Pesky et al v. United States of America

Filing 84

MEMORANDUM AND ORDER granting in part and denying in part 79 Motion to Dismiss. The United States has twenty days from the date of this Order to file an Amended Counterclaim, if it can do so consistent with this Order. Signed by Judge William B. Shubb. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (krb)

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UNITED STATES DISTRICT COURT

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DISTRICT OF IDAHO

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----oo0oo----

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ALAN PESKY and WENDY PESKY,

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Plaintiffs,

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NO. CIV. 1:10-186 WBS
MEMORANDUM AND ORDER RE:
MOTION TO DISMISS

v.
UNITED STATES OF AMERICA,

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Defendant.
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Plaintiffs Alan and Wendy Pesky brought suit against

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the United States of America seeking a refund for taxes,

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penalties, and interest assessed against them for the 2003 and

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2004 tax years.

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First Amended Complaint, the United States filed counterclaims

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against the Peskys.

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States’ counterclaims for civil fraud penalties due to

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conservation easement fraud and Schedule C expense fraud pursuant

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to Federal Rule of Civil Procedure 12(b)(6).

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I.

After a stay of the action and the filing of the

The Peskys now seek to dismiss the United

Factual and Procedural Background
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Alan and Wendy Pesky are husband and wife.

The Peskys

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brought suit against the United States in April 2010 seeking

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recovery of taxes, penalties, and interest assessed by the United

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States for the 2003 and 2004 tax years.

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Peskys then moved for partial summary judgment against the United

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States, but the motion was denied.

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September 20, 2011, the United States moved to stay the action

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under 26 U.S.C. § 7422(e) because the Internal Revenue Service

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(“I.R.S.”) issued new statutory notices of deficiency against the

(Docket No. 1.)

(Docket No. 54.)

The

On

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Peskys for the 2003 and 2004 tax years.

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Stay (Docket No. 58).)

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adjustments to income and expenses as to both Alan and Wendy

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Pesky, but the notice to Alan Pesky included a civil fraud

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penalty under 26 U.S.C. § 6663 and additions to tax pursuant to §

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6662.

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statutory notice of deficiency against the Peskys for the 2002

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tax year.

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(United States’ Mot. to

The new notices of deficiency included

(Id. at 2, Ex. B.)

The I.R.S. also allegedly issued a

(Id. at 2; FAC ¶¶ 15-19.)
The court stayed the action pursuant to 26 U.S.C. §

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7422(e) on October 13, 2011.

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request by the parties during a telephonic status conference on

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September 17, 2012, the court lifted the stay.

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The Peskys filed their First Amended Complaint on September 24,

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2012.1

(Docket No. 72.)

(Docket No. 61.)

After an oral

(Docket No. 71.)

The United States filed its Answer to

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The Peskys appear to have declined to file a petition
for redetermination in the Tax Court within the statutory period,
thus giving the United States the option of filing a
counterclaim. See 26 U.S.C. § 7422(e) (“If the Secretary prior
to the hearing of a suit brought by a taxpayer in a district
court . . . mails to the taxpayer a notice that a deficiency has
been determined in respect of the tax which is the subject matter

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the First Amended Complaint and its Counterclaim against the

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Peskys on October 9, 2012.

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(Docket No. 74.)

The Counterclaim alleges that, in 1993, Alan Pesky

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began negotiations to acquire a piece of undeveloped property in

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Blaine County, Idaho (“Ketchum Property”).

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14.)

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Ernest Hemingway’s last home stood (“Hemingway Property”).

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¶ 6.)

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the owners of the Ketchum Property in 1985 (“Hemingway

(Countercl. ¶¶ 13-

The Ketchum Property is adjacent to another property where
(Id.

Mary Hemingway is alleged to have granted an easement to

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Easement”), though the easement was arguably legally defective.

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(Id.)

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(“TNC”) allegedly became the owner of the Hemingway Property and

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disputed the Ketchum Property owners’ right to access the Ketchum

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Property via the Hemingway Easement.

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Upon Mrs. Hemingway’s death, The Nature Conservancy

(Id. ¶¶

7-8.)

