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EDWARD FRANCIS BACHNER, IV AND REBECCA GAY BACHNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent, T.C. Memo. 2023-148

In 2016 the IRS mailed a notice of deficiency to both the Bachners, determining civil fraud penalties under section 6663 against Mr. Bachner for 2005, 2006, and 2007 of $82,877, $164,671, and $146,259, respectively.

FINDINGS OF FACT

Mrs. Bachner was a registered nurse. Mr. Bachner has a bachelor’s degree in business. During the years at issue, the Bachners were a married couple with no children. The Bachners filed joint Forms 1040, U.S. Individual Income Tax Return, for 2005–07. Mr. Bachner prepared and filed the returns. The Bachners falsely claimed refunds on these returns through reporting fictitious wages and fictitious withholding. On August 17, 2006, the Bachners electronically submitted their 2005 return to the IRS. The return claimed two personal exemptions.

The Bachners’ 2005 return reported the following:

The miscellaneous deduction for “other expenses” claimed on Schedule A, Itemized Deductions, was further described in the return as expenses for investment counsel and advice.

On Form 4797, Sales of Business Property, which was included with the 2005 return, the Bachners claimed a $22,054 capital loss deduction for the sale or exchange of a Jeep Grand Cherokee. The Bachners reported that the Jeep was acquired for $37,000 on June 30, 1997, that depreciation of $14,846 had been taken since acquisition, and that the Jeep was sold for $100 on December 31, 2005.

The Bachners’ 2005 return included a fake Form W–2, Wage and Tax Statement, purportedly issued by Rosetta-Wireless Corp. to Mr. Bachner, reporting wages of $457,940 and federal income tax withholding of $228,970. The Form W–2 also reported state income tax withholding of $68,691. The information from this Form W–2 (all of which was false) was reflected on the Bachners’ Form 1040 (for wages and withholding) including the Schedule A (for state and local income taxes).

The Bachners’ 2005 return included an authentic Form W–2 issued by the Camelot Schools, LLC, to Mrs. Bachner, reporting wages of $30,508 and withholding of $5,074. The Form W–2 also reported state income tax withholding of $916. The information from this Form W–2 was correct and was reflected on the Bachners’ Form 1040.

The 2005 return failed to report certain items of income and an amount of income tax withholding.

The 2005 return claimed certain itemized deductions that were disallowed by the notice of deficiency.

On or about October 19, 2006, the IRS paid a $111,201 refund to the Bachners. The record does not explain why the amount refunded was $45 less than the refund claimed per return ($111,246).

Starting in late 2006, Mr. Bachner used a false identity to order shipments of a lethal neurotoxin called tetrodotoxin. He placed and received his first order for tetrodotoxin in November 2006.

On April 10, 2007, the Bachners electronically submitted their 2006 return to the IRS. The return claimed two personal exemptions.

The Bachners’ 2006 return reported the following:

The Bachners’ 2006 return included a fake Form W–2 purportedly issued by EB Strategic Research, LLC, to Mr. Bachner, reporting wages of $1 million and federal income tax withholding of $500,000. The Form W–2 also reported state income tax withholding of $100,000. The information from this Form W–2 (all of which was false) was reflected in the Bachners’ Form 1040 (for wages and withholding) including the Schedule A (for state and local income taxes).

The Bachners’ 2006 return included an authentic Form W–2 issued by the Metropolitan Life Insurance Co. to Mrs. Bachner, reporting wages of $53,828 and withholding of $9,469. The Form W–2 also reported state withholding of $1,615. The information from this Form W–2 was correct and was reflected on the Bachners’ Form 1040.

The 2006 return failed to report certain items of income, and an amount of income tax withholding.

The 2006 return reported certain itemized deductions that were disallowed by the notice of deficiency.

