Di Giorgio v. Comm'r of Internal Revenue

1

T.C. Memo. 2023-44

ROBERT A. DI GIORGIO, SR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ROBERT A. DI GIORGIO, SR. AND ZANDRA M. DI GIORGIO,Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 15675-12, 15751-12

United States Tax Court

March 29, 2023

Robert A. Di Giorgio, Sr., and Zandra M. Di Giorgio, pro sese.

Derek P. Richman, Angela J. Ganase, and Daniel C. Munce, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BUCH JUDGE

Robert Anthony Di Giorgio, Sr., was a mortgage lender and real estate salesman who specialized in distressed properties. He failed to report substantial income from those and other activities for 2005 through 2007 (years in issue). With his unreported income, Mr. Di Giorgio led a lavish lifestyle with extravagant vacations, including one to the Philippines where he met his second wife. During their marriage, he kept her in the dark about their true financial situation. Through a bank deposits analysis, the Commissioner determined income tax deficiencies, additions to tax, and civil fraud penalties. The Di Giorgios challenged the Commissioner's determinations, and Ms. Di Giorgio asserted that she is entitled to innocent spouse relief under section 6015.^[1] The Commissioner established by clear and convincing evidence that Mr. Di Giorgio underreported his income, that he underpaid his tax, and that those underpayments were due to fraud. Ms. Di Giorgio established that she is entitled to relief from joint and several liability.

FINDINGS OF FACT

Mr. Di Giorgio and his first wife incorporated Radius Capital Corp. (Radius CA) in California in 1995.^[2] They held all outstanding shares as community property under California law. Radius CA operated as a mortgage lender and issuer of mortgage-backed securities, and Mr. Di Giorgio was its president and chief executive officer throughout its existence. Radius CA did business under other names, including Home Mortgage of America and Home Realty of America. Radius CA elected to be treated as an S corporation for income tax purposes.

Mr. Di Giorgio, his first wife, and their two sons moved to Cape Coral, Florida, in 2003. They purchased a home in which they resided. Mr. Di Giorgio's first wife passed away in December 2005. After her death, Mr. Di Giorgio continued working in Florida and remarried. We discuss his relationship with his second wife separately, below.

I. Business and Other Income-Producing Activities

It is difficult to paint a precise picture of Mr. Di Giorgio's business activities. He held multiple bank accounts in his own name or in the names of his businesses. He did business with more than 30 title companies and myriad borrowers from whom he received and deposited payments in both his business and personal accounts. He comingled funds, moving money between those accounts and using business accounts for personal expenses. He provided the Court little in the way of books and records. Nevertheless, this is clear: Mr. Di Giorgio had many sources of income. His major income sources include (1) real estate sales, (2) Radius CA, (3) a similarly named entity, Radius Capital Corp. of Florida (Radius FL), (4) a Scottrade brokerage account, and (5) other miscellaneous sources.

A. Real Estate Sales

Mr. Di Giorgio earned income from selling real estate in 2005 and 2006. He sold 12 properties in 2005 and 7 properties in 2006. He generally purchased "tax sale" homes that he would re-sell at higher prices without much refurbishment. He was the sole owner of each property he sold except one, which he co-owned with his first wife at the time of her death.

B. Radius CA

Mr. Di Giorgio earned income from operating Radius CA in 2005 and 2006. He wrote checks from Radius CA to himself and used Radius CA's credit cards and bank accounts to pay personal expenses.

Radius CA earned income by making mortgage loans and selling mortgage-backed securities. A mortgage-backed security is created when a lender pools a group of mortgage loans and sells interests in the pool to investors. During 2005 and 2006, Radius CA sold at least 15 mortgage-backed securities.

In connection with those securities, the Securities and Exchange Commission (SEC) filed a complaint against Radius CA and Mr. Di Giorgio alleging that they defrauded the Government National Mortgage Association (Ginnie Mae). The SEC prevailed in 2015. Mr. Di Giorgio and Radius CA were enjoined from selling mortgage-backed securities and were held jointly and severally liable for disgorgement of $1,427,095, which represented profits obtained from the violations. See SEC v. Radius Cap. Corp., No. 2:11-cv-116-FtM-29DNF, 2015 WL 1781567, at *11 (M.D. Fla. Apr. 20, 2015). The U.S. Court of Appeals for the Eleventh Circuit affirmed. See SEC v. Radius Cap. Corp., 653 Fed.Appx. 744 (11th Cir. 2016).

