¶9189, 588 F2d 1248.

A conviction for aiding in the preparation of false returns was remanded so that the trial judge could decide whether a report made by a special agent, which the trial judge had refused to order produced, would show that a substantial number of the returns prepared by the defendant contained no error. This report might have had a bearing on the critical issues of motivation and intent.

D. Sternstein, CA-2, 79-1 USTC ¶9338, 596 F2d 528.

After the remand, the appellate court affirmed the trial judge's finding that the probative value of the report was negligible at best.

D. Sternstein, CA-2, 79-2 USTC ¶9626, 605 F2d 672.

The convictions of a manager of a cooperative and its accountant for conspiracy and for wilfully subscribing false and fraudulent corporate income tax returns were affirmed. Personal income tax returns of the officer were relevant to the conspiracy count and were properly admitted in evidence. Rulings at trial curtailing cross-examination of an IRS agent, refusal to give jury instructions offered by the defendants governing taxation of loans from a corporation to an officer and comments by the trial court on the evidence did not preclude the defendants from presenting their theory of defense to the jury. The trial court did not err in not inspecting a file containing a memorandum prepared by IRS counsel in camera since defense counsel accepted the prosecution's assurance that the file did not contain material subject to discovery.

J.E. White, CA-8, 82-1 USTC ¶9220, 671 F2d 1126.

No basis existed for excluding evidence relating to the proposed and final amendments of Reg. §1.612-3(b)(3) from the trial of a group of individuals on tax fraud charges because prosecution for violation of the regulation was not necessary to establish criminal fraud under the indictment. Evidence concerning the regulation, the defendants' understanding of it, and their alleged actions to circumvent its effects may be relevant in the trial.

R. Osserman, DC, 82-1 USTC ¶9315.

The trial court did not commit reversible error in excluding evidence relating to bias during the cross-examination of a government witness. Although the taxpayer was precluded from asking about a specific incident, he was permitted to cross-examine the witness extensively regarding his possible motives in testifying favorably for the government. Moreover, the jury was in possession of sufficient information to assess the witness's possible bias. In addition, the trial court did not err in refusing to admit into evidence, for impeachment purposes, copies of a civil action brought against the witness. The documents did not contradict the witness's testimony. Furthermore, the trial court did not err in admitting and relying on the government's sentencing memorandum and affidavit.

F.P. Tracey, CA-1, 82-1 USTC ¶9325. Cert. denied, 105 SCt 787.

The taxpayer's conviction for willfully filing false corporate income tax returns was affirmed. The evidence was sufficient to establish that he willfully omitted substantial amounts of income from the returns. A denial of a proposed jury instruction was not error. The taxpayer's conviction for obstruction of justice, based on evidence of intimidation and threats of force against former employees to prevent their communication with IRS investigators, was affirmed.

R.C. Thetford, CA-5, 82-1 USTC ¶9393, 676 F2d 170.

The fact that the taxpayer's name was signed to the tax returns was prima facie evidence in prosecution for income tax violations that he actually signed them.

V. Carrodeguas, CA-11, 85-2 USTC ¶9567.

A taxpayer's conviction for understating his income and the income of his deceased aunt's estate for the purposes of preparing her income tax return was upheld. Documents belonging to the law firm engaged by the taxpayer to prepare the return and testimony of its employees was properly admitted. The information given to the attorneys by the taxpayer was transferred to the firm for the purpose of preparing a tax return and was not protected by the attorney/client privilege.

D.H. Windfelder, CA-7, 86-1 USTC ¶9402.

A tax shelter promoter's conviction on charges of willfully filing and assisting others in filing false returns was upheld where the appellate court rejected allegations of error regarding jury instructions and the admission into evidence of certain statements.

W.J. Kelley, CA-7, 89-1 USTC ¶9132, 864 F2d 569.

Suppression of evidence on collateral estoppel grounds was unwarranted. The lower court barred evidence that the taxpayer owned certain stock accounts or committed tax law violations because he had been acquitted of tax evasion. The appellate court held that the taxpayer did not prove that the jury in the first trial decided the issues in his favor.

I.P. Citron, CA-2, 88-2 USTC ¶9552.

A mayor who failed to report the receipt of income from a constituent was properly convicted of filing false tax returns. The evidence indicated that the mayor knew that the constituent was not making a loan or a campaign contribution. Given the large amount of unreported income in comparison to his reported income, the jury could infer that the mayor intended to violate the tax laws and had not made an honest mistake.

W.R. Tucker, III, CA-9, 98-1 USTC ¶50,147, 133 F3d 1208.

Evidence of a public official's zoning and political activities on behalf of a developer that paid the official for consulting services was properly admitted.

J. Howard, CA-11, 88-2 USTC ¶9522.

A statement by a husband in a previous affidavit that was inconsistent with his testimony supporting false claims at a trial for willfully aiding and assisting in the preparation of false and fraudulent income tax returns was admissible under the hearsay rule only to establish the credibility of the witness and could not be used as substantive evidence. An accountant's testimony of a conversation he had with the defendant in which the defendant offered to backdate documents for another taxpayer was admissible under the recent admission of a party exception to the hearsay rule. Additionally, the offer to commit a similar crime was itself a similar act and was relevant as to the issue of willfulness.

N. Micke, CA-7, 88-2 USTC ¶9553.

Perjury convictions were overturned against married taxpayers who were charged with making false federal income tax returns. The government had failed to prove the materiality of allegedly false testimony given by the wife in the course of a deposition in connection with her sex discrimination suit against a federal agency.

A.B. Adams, CA-6, 89-2 USTC ¶9438, 870 F2d 1140.

Conviction for preparing false tax returns was upheld. Materiality of false information on returns was a matter of law left to the court. Proceeding in the taxpayer's brief absence with part of the trial was proper since the government's case was strong and trial transcripts were made available to the taxpayer. Evidence of convictions for passing bad checks was properly admitted since dishonesty and false statements were elements of the convictions. Finally, the government's harsh closing argument did not constitute plain error due to its strong case.

S.E. Rogers, CA-4, 88-2 USTC ¶9538.

A trial judge properly refused to admit the expert testimony of a CPA in a criminal tax fraud case because the charge was not that the returns were filled out improperly, but that the returns contained misstatements of fact of which the accountant had no knowledge. Further, there was sufficient evidence to support the conviction since it was up to the jury to decide whether to accept the testimony as to the taxpayer's limited ability to read and his capacity to understand the returns.

E.K. Dorotich, CA-9, 90-1 USTC ¶50,202, 900 F2d 192.

A taxpayer's conviction for filing false individual and corporate returns was upheld. The jury had ample evidence to sustain the three counts, which involved gambling debts that were paid as "commissions" from the taxpayer's wholly owned corporation and the unreported constructive dividends that the taxpayer received from his corporation. Statements that the taxpayer made to an IRS agent, which were obtained by the agent in violation of IRS manual guidelines, were not obtained through "fraud, trickery and deceit." Finally, evidence of the taxpayer's alleged dealings with bookmakers was relevant because it showed a continuing course of conduct, was not directed at the taxpayer's character, and was not prejudicial.

E.R. Knight, CA-5, 90-1 USTC ¶50,246, 898 F2d 436.

The due process clause did not require the suppression of currency seized at the Canadian border, even though the taxpayers alleged that they did not know they were required to report the currency upon leaving the United States. Thus, other evidence obtained as a result of the seizure was not suppressed.

B. Romano, DC N.Y., 89-2 USTC ¶9653. Rev'd and rem'd on other issues, CA-2, 91-2 USTC ¶50,471.

See, also, related cases at ¶41,333.210.

Evidence of transfers between corporations wholly owned by the taxpayer demonstrated that the taxpayer engaged in transactions for the purpose of evading income tax and were admissible to show intent to commit the crime of filing a false income tax return.

L.R. Mews, CA-7, 91-1 USTC ¶50,044, 923 F2d 67.

A taxpayer was properly convicted of aiding and assisting in the preparation or presentation of false documents where he willfully caused false statements to be included in Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. A motion for judgment of acquittal on the grounds of insufficient evidence was properly denied. Certain bank transactions, currency reports and tax returns were properly allowed into evidence. Evidence of an acquittal on a criminal charge involving state securities' laws was properly excluded. Finally, the issue of materiality of alleged false statements was properly submitted to the jury because it was submitted at the request of the taxpayer.

R.S. Cutler, CA-10, 92-1 USTC ¶50,062, 948 F2d 691.

An individual's conviction for aiding in the preparation of false income tax returns was affirmed. The district court properly denied his motions for a new trial and reconsideration because his claims that the prosecution used perjured or erroneous testimony were speculative and unsupported by the evidence. Moreover, any use of false testimony by the government was unknowing and the defendant was unable to establish that barring such testimony would probably result in an acquittal on retrial.

T.W. Tierney, CA-8, 91-2 USTC ¶50,509.

The convictions of individual taxpayers for filing false corporate returns, aiding and assisting in the preparation of false corporate returns, and conspiracy were upheld. The trial court did not abuse its discretion by admitting daily sales sheets as properly authenticated business records because the sales sheets were delivered by the defendants' attorney pursuant to a subpoena and were identified by government witnesses.

C.W. Lawrence, Jr., CA-7, 91-2 USTC ¶50,522.

An individual's conviction for filing false tax and information returns was upheld. At trial, the taxpayer failed to properly preserve the issue of whether the evidence was sufficient to support the jury's findings. Even if the issue had been properly preserved, the evidence was sufficient to permit a reasonable trier of fact to convict the taxpayer. After the taxpayer's wages and truck were seized for nonpayment of taxes, he sent letters demanding payments from a former employer, a co-worker and several IRS agents. Additionally, the taxpayer admitted that he intentionally filed false Form 1096 and Form 1099 information returns.

M.G. Kuball, CA-9, 92-2 USTC ¶50,501, 976 F2d 529.

Sufficient evidence supported an individual's conviction for willfully filing false income tax forms. Based on the individual's issuance of Forms 1099 to several IRS employees showing payments that he never made, it was reasonable for a jury to conclude that he voluntarily and intentionally violated the law and, thus, acted willfully. In addition, the false statements were material since they involved income and the computation of tax and the IRS was forced to implement special procedures to intercept the false filings.

K.H. Winchell, CA-10, 97-2 USTC ¶50,890, 129 F3d 1093.

In proving that the taxpayer filed a false return, the IRS was not required to establish that it was a joint return, as described in the indictment. Further, the variance between proof of the taxpayer's unsigned return and indictment allegations of willful tax evasion and filing of a false return was not material. Since the taxpayer was aware of the charges against her and of the particular evidence that supported those charges, she was not prejudiced by use of this evidence.

S.N. Robinson, CA-5, 92-2 USTC ¶50,565, 974 F2d 575.

A doctor was properly convicted of willfully filing or assisting in filing false tax returns because evidence on the improper deduction of depreciation on a car did not constitute a constructive amendment of the indictment or a prejudicial variance. The evidence was properly admitted because it went directly to the issue of whether a physician understated his total income and did not prove facts that were materially different from those alleged in the indictment or modify essential elements of the charged offense.

M.K. Tandon, CA-6, 97-1 USTC ¶50,373, 111 F3d 482.

An architect's conviction for filing a false return was affirmed. Evidence presented in the case, including the books and testimony of the taxpayer's bookkeeper and accountant, was sufficient to satisfy the reasonable doubt standard. Amounts posted in the taxpayer's books and records as professional legal fees were actually used by the taxpayer for an investment in a horse partnership. Although the taxpayer contended that the conviction should have been upheld only if the evidence inexorably supported an inference of guilt, this higher standard of proof is applicable in cases involving embezzlement, not in cases alleging the filing of false returns.

J.G. Crozier, CA-2, 93-1 USTC ¶50,219, 987 F2d 893.

The taxpayer's motion to suppress statements made to IRS agents in the course of their civil and criminal investigations of the taxpayer was denied. The taxpayer's contention that an IRS agent assured his accountant that no criminal charges would be filed was unsupported.

L.A. Robinson, DC Miss., 93-1 USTC ¶50,213, 811 FSupp 1174.

A tax preparer's conviction for aiding and abetting the preparation of false returns was remanded so that the trial judge could redetermine whether prior year tax returns filed by the government's taxpayer witnesses were material to his defense. In denying the preparer's request for production, the trial court improperly imposed a "heavy burden" standard of materiality. First, similar treatment of a similar issue in a prior year, as to which the tax preparer played no role, might suggest that the falsify originated with the taxpayer rather than the preparer. Second, if a taxpayer testifies that he supplied the return preparer with accurate information, prior returns are a potential device for impeachment. Finally, such erroneous nondisclosure as to any taxpayer upon which the conviction was based might have undermined the government's entire case.

C.N. Lloyd, Jr., CA-D.C., 93-1 USTC ¶50,317, 992 F2d 348.

A federal district court had jurisdiction over an individual who was prosecuted for making false statements and attempting to interfere with the administration of the IRS. His claim that, as a natural born citizen of Montana, he was a nonresident alien exempt from the tax laws lacked merit. Further, sufficient evidence supported his conviction. His admission that he filed a false return was not excused by his genuine belief that the tax laws did not apply to him and that filing a false return would prompt an investigation which would thwart an overthrow of the government.

L.T. Hanson, CA-9, 94-1 USTC ¶50,075, 2 F3d 942.

An office manager's conviction for filing a fraudulent return was upheld because sufficient evidence of her consistent pattern of underreporting large amounts of income supported the inference of willful behavior. Additionally, the trial court did not abuse its discretion in allowing an IRS revenue agent to testify as an expert in the calculation of income and taxes.

E.A. Pratt Stokes, CA-5, 93-2 USTC ¶50,545, 998 F2d 279.

A trial court did not commit reversible error by excluding certain testimony proffered by married taxpayers who were ultimately convicted of filing incomplete income tax returns. The trial court erred in treating a third party's testimony on whether the husband possessed the requisite guilty state of mind as inadmissible hearsay because it was offered only to demonstrate its effect on his state of mind, as opposed to proving the truth of the matter asserted. However, such error was harmless because the evidence of guilt with respect to the husband was overwhelming and did not deprive him of the ability to put on a defense. The trial court's error was also harmless with respect to the wife because it did not affect her ability to present a defense.

L.D. Hanson, CA-7, 93-2 USTC ¶50,558.

A construction equipment dealer's conviction for tax fraud was upheld even though the government cross-examined him about his alleged bank fraud. Since the dealer placed his credibility in issue when he chose to testify, the government was entitled to cross-examine the dealer on his alleged bank fraud in an attempt to impeach him through evidence of specific instances of dishonesty that would tend to prove untruthfulness.

M.A. Chevalier, CA-7, 93-2 USTC ¶50,581.

Evidence presented by the government against two real estate construction business owners convicted of filing and subscribing false income tax returns was sufficient to establish guilt beyond a reasonable doubt. Although most of the evidence was circumstantial and subject to differing interpretations, a reasonable jury could have found the individuals guilty.

J.D. Morris, CA-11, 94-1 USTC ¶50,234, 20 F3d 1111.

The trial court did not abuse its discretion when it admitted a transcript of a taped interview between a dentist and his former wife's attorney into evidence at the dentist's trial for willful failure to pay taxes and filing a false income tax return. The taxpayer's statements were not hearsay, the transcript was adequately authenticated through testimony of the transcriber and the attorney, and the best evidence rule was not violated because the original tape had been erased. Finally, the government did not offer false evidence because the dentist's disagreement with an IRS agent's characterization of certain amounts as income did not convert the agent's testimony into a falsehood.

W.L. Workinger, CA-9, 96-2 USTC ¶50,402, 90 F3d 1409.

An attorney was properly convicted of conspiracy for attempting to hide his client's business income from the IRS, and the client was properly convicted of conspiracy and filing false tax returns. A pretrial ruling barring the client from introducing evidence of business deductions unless he established that he knew he was entitled to claim them before the returns were filed was not erroneous since the amount of taxes owed was irrelevant to the tax fraud. Other claimed errors with respect to prosecutor's comments and jury instructions did not warrant reversal of the convictions.

J.C. Minneman, CA-7, 98-1 USTC ¶50,347, 143 F3d 274. Cert. denied, 3/8/99.

Sole stockholders who made personal car payments using unreported business income were properly convicted of willfully filing false income tax returns for three tax years. The district court correctly permitted an IRS agent to give expert opinion testimony that was limited to factual determinations regarding the process by which summaries of invoices, sales tickets, and checks were compiled.

J.P. Proctor, CA-10 (unpublished opinion), 98-2 USTC ¶50,884, aff'g an unreported District Court decision.

The conviction and sentence of a former judge and compulsive gambler for filing false tax returns was upheld. The trial court did not abuse its discretion in excluding expert testimony regarding compulsive gambling, expert testimony on tax and accounting laws or testimony concerning the reasonableness of the taxpayer's belief that he could net out gambling wins and losses.

W.L. Scholl, CA-9, 99-1 USTC ¶50,230, 166 F3d 964.

Search warrants issued in connection with an IRS investigation of an individual who marketed a book promoting the evasion of taxes were sufficiently specific. The warrants limited the search to documentary evidence related to violations of the Code concerning possible conspiracy to evade taxes. The fact that the warrant failed to name the taxpayer or his wife was not fatal to its validity since it only had to identify the place to be searched and the targets of seizure.

D.L. Leveto, DC Pa., 2000-1 USTC ¶50,278. Aff'd on another issue, CA-3, 2001-2 USTC ¶50,536, 258 F3d 156.

Evidence that a taxpayer voluntarily provided to an IRS agent during a civil investigation was properly admitted in the taxpayer's subsequent trial for criminal tax fraud. The taxpayer alleged that the IRS agent in charge of the civil investigation violated the Internal Revenue Manual by continuing the investigation after she had evidence of criminal fraud. Although the agent had information that the taxpayer used her corporation to pay her personal expenses, she did not have evidence indicating that the taxpayer acted with criminal intent.

I.L. McKee, CA-6, 99-2 USTC ¶50,867, 192 F3d 535.

Evidence relating to willfulness that was uncovered pursuant to a search warrant authorizing the seizure of bank records was properly admitted against an accountant who was convicted of filing a false return. Although the warrant may have been insufficiently specific, it was executed by an IRS agent who acted on a good-faith belief that it was valid. Moreover, he was intimately involved in the investigation of the taxpayer prior to the execution of the warrant and in the preparation of an affidavit in support of the warrant, which gave him obvious knowledge of the crimes that were under investigation.

A.L. Guidry, CA-10, 2000-1 USTC ¶50,118, 199 F3d 1150.

Evidence was properly admitted and excluded from a return preparer's trial for filing false returns and assisting in the preparation of false returns. A revenue agent's testimony that the false information she provided was material to the computation of tax liability was admissible because it merely assisted the jury in understanding the facts. Documents that her mother voluntarily surrendered to an IRS agent were also admissible absent a showing that the agent made any misrepresentations to obtain them. Evidence that her husband once forced his former wife to sign a false return was properly excluded. While the husband may have forced her into the return preparation business and appropriated her proceeds, there was no evidence that he forced her to prepare any of the returns at issue.

B.K. Scarberry, CA-10 (unpublished opinion), 2000-1 USTC ¶50,272, 208 F3d 228.

Married taxpayers who filed tax returns on which they claimed that their wages constituted nontaxable compensation were properly convicted of filing false returns. The trial court's admission into evidence of the couple's tax return bearing the stamp "Frivolous Tax Penalty Assessed" was harmless error because it was more probable than not that the evidence did not materially affect the verdict.

B.R. Rosco, CA-9 (unpublished opinion), 2000-1 USTC ¶50,355, 215 F3d 1335. Aff'g an unreported District Court decision.

Evidence indicating that a taxpayer was not a partner in a company supported his conviction for filing a false tax return. The taxpayer argued that he was a partner and any funds he received from the company were nontaxable partnership distributions. However, evidence indicated that the taxpayer was never a partner, and partnership returns that identified the taxpayer as a partner had a tax avoidance motive and lacked economic substance.

L.L. Worman, CA-10 (unpublished opinion), 2000-1 USTC ¶50,359, 210 F3d 391. Aff'g an unreported District Court decision.

The president of a steel cutting company that failed to report advances that it received from a purchaser of scrap metal was properly convicted of signing false corporate returns. Evidence regarding unreported advances received by the corporation during a prior tax year and the evasion of the cash transaction reporting requirement was properly admitted because it was relevant to the issue of willfulness.

L. Ristovski, CA-6 (unpublished opinion), 2000-1 USTC ¶50,409, 211 F3d 1271. Aff'g an unreported District Court decision.