On or about May 18, 2007, the IRS made a $224,343 refund to the Bachners for the 2006 tax year, consisting of (1) a $218,133 payment and (2) a $6,210 offset against the Bachners’ outstanding 2004 tax liability. The record does not explain why the amounts of the debt-offset and the refund ($6,210 + $218,133 = $224,343) were $34 less than the refund claimed on the return ($224,377).

In September 2007, almost a year after his first tetrodotoxin order, Mr. Bachner submitted an application for insurance on the life of Mrs. Bachner. The application was for $20 million in coverage. The application falsely claimed that Mrs. Bachner was the CEO of Trident Solutions, LLC, and that Mrs. Bachner was a “key person” whose “absence” would result in a loss to the company. In correspondence with the insurance underwriters, Mr. Bachner claimed to be an agent acting on behalf of Trident Solutions, LLC, and that Trident Solutions, LLC, sought insurance on the life of Mrs. Bachner. Mrs. Bachner’s supposed signature appears on the life insurance application.

In February 2008, Mr. Bachner wired a $39,989 premium to the underwriter and a policy on Mrs. Bachner’s life was issued. The policy insured Mrs. Bachner’s life for the three-month period from February 11 until May 11, 2008. Trident Solutions, LLC, was the beneficiary under the insurance contract.

In February and March of 2008 Mr. Bachner placed and received three orders of tetrodotoxin.

On April 15, 2008, the Bachners electronically submitted their 2007 return to the IRS. The return claimed two personal exemptions.

The Bachners’ 2007 return reported the following:

The Bachners’ 2007 return included a fake Form W–2 purportedly issued by Fusion Marketing, LLC, to Mr. Bachner, reporting wages of $910,000 and federal income tax withholding of $455,000. The Form W–2 also reported state income tax withholding of $182,000. The information from this Form W–2 (all of which was false) was reflected in the Bachners’ Form 1040 (for wages and withholding) including the Schedule A (for state and local income taxes).

The Bachners’ 2007 return included an authentic Form W–2 issued by the Metropolitan Life Insurance Co. to Mrs. Bachner, reporting wages of $62,230 and federal income tax withholding of $11,435. The Form W–2 also reported state income tax withholding of $1,867. The information from this Form W–2 was correct and was incorporated in the Bachners’ Form 1040.

The 2007 return failed to report certain items of income and an amount of income tax withholding.

The 2007 return claimed certain itemized deductions that were disallowed by the notice of deficiency.

On or about May 12, 2008, the IRS refunded $202,703 to the Bachners for 2007, consisting of (1) a $170,617 payment and (2) a $32,086 offset of a debt owed by the Bachners to another agency. The record does not explain why the amounts of the debt-offset and the refund ($32,086 + $170,617 = $202,703) were $48 less than the refund claimed on the return ($202,751).

In June 2008, Mr. Bachner placed another order for tetrodotoxin.

On June 30, 2008, Mr. Bachner was arrested. On August 26, 2008, a federal grand jury indicted Mr. Bachner under 18 U.S.C. § 175(a) on five counts of possessing a biological agent for use as a weapon and under 18 U.S.C. § 175(b) on five counts of possessing a biological agent without any justifiable research or other peaceful purpose. As a result, Mr. Bachner became the criminal defendant in United States v. Bachner , No. 3:08-cr-50029, filed on June 30, 2008, in the United States District Court for the Northern District of Illinois.

About a year later, on June 16, 2009, a federal grand jury added the following six counts to the ten counts in the original indictment:

· One count of wire fraud, under 18 U.S.C. § 1343, for wiring a $39,989 premium to a life insurance company in a scheme to defraud it and collect $20 million in life insurance proceeds;

· One count of soliciting another to commit a crime of violence under 18 U.S.C. § 373(a);

· One count of use of interstate commerce facilities with the intent to commit murder-for-hire under 18 U.S.C. § 1958(a);

· Three counts of making or presenting false claims to a United States department or agency, under 18 U.S.C. § 287, for filing false income tax refund claims with the IRS for 2005, 2006, and 2007, respectively.

