T.C. Memo. 2021-43
UNITED STATES TAX COURT
WILLIAM E. FLYNN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15975-14. Filed April 13, 2021.
William E. Flynn, pro se.
Laurie B. Downs and Mark J. Miller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: Respondent determined deficiencies and additions to tax in
petitioner’s Federal income tax as follows:
Additions to tax Year Deficiency Sec. 6651(f) Sec. 6651(a)(2) Sec. 6654 1999 $140,968 $102,201.80 $35,242.00 $6,770.28
Served 04/13/21 -2-
[*2] 2000 59,771 43,333.98 14,942.75 3,214.77 2001 32,918 23,865.55 8,229.50 1,315.53
Respondent’s answer asserts in the alternative that to the extent the Court
determines that petitioner is not liable for the additions to tax under section
6651(f),1 he is liable for additions to tax under section 6651(a)(1) for 1999, 2000,
and 2001.
The issues for decision are whether petitioner: (1) failed to report gambling
income of $1,800, $3,745, and $20,000 for 1999, 2000, and 2001, respectively;
(2) failed to report other income of $413,850, $200,941, and $113,836 for 1999,
2000, and 2001, respectively; (3) is liable for additions to tax for fraudulent failure
to file under section 6651(f) for 1999 through 2001, or in the alternative for
additions to tax for failure to file under section 6651(a)(1); (4) is liable for
additions to tax for failure to timely pay under section 6651(a)(2) for 1999 through
2001; and (5) is liable for additions to tax for failure to pay estimated tax under
section 6654 for 1999 through 2001.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. -3-
[*3] FINDINGS OF FACT
Some of the facts were deemed stipulated under Rule 91(f) and are so
found.2 The deemed stipulated facts and the exhibits attached thereto are
incorporated herein by this reference. Additionally, some of the facts have been
stipulated and are so found. The first stipulation of facts, the first supplemental
stipulation of facts, the second supplemental stipulation of facts and the exhibits
attached thereto, and the admitted exhibits are incorporated herein by this
reference. Petitioner resided in Wisconsin when he timely filed his petition.
The Underlying Criminal Conspiracy Prosecution
1. Access Financial
In or about 1998 Janet Mavis Marcusse and others organized Access
Financial Group (Access), which they operated and promoted as an investment
business. Petitioner began working for Access in 1999 after he met Marcusse and
the others. Petitioner was included with the others in a Federal conspiracy
investigation. From 1999 until approximately December 2001 petitioner worked
to promote Access and managed a group of investors from northern Wisconsin.
2 By order dated March 29, 2017, after the Court’s hearing on the order to show cause under Rule 91(f), the Court deemed stipulated facts and evidence from the proposed stipulation of facts and made them part of the record. -4-
[*4] From 1999 until April 2001 Access operated out of the basement of the
residence of two of Access’ managers.
Petitioner and his fellow conspirators at Access represented that Access was
a successful investment organization with a history of returning large profits to
clients. They promoted Access’ connections to little-known, high-yield
investment opportunities in world markets that were not available to the general
public. Petitioner and his co-conspirators further represented to investors that
their principal would be kept in guaranteed accounts in a major world bank and
would not be at risk. Access claimed to operate as a tax-free church despite
having had no churchlike organization, no building, no worship services, and no
activities of a religious nature. Petitioner and his co-conspirators told investors
that their returns on their investments would be nontaxable if they purchased a
“church sub-chapter” package from Access. Many of the investors Access
attracted were retirees who transferred their entire retirement accounts to Access
on the representation that Access was eligible to receive the funds in those
accounts as nontaxable rollovers and that the investors’ profits would be tax free.
Investors were required to sign a nondisclosure and confidentiality
agreement before receiving details of the investment. Access sent potential
investors a “prospectus” that described the markets in which Access invested and -5-
[*5] stated that these alleged markets were recognized and regulated by the U.S.
Government, the Federal Reserve, and the International Chamber of Commerce.
Investors were told that they would receive monthly “profit” payments and a
return of as much as 20% on their principal. Access cautioned investors that they
would be “thrown out” of the program if they talked about it to their accountants
or the authorities.
Between 1998 and 2001 Access received approximately $20.7 million from
approximately 577 investors. However, by May 2001 most of this money was no
longer in the business, and Access began to default on its monthly “profit”
payments to investors. Through 2001 and into 2002 Access represented to
investors, orally and in newsletters, that these payment delays were temporary and
that Access was continuing to invest their funds successfully. When some
investors demanded that Access return their principal, they were told they were
being “thrown out” of the program. In December 2001 Access closed its office,
leaving investors with no information and no money.
2. Federal Investigation
In or about late 2001 the Federal Government initiated a criminal
investigation into Access and its participants in the Western District of Michigan.
Petitioner and Marcusse were subpoenaed by the grand jury; but they claimed the -6-
[*6] grand jury had no jurisdiction to subpoena them, and they challenged the
validity of Federal income tax laws. The Federal grand jury determined that, of
the approximately $20.7 million in investors’ funds received by Access,
approximately $8.4 million was used to make monthly payments purported to be
investment profits to existing investors. Marcusse and her co-conspirators
diverted approximately $4.8 million for their personal use, and they further
dissipated approximately $7.3 million in other transfers and payments.
On July 29, 2004, a Federal grand jury sitting in the Western District of
Michigan returned a 40-count indictment charging petitioner and seven
codefendants with mail fraud and conspiracy to commit mail fraud. On October
27, 2004, the grand jury returned an 83-count superseding indictment charging
petitioner and the codefendants with mail fraud, conspiracy to commit mail fraud,
money laundering, conspiracy to commit money laundering, and conspiracy to
defraud the United States. The superseding indictment also included a count
charging petitioner and each codefendant with criminal forfeiture of $10 million.
Three of petitioner’s codefendants pleaded guilty before trial.
On June 14, 2005, following a five-week trial in the U.S. District Court for
the Western District of Michigan, a jury returned a guilty verdict on all counts
against petitioner and his four remaining codefendants. On October 27, 2005, the -7-
[*7] District Court held a sentencing hearing during which the court sentenced
petitioner to 108 months’ imprisonment followed by three years of supervised
release. As a separate component of the sentence, the District Court ordered
petitioner, jointly and severally with his codefendants, to pay restitution of
$11,700,000 to the victims that were defrauded. The District Court’s judgment
was affirmed on appeal. See United States v. Flynn, 265 F. App’x 434 (6th Cir.
