Matthew Hutcheson at the very end of 2024 and very beginning of 2025 received both good news and bad news. Mr. Hutcheson, who had been convicted of wire fraud in 2013 and sentenced to 17 years in prison had his remaining sentence commuted by President Biden as part of his end of term pardons and sentence commutations on December 12, 2024.[^1] But three days into 2025, Mr. Hutcheson received less upbeat news, as the Tax Court found he owed taxes on the amounts he embezzled that led to those 2013 convictions in the case of Hutcheson v. Commissioner.[^2]

Facts of the Case

The Tax Court case of Hutcheson v. Commissioner involved Matthew D. Hutcheson, a professional independent fiduciary, and his wife, Annette Hutcheson, who were found to have underpaid their taxes. The case centered around Mr. Hutcheson’s diversion of over $5.3 million from two retirement plans, G Fiduciary Retirement Income Security Plan (G Fid) and the Retirement Security Plan and Trust (RSPT), for his personal benefit. The Court’s decision addressed several key issues, including whether the diverted funds constituted unreported income, whether the petitioners were liable for an early distribution tax, whether they were liable for failure to file a timely tax return, and whether Mr. Hutcheson was liable for a fraud penalty.

Factual Background:

Mr. Hutcheson’s Fiduciary Role: Mr. Hutcheson was the trustee and fiduciary of G Fid and RSPT, which were multiple-employer retirement plans. He was responsible for safeguarding plan assets and ensuring they were invested prudently for the benefit of the plan participants. He also owned two businesses related to his fiduciary activities, Matthew D. Hutcheson, LLC and Hutcheson Walker Advisors, LLC. Mr. Hutcheson held himself out as an expert in fiduciary responsibilities for qualified retirement plans. He had a degree in financial services, pursued a doctorate in the science of law, and held various accreditations and certifications relating to fiduciary responsibilities. He also testified before the U.S. Congress about qualified plans and fiduciary obligations.[^3]
The Diversion of Funds: In 2010, Mr. Hutcheson diverted $5,307,688 from G Fid and RSPT. He used G Fid assets primarily to pay personal expenses, including the purchase and extensive renovation of their new home in Idaho. He used RSPT assets in his attempts to acquire a resort and golf course. The transfers were discovered by 2011.
- G Fid Transfers: Mr. Hutcheson made a series of transfers from G Fid, totaling $2,031,688. He initially transferred funds to the National Retirement Security Plan 401(k) (NRSP) account to repay a personal loan and then to a bank account in the name of Pension Liquidity Plan and Trust (PLPT), which was a former name of RSPT. He instructed Aspire Financial Services, LLC, the recordkeeper for both plans, to liquidate plan participants’ accounts and record these transfers as investments in a “new account ... ‘TDA Mid-Term Interest Bearing (Cash Equiv)’” (TDA investment). The TDA investment was described as a private, nonpublicly traded cash equivalent with a 14% return. In reality, the funds were diverted to his own use.
- RSPT Transfers: Mr. Hutcheson directed two transfers from RSPT totaling $3,276,000. He formed Green Valley Holdings, LLC (GVH) to purchase a resort and golf course. He used RSPT funds to purchase a note (PCB note) that was collateralized by the golf course through GVH. He instructed Aspire to liquidate $3.1 million of RSPT’s plan assets and hold the proceeds as cash until investment instructions were provided, but he then used the money to purchase the PCB note without the knowledge of RSPT’s investment advisor, Kevin Price.
Use of Funds: Mr. Hutcheson used the diverted funds for various purposes:
- Home Purchase and Renovation: Approximately $1.2 million was used to purchase and renovate the Hutcheson’s new home, including payments to Givens Construction. The renovations included a pool, hot tub, new barn with living quarters, and horse-riding arena.
- Personal Expenses: G Fid’s plan assets were used to pay for personal expenses, such as the purchase of cars ($93,059), Christmas presents ($24,389), furniture ($11,702), and Costco purchases ($15,743).
- Resort-Related Expenses: Funds were used for expenses related to the attempted acquisition of a resort and golf course, including payments to consultants ($45,000+), attorneys ($26,000+), and salaries for GVH employees (including the Hutchesons’ relatives).
Discovery of the Scheme: Individuals associated with G Fid and RSPT began questioning the TDA and PCB investments, leading to the discovery of the scheme. Mr. Hutcheson provided inconsistent explanations, falsely claimed the investments were secure and would soon be liquidated, and made false statements. He told plan participants the investments were with an economic development fund with a 14% expected return. He eventually confessed to taking the plan assets.
Falsified Documents: Mr. Hutcheson created falsified documents, including a falsified proof-of-funds letter from TD Ameritrade and a false balance sheet showing a net worth of $61.5 million. He also had irrevocable trust receipts (ITRs) backdated to 2010 after he learned he was under criminal investigation.
Criminal Trial: Mr. Hutcheson was convicted of 17 counts of wire fraud and sentenced to over 17 years in prison. He was also ordered to pay criminal restitution of $5,307,688.

