UNITED STATES TAX COURT

ALS

T.C. Memo. 2013-69

UNITED STATES TAX COURT

TOMMY K. CRYER, Pe itioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8118-09.

Filed March 11, 2013.

Emile L. Hebert, III, for respondent.

MEMORANDUM 01 INION

GOEKE, Judge: After the filing of the pe ition herein Mr. Cryer died. No

substitution of any personal representative has bëen made. Consequently, when

the case was called for trial, no appearance was

ade for Mr. C er.

This case is before the Court for redetermination of the income tax liabilities

of Mr. Cryer for the tax years 1993 through 2001.

SERVED Mar 11 2013

-2[*2] From 1993 through 2001 the late Mr. Cryer operated a sole proprietorship

law practice but did not file Federal income tax returns. After an audit using a

bank deposits analysis, respondent determined Mr. Cryer had significant income

and was liable for various additions to tax for each of the years.1

After Mr. Cryer petitioned this Court, he met with respondent and the

parties agreed that significant reductions in the income tax and additions to tax

were in order which led to various concessions by respondent before trial.

1Respondent's notice of deficiency determinations were as follows:

Additions to tax

Year

Deficiency

Sec. 6651(f)

Sec. 6651(a)(2) Sec. 6654

1993

1994

1995

1996

1997

1998

1999

2000

2001

$67,332

69,317

93,663

56,930

290,346

56,926

88,712

72,705

52,875

$48,815.70

50,254.83

. 67,905.68

41,274.25

210,500.85

41,271.35

64,316.20

52,711.13

38,334.58

$16,833.00

17,329.25

23,415.75

14,232.50

72,586.50

14,231.50

22,178.00

18,176.25

13,218.75

$2,821.17

3,571.36

5,113.22

3,030.12

15,641.09

2,583.77

4,260.61

3,910.42

2,113.08

-3[*3] I. Concessions

First, the only adjustment for the tax year 1993 was for Mr. Cryer's

unreported income from his law practice for that tax year, and that adjustment was

based upon a bank deposits analysis. However, when counsel for respondent

received the administrative file for this matter, it did not contain any bank

statements for that tax year. Counsel for respondent then determined that Mr.

Cryer's bank statements for the tax year 1993 weie no longer available.

Accordingly, respondent has conceded in full all djustments for the tax year

1993.

Second, the adjustments for Mr. Cryer's unreported income from his law

practice for each of the tax years 1994 through 2001 were also based upon a bank

deposits analysis. In the notices of deficiency, the amounts determined under the

bank deposits analysis were as follows:

1994

1995

1996

Net taxable deposits

$347,952

$456,935

$294,705

Less reported gross

receipts

-0-

-0-

-0-

347,952

295,134

294,705

Total unreported

gross receipts

-4[*4]

Net taxable

deposits

1997

1998

1999

2000

2001

$1,357,713

$295,134

$409,006

$347,952

$456,935

-0-

-0-

-0-

-0-

-0-

1,357,713

295,134

409,006

347,952

456,935

Less reported

gross

receipts ,

Total

unreported ·

gross

receipts

Before he died Mr. Cryer and counsel for respondent reviewed the bank

deposits analysis and determined that some adjustments to that analysis were

warranted. After making those adjustments, the amounts determined under the

bank deposits analysis are as follows and are the amounts remaining at issue:

Net taxable

deposits

Less reported

gross

receipts

1994

1995

1996

1997 1

1998

$117,022.29

$141,768.28 ·

$117,405.30

$120,910.39

$106,802.44

-0-

-0 -

-0-

-0 -

-0 -

117,022.29

141,768.28

117,405.30

120,910.39

106,802.44 .

