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George v. Commissioner of Internal Revenue

United States Court of Appeals, First Circuit

September 13, 2016

DANIEL H. GEORGE, JR., Petitioner, Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.

         APPEAL FROM THE DECISION OF THE UNITED STATES TAX COURT

          John J.E. Markham, II, with whom Markham & Read was on brief, for appellant.

          Anthony T. Sheehan, Attorney, Tax Division, Department of Justice, with whom Caroline D. Ciraolo, Acting Assistant Attorney General, and Teresa E. McLaughlin, Attorney, Tax Division, were on brief, for appellee.

          Before Torruella, Lynch, and Barron, Circuit Judges.

          TORRUELLA, Circuit Judge.

         Daniel H. George, Jr., appeals a tax court decision affirming a determination by the Commissioner of the Internal Revenue Service ("IRS") that he owed $3.790 million in income taxes and penalties on $5.65 million in bank deposits he made and interest earned from 1995 to 2002. George argues that these deposits were not his taxable personal income but the program income of Biogenesis Foundation, Inc. ("Biogenesis"), a social welfare organization that had tax-exempt status pursuant to section 501(c)(4) of the Internal Revenue Code, 26 U.S.C. § 501(c)(4). We agree with the tax court's determination that an organization distinct from George did not exist during the applicable tax years and affirm.

         I.

         Between 1995 and 2002, George, a self-taught chemist, created his own health supplements. The proceeds from the sale of these supplements formed the basis of the bank deposits at issue in this appeal.

         George conducted experiments and created mineral, herbal, and chemical supplements in his home in Rockport, Massachusetts. George also worked with health supplement companies that provided him with raw materials, equipment, and feedback. In turn, these companies purchased George's supplements, which they incorporated into their own products. The supplement companies dealt with George directly, viewing him as a vendor, and paid him either in cash or by check.

         In addition to his dealings with the supplement companies, George sold his supplements directly to individuals who came to his Rockport house. Some of these individuals formed a "core group, " members of which promoted George's supplements through word of mouth and at meetings where they sold George's supplements to other people.

         The core group members also assisted George in holding retreats where he discussed health and spirituality and provided his supplements to attendees. Between 8 and 24 people participated in any given retreat and paid $300 to $1000 each to attend. The core group members provided services, such as cooking and organizing transportation, in lieu of paying fees. Part of the fees paid by nongroup attendees went towards reimbursing core group members for the costs of the retreats. George also received a portion of the fees as payment for the supplements he administered.

         George did not issue receipts or otherwise document the payments he received from the supplement companies or individuals. The only record of George's transactions was his deposit of these funds into fourteen different personal bank accounts he maintained. George did not spend any of the money he received from his activities. Rather, George covered his personal expenses using Social Security disability payments he received.

         In 2002, the IRS began investigating George. During an interview with an IRS agent, George admitted he had not paid any taxes since the 1970s.[1] George explained that he was hoping to accrue $10 million to set up a foundation and non-profit research laboratory. George was subsequently charged with and convicted of tax evasion in violation of 26 U.S.C. § 7201 based on his failure to pay taxes in the tax years 1996, 1997, 1998, and 1999. The United States District Court for the District of Massachusetts sentenced George to thirty months' imprisonment. We upheld George's conviction in United States v. George ("George I"), 448 F.3d 96 (1st Cir. 2006).

         II.

         In May 2003, six weeks after his tax evasion indictment, George incorporated Biogenesis. That July, George applied for tax-exempt status for Biogenesis as a charitable organization under section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. § 501(c)(3). In the application, George certified that he was filing for tax-exempt status "within 15 months from the end of the month in which [Biogenesis] was created or formed." The application also described Biogenesis's mission, which was, according to George, to expand upon his research to create supplements for treatments based on cellular regeneration technology and provide health products to those in need. George claimed ...


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