Walter D. Prezioso & Kimberly J. Prezioso v. Commissioner, T.C. Memo. 2026-63, July 28, 2026
The taxpayer, Walter D. Prezioso, joined GSP Precision, Inc. (GSP)—an aerospace manufacturing company incorporated under California law in 1983 by his father, Juan Pablo Prezioso, and George J. Gottardi—as an employee in 1992. Following Walter’s acquisition of a 25% interest in GSP from his father in 1997, George retained a 50% interest, while Juan Pablo and Walter each held 25%. In 2001, GSP’s board of directors adopted a resolution designating Walter’s signature as the sole requirement for any checks issued by GSP. By June 2002, George and Juan Pablo effectively retired from GSP’s day-to-day operations, vesting Walter with sole authority over day-to-day operations and future employment decisions, except for the employment of family members. Walter turned the company’s declining financials around and became chief executive officer in 2007.
The Court found that beginning in 2007, GSP began paying certain personal expenses for Walter. GSP’s board minutes dated December 22, 2009, authorized GSP to “continue to pay personal leased vehicle, vehicle insurance, gas, family medical insurance, Sentry life insurance[,] and credit card expenses for lunch, dinner, customer expenses[,] or company expenses.” However, the Court found that GSP paid for a vast array of Walter’s personal expenses that far exceeded those authorized by the board. Specifically, the Court found that GSP paid for Walter’s “personal credit cards, home renovations, a home-equity line of credit, landscaping services, tennis court and pool contractors, and audio/visual equipment.” GSP also paid Walter’s boat and recreational vehicle loans and leased vehicles on his behalf, issuing over 400 checks for Walter’s personal expenses during the tax years in issue (2009–12).
The Court found that for all years in issue except 2012, “the amounts GSP paid for Walter’s personal expenses exceeded the losses reported on its Forms 1120, U.S. Corporation Income Tax Return.” None of these payments were reported on Forms W-2 or Forms 1099-MISC issued to Walter, exempting them from payroll taxes and federal income tax reporting. Nonetheless, the Court found that Walter understood these benefits were compensatory, noting that on a credit application for a Ferrari lease, Walter listed his income as “Verifiable $52,950 W-2” and “Actual $275,000.”
The Taxpayers’ Request for Relief and Underlying Concessions
Walter and his wife, Kimberly J. Prezioso, timely filed joint Forms 1040 for the 2009 through 2013 tax years, reporting Walter’s W-2 salary but omitting all income attributable to GSP’s payment of their personal expenses. On December 20, 2023, the IRS issued Notices of Deficiency, determining federal income tax deficiencies and civil fraud penalties for all years in issue. Petitioners subsequently conceded the underlying deficiencies for all tax years, as well as the fraud penalty for tax year 2013, leaving only the civil fraud penalties for tax years 2009–12 for decision by the Tax Court.
In their request for relief, petitioners characterized their underpayments as the result of an “honest mistake” or poor judgment, and Walter testified that he was not aware at the time that GSP’s payment of his personal expenses constituted taxable income. He further testified that he believed these expenses were being correctly reported on GSP’s corporate returns.
The Statutory Framework and Burden of Proof
Under I.R.C. § 6663(a), “if any part of any underpayment of tax required to be shown on a return is due to fraud,” a penalty of 75% of the portion of the underpayment attributable to fraud is imposed. The Commissioner bears the burden of proving fraud by “clear and convincing evidence” under I.R.C. § 7454(a) and Tax Court Rule 142(b). This requires establishing two distinct elements: (1) that there was an underpayment of tax for each year in issue, and (2) that at least some portion of the underpayment for each year was due to fraud. See Hebrank v. Commissioner, 81 T.C. 640, 642 (1983). When the Commissioner asserts fraud penalties for multiple tax years, this burden “applies separately for each of the years.” See Vanover v. Commissioner, T.C. Memo. 2012-79; Temple v. Commissioner, T.C. Memo. 2000-337, aff’d, 62 F. App’x 605 (6th Cir. 2003).
Furthermore, under I.R.C. § 7491(c), the Commissioner bears the burden of production with respect to an individual taxpayer’s liability for any penalty, requiring sufficient evidence indicating that the penalty is appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). As part of this burden, the Commissioner must produce evidence of compliance with the written supervisory approval requirement of I.R.C. § 6751(b). See Graev v. Commissioner, 149 T.C. 485, 492–93 (2017).
In this case, because petitioners conceded the deficiencies, the IRS easily carried its burden regarding underpayments. The IRS also met its burden of production under I.R.C. § 6751(b) by showing that Group Manager Anet Magadamyan approved the civil fraud penalties by executing a Civil Penalty Approval Form on July 9, 2021.
