Michael T. Sestak

United States Tax Court

T.C. Memo. 2022-41

MICHAEL T. SESTAK,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 17285-18. Filed April 25, 2022.

—————

Michael T. Sestak, pro se.

Joel D. McMahan and A. Gary Begun, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WEILER, Judge: This case arises from a statutory notice of

deficiency issued to petitioner for tax year 2012. The issues for decision

are: (1) whether petitioner is entitled to a deduction with respect to a

loss on the sale of his foreign real estate holdings as part of his criminal

forfeiture with the United States and (2) whether petitioner is liable for

the civil fraud penalty under section 6663. 1

FINDINGS OF FACT

This case was tried during the Jacksonville, Florida, remote trial

session of the Court. At trial the parties stipulated most of the relevant

facts, which are so found, including the bribery proceeds petitioner

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, and all Rule

references are to the Tax Court Rules of Practice and Procedure. All monetary amounts

are rounded to the nearest dollar.

Served 04/25/22

2

[*2] received during tax year 2012. Petitioner is a U.S. citizen and

resided in Florida when he timely filed his Petition.

On November 15, 2000, petitioner received a bachelor of arts

degree in social sciences and history from Thomas Edison State College.

On January 27, 2003, he received a master of arts degree in politics from

New York University, and in August 2009 he received a diploma from

the U.S. War College Distance Education Program.

Petitioner was employed by the U.S. Department of State from

May 2003 until March 2014 and had had previous overseas assignments

in Bogota, Colombia, Madrid, Spain, and Krakow, Poland. Between

August 2010 and September 2012 petitioner was employed as a consular

officer by the State Department at the U.S. Consulate in Ho Chi Minh

City, Vietnam. While employed as a consular officer, he served as chief

of the Consulate’s Nonimmigrant Visa Unit. Petitioner’s responsibilities

included reviewing U.S. visa applications, conducting interviews, and

issuing U.S. visas to applicants.

In 2010 petitioner met a fellow U.S. citizen and resident of

Vietnam named Binh Vo. Mr. Vo and petitioner devised a scheme

whereby they would receive compensation in exchange for petitioner’s

facilitating approval of nonimmigrant visas to the United States

through his position as a consular officer. Petitioner agreed to accept

compensation from applicants—or their families—in exchange for

approval of nonimmigrant visas to the United States.

This scheme required petitioner to use fake or code names, special

email accounts, and cellphones for communication with Mr. Vo. Mr. Vo

would inform petitioner in advance of the identity of each foreign

national who agreed to pay money in exchange for a U.S. visa, and

petitioner would then attempt to personally handle the applicant’s visa

application, including conducting the applicant’s interview. In several

instances petitioner issued visas to applicants who had been previously

denied visas. From February to September 2012 petitioner approved 410

visa applications directed to him by Mr. Vo and others participating in

the fraudulent scheme.

Initially, petitioner was compensated for his part in this

fraudulent scheme in cash, which he stored in a safe at his residence in

Vietnam. However, as the bribery proceeds continued to grow, petitioner

asked Mr. Vo to maintain custody of them and to assist him in moving

the funds to petitioner’s bank account in Thailand. This request involved

3

[*3] making wire transfers of funds through intermediaries in China

and elsewhere. In all petitioner received wire transfers totaling

$3,227,501 to his bank account in Thailand during 2012.

In an attempt to hide his bribery proceeds from the U.S.

Government, petitioner acquired real property in Thailand, and from

June to December 2012 he purchased nine real estate properties for a

total of approximately $3.2 million. Petitioner also arranged for his

sister—who lived in the United States—to receive $150,000 of his

bribery proceeds, which she used to purchase a home in Yulee, Florida.

On or about September 24, 2012, petitioner submitted signed

responses to a “Questionnaire for National Security Positions (SF86

Format)” in which he falsely claimed he held no foreign financial

interests and did not own, anticipate owning, or plan to purchase real

estate in a foreign country. On October 19, 2012, petitioner was

interviewed by two diplomatic security special agents from the State

Department in the District of Columbia. During his interview, petitioner

was asked by the special agents whether he was aware of any State

Department officials who had unexpectedly come into a lot of money, not

in line with regular salary, while he was stationed at the U.S. Consulate

in Ho Chi Minh City. At the time of his interview with the special agents,

petitioner gave false answers in an effort to conceal the existence of the

fraudulent scheme and the proceeds derived therefrom.

