The following is from the opinion and gives a good introduction (footnotes omitted):\
Mr. Hovind established CSE in 1989. CSE purported to be a nondenominational religious organization that advocated the message of creation science and opposed the theory of evolution. CSE promoted its message through live lectures by Mr. Hovind and Eric Hovind. Mr. Hovind frequently traveled, domestically and internationally, for speaking engagements, and petitioner occasionally accompanied Mr. Hovind on these trips.The Ministry then somehow developed, with various revenue generating projects. The Court then continued (some footnotes omitted):
IV. Development of Ministerial Trusts
In 2002 Mr. Hovind decided to change the ownership structure of CSE and to that end contacted Glenn Stoll, the director of Remedies at Law. fn10 Mr. Stoll directed clients to form personal ministries which, once created, could be used to form ministerial trusts to manage ministry assets including management of assets on a tax-free basis. Mr. Stoll directed clients to associate each ministerial trust with a corporation sole. fn11
fn 10 Remedies at Law is an organization that purports to provide financial advice to religious organizations and individuals. During 2003 petitioner drafted and signed three checks drawn on a CSE account made payable to Remedies at Law. Mr. Stoll has been permanently enjoined from “organizing, promoting, marketing, or selling any trust, tax shelter, plan or arrangement” and from “[p]romoting the false and frivolous position that Federal income taxes can be reduced or eliminated by using ‘Corporations Sole’ and ‘Ministerial Trusts’ to shelter income”.
fn11 The Internal Revenue Service (IRS) has defined a corporation sole as “a corporate form authorized under certain state laws to enable bona fide religious leaders to hold property and conduct business for the benefit of the religious entity.” Rev. Rul. 2004-27, 2004-1 C.B. 625, 626; see also Chambers v. Commissioner, T.C. Memo. 2011-114, slip op. at 36.
On May 12, 2003, Mr. Hovind created a personal ministry using the CSE Foundation Trust package Mr. Stoll provided. Mr. Hovind executed formal written trust agreements for two trusts, Creation Science Evangelism Ministry and the Creation Science Evangelism Foundation. Mr. Hovind named the Director of Ecclesiastical Enterprises and the Firm Foundation, corporations sole established by Mr. Stoll, as trustees. In the trust package both the Director of Ecclesiastical Enterprises and the Firm Foundation are identified as being under the jurisdiction of the “Kingdom of Heaven”. Mr. Hovind is listed as the “CEO Manager” of Creation Science Evangelism Ministry. Petitioner is listed as the “First Position Successor”.
I think most readers can see where this is going. Suffice it to say that at the end of their elaborate shenanigans clothed in religion, the Hovinds were criminally proseucted:
In addition to the cash, Special Agent Schneider found an employee list, bank records, and boxes of checks in and around petitioner's desk. Although petitioner was not initially a target of the investigation, Special Agent Schneider eventually expanded the investigation to include petitioner after reviewing the items seized pursuant to the search warrant.
On July 11, 2006, petitioner was indicted on 45 counts of structuring monetary transactions to avoid financial reporting requirements. fn26 On October 17, 2006, a jury trial commenced in the U.S. District Court for the Northern District of Florida, Pensacola Division. The jury found petitioner guilty on all counts, and the District Court sentenced petitioner to one year and one day of incarceration and three years of supervised release and required her to pay a $3,500 fine and a $4,500 special monetary assessment. fn27
n26 Petitioner was indicted on the basis of the checks she had drafted to cash and endorsed. Tit. 31 U.S.C. sec. 5324(a)(3) (2006) prohibits an individual from structuring a transaction to avoid a cash transaction report. Tit. 31 U.S.C. sec. 5324(d) (2006) imposes a criminal penalty of a fine, imprisonment, or both against an individual who structures transactions to evade reporting requirements.
n27 Mr. Hovind was indicted on 45 counts of structuring monetary transactions to avoid reporting requirements, 12 counts of willfully failing to deduct and pay Federal income and withholding taxes for employees of CSE, see sec. 7202, and 1 count of obstructing the administration of the internal revenue laws, see sec. 7212(a). The jury found Mr. Hovind guilty on all counts. The District Court sentenced Mr. Hovind to 120 months' incarceration and three years' supervised release and required him to pay a $2,000 fine, a $5,800 special monetary assessment, and $604,875 in restitution.
The District Court subsequently issued forfeiture orders as to petitioner and Mr. Hovind. Under the forfeiture orders, petitioner and Mr. Hovind were liable individually and jointly in the amount of $430,400. On June 27, 2007, the court entered its first Order Forfeiting Substitute Property against petitioner and Mr. Hovind, which forfeited petitioner's and Mr. Hovind's interests in account 8577 and 10 properties. 28 On October 8, 2008, the court entered its second Order Forfeiting Substitute Property, which forfeited petitioner's and Mr. Hovind's interests in account 1872.The Tax Court's decision in Hovind involving only Mrs. Hovind is the civil tax aftermath of the criminal proceedings (which, after all, were the aftermath of the tax shenanigans leading to the criminal prosecution.
The issues the Tax Court resolved were:
1. Presumption of Correctness
Since Mr. and Mr. Hovind had not filed returns, their tax liabilities were joint and several. The records were in such shape that the IRS could determine that they had income but could not determine whose income it was. Mr. and Mrs. Hovind did not cooperate. Accordingly, the IRS asserted deficiencies based on the same income to each of them, but alleged that it sought to collect only once. Mrs. Hovind argued that this was arbitrary and defeated the presumption of correctness that otherwise might apply. The Tax Court rejected the argument, holding that, in order to protect the revenue, the IRS may take inconsistent positions.
