Tuesday, October 12, 2021

9th Circ. Affirms That Pot Biz Owner Owes Tax Fraud Penalties

According to Law360, A tax preparer owes around $103,000 in Fraud Penalties, as the Ninth Circuit ruled on October 8, 2021, that the U.S. Tax Court was justified in finding he underpaid his marijuana business's taxes, hid income and failed to cooperate with the IRS. 

The Ninth Circuit affirmed in Raymond and Ruby Chico v. Comm., case number 20-71017, in the U.S. Court of Appeals for the Ninth Circuit, the lower court's decision finding that Raymond Chico owes fraud penalties under Internal Revenue Code Section 6663  for 2010 through 2012 for underreporting income from his marijuana cigarette container company, Doobtubes, and other ventures. 

The Tax Court wasn't wrong to find there was convincing evidence that Chico committed fraud, including his presenting of scant documentation supporting his tax reporting for those years and is failure to cooperate with an Internal Revenue Service investigation.

Other "Badges of Fraud"
Supporting Chico's Liability For 
The Section 6663 Penalties Include: That He Hid Income From a Marijuana Dispensary Owned By Raymond Chico And That He Underreported More Than $275,000 in Income,
According To The Opinion.The Ninth Circuit declined to give the case a fresh look and instead reviewed the Tax Court's decision for clear error.

"The Tax Court did not clearly err in finding clear and convincing evidence of fraud based on the six badges of fraud present in the record," the opinion said. 

The U.S. Tax Court found in September 2019 that Raymond Chico had failed to report Doobtubes' gross receipts for the three tax years by around $180,000 and that Chico wasn't entitled to business deductions he originally claimed on tax returns. He also failed to report constructive dividends from the marijuana dispensary and failed to report income from a rental property, according to the opinion.

The lower court also held him liable for the fraud penalties, and indicated in an order in January 2020 that that liability totaled around $103,000.

Chico told the Ninth Circuit in December 2020 that there's not enough evidence indicating he fraudulently underreported his income and that he initially relied on an attorney who failed to cooperate with the IRS in its audit and was later disbarred from practicing law in California.

The U.S. rejected those arguments, saying in its own filing in February 2021 there was more than enough evidence indicating he committed fraud. This evidence includes that he understated income, kept inadequate records and failed to file business tax returns, according to the government.

In its opinion, the Ninth Circuit said: 

  1. The Tax Court wasn't mistaken in finding that the evidence justified the imposition of tax fraud penalties against Chico. and
  2. The Tax Court wasn't wrong to find that Chico's status as a certified tax return preparer, further strengthened the finding that he committed fraud, the appeals court said. (ya think?)

Have an IRS Tax Problem?

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