Evidentiary Disputes and the Exclusion of Third-Party Testimony
Prior to analyzing the fraud penalties, the Court resolved an evidentiary issue regarding the admissibility of testimony by George Gottardi’s son, Fernando Gottardi. In 2013, Fernando sought GSP employment and was rebuffed by Walter. Following this disagreement, Fernando analyzed GSP’s financials, identified discrepancies, and prompted George and Marta to file a shareholder-derivative suit in July 2013, which ultimately placed GSP into receivership and led to its February 3, 2014, voluntary petition for bankruptcy protection.
The IRS filed a Motion in Limine asking the Court to admit Fernando’s testimony, arguing that his investigation gave context to the shareholder suit and was relevant to evaluating Walter’s credibility. However, the Court excluded the testimony, explaining that the IRS failed to establish that Fernando had “firsthand knowledge of any relevant facts” during the years in issue. Citing Colvin v. Commissioner, T.C. Memo. 2012-26, the Court ruled that because Fernando’s testimony merely summarized and offered opinions on otherwise admissible documents, it was not relevant to the factual issues to be decided.
The Court’s Analysis of Circumstantial Fraud Indicators
Because direct proof of fraudulent intent is rarely available, the Court emphasized that “fraudulent intent may be established by circumstantial evidence.” See Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989). To sustain his burden, the Commissioner must show that “the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.” See Parks v. Commissioner, 94 T.C. 654, 661 (1990). The Court may examine “the taxpayer’s entire course of conduct” to infer this intent. See Webb v. Commissioner, 394 F.2d 366, 379 (5th Cir. 1968); Stone v. Commissioner, 56 T.C. 213, 224 (1971).
To evaluate circumstantial intent, courts rely on the well-known “badges of fraud” set forth in Bradford v. Commissioner, 796 F.2d 303, 307–08 (9th Cir. 1986). These badges include:
- Understating income;
- Failing to maintain adequate records;
- Offering implausible or inconsistent explanations;
- Concealing income or assets;
- Failing to cooperate with tax authorities;
- Engaging in illegal activities;
- Providing incomplete or misleading information to the taxpayer’s tax return preparer;
- Offering false or incredible testimony;
- Filing false documents, including false income tax returns;
- Failing to file tax returns; and
- Engaging in extensive dealings in cash.
The Tax Court noted that while the existence of any single badge is not dispositive, “the existence of several badges is persuasive circumstantial evidence of fraud.” See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).
Application of Law: The Dual-Chart Bookkeeping System and Deceptive Intent
A central pillar of the Court’s finding of fraudulent intent was Walter’s double bookkeeping system. GSP had no on-staff accountant, leaving Walter primarily responsible for entering checks and invoices into GSP’s bookkeeping software. The Court found that this process resulted in two distinct sets of charts of accounts: “an internal set provided to GSP shareholders for periodic review (Internal Charts) and an external set provided to Mr. Caven for accounting and tax purposes (Accountant Charts).”
In the Internal Charts, the Court found that Walter systematically disguised the payment of his personal expenses by entering different, false payee names, which were usually existing GSP business vendors. For example, the Court found that two checks dated February 2, 2011, payable to “Chase Card” for Walter’s personal credit cards, were falsely recorded in the Internal Charts as payable to Cowan Precision Grinding and Quality Heat Treating, Inc. Other entries substituted payees like Harvey Titanium, Titanium Industries, and Service Steel for the actual payee, Chase Card.
The Court found that Walter changed payee names for his personal expenses even when GSP was simultaneously paying legitimate business expenses to the same vendor. In October 2007, GSP issued two checks to Washington Mutual; Walter recorded the business expense check correctly, but recorded the personal expense check in the Internal Charts as payable to “A.M. Castle & Co.” Direct payments to Walter and his father were entirely omitted from the Internal Charts.
In contrast, when generating the Accountant Charts at the end of each month to send to Mr. Caven, Walter’s standard practice was to change the payee names in the bookkeeping software back to the correct payee names (though he failed to do so for at least three expenses in December 2011). After exporting the Accountant Charts, Walter would change the payee names back to the incorrect ones in the software.
Furthermore, the Court found that Walter manipulated GSP’s expense coding. GSP’s outside CPA, John Caven of Caven & Associates, had established specific expense codes, including Code 4710 for material purchases, Code 4711 for outside processing, Code 4715 for equipment rental, Code 4718 for equipment repair, and separate codes for officer compensation and shareholder draws. The Court found that Walter coded many personal expenses as equipment repair, then modified the code to material purchases or outside processing (and added a false payee name) for the Internal Charts, before reverting them to equipment repair for the Accountant Charts. Other personal expenses, such as the Chase credit card charges, were coded as material purchases and left unchanged for the Accountant Charts. Because these personal expenses were classified as material purchases, outside processing, or equipment repair, they were aggregated on GSP’s profit and loss statements as “Cost of Sales” and capitalized as “cost of goods sold” on GSP’s corporate tax returns (Forms 1120).