Insufficient evidence existed to support a conviction against a co-conspirator for assisting in the preparation of false returns for a business in connection with a tax evasion scheme. He did not prepare the returns and his mere association with the business was inadequate to establish a violation of Code Sec. 7206.

T.C. Gaskill, CA-9 (unpublished opinion), 2000-2 USTC ¶50,702, 232 F3d 897. Rev'g and rem'g in part an unreported District Court decision.

A motion to suppress documents and statements taxpayers gave to an IRS Agent in the course of a civil investigation that were subsequently used to convict them in criminal fraud proceedings was properly denied. There was no evidence that the agent improperly failed to refer the matter for criminal investigation or otherwise cease the civil investigation once there were firm indications of fraud. Moreover, the agent was not in uniform, and was unarmed and unaccompanied at the time he interviewed the taxpayers. Thus, they were not disadvantaged or under pressure to answer his questions.

K.P. Kontny, CA-7, 2001-1 USTC ¶50,197, 238 F3d 815. Cert. denied, 5/14/2001.

The appellate court rejected taxpayer's argument that the trial court's exclusion of a tax expert's testimony concerning her ignorance of the law constituted an abuse of discretion. The expert was consulted only for trial and had no involvement in the taxpayer's preparation of her return. Thus, he could not have offered testimony as to her confusion or good faith in failing to report rental income.

S.F. Rosales, CA-9 (unpublished opinion), 2001-1 USTC ¶50,397, 7 FedAppx 766, aff'g an unreported District Court decision.

Convictions for conspiracy to defraud the government were upheld against sibling owners and managers of a family construction business who attempted to pay employees significant overtime wages off-payroll without withholding taxes, skimmed cash from their business, and failed to report income. The taxpayers signed paychecks, reviewed them, made changes and advised employees of the benefit of making purported pre-tax mortgage payments.

J.A. Gambone, Sr., CA-3, 2003-1 USTC ¶50,162, 314 F3d 163.

Evidence was sufficient for a jury to find that the signatures on the false returns belonged to the taxpayer and to support his conviction of conspiracy to defraud the government and filing false personal and corporate tax returns.

G. Rhodis, CA-2 (unpublished opinion), 2003-1 USTC ¶50,197, 58 FedAppx 855, aff'g in part and rem'g in part an unreported District Court decision.

A trial court did not abuse its discretion in admitting evidence in a tax fraud proceeding that showed how a taxpayer handled the proceeds from the sale of his home in a manner designed to deceive the IRS. The evidence, which demonstrated an intent to defraud the government, was relevant, did not cause unfair prejudice to the taxpayer, and did not affect his substantial rights.

F.F. Paul, CA-6 (unpublished opinion), 2003-1 USTC ¶50,222, 57 FedAppx 597, aff'g, per curiam, an unreported District Court decision.

An individual's conviction for preparing or assisting in the preparation and presentation of fraudulent tax returns was upheld. The trial court's decisions on the admissibility of evidence, as well as its denial of a motion for a mistrial, were not abuses of discretion, as the court did not act "arbitrarily or irrationally." Furthermore, requests for particular jury instructions were either properly denied, or their denial was not reversible error.

W.A. Montes, CA-4 (unpublished opinion), 2003-1 USTC ¶50,274, 57 FedAppx 569, aff'g, per curiam, an unreported District Court decision.

Evidence presented by the government against an individual was sufficient to sustain a jury's verdict to convict him of conspiracy to defraud the government and two counts of aiding and assisting in the preparation or presentation of false income tax returns. Based on the testimony of the individual and several of his clients, it was reasonable for the jury to find that the tax preparer converted ordinary personal expenditures into tax deductible business expenses.

D.S. Fletcher, CA-8, 2003-1 USTC ¶50,283, 322 F3d 508.

A federal district court properly convicted a tax preparer of procuring the presentation of tax returns containing false statements by fraudulently inflating taxpayers' deductions. The preparer's appeal asserted that there was insufficient evidence to support six of his convictions. However, the weight of the evidence, including the testimony of witnesses for whom he had prepared returns, was sufficient to support a finding of the preparer's guilt.

W.M. Hayes, CA-4, 2003-1 USTC ¶50,312, 322 F3d 792 .

Sufficient evidence existed to find that an individual taxpayer willfully filed false returns for two tax years. During the years in issue, the taxpayer accepted and cashed checks from two corporations owned and controlled by her father, claiming the proceeds as "wages" on her tax returns, even though she had done no work for the two companies. Based on the evidence presented by the government, the jury reasonably could have found that the taxpayer knew of her obligation to accurately report income, she knew that the money she was receiving from the companies was not "wages", and she repeatedly attempted to cover up the truth about her relationship with the businesses.

L.A. Boulerice, CA-1, 2003-1 USTC ¶50,392, 325 F3d 75.

Two individuals' convictions for aiding and abetting in the fraudulent preparation of tax returns were upheld. Evidence of a settlement agreement between the IRS and the individuals, which disallowed 80 percent of the deductions that the IRS claimed to be fraudulent, was properly excluded. The evidence's probative value was substantially outweighed by the danger of confusion its introduction would have caused.

B.F. Manko, CA-2 (unpublished opinion), 2003-1 USTC ¶50,461, 63 FedAppx 570, aff'g an unpublished District Court decision.

Any error was harmless in the face of overwhelming evidence against the taxpayer.

W.N. Jackson, CA-2 (unpublished opinion), 2003-1 USTC ¶50,478, 65 FedAppx 754, aff'g an unreported District Court decision.

Tax shelter promoters willfully aided clients in filing false or fraudulent tax returns in violation of Code Sec. 7206(2). The promoters charged hundreds of clients to set up and manage trusts known as Unincorporated Business Organizations (UBOs), which purportedly avoided taxes on income streamed into them. The government sufficiently proved the three elements of a Code Sec. 7206 violation.

D.L. Smith, CA-9, 2005-2 USTC ¶50,565, 424 F3d 992.

Evidence that a tax return preparer agreed to pay 60 penalties for understating tax liability for multiple tax years was admissible in a criminal trial, in which the tax return preparer was charged with aiding the preparation and presentation of false tax returns. The imposition and payment of the penalties was material to the criminal case, was reasonably proximate to the criminal indictment and the circumstances surrounding the imposition of the penalties was sufficient to prove the prior bad acts. Likewise, evidence of a civil judgment against the tax preparer obtained by clients was admissible because it formed the factual setting of the crime in issue.

R.E. Reiss, DC Minn., 2005-2 USTC ¶50,538.

The Fourth Amendment rights of two brothers were not violated when notebooks containing accounting information were searched; thus, their request to suppress the contents of the notebooks as evidence of tax fraud and evasion was correctly denied. They had no expectation of privacy in the notebooks after the notebooks were given to a police officer for fingerprinting during a burglary investigation. They voluntarily allowed a police officer to take the notebooks in their entirety and hold them for several days and did not place any limitations on access to the notebooks. Further, one of the brothers permitted an officer who had knowledge of an IRS investigation of them to make copies of the notebooks. He did not keep the contents to himself, separate the notebook covers or secure the contents of the notebook so that only the covers could be accessed.

Y.B. Yang, CA-7, 2007-1 USTC ¶50,395, 478 F3d 832.

Evidence of prior bad acts was properly admitted during a tax return preparer's criminal trial on charges of aiding and assisting in the preparation of false federal income tax returns. The evidence possessed significant probative value.

R.E. Reiss, CA-8 (unpublished opinion), 2007-2 USTC ¶50,532, 230 FedAppx 629, aff'g, per curiam, an unreported DC Minn. decision.

Evidence provided by an individual to an IRS agent during a civil audit of his federal income tax returns that subsequently resulted in his indictment for tax evasion was not suppressed. He failed to prove that the IRS agent induced his compliance through false promises that his cooperation would result solely in a civil tax assessment and that the case would conclude after he turned over the requested records. The IRS agent never stated that he would not be prosecuted if he cooperated. Also, the agent never promised that she would not refer his case to the Criminal Investigation Division, but maintained that any decision was dependent upon a review and final determination.

J.F. Greve, CA-7, 2007-2 USTC ¶50,547, 490 F3d 566.

The president of a tax preparation business was properly convicted for aiding and abetting the filing of false tax returns and conspiring to defraud the government. The evidence at trial established that the individual, not his alleged co-conspirator, was exclusively responsible for electronically filing returns for his business and for printing refund checks for his clients. He prepared his clients' fraudulent tax returns by reporting non-existent income from another business entity, thereby increasing their earned income tax credit. Moreover, the individual consciously made attempts to conceal his conduct by making cash payments to his clients.

M. Okonkwo, CA-11 (unpublished opinion), 2007-2 USTC ¶50,624, aff'g, per curiam, an unreported DC Ala. decision.

An individual's conviction for failing to report his income received from gambling winnings and filing false income tax returns was proper. The trial court did not abuse its discretion in allowing the IRS agent to submit rebuttal evidence that detailed transactions which the taxpayer's accountant had not taken into account in determining the taxpayer's net gambling income. Since the accountant's calculations and conclusions were not fairly and adequately presented in the defendant's case-in-chief, the IRS agent's critique of that report was properly offered in rebuttal to disprove the accuracy of the accountant's calculations.

C.J. Bland, CA-6 (unpublished opinion), 2007-2 USTC ¶50,731, aff'g an unreported DC Ky. decision.

The government presented sufficient evidence to support an individual's conviction for filing false returns. The government provided his original tax returns, which stated his income, and the Forms 1040X that he later filed showing his adjusted gross income as zero. He knew his argument that domestic income of American citizens is not taxable under the Internal Revenue Code was invalid and that the amended returns he filed based on that argument were false.

C.T. Clayton, CA-5, 2007-2 USTC ¶50,775, 506 F3d 405, aff'g, per curiam, an unreported DC Texas decision.

An individual's conviction and sentence for aiding and assisting in the filing of a false income tax return was vacated and remanded for a new trial. The district court wrongfully excluded the expert testimony of the individual's psychiatrist, who offered evidence on the effect of the individual's mental disorder on his ability to form the intent to evade the tax laws. The testimony was highly probative because it would have materially assisted the jury in determining whether the individual committed a voluntary, intentional violation of a known legal duty.

L. Cohen, CA-9, 2008-1 USTC ¶50,111, 510 F3d 1114.

A federal district court properly convicted and sentenced an individual for filing false individual income tax returns because he failed to report income diverted from his company to pay off his gambling debts. The district court did not abuse its discretion when it did not admit expert psychiatric evidence and the testimony of a forensic accountant that the individual claimed would have demonstrated that he was a pathological gambler and would have rebutted the government's evidence characterizing his transactions as diversions or misappropriations. The court found that the expert evidence and testimonies were irrelevant and lacked probative value with respect to the question whether the individual possessed the specific intent to willfully file a false tax return. Moreover, the evidence, if admitted, would have confused the jury.

S.K, Hayez, CA-4 (unpublished opinion), 2008-1 USTC ¶50,137, aff'g an unreported DC N.C. decision.

The winner of a reality television show failed to establish that he was improperly convicted and sentenced for filing false tax returns. Neither he nor his witnesses proffered any testimony or produced any evidence that demonstrated his belief that he had no legal duty to pay taxes on his winnings. The trial court also properly restricted the testimony of a witness for the individual regarding the competency of the accountants who had prepared his returns since it was irrelevant to the individual's intent.

R. Hatch, CA-1, 2008-1 USTC ¶50,166, 514 F3d 145.

An individual's conviction and sentence for preparing false and fraudulent tax returns was proper. There was sufficient evidence for the jury to find that the tax returns at issue were materially false. Evidence of flight was properly admitted because of his failure to appear in court for at least one scheduled hearing. Further, the testimony of the individual's attorney on his prior willingness to plead guilty was properly admitted since the individual had explicitly waived his right to the attorney-client privilege on that issue.

P.A. Triumph, CA-2 (unpublished opinion), 2008-1 USTC ¶50,197, aff'g an unreported DC Conn.decision .

An individual's conviction for willfully assisting the filing of a false tax return was proper. A tax return was properly admitted into evidence to establish the existence of an improperly claimed deduction. Moreover, the individual had the opportunity to confront the witness who testified against him and there was sufficient evidence to support the jury's finding that the return was false.

H.S.H. Wong, CA-9 (unpublished opinion), 2008-1 USTC ¶50,205, aff'g an unreported DC Nev. decision.

An individual was properly convicted and sentenced for willfully aiding and assisting in the preparation and presentation of false tax returns. The evidence presented at trial supported her conviction because, even though the IRS was contacted and asked to disregard it, the individual had prepared a false tax return. Moreover, the individual did not dispute her involvement in the preparation of the fraudulent return.

L.A. Borden, CA-11 (unpublished opinion), 2008-1 USTC ¶50,227, aff'g, per curiam, DC Fla., 2007-1 USTC ¶50,490.

An individual was properly convicted and sentenced for making false statements and for willfully attempting to evade taxes. The evidence at trial demonstrated that the individual submitted documents purporting to be tax forms showing zero income despite receiving significant income for the tax years at issue and had signed those forms under penalty of perjury.

B.M. Parker, CA-4 (unpublished opinion), 2008-1 USTC ¶50,276, aff'g, per curiam, an unreported DC Texas decision.

A tax preparer was properly convicted and sentenced for willfully preparing false or fraudulent income tax returns. The evidence at trial clearly established that the individual willfully prepared returns containing materially false statements. Further, the court's instruction to the jury was not in error and did not affect the jury's verdict.

G.D. Goosby, CA-6, 2008-1 USTC ¶50,331.

A district court did not abuse its discretion when it admitted an IRS agent's testimony concerning the deductibility of certain expenses and the inaccuracy of some tax returns. The testimony did not improperly render legal conclusions about the facts of the case. Instead, the testimony expressed an opinion regarding the proper tax consequences of a transaction; thus, it was admissible expert evidence.

R.N. Bedford, CA-10, 2008-2 USTC ¶50,511.

Testimony by a client of a return preparer that the preparer had assisted in the preparation of her returns on which false business mileage deductions appeared was sufficient to establish the elements of the crime of willfully preparing false tax returns. The fact that the false deductions appeared on Schedule C, rather than on Schedule A and Form 2106, which were identified in the indictment, had no effect. The indictment also referred to "accompanying schedules" and that language covered the client's Schedule C. Further, the preparer was not entitled to a new trial on the ground that the IRS expert witness's testimony was false. The testimony was correct and, thus, could not have caused any prejudice.

U. Kamalu, CA-4, 2008-2 USTC ¶50,648.

An individual was properly convicted of filing a false income tax return because the evidence was sufficient to find that the individual willfully filed tax returns that he did not believe were true and correct as to every material matter. Since the individual was a successful small business owner who kept careful records and reviewed his tax returns, the jury could reasonably infer that the individual had knowledge of the documents that he signed in furtherance of his stated intent to reduce tax liability.

S.F. Creasia, CA-9, 2008-2 USTC ¶50,666.

An individual who personally prepared amended income tax returns containing false information for her clients was properly convicted of willfully aiding and assisting in the preparation of false and fraudulent income tax returns. Substantial evidence was presented from which a reasonable-minded jury could have found the defendant guilty beyond a reasonable doubt. The government's evidence established that the individual prepared the amended returns reporting inflated deductions, contributions and credits, thereby wrongly entitling her clients to become eligible for additional refunds. The individual's argument that the erroneous amounts were the result of a computer glitch was rejected. The individual had education, training and experience in the preparation of amended tax returns, knew that the deductions were false and willfully provided the inaccurate numbers.

A. Tinder, DC Iowa, 2008-2 USTC ¶50,684.

An individual's conviction on two counts of filing false income tax returns was vacated as to one count, but affirmed as to another. The indictment was insufficient to support the individual's conviction on one count because it alleged that the individual filed a false amended tax return based on the false statements contained in a schedule attached to his original return. However, the schedule, which formed an integral part of the original return, was not an integral part of the amended return. By signing the jurat on the amended return, the individual swore to the veracity of only the amended return. However, the government's evidence supported the individual's conviction on the other count.

J.D. Adams, CA-5, 2009-1 USTC ¶50,241.

The conviction of a pastor for fraudulent evasion of personal income taxes was proper. The government's evidence at trial established that the individual willfully filed tax returns in which he knowingly and significantly under-reported his income.

G.L. Clarke, CA-11, 2009-1 USTC ¶50,295.

The evidence in an individual's trial for failure to file a tax return established that he voluntarily and intentionally violated his tax reporting obligations. He had been repeatedly informed of his tax obligations and the correct method of reporting his income. The admission of transcripts from a previous criminal trial for failure to file returns was not erroneous. Since his defense was that he was unaware of any obligation to report his earnings as income, the government was entitled to introduce the transcripts, which possessed significant probative value, as evidence that he acted willfully and with knowledge of the tax laws and his reporting obligations. Therefore, he was not entitled to a new trial or a judgment of acquittal.

R. Menner, DC Va., 2009-1 USTC ¶50,305.

A couple was properly convicted and sentenced for aiding and abetting the filing of false tax returns. The couple's motion for acquittal was properly denied because the government's evidence was sufficient to sustain the guilty verdict. The trial court did not direct a guilty verdict and properly instructed the jury as to the couple's good faith defense and their reliance on the advice of an attorney, accountant or other tax expert. Third-party tax losses were properly considered at sentencing because the husband's advice to third parties was relevant conduct forming part of a related common scheme or plan. The trial court also did not impermissibly consider hearsay evidence when attributing the third-party tax losses to the individual because the testimony met the required indicia of reliability.

J. Aldridge, CA-8, 2009-1 USTC ¶50,326.

An investment advisor was properly convicted and sentenced for willful tax evasion, subscribing false tax returns, willfully failing to file timely personal income tax returns and pay taxes, and obstructing and impeding the IRS's investigation into his assets. The evidence established that he had a substantial tax debt, his returns falsely claimed entitlement to deduct net operating loss despite being informed of the disallowance of the loss, and he engaged in affirmative acts of evasion by concealing the existence of two corporate entities that were set up to avoid lawful seizure of his assets and establishing stock accounts for his children, into which he redirected his income subsequent to receiving the deficiency notice.

R. Josephberg, CA-2, 2009-1 USTC ¶50,346.

The conviction of a company's president and sole owner for filing false tax returns was upheld because the government established that the owner willfully and knowingly signed the company's tax returns, which contained deductions for payments made to non-existent subcontractors. The government showed that the owner helped create the subcontractors and their invoices and made out checks to the non-existent subcontractors that were cashed every week by the company's superintendent.

R.J. Presbitero, CA-7, 2009-2 USTC ¶50,458.

An individual was properly convicted and sentenced for aiding and assisting in the filing of false tax returns. Admission of testimonial hearsay evidence, which relied on charts and summarizing data of the national tax return statistics, was not an abuse of discretion. The evidence was relevant because it showed that the average charitable contribution on tax returns prepared by the individual and the percentage of such returns that resulted in refunds were much higher than the national average. Further, the individual's personal tax returns were admissible under the public records exception to the hearsay rule.

A.T. Stefani, CA-9, 2009-2 USTC ¶50,474.

A federal district court properly convicted an individual of filing a false tax return. A rational jury could reasonably conclude that the individual knew how much money his law practice made and that he misreported that figure on his returns willfully and with specific intent to violate the law. The individual kept a running log of the financial status of each case; therefore, he was well aware of his law firm's finances. Considering the significant disparity between the income reported by the individual and the actual income earned through his law practice, the jury was entitled to disbelieve his excuse that he relied on his hired assistant and accountant to file accurate returns and signed the returns without reading them.

S.H. Thomas, CA-5, 2009-2 USTC ¶50,510.

An individual convicted of filing false tax returns in violation of Code Sec. 7206(1) was not entitled to a new trial or judgment of acquittal because the government's evidence was sufficient to sustain a guilty verdict. The evidence established that the individual received funds that she did not report as income on her tax returns and that the individual signed her tax return knowing that it did not accurately reflect her income. Testimony that the individual made false representations regarding investments was properly introduced. The evidence was relevant to show that the individual willfully failed to include reportable income on her tax returns and was not shown to be prejudicial.

M. Mendoza, DC Ill., 2009-2 USTC ¶50,547.

An individual was properly convicted of willfully aiding and assisting the preparation of false and fraudulent tax returns. The government established that he actually prepared the fraudulent returns and was aware of their falsity. Documentary evidence, testimony of experts in fingerprint identification and electronically filed tax returns traceable to him were sufficient proof of the individual's willful participation in the preparation of the fraudulent returns. Evidence relating to the IRS's taxpayer audits and the taxpayers' subsequent amended returns and agreed deficiencies was properly admitted. The evidence was relevant and probative of the material falsity of the returns prepared by him, and its admission was not an abuse of discretion.

