                               T.C. Memo. 2012-214



                          UNITED STATES TAX COURT



                 BETTY LOREN-MALTESE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1069-05.                             Filed July 30, 2012.



      John James Morrison, for petitioner.

      Sean R. Gannon and Katie Chapman, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Betty Loren-Maltese is a locally well-known Illinois

public servant who until recently was serving time in federal prison for her role in an

insurance scheme to defraud the Town of Cicero of more than $10 million. See

United States v. Spano, 421 F.3d 599, 602 (7th Cir. 2005). The government also
                                         -2-

indicted her on charges of criminal-tax fraud, but the criminal-tax trial led to a hung

jury and the charges were dismissed. The Commissioner claims that Ms. Loren-

Maltese fraudulently underreported income on her 1994 income tax return by

omitting two very substantial conversions of campaign funds to personal use. This,

he argues, justifies imposing on her a civil-fraud penalty and eliminates the bar of

the statute of limitations. Ms. Loren-Maltese was mostly silent during her trial in

our Court, relying on her attorney’s advice to take shelter under the Fifth

Amendment.

                                      OPINION

      It’s the facts that make this case interesting, but there are three issues of law

that color its background: the general rules of tax fraud, the proper tax treatment of

money taken by a politician from her campaign fund for personal use, and the effect

of taking the Fifth Amendment in civil litigation. We’ll quickly review them.

      Tax fraud is important in this case because fraud stops the clock on the

statute of limitations, and so much time has passed that proving fraud is the only

way the Commissioner can win. See sec. 6501(a), (c).1 The question is: Can the



      1
        Unless we say otherwise, all section references are to the Internal Revenue
Code for the year at issue, and the Rule references are to the Tax Court Rules of
Practice and Procedure.
                                         -3-

Commissioner prove, by clear and convincing evidence, that Ms. Loren-Maltese

intentionally evaded a tax that she believed was due? To do so, the Commissioner

must establish that (1) an underpayment exists; and (2) some portion of the

underpayment was due to fraud. See sec. 7454(a); Rule 142(b); Duncan & Assocs.

v. Commissioner, T.C. Memo. 2003-158, 2003 WL 21233527, at *4. Fraud

requires a state of mind--it is commonly defined as an “intentional wrongdoing” on

the part of the taxpayer with “the specific purpose to evade a tax believed to be

owing.” McGee v. Commissioner, 61 T.C. 249, 256 (1973), aff’d, 519 F.2d 1121

(5th Cir. 1975).

        Because it’s rare to have direct proof of someone’s state of mind, we usually

have to rely on circumstantial evidence. Petzoldt v. Commissioner, 92 T.C. 661,

699 (1989). We consider the entire record. Beaver v. Commissioner, 55 T.C. 85,

92 (1970). We may infer fraud from any conduct calculated to mislead or conceal.

Id. at 93; Acker v. Commissioner, 26 T.C. 107, 112 (1956). And we look for

“badges of fraud”--including the ones the Commissioner argues are present in this

case:
                                          -4-

      •      inadequate records;

      •      implausible or inconsistent explanations of behavior;

      •      concealing assets;

      •      engaging in illegal activities; and

      •      attempting to conceal activities.

Bradford v. Commissioner, 796 F.2d 303, 307-08 (9th Cir. 1986), aff’g T.C. Memo.

1984-601. We also look at the taxpayer’s background, including her sophistication,

experience, and education. Niedringhaus v. Commissioner, 99 T.C. 202, 211

(1992).

      The second legal issue in this case is the use of campaign funds. Ms. Loren-

Maltese controlled two of these: the Republican Committeeman Fund for the Town

Republican Organization of Cicero (Organization Fund), and the Betty Loren-

Maltese Committeeman Fund (Committeeman Fund). Cicero’s town attorney, Burt

Odelson, told Ms. Loren-Maltese before she filed her 1994 return that the Illinois

state election code didn’t require her to file financial reports or publicly disclose

contributions or expenditures for the Committeeman Fund. The Organization Fund,

however, was required to file publicly disclosed financial reports that gave detailed
                                         -5-

lists of contributions and expenditures.2 He also correctly explained the tax

consequences of taking money from the funds--Ms. Loren-Maltese could

supplement her salary by taking money from either the Organization Fund or the

Committeeman Fund to buy something for herself or to make an investment for her

own personal benefit, but the money would be personal income to her and she’d

owe tax on it in the year that she took it. See United States v. Scott, 660 F.2d 1145,

1151 (7th Cir. 1981); Stratton v. Commissioner, 54 T.C. 255, 282 (1970). She

could also buy things or make investments as a fund’s agent, and, if she used what

she bought for the fund’s intended political purpose would not have to include that

money in her income,. See Stratton, 54 T.C. at 282; Rev. Rul. 71-449, 1971-2 C.B.

