                                  T.C. Memo. 2019-146



                            UNITED STATES TAX COURT



                     BERTRAM RUSSELL, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 18571-16.                             Filed October 30, 2019.



      Bertram Russell, pro se.

      Harry J. Negro, Kristina L. Rico, and Corey R. Clapper, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      RUWE, Judge: Respondent determined a $121,695 deficiency in

petitioner’s 2000 Federal income tax, a $91,271.25 civil fraud penalty under

section 6663,1 and a $29,749.75 addition to tax under section 6651(a)(1). The


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                        -2-

[*2] issues before this Court are: (1) whether petitioner received $328,440 in

unreported income in 2000, (2) whether petitioner is liable for a civil fraud penalty

under section 6663, and (3) whether petitioner is liable for an addition to tax under

section 6651(a)(1).

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found.

      When the petition was filed, petitioner resided in Pennsylvania.

Petitioner’s Background

      Petitioner was a licensed physician for almost 30 years, practicing

radiology. Petitioner obtained a bachelor of science degree from Johns Hopkins

University and a medical degree from Thomas Jefferson University Medical

College in 1976. As part of his training petitioner had a radiology residency at

Mercy Catholic Medical Center for one year, switched to Bryn Mawr Hospital,

and then finished the fourth year of his residency at Thomas Jefferson University

Medical College.




      1
      (...continued)
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                        -3-

[*3] As a radiologist petitioner specialized in diagnosing and treating disease

and injury through the use of medical imaging techniques such as x rays, CT

scans, and MRIs. Petitioner also acted as a consultant to referring physicians.

Petitioner’s Family

      Petitioner was married to Dr. Pamela Russell, a neonatolgist, from 1977

until 2011, when their divorce was finalized. Petitioner and Dr. Russell have three

children. Dr. Russell worked as a doctor at the same hospital as petitioner in

2000, was a salaried employee, and received a Form W-2, Wage and Tax

Statement. Dr. Russell’s income was used to pay for daily management of the

household and children, while petitioner’s income was supposed to pay for school

tuition, taxes, and retirement. Petitioner and Dr. Russell each had a separate,

individual bank account, and Dr. Russell did not have access to petitioner’s bank

account or credit cards.

Petitioner’s History as an Independent Contractor

      In 1980 petitioner became an associate with Chester County Radiology

Associates, P.C., at Chester County Hospital. When he started at the hospital, he

was a salaried employee paid by Chester County Radiology Associates, P.C., and

received a Form W-2. In either the late 1980s or early 1990s petitioner requested

to be treated as an independent contractor by Chester County Radiology
                                        -4-

[*4] Associates, P.C., which he was allowed to do. No other radiologists at

Chester County Radiology Associates, P.C., were classified as independent

contractors. Petitioner’s paychecks were sent to his home address and made

payable to Pennsylvania Physicians, P.C. (Pennsylvania Physicians). No Federal

income tax was withheld from the paychecks.

      Chester County Radiology Associates, P.C., eventually merged into the

University of Pennsylvania Health System (UPHS). The Trustees of the

University of Pennsylvania own and operate UPHS and the Clinical Practices of

the University of Pennsylvania (CPUP). CPUP operates a radiology department

known as the Division of Community Radiology. Petitioner continued to provide

radiology services as an independent contractor after UPHS and CPUP took over.

Petitioner’s paycheck continued to be made payable to Pennsylvania Physicians,

rather than petitioner. All of the other radiologists working for UPHS and CPUP

were salaried employees receiving Forms W-2.

Pennsylvania Physicians

      Pennsylvania Physicians was incorporated in 1996 by petitioner, Bernard J.

Bagdis, a tax attorney, and Dr. John P. Leichner. Petitioner was president of

Pennsylvania Physicians, which had its registered office at J. Bagdis’ office but

otherwise had no physical location. According to petitioner the main purpose of
                                       -5-

[*5] the corporation was to address a perceived malpractice crisis and to become a

self-insurer for physicians. Pennsylvania Physicians was purportedly supposed to

grow and acquire other doctors. In practice, no other doctors were acquired.

Pennsylvania Physicians never had employees, never filed employment tax

returns, and never filed corporate income tax returns reporting the income received

from CPUP, including for tax year 2000. Petitioner claimed that he lent money

that he had inherited to Pennsylvania Physicians to invest “equity” in

Pennsylvania Physicians although there is no documentary evidence of this loan.

