                              T.C. Memo. 2018-89



                        UNITED STATES TAX COURT



            GARY GASKIN AND JESSIE GASKIN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7475-17.                         Filed June 20, 2018.



      Gary Gaskin and Jessie Gaskin, pro sese.

      Alicia A. Mazurek and Robert D. Heitmeyer, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      BUCH, Judge: Mr. Gaskin filed fraudulent returns, which he admits. He

later filed amended returns reporting additional income. The Commissioner

processed those amended returns and determined deficiencies in tax beyond what

was shown on those amended returns along with fraud penalties. Mr. Gaskin

disputes the fraud penalties. We find for the Commissioner.
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[*2]                           FINDINGS OF FACT

       The facts of this case are undisputed. Mr. Gaskin filed fraudulent tax

returns for 2008 through 2011. With the intent to evade tax, Mr. Gaskin omitted

income from each of those returns. The Commissioner selected the returns for

examination, and that examination led to a criminal investigation, indictment, and

plea agreement. The criminal investigation began in 2012, with the indictment

and plea agreement both taking place in 2015.

       In August 2014, while under criminal investigation, Mr. Gaskin filed Forms

1040X, Amended U.S. Individual Income Tax Return, for 2008 through 2011.

Those amended returns reported, in aggregate, more than $400,000 of additional

adjusted gross income and more than $100,000 of additional tax. In 2016 the

Commissioner assessed the tax shown on those amended returns.

       When Mr. Gaskin entered into the plea agreement in 2015, he agreed to

amounts of adjusted gross income and tax that differed from those reported on his

previously filed amended returns. The Commissioner eventually issued a notice of

deficiency in which he determined deficiencies for 2008, 2010, and 2011 and

fraud penalties under section 6663 for 2008 through 2011.1 The underpayments


       1
       All section references are to the Internal Revenue Code (Code) in effect for
the years in issue.
                                        -3-

[*3] on which the fraud penalties were calculated were based on the differences

between Mr. Gaskin’s tax liabilities as determined in the notice of deficiency and

those reported on his original fraudulent returns. While residing in Michigan, Mr.

Gaskin filed a timely petition.

      We held a trial on March 21, 2018, in Detroit, Michigan. At trial Mr.

Gaskin admitted to filing fraudulent returns. He does not contest the deficiencies

in tax determined in the notice of deficiency. He contests only the penalties under

section 6663.

                                     OPINION

      Mr. Gaskin does not dispute the deficiencies in tax; however, he disputes

the fraud penalties. Mr. Gaskin argues that the comparatively modest tax

adjustments shown in the notice of deficiency were not attributable to his fraud but

to his honest mistakes. From his perspective the notice of deficiency makes tax

adjustments by comparing Mr. Gaskin’s correct tax liabilities with the amounts

reported on his amended, nonfraudulent returns. He observes what he considers to

be an inconsistency in that the fraud penalties are computed by comparing Mr.

Gaskin’s correct tax liabilities with the amounts shown on his original, fraudulent

returns. Because in his view the notice of deficiency is predicated on the

nonfraudulent returns, he reasons that the fraud penalties should not apply.
                                       -4-

[*4] Section 6663 imposes a penalty equal to 75% of any portion of an

underpayment that is attributable to fraud. Under section 6664(a) an

underpayment is defined as the amount by which any tax imposed by the Code

exceeds the sum of the amount of tax shown by the taxpayer on his return, plus the

amounts previously assessed or collected without assessment over the amount of

rebates, which include abatements, credits, refunds, and other payments to the

taxpayer.

      The regulations clarify the effect of an amended return on a previously filed

fraudulent return for the purposes of determining an underpayment. Under section

1.6664-2(c)(2), Income Tax Regs., the amount shown on an amended return is not

included in the “amount shown as the tax by the taxpayer on his return” for

establishing the amount of the underpayment in determining the fraud penalty

under section 6663.

      Courts at every level have held that a taxpayer who filed a fraudulent return

cannot avoid the fraud penalty by filing an amended return. In Badaracco v.

Commissioner, 464 U.S. 386, 394 (1984), the U.S. Supreme Court held that “a

taxpayer who submits a fraudulent return does not purge the fraud by subsequent

voluntary disclosure; the fraud was committed, and the offense completed, when

the original return was prepared and filed.” In Badaracco the taxpayer argued that
                                           -5-

[*5] an amended return restarted the period of limitations for that year. While the

facts in this case differ, the same principle applies. In Brown v. Commissioner,

T.C. Memo. 1996-416, 72 T.C.M. (CCH) 620 (1996), we held that a taxpayer was

liable for a fraud penalty even after he filed an amended return. The subsequent

filing of an amended return after an audit had begun did not purge the original

fraudulent filing or fraudulent intent.

      In his plea agreement Mr. Gaskin admitted to filing fraudulent returns. He

agreed that from 2008 to 2011 he underpaid his taxes by over $100,000 and that

the underpayment for each year was due to fraud. As a result the fraud penalty

applies to each of the fraudulent returns. An amended return cannot erase the

fraud he committed.


                                                 Decision will be entered for

                                          respondent.
