Unpublished Disposition, 843 F.2d 501 (9th Cir. 1988)

MEMORANDUM^* 

Mark Haines appeals the Tax Court's judgment confirming a deficiency for the tax years 1972, 1973 and 1974, resulting from unreported income and unreported capital gain on property. Appellant claims the Tax Court erred in determining these deficiencies, in awarding an addition to the tax for fraud, and in declining to give relief for the Service's alleged failure to return certain documents to him. We affirm.

ANALYSIS

The Tax Court found appellant's testimony that the kickbacks he received were actually loans, investments, or transfer payments to his boss, Christensen, self-serving and not credible. On appeal, the taxpayer wishes to renew his arguments below. Appellant contends that the Tax Court failed to credit the testimony of Eugene Stone, one of Haines' supposed creditors. In fact, the Tax Court did find that the money Stone gave to Haines was a bona fide loan. This ruling did not, however, require the Tax Court to give credence to taxpayer's testimony that the payments made to him by other people likewise constituted loans. Taxpayer failed to adduce evidence that the "loans" were represented by promissory notes, had specified terms of repayment, were supported by collateral, were to be subject to interest, or that he even knew the current whereabouts of the people he was supposed to repay.

Appellant counsel's representations of the actual source and purpose of the payments received by Haines is an exercise in creative accounting and does not address at all the findings of the Tax Court. For example, in the 1972 tax year, Haines did not offer any evidence that $22,522 of the $30,872 received from John Waits in that year was an investment in his Mexican property. Neither stipulation 10 nor the record transcript, which appellant's counsel cite, supports this assertion. Moreover, taxpayer claims that in 1972, $2,000 of the amount paid to him by John Waits constituted a gift, although this gift would have also been included in income. No evidence, aside from Haines' own testimony, corroborated the alleged transfer payments to Christensen, or the other loans specified. For the 1973 tax year, taxpayer claims that a $15,000 loan from Viking American Construction Company was evidenced by a promissory note. The taxpayer fails to mention, however, that he had previously admitted that when the note was signed he was told that if he found at least two shopping center locations for Viking, the money would be considered a finders fee which the taxpayer would never have to repay. Taxpayer never did repay the money. The Tax Court consequently found that this was a payment, not a loan.

Taxpayer's argument is simply unbelievable. Absent any evidence adduced at the trial court to the contrary, we will not disturb the findings of the Tax Court that the kickbacks Haines received were all payments that should have been included in his income.

B. Unreported Capital Gain on Mexican Property

The Commissioner determined, and the Tax Court agreed, that appellant made a $14,173 capital gain on his Mexican property. The taxpayer claims that he disposed of the land at a "very substantial loss," based upon various fees paid to the Mexican government plus costs incurred in the construction of a house on one of the parcels acquired as vacant land. Unfortunately, taxpayer could only produce photographs of a house under construction, and his testimony while referring to a check register (but did not offer the check register in evidence) as proof of these payments. The Tax Court ruled that Haines "had failed to substantiate his purported expenditures or demonstrate that the determined unreported long-term capital gains are inaccurate."

Taxpayer claims on appeal that the Tax Court failed to apply the rule in Cohan v. C.I.R., 39 F.2d 540 (2d Cir. 1930). Cohan involved entertainer George M. Cohan, who alleged that he had spent considerable sums on traveling and entertainment, but that he did not have records to substantiate the deduction of these expenses on his income tax returns. Id. at 543. The Board of Tax Appeals, the predecessor of the Tax Court, found that these expenses were incurred but refused to allow deduction of any part of the taxpayer's claim since he was unable to tell precisely how much he had, in fact, spent. Id. The Second Circuit Court of Appeals, Judge Learned Hand writing, reversed and ordered that "the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent." Id. at 544. The application of the Cohan rule to travel and entertainment expenses has since been effectively overruled, see 26 U.S.C. § 274, although the doctrine itself has assumed a fundamental position in federal tax matters and remains viable in appropriate circumstances. United States v. Marabelles, 724 F.2d 1374, 1382-83 (9th Cir. 1984); Coloman v. C.I.R., 540 F.2d 427, 431-32 (9th Cir. 1976).

The rule in Cohan does not, however, apply to Haines' situation. All Cohan stands for is that the Tax Court cannot make a finding that considerable allowable expenditures have been made, while at the same time disallowing a deduction entirely because of the lack of specific proof. In our case, the evidence was utterly insufficient to establish that any costs which would increase the taxpayer's basis in the Mexican property had, in fact, been made, and the Tax Court so ruled. In Cohan, by contrast, there was substantial evidence and an express finding by the trial court that "considerable sums" had been spent. Pictures of the house and entries into a check register did not constitute substantial evidence. The Tax Court was right in rejecting these sums to be added to taxpayer's cost bases in his Mexican property. Haines did not carry his burden of proof of showing that he had a capital loss. To apply the Cohan doctrine to this case would be "in essence to condone the use of that doctrine as a substitute for burden of proof." Coloman, 540 F.2d at 431-32 (refusing to apply Cohan rule to situation where taxpayer claimed basis in stock). We uphold the Tax Court's finding that Haines failed to prove he incurred a capital loss on his Mexican property.

Section 6653(b) (1) of the Internal Revenue Code 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 ... 50% of the underpayment." 26 U.S.C. §§ 6653(b) (1) (1982) (later raised to 75% by 1986 Tax Reform Act). Appellant claims the Tax Court erred in finding the underpayment was due to fraud. Fraud is conduct intended to conceal, mislead or otherwise prevent the collection of taxes. Spies v. United States, 317 U.S. 492, 499 (1943); Akland v. C.I.R., 767 F.2d 618, 621 (9th Cir. 1985). Proof of fraud is seldom established by direct evidence. Fraudulent intent may, therefore, be proven through circumstantial evidence, by surveying the taxpayer's entire course of conduct and drawing reasonable inferences therefrom. Akland, 767 F.2d at 621. A consistent pattern of understating income is highly persuasive evidence of a fraudulent intent to evade taxes. Lollis v. C.I.R., 595 F.2d 1189, 1191 (9th Cir. 1979); Ruark v. C.I.R., 449 F.2d 311, 313 (9th Cir. 1971); Baumgardner v. C.I.R., 251 F.2d 311, 322 (9th Cir. 1957) (quoting Kurnick v. C.I.R., 232 F.2d 678, 681 (6th Cir. 1956)).

The Tax Court found that Haines had failed to disclose over $168,000 in income for the three years in issue, a figure nearly three times the income he actually did report. The Tax Court also rejected taxpayer's claim that he merely failed to inform his tax preparers of the sources of his additional income but did notify them of the full amount of his income. It was not clearly erroneous for the Tax Court to hold taxpayer's underpayments were due to fraud, and to award an additional tax for fraud.

Finally, appellant argues that the Service's failure to return documents, which he had voluntarily made available to the government prosecutors in a grand jury investigation of Christensen, violated appellant's right to a fair trial. The Tax Court found, however, all those documents had indeed been returned to taxpayer. Haines was unable to produce any evidence that not all of the documents were returned to him.

It is true that Haines did seek a release of documents from the grand jury investigating Christensen in Connecticut, pursuant to Fed. R. Crim. P. 6(e), but that motion was denied. If the taxpayer truly believed all of his records had not been returned, there is no reason why he could not have sought to subpoena the documents or moved the Tax Court for an order to compel their production. The taxpayer's failure to convince the district court in Connecticut of his need for the documents in order to prosecute his case in the Tax Court is no excuse for failing to carry his burden of proof below. Finally, taxpayer was in a better position to know (and, indeed, keep photocopies) of all the documents he gave to the government for its investigation of Christensen, and so should have been able to make a complete inventory in case any of the documents were not returned. Appellant has also failed to show that he pursued the necessary avenues for redress or that he was even prejudiced. We reject his due process claim.

CONCLUSION

The decision of the Tax Court is AFFIRMED.