Paul MacCaskill and John Hagestad (“M&H”), the owners

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of the Ketchum Property at the time, allegedly sued TNC to reform

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the Hemingway Easement and obtain access to the Ketchum Property.

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(Id. ¶ 12.)

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an option to buy the Ketchum property.

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TNC allegedly responded to the lawsuit by purchasing
(Id. ¶ 15.)

The United States alleges that Alan Pesky, through his

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attorney, negotiated and eventually engaged in a transaction with

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TNC whereby the Peskys would receive the option to buy the

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Ketchum Property and a perfected easement for a driveway over the

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of taxpayer’s suit, the proceedings in taxpayer’s suit shall be
stayed . . . . If the taxpayer files a petition with the Tax
Court, the district court . . . shall lose jurisdiction of the
taxpayer’s suit to whatever extent jurisdiction is acquired by
the Tax Court . . . . If the taxpayer does not file a petition
with the Tax Court for a redetermination of the asserted
deficiency, the United States may counterclaim in the taxpayer’s
suit . . . .”).
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Hemingway Property.

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alleged to have given TNC payment as well as a conservation

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easement that limited development of the Ketchum Property to a

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single home and related buildings.

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(Id. ¶¶ 15-36.)

In exchange, Alan Pesky is

(Id.)

The United States further alleges that Mr. Pesky

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attempted to structure the transaction to hide its quid pro quo

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nature so that he could claim a charitable deduction based on the

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conservation easement.

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States alleges that the negotiations were for a single

(Id. ¶¶ 27-30.)

Specifically, the United

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transaction, but that the transaction was broken up into separate

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documents.

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for $50,000 and the Peskys’ agreement to limit the height of any

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structures on the property (“Easement Agreement”), TNC allegedly

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agreed to grant the Peskys the option to purchase the Ketchum

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Property from M&H and agreed to support Mr. Pesky’s application

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for driveway approval with the local authorities (“Driveway

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Easement”).

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the Pledge Agreement, Mr. Pesky agreed to pay $400,000 to TNC and

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convey within five years “all right to develop or improve the

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[Ketchum] Property except for one single-family residence and

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such accessory buildings as are allowed under applicable zoning.”

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(Id. ¶ 31, Exs. 21, 25.)2

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(Id. ¶ 20.)

In the Assignment Agreement, in exchange

(Id. Exs. 20, 22-24.)

In a separate document called

Mr. Pesky is alleged to have consulted an accounting

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firm as early as February 1993 to discuss the effective profit he

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would make by selling the Ketchum Property once the charitable

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The Pledge Agreement was allegedly secured by a
liquidated damages clause and by Alan Pesky granting deeds of
trust to TNC. (Countercl. ¶¶ 31, 35, Exs. 25, 26.)
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deduction for the conservation easement was factored in.

(Id. ¶

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38.)

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insistence, the Pledge Agreement was never recorded, (id. ¶ 33),

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and that Mr. Pesky attempted to keep the Pledge Agreement secret

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from outside parties, including city officials and even

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appraisers of the property.

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Exs. 35-36, 39, 67-71.)

The United States also alleges that, at Mr. Pesky’s

(Id. ¶¶ 30-34, 56-63, 66, 105-10,

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Mr. Pesky allegedly exercised his option to purchase

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the Ketchum Property for $1.6 million, (id. ¶ 36, Exs. 6, 27),

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and TNC is alleged to have granted Mr. Pesky an Amended Driveway

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Easement, (id. ¶ 50, Ex. 34).

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marketing the property soon after obtaining the Amended Driveway

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Easement and eventually sold the property for around $7 million,

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(id. ¶¶ 65, 97, Ex. 61).

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the Pledge Agreement, (id. ¶¶ 70, 76, Exs. 41, 45),

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allegedly complied with the terms of the Pledge Agreement by

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granting a conservation easement to TNC in March 2002, just days

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before selling the property, (id. ¶ 96, Ex. 60).

Mr. Pesky is alleged to have begun

After extending the time to comply with
Mr. Pesky

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Mr. Pesky allegedly reported a charitable deduction of

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$3 million--the appraised value of the conservation easement–-on

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his 2002, 2003, and 2004 tax returns.