77.




      2
         In 1994 Illinois law allowed public officials, who like Ms. Loren-Maltese,
were also political-party officials, to raise money from donors--in their capacity as
party officials--in amounts that they could keep secret. This was because political-
party officials were not considered public officeholders under Illinois law, which
required only political committees for public officeholders to disclose committee
contributions and expenditures. See 10 Ill. Comp. Stat. Ann. 5/9-1.3, 5/9-1.7, 5/9-
10 (West 2010). Illinois sewed up this loophole in 1995 by redefining members of
political-party committees as public officeholders. 1995 Ill. Legis. Serv. P.A. 89-
405 (H.B. 1498), sec. 10 (West). This made Ms. Loren-Maltese’s Committeemen
Fund subject to the same public financial-disclosure requirements as any other
political fund beginning November 8, 1995. See 10 Ill. Comp. Stat. Ann. 5/9-1.3,
5/9-1.7.
                                         -6-

      The third and final legal issue in this case is the consequence of Ms. Loren-

Maltese’s taking the Fifth Amendment. Like the other legal issues, the law here is

well settled, and Ms. Loren-Maltese’s steadfast invocation of her right not to

incriminate herself makes the Commissioner’s job at least a bit easier. The parties

took pains to argue about whether Ms. Loren-Maltese’s invocation of the Fifth was

justified--but that doesn’t matter much here because even a valid invocation of the

Fifth Amendment allows us to draw a negative inference from her refusal to answer

a question if the Commissioner produces some additional supporting evidence. See

Baxter v. Palmigiano, 425 U.S. 308, 318 (1976).

      We can also draw inferences from her silence if, under the circumstances, it

would’ve been natural for her to object. See United States v. Hale, 422 U.S. 171,

176 (1975). This later principle is not constitutional, just an acknowledgment of

human nature. The original Cicero made the point 2,000 years ago in his oration

exposing the plot of Lucius Catilina and his friends to plunder their government’s

treasury.3 He observed that people have a natural tendency to defend their

reputation, and that silence in the face of accusations suggests that there might be



      3
         And, allegedly, to murder the Senate, overthrow the Republic, and set their
city on fire. See Z. Yavetz, “The Failure of Catiline’s Conspiracy”, 12 Historia:
Zeitschrift für Alte Geschichte 485, 485 n.1 (1963).
                                          -7-

some merit to the charges. The Latin is more succinct: Cum tacent, clamant. M.

Tullius Cicero, First Oration Against Lucius Catilina: Delivered in the Senate 21.

                                FINDINGS OF FACT

      The silence that shouts out here arose from Cicero, Illinois, a suburb of

Chicago that sits on its western hip like a well-holstered gun, and that has a colorful

history that reaches back into the 1920s when Al Capone took refuge there.

(Capone, though best known for his failure to file accurate tax returns, was also

apparently well known for superintending a large number of saloons and other

illegal enterprises in Cicero during Prohibition.) Some of this past is not dead, and

is not even past--as Ms. Loren-Maltese remarked at trial: “There’s always

investigations in Cicero.”