Petitioner’s Pennsylvania Physicians Checking Account

      Petitioner opened a checking account in the name of Pennsylvania

Physicians with First Union National Bank over which he had signatory authority.

Dr. Leichner also had his own Pennsylvania Physicians bank account. Dr.

Leichner never had access to petitioner’s Pennsylvania Physicians bank account,

nor was he aware of it.

Independent Contractor Agreement

      In 1997 CPUP entered into an agreement with Pennsylvania Physicians

pursuant to which petitioner, as an independent contractor, would provide services

customarily performed by physicians practicing radiology to CPUP in exchange

for compensation of $5,900 per week. The agreement also stated that
                                        -6-

[*6] Pennsylvania Physicians was “responsible for all federal, state and local taxes

on the compensation paid” by Pennsylvania Physicians to petitioner. This

agreement was in effect in 2000.

      During tax year 2000, 13 checks were written by CPUP to Pennsylvania

Physicians totaling $328,440. The checks were payment for services provided by

petitioner as a radiologist. Petitioner deposited the checks into the Pennsylvania

Physicians checking account that he maintained signatory control over. Petitioner

did not report the $328,440 on Pennsylvania Physicians’ corporate income tax

return or on his personal income tax return.

The 2000 Tax Return

      For 2000 petitioner and Dr. Russell signed and filed a joint Form 1040, U.S.

Individual Income Tax Return, that was received by respondent on September 13,

2002, despite the fact that it was due on April 15, 2001. Petitioner did not request

an extension of time to file the return. The only wages included on the joint

income tax return were Dr. Russell’s wages totaling $163,793. The $328,440 that

Pennsylvania Physicians had been paid for the services petitioner supplied was not

reported anywhere on the return.
                                        -7-

[*7] Petitioner’s Criminal Conviction for Income Tax Evasion

      Petitioner was indicted on November 27, 2007, in the case of United States

v. Bagdis, No. 07-cr-00730 (E.D. Pa. Nov. 27, 2007). The November 27, 2007,

indictment charged petitioner with various tax crimes, including evading income

tax in violation of section 7201 for tax year 2000. On April 22, 2009, petitioner

was convicted by a jury of 16 criminal offenses, including: one count of

conspiracy to defraud the United States in violation of 18 U.S.C. sec. 371 (2006)

for acts occurring between 1996 and 2006; seven counts of tax evasion under

section 7201 for tax years 2000 through 2006; two counts of subscribing a false

tax return in violation of section 7206(1) for tax years 1998 and 2000; and six

counts of failing to file tax returns or supply information under section 7203 for

tax years 2001 through 2006.

      On May 14, 2010, petitioner was adjudged guilty by the U.S. District Court

for the Eastern District of Pennsylvania. Petitioner was sentenced to 66 months of

imprisonment and ordered to pay $1,158,914.99 in restitution.

The Examination Process of Petitioner’s 2000 Tax Return

      Revenue Agent Kenneth Kelly conducted an examination of petitioner’s

2000 tax return in 2015. As part of this examination Agent Kelly assisted in

producing a Form 3198, Special Handling Notice for Examination Case
                                        -8-

[*8] Processing. This form internally proposed a civil fraud penalty under section

6663. The proposed section 6663 civil fraud penalty received written approval

from Agent Kelly’s immediate supervisor before August 23, 2015.

      On June 29, 2016, respondent sent petitioner a notice of deficiency for 2000

in which respondent determined a deficiency in Federal income tax of $121,695, a

civil fraud penalty under section 6663 of $91,271.25, and an addition to tax under

section 6651(a)(1) of $29,749.75.

                                     OPINION

I.    Unreported Income

      We first address the $121,695 deficiency based on petitioner’s purported

failure to report $328,440 in income for 2000. The Commissioner’s

determinations in a notice of deficiency are generally presumed correct, and the

taxpayer bears the burden of proving that the determinations are in error. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Where a case involving

unreported income is appealable to the Court of Appeals for the Third Circuit,

which is the case here absent a contrary written stipulation, see sec. 7482(b)(1)(A),

the Commissioner must produce evidence linking the taxpayer to the tax-

generating activity in order to benefit from the presumption of correctness,

Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986) (citing Gerardo v.
                                         -9-

[*9] Commissioner, 552 F.2d 549, 554 (3d Cir. 1977), aff’g in part, rev’g in part

and remanding T.C. Memo. 1975-341), vacating and remanding T.C. Memo.

