On September 28, 2021, the Tax Court issued a Memorandum Opinion in the case of Clark v. Commissioner (T.C. Memo. 2021-114). The primary issue presented in Clark was whether the petitioner fraudulently underreported his income.
Held: Oh, dear God. The fraud!
The Tax Court’s Summary of the Issue in Clark v. Commissioner
And I quote:
In 2011 through 2014, the years at issue, Robert S. Clark owned an auto body shop, rental properties, a large home, and numerous trucks, automobiles, and utility vehicles. His ability to acquire these assets is a remarkable feat given that, according to his tax returns, he had taxable income of $114, $0, $0, and $0, respectively, during those years.
Or he fraudulently underreported his income.
This doesn’t appear like it will turn out well for the petitioner, but just for giggles, let’s read on, dear readers.
The Meat of the Issue (i.e., We Save You from Reading 30 Pages)
Judge Buch spends 15 pages of the opinion dedicated to listing out all of the petitioner’s assets, dealings, and general accretions to wealth—which were many.
Judge Buch, then spends the next ten pages of the opinion describing the IRS’s exams and the five information document requests (IDRs) to which the petitioner and his wife either refused to respond or generally just fabricated their responses. Then Judge Buch discusses the multiple summonses…which were quite a bit more fruitful for the IRS.
The Civil Fraud Penalty
Finally, at page 30 of the opinion, we reach the assertion of the Civil Fraud Penalty under IRC § 6663. To no one’s surprise, the IRS “ascertained that Mr. Clark was liable for civil fraud penalties.” The RA concluded that the Clarks “intended to evade their tax liability by understating income on their 2011 and 2012 tax returns,” making them liable for civil fraud penalties.
The agent noted that the indicators of fraud included concealment of bank accounts, concealment of property, and a substantial excess of personal expenditures over available resources. The agent’s group manager timely signed a penalty approval form approving IRC § 6663 penalties for 2011 and 2012.
For 2013 and 2014, the RA also concluded that Mr. Clark “intended to evade his tax liability by understating income on his 2013 and 2014 tax returns” and was, thus, liable for civil fraud penalties. The indicators of fraud were concealment of bank accounts and substantial excess of personal expenditures over available resources. The agent’s group manager once again timely signed a penalty approval form approving IRC § 6663 civil fraud penalties for 2013 and 2014.
We don’t mean to pick on Mr. Clark (yes we do…who are we kidding here?), but we’ve seen our share of ne’er-do-well fraudsters in our time at Briefly Taxing.
A Finding of Fraudulent Intent
Mr. Clark’s counsel argued that Mr. Clark lacked the sophistication and acumen to purposefully under-report his income. His counsel points to Mr. Clark’s substantial overdraft fees at his banks, his learning disability (dyslexia), his struggle with higher math concepts, and his belief that if he immediately spent money that came in, “it would wash out” and not count as income for Federal tax purposes.
Admittedly, this is a novel FIFO accounting approach – first in, fast out. Let’s see how it plays out…
The Tax Court was not persuaded:
While it may be true that Mr. Clark is neither highly educated nor well-versed in the tax code, he had enough financial sense to run his own business for decades, manage multiple rental properties, and timely repay over a dozen auto loans in four years. He had three years of college as a pre-med major and admitted that he would have had a better understanding of his tax filings if he had put in the effort.
Contrary to counsel’s argument, Mr. Clark did not underreport his income because he did not understand how to comply with the tax laws. He knowingly underreported to avoid paying tax on his full income, even if he did not completely appreciate the consequences of doing so. Mr. Clark’s actions and behavior show that he knew he was evading his tax responsibilities, and he attempted to continue this evasion once the examination began.
As for “cooperating” with the IRS examination, Judge Buch had stern words as well:
Mr. Clark actively attempted to deceive the revenue agent, indicating that he fully grasped the situation and the purpose of the audit. He misled the agent during the initial interview, telling her that his only household income came from the body shop. The agent later discovered that he also had income from his rental properties.
When asked how many business bank accounts he had, Mr. Clark responded that he had one. He had five.
Mr. Clark admitted owning two pieces of real property, his home and the body shop, neglecting to mention his three rental properties. He also claimed that he and Ms. Clark owned three vehicles when they owned several more. Mr. Clark even contradicted some of these statements in follow-up conversations with the revenue agent.
Mr. Clark also sought to conceal his income by failing to provide records to the revenue agent. He brought few receipts and documents to the initial interview. After the interview, the revenue agent sent Mr. Clark several IDRs requesting additional information. Mr. Clark largely ignored these requests. When he did respond, he provided incomplete information. The revenue agent had to resort to summonses to reveal the extent of Mr. Clark’s finances.
But did Mr. Clark “really” know what his assets were? I mean, where’s the proof?
Judge Buch again provides a rather damning attestation of Mr. Clark’s fraud:
Mr. Clark was fully aware of his assets. He compiled financial statements to extend a line of credit in which he claimed $1.29 million of assets and a net worth of $923,000. As part of his divorce proceedings, Mr. Clark had to reckon with his assets and liabilities to divide the couple’s assets. He was fully aware of his assets and expenditures. Mr. Clark made false statements to the revenue agent in an effort to derail the examinations and mislead the revenue agent.
Well, I guess there’s the “proof.”
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