On January 14, 2020, the Tax Court issued a Memorandum Opinion in the case of Purvis v. Commissioner (T.C. Memo. 2020-13). The issue presented in Purvis was whether the IRS overcame their burden of proof to establish the petitioners’ liability for the taxes and the fraud penalty under IRC § 6663(a). What a crazy case…
The Quick and Dirty Background of One of the Craziest Cases I’ve Ever Read
This case is a morality tale.
The facts are just about as insane as the petitioner-husband whose world the Tax Court had to live in for a brief moment in January 2020. Purvis is a long opinion. The court spends a surprisingly large number of pages carefully documenting each new absurdity and boondoggle that took Mr. Purvis soaring ever higher and higher over the Cuckoo’s Nest before the wax melted, and it all came (predictably) crashing down like a meth-induced Icarus. I will do my best to sum it up the facts in one paragraph. If it makes no sense, you have only Mr. Purvis to blame.
A nurse (Mr. Purvis) became a religious leader (the “Scribe”) of a religious cult that was actually a front for a multi-million-dollar Ponzi-scheme. The Scribe stole a lot of money. He and his cahooting cronies (apostles?) were investigated by the State of Arizona in relation to said Ponzi-scheming. He refused to cooperate to such a degree that the state court held him in contempt. This only buttered Mr. Purvis’ crazy toast even more, and he decided to get even with the judge, the attorneys, and the reporters that he believed “libeled” him. The Scribe bribed a cop for confidential information on the judge, attorneys, and reporters, which information he used to file a “self-executing” admiralty suit (Yes, an admiralty suit in landlocked Arizona. Keep up, people.) against all of the aforementioned “libelees” (Mr. Purvis’ word, not mine). When that didn’t work, the Scribe filed creditor claims against some of the libelees, and then, as his coup de grace, he filed involuntary bankruptcy proceedings against others. Mr. Purvis was indicted for criminal harassment and sentenced. He was then indicted for all sorts of financial felonies (over 100), all told carrying a possible sentence of more than a century in prison. Somehow, he was permitted to plead guilty to two counts, was sent to prison for 5 years, and was ordered to pay $3.8m in restitution.
Oh, the Scribe didn’t file or pay his taxes before, during, or after the Maricopa County Shitshow concluded. To the shock of no one, except perhaps Mr. Purvis, the IRS commenced an audit, discovered the concealed money trail, and ultimately asserted the fraud penalty under IRC § 6663(a).
The Fraud Penalty of IRC § 6663(a)
If any part of any underpayment of tax required to be shown on a return is due to fraud, the IRS may assess a penalty in an amount equal to 75% of the portion of the underpayment attributable to fraud. IRC § 6663(a). The fraud penalty is a civil sanction that is provided for protection of the Government’s revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud. See Helvering v. Mitchell, 303 U.S. 391, 401 (1938); Sadler v. Commissioner, 113 T.C. 99, 102 (1999). So says the Tax Court.
The IRS bears the burden of proving, by clear and convincing evidence, that for each relevant year an underpayment of tax exists, and such underpayment was due to fraud. See IRC § 7454(a) (burden); Tax Rule 142(b) (same); see Sadler, 113 T.C. at 102 (elements); Katz v. Commissioner, 90 T.C. 1130, 1143 (1988) (same). This burden is met by showing that the taxpayer intended to conceal, mislead, or otherwise evade the collection of taxes known or believed to be owing. Katz, 90 T.C. at 1143. If the IRS establishes that any portion of the underpayment is attributable to fraud, the entire underpayment is subject to the 75% penalty, unless the taxpayer establishes by a preponderance of the evidence that at least some part of the underpayment is not attributable to fraud. See IRC § 6663(b).
Compliance with the Prior Supervisory Approval Requirement of § 6751(b)(1)
In the recent decision of Belair Woods, LLC v. Commissioner, 154 T.C. No. 1, *24-*25 (Jan. 6, 2020), the Tax Court held that the initial determination of a penalty assessment, which must be personally approved of in writing by the immediate supervisor of the individual making the determination (or another even higher-level official), is embodied in the document by which Exam formally notifies the taxpayer, in writing, that it has completed its work and has made an unequivocal decision to assert penalties. See IRC § 6751(b)(1); Graev v. Commissioner, 149 T.C. 485, 492-493 (2017); Clay v. Commissioner, 152 T.C. 223, 249 (2019).
After a bit of legal gymnastics due to the intervening decisions of Graev and Clay, which persuaded the Tax Court to reopen the record to admit additional evidence regarding supervisory approval, the Tax Court determined that the procedural requirements of IRC § 6751(b)(1) had been met.