1985-101.

      Respondent has produced evidence of 13 payments from CPUP to

Pennsylvania Physicians and the deposit of those funds into a checking account

controlled by petitioner. Respondent has also produced evidence that petitioner

performed medical services in exchange for the payments. Therefore,

respondent’s determination in the notice of deficiency is entitled to its

presumption of correctness.

      Section 61(a) defines gross income to mean “all income from whatever

source derived”. Except as otherwise provided, gross income includes

“[c]ompensation for services, including fees, commissions, fringe benefits, and

similar items”. Sec. 61(a)(1). This definition is construed broadly and extends to

accession to wealth over which the taxpayer has complete control. See

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

      Taxpayers have the right to shape business transactions to minimize the

incidence of taxation, including the right to use corporate entities. Gregory v.

Helvering, 293 U.S. 465, 469 (1935). Furthering this pursuit, a “corporate entity

is deemed to exist as a separate taxpayer if it is organized to carry on a business
                                         - 10 -

[*10] activity or if, in fact, it has carried on such activity.” Pappas v.

Commissioner, T.C. Memo. 2002-127, 2002 WL 1035454, at *8; see also Moline

Props., Inc. v. Commissioner, 319 U.S. 436, 439 (1943) (“[S]o long as * * * [the

corporate purpose] is the equivalent of business activity or is followed by the

carrying on of business by the corporation, the corporation remains a separate

taxable entity.”). However, in “matters relating to the revenue, the corporate form

may be disregarded where it is a sham or unreal.” Pappas v. Commissioner, 2002

WL 1035454, at *8 (quoting Moline Props., Inc. v. Commissioner, 319 U.S. at

439).

        Characteristics of a sham corporate entity include: “the intermingling of

corporate and personal funds, undercapitalization of the corporation, failure to

observe corporate formalities such as the maintenance of separate books and

records, failure to pay dividends, insolvency at the time of a transaction, siphoning

off of funds by the dominant shareholder, and the inactivity of other officers and

directors.” Id. at *9 (quoting LiButti v. United States, 107 F.3d 110, 119 (2d Cir.

1997)).

        Pennsylvania Physicians’ activities reek of a sham corporate entity.

Pennsylvania Physicians filed no corporate income tax return for any year,

including 2000. The entity had no employees and no proper physical location, and
                                        - 11 -

[*11] it appears to have respected no corporate formalities. There is no evidence

that it ever paid any dividends. The 13 payments from CPUP to Pennsylvania

Physicians were deposited into a checking account that petitioner, and only

petitioner, exercised control over. Funds in this checking account were later used

to pay petitioner’s personal expenses, such as private school tuition for his

children. Petitioner observed no meaningful distinction between his personal

funds and the funds of Pennsylvania Physicians. We therefore find that

Pennsylvania Physicians is a sham corporate entity which is disregarded for

Federal income tax purposes.

      Petitioner argued that Pennsylvania Physicians, rather than petitioner,

performed the radiology services for CPUP, but the independent contractor

agreement between the parties expressly states that petitioner would be performing

the services in his capacity as a physician. Petitioner also claims that the money

he received from Pennsylvania Physicians was repayment for a loan he made to

Pennsylvania Physicians, but he introduced no evidence of a loan other than his

own unconvincing testimony.

       Accordingly, we hold that respondent’s determination of unreported

income as set forth in the notice of deficiency is correct, and that determination is

sustained.
                                       - 12 -

[*12] II.    Section 6663 Civil Fraud Penalty

      A.     Section 6751(b)(1) Supervisory Approval

      As a threshold matter with respect to the section 6663 civil fraud penalty,

the Commissioner’s burden of production under section 7491(c) includes

introducing sufficient evidence to establish compliance with the supervisory

approval requirements of section 6751(b)(1). See Graev v. Commissioner, 149

T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016).

Section 6751(b)(1) requires the Commissioner to show the section 6663 civil fraud

penalty was “personally approved (in writing) by the immediate supervisor of the

individual” making the initial penalty determination.

      The record contains sufficient evidence that the requisite supervisory

approval for the section 6663 civil fraud penalty was obtained.

      B.     Collateral Estoppel

      Respondent argues that petitioner’s previous conviction for tax evasion

under section 7201 collaterally estops petitioner from denying in the present civil

tax proceeding that (1) his failure to report income resulted in an underpayment of
                                        - 13 -

[*13] his 2000 Federal income tax and (2) at least part of the underpayment is due

to fraud within the meaning of section 6663. We agree.2

      Section 6663(a) provides: “If any part of any underpayment of tax required

to be shown on a return is due to fraud, there shall be added to the tax an amount

equal to 75 percent of the portion of the underpayment which is attributable to

fraud.” Respondent bears the burden of proving fraud by clear and convincing

evidence. Sec. 7454(a); Rule 142(b). To satisfy this burden, respondent must

establish that: (1) an underpayment exists and (2) the taxpayer intended to evade

tax known to be owed by conduct intended to conceal, mislead, or otherwise

prevent the collection of tax. See Sadler v. Commissioner, 113 T.C. 99, 102

(1999); Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).

      In Montana v. United States, 440 U.S. 147, 153 (1979), the Supreme Court

explained the doctrine of collateral estoppel as follows: “Under collateral

estoppel, once an issue is actually and necessarily determined by a court of

competent jurisdiction, that determination is conclusive in subsequent suits based

on a different cause of action involving a party to the prior litigation.” Collateral

estoppel applies only if “(1) the issue sought to be precluded [is] the same as that

      2
      Respondent concedes that petitioner may still contest the precise amount of
unreported income for 2000, as the determination of the precise amount of
unreported income was not essential to his conviction.
                                         - 14 -

[*14] involved in the prior action; (2) that issue [was] actually litigated; (3) it

[was] determined by a final and valid judgment; and (4) the determination [was]

essential to the prior judgment.” Anderson v. Commissioner, 698 F.3d 160, 164

(3d Cir. 2012) (alterations in original) (quoting Graham v. IRS (In re Graham),

973 F.2d 1090, 1097 (3d Cir. 1992)), aff’g T.C. Memo. 2009-44.

      It is well established that a conviction for criminal tax evasion under section

7201 conclusively establishes the defendant’s civil liability for tax fraud under

section 6663 when the conviction was for the same taxable year. See id. at 164;

DiLeo v. Commissioner, 96 T.C. 858, 885 (1991), aff’d, 959 F.2d 16 (2d Cir.

1992). The only practical difference between criminal tax evasion under section

7201 and civil tax fraud is the “larger quantum of proof required in a criminal

evasion case”. Edwards v. Commissioner, T.C. Memo. 2016-117, at *23 (quoting

Moore v. United States, 360 F.2d 353, 355 (4th Cir. 1965)).

      Petitioner was convicted of tax evasion under section 7201 for tax year

2000, and that judgment has become final. Accordingly, petitioner is precluded

from denying that he underpaid his tax for tax year 2000 and that he filed a false

and fraudulent Federal income tax return with the requisite fraudulent intent.

Although petitioner is not precluded from contesting precisely how much he

underpaid his tax for tax year 2000, respondent has shown by clear and convincing
                                         - 15 -

[*15] evidence that petitioner did not report $328,440 in taxable income. We

therefore hold that petitioner is liable for the section 6663 civil fraud penalty.

III.   Section 6651(a)(1) Addition to Tax

       Respondent determined that petitioner was liable for an addition to tax

under section 6651(a)(1). Section 6651(a)(1) imposes an addition to tax when a

taxpayer fails to timely file a return unless the taxpayer establishes that the failure

was due to reasonable cause and not willful neglect.

       The Commissioner has the burden of production with respect to the section

6651(a)(1) addition to tax. See sec. 7491(c). To meet this burden, the

Commissioner must produce evidence that the addition to tax is appropriate. See

id.; Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner

satisfies this burden, the taxpayer has the burden of proof with respect to

exculpatory factors such as reasonable cause. Higbee v. Commissioner, 116 T.C.

at 446-447.3

       Respondent has shown that petitioner’s return was due by April 15, 2001,

and that the return was not filed until September 13, 2002. Petitioner did not


       3
       Sec. 6751(b)(1), which requires respondent to show certain penalties were
“personally approved (in writing) by the immediate supervisor of the individual”
making the initial penalty determination, does not apply to sec. 6651 additions to
tax. See sec. 6751(b)(2)(A).
                                        - 16 -

[*16] request an extension. Further, petitioner did not show any reasonable cause

for his failure to timely file the return. Accordingly, we hold that petitioner is

liable for the addition to tax under section 6651(a).

      In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit.

      To reflect the foregoing,


                                                 Decision will be entered for

                                        respondent.