2008).
Petitioner’s Investments
1. Billy’s
Before joining Access petitioner, who generally went by the name Billy
Flynn, owned and operated a bar in Wisconsin named Billy’s. Petitioner had two
bank accounts associated with Billy’s: (1) a Bank North account ending in 4072
in the name of William E. Flynn d.b.a. Billy’s (Bank North account) and (2) an
Associated Bank account ending in 8244 in the name of Billy’s LLC (Associated
Bank account). Bank North and Associated Bank both mailed statements for their
respective accounts to petitioner. These accounts were in addition to petitioner’s
F&M Bank account ending in 2696 in the name of William E. Flynn for which -8-
[*8] petitioner and his daughter were the only signatories (F&M Bank account).3
On or about January 1, 1997, a fire destroyed Billy’s bar and it ceased operation.
After Billy’s bar operations ceased, petitioner continued to use both accounts for
personal expenses and other expenses unrelated to Billy’s. On August 30, 1999,
petitioner organized a single member LLC with the State of Wisconsin named
Billy’s LLC. On September 8, 1999, petitioner, as manager, opened a bank
account in the name of Billy’s LLC with Associated Bank which he continued to
use until 2000. Petitioner also continued to use the Bank North account during
1999, 2000, and 2001, but never changed the account information from William E.
Flynn d.b.a. Billy’s.
2. Moonshine Hill Property
On December 1, 1998, petitioner made an offer to purchase a house on
Moonshine Hill Road in Crivitz, Wisconsin (Moonshine Hill property). On
January 27, 1999, petitioner submitted an application for a mortgage loan of
$110,000 to F&M Bank for the purchase of the Moonshine Hill property. On his
application petitioner claimed to be employed by Access with a total base monthly
income of $5,000 and investments of $60,000. He submitted with the application
3 On July 7, 2000, F&M Bank was acquired by Citizens Bank and the F&M Bank account became a Citizen’s Bank account ending in 7824 (Citizen’s Bank account). -9-
[*9] various documents to support his stated income including: (1) a letter dated
January 4, 1999, and signed by Marcusse on behalf of Access stating that
petitioner had $60,000 invested in the company’s self-styled “principal guaranteed
product” that could be liquidated within five business days; (2) an Access payroll
summary printout for the period of January 1 to December 28, 1998, signed by
Marcusse that listed petitioner as an Access employee with gross pay of $78,000
and total Federal withholdings of $19,207.20; and (3) statements from petitioner’s
Bank North account. F&M Bank approved the mortgage loan on January 28,
1999. After closing, petitioner used the Moonshine Hill property as his principal
residence during each of the years in issue.
During 1999 petitioner paid at least $48,267.37 for the purchase and
subsequent loan payments for the Moonshine Hill property. Petitioner made loan
payments of at least $10,800 in 2000, and payments of at least $9,836.35 in 2001
for the Moonshine Hill property.
3. Pevos a.k.a. Cheeks Bar a.k.a Thunder Lake Lodge
On or about October 12, 1999, petitioner contracted to purchase a bar
named Pevos owned by Paul Blochowiak and an adjoining mobile home owned by
petitioner’s sister and Paul Blochowiak. As part of the purchase agreement,
petitioner agreed to pay taxes Blochowiak owed for Pevos to Marinette County in - 10 -
[*10] the State of Wisconsin, the balance due on a loan Blochowiak owed to M&I
bank, and the cost of a flat screen TV Blochowiak purchased. Also as part of
petitioner’s purchase agreement on October 29, 1999, he wrote check No. 4804
drawn on his Bank North account that was made payable to Paul Blochowiak for
$1,000. On October 28, 1999, Access deposited $65,000 into petitioner’s Bank
North account. Petitioner used these funds to pay off the back taxes and the M&I
Bank loan. Petitioner sent the Marinette County treasurer a check for $5,243.89
drawn on his Bank North account dated October 29, 1999, to satisfy the unpaid
taxes related to Pevos. On the same day petitioner issued Bank North check No.
4800, which was drawn on his Bank North account, for $58,053.01 to obtain
personal money order No. 274925 in the same amount. Petitioner then used the
money order to repay the balance of the loan that Blochowiak owed to M&I Bank.
On November 19, 1999, petitioner received a deposit of $3,000 from Access into
his Bank North account. On November 20, 1999, petitioner used this deposit to
write check No. 4878 for $2,466.55 to Blochowiak for the flat screen TV.
On November 3, 1999, petitioner formed Cheeks as a limited liability
company in the State of Wisconsin. On or about February 17, 2000, Paul
Blochowiak transferred a warranty deed for the bar property to Cheeks, LLC.
Petitioner operated the bar formerly known as Pevos under the new name of - 11 -
[*11] Cheeks. Cheeks LLC did not have a bank account and petitioner used his
Bank North account checks reflecting the designations d.b.a. Billy’s to operate the
bar known as Cheeks.
Petitioner eventually contracted to remodel and improve Cheeks. He
engaged Dave Federici to carry out these improvements, including grading a dirt
road. During November and December 1999 petitioner paid Dave Federici with
checks drawn on his Bank North account totaling $12,000 for his remodeling work
on Cheeks. Petitioner eventually changed the name of the bar from Cheeks to
Thunder Lake Lodge.
4. New Billy’s Bar
Petitioner took steps to rebuild a bar named Billy’s (new Billy’s) on a piece
of real estate on Newton Lake Road in Stephenson, Wisconsin (Newton Lake
property). Petitioner purchased the 4.65-acre property for $7,500 in 1997.
Petitioner engaged Jim Watson Excavating to begin preparing the Newton Lake
property for the construction of new Billy’s. On October 26, 1999, petitioner
received a wire transfer from Marcusse via Access for $20,000 that was deposited
into his Associated Bank account. The next day petitioner wrote a check to Jim
Watson Excavating for $20,000 drawn on his Associated Bank account. On - 12 -
[*12] March 4, 2000, petitioner wrote a check to Jim Watson for $3,000 drawn on
his Bank North account.