W. Clark, Jr., CA-5, 2009-2 USTC ¶50,539.

T.C. Summary Opinion 2009-128]
Frankie D. Newkirk v. Commissioner.

Docket No. 28518-07S . Filed August 13, 2009.

An individual was not entitled to the filing status of head of household because insufficient evidence was provided to establish that the individual maintained a household for a qualifying individual and that she provided over one-half of the support for the child. --CCH.


[ Code Secs. 24 and 32]
Tax Court: Summary opinion: Earned income tax credit: Eligibility: Child tax credit: Qualifying child. --
The child and earned income tax credits were denied because the child claimed did not satisfy the relationship test to the taxpayer to be a qualifying child.
[ Code Sec. 152]
Tax Court: Summary opinion: Special definition relating to dependents: Qualifying child: Qualifying relative. --
The minor child was not a dependent of the taxpayer since the child did not satisfy the relationship test for a qualifying child. Also, the child could not be considered a qualifying relative since insufficient evidence was presented to establish either maintenance of a household or that over one-half of the child's support was proved by the individual.



PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.





Frankie D. Newkirk, pro se. Randall L. Eager, for respondent.



MARVEL, 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 other court, and this opinion shall not be treated as precedent for any other case.



Respondent determined a deficiency in petitioner's Federal income tax of $6,081 for 2006. After concessions, the issues for decision are: (1) Whether petitioner was entitled to the dependency exemption deduction for a minor child, F.P., 2 for 2006; (2) whether petitioner was entitled to head of household filing status for 2006; (3) whether petitioner was entitled to the earned income credit for 2006; and (4) whether petitioner was entitled to the child tax credit for F.P. for 2006.





Background



Some of the facts have been stipulated. The stipulation of facts is incorporated herein by this reference. When she petitioned the Court, petitioner resided in North Carolina.



F.P. is a minor child who was 8 years old in 2006 and who is the daughter of Ursella P. Chancey (Ms. Chancey). Petitioner is F.P.'s godmother but is not legally or biologically related to F.P. During 2006 petitioner lived in a mobile home in North Carolina. F.P. spent the entire summer, most weekend nights throughout the year, and occasional weeknights during the school year at petitioner's home. When she was not staying at petitioner's home, F.P. stayed with Ms. Chancey, who lived several miles away. Ms. Chancey has three other children, and she allowed F.P. to stay with petitioner because F.P. would receive more care and attention at petitioner's home than at Ms. Chancey's home.



Whenever F.P. visited petitioner's home, including some evenings when F.P. visited her after school but did not stay the night, petitioner would cook dinner for her. Petitioner also occasionally packed lunches for F.P. to take to school. In addition to providing some food and housing, petitioner purchased clothing and gifts for F.P. throughout the year, including a Playstation 2 video game console, games, clothing, and accessories.



Petitioner did not legally adopt F.P., nor was petitioner F.P.'s legal foster parent. Ms. Chancey did not reimburse petitioner for expenses petitioner incurred in taking care of F.P. Petitioner's mortgage payment was $316 per month, and her electric bill ranged from $95 to $150 per month during 2006. Petitioner spent approximately $160 per month on food.



At some point during 2006 or early 2007, petitioner had a conversation with Ms. Chancey about claiming F.P. as a dependent. Ms. Chancey agreed to let petitioner claim F.P. as a dependent on petitioner's 2006 Form 1040, U.S. Individual Income Tax Return. Petitioner did not compensate Ms. Chancey for allowing her to claim F.P. as a dependent.



Petitioner claimed another minor child, D.Q., as a dependent on her 2006 Form 1040, despite the fact that petitioner is unrelated to D.Q. and provided no support to D.Q. in 2006. Petitioner conceded before trial that she was not entitled to claim D.Q. as a dependent. 3





Discussion




1. Dependency Exemption


Section 151(c) allows a taxpayer to deduct an exemption amount for each dependent of the taxpayer for the taxable year. Section 152(a) defines a dependent as a qualifying child or a qualifying relative.



Section 152(c)(2) defines a qualifying child as "(A) a child of the taxpayer or a descendant of such a child, or (B) a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative." As F.P. fits neither of these definitions, F.P. is not a qualifying child with respect to petitioner.



There are two tests to determine whether an individual is a qualifying relative. Section 152(d)(2)(H) defines a qualifying relative as any individual who has the same principal place of abode as the taxpayer and is a member of the taxpayer's household (household test). To satisfy the household test, the individual must live with the taxpayer for the entire taxable year. Sec. 1.152-1(b), Income Tax Regs. 4 However, temporary absences due to "illness, education, business, vacation, military service, or a custody agreement under which the dependent is absent for less than six months" will not cause an individual to fail to qualify as a member of the taxpayer's household. Id.



A qualifying relative must also have received more than half of his or her support from the taxpayer (support test). Sec. 152(d)(1)(C). "The term 'support' includes food, shelter, clothing, medical and dental care, education, and the like." Sec. 1.152-1(a)(2)(i), Income Tax Regs. If the support is in the form of lodging, the item is measured according to its fair market value. Id. Fair market value is measured according to the value of the dependent's quarters, as opposed to the full mortgage payment made by the taxpayer. See Barnes v. Commissioner, T.C. Memo. 1985-397.



Petitioner has the burden under Rule 142(a)(1) of presenting credible evidence that F.P. was a dependent within the meaning of section 152(a) and that she was entitled to a dependency exemption deduction for F.P. See Stephenson v. Commissioner, 79 T.C. 995, 1004 (1982), affd. 748 F.2d 331 (6th Cir. 1984). In evaluating petitioner's evidence we are not bound to accept self-serving, unverified, and undocumented testimony. Shea v. Commissioner, 112 T.C. 183, 189 (1999); see also Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).



Petitioner has not satisfied the household test, because F.P. did not live with her for the entire year. Although F.P. spent most weekend nights and the entire summer with petitioner, F.P. lived with petitioner for slightly less than 60 percent of the year. In addition, petitioner did not introduce any evidence that F.P.'s absence from her home during the remainder of the year was due to illness, education, vacation, or any other acceptable special circumstances.



Neither has petitioner satisfied the support test, because she did not introduce any credible evidence that she provided more than half of F.P.'s total support from all sources during 2006. Petitioner did not introduce any evidence regarding the fair rental value of F.P.'s quarters in petitioner's home or the total support F.P. received from all sources in 2006 for food, clothing, education, transportation, medical care, and other necessities. Aside from petitioner's self-serving testimony, the only evidence petitioner introduced to substantiate her expenses consisted of 10 receipts totaling less than $500 for a video game console, video games, clothing, and accessories.



Because petitioner has failed to prove that she satisfies the household and support tests, we hold that she was not entitled to a dependency exemption deduction for 2006 with respect to F.P. as a qualifying relative.




2. Head of Household Filing Status


Section 1(b) imposes a special tax rate on an individual taxpayer who files a Federal income tax return as a head of household. Section 2(b) defines a head of household as an individual taxpayer who: (1) Is unmarried as of the close of the taxable year and is not a surviving spouse, and (2) maintains as his home a household that constitutes for more than one-half of the taxable year the principal place of abode, as a member of such household, of a dependent for whom the taxpayer is entitled to a deduction under section 151. Sec. 2(b)(1)(A)(ii); see also, e.g., Rowe v. Commissioner, 128 T.C. 13, 16-17 (2007). Because F.P. was not a dependent for whom petitioner was entitled to a deduction under section 151, petitioner was not entitled to head of household filing status for 2006.




3. Earned Income Credit


An eligible individual is entitled to a credit against his or her Federal income tax liability, calculated as a percentage of such individual's earned income, subject to certain limitations. Sec. 32(a)(1); Rowe v. Commissioner, supra at 15. Different percentages and amounts are used to calculate the earned income credit (EIC), depending on whether the individual has no qualifying children, one qualifying child, or two or more qualifying children. Sec. 32(b); Rowe v. Commissioner, supra at 15. An eligible individual means, in pertinent part, "any individual who has a qualifying child for the taxable year". Sec. 32(c)(1)(A)(i). A "qualifying child" means a qualifying child of the taxpayer as defined in section 152(c). Sec. 32(c)(3)(A).



As discussed previously, F.P. was not a qualifying child of petitioner within the meaning of section 152(c). Accordingly, petitioner was not entitled to claim the EIC for 2006.




4. Child Tax Credit


Section 24(a) allows a taxpayer a credit of up to $1,000 against his or her Federal income tax liability for each qualifying child. 5 The term "qualifying child" means a qualifying child of the taxpayer, as defined in section 152(c), who has not attained the age of 17. Sec. 24(c)(1). Because F.P. was not petitioner's qualifying child, petitioner was not entitled to claim the child tax credit with respect to F.P.




5. Conclusion


For the foregoing reasons, we hold that (1) petitioner was not entitled to a dependency exemption deduction for F.P. in 2006; (2) petitioner was not entitled to head of household filing status in 2006; (3) petitioner was not entitled to the EIC in 2006; and (4) petitioner was not entitled to the child tax credit in 2006.



We have considered all remaining arguments made by the parties, and to the extent not discussed above, we conclude such arguments are irrelevant, moot, or without merit.



To reflect the foregoing,



Decision will be entered for respondent.


1 Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 The Court refers to minor children by their initials. Rule 27(a)(3).

3 At trial petitioner initially testified she could not recall how she obtained D.Q.'s Social Security number, which she required in order to claim D.Q. as a dependent. When pressed by respondent's counsel and the Court, however, petitioner admitted that she paid D.Q.'s biological mother to allow her to claim D.Q. as a dependent.

4 Sec. 1.152-1, Income Tax Regs., has not been amended to reflect changes in sec. 152 that were enacted by the Working Families Tax Relief Act of 2004, Pub. L. 108-311, sec. 201, 118 Stat. 1169. Nevertheless, the regulation remains valid to the extent it is not inconsistent with sec. 152 as amended.

5 The credit is reduced by $50 for each $1,000 (or fraction thereof) by which a taxpayer's modified adjusted gross income exceeds $110,000 in the case of a joint return, $75,000 in the case of an unmarried individual, and $55,000 in the case of a married individual filing a separate return. Sec. 24(b).

2009 IRS Summertime Tax Tip 2009-16

August 13, 2009

Internal Revenue Service : 2009 summer tax tips : Home office deduction .



Five Facts about the Home Office Deduction



IRS Summertime Tax Tip 2009-16

With technology making it easier than ever for people to operate a business out of their house, many taxpayers may be able to take a home office deduction when filing their 2009 federal tax return next year.

Here are five important things the IRS wants you to know about claiming the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

 As your principal place of business, or

 As a place to meet or deal with patients, clients or customers in the normal course of your business, or

 In the case of a separate structure which is not attached to your home, it must be used in connection with your trade or business

For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

2. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

3. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

4. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction. Report the deduction on line 30 of Schedule C, Form 1040.

5. Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

2009 IRS Summertime Tax Tip 2009-16

August 13, 2009

Internal Revenue Service : 2009 summer tax tips : Home office deduction .



Five Facts about the Home Office Deduction



IRS Summertime Tax Tip 2009-16

With technology making it easier than ever for people to operate a business out of their house, many taxpayers may be able to take a home office deduction when filing their 2009 federal tax return next year.

Here are five important things the IRS wants you to know about claiming the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

 As your principal place of business, or

 As a place to meet or deal with patients, clients or customers in the normal course of your business, or

 In the case of a separate structure which is not attached to your home, it must be used in connection with your trade or business

For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

2. Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

3. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

4. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction. Report the deduction on line 30 of Schedule C, Form 1040.

5. Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

2009 IRS Summertime Tax Tip 2009-14

August 13, 2009

Internal Revenue Service : 2009 summer tax tips : Gambling winnings .



The Lucky Seven...Gambling Winnings and Losses Tax Tips



IRS Summertime Tax Tip 2009-14

You may know when to hold `em and when to fold `em but do you know how and when to report `em? Whether you are playing cards or the slots, it is important to know the rules about reporting gambling winnings and losses.

Here are seven things the IRS wants you to know about reporting what Lady Luck has sent your way.
1. All gambling winnings are fully taxable.

2. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, poker tournaments and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips.

3. A payer is required to issue you a Form W-2G if you receive certain gambling winnings or if you have any gambling winnings subject to federal income tax withholding.

4. Even if a W-2G is not issued, all gambling winnings must be reported as taxable income. Therefore, you may be required to pay an estimated tax on the gambling winnings. For more information on paying estimated taxes, refer to IRS Publication 505, Tax Withholding and Estimated Tax.

5. You must report your gambling winnings on Form 1040, line 21.

6. If you itemize your deductions on Form 1040, Schedule A, you can deduct gambling losses you had during the year, but only up to the amount of your winnings. Your losses are not subject to the 2 percent of AGI Limitation.

7. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

For more information, refer to IRS Publications 525, Taxable and Nontaxable Income, and 529, Miscellaneous Deductions. Additional information can also be found in IRS Instructions for Forms W-2G and 5754, Certain Gambling Winnings & Statement by Person(s) Receiving Gambling Winnings. These publications are available at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

2009 IRS Summertime Tax Tip 2009-15

August 13, 2009

Internal Revenue Service : 2009 summer tax tips : Payment of taxes due .



Eight Tips for Taxpayers Who Owe Money to the IRS



IRS Summertime Tax Tip 2009-15

The vast majority of Americans get a tax refund from the IRS each spring, but what do you do if you are one of those who received a tax bill? Here are eight tips for taxpayers who owe money to the IRS.

1. If you get a bill this summer for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.

2. You can also pay the bill with your credit card. To pay by credit card contact either Official Payments Corporation at 800-2PAYTAX (also www.officialpayments.com) or Link2Gov at 888-PAY-1040 (also www.pay1040.com).

3. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

4. You can also pay the balance owed by electronic funds transfer, check, money order, cashier's check or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or 800-945-8400 or online at www.eftps.gov.

5. An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.

6. If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the web-based application called Online Payment Agreement found at IRS.gov.

7. You can also complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS. The IRS will inform you usually within 30 days whether your request is approved, denied, or if additional information is needed. If the amount you owe is $25,000 or less, provide the monthly amount you wish to pay with your request. At a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement, Form 433, is an amount that will full pay the total balance owed within 60 months.

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based upon your financial information.

8. If an agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged, and is automatically figured based on your income.

For more information about installment agreements and other payment options visit the IRS Web site at IRS.gov. IRS Publications 594, The IRS Collection Process and 966, Electronic Choices to Pay All Your Federal Taxes also provide additional information regarding your payment options. These publications and Form 9465 can be obtained on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).

James Doulgeris, Plaintiff and Counterclaim Defendant v. United States of America, Defendant and Counterclaimant.

U.S. District Court, Mid. Dist. Fla., Tampa Div.; 8:08-cr-282-T-24-MAP, August 3, 2009.

[ Code Sec. 6672]

Penalties, civil: Trust fund recovery penalty: Unpaid payroll taxes: Responsible person: Willfulness: Knowledge of nonpayment: Preference to other creditors. --
The president/CEO of a hospital was liable for the trust fund recovery penalties assessed against him in connection with the hospital's unpaid employment taxes. The individual was a responsible person with respect to the hospital and acted willfully in failing to remit the hospital's withholding taxes. Despite having knowledge that the payroll taxes collected from hospital employees had not been remitted to the government in their entirety and possessing the authority to make payments on behalf of the hospital, the individual signed checks to pay suppliers and nongovernmental creditors; thereby willfully enabling hospital funds to be used for purposes other than paying taxes. His contention that he left financial decisions to the CFO was insufficient to absolve him of his responsibility to ensure payment of the taxes.







ORDER


BUCKLEW, United States District Judge: This cause comes before the Court on the United States' motion for judgment as a matter of law against Plaintiff James Doulgeris, pursuant to Federal Rule of Civil Procedure 50(b). (Doc. 65.) Plaintiff Doulgeris, appearing pro se, opposes the motion. (Doc. 66.)




PROCEDURAL HISTORY


This case revolves around whether Plaintiff James Doulgeris can be held liable for the unpaid payroll taxes collected, but not paid over, by International Philanthropic Hospital Foundation d/b/a Granada Hills Community Hospital ("GHCH"), for the tax quarters ending in March 2003 and June 2003. 1 To be held liable for the taxes, Plaintiff 1) must have been a person responsible for paying over the taxes to the government during the relevant fiscal quarters, and 2) must have acted willfully in failing to pay over the taxes. 26 U.S.C. § 6672.

This case was tried before a jury on the dates of June 29th and June 30th, 2009. ( See Dkt. Nos. 46, 49.) At the close of the Plaintiff's case, the government moved for judgment as a matter of law, pursuant to Federal Rule of Civil Procedure 50, asking the Court to find that, as a matter of law, Plaintiff was a responsible person who had willfully failed to pay over to the government the funds collected by the hospital for payroll taxes. (Dkt. No. 47.) The Court denied the motion. (Dkt. No. 48.) After both parties had rested, the government renewed its Rule 50 motion. (Dkt. No. 50.) The Court granted the government's motion for judgment as a matter of law as to the issue of whether Plaintiff was a responsible person, finding that as President and CEO of GHCH, vested with the responsibilities incumbent upon those offices during the relevant time period, Plaintiff was a responsible person. (Dkt. No. 51.) The Court charged the jury with determining whether Plaintiff had shown by a preponderance of the evidence that he had not acted willfully in failing to pay over the taxes. The jury was unable to reach a verdict on the issue, and on June 30th the Court declared a mistrial. (Dkt. No. 57.) The government then timely renewed its Rule 50 motion as to the single outstanding issue of willfulness. (Doc. 65.) Plaintiff timely filed his response in opposition thereto. (Doc. 66.)




FACTS


After experiencing financial hardship, GHCH filed for bankruptcy. (Doc. 60, pp. 97-98.) In January of 2003, GHCH hired Health Care Resource Specialists, Inc., a company owned by Bay Management Group ("BMG"), to help the hospital with its bankruptcy reorganization and to remediate the hospital's financial troubles. ( Id. at 98, 166; Gov't. Ex. 19.) On January 21st, 2003, BMG appointed Plaintiff as interim president and Chief Executive Officer ("CEO") of the hospital. ( Id. at 99.) Plaintiff's primary area of vast expertise was in managing the operations, rather than finances, of hospitals in financial distress. ( Id. at 97-99.) Mark Jonas, another BMG employee, served as the Chief Financial Officer ("CFO") of the hospital during Plaintiff's tenure at GHCH. Mr. Jonas testified that he made payments to various creditors on behalf of the hospital based on his judgment and sometimes with the input or under the direction of Plaintiff or Philip Rappa, the CEO of BMG. ( Id. at 223, 226-27, 243.)

It is undisputed that GHCH withheld federal income taxes and social security taxes from the wages and salaries paid to its employees during the tax quarters ending in March 2003 and June 2003. The parties further agree that the hospital then failed to fulfill its legal requirement to turn over to the government the full amount of the funds withheld during that time.

Plaintiff admits that he knew GHCH was delinquent in its payroll taxes when he began his term as interim president and CEO. (Doc. 60, pp. 97-99, 182-83.) There is no dispute that Plaintiff had the authority to draw on the bank accounts of the hospital, including the accounts entitled "payroll" and "taxes." (Gov't. Ex. 225, pp. 10, 14, 22, 33, 44, 57; Doc. 60, pp. 169-75.) In fact, between February and July of 2003, Plaintiff signed checks on behalf of the hospital on 57 separate occasions and totaling at least 2.9 million dollars, while payroll taxes were delinquent. (Doc. 60, p. 176; Gov't. Ex. 26.) Plaintiff claims, and there is no evidence to the contrary, that these were checks that Mr. Jonas, the CFO, had made out and left for Plaintiff to sign while Mr. Jonas was out of the office. (Doc. 60. P. 176, 191-92.) Plaintiff claims that he did not make out the hospital's checks; he only signed them on occasion. ( Id.) Thus, he claims that he was not actually in control over whom the hospital paid. Instead, financial decisions and payments fell under the authority of Mr. Jonas, who answered to Mr. Rappa of BMG, rather than to Plaintiff. ( See, e.g., Doc. 62, pp. 102-03; Doc. 66, pp. 3-4.)

