Certain things, while having the look, sound, and even feel of illegality, are actually within the confines of the law, like cock-fighting, marrying a step-sister, or killing a hobo for sport. Wait…what? OK, scratch that last one. But you get the idea. The law is complicated and convoluted, and what separates the guilty from the accused is often times attributable to puzzling semantics.
Consider this recent Tax Court case, in which an air conditioning technician, despite conducting a pattern of behavior that any reasonable person would coin corporate fraud, successfully avoided over $260,000 in penalties courtesy of the specific nuances of the tax law.
Paul Avenell (Avenell) owned 96% of a corporation (Tacon). Tacon was sued, lost, and as a consequence, owed significant sums to a former subcontractor. Believing the verdict to be unjust, Avenell filed for bankruptcy and began to divert funds away from the corporation so they couldn’t be accessed by his creditor. As checks came in, he would exchange them for cashier’s checks, which were used to pay both corporate and personal expenses. As a result, the income was never recorded inside Tacon. The IRS assessed tax deficiencies, as well as substantial fraud penalties.
Despite his subversive behavior, the court found that Avenell had not committed tax fraud, because his concealment of income was done with the intent of avoiding judgment collection, rather than with the specific purpose of evading income tax.
Respondent infers that petitioner intended to evade taxes by exchanging general contractor’s checks for cashier’s checks and using those funds for personal purposes, including making a personal loan and opening a Cayman Islands bank account. Respondent further infers fraudulent intent from petitioner’s purchases of real estate in others’ names. Piling inference upon inference, however, does not qualify as clear and convincing evidence. His inferences fall short of the required proof of fraud by clear and convincing evidence. We cannot conclude that petitioner’s delusive behavior was part of a deliberate scheme of fraudulent tax evasion. Petitioner credibly testified that he refused to deposit funds into Tacon’s account to avoid the judgment collection. The timing of petitioner’s delusive behavior involving cashier’s checks, the Cayman Islands bank account, real property purchases and the personal loan is consistent with that of Grant Metal’s judgment. We do not condone petitioner’s efforts to avoid judgment collection. We also do not find, however, that his actions were done with the intent to evade tax.
Because the underlying tax deficiencies were assessed more than three years from the date the tax returns were filed, the failure of the IRS to prove fraud — which would have extended the statute of limitations indefinitely — permitted Avenell to avoid the assessed tax in addition to the dismissed fraud penalties.