Opinion
8271-19
01-21-2022
BRIAN HOLLNAGEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph W. Nega Judge
This case was previously calendared for a remote trial at the session of the Court scheduled to commence on November 16, 2020, for cases in which Chicago, Illinois, is the place of trial. On October 7, 2020, this case was continued, and jurisdiction was retained by the undersigned.
This deficiency case is before the Court on petitioner's Motion for Partial Summary Judgment, filed September 14, 2020 (petitioner's motion).
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26, U.S.C., in effect for the years in issue, all regulation references are to Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
On September 30, 2020, respondent filed a Motion for Extension of Time, in which respondent requested that the Court extend the time to file a response to petitioner's motion. By Order dated October 7, 2020, the Court held petitioner's motion filed September 14, 2020, in abeyance.
On March 31, 2021, the Court issued an Order granting respondent's Motion for Extension of Time filed September 30, 2020, directing respondent to file a response to petitioner's motion by April 30, 2021.
On April 30, 2021, respondent filed an Objection to Motion for Partial Summary Judgment and a Declaration of Briseyda Villalpando in Support of Objection to Motion for Partial Summary Judgment. On May 18, 2021, petitioner filed a Reply to Objection to Motion for Partial Summary Judgment and Affidavit of Paula M. Junghans in Support of Reply to Objection to Motion for Partial Summary Judgment. On May 19, 2021, petitioner filed a First Amended Declaration of Paula M. Junghans in Support of Reply to Objection to Motion for Partial Summary Judgment.
Background
The following facts are drawn from the parties' pleadings and motion papers, including the attached declarations and exhibits. See Rule 121. Petitioner resided in Illinois when he filed the petition in this case.
In 2005, petitioner was the chief executive officer and sole shareholder of BCI Aircraft Leasing, Inc. ("BCI"), a C-corporation engaged primarily in the acquisition and leasing of commercial passenger aircraft. On May 19, 2005, BCI incorporated BCI Jet Sales & Leasing LLC (Jets) as its wholly-owned, single-member LLC. On that same day, BCI and petitioner executed an agreement assigning BCI's membership interest in Jets to petitioner. On July 13, 2005, petitioner caused Jets to acquire a Lear 35A jet from a third party for $1 million, using funds transferred to Jets from BCI. On October 27, 2005, Jets sold the Lear jet to a third party for approximately $2.45 million, resulting in a net profit of $1.098 million, after expenses.
In October 2006, petitioner instructed a BCI employee to prepare his personal Federal income tax return for tax year 2005, which he then signed and caused to be timely filed with the Internal Revenue Service (IRS). Petitioner did not attach to that return a Schedule C or report any business activity associated with Jets. Instead, BCI reported the net profit from the sale of the Lear jet on its 2005 corporate Federal income tax return. However, BCI was apparently entitled to depreciation and interest deductions that more than offset its gross income, so the inclusion of the net profit did not lead to any additional tax liability.
In 2009, BCI's CFO reviewed previously reported transactions and determined that petitioner should have reported the business activity of Jets on his personal return for 2005. BCI's outside accountant prepared an amended personal income tax return for petitioner, which included a attached Schedule C. The Schedule C reported gross receipts of zero and $74,066 in expenses, but did not report any gross income or expenses previously reported by BCI. Petitioner signed the amended return and it was submitted to the IRS on August 21, 2009.
On March 13, 2010, a grand jury in the Northern District of Illinois returned a 16-count indictment against petitioner, charging him with wire fraud related to his activities with BCI.
On December 15, 2011, the United States filed a superseding indictment, which included an additional charge of willfully filing a false amended personal tax return for 2005, in violation of section 7206(1).
On August 5, 2011, the court severed the tax count from the other counts in the indictment that proceeded to trial. On March 14, 2012, after a trial, a jury returned a guilty verdict for six counts of wire fraud and one count of obstruction of justice for lying to the Securities and Exchange Commission (SEC). On March 11, 2013, a plea agreement was filed with regard to the remaining tax count, in which petitioner pleaded guilty to one count of filing a false amended tax return for 2005 in violation of section 7206(1). On December 16, 2013, petitioner was ordered to pay restitution of $408,912 to the IRS relating to the unreported income received from the sale of the Lear jet. On May 19, 2014, the IRS assessed restitution in the amount of $408,912, and on February 10, 2015, a payment in that amount was posted to petitioner's restitution account in the IRS's computerized transcript system.
On March 6, 2019, respondent mailed a Notice of Deficiency to petitioner. Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 2005 of $416,188 and a civil fraud penalty of $312,141 pursuant to section 6663. On May 17, 2019, petitioner timely filed a petition with this Court.
Petitioner represents that he does not dispute $408,912 of the tax portion of the deficiency, which relates to the restitution-based assessment that petitioner paid to respondent. The issue for decision on petitioner's motion is whether sufficient facts exist in the record to support a finding that petitioner had fraudulent intent within the meaning of section 6663(a).
Analysis
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C 678, 681 (1998). The Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judgment, we construe factual materials and draw inferences from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. However, the nonmoving party may not rest upon mere allegations or denials of his pleadings but, rather, must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see Sundstrand Corp., 98 T.C. at 520.
Section 6663 provides that a taxpayer shall be liable for a penalty of 75% of any underpayment of tax attributable to fraud. The Commissioner bears the burden of proving by clear and convincing evidence that a petitioner is liable for a section 6663 penalty. See § 7454(a); Rule 142(b). The Commissioner may satisfy that initial burden by demonstrating: (1) that the taxpayer has underpaid his taxes for the year at issue; and (2) that some part of the underpayment was due to fraud. See DiLeo v. Commissioner, 96 T.C. 858, 885 (1991).