On May 4, 2000, petitioner signed an initial construction agreement with
Corrigan’s Custom Built Structures (Corrigan’s) for the construction of a
bar-nightclub facility on the Newton Lake property. The “estimated turnkey
project cost” stated in the contract was $500,000 with a $50,000 downpayment
due before the commencement of construction. Corrigan’s would not commence
construction until petitioner secured funding. On May 18, 2000, petitioner applied
for a construction loan of $125,000 with F&M Bank. As part of the construction
loan application paperwork, petitioner provided F&M Bank with an unsigned
Form 1040, U.S. Individual Income Tax Return, for the 1999 year reporting
adjusted gross income of $149,909. He also included a 1999 Form W-2, Wage
and Tax Statement, generated by Access that showed wages of $144,000 with
Federal income tax withheld of $35,726.40,4 and a 1999 Schedule E, Supplemental
Income and Loss, showing petitioner earned income of $5,742 from Cheeks LLC.
On May 30, 2000, F&M Bank approved petitioner’s construction loan request.
4 The certified account transcript for petitioner’s tax year 1999 does not reflect that this Form W-2 had been issued or that the referenced Federal income tax withholding had been deposited. - 13 -
[*13] On June 15, 2000, petitioner signed a contractor and client agreement with
Corrigan’s that stated the actual cost of the proposed contract to be $217,413. On
or about August 4, 2000, petitioner requested a change order that increased the
total construction cost to $240,429.
5. Airplanes
a. 1969 Cessna 337D Skymaster
In or about September 1999 petitioner entered into an agreement to
purchase a 1969 Cessna 337D Skymaster airplane (Cessna 337D Skymaster) from
Skymaster, Inc. On September 25, 1999, he wrote check No. 2554 payable to
Skymaster, Inc., for $500 drawn on his F&M Bank account. On December 14,
1999 petitioner applied to F&M Bank for a home mortgage loan of $45,000 to pay
for the Cessna 337D Skymaster (Cessna 337D loan). The Moonshine Hill
property was the collateral for the Cessna 337D loan. On or about December 18,
1999, following F&M Bank’s approval of the loan, petitioner paid Skymaster,
Inc., $10,500 as a downpayment, leaving a balance due of $30,000. Petitioner was
solely responsible for the monthly Cessna 337D loan payments to F&M Bank of
$575 beginning on January 20, 2000. During 2000 petitioner made the required
monthly payments to F&M Bank out of his F&M Bank account for a total of
$6,900. In that same year he also wrote three $1,000 checks drawn on his Bank - 14 -
[*14] North account to Wisconsin Aviation for flight training. During 2001
petitioner made monthly payments to F&M Bank totaling $3,450 out of his F&M
Bank account.
On April 27, 2000, petitioner damaged the Cessna 337D Skymaster when a
mechanical problem prompted him to make an emergency landing. After the
accident petitioner attempted to sell the Cessna 337D Skymaster. On or about
April 26, 2001, petitioner traded in the Cessna 337D Skymaster for a $33,250
credit towards his purchase of a replacement airplane, a 2001 American Champion
Super Decathlon 8kCAB (American Champion 8kCAB). Eventually the balance
of the Cessna 337D loan was foreclosed for failure to pay.
b. 1978 Cessna T310R
On September 3, 1999, petitioner organized Flynn’s Properties, L.L.C.
(Flynn’s Properties). In or about May 2000 petitioner (through Flynn’s Properties)
entered into an agreement to purchase a 1978 Cessna T310R (Cessna T310R) for
$190,000 with a downpayment of $19,000. As part of petitioner’s purchase of his
Cessna T310R, on April 27, 2000, petitioner wrote check No. 2571 as a
downpayment to Darrel Massman for $5,000 from his F&M Bank account. On
May 4, 2000, petitioner applied for a loan of $171,350 from Textron Financial
Corp. (Textron) and listed Flynn’s Properties as the plane’s owner (Cessna T310R - 15 -
[*15] loan). Petitioner had formed Flynn’s Properties with the State of Wisconsin
on September 3, 1999. While petitioner named both himself and his son Patrick
Flynn as managers, petitioner was the sole owner of Flynn’s Properties.
Petitioner provided Textron an aircraft financing application, a personal
financial statement, a corporation form as petitioner was purchasing the airplane in
the name of Flynn’s Properties L.L.C., a handwritten letter stating that he planned
to use the airplane to deal with his clients, and Forms 1040 for 1998 and 1999 as
part of the financing application for petitioner’s Cessna T310R loan. In his
application petitioner stated that he was employed by Access and received a
monthly salary of $12,000 and that he was the sole owner of Cheeks LLC.
Petitioner represented that he had $30,000 in cash among his assets. The Form
1040 for 1998 stated that petitioner had received Form W-2 income of $90,000
from Access. The Form 1040 for 1999 stated that petitioner had received Form
W-2 income of $144,000 from Access and Schedule E, income of $5,742 from
Cheeks LLC.
Textron approved petitioner’s Cessna T310R loan application on or about
June 2, 2000. Petitioner was solely responsible for making the monthly payments
of $2,336.16 for the Cessna T310R loan. During 2000 petitioner made payments
from multiple accounts totaling $11,680.80 to Textron. On August 24, 2000, he - 16 -
[*16] also wrote check No. 2906 drawn on his F&M bank account to Daniel
Massman to pay the remaining downpayment of $14,000. During 2000 Sanctuary
Ministries (a purported church related to Access) made $2,336 in payments to
Textron towards petitioner’s Cessna T310R loan.
During 2001 petitioner made payments to Textron for the Cessna T310R
loan totaling $18,689.28 from various accounts. These payments included at least
$2,336 that Sanctuary Ministries American Heritage Church made to Textron on
petitioner’s Cessna 310R loan. Petitioner eventually fell behind on the monthly
payments, and Textron ultimately repossessed the Cessna T310R.
c. American Champion 8kCAB
Petitioner purchased the American Champion 8kCAB from the American
Champion Aircraft Corp. for $133,250. On or around April 30, 2001, petitioner
applied for a loan with Textron for $100,475 for the purchase of his American
Champion 8kCAB (American Champion 8kCAB loan) and listed Flynn’s
Properties as the plane’s owner. As part of the financing application for
petitioner’s American Champion 8kCAB loan, Textron was provided with a
personal financial statement showing petitioner as owning his home, the Newton
Lake Road property, and Cheeks bar; a Form W-2 from Access for 2000 showing - 17 -
[*17] petitioner as receiving wage income of $327,578.16;5 and printouts showing
Flynn’s Properties as being in good standing with petitioner as the registered
agent.
