MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined deficiencies in and penalties on petitioner's Federal income tax as follows:
As alternatives to the section 6651(f) and section 6663 penalties, respondent determined additions to tax under section 6651(a) and a penalty under section 6662, respectively. After concessions, the issues remaining for decision are: (1) whether sums deposited by petitioner and related interest for the years in issue are tax exempt under section 501(a) and(c)(4); (2) whether petitioner is liable for a fraud penalty under section 6663 or, alternatively, for an accuracy-related penalty under section 6662; and (3) whether petitioner is liable for fraud penalties under section 6651(f) or, alternatively, for additions to tax under section 6651(a). Unless otherwise indicated, all section references are to the Internal Revenue Codein effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in Massachusetts when he filed his petition.
Petitioner, a.k.a. Dan West, is a chemist who holds four chemistry-related U.S. patents. During the years in issue, petitioner used both the kitchen and basement of his home to conduct experiments and went to local public libraries to conduct research. During those years, petitioner's activities included providing research services to health supplement companies and manufacturing mineral, herbal, and chemical supplements, which he sold to them.
The health supplement companies, through their representatives such as Richard Breitbarth of Biophase Laboratories, Inc., would provide raw materials and other resources that petitioner needed for his work. The companies considered petitioner a vendor and were unaware of any charitable organization or purpose with respect to his goods and services.
Petitioner received payments in the form of cash or checks for his services, but he did not provide the health supplement companies with any receipts. Checksfor his services were made out to petitioner in his name or to "Dan West". Petitioner asked a company, which was paying $5,000 a month for his services, to increase its payment to $10,000 a month because he believed it to be doing financially better because of his products. With at least one customer, petitioner requested that payments of $10,000 or less be made in cash and that payments over $10,000 be made by check. That customer would send to him "significant" cash payments through Federal Express.
Petitioner's activities also included directly administering supplements to various individuals and groups that came to see him on the porch of his home. A small selection of these customers, who came to form a core group for petitioner, believed their "sole purpose" was to spread the word about his products. They did so by word of mouth in settings such as meetings at their homes or encounters with people on the street. The core group also assisted petitioner in conducting retreats held at petitioner's home and nearby facilities. The core group would first meet with someone before that person could be invited to a retreat, i.e., a person could not just show up.
The retreats were sometimes held bimonthly for approximately 8-24 participants and usually ran over a long weekend (but could last longer). The retreats offered exercise, spirituality, holistic meals, and lectures on health andscience. The focal point of the retreats, however, was petitioner's personal administration of his nutritional supplements to the participants.
Participants were charged from $300 to $1,000 to attend a retreat. Petitioner sometimes received payments in cash or by check from participants but, again, did not provide any receipts. Typically the core group, acting as staff, was not charged any retreat fees, and members were reimbursed for travel expenses from the moneys paid by nonstaff participants.
Petitioner did not maintain any books or records of his activities, and the only financial records available were those maintained by banks where he held accounts. Petitioner declined to open a commercial bank account on behalf of a charitable entity and instead used his personal bank accounts to deposit the earnings from his activities. During the eight years in issue, petitioner had control over at least 14 personal bank accounts at nine different banks under several different Social Security numbers. Of these accounts only two were opened by petitioner using his actual Social Security number. The remaining 12 accounts were opened by petitioner with some digits of his Social Security number transposed. Almost all the bank accounts had petitioner's mother, Nancy Burnham, listed as the beneficiary.
The accounts were opened and closed as follows:
The funds petitioner received for his goods and services were deposited into these bank accounts. The deposits, and interest accruing therefrom, were as follows:
Petitioner did not use these deposited funds for his personal expenses but used Social Security disability payments to support himself.
Petitioner did not file Federal income tax returns for 1995 through 2001. The Internal Revenue Service (IRS) sent an agent to investigate petitioner. The agent went to petitioner's home to meet with him, but petitioner did not want to be interviewed. Several weeks later, around December 31, 2002, the agent was able to conduct an interview with petitioner over the telephone. During the interview, petitioner indicated that he had not filed a tax return since at least the 1970s.
Petitioner explained to the agent that he was looking to save $10 million through donations and when he reached that amount he would have the resources necessary to set up a foundation. He further explained that if he had to pay tax on the donations then he would not be able to fulfill his dream and would give all the money back to the people that donated it. He stated that while he did not maintain business records, he did keep a list of benefactors who provided him with donations. The agent asked for the list but petitioner did not want to provide it.
On April 3, 2003, the Government of the United States indicted petitioner on four counts of tax evasion for the tax years 1996 through 1999 in violation of section 7201. A Federal District Court jury found petitioner guilty on all four counts of tax evasion on May 18, 2004. In her Memorandum of Sentencing Hearing and Report of Statement of Reason, the District Court judge determined the tax loss to be "level 17 (more than $325,000)".
Petitioner moved for a new trial, which the District Court denied. He then appealed the trial court decision. On appeal, the Court of Appeals for the First Circuit affirmed the lower court's decision in United States v. George, 448 F.3d 96 (1st Cir. 2006).
On May 12, 2003, petitioner filed articles of organization with the Commonwealth of Massachusetts to incorporate Biogenesis Foundation, Inc. (Biogenesis). The articles provided that Biogenesis had no members, that petitioner served as its sole director and all of its officers, and that its principal office address was the same as petitioner's personal address. On May 14, 2003, Biogenesis officially incorporated.
On behalf of Biogenesis, petitioner submitted Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, to the IRS on or around May 22, 2003. Petitioner reported that he was filing Form1023 within 15 months from the end of the month in which Biogenesis was created or formed. The Form 1023 listed "Daniel George" as all the officers and sole director of Biogenesis. It also reported that Biogenesis received gifts, grants, and contributions of $6,600,000 from May 3, 2003 to December 31, 2003, and was projected to receive a total of $10,100,000 by end of 2005.
A statement attached to Form 1023--regarding Biogenesis' activities and operational information--referred to Biogenesis as "the brainchild of Daniel David West, a self-taught nutritional biochemist" and clarified in a footnote that petitioner was in the process of changing his name legally to Daniel David West. The statement also expressed the "mission" of Biogenesis, as...