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When the I.R.S. began an audit of Mr. Pesky’s tax deductions, he

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is alleged to have withheld responsive documents, including the

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Pledge Agreement.

(Id. ¶¶ 112, Ex. 74.)

(Id. ¶¶ 113-31.)3

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The scope of the I.R.S.’s investigation was hotly
contested and led to multiple petitions in this court. See Pesky
v. United States, Civ. No. 1:10-06789 EJL CWD (Dist. Idaho 2010)
(Peskys’ petition to quash an I.R.S. summons); United States v.
Pesky, Civ. No. 1:10-00143 EJL (Dist. Idaho 2010) (United States’
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On the basis of these facts, the United States brings

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four counterclaims: (1) conservation easement fraud under 26

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U.S.C. § 6663 against Mr. Pesky; (2) Schedule C expense fraud

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under § 6663 against Mr. Pesky; (3) penalties for failure to file

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within the time proscribed by law against both Mr. and Mrs.

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Pesky; and (4) failure to pay assessed amounts under § 6663 or,

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alternatively, § 6662 against both Mr. and Mrs. Pesky.

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149-79.)

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counterclaims under Federal Rule of Civil Procedure 12(b)(6) for

(Id. ¶¶

The Peskys now move to dismiss the first and second

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failure to state a claim upon which relief can be granted.

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II.

Discussion

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To survive a motion to dismiss, a claimant must plead

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“only enough facts to state a claim to relief that is plausible

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on its face.”

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(2007).

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than a sheer possibility that a defendant has acted unlawfully,”

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Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009), and “[w]here a

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complaint pleads facts that are ‘merely consistent with’ a

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defendant’s liability, it ‘stops short of the line between

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possibility and plausibility of entitlement to relief.’”

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(quoting Twombly, 550 U.S. at 557).

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

This “plausibility standard,” however, “asks for more

Id.

In deciding whether a

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petition to enforce an I.R.S. summons); United States v. Richey,
Civ. No. 1:08-00452 EJL (Dist. Idaho 2008) (United States’
petition to enforce an I.R.S. summons), consolidated with Civ.
No. 1:08-10-00143.
In one of the suits, the Ninth Circuit
overturned the district court’s holding that the entire work file
of Mark Richey, the appraiser of the conservation easement, was
protected by the attorney-client privilege and by the workproduct doctrine, thus remanding the case back to the district
court for an in camera examination of the materials summoned by
the I.R.S. in order to determine which documents, if any, were
protected from disclosure. United States v. Richey, 632 F.3d
559, 566-68 (9th Cir. 2011).
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claimant has stated a claim, the court must accept the

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allegations in the complaint as true and draw all reasonable

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inferences in favor of the claimant.

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232, 236 (1974), overruled on other grounds by Davis v. Scherer,

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468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972).

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A.

Scheuer v. Rhodes, 416 U.S.

Civil Fraud Penalty under § 6663

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Section 6663 provides that “[i]f any part of any

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underpayment of tax required to be shown on a return is due to

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fraud, there shall be added to the tax an amount equal to 75

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percent of the portion of the underpayment which is attributable

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to fraud.”

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26 U.S.C. § 6663(a).
In the context of the seventy-five percent penalty of §

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6663,4 “fraud is intentional wrongdoing on the part of the

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taxpayer with the specific intent to avoid a tax known to be

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owing.”

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(quoting Akland v. Comm’r, 767 F.2d 618, 621 (9th Cir. 1985)).

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To establish liability for the civil fraud penalty, “the

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Government must establish: (1) a knowing falsehood; (2) an intent

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to evade taxes; and (3) an underpayment of tax.”

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United States, 683 F.2d 1285, 1286 (9th Cir. 1982).

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Bradford v. Comm’r, 796 F.2d 303, 307 (9th Cir. 1986)

Considine v.

The government “must prove fraud by clear and

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convincing evidence, but intent can be inferred from strong

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circumstantial evidence.”

