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Marijuana & Tax Return Preparer's Defense Went Up In Smoke

Marijuana & Tax Return Preparer's Defense Went Up In Smoke

According to Law360, a California licensed tax return preparer committed fraud in underreporting income from his marijuana business, and a U.S. Tax Court ruling holding him liable for penalties should be affirmed, the U.S. told the Ninth Circuit.

Raymond Chico, who founded the marijuana cigarette container company Doobtubes, was uncooperative with the Internal Revenue Service during its audit of his income tax returns, (not recommended and probably resulted in the fraud penalty assessment) and the Tax Court rightly held him liable for fraud penalties related to his overstating of business expenses and understating of income, the government said in a brief Wednesday.

Chico, whom the government described as a "serial entrepreneur," had plenty of tax preparing experience and should have recognized his mistakes on his tax returns, the government said.

"Based On This Court's Precedent, Chico's Understatement Of His And His Wife's Income By More Than $640,000 Over
The Course Of Three Years, Coupled With His
Inadequate Record-Keeping, Is Sufficient To Establish
 His Fraudulent Intent," The Government Said.

In December, Chico told the appeals court that the IRS failed to clearly prove he knowingly avoided paying taxes on Doobtubes' income. Chico said that the Tax Court's ruling should be reversed because he had properly filed his personal income tax returns and at most made mistakes in his business tax filings, according to the brief.

The Tax Court ruled in September 2019 that Chico underreported Doobtubes' receipts by $180,000 and ordered him to pay fraud penalties. Chico, despite being a licensed tax return preparer, also didn't file corporate returns for Colorado marijuana dispensary Lakewood Patient Resource Center Inc., for which he was chief financial officer and half-owner, according to the Tax Court.

Chico Was Also Said To Be Uncooperative During A Revenue Agent's Examination of His Tax Compliance, Failing To Respond Adequately and Provide Requested Paperwork Related
To His Tax Returns Between 2010 And 2012,
According To The Tax Court Opinion. 

Most Likely This Lack of Cooperation Inspired
the Revenue Agent to Assess the Fraud Penalty

But Chico said in his brief that he had only limited experience as a tax return preparer and during the Tax Court proceedings he initially relied on an attorney who failed to cooperate with the IRS in its audit and was later disbarred from practicing law in California.

Despite Chico's arguments, the government said in its brief there is more than enough evidence showing that he committed fraud and Chico was responsible for the actions of his first legal representative.

In addition to Chico's understatement of income, he also kept inadequate records and failed to file business tax returns for Lakewood Patient Resource Center, the government said. Taken together, the "badges of fraud" make clear that Chico's tax position was fraudulent, the U.S. said.

The government also told the appeals court that even though the Tax Court judge who presided over Chico's trial didn't issue the opinion in his case, the factual record is more than sufficient to support the imposition of fraud penalties. The case didn't require the new judge to make any credibility determinations on witness testimony, as Chico has argued, the U.S. said.

It is too late for Chico to raise arguments in the appeals court that a retrial should be held in his case, the government said.

"[Chico] consented to a decision in the Tax Court by a successor judge based on the record developed at trial, expressly declining the opportunity afforded by the court to seek a new trial or supplement the record," the government said.

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Read more at: Tax Times blog

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