The parties agree that an underpayment exists for tax year 2005, leaving only the fraud requirement of section 6663 for decision. Petitioner argues that respondent has not alleged sufficient facts to support an inference that petitioner had fraudulent intent. Respondent counters that his allegations establish that several badges of fraud were present, namely that petitioner (1) understated income, (2) concealed income or assets, and (3) engaged in illegal activities.
The parties disagree about the proper computation of that underpayment.
Fraud is defined as "an intentional wrongdoing designed to evade tax believed to be owing." Id. at 889; see Pittman v. Commissioner, 100 F.3d 1308, 1319 (7th Cir. 1996). Because direct evidence of fraudulent intent is rarely available, the Commissioner may establish fraud based on circumstantial evidence, including evidence of the taxpayer's entire course of conduct. See Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). We often look to a non-exhaustive list of factors, deemed the badges of fraud, in determining whether a taxpayer's underpayment was fraudulent. See, e.g., O'Neal v. Commissioner, T.C. Memo. 2016-49, at *46 (citing Spies v. United States, 317 U.S. 492, 499 (1943)). A taxpayer's education, intelligence, and tax expertise are relevant. See Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982), aff'd, 748 F.2d 331 (6th Cir. 1984). While a taxpayer's criminal conviction under section 7206(1) is not dispositive of fraud as a matter of law, it does provide "probative evidence that the taxpayer intended to evade taxes." Hoover v. Commissioner, T.C. Memo. 2006-82, 2006 WL 1073427, at *13 (citing Wright v. Commissioner, 84 T.C. 636, 643-644 (1985)).
It is axiomatic that "[s]ummary judgment is notoriously inappropriate for determination of claims in which issues of intent, good faith and other subjective feelings play dominant roles." Stumph v. Thomas & Skinner, Inc., 770 F.2d 93, 97 (7th Cir. 1985); see Espinoza v. Commissioner, 78 T.C. 412, 417 (1982) ("Ordinarily, summary judgment should not be granted in a case in which intent is an issue."); Shiosaki v. Commissioner, 61 T.C. 861, 864 (1974) ("A conclusion as to the petitioner's intent should not be reached without the benefit of a trial in which his demeanor can be observed and his credibility can be weighed."). Because respondent has sufficiently alleged facts from which fraudulent intent can be inferred, this is not the extraordinary case in which summary judgment would be appropriate.
First, respondent's allegation that petitioner engaged in illegal activities provides support for the Court to infer on summary judgment that fraud was present. Petitioner was convicted on nontax charges of wire fraud and obstruction of justice, related to a long-term scheme of defrauding investors and financial institutions and the obstruction of an ensuing investigation by the SEC. Convictions for a crime with a specific intent to defraud requirement may suggest that petitioner had fraudulent intent with regard to his underpayment of tax. See, e.g., Chen v. Commissioner, T.C. Memo. 2006-160, 2006 WL 2270402, at *3 (finding that admissions in plea agreements that taxpayers "conspired to commit fraud" and acted "with a specific intent to commit fraud" were "the most important" evidence in favor of fraud); Ferguson v. Commissioner, T.C. Memo. 2004-90, 2004 WL 605224, at *17 (a taxpayer's "willingness to defraud others may indicate a willingness to defraud the Commissioner"). That inference is further bolstered by petitioner's guilty plea for violating section 7206(1), which is probative of fraud. See Wright, 84 T.C. at 643-644.
Second, respondent has alleged that petitioner knowingly understated his income on his 2005 return because he signed the amended LLC operating agreement, which stated that he was required to report Jets's business activity on his personal return. Petitioner disagrees, arguing that respondent has mischaracterized the provision and has failed to otherwise provide evidence showing that petitioner understood the tax implications of these provisions.
Petitioner also asserts that respondent cannot establish fraud, because petitioner's case involves only a single transaction in one tax year, rather than a consistent pattern of understating income. At this stage, we cannot conclude that petitioner's single, substantial understatement of income is insufficient to establish fraud. Cf. Mitchell v. Commissioner, T.C. Memo. 1994-242 (sustaining fraud penalty determination on taxpayer's single underreporting of $700,000 in proceeds from the sale of a Cessna Citation II aircraft).
We agree that provisions of the amended operating agreement address the tax consequences to petitioner, namely via provisions stating that "[petitioner] intends for the Company to be taxed as a disregarded entity and not an association taxable as a corporation" and that "[a]ll items of income, gain, loss or deduction * * * shall be allocated solely to [petitioner]." The fact that petitioner signed and executed the agreement supports the allegation that he was aware of his tax reporting obligation. At this stage, respondent's allegation suggests knowledge and thus fraudulent intent.
Construing the facts in the light most favorable to respondent, we find that a genuine factual dispute exists between the parties as to whether petitioner had fraudulent intent, making that issue ripe for trial. This Court has considered all the other arguments of the parties and, to the extent not discussed above, find those arguments to be irrelevant, moot, or without merit.
Upon due consideration and for cause, it is
ORDERED that petitioner's Motion for Partial Summary Judgment, filed September 14, 2020, is denied. It is further
ORDERED that jurisdiction over this case is no longer retained by the undersigned and this case is restored to the general docket for trial or other disposition.