Attorney-at-Law

A FRAUDULENT RETURN IS NOT EVASIVE

In Uncategorized on 12/26/2018 at 17:12

Richard C. Mathews, 2018 T. C. Memo. 212, filed 12/26/18, lacked “the necessary education, experience, or acumen,” and “bookkeeping, accounting, or taxation experience,” 2018 T. C. Memo. at p. 5 and p. 6, respectively.

Nevertheless, RC, an Army-trained computer whiz, managed to run a multi-level marketing operation (the sort of scam I shut down as an apprentice thief-catcher at the NY Attorney General’s office so long ago) through his Belize trust, although he had never been to Belize, had no office there, and had no idea how a Belize trust would affect his US tax liability.

So although the deficiencies for the two years at issue aggregate less than $25K, IRS wants to mulct RC for $16K in Section 6663(a) fraud chops. And they do have a strong platform from which to seek such chops. RC did not start well at Examination; he lied fore-and-aft. Then his website quoted Al Capone. When CID executed a search warrant of his home, RC had trouble owning up to the two safes containing an aggregate of $13K in what certain of my clients called blätter.

And the CID Sherlocks found about a quarter-million in unreported income over a four-year stretch (but only two of them are involved here. Spoiler alert: RC dodges the fraud chops, so SOL torpedoes the whole shebang).

Although CID and the AUSA started with tax evasion, they superseded that indictment with Section 7206(1) signoff on a false return and 7212 obstructing tax admin. RC goes down on all counts in USDCEDAR, and gets 27 months. 8 Cir affirms in a published opinion, thrashing RC good.

Now we all know that signing a false return doesn’t preclude claiming no tax evasion; you can sign a blatantly false return if you don’t owe any tax, and go down under Section 7206(1). Signing the false return doesn’t prove intent to evade, even though H. D. Thoreau’s milky trout might indicate otherwise.

We have the Eleven Factors; see 2018 T. C. Memo. 212 at p. 23, a for a non-exclusive, non-exhaustive list thereof. And “clear and convincing” is the evidentiary test. Although IRS has met that burden on unreported income, they fall down on fraudulent intent, even though RC concedes the nonreporting.

Maybe Judge Vasquez has the Christmas spirit. Or maybe RC’s stretch as a guest of Our Great Nation brought him “out of error into truth, out of sin into righteousness,” as a much more exalted source puts it.

Howbeit, “Petitioner lied on numerous occasions to RA C and SA W during respondent’s civil examination and criminal investigation.  However, we do not believe he did so in this proceeding.  Before trial, petitioner had served a substantial prison sentence stemming in large part from his behavior during the audit and criminal investigation.  We believe this experience impressed upon petitioner the importance of telling the truth.  At trial petitioner admitted to making mistakes; he was respectful towards respondent and respondent’s witnesses; and he was cooperative with the Court.  His testimony was convincing and withstood cross-examination.  We will therefore credit, as specified below, portions of petitioner’s testimony.

“RA C and SA W also testified at trial.  We found each of them to be honest, forthright, and credible.  However, we disagree with their conclusions about petitioner’s fraudulent intent.

“Petitioner is not a sophisticated taxpayer or financially astute.  He dropped out of high school after the 10th grade and has no training or experience in bookkeeping, taxation, or accounting.  At trial he appeared confused about the nature of his tax liabilities and, at one point, credibly testified: ‘[I]t’s over my head.’” 2018 T. C. Memo. 212, at pp. 24-25. (Names omitted).

But Judge Vasquez is no pushover. “To be sure, this is a close case.” 2018 T. C. Memo. 212, at p. 28. 8 Cir was convinced that RC was a bad ‘un; he did lie throughout his dealings with Exam and CID.

But Judge Vasquez lets RC out of four (count ‘em, four) paragraphs of stips wherein RC gives away the cliché, in the interests of justice.

IRS comes up short on the proof side.

RC walks.

 

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  1. I have read every Tax Court case containing assertion of a fraud penalty by SNOD or Answer. Regular and Memorandum Opinions. All those issued in 1961 and later. On both procedure and substantive law, this case is the most poorly supported no fraud finding that I have read in the more than 50 years of case law. Funny blog you have, but the petitioner in the case has the last and best laugh. With a sad story and a judge’s analysis such as this, who needs counsel?

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    • Mr Harris, As I said in an earlier blogpost today, “Everybody’s testimony looks the same as anybody else’s on paper; nobody’s testimony looks the same as anybody else’s on the stand.” It may be that Mathews was truly out of his depth, and not just a clever con man with a sob story. I didn’t see the testimony, so I can’t say. Judge Vasquez has been on Tax Court Bench for 23 years; he’s seen a lot of witnesses. That doesn’t mean he can’t be fooled (any more or less than the rest of us). But I’d give the Judge the benefit of the doubt this once.

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      • Your quote is fabulous for sure.

        In this type case, fraud is determined at the time of filing. One cannot repent by testifying credibly (and somewhat implausibly) in the Tax Court. A petitioner shouldn’t get “credit” for the absence of a particular fraud indicia. Other decisions make this mistake. More often than not, the “explanation” or “excuse” (like what was proffered here) confirms the antecedent fraudulent intent.

        Even in print, the petitioner’s explanations seemed highly implausible. The Rule 91 relief is also rather extraordinary and insufficiently or incorrectly explained.

        As for a judge’s time on the court, that doesn’t necessarily impart expertise in the fraud determination process. The weight of petitioner’s demeanor at trial is strikingly overstated here and the other fraud indicia present not given their due weight. In a “close case” I expect a Tax Court judge to do a better job convincing me.

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  2. Mr Harris, I agree. Fraud is determined at filing (or at non-filing when filing is due), and subsequent repentance doesn’t cure fraud. But that begs the question: it assumes Mathews did commit fraud. The question here really is, did the “evil-meaning mind meet the evil-doing hand?” Judge Vasquez said no. No doubt this case is one for the recordbook; I shouldn’t like to litigate another such. Nor would I be convulsed with surprise if IRS appeals, and 11 Cir follows 8 Cir and slugs Mathews hard. But I can also see 11 Cir saying (as many appellate courts are wont) “Judge Vasquez saw the witnesses; we didn’t.”

    Whatever, ya gotta love this stuff.

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