Textron approved the American Champion 8kCAB loan on May 3, 2001.
Petitioner was solely responsible for making the monthly payments of $1,036.49
for the American Champion 8kCAB loan. In 2001 petitioner made only four
payments to Textron from various accounts totaling $4,249.60, none of which
were paid on time. Petitioner ceased making payments on the American
Champion 8kCAB loan after November 2001, and Textron repossessed the
American Champion 8kCAB.
Deposits Into Petitioner’s Bank Accounts
In addition to endorsing and depositing thousands of dollars in checks into
his various bank accounts petitioner received numerous wire transfers depositing
approximately $431,500 into these accounts during all the years in issue. During
1999, 2000, and 2001 petitioner deposited or received at least $383,850, $139,500,
and $63,500, respectively, into his Bank North account. During 1999 petitioner
deposited or received at least $20,000 into the Associated Bank account of Billy’s
5 The certified account transcript for petitioner’s tax year 2000 does not reflect that this Form W-2 had been issued or the referenced Federal income tax withholding had been deposited. - 18 -
[*18] LLC. During 1999, 2000, and 2001 petitioner deposited or received at least
$2,000, $56,500, and $40,000, respectively, into his F&M Bank account/Citizen’s
Wire Transfers
On February 23, 1999, petitioner withdrew $19,000 from his Bank North
account. On February 23, 1999, petitioner took $18,740 in cash to Angeli’s
County Market in Marinette County, Wisconsin (Angeli’s Market), where he
initiated two wire transfers of $9,000 each to Mary Oko and Ahmed Kabira in
Nigeria on behalf of himself and an Access-related church entity named
“Sanctuary Ministries”. When he made the wire transfers, petitioner indicated to
Angeli’s Market employees that he worked for Sanctuary Ministries.
On February 26, 1999, petitioner withdrew $86,000 from his Bank North
account. On the same day petitioner took cash to Angeli’s Market, where he
initiated multiple wire transfers totaling $85,000 to multiple people in Nigeria on
behalf of himself and Sanctuary Ministries. During this second visit petitioner
again indicated that he worked for Sanctuary Ministries. He further stated that he
was sending the money to Nigeria for missionaries. - 19 -
[*19] On March 18, 1999, petitioner withdrew $46,000 from his Bank North
account that he used to obtain three cashier’s checks for $9,000 and two cashier’s
checks for $9,500. Petitioner used the cashier’s checks to initiate wire transfers in
the same amounts to several individuals on behalf of himself and Sanctuary
Ministries.
On March 29, 1999, petitioner withdrew $11,500 from his Bank North
account that he used to initiate two wire transfers on behalf of himself and
Sanctuary Ministries.
On March 16, 2001, petitioner took $20,000 to Angeli’s Market. The
$20,000 was not withdrawn from any of petitioner’s bank accounts. On the same
date petitioner initiated 10 separate wire transfers totaling $19,220 to Marcusse on
behalf of himself and another Access-related church entity named Discovery
Church. Petitioner told an Angeli’s Market employee that he was had finished his
theology degree and was now the church pastor at Discovery Church. He further
stated that he was sending the money to Las Vegas to purchase land for his church.
Gambling Income
During each of the years in issue petitioner engaged in recreational
gambling at various casinos. In 1999 petitioner played the slot machines in a
casino owned by the Oneida Tribe of Indians of Wisconsin (Oneida casino). On - 20 -
[*20] April 12, 2000, the Oneida casino filed with the Internal Revenue Service
(IRS) Form W-2G, Certain Gambling Winnings, reporting that it paid $1,800 in
gambling winnings to petitioner in 1999. In 2000 petitioner played bingo at the
Hannahville Chip-In Casino in Michigan (Chip-In Casino). On March 21, 2001,
the Chip-In Casino filed with the IRS Form W-2G reporting that it paid $3,745 in
gambling winnings to petitioner in 2000. On or about March 26, 2001, 10 days
after wire transferring money to Las Vegas, petitioner won a Keno jackpot while
gambling at the Gordon Gaming Corp. d.b.a. Sahara Hotel and Casino in Las
Vegas, Nevada (Sahara Casino). The Sahara Casino filed with the IRS Form
8852, Currency Transaction Report by Casinos--Nevada, that stated it made a cash
payment of $20,000 to petitioner on that date. On March 21, 2002, the Sahara
Casino filed with the IRS Form W-2G reporting the $20,000 as gambling
winnings paid to petitioner in 2001.6
Tax Reporting for 1999 Through 2001
Petitioner claims that on February 14, 2003, he filed Forms 1040 for 1999,
2000, and 2001, each return being due before February 14, 2003. During his
criminal trial petitioner introduced into evidence signed copies of these Forms
6 Petitioner does not dispute receiving gambling income of $1,800 in 1999, $3,745 in 2000, and $20,000 in 2001. - 21 -
[*21] 1040 for the subject years.7 While the “copy” for 2001 reports gambling
income of $20,000, the “copies” for 1999 and 2000 did not report gambling
income petitioner received in those years. Nor did any of the “copies” report any
funds or Form W-2 income received from Access or income or losses from Cheeks
LLC. Petitioner’s Internal Revenue Service (IRS) account transcripts do not
record Forms 1040 as filed for any of the years in issue. Petitioner did not file a
Federal income tax return for any of the tax years at issue.
Respondent’s Determinations
In 2013 respondent prepared section 6020(b) substitutes for returns (SFR)
for petitioner for 1999 through 2001. To prepare the SFR for each year in issue
respondent relied on specific checks and wire transfers deposited into the
aforementioned accounts, specific checks and wire transfers made to third parties
on petitioner’s behalf, and the above-mentioned Forms W2-G. The SFRs state
that petitioner received unreported gambling income of $1,800, $3,745, and
$20,000 for 1999, 2000, and 2001, respectively. The SFRs also state that
7 The parties were unable to obtain copies of the purported Forms 1040 admitted into evidence during petitioner’s 2003 criminal trial, and the District Court did not retain the exhibits. The amounts reported for the years in issue are drawn from the criminal trial transcript. - 22 -
[*22] petitioner received unreported other income of $413,850, $200,941, and
$113,836 for 1999, 2000, and 2001, respectively.