The Internal Revenue Service ("IRS") determined that Plaintiff was a hospital officer responsible for the payment of funds withheld for payroll taxes, during the period in which GHCH failed to pay over the withheld taxes to the government. ( See, e.g., Counterclaim.) Therefore, the IRS held Plaintiff personally liable for the full amount owed. ( See id.) Plaintiff paid a $100 assessment for each of the quarters for which the IRS deemed him liable for the unpaid taxes. (Compl.) Then, in February of 2008, Plaintiff brought this suit against the United States to recover the assessments he paid and to absolve himself of liability for the remainder of the unpaid taxes. ( See id.) The United States counterclaimed to reduce the outstanding amount of the unpaid taxes (plus interest) to judgment against Plaintiff. (Counterclaim.)




STANDARD OF REVIEW


During a jury trial, after a party has been fully heard on the issues, the opposing party may move for a judgment as a matter of law as to one or all of those issues. Fed R. Civ. P. 50. The Court may grant the motion if, drawing all reasonable inferences in favor of the non-moving party, Smith v. United States, 894 F. 2d 1549, 1552 (11th Cir. 1990), "a reasonable jury would not have a legally sufficient evidentiary basis" to find for the non-moving party, Fed. R. Civ. P. 50(a). If the Court does not grant the motion before sending the issue(s) to the jury, "the court is considered to have submitted the action to the jury subject to the court's later deciding the legal questions raised by the motion," and the moving party may renew the motion within ten days of either the entry of judgment or, if the issue is not decided by a verdict, the date on which the jury was discharged. Fed. R. Civ. P. 50(b).




DISCUSSION


When a person who is responsible for paying to the government funds withheld for the purpose of payroll taxes, willfully fails to turn those funds over to the government, he may be held personally liable for the amount that is not paid over. 26 U.S.C. § 6672. The government has the burden of demonstrating by a preponderance of the evidence that the person in question was a responsible person under the law; if the government so demonstrates, the burden shifts to the responsible person to show that he did not act willfully in failing to pay over the taxes. Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir. 1987).

In this context, a person acts "willfully" if he voluntarily, consciously, and intentionally uses, or causes to be used, funds withheld for payroll taxes for purposes other than the payment of those taxes. Malloy v. United States, 17 F.3d 329, 332 (11th Cir. 1994). Willfulness is demonstrated when it is shown that an officer decided to use the money withheld for payroll taxes to pay suppliers or other creditors when he knew that payroll taxes were due and owing to the government. Id. Even acting "with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the Government, such as by failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted," can constitute willful failure to pay. Id. (citations omitted) (emphasis in original). Delegation of financial responsibility to another person is insufficient to disprove willfulness. Mazo v. United States, 591 F.2d 1151, 1155 (5th Cir. 1979). In other words, if an officer has a responsibility to pay over taxes to the government, he cannot absolve himself of that responsibility by leaving it for someone else to fulfill. Hornsby v. Internal Revenue Svc., 588 F.2d 952, 953 (5th Cir. 1979).

There is no dispute that Plaintiff was the president and CEO of GHCH during the tax quarters in question. He admits that he knew that the payroll taxes collected from hospital employees had not been turned over to the government in their entirety for the quarters ending in March and June 2003. He acknowledges that he had the authority to make payments on behalf of the hospital. In fact, Plaintiff admits that he signed checks totaling over 2.9 million dollars ( see Gov't Ex. 26), paying other creditors, rather than the government, while he knew that payroll taxes were delinquent. Thus, he decided to use the money withheld for payroll taxes to pay suppliers or other creditors when he knew that payroll taxes were due and owing to the government.

Further, even if Plaintiff did not make out the checks he signed, his signature was necessary to give the checks value, and thus his signature "cause[d] [the payroll tax funds] to be used ... for purposes other than the payment of taxes." Significantly, Plaintiff admits that he had the power to directly transfer hospital funds to the government to make payroll tax payments, and that he did so when Mr. Jonas was out of town. (Doc. 60, p. 177.) The fact that Plaintiff had the power to pay the taxes but had generally left financial decisions to Mr. Jonas is insufficient to absolve Plaintiff of his responsibility to see that the taxes were paid.

Based on the facts in evidence, it is clear that Plaintiff willfully enabled hospital funds to be used for purposes other than paying taxes owed to the government while he knew that such taxes were owing and was able to effect their payment. Thus, even making all inferences in favor of Plaintiff, there is insufficient evidence by which a reasonable jury could find for Plaintiff on the issue of willfulness. Therefore, as a matter of law, Plaintiff was willful in failing to pay over the payroll taxes for the fiscal quarters in question.




CONCLUSION


Accordingly, it is ORDERED AND ADJUDGED that the United States' motion for judgment as a matter of law is GRANTED as to Plaintiff's willfulness. The two legal issues informing the resolution of this case are 1) whether Plaintiff was a person responsible for paying over to the government payroll tax funds collected from hospital employees for the May and June 2003 tax quarters, and 2) whether Plaintiff acted willfully in failing to pay over those funds. Because the court has now ruled for the government as to each issue as a matter of law, the clerk is directed to enter judgment in favor of the United States and against James Doulgeris in the amount of $1,935,204.33.

DONE AND ORDERED this 3rd day of August, 2009.

1 Just before the commencement of trial, the government dismissed its claim that Plaintiff was liable for the unpaid taxes from the tax quarter ending in September 2003.

Treasury Inspector General for Tax Administration (TIGTA) Press Release: TIGTA Releases Review of IRS's Tax Exempt/Government Entities Anti-Fraud Program

August 11, 2009

TIGTA press release : Tax Exempt/Government Entities Division : Anti-fraud program .



TIGTA RELEASES REVIEW OF IRS's TAX EXEMPT/GOVERNMENT ENTITIES ANTI-FRAUD PROGRAM

The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its review of the Internal Revenue Service's (IRS) efforts to increase the effectiveness of the Tax Exempt/Government Entities (TE/GE) Division's anti-fraud program.

TIGTA found that the Division's five offices have implemented changes to their anti-fraud programs, resulting in more potential fraud being identified. More cases are referred to the IRS Criminal Investigation Division for further investigation and to the Justice Department for possible prosecution. However, the effectiveness of anti-fraud programs varies by office, with one of the five offices responsible for most of the referrals for investigation and prosecution.

TIGTA recommended that the TE/GE Division develop and implement a uniform, Division-wide approach with centralized oversight for its anti-fraud program and ensure that all TE/GE offices follow IRS procedures. The IRS agreed with TIGTA's recommendations and provided planned actions to address them.

TIGTA conducted the audit as a follow-up to its September 2003 and September 2005 reports on the TE/GE Division's efforts to improve its fraud detection and prevention program.

"The Tax Exempt Division has made significant progress in detecting and preventing fraud," stated J. Russell George, the Treasury Inspector General for Tax Administration. "However, the IRS should ensure that all of the Division's offices are effectively implementing anti-fraud programs. An effective anti-fraud program will provide greater assurance that the trust placed in tax-exempt organizations by taxpayers and the good work done by most of them are not tarnished," Inspector General George added.

To view the report, including the scope, methodology, and full IRS response, go to: http://www.treas.gov/tigta/auditreports/2009reports/200910096fr.pdf .

Notice 2009-62 , I.R.B. 2009-35, August 7, 2009.




Reporting requirements: Foreign bank account reports (FBAR): United States person. --
The IRS has extended the due date for certain specified persons to file foreign bank account reports (FBARs) (Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts) for 2008 and earlier calendar years. Citing additional time needed by the Treasury Department to address issues pertaining to FBAR filing requirements and the need to provide administrative relief for specified persons, the IRS has provided that eligible persons have until June 30, 2010, to file FBARS for 2008, 2009 and earlier calendar years. Specified persons are (1) persons with signature authority over, but no financial interest in, a foreign financial account, and (2) persons with a financial interest in, or signature authority over, a foreign commingled fund.





I. Background and Purpose

The Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1 (hereinafter referred to as "FBAR"), provides necessary information for certain governmental agencies. Information on the FBAR may be used in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism. This governmental need for information is balanced with the administrative concerns presented by the filing of the information by U.S. persons.

In October 2008, the IRS revised the FBAR and the accompanying instructions. On June 5, 2009, the IRS issued Announcement 2009-51, 2009-25 I.R.B. 1105, which stated that the IRS is temporarily suspending the filing requirement of the FBAR for those persons who are not U.S. citizens, residents, or domestic entities. On May 6, 2009 and June 24, 2009, the IRS posted questions and answers (Q&As-9 and -43, respectively) on its public website ( www.irs.gov) that provide relief to certain persons who only recently learned of their obligation to file an FBAR by setting forth conditions and procedures for filing Form TD F 90-22.1 by September 23, 2009. More information concerning this relief is available at http://www.irs.gov/newsroom/article/0,,id=210027,00.html. This Notice provides additional administrative relief for (i) persons with no financial interest in a foreign financial account but with signature or other authority over the foreign financial account (hereinafter referred to as "signature authority"), and (ii) persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a commingled fund (hereinafter referred to as "foreign commingled funds"). The Department of the Treasury intends to issue regulations clarifying the FBAR filing requirements pertaining to those persons with respect to these foreign financial accounts, and solicits comments related to these FBAR filing requirements in this Notice.



II. Extended Filing Date for Specified Persons



A. Current FBAR Instructions

The current instructions to the FBAR provide, with certain exceptions, that U.S. persons that have signature authority over, but no financial interest in, a foreign financial account are required to file an FBAR. These persons must report the account on an FBAR even if the foreign financial account is reported on an FBAR filed by the owner of the account (or other person that has a financial interest in the account).

The current instructions to the FBAR also provide that a foreign financial account that must be reported on an FBAR includes any bank, securities, securities derivatives, or other financial instruments account. The FBAR instructions further provide that those accounts "generally also encompass any accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund (including mutual funds)."

The current instructions to the FBAR also provide that Form TD F 90-22.1 with respect to a given calendar year must be filed with the Department of the Treasury on or before June 30 of the succeeding year. Thus, except as provided in the prior relief granted by the IRS on its public website and the relief granted in this Notice, FBARs with respect to the 2008 calendar year should have been filed on or before June 30, 2009.



B. Extended Date for Filing an FBAR

In light of the additional time needed for the Department of the Treasury to address issues pertaining to FBAR filing requirements and the need to provide administrative relief for (i) persons with signature authority over, but no financial interest in, a foreign financial account, and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund, this Notice provides that those persons have until June 30, 2010, to file an FBAR for the 2008 and earlier calendar years with respect to these foreign financial accounts. Thus, eligible persons that avail themselves of the administrative relief provided in this Notice may need to file FBARs for the 2008, 2009 and earlier calendar years on or before June 30, 2010, to the extent provided in future guidance.

The FBAR filing extension provided by this Notice applies to FBARs with respect to 2008 and earlier calendar years. For (i) persons with signature authority over, but no financial interest in, a foreign financial account, and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund, the FBAR filing extension provided in this Notice supplements the filing extension to September 23, 2009, previously provided by the IRS on its public website.



III. Request for Public Comments

The Department of the Treasury is interested in receiving comments on the following issues affecting a person's FBAR filing obligation.

The Department of the Treasury requests comments regarding when a person with signature authority over, but no financial interest in, a foreign financial account should be relieved of filing an FBAR for the account. For example, comments are requested regarding whether relief from filing would be appropriate if a person with a financial interest in the account has filed an FBAR.

The Department of the Treasury requests comments discussing in what circumstances the exception from FBAR filing currently available for officers and employees of banks and certain publicly-traded domestic companies might be expanded to apply to all officers and employees with only signature authority over, and no financial interest in, an employer's foreign financial account, including circumstances in which an individual has been advised that an FBAR has been filed with respect to a foreign financial account for which that person has signature authority. The Department of the Treasury also requests comments discussing how the bank and publicly-traded company exception (including the requirement of notification that an FBAR was filed by a U.S. person with a financial interest in the account) might apply to officers and employees with only signature authority over accounts owned by clients of their employer.

The Department of the Treasury requests comments concerning when an interest in a foreign entity (e.g., a corporation, partnership, trust, or estate) should be subject to FBAR reporting. For example, comments are requested regarding the possibility of applying the principles of sections 1297 and 1298(b) of the Internal Revenue Code to determine when an interest in a foreign entity should be subject to FBAR reporting. Comments are also requested regarding whether the passive asset and passive income thresholds of 50 percent and 75 percent, respectively, are appropriate and whether the tests should apply conjunctively.

The Department of the Treasury also requests comments on whether a U.S. person should be relieved from an FBAR filing requirement with respect to a foreign commingled fund in other circumstances, such as when filing would be duplicative of other reporting.

Interested persons should submit comments and suggestions with respect to the guidance on FBAR reporting in this Notice by October 6, 2009, to:
Internal Revenue Service

Attn: CC:PA:LPD:PR ( Notice 2009-62)

Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044

or hand deliver comments Monday through Friday between the hours of 8 a.m. and 4 p.m. to:
Courier's Desk

Internal Revenue Service

Attn: CC:PA:LPD:PR ( Notice 2009-62)

1111 Constitution Avenue, N.W.

Washington, D.C. 20224

A copy of those comments should also be sent to:
Financial Crimes Enforcement Network

Department of the Treasury

P.O. Box 39

Vienna, VA 22183

Alternatively, the public may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov with a copy to regcomments@fincen.gov. Respondents should include "Notice 2009-62" in the subject line of any comment submitted.

All comments submitted by the public will be made available for public inspection and copying in their entirety.



IV. Effective Date

This Notice applies to FBARs (Form TD F 90-22.1) with respect to calendar year 2008 and prior calendar years.



V. Contact Information

For further information regarding the relief relating to signature authority, contact Terra-Lynn Zentara at (202) 283-7659 (not a toll-free call). For further information regarding foreign commingled funds, contact Joseph Henderson at (202) 622-3446 (not a toll-free call).


Announcement 2009-51 , I.R.B. 2009-25, June 5, 2009.




Reporting requirements: Foreign bank account reports: United States person. --
The IRS is temporarily suspending the requirement to file foreign bank account reports (FBARs) (Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts) due on June 30, 2009, for persons who are not citizens, residents or domestic entities. Form TD F 90-22.1, which was revised in October 2008, changed the definition of "United States person" and resulted in some confusion that may require additional guidance. Therefore, for FBARs due on June 30, 2009, taxpayers should use the prior (July 2000) version's definition in determining who must file an FBAR. Under that former definition, a "United States person" is (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust. Taxpayers required to file an FBAR due on June 30, 2009, should still file the current version of Form TD F 90-22.1. The substitution of the prior definition of "United States person" applies only with respect to FBARs due on June 30, 2009.



The Internal Revenue Service is temporarily suspending the reporting requirement with respect to foreign bank accounts (Form TD F 90.22-1 (Report of Foreign Bank and Financial Accounts)) due on June 30, 2009, for those persons who are not citizens, residents, or domestic entities. The revised Form TD F 90.22-1 (October 2008) was issued with a change in the instructions to the definition of "United States person." The IRS has received a number of questions and comments from the public concerning the new filing requirement that may require additional guidance.

To reduce the burden on the public with respect to FBARs due on June 30, 2009, all persons may rely on the definition of "United States person" found in the instructions for the prior version of the FBAR (the July 2000 version) to determine whether they have an obligation to file an FBAR. The definition of "United States person" from the prior version is as follows:
United States Person The term "United States person" means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

The definition of the term "United States person" from the instructions for the prior version of the FBAR form may be relied upon for purposes of determining who must file an FBAR. All other requirements of the current version of the FBAR form and instructions (revision October 2008) are still in effect. The current version of the form must be used when filing an FBAR.

The substitution of the definition of "United States person" from the instructions for the prior version of the FBAR applies only with respect to FBARs due on June 30, 2009. Additional guidance will be issued with respect to FBARs due in subsequent years.

The Service invites interested persons to submit comments regarding the revised FBAR form and instructions (revision October 2008). Please submit comments by August 31, 2009 to: Internal Revenue Service, CC:PA:LPD:PR (Announcement 2009- 51), room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions also may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (Announcement 2009-51), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue N.W., Washington, DC. Alternatively, taxpayers may submit electronic comments directly to the IRS e-mail address: notice.comments@irscounsel.treas.gov (attention: Announcement 2009-51).

The principal author of this announcement is Adrienne Mikolashek of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this announcement contact Adrienne


General Requirement of Return: Foreign bank, securities, and other financial accounts reporting

Corporations with subsidiaries are allowed to file consolidated reports on Form 90-22.1. Individuals who had to file because they have signature authority over a corporate bank account will not be required to file.

Treas. Dept. News Rel. B-797, Mar. 23, 1978, 789 CCH ¶6519.

A special filing procedure applies to persons having a financial interest in 25 or more foreign financial accounts.

Treas. Dept. News Rel. B-394, Aug. 16, 1977, 779 CCH ¶6926K.

Treasury Form 90-22.1 will not be required of persons owning or controlling foreign financial accounts valued at less than $5,000.

IRM 4234, Exhibit 200-4.

Treasury Form TD F 90-22.1 is not required of individuals, partnerships, trusts, or corporations having a financial interest in or authority over one or more bank accounts, securities accounts, or other financial accounts in a foreign country, when such account(s) have an aggregate value in excess of $10,000.

IRM Handbook 9.10, chapter 2.4.3 (rev. 08/99).

This is a conspiracy case under 7206(2). To obtain a conviction for aiding and assisting in the filing of false tax returns under 26 U.S.C. § 7206(2), the government must prove the following elements beyond a reasonable doubt: "(1) the defendant aided, assisted, or otherwise caused the preparation and presentation of a return; (2) that the return was fraudulent or false as to a material matter; and (3) the act of the defendant was willful." United States v. Aramony, 88 F.3d 1369, 1382 (4th Cir. 1996) (quoting United States v. Salerno, 902 F.2d 1429, 1432 (9th Cir. 1990)). The third element, which is the only element in serious dispute in this case, requires that the Government demonstrate beyond a reasonable doubt that the defendant acted voluntarily and intentionally --and by not mistake, accident, negligence or other innocent reason --with the specific intent to aid and assist in the filing of a false tax return. See Sand, Siffert, Loughlin, & Reiss, Modern Federal Jury Instructions P. 59.01, No. 58-9; P. 59.04, No. 59-30 [hereinafter Jury Instructions]. "The Supreme Court has repeatedly held that in order to make out a 'willful violation' of section 7206(2) the government must prove defendants acted with specific intent to defraud the government in the enforcement of its tax laws." Salerno, 902 F.2d at 1432 (citing several Supreme Court cases).
United States of America v. Joseph Poole, Defendant.

U.S. District Court, Dist. Md.; RDB-08-0098, July 24, 2009.


A CPA was convicted of willfully aiding and assisting in the preparation of materially false income tax returns for the president and 100-percent owner of a mortgage brokerage firm and his wife. The government proved beyond a reasonable doubt that the CPA prepared the couple's returns and willfully failed to report as taxable income business funds used by the couple for their personal purposes. The CPA was aware that the owner received officer's compensation from the firm, that the firm's business funds were used to pay the couple's personal expenditures and that funds withdrawn by the owner for his personal expenses constituted shareholder distributions that were taxable to the couple.




MEMORANDUM OPINION


BENNETT, United States District Judge: In an Indictment that also contained tax fraud charges against Stilianos Mavroulis and Kyriakos Mavroulis ("Mavroulis Defendants"), 1 Defendant Joseph Poole was charged with conspiracy to defraud the Internal Revenue Service in violation of 18 U.S.C. § 371 (Count One) and aiding and assisting in the filing of false tax returns in violation of 26 U.S.C. § 7206(2) (Counts Six through Nine). Specifically, Counts Six through Nine allege in part as follows:


____________________________________________________________________________________
Count Date Prepared Tax Year Material False Matters on Tax Return

____________________________________________________________________________________
6 12/12/01 2000 Line 39: taxable income reported was $0,
when in fact the taxpayers had
substantial unreported taxable income




Lines 65-67a: tax payments and refund
claimed of $3,365, when in fact the
taxpayers owed a substantial amount of
income tax

____________________________________________________________________________________
7 4/11/03 2001 Line 39: taxable income reported was $0,
when in fact the taxpayers had
substantial additional unreported taxable
income




Lines 66-68a: tax payments and refund
claimed of $3,410, when in fact the
taxpayers owed a substantial amount of
income tax

____________________________________________________________________________________
8 11/18/03 2002 Line 41: taxable income reported as
$47,365, when in fact the taxpayers had
substantial additional unreported taxable
income




Line 73: Amount of income tax owed
reported as $3,292, when in fact the
taxpayers owed a substantial additional
amount of income tax

____________________________________________________________________________________
9 10/14/04 2003 Line 40: taxable income reported as
$475,535, when in fact the taxpayers had
substantial additional unreported taxable
income.