2. Burden of Proof.
Mrs. Hovind alleged that the IRS bore the burden of proof. Section 7491(a) imposes on the IRS the burden of proof if the taxpayer maintains the required records, reasonably cooperated in the audit, and introduces credible evidence of the claims she makes. She did not do either of the first two and, the Tax Court found, the evidence as not credible.
I digress just to point out the court's footnote 36 that addresses the concept of credible evidence. In that footnote, the Court says: "Credible evidence is evidence the Court would find sufficient upon which to base a decision on the issue in the taxpayer's favor, absent any contrary evidence. See Higbee v. Commissioner, 116 T.C. 438, 442 (2001)." Thus, the credible evidence concept functions somewhat like a production burden if the case were tried before a jury, at least in the sense that it might initially get the issue to the jury (even if, as production burdens sometimes work, it would not compel a decision for the proponent bearing the burden in the absence of evidence to the contrary.
3. Collateral Estoppel.
Mrs. Hovind and her husband had had numerous encounters with the IRS and the courts, including their criminal case. She argued that collateral estoppel arose from these encounters. The Court held otherwise in straight-forward collateral estoppel analysis.
4. Bank Deposits Method of Proof.
The Court held that Mr. and Mrs. Hovind's records were inadequate and thus the IRS's use of the Bank Deposits Method was appropriate. Her specific argument in this respect, however, seemed to focus on the propriety of asserting that the income was hers while also protectively asserting that the income was her husband's. That went nowhere before so this was a repeat holding.
5. Allocation of Income.
As noted, the IRS assertion of income to Mrs. Hovind was in the gross amount previously allocated to Mr. Hovind because the IRS could not determine their shares of the income. The Tax Court was not going to sustain the entire amount and taxed Mrs. Hovind on only one-half. Here is the Court's reasoning:
Although we reject petitioner's argument that Mr. Hovind alone exercised dominion and control over CSE's accounts, the preponderance of credible evidence in the record demonstrates, and we so find, that petitioner was actively involved in the operation of CSE and that she and Mr. Hovind jointly owned and operated CSE. Respondent has introduced no credible evidence that petitioner was the sole owner of CSE or that Mr. Hovind had only minimal involvement in CSE's operation. Accordingly, we are faced with the task of determining how much of CSE's net profit should be allocated to petitioner. fn436. Failure to file Penalty.
fn43 We recognize respondent's acknowledgment that he is seeking to tax CSE's profits only once. Petitioner and Mr. Hovind, however, did not file joint returns for the years at issue, and therefore they are not jointly and severally liable for the determined income tax deficiencies.
Neither party introduced any definitive proof regarding a more precise allocation of income between petitioner and Mr. Hovind or credible evidence regarding the scope of petitioner's and Mr. Hovind's involvement in CSE. In the absence of credible evidence regarding a more precise basis for allocating the net income generated by CSE, fn44 we will allocate income to petitioner in accordance with our finding that petitioner and Mr. Hovind jointly owned and controlled CSE. Because petitioner did not introduce any credible evidence to support a finding that her ownership interest in CSE was more or less than 50%, we shall allocate 50% of the unreported net profit attributable to CSE to her as unreported income. See, e.g., McKenzie Family Trust v. Commissioner, T.C. Memo. 1984-9. Accordingly, we find that petitioner had unreported income equal to 50% of the net profit attributable to CSE, defined as CSE's gross receipts reduced by the Schedule C expenses allowed in the notice of deficiency, for the years at issue. fn45 Because we find that both petitioner and Mr. Hovind had dominion and control over CSE's accounts during the years at issue and we allocate the income accordingly, we also find that petitioner has unreported income equal to 50% of the interest income earned on CSE's accounts during the years at issue. Finally, we find that petitioner had unreported income equal to 100% of the deposits into her personal account during the years at issue.
n44 Neither party addressed the effect of State law on petitioner's right to income with respect to a joint bank account or an unincorporated business. Under Florida law, petitioner and Mr. Hovind likely held their interests in the joint bank accounts and CSE as tenancies by the entirety. See Beal Bank, SSB v. Almand & Assocs., 780 So. 2d 45, 58-59 (Fla. 2001); see also Clements v. Clements, 509 So. 2d 957, 958 (Fla. Dist. Ct. App. 1987). "When a married couple holds property as a tenancy by the entireties, each spouse is said to hold it 'per tout,' meaning that each spouse holds the 'whole or the entirety, and not a share, moiety, or divisible part.'" Beal Bank, SSB, 780 So. 2d at 53. While, under State law, petitioner may have had the right to the entirety of income in the joint bank accounts and earned by CSE, the issue in the current proceeding is the appropriate allocation of that income for Federal tax purposes. Because we are convinced that petitioner and Mr. Hovind jointly owned and controlled CSE and its related activities, we shall allocate only a portion of the net income to petitioner.
n45 Additionally, we note that petitioner had income attributable to her piano lesson business that was reported on the Schedules C attached to her untimely filed returns. The total unreported income allocated to petitioner pursuant to this opinion shall be adjusted appropriately in the Rule 155 computations to reflect the income that she reported.
The Court imposed the Section 6651(a) failure to file penalty. This is a straight-forward holding.
7. Civil Fraud Penalty.
The Court imposed the civil fraud penalty under Section 6653, meticulously going through the presence of overwhelming badges of fraud.