      With a population of around 80,000, Cicero is one of the largest

municipalities in Illinois. It also has the unusual distinction of being its own

township. Cicero, Ill., Code of Ordinances pt. I (2001). This makes Cicero more

autonomous than most municipalities: It runs its own elections, administers its own

finances (although Cook County may review some township functions, such as

property-tax assessments), and provides services for its citizens that are ordinarily

provided by counties in Illinois. See, e.g., 60 Ill. Comp. Stat. Ann. 1/85-10 (West

2006 & Supp. 2012) (powers generally); 60 Ill. Comp. Stat. Ann. 1/85-13 (health
                                        -8-

and safety authority); 60 Ill. Comp. Stat. Ann. 1/235-5 (taxation authority). Cicero

also has its own police department, fire department, housing department, liquor

commission, etc. At the time of the events leading to this case, Cicero was divided

into 80 voting precincts, each of which had at least one precinct captain for each

party. The precinct captain, who is appointed by the committeeman or another

elected official, marshals support for party nominees. The Town is governed by a

board of trustees and by the town president, both of which hold considerable power

in the Town’s day-to-day affairs.

      Ms. Loren-Maltese was the President of Cicero and the Republican

Committeeman of Cicero Township in 1994. She is also the widow of Frank

Maltese, a “prominent Cicero politician who confessed to being a mob bookmaker

and pleaded guilty to a federal gambling charge.” Hanania v. Loren-Maltese, 212

F.3d 353, 354-55 (7th Cir. 2000) (citing United States v. Maltese, No. 90 CR 87-

19, 1993 WL 222350 (N.D. Ill. June 22, 1993)). Like his wife, Mr. Maltese was

sentenced to prison, but he died of natural causes before he began serving his

sentence.

      Ms. Loren-Maltese’s political roots in Cicero are deep, and sprouted from her

job as editor of The Cicero Observer, a Republican newsletter about the Town’s

politics. She was also an important supporter and precinct captain for former Town
                                         -9-

President Henry Klosak. She served as his presidential aide and, since 1980, held

several appointments in Town government with a portfolio of subjects from Section

8 housing to traffic violations and even deputy court-clerking duties. Mr. Maltese

then appointed her to be the town’s deputy liquor commissioner when the previous

one resigned during an FBI investigation into his practice of taking bribes and

skimming money off liquor-license renewal fees. See United States v. Maltese,

1993 WL 222350, at *2.

      Ms. Loren-Maltese had more effective power than most deputy liquor

commissioners, because the incumbent liquor commissioner was serving at the same

time as president of Cicero, and most of his liquor-commissioner-related duties fell

to her. The Town had problems on this front--when Ms. Loren-Maltese took over

the job, there weren’t any records, and she had to go up and down the streets of the

Town to find out who was selling liquor and who had a license. She also held

hearings in cases arising from violations of the liquor laws and license revocations,

and she even worked on a revision of the Town’s liquor ordinance.

      On January 12, 1993, Mr. Maltese (who himself had an active public life as

simultaneously town assessor, head of the public-works department, and member of

the Town’s board of trustees) succeeded in securing his wife’s appointment as

interim president after Mr. Klosak died in office. She then won election in her own
                                        - 10 -

right in April 1993. Ms. Loren-Maltese claims she was a “political neophyte,” yet

she managed to be reelected for three additional four-year terms in some hotly

contested elections and remained president until convicted in September 2002. She

was also not above being a bit aggressive in dealing with political rivals. See Cruz

v. Town of Cicero, Ill., 275 F.3d 579, 588-89 (7th Cir. 2001) (holding that a

reasonable jury could conclude that Ms. Loren-Maltese was motivated by improper

animus when she rejected a developer’s condominium-conversion application in

retribution for his repaying her “million-dollar favor” of approving a favorable lease

with merely a bouquet of flowers.)

      When Ms. Loren-Maltese became president, she was also appointed the

Republican committeeman of Cicero Township and was later elected to a full term

in that job too. Committeeman is a political position--the Republican committeeman

of Cicero Township heads the Town Republican Organization of Cicero. In that

position, she promoted Republican candidates for office and oversaw scores of

precinct captains. The job also gave her control over the Organization Fund.

      Her tenure in office was not tranquil. In October 1996 the Chicago Sun-

Times ran an article that named her as a target of a government investigation. In

June 2001 a federal grand jury indicted her and several coconspirators for
                                         - 11 -

conspiracy to defraud the Town through a pattern of racketeering via multiple acts

of bribery, money laundering, mail and wire fraud, official misconduct, and

interstate transportation of stolen property. Her criminal trial lasted about three

months, culminating in a conviction on August 23, 2002, on all but one count of the

indictment (the criminal tax charge later tried separately). This put an end to her

political career, and she was sentenced to eight years in prison. The government

then tried her separately on the criminal-tax charges, but the jury hung, and the

government decided not to try her again. See Gov’t Motion to Dismiss Count 13 of

the Above-Captioned Indictment, United States v. Spano, No. 1:01-cr-348 (N.D. Ill.