Fraud Penalty under IRC § 6663(a): Generally Proving Fraud
Fraud, for purpose of the Code, is an intentional wrongdoing by the taxpayer motivated by the specific purpose of avoiding tax known or believed to be owing. Maciel v. Commissioner, 489 F.3d 1018, 1026 (9th Cir. 2007), aff’g in part, rev’g in part, T.C. Memo. 2004-28; Neely v. Commissioner, 116 T.C. 79, 86 (2001). Fraud does not include negligence, carelessness, mistake, or an unintentional understatement of income; it includes only conduct designed to conceal, mislead, or otherwise prevent the collection of taxes. United Stated v. Pechenik, 236 F.2d 844, 846 (3d Cir. 1956); Holland v. United States, 348 U.S. 121, 139 (1954); United States v. Murdock, 290 U.S. 389, 396 (1933); DiLeo v. Commissioner, 96 T.C. 858, 874 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992).
Fraud is never presumed, and the IRS must establish it by independent evidence of fraudulent intent. Recklitis v. Commissioner, 91 T.C. 874, 909-910 (1988). Because direct proof of fraudulent intent is rarely available, fraud may be (and generally is) established by circumstantial evidence and inferences drawn from the facts on the record. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992).
The taxpayer’s entire course of conduct during each relevant year may establish the requisite intent. DiLeo, 96 T.C. at 874; Stone v. Commissioner, 56 T.C. 213, 224 (1971). Intent may be inferred from circumstantial evidence known as “badges of fraud.” Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), aff’g T.C. Memo. 1984-601. The existence of any one factor is not dispositive but the existence of several factors is persuasive. See Niedringhaus, 99 T.C. at 211; Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).
- Is there a pattern of understating income? See Green, T.C. Memo. 2016-67, at *36; Evans v. Commissioner, T.C. Memo. 2010-199, *13, aff’d, 507 F. App’x 645 (9th Cir. 2013); Rogers v. Commissioner, 111 F.2d 987, 989 (6th Cir. 1940), aff’g 38 B.T.A 16 (1938); Cooley v. Commissioner, T.C. Memo. 2004-49, *20.
- Did the taxpayer fail to maintain adequate records? See Truesdell v. Commissioner, 89 T.C. 1280, 1302-1303 (1987).
- Did the taxpayer offer implausible or inconsistent explanations of behavior? See Bradford, 796 F.2d at 307-308; Bahoric v. Commissioner, 363 F.2d 151, 153 (9th Cir. 1966).
- Did the taxpayer conceal any income or assets? See Spies v. United States, 317 U.S. 492, 499 (1943); Romer v. Commissioner, T.C. Memo. 2001-168, *45-*46; Evans, T.C. Memo. 2010-199, at *12-*14.
- Did the taxpayer deal predominately in cash? See Bradford, 796 F.2d at 307-308; Valbrun v. Commissioner, T.C. Memo. 2004-242, at *8-*9.
- Did the taxpayer provide incomplete or misleading information to his or her tax return preparer? See Dubose v. Commissioner, T.C. Memo. 1996-99, *8-*9; Scallen v. Commissioner, T.C. Memo. 1987-412, aff’d, 877 F.2d 1364 (8th Cir. 1989). Vanover v. Commissioner, T.C. Memo. 2012-79, *14-*15.
- Did the taxpayer file false documents (including false Federal returns)? See Durland, T.C. Memo. 2016-133, at *79; Zell v. Commissioner, 763 F.2d 1139, 1146 (10th Cir. 1985), aff’g T.C. Memo. 1984-152.
- Did the taxpayer fail to file Federal tax returns? See Hovind, T.C. Memo. 2012-281, at *55.
- Did the taxpayer fail to cooperate with tax authorities? Korecky v. Commissioner, 781 F.2d 1566, 1568-1569 (11th Cir. 1986), aff’g T.C. Memo. 1985-63; Prof’l Servs. v. Commissioner, 79 T.C. 888, 932-933 (1982).
- Did the taxpayer engage in illegal activity, and if so, did the taxpayer try to conceal it? See Niedringhaus, 99 T.C. at 211; Wright v. Commissioner, T.C. Memo. 2000-336, *12.
Though amassing as many badges of fraud as possible is not a competition, this did not dissuade Mr. Purvis from giving it his best, crazy shot.
Original opinion: (T.C. Memo. 2020-13) Purvis v. CommissionerAdd to favorites