Tax Court Issues:

The Tax Court addressed the following issues:

Unreported Income: The Court determined that the $5,307,688 Mr. Hutcheson diverted from the retirement plans constituted taxable, unreported embezzlement income. The Court noted that when taxpayers misappropriate money for their own benefit, the money is considered gross income. The court found that Mr. Hutcheson had abandoned his fiduciary role and treated the assets as his own. They also determined that the petitioners had other unreported income of $10,825.
Early Distribution Tax: The Court held that the petitioners were liable for a 10% additional tax on an early distribution from an individual retirement account (IRA) because Mr. Hutcheson was under the age of 59½ when he received the distribution.
Failure to File: The Court found the petitioners liable for a section 6651(a)(1) addition to tax for failure to file a return timely.
Fraud Penalty: The Court held Mr. Hutcheson liable for a section 6663 fraud penalty. The Court found that Mr. Hutcheson had underpaid his taxes and that part of the underpayment was due to fraud. The court examined the badges of fraud present in Mr. Hutcheson’s actions including underreporting income, providing implausible or inconsistent explanations, concealing income, and failing to cooperate with tax authorities. The court stated Mr. Hutcheson’s experience in fiduciary responsibilities was a factor in determining fraudulent intent.

Court’s Rationale:

The court rejected the petitioners’ arguments that the funds were invested in a nonpublicly traded company called NRSP Management. The court found the ITRs were likely falsified, and Mr. Hutcheson’s testimony was not credible. The court concluded that Mr. Hutcheson had transferred the funds for his own benefit, not for the benefit of plan participants, and that his actions constituted embezzlement. The court also found the petitioners adopted a lifestyle above their means and used plan assets to finance it. In summary, the Tax Court case of Hutcheson v. Commissioner detailed an elaborate scheme by Mr. Hutcheson to embezzle funds from retirement plans for his personal benefit. The Court found that the diverted funds were taxable income, that the petitioners were liable for the additional tax on early distribution, failure to file penalty, and that Mr. Hutcheson was liable for a fraud penalty due to his intentional and deceitful actions. The court’s decision was based on a thorough review of the evidence, including Mr. Hutcheson’s actions, falsified documents, and inconsistent statements, and it also relied on legal precedent regarding the taxation of embezzled funds.

Court’s Application of the Law to the Facts

In Hutcheson v. Commissioner, the Tax Court meticulously applied relevant sections of the Internal Revenue Code and case law to determine the tax liabilities of Matthew and Annette Hutcheson. The court's reasoning addressed multiple issues, including the taxability of embezzled funds, penalties for early retirement distributions, failure to file, and the fraud penalty.

Unreported Income from Embezzlement

The court addressed whether the funds Mr. Hutcheson diverted from the retirement plans were taxable income to the petitioners. The court determined that the diverted funds were taxable income and cited several authorities in its analysis.

Gross Income Definition: The Court referenced Internal Revenue Code Section 61(a), which defines gross income as income from any source. The court cited Charley v. Commissioner, 91 F.3d 72, 73–74 (9th Cir. 1996), to support this interpretation.
Embezzled Funds as Income: The court relied on James v. United States, 366 U.S. 213, 219–20 (1961), which established that misappropriated funds are considered gross income. This precedent holds even if the taxpayer repays the funds or is ordered to pay restitution later. The court also cited Yerkie v. Commissioner, 67 T.C. 388, 390 (1976) and several other Tax Court cases to further support this rule. Treasury Regulation § 1.61-14(a) was also cited.
Trustee’s Fiduciary Duty: The court explained the fiduciary responsibilities of an ERISA trustee, citing 29 U.S.C. § 1104(a)(1) and discussing the trustee’s obligation to act solely in the interest of the plan participants. It cited Barboza v. Cal. Ass’n of Pro. Firefighters, 799 F.3d 1257, 1265–66 (9th Cir. 2015), for the principle that an ERISA trustee must hold legal title to plan assets solely for the benefit of the plan’s members.
Misappropriation of Plan Assets: The court stated that when an ERISA trustee misappropriates plan assets for their benefit, those amounts are includible in the trustee’s gross income. The court cited Bailey v. Commissioner, T.C. Memo. 2012-96, aff’d sub nom. Bailey v. IRS, No. 13-1455, 2014 WL 1422580 (1st Cir. Mar. 14, 2014), Zuckerman v. Commissioner, T.C. Memo. 1997-21, and Adams v. Commissioner, T.C. Memo. 1970-104, aff'd per curiam, 456 F.2d 259 (9th Cir. 1972), to support this.
Dominion and Control: The court stated that while a trustee’s control over plan assets does not automatically make the money income, there must be evidence the trustee abandoned their fiduciary role and treated the assets as their own. The court referenced Bailey, T.C. Memo. 2012-96, as authority for this principle, as well as Smiley v. Commissioner, T.C. Memo. 2024-66.
Application to the Facts: The court concluded that Mr. Hutcheson had, in fact, abandoned his fiduciary duty and had complete dominion and control over the assets. He transferred the funds for his own benefit and for the benefit of the petitioners. This was evidenced by the use of funds for home renovations, personal expenses, and the attempted resort acquisition. The court stated that the record “clearly and convincingly” showed the transfers were for the Hutchesons’ economic benefit and not for the plan participants. The court dismissed the argument the transfers were for community benefit, stating the petitioners adopted a lifestyle above their means and used the funds to finance it.
Embezzlement as Income: The court determined that the funds were taxable as embezzled income, and the fact that Mr. Hutcheson may have intended to repay the funds later did not change this fact, citing James, 366 U.S. at 219-20.