In early 2013 petitioner timely filed his 2012 Form 1040, U.S.

Individual Income Tax Return, reporting therein wages of $122,029 as

an employee of the State Department. However, petitioner failed to

report on this tax return the $3,227,501 in bribery proceeds he received.

Petitioner is a well-educated man who had been employed by the State

Department and worked overseas for many years. Consequently, we find

that when he filed his 2012 tax return, he knew (or should have

otherwise known) that he was required to recognize his bribery proceeds

as income; and he intentionally did not do so to continue his

participation in the fraudulent scheme.

The State Department uncovered the fraudulent scheme, and

petitioner was arrested by local authorities in Thailand. Petitioner was

then extradited to the United States, where he was subsequently named

a defendant in a criminal complaint filed in the U.S. District Court for

the District of Columbia, in a case brought by the U.S. Department of

Justice. Ultimately, petitioner pleaded guilty to one count of conspiracy

to commit offenses against the United States and to defraud the United

4

[*4] States, one count of bribery of a public official, and one count of

conspiracy to engage in a monetary transaction in property derived from

specified unlawful activity.

On November 1, 2013, petitioner entered into a written plea

agreement with the United States. As part of the plea agreement he also

executed a preliminary consent order of forfeiture imposing a forfeiture

money judgment of $6,021,441 in favor of the United States, which

included forfeiture of his real estate holdings in Thailand and other

assets held by his co-defendants. Under his plea agreement, he agreed

that his real estate holdings in Thailand represented bribery proceeds

traceable to the fraudulent visa scheme, constituted property involved

in the conspiracy to engage in a monetary transaction to which he

pleaded guilty, and were subject to forfeiture pursuant to 18 U.S.C.

§ 981(a)(1)(C), 18 U.S.C. § 982(a)(1) and (6), 21 U.S.C. § 853(p), and

28 U.S.C. § 2461. Pursuant to the written plea agreement and under the

terms of the preliminary consent order of forfeiture, petitioner agreed to

cooperate and voluntarily sell his real estate holdings in Thailand and

to transfer the net proceeds to the United States to satisfy a portion of

the money judgment entered against him.

As part of his plea agreement petitioner retained an independent

appraiser and agent to appraise, market, and sell the real estate

holdings in Thailand. Subject to the approval of the United States, the

properties were to be sold at any price and only to unrelated third

parties. It was also agreed that in the event the net proceeds from the

sale of the real estate holdings in Thailand collectively exceeded

$3,255,840, then 50% of the excess would be used by petitioner to pay

any federal income tax due for tax years 2012 and 2013. Ultimately,

petitioner sold his real estate holdings during 2013 to 2015, and in

connection with the sales of his real estate holdings in Thailand and

other criminal forfeitures, the United States received $1,551,134. 2

The IRS first corresponded with petitioner by letter dated

September 21, 2015, concerning the civil resolution of his criminal

proceedings. The IRS audited petitioner’s 2012 return, and through IRS

Letter 950 (a 30-day letter) dated December 6, 2017, along with Form

4549–A, Income Tax Examination Changes, the IRS first asserted the

civil fraud penalty against petitioner. Revenue Agent (RA) Janett

2 During its investigation the United States identified the Yulee, Florida,

property owned by petitioner’s sister as being purchased using funds originating from

his bribery proceeds. However, at no time did the United States move to foreclose on

the Yulee, Florida, property.

5

[*5] Ballentine, during the audit, made the initial determination to

assert the civil fraud penalty under section 6663 against petitioner.

RA Ballentine obtained prior written supervisory approval to assert the

civil fraud penalty pursuant to section 6663 from her immediate

supervisor, Patrick L. Freeman, Jr., before she formally communicated

the penalty to petitioner.

OPINION

I. Summary of the Parties’ Arguments

At trial petitioner readily acknowledged receipt of the stipulated

bribery proceeds during tax year 2012. However, he argues that the

liquidation of his real estate holdings in Thailand was not a forfeiture,

because the properties were located outside of the United States and,

therefore, outside the jurisdiction of the U.S. court system. Petitioner

contends that because the proceeds from the sales of his real estate

holdings were voluntarily transferred at a loss to the United States as

part of his plea agreement, he is entitled to deduct the loss from his

bribery proceeds. 3 In furtherance of his argument, petitioner refers the

Court to Stephens v. Commissioner, 905 F.2d 667, 671 (2d Cir. 1990),

rev’g on other grounds 93 T.C. 108 (1989), and contends that his

payments to the United States are appropriately classified as

compensatory and are, therefore, tax deductible. Next, petitioner

contends that he purchased eight of the nine real estate holdings in

Thailand for investment purposes, with the plan to rent the properties

as an income-generating business. Therefore, he concludes that the

liquidation of his real estate holdings resulted in a substantial business

loss.

Finally, petitioner disputes the civil fraud penalty determined

under section 6663 and contends that he should be granted credit for

those funds that he transferred to the United States as part of his plea

agreement for any civil fraud penalty imposed.

In dispute of petitioner’s arguments respondent contends

petitioner is not entitled to a loss deduction for tax year 2012 on the

liquidation of his real estate holdings in Thailand because he is

precluded from deducting losses as a result of the criminal forfeiture and

because the real estate sales occurred in tax years other than the tax

3 Petitioner seeks a deduction against his income equal to the difference

between his acquisition costs (or tax bases) in his real estate holdings, less the amount

realized on the liquidation of the properties.

6

[*6] year in which he received the bribery proceeds. Respondent further

contends—assuming arguendo that he incurred a loss in the tax year at

issue—that petitioner is not entitled to deduct a loss from the criminal

forfeitures of property because allowance of such a deduction would

frustrate established U.S. and state policy.

II. Discussion

Generally, the taxpayer bears the burden of proving that the

Commissioner’s determinations are erroneous. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Under section 7491(a)(1), “[i]f, in

any court proceeding, a taxpayer introduces credible evidence with

respect to any factual issue relevant to ascertaining the liability of the

taxpayer for any tax imposed by subtitle A or B, the Secretary shall have

the burden of proof with respect to such issue.” See Higbee v.

Commissioner, 116 T.C. 438, 442 (2001). Petitioner has not introduced

credible evidence sufficient to shift the burden of proof to respondent

under section 7491(a) as to any relevant issue in dispute.

A. Gross Income

Section 61 provides that gross income from whatever source

derived is subject to federal income taxation. We have found that gross

income specifically includes income from illegal sources, such as bribes.

Traficant v. Commissioner, 89 T.C. 501 (1987), aff’d, 884 F.2d 258 (6th

Cir. 1989). Taxable income, however, means gross income minus those

deductions allowed by law. I.R.C. § 63.

B. Loss Deduction

Section 165(a) allows a deduction for “any loss sustained during

the taxable year and not compensated for by insurance or otherwise.” In

the case of an individual, the deduction is limited to losses incurred in a

trade or business or in any transaction entered into for profit or to

certain theft or casualty losses. I.R.C. § 165(c). Furthermore, a deduction

arising from a loss on the sale or exchange of a capital asset can be

claimed only to the extent allowed by sections 1211 and 1212. I.R.C.

§ 165(f). A deduction for property forfeited, if allowed, falls under section

165 and not under section 162. See, e.g., Holmes Enters., Inc. v.

Commissioner, 69 T.C. 114 (1977); Holt v. Commissioner, 69 T.C. 75

(1977), aff’d per curiam without published opinion, 611 F.2d 1160 (5th

Cir. 1980).

7

[*7] Federal courts consistently have disallowed loss deductions

where the deduction would frustrate a sharply defined federal or state

policy. See, e.g., Wood v. United States, 863 F.2d 417 (5th Cir. 1989);

United States v. Algemene Kunstzijde Unie, N.V., 226 F.2d 115, 119–20

(4th Cir. 1955); Fuller v. Commissioner, 213 F.2d 102 (10th Cir. 1954),

aff’g 20 T.C. 308 (1953); Blackman v. Commissioner, 88 T.C. 677, 682–83

(1987), aff’d without published opinion, 867 F.2d 605 (1st Cir. 1988);

Holmes Enters., 69 T.C. 114. The test of “nondeductibility on public

policy grounds under section 165” is the severity and immediacy of the

frustration of a “sharply defined national or state policy” that would

result from allowance of the deduction. Stephens v. Commissioner, 905

F.2d at 670; Wood v. United States, 863 F.2d 417.

C. Trade or Business Deduction

Taxpayers are allowed deductions for certain business and

investment expenses pursuant to sections 162 and 212. Petitioner has

not argued that this deduction falls under section 212 as an expense

incurred in the management, conservation, or maintenance of property

held for the production of income (nor could he reasonably make such

arguments), so we limit our analysis here to section 162.

Section 162(a) “allow[s] as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in carrying

on any trade or business.” However, neither the Code nor the regulations

provide a generally applicable definition of a “trade or business.”

Commissioner v. Groetzinger, 480 U.S. 23, 27 (1987); McManus v.

Commissioner, T.C. Memo. 1987-457, 1987 Tax Ct. Memo LEXIS 454,

at *19, aff’d per curiam without published opinion, 865 F.2d 255 (4th

Cir. 1988). Determining the existence of a trade or business “requires an

examination of the facts in each case.” Commissioner v. Groetzinger, 480

U.S. at 36 (quoting Higgins v. Commissioner, 312 U.S. 212, 217 (1941)).

When examining the facts of each case to determine whether a trade or

business exists, we have focused on three factors: (1) whether the

taxpayer undertook the activity intending to earn a profit; (2) whether

the taxpayer is regularly and actively involved in the activity; and

(3) whether the taxpayer’s activity has actually commenced. E.g.,

Weaver v. Commissioner, T.C. Memo. 2004-108, 2004 WL 938293, at *6;

McManus, 1987 Tax Ct. Memo LEXIS 454, at *20.

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[*8] D. Civil Tax Fraud

“If any part of any underpayment of tax required to be shown on

a return is due to fraud,” section 6663(a) imposes a penalty of 75% of the

portion of the underpayment attributable to fraud. The Commissioner

has the burden of proving fraud, and he must prove it by clear and

convincing evidence. I.R.C. § 7454(a); Rule 142(b). To sustain his

burden, the Commissioner must establish two elements: (1) that there

was an underpayment of tax for each year at issue and (2) that at least

some portion of the underpayment for each year was due to fraud.

Hebrank v. Commissioner, 81 T.C. 640, 642 (1983).

Section 6751(b)(1) provides that “[n]o penalty under this title

shall be assessed unless the initial determination of such assessment is

personally approved (in writing) by the immediate supervisor of the

individual making such determination.” As a threshold matter, the

Commissioner must show compliance with section 6751(b)(1). See Chai

v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017) (“[C]ompliance with

§ 6751(b) is part of the Commissioner’s burden of production.”), aff’g in

part, rev’g in part T.C. Memo. 2015-42. Under section 7491(c), the

Commissioner carries “the burden of production in any court proceeding

with respect to the liability of any individual for any penalty.” This

burden requires the Commissioner to come forward with sufficient

evidence indicating that imposition of the penalty is appropriate. See

Higbee, 116 T.C. at 446. The Commissioner’s burden of production under

section 7491(c) includes establishing compliance with section 6751(b)(1).

See Chai v. Commissioner, 851 F.3d at 217, 221–22; Graev v.

Commissioner, 149 T.C. 485 (2017), supplementing and overruling in

part 147 T.C. 460 (2016).

Before trial, the parties stipulated that respondent has met his

initial burden of production under section 7491(c) with respect to the

requirements under section 6751(b)(1) because RA Ballentine obtained

written supervisory approval of the penalty being asserted under section

6663 before the penalty determination was formally communicated to

petitioner. On the basis of the evidence before the Court, we accept this

stipulation as true and find respondent has met his initial burden of

production under section 7491(c) with respect to the requirements of

section 6751(b)(1).

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[*9] III. Analysis of Petitioner’s Arguments

It is undisputed that petitioner’s real estate holdings in Thailand

were sold at a loss, meaning the funds received were less than the

amount he paid to acquire the properties. The legal question to be

resolved by the Court is whether petitioner is entitled to a tax deduction

for the financial loss against his bribery proceeds received for the tax

year in question.

Petitioner pleaded guilty to one count of conspiracy to commit

offenses against the United States and to defraud the United States and

one count of bribery of a public official. 4 The criminal forfeiture of

petitioner’s funds was made pursuant to 18 U.S.C. § 981, and the district

court ordered him to forfeit to the United States “any property, real or

personal, which constitutes or is derived from proceeds traceable to the

offense of Conspiracy to Commit Bribery, pursuant to 18 U.S.C.

§ 981(a)(1)(C) and 28 U.S.C. § 2461(c).”

In Stephens the taxpayer was convicted and sentenced in a

scheme to defraud Raytheon, a Delaware corporation, of which he was a

principal owner. As part of his sentence, the district court ordered the

taxpayer to make restitution of $1 million to Raytheon. As part of his

settlement agreement with Raytheon, and in connection with two civil

actions, the taxpayer turned over $530,000 in cash held in his name at

a Bermuda bank and signed a promissory note for $470,000. The

taxpayer later claimed as a tax deduction the $530,000 in restitution.

Although this Court denied the deduction, the Court of Appeals for the

Second Circuit reversed and remanded the case, determining the

taxpayer was entitled to a deduction under the circumstances of his

restitution order. Stephens v. Commissioner, 905 F.2d at 674 (“Stephens’

restitution payment was neither a fine or similar penalty, nor paid to

the government. Thus, we hold that neither the public policy exception

to [s]ection 165, precluding a deduction when it would severely and

immediately frustrate public policy to allow it, nor the codification of the

4 We note that Congress does not concern itself with the lawfulness of the

income it taxes; income from criminal enterprises is taxed at the same rate. And it is

true that taxpayers, in some instances, have been allowed deductions against gross

income otherwise illegal under state or federal laws. See Commissioner v. Sullivan,

356 U.S. 27 (1958) (allowing deductions for rent and wages paid to the operator of an

illegal gambling enterprise).

10

[*10] public policy exception to deductibility of expenses pursuant to

[s]ection 162, bars deduction of Stephens’ restitution payment.”).

In this case there was no restitution made by petitioner; rather

the proceeds derived from his bribery scheme with Mr. Vo were subject

to a court-ordered forfeiture. Consequently, petitioner’s reliance upon

Stephens is misplaced since the case is distinguishable. To allow

petitioner a deduction for losses arising out of forfeited proceeds

obtained through illegal activities would undermine public policy by

permitting a portion of the forfeiture to be borne by the Government,

thus taking the “sting” out of the forfeiture. See Tank Truck Rentals,

Inc. v. Commissioner, 356 U.S. 30, 35 (1958); Wood, 863 F.2d at 422;

Holt, 69 T.C. at 81; Farris v. Commissioner, T.C. Memo. 1985-346, aff’d

without published opinion, 823 F.2d 1552 (9th Cir. 1987). In accordance

with these controlling precedents, petitioner is not entitled to a loss

deduction under section 165 for the proceeds (including the proceeds

from the real estate sales) that he later forfeited pursuant to the

forfeiture agreement with the United States.

Petitioner seeks to draw a distinction between his situation and

those prior cases denying deductions for forfeitures on the ground that

his plea agreement called for voluntary sales and forfeiture of funds

along with profit sharing for tax purposes, which deviates from the norm

in punitive actions and indicates a more compensatory approach to the

liquidation of his real estate holdings in Thailand. We think petitioner’s

distinctions are unpersuasive considering the potential angles, as

discussed below.

In Lilly v. Commissioner, 343 U.S. 90 (1952), opticians sought to

deduct payments that they made to eye doctors as ordinary and

necessary business expenses. These payments were made pursuant to

agreements that reflected an established and widespread practice in

that industry, whereby the eye doctors agreed to recommend certain

opticians to their patients and the opticians agreed to pay those

referring eye doctors one-third of the retail sale prices that they received

for the eyeglasses that they sold. The Court of Appeals for the Fourth

Circuit held such payments were nondeductible on the grounds that

they were against public policy. The Supreme Court reversed, however,

holding that the payments did not stand on the same basis as

expenditures that violated some federal or state law or that were

incidental to such violations. The Supreme Court drew a distinction

between these payments, which were at most professionally unethical,

11

[*11] from those of outlawed expenditures, which, by virtue of their

illegality, frustrate federal or state policy.

Petitioner’s proceeds from his fraudulent scheme are not akin to

the payments in dispute in Lilly. The moneys petitioner forfeited were

admittedly the essence of his illegal venture. The forfeiture was

incidental to his violation of federal laws. Therefore, the holding in Lilly

does not support petitioner’s argument.

In Commissioner v. Sullivan, 356 U.S. 27, the Supreme Court

held that an illegal gambling enterprise was a business for federal tax

purposes and that deductions for ordinary and necessary business

expenses involved in operating the enterprise were allowable. The

Supreme Court reasoned that to deny such deductions would result in

taxing the gross receipts of the business rather than its net income. In

Commissioner v. Tellier, 383 U.S. 687 (1966), the taxpayer sought a

deduction for legal fees incurred in the unsuccessful defense of a

criminal prosecution relating to his business. The Commissioner

conceded that the fees were ordinary and necessary business expenses.

The only question was whether the allowance of a deduction would

frustrate public policy. The Supreme Court held that no public policy

was frustrated by allowing these legal fees to be deducted as ordinary

and necessary business expenses.

Sullivan and Tellier stand for the proposition that a taxpayer may

be allowed to deduct legitimate (i.e., ordinary and necessary) business

expenses in the operation of an illegitimate enterprise. That concept is

not determinative in our analysis of this case because we are dealing

with a forfeiture that (as discussed above) does not qualify as an

ordinary and necessary business expense under section 162. 5

Furthermore, the allowance of a loss deduction in this case would

undermine the impact of the sharply defined policy against bribery of a

government official. Accordingly, Sullivan and Tellier are inapposite to

the case here.

Accordingly, we will sustain respondent’s disallowance of

petitioner’s loss deduction claimed with respect to his criminal

5 It is unclear whether petitioner claims his real estate activity was a separate

trade or business, or, as it seems, he is claiming that his real estate activity was part

of his illegitimate bribery business activity. While petitioner does not consider the

transfer of the sales proceeds to the government to be a forfeiture, the preliminary

consent order and our findings which should be with respect thereto reflect otherwise.

12

[*12] forfeiture. Next we will turn to the civil fraud penalty determined

against petitioner under section 6663.

The Commissioner must prove an underpayment of tax in support

of the fraud penalty. To sustain his burden, the Commissioner need not

prove the precise amount of the underpayment attributable to fraud, but

only that a part of the underpayment is attributable to fraud. Estate of

Beck v. Commissioner, 56 T.C. 297, 363–64 (1971). When the allegations

of fraud are intertwined with unreported income and indirectly

reconstructed income, as they are in this case, the Commissioner may

prove an underpayment by proving a likely source of the unreported

income. Id. at 361.

As previously discussed, respondent has shown sources of

unreported income to petitioner, and petitioner has failed to show that

the receipts were offset by deductible costs or expenses. Furthermore

petitioner agrees that he failed to report his bribery proceeds for 2012.

As a result, it is established by clear and convincing evidence that he

has an underpayment for the 2012 tax year.

We now turn to the second element of the penalty, fraudulent

intent. Fraud is intentional wrongdoing designed to evade tax believed

to be owing. Neely v. Commissioner, 116 T.C. 79, 86 (2001). The existence

of fraud is a question of fact to be resolved upon consideration of the

entire record. Estate of Pittard v. Commissioner, 69 T.C. 391, 400 (1977).

Fraud is not to be presumed, nor should a finding of fraudulent intent

be based upon mere suspicion. Petzoldt v. Commissioner, 92 T.C. 661,

699–700 (1989). But because direct proof of a taxpayer’s intent is rarely

available, fraudulent intent may be established by circumstantial

evidence. Id. at 699. The Commissioner satisfies his burden of proof by

showing that “the taxpayer intended to evade taxes known to be owing

by conduct intended to conceal, mislead, or otherwise prevent the

collection of taxes.” Parks v. Commissioner, 94 T.C. 654, 661 (1990). The

taxpayer’s entire course of conduct may be examined to establish the

requisite intent, and an intent to mislead may be inferred from a pattern

of conduct. Webb v. Commissioner, 394 F.2d 366, 379 (5th Cir. 1968),

aff’g T.C. Memo. 1966-81; Stone v. Commissioner, 56 T.C. 213, 224

(1971).

Circumstances that may indicate fraudulent intent, often called

“badges of fraud,” include but are not limited to: (1) understating

income, (2) keeping inadequate records, (3) giving implausible or

inconsistent explanations of behavior, (4) concealing income or assets,

13

[*13] (5) failing to cooperate with tax authorities, (6) engaging in illegal

activities, (7) supplying incomplete or misleading information to a tax

return preparer, (8) providing testimony that lacks credibility, (9) filing

false documents (including false tax returns), (10) failing to file tax

returns, and (11) dealing in cash. See Schiff v. United States, 919 F.2d

830, 833 (2d Cir. 1990); Bradford v. Commissioner, 796 F.2d 303, 307–08

(9th Cir. 1986), aff’g T.C. Memo. 1984-601; Parks, 94 T.C. at 664–65;

Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); Morse v.

Commissioner, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d,

419 F.3d 829 (8th Cir. 2005). No single factor is dispositive, but the

existence of several factors is “persuasive circumstantial evidence of

fraud.” Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Petzoldt,

92 T.C. at 700.

According to the record before the Court petitioner’s prior

criminal conviction demonstrates his intent to mislead, conceal, or

otherwise interfere with the IRS’s ability to assess and collect his federal

income tax. 6 Petitioner was employed as a Consular Officer and served

as chief of the Nonimmigrant Visa Unit at the U.S. Consulate in Ho Chi

Minh City, an influential position within the State Department, which

he illegally used for personal financial gain. Furthermore, his use of co-

conspirators to transfer funds through foreign bank accounts in China

and subsequent purchase of real estate holdings in Thailand reflect

petitioner’s sophisticated effort to conceal and otherwise prevent the

collection of tax.

We find that respondent has shown that five “badges of fraud”

exist in this case, including understating income, concealing income or

assets, engaging in illegal activities, dealing in cash, and filing false

documents, including a false tax return. These factors favor a finding of

fraud. Petitioner has provided evidence of his cooperation with U.S.

authorities, including the IRS; however, this evidence is only a single

factor weighing against fraudulent intent.

Furthermore, petitioner does not dispute that he intended to

evade tax by not reporting his bribery proceeds, but he tries to offset the

penalty solely through a reduction of the underpayment amount.

6 Convictions for crimes involving perjury, deceit, breach of fiduciary duty, and

concealment of criminal proceeds are highly probative of the intent to evade tax. See

Wright v. Commissioner, T.C. Memo. 2000-336, 2000 WL 1635407, at *6. Admission of

facts showing fraudulent behavior in a criminal plea agreement is also relevant to

finding fraudulent intent. See Duncan & Assocs. v. Commissioner, T.C. Memo. 2003-

158, 2003 WL 21233527, at *6.

14

[*14] Considering the evidence before the Court, we have no doubt that

petitioner—being a well-educated individual employed by the State

Department and having worked overseas for most of his career—knew

that the bribes were in fact taxable income to him, which he failed to

report with the intent, at least in part, to evade tax.

Petitioner asserted that he is not liable for the fraud penalty

because while incarcerated he directed his tax preparer to file an

amended return for 2012, reporting his bribery proceeds as income.

Petitioner is mistaken on this point. Fraud occurs upon the filing of a

false return with the requisite fraudulent intent, and that conduct

cannot be subsequently purged through the filing of an amended return.

See Badaracco v. Commissioner, 464 U.S. 386, 394 (1984). Furthermore,

respondent furnished a Certification of Lack of Record which showed

that no amended tax return for 2012 has been received from petitioner.

Petitioner’s activities with regard to the receipt of bribery

proceeds and his attempts to hide the activities associated therewith are

“badges of fraud” that clearly and convincingly indicate the civil fraud

penalty under section 6663 applies for the tax year at issue. Accordingly,

we will sustain respondent’s determination of the fraud penalty in this

case.

We have considered all of the arguments that petitioner has

made, and to the extent they are not addressed herein, we find the

arguments to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent.