                                T.C. Memo. 2018-9


                         UNITED STATES TAX COURT



      TAMATHA D. BYRUM AND MICHEAL B. BYRUM, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 17400-16.                         Filed January 25, 2018.



      Mark H. Westlake, for petitioners.

      William B. McClendon and William W. Kiessling, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      FOLEY, Judge: The issues for decision are whether petitioners received

unreported income, whether petitioners are liable for a section 6651(a)(1) addition

to tax, and whether Mrs. Byrum is liable for section 6663 fraud penalties.1



      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code relating to the years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                        -2-

[*2]                           FINDINGS OF FACT

       During 2003, 2004, and 2005 (years in issue) Mrs. Byrum was employed as

the president of Team Systems, LLC (Team Systems), which was wholly owned

by Steven Guynn. Team Systems designed and maintained software that enabled

contract furniture dealers to create bids, place orders, and generate delivery

documents.

       Prior to joining Team Systems, Mrs. Byrum worked at Corporate

Environments of Tennessee as a contract furniture dealer and at Taylor

Impressions as an assistant to the company’s certified public accountant (C.P.A.).

In 1994 Mrs. Byrum began working at Team Systems and attending accounting

classes at Nashville Tech. She was hired because of her experience working with

Team Systems’ software at Corporate Environments of Tennessee and initially

worked in technical support answering customer questions regarding use of the

software. Eventually, Mrs. Byrum was moved to Team Systems’ accounting

department.

       In 2001 Mr. Guynn decided to semi-retire from Team Systems. He

continued writing updates for the software but did not manage the daily needs of

the business or regularly visit the office. Instead, he promoted Mrs. Byrum to

Team Systems’ president and increased her salary to $120,000. She was the “face
                                       -3-

[*3] of the company”, interacted with customers, managed the business, and

oversaw all of the company’s finances (e.g., payroll, accounts payable, and

accounts receivable).2 Mr. Guynn did not closely monitor Team Systems’ finances

and relied exclusively on Mrs. Byrum to advise him regarding the financial status

of the company.

      Mrs. Byrum was the only employee with access to Mr. Guynn’s signature

stamp and authority to write manual and computer-generated checks. From 2003

through 2005 Mrs. Byrum, without authorization, wrote to herself Team Systems

checks ranging from $526 to $18,000 (i.e., 29 checks totaling $63,800 in 2003, 58

checks totaling $164,888 in 2004, and numerous checks totaling $168,190 in

2005).

      During the years in issue Mr. Byrum owned and operated a custom

motorcycle business. From 2003 through 2005 Mrs. Byrum used her Team

Systems American Express and PayPal account to purchase motorcycle parts for

Mr. Byrum’s business. Mrs. Byrum made 16 purchases totaling $5,267 in 2003,

96 purchases totaling $23,581 in 2004, and 112 purchases totaling $56,036 in

2005. The purchases ranged from $16 to $2,500. Team Systems’ C.P.A. prepared

      2
       In addition to depending on Mrs. Byrum to run his business, Mr. Guynn
and his wife trusted Mrs. Byrum to organize a myriad of highly sensitive personal
matters.
                                           -4-

[*4] its financial statements and tax returns relating to the years in issue. Mrs.

Byrum prepared and provided Team Systems’ financial information to the C.P.A.,

but omitted any information relating to the unauthorized Team Systems checks or

American Express PayPal purchases.

      In late 2005 Mr. Guynn began negotiations to sell Team Systems, and in

January 2006 he sold Team Systems to a Texas company for $8 million. After the

sale, Mr. Guynn became concerned that the purchasers would move the company

or fire Mrs. Byrum. To reward her loyalty and many years of employment, and to

ensure her financial stability after the sale, Mr. Guynn paid Mrs. Byrum a

$254,397 bonus.

      On April 15, 2004 and 2005, petitioners timely filed their joint 2003 and

2004 Federal income tax returns, and filed their joint 2005 Federal income tax

return on October 25, 2006.3 Petitioners did not report on their 2003 and 2004

returns any income relating to the unauthorized Team Systems checks. In 2005

petitioners reported the funds received from the unauthorized Team Systems

checks as self-employment income. They did not report any income relating to the

American Express PayPal purchases on their 2003, 2004, or 2005 tax return.


      3
          Petitioners received an extension until October 15, 2006, to file their 2005
return.
                                      -5-

[*5] In May 2006 petitioners’ 2003 and 2004 Federal income tax returns were

selected for examination. Revenue Agent Stephanie Hunter asked Mrs. Byrum to

explain the Team Systems checks written to her and deposited in her bank

account. Mrs. Byrum stated that the deposits were loans approved by Mr. Guynn,

provided Revenue Agent Hunter with a document that delineated the deposits, and

asserted that the document was an accounts receivable ledger. Revenue Agent

Hunter informed Mrs. Byrum that if the deposits were wages, Team Systems

would be liable for additional employment taxes. Mrs. Byrum stated that she did

not wish to involve Mr. Guynn and offered to pay Team Systems’ additional

employment tax liabilities. Suspicious of Mrs. Byrum’s explanation, Revenue

Agent Hunter asked for Mr. Guynn’s contact information, and Mrs. Byrum

provided her office phone number and the wrong address. Revenue Agent Hunter

then independently obtained Mr. Guynn’s address and sent him a letter asking him

to call her. Mr. Guynn contacted Revenue Agent Hunter, and she asked him to

verify the loans that he had made to Mrs. Byrum. When Mr. Guynn denied having

ever loaned money to Mrs. Byrum, Revenue Agent Hunter faxed him the

document provided by Mrs. Byrum. Mr. Guynn did not recognize the document,

explained that he had designed Team Systems’ accounting software, emphasized

that the document was not created in the company software, and further assisted
                                        -6-

[*6] Revenue Agent Hunter in her examination. Mr. Guynn also provided a

statement to the Tennessee Bureau of Investigation, and Mrs. Byrum was

subsequently indicted, arrested, and charged with embezzlement, fraud, and

forgery.4

      On May 10, 2016, respondent issued petitioners a notice of deficiency

relating to the years in issue. In the notice, respondent determined that the funds

received from unauthorized Team Systems checks and the American Express

PayPal purchases were income to petitioners. Accordingly, respondent further

determined 2003, 2004, and 2005 deficiencies of $15,293, $58,265, and $17,039,

respectively; a section 6651 addition to tax of $852 relating to 2005; and that Mrs.

Byrum was liable for section 6663 fraud penalties of $11,470, $43,699, and

$12,779 relating to 2003, 2004, and 2005, respectively. On August 8, 2016,

petitioners, while residing in Mount Juliet, Tennessee, timely filed a petition with

the Court.

                                     OPINION

      Except as otherwise provided, gross income includes income from all

sources. Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).


      4
       At the time of trial, Mrs. Byrum’s criminal case was pending in Tennessee
State court.
                                       -7-

[*7] During trial Mrs. Byrum repeatedly contradicted herself and vacillated

between identifying the additional Team Systems checks and American Express

PayPal purchases as loans or gifts approved by Mr. Guynn. Respondent

established the transactions were not gifts or loans. Accordingly, we sustain

respondent’s determinations relating to unreported income. See Welch v.

Helvering, 290 U.S. 111, 115 (1933). Respondent has met his burden of

production and, by clear and convincing evidence, established that Mrs. Byrum

understated income with the intent to commit fraud. See secs. 6663(a),

6751(b)(1), 7454(a); Petzoldt v. Commissioner, 92 T.C. 661, 700-702 (1989)

(stating fraudulent intent may be inferred from “badges of fraud”). Mrs. Byrum’s

testimony to the contrary was inconsistent, contradictory, and simply not credible.

Indeed, her penchant for dissembling was on full display.

      Mrs. Byrum scrupulously concealed the Team Systems checks and

American Express PayPal purchases from Mr. Guynn, Team Systems employees,

and Team Systems’ C.P.A.; gave respondent a bogus accounts receivable ledger

and misleading contact information relating to Mr. Guynn; and consistently failed

to report Team Systems checks relating to 2003 and 2004 and American Express

PayPal purchases relating to 2003, 2004, and 2005. See Holland v. United States,

348 U.S. 121, 139 (1954) (holding that a pattern of consistently and substantially
                                         -8-

[*8] underreporting income may justify an inference of fraud); Rowlee v.

Commissioner, 80 T.C. 1111, 1123 (1983) (stating that a taxpayer’s attempts to

mislead the Internal Revenue Service or prevent the collection of income tax may

establish the requisite fraudulent intent). Because respondent established by clear

and convincing evidence that Mrs. Byrum filed false or fraudulent returns with the

intent to evade tax, the assessment period remains open. See secs. 6501(c)(1),

7454(a); Rule 142(b).

      Petitioners untimely filed their 2005 joint Federal income tax return.

Pursuant to section 7491(c), respondent bears and has met his burden of

production relating to section 6651(a). Petitioners’ failure to timely file their

return was the result of willful neglect, not reasonable cause. Accordingly,

petitioners are liable for the section 6651(a)(1) addition to tax relating to 2005.

      Contentions we have not addressed are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                               Decision will be entered

                                        for respondent.
