Cole v. Commissioner
2011 U.S. App. LEXIS 6250
| 7th Cir. | 2011Background
- IRS audited the Coles' 2001 joint return beginning in 2003 and uncovered a web of entities (Bentley Group, SCC, JAC Investments) and dubious transactions indicating unreported income.
- Bentley Group (formed 1998 by Scott and Darren Cole) operated as Cole Law Offices, with disputed ownership and transfers in 2001 suggesting attempts to divert income.
- In 2001 the Coles earned substantial income (notably $1.2 million from the Sandefur Living Trust) but did not report it on their 2001 return, instead moving funds through related entities.
- The Coles maintained incomplete records; the IRS used specific-items and bank-deposits methods to reconstruct 2001 income, resulting in large unreported sums.
- The Tax Court concluded the Coles understated income and that the understatement was fraudulent, assessing deficiencies and fraud penalties; the Seventh Circuit affirmed.
- Scott and Jennifer Cole appealed, challenging the Tax Court findings and the fraud penalty, but the court upheld the Tax Court's results.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Omission of income from 2001 return | Cole(s) contend SCC owned Bentley Group income | Commissioner supported attribution of Bentley income to Coles | Affirmed: IRS reconstructions were reasonable; Cole income omitted |
| Fraud penalty imposition | Coles argue lack of clear intent to evade tax | IRS showed clear and convincing evidence of fraud | Affirmed: evidence supported fraud finding and 75% penalty |
Key Cases Cited
- Glenshaw Glass Co. v. Commissioner, 348 U.S. 426 (1955) (broad definition of gross income and taxing power)
- Lucas v. Earl, 281 U.S. 111 (1930) (assignment of income doctrine)
- Griffiths v. Helvering, 308 U.S. 355 (1939) (focus on actual command over property taxed)
- Spies v. United States, 317 U.S. 492 (1943) (inference of willful tax evasion from conduct showing concealment or manipulation)
- Kenseth v. Comm'r, 259 F.3d 881 (7th Cir. 2001) (assignment of income does not avoid tax liability)
- Bradford v. Comm'r, 796 F.2d 303 (9th Cir. 1986) (fraud indicators; use of badges of fraud)
- Walton v. United States, 909 F.2d 915 (6th Cir. 1990) (consideration of badges of fraud and record-keeping failures)
- Toushin v. Comm'r, 223 F.3d 642 (7th Cir. 2000) (fraud burden; clear and convincing standard)