Bradford, 796 F.2d at 307 (quoting

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The Tax Reform Act of 1986, Pub. L. No. 99-514, 100
Stat. 2085 (1986), amended 26 U.S.C. § 6653(b) to increase the
civil penalty for fraud from fifty percent to seventy-five
percent. Cooley v. Comm’r, 87 T.C.M. (CCH) 1025, 2004 WL 406756,
at *7 n.4 (2004). The Omnibus Budget Reconciliation Act of 1989,
Pub. L. No. 101-239, 103 Stat. 2106 (1989), subsequently removed
the civil penalty for fraud from § 6653(b) and replaced it with §
6663. Id.
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Akland, 767 F.2d at 621 (internal citations omitted)); see 26

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U.S.C. § 7454(a) (“In any proceeding involving whether the

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petitioner has been guilty of fraud with intent to evade tax, the

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burden of proof in respect to such issue shall be upon the

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Secretary.”).

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by direct evidence, this court has inferred intent from various

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kinds of circumstantial evidence.

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include: (1) understatement of income; (2) inadequate records;

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(3) failure to file tax returns; (4) implausible or inconsistent

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explanations of behavior; (5) concealing assets; and (6) failure

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to cooperate with tax authorities.”

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omitted).

“Because fraudulent intent is rarely established

These ‘badges of fraud’

Id. (internal citations

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1.

Conservation Easement Fraud

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“Section 170(a) of the Internal Revenue Code of 1954

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allows a deduction for charitable contributions . . . .”

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v. Comm’r, 511 F.2d 1263, 1266 (9th Cir. 1975); see 26 U.S.C. §

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170(a).

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charitable organization, made with charitable intent and without

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the receipt or expectation of receipt of adequate consideration.”

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Mitchell v. Comm’r, 138 T.C. No. 16, 2012 WL 1109342, at *4

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(2012) (citing Hernandez v. Comm’r, 490 U.S. 680, 690 (1989);

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United States v. Am. Bar. Endowment, 477 U.S. 105, 116-18; 26

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C.F.R. § 170A-1(h)(1)-(2)).

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allowed a charitable deduction for a gift of property consisting

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of less than an entire estate in that property, an exception is

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made for a ‘qualified conservation contribution.’”

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U.S.C. § 170(f)(3)(A), (f)(3)(B)(iii), (h).

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Collman

“A charitable contribution is a gift of property to a

“While a taxpayer is generally not

Id.; see 26

Here, the United States alleges that Alan Pesky
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underpaid his taxes by fraudulently deducting the full value of a

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conservation easement as a charitable deduction when the easement

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was obtained through a quid pro quo transaction with TNC.

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(Countercl. ¶¶ 151-53.)

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exhibits that the United States attaches in support of its

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counterclaims.

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Colleges, 655 F.3d 984, 999 (9th Cir. 2011) (noting that a court

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may “consider materials that are submitted with and attached to

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the Complaint” on a Rule 12(b)(6) motion to dismiss).

The court has examined over ninety

See generally United States v. Corinthian

In its

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counterclaims and attached exhibits, the United States identifies

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key documents and communications between the various people

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alleged to have participated in or been affected by the fraud.

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For example, in support of its allegations that the

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Assignment Agreement and Pledge Agreement were part of a single

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transaction, the United States attaches internal memoranda shared

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with Mr. Pesky that detail the negotiations between TNC and the

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Peskys’ attorneys.

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that both the Assignment Agreement and Pledge Agreement were

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drafted around the same time, (id. Ex. 10), discuss the terms of

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the Assignment Agreement and the Pledge Agreement in the same

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memoranda, (id. Ex. 11), as well as have a subject line that

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refers to the “Nature Conservancy Transaction” in the singular,

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(id. Exs. 11, 13).

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out of” and is “integral with” the Assignment Agreement, (id. Ex.

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25), and the minutes from a zoning board meeting include a

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statement from Mark Elsbree, a TNC employee, that TNC “had agreed

(See id. Exs. 10-16.)

The memoranda note

The Pledge Agreement notes that it “arises

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to grant Mr. Pesky a reformed easement,5 conditioned upon the

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fact that he can build one house (and one guest house) there,”

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(id. ¶ 46, Ex. 32).