According to Mr. Di Giorgio, Radius CA no longer operated as of 2007. But Radius CA was not completely inactive. That year, he nominally made his second wife Radius CA's president, using her maiden name on the paperwork. In April 2007, Radius CA transferred ownership of real property at 215 Flamingo Street, Fort Myers Beach, Florida, to Mr. Di Giorgio by corporate warranty deed. His second wife's maiden name was used on the corporate warranty deed for Radius CA, but it was not her signature. At trial, she did not recognize the document or the signature. She was unaware of what a corporate warranty deed was and was unsure of whether Radius CA or Mr. Di Giorgio owned the Flamingo Street property. Mr. Di Giorgio deposited the proceeds of the sale in a personal bank account that he did not share with his second wife.

C. Radius FL

Mr. Di Giorgio earned income from Radius FL, which was distinct from Radius CA, in 2005 through 2007. His nephews were involved in Radius FL, but its operations, ownership, and relationship to Radius CA are unclear from the record. Automatic Data Processing, Inc. (ADP), periodically issued checks to Mr. Di Giorgio from Radius FL in 2005 and 2006. And throughout the years in issue, he frequently withdrew cash and wrote checks to himself from Radius FL's bank account, and he deposited those checks in his personal accounts. Memos written on the checks included, among others, "income dispersement" (sic), "return on investment," "multiple commissions," and "multiple accounts." Radius FL used Mr. Di Giorgio's mortgage license in its operations because it did not otherwise have one.

D. Scottrade Brokerage Account

In 2007, Mr. Di Giorgio earned income from trading securities through a Scottrade brokerage account. He transferred at least $805,000 to the account that year. He received dividends totaling $29,791.

E. Miscellaneous

Mr. Di Giorgio had other sources of both nontaxable and taxable income including a life insurance policy, retirement accounts, and a company called Quickbling Investment Corp., Inc. (Quickbling).

In March 2006, Mr. Di Giorgio received $1,008,039 representing proceeds from an insurance policy on the life of his first wife. He deposited those proceeds in a personal account.

In February 2007, he incorporated Quickbling. In May 2007, he made his second wife nominal vice president, but she did not work for Quickbling and did not know its business purpose. It is unclear from the record what Quickbling did, and its one bank account included in the stipulation had little activity.

Mr. Di Giorgio received retirement account distributions totaling $88,781 during 2007. He was in his midforties that year.

II. Lifestyle

Mr. Di Giorgio's income funded his lifestyle. He owned a four-bedroom waterside home. He also owned a beach house at which his sons from his first marriage resided at times. He owned multiple cars, boats, and jet skis, and he spent large sums at marinas. In 2007, he traded his boat toward the purchase of a $300,000 yacht. He traveled regularly, stayed in expensive hotels, and purchased airfare and other items for family members.

III. Reporting

On federal income tax returns that he prepared, Mr. Di Giorgio painted a picture that differed from the lifestyle he led. For each year in issue, Mr. Di Giorgio filed a Form 1040, U.S. Individual Income Tax Return, on which he reported taxable income of zero. As president of Radius CA, he filed Form 1120S, U.S. Income Tax Return for an S Corporation, for 2005 but failed to do so for 2006 and 2007. He filed his returns late for each year in issue.

A. 2005 Returns

Mr. Di Giorgio filed his 2005 individual return with the status of married filing separately. He reported adjusted gross income (AGI) of $50,192, which consisted of $37,685 of wages $105,029 of taxable interest, a $9,018 net profit from Schedule C, Profit or Loss From Business, a net loss of $85,673 from Schedule E, Supplemental Income and Loss, and self-employment deductions totaling $15,867. Radius FL issued a Form W-2, Wage and Tax Statement, for the wages Mr. Di Giorgio reported, but he did not attach the Form W-2 to his return. Instead, he attached Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., on which he listed himself as both the payor and the payee of the wages. The Schedule C profit stemmed from Radius CA, for which he reported gross receipts or sales of $62,951 and expenses totaling $53,933. He claimed itemized deductions and exemptions far greater than his AGI and reported taxable income of zero. The Schedule E loss stemmed from rental real estate activities. On Schedule E, Part I, Income or Loss From Rental Real Estate and Royalties, Mr. Di Giorgio reported six rental real estate properties, rents of $1,920, and expenses totaling $87,593. Mr. Di Giorgio did...