Jan. 31, 2003), ECF No. 494. Ms. Loren-Maltese and the other conspirators

appealed their convictions and sentences to the Seventh Circuit, which upheld the

convictions but remanded for resentencing. See United States v. Spano, 421 F.3d

599 (7th Cir. 2005). The trial court then upheld the original sentence, and she

remained imprisoned until 2010.

      Even though the criminal tax-fraud indictment was dismissed, the

Commissioner was not through with Ms. Loren-Maltese. He issued a notice of

deficiency alleging civil tax-fraud for tax year 1994. Ms. Loren-Maltese filed a
                                           - 12 -

petition in our court while involuntarily living in a federal prison in California,4 and

we held a short trial in Chicago whose record was supplemented by the parties’

stipulated admission--“as testimony and exhibits in this proceeding”--of slightly

fewer than 10,000 pages of transcript and numerous exhibits from her criminal

trials.5

           The Commissioner boiled down this sea of information into a very detailed

analysis of two transactions: Ms. Loren-Maltese’s purchase of a 1993 classic black

Cadillac Allante convertible, and her investment in a luxury golf course and

clubhouse. The Commissioner contends that her withdrawal of more than $350,000

from the Committeeman Fund to finance the car and investment created taxable

income and that she fraudulently tried to evade the tax due on that income.




           4
         Our decisions are appealable to the circuit where the taxpayer resides when
she files her petition unless the parties stipulate differently. Sec. 7482(b)(1)(A), (2).
Ms. Loren-Maltese was a longtime resident of Cicero until she was incarcerated.
Unless incarceration results in a change of residency, which we doubt but need not
resolve here, our decision would be appealable to the Seventh Circuit unless the
parties stipulate differently.
           5
        We therefore accept as testimony for purposes of this trial all of the
testimony that took place in the criminal trials, and we (like the parties) used the
documentary evidence extensively. See, e.g., Hoover v. Commissioner, T.C.
Memo. 2006-82, 2006 WL 1073427, at *1; Vardine v. Commissioner, T.C. Memo.
1969-57.
                                        - 13 -

A.    The Car

      In September 1994, Ms. Loren-Maltese visited a local dealer and bought a

classic black limited-edition 1993 Cadillac Allante convertible for $53,512.40. She

paid with a check, and the check was drawn on the Committeeman Fund. All the

documents prepared by the dealer, which we find Ms. Loren-Maltese reviewed,

show the owner as Betty Loren-Maltese (and not in any representative capacity for

the Town of Cicero or the Republican Party)--including the Bill of Sale/Purchase

Agreement, the Certificate of Origin, and the title and license-plate registration. Ms.

Loren-Maltese even transferred the license plate from her other personal car to the

Cadillac. She added the Cadillac to her personal automobile-insurance policy, and

designated its use as “pleasure use” (even though her insurance agent, Eric

Sundstrom, explained that if the Allante were owned by the Town it would need a

separate commercial policy). Ms. Loren-Maltese gave the dealership her personal

information such as her address and driver’s-license number.6 The name on the title

creates a prima facie presumption under Illinois law that she is the owner. See

United States v. Ellis, 739 F.2d 1250, 1254 (7th Cir. 1984).


      6
        The exhibits included the title to a Jeep which the Town of Cicero bought
that same year. We observed that all the documents related to the Jeep identify the
Town as purchaser and Ms. Loren-Maltese as the Town’s duly authorized agent.
We find that this shows that Ms. Loren-Maltese knew how to distinguish personal
from government car ownership.
                                        - 14 -

      Paper formalities aren’t conclusive, though. See Stratton, 54 T.C. at 269,

282. “[T]axation is not so much concerned with the refinements of title as it is with

actual command over the property taxed.” Corliss v. Bowers, 281 U.S. 376, 378

(1930); Friedman v. Commissioner, T.C. Memo. 1968-145, aff’d, 421 F.2d 658 (6th

Cir. 1970). On this issue, the Commissioner points not just to the paper trail but to

Ms. Loren-Maltese’s silence at trial. She invoked the Fifth on virtually every

question about the car, including its purchase and her use of it, and how she

reported (or rather didn’t report) on her 1994 tax return her use of Committeeman

Fund money to buy it.