On August 2, 2011, Mr. Bachner accepted a plea agreement and pleaded guilty to three counts in the superseding indictment: one count of wire fraud; one count of possessing a biological agent for use as a weapon; and one count of making or presenting a false claim to the IRS (for 2005).

As part of the plea agreement, Mr. Bachner “admitted” various facts regarding the three counts to which he pleaded guilty. With respect to the count for wire fraud, Mr. Bachner admitted the following: (1) he bought a $20 million life insurance policy on the life of his wife in a scheme to defraud the life insurance company through fraudulent pretenses, representations, and omissions; (2) to justify the amount of the coverage of the policy, he misrepresented his wife’s employment, education, and work experience; and (3) he planned to profit from the death of his wife by collecting proceeds from the fraudulently obtained life insurance policy. With respect to the count for possession of a biological agent for use as a weapon, Mr. Bachner admitted that he knowingly acquired tetrodotoxin, using an alias, for the purpose of using it as a weapon. With respect to the count of making or presenting a false claim to the IRS for tax year 2005, Mr. Bachner admitted the following: (1) he made and presented to the IRS a claim for payment by filing a Form 1040 for tax year 2005; (2) he falsely claimed that he had received income and that federal income tax had been withheld from his income by Rosetta-Wireless Corp.; (3) as a result of those false statements on the return, the return falsely claimed he was entitled to a refund of $111,246; and (4) he made and presented the return to the IRS knowing that the return and the claimed refund were false, fictitious, and fraudulent.

As part of the plea agreement, Mr. Bachner admitted that he engaged in certain conduct that constituted relevant conduct under U.S. Sentencing Guideline § 1B1.3. In particular, Mr. Bachner admitted that for tax year 2006 (1) he made and presented to the IRS a claim for payment by filing a Form 1040 and (2) the return claimed a refund of withholding tax of $224,377, which he knew to be false, fictitious, and fraudulent. And for tax year 2007 Mr. Bachner admitted (1) he made and presented to the IRS a claim for payment by filing a Form 1040 and (2) the return claimed a refund of withholding tax of $224,377 which he knew to be false, fictitious, and fraudulent.

Mr. Bachner was sentenced to 92 months’ imprisonment on the wire fraud and biological-agent-possession counts and 60 months’ imprisonment on the false-claim count, ordered to be served concurrently. He was also ordered to pay $512,396 in restitution to the United States Department of the Treasury. Mr. Bachner was in federal custody from the date of his arrest, June 30, 2008, until his release on March 4, 2015.

Examination and notice of deficiency

2005 Determinations

The notice of deficiency determined that, contrary to the Form W–2 allegedly issued by Rosetta-Wireless Corp. to Mr. Bachner stating that he had wages of $457,940 and withholding of $228,970, Mr. Bachner did not receive any of the wages reported from Rosetta-Wireless Corp., and Rosetta-Wireless Corp. did not make the reported withholdings.

The notice of deficiency also determined that the Bachners failed to report the following amounts of gross income and withholding:

The notice of deficiency also determined that the Bachners improperly claimed a $22,054 capital loss deduction for the sale or exchange of business property. The notice of deficiency also determined that the Bachners improperly claimed $109,807 in itemized deductions:

The notice of deficiency determined that the Bachners were entitled to two personal exemptions, the same number claimed on the return. The notice of deficiency computed that the total amount of deductions corresponding to these exemptions was $6,400.

The notice of deficiency determined that $90 was the amount of the deduction to which the Bachners were entitled for one-half of self-employment tax liability. The Bachners’ 2005 return reported this amount was zero.

The notice of deficiency determined an underpayment of $110,503 as follows:

The notice of deficiency determined a fraud penalty under section 6663 of $82,877, computed as 75% of the $110,503 underpayment of tax.