Line 60: Income tax reported as $141,644,
when in fact the taxpayers owed a
substantial additional amount of income
tax

____________________________________________________________________________________


On December 1, 2008, this Court granted Defendant Poole's Motion for Severance (Paper No. 35), based in large part on the Supplemental Memorandum in Support of Motion to Sever Defendants (Paper No. 59) filed by Stilianos Mavroulis. In that submission, Stilianos Mavroulis attached an affidavit by Defendant Poole in which Defendant Poole stated that he would only waive his Fifth Amendment privilege to testify at the severed trial of the Mavroulis Defendants (and not at a joint trial), and that his testimony would be that, inter alia: (1) he taught the Mavroulis Defendants the accounting program QuickBooks; (2) he frequently answered questions about the characterization of expenses; (3) he prepared the financial statements and tax returns; and (4) he doesn't believe that the Mavroulis Defendants acted to intentionally defraud the government. For the reasons stated on the record at the motions hearing conducted on November 26, 2008, this Court determined that the Defendants had met their burden under the test enunciated in United States v. Parodi, 703 F.2d 768 (4th Cir. 1983), 2 and consequently the Government's case against Defendant Poole was severed from the case against the Mavroulis Defendants.

On June 2, 2009, Defendant Poole waived his Seventh Amendment right to a jury (Paper No. 96), and the Government consented to proceeding with a bench trial (Paper No. 97). The bench trial of Defendant Poole commenced on Monday, July 13, 2009, and closing arguments were heard on Tuesday, July 21, 2009. The following day, the parties submitted, at the Court's request, proposed statements of law and findings of fact. By way of the accompanying Verdict, and for the reasons stated in this Memorandum Opinion, this Court finds Defendant Joseph Poole GUILTY as to the aiding and assisting in the filing of false tax returns charged in Counts Six through Nine, and NOT GUILTY as to the conspiracy to defraud the United States charged in Count One.


STATEMENTS OF LAW




I. Aiding and Assisting

To obtain a conviction for aiding and assisting in the filing of false tax returns under 26 U.S.C. § 7206(2), the government must prove the following elements beyond a reasonable doubt: "(1) the defendant aided, assisted, or otherwise caused the preparation and presentation of a return; (2) that the return was fraudulent or false as to a material matter; and (3) the act of the defendant was willful." United States v. Aramony, 88 F.3d 1369, 1382 (4th Cir. 1996) (quoting United States v. Salerno, 902 F.2d 1429, 1432 (9th Cir. 1990)). The third element, which is the only element in serious dispute in this case, requires that the Government demonstrate beyond a reasonable doubt that the defendant acted voluntarily and intentionally --and by not mistake, accident, negligence or other innocent reason --with the specific intent to aid and assist in the filing of a false tax return. See Sand, Siffert, Loughlin, & Reiss, Modern Federal Jury Instructions P. 59.01, No. 58-9; P. 59.04, No. 59-30 [hereinafter Jury Instructions]. "The Supreme Court has repeatedly held that in order to make out a 'willful violation' of section 7206(2) the government must prove defendants acted with specific intent to defraud the government in the enforcement of its tax laws." Salerno, 902 F.2d at 1432 (citing several Supreme Court cases).

A factfinder may determine that a defendant acted willfully under section 7206(2) if the defendant acted with willful blindness, i.e. that the defendant "purposely closed his eyes to avoid knowing what was taking place around him." United States v. Ruhe, 191 F.3d 376, 384-85 (4th Cir. 1999). Willful blindness may be found when "the defendant asserts a lack of guilty knowledge but the evidence supports an inference of deliberate ignorance." United States v. Abbas, 74 F.3d 506, 513 (4th Cir. 1996). "In a tax case, a willful blindness instruction is warranted if the record supports a finding that the defendant was aware of a high probability that his understanding of the tax laws was erroneous and consciously avoided obtaining actual knowledge of his obligations." United States v. Dantzler, 45 Fed. Appx. 259, 261 (4th Cir. 2002); see also United States v. Whittington, 26 F.3d 456, 463 (4th Cir. 1994) (holding that "the record need not contain direct evidence ... that the defendant deliberately avoided knowledge of wrongdoing; all that is necessary is evidence from which the jury could infer deliberate avoidance of knowledge").



II. Conspiracy

The elements of conspiracy to defraud the United States in violation of 18 U.S.C. § 371 are: (1) the existence of an agreement, (2) an overt act by a conspirator in furtherance of the agreement, and (3) an intent by the conspirators to agree to defraud the United States. United States v. Gosselin Worldwide Moving, N.V., 411 F.3d 502, 516 (4th Cir. 2005). As to the first element, it is not necessary that the alleged members of the conspiracy entered into any express or formal agreement. Instead, the Government must demonstrate that there was a mutual understanding, either spoken or unspoken, between two or more people to cooperate with each other to accomplish an unlawful act. See Jury Instructions, P. 19.01, No. 19-4. In the context of a section 371 conspiracy, the Fourth Circuit has held that "[t]he existence of a tacit or mutual understanding between conspirators is sufficient evidence of a conspiratorial agreement. Proof of the agreement may be established by circumstantial evidence." United States v. Cardwell, 433 F.3d 378, 390 (4th Cir. 2005) (internal quotation marks omitted) (citing United States v. Ellis, 121 F.3d 908, 922 (4th Cir. 1997) and United States v. Burgos, 94 F.3d 849, 862 (4th Cir. 1996) (en banc)). As to the third element, "[f]raudulent intent may be inferred from the totality of the circumstances and need not be proven by direct evidence." United States v. Ham, 998 F.2d 1247, 1254 (4th Cir. 1993).

This Court, as the finder of fact, need not convict Defendant Poole of a conspiracy to defraud the United States even if it finds Defendant Poole guilty of aiding and assisting in the filing of false tax returns. It is well settled that a conspiracy requires an agreement, which is not a required element in proving an aiding and assisting charge. See, e.g., United States v. Stozek, 783 F.2d 891, 894 (9th Cir. 1986) (affirming a conviction on aiding and assisting the misapplication of bank funds, despite an acquittal on the conspiracy charge to do the same, because "[c]onspiracy requires proof of an agreement, which aiding and abetting does not"); United States v. Arrington, 719 F.2d 701, 705 (4th Cir. 1983) ("There were several obviously differing elements of proof necessary for conviction under the conspiracy and aiding and abetting counts of the indictment. Conspiracy requires proof of 'preconcert and connivance not necessarily inherent in the mere joint activity common to aiding and abetting.'" (citations omitted)); United States v. Krogstad, 576 F.2d 22, 29 (3d Cir. 1978) ("The cases are clear that one may cause another to commit a crime, ... or aid and abet the commission of a crime, ... without being a conspirator with the principal offender. There need be no agreement, express or tacit[,] between the principal offender and the aider and abettor, and indeed the principal offender need not even be aware that he was aided and abetted by another.").


FINDINGS OF FACT




I. Facts Common To All Counts

Defendant Poole was licensed in Maryland as a CPA for a period of time prior to 1998, but was not licensed thereafter. Stilianos Mavroulis was the President and 100 percent owner of Fidelity Home Mortgage Corporation ("FHMC"), a Subchapter S corporation headquartered in Baltimore, Maryland. FHMC was a mortgage brokerage firm that, in 1999, shifted from being a "retail" mortgage brokerage firm to primarily a "wholesale" mortgage brokerage firm. As a result, FHMC's business grew substantially --at one point FHMC operated in forty-five states and had hundreds of millions of dollars on its accounting books. Kyriakos Mavroulis is Stilianos Mavroulis's son, and he worked at FHMC as the head of its accounting department during the tax years in question. All members of Stilianos Mavroulis's immediate family, including his wife Elizabeth Mavroulis and their five children, worked at FHMC at various times during tax years 1998-2003. Except for Vasilios Mavroulis, the Mavroulis children were not on FHMC's payroll and did not receive W-2's or 1099's during their employment at FHMC.

Between January 1, 1998, and October 18, 2004, Defendant Poole worked as an accountant for Bay Area Accounting & Management ("BAAM"), and in that role served as the outside accountant for FHMC. Defendant Poole prepared all of the year-end audited financial statements for FHMC for 1998 through 2003 (Gov. Ex.'s 98-103). Defendant Poole also prepared all of the informational returns for FHMC on Form 1120-S's that were filed with the IRS (Gov. Ex.'s 1-4), covering tax years 1998, 2000, 2001 (Defendant Poole prepared, but did not sign, the 2001 return), and 2003, as well as all of the joint personal returns for Stilianos and Elizabeth Mavroulis on Form 1040's for tax years 1998 through 2003 (Gov. Ex.'s 7-12). Poole billed between $30,000 and $40,000 annually to FHMC and, although FHMC and Stilianos Mavroulis represented less than 8% of BAAM's business, they comprised one of BAAM's largest clients. Defendant Poole testified that he worked no more than seventy-five hours a year for FHMC and Stilianos Mavroulis.

Defendant Poole recommended QuickBooks software to FHMC in 1998, and he and another employee installed the program in 1998. Defendant Poole trained Stilianos and Kyriakos Mavroulis on the program, and he thereafter relied on the accounting staff at FHMC to properly characterize and book the personal expenses of the Mavroulis family. The owner's draw account was referred to in QuickBooks as the shareholder draw account.

Stilianos Mavroulis also started two new companies during the relevant time period: Fidelity Promotions was incorporated on February 26, 2002; and 1012 Northpoint, Inc. was incorporated on July 17, 2002.



II. Aiding and Abetting

It cannot be disputed that Stilianos Mavroulis used FHMC funds to pay for personal expenses and other benefits in each tax year between 2000 and 2003, such as (but not necessarily limited to) compensating his children under the guise of shareholder draws ( see Gov. Exs. 87a-f & 88a-f), sending a starter check to Fidelity Promotions ( see, e.g., Gov. Ex. 86a), investing in the stock market through a personal E-Trade Securities account ( see, e.g., Gov. Exs. 84, 85), paying for a personal trip for the family to Greece ( see Gov. Ex. 82), and paying for school tuition for his children ( see, e.g., Gov. Ex. 92). 3 This Court credits Internal Revenue Agent Richard Wallace's ultimate conclusion that, based on his extensive review of the evidence in this case, substantial personal expenditures were being paid by business funds, and, based on the tax returns and financial statements (as discussed below), there was substantial unreported income, resulting in substantial unpaid taxes due to the IRS in the years in question. 4

At the time Defendant Poole prepared the 2000-03 Form 1120-S returns for FHMC and the 2000-03 Form 1040 tax returns for Stilianos and Elizabeth Mavroulis, Defendant Poole had access to FHMC's QuickBooks and knew that Stilianos Mavroulis was using FHMC funds to pay for these personal expenses and benefits. As Defendant Poole was well aware, many of these personal expenses and benefits were not booked in QuickBooks as shareholder draws ( see, e.g., Gov. Exs. 128b-d); instead, the expenses were buried in other categories that made detection difficult. Defendant Poole also knew that Stilianos Mavroulis was booking the paychecks that he provided to his children for their work at FHMC as shareholder draws, and that the Mavroulis children were being paid outside FHMC's payroll system.

In his role as the tax preparer for FHMC and Stilianos Mavroulis, Defendant Poole failed to properly account for the payment by FHMC of personal expenses and other benefits to Stilianos Mavroulis and his family members. As detailed in Government Exhibit 200, which was prepared by Internal Revenue Agent Richard Wallace, approximately $1.1 million of personal expenses were deducted against the gross receipts of FHMC in the Form 1120-S tax returns that were filed by FHMC in tax years 1998, 2000, 2001, and 2003, and/or prepared by Poole but were not filed (1999 and 2002). Stilianos Mavroulis withdrew approximately another $700,000 of FHMC funds for personal expenses that were not deducted against the gross receipts of FHMC, but which constituted shareholder distributions that were taxable to Stilianos Mavroulis because he lacked any basis in FHMC at the time those withdrawals were made. After accounting for amounts reported as income on tax returns filed by Stilianos Mavroulis's children (mostly for tax year 2003), the net total of FHMC funds used for Stilianos Mavroulis's personal purposes between 2000 and 2003 was approximately $340,977.25 in 2000, $271,092.38 in 2001, $475,456.63 in 2002, and $351,161.42 in 2003.

The stark differences between the financial statements (both the audited FHMC financial statements and the personal financial statements) and tax returns prepared by Defendant Poole strongly evidence criminal intent. Defendant Poole prepared corporate financial statements for FHMC that, inter alia, indicate that Stilianos Mavroulis received $120,000 in officer's compensation from FHMC in 2000, 2001, 2002, and 2003. Nonetheless, Defendant Poole willfully failed to include this amount as income on the Form 1040 returns for any of the years in question. ( Compare Gov. Exs. 9-12 with Gov. Ex. 100-103.) Another example is the fact that the personal financial statements for Stilianos and Elizabeth Mavroulis included large sums of money in foreign bank accounts ($261,499 in 2000 and $318,400 in 2001), yet the Form 1040 returns for these years indicated that such foreign bank accounts didn't exist. ( Compare Gov. Exs. 10-12 with Gov. Ex. 105-107.)

This Court does not credit Defendant Poole's testimony that he believed that Stilianos Mavroulis acquired at least $20 million of basis in FHMC because he personally guaranteed FHMC's warehouse lines of credit in that amount. 5 In fact, this is quite clearly not the case, as Defendant Poole knew (or, at a minimum, should have known if he were not willfully ignorant) that Stilianos Mavroulis lacked basis in FHMC to take any shareholder distributions from FHMC from 2000 to 2003 without declaring such distributions as capital gains on his 1040 tax returns. Moreover, although the financial statement prepared by Defendant Poole reflected shareholder distributions of $67,815 for 2000, $105,161 for 2001, and $155,781 for 2003, Defendant Poole willfully failed to include as a capital gain (and therefore taxable income) any of these shareholder distributions on Stilianos Mavroulis's Form 1040 returns for 2000, 2001, and 2003. 6 (Gov. Exs. 9, 10, & 12.)

The E-Trade Securities account ending in number 3304 was quite clearly a personal account of Stilianos Mavroulis, as Thomas Walsh, a manager at E-Trade Securities, testified that an E-Trade Securities account can be held in a corporate capacity if the necessary supporting documentation is provided. ( See Gov. Exs. 112, 125.) Stilianos Mavroulis chose to open his account in a personal capacity. Defendant Poole knew that Stilianos Mavroulis used corporate funds of FHMC to fund his personal E-Trade account and that those funds should have been treated as distributions to Stilianos Mavroulis and reportable as capital gains on his 1999, 2000, and 2001 Form 1040 returns. Nonetheless, Defendant Poole willfully failed to report as capital gains on Stilianos Mavroulis's Form 1040 returns the following amounts of distributions related to the E-Trade account: $61,000 in 1999; $173,605.76 in 2000; and $80,000 in 2001. (Gov. Exs. 8, 9, & 10.)

Based on the above facts, as well as the evidence and testimony at trial, this Court finds beyond a reasonable doubt that Poole willfully prepared the Form 1040 returns in question for tax years 2000-03 that failed to report as taxable income funds used for personal purposes. Thus, Defendant Poole is GUILTY of willfully aiding and assisting in preparing materially false Form 1040 returns for Stilianos Mavroulis and Elizabeth Mavroulis for 2000, 2001, 2002, and 2003, as charged in Counts Six through Nine of the Indictment. 7



III. Conspiracy

Unsurprisingly, the Government cannot point to any direct evidence of an actual agreement between Stilianos Mavroulis and Defendant Poole to establish a conspiracy to defraud the Internal Revenue Service. Instead, the Government argues its case circumstantially, pointing to (1) its contention that Stilianos Mavroulis and Defendant Poole are "sophisticated players," (2) the fact that Stilianos Mavroulis involved Defendant Poole in all of his accounting and tax work, and (3) a consistent pattern of shoddy professional work beginning in 1998, and continuing even after they knew that the IRS initiated a criminal investigation. 8 In addition, the Government also points to correspondence between Stilianos Mavroulis and Defendant Poole as support for the alleged conspiracy.

In a memorandum dated June 26, 2005, which appears to address taxes due to the IRS, Defendant Poole wrote to Stilianos Mavroulis that "[t]he credit card spread is not as lopsided in your favor as I would have liked, but we are still only dealing with a possible additional tax over three years of approx. $36,000..., and we have loss carryback to help defray that. My understanding is that you must potentially owe $60K before this rises to criminal level???" (Gov. Ex. 118.) In an email discussion on November 11-13, 2005, Defendant Poole wrote to Stilianos Mavroulis that "as you know we have cut many corners along the way, consequently audit trails, which are what he is requesting, simply are non-existent." (Gov. Ex. 120.) In response, Stilianos Mavroulis stated that:
[C]utting a corner is one thing, under-repporting [sic] is another. And trully [sic], I am not familiar with you cutting any corners on my [t]axes. I never requested something like that from you and neither [have] I requested that you underreport [sic] my taxes. With full knowledge I agree on the financials, there I knew of they were inflated [sic], [b]ut not on my [t]ax returns. On tax returns I relied on your creativity.

( Id.) On March 23, 2006, Defendant Poole wrote to Stilianos Mavroulis that he was "faxed ... some additional ... info last night - I need to review/audit that - then on to the creative part of this [ i.e.] making sure statements reach the needed goal!" (Gov. Ex. 129.) In an email to Stilianos Mavroulis dated July 11, 2007, Defendant Poole stated in relevant part: "[A]s far as anguish is concerned, I still wake up every morning wondering when the other shoe will drop on us because of your unfortunate hire of [the FHMC employee that triggered the criminal investigation] - I have protected you throughout on this and always will, so we are pretty even on the anguish front." (Gov. Ex. 111).

Although these emails demonstrate some level of coordination between Stilianos Mavroulis and Defendant Poole, they do not necessarily establish a conspiracy. The Indictment alleges that the conspiracy took place between 1998 and October 14, 2004, so all the emails are dated well after the alleged conspiracy took place. Moreover, Stilianos Mavroulis appears to explicitly disclaim an agreement when he wrote that "I am not familiar with you cutting any corners on my [t]axes. I never requested something like that from you and neither [have] I requested that you underreport [sic] my taxes."

The evidence in this case may cumulatively demonstrate beyond a preponderance of the evidence that there was a tacit, mutual understanding between Defendant Poole and Stilianos Mavroulis to knowingly and willfully prepare Form 1040 returns that substantially underreported the Mavroulis's taxable income. This Court does not find, however, that the evidence demonstrates beyond a reasonable doubt that such an agreement existed. Evidence supporting a meeting of the minds between Defendant Poole and Stilianos Mavroulis is simply not strong enough in this case for this Court to convict Defendant Poole of a conspiracy.


CONCLUSION


This Court finds Defendant Joseph Poole GUILTY as to the aiding and assisting in the filing of false tax returns charged in Counts Six through Nine, and NOT GUILTY as to the conspiracy to defraud the United States charged in Count One. A separate Verdict follows.

1 Kyriakos Mavroulis pled guilty to a Superseding Information (Paper No. 71) and was sentenced on May 22, 2009, and Stilianos Mavroulis pled guilty to the charges contained in the Indictment and is scheduled to be sentenced on September 30, 2009.

2 Addressing a motion for severance based on the asserted need for a co-defendant's testimony, the Fourth Circuit in Parodi determined that a trial court must first determine whether the defendant has demonstrated: (1) a bona fide need for the testimony of his co-defendant; (2) a likelihood that the co-defendant would testify at a second trial and waive his Fifth Amendment privilege; (3) the substance of his co-defendant's testimony; and (4) the exculpatory nature and effect of such testimony." United States v. Parodi, 703 F.2d 768, 779 (4th Cir. 1983). If such a showing is made, the trial court must then: (1) examine the significance of the testimony in relation to the defendant's theory of defense; (2) assess the extent of prejudice caused by the absence of the testimony; (3) pay close attention to judicial administration and economy; (4) give weight to the timeliness of the motion; and (5) consider the likelihood that the co-defendant's testimony could be impeached. Id.