      Ms. Loren-Maltese, whose coiffure is legendary in Chicagoland, broke her

Fifth Amendment silence on this subject only once--to tell us that though the car was

a convertible, she didn’t go “cruising around” Town with the top down because she

“wouldn’t want to mess up [her] hair.” On this narrow issue, we find her entirely

credible, but the evidence that her use of the Cadillac was personal rather than

political is overwhelming. Though she was a good-humored, engaging, and credible

witness when actually answering questions, her silence on substantive questions

severely injured her case--not only because we specifically warned her that

claiming the Fifth Amendment would allow us to draw a negative inference, but
                                            - 15 -

because the Commissioner’s voluminous evidence against her strongly supported

that inference.

      Ms. Loren-Maltese used money from her personal bank account7 to pay the

insurance premiums as well as for the annual license-plate registration renewals,

gas, repairs, and maintenance for the car. Ms. Loren-Maltese, who has also been a

licensed real-estate agent since the 1970s, even deducted gas and mileage for the car

on her 1994 income tax return as a “real estate sales” business expense--which we

find was clearly not a political purpose.

      Shortly after she bought the car, Ms. Loren-Maltese called her secretary,

Lauren Racanelli, down from her office to “see her new car” (while she was on her

way to her summer home in Lakes of the Four Seasons in Crown Point, Indiana).

Both Ms. Racanelli and Commander Clarence Gross (of the Cicero Police

Department), and even her own administrative assistant, never saw the Cadillac at

any political or campaign function, and there were numerous such events during Ms.

Loren-Maltese’s presidency.

      Ms. Loren-Maltese refused to testify to the whereabouts of the Allante, but

the evidence leads us to find that in 1994 the car wasn’t even normally in Cicero,


      7
        With the exception of two payments made in years not at issue made with
funds from the Committeeman Fund--one for 1995 and one for 1997.
                                         - 16 -

but rather garaged at her summer home in Indiana, and that this continued to be the

case until 1998. Ms. Racanelli only saw the car twice: the first time when Ms.

Loren-Maltese called her down from her office to see the new car before driving it

to Indiana, and the second time at the garage next to the town hall about a month

later. Commander Gross, the policeman who had the chore of supervising the

garage, saw the Allante in Ms. Loren-Maltese’s personal parking spot only

“several” times in the six months after she first bought it, and then didn’t see the car

at all after that until 1998 (when it had a vehicle decal from the gated community in

Indiana where she had her summer home).

      These facts, together with Ms. Loren-Maltese’s silence at trial, lead us to

find that she personally converted $53,512.40 from the Committeeman Fund to

buy a car for her personal use, failed to include that amount as income on her

return, and that then caused an understatement of her tax liability. An

understatement alone is not enough to show fraud. The Commissioner must

provide some evidence to support an inference of fraudulent intent. There is

plenty to suggest that not only did Ms. Loren-Maltese understand that she was

using campaign funds for personal use, but that she willfully did so with the intent

to evade tax she knew would have been due. She was well-advised by the town

attorney on the details and importance of titling and tracing funds. She used this
                                        - 17 -

knowledge to hide her use of campaign funds--transferring money from the

Organization Fund (which had a reporting requirement) to the Committeeman Fund

(which until the end of 1995 did not). Moreover, once the political winds shifted,

Ms. Loren-Maltese asked Commander Gross to garage the car at his home from

1998 until 2000 or 2001--after the Chicago Sun-Times named her as the target of a

federal investigation, and after she learned that Charles Schneider (one of her

alleged co-conspirators) had been served with a grand-jury subpoena.

      We therefore find that the Commissioner has shown by clear and convincing

evidence that Ms. Loren-Maltese’s understatement of income was due to fraud.

B.    The Golf Course

      Once the Commissioner has established fraud for one portion of the

understatement, the burden shifts to the taxpayer to show by a preponderance of the

evidence that other parts of the understatement aren’t also due to fraud. Sec.

