BRUCE S. JENKINS, District Judge.
This matter came before the court for bench trial, beginning on February 6, 2017 and continuing through February 10, 2017. Michael Black and April Medley appeared on behalf of Omega Forex Group, LC ("Omega Forex"). Landon Yost and Alex Halverson appeared on behalf of the United States.
In the opinion of the Court, the tax returns for the year 1998 and the year 1999 of Robert Flath ("Flath") remain open for the court to consider his use in his returns of pass through losses created by Omega Forex—an entity allegedly engaged in foreign currency speculation and dealt with for tax purposes as a reporting partnership.
The question is whether or not by clear and convincing evidence Flath intended to defraud the United States of rightfully owed taxes for each year.
The short answer as to intent is yes. The reasons are set forth below.
On his 1998 return, Flath claimed a pass through loss of $149,857, passed through by Omega Forex as Flath's share of a $4,698,325 loss allegedly sustained in currency speculation by Omega Forex.
The books and records of Omega Forex for 1998 show a note receivable from Flath of $200,000.
Flath claims to have begun the process of transferring marketable shares of stock with a value of $165,000 to Omega Forex in late December 1998 and that the transfer was ultimately consummated in 1999. The stock, whenever it was transferred, was liquidated in March or April of 1999—not December of 1998. Indeed, while the shares of stock had a value of about $165,000 when they were liquidated, their market value was about $30,000 less in December of 1998.
After receiving his K-1 for 1998, Flath consulted with Gail Anger, a certified public accountant, to assist him in filing his 1998 return. Flath asserts that he took the deduction for Omega Forex losses in good faith only after counseling with his tax preparer. The practical problem is that the tax preparer was apprehensive about the pass through loss deduction and did not believe the IRS would allow such a loss.
The experience was similar in filing the 1999 tax return. The 1999 K-1 issued by Omega Forex and provided to Flath showed a beginning capital account balance of $49,881 and a capital contribution of $100,000.
Flath was a college graduate, a retired naval officer of twenty years, and a private dentist with a practice that produced revenues of several hundred thousand dollars per year. Had he made a capital contribution in 1998 of $200,000 to Omega Forex for currency speculation, as noted in the 1998 K-1 provided to him, he would have been aware of it. Had he made a contribution of $100,000 in 1999 to Omega Forex for currency speculation, as noted in the 1999 K-1 provided to him, he would have been aware of it. What he did pay through stock sales, less fees to his tax expert Evanson, ended up on deposit with ICG subject to his control. Flath's "at risk" capital contribution—purportedly lost—was used by him from time to time to buy stocks and to pay family expenses. Flath knew that as well.
Flath asserts he relied on "expert advice"—namely, Evanson and CPAs Gail Anger and Bryce Olson—which negates fraudulent intent. It is a strange form of "expertise" which suggests one may still spend what is lost. Evanson, the "tax expert" on whom Flath purportedly relied, received an initial fee of $20,000 and thereafter was to be paid on a contingency basis. Evanson was to get 20% of all tax savings he provided to Flath.
As to CPAs Gail Anger and Bryce Olson, expertise of tax preparers depends on accurate and complete information—all necessary information—from the filer.
In its petition, Omega Forex asks that (1) Flath be refunded the $93,687 remitted pursuant to 26 U.S.C. § 6226; (2) the court determine that the 1998 and 1999 Notice of Final Partnership Administrative Adjustments ("FPAAs") are invalid, or that the adjustments therein, including penalties and interest, be determined to be without basis in law and fact and therefore incorrect, and that the Form 1065s filed by Omega Forex for 1998 and 1999 be determined to be correct as filed as to Flath; and (3) that Omega Forex is entitled to recover cost and attorney's fees.
The court DENIES Omega Forex's petition for relief. Instead, for the reasons described above, the court finds in favor of the United States. The court upholds the adjustments in the Omega Forex FPAAs that disallow the fraudulent Section 988 losses, determines that the fraud penalty is applicable to such losses, and finds that the statute of limitations as to Flath is still open to make the assessments relating to such adjustments.
Let judgment be entered accordingly.