Tuesday, July 9, 2019

IRS Raises Fraud In Tax Court Amended Answer and Prevails (7/9/19)

In Wegbreit v. Commissioner, T.C. Memo. 2019-82, here, the taxpayer husband went through some deceptive shenanigans to hide the income from the sale of his interest in a business.  There were some other issues.  The numbers are large.  I won't get into the detailed facts, but what caught my eye was this (slip op., at 2-3, 44-45):
After the petitions were filed, respondent filed an amended answer asserting that Samuel Wegbreit (S. Wegbreit) and Elizabeth J. Wegbreit (E. Wegbreit) were each liable for penalties for fraud pursuant to section 6663 for 2005 through 2009. 
See also slip op. 44-45 for some more detailed on the amended answer allegations of fraud.

The Opinion section starts with general discussion and swings to the fraud issue as follows (slip op. 47-49):
The Commissioner has the burden of proving by clear and convincing evidence that (1) an underpayment exists for the year in issue and (2) some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b). The Commissioner also has the burden of producing evidence in relation to other penalties. Sec. 7491(c). Thus in analyzing the evidence in this case we have considered whether it is clear and convincing as to the elements of underpayment of tax for each year and of fraudulent intent. We conclude that the evidence is sufficient under that standard. 
Many of the critical documents in the record reflect “effective as of” dating and do not reveal when they were executed. Most of the documents were also prepared or notarized by Palardy. Palardy admitted that at Agresti’s request she would backdate documents and notarize documents stating incorrect dates. That any backdating occurred suggests a willingness to manipulate the relevant chronology in a way that undermines the credibility of petitioners Wegbreit’s evidence. 
The “effective as of” dating and the backdating of relevant documents also impede our review of the substance of the transactions involving SWTF, Threshold, and Acadia and lead us to conclude that the chronology reflected in those documents is not credible. The number of documents in the record that are on their face unreliable has made this case considerably more difficult. Our chore is compounded because the parties included numerous duplicate copies of key documents without explanation or analysis. Notwithstanding the Court’s comments and directions at the conclusion of the trial, the briefs of the parties failed to focus on the material facts. Respondent’s proposed findings of fact merely summarize testimony and documents and generally fail to analyze the transactions and entities involved. See Rule 151(e). Respondent continues to use the shotgun approach to theories of the case rather than selecting the strongest arguments and focusing on them. Petitioners Wegbreit’s briefs misstate the record and are unreliable. After dealing directly with the record with little aid from the parties’ briefs, we conclude that the reliable evidence is clear and convincing as to unreported income and fraudulent intent.
Well, the IRS prevailed despite the shortcomings of the cohort of IRS lawyers.

General Lesson

The obvious general lesson from a case like this is to remember that filing a case in the Tax Court can open upon issues not previously set up by the IRS in the notice of deficiency.  This can be substantive issues involving additional tax or can be penalties, both of which, if asserted as new matter, can draw interest from the due date of the return.

Beyond the General Lesson

There is more in the details as lessons to trial counsel.  As noted above, the Court found that the "Petitioners Wegbreit’s briefs misstate the record and are unreliable."  Presumably those briefs were submitted by their trial counsel.

Moreover, beyond misstating the record, the case should remind trial counsel to vet the evidence the taxpayer introduces through the lawyer (or if by testimony, upon cross-examination).  Let's go back to the opinion.

In the actual consideration of the fraud issue (slip op. 59-62), the Court finds fraud.  Here are some key excerpts (slip op. 61-62):
The evidence is clear and convincing that petitioners Wegbreit: (1) significantly understated their income; (2) failed to cooperate with tax authorities by providing evasive and misleading responses to interrogatories and during an investigative interview; (3) conspired with Agresti to produce falsified and back-dated documents to conceal assets and income and to mislead the Government; and (4) filed false Form 1040 for each year 2005 through 2009. S. Wegbreit further caused false and misleading information regarding the ownership of his Oak Ridge, LLC interest to be included with Oak Ridge, LLC’s Forms 1065 and Schedules K-1 for 2002 through 2005. 
Both petitioners Wegbreit gave testimony during trial that was implausible and unreliable. S. Wegbreit claimed that the WFP had existed in 2002 when he applied for the Threshold policy. He testified that Agresti and the other trustees selected SWTF investments, that he merely suggested investments to the trustees, and that he was generally unaware how SWTF assets were invested. E. Wegbreit testified that she left family finances to her husband. She repeatedly testified that she either was unaware of or did not remember the various SWTF transactions. She testified inconsistently that she read every purported loan request, promissory note, and tax return she signed. She further testified that she would always ask about documents or transactions she did not understand, and that S. Wegbreit would answer her questions. Petitioners Wegbreit each engaged in a pattern of conduct by which they attempted to defraud the Federal Government. 
Petitioners Wegbreit offered numerous documents that were back dated and otherwise unreliable on their face. They have presented no credible evidence to show that any part of the underpayment is not due to fraud. Accordingly, we hold that petitioners Wegbreit are liable for the section 6663(a) fraud penalty on the underpayment of tax required to be shown on their joint Form 1040 for each year 2005 through 2009. Because of our holding we need not address respondent’s penalty determination under section 6662(a) and (b)(2) for those years. See sec. 6662(b).
Well, the Court was not pleased with the taxpayers' performance.

Another issue with respect to the evidence that seems to have been false (presumably both testimony and some of the documents) is where was the lawyer to prevent that from happening.  And did the lawyer know or have reason to know that it was happening?  The opinion does not address that issue.  So, I have no idea.

I did notice that the lawyer line up in this case:
John E. Rogers, for petitioners.
Lauren N. May, David A. Lee, Angela B. Reynolds, Michelle E. Marcove, Naseem Jehan Khan, Thomas F. Harriman, and Tess Deliefde, for respondent.
Mr. Rogers resume on his web site is here.

Was Mr. Rogers just outgunned (1 to 7)?  I don't know, but I do know that in most cases a lawyer just can't get around the facts in the hand he or she has been dealt.  Mr. Rogers had a bad hand, but apparently made it worse (in the judge's eyes, by misstating the record).

Mr. Rogers has had his own run-ins with the IRS.  A docket search on the Tax Court website shows 13 cases where the petitioner name is John E. Rogers of Illinois.  (There is one from California in 1988, so I presume that is not the same John E. Rogers.)  I was not able to check to see whether all of the John E. Rogers indicated for Illinois were the same John E. Rogers because the Tax Court search stopped me citing frequency (had never seen that before but had never done this type of search before).

I also did a google search: "john e. rogers" tax fraud and got a lot of hits.  Two of them caught my eye:

  • Chicago Lawyer Barred from Promoting Tax Shelters Generating $370 Million in Sham Deductions (DOJ Press Release 10/4/11), here.
  • There Goes The Neighborhood (Taishoff Law Blog 9/3/13), here.

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