Judge Albert G. (“Scholar Al”) Lauber is far too well-bred to utter a misquotation of Alfonso Bedoya’s famous line from the Bogart classic. But he does give us an exegesis of the celebrated “badges of fraud” in the Dixieland Boondockery context.

“The traditional ‘badges of fraud’ were developed by the courts chiefly in cases involving unreported income. During 2017, the tax year at issue, [petitioner] engaged in little or no business activity and had no income; the dispute between the parties focuses on an allegedly overstated deduction. In a case such as this, several traditional badges of fraud—e.g., understating gross income, concealing income or assets, failing to file tax returns, and dealing extensively in cash—may have little salience because they will be absent almost by definition. Other badges of fraud—e.g., providing testimony that lacks credibility, giving implausible or inconsistent explanations of behavior, and failing to cooperate with tax authorities—are incapable of complete evaluation at the current stage of this litigation, with a trial scheduled six months down the road and discovery still on-going.” North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, Docket No. 24703-21, filed 4/10/24, at pp. 5-6.

The Donalds want summary J that IRS can’t prove fraud, so drop the 75% chop. The Donalds rely on Mill Road 36 Henry, where the 40% overvaluation chop, but not the 75% fraud chop, was applied, because IRS failed to produce badges, and the Donalds say they told all on their 1065 and attachments, so no concealment or obfuscation.

“Following a one-week trial, the Court sustained (in large part) the disallowance of the charitable contribution deduction and the imposition of a 40% penalty for a ‘gross valuation misstatement.’ But the Court held the fraud penalty inapplicable, finding that ‘[t]he evidence [did] not establish an attempt by [the taxpayer] to conceal or deceive in the Commissioner’s administration of tax collection’.” Order, at p. 4. (Citations omitted).

Judge Scholar Al wants to wait for the trial. He goes into what IRS might prove after discovery, like documents that were backdated, discussions of sensitive topics carried on by telephone and in person rather than e-mail as keeping inadequate records and manifesting intent to conceal.

But all this can wait until discovery is complete.