Steven H. Toushin was convicted in 1988 for filing false income tax returns for 1980, 1981, and 1982, but this conviction was reversed due to improper jury instructions. Before a second trial, he pled guilty to one count of filing a false return for 1980 and was sentenced to time served. Subsequently, the IRS initiated a civil proceeding against Toushin on July 1, 1992, for unpaid taxes, concluding that he had fraudulently under-reported his income. The IRS issued a notice of tax deficiency and imposed penalties for fraud for the tax years in question. After a four-day bench trial, the United States Tax Court upheld the IRS’s findings, concluding there was clear and convincing evidence of tax underpayments due to fraud. Toushin appealed the Tax Court’s decision, claiming errors in the income calculations for 1981 and 1982 and disputing the fraud determination for those years. The Court of Appeals affirmed the Tax Court's judgment.
Toushin does not dispute the Tax Court's determination that he underreported his income in 1980 and that this underreporting was fraudulent. He argues, however, that the Tax Court incorrectly calculated his unreported income for 1981 and 1982 by not considering $80,000 in cash he claims to have had on hand as of January 1, 1980, which he asserts came from nontaxable sources. The court applies de novo review for legal issues and clear error review for factual determinations. The Tax Court found Toushin's testimony about the cash hoard to be incredible, noting his guilty plea which acknowledged unreported income of $59,411 in 1980 based on a cash on hand figure of $0. Evidence of his severe financial difficulties from 1976 to 1978 further undermined his claims. The court noted he had borrowed money, worked as a janitor, and had almost no money in his accounts, all inconsistent with having $80,000 in cash. Consequently, the court affirmed that he had no cash on hand as of January 1, 1980, and upheld its calculations of unreported income for 1981 and 1982. Regarding fraud, Toushin contends that his underpayment of taxes for those years was due to a good faith mistake, as he reported unreported income on the corporate return for his adult theater business.
The IRS had the burden of proving by clear and convincing evidence that Toushin's tax underpayment in 1981 and 1982 was fraudulent, as per 26 U.S.C. sec. 7454(a). A Tax Court's finding of fraud is a factual determination that can only be overturned if clearly erroneous. To establish fraud, the IRS must prove that Toushin intended to evade taxes he knew he owed, which can be shown through circumstantial evidence, given the rarity of direct evidence regarding a taxpayer's intent. The Supreme Court in Spies v. United States identified behaviors indicative of tax evasion, such as maintaining false records or concealing income.
The Tax Court found multiple indicators of fraud in Toushin's case, including consistent underreporting of income in 1980 to 1982, inadequate business records, and the destruction of records at the Bijou Theater, where he operated a sex business. Additionally, Toushin attempted to obstruct the IRS's investigation by instructing his manager to lie and sending him on vacation. Toushin admitted to skimming cash from the business and pled guilty to filing a false tax return for 1980. The IRS successfully demonstrated that the underpayments for 1981 and 1982 were fraudulent, and the Tax Court's conclusions were upheld as not clearly erroneous. Consequently, Toushin was given 14 days to explain why he should not be sanctioned for filing a frivolous appeal, and the Tax Court's judgment was affirmed.
The IRS determined that Toushin underreported his income by $59,411 in 1980, $57,656 in 1981, and $43,757 in 1982, using the "cash method" which calculated unreported income based on the excess of cash expenditures over cash sources for each year. Toushin claimed his $80,000 cash on hand resulted from various sources, including earnings from the Bijou, checks from a receiver, a money order, and an inheritance. He argued that his financial difficulties were a strategy to conceal assets from his wife during divorce proceedings. However, the Tax Court found his testimony to be vague and contradictory, leading to the conclusion that his claims were not credible. The court's credibility findings are given deference, and the evidence supported the rejection of Toushin's argument. Additionally, under 26 U.S.C. § 6653(b) for the years in question, penalties for tax underpayment due to fraud included an additional 50% of the underpayment amount, which remained consistent in 1982 with an added penalty on interest.