On December 16, 2013, an employee of respondent with authority to sign a
return prepared in accordance with section 6020(b) subscribed a Form 13496, IRC
Section 6020(b) Certification, for each of the tax years in issue. Each Form 13496
referenced additional attached forms which make up the SFR including: Form
4549, Income Tax Examination Changes; Form 4549-A, Income Tax Discrepancy
Adjustments; Form 5278, Statement--Income Tax Changes; Form 4667,
Examination Changes--Federal Unemployment Tax; Form 4688, Employment Tax
Examination Changes Report; and Form 886-A, Explanation of Items. Petitioner
failed to pay any of the tax shown on each SFR. On April 3, 2014, respondent
issued a notice of deficiency to petitioner for 1999, 2000, and 2001.
OPINION
I. Unreported Income
A. Burden of Proof
In general, taxpayers bear the burden of proving that the Commissioner’s
determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). In an unreported income case, if the Commissioner introduces evidence
that the taxpayer received unreported income, the taxpayer must show by a - 23 -
[*23] preponderance of the evidence that the deficiency determination was
arbitrary and erroneous. Hardy v. Commissioner, 181 F.3d 1002, 1004 (9th Cir.
1999), aff’g T.C. Memo. 1997-97; see also Pittman v. Commissioner, 100 F.3d
1308, 1313 (7th Cir. 1996), aff’g T.C. Memo. 1995-243.
In order to shift the burden of proof as to a factual issue under section
7491(a), taxpayers must, among other things, introduce credible evidence as to the
factual issue and maintain required records. Sec. 7491(a)(1) and (2). Petitioner
has failed to do so.
B. Gross Income
Gross income generally includes all income from whatever source derived.
Sec. 61(a). Taxpayers must keep adequate books and records from which their
correct tax liability can be determined. Sec. 6001. When a taxpayer fails to keep
records, the Commissioner has discretion to reconstruct the taxpayer’s income by
any reasonable method that in the Commissioner’s opinion clearly reflects income.
Sec. 446(b); Cole v. Commissioner, 637 F.3d 767, 774-775 (7th Cir. 2011), aff’g
T.C. Memo. 2010-31; Webb v. Commissioner, 394 F.2d 366, 371-372 (5th Cir.
1968), aff’g T.C. Memo. 1966-81; Factor v. Commissioner, 281 F.2d 100, 117
(9th Cir. 1960), aff’g T.C. Memo. 1958-94. The specific items method is a direct
proof of income reconstruction this Court has approved. See Dyer v. - 24 -
[*24] Commissioner, T.C. Memo. 2012-224, at *17. Once the Commissioner
produces clear evidence of unreported gross income, the taxpayer bears the burden
of proving that the Commissioner’s method of income reconstruction is unfair or
inaccurate under the specific deposits method. See id. at *18; Levine v.
Commissioner, T.C. Memo. 1998-383, 76 T.C.M. (CCH) 731, 735 (1998), aff’d
without published opinion, 229 F.3d 1158 (9th Cir. 2000). To carry his burden,
the taxpayer must offer “competent and relevant evidence from which it could be
found that he did not receive the income alleged in the deficiency notice.” Dyer v.
Commissioner, at *18 (quoting Sharwell v. Commissioner, 419 F.2d 1057, 1060
(6th Cir. 1969), vacating and remanding T.C. Memo. 1968-89).
In this case respondent used the specific items method to reconstruct the
amounts of payments petitioner received from Marcusse, Access, and various
other sources. The record contains extensive banking records, canceled checks,
and loan application records showing that petitioner received payments that he did
not recognize as income for the tax years in issue. The record also includes Form
4789, Currency Transaction Report, and Western Union money transfer records
documenting petitioner’s numerous domestic and international wire transactions
with various individuals. - 25 -
[*25] In full, the record shows sufficiently that petitioner received numerous
payments from Access and others that he used for his personal and unrelated
business expenses. Respondent also introduced Form 4789 as well as Western
Union money transfer records documenting numerous wire transfers initiated by
petitioner to Marcusse and various individuals. Each of these wire transfers was
in an amount below the then reporting threshold of $10,000. Respondent has
provided clear and convincing evidence that petitioner had unreported income for
each of the years in issue. Respondent has provided evidence that petitioner not
only received deposits of income into bank accounts that he controlled and
additional payments made on his behalf, but also used that income for his own
benefit.
Petitioner has provided no credible evidence demonstrating error in
respondent’s analysis, and he does not dispute the amount of funds received for
any of the years in issue. Instead he argues that these funds deposited into his
bank accounts and the funds he used to initiate wire transfers were investments
made by Sanctuary Ministries and Discovery Church. Petitioner argues that the
entities involved, including Cheeks LLC, Billy’s LLC, and Flynn’s Properties
were formed by Access to hold title to investments made for the benefit of
Sanctuary Ministries. - 26 -
[*26] Petitioner provides no records supporting his claim that the businesses and
assets were investments he made for Access on Sanctuary Ministries’ behalf or
that either entity was in any way involved. Nor was Sanctuary Ministries or
Access referenced in any of the entity formation documents, sales agreements, or
loan contracts. The record also amply demonstrates that petitioner, in his own
name, applied for and received the numerous loans.
Similarly petitioner provides no records documenting the purpose of the
numerous wire transfers he initiated to Marcusse and several individuals in
Nigeria. The wire transfer records and Forms 4789 indicate that the transfers were
made on behalf of petitioner and either Sanctuary Ministries or Discovery Church.