3 Defendant Poole's theory of the case is that these expenses were not deducted as business expenses by FHMC, and, as a result, FHMC income was not improperly reduced on account of those payments. Thus, the net income of FHMC flowed through onto Stilianos Mavroulis's personal returns, and he owed no additional taxes on those funds. Defendant Poole's contention that there was no tax violation (let alone no criminal wrongdoing) is belied not only by Internal Revenue Agent Richard Wallace's convincing testimony, but also by the simple fact that Stilianos Mavroulis has pled guilty on the advice of his attorneys to four separate counts of filing false tax returns in violation of 26 U.S.C. § 7206(1).

4 Government Exhibit 117 is a purported tax return completed by Defendant Poole that was never filed and that indicates substantially more tax due to the IRS. The investigation into Defendant Poole's conduct was triggered when this exhibit was turned over to IRS officials by an employee of FHMC. Defendant Poole has raised several issues concerning this document. Specifically, Defendant Poole has argued that there is a missing tenth page to the document admitted into evidence (although there has been no evidence as to what was contained in the allegedly missing tenth page), and that the document admitted into evidence contains a fraudulent signature. Regardless, Defendant Poole does not contest that he actually completed a tax return that was never filed. ( See Paper No. 116 ( "[The FHMC employee] manipulated Mr. Poole into preparing a 'what if 2001 Form 1040 for Mr. and Mrs. Mavroulis, which [the FHMC employee] then used to convince the Government to initiate an investigation.").) This document demonstrates that if the Mavroulis's filed their joint Form 1040 tax return on a cash basis (and not an accrual basis), they would have owed substantially more taxes. Other than that limited purpose, this Court does not place any additional import on the document in making the findings of fact included herein.

5 This Court finds that Defendant Poole was sufficiently competent (even if he was not exceptional) at his asserted profession to complete the task at hand without committing the errors that he admits he made. His incompetency defense is therefore rejected. Moreover, this Court finds unavailing Defendant Poole's argument that he did not have the requisite intent because of the complexity of the tax returns. He has argued that he spent at most seventy-five hours a year for FHMC and Stilianos Mavroulis, while Internal Revenue Agent Richard Wallace spent 4,160 hours investigating this case. This argument overlooks the fact that it takes almost no time whatsoever to act in a willfully blind manner in the preparation of tax returns, yet it can take several thousand hours, as was the case here, for a single case agent to piece together a tax fraud stretching several years and involving the use of a large corporation's funds.

6 As to 2002, the corporate financial statement prepared by Defendant Poole did not list any amount of shareholder distributions. However, there was in fact $92,000 in transactions booked as shareholder draw in FHMC's Quick Books for that year. Defendant Poole, however, did not include this amount as a capital gain on Stilianos Mavroulis's 1040 return for 2002. (Gov. Ex. 11.)

7 Defendant Poole argues summarily in his proposed findings of fact that "[t]he Government has offered no proof that Mr. Poole willfully prepared tax returns that were fraudulent or false as to a material matter." The evidence quite clearly indicates beyond a reasonable doubt that the mistakes on the tax returns were material. See United States v. Aramony, 88 F.3d 1369, 1384-85 (4th Cir. 1996) (stating that a misstatement is material if it could hinder the IRS in verifying the accuracy of a tax return, and that "it is clear that a finding of materiality does not depend upon the amount of the unpaid tax" (citing cases)).

8 In its proposed findings of fact, the Government extensively delineates the errors made by Stilianos Mavroulis and Defendant Poole on the Form 1120-S's and Form 1040's for tax years 1998 and 1999. Although the Indictment alleges that the alleged conspiracy began in 1998, there are no independent substantive charges associated with the errors in 1998 and 1999. Therefore, this Court discerns no reason to outline in this Memorandum Opinion the extensive evidence as to these years, apart from acknowledging that (a) the evidence in this case does, in fact, indicate that significant tax mistakes were made in 1998 and 1999, and, (b) although the mistakes in tax years 1998 and 1999 are consistent with the mistakes made in tax years 2000 through 2003, these mistakes alone are insufficient to infer an agreement to conspire. An agreement to conspire cannot be inferred solely by reason of the tax violation itself because, otherwise, every criminal tax case involving a tax preparer and taxpayer would necessarily involve a conspiracy. There must be some independent evidence indicating a meeting of the minds.




Aiding and advising preparation of false returns. --Fraud and False Statements: Aiding and advising preparation of false returns

Conviction for willfully aiding and advising the preparation of false and fraudulent income tax returns was affirmed.

Herskovitz, CA-2, 54-1 USTC ¶9182, 209 F2d 881.

H.F. Cliff, CA-5, 60-1 USTC ¶9181, 271 F2d 126, aff'g DC, 60-1 USTC ¶9180. Cert. denied, 361 US 963.

F. Strangway, CA-9, 63-1 USTC ¶9183, 312 F2d 283. Cert. denied, 373 US 903.

J.L. Barnes, CA-6, 63-1 USTC ¶9247, 313 F2d 325.

J.M. Hedrick, CA-10, 66-1 USTC ¶9269, 357 F2d 121.

C.L.O. Edwards, CA-9, 67-1 USTC ¶9356, 375 F2d 862.

W.J. Driscoll, CA-1, 67-1 USTC ¶9430, 376 F2d 254.

A. Maius, CA-6, 67-2 USTC ¶9521, 378 F2d 716. Cert. denied, 389 US 905.

J.C. Ping, CA-8, 69-1 USTC ¶9248, 407 F2d 157.

S.A. Grayson, CA-5, 69-2 USTC ¶9639, 416 F2d 1073. Cert. denied, 396 US 1059.

S. Bernstein, CA-2, 70-1 USTC ¶9106, 417 F2d 641.

H. Davis, CA-5, 70-1 USTC ¶9375, 424 F2d 1241. Cert. denied, 400 US 821.

R.G. Warner, CA-8, 70-2 USTC ¶9470, 428 F2d 730.

J. Brown, CA-7, 70-2 USTC ¶9521, 428 F2d 1191. Cert. denied, 400 US 1191.

J.W. Baum, CA-7, 71-1 USTC ¶9130, 435 F2d 1197.

N.H. Egenberg, CA-2, 71-1 USTC ¶9303, 441 F2d 441. Cert. denied, 404 US 994.

L. Cramer, CA-2, 71-2 USTC ¶9565, 447 F2d 210.

A.J. Jackson, CA-7, 71-2 USTC ¶9739, 452 F2d 144.

M. McKee, CA-6, 72-1 USTC ¶9334, 456 F2d 1049. Cert. denied, 407 US 910.

J.H. Wheeler, CA-4, 73-1 USTC ¶9328. Cert. denied, May 29, 1973.

C.H. Jackson, CA-8, 73-1 USTC ¶9397, 477 F2d 879.

N.L. Le Fevre, CA-3, 73-2 USTC ¶9557, 483 F2d 477.

E.H. Fritz, CA-9, 73-2 USTC ¶9571, 481 F2d 644.

P.C. Washburn, CA-5, 74-1 USTC ¶9138, 488 F2d 139.

L.V. Amos, CA-8, 74-1 USTC ¶9447, 496 F2d 1269.

N. D'Andrea, CA-3, 74-1 USTC ¶9451, 495 F2d 1170.

A.R. Johnson, CA-5, 74-2 USTC ¶9504, 495 F2d 1097.

M. Abbas, CA-9, 74-2 USTC ¶9755, 504 F2d 123.

W.P. Dobbs, CA-5, 75-1 USTC ¶9210, 506 F2d 445.

J.D. Burks, CA-5, 75-1 USTC ¶9258, 508 F2d 672.

A.M. Villa, CA-10, 75-2 USTC ¶9523.

D.G. Crum, CA-9, 76-1 USTC ¶9214, 529 F2d 1380.

O.H. Miller, CA-9, 76-1 USTC ¶9228, 529 F2d 1125. Cert. denied, 426 US 924.

J.D. Clardy, CA-9, 80-2 USTC ¶9721, 612 F2d 1139.

A. Winograd, CA-7, 81-2 USTC ¶9622, 656 F2d 279. Cert. denied, 455 US 989, 101 SCt 1612.

T.C. Erickson, CA-10, 82-1 USTC ¶9175, 676 F2d 408.

J.M. Damon, CA-5, 82-1 USTC ¶9397, 676 F2d 1060.

R.S. Baskes, CA-7, 82-2 USTC ¶9526.

S.M. Moon, CA-2, 83-2 USTC ¶9581, 718 F2d 1210. Cert. denied, 104 SCt 2344.

V. Greger, CA-9, 83-2 USTC ¶9654. Cert. denied, 104 SCt 1002.

A. Isaksson, CA-7, 84-2 USTC ¶9966, 744 F2d 574.

A.B. Condo, CA-9, 85-1 USTC ¶9273.

J.L. Freeman, CA-9, 85-1 USTC ¶9421, 761 F2d 549.

J. Daly, CA-5, 85-1 USTC ¶9404, 756 F2d 1076.

L.D. Gleason, CA-8, 85-2 USTC ¶9519, 766 F2d 1239.

A.W. Kouba, CA-8, 87-2 USTC ¶9396, 822 F2d 768.

A.M. Pinto, CA-10, 88-1 USTC ¶9154, 838 F2d 426.

R.J. Sassak, CA-6, 89-2 USTC ¶9455, 881 F2d 276.

S.J. Gunary, CA-2, 88-2 USTC ¶9573, 860 F2d 521. Cert. denied, 109 SCt 1931.

C.A. Atkins, CA-2, 89-1 USTC ¶9195, 869 F2d 135.

E.K. Rowlee, CA-2, 90-1 USTC ¶50,189, 899 F2d 1275.

R.H. Pacheco, CA-9, 90-2 USTC ¶50,458, 912 F2d 297.

T.W. Tierney, CA-8, 91-2 USTC ¶50,509.

R.S. Cutler, CA-10, 92-1 USTC ¶50,062, 948 F2d 691.

J.L. Motley, CA-7, 92-1 USTC ¶50,104.

A.C. Kellogg, CA-9, 92-1 USTC ¶50,117, 955 F2d 1244.

D.K. Dunn, CA-7, 92-1 USTC ¶50,293, 961 F2d 648.

J.G. Crozier, CA-2, 93-1 USTC ¶50,219, 987 F2d 893.

R.M. Hirschfeld, CA-4, 93-1 USTC ¶50,098, 964 F2d 318.

D.L. Watson, CA-8, 93-2 USTC ¶50,608, 1 F3d 733.

S.G. Knapp, CA-7, 94-1 USTC ¶50,252, 25 F3d 451.

J. Klausner, CA-2, 96-1 USTC ¶50,173.

M.G. Marshall, CA-8, 96-2 USTC ¶50,678, 92 F3d 758.

G.C. Ervasti, CA-8, 2000-1 USTC ¶50,173, 201 F3d 1029.

O.L. Maye, CA-4, (unpublished opinion), 2000-1 USTC ¶50,261, 205 F3d 1335, aff'g, per curiam, an unreported district court decision.

T.C. Gaskill, CA-9 (unpublished opinion), 2000-2 USTC ¶50,702, aff'g, rev'g and rem'g on other issues an unreported district court decision.

S. Aragbaye, CA-9, 2001-1 USTC ¶50,126, 234 F3d 1101.

M. Wick, CA-9 (unpublished opinion), 2002-1 USTC ¶50,456, 34 FedAppx 273, aff'g an unreported District Court decision.

J.A. Gambone, Sr., CA-3, 2003-1 USTC ¶50,162, 314 F3d 163.

B.L. Jordan, CA-4 (unpublished opinion), 2003-1 USTC ¶50,514, 66 FedAppx 488, aff'g, per curiam, an unpublished District Court decision.

M. Brilliant, DC, 59-2 USTC ¶9601, 170 FSupp 759. Aff'd, CA-2, 60-1 USTC ¶9253, 274 F2d 618.

J. Gisehaltz, DC, 67-2 USTC ¶9616, 278 FSupp 434.

Individuals were properly convicted of aiding and abetting in the filing of fraudulent Forms W-4.

L. Clark, CA-5, 98-2 USTC ¶50,544, 139 F3d 485, aff'g, per curiam, an unreported District Court decision.

The defendant was found guilty of aiding and assisting in the preparation and presentation of false returns.

R.J. MacKenzie, CA-2, 86-1 USTC ¶9103, 777 F2d 811.

C.L.O. Edwards, DC, 64-2 USTC ¶9739, 230 FSupp 881.

M.J. Fronek, DC, 64-2 USTC ¶9746, 231 FSupp 8.

J. DeFabritus, DC N.Y., 85-2 USTC ¶9844, 605 FSupp 1538.

E.J. Bachler, 50 TCM 159, Dec. 42,162(M), TC Memo. 1985-291.

A defendant's conviction was affirmed where: 1.) instructing the jurors to reconsider their position if they found that a majority of the jurors took an opposite position and 2.) failing to address the jury's concern at having to work during a religious holiday did not constitute reversible error.

R.B. Graham, CA-3, 85-1 USTC ¶9317, 758 F2d 879.

Defendant's conviction for preparing false and fraudulent income tax returns for illiterate persons was affirmed.

C. Blount, CA-7, 64-2 USTC ¶9863, 339 F2d 331.

Defendant was found not guilty of preparing false returns.

M.M. Unger, DC, 58-2 USTC ¶9584, 159 FSupp 850.

An accountant who was the assistant secretary and a director of a corporation was guilty of assisting in preparing false and fraudulent returns for the corporation and some of its stockholders.

S.J. Brill, CA-3, 59-2 USTC ¶9694, 270 F2d 525.

A conviction for aiding in the preparation of false returns, based on the fact that the defendant had overstated the value of several yachts that had been donated to a university, was reversed and remanded. The trial judge gave inadequate instructions as to the probative value of the price at which the university subsequently sold the yachts. Moreover, the judge unduly restricted cross-examination of a government witness.

N. Wolfson, CA-5, 78-1 USTC ¶9456, 573 F2d 216.

The defendants' convictions for willfully advising the presentation or preparation of fraudulent returns were reversed due to the prosecution's failure to show that the defendants had the specific intent to defraud the government. At the time the defendants advocated a tax shelter program, there was no federal law, regulation or court decision warning that advocacy of the tax shelter would lead to criminal prosecution. Prosecution against the defendants for instructing an audience on how to create a tax shelter was barred by the first and fifth amendments in the absence of any showing that the defendants had a specific intent to incite violation of the law and that violation was imminent.

K.L. Dahlstrom, CA-9, 83-2 USTC ¶9557, 713 F2d 1423.

The organizer and leader of a group which expounded the belief that the federal income tax is unconstitutional as applied to wages and who, in exchange for dues paid, provided forms and instructions on the preparation of false W-4 forms was convicted of aiding and assisting in the preparation of false W-4 forms.

M.S. Kelley, CA-4, 85-2 USTC ¶9592, 769 F2d 215.

Conviction affirmed, defendant supplying a fraudulent report that greatly inflated the estimates of coal reserves in properties to induce people to invest in tax shelters and knowing that the report would be used to compute unjustified deductions.

W.G. Nealy, CA-4, 84-1 USTC ¶9293, 729 F2d 961.

A district court's finding that a taxpayer who was convicted of knowingly filing a materially false income tax return did not establish by clear and convincing evidence that IRS agents used fraud, trickery or deceit in gaining the interview with him was not clearly erroneous. There was no evidence that the IRS agents desired to interview the taxpayer as part of an independent criminal investigation. The interview was conducted with the taxpayer to investigate other tax years besides the one at issue. Because this was not yet a criminal investigation, the court did not have to decide whether the taxpayer had a Fifth Amendment right to rely on the IRS regulations.

W.A. Caldwell, Jr., CA-5, 87-2 USTC ¶9423, 820 F2d 1395.

The appellate court reduced a felony conviction for aiding and assisting in the filing of false W-3 wage transmittal forms to a misdemeanor conviction under Code Sec. 7204. However, it refused to reduce a felony conviction for furnishing an employee with a false W-2 form.

M.J. Hughes, CA-6, 91-1 USTC ¶50,022, 899 F2d 1495.

The conviction for conspiracy to file false income tax returns of an apartment manager who assisted in the creation and filing of fictitious tax returns for prospective tenants was upheld. Evidence that the defendant knew of the tax refund scheme and agreed to participate in it and the jury inference that he cooperated in the scheme by providing the names and biographical data of applicants at his apartment complex were sufficient to support conviction.

J.D. Orr, CA-10, 89-1 USTC ¶9220, 864 F2d 1505.

The IRS failed to prove beyond a reasonable doubt that embezzlers previously employed by a gambling casino acted with the willful and specific intent to aid or assist the casino in the preparation of false corporate income tax returns. The embezzlers acted for their own personal financial gain and received no benefit from the filing of any false corporate return.

L.J. Salerno, CA-9, 90-1 USTC ¶50,261, 902 F2d 1429.

Promoters who induced investors to purchase substantial amounts of life insurance by falsely representing that the buyer could completely avoid future payment of federal income taxes were liable to one such investor for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). Mail fraud was established because the purpose of the scheme was to defraud, and it involved the mailing of false tax returns.

M.L. Hofstetter, CA-6, 91-1 USTC ¶50,102, 905 F2d 897.

Convictions for aiding and assisting in the preparation of false income tax returns were upheld in 16 of 29 counts against promoters of a tax shelter involving energy systems. Although the evidence was insufficient to support the IRS's global theory, which attempted to link together all instances of alleged false income tax preparation with the marketing of the tax shelter, sufficient evidence existed with respect to the 16 counts to show that the return filers never actually owned the equipment as claimed. Based on the incomplete state of the record regarding the other counts, the remaining convictions were reversed.

J.T. Coveney, CA-5, 93-2 USTC ¶50,513, 995 F2d 578.

A seminar organizer willfully aided and assisted seminar attendees in the preparation of false income tax returns. He had advised his attendees to classify themselves as nonresident aliens when they were, in fact, residents of the United States, subject to taxation and not entitled to the refunds they claimed. Therefore, he could not use a good faith defense to disguise his knowing disregard of well-established legal principles and duties.

E.G. Ambort, CA-10, 2005-2 USTC ¶50,453, 405 F3d 1109.

Tax shelter promoters willfully aided clients in filing false or fraudulent tax returns in violation of Code Sec. 7206(2). The promoters charged hundreds of clients to set up and manage trusts known as Unincorporated Business Organizations (UBOs), which purportedly avoided taxes on income streamed into them. The government sufficiently proved that the promoters aided, assisted, or otherwise caused the preparation and presentation of a false or fraudulent tax return. The promoters repeatedly advised clients that they did not have to file tax returns or pay tax once they transferred their income and assets to the UBO.

D.L. Smith, CA-9, 2005-2 USTC ¶50,565, 424 F3d 992.

An individual who prepared and filed tax returns containing false information was properly convicted for aiding and assisting in the preparation of fraudulent income tax returns in violation of Code Sec. 7206(2). The term "willful" was not too vague to allege that the individual intended to violate a known legal duty. "Willfulness" is a term of art with a known meaning for tax defendants of knowing one's duty and intentionally and voluntarily violating it. Furthermore, the indictment properly alleged the statutory element of willfulness; therefore, the court's decision to not release grand jury transcripts was not an abuse of discretion.

R.N. Whistler, CA-9 (unpublished opinion) 2005-2 USTC ¶50,569, 139 FedAppx 1, aff'g in part and rem'g in part an unreported DC Ariz. decision.

Investors were found not guilty of aiding and assisting in the filing of false and fraudulent tax returns because the government's contention that the underlying transactions were shams was not proved.

W.A. Kilpatrick, DC Colo., 90-1 USTC ¶50,319, 726 FSupp 789.

A financial broker's motion to dismiss an indictment charging him with aiding, counseling, and causing the preparation and presentation of a third party's false and fraudulent tax return for the purpose of assisting that party to obtain a loan was denied. Although the return overstated the third party's income, the false statement was "material" because it had the potential for hindering IRS efforts to monitor and verify his tax liability.

P. Bouzanis, DC Ill., 2003-1 USTC ¶50,315.

Taxpayers may not claim a refund of Social Security taxes paid based on the position that they have waived the right to receive Social Security benefits or claim a charitable contribution deduction for Social Security taxes "donated" or "gifted" to the government. Persons, including return preparers, who promote these frivolous positions and those who assist taxpayers in claiming tax benefits based on these frivolous positions are subject to penalties including criminal prosecution for assisting or advising about the preparation of a false return, statement, or other document.

Rev. Rul. 2005-17, 2005-1 CB 823.