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The United States also includes specific factual

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allegations and exhibits regarding Mr. Pesky’s intent to defraud,

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such as attempts to keep the Pledge Agreement hidden from city

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officials, real estate agents, and appraisers, (id. ¶¶ 57-63, 66,

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105-09, Exs. 35-36, 39, 67-71), as well as his refusal, through

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his attorney, to share the Pledge Agreement and other documents

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with the I.R.S., (id. 116-47, Exs. 76-95).

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the subject, Mr. Pesky is alleged to have claimed a near total

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lack of recall as to anything related to the Pledge Agreement.

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(Id. ¶ 148.)

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When questioned on

The Peskys argue - and the United States does not

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contest - that the heightened pleading standard of Federal Rule

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of Civil Procedure 9(b) applies to the United States’

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counterclaims for fraud under § 6663.

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Corp., USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (stating that

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averments of fraud must be “specific enough to give defendants

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notice of the particular misconduct so that they can defend

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against the charge and not just deny that they have done anything

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wrong” (internal quotation marks and citations omitted)); Gaughen

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v. United States, Civ. No. 1:09-2488, 2011 WL 292019, at *2-3

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(M.D. Penn. Jan. 27, 2011) (applying Rule 9(b) to the

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government’s answer in a suit by a taxpayer seeking a Rule 12(c)

See Vess v. Ciba-Geigy

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The “reformed easement” here could reasonably be
interpreted as referring to the Driveway Easement contained in
the Assignment Agreement.
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judgment on the pleadings for a refund of § 6663 penalties).

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see Payne v. United States, 247 F.2d 481, 485 (8th Cir. 1957)

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(“We should doubt that [Rule 9(b)] has any application to a

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complaint in a suit to collect assessed tax deficiencies and

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fraud penalties, of which the taxpayer has administratively been

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given due notice of determination, assessment, and demand for

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payment.”).

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But

Assuming, arguendo, that the heightened pleading
requirements of Rule 9(b) apply to the United States’

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counterclaims for civil fraud penalties under § 6663, the United

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States has more than adequately pled facts of particular

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misconduct regarding the allegedly fraudulent charitable

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deduction so that the Peskys can adequately defend against the

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charge.

See Vess, 317 F.3d at 1106.

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The Peskys argue that the United States’ allegations

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misconstrue the nature of the transactions at issue and that a

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close reading of the exhibits forecloses any plausible

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possibility of fraud by Mr. Pesky.

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accept the allegations as being true’” when “material is attached

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to the complaint which refutes the allegations contained in the

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complaint,” Hores v. Mason, 1999 WL 674588, at *4 (Dist. Idaho

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July 19, 1999) (quoting Roth v. Garcia Marquez, 942 F.2d 617, 625

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(9th Cir. 1991)), the Peskys ask the court to go far beyond this

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rule and adopt their interpretation of the documents.

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approach is inappropriate in ruling on a Rule 12(b)(6) motion

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since the court must draw all reasonable inferences in favor of

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the claimant.

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grounds by Davis, 468 U.S. at 191.

While the court “‘need not

Such an

Scheuer, 416 U.S. at 236, overruled on other

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For example, the Peskys argue that exhibits documenting

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the negotiations show that the Peskys and TNC never negotiated

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for a one home site restriction in exchange for the option to buy

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the Ketchum Property, but instead only contemplated a three home

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site restriction.

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fact that the attached exhibits may show that the Peskys and TNC

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discussed alternative arrangements is not inconsistent with the

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United States’ allegations.

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have discussed alternatives during their negotiations does not

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preclude the inference that they eventually settled upon a one

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home site restriction as part of the exchange for the option to

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buy the Ketchum property.

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(See Countercl. Exs. 5, 8, 9.)

However, the

The fact that the Peskys and TNC may

Accepting as true all material allegations in the

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counterclaims and drawing all reasonable inferences in favor of

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the United States, the United States has adequately pled a

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counterclaim for a civil penalty under § 6663 based on the

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Pesky’s allegedly fraudulent charitable deduction for the value

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of the conservation easement.