6663(b); Bussell v. Commissioner, T.C. Memo. 2005-77, 2005 WL 775755, at *13,

aff’d, 262 Fed. Appx. 770 (9th Cir. 2007).

      The other part of the asserted understatement in this case comes from Ms.

Loren-Maltese’s investment in the Four Seasons, a historic resort and golf course

located on Miscauno Island, Wisconsin. In 1993, however, it badly needed

substantial renovation to regain its old glory--and the money for the work came
                                       - 18 -

from Specialty Risk Consultants,8 Plaza Partners9 (which owned the Four Seasons),

Miscauno Management (which managed the resort), and also from loans by Ms.

Loren-Maltese and others.

      Plaza Partners bought the Four Seasons Golf Course from Miscauno

Management on December 2, 1993. Ms. Loren-Maltese went with Gregory Ross,

John LaGiglio, and Michael Spano, Sr. to see if it would be a good investment.10

Between July and September of 1994 Ms. Loren-Maltese gave Mr. LaGiglio three




      8
       The money from the Specialty Risk Consultant bank account came from
payments the Town received to administer insurance claims of its employees.
United States v. Spano, 421 F.3d 599, 602 (7th Cir. 2005).
      9
        Plaza Partners was created on October 17, 1992, to serve as a nominee for
Messrs. John LaGiglio and Frank Taylor (who were also convicted for their role in
operating Specialty Risk Consultants, which was the insurance administrator for
Cicero, and the key organization in defrauding the Town of more than $10 million).
Both men needed nominees to disguise their interest in various investments, as they
had trouble with the IRS, so they put their partnership interests in their wives’
names. See Spano, 421 F.3d at 604; Plea Agreement at 7, United States v. Taylor,
No. 1:01-cr-348-10 (N.D. Ill. Apr. 24, 2002), ECF No. 161.
      10
        Mr. Ross was a former special agent with the IRS, and a co-conspirator
turned government witness. See Plea Agreement, United States v. Ross, No. 1:01-
cr-348-8 (N.D. Ill. May 13, 2002), ECF No. 195; Plea Agreement, United States v.
Ross, No. 1:00-cr-734 (N.D. Ill. Apr. 19, 2002), ECF No. 35; Plea Agreement,
United States v. Ross, No. 1:01-cr-30-5 (N.D. Ill. Feb. 14, 2002), ECF No. 145.
He, Mr. LaGiglio, and Mr. Spano were also convicted for their participation in the
insurance-fraud scheme that ensnared Ms. Loren-Maltese.
                                        - 19 -

checks totaling $300,000 that she drew on the Committeeman Fund’s account. All

these checks were for investment in the Four Seasons.

      The investment was memorialized in a promissory note dated January 11,

1994; a nominee agreement executed by Ms. Loren-Maltese dated November 1,

1994; and a mortgage on the Four Seasons dated November 28, 1994. All these

documents identify Ms. Loren-Maltese in her personal capacity only--there is no

mention of her in any representative capacity, much less as an officer or agent of the

Committeeman Fund. This is striking when one notices that the other investors

(such as Specialty Risk Consultants) were identified in their respective promissory

notes as holding interests as partnerships. The documents also show that the deal

was meticulously researched and carefully drafted. The investors even

commissioned research into a complicated question of Wisconsin law of whether

multiple parties who share a mortgage can have equal priority in the event of a

default. The lawyers who did the research carefully noted the names of the parties

involved, their legal capacities, and the amounts of their investments.

      These notes and other documents show that Ms. Loren-Maltese gave Mr.

LaGiglio a check for $100,000 that was drawn on the Committeeman Fund in July

1994 and that she personally signed that check. Mr. LaGiglio deposited it into

Plaza Partners’ account the next day. On July 20, 1994, Ms. Loren-Maltese
                                       - 20 -

withdrew $250,000 from the Organization Fund account and deposited it in the

Committeeman Fund account, and later that day Ms. Loren-Maltese gave Mr.