Total

unreported

gross

receipts

.- 5

[*5]

Net taxable

deposits

Less reported gross

receipts

-

1999

2000

2001

$104,394.53

$54,726.02

$87,123.89

-0-

-0-

-0-

104,394.53

54,726.02

87,123.89

-

Total unreported

gross receipts

The amounts respondent conceded for 1994, 1995, 1996, 1997, 1998, and

1999 are all of the deposits to the Tommy K. Cryer, Attorney-at-Law, Trust

Accounts Mr. Cryer maintained during those tax years. The amounts respondent

conceded for 2000 and 2001 are (a) all of the deposits to the Tommy K. Cryer,

Attorney-at-Law, Trust Accounts Mr. Cryer maintained during those tax years,

and (b) all of the deposits to another of Mr. Cryer's bank accounts maintained

during those tax years.2

Third, on the basis of the payroll tax returns Mr. Cryer filed for his law

practice for the tax years 1994 through 2001 and information obtained from third

parties, he is entitled to the following deductions claimed on Schedule C, Profit or

Loss From Business:

2When respondent received the administrative file in this matter, it did not

contain any bank statements for that other account for 2000 or 2001, and

respondent determined that those bank statements were no longer available.

-6[*6]

1994

1995

1996

1997

1998

Wages

$20,150

$21,025

$23,125

$23,125

$24,050

1,975

2,101

2,202

2,134

2,274

expenses

13,380

13,380

13,380

13,380

13,380

Allowable

Sch. C

expenses

35,505

36,506

38,707

38,639

39,704

-

Taxes &

licenses

Other

1999

2000

2001

$22,635

$21,275

$21,275

Taxes & licenses

2,166

2,062

2,062

Other expenses

13,380

13,380

13,380

Allowable Sch. C

expenses

38,181

36,717

36,717

Wages

II. Developments After Mr. Cryer's Death

On July 19, 2012, pleadings were filed opening the Successión of Tommy

K. Cryer in the First Judicial District Court, Parish of Caddo, State of Louisianá

(docket No. 560863-B). In those proceedings, the court denied probate of a

purported will of Mr. Cryer. The State court has yet to appoint anyone as

the executor, the administrator, or the independent administrator of the

succession, nor has it appointed anyone to act as curator for any missing heir(s).

-7-

[*7] There is no party remaining to litigate this case for Mr. Cryer; but because

of the complexity of the case and respondent's concessions, the Court determined

that respondent must present evidence to sustain the additions to tax.

Background

Decedent, Mr. Cryer, was a resident of Louisiana when he filed the petition.

During the tax years 1993 through 2001 Mr. Cryer operated a sole

proprietorship law office but did not file a Federal income tax return for any of

those years. On January 10, 2001, respondent's revenue agent sent a letter to Mr.

Cryer regarding his tax years 1993 through 1999. Attached to that letter was a

request for documents for the tax years 1993 through1999, including: (a) general

ledgers for his businesses; (b) records detailing asset sale(s) in those tax years; (c)

all business bank account information including statements, deposit slips, and

returned checks for those tax years; (d) verification of all business expenses for

those tax years; (e) copies of all filed payroll returns for those tax years; and (f) all

personal bank statements for those tax years. Mr. Cryer never produced any of the

requested records.

Mr. Cryer failed to maintain, and during the audit for his tax years 1993 .

through 2001 failed to submit for examination by respondent, complete and

accurate books and records of his income-producing activities for those tax years.

-8[*8] As a result of Mr. Cryer's failure to maintain complete and accurate records

of his income-producing activities and his failure to produce complete and

,

accurate records to respondent in connection with the examination of his tax years

1994 through 2001, respondent could not determine from Mr. Cryer's records the

amount of his gross receipts from his sole proprietorship law practice for the tax

years 1993 through 2001. Thus, respondent determined Mr. Cryer's gross receipts

from his sole proprietorship for those tax years through the use of the bank

deposits method. The revenue agents who conducted the audit for Mr. Cryer's tax

years 1993 through 2001 analyzed Mr. Cryer's bank records for those tax years to

determine the gross receipts for his sole proprietorship law practice during the tax

years 1993 through 2001. In making that analysis, the revenue agents reviewed

Mr. Cryer's bank records to determine whether any of the deposits thereto

included nontaxable items such as loans and interaccount transfers.

Mr. Cryer was married to Carolyn F. Cryer in Louisiana during all of the tax

years 1994 through 1998 and during the tax year 1999 until Ms. Cryer died in

March 1999. Louisiana is a community property State, and respondent's

calculations reflect only Mr. Cryer's share of the community income while he was

married.

-9[*9] On the basis of payments reported by third parties, respondent determined

that Mr. Cryer received $3,000 of nonemployee compensation in 1995 and $367 of

capital gains in 1998, one-half of each being unreported income of Mr. Cryer for

the respective tax years. Additionally, on the basis of the payments reported by -·

third parties, respondent determined that Mr. Cryer's unreported interest income is

as follows:

Year

Total unreported

interest income

1994

1995

1996

1997

1998

1999

2000

2001

$140

315

42

182

57

138

91

79

Unreported interest

Mr. Cryer's

income reportable by unreported interest

Mr. Crver's spouse

income

$70

157

21

91

28

69

-0-Ø-

$70

158

21

91

29

69

91

79

Mr. Cryer's unreported royalty income is as follows:

Year

1995

1996

1997

1998

1999

2000

2001

Unreporteil royalty

Total unreported royalty income reportable by Mr. Cryer's unreported

income

Mr. Cryer's spouse

royalty income

$106

71

141

30

85

384

253

$53

35

70 |

15 1

42

-0-0-

$53

36

71

15

43

384

253

- 10 [*10]

Discussion

I. Addition to Tax for Fraudulent Failure To File

.

Under Rule 142(b),3 the Commissioner bears the burden of proving fraud by

the taxpayer. The Commissioner's burden of proving that an addition to tax under

section 6651(f) for fraudulent failure to file a tax return is appropriate may be met

by evidence of (1) an underpayment of income tax (a deficiency); (2) the intent of

the taxpayer to evade taxes known or believed to be owing; and (3) a failure to file

a required return, unless due to reasonable cause. Sec. 7454 (a); Rule 142(b);

Considine v. United States, 683 F.2d 1285, 1286 (9th Cir. 1982); Dunlap v.

Commissioner, T.C. Memo. 1993-187; Schmitz v. Commissioner, T.C. Memo.

1983-482.

During the tax years 1994 through 2001 Mr. Cryer operated a sole

proprietorship law practice and also received nonemployee compensation, gains .

derived from dealing in property, interest, and royalties. Mr. Cryer did not file a

Federal income tax return for any of the tax years 1994 through 2001 and did not

report any of the income he received during those tax years.

3All Rule references are to the Tax Court Rules of Practice and Procedure,

and all section references are to the Internal Revenue Code (Code) in effect for the

years m issue.

- 11 [*11] Mr. Cryer failed to maintain and to submit for examination by respondent

complete and accurate books and records of his income-producing activities for

those years. As a result, respondent used a bank deposits analysis.

The presence or absence of fraud is never presumed but is a question of fact

that must be established by affirmative evidence. Gajewski v. Commissioner, 67

T.C. 181, 199 (1976), aff'd without published opinion, 578 F.2d 1383 (8th Cir.

1978); Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Respondent may prove

Mr. Cryer's fraudulent intent by presenting affirmative proof that he intended to

evade taxes that he knew or believed that he owed, by conduct intended to

conceal, mislead, or otherwise prevent the collection of such taxes. See Webb v.

Commissioner, 394 F.2d 366 (5th Cir. 1968), aff'è T.C. Mémo. 1966-81; Rowlee

v. Commissioner, 80 T.C. 1111, 1123 (1983). Respondent may also prove Mr.

Cryer's fraudulent intent by means of circumstantial evidence where direct

evidence is unavailable. See Stone v. Commissioner, 56 T.C. 213, 223-224

(1971); Otsuki v. Commissioner, 53 T.C. 96, 105 106 (1969).

Mr. Cryer failed to report the following amounts of taxable income he

received during the tax years 1994 through 2001:

- 12 [*12]

1994

$40,828.65

1995

54,395.14

. 1996

39,406.15

1997

41,297.70

1998

33,777.22

1999

33,218.77

2000

18,483.02

2001

50,738.89

The substantial amounts of taxable income Mr. Cryer failed to report for the tax

years at issue are evidence of his fraudulent intent for those tax years. See Ballard

v. Commissioner, 740 F.2d 659 (8th Cir. 1984), aff's in part, rev'g in part T.C.

Memo. 1982-466; Marcus v. Commissioner, 70 T.C. 562 (1978), aff'd without

published opinion, 621 F.2d 439 (5th Cir. 1980); United States v. Diehl, 460 F.

Supp. 1282 (S.D. Tex. 1978), aff'd, 586 F.2d 1080 (5th Cir. 1978).

Furthermore, in the fall of 2003 Mr. Cryer submitted income tax returns for

1994, 1995, 1996, and 1997 to the State of Louisiana listing the amounts of

$34,310, $25,793, $43,718, and $59,877, for the years 1994, 1995, 1996, and

1997, respectively, on line 7 (Federal adjusted gross income) of the Louisiana

individual State income tax returns for those years. Attached to each of those

- 13 [*13] returns was a statement in which Mr. Cryer wrote he "entered the total of all

income received during the tax year".

La. Rev. Stat. Ann. sec. 47:42A (2001), wlÅich was in effect during the tax

years 1994 through 2001, provided that "Gross income includes gains, profits, and

income derived from salaries, wages, or compensation for personal service * * * or

from professions, vocations, trades, businesses * * *[and] from interest * * * or

the transaction of any business carried on for gain or profit". La. Rev. Stat. Ann.

sec. 47:161A (2001), which was also in effect during the tax years 1994 through

2001, provided that "[i]n the case of a resident individual, items of gross income

* * * from whatever source received * * * shall be included in the taxpayer's

return and the amount of the tax shall be compute¿l upon the entire income from

whatever source derived". Mr. Cryer's Louisiana income tax returns for 1994,

1995, 1996, and 1997 are admissions that he knew that the income he received

during those tax years was taxable as gross income under the laws of the State of

Louisiana.

Those Louisiana income tax statutes are similar to the Code, which provides

that gross income means all income from whatever source derived, including

compensation for services'(including fees) and gross income derived from

business. Sec. 61(a)(1) and (2). Accordingly, Mr! Cryer, who was.a practicing

- 14 [*14] attorney in Louisiana during those tax years, knew or should have known

that the income he received at least during the years 1994-97 was taxable as gross

income under the Code.

Nevertheless, in the statements attached to his Louisiana income tax returns

for tax years 1994, 1995, 1996, and 1997 Mr. Cryer alleges that none of the

income he reported on those tax returns "can be regarded as 'Federal Adjusted

Gross Income'." In those statements Mr. Cryer also alleged that he "did not have

any taxable items of income from a taxable source (Federal gross income and

Federal gross adjusted income) as defined by the provisions of the Code (title 26,

United States Code), and the Code of Federal Regulations during the year" of that

return. Furthermore, in his January 26, 2001, letter in response to the revenue

agent's Jamiary 10, 2001, letter requesting that he produce certain documents, Mr.

Cryer wrote: "I have no records of having any taxable items of gross income from

a taxable source for the years listed in your letter, 1993-1999."

In essence, Mr. Cryer claimed that the income he received during the tax

years at issue from certain "sources" was taxable under Louisiana law, but not

under Federal law. In United States v. Clayton, 506 F.3d 405, 412 (5th Cir. 2007),

the Court to which an appeal would lie in this case, cited and followed its prior

unpublished opinion holding that "the argument that income derived from sources

- 15 [*15) within the United States" is not taxable under Federal law is "patently

frivolous" and "absurd".

In his January 26, 2001, letter Mr. Cryer also wrote: "I note that none of the

enclosures, some of which request information and/or documentation, have OMB

control numbers, indicating to me that they are not official requests requiring a

response." In Lonsdale v. United States, 919 F.2d 1440, 1445 (10th Cir. 1990),

the court held that "the Paperwork Reduction Act is inapplicable to 'information

collection request' forms issued during an investigation against an individual to

determine his or her tax liability." See also 44 U.S.C. sec. 3518(c)(1)(B)(ii)

(2002).

Mr. Cryer's allegations that (a) income of a U.S. citizen earned in and while

a resident of a State is not taxable under the Code and (b) that documents issued

by the Internal Revenue Service without OMB numbers are invalid have

repeatedly been rejected by this Court as well as other Federal courts. United

States v. Bell, 414 F.3d 474, 475-476 (3d Cir. 2005); United.States v. Hicks, 947

F.2d 1356, 1359 (9th Cir. 1991); Williams v. Commissioner, 114 T.C. 136, 138139 (2000); McDougall v. Commissioner, T.C. Memo. 1992-683, aff'd without

published opinion, 15 F.3d 1087 (9th Cir. 1993).

- 16 [*16] Additional evidence of the fact that Mr. Cryer had but failed to report

taxable income during at least some of the tax years at issue is found in two loan

applications he submitted to banks. In a loan application Mr. Cryer signed on

April 28, 1995, and gave to Minden Bank & Trust Co., he listed $50,000-$75,000

per year in the block entitled "Your Present Gross Salary or Commission".

Similarly, in a loan application date stamped January 18, 2001, that Mr. Cryer

gave to Regions Bank, he listed $6,000 in the field entitled "Gross Monthly

Income" and $1,500 in the field entitled "Other Monthly Income".

The facts supporting respondent's determination that Mr. Cryer fraudulently

and with intent to evade taxes failed to file Federal income tax returns reporting

his taxable income and income tax liabilities for the tax years 1994 through 2001

inólude but are not limited to the following:

(1) Mr. Cryer's awareness of requirements under the

Internal Revenue Code for filing returns as evidenced by

the Federal payroll tax returns he filed for liis law

practice during each of the tax years 1994 through 2001;

(2) Mr. Cryer's failure to file a Federal income tax return

for any of the tax years 1994 through 2001;

- 17 [*17]

(3) Mr. Cryer's failure to maintain and submit to

respondent complete and accurate records of his sole

proprietorship law practice for 1994 through 2001;

(4) Mr. Cryer's failure to report any of his gross receipts

from his sole proprietorship law pra tice;

(5) Mr. Cryer's failure to report any of the other income

he received;

(6) Mr. Cryer's admissions on his Louisiana income tax

returns that he received income that was taxable under

Louisiana law during the tax years at issue;

(7) Mr. Cryer's acknowledgments on loan applications .

that he submitted to banks that he had taxable income

During some of the years at issue; and

(8) Mr. Cryer's eight-year pattern of such activity.

These facts, taken together, satisfy respondent's burden of proving fraudulent

intent and establish that Mr. Cryer is liable for additions to tax under section

6651(f) for the tax years 1994 through 2001.

- 18 [*18] II. Additions to Tax for Failure To Timely Pay Tax

Because Mr. Cryer did not file Federal income tax returns for 1994 through

2001, respondent prepared substitutes for returns. See sec. 6020(b). Additionally,

Mr. Cryer has never made any payments for his Federal income tax for any of the

years. See, e.g., Asbury v. Commissioner, T.C. Memo. 2011-107.

Section 6651(a)(2) provides that if a taxpayer fails to pay taxes, unless the

failure is due to reasonable cause and not due to willful neglect, there shall be

added to the amount required to be shown as tax on the return an,amount equal to

0.5% for each month during which the taxpayer continues to fail to pay such taxes,

not exceeding 25% in the aggregate. The record shows no basis to f'md reasonable

cause. Accordingly, imposition of the additions to tax under section 6651(a)(2) for

1994 through 2001 is justified. See Pryor v. Commissioner, T.C. Memo. 1994-287.

III. Additions to Tax Under Section 6654 for Failure To Make the Required

Estimated Tax Payments

Section 6654(a) provides that if a taxpayer underpays estimated taxes, there

shall be added to the tax an amount determined at the annual rate established under

section 6621 on the amount of the underpayment for the period of said

underpayment. In this case, despite receiving gross receipts from his sole

- 19 [*19] proprietorship law practice, nonemployee compensation capital gains,

interest income, and royalties during 1994 through 2001, Mr. Cryer made no

estimated tax payments for any of those years. Accordingly, the imposition of the

additions to tax for Mr. Cryer's failure to pay his estimated tax for the years 1994

through 2001 is justified. See Ballmer v. Commissioner, T.C. Memo. 2007-295;

Horner v. Commissioner, T.C. Memo. 1994-447.

To reflect the foregoing and concessions bylrespondent,

Decision will be entered

under Rule 155.