They further state that petitioner is a “church employee”. This information is
based entirely on the information petitioner provided the company handling the
wire transaction. Petitioner offers nothing further other than his own self-serving
testimony, which the Court finds to be incredible. The fact that petitioner
withdrew most of the funds from his bank accounts to initiate the wire transfers to
seemingly random individuals is suspect in that, in part, each of the wire transfers
was structured to be an amount below the $10,000 threshold for currency
transaction reporting. See 31 U.S.C. sec. 5313 (1994); 31 C.F.R. sec. 103.22
(1998). - 27 -
[*27] On the basis of the record the Court concludes that petitioner has failed to
meet his burden to prove that respondent’s method of income reconstruction is
unfair or inaccurate under the specific deposits method for any of the relevant
amounts deposited into petitioner’s bank accounts. The Court concludes that the
income deposited into petitioner’s previously described bank accounts is taxable
income to the extent described herein.8
II. Section 6651(f) Addition to Tax
Respondent determined petitioner was liable for the section 6651(f)
fraudulent failure to file addition to tax for 1999, 2000, and 2001. Section
6651(a)(1) imposes an addition to tax for failure to timely file a Federal income
tax return. This addition to tax equals 5% of the tax required to be shown on the
return for each month or fraction thereof for which there is a failure to file a
return, up to 25% in the aggregate. Section 6651(f) increases those respective
percentages to 15% and 75% where the failure to timely file is fraudulent. In
order to ascertain whether a taxpayer’s failure to timely file was fraudulent under
section 6651(f), the Court considers whether the taxpayer failed because of
fraudulent intent to timely file a return for the taxable year where there was a tax
8 Certain transactions that respondent determined were items of income were never established to have occurred. The total amount of the unreported income will be determined in a Rule 155 calculation. - 28 -
[*28] liability required to be shown on a return. See sec. 6651(a), (b)(1), (f);
Clayton v. Commissioner, 102 T.C. 632, 653 (1994); Porter v. Commissioner, T.C.
Memo. 2015-122, at *44. The Commissioner has the burden of proving these
elements by clear and convincing evidence for each year for which fraud is
alleged. Sec. 7454(a); Rule 142(b); Clayton v. Commissioner, 102 T.C. at 646;
Porter v. Commissioner, at *44.
A. Whether Petitioner Filed Valid Returns
Respondent first must prove that petitioner failed to timely file a required
Federal tax return. See sec. 6651(a)(1). Respondent may establish that
petitioner’s income was sufficient to require filing a Federal tax return through
income figures petitioner supplied on a loan application. See Trescott v.
Commissioner, T.C. Memo. 2012-321, at *8 (citing Driggers v. Commissioner,
T.C. Memo. 1997-354). Petitioner submitted purported Forms W-2 with loan
applications to various banks, reporting that he earned enough income from
Access to require him to make a return for each of the years at issue.9 See secs.
6011(a), 6012(a)(1)(A). Respondent introduced certified transcripts showing that
there is no record that petitioner ever filed Federal income tax returns for 1999,
9 Petitioner’s loan applications reflected Form W-2 wages of $90,000 for 1998, $144,000 for 1999, and $327,578 for 2000. - 29 -
[*29] 2000, and 2001, nor did they reflect that any Federal income tax withholding
was deposited on his behalf.10 Although petitioner submitted documents into
evidence during his 2003 criminal trial that purported to be returns for the years in
issue, he failed to provide proof that he actually filed any of those documents as a
return for any of the years in issue. Respondent has met his burden to establish
that petitioner failed to file timely Federal income tax returns.
B. Whether Petitioner’s Failure To File Was Fraudulent
In determining whether a taxpayer had the requisite fraudulent intent for
imposition of the section 6651(f) addition to tax, the Court considers the same
elements that it considers in imposing the fraud penalty under section 6663 and
former section 6653(b)(1). Clayton v. Commissioner, 102 T.C. at 653; see
Granado v. Commissioner, 792 F.2d 91, 93-94 (7th Cir. 1986), aff’g T.C. Memo.
1985-237. Fraud is established by proving that a taxpayer intended to evade tax
believed to be owing by conduct intended to conceal, mislead, or otherwise
prevent the collection of tax. Clayton v. Commissioner, 102 T.C. at 647; see
Pittman v. Commissioner, 100 F.3d at 1319. The existence of fraudulent intent is
determined by looking at the entire record and the taxpayer’s conduct. See DiLeo
10 The SFRs for the years in issue are not returns for sec. 6651(a)(1) or (f) purposes. See Porter v. Commissioner, T.C. Memo. 2015-122, at *45. - 30 -
[*30] v. Commissioner, 96 T.C. 858, 874 (1991), aff’d, 959 F.2d 16 (2d Cir.
1992). Fraud is never presumed and must be proven by independent evidence.
Zell v. Commissioner, 763 F.2d 1139, 1143 (10th Cir. 1985), aff’g T.C. Memo.
1984-152; Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Fraud need not be
established by direct evidence, which is rarely available, but may be proved by
circumstantial evidence and reasonable inferences drawn from the facts.
Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992); see Pittman v.
Commissioner, 100 F.3d at 1319.
In determining whether there was fraudulent intent, the Court will look at a
nonexclusive list of factors. See Pittman v. Commissioner, 100 F.3d at 1319
(quoting Spies v. United States, 317 U.S. 492, 499 (1943)); Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601;
Niedringhaus v. Commissioner, 99 T.C. at 211; Recklitis v. Commissioner, 91
T.C. 874, 910 (1988). These factors include: (1) failing to file income tax returns;
(2) filing false documents, including false income tax returns; (3) understating
income; (4) concealing income or assets; (5) engaging in illegal activity; (6)
failing to cooperate with tax authorities; and (7) asserting frivolous arguments and
objections to the tax laws. Bradford v. Commissioner, 796 F.2d at 307;
Niedringhaus v. Commissioner, 99 T.C. at 211. While no single factor is - 31 -
[*31] determinative for establishing fraud, the existence of several “badges of
fraud” may constitute compelling circumstantial evidence of fraud. Bradford v.
Commissioner, 796 F.2d at 307-308; Niedringhaus v. Commissioner, 99 T.C.
at 211.
1. Failing To File Income Tax Returns
While the mere failure to file a return, standing alone, is not sufficient to
support a finding of fraud, Niedringhaus v. Commissioner, 99 T.C. at 211, an
extended pattern of failing to file returns is a badge of fraud and may be
persuasive circumstantial evidence of the intent to evade tax, see Bradford v.
Commissioner, 796 F.2d at 308; Petzoldt v. Commissioner, 92 T.C. 661, 701
(1989). Petitioner failed to file Federal income tax returns for 1999, 2000, and
2001. This factor weighs against petitioner for each of the years in issue.
2. Filing False Documents
Filing false documents with the IRS constitutes an “affirmative act” of
misrepresentation sufficient to justify the fraud penalty. Zell v. Commissioner,
763 F.2d at 1146. Petitioner never filed Federal income tax returns for the years in
issue, and there is no evidence he filed with the IRS false documents that he used
to obtain various loans. But filing false documents with a third party supports an
inference of fraud. See Isaacson v. Commissioner, T.C. Memo. 2020-17, at *54. - 32 -
[*32] In light of petitioner’s repeated use of false employment and Federal tax
documents with multiple financial institutions, this factor indicates fraudulent
intent.
3. Understating Income
A pattern of substantially underreporting income for several years is strong
evidence of fraud, particularly if the understatements are not due to innocent
mistake or are not otherwise satisfactorily explained. See Holland v. United
States, 348 U.S. 121, 137-139 (1954); Spies, 317 U.S. at 499; Pittman v.
Commissioner, 100 F.3d at 1319-1320; Marcus v. Commissioner, 70 T.C. 562,
577 (1978), aff’d without published opinion, 621 F.2d 439 (5th Cir. 1980).
Petitioner at his criminal trial provided his purported Forms 1040 for 1999 through
2001, which admitted that he failed to report significant amounts of income
received from Access and Marcusse as income for 1999, 2000, and 2001. He did
include that income on loan applications, and that inconsistency weighs against
petitioner. He also failed to report gambling income for 1999, 2000, and 2001.
This factor weighs against petitioner for 1999, 2000, and 2001.
4. Concealing Income and Assets
An intent to evade tax may be inferred from “concealment of assets or
covering up sources of income”. Spies, 317 U.S. at 499. Concealing assets - 33 -
[*33] coupled with a failure to file tax returns is a strong indication of fraud.
Freidus v. Commissioner, T.C. Memo. 1999-195, 1999 WL 391919, at *10. A
taxpayer’s use of nominee corporations is evidence of asset concealment. See
Bennett v. Commissioner, T.C. Memo. 2014-256, at *12, aff’d, 690 F. App’x 934
(9th Cir. 2017).
Petitioner claims that he formed and used the various entities and accounts
to house assets purchased as investments on behalf of Access. The entities and
accounts petitioner used neither reference Access nor were managed as assets
purportedly held for the benefit of the victims of the Access scheme. Furthermore,
nothing in the record supports petitioner’s contention that he used any of the
entities or accounts on behalf of, or in partnership with, Access or any
Access-related entities. The bank accounts he opened, the loans he received, and
the assets he purchased were used, at least to a significant extent, to conceal the
amounts he received from his participation in the Access scheme. This factor
weighs against petitioner for each of the years in issue.
5. Engaging in Illegal Activity
Engaging in an illegal activity is a badge of fraud. See Niedringhaus v.
Commissioner, 99 T.C. at 211. In each of the years in issue petitioner participated
in an illegal pyramid scheme for which he was prosecuted and convicted. - 34 -
[*34] Petitioner played an active role in convincing victims to invest their savings,
including retirement savings, in the Access scheme. Victims’ funds were never
invested on their behalf, and amounts Access paid as purported investment
proceeds to its earlier victims were paid, at least in part, with funds received from
subsequent victims. Instead of investing the victims’ funds petitioner, Marcusse,
and the other Access co-conspirators spent a good portion of the money for their
own benefit. Petitioner used the funds he received from Marcusse and the Access
scheme to purchase his personal residence, two bars, and three airplanes as well as
to pay for construction of new Billy’s and to generally support his lifestyle. In
addition, the razzle-dazzle of Billy Flynn’s loan applications enticed the lenders to
approve multiple loans to him and his various entities in amounts exceeding
$550,000, and the payments on the loans were made from his previously described
bank accounts. This factor weighs against petitioner for each of the years in issue.
6. Failing To Cooperate With Tax Authorities
Failure to cooperate with revenue agents during an audit is a badge of fraud.
Grosshandler v. Commissioner, 75 T.C. 1, 19-20 (1980); see Zell v.
Commissioner, 763 F.2d at 1146; Toushin v. Commissioner, 223 F.3d 642, 647
(7th Cir. 2000), aff’g T.C. Memo. 1999-171. Petitioner gave inconsistent and
misleading testimony during his Federal criminal trial. And his testimony during - 35 -
[*35] trial in this case was implausible and unreliable. He also submitted
additional false Federal income tax returns for years 1999 through 2001 into
evidence during the criminal trial. This factor weighs against petitioner.
7. Asserting Frivolous Arguments
Frivolous, irrelevant, and meritless arguments, coupled with affirmative acts
designed to evade Federal income tax, support a finding of fraud. See Kotmair v.
Commissioner, 86 T.C. 1253, 1259-1261 (1986); Porter v. Commissioner, at *58;
see also Toushin v. Commissioner, 223 F.3d at 647. Petitioner asserted frivolous
arguments to criminal investigators in the Western District of Michigan, and he
has consistently maintained those arguments in this proceeding. This factor
weighs against petitioner.
C. Conclusion
Taking the entire record into account, the Court concludes that petitioner’s
failure to file tax returns for 1999, 2000, and 2001 was fraudulent. Although
petitioner submitted a purported Form 1040 for each of the years in issue as
evidence in his 2003 criminal trial, he provided no evidence that any of those
documents was a valid timely return. Petitioner’s failure to file a valid return for
each year was deliberate and intended to conceal the fact that he had income
subject to tax. Respondent has proven fraudulent intent by showing that petitioner - 36 -
[*36] committed affirmative acts of concealment or misrepresentation with respect
to each year. See Zell v. Commissioner, 763 F.2d at 1146. Petitioner is therefore
liable for the addition to tax under section 6651(f) for 1999, 2000, and 2001.11
In view of our determination that petitioner is liable under section 6651(f),
the Court need not address respondent’s alternative position that petitioner is
liable under subsection (a)(1).
III. Section 6651(a)(2) Addition to Tax
Respondent determined that petitioner is liable for additions to tax under
section 6651(a)(2) for failure to timely pay his 1999, 2000, and 2001 Federal tax
liabilities. Section 6651(a)(2) imposes an addition to tax on taxpayers for their
failure to pay timely the amount of tax shown on a return. This addition to tax
applies only when an amount of tax is shown on a return, unless it is shown that
the failure is due to reasonable cause and not due to willful neglect. See Wheeler
v. Commissioner, 127 T.C. 200, 208-209 (2006), aff’d, 521 F.3d 1289 (10th Cir.
2008); Repetto v. Commissioner, T.C. Memo. 2012-168, slip op. at 38. Where the
taxpayer did not file a valid return, as is the case here, the Commissioner must
11 The sec. 6651(f) addition to tax is not subject to the supervisory approval requirements under sec. 6751(b). See sec. 6751(b)(2)(A); see also Hendrickson v. Commissioner, T.C. Memo. 2019-10, at *26, aff’d per order, 2020 WL 2563412 (6th Cir. Apr. 2, 2020). - 37 -
[*37] introduce evidence that a substitute for return under section 6020(b) was
prepared to satisfy the burden of production. See sec. 6651(g)(2). To satisfy his
burden of production, respondent must produce sufficient evidence that petitioner
filed returns showing tax liabilities for the years at issue. See Wheeler v.
Commissioner, 127 T.C. at 210. A return prepared by the Commissioner in
accordance with section 6020(b) is treated as the return filed by the taxpayer for
the purpose of determining the amount of the addition under section 6651(a)(2).
Sec. 6651(g)(2); Wheeler v. Commissioner, 127 T.C. at 208-209.
Respondent has the burden of proving that substitutes for returns satisfying
the requirements of section 6020(b) were submitted. See Cabirac v.
Commissioner, 120 T.C. 163, 170-171 (2003), aff’d per curiam without published
opinion, 2004 WL 7318960 (3d Cir. Feb. 10, 2004); see also Wheeler v.
Commissioner, 127 T.C. at 210. To constitute a section 6020(b) substitute for
return, “the return must be subscribed, it must contain sufficient information from
which to compute the taxpayer’s tax liability, and the return form and any
attachments must purport to be a ‘return’.” Rader v. Commissioner, 143 T.C. 376,
382 (2014) (quoting Spurlock v. Commissioner, T.C. Memo. 2003-124, slip op. at
27), aff’d in part, dismissed in part, 616 F. App’x 391 (10th Cir. 2015). The Court
has held that the requirements of section 6020(b) have been met where the - 38 -
[*38] substitutes for returns consist of Forms 4549-A, Forms 886-A, and Forms
13496. Id.
The substitutes for returns at hand included Forms 4549-A, Forms 886-A,
and Forms 13496. Further, the substitutes for returns purport to be “section
6020(b) returns”, contain the information necessary to calculate petitioner’s
liabilities, and are subscribed. The substitutes for returns constitute valid section
6020(b) returns for 1999 through 2001. Accordingly, respondent has satisfied his
burden.
Once the Commissioner meets his burden, the burden of proof is with the
taxpayer to show that the additions to tax that the Commissioner determined in the
notice of deficiency should not be imposed. See Higbee v. Commissioner, 116
T.C. 438, 446-447 (2001). Petitioner’s burden requires that he prove that his
failure to timely pay his Federal income tax was due to reasonable cause and was
not due to willful neglect. See sec. 6651(a)(2). Petitioner did not pay any of his
tax liabilities for 1999 through 2001, and he has failed to present any evidence that
would establish that his failure to pay was due to reasonable cause and not due to
willful neglect. The additions to tax under section 6651(a)(2) for those years are
sustained. - 39 -
[*39] IV. Section 6654 Addition to Tax
Respondent determined that petitioner is liable for an addition to tax under
section 6654(a) for failure to pay estimated income tax for 1999, 2000, and 2001.
Section 6654(a), (b), and (c) imposes an addition to tax on an individual taxpayer
to the extent he underpays a required installment of estimated tax. The addition to
tax is calculated with reference to four installment payments each equal to 25% of
the required annual payment. Sec. 6654(c)(1), (d)(1)(A). The “required annual
payment” is generally the lesser of (1) 90% of the tax shown on the return for the
taxable year (or, if no return is filed, 90% of the tax for such year), or (2) 100% of
the tax shown on the taxpayer’s return for the preceding taxable year. Sec.
6654(d)(1)(B) and (C). Option (2) does not apply where a taxpayer has not filed a
return for the preceding taxable year. Id. subpara. (B) (flush language).
The Commissioner has the burden of production with respect to the section
6654 addition to tax. Sec. 7491(c). To satisfy that burden, the Commissioner, at a
minimum, must produce evidence establishing that the taxpayer had a “required
annual payment” as defined in section 6654(d)(1)(B). Wheeler v. Commissioner,
127 T.C. at 211-212. This burden requires the Commissioner to produce evidence
that allows the Court to determine the amount of the required annual payment.
See sec. 6654(d)(1)(B); Wheeler v. Commissioner, 127 T.C. at 212. To determine - 40 -
[*40] the amount of petitioner’s required annual payment for those years, the
Court must know whether petitioner filed a return for the preceding taxable year
and, if so, the amount of “tax shown” on that return. See sec. 6654(d)(1)(B)(ii).
Thus, respondent must introduce evidence showing whether petitioner filed a
return for each preceding year and, if he did, the amount of “tax shown” on that
return. See id.; see also Wheeler v. Commissioner, 127 TC at 212.
Respondent introduced evidence that petitioner last filed a Federal income
tax return in 1995 and that he did not file a Federal income tax return for 1998,
1999, 2000, or 2001. Petitioner had no withholdings and did not make any
estimated tax payments for years 1999, 2000, and 2001. Therefore, given that
petitioner had an unpaid Federal tax liability for each of those years, respondent
met his burden under section 7491(c) to show that for 1999, 2000, and 2001
petitioner had a required annual payment under section 6654(d)(1)(B) but did not
make any estimated tax payments.
Petitioner failed to introduce any evidence to show that he did not have
required annual payments for the tax years at issue. Petitioner also presented no
evidence that he qualified for any exception to the requirements for estimated tax
payments under section 6654(e). Petitioner is therefore liable for the section
6654(a) additions to tax. - 41 -
[*41] The Court has considered all of the parties’ arguments, and, to the extent not
addressed above, the Court concludes that they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.