LaGiglio a check drawn on the Committeeman Fund for $100,000 which he

deposited in the Plaza Partners account. Two months later, Ms. Loren-Maltese gave

Mr. LaGiglio another check for $100,000 drawn on the Committeeman Fund, which

he deposited into Miscauno Management. This leads us to find that Ms. Loren-

Maltese financed this investment with campaign money, but when payments were

made in partial satisfaction of the resulting debt they were made to Ms. Loren-

Maltese personally. This was again in contrast to other checks in the record, for

instance those written by Specialty Risk Consultants11 to Ms. Loren-Maltese as

political contributions, which were written to her as “Betty Loren-Maltese,

Committeeman,” “The Committee to Elect Betty Loren-Maltese,” or written directly

to the Committeeman Fund, but were not written to Ms. Loren-Maltese personally.

      There is one important quibble. Although Ms. Loren-Maltese’s promissory

note is for $500,000, which is the amount the Government argued during the

criminal investigation was her total investment in the property. After her two




      11
        At some point after the promissory note was signed, ownership of the Four
Seasons was transferred to Specialty Risk Consultants.
                                        - 21 -

criminal trials, however, the Commissioner limits his argument to the $300,000 that

he can trace to withdrawals in 1994 from the Funds that Ms. Loren-Maltese

controlled.

      Ms. Loren-Maltese fails to carry her burden to establish by a preponderance

of the evidence that the understatement of income arising from the Four Seasons

investment wasn’t done with fraudulent intent. Ms. Loren-Maltese argues that the

repayments support her contention that this was an investment on behalf of the

Committeeman Fund. But we find that the timing of the partial repayments12 is

actually more consistent with trying to conceal fraud. The terms of the promissory

note required monthly payments much earlier than when the first one was made,

with interest and a late fee.13 But the checks were issued only after a grand-jury

subpoena for information and documents relating to investments made in the Four




      12
        A total of $271,925.32 was repaid in three checks issued by Specialty Risk
Consultants: $150,000 on January 5, 1996, and two checks for $75,000 and
$46,925.32 on October 18, 1996. The checks were payable to Betty Loren-
Maltese, and she later (on February 5 and October 21, 1996, respectively) signed
them over to the Committeeman Fund.
      13
        The first payment, of interest from October 1, 1994, through March 31,
1995, was due on April 1, 1995, and monthly installments of interest and principal
should have begun on May 1, 1995, and continued until October 1, 1995. The
promissory note provided for a 5% late fee for any payment not received by five
business days after its due date.
                                            - 22 -

Seasons was served on Mr. Schneider and Specialty Risk Consultants in September

1995.

         Ms. Loren-Maltese’s claim is also inconsistent with her treatment of the

investment on her Form D-2s.14 The chicanery with these financial reports (which

overstate the amount of money available to the Committeeman Fund) also suggests

fraud:

                                                     Actual amount
                         Amount reported               available
                         on Form D-2 as of           Committeeman
                            first date of             Fund Bank
     D-2 period           reporting period             statements      Difference


 11/8 - 12/31/1995         $787,669.00                $474,063.18     $313,605.82


 1/1 - 6/30/1996             813,316.0015              449,570.18      363,745.82


         14
         Form D-2, Report of Campaign Contributions and Expenditures, is the
name of the form political committees use in Illinois to report their assets,
contributions, and expenses. “A Guide to Campaign Disclosure”, Illinois State
Board of Elections, 14 (Mar. 2012), http://www.elections.il.gov/downloads/
campaigndisclosure/pdf/campdiscguide.pdf.
         15
         Ms. Loren-Maltese filed two Forms D-2 that allegedly detail the amount of
the Committeeman Fund’s assets on January 1, 1996: one, a pre-election report for
the period of January 1, 1996, through February 18, 1996, filed on March 1, 1996,
and claiming assets of $777,162, and another, a semi-annual report for the period
January 1, 1996, through June 30, 1996, filed on October 17, 1996, claiming assets
of $813,316. This unexplained $36,000 discrepancy underscores how unbelievable
the Committeeman Fund’s Forms D-2 are.
                                       - 23 -


 7/1 - 12/31/1996         968,301.00            766,081.49          202,219.51


 1/1 - 6/30/1997          978,275.35            900,025.14            78,250.21


 7/1 - 12/31/1997         557,941.49            483,229.06            74,712.43

      Ms. Loren-Maltese argued at length during her second criminal trial that the

difference between the reported assets and the actual account balances of the

Committeeman Fund represented the amount of the loan balance on the Four

Seasons investment. This explanation makes no sense: The Committeeman

Fund’s share of the loan was supposedly $300,000, and at the beginning of

January 1996 no payments had yet been made, but the difference between the

Fund’s reported assets and cash-on-hand was still more than $50,000 greater than

the amount of the loan. And the difference continued to fluctuate even after Ms.