Claims that the 16th Amendment to the Constitution, which authorizes Congress to lay and collect taxes on income, was not properly ratified, that the federal income tax is a violation of the Due Process Clause of the Fifth Amendment, and that the payment of taxes is a form of slavery under the 13th Amendment are frivolous. Return preparers and promoters of these frivolous positions may face penalties including criminal prosecution for assisting or advising about the preparation of a false return, statement, or other document.

Rev. Rul. 2005-19, 2005-1 CB 819.

Taxpayers may not refuse to file returns, or reduce or eliminate their tax liability based on their opposition to government programs or policies due to moral, ethical or religious beliefs. Return preparers and promoters of these frivolous positions may face penalties including criminal prosecution for assisting or advising about the preparation of a false return, statement, or other document.

Rev. Rul. 2005-20, 2005-1 CB 821.

The use of different forms of a taxpayer's name does not create a "straw man" that allows the taxpayer to avoid his or her tax liability. Return preparers and promoters of these frivolous positions may face penalties including criminal prosecution for assisting or advising about the preparation of a false return, statement, or other document.

Rev. Rul. 2005-21, 2005-1 CB 822.

The IRS has cautioned taxpayers to avoid falling victim to a variety of tax scams. Newly issued guidance sets out many of the most common frivolous arguments used by tax-avoidance schemes and details potential civil and criminal penalties that may be imposed. Persons, including return preparers, who promote frivolous positions and those who assist taxpayers in claiming tax benefits based on such positions may face penalties and be enjoined from return preparation. Notice 2005-30, 2005-1 CB 827, modified and superseded.

Notice 2006-31, I.R.B. 2006-15, 751.

The IRS has issued a fact sheet that urges taxpayers to be careful when choosing a tax preparer. The fact sheet reminds taxpayers that, even if they are unaware of false information that may appear on their returns, they are responsible for any additional taxes and interest and may be subject to penalties and criminal prosecution for filing a false tax return. The fact sheet includes helpful hints when choosing a return preparer, criminal investigation statistical information on return preparer fraud, case summaries of criminal and civil legal actions against certain return preparers, and directions for reporting suspected tax fraud activity.

IRS Fact Sheet 2007-12, January 29, 2007.

An individual was properly convicted and sentenced for willfully aiding and assisting in the preparation of a materially false tax return and making a false statement to an FBI agent. The fact that he was directly involved in hiring employees whose income was not reported to the IRS and that he repeatedly failed to provide his accountant with necessary documentation provided ample evidence of willfulness.

I.S. Abuhawwas, CA-4 (unpublished opinion), 2007-1 USTC ¶50,337, 215 FedAppx 311, aff'g, per curiam, an unreported DC Va. decision.

A loan broker's conviction for assisting an individual in the preparation and presentation of a false tax return was vacated. Although a false tax return was used to defraud a lender and the United States Small Business Administration, that form was not filed with the IRS. It could not be established beyond a reasonable doubt that the return actually filed with the IRS was false. Therefore, although the broker aided in the commission of loan fraud, he did not violate Code Sec. 7206(2).

P. Palivos, CA-7, 2007-1 USTC ¶50,447, 486 F3d 250.

An individual's conviction and sentence for aiding and abetting the filing of fraudulent tax returns was upheld. The evidence at trial established that the individual prepared fraudulent tax returns for his clients and also instructed and supervised the preparation of fraudulent returns by his employees.

C. Contreras, CA-2 (unpublished opinion), 2007-2 USTC ¶50,712, 247 FedAppx 293, aff'g an unreported DC N.Y. decision.

The IRS urges taxpayers to be careful when choosing a tax preparer. According to the fact sheet, return preparer fraud generally involves the preparation and filing of income tax returns that claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions. Preparers may also fraudulently obtain tax credits, such as the earned income tax credit, by manipulating income figures. The fact sheet reminds taxpayers that, even if they are unaware of false information that may appear on their returns, they are responsible for any additional taxes and interest and may be subject to penalties. The fact sheet includes helpful hints when choosing a return preparer, criminal investigation statistical information on return preparer fraud, case summaries of criminal and civil legal actions against certain return preparers, and directions for reporting suspected tax fraud activity.

IRS Fact Sheet FS-2008-10, January 2, 2008.

A tax preparer was properly convicted and sentenced for willfully preparing false or fraudulent income tax returns. The evidence at trial clearly established that the individual willfully prepared returns containing materially false statements. Further, the court's instruction to the jury was not in error and did not affect the jury's verdict.

G.D. Goosby, CA-6, 2008-1 USTC ¶50,331.

Two individuals were properly convicted of conspiracy and assisting in the preparation and presentation of false income tax returns. The district court had jurisdiction over federal criminal proceedings involving tax crimes, the public protection provision of the Paperwork Reduction Act (PRA) was not a defense to their criminal violations of the Internal Revenue Code, and congressional failure to enact Title 26 into positive law did not impugn the validity or enforceability of the laws set forth in that title.

E. Ferrand, CA-5 (unpublished opinion), 2008-2 USTC ¶50,423, aff'g, per curiam, an unreported DC La. decision.

An individual who personally prepared amended income tax returns containing false information for her clients was properly convicted of willfully aiding and assisting in the preparation of false and fraudulent income tax returns. Substantial evidence was presented from which a reasonable-minded jury could have found the defendant guilty beyond a reasonable doubt. The government's evidence established that the individual prepared the amended returns reporting inflated deductions, contributions and credits, thereby wrongly entitling her clients to become eligible for additional refunds. The individual's argument that the erroneous amounts were the result of a computer glitch was rejected. The individual had education, training and experience in the preparation of amended tax returns, knew that the deductions were false and willfully provided the inaccurate numbers.

A. Tinder, DC Iowa, 2008-2 USTC ¶50,684.

The IRS has issued a fact sheet that urges taxpayers to be careful when choosing a tax preparer. The fact sheet reminds taxpayers that even if they are unaware of false information that may appear on their returns, they are responsible for any additional taxes and interest and may be subject to penalties and criminal prosecution for filing a false tax return. The guidance also includes hints on choosing a return preparer, criminal investigation statistical information on return preparer fraud, case summaries of criminal and civil legal actions against certain return preparers, and directions for reporting suspected tax fraud activity.

IRS Fact Sheet FS-2009-7, January 6, 2009.

The sentence imposed on an individual convicted of aiding and assisting in the preparation of false tax returns was vacated and remanded because the government did not provide a reasonable estimate of the aggregate tax loss attributable to the preparer's crime. The government's use of a non-random sample to calculate the average tax loss per return resulted in an average tax loss that was not representative of all the returns filed by the individual.

I. Ahanmisi, CA-4, 2009-1 USTC ¶50,365.

A legal assistant with a serious mental condition had reasonable cause for her failure to report Social Security disability payments based on her belief that federal disability payments, like state disability payments, were not subject to income tax; therefore, the accuracy-related penalty was not imposed with respect to the disability income. However, the penalty was imposed based on interest income properly reported to her on Form 1099 that she failed to include as income. The taxpayer's contention that entries on her Form 1099 were ambiguous was unreasonable.

T.C. Summary Opinion 2009-122]
Janet S. Smiley v. Commissioner.

Docket No. 8049-08S . Filed August 4, 2009.




GERBER, 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 other court, and this opinion shall not be treated as precedent for any other case.

Respondent determined a $5,400 income tax deficiency for petitioner's 2005 tax year and a section 6662(a) penalty of $1,080. The income tax deficiency was based on petitioner's failure to report two items of income. Petitioner now agrees that the items should have been reported, but she contends that her actions were reasonable and that no section 6662(a) penalty should apply to the portion of the underpayment attributable to either income adjustment. That penalty is the only issue remaining for the Court's consideration.


Background

Petitioner resided in California at the time her petition was filed. She was employed before 2005 as a legal assistant and performed both clerical and paralegal work. Although petitioner was licensed to practice law, she never practiced. Petitioner had no background in tax law and did little or no legal research in performing her employment duties. Before 2005 petitioner became severely depressed and was unable to continue working. At the onset of her depression petitioner took several prescription medicines for her condition. The medication coupled with her condition affected her judgment and thought processes throughout the period under consideration.

Before 2005 petitioner applied for State of California disability benefits and private group disability benefits from her employer's health plan. She was granted benefits from both the State and her employer's plan. For income tax purposes petitioner reported only her employer's plan benefits because it was her understanding that, unlike the private benefits, Government disability benefits were not taxable.

During 2005 petitioner applied for Social Security Administration (SSA) disability benefits. She maintained correspondence with the SSA in a separate folder. Petitioner maintained other folders, including a folder for information and documents that she used in preparing her income tax return. During 2005 petitioner received notice that she had been awarded Social Security benefits. She filed that notification in the Social Security folder.

During 2005 petitioner was paid $19,021 in Social Security benefits, including retroactive 2004 benefits and 2005 benefits. She also received a Form SSA-1099, Social Security Benefit Statement, from the SSA, which she placed in her Social Security folder. The Form SSA-1099 contains several statements indicating that a portion of Social Security benefits may be taxable. Petitioner did not report any of the Social Security disability benefits because of her understanding and belief that Federal benefits for disability, like her State benefit, were not taxable. Petitioner reported her private disability benefits for 2005, but she did not report either the State or Federal disability benefits received in that year.

For 2005 petitioner received a "1099 Consolidated Tax Statement" (1099 statement) from her stockbroker. The document consisted of eight pages and contained petitioner's income tax information, including interest, tax-exempt municipal interest, ordinary dividends, qualifying dividends, stock transactions, and related materials. The face or first page of the statement listed amounts for ordinary dividends, qualified dividends, investment expenses, and interest income. Interest income of $3,908.68 was listed. The line showing the interest income contained the following explanation: "INTEREST INCOME NOT INCLUDED IN IRS BOX 3". On that same page were three places that were labeled "BOX 3". They were denominated "NONTAXABLE DISTRIBUTIONS"; "INTEREST INCOME ON U.S. TREASURY OBLIGATIONS"; and "OTHER INCOME."

Petitioner found the "INTEREST INCOME NOT INCLUDED IN IRS BOX 3" language to be ambiguous and confusing, and she interpreted it to mean that her interest income was not taxable. Petitioner, however, did extract information from other parts of the 1099 statement, including tax-exempt municipal interest, which she reported on the correct part of her Form 1040, U.S. Individual Income Tax Return. The fifth page of the 1099 statement made clear that the $3,908.68 in interest had been received on petitioner's behalf from various corporate securities.

Respondent's computer matching capability revealed that petitioner had not reported the Social Security disability benefits and interest income, and she was notified by mail. Shortly after petitioner received the notification from respondent, she filed an amended 2005 income tax return, along with payment, that reported the $3,908.68 of interest income and the 2005 portion of her Social Security benefits. Petitioner's failure to report the 2004 Social Security benefits was based on her lack of understanding about tax accounting principles and, more specifically, on the fact that she was a cash basis taxpayer.


Discussion 2

Petitioner has conceded that the interest income and Social Security benefits are taxable. She contends, however, that her failure to report these amounts was reasonable and that the section 6662(a) penalty should not apply to her underpayment.

Section 6662(a) and (b)(1) and (2) provides that a taxpayer is liable for a 20-percent accuracy-related penalty on any portion of an underpayment of tax required to be shown on a return attributable to, inter alia, (1) negligence or disregard of the rules or regulations or (2) a substantial understatement of income tax. Negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code, and the term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c). Section 6664(c)(1) provides that the penalty under section 6662(a) shall not apply to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer's position with respect to that portion and that the taxpayer acted in good faith with respect to that portion. Higbee v. Commissioner, 116 T.C. 438, 448 (2001). The determination of whether a taxpayer acted with reasonable cause and in good faith within the meaning of section 6664(c)(1) is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. Id.; sec. 1.6664-4(b)(1), Income Tax Regs. The most important factor is the extent of the taxpayer's effort to assess her proper tax liability for the year. Sec. 1.6664-4(b)(1), Income Tax Regs. "Circumstances that may indicate reasonable cause and good faith include * * * the experience, knowledge, and education of the taxpayer." Id.

We consider the two adjustments separately concerning whether the accuracy-related penalty applies to the resulting underpayment caused by each.

With respect to petitioner's failure to report $3,908.68 of interest income, her explanation is that the language preceding the amount shown on the 1099 statement was "ambiguous". We are unable to find that petitioner's explanation is reasonable under the circumstances. Petitioner, who prepared her own return, sorted through this 1099 statement to find various amounts of income, both taxable and tax exempt, and she placed the amounts on various parts of her income tax return. Petitioner's interpretation of the phrase "INTEREST INCOME NOT INCLUDED IN IRS BOX 3" as meaning that the interest income was not reportable or taxable is more wishful thinking than anything else. Moreover, we are unconvinced that the face of the 1099 statement was ambiguous. Accordingly, and considering all of the circumstances, we hold that petitioner's failure to report the interest income was not reasonable, and petitioner is subject to the section 6662(a) penalty on the resulting underpayment.

With respect to petitioner's failure to report $19,021 of disability benefits, her explanation is that it was her understanding and belief that, like State disability payments, Federal disability payments were not subject to the income tax. We are cognizant of the fact that before 2005 petitioner had received disability payments and correctly reported them; i.e., payments from employer's health plan as taxable and payments from the State of California as not taxable. In addition, petitioner was being treated by a doctor for a serious mental condition and was taking various medicines that affected her judgment and thinking processes. She was involved in pursuing disability claims with three different sources and had received various correspondence from each, including the SSA. It is clear that she believed the disability payments from the SSA were not taxable. She filed correspondence and documents from the SSA in a special folder on that subject, and she did not include any of those documents in her separately maintained folder for tax-related documents.

When her failure to report was brought to her attention by respondent, petitioner promptly filed an amended return including interest and benefits, along with payment of the additional tax. We note that petitioner did not understand tax accounting principles; and in spite of the fact that respondent had determined that she failed to report the $19,021, petitioner included only the payments for 2005 on her amended return, although all of the $19,021 had been received during 2005. Petitioner's testimony, actions, and the circumstances of this case are persuasive and reflect that she made a reasonable and good faith attempt to report her tax liability as it related to her disability payments. Accordingly, we hold that petitioner is not liable for a section 6662(a) penalty on the underpayment caused by her failure to report Social Security benefits. To reflect the foregoing,

Decision will be entered under Rule 155.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 The parties did not raise any question about the burden of proof or sec. 7491. Under that statute, respondent bears a burden of production with respect to the accuracy-related penalties determined under sec. 6662(a). See sec. 7491(c).

Steven Booth, et al., Petitioners-Appellants v. Commissioner of Internal Revenue, Respondent-Appellee.

U.S. Court of Appeals, 9th Circuit; 08-71561, July 28, 2009.

The Tax Court lacked subject matter jurisdiction to compel a Collection Due Process (CDP) hearing or the issuance of a determination letter with respect to a couple's tax liabilities. The couple failed to request a CDP hearing regarding the initial lien and levy notices. Back reference: ¶38,134.89.




Before: Schroeder, Thomas and Wardlaw, Circuit Judges.

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT. No. 08-71561. Tax Ct. No. 16340-07L. Appeal from a Decision of the United States Tax Court. Submitted July 14, 2009 ** .




MEMORANDUM * .


Steven and Louise Booth appeal pro se from the Tax Court's order dismissing for lack of jurisdiction their petition for an order compelling the Internal Revenue Service ("IRS") to issue a determination letter regarding lien and levy notices, and from the Tax Court's order denying their motion for reconsideration. We have jurisdiction pursuant to 26 U.S.C. § 7482(a). We review de novo the Tax Court's dismissal for lack of subject matter jurisdiction, Gorospe v. Comm'r, 451 F.3d 966, 968 (9th Cir. 2006), and we affirm.

Dismissal was proper because the Booths failed to avail themselves of a collection due process ("CDP") hearing regarding the initial lien and levy notices, and, thus, the Tax Court lacked jurisdiction to compel a CDP hearing or the issuance of a determination letter that would result from a CDP hearing. See 26 U.S.C. § 6320(c) (conferring jurisdiction to the Tax Court for review of a lien notice only after a taxpayer requests and receives a CDP hearing and the IRS issues a determination letter based upon the hearing); 26 U.S.C. § 6330 (same for levy notice); see also 26 C.F.R. § 301.6320-1(b)(2) (requiring taxpayer to request hearing upon filing of first lien notice); 26 C.F.R. § 301.6330-1(b)(2) (same for levy notice); Gorospe, 451 F.3d at 968 (explaining that the Tax Court's subject matter jurisdiction is statutorily limited by Title 26 of the United States Code).

Contrary to the Booths' contention, the Tax Court properly considered arguments raised by the IRS in its supplemental briefing as to why the Booths are not entitled to a hearing and determination letter. See S.F. BayKeeper v. Whitman, 297 F.3d 877, 886 (9th Cir. 2002) ("[W]hen a court considers a claim that an agency has failed to act in violation of a legal obligation, review is not limited to the record as it existed at any single point in time, because there is no final agency action to demarcate the limits of the record.") (internal citations and quotation marks omitted).

The Tax Court did not abuse its discretion by denying the Booths' motion for reconsideration because the motion provided no basis to suggest the dismissal was in error. See Parkinson v. Comm'r, 647 F.2d 875, 876 (9th Cir. 1981) (per curiam) ("The Tax Court's denial of a motion for reconsideration will not be overturned on appeal absent a clear abuse of discretion.").

AFFIRMED.

** The panel unanimously finds this case suitable for decision without oral argument. See Fed. R. App. P. 34(a)(2).

* This disposition is not appropriate for publication and is not precedent except as provided by 9th Cir. R. 36-3.

The IRS has updated the list of transactions that it has determined to be "listed transactions" for purposes of the disclosure and registration requirements and associated penalties. The notice updates the list of listed transactions in Notice 2004-67, 2004-2 CB 600, adding transactions identified as listed transactions in notices and other guidance released after September 24, 2004, and deleting those that the IRS has previously announced will no longer be considered listed transactions.




Notice 2009-59 , I.R.B. 2009-31, July 15, 2009.





SECTION 1. PURPOSE

This notice updates the list of transactions that have been determined by the Internal Revenue Service to be "listed transactions" for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 6111, 6112, 6662A, 6707, 6707A, and 6708 of the Internal Revenue Code. This notice restates the list of "listed transactions" in Notice 2004-67, 2004-2 C.B. 600, and updates the list by adding transactions identified as "listed transactions" in notices and other guidance released after September 24, 2004.



SECTION 2. CURRENT LISTED TRANSACTIONS

Transactions that are the same as or substantially similar to one of the types of transactions described in the list below have been determined by the Service to be tax avoidance transactions and are "listed transactions" for purposes of § 1.6011-4(b)(2) and §§ 6111, 6112, 6662A, 6707, 6707A and 6708. As a result, taxpayers may need to disclose their participation in these listed transactions as prescribed in § 1.6011-4, and material advisors may need to disclose these transactions under § 301.6111-3 of the Procedure and Administration Regulations. Taxpayers who fail to disclose may be subject to penalties under §§ 6662A and 6707A. Material advisors who fail to disclose may be subject to penalties under § 6707. In addition, material advisors must maintain lists of advisees and other information with respect to these listed transactions pursuant to § 301.6112-1. Material advisors who fail to furnish a list as required under § 301.6112-1 may be subject to penalties under § 6708.