Analysis of the Taxpayers’ Arguments

The petitioners argued that Mr. Hutcheson had invested G Fid and RSPT's plan assets in a nonpublicly traded company called NRSP Management. They claimed the investments were targeted towards job creation and were compliant with plan requirements, issuing ITRs to identify each plan’s ownership of the stock. The petitioners argued that the ITRs and NRSP stock became the plan assets and the plans were the beneficial owners of the stock. They claimed the plan participants were the beneficial owners of the PCB note and GVH held nominal title.

Rejection of the ITRs: The court rejected the ITRs as evidence of this investment, stating that they were likely falsified. The court noted that a witness had testified during Mr. Hutcheson’s criminal trial that Mr. Hutcheson had asked him to prepare the ITRs in December 2012 and backdate them to 2010, and that the district court in the criminal case called the ITRs “fraudulent” and not valid. The court also emphasized that Mr. Hutcheson never mentioned the ITRs to Mr. Walker, Mr. Peterson, or the plan participants. The court pointed out that Mr. Hutcheson had the ITRs created after learning of the criminal investigation.
Rejection of NRSP Management Investment: The court did not find credible the petitioners’ arguments concerning the NRSP Management investment. The court noted that while the company’s articles of incorporation were filed in 2010, the claims made about the company by the petitioners were not supported by credible evidence. The court placed no weight on the documents of stock issuance because they were not signed by anyone other than Mr. Hutcheson and were undated.
Lack of Credibility: The court did not find Mr. Hutcheson credible. His testimony was often contradicted by documents in the record and testimony from other witnesses. The court noted Mr. Hutcheson provided numerous contradictory explanations for the TDA and PCB investments and never mentioned the ITRs or the alleged NRSP investment. In sum, the court did not believe any of the petitioners' arguments regarding the plan assets being invested for the benefit of plan participants.

Early IRA Distribution

10% Additional Tax: The court determined that the petitioners were liable for a 10% additional tax on early withdrawals from qualified retirement plans under Section 72(t).
Early Withdrawal Definition: An early withdrawal is defined as a distribution before the employee attains the age of 59 1/2. The court noted that Mr. Hutcheson was under 59 1/2 when he received the distribution, and the petitioners failed to argue that a statutory exception to this rule applied. The court cited Bunney v. Commissioner, 114 T.C. 259, 265 (2000), for the principle that the taxpayer has the burden of proof to establish an exception applies.

Failure to File

Addition to Tax: The court found the petitioners liable for a section 6651(a)(1) addition to tax for failure to file a return timely.
Reasonable Cause: Section 6651(a)(1) imposes a penalty for failure to file, unless the taxpayer demonstrates reasonable cause and not willful neglect. The court explained that reasonable cause exists if a taxpayer exercised ordinary business care but was unable to file due to circumstances outside of their control. The court cited United States v. Boyle, 469 U.S. 241, 243 (1985), and Treasury Regulation § 301.6651-1(c)(1), in support of its holding.
Application to the Facts: The petitioners filed their 2010 return late, and there was no evidence they had reasonable cause.

