Harrington v. Commissioner
In Harrington v. Commissioner of Internal Revenue,
The
Facts
Harrington is a
In 2009,
Relying on information disclosed in the agreement, revenue agent
After considering both the original and amended tax returns, McManus concluded that Harrington had unreported income from dividends, interest, and capital gains from previously unreported foreign accounts in the
McManus informed Harrington of the proposed tax deficiencies and fraud penalties for tax years 2005 through 2010 via a letter dated
Analysis
Harrington argued that "(1) the Tax Court erred in finding fraud in connection with his tax returns for 2005-09, (2) the statute of limitations barred assessment of taxes for those years, and (3)
Harrington argued that the Tax Court erred in finding he underpaid taxes for tax years 2005 through 2009 and in finding his originally filed returns were fraudulently filed with the intent to evade payment of income tax. In particular, he argued that his amended returns should not have been considered evidence of underreported income because he submitted the amended return by mistake at McManus's demand and his counsel's erroneous advice.
The Tax Court stated precedent that held positions taken in a tax return signed by a taxpayer may be treated as admissions. Nevertheless, it still weighed Harrington's testimony that he submitted the amended returns at the demand of McManus against McManus's testimony that denied the same. The appellate court refused to reweigh the testimony evidence on appellate review.
The Tax Court defined fraud as actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owed.If the Commissioner established that any portion of an underpayment was attributable to fraud, the entire underpayment is treated as attributable to fraud, except with respect to any portion of the underpayment that the taxpayer established (by a preponderance of the evidence) was not attributable to fraud.
Because the existence of fraud is ordinarily not susceptible of direct proof, it must generally be determined from surrounding inferences and circumstances fairly deductible from the conduct of the parties. Accordingly, the Tax Court reviewed Harrington's entire course of conduct to determine whether there existed "badges of fraud," which include but are not limited to:
- understating income,
- keeping inadequate records,
- giving implausible or inconsistent explanations of behavior,
- concealing income or assets,
- failing to cooperate with tax authorities,
- engaging in illegal activities,
- supplying incomplete or misleading information to a tax return preparer,
- providing testimony that lacks credibility,
- filing false documents (including false tax returns),
- failing to file tax returns, and
- dealing in cash.
Based on the amended tax returns and the records obtained through
On appeal, Harrington primarily restated his arguments from his post-trial briefing before the Tax Court. He argued that his testimony was, in fact, plausible and consistent; that he never exercised ownership or control over assets in the offshore accounts; that he cooperated with McManus during her examination; and that his originally filed tax returns, which did not acknowledge any ownership in the offshore accounts, were true and correct.
Nevertheless, these arguments were based on factual conclusions, and the appellate court stated that it did not have the authority to change the Tax Court's factual findings. Thus, the appellate court affirmed the Tax Court's holding that Harrington's initially filed returns were false and fraudulent with the intent to evade tax.
Harrington also argued that the statute of limitations had run on the Commissioner's authority to impose the tax assessments. The court responded by referring to Section 6501(c)(1), which states that "[i]n the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed ... at any time." Because the appellate court had affirmed the Tax Court's finding that Harrington's initially filed returns were false and fraudulent with the intent to evade tax, the appellate court affirmed the Tax Court's conclusion that the statute of limitations did not bar the assessment.
Harrington argued that the penalty assessments were void for failure to obtain prior supervisory approval under Section 6751(b), which provides that "[n]o penalty ... 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." The Tax Court has held that Section 6751(b) requires supervisory approval before the revenue agent formally communicates the decision to impose penalties to the taxpayer. McManus's case activity record, internal emails, and the handwritten date next to Slack's approval signature supported that McManus obtained supervisory approval on
Harrington argued that McManus and Slack improperly backdated the supervisory approval form. He supported his position by referring to a typewritten date of
Comment
This article first appeared in the
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