(1) Rev. Rul. 90-105, 1990-2 C.B. 69 (transactions in which taxpayers claim deductions for contributions to a qualified cash or deferred arrangement or matching contributions to a defined contribution plan where the contributions are attributable to compensation earned by plan participants after the end of the taxable year (identified as "listed transactions" on February 28, 2000)). See also Rev. Rul. 2002-46, 2002-2 C.B. 117 (result is the same, and transactions are substantially similar, even though the contributions are designated as satisfying a liability established before the end of the taxable year), modified by Rev. Rul. 2002-73, 2002-2 C.B. 805;

(2) Notice 95-34, 1995-1 C.B. 309 (certain trust arrangements purported to qualify as multiple employer welfare benefit funds exempt from the limits of §§ 419 and 419A (identified as "listed transactions" on February 28, 2000)). See also § 1.419A(f)(6)-1 (10 or more employer plans);

(3) Transactions substantially similar to those at issue in ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000), and ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998) (transactions involving contingent installment sales of securities by partnerships in order to accelerate and allocate income to a tax-indifferent partner, such as a tax-exempt entity or foreign person, and to allocate later losses to another partner (identified as "listed transactions" on February 28, 2000));

(4) Section 1.643(a)-8 (transactions involving distributions described in §1.643(a)-8 from charitable remainder trusts (identified as "listed transactions" on February 28, 2000));

(5) Notice 99-59, 1999-2 C.B. 761 (transactions involving the distribution of encumbered property in which taxpayers claim tax losses for capital outlays that they have in fact recovered (identified as "listed transactions" on February 28, 2000)). See also § 1.301-1(g);

(6) Section 1.7701(l)-3 (transactions involving fast-pay arrangements as defined in § 1.7701(l)-3(b) (identified as "listed transactions" on February 28, 2000));

(7) Rev. Rul. 2000-12, 2000-1 C.B. 744 (certain transactions involving the acquisition of two debt instruments the values of which are expected to change significantly at about the same time in opposite directions (identified as "listed transactions" on February 28, 2000));

(8) Notice 2000-44, 2000-2 C.B. 255 (transactions generating losses resulting from artificially inflating the basis of partnership interests (identified as "listed transactions" on August 11, 2000)). See also §§ 1.752-1(a), 1.752-6, and 1.752-7;

(9) Notice 2000-60, 2000-2 C.B. 568 (transactions involving the purchase of a parent corporation's stock by a subsidiary, a subsequent transfer of the purchased parent stock from the subsidiary to the parent's employees, and the eventual liquidation or sale of the subsidiary (identified as "listed transactions" on November 16, 2000));

(10) Notice 2000-61, 2000-2 C.B. 569 (transactions purporting to apply § 935 to Guamanian trusts (identified as "listed transactions" on November 21, 2000));

(11) Notice 2001-16, 2001-1 C.B. 730 (transactions involving the use of an intermediary to sell the assets of a corporation (identified as "listed transactions" on January 18, 2001)). Notice 2008-111, 2008-51 I.R.B. 1299, clarifies Notice 2001-16 and supersedes Notice 2008-20, 2008-1 C.B. 406;

(12) Notice 2001-17, 2001-1 C.B. 730 (transactions involving a loss on the sale of stock acquired in a purported § 351 transfer of a high basis asset to a corporation and the corporation's assumption of a liability that the transferor has not yet taken into account for federal income tax purposes (identified as "listed transactions" on January 18, 2001));

(13) Notice 2001-45, 2001-2 C.B. 129 (certain redemptions of stock in transactions not subject to U.S. tax in which the basis of the redeemed stock is purported to shift to a U.S. taxpayer (identified as "listed transactions" on July 26, 2001));

(14) Notice 2002-21, 2002-1 C.B. 730 (transactions involving the use of a loan assumption agreement to inflate basis in assets acquired from another party to claim losses (identified as "listed transactions" on March 18, 2002);

(15) Notice 2002-35, 2002-1 C.B. 992 (transactions involving the use of a notional principal contract to claim current deductions for periodic payments made by a taxpayer while disregarding the accrual of a right to receive offsetting payments in the future (identified as "listed transactions" on May 6, 2002)). Notice 2006-16, 2006-1 C.B. 538, clarifies and modifies Notice 2002-35;

(16) Notice 2002-50, 2002-2 C.B. 98 (transactions involving the use of a straddle, a tiered partnership structure, a transitory partner, and the absence of a § 754 election to claim a permanent noneconomic loss (identified as "listed transactions" on June 25, 2002)); Notice 2002-65, 2002-2 C.B. 690 (transactions involving the use of a straddle, an S corporation or a partnership, and one or more transitory shareholders or partners to claim a loss while deferring an offsetting gain are substantially similar to transactions described in Notice 2002-50); and Notice 2003-54, 2003-2 C.B. 363 (transactions involving the use of economically offsetting positions, one or more tax indifferent parties, and the common trust fund accounting rules of § 584 to allow a taxpayer to claim a noneconomic loss are substantially similar to transactions described in Notice 2002-50 and Notice 2002-65);

(17) Rev. Rul. 2002-69, 2002-2 C.B. 760, modifying and superseding Rev. Rul. 99-14, 1999-1 C.B. 835 (transactions in which a taxpayer purports to lease property and then purports to immediately sublease it back to the lessor (often referred to as "lease-in/lease-out" or "LILO" transactions) (identified as "listed transactions" on February 28, 2000));

(18) Rev. Rul. 2003-6, 2003-1 C.B. 286 (certain arrangements involving the transfer of employee stock ownership plans (ESOPs) that hold stock in an S corporation for the purpose of claiming eligibility for the delayed effective date of § 409(p) (identified as "listed transactions" on December 17, 2002));

(19) Notice 2003-22, 2003-1 C.B. 851 (certain arrangements involving leasing companies that have been used to avoid or evade federal income and employment taxes (identified as "listed transactions" on April 4, 2003));

(20) Notice 2003-24, 2003-1 C.B. 853 (certain arrangements that purportedly qualify as collectively-bargained welfare benefit funds excepted from the account limits of §§ 419 and 419A (identified as "listed transactions" on April 11, 2003));

(21) Notice 2003-47, 2003-2 C.B. 132 (transactions involving compensatory stock options and related persons to avoid or evade federal income and employment taxes (identified as "listed transactions" on July 1, 2003));

(22) Notice 2003-55, 2003-2 C.B. 395 (transactions in which one participant claims to realize rental or other income from property or service contracts and another participant claims the deductions related to that income (often referred to as "lease strips")), modifying and superseding Notice 95-53, 1995-2 C.B. 334 (identified as "listed transactions" on February 28, 2000);

(23) Notice 2003-77, 2003-2 C.B. 1182 (certain transactions that use contested liability trusts improperly to accelerate deductions for contested liabilities under § 461(f) (identified as "listed transactions" on November 19, 2003)). See also § 1.461-2. See Rev. Proc. 2004-31, 2004-1 C.B. 986, for procedures which taxpayers must use to change their methods of accounting for deducting under § 461(f) amounts transferred to trusts in transactions described in Notice 2003-77;

(24) Notice 2003-81, 2003-2 C.B. 1223 (certain transactions in which a taxpayer claims a loss upon the assignment of a purported § 1256 contract to a charity but fails to report the recognition of gain when the taxpayer's obligation under an offsetting non- section 1256 contract terminates (identified as "listed transactions" on December 4, 2003)). Notice 2007-71, 2007-2 C.B. 472, modified and supplemented Notice 2003-81;

(25) Notice 2004-8, 2004-1 C.B. 333 (certain transactions designed to avoid the limitations on contributions to Roth IRAs described in § 408A (identified as "listed transactions" on December 31, 2003));

(26) Rev. Rul. 2004-4, 2004-1 C.B. 414 (transactions that involve segregating the business profits of an ESOP-owned S corporation in a qualified subchapter S subsidiary, so that rank-and-file employees do not benefit from participation in the ESOP (identified as "listed transactions" on January 23, 2004));

(27) Situation 2 of Rev. Rul. 2004-20, 2004-1 C.B. 546, modifying and superseding Rev. Rul. 55-748, 1955-2 C.B. 234 (certain arrangements in which an employer deducts contributions to a qualified pension plan used to pay premiums on life insurance contracts that provide for death benefits in excess of the participant's death benefit, where under the terms of the plan, the balance of the death benefit proceeds revert to the plan as a return on investment) (identified as "listed transactions" on February 13, 2004)). See also Rev. Rul. 2004-21, 2004-1 C.B. 544, §§ 1.79-1(d)(3), 1.83-3(e) and 1.402(a)-1(a)(1) and (2), and Rev. Proc. 2005-25, 2005-1 C.B. 962, modifying and superseding Rev. Proc. 2004-16, 2004-1 C.B. 559;

(28) Notice 2004-20, 2004-1 C.B. 608 (transactions in which, pursuant to a prearranged plan, a domestic corporation purports to acquire stock in a foreign target corporation and to make an election under § 338 before selling all or substantially all of the target corporation's assets in a preplanned transaction that generates a taxable gain for foreign tax purposes (but not for U.S. tax purposes) (identified as "listed transactions" on February 17, 2004));

(29) Notice 2004-30, 2004-1 C.B. 828 (transactions in which S corporation shareholders attempt to transfer the incidence of taxation on S corporation income by purportedly donating S corporation nonvoting stock to an exempt organization while retaining the economic benefits associated with that stock (identified as "listed transactions" on April 1, 2004));

(30) Notice 2004-31, 2004-1 C.B. 830 (transactions in which corporations claim inappropriate deductions for payments made through a partnership (identified as "listed transactions" on April 1, 2004));

(31) Notice 2005-13, 2005-1 C.B. 630 (transactions in which a taxpayer enters into a purported sale-lease-back arrangement with a tax-indifferent person in which substantially all of the tax-indifferent person's payment obligations are economically defeased and the taxpayer's risk of loss from a decline, and opportunity for profit from an increase, in the value of the leased property are limited (often referred to as "sale-in/lease out" or "SILO" transactions) (identified as "listed transactions" on February 11, 2005));

(32) Notice 2007-57, 2007-2 C.B. 87 (transactions in which a U.S. taxpayer uses offsetting positions with respect to foreign currency or other property for the purpose of importing a loss, but not the corresponding gain, in determining U.S. taxable income (identified as "listed transactions" on June 20, 2007));

(33) Notice 2007-83, 2007-2 C.B. 960 (certain arrangements involving a trust or other fund described in § 419(e)(3) that is purportedly a welfare benefit fund and pays premiums on one or more life insurance policies with respect to which value is accumulated, where the employer has deducted contributions in excess of specified amounts (identified as "listed transactions" on October 17, 2007));

(34) Notice 2008-34, 2008-12 I.R.B. 645 (transactions in which a tax indifferent party contributes one or more distressed assets with a high basis and low fair market value to a trust or series of trusts and sub-trusts, and a U.S. taxpayer acquires an interest in the trust (and/or series of trusts and/or sub-trusts) for the purpose of shifting a built-in loss from the tax indifferent party to the U.S. taxpayer that has not incurred the economic loss (identified as "listed transactions" on February 27, 2008)).



SECTION 3. TRANSACTIONS NO LONGER CONSIDERED TO BE LISTED TRANSACTIONS

Transactions that are the same as, or substantially similar to, one of the types of transactions described in the list below will no longer be considered listed transactions for purposes of § 1.6011-4(b)(2) and §§ 6111 and 6112. No inference is intended, however, as to whether such transactions are otherwise subject to the disclosure requirements of § 6011, the disclosure requirements of § 6111, or the list maintenance requirements of § 6112.

(1) Transactions described in Part II of Notice 98-5, 1998-1 C.B. 334 (transactions in which the reasonably expected economic profit is insubstantial in comparison to the value of the expected foreign tax credits (identified as "listed transactions" on February 28, 2000)). Notice 2004-19, 2004-1 C.B. 606, withdrew Notice 98-5. Effective for taxable years for which the due date of the return (including extensions, whether or not actually requested) is after February 17, 2004, transactions will not be considered listed transactions for purposes of § 1.6011-4(b)(2) and § 6112 solely because they are the same as or substantially similar to the transactions or arrangements described in Part II of Notice 98-5. In addition, for offers made after February 17, 2004, transactions will not be considered listed transactions for purposes of § 6111 solely because they are the same as or substantially similar to the transactions or arrangements described in Part II of Notice 98-5.

(2) Transactions described in Notice 2002-70, 2002-2 C.B. 765 (transactions involving reinsurance arrangements between a taxpayer and the taxpayer's own reinsurance company that is subject to little or no federal income tax (identified as "listed transactions" on October 15, 2002)). Notice 2004-65, 2004-2 C.B. 599, modified Notice 2002-70 by removing the identification of transactions that are the same as, or substantially similar to, transactions described in Notice 2002-70 as listed transactions effective for taxable years for which the due date of the return (including extensions, whether or not actually requested) is after September 24, 2004.



SECTION 4. EFFECT ON OTHER NOTICES

Notice 2004-67 is supplemented and superseded. For updates to this list go to the IRS web page at www.irs.gov/businesses/corporations and click on "Abusive Tax Shelters and Transactions." Notices and other published guidance will still be used to identify transactions that have been determined by the Service to be "listed transactions."



DRAFTING INFORMATION

The principal authors of this notice are Eric P. Ingala and Michael H. Beker of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice contact the authors at (202) 622-3070 (not a toll-free call).



SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION INFORMATION WITH RETURN.
6707A(a) IMPOSITION OF PENALTY. --Any person who fails to include on any return or statement any information with respect to a reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).

6707A(b) AMOUNT OF PENALTY. --

6707A(b)(1) IN GENERAL. --Except as provided in paragraph (2), the amount of the penalty under subsection (a) shall be --

6707A(b)(1)(A) $10,000 in the case of a natural person, and

6707A(b)(1)(B) $50,000 in any other case.

6707A(b)(2) LISTED TRANSACTION. --The amount of the penalty under subsection (a) with respect to a listed transaction shall be --

6707A(b)(2)(A) $100,000 in the case of a natural person, and

6707A(b)(2)(B) $200,000 in any other case.

6707A(c) DEFINITIONS. --For purposes of this section:

6707A(c)(1) REPORTABLE TRANSACTION. --The term "reportable transaction" means any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

6707A(c)(2) LISTED TRANSACTION. --The term "listed transaction" means a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.

6707A(d) AUTHORITY TO RESCIND PENALTY. –

SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO REPORTABLE TRANSACTIONS.
6708(a) IMPOSITION OF PENALTY. --

6708(a)(1) IN GENERAL. --If any person who is required to maintain a list under section 6112(a) fails to make such list available upon written request to the Secretary in accordance with section 6112(b) within 20 business days after the date of such request, such person shall pay a penalty of $10,000 for each day of such failure after such 20th day.

6708(a)(2) REASONABLE CAUSE EXCEPTION. --No penalty shall be imposed by paragraph (1) with respect to the failure on any day if such failure is due to reasonable cause.

6708(b) PENALTY IN ADDITION TO OTHER PENALTIES. --The penalty imposed by this section shall be in addition to any other penalty provided by law.


6707A(d)(1) IN GENERAL. --The Commissioner of Internal Revenue may rescind all or any portion of any penalty imposed by this section with respect to any violation if --

6707A(d)(1)(A) the violation is with respect to a reportable transaction other than a listed transaction, and

6707A(d)(1)(B) rescinding the penalty would promote compliance with the requirements of this title and effective tax administration.

6707A(d)(2) NO JUDICIAL APPEAL. --Notwithstanding any other provision of law, any determination under this subsection may not be reviewed in any judicial proceeding.

6707A(d)(3) RECORDS. --If a penalty is rescinded under paragraph (1), the Commissioner shall place in the file in the Office of the Commissioner the opinion of the Commissioner with respect to the determination, including --

6707A(d)(3)(A) a statement of the facts and circumstances relating to the violation,

6707A(d)(3)(B) the reasons for the rescission, and

6707A(d)(3)(C) the amount of the penalty rescinded.

6707A(e) PENALTY REPORTED TO SEC. --In the case of a person --

6707A(e)(1) which is required to file periodic reports under section 13 or 15(d) of the Securities Exchange Act of 1934 or is required to be consolidated with another person for purposes of such reports, and

6707A(e)(2) which --

6707A(e)(2)(A) is required to pay a penalty under this section with respect to a listed transaction,

6707A(e)(2)(B) is required to pay a penalty under section 6662A with respect to any reportable transaction at a rate prescribed under section 6662A(c), or

6707A(e)(2)(C) is required to pay a penalty under section 6662(h) with respect to any reportable transaction and would (but for section 6662A(e)(2)(B)) have been subject to penalty under section 6662A at a rate prescribed under section 6662A(c),

the requirement to pay such penalty shall be disclosed in such reports filed by such person for such periods as the Secretary shall specify. Failure to make a disclosure in accordance with the preceding sentence shall be treated as a failure to which the penalty under subsection (b)(2) applies.

6707A(f) COORDINATION WITH OTHER PENALTIES. --The penalty imposed by this section shall be in addition to any other penalty imposed by this title.

6707(a) IN GENERAL. --If a person who is required to file a return under section 6111(a) with respect to any reportable transaction --

6707(a)(1) fails to file such return on or before the date prescribed therefor, or

6707(a)(2) files false or incomplete information with the Secretary with respect to such transaction,

such person shall pay a penalty with respect to such return in the amount determined under subsection (b).

6707(b) AMOUNT OF PENALTY. --

6707(b)(1) IN GENERAL. --Except as provided in paragraph (2), the penalty imposed under subsection (a) with respect to any failure shall be $50,000.

6707(b)(2) LISTED TRANSACTIONS. --The penalty imposed under subsection (a) with respect to any listed transaction shall be an amount equal to the greater of --

6707(b)(2)(A) $200,000, or

6707(b)(2)(B) 50 percent of the gross income derived by such person with respect to aid, assistance, or advice which is provided with respect to the listed transaction before the date the return is filed under section 6111.

Subparagraph (B) shall be applied by substituting "75 percent" for "50 percent" in the case of an intentional failure or act described in subsection (a).

6707(c) RESCISSION AUTHORITY. --The provisions of section 6707A(d) (relating to authority of Commissioner to rescind penalty) shall apply to any penalty imposed under this section.

6707(d) REPORTABLE AND LISTED TRANSACTIONS. --For purposes of this section, the terms "reportable transaction" and "listed transaction" have the respective meanings given to such terms by section 6707A(c).
SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS WITH RESPECT TO REPORTABLE TRANSACTIONS.
6662A(a) IMPOSITION OF PENALTY. --If a taxpayer has a reportable transaction understatement for any taxable year, there shall be added to the tax an amount equal to 20 percent of the amount of such understatement.

6662A(b) REPORTABLE TRANSACTION UNDERSTATEMENT. --For purposes of this section --

6662A(b)(1) IN GENERAL. --The term "reportable transaction understatement" means the sum of --

6662A(b)(1)(A) the product of --

6662A(b)(1)(A)(i) the amount of the increase (if any) in taxable income which results from a difference between the proper tax treatment of an item to which this section applies and the taxpayer's treatment of such item (as shown on the taxpayer's return of tax), and

6662A(b)(1)(A)(ii) the highest rate of tax imposed by section 1 ( section 11 in the case of a taxpayer which is a corporation), and

6662A(b)(1)(B) the amount of the decrease (if any) in the aggregate amount of credits determined under subtitle A which results from a difference between the taxpayer's treatment of an item to which this section applies (as shown on the taxpayer's return of tax) and the proper tax treatment of such item.

For purposes of subparagraph (A), any reduction of the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable income.

6662A(b)(2) ITEMS TO WHICH SECTION APPLIES. --This section shall apply to any item which is attributable to --

6662A(b)(2)(A) any listed transaction, and

6662A(b)(2)(B) any reportable transaction (other than a listed transaction) if a significant purpose of such transaction is the avoidance or evasion of Federal income tax.

6662A(c) HIGHER PENALTY FOR NONDISCLOSED LISTED AND OTHER AVOIDANCE TRANSACTIONS. --Subsection (a) shall be applied by substituting "30 percent" for "20 percent" with respect to the portion of any reportable transaction understatement with respect to which the requirement of section 6664(d)(2)(A) is not met.

6662A(d) DEFINITIONS OF REPORTABLE AND LISTED TRANSACTIONS. --For purposes of this section, the terms "reportable transaction" and "listed transaction" have the respective meanings given to such terms by section 6707A(c).

6662A(e) SPECIAL RULES. --

6662A(e)(1) COORDINATION WITH PENALTIES, ETC., ON OTHER UNDERSTATEMENTS. --In the case of an understatement (as defined in section 6662(d)(2)) --

6662A(e)(1)(A) the amount of such understatement (determined without regard to this paragraph) shall be increased by the aggregate amount of reportable transaction understatements for purposes of determining whether such understatement is a substantial understatement under section 6662(d)(1), and

6662A(e)(1)(B) the addition to tax under section 6662(a) shall apply only to the excess of the amount of the substantial understatement (if any) after the application of subparagraph (A) over the aggregate amount of reportable transaction understatements.

6662A(e)(2) COORDINATION WITH OTHER PENALTIES. --

6662A(e)(2)(A) COORDINATION WITH FRAUD PENALTY. --This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6663.

6662A(e)(2)(B) COORDINATION WITH GROSS VALUATION MISSTATEMENT PENALTY. --This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6662 if the rate of the penalty is determined under section 6662(h).

6662A(e)(3) SPECIAL RULE FOR AMENDED RETURNS. --Except as provided in regulations, in no event shall any tax treatment included with an amendment or supplement to a return of tax be taken into account in determining the amount of any reportable transaction understatement if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary.