Tax Court in Brief | Metz v. Commissioner | Interaction of criminal tax, civil tax and civil penalties | law of the free man


The Tax Court in Brief – April 4 to April 8, 2022

Freeman Law’s “Tax Court Brief” covers all of the Tax Court’s substantive opinions, providing a weekly summary of its decisions in clear, concise prose.

For a link to our Tax Court in Brief podcast, download here or watch other episodes of The Freeman Bill.

Tax litigation: The week of April 4, 2022 to April 8, 2022

  • Middleton v. Comm’r, TC Memo. 2022-28 | April 4, 2022 |Kerrigan, J. | Dekt. No. 8158-19L
  • Scholz v. Comm’r, TC Summary Notice 2022-5 | April 4, 2022 | Panuthos, J. | Dekt. No. 20743-19S
  • Salter c. Comm’r, TC Memo. 2022-9 |April 5, 2022 |Lauber, J. | Dekt. No. 10776-20
  • Continuing Life Communities Thousand Oaks LLC v. Comm’r, TC Memo. 2022-31 |April 6, 2022 |Holmes, J. | Dekt. No. 4806-15
  • Norberg v. Comm’r, | April 5, 2022 | Lauber, A. | Dekt. No. 12638-20L

Metz v. Comm’r, TC Memo. 2022-33 | April 7, 2022 | Weiler, J. | Dekt. No. 16784-19

Short summary: During the 2000 to 2008 taxation years, Daniel Metz (“Applicant”) worked as a professional engineer. The petitioner formed Metz & Associates, Inc. in 1994 and was the sole shareholder until 2007. At that time he dissolved Metz & Associates, Inc. and formed Metz & Associates, LLC and held a 94 %. During the years in question, the applicant was an employee of both entities and received a salary.

For the 2000 through 2007 tax years, Petitioner filed timely Forms 1120S for Metz & Associates, Inc. and timely filed Forms 1065 for Metz & Associates, LLC for the 2007 and 2008 tax years. However, the petitioner did not file the 1040 forms in a timely manner for those tax years. . Instead, for the 2000 and 2001 tax years, the petitioner filed “statements,” in which he argued that he was not required to file Forms 1040. The Internal Revenue Service ( “IRS”) initiated an audit in 2009 and the petitioner filed Forms 1040 for tax. years 2000 to 2007. However, the IRS has prepared a substitute return for the 2008 tax year.

As part of a fraudulent scheme to obtain withholding tax credits, the petitioner submitted false 1099-OID forms along with his 1040 forms for tax years 2000 through 2007, claiming $1,297,490 in refunds fraudulent. After the IRS Criminal Investigation Division opened an investigation for the 2005 through 2007 tax years, the Petitioner was ultimately convicted and sentenced on three counts of filing false or fraudulent statements and one count of attempted obstruction or interference with domestic tax laws. Further, the petitioner failed to cooperate with the IRS, taking various actions, such as: claiming that he was not subject to the Internal Revenue Code, submitting interrogations to the IRS, not comply with certain subpoenas and requests for disclosure documents, and seek an injunction to prevent the IRS from continuing its audit.

Consistent with its audit and reconstruction of the taxpayer’s income based on its analysis of bank statements, the IRS issued a notice of deficiency for the 2000 through 2008 tax years, determining that the petitioner was responsible for certain tax shortfalls and additions to tax/penalties under Sections 6663(a), 6651(a)(1), 6651(a)(2), and 6654. tax and submitted the case for determination without a trial under Rule 122.

Key questions:

  • (1) If the Applicant received undeclared income from 2005 to 2008;
  • (2) Whether the Petitioner was subject to civil penalties for fraud under Section 6663 from 2000 to 2007;
  • (3) Whether the Petitioner is liable for additional tax under section 6651(a)(1) for 2005 through 2008; and
  • (4) Whether the Applicant is liable for additional tax under Sections 6651(a)(2) and (f) and 6654 for 2008.