Loren-Maltese reimbursed the Fund in 1996. Ms. Loren-Maltese nevertheless

argues that the reported assets and the cash-on-hand between the end-of-year 1996

and midyear 1997 reports is due to the $150,000 and the $75,000 repayments.

Again, neither the facts nor simple arithmetic supports her argument. By the

beginning of the third reporting period she had received a repayment of $150,000

which she deposited in the Committeeman Fund, and by the beginning of the
                                        - 24 -

fourth reporting period she received two payments for $75,000 and $46,925.32.

Something is clearly missing.

      We draw a negative inference from her taking the Fifth Amendment when

asked at trial about whether she knowingly falsified the Forms D-2 to disguise her

investment in the Four Seasons. The omissions and inconsistencies in these forms,

along with her less-than-credible explanations, flash another badge of fraud, that of

implausible explanations.

      Her contention that she complied with state reporting requirements and

treated the promissory note as an investment is not credible. In 1998 the Form D-2

changed to include an investment schedule, and Ms. Loren-Maltese reported the

loan amount’s face value as only $75,000 on that schedule. She also reported only

some of the repayments on the promissory note. She reported interest received on

October 18, 1996, of only $46,925.32. But she failed to report the $75,000

payment she received that same day, as well as the $150,000 payment on January 5,

1996--even though she claims that these payments reduced the loan balance. This is

exceptionally suspicious imprecision--especially given the meticulous attention to

detail on other expenditures and receipts on the Forms D-2, which include the exact

values of keychains, McDonald’s meals, and similarly modest expenses.
                                        - 25 -

      We therefore find that Ms. Loren-Maltese’s treatment of the promissory note

from start (the name on the promissory note, mortgage, and nominee agreement) to

finish (her treatment on the disclosure on the Forms D-2) is inconsistent with the

withdrawal of $300,000 from the Committeeman Fund to invest in the luxury golf

course as the Committeeman Fund’s own investment. Her attempts to

recharacterize this as an investment on behalf of the Fund, rather than a conversion

of the Fund’s assets to her personal use--an attempt we find she made only after

Specialty Risk Consultants received a subpoena--are too little too late, and fail to

refute the Commissioner’s argument that any understatement of tax flowing from her

failure to include the amount of her investment in the Four Seasons as income on her

1994 return was due to fraud.

      The Commissioner also reminds us that a taxpayer’s level of education and

business experience is a factor in figuring out whether a person is acting with

fraudulent intent. Niedringhaus, 99 T.C. at 211. Ms. Loren-Maltese is a capable

politician who managed the business affairs of the Town. She understood

contracts and the importance of title from her experience as a real-estate agent.

She understood what a nominee was from her experience as deputy liquor

commissioner. She hired attorneys to create the Committeeman Fund and to

document the Four Seasons investment. She participated in a complex scheme to
                                        - 26 -

defraud the Town of Cicero of over $10 million, which not only indicates an astute

understanding of business affairs, but also a willingness to defraud.

      Finally, the record has ample evidence that Ms. Loren-Maltese tried to

conceal her activities. She used the Committeeman Fund to hide her

expenditures--and concealing assets is powerful evidence of fraud. Friedman v.

Commissioner, T.C. Memo. 1968-145, aff’d, 421 F.2d 658 (6th Cir. 1970). She

falsified campaign-finance disclosures (the Forms D-2). She even tried to hide the

car itself once she understood she was under federal investigation.

      Thus, we find that both items that the government argues Ms. Loren-Maltese

should have included in her income, should have been included in her income. Ms.

Loren-Maltese’s failure to do so was due to fraud, so the statute of limitations is no

bar to assessing this old deficiency. This means that


                                                 Decision will be entered for

                                        respondent.