The Court rejected petitioners’ argument that the Internal Charts were kept merely for the non-tax purpose of hiding Walter’s personal expenses from envious GSP employees. The Court clarified that “a taxpayer’s practice of double bookkeeping, even where the fraudulent set of books was kept for nontax purposes, is indicative of fraudulent intent.” See Podlucky v. Commissioner, T.C. Memo. 2022-45, aff’d, No. 22-70169, 2024 WL 4234510 (9th Cir. Sep. 19, 2024).
The Court further held that Walter’s bookkeeping practices resulted in “providing incomplete or misleading information” to Mr. Caven, another powerful badge of fraud. The Court emphasized that “a taxpayer who relies on a return preparer may not withhold information from the return preparer and then ‘escape responsibility for the false tax returns which result.'” See United States v. Garavaglia, 566 F.2d 1056, 1060 (6th Cir. 1977). Under long-standing precedent, “keeping two sets of books is circumstantial evidence of fraudulent intent.” See Benavides & Co., P.C. v. Commissioner, T.C. Memo. 2019-115; Potter v. Commissioner, T.C. Memo. 2014-18; Karcho v. Commissioner, T.C. Memo. 2000-213.
Application of Law: Consistently Underreported Income and Willful Blindness
Under established federal tax law, a corporation’s payment of a shareholder’s personal expenses generally constitutes taxable income to the shareholder, as either compensation or constructive dividends. See Barrington v. Commissioner, T.C. Memo. 2022-68; see also Helvering v. Horst, 311 U.S. 112, 119 (1940). The Court found that petitioners consistently and substantially underreported their income across all tax years in issue. Although a mere understatement of income is not alone proof of fraud, “the consistent and substantial understatement of income is strong evidence of it.” See Truesdell v. Commissioner, 89 T.C. 1280, 1302 (1987); Marcus v. Commissioner, 70 T.C. 562, 577 (1978).
The Court dismissed Walter’s defense that the underreporting resulted from an honest mistake. It pointed to his credit application for a Ferrari lease—where he listed his verifiable income as $52,950 but his actual income as $275,000—as clear evidence that Walter understood his actual income was far greater than what was reported to the IRS.
Additionally, the Court highlighted Walter’s willful blindness. Walter executed GSP’s corporate returns (Forms 1120) for the 2009 through 2011 tax years. He admitted at trial that he did not thoroughly review them or inquire about their accuracy, despite his highly irregular bookkeeping practices and the corporate losses generated by his personal expenditures. The Court held that “a trier of fact may infer that an individual knew of his or her evasion of tax from his or her willful blindness to the existence of that fact.” See Fields v. Commissioner, T.C. Memo. 1996-425.
The Court also rejected Walter’s attempt to shift blame onto GSP’s deceased accountant, Mr. Caven. Since Mr. Caven had created detailed expense codes for officer compensation and draws, it was highly implausible that he would instruct Walter to code personal items as “equipment repair” or “material purchases.” The Court held that providing trial testimony that lacks credibility is a distinct badge of fraud. See Beleiu v. Commissioner, T.C. Memo. 2025-70; Morse v. Commissioner, T.C. Memo. 2003-332, aff’d, 419 F.3d 829 (8th Cir. 2005).
Finally, the Court connected Walter’s willingness to deceive GSP’s other shareholders through the Internal Charts to his tax fraud, noting that “a taxpayer’s dishonesty in business transactions or willingness to defraud others may indicate a willingness to defraud the Commissioner.” See Solomon v. Commissioner, 732 F.2d 1459, 1462 (6th Cir. 1984); McGee v. Commissioner, 61 T.C. 249, 260 (1973); Ferguson v. Commissioner, T.C. Memo. 2004-90.
Conclusion and Joint Liability Implications
In sum, the Tax Court found clear and convincing evidence of civil fraud under I.R.C. § 6663(a) with respect to all years in issue, citing Walter’s double bookkeeping, implausible explanations, and active efforts to conceal the payment arrangement. Although there was no finding that Kimberly J. Prezioso participated in the fraud, the Court confirmed she remained jointly and severally liable for the deficiencies and fraud penalties because they filed joint returns. Under I.R.C. § 6013(d)(3), spouses filing a joint return are each fully responsible for the accuracy of their return and are jointly and severally liable for the entire tax and penalties found to be owed. See Butler v. Commissioner, 114 T.C. 276, 282 (2000).
Prepared with assistance from NotebookLM.