Main holdings:

  • (1) The applicant received undeclared income from 2005 to 2008;
  • (2) Petitioner is subject to civil penalties for fraud under Section 6663 from 2000 to 2007;
  • (3) the petitioner is liable for the additions to tax under section 6651(a)(1) for the period from 2005 to 2008; and
  • (4) The petitioner is liable for additions to tax under sections 6651(a)(2) and (f) and 6654 for 2008.

Main points of law:

  • The Commissioner’s determination of inadequacy usually gives rise to a presumption of accuracy. See Bone v. Comm’r324 F.3d 1289, 1293 (11th Cir. 2003), aff’g C. Memo. 2001-43.
  • If a taxpayer is uncooperative in the audit of their tax returns, the Commissioner is given wide latitude as to the method he may use to reconstruct that taxpayer’s income. Giddio vs. Comm’r54 TC 1530 (1970).
  • The Commissioner may use any reasonable method that reflects the taxpayer’s income, including the bank deposit method. Cupp vs. Comm’r65 TC 68, 82 (1975), aff’d without published opinion559 F.2d 1207 (3rd Cir. 1977).
  • A federal district court can order restitution to the victim of a criminal offense. 18 USC § 3663(a). Although restitution in a tax case is based on an estimate of civil tax liability, it is not determinative of civil tax liability. See Morse v. Comm’r419 F.3d 829, 833–35 (8th Cir. 2005), aff’gC. Memo. 2003-332, 86 TCM (CCH) 673; Hickman v. Comm’r183 F.3d 535, 537–38 (6th Cir. 1999), aff’g CT memo. 1997-566.
  • For the purposes of section 6663(a), to discharge his burden of proving fraud by clear and convincing evidence, the Commissioner must prove for each relevant year that (1) an underpayment of tax exists and ( 2) the underpayment was due to fraud. Sadler v. Comm’r113 TC 99, 102 (1999); Katz vs. Comm’r90TC 1130, 1143 (1988).
  • Circumstances that may indicate fraudulent intent, often referred to as “signs of fraud”, include, but are not limited to: (1) understating income, (2) keeping inadequate records, (3) giving explanations of implausible or inconsistent behavior, (4) concealing income or assets, (5) failing to cooperate with tax authorities, (6) engaging in illegal activities, (7) providing incomplete or misleading information to a tax preparer income, (8) providing testimony that lacks credibility, (9) filing false documents (including false tax returns), (10) failure to file tax returns and (11) cash transactions. See, for example, Schiff v. United States919 F.2d 830, 833 (2d Cir. 1990); Bradford vs. Comm’r796 F.2d 303, 307–08 (9th Cir. 1986), aff’gC. Memo. 1984-601; Recklitis c. Comm’r91TC 874, 910 (1988).
  • If the Commissioner discharges the burden of filing with respect to the taxpayer’s liability for tax additions, the taxpayer bears the burden of proving that the failure to file in a timely manner was due to reasonable cause and not to willful negligence. To seeRC § 6651(a)(1); Higbee vs. Comm’r116 TC 438, 447 (2001).
  • The Tax Court considers the same matters as when considering the imposition of the additional tax for fraud under Section 6663 by applying Section 6651(f) in determining whether the failure to a taxpayer to file his tax returns was fraudulent. See Clayton v. Comm’r102 TC 632, 653 (1994).
  • To discharge his filing burden under section 7491(c) with respect to the addition of section 6651(a)(2) to the tax, the commissioner must provide proof of a tax return. See Wheeler v. Comm’r7TC 200, 208–10 (2006), aff’d521 F.3d 1289 (10th Cir. 2008).
  • Except in very limited circumstances, to seeRC § 6654(e)(3), Section 6654 provides no exception for reasonable cause or lack of willful negligence.

Insight: Metz effectively handles civil assessments by the IRS against a tax protester. Besides, Metz deals with the interplay between criminal tax violations (i.e. restitution) and civil tax and penalty assessments. Taxpayers should be aware of their income tax reporting obligations, particularly when they own 100% or controlling interests in business entities. However, if taxpayers commit fraud and openly protest against the IRS, they may be subject to criminal and civil penalties.

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