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the United States’ first counterclaim.

Thus, the court will not dismiss

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2.

Schedule C Fraud

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“In general, section 162 allows deductions for ordinary

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and necessary expenses of carrying on a trade or business.”

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Shelton v. Comm’r, 72 T.C.M. (CCH) 807, 1996 WL 544608, at *4

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(1996); 26 U.S.C. § 162(a).

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‘ordinary’ has been defined as that which is ‘normal, usual, or

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customary’ in the taxpayer's trade or business.”

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Deputy v. DuPont, 308 U.S. 488, 495 (1940)).

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been construed to mean ‘appropriate’ or ‘helpful’ in the

“As used in section 162(a),

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Id. (citing

“‘Necessary’ has

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development of the taxpayer's business.”

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Helvering, 290 U.S. 111, 113 (1933)).

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for, section 162 prohibits deductions for personal, living, or

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family expenses.”

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of § 6663, “fraudulent understatement of income may be

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established by overstatement of Schedule C expenses.”

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Comm’r, 87 T.C.M. (CCH) 1025, 2004 WL 406756, at *8 (2004)

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(citations omitted).

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Id.

Id. (citing Welch v.

“Unless expressly provided

In an action to impose the civil penalty

Cooley v.

In stark contrast to its allegations regarding the

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conservation easement deduction, the United States’ pleadings are

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conspicuously devoid of factual allegations regarding fraudulent

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business deductions on the Peskys’ Schedule C forms.

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Counterclaim includes formulaic allegations of liability under §

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6663, (Countcl. ¶ 158), and alleges that Alan Pesky wrongly

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“claimed expenses incurred by himself personally or by entities

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other than any of his possible sole proprietorships as ordinary

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and necessary expenses,” including “as a non-exhaustive

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example[,] . . . expenses for accounting services.”

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60.)

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sole proprietorship that incurred the Schedule C expenses on his

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2003 and 2004 tax returns, yet it asserts no factual allegations

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related to the Schedule C expenses, such as what “possible sole

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proprietorships” and entities are alleged to have be involved,

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what expenses were deducted, or what facts lead the United States

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to believe that Mr. Pesky did not operate a sole proprietorship.

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The United States has not included enough factual allegations to

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“nudge[] [its] claim[] across the line from conceivable to

The

(Id. ¶¶ 159-

The United States alleges that Mr. Pesky never operated a

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Twombly, 550 U.S. at 547.6

plausible.”

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Thus the court will dismiss the United States’

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counterclaim for civil penalties under § 6663 due to Mr. Pesky’s

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allegedly fraudulent reporting of business expenses on his

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Schedule C forms.

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Since this is the first motion to dismiss the United

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States’ counterclaims, and the United States appears to be able

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to cure the deficiency, it will be granted leave to amend.

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Foman v. Davis, 371 U.S. 178, 182 (1962) (“In the absence of any

See

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apparent or declared reason--such as undue delay, bad faith or

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dilatory motive on the part of the movant, repeated failure to

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cure deficiencies by amendments previously allowed, undue

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prejudice to the opposing party by virtue of allowance of the

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amendment, futility of amendment, etc.--the leave sought should,

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as the rules require, be ‘freely given.’); Fed. R. Civ. P. 15(a).

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IT IS THEREFORE ORDERED that the Peskys’ motion to
dismiss be, and the same hereby is:

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(1)

DENIED as to the United States’ first counterclaim

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for a civil fraud penalty under 26 U.S.C. § 6663 due to Alan

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Pesky’s alleged conservation easement fraud; and

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(2)

GRANTED as to the United States’ second

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counterclaim for a civil fraud penalty under 26 U.S.C. § 6663 due

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to Alan Pesky’s alleged Schedule C fraud.

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The United States has twenty days from the date of this

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Order to file an Amended Counterclaim, if it can do so consistent

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A fortiori,if the heightened pleading standard of Rule
9(b) applies, the United States also fails to satisfy Rule 9(b)’s
particularity requirement for its counterclaim alleging
fraudulent reporting of Schedule C expenses.
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with this Order.

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DATED:

January 7, 2013

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