Fraud Penalty

Fraud Penalty Imposed: The court held Mr. Hutcheson liable for a section 6663 fraud penalty.
Burden of Proof: The court noted that Section 6663(a) imposes a penalty of 75% on any tax underpayment due to fraud. The Commissioner has the burden to prove fraud by clear and convincing evidence under Section 7454(a) and Tax Court Rule 142(b). The court cited Parks v. Commissioner, 94 T.C. 654, 660-61 (1990) to explain the Commissioner must show that the taxpayer underpaid their tax and that some portion of the underpayment was due to fraud.
Fraudulent Intent: The court referenced Clayton v. Commissioner, 102 T.C. 632, 647 (1994) and Neely v. Commissioner, 116 T.C. 79, 86 (2001) to define fraud as when a “taxpayer intended to evade tax believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such tax.”. The court explained that fraudulent intent is a factual question determined by the entire record, citing Estate of Pittard v. Commissioner, 69 T.C. 391, 400 (1977), and that fraud cannot be presumed. The court stated that mere suspicion is insufficient to prove fraud.
Circumstantial Evidence: The court stated that direct proof of fraud is not needed and that fraudulent intent may be shown through circumstantial evidence and reasonable inferences. Petzoldt, 92 T.C. at 699. The court cited Parks, 94 T.C. at 661, to emphasize that the Commissioner must show that the taxpayer intended to evade taxes by concealing or misleading conduct. Webb v. Commissioner, 394 F.2d 366, 379 (5th Cir. 1968), aff’g T.C. Memo. 1966-81 and Stone v. Commissioner, 56 T.C. 213, 224 (1971) were cited to explain that intent may be inferred from patterns of conduct.
Badges of Fraud: The court outlined “badges of fraud,” such as understating income, giving inconsistent explanations, concealing income, failing to cooperate with tax authorities, and engaging in illegal activities. The court stated that these badges were considered based on the facts in Parks, 94 T.C. at 664–65, Recklitis v. Commissioner, 91 T.C. 874, 910 (1988), Morse v. Commissioner, T.C. Memo. 2003-332, aff’d, 419 F.3d 829 (8th Cir. 2005) and Bradford v. Commissioner, 796 F.2d 303, 307–08 (9th Cir. 1986), aff’g T.C. Memo. 1984-601. The court also stated that the intelligence, education, and tax expertise of the taxpayer is also considered, citing Holmes v. Commissioner, T.C. Memo. 2012-251, at 31, aff’d, 593 F. App’x 693 (9th Cir. 2015).
Application to the Facts: The court found numerous badges of fraud present. Mr. Hutcheson underreported his income by over $5.3 million, gave inconsistent explanations, concealed his actions, failed to cooperate with tax authorities, engaged in illegal activities, provided testimony that lacked credibility, and prepared falsified documents. The court also noted his experience and expertise in fiduciary responsibilities. The court found that Mr. Hutcheson abused his position for his own benefit, took steps to conceal his embezzlement scheme, and made numerous false statements.
Reliance on Criminal Conviction: The court referenced Olshausen v. Commissioner, 273 F.2d 23, 27–28 (9th Cir. 1959), aff’g T.C. Memo. 1958-85 and SEC v. Jarkesy, 144 S. Ct. 2117 (2024). The court noted that Mr. Hutcheson was convicted of criminal fraud for the activities in the case before the court. The Court also noted that the Ninth Circuit found abundant evidence to support Mr. Hutcheson’s convictions, citing United States v. Hutcheson, 603 F. App’x 613, 614 (9th Cir. 2015).
Conclusion: The court concluded that Mr. Hutcheson willfully and fraudulently intended to evade tax on his unreported income and was liable for the fraud penalty. Because the underpayment was due to Mr. Hutcheson's fraud, the burden shifted to the petitioners to prove that some part of the underpayment was not due to fraud, which they did not do. The court therefore held that the entire underpayment was subject to the 75% fraud penalty. In summary, the Tax Court’s reasoning was thorough and grounded in specific sections of the Internal Revenue Code and relevant case law. The Court systematically addressed each issue, clearly articulating how the law applied to the facts of the case. The court rejected the taxpayer’s arguments due to a lack of credibility and evidence, highlighting the fraudulent nature of Mr. Hutcheson’s actions.

[^1]: Clemency Recipient List, White House website, December 12, 2024, https://www.whitehouse.gov/briefing-room/statements-releases/2024/12/12/clemency-recipient-list-7/ (retreived January 3, 2025)

[^2]: Hutcheson v. Commissioner, TC Memo 2025-1, January 2, 2025, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/couple-had-unreported-embezzlement-income-liable-penalties/7q0s7

[^3]: Somewhat ironically, he testified before Congress on the topic of “Creating Greater Transparency for Pensioners” in 2010, the year the transactions in question in this case took place. Testimony of Matthew D. Hutcheson, Professional Independent Fiduciary, Before the House Subcommittee on Health, Employment, Labor and Pensions on “Creating Greater Accounting Transparency for Pensioners,” July 20, 2010, https://edworkforce.house.gov/uploadedfiles/7.20.10_hutcheson.pdf (retrieved January 3, 2025)