2006 Determinations

The notice of deficiency determined that, contrary to the Form W–2 allegedly issued by EB Strategic Research, LLC, to Mr. Bachner stating that he had wages of $1 million and withholding of $500,000, Mr. Bachner did not receive any of the wages reported from EB Strategic Research, LLC, and EB Strategic Research, LLC, did not make the reported withholdings.

The notice of deficiency also determined that the Bachners failed to report the following amounts of gross income and withholding:

The notice of deficiency also determined that the Bachners improperly claimed $150,698 in itemized deductions:

The notice of deficiency determined that the Bachners were entitled to two personal exemptions, the same number claimed on the return. The notice of deficiency computed that the total amount of deductions corresponding to these exemptions was $4,400.

The notice of deficiency determined an underpayment of $219,561 as follows:

The notice of deficiency determined a fraud penalty under section 6663 of $164,671, computed as 75% of the $219,561 underpayment of tax.

2007 Determinations

The notice of deficiency determined that, contrary to the Form W–2 allegedly issued by Fusion Marketing, LLC, to Mr. Bachner stating that he had wages of $910,000 and withholding of $455,000, Mr. Bachner did not receive any of the wages reported from Fusion Marketing, LLC, and Fusion Marketing, LLC, did not make the reported withholdings.

The notice of deficiency also determined that the Bachners failed to report the following amounts of gross income and withholding:

The notice of deficiency also determined that the Bachners improperly claimed $227,437 in itemized deductions:

The notice of deficiency determined that the Bachners were entitled to two personal exemptions, the same number claimed on the return. The notice of deficiency computed that the total amount of deductions corresponding to these exemptions was $4,534.

The notice of deficiency determined an underpayment of $195,012 as follows:

The notice of deficiency determined a $146,259 fraud penalty under section 6663, computed as 75% of the $195,012 underpayment of tax.

Jurisdiction as to Mrs. Bachner

The Bachners argue that because the IRS granted Mrs. Bachner full innocent spouse relief under section 6015(b) and is not asserting the fraud penalties (or any other liability) against her, the notice erred in listing her as an addressee. (The notice of deficiency names both Bachners as addressees in the inside address. It also names both Bachners as “taxpayer(s).”) The Bachners conclude that the notice of deficiency is invalid as to Mrs. Bachner and that she should be dismissed from this case. Before trial the IRS had opposed dismissing Mrs. Bachner from the case, contending that the redetermination of Mr. and Mrs. Bachner’s joint tax liabilities for years 2005, 2006, and 2007 is under the exclusive jurisdiction of the Court, and that Mrs. Bachner has standing to make an overpayment claim. The IRS now contends (in a footnote in its opening brief) that “it is debatable as to whether petitioner-wife should be a party to this case, as the notice was only directed to Bachner (the notice of deficiency contains the salutation ‘Dear Mr. Bachner’).” The courts have recognized that certain factors are indicators of fraud.

These factors include substantially understating income for several years, engaging in illegal activities, and filing false documents. In the case of a joint return, the fraud penalty “shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.” The Bachners previously moved to dismiss Mrs. Bachner and sought to invalidate the notice of deficiency as to Mr. Bachner; but the motions were denied without prejudice because they did not take into account facts subsequently deemed established under Rule 91(f).

Both Mr. and Mrs. Bachner were issued a valid notice of deficiency for 2005, 2006, and 2007. See supra OPINION, Part III.C. Both Mr. and Mrs. Bachner timely petitioned the Court. Both “Edward Francis Bachner, IV” and “Rebecca Gay Bachner” are named as petitioners on the first page of the Petition. Both Mr. and Mrs. Bachner signed the Petition.

Theoretically, if the Court determined an overpayment for any of the tax years at issue, the amount of that overpayment would be credited or refunded to the Bachners when the decision of the Tax Court became final. We hold that the Court has jurisdiction as to Mrs. Bachner on the basis of the issuance of a valid notice of deficiency that was timely petitioned, thus giving the Court the theoretical ability to determine that she, together with Mr. Bachner, made overpayments for the years at issue.