Civil Tax Fraud and Criminal Tax Evasion - Relevance of Intent at the Time of Filing (1/3/14)

The Procedurally Taxing Blog has this terrific entry:  Leslie Book, A Round Trip Ticket to Unwanted IRS Attention: False Documents and Fraud (Procedurally Taxing 12/31/13), here. The Blog discusses the opinion by Judge Holmes in the Tax Court in Brown v. Commissioner, T.C. Memo. 2013-275, here.  I strongly encourage readers of this blog to read it.

I will use that blog entry to extend the discussion in that blog.  So, I will give a very succinct summary.  In late 2003, The taxpayer bought an expensive plane for use in his business.  He wanted to claim 50% bonus depreciation, so he needed to place the plane in service in 2003.  On December 30, 2003, he took delivery for two short flights, returning from the second flight early on December 31, 2003.  At the destination on each of those flights, he claimed to have met with persons for business purposes.  Upon return, and into the following year, the customizers on the plane made modifications to the plane he claimed he needed for his business.  So, his significant business use did not start until well into 2014.  The question is whether he had placed the plane in service by actual business use in 2003, so that he could qualify for the 50% bonus depreciation. His proof of the business purpose consisted in part of letters from two of the persons he claimed to have met with for business purposes.  The letters had not been prepared contemporaneously, and the Judge Holmes seemed to think that they may have been prepared incident to the audit to support the claimed bonus depreciation.  The IRS was more than suspicious.  The IRS denied the depreciation and asserted penalties -- the 75% civil fraud penalty under Section 6663, here, and, in the alternative, the 20% accuracy related penalty.  The parties stipulated as to significant adjustments increasing tax and stipulated that some of those adjustments were fraudulent, thus subject to the 6663 penalty.  At the trial, the only issue was the bonus depreciation.  Under Section 6663's burden shifting rules, since the taxpayer had stipulated to fraud, the taxpayer bore the burden of showing by a preponderance of the evidence that the bonus depreciation claim was not fraudulent.  Judge Holmes denied the civil fraud penalty, but sustained the accuracy related penalty.  Judge Holmes reasoned that the the taxpayer had shown by a preponderance of the evidence that the bonus depreciation was not fraudulent.  In part, the Court reasoned (Slip Op. 45-48, footnotes omitted and emphasis supplied):

The Commissioner first contends that the "thank you" letters -- purportedly from Mastro and Pasquale but really drafted by one of Brown's employees years later -- were false documents. The Commissioner is correct that making false documents is one of the factors that indicates fraud. See, e.g., Spies, 317 U.S. at 499. Still, while these letters weren't actually written by Mastro or Pasquale, we know at least Pasquale did sign the one with his name on it. Thus, while the contents of Pasquale's letter were -- as Pasquale mildly put it -- "a little bit over the top," it's not clear that the contents of either letter were patently false. 

But even if they were, we don't find that they bear on the fraud analysis here. It's well established that fraudulent intent must exist at the time the taxpayer files the return. See Gleis v. Commissioner, 24 T.C. 941, 952 (1995), aff'd, 245 F.2d 237 (6th Cir. 1957); Holmes v. Commissioner, T.C. Memo. 2012-251, at *37. We found that Brown (via Fitzgerald) generated those letters during the audit process; that is, actions that took place after the filing of the return. While we have said that post-filing events can indicate fraudulent intent at the time of filing, see Holmes, at *37, we don't see any evidence that Brown formed the intent to create those letters when he filed the 2003 return. Brown testified that his practice was to have Fitzgerald write letters on behalf of business associates only "when the IRS requests them" -- that is, after a return has been filed. On the unusual facts of this case, we do find this bit of Brown's testimony credible, and it does persuade us that the letters are not good proof that Brown intended to evade tax at the time he filed his returns. See id. at *41 (finding that "[A]lthough petitioner failed to cooperate with respondent's agents by intentionally submitting a false document, his failure does not compel the conclusion that he had a fraudulent intent in filing his 2000-04 tax returns"); id. at *32 ("Although respondent has proffered some evidence of fraud, that evidence relates exclusively to petitioner's postfiling actions and does not convince us of his intention to evade tax when he filed his tax return for each year in issue"). 

* * * * 

We're not focusing here, however, on whether Brown committed fraud on the returns generally; rather we're looking at whether he has shown by a preponderance of evidence that he didn't commit fraud with respect to one specific deduction. The Commissioner concedes that the bonus-depreciation deduction at issue is a legitimate business expense (albeit for 2004, not 2003). While that concession alone certainly doesn't shield Brown from fraud, we also find persuasive that Brown actually bought the plane and took ownership of it in 2003. And we also find noteworthy that Pasquale credibly testified that Brown flew to Chicago that year to talk business with him.

Note the Court's focus that the civil fraud inquiry inquiry is into whether there was fraud at the time the return was filed.  To be sure post-filing conduct may be considered if it is relevant to the issue of the taxpayer's intent at filing.  But, in this case, Judge Holmes made the key findings of intent at the time of filing.  Those key findings were made in major part on Judge Holmes' assessment of the taxpayer's credibility.  The post-filing creation of questionable documents did not, under the facts as Judge Holmes saw them, indicate the taxpayer's fraudulent intent at filing.

Now, consider the crime of tax evasion which may be accomplished by a fraudulent tax return.  But, Section 7201, here, is very clear that evasion may be accomplished "in any manner."  Hence, a fraudulent post-filing act to influence the IRS to give the taxpayer a benefit to which he is not entitled would be an act of evasion.  Further, in the case of documents such as proffered in this case, those documents might be prosecuted in other ways focusing on the post-filing event of proffering them to the IRS in an audit.  See Sections 7206(2), here, and 18 USC 1001(a)(3), here.  Further, of course, if a conspiracy were involved, those documents could be overt acts of the conspiracy.